aaoi_Current_Folio_10Q

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2019

 

OR

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to __________

 

Commission File Number: 001-36083

 

Applied Optoelectronics, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware

76-0533927

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

13139 Jess Pirtle Blvd.

Sugar Land, TX 77478

(Address of principal executive offices)

 

(281) 295-1800

(Registrant’s telephone number)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (“Exchange Act”) 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 filing requirements for the past 90 days.                                                            Yes ☒ No 

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

            Yes ☒ No 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

 

Large accelerated filer

 

 

 

Accelerated filer

 

 

 

Non-accelerated filer

 

 

 

Smaller reporting company

 

 

 

Emerging growth company

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.                    ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

            Yes ☐ No ☒

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

 

Title of each class

Trading Symbol(s)

Trading Name of each exchange on which registered

Common Stock, Par value $0.001

AAOI

NASDAQ Global Market

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: as of May 2, 2019 there were 19,939,626 shares of the registrant’s Common Stock outstanding.

 

 

 


 

Table of Contents

Applied Optoelectronics, Inc.

Table of Contents

 

 

 

Page

Part I. Financial Information 

 

 

 

Item 1. 

Condensed Consolidated Financial Statements (Unaudited)

3

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2019 (Unaudited) and December 31, 2018

3

 

 

 

 

Condensed Consolidated Statements of Operations for the Three Months ended March 31, 2019 and 2018 (Unaudited)

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months ended March 31, 2019 and 2018 (Unaudited)

5

 

 

 

 

Condensed Consolidated Statements of Stockholders’ Equity for the Three Months ended March 31, 2019 and 2018 (Unaudited)

6

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months ended March 31, 2019 and 2018 (Unaudited)

7

 

 

 

 

Notes To Condensed Consolidated Financial Statements (Unaudited)

8

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

25

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

32

 

 

 

Item 4. 

Controls and Procedures

32

 

 

 

Part II. Other Information 

 

 

 

Item 1. 

Legal Proceedings

34

 

 

 

Item 1A. 

Risk Factors

35

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

56

 

 

 

Item 3. 

Defaults Upon Senior Securities

56

 

 

 

Item 4. 

Mine Safety Disclosures

56

 

 

 

Item 5. 

Other Information

57

 

 

 

Item 6. 

Exhibits

57

 

 

 

 

Signatures

60

 

 

2


 

Table of Contents

Part I. Financial Information

 

Item 1. Condensed Consolidated Financial Statements

 

Applied Optoelectronics, Inc. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

    

2019

    

2018

 

ASSETS

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

74,930

 

$

55,646

 

Restricted cash

 

 

2,529

 

 

2,358

 

Accounts receivable - trade, net of allowance of $32 and $31, respectively

 

 

32,123

 

 

30,534

 

Notes receivable

 

 

79

 

 

 —

 

Inventories

 

 

84,464

 

 

93,256

 

Prepaid income tax

 

 

1,423

 

 

1,188

 

Prepaid expenses and other current assets

 

 

7,726

 

 

11,293

 

Total current assets

 

 

203,274

 

 

194,275

 

Property, plant and equipment, net

 

 

242,623

 

 

234,211

 

Land use rights, net

 

 

5,894

 

 

5,814

 

Operating right of use asset

 

 

8,293

 

 

 —

 

Intangible assets, net

 

 

4,001

 

 

3,977

 

Deferred income tax assets

 

 

24,188

 

 

21,714

 

Other assets, net

 

 

2,932

 

 

6,849

 

TOTAL ASSETS

 

$

491,205

 

$

466,840

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Current portion of notes payable and long-term debt

 

$

18,168

 

$

23,589

 

Accounts payable

 

 

28,332

 

 

29,910

 

Bank acceptance payable

 

 

5,198

 

 

4,628

 

Current lease liability

 

 

1,053

 

 

 —

 

Accrued liabilities

 

 

12,424

 

 

19,291

 

Total current liabilities

 

 

65,175

 

 

77,418

 

Notes payable and long-term debt, less current portion

 

 

17,535

 

 

60,328

 

Convertible senior notes

 

 

76,439

 

 

 —

 

Non-current lease liability

 

 

8,438

 

 

 —

 

TOTAL LIABILITIES

 

 

167,587

 

 

137,746

 

Stockholders' equity:

 

 

 

 

 

 

 

Preferred Stock; 5,000 shares authorized at $0.001 par value; no shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively

 

 

 —

 

 

 —

 

Common Stock; 45,000 shares authorized at $0.001 par value; 19,888 and 19,810 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively

 

 

20

 

 

20

 

Additional paid-in capital

 

 

295,130

 

 

292,480

 

Accumulated other comprehensive income

 

 

2,950

 

 

602

 

Retained earnings

 

 

25,518

 

 

35,992

 

TOTAL STOCKHOLDERS' EQUITY

 

 

323,618

 

 

329,094

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

491,205

 

$

466,840

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

3


 

Table of Contents

Applied Optoelectronics, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

 

    

2019

    

2018

    

Revenue, net

 

$

52,719

 

$

65,239

 

Cost of goods sold

 

 

40,368

 

 

39,403

 

Gross profit

 

 

12,351

 

 

25,836

 

Operating expenses

 

 

 

 

 

 

 

Research and development

 

 

11,185

 

 

11,736

 

Sales and marketing

 

 

2,595

 

 

2,474

 

General and administrative

 

 

10,440

 

 

9,456

 

Total operating expenses

 

 

24,220

 

 

23,666

 

Income (loss) from operations

 

 

(11,869)

 

 

2,170

 

Other income (expense)

 

 

 

 

 

 

 

Interest income

 

 

72

 

 

52

 

Interest expense

 

 

(996)

 

 

(71)

 

Other expense, net

 

 

(155)

 

 

(1,027)

 

Total other expense, net

 

 

(1,079)

 

 

(1,046)

 

Income (loss) before income taxes

 

 

(12,948)

 

 

1,124

 

Income tax benefit

 

 

2,474

 

 

996

 

Net income (loss)

 

$

(10,474)

 

$

2,120

 

Net income (loss) per share

 

 

 

 

 

 

 

Basic

 

$

(0.53)

 

$

0.11

 

Diluted

 

$

(0.53)

 

$

0.11

 

 

 

 

 

 

 

 

 

Weighted average shares used to compute net income (loss) per share:

 

 

 

 

 

 

 

Basic

 

 

19,863,080

 

 

19,492,251

 

Diluted

 

 

19,863,080

 

 

19,988,575

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

4


 

Table of Contents

Applied Optoelectronics, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited, in thousands)

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

 

    

2019

    

2018

    

Net income (loss)

 

$

(10,474)

 

$

2,120

 

Gain on foreign currency translation adjustment

 

 

2,348

 

 

6,335

 

Comprehensive income (loss)

 

$

(8,126)

 

$

8,455

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5


 

Table of Contents

Applied Optoelectronics, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Three months ended March 31, 2019 and 2018

(Unaudited, in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

Preferred Stock

 

Common Stock 

 

Additional

 

other

 

 

 

 

 

 

 

 

Number

 

 

 

 

Number

 

 

 

 

paid-in

 

comprehensive

 

Retained

 

Stockholders'

 

 

    

of shares

    

Amount

    

of shares

    

Amount

    

capital

    

gain (loss)

    

earnings

    

equity

 

January 1, 2019

 

 —

 

$

 —

 

19,810

 

$

20

 

$

292,480

 

$

602

 

$

35,992

 

$

329,094

 

Stock options exercised, net of shares withheld for employee tax

 

 —

 

 

 —

 

 1

 

 

 —

 

 

 7

 

 

 —

 

 

 —

 

 

 7

 

Issuance of restricted stock, net of shares withheld for employee tax

 

 —

 

 

 —

 

77

 

 

 —

 

 

(299)

 

 

 —

 

 

 —

 

 

(299)

 

Share-based compensation

 

 —

 

 

 —

 

 —

 

 

 —

 

 

2,942

 

 

 —

 

 

 —

 

 

2,942

 

Foreign currency translation adjustment

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

2,348

 

 

 —

 

 

2,348

 

Other

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Net loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(10,474)

 

 

(10,474)

 

March 31, 2019

 

 —

 

$

 —

 

19,888

 

$

20

 

$

295,130

 

$

2,950

 

$

25,518

 

$

323,618

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

Preferred Stock

 

Common Stock 

 

Additional

 

other

 

 

 

 

 

 

 

 

Number

 

 

 

 

Number

 

 

 

 

paid-in

 

comprehensive

 

Retained

 

Stockholders'

 

 

    

of shares

    

Amount

    

of shares

    

Amount

    

capital

    

gain (loss)

    

earnings

    

equity

 

January 1, 2018

 

 —

 

$

 —

 

19,451

 

$

19

 

$

285,376

 

$

9,743

 

$

38,138

 

$

333,276

 

Stock options exercised, net of shares withheld for employee tax

 

 —

 

 

 —

 

38

 

 

 —

 

 

(609)

 

 

 —

 

 

 —

 

 

(609)

 

Issuance of restricted stock, net of shares withheld for employee tax

 

 —

 

 

 —

 

49

 

 

 1

 

 

(398)

 

 

 —

 

 

 —

 

 

(397)

 

Share-based compensation

 

 —

 

 

 —

 

 —

 

 

 —

 

 

2,569

 

 

 —

 

 

 —

 

 

2,569

 

Foreign currency translation adjustment

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

6,335

 

 

 —

 

 

6,335

 

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

2,120

 

 

2,120

 

March 31, 2018

 

 —

 

$

 —

 

19,538

 

$

20

 

$

286,938

 

$

16,078

 

$

40,258

 

$

343,294

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

6


 

Table of Contents

Applied Optoelectronics, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

 

    

2019

    

2018

    

Operating activities:

 

 

 

 

 

 

 

Net income (loss)

 

$

(10,474)

 

$

2,120

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

Lower of cost or market reserve adjustment to inventory

 

 

2,287

 

 

877

 

Depreciation and amortization

 

 

5,948

 

 

6,964

 

Amortization of debt issuance costs

 

 

243

 

 

 —

 

Deferred income taxes, net

 

 

(2,474)

 

 

(1,103)

 

Loss (gain) on disposal of assets

 

 

 9

 

 

(1)

 

Share-based compensation

 

 

2,942

 

 

2,569

 

Unrealized foreign exchange gain

 

 

(249)

 

 

(710)

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable, trade

 

 

(1,589)

 

 

6,195

 

Notes receivable

 

 

(79)

 

 

 —

 

Prepaid income tax

 

 

(224)

 

 

109

 

Inventories

 

 

7,304

 

 

(15,761)

 

Other current assets

 

 

3,670

 

 

(1,870)

 

Operating right of use asset

 

 

245

 

 

 —

 

Accounts payable

 

 

(1,579)

 

 

2,599

 

Accrued liabilities

 

 

(5,698)

 

 

(6,052)

 

Lease liability

 

 

(242)

 

 

 —

 

Net cash provided by (used in) operating activities

 

 

40

 

 

(4,064)

 

Investing activities:

 

 

 

 

 

 

 

Maturities of short-term investments

 

 

 —

 

 

36

 

Purchase of property, plant and equipment

 

 

(12,812)

 

 

(9,659)

 

Purchase of land use rights

 

 

 —

 

 

(5,591)

 

Proceeds from disposal of equipment

 

 

 1

 

 

 —

 

Deposits and prepaid for equipment

 

 

3,931

 

 

3,128

 

Purchase of intangible assets

 

 

(155)

 

 

(134)

 

Net cash used in investing activities

 

 

(9,035)

 

 

(12,220)

 

Financing activities:

 

 

 

 

 

 

 

Proceeds from issuance of notes payable and long-term debt, net of debt issuance costs

 

 

6,488

 

 

26,556

 

Principal payments of long-term debt and notes payable

 

 

(40,132)

 

 

(341)

 

Proceeds from line of credit borrowings

 

 

10,859

 

 

44,953

 

Repayments of line of credit borrowings

 

 

(25,747)

 

 

(55,583)

 

Proceeds from bank acceptance payable

 

 

2,382

 

 

 —

 

Repayments of bank acceptance payable

 

 

(1,917)

 

 

 —

 

Proceeds from issuance of convertible senior notes, net of debt issuance costs

 

 

76,378

 

 

 —

 

Exercise of stock options

 

 

 7

 

 

52

 

Payments of tax withholding on behalf of employees related to share-based compensation

 

 

(299)

 

 

(1,061)

 

Net cash provided by financing activities

 

 

28,019

 

 

14,576

 

Effect of exchange rate changes on cash

 

 

431

 

 

1,059

 

Net increase (decrease) in cash, cash equivalents and restricted cash

 

 

19,455

 

 

(649)

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

58,004

 

 

83,948

 

Cash, cash equivalents and restricted cash at end of period

 

$

77,459

 

$

83,299

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

Interest

 

$

421

 

$

58

 

Income taxes

 

 

224

 

 

 —

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

Net change in accounts payable related to property and equipment additions

 

 

(2,168)

 

 

(1,138)

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

7


 

Table of Contents

Applied Optoelectronics, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1.   Description of Business

 

Business Overview

 

Applied Optoelectronics, Inc. (“AOI” or the “Company”) is a Delaware corporation. The Company is a leading, vertically integrated provider of fiber-optic networking products, primarily for four networking end-markets: internet data center, cable television, telecommunications and fiber-to-the-home. The Company designs and manufactures a wide range of optical communications products at varying levels of integration, from components, subassemblies and modules to complete turn-key equipment.

 

The Company has manufacturing and research and development facilities located in the U.S., Taiwan and China. In the U.S., at its corporate headquarters and manufacturing facilities in Sugar Land, Texas, the Company primarily manufactures lasers and laser components and performs research and development activities for laser component and optical module products. In addition, the Company also has a research and development facility in Duluth, Georgia. The Company operates in Taipei, Taiwan and Ningbo, China through its wholly-owned subsidiary Prime World International Holdings, Ltd. (“Prime World”, incorporated in the British Virgin Islands). Prime World operates a branch in Taipei, Taiwan, which primarily manufactures transceivers and performs research and development activities for the transceiver products. Prime World is also the parent of Global Technology, Inc. (“Global”, incorporated in the People’s Republic of China). Through Global, the Company primarily manufactures certain of its data center transceiver products, including subassemblies, as well as Cable TV Broadband (“CATV”) systems and equipment, and performs research and development activities for the CATV products.

 

Interim Financial Statements

 

The unaudited condensed consolidated financial statements of the Company as of March 31, 2019 and December 31, 2018 and for the three months ended March 31, 2019 and March 31, 2018, have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim information and with the instructions on Form 10-Q and Rule 10-01 of Regulation S-X pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In accordance with those rules and regulations, the Company has omitted certain information and notes required by GAAP for annual consolidated financial statements. In the opinion of management, the condensed consolidated financial statements contain all adjustments, except as otherwise noted, necessary for the fair presentation of the Company’s financial position and results of operations for the periods presented. The year-end condensed balance sheet data was derived from audited financial statements. These condensed consolidated financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report on Form 10-K (“Annual Report”) for the fiscal year ended December 31, 2018. The results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results expected for the entire fiscal year. All significant intercompany accounts and transactions have been eliminated.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported. Actual results could differ from those estimates in the consolidated financial statements and accompanying notes. Significant estimates and assumptions that impact these financial statements and the accompanying notes relate to, among other things, allowance for doubtful accounts, inventory reserve, product warranty costs, share-based compensation expense, estimated useful lives of property and equipment, and taxes.

 

Note 2.   Significant Accounting Policies

 

There have been no changes in the Company’s significant accounting policies for the three months ended March 31, 2019, as compared to the significant accounting policies described in its 2018 Annual Report, except as described below.

 

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Recent Accounting Pronouncements

 

Recent Accounting Pronouncements Adopted in 2019 

On February 25, 2016, the FASB released Accounting Standards Update (ASU) No. 2016-02, Leases, to complete its project to overhaul lease accounting. The ASU codifies ASC 842, Leases, which will replace the guidance in ASC 840. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. The Company adopted this ASU on January 1, 2019 without any impact to beginning retained earnings. Upon adoption of the new lease standard, the Company elected the package of practical expedients which allowed it to carry forward the historical lease classification on existing leases at adoption. In addition, the Company elected the short-term lease recognition exemption for all leases that qualify. The Company also elected the practical expedient to not separate lease and non-lease components for all of its leases. The Company has implemented internal controls to enable the presentation of financial information on adoption. The standard has a material impact on the Company’s consolidated balance sheet, but did not have an impact in its consolidated income statements. The most significant effects of adopting the new standard relate to the recognition of new ROU assets and lease liabilities on its balance sheet for its Taiwan branch. See Note 4, "Operating Leases" for additional information on the required disclosures related to the impact of adopting this standard.

 

In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for nonemployee share-based payment transactions. The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The Company adopted this ASU on January 1, 2019 with no impact on its consolidated financial statements.

   

Recent Accounting Pronouncements Yet to be Adopted

 

In June 2016, the FASB issued ASU 2016-13 Financial Instruments - Credit Losses, Measurement of Credit Losses on Financial Instruments, which changes the way entities measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net earnings. The new standard is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods. Based on the composition of the Company’s investment portfolio, current market conditions, and historical credit loss activity, the adoption of ASU 2016-13 is not expected to have a material impact on its consolidated financial statements.

 

 

Note 3.  Revenue Recognition

 

The adoption of Topic 606 represents a change in accounting principle that will provide financial statement readers with enhanced revenue recognition disclosures. In accordance with Topic 606, revenue is recognized when obligations under the terms of a contract with our customer are satisfied; generally this occurs with the transfer of control of products or services. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products or providing services. Certain customers may receive cash and/or non-cash incentives, which are accounted for as variable consideration. To achieve this core principle, the Company applies the following five steps: (i) identify the contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to performance obligations in the contract; and (v) recognize revenue when or as the Company satisfies a performance obligation. The Company generally satisfies performance obligations at a point in time. Revenue is recognized based on the transaction price at the time the related performance obligation is satisfied by transferring a promised product or service to a customer.

 

Disaggregation of Revenue

 

Revenue is classified based on the location of where the product is manufactured. For additional information on the disaggregated revenues by geographical region, see Note 17, "Geographic Information.”

 

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Revenue is also classified by major product category and is presented below (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

    

2019

    

% of Revenue

 

2018

 

% of Revenue

Data Center

 

$

38,499

 

73.0%

 

$

50,583

 

77.5%

CATV

 

 

11,962

 

22.7%

 

 

10,568

 

16.2%

Telecom

 

 

1,738

 

3.3%

 

 

3,586

 

5.5%

FTTH

 

 

94

 

0.2%

 

 

111

 

0.2%

Other

 

 

426

 

0.8%

 

 

391

 

0.6%

Total Revenue

 

$

52,719

 

100.0%

 

$

65,239

 

100.0%

 

 

Note 4.  Operating Leases

 

The Company leases space under non-cancelable operating leases for manufacturing facilities, research and development offices and certain storage facilities and apartments. These leases do not contain contingent rent provisions. The Company also leases certain machinery, office equipment and a vehicle under operating leases. Many of its leases include both lease (e.g. fixed payments including rent, taxes, and insurance costs) and non-lease components ( e.g. common-area or other maintenance costs) which are accounted for as a single lease component as the Company has elected the practical expedient to group lease and non-lease components for all leases. Several of the leases include one or more options to renew which have been assessed and either included or excluded from the calculation of the lease liability of ROU asset based on management’s intentions and individual fact patterns. Several warehouses and apartments have a non-cancelable lease terms of less than one-year and therefore, the Company has elected the practical expedient to exclude these short-term leases from its ROU asset and lease liabilities.

 

As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate, which are the rates incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. Based on the applicable lease terms and current economic environment, the Company applies a location approach for determining the incremental borrowing rate.

 

The Components of lease expense were as follows for the periods indicated (in thousands):

 

 

 

 

 

Three months ended March 31, 

 

 

2019

Operating lease expense

$

323

Short Term lease expense

 

29

  Total lease expense

$

352

 

Maturities of lease liabilities are as follows for the future one-year periods ending March 31, (in thousands):

 

 

 

 

2020

$

1,378

2021

 

1,205

2022

 

1,080

2023

 

1,051

2024

 

1,074

2025 and thereafter

 

5,765

Total lease payments

$

11,553

Less imputed interest

 

(2,062)

Present value

$

9,491

 

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The weighted average remaining lease term and discount rate for operating leases were as follows for the periods indicated:

 

 

 

 

March 31, 

 

2019

Weighted Average Remaining Lease Term (Years)

9.81

Weighted Average Discount Rate

3.17%

 

Supplemental cash flow information related to operating leases was as follows for the periods indicated (in thousands):

 

 

 

Three months ended March 31, 

 

2019

Cash paid for amounts included in the measurement of lease liabilities

 

Operating cash flows from operating leases

332

Operating cash flows from financing lease

 —

Financing cash flows from financing lease

 —

Right-of-use assets obtained in exchange for new operating lease liabilities

 —

Right-of-use assets obtained in exchange for new finance lease liabilities

 —

 

 

 

Note 5.  Cash, Cash Equivalents and Restricted Cash

 

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the statement of financial position that sum to the total of the same such amounts in the statement of cash flows (in thousands):

 

 

 

 

 

 

 

 

March 31, 

 

 

December 31, 

 

    

2019

 

2018

Cash and cash equivalents

$

74,930

 

$

55,646

Restricted cash

 

2,529

 

 

2,358

Total cash, cash equivalents and restricted cash shown in the statement of cash flows

$

77,459

 

$

58,004

 

Restricted cash includes guarantee deposits for customs duties and compensating balances required for certain credit facilities.

 

Note 6.   Earnings Per Share

 

Basic net income (loss) per share has been computed using the weighted-average number of shares of common stock outstanding during the period. Diluted net income (loss) per share has been computed using the weighted-average number of shares of common stock and dilutive potential common shares from stock options, restricted stock units and senior convertible notes outstanding during the period. In periods with net losses, normally dilutive shares become anti-dilutive. Therefore, basic and diluted earnings per share are the same.

 

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The following table sets forth the computation of the basic and diluted net income (loss) per share for the periods indicated (in thousands, except per share amounts):

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

 

    

2019

    

2018

    

Numerator:

 

 

 

 

 

 

 

Net income (loss) 

 

$

(10,474)

 

$

2,120

 

Denominator:

 

 

 

 

 

 

 

Weighted average shares used to compute net income (loss) per share

 

 

 

 

 

 

 

Basic

 

 

19,863

 

 

19,492

 

Effect of dilutive options and restricted stock units

 

 

 —

 

 

497

 

Diluted

 

 

19,863

 

 

19,989

 

Net income (loss) per share

 

 

 

 

 

 

 

Basic

 

$

(0.53)

 

$

0.11

 

Diluted

 

$

(0.53)

 

$

0.11

 

 

The following potentially dilutive securities were excluded from the diluted net income (loss) per share as their effect would have been antidilutive (in thousands):

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

 

 

    

2019

 

2018

    

    

Employee stock options

 

93

 

 —

 

 

Restricted stock units

 

10

 

 —

 

 

Shares for convertible senior notes

 

4,587

 

 —

 

 

Total antidilutive shares

 

4,690

 

 —

 

 

 

 

Note 7.   Inventories

 

Inventories, net of inventory write-downs, consist of the following for the periods indicated (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

March 31, 2019

    

December 31, 2018

 

Raw materials

 

$

27,473

 

$

30,214

 

Work in process and sub-assemblies

 

 

53,642

  

 

49,192

 

Finished goods

 

 

3,349

  

 

13,850

 

Total inventory

 

$

84,464

 

$

93,256

 

 

The lower of cost or market adjustment expensed for inventory for the three months ended March 31, 2019 and 2018 was $2.3 million and $0.9 million, respectively.

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Note 8.   Property, Plant & Equipment

 

Property, plant and equipment consisted of the following for the periods indicated (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

March 31, 2019

    

December 31, 2018

 

Land improvements

 

$

806

 

$

806

 

Building and improvements

 

 

82,945

 

 

80,960

 

Machinery and equipment

 

 

225,650

 

 

214,718

 

Furniture and fixtures

 

 

5,123

 

 

5,043

 

Computer equipment and software

 

 

9,808

 

 

9,709

 

Transportation equipment

 

 

664

 

 

658

 

 

 

 

324,996

 

 

311,894

 

Less accumulated depreciation and amortization

 

 

(101,049)

 

 

(95,233)

 

 

 

 

223,947

 

 

216,661

 

Construction in progress

 

 

17,575

 

 

16,449

 

Land

 

 

1,101

 

 

1,101

 

Total property, plant and equipment, net

 

$

242,623

 

$

234,211

 

 

For the three months ended March 31, 2019 and 2018, depreciation expense of property, plant and equipment was $5.8 million and $6.8 million, respectively.

 

Included in depreciation expense was $2.5 million and $3.8 million recorded as cost of sales for the three months ended March 31, 2019 and 2018, respectively.

 

Note 9.   Intangible Assets, net

 

Intangible assets consisted of the following for the periods indicated (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

    

Gross

    

Accumulated

    

Intangible