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Item 1. Business

2024-03-15 compared with 2023-03-16 · 134 added, 153 removed, 424 unchanged (40% of the section changed)

(“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.

AXT is a worldwide materials science company that develops and produces high-performance compound and single element semiconductor substrates, also known as wafers.

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.

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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.

Data centers use InP devices for high-speed optical data transmission.

We believe the growth of AI applications will increase the need for high-speed data transfer which may lead to an increase in InP substrate demand from such data centers.

Currently, InP substrates are being used in certain consumer products, including proximity sensors in mobile devices, 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 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.

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

Semi-conducting GaAs substrates are used to create opto-electronic products, such as light emitting diodes (LEDs) that are used in a wide range of applications including automotive lighting, horticulture, signage, display, sensors and machine vision.

Semi-conducting GaAs substrates are also used in making industrial lasers.

GaAs wafers could also be used for making vertical cavity surface emitting lasers (VCSELs) for facial recognition 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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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.

A 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 antimonite and gallium phosphide ingots, and other materials and alloys.

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• Data center connectivity using light/lasers

• High-speed data transfer in data centers to support AI applications

• 5G communications

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• Photonic Integrated circuits (PICs)

• High efficiency terrestrial solar cells (CPV)

• Thermo-Photovoltaics (TPV’s)

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

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• Screen displays using micro-LEDs

1”, 2”, 3”, 4”, 5", 6”

1”, 2”, 3”, 4”, 5", 6”,8’

• Printer head lasers and LEDs

(8” in sample quantities)

• 3-D sensing using VCSELs

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• Used when growing single-crystal compound semiconductor ingots

• Used as effusion rings growing OLED tools

• Used as effusion rings when growing OLED tools

pBN insulating parts

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

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

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

The PRC generally has favorable costs for facilities and labor compared with comparable facilities in the United States, Europe or Japan.

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

In 2015, the Beijing city government announced its decision to move most of its offices into the district where our original manufacturing facility is currently located (the Tongzhou district) and the Beijing city government has moved 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.

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.

To create room and upgrade the district, the city instructed virtually all existing manufacturing companies, including Tongmei, 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 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.

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

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

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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.

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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 each of our sites.

We believe our success in the relocation and our ability to add capacity in the future gives us competitive advantages.

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

New 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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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.

dollars for this Annual Report on Form 10-K.

The remaining investment of approximately $1.5 million of new capital was funded in January 2021.

The government approved the approximately $49 million investment in its entirety on January 25, 2021.

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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.

Subject to review and approval by the CSRC and other authorities, Tongmei hopes to accomplish this goal in the coming months.

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

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

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

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

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.

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

increased the number of customers and employees attributable to Tongmei as well as increased 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”).

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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 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 part of 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.

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The future impact of tariffs and trade wars is uncertain.

Effective as of August 1, 2023, the PRC government instituted a requirement for export licenses for gallium and germanium-related materials and the derivative products using these materials.

Tongmei is required to apply for export licenses for gallium arsenide and germanium wafer substrates and each application must state the end use of the product exported.

These regulations have required a new level of administration by Tongmei.

In some cases, the PRC government has not issued the requisite licenses and our shipments have been delayed.

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.

We licensed to our PRC subsidiaries intellectual property and received from our PRC subsidiaries royalty payments or one-time fees.

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”).

In the past, we sold to our PRC subsidiaries capital equipment that we purchased at the request of our PRC subsidiaries and for which we were reimbursed by the applicable PRC subsidiary.

In recent years, Tongmei purchases capital equipment from suppliers in Taiwan, Japan, China, Europe or South Korea.

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

For the years ended December 31, 2023, 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 $4.3 million, $2.9 million and $774,000, respectively.

For years ended December 31, 2023 and 2022, 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.

In the year ended December 31, 2023, we continued the settlement of amounts owed under our transfer pricing arrangements in the ordinary course of business.

We have no current intentions to distribute earnings to our investors under our corporate structure.

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

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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.

Please carefully read the “Risk Factors” in this Annual Report on Form 10-K in Item 1A below, including Category III, “Risks Related to International Aspects of Our Business”.

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

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● 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.

● Although the audit report 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 LLP (“BPM”), which is registered with the 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.

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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.

BPM is headquartered in the United States and not in the PRC or Hong Kong.

As such, BPM is 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.

See “Although the audit report is prepared by an independent registered public accounting firm that 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 the section entitled “Risk Factors” in Item 1A below for further information on risks related 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, 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.

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

Data centers use InP devices for high-speed optical data transmission.

We believe the growth of AI applications will increase the need for high speed data transfer, which may lead to an increase in InP substrate demand from such data centers.

Currently, InP substrates are being used in certain consumer products, including proximity sensors in mobile devices, biometric wearables and other health monitoring applications.

In recent years, InP demand has increased.

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.

Semi-conducting GaAs substrates are used to create opto-electronic products, including light emitting diodes (LEDs) that are used for a wide range of applications including automotive lighting, horticulture, signage, display, sensors and machine vision.

They are also used in making industrial lasers.

GaAs wafers could also be used for making vertical cavity surface emitting lasers (VCSELs) for facial recognition 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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We believe that we benefit from the following advantages:

● New facilities, equipment and added 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 .

● 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 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.

We believe our InP wafers have the lowest defect densities, stress and slip lines on the market, enabling our customers to achieve the highest wafer fab and device yields.

● We believe our InP substrates are best in class.

We believe our InP substrates have the lowest defect densities and lowest stress and slip lines on the market and are best in class.

Our InP substrates enable our customers to achieve the highest wafer fab and device yields.

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.

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

We intend to promote our track record of successfully adding capacity as the market expands.

Further, we believe we can be the dominant supplier in the emerging 6-inch diameter market.

Already, our InP substrates have reached production in at least two well-known consumer products.

Also, one of our largest data center upgrade customers works closely with us as a partner.

Our advantages increase with larger diameters, which the industry is starting to demand, and we believe our superior technology will converge with new demands from data centers that are driven by AI applications, additional consumer application wins and other data center and 5G/telecom applications .

● New facilities, equipment and added capacity .

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

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

We believe this provides us with a more reliable supply of, and shorter lead-times for, the raw materials central to our final manufactured products.

Customers find this business model attractive.

Revenue from the sale of raw materials provides further diversity in our customer base and business model .

● Unique access to capital if needed to expand capacity.

We believe the combination of access to both the U.S.

and China capital markets presents a strong position to our customers and gives us an advantage over our competitors.

● 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.

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

● 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.

In recent years customer demand for low etch pit density (“EPD”) GaAs wafer substrates has increased.

The most recent example is the requirement for 8-inch wafers GaAs.

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.

As we qualify low EPD wafers from our new location, we believe the quality of our low EPD wafers and our ability to expand manufacturing capacity quickly will enable us to support new applications and generate additional revenue.

We believe the quality of our low EPD wafers will enable us to support new applications and generate additional revenue.

● Proprietary process technology drives manufacturing.

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This also creates a barrier to entry.

● Low-cost manufacturing operation in China.

As of December 31, 2022, 1,532 of our 1,559 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 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 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 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.

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.

Our strategy allows our consolidated subsidiaries to also sell raw materials in the open market to third parties.

Revenue from non-substrate products provides further diversity in our customer base and business model.

● Business model unique among current competitors.

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

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.

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

We are known in the marketplace to be knowledgeable and responsive.

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

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As cloud-based data centers continue to combine integrated circuits and InP-based lasers to transfer data through light, we believe there will be increased demand for InP substrates.

More recently InP is being used in 5G infrastructure.

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.

We are continuing to add manufacturing capacity for InP to support the growth for this product line.

End market applications using our wafer substrate products often have long product life cycles.

We believe the end market applications using InP could have product life cycles that are similar to the long product life cycles of end market applications using GaAs.

In addition to adding manufacturing capacity, we are continuing to invest in InP crystal growth technology and wafer processing technology.

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

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.

We believe 3-D sensing technology will also be used as sensors in driverless automobiles.

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

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 .

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 supplier for customers.

We intend to promote our capabilities as we believe we provide “best in class” InP wafers.

On the horizon, AI will use InP for high-speed data transmission.

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

● Promote flagship products:

8-inch GaAs and 6-inch InP.

We intend to promote our technological strengths by showcasing our success in developing larger diameter wafers.

Our 8-inch GaAs product has crossed several milestones and is now shipping in small quantities.

The InP development will initially target a consumer market.

● Expand our recycling program.

We have successfully deployed InP recycling and have developed a recycling program for GaAs.

Recycling can lower our manufacturing costs and it is also good for the environment.

Some customers require recycling programs.

● Showcase our new facilities.

With travel restrictions largely removed, we plan to host more customers that tour our facilities.

We had several very positive visits in 2023 and plan to increase the number of visits in 2024.

● Strengthen our raw materials supply chain .

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

Over the years, we have established or invested in raw material companies in China that are an integral part of our supply chain.

We will continue to provide strategic support to these companies and they, in turn, will continue to be the backbone of our supply chain.

We have identified some new steps that will make our supply chain even stronger.

● 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 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.

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

● Increase manufacturing efficiencies.

The recent industry-wide inventory corrections and reduced manufacturing volumes impacted our manufacturing efficiencies.

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

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

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.

Over the years, we have established or invested in raw material companies in China that are an integral part of our supply chain.

We will continue to provide strategic support to these companies and they, in turn, will continue to be the backbone of our supply chain.

We plan to work closely with these companies to increase their productivity and improve their financial performance as they continue to support our supply chain.

● Materials of the future.

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We do not grow the epitaxial layer.

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

We sell the majority of our substrates to companies that specialize

in applying the epitaxial layer.

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

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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.

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), 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.

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.

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

InP crystal growth relies on extreme pressure within the crucible.

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It is this combination of variables and the required methods to control them that create a barrier to entry.

We believe our long-term investment in InP research and development has resulted in a substantive body of proprietary knowledge.

We believe our long-term investment in research and development has resulted in a substantive body of proprietary knowledge.

After growing the crystalline ingot, the material is then sliced into individual substrates or wafers.

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

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.

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

On the horizon, we believe InP wafers will be used in artificial intelligence hardware architecture for high-speed data transmission.

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).

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.

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 facial recognition 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.

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

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

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 Ge substrates in two-, four- and six-inch

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.

More recently we have successfully developed 8-inch GaAs wafers and are selling them in small quantities.

Raw Materials.

Our two consolidated raw material 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 consolidated raw material 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.

One of these consolidated companies produces pBN crucibles and the other consolidated company converts raw gallium to purified gallium and produces InP base material.

A third newly formed subsidiary will focus on production and sale of arsenic.

We promote our product diversity as a way to differentiate ourselves in the market.

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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.

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 .

No customer represented more than 10% of our revenue for the years ended December 31, 2023 and 2021 and o ne customer, Landmark, represented 15% of our revenue for the year ended December 31, 2022.

Our top five customers, although not the same five customers for each period, represented 25% of our revenue for the year 2023, 34% of our revenue for 2022 and 26% of our revenue for 2021.

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

Growing the crystalline elements into cylindrical ingots takes a number of days, depending on the diameter and length of the ingot produced.

Growing the crystalline elements into cylindrical ingots takes a number of days, depending on the material, the diameter and length of the ingot produced.

The crystal growth stage utilizes AXT proprietary process technology.

The second stage includes slicing or sawing the ingot into wafers or substrates, then processing each substrate to strict specifications, including grinding to reduce the thickness, beveling the edges, and then polishing and cleaning each substrate.

The second stage includes slicing or

sawing the ingot into wafers or substrates, then processing each substrate to strict specifications, including grinding to reduce the thickness, beveling the edges, and then polishing and cleaning each substrate.

Many of the wafer processing steps use chemical baths and properly cleaning the wafer is a critical process.

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They may also result from variances in the manufacturing process.

We have many steps in our line that are partially or fully automated but other manufacturing steps are performed manually.

We have many steps in our manufacturing line that are partially or fully automated but other manufacturing steps are performed manually.

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

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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.

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.

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

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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.

We have also developed a recycling process for gallium arsenide and expect to deploy it when final permits are issued.

Sales and Marketing

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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.

Our direct sales force 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 86% of our revenue for 2022 and approximately 90% of our revenue during each of 2021 and 2020.

Sales to customers outside North America (primarily the United States) accounted for approximately 90% of our revenue for 2023 and approximately 86% and 90% of our revenue during each of 2022 and 2021, respectively.

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

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.

Our raw material companies sell specialty raw materials including 4N, 5N, 6N, 7N and 8N gallium, boron oxide, germanium, arsenic, germanium dioxide, and pyrolytic boron nitride crucibles used, for example, in crystal growth processes, epitaxial layer growth in MBE reactors and 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.

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Crystal growth of specialty earth materials becomes significantly more difficult as the ingot diameter increases because a consistent temperature, and in the case of InP, consistent control of pressure, must be applied over a larger surface area.

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

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 will also be required for GaAs 8-inch diameter wafers 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.

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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.

We are also focused on developing 6-inch InP wafer substrates and on increasing yields on the recently developed 8-inch GaAs wafers substrates.

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.

All of our research and development is conducted at our manufacturing facilities and the process technology developed by the 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.

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Qualified suppliers must meet industry- standard specifications for quality, on-time delivery and customer support.

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.

Once a substrate supplier has qualified with a customer, then 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.

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Intellectual Property

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 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.

Our success and the competitive position of our VGF technology depend on our ability to maintain the proprietary process technology secrets developed by teams in China 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 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 in China 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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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.

Furthermore, in aggregate, our consolidated raw material companies have been issued 112 patents in China, including 35 patents issued to JinMei, 66 patents issued to BoYu and 11 patents issued to ChaoYang XinMei High Purity Semiconductor Materials Co., Ltd.

(“ChaoYang XinMei”).

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

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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.

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, which may increase our capital expenditures and require us to obtain new permits.

In 2017, China increased its focus on environmental concerns which increased pressure on manufacturing companies.

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In aggregate, we and our consolidated raw material companies had 1,456 employees, of whom 1,044 were principally engaged in manufacturing, 177 in sales and administration and 235 in research and development.

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.

Of these 1,456 employees, 24, consisting of sales and marketing, accounting and finance, administration and corporate executives were located in the United States, one in France and 1,431 in China.

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

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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