Quarterly Report (10-q)

Date : 11/07/2019 @ 9:06PM
Source : Edgar (US Regulatory)
Stock : Applied Optoelectronics Inc (AAOI)
Quote : 7.45  -0.24 (-3.12%) @ 1:00AM
Applied Optoelectronics share price Chart
After Hours
Last Trade
Last $ 7.45 ◊ 0.00 (0.00%)

Quarterly Report (10-q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2019

OR

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

For the transition period from __________ to __________

Commission File Number: 001-36083

Applied Optoelectronics, Inc.

(Exact name of registrant as specified in its charter)

Delaware

76-0533927

(State or other jurisdiction of incorporation or organization)

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

13139 Jess Pirtle Blvd.

Sugar Land, TX 77478

(Address of principal executive offices)

(281295-1800

(Registrant’s telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (“Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                                                             Yes  No  

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

            Yes  No  

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

Large accelerated filer

Accelerated filer

 

Non-accelerated filer

 

Smaller reporting company

 

Emerging growth company

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

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

Yes   No  

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

Title of each class

Trading Symbol(s)

Trading Name of each exchange on which registered

Common Stock, Par value $0.001

AAOI

NASDAQ Global Market

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: as of November 4, 2019 there were 20,111,843 shares of the registrant’s Common Stock outstanding.

Applied Optoelectronics, Inc.

Table of Contents

Page

Part I. Financial Information

 

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

3

 

Condensed Consolidated Balance Sheets as of September 30, 2019 (Unaudited) and December 31, 2018

3

 

Condensed Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2019 and 2018 (Unaudited)

4

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months ended September 30, 2019 and 2018 (Unaudited)

5

 

Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months ended September 30, 2019 and 2018 (Unaudited)

6

 

Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2019 and 2018 (Unaudited)

7

 

Notes To Condensed Consolidated Financial Statements (Unaudited)

8

 

Item 2.

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

26

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

35

 

Item 4.

Controls and Procedures

35

 

Part II. Other Information

Item 1.

Legal Proceedings

36

Item 1A.

Risk Factors

37

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

59

Item 3.

Defaults Upon Senior Securities

59

Item 4.

Mine Safety Disclosures

59

Item 5.

Other Information

59

Item 6.

Exhibits

59

Signatures

61

2

Part I. Financial Information

Item 1. Condensed Consolidated Financial Statements

Applied Optoelectronics, Inc. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except per share data)

September 30, 

December 31, 

    

2019

    

2018

ASSETS

Current Assets

Cash and cash equivalents

$

69,994

$

55,646

Restricted cash

 

2,382

2,358

Accounts receivable - trade, net of allowance of $30 and $32, respectively

 

29,709

30,534

Inventories

 

82,118

93,256

Prepaid income tax

 

759

1,188

Prepaid expenses and other current assets

 

5,685

11,293

Total current assets

 

190,647

194,275

Property, plant and equipment, net

 

245,535

234,211

Land use rights, net

 

5,551

5,814

Operating right of use asset

7,738

Intangible assets, net

 

4,072

3,977

Deferred income tax assets

29,362

21,714

Other assets, net

 

973

6,849

TOTAL ASSETS

$

483,878

$

466,840

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities

Current portion of notes payable and long-term debt

$

15,803

$

23,589

Accounts payable

 

28,074

29,910

Bank acceptance payable

 

4,080

4,628

Current lease liability

924

Accrued liabilities

 

15,542

19,291

Total current liabilities

 

64,423

77,418

Notes payable and long-term debt, less current portion

 

32,373

60,328

Convertible senior notes

76,835

Non-current lease liability

7,962

TOTAL LIABILITIES

 

181,593

137,746

Stockholders' equity:

Preferred Stock; 5,000 shares authorized at $0.001 par value; no shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively

 

Common Stock; 45,000 shares authorized at $0.001 par value; 20,061 and 19,810 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively

 

20

20

Additional paid-in capital

 

300,725

292,480

Accumulated other comprehensive income

 

(3,832)

602

Retained earnings

 

5,372

35,992

TOTAL STOCKHOLDERS' EQUITY

 

302,285

329,094

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$

483,878

$

466,840

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

3

Applied Optoelectronics, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

Three months ended September 30, 

Nine months ended September 30, 

    

2019

    

2018

    

2019

    

2018

Revenue, net

$

46,084

$

56,386

$

142,214

$

209,447

Cost of goods sold

 

34,108

38,849

 

107,349

132,211

Gross profit

 

11,976

17,537

 

34,865

77,236

Operating expenses

Research and development

 

10,466

14,180

 

32,802

38,561

Sales and marketing

 

2,518

2,370

 

7,444

7,221

General and administrative

 

9,988

10,591

 

31,312

29,945

Total operating expenses

 

22,972

27,141

 

71,558

75,727

Income (loss) from operations

 

(10,996)

(9,604)

 

(36,693)

1,509

Other income (expense)

Interest income

 

347

86

 

729

223

Interest expense

 

(1,517)

(274)

 

(4,003)

(624)

Other income, net

 

1,446

766

 

1,742

1,320

Total other income (expense), net

 

276

578

 

(1,532)

919

Income (loss) before income taxes

 

(10,720)

(9,026)

 

(38,225)

2,428

Income tax benefit

 

1,940

5,294

 

7,605

3,994

Net income (loss)

$

(8,780)

$

(3,732)

$

(30,620)

$

6,422

Net income (loss) per share

Basic

$

(0.44)

$

(0.19)

$

(1.54)

$

0.33

Diluted

$

(0.44)

$

(0.19)

$

(1.54)

$

0.32

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

Basic

 

20,022,520

19,707,036

 

19,939,605

19,597,181

Diluted

 

20,022,520

19,707,036

 

19,939,605

20,038,657

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

4

Applied Optoelectronics, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited, in thousands)

Three months ended September 30, 

Nine months ended September 30, 

    

2019

    

2018

    

2019

    

2018

Net income (loss)

$

(8,780)

$

(3,732)

$

(30,620)

$

6,422

Loss on foreign currency translation adjustment

 

(3,453)

(4,798)

 

(4,434)

 

(8,908)

Comprehensive loss

$

(12,233)

$

(8,530)

$

(35,054)

$

(2,486)

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

5

Applied Optoelectronics, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Three and Nine Months ended September 30, 2019 and 2018

(Unaudited, in thousands)

Accumulated

Preferred Stock

Common Stock 

Additional

other

Number

Number

paid-in

comprehensive

Retained

Stockholders'

    

of shares

    

Amount

    

of shares

    

Amount

    

capital

    

gain (loss)

    

earnings

    

equity

July 1, 2019

$

19,951

$

20

$

297,922

$

(379)

$

14,152

$

311,715

Stock options exercised, net of shares withheld for employee tax

1

1

1

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

 

109

(176)

(176)

Share-based compensation

 

2,978

2,978

Foreign currency translation adjustment

 

(3,453)

(3,453)

Net income (loss)

 

(8,780)

(8,780)

September 30, 2019

$

20,061

$

20

$

300,725

$

(3,832)

$

5,372

$

302,285

Accumulated

Preferred Stock

Common Stock 

Additional

other

Number

Number

paid-in

comprehensive

Retained

Stockholders'

    

of shares

    

Amount

    

of shares

    

Amount

    

capital

    

gain (loss)

    

earnings

    

equity

July 1, 2018

$

19,634

$

20

$

288,686

$

5,633

$

48,292

$

342,631

Stock options exercised, net of shares withheld for employee tax

43

(845)

(845)

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

 

81

(665)

(665)

Share-based compensation

 

2,894

2,894

Foreign currency translation adjustment

 

(4,798)

(4,798)

Net income

 

(3,732)

(3,732)

September 30, 2018

$

19,758

$

20

$

290,070

$

835

$

44,560

$

335,485

Accumulated

Preferred Stock

Common Stock 

Additional

other

Number

Number

paid-in

comprehensive

Retained

Stockholders'

    

of shares

    

Amount

    

of shares

    

Amount

    

capital

    

gain (loss)

    

earnings

    

equity

January 1, 2019

$

19,810

$

20

$

292,480

$

602

$

35,992

$

329,094

Stock options exercised, net of shares withheld for employee tax

1

8

8

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

 

250

(702)

(702)

Share-based compensation

 

8,939

8,939

Foreign currency translation adjustment

 

(4,434)

(4,434)

Other

 

Net loss

 

(30,620)

(30,620)

September 30, 2019

$

20,061

$

20

$

300,725

$

(3,832)

$

5,372

$

302,285

Accumulated

Preferred Stock

Common Stock 

Additional

other

Number

Number

paid-in

comprehensive

Retained

Stockholders'

    

of shares

    

Amount

    

of shares

    

Amount

    

capital

    

gain (loss)

    

earnings

    

equity

January 1, 2018

$

19,451

$

19

$

285,376

$

9,743

$

38,138

$

333,276

Stock options exercised, net of shares withheld for employee tax

121

(2,073)

(2,073)

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

 

186

1

(1,595)

(1,594)

Share-based compensation

 

8,362

8,362

Foreign currency translation adjustment

 

(8,908)

(8,908)

Net income

 

6,422

6,422

September 30, 2018

$

19,758

$

20

$

290,070

$

835

$

44,560

$

335,485

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

6

Applied Optoelectronics, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

Nine months ended September 30, 

    

2019

    

2018

    

Operating activities:

Net income (loss)

$

(30,620)

$

6,422

Adjustments to reconcile net income to net cash provided by operating activities:

Lower of cost or market reserve adjustment to inventory

 

6,615

 

5,546

Depreciation and amortization

 

17,982

 

21,807

Amortization of debt issuance costs

673

Deferred income taxes, net

(7,710)

(5,734)

Loss (gain) on disposal of assets

 

10

 

(5)

Share-based compensation

 

8,939

 

8,362

Unrealized foreign exchange gain

 

(220)

 

(580)

Changes in operating assets and liabilities:

Accounts receivable, trade

 

825

 

27,822

Notes receivable

 

(3)

 

Prepaid income tax

426

653

Inventories

 

3,197

 

(41,288)

Other current assets

 

5,577

 

(2,013)

Operating right of use asset

738

Accounts payable

 

(1,836)

 

10,082

Accrued liabilities

 

(2,405)

 

(7,390)

Lease liability

(777)

1,941

Net cash provided by operating activities

 

1,411

 

25,625

Investing activities:

Purchase of short-term investments

 

 

(15,023)

Maturities of short-term investments

9,036

Purchase of property, plant and equipment

 

(25,982)

 

(52,268)

Purchase of land use rights

(5,591)

Proceeds from disposal of equipment

 

2

 

697

Deposits and prepaid for equipment

 

(520)

 

(7,533)

Purchase of intangible assets

 

(497)

 

(343)

Net cash used in investing activities

 

(26,997)

 

(71,025)

Financing activities:

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

 

13,661

 

35,899

Principal payments of long-term debt and notes payable

 

(42,272)

 

(1,883)

Proceeds from line of credit borrowings

 

59,296

 

113,266

Repayments of line of credit borrowings

 

(66,299)

 

(125,678)

Proceeds from bank acceptance payable

 

8,214

 

Repayments of bank acceptance payable

 

(8,682)

 

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

 

76,362

 

Exercise of stock options

 

8

 

120

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

(702)

(3,788)

Net cash provided by financing activities

 

39,586

 

17,936

Effect of exchange rate changes on cash

 

372

 

1,591

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

 

14,372

 

(25,873)

Cash, cash equivalents and restricted cash at beginning of period

 

58,004

 

83,948

Cash, cash equivalents and restricted cash at end of period

$

72,376

$

58,075

Supplemental disclosure of cash flow information:

Cash paid for:

Interest

$

2,933

$

525

Income taxes

 

(329)

 

8,433

Non-cash investing and financing activities:

Net change in accounts payable related to property and equipment additions

 

(4,626)

 

1,524

Net change in deposits and prepaid for equipment related to property and equipment additions

6,370

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

7

Applied Optoelectronics, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1.   Description of Business

Business Overview

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

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

Interim Financial Statements

The unaudited condensed consolidated financial statements of the Company as of September 30, 2019 and December 31, 2018 and for the three and nine months ended September 30, 2019 and September 30, 2018, have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim information and with the instructions on Form 10-Q and Rule 10-01 of Regulation S-X pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In accordance with those rules and regulations, the Company has omitted certain information and notes required by GAAP for annual consolidated financial statements. In the opinion of management, the condensed consolidated financial statements contain all adjustments, except as otherwise noted, necessary for the fair presentation of the Company’s financial position and results of operations for the periods presented. The year-end condensed balance sheet data was derived from audited financial statements. These condensed consolidated financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report on Form 10-K (“Annual Report”) for the fiscal year ended December 31, 2018. The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results expected for the entire fiscal year. All significant intercompany accounts and transactions have been eliminated.

Use of Estimates

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

Note 2.   Significant Accounting Policies

There have been no changes in the Company’s significant accounting policies for the three and nine months ended September 30, 2019, as compared to the significant accounting policies described in its 2018 Annual Report, except as described below.

8

Recent Accounting Pronouncements

Recent Accounting Pronouncements Adopted in 2019 

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

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

Recent Accounting Pronouncements Yet to be Adopted

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

Note 3. Revenue Recognition

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

Disaggregation of Revenue

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

9

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

Three months ended September 30, 

                   

% of

                   

% of

    

2019

    

Revenue

    

2018

    

Revenue

Data Center

$

34,006

73.8%

$

38,954

69.1%

CATV

8,797

19.1%

14,295

25.4%

Telecom

2,868

6.2%

2,656

4.7%

FTTH

 

39

0.1%

 

221

0.4%

Other

 

374

0.8%

 

260

0.5%

Total Revenue

$

46,084

100.0%

$

56,386

100.0%

Nine months ended September 30, 

% of

% of

    

2019

    

Revenue

    

2018

    

Revenue

Data Center

$

104,311

73.3%

$

158,577

75.7%

CATV

30,577

21.5%

39,047

18.6%

Telecom

6,236

4.4%

10,399

5.0%

FTTH

 

149

0.1%

 

498

0.2%

Other

 

941

0.7%

 

926

0.4%

Total Revenue

$

142,214

100.0%

$

209,447

100.0%

Note 4. Operating Leases

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

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

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

Three months ended September 30, 

Nine months ended September 30, 

2019

2019

Operating lease expense

$

287

$

929

Short Term lease expense

20

100

Total lease expense

$

307

$

1,029

10

Maturities of lease liabilities are as follows for the future one-year periods ending September 30, (in thousands):

2020

$

1,231

2021

 

1,136

2022

 

1,077

2023

 

1,055

2024

1,061

2025 and thereafter

5,169

Total lease payments

$

10,729

Less imputed interest

(1,843)

Present value

$

8,886

 

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

September 30, 

2019

Weighted Average Remaining Lease Term (Years)

9.46

Weighted Average Discount Rate

3.13%

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

Nine months ended September 30, 

2019

Cash paid for amounts included in the measurement of lease liabilities

Operating cash flows from operating leases

1,002

Operating cash flows from financing lease

Financing cash flows from financing lease

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

39

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

Note 5. Cash, Cash Equivalents and Restricted Cash

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

September 30, 

December 31, 

    

2019

2018

Cash and cash equivalents

$

69,994

$

55,646

Restricted cash

 

2,382

 

2,358

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

$

72,376

$

58,004

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

Note 6.   Earnings Per Share

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

11

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

Three months ended September 30, 

Nine months ended September 30, 

    

2019

    

2018

    

2019

    

2018

    

Numerator:

Net income (loss)

$

(8,780)

$

(3,732)

$

(30,620)

$

6,422

Denominator:

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

Basic

 

20,023

 

19,707

 

19,940

 

19,597

Effect of dilutive options and restricted stock units

 

 

 

 

442

Diluted

 

20,023

 

19,707

 

19,940

 

20,039

Net income (loss) per share

Basic

$

(0.44)

$

(0.19)

$

(1.54)

$

0.33

Diluted

$

(0.44)

$

(0.19)

$

(1.54)

$

0.32

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

Three months ended September 30, 

Nine months ended September 30, 

    

2019

2018

    

2019

2018

    

Employee stock options

 

16

 

247

 

50

 

 

Restricted stock units

 

19

 

231

 

 

 

Shares for convertible senior notes

4,587

4,587

Total antidilutive shares

 

4,622

 

478

 

4,637

 

 

Note 7.   Inventories

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

    

September 30, 2019

    

December 31, 2018

 

Raw materials

$

22,392

$

30,214

Work in process and sub-assemblies

 

51,089

  

 

49,192

Finished goods

 

8,637

  

 

13,850

Total inventories

$

82,118

$

93,256

The lower of cost or market adjustment expensed for inventory for the three months ended September 30, 2019 and 2018 was $1.4 million and $3.2 million, respectively. The lower of cost or market adjustment expensed for inventory for the nine months ended September 30, 2019 and 2018 was $6.6 million and $5.5 million, respectively.

12

Note 8.   Property, Plant & Equipment

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

    

September 30, 2019

    

December 31, 2018

 

Land improvements

$

806

$

806

Building and improvements

 

82,543

 

80,960

Machinery and equipment

 

231,976

 

214,718

Furniture and fixtures

 

5,047

 

5,043

Computer equipment and software

 

10,041

 

9,709

Transportation equipment

 

644

 

658

 

331,057

 

311,894

Less accumulated depreciation and amortization

 

(110,499)

 

(95,233)

 

220,558

 

216,661

Construction in progress

 

23,876

 

16,449

Land

 

1,101

 

1,101

Total property, plant and equipment, net

$

245,535

$

234,211

For the three months ended September 30, 2019 and 2018, depreciation expense of property, plant and equipment was $5.9 million and $7.4 million, respectively. For the nine months ended September 30, 2019 and 2018, depreciation expense of property, plant and equipment was $17.6 million and $21.4 million, respectively.

Depreciation expense of $2.3 million and $3.7 million was recorded as cost of sales for the three months ended September 30, 2019 and 2018, respectively. Depreciation expense of $7.1 million and $11.3 million was recorded as cost of sales for the nine months ended September 30, 2019 and 2018, respectively.

Note 9.   Intangible Assets, net

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

September 30, 2019

    

Gross

    

Accumulated

    

Intangible

Amount

amortization

assets, net

Patents

$

7,472

$

(3,403)

$

4,069

Trademarks

 

16

(13)

 

3

Total intangible assets

$

7,488

$

(3,416)

$

4,072

December 31, 2018

    

Gross

    

Accumulated

    

Intangible

Amount

amortization

assets, net

Patents

$

6,983

$

(3,008)

$

3,975

Trademarks

 

15

  

 

(13)

 

2

Total intangible assets

$

6,998

$

(3,021)

$

3,977

For the three months ended September 30, 2019 and 2018, amortization expense for intangible assets, included in general and administrative expenses on the income statement, was each $0.1 million. For the nine months ended September 30, 2019 and 2018, amortization expense for intangible assets, included in general and administrative expenses on the income statement, was each $0.4 million.

The remaining weighted average amortization period for intangible assets is approximately 7 years.

13

Note 10. Fair Value of Financial Instruments

The following table represents a summary of the Company’s financial instruments measured at fair value on a recurring basis for the periods indicated (in thousands):

As of September 30, 2019

As of December 31, 2018

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Total

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Total

Assets:

  

 

  

Cash and cash equivalents

$

69,994

$

$

$

69,994

$

55,646

$

$

$

55,646

Restricted cash

 

2,382

 

 

  

 

2,382

 

2,358

 

 

  

 

2,358

Total assets

$

72,376

$

$

$

72,376

$

58,004

$

$

$

58,004

Liabilities:

  

  

Bank acceptance payable

$

4,080

  

$

4,080

$

4,628

  

$

4,628

Convertible senior notes

75,131

75,131

Total liabilities

$

$

79,211

$

$

79,211

$

$

4,628

$

$

4,628

The carrying value amounts of accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses and other current liabilities approximate fair value because of the short-term maturity of these instruments. The carrying value amounts of debt approximate fair value due to the short-term nature of the debt since it renews frequently at current interest rates. The Company believes that the interest rates in effect at each period end represent the current market rates for similar borrowings.

Note 11.   Notes Payable and Long-Term Debt

Notes payable and long-term debt consisted of the following for the periods indicated (in thousands):

    

September 30, 2019

    

December 31, 2018

Revolving line of credit with a U.S. bank up to $25,000 with interest at LIBOR plus 1.5%, maturing April 2, 2021

$

20,000

$

23,104

Term loan with a U.S. bank with monthly payments of principal and interest at LIBOR plus 1.15%, maturing April 1, 2024

 

  

20,067

Term loan with a U.S. bank with monthly payments of principal and interest at LIBOR plus 1.3%, maturing between April 1, 2023 and December 18, 2023

 

  

19,164

Revolving line of credit with a Taiwan bank up to $3,222 with 2.2% interest, maturing July 31, 2020

3,222

3,256

Revolving line of credit with a Taiwan bank up to $7,000 with interest ranging from 1.5% to 3.5%, matured July 26, 2019

3,550

Notes payable to a finance company due in monthly installments with 3.4% interest, maturing November 30, 2021

4,653

6,331

Notes payable to a finance company due in monthly installments with 3.1% interest, maturing January 21, 2022

 

5,012