What changed in this filing

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Item 1. Business

2023-03-16 compared with 2022-03-15 · 158 added, 76 removed, 419 unchanged (36% of the section changed)

15 unchanged sentences

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

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.

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

More recently, InP substrates are being used in certain consumer products, including biometric wearables and other health monitoring applications.

In recent years, InP demand has increased.

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

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

Two of these companies are consolidated.

Our supply chain strategy includes several consolidated raw material companies.

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.

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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, 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%, 75% and 79% of our consolidated revenue and our raw materials product group generated 21%, 25% and 21% for 2022, 2021 and 2020, respectively.

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• Fiber optic lasers and detectors

• Consumer devices

• Passive Optical Networks (PONs)

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• Printer head lasers and LEDs

(8” in sample quantities)

• 3-D sensing using VCSELs

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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.

In the event of industry-wide supply shortages we believe our vertically integrated supply chain strategy will be even more advantageous.

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).

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We consolidate the companies in which we have either a controlling financial interest, or majority financial interest combined with the ability to exercise substantive control over the operations, or financial decisions, of such companies.

We use the equity method to account for companies in which we have smaller financial interest and have the ability to exercise significant influence, but not control, over such companies.

We use the equity method to account for companies in which we have noncontrolling financial interest and have the ability to exercise significant influence, but not control, over such companies.

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.

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

We entered into volume production in 2020.

Our PRC subsidiary, Baoding Tongmei Xtal Technology Co., Ltd.

(“Baoding Tongmei”), 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 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, as well as prospective 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.

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 the new manufacturing facility of our PRC subsidiary, ChaoYang Tongmei Xtal Technology Co., Ltd., (“ChaoYang Tongmei”), in Kazuo, a city approximately 250 miles from Beijing.

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

Most of our larger, more sophisticated customers have qualified gallium arsenide wafers from the new sites.

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

These new facilities enabled us to expand capacity and upgrade some of the equipment.

In 2021 and 2022, we added additional equipment, including certain more advanced equipment.

We have also invested in additional buildings to complement the initial construction and add capacity as needed.

Our PRC subsidiaries also acquired sufficient land to enable them 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.

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

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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 consist of 10 private equity funds, had engaged with Tongmei for a total investment of approximately $48.1 million.

31, 2020, Investors, which consist of 10 private equity funds, had entered into two sets of definitive transaction documents, each consisting of a capital increase agreement along with certain supplemental agreements in substantially the same form (collectively, the “Capital Investment Agreements”), 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 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.

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 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 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 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.

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

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 the IPO fails to pass the audit of the Shanghai Stock Exchange, is not approved by the Chinese Securities Regulatory Commission (“CSRC”) or Tongmei cancels the IPO application.

The aggregate redemption amount is approximately $49 million, subject to the foreign exchange rate variable at time of redemption.

Tongmei submitted its IPO application to the Shanghai Stock Exchange in December 2021 and it was formally accepted for review on January 10, 2022.

The Shanghai Stock Exchange approved the IPO application on July 12, 2022.

On August 1, 2022, the CSRC accepted for review Tongmei’s IPO application.

The STAR Market IPO remains subject to review and approval by the CSRC and other authorities.

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

Further, the timing of the completion of the Star Market IPO is subject to numerous factors outside Tongmei’s control.

The listing of Tongmei on the 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.

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

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

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

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.

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

The assignment to Tongmei of JinMei, BoYu and its subsidiaries, and AXT-Tongmei, Inc.

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”).

Recent statements and regulatory actions by China’s government on the use of VIEs and data security or anti-monopoly concerns have not impacted our ability to conduct our business or continue to list our common stock on the Nasdaq Global Select Market.

The following organization chart depicts the consolidated structure as of December 31, 2022.

The businesses of our PRC subsidiaries and PRC joint ventures are subject to complex and rapidly evolving laws and regulations in the PRC, which can change quickly with little advance notice.

The PRC government is a single party form of government with virtually unlimited authority and power to intervene in or influence commercial operations in China.

In the past, we have experienced such intervention or influence by the PRC government and a change in the rules and regulations in China when we were instructed by the Beijing municipal government to relocate our manufacturing facility in Beijing and expect that such intervention or influence or change in the rules and regulations in China could occur in the future.

In the ordinary course of business, our PRC subsidiaries and PRC joint ventures require permits and licenses to operate in the PRC.

Such permits and licenses include permits to use hazardous materials in manufacturing operations.

From time to time, the PRC government issues new regulations, which may require additional actions on the part of our PRC subsidiaries and PRC joint ventures to comply.

For example, on February 27, 2015, the China State Administration of Work Safety updated its list of hazardous substances.

The previous list, which was published in 2002, did not restrict the materials that we use in our wafers.

The new list added gallium arsenide.

As a result of the newly published list, we were required to seek additional permits.

In the ordinary course of business, our PRC subsidiaries and PRC joint ventures apply for permits as required.

Any such intervention or influence or change in the rules and regulations in China could result in a material change in our PRC operations and/or the value of our common stock or cause the value of such securities to significantly decline or be worthless.

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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The future impact of tariffs and trade wars is uncertain.

We have created a vertically-integrated supply chain and transfer cash through our corporate structure in three ways.

First, we capitalize our investments in our PRC subsidiaries.

We license to our PRC subsidiaries intellectual property and receive from our PRC subsidiaries royalty payments.

Second, we use transfer pricing arrangements to buy from our PRC subsidiaries and PRC joint ventures wafers and raw materials.

We also sell to our PRC subsidiaries capital equipment that we purchase at the request of our PRC subsidiaries and for which we are reimbursed by the applicable PRC subsidiary.

We review the terms of the transfer pricing arrangements annually with our independent registered public accounting firm.

Third, our PRC subsidiaries and PRC joint ventures have paid dividends to entities within the Company’s corporate structure.

For the years ended December 31, 2022 and 2021, the aggregate dividends paid to the

Company, directly or to an intermediate entity within our corporate structure, by our PRC subsidiaries and PRC raw material joint ventures were approximately $2.9 million and $774,000, respectively.

In June 2021, the Company received a $774,000 dividend from one of our equity investments, Xiaoyi XingAn Gallium Co., Ltd.

(“Xiaoyi XingAn”).

For years ended December 31, 2022 and 2021, the aggregate dividends paid to minority shareholders by our PRC subsidiaries and PRC raw material joint ventures were approximately $0 and $0, respectively.

All of these distributions were paid to our PRC subsidiaries and the minority shareholders.

For the year ended December 31, 2022, no transfers, dividends, or distributions have been made to date between the Company and its PRC subsidiaries, or to investors, except for the settlement of amounts owed under our transfer pricing arrangements in the ordinary course of business.

We have no current intentions to distribute to our investor’s earnings under our corporate structure.

We settle amounts owed under our transfer pricing arrangements in the ordinary course of business.

The cash generated from one PRC subsidiary is not used to fund another PRC subsidiary’s operations.

None of our PRC subsidiaries has ever faced difficulties or limitations on its ability to transfer cash between our subsidiaries.

We have cash management policies that dictate the amount of such funding.

We are subject to a number of unique legal and operational risks associated with our corporate structure, any of which could result in a material change in our operations and/or the value of our common stock or cause the value of such securities to significantly decline or be worthless.

Please carefully read the information beginning on page 9 of this report and included in Item 1A.

Risk Factors.

In particular, the following risk factors address issues associated with our corporate structure:

● Although we are a Delaware corporation and are neither a PRC operating company nor do we conduct our operations in China through the use of VIEs, in the event we inadvertently concluded that we do not require any permissions or approvals from the CSRC or other PRC central government authorities to complete a public offering of securities in the U.S.

or applicable laws, regulations, or interpretations change, we may be required to obtain such permissions or approvals to complete such a public offering of securities.

● The PRC central government may intervene in or influence our PRC operations at any time and the rules and regulations in China can change quickly with little advance notice.

● The PRC central government may also exert more control over offerings conducted overseas and/or foreign investment in China-based issuers, which could result in a material change in our operations and/or the value of our common stock.

● Changes in China’s political, social, regulatory or economic environments may affect our financial performance.

● Joint venture raw material companies in China bring certain risks.

● Risks exist in utilizing our new gallium arsenide manufacturing sites efficiently.

● The Chinese central government is increasingly aware of air pollution and other forms of environmental pollution and their reform efforts can impact our manufacturing, including intermittent mandatory shutdowns.

● Shutdowns or underutilizing our manufacturing facilities may result in declines in our gross margins.

● Enhanced trade tariffs, import restrictions, export restrictions, Chinese regulations or other trade barriers may materially harm our business.

● If China places restrictions on freight and transportation routes and on ports of entry and departure this could result in shipping delays or increased costs for shipping.

● Our international operations are exposed to potential adverse tax consequence in China.

● We derive a significant portion of our revenue from international sales, and our ability to sustain and increase our international sales involves significant risks.

● The terms of the private equity raised in China as a first step toward an IPO on the STAR Market grant each Investor a right of redemption if Tongmei fails to achieve its IPO.

● We are subject to foreign exchange gains and losses that may materially impact our statement of operations.

● Although the audit report incorporated by reference in this prospectus is prepared by an independent registered public accounting firm that is currently inspected fully by the Public Company Accounting

Oversight Board (the “PCAOB”), there is no guarantee that future audit reports will be prepared by an independent registered public accounting firm that is completely inspected by the PCAOB.

Our independent registered public accounting firm is BPM, which is registered with PCAOB.

The Holding Foreign Companies Accountable Act (the “HFCA Act”) requires that the PCAOB determine whether it is unable to inspect or investigate completely registered public accounting firms located in a non-U.S.

jurisdiction because of a position taken by one or more authorities in that jurisdiction.

On December 16, 2021, the PCAOB issued a report on its determinations that the PCAOB is unable to inspect or investigate completely registered public accounting firms headquartered in the PRC and Hong Kong because of positions taken by PRC authorities in those jurisdictions.

BPM is neither headquartered in the PRC or Hong Kong nor is it subject to the determinations announced by the PCAOB.

Accordingly, the Company does not expect the HFCA Act, the Accelerating Holding Foreign Companies Accountable Act and the related regulations to affect the Company and does not expect to be identified by the Securities and Exchange Commission, or SEC, under the HFCA Act.

On December 15, 2022, the PCAOB vacated its 2021 determinations that the positions taken by authorities in the PRC and Hong Kong prevented it from inspecting and investigating completely registered public accounting firms headquartered in those jurisdictions.

See “Although the audit report is prepared by an independent registered public accounting firm who is currently inspected fully by the PCAOB, there is no guarantee that future audit reports will be prepared by an independent registered public accounting firm that is completely inspected by the PCAOB” under Item 1A.

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

We were incorporated in California in December 1986 and reincorporated in Delaware in May 1998.

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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 and health and well-being biometric applications.

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

More recently, InP substrates are being used in certain consumer products.

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

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 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.

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● New facilities, equipment and added capacity.

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

We believe we are the only company in our industry to have added significant new facilities, equipment and capacity in 2021 and 2022.

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 .

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● 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 have partial ownership of raw material companies in China that form an integral part of our

supply chain.

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.

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We believe we are the only publicly traded company producing InP, GaAs and Ge wafer substrates.

Our direct competitors are either privately owned companies or divisions within very large companies that are publicly listed in Japan.

Our main competitors are either privately owned companies or divisions within very large companies that are publicly listed in Japan.

We believe the combination of access to U.S.

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.

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.

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Before specialty material wafers can be used, a thin layer of structured chemicals is grown on the surface of the substrate.

This is called an epitaxial layer.

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

This is called an epitaxial layer and it is a complicated and highly technical process.

We do not grow the epitaxial layer.

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

The wafers are then used to produce state-of-the-art electronic and opto-electronic devices and circuit applications.

Our wafers are then used to produce state-of-the-art electronic circuits and opto-electronic devices.

The chips are used in a wide variety of applications.

InP and GaAs compounds are formed by combining elements from Groups III and V in the periodic table of elements, whereas Ge is a Group IV elemental material.

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As a result of their special high electron mobility combined with their direct ban-gap properties, both InP and GaAs wafers have enjoyed dominant roles in the production of light-emitting diodes (LEDs), solid-state lasers and power amplifiers for mobile phones, to name a few applications.

Ge wafers, on the other hand, have played a key role in the manufacturing of special solar cells known as triple junction solar cells (TJSCs) for space and terrestrial power generation.

Ge wafers, on the other

hand, have played a key role in the manufacturing of special solar cells known as triple junction solar cells (TJSCs) for space and terrestrial power generation.

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

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), health and well-being biometric wearables and certain consumer products.

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.

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Dislocation densities can be seen as a group of tiny marks or pits under a microscope by etching the wafer with acid and each wafer has an etch pit density or EPD.

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.

Certain micro devices, such as GaAs industrial lasers, 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.

We have two product lines:

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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, 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.

Through 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, photonic ICs (PICs), terrestrial solar cell (CPV), lasers, RF amplifiers, infrared motion control and infrared thermal imaging.

During the year ended December 31, 2022, two consumer products were released that use chips fabricated on our InP substrate wafers.

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

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).

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We currently sell compound substrates manufactured from InP and GaAs, as well as single-element substrates manufactured from Ge.

We supply InP substrates in two-, three- and four-inch diameters, and Ge substrates in two-, four- and six-inch diameters.

We supply InP substrates in two-, three- and four-inch diameters, and are developing six-inch diameter InP substrates.

We supply Ge substrates in two-, four- and six-inch diameters.

We supply both semi-insulating and semi-conducting GaAs substrates in one-, two-, three-, four-, five- and six-inch diameters.

We are developing eight-inch diameter GaAs substrate wafers and began selling samples in the second half of 2022.

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.

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Some competitors limit their wafer diameters to only a few sizes.

Our wafers range from one inch to up to six inches in diameter.

Our wafers range from one inch to up to eight inches in diameter.

We also produce substrates with customer defined specifications, which may range in thickness, smoothness or flatness and may include adding special additional materials, such as iron or sulfur.

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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.

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.

O ne customer, Landmark, represented 15% and 11% of our revenue for the years ended December 31, 2022 and 2020, respectively, and no customer represented more than 10% of our revenue for the year ended December 31, 2021 .

Our top five customers, although not the same five customers for each period, represented 34% of our revenue for the year 2022, 26% of our revenue for 2021 and 32% of our revenue for 2020.

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We use a two-stage wafer manufacturing process.

The first stage deploys our VGF technology for the crystal growth of single element or compound element ingots in diameters currently ranging from one inch to six inches.

The first stage deploys our VGF technology for the crystal growth of single element or compound element ingots in diameters currently ranging from one inch to eight inches.

The growth process occurs in high temperature furnaces built using our proprietary designs.

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We intend to increase the level of automation, particularly in cleaning the wafers.

In 2015, we purchased wafer processing equipment from Hitachi Metals to help us increase automation in our production line and, therefore, reduce variability and defects.

In addition, we secured a manufacturing license from Hitachi Metals.

This license includes detailed work instructions for using the equipment purchased and allows us to apply the licensed proprietary wafer processing technology at any step and on any form of equipment in our line.

Due to potential defects, yield is a key factor in our manufacturing cost.

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

In 2015, we purchased wafer processing equipment.

In addition, we secured a manufacturing license.

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.

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, high-purity arsenic, germanium, germanium dioxide, pBN and boron oxide.

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.

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

We developed a proprietary process technology that enables us to recycle remnants of indium phosphide processing material.

The process was introduced into manufacturing in 2022.

The process involves capturing certain InP waste materials generated in the manufacturing process.

These materials can then be re-processed and cycled back into the normal process procedures.

Not only is this beneficial for environmental reasons, it also reduces our total material costs and, ultimately, improves our gross margin.

We are continuing this recycling effort and expect to apply this process to gallium arsenide processing in the future.

Sales and Marketing

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

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

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

Specialty material wafers are scientifically complicated.

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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% of our revenue during each of 2021, 2020 and 2019.

Sales to customers outside North America (primarily the United States) accounted for approximately 86% of our revenue for 2022 and approximately 90% of our revenue during each of 2021 and 2020.

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 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.

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In 2015, we acquired certain proprietary InP crystal growth technology and equipment from Crystacomm.

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

In anticipation of a growth in demand for low EPD six-inch wafers, we have focused our development efforts on increasing our yield of such wafers.

Certain micro devices, such as those used in industrial lasers, require GaAs wafers with very low EPD.

Low EPD will also be required for GaAs 8-inch diameter wafers that will be used in micro LED applications and InP wafers that will be used in certain high-end applications.

Low EPD has been, and will remain, a focus in our research and development efforts.

Our current substrate research and development activities focus on continued development and enhancement of GaAs, InP and Ge substrates, including improved yield, enhanced surface and electrical characteristics and uniformity, greater substrate strength and increased crystal length.

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It is important to remove any residual cleaning agents from each wafer to ensure that the epitaxial growth process is not encumbered by residual chemicals on the wafer.

As a manufacturing company, we must constantly improve our manufacturing processes to remain competitive, and our research and development programs must be integrated into our manufacturing lines.

All of our research and development is conducted at our manufacturing facilities and the process technology developed by our China teams over the last 20 years enables us to remain competitive and to provide high-quality wafer substrates to our customers.

Our China research and development teams must continue to stay close to the manufacturing sites and develop new process steps, features and benefits.

We believe our teams are fully capable of moving the process technology forward.

Our consolidated subsidiaries conduct research and development, focusing on gallium alloys, gallium refinement and pyrolytic boron nitride crucibles used in high temperature crystal growth.

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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.

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Our success and the competitive position of our VGF technology depend on our ability to maintain our proprietary process technology secrets and other intellectual property protections.

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 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.

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In addition to proprietary process trade secrets, we also file patents.

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

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.

To date, we have been issued 111 patents that relate to our VGF products and processes;

83 in China, 11 in the United States, 8 in Japan, 4 in Taiwan, 3 in the European Union, and 2 in Germany.

Patents have a protected life of 20 years (or 10 years for utility model patents in China) from their filing dates.

Our patents have expiration dates ranging from 2023 to 2038.

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

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.

We have several patent applications pending in China, United States, and rest of the world.

Furthermore, in aggregate, our consolidated raw material companies have been issued 59 patents in China, including 26 patents issued to JinMei and 59 patents issued to BoYu.

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

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If we fail to comply with applicable regulations, we could be subject to substantial liability for clean-up efforts, personal injury, fines or suspension or be forced to cease our operations, and/or suspend or terminate the development, manufacture or use of certain of our products, the use of our facilities, or the use of our real property, each of which could have a material adverse effect on our business, financial condition and results of operations.

The regulatory landscape shifts and changes in China as that country attempts to address its environmental pollution.

The regulatory landscape shifts and changes in China as that country works to improve the environment.

Because we manufacture all of our products in China, we are subject to an evolving set of regulations that could require changes in our equipment and processes and require us to obtain new permits.

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In aggregate, we and our consolidated raw material companies had 1,559 employees, of whom 1,158 were principally engaged in manufacturing, 184 in sales and administration and 217 in research and development.

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

Of these 1,559 employees, 26, consisting of sales and marketing, accounting and finance, administration and corporate executives were located in the United States, one in

France and 1,532 in China.

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

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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 to our 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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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 file electronically with the 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.

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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