APPLIED OPTOELECTRONICS, INC.

Previous wording

In early 2025, the U.S. Presidential administration implemented significant new tariffs on foreign imports impacting multiple countries, commodities and industries, and these new tariffs and export restrictions also prompted retaliatory tariffs and export restrictions from certain countries. As of April 2025, certain tariffs and retaliatory tariffs have been delayed, but a number of the new tariffs remain in effect, including significant tariffs and trade sanctions between the United States and China. Tariffs, trade restrictions and retaliatory measures could result in revenue reduction, cost increases on material used in our products or significant production delays, which could adversely affect our business, financial condition, operational results and cash flows.

Current wording

In early 2025, the U.S. Presidential administration implemented significant new tariffs on foreign imports impacting multiple countries, commodities and industries, and these new tariffs and export restrictions also prompted retaliatory tariffs and export restrictions from certain countries. As of April, certain tariffs and retaliatory tariffs have been delayed, but a number of the new tariffs remain in effect, including significant tariffs and trade sanctions between the United States and China. In mid-May, the U.S. administration issued an executive order suspending certain previously announced tariff increases on China and temporarily reinstating a lower baseline tariff for a 90-day period. As of early August, the 90-day suspension is approaching its end, and the U.S. has imposed a 20% temporary tariff on most imports from Taiwan, effective August 7, 2025. The U.S. remains in active tariff negotiations with key trading partners, including China and Taiwan, though the final outcomes of these negotiations remain uncertain. Although we have not been significantly impacted by the increased tariffs imposed on China to date, newly imposed or future tariffs, trade restrictions and retaliatory measures could result in revenue reduction, cost increases on material used in our products or significant production delays, which could adversely affect our business, financial condition, operational results and cash flows.

Previous wording

We generate revenue through the sale of our products to equipment providers and network operators for the internet data center, CATV, telecom, FTTH and other markets. We derive a significant portion of our revenue from our top ten customers, and we anticipate that we will continue to do so for the foreseeable future. The following charts provide the revenue contribution from each of the markets we served for the three months ended March 31, 2025 and 2024 (in thousands, except percentages):

Current wording

We generate revenue through the sale of our products to equipment providers and network operators for the internet data center, CATV, telecom, FTTH and other markets. We derive a significant portion of our revenue from our top ten customers, and we anticipate that we will continue to do so for the foreseeable future. The following charts provide the revenue contribution from each of the markets we served for the three and six months ended June 30, 2025 and 2024 (in thousands, except percentages):

Previous wording

The changes in revenue during the three months ended March 31, 2025 and 2024 were primarily due to increased demand from customers.

Current wording

The changes in revenue during both the three months and the six months ended June 30, 2025 and 2024 were primarily due to increased demand from customers.

Previous wording

We continue to see increased orders for our 100G data center products from several large customers. Based on forecasts from our customers, we expect increased demand for these products through the end of 2025. 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.

Current wording

We continue to see increased orders for our 100G and 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 2025. 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. We continue to expect revenue from this contract to increase in 2025 compared to 2024.

Previous wording

Our first quarter CATV revenue increased $55.8 million, or 638.3% compared to the first quarter of 2024 due to the recovery in market demand for our products, which is being driven by the beginning of a major network upgrade project by a major North American MSO customer.

Current wording

For the second quarter of 2025, CATV revenue increased $50.2 million, or 862.9%, compared to the second quarter of 2024. For the six months ended June 30, 2025 and 2024, CATV increased $106.0 million, or 728.1%. The increases were due to the recovery in market demand for our products, which is being driven by the beginning of a major network upgrade project by a major North American MSO customer.

Previous wording

For the three months ended March 31, 2025 and 2024, our top ten customers represented 97% and 92% of our revenue, respectively. We believe that diversifying our customer base is critical for our future success, since reliance on a small number of key customers makes our ability to forecast future results dependent upon the accuracy of the forecasts we receive from those key customers. We continue to prioritize new customer acquisition and growth of diverse revenue streams.

Current wording

For the three months ended June 30, 2025 and 2024, our top ten customers represented 98% and 94% of our revenue, respectively. For the six months ended June 30, 2025 and 2024, our top ten customers represented 97% and 93% of our revenue, respectively. We believe that diversifying our customer base is critical for our future success, since reliance on a small number of key customers makes our ability to forecast future results dependent upon the accuracy of the forecasts we receive from those key customers. We continue to prioritize new customer acquisition and growth of diverse revenue streams.

Previous wording

Cost of goods sold increased by $36.2 million or 109.5% for the three months ended March 31, 2025 compared to the three months ended March 31, 2024. The increase in cost of goods sold was due to increased revenue for the three months ended March 31, 2025 compared to the three months ended March 31, 2024.

Current wording

Cost of goods sold increased by $38.1 million, or 113.0%, for the three months ended June 30, 2025 compared to the three months ended June 30, 2024. Cost of goods sold increased by $74.3 million, or 111.3%, for the six months ended June 30, 2025 compared to the six months ended June 30, 2024. The increase in cost of goods sold was mainly due to increased revenue.

Previous wording

Gross profit increased by $23.0 million or 302.4% for the three months ended March 31, 2025 compared to the three months ended March 31, 2024. The increase is primarily due to higher sales on our high gross margin products and ongoing efforts to reduce production costs.

Current wording

Gross profit increased by $21.6 million, or 225.9%, for the three months ended June 30, 2025 compared to the three months ended June 30, 2024. Gross profit increased by $44.6 million, or 259.7%, for the six months ended June 30, 2025 compared to the six months ended June 30, 2024. The increase is primarily due to higher sales on our high gross margin products and ongoing efforts to reduce production costs.

Previous wording

Research and development expense increased by $6.1 million, or 52.1% for the three months ended March 31, 2025 compared to the three months ended March 31, 2024. The increases were primarily due to increased personnel-related expense and increased R&D related project costs. 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.

Current wording

Research and development expense increased by $7.5 million, or 57.6%, for the three months ended June 30, 2025 compared to the three months ended June 30, 2024. Research and development expense increased by $13.6 million, or 55.0%, for the six months ended June 30, 2025 compared to the six months ended June 30, 2024. The increases were primarily due to increased personnel-related expense and increased R&D related project costs. The increases in R&D expenses were driven by customer demand 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 $1.6 million, or 41.0%, for the three months ended March 31, 2025 compared to the three months ended March 31, 2024. The increases were primarilydue to the increased business development effort in our CATV and data center businesses along with higher shipping costs.

Current wording

Sales and marketing expense increased by $2.2 million, or 37.6%, for the three months ended June 30, 2025 compared to the three months ended June 30, 2024. Sales and marketing expense increased by $3.8 million, or 39.0%, for thesix months ended June 30, 2025 compared to thesix months ended June 30, 2024. The increases were primarilydue to the increased business development effort in our CATV and data center businesses along with higher shipping costs.

Previous wording

General and administrative expense increased by $2.6 million, or 18.8% for the three months ended March 31, 2025 compared to the three months ended March 31, 2024. The increase was primarily due to increased personnel-related expense and increased consulting fees for our ongoing enterprise resource planning ("ERP") system upgrade.

Current wording

General and administrative expense increased by $1.6 million, or 9.4%, for the three months ended June 30, 2025 compared to the three months ended June 30, 2024. General and administrative expense increased by $4.2 million, or 13.6%, for the six months ended June 30, 2025 compared to the six months ended June 30, 2024. The increases were primarily due to increased personnel-related expense.

Previous wording

Interest expense decreased by $0.7 million, or 44.3% for the three months ended March 31, 2025 compared to the three months ended March 31, 2024. The decrease was due tothe lower effective interest rate for our 2030 Notes.

Current wording

Interest expense decreased by $0.9 million, or 51.7%, for the three months ended June 30, 2025 compared to the three months ended June 30, 2024. Interest expense decreased by $1.6 million, or 48.0%, for thesix months ended June 30, 2025 compared to thesix months ended June 30, 2024. The decrease was due tothe lower effective interest rate for our 2030 Notes.

Previous wording

Other income (expenses) increased by $0.6 million, or 535.8% for the three months ended March 31, 2025 compared to the three months ended March 31, 2024. The increase was mainly due to the increased government subsidy income and positive foreign exchange impact.

Current wording

Other income (expenses) increased by $5.7 million, or 328.6%, for the three months ended June 30, 2025 compared to the three months ended June 30, 2024. Other income (expenses) increased by $6.3 million, or 386.7%, for the six months ended June 30, 2025 compared to the six months ended June 30, 2024. The increase was mainly due to the 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 made significant such investments in the three months ended March 31, 2025, 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 investments in the six months ended June 30, 2025 which we believe should qualify for these credits, but we intend to continue to evaluate these and future investments for applicability to the tax credit provisions of the CHIPS Act.

Previous wording

Comprehensive loss decreased by $15.5 million, or 62.2%, for the three months ended March 31, 2025 as compared to the three months ended March 31, 2024.

Current wording

Comprehensive loss decreased by $21.7 million, or 80.6%, for the three months ended June 30, 2025 as compared to the three months ended June 30, 2024. Comprehensive loss decreased by $37.2 million, or 71.8%, for the six months ended June 30, 2025 as compared to the six months ended June 30, 2024.

Previous wording

As of March 31, 2025, we had $29.4 millionof unused borrowing capacity from all of our loan agreements. As of March 31, 2025, our cash, cash equivalents and restricted cash totaled $66.8 million. Cash and cash equivalents are held for working capital purposes and are invested primarily in money market or time deposit funds. We do not enter into investments for trading or speculative purposes.

Current wording

As of June 30, 2025, we had $31.2 millionof unused borrowing capacity from all of our loan agreements. As of June 30, 2025, our cash, cash equivalents and restricted cash totaled $87.2 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 February 28, 2025, 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 $100 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.

Current wording

On May 28, 2025, the Company entered into an Equity Distribution Agreement (the "Agreement") with Raymond James & Associates and Needham & Company, LLC (collectively, the "Sales Agents" and each, a "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 $100 million (the "Second ATM Offering"), from time to time through the Sales Agents. 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 Agents 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 Agents. In the placement notice, the Company would designate the maximum number of Shares to be sold through the Sales Agents, 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 Agents would use their 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 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.

Current wording

The Agreement provided that each of the Sales Agents would be entitled to compensation of up to 2% of the gross sales price of the Shares sold through such Sales Agent from time to time. The Company also agreed to reimburse the Sales Agents 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 Agents against certain liabilities, including liabilities under the Securities Act, or to contribute to payments that the Sales Agents could be required to make because of any of those liabilities.

Previous wording

On April 8, 2025, the Company completed the ATM Offering and sold approximately 5.7 million shares at a weighted average price of $17.71 per share, providing proceeds of approximately $98 million, net of expenses and underwriting discounts and commissions.

Current wording

On June 18, 2025, the Company completed the Second ATM Offering and sold approximately 5.7 million shares at a weighted average price of $17.46 per share, providing proceeds of approximately $98 million, net of expenses and underwriting discounts and commissions.

Previous wording

The details of the shares of common stock sold through the ATM Offering as of the end of March 31, 2025 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 Second ATM Offering as of the end of June 30, 2025 are as follows (in thousands, except shares and weighted average per share price):

Previous wording

For the three months ended March 31, 2025, net cash used in operating activities was $50.9 million. Net cash used in operating activities consisted of our net loss of $9.2 million after exclusion of non-cash items of $10.2 million. Cash decreased due to accounts receivable increase of $54.3 million and inventory increase of $16.2 million, partially offset by accounts payable increase of $19.9 million.

Current wording

For the six months ended June 30, 2025, net cash used in operating activities was $116.4 million. Net cash used in operating activities consisted of our net loss of $18.3 million after exclusion of non-cash items of $15.9 million. Cash decreased due to an increase in accounts receivable of $94.7 million and an increase in inventory of $51.0 million, partially offset by an increase in accounts payable of $28.0 million.

Previous wording

For the three months ended March 31, 2025, net cash used in investing activities was $36.3 million, mainly for the purchase of additional plant, machinery and equipment.

Current wording

For the six months ended June 30, 2025, net cash used in investing activities was $75.2 million, mainly for the purchase of additional property, plant, and equipment.

Previous wording

For the three months ended March 31, 2025, net cash provided by financing activities was $70.0 million. This increase was due to the net proceeds of $71.7 million from the ATM Offering, partially offset by tax payments related share-based compensation of $1.7 million.

Current wording

For the six months ended June 30, 2025, net cash provided by financing activities was $196.0 million. This increase was due to the net proceeds of $195.8 million from the ATM Offering and proceed of bank acceptance payable of $12.7 million, partially offset by tax payments related share-based compensation of $7.8 million.

Previous wording

Currently, in the U.S., we do not have a bank loan agreement with any U.S. financial institution. However, we may explore lending opportunities in the U.S. in the future. In China, we have lending arrangements with two financial institutions. As of March 31, 2025, we were in compliance with the covenants in the lending arrangements. As of March 31, 2025, we had $29.4 million of unused borrowing capacity.

Current wording

As of June 30, 2025, we do not have a bank loan agreement with any U.S. financial institution. However, we may explore lending opportunities in the U.S. in the future. As of June 30, 2025, we have lending arrangements with twofinancial institutions in China. As of June 30, 2025, we were in compliance with the covenants in the lending arrangements. As of June 30, 2025, we had $31.2 million of unused borrowing capacity.

Previous wording

We had cash, cash equivalents and restricted cash of $66.8 million as of March 31, 2025, a decrease of approximately $12.3 million compared to December 31, 2024. 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 in Taiwan or U.S., changes in our manufacturing capacity and the continuing market acceptance of our products.

Current wording

We had cash, cash equivalents and restricted cash of $87.2 million as of June 30, 2025, an increase of approximately $8.1 million compared to December 31, 2024. 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 in Taiwan or U.S., changes in our manufacturing capacity and the continuing market acceptance of our products.

Previous wording

As of March 31, 2025, wehad a total loan balance (excluding convertible notes) of $22.1 million from various lenders in China and had $29.4 million available borrowing capacity on existing credit lines. Should additional liquidity be needed, our Board 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).

Current wording

As of June 30, 2025, wehad a total loan balance (excluding convertible notes) of $22.2 million from various lenders in China and had $31.2 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).

Previous wording

The annual inflation rate in the US came down to 2.9% in 2024, compared to 3.4% in 2023. Even though inflation has slowed from the peak, it remained well above the Federal Reserve's objective of 2%. The annual inflation rate in Taiwan came down to 2.1% 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. Compared to other major economies in the world, China has a stable level of inflation, which has not had a significant impact on our sales or operating results. We do not believe that inflation had a material impact on our business, financial condition, or results of operations during the three months ended March 31, 2025. 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 to 3.4% in 2023. Even though inflation has slowed from the peak, it remained well above the Federal Reserve's objective of 2%. The annual inflation rate in Taiwan came down to 2.1% 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. Compared to other major economies in the world, China has a stable level of inflation, which has not had a significant impact on our sales or operating results. We do not believe that inflation had a material impact on our business, financial condition, or results of operations during the six months ended June 30, 2025. 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.