form10q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
|
x
|
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|
for the quarterly period ended June 30, 2011
Or
|
|
o
|
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|
for the transition period from to
Commission File Number 000-24085
AXT, INC.
(Exact name of registrant as specified in its charter)
|
DELAWARE
|
94-3031310
|
|
(State or other jurisdiction of
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 o NO 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 July 29, 2011
|
|
Common Stock, $0.001 par value
|
|
32,088,670
|
FORM 10-Q
| |
Page
|
|
|
3
|
|
|
3
|
|
|
3
|
|
|
4
|
|
|
5
|
|
|
6
|
|
|
18
|
|
|
29
|
|
|
31
|
|
|
31
|
|
|
31
|
|
|
31
|
|
|
44
|
|
|
44
|
|
|
44
|
|
|
44
|
|
|
45
|
|
|
46
|
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
| |
|
June 30,
|
|
|
December 31,
|
|
| |
|
2011
|
|
|
2010 (1)
|
|
| |
|
(unaudited)
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
21,078 |
|
|
$ |
23,724 |
|
|
Short-term investments
|
|
|
3,476 |
|
|
|
10,079 |
|
|
Accounts receivable, net of allowances of $332 and $561 as of June 30, 2011 and December 31, 2010, respectively
|
|
|
22,958 |
|
|
|
23,076 |
|
|
Inventories
|
|
|
39,653 |
|
|
|
35,986 |
|
|
Prepaid expenses and other current assets
|
|
|
8,699 |
|
|
|
4,090 |
|
|
Total current assets
|
|
|
95,864 |
|
|
|
96,955 |
|
|
Long-term investments
|
|
|
11,721 |
|
|
|
7,172 |
|
|
Property, plant and equipment, net
|
|
|
28,814 |
|
|
|
24,240 |
|
|
Other assets
|
|
|
14,263 |
|
|
|
11,884 |
|
|
Total assets
|
|
$ |
150,662 |
|
|
$ |
140,251 |
|
| |
|
|
|
|
|
|
|
|
|
Liabilities and stockholders’ equity:
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
3,745 |
|
|
$ |
7,094 |
|
|
Accrued liabilities
|
|
|
7,681 |
|
|
|
7,745 |
|
|
Total current liabilities
|
|
|
11,426 |
|
|
|
14,839 |
|
|
Long-term portion of royalty payments
|
|
|
4,750 |
|
|
|
5,500 |
|
|
Other long-term liabilities
|
|
|
118 |
|
|
|
108 |
|
|
Total liabilities
|
|
|
16,294 |
|
|
|
20,447 |
|
|
Commitments and contingencies (Note 10)
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 2,000 shares authorized; 883 shares issued and outstanding as of June 30, 2011 and December 31, 2010, respectively (Liquidation preference of $5.7 million and $5.6 million as of June 30, 2011 and December 31, 2010, respectively)
|
|
|
3,532 |
|
|
|
3,532 |
|
|
Common stock, $0.001 par value per share; 70,000 shares authorized; 32,088 and 31,877 shares issued and outstanding as of June 30, 2011 and December 31, 2010, respectively
|
|
|
32 |
|
|
|
32 |
|
|
Additional paid-in capital
|
|
|
190,976 |
|
|
|
190,021 |
|
|
Accumulated deficit
|
|
|
(71,207 |
) |
|
|
(82,477 |
) |
|
Accumulated other comprehensive income
|
|
|
5,366 |
|
|
|
4,652 |
|
|
Total AXT, Inc. stockholders’ equity
|
|
|
128,699 |
|
|
|
115,760 |
|
| |
|
|
|
|
|
|
|
|
|
Noncontrolling interests
|
|
|
5,669 |
|
|
|
4,044 |
|
|
Total stockholders’ equity
|
|
|
134,368 |
|
|
|
119,804 |
|
| |
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$ |
150,662 |
|
|
$ |
140,251 |
|
See accompanying notes to condensed consolidated financial statements.
_________________________
|
|
(1)
|
The Condensed Consolidated Balance Sheet at December 31, 2010 has been derived from the audited consolidated financial statements at that date.
|
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)
| |
|
Three Months Ended
|
|
|
Six Months Ended
|
|
| |
|
June 30,
|
|
|
June 30,
|
|
| |
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
30,031 |
|
|
$ |
23,177 |
|
|
$ |
54,597 |
|
|
$ |
41,818 |
|
|
Cost of revenue
|
|
|
16,005 |
|
|
|
14,642 |
|
|
|
29,911 |
|
|
|
26,551 |
|
|
Gross profit
|
|
|
14,026 |
|
|
|
8,535 |
|
|
|
24,686 |
|
|
|
15,267 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
3,714 |
|
|
|
3,039 |
|
|
|
7,404 |
|
|
|
6,458 |
|
|
Research and development
|
|
|
699 |
|
|
|
515 |
|
|
|
1,204 |
|
|
|
966 |
|
|
Total operating expenses
|
|
|
4,413 |
|
|
|
3,554 |
|
|
|
8,608 |
|
|
|
7,424 |
|
|
Income from operations
|
|
|
9,613 |
|
|
|
4,981 |
|
|
|
16,078 |
|
|
|
7,843 |
|
|
Interest income (expense), net
|
|
|
69 |
|
|
|
(25 |
) |
|
|
156 |
|
|
|
(10 |
) |
|
Other income, net
|
|
|
450 |
|
|
|
1,556 |
|
|
|
87 |
|
|
|
1,635 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
10,132 |
|
|
|
6,512 |
|
|
|
16,321 |
|
|
|
9,468 |
|
|
Provision for income taxes
|
|
|
(1,064 |
) |
|
|
(560 |
) |
|
|
(1,966 |
) |
|
|
(806 |
) |
|
Net income
|
|
|
9,068 |
|
|
|
5,952 |
|
|
|
14,355 |
|
|
|
8,662 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net income attributable to noncontrolling interest
|
|
|
(2,006 |
) |
|
|
(417 |
) |
|
|
(3,085 |
) |
|
|
(547 |
) |
|
Net income attributable to AXT, Inc.
|
|
$ |
7,062 |
|
|
$ |
5,535 |
|
|
$ |
11,270 |
|
|
$ |
8,115 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to AXT, Inc. per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.22 |
|
|
$ |
0.18 |
|
|
$ |
0.35 |
|
|
$ |
0.26 |
|
|
Diluted
|
|
$ |
0.21 |
|
|
$ |
0.17 |
|
|
$ |
0.34 |
|
|
$ |
0.25 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
31,831 |
|
|
|
30,834 |
|
|
|
31,775 |
|
|
|
30,789 |
|
|
Diluted
|
|
|
33,093 |
|
|
|
32,172 |
|
|
|
33,146 |
|
|
|
31,982 |
|
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
| |
|
Six Months Ended
June 30,
|
|
| |
|
2011
|
|
|
2010
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
Net income
|
|
$ |
14,355 |
|
|
$ |
8,662 |
|
| |
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,663 |
|
|
|
1,411 |
|
|
Amortization of marketable securities premium
|
|
|
187 |
|
|
|
47 |
|
|
Loss on disposal of property, plant and equipment
|
|
|
5 |
|
|
|
1 |
|
|
Stock-based compensation
|
|
|
422 |
|
|
|
233 |
|
|
Realized loss (gain) on sale of investments
|
|
|
8 |
|
|
|
(196 |
) |
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
156 |
|
|
|
(3,306 |
) |
|
Inventories
|
|
|
(3,567 |
) |
|
|
350 |
|
|
Prepaid expenses and other current assets
|
|
|
(4,547 |
) |
|
|
(1,657 |
) |
|
Other assets
|
|
|
309 |
|
|
|
(22 |
) |
|
Accounts payable
|
|
|
(3,369 |
) |
|
|
(1,523 |
) |
|
Accrued liabilities
|
|
|
(99 |
) |
|
|
869 |
|
|
Other long-term liabilities
|
|
|
(613 |
) |
|
|
(12 |
) |
|
Net cash provided by operating activities
|
|
|
4,910 |
|
|
|
4,857 |
|
| |
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(5,977 |
) |
|
|
(1,187 |
) |
|
Proceeds from disposal of property, plant and equipment
|
|
|
— |
|
|
|
4 |
|
|
Purchases of available for sale securities
|
|
|
(11,831 |
) |
|
|
(11,202 |
) |
|
Proceeds from available for sale securities
|
|
|
13,663 |
|
|
|
10,996 |
|
|
Investments in joint ventures
|
|
|
(2,649 |
) |
|
|
— |
|
|
Net cash used in investing activities
|
|
|
(6,794 |
) |
|
|
(1,389 |
) |
| |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from common stock options exercised
|
|
|
533 |
|
|
|
166 |
|
|
Dividends paid by joint ventures
|
|
|
(1,636 |
) |
|
|
(192 |
) |
|
Long-term debt payments
|
|
|
— |
|
|
|
(38 |
) |
|
Net cash used in financing activities
|
|
|
(1,103 |
) |
|
|
(64 |
) |
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
341 |
|
|
|
52 |
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(2,646 |
) |
|
|
3,460 |
|
|
Cash and cash equivalents at the beginning of the period
|
|
|
23,724 |
|
|
|
16,934 |
|
|
Cash and cash equivalents at the end of the period
|
|
$ |
21,078 |
|
|
$ |
20,394 |
|
See accompanying notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The accompanying condensed consolidated financial statements of AXT, Inc. (“AXT,” the “Company,” “we,” “us,” and “our” refer to AXT, Inc. and all of its consolidated subsidiaries) are unaudited, and have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the year-end condensed consolidated balance sheet data was derived from our audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the
United States of America. In the opinion of our management, the unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, considered necessary to present fairly the financial position, results of operations and cash flows of AXT and our consolidated subsidiaries for all periods presented.
Our management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ materially from those estimates.
The results of operations are not necessarily indicative of the results to be expected in the future or for the full fiscal year. It is recommended that these condensed consolidated financial statements be read in conjunction with our consolidated financial statements and the notes thereto included in our 2010 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 16, 2011 and our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2011 filed with the SEC on May 10, 2011.
The condensed consolidated financial statements include the accounts of AXT and our majority-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated. Investments in business entities in which we do not have control, but have the ability to exercise significant influence over operating and financial policies (generally 20-50% ownership), are accounted for by the equity method. For majority-owned subsidiaries, we reflect the noncontrolling interest of the portion we do not own on our Condensed Consolidated Balance Sheets in Equity and in our Condensed Consolidated Statements of Operations.
Note 2. Accounting for Stock-Based Compensation
We account for stock-based compensation in accordance with the provisions of FASB Accounting Standards Codification (“ASC”) topic 718, Compensation-Stock Compensation (“ASC 718”), which established accounting for stock-based awards exchanged for employee services. Accordingly, stock-based compensation cost is measured at each grant date, based on the fair value of the award, and is recognized as expense over the employee’s requisite service period of the award. All of the Company’s stock compensation is accounted for as an equity instrument. The provisions of ASC 718 apply to all awards granted or modified after the
date of adoption which was January 1, 2006. The unrecognized expense of awards not yet vested at the date of adoption will be recognized in net income (loss) in the periods after the date of adoption using the same Black-Scholes valuation method and assumptions determined under the original provisions of ASC 718.
We utilized the Black-Scholes valuation model for estimating the fair value of the stock compensation granted both before and after the adoption of ASC 718. The following table summarizes compensation costs related to our stock-based compensation awards (in thousands, except per share data):
| |
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
| |
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
Stock-based compensation in the form of employee stock options, included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$ |
20 |
|
|
$ |
5 |
|
|
$ |
40 |
|
|
$ |
15 |
|
|
Selling, general and administrative
|
|
|
183 |
|
|
|
103 |
|
|
|
359 |
|
|
|
200 |
|
|
Research and development
|
|
|
12 |
|
|
|
11 |
|
|
|
23 |
|
|
|
18 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
|
215 |
|
|
|
119 |
|
|
|
422 |
|
|
|
233 |
|
|
Tax effect on stock-based compensation
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net effect on net income
|
|
$ |
215 |
|
|
$ |
119 |
|
|
$ |
422 |
|
|
$ |
233 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect on net income attributable to AXT, Inc. per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.01 |
|
|
$ |
0.00 |
|
|
$ |
0.01 |
|
|
$ |
0.01 |
|
|
Diluted
|
|
$ |
0.01 |
|
|
$ |
0.00 |
|
|
$ |
0.01 |
|
|
$ |
0.01 |
|
The amortization of stock compensation under ASC 718 for the period after our January 1, 2006 adoption is based on the single-option approach.
As of June 30, 2011, the compensation costs related to unvested stock options granted to employees under our stock option plan but not yet recognized was approximately $1.3 million, net of estimated forfeitures of $133,000. These costs will be amortized on a straight-line basis over a weighted-average period of approximately 2.5 years and will be adjusted for subsequent changes in estimated forfeitures. We elected not to capitalize any stock-based compensation to inventory as of June 30, 2011 due to the immateriality of the amount.
We estimate the fair value of stock options using a Black-Scholes valuation model, consistent with the provisions of ASC 718. There were no stock option grants made in the three and six months ended June 30, 2011 and 2010.
The following table summarizes the stock option transactions during the six months ended June 30, 2011 (in thousands, except per share data):
| |
|
Shares
|
|
|
Weighted-
average
Exercise
Price
|
|
|
Weighted-
average
Remaining
Contractual
Life
(in years)
|
|
|
Aggregate
Intrinsic
Value
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of January 1, 2011
|
|
|
2,280 |
|
|
$ |
3.10 |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(199 |
) |
|
|
2.68 |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canceled and expired
|
|
|
(10 |
) |
|
|
39.80 |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of June 30, 2011
|
|
|
2,071 |
|
|
$ |
2.97 |
|
|
|
6.08 |
|
|
$ |
11,471 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest as of June 30, 2011
|
|
|
2,004 |
|
|
$ |
2.94 |
|
|
|
6.00 |
|
|
$ |
11,155 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable as of June 30, 2011
|
|
|
1,213 |
|
|
$ |
2.43 |
|
|
|
4.34 |
|
|
$ |
7,397 |
|
The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on our closing price of $8.48 on June 30, 2011, which would have been received by the option holder had all option holders exercised their options on that date. The total number of in-the-money options exercisable as of June 30, 2011 was 1,179,362.
The options outstanding and exercisable as of June 30, 2011 were in the following exercise price ranges:
|
Options Outstanding as of June 30, 2011
|
|
|
Options Exercisable
as of June 30, 2011
|
|
|
Range of Exercise Price
|
|
Shares
|
|
|
Weighted-
average
Exercise Price
|
|
|
Weighted-
average
Remaining
Contractual Life
|
|
|
Shares
|
|
|
Weighted-
Average
Exercise Price
|
|
|
$1.18 - $1.33
|
|
|
231,174 |
|
|
$ |
1.26 |
|
|
|
3.66 |
|
|
|
231,174 |
|
|
$ |
1.26 |
|
|
$1.34 - $1.40
|
|
|
191,494 |
|
|
$ |
1.38 |
|
|
|
2.16 |
|
|
|
191,494 |
|
|
$ |
1.38 |
|
|
$1.59 - $1.59
|
|
|
334,404 |
|
|
$ |
1.59 |
|
|
|
7.79 |
|
|
|
146,472 |
|
|
$ |
1.59 |
|
|
$1.88 - $1.98
|
|
|
15,000 |
|
|
$ |
1.93 |
|
|
|
3.85 |
|
|
|
15,000 |
|
|
$ |
1.93 |
|
|
$2.04 - $2.04
|
|
|
459,900 |
|
|
$ |
2.04 |
|
|
|
8.32 |
|
|
|
183,574 |
|
|
$ |
2.04 |
|
|
$2.19 - $2.19
|
|
|
212,500 |
|
|
$ |
2.19 |
|
|
|
1.40 |
|
|
|
212,500 |
|
|
$ |
2.19 |
|
|
$3.11 - $5.09
|
|
|
133,428 |
|
|
$ |
3.98 |
|
|
|
4.15 |
|
|
|
133,147 |
|
|
$ |
3.98 |
|
|
$5.83 - $5.83
|
|
|
365,750 |
|
|
$ |
5.83 |
|
|
|
9.09 |
|
|
|
0 |
|
|
$ |
0.00 |
|
|
$6.31 - $9.69
|
|
|
123,599 |
|
|
$ |
7.38 |
|
|
|
5.50 |
|
|
|
96,001 |
|
|
$ |
7.37 |
|
|
$12.12 - $12.12
|
|
|
4,000 |
|
|
$ |
12.12 |
|
|
|
0.36 |
|
|
|
4,000 |
|
|
$ |
12.12 |
|
| |
|
|
2,071,249 |
|
|
$ |
2.97 |
|
|
|
6.08 |
|
|
|
1,213,362 |
|
|
$ |
2.43 |
|
There were 99,000 and 199,000 options exercised in the three months and six months ended June 30, 2011, respectively. The total intrinsic value of options exercised for the three and six months ended June 30, 2011 was $612,000 and $1.2 million, respectively. Cash received from options exercised for the three and six months ended June 30, 2011 was $176,000 and $533,000, respectively.
Restricted stock awards
A summary of activity related to restricted stock awards for the six months ended June 30, 2011 is presented below:
|
Stock Awards
|
|
Shares
|
|
|
Weighted-Average
Grant Date Fair Value
|
|
|
Non-vested as of January 1, 2011
|
|
|
218,405 |
|
|
$ |
3.30 |
|
|
Granted
|
|
|
16,548 |
|
|
$ |
7.25 |
|
|
Vested
|
|
|
(49,313 |
) |
|
$ |
1.33 |
|
|
Non-vested as of June 30, 2011
|
|
|
185,640 |
|
|
$ |
4.17 |
|
As of June 30, 2011, we had $613,000 of unrecognized compensation expense, net of forfeitures, related to restricted stock awards, which will be recognized over the weighted average period of 2.1 years. During both the three and six months ended June 30, 2011, 49,313 shares of restricted stock were vested.
Note 3. Investments and Fair Value Measurements
Our cash, cash equivalents and investments are classified as follows (in thousands):
| |
|
June 30, 2011
|
|
|
December 31, 2010
|
|
| |
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gain
|
|
|
Gross
Unrealized
(Loss)
|
|
|
Fair
Value
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gain
|
|
|
Gross
Unrealized
(Loss)
|
|
|
Fair
Value
|
|
|
Classified as:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$ |
19,494 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
19,494 |
|
|
$ |
22,736 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
22,736 |
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market fund
|
|
|
1,584 |
|
|
|
— |
|
|
|
— |
|
|
|
1,584 |
|
|
|
988 |
|
|
|
— |
|
|
|
— |
|
|
|
988 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
|
21,078 |
|
|
|
— |
|
|
|
— |
|
|
|
21,078 |
|
|
|
23,724 |
|
|
|
— |
|
|
|
— |
|
|
|
23, 724 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of Deposit
|
|
|
2,880 |
|
|
|
10 |
|
|
|
(1 |
) |
|
|
2,889 |
|
|
|
3,360 |
|
|
|
11 |
|
|
|
— |
|
|
|
3,371 |
|
|
US Treasury and agency securities
|
|
|
2,275 |
|
|
|
— |
|
|
|
— |
|
|
|
2,275 |
|
|
|
4,903 |
|
|
|
8 |
|
|
|
(2 |
) |
|
|
4,909 |
|
|
Corporate bonds
|
|
|
10,042 |
|
|
|
16 |
|
|
|
(25 |
) |
|
|
10,033 |
|
|
|
8,961 |
|
|
|
10 |
|
|
|
— |
|
|
|
8,971 |
|
|
Total investments
|
|
|
15,197 |
|
|
|
26 |
|
|
|
(26 |
) |
|
|
15,197 |
|
|
|
17,224 |
|
|
|
29 |
|
|
|
(2 |
) |
|
|
17,251 |
|
|
Total cash, cash equivalents and investments
|
|
$ |
36,275 |
|
|
$ |
26 |
|
|
$ |
(26 |
) |
|
$ |
36,275 |
|
|
$ |
40,948 |
|
|
$ |
29 |
|
|
$ |
(2 |
) |
|
$ |
40,975 |
|
|
Contractual maturities on investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due within 1 year
|
|
$ |
3,459 |
|
|
|
|
|
|
|
|
|
|
$ |
3,476 |
|
|
$ |
10,074 |
|
|
|
|
|
|
|
|
|
|
$ |
10,079 |
|
|
Due after 1 through 5 years
|
|
|
11,738 |
|
|
|
|
|
|
|
|
|
|
|
11,721 |
|
|
|
7,150 |
|
|
|
|
|
|
|
|
|
|
|
7,172 |
|
| |
|
$ |
15,197 |
|
|
|
|
|
|
|
|
|
|
$ |
15,197 |
|
|
$ |
17,224 |
|
|
|
|
|
|
|
|
|
|
$ |
17,251 |
|
We manage our investments as a single portfolio of highly marketable securities that is intended to be available to meet our current cash requirements. We have no investments in auction rate securities. For the three and six months ended June 30, 2011, we had $3,000 and $8,000 gross realized losses on sales of our available-for-sale securities, respectively. For the three and six months ended June 30, 2010, we had $76,000 and $196,000 gross realized gains on sales of our available-for-sale securities, respectively.
The gross unrealized losses related to our portfolio of available-for-sale securities were primarily due to changes in interest rates and market and credit conditions of the underlying securities. We have determined that the gross unrealized losses on our available-for-sale securities as of June 30, 2011 are temporary in nature. We periodically reviewed our investment portfolio to identify and evaluate investments that have indications of possible impairment. Factors considered in determining whether a loss is temporary include the magnitude of the decline in market value, the length of time the market value has been below cost (or adjusted cost), credit quality, the financial condition and near-term prospects
of the issuer 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 June 30, 2011 (in thousands):
| |
|
In Loss Position
< 12 months
|
|
|
In Loss Position
> 12 months
|
|
|
Total In
Loss Position
|
|
| |
|
Fair
Value
|
|
|
Gross
Unrealized
(Loss)
|
|
|
Fair
Value
|
|
|
Gross
Unrealized
(Loss)
|
|
|
Fair
Value
|
|
|
Gross
Unrealized
(Loss)
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of Deposit
|
|
$ |
959 |
|
|
$ |
(1 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
959 |
|
|
$ |
(1 |
) |
|
Corporate bonds
|
|
|
7,104 |
|
|
|
(25 |
) |
|
|
— |
|
|
|
— |
|
|
|
7,104 |
|
|
|
(25 |
) |
|
Total in loss position
|
|
$ |
8,063 |
|
|
$ |
(26 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
8,063 |
|
|
$ |
(26 |
) |
Investments in Privately-held Companies
We have made strategic investments in private companies located in China in order to gain access at a competitive cost to raw materials that are critical to our substrate business (see Note 9). The investment balances for the companies accounted for under the equity method are included in “other assets” in the condensed consolidated balance sheets and totaled $8.0 million and $4.8 million as of June 30, 2011 and December 31, 2010, respectively. We also maintain minority investments in other unconsolidated privately-held companies which are accounted for under the cost method as of June 30, 2011 and December 31, 2010. As of both June 30, 2011 and December 31, 2010, our investments in
these unconsolidated privately-held companies had a carrying value of $392,000 and are also included in “other assets” in the condensed consolidated balance sheets.
Fair Value Measurements
On January 1, 2008, we adopted ASC topic 820, Fair Value Measurements and Disclosures (“ASC 820”) which defines fair value, establishes a framework for using fair value to measure assets and liabilities, and expands disclosures about fair value measurements. ASC 820 applies whenever other statements require or permit assets or liabilities to be measured at fair value. ASC 820 applies to all financial assets and financial liabilities that are being measured and reported on a fair value basis and requires disclosure that establishes a framework for measuring fair value and expands disclosure about fair value measurements.
Our financial assets and liabilities are valued using market prices on both active markets (Level 1) and less active markets (Level 2). Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 instrument valuations are obtained from readily-available pricing sources for comparable instruments. 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 June 30, 2011, we did not have any Level 3 assets or liabilities. This hierarchy requires us to use observable market data, when available, and to
minimize the use of unobservable inputs when determining fair value. On a recurring basis, we measure certain financial assets and liabilities at fair value, primarily consisting of our short-term and long-term investments.
Our cash equivalents and investment instruments are classified within Level 1 or Level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. The type of instrument valued based on quoted market prices in active markets include money market funds, which are generally classified within Level 1 of the fair value hierarchy.
The types of instruments valued based on other observable inputs include investment-grade corporate bonds and US Treasury and agency securities. Such instruments are generally classified within Level 2 of the fair value hierarchy.
The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis in accordance with ASC 820 as of June 30, 2011 (in thousands):
| |
|
Balance as of
June 30, 2011
|
|
|
Quoted Prices in
Active Markets of
Identical Assets
(Level 1)
|
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents and investments:
|
|
|
|
|
|
|
|
|
|
|
Money market fund
|
|
$ |
1,584 |
|
|
$ |
1,584 |
|
|
$ |
— |
|
|
Certificates of deposit
|
|
|
2,889 |
|
|
|
— |
|
|
|
2,889 |
|
|
US Treasury and agency securities
|
|
|
2,275 |
|
|
|
— |
|
|
|
2,275 |
|
|
Corporate bonds
|
|
|
10,033 |
|
|
|
— |
|
|
|
10,033 |
|
|
Total
|
|
$ |
16,781 |
|
|
$ |
1,584 |
|
|
$ |
15,197 |
|
|
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 method (See Note 9). We did not record other-than-temporary impairment charges for either of these investments during the six months ended June 30, 2011 and 2010.
Note 4. Inventories
The components of inventories are summarized below (in thousands):
| |
|
June 30,
|
|
|
December 31,
|
|
| |
|
2011
|
|
|
2010
|
|
|
Inventories, net:
|
|
|
|
|
|
|
|
Raw materials
|
|
$ |
20,253 |
|
|
$ |
16,477 |
|
|
Work in process
|
|
|
14,336 |
|
|
|
15,839 |
|
|
Finished goods
|
|
|
5,064 |
|
|
|
3,670 |
|
| |
|
$ |
39,653 |
|
|
$ |
35,986 |
|
Note 5. Accrued Liabilities
The components of accrued liabilities are summarized below (in thousands):
| |
|
June 30,
|
|
|
December 31,
|
|
| |
|
2011
|
|
|
2010
|
|
| |
|
|
|
|
|
|
|
Accrued compensation and related charges
|
|
$ |
1,238 |
|
|
$ |
1,694 |
|
|
Current portion of royalty payments
|
|
|
1,375 |
|
|
|
1,622 |
|
|
Accrued product warranty
|
|
|
876 |
|
|
|
740 |
|
|
Accrued income taxes
|
|
|
1,032 |
|
|
|
516 |
|
|
Other accrued liabilities
|
|
|
3,160 |
|
|
|
3,173 |
|
| |
|
$ |
7,681 |
|
|
$ |
7,745 |
|
Note 6. Net Income Per Share
Basic net income per share is computed using the weighted average number of common shares outstanding during the periods less shares of common stock subject to repurchase and non-vested stock awards. Diluted net income per share is computed using the weighted average number of common shares outstanding and potentially dilutive common shares outstanding during the 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. 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 per share calculations is as follows (in thousands, except per share data):
| |
|
Three Months Ended
|
|
|
Six Months Ended
|
|
| |
|
June 30,
|
|
|
June 30,
|
|
| |
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to AXT, Inc.
|
|
$ |
7,062 |
|
|
$ |
5,535 |
|
|
$ |
11,270 |
|
|
$ |
8,115 |
|
|
Less: Preferred stock dividends
|
|
|
(44 |
) |
|
|
(44 |
) |
|
|
(88 |
) |
|
|
(88 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
$ |
7,018 |
|
|
$ |
5,491 |
|
|
$ |
11,182 |
|
|
$ |
8,027 |
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income per share - weighted average common shares
|
|
|
31,831 |
|
|
|
30,834 |
|
|
|
31,775 |
|
|
|
30,789 |
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock options
|
|
|
1,159 |
|
|
|
1,338 |
|
|
|
1,241 |
|
|
|
1,193 |
|
|
Restricted stock awards
|
|
|
103 |
|
|
|
— |
|
|
|
130 |
|
|
|
— |
|
|
Denominator for dilutive net income per common share
|
|
|
33,093 |
|
|
|
32,172 |
|
|
|
33,146 |
|
|
|
31,982 |
|
|
Net income attributable to AXT, Inc. per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.22 |
|
|
$ |
0.18 |
|
|
$ |
0.35 |
|
|
$ |
0.26 |
|
|
Diluted
|
|
$ |
0.21 |
|
|
$ |
0.17 |
|
|
$ |
0.34 |
|
|
$ |
0.25 |
|
|
Options excluded from diluted net income per share as the impact is anti-dilutive
|
|
|
418 |
|
|
|
351 |
|
|
|
406 |
|
|
|
355 |
|
|
Restricted stock excluded from diluted net income per share as the impact is anti-dilutive
|
|
|
186 |
|
|
|
154 |
|
|
|
186 |
|
|
|
154 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The 883,000 shares of $0.001 par value Series A preferred stock issued and outstanding as of both June 30, 2011 and December 31, 2010, 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 $4 per share liquidation preference over common stock, and 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 7. Stockholders’ Equity and Other Comprehensive Income (Loss)
Consolidated 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, 2010
|
|
$ |
3,532 |
|
|
$ |
32 |
|
|
$ |
190,021 |
|
|
$ |
(82,477 |
) |
|
$ |
4,652 |
|
|
$ |
115,760 |
|
|
$ |
4,044 |
|
|
$ |
119,804 |
|
|
Common stock options exercised
|
|
|
|
|
|
|
|
|
|
|
533 |
|
|
|
|
|
|
|
|
|
|
|
533 |
|
|
|
|
|
|
|
533 |
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
422 |
|
|
|
|
|
|
|
|
|
|
|
422 |
|
|
|
|
|
|
|
422 |
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,270 |
|
|
|
|
|
|
|
11,270 |
|
|
|
3,085 |
|
|
|
14,355 |
|
|
Dividend paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,636 |
) |
|
|
(1,636 |
) |
|
Change in unrealized (loss) gain on marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27 |
) |
|
|
(27 |
) |
|
|
|
|
|
|
(27 |
) |
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
741 |
|
|
|
741 |
|
|
|
176 |
|
|
|
917 |
|
|
Balance as of June 30, 2011
|
|
$ |
3,532 |
|
|
$ |
32 |
|
|
$ |
190,976 |
|
|
$ |
(71,207 |
) |
|
$ |
5,366 |
|
|
$ |
128,699 |
|
|
$ |
5,669 |
|
|
$ |
134,368 |
|
The components of comprehensive income (loss) are as follows (in thousands):
| |
|
Three Months Ended
|
|
|
Six Months Ended
|
|
| |
|
June 30,
|
|
|
June 30,
|
|
| |
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to AXT, Inc.
|
|
$ |
7,062 |
|
|
$ |
5,535 |
|
|
$ |
11,270 |
|
|
$ |
8,115 |
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in foreign currency translation gain (loss), net of tax
|
|
|
759 |
|
|
|
(158 |
) |
|
|
917 |
|
|
|
(363 |
) |
|
Change in unrealized gain (loss) on available-for-sale investments, net of tax
|
|
|
20 |
|
|
|
(274 |
) |
|
|
(27 |
) |
|
|
(293 |
) |
|
Total other comprehensive income (loss), net of tax
|
|
|
779 |
|
|
|
(432 |
) |
|
|
890 |
|
|
|
(656 |
) |
|
Comprehensive income
|
|
|
7,841 |
|
|
|
5,103 |
|
|
|
12,160 |
|
|
|
7,459 |
|
|
Less: Comprehensive income attributable to the noncontrolling interest
|
|
|
(133 |
) |
|
|
— |
|
|
|
(176 |
) |
|
|
— |
|
|
Comprehensive income attributable to AXT, Inc.
|
|
$ |
7,708 |
|
|
$ |
5,103 |
|
|
$ |
11,984 |
|
|
$ |
7,459 |
|
Note 8. Segment Information and Foreign Operations
Segment Information
We operate in one segment for the design, development, manufacture and distribution of high-performance compound semiconductor substrates and sale of materials. In accordance with ASC topic 280, Segment Reporting, our chief operating decision-maker has been identified as the principal executive officer, who reviews operating results to make decisions about allocating resources and assessing performance for the Company. Since we operate in one segment, all financial segment and product line information can be found in the consolidated financial statements.
Product Information
| |
|
Three Months Ended
|
|
|
Six Months Ended
|
|
| |
|
June 30,
|
|
|
June 30,
|
|
| |
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
Revenue by product type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GaAs substrates
|
|
$ |
17,966 |
|
|
$ |
16,235 |
|
|
$ |
33,858 |
|
|
$ |
29,669 |
|
|
InP substrates
|
|
|
1,604 |
|
|
|
1,077 |
|
|
|
2,936 |
|
|
|
1,952 |
|
|
Ge substrates
|
|
|
2,701 |
|
|
|
1,602 |
|
|
|
5,691 |
|
|
|
3,242 |
|
|
Raw materials and other
|
|
|
7,760 |
|
|
|
4,263 |
|
|
|
12,112 |
|
|
|
6,955 |
|
|
Total
|
|
$ |
30,031 |
|
|
$ |
23,177 |
|
|
$ |
54,597 |
|
|
$ |
41,818 |
|
Geographical Information
The following table represents revenue amounts (in thousands) reported for products shipped to customers in the corresponding geographic region:
| |
|
Three Months Ended
|
|
|
Six Months Ended
|
|
| |
|
June 30,
|
|
|
June 30
|
|
| |
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
Revenue by geographic region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America*
|
|
$ |
6,412 |
|
|
$ |
4,717 |
|
|
$ |
10,204 |
|
|
$ |
9,248 |
|
|
Europe
|
|
|
6,048 |
|
|
|
4,201 |
|
|
|
11,232 |
|
|
|
7,969 |
|
|
Japan
|
|
|
4,379 |
|
|
|
3,504 |
|
|
|
7,407 |
|
|
|
6,282 |
|
|
Taiwan
|
|
|
2,745 |
|
|
|
4,019 |
|
|
|
5,609 |
|
|
|
6,601 |
|
|
Asia Pacific
|
|
|
10,447 |
|
|
|
6,736 |
|
|
|
20,145 |
|
|
|
11,718 |
|
|
Total
|
|
$ |
30,031 |
|
|
$ |
23,177 |
|
|
$ |
54,597 |
|
|
$ |
41,818 |
|
_______________
*Primarily the United States
Long-lived assets consist primarily of property, plant and equipment, and are attributed to the geographic location in which they are located. Long-lived assets by geographic region were as follows (in thousands):
| |
|
As of
|
|
| |
|
June 30,
|
|
|
December 31,
|
|
| |
|
2011
|
|
|
2010
|
|
|
Long-lived assets by geographic region:
|
|
|
|
|
|
|
|
North America
|
|
$ |
504 |
|
|
$ |
543 |
|
|
China
|
|
|
28,310 |
|
|
|
23,697 |
|
| |
|
$ |
28,814 |
|
|
$ |
24,240 |
|
Significant Customers
One customer represented more than 10% of revenue at 19.0% for the three months ended June 30, 2011 while one customer represented more than 10% of revenue at 18.7% for the three months ended June 30, 2010. One customer represented more than 10% of revenue at 17.6% for the six months ended June 30, 2011 and 2010. Our top five customers represented 36.9% and 42.5% of revenue for the three months ended June 30, 2011 and 2010, respectively. Our top five customers represented 36.5% and 40.5% of revenue for the six months ended June 30, 2011 and 2010, 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 customer accounted for 10% or more of our trade accounts receivable balance as of June 30, 2011 at 39.5%. One customer accounted for 10% or more of our trade accounts receivable balance as of December 31, 2010 at 30.4%.
Note 9. Investments in Privately-held Companies
We have made strategic investments in private companies located in China in order to gain access to raw materials at a competitive cost that are critical to our substrate business.
Our investments are summarized below (in thousands):
| |
|
Investment Balance as of
|
|
|
|
|
|
| |
|
June 30,
|
|
December 31,
|
|
Accounting
|
|
Ownership
|
|
|
Company
|
|
2011
|
|
2010
|
|
Method
|
|
Percentage
|
|
|
Beijing JiYa Semiconductor Material Co., Ltd
|
|
$
|
996
|
|
$
|
996
|
|
Consolidated
|
|
46
|
%
|
|
Nanjing Jin Mei Gallium Co., Ltd
|
|
592
|
|
592
|
|
Consolidated
|
|
83
|
%
|
|
Beijing BoYu Semiconductor Vessel Craftwork Technology Co., Ltd
|
|
410
|
|
410
|
|
Consolidated
|
|
70
|
%
|
| |
|
$
|
1,998
|
|
$
|
1,998
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Jiangsu Dongfang Electric, Inc.
|
|
$
|
2,200
|
|
$
|
—
|
|
Equity
|
|
46
|
%
|
|
Xilingol Tongli Germanium Co. Ltd
|
|
|
3,765
|
|
|
3,437
|
|
Equity
|
|
25
|
%
|
|
Emeishan Jia Mei High Purity Metals Co., Ltd
|
|
1,112
|
|
1,055
|
|
Equity
|
|
25
|
%
|
| |
|
$
|
7,077
|
|
$
|
4,492
|
|
|
|
|
|
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 a majority control of the board. Our chief executive officer is chairman of the JiYa board, while our president of China operations and our vice president of China administration and our vice president of wafer production are also members of the JiYa board.
Our ownership of Nanjing Jin Mei Gallium Co., Ltd. (Jin Mei) is 83%. We continue to consolidate Jin Mei as we have significant influence in management and have a majority control of the board. Our chief executive officer is chairman of the Jin Mei board, while our president of China operations and our vice president of China administration are also members of the Jin Mei board.
Our ownership of Beijing BoYu Semiconductor Vessel Craftwork Technology Co., Ltd (BoYu), is 70%. We continue to consolidate BoYu as we have a significant influence over management and have a majority control of the board. Our chief executive officer is chairman of the BoYu board and our president of China operations and our vice president of China administration are members of the BoYu board.
Although we have representation on the boards of directors of each of these companies, the daily operations of each of these companies are managed by local management and not by us. Decisions concerning their respective short term strategy and operations, any capacity expansion and annual capital expenditures, and decisions concerning sales of finished product, are made by local management with some input from us.
We have added a new joint venture accounted for under the equity method during the three months ended June 30, 2011. The investment balances for the joint ventures accounted for under the equity method are included in other assets in our consolidated balance sheets and totaled $7.1 million and $4.5 million as of June 30, 2011 and December 31, 2010, respectively. 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:
|
|
●
|
these 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.
|
During the three and six months ended June 30, 2011, the three consolidated joint ventures had income of $4.5 million and $7.1 million, respectively, of which $2.0 million and $3.1 million, respectively, was allocated to minority interests, resulting in income of $2.5 million and $4.0 million, respectively, included in our net income. During the three and six months ended June 30, 2010, the three consolidated joint ventures had income of $1.3 million and $1.8 million, respectively, of which $417,000 and $547,000, respectively, was allocated to minority interests, resulting in income of $930,000 and $1.3 million, respectively, included in our net income.
We also maintain minority investments indirectly in privately-held companies 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 June 30, 2011 and December 31, 2010, our consolidated joint ventures included these minority investments in “other assets” in the condensed consolidated balance sheets with a carrying value of $892,000 and $341,000, respectively.
Our equity earnings from the three minority-owned joint ventures that are not consolidated are recorded as other income, net and totaled $309,000 and $382,000 for the three and six months ended June 30, 2011, respectively. Our equity earnings from the two-minority owned joint ventures that are not consolidated are recorded as other income, net and totaled $61,000 and $82,000 for the three and six months ended June 30 2010, respectively.
Undistributed retained earnings relating to all our investments in these companies were $20.7 million and $16.3 million as of June 30, 2011 and December 31, 2010, respectively.
Our three minority-owned joint ventures that are not consolidated and accounted for under the equity method had the following summarized income information (in thousands) for the three and six months ended June 30, 2011 and 2010.
| |
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
| |
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$ |
4,519 |
|
|
$ |
3,504 |
|
|
$ |
7,823 |
|
|
$ |
6,842 |
|
|
Gross profit
|
|
|
2,294 |
|
|
|
895 |
|
|
|
3,653 |
|
|
|
1,790 |
|
|
Operating income
|
|
|
1,587 |
|
|
|
277 |
|
|
|
1,950 |
|
|
|
400 |
|
|
Net income
|
|
|
1,242 |
|
|
|
244 |
|
|
|
1,534 |
|
|
|
326 |
|
We also maintain minority investments directly in two 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 June 30, 2011 and December 31, 2010, our investments in these two unconsolidated privately-held companies had a carrying value of $392,000 and are included in “other assets” in the condensed consolidated balance sheets.
Note 10. Commitments and Contingencies
Indemnification Agreements
We enter into standard indemnification arrangements in the ordinary course of business. Pursuant to these arrangements, we indemnify, hold harmless, and agree to reimburse the indemnified parties for losses suffered or incurred by the indemnified party, generally 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.
We have entered into indemnification agreements with our directors and officers that may require us to indemnify our directors and officers against liabilities that may arise by reason of their status or service as directors or officers, other than liabilities arising from willful misconduct of a culpable nature; to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified; and to obtain directors’ and officers’ insurance if available on reasonable terms, which we currently have in place.
Product Warranty
We warrant our products for a specific period of time, generally twelve months, against material defects. We provide for the estimated future costs of warranty obligations in cost of sales when the related revenue is recognized. The accrued warranty costs represent the best estimate at the time of sale of the total costs that we expect to incur to repair or replace product parts that fail while still under warranty. The amount of accrued estimated warranty costs are primarily based on historical experience as to product failures as well as current information on repair costs. On a quarterly basis, we review the accrued balances and update these based on the historical warranty cost trends. The following table
reflects the change in our warranty accrual which is included in “accrued liabilities” on the condensed consolidated balance sheets during the three and six months ended June 30, 2011 and 2010 (in thousands):
| |
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
| |
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning accrued warranty and related costs
|
|
$ |
798 |
|
|
$ |
1,086 |
|
|
$ |
740 |
|
|
$ |
1,082 |
|
|
Charges/(benefit) to cost of revenue
|
|
|
79 |
|
|
|
(206 |
) |
|
|
137 |
|
|
|
(146 |
) |
|
Actual warranty expenditures
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(56 |
) |
|
Ending accrued warranty and related costs
|
|
$ |
877 |
|
|
$ |
880 |
|
|
$ |
877 |
|
|
$ |
880 |
|
Contractual Obligations
We lease certain office space, manufacturing facilities and equipment under long-term operating leases expiring at various dates through February 2014. 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.
We have 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 on the agreement.
Outstanding contractual obligations as of June 30, 2011 are summarized as follows (in thousands):
| |
|
Payments due by period
|
|
|
Contractual Obligations
|
|
Total
|
|
|
Less than 1 year
|
|
|
1-3
years
|
|
|
3-5
years
|
|
|
More than
5 years
|
|
|
Operating leases
|
|
$ |
1,529 |
|
|
$ |
379 |
|
|
$ |
713 |
|
|
$ |
437 |
|
|
$ |
— |
|
|
Royalty agreement
|
|
|
6,125 |
|
|
|
1,375 |
|
|
|
1,825 |
|
|
|
1,487 |
|
|
|
1,438 |
|
|
Total
|
|
$ |
7,654 |
|
|
$ |
1,754 |
|
|
$ |
2,538 |
|
|
$ |
1,924 |
|
|
$ |
1,438 |
|
Purchase Obligations
Through the normal course of business, we purchase or place orders for the necessary materials for our products from various suppliers and we commit to purchase products where we may incur a penalty if the agreement was canceled. As of June 30, 2011, we did not have any outstanding material purchase obligations.
Legal Proceedings
From time to time we may be involved in judicial or administrative proceedings concerning matters arising in the ordinary course of business. We do not expect that any of these matters, individually or in the aggregate, will have a material adverse effect on our business, financial condition, cash flows or results of operation.
Note 11. Foreign Exchange Transaction Gains/Losses
We incurred foreign exchange transaction exchange gains of $65,000 and $230,000 for the three months ended June 30, 2011 and 2010, respectively. We incurred foreign currency transaction exchange losses of $131,000 and foreign exchange gains of $162,000 for the six months ended June 30, 2011 and 2010, respectively. These amounts are included in “Other income, net” on the condensed consolidated statements of operations.
Note 12. Income Taxes
In July 2006, the Financial Accounting Standards Board (“FASB”) issued ASC topic 740, Income Taxes (“ASC 740”). ASC 740 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with ASC 740. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also provides guidance on de-recognition of tax benefits, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure, and
transition. We adopted ASC 740 effective January 1, 2007. We recognize interest and penalties related to uncertain tax positions in income tax expense. As of June 30, 2011, we do not have any gross unrecognized tax benefits, nor any accrued interest and penalties related to uncertain tax positions. As a result of the implementation of ASC 740, we identified $16.4 million in the liability for unrecognized tax benefits. Of this amount, none was accounted for as a reduction to the January 1, 2007 balance of retained earnings. The amount decreased the tax loss carry-forwards in the U.S. which are fully offset by a valuation allowance. We file income tax returns in the U.S. federal, various states and foreign jurisdictions. We have substantially concluded all U.S. federal and state income tax matters through December 31, 2009. There was no Federal U.S. tax expense during
three and six months ended June 30, 2011 due to the valuation allowance being utilized.
Note 13. Recent Accounting Pronouncements
With the exception of those stated below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the six months ended June 30, 2011, as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K that are of material significance, or have potential material significance, to the Company.
In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income (Topic 220)”. This standard eliminates the current option to report other comprehensive income and its components in the statement of changes in stockholders’ equity. The company will have option to present the total of comprehensive income, the component of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The new requirements are effective as of the beginning of a fiscal year that
begins after December 15, 2011 and interim and annual periods thereafter. We are currently evaluating the impact the application of these amendments will have on our consolidated financial statements.
In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U. S. GAAP and IFRS,” which amends the current fair value measurement and disclosure guidance to include increased transparency around valuation inputs and investment categorization. This guidance will be effective for interim and annual periods beginning after December 15, 2011. We are currently evaluating the impact the application of these amendments will have on our consolidated financial
statements.
Note 14. Subsequent Event
In July 2011, we filed a Form S-3 shelf registration statement with the Securities and Exchange Commission. If it is declared effective by the SEC, we may 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.
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 our positioning with respect to our leverage of our PRC-based manufacturing capabilities and access to favorably priced raw materials, industry trends, results of operations, customer demand, our ability to expand our markets and increase sales, customer qualifications of our products, gross margins, the impact of the adoption of certain accounting pronouncements, our investments in capital projects, our belief that our stock option program helps us
attract, motivate and retain high quality employees, 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. 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, 2010 and the condensed consolidated financial statements included elsewhere in this report.
Overview
We are a leading worldwide developer and producer of high-performance compound and single element semiconductor substrates comprising gallium arsenide (GaAs), indium phosphide (InP) and germanium (Ge). We currently sell the following substrate products in the sizes and for the applications indicated:
|
Product
|
|
|
|
Substrates
|
|
Diameter
|
|
Applications
|
|
GaAs (semi-insulating)
|
|
2”, 3”, 4”, 5”, 6”
|
|
· Power amplifiers and radio frequency integrated circuits for wireless handsets (cell phones)
|
| |
|
|
|
· Direct broadcast television
|
| |
|
|
|
· High-performance transistors
|
| |
|
|
|
· Satellite communications
|
| |
|
|
|
|
|
GaAs (semi-conducting)
|
|
2”, 3”, 4”
|
|
· High brightness light emitting diodes
|
| |
|
|
|
· Lasers
|
| |
|
|
|
· Optical couplers
|
| |
|
|
|
|
|
InP
|
|
2”, 3”, 4”
|
|
· Broadband and fiber optic communications
|
| |
|
|
|
|
|
Ge
|
|
2”, 4”, 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 pricing advantages, reliable supply and enhanced sourcing lead-times for key raw materials which are central to our final manufactured products. These joint ventures produce products including 99.99% pure gallium (4N Ga), high purity gallium, arsenic, germanium, germanium
dioxide, paralytic boron nitride (pBN) crucibles and boron oxide. Our ownership interest in these entities ranges from 25% to 83%. We consolidate, for accounting purposes, the joint ventures in which we own a majority or controlling financial interest and employ equity accounting for the joint ventures in which we have a 25% to 46% interest in each. We purchase portions of the materials produced by these ventures for our own use and the joint ventures sell the remainder of their production to third parties. We use our direct sales force in the United States and independent sales representatives in Europe and Asia to market our substrates. We believe that, as the demand for compound semiconductor substrates is expected to increase, we are positioned to leverage our PRC-based manufacturing capabilities and access to favorably priced raw materials to increase our market share.
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 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 in excess of 90 days and for receivables from customers located outside the U.S. in excess of 120 days and reserve allowance on the receivable balances if needed. 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 June 30, 2011 and December 31, 2010, our accounts receivable, net, balance was $23.0 million and $23.1 million, respectively, which was net of an allowance for doubtful accounts of $1,000 and $99,000, respectively. During three and six months ended June 30, 2011, we decreased this allowance for doubtful accounts by $54,000 and $98,000, respectively, primarily due to receipt of some long past due accounts. 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.
The allowance for sales returns is also deducted from gross accounts receivable. As of June 30, 2011 and December 31, 2010, our allowance for sales returns was $331,000 and $462,000, 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 June 30, 2011 and December 31, 2010, accrued product warranties totaled $877,000 and $740,000, respectively. If actual warranty costs differ substantially from our estimates, revisions to the estimated warranty liability would be required, which could have a material impact on our financial condition and results of operations.
Inventory Valuation
Inventories are stated at the lower of cost or market. Cost is determined using the weighted average cost method. Our inventory consists of raw materials as well as finished goods and work-in-process that include material, labor and manufacturing overhead costs. Given the nature of our substrate products, and the materials used in the manufacturing process, the wafers and ingots comprising work-in-process may be held in inventory for up to two years and three years, respectively, as the risk of obsolescence for these materials is low. We routinely evaluate the levels of our inventory in light of current market conditions in order to identify excess and obsolete inventory, and we provide a valuation allowance
for certain inventories based upon the age and quality of the product and the projections for sale of the completed products. As of June 30, 2011 and December 31, 2010, we had an inventory reserve of $10.6 million and $11.5 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 companies for business and strategic purposes. These investments are classified as other assets and are accounted for under the cost method as we do not have the ability to exercise significant influence over their operations. We monitor our investments for impairment and record reductions in carrying value when events or changes in circumstances indicate that the carrying value may not be recoverable. Determination of impairment is highly subjective and is based on a number of factors, including an assessment of the strength of 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.
Fair Value of Investments
In the current market environment, the assessment of the fair value of debt instruments can be difficult and subjective. Although volume of trading activity of certain debt instruments has increased since 2010, and the rapid changes occurring in today’s financial markets can lead to changes in the fair value of financial instruments in relatively short periods of time. ASC 820 establishes three levels of inputs that may be used to measure fair value.
Level 1 instruments represent quoted prices in active markets. Therefore, determining fair value for Level 1 instruments does not require significant management judgment, and the estimation is not difficult.
Level 2 instruments include observable inputs other than Level 1 prices, such as quoted prices for identical instruments in markets with insufficient volume or infrequent transactions (less active markets), issuer credit ratings, non-binding market consensus prices that can be corroborated with observable market data, model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated with observable market data for substantially the full term of the assets or liabilities, or quoted prices for similar assets or liabilities. These Level 2 instruments require more management judgment and subjectivity compared to Level 1 instruments,
including:
|
|
●
|
Determining which instruments are most similar to the instrument being priced requires management to identify a sample of similar securities based on the coupon rates, maturity, issuer, credit rating, and instrument type, and subjectively select an individual security or multiple securities that are deemed most similar to the security being priced.
|
|
|
●
|
Determining whether a market is considered active requires management judgment. Our assessment of an active market for our marketable debt instruments generally takes into consideration activity during each week of the one-month period prior to the valuation date of each individual instrument, including the number of days each individual instrument trades and the average weekly trading volume in relation to the total outstanding amount of the issued instrument.
|
|
|
●
|
Determining which model-derived valuations to use in determining fair value requires management judgment. When observable market prices for identical securities or similar securities are not available, we price our marketable debt instruments using non-binding market consensus prices that are corroborated with observable market data or pricing models, such as discounted cash flow models, with all significant inputs derived from or corroborated with observable market data.
|
Level 3 instruments include unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities. The determination of fair value for Level 3 instruments requires the most management judgment and subjectivity. As of June 30, 2011, we did not have any assets or liabilities without observable market values that would require a high level of judgment to determine fair value (Level 3 assets).
Impairment of Long-Lived Assets
We evaluate the recoverability of property, equipment and intangible assets in accordance with ASC topic 360, Impairment of Disposal of Long-Lived Assets (“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.
Stock-based Compensation
We grant options to substantially all management employees and believe that this program helps us to attract, motivate and retain high quality employees, to the ultimate benefit of our stockholders. We account for stock-based compensation in accordance with ASC topic 718, Stock-based Compensation (“ASC 718”), using the modified prospective method. We utilize the Black-Scholes option pricing model to estimate the grant date fair value of employee stock compensation awards, which requires the input of highly subjective assumptions, including expected volatility and expected term. Historical volatility was used in estimating the fair value of our
stock options awards, while the expected term for our options was estimated based on historical option exercise behavior and post-vesting forfeitures of options by our employees. Further, we estimate 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.
We recognize the compensation costs net of an estimated forfeiture rate over the requisite service period of the options award, which is generally the vesting term of four years. The cost of restricted stock awards is determined using the fair value of our common stock on the date of grant. 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 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 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 12—“Income Taxes” in the notes to condensed financial statements for additional information.
Results of Operations
Revenue
| |
|
Three Months Ended
June 30,
|
|
|
Increase
|
|
|
|
|
| |
|
2011
|
|
|
2010
|
|
|
(Decrease)
|
|
|
% Change
|
|
| |
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
GaAs
|
|
$ |
17,966 |
|
|
$ |
16,235 |
|
|
$ |
1,731 |
|
|
|
10.7 |
% |
|
InP
|
|
|
1,604 |
|
|
|
1,077 |
|
|
|
527 |
|
|
|
48.9 |
% |
|
Ge
|
|
|
2,701 |
|
|
|
1,602 |
|
|
|
1,099 |
|
|
|
68.6 |
% |
|
Raw materials and other
|
|
|
7,760 |
|
|
|
4,263 |
|
|
|
3,497 |
|
|
|
82.0 |
% |
|
Total revenue
|
|
$ |
30,031 |
|
|
$ |
23,177 |
|
|
$ |
6,854 |
|
|
|
29.6 |
% |
Revenue increased $6.9 million, or 29.6%, to $30.0 million for the three months ended June 30, 2011 from $23.2 million for the three months ended June 30, 2010. Total GaAs substrate revenue increased $1.7 million, or 10.7%, to $18.0 million for the three months ended June 30, 2011 from $16.2 million for the three months ended June 30, 2010. The increase in revenue was primarily due to the growing demand in the light emitting diode (LED) market that uses semi-conducting (SC) substrates, partially offset by reduced orders from some semi-insulating (SI) customers in the wireless devices market who reduced orders while utilizing excess inventory.
Sales of 5 inch and 6 inch diameter GaAs substrates were $6.3 million for the three months ended June 30, 2011 compared to $6.8 million for the three months ended June 30, 2010. The decrease in revenue from larger diameter substrates was primarily due to reduced orders from customers in the wireless devices market utilizing excess inventory compared to the same period in the prior year.
Sales of 2 inch, 3 inch and 4 inch diameter GaAs substrates were $11.7 million for the three months ended June 30, 2011 compared with $9.4 million for the three months ended June 30, 2010. The increase in revenue from smaller diameter substrates was due to increasing worldwide adoption and investment in LED technology in many applications.
InP substrate revenue increased $527,000, or 48.9%, to $1.6 million for the three months ended June 30, 2011 from $1.1 million for the three months ended June 30, 2010 as demand from customers in the optical networking industry increased. We continued to see renewed demand for these substrates as investment in high-speed optical communications increased worldwide.
Ge substrate revenue increased $1.1 million, or 68.6%, to $2.7 million for the three months ended June 30, 2011 from $1.6 million for the three months ended June 30, 2010. Our Ge substrate revenue increased as demand from our customers increases for concentrated photovoltaic solar applications. We continued to make progress in our penetration of the solar cell market, particularly in satellite applications.
Raw materials revenue increased $3.5 million, or 82.0%, to $7.8 million for the three months ended June 30, 2011 from $4.3 million for the three months ended June 30, 2010. The increase in raw materials revenue was primarily due to an increase in demand from new customers and from existing customers for 4N raw gallium, as well as from increased selling prices based on the prevailing market demand.
| |
|
Six Months Ended
June 30,
|
|
|
Increase
|
|
|
|
|
| |
|
2011
|
|
|
2010
|
|
|
(Decrease)
|
|
|
% Change
|
|
| |
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
GaAs
|
|
$ |
33,858 |
|
|
$ |
29,669 |
|
|
$ |
4,189 |
|
|
|
14.1 |
% |
|
InP
|
|
|
2,936 |
|
|
|
1,952 |
|
|
|
984 |
|
|
|
50.4 |
% |
|
Ge
|
|
|
5,691 |
|
|
|
3,242 |
|
|
|
2,449 |
|
|
|
75.5 |
% |
|
Raw materials and other
|
|
|
12,112 |
|
|
|
6,955 |
|
|
|
5,157 |
|
|
|
74.1 |
% |
|
Total revenue
|
|
$ |
54,597 |
|
|
$ |
41,818 |
|
|
$ |
12,779 |
|
|
|
30.6 |
% |
Revenue increased $12.8 million, or 30.6%, to $54.6 million for the six months ended June 30, 2011 from $41.8 million for the six months ended June 30, 2010. Total GaAs substrate revenue increased $4.2 million, or 14.1%, to $33.9 million for the six months ended June 30, 2011 from $29.7 million for the six months ended June 30, 2010. The increase in revenue was primarily due to the growing demand in the light emitting diode (LED) market that uses semi-conducting (SC) substrates, partially offset by reduced orders from some semi-insulating (SI) customers in the wireless devices market who reduced orders while utilizing excess inventory.
Sales of 5 inch and 6 inch diameter GaAs substrates were $10.9 million for the six months ended June 30, 2011 compared to $12.3 million for the six months ended June 30, 2010. The decrease in revenue from larger diameter substrates was primarily due to reduced orders from customers in the wireless devices market utilizing excess inventory compared to the same period in the prior year.
Sales of 2 inch, 3 inch and 4 inch diameter GaAs substrates were $23.0 million for the six months ended June 30, 2011 compared with $17.4 million for the six months ended June 30, 2010. The increase in revenue from smaller diameter substrates was due to increasing worldwide adoption and investment in LED technology in many applications.
InP substrate revenue increased $984,000, or 50.4%, to $2.9 million for the six months ended June 30, 2011 from $2.0 million for the six months ended June 30, 2010 as demand from customers in the optical networking industry increased. We continued to see renewed demand for these substrates as investment in high-speed optical communications increased worldwide.
Ge substrate revenue increased $2.5 million, or 75.5%, to $5.7 million for the six months ended June 30, 2011 from $3.2 million for the six months ended June 30, 2010. Our Ge substrate revenue increased as demand from our customers increase for concentrated photovoltaic solar applications. We continued to make progress in our penetration of the solar cell market, particularly in satellite applications.
Raw materials revenue increased $5.2 million, or 74.1%, to $12.1 million for the six months ended June 30, 2011 from $7.0 million for the six months ended June 30, 2010. The increase in raw materials revenue was primarily due to an increase in demand from new customers and from existing customers for 4N raw gallium, as well as from increased selling prices based on the prevailing market demand.
Revenue by Geographic Region
| |
|
Three Months Ended
June 30,
|
|
|
Increase
|
|
|
|
|
| |
|
2011
|
|
|
2010
|
|
|
(Decrease)
|
|
|
% Change
|
|
| |
|
($ in thousands)
|
|
|
|
|
|
|
|
|
North America *
|
|
$ |
6,412 |
|
|
$ |
4,717 |
|
|
$ |
1,695 |
|
|
|
35.9 |
% |
|
% of total revenue
|
|
|
21.4 |
% |
|
|
20.4 |
% |
|
|
|
|
|
|
|
|
|
Europe
|
|
|
6,048 |
|
|
|
4,201 |
|
|
|
1,847 |
|
|
|
44.0 |
% |
|
% of total revenue
|
|
|
20.1 |
% |
|
|
18.1 |
% |
|
|
|
|
|
|
|
|
|
Japan
|
|
|
4,379 |
|
|
|
3,504 |
|
|
|
875 |
|
|
|
25.0 |
% |
|
% of total revenue
|
|
|
14.6 |
% |
|
|
15.1 |
% |
|
|
|
|
|
|
|
|
|
Taiwan
|
|
|
2,745 |
|
|
|
4,019 |
|
|
|
(1,274 |
) |
|
|
(31.7 |
) % |
|
% of total revenue
|
|
|
9.1 |
% |
|
|
17.3 |
% |
|
|
|
|
|
|
|
|
|
Asia Pacific (excluding Japan and Taiwan)
|
|
|
10,447 |
|
|
|
6,736 |
|
|
|
3,711 |
|
|
|
55.1 |
% |
|
% of total revenue
|
|
|
34.8 |
% |
|
|
29.1 |
% |
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$ |
30,031 |
|
|
$ |
23,177 |
|
|
$ |
6,854 |
|
|
|
29.6 |
% |
________________
|
|
*Primarily the United States
|
Revenue from customers in North America increased by $1.7 million, or 35.9%, to $6.4 million for the three months ended June 30, 2011 from $4.7 million for the three months ended June 30, 2010 primarily due to increased demand for both semi-insulating substrates and InP substrates.
Revenue from customers in Europe increased by $1.8 million, or 44.0%, to $6.0 million for the three months ended June 30, 2011 from $4.2 million for the three months ended June 30, 2010. This increase was primarily due to increased semi-conducting substrate sales and germanium substrates sales to customers in Germany.
Revenue from customers in Japan increased by $875,000, or 25.0%, to $4.4 million for the three months ended June 30, 2011 from $3.5 million for the three months ended June 30, 2010. The increase was primarily due to increased raw material sales of 4N gallium and semi-conducting substrate sales.
Revenue from customers in Taiwan decreased by $1.3 million, or 31.7%, to $2.7 million for the three months ended June 30, 2011 from $4.0 million for the three months ended June 30, 2010. The decrease in revenue was primarily due to reduced orders from customers in the wireless devices market utilizing excess inventory.
Revenue from customers in Asia Pacific (excluding Japan and Taiwan) increased by $3.7 million, or 55.1%, to $10.4 million for the three months ended June 30, 2011 from $6.7 million for the three months ended June 30, 2010. The increase was primarily due to increased raw material sales of 4N gallium and increased sales of semi-conducting substrate used in the LED market in China.
| |
|
Six Months Ended
June 30,
|
|
|
Increase
|
|
|
|
|
| |
|
2011
|
|
|
2010
|
|
|
(Decrease)
|
|
|
% Change
|
|
| |
|
($ in thousands)
|
|
|
|
|
|
|
|
|
North America *
|
|
$ |
10,204 |
|
|
$ |
9,248 |
|
|
$ |
956 |
|
|
|
10.3 |
% |
|
% of total revenue
|
|
|
18.7 |
% |
|
|
22.1 |
% |
|
|
|
|
|
|
|
|
|
Europe
|
|
|
11,232 |
|
|
|
7,969 |
|
|
|
3,263 |
|
|
|
40.9 |
% |
|
% of total revenue
|
|
|
20.6 |
% |
|
|
19.1 |
% |
|
|
|
|
|
|
|
|
|
Japan
|
|
|
7,407 |
|
|
|
6,282 |
|
|
|
1,125 |
|
|
|
17.9 |
% |
|
% of total revenue
|
|
|
13.6 |
% |
|
|
15.0 |
% |
|
|
|
|
|
|
|
|
|
Taiwan
|
|
|
5,609 |
|
|
|
6,601 |
|
|