What changed in this filing

/stocks — the workspaceLOADING

Item 1. Business

2022-03-15 compared with 2021-03-23 · 66 added, 53 removed, 429 unchanged (22% of the section changed)

20 unchanged sentences

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 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.

GaAs wafers could also be used for making vertical cavity surface emitting lasers (VCSELs) and micro-LEDs targeting improved screen technology.

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

72 unchanged sentences

• 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.

All of our products are manufactured in the People’s Republic of China (PRC or China) by our PRC subsidiaries and PRC joint ventures.

The PRC 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).

5 unchanged sentences

We purchase portions of the materials produced by these companies for our own use and they sell the remainder of their production to third parties.

The Beijing city government is moving its offices into the area where our original manufacturing facility is currently located and is in the process of moving thousands of government employees into this area.

The Beijing city government is moving its offices into the district where our original manufacturing facility is currently located and is in the process of moving thousands of government employees into this district.

The government has constructed showcase tower buildings and overseen the establishment of new apartment complexes, retail stores and restaurants.

An amusement park is being constructed within a few miles of our facility.

A large park, named Green Heart City Park, was built across the street from our facility and Universal Studios has developed an amusement park within a few miles of our facility.

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 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 in Beijing.

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

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

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

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

We entered into volume production in 2020.

3 unchanged sentences

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.

A few customers, as well as prospective customers, are still in that process.

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

11 unchanged sentences

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.

By December 31, 2020, Investors, which consist 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.

dollars for this report.) The remaining investment of approximately $1.5 million of new capital was funded in January 2021.

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.

The government approved the approximately $49 million investment in its entirety 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.

Pursuant to the 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 to the Shanghai Stock Exchange and is accepted for review.

Tongmei submitted the application in December 2021 and it was formally accepted for review on January 10, 2022.

If the Shanghai Stock Exchange approves the formal application, then the Shanghai Stock Exchange will forward it to the Chinese Securities Regulatory Commission (“CSRC”) for further review.

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.

Tongmei does not expect to complete the IPO until the second half of 2022.

If, on December 31, 2022, the IPO application 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.

If the application is approved and Tongmei completes the IPO then the redemption right is canceled.

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

public company.

3 unchanged sentences

(“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.

As of June 30, 2021, AXT-Tongmei, Inc., a wholly owned subsidiary of AXT (“AXT-Tongmei”), was assigned to Tongmei.

The assignment to Tongmei of JinMei, BoYu and its subsidiaries, and AXT-Tongmei will increase the number of customers and employees attributable to Tongmei as well as increase Tongmei’s consolidated revenue.

We are neither a PRC operating company nor do we conduct our operations in China through the use of variable interest entities (“VIEs”).

The following organization chart depicts the consolidated structure as of December 31, 2021;

2 unchanged sentences

The initial tariff rate was 10% and subsequently was increased to 25%.

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

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

Approximately 10% of our revenue derives from importing our wafers into the United States and we expect the volume to increase.

In 2021, 2020 and 2019, we paid approximately $1.3 million, $1.3 million and $0.7 million, respectively, in tariffs.

The future impact of tariffs and trade wars is uncertain.

11 unchanged sentences

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.

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

5 unchanged sentences

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 substrates can also be used in 5G and health and well-being biometric 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 HBLEDs that are often used to backlight wireless handsets and LCD TVs and also used for automotive panels, signage, display and lighting applications.

GaAs wafers could also be used for making VCSELs and micro-LEDs targeting improved screen technology.

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

3 unchanged sentences

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

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.

Although current customers and prospective customers previously viewed our relocation process as a risk, we believe our success in managing this process now positions 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 the anticipated future IPO of Tongmei are viewed favorably by our customers, prospective customers and government agencies in China.

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 .

We believe customers view the funds raised in December 2020 and January 2021, 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 .

Further, we believe Tongmei is viewed more favorably by local government agencies in light of its intention to go public on the STAR Market .

● Key leadership in InP technology and revenue growth.

1 unchanged sentence

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.

22 unchanged sentences

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.

As demand for our wafer substrates expands it could strain the supply of raw materials making our business model even more important.

● Enhanced revenue diversity through the sale of raw materials.

5 unchanged sentences

We believe the combination of access to U.S.

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.

and China capital markets, 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.

3 unchanged sentences

More recently InP is being used in 5G infrastructure.

Future applications could include driverless cars and 5G in cell phones.

Future applications could include driverless cars, 5G in cell phones and health and well-being biometric wearables.

Add InP capacity and continue InP R&D.

4 unchanged sentences

For example, we are developing six-inch diameter ingots and improving the relative flatness of the wafer surface to improve performance.

Qualify the new facilities for GaAs based 3-D and Time of Flight sensing array applications in mobile devices.

Target GaAs based 3-D and Time of Flight sensing array applications in mobile devices.

Although 3-D sensing has not yet been widely adopted and embraced, we believe its use in world-facing cameras will accelerate adoption and generate a significant impact for high-quality GaAs suppliers.

2 unchanged sentences

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

Analyze and monitor the potential market for GaAs-based micro-LEDs.

There is growing interest in developing micro-LEDs for advanced screen technology.

If such technology is adopted successfully for use in smart phones, then the total available market could be significant and we would endeavor to serve that market.

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

7 unchanged sentences

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.

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.

19 unchanged sentences

This is called an epitaxial layer.

We do not grow the epitaxial layer as it is a complicated and highly technical process.

We sell the majority of our substrates to companies that specialize in applying the epitaxial layer.

5 unchanged sentences

With the recent evolution in several applications, InP lasers are projected to play a dominant role in the optoelectronics arena, e.g.

silicon photonics (where InP lasers are a key component) and autonomous cars (where special wavelength InP-based lasers are used for object sensing and collision avoidance).

silicon photonics (where InP lasers are a key component), autonomous cars (where special wavelength InP-based lasers are used for object sensing and collision avoidance) and health and well-being biometric wearables.

Crystal growth process technology frequently contains steps and procedures that are considered proprietary secrets held by the producer, often including methods to control the temperature within the crucible.

11 unchanged sentences

Certain micro devices, such as the array used for 3-D sensing, require wafers with very low EPD.

AXT considers the process technology we use to achieve low EPD as proprietary process technology and we believe we are one of only a few substrate manufacturing companies that can produce low EPD wafers.

AXT considers

the process technology we use to achieve low EPD as proprietary process technology and we believe we are one of only a few substrate manufacturing companies that can produce low EPD wafers.

We have two product lines:

1 unchanged sentence

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

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.

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, 5G infrastructure, metro and data center connectivity, silicon photonics (data centers), photonic ICs (PICs), terrestrial solar cell (CPV), lasers, RF amplifiers (military wireless), infrared motion control and infrared thermal imaging.

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.

Our semi-conducting GaAs substrates are used to create opto-electronic products, which include High Brightness LEDs that are often used to backlight wireless handsets and LCD TVs and for automotive, signage, display and lighting applications, as well as high power industrial lasers for material processing (welding, cutting, drilling, soldering, marking and surface modification).

Our semi-conducting GaAs substrates could be used to create opto-electronic products for 3-D sensing using VCSELs.

Our semi-conducting GaAs substrates can be used to make micro-LEDs for advanced screen technologies and to create opto-electronic products for 3-D sensing using VCSELs.

Ge substrates are used in emerging applications, such as triple junction solar cells for space and terrestrial photovoltaic applications and for optical applications.

3 unchanged sentences

Many of our customers require customized specifications, such as special levels of iron or sulfur dopants or a special wafer thickness.

We are developing 6-inch InP wafers and 8-inch GaAs wafers.

Raw Materials.

11 unchanged sentences

This is called an epitaxial layer.

We do not grow the epitaxial layer.

We sell our substrates to companies that apply the epitaxial layer, who then in turn sell the modified wafers to the wafer fabs, chip design companies, LED manufacturers and others.

4 unchanged sentences

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

No customer represented more than 10% of our revenue for the year ended December 31, 2021 and o ne customer, Landmark, represented 11% and 15% of our revenue for the years ended December 31, 2020 and 2019, respectively.

Our top five customers, although not the same five customers for each period, represented 26% of our revenue for the year 2021, 32% of our revenue for 2020 and 40% of our revenue for 2019.

For the year ended December 31, 2021, three customers of our consolidated subsidiaries, in aggregate, accounted for 28% 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.

For the year ended December 31, 2020, three customers of our consolidated subsidiaries, in aggregate, accounted for 31% of raw material sales and for the year ended December 31, 2019, three customers accounted for 48% 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.

24 unchanged sentences

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

We depend on a single or limited number of suppliers for certain critical materials used in the production of our substrates, such as quartz tubing, arsenic and polishing solutions.

We depend on a single or limited number of suppliers for certain critical materials used in the production of our substrates, such as quartz tubing, arsenic, phosphorus and polishing solutions.

We generally purchase our materials through standard purchase orders and not pursuant to long-term supply contracts.

2 unchanged sentences

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.

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

Specialty material wafers are scientifically complicated.

28 unchanged sentences

Certain wafer substrates, such as low-quality wafer substrates for consumer products using LED lighting, compete almost entirely on price.

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

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 advantages of greater name recognition and more established relationships in the industry.

14 unchanged sentences

A majority of our customers specialize in epitaxial growth, a complex series of chemical layers grown on top of our wafers.

Our wafers cannot be used to make chips until the epitaxial layers are grown.

Typically, our customer or prospective customer has at least two qualified substrate suppliers.

2 unchanged sentences

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”) and Vital Materials.

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.

14 unchanged sentences

To date, we have been issued 75 patents related to our VGF products and processes;

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.

50 in China, 11 in the United States, seven in Japan, two in Taiwan, three 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.

1 unchanged sentence

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

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

We currently have 23 patent applications pending, including five in China, three in the United States, three in Japan, four in Taiwan, four in Europe and four in rest of the world.

Furthermore, in aggregate, our consolidated raw material companies have been issued 59 patents in China, including 44 patents issued to BoYu and 15 patents issued to JinMei.

16 unchanged sentences

As of December 31, 2021, AXT and Tongmei had 1,008 employees, which consisted of 28 employees in our headquarters in Fremont, California, one sales professional in France and 979 employees in our factories in China.

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

In addition, our consolidated raw material companies had, in total, 391 employees.

In aggregate, we and our consolidated raw material companies had 1,399 employees, of whom 1,023 were principally engaged in manufacturing, 189 in sales and administration and 187 in research and development.

Of these 1,399 employees, 28 were located in the United States, one in France and 1,370 in China.

Our employees in China are citizens of China, have families and pay taxes in China.

We believe these factors are viewed favorably by government agencies in China.

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

1 unchanged sentence

Most of our employees in China are 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.

As of December 31, 2021, 1,151 employees in China, including employees of our 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.

11 unchanged sentences

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