APPLIED OPTOELECTRONICS INC

Previous wording

On September 15, 2022, the Company and Prime World International Holdings Ltd. (the "Seller") entered into the Purchase Agreement with Yuhan Optoelectronic Technology (Shanghai) Co., Ltd. (the "Purchaser") for the sale of the manufacturing facilities in the People's Republic of China and certain assets related to its transceiver business and multi-channel optical sub-assembly products. On September 12, 2023, we delivered a notice of termination to the Purchaser to terminate the Purchase Agreement as a result of the Purchaser's failure to satisfy certain of its material obligations under the Purchase Agreement. In doing so, we also asserted the right to recover a break-up fee from the Purchaser. On December 22, 2023, the Purchaser filed for arbitration in Hong Kong with the Hong Kong International Arbitration Centre disputing the validity of our termination notice and seeking specific performance with respect to the transactions contemplated by the Purchase Agreement, which would in any case remain subject to regulatory approvals. We filed our response on January 22, 2024, generally denying the Purchaser’s allegations and asserting certain counterclaims. The HKIAC Tribunal issued a procedural order on April 17, 2024 setting the evidentiary hearing to be held on September 2025. While we do not believe the Purchaser’s claims have merit, we are not able to determine the outcome of this dispute or the likelihood or amount of our loss or recovery, if any, arising from this matter.

Current wording

On September 15, 2022, the Company and Prime World International Holdings Ltd. (the "Seller") entered into the Purchase Agreement with Yuhan Optoelectronic Technology (Shanghai) Co., Ltd. (the "Purchaser") for the sale of the manufacturing facilities in the People's Republic of China and certain assets related to its transceiver business and multi-channel optical sub-assembly products. On September 12, 2023, we delivered a notice of termination to the Purchaser to terminate the Purchase Agreement as a result of the Purchaser's failure to satisfy certain of its material obligations under the Purchase Agreement. In doing so, we also asserted the right to recover a break-up fee from the Purchaser. On December 22, 2023, the Purchaser filed for arbitration in Hong Kong with the Hong Kong International Arbitration Centre disputing the validity of our termination notice and seeking specific performance with respect to the transactions contemplated by the Purchase Agreement, which would in any case remain subject to regulatory approvals. We filed our response on January 22, 2024, generally denying the Purchaser’s allegations and asserting certain counterclaims. The HKIAC Tribunal issued a procedural order on April 17, 2024 setting the evidentiary hearing to be held on September 2025. We are not able to determine the outcome of this dispute or the likelihood or amount of our loss or recovery, if any, arising from this matter.

Previous wording

We generate revenue through the sale of our products to equipment providers and network operators for the internet data center, CATV, telecom, FTTH and other markets. We derive a significant portion of our revenue from our top ten customers, and we anticipate that we will continue to do so for the foreseeable future. The following charts provide the revenue contribution from each of the markets we served for the three months ended March 31, 2024 and 2023 (in thousands, except percentages):

Current wording

We generate revenue through the sale of our products to equipment providers and network operators for the internet data center, CATV, telecom, FTTH and other markets. We derive a significant portion of our revenue from our top ten customers, and we anticipate that we will continue to do so for the foreseeable future. The following charts provide the revenue contribution from each of the markets we served for the three and six months ended June 30, 2024 and 2023 (in thousands, except percentages):

Previous wording

The changes in revenue during the three months ended March 31, 2024 and 2023 were primarily due to strong demand from major data center customers, partially offset by weak demand from CATV customers. CATV demand in the 3 months ended March 31, 2024 was lower than in the corresponding period in the prior year largely due to a pending technology transition from older-generation products compliant with the Data Over Cable Service Interface Specification (DOCSIS) version 3.1, to the newer DOCSIS 4.0 standard. Due to the pending transition from the older to newer standard, customers are placing fewer orders for the older products and instead reducing their inventory of such products.

Current wording

The changes in revenue during the three and six months ended June 30, 2024 and 2023 were primarily due to increased demand from major data center customers, offset by weak demand from CATV and Telecom customers. CATV demand in the 3 months ended June 30, 2024 was lower than in the corresponding period in the prior year largely due to a pending technology transition from older-generation products compliant with the Data Over Cable Service Interface Specification (DOCSIS) version 3.1, to the newer DOCSIS 4.0 standard. Due to the pending transition from the older to newer standard, customers are placing fewer orders for the older products and instead reducing their inventory of such products.

Previous wording

For the three months ended March 31, 2024 and 2023, our top ten customers represented 92% and 93% of our revenue, respectively. We believe that diversifying our customer base is critical for our future success, since reliance on a small number of key customers makes our ability to forecast future results dependent upon the accuracy of the forecasts we receive from those key customers. We continue to prioritize new customer acquisition and growth of diverse revenue streams.

Current wording

For the three months ended June 30, 2024 and 2023, our top ten customers represented 94% and 88.1% of our revenue, respectively. For the six months ended June 30, 2024 and 2023, our top ten customers represented 92.7% and 90.6% of our revenue, respectively. We believe that diversifying our customer base is critical for our future success, since reliance on a small number of key customers makes our ability to forecast future results dependent upon the accuracy of the forecasts we receive from those key customers. We continue to prioritize new customer acquisition and growth of diverse revenue streams.

Previous wording

Cost of goods sold decreased by $10.7 million, or 24.4% for the three months ended March 31, 2024 compared to the three months ended March 31, 2023, primarily due to less sales in the first quarter, offset by less inventory write-off expenses and less inventory reserve expenses.

Current wording

Cost of goods sold was approximately the same for the three months ended June 30, 2024 and June 30, 2023. Cost of goods sold decreased by $10.7 million for the six months ended June 30, 2024 ,compared to the six months ended June 30, 2023 primarily due to lower sales, lower inventory write-off expenses and lower inventory reserve expenses in 2024.

Previous wording

Research and development expense increased by $3.2 million, or 37.2 % for the three months ended March 31, 2024 compared to the three months ended March 31, 2023. The increase was primarily due to more personnel-related expense for hiring R&D engineers, more R&D related project costs and more R&D consulting fees for ongoing R&D projects.

Current wording

Research and development expense increased by $4.4 million, or 51.4% for the three months ended June 30, 2024, compared to the three months ended June 30, 2023. Research and development expense increased by $7.6 million, or 44.3% for the six months ended June 30, 2024 compared to the same period ended June 30, 2023. The increases were primarily due to increased personnel-related expense, increased R&D related project costs and increased R&D consulting fees for ongoing R&D projects.

Previous wording

Sales and marketing expense increased by $1.5 million, or 63.2% for the three months ended March 31, 2024 compared to the three months ended March 31, 2023. The increase was primarilydue to the business development effort on quantum bandwidth products and higher shipping costs.

Current wording

Sales and marketing expense increased by $3.6 million, or 160.5% for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. Sales and marketing expense increased by $5.1 million, or 111.2 % for the six months ended June 30, 2024 compared to the same period ended June 30, 2023. The increases were primarilydue to the increased business development effort in our CATV and Datacenter businesses and higher shipping costs.

Previous wording

General and administrative expense increased by $1.2 million, or 9.4% for the three months ended March 31, 2024 compared to the three months ended March 31, 2023. This increase was primarily due to higher legal fees and higher share based compensation expense.

Current wording

General and administrative expense increased by $3.9 million, or 29.8% for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. General and administrative expense increased by $5.0 million, or 19.8% for the six months ended June 30, 2024 compared to the same period ended June 30, 2023. The increases were primarily due to higher legal fees and higher share-based compensation expense.

Previous wording

Interest income increased by $ 0.2 million, or 690% for the three months ended March 31, 2024 compared to the three months ended March 31, 2023. The increase is due tohigher saving balances and higher interest rate on our saving account in Q1 2024.

Current wording

Interest income increased by $56 thousand, or 151.4% for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. Interest income increased by $283 thousand or 404.3% for the six months ended June 30, 2024 compared to the same period ended June 30, 2023. The increases were due tohigher saving balances and higher interest rate on our saving account in the first half year of 2024.

Previous wording

Interest expense decreased by $0.5 million, or 21.6% for the three months ended March 31, 2024 compared to the three months ended March 31, 2023. The decrease was due tothe termination of CIT loan in November 2023.

Current wording

Interest expense decreased by $0.5 million, or 22.2% for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. Interest expense decreased by $0.9 million, or 21.9% for the six months ended June 30, 2024 compared to the same period ended June 30, 2023. The decreases were due tothe termination of the loan with CIT Northbridge in November 2023.

Previous wording

On August 9, 2022, the Creating Helpful Incentives to Produce Semiconductors Act ("CHIPS Act") was enacted. Among its provisions, the bill provides various federal grants, tax credits, and incentives for investment in the United States. On August 16, 2022, the Inflation Reduction Act ("IRA") was also signed into law. Among other provisions, the IRA imposes a 15% corporate alternative minimum tax ("Corporate AMT") for tax years beginning after December 31, 2022, imposes a 1% excise tax on corporate stock repurchases after December 31, 2022, and provides tax incentives to promote various energy efficient initiatives. To the extent that we make investments in expanding manufacturing in our semiconductor fabrication facility in Texas, we believe that the CHIPS Act would provide a refundable tax credit for certain equipment and facilities upgrades. We did not make significant such investments in the three months ended March 31, 2024, but we intend to continue to evaluate future investments for applicability to the tax credit provisions of the CHIPS Act.

Current wording

On August 9, 2022, the Creating Helpful Incentives to Produce Semiconductors Act ("CHIPS Act") was enacted. Among its provisions, the bill provides various federal grants, tax credits, and incentives for investment in the United States. On August 16, 2022, the Inflation Reduction Act ("IRA") was also signed into law. Among other provisions, the IRA imposes a 15% corporate alternative minimum tax ("Corporate AMT") for tax years beginning after December 31, 2022, imposes a 1% excise tax on corporate stock repurchases after December 31, 2022, and provides tax incentives to promote various energy efficient initiatives. To the extent that we make investments in expanding manufacturing in our semiconductor fabrication facility in Texas, we believe that the CHIPS Act would provide a refundable tax credit for certain equipment and facilities upgrades. We did not make significant such investments in the six months ended June 30, 2024, but we intend to continue to evaluate future investments for applicability to the tax credit provisions of the CHIPS Act.

Previous wording

Comprehensive loss increased by $10.2 million, or 69.5%, for the three months ended March 31, 2024 as compared to the three months ended March 31, 2023, primarily due to increase of net loss of $6.9 million and increase of $3.3 million in loss on foreign currency translation adjustments for non-U.S. dollar functional currency operations.

Current wording

Comprehensive loss increased by $4.7 million, or 21.2%, for the three months ended June 30, 2024 as compared to the three months ended June 30, 2023 Comprehensive loss increased by $13.1 million, or 35.5%, for the six months ended June 30, 2024 as compared to the same period ended June 30, 2023 The changes were primarily due to increase of net loss of $9.2 million and $14.2 million respectively, and foreign currency translation adjustments for non-U.S. dollar functional currency operations of $4.4 million and $1.1 million, respectively.

Previous wording

As of March 31, 2024, we had $29.4 millionof unused borrowing capacity from all of our loan agreements. As of March 31, 2024, our cash, cash equivalents and restricted cash totaled $17.4 million. Cash and cash equivalents are held for working capital purposes and are invested primarily in money market or time deposit funds. We do not enter into investments for trading or speculative purposes.

Current wording

As of June 30, 2024, we had $29.4 millionof unused borrowing capacity from all of our loan agreements. As of June 30, 2024, our cash, cash equivalents and restricted cash totaled $16.1 million. Cash and cash equivalents are held for working capital purposes and are invested primarily in money market or time deposit funds. We do not enter into investments for trading or speculative purposes.

Previous wording

As of March 31, 2024, we have sold approximately 270,000 shares of the Company's common stock with an aggregate offering price of approximately $4.0 million under the current ATM Offering.

Current wording

As of June 30, 2024, we have sold approximately 1.7 million shares of the Company's common stock with an aggregate offering price of approximately $20.5 million under the current ATM Offering.

Previous wording

For the three months ended March 31, 2024, net cash used in operating activities was $28.5 million. Net cash used in operating activities consisted of our net loss of $23.2 million after exclusion of non-cash items of $10.2 million. Cash decreased due to accounts receivable increase of $9.4 million, accounts payable decrease of $9.3 million and accrued liability decrease of $5.1 million, offset by inventory decrease of $7.3 million.

Current wording

For the six months ended June 30, 2024, net cash used in operating activities was $30.5 million. Net cash used in operating activities consisted of our net loss of $49.3 million after exclusion of non-cash items of $30.5 million. Cash decreased due to accounts receivable increase of $11.4 million, accrued liability decrease of $1.2 million, offset by inventory decrease of $5.6 million.

Previous wording

For the three months ended March 31, 2023, net cash used in operating activities was $9.4 million. Net cash used in operating activities consisted of our net loss of $16.3 million after exclusion of non-cash items of $9.5 million. Cash decreased due to an increase in accounts receivable of $4.4 million, an increase in trade receivables from our customers of $0.7 million together with decrease in accounts payable of $9.4 million and accrued liabilities of $3.8 million, respectively, offset with a decrease in inventory of $7.4 million.

Current wording

For the six months ended June 30, 2023, net cash generated in operating activities was $5.9 million. Net cash provided by operating activities consisted of our net loss of $33.2 million after exclusion of non-cash items of $20.4 million. Cash increased due to a net decrease in accounts and trade notes receivable of $18.1 million, together with a decrease in inventory of $7.0 million and a major customer advance payment for unearned revenue of $8.7 million, offset with a decrease in accounts payable of $12.7 million and accrued liabilities of $2.4 million, respectively.

Previous wording

For the three months ended March 31, 2024, net cash used in investing activities was $8.1 million, mainly from the purchase of additional plant, machinery and equipment.

Current wording

For the six months ended June 30, 2024, net cash used in investing activities was $12.2 million, mainly for the purchase of additional plant, machinery and equipment.

Previous wording

For the three months ended March 31, 2023, net cash used in investing activities was $0.8 million, mainly from the purchase of additional plant, machinery and equipment.

Current wording

For the six months ended June 30, 2023, net cash used in investing activities was $1.9 million, mainly for the purchase of additional plant, machinery and equipment.

Previous wording

For the three months ended March 31, 2024, net cash used in financing activities was $1.4 million. This decrease in cash was due to the net repayment of bank acceptance of $4.7 million, offset by the proceeds from the ATM program of $3.8 million.

Current wording

For the six months ended June 30, 2023, net cash used in financing activities was $11.8 million. This decrease in cash was due to repayment of $18.6 million on our lines of credit and repayment of $3.3 million bank acceptances payable, offset by net proceeds of $10.3 million from the ATM Offering.

Previous wording

We had cash, cash equivalents and restricted cash of $17.4 million as of March 31, 2024, a decrease of approximately $37.7 million compared to December 31, 2023. Our future capital requirements will depend on many factors including our growth rate, the timing and extent of spending to support our research and development efforts, the expansion of our sales and marketing activities, the introduction of new and enhanced products, the building improvement of a new factory and other facilities at our Ningbo, China location, changes in our manufacturing capacity and the continuing market acceptance of our products.

Current wording

We had cash, cash equivalents and restricted cash of $16.1 million as of June 30, 2024, a decrease of approximately $39.0 million compared to December 31, 2023. Our future capital requirements will depend on many factors including our growth rate, the timing and extent of spending to support our research and development efforts, the expansion of our sales and marketing activities, the introduction of new and enhanced products, the building improvement of a new factory and other facilities at our Ningbo, China location, changes in our manufacturing capacity and the continuing market acceptance of our products.

Previous wording

As of March 31, 2024, wehad a total loan balance (excluding convertible notes) of $24.1 million from various lenders in China and had $29.4 million available borrowing capacity on existing credit lines. Should additional liquidity be needed, our Board has authorized issuance of equity totaling up to $25 million under the ATM Offering (see the discussion of "Liquidity and Capital Resources" in Item 2).

Current wording

As of June 30, 2024, wehad a total loan balance (excluding convertible notes) of $22.5 million from various lenders in China and had $29.4 million available borrowing capacity on existing credit lines. Should additional liquidity be needed, our Board has authorized issuance of equity totaling up to $25 million under the ATM Offering (see the discussion of "Liquidity and Capital Resources" in Item 2). As of June 30, 2024, we had raised $20.5 million under the authorized ATM Offering, and still had $4.5 million available.

Previous wording

The annual inflation rate in the US came down to 3.4% in 2023. Even though the inflation has slowed from the peak, it remained well above the Federal Reserve's objective of 2%. The annual inflation rate in Taiwan came down to 2.7% in 2023 from 2.95% in 2022. The cost of inflation was reflected in increases in shipping costs, labor rates, and in costs of some raw materials. We believe these decreases are related to the supply chain pressure easing and decreasing commodity prices, however the labor market is still tight, and the wage pressure is still high. We cannot be sure when or if prices will return to pre-pandemic levels. Compared to other major economies in the world, China has a stable level of inflation, which has not had a significant impact on our sales or operating results. We do not believe that inflation had a material impact on our business, financial condition, or results of operations during the three months ended March 31, 2024. However, there is no guarantee that we may increase selling prices or reduce costs to fully mitigate the effect of inflation on our costs, which may adversely impact our sales margins and profitability.

Current wording

The annual inflation rate in the US reduced to 3.4% in 2023. Even though inflation has slowed from the peak, it remained well above the Federal Reserve's objective of 2%. The annual inflation rate in Taiwan came down to 2.7% in 2023 from 2.95% in 2022. The cost of inflation was reflected in increases in shipping costs, labor rates, and in costs of some raw materials. We believe these decreases are related to the supply chain pressure easing and decreasing commodity prices, however the labor market is still tight, and the wage pressure is still high. We cannot be sure when or if prices will return to pre-pandemic levels. Compared to other major economies in the world, China has a stable level of inflation, which has not had a significant impact on our sales or operating results. We do not believe that inflation had a material impact on our business, financial condition, or results of operations during the three months ended June 30, 2024. However, there is no guarantee that we may increase selling prices or reduce costs to fully mitigate the effect of inflation on our costs, which may adversely impact our sales margins and profitability.