ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q for the period ended June 30, 2017 and the audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2016 included in our Annual Report on Form 10-K. References to “NeoPhotonics,” “we,” “our,” and “us” are to NeoPhotonics Corporation unless otherwise specified or the context otherwise requires.
This Quarterly Report on Form 10-Q for the period ended June 30, 2017 contains “forward-looking statements” that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Quarterly Report on Form 10-Q for the period ended June 30, 2017 that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Terminology such as “believe,” “may,” “might,” “objective,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “predict,” “potential,” or the negative of these terms or other similar expressions is intended to identify forward-looking statements.
We have based these forward-looking statements largely on our current expectations and projections about future events and industry and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified in “Part II —Item 1A. Risk Factors” below, and those discussed in the sections titled “Special Note Regarding Forward-Looking Statements” and “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the SEC on March 16, 2017. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.
Business overview
We develop, manufacture and sell optoelectronic products that transmit, receive and switch high speed digital optical signals for communications networks. We sell our products to the world’s leading network equipment manufacturers, including Nokia (formerly Alcatel-Lucent, which was acquired by Nokia in January 2016), Ciena Corporation, Cisco Systems, Inc., HiSilicon Technologies, Ltd., an affiliate of Huawei Technologies, Co., Ltd. and Huawei Technologies Co., Ltd. (collectively “Huawei”). These companies are among our largest customers and a focus of our strategy due to their leading market positions.
We have research and development and wafer fabrication facilities in San Jose and Fremont, California and in Tokyo, Japan that coordinate with our research and development and manufacturing facilities in Dongguan, Shenzhen and Wuhan, China and Ottawa, Canada. We also perform limited research and development and manufacturing in Moscow, Russia. We use proprietary design tools and design-for-manufacturing techniques to align our design process with our precision nanoscale, vertically integrated manufacturing and testing. We believe we are one of the highest volume PIC manufacturers in the world and that we can further expand our manufacturing capacity to meet market needs.
Recognizing our focus on growth in our 100Gbps (“100G”) and beyond products, we align our product group reporting to “High Speed Products” which includes products designed for 100G and beyond applications and “Network Products and Solutions,” which comprises all products designed for applications below 100G.
In December 2016, we entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with APAT Optoelectronics Components Co., Ltd. (the “Purchaser”) for the sale of certain assets of our access and low speed
transceiver product lines (the “Low Speed Transceiver Products”) which was completed in January 2017. All of these products were part of our Network Products and Solutions group and included the low speed passive optical network, or PON, products for which the end-of-life plan was announced in mid-2016. In 2016, the Low Speed Transceiver Products generated approximately 15% of our total revenue.
The asset sale consisted of approximately $25.0 million in cash consideration plus approximately $1.4 million post-closing transition services under a transition services agreement with the Purchaser. After closing, the consideration was reduced by $3.4 million for inventory adjustments to approximately $21.6 million and is subject to other adjustments of up to $10.0 million for any potential indemnification claims for which we recorded a reserve of $6.7 million as of March 31, 2017. We recognized a $2.0 million gain on asset sale in the three months ended March 31, 2017. As of June 30, 2017, we maintained the reserve of $6.7 million for any potential indemnification claims for which the warranty period expired on June 30, 2017, with no additional adjustment to the gain on asset sale.
In May 2017, we undertook restructuring actions to implement a series of cost saving measures in light of both the sale of our Low Speed Transceiver Products and the current lower market outlook for China. These measures include reorganizing our product lines, reducing our real estate footprint and reducing our workforce. We incurred restructuring charges of approximately $0.7 million in the second quarter of 2017. We are seeking to continue, with limited critical hiring, to maintain our key research and development efforts and production capabilities to meet future growth.
In the three months ended June 30, 2017, High Speed Products represented approximately 81% of total revenue and Network Products and Solutions represented approximately 19% of total revenue. In the three months ended June 30, 2016, High Speed Products was 66% of total revenue and Network Products and Solutions represented approximately 34% of total revenue, which includes Low Speed Transceiver Products that were subsequently sold.
Revenue was $73.2 million in the three months ended June 30, 2017, compared to $99.1 million in the same period in 2016 primarily due to the sale of our Low Speed Transceiver Products’ assets in January 2017 and a reduction in demand in the China market. Our gross profit was 22.9% of revenue in the three months ended June 30, 2017, compared to 27.8% of revenue in the three months ended June 30, 2016, primarily attributable to inventory write-downs associated with discontinued products and under-utilization attributable to lower volumes in our plants.
We have announced a number of new products during the first six months of 2017. Targeting growth in Metro, provincial China backbone, and data center interconnect networks are our 100G and 200G coherent pluggable module (CFP-DCO), our 64 Gbaud Micro-Modulator for 400G and 600G transponders and we demonstrated a 64 Gbaud/64 QAM Coherent CFP2-ACO module for 400G to 600G applications. For applications inside the data center we demonstrated a 400G pluggable module (CFP8-LR8) and we introduced new non-hermetic laser arrays to drive short reach silicon photonics modules (QSFP28) and our low power consumption, 28Gbaud externally modulated laser (EML) with integrated driver, designed for 10 km to 80 km reaches for 100G, 200G and 400G applications. We expect continued volume growth for our High Speed Products, although quarter-to-quarter results may show considerable variability as is usual in a rapid initial ramp-up following the introduction of new technologies and the slower demand in China. Similar to revenue, our gross margins may fluctuate materially depending on a variety of factors including average selling price changes, product mix, volume, manufacturing utilization and ongoing manufacturing process improvements.
Critical accounting policies and estimates
There have been no material changes to our critical accounting policies and estimates during the three and six months ended June 30, 2017 from those disclosed in Note 1 in Notes to Condensed Consolidated Financial Statements in Item 1, Part I of this Report and in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2016.
Results of operations
Revenue
Our business is focused on the highest speed digital optics and signal processing communications applications. In 2016, we entered into an Asset Purchase Agreement for the sale of assets of our Low Speed Transceiver Products within our Network Products and Solutions product group. In 2016, the Low Speed Transceiver Products represented approximately 15% of total revenue. The asset sale was closed in January 2017.
We sell substantially all of our products to original equipment manufacturers, or OEMs. Revenue is recognized when the product is shipped and title has transferred to the buyer. We price our products based on market and competitive conditions and may periodically reduce the price of our products as market and competitive conditions change and as manufacturing costs are reduced. Historically, our first quarter revenue is generally seasonally lower than the rest of the year primarily due to lower capacity utilization during the holidays in China and customer pricing schedules. However, this historical pattern should not be considered a reliable indicator of our future revenue or financial performance. Our sales transactions to customers are denominated primarily in U.S. dollars, with some portions in Chinese Renminbi (“RMB”) or Japanese Yen (“JPY”).
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Three Months Ended
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Six Months Ended
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June 30,
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June 30,
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(in thousands)
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2017
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2016
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$ Change
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% Change
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2017
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2016
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$ Change
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% Change
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Total revenue
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$
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73,214
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$
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99,129
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$
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(25,915)
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(26)
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%
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$
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144,902
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$
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198,274
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$
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(53,372)
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(27)
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%
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We have generated most of our revenue from a limited number of customers. Customers accounting for more than 10% of our total revenue and revenue from our top ten customers in the three and six months ended June 30, 2017 and 2016 were as follows:
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Three Months Ended
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Six Months Ended
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June 30,
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June 30,
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2017
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2016
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2017
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2016
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Percent of revenue from customers accounting for 10% or more of total revenue:
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Huawei Technologies Co., Ltd (1)
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37
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%
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45
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%
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39
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%
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49
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%
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Ciena Corporation
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19
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16
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16
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16
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Percent of revenue from top ten customers
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89
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|
91
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|
89
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91
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(1)
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Huawei’s percentage of revenue includes its affiliate, HiSilicon Technologies Co. Ltd. (“HiSilicon”). Revenue from HiSilicon represented approximately 35% and 31% of total revenue, respectively, in the three months ended June 30, 2017 and 2016 and approximately 37% and 33% of total revenue, respectively, in the six months ended June 30, 2017 and 2016.
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We expect that a significant portion of our revenue will continue to be derived from a limited number of customers. As a result, the loss of, or a significant reduction in, orders from any of our key customers would materially affect our revenue and results of operations. Similarly, our accounts receivable are from a limited number of customers. As of June 30, 2017, two customers accounted for 36% and 12% of total accounts receivable and as of December 31, 2016, three customers accounted for 42%, 12% and 12% of our total accounts receivable.
Three Months Ended June 30, 2017 Compared With Three Months Ended June 30, 2016
Revenue decreased $25.9 million, or 26%, in the three months ended June 30, 2017, compared to the same period in 2016, primarily due to the lower revenue from Low Speed Transceiver Products as we completed the related asset sale in January 2017 and a reduction in demand from China-based customers. Revenue generated by Low Speed Transceiver Products was zero in three months ended June 30, 2017, compared to $15.8 million in the same 2016 period. Further, in 2016, our historical seasonality pattern shifted from the first quarter to the second quarter due to certain price reductions being delayed beyond the first quarter in part due to surging volumes in the first quarter supporting 100G build-outs,
notably in China. In the three months ended June 30, 2017, High Speed Products represented approximately 81% of total revenue, compared to 66% of total revenue in the same period in 2016 while Network Products and Solutions represented approximately 19% of total revenue in the three months ended June 30, 2017, compared to approximately 34% of total revenue in the same period a year ago, which included revenue from Low Speed Transceiver Products. In the three months ended June 30, 2017, revenue from China, United States, Japan and rest of the world was 53%, 15%, 4% and 28% of total revenue, respectively, compared to 60%, 20%, 5% and 15% of total revenue, respectively, in the same period in 2016.
Six Months Ended June 30, 2017 Compared With Six Months Ended June 30, 2016
Revenue decreased $53.3 million, or 27% in the six months ended June 30, 2017, compared to the same period in 2016, primarily due to the lower revenue from Low Speed Transceiver Products as we completed the related asset sale in January 2017 and a reduction in demand from China-based customers. Revenue generated by Low Speed Transceiver Products before the asset sale was $1.5 million in the six months ended June 30, 2017, compared to $37.7 million in the same 2016 period. In the six months ended June 30, 2017, High Speed Products represented approximately 81% of total revenue, compared to 65% of total revenue in the same period in 2016 while Network Products and Solutions represented approximately 19% of total revenue in the six months ended June 30, 2017, compared to approximately 35% of total revenue in the same period a year ago, which included Low Speed Transceiver Products. In the six months ended June 30, 2017, revenue from China, United States, Japan and rest of the world was 53%, 15%, 4% and 28% of total revenue, respectively, compared to 61%, 20%, 5% and 14% of total revenue respectively, in the same period in 2016.
Cost of Goods Sold and Gross Profit
Our cost of goods sold consists primarily of the cost to produce wafers and to manufacture and test our products. Additionally, our cost of goods sold generally includes stock-based compensation, write-downs of excess and obsolete inventory, amortization of certain purchased intangible assets, depreciation, acquisition-related fair value adjustments, restructuring charges, warranty costs, royalty payments, logistics and allocated facilities costs.
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 volume, production volume compared to sales over time, the mix of products sold, inventory changes, changes in the average selling prices of our products, changes in the cost and volumes of materials purchased from our suppliers, changes in labor costs, changes in overhead costs or requirements, stock-based compensation, write-downs of excess and obsolete inventories and warranty costs. In addition, we periodically negotiate pricing with certain customers which can cause our gross margins to fluctuate, particularly in the quarters in which the negotiations occurred. Historically, our first quarter gross margins are generally seasonally lower than the fourth quarter of the prior year due to customer pricing schedules as well as lower capacity utilization during the holidays in China and the lower installment of outside plant equipment by customers in winter.
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Three Months Ended
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Six Months Ended
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June 30,
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June 30,
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(in thousands, except percentages)
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2017
|
|
2016
|
|
$ Change
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% Change
|
|
2017
|
|
2016
|
|
$ Change
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% Change
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|
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Cost of goods sold
|
|
$
|
56,437
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$
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71,600
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$
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(15,163)
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(21)
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%
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$
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109,622
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$
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139,623
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$
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(30,001)
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(21)
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%
|
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Gross profit
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|
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16,777
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|
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27,529
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(10,752)
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(39)
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%
|
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35,280
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58,651
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(23,371)
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(40)
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%
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Three Months Ended
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Six Months Ended
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|
|
June 30,
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June 30,
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2017
|
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2016
|
|
2017
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2016
|
|
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Gross profit as a % of revenue
|
|
23
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%
|
28
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%
|
24
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%
|
30
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%
|
|
Three Months Ended June 30, 2017 Compared With Three Months Ended June 30, 2016
Gross profit decreased $10.8 million, or 39%, to $16.8 million in the three months ended June 30, 2017, compared to $27.5 million in the same period in 2016. Gross margin decreased by approximately five percentage points to 23% in
the three months ended June 30, 2017, compared to the same period in 2016. The decreases are primarily attributable to excess and obsolete inventory costs and under-utilization attributable to lower volumes in our plants. Further, in 2016, our historical seasonality pattern shifted from the first quarter to the second quarter due to certain price reductions being delayed beyond the first quarter in part due to surging volumes in the first quarter of 2016 supporting 100G build-outs, notably in China.
Six Months Ended June 30, 2017 Compared With Six Months Ended June 30, 2016
Gross profit decreased by $23.4 million, or 40% to $35.3 million in the six months ended June 30, 2017, compared to $58.7 million in the same period in 2016. Gross margin decreased by approximately six percentage points to 24% in the six months ended June 30, 2017, compared to the same period in 2016. The decreases are primarily attributable to unfavorable direct material procurement costs, excess and obsolete inventory costs and under-utilization attributable to lower volumes in our manufacturing plants.
Operating expenses
Personnel costs are the most significant component of operating expenses and consist of costs such as salaries, benefits, bonuses, stock-based compensation and, with regard to sales and marketing expense, other variable compensation.
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Three Months Ended
|
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Six Months Ended
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|
|
June 30,
|
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|
|
June 30,
|
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|
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|
|
(in thousands, except percentages)
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|
2017
|
|
2016
|
|
$
Change
|
|
% Change
|
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
|
|
Research and development
|
|
$
|
14,206
|
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$
|
11,780
|
|
$
|
2,426
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21
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%
|
$
|
29,750
|
|
$
|
24,732
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$
|
5,018
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|
20
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%
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Sales and marketing
|
|
|
3,910
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|
|
3,807
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|
|
103
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3
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%
|
|
8,842
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|
|
7,738
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|
|
1,104
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14
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%
|
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General and administrative
|
|
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7,729
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|
|
7,841
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(112)
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(1)
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%
|
|
19,155
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|
|
16,925
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|
|
2,230
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|
13
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%
|
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Amortization of purchased intangible assets
|
|
|
118
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|
|
460
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|
|
(342)
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|
|
(74)
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%
|
|
236
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|
|
913
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|
|
(677)
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|
(74)
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%
|
|
Acquisition and asset sale related costs
|
|
|
21
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|
|
775
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|
|
(754)
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|
|
(97)
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%
|
|
151
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|
|
775
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|
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(624)
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|
(81)
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%
|
|
Restructuring charges
|
|
|
494
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|
|
—
|
|
|
494
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|
|
100
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%
|
|
721
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|
|
—
|
|
|
721
|
|
100
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%
|
|
Gain on asset sale
|
|
|
—
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|
|
—
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|
|
—
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|
|
—
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%
|
|
(2,000)
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|
|
—
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|
|
(2,000)
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|
(100)
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%
|
|
Total operating expenses
|
|
$
|
26,478
|
|
$
|
24,663
|
|
$
|
1,815
|
|
|
7
|
%
|
$
|
56,855
|
|
$
|
51,083
|
|
$
|
5,772
|
|
11
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%
|
Research and development
Research and development expense consists of personnel costs, including stock-based compensation, for our research and development personnel, and product development costs, including engineering services, development software and hardware tools, depreciation of equipment and facility costs. We record all research and development expense as incurred.
Three Months Ended June 30, 2017 Compared With Three Months Ended June 30, 2016
Research and development expense increased by $2.4 million, or 21%, in the three months ended June 30, 2017, compared to the same period in 2016. The increase was primarily due to a $0.9 million increase in development projects including prototype and materials, a $0.7 million increase in outside development services, a $0.6 million increase in salaries and related expenses, a $0.4 million increase in net allocated expenses including facilities and a $0.2 million increase in depreciation for new equipment, partially offset by a $0.4 million decrease in variable compensation costs and stock-based compensation expense in the three months ended June 30, 2017, compared to the same 2016 period.
Six Months Ended June 30, 2017 Compared With Six Months Ended June 30, 2016
Research and development expense increased by $5.0 million, or 20%, in the six months ended June 30, 2017, compared to the same period in 2016. The increase was primarily due to a $1.7 million increase in development project including prototype and materials, a $1.6 million increase in salaries and related expenses, a $1.1 million increase in outside development services, a $0.9 million increase in net allocated expenses including facilities and a $0.5 million increase in depreciation expenses, partially offset by a $0.6 million decrease in variable compensation and a $0.4 million decrease in stock-based compensation expense in the six months ended June 30, 2017, compared to the same 2016 period.
Sales and marketing
Sales and marketing expense consists primarily of personnel costs, including stock-based compensation and other variable compensation, costs related to sales and marketing programs and services and facility costs.
Three Months Ended June 30, 2017 Compared With Three Months Ended June 30, 2016
Sales and marketing expense increased by $0.1 million, or 3%, in the three months ended June 30, 2017, compared to the same period in 2016 primarily due to a $0.4 million increase in salaries and related expenses, offset by a $0.3 million decrease in commission due to lower revenue.
Six Months Ended June 30, 2017 Compared With Six Months Ended June 30, 2016
Sales and marketing expense increased by $1.1 million, or 14%, in the six months ended June 30, 2017, compared to the same period in 2016. The increase was primarily due to a $1.1 million increase in salaries and related expenses, a $0.4 million reversal of bad debt expense in the 2016 period due to collection, a $0.3 million increase in product promotion initiative and $0.2 million increase in employee training, partially offset by a $0.5 million decrease in stock-based compensation expense and a $0.5 million decrease in commission due to lower revenue.
General and administrative
General and administrative expense consists primarily of personnel costs, including stock-based compensation, 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 and facility costs.
Three Months Ended June 30, 2017 Compared With Three Months Ended June 30, 2016
General and administrative expense decreased by $0.1 million, or 1%, in the three months ended June 30, 2017, compared to the same period in 2016. The decrease was primarily due to a $0.1 million decrease in salaries and related expense and a $0.3 million decrease in variable compensation, partially offset by a $0.3 million increase in audit and legal fees.
Six Months Ended June 30, 2017 Compared With Six Months Ended June 30, 2016
General and administrative expense increased by $2.2 million, or 13%, in the six months ended June 30, 2017, compared to the same period in 2016. The increase was primarily due to a $1.5 million increase in audit-related fees, a $1.1 million increase in professional and legal expenses, a $0.8 million increase in net allocated expense including facilities, a $0.6 million increase in salaries and related expense, partially offset by $0.9 million in other compensation expense.
Amortization of purchased intangible assets
Our intangible assets are being amortized over their estimated useful lives. Amortization expense relating to technology, patents and leasehold interests are included within cost of goods sold, while customer relationships and other agreements are recorded within operating expenses. Amortization of purchased intangibles included in operating expenses decreased in the three and six months ended June 30, 2017, compared to the same period in 2016 primarily due to certain intangible assets being fully amortized in 2016.
Acquisition and asset sale related transaction costs
We incurred $0.2 million in acquisition and asset sale related costs primarily related to legal, accounting and other professional services in the six months ended June 30, 2017 and an insignificant amount in the three months ended June 30, 2017. There was $0.8 million in the three and six months ended June 30, 2016, in acquisition-related costs for legal, accounting and other professional services.
Restructuring charges
Restructuring charges in the three months ended June 30, 2017 were $0.7 million, of which $0.5 million was included in operating expenses and the remainder in cost of goods sold, pertaining to our restructuring actions initiated in the first quarter of 2017 in connection with the sale of our Low Speed Transceiver Products’ assets which closed in January 2017. In May 2017, we undertook further restructuring actions in light of our lower market outlook for China. We reorganized our product lines, started the process to reduce our footprint and reduced our workforce. Restructuring charges in the six months ended June 30, 2017 were $1.0 million, of which $0.7 million was included in operating expenses and the remainder in cost of goods sold. As of June 30, 2017, our restructuring liability of $0.2 million is included in accrued and current liabilities on our condensed consolidated balance sheets. There were no restructuring charges in the three and six months ended June 30, 2016.
Gain on Asset Sale
In the six months ended June 30, 2017, we recognized a $2.0 million gain associated with the sale of our Low Speed Transceiver Products’ assets. See Note 5 in Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Report.
Interest and other income (expense), net
Interest income consists of income earned on our cash, cash equivalents and short-term investments, as well as restricted cash. Interest expense consists of amounts paid for interest on our bank and other borrowings. Other income (expense), net is primarily made up of government subsidies as well as foreign currency transaction gains and losses. The functional currency of our subsidiaries in China is the RMB and of our subsidiary in Japan is the JPY. The foreign currency transaction gains and losses of our subsidiaries in China and Japan primarily result from their transactions in U.S. dollars.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
|
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
|
|
Interest income
|
|
$
|
31
|
|
$
|
77
|
|
$
|
(46)
|
|
|
(60)
|
%
|
|
$
|
104
|
|
$
|
132
|
|
$
|
(28)
|
|
(21)
|
%
|
|
Interest expense
|
|
|
(111)
|
|
|
(99)
|
|
|
(12)
|
|
|
12
|
%
|
|
|
(248)
|
|
|
(201)
|
|
|
(47)
|
|
23
|
%
|
|
Other income (expense), net
|
|
|
(11)
|
|
|
458
|
|
|
(469)
|
|
|
(102)
|
%
|
|
|
238
|
|
|
(846)
|
|
|
1,084
|
|
(128)
|
%
|
|
Total
|
|
$
|
(91)
|
|
$
|
436
|
|
$
|
(527)
|
|
|
(121)
|
%
|
|
$
|
94
|
|
$
|
(915)
|
|
$
|
1,009
|
|
(110)
|
%
|
Total interest and other income (expense), net decreased by $0.5 million and increased by $1.0 million in the three and six months ended June 30, 2017, compared to the same periods in 2016. The decrease for the three months ended June 30, 2017 was primarily due to favorable foreign currency exchange rates, while the increase for the six months ended June 30, 2017 was primarily due to unfavorable foreign currency exchange rates.
Income taxes
We conduct our business globally and our operating income is subject to varying rates of tax in the U.S., China, Japan and other various foreign jurisdictions. 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. Historically, we have experienced net losses in the U.S. and in the short term, we expect this trend to continue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
|
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
|
|
Income tax (provision) benefit
|
|
$
|
451
|
|
$
|
(626)
|
|
$
|
1,077
|
|
|
(172)
|
%
|
|
$
|
618
|
|
$
|
|
(1,667)
|
|
$
|
2,285
|
|
|
(137)
|
%
|
Our income tax (provision) benefit in the three months ended June 30, 2017 and 2016 was primarily related to income taxes of our non-U.S. operations. In June 2016, the State Administration of Taxation issued a notice to adjust the requirements for high technology enterprise status. As a result, one of our China subsidiaries which had historically qualified for a preferential 15% tax rate available for high technology enterprises changed to the statutory 25% tax rate for the tax year 2016. Therefore, since September 2016, we have computed our China subsidiary’s tax (provision) benefit based on a 25% regular corporate income tax rate.
Liquidity and capital resources
At June 30, 2017, we had working capital of $102.8 million, including total cash, cash equivalents, short-term investments and restricted cash of $79.0 million. Approximately 21% of our total cash, cash equivalents, short-term investments and restricted cash were held by our foreign entities, including approximately $11.5 million in accounts held by our subsidiaries in China, of which $3.3 million was in restricted cash, and approximately $5.2 million in accounts held by our subsidiary in Japan. Cash, cash equivalents, investments and restricted cash held outside of the U.S. may be subject to taxes if repatriated and may not be immediately available for our working capital needs.
Approximately $8.7 million of our retained earnings within our total accumulated deficit at December 31, 2016 was subject to restrictions due to the fact that our subsidiaries in China are required to set aside at least 10% of their respective accumulated profits each year end to fund statutory common reserves as well as allocate a discretionary
portion of their after-tax profits to their staff welfare and bonus fund. This restricted amount is not distributable as cash dividends except in the event of liquidation.
In January 2017, we completed the sale of certain Low Speed Transceiver Products’ assets for an approximately $25.0 million consideration plus an approximately $1.4 million post-closing transition services fees. The consideration was reduced by $3.4 million for inventory adjustment after closing to approximately $21.6 million, which is subject to other adjustments of up to $10.0 million for any potential claims.
See Note 5 in Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Report.
We have a bank credit agreement, as amended, with Comerica Bank in the U.S. (the “Comerica Bank Credit Facility”). Amounts borrowed under the Comerica Bank Credit Facility are due on or before August 31, 2017 and borrowings bear interest at an interest rate option of a base rate as defined in the agreement plus 1.75% or LIBOR plus 2.75%. See Note 8 of Notes to
Condensed Consolidated Financial Statements in Item 1 of Part I
of this Report. As of June 30, 2017, the outstanding balance was $20.0 million.
We regularly issue short-term notes payable to our suppliers in China in exchange for accounts payable. These notes are supported by non-interest bearing bank acceptance drafts and are due three to six months after issuance. As a condition of the notes payable 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 amounts are settled. As of June 30, 2017, our subsidiary in China had three short-term line of credit facilities with banking institutions. As of June 30, 2017 and December 31, 2016, the non-interest bearing bank acceptance drafts issued in connection with our notes payable to our suppliers in China under these line of credit facilities had an outstanding balance of $4.1 million and $6.4 million, respectively. Compensating balances relating to these credit facilities totaled $1.2 million and $2.1 million, respectively, as of June 30, 2017 and December 31, 2016. Compensating balances are classified as restricted cash on our consolidated balance sheets. See Note 3 and Note 8 of Notes to
Condensed Consolidated Financial Statements in Item 1 of Part I
of this Report. We also held approximately $2.0 million in restricted cash as potential compensation for any breach of closing provisions under the asset purchase agreement for the asset sale closed in January 2017.
As of June 30, 2017, we had three loan arrangements
with the Bank of Tokyo-Mitsubishi UFJ, Ltd. (collectively the “Mitsubishi Bank Term Loans”). One of Mitsubishi Bank Term Loans requires interest only payments until the maturity date of February 23, 2018, with a lump sum payment of the aggregate principal amount on the maturity date while the other requires equal monthly payments of principal equal to 8,333,000 JPY until the maturity date of February 25, 2025, with a lump sum payment of the balance of 8,373,000 JPY on the maturity date. Interest on these loans accrues and is paid monthly based upon the annual rate of the monthly Tokyo Interbank Offer Rate (TIBOR) plus 1.40% and is secured by real estate collateral. The third
term loan of 690 million JPY (approximately $6.2 million) (the “2017 Mitsubishi Bank Loan”) was entered into in March 2017 to acquire manufacturing equipment for our Japanese subsidiary and has an annual interest rate of the monthly TIBOR rate plus 1.00%. The 2017 Mitsubishi Bank Loan requires monthly interest and principal payments over 72 months commencing in April 2018. This loan is available from March 31, 2017 to March 30, 2018 and 625.0 million JPY (approximately $5.6 million) under this loan was drawn on the closing date of June 30, 2017. As of June 30, 2017, our total outstanding principal balance under the Mitsubishi Bank Term Loans was 1.9 billion JPY (approximately $16.7 million). See Note 8 of Notes to
Condensed Consolidated Financial Statements in Item 1 of Part I
of this Report.
From time to time we accept notes receivable in exchange for accounts receivable from certain of our customers in China. These notes receivable are non-interest bearing and are generally due within six months. Historically, we have collected on the notes receivable in full at the time of maturity.
We believe that our existing cash, cash equivalents and cash flows from our operating activities and funds available under our credit facilities will be sufficient to meet our anticipated cash needs for at least the next 12 months. As of June 30, 2017, we had working capital of $102.8 million including available cash, cash equivalents, short-term investments and restricted cash of approximately $79.0 million. In the first six months of 2017, we generated operating losses of $21.6 million and negative cash flows from operations of $16.5 million. We had an accumulated deficit of approximately $319.5 million as of June 30, 2017.
We have two credit agreements both of which are subject to renewal or expiration in the third quarter of 2017: a $30.0 million credit facility with Comerica Bank in the U.S. and a $39.2 million credit facility with CITIC Bank in China. As of June 30, 2017, we had $20.0 million debt outstanding under the Comerica facility and subsequent to the quarter end we borrowed $17.0 million from CITIC Bank. These amounts are due on August 31, 2017 and January 2, 2018, respectively.
In addition, our forecasts for revenue from customers in China during the second half of 2017 have been reduced from prior levels as industry forecasts for the region’s telecom carriers deploying metro and provincial networks have been reduced in the near term.
We must extend or replace one of the above-noted credit agreements in order to have sufficient resources to fund our currently planned operations and expenditures over the next twelve months. We believe extending or replacing one of these credit agreements is probable; however, if this is unsuccessful, we intend to implement working capital management plans as described below.
In May 2017, we implemented a restructuring plan to execute a range of cost saving measures that reduced and delayed spending in the second quarter of 2017. We intend to manage production and inventory levels, aggressively pursue collections, further reduce or delay product development projects and capital expenditures to conserve our cash resources. Additionally, we have $20.8 million of unused credit as part of a credit facility in China that is available to us until July 2019. If cash flows from such plans are insufficient to meet our cash flow needs over the next twelve months, we have developed a contingency plan. This contingency plan includes closing certain operations, eliminating some marketing and research and development programs and further reducing our administrative costs. We believe that it is probable that these plans can be effectively implemented and that it is probable these plans will mitigate issues that might arise within one year after these financial statements are issued should we be unable to extend or replace one of our existing credit agreements.
We operate in an industry that makes our prospects difficult to evaluate with certainty. Future declines in China market demand or other changes to our forecasts could adversely affect our results of operations, financial position and cash flows. We may need to raise additional debt or equity capital to fund our operations in the next twelve months. Any additional debt arrangements may likely require regular interest payments which could adversely affect our operations. There can be no assurance that additional debt or equity capital will be available on acceptable terms, or at all, or that our revenue will reach a level sufficient to provide for self-sustaining cash flows. Although we believe it is probable that we will be able to satisfactorily complete these plans, if we are not successful in completing these plans it could raise substantial doubt about our ability to continue as a going concern.
Rusnano Rights Agreement
Under our amended rights agreement, dated June 30, 2015, with Rusnano, one of our principal stockholders, we agreed to
make a $30.0 million investment commitment (the “Investment Commitment”) toward our Russian operations. The Investment Commitment can be partially satisfied by cash and/or non-cash investment inside or outside of Russia. Our $18.8 million investment milestone for 2016 was met as of December 31, 2016. If certain of the Investment Commitments are not
achieved in the indicated time frames through 2019, we have the ability to exit our Russian operations by paying an exit fee of up to
$2.0
million at that time. See Note 10 in Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Report.
Cash flow discussion
The table below sets forth selected cash flow data for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
|
(in thousands)
|
|
2017
|
|
2016
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
(16,496)
|
|
$
|
23,178
|
|
|
Net cash provided by (used in) investing activities
|
|
|
5,996
|
|
|
(19,682)
|
|
|
Net cash provided by financing activities
|
|
|
966
|
|
|
2,948
|
|
|
Effect of exchange rates on cash and cash equivalents
|
|
|
695
|
|
|
(56)
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
(8,839)
|
|
$
|
6,388
|
|
Operating activities
Net cash used in operating activities was $16.5 million in the six months ended June 30, 2017, compared to $23.2 million provided by operating activities in the same 2016 period. The decrease was primarily attributable to a $34.2 million decrease in cash flows from inventories primarily due to higher production levels as we prepare for the increased revenue in the second half of 2017, a $26.3 million decrease in cash flows related to net loss and non-cash adjustments, a $5.8 million decrease in accounts payable due to vendor payments and a $14.3 million decrease in cash flows from prepaid expenses and other assets primarily due to a receivable from the transition service agreement (TSA) with APAT OE. The decreases are partially offset by a $27.4 million increase in cash flows from accounts receivable primarily driven by strong collections and payments ahead of due date and a $13.5 million increase in accrued and other liabilities primarily relating to the TSA with APAT OE payable in the current year.
Investing activities
Net cash provided by investing activities was $6.0 million in the six months ended June 30, 2017, compared to $19.7 million used in the same 2016 period. Cash from investing activities increased primarily due to a $17.6 million increase in proceeds from sale of marketable securities, a $21.7 million increase due to proceeds from the sale of Low Speed Transceiver Products’ assets in January 2017, a $1.9 million increase due to proceeds from restricted cash and foreign currency hedge contracts, partially offset by a $20.0 million decrease due to property, plant and equipment purchases to expand our capacity, a $6.0 million decrease due to purchases of marketable securities and a $1.5 million decrease due to proceeds from maturity of marketable securities.
Financing activities
Net cash provided by financing activities was $1.0 million in the six months ended June 30, 2017, compared to $2.9 million provided by financing activities in the same 2016 period. The decrease in cash flows from financing activities was largely due to a $5.0 million decrease in issuance of notes payable, a $0.4 million decrease in proceeds from stock option exercises and issuance of stock under our employee stock purchase plan driven by the stock price of our common stock, partially offset by a $2.7 million increase in repayment of notes payable and a $1.4 million increase in proceeds from bank loans primarily relating to capital equipment financing in Japan.
Contractual obligations and commitments
As of June 30, 2017, our principal commitments consisted of obligations under operating leases, purchase commitments, debt and other contractual obligations. There have been no significant changes to these obligations during the six months ended June 30, 2017 compared to the contractual obligations disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations, set forth in Part II, Item 7, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.
Off-balance sheet arrangements
As of June 30, 2017, we did not have any significant off-balance sheet arrangements.
Recent accounting pronouncements
See Note 1 “Basis of presentation and significant accounting policies” in the Notes to Condensed Consolidated Financial Statements on this Quarterly Report on Form 10-Q for a description of recent accounting pronouncements and accounting changes.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have entered into foreign currency forward contracts to minimize the short-term impact of foreign currency exchange rate fluctuations, related to RMB on our inter-company receivables and payables. Our exposures to other market risk have not changed materially since
December 31, 2016
. For quantitative and qualitative disclosures about market risk, see Item 7A Quantitative and Qualitative Disclosures About Market Risk, in our Annual Report on Form 10-K for the year ended
December 31, 2016
.
ITEM 4.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
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 June 30, 2017. 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.
As previously reported in our Annual Report on Form 10-K, as of December 31, 2016, our management concluded that we did not maintain effective internal control over financial reporting as of December 31, 2016, because of the material weakness described in our Annual Report on Form 10-K, specifically our internal controls were not designed and operating effectively to ensure proper cut-off for certain revenue transactions. Our logistics personnel did not have adequate written procedures and training with respect to our shipping and handling policies for sales. As a result of these design and operating effectiveness deficiencies, our policies and controls related to our revenue recognition and shipping and handling practices did not operate effectively to provide reasonable assurance that revenue was properly accounted for in accordance with generally accepted accounting principles. No actual material misstatements were identified for the year ended December 31, 2016.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
In the Evaluation of Disclosure Controls and Procedures included in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as a result of the material weakness that existed in our internal controls over financial reporting related to revenue recognition and shipping and handling practices.
Changes in Internal Control over Financial Reporting
There have not been any changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities and Exchange Act of 1934, as amended) for the quarter ended June 30, 2017 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Remedial Measures
Our management continued significant efforts in 2017 to establish a framework to improve internal controls over financial reporting. We committed considerable resources to the design, implementation, documentation, and testing of our internal controls. Additional efforts are required to remediate and re-test certain internal control deficiencies. Our management believes that these efforts have improved our internal control over financial reporting. With the oversight of senior management and our audit committee, we have taken steps and plan to take additional measures to remediate the underlying causes of our existing material weakness. Our management is in the process of completing the following steps as part of our ongoing remediation efforts to address the material weakness:
|
|
(a)
|
|
Strengthening our cut-off controls with improved documentation standards and training;
|
|
|
(b)
|
|
Improving logistics and operations documentation standards and procedures; and
|
|
|
(c)
|
|
Restricting and enhancing system access rights to ensure adequate controls within the sales organization.
|
While these steps have helped address some of the root causes of the material weakness noted above, they have not fully remediated the material weaknesses that existed as of December 31, 2016. We intend to conduct additional training to remediate the material weakness.
Our goal is to remediate this material weakness by the end of 2017, provided that there are sufficient opportunities to conclude, through testing, that the enhanced controls are operating effectively.
Inherent Limitation on the Effectiveness of Internal Controls
The effectiveness of any system of internal control over financial reporting is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, any system of internal control over financial reporting can only provide reasonable, not absolute assurances. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but cannot assure that such improvements will be sufficient to provide us with effective internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
From time to time, we are involved in litigation that we believe is of the type common to companies engaged in our line of business, including commercial disputes and employment issues. As of the date of this Quarterly Report on Form 10-Q, other than as described below, we are not involved in any pending legal proceedings that we believe could have a material adverse effect on our financial condition, results of operations or cash flows. However, as described below, a certain dispute involves a claim by a third party that our activities infringe their intellectual property rights. This and other types of intellectual property rights claims generally involve the demand by a third party that we cease the manufacture, use or sale of the allegedly infringing products, processes or technologies and/or pay substantial damages or royalties for past, present and future use of the allegedly infringing intellectual property. Claims that our products or
processes infringe or misappropriate any third-party intellectual property rights (including claims arising through our contractual indemnification of our customers) often involve highly complex, technical issues, the outcome of which is inherently uncertain. Moreover, from time to time, we may pursue litigation to assert our intellectual property rights. Regardless of the merit or resolution of any such litigation, complex intellectual property litigation is generally costly and diverts the efforts and attention of our management and technical personnel which could adversely affect our business.
For a discussion of our current legal proceedings, please refer to the information set forth under the “Litigation” section in Note 10,
Commitments and Contingencies
, in Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
ITEM 1A.
RISK FACTORS
Except for those risk factors denoted by an asterisk (*), the risk factors facing our company have not changed materially from those set forth in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the SEC on March 16, 2017, which risk factors are set forth below.
Risks Related to Our Business
*We are dependent on Huawei Technologies Co., Ltd. and its affiliate HiSilicon Technologies Co., Ltd., Ciena, Nokia and our other key customers for a large portion of our revenue and the loss of, or a significant reduction in orders in any period from any of our major customers may reduce our revenue and adversely impact our results of operations.
We have generated
most of our revenue from a limited number of customers. In the six months ended June 30, 2017, Huawei Technologies Co. Ltd., together with its affiliate HiSilicon Technologies Co., Ltd. (collectively “Huawei”), and Ciena Corporation accounted for approximately 39% and 16% of our revenue, respectively, and our top ten customers represented 89% of our revenue. In the year ended December 31, 2016, Huawei Technologies, together with its affiliate HiSilicon (or collectively, Huawei), and Ciena Corporation accounted for approximately 49% and 16% of our revenue, respectively, and our top ten customers represented 91% of our revenue. In the year ended December 31, 2015, Huawei and Ciena accounted for approximately 44% and 21% of our revenue, respectively, and our top ten customers represented 91% of our revenue.
The loss of, or a significant reduction in orders from these major customers or any of our other key customers would materially and adversely affect our revenue and results of operations.
*We are subject to risks and uncertainties related to our revenue growth outlook in China.
Fiber optics telecommunication growth in China is an important contributor to our success. We expect a major portion of
our revenue to come from China infrastructure spending in wireline and wireless networks, notably from the three largest China telecom carriers, China Mobile Communications Corporation, China Telecommunications Corporation and China United Network Communications Group Co., Ltd. In part, this infrastructure spending originates from the publicly announced China Broadband 2020 National Initiative. If the anticipated Chinese spending and carrier tender awards do not materialize as anticipated, or if there are unanticipated and/or prolonged delays in the Chinese initiative, our business, financial condition, results of operations and prospects would be adversely affected.
*
We may need to raise additional capital and/or extend or replace our current credit facilities in order to maintain our currently-planned operations, and we may not be able to
obtain capital when desired on favorable terms, if at all, or without dilution to our stockholders
We believe that our existing cash and cash equivalents, and cash flows from our operating activities and funds available under our credit facilities will be sufficient to meet our anticipated cash needs for at least the next 12 months. However, in our Note 1 of Notes to Condensed Financial Statements in Item 1 of Part I of this report, we have disclosed our conclusions under ASU 2014-15, “Presentation of Financial Statements - Going Concern” that we will need to take certain steps, and may need to implement certain contingency plans, to maintain our ability to continue as a going concern. Although we believe it is probable that we will be able to complete these plans, it is possible that we may not be successful in completing these plans and/or we may not generate sufficient cash flow from operations or otherwise have
the capital resources to meet our future capital needs and continue as a going concern.
In this regard, we have two credit agreements both of which are subject to renewal or expiration in the third quarter of 2017: a $30.0 million credit facility with Comerica Bank in the U.S. and a $39.2 million credit facility with CITIC Bank in China. We must extend or replace one of these credit agreements in order to have sufficient resources to fund our currently-planned operations and expenditures over the next twelve months. If we are not able to extend or replace at least one of these credit agreements, we will likely need to implement certain contingency plans, which may include closing certain operations, eliminating some marketing and research and development programs and further reducing our administrative costs, which could have an adverse effect on our business.
Additionally, in light of our current financial condition, we
may need additional financing to continue operations or execute on our current or future business strategies, including to:
|
|
·
|
|
invest in our research and development efforts, including by hiring additional technical and other personnel;
|
|
|
·
|
|
maintain and expand our operating or manufacturing infrastructure;
|
|
|
·
|
|
acquire complementary businesses, products, services or technologies; or
|
|
|
·
|
|
otherwise pursue our strategic plans and respond to competitive pressures.
|
We do not know with certainty what forms of financing, if any, will be available to us. If financing is not available on acceptable terms, if and when needed, our ability to fund our operations, enhance our research and development and sales and marketing functions, develop and enhance our products, respond to unanticipated events, including unanticipated opportunities, or otherwise respond to competitive pressures could be adversely impacted. In any such event, our business, financial position and results of operations could be materially harmed, and we may need to implement further contingency plans to further reduce expenses in order to continue operations. Moreover, if we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders could be significantly diluted, and these newly issued securities may have rights, preferences or privileges senior to those of existing stockholders. If we fail to raise sufficient additional capital if needed, we may not be able to completely execute our business plan and may not be able to continue as a going concern.
If we incur additional indebtedness through arrangements such as credit agreements or term loans, such arrangements may impose restrictions and covenants that limit our ability to respond appropriately to market conditions, make capital investments or take advantage of business opportunities. In addition, any additional debt arrangements we may enter into would likely require us to make regular interest payments, which could adversely affect our results of operations.
Manufacturing problems could impact manufacturing yields or result in delays in product shipments to customers and could adversely affect our revenue, competitive position and reputation.
We may experience delays, disruptions or quality control problems in our manufacturing operations or supply chain constraints, which could adversely impact manufacturing volumes, yields or delay product shipments. As a result, we could incur additional costs that would adversely affect our gross margin, and product shipments to our customers could be delayed beyond the shipment schedules requested by our customers, which would negatively affect our revenue, competitive position and reputation.
Additionally, manufacturing yields depend on a number of factors, including the stability and manufacturability of the product design, manufacturing improvements gained over cumulative production volumes, the quality and consistency of component parts and the nature and extent of customization requirements by customers. Capacity constraints, raw materials shortages, logistics issues, labor shortages, volatility in utilization of manufacturing operations, supporting utility services and other manufacturing supplies, the introduction of new product lines, rapid increases in production demands and changes in customer requirements, manufacturing facilities or processes, or those of some third party contract manufacturers and suppliers of raw materials and components have historically caused, and may in the future cause, reduced manufacturing yields, negatively impacting the gross margin on, and our production capacity for, those products. Our ability to maintain sufficient manufacturing yields is particularly challenging with
respect to PICs due to the complexity and required precision of a large number of unique manufacturing process steps. Manufacturing yields for PICs can also suffer if contaminated materials or materials that do not meet highly precise composition requirements are inadvertently utilized. Because a large portion of our PIC manufacturing costs are fixed, PIC manufacturing yields have a substantial effect on our gross margin. Lower than expected manufacturing yields could also delay product shipments and decrease our revenue.
Customer demand is difficult to accurately forecast and, as a result, we may be unable to optimally match production with customer demand.
We make planning and spending decisions based on our estimates of customer requirements. The short-term nature of commitments by many of 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 higher or more restrictive procurement commitments, increase our manufacturing yield loss and scrapping of excess materials, result in delayed shipments and/or reduce our gross margins. We may not have sufficient capacity at any given time to meet the volume demands of our customers, and we may have difficulty expanding our manufacturing operations on a timely basis to meet increasing customer demand. Additionally, one or more of our suppliers may not have sufficient capacity at any given time to meet our volume demands. Because many of our costs and operating expenses are relatively fixed, reduction in customer demand due to market downturns or other reasons would have a material adverse effect on our operating results.
We depend upon outside contract manufacturers for a portion of the manufacturing process for some of our products. Our operations and revenue related to these products could be adversely affected if we encounter problems with a contract manufacturer.
The majority of our products are manufactured internally. However, we also rely upon contract manufacturers in Thailand, China, Japan and other Asia locations to provide back-end manufacturing and produce the finished portion of some of our products. Our reliance on contract manufacturers for these products makes us vulnerable to possible capacity constraints and reduced control over their supply chains, delivery schedules, manufacturing yields, manufacturing quality/controls and costs. If one of our contract manufacturers is unable to meet all of our customer demand in a timely fashion, whether due to their direct operating control or due to their supply chain, this could have a material adverse effect on the revenue from our products.
We are under continuous pressure to reduce the prices of our products, which has adversely affected, and may continue to adversely affect, our gross margins.
The communications networks industry has been characterized by declining product prices over time as technological advances increase price and performance and put pressure on existing products. We have reduced the prices of many of our products in the past, most often during annual end-of-year price negotiation. We expect pricing pressure for our products to continue, including from our major customers. To maintain or increase their market share, our competitors also reduce prices of their products each year. In addition, our customers may seek to internally develop and manufacture competing products at a lower cost than we would otherwise charge, which would add additional pressure on us to lower our selling prices. If we are unable to offset any future reductions in our average selling prices by increasing our sales volume, reducing our costs or introducing new products, our gross margin would be adversely affected.
If the Metro and datacenter interconnect market sectors do not grow as rapidly as we expect, or if demand for our products in these sectors is lower than we expect, our revenue growth may be adversely affected.
We expect that our future growth in the market for 100G and beyond coherent products to be driven in large part by the increased adoption of our products in the Metro market segment and in the high-performance datacenter interconnect market. Over the last sever
al years, 100G and beyond coherent technology has seen increasing adoption in the Long Haul market segment and now is penetrating the much larger Metro sector of the market.
If we fail to achieve or sustain a leadership position in the Long Haul telecom sector and use our position in that market to penetrate t
he Metro and datacenter interconnect segments, if these segments fail to grow as expected, or if demand for our products in the Metro and datacenter interconnect market segments fails to materialize, our business, financial condition, results of operations and prospects would suffer.
We face intense competition which could negatively impact our results of operations and market share.
The communications networks industry is highly competitive. Our competitors range from large international companies offering a wide range of products to smaller companies specializing in niche products.
Some of our competitors have substantially greater name recognition, technical, financial, and marketing resources, and greater manufacturing capacity, as well as better-established relationships with customers, than we do. Some of our competitors have more resources to develop or acquire, and more experience in developing or acquiring, new products and technologies. Some of our competitors may be able to develop new products more quickly than us and may be able to develop products that are more reliable or which provide more functionality than ours. 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.
We also face competition from some of our customers who evaluate our capabilities against the merits of manufacturing products internally, including Huawei. Due to the fact that such customers are not seeking to make a comparable profit directly from the manufacture of these products, they may have the ability to provide competitive products at a lower total cost than we would charge such customers. As a result, these customers may purchase less of our products and there would be additional pressure to lower our selling prices which, accordingly, would negatively impact our revenue and gross margin.
If we fail to retain our key personnel or if we fail to attract additional qualified personnel, we may not be able to achieve our anticipated growth and our business could suffer.
Our success and ability to implement our business strategy depends upon the continued contributions of our senior management team and others, including senior management in foreign subsidiaries and our technical and operations employees in all locations. Our future success depends, in part, on our ability to attract and retain key personnel, including our senior management and others. The loss of services of members of our senior management team or key personnel or the inability to continue to attract and retain qualified personnel could have a material adverse effect on our business. Competition for highly skilled technical and operations people where we operate is extremely intense, and we continue to face challenges identifying, hiring and retaining qualified personnel in many areas of our business.
*We have had a history of losses which may recur in the future.
We have had a history of losses and we may incur additional losses in future periods. As of December 31, 2016, our accumulated de
ficit was $298.7
million and we incurred a net loss of $20.9 million in the six months ended June 30, 2017. We also expect to continue to make significant expenditures related to the ongoing operation and development of our business. These include expenditures related to the sales, marketing and development of our products and to maintain our manufacturing facilities and research and development operations.
The majority of our customer contracts do not commit customers to specified buying levels, and many of our customers may decrease, cancel or delay their buying levels at any time with little or no advance notice to us.
Our products are typically sold pursuant to individual purchase orders or by use of a vendor-managed inventory, or VMI, model, which is a process by which we ship agreed quantities of products to a customer-designated location and those products remain our inventory and we retain the title and risk of loss for those products until the customer takes possession of the products. Our customers are typically not contractually committed to buy any quantity of products beyond firm purchase orders. Many of our customers may increase, decrease, cancel or delay purchase orders already in
place. We have experienced and expect to continue to experience wide fluctuations in demand from customers using VMI, particularly Huawei Technologies Co., Ltd. and their affiliate HiSilicon
Technologies Co., Ltd.
, even in instances where we have built and shipped products to the customer-designated locations as VMI.
If we fail to adequately manage our growth and expansion, our business and financial results will suffer.
In recent years, we have experienced significant growth through, among other things, internal manufacturing and related expansion programs, product development and acquisitions of other businesses and products. Our business has expanded to numerous locations, including foreign locations, and as a result has become more complex, more demanding of management’s attention and subject to new laws and regulations.
Our success and ability to further scale our business will depend, in part, on our ability to manage changes in a cost-effective and efficient manner. If we cannot manage our growth, we may be unable to take advantage of market opportunities, execute our business strategies or respond to competitive pressures. Any failure to effectively manage growth, maintain our quality and/or or customer satisfaction could adversely affect our business and reputation.
Our success will depend on our ability to anticipate and quickly respond to evolving technologies and customer requirements.
Our ability to anticipate and respond to evolving technology, industry standards, customer requirements and product offerings, and to develop and introduce new and enhanced products and technologies, will be critical factors in our ability to succeed. In addition, the introduction of new products by other companies embodying new technologies, or the emergence of new industry standards, could render our existing products uncompetitive from a pricing standpoint, obsolete or otherwise unmarketable.
While we rely on many suppliers, there are a few which, if they stopped, decreased or delayed shipments to us; it could have an adverse effect on our business and financial results.
We depend on a limited number of suppliers for certain components and materials we have qualified to use in the manufacture of certain of our products. Some of these suppliers could disrupt our business if they stop, decrease or delay shipments or if the components they ship have quality, consistency, or business continuity issues. Some of these components and materials are available only from a sole source, or have been qualified only from a single source. We may also face component shortages if we experience increased demand for components beyond what our qualified suppliers can deliver. If we experience component shortages from certain key suppliers, we may be unable to meet customer demand or may have higher purchasing costs, or both. Although we engage in various actions to mitigate the impact of these shortages, any inability on our part to obtain sufficient quantities of critical components at reasonable costs could adversely affect our ability to meet demand for our products, which could cause our revenue, results of operations, or both to suffer.
Our customers generally restrict our ability to change the component parts in our modules without their approval and such changes may require repeating product qualification processes. The reliance on a sole supplier, single qualified vendor or limited number of suppliers could result in delivery and quality problems, reduced control over product pricing, reliability and performance and an inability to identify and qualify another supplier in a timely manner. Any supply deficiencies relating to the quality, quantities or timeliness of delivery of components that we use to manufacture our products could adversely affect our ability to fulfill our customer orders and our results of operations.
We must continually achieve new design wins and enhance existing products or our business and future revenue 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. The anticipated or actual introduction of new and enhanced products by us and by our competitors may cause our customers to defer or
cancel orders for our existing products, and could result, and in the past, has resulted, in a write-down in the value of inventory. To the extent customers defer or cancel orders for our products for any reason or we fail to achieve new design wins, our competitive position would be adversely affected and our ability to grow revenue would be impaired.
Furthermore, fast time-to-market with new products can be critical to success in our markets. It is difficult to displace an existing supplier for a particular type of product once a network equipment vendor has chosen a supplier, even if a later-to-market product provides superior performance or cost efficiency. 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.
We may be exposed to costs or losses from product lines that we intend to exit or may undertake divestiture of portions of our business that require us to continue providing substantial post-divestiture transition services and support, which may cause us to incur unanticipated costs and liabilities and adversely affect our financial condition and results of operations.
In August 2016, we announced our intention to reduce the volume and end the production of certain of our lower-margin laser and PON products within a year of August 2016. In January 2017, we completed the sale of assets and transfer of certain liabilities of our access network and low speed transceiver product lines (the “Low Speed Transceiver Products”). The foregoing actions are part of our strategy to exit products that have been declining in revenue and have lower gross margins than our other higher speed products. We may incur additional costs in connection with the sale or end-of-life of these products, or other products and/or facilities in the future, and our revenues and net income could be negatively affected, particularly in the short term, in connection with the end-of-life or sales of such products and/or facilities. It is also possible that we could incur continued costs or liabilities after the end-of-life process is completed, which could have a material adverse effect on our financial condition or operating results.
We are subject to the cyclical nature of the markets in which we compete and any future downturn may reduce demand for our products and revenue.
The markets in which we compete are tied to the aggregate capital expenditures of telecommunications service providers as they build out and upgrade their network infrastructure. These markets may be cyclical and characterized by rapid technological change, price erosion, evolving standards and wide fluctuations in product supply and demand. In the past, including recently to varying degrees in China, the U.S. and Europe, these markets have experienced significant downturns, often connected with, or in anticipation of, the maturation of product cycles—for both manufacturers’ and their customers’ products—or in response to over or under purchasing of inventory by our customers relative to ultimate carrier demand, and with declining general economic conditions. 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 substantial fluctuations, and we may experience substantial period-to-period fluctuations in future results of operations.
If spending for communications networks does not continue to grow as expected, our business and financial results may suffer.
Our future success as a provider of modules and subsystems to leading network equipment vendors depends on continued capital spending on global communications networks. Network traffic has experienced rapid growth driven primarily by bandwidth-intensive content, including cloud services, mobile video and data services, wireless 4G/LTE and 5G services, social networking, video conferencing and other multimedia. This growth is intensified by the proliferation of fixed and wireless devices that are enabling consumers to access content at increasing data rates anytime and anywhere. Our future success depends on continued demand for high-bandwidth, high-speed communications networks and the ability of network equipment vendors and carrier datacenter operators to fulfill this demand.
We face a variety of risks associated with international sales and operations, which if not adequately managed could adversely affect our business and financial results.
We derive, and expect to continue to derive, a significant portion of our revenue from international sales in various markets. In addition, a major portion of our operations is based in Shenzhen and Dongguan, China and we have additional operations in Japan, Russia and Canada. Our international revenue and operations are subject to a number of material risks, including, but not limited to:
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difficulties in staffing, managing and supporting operations in more than one country;
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difficulties in enforcing agreements and collecting receivables through foreign legal systems;
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fewer legal protections for intellectual property in foreign jurisdictions;
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the need for compliance with local laws and regulations;
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foreign and U.S. taxation issues and international trade barriers;
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general economic and political conditions in the markets in which we operate;
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difficulties in obtaining any necessary governmental authorizations for the export of our products to certain foreign jurisdictions;
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imposition of export restrictions on sales to any of our major foreign customers;
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fluctuations in foreign economies and fluctuations in the value of foreign currencies and interest rates;
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trade and travel restrictions;
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outbreaks of contagious disease;
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domestic and international economic or political changes, hostilities and other disruptions; and
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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 international labor standards. Negative developments in any of these areas in China, Japan, Russia 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, higher labor costs and a higher cost of doing business.
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In addition, although we maintain an anti-corruption compliance program throughout our company, violations of our compliance program 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.
Failure to realize the anticipated benefits from our planned expansion in the Russian Federation may affect our future results of operations and financial condition.
In connection with our raising capital in an April 2012 private placement of common stock, we have established a wholly-owned subsidiary and company operations in the Russian Federation. The establishment of successful operations in the Russian Federation requires capital expenditure over several years, and is in part dependent on the cooperation of Russian entities that could include the Russia government and other third parties. If there are delays in our efforts to establish and maintain operations in the Russian Federation, the anticipated benefits of our Russian expansion may not be realized or may take longer to realize than expected. We could be required to pay up to
$2.0
million to
Joint Stock Company “RUSNANO”, or
Rusnano, at the time if we do not meet certain investment conditions towards our Russian operations by 2019.
Our business operations conducted in Russia are relatively small compared to our overall business
. However, we are subject to economic, political, legal, and social events and developments in Russia
, including but not limited to actions such as restrictions placed on U.S. companies doing business in Russia.
Our revenues and costs will fluctuate over time, making it difficult to predict our future results of operations.
Our revenue, gross margin and results of operations have varied significantly and are likely to continue to vary from quarter to quarter due to a number of factors, many of which are not within our control. For instance, changes in gross margin may result from various factors, such as changes in pricing, changes in our fixed costs, changes in the cost of labor, changes in the mix of our products sold, changes in the amount of product manufactured versus the amount of product sold over time, and charges for excess and obsolete inventory. In addition, our first quarter revenue is generally seasonally lower than the rest of the year primarily due to lower capacity utilization during the holidays in China and the impact of typical price negotiations during the fourth quarter. It is difficult for us to accurately forecast our future revenue and gross margin and plan expenses accordingly and, therefore, it is difficult for us to predict our future results of operations.
Increasing costs and other factors may adversely impact our gross margins.
We may not be able to maintain or improve our gross margins because of slow introductions of new products, pricing pressure from increased competition, failure to effectively reduce the cost of existing products, failure to improve our product mix, future macroeconomic or market volatility reducing sales volumes, changes in customer demand (including a change in product mix among different areas of our business) or other factors. Our gross margins can also be adversely affected for reasons including, but not limited to, fixed manufacturing costs that would not be expected to decrease in proportion to any decrease in revenues; unfavorable production yields or variances; increases in costs of input parts and materials; the timing of movements in our inventory balances; warranty costs and related returns; changes in foreign currency exchange rates; possible exposure to inventory valuation reserves; and other increases
in our costs and expenses, including as a result of rising labor costs in China
.
Such significant increases in costs without corresponding increases in revenue would materially and adversely affect our business, our results of operations and our financial condition and our gross margins.
If our customers do not qualify our products for use, then our results of operations may suffer.
Prior to placing volume purchase orders with us, most of our customers require us to obtain their approval—called qualification in our industry—of our new and existing products, and our customers often audit our manufacturing facilities and perform other vendor 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 qualify our products with customers, then our revenue would be lower than expected and we may not be able to recover the costs associated with the qualification process which would have an adverse effect on our results of operations.
In addition, due to evolving 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.
We have pursued and may continue to pursue acquisitions. Acquisitions could be difficult to integrate, divert the attention of key personnel, disrupt our business, dilute stockholder value and impair our financial results.
As part of our business strategy, we have pursued and intend to continue to pursue acquisitions of complementary businesses, products, services or technologies that we believe could accelerate our ability to compete in our existing markets or allow us to enter new markets. Any of these transactions could be material to our financial condition and results of operations. For instance, in October 2011, we completed the acquisition of Santur Corporation, a designer and manufacturer of InP-based PIC products, and in March 2013 we completed the acquisition of the optical semiconductor business unit of LAPIS Semiconductor Co., Ltd., now known as NeoPhotonics Semiconductor. We purchased the tunable laser product lines of EMCORE in January 2015 and the power monitoring products business of EigenLight Corporation, or Eigenlight, in November 2015.
Acquisitions involve numerous risks. The failure to successfully evaluate and execute acquisitions or otherwise adequately address such risks could result in excess costs and materially harm our business and financial results.
Acquisitions also frequently result in the recording of goodwill and other intangible assets which are subject to potential impairments which have occurred in the past and which, were they to occur in the future, could harm our financial results.
It could be discovered that our products contain defects that may cause us to incur significant costs, divert our attention, result in a loss of customers and result in product liability claims.
Our products are complex and undergo quality testing as well as formal qualification, both by our customers and by us. 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. Any significant product failure could result in lost future sales of the affected product and other products, as well as customer relations problems and litigation, which could harm our business.
The communications networks industry has long product development cycles requiring us to incur product development costs without assurances of an acceptable investment return.
Large volumes of communications equipment and support structures are installed with considerable expenditures of funds and other resources, and long investment return period expectations. At the component supplier level, these cycles create considerable, typically multi-year, gaps between the commencement of new product development and volume purchases. Due to changing industry and customer requirements, we are constantly developing new products, including seeking to further integrate functions on PICs and developing and using new technologies in our products. These development activities necessitate significant investment of capital. Our new products often require a long time to develop because of their complexity and rigorous testing and qualification requirements. Accordingly, we and our competitors often incur significant research and development and sales and marketing costs for products that, initially, will be purchased by our customers long after much of the cost is incurred and, in some cases, may never be purchased due to changes in industry or customer requirements in the interim.
We are subject to global governmental export and import controls that could subject us to liability, impair our ability to compete in international markets, or restrict our sales to certain customers.
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, especially laser-dependent products. In some cases, it is possible that export licenses would be required from the U.S. or other government agencies outside the U.S. such as, but not limited to, Japan, China or Russia for some of our products in accordance with various statutes. In addition, various countries regulate the export or import of certain technologies and have enacted laws that could limit our ability to distribute our products. Failure to comply with these and similar laws on a timely basis, or at all, or any limitation on our ability to export or sell our products or to obtain any required licenses would adversely affect our business, financial condition and results of operations.
If we fail to protect our intellectual property and other proprietary rights, our business and results of operations could be materially harmed.
Our success depends to a significant degree 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. We cannot guarantee that our pending applications will be approved by the applicable governmental authorities.
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. or Japan law. Particularly, our U.S. patents do not afford any intellectual property protection in China, Japan, Canada or other Asia locations, including Russia, where we have company operations.
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. 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.
We may be involved in intellectual property disputes, 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. Numerous patents in these industries are held by others, including our competitors. In addition, from time to time, we have been notified that we may be infringing certain patents or other 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. In addition, there can be no assurance that third parties will not assert infringement claims against us. While we believe that our products do not infringe in any material respect upon intellectual property rights of other parties and/or meritorious defense would exist with respect to any assertions to the contrary, we cannot be certain that our products would not be found infringing the intellectual property rights of others.
In January 2010, Finisar Corporation, or Finisar, filed a complaint in the U.S. District Court for the Northern District of California against us and three other co-defendants. In the complaint, Finisar alleged infringement of certain of its U.S. patents arising from the co-defendants’ respective manufacture, importation, use, sale of or offer to sell certain optical transceiver products in the U.S. In March 2010, we filed an answer to the complaint and counterclaims, asserting two claims of patent infringement and additional claims asserting that Finisar has violated state and federal competition laws and violated its obligations to license on reasonable and non-discriminatory terms. In May 2010, the Court dismissed without prejudice all co-defendants (including us) except Source Photonics, Inc., on grounds that such claims should have been asserted in four separate lawsuits, one against each co-defendant. This dismissal without prejudice does not prevent Finisar from bringing a new similar lawsuit against us. In May 2012, we and Finisar agreed to toll our respective claims until the refiling of certain of the previously asserted claims from this dispute. As a result, Finisar is permitted to bring a new lawsuit against us if it chooses to do so, and we may bring new claims against Finisar upon seven days written notice prior to filing such claims.
Although we believe that we would have meritorious defenses to the infringement allegations and intend to defend any new similar lawsuit vigorously, there can be no assurance that we will be successful in our defense. Even if we are successful, we may incur substantial legal fees and other costs in defending the lawsuit. Further, a new lawsuit, if brought by either party, would be likely to divert the efforts and attention of our management and technical personnel, which could harm our business.
If we fail to obtain the right to use the intellectual property rights of others which 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. Failure to obtain a necessary third-party license required for our product offerings or to develop new products and product enhancements could adversely affect our business.
Participation in standards setting organizations may subject us to intellectual property licensing requirements or limitations that could adversely affect our business and prospects.
In the course of our participation in the development of emerging standards for some of our present and future products, we may agree to grant to all other participants a license to our patents that are essential to the practice of those standards on
reasonable and non-discriminatory, or RAND,
terms. If we fail to limit to whom we license our patents, or fail to limit the terms of any such licenses, we may be required to license our patents or other intellectual property to others in the future, which could limit the effectiveness of our patents against competitors.
Any potential dispute involving our products, services or technology could also include our customers using our products, which could trigger our indemnification obligations to them and result in substantial expenses to us.
In any potential dispute involving allegations that our products, services or technology infringe the intellectual property rights of third parties, our customers could also become the target of litigation. Because we often indemnify our customers for intellectual property claims made against them for products incorporating our technology, any claims against our customers could trigger indemnification obligations in some of our supply agreements, which could result in substantial expenses such as increased legal expenses, product recalls, damages for past infringement or royalties for future use.
Natural disasters, terrorist attacks or other catastrophic events could harm our operations and our financial results.
Our worldwide operations could be subject to natural disasters and other business disruptions, which could harm our future revenue and financial condition and increase our costs and expenses. For example, our corporate headquarters and wafer fabrication facility in Silicon Valley, California and our Tokyo, Japan facility are located near major earthquake fault lines, and our manufacturing facilities are located in Shenzhen and Dongguan, China, areas that are susceptible to typhoons. We are not insured against many natural disasters, including earthquakes.
Similarly, our worldwide operations could be subject to secondary effects of natural disasters, terrorist attacks or other catastrophic events. Even if our facilities are not directly affected, any of these types of events could substantially disrupt the business of our suppliers or customers, which could have a material adverse effect on us.
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. Various industry organizations are currently considering whether and to what extent to create standards for elements used in 100Gbps and beyond systems. 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 and our revenue and results of operations would suffer.
Potential changes in our effective tax rate could negatively affect our future results.
We are subject to income taxes in the U.S., China, Japan and other foreign jurisdictions, and our domestic and international tax liabilities are subject to the allocation of expenses in differing jurisdictions. Our tax rate is affected by changes in the mix of earnings and losses in countries with differing statutory tax rates, certain non-deductible expenses and the valuation of deferred tax assets and liabilities, including our ability to utilize our net operating losses. Increases in our effective tax rate could negatively affect our results of operations.
Our future results of operations may be subject to volatility as a result of exposure to fluctuations in foreign exchange rates, primarily the Chinese Renminbi (RMB) and Japanese Yen (JPY) exchange rates.
We are exposed to foreign exchange risks. Foreign currency fluctuations may adversely affect our revenue and our costs and expenses, and hence our results of operations. A substantial portion of our business is conducted through our subsidiaries based in China, whose functional currency is the RMB and Japan, whose functional currency is the JPY, and a smaller amount in Russian Rubles (RUB). The value of the RMB against the U.S. dollar and other currencies and the value of the JPY and RUB against the U.S. dollar and other currencies fluctuate and are affected by, among other things, changes in political and economic conditions.
To the extent that transactions by our subsidiaries in China and Japan are denominated in currencies other than the RMB and JPY, we bear the risk that fluctuations in the exchange rates of the RMB and JPY in relation to other currencies could decrease our revenue or increase our costs and expenses, therefore having an adverse effect on our future results of operations.
While we generate a significant portion of our revenue in U.S dollars, a significant portion of our cost of goods sold are in RMB and JPY. Therefore appreciation in RMB and JPY against the U.S. dollar would negatively impact our cost of goods sold upon translation to U.S. dollars.
We have entered into hedging transactions to reduce the short-term impact of foreign currency fluctuations. However, the availability and effectiveness of these hedging transactions may be limited and we may not be able to successfully hedge our exposure. In addition, our currency exchange variations may be magnified by Chinese exchange control regulations that restrict our ability to convert RMB into foreign currency.
We have identified a material weakness in our internal control over financial reporting which could, if not remediated, result in material misstatements in our financial statements.
As part of our annual evaluation of internal controls for fiscal 2016, our management identified several deficiencies (including inadequate written shipping procedures) in our internal control over financial reporting related to certain revenue cut-off procedures. These deficiencies aggregated to a material weakness in our controls over revenue cut-off procedures, which affected the timing of our revenue recognition. A material weakness is defined as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. While no actual material misstatements were identified for the year ended December 31, 2016, the material weakness had not been remediated as of June 30, 2017.
Over the second half of 2017, we intend to complete implementation of a remediation plan designed to address this material weakness. However, if our remediation measures are insufficient to address this material weakness, if any of our personnel overrides our controls or if additional material weaknesses in our internal control are discovered or occur in the future, our consolidated financial statements may contain material misstatements and we could be required to restate our financial results. For more information see “Item 4. Controls and Procedures”.
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.
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended, or the Exchange Act.
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. If we
fail to maintain the adequacy of our internal controls over financial reporting, our business and operating results may be harmed
and we may fail to meet our financial reporting obligations. If material
weaknesses in our internal control are discovered or occur, our consolidated financial statements may contain material misstatements and we could be required to restate our financial results.
Our internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. Any failure of our internal controls could adversely affect the results of the periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting. If we cannot provide reliable financial reports or prevent fraud, our business and results of operations could be harmed, investors could lose confidence in our reported financial information, and the trading price of our stock may decline.
We may be subject to disruptions or failures in information technology systems and network infrastructures that could have a material adverse effect on our business and financial condition.
We rely on the efficient and uninterrupted operation of complex information technology systems and network infrastructures to operate our business. A disruption, infiltration or failure of our information technology systems as a result of software or hardware malfunctions, system implementations or upgrades, computer viruses, cyber-attacks, third-party security breaches, employee error, theft or misuse, malfeasance, power disruptions, natural disasters or accidents could cause breaches of data security, loss of intellectual property and critical data and the release and misappropriation of sensitive competitive information and partner, customer and employee personal data. Any of these events could harm our competitive position, result in a loss of customer confidence, cause us to incur significant costs to remedy any damages and ultimately materially adversely affect our business and financial condition.
Covenants in our borrowing arrangements may limit our flexibility in responding to business opportunities and competitive developments and increase our vulnerability to adverse economic or industry conditions.
We have lending arrangements with several financial institutions, which generally require us to maintain certain financial covenants and limit our ability to take certain actions such as incurring some kinds of additional debt, paying dividends, or engaging in certain transactions like mergers and acquisitions, investments and asset sales without the lenders’ consent. These restrictions may limit our flexibility in responding to business opportunities, competitive developments and adverse economic or industry conditions. In addition, a breach of any of these covenants, 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 be unable to utilize our net operating loss carryforwards to reduce our income taxes, which could adversely affect our future financial results.
As of December 31, 2016, we had net operating loss, or NOL, carryforwards for U.S. federal and state tax purposes of $207.3 million and $51.0 million, respectively. As these net operating losses have not been utilized and may not be utilized prior to their expiration in the future. The utilization of the NOL and tax credit carryforwards are subject to a substantial limitation imposed by Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, and similar state provisions. We recorded deferred tax assets, net of valuation allowance, for the NOL carryforwards currently available after considering the existing Section 382 limitation. If we incur an additional limitation under Section 382, then the NOL carryforwards, as
disclosed, could be reduced by the impact of any future limitation that would result in existing NOL carryforwards and tax credit carryforwards expiring unutilized and increases in future tax liabilities.
We may utilize conflict minerals in our production or rely on suppliers who utilize conflict minerals in their production, and the use of such conflict minerals may negatively impact our results of operations.
Since 2013, we have been subject to reporting obligations for the use of conflict minerals originating in the Democratic Republic of the Congo and adjoining countries and subsequently have
timely filed our conflict minerals reports with the SEC.
If we fail to comply with these requirements, our operating results could be harmed.
In some instances, we rely on third-party sales representatives to assist in selling our products, and the failure of these representatives to perform as expected could reduce our future revenue.
Although we primarily sell our products through direct sales to systems vendors, we also sell our products to some of our customers through third-party sales representatives. Many of our third-party sales representatives also market and sell competing products from our competitors. Our third-party sales representatives 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 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 third-party sales representatives fail to perform as expected or to operate their businesses effectively, our revenue and results of operations could be harmed.
We are subject to environmental, health and safety laws and regulations, which could subject us to liabilities, increase our costs, or restrict our business or operations in the future.
Our manufacturing operations and our products are subject to a variety of federal, state, local and international environmental, health and safety laws and regulations in each of the jurisdictions in which we operate or sell our products. Our failure to comply with present and future environmental, health or safety requirements, or the identification of contamination, could cause us to incur substantial costs, including cleanup costs, monetary fines, civil or criminal penalties, or curtailment of operations, which could have a material adverse effect on our business, financial condition and results of operations.
Additionally, increasing efforts to control emissions of greenhouse gases, or GHG, may also impact us. Additional climate change or GHG control requirements are under consideration at the federal level in the U.S. and in China. Additional restrictions, limits, taxes, or other controls on GHG emissions could increase our operating costs and, while it is not possible to estimate the specific impact any final GHG regulations will have on our operations, there can be no assurance that these measures will not have significant additional impact on us.
Risks Related to Our Operations in China
Our business operations conducted in China are critical to our success. A significant portion of
our revenue was recognized from customers for whom we shipped products to a location in China. Additionally, a substantial portion of our net property, plant and equipment, approximately
31%
as of June 30, 2017, was located in China. We expect to make further investments in China in the foreseeable future. Therefore, our business, financial condition, results of operations and prospects are to a significant degree subject to economic, political, legal, and social events and developments 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 and 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. Moreover, the laws, regulations and legal requirements in China, including the laws that apply to foreign-invested enterprises are relatively new and are subject to frequent changes. The interpretation and enforcement of such laws is uncertain. Any adverse changes to these laws, regulations and legal requirements, including tax laws, or their interpretation or enforcement, or the creation of new laws or regulations relating to our business, could have a material adverse effect on our business.
Furthermore, any slowdown or economic downturn, whether actual or perceived, in China could have a material adverse effect on our business, financial condition and results of operation.
The termination, expiration or unavailability of our preferential income tax treatment in China may have a material adverse effect on our operating results.
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 foreign-invested enterprises. Historically, one of our subsidiaries in China qualified for a preferential 15% tax rate that is available for new and high technology enterprises.
In June 2016, the State Administration of Taxation issued a notice to adjust the requirements for high technology enterprise status. As a result, we did not meet the requirements for 2016 and became subject to the 25% regular income tax rate, which may impact our operating results for future years.
Our subsidiaries in China may be subject to restrictions on dividend payments, on making other payments to us or any other affiliated company, and on borrowing or allocating tax losses among our subsidiaries.
Current Chinese regulations permit our subsidiaries in China to pay dividends only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations, which are different than U.S. accounting standards and regulations. In addition, our subsidiaries in China are required to set aside at least 10% of their respective accumulated profits each year, if any, to fund their statutory common reserves until such reserves have reached at least 50% of their respective registered capital, as well as to allocate a discretional portion of their after-tax profits to their staff welfare and bonus fund
. As of June 30, 2017 and December 31, 2016, our Chinese subsidiaries’ common reserves had not reached this threshold and, accordingly, these entities are required to continue funding such reserves with accumulated net profits. Accordingly, we may not be able to move our capital easily, which could harm our business.
Restrictions on currency exchange may limit our ability to receive and use our revenue and cash effectively.
Because a portion of our revenue is denominated in RMB, any restrictions on currency exchange may limit our ability to use revenue generated in RMB to fund any business activities we may have outside China or to make dividend payments in U.S. dollars. Under relevant Chinese rules and regulations, the RMB is convertible under the “current account,” which includes dividends, trade and service-related foreign exchange transactions, but not under the “capital account,” which includes foreign direct investment and loans, without the prior approval of the State Administration of Foreign Exchange, or
SAFE. We cannot be certain that Chinese regulatory authorities will not impose more stringent restrictions on the convertibility of the RMB, especially with respect to foreign exchange transactions.
If such restrictions are imposed, our ability to adjust our capital structure or engage in foreign exchange transactions may be limited.
Uncertainties with respect to China’s legal system could adversely affect the legal protection available to us.
Our operations in China are governed by Chinese laws and regulations. Our subsidiaries in China are generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable to wholly foreign-owned enterprises. China’s legal system is a civil law system based on written statutes. Unlike common law systems, it is a legal system where decided legal cases have limited value as precedents. However, China has not developed a fully-integrated legal system, and recently-enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. Uncertainties in the Chinese legal system may impede our ability to enforce the contracts we have entered into with our distributors, business partners, customers and suppliers. In addition, 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. All of these uncertainties could limit the legal protections available to us and could materially and adversely affect our business and operations.
If the Chinese government determines that we failed to obtain approvals of, or registrations with, the requisite Chinese regulatory authority with respect to our current and past import and export of technologies, or failed to obtain the necessary licenses to file patent applications outside China for inventions made in China, we could be subject to sanctions, which could adversely affect our business.
China imposes controls on technology import and export. The term “technology import and export” is broadly defined to include, without limitation, the transfer or license of patents, software and know-how, and the provision of services in relation to technology. Depending on the nature of the relevant technology, the import and export of technology to or from China requires either approval by or registration with, the relevant Chinese governmental authorities. Additionally, the Chinese government requires the patent application for any invention made at least in part in China to be filed first in China, then undergo a government secrecy review and obtain a license before such application is filed in other countries.
If the Chinese government determines that we failed to obtain follow required procedures and obtain the appropriate license before filing a patent application outside China for an invention made at least in part in China, our China patents on such products may be invalidated, which could have a material and adverse effect on our business and operations.
China regulation of loans and direct investment by offshore holding companies to China entities may delay or prevent us from using our cash proceeds to make loans or additional capital contributions to our China subsidiaries.
From time to time, we may make loans or additional capital contributions to our China subsidiaries. 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 subsidiaries. If we fail to receive such registrations or approvals, our ability to capitalize our China subsidiaries may be negatively affected, which could materially and adversely affect our liquidity and ability to fund and expand our business.
Dividends paid to us by our Chinese subsidiaries may be subject to Chinese withholding tax.
The EIT Law and the implementation regulations provide that a 10% withholding tax may apply to dividends payable to investors that are “non-resident enterprises,” to the extent such dividends are derived from sources within China and in the absence of any tax treaty that may reduce such withholding tax rate.
Our contractual arrangements with our subsidiaries in China may be subject to audit or challenge by the Chinese tax authorities, and a finding that our subsidiaries in China owe additional taxes could substantially reduce our net income and the value of our stockholders’ investment.
Under the applicable laws and regulations in China, arrangements and transactions among related parties may be subject to audit or challenge by the Chinese tax authorities. We would be subject to adverse tax consequences if the Chinese tax authorities were to determine that the contracts with or between our subsidiaries were not executed on an arm’s length basis, and as a result the Chinese tax authorities could require that our Chinese subsidiaries adjust their taxable income upward for Chinese tax purposes. Such an adjustment could adversely affect us by increasing our tax expenses.
We may have difficulty maintaining adequate management, legal and financial controls in China, which we are required to do in order to comply with Section 404 of the Sarbanes-Oxley Act and securities laws, and which could cause a material adverse impact on our consolidated financial statements, the trading price of our common stock and our business.
Chinese companies 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. Most of our middle management staff in China are not educated in the western system, and we may have difficulty hiring new employees in China with experience and expertise relating to accounting principles generally accepted in the U.S. and U.S. public-company reporting requirements. These issues could make it more difficult for us to
establish and maintain adequate internal control over our financial reporting, which could then result in errors that could cause a material misstatement of our consolidated financial statements.
We may be exposed to liabilities under the FCPA and Chinese anti-corruption
laws, and any determination that we violated these laws could have a material adverse effect on our business.
We are subject to the Foreign Corrupt Practices Act of 1977, or FCPA, and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute, for the purpose of obtaining or retaining business. We have operations, agreements with third parties and we make significant sales in China. China also strictly prohibits bribery of government officials. Our activities in China create the risk of unauthorized payments or offers of payments by our employees, consultants, sales agents or distributors, even though they may not always be subject to our control. Although we have implemented policies and procedures to discourage these practices by our employees, our existing safeguards and any future improvements may prove to be less than effective, and our employees, consultants, sales agents or distributors may engage in conduct for which we might be held responsible. Violations of the FCPA or anti-corruption laws in other countries may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition.
Risks Related to Ownership of Our Common Stock
Our stock price may be volatile due to fluctuation of our financial results from quarter-to-quarter and other factors.
Our quarterly revenue and results of operations have varied in the past and may 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:
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fluctuations in demand for our products;
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the timing, size and product mix of sales of our products;
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changes in our pricing and sales policies, particularly in the first quarter of the year, or changes in the pricing and sales policies of our competitors;
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our ability to design, manufacture and deliver products to our customers in a timely and cost-effective manner and that meet customer requirements;
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quality control or yield problems in our manufacturing operations;
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our ability to timely obtain adequate quantities of the components used in our products;
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length and variability of the sales cycles of our products;
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unanticipated increases in costs or expenses; and
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fluctuations in foreign currency exchange rates.
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The foregoing factors are difficult to forecast, and these, as well as other factors, could materially adversely affect our quarterly and annual results of operations in the future. 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. Moreover, our results of operations may not meet our announced financial outlook 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.
The market price of our common stock could be subject to wide fluctuations in response to, among other things, the risk factors described in this section of this Quarterly Report on Form 10-Q, and other factors beyond our control, such as fluctuations in the valuation of companies perceived by investors to be comparable to us.
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, sovereign debt or liquidity issues, 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.
Our failure to prepare and file timely our periodic reports with the SEC may make it more difficult for us to access the public markets to raise debt or equity capital.
In January 2017 we did not file a Current Report on Form 8-K reporting the completion of the sale of the assets of our Low Speed Transceiver Products within the time frame required by the SEC. As a result of our failure to file this Current Report by the filing date required by the SEC, we are not eligible to file or use a Form S-3 registration statement to conduct public offerings until our filings with the SEC have been timely made for a full year. Our ineligibility to use Form S-3 during this time period may have a negative impact on our ability to quickly access the public capital markets because we would be required to file a long-form registration statement and wait for the SEC to declare such registration statement effective. This may limit our ability to access the public markets quickly to raise debt or equity capital. Our limited ability to access the public markets could prevent us from pursuing transactions or implementing business strategies that we believe would be beneficial to our business.
The concentration of our capital stock ownership with our principal stockholders, executive officers and directors and their affiliates may limit other stockholders’ ability to influence corporate matters.
As of December 31, 2016, our executive officers and directors, and entities that are affiliated with them or that have a right to designate a director, beneficially own an aggregate of approximately 39% of our
outstanding common stock. This significant concentration of share ownership may adversely affect the trading price for our common stock because investors often perceive disadvantages in owning stock in companies with controlling stockholders. Also, as a result, these stockholders, acting together, may be able to control our management and affairs and matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions.
Our charter documents 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 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:
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providing for a classified board of directors with staggered, three-year terms;
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not providing for cumulative voting in the election of directors;
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authorizing our board of directors to issue, without stockholder approval, preferred stock rights senior to those of common stock;
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prohibiting stockholder action by written consent;
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limiting the persons who may call special meetings of stockholders; and
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requiring advance notification of stockholder nominations and proposals.
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In addition, we have been governed by the provisions of Section 203 of the Delaware General Corporate Law since the completion of our initial public offering. 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 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.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5.
OTHER INFORMATION
None.
ITEM 6.
EXHIBITS
See Index to Exhibits at the end of this report.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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NeoPhotonics Corporation
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Date:
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August 8, 2017
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By:
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/S/ SANDRA A. WAECHTER
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Sandra A. Waechter
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Interim Chief Financial Officer
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(Principal Financial and Accounting Officer)
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EXHIBIT INDEX
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Exhibit
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Description of exhibit
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Form
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SEC File No.
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Exhibit
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Filing Date
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Filed Herewith
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2.1
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Asset Purchase Agreement dated December 14, 2016 between APAT Optoelectronics Components Co., Ltd., NeoPhotonics Dongguan Co., Ltd. and NeoPhotonics (China) Co., Ltd.*
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Form 8-K
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001-35061
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2.1
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January 23, 2017
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2.2
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Supplementary Agreement to Asset Purchase Agreement, dated January 12, 2017, between APAT Optoelectronics Components Co., Ltd., NeoPhotonics Dongguan Co., Ltd. and NeoPhotonics (China) Co., Ltd.*
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Form 8-K
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001-35061
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2.2
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January 23, 2017
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2.3
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Second Supplementary Agreement to Asset Purchase Agreement, dated January 14, 2017, between APAT Optoelectronics Components Co., Ltd., NeoPhotonics Dongguan Co., Ltd. and NeoPhotonics (China) Co., Ltd.*
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Form 8-K
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001-35061
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2.3
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January 23, 2017
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3.1
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Amended and Restated Certificate of Incorporation of NeoPhotonics Corporation.
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Form 8-K
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001-35061
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3.1
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February 10, 2011
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3.2
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Amended and Restated Bylaws of NeoPhotonics Corporation.
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Form S-1
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333-166096
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3.4
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November 22, 2010
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4.1
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Specimen Common Stock Certificate of NeoPhotonics Corporation.
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Form S-1
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333-166096
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4.1
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May 17, 2010
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4.2
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2008 Investors’ Rights Agreement by and between NeoPhotonics Corporation and the investors listed on Exhibit A thereto, dated May 14, 2008.
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Form S-1
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333-166096
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4.2
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April 15, 2010
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4.3
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Commitment to File Registration Statement and Related Waiver of Registration Rights by and between NeoPhotonics Corporation and Open Join Stock Company “RUSNANO” dated as of December 18, 2014.
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Form S-1
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333-201180
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4.4
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December 19, 2014
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10.1
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Eleventh Amendment dated April 28, 2017 to Revolving Credit and Term Loan Agreement, dated March 21, 2013, by and between NeoPhotonics Corporation and Comerica Bank, as Agent and sole Lender.
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10.2
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Twelfth Amendment dated June 29, 2017 to Revolving Credit and Term Loan Agreement, dated March 21, 2013, by and between NeoPhotonics Corporation and Comerica Bank, as Agent and sole Lender.
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Form 8-K
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001-35061
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10.1
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June 29, 2017
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10.3
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Lease Agreement, dated June 13, 2017, by and between NeoPhotonics Corporation and The Realty Associates Fund X, L.P.
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Form 8-K
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001-35061
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10.1
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June 19, 2017
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10.4
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Consulting Agreement, by and between NeoPhotonics Corporation and Kainos Consulting, LLC, dated May 15. 2017.
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10.5
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Separation Agreement, by and between NeoPhotonics Corporation and Clyde R. Wallin, dated April 4. 2017.
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10.6+
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2017 Performance Bonus Program.
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Exhibit
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Description of exhibit
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Form
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SEC File No.
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Exhibit
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Filing Date
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Filed Herewith
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31.1
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Certification pursuant to Rule 13a-14(a)/15d-14(a).
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31.2
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Certification pursuant to Rule 13a-14(a)/15d-14(a).
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32.1
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Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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X
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101.INS
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XBRL Instance Document.
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X
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101.SCH
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XBRL Taxonomy Extension Schema Document.
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X
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101.CAL
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XBRL Taxonomy Extension Calculation Linkbase Document.
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X
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101.DEF
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XBRL Taxonomy Extension Definition Linkbase Document.
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X
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101.LAB
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XBRL Taxonomy Extension Label Linkbase Document.
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X
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101.PRE
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XBRL Taxonomy Extension Presentation Linkbase Document.
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X
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+ Management compensatory plan or arrangement.
* Translation to English of an original Chinese document.
** Translation to English of an original Japanese document.
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NeoPhotonics (NYSE:NPTN)
Historical Stock Chart
From Mar 2024 to Apr 2024
NeoPhotonics (NYSE:NPTN)
Historical Stock Chart
From Apr 2023 to Apr 2024
