APPLIED OPTOELECTRONICS INC

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 and six months ended June 30, 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 nine months ended September 30, 2024 and 2023 (in thousands, except percentages):

Previous 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.

Current wording

The changes in revenue during the three months ended September 30, 2024 and 2023 were primarily due toincreased demand from CATV customers, offset by the lack of non-recurring engineering ("NRE") revenue in the third quarter of 2024 and the effect of pricing reductions offered to certain of our data center customers in 2024, which affected our data center market. The changes in revenue during the nine months ended September 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 nine months ended September 30, 2024 was lower than in the corresponding period in the prior year largelydue 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

We have begun to see increased orders for our 400G data center products from several large customers. Based on forecasts from our customers, we expect increased demand for these products through the end of 2024. We entered into a supply agreement with Microsoft to design certain datacenter goods and to build a supply chain to manufacture, assemble, sell and ship the goods to them or an authorized purchasing entity. The initial term of the agreement is five years with automatic renewal unless terminated earlier.

Current wording

We have begun to see increased orders for our 400G data center products from several large customers. Based on forecasts from our customers, we expect increased demand for these products through the end of 2024. We entered into a supply agreement with Microsoft to design certain data center goods and to build a supply chain to manufacture, assemble, sell and ship the goods to them or an authorized purchasing entity. The initial term of the agreement is five years with automatic renewal unless terminated earlier.

Previous wording

In addition to our existing datacenter customers, we have also begun to receive orders from a hyperscale datacenter customer from which we have not received significant orders in several years. While the new customer interaction is not material within the quarter, we believe that both this new customer interaction and much of the growth in our existing datacenter business is related to efforts by these customers to increase processing capacity within their datacenters, largely to accommodate applications enabled by generative artificial intelligence ("AI").

Current wording

In addition to our existing data center customers, we have also begun to receive orders from a hyperscale data center customer from which we have not received significant orders in several years. While the new customer interaction is not material within the quarter, we believe that both this new customer interaction and much of the growth in our existing data center business is related to efforts by these customers to increase processing capacity within their data centers, largely to accommodate applications enabled by generative artificial intelligence ("AI").

Previous 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.

Current wording

For the three months ended September 30, 2024 and 2023, our top ten customers represented 95.8% and 96.1% of our revenue, respectively. For the nine months ended September 30, 2024 and 2023, our top ten customers represented 93.7% and 93.3% 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 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.

Current wording

Cost of goods sold increased by $6.9 million for the three months ended September 30, 2024 compared to the three months ended September 30, 2023. The increase in cost of goods sold was due to increased revenue and higher cost of certain materials, partially offset by lower inventory reserve in the current period. Cost of goods sold decreased by $3.9 million for the nine months ended September 30, 2024, compared to the nine months ended September 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 $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.

Current wording

Research and development expense increased by $4.0 million, or 42.0% for the three months ended September 30, 2024, compared to the three months ended September 30, 2023. Research and development expense increased by $11.6 million, or 43.5% for the nine months ended September 30, 2024 compared to the same period ended September 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. The increases in R&D expenses were driven by customer demands for new products as well as acceleration of previously-planned project expenditures which were necessary to accommodate accelerated demand projections for these products from certain customers.

Previous 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.

Current wording

Sales and marketing expense increased by $1.8 million, or 58.0% for the three months ended September 30, 2024 compared to the three months ended September 30, 2023. Sales and marketing expense increased by $6.9 million, or 90.1% for the nine months ended September 30, 2024 compared to the same period ended September 30, 2023. The increases were primarilydue to the increased business development effort in our CATV and data center businesses, higher shipping costs and increases in trade show expenses.

Previous 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.

Current wording

General and administrative expense was approximately the same for the three months ended September 30, 2024 compared to the three months ended September 30, 2023. General and administrative expense increased by $4.9 million, or 12.3% for the nine months ended September 30, 2024 compared to the same period ended September 30, 2023. The increase was primarily due to increased personnel-related expense, including higher share-based compensation expense.

Previous 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.

Current wording

Interest income increased by $0.09 million, or 140% for the three months ended September 30, 2024 compared to the three months ended September 30, 2023. Interest income increased by $0.38 million or 282.7% for the nine months ended September 30, 2024 compared to the same period ended September 30, 2023. The increases were due tohigher saving balances and higher interest rate on our saving account in the first three quarters of 2024.

Previous 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.

Current wording

Interest expense decreased by $0.3 million, or 14.4% for the three months ended September 30, 2024 compared to the three months ended September 30, 2023. Interest expense decreased by $1.2 million, or 19.5% for the nine months ended September 30, 2024 compared to the same period ended September 30, 2023. The decreases were due tothe termination of the loan with CIT Northbridge in November 2023.

Previous wording

Other income (expenses) increased by $0.6 million, or 48.2%, for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. Other income (expenses) increased by $0.5 million, or 41.5%, for the six months ended June 30, 2024 compared to the same period ended June 30, 2023.These increases were mainly due to the resolution of legal matters, more government subsidy and positive foreign exchange impact.

Current wording

Other income (expenses) increased by $0.7 million, or 198% for the three months ended September 30, 2024 compared to the three months ended September 30, 2023. Other income (expenses) increased by $1.2 million, or 143.7%, for the nine months ended September 30, 2024 compared to the same period ended September 30, 2023.These increases were mainly due to the resolution of legal matters, increased government subsidy income and positive foreign exchange impact.

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 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.

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 made significant such investments in the nine months ended September 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 $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.

Current wording

Comprehensive loss increased by $5.8 million, or 60.4%, for the three months ended September 30, 2024 as compared to the three months ended September 30, 2023. Comprehensive loss increased by $20.7 million, or 44.6%, for the nine months ended September 30, 2024 as compared to the same period ended September 30, 2023.The changes were primarily due to increase of net loss of $8.8 million and $24.9 million for the three months ended September 30, 2024 and 2023 and the nine months ended September 30, 2024 and 2023, respectively, and offset by foreign currency translation adjustments for non-U.S. dollar functional currency operations of $3.0 million and$4.1 million, respectively.

Previous 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.

Current wording

As of September 30, 2024, we had $23.3 millionof unused borrowing capacity from all of our loan agreements. As of September 30, 2024, our cash, cash equivalents and restricted cash totaled $41.4 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.

Previous wording

On January 5, 2023, the Company filed a Registration Statement on Form S-3 with the Securities and Exchange Commission, which was declared effective on March 21, 2023, providing for the public offer and sale of certain securities of the Company from time to time, at our discretion, up to an aggregate amount of $185 million.

Current wording

On January 5, 2023, the Company filed a Registration Statement on Form S-3 with the Securities and Exchange Commission, which was declared effective on March 21, 2023, providing for the public offer and sale of certain securities of the Company from time to time, at our discretion, up to an aggregate amount of$185 million.

Previous wording

On March 13, 2024, we entered into an Equity Distribution Agreement (the "Agreement") with Raymond James & Associates (the "Sales Agent") pursuant to which the Company may issue and sell shares of the Company’s common stock, par value $0.001 per share (the "Shares") having an aggregate offering price of up to $25 million (the "ATM Offering"), from time to time through the Sales Agent. Upon delivery of a placement notice and subject to the terms and conditions of the Agreement, sales, if any, of the Shares will be made through the Sales Agent in transactions that are deemed to be “at the market” offerings as defined in Rule 415 of the Securities Act of 1933, as amended (the "Securities Act"), including sales made through the facilities of the Nasdaq Global Market, the principal trading market for the Company’s common stock, on any other existing trading market for the Company’s common stock, to or through a market maker or as otherwise agreed by the Company and the Sales Agent. In the placement notice, the Company will designate the maximum number of Shares to be sold through the Sales Agent, the time period during which sales are requested to be made, the minimum price for the Shares to be sold, and any limitation on the number of Shares that may be sold in any one day. Subject to the terms and conditions of the Agreement, the Sales Agent will use its commercially reasonable efforts to sell Shares on the Company’s behalf up to the designated amount specified in the placement notice. The Company has no obligation to sell any Shares under the Agreement and may at any time suspend offers and sales of the Shares under the Agreement.

Current wording

On March 13, 2024, we entered into an Equity Distribution Agreement (the "Agreement") with Raymond James & Associates (the "Sales Agent") pursuant to which the Company could issue and sell shares of the Company’s common stock, par value $0.001 per share (the "Shares") having an aggregate offering price of up to $25 million (the "ATM Offering"), from time to time through the Sales Agent. Upon delivery of a placement notice and subject to the terms and conditions of the Agreement, sales of the Shares were made through the Sales Agent in transactions that are deemed to be “at the market” offerings as defined in Rule 415 of the Securities Act of 1933, as amended (the "Securities Act"), including sales made through the facilities of the Nasdaq Global Market, the principal trading market for the Company’s common stock, on any other existing trading market for the Company’s common stock, to or through a market maker or as otherwise agreed by the Company and the Sales Agent. In the placement notice, the Company would designate the maximum number of Shares to be sold through the Sales Agent, the time period during which sales were requested to be made, the minimum price for the Shares to be sold, and any limitation on the number of Shares that could be sold in any one day. Subject to the terms and conditions of the Agreement, the Sales Agent would use its commercially reasonable efforts to sell Shares on the Company’s behalf up to the designated amount specified in the placement notice.

Previous wording

The Agreement provides that the Sales Agent will be entitled to compensation of up to 2% of the gross sales price of the Shares sold through the Sales Agent from time to time. The Company has also agreed to reimburse the Sales Agent for certain specified expenses in connection with the registration of Shares under state blue sky laws and any filing with, and clearance of the offering by, the Financial Industry Regulatory Authority Inc., not to exceed $10,000 in the aggregate, and any associated application fees incurred. Additionally, if the Agreement is terminated under certain circumstances, and the Company fails to sell a minimum amount of the Shares as set forth in the Agreement, then the Company has agreed to reimburse the Sales Agent for reasonable out-of-pocket expenses, including the reasonable fees and disbursements of counsel incurred by the Sales Agent, up to a maximum of $30,000 in the aggregate. The Company agreed to indemnify the Sales Agent against certain liabilities, including liabilities under the Securities Act, or to contribute to payments that the Sales Agent may be required to make because of any of those liabilities.

Current wording

The Agreement provided that the Sales Agent would be entitled to compensation of up to 2% of the gross sales price of the Shares sold through the Sales Agent from time to time. The Company also agreed to reimburse the Sales Agent for certain specified expenses in connection with the registration of Shares under state blue sky laws and any filing with, and clearance of the offering by, the Financial Industry Regulatory Authority Inc., not to exceed $10,000 in the aggregate, and any associated application fees incurred. The Company agreed to indemnify the Sales Agent against certain liabilities, including liabilities under the Securities Act, or to contribute to payments that the Sales Agent could be required to make because of any of those liabilities.

Previous 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.

Current wording

On August 6, 2024, we entered into Amendment No. 1 to the Agreement with the Sales Agent to increase the aggregate offering price from $25 million to $60 million. As of September 30, 2024, we sold approximately 5.7 million shares of the Company's common stock with an aggregate offering price of approximately $59.9 million under this ATM Offering.

Previous 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.

Current wording

For the nine months ended September 30, 2024, net cash used in operating activities was $44.9 million. Net cash used in operating activities consisted of our net loss of $67.0 million after exclusion of non-cash items of $32.4 million. Cash decreased due to accounts receivable increase of $30.2 million, other receivables increase of $2.4 million, inventory increase of $2.8 million, offset by accounts payable increase of $23.1 million.

Previous 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.

Current wording

For the nine months ended September 30, 2023, net cash used in operating activities was $9.5 million. Net cash used in operating activities consisted of our net loss of $42.2 million after exclusion of non-cash items of $31.2 million. Cash increased due to an unearned revenue increase of $9.5 million, together with a decrease in inventory of $2.9 million, offset with a decrease in accounts payable of $13 million and accrued liabilities of $0.6 million, respectively.

Previous 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.

Current wording

For the nine months ended September 30, 2024, net cash used in investing activities was $21.4 million, mainly for the purchase of additional plant, machinery and equipment.

Previous 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.

Current wording

For the nine months ended September 30, 2023, net cash used in investing activities was $5.2 million, mainly for the purchase of additional plant, machinery and equipment.

Previous wording

For the six months ended June 30, 2024, net cash provided by financing activities was $3.1 million. This increase was due to the proceeds from the ATM program of $20 million, offset by the net repayment of bank acceptance of $10.4 million, cash settlement and other related tax payment of share-based compensation of $5.5 million.

Current wording

For the nine months ended September 30, 2024, net cash provided by financing activities was $52.5 million. This increase was due to the net proceeds of $58.7 million from the ATM Offerings, and an increase of $5.9 million bank loans, offset by the net repayment of bank acceptance of $5.7 million, cash settlement and other related tax payment of share-based compensation of $5.8 million.

Previous 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.

Current wording

For the nine months ended September 30, 2023, net cash used in financing activities was $9.3 million. This increase in cash was due to the net proceeds of $32.2 million from our ATM Offering and $2.4 million from bank acceptance payable, offset by the repayment of $24.8 million to lines of credit.

Previous wording

We have lending arrangements with two financial institutions in China. Currently, in the US, we do not have any lending arrangement. As of June 30, 2024, we were in compliance with the covenant in the lending arrangements.

Current wording

We have lending arrangements with two financial institutions in China. Currently, in the US, we do not have any lending arrangement. As of September 30, 2024, we were in compliance with the covenants in the lending arrangements. As of September 30, 2024, we had $23.3 million of unused borrowing capacity.

Previous wording

See Note 11 "Notes Payable and Long-term Debt" and Note 12 "Convertible Senior Notes" of our Condensed Consolidated Financial Statements for a description of our notes payable and long-term debt and convertible senior notes.

Current wording

On December 5, 2023, we issued $80.2 million of 5.25% convertible senior notes due in 2026. The 2026 Notes mature on December 5, 2026, unless earlier repurchased, redeemed or converted in accordance with their terms. See Note 11 "Notes Payable and Long-term Debt" and Note 12 "Convertible Senior Notes" of our Condensed Consolidated Financial Statements for a description of our notes payable and long-term debt and convertible senior notes.

Previous 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.

Current wording

We had cash, cash equivalents and restricted cash of $41.4 million as of September 30, 2024, a decrease of approximately $13.7 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.

Previous 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.

Current wording

As of September 30, 2024, wehad a total loan balance (excluding convertible notes) of $29.5 million from various lenders in China and had $23.3 million available borrowing capacity on existing credit lines. Should additional liquidity be needed, our Board may authorize issuance of additional common stock under an at-the-market offering in the future (see the discussion of "Liquidity and Capital Resources" in Item 2).