AXT
Annual Report 2011

Plain-text annual report

FintUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 Form 10-K(Mark One)xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2011ORoTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to Commission file number: 000-24085 AXT, INC.(Exact name of registrant as specified in its charter) Delaware 94-3031310(State or other jurisdiction of (I.R.S. Employerincorporation or organization) Identification No.)4281 Technology Drive, Fremont, California 94538(Address of principal executive offices) (Zip Code) Registrant’s telephone number, including area code: (510) 683-5900Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registeredCommon Stock, $0.001 par value The NASDAQ Stock Market LLC Securities registered pursuant to Section 12(g) of the Act:None Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act o Yes x No Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes x No Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. x Yes o No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data Filerequired to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorterperiod that the registrant was required to submit and post such files). x Yes o No Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein,and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form10-K or any amendment to this Form 10-K. x Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Act. (Check one): Large accelerated filer oAccelerated filer xNon-accelerated filer o(Do not check if a smaller reportingcompany)Smaller reporting company o Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes x No The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing sale price of $8.48 for the commonstock on June 30, 2011 as reported on the Nasdaq Global Market, was approximately $208,003,000. Shares of common stock held by each officer, directorand by each person who owns 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. Thisdetermination of affiliate status is not a conclusive determination for other purposes. As of March 2, 2012, 32,321,687 shares, $0.001 par value, of the registrant’s common stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive proxy statement for the registrant’s 2012 annual meeting of stockholders to be filed with the Commission pursuant toRegulation 14A not later than 120 days after the end of the fiscal year covered by this form are incorporated by reference into Part III of this Form 10-K report.Except for those portions specifically incorporated by reference herein, such document shall not be deemed to be filed with the Commission as part of thisForm 10-K.  TABLE OF CONTENTS PagePART IItem 1.Business2Item 1A.Risk Factors10Item 1B.Unresolved Staff Comments24Item 2.Properties25Item 3.Legal Proceedings25Item 4.Mine Safety Disclosures25PART IIItem 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities26Item 6.Selected Consolidated Financial Data28Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations29Item 7A.Quantitative and Qualitative Disclosures About Market Risk41Item 8.Consolidated Financial Statements and Supplementary Data43Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure43Item 9A.Controls and Procedures43Item 9B.Other Information44PART IIIItem 10.Directors, Executive Officers and Corporate Governance46Item 11.Executive Compensation46Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters46Item 13.Certain Relationships and Related Transactions and Director Independence46Item 14.Principal Accountant Fees and Services46PART IVItem 15.Exhibits and Financial Statement Schedules47 1Table of Contents PART I This Annual Report (including the following section regarding Management’s Discussion and Analysis of Financial Condition and Results ofOperations) contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,”“anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this Annual Report. Additionally, statements concerningfuture matters such as industry trends, customer demand, the development of new products, enhancements or technologies, sales levels, expense levels,planned investments and other statements regarding matters that are not historical are forward-looking statements. Although forward-looking statements in this Annual Report reflect the good faith judgment of our management, such statements can only be based onfacts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results andoutcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause orcontribute to such differences in results and outcomes include without limitation those discussed under the heading “Risk Factors” in Item 1A below, as wellas those discussed elsewhere in this Annual Report. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as ofthe date of this Annual Report. We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance thatmay arise after the date of this Annual Report. Readers are urged to carefully review and consider the various disclosures made in this Annual Report, whichattempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects. Item 1. Business AXT, Inc. (“AXT”, “we,” “us,” and “our” refer to AXT, Inc. and all of its subsidiaries) is a leading worldwide developer and producer of high-performance compound and single element semiconductor substrates, including substrates made from gallium arsenide (GaAs), indium phosphide (InP) andgermanium (Ge). We currently sell the following substrate products in the sizes and for the applications indicated: Substrates SubstrateDiameter ApplicationsGaAs (semi-insulating) 2”, 3”, 4”, 5”, 6” ● Power amplifiers and radio frequencyintegrated circuits for wireless handsets (cellphones) ● Direct broadcast television ● High-performance transistors ● Satellite communicationsGaAs (semi-conducting) 2”, 3”, 4” ● High brightness light emitting diodes ● Lasers ● Optical couplersInP 2”, 3”, 4” ● Broadband and fiber opticcommunications Ge 2”, 4”, 6” ● Satellite and terrestrial solar cells ● Optical applications We manufacture all of our semiconductor substrates using our proprietary vertical gradient freeze (VGF) technology. Most of our revenue is fromsales of GaAs substrates. We manufacture all of our products in the People’s Republic of China (PRC or China), which generally has favorable costs forfacilities and labor compared with comparable facilities in the United States, Europe or Japan. We also have joint ventures in China which provide us pricingadvantages, reliable supply and enhanced sourcing lead-times for key raw materials that are central to our final manufactured products. These joint venturesproduce products including 99.99% pure gallium (4N Ga), high purity gallium, arsenic, germanium, germanium dioxide, paralytic boron nitride (pBN)crucibles and boron oxide (B2O3). Our ownership interest in these entities ranges from 25% to 83%. We consolidate, for accounting purposes, the jointventures in which we have a majority or controlling financial interest and employ equity accounting for the joint ventures in which we have a smallerownership interest. We purchase portions of the materials produced by these ventures for our own use and the joint ventures sell the remainder of theirproduction to third parties. We use our direct sales force in the United States and China, and independent sales representatives in Europe and Asia, to marketour substrates. Our ten largest customers for 2011 were: AZUR Space Solar Power GmbH, Beijing China Crystal Technology, Ltd., the IQE group, Nan DaGuang Dang, Osram Opto Semiconductors GmbH, Shin-Etsu Handoutai Co., Ltd., Sumika Electronic Materials, Inc, Sumitomo Chemical Co., Ltd.,TianJin Sanan Optoelectronics Co. Ltd. and Visual Photonics Epitaxy Co. We believe that, as the demand for compound semiconductor substrates increase,we are well positioned to leverage our PRC-based manufacturing capabilities and access to favorably priced raw materials to increase our market share. 2Table of Contents Positive industry trends in the wireless device, LED and solar cell markets, as well as healthy demand for our products and continued advantages inour manufacturing cost structure give us confidence in our ability to continue to drive positive results in our business in 2012. Our qualification efforts inboth gallium arsenide and germanium substrates have been successful and we are pleased with our increasing diversification in these areas. While the volatilebusiness and financial markets are prompting us to continue to take a conservative approach to our business, we remain optimistic about our business.We were incorporated in California in December 1986 and reincorporated in Delaware in May 1998. We changed our name from American XtalTechnology, Inc. to AXT, Inc. in July 2000. Our principal corporate office is located at 4281 Technology Drive, Fremont, California 94538, and our telephonenumber at this address is (510) 683-5900. Industry Background Certain electronic and opto-electronic applications have performance requirements that exceed the capabilities of conventional silicon substrates andoften require high-performance compound or single element substrates. Examples of higher performance non-silicon based substrates include GaAs, InP,gallium nitride (GaN), silicon carbide (SiC) and Ge. For example, power amplifiers and radio frequency integrated circuits for wireless handsets and other wireless devices are made with semi-insulatingGaAs substrates. Semi-conducting GaAs substrates are used to create opto-electronic products including high brightness light emitting diodes (HBLEDs) thatare often used to backlight wireless handsets and liquid crystal display (LCD) TVs and are also used for automotive panels, signage, display and lightingapplications. InP is a high performance semiconductor substrate used in broadband and fiber optic applications. Ge substrates are used in emergingapplications such as solar cells for space and terrestrial photovoltaic applications. Our business and operating results depend in significant part upon capital expenditures of semiconductor designers and manufacturers, which inturn depend upon the current and anticipated market demand for products incorporating semiconductors from these designers and manufacturers. Ourbusiness also depends in part on worldwide economic conditions. The severe recession in the United States and in other key international economies inprevious years have decreased market demand for products incorporating semiconductors, but we began to see improvement in the demand environment forour products worldwide in the second half of 2009 that contributed to our strengthening revenue results. During 2010, one of the most interesting areas was thegrowth of smart phones and other sophisticated Internet-connected devices, such as tablets and netbooks that supported more advanced features and access tonew web-based applications and services. In addition to improving sales of these products, the benefit to AXT from the sales of more feature-rich,sophisticated devices was that they required greater gallium arsenide content in order to meet the speed and functionality requirements that consumers havecome to expect. Although our business experienced some fluctuation of customers’ demand in the wireless market in 2011, we believe there continues to beareas of opportunity for our business in the long term. As we move into 2012, we expect that the demand for gallium arsenide product will be driven by the proliferation of wireless-enabled devices and theincreasing rollout of 3G and 4G smartphones that support substantially faster download speeds. This network upgrade enables full performance capability ofthe video, gaming and Internet browsing capabilities of these next generation handsets and wireless devices and is driving increases in wireless subscribers inmajor geographic areas around the world as well as a compelling upgrade cycle for new devices. The LED market has experienced growth in 2011 in a broad range of applications, such as backlighting, signage, general illumination andautomotive. LED-based products are becoming increasingly common as the technology offers benefits in terms of cost, efficiency and performance over oldertechnologies. AXT has historically focused its efforts in the high-end market and while we plan to continue to do so, we are also exploring opportunities toparticipate in the higher-volume, lower-end market as well. To date, this market has been geared towards novelty products and has therefore been very marginconstrained. However, we believe that this market is also providing the entry into general illumination applications, as these applications will need lower costLED devices in order to gain critical mass. Industry leaders have been making significant product development noted by the declining selling prices of LED-based light bulbs and we believe it will be important to have a presence in this market as it develops. The concentrator photovoltaic (CPV) market for germanium also continued to grow in 2011, albeit from a smaller base. We expect growth in theglobal solar industry in 2012 as there is increasing interest in the replacement of fossil fuel resources with sustainable alternatives such as solar power andsolar modules and a renewed interest in renewable energy technology, particularly in the United States, Europe, Asia and the Middle East. At the same time, webelieve that improvements in conversion efficiency for germanium are occurring, which we believe will enable this technology to become more affordable andtherefore, more widely utilized, in the future. 3Table of Contents The AXT Advantage We believe that we benefit from the following advantages: ●Low-cost manufacturing operation in the PRC. Since 2004, we have manufactured all of our products in China, which generally hasfavorable costs for facilities and labor compared to comparable facilities in the United States or Europe. As of December 31, 2011,approximately 1,284 of our 1,308 employees (including employees at our consolidated joint ventures) are in China. Our primary competitorshave their major manufacturing operations in Germany or Japan and have limited manufacturing operations starting in China. ●Favorable access to raw materials. Our joint ventures in China provide us favorable pricing, reliable supply and shorter lead-times for rawmaterials central to our final manufactured products. These materials include gallium, arsenic, germanium, germanium dioxide, paralyticboron nitride crucibles and boron oxide. As a result, we believe that our joint ventures will enable us to meet potential increases in demand fromour customers by providing a more stable supply of raw materials at lower prices. ●Flexible manufacturing infrastructure. Our total manufacturing space in China is approximately 190,000 square feet which we currently usefor wafer processing. We believe that our competitors typically purchase crystal growing furnaces from original equipment manufacturers. Incontrast, we design and build our own VGF crystal growing furnaces, which we believe should allow us to increase our production capacitymore quickly and cost effectively. Given these advantages, when the worldwide economies continued to improve in 2011 after the recovery from the worldwide recession, weexperienced increased demand for our compound semiconductor substrates. We believe that we are well positioned to leverage our PRC-based manufacturingcapabilities and access to favorably priced raw materials to increase our revenue and market share. Strategy Our goal is to become the leading worldwide supplier of high-performance compound and single element semiconductor substrates. Key elements ofour strategy include: Continue to provide customers high and consistent quality products and service. We seek to improve our manufacturing processes continuallyin order to meet and exceed our customers’ high product quality standards, ensure on-time delivery of our products and optimize the cost of ownership. Weexpect to continue to improve our manufacturing processes in 2012 by adding new facilities, some additional equipment, automating additional processes, andstreamlining performance. In addition, we plan to continue to enhance our support functions, including service and applications engineering. Increase market share. We intend to leverage our product quality, competitive pricing and lead times both to establish relationships with newcustomers and to increase our market share with current customers in the integrated circuits for wireless devices and HBLED markets. Flexible capacity to meet customers’ increasing demand for substrates. Since 2006, we have tripled our 6-inch semi-insulating gallium arsenidesubstrate capacity in order to scale with increasing demand. As we enter 2012, we are continuing to see increasing demand for all sizes of our GaAs substratesand are reviewing our GaAs substrate capacity in order to make appropriate adjustments. In January 2012, we agreed with the Administrative Commission of Tianjin Economy and Technology Development Zone to establish a secondmanufacturing facility in Tianjin, China. The arrangement provides us with land use rights for approximately 32 acres of industrial land located in YixianScientific and Industrial Park to construct a compound semiconductor substrate manufacturing facility that would be completed in phases by 2017. We havecommitted to invest $12.5 million in the first phase of the construction of the facility and have an understanding with our BoYu joint venture that it willcommit the RMB 32.0 million, or approximately $5.0 million, that is anticipated to be required for the portion of the project devoted to crystal support, inexchange for land use rights, enterprise and individual income tax rebates, employee hiring and development subsidies, and other benefits. 4Table of Contents Establish leadership in emerging substrate applications. We intend to expand our served markets by exploring new opportunities for oursubstrates and we continue to work with our customers to enhance our substrate product offering. We have worked on the development of a 6” Ge substratebecause the larger usable area in a 6-inch wafer over a 4-inch wafer will substantially reduce the cost of Ge solar cell manufacturing, which we believe isessential for commercial adoption of Ge solar cell technology for terrestrial applications. In 2011, we continued to experience a noticeable increase in demand for our Ge substrates due to improving economic conditions as well as newcustomer qualifications. As a result, we increased our Ge substrate capacity in 2011 and will closely follow future demand increases and adjust ourproduction capacity accordingly. Technology enhancements. We continue to focus on technology development in the areas of VGF technology enhancement. We are working toincrease the VGF ingot length and improve our single crystal yield rate. We also continue to work to improve our wafer processing technologies to give us betteryield, lower production costs and better quality and performance for our customers. Technology There are basically three technologies for crystal growth in our business: Vertical Gradient Freeze (VGF), Liquid Encapsulated Czochralski (LEC),and Czochralski (CZ). Our core technologies include our proprietary VGF technique used to produce high-quality crystals that are processed into compoundsubstrates, and the technologies of our joint venture companies, which enable us to manufacture a range of products that are used in the manufacture ofcompound semiconductor substrates or can be sold as raw materials to third parties. Our VGF technique is designed to control the crystal-growth process with minimal temperature variation and is the current technique we use toproduce our GaAs, InP and Ge substrates. Unlike traditional techniques, our VGF technique places the hot compound melt above the cool crystal, andminimizes the temperature gradient between the crystal and the melt which reduces the turbulence at the interface of the melt and the solid crystal. Incomparison, in the LEC technique the melt and crystal are inverted, there is a higher temperature gradient between the melt and the crystal, and moreturbulence at the interface of the melt and solid crystal. These aspects of the VGF technique enable us to grow crystals that have a relatively low defect densityand high uniformity. The crystal and the resulting substrate are mechanically strong, resulting in lower breakage rates during a customer’s manufacturingprocess. Since the temperature gradient is controlled electronically rather than by physical movement, the sensitive crystal is not disturbed as it may be duringsome competitors’ VGF-like growth processes. In addition, the melt and growing crystal are contained in a closed chamber, which isolates the crystal from theoutside environment to reduce potential contamination. This substrate isolation allows for more precise control of the gallium-to-arsenic ratio, resulting in betterconsistency and uniformity of the crystals. 5Table of Contents Our VGF technique offers several benefits for producing our GaAs substrates when compared to traditional crystal growing technologies. TheHorizontal Bridgman (HB) technique is the traditional method for producing semi-conducting GaAs substrates for opto-electronic applications, but because ofthe techniques used to hold the GaAs melt, the HB technique cannot be used cost-effectively to produce substrates greater than three inches in diameter. Inaddition, the HB technique houses the GaAs melt in a quartz container during the growth process, which can contaminate the GaAs melt with siliconimpurities, making it unsuitable for producing semi-insulating GaAs substrates. Our VGF technique also offers advantages over the LEC technique for producing semi-insulating GaAs substrates for wireless applications. Unlikethe VGF technique, the LEC technique can result in greater turbulence in the melt, and at a temperature gradient that is significantly higher than the VGFtechnique, which can cause LEC-grown crystals to have a higher dislocation density than VGF-grown crystals, resulting in a higher rate of breakage duringthe device manufacturing process. However, the LEC technique can be useful for GaAs semi-conducting substrates since the LED application specificationsand requirements are less stringent than those of wireless applications. Products We design, develop, manufacture and distribute high-performance semiconductor substrates. We make semi-insulating GaAs substrates used inapplications such as amplifiers and switches for wireless devices, and semi-conducting GaAs substrates used to create opto-electronic products includingHBLEDs, which are often used to backlight wireless handsets and LCD TVs and for automotive, signage, display and lighting applications. InP is a high-performance semiconductor substrate used in broadband and fiber optic applications. Ge substrates are used in emerging applications such as triple junctionsolar cells for space and terrestrial photovoltaic applications and for optical applications. The table below sets forth our products and selected applications: Product ApplicationsSubstrates ElectronicOpto-electronicGaAs ●Cellular phones●LEDs ●Direct broadcast television●Lasers ●High-performance transistors●Optical couplers ●Satellite communications InP ●Fiber optic communications●Lasers ●Satellite communications ●High-performance transistors ●Automotive collision avoidance radar Ge ●Satellite and terrestrial solar cells●Optical applications Substrates. We currently sell compound substrates manufactured from GaAs and InP, as well as single-element substrates manufactured from Ge.We supply GaAs substrates in two-, three-, four-, five- and six-inch diameters. We supply InP substrates in two-, three- and four-inch diameters, and Gesubstrates in two-, four- and six-inch diameters. Materials. We participate in joint ventures in China that sell raw materials used by us in substrate manufacturing and by others. These jointventures produce products including 99.99% pure gallium (4N Ga), high purity gallium, arsenic, and germanium, germanium dioxide, paralytic boronnitride (pBN) crucibles, and boron oxide (B2O3). In 2011 and 2010, sales of raw materials by these joint ventures to third parties were approximately $23.6million and $14.9 million, respectively. The primary costs of manufacturing compound semiconductor substrates are labor, raw materials and manufacturing equipment such as crystalgrowing furnaces. Accordingly, substrate manufacturers, including AXT, are continuing to shift production to larger wafers to reduce manufacturing costs. 6Table of Contents Customers We sell our compound semiconductor substrates and materials worldwide. Our top ten revenue producing customers in 2011 by revenue inalphabetical order were: ● AZUR Space Solar Power GmbH● Shin-Etsu Handoutai Co., Ltd. ● Beijing China Crystal Technology, Ltd.● Sumika Electronic Materials Co., Ltd. ● IQE Group● Sumitomo Chemical Co., Ltd. ● Nan Da Guang Dang● TianJin Sanan Optoelectronics Co., Ltd. ● Osram Opto Semiconductors GmbH ● Visual Photonics Epitaxy Co. Historically, we have sold a significant portion of our products in any particular period to a limited number of customers. IQE Group (IQE, Inc.,IQE RF, LLC, IQE (Europe) Limited, MBE Technology Pte. Ltd., Wafer Technology Ltd.) represented approximately 18% of our revenue for the year endedDecember 31, 2011. One customer represented 19% of the revenue for the year ended December 31, 2010, and one customer represented 15% of the revenue forthe year ended December 31, 2009. Our top five customers represented 35% of our revenue for the year ended December 31, 2011, 40% of our revenue for theyear ended December 31, 2010, and 41% of our revenue for the year ended December 31, 2009. We expect that sales to a small number of customers willcontinue to comprise a significant portion of our revenue in the future. There were two third party customers for the raw materials revenue from our joint ventures that accounted for 15% and 13% of the revenue from rawmaterials sales for the year ended December 31, 2011, two third party customers for our raw materials revenue that accounted for 21% and 19% of the revenuefrom raw materials sales for the year ended December 31, 2010, and three third party customers for our raw materials that accounted for 18%, 13% and 11%of the revenue from raw materials sales for the year ended December 31, 2009. Our joint ventures are a key strategic benefit for us as they give us a strongcompetitive advantage of allowing our customers to work with one supplier for their substrate and raw material requirements. Our raw materials customersinclude chemical companies. Additionally, we sell raw materials to some of the competitors to our substrate business. Manufacturing, Raw Materials and Supplies We believe that our operating results reflect our manufacturing efficiency and high product yields and we continually emphasize quality and processcontrol throughout our manufacturing operations. We manufacture all of our products at our facilities in Beijing, China, which generally has favorable costsfor facilities and labor compared to our previous manufacturing in the United States. We believe that our capital investment and subsequent operating costs arelower for our manufacturing facilities in China relative to the previous facilities in the United States. Although some of our manufacturing operations are fullyautomated and computer monitored or controlled, enhancing reliability and yield, we expect to continue to improve our processes and increase the number ofautomated processes in 2012. We use proprietary equipment in our substrate manufacturing operations to protect our intellectual property and control thetiming and pace of capacity additions. All of our manufacturing facilities are ISO 9001 or 9002 certified. In January 2006, our Beijing facility successfullypassed the ISO 14001 certification audit. We have joint ventures in China that provide us favorable pricing, reliable supply and shorter lead-times for raw materials central to ourmanufactured products including gallium, arsenic, germanium, germanium dioxide, pyrolitic boron nitride crucibles, and boron oxide. We believe that thesejoint ventures have been and will continue to be advantageous in allowing us to procure materials to support our planned growth and cost management goals. Inaddition, we purchase supply parts, components and raw materials from several other domestic and international suppliers. We depend on a single or limitednumber of suppliers for certain critical materials used in the production of our substrates, such as quartz tubing, and polishing solutions. We generallypurchase these materials through standard purchase orders and not pursuant to long-term supply contracts. Although we seek to maintain sufficient inventorylevels of certain materials to guard against interruptions in supply and to meet our near term needs, and have to date been able to obtain sufficient supplies ofmaterials in a timely manner, in the future, we may experience shortages of certain key materials, such as gallium. Sales and Marketing We advertise in trade publications, distribute promotional materials, conduct marketing and sales programs, and participate in industry trade showsand conferences in order to raise market awareness of our products. 7Table of Contents We sell our substrate products directly to customers through our direct salesforce in the U.S. and through independent sales representatives inFrance, Germany, Japan, South Korea, Taiwan and the United Kingdom. Our direct salesforce is knowledgeable in the use of compound and single-elementsubstrates. Our applications engineers work with customers during all stages of the substrate manufacturing process, from developing the precise compositionof the substrate through manufacturing to processing the substrate to the customer’s specifications. We believe that maintaining a close relationship withcustomers and providing them with ongoing engineering support improves customer satisfaction and will provide us with a competitive advantage in sellingother substrates to our customers. International Sales. International sales are an important part of our business. Sales to customers outside North America (primarily United States)accounted for 80% of our revenue in 2011, 78% of our revenue in 2010, and 81% of our revenue in 2009. The primary markets for sales of our substrateproducts outside of the United States are to customers located in Asia and Western Europe. We also sell through our joint ventures raw materials including 4N, 5N, 6N, 7N and 8N gallium, boron oxide, germanium, arsenic, germaniumdioxide, paralytic boron nitride crucibles used in crystal growth and parts for MBE (Molecular Beam Epitaxy). Our joint ventures are a key strategic benefitfor us as they give us a strong competitive advantage by allowing our customers to work with one supplier for all their substrate and raw materialrequirements. Our joint ventures have their own separate salesforce where they also sell directly to their own customers in addition to their supply of rawmaterials to us. Research and Development To maintain and improve our competitive position, we focus our research and development efforts on designing new proprietary processes andproducts, improving the performance of existing products and reducing manufacturing costs. We have assembled a multi-disciplinary team of skilledscientists, engineers and technicians to meet our research and development objectives. 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. During 2011and 2010, we continued to focus research and development resources to reduce surface quality problems we experienced with our GaAs and InP substrates forsome customers, particularly related to surface morphology. Although some major problems related to surface quality have been resolved, we still need tocontinue to improve in this area and expect that this effort in research and development will continue in 2012. In 2011, one of our joint ventures continued towork on research and development projects to qualify for a government incentive program for reduced future tax rates in China. It will continue this effort inthe future. We focus our research and development effort to utilize more of our VGF technique to produce high-purity gallium. Research and development expenses were $2.5 million in 2011, compared with $2.3 million in 2010 and $1.6 million in 2009. We expect our rate ofexpenditure on research and development costs in 2012 to remain constant as we continue to improve on our processes. Our joint ventures will continue theireffort in research and development. Competition The semiconductor substrate industry is characterized by rapid technological change and price erosion, as well as intense foreign and domesticcompetition. We compete in the market for GaAs substrates with our expertise in VGF technology, product quality, response times and prices. However, weface actual and potential competition from a number of established domestic and international companies who may have advantages not available to usincluding substantially greater financial, technical and marketing resources; greater name recognition; and more established relationships in the industry andmay utilize these advantages to expand their product offerings more quickly, adapt to new or emerging technologies and changes in customer requirementsmore quickly, and devote greater resources to the marketing and sale of their products. We believe that the primary competitive factors in the markets in which our substrate products compete are: ●quality; ●price; 8Table of Contents ●performance; ●capacity; ●meeting customer specifications; and ●customer support and satisfaction. Our ability to compete in target markets also depends on factors such as: ●the timing and success of the development and introduction of new products and product features by us and our competitors; ●the availability of adequate sources of raw materials; ●protection of our products by effective use of intellectual property laws; and ●general economic conditions. A compound semiconductor substrate customer typically has two or three substrate suppliers that it has qualified for the production of its products.These qualified suppliers must meet industry-standard specifications for quality, on-time delivery and customer support. Once a substrate supplier hasqualified with a customer, price, consistent quality and current and future product delivery lead times become the most important competitive factors. Asupplier that cannot meet customers’ current lead times or that a customer perceives will not be able to meet future demand and provide consistent quality canlose current market share. Our primary competition in the market for compound semiconductor substrates includes Freiberger Compound Materials, HitachiCable, and Sumitomo Electric Industries. We believe that at least two of our competitors are shipping high volumes of GaAs substrates manufactured using atechnique similar to our VGF technique. In addition, we also face competition from compound semiconductor device manufacturers that produce substratesfor their own internal use, including Hitachi, and from companies such as TriQuint Semiconductors that are actively developing alternative compoundsemiconductor materials. We believe we are the only compound semiconductor substrate supplier to offer a full suite of raw materials and we believe that this gives us a strongcompetitive advantage in our marketplace. Protection of our Intellectual Property Our success and the competitive position of our VGF technique depend on our ability to maintain trade secrets and other intellectual propertyprotections. We rely on a combination of patents, trademark and trade secret laws, non-disclosure agreements and other intellectual property protectionmethods to protect our proprietary technology. We believe that, due to the rapid pace of technological innovation in the markets for our products, our ability toestablish and maintain a position of technology leadership depends as much on the skills of our research and development personnel as upon the legalprotections afforded our existing technologies. To protect our trade secrets, we take certain measures to ensure their secrecy, such as executing non-disclosureagreements with our employees, customers and suppliers. However, reliance on trade secrets is only an effective business practice insofar as trade secretsremain undisclosed and a proprietary product or process is not reverse engineered or independently developed. To date, we have been issued fifteen (15) patents that relate to our VGF products and processes, three (3) in the U.S., two (2) in Japan, eight (8) inChina, one (1) in Canada, and one (1) in Korea, which expire in 2016 (1 U.S.), 2017 (1 JP), 2018 (1 CN), 2020 (2 CN), 2021 (1 JP, 5 CN), 2022 (1 U.S.,1 CA, 1 KR), 2027 (1 U.S.). We have nine (9) U.S. patent applications pending and thirty-two (32) foreign patent applications pending (includingapplications in Patent Cooperation Treaty (“PCT”) and national stage processes) in Europe, Canada, China, Japan and Taiwan, which are based on our USpatents and/or pertain to our VGF-related wafer manufacturing processes. In the normal course of business, we periodically receive and make inquiries regarding possible patent infringement. In dealing with such inquiries,it may become necessary or useful for us to obtain or grant licenses or other rights. However, there can be no assurance that such licenses or rights will beavailable to us on commercially reasonable terms. If we are not able to resolve or settle claims, obtain necessary licenses on commercially reasonable termsand/or successfully prosecute or defend our position, our business, financial condition and results of operations could be materially and adversely affected. 9Table of Contents Environmental Regulations We are subject to federal, state and local environmental laws and regulations, including laws in China as well as the U.S. These laws, rules andregulations govern the use, storage, discharge and disposal of hazardous chemicals during manufacturing, research and development and salesdemonstrations. We maintain a number of environmental, health and safety programs that are primarily preventive in nature. As part of these programs, weregularly monitor ongoing compliance. If we fail to comply with applicable regulations, we could be subject to substantial liability for clean-up efforts,personal injury and fines or suspension or cessation of our operations. Employees As of December 31, 2011, we had 1,308 employees, of whom 1,014 were principally engaged in manufacturing, 137 in sales and administration,and 157 in research and development. Of these employees, 24 were located in the United States and 1,284 in China. As of December 31, 2010, we had 1,302employees, of whom 1,034 were principally engaged in manufacturing, 129 in sales and administration, and 139 in research and development. Of theseemployees, 25 were located in the United States and 1,277 in China.As of December 31, 2011, 1,130 employees in China were represented by unions, but we have never experienced a work stoppage. We consider ourrelations with our employees to be good. Geographical Information Please see Note 15 of our Notes to Consolidated Financial Statements for information regarding our foreign operations, and see “Risks related tointernational aspects of our business” under Item 1A. Risk Factors for further information on risks attendant to our foreign operations and dependence. Available Information Our principal executive offices are located at 4281 Technology Drive, Fremont, CA 94538, and our main telephone number at this address is (510)683-5900. The public may read and copy any material we file with the Securities and Exchange Commission, or SEC, at the SEC’s Public Reference Room at100 F Street, N.E., Washington D.C., 20549. The public may obtain information on the operations of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site http://www.sec.gov that contains reports, proxy and information statements and other information regardingissuers that file electronically with the SEC. Our web site is www.axt.com. We make available, free of charge, on or through our web site, our annual, quarterly and current reports, and anyamendments to those reports as soon as reasonably practicable after those reports are filed with the SEC. The information on our web site does not constitute apart of this Annual Report on Form 10-K and is not incorporated herein. Item 1A. Risk FactorsFor ease of reference, we have divided these risks and uncertainties into the following general categories: ●Risks related to our general business; ●Risks related to international aspects of our business; ●Risks related to our financial results and capital structure; ●Risks related to our intellectual property; and ●Risks related to compliance and other legal matters. 10Table of Contents Risks Related to Our General Business Ongoing financial market volatility and adverse changes in the domestic and global economic environment could have a significant adverse impacton our business, financial condition and operating results. We are subject to the risks arising from adverse changes and uncertainty in domestic and global economies. For example, our business and operatingresults were significantly impacted by the global economic downturn in 2009 due to the effects of the credit market crisis, slower economic activity and agenerally negative economic outlook, a decrease in consumer and business confidence and liquidity concerns, as well as concerns over U.S. government debt.Global market and economic conditions continue to be uncertain and volatile. The possible duration and severity of this adverse economic cycle is unknown.Although we remain well-capitalized and have not suffered any liquidity issues as a result of those events, the cost and availability of funds may be adverselyaffected by illiquid credit markets. Continued turbulence in U.S. and international markets and economies may adversely affect our liquidity, financialcondition and profitability. Another severe or prolonged economic downturn could result in a variety of risks to our business, including: ●increased volatility in our stock price; ●increased volatility in foreign currency exchange rates; ●delays in, or curtailment of, purchasing decisions by our customers or potential customers either as a result of overall economic uncertainty oras a result of their inability to access the liquidity necessary to engage in purchasing initiatives; ●increased credit risk associated with our customers or potential customers, particularly those that may operate in industries most affected bythe economic downturn, such as financial services; and ●impairment of our intangible or other assets. We have experienced and expect to continue to experience delays in customer purchasing decisions or disruptions in normal volume of customerorders that we believe are in part due to the uncertainties in the global economy and an adverse impact on consumer spending. During challenging anduncertain economic times and in tight credit markets, many customers delay or reduce technology purchases. To the extent that the current economic downturnworsens or persists, or any of the above risks occur, our business and operating results could be significantly and adversely affected. The average selling prices of our products may decline over relatively short periods, which may reduce our gross margins. The market for our products is characterized by declining average selling prices resulting from factors such as increased competition, overcapacity,the introduction of new products and decreased sales of products incorporating our products and average selling prices for our products may decline overrelatively short time periods. We have in the past experienced, and in the future may experience, substantial period-to-period fluctuations in operating resultsdue to declining average selling prices. On average, we have experienced average selling price declines over the course of the last twelve months of anywherefrom approximately 5% to 20% per year depending on the product. It is also possible for the pace of average selling price declines to accelerate beyond theselevels for certain products in a commoditizing market. We anticipate that average selling prices will decrease in the future in response to the current difficulteconomic environment, product introductions by competitors or us, or by other factors, including pricing pressures from significant customers. When ouraverage selling prices decline, our gross profits decline unless we are able to sell more products or reduce the cost to manufacture our products. We generallyattempt to combat average selling price declines by improving yields, manufacturing efficiency and working to reduce the costs of our raw materials and ofmanufacturing our products. We have in the past and may in the future experience declining sales prices, which could negatively impact our revenues, grossprofits and financial results. We therefore need to sell our current products in increasing volumes to offset any decline in their average selling prices, andintroduce new products, which we may not be able to do, or do on a timely basis. We may be unable to reduce the cost of our products sufficiently to enable us to compete with others. Our cost reduction efforts may not allow us tokeep pace with competitive pricing pressures and could adversely affect our margins. In order to remain competitive, we must continually reduce the cost ofmanufacturing our products through design and engineering changes. We cannot assure you that any changes effected by us will result in sufficient costreductions to allow us to reduce the price of our products to remain competitive or improve our gross margins. 11Table of Contents Shifts in our product mix may result in declines in gross margins. Our gross profit margins vary among our product families, and are generally higher on our larger diameter wafers. In addition, historically our grossmargins have been higher on our raw materials sales. Accordingly, our overall gross margins have fluctuated from period to period as a result of shifts inproduct mix, the introduction of new products, decreases in average selling prices for products and our ability to reduce product costs, and these fluctuationsare expected to continue in the future. We do not control the prices at which our joint venture companies sell their raw materials products to third parties. However, as we consolidate theresults of three of these companies with our own, any reduction in their gross margins could have a significant, adverse impact on our overall gross margins.One or more of our joint venture companies has in the past and may in the future sell raw materials at significantly reduced prices in order to gain volumesales, or sales to new customers. In such an event, our gross margin may be adversely impacted. In addition, one of our joint venture companies has in thepast been subject to capacity constraints requiring it to source product from other third party suppliers in order to meet customer demand, resulting indecreased gross margin and adversely impacting our gross margin. This joint venture may in the future continue to experience such capacity restraints,causing our gross margin, and consequently our operating results, to be adversely impacted. The cyclical nature of the semiconductor industry may limit our ability to maintain or increase net sales and operating results during industrydownturns. The semiconductor industry is highly cyclical and periodically experiences significant economic downturns characterized by diminished productdemand, resulting in production overcapacity and excess inventory in the markets we serve. A downturn can result in lower unit volumes and rapid erosion ofaverage selling prices. The semiconductor industry has experienced significant downturns, often in connection with, or in anticipation of, maturing productcycles of both semiconductor companies’ and their customers’ products or a decline in general economic conditions. We have experienced these conditions inour business for most of 2011 especially for GaAs substrate, and may experience widespread and possibly more severe and prolonged downturns in the futureas a result of such cyclical changes. This may adversely affect our results of operations and the value of our business. Our continuing business depends in significant part upon manufacturers of electronic and opto-electronic compound semiconductor devices, as wellas the current and anticipated market demand for these devices and products using these devices. As a supplier to the compound semiconductor industry, weare subject to the business cycles that characterize the industry. The timing, length and volatility of these cycles are difficult to predict. The compoundsemiconductor industry has historically been cyclical due to of sudden changes in demand, the amount of manufacturing capacity and changes in thetechnology employed in compound semiconductors. The rate of changes in demand, including end demand, is high, and the effect of these changes upon usoccurs quickly, exacerbating the volatility of these cycles. These changes have affected the timing and amounts of customers’ purchases and investments innew technology. These industry cycles create pressure on our revenue, gross margin and net income. Our industry has in the past experienced periods of oversupply that result in significantly reduced demand and prices for compound semiconductordevices and components, including our products, both as a result of general economic changes and overcapacity. When these periods occur and our operatingresults and financial condition are adversely affected, oversupply creates pressure on our revenue, gross margins and net income. Inventory buildups intelecommunications products and slower than expected sales of computer equipment resulted in overcapacity and led to reduced sales by our customers, andtherefore reduced purchases of our products. During periods of weak demand such as those experienced historically, customers typically reduce purchases,delay delivery of products and/or cancel orders of component parts such as our products. Increased price competition has resulted, causing pressure on our netsales, gross margin and net income. We experienced cancellations, price reductions, delays and push-outs of orders, which have resulted in reduced revenue. Ifthe economic downturn continues, further order cancellations, reductions in order size or delays in orders could occur and would materially adversely affectour business and results of operations. Actions to reduce our costs may be insufficient to align our structure with prevailing business conditions. We may berequired to undertake additional cost-cutting measures, and may be unable to invest in marketing, research and development and engineering at the levels webelieve are necessary to maintain our competitive position. Our failure to make these investments could seriously harm our business. We base our planned operating expenses in part on our expectations of future revenue, and a significant portion of our expenses is relatively fixed inthe short term. If revenue for a particular quarter is lower than we expect, we likely will be unable to proportionately reduce our operating expenses for thatquarter, which would harm our operating results for that quarter. 12Table of Contents The loss of one or more of our key substrate customers would significantly hurt our operating results. A small number of substrate customers have historically accounted for a substantial portion of our total revenue. For the year ended December 31,2011, IQE Group represented 18% of our revenue, compared to 19% in the year ended December 31, 2010. Our top five customers represented 35% of revenuefor the year ended December 31, 2011, 40% of revenue for the year ended December 31, 2010, and 41% of revenue for the year ended December 31, 2009. Weexpect that a significant portion of our future revenue will continue to be derived from a limited number of substrate customers. Most of our customers are notobligated to purchase a specified quantity of our products or to provide us with binding forecasts of product purchases. In addition, our customers mayreduce, delay or cancel orders at any time without any significant penalty. In the past, we have experienced slower bookings, significant push-outs andcancellation of orders from customers. If we lose a major customer or if a customer cancels, reduces or delays orders, our revenue would decline. In addition,customers that have accounted for significant revenue in the past may not continue to generate revenue for us in any future period. Any delay in scheduledshipments of our products could cause revenue to fall below our expectations and the expectations of market analysts or investors, causing our stock price todecline. We depend on high utilization of our manufacturing capacity. An important factor in our success is the extent to which we are able to utilize the available capacity in our Beijing facility. As many of our costs arefixed, a reduction in capacity utilization, as well as changes in other factors such as reduced yield or unfavorable product mix, could reduce our profitmargins and adversely affect our operating results. A number of factors and circumstances may reduce utilization rates, including periods of industryovercapacity, low levels of customer orders, operating inefficiencies, mechanical failures and disruption of operations due to expansion, power interruptions,fire, flood or other natural disasters or calamities. The Chinese Government has previously imposed manufacturing restrictions that, if imposed again in the future on our facilities, could materiallyand adversely impact our results of operations and our financial condition. The Chinese government has in the past imposed restrictions on manufacturing facilities, such as the restrictions imposed on polluting factories forthe 2008 Olympics and Paralympics, including a shut-down of transportation of materials and power plants to reduce air pollution. If, in the future,restrictions are imposed on our operations, our ability to meet customer demand or supply current or new orders would be significantly impacted. Customerscould then be required to purchase product from our competitors, causing our competitors to take market share from us, and could result in our customerssupplying future needs from our competitors. Restrictions on transportation of materials could limit our ability to transport our product, and could result inbottlenecks at shipping ports, limiting our ability to deliver products to our customers. During periods of such restrictions, we may increase our stock ofcritical materials (such as arsenic, gallium, and other chemicals) for use during the period that these restrictions are likely to last, which will increase our useof cash and increase our inventory level, such as occurred during 2008. Any of these restrictions could materially and adversely impact our results ofoperations and our financial condition. Defects in our products could diminish demand for our products. Our products are complex and may contain defects. We have experienced quality control problems with many of our products, which causedcustomers to return products to us, reduce orders for our products, or both. Although our quality has improved, resulting in some increases in product sales,we believe that we continue to experience some reduction in orders as a result of our prior product quality problems. If we continue to experience quality controlproblems, or experience these or other problems in new products, customers may cancel or reduce orders or purchase products from our competitors, we maybe unable to maintain or increase sales to our customers and sales of our products could decline. Defects in our products could cause us to incur highermanufacturing costs and suffer product returns and additional service expenses, all of which could adversely impact our operating results. If new products developed by us contain defects when released, our customers may be dissatisfied and we may suffer negative publicity or customerclaims against us, lose sales or experience delays in market acceptance of our new products. Our results of operations may suffer if we do not effectively manage our inventory. We must manage our inventory of component parts, work-in-process and finished goods effectively to meet changing customer requirements, whilekeeping inventory costs down and improving gross margins. Some of our products and supplies have in the past and may in the future become obsolete whilein inventory due to changing customer specifications, or become excess inventory due to decreased demand for our products and an inability to sell theinventory within a foreseeable period. Furthermore, if current costs of production increase or sales prices drop below the standard prices at which we valueinventory, we may need to take a charge for a reduction in inventory values. We have in the past had to take inventory valuation and impairment charges. Anyfuture unexpected changes in demand or increases in costs of production that cause us to take additional charges for un-saleable, obsolete or excess inventory,or to reduce inventory values, could adversely affect our results of operations. 13Table of Contents If we have low product yields, the shipment of our products may be delayed and our operating results may be adversely impacted. Our products are manufactured using complex technologies, and the number of usable substrates we produce can fluctuate as a result of manyfactors, including: ●impurities in the materials used; ●contamination of the manufacturing environment; ●substrate breakage; ●equipment failure, power outages or variations in the manufacturing process; and ●performance of personnel involved in the manufacturing process. If our yields decrease, our revenue could decline if we are unable to produce needed product on time. At the same time, our manufacturing costs couldremain fixed, or could increase. We have experienced product shipment delays and difficulties in achieving acceptable yields on both new and older products,and delays and poor yields have adversely affected our operating results. We may experience similar problems in the future and we cannot predict when theymay occur or their duration or severity. In particular, many of our manufacturing processes are new and are still being refined, which can result in loweryields. If our manufacturing processes result in defects in our products making them unfit for use by our customers, our products would be rejected,resulting in compensation costs paid to our customers, and possible disqualification. This could lead to revenue loss and market share loss. If we do not successfully develop new products to respond to rapidly changing customer requirements, our ability to generate revenue, obtain newcustomers, and retain existing customers may suffer. Our success depends on our ability to offer new products and product features that incorporate leading technology and respond to technologicaladvances. In addition, our new products must meet customer needs and compete effectively on quality, price and performance. The life cycles of our productsare difficult to predict because the markets for our products are characterized by rapid technological change, changing customer needs and evolving industrystandards. If our competitors introduce products employing new technologies or performance characteristics, our existing products could become obsolete andunmarketable. During the past three years, we have seen our competitors selling more substrates manufactured using a crystal growth technology similar toours, which has eroded our technological differentiation. Other companies, including TriQuint Semiconductors, are actively developing substrate materialsthat could be used to manufacture devices that could provide the same high-performance, low-power capabilities as GaAs- and InP-based devices atcompetitive prices. If these substrate materials or VGF-derived products are successfully developed and semiconductor device manufacturers adopt them,demand for our GaAs substrates could decline and our revenue could suffer. The development of new products can be a highly complex process, and we may experience delays in developing and introducing new products. Anysignificant delay could cause us to fail to timely introduce and gain market acceptance of new products. Further, the costs involved in researching, developingand engineering new products could be greater than anticipated. If we fail to offer new products or product enhancements or fail to achieve higher qualityproducts, we may not generate sufficient revenue to offset our development costs and other expenses or meet our customers’ requirements. Intense competition in the markets for our products could prevent us from increasing revenue and sustaining profitability. 14Table of Contents The markets for our products are intensely competitive. We face competition for our substrate products from other manufacturers of substrates, suchas Freiberger Compound Materials, Hitachi Cable and Sumitomo Electric, from semiconductor device manufacturers that produce substrates for their ownuse, and from companies, such as TriQuint Semiconductors, that are actively developing alternative materials to GaAs and marketing semiconductor devicesusing these alternative materials. We believe that at least two of our major competitors are shipping high volumes of GaAs substrates manufactured using atechnique similar to our VGF technique. Other competitors may develop and begin using similar technology. If we are unable to compete effectively, ourrevenue may not increase and we may be unable to remain profitable. We face many competitors that have a number of significant advantages over us,including: ●greater experience in the business; ●more manufacturing experience; ●extensive intellectual property; ●broader name recognition; and ●significantly greater financial, technical and marketing resources. Our competitors could develop new or enhanced products that are more effective than our products. The level and intensity of competition has increased over the past year and we expect competition to continue to increase in the future. Competitivepressures caused by the current economic conditions have resulted in reductions in the prices of our products, and continued or increased competition couldreduce our market share, require us to further reduce the prices of our products, affect our ability to recover costs and result in reduced gross margins. In addition, new competitors have and may continue to emerge, such as a small crystal growing company established by a former employee in Chinathat is supplying ingots to the market. While new competitors such as this company currently do not appear to be fully competitive, competition from sourcessuch as this could increase, particularly if these competitors are able to obtain large capital investments. Demand for our products may decrease if our customers experience difficulty manufacturing, marketing or selling their products. Our products are used as components in our customers’ products. Accordingly, demand for our products is subject to factors affecting the ability ofour customers to introduce and market their products successfully, including: ●the competition our customers face in their particular industries; ●the technical, manufacturing, sales and marketing and management capabilities of our customers; ●the financial and other resources of our customers; and ●the inability of our customers to sell their products if they infringe third-party intellectual property rights. If demand for the end-user applications for which our products are used decreases, or our customers are unable to develop, market and sell theirproducts, demand for our products will decrease. Current global economic conditions may have an impact on our business and financial condition in ways that we currently cannot predict. Our operations and financial results depend on worldwide economic conditions and their impact on levels of business spending, which haddeteriorated significantly in many countries and regions in previous years and may be depressed for the foreseeable future. Uncertainties in the financial andcredit markets have caused our customers to postpone deliveries of ordered systems and placement of new orders. Continued uncertainties may reduce futuresales of our products and services. The revenue growth and profitability of our business depends on the overall demand for our substrates, and we areparticularly dependent on the market conditions for the wireless, solid-state illumination, fiber optics and telecommunications industries. Because our sales areprimarily to major corporate customers whose businesses fluctuate with general economic and business conditions, a softening of demand for products thatuse our substrates, caused by a weakening economy, may result in decreased revenue. Customers may find themselves facing excess inventory from earlierpurchases, and may defer or reconsider purchasing products due to the downturn in their business and in the general economy. If the current marketconditions continue to deteriorate, we may experience increased collection times and greater write-offs, either of which could have a material adverse effect onour cash flow. 15Table of Contents In addition, the tightening of credit markets and concerns regarding the availability of credit may make it more difficult for our customers to raisecapital, whether debt or equity, to finance their purchases of capital equipment, including the products we sell. Delays in our customers’ ability to obtain suchfinancing, or the unavailability of such financing, would adversely affect our product sales and revenues and therefore harm our business and operatingresults. We cannot predict the timing, duration of or effect on our business of the economic slowdown or the timing or strength of any subsequent recovery. The financial condition of our customers may affect their ability to pay amounts owed to us. Many of our customers are facing business downturns that have reduced their cash balances and their prospects. We frequently allow our customersextended payment terms after shipping products to them. Subsequent to our shipping a product, some customers have been unable to make payments whendue, reducing our cash balances and causing us to incur charges to allow for a possibility that some accounts might not be paid. Customers may also beforced to file for bankruptcy. If our customers do not pay their accounts when due, we will be required to incur charges that would reduce our earnings. We purchase critical raw materials and parts for our equipment from single or limited sources, and could lose sales if these sources fail to fill ourneeds. We depend on a limited number of suppliers for certain raw materials, components and equipment used in manufacturing our products, includingkey materials such as quartz tubing and polishing solutions. Although several of these raw materials are purchased from suppliers in which we hold anownership interest, we generally purchase these materials through standard purchase orders and not pursuant to long-term supply contracts, and no supplierguarantees supply of raw materials or equipment to us. If we lose any of our key suppliers, our manufacturing efforts could be significantly hampered and wecould be prevented from timely producing and delivering products to our customers. Prior to investing in our raw material joint ventures, we sometimesexperienced delays obtaining critical raw materials and spare parts, including gallium, due to shortages of these materials and we could experience such delaysagain in the future due to shortages of materials and may be unable to obtain an adequate supply of materials. These shortages and delays could result inhigher materials costs and cause us to delay or reduce production of our products. If we have to delay or reduce production, we could fail to meet customerdelivery schedules and our revenue and operating results could suffer. We have made and may continue to make strategic investments in raw materials suppliers, which may not be successful and may result in the lossof all or part of our investment. We have made investments through our joint ventures in raw material suppliers in China, which provide us with opportunities to gain supplies ofkey raw materials that are important to our substrate business. These affiliates each have a market beyond that provided by us. We do not have influence overall of these companies, each of which is located in China, and in some we have made only a strategic, minority investment. We may not be successful inachieving the financial, technological or commercial advantage upon which any given investment is premised, and we could end up losing all or part of ourinvestment. Our substrate products have a long qualification cycle that makes it difficult to plan our expenses and forecast our results. Customers typically place orders with us for our substrate products three months to a year or more after our initial contact with them. The sale of ourproducts may be subject to delays due to our customers’ lengthy internal budgeting, approval and evaluation processes. During this time, we may incursubstantial expenses and expend sales, marketing and management efforts while the customers evaluate our products. These expenditures may not result insales of our products. If we do not achieve anticipated sales in a period as expected, we may experience an unplanned shortfall in our revenue. As a result, wemay not be able to cover expenses, causing our operating results to vary. In addition, if a customer decides not to incorporate our products into its initialdesign, we may not have another opportunity to sell products to this customer for many months or even years. In the current competitive and economicclimate, the average sales cycle for our products has lengthened even further and is expected to continue to make it difficult for us to forecast our future salesaccurately. We anticipate that sales of any future substrate products will also have lengthy sales cycles and will, therefore, be subject to risks substantiallysimilar to those inherent in the lengthy sales cycles of our current substrate products. 16Table of Contents Problems incurred by our joint ventures or venture partners could result in a material adverse impact on our financial condition or results ofoperations. We have invested in joint venture operations in China that produce products including 99.99% pure gallium (4N Ga), high purity gallium, arsenic,germanium, germanium dioxide, paralytic boron nitride (pBN) crucibles and boron oxide (B2O3). We purchase a portion of the materials produced by theseventures for our use and sell the remainder of their production to third parties. Our ownership interest in these entities ranges from 25% to 83%. We consolidatethe joint ventures in which we have a majority or controlling financial interest and employ equity accounting for the joint ventures in which we have a smallerownership interest. Several of these joint ventures occupy space within larger facilities owned and/or operated by one of the other venture partners. Several ofthese venture partners are engaged in other manufacturing activities at or near the same facility. In some facilities, we share access to certain functions,including water, hazardous waste treatment or air quality treatment. If any of our joint venture partners in any of these ventures experiences problems with itsoperations, disruptions of our joint venture operations could result, having a material adverse effect on the financial condition and results of operation of ourjoint ventures, and correspondingly on our financial condition or results of operations. For example, since gallium is a by-product of aluminum, our galliumjoint venture in China, which is housed in and receives services from an affiliated aluminum plant, could generate lower production of gallium as a result ofreduced by-product services provided by the aluminum plant. Accordingly, in order to meet customer supply obligations, our joint venture may have to sourcefinished products from another independent third party supplier, resulting in reduced gross margin. In addition, if any of our joint ventures or venture partners with which our joint ventures share facilities is deemed to have violated applicable laws,rules or regulations governing the use, storage, discharge or disposal of hazardous chemicals during manufacturing, research and development, or salesdemonstrations, the operations of our joint ventures could be adversely affected and we could be subject to substantial liability for clean-up efforts, personalinjury and fines or suspension or cessation of our joint venture operations as a result of the actions of the joint ventures or other venture partners. Employeesworking for our joint ventures or any of the other venture partners could bring litigation against us as a result of actions taken at the joint venture or venturepartner facilities, even though we are not directly controlling the operations, including actions for exposure to chemicals or other hazardous materials at thefacilities of our joint ventures or the facilities of any venture partner that are shared by our joint ventures. While we would expect to defend ourselvesvigorously in any litigation that is brought against us, litigation is inherently uncertain and it is possible that our business, financial condition, results ofoperations or cash flows could be affected. Even if we are not deemed responsible for the actions of the joint ventures or venture partners, litigation could becostly, time consuming to defend and divert management attention; in addition, if we are deemed to be the most financially viable of the partners, plaintiffsmay decide to pursue us for damages. We believe that continuing to invest in additional joint ventures will be important to remaining competitive in our marketplace and ensuring a supplyof critical raw materials. However, we may not be able to identify complementary joint venture opportunities or, even once opportunities are identified, we maynot be able to reach agreement on the terms of the venture with the other venture partners. Additional joint ventures could cause us to incur contingent liabilitiesor other expenses, any of which could adversely affect our financial condition and operating results. Since all of our joint venture activity is expected to occur in China, these activities could subject us to a number of risks associated with conductingoperations internationally, including: ●difficulties in managing geographically disparate operations; ●difficulties in enforcing agreements through non-U.S. legal systems; ●unexpected changes in regulatory requirements that may limit our ability to export the venture products or sell into particular jurisdictions orimpose multiple conflicting tax laws and regulations; ●political and economic instability, civil unrest or war; ●terrorist activities that impact international commerce; ●difficulties in protecting our intellectual property rights, particularly in countries where the laws and practices do not protect proprietary rightsto as great an extent as do the laws and practices of the United States; ●changing laws and policies affecting economic liberalization, foreign investment, currency convertibility or exchange rates, taxation oremployment; and 17Table of Contents ●nationalization of foreign-owned assets, including intellectual property. The effect of terrorist threats and actions on the general economy could decrease our revenue. The United States continues to be on alert for terrorist activity. The potential near- and long-term impact terrorist activities may have in regards to oursuppliers, customers and markets for our products and the U.S. economy is uncertain. There may be embargos of ports or products, or destruction ofshipments or our facilities, or attacks that affect our personnel. There may be other potentially adverse effects on our operating results due to significant eventsthat we cannot foresee. Since we perform all of our manufacturing operations in China, and a significant portion of our customers are located outside of theUnited States, terrorist activity or threats against U.S.-owned enterprise are a particular concern to us. If any of our facilities is damaged by occurrences such as fire, explosion, or natural disaster, we might not be able to manufacture our products. The ongoing operation of our manufacturing and production facilities in China is critical to our ability to meet demand for our products. If we are notable to use all or a significant portion of our facilities for prolonged periods for any reason, we would not be able to manufacture products for our customers.For example, a fire or explosion caused by our use of combustible chemicals and high temperatures during our manufacturing processes or power interruptioncaused by severe weather situation could render some or all of our facilities inoperable for an indefinite period of time. Actions outside of our control, such asearthquakes or other natural disasters, could also damage our facilities, rendering them inoperable. If we are unable to operate our facilities and manufactureour products, we would lose customers and revenue and our business would be harmed. We depend on the continuing efforts of our senior management team and other key personnel. If we lose members of our senior managementteam or other key personnel, or are unable to successfully retain, recruit and train qualified personnel, our ability to manufacture and sell ourproducts could be harmed. Our future success depends on the continuing services of members of our senior management team and other key personnel. Our industry ischaracterized by high demand and intense competition for talent, and the turnover rate can be high. We compete for qualified management and other personnelwith other semiconductor companies. Our employees could leave our company with little or no prior notice and would be free to work for a competitor. If oneor more of our senior executives or other key personnel were unable or unwilling to continue in their present positions, we may not be able to replace them easilyor at all, and other senior management may be required to divert attention from other aspects of the business. The loss of any of these individuals or ourability to attract or retain qualified personnel could adversely affect our business. Risks Related to International Aspects of Our Business Changes in tariffs, import restrictions, export restrictions or other trade barriers may reduce gross margins. We may incur increases in costs due to changes in tariffs, import or export restrictions, or other trade barriers, or unexpected changes in regulatoryrequirements, any of which could reduce our gross margins. For example, in 2006, tax authorities in the PRC changed the treatment of refunds of value-addedtaxes that companies pay when they purchase certain raw materials, including gallium and arsenic. The cumulative effect is that our PRC joint venturecompanies no longer receive a refund of value-added tax for exports of gallium or arsenic, including certain shipments to our wholly-owned PRC subsidiarythat are treated as exports under PRC tax regulations. Given the relatively fluid regulatory environment in the PRC, there could be additional tax or otherregulatory changes in the future. Any such changes could directly and materially adversely impact our financial results and general business condition. Our operating results depend in large part on continued customer acceptance of our substrate products manufactured in China and continuedimprovements in product quality. We manufacture all of our products in China, and source most of our raw materials in China. Accordingly, we continue to seek customerqualification of our China-manufactured products. In addition, we have in the past experienced quality problems with our China-manufactured products. Ourprevious quality problems caused us to lose market share to our competitors, as some customers reduced their orders from us until our surface quality was asgood and consistent as that offered by competitors and customers allocated their requirements for compound semiconductor substrates across more of ourcompetitors. If we are unable to continue to achieve customer qualifications for our products, or if continue to experience quality problems, customers may notincrease purchases of our products, our China facility will become underutilized, and we will be unable to achieve expected revenue growth. In addition, wehave recently entered into an arrangement to establish a second manufacturing facility in China, which when complete will further our reliance on Chinesemanufacturing facilities. We may again lose sales of our products to competitors and experience loss of market share. If we are unable to recover and retain ourmarket share, we may be unable to grow our business. 18Table of Contents We derive a significant portion of our revenue from international sales, and our ability to sustain and increase our international sales involvessignificant risks. Our revenue growth depends in part on the expansion of our international sales and operations. International sales represented 80%, 78% and 81%our total revenue for the years ended December 31, 2011, 2010 and 2009, respectively. We expect that sales to customers outside the United States, particularlysales to customers in Asia, will continue to represent a significant portion of our revenue. Currently, a significant percentage of our sales is to customers headquartered in Asia. All of our manufacturing facilities and some of our suppliersare also located outside the U.S. Managing our overseas operations presents challenges, including periodic regional economic downturns, trade balance issues,varying business conditions and demands, political instability, variations in enforcement of intellectual property and contract rights in different jurisdictions,differences in the ability to develop relationships with suppliers and other local businesses, changes in U.S. and international laws and regulations includingU.S. export restrictions, fluctuations in interest and currency exchange rates, the ability to provide sufficient levels of technical support in different locations,cultural differences, shipping delays and terrorist acts or acts of war, among other risks. Many of these challenges are present in China, which represents alarge potential market for semiconductor devices and where we anticipate significant opportunity for growth. Global uncertainties with respect to: (i) economicgrowth rates in various countries; (ii) sustainability of demand for electronics products; (iii) capital spending by semiconductor manufacturers; (iv) priceweakness for certain semiconductor devices; and (v) political instability in regions where we have operations may also affect our business, financial conditionand results of operations. Our dependence on international sales involves a number of risks, including: ●changes in tariffs, import restrictions, export restrictions, or other trade barriers; ●unexpected changes in regulatory requirements; ●longer periods to collect accounts receivable; ●changes in export license requirements; ●political and economic instability; ●unexpected changes in diplomatic and trade relationships; and ●foreign exchange rate fluctuations. Our sales are denominated in U.S. dollars, except for sales to our Japanese customers which are denominated in Japanese yen. Thus, increases in thevalue of the U.S. dollar could increase the price of our products in non-U.S. markets and make our products more expensive than competitors’ products inthese markets. Also, denominating some sales in Japanese yen subjects us to fluctuations in the exchange rates between the U.S. dollar and the Japanese yen. Thefunctional currency of our Chinese subsidiary and joint ventures is the local currency. We incur transaction gains or losses resulting from consolidation ofexpenses incurred in local currencies for these entities, as well as in translation of the assets and liabilities of their assets at each balance sheet date. If we do noteffectively manage the risks associated with international sales, our revenue, cash flows and financial condition could be adversely affected. If there are power shortages in the PRC, we may have to temporarily close our China operations, which would adversely impact our ability tomanufacture our products and meet customer orders, and would result in reduced revenue. In the past, the Chinese government has faced a power shortage resulting in power demand outstripping supply in peak periods. Instability inelectrical supply in past years has caused sporadic outages among residential and commercial consumers causing the Chinese government to implement toughmeasures to ease the energy shortage, and as a result, we closed most of our operations for a week in late July 2004 in conformance with this policy. 19Table of Contents In 2006 we were able to switch the electrical supply for our manufacturing facility onto the same power grid as that used by vital PRC governmentservices such as hospitals and police. However, if even despite this switch, further problems with power shortages occur in the future, and we are required tomake temporary closures of our subsidiary and joint venture operations, we may be unable to manufacture our products, and would then be unable to meetcustomer orders except from inventory on hand. As a result, our revenue could be adversely impacted, and our relationships with our customers could suffer,impacting our ability to generate future revenue. In addition, if power is shut off at our Beijing subsidiary at any time, either voluntarily or as a result ofunplanned brownouts, during certain phases of our manufacturing process including our crystal growth phase, the work in process may be ruined andrendered unusable, causing us to incur expense that will not be covered by revenue, and negatively impacting our cost of revenue and gross margins. Changes in China’s political, social and economic environment may affect our financial performance. Our financial performance may be affected by changes in China’s political, social and economic environment. The role of the Chinese central andlocal governments in the Chinese economy is significant. Chinese policies toward economic liberalization, and laws and policies affecting technologycompanies, foreign investment, currency exchange rates and other matters could change, resulting in greater restrictions on our ability to do business andoperate our manufacturing facilities in China. Any imposition of surcharges or any increase in Chinese tax rates or reduction or elimination of Chinese taxbenefits could hurt our operating results. The Chinese government could revoke, terminate or suspend our license for national security and similar reasonswithout compensation to us. If the Chinese government were to take any of these actions, we would be prevented from conducting all or part of our business.Any failure on our part to comply with governmental regulations could result in the loss of our ability to manufacture our products in China. An outbreak of contagious disease such as Severe Acute Respiratory Syndrome (SARS) or the Avian Flu may adversely impact ourmanufacturing operations and some of our key suppliers and customers. Any reoccurrence of SARS or an outbreak of a contagious disease, such as Avian Flu, may cause us to temporarily close our manufacturingoperations. Similarly, if one or more of our key suppliers is required to close for an extended period, we might not have enough raw material inventories tocontinue manufacturing operations. In addition, while we possess management skills among our China staff that enable us to maintain our manufacturingoperations with minimal on-site supervision from our U.S.-based staff, our business could also be harmed if travel to or from Asia and the United States isrestricted or inadvisable. If our manufacturing operations were closed for a significant period, we could lose revenue and market share, which would depressour financial performance and could be difficult to recapture. Finally, if one of our key customers is required to close for an extended period, we might not beable to ship product to them, our revenue would decline and our financial performance would suffer. Risks Related to Our Financial Results and Capital Structure If we fail to manage periodic contractions, we may utilize our cash balances, resulting in the decline of our existing cash, cash equivalents andinvestment balances. We anticipate that our existing cash resources will fund our operations and purchases of capital equipment, as well as provide adequate workingcapital for the next twelve months. However, our liquidity is affected by many factors including, among others, the extent to which we pursue additionalcapital expenditures, the level of our production, and other factors related to the uncertainties of the industry and global economies. If we fail to manage ourcontractions successfully we may draw down our cash reserves, which would adversely affect our operating results and financial condition, reduce our valueand possibly impinge our ability to raise debt and equity funding in the future, at a time when we might be required to raise additional cash. Accordingly, therecan be no assurance that events in the future will not require us to seek additional capital or, if required, that such capital would be available on termsacceptable to us, if at all. As part of our effort to reduce costs, we may lose key staff, production resources and technology that we will need to replenish whenend markets recover. These events could reduce our ability to grow profitably as markets recover. If we are not able to fund our capital commitments to expand our facilities in China, our business and operating results may be adversely affected. We and one of our joint ventures expect to invest up to approximately $17.5 million in capital projects at our China facilities, including the secondmanufacturing facility in Tianjin, in 2012 and 2013 to expand our manufacturing capabilities to optimize the utilization of our resources. If we are unable tofund these projects due to an unexpected decrease in our cash reserves or an inability to raise additional funds, our business and operating results may bematerially adversely impacted. 20Table of Contents Unpredictable fluctuations in our operating results could disappoint analysts or our investors, which could cause our stock price to decline. We have experienced and may continue to experience significant fluctuations in our revenue and earnings. Our quarterly and annual revenue andoperating results have varied significantly in the past and may vary significantly in the future due to a number of factors, including: ●our ability to develop, manufacture and deliver high quality products in a timely and cost-effective manner; ●decline in general economic conditions or downturns in the industry in which we compete; ●fluctuations in demand for our products; ●expansion of our manufacturing capacity; ●expansion of our operations in China; ●limited availability and increased cost of raw materials; ●the volume and timing of orders from our customers, and cancellations, push-outs and delays of customer orders once made; ●fluctuation of our manufacturing yields; ●decreases in the prices of our or our competitors’ products; ●costs incurred in connection with any future acquisitions of businesses or technologies; and ●increases in our expenses, including expenses for research and development. Due to these factors, we believe that period-to-period comparisons of our operating results may not be meaningful indicators of our futureperformance. A substantial percentage of our operating expenses are fixed in the short term, and we may be unable to adjust spending to compensate for anunexpected shortfall in revenue. As a result, any delay in generating revenue could cause our operating results to be below the expectations of market analystsor investors, which could also cause our stock price to fall. If our operating results and financial performance do not meet the guidance that we have provided to the public, our stock price may decline. We provide public guidance on our expected operating and financial results for future periods. Although we believe that this guidance provides ourstockholders, investors and analysts with a better understanding of our expectations for the future, such guidance is comprised of forward-looking statementssubject to the risks and uncertainties described in this report and in our other public filings and public statements. Our actual results may not meet theguidance we have provided. If our operating or financial results do not meet our guidance or the expectations of investment analysts, our stock price maydecline. We have adopted certain anti-takeover measures that may make it more difficult for a third party to acquire us. Our board of directors has the authority to issue up to 2,000,000 shares of preferred stock and to determine the price, rights, preferences andprivileges of those shares without any further vote or action by the stockholders. The rights of the holders of common stock will be subject to, and may beadversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of shares of preferred stock could havethe effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock. We have no present intention to issue additionalshares of preferred stock. 21Table of Contents Provisions in our amended and restated certificate of incorporation and amended and restated bylaws may have the effect of delaying or preventing amerger, acquisition or change of control, or changes in our management, which could adversely affect the market price of our common stock. The followingare some examples of these provisions: ●the division of our board of directors into three separate classes, each with three-year terms; ●the right of our board to elect a director to fill a space created by a board vacancy or the expansion of the board; ●the ability of our board to alter our amended and restated bylaws; and ●the requirement that only our board or the holders of at least 10% of our outstanding shares may call a special meeting of our stockholders. Furthermore, because we are incorporated in Delaware, we are subject to the provisions of Section 203 of the Delaware General Corporation Law.These provisions prohibit us from engaging in any business combination with any interested stockholder (a stockholder who owns 15% or more of ouroutstanding voting stock) for a period of three years following the time that such stockholder became an interested stockholder, unless: ●662/3% of the shares of voting stock not owned by the interested stockholder approve the merger or combination, or ●the board of directors approves the merger or combination or the transaction which resulted in the stockholder becoming an interestedstockholder. Our common stock may be delisted from The Nasdaq Global Select Market, which could negatively impact the price of our common stock and ourability to access the capital markets. Our common stock is listed on The Nasdaq Global Select Market. The bid price of our common stock has in the past closed below the $1.00minimum per share bid price required for continued inclusion on The Nasdaq Global Select Market under Marketplace Rule 5450(a). If the bid price of ourcommon stock remains below $1.00 per share for thirty consecutive business days, we could be subject to delisting from the Nasdaq Global Select Market. Any delisting from The Nasdaq Global Select Market could have an adverse effect on our business and on the trading of our common stock. If adelisting of our common stock were to occur, our common stock would trade on the OTC Bulletin Board or on the “pink sheets” maintained by the NationalQuotation Bureau, Inc. Such alternatives are generally considered to be less efficient markets, and our stock price, as well as the liquidity of our commonstock, may be adversely impacted as a result. Delisting from The Nasdaq Global Select Market could also have other negative results, including the potentialloss of confidence by suppliers and employees, the loss of institutional investor interest and fewer business development opportunities, as well as the loss ofliquidity for our stockholders. Risks Related to Our Intellectual Property Intellectual property infringement claims may be costly to resolve and could divert management attention. Other companies may hold or obtain patents on inventions or may otherwise claim proprietary rights to technology necessary to our business. Themarkets in which we compete are comprised of competitors that in some cases hold substantial patent portfolios covering aspects of products that could besimilar to ours. We could become subject to claims that we are infringing patent, trademark, copyright or other proprietary rights of others. For example, wehave in the past been involved in lawsuits alleging patent infringement, and could in the future be involved in similar litigation. If we are unable to protect our intellectual property, we may lose valuable assets or incur costly litigation. We rely on a combination of patents, copyrights, trademark and trade secret laws, non-disclosure agreements and other intellectual propertyprotection methods to protect our proprietary technology. However, we believe that, due to the rapid pace of technological innovation in the markets for ourproducts, our ability to establish and maintain a position of technology leadership also depends on the skills of our development personnel. Despite our effortsto protect our intellectual property, third parties can develop products or processes similar to ours. Our means of protecting our proprietary rights may not beadequate, and our competitors may independently develop similar technology, duplicate our products or design around our patents. We believe that at least twoof our competitors have begun to ship GaAs substrates produced using a process similar to our VGF technique. Our competitors may also develop and patentimprovements to the VGF technology upon which we rely, and thus may limit any exclusivity we enjoy by virtue of our patents or trade secrets. 22Table of Contents It is possible that pending or future United States or foreign patent applications made by us will not be approved, that our issued patents will notprotect our intellectual property, or that third parties will challenge our ownership rights or the validity of our patents. In addition, the laws of some foreigncountries may not protect our proprietary rights to as great an extent as do the laws of the United States and it may be more difficult to monitor the use of ourintellectual property. Our competitors may be able to legitimately ascertain non-patented proprietary technology embedded in our systems. If this occurs, wemay not be able to prevent the development of technology substantially similar to ours. We may have to resort to costly litigation to enforce our intellectual property rights, to protect our trade secrets or know-how or to determine theirscope, validity or enforceability. Enforcing or defending our proprietary technology is expensive, could cause us to divert resources and may not provesuccessful. Our protective measures may prove inadequate to protect our proprietary rights, and if we fail to enforce or protect our rights, we could losevaluable assets. Risks Related to Compliance and Other Legal Matters We need to continue to improve or implement our systems, procedures and controls. The shift of our manufacturing operations to China and growth of our business has placed and continues to place a significant strain on ouroperations and management resources. We have upgraded our inventory control systems, but continue to rely on certain manual processes in our operationsand in connection with consolidation of our financial results. If we fail to manage a transition from manual processes to automated processes effectively, ouroperations may be disrupted. To manage our business effectively, we may need to implement additional and improved management information systems, further develop ouroperating, administrative, financial and accounting systems and controls, add experienced senior level managers, and maintain close coordination among ourexecutive, engineering, accounting, marketing, sales and operations organizations. We are subject to internal control evaluations and attestation requirements of Section 404 of the Sarbanes-Oxley Act. Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we must include in our Annual Report on Form 10-K a report of management on theeffectiveness of our internal control over financial reporting. Ongoing compliance with this requirement is complex, costly and time-consuming. If: (1) we failto maintain effective internal control over financial reporting; or (2) our management does not timely assess the adequacy of such internal control, we could besubject to regulatory sanctions and the public’s perception of us may be adversely impacted. If we fail to comply with environmental and safety regulations, we may be subject to significant fines or forced to cease our operations; inaddition, we could be subject to suits for personal injuries caused by hazardous materials. We are subject to federal, state and local environmental and safety laws and regulations in all of our operating locations, including laws andregulations of China, such as laws and regulations related to the development, manufacture and use of our products, the operation of our facilities, and the useof our real property. These laws and regulations govern the use, storage, discharge and disposal of hazardous chemicals during manufacturing, research anddevelopment, and sales demonstrations. If we fail to comply with applicable regulations, we could be subject to substantial liability for clean-up efforts,personal injury and fines or suspension or be forced to cease our operations, and/or suspend or terminate the development, manufacture or use of certain of ourproducts, 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 andresults of operations. We have in the past been the subject of claims made by the California Occupational Safety and Health Administration in an investigation primarilyregarding impermissible levels of potentially hazardous materials in certain areas of our manufacturing facility in Fremont, California. We were alsopreviously the target of press allegations and correspondence purportedly on behalf of current and/or former employees concerning our environmentalcompliance programs and exposure of our employees to hazardous materials in California. In addition, a complaint was previously filed against us and twocurrent officers, alleging personal injury, general negligence, intentional tort, wage loss and other damages, including punitive damages, as a result of exposureof plaintiffs to high levels of gallium arsenide in gallium arsenide wafers, and methanol. Other current and/or former employees could bring litigation againstus in the future. Although we have put in place engineering, administrative and personnel protective equipment programs to address these issues, our ability toexpand or continue to operate our present locations could be restricted or we could be required to acquire costly remediation equipment or incur other significantexpenses if we were found liable for failure to comply with environmental and safety regulations. Existing or future changes in laws or regulations in theUnited States and China may require us to incur significant expenditures or liabilities, or may restrict our operations. In addition, our employees could beexposed to chemicals or other hazardous materials at our facilities and we may be subject to lawsuits seeking damages for wrongful death or personal injuriesallegedly caused by exposure to chemicals or hazardous materials at our facilities. 23Table of Contents Litigation is inherently uncertain and while we would expect to defend ourselves vigorously, it is possible that our business, financial condition,results of operations or cash flows could be affected in any particular period by litigation pending and any additional litigation brought against us. In addition,future litigation could divert management’s attention from our business and operations, causing our business and financial results to suffer. We could incurdefense or settlement costs in excess of the insurance covering these litigation matters, or that could result in significant judgments against us or cause us toincur costly settlements, in excess of our insurance limits. Item 1B. Unresolved Staff Comments None. 24Table of Contents Item 2. Properties Our principal properties as of February 28, 2012 are as follows: Location SquareFeet Principal Use OwnershipFremont, CA 27,760 Administration Operating lease, expires November 2015Beijing, China 33,000 Production OwnedBeijing, China 34,000 Production OwnedBeijing, China 48,000 Production OwnedBeijing, China 22,000 Production and Administration OwnedBeijing, China 53,000 Production OwnedXianxi, China 56,500 Production Owned by Beijing Ji Ya Semiconductor Material, Co.,Ltd.*Xianxi, China 7,500 Administration Owned by Beijing Ji Ya Semiconductor Material, Co.,Ltd.*Beijing, China 2,000 Administration Operating lease by Beijing Ji Ya Semiconductor Material,Co., Ltd., expires February 2014Nanjing, China 22,000 Production Owned by Nanjing Jin Mei Gallium Co., Ltd.*Nanjing, China 5,700 R&D and Administration Owned by Nanjing Jin Mei Gallium Co., Ltd.*Nanjing, China 3,900 Production Owned by Nanjing Jin Mei Gallium Co., Ltd.*Beijing, China 7,600 Production and Administration Operating leases by Bo Yu Semiconductor VesselCraftwork Technology Co., Ltd., expire in various termsuntil March 2014 *Joint ventures in which we hold an interest. We hold a 46% interest in Beijing Ji Ya Semiconductor Material Co., Ltd., a 83% interest in Nanjing JinMei Gallium Co., Ltd., and a 70% interest in Beijing BoYu Semiconductor Vessel Craftwork Technology Co., Ltd. We consider each facility to be in good operating condition and adequate for its present use, and believe that each facility has sufficient plant capacityto meet its current and anticipated operating requirements. Item 3. Legal Proceedings From time to time we may be involved in judicial or administrative proceedings concerning matters arising in the ordinary course of business. We donot expect that any of these matters, individually or in the aggregate, will have a material adverse effect on our business, financial condition, cash flows orresults of operation. Item 4. Mine Safety Disclosures Not applicable. 25Table of ContentsPART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our common stock has been trading publicly on the NASDAQ Global Market (NASDAQ) under the symbol “AXTI” since May 20, 1998, thedate we consummated our initial public offering, and beginning on January 3, 2011, our common stock began trading on the NASDAQ Global Select Marketunder the same symbol. The following table sets forth the range of high and low sales prices of the common stock for the periods indicated, as reported byNASDAQ. High Low 2011 First Quarter $12.23 $5.65 Second Quarter $8.90 $5.85 Third Quarter $9.24 $4.98 Fourth Quarter $5.97 $3.63 2010 First Quarter $3.84 $2.65 Second Quarter $5.20 $3.17 Third Quarter $7.03 $4.05 Fourth Quarter $10.74 $6.26 As of December 31, 2011, there were 77 holders of record of our common stock. Because many shares of AXT’s common stock are held by brokersand other institutions on behalf of stockholders, we are unable to estimate the total number of beneficial owners of our common stock. We have never paid or declared any cash dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future.Dividends accrue on our outstanding Series A preferred stock at the rate of $0.20 per annum per share of Series A preferred stock. The 883,000 shares of$0.001 par value Series A preferred stock issued and outstanding as of December 31, 2011 and 2010, respectively, valued at $3,532,000 are non-voting andnon-convertible preferred stock with a 5.0% cumulative annual dividend rate payable when declared by the board of directors, and $4 per share liquidationpreference over common stock, and must be paid before any distribution is made to common stockholders. These preferred shares were issued to LyteOptronics, Inc. stockholders in connection with the completion of our acquisition of Lyte Optronics, Inc. on May 28, 1999. Issuer Purchases of Equity Securities During the years ended December 31, 2011 and 2010, we did not repurchase any shares of our common stock. 26Table of Contents Comparison of Stockholder Return Set forth below is a line graph comparing the annual percentage change in the cumulative total return to the stockholders of the Company on ourcommon stock with the CRSP Total Return Index for the Nasdaq Stock Market (U.S. Companies) and the Nasdaq Electronic Components Index for theperiod commencing December 31, 2006, and ending December 31, 2011. 12/06 12/07 12/08 12/09 12/10 12/11 AXT, Inc. $100.00 $131.36 $28.60 $68.86 $221.19 $88.35 NASDAQ Composite $100.00 $110.26 $65.65 $95.19 $112.10 $110.81 NASDAQ Electronic Components $100.00 $117.33 $60.16 $96.77 $110.84 $99.75 27Table of Contents Item 6. Selected Consolidated Financial Data The following selected consolidated financial data is derived from and should be read in conjunction with our consolidated financial statements andrelated notes set forth in Item 8 below, and in our previously filed reports on Form 10-K. See also Item 7. “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” for further information relating to items reflecting our results of operations and financial condition. Years Ended December 31, 2011 2010 2009 2008 2007 (in thousands, except per share data) Statements of Operations Data: Revenue $104,121 $95,493 $55,364 $73,075 $58,203 Cost of revenue 59,339 58,998 41,495 55,115 37,942 Gross profit 44,782 36,495 13,869 17,960 20,261 Operating expenses: Selling, general, and administrative 14,836 13,972 13,389 15,751 13,746 Research and development 2,473 2,339 1,569 2,164 1,699 Impairment (recovery of impairment) on assets held for sale — — — 83 (481)Restructuring charge — — 507 — — Total operating expenses 17,309 16,311 15,465 17,998 14,964 Income (loss) from operations 27,473 20,184 (1,596) (38) 5,297 Interest income, net 449 53 177 513 704 Other income, net 696 2,462 385 1,290 1,912 Income (loss) before provision for income taxes 28,618 22,699 (1,034) 1,765 7,913 Provision for income taxes 2,795 2,323 471 1,023 728 Net income (loss) 25,823 20,376 (1,505) 742 7,185 Less: Net income attributable to noncontrolling interest 5,503 1,723 393 1,431 1,896 Net income (loss) attributable to AXT, Inc. $20,320 $18,653 $(1,898) $(689) $5,289 Net income (loss) attributable to AXT, Inc. per common share: Basic $0.63 $0.60 $(0.07) $(0.03) $0.17 Diluted $0.61 $0.57 $(0.07) $(0.03) $0.16 Shares used in per share calculations: Basic 31,872 31,008 30,500 30,400 30,035 Diluted 33,061 32,512 30,500 30,400 31,348 28Table of Contents December 31, 2011 2010 2009 2008 2007 (in thousands) Balance Sheet Data: Cash and cash equivalents $26,156 $23,724 $16,934 $13,566 $18,380 Investments 14,486 17,251 18,469 17,756 20,825 Working capital 92,220 82,116 70,681 66,836 75,350 Restricted deposits — — — 3,013 6,700 Total assets 162,488 140,251 107,946 111,662 112,772 Long-term debt, net of current portion — — 420 496 6,250 Stockholders’ equity 147,049 119,804 97,251 96,876 96,986 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations In addition to historical information, the following discussion contains forward-looking statements that are subject to risks and uncertainties. Actualresults may differ substantially from those referred to herein due to a number of factors, including but not limited to risks described in the section entitled Item1A. “Risk Factors” and elsewhere in this Annual Report. This discussion should be read in conjunction with Item 6. “Selected Consolidated Financial Data”and our consolidated financial statements and related notes included elsewhere in this Form 10-K. Critical Accounting Policies and Estimates We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America.Accordingly, we make estimates, assumptions and judgments that affect the amounts reported on our consolidated financial statements. These estimates,assumptions and judgments about future events and their effects on our results cannot be determined with certainty, and are made based upon our historicalexperience and on other assumptions that are believed to be reasonable under the circumstances. These estimates may change as new events occur or additionalinformation is obtained, and we may periodically be faced with uncertainties, the outcomes of which are not within our control and may not be known for aprolonged period of time. We have identified the policies below as critical to our business operations and understanding of our financial condition and results of operations. Acritical accounting policy is one that is both material to the presentation of our consolidated financial statements and requires us to make difficult, subjectiveor complex judgments that could have a material impact on our consolidated financial statements and results of operations. Different estimates that we couldhave used, or changes in the estimates that are reasonably likely to occur, may have a material impact on our financial condition or results of operations. Wealso refer you to our “The Company and Summary of Significant Accounting Policies” discussed in the accompanying notes to our consolidated financialstatements included elsewhere in this Form 10-K. Revenue Recognition We manufacture and sell high-performance compound semiconductor substrates and sell certain raw materials including gallium, germaniumdioxide, and pBN crucibles. After we ship our products, there are no remaining obligations or customer acceptance requirements that would preclude revenuerecognition. Our products are typically sold pursuant to a purchase order placed by our customers, and our terms and conditions of sale do not requirecustomer acceptance. We recognize revenue upon shipment and transfer of title of products to our customers, which is either upon shipment from our dock,receipt at the customer’s dock, or removal from consignment inventory at the customer’s location, provided that we have received a signed purchase order, theprice is fixed or determinable, title and risk of ownership have transferred, collection of resulting receivables is probable, and product returns are reasonablyestimable. We do not provide training, installation or commissioning services.We provide for future returns based on historical experience, current economic trends and changes in customer demand at the time revenue isrecognized. 29Table of Contents Accounts Receivable and Allowance for Doubtful AccountsWe periodically review the likelihood of collection on our accounts receivable balances and provide an allowance for doubtful accounts receivableprimarily based upon the age of these accounts. We evaluate receivables from U.S. customers in excess of 90 days and for receivables from customers locatedoutside the U.S. in excess of 120 days and reserve allowance on the receivable balances if needed. We assess the probability of collection based on a number offactors, including the length of time a receivable balance has been outstanding, our past history with the customer and their creditworthiness.As of December 31, 2011, our accounts receivable balance was $18.0 million with no allowance for doubtful accounts. During 2011, we decreasedour allowance for doubtful accounts by $99,000 compared to the amount as of December 31, 2010 primarily for improved collections worldwide. As ofDecember 31, 2010, our accounts receivable balance was $23.1 million, which was net of an allowance for doubtful accounts of $99,000. During 2010, wedecreased our allowance for doubtful accounts by $64,000 compared to the amount as of December 31, 2009 primarily for improved collections worldwide.As of December 31, 2009, our accounts receivable balance was $15.4 million, which was net of an allowance for doubtful accounts of $163,000. During2009, we decreased our allowance by $367,000 compared to the amount as of December 31, 2008 primarily for improved collections from slow-payingcustomers in Asia. If actual uncollectible accounts differ substantially from our estimates, revisions to the estimated allowance for doubtful accounts would berequired, which could have a material impact on our financial results for the period. The allowance for sales returns is also deducted from gross accounts receivable. During 2011, we utilized $367,000 and charged an additional$29,000 resulting in the allowance for sales returns of $124,000 as of December 31, 2011. During 2010, we utilized $703,000 and charged an additional$309,000 resulting in the allowance for sales returns of $462,000 as of December 31, 2010. During 2009, we utilized $119,000 and charged an additional$842,000 resulting in the allowance for sales returns of $856,000 as of December 31, 2009. Warranty Reserve We maintain a warranty reserve based upon our claims experience during the prior twelve months. Warranty costs are accrued at the time revenue isrecognized. As of December 31, 2011 and 2010, accrued product warranties totaled $1.0 million and $740,000, respectively. The increase in accrued productwarranties is primarily attributable to increased claims for quality issues experienced by some customers. If actual warranty costs differ substantially fromour estimates, revisions to the estimated warranty liability would be required, which could have a material impact on our financial condition and results ofoperations.Inventory Valuation Inventories are stated at the lower of cost or market. Cost is determined using the weighted average cost method. Our inventory consists of rawmaterials as well as finished goods and work-in-process that include material, labor and manufacturing overhead costs. Given the nature of our substrateproducts, and the materials used in the manufacturing process, the wafers and ingots comprising work-in-process may be held in inventory for up to twoyears and three years, respectively, as the risk of obsolescence for these materials is low. We routinely evaluate the levels of our inventory in light of currentmarket conditions in order to identify excess and obsolete inventory and provide a valuation allowance for certain inventories based upon the age and quality ofthe product and the projections for sale of the completed products. As of December 31, 2011 and 2010, we had an inventory reserve of $12.3 million and$11.5 million, respectively, for excess and obsolete inventory. If actual demand for our products were to be substantially lower than estimated, additionalinventory adjustments for excess or obsolete inventory might be required, which could have a material impact on our business, financial condition and resultsof operations. Impairment of Investments We classify our investments in debt and equity securities as available-for-sale securities in accordance with ASC topic 320, Investments—Debt andEquity Securities (“ASC 320”). All available-for-sale securities with a quoted market value below cost (or adjusted cost) are reviewed in order to determinewhether the decline is other-than-temporary. Factors considered in determining whether a loss is temporary include the magnitude of the decline in marketvalue, the length of time the market value has been below cost (or adjusted cost), credit quality, and our ability and intent to hold the securities for a period oftime sufficient to allow for any anticipated recovery in market value. 30Table of Contents We invest in equity instruments of privately-held companies for business and strategic purposes. These investments are classified as other assetsand are accounted for under the cost method as we do not have the ability to exercise significant influence over their operations. We monitor our investments forimpairment and record reductions in carrying value when events or changes in circumstances indicate that the carrying value may not be recoverable.Determination of impairment is highly subjective and is based on a number of factors, including an assessment of the strength of investee’s management, thelength of time and extent to which the fair value has been less than our cost basis, the financial condition and near-term prospects of the investee, fundamentalchanges to the business prospects of the investee, share prices of subsequent offerings, and our intent and ability to hold the investment for a period of timesufficient to allow for any anticipated recovery in our carrying value. We had no write-downs in 2011, 2010 or 2009. Fair Value of Investments In the current market environment, the assessment of the fair value of investment instruments can be difficult and subjective. Although the volume oftrading activity of certain investment instruments has increased in 2011, the rapid changes occurring in today’s financial markets may lead to changes in thefair value of financial instruments in relatively short periods of time. ASC 820 establishes three levels of inputs that may be used to measure fair value. Level 1 instruments represent quoted prices in active markets. Therefore, determining fair value for Level 1 instruments does not require significantmanagement judgment, and the estimation is not difficult. Level 2 instruments include observable inputs other than Level 1 prices, such as quoted prices for identical instruments in markets with insufficientvolume or infrequent transactions (less active markets), issuer credit ratings, non-binding market consensus prices that can be corroborated with observablemarket data, model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated with observablemarket data for substantially the full term of the assets or liabilities, or quoted prices for similar assets or liabilities. These Level 2 instruments require moremanagement judgment and subjectivity compared to Level 1 instruments, including: ●Determining which instruments are most similar to the instrument being priced requires management to identify a sample of similar securitiesbased on the coupon rates, maturity, issuer, credit rating, and instrument type, and subjectively select an individual security or multiplesecurities that are deemed most similar to the security being priced. ●Determining whether a market is considered active requires management judgment. Our assessment of an active market for our marketable debtinstruments generally takes into consideration activity during each week of the one-month period prior to the valuation date of each individualinstrument, including the number of days each individual instrument trades and the average weekly trading volume in relation to the totaloutstanding amount of the issued instrument. ●Determining which model-derived valuations to use in determining fair value requires management judgment. When observable market pricesfor identical securities or similar securities are not available, we price our marketable debt instruments using non-binding market consensusprices that are corroborated with observable market data or pricing models, such as discounted cash flow models, with all significant inputsderived from or corroborated with observable market data. Level 3 instruments include unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets orliabilities. The determination of fair value for Level 3 instruments requires the most management judgment and subjectivity. As of December 31, 2011, we didnot have any assets or liabilities without observable market values that would require a high level of judgment to determine fair value (Level 3 assets). Impairment of Long-Lived Assets We evaluate the recoverability of property, equipment and intangible assets in accordance with ASC topic 360, Property, Plant and Equipment(“ASC 360”). When events and circumstances indicate that long-lived assets may be impaired, we compare the carrying value of the long-lived assets to theprojection of future undiscounted cash flows attributable to such assets. In the event that the carrying value exceeds the future undiscounted cash flows, werecord an impairment charge against income equal to the excess of the carrying value over the asset’s fair value. Fair values are determined based on quotedmarket values, discounted cash flows or internal and external appraisals, as applicable. Assets held for sale are carried at the lower of carrying value orestimated net realizable value. We had no “Assets held for sale” on the consolidated balance sheet as of December 31, 2011 and 2010. 31Table of Contents Stock Based Compensation We grant options to substantially all management employees and believe that this program helps us to attract, motivate and retain high qualityemployees, to the ultimate benefit of our stockholders. We account for stock-based compensation in accordance with the provisions of FASB AccountingStandards Codification (“ASC”) topic 718, Stock-based Compensation (“ASC 718”), using the modified prospective method. We utilize the Black-Scholes option pricing model to estimate the grant date fair value of employee stock compensation awards, which requires theinput of highly subjective assumptions, including expected volatility and expected term. Historical volatility was used in estimating the fair value of our stockoptions awards, while the expected term for our options was estimated based on historical option exercise behavior and post-vesting forfeitures of options byour employees. Further, we estimate forfeitures for stock compensation awards that are not expected to vest. Changes in these inputs and assumptions canmaterially affect the measure of estimated fair value of our stock compensation. We recognize the compensation costs net of an estimated forfeiture rate over the requisite service period of the options award, which is generally thevesting term of four years. The cost of restricted stock awards is determined using the fair value of our common stock on the date of grant. Compensationexpense for restricted stock awards is recognized over the vesting period, which is generally three years or four years. Stock-based compensation expense isrecorded in cost of revenue, research and development, and selling, general and administrative expenses. (see Note 1—Summary of Significant AccountingPolicies—Stock-Based Compensation). All of our stock compensation is accounted for as an equity instrument.Income Taxes We account for income taxes in accordance with ASC topic 740, Income Taxes (“ASC 740”) which requires that deferred tax assets and liabilities berecognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. ASC 740 alsorequires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that a portion of the deferred tax asset will not be realized. We provide for income taxes based upon the geographic composition of worldwide earnings and tax regulations governing each region, particularlyChina. The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws,particularly in foreign countries such as China. See Note 13—”Income Taxes” in the consolidated financial statements for additional information. Results of Operations Overview We were founded in 1986 to commercialize and enhance our proprietary vertical gradient freeze (VGF) technique for producing high-performancecompound semiconductor substrates. We have one operating segment: our substrate business, with limited additional raw materials sales. We recorded ourfirst substrate sales in 1990 and our substrate division currently sells gallium arsenide (GaAs), indium phosphide (InP) and germanium (Ge) substrates tomanufacturers of semiconductor devices for use in applications such as fiber optic and wireless telecommunications, light emitting diodes (LEDs), lasers andfor solar cells for space and terrestrial photovoltaic applications. We also sell raw materials including gallium and germanium through our participation inmajority- and minority-owned joint ventures. During 2011, we continued to qualify our germanium substrates with satellite and terrestrial solar cell systemmanufacturers in the United States, Europe, Asia and the Middle East. Continuing Operations We manufacture all of our semiconductor substrates using our proprietary vertical gradient freeze (VGF) technology. Most of our revenue is fromsales of GaAs substrates. We manufacture all of our products in the People’s Republic of China (PRC or China), which generally has favorable costs forfacilities and labor compared to comparable facilities in the United States or Europe. We also have joint ventures in China that provide us favorable pricing,reliable supply and shorter lead-times for raw materials central to our final manufactured products. Our business and operating results depend in significant part upon capital expenditures of semiconductor designers and manufacturers, which inturn depend upon the current and anticipated market demand for products incorporating semiconductors from these designers and manufacturers. Ourbusiness also depends in part on worldwide economic conditions. During 2011, the United States and other key international economies continued to recoverfrom the recent economic downturn and our business has grown as a whole. Although we experienced some fluctuation in the customer demand for the GaAssubstrates that are used for end-products in the wireless market, our revenues have grown in all other substrates including semi-conducting GaAs substrate,InP substrate and Ge substrate. These results reflect both strong growth in our markets as well as continued share gains and improved operational executionacross our entire organization. Should the worldwide economic conditions continue to recover and customer demand becomes stable, we believe that we are wellpositioned to leverage our PRC-based manufacturing capabilities and access to favorably priced raw materials to increase our market share. 32Table of Contents Revenue 2010 to 2011 2009 to 2010 Years Ended Dec. 31, Increase Increase ($ in thousands) 2011 2010 2009 (Decrease) % Change (Decrease) % Change GaAs $63,697 $67,591 $41,054 $(3,894) (5.8)% $26,537 64.6%InP 5,182 4,038 2,375 1,144 28.3 1,663 70.0 Ge 11,635 8,955 5,440 2,680 29.9 3,515 64.6 Raw Materials 23,606 14,884 6,440 8,722 58.6 8,444 131.1 Other 1 25 55 (24) (96.0) (30) (54.5)Total revenue $104,121 $95,493 $55,364 $8,628 9.0% $40,129 72.5% Revenue increased by $8.6 million or 9.0%, to $104.1 million in 2011 from $95.5 million in 2010. Total GaAs substrate revenue decreased $3.9million, or 5.8%, to $63.7 million in 2011 from $67.6 million in 2010. The decrease in revenue was primarily due to reduced orders from a few bigcustomers as demand fell in the wireless market. Sales of 5 inch and 6 inch diameter GaAs substrates, which are mainly used in wireless devices, decreased by $7.1 million to $20.7 million in2011 compared to $27.8 million in 2010 primarily due to reduced orders from a few big customers as demand fell in the wireless market.Sales of 2 inch, 3 inch and 4 inch diameter GaAs substrates, which are mainly used in LED applications, increased by $3.2 million to $43.0million in 2011 compared to $39.8 million in 2010 primarily due to increased worldwide adoption and investment in LED technology in many applications in2011 compared to the prior year.Revenue increased by $40.1 million or 72.5%, to $95.5 million in 2010 from $55.4 million in 2009. Total GaAs substrate revenue increased$26.5 million, or 64.6%, to $67.6 million in 2010 from $41.1 million in 2009. The increase in revenue was primarily due to the stronger demandenvironment worldwide in 2010 compared to 2009, particularly for our GaAs product. Sales of 5 inch and 6 inch diameter GaAs substrates, which aremainly used in wireless devices, increased by $10.6 million to $27.8 million in 2010 compared to $17.2 million in 2009 primarily due to strong sales ofwireless devices. Sales of 2 inch, 3 inch and 4 inch diameter GaAs substrates, which are mainly used in LED applications, increased by $15.9 million to$39.8 million in 2010 compared to $23.9 million in 2009 primarily due to strong sales of wireless devices as well as the increasing worldwide adoption andinvestment in LED technology in many applications, compared to the worldwide economic slowdown we experienced in the prior year. InP substrate revenue increased by $1.1 million, or 28.3%, to $5.2 million in 2011 compared to $4.0 million in 2010 as demand from customers inthe optical networking industry increased. We continued to see renewed demand for these substrates as investment in high-speed optical communicationsincreased worldwide. InP substrate revenue increased by $1.7 million, or 70.0%, to $4.0 million in 2010 compared to $2.4 million in 2009 as demand fromcustomers in the optical networking industry increased. Ge substrate revenue increased by $2.7 million, or 29.9%, to $11.6 million in 2011 from $9.0 million in 2010. Our Ge substrate revenue increasedas demand from our customers increased for satellite applications and for concentrated photovoltaic solar applications. We continued to make progress in ourpenetration of the solar cell market, particularly in satellite applications. Ge substrate revenue increased by $3.5 million, or 64.6%, to $9.0 million in 2010from $5.4 million in 2009. Our Ge substrate revenue increased primarily due to demand increased for concentrated photovoltaic solar applications from ourGerman and Chinese customers. 33Table of Contents Raw materials revenue increased by $8.7 million, or 58.6%, to $23.6 million in 2011 from $14.9 million in 2010 primarily as a result of increaseddemand from our new and existing customers for 4N raw gallium, as well as from increased selling prices. However, the selling price of gallium has begun tostabilize and we expect that this will affect our raw material revenue in future years. Raw materials revenue increased by $8.4 million, or 131.1%, to $14.9million in 2010 from $6.4 million in 2009 as a result of increased demand of 4N raw gallium.Our raw materials business has increasingly become an important part of our business, as it provides us protection against raw materials pricingincreases and supply constraints. Since we are able to supply raw materials necessary for the production of our substrates at favorable prices, our ability tosell such materials in the open market, at market prices, also provides us with pricing protection. We expect to continue to expand our raw materials salesefforts. However, the selling price of gallium has begun to stabilize and we expect that this will affect our raw material revenue in future years.Revenue by Geographic Region 2010 to 2011 2009 to 2010 Years Ended Dec. 31, Increase Increase ($ in thousands) 2011 2010 2009 (Decrease) % Change (Decrease) % Change North America* $20,471 $20,739 $10,701 $(268) (1.3)% $10,038 93.8%% of total revenue 20% 22% 19% Europe 21,082 18,838 10,489 2,244 11.9 8,349 79.6 % of total revenue 20% 20% 19% Japan 13,749 11,857 7,777 1,892 16.0 4,080 52.5 % of total revenue 13% 12% 14% Taiwan 9,813 14,834 10,453 (5,021) (33.8) 4,381 41.9 % of total revenue 9% 15% 19% Asia Pacific (excludingJapan and Taiwan) 39,006 29,225 15,944 9,781 33.5 13,281 83.3 % of total revenue 38% 31% 29% Total revenue $104,121 $95,493 $55,364 $8,628 9.0% $40,129 72.5% *Primarily the United States. Sales to customers located outside of North America represented approximately 80%, 78%, and 81% of our revenue during 2011, 2010 and 2009,respectively. Revenue from customers located in North America decreased by $268,000, or 1.3%, to $20.5 million in 2011 from $20.7 million in 2010. Thisdecrease in 2011 was due to a decrease in the demand for GaAs substrates of $1.9 million, reflecting the slower demand in the wireless market, offset by anincrease in the demand for raw materials of $935,000 primarily from 4N raw gallium and an increase in the demand for InP substrates of $637,000 used inthe optical networking industry. Revenue from customers located in North America increased by $10.0 million, or 93.8%, to $20.7 million in 2010 from$10.7 million in 2009. This increase in 2010 was due to an increase in the demand for substrates of $9.2 million and an increase in the demand for rawmaterials of $837,000 due to the stronger demand environment compared to the economic slowdown we experienced in the prior year. Revenue from customers located in Europe increased by $2.2 million, or 11.9%, to $21.1 million in 2011 from $18.8 million in 2010. Thisincrease was mainly from increased sales of $2.8 million primarily of GaAs substrates, Ge substrates and 4N raw gallium to customers in Germany,increased sales of $911,000 primarily of GaAs substrates to customers in the United Kingdom, offset by decreased sales of $1.7 million primarily of GaAssubstrates to customers in France. Revenue from customers located in Europe increased by $8.3 million, or 79.6%, to $18.8 million in 2010 from $10.5million in 2009. This increase was mainly from increased sales of $5.6 million primarily of GaAs substrates and Ge substrates to customers in Germany,increased sales of $1.2 million primarily of GaAs substrates to customers in France and $1.1 million in raw materials sales to customers in Slovakia. Revenue from customers located in Japan increased by $1.9 million, or 16.0%, to $13.7 million in 2011 from $11.9 million in 2010. The increasemainly came from increased sales of semi-conducting GaAs substrates of $3.1 million, increased raw material sales of $1.5 million and increased sales of Gesubstrates of $246,000, offset by decreased sales of semi-insulating GaAs substrates of $3.3 million reflecting the slower demand in wireless market. Revenuefrom customers in Japan increased by $4.1 million, or 52.5%, to $11.9 million in 2010 from $7.8 million in 2009. The increase mainly came fromincreased sales of substrates of all sizes amounting to $3.0 million and increased raw material sales of $960,000. 34Table of Contents Revenue from customers in Taiwan decreased by $5.0 million, or 33.8%, to $9.8 million in 2011 from $14.8 million in 2010. This decrease wasmainly from decreased sales of GaAs substrates as demand for both semi-insulating and semi-conducting substrates decreased from a few big customers.Revenue from customers in Taiwan increased by $4.4 million, or 41.9%, to $14.8 million in 2010 from $10.5 million in 2009. This increase was mainlyfrom increased sales of $3.6 million of GaAs substrates as demand for both semi-insulating and semi-conducting substrates increased. Revenue from customers in the Asia Pacific (excluding Japan and Taiwan) increased by $9.8 million, or 33.5%, to $39.0 million in 2011 from$29.2 million in 2010. The increase was mainly from increased sales of $8.7 million to customers in the PRC due to increases primarily in demand for rawmaterials and all substrates and increased sales of $1.0 million primarily from GaAs substrates to customers in Singapore and Korea. Revenue fromcustomers in the Asia Pacific (excluding Japan and Taiwan) increased by $13.3 million, or 83.3%, to $29.2 million in 2010 from $15.9 million in 2009. Theincrease was mainly from increased sales of $8.1 million to customers in the PRC due to an increase primarily in demand for raw materials and substrates,and increased sales of $4.4 million primarily from GaAs substrates to customers in Singapore. Gross Margin 2010 to 2011 2009 to 2010 Years Ended Dec. 31, Increase Increase 2011 2010 2009 (Decrease) % Change (Decrease) % Change ($ in thousands) Gross profit $44,782 $36,495 $13,869 $8,287 22.7% $22,626 163.1%Gross Margin % 43.0% 38.2% 25.1% Gross margin increased to 43.0% of total revenue in 2011 from 38.2% of total revenue in 2010. Sales product mix, and process improvements inproduction such as longer ingots and first pass yield improvements in ingots, continued to contribute to higher gross margins, as well as raw material saleswith higher gross margins due to higher gallium selling prices compared to the prior year. The 2011 quarterly trend of gross margin for the first quarter to thefourth quarter of 43.4%, 46.7%, 43.3% and 36.9%, respectively, demonstrates the high rate of absorption of manufacturing overhead with higher productionvolume in the earlier quarters of the year. The lower 36.9% gross margin for the fourth quarter was due to the lower rate of absorption of manufacturingoverhead as a result of fluctuation of customers’ orders in the wireless market towards the end of the year. Gross margin increased to 38.2% of total revenue in 2010 from 25.1% of total revenue in 2009. Sales product mix, process improvements inproduction such as longer ingots and first pass yield improvements in wafers, and improved slicing methods contributed to higher gross profit for the yearended December 31, 2010. Our manufacturing facility in Beijing was operating at a higher utilization capacity in 2010 compared to the prior year, whichresulted in higher absorption rates. The 2010 quarterly trend of gross margin for the first quarter to the fourth quarter of 36.1%, 36.8%, 39.3% and 39.8%,respectively, demonstrates the high rate of absorption of manufacturing overhead with higher production volume. The lower 25.1% gross margin for the yearended December 31, 2009 was primarily due to the low rate of absorption of manufacturing overhead as a result of reduced sales and hence lower productionvolume. Selling, General and Administrative Expenses 2010 to 2011 2009 to 2010 Years Ended Dec. 31, Increase Increase 2011 2010 2009 (Decrease) % Change (Decrease) % Change ($ in thousands) Selling, general andadministrativeexpenses $14,836 $13,972 $13,389 $864 6.2% $583 4.4%% of total revenue 14.2% 14.6% 24.2% Selling, general and administrative expenses increased $864,000 to $14.8 million for 2011 compared to $14.0 million for 2010. The increase wasprimarily due to (i) $606,000 higher health insurance costs in China compared to a health insurance refund received in the prior year, (ii) $363,000 higherlabor costs from annual salary increases and increased average headcount, (iii) $323,000 higher taxes and registration expenses primarily from new businesstaxes levied on all foreign-owned companies in China., partially offset by (iv) $517,000 lower selling expenses mainly due to absence of severance cost andpersonnel cost after the departure of one of the executive officers at the end of 2010. We expect our selling, general administrative expenses may increase in thefuture with rising costs of doing business in China for increasing labor costs, business taxes and utilities expenses. 35Table of Contents Selling, general and administrative expenses increased $583,000 to $14.0 million for 2010 compared to $13.4 million for 2009. The increase wasprimarily due to (i) $1.0 million higher commission and bonus accrual based on improved company performance, (ii) $346,000 higher accounting fees for theintegrated audit including the SOX audit for 2010, which was not required for 2009, (iii) $283,000 higher legal fees incurred in fourth quarter of 2010 toconclude the royalty negotiation with Sumitomo, partially offset by (iv) $567,000 lower legal fees as certain legal fees incurred in 2009 did not recur in 2010,and (v) $376,000 lower severance cost. Research and Development Expenses 2010 to 2011 2009 to 2010 Years Ended Dec. 31, Increase Increase 2011 2010 2009 (Decrease) % Change (Decrease) % Change ($ in thousands) Research anddevelopment expenses $2,473 $2,339 $1,569 $134 5.7% $770 49.1%% of total revenue 2.4% 2.4% 2.8% Research and development expenses increased $134,000, or 5.7%, to $2.5 million for 2011, from $2.3 million for 2010 primarily due to higherlabor costs from increased headcount of our joint ventures in China. We expect our rate of expenditures on research and development costs in 2012 to be stableas our joint ventures continue to maintain their efforts in research and development. Research and development expenses increased $770,000, or 49.1%, to $2.3 million for 2010, from $1.6 million for 2009 mainly from increases of$553,000 for costs relating to new product testing primarily from one of our joint ventures to possible qualification for a government incentive program toreduce future tax rates and development of 6” Germanium and increased bonus accrual of $95,000 due to better company performance.Interest Income, Net 2010 to 2011 2009 to 2010 Years Ended Dec. 31, Increase Increase 2011 2010 2009 (Decrease) % Change (Decrease) % Change ($ in thousands) Interest income, net $449 $53 $177 $396 747.2% $(124) (70.1)%% of total revenue 0.4% 0.1% 0.3% Interest income, net increased $396,000 to $449,000 for 2011 from $53,000 for 2010 as a result of higher returns from various investment portfoliomixes and the absence of interest expense for the tenant improvement loan at our Fremont, U.S. offices, which was paid in full in September 2010. Interest income, net decreased $124,000 to $53,000 for 2010 from $177,000 for 2009 as a result of lower returns from various investment portfoliomixes. 36Table of Contents Other Income, Net and Noncontrolling Interest 2010 to 2011 2009 to 2010 Years Ended Dec. 31, Increase Increase 2011 2010 2009 (Decrease) % Change (Decrease) % Change ($ in thousands) Other income, net $696 $2,462 $385 $(1,766) (71.7)% $2,077 539.5%% of total revenue 0.7% 2.6% 0.7% Noncontrolling interest $5,503 $1,723 $393 $3,780 219.4% $1,330 338.4%% of total revenue 5.3% 1.8% 0.7% Other income, net was $696,000 for 2011 primarily due to net investment gains of $741,000 from our minority-owned joint ventures that are notconsolidated, a $319,000 small business development fund received by our joint ventures in China, partially offset by $316,000 withholding tax on foreigndividends from joint ventures and foreign exchange losses of $101,000. Other income, net was $2.5 million for 2010 primarily due to a $1.2 million net sales tax refund, a realized gain of $346,000 on the sale ofinvestments, investment gains of $259,000 from our minority-owned joint ventures that are not consolidated, foreign exchange gain of $614,000, partiallyoffset by a $109,000 tax on foreign dividends from joint ventures. Minority interest in earnings of consolidated subsidiaries for the years ended December 31, 2011, 2010, and 2009 were $5.5 million, $1.7 million,and $393,000, respectively. The increase in minority interest from 2010 to 2011 was due to improved profitability from all of our majority-owned consolidatedsubsidiaries which had higher sales worldwide in 2011. The increase in minority interest from 2009 to 2010 was due to improved profitability from all of ourmajority-owned consolidated subsidiaries which had higher sales worldwide in 2010. Provision for Income Taxes 2010 to 2011 2009 to 2010 Years Ended Dec. 31 Increase Increase 2011 2010 2009 (Decrease) % Change (Decrease) % Change ($ in thousands) Provision for incometaxes $2,795 $2,323 $471 $472 20.3% $1,852 393.2%% of total revenue 2.7% 2.4% 0.9% Provision for income taxes for 2011 was $2.8 million, which was mostly related to our foreign subsidiaries. The increase in provision for incometaxes from 2010 to 2011 was due to increased net income of our foreign subsidiaries as well as higher taxable income for state taxes purpose in the U.S.Besides the state taxes liabilities, no income taxes have been provided for U.S. operations due to our available federal net operating loss carryforwards.Provision for income taxes for 2010 was $2.3 million, which was mostly related to our foreign subsidiaries. The increase in provision for incometaxes from 2009 to 2010 was due to improved profitability of our foreign subsidiaries. Provision for income taxes for 2009 was $471,000, which was mostly related to our foreign subsidiaries. Due to our uncertainty regarding our future profitability, we recorded a full valuation allowance against our net deferred tax assets of $49.6 million in2011, $53.1 million in 2010 and $54.7 million in 2009. 37Table of Contents Liquidity and Capital Resources Years Ended December 31, 2011 2010 2009 ($ in thousands) Net cash provided by (used in): Operating activities $18,132 $11,009 $4,665 Investing activities (15,430) (5,272) 2,365 Financing activities (999) 474 (3,692)Effect of exchange rate changes 729 579 30 Net change in cash and cash equivalents 2,432 6,790 3,368 Cash and cash equivalents—beginning period 23,724 16,934 13,566 Cash and cash equivalents—end of period 26,156 23,724 16,934 Short and long-term investments—end of period 14,486 17,251 18,469 Total cash, cash equivalents and short-term and long-term investments $40,642 $40,975 $35,403 We consider cash and cash equivalents, short-term investments and long-term investments as liquid and available for use within two years in ourcurrent operations. Short-term investments and long-term investments are comprised of U.S. government securities and investment-grade corporate notes andbonds. As of December 31, 2011, our principal sources of liquidity were $40.6 million of which $15.0 million was held by our consolidated joint ventures,consisting of cash and cash equivalents of $26.2 million, short-term investments of $5.5 million and long-term investments of $9.0 million, a decrease of$400,000 from $41.0 million as of December 31, 2010. The $2.4 million combined increase in cash and cash equivalents was primarily due to net cashprovided by operating activities of $18.1 million, offset by net cash used in investing activities of $15.4 million and net cash used in financing activities of$999,000. Short-term and long-term investments decreased by $2.8 million to $14.5 million from $17.3 million.Cash and cash equivalents and short-term and long-term investments increased $5.6 million to $41.0 million as of December 31, 2010 from $35.4million as of December 31, 2009. The $6.8 million increase in cash and cash equivalents was primarily due to net cash provided by operating activities of$11.0 million, and net cash provided by financing activities of $474,000, partially offset by net cash used in investing activities of $5.3 million. Short-termand long-term investments decreased by $1.2 million to $17.3 million from $18.5 million. Net cash provided by operating activities of $18.1 million for 2011 was primarily comprised of our net income of $25.8 million, adjusted for non-cash items of depreciation of $3.4 million, stock-based compensation of $896,000, amortization of marketable securities premium of $368,000, a realizedloss on sale of investments of $8,000 and a net increase of $12.4 million in assets and liabilities. The $12.4 million net increase in assets and liabilitiesprimarily resulted from a $9.8 million increase in inventories, a $4.0 million decrease in accounts payable and accrued liabilities, a $3.3 million increase inprepaid expenses and other current assets and a $781,000 decrease in other long-term liabilities, partially offset by a $5.2 million decrease in accountsreceivable and a $426,000 decrease in other assets. Net cash provided by operating activities of $11.0 million for 2010 was primarily comprised of our net income of $20.4 million, adjusted for non-cash items of depreciation of $2.9 million, stock-based compensation of $655,000, amortization of marketable securities premium of $316,000, offset by arealized gain on sale of investments of $346,000 and a net increase of $12.9 million in assets and liabilities. The $12.9 million net increase in assets andliabilities primarily resulted from a $8.3 million increase in inventories, a $7.7 million increase in accounts receivable, a $5.7 million increase in other assets,a $1.7 million increase in prepaid expenses and other current assets, partially offset by a $5.8 million increase in other long-term liabilities, a $3.2 millionincrease in accrued liabilities and a $1.5 million increase in accounts payable. Net cash provided by operating activities of $4.7 million for 2009 was primarily comprised of our net loss of $1.5 million, adjusted for non-cashitems of depreciation of $3.1 million, stock-based compensation of $766,000, a restructuring charge of $507,000, and a $164,000 loss on sale ofinvestments, partially offset by a realized gain on sale of property, plant and equipment of $237,000, and by a net decrease of $1.9 million in assets andliabilities. The net decrease in assets and liabilities of $1.9 million resulted from a $7.4 million decrease in inventories, net, a $717,000 decrease in prepaidexpenses, partially offset by a $3.9 million increase in accounts receivable, net, a $1.1 million decrease in accounts payable, a $769,000 increase in otherassets, a $390,000 decrease in accrued liabilities, and a $27,000 decrease in other long-term liabilities. Net cash used in investing activities of $15.4 million for the year ended December 31, 2011 was primarily from the purchase of property, plant andequipment of $13.1 million mainly in capital projects at our China facilities, investments in new joint ventures of $3.0 million, loans from our consolidatedjoint ventures to their equity investment entities of $1.6 million offset by net proceeds from investment securities totaling $2.2 million. 38Table of Contents Net cash used in investing activities of $5.3 million for the year ended December 31, 2010 was primarily net proceeds from investment securitiestotaling $1.1 million, offset by purchases of property and equipment of $6.4 million. Net cash provided by investing activities of $2.4 million for the year ended December 31, 2009 included a decrease in our restricted deposits of $3.0million, net proceeds from investment securities totaling $885,000, proceeds from the sale of property, plant and equipment of $430,000, partially offset bypurchases of property and equipment of $2.0 million. In January 2012, we have agreed with the Administrative Commission of Tianjin Economy and Technology Development Zone to establish a secondmanufacturing facility in Tianjin, China. The arrangement provides us with land use rights for approximately 32 acres of industrial land located in YixianScientific and Industrial Park to construct a compound semiconductor substrate manufacturing facility that would be completed in phases by 2017. We havecommitted to invest $12.5 million in the first phase of the construction of the facility and have an understanding with our BoYu joint venture that it willcommit the RMB 32.0 million, or approximately $5.0 million, that is anticipated to be required for the portion of the project devoted to crystal support, inexchange for land use rights, enterprise and individual income tax rebates, employee hiring and development subsidies, and other benefits. The investment of$12.5 million in one of the projects will be funded by cash flow generated by our normal operations supplemented by our existing line of credit. Theinvestment of $5.0 million will be funded by our BoYu joint venture.In January 2012, we increased the credit facility line of credit maintained by us with a bank from $3.0 million to $10.0 million at an annual interestrate of 1.65% above the current 30-day LIBOR (London Interbank Offered Rate). As of December 31, 2011 and 2010, we had not used the $3.0 million line ofcredit.Net cash used in financing activities was $999,000 for the year ended December 31, 2011 consisted of $1.6 million of dividends paid by jointventures, offset by $637,000 from the proceeds from the exercise of employee stock options. Net cash provided by financing activities was $474,000 for the year ended December 31, 2010 consisted of $1.5 million from the proceeds from theexercise of employee stock options, offset by $496,000 long-term debt payment and $527,000 of dividends paid by joint ventures. Net cash used in financing activities was $3.7 million for the year ended December 31, 2009 and consisted of $3.1 million paying down our line ofcredit and long-term debt, $1.0 million of dividends paid by joint ventures, partially offset by $351,000 from the proceeds from the exercise of employee stockoptions. We believe that we have adequate cash and investments to meet our needs over the next 12 months. If our sales decrease, however, our ability togenerate cash from operations will be adversely affected which could adversely affect our future liquidity, require us to use cash at a more rapid rate thanexpected, and require us to seek additional capital. There can be no assurance that such additional capital will be available or, if available it will be at termsacceptable to us. On September 13, 2011, our registration statement on Form S-3 was declared effective by the Securities and Exchange Commission (SEC).We may from time to time offer up to $60.0 million of common stock, preferred stock, depositary shares, warrants, debt securities and/or units in one ormore offerings and in any combination. We intend to use the net proceeds from any sale of securities under the shelf registration statement for general corporatepurposes, which may include capital expenditures in connection with our planned expansion of our manufacturing facilities in China. The timing of anyoffering will be at our discretion and will depend on many factors, including the prevailing market conditions. Specific terms and share prices of any futureoffering under the registration statement will be established at the time of any such offering, and will be described in a prospectus supplement that we will filewith the SEC.Cash from operations could be affected by various risks and uncertainties, including, but not limited to those set forth below under Item 1A. “RiskFactors” above.Off-Balance Sheet Arrangements We do not have any off-balance sheet financing arrangements and have never established any special purpose entities. We have not entered into anyoptions on non-financial assets.Contractual Obligations We lease certain office space, manufacturing facilities and property under long-term operating leases expiring at various dates through November2015. The lease agreement for the facility at Fremont, California with approximately 27,760 square feet commenced on December 1, 2008 for a term of sevenyears, with an option by us to cancel the lease after five years, upon forfeiture of the security deposit and payment of one-half of the fifth year’s rent. Total rentexpenses under these operating leases were approximately $460,000, $308,000, and $298,000 for year ended December 31, 2011, 2010 and 2009,respectively. 39Table of Contents We entered into a royalty agreement with a vendor effective December 3, 2010 with a term of eight years, terminating December 31, 2018. We and ourrelated companies are granted a worldwide, nonexclusive, royalty bearing, irrevocable license to certain patents for the term on the agreement. We shall pay atotal of $7.0 million royalty payment over eight years that began in 2011 based on future royalty bearing sales. Royalty expense under this agreement was $1.3million for the year ended December 31, 2011 and was included in cost of revenue.The following table summarizes our contractual obligations as of December 31, 2011 (in thousands): Payments due by period Contractual Obligations Total Less than 1 year 1-3years 3-5years More than5 years Operating leases $1,348 $376 $686 $286 $— Royalty agreement 5,500 1,375 1,600 1,375 1,150 Total $6,848 $1,751 $2,286 $1,661 $1,150 40Table of ContentsSelected Quarterly Results of OperationsThe following table sets forth unaudited quarterly results for the eight quarters ended December 31, 2011. We believe that all necessary adjustments,consisting only of normal recurring adjustments, have been included in the amounts stated below to present fairly such quarterly information. The operatingresults for any quarter are not necessarily indicative of results for any subsequent period. Quarters Ended (in thousands, except Dec. 31, *Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31, for per share amounts) 2011 2011 2011 2011 2010 2010 2010 2010 Revenue $21,219 $28,305 $30,031 $24,566 $26,866 $26,809 $23,177 $18,641 Cost of revenue 13,386 16,042 16,005 13,906 16,169 16,278 14,642 11,909 Gross profit 7,833 12,263 14,026 10,660 10,697 10,531 8,535 6,732 Operating expenses: Selling, general andadministrative 3,851 3,581 3,714 3,690 4,167 3,347 3,039 3,419 Research and development 657 612 699 505 911 462 515 451 Total operating expenses 4,508 4,193 4,413 4,195 5,078 3,809 3,554 3,870 Income from operations 3,325 8,070 9,613 6,465 5,619 6,722 4,981 2,862 Interest income (expense), net 190 103 69 87 37 26 (25) 15 Other income and (expense), net 253 356 450 (363) 385 442 1,556 79 Income before provision forincome taxes 3,768 8,529 10,132 6,189 6,041 7,190 6,512 2,956 Provision for income taxes 162 667 1,064 902 646 871 560 246 Net income 3,606 7,862 9,068 5,287 5,395 6,319 5,952 2,710 Less: Net income attributableto noncontrolling interest 1,040 1,378 2,006 1,079 496 680 417 130 Net income attributable toAXT, Inc $2,566 $6,484 $7,062 $4,208 $4,899 $5,639 $5,535 $2,580 Net income attributable toAXT, Inc. per common share: Basic $0.08 $0.20 $0.22 $0.13 $0.16 $0.18 $0.18 $0.08 Diluted $0.08 $0.19 $0.21 $0.13 $0.15 $0.17 $0.17 $0.08 Weighted average number ofcommon shares outstanding: Basic 31,991 31,944 31,831 31,718 31,061 30,944 30,834 30,743 Diluted 32,822 33,126 33,093 33,199 32,614 32,509 32,172 31,792 *Certain reclassifications have been made between cost of revenue and selling, general and administrative expenses. The reclassifications have no impacton reported total assets, stockholders’ equity and net income. Recent Accounting Pronouncements Recent accounting pronouncements are detailed in Note 1 to our Consolidated Financial Statements included in this Annual Report on Form 10-K.Item 7A. Quantitative and Qualitative Disclosures about Market Risk Foreign Currency Risk A significant portion of our business is conducted in currencies other than the U.S. dollar. The functional currency for our foreign operations is therenminbi, the local currency of China, where our operating expenses are predominantly in the local currency. Since most of our operations are conducted inChina, most of our costs are incurred in Chinese currency, which subjects us to fluctuations in the exchange rates between the U.S. dollar and the Chineserenminbi. We incur transaction gains or losses resulting from consolidation of expenses incurred in local currencies for these subsidiaries, as well as intranslation of the assets and liabilities of these assets at each balance sheet date. Our financial results could be adversely affected by factors such as changes inforeign currency exchange rates or weak economic conditions in foreign markets, including the revaluation by China of the renminbi, and any futureadjustments that China may make to its currency such as any move it might make to a managed float system with opportunistic interventions. In the futurewe may experience foreign exchange losses on our non-functional currency denominated receivables and payables to the extent that we have not mitigated ourexposure utilizing foreign currency forward exchange contracts. Foreign exchange losses could have a material adverse effect on our operating results and cashflows. The U.S. is currently pressuring China to revalue the renminbi, which could adversely affect our operation costs and results of operations. If we do noteffectively manage against these risks, our cash flows and financial condition may be adversely affected. 41Table of Contents In July 2005, China agreed to a shift in Chinese currency policy. It established a 2% revaluation of the renminbi and referenced the renminbi to abasket of currencies, with a daily trading band of +/−0.3%. Depending on market conditions and the state of the Chinese economy, it is possible that Chinawill make more adjustments in the future. Over the next five to ten years, China may move to a managed float system, with opportunistic interventions. Thismay negatively impact the United States dollar and U.S. interest rates, which, in turn, could negatively impact our operating results and financial condition.The functional currency of our Chinese subsidiaries, including our joint ventures, is the local currency; since most of our operations are conducted in China,most of our costs are incurred in Chinese currency, which subjects us to fluctuations in the exchange rates between the U.S. dollar and the Chinese renminbi.We incur transaction gains or losses resulting from consolidation of expenses incurred in local currencies for these subsidiaries, as well as in translation of theassets and liabilities of these assets at each balance sheet date. These risks may be increased by the fluctuation and revaluation of the Chinese renminbi. If wedo not effectively manage the risks associated with this currency risk, our revenue, cash flows and financial condition could be adversely affected.We manage against these risks by actively monitoring our exchange rate exposure. Our foreign operations, however, in most instances act as a naturalhedge since both operating expenses as well as revenues and both assets and liabilities are generally denominated in their respective local currency. In theseinstances, although an unfavorable change in the exchange rate of foreign currencies against the U.S. dollar will result in lower revenues when translated intoU.S. dollars, the operating expenses will be lower as well. We do not use short-term forward exchange contracts for hedging purposes to reduce the effects ofadverse foreign exchange rate movements. We had previously purchased foreign exchange contracts to hedge against certain trade accounts receivabledenominated in Japanese yen. The change in the fair value of the forward contracts was recognized as part of the related foreign currency transactions as theyoccur. As of December 31, 2011 and 2010, we had no outstanding commitments with respect to foreign exchange contracts.During 2011, we recorded net realized foreign exchange losses of $101,000, included as part of other income in our consolidated statements ofoperations. We incurred foreign currency transaction exchange gains and losses due to operations in general. It is uncertain whether these currency trends willcontinue. In the future we may experience foreign exchange losses on our non-functional currency denominated receivables and payables to the extent that wehave not mitigated our exposure utilizing foreign currency forward exchange contracts. Foreign exchange losses could have a materially adverse effect on ouroperating results and cash flows. During 2011, we recorded unrealized foreign currency gains of $1.7 million related to currency translation which areincluded in the balance of accumulated other comprehensive income on our consolidated balance sheet. Interest Rate Risk Cash and cash equivalents earning interest and certain variable rate debt instruments are subject to interest rate fluctuations. The following table setsforth the probable impact of a 10% change in interest rates (in thousands): Instrument Balance as ofDecember 31,2011 CurrentInterestRate Projected AnnualInterestIncome/(Expense) Proforma 10%Interest RateDeclineIncome/(Expense) Proforma 10%Interest RateIncreaseIncome/(Expense) Cash $25,299 0.38% $96 $87 $106 Cash equivalents 857 0.14 1 1 1 Investment in debt and equity instruments 14,486 3.51 508 457 559 $605 $545 $666 The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk. Financialinstruments that potentially subject us to concentration of credit risk consist primarily of cash and cash equivalents, short-term investments, and tradeaccounts receivable. We invest primarily in money market accounts, certificates of deposits, corporate bonds and notes, and government securities. We areexposed to credit risks in the event of default by the issuers to the extent of the amount recorded on the consolidated balance sheets. These securities aregenerally classified as available-for-sale and consequently are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separatecomponent of accumulated other comprehensive income, net of estimated tax. Our cash, cash equivalents and short-term investments are in high-qualitysecurities placed with major banks and financial institutions and commercial paper. We have no investments in auction rate securities. 42Table of ContentsCredit Risk We perform periodic credit evaluations of our customers’ financial condition and generally do not require collateral. Two customers accounted for10% or more of our trade accounts receivable balance at 33% and 12%, respectively, as of December 31, 2011. One customer accounted for 10% or more of ourtrade accounts receivable balance at 30% as of December 31, 2010. Equity RiskWe maintain minority investments directly, and indirectly through our joint ventures in privately-held companies located in China. These minorityinvestments are reviewed for other than temporary declines in value on a quarterly basis. These investments are classified as other assets in the consolidatedbalance sheets and are either accounted for under the cost method or under equity method consolidated through joint ventures as we do not have the ability toexercise significant influence over their operations. We monitor our investments for impairment and record reductions in carrying value when events or changesin circumstances indicate that the carrying value may not be recoverable. Reasons for other than temporary declines in value include whether the relatedcompany would have insufficient cash flow to operate for the next twelve months, significant changes in the operating performance and changes in marketconditions. As of December 31, 2011 and 2010, the direct minority investments totaled $392,000, and the indirect minority investments totaled $1.3 millionand $341,000, respectively. Item 8. Consolidated Financial Statements and Supplementary Data The consolidated financial statements, related notes thereto and financial statement schedule required by this item are listed and set forth beginningon page 48, and is incorporated by reference here. Supplementary financial information regarding quarterly financial information required by this item is setforth under the caption “Selected Quarterly Results of Operations” in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results ofOperations,” and is incorporated by reference here. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures Evaluation of disclosure controls and procedures. Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of the design andoperation of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based upon this evaluation, ourChief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures as defined under Exchange Act Rules 13a-15(e) and 15d-15(e) were effective at the reasonable assurance level to ensure that information required to be disclosed in our Securities Exchange Act reportsis recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission and is accumulated andcommunicated to management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regardingrequired disclosure.Our disclosure controls and procedures include components of our internal control over financial reporting. Management’s assessment of theeffectiveness of our internal control over financial reporting is expressed at the level of reasonable assurance because a control system, no matter how welldesigned and operated, can provide only reasonable assurance that the control system’s objectives will be met. 43Table of ContentsManagement’s report on internal control over financial reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed by, or under the supervision of, our ChiefExecutive Officer and Chief Financial Officer, and implemented by our Board of Directors, management and other personnel to provide reasonable assuranceregarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principlesgenerally accepted in the United States. Internal control over financial reporting includes those policies and procedures that: ●pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and dispositions of our assets; ●provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance withGAAP, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and ●provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that couldhave a material effect on the financial statements. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate. Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has assessed theeffectiveness of our internal control over financial reporting as of December 31, 2011 based on the criteria established in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management has concluded that our internalcontrol over financial reporting was effective as of December 31, 2011. Our independent registered public accounting firm, Burr Pilger Mayer, Inc. has audited the consolidated financial statements included in this AnnualReport on Form 10-K and has issued its report on the effectiveness of our internal control over financial reporting as of December 31, 2011. Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2011 that has materially affected,or is reasonably likely to materially affect, our internal control over financial reporting. Item 9B. Other Information On January 17, 2012, our credit line account with UBS Bank USA (“UBS”) was increased from $3.0 million to $10.0 million at an annual interestrate of 1.65% above the current 30-day LIBOR (London Interbank Offered Rate). Our original credit line account with UBS was opened in December 2008pursuant to a Credit Line Account Application and Agreement for Organizations and Businesses. The credit line account is for an uncommitted, demandcredit facility. Loans made under this account are subject to final credit and bank approval. 44Table of Contents Report of Independent Registered Public Accounting FirmTo the Board of Directors and Stockholders ofAXT, Inc.We have audited the internal control over financial reporting of AXT, Inc. and its subsidiaries (the “Company”) as of December 31, 2011, based oncriteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over FinancialReporting, appearing in item 9A. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weaknessexists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internalcontrol over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately andfairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary topermit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.In our opinion, AXT, Inc. and its subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December31, 2011, based on the COSO criteria.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidatedbalance sheets of AXT, Inc. and its subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of operations, stockholders’equity and cash flows for each of the three years in the period ended December 31, 2011 and our report dated March 14, 2012 expressed an unqualifiedopinion thereon. /s/ Burr Pilger Mayer, Inc. San Jose, CaliforniaMarch 14, 2012 45Table of Contents PART III The United States Securities and Exchange Commission (“SEC”) allows us to include information required in this report by referring to otherdocuments or reports we have already or will soon be filing. This is called “Incorporation by Reference.” We intend to file our definitive proxy statement for ourannual meeting of stockholders to be held on May 15, 2012 (the “Proxy Statement”) pursuant to Regulation 14A not later than 120 days after the end of thefiscal year covered by this report, and certain information therein is incorporated in this report by reference. Item 10. Directors, Executive Officers and Corporate Governance The information required by this item with respect to identification of directors is incorporated by reference to the information contained in the sectioncaptioned “Information About our Board of Directors” in the Proxy Statement. The information with respect to our executive officers, is incorporated byreference to the information contained in the section captioned “Executive Officers” in the Proxy Statement. Information with respect to Items 405 of RegulationS-K is incorporated by reference to the information contained in the sections of the Proxy Statement captioned “Section 16(a) Beneficial Ownership ReportingCompliance.” There will be no disclosure under Item 407(c)(3). Information with respect to Items 407(d)(4) and 407(d)(5) is incorporated by reference to theinformation contained in the sections of the Proxy Statement captioned “Corporate Governance—Committees of the Board of Directors.” The Board of Directors of AXT, Inc. has adopted a Code of Conduct and Ethics (the “Code”) that applies to our principal executive officers,principal financial officer, and corporate controller, as well as other employees. A copy of this Code has been posted on our Internet website at www.axt.com.Any amendments to, or waivers from, a provision of our Code that applies to our principal executive officer, principal financial officer, controller, or personsperforming similar functions and that relates to any element of the Code enumerated in paragraph (b) of Item 406 of Regulation S-K shall be disclosed byposting such information on our website. Item 11. Executive Compensation The information required by this Item is incorporated herein by reference to information set forth in our Proxy Statement under the section entitled“Executive Compensation and Other Matters.” Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this Item is incorporated herein by reference to information set forth in our Proxy Statement under the section entitled“Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information.” Item 13. Certain Relationships and Related Transactions and Director Independence Information required by this item will be set forth in our Proxy Statement under the headings “Compensation Committee Interlocks and InsiderParticipation” and “Certain Relationships and Related Transactions,” which information is incorporated herein by reference. Item 14. Principal Accountant Fees and Services The information required by this Item is incorporated herein by reference to information set forth in our Proxy Statement under the section entitled“Ratification of Appointment of Independent Registered Public Accountants.” 46Table of Contents PART IV Item 15. Exhibits and Financial Statement Schedules (a) The following documents are filed as part of this report: (1) Financial Statements: INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm, Burr Pilger Mayer, Inc.48Consolidated Balance Sheets49Consolidated Statements of Operations50Consolidated Statements of Stockholders’ Equity51Consolidated Statements of Cash Flows52Notes to Consolidated Financial Statements53 (2) Financial Statement Schedules All schedules have been omitted because the required information is not applicable or because the information required is included in the consolidatedfinancial statements or notes thereto. (b) Exhibits See Index to Exhibits attached elsewhere to this Form 10-K. The exhibits listed in the accompanying Index to Exhibits are filed as part of, orincorporated by reference into, this report on Form 10-K. 47Table of Contents Report of Independent Registered Public Accounting FirmTo the Board of Directors and Stockholders ofAXT, Inc.We have audited the accompanying consolidated balance sheets of AXT, Inc. and its subsidiaries (the “Company”) as of December 31, 2011 and2010, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31,2011. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on theseconsolidated financial statements based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe thatour audits provide a reasonable basis for our opinion.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AXT, Inc. andits subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period endedDecember 31, 2011, in conformity with accounting principles generally accepted in the United States of America.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internalcontrol over financial reporting as of December 31, 2011, based on criteria established in Internal Control — Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission and our report dated March 14, 2012 expressed an unqualified opinion thereon. /s/ Burr Pilger Mayer, Inc. San Jose, CaliforniaMarch 14, 2012 48Table of Contents AXT, INC. CONSOLIDATED BALANCE SHEETS December 31, 2011 2010 (In thousands, except per share data) ASSETS Current assets Cash and cash equivalents $26,156 $23,724 Short-term investments 5,505 10,079 Accounts receivable, net of allowances of $124 and $561 as of December 31, 2011 and 2010, respectively 17,966 23,076 Inventories 46,012 35,986 Related party notes receivable - current 412 — Prepaid expenses and other current assets 7,052 4,090 Total current assets 103,103 96,955 Long-term investments 8,981 7,172 Property, plant and equipment, net 34,282 24,240 Related party notes receivable - long-term 2,021 — Other assets 14,101 11,884 Total assets $162,488 $140,251 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Accounts payable $3,286 $7,094 Accrued liabilities 7,597 7,745 Total current liabilities 10,883 14,839 Long-term portion of royalty payments 4,125 5,500 Other long-term liabilities 431 108 Total liabilities 15,439 20,447 Commitments and contingencies (Note 17) Stockholders’ equity: Preferred stock, $0.001 par value; 2,000 shares authorized; 883 shares issued and outstanding as of December31, 2011 and 2010 (Liquidation preference of $5.8 million and $5.6 million as of December 31, 2011 and2010, respectively) 3,532 3,532 Common stock, $0.001 par value; 70,000 shares authorized; 32,222 and 31,877 shares issued andoutstanding as of December 31, 2011 and 2010, respectively 32 32 Additional paid-in-capital 191,554 190,021 Accumulated deficit (62,157) (82,477)Other comprehensive income 5,818 4,652 AXT, Inc. stockholders’ equity 138,779 115,760 Noncontrolling interests 8,270 4,044 Total stockholders’ equity 147,049 119,804 Total liabilities and stockholders’ equity $162,488 $140,251 See accompanying notes to consolidated financial statements. 49Table of Contents AXT, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31, 2011 2010 2009 (In thousands, except per share data) Revenue $104,121 $95,493 $55,364 Cost of revenue 59,339 58,998 41,495 Gross profit 44,782 36,495 13,869 Operating expenses: Selling, general, and administrative 14,836 13,972 13,389 Research and development 2,473 2,339 1,569 Restructuring charge — — 507 Total operating expenses 17,309 16,311 15,465 Income (loss) from operations 27,473 20,184 (1,596)Interest income, net 449 53 177 Other income, net 696 2,462 385 Income (loss) before provision for income taxes 28,618 22,699 (1,034)Provision for income taxes 2,795 2,323 471 Net income (loss) 25,823 20,376 (1,505)Less: Net income attributable to noncontrolling interest (5,503) (1,723) (393)Net income (loss) attributable to AXT, Inc $20,320 $18,653 $(1,898)Net income (loss) attributable to AXT, Inc. per common share: Basic $0.63 $0.60 $(0.07)Diluted $0.61 $0.57 $(0.07)Weighted average number of common shares outstanding: Basic 31,872 31,008 30,500 Diluted 33,061 32,512 30,500 See accompanying notes to consolidated financial statements. 50Table of Contents AXT, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(In thousands) Common Stock Preferred Additional Other AXT, Inc. Total Stock Paid In Accumulated Comprehensive stockholders’ Noncontrolling stockholders’ Comprehensive Shares $ Shares $ Capital Deficit Income/(loss) equity interests equity Income/(loss) Balance as ofDecember 31,2008 883 $3,532 30,513 $30 $186,754 $(99,232) $2,580 $93,664 $3,212 $96,876 $(391)Common stockoptionsexercised 246 351 351 351 Stock-basedcompensation 766 766 766 Issuance ofcommon stockin the form ofrestricted stock 121 Comprehensiveloss: Net loss (1,898) (1,898) 393 (1,505) (1,898)Dividend declaredby jointventures (957) (957) Change inunrealized(loss) gain onmarketablesecurities 1,750 1,750 1,750 1,750 Currencytranslationadjustment (30) (30) (30) (30)Balance as ofDecember 31,2009 883 3,532 30,880 30 187,871 (101,130) 4,300 94,603 2,648 97,251 $(178)Common stockoptionsexercised 876 2 1,495 1,497 1,497 Stock-basedcompensation 655 655 655 Issuance ofcommon stockin the form ofrestricted stock 121 Comprehensiveincome: Net income 18,653 18,653 1,723 20,376 18,653 Dividend declaredby jointventures (527) (527) Change inunrealized(loss) gain onmarketablesecurities (144) (144) (144) (144)Currencytranslationadjustment 496 496 200 696 496 Balance as ofDecember 31,2010 883 3,532 31,877 32 190,021 (82,477) 4,652 115,760 4,044 119,804 $19,005 Common stockoptionsexercised 251 637 637 637 Stock-basedcompensation 896 896 896 Issuance ofcommon stockin the form ofrestrictedstock-net 94 ComprehensiveComprehensiveincome: Net income 20,320 20,320 5,503 25,823 20,320 Dividend declaredby jointventures (1,636) (1,636) Change inunrealized(loss) gain onmarketablesecurities (161) (161) (161) (161)Currencytranslationadjustment 1,327 1,327 359 1,686 1,327 Balance as ofDecember 31,2011 883 $3,532 32,222 $32 $191,554 $(62,157) $5,818 $138,779 $8,270 $147,049 $21,486 See accompanying notes to consolidated financial statements. 51Table of Contents AXT, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2011 2010 2009 (In thousands) Cash flows from operating activities: Net income (loss) $25,823 $20,376 $(1,505)Adjustments to reconcile net income (loss) to net cash provided by operations: Depreciation and amortization 3,410 2,916 3,058 Amortization (accretion) of marketable securities premium/discount 368 316 (12)Stock-based compensation 896 655 766 Realized loss (gain) on sale of investments 8 (346) 164 Restructuring charge — — 507 (Gain) loss on disposal of property, plant and equipment 6 5 (237)Changes in assets and liabilities: Accounts receivable, net 5,165 (7,726) (3,880)Inventories (9,839) (8,288) 7,352 Prepaid expenses and other current assets (3,313) (1,684) 717 Other assets 426 (5,689) (769)Accounts payable (3,840) 1,530 (1,079)Accrued liabilities (197) 3,187 (390)Other long-term liabilities (781) 5,757 (27)Net cash provided by operating activities 18,132 11,009 4,665 Cash flows from investing activities: Purchases of property, plant and equipment (13,102) (6,386) (1,963)Proceeds from disposal of property, plant and equipment 33 10 430 Purchases of available for sale securities (13,951) (18,982) (3,012)Proceeds from available for sale securities 16,179 20,086 3,897 Investments in joint ventures (3,024) — — Loans to related parties (1,565) — — Decrease in restricted deposits — — 3,013 Net cash provided by (used in) investing activities (15,430) (5,272) 2,365 Cash flows from financing activities: Proceeds from common stock options exercised 637 1,497 351 Dividends paid by joint ventures (1,636) (527) (957)Payment on line of credit — — (3,013)Long-term debt payments — (496) (73)Net cash provided by (used in) financing activities (999) 474 (3,692)Effect of exchange rate changes on cash and cash equivalents 729 579 30 Net increase in cash and cash equivalents 2,432 6,790 3,368 Cash and cash equivalents at the beginning of the year 23,724 16,934 13,566 Cash and cash equivalents at the end of the year $26,156 $23,724 $16,934 Supplemental disclosures: Interest paid $— $14 $72 Income taxes paid $3,234 $1,979 $887 See accompanying notes to consolidated financial statements. 52Table of Contents AXT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. The Company and Summary of Significant Accounting Policies The Company AXT, Inc. (“AXT”, “we,” “us,” and “our” refer to AXT, Inc. and all of its subsidiaries) designs, develops, manufactures and distributes high-performance compound semiconductor substrates. Our substrate products are used primarily in wireless communications, lighting display applications, andfiber optic communications. We believe our vertical gradient freeze, or VGF, technique for manufacturing semiconductor substrates provides significantbenefits over other methods and enabled us to become a leading manufacturer of such substrates. We pioneered the commercial use of VGF technology tomanufacture gallium arsenide (GaAs) substrates and subsequently used VGF technology to manufacture substrates from indium phosphide (InP), andgermanium (Ge). We also manufacture and sell raw materials related to our substrate business through our joint ventures located in China. These jointventures produce products including 99.99% pure gallium (4N Ga), high purity gallium, arsenic, and germanium, germanium dioxide, paralytic boronnitride (pBN) crucibles, and boron oxide (B2O3). AXT’s ownership interest in these entities ranges from 25 percent to 83 percent. We consolidate the jointventures in which we own a majority or controlling share and employ equity accounting for the joint ventures in which we have a smaller ownership interest.We purchase the materials produced by these ventures for our own use and sell other portions of their production to third parties. Principles of Consolidation The consolidated financial statements include the accounts of AXT and our majority-owned subsidiaries. All significant inter-company accounts andtransactions have been eliminated. Investments in business entities in which we do not have control, but have the ability to exercise significant influence overoperating and financial policies (generally 20-50% ownership), are accounted for by the equity method. For majority-owned subsidiaries and joint ventures thatare consolidated, we reflect the noncontrolling interest of the portion we do not own on our Consolidated Balance Sheets in Stockholders’ Equity and in ourConsolidated Statements of Operations.Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities atthe date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially fromthese estimates.Fair Value of Financial Instruments The carrying amounts of certain of our financial instruments including cash and cash equivalents, accounts receivable, short-term investments andlong-term investments, accounts payable and accrued liabilities approximate fair value due to their short maturities. Fair Value of InvestmentsIn the current market environment, the assessment of the fair value of debt instruments can be difficult and subjective. ASC 820 establishes threelevels of inputs that may be used to measure fair value.Level 1 instruments represent quoted prices in active markets. Therefore, determining fair value for Level 1 instruments does not require significantmanagement judgment, and the estimation is not difficult. 53Table of Contents Level 2 instruments include observable inputs other than Level 1 prices, such as quoted prices for identical instruments in markets with insufficientvolume or infrequent transactions (less active markets), issuer credit ratings, non-binding market consensus prices that can be corroborated with observablemarket data, model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated with observablemarket data for substantially the full term of the assets or liabilities, or quoted prices for similar assets or liabilities. These Level 2 instruments require moremanagement judgment and subjectivity compared to Level 1 instruments, including: ·Determining which instruments are most similar to the instrument being priced requires management to identify a sample of similar securities basedon the coupon rates, maturity, issuer, credit rating, and instrument type, and subjectively select an individual security or multiple securities that aredeemed most similar to the security being priced. ·Determining whether a market is considered active requires management judgment. Our assessment of an active market for our marketable debtinstruments generally takes into consideration activity during each week of the one-month period prior to the valuation date of each individualinstrument, including the number of days each individual instrument trades and the average weekly trading volume in relation to the total outstandingamount of the issued instrument. ·Determining which model-derived valuations to use in determining fair value requires management judgment. When observable market prices foridentical securities or similar securities are not available, we price our marketable debt instruments using non-binding market consensus prices thatare corroborated with observable market data or pricing models, such as discounted cash flow models, with all significant inputs derived from orcorroborated with observable market data.Level 3 instruments include unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets orliabilities. The determination of fair value for Level 3 instruments requires the most management judgment and subjectivity. As of December 31, 2011, we didnot have any assets or liabilities without observable market values that would require a high level of judgment to determine fair value (Level 3 assets).Foreign Currency Translation The functional currencies of our Chinese subsidiaries are the local currencies. Transaction gains and losses resulting from transactions denominatedin currencies other than the U.S. dollar or in the functional currencies of our subsidiaries are included in other income, net for the periods presented. The assets and liabilities of the subsidiaries are translated at the rates of exchange on the balance sheet date. Revenue and expense items are translatedat the average rate of exchange for the period. Gains and losses from foreign currency translation are included in other comprehensive income (loss) instockholders’ equity. Revenue Recognition We recognize revenue upon the shipment of our products to customers when: ·we have received a signed purchase order placed by our customers, ·the price is fixed or determinable, ·title and risk of ownership has transferred to our customers upon shipment from our dock, receipt at customer’s dock, or removal fromconsignment inventory at customer’s location, ·collection of resulting receivables is probable, and ·product returns are reasonably estimable. We do not provide training, installation or commissioning services. Our terms and conditions of sale do not require customer acceptance. We assessthe probability of collection based on a number of factors including past history with the customer and credit worthiness. We provide for future returns basedon historical experience, current economic trends and changes in customer demand at the time revenue is recognized. Additionally, we do not providediscounts or other incentives to customers. We present our revenue net of any taxes assessed by any governmental authority. Accounting for Sales Taxes in Net Revenues We report sales taxes collected on sales of our products as a component of net revenues and as accrued liabilities on our consolidated balance sheets.The amount is immaterial for fiscal years 2011, 2010 and 2009. 54Table of Contents Risks and Concentration of Credit Risk Our business is very dependent on the semiconductor industry, which is highly cyclical and has historically experienced downturns as a result ofeconomic changes, overcapacity, and technological advancements. Significant technological changes in the industry or customer requirements, or theemergence of competitive products with new capabilities or technologies, could adversely affect operating results. In addition, a significant portion of ourrevenues and net income is derived from international sales. Fluctuations of the United States dollar against foreign currencies and changes in local regulatoryor economic conditions, particularly in an emerging market such as China, could adversely affect operating results. We depend on a single or limited number of suppliers for certain critical materials used in the production of our substrates, such as quartz tubingand polishing solutions. We generally purchase these materials through standard purchase orders and not pursuant to long-term supply contracts. Financial instruments that potentially subject us to concentration of credit risk consist primarily of cash equivalents, short-term investments, andtrade accounts receivable. We invest primarily in money market accounts, commercial paper instruments, and investment grade securities with high qualityfinancial institutions. The composition and maturities are regularly monitored by management. Such deposits are in excess of the amount of the insuranceprovided by the federal government on such deposits. We are exposed to credit risks in the event of default by the issuers to the extent of the amount recordedon the consolidated balance sheets.We perform ongoing credit evaluations of our customers’ financial condition, and limit the amount of credit extended when deemed necessary, butgenerally do not require collateral. The credit risk in our accounts receivable is substantially mitigated by our credit evaluation process, reasonably shortcollection terms and the geographical dispersion of sales transactions. One customer represented 18%, 19% and 15% of revenue for the year ended December31, 2011, 2010 and 2009, respectively. Our top five customers represented 35%, 40% and 41% of revenue for the year ended December 31, 2011, 2010 and2009, respectively. We expect that sales to a small number of customers will continue to comprise a significant portion of our revenue in the future. Twocustomers accounted for 10% or more of our trade accounts receivable balance as of December 31, 2011 at 33% and 12%, respectively.. One customeraccounted for 10% or more of our trade accounts receivable balance as of December 31, 2010 at 30%. Cash Equivalents and Short-Term and Long-Term Investments We classify our investments in debt and equity securities as available-for-sale securities as prescribed by ASC topic 320, Debt and EquitySecurities (“ASC 320”). We consider investments in highly liquid instruments purchased with an original maturity of three months or less to be cashequivalents. Cash equivalents consist primarily of money market funds. Cash and cash equivalents are stated at cost, which approximates fair value. Short-term and long-term investments are comprised of marketable debt securities, which consist primarily of certificates of deposit, U.S.government securities, and corporate notes and bonds. These investments are reported at fair value as of the respective balance sheet dates with unrealizedgains and losses included in accumulated other comprehensive income within stockholders’ equity on the consolidated balance sheets. The amortized cost ofsecurities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in other income, net in theconsolidated statements of operations. Realized gains and losses and declines in value judged to be other than temporary on available-for-sale securities are alsoincluded in other income, net in the consolidated statements of operations. The cost of securities sold is based upon the specific identification method. All available-for-sale securities with a quoted market value below cost (or adjusted cost) are reviewed in order to determine whether the decline is other-than-temporary. Factors considered in determining whether a loss is temporary include the magnitude of the decline in market value, the length of time the marketvalue has been below cost (or adjusted cost), credit quality, and our ability and intent to hold the securities for a period of time sufficient to allow for anyanticipated recovery in market value. Accounts Receivable and Allowance for Doubtful Accounts and Sales Returns Accounts receivable are recorded at the invoiced amount and are not interest bearing. We periodically review the likelihood of collection on ouraccounts receivable balances and provide an allowance for doubtful accounts receivable primarily based upon the age of these accounts. We evaluatereceivables from U.S. customers in excess of 90 days and for receivables from customers located outside the U.S. in excess of 120 days and reserve allowanceon the receivable balances if needed. We assess the probability of collection based on a number of factors, including the length of time a receivable balance hasbeen outstanding, our past history with the customer and their credit worthiness. We exercise judgment when determining the adequacy of these reserves as weevaluate historical bad debt trends, general economic conditions in the United States and internationally, and changes in customer financial conditions.Uncollectible receivables are recorded as bad debt expense when all efforts to collect have been exhausted and recoveries are recognized when they are received. 55Table of Contents As of December 31, 2011, our accounts receivable balance was $18.0 million with no allowance for doubtful accounts accrued. During 2011, wedecreased this allowance for doubtful accounts by $99,000 primarily for improved collections worldwide. As of December 31, 2010, our accounts receivablebalance was $23.1 million, which was net of an allowance for doubtful accounts of $99,000. During 2010, we decreased this allowance for doubtful accountsby $64,000 primarily for improved collections worldwide. As of December 31, 2009, our accounts receivable balance was $15.4 million, which was net of anallowance for doubtful accounts of $163,000. During 2009, we decreased this allowance by $367,000 primarily for improved collections from slow-payingcustomers in Asia, resulting in the allowance for doubtful accounts of $163,000 as of December 31, 2009. No amounts have been written off. If actualuncollectible accounts differ substantially from our estimates, revisions to the estimated allowance for doubtful accounts would be required, which could havea material impact on our financial results for the period. The allowance for sales returns is also deducted from gross accounts receivable. During 2011, we utilized $367,000 and charged an additional$29,000 resulting in the allowance for sales returns of $124,000 as of December 31, 2011. During 2010, we utilized $703,000 and charged an additional$309,000 resulting in the allowance for sales returns of $462,000 as of December 31, 2010. During 2009, we utilized $119,000 and charged an additional$842,000 resulting in the allowance for sales returns of $856,000 as of December 31, 2009. Inventories Inventories are stated at the lower of cost (approximated by standard cost) or market. Cost is determined using the weighted average cost method. Ourinventory consists of raw materials as well as finished goods and work-in-process that include material, labor and manufacturing overhead costs. Weroutinely evaluate the levels of our inventory in light of current market conditions in order to identify excess and obsolete inventory, and we provide a valuationallowance for certain inventories based upon the age and quality of the product and the projections for sale of the completed products. Property, Plant and Equipment Property, plant and equipment are stated at cost less accumulated depreciation computed using the straight-line method over the estimated economiclives of the assets, which vary from 3 to 27.5 years. Leasehold improvements are amortized over the shorter of the estimated useful life or the term of the lease.We generally depreciate computers and software over 3 years, office equipment, furniture and fixtures over 3 years, automobiles over 5 years, leaseholdimprovements over 10 years, or lease term if shorter, and buildings over 27.5 years. Repairs and maintenance costs are expensed as incurred. Impairment of Long-Lived Assets We evaluate the recoverability of property, equipment and intangible assets in accordance with ASC topic 360, Property, Plant and Equipment(“ASC 360”). When events and circumstance indicate that long-lived assets may be impaired, our management compares the carrying value of the long-livedassets to the projection of future undiscounted cash flows attributable to such assets. In the event that the carrying value exceeds the future undiscounted cashflows, we record an impairment charge against income equal to the excess of the carrying value over the asset’s fair value. Fair values are determined based onquoted market values, discounted cash flows or internal and external appraisals, as applicable. Assets held for sale are carried at the lower of carrying value orestimated net realizable value. We had no “Assets held for sale” on the consolidated balance sheet as of December 31, 2011 and 2010.Segment Reporting Our business is conducted in a single operating segment. Our principal executive officer reviews a single set of financial data that encompasses ourentire operations for purposes of making operating decisions and assessing financial performance. Our principal executive officer manages our Companybased primarily on broad functional categories of sales, manufacturing, product development and engineering and marketing and strategy. While we obtainfinancial statements from all of our joint ventures in order to prepare our consolidated financial statements, we do not review them either individually or in theaggregate when making operating decisions for our business. We manage our Company on a consolidated basis with a review of revenue by product. Wediscuss revenue and capacity for both AXT and our joint ventures collectively, when determining capacity constraints and need for raw materials in ourbusiness, and consider their capacity when determining our strategic and product marketing and advertising strategies. While we consolidate three of the jointventures we do not allocate resources to any of them, nor allocate any portion of overhead, interest and other income, interest expense or taxes to them. Wetherefore have determined that our joint venture operations do not constitute an operating segment. 56Table of Contents Impairment of Investments We invest in equity instruments of privately-held companies for business and strategic purposes. These investments are classified as other assetsand are accounted for under the cost method as we do not have the ability to exercise significant influence over their operations. We monitor our investments forimpairment and record reductions in carrying value when events or changes in circumstances indicate that the carrying value may not be recoverable.Determination of impairment is highly subjective and is based on a number of factors, including an assessment of the strength of investee’s management, thelength of time and extent to which the fair value has been less than our cost basis, the financial condition and near-term prospects of the investee, fundamentalchanges to the business prospects of the investee, share prices of subsequent offerings, and our intent and ability to hold the investment for a period of timesufficient to allow for any anticipated recovery in our carrying value. We estimate fair value of our cost method investments considering available informationsuch as pricing in recent rounds of financing, current cash positions, earnings and cash flow forecasts, recent operational performance and any other readilyavailable market data. Stock-Based Compensation We have employee stock option plans, which are described more fully in Note 11—Employee Benefit Plans and Stock-based Compensation. Weaccount for stock-based compensation in accordance with the provisions of ASC topic 718, Stock Compensation (“ASC 718”). We utilize the Black-Scholesoption pricing model as the most appropriate method for determining the estimated fair value of our share-based awards. Stock-based compensation cost ismeasured at each grant date, based on the fair value of the award, and is recognized as expense over the requisite service period of the award. All of our stockcompensation is accounted for as an equity instrument. Research and Development Research and development costs consist primarily of salaries including stock compensation expense and related personnel costs, depreciation andproduct testing and are expensed as incurred. Advertising Costs Advertising costs, included in selling, general and administrative expenses, are expensed as incurred. Advertising costs for the years ended December31, 2011, 2010, and 2009 were $16,000, $83,000 and $71,000, respectively. Shipping and Handling costs We include fees billed to customers and costs incurred for shipping and handling as a component of cost of sales. Income Taxes We account for income taxes in accordance with ASC topic 740, Income Taxes (“ASC 740”) which requires that deferred tax assets and liabilities berecognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. ASC 740 alsorequires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that a portion of the deferred tax asset will not be realized. Theimpact of ASC 740 is more fully described in Note 13. Comprehensive Income (Loss) We report comprehensive income or loss in accordance with the provisions of ASC topic 220 Comprehensive Income (“ASC 220”) whichestablishes standards for reporting comprehensive income or loss and its components in the financial statements. The components of other comprehensiveincome (loss) consist of unrealized gains and losses on marketable securities and foreign currency translation adjustments. Comprehensive income (loss) ispresented in the accompanying consolidated statements of stockholders’ equity. The balance of accumulated other comprehensive income is as follows (inthousands): 57Table of Contents As of December 31, 2011 2010 Accumulated other comprehensive income: Unrealized gain on investments, net $(132) $29 Cumulative translation adjustment 6,509 4,823 6,377 4,852 Less: Cumulative translation adjustment attributable to the noncontrolling interest 559 200 Accumulated other comprehensive income attributable to AXT, Inc. $5,818 $4,652 Years ended December 31, 2011 2010 2009 Net income (loss) attributable to AXT, Inc. $20,320 $18,653 $(1,898)Other comprehensive income, net of tax: Change in foreign currency translation gain (loss), net of tax 1,686 696 (30)Change in unrealized gain (loss) on available-for-sale investments, net of tax (161) (144) 1,750 Total other comprehensive income, net of tax 1,525 552 1,720 Comprehensive income (loss) 21,845 19,205 (178)Less: Comprehensive income attributable to the noncontrolling interest 359 200 — Comprehensive income (loss) attributable to AXT, Inc. $21,486 $19,005 $(178) Net Income (Loss) Per Share Basic net income per share is computed using the weighted average number of common shares outstanding during the periods less shares of commonstock subject to repurchase and non-vested stock awards. Diluted net income per share is computed using the weighted average number of common sharesoutstanding and potentially dilutive common shares outstanding during the periods. The dilutive effect of outstanding stock options and restricted stockawards is reflected in diluted earnings per share by application of the treasury stock method. Potentially dilutive common shares consist of common sharesissuable upon the exercise of stock options and upon the vesting of restricted stock awards under the treasury stock method.Recent Accounting Pronouncements In September 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2011-08 (“ASU No. 2011-08),“Intangibles — Goodwill and Other (Topic 350).” This standard is intended to simplify the testing of goodwill for impairment by permitting an entity tofirst assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basisfor determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. This standard will become effective for fiscalyears that begin after December 15, 2011, with early adoption permitted. The standard will become effective for us in January 2012 and the adoption is notexpected to have a material impact on our consolidated results of operations and financial condition.In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income (Topic 220)”. This standard eliminates the currentoption to report other comprehensive income and its components in the statement of stockholders’ equity. The Company will have the option to present the totalof comprehensive income, the component of net income, and the components of other comprehensive income either in a single continuous statement ofcomprehensive income or in two separate but consecutive statements. The new requirements are effective as of the beginning of a fiscal year that begins afterDecember 15, 2011 and interim and annual periods thereafter. The standard will become effective for us for the three months ended March 31, 2012 and isnot expected to have a material impact on our consolidated results of operations and financial condition.In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair ValueMeasurement and Disclosure Requirements in U. S. GAAP and IFRS,” which amends the current fair value measurement and disclosure guidance toinclude increased transparency around valuation inputs and investment categorization. This guidance will be effective for interim and annual periodsbeginning after December 15, 2011. The standard will become effective for us for the three months ended March 31, 2012 and is not expected to have amaterial impact on our existing fair value measurements or disclosures. 58Table of ContentsNote 2. Cash, Cash Equivalents and Investments Our cash, cash equivalents and investments are classified as follows (in thousands): December 31, 2011 December 31, 2010 AmortizedCost GrossUnrealizedGain GrossUnrealized(Loss) FairValue AmortizedCost GrossUnrealizedGain GrossUnrealized(Loss) FairValue Classified as: Cash $25,299 $— $— $25,299 $22,736 $— $— $22,736 Cash equivalents: Money market fund 857 — — 857 988 — — 988 Total cash equivalents 857 — — 857 988 — — 988 Total cash and cashequivalents 26,156 — — 26,156 23,724 — — 23,724 Investments: Certificates of Deposit 3,561 5 (3) 3,563 3,360 11 — 3,371 US Treasury andagency securities 1,200 — (1) 1,199 4,903 8 (2) 4,909 Corporate bonds 9,859 2 (137) 9,724 8,961 10 — 8,971 Total investments 14,620 7 (141) 14,486 17,224 29 (2) 17,251 Total cash, cashequivalents andinvestments $40,776 $7 $(141) $40,642 $40,948 $29 $(2) $40,975 Contractual maturitieson investments: Due within 1 year $5,521 $5,505 $10,074 $10,079 Due after 1 through 5years 9,099 8,981 7,150 7,172 $14,620 $14,486 $17,224 $17,251 We manage our investments as a single portfolio of highly marketable securities that is intended to be available to meet our current cash requirements.We have no investments in auction rate securities. For the year ended December 31, 2011 and 2009, we had $8,000 and $164,000, respectively, of grossrealized losses on sales of our available-for-sale securities. For the year ended December 31, 2010, we had $346,000 of gross realized gains on sales of ouravailable-for-sale securities. The gross unrealized losses related to our portfolio of available-for-sale securities were primarily due to changes in interest rates and market and creditconditions of the underlying securities. We have determined that the gross unrealized losses on some of our available-for-sale securities as of December 31,2011 are temporary in nature. We periodically review our investment portfolio to identify and evaluate investments that have indications of possibleimpairment. Factors considered in determining whether a loss is temporary include the magnitude of the decline in market value, the length of time the marketvalue has been below cost (or adjusted cost), credit quality, and our ability and intent to hold the securities for a period of time sufficient to allow for anyanticipated recovery in market value. The following table summarizes the fair value and gross unrealized losses related to available-for-sale securities, aggregated by investment categoryand length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2011 (in thousands): In Loss Position< 12 months Total InLoss Position Gross Gross Fair Unrealized Fair Unrealized Value (Loss) Value (Loss) Investments: Certificates of Deposit 678 (3) 678 (3)US Treasury and agency securities 1,199 (1) 1,199 (1)Corporate bonds $8,221 $(137) $8,221 $(137)Total in loss position $10,098 $(141) $10,098 $(141) 59Table of Contents Investments in Privately-held Companies We have made strategic investments in private companies located in China in order to gain access at a competitive cost to raw materials that arecritical to our substrate business (see Note 6). The investment balances for all the companies, including minority investments indirectly in privately-heldcompanies through our consolidated joint ventures, accounted for under the equity method are included in “other assets” in the consolidated balance sheets andtotaled $8.3 million and $4.8 million as of December 31, 2011 and 2010, respectively. We also maintain minority investments in other unconsolidatedprivately-held companies which are accounted for under the cost method. As of both December 31, 2011 and 2010, our investments in these unconsolidatedprivately-held companies had a carrying value of $392,000 and are also included in “other assets” in the consolidated balance sheets.Fair Value Measurements Our financial assets and liabilities are valued using market prices on both active markets (Level 1) and less active markets (Level 2). Level 1instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 instrument valuationsare obtained from readily-available pricing sources for comparable instruments. Level 3 instrument valuations are obtained from unobservable inputs in whichthere is little or no market data, which require us to develop our own assumptions. As of December 31, 2011, we did not have any Level 3 assets or liabilities.This hierarchy requires us to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. On arecurring basis, we measure certain financial assets and liabilities at fair value, primarily consisting of our short-term and long-term investments. The type of instrument valued based on quoted market prices in active markets include our money market funds, which are generally classified within Level1 of the fair value hierarchy. We classify all of our available-for-sale securities as having Level 2 inputs. The valuation techniques used to measure the fairvalue of these financial instruments having Level 2 inputs were derived from quoted market prices, broker or dealer quotations, or alternative pricing sourceswith reasonable levels of price transparency.The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis in accordance with ASC 820 as ofDecember 31, 2011 (in thousands): Balance as ofDecember 31, 2011 Quoted Prices inActive Markets ofIdentical Assets(Level 1) Significant OtherObservable Inputs(Level 2) Assets: Cash equivalents and investments: Money market fund – cash $857 $857 $— Certificates of deposit 3,563 — 3,563 US Treasury and agency securities 1,199 — 1,199 Corporate bonds 9,724 — 9,724 Total $15,343 $857 $14,486 Liabilities $— $— $— Items Measured at Fair Value on a Nonrecurring Basis Certain assets that are subject to nonrecurring fair value measurements are not included in the table above. These assets include investments inprivately-held companies accounted for by equity and cost method (See Note 6). We did not record other-than-temporary impairment charges for either of theseinvestments during 2011. 60Table of Contents Note 3. Inventories The components of inventory are summarized below (in thousands): As of December 31, 2011 2010 Inventories: Raw materials $25,460 $16,477 Work in process 15,753 15,839 Finished goods 4,799 3,670 $46,012 $35,986 As of December 31, 2011 and 2010, carrying values of inventories were net of inventory reserve of $12.3 million and $11.5 million, respectively, for excessand obsolete inventory. Note 4. Related Party Transactions In August 2011, our consolidated joint venture, Beijing JiYa Semiconductor Material Co., Ltd (JiYa), entered into a non-interest bearing note agreement in theamount of $1.6 million with one of its equity investment entities. Under the loan agreement, JiYa loaned $779,000 to its equity investment entity in August2011 and the remaining amount of $868,000 will be loaned during the three months ending March 31, 2012 and has been included as part of accruedliabilities on the consolidated balance sheets. The term of the loan is two years and ten months and the equity investment entity will repay JiYa in threeinstallments with the first installment of $412,000 due in December 2012, the second installment of $823,000 due in December 2013, and last installment of$412,000 due in May 2014. As of December 31, 2011, we included $412,000 in “Related party notes receivable – short term” and $1.2 million in “Relatedparty notes receivable – long term” in the consolidated balance sheets. In August 2011, our consolidated joint venture, Jin Mei loaned $786,000 to its equity investment entity for construction purposes. As of December31, 2011, this balance was included in “Related party notes receivable – long term” in the consolidated balance sheets.Our Related Party Transactions Policy seeks to prohibit all conflicts of interest in transactions between the Company and related parties, unless theyhave been approved by the Board of Directors of the Company. This policy applies to all employees and directors of the Company, our subsidiaries and ourjoint ventures. Our executive officers retain board seats on the Board of Directors of the companies in which we have invested in our China joint ventures. SeeNote 6 for further details.Note 5. Property, Plant and Equipment, NetThe components of our property, plant and equipment are summarized below (in thousands): As of December 31, 2011 2010 Property, plant and equipment: Building $19,997 $17,841 Machinery and equipment 32,242 28,744 Leasehold improvements 2,330 2,123 Construction in progress 11,574 4,139 66,143 52,847 Less: accumulated depreciation and amortization (31,861) (28,607) $34,282 $24,240 Depreciation and amortization expense was $3.4 million, $2.9 million, and $3.1 million for the years ended 2011, 2010, and 2009, respectively. 61Table of Contents Note 6. Investments in Privately-held Companies We have made strategic investments in private companies located in China in order to gain access to raw materials at a competitive cost that arecritical to our substrate business. Our investments are summarized below (in thousands): Investment Balance as of December 31, December 31, Accounting Ownership Company 2011 2010 Method Percentage Beijing JiYa Semiconductor Material Co., Ltd $996 $996 Consolidated 46%Nanjing Jin Mei Gallium Co., Ltd 592 592 Consolidated 83%Beijing BoYu Semiconductor Vessel Craftwork Technology Co., Ltd 410 410 Consolidated 70% $1,998 $1,998 Jiangsu Dongfang Electric, Inc. $2,167 $— Equity 46%Xilingol Tongli Germanium Co. Ltd 3,881 3,437 Equity 25%Emeishan Jia Mei High Purity Metals Co., Ltd 1,001 1,055 Equity 25% $7,049 $4,492 Our ownership of Beijing JiYa Semiconductor Material Co., Ltd. (JiYa) is 46%. We continue to consolidate JiYa as we have significant influence inmanagement and have a majority control of the board. Our Chief Executive Officer is chairman of the board, while our president of China operations and ourvice president of China administration and our vice president of wafer production are members of the board.Our ownership of Nanjing Jin Mei Gallium Co., Ltd. (Jin Mei) is 83%. We continue to consolidate Jin Mei as we have significant influence inmanagement and have a majority control of the board. Our Chief Executive Officer is chairman of the board, while our president of China operations and ourvice president of China administration are members of the board. Our ownership of Beijing BoYu Semiconductor Vessel Craftwork Technology Co., Ltd (BoYu) is 70%. We continue to consolidate BoYu due to ourownership position as well as our significant influence over management and our majority control of the board. Our Chief Executive Officer is chairman of theboard and our president of China operations and our vice president of China administration are members of the board. Although we have representation on the boards of directors of each of these companies, the daily operations of each of these companies, are managedby local management and not by us. Decisions concerning their respective short term strategy and operations, any capacity expansion and annual capitalexpenditures, and decisions concerning sales of finished product, are made by local management without input from us. During 2011, 2010 and 2009, the three consolidated joint ventures generated $12.5 million, $5.3 million and $1.2 million of income, respectively,of which $5.5 million, $1.7 million and $393,000, respectively was allocated to minority interests, resulting in $7.0 million, $3.6 million and $826,000,respectively to our net income. We have added a new equity investment entity during the year ended December 31, 2011. The investment balances for all of these three equityinvestment entities are included in other assets in our consolidated balance sheets and totaled $7.0 million and $4.5 million as of December 31, 2011 and2010, respectively. We own 46% of the ownership interests in one of these companies and 25% in each of the other two companies. These three companies arenot considered variable interest entities because: ·all three companies have sustainable businesses of their own; ·our voting power is proportionate to our ownership interests; ·we only recognize our respective share of the losses and/or residual returns generated by the companies if they occur; and ·we do not have controlling financial interest in, do not maintain operational or management control of, do not control the board of directors of, and arenot required to provide additional investment or financial support to any of these companies. 62Table of Contents The equity earnings from all of these three minority-owned joint ventures that are not consolidated are recorded as other income, net and totaled$520,000 for 2011. Our equity earnings from the two-minority owned joint ventures that are not consolidated are recorded as other income, net and totaled$259,000 and $484,000 for 2010 and 2009, respectively. Undistributed retained earnings relating to our investments in all these companies were $23.8 million, $16.3 million, and $12.4 million as ofDecember 31, 2011, 2010 and 2009, respectively. Net income recorded from all of these joint ventures was $7.5 million, $3.8 million, and $1.3 million forthe year ended December 31, 2011, 2010 and 2009, respectively We also maintain minority investments indirectly in privately-held companies through our consolidated joint ventures. These minority investmentsare accounted for under the equity method in the books of our consolidated joint ventures. As of December 31, 2011 and 2010, our consolidated joint venturesincluded these minority investments in “other assets” in the consolidated balance sheets with a carrying value of $1.3 million and $341,000, respectively.All the minority investment entities that are not consolidated and accounted for under the equity method had the following summarized incomeinformation (in thousands) for the years ended December 31, 2011, 2010 and 2009, respectively. Our share for the Years Ended Years Ended December 31, 2011 2010 2009 2011 2010 2009 Net Sales $21,340 $13,009 $11,660 $4,886 $3,252 $2,915 Gross profit 7,576 3,697 4,063 1,638 924 1,016 Operating income 3,819 899 1,763 731 225 441 Net income 2,900 973 1,936 549 243 484 All the minority investment entities that are not consolidated and accounted for under the equity method had the following summarized balance sheetinformation (in thousands) as of December 31, 2011 and 2010, respectively. As of December 31, 2011 2010 Current assets: Cash $7,419 $2,386 Accounts receivable, net 4,157 811 Notes receivable 1,412 957 Inventory 3,647 1,724 Other current assets 757 2,198 Total current assets 17,392 8,076 Property, plant and equipment, net 32,371 17,246 Other assets 1,407 1,261 Total assets $51,170 $26,583 Current liabilities: Accounts payable $6,444 $1,899 Advances from customers 19 1 Long term debt, current portion 793 757 Other payables 7,266 567 Dividend payable 2,186 2,237 Total current liabilities 16,708 5,461 Long term debt, net of current portion 3,806 3,180 Other long term liabilities — 260 Total liabilities 20,514 8,901 Total stockholders’ equity 30,656 17,682 Total liabilities and stockholders’ equity $51,170 $26,583 63Table of Contents Note 7. Other InvestmentsAs of December 31, 2011, we maintain minority investments in two privately-held companies. Our investments in these privately-held companies arereviewed for other than temporary declines in value on a quarterly basis. These are accounted for under the cost method as we do not have the ability to exercisesignificant influence over their operations. We monitor our investments for impairment and record reductions in carrying value when events or changes incircumstances indicate that the carrying value may not be recoverable. Reasons for other than temporary declines in value include whether the related companywould have insufficient cash flow to operate for the next twelve months, significant changes in the operating performance and changes in market conditions.As of December 31, 2011 and 2010, our investments in these two unconsolidated privately-held companies had a carrying value of $392,000 and are includedin “other assets” in the consolidated balance sheets.Note 8. Accrued Liabilities The components of accrued liabilities are summarized below (in thousands): As of December 31, 2011 2010 Accrued compensation and related charges $1,807 $1,694 Current portion of royalty payments 1,375 1,622 Accrued product warranty 1,003 740 Loan commitment for related party notes receivable 868 — Accrued professional services 650 713 Other accrued liabilities 1,894 2,976 $7,597 $7,745 Note 9. Debt We have a credit facility maintained by us with a bank with a $3.0 million line of credit. As of December 31, 2011 and 2010, we have an unused $3.0 millionline of credit at an annual interest rate of approximately 1.5% over the current LIBOR (London InterBank Offered Rate) fixed funding rate. Note 10. Stockholders’ Equity The 883,000 shares of $0.001 par value Series A preferred stock issued and outstanding as of December 31, 2011 and 2010, valued at $3,532,000are non-voting and non-convertible preferred stock with a 5.0% cumulative annual dividend rate payable when declared by the board of directors and $4 pershare liquidation preference over common stock, and must be paid before any distribution is made to common stockholders. These preferred shares wereissued to Lyte Optronics, Inc. stockholders in connection with the completion of our acquisition of Lyte Optronics, Inc. on May 28, 1999. Note 11. Employee Benefit Plans and Stock-based Compensation Stock Option Plans and Equity Incentive Plans In July 1997, our board of directors approved the 1997 Stock Option Plan (“1997 Plan”), which provides for the grant of incentive and non-qualified stock options to our employees, consultants and directors. Under the 1997 Plan, 5,423,583 shares of common stock have been authorized forissuance. Options granted under the 1997 Plan are generally for periods not to exceed ten years (five years if the option is granted to a 10% stockholder) andare granted at the fair market value of the stock at the date of grant as determined by the board of directors. Options granted under the 1997 Plan generally vest25% at the end of one year and 2.1% each month thereafter, with full vesting after four years. In May 2007, our shareholders approved our 2007 Equity Incentive Plan (the “2007 Plan”). The 2007 Plan is a restatement of the 1997 Plan whichwas scheduled to expire in 2007. The share reserve of the 1997 Plan became the reserve of the 2007 Plan, together with 1,300,000 additional shares approvedfor issuance under the 2007 Plan. As of December 31, 2007, approximately 2.9 million shares remained available for grant under the 2007 Plan. Awards maybe made under the 2007 Plan of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units,deferred compensation awards and other stock-based awards. Stock options and stock appreciation rights awarded under the 2007 Plan may not be repricedwithout stockholder approval. Stock options and stock appreciation rights may not be granted below fair market value. Stock options or stock appreciationrights generally shall not be fully vested over a period of less than three years from the date of grant and cannot be exercised more than 10 years from the dateof grant. Restricted stock, restricted stock units, and performance awards generally shall not vest faster than over a three-year period (or a twelve-month periodif vesting is based on a performance measure). In December 2008, the 2007 Plan was amended to comply with the applicable requirements under Section 409Aof the Internal Revenue Code. As of December 31, 2011, approximately 919,000 shares were available for grant under the 2007 Plan. 64Table of Contents The following summarizes our stock option activity under the 1997 Plan and the 2007 Plan, and the related weighted average exercise price within eachcategory for each of the years ended December 31, 2009, 2010, and 2011 (in thousands, except per share data): Stock Options Number ofOptionsOutstanding Weighted-averageExercisePrice Weighted-averageRemainingContractualLife AggregateIntrinsicValue (in years) Balance as of December 31, 2008 2,764 $2.74 6.61 $92 Granted 789 1.87 Exercised (247) 1.42 Canceled (426) 3.73 Balance as of December 31, 2009 2,880 2.46 5.70 3,850 Granted 399 5.93 Exercised (876) 1.71 Canceled (123) 7.26 Balance as of December 31, 2010 2,280 3.10 6.40 17,030 Granted 367 4.79 Exercised (251) 2.54 Canceled (16) 27.98 Balance as of December 31, 2011 2,380 $3.25 6.25 $3,456 Options vested and expected to vest as of December 31, 2011 2,322 $3.22 6.18 $3,426 Options exercisable as of December 31, 2011 1,412 $2.72 4.56 $2,646 The options outstanding and exercisable as of December 31, 2011 were in the following exercise price ranges (in thousands, except per share data): Options Outstanding as ofDecember 31, 2011 Options Vested andExercisable as ofDecember 31, 2011 Weighted-average Range of Weighted-average Remaining Weighted-Average Exercise Price Shares ExercisePrice Contractual Life Shares ExercisePrice $1.18 - $1.38 407 $1.31 2.48 407 $1.31 $1.40 - $1.40 1 $1.40 3.20 1 $1.40 $1.59 - $1.59 328 $1.59 7.29 194 $1.59 $1.88 - $1.91 8 $1.90 2.74 8 $1.90 $2.04 - $2.04 442 $2.04 7.82 224 $2.04 $2.19 - $3.11 260 $2.36 1.10 260 $2.36 $3.14 - $4.09 18 $3.34 3.32 18 $3.34 $4.79 - $4.79 366 $4.79 9.82 0 $0.00 $4.81 - $5.09 65 $4.84 4.99 64 $4.84 $5.83 - $9.69 485 $6.22 7.68 236 $6.51 2,380 $3.25 6.25 1,412 $2.72 The total intrinsic value of options exercised for the years ended December 31, 2011, 2010 and 2009 were $1.6 million, $4.3 million and $142,000,respectively. Total fair value of stock options vested during the years ended December 31, 2011, 2010 and 2009 was $705,000, $426,000 and $699,000,respectively. Cash received from option exercises for the years ended December 31, 2011, 2010 and 2009 were $637,000, $1.5 million, and $351,000,respectively. 65Table of Contents As of December 31, 2011, the total unamortized stock-based compensation cost related to unvested stock options granted to employees under ourstock option plans was approximately $1.9 million, net of estimated forfeitures of $136,000. This cost is being amortized on a straight-line basis over aweighted-average period of approximately 2.6 years and will be adjusted for subsequent changes in estimated forfeitures. We did not capitalize any stock-basedcompensation to inventory as of December 31, 2011 and 2010, as the amounts are not significant. Restricted stock awards A summary of activity related to restricted stock awards for the years ended December 31, 2009, 2010 and 2011 is presented below: Stock Awards Shares Weighted-AverageGrant DateFair Value Non-vested as of December 31, 2008 78,544 $2.12 Granted 120,908 0.88 Vested (28,792) 2.32 Non-vested as of December 31, 2009 170,660 1.21 Granted 121,237 5.29 Vested (69,092) 1.48 Forfeited (4,400) 5.83 Non-vested as of December 31, 2010 218,405 3.30 Granted 97,986 5.21 Vested (93,264) 2.51 Non-vested as of December 31, 2011 223,127 $4.47 Total fair value of stock awards vested during the years ended December 31, 2011, 2010 and 2009 was $234,000, $102,000 and $67,000,respectively. As of December 31, 2011, we had $854,000 of unrecognized compensation expense, net of forfeitures, related to restricted stock awards, whichwill be recognized over the weighted average period of 2.5 years. Stock-based CompensationWe recorded $896,000, $655,000 and $766,000 of stock-based compensation in our consolidated statements of operations for the years endedDecember 31, 2011, 2010 and 2009, respectively. We utilized the Black-Scholes valuation model for estimating the fair value of the stock compensationgranted both before and after the adoption of ASC 718. The following table summarizes compensation costs related to our stock-based compensation awards(in thousands, except per share data): Years Ended December 31, 2011 2010 2009 Stock-based compensation in the form of employee stock options and restricted stock, included in: Cost of revenue $84 $36 $39 Selling, general and administrative 766 562 672 Research and development 46 57 55 Total stock-based compensation 896 655 766 Tax effect on stock-based compensation — — — Net effect on net income/loss $896 $655 $766 Shares used in computing basic net income per share 31,872 31,008 30,500 Shares used in computing diluted net income per share 33,061 32,512 30,500 Effect on basic net income/loss per share $(0.03) $(0.02) $(0.03)Effect on diluted net income/loss per share $(0.03) $(0.02) $(0.03)We estimate the fair value of stock options using a Black-Scholes valuation model. The weighted-average grant date fair value of our stock optionsgranted to employees during 2011, 2010, and 2009 was $2.65, $3.11, and $0.99 per share, respectively. The fair value of options granted was estimated atthe date of grant using the following weighted-average assumptions: 66Table of Contents Years EndedDecember 31, 2011 2010 2009 Risk-free interest rate 0.80% 1.00% 2.04%Expected life (in years) 4.0 4.0 4.0 Dividend yield — — — Volatility 74.99% 69.84% 69.0%Estimated forfeitures 4.4% 7.2% 7.5% The dividend yield of zero is based on the fact that we have never paid cash dividends and have no present intention to pay cash dividends. Expectedvolatility is based on the historical volatility of our Company’s common stock. The risk-free interest rates are taken from the Daily Federal Yield Curve Ratesas of the grant dates as published by the Federal Reserve and represent the yields on actively traded Treasury securities for terms equal to the expected term ofthe options. The expected term calculation for stock options is based on the observed historical option exercise behavior and post-vesting forfeitures of optionsby our employees.ASC 718, Stock Compensation, requires us to estimate forfeiture rates at the time of grant and revise those estimates in subsequent periods if actualforfeitures differ from those estimates. We use historical forfeitures to estimate its future forfeiture rates. We decreased our forfeiture rate for stock options from7.2% in 2010 to 4.4% in 2011 due to lower historical cancellation rates, which did not materially impact stock compensation expense. The forfeiture rate forrestricted stock awards remained 0% for both 2011 and 2010.Retirement Savings Plan We have a 401(k) Savings Plan (“Savings Plan”) which qualifies as a thrift plan under Section 401(k) of the Internal Revenue Code. All full-timeU.S. employees are eligible to participate in the Savings Plan after 90 days from the date of hire. Employees may elect to reduce their current compensation byup to the statutory prescribed annual limit and have the amount of such reduction contributed to the 401(k) Plan. We provide matching to employeecontributions up to 4% of the employees’ base pay if employees contribute at least 6% of their base pay. If the contribution rate is less than 6% of the base pay,the matching percentage is prorated. Our consolidated joint ventures in China also contribute to the retirement saving plans for the full-time employees inChina. Our contributions to the retirement savings plans were $610,000, $485,000, and $453,000 for the years ended December 31, 2011, 2010 and 2009,respectively. Note 12. Guarantees Indemnification Agreements We enter into standard indemnification arrangements in the ordinary course of business. Pursuant to these arrangements, we indemnify, holdharmless, and agree to reimburse the indemnified parties for losses suffered or incurred by the indemnified party, generally their business partners orcustomers, in connection with any U.S. patent, or any copyright or other intellectual property infringement claim by any third party with respect to ourproducts. The term of these indemnification agreements is generally perpetual anytime after the execution of the agreement. The maximum potential amount offuture payments we could be required to make under these agreements is unlimited. We have never incurred costs to defend lawsuits or settle claims related tothese indemnification agreements. As a result, we believe the estimated fair value of these agreements is minimal. We have entered into indemnification agreements with our directors and officers that may require us to indemnify our directors and officers againstliabilities that may arise by reason of their status or service as directors or officers, other than liabilities arising from willful misconduct of a culpable nature;to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified; and to obtain directors’ and officers’insurance if available on reasonable terms, which we currently have in place. Product Warranty We warrant our products for a specific period of time, generally twelve months, against material defects. We provide for the estimated future costs ofwarranty obligations in cost of sales when the related revenue is recognized. The accrued warranty costs represent the best estimate at the time of sale of thetotal costs that we expect to incur to repair or replace product parts, which fail while still under warranty. The amount of accrued estimated warranty costs areprimarily based on historical experience as to product failures as well as current information on repair costs. On a quarterly basis, we review the accruedbalances and update the historical warranty cost trends. The following table reflects the change in our warranty accrual included in “accrued liabilities” during2011 and 2010 (in thousands): 67Table of Contents Years EndedDecember 31, 2011 2010 Beginning accrued warranty and related costs $740 $1,082 Charges/(benefit) to cost of revenue 263 (286)Actual warranty expenditures — (56)Ending accrued warranty and related costs $1,003 $740 Note 13. Income Taxes Consolidated income (loss) before provision for income taxes includes non-U.S. income of approximately $22.0 million, $14.5 million and $3.3million for the years ended December 31, 2011, 2010 and 2009, respectively. We recorded a current tax provision of $2.8 million, $2.3 million and $471,000for the years ended December 31, 2011, 2010 and 2009, respectively. The components of the provision (benefit) for income taxes are summarized below (inthousands): Years Ended December 31, 2011 2010 2009 Current: Federal $— $— $(68) State 259 130 (38) Foreign 2,536 2,193 577 Total current 2,795 2,323 471 Deferred: Federal — — — State — — — Total deferred — — — Total net provision for income taxes $2,795 $2,323 $471 A reconciliation of the effective income tax rates and the U.S. statutory federal income tax rate is summarized below: Years Ended December 31, 2011 2010 2009 Statutory federal income tax rate 35.0% 35.0% 35.0%State income taxes, net of federal tax benefits 0.6 0.4 2.4 Change in valuation allowance (11.5) (13.3) (61.5)Stock compensation 0.3 (0.4) (13.8)Foreign rate differences (17.1) (12.3) 56.9 Dividend from PRC investee 3.2 — (86.7)Net loss from privately-held PRC investments (0.7) (0.4) 16.4 Other — 1.2 5.7 Effective tax rate 9.8% 10.2% (45.6)% 68Table of Contents Deferred tax assets and liabilities are summarized below (in thousands): As of December 31, 2011 2010 Deferred tax assets: Net operating loss $43,583 $47,357 Accruals and reserves not yet deductible 4,494 4,240 Credits 1,488 1,488 49,565 53,085 Deferred tax liabilities: Unrepatriated foreign earnings — — — — Net deferred tax assets 49,565 53,085 Valuation allowance (49,565) (53,085)Net deferred tax assets $— $— As of December 31, 2011, we have federal and state net operating loss carryforwards of approximately $128.8 million and $43.1 million,respectively, which will expire beginning in 2022 and 2017, respectively. In addition, we have federal tax credit carryforwards of approximately $1.5 million,which will expire beginning in 2019. The deferred tax assets valuation allowance as of December 31, 2011 is attributed to U.S. federal, and state deferred tax assets, which resultprimarily from future deductible accruals, reserves and tax depreciation expense, net operating loss carryforwards, and tax credit carryforwards. We believethat, based on a number of factors, the available objective evidence creates sufficient uncertainty regarding the realizability of the deferred tax assets such thata full valuation allowance has been recorded. These factors include our history of losses, and the lack of carryback capacity to realize deferred tax assets. Thevaluation allowance decreased by $3.5 million and $1.6 million for the years ended December 31, 2011 and 2010, respectively. Our consolidated subsidiaries in China have enjoyed various tax holidays since 2000, some of which expired as of December 31, 2007. Benefitsunder the tax holidays vary by jurisdiction. In accordance with Section 382 of the Internal Revenue Code, the amounts of and benefits from net operating loss and tax credit carryforwards maybe impaired or limited in certain circumstances. Events which cause limitations in the amount of net operating losses or credits that we may utilize in any oneyear include, but are not limited to, a cumulative ownership change of more that 50% as defined, over a three year period. As a result of the implementation of Interpretation 48, we recognized $16.4 million of liability for unrecognized tax benefits. Of this amount, nonewas accounted for as a reduction to the January 1, 2007 balance of retained earnings. The amount decreased tax loss carryforwards in the U.S., which arefully offset by a valuation allowance. We recognize interest and penalties related to uncertain tax positions in income tax expense. Income tax expense for the year ended December 31, 2011includes no interest and penalties. As of December 31, 2011, we have no accrued interest and penalties related to uncertain tax positions. We file income tax returns in the U.S. federal, various states and foreign jurisdictions. We have substantially concluded all U.S. federal and stateincome tax matters through December 31, 2010. A reconciliation of the beginning and ending amount of the gross unrecognized tax benefits is as follows (in thousands): Gross unrecognized tax benefits balance as of December 31, 2010 $16,403 Add: Additions based on tax positions related to the current year — Additions for tax positions of prior years — Gross unrecognized tax benefits balance as of December 31, 2011 $16,403 69Table of Contents Excluding the effects of recorded valuation allowances for deferred tax assets, $16.4 million of the unrecognized tax benefit would favorably impactthe effective tax rate in future periods if recognized. Note 14. Net income (loss) per Share A reconciliation of the numerators and denominators of the basic and diluted net income (loss) per share calculations is as follows (in thousands,except per share data): Years Ended December 31, 2011 2010 2009 Numerator: Net income (loss) attributable to AXT, Inc $20,320 $18,653 $(1,898)Less: Preferred stock dividends (177) (177) (177)Net income (loss) to common stockholders $20,143 $18,476 $(2,075)Denominator: Denominator for basic net income (loss) per share—weighted average common shares 31,872 31,008 30,500 Effect of dilutive securities: Common stock options 1,093 1,380 — Restricted stock awards 96 124 — Denominator for dilutive net income (loss) per share 33,061 32,512 30,500 Basic net income (loss) per share: Net income (loss) attributable to AXT, Inc $0.64 $0.60 $(0.06)Net income (loss) to common stockholders $0.63 $0.60 $(0.07)Diluted net income (loss) per share: Net income (loss) attributable to AXT, Inc $0.61 $0.57 $(0.06)Net income (loss) to common stockholders $0.61 $0.57 $(0.07)Options excluded from diluted net income (loss) per share as the impact is anti-dilutive 478 14 2,880 Restricted stock excluded from diluted net income (loss) per share as the impact is anti-dilutive 116 127 55 Note 15. Segment Information and Foreign OperationsSegment Information We operate in one segment for the design, development, manufacture and distribution of high-performance compound semiconductor substrates andsale of materials. In accordance with ASC topic 280, Segment Reporting, our chief operating decision-maker has been identified as the Chief ExecutiveOfficer, who reviews operating results to make decisions about allocating resources and assessing performance for the Company. Since we operate in onesegment, all financial segment and product line information can be found in the consolidated financial statements.Product Type The following table represents revenue amounts (in thousands) by type: Years Ended December 31, 2011 2010 2009 Product type: GaAs $63,697 $67,591 $41,054 InP 5,182 4,038 2,375 Ge 11,635 8,955 5,440 Raw materials 23,606 14,884 6,440 Other 1 25 55 $104,121 $95,493 $55,364 70Table of Contents Geographical Information The following table represents revenue amounts (in thousands) reported for products shipped to customers in the corresponding geographic region: Years Ended December 31, 2011 2010 2009 Product revenue: North America* $20,471 $20,739 $10,701 Europe 21,082 18,838 10,489 Japan 13,749 11,857 7,777 Taiwan 9,813 14,834 10,453 Asia Pacific (excluding Japan and Taiwan) 39,006 29,225 15,944 $104,121 $95,493 $55,364 *Primarily the United States Long-lived assets consist primarily of property, plant and equipment, and are attributed to the geographic location in which they are located. Long-lived assets by geographic region were as follows (in thousands): As of December 31, 2011 2010 Long-lived assets: United States of America $484 $543 China 33,798 23,697 $34,282 $24,240 Note 16. Foreign Exchange Contracts and Transaction Gains/Losses As of December 31, 2011, and 2010, we had no outstanding commitments with respect to foreign exchange contracts. We incurred foreign currency transaction exchange gains (losses) of $(100,000), $614,000, and $(76,000) for the years ended December 31, 2011,2010, and 2009, respectively. Note 17. Commitments and Contingencies Legal Matters We are subject to legal proceedings and claims, either asserted or unasserted, that arise in the ordinary course of business. While the outcome of theseproceedings and claims cannot be predicted with certainty, management does not believe that the outcome of any of these legal matters will have a materialadverse effect on our consolidated financial position, results of operations or cash flows. 71Table of Contents Leases We lease certain office space, manufacturing facilities and equipment under long-term operating leases expiring at various dates through November2015. The lease agreement for the facility at Fremont, California with approximately 27,760 square feet commenced on December 1, 2008 for a term of sevenyears, with an option by us to cancel the lease after five years, upon forfeiture of the security deposit and payment of one-half of the fifth year’s rent. Total rentexpenses under these operating leases were $460,000, $308,000 and $298,000 for the years ended December 31, 2011, 2010 and 2009, respectively. Totalminimum lease payments under these leases as of December 31, 2011 are summarized below (in thousands): Lease Payments 2012 $376 2013 371 2014 315 2015 286 $1,348 Royalty Agreement We entered into a royalty agreement with a vendor effective December 3, 2010 with a term of eight years, terminating December 31, 2018. We and ourrelated companies are granted a worldwide, nonexclusive, royalty bearing, irrevocable license to certain patents for the term on the agreement. We shall pay atotal of $7.0 million royalty payment over eight years that began in 2011 based on future royalty bearing sales. Royalty expense under this agreement was$1.3 million for the year ended December 31, 2011 and was included in cost of revenue. Total royalty payments under this agreement as of December 31,2011 are summarized below (in thousands): Royalty Payments 2012 $1,375 2013 800 2014 800 2015 800 2016 575 Thereafter 1,150 $5,500 72Table of ContentsNote 18. Unaudited Quarterly Consolidated Financial Data Quarter First Second Third Fourth (in thousands, except per share data) 2011: Revenue $24,566 $30,031 $28,305 $21,219 Gross profit 10,660 14,026 *12,263 7,833 Net income attributable to AXT, Inc 4,208 7,062 6,484 2,566 Net income attributable to AXT, Inc per share, basic $0.13 $0.22 $0.20 $0.08 Net income attributable to AXT, Inc per share, diluted $0.13 $0.21 $0.19 $0.08 2010: Revenue $18,641 $23,177 $26,809 $26,866 Gross profit 6,732 8,535 10,531 10,697 Net income attributable to AXT, Inc 2,580 5,535 5,639 4,899 Net income attributable to AXT, Inc per share, basic $0.08 $0.18 $0.18 $0.16 Net income attributable to AXT, Inc per share, diluted $0.08 $0.17 $0.17 $0.15 *Certain reclassifications have been made between cost of revenue and selling, general and administrative expenses. The reclassifications have no impact onreported total assets, stockholders’ equity and net income.Note 19. Subsequent EventIn January 2012, we agreed with the Administrative Commission of Tianjin Economy and Technology Development Zone to establish a secondmanufacturing facility in Tianjin, China. The arrangement provides us with land use rights for approximately 32 acres of industrial land located in YixianScientific and Industrial Park to construct a compound semiconductor substrate manufacturing facility that would be completed in phases by 2017. We havecommitted to invest $12.5 million in the first phase of the construction of the facility and have an understanding with our BoYu joint venture that it willcommit the RMB 32.0 million, or approximately $5.0 million, that is anticipated to be required for the portion of the project devoted to crystal support, inexchange for land use rights, enterprise and individual income tax rebates, employee hiring and development subsidies, and other benefits.In January 2012, we increased the credit facility line of credit maintained by us with a bank from $3.0 million to $10.0 million at an annual interestrate of approximately 1.65% above the current 30-day LIBOR (London Interbank Offered Rate). The annual interest rate is currently approximately 2.0%. 73Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed onits behalf by the undersigned, thereto duly authorized. AXT, Inc. By:/s/ RAYMOND A. LOW Raymond A. Low Chief Financial Officer and Corporate Secretary (Principal Financial Officer) Date: March 15, 2012 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Morris S.Young and Raymond A. Low, and each of them, his true and lawful attorney-in-fact and agent, with full power of substitution, each with power to act alone,to sign and execute on behalf of the undersigned any and all amendments to this Report on Form 10-K, and to perform any acts necessary in order to file thesame, with all exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, granting unto said attorney-in-factand agent full power and authority to do and perform each and every act and thing requested and necessary to be done in connection therewith, as fully to allintents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or their or his or hersubstitutes, shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated. Signature Title Date /s/ MORRIS A. YOUNG Chief Executive Officer and Director March 15, 2012Morris A. Young (Principal Executive Officer) /s/ RAYMOND A. LOW Chief Financial Officer and Corporate Secretary March 15, 2012Raymond A. Low (Principal Financial Officer and Principal Accounting Officer) /s/ JESSE CHEN Chairman of the Board of Directors March 15, 2012Jesse Chen /s/ DAVID C. CHANG Director March 15, 2012David C. Chang /s/ LEONARD LEBLANC Director March 15, 2012Leonard LeBlanc /s/ NAI-YU PAI Director March 15, 2012Nai-yu Pai 74Table of Contents AXT, Inc. EXHIBITS TO FORM 10-K ANNUAL REPORT For the Year Ended December 31, 2011 ExhibitNumber Description3.1(1) Restated Certificate of Incorporation3.2(2) Certificate of Amendment of Certificate of Incorporation3.3(3) Certificate of Amendment to the Restated Certificate of Incorporation3.4(4) Certificate of Designation, Preferences and Rights of Series A Preferred Stock (which is incorporated herein by reference to Exhibit 2.1 tothe registrant’s form 8-K dated May 28, 1999).3.5(5) Second Amended and Restated By Laws3.6(6) Amended and Restated Section 5.1 of Article V of the Second Amended and Restated Bylaws of AXT, Inc.3.7(7) Certificate of Amendment to By Laws4.1(8) Rights Agreement dated April 24, 2001 by and between AXT, Inc. and ComputerShare Trust Company, Inc.10.1(9) Form of Indemnification Agreement for directors and officers*10.2(10) 1997 Stock Option Plan and forms of agreements thereunder*10.3(11) Purchase and Sale Agreement by and between Limar Realty Corp #23 and AXT, Inc. dated April 199810.4(12) Bond Purchase Contract between Dain Rauscher Incorporated and AXT, Inc. dated December 1, 199810.5(13) Remarketing Agreement between Dain Rauscher Incorporated and AXT, Inc. dated December 1, 199810.6(14) Reimbursement Agreement between Wells Fargo Bank National Association and AXT, Inc. dated April 7, 200310.7(15) Asset purchase agreements dated September 4, 2003 by and between Dalian Luming Science and Technology Group, Ltd and AXT, Inc.and by and between Lumei Optoelectronics Corp., AXT, Inc., Lyte Optronics, Inc., Beijing Tongmei Xtal Technology and XiamenAdvanced Semiconductor Co., Ltd.10.8(16) Agreement respecting severance payment between the Company and Dr. Morris S. Young.*10.9(17) Employment agreement between the Company and Mr. Davis Zhang*10.10(18) Purchase and Sale Agreement by and between Car West Auto Body, Inc., a California corporation and AXT, Inc. dated February 19,200810.11(19) Lease agreement dated July 2, 2008 between AXT, Inc. and T. Drive Partners, L.P., a California partnership10.12(20) 6-inch Supply Agreement dated December 31, 2008 between AXT, Inc. and IQE plc**10.13(21) 4-inch Supply Agreement dated December 31, 2008 between AXT, Inc. and IQE plc**10.14(22) 2007 Equity Incentive Plan (amended December 8, 2008)10.15(23) Forms of agreements under the 2007 Equity Incentive Plan*10.16(24) Employment Letter Agreement between the Company and Mr. Raymond Low*10.17(25) Employment Letter Agreement between the Company and Mr. Davis Zhang*10.18(26) Employment Letter Agreement between the Company and Mr. Robert G. Ochrym*10.20(28) Supply Agreement signed January 29, 2010 between AXT, Inc. and AZUR SPACE Solar Power GmbH**10.21(29) 2011 Executive Bonus Plan*10.22 2012 Executive Bonus Plan*10.23 Credit Line Account Application and Agreement for Organizations and Businesses between AXT, Inc. and UBS Bank USA datedDecember 15, 200810.24 Notice of Credit Line Account Increase between AXT, Inc. and UBS Bank USA dated January 17, 201221.1(30) List of Subsidiaries23.1 Consent of Independent Registered Public Accounting Firm, Burr Pilger Mayer, Inc24.1 Power of Attorney (see signature page)31.1 Certification by principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2 Certification by principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1 Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-OxleyAct of 200232.2 Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-OxleyAct of 2002101.INS* XBRL Instance.101.SCH* XBRL Taxonomy Extension Schema.101.CAL* XBRL Taxonomy Extension Calculation Linkbase.101.DEF* XBRL Taxonomy Extension Definition Linkbase.101.LAB* XBRL Taxonomy Extension Label Linkbase.101.PRE* XBRL Taxonomy Extension Presentation Linkbase. * XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes ofsections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and is otherwise notsubject to liability under these sections. Table of Contents (1)Incorporated by reference to exhibit 3.1 to registrant’s Form 10-K filed with the SEC on March 31, 1999. (2)Incorporated by reference to exhibit 3.1 to registrant’s Form 10-Q filed with the SEC on August 14, 2000. (3)Incorporated by reference to exhibit 3.4 to registrant’s Form 10-Q filed with SEC on August 5, 2004. (4)Incorporated by reference to exhibit 3.1 to registrant’s Form 8-K filed with the SEC on June 14, 1999. (5)Incorporated by reference to exhibit 3.4 to registrant’s Form 8-K filed with the SEC on May 30, 2001. (6)Incorporated by reference to exhibit 99.2 to registrant’s Form 8-K filed with the SEC on August 1, 2007. (7)Incorporated by reference to exhibit 3.1 to registrant’s Form 8-K filed with the SEC on October 26, 2010. (8)Incorporated by reference to exhibit 4.2 to registrant’s Form 8-K filed with the SEC on May 30, 2001. (9)Incorporated by reference to exhibit 10.1 to registrant’s Registration Statement on Form S-1 filed with the SEC on March 17, 1998. (10)Incorporated by reference to exhibit 10.3 to registrant’s Registration Statement on Form S-1 filed with the SEC on March 17, 1998. (11)Incorporated by reference to exhibit 10.7 to registrant’s Registration Statement on Amendment No. 2 to Form S-1 filed with the SEC on May 11,1998. (12)Incorporated by reference to exhibit 10.10 to registrant’s Form 10-K filed with the SEC on March 31, 1999. (13)Incorporated by reference to exhibit 10.11 to registrant’s Form 10-K filed with the SEC on March 31, 1999. (14)Incorporated by reference to exhibit 10.15 to registrant’s Form 10-Q filed with the SEC on May 9, 2003. (15)Incorporated by reference to exhibit 10.16 to registrant’s Form 10-Q filed with the SEC on November 13, 2003. (16)Incorporated by reference to exhibit 99.1 to registrant’s Form 8-K filed with the SEC on March 30, 2005. (17)Incorporated by reference to exhibit 99.1 to registrant’s Form 8-K filed with the SEC on January 17, 2006. (18)Incorporated by reference to exhibit 10.25 to registrant’s Form 8-K filed with the SEC on February 20, 2008. (19)Incorporated by reference to exhibit 10.28 to registrant’s Form 8-K filed with the SEC on July 8, 2008. (20)Incorporated by reference to exhibit 10.29 to registrant’s Form 8-K filed with the SEC on January 5, 2009. (21)Incorporated by reference to exhibit 10.30 to registrant’s Form 8-K filed with the SEC on January 5, 2009. (22)Incorporated by reference to exhibit 10.31 to registrant’s Form 10-K filed with the SEC on March 31, 2009. (23)Incorporated by reference to exhibit 10.20 to registrant’s Form 10-K filed with the SEC on March 22, 2010. (24)Incorporated by reference to exhibit 10.22 to registrant’s Form 10-K filed with the SEC on March 22, 2010. (25)Incorporated by reference to exhibit 10.23 to registrant’s Form 10-K filed with the SEC on March 22, 2010. (26)Incorporated by reference to exhibit 10.24 to registrant’s Form 10-K filed with the SEC on March 22, 2010. (27)Incorporated by reference to exhibit 10.25 to registrant’s Form 10-K filed with the SEC on March 22, 2010. (28)Incorporated by reference to exhibit 10.31 to registrant’s Form 8-K filed with the SEC on February 2, 2010. (29)Incorporated by reference to exhibit 10.21 to registrant’s Form 10-K filed with the SEC on March 16, 2011. (30)Incorporated by reference to exhibit 21.1 to registrant’s Registration Statement on Amendment No. 1 to Form S-3 filed with the SEC on July 28,2006. *Management contract or compensatory plan. **Confidential treatment has been requested of the SEC for portions of the exhibit. Exhibit 10.22 AXT, INC.FISCAL 2012 EXECUTIVE INCENTIVE BONUS PLAN The following are the terms of the 2012 Executive Bonus Plan approved by the Compensation Committee of the Board of Directors of AXT, Inc.(the “Company”) on December 19, 2011 (the “Plan”). A. Purpose 1. The terms of the Plan have been established to attract, motivate, retain and reward the Company’s executive officers and other officers of theCompany for driving the Company to achieve specific corporate objectives. 2. The Plan provides for the payment of quarterly cash bonuses based upon Company financial targets and individual performance targetobjectives. B. Eligibility 1. Those eligible to participate in the Plan are the officers of the Company subject to Section 16 of the Securities Exchange Act of 1934, asamended and any other officers of the Company designated by the Compensation Committee (each, an “Officer” and collectively, the “Officers”). C. Determination of Bonus Amounts 1. The Compensation Committee has determined that each individual Officer will have an “Individual Bonus Percentage” and an“Individual Target Bonus” as defined below, which will vary depending on such Officer’s position and responsibilities in the Company. 2. Bonuses payable will be determined based upon achievement of corporate financial targets (the “Corporate Targets”) and individualtargets established for each Officer (the “Individual Targets”). Achievement of the Corporate Targets will represent 70% of the total bonus, and achievementof the Individual Targets will represent 30% of the total bonus. The Corporate Targets shall be comprised of four financial targets: (1) total revenue (“TotalRevenue Target”), (2) gross profit (“Gross Profit Target”), (3) operating expense (“Operating Expense Target”) and (4) net income (“Net IncomeTarget”). The actual quarterly Corporate Targets are set forth in the operating plan for the year ending December 31, 2012, and approved by the Board ofDirectors (the “2012 Operating Plan”). 3. The Corporate Targets are weighted 10% for each of the Total Revenue Target, Gross Profit Target and Operating Expense Target, and 40%for the Net Income Target, for a total of 70% of the total bonus. The Individual Bonus Earned (as defined below) for each quarter will depend on the“Corporate Target Achievement Multiplier” which shall equal the sum of: (a) actual total revenue for such quarter divided by the Total Revenue Target forthe quarter multiplied by 0.1; (b) actual gross profit for such quarter divided by the Gross Profit Target for the quarter multiplied by 0.1; (c) actual operatingexpense for such quarter divided by Operating Expense Target multiplied by 0.1; and (d) actual net income for such quarter divided by the Net Income Targetmultiplied by 0.4 (subject to Section 6 below).  4. The determination of the quarterly bonus based on the achievement of the Total Revenue Target, Gross Profit Target and Operating ExpenseTarget shall be subject to the following: ·The percentage of the bonus resulting from the achievement of the Total Revenue, Gross Profit Target and Operating Expense Target ranges from 80%to 120%. ·No portion of the quarterly bonus with respect to such Corporate Target will be paid if the achievement of such Corporate Target is less than 90% ofthe 2012 Operating Plan amount for such Corporate Target. ·At 90% achievement of the 2012 Operating Plan for such Corporate Target, 80% of the Quarterly Individual Target Bonus with respect to suchCorporate Target shall be payable. ·At 120% achievement of the 2012 Operating Plan for such Corporate Target, 100% of the Quarterly Individual Target Bonus with respect to suchCorporate Target shall be payable. ·At 150% achievement or greater of the 2012 Operating Plan for such Corporate Target, 120% of the Quarterly Individual Target Bonus with respectto such Corporate Target shall be payable. This will be the maximum amount payable for each such Corporate Target. ·Accordingly, for each 1.5% increase in the performance for each Corporate Target against the 2012 Operating Plan over the minimum 90% threshold,the bonus will increase by 1% until a maximum bonus equal to 120% of the Quarterly Individual Target Bonus relating to such Corporate Target isearned. ·The parameters described above are summarized in the following table:Total Revenue, Gross Profit, Operating ExpenseIf achieve<90%90%100%120%150%Bonus0%80%86.67%100%120% 4. The determination of the quarterly bonus based on the achievement of the Net Income Target shall be subject to the following: ·The quarterly bonus based on the achievement of the Net Income Target shall be 0% of the Quarterly Individual Target Bonus (with respect to NetIncome) when actual Net Income is less than 70% of the budgeted Net Income for such quarter under the 2012 Operating Plan. ·The quarterly bonus based on the achievement of the Net Income Target shall be 100% of the Quarterly Individual Target Bonus (with respect to NetIncome) when actual Net Income is 100% of the budgeted Net Income for such quarter under the 2012 Operating Plan. ·For each percentage improvement in the actual Net Income for the quarter over the minimum 70% threshold, the percentage of the QuarterlyIndividual Target Bonus payable will increase by 1% up to a maximum total bonus payable of 120% of the Quarterly Individual Target Bonus(relating to Net Income) when actual Net Income is 120% or greater than the budgeted Net Income for such quarter set forth in the 2012 OperatingPlan. ·The parameters described above are summarized in the following table:  Net IncomeIf achieve<70%70%100%120%Bonus0%70%100%120% 5. The determination of the quarterly bonus shall also be subject to the following: ·In the event that actual Net Income is negative for any particular quarter, no bonus shall be payable for such quarter. ·In no event shall the achievement of any individual Corporate Target represent more than 120% of such Corporate Target for such quarter. Thismeans that the achievement of each of the Total Revenue Target, Gross Profit Target and Operating Expense Target shall not result in the payment of abonus relating to such Corporate Target exceeding 12% of the Quarterly Individual Bonus Target in any quarter. The Individual Targets shall notrepresent more than 30% of the Individual Bonus Earned by any Officer in any quarter. Therefore, the maximum total quarterly bonus earned byany Officer in any quarter is 114% of the Quarterly Individual Target Bonus (the sum of 12% 12% 12% 48% and 30 %). 6. Achievement of the Individual Targets, representing 30% of the Plan, shall be determined each quarter by the Chief Executive Officer for allOfficers other than the Chief Executive Officer, pursuant to objectives established by the Chief Executive Officer for each such Officer. Achievement of theIndividual Targets by the Chief Executive Officer shall be determined each quarter by the Compensation Committee, based upon objectives established by theCompensation Committee each quarter for the Chief Executive Officer. D. Individual Target Percentages 1. “Individual Bonus Percentage” means the percentage of a respective Officer’s base salary that is targeted as a bonus payment under thePlan assuming exactly one hundred percent achievement by the Company of each of the Corporate Targets and Individual Targets (as defined below). TheIndividual Bonus Percentage for each Officer is set as a percentage of base salary and varies based upon the Officer’s position and responsibilities. TheIndividual Bonus Percentage for each Officer under the Plan is as follows:NameTarget BonusMorris S. Young75Davis Zhang50Raymond Low45Robert Ochrym45  2. “Individual Target Bonus” for each fiscal year means the amount equal to a respective Officer’s base salary multiplied by such Officer’sIndividual Bonus Percentage. The “Quarterly Individual Target Bonus” shall be the Individual Target Bonus divided by four. The “Individual BonusEarned” means the amount equal to Individual Target Bonus multiplied by the Corporate Target Achievement Multiplier.3. In the 2012 Plan, the Individual Targets would represent 30% (increased from 20% in the 2011 Plan) of the total bonus. The CompensationCommittee wanted a focus of 10% allocated to management on Cash Flow performance. As per the 2012 Operating Plan approved by the Board of Directors onDecember 19, 2011, the net increase in cash and cash equivalents is shown as $856,344. The Compensation Committee has set the Cash Flow target at a netincrease of $6.2 million dollars, and would pay 10% bonus. If Management achieves a net increase of $4.2 million dollars or less, no bonus would be paidout. Any net increase above $4.2 million dollars up to $6.2 million dollars would be on a sliding scale from 0% to 10%. The Cash Flow portion of the bonuswould be calculated and paid out on an annual basis only, for the Cash Flow performance for each calendar year.E. Plan Changes1. The Board or the Compensation Committee may modify the financial performance goals at any time based on changes in businessconditions during the year and may grant bonuses to Officers even if the financial performance goals are not met. In its discretion, the CompensationCommittee may, either at the time it grants an award under the Plan or at any time thereafter, provide for the adjustment of the award formula applicable to anaward granted to any participant under the Plan to reflect such participant’s individual performance in his or her position with the Company or such otherfactors as the Compensation Committee may determine. Notwithstanding the attainment of any performance goal under the Plan, the Compensation Committeeshall have the discretion, on the basis of such criteria as it may establish, to reduce the amount of or to eliminate any final award that would otherwise bepaid, and retains the absolute discretion to amend, modify or terminate the Plan at any time. 2. Nothing in this Plan will interfere with or limit in any way the right of the Company or the right of any individual to terminate theemployment relationship at any time, with or without cause. EXHIBIT 10.23 UBS Bank USA Variable Credit Line Account Number: (if applicable) 5V 66301 FG Fixed Credit Line Account Number: (if applicable) 5F Credit Line Account Application and SS#/TIN94-3031310Agreement for Organizations and Businesses HB Internal Use Only For Internal Use OnlyVariable Credit Line Account at UBS Bank USA AXT INC 5V 66301 FGFixed Credit Line Account at UBS Bank USA 5F Collateral Account(s) at UBS Financial Services Inc.Insert the information below for each UBS financial Services Inc. account to be pledged to secure the Borrower's credit line.Full Collateral (Securities) Account TitleBranchAccount NumberFA#1) AXT INCFG09583SM2) 3) 4) 5) 6) Credit Line AccountSelect the type of credit line account: Variable Credit Line Accounto Fixed Credit Line Accounto BothIt you do not indicate your preference you will be deemed to haveselected the "Both" option.Account OwnershipSelect the Organization/Business Structure;  Corporationo Corp-Subchapter ‘S’o Limited Liability Company (LLC) o Fed Charter-Credit Uniono Foundation-not for profit o Fed Charter-Trust Co.o Govt Agency-Federal o Limited Liability Partnership (LLP) o Endowment-not for profit o Govt Agency-Local EntAny changes or correctionso Limited Liability-Limited Partnership (LLP) o State Charter-S&L Banko State Charter-Saving Bank o Govt Agency-Stateto the information on thiso Sole Proprietorship o State Charter-Comm Bank application must be initiatedo Partnership-General o State Charter-Trust Co. by you.o Partnership-Limited o State Charter-Credit Union o Associated o State Charter-Indus Loan o Partnership-Invest Club o Fed Charter-Savings Assoc o Invest Club Membership o Fed Charter-Nat’l Bank Borrower InformationThis section should be completed by Organization/Business.BorrowerOrganization/Business Name Location of AddressOrganization/Business is (please complete each item that applies):  Business - PrimaryoOther ( please specify )1)  Incorporated o Unincorporated 2)  For Profit o Not For Profit Street Address (if a P.O. Box, complete the Additional Addressinformation on page 3 .): 4281 TECHNOLOGY DRIVEIndustry Group (e.g., Construction, Service, etc.): City: FREMONTState: CAZIP: 94538-6339 Business Telephone Number:Is the Organization/Business publiclylisted?o No  Yes; specify: 510.683.5900 NASDAQ-NMS AXTI Exchange (NYSE, AMEX, or NASDAQ)Ticker Symbol Place of Formation / Incorporation  USA (if formed/incorporated, specifyState):Deleware o Other (specify) TIN 94-303 1310Date of Incorporation / Establishment: March 21, 1997  UBS Bank USA Variable Credit Line Account Number: (if applicable) 5V 66301 FG Fixed Credit Line Account Number: (if applicable) 5F SS#/TIN94-3031310 Internal Use Only Borrower Financial and Ownership informationAnnual Income: Liquid Assets: Is the Borrower an officer or member of the board of directors of UBS AG,$2,000,000 $20,000,000 its subsidiaries or affiliates?*Net Worth: Fiscal Year End (Indicate month) o Yes x No If yes specify:$40,000,000 December Subsidiary or Affiliate Employee Name and SS#Do you receive a substantial amount of the your revenue/wealth (over 50%)(trade/export) from a country outside of the United States?o Yes x No If yes specify: Is the Borrower an immediate family member of an executive officer ormember of the board of directors of UBS AG? Immediate family membermeans a spouse or any relative in the Borrower’s household to whom theBorrower lends financial support.Country(ies): o Yes x No If yes specify:Does the Borrower own 10% or more of the shares of any publicly tradedcompany?o Yes x No If yes, please specify company and %: % Subsidiary or Affiliate Employee Name and SS# Are any of the Borrowers, business owners of directors/principle officers acontrol person of UBS AG or its subsidiaries or affiliates?* Will any of the loan proceeds be used to repay any debt or obligation owedto, or purchase an asset from. UBS AG or its subsidiaries or affiliates?o Yes x No If yes, please specify:o Yes x No If yes, please specify company and %: Subsidiary or Affiliate % *For purposes these questions, “control” means a person or entity that either (a) owns, controls or has the power to vote 25% or more of any class of votingsecurities, (b) has the ability to control the election of the majority of the directors of a company, or (c) has the power to exercise a controlling influence overmanagement policies. A person of entity is presumed to have control of a company if the person or entity owns, controls or has the power to vote 10% or moreof any class of voting securities of the company and (i) the person is an executive officer or director of the company or (ii) no other person has a greaterpercentage of that class voting securities. Principal Officer/Beneficial OwnerComplete this section for the Principal Officer(s) of the borrower, or beneficial owner for an LLC. To include additional principal officers please photocopythis page and submit it with application.Principal Officer Name SS# Principal Officer Name SS#PHIL C.S. YIN WILSON W. CHEUNG Country of Citizenship: Date of Birth Country of Citizenship: Date of Birth  USA o Other (specify)  USAo Other (specify) Passport/CEDULA and Green Card #: (if non-U.S. and no SS# specified) Passport/CEDULA and Green Card #: (if non-U.S. and no SS# specified)US Passport / 217343245 US Passport/ 204343845 Passport/CEDULA Country of Issuance: Passport/CEDULA Country of Issuance: Street Address: Street Address: City: State: ZIP City:State: ZIP Telephone Number: Telephone Number: 2 UBS Bank USA Variable Credit Line Account Number: (if applicable) 5V 66301 FG Fixed Credit Line Account Number: (if applicable) 5F SS#/TIN94-3031310 Internal Use Only Credit Line Account FeaturesCheck WritingIf you would like to receive Credit Line checks for your credit line account,Please enroll below. Alternate Mailing Address for ChecksPrint the mailing address for the delivery of checks if different from theaddress on the checks: o Check here if you would like Credit Line checks. Checks will be in the name of the Borrower. Please print the address that you would like to appear on your checks. Wire Instructions for Loan Payment: (in US dollars)Bank Name: UBS AG Wire System Address: ABA 026007993 For Further Credit to the Account of: UBS Bank USA Account Number: 101-WA-792479-000 For the Benefit of: Full Name Account Number: 5[F or V] 00000 Senior Political AffiliationI)Is client, any authorized signatories, beneficial owners, trustees, power of attorneys or other individuals with authority to effect transactions a currentU.S. political official (as defined in B below)? x No o Yes If yes, complete:A) Official’s Name: B) Current Position: o Presidento Vice Presidento US Cabinet Member o Member of the House of Representativeso Supreme Court Justice o Chairman of the Joint Chiefs of Staffo Governor o Senator C) Relationship to Client(s): o Selfo Immediate family membero Close associate o Associated with business or trust II)Is client, any authorized signatories, beneficial owners, trustees, power of attorneys or other individuals with authority to effect transactions, or any oftheir immediate family members or close associates a current or former Senior non-U.S. political official, or Senior/Influential representative of a majornon-U.S. political party or state owned enterprise of national importance? x No o Yes If yes, complete: Political Official's Name: Current of Former Position: Relationship to Client(s):o Selfo Immediate family membero Close associate o Associated with business or trust Duplicate Party AddendumComplete this section for each Duplicate Party to receive a duplicate credit line account statement. Name: Country Of Citizenship: Street Address: o USA o Other (specify): City: State: Zip: Additional Address InformationIf the Borrower's mailing address is a P.O. Box please provide a legal residence address below.First Name: Last Name: Street Address: Location of Address: o Business - Primary o Business - Secondary City: State: Zip: o Other (Specify): 3 UBS Bank USA Variable Credit Line Account Number: (if applicable) 5V 66301 FG Fixed Credit Line Account Number: (if applicable) 5F SS#/TIN94-3031310 Internal Use OnlyCredit Line Agreement Borrower Agreement BY SIGNING BELOW, THE BORROWER UNDERSTANDS, ACKNOWLEDGES AND AGREES THAT:AThe Borrower has received and read a copy of this Borrower Agreement, the attached Credit Line Account Application and Agreement (including the Creditline Agreement following this Borrower Agreement) and the Loan Disclosure Statement explaining the risk factors that the Borrower should consider beforeobtaining a loan secured by the Borrowers securities account. The Borrower agrees to be bound by the terms and conditions contained in the Credit LineAccount Application and Agreement (including the Credit Line Agreement following this Borrower Agreement) (which terms and conditions are incorporateby reference). Capitalized terms used in this Borrower Agreement have the meanings set forth in the Credit line Agreement.BTHE BORROWER UNDERSTANDS AND AGREES THAT UBS BANK USA MAY DEMAND FULL OR PARITAL PAYMENT OF THECREDIT LINE OBLIGATIONS, AT ITS SOLE OPTION AND WITHOUT CAUSE, AT ANY TIME, AND THAT NEITHER FIXED RATEADVANCES NOR VARIABLE RATE ADVANCES ARE EXTENDED FOR ANY SPECIFIC TERM OR DURATION. THE BORROWERUNDERSTANDS AND AGREES THAT ALL ADVANCES ARE SUBJECT TO COLLATERAL MAINTENANCE REQUIREMENTS,THE BORROWER UNDERSTANDS THAT UBS BANK. USA MAY, AT ANY TIME, IN ITS DISCRETION, TERMINATE ANDCANCEL THE CREDIT LINE REGARDLESS OF WHETHER OR NOT AN EVENT HAS OCCURRED.CUNLESS DISCLOSED IN WRITING TO UBS BANK USA AT THE TIME OF THIS AGREEMENT, AND APPROVED BY UBS BANKUSA, THE BORROWER AGREES NOT TO USE THE PROCEEDS OF ANY ADVANCE EITHER TO PURCHASE, CARRY OR TRADEIN SECURITIES OR TO REPAY ANY DEBT (I) USED TO PURCHASE, CARRY OR TRADE IN SECURITIES OR (II) TO ANYAFFILIATE OF UBS BANK USA. THE BORROWER WILL BE DEEMED TO REPEAT THIS AGREEMENT EACH TIME THEBORROWER REQUESTS AN ADVANCE.DTHE BORROWER UNDERSTANDS THAT BORROWING USING SECURITIES AS COLLATERAL ENTAILS RISKS, SHOULD THEVALUE OF THE SECURITIES IN THE COLLATERAL ACCOUNT DECLINE BELOW THE REQUIRED COLLATERALMAINTENANCE REQUIREMENTS, UBS BANK USA MAY REQUIRE THAT THE BORROWER POST ADDITIONAL COLLATERALREPAY PART OF ALL OF THE BORROWER'S LOAN AND/OR SELL THE BORROWER'S SECURITIES. ANY REQUIREDLIQUIDATIONS MAY INTERRUPT THE BORROWER'S LONG-TERM INVESTMENT STRATEGIES AND MAY RESULT INADVERSE TAX CONSEQUENCES.ENeither UBS Bank USA nor UBS financial Services Inc. provides legal or tax advice and nothing herein shall be construed as providing legalor tax advice.FUpon execution of this Credit line Account, Application and Agreement, the Borrower declares that all of the information requested in the Application andsupplied by the Borrower is true and accurate and further agrees to promptly notify UBS Bank USA in writing of any material changes to any or allinformation contained in the Application including information relating to the Borrower’s financial situation.GSubject to any applicable financial privacy laws and regulations, data regarding the Borrower and the Borrower’s securities accounts may be shared withUBS Bank USA affiliates. Subject to any applicable financial privacy laws and regulations, the Borrower requests that UBS Bank USA share suchpersonal financial data with non-affiliates of UBS Bank USA as is necessary or advisable to effect, administer of enforce or to service, process ormaintain, all transactions and accounts contemplated by this Agreement.HThe Borrower authorizes UBS Bank USA and UBS Financial Services Inc. to obtain a credit report of other credit references concerning the Borrower(including making verbal or written Inquiries concerning credit history) or to otherwise verify or update credit information given to UBS Bank USA atany time. The Borrower authorizes the release of this credit report or other credit information to UBS Bank USA affiliates as it deems necessary oradvisable to effect, administer or enforce, or to service, process or maintain all transactions and accounts contemplated by this Agreement, and for thepurpose of offering additional products, from time to time, to the Borrower. The Borrower authorities UBS Bank USA to exchange Borrower informationwith any party it reasonably believes is conducting a legitimate credit inquiry in accordance with the Fair Credit Reporting Act, UBS Bank, USA mayalso share credit or other transactional experience with the Borrower’s designated UBS Financial Services Inc. Financial Advisor or other partiesdesignated by the Borrower.IUBS Bank USA is subject to examination by various federal, state and self-regulatory organizations and the books and records maintained by UBSBank USA are subject to inspection and subpoena by these regulators and by federal, state, and local law enforcement officials. The Borrower alsoacknowledges that such regulators and officials may, pursuant to treaty or other arrangements, in turn disclose such information to the officials ofregulators of other countries, and that U.S. courts may be required to compel UBS Bank USA to disclose such information to the officials & regulatorsof the countries. The Borrower agrees that UBS Bank USA may disclose to such regulators and officials information about the Borrower andtransactions in the credit line account or other accounts at UBS Bank USA without notice to the Borrower. In addition, UBS Bank USA may in thecontext of a private dispute be required by subpoena or other judicial process to disclose information or produce documentation related to the Borrower, thecredit line account or other accounts at UBS Bank USA. The Borrower acknowledges and agrees that UBS Bank USA reserves the right, in its solediscretion, to respond to subpoenas and judicial process as it deems appropriate.JTo help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify, andrecord information that identifies each person who opens an account. When the Borrower opens an account with UBS Bank USA. UBS Bank USA willask for the Borrower’s name, address and other information that will allow UBS Bank USA to identify the Borrower. UBS Bank USA may also ask tosee other Identifying documents, UBS Financial Serves Inc. and UBS Bank USA are firmly committed to compliance with all applicable laws, rules andregulations, including those related to combating money laundering. The Borrower understands and agrees that the Borrower must take necessary steps tocomply with the anti-money laundering laws and regulations of the Borrower’s country of origin, country of residence and the sites of the Borrower'stransaction.KUBS Bank USA and its affiliates will act as creditor’s and. accordingly, their interests may be inconsistent with, and potentially adverse to, theBorrower’s Interests. As a lender and consistent with normal lending practice, UBS Bank USA may take any steps necessary to perfect its interests inthe Credit line, issue a call for additional collateral or force the sale of the Borrower's securities if the Borrower's actions or inactions call the Borrower'screditworthiness into question, Neither UBS Bank USA nor UBS Financial Services Inc. will act as Client investment advisor with respect to anyliquidation. In fact UGS Bank USA will act as a creditor and UBS financial Services Inc. will act as securities intermediary.LThe Borrower understands that, if the Collateral Account is a managed account with UBS Financial Services Inc.. (i) in addition to any fees payable toUBS Financial Services Inc. in connection with the Borrower’s managed account, interest will be payable to the Bank on an amount advanced to theBorrower in connection with the Credit Line Account, and (ii) the performance of the managed account might not exceed the managed account fees and theinterest expense payable to the Bank in which case the Borrower’s overall rate of return will be less than the costs associated with the managed account.MUBS Bank USA may provide copies of all credit line account statements to UBS Financial Services Inc. and to any Guarantor, The Borroweracknowledges and agrees that UBS Bank USA may share any and all information regarding the Borrower and the Borrower’s accounts at UBS BankUSA with UBS Financial Services Inc. UBS Financial Services Inc. may provide copies of all statements and confirmations concerning each CollateralAccount to UBS Bank USA at such times and in such manner as UBS Bank USA may request and may share with UBS Bank USA any and allinformation regarding the Borrower and the Borrower's accounts with UBS Financial Services Inc. IN WITNESS WHEREOF, the undersigned (*Borrower*) has signed this Agreement, or has caused this Agreement to be signed in its name by its dulyauthorized representative, as of the date indicated below. DATE: 12/15/08 By:/s/ PHIL YIN Title:CEO (Signature of Authorized Signatory of Borrower)* PHIL YIN (Title of Authorized Signatory of Borrower)By:/s/ WILSON CHEUNG Title:CFO (Signature of Authorized Signatory of Borrower)* WILSONCHEUNG (Title of Authorized Signatory of Borrower)The authorized signatory of the Borrower must be one of the Authorized Persons designated on the applicable USB Bank USA supplemental form executed bythe Borrower (e.g., the Supplemental Corporate Resolution Form (HP Form)). 4Exhibit 10.24 UBS Bank USA c/o UBS Financial Services Inc.1000 Harbor Boulevard, 8th FL.Weehawken, NJ 07086-6761 ubs.com/fs 000126 UBSBDD11 000000AXT Inc ATTN: Raymond Low4281 Technology DriveFremont, CA 94538-6339 January 17, 2012 Notice: Your Credit Line account has been increased Approval amount on your UBS Credit Line account has been increased as detailed below. Account number5V 66301Previous approval amount$3,000,000,00New approval amount as of January 13, 2012$10,000,000.00 Please note that the rate on your Credit Line may have changed as a result of this increase; refer to Schedules I and II in your Credit Line Agreement. QuestionsPlease contact your Financial Advisor at 1-415-398-6400 if you have questions regarding your Credit Line account. Thank you for allowing us to serve yourwealth management needs. Sincerely, /s/ Steve Stewart Steve Stewart Senior Vice President & Chief Credit Officer UBS Bank USA DisclosureLoans made through a Credit Line are extended solely at the discretion of UBS Bank USA under the terms of the§Credit Line Agreement (Agreement), This is not a committed loan facility and UBS Bank USA is not obligated to you or any third party to satisfy yourborrowing requests. UBS Bank USA Credit Line loans may not be used to purchase, carry, or trade in securities, or pay debt that was used to purchase,carry, or trade in securities, Payment of principal prior to the end of a fixed rate contact may result in prepayment fees, Changes in the value of the collateralsupporting your Credit Line, as well as other factors described in the Agreement, may limit your ability to access funds from your Credit Line, Reliance onthis letter by a third party for any reason shall in no way create any obligation upon UBS Bank USA to such third party, UBS Bank USA and UBS Financial Services Inc. are a subsidiaries of UBS AGPackage ID: 0018589843 - 01E Exhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-143366, 333-38858 and 333-67297) and Form S-3(No. 333-175820) of AXT, Inc. of our reports dated March 14, 2012 relating to the consolidated financial statements and the effectiveness of internal controlover financial reporting as of December 31, 2011, which appear in this Form 10-K. /s/ Burr Pilger Mayer, Inc. San Jose, CaliforniaMarch 14, 2012 Exhibit 31.1 CERTIFICATION PURSUANT TO 18 U.S.C. RULE 13a-14(a)/15d-14(a)AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Morris S. Young, certify that: 1.I have reviewed this annual report on Form 10-K of AXT, Inc.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periodcovered by this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all materialrespects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (asdefined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules13a-15(f) and 15d-15(f)) for the registrant and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made knownto us by others within those entities, particularly during the period in which this report is being prepared; (b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designedunder our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generally accepted accounting principles; (c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusionsabout the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on suchevaluation; and (d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’smost recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or isreasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financialreporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalentfunctions): (a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting whichare reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;and (b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’sinternal control over financial reporting. March 15, 2012/s/ Morris S. Young Morris S. Young Chief Executive Officer (Principal Executive Officer) Exhibit 31.2 CERTIFICATION PURSUANT TO 18 U.S.C. RULE 13a-14(a)/15d-14(a)AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Raymond A. Low, certify that: 1.I have reviewed this annual report on Form 10-K of AXT, Inc.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periodcovered by this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all materialrespects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (asdefined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules13a-15(f) and 15d-15(f)) for the registrant and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made knownto us by others within those entities, particularly during the period in which this report is being prepared; (b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designedunder our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generally accepted accounting principles; (c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusionsabout the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on suchevaluation; and (d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’smost recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or isreasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financialreporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalentfunctions): (a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting whichare reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;and (b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’sinternal control over financial reporting. March 15, 2012/s/ Raymond A. Low Raymond A. Low Chief Financial Officer and Corporate Secretary (Principal Financial Officer and Principal Accounting Officer) Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of AXT, Inc. (the “Company”) on Form 10-K for the year ending December 31, 2011 as filed with theSecurities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: (1)The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and (2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany. Date: March 15, 2012By:/s/ Morris S. Young Morris S. Young Chief Executive Officer (Principal Executive Officer) Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of AXT, Inc. (the “Company”) on Form 10-K for the year ending December 31, 2011 as filed with theSecurities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: (1)The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and (2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany. Date: March 15, 2012By:/s/ Raymond A. Low Raymond A. Low Chief Financial Officer and Corporate Secretary (Principal Financial Officer and Principal Accounting Officer) 

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