APPLIED OPTOELECTRONICS INC

Previous wording

*You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the accompanying notes appearing elsewhere in this Form 10-K. This discussion and other parts of this Form 10-K contain forward-looking statements that involve risks and uncertainties, such asstatements of our plans, objectives, expectations and intentions. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in “Risk Factors.”*This section generally discusses the results of our operations for the year ended December 31, 2023 compared to the year ended December 31, 2022. For a discussion of the year ended December 31, 2022 compared to the year ended December 31, 2021, please refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2022, as amended.

Current wording

*You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the accompanying notes appearing elsewhere in this Form 10-K. This discussion and other parts of this Form 10-K contain forward-looking statements that involve risks and uncertainties, such asstatements of our plans, objectives, expectations and intentions. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in “Risk Factors.”*This section generally discusses the results of our operations for the year ended December 31, 2024, compared to the year ended December 31, 2023. For a discussion of the year ended December 31, 2023 compared to the year ended December 31, 2022, please refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2023.

Previous wording

We are a leading, vertically integrated provider of fiber-optic networking products. We target four networking end-markets: internet data centers, CATV, telecom and FTTH. We design and manufacture a range of optical communications products at varying levels of integration, from components, subassemblies and modules to complete turn-key equipment. In designing products for our customers, we begin with the fundamental building blocks of lasers and laser components. From these foundational products, we design and manufacture a wide range of products to meet our customers’ needs and specifications, and such products differ from each other by their end market, intended use and level of integration. We are primarily focused on the higher-performance segments within the internet data center, CATV, telecom and FTTH markets which increasingly demand faster connectivity and innovation. Our vertically integrated manufacturing model provides us several advantages, including rapid product development, fast response times to customer requests and control over product quality and manufacturing costs.

Current wording

We are a leading, vertically integrated provider of fiber-optic networking products. We target four networking end-markets: internet data centers, CATV, telecom and FTTH. We design and manufacture a range of optical communications products at varying levels of integration, from components, subassemblies and modules to complete turn-key equipment. In designing products for our customers, we typically begin with the fundamental building blocks of lasers and laser components. From these foundational products, we design and manufacture a wide range of products to meet our customers’ needs and specifications, and such products differ from each other by their end market, intended use and level of integration. We are primarily focused on the higher-performance segments within the internet data center, CATV, telecom and FTTH markets which increasingly demand faster connectivity and innovation. Our vertically integrated manufacturing model provides us several advantages, including rapid product development, fast response times to customer requests and control over product quality and manufacturing costs.

Previous wording

In 2023, 2022 and 2021, our revenue was $217.6 million, $222.8 million, and $211.6 million, and our gross margin was 27.1%, 15.1%, and 17.8%, respectively. We have grown our annual revenue at a compound annual growth rate, or CAGR, of 10.7% between 2013 and 2023. In the years ended December 31, 2023, 2022 and 2021, we had net loss of $56.0 million,$66.4 million, and $54.2 million, respectively. At December 31, 2023 and 2022, our accumulated deficit was $265.1 million and $209.1 million, respectively. In 2023, we earned 64.9% of our total revenue from the internet data center market and 27.5% of our total revenue from the CATV market.

Current wording

In 2024, 2023 and 2022, our revenue was $249.4 million, $217.6 million and $222.8 million, and our gross margin was 24.8%, 27.1% and 15.1%, respectively. We have grown our annual revenue at a compound annual growth rate, or CAGR, of 6.7% between 2014 and 2024. In the years ended December 31, 2024, 2023 and 2022, we had net loss of $186.7 million, $56.0 million and$66.4 million, respectively. At December 31, 2024 and 2023, our accumulated deficit was $451.9 million and $265.1 million, respectively. In 2024, we earned 59.5% of our total revenue from the internet data center market and 35.2% of our total revenue from the CATV market.

Previous wording

We sell our products to leading OEMs in the CATV, telecom, and FTTH markets as well as internet data center operators and CATV MSOs. In 2023, revenue from the internet data center market, CATV market, telecom market and FTTH markets provided 64.9%, 27.5%, 6.4%, and 0.0% of our revenue, respectively, compared to 34.6%, 53%, 11.1%, and 0.1% of our 2022 revenue, respectively. In 2023, our key customers in the internet data center market included Microsoft, a U.S. based large data center operator, and a China based datacenter equipment manufacturer. In 2023,2022, and 2021, Microsoft accounted for 46.6%, 18.4%, and 14.1% of our revenue, a U.S. based large data center operator accounted for 8.8%, 5.9% and 8.3% of our revenue and China based manufacture accounted for 3.3%, 1.2% and 1.2% of our revenue, respectively. In 2023, our key customers in the CATV market included ATX, Digicomm and a U.S. based large CATV equipment provider. In 2023,2022, and 2021, ATX accounted for 15.6%, 47.3%, and 25.6% of our revenue, Digicomm accounted for 11.3%, 0%, and 0% of our revenue, and a U.S. based large CATV equipment provider accounted for 1.3%, 1.7% and 3.3% of our revenue, respectively.

Current wording

We sell our products to leading OEMs in the CATV, telecom, and FTTH markets as well as internet data center operators and CATV MSOs. In 2024, revenue from the internet data center market, CATV market, telecom market, FTTH and other markets provided 59.5%, 35.2%, 4.4% and 0.9% of our revenue, respectively, compared to 64.9%, 27.5%, 6.4% and 1.2% of our 2023 revenue, respectively. In 2024, our key customers in the internet data center market included Microsoft, Oracle and a U.S. based datacenter equipment manufacturer. In 2024,2023, and 2022, Microsoft accounted for 43.7%, 46.6%, and 18.4% of our revenue and a Oracle accounted for 12.4%, 8.8% and 5.9% of our revenue, respectively. In 2024, our key customer in the CATV market was Digicomm, a provider of logistics solutions and a distributor of equipment to CATV MSOs. In 2024,2023, and 2022, Digicomm accounted for 34.1%, 11.3% and 0% of our revenue.

Previous wording

In 2023, our decrease of revenue of 2.3% over the prior-year was driven primarily by decreased demand in the CATV market, which we believe is due to reductions in purchasing of older generation DOCSIS 3.1 equipment, which was nearly offset by increased demand for our internet datacenter products, which we believe is arising from demand for products necessary for new datacenter construction along with datacenter upgrades to enable new technologies like Artificial Intelligence (AI). Based on customer forecasts and order backlog we believe that this elevated datacenter demand will likely continue into 2024. We also believe that sales in our CATV market will increase in 2024 as a result of DOCSIS 4.0 products which we plan to release in 2024.

Current wording

In 2024, our increase of revenue of 14.6% over the prior-year was driven primarily by increased demand for our internet data center products, which we believe is arising from demand for products necessary for new data center construction along with data center upgrades to enable new technologies like AI, and the demand recovery in the CATV market, offset by the lack of revenue from Non-Recurring Engineering ("NRE") projects. Based on customer forecasts and order backlog we believe that this elevated data center demand will likely continue into 2025. We also believe that sales in our CATV market will increase in 2025.

Previous wording

We expect continued sales of our 40 Gbps and 100 Gbps products in 2024, and we expect that sales of 400 Gbps products will likely exceed sales of 100 Gbps products later in 2024. However, quarter-to-quarter results may show considerable variability as is usual in a period of technology transition. Similar to revenue, our gross margins can fluctuate materially depending on a variety of factors including average selling price changes, product mix, global supply chain situation, raw material cost reduction or increase, manufacturing utilization rate and changes in manufacturing efficiency.

Current wording

We expect continued sales of our 40 Gbps and 100 Gbps products in 2025, and we expect that sales of 400 Gbps products will likely exceed sales of 100 Gbps products later in 2025. However, quarter-to-quarter results may show considerable variability as is usual in a period of technology transition. Similar to revenue, our gross margins can fluctuate materially depending on a variety of factors including average selling price changes, product mix, global supply chain situation, raw material cost reduction or increase, manufacturing utilization rate and changes in manufacturing efficiency. We currently expect to see material revenue from 800G products in 2025.

Previous wording

In 2023, 2022 and 2021, we had 6,12, and 20 design wins, respectively. We define a design win as the successful completion of the evaluation stage, where our customer has tested our product, verified that our product meets substantially all of their requirements and has informed us that they intend to purchase the product from us. Although we believe that our ability to obtain design wins is a key strength and can provide meaningful and recurring revenue, an increase or decrease in the mere number of design wins does not necessarily correlate to a likely increase or decrease in revenue, particularly in the short term. As such, the number of design wins we achieve on a quarterly or annual basis and any increase or decrease in design wins will not necessarily result in a corresponding increase or decrease in revenue in the same or immediately succeeding quarter or year. For example, if our total number of design wins in an annual or quarterly period increases or decreases compared to the total number of design wins in a prior period, this does not necessarily mean that our revenue in such period will be higher or lower than our revenue in the prior period. In fact, our experience is that some design wins result in significant revenue and some do not, and the timing of such revenue is difficult to predict as it depends on the success of the end customer’s product that uses our components. Thus, some design wins result in orders and significant revenue shortly after the design win is awarded and other design wins do not result in significant orders and revenue for several months or longer after the initial design win (if at all). We do believe that over a period of years the collective impact of design wins correlates to our overall revenue growth.

Current wording

In 2024, 2023 and 2022, we had 8, 6, and 12 design wins, respectively. We define a design win as the successful completion of the evaluation stage, where our customer has tested our product, verified that our product meets substantially all of their requirements and has informed us that they intend to purchase the product from us. Although we believe that our ability to obtain design wins is a key strength and can provide meaningful and recurring revenue, an increase or decrease in the mere number of design wins does not necessarily correlate to a likely increase or decrease in revenue, particularly in the short term. As such, the number of design wins we achieve on a quarterly or annual basis and any increase or decrease in design wins will not necessarily result in a corresponding increase or decrease in revenue in the same or immediately succeeding quarter or year. For example, if our total number of design wins in an annual or quarterly period increases or decreases compared to the total number of design wins in a prior period, this does not necessarily mean that our revenue in such period will be higher or lower than our revenue in the prior period. In fact, our experience is that some design wins result in significant revenue and some do not, and the timing of such revenue is difficult to predict as it depends on the success of the end customer’s product that uses our components. Thus, some design wins result in orders and significant revenue shortly after the design win is awarded and other design wins do not result in significant orders and revenue for several months or longer after the initial design win (if at all). We do believe that over a period of years the collective impact of design wins correlates to our overall revenue growth.

Previous wording

Customer Concentration within End Markets. Historically, our revenue has been significantly concentrated within the data center market, and starting from 2021, our revenue tends to be split primarily between CATV market and data center market. Moreover, within these markets, revenue tends to be concentrated among a small number of customers. In the last couple years, we have taken several actions to increase the diversity of our customer base. These actions include hiring additional sales staff to improve our ability to serve new customers and introduction of new products that we believe will appeal to new customers. Furthermore, we have developed additional original design manufacturer, or ODM, relationships with customers in each of our target markets which should enable us to diversify our revenue base. We had three customers and two customers that accounted for more than 10% of our revenue in 2023 and 2022, respectively.

Current wording

Customer Concentration within End Markets. Our revenue tends to be split primarily between CATV market and data center market. Moreover, within these markets, revenue tends to be concentrated among a small number of customers. We have taken several actions to increase the diversity of our customer base. These actions include hiring additional sales staff to improve our ability to serve new customers and introduction of new products that we believe will appeal to new customers. Furthermore, we have developed additional original design manufacturer, or ODM, relationships with customers in each of our target markets which should enable us to diversify our revenue base. We had three customers that accounted for more than 10% of our revenue in 2024 and 2023, respectively.

Previous wording

In 2023, 2022 and 2021, our top ten customers represented 92.7%, 87.2%, and 84.7% of our revenue, respectively.

Current wording

In 2024, 2023 and 2022, our top ten customers represented 95.0%, 92.7% and 87.2% of our revenue, respectively.

Previous wording

Revenue is recognized when obligations under the terms of a contract with our customer are satisfied; generally this occurs with the transfer of control of products or services. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products or providing services. A majority of our annual sales are denominated in U.S. dollars, but some sales from our Taiwan location and China-based subsidiary are denominated in NT dollars and RMB, respectively. For the year ended December 31, 2023, 19.9% of our total revenue was manufactured at our China-based subsidiary, with $3.8 million denominated in RMB and 66% of our total revenue was from products manufactured at our Taiwan-based facility, with no revenue denominated in NT dollars. We expect a similar portion of our sales to be denominated in foreign currencies in 2024.

Current wording

Revenue is recognized when obligations under the terms of a contract with our customer are satisfied; generally this occurs with the transfer of control of products or services. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products or providing services. A majority of our annual sales are denominated in U.S. dollars, but some sales from our Taiwan location and China-based subsidiary are denominated in NT dollars and RMB, respectively. For the year ended December 31, 2024, 44.8% of our total revenue was manufactured at our China-based subsidiary, with $0.8 million denominated in RMB and 50.8% of our total revenue was from products manufactured at our Taiwan-based facility, with no revenue denominated in NT dollars. We expect a similar portion of our sales to be denominated in foreign currencies in 2025.

Previous wording

For the years ended December 31, 2023 and 2022, we had $0.2 million and $0.2 million, respectively, of unrecognized tax benefits related to U.S. tax benefits recognized for which we do not meet the more likely than not threshold.

Current wording

For the years ended December 31, 2024 and 2023, we had $0.2 million each, of unrecognized tax benefits related to U.S. tax benefits recognized for which we do not meet the more likely than not threshold.

Previous wording

We are uncertain whether the demand for our internet data center, CATV, telecom and FTTH products is seasonal, as our sales data does not indicate a significant trend with respect to these products. We began to manufacture a meaningful quantity of CATV and internet data center products in our Ningbo, China factory in 2017 and 2020, respectively. This factory experiences a lengthy shut-down associated with the Lunar New Year holiday which occurs in Q1 of each year. In addition to the factory shut-down, it is also common for employees in the factory to fail to return to work following resumption of operations. In the years 2023,2022, and 2021, the percentage of employees in our China factory who resigned or were terminated during Q1, relative to the average number of employees during the quarter was 53.8%, 66.1%, and 35.9%, respectively. We believe that the turnover in 2022 was higher than usual due to the COVID-19 pandemic which caused travel restrictions, additional health check requirements, and a lengthy shutdown of operations in Ningbo. As a result of employee turnover, we must hire and train replacement employees. These replacement employees require a period of training and improvement, and this impacts the quantity of products we can produce in the quarter. The combined effect of the factory shut-down and employee turnover in the quarter may also contribute to negative seasonality in Q1.

Current wording

We are uncertain whether the demand for our internet data center, CATV, telecom and FTTH products is seasonal, as our sales data does not indicate a significant trend with respect to these products. We began to manufacture a meaningful quantity of CATV and internet data center products in our Ningbo, China factory in 2017 and 2020, respectively. This factory experiences a lengthy shut-down associated with the Lunar New Year holiday which occurs in Q1 of each year. In addition to the factory shut-down, it is also common for employees in the factory to fail to return to work following resumption of operations. In the years 2024,2023, and 2022, the percentage of employees in our China factory who resigned or were terminated during Q1, relative to the average number of employees during the quarter was 17.2%, 53.8% and 66.1%, respectively. We believe that the turnover in 2022 was higher than usual due to the COVID-19 pandemic which caused travel restrictions, additional health check requirements, and a lengthy shutdown of operations in Ningbo. As a result of employee turnover, we must hire and train replacement employees. These replacement employees require a period of training and improvement, and this impacts the quantity of products we can produce in the quarter. The combined effect of the factory shut-down and employee turnover in the quarter may also contribute to negative seasonality in Q1. In 2024, we began to produce more of our CATV and internet data center products outside of China which we believe will be instrumental in further alleviating some of the typical seasonality that we see in Q1.

Previous wording

Revenue decreased by $5.2 million or 2.3% from 2022 to 2023. The decrease was driven primarily by decreased demand in the CATV market, which we believe is due to reductions in purchasing of older generation DOCSIS 3.1 equipment, which was nearly offset by increased demand for our internet datacenter products, arising from demand for products necessary for new datacenter construction along with datacenter upgrades to enable new technologies like Artificial Intelligence (AI). Based on customer forecasts and order backlog we believe that this elevated datacenter demand will likely continue into 2024. We also believe that sales in our CATV market will increase in 2024 as a result of DOCSIS 4.0 products which we plan to release in 2024.

Current wording

Revenue increased by $31.7 million or 14.6% from 2023 to 2024. The increase was driven primarily by increased demand in the CATV market, which we believe is due to market acceptance on our newly release DOCSIS 4.0 products in 2024, and increased demand for our internet data center products, arising from demand for products necessary for new data center construction along with data center upgrades to enable new technologies like AI, offset by the lack of NRE project revenue in 2024. Based on customer forecasts and order backlog we believe that this elevated data center demand will likely continue into 2025. We also believe that sales in our CATV market will increase in 2025 as a result of further adoption of our DOCSIS 4.0 products.

Previous wording

In the years ended December 31, 2023 and 2022, our top ten customers represented 92.7% and 87.2% 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.

Current wording

In the years ended December 31, 2024 and 2023, our top ten customers represented 95.0% and 92.7% 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.

Previous wording

Research and development expense decreased $0.27 million, or 0.7% from 2022 to 2023. Research and development costs consist of R&D work orders, R&D material usage and other project related costs related to 100 Gbps, 200/400 Gbps data center products, DOCSIS 4.0 capable CATV products, including 1.8 GHz-capable amplifier products, and other new product development, and depreciation expense resulting from R&D equipment investments. These decreases were primarily due to less R&D work orders, less depreciation expense and less indirect materials usage, offset by higher R&D wage expenses due to a combination of increased headcount and salary increases.

Current wording

Research and development expense increased $19.0 million, or 52.8% from 2023 to 2024. Research and development costs consist of R&D work orders, R&D material usage and other project related costs related to 100 Gbps, 200/400/800/1600 Gbps data center products, DOCSIS 4.0 capable CATV products, including 1.8 GHz-capable amplifier products, and other new product development, and depreciation expense resulting from R&D equipment investments. The expenses increased due to a higher volume of internal work orders and headcount increase. During 2024, we experienced increased interest in new technologies like 800G and 1.6T among our data center customers. Supporting customer testing and qualification for these new opportunities materially increased our R&D expenditures, and to the extent that we continue to see elevated customer interest in these new technologies we also expect continued elevated R&D expenditures relative to historical averages. We continue to place a high degree of strategic focus on innovation and product development to support future growth.

Previous wording

Sales and marketing expense increased by $1.3 million, or 13.8%, from 2022 to 2023. These increases were primarily due to more sales effort for our Quantum Bandwidth™ products, offset by less commission expense in China.

Current wording

Sales and marketing expense increased by $7.1 million, or 64.0%, from 2023 to 2024. These increases were primarily due to more sales effort for our Quantum Bandwidth™ products and higher shipping expenses.

Previous wording

General and administrative expense increased by $6.6 million, or 14.1%, from 2022 to 2023. These increases were primarily due to the higher professional service fees and share-based compensation expense, offset by less depreciation expense.

Current wording

General and administrative expense increased by $6.4 million, or 12.0%, from 2023 to 2024. These increases were primarily due to the higher professional service fees and share-based compensation expense.

Previous wording

Interest income increased by $0.5 million, or 383.3% from 2022 to 2023. The increase was primarily due to higher savings balance and higher savings rate in 2023, compared with 2022.

Current wording

Interest income increased by $0.3 million, or 43.5% from 2023 to 2024. The increase was primarily due to higher savings balance in 2024.

Previous wording

Other expense increased by $4.7 million, or 387.2% from 2022 to 2023. This increase was primarily due to the debt extinguishment cost relating to the 2024 Notes, which is non cash expense related to issuance of shares.

Current wording

Other expense increased by $104.0 million, or 1,771.4% from 2023 to 2024. This increase was primarily due to the debt extinguishment cost relating to the 2026 Notes, reflecting the difference between the book value of the 2026 Notes and its fair value at the time of settlement. This resulted in a one-time loss recognized in the period, contributing to the overall rise in non-operating expenses.

Previous wording

As of December 31, 2023, we had $22.5 million of unused borrowing capacity from all of our loan agreements. As of December 31, 2023, our cash, cash equivalents, restricted cash and short-term investments totaled $55.1 million. Cash and cash equivalents are held for working capital purposes and are invested primarily in money market or time deposit funds.

Current wording

As of December 31, 2024, we had $24.8 million of unused borrowing capacity from all of our loan agreements. As of December 31, 2024, our cash, cash equivalents, restricted cash and short-term investments totaled $79.1 million. Cash and cash equivalents are held for working capital purposes and are invested primarily in money market or time deposit funds.

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. Pursuant to Rule 415(a)(6) under the Securities Act, the securities registered pursuant to this registration statement include unsold securities previously registered for sale pursuant to our previously filed Registration Statement on Form S-3, which became effective on January 9, 2020.

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 September 12, 2023, we entered into Amendment No. 1 to the Agreement with the Sales Agent, to increase the aggregate offering price from $35 million to $70 million. In November, 2023, we completed sales under the ATM Offering.

Current wording

On March 13, 2024, we entered into an Equity Distribution Agreement (the "First ATM Agreement") with Raymond James & Associates (the "Sales Agent") pursuant to which the Company could issue and sell shares of the Company’s common stock, having an aggregate offering price of up to $25 million (the "First ATM Offering"), from time to time through the Sales Agent. On August 6, 2024, we entered into Amendment No. 1 to the First ATM Agreement with the Sales Agent, to increase the aggregate offering price from $25 million to $60 million. On November 6, 2024, we provided notice of its termination, effective on such date, of the First ATM Agreement, as amended. We sold approximately 5.7 million shares at a weighted average price of $10.55 per share, providing proceeds of $58.7 million, net of expenses and underwriting discounts and commissions, under the First ATM Offering.

Previous wording

On March 24, 2023, 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 $35 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 November 7, 2024, we entered into another Equity Distribution Agreement (the "Second ATM Agreement") with 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 $55 million (the "Second 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 Second ATM 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

The details of the shares of common stock sold through the ATM Offering through December 31, 2023 are as follows (in thousands, except shares and weighted average per share price):

Current wording

The details of the shares of common stock sold through the First ATM Offering and the Second ATM Offering through December 31, 2024 are as follows (in thousands, except shares and weighted average per share price):

Previous wording

On March 5, 2019, the Company issued $80.5 million of 5% convertible senior notes due 2024, bearing interest at a rate of 5% per year maturing on March 15, 2024 (the "2024 Notes"), unless earlier repurchased, redeemed or converted in accordance with their terms.

Current wording

On March 5, 2019, the Company issued $80.5 million of 5% convertible senior notes due 2024, bearing interest at a rate of 5% per year maturing on March 15, 2024 (the "2024 Notes"), unless earlier repurchased, redeemed or converted in accordance with their terms. The Company paid off the remaining $0.29 million of the 2024 Notes on March 15, 2024.

Previous wording

As of December 31, 2023, we had $22.5 million of unused borrowing capacity.

Current wording

As of December 31, 2024, we had $24.8 million of unused borrowing capacity.

Previous wording

On December 5, 2023, the Company issued $80.2 million of 5.250% convertible senior notes due 2026. The 2026 Notes will mature on December 15, 2026, unless earlier repurchased, redeemed or converted in accordance with their terms.

Current wording

On December 23, 2024, the Company issues $125.0 million of 2.75% convertible senior notes due 2030. The 2030 Notes will mature on January 15, 2030, unless earlier repurchased, redeemed or converted in accordance with their terms.

Previous wording

On February 8, 2018, we entered into a construction contract with Zhejiang Xinyu Construction Group Co., Ltd. for the construction of a new factory and other facilities at our Ningbo, China location. Construction costs for these facilities under this contract are estimated to total approximately $27.5 million. As of December 31, 2023, construction of the building shell is complete, and approximately $27.4 million of this total cost has been paid and the remaining portion will be paid in yearly installments for three years after final inspection. We anticipate additional expenses for building improvements to the factory and we are in the process of evaluating the timing of these expenditures and obtaining bids for any such work. Based on forecasts, we believe the factory will be placed in service in the second half of 2024 after the construction is completed for the building interior. Property will be transferred from construction in progress to building and improvement at that time.

Current wording

On February 8, 2018, we entered into a construction contract with Zhejiang Xinyu Construction Group Co., Ltd. for the construction of a new factory and other facilities at our Ningbo, China location. Construction costs for these facilities under this contract are estimated to total approximately $27.5 million. As of December 31, 2024, construction of the building shell is complete and the first floor has been used, and approximately $27.4 million of this total cost has been paid and the remaining portion will be paid in yearly installments for three years after final inspection. We anticipate additional expenses for building improvements to the factory and we are in the process of evaluating the timing of these expenditures and obtaining bids for any such work. Based on forecasts, we believe the factory will be placed in full service in the year 2025 after the construction is completed for the building interior. Property has been transferred from construction in progress to building and improvement in 2024.

Previous wording

We have outstanding notes payable with varying maturities. As of December 31, 2023, our notes payable had an amount of $23.2 million, and the entire balance is due within 12 months. Further information regarding our notes payable is provided in Note K Notes Payable and Long-Term Debt in the Notes to Consolidated Financial Statements in this Form 10-K. We also have a fixed-rate convertible senior note. As of December 31, 2023, our 2026 Note had an aggregate principle amount of $80.2 million and future interest payments associated with our 2026 Notes totaled $12.6 million. Further information regarding our convertible senior notes is provided in Note L – Convertible Senior Notes in the Notes to Consolidated Financial Statements in this Form 10-K. In addition, we have operating and financing leases for certain property and equipment with an expected term at the commencement date of more than 12 months. As of December 31, 2023, the future minimum payments required under these leases totaled $6.4 million, with $1.3 million payable within 12 months. Further information regarding our leases is provided in Note D – Leases to Consolidated Financial Statements in this Form 10-K.

Current wording

We have outstanding notes payable and debt with varying maturities with various financial institutions. As of December 31, 2024, our notes payable and debt had an amount of $26.7 million, $22.4 million of which is due within 12 months. Further information regarding our notes payable is provided in Note K – Notes Payable and Long-Term Debt in the Notes to Consolidated Financial Statements in this Form 10-K. We also have fixed-rate convertible senior notes. As of December 31, 2024, the 2026 Notes had a principal amount of $3.5 million and future interest payments associated with the 2026 Notes totaled $0.2 million. As of December 31, 2024, the 2030 Notes had an aggregate principal amount of $125 million and future interest payments associated with the 2030 Notes totaled $13.9 million. Further information regarding our convertible senior notes is provided in Note L – Convertible Senior Notes in the Notes to Consolidated Financial Statements in this Form 10-K. In addition, we have operating leases for certain property and equipment with an expected term at the commencement date of more than 12 months. As of December 31, 2024, the future minimum payments required under these leases totaled $12.3 million, with $1.7 million payable within 12 months. Further information regarding our leases is provided in Note D – Leases to Consolidated Financial Statements in this Form 10-K.

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. 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 came down to 2.9% in 2024, compared with 3.4% in 2023. Even though the inflation has slowed from the peak, it remained above the Federal Reserve's objective of 2%. The annual inflation rate in Taiwan came down to 2.1% in 2024 from 2.7% in 2023. 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. 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.

Previous wording

During the years ended December 31, 2023, 2022 and 2021, we recorded excess and obsolete inventory reserve charges of $8.7 million, $4.9 million, and $3.9 million, respectively. For the years December 2023, 2022 and 2021, the direct inventory write-offs related to scrap, discontinued products and damaged inventories were $10.6 million, $10.4 million, and $16.8 million, respectively.

Current wording

During the years ended December 31, 2024, 2023 and 2022, we recorded excess and obsolete inventory reserve charges of $3.4 million, $8.7 million and $4.9 million, respectively. For the years ended December 31, 2024, 2023 and 2022, the direct inventory write-offs related to scrap, discontinued products and damaged inventories were $3.8 million, $10.6 million and $10.4 million, respectively.

Previous wording

On the basis of this evaluation, as of December 31, 2023, a valuation allowance of $78.1 million has been recorded related to deferred tax assets to recognize only the portion of the deferred tax assets that are more likely than not to be realized. The amount of the deferred tax assets considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as our projections for growth.

Current wording

On the basis of this evaluation, as of December 31, 2024, a valuation allowance of$94.8 million has been recorded related to deferred tax assets to recognize only the portion of the deferred tax assets that are more likely than not to be realized. The amount of the deferred tax assets considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as our projections for growth.