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, 2013~~March 31, 2014

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) 683-5900

(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 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 x 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 x

Non-accelerated filer o		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~~Yes o NONo x

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 2, 2013~~May 5, 2014
Common Stock, $0.001 par value		~~32,598,197~~32,604,958

AXT, INC.

FORM 10-Q

TABLE OF CONTENTS

		Page
PART I.	FINANCIAL INFORMATION	23
Item 1.	Financial Statements (unaudited)	23
Condensed Consolidated Balance Sheets as of ~~September 30, 2013~~March 31, 2014 and December 31, ~~2012~~2013		23
Condensed Consolidated Statements of Operations for the three months ended March 31, 2014 and ~~nine months ended September 30,~~ 2013 ~~and 2012~~		34
Condensed Consolidated Statements of Comprehensive Income (loss) for the three months ended March 31, 2014 and ~~nine months ended September 30,~~ 2013 ~~and 2012~~		45
Condensed Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30,~~March 31, 2014 and 2013 ~~and 2012~~		56
Notes To Condensed Consolidated Financial Statements		67
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3229
Item 4.	Controls and Procedures	3431
PART II.	OTHER INFORMATION	3431
Item 1.	Legal Proceedings	3431
Item 1A.	Risk Factors	3431
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4744
Item 3.	Defaults Upon Senior Securities	4844
Item 4.	Mine Safety Disclosures	4844
Item 5.	Other Information	4844
Item 6.	Exhibits	4845
	Signatures	4946

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements ~~(unaudited)~~(Unaudited)

AXT, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except per share data)

	September 30,			December 31,			March 31,			December 31,
	2013			2012 (1)			2014			2013
ASSETS
Current assets:
Cash and cash equivalents	$	27,723		$	30,634		$	22,760		$	24,961
Short-term investments		8,412			10,270			22,375			12,499
Accounts receivable, net of allowances of $928 and $245 as of September 30, 2013 and December 31, 2012, respectively		16,266			17,912
Accounts receivable, net of allowances of $791 and $1,054 as of March 31, 2014 and December 31, 2013								16,364			14,943
Inventories		38,376			40,352			38,040			39,127
Related party notes receivable – current		2,517			2,036
Prepaid expenses and other current assets		7,412			5,268			6,401			8,010
Total current assets		100,706			106,472			105,940			99,540
Long-term investments		12,287			9,191			1,678			10,145
Property, plant and equipment, net		37,450			37,235			36,179			37,621
Related party notes receivable – long-term		—			416			1,701			1,715
Other assets		14,830			14,275			14,752			14,801
Total assets	$	165,273		$	167,589		$	160,250		$	163,822

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	8,596		$	5,894		$	7,618		$	8,140
Accrued liabilities		9,208			7,202			6,646			7,286
Total current liabilities		17,804			13,096			14,264			15,426
Long-term portion of royalty payments		2,725			3,325			2,325			2,525
Other long-term liabilities		155			254			272			325
Total liabilities		20,684			16,675			16,861			18,276
Commitments and contingencies
Commitments and contingencies (Note 11)
Stockholders’ equity:
Preferred stock, $0.001 par value; 2,000 shares authorized; 883 shares issued and outstanding as of September 30, 2013 and December 31, 2012, respectively (Liquidation preference of $6.1 million and $5.9 million as of September 30, 2013 and December 31, 2012, respectively)		3,532			3,532
Common stock, $0.001 par value per share; 70,000 shares authorized; 32,612 and 32,471 shares issued and outstanding as of September 30, 2013 and December 31, 2012, respectively		32			32
Preferred stock, $0.001 par value; 2,000 shares authorized; 883 shares issued and outstanding as of March 31, 2014 and December 31, 2013 (Liquidation preference of $6.2 million and $6.1 million as of March 31, 2014 and December 31, 2013, respectively)								3,532			3,532
Common stock, $0.001 par value per share; 70,000 shares authorized; 32,605 and 32,605 shares issued and outstanding as of March 31, 2014 and December 31, 2013, respectively								32			32
Additional paid-in capital		194,058			193,063			194,448			194,156
Accumulated deficit		(65,777	)		(59,047	)		(69,045	)		(67,005	)
Accumulated other comprehensive income		6,988			6,033			8,500			8,953
Total AXT, Inc. stockholders’ equity		138,833			143,613
AXT, Inc. stockholders’ equity								137,467			139,668
Noncontrolling interests		5,756			7,301			5,922			5,878
Total stockholders’ equity		144,589			150,914			143,389			145,546

Total liabilities and stockholders’ equity	$	165,273		$	167,589		$	160,250		$	163,822

See accompanying notes to condensed consolidated financial statements.

~~(1)~~

~~The condensed consolidated balance sheet at December 31, 2012 has been derived from the audited consolidated financial statements at that date.~~

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AXT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except per share data)

	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30,						September 30,						March 31,
	2013			2012			2013			2012			2014			2013

Revenue	$	20,521		$	20,808		$	66,732		$	69,447		$	19,345		$	22,380
Cost of revenue		18,075			15,342			57,717			48,279			16,627			18,896
Gross profit		2,446			5,466			9,015			21,168			2,718			3,484

Operating expenses:
Selling, general and administrative		4,303			3,950			12,435			11,709			3,436			3,925
Research and development		766			844			2,627			2,593			775			822
Restructuring charge														907			—
Total operating expenses		5,069			4,794			15,062			14,302			5,118			4,747
Income (loss) from operations		(2,623	)		672			(6,047	)		6,866
Loss from operations														(2,400	)		(1,263	)
Interest income, net		55			52			136			202			127			31
Equity in earnings of unconsolidated joint ventures		346			348			1,099			786			487			282
Other income (expense), net		(47	)		144			(491	)		(472	)		10			(825	)
Loss before provision for income taxes														(1,776	)		(1,775	)
Provision (benefit) for income taxes														59			184
Net loss														(1,835	)		(1,959	)
Less: Net loss attributable to noncontrolling interests														(205	)		(441	)
Net loss attributable to AXT, Inc.													$	(2,040	)	$	(2,400	)

Income (loss) before provision for income taxes		(2,269	)		1,216			(5,303	)		7,382
Provision for (benefit from) income taxes		(204	)		(228	)		322			559
Net income (loss)		(2,065	)		1,444			(5,625	)		6,823
Less: Net income attributable to noncontrolling interest		(230	)		(512	)		(1,105	)		(2,957	)
Net income (loss) attributable to AXT, Inc.	$	(2,295	)	$	932		$	(6,730	)	$	3,866

Net income (loss) attributable to AXT, Inc. per common share:
Net loss attributable to AXT, Inc. per common share:
Basic	$	(0.07	)	$	0.03		$	(0.21	)	$	0.12		$	(0.06	)	$	(0.08	)
Diluted	$	(0.07	)	$	0.03		$	(0.21	)	$	0.11		$	(0.06	)	$	(0.08	)

Weighted average number of common shares outstanding:
Basic		32,366			32,183			32,407			32,118			32,364			32,297
Diluted		32,366			32,769			32,407			32,911			32,364			32,297

See accompanying notes to condensed consolidated financial statements.

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AXT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited, in thousands)

	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30,						September 30,						March 31,
	2013			2012			2013			2012			2014			2013

Net income (loss)	$	(2,065	)	$	1,444		$	(5,625	)	$	6,823		$	(1,835	)	$	(1,959	)

Other comprehensive income (loss), net of tax:
Change in foreign currency translation gain (loss), net of tax		307			(192	)		1,177			119			(521	)		407
Change in unrealized gain (loss) on available-for-sale investments, net of tax		73			9			26			115			(10	)		(17	)
Total other comprehensive income (loss), net of tax		380			(183	)		1,203			234
Total other comprehensive income, net of tax														(531	)		390
Comprehensive income (loss)		(1,685	)		1,261			(4,422	)		7,057			(2,366	)		(1,569	)
Less: Comprehensive income attributable to noncontrolling interest		(272	)		(486	)		(1,353	)		(3,003	)
Less: Comprehensive income attributable to the noncontrolling interests														(126	)		(498	)
Comprehensive income (loss) attributable to AXT, Inc.	$	(1,957	)	$	775		$	(5,775	)	$	4,054		$	(2,492	)	$	(2,067	)

See accompanying notes to condensed consolidated financial ~~statements~~statements.

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AXT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

	Nine Months Ended September 30,						Three Months Ended March 31,
	2013			2012			2014			2013
Cash flows from operating activities:
Net income (loss)	$	(5,625	)	$	6,823
Net Loss							$	(1,835	)	$	(1,959	)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Adjustments to reconcile net loss to net cash from operating activities:
Depreciation and amortization		4,075			2,832			1,404			1,291
Amortization of marketable securities premium		394			220			122			146
Stock-based compensation		1,004			873			292			332
Loss (gain) on disposal of property, plant and equipment								(5	)		—
Provision for doubtful accounts		627			—			1			—
Gain on sale of cost method investment		(811	)		—
(Gain) loss on disposal of property, plant and equipment, net		(7	)		176
Changes in assets and liabilities:
Accounts receivable, net		1,083			1,076			(1,459	)		922
Inventories		2,147			6,071			985			1,649
Prepaid expenses and other current assets		(1,730	)		1,923			1,584			(1,740	)
Other assets		(77	)		(97	)		18			105
Accounts payable		2,647			1,287			(489	)		664
Accrued liabilities		774			(795	)		(697	)*		(164	)*
Other long-term liabilities		(494	)		(824	)		(308	)		(270	)
Net cash provided by operating activities		4,007			19,565
Net cash (used in) provided by operating activities								(387	)		976

Cash flows from investing activities:
Purchases of property, plant and equipment		(3,919	)		(4,951	)		(163	)		(1,349	)
Proceeds from sale of property, plant and equipment		9			—
Purchases of available for sale securities		(14,091	)		(8,225	)
Proceeds from maturities of available for sale securities		12,486			6,660
Proceeds from sales of property, plan and equipment								5			—
Purchases of available-for-sale securities								(3,725	)		(12,410	)
Proceeds from maturities of available-for-sale securities								2,180			8,130
Net cash used in investing activities		(5,515	)		(6,516	)		(1,703	)		(5,629	)

Cash flows from financing activities:
Proceeds from common stock options exercised		278			276			—			256
Repurchase of the Company’s common stock, including commission		(287	)		—
Dividends paid by joint ventures		(1,730	)		(4,086	)		—			(532	)
Net cash used in financing activities		(1,739	)		(3,810	)		—			(276	)
Effect of exchange rate changes on cash and cash equivalents		336			108			(111	)		87
Net increase (decrease) in cash and cash equivalents		(2,911	)		9,347

Net decrease in cash and cash equivalents								(2,201	)		(4,842	)
Cash and cash equivalents at the beginning of the period		30,634			26,156			24,961			30,634
Cash and cash equivalents at the end of the period	$	27,723		$	35,503		$	22,760		$	25,792

* Dividends accrued but not paid by joint ventures of $729 and $2,365 was included in accrued liabilities as of March 31, 2014 and March 31, 2013, respectively.

See accompanying notes to condensed consolidated financial statements.

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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 ~~generally accepted~~ accounting principles ~~(“GAAP”)~~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 ~~GAAP.~~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 ~~certain~~a number of estimates ~~judgments~~ 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 ~~GAAP.~~ ~~We believe that~~accounting principles generally accepted in the estimates, judgments, and assumptions upon which it relies are reasonable based on information available at the time that these estimates, judgments, and assumptions are made. These estimates, judgments, and assumptions can affect the reported amountsUnited States of ~~assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented.~~ 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 ~~2012~~2013 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March ~~15, 2013 and our Quarterly Report~~s ~~on Form 10-Q for the quarterly periods ended March 31, 2013 and June 30, 2013 filed with the SEC on May 10, 2013 and August 9, 2013, respectively.~~14, 2014.

The ~~condensed~~ consolidated financial statements include the accounts of AXT, our wholly-owned subsidiary, Beijing Tongmei Xtal Technology Co, Ltd. and our majority‑owned subsidiaries, Beijing JiYa Semiconductor Material Co., ~~our majority-owned subsidiaries~~ Ltd., Nanjing Jin Mei Gallium Co., Ltd. and ~~certain joint ventures which we control~~.Beijing BoYu Semiconductor Vessel Craftwork Technology Co., Ltd. All significant ~~inter-company~~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 ~~interests for~~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 and comprehensive income (loss).~~

Certain prior period amounts in our condensed consolidated statements of operations have been reclassified to conform to the current period presentation. We reclassified $348,000 and $786,000 from “other income (expense), net” to “equity in earnings of unconsolidated joint ventures” for the three and nine months ended September 30, 2012, respectively, ~~due to significance of the amounts.~~

operations.

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Note 2. Investments~~in Marketable Securities~~ and Fair Value Measurements

Our cash, cash equivalents and investments are classified as follows (in thousands):

	September 30, 2013									December 31, 2012									March 31, 2014									December 31, 2013
			Gross		Gross							Gross		Gross							Gross		Gross							Gross		Gross
	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		(Losses)			Value		Cost		Gains		(Losses)			Value		Cost		Gain		(Loss)			Value		Cost		Gain		(Loss)			Value
Classified as:
Cash	$	24,114	$	—	$	—		$	24,114	$	26,250	$	—	$	—		$	26,250	$	21,638	$	—	$	—		$	21,638	$	24,852	$	—	$	—		$	24,852
Cash equivalents:
Money market fund		3,609		—		—			3,609		4,384		—		—			4,384		1,122		—		—			1,122		109		—		—			109

Total cash and cash equivalents		27,723		—		—			27,723		30,634		—		—			30,634		22,760		—		—			22,760		24,961		—		—			24,961

Investments (Available-for-sale):
Investments (available for sale):
Certificates of deposit		6,320		5		(9	)		6,316		6,638		9		(2	)		6,645		7,864		1		(2	)		7,863		6,320		2		(4	)		6,318
Corporate bonds		14,402		6		(25	)		14,383		12,872		7		(63	)		12,816		14,155		12		(2	)		14,165		14,276		8		(6	)		14,278
Corporate equity security																				125		1,900		—			2,025		125		1.923		—			2,048
Total investments		20,722		11		(34	)		20,699		19,510		16		(65	)		19,461		22,144		1,913		(4	)		24,053		20,721		1,933		(10	)		22,644
Total cash, cash equivalents and investments	$	48,445	$	11	$	(34	)	$	48,422	$	50,144	$	16	$	(65	)	$	50,095	$	44,904	$	1,913	$	(4	)	$	46,813	$	45,682	$	1,933	$	(10	)	$	47,605
Contractual maturities on investments:
Due within 1 year	$	8,405						$	8,412	$	10,288						$	10,270	$	20,464						$	22,375	$	10,569						$	12,499
Due after 1 through 5 years		12,317							12,287		9,222							9,191		1,680							1,678		10,152							10,145
	$	20,722						$	20,699	$	19,510						$	19,461	$	22,144						$	24,053	$	20,721						$	22,644

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. There were no sales of available-for-sales securities and no realized gains and losses for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2014 and 2013.

Also included in short-term investments at March 31, 2014 is our investment in the common stock of Intelligent Epitaxy Technology, Inc (IntelliEPI), a Taiwan publicly-traded company. We began classifying this asset as an available-for- sale security upon its initial public offering (IPO) in 2013. Prior to the IPO in 2013, we sold some of our stock in IntelliEPI and ~~2012.~~realized a gain of approximately $800,000. An unrealized gain of $1.6 million net of tax was recorded as of March 31, 2014. These securities are valued at fair market value at March 31, 2014. There is no assurance that the Company will realize this value when the securities are sold in the future.

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 some of our available-for-sale securities as of ~~September 30, 2013~~March 31, 2014 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.

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, 2013~~March 31, 2014 (in thousands):

	In Loss Position < 12 months					In Loss Position > 12 months				Total In Loss Position					In Loss Position < 12 months					In Loss Position > 12 months					Total In Loss Position
			Gross					Gross				Gross					Gross					Gross					Gross
	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		(Losses)			Value		(Losses)		Value		(Losses)			Value		(Loss)			Value		(Loss)			Value		(Loss)
Investments:
Certificates of deposit	$	3,671	$	(9	)	$	—	$	—	$	3,671	$	(9	)	$	1,918	$	(1	)	$	1,239	$	(1	)	$	3,157	$	(2	)
Corporate bonds		11,738		(25	)		—		—		11,738		(25	)		—		—			2,382		(2	)		2,382		(2	)
Total in loss position	$	15,409	$	(34	)	$	—	$	—	$	15,409	$	(34	)	$	1,918	$	(1	)	$	3,621	$	(3	)	$	5,539	$	(4	)

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																In Loss Position < 12 months					In Loss Position > 12 months					Total In Loss Position
																		Gross					Gross					Gross
	In Loss Position < 12 Months					In Loss Position > 12 Months					Total In Loss Position					Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Fair Value		Gross Unrealized (Losses)			Fair Value		Gross Unrealized (Losses)			Fair Value		Gross Unrealized (Losses)			Value		(Loss)			Value		(Loss)			Value		(Loss)
Investments:
Certificates of deposit	$	1,877	$	(1	)	$	199	$	(1	)	$	2,076	$	(2	)	$	3,425	$	(4	)	$	720	$	(0	)	$	4,145	$	(4	)
Corporate bonds		6,446		(40	)		1,502		(23	)		7,948		(63	)		4,473		(5	)		3,711		(1	)		8,184		(6	)
Total in loss position	$	8,323	$	(41	)	$	1,701	$	(24	)	$	10,024	$	(65	)	$	7,898	$	(9	)	$	4,431	$	(1	)	$	12,329	$	(10	)

~~Minority~~ 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 6). The investment balances for all of these companies, including minority investments indirectly in privately-held companies made ~~indirectly through~~by our consolidated joint ventures, ~~are~~ accounted for under the equity method ~~and~~ are included in “other assets” in the ~~condensed~~ consolidated balance sheets and totaled ~~$10.6~~$11.0 million and ~~$9.4~~$10.9 million as of ~~September 30, 2013~~March 31, 2014 and December 31, ~~2012,~~2013, respectively.

We also maintain minority investments in ~~two other companies~~one company which ~~are~~is accounted for under the cost method as we do not have the ability to exercise significant influence over their operations. Our investments ~~in these two companies~~under the cost method are reviewed for other than temporary declines in value on a quarterly basis. 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. As of ~~September 30, 2013~~March 31, 2014 and December 31, ~~2012,~~2013, our investments in ~~these two~~this unconsolidated ~~companies~~company had a carrying value of ~~$325,000 and $392,000, respectively,~~$200,000 and were also included in “other assets” in the condensed consolidated balance sheets.

Fair Value Measurements

ASC topic 820, Fair value measurement (“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 involving identical assets. Level 2 instrument valuations are obtained from readily-available 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. As of ~~September 30, 2013,~~March 31, 2014, we did not have any Level 3 assets or liabilities. 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. WeOther than corporate equity securities which are based on quoted market prices and classified as Level 1, we classify ~~all of~~ 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 quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. There were no changes in valuation techniques or related inputs in the three ~~and nine~~ months ended ~~September 30, 2013.~~March 31, 2014. There have been no transfers between fair value measurement levels during the three ~~and nine~~ months ended ~~September 30, 2013.~~March 31, 2014.

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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, 2013~~March 31, 2014 (in thousands):

	Balance as of September 30, 2013		Quoted Prices in Active Markets of Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Balance as of March 31, 2014		Quoted Prices in Active Markets of Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Assets:
Cash equivalents and investments:
Money market fund	$	3,609	$	3,609	$	—	$	1,122	$	1,122	$	—
Certificates of deposit		6,316		—		6,316		7,863		—		7,863
Corporate bonds		14,383		—		14,383		14,165		—		14,165
Corporate equity securities								2,025		2,025		—
Total	$	24,308	$	3,609	$	20,699	$	25,175	$	3,147	$	22,028
Liabilities	$	—	$	—	$	—	$	—	$	—	$	—

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The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis in accordance with ASC 820 as of December 31, ~~2012~~2013 (in thousands):

	Balance as of December 31, 2012		Quoted Prices in Active Markets of Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Balance as of December 31, 2013		Quoted Prices in Active Markets of Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Assets:
Cash equivalents and investments:
Money market fund	$	4,384	$	4,384	$	—	$	109	$	109	$	—
Certificates of deposit		6,645		—		6,645		6,318		—		6,318
Corporate bonds		12,816		—		12,816		14,278		—		14,278
Corporate equity securities								2,048		2,048		—
Total	$	23,845	$	4,384	$	19,461	$	22,753	$	2,157	$	20,596
Liabilities	$	—	$	—	$	—	$	—	$	—	$	—

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 equity and cost ~~methods~~method (See Note 6). We did not record ~~any~~ other-than-temporary impairment charges for ~~any~~either of these investments during the three ~~and nine~~ months ended ~~September 30, 2013 and 2012.~~March 31, 2014 or 2013.

Note 3. Inventories

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

	September 30,		December 31,		March 31,		December 31,
	2013		2012		2014		2013
Inventories:
Raw materials	$	21,009	$	20,003	$	19,873	$	21,063
Work in process		13,265		15,608		14,396		14,027
Finished goods		4,102		4,741		3,771		4,037
	$	38,376	$	40,352	$	38,040	$	39,127

As of ~~September 30, 2013~~March 31, 2014 and December 31, ~~2012,~~2013, carrying values of inventories were net of inventory ~~reserves~~reserve of ~~$10.5~~$11.5 million and ~~$10.1~~$11.0 million, respectively, for excess and obsolete inventory.

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Note 4. Accrued Liabilities

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

	March 31,		December 31,
	2014		2013
Accrued product warranty	$	1,227	$	1,048
Accrued compensation and related charges		1,210		1,762
Current portion of royalty payments		800		800
Dividends payable by consolidated joint ventures		729		649
Accrued professional services		279		543
Accrued income taxes		100		125
Other accrued liabilities		2,301		2,359
	$	6,646	$	7,286

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September 30, December 31,

2013 2012

Accrued compensation and related charges $ 1,817 $ 2,066
Dividends payable by consolidated joint ventures
1,175

—

Accrued product warranty 895 588
Current portion of royalty payments 800 800
Accrued professional services 654 609
Accrued income taxes 156 640
Other accrued liabilities 3,711 2,499

$ 9,208 $ 7,202

Note 5. Related Party Transactions

In August 2011, our consolidated joint venture, Beijing JiYa Semiconductor Material Co., ~~Ltd~~Ltd. (JiYa), entered into a non-interest bearing note agreement ~~for~~in the amount of $1.7 million (Rmb 10,485,200) with one of its equity investment entities. Under the loan agreement, JiYa loaned $801,000 (Rmb 4,959,000) to its equity investment entity in August 2011 and the remaining amount of $893,000 (Rmb 5,526,200) was loaned during the three months ended March 31, 2012.entities The original term of the loan was for two years and ten months ~~and~~with 3 periodic principal payments required. After various amendments to the ~~loan was payable to JiYa in three installments with~~terms of the ~~first installment of $423,000 (Rmb 2,620,000) due in December 2012, the second installment of $847,000 (Rmb 5,240,000) due~~note, in December 2013 ~~and the third installment of $424,000 (Rmb 2,625,200) due in May 2014. In December, 2012,~~ the parties ~~signed an addendum to the note agreement~~agreed to delay ~~the first~~all principal repayment ~~of $423,000 (Rmb 2,620,000) to June 2013. In June, 2013 the parties signed another addendum to the note agreement to delay this first repayment of $423,000 (Rmb 2,620,000) to June 2014~~ ~~as the last installment~~.until December 2016. As of ~~September 30,~~March 31, 2014, and December 31, 2013, we included $1.7 million (Rmb ~~10.5 million)~~10,485,200) in “Related party notes receivable – ~~short~~long term” in our ~~condensed~~ consolidated balance sheets.

In August 2011, our consolidated joint venture, Nanjing Jin Mei Gallium Co., Ltd. (Jin Mei) loaned $813,000 (Rmb 5,000,000) to its equity investment entity for construction purposes. As of September 30, 2013, this balance was included in “related party notes receivable – short term” in our condensed consolidated balance sheets. During the three months ended December 31, 2012, the parties signed a note agreement retroactively to set forth the terms for the loan. The loan bears interest at 6.7% per annum, subject to adjustment to market rate, and the principal is due on December 31, 2013.

Beginning in 2012, JiYa is contractually obligated under an agency sales agreement to sell raw material on behalf of one of its equity investment entities. ~~JiYa~~Jiya bills to the customers and remits the receipts, net of its portions of sales commission, to this equity investment entity. For the three months ended ~~September 30,~~March 31, 2014 and 2013, ~~and 2012,~~ JiYa has recorded $0 and $10,000 of income from agency sales respectively, which was included in “other ~~income (expense),~~expense, net” in our condensed consolidated statements of operations. For the nine months ended September 30, 2013 and 2012, $20,000 and $15,000 of income from agency sales was recorded in “other income (expense), net” respectively, in our condensed consolidated statements of operations. As of ~~September 30, 2013~~March 31, 2014 and December 31, ~~2012,~~2013, there were no amounts payable ~~of $521,000 and $257,000, respectively,~~ to this equity investment ~~entity for delivery in transit was included in “accrued liabilities” in our condensed consolidated balance sheets.~~entity.

JiYa also purchases raw materials from one of its equity investment entities for production in the ordinary course of business. As of ~~September 30, 2013~~March 31, 2014 and December 31, ~~2012,~~2013, amounts payable of ~~$827,000~~$1.2 million and ~~$1.1~~$1.5 million, respectively, were included in “accounts payable” in our condensed consolidated balance sheets.

Beginning in 2012, our consolidated joint venture, Nanjing Jin Mei Gallium Co., Ltd (Jin Mei) is contractually obligated under an agency sales agreement to sell raw material on behalf of its equity investment entity. Jin Mei bills to the customers and remits the receipts, net of its portions of sales commission, to this equity investment entity. For the three months ended ~~September 30,~~March 31, 2014 and 2013, ~~and 2012,~~ Jin Mei has recorded ~~$29,000~~ $5,000 and ~~$18,000 of~~ $65,000 income from agency sales, respectively, which were included in “other income (expense), net” in ~~our condensed consolidated statements of operations. For~~ the ~~nine months ended September 30, 2013 and 2012, $123,000 and $113,000 of income from agency sales was recorded in “other expense, net” respectively, in our condensed~~ consolidated statements of operations.

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~~Our~~In March 2012, our wholly-owned subsidiary, Beijing Tongmei Xtal Technology ~~Co,~~Co., Ltd. (Tongmei), entered into an operating lease for the land it owns with our consolidated joint venture Beijing BoYu Semiconductor Vessel Craftwork Technology Co., Ltd. The lease agreement for the land of approximately 22,081 square feet commenced on January 1, 2012 for a term of 10 years with annual lease payments of $24,000 (Rmb 150,000) subject to a 5% increase at each third year anniversary. The annual lease payment is due by January 31 of each year.

Tongmei has paid $120,000 (Rmb 740,924) on behalf of Donghai County Dongfang High Purity Electronic Materials Co., Ltd. its equity investment entity, to purchase materials. As of ~~September 30, 2013,~~March 31, 2014, this balance was included in "prepaid expenses and other current assets" in our ~~condensed~~ consolidated balance sheets.

Our Related Party Transactions Policy seeks to prohibit all conflicts of interest in transactions between related parties and us, unless they have been approved by our Board of Directors. This policy applies to all of our employees and directors, our subsidiaries and our joint ventures. Our executive officers retain board seats on the ~~Board~~board of ~~Directors~~directors of the companies in which we have invested in our China joint ventures. See Note 6 for further details.

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Note 6. 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~~ ~~at a competitive cost.~~business.

~~The~~Our investments are summarized below (in thousands):

Investment Balance as of

September 30, December 31, Accounting Ownership
Company 2013 2012 Method Percentage
Beijing JiYa Semiconductor Material Co., Ltd $ 3,331 $ 3,331 Consolidated 46 %
Nanjing Jin Mei Gallium Co., Ltd 592 592 Consolidated 83 %
Beijing BoYu Semiconductor Vessel Craftwork Technology Co., Ltd 410 410 Consolidated 70 %

$ 4,333 $ 4,333

Donghai County Dongfang High Purity Electronic Materials Co., Ltd. $ 1,950 $ 2,038 Equity 46 %
Xilingol Tongli Germanium Co. Ltd
4,618

4,246
Equity 25 %
Emeishan Jia Mei High Purity Metals Co., Ltd 942 1,042 Equity 25 %

$ 7,510 $ 7,326

	Investment Balance as of
	March 31,		December 31,		Accounting	Ownership
Company	2014		2013		Method	Percentage
Beijing JiYa Semiconductor Material Co., Ltd.	$	3,331	$	3,331	Consolidated		46	%
Nanjing Jin Mei Gallium Co., Ltd.		592		592	Consolidated		83	%
Beijing BoYu Semiconductor Vessel Craftwork Technology Co., Ltd.		1,346		1,346	Consolidated		70	%
	$	5,269	$	5,269

Donghai County Dongfang High Purity Electronic Materials Co., Ltd.	$	1,867	$	1,900	Equity		46	%
Xilingol Tongli Germanium Co. Ltd.		4,849		4,692	Equity		25	%
Emeishan Jia Mei High Purity Metals Co., Ltd.		925		945	Equity		25	%
	$	7,641	$	7,537

Our ownership of Beijing JiYa Semiconductor Material Co., Ltd. (JiYa) is 46%. We continue to consolidate JiYa as we have significant influence in management and have 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 board.

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 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 board.

Our ownership of Beijing BoYu Semiconductor Vessel Craftwork Technology Co., ~~Ltd~~Ltd. (BoYu) is 70%. We continue to consolidate BoYu as we have a significant influence in management and have majority control of the board. Our Chief Executive Officer is chairman of the BoYu board, while our president of China operations and our vice president of China administration are also members of the 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~~inputs from us.

During the three months ended ~~September 30,~~March 31, 2014 and 2013, ~~and 2012,~~ the three consolidated joint ventures generated ~~$565,000~~$0.8 million and ~~$1.8~~$1.3 million of income, respectively, of which ~~$230,000~~$205,000 and ~~$512,000,~~$441,000, respectively, were allocated to minority interests, resulting in ~~$335,000~~$548,000 and ~~$1.2 million~~$852,000 of income, respectively, included in our net income (loss). During the nine months ended September 30, 2013 and 2012, the three consolidated joint ventures generated $3.3 million and $7.0 million of income, respectively, of which $1.1 million and $3.0 million, respectively, was allocated to ~~minority interests, resulting in $2.2 million and $4.0 million of income, respectively, included in~~ our net income (loss).

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For the three minority investment entities that are not consolidated, the investment balances are included in “other assets” in our condensed consolidated balance sheets and totaled ~~$7.5~~$7.6 million and ~~$7.3~~$7.5 million as of ~~September 30, 2013~~March 31, 2014 and December 31, ~~2012, respectively.~~2013. We own 46% of the ownership interests in one of these companies and 25% in each of the other two companies. These three companies are not considered variable interest entities because:

all three 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 any of these companies.

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We also maintain minority investments in privately-held companies made indirectly through our consolidated joint ventures. These minority investments are accounted for under the equity method in the books of our consolidated joint ventures. As of ~~September 30, 2013~~March 31, 2014 and December 31, ~~2012,~~2013, our consolidated joint ventures included these minority investments in “other assets” in the condensed consolidated balance sheets with a carrying value of ~~$3.1 million and $2.0 million, respectively.~~

~~During the three months ended September 30, 2013, our consolidated joint venture JiYa invested $460,000 (Rmb 2.8 million)~~ ~~for~~ ~~a 20% equity investment in Shanxi Jia Hua Galaxy Electronic Materials Co., Ltd, a gallium producer.~~$3.4 million.

All of the minority investment entities 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, 2013~~March 31, 2014 and ~~2012.~~2013.

	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2013		2012		2013		2012		2014		2013

Net revenue	$	11,024	$	9,394	$	29,938	$	23,676
Net Sales									$	13,480	$	9,273
Gross profit	$	3,628	$	3,377	$	10,516	$	8,137		3,963		3,124
Operating income	$	2,393	$	2,018	$	6,566	$	4,542		2,664		1,614
Net income	$	1,631	$	1,897	$	4,960	$	3,915		2,119		1,295

Our gross entity earnings from all the minority investment entities that are not consolidated and accounted for under the equity method were ~~$346,000~~$487,000 and $~~348,000~~$282,000 for the three months ended ~~September 30,~~March 31, 2014 and 2013, ~~and 2012, respectively, and $1.1 million and $786,000~~ ~~for the nine months ended September 30, 2013 and 2012,~~ respectively.

We also maintain minority investments directly in ~~two other~~one privately-held companies accounted for under the cost method and we do not have the ability to exercise significant influence over their operations. As of ~~September 30, 2013~~March 31, 2014 and December 31, ~~2012,~~2013, our investments in ~~these two~~this unconsolidated ~~companies~~privately-held company had a carrying value of ~~$325,000~~$200,000 and ~~$392,000, respectively~~, ~~and were~~are included in “other assets” in the condensed consolidated balance sheets.

Note 7. Stockholders’ Equity and Stock Repurchase Program

Consolidated ~~Statement~~Statements of Changes in Equity

~~(in thousands)~~

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, 2012 $ 3,532 $ 32 $ 193,063 $ (59,047 ) $ 6,033 $ 143,613 $ 7,301 $ 150,914
Common stock options exercised 278 278 278
Common stock repurchased (287 ) (287 ) (287 )
Stock-based compensation 1,004 1,004 1,004
Net income (loss) (6,730 ) (6,730 ) 1,105 (5,625 )
Dividends declared by joint ventures (2,898 ) (2,898 )
Change in unrealized (loss) gain on marketable securities 26 26 26
Currency translation adjustment 929 929 248 1,177
Balance as of September 30, 2013 $ 3,532 $ 32 $ 194,058 $ (65,777 ) $ 6,988 $ 138,833 $ 5,756 $ 144,589

	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, 2013	$	3,532	$	32	$	194,156	$	(67,005	)	$	8,953		$	139,668		$	5,878		$	145,546
Stock-based compensation						292								292						292
Net (loss) income								(2,040	)					(2,040	)		205			(1,835	)
Dividends declared by joint ventures																	(83	)		(83	)
Change in unrealized (loss) gain on marketable securities											(10	)		(10	)					(10	)
Currency translation adjustment											(442	)		(442	)		(79	)		(521	)
Balance as of March 31, 2014	$	3,532	$	32	$	194,448	$	(69,045	)	$	8,501		$	137,468		$	5,921		$	143,389

There were no reclassification adjustments from accumulated other comprehensive income for the ~~nine~~three months ended ~~September 30,~~March 31, 2014 and March 31, 2013 ~~and 2012~~.

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~~Note 8.~~ Stock Repurchase Program

On February 21, 2013, our Board of Directors approved a stock repurchase program pursuant to which we may repurchase up to ~~$6.0~~$6.0 million of our outstanding common stock through February 27, 2014. These purchases can be made from time to time in the open market and are funded from our existing cash balances and cash generated from operations. During ~~the nine months ended September 30~~, 2013,, we repurchased approximately ~~103,000~~285,000 shares at an average price of ~~$2.79~~$2.51 per share for a total purchase price of ~~$287,000~~$716,000 under the stock repurchase program.

As of ~~September~~ ~~30,~~December 31, 2013,, approximately ~~$5.7~~$5.3 million remained available for future repurchases under this program. No shares were repurchased in the three months ended March 31, 2014 under this program. This repurchase plan expired on February 27, 2014. See Item 2, Unregistered Sales of Equity Securities and Use of Proceeds in Part II, Other Information, for additional information.

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Note 9.8. 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. 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 employee’s requisite service period of the award. All of our stock compensation is accounted for as an equity instrument.

The following table summarizes compensation costs related to our stock-based awards (in ~~thousands)~~thousands, except per share data):

	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2013		2012		2013		2012		2014		2013

Cost of revenue	$	6	$	19	$	17	$	56	$	5	$	6
Selling, general and administrative		285		245		860		721		244		284
Research and development		43		36		127		96		43		42
Total stock-based compensation		334		300		1,004		873		292		332
Tax effect on stock-based compensation		—		—		—		—		—		—
Net effect on net income (loss)	$	334	$	300	$	1,004	$	873	$	292	$	332

As of ~~September 30, 2013,~~March 31, 2014, the unamortized compensation costs related to unvested stock options granted to employees under our stock option ~~plan was~~plans were approximately ~~$1.5~~$1.4 million, net of estimated forfeitures of ~~$30,000.~~$92,000. These costs ~~will be~~are amortized on a straight-line basis over a weighted-average period of approximately ~~2.4~~2.6 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, 2013~~March 31, 2014 due to the immateriality of the amount.

We estimate the fair value of stock options using ~~the~~a Black-Scholes valuation ~~model.~~model, consistent with the provisions of ASC 718. There were ~~60,000 and 0~~no stock options granted ~~with weighted average grant date fair values of $1.21 and $0~~ in the three months ended ~~September 30, 2013~~March 31, 2014 and 2012, respectively. There were 60,000 and 104,000 stock options granted with weighted average grant date fair values of $1.21 and $2.84 in the nine months ended September 30, 2013 and 2012, respectively. The fair value of our stock options granted to employees for the three and nine months ended September 30, 2013 was estimated using the following weighted-average assumptions:

Three Months
Ended
Nine Months
Ended
September 30, 2013
September 30,
2013

Expected term (in years) 4.0 4.0
Volatility 61.86 % 61.86 %
Expected dividend 0 % 0 %
Risk-free interest rate 1.00 % 1.00 %

2013.

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The following table summarizes ~~the~~our stock option ~~transactions~~activities during the ~~nine~~three months ended ~~September 30, 2013~~March 31, 2014 (in thousands, except per share data):

Stock Options	Shares			Weighted- average Exercise Price		Weighted- average Remaining Contractual Life (in years)		Aggregate Intrinsic Value		Shares			Weighted- average Exercise Price		Weighted- average Remaining Contractual Life (in years)		Aggregate Intrinsic Value

Outstanding at January 1, 2013		2,727		$	3.28		6.71	$	1,353
Balance as of January 1, 2014											2,671		$	3.29		6.71	$	893

Granted		60			2.55						—			—

Exercised		(200	)	$	1.40						—			—

Canceled and expired		(48	)	$	4.42						(74	)		5.18
Outstanding at September 30, 2013		2,539		$	3.39		6.44	$	610

Options vested and expected to vest as of September 30, 2013		2,522		$	3.39		6.42	$	610
Balance as of March 31, 2014											2,597		$	3.24		6.65	$	438

Options exercisable as of September 30, 2013		1,682		$	3.22		5.30	$	607
Options vested and expected to vest as of March 31, 2014											2,597		$	3.24		6.65	$	438

Options exercisable as of March 31, 2014											1,663		$	3.30		5.43	$	438

The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on our closing price of ~~$2.34~~$2.20 on ~~September 30, 2013,~~March 31, 2014, which would have been received by the option holder had all option holders exercised their options on that date.

Restricted stock awards

A summary of activity related to restricted stock awards for the ~~nine~~three months ended ~~September 30, 2013~~March 31, 2014 is presented below:

Stock Awards	Shares			Weighted-Average Grant Date Fair Value		Shares		Weighted-Average Grant Date Fair Value
Non-vested as of January 1, 2013		238,723		$	4.27
Non-vested as of January 1, 2014							241,232	$	3.44
Granted		43,636		$	2.75		—	$	—
Vested		(47,767	)	$	5.13		—	$	—
Non-vested as of September 30, 2013		234,592		$	3.82
Non-vested as of March 31, 2014							241,232	$	3.44

As of ~~September 30, 2013,~~March 31, 2014, the unamortized compensation costs related to unvested restricted stock awards was approximately ~~$687,000,~~$581,000, which is to be amortized on a straight-line basis over a weighted average period of approximately ~~2.4~~2.3 years.

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Note ~~10.~~9. Net Income (loss) Per Share

Basic net income (loss) per share is computed using the ~~weighted average~~weighted-average number of common shares outstanding during the ~~period.~~periods less shares of common stock subject to repurchase and non-vested stock awards. Diluted net income (loss) per share is computed using the ~~weighted average~~weighted-average number of common shares outstanding and potentially dilutive common shares outstanding during the ~~period.~~periods. The dilutive effect of outstanding stock options and restricted stock awards is reflected in diluted earnings per share by application of the treasury stock method. Potentially dilutive common shares consist of common shares issuable upon the exercise of stock ~~options and vesting of restricted stock awards.~~options. Potentially dilutive common shares are excluded in net loss periods, as their effect would be anti-dilutive.

A reconciliation of the numerators and denominators of the basic and diluted net ~~income (loss)~~loss per share calculations is as follows (in thousands, except per share data):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,						Three Months Ended March 31,
	2013			2012			2013			2012			2014			2013
Numerator:
Net income (loss) attributable to AXT, Inc.	$	(2,295	)	$	932		$	(6,730	)	$	3,866
Net loss attributable to AXT, Inc.													$	(2,040	)	$	(2,400	)
Less: Preferred stock dividends		(44	)		(44	)		(132	)		(132	)		(44	)		(44	)

Net income (loss) available to common stockholders	$	(2,339	)	$	888		$	(6,862	)	$	3,734
Net loss available to common stockholders													$	(2,084	)	$	(2,444	)
Denominator:
Weighted average common shares (basic)		32,366			32,183			32,407			32,118
Denominator for basic net loss per share - weighted average common shares														32,364			32,297
Effect of dilutive securities:
Common stock options		—			582			—			754			—			—
Restricted stock awards		—			4			—			39			—			—
Weighted average common shares (dilutive)		32,366			32,769			32,407			32,911
Net income (loss) attributable to AXT, Inc. per common share:
Denominator for dilutive net loss per common share														32,364			32,297
Net loss attributable to AXT, Inc. per common share:
Basic	$	(0.07	)	$	0.03		$	(0.21	)	$	0.12		$	(0.06	)	$	(0.08	)
Diluted	$	(0.07	)	$	0.03		$	(0.21	)	$	0.11		$	(0.06	)	$	(0.08	)
Options excluded from diluted net income (loss) per share as the impact is anti-dilutive		2,524			992			2,563			977
Restricted stock excluded from diluted net income (loss) per share as the impact is anti-dilutive		243			172			242			14
Weighted-average shares:
Options excluded from diluted net loss per share as the impact is anti-dilutive														2,607			2,656
Restricted stock excluded from diluted net loss per share as the impact is anti-dilutive														241			239

The 883,000 shares of $0.001 par value Series A preferred stock issued and outstanding as of ~~both September 30, 2013~~March 31, 2014 and December 31, ~~2012,~~2013, valued at $3,532,000, 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~~which must be paid before any distribution is made to common stockholders. These preferred shares were issued to Lyte Optronics, Inc. stockholders in connection with the completion of our acquisition of Lyte Optronics, Inc. on May 28, 1999.

Note ~~11.~~10. 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 our Chief 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~~our condensed consolidated financial statements.

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The following table represents revenue amounts (in thousands) by product type:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,				Three Months Ended March 31,
	2013		2012		2013		2012		2014		2013
Product type:
GaAs substrates	$	9,013	$	12,901	$	31,378	$	39,994	$	8,488	$	11,723
InP substrates		1,420		1,649		5,286		4,433		2,180		1,849
Ge substrates		5,472		2,007		13,370		7,078		3,278		2,551
Raw materials and other		4,616		4,251		16,698		17,942		5,399		6,257
Total	$	20,521	$	20,808	$	66,732	$	69,447	$	19,345	$	22,380

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				Three Months Ended March 31,
	September 30,				September 30				2014		2013
	2013		2012		2013		2012
Geographical region:
Geographical information:
Europe (primarily Germany)									$	6,583	$	4,689
China	$	6,611	$	3,063	$	20,344	$	15,031		4,165		6,029
Europe (primarily Germany)		5,732		5,148		16,043		14,519
Asia Pacific (excluding China, Japan and Taiwan)										2,389		2,132
Taiwan		1,536		3,490		8,474		9,130		2,115		3,779
Japan										2,313		2,282
North America (primarily the United States)		2,298		3,230		7,810		12,663		1,780		3,469
Japan		1,931		2,404		7,233		7,196
Asia Pacific (excluding China, Taiwan and Japan)		2,413		3,473		6,828		10,908
Total	$	20,521	$	20,808	$	66,732	$	69,447	$	19,345	$	22,380

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				As of
	September 30,		December 31,		March 31,		December 31,
	2013		2012		2014		2013

Long-lived assets by geographic region:
North America	$	228	$	430	$	179	$	204
China		37,222		36,805		36,000		37,417
	$	37,450	$	37,235	$	36,179	$	37,621

Significant Customers

No customer represented more than 10% of our revenue for the three months ended September 30, 2013 while one customer represented 14.3% of our revenue for the three months ended September 30, 2012. No customer represented more than 10% of our revenue for the nine months ended September 30, 2013 while one customer represented 15.6% of our revenue for the nine months ended September 30, 2012. March 31, 2014 and 2013. Our top five customers, although not the same five customers for each period, represented ~~36.8%~~39% and ~~37.3%~~34% of our revenue for the three months ended ~~September 30,~~March 31, 2014 and 2013, ~~and 2012, respectively. Our top five customers, although not the same five customers for each period, represented~~ ~~30.9% and~~ ~~37.0% of our revenue for the nine months ended September 30, 2013 and 2012,~~ respectively.

We perform ongoing credit evaluations of our customers’ financial condition, and limit the amount of credit extended when deemed necessary, but generally do not require collateral. ~~One~~No customer accounted for ~~11% and 28%~~over 10% of our trade accounts receivable balance as of ~~September 30, 2013 and~~March 31, 2014 while one customer accounted for 20% of our trade accounts receivable balance as of December 31, ~~2012, respectively.~~2013.

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Note ~~12.~~11. Commitments and Contingencies

Indemnification Agreements

We enter into standard indemnification arrangements with our customers 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 their 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.

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We have entered into indemnification agreements with our directors and officers that require us to (i) 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~~nature, (ii) advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified; and to(iii) obtain directors’ and officers’ insurance if available on reasonable terms, which we currently have in place.

Product Warranty

We provide warranties for 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,~~March 31, 2014 and 2013 ~~and 2012~~ (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2013			2012			2013			2012			2014			2013

Beginning accrued warranty and related costs	$	804		$	740		$	588		$	1,003		$	1048		$	588
Accruals for warranties issued		183			92			558			331			496			264
Adjustments related to pre-existing warranties including expirations and changes in estimates		14			(57	)		351			(338	)		(103	)		166
Cost of warranty repair		(106	)		(78	)		(602	)		(299	)		(214	)		(269	)
Ending accrued warranty and related costs	$	895		$	697		$	895		$	697		$	1,227		$	749

Contractual Obligations

We lease certain office space, manufacturing facilities and equipment under long-term operating leases expiring at various dates through February ~~2016.~~2023. The majority of our lease ~~obligation~~obligations relates to our lease agreement for the facility at Fremont, California with approximately 27,760 square feet, which commenced on December 1, 2008 for a term of seven years, with an option by us to cancel the lease after five years, upon forfeiture of the security deposit and payment of one-half of the fifth year’s rent. On June 28, 2013, we sent a notice to terminate the lease effective November 30, 2013 with an early termination penalty of $142,000 which was recorded as an expense in the third quarter of ~~2013~~.2013. On August 2, 2013, we signed a new lease agreement for the current facility with reduced footage of 20,767 square feet, which ~~will commence~~commenced on December 1, 2013 for a term of two years. The reduced square footage, the reduced rate per square foot, and the expected reduced operating costs, would save us approximately total $382,000 during 2014 and 2015.

We entered into a royalty agreement with a vendor effective December 3, 2010 with a term of eight years, terminating December 31, 2018. We and our related companies are granted a worldwide, nonexclusive, royalty bearing, irrevocable license to certain patents for the term of the agreement. We shall pay a total of $7.0 million royalty payment over eight years beginning in 2011 based on future royalty bearing sales.This agreement contains a clause that allows us to make a claim for credit, starting in 2013, in the event that the royalty bearing sales for the year is lower than a pre-determined amount set forth in this agreement.

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Outstanding contractual obligations as of ~~September 30, 2013~~March 31, 2014 are summarized as follows (in thousands):

	Payments due by period										Payments due by period
Contractual Obligations	Total		Less than 1 year		1-3 years		4-5 years		More than 5 years		Total		Less than 1 year		1-3 years		4-5 years		More than 5 years
Operating leases	$	379	$	210	$	169	$	—	$	—	$	557	$	263	$	208	$	34	$	52
Royalty agreement		3,525		800		1,431		1,150		144		3,125		800		1,319		1,006		—
Total	$	3,904	$	1,010	$	1,600	$	1,150	$	144	$	3,682	$	1,063	$	1,527	$	1,040	$	52

Purchase Obligations

In the normal course of business, we purchase or place orders for the necessary materials ~~for~~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, 2013,~~March 31, 2014, we ~~did~~do not have any outstanding material purchase obligations.

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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 ~~operations.~~operation.

Note ~~13.~~12. Foreign Exchange Transaction ~~Gains/~~Losses

We incurred foreign currency transaction exchange gains of $17,000 and losses of ~~$67,000 and gains of $114,000~~$593,000 for the three months ended ~~September 30,~~March 31, 2014 and 2013, ~~and 2012, respectively. We incurred foreign currency transaction exchange losses of $964,000~~ ~~and~~ ~~gains of $55,000 for the nine months ended September 30, 2013 and 2012,~~ respectively. These amounts are included in ~~“other income (expense),~~“Other expense, net” on our condensed consolidated statements of operations.

Note ~~14.~~13. Income Taxes

We account for income taxes in accordance with ASC topic 740, Income Taxes (“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 recognize interest~~

In accordance with Section 382 of the Internal Revenue Code, the amounts of and ~~penalties related~~benefits from net operating loss and tax credit carryforwards may be impaired or limited in certain circumstances. Events which cause limitations in the amount of net operating losses or credits that we may utilize in any one year include, but are not limited to, ~~uncertain tax positions in income tax expense.~~a cumulative ownership change of more that 50% as defined, over a three year period. As a result of ~~September 30, 2013,~~the implementation of Interpretation 48, we ~~do not have any gross unrecognized tax benefits, nor accrued interest and penalties related to uncertain tax positions. As of December 31, 2012, we had~~recognized $16.4 million of liability for unrecognized tax benefits. Of this amount, none was accounted for as a reduction to ~~the~~ balance of retained earnings. No ~~material~~ ~~changes have occurred in our~~ The amount decreased tax ~~position taken as of December 31, 2012~~loss carryforwards in the U.S., which are fully offset by a valuation allowance.

We recognize interest and penalties related to uncertain tax positions in income tax expense. Income tax expense for the three month ended March 31, 2014 includes no interest and ~~nine months ended September 30, 2013.~~ penalties. As of March 31, 2014, we have no accrued interest and penalties related to uncertain tax positions. 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, ~~2012~~. 2012.

Provision for income taxes for three ~~and nine~~ months ended ~~September 30,~~March 31, 2014 and 2013 ~~and 2012~~ was mostly related to our China subsidiary and our China joint venture operations. We have made a tax election in China whereby certain minimum foreign withholding taxes are treated as an expense and not a tax credit. Besides the state ~~tax~~taxes liabilities, no federal income tax benefit or expense has been provided for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2014 or 2013 due to our net ~~loss. No federal income tax benefit or expense has been provided for the three and nine months ended September 30, 2012 due to~~loss, our valuation allowance being utilized and ~~the~~ uncertainty of future profits in the U.S.

Note 14. Restructuring Charges

On February 25, 2014, we announced a restructuring plan with respect to our wholly-owned subsidiary, Beijing Tongmei Xtal Technology Co, Ltd. (“Tongmei”) in order to better align demand with manufacturing capacity. Under the restructuring plan, Tongmei would implement certain workforce reductions with respect to its manufacturing facility in China. We also announced that the restructuring plan would be completed by March 31, 2014, depending on local legal requirements.

In the first quarter of 2014, we reduced the workforce at Tongmei by approximately 93 positions that are no longer required to support production and operations, or approximately 11 percent of the workforce. Accordingly, we recorded a restructuring charge of approximately $907,000 related to the reduction in force for severance-related expenses. As of March 31, 2014 we have completed this restructuring plan and the reduction in force.

Note 15. Recent Accounting Pronouncements

~~In July 2013, the FASB issued ASU No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.”~~ This standard provides guidance on financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This standard applies to all entities thatThere have ~~unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. This standard will become effective for us for~~been no new accounting pronouncements during the three months ~~ending~~ended March 31, ~~2014.~~ ~~We are currently evaluating~~2014, as compared to the ~~potential impact, if any, of the adoption of the standard~~recent accounting pronouncements described in our Annual Report on ~~our consolidated results of operations and financial condition.~~

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~~In March 2013, the FASB issued ASU No. 2013-05, “Parent's Accounting~~Form 10-K for the ~~Cumulative Translation Adjustment upon Derecognition~~year ended December 31, 2013, that are of ~~Certain Subsidiaries~~material significance, or ~~Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity.”~~ ~~This standard addresses~~potential significance, to the accounting for the cumulative translation adjustment when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. The standard is effective as of the beginning of a fiscal year that begins after December 15, 2013 and interim and annual periods thereafter. The standard will become effective for us for the three months ending March 31, 2014. ~~We are currently evaluating the potential impact, if any, of the adoption of the standard on our consolidated results of operations and financial condition.~~

~~In February 2013, the FASB issued ASU No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”.~~ This standard requires entities to present information about reclassification adjustments from accumulated other comprehensive income in the annual financial statements in a single note or on the face of the financial statements. Public companies will also have to provide this information in their interim financial statements. The new requirements are effective as of the beginning of a fiscal year that begins after December 15, 2012 and interim and annual periods thereafter. The standard has been effective for us since the beginning of fiscal 2013 and did not have any significant impact on our consolidated results of operations and footnote disclosures.Company.

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ITEM 2.

MANAGEMENT’S 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, ~~outlook,~~ customer demand, our ability to expand our markets and increase sales, industry trends, customer qualifications of our products, gross margins, 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 management’s 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, 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.

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. We undertake no obligation to revise or update any forward‑looking statements in order to reflect any event or circumstance that may arise after the date of this report. Readers are urged to carefully review and consider the various disclosures made in this report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects. This discussion should be read in conjunction with Management’s 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, ~~2012~~2013 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, including substrates made from 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”, 6”	· High brightness light emitting diodes
		· Lasers
		· Optical couplers

InP	2”, 3”, 4”	· Broadband and fiber optic communications

Ge	2”, 4”, 6”	· 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 People’s Republic of China (PRC or China), which generally has favorable costs for facilities and labor compared to comparable facilities in the United States, Europe or Japan. We also have joint ventures in China, which provide us with pricing advantages, reliable supply and enhanced sourcing lead-times for key raw materials ~~which~~that 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, pyrolytic boron nitride (pBN) crucibles and boron oxide (B2O3). Our ownership interest in these entities ranges from 20% to 83%. We consolidate, for accounting purposes, the joint ventures in which we have majority or controlling financial interest and significant influence on management, and employ equity accounting for the joint ventures in which we have a smaller ownership ~~interest and significant influence on management.~~interest. We purchase portions of the materials produced by these joint 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 China and independent sales representatives in Europe and other parts of Asia to market and sell our substrates.

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Restructuring Charges

In the first quarter of 2014, we reduced the workforce at Tongmei by approximately 93 positions that are no longer required to support production and operations, or approximately 11 percent. Accordingly, we recorded a restructuring charge of approximately $907,000 related to the reduction in force for severance-related expenses. As of March 31, 2014 we have completed this restructuring plan and reduction in force.

Critical Accounting Policies and Estimates

We prepared our condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. As such, we 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.

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.

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 customer’s dock, or removal from consignment inventory at the customer’s 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 provide allowance 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 evaluate receivables from U.S. customers with an emphasis on balances in excess of 90 days and for receivables from customers located outside the U.S. with an emphasis on balances in excess of 120 days and reserve allowance on the receivable balances if needed. The reason for the difference in the evaluation of receivables between foreign and U.S. customers is that U.S. customers have historically made payments in a shorter period of time than foreign customers. Foreign business practices generally require us to allow customer payment terms that are longer than those accepted in the United States. 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, 2013~~March 31, 2014 and December 31, ~~2012,~~2013, our accounts receivable, net, balance was ~~$16.3~~$16.4 million and ~~$17.9~~$14.9 million, respectively, which was net of an allowance for doubtful accounts of ~~$627,000~~$570,000 and ~~zero,~~$869,000, 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 ~~affected period.~~future periods.

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The allowance for sales returns is also deducted from gross accounts receivable. As of ~~September 30, 2013~~March 31, 2014 and December 31, ~~2012,~~2013, our allowance for sales returns was ~~$301,000~~$221,000 and ~~$245,000,~~$186,000, 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, 2013~~March 31, 2014 and December 31, ~~2012,~~2013, accrued product warranties totaled ~~$895,000~~$1.2 million and ~~$588,000,~~$1.0 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 for future periods.

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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, 2013~~March 31, 2014 and December 31, ~~2012,~~2013, we had an inventory reserve of ~~$10.5~~$11.5 million and ~~$10.1~~$11.0 million, respectively, for excess and obsolete inventory. 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.

Impairment of Investments

We classify our investments in debt and equity securities as available-for-sale securities in accordance with ASC topic 320, Investments - Debt and Equity Securities (“ASC 320”). 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.

We invest in equity instruments of ~~privately held or pre-IPO~~privately-held companies in China 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 investee’s 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. We had no write‑downs for the three ~~and nine~~ months ended ~~September 30, 2013 and 2012.~~March 31, 2014 or 2013.

Fair Value of Investments

ASC 820, Fair Value Measurement (“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:

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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 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, 2013,~~March 31, 2014, 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). There have been no transfers between fair value measurement levels during the three ~~and nine~~ months ended ~~September 30, 2013.~~March 31, 2014.

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Impairment of Long-Lived Assets

We evaluate the recoverability of property, equipment and intangible assets in accordance with ASC topic 360, Property, Plant and Equipment (“ASC 360”). 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. We had no “Assets held for sale” on the condensed consolidated balance sheet as of ~~September 30, 2013~~March 31, 2014 or December 31, ~~2012.~~2013.

Stock-based Compensation

We account for stock-based compensation in accordance with ASC topic 718, Stock-based Compensation (“ASC 718”), using the modified prospective method. Share-based awards granted include stock options and restricted stock awards. We utilize the Black‑Scholes option pricing model to estimate the grant date fair value of stock options, which requires the input of highly subjective assumptions, including expected volatility and expected term. Historical volatility was used while the expected term for our options was estimated based on historical option exercise behavior and post-vesting forfeitures of options, and the contractual term, the vesting period and the expected term of the outstanding options. Further, we apply an expected forfeiture rate in determining the amount of share-based compensation. We use historical forfeitures to estimate the forfeitures for stock compensation awards that are not expected to vest. Changes in these inputs and assumptions can materially affect the measure of estimated fair value of our stock compensation. The cost of restricted stock awards is determined using the fair value of our common stock on the date of grant.

We recognize the compensation costs ~~for stock options~~ net of an estimated forfeiture rate over the requisite service period of the options award, which is generally the vesting term of four years. Compensation expense for restricted stock awards is recognized over the vesting period, which is generally three years or four years. Stock-based compensation expense is recorded in cost of revenue, research and development, and selling, general and administrative expenses.

Income Taxes

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.

See Note ~~14—~~13—“Income Taxes” in the notes to condensed financial statements for additional information.

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Results of Operations

Revenue

	Three Months Ended September 30,				Increase						Three Months Ended March 31,						Increase
	2013		2012		(Decrease)			% Change			2014			2013			(Decrease)				% Change
($ in thousands)
											($ in thousands)
GaAs	$	9,013	$	12,901	$	(3,888	)		(30.1	)%		$	8,488		$	11,723		$	(3,235	)		(27.6	)%
InP		1,420		1,649		(229	)		(13.9	)%			2,180			1,849			331			17.9	%
Ge		5,472		2,007		3,465			172.6	%			3,278			2,551			727			28.5	%
Raw materials and other		4,616		4,251		365			8.6	%			5,399			6,257			(858	)		(13.7	)%
Total revenue	$	20,521	$	20,808	$	(287	)		(1.4	)%		$	19,345		$	22,380		$	(3,035	)		(13.6	)%

Revenue decreased $3.0 million, or 13.6%, to $19.3 million for the three months ended March 31, 2014 from $22.4 million for the three months ended March 31, 2013. Total GaAs substrate revenue decreased $3.2 million, or 27.6%, to $8.5 million for the three months ended March 31, 2014 from $11.7 million for the three months ended March 31, 2013. The decrease in GaAs substrate revenue was primarily due to the ~~weaker~~softer demand environment from our current customer base in both the wireless devices market and the light emitting diode (LED) ~~market and wireless devices~~ market.

Sales of 2 inch, 3 inch and 4 inch diameter GaAs substrates, which are mainly semi-conducting substrates used in LED applications, decreased ~~$2.4~~$1.4 million to ~~$6.9~~$6.1 million for the three months ended ~~September 30, 2013~~March 31, 2014 from ~~$9.3~~$7.5 million for the three months ended ~~September 30, 2012.~~March 31, 2013. The decrease in revenue from smaller diameter substrates was primarily due to weaker demand from our current customers in the LED market. ~~We expect revenue from semi-conducting GaAs substrates to remain flat~~ ~~in the fourth~~ ~~quarter as the markets in Asia and China in particular, remain weak.~~

Sales of 5 inch and 6 inch diameter GaAs substrates, which are mainly semi-insulating substrates used in wireless devices, decreased ~~$1.4~~by $1.8 million to ~~$2.2~~$2.4 million for the three months ended ~~September 30, 2013~~March 31, 2014 from ~~$3.6~~$4.2 million for the three months ended ~~September 30, 2012.~~March 31, 2013. The decrease in revenue from larger diameter substrates was primarily due to ~~weaker~~lower demand for semi-insulating GaAs substrate from ~~our major~~ customers in the wireless devices ~~market. We expect revenue from semi-insulating GaAs substrate~~market compared to ~~remain flat~~ in the ~~fourth quarter~~ ~~and~~ ~~should improve in~~ ~~2014.~~same period of the prior year.

InP substrate revenue ~~decreased primarily due~~increased $331,000, or 17.9%, to ~~reduction in orders~~$2.2 million for the three months ended March 31, 2014 from ~~a major customer utilizing excess inventory~~$1.8 million for the three months ended March 31, 2013 as demand from customers in the optical networking ~~industry.~~industry increased. We ~~expect revenue from InP substrate~~continued to ~~improve~~see renewed demand for these substrates as investment in ~~the fourth~~ ~~quarter.~~high-speed optical communications increased worldwide.

Ge substrate revenue increased ~~$3.5 million~~by $727,000, or 28.5%, to ~~$5.5~~$3.3 million for the three months ended ~~September 30, 2013~~March 31, 2014 from ~~$2.0~~$2.6 million for the three months ended ~~September 30, 2012 primarily~~March 31, 2013 due to ~~more planned satellite launches compared to the same period prior year and from~~ increased demand ~~from~~for concentrated photovoltaic solar applications ~~for solar terrestrial cells. We expect Ge substrate revenue to increase in the future as we are seeing increased demand~~ from ~~concentrated photovoltaic applications for solar terrestrial cells.~~our German and Chinese customers.

Raw materials ~~and other~~ revenue ~~increased~~decreased $863,000, or 13.8%, to $5.4 million for the three months ended March 31, 2014 from $6.3 million for the three months ended March 31, 2013 primarily due to decreased selling prices and decreased tonnage sold of 4N gallium, partially offset by increased sales of pBN ~~crucibles while revenue from raw gallium sales remains flat. We expect our third party raw material revenue to remain flat~~ ~~in the fourth~~ ~~quarter as demand remains soft.~~

crucibles.

Nine Months Ended
September 30,
Increase

2013 2012 (Decrease) % Change
($ in thousands)

GaAs $ 31,378 $ 39,994 $ (8,616 ) (21.5 )%
InP 5,286 4,433 853 19.2 %
Ge 13,370 7,078 6,292 88.9 %
Raw materials and other 16,698 17,942
(1,244
)
(6.9
)%
Total revenue $ 66,732 $ 69,447 $ (2,715 ) (3.9 )%

Revenue by Geographic Region

	Three Months Ended March 31,						Increase
	2014			2013			(Decrease)			% Change
	($ in thousands)
Europe (primarily Germany)	$	6,583		$	4,689		$	1,894			40.4	%
% of total revenue		34	%		21	%
China		4,165			6,029			(1,864	)		(30.9	)%
% of total revenue		22	%		27	%
Asia Pacific (excluding China, Taiwan and Japan)		2,389			2,132			257			12.1	%
% of total revenue		12	%		9	%
Japan		2,313			2,282			31			1.4	%
% of total revenue		12	%		10	%
Taiwan		2,115			3,779			(1,664	)		(44.0	)%
% of total revenue		11	%		17	%
North America (primarily the United States)		1,780			3,469			(1,689	)		(48.7	)%
% of total revenue		9	%		16	%
Total revenue	$	19,345		$	22,380		$	(3,035	)		(13.6	)%

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~~The decrease in GaAs substrate revenue was primarily due to the weaker demand environment from our current customer base in both the light emitting diode (LED) market and wireless devices market.~~

Sales of 2 inch, 3 inch and 4 inch diameter GaAs substrates decreased $6.0 million to $21.8 million for the nine months ended September 30, 2013 from $27.8 million for the nine months ended September 30, 2012. The decrease in revenue from smaller diameter substrates was primarily due to weaker demand from our current customers in the LED market as the markets became weak in Asia, and China in particular.

Sales of 5 inch and 6 inch diameter GaAs substrates decreased $2.6 million to $9.6 million for the nine months ended September 30, 2013 compared to $12.2 million for the nine months ended September 30, 2012. The decrease in revenue from larger diameter substrates was primarily due to weaker demand from our major customers in the wireless devices market.

~~InP substrate revenue increased primarily due to stronger demand from a major customer in the optical networking industry.~~

Ge substrate revenue increased primarily due to more planned satellite launches compared to the same period prior year as well as increased demand from concentrated photovoltaic applications for solar terrestrial cells.

~~Raw materials and other revenue decreased primarily due to decreased selling prices which was partially offset by increased tonnage sold of 4N gallium.~~

~~Revenue by Geographic Region~~

Three Months Ended
September 30,
Increase
2013 2012 (Decrease) % Change
($ in thousands)
China $ 6,611 $ 3,059 $ 3,552 116.1 %
% of total revenue 32.2 % 14.7 %
Europe (primarily Germany) 5,732 5,148 584 11.3 %
% of total revenue 27.9 % 24.7 %
Taiwan 1,536 3,490 (1,954 ) (56.0 )%
% of total revenue 7.5 % 16.8 %
North America (primarily the United States) 2,298 3,230 (932 ) (28.9 )%
% of total revenue 11.2 % 15.5 %
Japan 1,931 2,404 (473 ) (19.7 )%
% of total revenue 9.4 % 11.6 %
Asia Pacific (excluding China, Taiwan and Japan) 2,413 3,477 (1,064 ) (30.6 )%
% of total revenue 11.8 % 16.7 %
Total revenue $ 20,521 $ 20,808 $ (287 ) (1.4 )%

~~Revenue from customers in China increased primarily due to increased Ge substrate revenue and raw materials revenue.~~

Revenue from customers in Europe increased by $1.9 million, or 40.4%, to $6.6 million for the three months ended March 31, 2014 from $4.7 million for the three months ended March 31, 2013 primarily due to increased raw materials revenue of 4N gallium and Ge substrate revenue partially offset by decreased ~~semi-conducting~~ GaAs ~~substrate and raw materials revenue.~~

~~Revenue from customers in Taiwan decreased primarily due to decreased semi-conducting GaAs substrate revenue and decreased InP~~ substrate revenue.

Revenue from customers in ~~North America~~China decreased by $1.9 million, or 30.9%, to $4.2 million for the three months ended March 31, 2014 from $6.0 million for the three months ended March 31, 2013 primarily due to decreased raw ~~material~~materials revenue of 4N gallium and ~~semi-insulating GaAs substrates.~~

~~Revenue from customers in Japan decreased primarily due to decreased semi-conducting GaAs substrate revenue.~~Ge substrate.

Revenue from customers in Asia Pacific (excluding China, Taiwan and Japan) ~~decreased~~increased by $257,000, or 12.1%, to $2.4 million for the three months ended March 31, 2014 from $2.1 million for the three months ended March 31, 2013 primarily due to ~~decreased~~increased semi-insulating GaAs substrate revenue ~~and decreased sales of pBN crucibles partially offset by increased Ge substrate revenue.~~

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Nine Months Ended
September 30,
Increase
2013 2012 (Decrease) % Change
($ in thousands)
China $ 20,344 $ 15,028 $ 5,316 35.4 %
% of total revenue 30.5 % 21.6 %
Europe (primarily Germany) 16,043 14,519 1,524 10.5 %
% of total revenue 24.1 % 20.9 %
Taiwan 8,474 9,130 (656 ) (7.2 )%
% of total revenue 12.7 % 13.2 %
North America (primarily the United States) 7,810 12,663 (4,853 ) (38.3 )%
% of total revenue 11.7 % 18.2 %
Japan 7,233 7,196 37 0.5 %
% of total revenue 10.8 % 10.4 %
Asia Pacific (excluding China, Taiwan and Japan) 6,828 10,911 (4,083 ) (37.4 )%
% of total revenue 10.2 % 15.7 %
Total revenue $ 66,732 $ 69,447 $ (2,715 ) (3.9 )%

~~Revenue~~ from customers in ~~China increased primarily due to increased Ge substrate revenue and raw material revenue.~~Malaysia.

Revenue from customers in ~~Europe~~Japan slightly increased by $31,000, or 1.4%, to $2.3 million for the three months ended March 31, 2014 from $2.3 million for the three months ended March 31, 2014 primarily due to increased ~~Ge substrate~~raw materials revenue ~~and semi-insulating GaAs substrate revenue~~partially offset by ~~increased semi-conducting GaAs~~decreased Ge substrate revenue.

Revenue from customers in Taiwan decreased by $1.7 million, or 44.0%, to $2.1 million for the three months ended March 31, 2014 from $3.8 million for the three months ended March 31, 2013 primarily due to decreased ~~semi-conducting~~ GaAs substrate revenue partially offset by increased ~~semi-insulating GaAs substrate revenue and~~ InP substrate revenue.

Revenue from customers in North America decreased by $1.7 million, or 48.7%, to $1.8 million for the three months ended March 31, 2014 from $3.5 million for the three months ended March 31, 2013 primarily due to decreased ~~semi-insulating GaAs substrates and decreased~~ raw materials revenue ~~of 4N gallium offset by increased semi-insulating GaAs substrates~~ and ~~increased InP substrate revenue.~~

~~Revenue from customers in Japan increased~~ ~~slightly~~ ~~primarily due to increased sales of pBN crucibles and semi-insulating GaAs substrate revenue offset by semi-conducting~~ GaAs substrate revenue.

Revenue from customers in Asia Pacific (excluding China, Japan and Taiwan) decreased primarily due to decreased semi-insulating GaAs substrates and decreased sales of pBN crucibles offset by increased Ge substrate revenue.

Gross Margin

	Three Months Ended September 30,						Increase						Three Months Ended March 31,						Increase
	2013			2012			(Decrease)			% Change			2014			2013			(Decrease)			% Change
	($ in thousands)												($ in thousands)
Gross profit	$	2,446		$	5,466		$	(3,020	)		(55.3	)%	$	2,718		$	3,484		$	(766	)		(22.0	)%
Gross Margin %		11.9	%		26.3	%								14.1	%		15.6	%

Gross margin decreased ~~primarily~~to 14.1% of total revenue for the three months ended March 31, 2014 from 15.6% of total revenue for the three months ended March 31, 2013. Lower revenue and lower average selling prices due to product mix and customer mix negatively impacted the gross margins for GaAs substrates. Although Ge substrate sales increased by $727,000, gross margins for Ge substrate was decreased due to higher priced raw material in our inventory and lower average selling ~~prices for substrates.~~prices. Gross margins for raw material sales also decreased due to decreased selling prices of 4N raw gallium.

Nine Months Ended
September 30,
Increase

2013 2012 (Decrease) % Change

($ in thousands)

Gross profit $ 9,015 $ 21,168 $ (12,153 ) (57.4 )%
Gross Margin % 13.5 % 30.5 %

Gross margin decreased primarily due to higher priced raw material and lower average selling prices for substrates. Gross margins for raw material sales also decreased due to decreased selling prices of 4N raw gallium.

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Selling, General and Administrative Expenses

	Three Months Ended September 30,						Increase					Three Months Ended March 31,						Increase
	2013			2012			(Decrease)		% Change			2014			2013			(Decrease)			% Change
	($ in thousands)											($ in thousands)
Selling, general and administrative expenses	$	4,303		$	3,950		$	353		8.9	%	$	3,436		$	3,925		$	(489	)		(12.5	)%
% of total revenue		21.0	%		19.0	%							17.8	%		17.5	%

Selling, general and administrative expenses ~~increased~~decreased $489,000, or 12.5% to $3.4 million for the three months ended March 31, 2014 from $3.9 million for the three months ended March 31, 2013. The decrease was primarily due to ~~an increase~~the companywide cost saving efforts implemented in ~~allowance for doubtful accounts, and increased~~2014 including lower personnel related ~~cost, partially offset by decreased sales commission expenses resulting from~~costs, lower ~~revenue.~~facility rent in Fremont and lower stock-based compensation expenses.

Nine Months Ended
September 30,
Increase
2013 2012 (Decrease) % Change
($ in thousands)
Selling, general and administrative expenses $ 12,435 $ 11,709 $ 726 6.2 %
% of total revenue 18.6 % 16.9 %

Research and Development

	Three Months Ended March 31,						Increase
	2014			2013			(Decrease)			% Change
	($ in thousands)
Research and development	$	775		$	822		$	(47	)		(5.7	)%
% of total revenue		4.0	%		3.7	%

~~Selling, general~~

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Research and ~~administrative~~development expenses ~~increased~~decreased $47,000, or 5.7% to $775,000 for the three months ended March 31, 2014 from $822,000 for the three months ended March 31, 2013. The decrease was primarily due to ~~an increase~~lower depreciation expense at our facilities in ~~allowance for doubtful accounts, higher personnel~~China and product testing related ~~cost, higher health insurance~~costs from our joint ventures in China ~~and higher stock-based compensation expenses resulting from the options and stock awards granted in 2012, partially~~ offset by ~~decreased bonus and sales commission expenses resulting from lower revenue.~~

~~Research and Development~~

Three Months Ended
September 30,
Increase

2013 2012 (Decrease) % Change

($ in thousands)

Research and development $ 766 $ 844 $ (78 ) (9.2 )%
% of total revenue 3.7 % 4.1 %

~~Research and development expenses decreased primarily due to lower product testing~~higher personnel related costs.

Nine Months Ended
September 30,
Increase

2013 2012 (Decrease) % Change

($ in thousands)

Research and development $ 2,627 $ 2,593 $ 34 1.3 %
% of total revenue 3.9 % 3.7 %

Restructuring Charges

~~Research~~In the first quarter of 2014, we reduced the workforce at Tongmei by approximately 93 positions that are no longer required to support production and ~~development expenses increased slightly primarily due~~operations, or approximately 11 percent. Accordingly, we recorded a restructuring charge of approximately $907,000 related to ~~consulting expenses~~the reduction in force for ~~product testing, partially offset by lower product testing related costs.~~severance-related expenses. As of March 31, 2014 we have completed this restructuring plan and the reduction in force.

Interest Income, ~~Net~~net

	Three Months Ended September 30,						Increase					Three Months Ended March 31,						Increase
	2013			2012			(Decrease)		% Change			2014			2013			(Decrease)		% Change
	($ in thousands)											($ in thousands)
Interest income, net	$	55		$	52		$	3		5.8	%	$	127		$	31		$	96		309.7	%
% of total revenue		0.3	%		0.2	%							0.7	%		0.1	%

Interest income, net increased ~~slightly~~$96,000 to $127,000 for the three months ended March 31, 2014 from $31,000 for the three months ended March 31, 2013. The increase was primarily due to ~~slightly~~ higher returns from the mix of investment securities.

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Nine Months Ended
September 30,
Increase

2013 2012 (Decrease) % Change

($ in thousands)

Interest income, net $ 136 $ 202 $ (66 ) (32.7 )%
% of total revenue 0.2 % 0.3 %

~~Interest income, net decreased primarily due to the timing of receiving interest income in our joint ventures in China.~~

Equity in Earnings of Unconsolidated Joint Ventures

Three Months Ended
September 30,
Increase

2013 2012 (Decrease) % Change

($ in thousands)

Equity in earnings of unconsolidated joint ventures $ 346 $ 348 $ (2 ) (0.6 )%
% of total revenue 1.7 % 1.7 %

~~Equity in earnings of unconsolidated joint ventures remained relatively unchanged compared to the prior year same period.~~

	Three Months Ended March 31,						Increase
	2014			2013			(Decrease)		% Change
	($ in thousands)
Equity in earnings of unconsolidated joint ventures	$	487		$	282		$	205		72.7	%
% of total revenue		2.5	%		1.3	%

Nine Months Ended
September 30,
Increase

2013 2012 (Decrease) % Change

($ in thousands)

Equity in earnings of unconsolidated joint ventures $ 1,099 $ 786 $ 313 39.8 %
% of total revenue 1.6 % 1.1 %

Equity in earnings of unconsolidated joint ventures increased ~~on a year~~$205,000 to ~~date basis compared to~~$487,000 for the ~~same period last year~~three months ended March 31, 2014 from $282,000 for the three months ended March 31, 2013 primarily due to higher net income from ~~one of~~ our minority-owned joint ventures ~~due to higher germanium sales.~~that are not consolidated.

Other Income (Expense), ~~Net~~net

	Three Months Ended March 31,						Increase
	2014			2013			(Decrease)		% Change
	($ in thousands)
Other income (expense), net	$	10		$	(825	)	$	835	NM
% of total revenue		0.1	%		(3.7	)%

Three Months Ended
September 30,
Increase

2013 2012 (Decrease) % Change

($ in thousands)

Other income (expense), net $ (47 ) $ 144 $ 191 NM
% of total revenue (0.2 )% 0.7 %

~~NM =~~NM= % not meaningful

Other income (expense), net ~~decreased~~increased $835,000 to $10,000 for the three months ended March 31, 2014 from ~~income last year to an~~net expense ~~this year~~$825,000 for the three months ended March 31, 2013 primarily due to ~~higher~~lower foreign exchange losses ~~this year.~~and lower withholding tax on foreign dividends from our consolidated joint ventures.

Nine Months Ended

September 30, Increase

2013 2012 (Decrease) % Change

($ in thousands)

Other expense, net $ (491 ) $ (472 ) $ 19 (4.0 )%
% of total revenue 0.7 % 0.7 %

Other expense, net decreased primarily due to the gain recognized from the sale of our 35% ownership in our cost method investee in its pre-IPO placement in Taiwan, the absence of loss on disposal of equipments from the same period in the prior year, offset by higher foreign exchange losses.

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Provision for Income Taxes

	Three Months Ended
	September 30,						Increase					Three Months Ended March 31,						Increase
	2013			2012			(Decrease)		% Change			2014			2013			(Decrease)			% Change
	($ in thousands)											($ in thousands)
Provision for income taxes	$	(204	)	$	(228	)	$	24		1.1	%	$	59		$	184		$	(125	)		(67.9	)%
% of total revenue		(1.0	%)		(1.1	)%							0.3	%		0.8	%

Provision for income taxes iswas mostly related to our China subsidiary and our China joint venture operations ~~but due~~and decreased by $125,000 to ~~timing we have a benefit from income taxes~~$59,000 for ~~both~~ the three months ended ~~September 30, 2013 and 2012~~March 31, 2014 from $184,000 for the three months ended March 31, 2013. The decrease in provision for income taxes was primarily due to ~~tax refunds expected for state~~decreased sales and net income ~~taxes~~of our foreign subsidiaries as well as lower taxable income for state tax ~~refunds received by our China joint ventures.~~purposes in the U.S. Besides the state~~minimum~~ tax liabilities, no federal income tax or benefit has been provided for U.S. operations due to our net loss, ~~for the three months ended September 30, 2013 and~~ our available net operating loss carryforwards for the three months ended March 31, 2014 and 2013 and uncertainty of profits in the U.S.

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Noncontrolling interests

	Three Months Ended March 31,						Increase
	2014			2013			(Decrease)			% Change
	($ in thousands)
Noncontrolling interests	$	205		$	441		$	(236	)		(53.5	)%
% of total revenue		1.1	%		2.0	%

Net income attributable to noncontrolling interests decreased $236,000, or 53.5% to $205,000 for the three months ended ~~September 30, 2012.~~

Nine Months Ended
September 30,
Increase

2013 2012 (Decrease) % Change

($ in thousands)

Provision for income taxes $ 322 $ 559 $ (237 ) (42.4 )%
% of total revenue 0.5 % 0.8 %

~~Provision for income taxes~~March 31, 2014 from $441,000 for the ~~nine~~three months ended ~~September 30,~~March 31, 2013 ~~and 2012 was mostly related~~primarily due to ~~our China subsidiary and~~significantly lower profitability from one of our China joint venture operations ~~with the decrease in the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012 primarily due to decreased sales and decreased net income in the nine months of 2013~~ compared to the same period last ~~year and tax refunds expected in 2013 for state income taxes as well as tax refunds received by our China joint ventures. Besides the state~~ ~~minimum~~ taxes liabilities, no federal income taxes have been provided for U.S. operations due to our available net operating loss carryforwards. Our estimated tax rate can vary greatly from period to period because of the change in the mix of taxable income between the U.S. and China based operations.

~~Noncontrolling Interest~~

Three Months Ended
September 30,
Increase

2013 2012 (Decrease) % Change

($ in thousands)

Noncontrolling interest $ 230 $ 512 $ (282 ) (55.1 )%
% of total revenue 1.1 % 2.5 %

Noncontrolling interest decreased primarily due to lower profitability from our China joint venture operations as profits from raw materials sales have decreased due to decreased selling prices of gallium compared to the same period prior year.

Nine Months Ended
September 30,
Increase

2013 2012 (Decrease) % Change

($ in thousands)

Noncontrolling interest $ 1,105 $ 2,957 $ (1,852 ) (62.6 )%
% of total revenue 1.7 % 4.3 %

Liquidity and Capital Resources

We consider cash and cash equivalents, short-term investments and long-term investments as liquid and available for use within two years in our current operations. Short-term investments and long-term investments are comprised of U.S. government securities and investment-grade corporate notes and bonds. Also included in short-term investments is our investment in common stock of Intelligent Epitaxy Technology, Inc (IntelliEPI), a Taiwan publicly-traded company. In 2013, we re-categorized our IntelliEPI investment from cost method to short-term investments as they completed their initial public offering in 2013. As of ~~September 30, 2013,~~March 31, 2014, our principal sources of liquidity were ~~$48.4~~$46.8 million of cash and investments of which $5.3 million of cash and cash equivalent was held by our consolidated joint ventures which are not available for use in the United States without paying income taxes, consisting of cash and cash equivalents of ~~$27.7~~$22.8 million, short-term investments of ~~$8.4~~$22.4 million and long-term investments of ~~$12.3~~$1.7 million. ~~A total of approximately $17.5 million of our cash and investments at September 30, 2013 is held outside of the United States through our subsidiaries and consolidated joint ventures.~~

Cash and cash equivalents of ~~$27.7~~$22.8 million decreased by ~~$2.9~~$2.2 million and short-term and long-term investments of ~~$20.7~~$24.1 million increased by ~~$1.2~~$1.4 million during the ~~nine~~three months ended ~~September 30, 2013.~~March 31, 2014. Cash and cash equivalents of ~~$35.5~~$25.8 million ~~increased~~decreased by ~~$9.3~~$4.8 million and short-term and long-term investments of ~~$16.0~~$23.6 million increased by ~~$1.5~~$4.1 million during the ~~nine~~three months ended ~~September 30, 2012.~~March 31, 2013.

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Net cash ~~provided~~used by operating activities of ~~$4.0 million~~$387,000 for the ~~nine~~three months ended ~~September 30, 2013~~March 31, 2014 was primarily comprised of our net loss of ~~$5.6~~$1.8 million, adjusted for non-cash items of depreciation of ~~$4.1~~$1.4 million, stock-based compensation of ~~$1.0 million, provision for doubtful accounts of $627,000,~~$292,000, amortization of marketable securities premium of ~~$394,000,~~$122,000, offset by ~~gain on sale of cost method investment of $811,000 and~~ gain on disposal property and equipment of ~~$7,000,~~$5,000, and a net change of $~~4.4~~ ~~million~~$366,000 in assets and liabilities. The $~~4.4~~ ~~million~~$366,000 net change in assets and liabilities primarily resulted from a ~~$2.1 million decrease~~$985,000 increase in inventories, a $~~774,000~~$1.5 million increase ~~in accrued liabilities and a $1.1 million decrease~~ in accounts receivable, ~~partially offset by~~ a $~~77,000~~ ~~increase~~$18,000 decrease in other assets, a $~~1.7~~$489,000 decrease in accounts payable, a $1.6 million ~~increase~~decrease in prepaid expenses and other current assets, a $~~2.6~~ ~~million increase~~$697,000 decrease in ~~accounts payable~~accrued liabilities and a $~~494,000~~$308,000 decrease in other long-term liabilities.

Net cash provided by operating activities of ~~$19.6 million~~$976,000 for the ~~nine~~three months ended ~~September 30, 2012~~March 31, 2013 was primarily comprised of our net ~~income~~loss of ~~$6.8~~$2.0 million, adjusted for non-cash items of depreciation of ~~$2.8~~$1.3 million, stock-based compensation of ~~$873,000,~~$332,000, amortization of marketable securities premium of ~~$220,000, and loss on disposal of property, plant and equipment of $176,000,~~$146,000 and a net change of ~~$8.6~~$1.2 million in assets and liabilities. The ~~$8.6~~$1.2 million net change in assets and liabilities primarily resulted from a ~~$6.1~~$1.6 million decrease in inventories, a ~~$1.9 million decrease in prepaid expenses, a $1.1 million~~$922,000 decrease in accounts receivable, a ~~$1.3 million~~$105,000 decrease in other assets, a $664,000 increase in accounts payable, partially offset by a ~~$824,000 decrease~~$1.7 million increase in prepaid expenses and other ~~long-term liabilities,~~current assets, a ~~$795,000~~$164,000 decrease in accrued liabilities and a ~~$97,000 increase~~$270,000 decrease in other ~~assets.~~long-term liabilities.

Net cash used in investing activities of $1.7 million for the three months ended March 31, 2014 was primarily from the net purchases of marketable investment securities of $3.7 million, the purchase of property, plant and equipment of $163,000, partially offset by proceeds from available for sales security of $2.2 million and proceeds from sales of property, plant and equipment of $5,000.

Net cash used in investing activities of $5.6 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2013 was primarily from the purchase of property, plant and equipment of $~~3.9~~$1.3 million and the ~~purchase~~net purchases of ~~investments totaling $14.1million offset by the maturities~~marketable investment securities of ~~investments totaling $12.5 million.~~

Net cash used in investing activities of $6.5 million for the nine months ended September 30, 2012 was primarily from the purchase of property, plant and equipment of $5.0 million and the purchase of investments totaling $8.2 million offset by the sale of investments totaling $6.7$4.3 million.

In January 2012, we agreed with the Administrative Commission of Tianjin Economy and Technology Development Zone to establish a second manufacturing facility in Tianjin, China. The arrangement, if completed, would provide us with land use rights for approximately 32 acres of industrial land located in Yixian Scientific and Industrial Park to construct a compound semiconductor substrate manufacturing facility that would be completed in phases over a number of years. We agreed to provide $12.5 million in the first phase of the construction of the facility and have an understanding with our BoYu joint venture that it will provide the RMB 32.0 million, or approximately $5.0 million, that is anticipated to be required for the portion of the project devoted to crystal support, in exchange for land use rights, enterprise and individual income tax rebates, employee hiring and development subsidies, and other benefits. We expect to fund the first phase of the construction of the facility with cash flow generated by our normal operations supplemented by our existing line of credit. However, we have delayed our participation in the project at this time due to the volatility in our substrate ~~business. It~~business and do not expect this project to proceed. In the event that the project proceeds, it is possible that the investment of $5.0 million will still be funded by our BoYu joint venture for crystal support.

~~Net~~

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There was no cash used in or provided by financing activities ~~of $1.7 million~~ for the ~~nine~~three months ended September 30, 2013 consisted of $1.7 million net dividends paid by our joint ventures and $287,000 of repurchases of shares of our common stock, offset by net proceeds of $279,000 on the issuance of common stock pursuant to stock option exercises.March 31, 2014.

Net cash used in financing activities of ~~$3.8 million~~$276,000 for the ~~nine~~three months ended ~~September 30, 2012~~March 31, 2013 consisted of ~~$4.1 million~~$532,000 net dividends paid by our consolidated joint ventures partially offset by net proceeds of ~~$276,000~~$256,000 on the issuance of common stock pursuant to stock option exercises.

On September 13, 2011, our registration statement on Form S-3 was declared effective by the Securities and Exchange Commission (SEC). We may from time to time offer up to $60.0 million of common stock, preferred stock, depositary shares, warrants, debt securities and/or units in one or more offerings and in any combination. We intend to use the net proceeds from any sale of securities under the shelf registration statement for general corporate purposes, which may include capital expenditures in connection with our planned expansion of our manufacturing facilities in China. The timing of any offering will be at our discretion and will depend on many factors, including the prevailing market conditions. Specific terms and share prices of any future offering under the registration statement will be established at the time of any such offering, and will be described in a prospectus supplement that we will file with the SEC.

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On February 21, 2013, our Board of Directors approved a stock repurchase program that complies with Rule 10b-18 of the Securities Exchange Act of 1934, as amended, authorizing us to purchase up to $6.0 million of our outstanding common stock through February 27, 2014. The timing, actual number and value of the shares that are repurchased under this program are dependent on market conditions and other corporate considerations, including price, corporate and regulatory requirements and alternative investment opportunities. The program is funded from existing cash balances and cash generated from operations. We are not obligated to repurchase any particular amount of common stock during any period and may choose to suspend or discontinue the repurchase program at any time. During ~~the~~ ~~three and nine~~ ~~months ended September 30~~, 2013,, we repurchased ~~none, and~~ approximately ~~103,000~~285,000 shares at an average price of $~~2.79~~$2.51 per share for a total purchase price of ~~$287,000~~$716,000 under the stock repurchase ~~program, respectively.~~program. As of ~~September 30,~~December 31, 2013, approximately ~~$5.7~~$5.3 million remained available for future repurchases under this ~~program~~program. For the three months ended March 31, 2014, we did not repurchase any shares.. This repurchase plan expired on February 27, 2014.

We intend to fund our operating expenses primarily through cash flows from operations. 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 on 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.”

Line of Credit

We have an unused credit facility with a bank that provides for a line of credit of $10.0 million, which is secured by marketable securities we have with the bank. There were no outstanding borrowings under this line of credit as of ~~September 30, 2013~~March 31, 2014 and December 31, ~~2012.~~2013.

Contractual Obligations and Operating Leases

We lease certain office space, manufacturing facilities and equipment under long-term operating leases expiring at various dates through February 2016. The lease agreement for the facility at Fremont, California with approximately 27,760 square feet commenced on December 1, 2008 for a term of seven years, with an option by us to cancel the lease after five years, upon forfeiture of the security deposit and payment of one-half of the fifth year’s rent. On June 28, 2013, we sent a notice to terminate the lease effective November 30, 2013 with an early termination penalty of ~~$142,000.~~$142,000 which was recorded as an expense in the third quarter of 2013. On August 2, 2013, we signed a new lease agreement for the current facility with reduced footage of 20,767 square feet, which ~~will commence~~commenced on December 1, 2013 for a term of two years. The reduced square footage, the reduced rate per square foot, and the expected reduced operating costs, ~~are expected~~would save us approximately $382,000 during 2014 and 2015.

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We entered into a royalty agreement with a vendor effective December 3, 2010 with a term of eight years, terminating December 31, 2018. We and our related companies are granted a worldwide, nonexclusive, royalty bearing, irrevocable license to certain patents for the term ofon the agreement. We shall pay a total of $7.0 million royalty payment over eight years ~~beginning~~that began in 2011 based on future royalty bearing sales. This agreement contains a clause that allows us to claim for credit, starting in 2013, in the event that the royalty bearing sales for the year is lower than a pre-determined amount set forth in this agreement.

Outstanding contractual obligations as of ~~September 30, 2013~~March 31, 2014 are summarized as follows (in thousands):

	Payments due by period										Payments due by period
Contractual Obligations	Total		Less than 1 year		1-3 years		4-5 years		More than 5 years		Total		Less than 1 year		1-3 years		4-5 years		More than 5 years
Operating leases	$	379	$	210	$	169	$	—	$	—	$	557	$	263	$	208	$	34	$	52
Royalty agreement		3,525		800		1,431		1,150		144		3,125		800		1,319		1,006		—
Total	$	3,904	$	1,010	$	1,600	$	1,150	$	144	$	3,682	$	1,063	$	1,527	$	1,040	$	52

Purchase orders or contracts for the purchase of certain goods and services are not included in the preceding table. We cannot determine the aggregate amount of such purchase orders that represent contractual obligations because purchase orders may represent authorizations to purchase rather than binding agreements. For the purposes of this table, contractual obligations for purchase of goods or services are defined as agreements that are enforceable and legally binding and that specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. Our purchase orders are based on our current needs and are fulfilled by our vendors within short time horizons. We also enter into contracts for outsourced services; however, the obligations under these contracts were not significant and the contracts generally contain clauses allowing for cancellation without significant penalty. Contractual obligations that are contingent upon the achievement of certain milestones are not included in the table above.

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Off-Balance Sheet Arrangements

As of ~~September 30, 2013,~~March 31, 2014, we did not have any off-balance sheet financing arrangements and have never established any special purpose entities as defined under SEC Regulation S-K Item 303(a)(4)(ii).

~~Recent Accounting Pronouncements~~

For a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our condensed consolidated financial statements, please see “Note 15 - Recent Accounting Pronouncements” in the Notes to Condensed Consolidated Financial Statements of this Form 10-Q.

Recent Accounting Pronouncements

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. Since most of our operations are conducted in China, most of our costs are incurred in Chinese Renminbi, 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 our Chinese subsidiaries, including our joint ventures, as well as in translation of the assets and liabilities 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 system with opportunistic interventions. We may also 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. If we do not effectively manage the risks associated with this currency risk, our revenue, cash flows and financial condition could be adversely affected.

We manage against these risks by actively monitoring our exchange rate exposure. Our foreign operations, however, in most instances act as a natural hedge since both operating expenses as well as revenues and both assets and liabilities are generally denominated in their respective local currency. In these instances, although an unfavorable change in the exchange rate of foreign currencies against the U.S. dollar will result in lower revenues when translated into U.S. dollars, the operating expenses will be lower as well. We do not use short-term forward exchange contracts for hedging purposes to reduce the effects of adverse foreign exchange rate movements. We cannot be certain that any such hedging activities will be effective, or available to us at commercially reasonable rates. As of ~~September 30, 2013~~March 31, 2014 and December 31, ~~2012,~~2013, we had no outstanding commitments with respect to foreign exchange contracts.

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During the three ~~and nine~~ months ended ~~September 30, 2013,~~March 31, 2014, we recorded net foreign exchange ~~losses~~gains of ~~$67,000 and $964,000 respectively,~~$17,000, included as part of ~~“other~~other income (expense), net” in our condensed consolidated statements of operations. We incurred foreign currency transaction exchange gains and losses due to operations in general. 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. During the three ~~and nine~~ months ended ~~September 30, 2013,~~March 31, 2014, we recorded unrealized foreign currency ~~translation gains~~losses of ~~$307,000 and $1.2 million respectively,~~$521,000, included in the balance of “accumulated other comprehensive income” on our condensed consolidated balance sheets.

Interest Rate Risk

~~The primary objective of our investment activities is~~Cash and cash equivalents earning interest and certain variable rate debt instruments are subject to ~~preserve principal while maximizing income without significantly increasing risk.~~ ~~Our exposure to market risk for changes in~~ interest ~~rates relates primarily to our investment portfolio.~~ ~~We invest primarily in money market accounts, certificates of deposits, and corporate bonds and notes. The majority of these investments pay a fixed~~ rate ~~of interest. We~~ ~~mitigate default risk by investing in high grade investment securities and limit the amount of credit exposure to any single issue, issuer, or type of investment.~~ As of September 30, 2013 and December 31, 2012, the gross unrealized losses on our investments classified as available-for-sale and held-to-maturity securities were immaterial and temporary in nature. We have the intent and the ability to hold these investments for a reasonable period of time sufficient for a forecasted recovery of fair value up to (or beyond) the initial cost of the investments. We expect to realize the full value of all of these investments upon maturity.

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fluctuations. The following table sets forth the probable impact of a 10% change in interest rates (in thousands):

Instrument	Balance as of September 30, 2013		Current Interest Rate			Projected Annual Interest Income/(Expense)		Proforma 10% Interest Rate Decline Income/(Expense)		Proforma 10% Interest Rate Increase Income/(Expense)		Balance as of March 31, 2014		Current Interest Rate			Projected Annual Interest Income/(Expense)		Proforma 10% Interest Rate Decline Income/(Expense)		Proforma 10% Interest Rate Increase Income/(Expense)
Cash	$	24,114		0.76	%	$	183	$	165	$	201	$	21,638		1.14	%	$	247	$	222	$	271
Cash equivalents		3,609		0.02	%		1		1		1		1,122		0.02			—		—		—
Investment in debt and equity instruments		20,699		3.07	%		636		572		699		22,028		3.34			736		662		809
						$	820	$	738	$	901						$	983	$	884	$	1,080

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, certificates of deposits, corporate bonds and notes, and government securities. We are exposed to credit risks in the event of default by the issuers to the extent of the amount recorded on the condensed 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, net of estimated tax. Our cash, cash equivalents and short-term investments and long-term investments are in high-quality securities placed with major banks and financial institutions and commercial paper. We have no investments in auction rate securities.

Credit Risk

We perform periodic credit evaluations of our customers’ financial condition and generally do not require collateral. ~~One~~No customer accounted for ~~11% and 28%~~over 10% of our trade accounts receivable balance as of ~~September 30, 2013 and~~March 31, 2014 while one customer accounted for 20% of our trade accounts receivable balance as of December 31, ~~2012, respectively.~~2013.

Equity Risk

We maintain minority investments directly, and indirectly through our consolidated joint ventures in privately-held companies located in China. These minority investments are reviewed for other than temporary declines in value on a quarterly basis. These investments are classified as ~~“other assets”~~other assets in the ~~condensed~~ consolidated balance sheets and are either accounted for under the cost method or under equity method consolidated through joint ventures ~~depending upon our equity ownership and whether or~~as we do not we 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, 2013~~March 31, 2014 and December 31, ~~2012,~~2013, the direct minority investments totaled ~~$7.8 million~~$200,000 and ~~$7.7 million, respectively,~~$325,000, and the indirect minority investments ~~through~~by our consolidated joint ventures totaled ~~$3.1~~$3.4 million and ~~$2.0~~$3.4 million, respectively.

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ITEM 4.

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

	Three Months Ended			Nine Months Ended
	September 30, 2013			September 30, 2013

Expected term (in years)		4.0			4.0
Volatility		61.86	%		61.86	%
Expected dividend		0	%		0	%
Risk-free interest rate		1.00	%		1.00	%

Exhibit Number		Description

~~10.1(1)~~		~~Lease agreement dated August 2, 2013 between AXT, Inc. and T. Drive Partners, L.P., a California partnership~~

31.1		Certification by Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification by ~~interim~~ 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 ~~interim~~ Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

			AXT, INC.

Dated: ~~November 8, 2013~~	May 9, 2014	By:	/s/ MORRIS S. YOUNG
			Morris S. Young
			Chief Executive Officer
			(Principal Executive Officer)

			/s/ MORRIS S. YOUNG
			Morris S. Young
			Interim Chief Financial Officer
			(Interim Principal Financial Officer and Principal ~~Accounting Officer)~~AccountingOfficer)

Exhibit	Number
~~Number~~		Description

~~10.1(1)~~		~~Lease agreement dated August 2, 2013 between AXT, Inc. and T. Drive Partners, L.P., a California partnership~~

31.1		Certification by Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification by ~~interim~~ 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 ~~interim~~ Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.