Table of Contents

 

 

 

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

**(MarkOne)**

 

| **x**                                                                                             | ** ** | **Quarterly report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934**  |
|---------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
| ** **                                                                                        | ** ** |
| **for the quarterly period ended  March 31, 2009**                                           |
| ** **                                                                                        | ** ** |
| **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**

 

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**AXT,INC.**

(Exact name of registrant asspecified in its charter)

 

| **DELAWARE**                                                    | ** ** | **94-3031310**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of  Incorporation or organization) |       | (I.R.S. Employer  Identification No.) |

 

**4281Technology Drive, Fremont, California 94538**

(Address of principal executive offices)****(Zip code)

 

**(510) 683-5900**

(Registrant’s telephone number,including area code)

 

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Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesAct of 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. YES  x  NO  o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits Web site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§232.405 of thischapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files). Yes o No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting 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 (asdefined in Rule 12b-2 of the Exchange Act). YES o  NO x

 

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

 

| **Class**                      | ** ** | **Outstanding at April 30, 2009** |
|--------------------------------|------------|-------------------------------------------------------|
| Common Stock, $0.001 par value |       | 30,512,899                                            |

 

 

 

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Table of Contents

 

AXT, INC.FORM 10-QTABLE OF CONTENTS

 
| ** **                                                                                                | ** ** | **Page** |
|-----------------------------------------------------------------------------------------------------------|------------|----------|
| PART I. FINANCIAL INFORMATION                                                                        |       | 3        |
| Item 1.  Financial Statements (unaudited)                                                                 |       | 3        |
| Condensed  Consolidated Balance Sheets as of March 31, 2009 and December 31,  2008              |       | 3        |
| Condensed  Consolidated Statements of Operations for the three months ended  March 31, 2009 and 2008 |       | 4        |
| Condensed  Consolidated Statements of Cash Flows for the three months ended  March 31, 2009 and 2008 |       | 5        |
| Notes To  Condensed Consolidated Financial Statements                                                     |       | 6        |
| Item 2. Management’s  Discussion and Analysis of Financial Condition and Results of Operations       |       | 17       |
| Item 3.  Quantitative and Qualitative Disclosures About Market Risk                                       |       | 28       |
| Item 4.  Controls and Procedures                                                                          |       | 29       |
| PART II. OTHER INFORMATION                                                                           |       | 30       |
| Item 1. Legal Proceedings                                                                                 |       | 30       |
| Item 1A. Risk  Factors                                                                                    |       | 30       |
| Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds                                      |       | 30       |
| Item 3.  Defaults Upon Senior Securities                                                                  |       | 30       |
| Item 4.  Submission of Matters to a Vote of Security Holders                                              |       | 30       |
| Item 5. Other Information                                                                                 |       | 30       |
| Item 6.  Exhibits                                                                                         |       | 31       |
| Signatures                                                                                                |       | 32       |

 

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**PART I.FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

AXT, INC.CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except per sharedata)

 
| ** **                                                                                                                                                                                     | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                     | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| Assets:                                                                                                                                                                                        |       |               |       |                  |       |
| Current assets:                                                                                                                                                                                |       |               |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                      |       | $                  | 11,507     |                  | $          | 13,566 |   |
| Short-term investments                                                                                                                                                                         |       | 17,960             |       | 17,756                |       |
| Accounts receivable, net of allowances of  $236 and $663 as of March 31, 2009 and December 31, 2008,  respectively                                                                   |       | 8,390              |       | 11,497                |       |
| Inventories, net                                                                                                                                                                               |       | 33,497             |       | 35,082                |       |
| Prepaid expenses and other current assets                                                                                                                                                      |       | 2,298              |       | 3,131                 |       |
| Total current assets                                                                                                                                                                           |       | 73,652             |       | 81,032                |       |
| Property, plant and equipment, net                                                                                                                                                             |       | 21,511             |       | 22,184                |       |
| Restricted deposits                                                                                                                                                                            |       | 3,000              |       | 3,013                 |       |
| Other assets                                                                                                                                                                                   |       | 5,375              |       | 5,433                 |       |
| Total assets                                                                                                                                                                                   |       | $                  | 103,538    |                  | $          | 111,662 |   |
|                                                                                                                                                                                           |       |               |       |                  |       |
| Liabilities and stockholders’ equity:                                                                                                                                                     |       |               |       |                  |       |
| Current liabilities:                                                                                                                                                                           |       |               |       |                  |       |
| Accounts payable                                                                                                                                                                               |       | $                  | 4,202      |                  | $          | 6,657 |   |
| Accrued liabilities                                                                                                                                                                            |       | 3,974              |       | 4,453                 |       |
| Accrued restructuring                                                                                                                                                                          |       | 442                |       | —                |       |
| Line of credit                                                                                                                                                                                 |       | 3,000              |       | 3,013                 |       |
| Current portion of long-term debt                                                                                                                                                              |       | 74                 |       | 73                    |       |
| Total current liabilities                                                                                                                                                                      |       | 11,692             |       | 14,196                |       |
| Long-term debt, net of current portion                                                                                                                                                         |       | 478                |       | 496                   |       |
| Other long-term liabilities                                                                                                                                                                    |       | 64                 |       | 94                    |       |
| Total liabilities                                                                                                                                                                              |       | 12,234             |       | 14,786                |       |
| Commitments and contingencies  (Note 11)                                                                                                                                                  |       |               |       |                  |       |
| Stockholders’ equity:                                                                                                                                                                     |       |               |       |                  |       |
| Preferred stock, $0.001 par value per  share; 2,000 shares authorized; 883 shares issued and outstanding as of  March 31, 2009 and December 31, 2008                                 |       | 3,532              |       | 3,532                 |       |
| Common stock, $0.001 par value per share;  70,000 shares authorized; 30,513 and 30,513 shares issued and  outstanding as of March 31, 2009 and December 31, 2008,  respectively |       | 30                 |       | 30                    |       |
| Additional paid-in capital                                                                                                                                                                     |       | 187,212            |       | 186,754               |       |
| Accumulated deficit                                                                                                                                                                            |       | (104,748           | )          | (99,232               | )          |
| Accumulated other comprehensive income                                                                                                                                                         |       | 2,770              |       | 2,580                 |       |
| Total AXT, Inc. stockholders’ equity                                                                                                                                                 |       | 88,796             |       | 93,664                |       |
|                                                                                                                                                                                           |       |               |       |                  |       |
| Noncontrolling interests                                                                                                                                                                       |       | 2,508              |       | 3,212                 |       |
| Total stockholders’ equity                                                                                                                                                                |       | 91,304             |       | 96,876                |       |
|                                                                                                                                                                                           |       |               |       |                  |       |
| Total liabilities and stockholders’ equity                                                                                                                                                |       | $                  | 103,538    |                  | $          | 111,662 |   |

 

See accompanying notes to condensedconsolidated financial statements.

 

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AXT, INC.CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except per sharedata)

 
| ** **                                                          | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                          | ** ** | **March 31,**               | ** ** |
| ** **                                                          | ** ** | **2009**                         | ** ** | **2008** | ** ** |
|                                                                |       |                             |       |   |   |
| Revenue                                                             |       | $                                | 7,654      |   | $ | 19,634 |   |
| Cost of revenue                                                     |       | 7,891                            |       | 13,413 |   |
| Gross profit (loss)                                                 |       | (237                             | )          | 6,221 |   |
|                                                                |       |                             |       |   |   |
| Operating expenses:                                                 |       |                             |       |   |   |
| Selling, general and administrative                                 |       | 4,006                            |       | 3,667 |   |
| Research and development                                            |       | 460                              |       | 504 |   |
| Impairment on assets held for sale                                  |       | —                           |       | 83 |   |
| Restructuring charge                                                |       | 507                              |       | — |   |
| Total operating expenses                                            |       | 4,973                            |       | 4,254 |   |
| Income (loss) from operations                                       |       | (5,210                           | )          | 1,967 |   |
| Interest income, net                                                |       | 44                               |       | 124 |   |
| Other income (loss), net                                            |       | (422                             | )          | 927 |   |
|                                                                |       |                             |       |   |   |
| Income (loss) before provision for income  taxes                    |       | (5,588                           | )          | 3,018 |   |
| Provision for income taxes                                          |       | 4                                |       | 560 |   |
| Net income (loss)                                                   |       | (5,592                           | )          | 2,458 |   |
| Less: Net income (loss) attributable to  noncontrolling interest    |       | 76                               |       | (499 | ) |
| Net income (loss) attributable to  AXT, Inc.                   |       | $                                | (5,516     | ) | $ | 1,959 |   |
|                                                                |       |                             |       |   |   |   |   |
| Net income (loss) attributable to  AXT, Inc. per common share: |       |                             |       |   |   |
| Basic                                                               |       | $                                | (0.18      | ) | $ | 0.06 |   |
| Diluted                                                             |       | $                                | (0.18      | ) | $ | 0.06 |   |
|                                                                |       |                             |       |   |   |
| Weighted average number of common shares  outstanding:              |       |                             |       |   |   |
| Basic                                                               |       | 30,434                           |       | 30,367 |   |
| Diluted                                                             |       | 30,434                           |       | 31,585 |   |

 

See accompanying notes to condensedconsolidated financial statements.

 

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AXT, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

 
| ** **                                                           | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                           | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
|                                                                 |       |                                             |       |   |   |
| Cash flows from operating activities:                                |       |                                             |       |   |   |
| Net income (loss) attributable to AXT, Inc.                          |       | $                                                | (5,516     | ) | $ | 1,959 |   |
|                                                                 |       |                                             |       |   |   |
| Adjustments to reconcile net income to net  cash used in operations: |       |                                             |       |   |   |
| Depreciation                                                         |       | 800                                              |       | 478 |   |
| Accretion of marketable securities premium                           |       | (4                                               | )          | — |   |
| Loss on disposal of property, plant and  equipment                   |       | 1                                                |       | — |   |
| Impairment on assets held for sale                                   |       | —                                           |       | 83 |   |
| Stock-based compensation                                             |       | 458                                              |       | 170 |   |
| Non-cash restructuring charge                                        |       | 507                                              |       | — |   |
| Realized gain on sale of investments                                 |       | —                                           |       | (459 | ) |
| Changes in assets and liabilities:                                   |       |                                             |       |   |   |
| Accounts receivable, net                                             |       | 3,108                                            |       | (4,366 | ) |
| Inventories                                                          |       | 1,583                                            |       | (4,028 | ) |
| Prepaid expenses                                                     |       | 833                                              |       | (1,701 | ) |
| Other assets                                                         |       | 58                                               |       | (185 | ) |
| Accounts payable                                                     |       | (2,454                                           | )          | 4,469 |   |
| Accrued liabilities                                                  |       | (544                                             | )          | 121 |   |
| Other long-term liabilities                                          |       | (733                                             | )          | (902 | ) |
| Net cash used in operating activities                                |       | (1,903                                           | )          | (4,361 | ) |
|                                                                 |       |                                             |       |   |   |
| Cash flows from investing activities:                                |       |                                             |       |   |   |
| Purchases of property, plant and equipment                           |       | (135                                             | )          | (986 | ) |
| Proceeds from sale of assets held for sale                           |       | —                                           |       | 5,057 |   |
| Purchases of marketable securities                                   |       | (13                                              | )          | (6,808 | ) |
| Proceeds from sale of marketable securities                          |       | —                                           |       | 11,328 |   |
| Decrease in restricted deposits                                      |       | 13                                               |       | 150 |   |
| Net cash provided by (used in) investing  activities                 |       | (135                                             | )          | 8,741 |   |
|                                                                 |       |                                             |       |   |   |
| Cash flows from financing activities:                                |       |                                             |       |   |   |
| Proceeds from issuance of common stock, net                          |       | —                                           |       | 68 |   |
| Long-term debt payments                                              |       | (30                                              | )          | (150 | ) |
| Long-term debt proceeds                                              |       | —                                           |       | 274 |   |
| Net cash provided by (used in) financing  activities                 |       | (30                                              | )          | 192 |   |
| Effect of exchange rate changes on cash and  cash equivalents        |       | 9                                                |       | 273 |   |
| Net increase (decrease) in cash and cash  equivalents                |       | (2,059                                           | )          | 4,845 |   |
| Cash and cash equivalents at the beginning  of the period            |       | 13,566                                           |       | 18,380 |   |
| Cash and cash equivalents at the end of the  period                  |       | $                                                | 11,507     |   | $ | 23,225 |   |

 

See accompanying notes to condensedconsolidated financial statements.

 

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AXT, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

**Note1. 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 ofits consolidated subsidiaries) are unaudited, and have been prepared in accordance with accounting principlesgenerally accepted in the United States of America for interim financialinformation and with the instructions to Form 10-Q and Article 10 ofRegulation S-X. Accordingly, the year-end condensed consolidated balance sheetdata was derived from our audited consolidated financial statements, but doesnot include all disclosures required by accounting principles generally accepted in the UnitedStates of America. In the opinion of our management, the unaudited condensedconsolidated financial statements reflect all adjustments, consisting only ofnormal recurring adjustments, considered necessary to present fairly thefinancial position, results of operations and cash flows of AXT and oursubsidiaries for all periods presented.

 

Our management has made a number of estimates and assumptions relatingto the reporting of assets and liabilities and the disclosure of contingentassets and liabilities to prepare these condensed consolidated financialstatements in conformity with accounting principles generally accepted in the United States ofAmerica. Actual results could differ materially from those estimates.

 

The results of operations are not necessarily indicative of the resultsto be expected in the future or for the full fiscal year. It is recommendedthat these condensed consolidated financial statements be read in conjunctionwith our consolidated financial statements and the notes thereto included inour 2008 Annual Report on Form 10-K filed with the Securities and ExchangeCommission (the “SEC”) on March 31, 2009.

 

Certain reclassifications have been made to the prior periodconsolidated financial statements to conform to current periodpresentation.  These reclassificationshad no impact on previously reported total assets, stockholders’ equity or netincome (loss).

 

**Note****2. Accounting for Stock-Based Compensation**

 

We account for stock-based compensation inaccordance with the provisions of SFAS No. 123 (revised 2004), “*Share-Based Payment*,” (“SFAS 123(R)”),which established accounting for stock-based awards exchanged for employeeservices. Accordingly, stock-based compensation cost is measured at each grantdate, based on the fair value of the award, and is recognized as expense overthe employee’s requisite service period of the award. All of the Company’sstock compensation is accounted for as an equity instrument. The provisions ofSFAS 123(R) apply to all awards granted or modified after the date ofadoption which was January 1, 2006. The unrecognized expense of awards notyet vested at the date of adoption will be recognized in net income (loss) inthe periods after the date of adoption using the same Black-Scholes valuationmethod and assumptions determined under the original provisions of SFAS No. 123,“*Accounting for Stock-Based Compensation.*”

 

We recorded $458,000 and $170,000 of stockbased compensation in our condensed statements of operations for the threemonths ended March 31, 2009 and 2008, respectively. We utilized theBlack-Scholes valuation model for estimating the fair value of the stockcompensation granted both before and after the adoption of SFAS 123(R).The following table summarizes compensation costs related to our stock-basedcompensation awards (in thousands, except per share data):

 
| ** **                                                                                                            | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                                            | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| Stock-based compensation in the form of  employee stock options, included in: |       |                                             |       |   |   |
|                                                                                                                  |       |                                             |       |   |   |
| Cost of revenue                                                                                                       |       | $                                                | 13         |   | $ | 16 |   |
| Selling, general and administrative                                                                                   |       | 418                                              |       | 122 |   |
| Research and development                                                                                              |       | 27                                               |       | 32 |   |
|                                                                                                                  |       |                                             |       |   |   |
| Total stock-based compensation                                                                                        |       | 458                                              |       | 170 |   |
| Tax effect on stock-based compensation                                                                                |       | —                                           |       | — |   |
|                                                                                                                  |       |                                             |       |   |   |
| Net effect on net income                                                                                              |       | $                                                | 458        |   | $ | 170 |   |
| Effect on net income (loss) attributable to  AXT, Inc. per common share:                                         |       |                                             |       |   |   |
| Basic                                                                                                                 |       | $                                                | 0.02       |   | $ | 0.00 |   |
| Diluted                                                                                                               |       | $                                                | 0.02       |   | $ | 0.00 |   |

 

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As of March 31, 2009 the totalcompensation costs related to unvested stock-based awards granted to employeesunder our stock option plan but not yet recognized was approximately $749,000,net of estimated forfeitures of $116,000. These costs will be amortized on astraight-line basis over a weighted-average period of approximately 2.73 yearsand will be adjusted for subsequent changes in estimated forfeitures. Weelected not to capitalize any stock-based compensation to inventory as of March 31,2009 due to the immateriality of the amount.

 

The amortization of stock compensation underSFAS 123(R) for the period after our January 1, 2006 adoption isbased on the single-option approach.

 

We estimate the fair value of stock optionsusing a Black-Scholes valuation model, consistent with the provisions of SFAS123(R), and the SEC Staff Accounting Bulletin No. 107. There were no stockoption grants made in the three months ended March 31, 2009. The fairvalue of our stock options granted to employees for thethree months ended March 31, 2008 was estimated using the followingweighted-average assumptions:

 
| ** **                  | ** ** | **Three Months Ended  March 30,** | ** ** |
|-----------------------------|------------|--------------------------------------------------|------------|
| ** **                  | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| Expected term (in years)    |       | n/a                                              |       | 4.0 |   |
|                        |       |                                             |       |   |   |
| Volatility                  |       | n/a                                              |       | 60.79 | % |
|                        |       |                                             |       |   |   |
| Expected dividend           |       | n/a                                              |       | 0 | % |
|                        |       |                                             |       |   |   |
| Risk-free interest rate     |       | n/a                                              |       | 2.69 | % |
|                        |       |                                             |       |   |   |
| Estimated forfeitures       |       | 5.07                                             | %          | 14.64 | % |
|                        |       |                                             |       |   |   |
| Weighted-average fair value |       | n/a                                              |       | $ | 5.09 |   |
|                             |            |                                                  |            |  |  |  |

 

The followingtable summarizes the stock option transactions during the three months ended March 31,2009 (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 December 31,  2008              |       | 2,764      |       | $                                             | 2.74       |                                                                            |       |                            |       |   |
|                                                           |       |       |       |                                          |       |                                                                            |       |                            |       |
| Granted                                                        |       | —     |       | —                                        |       |                                                                            |       |                            |       |
|                                                           |       |       |       |                                          |       |                                                                            |       |                            |       |
| Exercised                                                      |       | —     |       | —                                        |       |                                                                            |       |                            |       |
|                                                           |       |       |       |                                          |       |                                                                            |       |                            |       |
| Canceled and expired                                           |       | (11        | )          | 3.06                                          |       |                                                                            |       |                            |       |
|                                                           |       |       |       |                                          |       |                                                                            |       |                            |       |
| Options outstanding as of March 31,  2009                 |       | 2,753      |       | $                                             | 2.74       |                                                                            | 4.75       |                            | —     |   |
|                                                           |       |       |       |                                          |       |                                                                            |       |                            |       |
| Options vested and expected to vest as of  March 31, 2009 |       | 2,713      |       | $                                             | 2.73       |                                                                            | 4.70       |                            | —     |   |
|                                                           |       |       |       |                                          |       |                                                                            |       |                            |       |
| Options exercisable as of March 31,  2009                 |       | 2,163      |       | $                                             | 2.63       |                                                                            | 4.03       |                            | —     |   |

 

Asof December 31, 2008, options to purchase 1,914,000 shares at a weightedaverage exercise price of $2.58 per share were vested and exerciseable.

 

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Theaggregate intrinsic value in the table above represents the total pretaxintrinsic value, based on our closing price of $0.86 on March 31, 2009,which would have been received by the option holder had all option holdersexercised their options on that date. There are no in-the-money optionsexerciseable as of March 31, 2009.

 

Theoptions outstanding and exercisable as of March 31, 2009 were in thefollowing exercise price ranges:

 
| **Options Outstanding as of March 31, 2009** | ** ** | **Options Exercisable  as of March 31, 2009** | ** ** |
|----------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| **Range of Exercise Price**                                 | ** ** | **Shares**                                                             | ** ** | **Weighted-  average  Exercise Price** | ** ** | **Weighted-  average  Remaining  Contractual Life** | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise Price** | ** ** |
| $1.17 -  $1.38                                                             |       | 1,198,568                                                              |       | $ | 1.28 |   | 4.32 |   | 1,145,324 |   | $ | 1.28 |   |
| $1.39 -  $1.44                                                             |       | 4,261                                                                  |       | $ | 1.43 |   | 1.53 |   | 4,261 |   | $ | 1.43 |   |
| $1.45 -  $2.24                                                             |       | 821,563                                                                |       | $ | 1.88 |   | 5.31 |   | 519,163 |   | $ | 2.04 |   |
| $2.25 -  $6.31                                                             |       | 670,084                                                                |       | $ | 4.97 |   | 5.03 |   | 435,484 |   | $ | 4.67 |   |
| $6.32 -  $41.50                                                            |       | 58,500                                                                 |       | $ | 19.17 |   | 2.35 |   | 58,500 |   | $ | 19.17 |   |
|                                                                       |       | 2,752,976                                                              |       | $ | 2.74 |   | 4.74 |   | 2,162,732 |   | $ | 2.63 |   |

 

There were no options exercisedin the three months ended March 31, 2009. The total intrinsic value ofoptions exercised for the three months ended March 31, 2008 was $128,000.Cash received from option exercises for the three ended March 31, 2008 was$68,000.

 

Asummary of activity related to restricted stock awards for the three monthsended March 31, 2009 is presented below:

 
| ** **                                                                   | ** ** | **Shares** | ** ** | **Weighted-Average  Grant Date Fair Value** | ** ** |
|------------------------------------------------------------------------------|------------|------------|------------|------------------------------------------------------------|------------|
| Non-vested restricted stock shares  outstanding as of December 31, 2008 |       | 78,544     |       | $                                                          | 2.12       |   |
| Restricted stock shares granted                                              |       | —     |       | $                                                          | —     |   |
| Restricted stock shares vested                                               |       | —     |       | $                                                          | —     |   |
| Non-vested restricted stock shares  outstanding as of March 31, 2009    |       | 78,544     |       | $                                                          | 2.12       |   |

 

As of March 31, 2009, wehad $129,000 of unrecognized compensation expense, net of forfeitures, relatedto restricted stock awards, which will be recognized over the weighted averageperiod of 2.23 years. During the three months ended March 31, 2009, noshares of restricted stock vested.

 

**Note 3. Investments and Fair Value Measurements**

 

Ourcash, cash equivalents and investments, and strategic investments inprivately-held companies are classified as follows (in thousands):

 
| ** **                                    | ** ** | **March 31, 2009** | ** ** | **December 31, 2008** | ** ** |
|-----------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                                    | ** ** | ** **                   | ** ** | **Gross**                       | ** ** | **Gross** | ** ** | ** ** | ** ** | ** ** | ** ** | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                                    | ** ** | **Amortized**                | ** ** | **Unrealized**                  | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Amortized** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** |
| ** **                                    | ** ** | **Cost**                     | ** ** | **Gain**                        | ** ** | **(Loss)** | ** ** | **Value** | ** ** | **Cost** | ** ** | **Gain** | ** ** | **(Loss)** | ** ** | **Value** | ** ** |
| **Classified as:**                            |       |                         |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash                                          |       | $                            | 11,353     |                            | $          | — |   | $ | — |   | $ | 11,353 |   | $ | 13,385 |   | $ | — |   | $ | — |   | $ | 13,385 |   |
| Cash equivalents:                             |       |                         |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Money market fund                             |       | 154                          |       | —                          |       | — |   | 154 |   | 181 |   | — |   | — |   | 181 |   |
|                                          |       |                         |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total cash equivalents                        |       | 154                          |       | —                          |       | — |   | 154 |   | 181 |   | — |   | — |   | 181 |   |
|                                          |       |                         |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total cash and cash equivalents               |       | 11,507                       |       | —                          |       | — |   | 11,507 |   | 13,566 |   | — |   | — |   | 13,566 |   |
|                                          |       |                         |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Investments:                                  |       |                         |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Corporate bonds                               |       | 22,352                       |       | —                          |       | (1,392 | ) | 20,960 |   | 22,348 |   | — |   | (1,579 | ) | 20,769 |   |
| Total investments                             |       | 22,352                       |       | —                          |       | (1,392 | ) | 20,960 |   | 22,348 |   | — |   | (1,579 | ) | 20,769 |   |
| Total cash, cash equivalents and  investments |       | $                            | 33,859     |                            | —     |   | $ | (1,392 | ) | $ | 32,467 |   | $ | 35,914 |   | $ | — |   | $ | (1,579 | ) | $ | 34,335 |   |
| **Contractual maturities on investments:**    |       |                         |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Due within 1 year                             |       | $                            | 10,062     |                            |       |   |   |   | $ | 9,562 |   | $ | 4,060 |   |   |   |   |   | $ | 3,822 |   |
| Due after 1 through 5 years                   |       | 12,290                       |       |                            |       |   |   | 11,398 |   | 18,288 |   |   |   |   |   | 16,947 |   |
|                                          |       | $                            | 22,352     |                            |       |   |   |   | $ | 20,960 |   | $ | 22,348 |   |   |   |   |   | $ | 20,769 |   |
|                                               |            |                              |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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Theinvestments include $3.0 million recorded as restricted deposits on thecondensed consolidated balance sheets as of March 31, 2009 and December 31,2008. The $3.0 million restricted deposit was a drawdown of our line of creditfacility, with an annual interest rate of 1.78% as of March 31, 2009.

 

Wemanage our investments as a single portfolio of highly marketable securitiesthat is intended to be available to meet our current cash requirements. We haveno investments in auction rate securities. For the three months ended March 31,2009 we had no gross realized gains or losses on sales of ouravailable-for-sale securities. For the three months ended March 31, 2008we had $459,000 in gross realized gains on sales of our available-for-salesecurities.

 

Thegross unrealized losses related to our portfolio of available-for-salesecurities were primarily due to a decrease in the fair value of debtsecurities. We have determined that the gross unrealized losses on ouravailable-for-sale securities as of March 31, 2009 are temporary innature. We reviewed our investment portfolio to identify and evaluateinvestments that have indications of possible impairment. Factors considered indetermining whether a loss is temporary include the magnitude of the decline inmarket value, the length of time the market value has been below cost (oradjusted cost), credit quality, and our ability and intent to hold thesecurities for a period of time sufficient to allow for any anticipatedrecovery in market value. The following table provides a breakdown of ouravailable-for-sale securities with unrealized losses as of March 31, 2009(in thousands):

 
| ** **             | ** ** | **In Loss Position  < 12 months** | ** ** | **In Loss Position  > 12 months** | ** ** | **Total In  Loss Position** | ** ** |
|------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------|------------|
| ** **             | ** ** | ** **                                               | ** ** | **Gross**                                                | ** ** | ** **                            | ** ** | **Gross** | ** ** | ** ** | ** ** | **Gross** | ** ** |
| ** **             | ** ** | **Fair**                                                 | ** ** | **Unrealized**                                           | ** ** | **Fair**                              | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** |
| ** **             | ** ** | **Value**                                                | ** ** | **(Loss)**                                               | ** ** | **Value**                             | ** ** | **(Loss)** | ** ** | **Value** | ** ** | **(Loss)** | ** ** |
| Investments:           |       |                                                     |       |                                                     |       |                                  |       |   |   |   |   |   |   |
| Corporate bonds        |       | $                                                        | 11,398     |                                                     | $          | (892                                  | )          | $ | 9,562 |   | $ | (500 | ) | $ | 20,960 |   | $ | (1,392 | ) |
| Total in loss position |       | $                                                        | 11,398     |                                                     | $          | (892                                  | )          | $ | 9,562 |   | $ | (500 | ) | $ | 20,960 |   | $ | (1,392 | ) |

 

***Investments in Privately-held Companies***

 

We have made strategic investments in privatecompanies located in China in order to gain access at a competitive cost to rawmaterials that are critical to our substrate business (see Note 10). Theinvestment balances for the two companies accounted for under the equity methodare included in “other assets” in the condensed consolidated balance sheets andtotaled $3.8 million and $3.7 million as of March 31, 2009 and December 31,2008, respectively. We have investments in two unconsolidated privately-heldcompanies accounted for under the cost method. As of March 31, 2009 and December 31,2008, our investments in the two unconsolidated privately-held companiesaccounted for under the cost method had a carrying value of $0.4 million and$0.4 million, respectively, and are included in “other assets” in the condensedconsolidated balance sheets.

 

***Fair Value Measurements***

 

On January 1, 2008, we adoptedSFAS 157 which defines fair value, establishes a framework for using fairvalue to measure assets and liabilities, and expands disclosures about fairvalue measurements. SFAS 157 applies whenever other statements require or permitassets or liabilities to be measured at fair value. SFAS 157 is effectivefor fiscal years beginning after November 15, 2007, except fornon-financial assets and liabilities that are recognized or disclosed at fairvalue in the financial statements on a nonrecurring basis, for whichapplication has been deferred for one year.

 

The following table summarizes our financialassets and liabilities measured at fair value on a recurring basis inaccordance with SFAS 157 as of March 31, 2009 (in thousands):

 

| ** **              | ** ** | **Balance as of  March 31, 2009** | ** ** | **Quoted Prices in  Active Markets of  Identical Assets  (Level 1)** | ** ** | **Significant Other  Observable  Inputs  (Level 2)** | ** ** |
|-------------------------|------------|-------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| Assets:                 |       |                                                  |       |                                                                                               |       |                                                           |       |
| Short-term investments: |       |                                                  |       |                                                                                               |       |                                                           |       |
| Money market fund       |       | $                                                     | 154        |                                                                                               | $          | 154                                                            |       | $ | — |   |
| Corporate bonds         |       | 20,960                                                |       | —                                                                                             |       | 20,960                                                         |       |
| Total                   |       | $                                                     | 21,114     |                                                                                               | $          | 154                                                            |       | $ | 20,960 |   |
| Liabilities             |       | $                                                     | —     |                                                                                               | $          | —                                                         |       | $ | — |   |

 

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Our financial assets and liabilities arevalued using market prices on both active markets (Level 1) and lessactive markets (Level 2). Level 1 instrument valuations are obtainedfrom real-time quotes for transactions in active exchange markets involvingidentical assets. Level 2 instrument valuations are obtained fromreadily-available pricing sources for comparable instruments. As of March 31,2009, we did not have any assets or liabilities without observable marketvalues that would require a high level of judgment to determine fair value(Level 3 assets).

 

***Items Measured at Fair Value on aNonrecurring Basis***

 

Certain assetsthat are subject to nonrecurring fair value measurements are not included inthe table above. These assets include equity and cost method investments in privatecompanies. We did not record other-than-temporary impairment charges for eitherof these investments during the first three months of 2009 or 2008.

 

**Note4. Inventories, Net**

 

The components ofinventories are summarized below (in thousands):

 
| ** **        | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------|------------|--------------------|------------|-----------------------|------------|
| ** **        | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| Inventories, net: |       |               |       |                  |       |
| Raw materials     |       | $                  | 18,391     |                  | $          | 17,863 |   |
| Work in process   |       | 11,606             |       | 12,961                |       |
| Finished goods    |       | 3,500              |       | 4,258                 |       |
|              |       | $                  | 33,497     |                  | $          | 35,082 |   |

 

**Note5. Impairment on Assets Held For Sale**

 

During the three monthsended March 31, 2008, we completed the sale of our property in Fremont,California. The escrow established to pay the purchase price of the propertyclosed on March 28, 2008. The final purchase price for the property was$5.3 million. We received net proceeds of $5.1 million after deductingcommissions and selling expenses. We recorded an impairment charge upon thesale of the property of $83,000. There was no impairment charge for the samethree month period ended March 31, 2009.

 

**Note6. Restructuring Charge**

 

As of March 31, 2009, our restructuringaccrual is as follows: (in thousands):

 
| ** **          | ** ** | **Restructuring  Accrual as of  December 31, 2008** | ** ** | **Additions** | ** ** | **Payments** | ** ** | **Restructuring  Accrual as of  March 31, 2009** | ** ** |
|---------------------|------------|-------------------------------------------------------------------------|------------|---------------|------------|--------------|------------|----------------------------------------------------------------------|------------|
| Workforce reduction |       | $                                                                       | —     |          | $          | 507          |       | $                                                                    | (65        | ) | $ | 442 |   |
| Total               |       | $                                                                       | —     |          | $          | 507          |       | $                                                                    | (65        | ) | $ | 442 |   |

 

During the firstquarter of 2009, we reduced the workforce at our Fremont and Beijing facilitiesby approximately 11 positions that are no longer required to support certainproduction and administrative operations. This measure was being taken as partof our 2009 operating plan. Accordingly, we recorded a restructuring charge of$507,000 in March 2009 related to the reduction in force forseverance-related expenses from the reduction in force, all of which will becash expenditures. We anticipate that the majority of cash outflow from thischarge to be incurred in the second quarter of 2009 and we expect to saveapproximately $1.3 million annually in payroll and related expenses. We had norestructuring charge for the first quarter of 2008.

 

**Note 7. Net Income (Loss) Per Share**

 

Basic net income (loss) per common share iscalculated by dividing net income (loss) available to common stockholders bythe weighted average number of common shares outstanding during the period.Diluted net income (loss) per common and common equivalent shares include thedilutive effect of common stock equivalents outstanding during the periodcalculated using the treasury stock method. Common stock equivalents consist ofthe shares issuable upon the exercise of stock options.

 

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

 
| ** **                                                                                | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| Numerator:                                                                                |       |                                             |       |   |   |
| Net income (loss) attributable to  AXT, Inc.                                         |       | $                                                | (5,516     | ) | $ | 1,959 |   |
| Less: Preferred stock dividends                                                           |       | (44                                              | )          | (44 | ) |
|                                                                                      |       |                                             |       |   |   |
| Net income (loss) available to common  stockholders                                       |       | $                                                | (5,560     | ) | $ | 1,915 |   |
| Denominator:                                                                              |       |                                             |       |   |   |
| Denominator for basic net income (loss) per  share - weighted average common shares       |       | 30,434                                           |       | 30,367 |   |
| Effect of dilutive securities:                                                            |       |                                             |       |   |   |
| Common stock options                                                                      |       | —                                           |       | 1,218 |   |
| Denominator for dilutive net income (loss)  per common share                              |       | 30,434                                           |       | 31,585 |   |
| Effect on net income (loss) attributable to  AXT, Inc. per common share:             |       |                                             |       |   |   |
| Basic                                                                                     |       | $                                                | (0.18      | ) | $ | 0.06 |   |
| Diluted                                                                                   |       | $                                                | (0.18      | ) | $ | 0.06 |   |
| Options excluded from diluted net income  (loss) per share as the impact is anti-dilutive |       | 2,753                                            |       | 511 |   |

 

**Note8. Comprehensive Income**

 

The components ofcomprehensive income are as follows (in thousands):

 
| ** **                                                            | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                            | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
|                                                                  |       |                                             |       |   |   |
| Net income (loss)                                                     |       | $                                                | (5,592     | ) | $ | 2,458 |   |
| Other comprehensive income, net of tax:                               |       |                                             |       |   |   |
| Foreign currency translation gain, net of  tax                        |       | 2                                                |       | 952 |   |
| Unrealized gain (loss) on  available-for-sale investments, net of tax |       | 187                                              |       | (547 | ) |
| Total other comprehensive income, net of  tax                         |       | 189                                              |       | 405 |   |
| Comprehensive income                                                  |       | (5,403                                           | )     | 2,863 |   |
| Comprehensive income attributable to the  noncontrolling interest     |       | 1                                                |       | 200 |   |
| Comprehensive income (loss) attributable to  AXT, Inc.           |       | $                                                | (5,402     | ) | $ | 3,063 |   |

 

**Note9. Segment Information and Foreign Operations**

 

***Segment Information***

*** ***

We operate in one segment for the design,development, manufacture and distribution of high-performance compoundsemiconductor substrates and sale of materials. In accordance with SFAS No. 131,*“Disclosures about Segments of an Enterpriseand Related Information,”* our chief operating decision-maker hasbeen identified as the principal executive officer, who reviews operatingresults to make decisions about allocating resources and assessing performancefor the company. Since we operate in one segment, all financial segment andproduct line information can be found in the consolidated financial statements.

 

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***Product Information***

 
| ** **               | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------|------------|--------------------------------------------------|------------|
| ** **               | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| Revenue by product type: |       |                                             |       |   |   |
| GaAs substrates          |       | $                                                | 5,012      |   | $ | 13,720 |   |
| InP substrates           |       | 490                                              |       | 478 |   |
| Ge substrates            |       | 622                                              |       | 1,385 |   |
| Raw materials and other  |       | 1,530                                            |       | 4,051 |   |
| Consolidated             |       | $                                                | 7,654      |   | $ | 19,634 |   |

 

***GeographicalInformation***

*** ***

Thefollowing table represents revenue amounts (in thousands) reported for productsshipped to customers in the corresponding geographic region:

 
| ** **     | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------|------------|--------------------------------------------------|------------|
| ** **     | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| Net revenues:  |       |                                             |       |   |   |
| North America* |       | $                                                | 1,736      |   | $ | 4,999 |   |
| Europe         |       | 2,213                                            |       | 2,817 |   |
| Japan          |       | 1,152                                            |       | 4,140 |   |
| Taiwan         |       | 689                                              |       | 2,807 |   |
| Asia Pacific   |       | 1,864                                            |       | 4,871 |   |
| Consolidated   |       | $                                                | 7,654      |   | $ | 19,634 |   |

 

----

*Primarilythe United States

 

Long-livedassets consist primarily of property, plant and equipment, and are attributedto the geographic location in which they are located. Long-lived assets bygeographic region were as follows (in thousands):

 
| ** **         | ** ** | **As of**     | ** ** |
|--------------------|------------|--------------------|------------|
| ** **         | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
| ** **         | ** ** | **2009**           | ** ** | **2008** | ** ** |
| Long-lived assets: |       |               |       |   |   |
| North America      |       | $                  | 744        |   | $ | 867 |   |
| China              |       | 20,767             |       | 21,317 |   |
|               |       | $                  | 21,511     |   | $ | 22,184 |   |

 

***Significant Customers***

*** ***

Beginning2008, we have grouped sales to all IQE companies as sales to one customer.  Two customers each represented more than 10%of revenue for the three month period ended March 31, 2009 while only theIQE group represented more than 10% of revenue for the three month period endedMarch 31, 2008.  Our top fivecustomers represented 43.9% and 41.0% of revenue for the three month periodsended March 31, 2009 and 2008, respectively.

 

**Note 10. Investments in Privately-held Companies**

 

We have made strategic investments in privatecompanies located in China in order to gain access to raw materials at acompetitive cost that are critical to our substrate business.

 

Our investments are summarized below (inthousands):

 
| ** **                                                                 | ** ** | **Investment Balance as of** | ** ** | ** **            | ** ** | ** **     | ** ** |
|----------------------------------------------------------------------------|------------|---------------------------------------------|------------|-----------------------|------------|----------------|------------|
| ** **                                                                 | ** ** | **March 31,**                          | ** ** | **December 31,** | ** ** | **Accounting** | ** ** | **Ownership** | ** ** |
| **Company**                                                                | ** ** | **2009**                                    | ** ** | **2008**              | ** ** | **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 | % |
| Xilingol Tongli Germanium Co. Ltd                                |       | 2,966                                       |       | 2,906                 |       | Equity         |       | 25 | % |
| Emeishan Jia Mei High Purity  Metals Co., Ltd                    |       | 790                                         |       | 843                   |       | Equity         |       | 25 | % |
|                                                                            |            |                                             |            |                       |            |                |            |  |  |  |  |

 

Our ownership of Beijing Ji Ya SemiconductorMaterial Co., Ltd. (JiYa) is 46%. We continue to consolidate JiYa aswe have significant influence in management and have a majority control of theboard. Our chief financial officer is chairman of the board, while our chiefoperating officer, and our president of joint venture operations are members ofthe board. Our former chief executive officer, formerly a member of this boardof directors, resigned from this board on March 17, 2009.

 

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Our ownership of Nanjing Jin MeiGallium Co., Ltd. (Jin Mei) is 83%. We continue to consolidate JinMei as we have significant influence in management and have a majority controlof the board. Our chief operating officer is chairman of the board, while ourpresident of joint venture operations is a member of the board. Our formerchief executive officer, formerly a member of this board of directors, resignedfrom this board on March 17, 2009.

 

Our ownership of Beijing BoYu SemiconductorVessel Craftwork Technology Co., Ltd (BoYu), is 70%. We continue toconsolidate Bo Yu as we have a significant influence over management and have amajority control of the board. Our chief operating officer and our president ofjoint venture operations are members of the board. Our former chief executiveofficer has resigned as chairman of the board of BoYu effective March 17,2009.

 

Although we have representation on the boardsof directors of each of these companies, the daily operations of each of thesecompanies are managed by local management and not by us. Decisions concerningtheir respective short term strategy and operations, any capacity expansion andannual capital expenditures, and decisions concerning sales of finishedproduct, are made by local management without input from us.

 

The investment balances for the two companiesaccounted for under the equity method are included in other assets in theconsolidated balance sheets and totaled $3.8 million and $3.7 millionas of March 31, 2009 and December 31, 2008, respectively. We own 25%of the ownership interests in each of these companies. These two companies arenot considered variable interest entities because:

 

·                  both companieshave sustainable businesses of their own;

 

·                  our voting poweris proportionate to our ownership interests;

 

·                  we onlyrecognize our respective share of the losses and/or residual returns generatedby the companies if they occur; and

 

·                  we do not have controllingfinancial interest in, do not maintain operational or management control of, donot control the board of directors of, and are not required to provideadditional investment or financial support to either company.

 

During the three months ended March 31,2009 the three consolidated joint ventures lost $0.3 million of income of which$0.1 million was allocated to minority interests, resulting in a loss of$0.2 million included in our net loss. During the three months ended March 31,2008 the three consolidated joint ventures generated $1.3 million ofincome of which $0.5 million was allocated to minority interests,resulting in $0.8 million included in our net income. Our equity earningsfrom the two-minority owned joint ventures that are not consolidated arerecorded as other income (loss), net and totaled $7,000 and $0.2 millionfor the three months ended March 31, 2009 and 2008, respectively.Undistributed retained earnings relating to all our investments in thesecompanies were $11.0 million, and $11.1 million, respectively as of March 31,2009 and December 31, 2008, respectively.

 

Our two minority-ownedjoint ventures that are not consolidated had the following summarized incomeinformation (in thousands) for the three months ended March 31, 2009 and 2008,respectively.
| ** **       | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------|------------|--------------------------------------------------|------------|
| ** **       | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
|             |       |                                             |       |   |   |
| Net Sales        |       | $                                                | 2,104      |   | $ | 3,006 |   |
| Gross profit     |       | 687                                              |       | 1,476 |   |
| Operating income |       | 73                                               |       | 1,004 |   |
| Net income       |       | 29                                               |       | 936 |   |
|                  |            |                                                  |            |  |  |  |  |

 

We have investments in two unconsolidatedprivately-held companies accounted for under the cost method. As of March 31,2009 and December 31, 2008, our investments in the two unconsolidatedprivately-held companies accounted for under the cost method had a carryingvalue of $0.4 million and $0.4 million, respectively, and are included in “otherassets” in the condensed consolidated balance sheets.

 

**Note11. Commitments and Contingencies**

 

***Indemnification Agreements***

 

Weenter into standard indemnification arrangements in the ordinary course ofbusiness. Pursuant to these arrangements, we indemnify, hold harmless, andagree to reimburse the indemnified parties for losses suffered or incurred bythe indemnified party, generally their business partners or customers, inconnection with any U.S. patent, or any copyright or other intellectualproperty infringement claim by any third party with respect to our products.The term of these indemnification agreements is generally perpetual anytimeafter the execution of the agreement. The maximum potential amount of future paymentswe could be required to make under these agreements is unlimited. We have neverincurred costs to defend lawsuits or settle claims related to theseindemnification agreements. As a result, we believe the estimated fair value ofthese agreements is minimal.

 

Wehave entered into indemnification agreements with our directors and officersthat may require us to indemnify our directors and officers against liabilitiesthat may arise by reason of their status or service as directors or officers,other than liabilities arising from willful misconduct of a culpable nature; toadvance their expenses incurred as a result of any proceeding against them asto which they could be indemnified; and to obtain directors’ and officers’insurance if available on reasonable terms, which we currently have in place.

 

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***Product Warranty***

*** ***

Wewarrant our products for a specific period of time, generally twelve months,against material defects. We provide for the estimated future costs of warrantyobligations in cost of sales when the related revenue is recognized. Theaccrued warranty costs represent the best estimate at the time of sale of thetotal costs that we expect to incur to repair or replace product parts thatfail while still under warranty. The amount of accrued estimated warranty costsare primarily based on historical experience as to product failures as well ascurrent information on repair costs. On a quarterly basis, we review theaccrued balances and update these based on the historical warranty cost trends.The following table reflects the change in our warranty accrual which isincluded in “accrued liabilities” on the condensed consolidated balance sheets,during the three months ended March 31, 2009 and 2008 (in thousands):

 
| ** **                                    | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                    | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| ** **                                    | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Beginning accrued warranty and related  costs |       | $                                                | 1,640      |   | $ | 1030 |   |
| Charged (credited) to cost of revenue         |       | 76                                               |       | 29 |   |
| Actual warranty expenditures                  |       | (253                                             | )          | (63 | ) |
| Ending accrued warranty and related costs     |       | $                                                | 1,463      |   | $ | 996 |   |

 

***Purchase Obligations***

 

Through the normal course of business, wepurchase or place orders for the necessary materials of our products fromvarious suppliers and we commit to purchase products where we may incur apenalty if the agreement was canceled. Our purchase agreement to purchaseeighteen thousand kilograms of gallium from Recapture Metals expired on December 31,2008. As of March 31, 2009, we do not have any material purchaseobligations.

 

**Note12. Foreign Exchange Transaction Gains/Losses**

 

Weincurred foreign currency transaction exchange losses of $437,000 and foreignexchange gains of $189,000 for the three month periods ended March 31,2009, and 2008, respectively. These amounts are included in “Other income(expense), net” on the condensed consolidated statements of operations.

 

**Note 13.Income Taxes**

 

In July 2006, the Financial AccountingStandards Board (“FASB”) issued Interpretation No. 48 (“FIN48”), *“Accounting for Uncertainty in Income Taxes—aninterpretation of FASB Statement No. 109)”* (“SFAS 109”). FIN 48 clarifies theaccounting for uncertainty in income taxes recognized in an enterprise’sfinancial statements in accordance with SFAS 109. This interpretationprescribes a recognition threshold and measurement attribute for the financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return. FIN 48 also provides guidance on derecognition of taxbenefits, classification on the balance sheet, interest and penalties,accounting in interim periods, disclosure, and transition. We adopted FIN 48effective January 1, 2007. We recognize interest and penalties related touncertain tax positions in income tax expense. As of March 31, 2009, we donot have any gross unrecognized tax benefits, nor any accrued interest andpenalties related to uncertain tax positions. As a result of the implementationof FIN 48, we identified $16.4 million in the liability for unrecognizedtax 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 losscarryforwards in the U.S. which are fully offset by a valuation allowance. Wefile income tax returns in the U.S. federal, various states and foreignjurisdictions. We have substantially concluded all U.S. federal and stateincome tax matters through December 31, 2007.

 

**Note14. Recent Accounting Pronouncements**

 

InSeptember 2006, the FASB issued Statement of Financial AccountingStandards No. 157, “*Fair Value Measurements*”(“SFAS 157”). This statement defines fair value, establishes a framework formeasuring fair value and expands disclosures about fair value measurements. Thestatement became effective for financial statements issued for years beginningafter November 15, 2007 and interim periods within that year. On February 12,2008 the FASB issued FASB Staff Position (FSP) FAS 157-2. This FSP permits adelay in the effective date of SFAS 157 to years beginning after November 15,2008, for nonfinancial assets and nonfinancial liabilities, except for itemsthat are recognized or disclosed at fair value in the financial 

 

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statementson a recurring basis (at least annually). The delay is intended to allow theBoard and constituents additional time to consider the effect of variousimplementation issues that have arisen, or that may arise, from the applicationof SFAS 157. On February 14, 2008, the FASB issued FSP FAS 157-1 toexclude SFAS 13, Accounting for Leases, and its related interpretive accountingpronouncements from the scope of SFAS 157. We adopted this statement forfinancial assets and financial liabilities and nonfinancial assets andnonfinancial liabilities disclosed or recognized at fair value on a recurringbasis (at least annually) as of January 1, 2008. We adopted the statementfor nonfinancial assets and nonfinancial liabilities on January 1, 2009.The adoption of this statement in each period did not have a material impact onour consolidated financial statements.

 

In December 2007, the FASB issued SFAS No. 141(revised 2007), “*Business Combinations*”,(“SFAS 141R”). SFAS 141R establishes the principles and requirementsfor how an acquirer in a business combination (1) recognizes and measuresin its financial statements the identifiable assets acquired, the liabilitiesassumed and any non-controlling interest in the acquiree, (2) recognizesand measures the goodwill acquired in the business combination or a gain from abargain purchase and (3) determines what information to disclose to enableusers of the financial statements to evaluate the nature and financial effectsof the business combination. SFAS 141(R) will be applicable beginningwith our fiscal 2009. We adopted this statement January 1, 2009. There wasno impact upon adoption of on our consolidated financial statements and itseffects on future periods will depend on the nature and extent of businesscombinations that we complete, if any, in or after fiscal 2009.

 

In December 2007, the FASB issued SFAS No. 160,*“Noncontrolling Interests in ConsolidatedFinancial  Statements” *(“SFAS 160”). SFAS 160 requiresthat minority interest be separately reported in the consolidated entity’sequity section and that no gain or loss shall be reported when transactionsoccur between the controlling interest and the non-controlling interests.Furthermore, the acquisition of non-controlling interest by the controllinginterest is not treated as a business combination. SFAS 160 is effectivefor fiscal years beginning after December 15, 2008. We adopted thisstatement on January 1, 2009. The presentation and disclosures required ofSFAS 160, which must be applied retrospectively for all periods presented, haveresulted in reclassifications to our prior period consolidated financialstatements.

 

In March 2008, the FASB issued SFAS No. 161,“*Disclosures about Derivative Instrumentsand Hedging Activities*” (“SFAS 161”). SFAS 161 requirescompanies with derivative instruments to disclose information that shouldenable financial-statement users to understand how and why a company usesderivative instruments, how derivative instruments and related hedged itemsaffect a company’s financial position, financial performance and cash flows.SFAS 161 is effective for financial statements issued for fiscal years andinterim periods beginning after November 15, 2008. We have determined thatthere is no impact from adopting this statement on our consolidated financialstatements.

 

In June 2008, the FASB issued FASB StaffPosition (“FSP”) Emerging Issues Task Force (EITF) 03-6-1, “Determining WhetherInstruments Granted in Share-Based Payment Transactions Are ParticipatingSecurities” (FSP EITF 03-6-1). FSP EITF 03-6-1 provides that unvestedshare-based payment awards that contain nonforfeitable rights to dividends ordividend equivalents (whether paid or unpaid) are participating securities andshall be included in the computation of earnings per share pursuant to thetwo-class method. FSP EITF 03-6-1 is effective for financial statementsissued for fiscal years beginning after December 15, 2008 and interimperiods within those years. Upon adoption, a company is required toretrospectively adjust its earnings per share data (including any amountsrelated to interim periods, summaries of earnings and selected financial data)to conform with the provisions in FSP EITF 03-6-1. Early application ofFSP EITF 03-6-1 is prohibited. We have determined that there is no impactfrom adopting this statement on our consolidated financial statements.

 

In April 2009, the FASB issued FSP FAS 141(R)-1, “*Accounting for Assets Acquired and Liabilities Assumed in a BusinessCombination That Arise from Contingencies*.” This FSP requires thatassets acquired and liabilities assumed in a business combination that arisefrom contingencies be recognized at fair value if fair value can be reasonablyestimated. If fair value cannot be reasonably estimated, the asset or liabilitywould generally be recognized in accordance with SFAS No. 5, “Accountingfor Contingencies” and FASB Interpretation No. 14, “Reasonable Estimationof the Amount of a Loss”. Further, the FASB removed the subsequent accountingguidance for assets and liabilities arising from contingencies from SFAS No. 141(R).The requirements of this FSP carry forward without significant revision theguidance on contingencies of SFAS No. 141, “Business Combinations”, whichwas superseded by SFAS No. 141(R). The FSP also eliminates the requirementto disclose an estimate of the range of possible outcomes of recognizedcontingencies at the acquisition date. For unrecognized contingencies, the FASBrequires that entities include only the disclosures required by SFAS No. 5.SFAS 141(R), as modified by FSP 141(R)-1, is required to be appliedprospectively to business combinations for which the acquisition date is on orafter the beginning of the first annual reporting period beginning on or after December 15,2008.  The adoption of SFAS 141(R), as modified by FSP 141(R)-1, asof January 1, 2009 had no impact on our consolidated financial statementsand its effects on future periods will depend on the nature and extent ofbusiness combinations that we complete, if any, in or after fiscal 2009.

 

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InApril 2009, the FASB issued the three new accounting standards which arerequired to be adopted no later than periods ending after June 15, 2009.We are currently evaluating the impact of the following:

 

i.)  FASBStaff Position FAS 157-4, “Determining Whether a Market Is Not Active and aTransaction Is Not Distressed” (“FSP FAS 157-4”) provides guidelines for makingfair value measurements more consistent with the principles presented in SFAS157. FSP FAS 157-4 provides additional authoritative guidance in determiningwhether a market is active or inactive, and whether a transaction isdistressed, is applicable to all assets and liabilities (i.e. financial andnonfinancial) and will require enhanced disclosures.

 

ii.)  FASBStaff Position FAS 115-2 and FAS 124-2, “Recognition and Presentation ofOther-Than-Temporary Impairments” provides additional guidance to providegreater clarity about the credit and noncredit component of another-than-temporary impairment event and to improve presentation anddisclosure of other than temporary impairments in the financial statements.

 

iii.)  FASBStaff Position FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value ofFinancial Instruments” amends FASB Statement No. 107, “Disclosures aboutFair Value of Financial Instruments”, to require disclosures about fair valueof financial instruments in interim as well as in annual financial statements.This FSP also amends APB Opinion No. 28, Interim Financial Reporting, torequire those disclosures in all interim financial statements.

 

In various areas, including revenuerecognition, stock option accounting, accounting standards and practicescontinue to evolve. Additionally, the SEC and the FASB’s Emerging Issues TaskForce continue to address revenues, stock option accounting related accountingissues. We believe that we are in compliance with all of the rules andrelated guidance as they currently exist. However, any changes to accountingprinciples generally accepted in the United States of America in these areascould impact the future accounting of our operations.

 

**Note15. Subsequent Event**

 

On April 17, 2009, we entered into a Separation Agreement andGeneral Release of Claims (the “Agreement”) with Philip C.S. Yin, our formerChief Executive Officer and Chairman of the Board, who resigned as Chairman andChief Executive Officer and as a member of the Board of Directors effective March 17,2009.

 

Pursuant to the terms of the Agreement, we will provide to Dr. Yincertain separation benefits as a result of the termination of his employment,subject to Dr. Yin’s execution of and compliance with a general release ofclaims.  Under the Agreement, we will payto Dr. Yin a lump sum payment in the amount of $340,000, representing 12months of his base salary, less applicable withholding and less the sum of$11,812.20 representing amounts due to the Company by Dr. Yin.  In the event that Dr. Yin timely electsto obtain continued group health insurance coverage under COBRA following histermination of employment, we will pay the full premiums for such coveragethrough the earlier of (i) March 31, 2010, or (ii) the date onwhich Dr. Yin first becomes eligible to obtain other comparable grouphealth insurance coverage.  Under theAgreement, all outstanding but unvested options to purchase our common stockheld by Dr. Yin vested in full immediately prior to the date oftermination of employment.  In addition,the period of exercisability of any vested stock options held by Dr. Yinhas been extended to September 30, 2011 or expiration of the individualoption grant, whichever occurs first.

 

In consideration for these benefits, Dr. Yinhas granted to us a release of claims.  Dr. Yinhas also agreed, that for a period of one year following the date of theAgreement, he will not, directly or indirectly, solicit employees to terminatetheir employment with us.

 

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**ITEM 2. MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

This quarterlyreport on Form 10-Q, including the following sections, containsforward-looking statements within the meaning of Section 21E of theSecurities Exchange Act of 1934, as amended, particularly statements relatingto our expectations regarding results of operations, customer demand,improvements in our product quality, our ability to expand our markets andincrease sales, customer qualifications of our products, gross margins, favorablepricing, reliable supply and enhanced sourcing lead-times of raw materials, andour reserve balances. These forward-looking statements are based uponmanagement’s current views with respect to future events and financialperformance, and are subject to certain risks and uncertainties that couldcause actual results to differ materially from historical results or thoseanticipated in such forward-looking statements. Such risks and uncertaintiesinclude those set forth under the section entitled “Risk Factors” below, whichidentify important factors that could cause actual results to differ materiallyfrom those predicted in any such forward-looking statements. We cautioninvestors that actual results may differ materially from those projected in theforward-looking statements as a result of certain risk factors identified inthis Form 10-Q and other filings we have made with the Securities andExchange Commission. Forward-looking statements may be identified by the use ofterms such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” andsimilar expressions. Statements concerning our future or expected financialresults and condition, business strategy and plans or objectives for futureoperations are forward-looking statements.

 

These forward-lookingstatements are not guarantees of future performance. Readers are cautioned notto place undue reliance on these forward-looking statements, which speak onlyas of the date hereof. This discussion should be read in conjunction withManagement’s Discussion and Analysis of Financial Condition and Results ofOperations included in our Annual Report on Form 10-K for the year ended December 31,2008 and the condensed consolidated financial statements included elsewhere inthis report.

 

**Overview**

 

We are a leadingworldwide developer and producer of high-performance compound and singleelement semiconductor substrates comprising gallium arsenide (GaAs), indiumphosphide (InP) and germanium (Ge). We currently sell the following substrateproducts in the sizes and for the applications indicated:

 
| **Product**            | ** ** | ** **                                   |
|------------------------|------------|----------------------------------------------|
| **Substrates**         | ** ** | **Diameter**                                 | ** ** | **Applications** |
| GaAs (semi-insulating) |       | 2”, 3”, 4”,  5”, 6” |   | ·  Power amplifiers and radio  frequency integrated circuits for wireless handsets (cell phones) |
|                   |       |                                         |   | ·  Direct broadcast television |
|                   |       |                                         |   | ·  High-performance transistors |
|                   |       |                                         |   | ·  Satellite communications |
|                   |       |                                         |   |   |
| GaAs (semi-conducting) |       | 2”, 3”, 4”                    |   | ·  High brightness light emitting  diodes |
|                   |       |                                         |   | ·  Lasers |
|                   |       |                                         |   | ·  Optical couplers |
|                   |       |                                         |   |   |
| InP                    |       | 2”, 3”, 4”                    |   | ·  Broadband and fiber optic  communications |
|                   |       |                                         |   |   |
| Ge                     |       | 2”, 4”                             |   | ·  Satellite and terrestrial solar  cells |
|                   |       |                                         |   | ·  Optical applications |

 

We manufacture all of our semiconductorsubstrates using our proprietary vertical gradient freeze (VGF) technology.Most of our revenue is from sales of GaAs substrates. We manufacture all of ourproducts in the People’s Republic of China (PRC or China), which generally hasfavorable costs for facilities and labor compared to comparable facilities inthe United States or Europe. We also have three majority-owned and twominority-owned joint ventures in China which provide us favorable pricing, reliable supply and enhanced sourcinglead-times for key raw materials which are central to our finalmanufactured products. These joint ventures produce products including 99.99% puregallium (4N Ga), high purity gallium, arsenic, germanium, germanium dioxide,paralytic boron nitride (pBN) crucibles and boron oxide. AXT’s ownershipinterest in these entities ranges from 25% to 83%. We consolidate the threeventures in which we own a majority or controlling financial interest andemploy equity accounting for the two joint ventures in which we have a 25%interest. We purchase portions of the materials produced by these ventures forour own use and the joint ventures sell the remainder of their production tothird parties. We use our direct sales force in the United States andindependent sales representatives in Europe and Asia to market our substrates.We believe that, as the demand for compound semiconductor substrates isexpected to 

 

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increase, we are positioned to leverage our PRC-based manufacturingcapabilities and access to favorably priced raw materials to increase ourmarket share. However, the economic downturn in 2008 coupled with inventoryoverhang in the industry put pressure on our financial performance and willcontinue to have an impact on our results in 2009.

 

While the volatilebusiness and financial markets are prompting us to continue to take aconservative approach to our business, we remain optimistic about our business.Positive industry trends, coupled with our competitive manufacturing and costadvantages give us confidence in our ability to continue to drive futurebusinesses in 2009. On March 28, 2008, we completed the sale of ourFremont, California facility and received net proceeds of approximately$5.1 million after deducting commissions and selling expenses. On July 1,2008, we exercised our right to redeem the taxable variable rate revenue bondand repaid all outstanding indebtedness and accrued interest under the terms ofthe revenue bond of approximately $6.4 million. Accordingly, all of ourremaining obligations under the revenue bond have terminated and the relatedrestricted deposits have been released. In September 2008, we obtained anexpress line of credit from our bank and drew down $3.0 million andclassified the same amount as restricted deposits as of March 31, 2009.The proceeds from the express line of credit were used in operations. The$3.0 million restricted cash carries an annual interest rate of 1.78% asof March 31, 2009. Also as of March 31, 2009, we had available cash,cash equivalents and short-term investments of $29.5 million, excludingrestricted deposits.

 

Dr. Philip C.S. Yin, our former Chairmanand Chief Executive Officer, resigned as an executive officer and as a memberof the Board of Directors, effective March 17, 2009. The Board ofDirectors has invested Wilson W. Cheung, our Chief Financial Officer, withthe responsibility of administering day-to-day operations. Mr. Cheung iscurrently performing the functions of principal executive officer in additionto his function as Chief Financial Officer during this transition period, andpending the appointment of an interim chief executive officer to serve until asuccessor Chief Executive Officer is named. In addition, Mr. Jesse Chen, adirector since 1998 and our Lead Independent Director, has been namednon-executive Chairman of the Board of Directors. The Board of Directors hascommenced a search for a replacement chief executive officer.

 

**Critical Accounting Policies and Estimates**

 

We have preparedour condensed consolidated financial statements in accordance with accountingprinciples generally accepted in the United States of America. As such, we havehad to make estimates, assumptions and judgments that affect the amountsreported on our financial statements. These estimates, assumptions andjudgments about future events and their effects on our results cannot bedetermined with certainty, and are made based upon our historical experienceand on other assumptions that are believed to be reasonable under thecircumstances. These estimates may change as new events occur oradditional information is obtained, and we may periodically be faced withuncertainties, the outcomes of which are not within our control andmay not be known for a prolonged period of time. The discussion andanalysis of our results of operations and financial condition are based uponthese condensed consolidated financial statements.

 

We have identifiedthe policies below as critical to our business operations and understanding ofour financial condition and results of operations.

 

A criticalaccounting policy is one that is both material to the presentation of ourfinancial statements and requires us to make difficult, subjective or complexjudgments that could have a material effect on our financial condition andresults of operations. They may require us to make assumptions aboutmatters that are highly uncertain at the time of the estimate, and differentestimates that we could have used, or changes in the estimate that arereasonably likely to occur, may have a material impact on our financialcondition or results of operations.  Webelieve that the following are our critical accounting policies:

 

***Revenue Recognition***

 

We manufacture and sell high-performancecompound semiconductor substrates and sell certain raw materials includinggallium, germanium dioxide, and pBN crucibles. After we ship our products,there are no remaining obligations or customer acceptance requirements thatwould preclude revenue recognition. Our products are typically sold pursuant toa purchase order placed by our customers, and our terms and conditions of saledo not require customer acceptance. We recognize revenue upon shipment andtransfer of title of products to our customers, which is either upon shipmentfrom our dock, receipt at the customer’s dock, or removal from consignmentinventory at the customer’s location, provided that we have received a signedpurchase order, the price is fixed or determinable, title and risk of ownershiphave transferred, collection of resulting receivables is probable, and productreturns are reasonably estimable. We do not provide training, installation orcommissioning services. Additionally, we may provide discounts or otherincentives to customers in order to secure business.

 

We provide for future returns based onhistorical experience, current economic trends and changes in customer demandat the time revenue is recognized.

 

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***Allowance for Doubtful Accounts***

 

We periodically review the likelihood ofcollection on our accounts receivable balances and provide an allowance fordoubtful accounts receivable primarily based upon the age of these accounts. Weprovide a 100% allowance for receivables from U.S. customers in excess of 90days and for receivables from customers located outside the U.S. in excess of120 days. We assess the probability of collection based on a number of factors,including the length of time a receivable balance has been outstanding, ourpast history with the customer and their creditworthiness.

 

As of March 31, 2009 and December 31,2008, our accounts receivable, net, balance was $8.4 million and $11.5 million,respectively, which was net of an allowance for doubtful accounts of $236,000and $663,000, respectively. If actual uncollectible accounts differsubstantially from our estimates, revisions to the estimated allowance fordoubtful accounts would be required, which could have a material impact on ourfinancial results for the period.

 

***Warranty Reserve***

 

We maintain a warranty reserve based upon ourclaims experience during the prior twelve months. Warranty costs are accrued atthe time revenue is recognized. As of March 31, 2009 and December 31,2008, accrued product warranties totaled $1.5 million and $1.6 million,respectively. If actual warranty costs differ substantially from our estimates,revisions to the estimated warranty liability would be required, which couldhave a material impact on our financial condition and results of operations.

 

***Inventory Valuation***

 

Inventories are stated at the lower of costor market. Cost is determined using the weighted average cost method. Ourinventory consists of raw materials as well as finished goods andwork-in-process that include material, labor and manufacturing overhead costs.Given the nature of our substrate products, and the materials used in themanufacturing process, the wafers and ingots comprising work-in-processmay be held in inventory for up to two years and three years,respectively, as the risk of obsolescence for these materials is low. Weroutinely evaluate the levels of our inventory in light of current marketconditions in order to identify excess and obsolete inventory, and we provide avaluation allowance for certain inventories based upon the age and quality ofthe product and the projections for sale of the completed products. As of eachof March 31, 2009 and December 31, 2008, we had an inventory reserveof $12.0 million for excess and obsolete inventory. The majority of thisinventory has not been scrapped, and accordingly, may be sold in futureperiods. If actual demand for our products were to be substantially lower thanestimated, additional inventory adjustments for excess or obsolete inventorymight be required, which could have a material impact on our business,financial condition and results of operations.

 

***Impairment ofInvestments***

 

We classify our investments in debt andequity securities as available-for-sale securities as prescribed by Statementof Financial Accounting Standards (SFAS) No. 115, *“Accounting for Certain Investments in Debt andEquity Securities.”* All available-for-sale securities with a quotedmarket value below cost (or adjusted cost) are reviewed in order to determinewhether the decline is other-than-temporary. Factors considered in determiningwhether a loss is temporary include the magnitude of the decline in marketvalue, the length of time the market value has been below cost (or adjustedcost), credit quality, and our ability and intent to hold the securities for aperiod of time sufficient to allow for any anticipated recovery in marketvalue.

 

In addition to our five joint ventures, wehave in the past invested in equity instruments of privately-held companies forbusiness and strategic purposes. These investments are classified as otherassets and are accounted for under the cost method as we do not have theability to exercise significant influence over their operations. We monitor ourinvestments for impairment and record reductions in carrying value when eventsor changes in circumstances indicate that the carrying value may not berecoverable. Determination of impairment is highly subjective and is based on anumber of factors, including an assessment of the strength of investee’smanagement, the length of time and extent to which the fair value has been lessthan our cost basis, the financial condition and near-term prospects of theinvestee, fundamental changes to the business prospects of the investee, shareprices of subsequent offerings, and our intent and ability to hold theinvestment for a period of time sufficient to allow for any anticipatedrecovery in our carrying value.

 

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***Fair Value ofInvestments***

 

In the current market environment, theassessment of the fair value of debt instruments can be difficult andsubjective. The volume of trading activity of certain debt instruments hasdeclined, and the rapid changes occurring in today’s financial markets can leadto changes in the fair value of financial instruments in relatively shortperiods of time. SFAS No. 157 establishes three levels of inputs that maybe used to measure fair value.

 

Level 1 instruments represent quotedprices in active markets. Therefore, determining fair value for Level 1instruments does not require significant management judgment, and theestimation is not difficult. Level 2 instruments include observable inputsother than Level 1 prices, such as quoted prices for identical instrumentsin markets with insufficient volume or infrequent transactions (less activemarkets), issuer credit ratings, non-binding market consensus prices that canbe corroborated with observable market data, model-derived valuations in whichall significant inputs are observable or can be derived principally from orcorroborated with observable market data for substantially the full term of theassets or liabilities, or quoted prices for similar assets or liabilities.These Level 2 instruments require more management judgment andsubjectivity compared to Level 1 instruments, including:

 

·                  Determiningwhich instruments are most similar to the instrument being priced requiresmanagement to identify a sample of similar securities based on the couponrates, maturity, issuer, credit rating, and instrument type, and subjectivelyselect an individual security or multiple securities that are deemed mostsimilar to the security being priced.

 

·                  Determiningwhether a market is considered active requires management judgment. Ourassessment of an active market for our marketable debt instruments generallytakes into consideration activity during each week of the one-month periodprior to the valuation date of each individual instrument, including the numberof days each individual instrument trades and the average weekly trading volumein relation to the total outstanding amount of the issued instrument.

 

·                  Determiningwhich model-derived valuations to use in determining fair value requiresmanagement judgment. When observable market prices for identical securities orsimilar securities are not available, we price our marketable debt instrumentsusing non-binding market consensus prices that are corroborated with observablemarket data or pricing models, such as discounted cash flow models, with allsignificant inputs derived from or corroborated with observable market data.

 

Level 3 instruments include unobservableinputs to the valuation methodology that are significant to the measurement offair value of assets or liabilities. The determination of fair value forLevel 3 instruments requires the most management judgment andsubjectivity. As of March 31, 2009, we did not have any assets orliabilities without observable market values that would require a high level ofjudgment 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 SFAS No. 144, *“Accounting for the Impairment or Disposal ofLong-Lived Assets.”* When events and circumstances indicate thatlong-lived assets may be impaired, we compare the carrying value of thelong-lived assets to the projection of future undiscounted cash flowsattributable to these assets. In the event that the carrying value exceeds thefuture undiscounted cash flows, we record an impairment charge against incomeequal to the excess of the carrying value over the assets’ fair value. Fairvalues are determined based on quoted market values, discounted cash flows orinternal and external appraisals, as applicable. Assets held for sale arecarried at the lower of carrying value or estimated net realizable value.

 

***Employee Stock Options***

 

We grant options to substantially allmanagement employees and believe that this program helps us to attract,motivate and retain high quality employees, to the ultimate benefit of ourstockholders. Effective January 1, 2006, we adopted the fair valuerecognition provisions of SFAS No. 123 (revised 2004), “*Share-Based Payment*” (“SFAS 123(R)”),using the modified prospective application transition method. Under thistransition method, stock-based compensation cost was recognized in thecondensed consolidated financial statements for all share-based payments after January 1,2006. Compensation cost recognized includes the estimated expense for theportion of the vesting period after January 1, 2006 for share-basedpayments prior to, but not vested as of January 1, 2006, based on thegrant date fair value estimated in accordance with the original provisions ofSFAS 123, “*Accounting for Stock-Based Compensation.”*We recognize these compensation costs net of an estimated forfeiture rate overthe requisite service period of the award, which is generally the vesting termof four years for stock options. Results for prior periods have not beenrestated, as provided for under the modified prospective application transitionmethod.

 

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***Income Taxes***

 

We account for income taxes in accordancewith SFAS No. 109 (“SFAS 109”), *“Accountingfor Income Taxes,”* which requires that deferred tax assets andliabilities be recognized using enacted tax rates for the effect of temporarydifferences between the book and tax bases of recorded assets and liabilities.SFAS 109 also requires that deferred tax assets be reduced by a valuationallowance if it is more likely than not that a portion of the deferred taxasset will not be realized.

 

We provide for income taxes based upon thegeographic composition of worldwide earnings and tax regulations governing eachregion, particularly China. The calculation of tax liabilities involvessignificant judgment in estimating the impact of uncertainties in theapplication of complex tax laws, particularly in foreign countries such asChina.

 

Effective January 1, 2007, we adoptedFASB Interpretation No. 48 (“FIN 48”), “*Accounting for Uncertainty in Income Taxes—an interpretation of FASBStatement No. 109*.” See Note 13—“Income Taxes” in thecondensed financial statements for additional information.

 

**Resultsof Operations**

 

**Revenue**

 
| ** **    | ** ** | **Three Months Ended  March 31,** | ** ** | **Increase**                   | ** ** | ** **     | ** ** |
|---------------|------------|--------------------------------------------------|------------|--------------------------------|------------|----------------|------------|
| ** **    | ** ** | **2009**                                         | ** ** | **2008**                       | ** ** | **(Decrease)** | ** ** | **% Change** | ** ** |
| ** **    | ** ** | ** **                                       | ** ** | **($ in thousands)** | ** ** | ** **     | ** ** | ** ** | ** ** |
| GaAs          |       | $                                                | 5,012      |                           | $          | 13,720         |       | $ | (8,708 | ) | (63.5 | )% |
| InP           |       | 490                                              |       | 478                            |       | 12             |       | 2.5 | % |
| Ge            |       | 622                                              |       | 1,385                          |       | (763           | )          | (55.1 | )% |
| Raw materials |       | 1,530                                            |       | 4,051                          |       | (2,521         | )          | (62.2 | )% |
| Total revenue |       | $                                                | 7,654      |                           | $          | 19,634         |       | $ | (11,980 | ) | (61.0 | )% |

 

Revenue decreased $12.0million, or 61.0%, to $7.7 million for the three months ended March 31,2009 from $19.6 million for the three months ended March 31, 2008. TotalGaAs substrate revenue decreased $8.7 million, or 63.5%, to $5.0 million forthe three months ended March 31, 2009 from $13.7 million for the threemonths ended March 31, 2008. The decline in revenue was primarily due tothe weaker demand environment and inventory overhang, affecting sales of alldiameters. We are also continuing our efforts to resolve specific productspecification issues with a few select customers from the prior quarter.

 

Sales of 5 inch and 6inch diameter GaAs substrates were $1.2 million for the three months ended March 31,2009 compared to $6.9 million for the three months ended March 31, 2008.Despite our renewed supply agreement with IQE plc for 2009, the demand fromtheir end customers also dropped due to the worldwide economic slowdown causingIQE as well as our other customers to temporarily utilize their excessinventory. However, under our agreement with IQE, they have agreed to purchasefrom us a minimum of approximately $14.3 million of GaAs substrates through March 2010and accordingly we expect demand from IQE group will increase in the latterhalf of 2009.

 

Sales of 2 inch, 3 inchand 4 inch diameter GaAs substrates were $3.7 million for the three monthsended March 31, 2009 compared with $6.9 million for the three months endedMarch 31, 2008. Similar to the larger diameter substrate customers, thedecrease in revenue from smaller diameter substrates was due to the drop indemand from our LED semi-conducting customers while they continue to utilizetheir excess inventory.

 

InP substrate revenueincreased $12,000, or 2.5%, to $490,000 for the three months ended March 31,2009 from $478,000 for the three months ended March 31, 2008 as demandfrom customers in the optical networking industry has remained steady.

 

Ge substrate revenuedecreased $763,000, or 55.1%, to $622,000 for the three months ended March 31,2009 from $1.4 million for the three months ended March 31, 2008. While wereceived qualification from a new European customer in the first quarter of2009, overall demand for concentrated photovoltaic applications from our Gecustomers has dropped since mid 2008 as a result of the worldwide economicslowdown.

 

Raw materials revenuedecreased $2.5 million, or 62.2%, to $1.5 million for the three months ended March 31,2009 from $4.1 million for the three months ended March 31, 2008. Thedecrease in raw materials revenue was primarily due to the worldwide drop indemand for 4N gallium. In particular, our China joint venture Jiya hasexperienced the impact of the slowdown causing their customers to postpone orcancel orders while utilizing excess inventory.

 

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*** ***

***Revenueby Geographic Region***

 
| ** **                                | ** ** | **Three Months Ended  March 31,** | ** ** | **Increase** | ** ** | ** **     | ** ** |
|-------------------------------------------|------------|--------------------------------------------------|------------|--------------|------------|----------------|------------|
| ** **                                | ** ** | **2009**                                         | ** ** | **2008**     | ** ** | **(Decrease)** | ** ** | **% Change** | ** ** |
| ** **                                | ** ** | **($ in thousands)**                   | ** ** | ** **   | ** ** | ** **     | ** ** |
| North America *                           |       | $                                                | 1,736      |         | $          | 4,999          |       | $ | (3,263 | ) | (65.3 | )% |
| *% of total revenue*                      |       | 23                                               | %          | 26           | %          |           |       |   |   |
| Europe                                    |       | 2,213                                            |       | 2,817        |       | (604           | )          | (21.4 | )% |
| *% of total revenue*                      |       | 29                                               | %          | 14           | %          |           |       |   |   |
| Japan                                     |       | 1,152                                            |       | 4,140        |       | (2,988         | )          | (72.2 | )% |
| *% of total revenue*                      |       | 15                                               | %          | 21           | %          |           |       |   |   |
| Taiwan                                    |       | 689                                              |       | 2,807        |       | (2,118         | )          | (75.5 | )% |
| *% of total revenue*                      |       | 9                                                | %          | 14           | %          |           |       |   |   |
| Asia Pacific (excluding Japan and Taiwan) |       | 1,864                                            |       | 4,871        |       | (3,007         | )          | (61.7 | )% |
| *% of total revenue*                      |       | 24                                               | %          | 25           | %          |           |       |   |   |
| Total revenue                             |       | $                                                | 7,654      |         | $          | 19,634         |       | $ | (11,980 | ) | (61.0 | )% |

 

----

*Primarily the UnitedStates

 

Revenue fromcustomers in North America decreased by $3.3 million, or 65.3%, to $1.7 millionfor the three months ended March 31, 2009 from $5.0 million for the threemonths ended March 31, 2008 as the demand for substrates and for rawmaterials fell. However, we expect our North America revenue to increase in thelatter part of 2009 based upon a renewed supply agreement we signed in thefourth quarter of 2008 with IQE plc. Under the terms of the agreement, IQE plc hasagreed to l purchase from us a minimum of approximately $14.3 million of 4-inchand 6-inch semi-insulating gallium arsenide (GaAs) substrates. Allsubstrates ordered pursuant to the agreement are to be shipped by the end of March 2010.

 

Revenue from customers inEurope decreased by $0.6 million, or 21.4%, to $2.2 million for the threemonths ended March 31, 2009 from $2.8 million for the three months ended March 31,2008. This decrease came primarily from decreased substrate sales to customersin France, and to a lesser extent from decreased sales to a customer in theUnited Kingdom that is part of the IQE group with whom we renewed a supplyagreement in the fourth quarter of 2008.

 

Revenue from customers inJapan decreased by $3.0 million, or 72.2%, to $1.2 million for the three monthsended March 31, 2009 from $4.1 million for the three months ended March 31,2008. The decrease came primarily from decreased raw material sales of 4Ngallium, and to a lesser extent from decreased substrate sales to majorexisting customers, particularly in large diameter wafers.

 

Revenue from customers inTaiwan decreased by $2.1 million, or 75.5%, to $0.7 million for the threemonths ended March 31, 2009 from $2.8 million for the three months ended March 31,2008. The decrease came mainly from reduced sales to one major existingcustomer for large diameter wafers who reduced its orders due to the impact ofthe weaker demand environment on its business and its inventory overhang.

 

Revenue from customers inAsia Pacific (excluding Japan and Taiwan) decreased by $3.0 million, or 61.7%,to $1.9 million for the three months ended March 31, 2009 from $4.9million for the three months ended March 31, 2008. The decrease camemainly from two customers in China and from two customers in Singapore, one ofwhich is part of the IQE group.

 

***Gross Margin***

 
| ** **          | ** ** | **Three Months Ended  March 31,** | ** ** | **Increase** | ** ** | ** **     | ** ** |
|---------------------|------------|--------------------------------------------------|------------|--------------|------------|----------------|------------|
| ** **          | ** ** | **2009**                                         | ** ** | **2008**     | ** ** | **(Decrease)** | ** ** | **% Change** | ** ** |
| ** **          | ** ** | **($ in thousands)**                   | ** ** | ** **   | ** ** | ** **     | ** ** |
| Gross profit (loss) |       | $                                                | (237       | )            | $          | 6,221          |       | $ | (6,458 | ) | (103.8 | )% |
| *Gross Margin %*    |       | (3.1                                             | )%         | 31.7         | %          |           |       |   |   |
|                     |            |                                                  |            |              |            |                |            |  |  |  |  |  |

 

Grossmargin decreased to negative 3.1% of total revenue for the three months ended March 31,2009 from 31.7% of total revenue for the three months ended March 31,2008. Gross margins in the three months ended March 31, 2009 and 2008 werepositively impacted by sales of approximately $414,000 and $620,000,respectively, of GaAs wafers that were previously fully reserved. The negative3.1 percent gross margin for the three months ended March 31, 2009 wasprimarily due to the low absorption rates as a result of reduced sales from thefourth quarter of 2008, and hence lower production volume. Since late 2008, ourgallium joint venture in China also continued to source finished products froman independent third party supplier, resulting in low gross margin. Our galliumjoint venture continues to discuss with this third party supplier an agreementto purchase and distribute a certain amount of its product on an ongoing basis,in amounts representing up to 50% of our joint venture’s total customercommitments.  This third-party providerhas a substantial share of the available gallium and is interested inpartnering with our joint venture in order to leverage its distributioncapabilities.  Although this potentialpartnership would provide additional capacity to our joint venture and increaseits competitive position, should an agreement be formalized, our raw materialsgross margin would be negatively impacted. In addition, gross margins werenegatively impacted by declining average selling prices and rising raw materialcosts, as well as an increase in depreciation as a result of our purchase ofequipment acquired for our capacity expansion.

 

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Conversely,product mix contributed to higher gross profit for the three months ended March 31,2008 as we sold a greater amount of larger diameter substrates whichcontributed higher gross profit and during the three months ended March 31,2008, our manufacturing facility in Beijing was operating at almost fullcapacity, which resulted in higher absorption rates.

 

***Selling,General and Administrative Expenses***

 
| ** **                                    | ** ** | **Three Months Ended  March 31,** | ** ** | **Increase** | ** ** | ** **     | ** ** |
|-----------------------------------------------|------------|--------------------------------------------------|------------|--------------|------------|----------------|------------|
| ** **                                    | ** ** | **2009**                                         | ** ** | **2008**     | ** ** | **(Decrease)** | ** ** | **% Change** | ** ** |
| ** **                                    | ** ** | **($ in thousands)**                   | ** ** | ** **   | ** ** | ** **     | ** ** |
| Selling, general and administrative  expenses |       | $                                                | 4,006      |         | $          | 3,667          |       | $ | 339 |   | 9.2 | % |
| *% of total revenue*                          |       | 52.3                                             | %          | 18.7         | %          |           |       |   |   |
|                                               |            |                                                  |            |              |            |                |            |  |  |  |  |  |

 

Selling, general andadministrative expenses increased $0.3 million to $4.0 million for the threemonths ended March 31, 2009 from $3.7 million for the three months ended March 31,2008. The increase was from $0.4 million increased legal fees as a result ofmatters relating to the change in management in March 2009, $0.3 millionseverance pay for our former chief executive officer, $0.3 million in relatedstock compensation expense for his stock option acceleration, partially offsetby $0.2 million from the absence of bonus accruals in 2009, $0.2 million lessbad debt allowance, $0.1 million less rent expense at our Fremont, CA facility,$0.1 million less sales commissions due to reduced sales volume, and $0.1million less labor costs in our joint ventures, mainly from the absence ofbonus accruals beginning in 2009.

 

***Researchand Development***

 
| ** **               | ** ** | **Three Months Ended  March 31,** | ** ** | **Increase** | ** ** | ** **     | ** ** |
|--------------------------|------------|--------------------------------------------------|------------|--------------|------------|----------------|------------|
| ** **               | ** ** | **2009**                                         | ** ** | **2008**     | ** ** | **(Decrease)** | ** ** | **% Change** | ** ** |
| ** **               | ** ** | **($ in thousands)**                   | ** ** | ** **   | ** ** | ** **     | ** ** |
| Research and development |       | $                                                | 460        |         | $          | 504            |       | $ | (44 | ) | (8.7 | )% |
| *% of total revenue*     |       | 6.0                                              | %          | 2.6          | %          |           |       |   |   |
|                          |            |                                                  |            |              |            |                |            |  |  |  |  |  |

 

Research and developmentexpenses decreased $44,000, or 8.7% to $460,000 for the three months ended March 31,2009 from $504,000 for the three months ended March 31, 2008. The decreasewas primarily due to the absence of bonus accruals beginning in 2009,discontinuation of our payment of expatriate per diem for US-based employeesworking substantially in China, and less outside consulting costs.

 

***Impairment (Recovery) onAssets Held For Sale***

*** ***
| ** **                                     | ** ** | **Three Months Ended  March 30,** | ** ** | **Increase** | ** ** | ** **     | ** ** |
|------------------------------------------------|------------|--------------------------------------------------|------------|--------------|------------|----------------|------------|
| ** **                                     | ** ** | **2009**                                         | ** ** | **2008**     | ** ** | **(Decrease)** | ** ** | **% Change** | ** ** |
| ** **                                     | ** ** | **($ in thousands)**                   | ** ** | ** **   | ** ** | ** **     | ** ** |
| Impairment (Recovery) on assets held for  sale |       | $                                                | —     |         | $          | 83             |       | $ | (83 | ) | NM |   |
| *% of total revenue*                           |       | 0.0                                              | %          | 4.2          | %          |           |       |   |   |
|                                                |            |                                                  |            |              |            |                |            |  |  |  |  |  |

*** ***

During the three monthsended March 31, 2008, we completed the sale of our property in Fremont,California. The escrow established to pay the purchase price of the propertyclosed on March 28, 2008. The final purchase price for the property was$5.3 million. We received net proceeds of $5.1 million after deductingcommissions and selling expenses. We recorded an impairment charge upon thesale of the property of $83,000. There was no impairment charge for the samethree month period ended March 31, 2009.

 

***RestructuringCharge***

 
| ** **           | ** ** | **Three Months Ended   March 31,** | ** ** | **Increase** | ** ** | ** **     | ** ** |
|----------------------|------------|--------------------------------------------------------|------------|--------------|------------|----------------|------------|
| ** **           | ** ** | **2009**                                               | ** ** | **2008**     | ** ** | **(Decrease)** | ** ** | **% Change** | ** ** |
| ** **           | ** ** | **($ in thousands)**                         | ** ** | ** **   | ** ** | ** **     | ** ** |
| Restructuring charge |       | $                                                      | 507        |         | $          | —         |       | $ | 507 |   | NM |   |
| *% of total revenue* |       | 6.6                                                    | %          | 0.0          | %          |           |       |   |   |
|                      |            |                                                        |            |              |            |                |            |  |  |  |  |  |

NM = % not meaningful

 

During the first quarterof 2009, we further reduced the workforce at our Fremont and Beijing facilitiesby approximately 11 positions that are no longer required to support certainproduction and administrative operations. This measure was being 

 

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taken as part ofour 2009 operating plan. Accordingly, we recorded a restructuring charge of$507,000 in March 2009 related to the reduction in force forseverance-related expenses from the reduction in force, all of which will becash expenditures. We anticipate that the majority of cash outflow from thischarge to be incurred in the second quarter of 2009 and we expect to saveapproximately $1.3 million annually in payroll and related expenses. We had norestructuring charge for the first quarter of 2008.

 

***InterestIncome, net***

 
| ** **           | ** ** | **Three Months Ended  March 31,** | ** ** | **Increase** | ** ** | ** **     | ** ** |
|----------------------|------------|--------------------------------------------------|------------|--------------|------------|----------------|------------|
| ** **           | ** ** | **2009**                                         | ** ** | **2008**     | ** ** | **(Decrease)** | ** ** | **% Change** | ** ** |
| ** **           | ** ** | **($ in thousands)**                   | ** ** | ** **   | ** ** | ** **     | ** ** |
| Interest income, net |       | $                                                | 44         |         | $          | 124            |       | $ | (80 | ) | (64.5 | )% |
| *% of total revenue* |       | 0.6                                              | %          | 0.6          | %          |           |       |   |   |
|                      |            |                                                  |            |              |            |                |            |  |  |  |  |  |

 

Interest income, netdecreased $80,000 to $44,000 for the three months ended March 31, 2009from $124,000 for the three months ended March 31, 2008.  Interest income, net for the three monthsended March 31, 2009 was lower due to the overall lower balances of ourcash and investments and with lower yields after we paid down on our taxablerevenue bond in July 2008, while interest income, net for the three monthsended March 31, 2008 had higher cash balances and with higher yields.

 

***Other Income (Loss), net***

 
| ** **               | ** ** | **Three Months Ended  March 31,** | ** ** | **Increase** | ** ** | ** **     | ** ** |
|--------------------------|------------|--------------------------------------------------|------------|--------------|------------|----------------|------------|
| ** **               | ** ** | **2009**                                         | ** ** | **2008**     | ** ** | **(Decrease)** | ** ** | **% Change** | ** ** |
| ** **               | ** ** | **($ in thousands)**                   | ** ** | ** **   | ** ** | ** **     | ** ** |
| Other income (loss), net |       | $                                                | (422       | )            | $          | 927            |       | $ | (1,349 | ) | (145.5 | )% |
| *% of total revenue*     |       | (5.5                                             | )%         | 4.7          | %          |           |       |   |   |
|                          |            |                                                  |            |              |            |                |            |  |  |  |  |  |

 

Other loss, net was$422,000 for the three months ended March 31, 2009 primarily due tounrealized foreign exchange losses of $409,000 on our Yen denominated accountsreceivable and miscellaneous items. Other income, net was $927,000 for thethree months ended March 31, 2008 primarily due a realized gain of $459,000on the sale of short-term investments held by us and unrealized foreignexchange gains of $416,000 on our Yen denominated accounts receivable andmiscellaneous items.

 

***Noncontrolling interest***

 
| ** **              | ** ** | **Three Months Ended  March 31,** | ** ** | **Increase** | ** ** | ** **     | ** ** |
|-------------------------|------------|--------------------------------------------------|------------|--------------|------------|----------------|------------|
| ** **              | ** ** | **2009**                                         | ** ** | **2008**     | ** ** | **(Decrease)** | ** ** | **% Change** | ** ** |
| ** **              | ** ** | **($ in thousands)**                   | ** ** | ** **   | ** ** | ** **     | ** ** |
| Noncontrolling interest |       | $                                                | 76         |         | $          | (499           | )          | $ | 575 |   | 115.2 | % |
| *% of total revenue*    |       | 1.0                                              | %          | (2.5         | )%         |           |       |   |   |
|                         |            |                                                  |            |              |            |                |            |  |  |  |  |  |

 

Noncontrolling interestincreased $575,000 or 115.2% to $76,000 for the three months ended March 31,2009 from $(499,000) for the three months ended March 31, 2008 indicatingless profitability from our China joint venture operations as raw materialssales have declined due to weaker demand environment causing our customers tocontinue to utilize their excess inventory.

 

***Provisionfor Income Taxes***

 
| ** **                 | ** ** | **Three Months Ended  March 31,** | ** ** | **Increase** | ** ** | ** **     | ** ** |
|----------------------------|------------|--------------------------------------------------|------------|--------------|------------|----------------|------------|
| ** **                 | ** ** | **2009**                                         | ** ** | **2008**     | ** ** | **(Decrease)** | ** ** | **% Change** | ** ** |
| ** **                 | ** ** | **($ in thousands)**                   | ** ** | ** **   | ** ** | ** **     | ** ** |
| Provision for income taxes |       | $                                                | 4          |         | $          | 560            |       | $ | (556 | ) | NM |   |
| *% of total revenue*       |       | 0.0                                              | %          | 2.9          | %          |           |       |   |   |
|                            |            |                                                  |            |              |            |                |            |  |  |  |  |  |

NM = % not meaningful

 

We provided for incometaxes of $4,000 for our China operations for the three months ended March 31,2009 compared to $560,000 for the three months ended March 31, 2008. Thedecrease in tax provision was primarily due to our overall loss position forthe first quarter of 2009 compared to the same period last year. Beginning in2008, the tax provision was calculated based on the assumption that we will nolonger receive refunds for profit reinvestments in China.

 

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**Liquidityand Capital Resources**

 

As of March 31,2009, our principal sources of liquidity were $29.5 million in cash and cashequivalents and short-term investments, excluding restricted deposits. Weconsider cash and cash equivalents and short-term investments as liquid andavailable for use. Short-term investments are comprised of government bonds andhigh-grade commercial debt instruments. All of our short-term investments incorporate bonds (see note 3) are invested in Citigroup guaranteed instruments.

 

Cashand cash equivalents and short-term investments of $29.5 million decreased by$1.9 million in the first quarter of 2009 compared to the fourth quarter of2008.  The combined decrease in cash andcash equivalents and short-term investments was primarily due to the use of netcash in operating activities of $1.9 million.

 

Net cash used inoperating activities of $1.9 million for the three months ended March 31,2009 was primarily comprised of our net loss of $5.5 million, adjusted fornon-cash items of depreciation of $0.8 million, stock-based compensation of$0.5 million, and a non-cash restructuring charge of $0.5 million, partiallyoffset by a net decrease of $1.8 million in assets and liabilities. The $1.8million net decrease in assets and liabilities primarily resulted from a $3.1million decrease in accounts receivable, a $1.6 million decrease ininventories, and a $0.8 million decrease in prepaids and other assets,partially offset by a $2.5 million decrease in accounts payable, a$0.7 million decrease in other long-term liabilities, primarily minorityinterests, and a $0.5 million decrease in accrued liabilities.

 

Accounts receivable, netdecreased by $3.1 million as of March 31, 2009 due to the weaker demandenvironment which resulted in lower sales volume and net increased by $4.4million as of March 31, 2008, as a result of our increased sales volume.Our days sales outstanding (DSO) is 99 days as of March 31, 2009 and was77 days as of March 31, 2008.

 

Inventories, net,decreased by $1.6 million, as we decreased inventory in work-in-process andfinished goods by $2.1 million and shipped these out as sales, partially offsetby a $0.5 million increase in raw materials as demand for raw material fell.Inventories, net, increased by $4.0 million as of March 31, 2008, as weincreased inventory in raw materials and work-in-process to increase productionin anticipation of increased forecast sales, and finished goods for consignmentorders.

 

Net cash used inoperating activities of $4.4 million for the three months ended March 31,2008 was primarily comprised of our net income of $2.0 million, adjusted fornon-cash items of depreciation of $0.5 million, stock-based compensation of$0.2 million, partially offset by a realized gain on sale of investments of$0.5 million, and offset by a net increase of $6.6 million in assets andliabilities. The $6.6 million net increase in assets and liabilities primarilyresulted from a $4.4 million increase in accounts receivable, a $4.0 millionincrease in inventories, a $1.7 million increase in prepaid expenses, a$0.9 million decrease in other long-term liabilities, primarily minorityinterests, a $0.2 million increase in other assets, a $0.1 milliondecrease in accrued liabilities, partially offset by a $4.5 million decrease inaccounts payable, and a $0.2 million decrease in income taxes payable.

 

Net cash used ininvesting activities of $0.1 million for the three months ended March 31,2009 was primarily from the purchase of property, plant and equipment of $0.1million.

 

Net cash provided byinvesting activities of $8.7 million for the three months ended March 31,2008 was primarily from the proceeds from the sale of investments of $10.8million, proceeds from sale of assets held for sale of $5.1 million and thedecrease of restricted cash of $0.2 million, partially offset by the purchaseof investments totaling $6.4 million, and the purchase of property, plant andequipment, of $1.0 million.

 

In 2009, we expect to invest up toapproximately $3.7 million in other projects at our China facilities,having delayed certain other expansion activities as a result of the impact ofthe current worldwide economic conditions.

 

Net cash used infinancing activities of $30,000 for the three months ended March 31, 2009consisted of payments of $30,000 related to our tenant improvement loan.

 

Netcash provided by financing activities of $0.2 million for the three monthsended March 31, 2008 consisted of $0.1 million from the proceeds from theexercise of employee stock options, and $0.3 million from the proceeds of along term borrowing in one of our joint ventures, partially offset by ascheduled payment of $0.2 million related to long-term borrowings.

 

We believe that we have adequate cash andinvestments to meet our needs over the next 12 months. If our salesdecrease, however, our ability to generate cash from operations will beadversely affected which could adversely affect our future liquidity, requireus to use cash at a more rapid rate than expected, and require us to seekadditional capital. There can be no 

 

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assurance that such additional capital will be available or, ifavailable it will be at terms acceptable to us. Cash from operations could beaffected by various risks and uncertainties, including, but not limited tothose set forth below under Item 1A “Risks Factors.”

 

Outstanding contractualobligations as of March 31, 2009 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** | ** ** |
| Line of credit                   |       | $                                         | 3,000      |   | $ | 3,000 |   | $ | — |   | $ | — |   | $ | — |   |
| Tenant improvement loan          |       | 552                                       |       | 75 |   | 156 |   | 169 |   | 152 |   |
| Operating leases                 |       | 1,963                                     |       | 300 |   | 578 |   | 573 |   | 512 |   |
| Total                            |       | $                                         | 5,515      |   | $ | 3,375 |   | $ | 734 |   | $ | 742 |   | $ | 664 |   |

 

We lease certain office space, manufacturingfacilities and property under long-term operating leases expiring at variousdates through November 2013. On July 2, 2008, we entered into a newlease agreement with the landlord of the facility at 4281 Technology Drive,Fremont, California with approximately 27,760 square feet. The new leasecommenced December 1, 2008 for a term of seven years, with an option by usto cancel the new lease after five years, upon forfeiture of the securitydeposit and payment of one-half of the fifth year’s rent. Total rent expensesunder these operating leases were approximately $0.1 million and$0.2 million for three months ended March 31, 2009 and 2008,respectively.

 

**RecentAccounting Pronouncements**

 

InSeptember 2006, the FASB issued Statement of Financial AccountingStandards No. 157, “*Fair Value Measurements*”(“SFAS 157”). This statement defines fair value, establishes a framework formeasuring fair value and expands disclosures about fair value measurements. Thestatement became effective for financial statements issued for years beginningafter November 15, 2007 and interim periods within that year. On February 12,2008 the FASB issued FASB Staff Position (FSP) FAS 157-2. This FSP permits adelay in the effective date of SFAS 157 to years beginning after November 15,2008, for nonfinancial assets and nonfinancial liabilities, except for itemsthat are recognized or disclosed at fair value in the financial statements on arecurring basis (at least annually). The delay is intended to allow the Boardand constituents additional time to consider the effect of variousimplementation issues that have arisen, or that may arise, from the applicationof SFAS 157. On February 14, 2008, the FASB issued FSP FAS 157-1 toexclude SFAS 13, Accounting for Leases, and its related interpretive accountingpronouncements from the scope of SFAS 157. We adopted this statement forfinancial assets and financial liabilities and nonfinancial assets andnonfinancial liabilities disclosed or recognized at fair value on a recurringbasis (at least annually) as of January 1, 2008. We adopted the statementfor nonfinancial assets and nonfinancial liabilities on January 1, 2009.The adoption of this statement in each period did not have a material impact onour consolidated financial statements.

 

In December 2007, the FASB issued SFAS No. 141(revised 2007), “*Business Combinations*”,(“SFAS 141R”). SFAS 141R establishes the principles and requirementsfor how an acquirer in a business combination (1) recognizes and measuresin its financial statements the identifiable assets acquired, the liabilitiesassumed and any non-controlling interest in the acquiree, (2) recognizesand measures the goodwill acquired in the business combination or a gain from abargain purchase and (3) determines what information to disclose to enableusers of the financial statements to evaluate the nature and financial effectsof the business combination. SFAS 141(R) will be applicable beginningwith our fiscal 2009. We adopted this statement January 1, 2009. There wasno impact upon adoption of on our consolidated financial statements and itseffects on future periods will depend on the nature and extent of businesscombinations that we complete, if any, in or after fiscal 2009.

 

In December 2007, the FASBissued SFAS No. 160, *“NoncontrollingInterests in Consolidated Financial Statements”* (“SFAS 160”). SFAS 160requires that minority interest be separately reported in the consolidatedentity’s equity section and that no gain or loss shall be reported whentransactions occur between the controlling interest and the non-controllinginterests. Furthermore, the acquisition of non-controlling interest by thecontrolling interest is not treated as a business combination. SFAS 160 iseffective for fiscal years beginning after December 15, 2008. We adoptedthis statement on January 1, 2009. The presentation and disclosuresrequired of SFAS 160, which must be applied retrospectively for all periodspresented, have resulted in reclassifications to our prior period consolidatedfinancial statements.

 

In March 2008, the FASB issued SFAS No. 161,“*Disclosures about Derivative Instrumentsand Hedging Activities*” (“SFAS 161”). SFAS 161 requirescompanies with derivative instruments to disclose information that shouldenable financial-statement users to understand how and why a company usesderivative instruments, how derivative instruments and 

 

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related hedged items affect a company’s financial position, financialperformance and cash flows. SFAS 161 is effective for financial statementsissued for fiscal years and interim periods beginning after November 15,2008. We have determined that there is no impact from adopting this statementon our consolidated financial statements.

 

In June 2008, the FASB issued FASB StaffPosition (“FSP”) Emerging Issues Task Force (EITF) 03-6-1, “Determining WhetherInstruments Granted in Share-Based Payment Transactions Are ParticipatingSecurities” (FSP EITF 03-6-1). FSP EITF 03-6-1 provides that unvestedshare-based payment awards that contain nonforfeitable rights to dividends ordividend equivalents (whether paid or unpaid) are participating securities andshall be included in the computation of earnings per share pursuant to thetwo-class method. FSP EITF 03-6-1 is effective for financial statementsissued for fiscal years beginning after December 15, 2008 and interimperiods within those years. Upon adoption, a company is required toretrospectively adjust its earnings per share data (including any amountsrelated to interim periods, summaries of earnings and selected financial data)to conform with the provisions in FSP EITF 03-6-1. Early application ofFSP EITF 03-6-1 is prohibited. We have determined that there is no impactfrom adopting this statement on our consolidated financial statements.

 

In April 2009, the FASB issued FSP FAS 141(R)-1, “*Accounting for Assets Acquired and Liabilities Assumed in a Business CombinationThat Arise from Contingencies*.” This FSP requires that assetsacquired and liabilities assumed in a business combination that arise fromcontingencies be recognized at fair value if fair value can be reasonablyestimated. If fair value cannot be reasonably estimated, the asset or liabilitywould generally be recognized in accordance with SFAS No. 5, “Accountingfor Contingencies” and FASB Interpretation No. 14, “Reasonable Estimationof the Amount of a Loss”. Further, the FASB removed the subsequent accountingguidance for assets and liabilities arising from contingencies from SFAS No. 141(R).The requirements of this FSP carry forward without significant revision theguidance on contingencies of SFAS No. 141, “Business Combinations”, whichwas superseded by SFAS No. 141(R). The FSP also eliminates the requirementto disclose an estimate of the range of possible outcomes of recognizedcontingencies at the acquisition date. For unrecognized contingencies, the FASBrequires that entities include only the disclosures required by SFAS No. 5.SFAS 141(R), as modified by FSP 141(R)-1, is required to be appliedprospectively to business combinations for which the acquisition date is on orafter the beginning of the first annual reporting period beginning on or after December 15,2008.  The adoption of SFAS 141(R), as modified by FSP 141(R)-1, asof January 1, 2009 had no impact on our consolidated financial statementsand its effects on future periods will depend on the nature and extent ofbusiness combinations that we complete, if any, in or after fiscal 2009.

 

InApril 2009, the FASB issued the three new accounting standards which arerequired to be adopted no later than periods ending after June 15, 2009.We are currently evaluating the impact of the following:

 

i.)  FASB Staff Position FAS 157-4, “DeterminingWhether a Market Is Not Active and a Transaction Is Not Distressed” (“FSP FAS157-4”) provides guidelines for making fair value measurements more consistentwith the principles presented in SFAS 157. FSP FAS 157-4 provides additionalauthoritative guidance in determining whether a market is active or inactive,and whether a transaction is distressed, is applicable to all assets andliabilities (i.e. financial and nonfinancial) and will require enhanceddisclosures.

 

ii.)  FASB Staff Position FAS 115-2 andFAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments”provides additional guidance to provide greater clarity about the credit andnoncredit component of an other-than-temporary impairment event and to improvepresentation and disclosure of other than temporary impairments in thefinancial statements.

 

iii.)  FASB Staff Position FAS 107-1 andAPB 28-1, “Interim Disclosures about Fair Value of Financial Instruments”amends FASB Statement No. 107, “Disclosures about Fair Value of FinancialInstruments”, to require disclosures about fair value of financial instrumentsin interim as well as in annual financial statements. This FSP also amends APBOpinion No. 28, Interim Financial Reporting, to require those disclosuresin all interim financial statements.

 

In various areas, including revenuerecognition, stock option accounting, accounting standards and practicescontinue to evolve. Additionally, the SEC and the FASB’s Emerging Issues TaskForce continue to address revenues, stock option accounting related accountingissues. We believe that we are in compliance with all of the rules andrelated guidance as they currently exist. However, any changes to accountingprinciples generally accepted in the United States of America in these areascould impact the future accounting of our operations.

 

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**ITEM 3*.*QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

***Foreign CurrencyRisk***

 

A significant portion of our business isconducted in currencies other than the U.S. dollar. The functional currency forour foreign operations is the renminbi, the local currency of China, where ouroperating expenses are predominantly in the local currency. Since most of ouroperations are conducted in China, most of our costs are incurred in Chinesecurrency, which subjects us to fluctuations in the exchange rates between theU.S. dollar and the Chinese renminbi. We incur transaction gains or lossesresulting from consolidation of expenses incurred in local currencies for thesesubsidiaries, as well as in translation of the assets and liabilities of theseassets at each balance sheet date. These risks may be increased by thefluctuations and revaluations of the Chinese renminbi. Our financial resultscould be adversely affected by factors such as changes in foreign currencyexchange rates or weak economic conditions in foreign markets, including therevaluation by China of the renminbi, and any future adjustments that China maymake to its currency such as any move it might make to a managed float systemswith opportunistic interventions. In the future we may experience foreignexchange losses on our non-functional currency denominated receivables andpayables to the extent that we have not mitigated our exposure utilizing foreigncurrency forward exchange contracts. Foreign exchange losses could have amaterially adverse effect on our operating results and cash flows.

 

We do not currently use short-term forwardexchange contracts for hedging purposes to reduce the effects of adverseforeign exchange rate movements. We had previously purchased foreign exchangecontracts to hedge against certain trade accounts receivable denominated inJapanese yen. The change in the fair value of the forward contracts wasrecognized as part of the related foreign currency transactions as they occur.As of March 31, 2009, we had no outstanding commitments with respect toforeign exchange contracts.

 

During the first quarter of 2009, we recordeda net realized foreign exchange loss of $28,000, included as part of otherincome in our consolidated statements of operations. We incurred foreigncurrency transaction exchange gains and losses due to operations in general. Itis uncertain whether these currency trends will continue. In the future we may experienceforeign exchange losses on our non-functional currency denominated receivablesand payables to the extent that we have not mitigated our exposure utilizingforeign currency forward exchange contracts. Foreign exchange losses could havea materially adverse effect on our operating results and cash flows. During thefirst quarter of 2009, we recorded unrealized foreign currency loss of $0.4million, included in the balance of accumulated other comprehensive income onour consolidated balance sheet.

 

In July 2005, China agreed to a shift inChinese currency policy. It established a 2% revaluation of the renminbi andreferenced the renminbi to a basket of currencies, with a daily trading band of+/-0.3%. Depending on market conditions and the state of the Chineseeconomy, it is possible that China will make more adjustments in the future.Over the next five to ten years, China may move to a managed float system, withopportunistic interventions. This reserve diversification may negatively impactthe United States dollar and U.S. interest rates, which, in turn, couldnegatively impact our operating results and financial condition. The functionalcurrency of our Chinese subsidiary, including our joint ventures, is the localcurrency; since most of our operations are conducted in China, most of ourcosts are incurred in Chinese currency, which subjects us to fluctuations inthe exchange rates between the U.S. dollar and the Chinese renminbi. We incurtransaction gains or losses resulting from consolidation of expenses incurredin local currencies for these subsidiaries, as well as in translation of theassets and liabilities of these assets at each balance sheet date. These risksmay be increased by the fluctuation and revaluation of the Chinese renminbi. Ifwe do not effectively manage the risks associated with this currency risk, ourrevenue, cash flows and financial condition could be adversely affected.

 

***Interest Rate Risk***

 

Cash and cash equivalents earning interestand certain variable rate debt instruments are subject to interest ratefluctuations. The following table sets forth the probable impact of a 10%change in interest rates (in thousands):

 
| **Instrument**                            | ** ** | **Balance as of  March 31,  2009** | ** ** | **Current  Interest  Rate** | ** ** | **Projected Annual  Interest  Income/(Expense)** | ** ** | **Proforma 10%  Interest Rate  Decline  Income/(Expense)** | ** ** | **Proforma 10%  Interest Rate  Increase  Income/(Expense)** | ** ** |
|-------------------------------------------|------------|---------------------------------------------------|------------|-----------------------------|------------|-------------------------------------------------------|------------|----------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| Cash                                      |       | $                                                 | 11,353     |                        | 0.50       | %                                                     | $          | 57                                                                   |       | $                                                                     | 51         |   | $ | 62 |   |
| Cash equivalents                          |       | 154                                               |       | 1.74                        |       | 3                                                     |       | 2                                                                    |       | 3                                                                     |       |
| Investment in debt and equity instruments |       | 20,960                                            |       | 4.29                        |       | 899                                                   |       | 809                                                                  |       | 989                                                                   |       |
| Line of credit                            |       | (3,000                                            | )          | 1.78                        |       | (53                                                   | )          | (48                                                                  | )          | (59                                                                   | )          |
| Tenant improvement loan                   |       | (552                                              | )          | 4.00                        |       | (22                                                   | )          | (20                                                                  | )          | (24                                                                   | )          |
|                                      |       |                                              |       |                        |       | $                                                     | 884        |                                                                 | $          | 794                                                                   |       | $ | 971 |   |
|                                           |            |                                                   |            |                             |            |                                                       |            |                                                                      |            |                                                                       |            |  |  |  |  |

 

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The primary objective of our investmentactivities is to preserve principal while maximizing income withoutsignificantly increasing risk. Financial instruments that potentially subjectus to concentration of credit risk consist primarily of cash and cashequivalents, short-term investments, and trade accounts receivable. We investprimarily in money market accounts, commercial paper instruments, andinvestment grade securities. We are exposed to credit risks in the event ofdefault by the issuers to the extent of the amount recorded on the consolidatedbalance sheets. These securities are generally classified as available-for-saleand consequently are recorded on the balance sheet at fair value with unrealizedgains or losses reported as a separate component of accumulated othercomprehensive income (loss), net of estimated tax. Our cash, cash equivalentsand short-term investments are in high-quality securities placed with majorbanks and financial institutions and commercial paper. We have no investmentsin auction rate securities. As of March 31, 2009, we have approximately$21.0 million in principal protected notes with Citicorp Smith Barney witha fair value of approximately $21.0 million. We expect to decrease ourexposure to Citicorp Smith Barney as these principal protected notes come dueand the underlying assets are placed into diversified securities.

 

We perform periodic credit evaluations of ourcustomers’ financial condition and generally do not require collateral. Threecustomers each accounted for 10% or more of our trade accounts receivablebalance as of March 31, 2009 at 38%, 13% and 10%, respectively.

 

***Equity Risk***

 

We maintain minority investments in twoprivately-held companies other than our strategic investments in privatecompanies located in China. These minority investments in two privately-heldcompanies are reviewed for other than temporary declines in value on aquarterly basis. These investments are classified as other assets in theconsolidated balance sheets and are accounted for under the cost method as wedo not have the ability to exercise significant influence over theiroperations. We monitor our investments for impairment and record reductions incarrying value when events or changes in circumstances indicate that thecarrying value may not be recoverable. Reasons for other than temporarydeclines in value include whether the related company would have insufficientcash flow to operate for the next twelve months, significant changes in theoperating performance and changes in market conditions. As of March 31,2009, the minority investments totaled $0.4 million.

 

**ITEM 4*.*CONTROLSAND PROCEDURES**

 

***Disclosure Controls andProcedures***

 

Under the supervision and with the participation of our management, ourPrincipal Executive Officer and Principal Financial Officer have evaluated theeffectiveness of the design and operation of our disclosure controls andprocedures, as such terms are defined under Rule 13a-15(e) and 15d-15(e) promulgatedunder the Securities Exchange Act of 1934, as amended. Based upon thatevaluation, our Principal Executive Officer and our Principal Financial Officerconcluded that our disclosure controls and procedures were effective as of theend of the period covered by this quarterly report.

 

***Changes in InternalControl Over Financial Reporting***

 

Duringthe quarter ended March 31, 2009, we completed the following changes inour internal control over financial reporting, or in other factors, that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting:

 

·      Dr. Philip C. S. Yin resigned aschairman and chief executive officer of the Company and as a member of theBoard of Directors.  The Board of Directorsinvested Wilson W. Cheung, the Company’s Chief Financial Officer, with theresponsibility of administering day-to-day operations following Dr. Yin’sresignation and authorized him to perform the functions of principal executiveofficer in addition to his function as Chief Financial Officer during thetransition period pending the appointment of a successor Chief ExecutiveOfficer.

 

Subsequent to the completionof the quarter, we commenced implementation of further controls relating toemployee business expenses, corporate gifts and business entertaining, andbusiness development activities in connection with our ongoing effort toimprove our control processes and corporate governance, and to monitorcompliance with applicable rules and regulations.  We also determined to continue additionalregular training for our employees, first conducted in April 2008, concerningmatters relating to understanding of and compliance with our code of conduct,our process for reporting matters to our audit committee, and compliance withapplicable rules and regulations.

 

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**PART II.OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

From time to time we may be involved in judicial or administrativeproceedings concerning matters arising in the ordinary course of business. Wedo not expect that any of these matters, individually or in the aggregate, willhave a material adverse effect on our business, financial condition, cash flowsor results of operation.

 

**Item 1A. Risk Factors**

 

There are no materialchanges from the risk factors set forth under Part I, Item 1A. “RiskFactors” in our Annual Report on Form 10-K for the fiscal year ended December 31,2008.

 

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

 

None

 

**Item 3. Defaults uponSenior Securities**

 

None

 

**Item 4. Submission of Matters to a Vote ofSecurity Holders**

 

None

 

**Item 5. Other Information**

 

None

 

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**Item 6. Exhibits**

 

**a.Exhibits**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                     |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                |
| 3.1(1)              |       | Restated  Certificate of Incorporation                                                                                                                                                              |
|                |       |                                                                                                                                                                                                |
| 3.2(2)              |       | Certificate  of Designation, Preferences and Rights of Series A Preferred Stock.                                                                                                               |
|                |       |                                                                                                                                                                                                |
| 3.3(3)              |       | Second  Amended and Restated By Laws                                                                                                                                                                |
|                |       |                                                                                                                                                                                                |
| 4.2(4)              |       | Rights  Agreement dated April 24, 2001 by and between AXT, Inc. and  ComputerShare Trust Company, Inc.                                                                               |
|                |       |                                                                                                                                                                                                |
| 10.33(5)            |       | Separation  Agreement and General Release of Claims between AXT, Inc. and Philip  C.S. Yin.                                                                                                    |
|                |       |                                                                                                                                                                                                |
| 31.1                |       | Certification  by Principal Executive Officer and Principal Financial Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                              |
|                |       |                                                                                                                                                                                                |
| 32.1                |       | Certification  by Principal Executive Officer and Principal Financial Officer Pursuant to 18  U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |

 

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(1) Incorporatedby reference to the exhibit as of the same number as filed with the SEC in ourAnnual Report on Form 10-K for the year ended December 31, 1998.

 

(2) Incorporatedby reference to Exhibit 3.1 to our Form 8-K as filed with the SEC on June 14,1999.

 

(3)  Incorporatedby reference to Exhibit 3.4 to our Form 8-K as filed with the SEC on May 30,2001.

 

(4) Incorporatedby reference to the exhibit of the same number as filed with the SEC in our Form 8-Kon May 30, 2001.

 

(5) Incorporatedby reference to the exhibit of the same number as filed with the SEC in our Form 8-Kon April 20, 2009.

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this Report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|                     | AXT, INC. |
|--------------------------|-----------|
|                     |      |   |
| Dated: May 11, 2009 | By:       | /s/ WILSON W. CHEUNG |
|                     |      | Wilson W.  Cheung

*Chief Financial Officer and Corporate Secretary  (Acting Principal Executive Officer and  Principal Financial Officer)* |

 

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**EXHIBIT INDEX**

 
| **Exhibit** | ** ** | ** **                                                                                                                                                                                                             |
|-------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description**                                                                                                                                                                                                        |
|        |       |                                                                                                                                                                                                                   |
| 3.1(1)      |       | Restated  Certificate of Incorporation                                                                                                                                                                                 |
|        |       |                                                                                                                                                                                                                   |
| 3.2(2)      |       | Certificate  of Designation, Preferences and Rights of Series A Preferred Stock  (which is incorporated herein by reference to Exhibit 2.1 to the  registrant’s form 8-K dated May 28, 1999). |
|        |       |                                                                                                                                                                                                                   |
| 3.3(3)      |       | Second  Amended and Restated By Laws                                                                                                                                                                                   |
|        |       |                                                                                                                                                                                                                   |
| 4.2(4)      |       | Rights  Agreement dated April 24, 2001 by and between AXT, Inc. and  ComputerShare Trust Company, Inc.                                                                                                  |
|        |       |                                                                                                                                                                                                                   |
| 10.33(5)    |       | Separation  Agreement and General Release of Claims between AXT, Inc. and Philip  C.S. Yin.                                                                                                                       |
|        |       |                                                                                                                                                                                                                   |
| 31.1        |       | Certification  by Principal Executive Officer and Principal Financial Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                 |
|        |       |                                                                                                                                                                                                                   |
| 32.1        |       | Certification  by Principal Executive Officer and Principal Financial Officer Pursuant to 18  U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                    |

 

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(1) Incorporatedby reference to the exhibit of the same number as filed with the SEC in ourAnnual Report on Form 10-K for the year ended December 31, 1998.

 

(2) Incorporatedby reference to Exhibit 3.1 to our Form 8-K as filed with the SEC on June 14,1999.

 

(3) Incorporatedby reference to Exhibit 3.4 to our Form 8-K as filed with the SEC on May 30,2001.

 

(4) Incorporatedby reference to the exhibit of the same number as filed with the SEC in our Form 8-Kon May 30, 2001

 

(5) Incorporatedby reference to the exhibit as of the same number as filed with the SEC in our Form 8-Kon April 20, 2009.

 

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