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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 

 

FORM 10-K

 

(Mark One)

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

For the fiscal year ended December 31, 2013

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.)

 

13115 Jess Pirtle Blvd.

Sugar Land, TX 77478

(Address of principal executive offices)

 

(281) 295-1800

(Registrant’s telephone number)

 

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

     
(Title of each class)   (Name of each exchange on which registered)
Common Stock, Par value $0.001   NASDAQ Global Market

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933 Yes £   No x

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act Yes £   No x

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 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 x   No £

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required 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 shorter period that the Registrant was required to submit and post such files). Yes x   No £

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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 Form 10-K or any amendment to this Form 10-K.  S

Indicate by check mark 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 Exchange Act. (Check one):

Large accelerated filer   £   Accelerated filer   £
       
Non-accelerated filer   x  (Do not check if a smaller reporting company)   Smaller reporting company   £

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes £   No x

As of June 30, 2013, the last business day of the Registrant’s most recently completed second fiscal quarter, the registrant’s common stock was not listed on any exchange or over-the-counter market. The Registrant’s common stock began trading on the NASDAQ Global Markets on September 26, 2013.

As of January 31, 2014, the Registrant had 12,660,885 outstanding shares of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive Proxy Statement for the Registrant’s 2013 Annual Meeting of Stockholders are incorporated by reference in Part III of this Annual Report on Form 10-K to the extent stated herein. The Proxy Statement will be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days of the Registrant’s fiscal year ended December 31, 2013.

 

 
 

 

Applied Optoelectronics, Inc.

Table of Contents

 

    Page
Part I   3
     
Item 1. Business 3
     
Item 1A. Risk Factors    13
     
Item 1B. Unresolved Staff Comments 33
     
Item 2. Properties 33
     
Item 3. Legal Proceedings 33
     
Item 4. Mine Safety Disclosure 33
     
Part II   34
   
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 34
     
Item 6. Selected Financial Data 35
     
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 37
     
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 51
     
Item 8. Financial Statements and Supplementary Data 56
     
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 56
     
Item 9A. Controls and Procedures 56
     
Item 9B. Other Information 56
     
Part III   56
     
Item 10. Directors, Executive Officers and Corporate Governance 56
     
Item 11. Executive Compensation 57
     
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 57
     
Item 13. Certain Relationships and Related Transactions, and Director Independence 57
     
Item 14. Principal Accounting Fees and Services 57
     
Part IV   57
     
Item 15. Exhibits, Financial Statements Schedules 57
     
Signatures 58

 

2
 

 

PART I

 

Item 1. Business

 

Forward-Looking Information

 

This report contains forward-looking statements. These forward-looking statements involve risks and uncertainties, as well as assumptions and current expectations, which could cause the company’s actual results to differ materially from those anticipated in such forward-looking statements. These risks and uncertainties include but are not limited to: reduction in the size or quantity of customer orders; change in demand for the company’s products due to industry conditions; changes in manufacturing operations; volatility in manufacturing costs; delays in shipments of products; disruptions in the supply chain; change in the rate of design wins or the rate of customer acceptance of new products; the company’s reliance on a small number of customers for a substantial portion of its revenues; potential pricing pressure; a decline in demand for our customers products or their rate of deployment of their products; general conditions in the CATV, internet data center or FTTH markets; changes in the world economy (particularly in the United States and China); the negative effects of seasonality; and other risks and uncertainties described more fully in the company’s documents filed with or furnished to the Securities and Exchange Commission. More information about these and other risks that may impact the company’s business are set forth in the Section titled “Risk Factors”. In some cases, you can identify forward-looking statements by terminology such as ‘‘may,’’ ‘‘will,’’ ‘‘should,’’ ‘‘expects,’’ ‘‘plans,’’ ‘‘anticipates,’’ ‘‘believes,’’ or ‘‘estimates” or by other similar expressions that convey uncertainty of future events or outcomes. You should not rely on forward-looking statements as predictions of future events. All forward-looking statements in this press release are based upon information available to us as of the date hereof, and qualified in their entirety by this cautionary statement. Except as required by law, we assume no obligation to update forward-looking statements for any reason after the date of this report to conform these statements to actual results or to changes in the company’s expectations.

 

BUSINESS

 

Overview

 

We are a leading, vertically integrated provider of fiber-optic networking products, primarily for three networking end-markets: cable television, or CATV, fiber-to-the-home, or FTTH, and internet data center. We design and manufacture a range of optical communications products at varying levels of integration, from components, subassemblies and modules to complete turn-key equipment. In designing products for our customers, we begin with the fundamental building blocks of lasers and laser components. From these foundational products, we design and manufacture a wide range of products to meet our customers’ needs and specifications, and such products differ from each other by their end market, intended use and level of integration. We are primarily focused on the higher-performance segments within all three of our target markets, which increasingly demand faster connectivity and innovation.

 

The three end markets we target are all driven by significant bandwidth demand fueled by the growth of network-connected devices, video traffic, cloud computing and online social networking. To address this increased bandwidth demand, CATV and telecommunications service providers are competing directly against each other by providing bundles of voice, video and data services to their subscribers and investing to enhance the capacity, reliability and capability of their networks. The trend of rising bandwidth consumption also impacts the internet data center market, as reflected in the shift to higher speed server connections. As a result of these trends, fiber-optic networking technology is becoming essential in all three of our target markets, as it is often the only economic way to deliver the desired bandwidth.

 

The CATV market is our largest and most established market, for which we supply a broad array of products including lasers, transmitters and turn-key equipment. In 2012, we were the leading provider of optical components and the second largest provider of subsystems to the CATV industry, according to research firm Ovum Limited, or Ovum. Sales of headend, node and distribution equipment have contributed significantly to our growth in recent years as a result of our ability to meet the needs of CATV equipment vendors who have begun to outsource both the design and manufacture of this equipment. While equipment vendors have relied upon third parties to assemble portions of their products, within the past four years certain of our customers have accelerated the outsourcing of both the design and manufacturing of both headend equipment and node equipment to third parties. The shift is due in part to the sophisticated engineering expertise needed to perform this work. We believe that our extensive high-speed optical, mixed-signal semiconductor and mechanical engineering capabilities position us well to benefit from these industry dynamics.

 

3
 

 

Our vertically integrated manufacturing model provides us several advantages, including rapid product development, fast response times to customer requests and control over product quality and manufacturing costs. We design, manufacture and integrate our own analog and digital lasers using a proprietary Molecular Beam Epitaxy, or MBE, fabrication process, which we believe is unique in our industry. We manufacture the majority of the laser chips and optical components that are used in our products. The lasers we manufacture are proven to be reliable over time and highly tolerant of changes in temperature and humidity, making them well-suited to the CATV and FTTH markets where networking equipment is often installed outdoors.

 

In 2013, our revenue was $78.4 million and our gross margin was 29.4%. We have grown our annual revenue at a CAGR of 33.1% between 2009 and 2013. In the years ended December 31, 2011, 2012, and 2013, we incurred losses of $5.3 million, $0.9 million, and $1.4 million, respectively, and our accumulated deficit at December 31, 2012 and December 31, 2013 was $81.9 million and $83.3 million, respectively. In 2013, we earned 60.4% of our total revenue from the CATV market, and 24.7% of our total revenue from the data center market. In 2013, our key customers in the CATV market included Cisco Systems and Biogenomics Corp., a distributor. In 2011, 2012 and 2013, Cisco Systems accounted for 26.8%, 33.2%, and 21.8%, respectively, of our revenue and Biogenomics Corp. accounted for 11.7%, 11.2% and 8.7%, respectively, of our revenue. In 2013, our key customers in the data center market included Amazon and Microsoft. In 2012 and 2013, Amazon accounted for 5.8% and 18.2% of our revenue, respectively, and Microsoft accounted for 2.6% and 6.1% of our revenue, respectively.

 

Industry Background

 

Our three target markets of CATV, FTTH and internet data centers share a common trend of a significant growth in bandwidth consumption, and the corresponding need for network infrastructure improvement to support it.

 

The prevailing themes in our target markets include:

 

•Trends in the CATV Market. In recent years, CATV service providers have invested extensively to support high speed, two-way communications, and we expect that they will continue to do so, particularly in countries with less developed CATV networks, such as China.

 

While equipment vendors have historically only relied upon third parties to assemble portions of their products, within the past four years certain of our customers have accelerated the outsourcing of both the design and manufacturing of both headend equipment and node equipment to third parties. The shift is due in part to the sophisticated engineering expertise needed to perform this work.

 

•Trends in the FTTH Market. The FTTH market generally refers to the Passive Optical Networks, or PONs, that telecommunications service providers are deploying. The most commonly deployed PON technology is Gigabit PON, or GPON, which delivers up to 2.5 gigabits per second of data, but due to the splitting of the bandwidth among multiple users, the actual bandwidth delivered to an individual subscriber is far less than 2.5 gigabits per second. One approach that does support true 1 gigabit per second service to the home is wavelength division multiplexing PON, or WDM-PON, a technology that enables the transmission of multiple wavelengths of data over a single fiber-optic strand.

 

•Trends in the Internet Data Center Market. To support the substantial increase in bandwidth consumption, internet data center operators are increasing the scale of their internet data centers and accelerating data transmission rates. As a result, there is an ongoing transition from the use of copper cable, typically at speeds up to 1 gigabit, to optical fiber as a transport medium, typically providing speeds from 10 gigabit to 40 gigabit. In recent years, a number of leading Internet companies have begun to adopt more open internet data center architectures, using a mix of systems and components from a variety of vendors, and in some cases designing their own equipment. For these companies, compatibility of new networking equipment with legacy infrastructure is not as important, and as a consequence, these companies are more willing to work with non-traditional equipment vendors, which creates an open and growing opportunity for optical device vendors.

 

4
 

 

We experience certain challenges within our target markets, including continuous pressure to innovate and deliver highly integrated products that perform reliably in harsh, demanding environments and to produce high-quality devices in large volumes.

 

Our Solutions

 

By addressing the challenges in our target markets, we provide the following benefits to our customers:

 

•Enable customers to deliver innovative products. We leverage our deep expertise in high-speed optical, mixed-signal semiconductor and mechanical engineering and our proprietary MBE laser fabrication process to deliver technologically advanced products to our customers.

 

•Enhance efficiency and cost effectiveness of our customers’ supply chain. We design and sell products at the level of integration desired by a customer, from components to turn-key equipment, providing our customers a dependable, cost-effective and simplified supply chain.

 

•Deliver high quality, reliable products in high volume. As a vertically integrated supplier, we are able to monitor and maintain quality control throughout the production process, using our internally produced components where possible for our final products. With manufacturing facilities in the U.S., Taiwan and China, we can support high volume production and timely delivery for our customers around the world.

 

•Provide sophisticated design solutions to our customers. We believe our in-house expertise in both analog and digital optical engineering enables us to design comprehensive solutions that meet many of the different network architectures and protocols used by our customers.

 

Our Strengths

 

Our key competitive strengths include the following:

 

•Industry-leading position in the CATV market. We are the leading provider of optical components and the second largest provider of subsystems to the CATV market, according to Ovum.

 

•Proprietary technological expertise and track record of innovation. We continue to develop innovative products by leveraging our technological expertise, including our proprietary MBE laser fabrication process.

 

•Highly customized products. Most of our products have some level of customization, making it more difficult for our customers to switch rapidly to another supplier. We believe this element of customization contributes to longer product lifecycles and more stable product pricing.

 

•Proven system design capabilities. We have deep expertise and proven design capabilities in high-speed optical, mixed-signal semiconductor and mechanical engineering, which we believe position us to take advantage of the continuing shift to outsourced design and manufacturing among CATV equipment vendors.

 

•Vertically integrated, geographically distributed manufacturing model. Our vertically integrated design and manufacturing process encompasses various steps from laser design and fabrication to complete optical system design and assembly. Furthermore, we have geographically distributed our manufacturing by strategically locating our operations in the U.S., China and Taiwan to reduce development time and production costs, to better support our customers and to help protect our intellectual property.

 

5
 

 

Our Strategy

 

We seek to be the leading global provider of optical components, modules and equipment for each of our three target markets, CATV, FTTH and internet data centers. Our strategy includes the following key elements:

 

•Extend our leadership in CATV networking. We intend to maintain our position as the leading producer of optical components used in CATV networks, and to capture an increasing share of the CATV equipment market as the major equipment vendors continue to outsource the design and manufacturing of such products.

 

•Continue to penetrate the FTTH market. We believe our WDM-PON technology is a cost-effective solution for delivering 1 gigabit bandwidth to a home. We intend to capture an increasing share of the FTTH market by delivering 1G asynchronous service to the home through internet service provider customers.

 

•Continue to penetrate the internet data center market. In the internet data center, we primarily target internet data center operators who have adopted an open system architecture—one in which the optical connectivity solutions can be provided by a different vendor than the vendor which provides their servers and switches.

 

•Continue to invest in our capabilities and infrastructure. We intend to continue to invest in new products, new technology and our production infrastructure and facilities to maintain and strengthen our competitive position.

 

•Selectively pursue other opportunities that leverage our existing expertise. Our expertise in designing and manufacturing outdoor equipment for the CATV industry positions us well to pursue applications that are also characterized by having varying and demanding environments, including wireless and wireline telecom infrastructure, industrial robotics, aerospace and defense, and oil and gas exploration.

 

•Pursue complementary acquisition and strategic alliance opportunities. We evaluate and selectively pursue acquisition opportunities or strategic alliances that we believe will enhance or complement our current product offerings, augment our technology roadmap, or diversify our revenue base.

 

Technology

 

We believe that we have technology leadership in four key areas: semiconductor laser manufacturing, electronic technologies that enhance the performance of our lasers, optical hybrid integration and mixed-signal semiconductor design.

 

•Differentiated semiconductor laser manufacturing. We use a MBE fabrication process to make our lasers, rather than MOCVD, the technique most commonly used in optical chip manufacturing by traditional communications optics vendors. Among the differentiators of MBE relative to MOCVD fabrication are a lower process temperature and the use of solid phase materials rather than gaseous sources to grow wafers and the growth of more highly strained crystals. These factors contribute to longer operating lives of our lasers, improved laser efficiency and threshold current, among other performance attributes that make them well-suited to our target markets. While we believe that these advantages of MBE are important, MBE does have disadvantages including the inability to use certain dopant materials (for example Iron), difficulty in certain types of regrowth, and the necessity to maintain complex ultra-high vacuum equipment. As a result of some of these challenges, production yields, and the performance attributes of laser devices, are highly variable and optimizing these characteristics requires numerous enhancements and modifications to standard MBE equipment and the MBE process. To our knowledge, we are unique in using an MBE process to produce communications lasers in high volume, and believe it would be difficult, and time-consuming, for other vendors to replicate our production technology.

 

•Laser enhancement technology. Certain properties of the semiconductor lasers predominantly used in traditional communications devices, such as chirp and wavelength drift, negatively affect their ability to transmit signals over long fiber distances or prevent them from transmitting signals with acceptable fidelity in certain applications. We have developed laser enhancement circuitry that can correct many of these deficiencies. We believe that our technology will become more essential with wider deployment of higher capacity CATV and FTTH systems, which place more stringent demands on laser performance.

 

6
 

 

•Optical hybrid-integration technology. Reducing the size, power consumption and complexity of optical devices is essential for achieving the price and performance targets of our customers. Our ability to integrate multiple optical networking functions into a single device, and to co-package multiple devices into smaller form factors helps us meet customer requirements and we believe can also create new opportunities. For instance, installing new fiber-optic cable is expensive and difficult, and in some situations prohibitively so for a network service provider. As a consequence, network operators seek to maximize the utilization of their installed fiber plant. In long-haul and metropolitan networks, service providers deployed WDM technology as fiber utilization rose. Fiber utilization in access networks is rising, but the use of WDM technology in the access segment has been problematic due to the relatively high cost and power consumption of the requisite optical devices. We have developed proprietary miniaturized optical packaging, electronic control circuitry and testing algorithms to create a hybrid WDM-PON solution that addresses these historical impediments that we believe will make WDM-PON a cost-effective alternative for deployment.

 

WDM-PON is a term used for a variety of multi-wavelength PON architectures. Various technologies have been utilized by several companies to deploy WDM-PON networks in the past. These existing technologies are generally believed to be too costly to deploy or suffer from operational limitations that limit their use to only certain deployment scenarios. By contrast, we believe our optical hybrid-integration technology can be deployed in a wide range of circumstances due to its lower cost per bit delivered, and as the market migrates to higher bandwidth connections we expect that our solutions will become increasingly attractive. In the internet data center market, we target operators who have adopted an open system architecture—one in which the optical connectivity solutions can be provided by a different vendor than the vendor which provides their servers and switches. We believe this segment of the market will grow meaningfully in coming years, and that we are well positioned to capture this business as an independent optics vendor.

 

•Mixed-signal design. As CATV providers continue to evolve from primarily broadcast-video content providers to a mixture of HD video content together with data-connectivity providers, the networks they utilize to offer these services must evolve as well. Older analog networks are giving way to hybrid networks that incorporate both analog and digital signals. For example, many newer networks are being designed with “digital return-path” capabilities. In this type of network, signals traveling from the headend to the residence are transported as analog signals, whereas signals traveling in the opposite direction (that is, originating at the residence and being transmitted towards the headend) are carried as digital signals. This combination of analog and digital signaling creates unique design challenges. Our engineers have many years of experience in developing equipment, modules and components that are well suited to these sorts of mixed-signal architectures. We believe that having deep experience in both digital and analog signaling allows us to offer superior solutions to our customers, compared with companies who have expertise in only one of these signal types.

 

Our Products

 

Our products include an array of optical communications solutions at varying levels of integration. We begin from the fundamental building blocks of lasers and laser components. From these foundational products, we design and manufacture a wide range of products from optical modules to complete turn-key equipment. We design our products to target customers in our identified markets to meet their needs and specifications.

 

Our components often incorporate one or more of our optical laser chips inside a precision housing that provides mechanical protection as well as standardized electrical contacts. More complex optical components may also include optical filters (for example, for use in WDM) or other optical elements by which optical signals are routed internally within the component. These more advanced components may also include coolers, heaters and sensors that allow the temperature of the laser chip to be measured and controlled. We manufacture the majority of the laser chips and optical components that are used in our own products.

 

7
 

 

At the next level of integration, our module or sub-assembly products typically contain one or more of our optical components and some additional control circuitry. Examples of modules include our transceiver line primarily used in internet data center markets and FTTH markets.

 

At the highest level of integration and complexity, our equipment products typically contain one or more optical components, modules and additional electronic control circuitry required to enable these subsystems to operate independently. For example, our CATV transmitter equipment requires utilization of our optical components and assembly onto a circuit board and to an external housing. Examples of equipment include our CATV transmitter and CATV nodes.

 

Our products mainly differ from each other by their end market, intended use and level of integration. We have over 10,600 product stock-keeping units, or SKUs, including approximately 4,600 component product SKUs, approximately 3,500 module product SKUs and approximately 2,600 equipment product SKUs.

 

Intellectual Property

 

We rely on a combination of patent, copyright, trademark and trade secret laws, as well as confidentiality and licensing arrangements, to establish and protect our intellectual property. We employ various methods to protect these intellectual property rights, including maintaining a technological infrastructure with significant security measures, limiting disclosure and restricting access to only those individuals with an operational need for such information, and having employees, consultants and suppliers execute confidentiality agreements with us. While we expect our intellectual property to provide competitive advantages, we also find meaningful value from unpatented proprietary process knowledge, know-how and trade secrets.

 

Patents

 

As of December 31, 2013, we owned a total of 113 U.S. and foreign issued patents, 58 of which were issued in the U.S. and 55 of which were issued in China and Taiwan. Our issued patents will expire between 2018 and 2028.

 

Our portfolio of patents and patent applications covers several different technology families including:

 

•laser structure and design;

 

•optical signal conditioning and laser control;

 

•laser fabrication;

 

•photodiode and optical receiver design and fabrication;

 

•optical device and module designs;

 

•optical device packaging equipment and techniques; and

 

•optical network enhancements.

 

Trademarks

 

We have registered the trademarks APPLIED OPTOELECTRONICS, INC., AOI and our logo with the U.S. Patent and Trademark Office on the Principal Register. These marks are also registered in, or have applications for registration pending in, various foreign trademark offices. A U.S. trademark registration is also pending for the mark “AAOI.”

 

8
 

 

Research and Development

 

To maintain our growth and competitiveness, we engage in an active research and development program to develop new products and enhance existing products. As a result of these efforts, we anticipate releasing various new or enhanced products over the next several years. Our research and development expenses were approximately $6.5 million, $7.6 million, and $8.5 million for the years 2011, 2012 and 2013, respectively.

 

As of December 31, 2013, we had a total of 142 employees working in the R&D department, including 12 with Ph.D. degrees. We continue to recruit talented engineers to further enhance our research and development capabilities. We have research and development departments in our facilities in Texas, China and Taiwan. Our research and development teams collaborate on joint projects, and by co-locating with our manufacturing operations enable us to achieve an efficient cost structure and improve our time to market.

 

A key factor in our research and development success is our highly collaborative process for new product development. Particularly in our equipment and module businesses, we often collaborate very closely with our customers from a very early stage in product development. By purposefully fostering this close collaboration, we believe that we can more rapidly develop leading solutions meeting the needs of our customers.

 

Manufacturing and Operations

 

We have three manufacturing sites: Sugar Land, Texas, Ningbo, China and Taipei, Taiwan. Our research and development functions are partnered with our manufacturing locations. In our U.S. facility, we manufacture laser chips (utilizing our MBE process), sub-assemblies and components. The sub-assemblies are used in the manufacture of components by our other manufacturing facilities or sold to third parties as modules. We manufacture our laser chips only within our U.S. facility, where our laser design team is located. In our Taiwan location, we manufacture optical components, such as our butterfly lasers, which incorporate laser chips, sub-assemblies and components manufactured within our U.S. facility. In addition, in our Taiwan location, we manufacture transceivers for the FTTH, internet data center and other markets. In our China facility we take advantage of lower labor costs and manufacture certain more labor intensive components and optical equipment systems, such as CATV transmitters (at the headend) and CATV outdoor equipment (at the node). Each facility conducts testing on the components, modules or subsystems it manufactures and each facility is certified to ISO 9001:2000.

 

Our products are sold to our customers worldwide and also supply our internal component needs for the transceivers and equipment we manufacture. With a vertically integrated manufacturing process, we produce many of our own laser chips and other parts required to manufacture our optical components. Through this model, we are able to reduce development time and product costs as well as enhance quality control. We incorporate our own components into our transceivers, subsystems and equipment products wherever possible. In instances where we do not produce components ourselves, we source them from external suppliers and regularly evaluate these relationships in an attempt to reduce risk and lower cost.

 

We depend on a limited number of suppliers for certain raw materials and components used in our products. We regularly review our vendor relationships in an attempt to mitigate risks and lower costs, especially where we depend on one or two vendors for critical components or raw materials. While maintaining inventories that we believe are sufficient to meet our near-term needs, we strive not to carry significant inventories of raw materials. Accordingly, we maintain ongoing communications with our vendors in order to help prevent any interruptions in supply, and have implemented a supply-chain management program to maintain quality and lower purchase prices through standardized purchasing efficiencies and design requirements. To date, we generally have been able to obtain sufficient quantities of quality supplies in a timely manner.

 

9
 

 

Customers

 

Our customers are primarily CATV and telecommunications equipment manufacturers, internet service providers and internet data center operators. We generally employ a direct sales model in North America and in the rest of the world we use both direct and indirect sales channels. In 2011, 2012, and 2013 we obtained 84.3%, 85.4% and 88.4% of our revenue, respectively, through our direct sales efforts and the remainder of our revenue through our indirect sales channels. Our sales channel partners provide logistical services and day-to-day customer support. Where we sell through an indirect sales channel, we work with the end customer to establish technological specifications for our products. Our equipment customers typically offer our equipment under their brand-name and our equipment is often customized with unique design or performance criteria by each of these customers. We also from time to time offer design or manufacturing services to customers to assist them in more effectively using our products and realizing time-to-market advantages.

 

In 2013, our products were used by the three largest CATV OEMs, consisting of Cisco Systems, Inc., Arris Group Inc. (which acquired the Motorola Home Business in 2013) and Aurora Networks, a subsidiary of Pace plc (which acquired the Harmonic Inc.’s optical business in 2013 and itself being acquired by Pace plc subsequently). The two customers that contributed most to our revenue in the FTTH market in 2013 were Genexis B.V. and a leading internet service provider. In 2013, our key customers in the internet data center market included Amazon and Microsoft. In 2013, revenue from the CATV market, data center market, FTTH market and other markets provided 60.4%, 24.7% and 5.6%, and 9.3% of our revenue, respectively, compared to 78.6%, 8.3%, 5.8% and 7.3%, respectively in 2012.

 

We support our sales efforts by attendance at industry trade shows, technical conferences, advertising in various trade journals and magazines and other promotional efforts. These efforts are aimed at attracting new customers and enhancing our existing customer relationships.

 

Backlog

 

We generally make sales pursuant to short-term purchase orders without deposits and subject to rescheduling, revision or cancellation on short notice. We accordingly believe that purchase orders are not an accurate indicator of our future sales and any backlog of purchase orders is not a reliable indicator of our future revenue.

 

Competition

 

The optical networking market is intensely competitive. Because of the broad nature of our product offerings, we do not believe that we face a single major competitor across all of our markets. We do, however, experience intense competition in each product area from a number of manufacturers and we anticipate that competition will increase. Our major competitors in one or more of our markets include Avago, Inc., EMCORE Corporation, Finisar Corporation, JDS Uniphase Corporation, Mitsubishi, NeoPhotonics Corporation, Oclaro, Inc. and Sumitomo Electric Industries, Ltd.

 

Many of our competitors are larger than we are and have significantly greater financial, marketing and other resources. In addition, several of our competitors have large market capitalizations or cash reserves and are much better positioned to acquire other companies to gain new technologies or products that may displace our products. Network equipment providers, who are our customers, and network service providers, who are supplied by our customers, may decide to manufacture the optical subsystems incorporated into their network systems in-house. We also encounter potential customers that, because of existing relationships, are committed to the products offered by these competitors.

 

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We believe the principal competitive factors in our target markets include the following:

 

•use of internally manufactured components;

 

•product breadth and functionality;

 

•timing and pace of new product development;

 

•breadth of customer base;

 

•technological expertise;

 

•reliability of products;

 

•product pricing; and

 

•manufacturing efficiency.

 

We believe that we compete favorably with respect to the above factors based on our MBE processes, our vertically integrated model, the performance and reliability of our product offerings and the compelling value we offer to our customers.

 

Employees

 

As of December 31, 2013, we employed 1,146 full-time employees, of which 26 held Ph.D. degrees in a science or engineering field. Of our employees, 229 are located in the U.S., 644 are in China, and 273 are in Taiwan. None of our employees are represented by any collective bargaining agreement, but certain employees of our China subsidiary are members of a trade union. We have never suffered any work stoppage and believe that we have satisfactory relations with our employees.

 

Environmental Matters

 

Our research and development and manufacturing operations and our products are subject to a variety of federal, state, local and foreign environmental, health and safety laws and regulations, including those governing discharges of pollutants to air and water, the use, storage, handling and disposal of hazardous materials, employee health and safety, and the hazardous material content in our products. Our environmental management systems in our facilities in Ningbo and Taipei are both certified to meet the requirements of ISO14001:2004. However, there can be no assurance that violations of applicable laws at any of our facilities will not occur in the future as a result of human error, accident, equipment failure or other causes. We use, store and dispose of hazardous materials in our manufacturing operations and hazardous materials are present in our products. We incur costs to comply with environmental, health and safety requirements, and any failure to comply, or the identification of contamination for which we are found liable, could cause us to incur substantial costs, including cleanup costs, monetary fines, or civil or criminal penalties, and subject us to property damage and personal injury claims, and result in the suspension of production, alteration of our manufacturing processes, redesign of our products, or curtailment of sales and adverse publicity. Liability under environmental, health and safety laws can be joint and several and without regard to fault or negligence. For example, pursuant to environmental laws and regulations, including but not limited to the Comprehensive Environmental Response Compensation and Liability Act, or CERCLA, we may be liable for the full amount of any remediation-related costs at properties we currently own or formerly owned, such as our currently owned Sugar Land, Texas facility, or at properties at which we operated, as well as at properties we will own or operate in the future, and properties to which we have sent hazardous substances, whether or not we caused the contamination.

 

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We expect that our operations and products will be affected by new environmental requirements on an ongoing basis. Environmental, health and safety requirements have become more stringent over time, and changes to existing requirements could restrict our ability to expand our facilities, require us to acquire costly pollution control equipment, or cause us to incur other significant expenses or to modify our manufacturing processes or the hazardous material content of our products. Identification of presently unidentified environmental conditions, more vigorous enforcement by a governmental authority, enactment of more stringent legal requirements or other unanticipated events could give rise to adverse publicity, restrict our operations, affect the design or marketability of our products or otherwise cause us to incur material environmental costs.

 

We face increasing complexity in our product design and procurement operations as we adjust to new and upcoming requirements relating to the materials composition of our products. Some jurisdictions in which our products are sold have enacted requirements regarding the hazardous material content of certain products. For example, member states of the European Union and China are among a growing number of jurisdictions that have placed restrictions on the use of lead, among other chemicals, in electronic products, which affect the composition and packaging of our products. The passage of such requirements in additional jurisdictions, or the tightening of standards or elimination of certain exemptions in jurisdictions where our products are already subject to such requirements, could cause us to incur significant expenditures to make our products compliant with new requirements, or could limit the markets into which we may sell our products. Other governmental regulations may require us to reengineer our products to use components that are more environmentally compatible, resulting in additional costs to us.

 

Export Regulations

 

The Bureau of Industry and Security (BIS) of the U.S. Department of Commerce is responsible for regulating the export of most commercial items that are so called dual-use goods that may have both commercial and military applications. A limited number of our products are exported by license under the Export Control Classification Number, or ECCN, of 5A991. Export Control Classification requirements are dependent upon an item’s technical characteristics, the destination, the end-use, and the end-user, and other activities of the end-user. Should the ECCN change, then the export of our products to certain countries would be restricted. However, we currently do not export our products to any countries on the restricted list, and therefore a change in the ECCN would not materially impact our business.

 

Corporate Information

 

We were incorporated in the State of Texas in 1997. In March 2013, Applied Optoelectronics, Inc., a Texas corporation, converted into a Delaware corporation. Our principal executive offices are located at 13115 Jess Pirtle Blvd., Sugar Land, TX 77478, and our telephone number is (281) 295-1800. Our website address is www.ao-inc.com. Information contained on our website is not incorporated by reference into this Annual Report on Form 10-K.

 

Available Information

 

We file electronically with the United States Securities and Exchange Commission, or SEC, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended. We make available on our website at www.ao-inc.com free of charge, copies of these reports as soon as reasonably practicable after filing these reports with, or furnishing them to, the SEC.

 

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Item 1A. Risk Factors

 

Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors and all other information contained in this Annual Report on Form 10-K before purchasing our common stock. If any of the following risks actually occur, we may be unable to conduct our business as currently planned and our financial condition and results of operations could be seriously harmed. In addition, the trading price of our common stock could decline due to the occurrence of any of these risks, and you may lose all or part of your investment.

 

Risks Inherent in Our Business

 

We are dependent on our key customers for a significant portion of our revenue and the loss of, or a significant reduction in orders from, any of our key customers would adversely impact our revenue and results of operations.

 

We generate much of our revenue from a limited number of customers. In 2011, 2012 and 2013, our top ten customers represented 76.6%, 77.6%, and 76.9% of our revenue, respectively. In 2013, Cisco Systems, Inc. represented 21.8% of our revenue, Amazon represented 18.2% of our revenue and Biogenomics Corp., a distributor, represented 8.7% of our total revenue. As a result, the loss of, or a significant reduction in orders from any of our key customers would materially and adversely affect our revenue and results of operations. We typically do not have long-term contracts with our customers and instead rely on recurring purchase orders. If our key customers do not continue to purchase our existing products or fail to purchase additional products from us, our revenue would decline and our results of operations would be adversely affected.

 

Adverse events affecting our key customers could also negatively affect our ability to retain their business and obtain new purchase orders, which could adversely affect our revenue and results of operations. For example, in recent years, there has been consolidation among various network equipment manufacturers and this trend is expected to continue. We are unable to predict the impact that industry consolidation would have on our existing or potential customers. We may not be able to offset any potential decline in revenue arising from the consolidation of our existing customers with revenue from new customers or additional revenue from the merged company.

 

If our customers do not qualify our products for use on a timely basis, our results of operations may suffer.

 

Prior to the sale of new products, our customers typically require us to obtain their approval and qualify our products for use in their applications. Additionally, new customers often audit our manufacturing facilities and perform other evaluations during this process. The qualification process involves product sampling and reliability testing and collaboration with our product management and engineering teams in the design and manufacturing stages. If we are unable to accurately predict the amount of time required to qualify our products with customers, or are unable to qualify our products with certain customers at all, then our ability to generate revenue could be delayed or our revenue would be lower than expected and we may not be able to recover the costs associated with the qualification process or with our product development efforts, which would have an adverse effect on our results of operations.

 

In addition, due to rapid technological changes in our markets, a customer may cancel or modify a design project before we have qualified our product or begun volume manufacturing of a qualified product. It is unlikely that we would be able to recover the expenses for cancelled or unutilized custom design projects. It is difficult to predict with any certainty whether our customers will delay or terminate product qualification or the frequency with which customers will cancel or modify their projects, but any such delay, cancellation or modification would have a negative effect on our results of operations.

 

Our ability to successfully qualify and scale capacity for new technologies and products is important to our ability to grow our business and market presence. If we are unable to qualify and sell any of our new products in volume, on time, or at all, our results of operations may be adversely affected.

 

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Customer demand is difficult to forecast accurately and, as a result, we may be unable to match production with customer demand.

 

We make planning and spending decisions, including determining the levels of business that we will seek and accept, production schedules, component procurement commitments, personnel needs and other resource requirements, based on our estimates of product demand and customer requirements. Our products are typically purchased pursuant to individual purchase orders. While our customers may provide us with their demand forecasts, they are typically not contractually committed to buy any quantity of products beyond firm purchase orders. Furthermore, many of our customers may increase, decrease, cancel or delay purchase orders already in place without significant penalty. The short-term nature of commitments by our customers and the possibility of unexpected changes in demand for their products reduce our ability to accurately estimate future customer requirements. On occasion, customers may require rapid increases in production, which can strain our resources, cause our manufacturing to be negatively impacted by materials shortages, necessitate more onerous procurement commitments and reduce our gross margin. We may not have sufficient capacity at any given time to meet the volume demands of our customers, or one or more of our suppliers may not have sufficient capacity at any given time to meet our volume demands. If any of our major customers decrease, stop or delay purchasing our products for any reason, we will likely have excess manufacturing capacity or inventory and our business and results of operations would be harmed.

 

We are subject to the cyclical nature of the markets in which we compete and any future downturn will likely reduce demand for our products and revenue.

 

In each of our target markets, including the CATV market, our sales depend on the aggregate capital expenditures of service providers as they build out and upgrade their network infrastructure. These markets are highly cyclical and characterized by constant and rapid technological change, price erosion, evolving standards and wide fluctuations in product supply and demand. In the past, these markets have experienced significant downturns, often connected with, or in anticipation of, the maturation of product cycles. These downturns have been characterized by diminished product demand, production overcapacity, high inventory levels and accelerated erosion of average selling prices. Our historical results of operations have been subject to these cyclical fluctuations, and we may experience substantial period-to-period fluctuations in our future results of operations. Any future downturn in any of the markets in which we compete could significantly reduce the demand for our products and therefore may result in a significant reduction in our revenue. Our revenue and results of operations may be materially and adversely affected in the future due to changes in demand from individual customers or cyclical changes in any of the markets utilizing our products. We may not be able to accurately predict these cyclical fluctuations and the impact of these fluctuations may have on our revenue and operating results.

 

If the CATV market does not continue to develop as we expect, or if there is any downturn in this market, our business would be adversely affected.

 

Historically, we have generated much of our revenue from the CATV market. In 2011, 2012, and 2013 the CATV market represented 81.4%, 78.6% and 60.4% of our revenue, respectively. In the CATV market, we are relying on expected increasing demand for bandwidth-intensive services and applications such as on-demand television programs, high-definition television channels, or HDTV, social media, peer-to-peer file sharing and online video creation and viewing from network service providers. Without network and bandwidth growth, the need for our products will not increase and may decline, adversely affecting our financial condition and results of operations. Although demand for broadband access is increasing, network and bandwidth growth may be limited by several factors, including an uncertain regulatory environment, high infrastructure costs to purchase and install equipment and uncertainty as to which competing content delivery solution, such as telecommunications, wireless or satellite, will gain the most widespread acceptance. CATV network operators may reduce or forego equipment purchases in anticipation of the availability of next generation DOCSIS3.1 solutions that are expected to be available soon, which may adversely affect our sales. If the trend of outsourcing for the design and manufacture of CATV equipment does not continue, or continues at a slower pace than currently expected, our customers’ demand for our design and manufacturing services may not grow as quickly as expected. If expectations for the growth of the CATV market are not realized, our financial condition or results of operations will be adversely affected. In February 2014, Time Warner and Comcast, the two largest CATV providers in the U.S., announced that they agreed to merge. We are unable to predict what impact this transaction, if completed, would have on the CATV market or on our business. In addition, if the CATV market is adversely impacted, whether due to competitive pressure from telecommunication service providers, regulatory changes, or otherwise, our business would be adversely affected. We may not be able to offset any potential decline in revenue from the CATV market with revenue from new customers in other markets.

 

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We have limited operating history in the FTTH and internet data center markets, and our business could be harmed if these markets do not develop as we expect.

 

We have only recently begun offering products to the FTTH and internet data center markets. Our business in these markets is dependent on the deployment of our optical components, modules and subassemblies. In the FTTH market, we are relying on increasing demand for bandwidth-intensive services and telecommunications service providers’ acceptance and deployment of WDM-PON as a technology supporting 1 gigabit per second service to the home. In the internet data center market, we are relying on the emergence of new internet data center providers and their adoption of open internet data center architectures that use a mix of systems and components from a variety of vendors, including non-traditional equipment vendors. Without network and bandwidth growth and adoption of our solutions by operators in these markets, we will not be able to sell our products in these markets in high volume or at our targeted margins, which would adversely affect our financial condition and results of operations. For example, WDM-PON technology may not be adopted by equipment and service providers in the FTTH market as rapidly as we expect or in the volumes we need to achieve acceptable margins, and internet data centers may elect to use larger vendors that require internet data center operators to purchase the optical modules for their systems from such larger vendors. Also, internet data centers may not expand as much or as quickly as expected and any slowdown in expansion could adversely impact our business and growth prospects. Network and bandwidth growth may be limited by several factors, including an uncertain regulatory environment, high infrastructure costs to purchase and install equipment and uncertainty as to which competing content delivery solution, such as CATV, will gain the most widespread acceptance. In addition, as we enter new markets or expand our product offerings in existing markets, our margins may be adversely affected due to competition in those markets and commoditization of competing products. If our expectations for the growth of these markets are not realized, our financial condition or results of operations will be adversely affected.

 

If we encounter manufacturing problems, we may lose sales and damage our customer relationships.

 

We may experience delays, disruptions or quality control problems in our manufacturing operations. These and other factors may cause less than acceptable yields at our wafer fabrication facility. Manufacturing yields depend on a number of factors, including the quality of available raw materials, the degradation or change in equipment calibration and the rate and timing of the introduction of new products. Changes in manufacturing processes required as a result of changes in product specifications, changing customer needs and the introduction of new product lines may significantly reduce our manufacturing yields, resulting in low or negative margins on those products. In addition, we use an MBE fabrication process to make our lasers, rather than Metal Organic Chemical Vapor Deposition, or MOCVD, the technique most commonly used in optical manufacturing by communications optics vendors, and our MBE fabrication process relies on custom-manufactured equipment. If our MBE fabrication facility in Sugar Land, Texas were to be damaged or destroyed for any reason, our manufacturing process would be severely disrupted. Any such manufacturing problems would likely delay product shipments to our customers, which would negatively affect our sales, competitive position and reputation. We may also experience delays in production, typically in February, during the Chinese New Year holiday when our facilities in China and Taiwan are closed.

 

We must continually develop successful new products and enhance existing products, and if we fail to do so or if our release of new or enhanced products is delayed, our business may be harmed.

 

The markets for our products are characterized by frequent new product introductions, changes in customer requirements and evolving industry standards, all with an underlying pressure to reduce cost and meet stringent reliability and qualification requirements. Our future performance will depend on our successful development, introduction and market acceptance of new and enhanced products that address these challenges. If we are unable to make our new or enhanced products commercially available on a timely basis, we may lose existing and potential customers and our financial results would suffer.

 

In addition, due to the costs and length of research, development and manufacturing process cycles, we may not recognize revenue from new products until long after such expenditures, if at all, and our margins may decrease if our costs are higher than expected, adversely affecting our financial condition and results of operation.

 

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Although the length of our product development cycle varies widely by product and customer, it may take 18 months or longer before we receive our first order. As a result, we may incur significant expenses long before customers accept and purchase our products.

 

Product development delays may result from numerous factors, including:

 

•modification of product specifications and customer requirements;

 

•unanticipated engineering complexities;

 

•difficulties in reallocating engineering resources and overcoming resource limitations; and

 

•rapidly changing technology or competitive product requirements.

 

The introduction of new products by us or our competitors could result in a slowdown in demand for our existing products and could result in a write-down in the value of our inventory. We have in the past experienced a slowdown in demand for existing products and delays in new product development, and such delays will likely occur in the future. To the extent we experience product development delays for any reason or we fail to qualify our products and obtain their approval for use, which we refer to as a design win, our competitive position would be adversely affected and our ability to grow our revenue would be impaired.

 

Furthermore, our ability to enter a market with new products in a timely manner can be critical to our success because it is difficult to displace an existing supplier for a particular type of product once a customer has chosen a supplier, even if a later-to-market product provides better performance or cost efficiency.

 

The development of new, technologically advanced products is a complex and uncertain process requiring frequent innovation, highly-skilled engineering and development personnel and significant capital, as well as the accurate anticipation of technological and market trends. We cannot assure you that we will be able to identify, develop, manufacture, market or support new or enhanced products successfully or on a timely basis. Further, we cannot assure you that our new products will gain market acceptance or that we will be able to respond effectively to product introductions by competitors, technological changes or emerging industry standards. We also may not be able to develop the underlying core technologies necessary to create new products and enhancements, license these technologies from third parties, or remain competitive in our markets.

 

Increasing costs and shifts in product mix may adversely impact our gross margins.

 

Our gross margins on individual products and among products fluctuate over each product’s life cycle. Our overall gross margins have fluctuated from period to period as a result of shifts in product mix, the introduction of new products, decreases in average selling prices and our ability to reduce product costs, and these fluctuations are expected to continue in the future. We may not be able to accurately predict our product mix from period to period, and as a result we may not be able to forecast accurately our overall gross margins. The rate of increase in our costs and expenses may exceed the rate of increase in our revenue, either of which would materially and adversely affect our business, our results of operations and our financial condition.

 

Given the high fixed costs associated with our vertically integrated business, a reduction in demand for our products will likely adversely impact our gross profits and our results of operations.

 

We have a high fixed cost base due to our vertically integrated business model, including the fact that 938 of our employees as of December 31, 2013 were employed in manufacturing and research and development operations. We may not be able to adjust these fixed costs quickly to adapt to rapidly changing market conditions. Our gross profit and gross margin are greatly affected by our sales volume and volatility on a quarterly basis and the corresponding absorption of fixed manufacturing overhead expenses. In addition, because we are a vertically integrated manufacturer, insufficient demand for our products may subject us to the risk of high inventory carrying costs and increased inventory obsolescence. Given our vertical integration, the rate at which we turn inventory has historically been low when compared to our cost of sales. We do not expect this to change significantly in the future and believe that we will have to maintain a relatively high level of inventory compared to our cost of sales. As a result, we continue to expect to have a significant amount of working capital invested in inventory. We may be required to write down inventory costs in the future and our high inventory costs may have an adverse effect on our gross profits and our results of operations.

 

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We have a history of losses which may continue in the future.

 

We have a history of losses and we may incur additional losses in future periods. In the years ended December 31, 2011, 2012 and 2013, we experienced net losses of $5.3 million, $0.9 million and $1.4 million, respectively. As of December 31, 2012 and December 31, 2013, our accumulated deficit was $81.9 million and $83.3 million, respectively. These losses were due to expenditures made to expand our business, including expenditures for hiring additional research and development and sales and marketing personnel, and expenditures to expand and maintain our manufacturing facilities and research and development operations. We expect to continue to make significant expenditures related to our business, including expenditures for hiring additional research and development and sales and marketing personnel, and expenditures to maintain and expand our manufacturing facilities and research and development operations. In addition, we have incurred significant additional time demands and legal, accounting and other expenses since we became a public company in September 2013. Our management and other personnel devote a substantial amount of time to complying with the applicable rules and requirements of being a public company.

 

Our financial results may vary significantly from quarter-to-quarter due to a number of factors, which may lead to volatility in our stock price.

 

Our quarterly revenue and operating results have varied in the past and will likely continue to vary significantly from quarter to quarter. This variability may lead to volatility in our stock price as research analysts and investors respond to these quarterly fluctuations. These fluctuations are due to numerous factors, including:

 

•the timing, size and mix of sales of our products;

 

•fluctuations in demand for our products, including the increase, decrease, rescheduling or cancellation of significant customer orders;

 

•our ability to design, manufacture and deliver products to our customers in a timely and cost-effective manner and that meet customer requirements;

 

•new product introductions and enhancements by us or our competitors;

 

•the gain or loss of key customers;

 

•the rate at which our present and potential customers and end users adopt our technologies;

 

•changes in our pricing and sales policies or the pricing and sales policies of our competitors;

 

•quality control or yield problems in our manufacturing operations;

 

•length and variability of the sales cycles of our products;

 

•unanticipated increases in costs or expenses;

 

•the loss of key employees;

 

•different capital expenditure and budget cycles for our customers, affecting the timing of their spending for our products;

 

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•political stability in the areas of the world in which we operate;

 

•fluctuations in foreign currency exchange rates;

 

•changes in accounting rules;

 

•the evolving and unpredictable nature of the markets for products incorporating our solutions; and

 

•general economic conditions and changes in such conditions specific to our target markets.

 

The foregoing factors are difficult to forecast, and these, as well as other factors, could materially adversely affect our quarterly and annual operating results. In addition, a significant amount of our operating expenses is relatively fixed in nature due to our internal manufacturing, research and development, sales and general administrative efforts. Any failure to adjust spending quickly enough to compensate for a revenue shortfall could magnify the adverse impact of such revenue shortfall on our results of operations. For these reasons, you should not rely on quarter-to-quarter comparisons of our results of operations as an indicator of future performance. Moreover, our operating results may not meet our announced guidance or the expectations of research analysts or investors, in which case the price of our common stock could decrease significantly. There can be no assurance that we will be able to successfully address these risks.

 

We face intense competition which could negatively impact our results of operations and market share.

 

The markets into which we sell our products are highly competitive. Our competitors range from large, international companies offering a wide range of products to smaller companies specializing in niche markets. Current and potential competitors may have substantially greater name recognition, financial, marketing, research and manufacturing resources than we do, and there can be no assurance that our current and future competitors will not be more successful than us in specific product lines or markets. Certain of our competitors may also have better-established relationships with our current or potential customers. Some of our competitors have more resources to develop or acquire new products and technologies and create market awareness for their products and technologies. In addition, some of our competitors have the financial resources to offer competitive products at below-market pricing levels that could prevent us from competing effectively and result in a loss of sales or market share or cause us to lower prices for our products. In recent years, there has been consolidation in our industry and we expect such consolidation to continue. Consolidation involving our competitors could result in even more intense competition. Network equipment manufacturers, who are our customers, and network service providers may decide to manufacture the optical subsystems incorporated into their network systems in-house instead of outsourcing such products to companies such as us. We also encounter potential customers that, because of existing relationships with our competitors, are committed to the products offered by our competitors.

 

We depend on key personnel to develop and maintain our technology and manage our business in a rapidly changing market.

 

The continued services of our executive officers and other key engineering, sales, marketing, manufacturing and support personnel is essential to our success. For example, our ability to achieve new design wins depends upon the experience and expertise of our engineers. Any of our key employees, including our Chief Executive Officer, Chief Financial Officer, Chief Strategy Officer, Senior Vice President of Network Equipment Module Business Unit and Asia General Manager, may resign at any time. We do not have key person life insurance policies covering any of our employees. To implement our business plan, we also intend to hire additional employees, particularly in the areas of engineering and manufacturing. Our ability to continue to attract and retain highly skilled employees is a critical factor in our success. Competition for highly skilled personnel is intense. We may not be successful in attracting, assimilating or retaining qualified personnel to satisfy our current or future needs. Our ability to develop, manufacture and sell our products, and thus our financial condition and results of operations, would be adversely affected if we are unable to retain existing personnel or hire additional qualified personnel.

 

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We depend on a limited number of suppliers and any supply interruption could have an adverse effect on our business.

 

We depend on a limited number of suppliers for certain raw materials and components used in our products. Some of these suppliers could disrupt our business if they stop, decrease or delay shipments or if the materials or components they ship have quality or reliability issues. Some of the raw materials and components we use in our products are available only from a sole source or have been qualified only from a single supplier. Furthermore, other than our current suppliers, there are a limited number of entities from whom we could obtain certain materials and components. We may also face shortages if we experience increased demand for materials or components beyond what our qualified suppliers can deliver. Our inability to obtain sufficient quantities of critical materials or components could adversely affect our ability to meet demand for our products, adversely affecting our financial condition and results of operation.

 

We typically have not entered into long-term agreements with our suppliers and, therefore, our suppliers could stop supplying materials and components to us at any time or fail to supply adequate quantities of materials or components to us on a timely basis. It is difficult, costly, time consuming and, on short notice, sometimes impossible for us to identify and qualify new suppliers. Our customers generally restrict our ability to change the components in our products. For more critical components, any changes may require repeating the entire qualification process. Our reliance on a limited number of suppliers or a single qualified vendor may result in delivery and quality problems, and reduced control over product pricing, reliability and performance.

 

Our products could contain defects that may cause us to incur significant costs or result in a loss of customers.

 

Our products are complex and undergo quality testing as well as formal qualification by our customers. Our customers’ testing procedures are limited to evaluating our products under likely and foreseeable failure scenarios and over varying amounts of time. For various reasons, such as the occurrence of performance problems that are unforeseeable in testing or that are detected only when products age or are operated under peak stress conditions, our products may fail to perform as expected long after customer acceptance. Failures could result from faulty components or design, problems in manufacturing or other unforeseen reasons. As a result, we could incur significant costs to repair or replace defective products under warranty, particularly when such failures occur in installed systems. Our products are typically embedded in, or deployed in conjunction with, our customers’ products, which incorporate a variety of components, modules and subsystems and may be expected to interoperate with modules produced by third parties. As a result, not all defects are immediately detectable and when problems occur, it may be difficult to identify the source of the problem. While we have not experienced material failures in the past, we will continue to face this risk going forward because our products are widely deployed in many demanding environments and applications worldwide. In addition, we may in certain circumstances honor warranty claims after the warranty has expired or for problems not covered by warranty to maintain customer relationships. Any significant product failure could result in litigation, damages, repair costs and lost future sales of the affected product and other products, divert the attention of our engineering personnel from our product development efforts and cause significant customer relations problems, all of which would harm our business. Although we carry product liability insurance, this insurance may not adequately cover our costs arising from defects in our products or otherwise.

 

We face a variety of risks associated with our international sales and operations.

 

We currently derive, and expect to continue to derive, a significant portion of our revenue from sales to international customers. In 2011, 2012 and 2013, 52.2%, 55.7% and 41.0% of our revenue was derived from sales that occurred outside of North America, respectively. In addition, a significant portion of our manufacturing operations is based in Ningbo, China and Taipei, Taiwan. Our international revenue and operations are subject to a number of material risks, including:

 

•difficulties in staffing, managing and supporting operations in more than one country;

 

•difficulties in enforcing agreements and collecting receivables through foreign legal systems;

 

•fewer legal protections for intellectual property in foreign jurisdictions;

 

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•foreign and U.S. taxation issues and international trade barriers;

 

•difficulties in obtaining any necessary governmental authorizations for the export of our products to certain foreign jurisdictions;

 

•fluctuations in foreign economies;

 

•fluctuations in the value of foreign currencies and interest rates;

 

•trade and travel restrictions;

 

•domestic and international economic or political changes, hostilities and other disruptions in regions where we currently operate or may operate in the future;

 

•difficulties and increased expenses in complying with a variety of U.S. and foreign laws, regulations and trade standards, including the Foreign Corrupt Practices Act; and

 

•different and changing legal and regulatory requirements in the jurisdictions in which we currently operate or may operate in the future.

 

Negative developments in any of these factors in China or Taiwan or other countries could result in a reduction in demand for our products, the cancellation or delay of orders already placed, difficulties in producing and delivering our products, threats to our intellectual property, difficulty in collecting receivables, and a higher cost of doing business. Although we maintain certain compliance programs throughout the company, violations of U.S. and foreign laws and regulations may result in criminal or civil sanctions, including material monetary fines, penalties and other costs against us or our employees, and may have a material adverse effect on our business.

 

Our business operations conducted in China and Taiwan are important to our success. A substantial portion of our property, plant and equipment is located in China and Taiwan. We expect to make further investments in China and Taiwan in the future. Therefore, our business, financial condition, results of operations and prospects are subject to economic, political, legal, and social events and developments in China and Taiwan. China does not recognize the sovereignty of Taiwan. Although significant economic and cultural relations have been established during recent years between China and Taiwan, relations have often been strained and the government of China has previously threatened to use military force to gain control over Taiwan. Factors affecting military, political or economic conditions in China and Taiwan could have a material adverse effect on our financial condition and results of operations, as well as the market price and the liquidity of our common shares.

 

In some instances, we rely on third parties to assist in selling our products, and the failure of those parties to perform as expected could reduce our future revenue.

 

Although we primarily sell our products through direct sales, we also sell our products to some of our customers through third party sales representatives and distributors. Many of such third parties also market and sell products from our competitors. Our third party sales representatives and distributors may terminate their relationships with us at any time, or with short notice. Our future performance will also depend, in part, on our ability to attract additional third party sales representatives and distributors that will be able to market and support our products effectively, especially in markets in which we have not previously distributed our products. If our current third party sales representatives and distributors fail to perform as expected, our revenue and results of operations could be harmed.

 

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Failure to manage our growth effectively may adversely affect our financial condition and results of operations.

 

Successful implementation of our business plan in our target markets requires effective planning and management. Our production volumes are increasing significantly and we have announced plans to increase our production capacity in response to demand for our products, adding both personnel as well as expanding our physical manufacturing facilities. We currently operate facilities in Sugar Land, Texas, Ningbo, China and Taipei, Taiwan. We currently manufacture our lasers using a proprietary process and customized equipment located only in our Sugar Land, Texas facility, and it will be costly to duplicate that facility to scale our laser manufacturing capacity or to mitigate the risks associated with operating a single facility. The challenges of managing our geographically dispersed operations have increased and will continue to increase the demand on our management systems and resources. Moreover, we are continuing to improve our financial and managerial controls, reporting systems and procedures. Any failure to manage our expansion and the resulting demands on our management systems and resources effectively may adversely affect our financial condition and results of operations.

 

Our loan agreements contain restrictive covenants that may adversely affect our ability to conduct our business.

 

We have lending arrangements with several financial institutions, including loan agreements with East West Bank in the U.S., and our China subsidiary has a line of credit arrangement. Our loan agreements governing our long-term debt obligations in the U.S. contain certain financial and operating covenants that limit our management’s discretion with respect to certain business matters. Among other things, these covenants require us to maintain certain financial ratios and restrict our ability to incur additional debt, create liens or other encumbrances, change the nature of our business, pay dividends, sell or otherwise dispose of assets and merge or consolidate with other entities. These restrictions may limit our flexibility in responding to business opportunities, competitive developments and adverse economic or industry conditions. Any failure by us or our subsidiaries to comply with these agreements could harm our business, financial condition and operating results. In addition, our obligations under our U.S. loan agreements with East West Bank are secured by substantially all of our U.S. assets, including our intellectual property assets, our Sugar Land facility and our equity interests in our subsidiaries, which limits our ability to provide collateral for additional financing. A breach of any of covenants under our loan agreements, or a failure to pay interest or indebtedness when due under any of our credit facilities, could result in a variety of adverse consequences, including the acceleration of our indebtedness.

 

We may not be able to obtain additional capital when desired, on favorable terms or at all.

 

We operate in a market that makes our prospects difficult to evaluate and, to remain competitive, we will be required to make continued investments in capital equipment, facilities and technological improvements. We expect that substantial capital will be required to expand our manufacturing capacity and fund working capital for anticipated growth. If we do not generate sufficient cash flow from operations or otherwise have the capital resources to meet our future capital needs, we may need additional financing to implement our business strategy, which includes:

 

•expansion of research and development;

 

•expansion of manufacturing capabilities;

 

•hiring of additional technical, sales and other personnel; and

 

•acquisitions of complementary businesses.

 

If we raise additional funds through the issuance of our common stock or convertible securities, the ownership interests of our stockholders could be significantly diluted. These newly issued securities may have rights, preferences or privileges senior to those of existing stockholders. Additional financing may not, however, be available on terms favorable to us, or at all, if and when needed, and our ability to fund our operations, take advantage of unanticipated opportunities, develop or enhance our infrastructure or respond to competitive pressures could be significantly limited. If we cannot raise required capital when needed, we may be unable to meet the demands of existing and prospective customers, adversely affecting our sales and market opportunities and consequently our business, financial condition and results of operations.

 

21
 

 

Future acquisitions may adversely affect our financial condition and results of operations.

 

As part of our business strategy, we may pursue acquisitions of companies that we believe could enhance or complement our current product portfolio, augment our technology roadmap or diversify our revenue base. Acquisitions involve numerous risks, any of which could harm our business, including:

 

•difficulties integrating the acquired business;

 

•unanticipated costs, capital expenditures or liabilities or changes related to research in progress and product development;

 

•diversion of financial and management resources from our existing business;

 

•difficulties integrating the business relationships with suppliers and customers of the acquired business with our existing business relationships;

 

•risks associated with entering markets in which we have little or no prior experience; and

 

•potential loss of key employees, particularly those of the acquired organizations.

 

Acquisitions may also result in the recording of goodwill and other intangible assets subject to potential impairment in the future, adversely affecting our operating results. We may not achieve the anticipated benefits of an acquisition if we fail to evaluate it properly, and we may incur costs in excess of what we anticipate. A failure to evaluate and execute an acquisition appropriately or otherwise adequately address these risks may adversely affect our financial condition and results of operations.

 

Our future results of operations may be subject to volatility as a result of exposure to fluctuations in currency exchange rates.

 

We have significant foreign currency exposure, and are affected by fluctuations among the U.S. dollar, the Chinese renminbi, or RMB, and the New Taiwan, or NT, dollar because a substantial portion of our business is conducted in China and Taiwan. Our sales, raw materials, components and capital expenditures are denominated in U.S. dollars, RMB and NT dollars in varying amounts.

 

Foreign currency fluctuations may adversely affect our revenue and our costs and expenses, and hence our results of operations. The value of the NT dollar or the RMB against the U.S. dollar and other currencies may fluctuate and be affected by, among other things, changes in political and economic conditions. The RMB currency is no longer being pegged solely to the value of the U.S. dollar. While the international reaction to the RMB revaluation has generally been positive, there remains significant international pressure on the Chinese government to adopt an even more flexible currency policy, which may result in a further and more significant appreciation of the RMB against the U.S. dollar. In the long term, the RMB may appreciate or depreciate significantly in value against the U.S. dollar, depending upon the fluctuation of the basket of currencies against which it is currently valued, or it may be permitted to enter into a full float, which may also result in a significant appreciation or depreciation of the RMB against the U.S. dollar. In addition, our currency exchange variations may be magnified by Chinese exchange control regulations that restrict our ability to convert RMB into foreign currency.

 

Our sales in Europe are denominated in U.S. dollars, and fluctuations in the Euro or our customers’ other local currencies relative to the U.S. dollar may impact our customers and affect our financial performance. If our customers’ local currencies weaken against the U.S. dollar, we may need to lower our prices to remain competitive in our international markets which could have a material adverse effect on our margins. If our customers’ local currencies strengthen against the U.S. dollar and if the local sales prices cannot be raised due to competitive pressures, we will experience a deterioration of our margins.

 

To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedging transactions may be limited and we may not be able to successfully hedge our exposure.

 

22
 

 

Natural disasters or other catastrophic events could harm our operations.

 

Our operations in the U.S., China and Taiwan could be subject to significant risk of natural disasters, including earthquakes, hurricanes, typhoons, flooding and tornadoes, as well as other catastrophic events, such as epidemics, terrorist attacks or wars. For example, our corporate headquarters and wafer fabrication facility in Sugar Land, Texas, is located near Gulf of Mexico, an area that is susceptible to hurricanes. We use a proprietary MBE laser manufacturing process that requires customized equipment, and this process is currently conducted and located solely at our wafer fabrication facility in Sugar Land, Texas, such that a natural disaster, terrorist attack or other catastrophic event that affects that facility would materially harm our operations. In addition, our manufacturing facility in Taipei, Taiwan, is susceptible to typhoons, and our manufacturing facility in Ningbo, China, has from time to time, suffered electrical outages. Any disruption in our manufacturing facilities arising from these and other natural disasters or other catastrophic events could cause significant delays in the production or shipment of our products until we are able to shift production to different facilities or arrange for third parties to manufacture our products. We may not be able to obtain alternate capacity on favorable terms or at all. Our property insurance coverage with respect to natural disaster is limited and is subject to deductible and coverage limits. Such coverage may not be adequate or continue to be available at commercially reasonable rates and terms. The occurrence of any of these circumstances may adversely affect our financial condition and results of operation.

 

If we fail to protect, or incur significant costs in defending, our intellectual property and other proprietary rights, our business and results of operations could be materially harmed.

 

Our success depends on our ability to protect our intellectual property and other proprietary rights. We rely on a combination of patent, trademark, copyright, trade secret and unfair competition laws, as well as license agreements and other contractual provisions, to establish and protect our intellectual property and other proprietary rights. We have applied for patent registrations in the U.S. and in other foreign countries, some of which have been issued. In addition, we have registered certain trademarks in the U.S. We cannot guarantee that our pending applications will be approved by the applicable governmental authorities. Moreover, our existing and future patents and trademarks may not be sufficiently broad to protect our proprietary rights or may be held invalid or unenforceable in court. A failure to obtain patents or trademark registrations or a successful challenge to our registrations in the U.S. or other foreign countries may limit our ability to protect the intellectual property rights that these applications and registrations intended to cover.

 

Policing unauthorized use of our technology is difficult and we cannot be certain that the steps we have taken will prevent the misappropriation, unauthorized use or other infringement of our intellectual property rights. Further, we may not be able to effectively protect our intellectual property rights from misappropriation or other infringement in foreign countries where we have not applied for patent protections, and where effective patent, trademark, trade secret and other intellectual property laws may be unavailable, or may not protect our proprietary rights as fully as U.S. law. We may seek to secure comparable intellectual property protections in other countries. However, the level of protection afforded by patent and other laws in other countries may not be comparable to that afforded in the U.S.

 

We also attempt to protect our intellectual property, including our trade secrets and know-how, through the use of trade secret and other intellectual property laws, and contractual provisions. We enter into confidentiality and invention assignment agreements with our employees and independent consultants. We also use non-disclosure agreements with other third parties who may have access to our proprietary technologies and information. Such measures, however, provide only limited protection, and there can be no assurance that our confidentiality and non-disclosure agreements will not be breached, especially after our employees end their employment, and that our trade secrets will not otherwise become known by competitors or that we will have adequate remedies in the event of unauthorized use or disclosure of proprietary information. Unauthorized third parties may try to copy or reverse engineer our products or portions of our products, otherwise obtain and use our intellectual property, or may independently develop similar or equivalent trade secrets or know-how. If we fail to protect our intellectual property and other proprietary rights, or if such intellectual property and proprietary rights are infringed or misappropriated, our business, results of operations or financial condition could be materially harmed.

 

In the future, we may need to take legal actions to prevent third parties from infringing upon or misappropriating our intellectual property or from otherwise gaining access to our technology. Protecting and enforcing our intellectual property rights and determining their validity and scope could result in significant litigation costs and require significant time and attention from our technical and management personnel, which could significantly harm our business. We may not prevail in such proceedings, and an adverse outcome may adversely impact our competitive advantage or otherwise harm our financial condition and our business.

 

23
 

 

We may be involved in intellectual property disputes in the future, which could divert management’s attention, cause us to incur significant costs and prevent us from selling or using the challenged technology.

 

Participants in the markets in which we sell our products have experienced frequent litigation regarding patent and other intellectual property rights. While we have a policy in place that is designed to reduce the risk of infringement of intellectual property rights of others and we have conducted a limited review of other companies’ relevant patents, there can be no assurance that third parties will not assert infringement claims against us. We cannot be certain that our products would not be found infringing the intellectual property rights of others. Regardless of their merit, responding to such claims can be time consuming, divert management’s attention and resources and may cause us to incur significant expenses. Intellectual property claims against us could force us to do one or more of the following:

 

•obtain from a third party claiming infringement a license to the relevant technology, which may not be available on reasonable terms, or at all;

 

•stop manufacturing, selling, incorporating or using our products that use the challenged intellectual property;

 

•pay substantial monetary damages; or

 

•expend significant resources to redesign the products that use the technology and to develop non-infringing technology.

 

Any of these actions could result in a substantial reduction in our revenue and could result in losses over an extended period of time.

 

In any potential intellectual property dispute, our customers could also become the target of litigation. Because we often indemnify our customers for intellectual property claims made against them with respect to our products, any claims against our customers could trigger indemnification claims against us. These obligations could result in substantial expenses such as legal expenses, damages for past infringement or royalties for future use. Any indemnity claim could also adversely affect our relationships with our customers and result in substantial costs to us.

 

If we fail to obtain the right to use the intellectual property rights of others that are necessary to operate our business, and to protect their intellectual property, our business and results of operations will be adversely affected.

 

From time to time we may choose to or be required to license technology or intellectual property from third parties in connection with the development of our products. We cannot assure you that third party licenses will be available to us on commercially reasonable terms, if at all. Generally, a license, if granted, would include payments of up-front fees, ongoing royalties or both. These payments or other terms could have a significant adverse impact on our results of operations. Our inability to obtain a necessary third party license required for our product offerings or to develop new products and product enhancements could require us to substitute technology of lower quality or performance standards, or of greater cost, either of which could adversely affect our business. If we are not able to obtain licenses from third parties, if necessary, then we may also be subject to litigation to defend against infringement claims from these third parties. Our competitors may be able to obtain licenses or cross-license their technology on better terms than we can, which could put us at a competitive disadvantage.

 

24
 

 

If we fail to maintain effective internal control over financial reporting in the future, the accuracy and timing of our financial reporting may be adversely affected.

 

Preparing our consolidated financial statements involves a number of complex manual and automated processes, which are dependent upon individual data input or review and require significant management judgment. One or more of these elements may result in errors that may not be detected and could result in a material misstatement of our consolidated financial statements. We have not performed an evaluation of our internal control over financial reporting, such as would be required by Section 404 of the Sarbanes-Oxley Act, nor have we engaged our independent registered public accounting firm to perform an audit of our internal control over financial reporting. In addition, for so long as we qualify as an “emerging growth company” under the JOBS Act, which may be up to five years following our initial public offering in September 2013, we will not have to provide an auditor’s attestation report on our internal controls in future annual reports on Form 10-K as otherwise required by Section 404(b) of the Sarbanes-Oxley Act. During the course of any evaluation, documentation or attestation, we or our independent registered public accounting firm may identify weaknesses and deficiencies that we may not otherwise identify in a timely manner or at all as a result of the deferred implementation of this additional level of review.

 

In connection with the audit of our financial statements for the period ended December 31, 2012, we identified a material weakness related to the inappropriate recording of certain inventory returned for re-work in China as a reduction in cost of sales. We remediated this material weakness in 2013 and we did not identify any material weaknesses in connection with the audit of our financial statements for the period ended December 31, 2013.

 

We have implemented internal controls that we believe provide reasonable assurance that we will be able to avoid accounting errors or material weaknesses in future periods. However, our internal controls cannot guarantee that no accounting errors exist or that all accounting errors, no matter how immaterial, will be detected because a control system, no matter how well designed and operated, can provide only reasonable, but not absolute assurance that the control system’s objectives will be met. If we are unable to implement and maintain effective internal control over financial reporting, our ability to accurately and timely report our financial results could be adversely impacted. This could result in late filings of our annual and quarterly reports under the Securities Exchange Act of 1934, or the Exchange Act, restatements of our consolidated financial statements, a decline in our stock price, suspension or delisting of our common stock by NASDAQ, or other material adverse effects on our business, reputation, results of operations or financial condition.

 

Our ability to use our net operating losses and certain other tax attributes may be limited.

 

As of December 31, 2013, we had U.S. accumulated net operating losses, or NOLs, of approximately $65.7 million for U.S. federal income tax purposes. We also had research and development credit carry forwards totaling $1.6 million as of December 31, 2013, which begin to expire in 2020. Under Section 382 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change NOLs, capital loss carry forwards and other pre-change tax attributes to offset its post-change income may be limited. An ownership change is generally defined as a greater than 50% change in equity ownership by value over a 3-year period. Based upon an analysis of our equity ownership, we have experienced an ownership change and our NOL carry forwards are limited in dollar amount. As of December 31, 2013, of the total accumulated NOL, only $40.3 million is available for utilization in 2014 and thereafter to shelter federal taxable income. Each year after 2014, an additional $0.3 million is added to the total available NOL, until a maximum of $43.9 million is reached. The amount of NOL available each year may decrease by the amount of NOL utilized and may increase by the amount of any operating losses incurred. Should we experience additional ownership changes, our NOL carry forwards may be further limited.

 

Changes in our effective tax rate may adversely affect our results of operation and our business.

 

We are subject to income taxes in the U.S. and other foreign jurisdictions, including China. We base our tax position on the anticipated nature and conduct of our business and our understanding of the tax laws of the countries in which we have assets or conduct activities. Our tax position may be reviewed or challenged by tax authorities. Moreover, the tax laws currently in effect may change, and such changes may have retroactive effect. We have inter-company arrangements in place providing for administrative and financing services and transfer pricing, which involve a significant degree of judgment and are often subject to close review by tax authorities. The tax authorities may challenge our positions related to these agreements. If the tax authorities successfully challenge our positions, our effective tax rate may increase, adversely affecting our results of operation and our business.

 

25
 

 

Our manufacturing operations are subject to environmental regulation that could limit our growth or impose substantial costs, adversely affecting our financial condition and results of operations.

 

Our properties, operations and products are subject to the environmental laws and regulations of the jurisdictions in which we operate and sell products. These laws and regulations govern, among other things, air emissions, wastewater discharges, the management and disposal of hazardous materials, the contamination of soil and groundwater, employee health and safety and the content, performance, packaging and disposal of products. Our failure to comply with current and future environmental laws and regulations, or the identification of contamination for which we are liable, could subject us to substantial costs, including fines, clean-up costs, third-party property damages or personal injury claims, and make significant investments to upgrade our facilities or curtail our operations. Liability under environmental, health and safety laws can be joint and several and without regard to fault or negligence. For example, pursuant to environmental laws and regulations, including but not limited to the Comprehensive Environmental Response Compensation and Liability Act, or CERCLA, we may be liable for the full amount of any remediation-related costs at properties we currently own or formerly owned, such as our currently owned Sugar Land, Texas facility, or at properties at which we operated, as well as at properties we will own or operate in the future, and properties to which we have sent hazardous substances, whether or not we caused the contamination. Identification of presently unidentified environmental conditions, more vigorous enforcement by a governmental authority, enactment of more stringent legal requirements or other unanticipated events could give rise to adverse publicity, restrict our operations, affect the design or marketability of our products or otherwise cause us to incur material environmental costs, adversely affecting our financial condition and results of operations.

 

Failure to comply with the U.S. Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.

 

We are subject to the U.S. Foreign Corrupt Practices Act which generally prohibits U.S. companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. In addition, we are required to maintain records that accurately and fairly represent our transactions and have an adequate system of internal accounting controls. Foreign companies, including some that may compete with us, may not be subject to these prohibitions, and therefore may have a competitive advantage over us. If we are not successful in implementing and maintaining adequate preventative measures, we may be responsible for acts of our employees or other agents engaging in such conduct. We could suffer severe penalties and other consequences that may have a material adverse effect on our financial condition and results of operations.

 

We are subject to governmental export and import controls that could subject us to liability or impair our ability to compete in international markets.

 

We are subject to export and import control laws, trade regulations and other trade requirements that limit which products we sell and where and to whom we sell our products. Specifically, the Bureau of Industry and Security of the U.S. Department of Commerce is responsible for regulating the export of most commercial items that are so called dual-use goods that may have both commercial and military applications. A limited number of our products are exported by license under the Export Control Classification Number, or ECCN, of 5A991. Export Control Classification requirements are dependent upon an item’s technical characteristics, the destination, the end-use, and the end-user, and other activities of the end-user. Should the regulations applicable to our products change, or the restrictions applicable to countries to which we ship our products change, then the export of our products to such countries could be restricted. As a result, our ability to export or sell our products to certain countries could be restricted, which could adversely affect our business, financial condition and results of operations. Changes in our products or any change in export or import regulations or related legislation, shift in approach to the enforcement or scope of existing regulations, or change in the countries, persons or technologies targeted by such regulations, could result in delayed or decreased sales of our products to existing or potential customers. In such event, our business and results of operations could be adversely affected.

 

26
 

 

Rapidly changing standards and regulations could make our products obsolete, which would cause our revenue and results of operations to suffer.

 

We design our products to conform to regulations established by governments and to standards set by industry standards bodies worldwide, such as The American National Standards Institute, the European Telecommunications Standards Institute, the International Telecommunications Union and the Institute of Electrical and Electronics Engineers, Inc. Various industry organizations are currently considering whether and to what extent to create standards applicable to our products. Because certain of our products are designed to conform to current specific industry standards, if competing or new standards emerge that are preferred by our customers, we would have to make significant expenditures to develop new products. If our customers adopt new or competing industry standards with which our products are not compatible, or the industry groups adopt standards or governments issue regulations with which our products are not compatible, our existing products would become less desirable to our customers and our revenue and results of operations would suffer.

 

Customer demands and new regulations related to conflict-free minerals may adversely affect us.

 

The Dodd-Frank Wall Street Reform and Consumer Protection Act imposes new disclosure requirements regarding the use of “conflict” minerals mined from the Democratic Republic of Congo and adjoining countries in products, whether or not these products are manufactured by third parties. These new requirements could affect the pricing, sourcing and availability of minerals used in the manufacture of our products. Certain of our customers are requiring additional information from us regarding the origin of our raw materials, and complying with these customer requirements may cause us to incur additional costs, such as costs related to determining the origin of any minerals used in our products. Our supply chain is complex and we may be unable to verify the origins for all metals used in our products. We may also encounter challenges with our customers and stockholders if we are unable to certify that our products are conflict free.

 

Risks Related to Our Operations in China

 

Adverse changes in economic and political policies in China, or Chinese laws or regulations could have a material adverse effect on business conditions and the overall economic growth of China, which could adversely affect our business.

 

The Chinese economy differs from the economies of most developed countries in many respects, including the level of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. The Chinese economy has been transitioning from a planned economy to a more market-oriented economy. Despite reforms, the government continues to exercise significant control over China’s economic growth by way of the allocation of resources, control over foreign currency-denominated obligations and monetary policy and provision of preferential treatment to particular industries or companies.

 

In addition, the laws, regulations and legal requirements in China, including the laws that apply to foreign-invested enterprises, or FIEs, are subject to frequent changes. The interpretation and enforcement of such laws is uncertain. Protections of intellectual property rights and confidentiality in China may not be as effective as in the U.S. or other countries or regions with more developed legal systems. Any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention. Any adverse changes to these laws, regulations and legal requirements or their interpretation or enforcement could have a material adverse effect on our business.

 

Furthermore, while China’s economy has experienced rapid growth in the past 20 years, growth has been uneven across different regions, among various economic sectors and over time. China has also in the past and may in the future experience economic downturns due to, for example, government austerity measures, changes in government policies relating to capital spending, limitations placed on the ability of commercial banks to make loans, reduced levels of exports and international trade, inflation, lack of financial liquidity, stock market volatility and global economic conditions. Any of these developments could contribute to a decline in business and consumer spending in addition to other adverse market conditions, which could adversely affect our business.

 

27
 

 

The termination and expiration or unavailability of our preferential tax treatments in China may have a material adverse effect on our operating results.

 

Prior to January 1, 2008, entities established in China were generally subject to a 30% state and 3% local enterprise income tax rate. In accordance with the China Income Tax Law for Enterprises with Foreign Investment and Foreign Enterprises, effective through December 31, 2007, our China subsidiary enjoyed preferential income tax rates. Effective January 1, 2008, the China Enterprise Income Tax Law, or the EIT law, imposes a single uniform income tax rate of 25% on all Chinese enterprises, including FIEs, and eliminates or modifies most of the tax exemptions, reductions and preferential treatment available under the previous tax laws and regulations. As a result, our China subsidiary may be subject to the uniform income tax rate of 25% unless we are able to qualify for preferential status. Currently, we have qualified for a preferential 15% tax rate that is available for new and high technology enterprises. The preferential rate applies to calendar years 2012, 2013 and 2014. We have not yet realized benefits from this reduction in tax rate because we have not yet generated taxable income in China. Any future increase in the enterprise income tax rate applicable to us or the expiration or other limitation of preferential tax rates available to us could increase our tax liabilities and reduce our net income.

 

China regulation of loans and direct investment by offshore holding companies to China entities may delay or prevent us from making loans or additional capital contributions to our China subsidiary.

 

Any loans that we wish to make to our China subsidiary are subject to China regulations and approvals. For example, any loans to our China subsidiary to finance their activities cannot exceed statutory limits, must be registered with State Administration of Foreign Exchange, or SAFE, or its local counterpart, and must be approved by the relevant government authorities. Any capital contributions to our China subsidiary must be approved by the Ministry of Commerce or its local counterpart. In addition, under Circular 142, our China subsidiary, as a FIE, may not be able to convert our capital contributions to them into RMB for equity investments or acquisitions in China.

 

We cannot assure you that we will be able to obtain these government registrations or approvals on a timely basis, if at all, with respect to our future loans or capital contributions to our China subsidiary. If we fail to receive such registrations or approvals, our ability to capitalize our China subsidiary may be negatively affected, which could materially and adversely affect our liquidity and ability to fund and expand our business.

 

Our China subsidiary is subject to Chinese labor laws and regulations and Chinese labor laws may increase our operating costs in China.

 

The China Labor Contract Law, together with its implementing rules, provides increased rights to Chinese employees. Previously, an employer had discretionary power in deciding the probation period, not to exceed six months. Additionally, the employment contract could only be terminated for cause. Under these rules, the probation period varies depending on contract terms and the employment contract can only be terminated during the probation period for cause upon three days’ notice. Additionally, an employer may not be able to terminate a contract during the probation period on the grounds of a material change of circumstances or a mass layoff. The new law also has specific provisions on conditions when an employer has to sign an employment contract with open-ended terms. If an employer fails to enter into an open-ended contract in certain circumstances, the employer must pay the employee twice their monthly wage beginning from the time the employer should have executed an open-ended contract. Additionally an employer must pay severance for nearly all terminations, including when an employer decides not to renew a fixed-term contract. These laws may increase our costs and reduce our flexibility.

 

28
 

 

The turnover of direct labor in manufacturing industries in China is high, which could adversely affect our production, shipments and results of operations.

 

Employee turnover of direct labor in the manufacturing sector in China is high and retention of such personnel is a challenge to companies located in or with operations in China. Although direct labor costs do not represent a high proportion of our overall manufacturing costs, direct labor is required for the manufacture of our products. If our direct labor turnover rates are higher than we expect, or we otherwise fail to adequately manage our direct labor turnover rates, then our results of operations could be adversely affected.

 

An increase in our labor costs in China may adversely affect our business and our profitability.

 

A significant portion of our workforce is located in China. Labor costs in China have been increasing recently due to labor unrest, strikes and changes in employment laws. If labor costs in China continue to increase, our costs will increase. If we are not able to pass these increases on to our customers, our business, profitability and results of operations may be adversely affected.

 

We may have difficulty establishing and maintaining adequate management and financial controls over our China operations.

 

Businesses in China have historically not adopted a western style of management and financial reporting concepts and practices, which includes strong corporate governance, internal controls and computer, financial and other control systems. Moreover, familiarity with U.S. GAAP principles and reporting procedures is less common in China. As a consequence, we may have difficulty finding accounting personnel experienced with U.S. GAAP, and we may have difficulty training and integrating our China-based accounting staff with our U.S.-based finance organization. As a result of these factors, we may experience difficulty in establishing management and financial controls over our China operations. These difficulties include collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet U.S. public-company reporting requirements. We may, in turn, experience difficulties in implementing and maintaining adequate internal controls as required under Section 404 of the Sarbanes-Oxley Act.

 

Risks Related to Our Common Stock

 

Our executive officers and directors own a significant percentage of our stock and have significant control of our management and affairs, and they can take actions that may be against your best interests.

 

As of January 31, 2014, our executive officers and directors, and entities that are affiliated with them, beneficially own an aggregate of approximately 5.2% of our outstanding common stock. As a result, these stockholders, acting together, may have significant influence over our management and affairs and matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as mergers, consolidations or the sale of substantially all of our assets. Consequently, this concentration of ownership may have the effect of delaying or preventing a change in control, including a merger, consolidation or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control, even if such a change in control would benefit our other stockholders.

 

29
 

 

Our stock price could decline due to the large number of outstanding shares of our common stock eligible for future sale.

 

Sales of substantial amounts of our common stock in the public market, or the perception that these sales could occur, could cause the market price of our common stock to decline. These sales could also make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate.

 

As of January 31, 2014, we had an aggregate of 12,660,885 shares of common stock outstanding, assuming no exercise of outstanding options or warrants. The 3,600,000 shares sold pursuant to our initial public offering are immediately tradable without restriction. Of the remaining shares outstanding, approximately 8.8 million shares will be eligible for sale upon the expiration of lock-up agreements, subject in some cases to volume and other restrictions of Rule 144 under the Securities Act. The lock-up agreements expire 180 days after September 25, 2013, subject to potential extensions in the event we release earning results or material news or a material event relating to us occurs near the end of the lock-up period and in the event that we cease to be an emerging growth company. Raymond James & Associates, Inc. and Piper Jaffray & Co., as representatives of the underwriters, may, in their sole discretion and at any time without notice, release all or any portion of the securities subject to lock-up agreements.

 

We currently do not intend to pay dividends on our common stock and, consequently, your only opportunity to achieve a return on your investment is if the price of our common stock appreciates.

 

We currently do not plan to declare or pay dividends on shares of our common stock in the foreseeable future. In addition, the terms of our loan and security agreement with East West Bank restrict our ability to pay dividends.

 

Our charter documents, stock incentive plans and Delaware law could prevent a takeover that stockholders consider favorable and could also reduce the market price of our stock.

 

Our amended and restated certificate of incorporation and our amended and restated bylaws and our stock incentive plans contain provisions that could delay or prevent a change in control of our company. These provisions could also make it more difficult for stockholders to elect directors and take other corporate actions. These provisions include:

 

•providing for a classified board of directors with staggered, three-year terms;

 

•not providing for cumulative voting in the election of directors;

 

•authorizing our board of directors to issue, without stockholder approval, preferred stock rights senior to those of common stock;

 

•prohibiting stockholder action by written consent;

 

•limiting the persons who may call special meetings of stockholders;

 

•requiring advance notification of stockholder nominations and proposals; and

 

•change of control provisions in our stock incentive plans, and the individual stock option agreements, which provide that a change of control may accelerate the vesting of the stock options issued under such plans.

 

In addition, the provisions of Section 203 of the Delaware General Corporate Law governs us. These provisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding common stock, from engaging in certain business combinations without the approval of substantially all of our stockholders for a certain period of time.

 

These and other provisions in our amended and restated certificate of incorporation, our amended and restated bylaws and under Delaware law could discourage potential takeover attempts, reduce the price that investors might be willing to pay for shares of our common stock in the future and result in the market price being lower than it would be without these provisions. See “Description of Capital Stock—Preferred stock” and “Description of Capital Stock—Anti-takeover effects of Delaware law.”

 

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Some provisions of our named executive officers’ agreements regarding change of control or separation of service contain obligations for us to make separation payments to them upon their termination.

 

Certain provisions contained in our employment agreements with our named executive officers regarding change of control or separation of service may obligate us to make lump sum severance payments and related payments upon the termination of their employment with us, other than such executive officer’s resignation without good reason or our termination of their employment as a result of their disability or for cause. In the event we are required to make these separation payments, it could have a material adverse effect on our results of operations for the fiscal period in which such payments are made.

 

Our stock price has been and is likely to be volatile.

 

The market price of our common stock has been and is likely to be subject to wide fluctuations in response to, among other things, the risk factors described in this section of this Annual Report on Form 10-K, and other factors beyond our control, such as fluctuations in the valuation of companies perceived by investors to be comparable to us.

 

Furthermore, the stock markets have experienced price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions, such as recessions, interest rate changes or international currency fluctuations, may negatively affect the market price of our common stock.

 

In the past, many companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may become the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.

 

As an “emerging growth company” within the meaning of the Securities Act, we will utilize certain modified disclosure requirements, and we cannot be certain if these reduced requirements will make our common stock less attractive to investors.

 

We are an emerging growth company within the meaning of the rules under the Securities Act. We have in this Annual Report on Form 10-K utilized, and we plan in future filings with the SEC to continue to utilize, the modified disclosure requirements available to emerging growth companies, including reduced disclosure about our executive compensation and omission of compensation discussion and analysis, and an exemption from the requirement of holding a nonbinding advisory vote on executive compensation and an exemption from the requirement that outside auditors attest as to our internal control over financial reporting. As a result, our stockholders may not have access to certain information they may deem important.

 

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In addition, Section 107 of the JOBS Act also provides that an emerging growth company can utilize the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to utilize this extended transition period. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards as they become applicable to public companies.

 

We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. We could remain an “emerging growth company” for up to five years, or until the earliest of (i) the last day of the first fiscal year in which our annual gross revenue exceed $1 billion, (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period.

 

If research analysts do not publish research about our business or if they issue unfavorable commentary or downgrade our common stock, our stock price and trading volume could decline.

 

The trading market for our common stock will depend on the research and reports that research analysts publish about us and our business. The price of our common stock could decline if one or more research analysts downgrade our common stock or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business. If one or more of the research analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price or trading volume to decline.

 

 

 

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Item 1B.  Unresolved Staff Comments

 

  Not Applicable.

 

Item 2.  Properties

 

We maintain manufacturing, research and development, sales and administrative offices in the U.S., China and Taiwan. Our corporate headquarters is located at our facility in Sugar Land, Texas. The table below provides information regarding our facilities.

 

Location  Owned or Lease Expiration Date  Approximate Square Footage   Use
Sugar Land, Texas   Owned (1)   23,850   Administration, sales, manufacturing, research and development
Sugar Land, Texas  May 31, 2015   7,066   Research and development
Ningbo, China  Owned (2)   458,849   Administration, sales, manufacturing, research and development
Taipei, Taiwan  March 31, 2015 (3)   55,269   Administration, sales, manufacturing, research and development

____________

(1)The property is subject to a mortgage in favor of East West Bank, securing our short-term debt obligations.

 

(2)Our China subsidiary acquired the land use rights to the real property on which our new facility is located from the Chinese government. The land use rights expire on October 7, 2054. Our China subsidiary owns the facility located on the property.

 

(3)Leases covering four floors expire on March 31, 2015.

 

In 2013, we expanded the amount of square footage utilized by our Taiwan facility, adding a fourth floor to our then existing lease space. We believe that our existing facilities are adequate to meet our needs in 2014, and that we will be able to obtain additional commercial space as needed. To meet planned growth in 2015, we plan in late 2014 to investigate expansion of our laser fabrication facilities in Sugar Land, Texas, and expansion of our transceiver manufacturing facilities in Taipei, Taiwan.

 

Item 3.  Legal Proceedings

 

We anticipate that we will from time to time be subject to various claims and legal actions during the ordinary course of our business. We are not aware of any material claims or legal actions to which we, our properties or our officers or directors are subject.

 

Item 4.  Mine Safety Disclosure

 

  Not Applicable.

 

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PART II

 

Item 5.

 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

On September 26, 2013, our common stock began to trade on the NASDAQ Global Market under the symbol “AAOI”. Prior to that time, there was no public market for our common stock. As of January 31, 2014, there were 359 holders of record of our common stock (not including beneficial holders of our common stock holder in street name). The following table sets forth, for the periods indicated, the high and low sales prices of our common stock as reported by the NASDAQ Global Market.

 

   High   Low 
Fiscal Year 2013:          
Third Quarter (from September 26, 2013)  $10.44   $9.37 
Fourth Quarter  $16.61   $9.07 

 

For equity compensation plan information refer to Item 12 of this Annual Report on Form 10-K.

 

On September 25, 2013, our registration statement on Form S-1 (File No. 333-190591) for our initial public offering was declared effective by the Securities and Exchange Commission. The offering commenced on September 26, 2013. We sold 3,600,000 shares of our common stock at a price to the public of $10.00 per share and the transaction was completed on October 1, 2013. Raymond James & Associates, Inc. and Piper Jaffray & Co. were the managing underwriters.

 

We received net proceeds of $31.5 million after deducting underwriting discounts and commissions of $2.5 million and other offering expenses of approximately $2.0 million. On October 22, 2013, the underwriters exercised their over-allotment option and selling stockholders sold 540,000 shares of common stock at the same price. No such discounts, commissions or offering expenses were paid by us to directors, officers or persons owning ten percent or more of our common stock or to their associates, or to our affiliates.

 

There has been no material change in the planned use of proceeds from our initial public offering as described in our final prospectus filed with the SEC pursuant to Rule 424(b). As of December 31, 2013, we had used $16.8 million of the net proceeds for working capital, the continued expansion of our existing business and general corporate purposes including the repayment of outstanding indebtedness.

 

Dividend Policy

 

We have never declared or paid any cash dividends on our capital stock, and we do not anticipate paying any cash dividends on our common stock for the foreseeable future. We currently intend to retain all available funds and future earnings for use in the operation and expansion of our business. Any future determination to pay cash dividends will be at the discretion of our board of directors and will depend upon our financial condition, results of operations, terms of financing arrangements, applicable Delaware law, capital requirements and such other factors as our board of directors deems relevant. In addition, the terms of our loan agreements governing our long-term debt obligations prohibit us from paying dividends.

 

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Item 6.

 Selected Financial Data

 

SELECTED CONSOLIDATED FINANCIAL DATA

 

The selected consolidated financial data in this section is not intended to replace our consolidated financial statements and the related notes. You should read this summary consolidated financial data together with the sections titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and related notes, all included elsewhere in this Annual Report on Form 10-K. We derived the consolidated statements of operations data for the years ended December 31, 2011, 2012 and 2013 and the consolidated balance sheet data as of December 31, 2012 and 2013 from our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of the results to be expected in the future and results of interim periods are not necessarily indicative of results for the entire year.

 

   Years ended December 31, 
   2009   2010   2011   2012   2013 
Consolidated Statements of Operations Data:  (in thousands, except share and per share data) 
Revenue  $24,969    40,489    47,840    63,421   $78,424 
Cost of goods sold (1)   21,525    27,539    34,468    44,492    55,396 
Gross profit  $3,444    12,950    13,372    18,929   $23,028 
Operating expenses:                         
Research and development (1)   5,707    5,176    6,451    7,603    8,512 
Sales and marketing (1)   2,018    1,993    2,412    3,135    4,191 
General and administrative (1)   7,298    8,382    8,243    8,012    10,632 
Asset impairment charges   –    492    –    –    – 
Total operating expenses  $15,023    16,043    17,106    18,750   $23,335 
Income (loss) from operations   (11,579)   (3,093)   (3,734)   179    (307)
Interest and other income (expense), net:                         
Interest income   7    34    15    26    104 
Interest expense   (1,038)   (906)   (1,338)   (1,381)   (1,125)
Other income (expense), net   68    585    (271)   231    (78)
Total interest and other income (expense), net  $(963)   (287)   (1,594)   (1,124)  $(1,099)
Loss before income taxes   (12,542)   (3,380)   (5,328)   (945)   (1,406)
Benefit from (provision for) income taxes   38    –    –    –    – 
Net loss attributable to common stockholders  $(12,504)   (3,380)   (5,328)   (945)  $(1,406)
Net loss per share attributable to common stockholders:                         
Basic and diluted  $(48.39)   (13.06)   (20.21)   (3.56)  $(0.14)
Weighted average shares used to compute net loss per share attributable to common stockholders:                         
Basic and diluted   258,414    258,901    263,658    265,576    9,964,955 

____________

(1)These expenses include share-based compensation expense. Share-based compensation expense is accounted for at fair value, using the Black-Scholes option-pricing model. Share-based compensation expense is recognized over the vesting period of the stock options and was included in cost of goods sold and operating expenses as follows:

 

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   Years ended December 31, 
   2011   2012   2013 
Cost of goods sold  $ 35   $ 7   $ 56 
Research and development    50     8     53 
Sales and marketing   58    9    52 
General and administrative   420    137    907 
Total share-based compensation expense  $563   $161   $1,068 

 

    Years ended December 31, 
  2009   2010   2011   2012   2013 
     (in thousands) 
Consolidated balance sheet data:                           
Cash, cash equivalents and short-term investments    2,867    4,643    2,074   $11,226    30,751 
Working capital (1)    7,511    (2,322)   (1,911)   13,669    38,879 
Total assets    45,560    52,934    53,723    65,748    111,057 
Total debt (2)    14,300    23,071    22,597    24,584    28,455 
Convertible preferred stock    90,423    90,423    94,373    105,367    – 
Common stock and additional paid-in-capital    3,939    4,723    5,303    5,542    144,036 
Total deficit    (72,263)   (75,643)   (80,972)   (81,917)   (83,323)

____________

(1)Working capital is defined as total current assets less total current liabilities.

 

(2)Total debt is defined as short-term loans, notes payable and total long-term debt.

 

 

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the accompanying notes appearing elsewhere in this Annual Report on Form 10-K. This discussion and other parts of this Annual Report on Form 10-K contain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in “Risk Factors.”

 

Overview

 

We are a leading, vertically integrated provider of fiber-optic networking products. We target three networking end-markets: CATV, FTTH and internet data centers. We design and manufacture a range of optical communications products at varying levels of integration, from components, subassemblies and modules to complete turn-key equipment. In designing products for our customers, we begin with the fundamental building blocks of lasers and laser components. From these foundational products, we design and manufacture a wide range of products to meet our customers’ needs and specifications, and such products differ from each other by their end market, intended use and level of integration. We are primarily focused on the higher-performance segments within the CATV, FTTH and internet data center markets which increasingly demand faster connectivity and innovation. Our vertically integrated manufacturing model provides us several advantages, including rapid product development, fast response times to customer requests and control over product quality and manufacturing costs.

 

The three end markets we target are all driven by significant bandwidth demand fueled by the growth of network-connected devices, video traffic, cloud computing and online social networking. Within the CATV market, we benefit from a number of ongoing trends including the global build-out of CATV infrastructure, the move to higher bandwidth networks among CATV service providers and the outsourcing of system design among CATV networking equipment companies. In the FTTH market, we benefit from continuing PON deployments and system upgrades among telecommunication service providers. Within the internet data center market, we benefit from the increasing use of higher-capacity optical networking technology as a replacement for copper cables, particularly as speeds reach 10 gigabits per second and above, as well as the movement to open internet data center architectures and the increasing use of in-house equipment design among leading internet companies.

 

We sell our products to leading original equipment manufacturers, or OEMs, in the CATV and FTTH markets as well as internet data center operators. In 2013, we earned 60.4% of our total revenue from the CATV market, and 24.7% of our total revenue from the data center market. In 2013, our key customers in the CATV market included Cisco Systems and Biogenomics Corp., a distributor. In 2011, 2012 and 2013, Cisco Systems accounted for 26.8%, 33.2%, and 21.8%, respectively, of our revenue and Biogenomics Corp. accounted for 11.7%, 11.2% and 8.7%, respectively, of our revenue. In 2013, our key customers that contributed most to our FTTH revenue were Genexis B.V. and a leading internet service provider, which accounted for 2.8% and 2.0% of our total revenue, respectively. In 2013, our key customers in the data center market included Amazon and Microsoft. In 2012 and 2013, Amazon accounted for 5.8% and 18.2% of our revenue, respectively, and Microsoft accounted for 2.6% and 6.1% of our revenue, respectively. In 2013, revenue from the CATV market, data center market, FTTH market and other markets provided 60.4%, 24.7%, 5.6%, and 9.3% of our revenue, respectively, compared to 78.6%, 8.3%, 5.8% and 7.3% of our 2012 revenue, respectively.

 

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Our sales model focuses on direct engagement and close coordination with our customers to determine product design, qualifications, performance and price. Our strategy is to use our direct sales force to sell to key accounts and to expand our use of distributors for increased coverage in certain international markets and certain domestic market segments. We have direct sales personnel that cover the U.S., Taiwan and China focusing primarily on major OEM customers and internet data center operators. Throughout our sales cycle, we work closely with our customers to qualify our products into their product lines. As a result, we strive to build strategic and long-lasting customer relationships and deliver products that are customized to our customers’ requirements.

 

Our business depends on winning competitive bid selection processes to develop components, systems and equipment for use in our customers’ products. These selection processes are typically lengthy, and as a result, our sales cycles will vary based on the level of customization required, market served, whether the design win is with an existing or new customer and whether our solution being designed in our customers’ product is our first generation or subsequent generation product. We do not have any long-term purchase commitments (in excess of one year) with any of our customers, all of whom purchase our products on a purchase order basis. Once one of our solutions is incorporated into a customer’s design, however, we believe that our solution is likely to continue to be purchased for that design throughout that product’s life cycle because of the time and expense associated with redesigning the product or substituting an alternative solution.

 

In 2011, 2012 and 2013, we had 11, 15 and 17 design wins, respectively. We define a design win as the successful completion of the evaluation stage, where our customer has tested our product, verified that our product meets substantially all of their requirements and has informed us that they intend to purchase the product from us. Although we believe that our ability to obtain design wins is a key strength and can provide meaningful and recurring revenue, an increase or decrease in the mere number of design wins does not necessarily correlate to a likely increase or decrease in revenue, particularly in the short term. As such, the number of design wins we achieve on a quarterly or annual basis and any increase or decrease in design wins will not necessarily result in a corresponding increase or decrease in revenue in the same or immediately succeeding quarter or year. For example, if our total number of design wins in an annual or quarterly period increases or decreases compared to the total number of design wins in a prior period, this does not necessarily mean that our revenue in such period will be higher or lower than our revenue in the prior period. In fact, our experience is that some design wins result in significant revenue and some do not, and the timing of such revenue is difficult to predict as it depends on the success of the end customer’s product that uses our components. Thus, some design wins result in orders and significant revenue shortly after the design win is awarded and other design wins do not result in significant orders and revenue for several months or longer after the initial design win (if at all). We do believe that over a period of years the collective impact of design wins correlates to our overall revenue growth.

 

We believe we have an attractive financial profile, with strong revenue performance and control over our manufacturing costs through our vertically integrated manufacturing model. While we have incurred substantial losses since our inception, and as of December 31, 2013 had an accumulated deficit of $83.3 million, we achieved profitability (net income on a GAAP basis) in the third quarter of 2013 and recorded a slight loss ($0.5 million) in the fourth quarter of 2013. We have grown our revenue at a 33.1% CAGR between 2009 and 2013, including 23.7% growth year-over-year from 2012 to 2013.

 

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Factors Affecting Our Performance

 

Increasing Consumer Demand for Bandwidth. Bandwidth demand in all of our target markets is driving service provider investment in new equipment and in turn generating demand for our products. Increasingly, optical networking technologies are being incorporated into networking equipment, replacing legacy copper-based networking technologies. This shift to optical networking solutions benefits us as a provider of those solutions.

 

Pricing, Product Cost and Margins. Our solution pricing varies depending upon the end market, the complexity of the product and the level of competition. Our product costs also vary with complexity as well as the degree to which we can utilize components designed and manufactured ourselves. We tend to realize higher gross margins on products that incorporate a higher percentage of our own components. We often initially experience lower gross margins on new products, as our pricing is based upon anticipated volume-driven cost reductions over the life of the design win. Thus, if we are unable to realize our expected cost reductions, we may experience declining gross margins on such products.

 

Our product pricing is established when the product is initially introduced to the market, and thereafter through periodic negotiations with customers. We generally do not agree to periodic automatic price reductions. Furthermore, due to the dynamics in the CATV market and the value of our outsourced design services to our customers, we believe we face less downward price pressure than many of our competitors. We sell a wide variety of products among our three target markets and our gross margin is heavily dependent in any quarter on the product mix achieved during that period.

 

Decreasing Customer Concentration within End Markets. Historically, our revenue has been significantly concentrated within the CATV market and among a few customers within this market. Over the past two years, we have developed new products within the FTTH and internet data center markets. Furthermore, we have developed additional original design manufacturer, or ODM, relationships with customers in each of our target markets which should enable us to diversify our revenue. Although the CATV market is our largest market today, we anticipate that sales in the FTTH and internet data center markets will account for a more significant percentage of our total revenue in the future. We believe that our entry into the FTTH and internet data center markets with new customers and with new products will continue to facilitate revenue growth and customer diversification.

 

Product Development. We invest heavily to develop new and innovative products. The majority of our research and development expense is allocated to product development, usually with a specific customer and customer platform in mind. We believe our close coordination with our customers regarding their future product requirements enhances the efficiency of our research and development expenditures.

 

Discussion of Financial Performance

 

Revenue

 

We generate revenue through the sale of our products to equipment providers for the CATV, FTTH and internet data center markets. We derive a significant portion of our revenue from our top ten customers, and we anticipate that we will continue to do so for the foreseeable future. We also anticipate that our revenue derived from the FTTH and internet data center markets will increase as a percentage of our revenue as we further penetrate and extend our products into these markets. The following chart provides the revenue contribution from each of the markets we serve for the years 2011, 2012 and 2013 , as well as the corresponding percentage of our total revenue for each period:

 

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   Mar. 31,   Jun. 30,   Sep. 30,   Dec. 31,   Mar. 31,   Jun. 30,   Sep. 30,   Dec. 31,   Mar. 31,   Jun. 30,   Sep. 30,   Dec. 31, 
Market  2011   2011   2011   2011   2012   2012   2012   2012   2013   2013   2013   2013 
   (in thousands, except percentages) 
CATV   7,422    9,228    9,878    12,411    9,760    13,274    13,530    13,277    8,259    10,514    14,559    14,041 
Datacenter   –    –    14    –    670    647    977    2,998    3,620    6,640    3,216    5,910 
FTTH   907    552    752    1,103    1,063    417    698    1,512    1,087    705    982    1,603 
Other   1,178    1,709    1,450    1,236    1,012    1,299    1,211    1,074    1,351    1,738    2,009    2,190 
Total   9,507    11,489    12,094    14,750    12,505    15,637    16,416    18,861    14,317    19,597    20,766    23,744 

 

   Percentage of Revenue
CATV  78.1%  80.3%  81.7%  84.1%  78.0%  84.9%  82.4%  70.4%  57.7%  53.7%  70.3%  59.1%
Datacenter  0.0%  0.0%  0.1%  0.0%  5.4%  4.1%  6.0%  15.9%  25.3%  33.9%  15.5%  24.9%
FTTH  9.5%  4.8%  6.2%  7.5%  8.5%  2.7%  4.2%  8.0%  7.6%  3.6%  4.7%  6.7%
Other  12.4%  14.9%  12.0%  8.4%  8.1%  8.3%  7.4%  5.7%  9.4%  8.8%  9.5%  9.3%
Total  100.0%  100.0%  100.0%  100.0%  100.0%  100.0%  100.0%  100.0%  100.0%  100.0%  100.0%  100.0%

 

In 2011, 2012, and 2013, our top ten customers represented 76.6%, 77.6% and 76.9% of our revenue, respectively. While the percentage earned from our top ten customers remained consistent, the increase in data center revenue, from 8.3% in 2012 to 24.7% in 2013 resulted in more diversification across our top ten customers. In 2013, our key customers in the CATV market included Cisco Systems, Biogenomics Corp., a distributor in China, and Aurora Networks. In 2011, 2012 and 2013, Cisco Systems accounted for 26.8%, 33.2%, and 21.8%, respectively, of our revenue and Biogenomics Corp. accounted for 11.7%, 11.2% and 8.7%, respectively, of our revenue. In 2013, our key customers in the data center market included Amazon and Microsoft. In 2012 and 2013, Amazon accounted for 5.8% and 18.2% of our revenue, respectively, and Microsoft accounted for 2.6% and 6.1% of our revenue, respectively.

 

In 2013, our key customers that contributed most to our FTTH revenue were Genexis B.V. and a leading internet service provider, which accounted for 2.8% and 2.0% of our total revenue, respectively.

 

Revenue is recognized when the product is shipped and title has transferred to the customer. We bear all costs and risks of loss or damage to the goods up to that point. On most orders, our terms of sale provide that title passes to the customer upon placement by us with a common carrier (upon shipment). A majority of our annual sales are denominated in U.S. dollars, but some sales from our Taiwan location and China-based subsidiary are denominated in NT dollars and RMB, respectively. For the year ended December 31, 2013, 17.4% of our total revenue was derived from our China-based subsidiary, with $6.3 million denominated in RMB, $2.0 million sold directly by our Taiwan location and an immaterial amount denominated in NT dollars. We expect a similar portion of our sales to be denominated in foreign currencies in 2014.

 

During 2013, our average sales price across our product lines declined less than 8.0% compared to 2012. Certain of our competitors in the optical industry, who may have narrower market focus than us or broader product lines within a market, have publically stated that they typically experience annual price declines of 10-15%. Revenue from period to period is driven by the volume of shipments and may be impacted by pricing pressures, among other factors.

 

Cost of goods sold and gross margin

 

Our cost of goods sold consists of material costs, direct labor, allocated overhead and periodic cost variances, including reserves for excess and obsolete inventory, with each representing approximately 65.1%, 12.6%, 17.3%, 5.0% of our total cost of goods sold, respectively, in 2013.

 

Our cost of goods sold is impacted by variances arising from changes in yields and production volume. We typically experience lower yields and higher associated costs on new products. In general, our cost of goods sold for a particular product declines over time as a result of increasing efficiencies in the manufacturing processes, or supply cost declines, as well as yield improvements and testing enhancements.

 

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We manufacture our products in all three of our facilities in the U.S., Taiwan and China. Generally, laser chips and optical components are manufactured in our U.S. facility, optical components and subassemblies are manufactured in our Taiwan facility, and equipment is manufactured in our China facility. Because of our vertical integration model, we utilize our own products in our semi-finished and finished goods that we sell between and among our respective manufacturing operations. We base those internal sales upon established transfer pricing methodologies. However, we eliminate all of those internal sales, and cost of goods sold transactions, to arrive at total revenue and cost of goods sold on a consolidated basis.

 

We have a global set of suppliers to help balance considerations related to product availability, quality and cost. Components of our cost of goods sold are denominated in U.S. or NT dollars or RMB, depending upon the manufacturing location.

 

Gross profit as a percentage of total revenue, or gross margin, has been and is expected to continue to be affected by a variety of factors, including the introduction of new products, production volumes, the mix of products sold, the geographic region in which products are sold, changes in the cost and volumes of materials purchased from our suppliers, changes in labor costs, changes in overhead costs, reserves for excess and obsolete inventories and changes in the average selling prices of our products. Although our overall gross margins over the past three years have been between 28.0% and 32.9%, our gross margins vary more broadly on a product-by-product basis. Our newer and more advanced products typically have higher average selling prices and higher gross margins; however, until the product volumes scale, the gross margin from newer and advanced products may initially be lower. Within our markets, we sell similar products to different geographic regions at different prices, and therefore realize different gross margins among those similar products. We generally realize a lower gross margin in sales to Asian markets. Our strategy is to improve our gross margins through vertical integration such as utilization of our own laser chips and optical sub-components in our solutions. We expect that our gross margins are likely to continue to fluctuate from quarter to quarter because of the variety of products we sell and the relative product mix within a quarter.

 

Operating expenses

 

Our operating expenses consist of research and development, sales and marketing, and general and administrative expenses. Personnel costs are the most significant component of operating expenses and include salaries, benefits, bonuses and share-based compensation. With regard to sales and marketing expense, personnel costs also include sales commissions.

 

Research and development. Research and development, or R&D, expense consists primarily of personnel costs, including share-based compensation for R&D personnel, and R&D work orders (that include material, direct labor and allocated overhead), as well as allocated development costs, such as engineering services, software and hardware tools, depreciation of capital equipment and facility costs. We record all research and development expense as incurred. Customers rely upon us to assist them with the development of new products and modification of existing products because of our extensive optical design and manufacturing expertise. We work closely with our customers in the critical design phase of product development, and are often reimbursed for those development efforts. By virtue of our overseas R&D operations and by focusing on customer-specific projects, our research and development expenses have tended to represent a lower percentage of revenue compared to some of our competitors. In the future, we expect research and development expense to increase on a dollar basis, but continue to decline as a percentage of revenue, to the extent our revenue increases over time.

 

Sales and marketing. Sales and marketing expense consists primarily of personnel costs, including stock based compensation for our sales and marketing personnel, as well as travel and trade show expense, sales commissions and the allocation of overall corporate services and facility costs. We sell our products to customers who either incorporate our products into their offering or resell our products to end customers. Because we sell to a limited number of well-established customers, we employ a limited number of sales professionals who are able to cover large markets. We compensate our sales staff through base salary and commissions, with base salary being the largest component of overall compensation. Total sales commissions to employees amounted to less than one percent of our revenue in 2013. Additionally, we pay commissions to third parties on certain product lines and identified customers, which also amounted to less than one percent of our revenue in 2013. As such, our sales and marketing expense does not directly increase with revenue. In the future, we expect sales and marketing expense to increase on a dollar basis as we incrementally increase our overall sales activities, but expect our sales and marketing expense to decline as a percentage of revenue, to the extent our revenue increases over time.

 

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General and administrative. General and administrative expense consists primarily of personnel costs, including share-based compensation, primarily for our finance, human resources and information technology personnel and certain executive officers, as well as professional services costs related to accounting, tax, banking, legal and information technology services, depreciation of capital equipment and facility costs. We expect general and administrative expense to increase in the short term, as we develop the infrastructure necessary to operate as a public company, including increased audit and legal fees, costs to comply with the Sarbanes-Oxley Act and the rules and regulations applicable to companies listed on a national stock exchange, as well as investor relations expense and higher insurance premiums. In the future, we expect general and administrative expense to increase on a dollar basis but continue to decline as a percentage of revenue, to the extent our revenue increases over time.

 

Other income (expense)

 

Interest income consists of income earned on our cash, cash equivalents and short-term investments. Interest expense consists of amounts paid for interest on our short-term and long-term debt borrowings.

 

Other income (expense), net is primarily made up of foreign currency transaction gains and losses. The functional currency of our China subsidiary is the RMB and the foreign currency transaction gains and losses of our China subsidiary primarily result from their transactions in U.S. dollars. The functional currency of our Taiwan location is the NT dollar and the foreign currency transaction gains and losses of our Taiwan location primarily result from their transactions in U.S. dollars.

 

Income taxes

We conduct our business globally. However, our operating income is subject to varying rates of tax in the U.S., Taiwan and China. Consequently, our effective tax rate is dependent upon the geographic distribution of our earnings or losses and the tax laws and regulations in each geographical region. We expect that our income taxes will vary in relation to our profitability and the geographic distribution of our profits. Our effective U.S. federal income tax rate was 0% in the past three years as we have incurred operating losses. At December 31, 2013, our U.S. accumulated net operating loss, or NOL, was $65.7 million. As we earn profits in the U.S., we expect to reduce our cash tax obligations by the utilization of NOL carry forwards. Our NOL benefits expire over the twelve-year period from 2020 to 2032. Under Section 382 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change NOLs, capital loss carry forwards and other pre-change tax attributes to offset its post-change income may be limited going forward. Based upon an analysis of our equity ownership, we have experienced an ownership change and our NOL carry forwards are limited in dollar amount. As of December 31, 2013, of the total accumulated NOL only $40.3 million is available for utilization in 2014 and thereafter to shelter federal taxable income. Each year after 2014, an additional $0.3 million is added to the total available NOL, until a maximum of $43.9 million is reached. The amount of NOL available each year may decrease by the amount of NOL utilized and may increase by the amount of any operating losses incurred. Should we experience additional ownership changes our NOL carry forwards may be further limited. 

Our wholly owned subsidiary, Global Technology, Inc., has enjoyed preferential tax concessions in China as a national high-tech enterprise.  In March 2007, China’s parliament enacted the PRC Enterprise Income Tax Law, or the EIT Law, under which, effective January 1, 2008, China adopted a uniform income tax rate of 25% for all enterprises including foreign invested enterprises. Global Technology, Inc. was recognized as a National high-tech enterprise in 2008 and was entitled to a 15% tax rate for a three year period from November 2008 to November 2011. In 2011, Global Technology, Inc. renewed its National high-tech enterprise certificate and was therefore extended its three year tax preferential status from November 2011 to November 2014.

 

For 2011 and 2012, there were no identified uncertain tax positions.  During 2013, our liabilities for uncertain tax positions increased by $2.2 million based on tax positions related to our net operating loss carryforwards.  As of December 31, 2013, we had $2.2 million, of unrecognized tax benefits on net operating loss carryforwards that must be certified under the dual consolidated loss rules.  If recognized, there would be no impact our effective tax rate as a result of the full valuation allowance previously recognized. We believe that it is reasonably possible that $0 of our remaining unrecognized tax positions may be recognized by the end of 2014 as a result of a lapse of the statute of limitations. 

 

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Results of Operations

 

The following table set forth our results of operations for the periods presented and as a percentage of our revenue for those periods. The period-to-period comparison of our financial results is not necessarily indicative of our financial results to be achieved in future periods.

 

  Years ended December 31,
  2011   2012   2013
Revenue, net 100.0%   100.0%   100.0%
Cost of goods sold 72.0%   70.2%   70.6%
Gross profit 28.0%   29.8%   29.4%
Operating expenses          
Research and development 13.5%   12.0%   10.9%
Sales and marketing 5.0%   4.9%   5.3%
General and administrative 17.2%   12.6%   13.6%
Total operating expenses 35.8%   29.6%   29.8%
Income (loss) from operations -7.8%   0.3%   -0.4%
Other income (expense)          
Interest expense -3.3%   -1.8%   -1.4%
Other income (expense), net 0.0%   0.0%   0.0%
Total other expense -3.3%   -1.8%   -1.4%
Loss before income taxes -11.1%   -1.5%   -1.8%
Income taxes 0.0%   0.0%   0.0%
Net loss -11.1%   -1.5%   -1.8%

 

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Comparison of Years Ended December 31, 2013 and 2012

 

Revenue

 

   Years ended December 31,   Change 
   2012   2013   Amount   % 
   (in thousands, except percentages) 
Revenue  $63,421   $78,424   $15,003    23.7% 

 

Of our total revenue in 2013, we generated $47.3 million, or 60.4%, from the CATV market, $19.3 million, or 24.7%, from the internet data center market, $4.4 million, or 5.6%, from the FTTH market, and $7.3 million, or 9.3%, from other markets. Total revenue increased by $15.0 million, or 23.7%, from 2012 to 2013.

 

The increase in revenue was attributable to a $14.1 million increase from the internet data center market, and a $2.7 million increase from other markets, partially offset by a $2.5 million decrease from our CATV market. The increase in revenues in the internet data center market were driven by increasing sales to customers we added late in 2012. The decline in revenues in the CATV market in 2013 was a result of market-wide weakness, particularly in China, as well as delays in orders as a consequence of mergers among several of our CATV customers.

 

Cost of goods sold and gross margin

 

   Years ended December 31,     
   2012   2013   Change 
   Amount   % of revenue   Amount   % of revenue   Amount   % 
   (in thousands, except percentages) 
Cost of goods sold  $44,492    70.2%   $55,396    70.6%   $10,904    24.5% 
Gross margin        29.8%         29.4%           

 

Cost of goods sold increased by $10.9 million, or 24.5%, from 2012 to 2013, primarily due to the combination of an $7.2 million increase in direct material costs and a $3.7 million increase in labor and overhead costs, both of which were associated with our increase in revenues. Within our markets, we sell similar products in different geographic regions at different prices, resulting in different gross margins among our products. The decrease in gross margin was primarily the result of a higher percentage of sales of lower margin CATV equipment in Asia and a lower percentage of higher margin component sales in the U.S.

 

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Operating expenses

 

   Years ended December 31,     
   2012   2013   Change 
   Amount   % of
 revenue		   Amount   % of
 revenue		   Amount   % 
   (in thousands, except percentages) 
Research and development  $7,603    12.0%   $8,512    10.9%   $909    11.9% 
Sales and marketing   3,135    4.9%    4,191    5.3%    1,056    33.7% 
General and administrative   8,012    12.6%    10,632    13.6%    2,620    32.7% 
Total operating expenses  $18,750    29.6%   $23,335    29.8%   $4,585    24.4% 

 

Research and development expense

 

Research and development expense increased by $0.9 million, or 11.9%, from 2012 to 2013. This was primarily due to increases in personnel costs and R&D work order and project costs related to new product development.

 

Sales and marketing expense

 

Sales and marketing expense increased by $1.1 million, or 33.7%, from 2012 to 2013. This was due to an increase in personnel costs due to additional sales and marketing staff to better serve our customers, and an increase in sales commissions directly related to our revenue growth.

 

General and administrative expense

 

General and administrative expense increased by $2.6 million, or 32.7%, from 2012 to 2013. This was primarily due to an increase in share-based compensation expense as well as an increase in personnel costs, expenses related to being a public company, professional fees and travel expenses.

 

Other income (expense), net

 

   Years ended December 31,     
   2012   2013   Change 
   Amount   % of
 revenue		   Amount   % of
 revenue		   Amount   % 
   (in thousands, except percentages) 
Interest income  $26    0.0%   $104    0.1%   $78    300.0% 
Interest expense   (1,381)   (2.2%)   (1,125)   (1.4%)   256    18.5%
Other income (expense), net   231    0.4%    (78)   (0.1%)   (309)   (133.8%)
Total Other income (expense), net  $(1,124)   (1.8%)  $(1,099)   (1.4%)  $25    2.2%

 

Total net other expense decreased slightly from 2012 to 2013. Interest expense decreased while average loan balances increased from 2012 to 2013 due to a further reduction in interest rates in 2013. Our net other expense decreased by $0.3 million from 2012 to 2013 primarily due to a $0.6 million unrealized foreign currency revaluation loss from U.S. denominated accounts in 2013 when the NT dollar depreciated against the U.S. dollar which was offset by an additional $0.2 million of government subsidies received by our China subsidiary.

 

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Benefit from (provision for) income taxes

 

   Years ended December 31,     
   2012   2013   Change 
   (in thousands, except percentages) 
Benefit from (provision for) income taxes  $–   $–   $– 
Effective tax rate   0.0%    0.0%    0.0% 

 

Our effective tax rate was 0.0% for 2012 and 2013, as we did not generate positive taxable income.

 

Comparison of Years Ended December 31, 2012 and 2011

 

Revenue

 

   Years ended
December 31,		   Change 
   2011   2012   Amount   % 
   (in thousands, except percentages) 
Revenue  $47,840   $63,421   $15,581    32.6% 

 

Of our total revenue in 2012, we generated $49.8 million, or 78.6%, from the CATV market, $5.3 million, or 8.3%, from the internet data center market, $3.7 million, or 5.8%, from the FTTH market, and $4.6 million, or 7.3%, from other markets. Total revenue increased by $15.6 million, or 32.6%, from 2011 to 2012. The increase in revenue was attributable to an $11.0 million increase in revenue from our CATV market, a $5.3 million increase from the internet data center market, and a $0.4 million increase in the FTTH market, which increases were partially offset by a $1.0 million decrease from other markets. Our CATV market revenue increased in 2012 primarily due to increased capital expenditures by CATV service providers and increased shipments of our CATV equipment products. Revenues in 2012 were also driven by sales increases from two customers in the internet data center market. Our FTTH market revenue increased primarily because of the sale of new transceiver products to existing customers. Revenue declined in other markets because of a de-emphasis by our sales staff and the decline in sales of certain legacy products within those markets.

 

Cost of goods sold and gross margin

 

   Years ended December 31,         
   2011   2012   Change 
   Amount   % of
revenue		   Amount   % of
revenue		   Amount   % 
   (in thousands, except percentages) 
Cost of goods sold  $34,468    72.0%   $44,492    70.2%   $10,024    29.1% 
Gross margin        28.0%         29.8%           

 

Cost of goods sold increased by $10.0 million, or 29.1%, from 2011 to 2012, primarily due to a combination of an $8.5 million increase in direct material costs and a $1.3 million increase in labor and overhead costs, both of which were associated with our increase in revenues. The increase in gross margin was caused by lower direct labor costs and lower overhead from improved efficiency, combined with a reduction in our inventory reserve. The inventory reserves were higher in 2011 primarily due to discontinued products and aging of inventory on hand.

 

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Operating expenses

 

   Years ended December 31,         
   2011   2012   Change 
   Amount   % of
revenue		   Amount   % of
revenue		   Amount   % 
   (in thousands, except percentages) 
Research and development  $6,451    13.5%   $7,603    12.0%   $1,152    17.9% 
Sales and marketing   2,412    5.0%    3,135    4.9%    723    30.0% 
General and administrative   8,243    17.2%    8,012    12.6%    (231)   (2.8%)
Total operating expenses  $17,106    35.8%   $18,750    29.6%   $1,644    9.6% 

 

Research and development expense

 

Research and development expense increased by $1.2 million, or 17.9%, from 2011 to 2012, $0.7 million of which was attributable to R&D material expenses associated with new product development. The remaining $0.5 million increase was a result of a reallocation of existing personnel costs to R&D work orders and an increase in R&D staffing. Because our R&D staff is integral to new product development, our R&D staff often rotate between R&D work orders (non-production orders) and production orders. As we shift those personnel from production back to R&D, our R&D expenses vary.

 

Sales and marketing expense

 

Sales and marketing expense increased by $0.7 million, or 30.0%, from 2011 to 2012. This was due to a $0.5 million increase in personnel costs due to additional sales and marketing staff to better serve our customers, and an increase in sales commissions of $0.2 million because of our revenue growth.

 

General and administrative expense

 

General and administrative expense decreased by $0.2 million, or 2.8 %, from 2011 to 2012. This was primarily due to a decrease in share-based compensation expense because of the use of a reduced volatility assumption and prior grants becoming fully vested.

 

Other income (expense), net

 

   Years ended December 31,         
   2011   2012   Change 
   Amount   % of
revenue		   Amount   % of
revenue		   Amount   % 
   (in thousands, except percentages) 
Interest income  $15    0.0%   $26    0.0%   $11    71.3% 
Interest expense   (1,338)   (2.8%)   (1,381)   (2.2%)   (45)   (3.3%)
Other income (expense), net   (271)   (0.6%)   231    0.4%    502    186.0% 
Total Other income (expense), net  $(1,594)   (3.3%)  $(1,124)   (1.8%)  $470    29.5% 

 

Total net other expense decreased by $0.5 million, or 29.5%, from 2011 to 2012. Interest expense remained relatively unchanged from 2011 to 2012. While average loan balances increased from 2011 to 2012 by about $2.0 million, we benefited from a reduction in interest rates in 2012. The net other expense decreased by $0.5 million from 2011 to 2012 primarily due to foreign currency revaluation gains from U.S. denominated accounts in 2012 when the NT dollar appreciated against the U.S. dollar.

 

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Benefit from (provision for) income taxes  Years ended
December 31,		     
   2011   2012   Change 
   (in thousands, except percentages) 
Benefit from (provision for) income taxes  $–   $–   $– 
Effective tax rate   0.0%    0.0%    0.0% 

 

Our effective tax rate was 0.0% for 2011 and 2012, as we did not generate positive taxable income.

 

Liquidity and Capital Resources

 

From inception until our initial public offering, we financed our operations through private sales of equity securities and cash generated from operations and from various lending arrangements. On October 1, 2013, we completed our initial public offering, in which we issued and sold 3,600,000 shares of our common stock at a public offering price of $10.00 per share, providing proceeds of $31.5 million, net of underwriting discounts and commissions and offering expenses. At December 31, 2013, our cash, cash equivalents, restricted cash and short-term investments totaled $30.8 million. Cash and cash equivalents were held for working capital purposes and were invested primarily in money market funds. We do not enter into investments for trading or speculative purposes.

 

The table below sets forth selected cash flow data for the periods presented:

 

Years Ended December 31,
   2011   2012   2013 
   (in thousands) 
Net cash provided by (used in) operating activities  $(4,125)  $(358)  $(6,552)
Net cash used in investing activities   (1,571)   (3,290)   (17,736)
Net cash provided by financing activities   2,836    12,754    35,368 
Effect of exchange rates on cash and cash equivalents   136    (150)   203 
Net increase (decrease) in cash and cash equivalents  $(2,724)  $8,956   $11,283 

 

Operating activities

 

In 2013, net cash used in operating activities was $6.6 million. Cash used in operating activities primarily related to an increase in receivables from customers from the sale of our products in excess of cash paid to our suppliers. During the year ended December 31, 2013, we recognized a net loss of $1.4 million. The net loss incorporated non-cash charges, including depreciation and amortization of $3.4 million, share-based compensation expenses of $1.1 million and non-cash increases to our inventory reserve accounts of $0.5 million. We also spent $7.5 million to increases our inventories to support increases in sales volumes, but this was offset by an increase in accounts payable.

 

In 2012, net cash used in operating activities was $0.4 million. Cash used in operating activities primarily related to payments to suppliers in excess of cash received from our customers from the sale of our products. During 2012, we recognized a net loss of $0.9 million. However, that net loss incorporated non-cash charges, including depreciation and amortization of $2.9 million, share-based compensation expense of $0.1 million and non-cash increases to our inventory reserve accounts of $0.9 million. In addition, we spent $0.5 million in 2012 to increase our inventories in anticipation of expected increases in sales volumes.

 

In 2011, net cash used in operating activities was $4.1 million. Cash used in operating activities primarily related to payments to suppliers in excess of cash received from our customers from the sale of our products. During 2011, we recognized a net loss of $5.3 million. However, that net loss incorporated non-cash charges, including depreciation and amortization of $3.1 million, share-based compensation expense of $0.6 million and non-cash increases to our inventory reserve accounts of $1.6 million. In addition, we spent $1.6 million in 2011 to increase our inventories in anticipation of expected increases in sales volumes.

 

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Investing activities

 

Our investing activities consisted primarily of capital expenditures and purchases of intangible assets.

 

In 2013, we used $17.7 million of cash for investing activities, of which $9.3 million of cash was used for the purchase of additional machinery and equipment to support our research and development efforts and manufacturing activities and $8.0 million of cash was used for the purchase of short-term investments.

 

In 2012, we used $3.3 million of cash for investing activities. We used $3.2 million of cash for the purchase of additional machinery and equipment to support our research and development efforts and manufacturing activities, partially offset by $0.1 million of cash provided by the sale of obsolete equipment.

 

In 2011, we used $1.6 million of cash for investing activities. We used $1.8 million of cash for the purchase of property and equipment, partially offset by $0.4 million of cash provided by the sale of obsolete equipment.

 

Financing activities

 

Our financing activities consisted primarily of proceeds from the issuance of common stock and preferred stock and activity associated with our various lending arrangements.

 

In 2013, our financing activities provided $35.4 million in cash. We received $31.5 million in net proceeds from our initial public offering. We received $3.5 million in net borrowings associated with our bank loans and received $0.7 million from the exercise of stock options and warrants. These increases were offset by an increase in our restricted cash by $0.2 million, related to the compensating balances required by our loans in China

 

In 2012, our financing activities provided $12.8 million in cash. We received $10.2 million in cash from the issuance of preferred stock, $2.7 million in net borrowings associated with our bank loans and $0.8 million from the issuance of notes payable, offset in part by $0.7 million of payments of principal on our term loans and notes payable and $0.2 million to repay loans from stockholders.

 

In 2011, our financing activities provided $2.8 million in cash, primarily resulting from $2.9 million of cash from the issuance of preferred stock and $1.6 million in net borrowings associated with our bank loans, offset in part by $0.2 million of payments of principal on our term loans and notes payable and $1.2 million to repay loans from stockholders.

 

Loans and commitments

 

We have lending arrangements with several financial institutions, including a loan and security agreement with East West Bank in the U.S., several lines of credit arrangements for our China subsidiary and financing agreements for our Taiwan location.

 

As of December 31, 2013, our loan and security agreement in the U.S. included a $7.0 million revolving line of credit which matures on November 15, 2015. Also included with the same bank is a term loan with monthly payments of principal and interest that matures on November 15, 2014. As of December 31, 2013, we had $7.0 million outstanding under the revolving line of credit and $3.1 million outstanding on the term loan.

 

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On September 10, 2013, our loan and security agreement in the U.S. was amended to add $5.0 million of borrowing capability to the existing credit line, for the purpose of financing equipment. The additional equipment term loan allows us to draw up to the lesser of (i) $5.0 million, or (ii) 90% of the costs of equipment purchased between March 31, 2013 and March 10, 2014. Through March 10, 2014, we are required to pay interest only on the then-outstanding balance, and then pay equal principal payments plus accrued interest monthly for the following 42 months. The interest rate for such equipment term loan is the bank’s prime lending rate plus 0.75%, currently a total of 4.0%. As of December 31 2013, $1.85 million has been drawn against this equipment term loan.

 

Our loan and security agreement requires us to maintain certain financial covenants, including a minimum current ratio, maximum debt over net worth ratio and minimum debt service coverage. The agreement also restricts our minimum cash deposits and the percentage of deposit with other banks. As of December 31, 2013, we were in compliance with all covenants contained in this agreement.

 

As of December 31, 2013, our China subsidiary had a line of credit facility and bank acceptances with China banks totaling $18.0 million. As of December 31, 2013, a total of $12.1 million was outstanding under various notes, each with its own maturity date and each renewing annually from January 2014 to August 2014. The notes that begin to mature in January 2014 are expected to be renewed on the same terms and with new one year terms. These loans have renewed each year for the past three years. While there can be no assurance of renewal as each loan matures, we expect these loans to renew this year as they have over the past periods. On January 6, 2014, we paid off $4.5 million in loans with maturity dates ranging January 2014 to March 2014 to China bank.

 

As of December 31, 2013, our China subsidiary had a U.S. currency based loan of $2.4 million under various notes with four-month terms.

 

In July 2013, our Taiwan location extended its outstanding note payable with a financing company to mature on July 31, 2015.

 

In December 2013, our Taiwan location entered into one year revolving Credit Facility Agreements with Taiwan banks, for a total of $8.0 million. Borrowings under the Credit Facility will be used for general corporate purposes. Our obligations under the Credit Facility are secured by our $8 million cash deposit in a one-year CD with such banks. Borrowings under the Credit Facility will bear interest at a rate equal to the Taiwan Time Deposit Interest Rate Index plus 0.41%, which is currently 1.78%. As of December 31, 2013, $3.8 million was outstanding under this credit facility.

 

A customary business practice in China is for customers to exchange accounts receivable with notes receivable issued by their bank. From time to time we accept notes receivable from certain of our customers in China. These notes receivable are non-interest bearing and are generally due within six months, and such notes receivable may be redeemed with the issuing bank prior to maturity at a discount. Historically, we have collected on the notes receivable in full at the time of maturity.

 

Frequently, we also direct our banking partners to issue notes payable to our suppliers in China in exchange for accounts payable. Our China subsidiary’s banks issue the notes to vendors and issue payment to the vendors upon redemption. We owe the payable balance to the issuing bank. The notes payable are non-interest bearing and are generally due within six months of issuance. As a condition of the notes payable lending arrangements, we are required to keep a compensating balance at the issuing banks that is a percentage of the total notes payable balance until the notes payable are paid by our China subsidiary. These balances are classified as restricted cash on our consolidated balance sheets. As of December 31, 2013, our restricted cash totaled $0.7 million.

 

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Future liquidity needs

 

We believe that our existing cash, cash equivalents, short term investments, and cash flows from our operating activities, will be sufficient to meet our anticipated cash needs for the next 12 to 24 months. Our future capital requirements will depend on many factors including our growth rate, the timing and extent of spending to support our development efforts, the expansion of our sales and marketing activities, the introduction of new and enhanced products, the costs to increase our manufacturing capacity and the continuing market acceptance of our products. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results and financial condition would be adversely affected.

 

Contractual Obligations and Commitments

 

The following summarizes our contractual obligations as of December 31, 2013:

 

   Payments due by period 
   Total   Less than 1 Year   1-3 Years   3-5 Years   More than 5 Years 
   (in thousands) 
Notes payable and long-term debt(1)  $28,455   $19,532   $8,923   $–   $– 
Operating leases(2)   914    689    225    –    – 
Purchase obligations(3)   35    26    9    –    – 
                          
Total commitments  $29,404   $20,247   $9,157   $–   $– 

____________

(1)We have several loan and security agreements in China, Taiwan and the U.S. that provide various credit facilities, including lines of credit and term loans. The amount presented in the table represents the principal portion of the obligations.

 

(2)We have entered into various non-cancellable operating lease agreements for our offices in Taiwan and the U.S.

 

(3)We are obligated to make payments under various arrangements with suppliers for the procurement of goods and services.

 

Item 7A.                Quantitative and Qualitative Disclosures about Market Risk

 

Market Risks

 

Market risk represents the risk of loss that may impact our financial statements through adverse changes in financial market prices and rates and inflation. Our market risk exposure results primarily from fluctuations in foreign exchange and interest rates. We manage our exposure to these market risks through our regular operating and financing activities. We have not historically attempted to reduce our market risks through hedging instruments; we may, however, do so in the future.

 

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Interest Rates

 

We are exposed to interest rate fluctuations on our cash, cash equivalents and short-term investments. We had unrestricted cash and cash equivalents of $1.8 million, $10.7 million and $22.0 million at December 31, 2011, 2012 and 2013, respectively. Our cash, cash equivalents and short-term investments are subject to limited interest rate risk and are primarily maintained in money market funds and bank deposits.

 

We have entered into various loan agreements with East West Bank in the U.S., China Construction Bank in China and Mega Bank and Chailease Finance Co LTD in Taiwan. At December 31, 2013:

 

•the revolving line of credit for our U.S.-based loans had a principal balance of $7.0 million, bearing interest at rates based on the prime rate plus a premium of 0.5% or floor rate of 3.75% whichever is higher, maturing on November 15, 2015,

 

•the term loan with a U.S. bank had a principal balance of $3.1 million, with monthly payment of principal and interest at prime rate plus 0.75% or floor rate 4%, maturing on November 15, 2014,

 

•our term loan with a U.S. bank had a principal balance of $1.9 million, interest payment only through March 10, 2014, and then equal principal and interest monthly installment payment for the following 42 months, maturing in September 2017,

 

•the Chinese-based revolving line of credit loan had a principal balance of $7.1 million, bearing interest at 108%-110% of LIBOR or 6.48% to 6.6%,

 

•the Chinese-based revolving loan had a principal balance of $2.4 million, bearing interest at 4.1% to 4.15%,

 

•the Chinese bank acceptance notes issued to vendors had a balance of $2.3 million, bearing no interest rate,

 

•the Taiwanese-based revolving line of credit had a principal balance of $3.8 million, bearing interest at 1.78%, maturing in December 2014, and

 

•the Taiwanese-based term loan had $0.9 million principal balance outstanding, with monthly payment of principal and interest at interest rate of 4.95%, maturing on July 30, 2015.

 

With respect to our interest expense for the year ended December 31, 2013, an increase or decrease of 1.0% in each of our interest rates would have resulted in an increase of $0.3 million in our interest expense for such period.

 

Foreign Exchange Rates

 

We operate on an international basis with a portion of our revenue and expenses being incurred in currencies other than the U.S. dollar. Fluctuations in the value of these foreign currencies in which we conduct our business relative to the U.S. dollar affects our results and will cause U.S. dollar translation of such currencies to vary from one period to another. We cannot predict the effect of exchange rate fluctuations upon our future operating results. The effect on our results of operations from currency fluctuations is reduced, however, because we have revenue and expenses in each of these foreign currencies.

 

We maintain certain assets, including certain bank accounts, accounts receivables, land and building, in RMB and the NT dollar, which are sensitive to foreign currency exchange rate fluctuations. Additionally, certain of our current and long-term liabilities are denominated in these currencies. As of December 31, 2013, fluctuation in RMB and NT dollar currency exchange rates resulted in assets and liabilities denominated in these currencies being translated into $0.5 million and $0.4 million more U.S. dollars than at December 31, 2012, respectively.

 

52
 

 

Additionally, the value of the RMB against the U.S. dollar and other currencies fluctuates and is affected by, among other things, changes in political and economic conditions in China. The conversion of RMB into foreign currencies, including U.S. dollars, has been based on rates set by the People’s Bank of China. On July 21, 2005, the Chinese government changed its policy of pegging the value of the RMB to the U.S. dollar and began allowing modest appreciation of the RMB against the U.S. dollar. Fluctuation of the RMB exchange rate is, however, restricted to a rise or fall of no more than 0.5% per day versus the U.S. dollar, and the People’s Bank of China continues to intervene in the foreign exchange market to prevent significant short-term fluctuations in the RMB exchange rate. Nevertheless, under China’s current exchange rate regime, the RMB may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. The RMB has appreciated 8.46% against the U.S. dollar from January 1, 2011 to December 31, 2013. There remains international pressure on the Chinese government to adopt a substantial liberalization of its currency policy, which could result in a further and more significant appreciation in the value of the RMB against the U.S. dollar.

 

We use the U.S. dollar as our functional and reporting currency for our financial statements. All transactions in currencies other than the U.S. dollar during the year are re-measured at the exchange rates prevailing on the respective relevant dates of such transactions. Monetary assets and liabilities existing at the balance sheet date denominated in currencies other than the U.S. dollar are re-measured at the exchange rates prevailing on such date. Exchange differences are recorded in our consolidated income statement. The financial records of our China subsidiary and our Taiwan location are maintained in their respective local currencies, the RMB and the NT dollar, which are the functional currencies for our China subsidiary and our Taiwan location, respectively. Assets and liabilities are translated at the exchange rates at the balance sheet date, equity accounts are translated at historical exchange rates and revenues, expenses, gains and losses are translated using the average annual rate in 2011, a quarterly average rate in 2012 and a monthly average rate in 2013. Translation adjustments are reported as cumulative translation adjustments and are shown as a separate component of accumulated other comprehensive income in our statement of stockholders’ equity (deficit) and comprehensive income. Transaction gains and losses are recognized in our statements of operations in other income (expenses).

 

We incurred approximately 49.4% of our operating expenses in currencies other than the U.S. dollar during 2013. As of December 31, 2013, we held the U.S. dollar equivalent of approximately $14.3 million in RMB and $0.1 million in NT dollars, included in cash, cash equivalents and short-term investments. Fluctuations in exchange rates directly affect our cost of revenues and net income, and have a significant impact on fluctuations in our operating margins. For example, in 2013, 92.2% of our revenues were generated from sales denominated in U.S. dollars, and 21.4% of our operating costs and expenses were denominated in RMB and 28.0% of our operating costs were denominated in NT dollars. Fluctuations in exchange rates also affect our balance sheet. For example, if we need to convert U.S. dollars into RMB or NT dollars for our operations, appreciation of the RMB or the NT dollar against the U.S. dollar would have an adverse effect on the RMB or NT dollar amount that we receive from the conversion. With respect to our total cash and short-term investments as of December 31, 2013, a 1.0% change in the exchange rates between the RMB and the U.S. dollar would result in a $0.1 million change in our total cash and short-term investments, and a 1.0% change in the exchange rates between the NT dollar and the U.S. dollar would result in an immaterial change in our total cash, cash equivalents and short-term investments.

 

Fluctuations in currency exchange rates of the above currencies we hold against the U.S. dollar would have a corresponding impact on the U.S. dollar equivalent of such currencies included in the cash, cash equivalents and short-term investments reported in our financial statements from period to period.

 

Inflation

 

We believe that the relatively low rate of inflation in the U.S. over the past few years has not had a significant impact on our sales or operating results or on the prices of raw materials. To the extent we expand our operations in China and Taiwan, such actions may result in inflation having a more significant impact on our operating results in the future.

 

Off-Balance Sheet Arrangements

 

During 2011, 2012 and 2013, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

 

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Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. These principles require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, expenses and cash flows, and related disclosure of contingent assets and liabilities. Our estimates include those related to revenue recognition, share-based compensation expense, impairment analysis of goodwill and long-lived assets, valuation of inventory, warranty liabilities and accounting for income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected.

 

We believe that of our significant accounting policies, which are described in Note B to our consolidated financial statements appearing elsewhere in this prospectus, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, we believe these are the most critical to fully understand and evaluate our financial condition and results of operations.

 

Revenue recognition

 

We generally employ a direct sales model in North America, and in the rest of the world we use both direct and indirect channels. Our revenue recognition policy is to recognize gross revenue whether our products are sold on a direct or indirect basis, because our reseller customers (indirect channel) take title to our products and honor the same terms and conditions as do our direct sales customers. We recognize revenue from the sale of our products provided that persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and collectability is reasonably assured. Contracts or customer purchase orders are used to determine the existence of an arrangement. Shipping documents and customer acceptance, when applicable, are used to verify delivery. We assess whether the price is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. We assess collectability based primarily on the creditworthiness of the customer as determined by credit checks and the customer’s payment history. Customers are generally extended net 30 credit terms from the date of shipment, with some extension to net 60 credit terms for some more creditworthy customers.

 

Whether our products are sold on a direct or indirect basis, revenue is recognized when the product is shipped and title has transferred to the customer. We bear all costs and risks of loss or damage to the goods up to that point. On most orders, our terms of sale provide that title passes to the customer upon placement by us with a common carrier (upon shipment). In some cases we may provide for title transfer to the customer upon delivery of the goods to the customer. We determine payments made to third party sales representatives are appropriately recorded to sales and marketing expense and not a reduction of revenue. Shipping and handling costs are included in cost of goods sold. We present revenue net of sales returns and allowances, sales taxes and any similar assessments. We provided a limited warranty as part of our standard terms and conditions of sale. This warranty provides for the repair or replacement of our products, at our discretion, that we determined (i) are defective in workmanship, material, or not in compliance with the mutually agreed written applicable specification and (ii) has in fact failed under normal use on or before one year from the date of original shipment of the products. Some of our customers are provided limited warranties between three to five years, on certain limited and identified products. Warranty costs associated with returned goods that are repaired or replaced are charged to cost of goods sold.

 

During our ordinary course of business, we may enter into new product development agreements to design, customize and develop new products for our customers. Such new product development agreements often involves material cost and engineering hours and therefore non-recurring engineering service (NRE) charges are agreed upon for the customer to reimburse our related costs. We adopt the percentage-of-completion method in revenue recognition for NRE revenues by using cost-input measurement. We capitalize cost input up to the contractual agreement amount and recognize NRE revenues based upon the agreement schedule. Contracts or customer purchase orders are often used to determine the existence of service agreement.

Share-Based Compensation

 

Stock option fair value is calculated on the date of grant using the Black-Scholes valuation model. The compensation cost is then recognized on a straight-line basis over the requisite service period of the option, which is generally the option vesting term of four years. The Black-Scholes valuation model requires us to estimate key assumptions such as expected term, volatility, dividend yield and risk-free interest rates that determine the stock option fair value. In addition, we estimate forfeitures at the time of grant. As there had been no market for our common stock prior to our initial public offering, the expected volatility for options granted to date was derived from an analysis of reported data for a peer group of companies that issued options with similar terms. The expected volatility has been determined using an average of the expected volatility reported by this peer group of companies. We use a risk free interest rate based on the 10-year Treasury as reported during the period. The expected term of the options has been determined utilizing the simplified method which calculates a simple average based on vesting period and option life. We do not anticipate paying dividends in the near future. Estimated forfeitures are based on historical experience and future work force projections.

 

Long-lived assets

 

Depreciation and amortization of the intangible assets and other long-lived assets is provided using the straight-line method over their respective estimated useful lives, reflecting the pattern of economic benefits associated with these assets. Changes in circumstances such as technological advances, changes to our business model, or changes in our capital strategy could cause the actual useful lives of intangible assets or other long-lived assets to differ from initial estimates. In those cases where we determine that the useful life of an asset should be revised, we depreciate the remaining net book value over the new estimated useful life.

 

Our long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We value on an asset-by-asset basis our long-lived assets and will recognize an impairment loss when the sum of such valuation is less than the carrying amount of such assets. The values, based on reasonable and supportable assumptions and projections, require subjective judgments. Depending on the assumptions and estimates used, the values projected in the evaluation of long-lived assets can vary within a range of outcomes. We consider the likelihood of possible outcomes in determining the best estimate for the value of the assets. We did not record any asset impairment charges in 2013 or 2012.

 

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Valuation of inventories

 

Inventories are stated at the lower of cost (average-cost method) or market. Work in process and finished goods includes materials, labor and allocated overhead. We assess the valuation of our inventory on a periodic basis and provide an allowance for the value of estimated excess and obsolete inventory based on estimates of future demand. During the years ended December 31, 2013, 2012 and 2011, we recorded excess and obsolete inventory charges of $0.5 million, $0.9 million, and $1.6 million, respectively. Of the $1.6 million in inventory reserves during 2011, $1.0 million was recorded in the fourth quarter of 2011 and was associated with the application of our inventory reserve policy.

 

During 2011, we reviewed our inventory policy to determine if the existing reserve for obsolescence and loss was appropriate. The policy at the time provided reserves on a schedule that weighted inventory over a two year period, but the maximum reserve was 80% of inventory value, regardless of the age of inventory. We modified the policy to account for more distinct periods, and to fully reserve any inventory that was over two years old. The policy provides for aging of inventory as follows:

 

•Less than 360 days—10%

 

•Between 360 and 540 days—50%

 

•Between 540 and 720—80%

 

•Over 720 days—100%

 

We considered the following factors in our determination of the appropriate reserve level: how often we buy material in bulk that lasts for more than 12 months of supply; changes in material costs over a 24 month period; the overall market value of raw material, semi-finished goods and finished goods across our varied product lines and within markets; changes in expected demand for our products; the change in valuations historically; the determined safety stock for key customers; and the likelihood of postponement in delivery schedules for materials already placed in finished goods inventory.

 

Accounting for income taxes

 

We account for income taxes in accordance with the provisions of ASC 740, Income Taxes. The liability method is used to account for deferred income taxes. Under the liability method, deferred tax assets and liabilities are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The ability to realize deferred tax assets is evaluated annually and a valuation allowance is provided if it is unlikely that the deferred tax assets will not give rise to future benefits in our tax returns.

 

Recent Accounting Pronouncements

 

ASU 2011-04. In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. This ASU represents the converged guidance of the FASB and the IASB on measuring fair value and for disclosing information about fair value measurements. The amendments in this ASU clarify our board of directors’ intent about the application of existing fair value measurement and disclosure requirements and changes particular principles or requirements for measuring fair value and for disclosing information about fair value measurements. ASU 2011-04 is effective prospectively for interim and annual reporting periods beginning after December 15, 2011. We adopted the provisions of ASU 2011-04 on January 1, 2012, and the adoption of this standard did not have a material impact on our financial position, results of operations, or cash flows.

 

55
 

 

Item 8. Financial Statements and Supplementary Data

 

The information required by this item is incorporated by reference to the consolidated financial statements and accompanying notes set forth on pages F-1 through F-27 of this Annual Report on Form 10-K

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

 

Item 9A. Controls and Procedures

 

a.Evaluation of Disclosure Controls and Procedures.

 

The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

 

b.Management’s Annual Report on Internal Control Over Financial Reporting.

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2013. Based upon such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of such date.

 

c.Changes in Internal Control over Financial Reporting

 

There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) identified in connection with management’s evaluation required by the Rules 13a-15(d) and 15d-15(d) under the Exchange Act that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B. Other Information 

Not applicable. 

 

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance

 

The information required regarding our directors is incorporated herein by reference from the information contained in our definitive Proxy Statement for the 2013 Annual Meeting of Stockholders (our “Proxy Statement”), a copy of which will be filed with the Securities and Exchange Commission within 120 days after the end of our fiscal year ended December 31, 2013.

 

The information required regarding our executive officers is incorporated herein by reference from the information contained in the section entitled “Management” in our Proxy Statement.

 

The information required regarding Section 16(a) beneficial ownership reporting compliance is incorporated by reference from the information contained in our Proxy Statement.

 

The information required with respect to procedures by which security holders may recommend nominees to our board of directors, the composition of our Audit Committee, and whether the Company has an “audit committee financial expert”, is incorporated by reference from the information contained in our Proxy Statement.

 

56
 

 

Adoption of Code of Ethics

 

The Company has adopted a Code of Business Conduct and Ethics (the “Code”) applicable to all of our board of director members, employees and executive officers, including our Chief Executive Officer (Principal Executive Officer), and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer). The Company has made the Code available on our website at http://www.ao-inc.com.

 

The Company intends to satisfy the public disclosure requirements regarding (1) any amendments to the Code, or (2) any waivers under the Code given to our Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer by posting such information on our website at www.ao-inc.com .. There were no amendments to the Code or waivers granted thereunder relating to the Principal Executive Officer, Principal Financial Officer or Principal Accounting Officer during 2013.

 

Item 11. Executive Compensation

 

The information required regarding the compensation of our directors and executive officers is incorporated herein by reference from the information contained in the sections entitled “Executive Compensation,” and “Director Compensation,” “Compensation Committee Report” in our Proxy Statement.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

The information required regarding security ownership of our 5% or greater stockholders and of our directors and management is incorporated herein by reference from the information contained in the section entitled “Security Ownership of Certain Beneficial Owners and Management” in our Proxy Statement.

 

The information required regarding securities authorized for issuance our equity compensation plans is incorporated herein by reference from the information contained in the section entitled “Employee Benefit Plans” in our Proxy Statement.

 

Item 13. Certain Relationships and Related Transactions, and Director Independence

 

The information required regarding related transactions is incorporated herein by reference from the information contained in our Proxy Statement.

 

Item 14. Principal Accounting Fees and Services

 

Information required by Part III, Item 14, will be included in our Proxy Statement relating to our 2013 annual meeting of stockholders to be filed with the Securities and Exchange Commission within 120 days after the end of our fiscal year ended December 31, 2013, and is incorporated herein by reference.

  

Part IV

 

Item 15. Exhibits, Financial Statements Schedules

 

(a) Exhibits.

 

See the Exhibit Index which follows the signature page of this Annual Report on Form 10-K, which is incorporated herein by reference.

 

(b) Financial Statement Schedules.

 

Financial statement schedules have been omitted, as the information required to be set forth therein is included in the Consolidated Financial Statements or Notes thereto appearing in this Annual Report on Form 10-K.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, on March 6, 2014.

 

  APPLIED OPTOELECTRONICS, INC.
   
  By:

/s/ Chih-Hsiang (Thompson) Lin

Chih-Hsiang (Thompson) Lin,
President and Chief Executive Officer and
Chairman of the Board of Directors

 

March 6, 2014

 

POWER OF ATTORNEY

 

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Chih-Hsiang (Thompson) Lin and James L. Dunn, Jr., and each of them, jointly and severally, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.

 

Pursuant to the requirements of the Securities Act of 1933, this Form 10-K has been signed by the following persons in the capacities and on the dates indicated.

 

Signature Date
   
   

/s/ Chih-Hsiang (Thompson) Lin

Chih-Hsiang (Thompson) Lin,

President, Chief Executive Officer and and
Chairman of the Board of Directors

(principal executive officer)

 March 6, 2014
   
   

/s/ James L. Dunn, Jr.

James L. Dunn, Jr.,

Chief Financial Officer

(principal financial officer and

principal accounting officer)

 March 6, 2014
   
   

 

58
 

 

 

Signature Date
   
   

/s/ William H. Yeh

William H. Yeh,

Director

 March 6, 2014
   
   

/s/ Richard B. Black

Richard B. Black,

Director

 March 6, 2014
   
   

/s/ Che-Wei Lin

Che-Wei Lin,

Director

 March 6, 2014
   
   

/s/ Alex Ignatiev

Alex Ignatiev,

Director

 March 6, 2014
   
   

/s/ Alan Moore

Alan Moore,

Director

 March 6, 2014
   
   

/s/ Min-Chu (Mike) Chen

Min-Chu (Mike) Chen,

Director

 March 6, 2014
   
   

  
     

 

 

 

59
 

 

EXHIBIT INDEX

 
 

Incorporated by Reference

Number

Exhibit Description

Form

File No.

Exhibit

Filing Date

             
3.1   Amended and Restated Certificate of Incorporation of the registrant, as currently in effect 10-Q 001-36083 3.1 November 14, 2013
             
3.2   Amended and Restated Bylaws of the registrant, as currently in effect 10-Q 001-36083 3.2 November 14, 2013
             
4.1   Form of Registration Rights Agreement S-1 333-190591 4.1 August 13, 2013
             
4.2   Form of Shareholders’ Agreement S-1 333-190591 4.2 August 13, 2013
             
10.1   Form of Indemnification Agreement between the registrant each of its Directors and certain of its Executive Officers S-1 333-190591 10.1 August 13, 2013
             
10.2 † 1998 Incentive Share Plan S-1 333-190591 10.2 August 13, 2013
             
10.2.1 † Form of Stock Option Agreement under 1998 Incentive Share Plan S-1 333-190591 10.2.1 August 13, 2013
             
10.2.2 † Form of Stock Option Agreement under 1998 Incentive Share Plan S-1 333-190591 10.2.2 August 13, 2013
             
10.3 † 2000 Incentive Share Plan S-1 333-190591 10.3 August 13, 2013
             
10.3.1 † Form of Stock Option Agreement under 2000 Incentive Share Plan S-1 333-190591 10.3.1 August 13, 2013
             
10.3.2 † Form of Stock Option Agreement under 2000 Incentive Share Plan S-1 333-190591 10.3.2 August 13, 2013
             
10.4 † 2004 Incentive Share Plan S-1 333-190591 10.4 August 13, 2013
             
10.4.1 † Form of Stock Option Agreement under 2004 Incentive Share Plan S-1 333-190591 10.4.1 August 13, 2013
             
10.5 † 2006 Incentive Share Plan S-1 333-190591 10.5 August 13, 2013
             
10.5.1 † First Amendment to 2006 Incentive Share Plan S-1/A 333-190591 10.5.1 August 27, 2013
             
10.5.2 † Form of Stock Option Agreement under 2006 Incentive Share Plan S-1/A 333-190591 10.5.2 August 27, 2013
             
10.6 † 2013 Equity Incentive Plan 10-Q 001-36083 10.1 November 14, 2013
             
10.6.1 † Form of Restricted Stock Award Agreement under 2013 Equity Incentive Plan S-1 333-190591 10.6.1 August 13, 2013

 

60
 

 

 
 

Incorporated by Reference

Number

Exhibit Description

Form

File No.

Exhibit

Filing Date

             
10.6.2 † Form of Restricted Stock Unit Award Agreement under 2013 Equity Incentive Plan S-1 333-190591 10.6.2 August 13, 2013
             
10.6.3 † Form of Stock Appreciation Right Award Agreement under 2013 Equity Incentive Plan S-1 333-190591 10.6.3 August 13, 2013
             
10.6.4 † Form of Notice of Stock Option Award and Stock Option Award Agreement under 2013 Equity Incentive Plan S-1 333-190591 10.6.4 August 13, 2013
             
10.7   Lease Agreement effective May 1, 2012 between the registrant and 12808 W. Airport, LLC S-1 333-190591 10.7 August 13, 2013
             
10.7.1   First Amendment to Lease Agreement effective June 15, 2012 between the registrant and 12808 W. Airport, LLC S-1 333-190591 10.7.1 August 13, 2013
             
10.8   Translation of Chinese lease agreement dated January 10, 2012 between the registrant and Admiral Overseas Corporation for space on 4F, NO.700, Jhongjheng Rd., Jhonghe District, New Taipei City 23552, Taiwan (R.O.C.) S-1 333-190591 10.8 August 13, 2013
             
10.8.1   Translation of Chinese Amendment to Office Lease Agreement dated August 28, 2013 between the registrant and Admiral Overseas Corporation for space on 4F, No.700, Jhongjheng Rd., Jhonghe District, New Taipei City 23552, Taiwan (R.O.C.) 10-Q 001-36083 10.3 November 14, 2013
             
10.9   Translation of Chinese lease agreement dated April 1, 2012 between the registrant and Admiral Overseas Corporation for space on 6-7F, NO.700, Jhongjheng Rd., Jhonghe District, New Taipei City 23552, Taiwan (R.O.C.) S-1 333-190591 10.9 August 13, 2013
             
10.9.1   Translation of Chinese Amendment to Office Lease Agreement dated August 28, 2013 between the registrant and Admiral Overseas Corporation for space on 6-7F, No.700, Jhongjheng Rd., Jhonghe District, New Taipei City 23552, Taiwan (R.O.C.) 10-Q 001-36083 10.3 November 14, 2013

 

 

61
 

 

 
 

Incorporated by Reference

Number

Exhibit Description

Form

File No.

Exhibit

Filing Date

             
10.10   Translation of Chinese lease agreement dated September 11, 2013 between the registrant and Admiral Overseas Corporation for space on 5F, No.700, Jhongjheng Rd., Jhonghe District, New Taipei City 23552, Taiwan (R.O.C.) 10-Q 001-36083 10.3 November 14, 2013
             
10.11   Amended and Restated Loan and Security Agreement effective May 20, 2009 between registrant and United Commercial Bank S-1 333-190591 10.10 August 13, 2013
             
10.11.1   First Amendment to Amended and Restated Loan and Security Agreement effective May 3, 2010 between the registrant and East West Bank (as successor in interest to United Commercial Bank) S-1 333-190591 10.10.1 August 13, 2013
             
10.11.2   Second Amendment to Amended and Restated Loan and Security Agreement effective October 28, 2010 between the registrant and East West Bank S-1 333-190591 10.10.2 August 13, 2013
             
10.11.3   Third Amendment to Amended and Restated Loan and Security Agreement effective December 6, 2010 between the registrant and East West Bank S-1 333-190591 10.10.3 August 13, 2013
             
10.11.4   Fourth Amendment to Amended and Restated Loan and Security Agreement effective May 5, 2011 between the registrant and East West Bank S-1 333-190591 10.10.4 August 13, 2013
             
10.11.5   Fifth Amendment to Amended and Restated Loan and Security Agreement effective November 30, 2011 between the registrant and East West Bank S-1 333-190591 10.10.5 August 13, 2013
             
10.11.6   Sixth Amendment to Amended and Restated Loan and Security Agreement effective March 29, 2012 between the registrant and East West Bank S-1 333-190591 10.10.6 August 13, 2013
             
10.11.7   Seventh Amendment to Amended and Restated Loan and Security Agreement effective June 29, 2012 between the registrant and East West Bank S-1 333-190591 10.10.7 August 13, 2013

 

62
 

 

 
 

Incorporated by Reference

Number

Exhibit Description

Form

File No.

Exhibit

Filing Date

             
10.11.8   Eighth Amendment to Amended and Restated Loan and Security Agreement effective November 2, 2012 between the registrant and East West Bank S-1 333-190591 10.10.8 August 13, 2013
             
10.11.9   Ninth Amendment to Amended and Restated Loan and Security Agreement effective April 11, 2013 between the registrant and East West Bank S-1 333-190591 10.10.9 August 13, 2013
             
10.11.10   Tenth Amendment to Amended and Restated Loan and Security Agreement effective September 10, 2013 between the registrant and East West Bank S-1/A 333-190591 10.10.10 September 11, 2013
             
10.11.11   Eleventh Amendment to Amended and Restated Loan and Security Agreement effective November 13, 2013 between the registrant and East West Bank 8-K 001-36083 10.1 November 19, 2013
             
10.11.12   Twelfth Amendment to Amended and Restated Loan and Security Agreement effective December 11, 2013 between the registrant and East West Bank 8-K 001-36083 10.1 December 17, 2013
             
10.11.13 * Translation of Chinese form of RMB Working Capital Loan Agreement between the Global Technology Inc. and China Construction Bank        
             
10.12 * Translation of Chinese form of USD Trust Receipt Loan Agreement between Global Technology Inc. and China Construction Bank        
             
10.13 * Translation of Chinese Loan Agreement dated December 31, 2013 between the registrant and E. Sun Commercial Bank Co., Ltd.        
             
10.14 * Translation of Chinese Loan Agreement dated December 20, 2013 between the registrant and Mega International Commercial Bank Co., Ltd.        

 

63
 

 

 
 

Incorporated by Reference

Number

Exhibit Description

Form

File No.

Exhibit

Filing Date

             
10.15 † Employment Agreement regarding Change of Control or Separation of Service between the registrant and Chih-Hsiang (Thompson) Lin, dated January 28, 2007 S-1 333-190591 10.12 August 13, 2013
             
10.15.1 † Amended and Restated Employment Agreement regarding Change of Control or Separation of Service between the registrant and Chih-Hsiang (Thompson) Lin, dated April 16, 2013 S-1 333-190591 10.12.1 August 13, 2013
             
10.15 † Employment Agreement regarding Change of Control or Separation of Service between the registrant and Stefan J. Murry, dated January 28, 2007 S-1 333-190591 10.13 August 13, 2013
             
10.16 † Employment Agreement regarding Change of Control or Separation of Service between the registrant and Shu-Hua (Joshua) Yeh, dated June 1, 2012 S-1 333-190591 10.14 August 13, 2013
             
10.17 † Employment Agreement between the registrant and James L. Dunn, Jr., dated April 16, 2013 S-1 333-190591 10.15 August 13, 2013
             
10.18 † Employment Agreement between the registrant and Hung-Lun (Fred) Chang, dated April 16, 2013 S-1 333-190591 10.16 August 13, 2013
             
21.1   Subsidiaries of the registrant S-1 333-190591 21.1 August 13, 2013
             
23.1 * Consent of Grant Thornton LLP        
             
23.3 * Consent of Ovum Limited        
             
24.1   Power of Attorney (see page 59 to this Annual Report on Form 10-K).        
             
31.1 * Certification of Principal Executive Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.        
             
31.2 * Certification of Principal Financial Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.        
             
32.1 * Certification of Principal Executive Officer and Principal Financial Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. §1350 as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.        
*Filed herewith.
**XBRL(Extensible Business Reporting Language) information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934, and is not subject to liability under those sections, is not part of any registration statement or prospectus to which it relates and is not incorporated or deemed to be incorporated by reference into any registration statement, prospectus or other document.
†Management contract, compensatory plan or arrangement.

 

64
 

 

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

Pages

   
Report of Independent Registered Public Accounting Firm F-2
   
Consolidated Balance Sheets F-3
   
Consolidated Statements of Operations F-4
   
Consolidated Statements of Comprehensive Loss F-5
   
Consolidated Statements of Stockholders’ Equity (Deficit) F-5
   
Consolidated Statements of Cash Flows F-7
   
Notes to Consolidated Financial Statements F-8

 

 

 

 

F-1
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 


Board of Directors and Stockholders

Applied Optoelectronics, Inc.

We have audited the accompanying consolidated balance sheets of Applied Optoelectronics, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive loss, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2013. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these 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 standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our 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 Applied Optoelectronics, Inc. and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America.

/s/ GRANT THORNTON LLP

Houston, Texas

March 6, 2014

 

 

F-2
 

 

Applied Optoelectronics, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

 

   December 31, 
   2013   2012 
ASSETS          
Current Assets          
Cash and cash equivalents  $22,006   $10,723 
Restricted cash   775    503 
Short-term investments   7,970    – 
Accounts receivable - trade, net of allowance of $42, $59 and $61, respectively   22,089    13,525 
Bank acceptance receivable   –    1,034 
Inventories   19,608    12,493 
Prepaid expenses and other current assets   5,488    968 
Total current assets   77,936    39,246 
Property, plant and equipment, net of accumulated depreciation of $28,145, $24,967 and $22,556, respectively   31,134    24,838 
Land use rights, net   959    674 
Intangible assets, net   851    795 
Other assets, net   177    195 
TOTAL ASSETS  $111,057   $65,748 
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current liabilities          
Current portion of notes payable and long-term debt  $17,185   $13,900 
Accounts payable   15,010    6,913 
Bank acceptance payable   2,347    1,521 
Accrued liabilities   4,515    3,243 
Total current liabilities   39,057    25,577 
Notes payable and long-term debt, less current portion   8,923    9,163 
TOTAL LIABILITIES   47,980    34,740 
Stockholders' equity (deficit):          
Redeemable Convertible Preferred Stock and Convertible Preferred Stock; 5,000 shares authorized; no shares issued and outstanding at December 31, 2013, $0.001 par value; 172,200 shares authorized; 5,547 shares issued and outstanding at December 31, 2012, no par value   –    105,367 
Common Stock; 45,000 shares authorized; 12,644 shares issued and outstanding at December 31, 2013, $0.001 par value; 300,000 shares authorized; 266 shares issued and outstanding at December 31, 2012 , no par value   13    1,074 
Additional paid-in capital   144,023    4,468 
Accumulated other comprehensive gain   2,364    2,016 
Accumulated deficit   (83,323)   (81,917)
TOTAL STOCKHOLDERS' EQUITY   63,077    31,008 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY  $111,057   $65,748 

 

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

 

F-3
 

 

Applied Optoelectronics, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

 

   Year ended December 31, 
   2013   2012   2011 
Revenue, net  $78,424   $63,421   $47,840 
Cost of goods sold   55,396    44,492    34,468 
Gross profit   23,028    18,929    13,372 
Operating expenses               
Research and development   8,512    7,603    6,451 
Sales and marketing   4,191    3,135    2,412 
General and administrative   10,632    8,012    8,243 
Total operating expenses   23,335    18,750    17,106 
Income (loss) from operations   (307)   179    (3,734)
Other income (expense)               
Interest expense   (1,125)   (1,381)   (1,338)
Other income (expense), net   26    257    (256)
Total other expense   (1,099)   (1,124)   (1,594)
Loss before income taxes   (1,406)   (945)   (5,328)
Income taxes   –    –    – 
Net loss  $(1,406)  $(945)  $(5,328)
                
Net loss per share—basic and diluted, as revised  $(0.14)  $(3.56)  $(20.21)
Weighted average shares used to compute net loss per share, as revised:               
Basic and diluted   9,964,955    265,576    263,658 

 

 

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

 

 

F-4
 

 

Applied Optoelectronics, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

 

   Year ended December 31, 
   2013   2012   2011 
Net loss  $(1,406)  $(945)  $(5,328)
Foreign currency translation adjustment, net of tax of $0, $0 and $0   348    44   434 
Comprehensive loss  $(1,058)  $(901)  $(4,894)

 

 

 

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

 

 

 

 

 

F-5
 

Applied Optoelectronics, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

Years ended December 2011, 2012 and 2013

(in thousands)

 

   Preferred Stock   Common Stock                 
   Number of shares   Amount   Number of shares   Amount   Additional paid-in capital   Accumulated deficit   Accumulated other comprehensive gain   Stockholders' equity 
December 31, 2010   4,118   $90,424    261   $1,052   $3,671   $(75,644)  $1,538   $21,041 
Preferred stock issued, net   223    3,949    –    –    –    –    –    3,949 
Issuance of stock for consultancy service   –    –    1    1    –    –    –    1 
Stock options exercised   –    –    3    16    –    –    –    16 
Stock based compensation   –    –    –    –    563    –    –    563 
Net loss   –    –    –    –    –    (5,328)   –    (5,328)
Foreign currency translation adjustment   –    –    –    –    –    –    434    434 
December 31, 2011   4,341   $94,373    265   $1,069   $4,234   $(80,972)  $1,972   $20,676 
Preferred stock issued, net   1,206    10,994    –    –    –    –    –    10,994 
Stock options exercised   –    –    1    5    –    –    –    5 
Stock based compensation   –    –    –    –    161    –    –    161 
Issuance of warrants   –    –    –    –    73    –    –    73 
Net loss   –    –    –    –    –    (945)   –    (945)
Foreign currency translation adjustment   –    –    –    –    –    –    44    44 
December 31, 2012   5,547   $105,367    266   $1,074   $4,468   $(81,917)  $2,016   $31,008 
Public offering of common stock, net   –    –    3,600    3    31,445    –    –    31,448 
Convert preferred stock common stock upon public offering   (5,601)   (105,801)   8,739    (1,211)   107,012    –    –    – 
Stock options exercised   –    –    29    87    86    –    –    173 
Warrants exercised   54    434    10    60    –    –    –    494 
Stock based compensation   –    –    –    –    1,012    –    –    1,012 
Net loss   –    –    –    –    –    (1,406)   –    (1,406)
Foreign currency translation adjustment   –    –    –    –    –    –    348    348 
December 31, 2013   –   $–    12,644   $13   $144,023   $(83,323)  $2,364   $63,077 

 

 

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

 

F-6
 

Applied Optoelectronics, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

   Year ended December 31, 
   2013   2012   2011 
Operating activities:               
Net loss  $(1,406)  $(945)  $(5,328)
Adjustments to reconcile net loss to net cash used in operating activities:               
Provision for obsolete inventory   492    858    1,579 
Depreciation and amortization   3,407    2,942    3,112 
Loss on disposal of assets   1    36    80 
Share-based compensation and warrant expense   1,069    161    563 
Changes in operating assets and liabilities:               
Accounts receivable   (8,457)   (1,158)   (4,498)
Bank acceptance receivable   1,036    (1,034)   – 
Inventory   (7,520)   (538)   (1,578)
Other current assets   (4,622)   (261)   473 
Accounts payable   8,079    (961)   1,534 
Accrued liabilities   1,369    542    (62)
Net cash used in operating activities   (6,552)   (358)   (4,125)
Investing activities:               
Purchase of short-term investments   (7,970)   –    – 
Purchase of property, plant and equipment   (9,600)   (3,178)   (1,790)
Proceeds from disposal of equipment   –    138    387 
Deposits and deferred charges   (43)   (41)   (1)
Purchase of intangible assets   (123)   (209)   (167)
Net cash used in investing activities   (17,736)   (3,290)   (1,571)
Financing activities:               
Proceeds from issuance of notes payable and long-term debt   2,851    845    – 
Principal payments of long-term debt and notes payable   (285)   (707)   (245)
Proceeds from line of credit borrowings   23,192    15,560    16,098 
Repayments of line of credit borrowings   (23,008)   (13,692)   (15,200)
Proceeds from bank acceptance payable   6,778    3,746    662 
Repayments of bank acceptance payable   (6,026)   (2,894)   – 
Repayments of shareholder loans   –    (150)   (1,200)
Increase in restricted cash   (249)   (193)   (155)
Exercise of stock options   173    5    16 
Exercise of warrants   494    –    – 
Common stock issued for consultant services   –    –    1 
Proceeds from initial public offering, net   31,448    –    – 
Issuance of preferred stock, net   –    10,234    2,859 
Net cash provided by financing activities   35,368    12,754    2,836 
Effect of exchange rate changes on cash   203    (150)   136 
Net increase (decrease) in cash   11,283    8,956    (2,724)
Cash and cash equivalents at beginning of year   10,723    1,767    4,492 
Cash and cash equivalents at end of year  $22,006   $10,723   $1,768 
Supplemental disclosure of cash flow information:               
Cash paid for:               
Interest   1,133    1,469    1,392 
Income taxes   1    –    1 
Conversion of shareholders' loan to preferred stock   –    760    1,100 

 

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

 

F-7
 

 

Applied Optoelectronics, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE A—ORGANIZATION AND OPERATIONS

 

Applied Optoelectronics, Inc. (“AOI” or the “Company”) was incorporated in the State of Texas on February 28, 1997. The Company is a leading, vertically integrated provider of fiber-optic networking products, primarily for three networking end-markets: cable television, fiber-to-the-home and internet data centers. The Company designs and manufactures a range of optical communications products at varying levels of integration, from components, subassemblies and modules to complete turn-key equipment.

 

Prime World International Holdings, Ltd. (“Prime World”) is a wholly-owned subsidiary of the Company incorporated in the British Virgin Islands on January 13, 2006. Prime World is the parent company of Global Technology, Inc. (“Global”). Global was established in June 2002 in the People’s Republic of China (“PRC”) and was acquired by Prime World on March 30, 2006. The Company also operates a division, AOI—Taiwan, which is qualified to do business in Taiwan and primarily manufactures transceivers and performs research and development activities.

 

NOTE B—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

1.Basis of Presentation

 

The consolidated financial statements include the accounts of the Company and all of its wholly-owned subsidiaries and are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). All intercompany balances and transactions have been eliminated in consolidation.

 

2.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 relate to, among other things, allowance for doubtful accounts, inventory reserve, share-based compensation expense, estimated useful lives of property and equipment, and taxes.

 

3.Foreign Currency Translation

 

All assets and liabilities of foreign subsidiaries are translated into U.S. dollars at the exchange rate as of the balance sheet date. Revenue and expense accounts are translated at weighted-average rates for the reporting period. Translation adjustments do not impact the results of operations and are reported as a separate component of stockholders’ equity. Foreign currency transaction gains and losses are included in the consolidated statements of operations.

 

4.Fair Value

 

The carrying value of cash, cash equivalents and short-term investments, accounts receivable, accounts payable, and note receivable approximate their historical fair values due to their short-term maturities. The carrying value of the debt approximates its fair value due to the short-term nature of the debt since it renews frequently at current interest rates. Management believes that the interest rates in effect at each year end represent the current market rates for similar borrowings.

 

F-8
 

 

5.Cash and Cash Equivalents

 

The Company considers all highly liquid securities with an original maturity of ninety days or less from the date of purchase to be cash equivalents. Cash in foreign accounts was approximately $6.6 million and $1.1 million at December 31, 2013 and 2012, respectively.

 

The Company maintains cash and cash equivalents at U.S. financial institutions for which the combined account balances in individual institutions may exceed Federal Deposit Insurance Corporation (“FDIC”) insurance coverage and, as a result, there is a concentration of credit risk related to amounts on deposit in excess of FDIC insurance coverage. As of December 31, 2013, approximately $16.0 million of U.S. deposits were not covered by FDIC insurance. The Company has not experienced any losses and believes it is not exposed to any significant risk with such accounts.

 

6.Restricted Cash/Compensating Balances

 

The Company is required to maintain a compensation deposit equal to 30% of its bank acceptance notes to vendors with a China bank. The Company’s Taiwan subsidiary also uses time deposits for customs guarantee. As of December 31, 2013 and 2012, the amount of restricted cash was $0.8 million and $0.5 million, respectively.

 

7.Short-Term Investments

 

The Company invests its excess cash in bank certificates of deposit. As of December 31, 2013, the Company invested $8.0 million in certificates of deposit in RMB currencies with Taiwan banks. The maturity dates range from 6 months to 12 months.

 

The Company arranged a revolving line of credit agreement with the same Taiwan bank by pledging 100% of its certificates of deposit. As of December 31, 2013, the pledged certificate of deposit for such arrangement amount is $4.0 million.

 

8.Accounts Receivable/Allowance for Doubtful Accounts

 

The Company carries its accounts receivable at the net amount that it estimates to be collectible. An allowance for uncollectable accounts is maintained through a charge against operations. The allowance is determined by management review of outstanding amounts per customer, historical payments and the aging of accounts.

 

9.Bank Acceptance Receivable

 

The Company carries its bank acceptance receivables at face value or discounted value if they are not interest bearing. The maturity date of the receivables are all within one year of the original issuance date and are carried at face value.

 

10.Concentration of Credit Risk and Significant Customers

 

Financial instruments which potentially subject the Company to concentrations of credit risk include cash, cash equivalents and accounts receivable. The Company places all cash and cash equivalents with high-credit quality financial institutions.

 

The Company performs ongoing credit valuations of its customers’ financial condition whenever deemed necessary and generally does not require deposits or collateral to support customer receivables. The historical amount of losses on uncollectible accounts has been within the Company’s estimates. The Company generates much of its revenue from a limited number of customers. In 2013, 2012 and 2011, its top ten customers represented 76.9%, 77.6% and 76.6% of its revenue, respectively. In 2013, Cisco Systems, Inc. represented 21.8% of its revenue, Amazon represented 18.2% of its revenue and Biogenomics Corp., a distributor, represented 8.7% of its total revenue. The five largest receivable balances for customers represented an aggregate of 66%, and 58% of total accounts receivable at December 31, 2013 and 2012, respectively.

 

F-9
 

 

11.Fair Value Accounting

 

The fair value measurement standard defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard characterizes inputs used in determining fair value according to a hierarchy that prioritized inputs based on the degree to which they are observable. The three levels of the fair value hierarchy are as follows:

 

Level 1—Inputs represent quoted prices in active markets for identical assets or liabilities.

 

Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

 

Level 3—Inputs that are not observable from objective sources, such as management’s internally developed assumptions used in pricing an asset or liability.

 

Assets and liabilities that are required to be fair valued on a recurring basis include money market funds, marketable securities, equity instruments and contingent consideration.

 

Money market funds are valued with Level 1 inputs, using quoted market prices, and are included in cash and cash equivalents on the Company’s consolidated balance sheets.

 

12.Inventories

 

Inventories are stated at the lower of cost (average-cost method) or market. Work in process and finished goods includes materials, labor and allocated overhead. The Company assesses the valuation of its inventory on a periodic basis and provides write-offs for the value of estimated excess and obsolete inventory based on estimates of future demand.

 

13.Property, Plant and Equipment

 

Property, plant and equipment are stated at cost, net of accumulated depreciation and amortization. The Company calculates depreciation using the straight-line method over the following estimated useful lives:

 

 

Useful lives

   
Buildings 20 - 40 years
   
Land improvements 10 years
   
Machinery and equipment 3 - 20 years
   
Furniture and fixtures 1 - 8 years
   
Computer equipment and software 3 - 7 years
   
Leasehold improvements The shorter of the life of the applicable lease or the useful life of the improvement
   
Transportation equipment 5 years

 

F-10
 

 

Major improvements are capitalized and expenditures for maintenance and repairs are expensed as incurred. Construction in progress represents property, plant and equipment under construction or being installed. Costs include original cost, installation, construction and other direct costs which include interest on borrowings used to finance the asset. Construction in progress is transferred to the appropriate fixed asset account and depreciation commences when the asset has been substantially completed and placed in service.

 

Land use rights allow the Company rights for 50 years to certain land in Ningbo, China on which the Company built a facility that included office space, manufacturing operations and employee dormitories. The land use rights are recorded at cost and are amortized on the straight-line basis over the useful life of the related contract. The land use rights expire on October 7, 2054.

 

14.Intangible Assets

 

Intangible assets consist of intellectual property that is stated at cost less accumulated amortization. As of December 31, 2013, the Company had 113 total patents issued. The costs incurred to obtain such patents have been capitalized and are being amortized over an estimated life of 20 years. The Company periodically evaluates its intangible assets to determine whether events or changes in circumstances indicate that a patent or trademark may not be applicable to the Company’s current products or is no longer in use. If such a determination is made, the intangible asset is impaired and the remaining value of the patent or trademark will be expensed at that time.

 

15.Impairment of Long-Lived Assets

 

The Company accounts for impairment of long-lived assets in accordance with Accounting Standards Codification (“ASC”) 360, Property, Plant and Equipment, (“ASC 360”). Long-lived assets consist primarily of property, plant and equipment. In accordance with ASC 360, the Company periodically evaluates long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When triggering event indicators are present, the Company obtains appraisals on an asset by asset basis, and will recognize an impairment loss when the sum of the appraised values is less than the carrying amounts of such assets. The appraised values, based on reasonable and supportable assumptions and projections, require subjective judgments. Depending on the assumptions and estimates used, the appraised values projected in the evaluation of long-lived assets can vary within a range of outcomes. The appraisals consider the likelihood of possible outcomes in determining the best estimate for the value of the assets.

 

The measurement for such an impairment loss is then based on the fair value of the asset as determined by the appraisals.

 

16.Comprehensive Income (Loss)

 

ASC 220, Comprehensive Income, (“ASC 220”) establishes rules for reporting and display of comprehensive income and its components. ASC 220 requires that unrealized gains and losses on the Company’s foreign currency translation adjustments be included in comprehensive income.

 

17.Share-based Compensation

 

The Company accounts for share-based compensation in accordance with the provisions of ASC 718, Compensation—Stock Compensation. Share-based compensation expense is recognized based on the estimated grant date fair value, net of an estimated forfeiture rate, in order to recognize compensation cost for those shares expected to vest. Compensation cost is recognized on a straight-line basis over the vesting period of the options.

 

F-11
 

 

18.Revenue Recognition

 

The Company derives revenue from the manufacture and sale of fiber optic networking products. Revenue recognition follows the criteria of ASC 605, Revenue Recognition. Specifically, the Company recognizes revenue when persuasive evidence exists of an arrangement with a customer, usually in the form of a customer purchase order; delivery to a third party carrier has occurred; title and risk of loss have transferred to the customer; the price is fixed or determinable; collectability is reasonably assured and there are no uncertainties with respect to customer acceptance. The Company may offer units (samples) to current and potential customers at no charge for evaluation or qualification purposes. Such sample units are expensed as selling or research and development costs when shipped.

 

19.Advertising Costs

 

Advertising costs are charged to operations as incurred and amounted to approximately $121,000, $80,000 and $104,000 for the years ended December 31, 2013, 2012 and 2011, respectively.

 

20.Research and Development

 

Research and development costs are charged to operations as incurred. The Company receives reimbursement for certain development costs, which are capitalized when incurred, up to the reimbursable amount.

 

21.Income Taxes

 

The Company accounts for income taxes in accordance with the provisions of ASC 740, Income Taxes. The liability method is used to account for deferred income taxes. Under the liability method, deferred tax assets and liabilities are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The realizability of deferred tax assets are evaluated annually and a valuation allowance is provided if it is unlikely that the deferred tax assets will not give rise to future benefits in the Company’s tax returns.

 

Uncertain tax provisions are recorded at their net recognizable amount, based on the amount of tax, interest and penalties that management deems is more likely than not to be sustained upon settlement with the tax authorities in the domestic and international jurisdictions in which the Company operates. The Company records tax-related interest and penalties as a component of income tax expense.

 

22.Supplemental Cash Flow Information

 

During the years ended December 31, 2012 and 2011, $0.8 million and $1.1 million in aggregate principal amount of the convertible shareholder notes was converted by the holders, respectively. Upon conversion, 72,381 shares and 60,556 shares of Series G Preferred Stock were issued to the holders, respectively.

 

23.New Accounting Standards Adopted in this Report

 

ASU 2011-04. In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. This ASU represents the converged guidance of the FASB and the IASB on measuring fair value and for disclosing information about fair value measurements. The amendments in this ASU clarify the board of directors’ intent about the application of existing fair value measurement and disclosure requirements and changes particular principles or requirements for measuring fair value and for disclosing information about fair value measurements. ASU 2011-04 is effective prospectively for interim and annual reporting periods beginning after December 15, 2011. The Company adopted the provisions of ASU 2011-04 on January 1, 2012, and the adoption of this standard did not have a material impact on the Company’s financial position, results of operations or cash flows.

 

F-12
 

 

24.Reverse Stock Split

 

On May 1, 2013, the Company’s board of directors approved, and holders of the requisite number of outstanding shares of our capital stock approved on May 21, 2013, an amendment to our certificate of incorporation to effect a reverse stock split with respect to our securities. Based on the prior board and stockholder approvals, on August 16, 2013 the Company’s board of directors determined that the ratio for the reverse stock split would be 30-to-one. The reverse stock split was effected on August 20, 2013, the date that the amendment to our certificate of incorporation was filed with the Delaware Secretary of State. The reverse stock split is reflected in the accompanying consolidated financial statements and related notes on a retroactive basis for all periods presented.

 

NOTE C—EARNINGS PER SHARE

 

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

 

The following table presents the calculation of basic and diluted EPS:

 

   Year ended December 31, 
   2013   2012   2011 
   (in thousands, except per share data) 
Numerator:               
Net loss  $(1,406)  $(945)  $(5,328)
Denominator:               
Weighted average shares used to compute net loss per share               
Basic and diluted   9,965    266    264 
Net loss per share               
Basic and diluted  $(0.14)  $(3.56)  $(20.21)

 

The following potentially dilutive securities were excluded from the computation of diluted net loss per share as their effect would have been antidilutive:

 

   2013   2012   2011 
       (in thousands)     
Employee stock options   595    419    377 
Preferred stock warrants   33    96    122 
Restricted stock units   33    –    – 
    661    515    499 

 

F-13
 

 

NOTE D—INVENTORIES

 

At December 31, 2013 and 2012, inventories consisted of the following:

 

   2013   2012 
   (in thousands) 
Raw materials  $8,832   $4,755 
Work in process   8,708    4,434 
Finished goods   2,068    3,304 
   $19,608   $12,493 

 

For the years ended December 31, 2013, 2012 and 2011, the lower of cost or market adjustment expensed for inventory was $0.5 million, $0.9 million and $1.6 million, respectively.

 

NOTE E—PROPERTY, PLANT AND EQUIPMENT

 

At December 31, 2013 and 2012, property, plant and equipment consisted of the following:

 

   2013   2012 
   (in thousands) 
Land improvements  $103   $93 
Building and improvements   16,016    15,239 
Machinery and equipment   37,490    29,977 
Furniture and fixtures   1,047    739 
Computer equipment and software   3,563    2,851 
Transportation equipment   188    173 
    58,407    49,072 
Less accumulated depreciation and amortization   (28,145)   (24,967)
    30,262    24,105 
Construction in progress   139    – 
Land   733    733 
Property, plant and equipment, net  $31,134   $24,838 

 

For the years ended December 31, 2013, 2012 and 2011, depreciation expense of property, plant and equipment was $3.3 million $2.9 million and $3.1 million, respectively.

 

NOTE F—INTANGIBLE ASSETS

 

At December 31, 2013 and 2012, intangible assets consisted of the following:

 

   2013 
   Gross Amount   Accumulated amortization   Intangible assets, net 
   (in thousands) 
Patents  $1,632   $(784)  $848 
Trademarks   10    (7)   3 
Total tangible assets   1,642    (791)   851 

 

   2012 
   Gross Amount   Accumulated amortization   Intangible assets, net 
   (in thousands) 
Patents  $1,509   $(718)  $791 
Trademarks   10    (6)   4 
Total tangible assets   1,519    (724)   795 

 

F-14
 

 

For the years ended December 31, 2013, 2012 and 2011, amortization expense for intangible assets, included in general and administrative expenses on the income statement, was $68,000 $60,000 and $46,000, respectively. The remaining weighted average amortization period for intangible assets is approximately 12 years.

 

At December 31, 2013, approximate amortization expense for intangible assets was as follows (in thousands):

 

2014  $68 
2015   68 
2016   68 
2017   68 
2018   68 
Thereafter   511 
   $851 

 

NOTE G—FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The following table presents a summary of the Company’s financial instruments measured at fair value on a recurring basis as of December 31, 2013 (in thousands):

 

   Quoted prices in active markets for identical assets (Level 1)   Significant other observable remaining inputs (Level 2)   Significant unobservable inputs (Level 3)   Total 
Assets:                    
Cash and cash equivalents  $22,006   $–   $–   $22,006 
Restricted cash   775    –    –    775 
Short term investments   7,970    –    –    7,970 
Total assets  $30,751   $–   $–   $30,751 
Liabilities:                    
Bank acceptance payable      $2,347        $2,347 
Total liabilities  $–   $2,347   $–   $2,347 

 

The following table presents a summary of the Company’s financial instruments measured at fair value on a recurring basis as of December 31, 2012 (in thousands):

 

   Quoted prices in active markets for identical assets (Level 1)   Significant other observable remaining inputs (Level 2)   Significant unobservable inputs (Level 3)   Total 
Assets:                    
Cash and cash equivalents  $10,723   $–   $–   $10,723 
Restricted cash   503    –    –    503 
Bank acceptance receivable   –    1,034    –    1,034 
Total assets  $11,226   $1,034   $–   $12,260 
Liabilities:                    
Interest rate swap  $–   $11   $–   $11 
Bank acceptance payable   –    1,521    –    1,521 
Total liabilities  $–   $1,532   $–   $1,532 
                     

 

F-15
 

 

NOTE H—NOTES PAYABLE AND LONG-TERM DEBT

 

Notes payable and long-term debt consisted of the following:

 

   December 31, 2013 
   2013   2012 
   (in thousands) 
Term loan with a U.S. bank with monthly payments of principal and interest at prime plus 1.125% (floor rate: 4.375%), maturing May 3, 2014  $–   $141 
Term loan with a U.S. bank with monthly payments of principal and interest at prime plus 0.75% (floor rate: 4%), maturing November 15, 2014   3,076    3,181 
Revolving line of credit with a U.S. bank up to $7,000 with interest at prime plus 0.5% (floor rate: 3.75%), maturing November 15, 2015   7,000    8,637 
Term loan with a U.S. bank with monthly payments of principal and interest at prime plus 0.75% (floor rate: 4.00%), maturing September 10, 2017   1,850    – 
Revolving line of credit with a China bank up to $12,000 with interest at 108%-110% of China Prime rate which ranged from 6.48% to 6.60% in 2013 with various maturity dates from January 2014 to August 2014   7,053    10,668 
Revolving line of credit with a China bank up to $3,280 with interest ranged from 4.10% to 4.15% with various maturity dates from January 2014 to March 2014   2,413    – 
Note payable to a finance company due in monthly installments with 9% interest, maturing October 31, 2013   –    38 
Revolving line of credit with a Taiwan bank up to $4,000 with interest at Taiwan Time Deposit Interest Rate Index plus 0.41% or LIBOR plus 1.28% maturing in December 2014   3,795    – 
Note payable to a finance company due in monthly installments with 4.95% interest, maturing July 30, 2015   921    398 
Total   26,108    23,063 
Less current portion   17,185    13,900 
Long term portion  $8,923   $9,163 
Bank Acceptance Payable          
Bank acceptance notes issued to vendors with a zero percent interest rate, a 30% guarantee deposit of $741, and maturity dates ranging from January 2014 to June 2014   2,347    1,521 

 

The current portion of long-term debt is the amount payable within one year of the balance sheet date of December 31, 2013. The prime rate of interest was 3.25% on December 31, 2013 and 2012.

 

Maturities of notes payable and long-term debt are as follows for the future years ending December 31(in thousands):

 

2014  $17,185 
2015   7,998 
2016   529 
2017   396 
Total outstanding  $26,108 

 

F-16
 

 

The U.S. bank loans and line of credit agreement require the Company to meet certain financial covenants including a minimum current ratio, debt service coverage, unrestricted cash and maximum debt over tangible net worth ratio requirements. Collateral for the U.S. bank loans and line of credit includes substantially all of the assets of the Company. As of December 31, 2013, the Company was in compliance with all of its financial and operational covenants associated with these loans.

 

As of December 31, 2013, the Company had $9.1 million of unused borrowing capacity.

 

In December 2013, the Company renewed its U.S. revolving line of credit of $7.0 million with the same U.S. bank with a maturity date of November 15, 2015. The interest rate on this line of credit is the prime rate plus 0.50% or the floor rate 3.75%, whichever is higher.

 

The Company issued warrants to the same U.S. bank in connection with the renewals of the loan in 2009, 2010 and 2012. The Company estimated the fair value of these warrants at the date of the grant using the Black-Scholes option-pricing model and records the expense over the life of the warrants. As of December 31, 2013, 32,665 warrants related to these loans are outstanding. As of December 31, 2013, $16,000 remains to be expensed for these warrants and this expense is expected to be recognized over the next four years.

 

The Company, through its China subsidiary, established RMB and USD currency lines of credit for $12.1 million and $3.3 million with a China Bank as of December 31, 2013. The interest rate for RMB line of credit ranged 108% and 110% of the China prime rate. The interest rate for USD currency ranged from 4.1% to 4.2%. This credit line is a revolving line that is renewable by its anniversary. Collateral for the loans includes the land use rights, building and equipment located in China.

 

The Company extended its equipment financing agreement of $1.0 million with a Taiwan bank in 2013. The financing agreement required equipment collateral. The agreement requires monthly installment payments over 24 months and ends in July 2015. The financing agreement bears interest at the rate of 4.95%.

 

The Company, through its Taiwan branch, established a $8 million revolving line of credit with Taiwan banks in 2013. The financing agreement required collateral of its time deposit of $8.0 million that is included in short-term investment. The interest rate for the revolving line of credit is variable every six months at Taiwan Time Deposit Interest Rate Index plus 0.41% maturing in December 2014, which is 1.78% as of December 31, 2013.

 

NOTE I—SHORT-TERM LOAN WITH SHAREHOLDERS

 

In 2010, the Company borrowed $3.2 million from 12 shareholders under the terms of unsecured promissory note agreements. These notes bore an interest rate of 6% with maturity dates of 18 months from the effective dates of the notes originally maturing on October 21, 2011, but extended to December 31, 2012. The note holders were also issued warrants that expire by April 23, 2020, to purchase 51,200 shares of the Company’s Series F Preferred Stock, with an exercise price of $7.50 per share. As part of the loan maturity date extension, additional warrants to purchase 6,081 shares of the Company’s Series G Preferred Stock were issued in 2011 with an exercise price of $18.00 per share that expire on April 23, 2020.

 

In 2011, two of the note holders converted their respective notes into shares of Series G Preferred Stock and four of the notes were repaid in full. In 2012, five of the remaining note holders converted their respective notes into shares of Series G Preferred Stock and one of the notes was repaid. As of December 31, 2012, all principal and interest related to these notes had been fully satisfied.

 

During the year ended December 31, 2013, warrants related to these loans were exercised for 64,219 shares of common stock.

 

F-17
 

 

NOTE J—ACCRUED LIABILITIES

 

Accrued liabilities consisted of the following as of December 31:

 

   2013   2012 
   (in thousands) 
Accrued payroll  $2,279   $1,631 
Accrued employee benefits   489    429 
Accrued taxes   270    167 
Accrued interest   34    74 
Advance payments   128    189 
Accrued commission   148    69 
Accrued professional fees   –    22 
Accrued other   1,167    662 
   $4,515   $3,243 

 

NOTE K—OTHER INCOME AND EXPENSE

 

Other income and expense consisted of the following as of December 31:

 

   2013   2012   2011 
   (in thousands) 
Interest income  $104   $26   $15 
Unrealized foreign exchange gain (loss)   (342)   217    (352)
Realized foreign exchange gain (loss)   (70)   (79)   83 
Government subsidy income   322    92    77 
Other non-operating gain (loss)   4    38    1 
Gain (loss) on disposal of assets   8    (37)   (80)
   $26   $257   $(256)

 

NOTE L—INCOME TAXES

The sources of our income or loss from operations before income taxes were as follows:

   Year ended December 31, 
   2013   2012   2011 
   (in thousands) 
Domestic  $(684)  $(3,077)  $(3,513)
Foreign  loss   (722)   2,132   (1,815)
Total loss  $(1,406)  $(945)  $(5,328)

  

F-18
 

 

Deferred income tax assets and liabilities result principally from net operating losses, different methods of recognizing depreciation, reserve for doubtful accounts, inventory reserves for obsolescence and accrued vacation, together with timing differences between book and tax reporting. At December 31, the net deferred tax assets and liabilities are comprised of the following approximate amounts:

   2013   2012 
   (in thousands) 
NOL Carryforward  $14,908   $22,673 
Inventory reserves   489    389 
Stock compensation   624    511 
Fixed assets and intangibles   (1,631)   1,582)
Impairment loss   (615)   (614)
Other   335    267 
    14,110    21,644 
Less valuation allowance   (14,110)   (21,644)
Deferred tax assets, net  $–   $– 

The valuation allowance was established to reduce the deferred tax asset for the amount that will likely not be realized. This reduction is primarily necessary due to the uncertainty of the Company’s ability to utilize all of the net operating loss carry forwards. The valuation allowance decreased by $7.5 million in 2013 and increased by approximately $1.5 million and $0.8 million in 2012 and 2011, respectively.

As of December 31, 2013 and 2012, and for the periods then ended, the Company had no uncertain tax positions.

The Company has a U.S. net operating loss carry forward of approximately $65.7 million, which expires between 2020 and 2033. The Company also has U.S. research and development tax credits of $1.6 million which expire between 2020 and 2032. The Company has a net operating loss carryforward from its China operations of approximately $3.6 million, which expires between 2014 and 2017. Utilization of net operating losses and tax credit carryforwards are subject to a substantial annual limitation due to the ownership change limitations set forth in Internal Revenue Code Section 382. Based upon analysis performed with respect to Section 382 of the Internal Revenue Code, approximately $21.7 million of the total available U.S. net operating loss carry forwards will not be available for utilization as an offset to taxable income in future periods. Because of changes in control that are deemed to have occurred under Section 382, the Company’s net operating loss carry forward available in calendar year 2013 to shelter taxable income was limited to $41.3 million at December 31, 2013, with an additional $3.7 million becoming available between 2014 and 2025. The additional $3.7 million is subject to an annual limitation of the $0.3 million. Additional ownership changes could result in the expiration of the net operating loss and tax credit carryforward before utilization.

The Company files income tax returns in the U.S federal jurisdiction and various states and foreign jurisdictions. As of December 31, 2013, the Company’s federal returns for the year ended December 31, 2011 through the current period are still open to examination. In addition, all of the net operating losses and research and development credit carry forwards that may be utilized in future years are still subject to examination. The Company is not currently subject to U.S. federal, state and local, or non-U.S. income tax examinations by any tax authorities.

A reconciliation of the U.S. federal income tax rate of 34% for the years ended December 31, 2013, 2012 and 2011 to the Company’s effective income tax rate follows:

   2013   2012   2011 
   (in thousands) 
Expected (benefit) taxes  $(467)  $(293)  $(1,808)
Non-deductible expenses  619   (760)  1,003 
(Decrease) Increase in valuation allowance  (7,533)  1,545   845 
Section 382 limitation   7,423    –    – 
Other   (42)   (492)   (40)
Tax expense  $–   $–   $– 

F-19
 

 

The Company’s wholly owned subsidiary, Prime World is a tax-exempt entity under the Income Tax Code of the British Virgin Islands.

The Company’s wholly owned subsidiary, Global Technology, Inc., has enjoyed preferential tax concessions in China as a national high-tech enterprise.  In March 2007, China’s parliament enacted the PRC Enterprise Income Tax Law, or the EIT Law, under which, effective January 1, 2008, China adopted a uniform income tax rate of 25% for all enterprises including foreign invested enterprises. Global Technology, Inc. was recognized as a National high-tech enterprise in 2008 and was entitled to a 15% tax rate for a three year period from November 2008 to November 2011. In 2011, Global Technology, Inc. renewed its National high-tech enterprise certificate and was therefore extended its three year tax preferential status from November 2011 to November 2014.

 

For 2011 and 2012, there were no identified uncertain tax positions.  During 2013, our liabilities for uncertain tax positions increased by $2.2 million based on tax positions related to our net operating loss carryforwards.  As of December 31, 2013, we had $2.2 million, of unrecognized tax benefits on net operating loss carryforwards that must be certified under the dual consolidated loss rules.  If recognized, there would be no impact our effective tax rate as a result of the full valuation allowance previously recognized. We believe that it is reasonably possible that $0 of our remaining unrecognized tax positions may be recognized by the end of 2014 as a result of a lapse of the statute of limitations.

 

NOTE M—SHARE-BASED COMPENSATION

 

The Company’s board of directors and stockholders previously approved, the 1998 Share Incentive Plan, the 2000 Share Incentive Plan, the 2004 Share Incentive Plan and the 2006 Share Incentive Plan, (collectively the “Prior Plans”). As of December 31, 2013, the Company had options outstanding to purchase 708,473 shares of common stock under its Prior Plans with a weighted average exercise price of $6.68 per share. Following the Company’s initial public offering in September 2013, no further awards will be granted under the Prior Plans. However, all outstanding awards under the Prior Plans will continue to exist and will continue to be governed by their existing terms.

 

On April 12, 2013, our board of directors adopted and approved the Company’s 2013 Equity Incentive Plan, (the “2013 Plan”), and it was subsequently approved by the Company’s stockholders on May 21, 2013. As of December 31, 2013, the Company had options outstanding to purchase 759,429 shares of common stock under the 2013 Plan with a weighted average exercise price of $9.97 per share.

 

The Company issues stock options to employees, consultants and non-employee directors. Stock option awards for the Prior Plans and the 2013 Plan generally vest over a four year period and have a maximum term of ten years. Stock options under these plans have been granted with an exercise price equal to the fair market value on the date of the grant. Nonqualified and Incentive Stock Options and restrictive stock units (“RSUs”) may be granted from these plans. Prior to the Company’s initial public offering, the fair market value of the Company’s stock had been historically determined by the board of directors and from time to time with the assistance of third party valuation specialists.

 

Under the 2013 Plan, participants may be granted RSUs, representing an unfunded, unsecured right to receive common stock on the date specified in the recipient’s award. The RSUs granted under the plan generally vest over one year at a rate of 1/12th per month. The Company recognizes compensation expense on a straight-line basis over the applicable vesting term of the award.

 

During the year ended December 31, 2013, the Company granted 33,000 RSUs with a total grant-date fair value of $0.3 million. The resulting compensation expense recorded in the year ended December 31, 2013 was approximately $0.2 million. At December 31, 2013, there was $0.1 million of unrecognized compensation cost related to RSUs, all of which is expected to be realized within one year.

 

The Company estimates the fair value of employee stock options at the date of the grant using the Black-Scholes option-pricing model with the following assumptions:

 

   2013  2012  2011
Expected volatility  52 to 70%  70.0%  70.0%
Risk-free interest rate  0.96% to 2.97%  1.01%  2.32%
Expected term (years)  6.25  6.25  6.25
Expected dividend yield  -  -  -
Estimated forfeitures  7.5%  10%  13%

 

F-20
 

 

As there had been no market for the Company’s common stock prior to its initial public offering, the expected volatility for options granted to date was derived from an analysis of reported data for a peer group of companies that issued options with similar terms. The expected volatility has been determined using an average of the expected volatility reported by this peer group of companies. The Company uses a risk free interest rate based on the 10-year Treasury as reported during the period. The expected term of the options has been determined utilizing the simplified method which calculates a simple average based on vesting period and option life. The Company does not anticipate paying dividends in the near future. Estimated forfeitures are based on historical experience and future work force projections.

 

Employee share-based compensation expenses recognized for the years ended December 31, were as follows:

 

   2013   2012   2011 
   (in thousands) 
Cost of goods sold  $56   $7   $35 
Research and development   53    8    50 
Sales and marketing   52    9    58 
General and administrative   907    137    420 
Total share-based compensation expense  $1,068   $161   $563 

 

Options have been granted to the Company’s employees under the five incentive plans and generally become exercisable as to 25% of the shares on the first anniversary date following the date of grant and semi-annually thereafter. All options expire ten years after the date of grant.

 

The following is a summary of option activity:

 

   Number of shares   Exercise price  Weighted average exercise price 
   (in thousands, except price data) 
Outstanding, January 1, 2011   288   3.00 - 7.50   5.838 
Granted   124   6.00   6.000 
Exercised   (3)  3.00 - 6.00   6.000 
Forfeited   (25)  6.00   6.000 
Expired   (7)  4.50 - 6.00   5.973 
Outstanding, December 31, 2011   377   3.00 - 7.50   5.877 
Granted   88   6.00   6.000 
Exercised   (1)  6.00 - 7.50   6.291 
Forfeited   (19)  6.00   6.000 
Expired   (26)  3.00 - 7.50   5.301 
Outstanding, December 31, 2012   419   3.00 - 7.50   5.936 
Granted   1,099   7.50 - 12.90   9.214 
Exercised   (29)  4.50 - 6.00   5.875 
Forfeited   (16)  3.00 - 7.50   7.099 
Expired   (5)  3.00 - 7.50   5.986 
Outstanding, December 31, 2013   1,468   3.00 - 12.90   8.379 
Exercisable, December 31, 2013   275   3.00 - 7.50   5.915 
Vested and expected to vest   1,325   3.00 - 12.90   8.287 

 

F-21
 

 

The following table summarizes information about the options outstanding at December 31, 2013:

 

Range of exercise prices  Number of shares outstanding   Weighted average exercise price   Aggregate intrinsic value   Weighted average remaining contractual life (years)   Number of shares exercisable   Weighted average exercise price   Aggregate intrinsic value   Weighted average remaining contractual life (years) 
   (in thousands, except price data) 
$3.00 - $6.00   371    5.914   $3,373    6.59    270    5.881   $2,463    6.22 
7.50 - 12.90   1,097    9.213    6,360    9.49    5    7.500    43    1.77 
Total   1,468    8.379   $9,733    8.76    275    5.915   $2,506    6.13 

 

As of December 31, 2013, total compensation cost related to unvested stock options not yet recognized was $5.1 million, which is expected to be expensed over a weighted-average period of 3.41 years.

 

The aggregate intrinsic value of options outstanding and options exercisable as of December 31, 2013 and December 31, 2012 was $2.5 million and $0.7 million, respectively.

 

The number and weighted average fair value of options granted in 2013, 2012 and 2011 is as follows:

 

2013   2012   2011 
Shares   Weighted average fair value   Shares   Weighted average fair value   Shares   Weighted average fair value 
(shares in thousands) 
 1,099   $4.9986    88   $4.9260    124   $0.3930 

 

NOTE N—STOCKHOLDERS’ EQUITY

 

1.Common Stock

 

The Company has authorized the issuance of up to 45,000,000 shares of common stock, all of which have been designated voting common stock, under its Amended and Restated Certificate of Incorporation.

 

2.Convertible Preferred Stock

 

The Company has authorized the issuance of up to 5,000,000 shares of preferred stock under the Company’s Amended and Restated Certificate of Incorporation.

 

3.Warrants

 

As of December 31, 2013, the Company had outstanding warrants to purchase:

 

•     15,999 shares of common stock at an exercise price of $6.25 per share.

 

•     9,999 shares of common stock at an exercise price of $15.00 per share. 

 

•     6,667 shares of common stock at an exercise price of $10.50 per share. 

 

For the year ended December 31, 2013, $57,000 of expense was recorded related to these warrants. At December 31, 2013, $16,000 of deferred compensation remains to be expensed for these warrants. During the year ended December 31, 2013, warrants were exercised for 74,219 shares of common stock.

 

F-22
 

 

Public Offering of Common Stock

 

On September 25, 2013, the Company sold 3.6 million shares of its common stock in its initial public offering at a price of $10.00 per share, providing proceeds of $31.5 million net of expenses and underwriting discounts and commissions. The Company’s initial public offering closed on October 1, 2013.

 

NOTE O—SEGMENT AND GEOGRAPHIC INFORMATION

 

The Company operates in one reportable segment. The Company’s Chief Executive Officer, who is considered to be the chief operating decision maker, manages the Company’s operations as a whole and reviews financial information presented on a consolidated basis, accompanied by information about product revenue, for purposes of evaluating financial performance and allocating resources.

 

The following tables set forth the Company’s revenue and asset information by geographic region. Revenue is classified based on the location of product manufacturing plants. Long-lived assets in the tables below comprise only property, plant, equipment and intangible assets (in thousands):

 

   For the year ended December 31, 
   2013   2012   2011 
Revenues:  (in thousands)  
United States  $14,705   $12,192   $18,767 
Taiwan   31,863    15,200    6,547 
China   31,856    36,029    22,526 
   $78,424   $63,421   $47,840 

 

   As of December 31, 
   2013   2012   2011 
Long-lived assets:   (in thousands)  
United States  $9,415    8,966   $9,457 
Taiwan   7,192    3,719    2,325 
China   16,337    13,595    14,052 
   $32,944   $26,280   $25,834 

 

The Company serves three primary markets, the CATV, internet data center and FTTH markets. Of the Company’s total revenues in 2013, the Company earned $47.4 million, or 60.4%, from the CATV market, $19.4 million, or 24.7%, from the internet data center market, $4.4 million, or 5.6%, from the FTTH market, and $7.3 million, or 9.3%, from other markets. Of the Company’s total revenues in 2012, the Company earned $49.8 million, or 78.6%, from the CATV market, $5.3 million, or 8.3%, from the internet data center market, $3.7 million, or 5.8% from the FTTH market, and $4.6 million, or 7.3% from other markets.

 

F-23
 

 

NOTE P—MAJOR CUSTOMERS

 

The Company currently derives its revenues from customers in the United States and throughout the rest of the world. Generally, the Company does not require deposits or other collateral to support customer receivables. The Company performs an initial and periodic credit evaluation of its customers and maintains an allowance for uncollectible accounts for potential uncollectible accounts. The historical amount of losses on uncollectible accounts has been within the Company’s estimates. The Company generates much of its revenue from a limited number of customers. In 2013, 2012 and 2011, its top ten customers represented 76.9%, 77.6% and 76.6% of its revenue, respectively. In 2013, Cisco Systems, Inc. represented 21.8% of its revenue, Amazon represented 18.2% of its revenue and Biogenomics Corp., a distributor, represented 8.7% of its total revenue. The five largest receivable balances for customers represented an aggregate of 66%, and 58% of total accounts receivable at December 31, 2013 and 2012, respectively.

 

NOTE Q—EMPLOYEE BENEFIT PLANS

 

On August 1, 2000, the Company established a 401(k) profit sharing plan covering employees meeting certain age and service requirements. The plan provides for discretionary Company contributions to be allocated based on the employee’s eligible contributions. The Company made no contributions to the 401(k) plan for the years ended December 31, 2013, 2012 and 2011.

 

Employees of Global participate in a state-mandated social security program in China. Under this program, pension costs are recorded on the basis of required monthly contributions to employees’ individual accounts during their service periods. Under the regulations of the People’s Republic of China, Global is required to make fixed contributions to a fund, which is under the administration of the local labor departments. Employees of AOI—Taiwan participate in a pension program under the Taiwan Labor Pension Act. Pension expense for Global was $384,000, $244,000 and $206,000 in 2013, 2012 and 2011, respectively. Pension expense for AOI—Taiwan was $203,000, $168,000 and $123,000 in 2013, 2012 and 2011, respectively.

 

NOTE R—COMMITMENTS AND CONTINGENCIES

 

1.Commitments

 

The Company conducts part of its operations from leased facilities and also leases equipment. Rent expense was $0.6 million, $0.6 million and $0.4 million for the years ended December 31, 2013, 2012 and 2011, respectively.

 

At December 31, 2013, the approximate minimum rental commitments under noncancellable leases in excess of one year that expire at varying dates through 2017 were as follows:

 

Year ending December 31,  Amount 
   (in thousands) 
2014  $689 
2015-2017   225 
   $914 

 

F-24
 

 

2.Employment Agreements and Consultancy Agreements

 

The Company has entered into employment and indemnification agreements with three executive officers. These agreements provide that if their employment is terminated as a result of a change of control of the Company, or if their employment is terminated for certain other reasons set forth in the agreements, the Company will be required to pay a severance payment in an amount equal to their annual base salary, and other additional compensation due under the terms of the agreements.

The Company has also entered into employment and indemnification agreements with two other executive officers. These agreements provide that if their employment is terminated as a result of a change of control of the Company, the Company will be required to pay a severance payment in an amount equal to their six months of their annual base salary, and other additional compensation due under the terms of the agreements.

In 2012, the Company entered into consulting agreements with two of its shareholders and board members for a period of one year from June 2012 to June 2013. Each agreement provides that a consulting fee will be paid to the consultant within 30 days after submission of the invoice by the consultant. The Company incurred $35,000 and $41,000 of consulting service fees to these consultants in 2013 and 2012, respectively.

 

3.Contingencies

 

The Company may be party to litigation, claims or assessments in the ordinary course of business. Management is not aware of any of these matters that would have a material effect on the financial condition, results of operations or cash flows of the Company.

 

NOTE S—RELATED PARTY TRANSACTIONS

 

The Company had the following related parties’ activities with its shareholders:

 

   2013   2012   2011 
   (in thousands) 
Interest expense  $–   $36   $176 
Consulting service fees   35    41    150 
Note payable   –    –    910 
Interest payable   –    –    122 

 

NOTE T—SUBSEQUENT EVENTS

 

We have evaluated subsequent events through the date the financial statements were available to be issued.

 

On January 28, 2014, the Company’s board of directors granted stock options for 107,800 shares of the Company’s common stock to various employees of the Company. The stock options have an exercise price of $13.84 per share and vest over a four year period from date of grant.

 

On January 3, 2014 the Company paid down $7.0 million of loans subsequent to year-end.

 

On January 6, 2014 the Company paid down $4.5 million of loans of its China subsidiary subsequent to year-end.

 

Subsequent to year end, the Company drew down $4.0 million of loans of its Taiwan bank facility.

 

F-25
 

 

NOTE U—Selected Quarterly Financial Data (unaudited)

 

The following tables set forth a summary of the Company’s quarterly financial information for each of the four quarters for the years ended December 31, 2013 and 2012.

 

   First   Second   Third   Fourth 
Year ended December 31, 2012  Quarter   Quarter   Quarter   Quarter 
   (in thousands, except percentages, share and per share data) 
Revenue  $12,506   $15,638   $16,416   $18,861 
Cost of goods sold   8,393    10,938    11,743    13,418 
Gross profit  $4,113   $4,700   $4,673   $5,443 
Gross margin   32.9%    30.1%    28.5%    28.9% 
                     
Operating expenses:                    
Research and development  $1,574   $1,708   $2,178   $2,144 
Sales and marketing   814    806    759    756 
General and administrative   1,961    1,947    1,892    2,213 
Total operating expenses  $4,349   $4,460   $4,829   $5,112 
                     
Income (loss) from operations  $(236)  $240   $(156)  $331 
Interest and other income (expense), net   (287)   (332)   (225)   (280)
Net income (loss)  $(523)  $(92)  $(381)  $51 
                     
Net loss per share—basic, as revised  $(1.97)  $(0.35)  $(1.43)  $0.20 
Net loss per share—diluted, as revised  $(1.97)  $(0.35)  $(1.43)  $0.07 
Weighted average shares used to compute net loss per share, as revised:                    
Basic   265,168    265,590    265,920    265,920 
Diluted   265,168    265,590    265,920    695,241 

 

F-26
 

 

   First   Second   Third   Fourth 
Year ended December 31, 2013  Quarter   Quarter   Quarter   Quarter 
   (in thousands, except percentages, share and per share data) 
Revenue  $14,317   $19,597   $20,766   $23,744 
Cost of goods sold   9,732    14,150    14,445    17,068 
Gross profit  $4,585   $5,447   $6,321   $6,676 
Gross margin   32.0%    27.8%    30.4%    28.1% 
                     
Operating expenses:                    
Research and development  $2,004   $1,898   $2,211   $2,400 
Sales and marketing   907    1,053    1,034    1,198 
General and administrative   2,374    2,447    2,435    3,375 
Total operating expenses  $5,285   $5,398   $5,680   $6,973 
                     
Income (loss) from operations  $(700)  $49   $641   $(297)
Interest and other income (expense), net   (294)   (331)   (250)   (223)
Net income (loss)  $(994)  $(282)  $390   $(520)
                     
Net loss per share—basic, as revised  $(3.74)  $(1.04)  $0.04   $(0.04)
Net loss per share—diluted, as revised  $(3.74)  $(1.04)  $0.04   $(0.04)
Weighted average shares used to compute net loss per share, as revised:                    
Basic   265,920    270,912    8,995,397    12,630,603 
Diluted   265,920    270,912    9,154,692    12,630,603 

 

 

F-27

 


Exhibit 10.11.13

 

Contract No.: 1230 ·

 

between

 

GLOBAL TECHNOLOGY INC.

 

as Borrower

 

and

 

CHINA CONSTRUCTION BANK - NINGBO YINZHOU BRANCH

 

as Lender

 

 

RMB WORKING CAPITAL LOAN AGREEMENT

 

 


 

This RMB Loan Agreement (the “Contract”) is entered into in order for the company’s daily operation expense [, including material purchase payment and employee’s salary], by and between:

 

GLOBAL TECHNOLOGY INC., located at NO. 88, QIUSHI RD, WANGCHUN INDUSTRIAL PART, NINGBO, CHINA, P.C.315176 with CHIH-HSIANG LIN as its legal representative and its fax number 88133820 and its telephone number 574-88133818 as borrower (“Party A”); and

 

CHINA CONSTRUCTION BANK - NINGBO YINZHOU BRANCH, located at TAIKANG ZHONG RD S. COMMERCIAL AREA 2ND FL, GUOHUA INT’L BLDG NO. 500, 315040 with · as its principal officer and its fax number being 87370029 and its telephone number being 87374267, as lender (“Party B”).

 

1


 

WHEREAS

 

(1)                                 Party A wishes to apply to Party B for a loan, and Party B agrees to extend to Party A such loan.

 

(2)                                 NOW THEREFORE upon consultation in accordance with applicable laws and regulations, both parties hereto agree as follows:

 

1.              LOAN AMOUNT

 

The amount of the loan that Party B provides to Party A hereunder shall be RMB [see Schedule A] (the “Loan”).

 

2.              PURPOSE OF THE LOAN AND SOURCES OF FUNDS FOR REPAYMENT

 

Party A shall utilize the loan for the purpose of the routine production operation.

 

The information relating to specific purposes of such loan under the Contract and sources of funds for repayment shall be determined in Schedule 1 “Loan Information”.

 

3.              TERM OF THE LOAN

 

The term of the Loan shall be 12 months, commencing from [see Schedule A] and expiring on [see Schedule A] (the “Term”).

 

Where the above commencement date is inconsistent with the date set forth on the loan-to deposit certificate (the “LDC” or “Loan Receipt”, the date set forth on the LDC for the first advance of the Loan shall be the commencement date of the Term and the expiry date of the Term shall be adjusted accordingly. The LDC shall constitute an integral part of the Contract and have the equal legal force as the Contract.

 

4.              INTEREST RATE ON THE LOAN, DEFAULT INTEREST RATE, INTEREST CALCULATION AND SETTLEMENT

 

4.1       Interest Rate on the Loan (the “Loan Rate”)

 

The Loan Rate hereunder shall be an annual rate set forth in item (2) below:

 

(1)         a fixed interest rate of                      % which shall remain the same during the Term;

 

(2)         [See Schedule A] on the date when interest commences to accrue (the “Interest Commencement Date”). Such interest rate shall remain the same during the Term; or

 

(3)         a floating interest rate equal to      (100% a floating percentage of      %) (the “Floating Percentage”) of the Base Rate (as defined below) on the date when interest commences to accrue (the “Interest Commencement Date”). The Loan Rate shall, during the period between the Interest Commencement Date and the date when all the principal amount and interest accrued thereon under the Contract have been fully repaid, be adjusted once every        months in accordance with the Base Rate on the interest rate adjustment date and the Floating Percentage. The interest rate adjustment date shall be a date corresponding to the Interest

 

2


 

Commencement Date in the month when such interest is adjusted. If there is no such a date corresponding to the Interest Commencement Date in such month, the adjustment date for the interest rate shall be the last day of such month.

 

4.2             Default Interest Rate

 

(1)         If Party A does not use the Loan hereunder for purposes set forth herein (“Misappropriation”), the default interest rate on such Loan shall be (100% plus 100%) of the Loan Rate. If the Loan Rate is adjusted according to Article 4.1 (3) above, the default interest rate shall be adjusted in accordance with the adjusted Loan Rate and the upward floating percentage set out in this Article 4.2 (1).

 

(2)         The default interest rate on overdue Loan shall be (100% plus 50 %) of the Loan Rate. If the Loan Rate is adjusted according to Article 4.1 (3) above, such default interest rate shall be adjusted in accordance with the adjusted Loan Rate and the upward floating percentage set out in this Article 4.2 (2).

 

(3)         If Misappropriation and overdue payment occur concurrently, the default interest shall be calculated and compounded in accordance with the higher of the two default interest rates provided for in Articles 4.2(1) and 4.2(2) herein.

 

4.3             The Interest Commencement Date provided in this Article 4 refers to the date on which the proceeds of the first advance have been deposited into the loan disbursement account designated in Article 6 (the “Loan Disbursement Account”).

 

For the first advance of the Loan, the Base Rate refers to the lending interest rate quoted by the People’s Bank of China (the “PBOC”) on the Interest Commencement Date for loans with the same tenor and within the same category. If the lending interest rate on other advances of the Loan is adjusted in accordance with Article 4.1 (3), the Base Rate refers to the lending interest rate quoted by the PBOC on the interest rate adjustment date for loans with the same tenor and within the same category. If the PBOC no longer publishes such lending interest rate, the Base Rate shall mean, unless agreed otherwise between the parties, the lending interest rate with the same tenor and within the same category generally accepted by the banking industry on the interest rate adjustment date or an interest rate commonly used for a loan with the same tenor and within the same category.

 

4.4             The interest on the Loan shall commence to accrue as of the date when such Loan proceeds have been deposited into the Loan Disbursement Account designated by Party A. Interest on the Loan shall be computed daily with the daily interest rate equal to 1/360 of the annual interest rate. If Party A can not pay interest on the interest settlement date as provided herein, the interest shall be compounded as of the date immediately following the applicable interest settlement date.

 

4.5             Interest Settlement

 

(1)                     For a loan subject to a fixed interest rate, the interest accrued thereon shall be calculated in accordance with the agreed fixed interest rate. For a loan subject to a floating interest rate, the interest accrued thereon shall be calculated in accordance with the interest rate determined for each interest rate floating period. If the interest rate has been adjusted more

 

3


 

than once during a single interest settlement period, the interest during each interest rate floating period shall be calculated first and the total interest accrued during such interest settlement period shall be the aggregate amount of all the interest accrued during each interest rate floating period within such interest settlement period.

 

(2)   The interest accrued on the Loan hereunder shall be settled in accordance with (i) of the following:

 

(i)                   on a monthly basis and the interest settlement date shall be the 20th day of each month;

 

(ii)                on a quarterly basis and the interest settlement date shall be the 20th day of the last month of the relevant quarter;

 

(iii)             other method:                                              .

 

5.              ADVANCE AND DRAWDOWN

 

5.1       Conditions Precedent to Advance

 

Unless Party B waives all or part of the following conditions, Party B shall be obligated to advance any amount of the Loan only if all the following conditions continuously remain satisfied:

 

(1)                     Party A has completed all the approval, registration, delivery, insurance and other statutory procedures in relation to the Loan hereunder;

 

(2)                     the security has become and remains effective, if a security is established for the Contract;

 

(3)                     Party A has opened the bank accounts for drawdown and debt service purposes as Party B requests;

 

(4)                     Party A has not triggered any event of default hereunder;

 

(5)                     no event has occurred that may adversely impact Party B’s rights as a creditor;

 

(6)                     the advance to be made by Party B is not prohibited or restricted by any laws, regulations, rules or competent authorities; and

 

(7)                     the financial indicators of Party A shall, at all time, continue to meet the requirements specified in Schedule 2 Terms relating to Mandatory Financial Indicators;

 

(8)                     Party A has submitted such materials as required in this Contract before any loan drawdown;

 

(9)                     the materials submitted by Party A are legal, authenticated, complete, accurate, valid and be in accordance with other requirements of Party B;

 

(10)              Other conditions

 

 

 

4


 

5.2                   Drawdown Schedule

 

“Drawdown” referred to in this Contract shall mean disbursements by Party B of the funds to the Loan Disbursement Account in accordance with Party A’s Application and this Contract.

 

The drawdown schedule hereunder shall be item [see Schedule A] of the following:

 

(1)               The drawdown schedule shall be as follows:

 

 

 

Drawdown Date (mm/dd/yyyy)

 

Amount

 

 

 

 

 

(i)

 

 

 

 

 

 

 

 

 

(ii)

 

 

 

 

 

 

 

 

 

(iii)

 

 

 

 

 

 

 

 

 

(iv)

 

 

 

 

 

 

 

 

 

(v)

 

 

 

 

 

 

 

 

 

(vi)

 

 

 

 

 

(2)               The drawdown schedule shall be as follows:

 

(i) from [

]

to [

],

Amount                           ;

(mm/dd/yyyy)

 

(mm/dd/yyyy)

 

 

 

 

 

 

 

(ii) from [

]

to [

],

Amount                           ;

(mm/dd/yyyy)

 

(mm/dd/yyyy)

 

 

 

 

 

 

 

(iii) from [

]

to [

],

Amount                           ;

(mm/dd/yyyy)

 

(mm/dd/yyyy)

 

 

 

 

 

 

 

(iv) from [

]

to [

],

Amount                           ;

(mm/dd/yyyy)

 

(mm/dd/yyyy)

 

 

 

 

 

 

 

(v) from [

]

to [

],

Amount                           ;

(mm/dd/yyyy)

 

(mm/dd/yyyy)

 

 

 

 

 

 

 

(vi) from [

]

to [

],

Amount                           ;

(mm/dd/yyyy)

 

(mm/dd/yyyy)

 

 

 

(3) from time to time, as required by Party A .

 

(4)

 

 

 

5


 

5.3             Party A shall draw the Loan in accordance with the drawdown schedule under Article 5.2. Without Party B’s written consent, Party A shall not accelerate, postpone or cancel any drawdown of the Loan.

 

5.4             If Party A draws the Loan in installments, the expiration date of the Term shall be determined in accordance with Article 3 hereunder.

 

5.5             Materials required to be submitted by Party A

 

In respect of materials required to be submitted by Party A, the Parties agree that Item  A  applies [choose A or B]:

 

A.

 

Situation NO. 1

 

Where the situation described in Item (1) [choose (1) or (2)] arises:

 

(1)   the amount of any particular drawdown is more than RMB TEN million and the amount of any scheduled payment out of such drawdown is more than RMB TEN million;

 

(2)

 

 

 

Party A shall submit to Party B the following materials no later than ONE working days before the date of such drawdown:

 

(1)   the LDC signed by Party A and payment/settlement certificate(s) signed by Party A;

 

(2)   materials related to the underlying transactions (including without limitation goods/services/monetary contracts and/or invoices and other documents in writing or electronic form that are capable of evidencing the particular purposes of the loan drawdown);

 

 

 

And other materials required by Party B (including without limitation business license, letter of authorization, articles of association, resolutions of Shareholders’ meeting /Board of directors of Party A’s counterparty).

 

Situation NO. 2

 

If Party B determines, after reviewing the aforementioned materials, that Party may initiate the payment in accordance with Article 5.7 of this Contract, or a situation other than Situation NO. 1 arises, Party A shall submit to Party B the

 

6

 

following materials no later than ONE working days before the date of such drawdown:

 

(1)                    The drawdown schedule corresponding to the proposed loan drawdown(The drawdown schedule being in the form of Schedule 3);

 

(2)                    LDC signed by Party A;

 

 

 

And other materials required by Party B (including without limitation business license, letter of authorization, articles of association, resolutions of Shareholders’ meeting/Board of directors of Party A ‘s counterparty).

 

B.

 

Party A shall submit to Party B the following materials no later than ONE working days before the date of such drawdown regardless of the amount of any particular drawdown:

 

(1)                    the LDC signed by Party A and payment/settlement certificate (s) signed by Party A;

 

(2)                    materials related to the underlying transactions (including without limitation goods/services/monetary contracts and/or invoices and other documents in writing or electronic form that are capable of evidencing the particular purposes of the loan drawdown);

 

 

 

 

And other materials required by Party B(including without limitation business license, letter of authorization, articles of association, resolutions of Shareholders’ meeting/Board of directors of Party A ‘s counterparty).

 

5.6             Entrusted Payment through Party B

 

(1)                    Situations where Entrusted Payment applies to Party B

 

If the situation described in (i) arises, , Entrusted Payment shall apply, i.e. Party A hereby irrevocably entrusts Party B to pay the amount of the drawdown to Party A’s counterparty. Party A shall not pay such amount directly to such counterparty or any other third party.

 

(i)     the amount of any particular drawdown is more than RMB TEN million and the amount of any scheduled payment out of such drawdown is more than RMB TEN million, and Party B determines, after reviewing the materials submitted by Party A, that recipient of the payment is specific and identifiable;

 

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(ii) Entrusted Payment applies regardless of the amount of any particular drawdown;

 

(iii) 

 

 

 

(2)                    In the case of entrusted payment, Party B deposits the amount of the loan drawdown in the Loan Disbursement Account and pays such amount through Loan Disbursement Account to the account designated by Party A’s counterparty. Party A shall not dispose of the loan drawdown in any way (including without limitation account transfer or withdrawal of cash).

 

(3)                    Party B will make prima facie examination of the documents submitted by Party A regarding payment amount, time of payment, recipient of payment, means of payment, and related accounts Party B will pay the drawdown amount to Party A’s counterparty if Party B determines at its discretion that it is satisfied with the abovementioned prima facie examination. The obligations of Party B relating to entrusted payment shall be extinguished once the drawdown amount is paid into the account of Party A’s counterparty (the information of such account shall be provided by Party A). Party A shall check and verify the status of payment within one working day after the date of payment and shall notify Party B in case of failure of payment. Party A shall guarantee that there is consistence between documents/information regarding recipient of payment, utilization of the loan and materials related to underlying documents.

 

(4)                    There is no warranty or representation by Party B in respect of the truthfulness or legality or compliance with regulations of the underlying transactions although Party B has made the above-mentioned prima facie examination of the payment documents. Nor shall Party B be implicated in any dispute between Party A and Party A’s counterparty or any third party. Nor shall Party B be liable for any obligations or liabilities of Party A. Party A shall compensate Party B for any and all losses incurred by Party B resulting from Party B’s activities relating to Entrusted Payment.

 

(5)                    Where there is a failure or delay in payment of the drawdown amount to the account of Party A’s counterparty and such failure or delay is caused by incompleteness, untruthfulness or inaccuracy of the documents submitted by Party A, or by violation of permitted utilization of loan or by information discrepancy or by other reasons but not by Party B’s fault, the following applies:

 

(i)        Party A shall be liable for all the consequences including without limitation all losses caused by the above mentioned failure or delay. Party B shall not be liable in any way and shall be compensated by Party A for any losses resulting therefrom;

 

(ii)       Party A shall not dispose of any of such drawdown amount in anyway (including without limitation account transfer or withdrawal of cash);

 

(iii)      Party A shall resubmit materials, make corrections and/or perform other activities as instructed by Party B within ONE working days;

 

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Party B may accelerate the maturity of such loan drawdown if Party A is in breach of any of the above provisions.

 

(6)                    Party A shall be liable for any and all risks, liabilities and losses caused by any failure or error or delay in payment which does not result from Party B’s fault. Party B shall not be liable in any way and shall be compensated by Party A for any losses resulting therefrom.

 

5.7             Payment on Party A’s own initiative

 

Where situation other than that described in Article 5.6 (1) arises, Party A may initiate the payment at its own discretion. i.e. Party B may deposit the drawdown amount to the Loan Disbursement Account as instructed by Party A’s application for loan drawdown, Party A may then pay such amount directly to the recipient. Party A shall guarantee the conformity between the recipient, utilization of loan and the underlying transaction documents.

 

5.8             The obligations of Party B to advance loans shall be extinguished once the loan amount is deposited into the Loan Disbursement Account regardless of entrusted payment or not. Party A shall ensure the Loan Disbursement Account remain in normal status (including without limitation not subject to freezing by competent authorities). Party A shall bear all risks, liabilities and losses including without limitation freezing and mandatory transfer by competent authorities. Party A shall compensate Party B for any losses resulting therefrom.

 

5.9             Change of means of payment

 

Party B is entitled to change the means of payment if any of the following circumstances arises, including without limitation re-determining the situations where Entrusted Payment applies,(e.g. changing the threshold amount for Entrusted Payment) and changing the means of payment in respect of any particular drawdown:

 

(1)         Any event of default by Party A arises;

 

(2)         There arises any event that may adversely impact Party B’s rights as a creditor;

 

(3)         Other circumstances where Party B deems necessary to change the means of payment.

 

Where Party B changes the means of payment, Party A shall resubmit the materials or perform other activities as required by this Contract and Party B.

 

6.                                      USE AND SUPERVISION OF ACCOUNTS

 

6.1                 Loan Disbursement Account

 

The Loan Disbursement Account herein shall be determined in accordance with (2):

 

(1)                   within        working days from the date of coming into effect of

 

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this Contract and before the date of first drawdown, Party A shall open an account within Party B for the sole purpose of the disbursement and payment of all loan amount under this Contract.

 

(2)                   other account opened by Party A within Party B (Account Number:                                            ).

 

6.2                 Account to collect sale proceeds

 

(1)            within ONE working days from the date of coming into effect of this Contract, Party A shall open an account within Party B for the purpose of collecting sale proceeds or designate an existing account within Party B as such (Account Number:                                            ).

 

(2)            Party A shall, on a monthly basis (choose “monthly” or “quarterly”), submit a report to Party B on the incoming and outgoing amounts of such account. Party A shall submit such report for the immediately preceding month or quarter (as the case may be) within the first FIVE working days of each month or quarter.

 

(3)            Party B is entitled to manage the incoming and outgoing amounts of such account. In particular, such account shall be in compliance with (vi) (one or more of the following requirements may be selected):

 

(i)                      average balances of such account:

 

 

 

(ii)                   time for incoming payment being deposited into such account:

 

 

 

(iii)                percentage of the overall sale proceeds of Party A that are to be deposited into such account:

 

 

 

(iv)               amount limit for any particular outgoing payment of such account:

 

 

 

(v)                  amount limit for daily outgoing payment (s) of such account:

 

 

 

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(vi)               restrictions on internet-banking functions of such account:

 

 

 

(vii)            no outgoing payment shall be made without Party B’s prior consent;

 

(viii)         Such account shall be used only for the purposes of collecting sale proceeds and repaying the loan, and not for any other purpose;

 

(ix)              

 

 

 

(x)                  other requirements by Party B;

 

(xi)               A separate Account Management Agreement signed by both Parties shall be complied with.

 

7.                                      REPAYMENT

 

7.1       General Principles for Repayment

 

Party A shall repay the Loan in accordance with the following principles: Party B has the right to apply Party A’s repayment first towards payment of any expense which shall be borne by Party A as provided hereunder but has been advanced by Party B and the expenses incurred by Party B for realizing its creditor’s rights. Party B shall apply the balance of such repayment in the order of interest first and then principal adhering to the principle that the interest shall be fully repaid concurrently with the repayment in full of all the principal amounts.

 

For any advance of which the principal has become due but unpaid for more than ninety days, or any advance on which the interest has become due but unpaid for more than ninety days, or any advance otherwise provided by the laws, regulations or rules, Party B may first apply Party A’s repayment towards those payments of expenses set out in the first paragraph of this article. Then Party B may apply the balance of such repayment towards payment in the order of principal first and then interest.

 

7.2       Payment of Interest

 

Party A shall pay due interest to Party B on the interest settlement date. The first interest payment date shall be the first interest settlement date after the release of an advance. All the interest and principal amounts outstanding shall be paid in full on the last repayment date.

 

7.3       Schedule for Repayment of the Principal

 

The repayment schedule hereunder shall be determined in accordance with item [see Schedule A] below:

 

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(1)                                                         The repayment schedule shall be as follows:

 

Repayment Date(mm/dd/yyyy)

 

Amount

 

(i)

 

 

 

 

 

 

 

 

 

(ii)

 

 

 

 

 

 

 

 

 

(iii)

 

 

 

 

 

 

 

 

 

(iv)

 

 

 

 

 

 

 

 

 

(v)

 

 

 

 

 

 

 

 

 

(vi)

 

 

 

 

(2)

 

 

 

7.4       Repayment Method

 

Party A shall deposit sufficient amount into the Account to collect sale processor other account at Party B before the repayment date provided hereunder and transfer such amount to repay the Loan (Party B may also debit such amount from such account to repay the Loan), or transfer such amount from another bank account of Party A to repay the Loan.

 

7.5       Prepayment

 

Party A may prepay the principals in full or in part upon approval by Party B of a written application submitted to Party B THIRTY working days in advance.

 

The interest accrued on the principals to be prepaid shall be calculated on the basis of the actual number of days lapsed and the Loan Rate provided herein.

 

If Party B approves the prepayment by Party A, Party B shall have the right to charge Party A the compensation fee in an amount to be determined in accordance with the (1) of the following methods:

 

(1)          compensation fee = amount of the principal prepaid × number of months remaining until the scheduled repayment date(the “Remaining Period”) × 1%; provided, however, that the part of the Remaining Period that falls short of a month shall be calculated as a full month; or

 

(2)

 

 

 

If Party A is required to repay the Loan in installments and prepays part of the principal, the prepaid amount shall be applied in the reverse order of the repayment schedule. After any partial prepayment, the outstanding Loan shall still be subject to the Loan Rate provided herein.

 

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8.                                                              PARTY A’S RIGHTS AND OBLIGATIONS

 

8.1 Party A’s Rights

 

Party A has the rights to:

 

(1)   request Party B to release each advance of the Loan as provided hereunder;

 

(2)   utilize the Loan for the purposes provided for hereunder;

 

(3)   apply to Party B for extension of the Term hereunder provided that it has satisfied all the conditions as Party B requests;

 

(4)          require Party B to keep confidential the relevant financial information and manufacturing and operating trade secrets furnished by Party A except provided otherwise by law, regulations and rules, or required otherwise by the competent authorities, or agreed otherwise between the both parties hereto;

 

(5)          reject Party B or its employees asking for bribe; it shall have the right to lodge complaint with the competent authority about such misconduct and any other act of Party B that may violate the laws and regulations relating to the lending interest rate and service charges.

 

8.2 Party A’s Obligations

 

(1)                    Party A shall draw the Loan and repay the principal and interest in full as provided herein, and bear the expenses and fees as provided herein;

 

(2)                    Party A shall provide its financial, accounting as well as manufacturing and operating information and other materials as the Party B may request, and among other things, on or before the TWENTY working day of the first month of each quarter, Party A shall provide to Party B with the balance sheet and the profit and loss statement (or the income and expenditure statement, if Party A is a public institution) up to the end of the preceding quarter, and shall provide the cash flow statement at the end of each year in a timely fashion. Party A shall be responsible for the legality, truthfulness, accuracy, completeness and validity of the information it provides, and shall not provide false information or conceal material facts with respect to its financial and operation status;

 

(3)                    In case of any change in Party A’s name, legal representative (or principal officer), registered address, business scope, registered capital, articles of association or any other registration with local industrial and commercial authority, or there arises any circumstances that may adversely affect Party A’s capability to repay the indebtedness or may endanger Party B’s rights as a creditor, Party A shall notify Party B in writing of the same with relevant documents together with such notification evidencing the changes within 3 working days thereafter;

 

(4)                    Party A shall utilize the Loan in accordance with the purposes as provided herein, and shall not misappropriate the Loan or utilize the Loan to carry out any transactions in violation of the laws and regulations, nor for investments in fixed assets, or equity or other areas, nor for production or operations prohibited by the state, nor for repaying the indebtedness incurred as a result of Party A’s investments

 

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in fixed assets or equity etc.; Party A shall cooperate with Party B in its inspection of Party A’s manufacturing, operating and financial activities and utilization of the Loan herein, and shall be subject to the requirements of Party B relating to loan management; Party A shall not try to evade its repayment obligations owing to Party B by means of withdrawing capital it has injected, transferring assets or entering into related-party transactions. Further, Party A shall not attempt to obtain loans or credit facilities from Party B by using dummy contracts with its related parties or by pledging such rights as notes receivable or accounts receivable without actual underlying transactions or by applying to Party B for discounting the same; Party A shall be in compliance with the provisions relating to means of payment and shall not evade Entrusted Payment by way of dividing a larger-amount payment into payments in smaller amounts;

 

(5)     Party A shall comply with the regulations relating to environmental protection, if the Loan hereunder shall be utilized for manufacturing or project construction;

 

(6)     Without Party B’s consent, Party A shall not mortgage or pledge any assets acquired by utilizing the Loan hereunder for the benefit of a third party before full repayment of the principals and interest accrued thereon;

 

(7)     If Party A qualifies as a group customer, it shall promptly report to Party B any related-party transactions involving more than 10% of Party A’s net assets, including (i) the relationship among all the parties to such transaction; (ii) the transaction and its nature; (iii) the transaction amount or the relevant ratio; and (iv) pricing policy (also applicable to the transactions with no price or merely nominal price);

 

(8)     Party A shall not carry out merger, split-up, transfer of shares, outward investment, substantial increase of debt financing or other activities of importance without Party B’s prior written consent. For the avoidance of doubt, such consent shall not impair Party B’s rights to take remedial measures if Party B determines at a later time that such activities of Party A may endanger Party B’s rights as a creditor;

 

(9)     In the case of payment at Party A’s own initiative, Party A shall submit reports to Party B on the use and payment of loan amounts on a monthly basis. Party A shall submit such report for the immediately preceding month within the first TEN working days of each month, together with a list of actual uses of loan amounts, until the date of repayment of all the loan. Such report shall be in the form attached in Schedule 4.

 

9.                                      PARTY B’S RIGHTS AND OBLIGATIONS

 

9.1                         Party B is entitled to request Party A to repay the principal, interest accrued thereon and expenses when due, to manage and control the payment of loan amounts, to monitor on a real-time basis overall cash flows of Party A and to accelerate the maturity of the loan considering the status of collection of sale proceeds of Party A. Party B may exercise any other rights hereunder and demand Party A to perform any other obligations hereunder.

 

9.2                         Party B is entitled to engage in Party A’s large-amount financing (The total amount of such financing shall be more than RMB SEVENTY-FOUR MILLION or Foreign Exchange equivalent) , sale of assets, merger, split-up,

 

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stock-company restructuring, bankruptcy, liquidation and other activities for the purpose of protecting Party B’s rights. The way(s) of engagement shall be (1) (multiple choices are allowed)

 

(1) Party A shall seek Party B’s prior written consent before carrying out any of the above activities;

 

(2) Party B is entitled to arrange for Party A’s large-amount financings;

 

(3) the sale price and buyer of the assets shall be in compliance with the following:

 

 

 

(4)

 

 

 

(5) other ways Party B deems fit.

 

9.3                         Party B shall advance the Loan as provided herein unless the delay or failure in advancing the Loan is caused by any reason attributable to Party A or any other reason that can not be attributed to Party B.

 

9.4                         Party B shall keep confidential the relevant financial documents and manufacturing and operating trade secrets furnished by Party A except otherwise provided by the laws, regulations and rules, or required by the competent authorities, or agreed between the parties hereto.

 

9.5                   Party B shall not bribe Party A or its employees, nor request any bribe or accept any bribe offered by Party A.

 

9.6                   Party B shall not engage in any activity which is dishonest or will be detrimental to Party A’s lawful interests.

 

10.                               DEFAULT AND REMEDY

 

10.1 Events of Default by Party B and Liabilities

 

(1)          If Party B does not advance the Loan as provided herein without justifiable reason, Party A may request Party B to advance the Loan in accordance with the Contract.

 

(2)          If Party B charges any interest or fee which is prohibited by the laws or regulations, Party A may request Party B to refund the interest or fee charged.

 

10.2 Events of Default by Party A

 

The events of default by Party A shall include:

 

(1) Party A breaches any statutory obligation or any contractual obligation hereunder; and

 

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(2) Party A has repudiated its obligations hereunder expressly or by its conduct.

 

10.3 Events that may Adversely Impact Creditor’s Rights

 

(1)     the occurrence of any of the following events upon Party A which Party B believes may adversely impact its creditor’s rights:

 

contracting, trustee (receiver) being appointed, lease, shareholding restructuring, decrease of its registered capital, investment, joint operation, mergers and acquisitions, acquisition and restructuring, division, joint venture, shares transfer, substantial increase of debt financing, applying for (or subject to an application for) temporary cessation of operation or dissolution, revocation, applying for (or subject to an application for) bankruptcy, change of controlling shareholders/actual controllers, transfer of material assets, suspension of production or operation, significant penalty imposed by regulatory authorities, cancellation of registration, revocation of business license, involvement in material legal proceedings, severe deterioration in operation and financial condition, deterioration of credit standing, legal representative/principal officer being unable to perform their duties;

 

(2)     the occurrence of any of the following events which Party B believes may adversely impact its creditor’s rights:

 

Party A fails to repay any other due debts, including such debts owed to any other branch or organization of China Construction Bank or to any other third party; Party A transfers assets at a low price or for free; Party A relieves or waives any debt of a third party; Party A fails to exercise its creditor’s rights or any other rights; or Party A provides security for a third party; financial indicators of Party A fail to meet, on a continuous basis, the requirements specified in Schedule2; there are unusual fluctuations in any of Party A’s accounts (including without limitation account to collect sale proceeds and other account subject to Party B’s supervision) ; there are grave cross-defaults by Party A; profit-making capability of Party A’s core business is undesirable; there is irregularity in the use of loan;

 

(3)     Party A’s shareholder manipulates the independence status of Party A as a legal person or the limited liability status of the shareholder in order to evade debts, and Party B believes this manipulation may adversely impact its creditor’s rights;

 

(4)     any of the conditions precedent to advance the Loan has not been satisfied continuously;

 

(5)     the occurrence of any of the following events upon the guarantor which Party B believes may adversely impact its creditor’s rights:

 

(i)         the guarantor breaches any provision of the guarantee contract, or any of the representations and warranties it has made proves to be false, wrong or incomplete;

 

(ii)      contracting, trustee (receiver) being appointed, lease, shareholding restructuring, decrease of its registered capital, investment, joint operation, mergers and acquisitions, acquisition and restructuring, division, joint venture, shares transfer, substantial increase of debt

 

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financing, applying for (or subject to an application for) temporary cessation of operation or dissolution, revocation, applying for (or subject to an application for) bankruptcy, change of controlling shareholders/actual controllers, transfer of material assets, transfer of assets at a low price or for free, relieving or waiving any debt of a third party; failure to exercise its creditor’s rights or any other rights, suspension of production or operation, significant penalty imposed by regulatory authorities, cancellation of registration, revocation of business license, involvement in material legal proceedings, severe deterioration in operation and financial condition, deterioration of credit standing, legal representative/principal officer’s inability to perform their duties, which may adversely impact its capability as a guarantor;

 

(iii)  other events in which the guarantor has lost or may lose its capability as guarantor.

 

(6)       the occurrence of any of the following events on the mortgage or pledge which Party B believes may adversely impact its creditor’s rights:

 

(i)                   the mortgaged or pledged property is damaged, destroyed or its value is reduced as a result of a third-party’s action, expropriation, confiscation, eminent domain or redevelopment and relocation by the government, market change, or any other reason;

 

(ii)                the mortgaged or pledged property has been seized, impounded, frozen, mandatorily debited, put on lien, sold by auction, subject to administration order by a government authority, or a dispute over the ownership of the mortgaged or pledged property occurs;

 

(iii)             the mortgagor or pledgor breaches any provision of the mortgage/pledge contract, or any of the representations and warranties it has made proves to be false, wrong or incomplete;

 

(iv)            other events that may adversely impact Party B’s ability to realize its mortgage or pledge.

 

(7)                    the security is not effected, becomes ineffective, invalid, or is rescinded or terminated, or the security provider defaults or repudiates its obligations expressly or by conduct, or the security provider has lost its capability to perform its obligations as a security provider in whole or in part, or the value of the collateral is reduced, which Party B believes may adversely impact its creditor’s rights; or

 

(8)                    other events which Party B believes may adversely impact its creditor’s rights.

 

10.4                        Party B’s Remedy

 

Upon occurrence of any event under Article 10.2 or 10.3, Party B may exercise one or more of the following rights:

 

(1)                         to stop advancing the Loan;

 

17


 

(2)             to request for more conditions precedent for loan advance and payment;

 

(3)             to change the means of payment of loan in accordance with this Contract;

 

(4)             to declare the Loan immediately due and payable, and request Party A to repay immediately all the due and undue principal, interest and fees;

 

(5)             if Party A fails to make any drawdown in accordance with the Contract, Party B may hold Party A liable to pay a penalty equal to 0 % of the Loan proceeds not drawn and may reject Party A’s request for drawing such Loan;

 

(6)             if Party A utilizes any part of the Loan for any purpose other than as provided herein, interest on the misappropriated amount shall be calculated and compounded for the period from the date of the misappropriation to the date when all the principal and interest have been fully paid in accordance with the relevant default interest rate and the interest settlement method as provided herein;

 

(7)             if any principal is overdue, the interest on such principal and on any overdue interest (including whole or part of the principal and interest which have been accelerated), shall be calculated and compounded for the period from the first date such principal becomes overdue to the date when all the principal and interest have been fully paid, in accordance with the relevant default interest rate and the interest settlement method as provided herein;

 

“Overdue” herein means that Party A fails to repay the Loan on the repayment date or, in case of repayment in installments, fails to repay the relevant installments in accordance with the repayment schedule as provided herein.

 

Before any principal is overdue, the overdue interest shall be compounded in accordance with the interest rate and the interest settlement method as provided herein;

 

(8)             other remedies, including but not limited to:

 

(i)                              to debit Party A’s accounts at China Construction Bank in RMB or other currencies with corresponding amount without prior notice to Party A;

 

(ii)                           to exercise its rights under the security interest;

 

(iii)                        to request Party A to provide new security satisfactory to Party B for all the debts of Party A hereunder;

 

(iv)                       to decline Party A’s request to dispose of its deposits of corresponding amount, within any account opened with any branch of China Construction Bank (including without limitation the account to collect sale proceeds);

 

(v)                          to terminate the Contract.

 

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11.                               MISCELLANEOUS

 

11.1                        Cost Allocation

 

(1)            all costs and expenses incurred as a result of Party A’s breach of any provision in this Contract, including without limitation court fees, arbitration fees, property preservation fees, travel expenses, enforcement expenses, valuation/appraisal fees, auction fees, notary fees, service fees, public announcement costs, legal fees, shall be borne by Party A.

 

(2)                 in respect of other fees the parties agree as follows:

 

11.2                        Use of Party A’s Information

 

Party A agrees that Party B is entitled to inquire about Party A’s creditworthiness with the Credit Database or relevant authorities established or approved by the People’s Bank of China and the Credit Reference Agency, and that Party B is entitled to provide Party A’s information to such Credit Database. Party A further agrees that Party B may reasonably use and disclose Party A’s information for business purpose.

 

11.3                        Collection by Public Announcement

 

In the event that Party A fails to repay on time any principal or interest or breaches any other contractual obligations hereunder, Party B is entitled to report to relevant authorities and demand repayments by means of public announcement via press.

 

11.4                        Party B’s Record as Evidence

 

Unless there is reliable and definitive evidence to the contrary, Party B’s internal records of principal, interest, expenses and repayment, receipts, vouchers made or retained by Party B during the course of drawdown, repayment and interest payment, and records and vouchers relating to the collections by Party B shall constitute valid evidence of the creditor-debtor relationship between the two parties. Party A shall not raise any objection merely because the above records, receipts, vouchers are made or retained by Party B.

 

11.5                        No Waivers

 

Party B’s rights hereunder shall not prejudice or exclude any other rights Party B is entitled to under applicable laws, regulations and other contracts. No forbearance, extension of time limit, preferential treatment or delay in exercising any right hereunder shall be deemed to constitute a waiver of rights and interests hereunder or permit or recognition of any breach of the Contract. Nor shall it restrict, prevent or interfere with the continuous exercise of such right at a later time or any other right, nor shall the foregoing cause Party B to be liable in any way to the Borrower.

 

11.6                        If Party A owes Party B any other due and payable debts in addition to the debts hereunder, Party B may debit any of Party A’s account at China Construction Bank in RMB or other currencies and may choose to repay any of the due and payable debts in the order it deems appropriate. Party A agrees not to raise any objection with respect thereto.

 

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11.7                        In the event of any change to the address or other contact information, Party A shall promptly notify Party B of such change in writing. Party A shall be liable for any loss caused by its failure of giving prompt notice of such change.

 

11.8                        Direct Debit Right

 

Party B is entitled to debit, without prior notice to Party A, any account of Party A at China Construction Bank in RMB or other currencies to pay all amounts payable under the Contract. Party A shall assist Party B to complete any procedures for foreign exchange settlement or sale, and Party A shall bear the risk of exchange rate fluctuation.

 

11.9                        Dispute Resolution

 

Any dispute arising from the performance of the Contract may be settled by consultation. If the dispute cannot be resolved through consultation, such dispute shall be submitted to  (1)  [please select from below]:

 

(1)                           the People’s court within the jurisdiction where Party B is located.

 

(2)                                                                             [name of the arbitration committee] for arbitration at                                  [place of arbitration] in accordance with the then prevailing arbitration rules. The arbitration award shall be final and binding on both Party A and Party B.

 

The undisputed provisions shall remain enforceable during the process of litigation or arbitration.

 

11.10           Effectiveness of the Contract

 

The Contract shall become effective upon:

 

(1)                    execution by the legal representative/(principal officer) or authorized representative of Party A and being affixed with the company chop of Party A; and

 

(2)                    execution by the principal officer or authorized representative of Party B and being affixed with the company chop of Party B. All Schedules of this Contract shall constitute integral parts of this Contract and shall be equally binding.

 

11.11           The Contract shall be executed in                                        counterparts.

 

11.12           Other Provisions:

 

 

 

 

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12.          REPRESENTATIONS

 

12.1                Party A clearly understands the business scope and authorization limit of Party B.

 

12.2                Party A has read the Contract. Party B, at Party A’s request, has explained the terms of the Contract, and Party A fully understands their meanings and corresponding legal consequences.

 

12.3                The execution and performance of the Contract by Party A is in compliance with laws, administrative regulations, rules and Party A’s articles of association (or its other internal constitutional documents) and has been approved by its internal competent organization and/or the competent governmental authorities.

 

12.4                Party A carries out production and operation in compliance with laws and regulations.

 

12.5                Party A has the capability to keep its business going and has the legitimate sources to repay the loan.

 

12.6                Party A warrants that the loan amount requested under this Contract is no more than necessary to meet the real needs of Party A for the purposes specified herein.

 

12.7                Both Party A and its controlling shareholder have good financial standing and have no record of gross misconducts.

 

12.8                Party A agrees that Party B has the right to instruct other branches of China Construction Bank to advance loan under this Contract and to exercise or perform the rights and obligations hereunder.

 

12.9                Party A represents that, at the time of execution of this Contract, there exists no action or event that violates any applicable laws, regulations or rules in relation to environmental protection, energy saving and emission/pollution reduction (the “Environmental Laws”). Party A further warrants that it shall strictly comply with such Environmental Law after the execution of this Contract. If any of the above representations or warranties is untrue, or Party A defaults on any of the above undertakings, or there is any potential risk of energy dissipation or pollution by Party A, Party B is entitled to stop advancing loans, to declare an acceleration of the principal and interest not yet due hereunder, or adopt other remedial measures provided hereunder or permitted by laws.

 

21


 

Party A (Company Chop)

 

 

 

By the legal representative (principal officer) or authorized representative:

 

 

 

Signature:

 

 

 

 

 

Date:

 

 

 

Party B (Company Chop)

 

 

 

By the principal officer or authorized representative:

 

 

 

Signature:

 

 

 

 

 

Date:

 

 

22


 

Schedule 1

 

Loan Information

 

1.  Specific purposes of the loan:

 

This Loan is used for company’s daily operation expense, including material purchase payment and employee’s salary.

 

Party A shall not change the purpose of the loan without Party B’s written consent.

 

2.  Sources of funds for loan repayment :

 

Company’s proceeds of sales.

 

Party A guarantees the truthfulness and legality of such sources of funds and the steadiness and adequacy of cash flows of such sources.

 

3.  Miscellaneous

 

23


 

Schedule 2

 

Mandatory Financial Indicators

 

The Financial indicators of Party A shall on a continuous basis meet the following requirements:

 

Maximum Monthly Capital/Debt

65%

 

 

Minimum Current Ratio:

100%

 

 

Minimum liquidity Ratio:

60%

 

 

Maximum contingency liability/Capital

30%

 

 

Maximum accumulated long term investment/Capital

30%

 

Party B has the right to change unilaterally such requirements as to mandatory indicators provided that FIVE working-day advanced notice is issued to Party A.

 

24


 

Schedule 3

 

Schedule for Loan Drawdown

 

Contract Number

Date of Drawdown

 

No.

 

Proposed
Purpose

 

Proposed Payment
Amount

 

Proposed Recipient
(if any)

 

Notes

1

 

 

 

 

 

 

 

 

2

 

 

 

 

 

 

 

 

…

 

 

 

 

 

 

 

 

…

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

RMB (CAPITALIZE WORDS)

 

 

Name of the Borrower (company seal):

 

25


 

Schedule 4

 

Consolidated report on payment at Party A’s initiative

 

Contract Number

Date of Delivery

 

NO.

 

Actual purpose of 
the Loan

 

Recipient

 

Amount

 

Evidencing 
Materials

 

Whether or not
in compliance
with the
purpose
specified in
this Contract

1

 

 

 

 

 

 

 

 

 

 

2

 

 

 

 

 

 

 

 

 

 

……

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

total

 

RMB (CAPITALIZE WORDS)

 

 

Name of the Borrower_ (company seal):

 

Internal review

Relationship Manager (signature):

 

 

 

Officer in charge of reviewing loan advances and payments (signature):

 

 

26


 

Schedule A to Form of RMB Working Capital Loan Agreement

 

 

Loan
Commencement
Date

Loan Expiration
Date

 

 Loan Amount Loan Rate Drawdown
Schedule		 Schedule for
Repayment
January 10, 2013 January 9, 2014 4,000,000 RMB

A fixed interest rate equal to 110% of the Base Rate

 

Option 1:

On January 10, 2013 for 4,000,000 RMB

Option 1:

On January 9, 2014 in the amount of 4,000,000 RMB

January 22, 2013 January 21, 2014

10,000,000

RMB

A fixed interest rate equal to 110% of the Base Rate

 

Option 1:

On January 22, 2013 for TEN MILLION RMB

Option 1:

On January 21, 2014 in the amount of 10,000,000 RMB

February 19, 2013 February 28, 2014 10,000,000 RMB

A fixed interest rate equal to 110% of the Base Rate

 

Option 1:

On February 19, 2013 for TEN MILLION RMB

Option 1:

On February 28, 2014 in the amount of 10,000,000 RMB

March 7, 2013 March 6, 2014 9,000,000 RMB

A fixed interest rate equal to 108% of the Base Rate

 

Option 1:

On March 7, 2013 for 9,000,000 RMB

Option 1:

On March 6, 2014 in the amount of 9,000,000 RMB

April 2, 2013 April 1, 2014 4,000,000 RMB

A fixed interest rate equal to 108% of the Base Rate

 

Option 1:

On April 2, 2013 for 4,000,000 RMB

Option 1:

On April 1, 2014 in the amount of 4,000,000 RMB

April 19, 2013 April 18, 2014

4,000,000

RMB

A fixed interest rate equal to 108% of the Base Rate

 

Option 1:

On April 19, 2013 for 4,000,000 RMB

Option 1:

On April 18, 2014 in the amount of 4,000,000 RMB

August 26, 2013 August 25, 2014 2,000,000 RMB

A fixed interest rate equal to 108% of the Base Rate

 

Option 1:

On August 26, 2013 for 2,000,000 RMB

Option 1 :

On August 25, 2014 in the amount of 2,000,000 RMB

 

 


Exhibit 10.12

 

 

Contract No.: 1230

 

 

 

 

between

 

GLOBAL TECHNOLOGY INC.

 

as Borrower

 

and

 

CHINA CONSTRUCTION BANK - NINGBO YINZHOU BRANCH

 

as Lender

 

 

 

 

 

 

 

 

 

 

RMB WORKING CAPITAL LOAN AGREEMENT

 

 

 

 

 

 

 

 

 
 

 

This RMB Loan Agreement (the “Contract”) is entered into in order for the company’s daily operation expense [, including material purchase payment and employee’s salary], by and between:

 

GLOBAL TECHNOLOGY INC., located at NO. 88, QIUSHI RD, WANGCHUN INDUSTRIAL PART, NINGBO, CHINA, P.C.315176 with CHIH-HSIANG LIN as its legal representative and its fax number 88133820 and its telephone number 574-88133818 as borrower (“Party A”); and

 

CHINA CONSTRUCTION BANK - NINGBO YINZHOU BRANCH, located at TAIKANG ZHONG RD S. COMMERCIAL AREA 2ND FL, GUOHUA INT'L BLDG NO. 500, 315040 with ● as its principal officer and its fax number being 87370029 and its telephone number being 87374267, as lender (“Party B”).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2
 

 

WHEREAS

 

(1)Party A wishes to apply to Party B for a loan, and Party B agrees to extend to Party A such loan.
(2)NOW THEREFORE upon consultation in accordance with applicable laws and regulations, both parties hereto agree as follows:
1.LOAN AMOUNT

 

The amount of the loan that Party B provides to Party A hereunder shall be RMB [see Schedule A] (the “Loan”).

 

2.PURPOSE OF THE LOAN AND SOURCES OF FUNDS FOR REPAYMENT

 

Party A shall utilize the loan for the purpose of the routine production operation.

 

The information relating to specific purposes of such loan under the Contract and sources of funds for repayment shall be determined in Schedule 1 “Loan Information”.

 

3.TERM OF THE LOAN

 

The term of the Loan shall be 12 months, commencing from [see Schedule A] and expiring on [see Schedule A] (the “Term”).

 

Where the above commencement date is inconsistent with the date set forth on the loan-to deposit certificate (the “LDC” or “Loan Receipt”, the date set forth on the LDC for the first advance of the Loan shall be the commencement date of the Term and the expiry date of the Term shall be adjusted accordingly. The LDC shall constitute an integral part of the Contract and have the equal legal force as the Contract.

 

4.INTEREST RATE ON THE LOAN, DEFAULT INTEREST RATE, INTEREST CALCULATION AND SETTLEMENT

 

4.1  Interest Rate on the Loan (the “Loan Rate”)

 

The Loan Rate hereunder shall be an annual rate set forth in item (2) below:

 

(1)   a fixed interest rate of % which shall remain the same during the Term;
(2)[See Schedule A] on the date when interest commences to accrue (the “Interest Commencement Date”). Such interest rate shall remain the same during the Term; or

3
 

 

(3)a floating interest rate equal to __ (100% a floating percentage of __ %) (the “Floating Percentage”) of the Base Rate (as defined below) on the date when interest commences to accrue (the “Interest Commencement Date”). The Loan Rate shall, during the period between the Interest Commencement Date and the date when all the principal amount and interest accrued thereon under the Contract have been fully repaid, be adjusted once every ___ months in accordance with the Base Rate on the interest rate adjustment date and the Floating Percentage. The interest rate adjustment date shall be a date corresponding to the Interest Commencement Date in the month when such interest is adjusted. If there is no such a date corresponding to the Interest Commencement Date in such month, the adjustment date for the interest rate shall be the last day of such month.
4.2Default Interest Rate
(1)If Party A does not use the Loan hereunder for purposes set forth herein (“Misappropriation”), the default interest rate on such Loan shall be (100% plus 100%) of the Loan Rate. If the Loan Rate is adjusted according to Article 4.1 (3) above, the default interest rate shall be adjusted in accordance with the adjusted Loan Rate and the upward floating percentage set out in this Article 4.2 (1).
(2)The default interest rate on overdue Loan shall be (100% plus 50 %) of the Loan Rate. If the Loan Rate is adjusted according to Article 4.1 (3) above, such default interest rate shall be adjusted in accordance with the adjusted Loan Rate and the upward floating percentage set out in this Article 4.2 (2).
(3)If Misappropriation and overdue payment occur concurrently, the default interest shall be calculated and compounded in accordance with the higher of the two default interest rates provided for in Articles 4.2(1) and 4.2(2) herein.
4.3The Interest Commencement Date provided in this Article 4 refers to the date on which the proceeds of the first advance have been deposited into the loan disbursement account designated in Article 6 (the “Loan Disbursement Account”).

For the first advance of the Loan, the Base Rate refers to the lending interest rate quoted by the People’s Bank of China (the “PBOC”) on the Interest Commencement Date for loans with the same tenor and within the same category. If the lending interest rate on other advances of the Loan is adjusted in accordance with Article 4.1 (3), the Base Rate refers to the lending interest rate quoted by the PBOC on the interest rate adjustment date for loans with the same tenor and within the same category. If the PBOC no longer publishes such lending interest rate, the Base Rate shall mean, unless agreed otherwise between the parties, the lending interest rate with the same tenor and within the same category generally accepted by the banking industry on the interest rate adjustment date or an interest rate commonly used for a loan with the same tenor and within the same category.

4.4The interest on the Loan shall commence to accrue as of the date when such Loan proceeds have been deposited into the Loan Disbursement Account designated by Party A. Interest on the Loan shall be computed daily with the daily interest rate equal to 1/360 of the annual interest rate. If Party A can not pay interest on the interest settlement date as provided herein, the interest shall be compounded as of the date immediately following the applicable interest settlement date.

4
 

 

4.5Interest Settlement
(1)For a loan subject to a fixed interest rate, the interest accrued thereon shall be calculated in accordance with the agreed fixed interest rate. For a loan subject to a floating interest rate, the interest accrued thereon shall be calculated in accordance with the interest rate determined for each interest rate floating period. If the interest rate has been adjusted more than once during a single interest settlement period, the interest during each interest rate floating period shall be calculated first and the total interest accrued during such interest settlement period shall be the aggregate amount of all the interest accrued during each interest rate floating period within such interest settlement period.
(2)The interest accrued on the Loan hereunder shall be settled in accordance with (i) of the following:

(i)on a monthly basis and the interest settlement date shall be the 20th day of each month;
(ii)on a quarterly basis and the interest settlement date shall be the 20th day of the last month of the relevant quarter;
(iii)other method:_______________________.
5.ADVANCE AND DRAWDOWN

  5.1 Conditions Precedent to Advance

Unless Party B waives all or part of the following conditions, Party B shall be obligated to advance any amount of the Loan only if all the following conditions continuously remain satisfied:

(1)Party A has completed all the approval, registration, delivery, insurance and other statutory procedures in relation to the Loan hereunder;
(2)the security has become and remains effective, if a security is established for the Contract;
(3)Party A has opened the bank accounts for drawdown and debt service purposes as Party B requests;
(4)Party A has not triggered any event of default hereunder;
(5)no event has occurred that may adversely impact Party B’s rights as a creditor;
(6)the advance to be made by Party B is not prohibited or restricted by any laws, regulations, rules or competent authorities; and
(7)the financial indicators of Party A shall, at all time, continue to meet the requirements specified in Schedule 2 Terms relating to Mandatory Financial Indicators;
(8)Party A has submitted such materials as required in this Contract before any loan drawdown;
(9)the materials submitted by Party A are legal, authenticated, complete, accurate, valid and be in accordance with other requirements of Party B;
(10)Other conditions
   
   

5
 

 

5.2Drawdown Schedule

“Drawdown” referred to in this Contract shall mean disbursements by Party B of the funds to the Loan Disbursement Account in accordance with Party A’s Application and this Contract.

The drawdown schedule hereunder shall be item [see Schedule A] of the following:

(1)The drawdown schedule shall be as follows:
  Drawdown Date (mm/dd/yyyy) Amount
(i)    
(ii)    
(iii)    
(iv)    
(v)    
(vi)    
(2)The drawdown schedule shall be as follows:

(i) from [                       ] to [                       ], Amount__________;

              (mm/dd/yyyy)      (mm/dd/yyyy)

(ii) from [                       ] to [                       ], Amount__________;

              (mm/dd/yyyy)      (mm/dd/yyyy)

(iii) from [                       ] to [                       ], Amount__________;

               (mm/dd/yyyy)      (mm/dd/yyyy)

(iv) from [                       ] to [                       ], Amount__________;

                (mm/dd/yyyy)      (mm/dd/yyyy)

(v) from [                       ] to [                       ], Amount__________;

               (mm/dd/yyyy)      (mm/dd/yyyy)

(vi) from [                       ] to [                       ], Amount__________;

                (mm/dd/yyyy)      (mm/dd/yyyy)

6
 

(3)from time to time, as required by Party A.

 

(4)
   
   

5.3Party A shall draw the Loan in accordance with the drawdown schedule under Article 5.2. Without Party B’s written consent, Party A shall not accelerate, postpone or cancel any drawdown of the Loan.
5.4If Party A draws the Loan in installments, the expiration date of the Term shall be determined in accordance with Article 3 hereunder.
   
 5.5Materials required to be submitted by Party A

In respect of materials required to be submitted by Party A, the Parties agree that Item A applies [choose A or B];

A.

Situation NO. 1

Where the situation described in Item (1) [choose (1) or (2)] arises

(1)the amount of any particular drawdown is more than RMB TEN million and the amount of any scheduled payment out of such drawdown is more than RMB TEN million;

 

(2)
   
   

Party A shall submit to Party B the following materials no later than ONE working days before the date of such drawdown:

(1)the LDC signed by Party A and payment/settlement certificate(s) signed by Party A;

 

(2)materials related to the underlying transactions (including without limitation goods/services/monetary contracts and/or invoices and other documents in writing or electronic form that are capable of evidencing the particular purposes of the loan drawdown);
   
   
   

7
 

 

And other materials required by Party B (including without limitation business license, letter of authorization, articles of association, resolutions of Shareholders’ meeting /Board of directors of Party A’s counterparty).

Situation NO. 2

If Party B determines, after reviewing the aforementioned materials, that Party may initiate the payment in accordance with Article 5.7 of this Contract, or a situation other than Situation NO. 1 arises, Party A shall submit to Party B　the following materials no later than ONE working days before the date of such drawdown

(1)The drawdown schedule corresponding to the proposed loan drawdown (The drawdown schedule being in the form of Schedule 3)

 

(2)LDC signed by Party A;
   
   
   

And other materials required by Party B (including without limitation business license, letter of authorization, articles of association, resolutions of Shareholders’ meeting/Board of directors of Party A ’s counterparty).

B.

Party A shall submit to Party B　the following materials no later than ONE working days before the date of such drawdown regardless of the amount of any particular drawdown:

(1)the LDC signed by Party A and payment/settlement certificate (s) signed by Party A;

 

(2)related to the underlying transactions (including without limitation goods/services/monetary contracts and/or invoices and other documents in writing or electronic form that are capable of evidencing the particular purposes of the loan drawdown);
   
   
   

And other materials required by Party B (including without limitation business license, letter of authorization, articles of association, resolutions of Shareholders’ meeting/Board of directors of Party A ’s counterparty).

5.6     Entrusted Payment through Party B

(1)Situations where Entrusted Payment applies to Party B

If the situation described in (i) arises, Entrusted Payment shall apply, i.e. Party A hereby irrevocably entrusts Party B to pay the amount of the drawdown to Party A’s counterparty. Party A shall not pay such amount directly to such counterparty or any other third party.

8
 

 

(i)the amount of any particular drawdown is more than RMB TEN million and the amount of any scheduled payment out of such drawdown is more than RMB TEN million, and Party B determines, after reviewing the materials submitted by Party A, that recipient of the payment is specific and identifiable;

(ii) Entrusted Payment applies regardless of the amount of any particular drawdown;

(iii) ________________________________________________________________________________

___________________________________________________________________________________

___________________________________________________________________________________ 

 (2)In the case of entrusted payment, Party B deposits the amount of the loan drawdown in the Loan Disbursement Account and pays such amount through Loan Disbursement Account to the account designated by Party A’s counterparty. Party A shall not dispose of the loan drawdown in any way (including without limitation account transfer or withdrawal of cash).
   
(3)Party B will make prima facie examination of the documents submitted by Party A regarding payment amount, time of payment, recipient of payment, means of payment, and related accounts Party B will pay the drawdown amount to Party A’s counterparty if Party B determines at its discretion that it is satisfied with the abovementioned prima facie examination. The obligations of Party B relating to entrusted payment shall be extinguished once the drawdown amount is paid into the account of Party A’s counterparty (the information of such account shall be provided by Party A). Party A shall check and verify the status of payment within one working day after the date of payment and shall notify Party B　in case of failure of payment. Party A shall guarantee that there is consistence between documents/information regarding recipient of payment, utilization of the loan and materials related to underlying documents.
(4)There is no warranty or representation by Party B in respect of the truthfulness or legality or compliance with regulations of the underlying transactions although Party B has made the above-mentioned prima facie examination of the payment documents. Nor shall Party B　be implicated in any dispute between Party A and Party A’s counterparty or any third party. Nor shall Party B be liable for any obligations or liabilities of Party A. Party A shall compensate Party B　for any and all losses incurred by Party B resulting from Party B’s activities relating to Entrusted Payment.
(5)Where there is a failure or delay in payment of the drawdown amount to the account of Party A’s counterparty and such failure or delay is caused by incompleteness, untruthfulness or inaccuracy of the documents submitted by Party A, or by violation of permitted utilization of loan or by information discrepancy or by other reasons but not by Party B’s fault, the following applies:
(i)Party A shall be liable for all the consequences including without limitation all losses caused by the above mentioned failure or delay. Party B　shall not be liable in any way and shall be compensated by Party A for any losses resulting therefrom;

 

9
 

 

(ii)Party A shall not dispose of any of such drawdown amount in anyway (including without limitation account transfer or withdrawal of cash);
(iii)Party A shall resubmit materials, make corrections and/or perform other activities as instructed by Party B within ONE working days;

___________________________________________________________________________________

___________________________________________________________________________________

___________________________________________________________________________________ 

Party B may accelerate the maturity of such loan drawdown if Party A is in breach of any of the above provisions.

(6) Party A shall be liable for any and all risks, liabilities and losses caused by any failure or error or delay in payment which does not result from Party B’s fault. Party B　shall not be liable in any way and shall be compensated by Party A　for any losses resulting therefrom.

5.7     Payment on Party A’s own initiative

Where situation other than that described in Article 5.6 (1) arises, Party A may initiate the payment at its own discretion. i.e. Party B may deposit the drawdown amount to the Loan Disbursement Account as instructed by Party As application for loan drawdown, Party A may then pay such amount directly to the recipient. Party A shall guarantee the conformity between the recipient, utilization of loan and the underlying transaction documents.

5.8The obligations of Party B to advance loans shall be extinguished once the loan amount is deposited into the Loan Disbursement Account regardless of entrusted payment or not. Party A shall ensure the Loan Disbursement Account remain in normal status (including without limitation not subject to freezing by competent authorities). Party A shall bear all risks, liabilities and losses including without limitation freezing and mandatory transfer by competent authorities. Party A shall compensate Party B for any losses resulting therefrom.

5.9     Change of means of payment

Party B is entitled to change the means of payment if any of the following circumstances arises, including without limitation re-determining the situations where Entrusted Payment applies, (e.g. changing the threshold amount for Entrusted Payment) and changing the means of payment in respect of any particular drawdown:

(1) Any event of default by Party A arises;

(2) There arises any event that may adversely impact Party B’s rights as a creditor;

(3) Other circumstances where Party B deems necessary to change the means of payment.

Where Party B changes the means of payment, Party A shall resubmit the materials or perform other activities as required by this Contract and Party B.

10
 

 

6.USE AND SUPERVISION OF ACCOUNTS

6.1 Loan Disbursement Account

The Loan Disbursement Account herein shall be determined in accordance with (2):

 (1)within working days from the date of coming into effect of this Contract and before the date of first drawdown, Party A shall open an account within Party B for the sole purpose of the disbursement and payment of all loan amount under this Contract.
   
(2)other account opened by Party A within Party B (Account Number: 33101995038050503008).

6.2 Account to collect sale proceeds

(1)within ONE working days from the date of coming into effect of this Contract, Party A shall open an account within Party B for the purpose of collecting sale proceeds or designate an existing account within Party B　as such (Account Number: 33101995038050503008).
(2)Party A shall, on a monthly basis (choose “monthly” or “quarterly”), submit a report to Party　B on the incoming and outgoing amounts of such account. Party A shall submit such report for the immediately preceding month or quarter (as the case may be) within the first FIVE working days of each month or quarter.
   
 (3)Party B is entitled to manage the incoming and outgoing amounts of such account. In particular, such account shall be in compliance with (vi) (one or more of the following requirements may be selected):

(i) average balances of such account:

___________________________________________________________________________________

___________________________________________________________________________________ 

(ii) time for incoming payment being deposited into such account:

___________________________________________________________________________________

___________________________________________________________________________________ 

(iii) percentage of the overall sale proceeds of Party A that are to be deposited into such account:

___________________________________________________________________________________

___________________________________________________________________________________ 

(iv) amount limit for any particular outgoing payment of such account:

___________________________________________________________________________________

___________________________________________________________________________________ 

11
 

 

(v) amount limit for daily outgoing payment (s) of such account:

___________________________________________________________________________________

___________________________________________________________________________________ 

(vi) restrictions on internet-banking functions of such account:

___________________________________________________________________________________

___________________________________________________________________________________ 

(vii) no outgoing payment shall be made without Party B’s prior consent;

(viii) Such account shall be used only for the purposes of collecting sale proceeds and repaying the loan, and not for any other purpose;

(iii) ____________________________________________________________________________

___________________________________________________________________________________

___________________________________________________________________________________ 

(x) other requirements by Party B;

(xi) A separate Account Management Agreement signed by both Parties shall be complied with.

7.REPAYMENT

7.1 General Principles for Repayment

Party A shall repay the Loan in accordance with the following principles: Party B has the right to apply Party A’s repayment first towards payment of any expense which shall be borne by Party A as provided hereunder but has been advanced by Party B and the expenses incurred by Party B for realizing its creditor’s rights. Party B shall apply the balance of such repayment in the order of interest first and then principal adhering to the principle that the interest shall be fully repaid concurrently with the repayment in full of all the principal amounts.

For any advance of which the principal has become due but unpaid for more than ninety days, or any advance on which the interest has become due but unpaid for more than ninety days, or any advance otherwise provided by the laws, regulations or rules, Party B may first apply Party A’s repayment towards those payments of expenses set out in the first paragraph of this article. Then Party B may apply the balance of such repayment towards payment in the order of principal first and then interest.

12
 

7.2 Payment of Interest

Party A shall pay due interest to Party B on the interest settlement date. The first interest payment date shall be the first interest settlement date after the release of an advance. All the interest and principal amounts outstanding shall be paid in full on the last repayment date.

7.3 Schedule for Repayment of the Principal

The repayment schedule hereunder shall be determined in accordance with item [see Schedule A] below:

(1)                     The repayment schedule shall be as follows:

  Repayment Date(mm/dd/yyyy) Amount
(i)    
(ii)    
(iii)    
(iv)    
(v)    
(vi)    

 

(2)
   
   

7.4 Repayment Method

Party A shall deposit sufficient amount into the Account to collect sale processor other account at Party B before the repayment date provided hereunder and transfer such amount to repay the Loan (Party B may also debit such amount from such account to repay the Loan), or transfer such amount from another bank account of Party A to repay the Loan.

7.5 Prepayment

Party A may prepay the principals in full or in part upon approval by Party B of a written application submitted to Party B THIRTY working days in advance.

The interest accrued on the principals to be prepaid shall be calculated on the basis of the actual number of days lapsed and the Loan Rate provided herein.

13
 

 

If Party B approves the prepayment by Party A, Party B shall have the right to charge Party A the compensation fee in an amount to be determined in accordance with the (1) of the following methods:

 (1)compensation fee = amount of the principal prepaid × number of months remaining until the scheduled repayment date(the “Remaining Period”) × __1__‰; provided, however, that the part of the Remaining Period that falls short of a month shall be calculated as a full month; or
   
(2)
   
   

If Party A is required to repay the Loan in installments and prepays part of the principal, the prepaid amount shall be applied in the reverse order of the repayment schedule. After any partial prepayment, the outstanding Loan shall still be subject to the Loan Rate provided herein.

8.PARTY A’S RIGHTS AND OBLIGATIONS

8.1 Party A’s Rights

Party A has the rights to:

 (1)request Party B to release each advance of the Loan as provided hereunder;
   
 (2)utilize the Loan for the purposes provided for hereunder;
   
 (3)apply to Party B for extension of the Term hereunder provided that it has satisfied all the conditions as Party B requests;
   
(4)require Party B to keep confidential the relevant financial information and manufacturing and operating trade secrets furnished by Party A except provided otherwise by law, regulations and rules, or required otherwise by the competent authorities, or agreed otherwise between the both parties hereto;
(5)reject Party B or its employees asking for bribe; it shall have the right to lodge complaint with the competent authority about such misconduct and any other act of Party B that may violate the laws and regulations relating to the lending interest rate and service charges.

8.2 Party A’s Obligations

(1)Party A shall draw the Loan and repay the principal and interest in full as provided herein, and bear the expenses and fees as provided herein;
(2)Party A shall provide its financial, accounting as well as manufacturing and operating information and other materials as the Party B may request, and among other things, on or before the TWENTY working day of the first month of each quarter, Party A shall provide to Party B with the balance sheet and the profit and loss statement (or the income and expenditure statement, if Party A is a public institution) up to the end of the preceding quarter, and shall provide the cash flow statement at the end of each year in a timely fashion. Party A shall be responsible for the legality, truthfulness, accuracy, completeness and validity of the information it provides, and shall not provide false information or conceal material facts with respect to its financial and operation status;

14
 

 

(3)In case of any change in Party A’s name, legal representative (or principal officer), registered address, business scope, registered capital, articles of association or any other registration with local industrial and commercial authority, or there arises any circumstances that may adversely affect Party A’s capability to repay the indebtedness or may endanger Party B’s rights as a creditor, Party A shall notify Party B in writing of the same with relevant documents together with such notification evidencing the changes within 3 working days thereafter;
(4)Party A shall utilize the Loan in accordance with the purposes as provided herein, and shall not misappropriate the Loan or utilize the Loan to carry out any transactions in violation of the laws and regulations, nor for investments in fixed assets, or equity or other areas, nor for production or operations prohibited by the state, nor for repaying the indebtedness incurred as a result of Party A’s investments in fixed assets or equity etc.; Party A shall cooperate with Party B in its inspection of Party A’s manufacturing, operating and financial activities and utilization of the Loan herein, and shall be subject to the requirements of Party B relating to loan management; Party A shall not try to evade its repayment obligations owing to Party B by means of withdrawing capital it has injected, transferring assets or entering into related-party transactions. Further, Party A shall not attempt to obtain loans or credit facilities from Party B by using dummy contracts with its related parties or by pledging such rights as notes receivable or accounts receivable without actual underlying transactions or by applying to Party B for discounting the same; Party A shall be in compliance with the provisions relating to means of payment and shall not evade Entrusted Payment by way of dividing a larger-amount payment into payments in smaller amounts;
   
 (5)Party A shall comply with the regulations relating to environmental protection, if the Loan hereunder shall be utilized for manufacturing or project construction;
   
 (6)Without Party B’s consent, Party A shall not mortgage or pledge any assets acquired by utilizing the Loan hereunder for the benefit of a third party before full repayment of the principals and interest accrued thereon;
   
 (7)If Party A qualifies as a group customer, it shall promptly report to Party B any related-party transactions involving more than 10% of Party A’s net assets, including (i) the relationship among all the parties to such transaction; (ii) the transaction and its nature; (iii) the transaction amount or the relevant ratio; and (iv) pricing policy (also applicable to the transactions with no price or merely nominal price);
   
 (8)Party A shall not carry out merger, split-up, transfer of shares, outward investment, substantial increase of debt financing or other activities of importance without Party B’s prior written consent. For the avoidance of doubt, such consent shall not impair Party B’s rights to take remedial measures if Party B determines at a later time that such activities of Party A may endanger Party B’s rights as a creditor;
   
 (9)In the case of payment at Party A’s own initiative, Party A shall submit reports to Party　B on the use and payment of loan amounts on a monthly basis. Party A shall submit such report for the immediately preceding month within the first TEN working days of each month, together with a list of actual uses of loan amounts, until the date of repayment of all the loan. Such report shall be in the form attached in Schedule 4.

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9.PARTY B’S RIGHTS AND OBLIGATIONS

9.1       Party B is entitled to request Party A to repay the principal, interest accrued thereon and expenses when due, to manage and control the payment of loan amounts, to monitor on a real-time basis overall cash flows of Party A and to accelerate the maturity of the loan considering the status of collection of sale proceeds of Party A. Party B may exercise any other rights hereunder and demand Party A to perform any other obligations hereunder.

9.2       Party B is entitled to engage in Party A’s large-amount financing (The total amount of such financing shall be more than RMB SEVENTY-FOUR MILLION or Foreign Exchange equivalent), sale of assets, merger, split-up, stock-company restructuring, bankruptcy, liquidation and other activities for the purpose of protecting Party B’s rights. The way(s) of engagement shall be (1) (multiple choices are allowed)

(1) Party A shall seek Party B’s prior written consent before carrying out any of the above activities;

(2) Party B is entitled to arrange for Party A’s large-amount financings;

(3) the sale price and buyer of the assets shall be in compliance with the following:

___________________________________________________________________________________

___________________________________________________________________________________ 

(4)__________________________________________________________________________________

___________________________________________________________________________________ 

(5) other ways Party B deems fit.

9.3Party B shall advance the Loan as provided herein unless the delay or failure in advancing the Loan is caused by any reason attributable to Party A or any other reason that can not be attributed to Party B.
   
 9.4Party B shall keep confidential the relevant financial documents and manufacturing and operating trade secrets furnished by Party A except otherwise provided by the laws, regulations and rules, or required by the competent authorities, or agreed between the parties hereto.
   
 9.5Party B shall not bribe Party A or its employees, nor request any bribe or accept any bribe offered by Party A.
   
 9.6Party B shall not engage in any activity which is dishonest or will be detrimental to Party A’s lawful interests.

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10.DEFAULT AND REMEDY

10.1    Events of Default by Party B and Liabilities

(1)If Party B does not advance the Loan as provided herein without justifiable reason, Party A may request Party B to advance the Loan in accordance with the Contract.
(2)If Party B charges any interest or fee which is prohibited by the laws or regulations, Party A may request Party B to refund the interest or fee charged.

10.2    Events of Default by Party A

The events of default by Party A shall include:

(1)    Party A breaches any statutory obligation or any contractual obligation hereunder; and

(2)    Party A has repudiated its obligations hereunder expressly or by its conduct.

10.3    Events that may Adversely Impact Creditor’s Rights

(1)the occurrence of any of the following events upon Party A which Party B believes may adversely impact its creditor’s rights:

contracting, trustee (receiver) being appointed, lease, shareholding restructuring, decrease of its registered capital, investment, joint operation, mergers and acquisitions, acquisition and restructuring, division, joint venture, shares transfer, substantial increase of debt financing, applying for (or subject to an application for) temporary cessation of operation or dissolution, revocation, applying for (or subject to an application for) bankruptcy, change of controlling shareholders/actual controllers, transfer of material assets, suspension of production or operation, significant penalty imposed by regulatory authorities, cancellation of registration, revocation of business license, involvement in material legal proceedings, severe deterioration in operation and financial condition, deterioration of credit standing, legal representative/principal officer being unable to perform their duties;

(2)the occurrence of any of the following events which Party B believes may adversely impact its creditor’s rights:

Party A fails to repay any other due debts, including such debts owed to any other branch or organization of China Construction Bank or to any other third party; Party A transfers assets at a low price or for free; Party A relieves or waives any debt of a third party; Party A fails to exercise its creditor’s rights or any other rights; or Party A provides security for a third party; financial indicators of Party A fail to meet, on a continuous basis, the requirements specified in Schedule2; there are unusual fluctuations in any of Party A’s accounts (including without limitation account to collect sale proceeds and other account subject to Party B’s supervision);there are grave cross-defaults by Party A; profit-making capability of Party A’s core business is undesirable; there is irregularity in the use of loan;

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(3)Party A’s shareholder manipulates the independence status of Party A as a legal person or the limited liability status of the shareholder in order to evade debts, and Party B believes this manipulation may adversely impact its creditor’s rights;
(4)any of the conditions precedent to advance the Loan has not been satisfied continuously;
(5)the occurrence of any of the following events upon the guarantor which Party B believes may adversely impact its creditor’s rights:
(i)the guarantor breaches any provision of the guarantee contract, or any of the representations and warranties it has made proves to be false, wrong or incomplete;
(ii)contracting, trustee (receiver) being appointed, lease, shareholding restructuring, decrease of its registered capital, investment, joint operation, mergers and acquisitions, acquisition and restructuring, division, joint venture, shares transfer, substantial increase of debt financing, applying for (or subject to an application for) temporary cessation of operation or dissolution, revocation, applying for (or subject to an application for) bankruptcy, change of controlling shareholders/actual controllers, transfer of material assets, transfer of assets at a low price or for free, relieving or waiving any debt of a third party; failure to exercise its creditor’s rights or any other rights, suspension of production or operation, significant penalty imposed by regulatory authorities, cancellation of registration, revocation of business license, involvement in material legal proceedings, severe deterioration in operation and financial condition, deterioration of credit standing, legal representative/principal officer’s inability to perform their duties, which may adversely impact its capability as a guarantor;
(iii)other events in which the guarantor has lost or may lose its capability as guarantor.

(6)          the occurrence of any of the following events on the mortgage or pledge which Party B believes may adversely impact its creditor’s rights:

(i)the mortgaged or pledged property is damaged, destroyed or its value is reduced as a result of a third-party’s action, expropriation, confiscation, eminent domain or redevelopment and relocation by the government, market change, or any other reason;
(ii)the mortgaged or pledged property has been seized, impounded, frozen, mandatorily debited, put on lien, sold by auction, subject to administration order by a government authority, or a dispute over the ownership of the mortgaged or pledged property occurs;
(iii)the mortgagor or pledgor breaches any provision of the mortgage/pledge contract, or any of the representations and warranties it has made proves to be false, wrong or incomplete;

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(iv)other events that may adversely impact Party B’s ability to realize its mortgage or pledge.
(7)the security is not effected, becomes ineffective, invalid, or is rescinded or terminated, or the security provider defaults or repudiates its obligations expressly or by conduct, or the security provider has lost its capability to perform its obligations as a security provider in whole or in part, or the value of the collateral is reduced, which Party B believes may adversely impact its creditor’s rights; or
(8)other events which Party B believes may adversely impact its creditor’s rights.
10.4Party B’s Remedy

Upon occurrence of any event under Article 10.2 or 10.3, Party B may exercise one or more of the following rights:

(1)to stop advancing the Loan;
(2)to request for more conditions precedent for loan advance and payment;
(3)to change the means of payment of loan in accordance with this Contract;
(4)to declare the Loan immediately due and payable, and request Party A to repay immediately all the due and undue principal, interest and fees;
(5)if Party A fails to make any drawdown in accordance with the Contract, Party B may hold Party A liable to pay a penalty equal to 0 % of the Loan proceeds not drawn and may reject Party A’s request for drawing such Loan;
(6)if Party A utilizes any part of the Loan for any purpose other than as provided herein, interest on the misappropriated amount shall be calculated and compounded for the period from the date of the misappropriation to the date when all the principal and interest have been fully paid in accordance with the relevant default interest rate and the interest settlement method as provided herein;
(7)if any principal is overdue, the interest on such principal and on any overdue interest (including whole or part of the principal and interest which have been accelerated), shall be calculated and compounded for the period from the first date such principal becomes overdue to the date when all the principal and interest have been fully paid, in accordance with the relevant default interest rate and the interest settlement method as provided herein;

“Overdue” herein means that Party A fails to repay the Loan on the repayment date or, in case of repayment in installments, fails to repay the relevant installments in accordance with the repayment schedule as provided herein.

Before any principal is overdue, the overdue interest shall be compounded in accordance with the interest rate and the interest settlement method as provided herein;

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(8)other remedies, including but not limited to:
(i)to debit Party A’s accounts at China Construction Bank in RMB or other currencies with corresponding amount without prior notice to Party A;
(ii)to exercise its rights under the security interest;
(iii)to request Party A to provide new security satisfactory to Party B for all the debts of Party A hereunder;
(iv)to decline Party A’s request to dispose of its deposits of corresponding amount, within any account opened with any branch of China Construction Bank (including without limitation the account to collect sale proceeds);
(v)to terminate the Contract.
11.MISCELLANEOUS

11.1       Cost Allocation

(1)all costs and expenses incurred as a result of Party A’s breach of any provision in this Contract, including without limitation court fees, arbitration fees, property preservation fees, travel expenses, enforcement expenses, valuation/appraisal fees, auction fees, notary fees, service fees, public announcement costs, legal fees, shall be borne by Party A.
(2)in respect of other fees the parties agree as follows:
11.2Use of Party A’s Information

Party A agrees that Party B is entitled to inquire about Party A’s creditworthiness with the Credit Database or relevant authorities established or approved by the People’s Bank of China and the Credit Reference Agency, and that Party B is entitled to provide Party A’s information to such Credit Database. Party A further agrees that Party B may reasonably use and disclose Party A’s information for business purpose.

11.3Collection by Public Announcement

In the event that Party A fails to repay on time any principal or interest or breaches any other contractual obligations hereunder, Party B is entitled to report to relevant authorities and demand repayments by means of public announcement via press.

11.4Party B’s Record as Evidence

Unless there is reliable and definitive evidence to the contrary, Party B’s internal records of principal, interest, expenses and repayment, receipts, vouchers made or retained by Party B during the course of drawdown, repayment and interest payment, and records and vouchers relating to the collections by Party B shall constitute valid evidence of the creditor-debtor relationship between the two parties. Party A shall not raise any objection merely because the above records, receipts, vouchers are made or retained by Party B.

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11.5No Waivers

Party B’s rights hereunder shall not prejudice or exclude any other rights Party B is entitled to under applicable laws, regulations and other contracts. No forbearance, extension of time limit, preferential treatment or delay in exercising any right hereunder shall be deemed to constitute a waiver of rights and interests hereunder or permit or recognition of any breach of the Contract. Nor shall it restrict, prevent or interfere with the continuous exercise of such right at a later time or any other right, nor shall the foregoing cause Party B to be liable in any way to the Borrower.

11.6If Party A owes Party B any other due and payable debts in addition to the debts hereunder, Party B may debit any of Party A’s account at China Construction Bank in RMB or other currencies and may choose to repay any of the due and payable debts in the order it deems appropriate. Party A agrees not to raise any objection with respect thereto.
11.7In the event of any change to the address or other contact information, Party A shall promptly notify Party B of such change in writing. Party A shall be liable for any loss caused by its failure of giving prompt notice of such change.
11.8Direct Debit Right

Party B is entitled to debit, without prior notice to Party A, any account of Party A at China Construction Bank in RMB or other currencies to pay all amounts payable under the Contract. Party A shall assist Party B to complete any procedures for foreign exchange settlement or sale, and Party A shall bear the risk of exchange rate fluctuation.

11.9Dispute Resolution

Any dispute arising from the performance of the Contract may be settled by consultation. If the dispute cannot be resolved through consultation, such dispute shall be submitted to (1) [please select from below]:

 (1)the People’s court within the jurisdiction where Party B is located.
   
(2)[name of the arbitration committee] for arbitration at ____ [place of arbitration] in accordance with the then prevailing arbitration rules. The arbitration award shall be final and binding on both Party A and Party B.

The undisputed provisions shall remain enforceable during the process of litigation or arbitration.

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11.10Effectiveness of the Contract

The Contract shall become effective upon:

 (1)execution by the legal representative/(principal officer) or authorized representative of Party A and being affixed with the company chop of Party A; and
   
(2)execution by the principal officer or authorized representative of Party B and being affixed with the company chop of Party B. All Schedules of this Contract shall constitute integral parts of this Contract and shall be equally binding.

 11.11The Contract shall be executed in _______ counterparts.
   
11.12Other Provisions:

___________________________________________________________________________________

___________________________________________________________________________________ 

___________________________________________________________________________________

___________________________________________________________________________________ 

12.REPRESENTATIONS
12.1Party A clearly understands the business scope and authorization limit of Party B.
12.2Party A has read the Contract. Party B, at Party A’s request, has explained the terms of the Contract, and Party A fully understands their meanings and corresponding legal consequences.
12.3The execution and performance of the Contract by Party A is in compliance with laws, administrative regulations, rules and Party A’s articles of association (or its other internal constitutional documents) and has been approved by its internal competent organization and/or the competent governmental authorities.
12.4Party A carries out production and operation in compliance with laws and regulations.
12.5Party A has the capability to keep its business going and has the legitimate sources to repay the loan.
12.6Party A warrants that the loan amount requested under this Contract is no more than necessary to meet the real needs of Party A for the purposes specified herein.
12.7Both Party A and its controlling shareholder have good financial standing and have no record of gross misconducts.
12.8Party A agrees that Party B has the right to instruct other branches of China Construction Bank to advance loan under this Contract and to exercise or perform the rights and obligations hereunder.
12.9Party A represents that, at the time of execution of this Contract, there exists no action or event that violates any applicable laws, regulations or rules in relation to environmental protection, energy saving and emission/pollution reduction (the “Environmental Laws”). Party A further warrants that it shall strictly comply with such Environmental Law after the execution of this Contract. If any of the above representations or warranties is untrue, or Party A defaults on any of the above undertakings, or there is any potential risk of energy dissipation or pollution by Party A, Party B is entitled to stop advancing loans, to declare an acceleration of the principal and interest not yet due hereunder, or adopt other remedial measures provided hereunder or permitted by laws.

22
 

Party A (Company Chop)

By the legal representative (principal officer) or authorized representative:

Signature: __________________________

Date:

 

Party B (Company Chop)

By the principal officer or authorized representative:

Signature: __________________________

Date:

 

 

 

 

 

 

23
 

Schedule 1

 

Loan Information

 

1. Specific purposes of the loan:

This Loan is used for company’s daily operation expense, including material purchase payment and employee’s salary.

 

___________________________________________________________________________________

___________________________________________________________________________________ 

___________________________________________________________________________________

___________________________________________________________________________________ 

Party A shall not change the purpose of the loan without Party B’s written consent.

 

2. Sources of funds for loan repayment:

Company’s proceeds of sales.

 

___________________________________________________________________________________

___________________________________________________________________________________ 

___________________________________________________________________________________

___________________________________________________________________________________ 

 Party A guarantees the truthfulness and legality of such sources of funds and the steadiness and adequacy of cash flows of such sources.

 

3. Miscellaneous

___________________________________________________________________________________

___________________________________________________________________________________ 

___________________________________________________________________________________

___________________________________________________________________________________ 

24
 


Schedule 2

 

Mandatory Financial Indicators

 

The Financial indicators of Party A shall on a continuous basis meet the following requirements:

Maximum Monthly Capital/Debt                65%

Minimum Current Ratio:                100%

Minimum liquidity Ratio:                60%

Maximum contingency liability/Capital                30%

Maximum accumulated long term investment/Capital                30%

___________________________________________________________________________________

___________________________________________________________________________________ 

___________________________________________________________________________________

___________________________________________________________________________________ 

 

Party B has the right to change unilaterally such requirements as to mandatory indicators provided that FIVE working-day advanced notice is issued to Party A.

 

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Schedule 3

 

 

Schedule for Loan Drawdown

Contract Number  
Date of Drawdown  
No. Proposed Purpose Proposed Payment Amount

Proposed Recipient

(if any)

 Notes
1        
2        

…

…

        
Total              RMB  (CAPITALIZE WORDS)

 

 

Name of the Borrower (company seal):

           

 

 

 

 

 

 

 

26
 

 

 

Schedule 4

 

Consolidated report on payment at Party A’s initiative

Contract Number  
Date of Delivery  
NO. Actual purpose of the Loan Recipient Amount Evidencing Materials Whether or not in compliance with the  purpose specified in this Contract
1          
2          
……          
total             RMB (CAPITALIZE WORDS)

 

 

Name of the Borrower (company seal):

Internal review

 

 

Relationship Manager (signature):

 

 

Officer in charge of reviewing loan advances and payments (signature):

             

 

 

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Loan Commencement Date

Loan Expiration Date

 

 Loan Amount Loan Rate Drawdown Schedule Schedule for Repayment
September 13, 2013 January 10, 2014 255,142.40 USD A fixed interest rate of 4.0999%, equal to LIBOR plus 230 basis points and 150 basis points of service charge

Option 1:

On September 13, 2013 for 255,142.40 USD

Option 1:

On January 10, 2014 in the amount of 255,142.40 USD

October 25, 2013 February 21, 2014 85,772.84 USD A fixed interest rate of 4.0770%, equal to LIBOR plus 230 basis points and 150 basis points of service charge

Option 1:

On October 25, 2013 for 85,772.84 USD

Option 1:

On February 21, 2014 in the amount of 85,772.84 USD

October 28, 2013 February 25, 2014 575,998.60 USD A fixed interest rate of 4.1539%, equal to LIBOR plus 230 basis points and 150 basis points of service charge

Option 1:

On October 28, 2013 for 575,998.60 USD

Option 1:

On February 25, 2014 in the amount of 575,998.60 USD

October 28, 2013 February 25, 2014 369,096.00 USD A fixed interest rate of 4.1539%, equal to LIBOR plus 230 basis points and 150 basis points of service charge

Option 1:

On October 28, 2013 for 369,096.00 USD

Option 1:

On February 25, 2014 in the amount of 369,096.00 USD

November 1, 2013 February 28, 2014 225,791.00 USD A fixed interest rate of 4.0783%, equal to LIBOR plus 230 basis points and 150 basis points of service charge

Option 1:

On November 1, 2013 for 225,791.00 USD

Option 1:

On February 28, 2014 in the amount of 225,791.00 USD

November 1, 2013 February 28, 2014 8,185.00 USD A fixed interest rate of 4.0783%, equal to LIBOR plus 230 basis points and 150 basis points of service charge

Option 1:

On November 1, 2013 for 8,185.00 USD

Option 1:

On February 28, 2014 in the amount of 8,185.00 USD

November 8, 2013 March 7, 2014 284,251.65 USD A fixed interest rate of 4.0757%, equal to LIBOR plus 230 basis points and 150 basis points of service charge

Option 1:

On November 8, 2013 for 284,251.65 USD

Option 1:

On March 7, 2014 in the amount of 284,251.65 USD

November 8, 2013 March 7, 2014 18,379.12 USD A fixed interest rate of 4.0757%, equal to LIBOR plus 230 basis points and 150 basis points of service charge

Option 1:

On November 8, 2013 for 18,379.12 USD

Option 1:

On March 7, 2014 in the amount of 18,379.12 USD

November 29, 2013 March 28, 2014 574,067.50 USD A fixed interest rate of 4.0745%, equal to LIBOR plus 230 basis points and 150 basis points of service charge

Option 1:

On November 29, 2013 for 574,067.50 USD

Option 1:

On March 28, 2014 in the amount of 574,067.50 USD

November 29, 2013 March 28, 2014 15,873.50 USD A fixed interest rate of 4.0745%, equal to LIBOR plus 230 basis points and 150 basis points of service charge

Option 1:

On November 29, 2013 for 15,873.50 USD

Option 1:

On March 28, 2014 in the amount of 15,873.50 USD

 

28

Exhibit 10.13

 

General Credit Facility Agreement

 

The undersigned, Applied Optoelectronics, Inc., Taiwan Branch. (hereinafter “Borrower”) and it guarantor (hereinafter “Guarantor”, together with the Borrower, the "Undersigned") hereby agree to the terms and conditions set forth below in addition to the General Loan Agreement, Letter of Guarantee and other signed instruments with respect to the credit facility extended by E. Sun Commercial Bank, Ltd. (hereinafter “Bank”):

 

Part I     Basic Terms

 

1.     The two types of credit and the line under this Agreement are as follows, marked with “X”:

 

x Credit in New Taiwan Currency (NTD) Line of Credit Credit in foreign currency Line of Credit
Working Capital Loan NTD 120 million Working Capital Loan USD
Advance for domestic draft NTD Issuance of foreign letter of credit USD
Export Loan NTD x DA, DP, OA financing USD 4 million
Guarantee for issuance of commercial promissory note NTD Guarantee USD
Issuance of domestic letter of credit NTD    
Guarantee NTD    
       

 

Borrower shall draw down the line up to the above credit line on a revolving basis, provided that the balance of each line of credit upon such drawdown shall not exceed the general credit line of NTD 120 million. In case of foreign currency, the general credit line shall be calculated based on the foreign exchange rate published by the Bank.

 

In the event that there exists any outstanding debt in the credit used by Borrower under the general credit line agreement, the remaining amount of such outstanding debt shall be incorporated into the credit line and general credit line as defined in this article for the purpose of calculation.

 

In the event that any drawdown is in foreign currency and exceeds its single credit line or general credit line due to the fluctuation of foreign exchange rate or otherwise, such exceeding part shall be jointly repaid by the Applicant

 

2.     During the revolving credit facility term, unless otherwise provided by each type of credit, Borrower may request for loans from the Bank during the period from December 17, 2013 to December 17 2014, with the initial drawdown to occur no later than December 17 2014, or this Agreement shall be void. Even if the amount of the drawdown during the above revolving credit term shall be repaid after expiration of such term, the Undersigned shall assume the responsibility for repayment and guarantee as required hereunder.

 

1
 

 

3.     For the purpose of drawdown of credit, Borrower shall submit a Drawdown Request acceptable to the Bank and relevant documents and can only draw down the line with the approval of the Bank. Subject to the approval by the Bank, the term of the drawdown shall be calculated in accordance with the relevant Drawdown Request. Each Drawdown Request and document shall be deemed a part of this Agreement and shall have the same legal force as this Agreement.

 

4.     Borrower agrees that the drawdown shall be deemed received by Borrower once the Bank deposits the drawdown into the Borrower’s bank account opened with the Bank or satisfies the purpose designated by the Borrower.

 

5.     Base interest rate and time deposits interest rate index

 

5.1     Base interest rate

 

5.1.1     Basis of pricing: The base interest rate = the arithmetic average of the overnight TAIBOR over the past three months + the margin determined, where “the arithmetic average of the overnight TAIBOR over the past three months” is based on the arithmetic average of the overnight TAIBOR published by “the Taipei Interbank Discount Center” and “the margin determined” will be the rate determined and subject to adjustment by the Bank in consideration of the funding cost, operational cost and interest risk. The Bank shall in its sole discretion adjust the foresaid calculation to reflect the change of prevailing market environment.

 

5.1.2     The reference rate will be based on the arithmetic average of the overnight TAIBOR published by the Taipei Interbank Discount Center over a full 3-month period (rounded up to two decimal places) prior to the adjustment date.

 

5.1.3     Frequency and method of adjustment

 

5.1.3(a) □ The base interest rate will be adjusted on a quarterly basis respectively on 23 March, 23 June, 23 September and 23 December each year (or the business day that follows if it falls on a non-business day).

 

Frequency of Adjustment Table:

Adjustment date 23 March 23 June 23 September 23 December
Effective period 23 March – 22 June 23 June – 22 September 23 September – 22 December 23 December – 22 March of the following year
Reference date to be taken 1 December – 29 February 1 March – 31 May 1 June – 31 August 1 September – 30 November

 

5.1.3(b) □ The base interest rate will be adjusted on a monthly basis on the 23rd day each month (or the business day that follows if it falls on a non-business day).

 

5.1.4     In case of a major force majeure event (for example, the reference bank acquires or merges or is acquired or merged, is defunct or information on the overnight TAIBOR is not accessible to the reference bank), the Bank may change the basis for determining the base interest rate.

 

2
 

 

5.2     Time deposits interest rate index

 

5.2.1     Basis of pricing: The time deposits interest rate index means the average of the interest rates applicable to one-year time deposits adopted by the reference bank to be selected from among the Bank of Taiwan, Changhwa Bank, Hua Nan Bank, First Bank, Cooperative Bank, Land Bank, Mega Bank, Cathay United Bank, Taiwan Medium and Small Enterprises Bank and the Chinatrust Bank (as posted on the website of the Bank as of the drawdown).

 

5.2.2     Frequency and method of adjustment:

 

5.2.2(a) □ The time deposits interest rate index will be adjusted on a quarterly basis with adjustments to occur on 21 February, 21 May, 21 August and 21 November respectively each year (or the business day that follows if it falls on a non-business day). The reference rate taken will be the average of the daily interest rate posted by the Central Bank of Republic of China (Taiwan) over the period from the 11th day through the 17th of the month rounded up to two decimal places.

 

Frequency of Adjustment Table:

Adjustment date 21 February 21 May 21 August 21 November
Effective period 21 February – 20 May 21 May – 20 August 21 August – 20 November 21 November – 20 February of the following year
Reference date to be taken 11 – 17 February 11 - 17 May 11 – 17 August 11 – 17 November

 

5.2.2(b) x The time deposit interest rate index will be adjusted on a monthly basis on the 21st day each month (or the business day that follows if it falls on a non-business day) and effective from the 21st day of the month through the 20th day of the following month. The reference rate taken will be the average of the daily interest rate posted by the Central Bank of Republic of China (Taiwan) over the period from the 11th day through the 17th of the month rounded up to two decimal places.

 

5.2.3 The undersigned agree that in the event of any of the following, the Bank may in its sole discretion change the reference bank and forthwith select another domestic bank for the designated bank to take the reference rate.

 

5.2.3(a) The reference bank merges or is merged, defunct, voluntarily suspends its business, is bankrupt, subject to reorganization or involuntary business suspension, or is put under official supervision or takeover as provided in the Article 62 of Banking Act of Republic of China.

 

5.2.3(b) One of the reference banks has withheld the offer of products to which the fixed interest rate applicable to one-year time deposit applies.

 

5.3 Manner of disclosure: Each post-adjustment base interest rate and time deposit interest rate index will be published on the interests rate bulletin board of the business units each of the Bank and the official website of the Bank (www.esunbank.com.tw).

 

3
 

 

6.     Borrower hereby authorizes the Bank to withdraw from time to time from Borrower’s current account (A/C No. 0808-940-005298) with the Bank via the automatic equipment or based on the evidence of withdrawal of savings signed by the authorized signatory of the Bank without the relevant passbook, signed request for withdrawal or check drawn by Borrower for the amount equal to the relevant amount of obligation owed, due and payable by Borrower as well as the relevant cost and charges incurred (including the principal, interest, default penalty, service charges, service charges of credit guarantee fund, insurance premium, cost arising from the Bank’s enforcement of the relevant claims in Borrower). Borrower acknowledges and agrees that the above relevant procedure shall be in accordance with the relevant rules of the Bank and that he/she shall not terminate, withdraw or impose restrictions on the above authorization without the consent of the Bank before his/her indebtedness owed to the Bank is duly repaid in full and nor shall he/she close the above savings account. Borrower agrees that this Agreement serve as the evidence of the above authorization.

 

7.     The Borrower shall repay in NTD any foreign currency loan and accrued interest at the exchange rate designated by the Bank at the time of such repayment or at the rate as set forth in a forward foreign exchange purchase agreement executed by Borrower and the Bank or in the original currency. In the event that Borrower delays in repayment of any loan and the exchange rate between the foreign exchange loan and the NTD changes, the risk associated with such exchange rate variation shall be borne by Borrower, and the Bank shall have the right to record the principal, interest and relevant costs in NTD at the exchange rate published by the bank on the record date and the Undersigned shall not raise any objection to such conversion date, foreign exchange rate and the amount. However, the Bank shall not be obligated to make such conversion.

 

8.     Borrower requesting for drawdown of the credit line shall pay in full the loan, interest, account opening commission and guarantee commissions and acceptance commission. In case of delay in repayment of the Principal, Borrower shall pay the late payment interest at the rate agreed upon by both parties. In case of delay in repayment of the principal and interest of less than 6 months, as from the maturity date, the late payment interest at the rate of 10% shall be charged; for the part the payment of which is delayed for more than 6 months, the late payment interest at the rate of 20% shall be charged. In the event that Borrower fails to repay the loan or pay any costs on a timely basis, Borrower shall pay the late payment fee at the base rate of the Bank plus the annual rate of 3.95% as from such maturity day.

 

In the event that Borrower fails to repay any foreign exchange loan or costs on a timely basis, the late payment interest shall be charged at the foreign exchange credit interest rate published by the Bank on the maturity date or due date or at the NTD base rate plus an annual rate of 3.95%, whichever is higher. In case of delay in repayment of the principal and interest of less than 6 months, as from the maturity date, the late payment interest at the rate of 10% shall be charged; for the part the payment of which is delayed for more than 6 months, the late payment interest at the rate of 20% shall be charged. In such case, the Undersigned shall be jointly and severally liable for the necessary costs incurred by the Bank for the purpose of enforcing its claims under this Agreement.

 

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9.     In the event that the Borrower entrusts the Bank to guarantee or accept any bills and the Bank is obligated to make any advance due to Borrower’s non-performance under any of such, or any breach event as described in article 5 of the Credit Facility Agreement (in case of the event descried in article 5.2, the Bank shall give a reasonable prior notice or reminder letter) occurs, then, in order to ensure that the Borrower performs its repayment obligation in respect of such guarantee or acceptance, the Bank may liquidate first all the bills guaranteed or accepted in the benefit of the Bank without performing its guarantee or acceptance responsibility and dispose of any collaterals by operation of law. The Bank may, after deduction of such amounts advanced and any other necessary costs incurred by it, retain the remaining amount of such proceeds to the extent of the amount payable under such guarantee or bill acceptance. In the event that the collateral is insufficient or absent, the Undersigned shall replenish the collateral or provide sufficient cash, or allow the Bank to retain the cash deposited by Borrower with the Bank for any further repayment to the extent of the amount payable under such guarantee or acceptance (in case of time deposit, the deposit deed shall be terminated first.) In the event that the Bank is exempted from the guarantee or acceptance obligation without making any advance, such retained amount shall be returned to the Undersigned. (This article is an optional article to be discussed by both parties)

 

10.    Guarantor represents and warrants to be jointly and severally liable for the obligations, including the principal, interest, default interest, default penalty, damages and all debts arising from the obligations owed to the Bank by Borrower under this Agreement. Guarantor further represents and warrants that he/she will neither voluntarily withdraw his/her guaranty nor refuse to perform his/her obligations as the guarantor by reason of the absence of Guarantor’s specimen-registered seal on the Drawdown Request issued by Borrower.

 

11.    The balance of the line of credit hereunder shall be determined subject to the amounts reflected in the Drawdown Request, the Application For Issuance of Irrevocable Documentary Letter of Credit, or the Bill or the Bank’s relevant vouchers or book records.

 

12.    With respect to any operations, responsibilities and liabilities under the line of credit hereunder, the Undersigned shall comply with, in addition to terms and condition of this Agreement or any other special provisions, the Uniform Customs and Practice for Documentary Credits, the Uniform Rules for Collections, the International Rules for the Interpretation of Trade Terms, as well as rules related to foreign exchange administration, published by International Chamber of Commerce. In case of amendment to any of the above rules, the Bank may, subject to such amended rules, opt to change, adjust or terminate this Agreement and the Undersigned will not raise any objection thereto.

 

13.    This Agreement shall be performed in Banqiao Branch of the Bank. The undersigned agree that the Taipei District Court or the New Taipei District Court, Taiwan will be the court of first instance having jurisdiction over all actions arising from or in connection with this Agreement.

 

Part II     Special Provisions

 

Intentionally Omitted.

 

D/A, D/P, O/A financing

 

1.The term of each loan shall not exceed 180 days.
2.The interest shall be calculated based on ______ or at the rate recorded in the Drawdown Request.
3.For the import loan granted under this line of credit, the Bank may pay the foreign capital payable under D/A, D/P, O/A which Borrower entrusts the Bank to deal with after granting such import loan.

 

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4.Borrower may apply to the Bank for loan under D/A, D/P, O/A in any other foreign currencies, but each loan shall be denominated in USD at the exchange rate designated by the Bank and shall be deemed part of the line of credit under this Agreement.
5.For the purpose of applying for import under D/A, D/P, , subject to the approval of the Bank, Borrower may apply to the Bank for shipping guarantee or sub-bill of landing endorsement to the extent of the agreed upon line of credit. Borrower shall submit the affidavits (specific to import collection shipping guarantee or sub-bill of landing endorsement) and all the deeds and documents as required by the Bank. The Undersigned and the Guarantor undertake to be liable for any damages suffered by the Bank in accordance with the amounts and provisions in each affidavits and relevant documents until the shipping documents are delivered to the Bank and the Principal carries out bill acceptance or makes the payment therefor.
6.When Borrower applies for loan under D/A, D/P or O/A, it may submit the Drawdown Request, promissory note or any other creditor’s right certificate,
   
  The Bank will not be liable for any losses or depreciation of all or any part of the products purchased or sold hereunder as a result of marine perils, piracy, flood, fire or any other force majeure event, or refused claim settlement or insufficient settlement or delay in indemnification or otherwise, thus making import or export impossible.

 

The undersigned represent that they were given a reasonable period of time to review this Agreement and that they have thoroughly read, understood and hereby accept in full the provisions of this Agreement as follows:

 

Acknowledged and accepted by :

 

Borrower :

Applied Optoelectronics, Inc., Taiwan Branch.

Responsible Person: Thompson, Lin

Address: 7F.-1,NO.700, Jhongjheng Rd., Jhonghe District , New Taipei City 23552, Taiwan

 

By:          /s/ Chih-Hsiang (Thompson) Lin

                (By seal)

 

By:          /s/ Applied Optoelectronics, Inc.

                (By corporate seal)

 

Date: December 31, 2013

Credit number: 009977

 

6

 

Exhibit 10.14

 

Credit Facility Agreement

of

Mega International Commercial Bank

 

Reference number: zhaodunyuezi no. A102322

Client: Applied Optoelectronics, Inc., Taiwan Branch

 

Applied Optoelectronics, Inc., Taiwan Branch (the “Borrower”) and Mega International Commercial Bank (the “Bank”) hereby agree that the Borrower shall be bound by the following terms and conditions for all the credit granting transactions with the Bank.

 

General conditions

 

Article 1: Scope of Application

 

This Agreement sets forth the general terms and conditions of all the credit granting transactions between the Borrower and the Bank, and unless otherwise provided by any other agreements, shall apply to all the credit facility granted hereunder. This Agreement shall come into effect upon being executed and returned to the Bank by the Borrower.

 

Article 2: Definition of Bank

 

For the purpose of this Agreement, the Bank includes the general management department and the branches thereof.

 

Article 3: Scope of Indebtedness

 

The indebtedness under this Agreement refers to all the bills, loans, advance payments, securities or other debts owed by the Borrower to the Bank, including the interest, late payment interest, default penalty, damages and any other expenses payable by the Borrower.

 

Article 4: Adjustment of the Amount and Extension Date

 

With respect to any loan to be granted to the Borrower, if the Bank is short of cash or the extension of such loan would make the Bank in breach of laws, the Bank may adjust the extension date and the amount of such loan, provided that any non-extended loan for which the undertaking fee has been paid by the Borrower shall be returned by the Bank in proportion to the amount of such non-extended loan.

 

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Article 5: Delivery of Documents

 

Any repayment request or notice given by the Bank hereunder to the Borrower shall be deemed to have been made when such request or notice has been delivered to the address most recently provided by the Borrower. In the event that the recipient or its agent fails to notify the Bank of any change of such address, or the Bank fails to deliver any of its request or notice to the address most recently provided by the Borrower for any other reasons, such request or notice shall be deemed to have been received by the recipient after a reasonable mailing period from the date the Bank delivers such documents to the post office.

 

Article 6: Calculation of Interests

 

The Borrower shall pay interest to the Bank per month for all the loans extended by the Bank at the rate set forth in the relevant credit agreement. In the absence of such rate, the base interest rate published by the Bank on the date its creditor’s right occurs shall apply.

 

Article 7: Non-responsibility for Verification of Seal

 

With respect to any bills issued, or secured or endorsed by the Borrower for the credit granted by the Bank, if the seal of the Borrower is stolen without the Bank being aware of it or the seal is forged and the Bank has performed to the largest extent its duty of care, the Applicant shall indemnify the Bank against any losses suffered by the Bank. With respect to the certificate of indebtedness, letter of guarantee or other documents held by the Bank for the credit granting, if the Bank can prove that it has provided the loan to the Borrower or issued a letter of guarantee to the beneficiary pursuant to the credit agreement, the Borrower shall not deny the existence of the credit relationship on the excuse of the seal of the Borrower being forged or stolen. The Borrower shall inform in writing the Bank of any change of name, organization, articles of association, person in charge, or any other changes which may have material impact on the operation of the Borrower, and provide the Bank with the application for changing or deregistering the seal. The Borrower shall assume the full liability for any transactions with the Bank before it informs the Bank of such changes. Before the Borrower obtains the approval of the Bank and completes the formality for changing or deregistering the seal, the seal kept by the Bank shall remain valid. The Borrower shall be fully liable for any consequences in connection with the use of the original seal in any transactions with the Bank. The above provisions shall apply to any losses caused by the original seal being stolen or forged.

 

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Article 8: Assumption of Risks related to defacement or loss of Bills

 

In the event that any bills, evidence of debt or any other supporting documents issued, endorsed, accepted or secured by the Borrower evidencing the indebtedness owed to the Bank are defaced or lost due to any accidents, force majeure or any other reasons not attributable to the Bank, or such bills, evidence of debt or other debt certificates are altered other than in connection with the gross negligence of the Bank, unless the Borrower can prove that any book account, voucher, computer generated documents or correspondence of the Bank contains mistakes, which mistakes shall be corrected by the Bank, the Borrower shall fully acknowledge all the information recorded in such documents and undertake to repay all the costs, default penalty, principal and interest when due.

 

Article 9: Loss of term rights

 

1.In any of the following circumstances, the Bank may reduce at any time the line of credit or shorten the term of the loan granted to the Borrower or deem such loan immediate due and payable without giving prior notice or reminder letter:

  

(1)the Borrower fails to repay the principal of any debt when due;
(2)the Borrower petitions for compromise, bankruptcy, reorganization according to the Bankruptcy Law, receives the refusal notice from the clearing house, is wound up or liquidates its debts;
(3)the Borrower fails to perform its obligation to provide security;
(4)the Borrower dies and his successor declares limited succession or abandons inheritance;
(5)the property of the Borrower is declared to be confiscated due to any criminal offence;

 

2.In any of the following circumstances, the Bank may reduce at any time the line of credit or shorten the term of the loan granted to the Borrower or deem such loan immediate due and payable by giving a reasonable prior notice or reminder letter:

  

(1)the Borrower fails to repay the interest of any debt when due;
(2)the collateral of the Borrower is attached, lost, devalued or is unable to cover the secured claim;
(3)the purpose of the funds provided by the Bank is not consistent with that authorized by the Bank;
(4)the Borrower is subject to enforcement or provisional attachment order, provisional injunction, or any other preservation measures,

 

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Article 10: Inspection of Property and Disposal of Documents

 

The Borrower shall be subject to the supervision of the purpose of the credit, the inspection of the business and finance and the examination and control of the collateral by the Bank, and shall provide the Bank with direct access to any relevant account books, financial statements (including the consolidated financial statements), vouchers and documents. The Bank may also, if necessary, require the Borrower to provide such credit checking materials or the financial statements audited by an account firm acceptable to the Bank on a regular basis, and require such account firm to provide the working paper and deliver a copy of such financial statements to Joint Credit Information Center by giving notice to the Bank. In the event that the Bank believes that any financial statements or any other documents submitted by the Borrower to the Bank contain false information, the Borrower shall be deemed in breach upon notice from the Bank. However, the Bank is not obligated to make such supervision, inspection, examination, control or review. In the event that the Bank believes that the financial structure of the Borrower needs to be improved, it may require the Borrower to effect such improvement.

 

The Borrower agrees that the Bank may provide the Borrower’s creditworthiness report issued by the Bank, credit facility documents (including records of delay in payment, reminder letter and bad loan), the Borrower's financial documents, paper credit materials, individual credit materials, credit card (including IC card and magnetic stripe card) materials and the credit materials of credit card’s appointed stores, as well as any other documents related to credit facility, to the Small and Medium Enterprise Credit Guarantee Fund (SMEG) or any organization appointed by the SMEG, for collection, computer processing, use and international transmission, and to Joint Credit Information Center for filing. The Borrower agrees that Joint Credit Information Center may provide such materials and documents to any of its member agencies.

 

Article 11: Setoff Right

 

Regardless of the maturity date of any debt or claim, the Bank shall have the right to dispose of all the deposits and creditor's rights of the Borrower against the Bank (excluding check deposit) and apply such proceeds toward payment of the Borrower's debt. The Borrower acknowledges and agrees that in case of any default under any deeds between the Bank and the Borrower, if the Bank intends to reduce the line of credit or reduce the term of the loan or declare that such loan becomes immediately due and payable, then the deposit check executed between the Borrower and the Bank shall automatically become invalid, in which case, the Bank will immediately return the remaining amount and apply such amount to be returned toward payment of any of the Borrower's debts. The above setoff provision requires that the setoff will immediately come into effect when such setoff is recorded in the book account, and any deposit receipts, books, checks or any other certificates shall become invalid to the extent of such setoff.

 

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Article 12: Setoff Priority

 

In the event the proceeds are not sufficient to cover all the debts owed to the Bank and the method and order of such setoff shall be subject to the Civil Act, provided that the default penalty

 

Article 13: Assumption of Expenses

 

In the event that the Borrower is the subject to a litigation due to failure to perform its obligations, the Borrower agrees that the credit investigation expenses, storage cost, legal fee (to the extent of the amount paid to the attorney engaged by the Bank if it is unable to litigate on its own) and any other necessary costs incurred by the Bank in exercising or preserving its claims against the Borrower shall be borne by the Borrower, unless the court decides that there is no creditor's right against the Borrower.

 

Article 14: Entrustment

 

The Borrower agrees that in light of the business need, the Bank may entrust its business to any other organizations pursuant to the Finance Department, and may provide such entrusted organization with relevant material, provided that such entrusted organization shall be bound by the relevant laws and regulations and the confidentiality obligation when processing through computer or use any materials of the Borrower. The Borrower may consult with the Bank in respect of the type of information to be disclosed to such entrusted organization and the name of such entrusted organization.

 

Article 15: Competent Jurisdiction

 

The undersigned agree that the _______ District Court or the Taipei District Court, Taiwan will be the court of first instance having jurisdiction over all actions arising from or in connection with the indebtedness owed by the Borrower to the Bank.

 

Special Provisions

 

Article 16

With respect to the debts guaranteed by the Borrower, if the main debtor does not perform its contractual obligations and the Bank deems it necessary to allow the main debtor to defer or amortize the payment upon request by such main debtor, it shall notify in writing the Borrower, in which case, the Borrower agrees to continue to perform its guarantee obligations as to all the debts after the written notice of the Bank is given or deemed given.

 

5
 

 

Article 17

In any of the following circumstances, the Bank may reduce at any time the line of credit or shorten the term of the loan granted to the Borrower or deem such loan immediate due and payable without giving prior notice or reminder letter:

(1) the Borrower provides any untrue financial report or materials to the Bank, resulting in the mistaken assessment by the Bank, thus causing the Bank make mistakes in its assessment, or intentionally hide or misrepresent any facts in dealing with the Bank, thus causing the Bank make mistakes;

(2) any permit or license used by the Bank to authorize the purpose of any fund is suspended or revoked;

(3) any capital authorized by the Bank is used in Mainland China.

 

Article 18

 

In any of the following circumstances, the Bank may reduce at any time the line of credit or shorten the term of the loan granted to the Borrower or deem such loan immediate due and payable by giving a reasonable prior notice or reminder letter:

(1) any bills used by the Borrower or its person in charge is not honored and no registration is made;

(2) any bill provided by the Borrower for repayment is not accepted;

(3) the Borrower delays in payment of its debt owed to any financial institution;

(4) the Borrower puts any of its property under custody of a third party without the approval of the Bank;

(5) the Borrower neglects to take out or renew any proper fire insurance (including the earthquake insurance) for the collateral;

(6) the Borrower is merged into or with any other company or is split or reduces its registered capital;

(7) the Borrower is in breach of any provisions of this Agreement.

 

Article 19

In the event that the Borrower allows the Bank to put under custody or transfer any claims (including the creditor's rights guarantee) against the Borrower to a third party pursuant to the applicable regulations on securitization of financial assets, the Bank may adopt the public announcement as set forth in such regulation in lieu of giving a transfer notice.

 

Article 20

 

The Borrower agrees that the Bank may, for the purpose of such transfer, provide the relevant creditor's rights documents to such transferee and debt value inspector, provided that the Bank shall procure such persons to comply with the Bank Law, Computer processing protection law and any other applicable laws, and shall not disclose such information to any third party.

 

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Article 21

 

The Borrower x agrees □ does not agree that the Bank may disclose or transfer any of its clients accounting, credit, investment or insurance documents held by or filed with the Bank, to Mega Financial Holding Co., Ltd and any subsidiaries thereof listed below and selected by the Borrower by checking a box, for the purpose of advertisement, marketing or provision of service, provided that such holding company or subsidiary shall take any necessary confidentiality measure to protect such documents (if the Borrower does not select "agree", or selects "agree" without selecting the subsidiaries which may use such materials, or the seal page is left blank or the seal is not compliant, the Borrower shall be deemed to have selected "does not agree":

 

□ Mega Securities Co. Ltd.

□ Chung Kuo Insurance Company

□ Mega Bills Finance Co. Ltd.

□Mega Life Insurance Agency Co. Ltd.

□Mega International Investment Trust Co., Ltd.

□Mega Asset Management Co., Ltd.

□Mega Venture Capital Co., Ltd.

□All of the above companies

Even if the Borrower accepts this article, it can disagree at any time in the future by telephone, in writing or dealing in person with the Bank, thereupon, the Bank will notify Mega Financial Holding Co., Ltd and the selected subsidiaries to not to send any materials and exchange of client's documents.

 

Article 22

 

This Agreement is signed and sealed by the Borrower in person. Any future credit facility agreement between the Borrower and the Bank affixed with any of the signature or seal of the Borrower will be valid.

 

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The Borrower hereby represents that it has read and is fully aware of the provisions of this Agreement before executing this Agreement.

 

Borrower: Applied Optoelectronics, Inc., Taiwan Branch

Reference number: 28410552

Responsible person: Thompson, Lin

Identity card number:

 

By:/s/ Chih-Hsiang (Thompson) Lin
 (By seal)
  
By:/s/ Applied Optoelectronics, Inc.
 (By corporate seal)

 

Date : December 20, 2013

Address: 7F.-1,NO.700, Jhongjheng Rd., Jhonghe District , New Taipei City 23552, Taiwan

 

 

 

 

 

 

 

 

 

 

 

 

 

8

 

Exhibit 23.1

 

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

We have issued our report dated March 6, 2014, with respect to the consolidated financial statements included in the Annual Report of Applied Optoelectronics, Inc. on Form 10-K for the year ended December 31, 2013. We hereby consent to the incorporation by reference of said report in the Registration Statement of Applied Optoelectronics, Inc. on Form S-8 (File No. 333-192407), effective November 19, 2013.

 

 

/S/ GRANT THORNTON LLP

 

Houston, Texas

March 6, 2014

 

Exhibit 23.3

 

CONSENT OF OVUM LIMITED

 

 

 

 

March 1, 2014

 

 

 

Applied Optoelectronics, Inc.

13115 Jess Pirtle Blvd.

Sugar Land, TX 77478

 

 

Ladies and Gentlemen:

 

In relation to future filings to be made pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and the Securities of 1933, as amended, we hereby consent to the inclusion of and reference to the name Ovum Limited, and the quotation and summarization of our reports, or information contained therein, prepared for Applied Optoelectronics, Inc., including the report dated March 14, 2013 entitled “CATV Access Infrastructure and Optics Supplier Landscape.”

 

Sincerely,

 

Ovum Limited

 

/s/ Christian Morrison

By: Christian Morrison

Title: US Manager BD

 

Exhibit 31.1

 

CERTIFICATION

 

I, Chih-Hsiang (Thompson) Lin, certify that:

 

1. I have reviewed this Annual Report on Form 10-K of Applied Optoelectronics, 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 to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects 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 and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are 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’s internal control over financial reporting.

 

Date: March 6, 2014

 

   
/s/ Chih-Hsiang (Thompson) Lin  
Chih-Hsiang (Thompson) Lin  
President, Chief Executive Officer  

Exhibit 31.2

CERTIFICATION

I, James L. Dunn, Jr., certify that:

 

1. I have reviewed this Annual Report on Form 10-K of Applied Optoelectronics, 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 to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects 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 and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are 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’s internal control over financial reporting.

 

Date: March 6, 2014

 

   
/s/ James L. Dunn, Jr.  
James L. Dunn, Jr.  
Chief Financial Officer and Senior Vice President  

Exhibit 32.1

 

CERTIFICATION

 

Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 1350 of Chapter 63 of Title 18 of the U.S. Code (18 U.S.C. § 1350), Chih-Hsiang (Thompson) Lin, President and Chief Executive Officer of Applied Optoelectronics, Inc. (the “Company”), and James L. Dunn, Jr., Chief Financial Officer and Senior Vice President of the Company, each hereby certifies that, to the best of his knowledge:

 

1. The Company’s Annual Report on Form 10-K for the period ended December 31, 2013, to which this Certification is attached as Exhibit 32.1 (the “Annual Report”) fully complies with the requirements of Section 13(a) or Section 15(d) of the Exchange Act; and

 

2. The information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

In Witness Whereof, the undersigned have set their hands hereto as of the 6th day of March, 2014.

 

 

/s/ Chih-Hsiang (Thompson) Lin       /s/ James L. Dunn, Jr.
Chih-Hsiang (Thompson) Lin       James L. Dunn, Jr.
President and Chief Executive Officer       Chief Financial Officer and
        Senior Vice President

 

This certification accompanies the Annual Report to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Applied Optoelectronics, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Annual Report), irrespective of any general incorporation language contained in such filing.