APPLIED OPTOELECTRONICS INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note1. Description of Business​

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Business Overview

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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 forfour networking end-markets: internet data center, cable television ("CATV"), telecommunications ("telecom") and fiber-to-the-home ("FTTH"). 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.

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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 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 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 CATV systems and equipment, and performs research and development activities for CATV and certain data center transceiver products.

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Interim Financial Statements

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The accompanying unaudited condensed consolidated financial statements of the Company as of* June 30, 2024* and* December 31, 2023* and for thethree andsix months ended* June 30, 2024* and* June 30, 2023*, 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 Form10-Q and Rule10-01 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 Form10-K ("Annual Report") for the fiscal year ended* December 31, 2023*. The results of operations for thethree andsix months ended* June 30, 2024* arenot necessarily indicative of the results expected for the entire fiscal year. All significant inter-company accounts and transactions have been eliminated.

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Use of Estimates

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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 materially 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, revenue recognition, allowance for doubtful accounts, inventory reserve, impairment of long-lived assets, service and product warranty costs, share-based compensation expense, estimated useful lives of tangible and intangible assets, and taxes.

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Note2. Significant Accounting Policies

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There have beenno changes in the Company’s significant accounting policies for thethree andsix months ended* June 30, 2024*, as compared to the significant accounting policies described in its2023 Annual Report.

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Recent Accounting Pronouncements

There wasno accounting pronouncement adopted inQ2 2024.

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Recent Accounting Pronouncements Yet to be Adopted

In* December 2023,the Financial Accounting Standard Board ("FASB") issued Accounting Standard Update ("ASU")2023-09, "Income Taxes (Topic740): Improvements to Income Tax Disclosures*", which requires the Company to disclose disaggregated jurisdictional and categorical information for the tax rate reconciliation, income taxes paid and other income tax related amounts. This guidance is effective for annual periods beginning after* December 15, 2024,*with early adoption permitted. The adoption is expected to enhance the Company's Notes to the Consolidated Financial Statements. The Company is currently evaluating the impact the new standard will have on its financial statements and related disclosures.

In* November 2023*, the FASB issued ASU2023-07, "Segment Reporting (Topic280*): Improvements to Reportable Segment Disclosures*", which requires the Company to expand the breadth and frequency of segment disclosures to include additional information about significant segment expenses, the chief operating decision maker (CODM) and other items, and also require the annual disclosures on an interim basis. This guidance is effective for annual periods beginning after* December 15, 2023,with early adoption permitted. The standard will be effective for the Company beginning with2024* 10-K and interim periods afterwards. The Company has evaluated this new standard and intends to comply with the new disclosure requirements when required.

In* October 2023,the FASB issued ASU2023*-06, "Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative", which amends U.S. GAAP to include14 disclosure requirements that are currently required under SEC Regulation S-X or Regulation S-K. Each amendment will be effective on the date on which the SEC removes the related disclosure requirement from SEC Regulation S-X or Regulation S-K. The Company has evaluated the new standard and determined that it will haveno material impact on its financial statements or disclosures since the Company is already subject to the relevant SEC disclosure requirements.

Note3. Revenue Recognition

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Disaggregation of Revenue

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Revenue is classified based on the location where the product is manufactured. For additional information on the disaggregated revenues by geographical region, see Note17, "Geographic Information."

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

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Unearned Revenue

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We record unearned revenues when cash payments are received or due in advance of our performance, including amounts which are refundable. Unearned revenues solely relate to statement of work with Microsoft regarding contract prices allocated to the performance obligations that are unsatisfied, or partially unsatisfied, as of the balance sheet dates. Unearned revenue balance as of* June 30, 2024* and* December 31, 2023* was $1.6 million and $1.8 million, respectively. For thethree months ended* June 30, 2024and2023*, revenue recognized from the unearned revenue balance was $0.1 million and $0.9 million, respectively. For thesix months ended* June 30, 2024and2023*, revenue recognized from the unearned revenue balance was $0.2 million and $1.2 million, respectively.

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Note4. Leases

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The Company leases space under non-cancellable operating leases for certain manufacturing facilities, certain research and development offices, and certain storage facilities and apartments. These leases donot contain contingent rent provisions. The Company also leases certain machinery, office equipment and a vehicle under an operating lease. 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 includeone or more options to renew which have been assessed and either included or excluded from the calculation of the lease liability of the right of use ("ROU") asset based on management’s intentions and individual fact patterns. Several warehouses and apartments have non-cancellable lease terms of less thanone-year and therefore, the Company has elected the practical expedient to exclude these short-term leases from its ROU asset and lease liabilities.

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As most of the Company’s leases donot 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.

Lease expense is included under general and administrative expenses and was$0.3 million each for thethree months ended* June 30, 2024and2023*. The lease expense was $0.6 million each for thesix months ended* June 30, 2024and2023,* respectively. The components of lease expense were as follows for the periods indicated (in thousands):

Maturities of lease liabilities are as follows for the futureone-year periods ending* June 30, 2024* (in thousands):

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

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

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Note5. Cash, Cash Equivalents and Restricted Cash

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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):

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Restricted cash includes guarantee deposits for customs duties, China government subsidy fund, and compensating balances associated with certain credit facilities. As of* June 30, 2024* and* December 31, 2023*, there were $2.3 million and $6.5 million of restricted cash required for bank acceptance notes issued to vendors, respectively. In addition, there were $2.5 million in certificates of deposit associated with credit facilities with a bank in China as of* June 30, 2024* and* December 31, 2023*. There were $0.7 million guarantee deposits for customs duties as of* June 30, 2024* and* December 31, 2023*.

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Note6. Earnings (Loss) Per Share

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Basic net loss per share has been computed using the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share has been computed using the weighted-average number of shares of common stock and dilutive potential common shares from 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 loss per share are the same.

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

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

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Note7. Inventories

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

For thethree months ended* June 30, 2024and2023*, the inventory reserve adjustment expensed for inventory was $1.4 million, and $2.4 million, respectively. Forsix months ended* June 30, 2024and2023*, the inventory reserve adjustment expensed for inventory was $3.1 million, and $5.0 million, respectively.

For thethree months ended* June 30, 2024and2023*, the direct inventory write-offs related to scrap, discontinued products, and damaged inventories were $0.8 million and $3.1 million, respectively. For thesix months ended* June 30, 2024and2023*, the direct inventory write-offs related to scrap, discontinued products, and damaged inventories were $1.7 million and $6.9 million, respectively.

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Note8. Property, Plant & Equipment

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

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For thethree months ended* June 30, 2024and2023*, the depreciation expense of property, plant and equipment were both $5.0 million. For thesix months ended* June 30, 2024and2023*, the depreciation expense of property, plant and equipment was $9.8 millionand $10.2 million, respectively.

As of* June 30, 2024**,*the Company concluded that its continued loss history constitutes a triggering event as described in ASC360-10-35-**21,Property, Plant, and Equipment. The Company performed a recoverability test and concluded that future undiscounted cash flows exceed the carrying amount of the Company’s long-lived assets and thereforeno impairment charge was recorded.

Note9. Intangible Assets, net

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

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For thethree months ended* June 30, 2024and2023*, amortization expense for intangible assets, included in general and administrative expenses on the statement of operations, was $0.1 million and $0.2 million, respectively. For thesix months ended* June 30, 2024and2023*, amortization expense for intangible assets, included in general and administrative expenses on the statement of operations, was $0.2 million and $0.3 million, respectively. The remaining weighted average amortization period for intangible assets is approximately 9.0 years.

On* June 30, 2024*, future amortization expenses for intangible assets for future periods are estimated to be (in thousands):

Note10. Fair Value of Financial Instruments​

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The carrying value amounts of cash and cash equivalents, restricted cash, accounts receivable, prepaid expenses, notes receivable and other current assets, accounts payable, accrued expenses, bank acceptance payable and other current liabilities approximate fair value because of the short-term maturity of these instruments. The Company believes that the interest rates in effect at each period end represent the current market rates for similar borrowings.

The fair value of convertible senior notes is measured for disclosure purposes only. The fair value and carrying amount of our convertible senior notes as of* June 30, 2024* was $70.3 million and $76.7 million, respectively. As of* December 31, 2023*, the fair value and carrying amount of our convertible senior notes were both $76.5 million. The fair value is based on observable market prices for this debt, which is traded in less active markets and are therefore classified as a Level2 fair value measurement.

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Note11. Notes Payable and Long-Term Debt

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

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The current portion of long-term debt is the amount payable withinone year of the balance sheet date of* June 30, 2024*.

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Maturities of long-term debt are as follows for the futureone-year periods ending* June 30, 2024* (in thousands):

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On* May 24, 2019,the Company’s China subsidiary, Global, entered into afive-year revolving credit line agreement, totaling 180,000,000 RMB (the "SPD Credit Line"), or approximately $25.4 million at that time, and a mortgage security agreement (the "Security Agreement"), with Shanghai Pudong Development Bank Co., Ltd ("SPD"). Borrowing under the SPD Credit Line will be used for general corporate and capital investment purposes, including the issuance of bank acceptance notes to Global’s vendors. Global maydraw upon the SPD Credit Line on an as-needed basis at any time during the5*-year term; however, draws under the SPD Credit Line* may*become due and repayable to SPD at SPD’s discretion due to changes in Chinese government regulations and/or changes in Global’s financial and operational condition. Each draw will bear interest equal to SPD’s commercial banking interest rate effective on the day of the applicable draw. Global’s obligations under the SPD Credit Line will be secured by real property owned by Global and mortgaged to the Bank under the terms of the Security Agreement.

On* May 24, 2024,Global renewed the SPD Credit Line for afive-year revolving credit line, totaling 170,000,000 RMB (the “Renewed SPD Credit Line”) or approximately $23.9 million at that time, and Global also entered into a mortgage contract security agreement, with SPD. Global maydraw upon the Credit Line on an as-needed basis between May 24, 2024and May 24, 2029.*

As of* June 30, 2024*, $11.3 million was outstanding under the Renewed SPD Credit Line and the outstanding balance of bank acceptance notes issued to vendors was$2.7 million.

On* June 7, 2022,the Company's China Subsidiary, Global, entered a security agreement with China Zheshang Bank in Ningbo City, China ("CZB") for afive-year credit line agreement, totaling 200,000,000 RMB (the"¥200M* Credit Facility"), or approximately $29.9 million at that time. Global* maydraw upon the¥200M* Credit Facility between* June 7, 2022and June 6, 2027 (the"¥200M* Credit Period"). During the*¥200M* Credit Period, Global* mayrequest to draw upon the¥200M* Credit Facility on an as-needed basis; however, draws under the*¥200M* Credit Facility* maybecome due and repayable to CZB at CZB’s discretion due to changes in Chinese government regulations and/or changes in Global’s financial and operational condition. Each draw will be facilitated by a separate credit agreement specifying the terms of each draw and will bear interest equal to CZB's commercial banking interest rate effective on the day of the applicable draw. Global’s obligations under the¥200M* Credit Facility will be secured by real property owned by Global and mortgaged to CZB under the terms of the Real Estate Security Agreement. On* December 21, 2023,Global entered into an asset pool business cooperation agreement ("Asset Pool Agreement") and an asset pool pledge contract (the "Pledge Contract") (referred to collectively as the Pledge Asset Line"), with CZB, which supplements the existing¥200M* Credit Facility. The Pledge Asset Line doesnot constitute a new credit line or an increase to the existing credit limits. Global* maydraw upon the Pledge Asset Line between December 21, 2023and December 21, 2025 ("Asset Pool Period"). During the Asset Pool Period, Global mayrequest to draw upon the Pledge Asset Line on an as-needed bases; however, amount of available credit under the Pledge Asset Line and approval of each draw maybe reduced or declined by CZB due to changes in Chinese government regulations and/or changes in Global's financial and operational condition. Each draw will be facilitated by a separate credit agreement specifying the terms of each draw and will bear interest equal to CZB's commercial banking interest rate effective on the day of the applicable draw. Global's obligations under the Pledge Asset Line will be secured by certain financial assets, including butnot* limited to, deposit receipts, domestic accounts receivable and electronic commercial paper. As of* June 30, 2024*, $16.8 million was outstanding under the*¥200M* Credit Facility and the outstanding balance of bank acceptance notes issued to vendors was $2.3 million.

As of* June 30, 2024* and* December 31, 2023*, the Company had $29.4 million and $22.5 million of unused borrowing capacity, respectively.

As of* June 30, 2024* and* December 31, 2023*, therewas $4.8 million and $9.7 million of restricted cash, investments or security deposits associated with the loan facilities, respectively.

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Note12. Convertible Senior Notes

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On* March 5, 2019,the Company issued $80.5 million of 5% convertible senior notes due2024* (the*“2024* Notes”). On* December 5, 2023,the Company issued approximately $80.2 million aggregate principal amount of 5.250% convertible senior notes due2026* (the*"2026* Notes"), and on the same day consummated various separate, privately negotiated exchange agreements with certain holders of its2024 Notes to exchange or repurchase approximately $80.2 million principal amount of the2024 Notes for aggregate consideration consisting of approximately $81.1 million in cash, which included accrued interest on the2024 Notes, and approximately 466,368 shares of the Company's common stock, par value $0.001 per share. The Company paid off the remaining $0.29 million of the2024 Notes on* March 15,*2024.

The2026 Notes were issued pursuant to an Indenture, dated as of* December 5, 2023, (the "Indenture"), between the Company and Computershare Trust Company, N.A., as trustee. The2026* Notes bear interest at a rate of5.250% per year and pay interest semi-annually in arrears on* June 15and December 15of each year, beginning on June 15, 2024.The2026* Notes mature on* December 15, 2026,*unless earlier converted, redeemed or repurchased in accordance with their terms.

The following table presents the carrying value of the2026 Notes for the periods indicated (in thousands):

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The conversion rate for the2026 Notes is 65.6276 shares of the Company’s common stock per $1,000 principal amount of the2026 Notes (which is equivalent to a conversion price of approximately $15.24 per share of the Company’s common stock, representing a premium of approximately 15% over the last reported sale price of the Company’s common stock on* November 30, 2023of $13.25 per share), subject to adjustment. Before September 15, 2026,holders of the2026* Notes have the right to convert their2026 Notes only upon the occurrence of certain events. From and after* September 15, 2026,holders of the2026* Notes* mayconvert their2026* Notes at any time at their election until the close of business on thesecond scheduled trading day immediately before the maturity date. The Company will settle conversions by paying or delivering, as applicable, cash, shares of its common stock or a combination of cash and shares of its common stock, at the Company’s election, based on the applicable conversion rate(s).

Currently there areno guarantors of the2026 Notes, but the2026 Notes would be fully and unconditionally guaranteed, on a senior, unsecured basis by certain of the Company’s future domestic subsidiaries, should any such subsidiaries be formed. The2026 Notes are the Company’s senior, unsecured obligations and are equal in right of payment with existing and future senior, unsecured indebtedness, senior in right of payment to the Company’s existing and future indebtedness that is expressly subordinated to the2026 Notes and effectively subordinated to the Company’s existing and future secured indebtedness, to the extent of the value of the collateral securing that indebtedness. The Note Guarantee (as defined in the Indenture) of each future guarantor, if any, will be such guarantor’s senior, unsecured obligations and is equal in right of payment with existing and future senior, unsecured indebtedness, senior in right of payment to such future guarantor’s existing and future indebtedness that is expressly subordinated to the2026 Notes and effectively subordinated to such future guarantor’s existing and future secured indebtedness, to the extent of the value of the collateral securing that indebtedness.

The Indenture contains covenants that limit the Company’s ability and the ability of our subsidiaries to, among other things: (i) incur or guarantee additional indebtedness or issue disqualified stock; and (ii) create or incur liens.

The2026 Notes will be redeemable, in whole or in part (subject to certain limitations described in the Indenture), at the Company’s option at any time, and from time to time, on or after* December 15, 2024and on or before the40th* scheduled trading day immediately before the maturity date, at a cash redemption price equal to the principal amount of the2026 Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date, but only if the last reported sale price per share of the Company’s common stock exceeds 130% of the conversion price on (1) each of at least 20 trading days, whether ornot consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately before the date the Company sends the related redemption notice; and (2) the trading day immediately before the date it sends such notice.

In addition, the2026 Notes will be redeemable, in whole or in part, at the Company’s option at any time, and from time to time, on or before the40th scheduled trading day immediately before the maturity date, at a cash redemption price equal to the principal amount of the2026 Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date (subject to the right of a holder of2026 Notes as of the close of business on a record date to receive the related interest payment on the corresponding interest payment date), if the Company completes the "Specified Divestiture" of (x)one or more of its manufacturing facilities located in the People’s Republic of China and/or (y) significant assets located in the People’s Republic of China which relate to the Company’s transceiver business and multi-channel optical sub-assembly products (or any substantially related assets), for aggregate consideration in cash to the Company ofnot less than the U.S. Dollar equivalent of $150,000,000 (measured at the time of completion).

Calling any Convertible Note for redemption will constitute a “Make-whole fundamental change” (as defined in the Indenture) with respect to that Convertible Note, in which case the conversion rate applicable to the conversion of that Convertible Note will be increased in certain circumstances if it is converted after it is called for redemption.

In addition, if the Specified Divestiture is completed, then each holder of2026 Notes will have the right to require the Company to repurchase its2026 Notes for cash on a date of the Company’s choosing, which must be a business day that isno more than35, nor less than20, business days after we send the related notice of Specified Divestiture. The repurchase price for a note tendered for such repurchase will be equal to the principal amount of the2026 Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the repurchase date (subject to the right of a holder of2026 Notes as of the close of business on a record date to receive the related interest payment on the corresponding interest payment date).

Moreover, if the Company undergoes a fundamental change, as described in the Indenture, holders of the2026 Notes* mayrequire the Company to repurchase for cash all or part of their2026* Notes at a repurchase price equal to 100% of the principal amount of the2026 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the required repurchase date.

Additionally, the2026 Notes are subject to customary events of default.No sinking fund is provided for the2026 Notes.

Pursuant to the guidance in ASC815-40, Contracts in Entity’s Own Equity, the Company evaluated whether the conversion feature of the note needed to be bifurcated from the host instrument as a freestanding financial instrument. Under ASC815-40, to qualify for equity classification (or non-bifurcation, if embedded) the instrument (or embedded feature) must be both (1) indexed to the issuer’s own stock and (2) meet the requirements of the equity classification guidance. Based upon the Company’s analysis, it was determined the conversion option is indexed to its own stock and also met all the criteria for equity classification contained in ASC815-40-25-7 and815-40-25-10. Accordingly, the conversion option isnot required to be bifurcated from the host instrument as a freestanding financial instrument. Since the conversion feature meets the equity scope exception from derivative accounting, the Company then evaluated whether the conversion feature needed to be separately accounted for as an equity component under ASC470-20, Debt with Conversion and Other Options. The Company determined that notes should be accounted for in their entirety as a liability.

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The Company incurred approximately $4.3 million in transaction costs in connection with the issuance of the2026 Notes. These costs were recognized as a reduction of the carrying amount of the Notes utilizing the effective interest method and are being amortized over the term of the Notes.

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The following table sets forth interest expense information related to the2024 Notes and2026 Notes (in thousands):

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Note13. Accrued Liabilities​

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Accrued liabilities consisted of the following for the periods indicated (in thousands):

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Note14. Other Income and Expense

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Other income and expense consisted of the following for the periods indicated (in thousands):

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Note15. Share-Based Compensation

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Equity Plans

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The Company’s board of directors and stockholders approved the following equity plans:

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The Company has issued stock options, restricted stock awards ("RSAs") and restricted stock units ("RSUs") to employees, consultants and non-employee directors. Stock option awards generally vest over afour-year period and have a maximum term often years. Stock options under these plans have been granted with an exercise price equal to the fair market value on the date of the grant. Nonqualified and Incentive Stock Options, RSAs and RSUs* may*be granted from these plans.

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Stock Options

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Options have been granted to the Company’s employees under the2013 Plan and generally become exercisable as to 25% of the shares on thefirst anniversary date following the date of grant and 12.5% on a semi-annual basis thereafter. All options expireten years after the date of grant.

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The following is a summary of option activity:

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As of* June 30, 2024*, there wasno unrecognized stock option expense.

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Performance Based Incentive

​Starting in2021, certain senior executives were granted performance stock units ("PSUs") under our2021 Equity Incentive Plan ("2021 Plan"), which generally vest over athree-year period subject to achievement of certain pre-established performance metrics. The number of shares of common stock that would ultimately be issued to settle PSUs granted ranged from 0% to 200% of the target number of shares granted. We estimate the fair value of the PSUs on the date of grant using a Monte Carlo simulation model, with stock-based compensation expense recognized ratably over the applicablethree-year performance period. The Company recognized stock-based compensation expense for the PSUs for thethree months ended* June 30, 2024and2023* of $3.8 million and $0.5 million, respectively. The Company recognized stock-based compensation expense for thesix months ended* June 30, 2024and2023* of $4.8 million and $0.9 million, respectively.

On* June 12, 2024,the Compensation Committee certified the Company exceeded the maximum performance target level for each of the performance targets set for the PSUs granted in June 2021 (the"2021* PSUs"). Therefore, applicable employees were entitled to payment of the2021 PSUs at 200% of the target shares granted under the2021 Plan. On* June 6, 2024,at the annual meeting of stockholders, a proposal to increase the number of shares of common stock authorized for issuance under the2021* Equity Incentive Plan by 2,000,000 shares wasnot approved, and as a result, the Company didnot have enough shares of common stock available for issuance to satisfy the additional shares earned above 100% of target shares of the2021 PSUs (the*"2021* Additional Shares". In lieu of shares of common stock, the Company settled the2021 Additional Shares in cash, resulting in an additional $2.8 million of stock based compensation expense in thethree months ended* June 30, 2024.*

The following is a summary of PSU activity for thesix months ended* June 30, 2024:*

As of* June 30, 2024*, there was $7.7 million of unrecognized stock-based compensation expense related to outstanding PSUs, which expense is expected to be recognized over 2.2 years.

Restricted Stock Units

The following is a summary of RSU activity:

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As of* June 30, 2024*, there was $15.1 million of unrecognized compensation expense related to these RSUs. This expense is expected to be recognized over 2.6 years.

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Share-Based Compensation

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Employee share-based compensation expenses recognized for the periods indicated (in thousands):

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Note16. Income Taxes

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For thethree months ended* June 30, 2024and2023*, the effective tax rate varied from the federal statutory rate of 21% primarily due to the change of the valuation allowance on federal, state, Taiwan, and China deferred tax assets ("DTA").

The Company continually monitors and performs an assessment of the realizability of its DTAs, including an analysis of factors such as future taxable income, reversal of existing taxable temporary differences, and tax planning strategies. In assessing the need for a valuation allowance, the Company considered both positive and negative evidence related to the likelihood of realization of deferred tax assets using a “more likely thannot” standard. In making such assessment, more weight was given to evidence that could be objectively verified, including recent cumulative losses. Based on the Company’s review of this evidence, management determined that a full valuation allowance against all of the Company’s net deferred tax assets at* June 30, 2024* was appropriate.

Note17. Geographic Information

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

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

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Note18. Contingencies

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Litigation

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Overview

From time to time, the Company* maybe subject to legal proceedings and litigation arising in the ordinary course of business, including, butnot* limited to, inquiries, investigations, audits and other regulatory proceedings, such as described below. The Company records a loss provision when it believes it is both probable that a liability has been incurred and the amount can be reasonably estimated.

Unless otherwise disclosed, the Company is unable to estimate the possible loss or range of loss for the legal proceeding described below.

Arbitration filed by Yuhan Optoelectronic Technology (Shanghai) Co., Ltd.

On* September 12, 2023,the Company delivered notice of termination with respect to that certain Agreement for the Sale and Purchase of a New Company to be Established in Hong Kong Special Administrative Region of the People’s Republic of China (the “Purchase Agreement”), dated September 15, 2022,with Prime World International Holdings Ltd. (the “Seller”) and Yuhan Optoelectronic Technology (Shanghai) Co., Ltd. (the “Purchaser”), pursuant to which the Seller would divest its manufacturing facilities located in the People's Republic of China and certain assets related to its transceiver business and multichannel optical sub-assembly products for the internet data center, FTTH and telecom markets. The termination, in accordance with the terms of the Purchase Agreement, was a result of the Purchaser's failure to satisfy certain of its material obligations under the Purchase Agreement. In terminating the Purchase Agreement, 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 (“HKIAC”) challenging the validity of our termination notice and seeking specific performance with respect to the transactions contemplated in the Purchase Agreement, which in any case if specific performance is granted by HKIAC, the transaction contemplated by the Purchase Agreement would still have to be approved by the Committee on Foreign Investment in the United States prior to its consummation. On January 22, 2024,the Company filed its response, generally denying the Purchaser’s allegations and asserting counterclaims for recovery of a break-up fee. The Company intends to vigorously defend this matter. The Company isnot* able to determine the outcome of this dispute or the likelihood or amount of the Company’s loss or recovery, if any, arising from this matter. The HKIAC Tribunal issued a procedural order on* April 17, 2024setting the evidentiary hearing to be held on September 2025.*

Other Contingencies

On* August 9, 2021,the Company received a Taxes Notification of Audit Result ("Notice") from the Texas Comptroller’s Office (the "Comptroller"), for fiscal years between2016* and2019, informing the Company that the Comptroller believes the Company didnot qualify for certain sales and use tax exemptions on various Research and Development purchases and accordingly the Company is liable for Sale and Use Tax in the amount of approximately $1.0 million including interest charges. The Company paid $0.4 million for the tax notice in* May 2021,but challenged the remaining tax assessments and vigorously defended its position. The Comptroller’s office exhausted its redetermination period and therefore moved AOI’s case to the hearing process.No hearing date has yet been scheduled, and as a result the Company isnot* able to determine the outcome of this sales tax dispute or the likelihood or amount of the Company’s loss, if any, arising from this matter.

Note19. Subsequent Events

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On Monday,* July 8, 2024,Hurricane Beryl came ashore as a category-1 hurricane in the area east of Matagorda, Texas, approximately70* miles southwest of the Company's headquarters facility in Sugar Land, TX. The Company's headquarters facility and its manufacturing and R&D facilities in Sugar Land suffered power outages from* July 8, 2024to July 11, 2024.The Company's backup power generators worked as designed, but were sufficient to allow only limited business activity. The Company's facilities are believed to have sufferedno* material damage as a result of the hurricane, and the Company is working to recover any production which was delayed by the power loss. Currently the Company expectsno material financial impact due to the storm.

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