What changed in this filing

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Item 1. Business

2021-03-23 compared with 2020-03-12 · 159 added, 127 removed, 323 unchanged (47% of the section changed)

(“AXT”, “the Company”, “we,”

“us,”

and “our”

refer to AXT, Inc.

(“AXT”, “the Company”, “we,” “us,” and “our” refer to AXT, Inc.

and its consolidated subsidiaries) is a materials science company that develops and produces high-performance compound and single element semiconductor substrates, also known as wafers.

Our consolidated subsidiaries produce and sell certain raw materials some of which are used in our substrate manufacturing process and some of which are sold to other companies.

Two of our consolidated subsidiaries produce and sell certain raw materials some of which are used in our substrate manufacturing process and some of which are sold to other companies.

Our substrate wafers are used when a typical silicon substrate wafer cannot meet the performance requirements of a semiconductor or optoelectronic device.

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Our single element substrates are made from germanium (Ge).

InP is a high-performance semiconductor substrate used in broadband and fiber optic applications and data center connectivity.

InP substrates can also be used in 5G applications.

InP is a high-performance semiconductor substrate used in broadband and fiber optic applications, 5G infrastructure and data center connectivity.

InP substrates are also used in biometric wearables and other health monitoring applications.

In recent years, InP demand has increased.

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A new application for semi-conducting GaAs substrates is 3-D sensing chips using VCSELs (vertical cavity surface emitting lasers) as an array of lasers on a single chip that can be used in cell phones and other devices.

GaAs wafers could also be used for making micro-LEDs.

Ge substrates are used in applications such as solar cells for space and terrestrial photovoltaic applications.

Our supply chain strategy includes partial ownership in raw material companies.

Our supply chain strategy includes partial ownership of raw material companies.

Two of these companies are consolidated.

One of these companies produces pyrolytic boron nitride (pBN) crucibles used in the high temperature (typically in the range 500 C to 1,500 C) growth process of single crystal ingots, effusion rings when growing OLED (Organic Light Emitting Diode) tools, epitaxial layer growth in MOCVD (Metal-Organic Chemical Vapor Deposition) reactors and MBE (Molecular Beam Epitaxy) reactors.

One of these consolidated companies produces pyrolytic boron nitride (pBN) crucibles used in the high temperature (typically in the range 500 C to 1,500 C) growth process of single crystal ingots, effusion rings when growing OLED (Organic Light Emitting Diode) tools, epitaxial layer growth in MOCVD (Metal-Organic Chemical Vapor Deposition) reactors and MBE (Molecular Beam Epitaxy) reactors.

We use these pBN crucibles in our own ingot growth processes and they are also sold in the open market to other companies.

The second consolidated company converts raw gallium to purified gallium.

We use purified gallium in producing our GaAs substrates and it is also sold in the open market to other companies for use in producing magnetic materials, high temperature thermometers, single crystal ingots, including gallium arsenide, gallium nitride, gallium antimonide and gallium phosphide ingots, and other materials and alloys.

We use purified gallium in producing our GaAs substrates and it is also sold in the open market to other companies for use in producing magnetic materials, high temperature thermometers, single crystal ingots, including gallium arsenide, gallium nitride, gallium antimonite and gallium phosphide ingots, and other materials and alloys.

In addition to purified gallium, the second consolidated company also produces InP base material which we then use to grow single crystal ingots.

In prior years, we consolidated a third company was consolidated, but, in the first quarter of 2019, we sold a portion of our ownership to our investment partner and, as of March 11, 2019, we ceased to consolidate this company.

In prior years, a third company was consolidated, but, in the first quarter of 2019, we sold a portion of our ownership to our investment partner and, as of March 11, 2019, we ceased to consolidate this company.

Our substrate product group generated 79%, 81% and 79% of our consolidated revenue and our raw materials product group generated 21%, 19% and 21% for 2020, 2019 and 2018, respectively.

The following chart shows our substrate products and their materials, diameters and illustrative applications and shows our raw materials group primary products and their illustrative uses and applications.

Substrate Group

Wafer Diameter

Substrate Group and Wafer Diameter

Sample of Applications

Indium Phosphide

2”, 3”, 4”

• Data center connectivity using light/lasers

• 5G communications

• Fiber optic lasers and detectors

• Passive Optical Networks (PONs)

Data center connectivity using light/lasers

• Silicon photonics

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• High efficiency terrestrial solar cells (CPV)

RF amplifier and switching

• RF amplifier and switching (military wireless & 5G)

• Infrared light-emitting diode (LEDs) motion control

• Lidar for robotics and autonomous vehicles

• Infrared thermal imaging

Gallium Arsenide

1”, 2”, 3”, 4”, 5”, 6”

Power amplifiers for wireless devices

• Wi-Fi devices

(GaAs - semi-insulating)

Direct broadcast television

• IoT devices

1”, 2”, 3”, 4”, 5”, 6”

• High-performance transistors

• Direct broadcast television

• Power amplifiers for wireless devices

• Satellite communications

• High efficiency solar cells for drones and automobiles

• Solar cells

Gallium Arsenide

1”, 2”, 3”, 4”, 5", 6”

3-D sensing using VCSELs

(GaAs - semi-conducting)

Data center communication using VCSELs

• High brightness LEDs

Near-infrared sensors

(GaAs - semi-conducting)

• Screen displays using micro-LEDs

1”, 2”, 3”, 4”, 5", 6”

• Printer head lasers and LEDs

• 3-D sensing using VCSELs

• Data center communication using VCSELs

• Sensors for industrial robotics/Near-infrared sensors

• Laser machining, cutting and drilling

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• High efficiency solar cells for drones and automobiles

• Other lasers

• Night vision goggles

2”, 4”, 6”

Satellite solar cells

• Lidar for robotics and autonomous vehicles

• Solar cells

• Multi-junction solar cells for satellites

• Optical sensors and detectors

• Terrestrial concentrated photo voltaic (CPV) cells

Multi-junction solar cells for satellites

• Infrared detectors

• Carrier wafer for LED

Raw Materials Group

4N raw gallium

Magnetic materials

High temperature thermometers

Low melting point alloys

Optical glass

Infrared detectors

6N+ purified gallium

6N+ and 7N+ purified gallium

• Key material in single crystal ingots such as:

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- Gallium Nitride (GaN)

- Gallium Antimonide (GaSb)

- Gallium Antimonite (GaSb)

- Gallium Phosphide (GaP)

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• Used when growing epitaxial layers in Molecular Beam Epitaxy (MBE) reactors

We manufacture all of our products in the People’s Republic of China (PRC or China), which generally has favorable costs for facilities and labor compared with comparable facilities in the United States, Europe or Japan.

Our supply chain includes partial ownership of raw material companies in China (subsidiaries/joint ventures).

We believe this supply chain arrangement provides us with pricing advantages, reliable supply, market trend visibility and better sourcing lead-times for key raw materials central to manufacturing our substrates.

Our subsidiaries and joint venture companies produce materials, including raw gallium (4N Ga), high purity gallium (6N Ga), arsenic, germanium, germanium dioxide, pyrolytic boron nitride (pBN) crucibles and boron oxide (B2O3).

Our ownership and the ownership held by one of the joint venture companies range from 100% to 25%.

Our raw material companies produce materials, including raw gallium (4N Ga), high purity gallium (6N and 7N Ga), starting material for InP, arsenic, germanium, germanium dioxide, pyrolytic boron nitride (pBN) crucibles and boron oxide (B2O3).

We have board representation in all of these raw material companies.

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To create room and upgrade the district, the city instructed virtually all existing manufacturing companies, including AXT, to relocate all or some of their manufacturing lines.

We were instructed to move our gallium arsenide manufacturing line out of the area.

We were instructed to relocate our gallium arsenide manufacturing lines.

For reasons of manufacturing efficiency, we elected to also move our germanium manufacturing line.

Our indium phosphide manufacturing line, as well as various administrative and sales functions, will remain primarily at our original site for the near future.

Our indium phosphide manufacturing line, as well as various administrative and sales functions, will remain primarily at our original site in Beijing.

Begun in 2017, the relocation of our gallium arsenide production lines is now largely completed.

We entered into volume production in 2020.

To mitigate our risks and maintain our production schedule, we moved our gallium arsenide equipment in stages.

By December 31, 2019, we have ceased all crystal growth for gallium arsenide in our original manufacturing facility in Beijing and have transferred 100% of our ingot production to our new manufacturing facility in Kazuo, a city approximately 250 miles from Beijing.

We have transferred our wafer processing equipment for gallium arsenide to our new manufacturing facility in Dingxing, a city approximately 75 miles from Beijing.

Our key focus is now transferring volume production of the wafer processing steps for gallium arsenide to Dingxing.

Some of our larger, more sophisticated customers want to perform a site qualification and subsequently develop a plan to ramp up production at Dingxing.

The new facilities are intended to give us the long-term capacity and a new level of technological sophistication in our manufacturing capabilities to support the major trends that we believe are likely to drive demand for our products in the years ahead.

Customer qualification of the Dingxing site requires us to continue to diligently address the many details that arise at both of the new sites.

By December 31, 2019, we had ceased all crystal growth for gallium arsenide in our original manufacturing facility in Beijing and transferred 100% of our ingot production to our new manufacturing facility in Kazuo, a city approximately 250 miles from Beijing.

We transferred our wafer processing equipment for gallium arsenide to our new manufacturing facility in Dingxing, a city approximately 75 miles from Beijing.

Some of our larger, more sophisticated customers qualified gallium arsenide wafers from the new sites in 2020.

A few customers are still in that process.

Our new facilities enabled us to expand capacity and upgrade some of our equipment.

The new buildings are large enough that we can install additional equipment if market demand increases or if we gain market share.

We also acquired sufficient land to enable us to add facilities, if needed in the future.

We believe our ability to add capacity gives us a competitive advantage.

In addition, a new level of technological sophistication in our manufacturing capabilities will enable us to support the major trends that we believe are likely to drive demand for our products in the years ahead.

Customer qualifications and expanding capacity as needed require us to continue to diligently address the many details that arise at both of the new sites.

A failure to properly accomplish this could result in disruption to our production and have a material adverse impact on our revenue, our results of operations and our financial condition.

If we fail to meet the product qualification requirements of a customer, we may lose sales to that customer.

If we fail to meet the product qualification and volume requirements of a customer, we may lose sales to that customer.

Our reputation may also be damaged.

Any loss of sales could have a material adverse effect on our revenue, our results of operations and our financial condition.

On November 16, 2020 we announced a strategic initiative to access China’s capital markets by beginning a process to list shares of Tongmei in an initial public offering (the “IPO”) on the STAR Market, an exchange intended to support innovative companies in China.

We formed and founded Tongmei in 1998 and believe Tongmei has grown into a company that will be an attractive offering on the STAR Market.

To qualify for a STAR Market listing, the first major step in the process was to engage private equity firms in China (“Investors”) to invest funds in Tongmei.

By December 31, 2020, investors which consists of 10 private equity funds had engaged with Tongmei for a total investment of approximately $48.1 million.

(The currency used in the investment transactions was the Chinese renminbi, which has been converted to approximate U.S.

dollars for this report.) The remaining investment of approximately $1.5 million of new capital was funded in early January.

Under China regulations these investments must be formally approved by the

appropriate government agency and are not deemed to be dilutive until such approval is granted.

The government approved the entire approximately $49 million investment on January 25, 2021.

In exchange for an investment of approximately $49 million, the Investors received a 7.28% noncontrolling interest in Tongmei.

Pursuant to the investment agreements (“Capital Investment Agreements”) with the Investors, each Investor has the right to require AXT to redeem any or all Tongmei shares held by such Investor at the original purchase price paid by such Investor, without interest, in the event of a material adverse change or if Tongmei does not achieve its IPO on or before December 31, 2022.

This right is suspended when Tongmei submits its formal application for IPO to the China Securities Regulatory Commission (“CSRC”).

Tongmei currently plans to submit its formal application to the CSRC in the third quarter of 2021.

However, if on December 31, 2022 the IPO application has been submitted and accepted by the CSRC or the stock exchange and such submission remains under review, then the date when such investor is entitled to exercise such redemption right shall be deferred to a date when such submission is rejected by the CSRC or stock exchange, or the date when Tongmei withdraws its IPO application.

Tongmei would be required to sell a minimum of 10% of its equity in the IPO.

The process of going public on the STAR Market includes several periods of review and is therefore a lengthy process.

Tongmei does not expect to complete the IPO until mid-2022.

The listing of Tongmei on China’s STAR Market will not change the status of AXT as a U.S.

public company.

An additional step in the STAR Market IPO process involves certain entity reorganizations and alignment of assets under Tongmei.

In this regard our two consolidated raw material companies, Nanjing JinMei Gallium Co., Ltd.

(“JinMei”) and Beijing BoYu Semiconductor Vessel Craftwork Technology Co., Ltd.

(“BoYu”) and its subsidiaries were assigned to Tongmei in December 2020.

This will increase the number of customers and employees attributable to Tongmei as well as increase Tongmei’s consolidated revenue.

The following organization chart depicts the consolidated structure as of December 31, 2020;

In September 2018, the Trump Administration announced a list of thousands of categories of goods that became subject to tariffs when imported into the United States.

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Approximately 10% of our revenue derives from importing our wafers into the United States.

In 2019, we paid approximately $735,000 in tariffs.

In 2020 and 2019, we paid approximately $1.3 million and $0.7 million, respectively, in tariffs.

The future impact of tariffs and trade wars is uncertain.

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Our principal corporate office is located at 4281 Technology Drive, Fremont, California 94538, and our telephone number at this address is (510) 438-4700.

We have approximately 730 employees.

In addition, our consolidated subsidiaries have, in total, approximately 250 employees.

In aggregate, we and our consolidated subsidiaries have approximately 980 employees.

Industry Background

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One of the earliest broadly used alternative wafer substrates was GaAs and GaAs wafer substrates were the earliest wafer substrates we produced.

Semi-insulating GaAs is used to create various high-speed microwave components, including power amplifier chips used in cell phones, satellite communications and broadcast television applications.

Semi-conducting GaAs substrates are used to create opto-electronic products, including high brightness light-emitting diodes (HBLEDs) that are often used to backlight wireless handsets and liquid crystal display (LCD) TVs and also used for automotive panels, signage, display and lighting applications.

A new application for semi-conducting GaAs is 3-D sensing chips using VCSELs (vertical cavity surface emitting lasers) as an array of lasers on a single chip that could be used in cell phones and other devices.

InP is a high-performance semiconductor substrate used in broadband and fiber optic applications, data center connectivity and 5G infrastructure.

Silicon substrates dominate the semiconductor substrate market.

Silicon wafers are larger in diameter and significantly lower in cost.

AXT and our competitors exist because the laws of physics prevent certain functions from performing properly, or at all, if silicon material is used as the wafer substrate.

Our substrate wafers are used when a typical silicon substrate wafer cannot meet the performance requirements of a semiconductor or optoelectronic device.

Demand for higher performance non-silicon-based wafer substrates, such as the substrates in which AXT specializes, is expected to increase as new applications are adopted.

In contrast to the ever-more complex electronic circuit designs and the skill sets required to accomplish such designs, the knowledge base and skill sets required for AXT and our competitors are material science-based.

We do not design or manufacture the semiconductor chips and other electronic circuits.

Instead we apply our deep knowledge in material science to grow single crystal ingots that are then sliced into individual wafer substrates.

We add value by researching, developing and producing the specialty material wafers.

This places us at the beginning of the semiconductor “food chain”.

InP is a high-performance semiconductor substrate used in broadband and fiber optic applications and data center connectivity.

InP substrates can also be used in 5G applications.

In recent years, InP demand has increased.

Semi-insulating GaAs substrates are used to create various high-speed microwave components, including power amplifier chips used in cell phones, satellite communications and broadcast television applications.

Semi-conducting GaAs substrates are used to create opto-electronic products, including high brightness light emitting diodes (HBLEDs) that are often used to backlight wireless handsets and liquid crystal display (LCD) TVs and also used for automotive panels, signage, display and lighting applications.

Ge substrates are used in applications such as solar cells for space and terrestrial photovoltaic applications.

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We believe we are the only company in our industry to have recently added significant new facilities, equipment and capacity.

supplier with a state of the art manufacturing line, a proven ability to add capacity and a commitment to continuous improvement.

Although current customers and prospective customers previously viewed our relocation process as a risk, we believe our progress and success in managing this process now position us as the “go to” supplier with a state of the art manufacturing line, a proven ability to add capacity and a commitment to continuous improvement .

● Funds from the recent private equity investments in Tongmei and additional funds from the anticipated future IPO of Tongmei are viewed favorably by our customers and prospective customers.

New applications using InP and GaAs wafer substrates could require significant capital investments to add capacity, purchase and install advanced process and test equipment or construct additional facilities.

We believe customers view the funds recently raised, and intended to be raised in the IPO, as a sign of our commitment to meet their needs and to deploy this capital to increase capacity as needed .

● Key leadership in InP technology and revenue growth.

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We have developed a strong base of proprietary InP technology that we continue to expand.

There are significant barriers to entry in the InP substrate market and currently, there are only three primary suppliers, including AXT.

There are significant barriers to entry in the InP substrate market and currently, there are only three primary

suppliers, including AXT.

We believe that this market will continue to expand and grow.

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● Key provider of low defect density GaAs wafer substrates.

In recent years customer demand for low etch pit density (“EPD”) GaAs wafer substrates has increased, particularly for LED lighting, the deployment of 3-D sensing for facial recognition in cell phones and world facing camera technology in cell phones.

The requirement of low EPD is a barrier to entry and we believe there are a limited number of potential substrate providers that can meet this requirement, including AXT.

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In our industry, the single crystal growth process and the wafer manufacturing process incorporate proprietary process technology.

We have a substantial body of proprietary process technology and this creates a barrier to entry as evidenced by the small number of suppliers of InP wafers or GaAs low EPD wafers.

We have a substantial body of proprietary process technology and we believe this gives us a competitive advantage, especially in InP.

This also creates a barrier to entry.

● Low-cost manufacturing operation in China.

Since 2004, we have manufactured all of our products in China, which generally has favorable costs for facilities and labor compared to costs of comparable facilities and labor in the United States, Japan or Europe.

As of December 31, 2019, approximately 950 of our 980 employees (including employees at our Beijing and Dingxing facilities as well as our consolidated joint venture companies) were located in China.

Our primary competitors have their major manufacturing

operations in Germany or Japan.

As of December 31, 2020, 1,046 of our 1,074 employees (including employees at our Beijing, Kazuo and Dingxing facilities as well as our consolidated raw material companies) were located in China.

Our primary competitors have their major manufacturing operations in Germany or Japan.

Our presence in China also enables us to closely manage our raw materials supply chain.

We are the only compound semiconductor substrate supplier to have a position in raw materials.

● We believe that we are the only compound semiconductor substrate supplier to have a position in raw materials.

We have partial ownership of raw material companies in China that form an integral part of our supply chain.

We believe our subsidiaries and joint venture companies in China provide us with a more reliable supply of, and shorter lead-times for, the raw materials central to our final manufactured products compared to third-party providers.

We believe our subsidiaries and raw material companies in China provide us with a more reliable supply of, and shorter lead-times for, the raw materials central to our final manufactured products compared to third-party providers.

We believe that this dedicated supply chain will enable us to meet increases in demand from our customers by providing an increased volume of raw materials quickly, efficiently and cost effectively.

● Our diverse product offering results in a broader range of customers and applications .

We offer a diverse range of products and are able to provide custom-defined products that meet our customers’

specifications.

We offer a diverse range of products and are able to provide custom-defined products that meet our customers’ specifications.

We have a strong technical sales support team that engages with our customers and understands their product requirements.

A significant percentage of the members of our team that engage with customers have PhDs in physics or materials science.

This combination of technical sales strength and our willingness to accept our customers’

unique product specifications results in a broad range of customers and applications.

This combination of technical sales strength and our willingness to accept our customers’ unique product specifications results in a broad range of customers and applications.

● Enhanced revenue diversity through the sale of raw materials.

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We believe the combination of access to U.S.

capital markets, U.S.-based product quality standards, but China-based manufacturing and a unique strategy for the supply of many of the raw materials we need is a competitive advantage as well as an attractive business model to our customers.

and China capital markets, U.S.-based product quality standards, China-based manufacturing and a unique strategy for the supply of many of the raw materials we need is a competitive advantage as well as an attractive business model to our customers.

Our goal is to become the leading worldwide supplier of high-performance compound and single element semiconductor substrates.

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The GaAs substrate requirements for 3-D sensing applications include very low defect densities or etch pitch densities.

We intend to capture opportunities in this emerging market as we establish volume production in our new facilities.

We intend to capture opportunities in these markets by promoting our strengths and capabilities.

Create customer awareness that the new facilities are designed to allow us to add equipment and capacity rapidly .

The construction of new facilities and infrastructure takes much longer to complete in comparison to the installation of furnaces and other manufacturing equipment.

We have proven our ability to do both and we believe this ability makes us an attractive vendor for customers.

We have proven our ability to do both and we believe this ability makes us an attractive supplier for customers.

Offer diverse products, including custom products.

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We plan to further promote this brand image as a way to differentiate ourselves in the market.

We believe this strategy will lead to a more diverse customer base.

We believe this strategy will lead to a more diverse customer base and higher volumes.

Sustain manufacturing efficiencies.

We seek to continue to leverage our China-based manufacturing advantage by increasing efficiencies in our manufacturing methods, systems and processes.

Our strategy is to combine the benefits of U.S.-based quality control and access to U.S.

capital markets with our China-based manufacturing operations.

Our strategy is to combine the benefits of U.S.

quality control systems and access to U.S.

and China capital markets with our China-based manufacturing operations.

We promote the concept and practice of continuous improvement within our company culture.

Increase productivity and seek profitability in our subsidiaries/joint venture companies.

Increase productivity and seek profitability in our subsidiaries/consolidated raw material companies.

The supply and demand equation for specialty materials can be complex and volatile.

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We plan to use our deep knowledge and experience in specialty materials and wafer substrates to seek new applications for existing substrates in our portfolio and explore additional materials that may be synergistic with our knowledge base, customer needs and manufacturing lines.

Wafer substrates serve as a cornerstone in semiconductor device fabrication, on which integrated circuits and optical devices are fabricated.

Wafer substrates on which integrated circuits and optical devices are fabricated serve as a foundation for semiconductor device fabrication.

Wafers are derived from ingots that are grown in a cylindrical form.

The diameter and length of an ingot will vary depending on the type of material and the growth process used.

An ingot may be either single-crystalline (also referred to as single element) or multi-crystalline (also referred to as compound elements).

Single-crystalline wafers typically have better material parameters.

An ingot can be single-crystalline (a single crystal) or multi-crystalline (polycrystalline).

A single crystal is a continuous lattice of atoms with no boundaries within the structure.

The ingot must be a single crystal in order for it to be useful in making wafers for device fabrication.

A single crystal ingot can be made from a single element such as germanium or silicon, or it can be made from two or more elements such as gallium arsenide (with gallium and arsenic) or indium phosphide (with indium and phosphorous).

Depending on physical properties of the materials in a wafer, the performance of devices and circuits can be remarkably different.

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We design, develop, manufacture and distribute high-performance semiconductor substrates, also known as wafers.

Through the two consolidated subsidiaries in our supply chain, we also sell certain raw materials.

InP is a high-performance semiconductor substrate used in fiber optic lasers and detectors, passive optical networks (PONs), telecommunication, now expanding to include 5G, metro and data center connectivity, silicon photonics, photonic ICs (PICs), terrestrial solar

cell (CPV), lasers, RF amplifiers (military wireless), infrared motion control and infrared thermal imaging.

the two consolidated subsidiaries in our supply chain, we also sell certain raw materials.

We make semi-insulating GaAs substrates used in making semiconductor chips in applications such as power amplifiers for wireless devices, high-performance transistors and high efficiency solar cells for drones.

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We have at times sold a significant portion of our products in any particular period to a limited number of customers.

One customer, Landmark, represented 15% of our revenue for the year ended December 31, 2019.

One customer, Landmark represented 13% of our revenue for the year ended December 31, 2018.

Landmark and Osram, represented 12% and 11%, respectively, of our revenue for the year ended December 31, 2017.

Our top five customers, although not the same five customers for each period, represented 40% of our revenue for the year 2019 and 35% of our revenue for each of the years 2018 and 2017, respectively.

For the year ended December 31, 2019, three customers with our consolidated subsidiaries, in aggregate, accounted for 48% of raw material sales.

For each of the years ended December 31, 2018 and 2017, three customers with our consolidated subsidiaries, in aggregate, accounted for over 30% of raw material sales.

Our subsidiaries and joint ventures are a key strategic benefit for us as they further diversify our sources of revenue.

One customer, Landmark, represented 11%, 15% and 13% of our revenue for the years ended December 31, 2020, 2019 and 2018, respectively.

Our top five customers, although not the same five customers for each period, represented 32% of our revenue for the year 2020, 40% of our revenue for 2019 and 35% of our revenue for 2018.

For the year ended December 31, 2020, three customers of our consolidated subsidiaries, in aggregate, accounted for 31% of raw material sales.

For the year ended December 31, 2019, three customers of our consolidated subsidiaries, in aggregate, accounted for 48% of raw material sales and in 2018, three customers accounted for 30% of

raw material sales.

Our subsidiaries and consolidated raw material companies are a key strategic benefit for us as they further diversify our sources of revenue.

Manufacturing, Raw Materials and Supplies

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Other key elements are the initial cost of the raw material elements, manufacturing equipment, factory loading, facilities and labor.

We have partially owned subsidiaries and joint venture companies in China that form the backbone of our supply chain model.

Together with certain subsidiaries we have partial ownership of 10 raw material companies in China that form the backbone of our supply chain model.

These companies generally provide us with reliable supply, market trend visibility, and shorter lead-times for raw materials central to our manufactured products, including gallium, gallium alloys, indium phosphide poly-crystal, arsenic, germanium, germanium dioxide, high purity arsenic, pBN and boron oxide.

We believe that these subsidiaries and joint ventures have been and will continue to be advantageous in allowing us to procure materials to support our planned growth.

We believe that these raw material companies have been and will continue to be advantageous in allowing us to procure materials to support our planned growth.

In addition, we purchase supply parts, components and raw materials from several other domestic and international suppliers.

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We sell our substrate products directly to customers through our direct salesforce in the United States, China and Europe.

We use independent sales representatives and distributors in Japan, Taiwan, Korea and other areas.

We also use independent sales representatives and distributors in Japan, Taiwan, Korea and other areas.

Our direct salesforce is knowledgeable in the use of compound and single-element substrates.

Specialty material wafers are scientifically complicated.

Our application engineers must work closely with customers during all stages of our wafer substrate manufacturing process, from developing the precise composition of the wafer substrate through manufacturing and processing the wafer substrate to the customer’s specifications.

We believe that maintaining a close relationship with customers and providing them with engineering support improves customer satisfaction and provides us with a competitive advantage in selling.

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International sales are a substantial part of our business.

Sales to customers outside North America (primarily the United States) accounted for approximately 90%, 90% and 91% of our revenue during 2019, 2018 and 2017, respectively.

Sales to customers outside North America (primarily the United States) accounted for approximately 90% of our revenue during each of 2020, 2019 and

The primary markets for sales of our substrate products outside of North America are to customers located in Asia and Western Europe.

We occasionally receive small orders from customers located in Israel and Russia.

Our raw material subsidiaries and joint venture companies sell specialty raw materials including 4N, 5N, 6N, 7N and 8N gallium, boron oxide, germanium, arsenic, germanium dioxide, pyrolytic boron nitride crucibles used in crystal growth, parts for MBE and parts used in manufacturing OLED rings.

These subsidiaries and joint ventures have their own separate sales forces and sell directly to their own customers in addition to selling raw materials to us.

Our raw material companies sell specialty raw materials including 4N, 5N, 6N, 7N and 8N gallium, boron oxide, germanium, arsenic, germanium dioxide, pyrolytic boron nitride crucibles used in crystal growth, parts for MBE and parts used in manufacturing OLED rings.

Each raw material company has its own separate sales force and sells directly to its own customers in addition to selling raw materials to us.

Research and Development

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In 2015, we acquired proprietary wafer processing equipment from Hitachi Metals.

The Hitachi Metals purchase includes a license covering the use of the proprietary equipment and Hitachi Metals’

proprietary wafer processing technology.

The Hitachi Metals purchase includes a license covering the use of the proprietary equipment and Hitachi Metals’ proprietary wafer processing technology.

A particular focus of the equipment and process technology is on cleaning the wafers.

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Other products, such as InP and low EPD GaAs wafers, have fewer competitors and quality is a key competitive factor in addition to price.

We face actual and potential competition from a number of established companies who have the advantage of greater name recognition and more established relationships in the industry.

We face actual and potential competition from a number of established companies who have the advantages of greater name recognition and more established relationships in the industry.

In some cases, our competitors have substantially greater financial, technical and marketing resources as they are divisions of much larger companies.

They may utilize these advantages to expand their product offerings more quickly, adapt to new or emerging technologies and changes in customer requirements more quickly, and devote greater resources to the marketing and sale of their products.

We believe a critical factor in our business is technical support extended to the customer or prospective customer and we attempt to counter possible advantages of name recognition or size with superior technical support through the use of our team of technical sales support professionals, the majority of whom hold PhDs in physics or materials science.

We believe a critical factor in our business is the level of technical support we provide to the customer or prospective customer and we attempt to counter possible advantages of name recognition or size with superior technical support through our team of technical sales support professionals, the majority of whom hold PhDs in physics or materials science.

We believe that the primary competitive factors in the markets in which our substrate products compete are:

● customer technical support;

● performance;

● meeting customer specifications;

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Once a substrate supplier has qualified with a customer, price, consistent quality and current and future product delivery lead times become the most important competitive factors.

A supplier that cannot meet a customer’s current lead times or that a customer perceives will not be able to meet future demand and provide consistent quality can lose market share.

Our primary competition in the market for compound and single element semiconductor substrates includes Sumitomo Electric Industries (“Sumitomo”), Japan Energy (“JX”), Freiberger Compound Materials (“Freiberger”), Umicore, and China Crystal Technology Corp.

(“CCTC”).

A supplier that cannot meet a customer’s current lead times or that a customer perceives will not be able to meet future demand and provide consistent quality can lose market share.

We believe that at least two of our competitors are shipping high volumes of GaAs substrates manufactured using a process similar to our VGF technology.

In addition, we also face competition from semiconductor device manufacturers that may use other specialty material substrates that are not GaAs, InP or Ge based materials and that are actively exploring alternative materials.

For example, silicon-on-insulator (“SOI”) technology, a silicon wafer technology that produces satisfactory devices at lower cost, has been proven in the market.

From 2012 to 2015, SOI technology displaced GaAs chips in key sectors, primarily the radio frequency (“RF”) switching function in cell phones.

Because of our vertically integrated, sophisticated supply chain through our subsidiaries and joint venture companies, we believe we are the only compound semiconductor substrate supplier to offer a broad suite of raw materials.

For example, silicon-on-insulator (“SOI”) technology, a silicon wafer technology that produces satisfactory devices at lower cost, has been proven in the market.

From 2012 to 2015, SOI technology displaced GaAs chips in key sectors, primarily the radio frequency (“RF”) switching function in cell phones.

Because of our vertically integrated, sophisticated supply chain, we believe we are the only compound semiconductor substrate supplier to offer a broad suite of raw materials.

We believe this gives us a unique competitive advantage because we have greater control and stability over many of our needed materials.

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We rely on a combination of patents, trademark and trade secret laws, non-disclosure agreements and other intellectual property protection methods to protect our proprietary technology.

We believe that, due to the rapid pace of technological innovation in the markets for our

products, our ability to establish and maintain a position of technology leadership depends as much on the skills of our research and development personnel as upon the legal protections afforded our existing technologies.

We believe that, due to the rapid pace of technological innovation in the markets for our products, our ability to establish and maintain a position of technology leadership depends as much on the skills of our research and development personnel as upon the legal protections afforded our existing technologies.

To protect our trade secrets, we take certain measures to ensure their secrecy, such as executing non-disclosure agreements with our employees, customers and suppliers.

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To date, we have been issued 56 patents related to our VGF products and processes;

34 in China, nine in the United States, seven in Japan, two in Taiwan, one in the European Union, one in Canada and one in South Korea.

Patents have a protected life of 20 years from their filing dates.

Our patents have expiration dates ranging from one expiration in 2019 to 2039.

34 in China, nine in the United States, seven in Japan, two in Taiwan, two in the European Union, one in Canada and one in South Korea.

Patents normally have a protected life of 20 years from their filing dates.

Our patents have expiration dates ranging from 2021 to 2037.

In some cases we may consider filing divisional, continuation or continuation-in-part of the existing patents for additional claims.

We have 13 patent applications pending, including six in China, two in the United States, three in the Patent Cooperation Treaty stage and two in Europe.

Furthermore, in aggregate, our consolidated joint venture companies have been issued 53 patents in China, including 31 patents issued to Beijing BoYu Semiconductor Vessel Craftwork Technology Co.

(“BoYu”), 22 patents issued to Nanjing JinMei Gallium Co.

(“JinMei”).

We entered into a technology license and royalty agreement with Sumitomo, effective December 3, 2010, with a term of eight years, terminating December 31, 2018.

We, and our related companies, were granted a worldwide, nonexclusive, royalty bearing, irrevocable license to certain patents for the term of the agreement.

In January 2020, we agreed to enter into a cross license and covenant agreement with Sumitomo that will expire December 31, 2029 and includes annual payments by us to Sumitomo over a 10-year period.

We currently have five patent applications pending, including three in China, one in the United States and one in Europe.

Furthermore, in aggregate, our consolidated raw material companies have been issued 61 patents in China, including 42 patents issued to BoYu and 19 patents issued to JinMei.

In the normal course of business, we periodically receive and make inquiries regarding possible patent infringement.

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For example, in the first quarter of 2018, over 300 manufacturing companies, including AXT, were intermittently shut down by the local government for a total of ten days from February 27 to March 31, due to severe air pollution.

As of December 31, 2019, we had 731 employees, which consisted of 27 employees in our headquarters in Fremont, California, one sales professional in France and 703 employees in our factories in China.

In addition, our consolidated subsidiaries had, in total, 257 employees.

In aggregate, we and our consolidated subsidiaries had 988 employees, of whom 795 were principally engaged in manufacturing, 133 in sales and administration and 60 in research and development.

Human Capital

As of December 31, 2020, AXT and Tongmei had 784 employees, which consisted of 27 employees in our headquarters in Fremont, California, one sales professional in France and 756 employees in our factories in China.

In addition, our two consolidated raw material companies had, in total, 290 employees.

In aggregate, we and our consolidated raw material companies had 1,074 employees, of whom 882 were principally engaged in manufacturing, 112 in sales and administration and 80 in research and development.

Of these 1,074 employees, 27 were located in the United States, one in France and 1,046 in China.

We believe that our future success largely depends upon our continued ability to attract and retain highly skilled employees.

We provide our employees with competitive salaries and bonuses, opportunities for equity ownership, development programs that enable continued learning and growth and a robust employment package that promotes well-being across all aspects of their lives, including health care and paid time off.

Most of our employees in China are represented by unions.

As of December 31, 2019, 832 employees in China including employees of our subsidiaries were represented by unions.

As of December 31, 2020, 881 employees in China, including employees of our two consolidated raw material companies, were represented by unions.

We have never experienced a work stoppage and we consider our relations with our employees to be good.

Geographical Information

Please see Note 14 of our Notes to Consolidated Financial Statements for information regarding our foreign operations, and see “Risks related to international aspects of our business”

under Item 1A.

Please see Note 14 of our Notes to Consolidated Financial Statements for information regarding our foreign operations, and see “Risks related to international aspects of our business” under Item 1A.

Risk Factors for further information on risks attendant to our foreign operations and dependence.

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Our website address is given solely for informational purposes;

we do not intend, by this reference, that our website should be deemed to be part of this Annual Report on Form 10-K or to incorporate the information available at our Internet address into this Annual Report on Form 10‑K.

we do not intend, by this reference, that our website should be deemed to be part of this Annual Report on Form 10-K or to incorporate the information available at our website address into this Annual Report on Form 10-K.

We file electronically with the Securities and Exchange Commission, or SEC, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended.

We make these reports available free of charge through our Internet website as soon as reasonably practicable after we have electronically filed such material with the SEC.

These reports can also be obtained from the SEC’s Internet website at www.sec.gov or at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C.

The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

These reports can also be obtained from the SEC’s Internet website at www.sec.gov.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business