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Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File Number: 001-36083

Applied Optoelectronics, Inc.

(Exact name of registrant as specified in its charter)

Delaware

76-0533927

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

13139 Jess Pirtle Blvd.

Sugar Land, TX 77478

(Address of principal executive offices)

(281295-1800

(Registrant’s telephone number)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Trading Name of each exchange on which registered

Common Stock, Par value $0.001

AAOI

NASDAQ Global Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒    No ☐ 

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes ☒    No ☐ 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

Large accelerated filer

☐ 

Accelerated filer

 

Non-accelerated filer

☐ 

Smaller reporting company

 

 

  

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.                     ☐ 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).                                       Yes   No ☒

 

As of October 29, 2021 there were 27,297,647 shares of the registrant’s Common Stock outstanding.

 

 

 

 

Applied Optoelectronics, Inc.

Table of Contents

   

Page

Part I. Financial Information

   

 

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

3

   

 

 

Condensed Consolidated Balance Sheets as of September 30, 2021 (Unaudited) and December 31, 2020

3

   

 

 

Condensed Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2021 and 2020 (Unaudited)

4

   

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months ended September 30, 2021 and 2020 (Unaudited)

5

   

 

 

Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months ended September 30, 2021 and 2020 (Unaudited)

6

   

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2021 and 2020 (Unaudited)

7

   

 

 

Notes To Condensed Consolidated Financial Statements (Unaudited)

8

   

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

   

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

32

   

 

Item 4.

Controls and Procedures

32

   

 

Part II. Other Information

Item 1.

Legal Proceedings

33

Item 1A.

Risk Factors

33

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

33

Item 3.

Defaults Upon Senior Securities

33

Item 4.

Mine Safety Disclosures

33

Item 5.

Other Information

33

Item 6.

Exhibits

33

 

Signatures

35

 

2

 

 

Part I. Financial Information

Item 1. Condensed Consolidated Financial Statements

Applied Optoelectronics, Inc. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands)

  

September 30,

  

December 31,

 

 

2021

  

2020

 

ASSETS

 

  

 

Current Assets

 

  

 

Cash and cash equivalents

 $43,534  $43,425 

Restricted cash

  5,363   6,689 

Accounts receivable - trade, net of allowance of $62 and $62, respectively

  43,942   43,042 

Notes receivable

  8,505   401 

Inventories

  94,507   110,397 

Prepaid income tax

  2   2 

Prepaid expenses and other current assets

  4,717   5,213 

Total current assets

  200,570   209,169 

Property, plant and equipment, net

  242,452   252,984 

Land use rights, net

  5,790   5,854 

Operating right of use asset

  7,277   7,729 

Financing right of use asset

  65   88 

Intangible assets, net

  3,877   3,999 

Other assets, net

  2,493   982 

TOTAL ASSETS

 $462,524  $480,805 

LIABILITIES AND STOCKHOLDERS' EQUITY

    

 

Current liabilities

 

    

Current portion of notes payable and long-term debt

 $41,254  $38,265 

Accounts payable

  28,333   29,482 

Bank acceptance payable

  6,481   15,860 

Current lease liability - operating

  1,045   1,012 

Current lease liability - financing

  18   18 

Accrued liabilities

  16,204   18,511 

Total current liabilities

  93,335   103,148 

Notes payable and long-term debt, less current portion

  19,271   13,904 

Convertible senior notes

  78,472   77,854 

Non-current lease liability - operating

  7,410   7,926 

Non-current lease liability - financing

  68   82 

TOTAL LIABILITIES

  198,556   202,914 

Stockholders' equity:

 

  

 

Preferred Stock; 5,000 shares authorized at $0.001 par value; no shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively

  -   - 

Common Stock; 45,000 shares authorized at $0.001 par value; 27,175 and 25,110 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively

  27   25 

Additional paid-in capital

  378,207   354,685 

Accumulated other comprehensive income

  13,865   11,690 

Accumulated deficit

  (128,131)  (88,509)

TOTAL STOCKHOLDERS' EQUITY

  263,968   277,891 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 $462,524  $480,805 

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

 

 

Applied Optoelectronics, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except share and per share data)

   

Three months ended September 30,

   

Nine months ended September 30,

 

 

2021

   

2020

   

2021

   

2020

 

Revenue, net

  $ 53,267     $ 76,608     $ 157,157     $ 182,298  

Cost of goods sold

    45,143       57,418       127,537       143,034  

Gross profit

    8,124       19,190       29,620       39,264  

Operating expenses

 

   

   

   

 

Research and development

    10,149       11,206       31,990       32,567  

Sales and marketing

    2,783       4,491       8,576       10,858  

General and administrative

    10,645       10,272       32,195       31,520  

Total operating expenses

    23,577       25,969       72,761       74,945  

Loss from operations

    (15,453 )     (6,779 )     (43,141 )     (35,681 )

Other income (expense)

 

   

   

   

 

Interest income

    17       26       49       220  

Interest expense

    (1,359 )     (1,480 )     (4,158 )     (4,424 )

Other income (expense), net

    998       866       7,628       2,096  

Total other income (expense), net

    (344 )     (588 )     3,519       (2,108 )

Loss before income taxes

    (15,797 )     (7,367 )     (39,622 )     (37,789 )

Income tax expense

    -       (2,249 )     -       (7,224 )

Net loss

  $ (15,797 )   $ (9,616 )   $ (39,622 )   $ (45,013 )

Net loss per share

 

   

   

   

 

Basic

  $ (0.58 )   $ (0.42 )   $ (1.48 )   $ (2.12 )

Diluted

  $ (0.58 )   $ (0.42 )   $ (1.48 )   $ (2.12 )

 

   

   

   

 

Weighted average shares used to compute net loss per share:

 

   

   

   

 

Basic

    27,097,372       22,744,361       26,791,415       21,275,778  

Diluted

    27,097,372       22,744,361       26,791,415       21,275,778  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

 

 

Applied Optoelectronics, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited, in thousands)

 

Three months ended September 30,

   

Nine months ended September 30,

 

 

2021

   

2020

   

2021

   

2020

 

Net loss

  $ (15,797 )   $ (9,616 )   $ (39,622 )   $ (45,013 )

Gain/ (Loss) on foreign currency translation adjustment

    (421 )     5,696       2,175       4,748  

Comprehensive loss

  $ (16,218 )   $ (3,920 )   $ (37,447 )   $ (40,265 )

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5

 

 

Applied Optoelectronics, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Three and Nine Months ended September 30, 2021 and 2020

(Unaudited, in thousands)

                                  Accumulated              

 

Preferred Stock

   

Common Stock

   

Additional

   

other

   

   

 

 

Number

   

   

Number

   

   

paid-in

   

comprehensive

   

Accumulated

   

Stockholders'

 

 

of shares

   

Amount

   

of shares

   

Amount

   

capital

   

gain (loss)

   

deficit

   

equity

 

June 30, 2021

        $       26,919     $ 27     $ 375,312     $ 14,286     $ (112,334 )   $ 277,291  

Public offering of common stock, net

                7             1                   1  

Issuance of restricted stock, net of shares withheld for employee tax

                249             (236 )                 (236 )

Share-based compensation

                            3,130                   3,130  

Foreign currency translation adjustment

                                  (421 )           (421 )

Net loss

                                        (15,797 )     (15,797 )

September 30, 2021

        $       27,175     $ 27     $ 378,207     $ 13,865     $ (128,131 )   $ 263,968  

   

   

   

   

   

   

Accumulated

   

   

 

 

Preferred Stock

   

Common Stock

   

Additional

   

other

   

   

 

 

Number

   

   

Number

   

   

paid-in

   

comprehensive

   

Accumulated

   

Stockholders'

 

 

of shares

   

Amount

   

of shares

   

Amount

   

capital

   

gain (loss)

   

deficit

   

equity

 

June 30, 2020

        $       21,940     $ 22     $ 323,405     $ (518 )   $ (65,454 )   $ 257,455  

Public offering of common stock, net

                780       1       8,702                   8,703  

Stock options exercised, net of shares withheld for employee tax

                2             11                   11  

Issuance of restricted stock, net of shares withheld for employee tax

                165             (348 )                 (348 )

Share-based compensation

                            3,265                   3,265  

Foreign currency translation adjustment

                                  5,696             5,696  

Net loss

                                        (9,616 )     (9,616 )

September 30, 2021

        $       22,887     $ 23     $ 335,035     $ 5,178     $ (75,070 )   $ 265,166  

 

   

   

   

   

   

   

Accumulated

   

   

 

 

Preferred Stock

   

Common Stock

   

Additional

   

other

   

   

 

 

Number

   

   

Number

   

   

paid-in

   

comprehensive

   

Accumulated

   

Stockholders'

 

 

of shares

   

Amount

   

of shares

   

Amount

   

capital

   

gain (loss)

   

deficit

   

equity

 

January 1, 2021

        $       25,110     $ 25     $ 354,685     $ 11,690     $ (88,509 )   $ 277,891  

Public offering of common stock, net

                1,553       2       15,229                   15,231  

Stock options exercised, net of shares withheld for employee tax

                2             8                   8  

Issuance of restricted stock, net of shares withheld for employee tax

                510             (637 )                 (637 )

Share-based compensation

                            8,922                   8,922  

Foreign currency translation adjustment

                                  2,175             2,175  

Net loss

                                        (39,622 )     (39,622 )

September 30, 2020

        $       27,175     $ 27     $ 378,207     $ 13,865     $ (128,131 )   $ 263,968  

 

   

   

   

   

   

   

Accumulated

   

   

 

 

Preferred Stock

   

Common Stock

   

Additional

   

other

   

   

 

 

Number

   

   

Number

   

   

paid-in

   

comprehensive

   

Retained

   

Stockholders'

 

 

of shares

   

Amount

   

of shares

   

Amount

   

capital

   

gain (loss)

   

earnings

   

equity

 

January 1, 2020

        $       20,140     $ 20     $ 303,401     $ 430     $ (30,057 )   $ 273,794  

Public offering of common stock, net

                2,362       2       22,629                   22,631  

Stock options exercised, net of shares withheld for employee tax

                2             14                   14  

Issuance of restricted stock, net of shares withheld for employee tax

                383       1       (813 )                 (812 )

Share-based compensation

                            9,804                   9,804  

Foreign currency translation adjustment

                                  4,748             4,748  

Net loss

                                        (45,013 )     (45,013 )

September 30, 2020

        $       22,887     $ 23     $ 335,035     $ 5,178     $ (75,070 )   $ 265,166  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

6

 

 

Applied Optoelectronics, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

   

Nine months ended September 30,

 

 

2021

   

2020

 

Operating activities:

 

   

 

Net loss

  $ (39,622 )   $ (45,013 )

Adjustments to reconcile net loss to net cash used in operating activities:

 

   

 

Lower of cost or market reserve adjustment to inventory

    3,335       3,340  

Depreciation and amortization

    19,188       18,350  

Amortization of debt issuance costs

    650       673  

Deferred income taxes, net

    -       7,358  

Loss on disposal of assets

    3       15  

Share-based compensation

    8,922       9,804  

Interest for extinguishment of debt

    (70 )     -  

Extinguishment of debt

    (6,229 )     -  

Unrealized foreign exchange gain

    1,021       (323 )

Changes in operating assets and liabilities:

           

Accounts receivable, trade

    (900 )     (16,799 )

Notes receivable

    (8,102 )     3  

Prepaid income tax

    -       13  

Inventories

    13,551       (27,303 )

Other current assets

    448       (2,692 )

Operating right of use asset

    609       189  

Accounts payable

    (1,149 )     23,306  

Accrued liabilities

    (2,372 )     (620 )

Lease liability

    (666 )     (206 )

Net cash used in operating activities

    (11,383 )     (29,905 )

Investing activities:

 

   

 

Purchase of property, plant and equipment

    (5,555 )     (12,132 )

Proceeds from disposal of equipment

    111       166  

Deposits for equipment

    (2,141 )     (2,733 )

Purchase of intangible assets

    (324 )     (376 )

Net cash used in investing activities

    (7,909 )     (15,075 )

Financing activities:

 

   

 

Proceeds from issuance of notes payable and long-term debt, net of debt issuance costs

    -       6,229  

Principal payments of long-term debt and notes payable

    (3,276 )     (4,066 )

Proceeds from line of credit borrowings

    103,925       73,700  

Repayments of line of credit borrowings

    (86,922 )     (67,430 )

Proceeds from bank acceptance payable

    16,702       26,341  

Repayments of bank acceptance payable

    (26,150 )     (19,598 )

Proceeds from issuance of convertible senior notes, net of debt issuance costs

    -       (18 )

Principal payments of financing lease

    (13 )     (13 )

Exercise of stock options

    8       14  

Payments of tax withholding on behalf of employees related to share-based compensation

    (696 )     (813 )

Proceeds from common stock offering, net

    15,397       22,632  

Net cash provided by financing activities

    18,975       36,978  

Effect of exchange rate changes on cash

    (900 )     (958 )

Net decrease in cash, cash equivalents and restricted cash

    (1,217 )     (8,960 )

Cash, cash equivalents and restricted cash at beginning of period

    50,114       67,028  

Cash, cash equivalents and restricted cash at end of period

  $ 48,897     $ 58,068  

Supplemental disclosure of cash flow information:

         

Cash paid (received) for:

         

Interest, net of amounts capitalized

  $ 4,691     $ 4,739  

Income taxes

    1       (192 )

Non-cash investing and financing activities:

       

 

Extinguishment of Debt and interest

    (6,299 )      

Purchase of property and equipment with line of credit borrowings

          941  

Net change in accounts payable related to property and equipment additions

    (4,147 )     1,173  

Net change in deposits and prepaid for equipment related to property and equipment additions

    83       36  

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

7

 

Applied Optoelectronics, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1.   Description of Business​

Business Overview

Applied Optoelectronics, Inc. (“AOI” or the “Company”) is a Delaware corporation. The Company is a leading, vertically integrated provider of fiber-optic networking products, primarily for four networking end-markets: internet data center, cable television ("CATV"), telecommunications ("telecom") and fiber-to-the-home ("FTTH"). The Company designs and manufactures a wide range of optical communications products at varying levels of integration, from components, subassemblies and modules to complete turn-key equipment.

The Company has manufacturing and research and development facilities located in the U.S., Taiwan and China. In the U.S., at its corporate headquarters and manufacturing facilities in Sugar Land, Texas, the Company primarily manufactures lasers and laser components and performs research and development activities for laser component and optical module products. In addition, the Company also has a research and development facility in Duluth, Georgia. The Company operates in Taipei, Taiwan and Ningbo, China through its wholly-owned subsidiary Prime World International Holdings, Ltd. (“Prime World”, incorporated in the British Virgin Islands). Prime World operates a branch in Taipei, Taiwan, which primarily manufactures transceivers and performs research and development activities for the transceiver products. Prime World is also the parent of Global Technology, Inc. (“Global”, incorporated in the People’s Republic of China). Through Global, the Company primarily manufactures certain of its data center transceiver products, including subassemblies, as well as CATV systems and equipment, and performs research and development activities for the CATV products.

Interim Financial Statements

The unaudited condensed consolidated financial statements of the Company as of September 30, 2021 and December 31, 2020 and for the three and nine months ended September 30, 2021 and September 30, 2020, have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim information and with the instructions on Form 10-Q and Rule 10-01 of Regulation S-X pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In accordance with those rules and regulations, the Company has omitted certain information and notes required by GAAP for annual consolidated financial statements. In the opinion of management, the condensed consolidated financial statements contain all adjustments, except as otherwise noted, necessary for the fair presentation of the Company’s financial position and results of operations for the periods presented. The year-end condensed balance sheet data was derived from audited financial statements. These condensed consolidated financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report on Form 10-K (“Annual Report”) for the fiscal year ended December 31, 2020. The results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of the results expected for the entire fiscal year. All significant inter-company accounts and transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported. Actual results could differ from those estimates in the consolidated financial statements and accompanying notes. Significant estimates and assumptions that impact these financial statements and the accompanying notes relate to, among other things, allowance for credit losses, inventory reserve, product warranty costs, share-based compensation expense, estimated useful lives of property and equipment, and taxes.

8

 
 

Note 2.  Significant Accounting Policies

There have been no changes in the Company’s significant accounting policies for the three and nine months ended September 30, 2021, as compared to the significant accounting policies described in its 2020 Annual Report, except as described below.

Recent Accounting Pronouncements

Recent Accounting Pronouncements Yet to be Adopted

 

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting”, which provides temporary optional expedients and exceptions to the GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. ASU 2020-04 was further amended in January 2021 by ASU 2021-01, which clarified the applicability of certain provisions. Both ASU 2020-04 and AUC 2021-01 are currently effective prospectively for all entities through December 31, 2022 when the reference rate replacement activity is expected to have completed. The guidance in ASU 2020-04 and AUC 2021-01 is optional and may be elected over time as reference rate reform activities occur. The Company continues to evaluate the impact of the guidance and may apply other selections as applicable as additional changes in the market occur. The Company does not expect the ASU to have a material impact on the consolidated financial statement on a prospective basis. 

 

In August 2020, the FASB issued ASU 2020-06, “Debt - Debt with Conversion and Other Options (Subtopic 470-20)” and “Derivatives and Hedging - Contracts in Entities Own Equity” (Subtopic 815-40). This ASU simplifies accounting for convertible instruments by eliminating two of the three models in ASC 470-20 that requires separating embedded conversion features from convertible instruments. The guidance is effective for fiscal years beginning after December 15, 2021. The Company does not expect the ASU to have a material impact on the consolidated financial statement.

 

In November 2020, the SEC issued a new rule that modernizes and simplifies various aspects and financial disclosure requirements in Regulation S-K, specifically related to Item 301 “Selected Financial Data”, Item 302 “Supplementary Financial Information” and Item 303 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”). The intent of this new rule is to (i) eliminate duplicative disclosures, (ii) enhance and promote more principles-based MD&A disclosures with the objective of making them more meaningful for investors, all while (iii) simplifying the compliance requirements and efforts for registrants, by providing them with the flexibility to present management’s perspective on the registrant’s financial condition and results of operations. While most of the changes involve reducing or eliminating previously required information and disclosures, the rule does expand the disclosure requirements surrounding certain aspects of the various items in Regulation S-K discussed above. The final rule was published in the Federal Register on January 11, 2021, is effective thirty days after its publication date, or February 10, 2021, and registrants are required to comply with this final rule in the registrant’s first fiscal year ending on or after the date that is 210 days after the publication date. The Company plans to comply with the new disclosure requirements on schedule and currently does not anticipate any material financial impact in complying with these new requirements.

 

 

Note 3.  Revenue Recognition

Disaggregation of Revenue

Revenue is classified based on the location where the product is manufactured. For additional information on the disaggregated revenues by geographical region, see Note 17, "Geographic Information.”

9

 

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

   

Three months ended September 30,

 

         

% of

           

% of

 

 

2021

   

Revenue

   

2020

   

Revenue

 

Data Center

  $ 23,929       44.9 %   $ 55,336       72.2 %

CATV

    23,101       43.4 %     11,642       15.2 %

Telecom

    5,148       9.7 %     8,870       11.6 %

FTTH

    62       0.1 %     67       0.1 %

Other

    1,027       1.9 %     693       0.9 %

Total Revenue

  $ 53,267       100.0 %   $ 76,608       100.0 %

   

Nine months ended September 30,

 

         

% of

           

% of

 

 

2021

   

Revenue

   

2020

   

Revenue

 

Data Center

  $ 72,259       46.0 %   $ 141,133       77.4 %

CATV

    69,339       44.1 %     22,007       12.1 %

Telecom

    12,959       8.2 %     17,600       9.7 %

FTTH

    784       0.5 %     69       0.0 %

Other

    1,816       1.2 %     1,489       0.8 %

Total Revenue

  $ 157,157       100.0 %   $ 182,298       100.0 %

 

 

Note 4.  Leases

The Company leases space under non-cancellable operating leases for manufacturing facilities, research and development offices and certain storage facilities and apartments. These leases do not contain contingent rent provisions. The Company also leases certain machinery, office equipment and a vehicle. Many of its leases include both lease (e.g. fixed payments including rent, taxes, and insurance costs) and non-lease components (e.g. common-area or other maintenance costs) which are accounted for as a single lease component as the Company has elected the practical expedient to group lease and non-lease components for all leases. Several of the leases include one or more options to renew which have been assessed and either included or excluded from the calculation of the lease liability of the right of use ("ROU") asset based on management’s intentions and individual fact patterns. Several warehouses and apartments have non-cancellable lease terms of less than one-year and therefore, the Company has elected the practical expedient to exclude these short-term leases from its ROU asset and lease liabilities.

As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. Based on the applicable lease terms and current economic environment, the Company applies a location approach for determining the incremental borrowing rate.

The components of lease expense were as follows for the periods indicated (in thousands):

 

   

Three months ended September 30,

   

Nine months ended September 30,

 

 

2021

   

2020

   

2021

   

2020

 

Operating lease expense

  $ 311     $ 299     $ 922     $ 890  

Financing lease expense

    8       8       24       24  

Short Term lease expense

    4       35       17       104  

Total lease expense

  $ 323     $ 342     $ 963     $ 1,018  

 

10

 

Maturities of lease liabilities are as follows for the future one-year periods ending  September 30, 2021 (in thousands):

      Operating       Financing  

2022

  $ 1,300     $ 22  

2023

    1,311       22  

2024

    1,249       49  

2025

    1,244        

2026

    1,209        

2027 and thereafter

    3,197        

Total lease payments

  $ 9,510     $ 93  

Less imputed interest

    (1,055 )     (7 )

Present value

  $ 8,455     $ 86  

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

   

Nine months ended September 30,

 

 

2021

   

2020

 

Weighted Average Remaining Lease Term (Years) - operating leases

    7.38       8.41  

Weighted Average Remaining Lease Term (Years) - financing leases

    2.33       3.08  

Weighted Average Discount Rate - operating leases

    3.23 %     3.23 %

Weighted Average Discount Rate - financing leases

    5.00 %     5.00 %

 

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

 

   

Nine months ended September 30,

 

 

2021

   

2020

 

Cash paid for amounts included in the measurement of lease liabilities

 

   

 

Operating cash flows from operating leases

    980       983  

Operating cash flows from financing lease

    4       4  

Financing cash flows from financing lease

    13       13  

Right-of-use assets obtained in exchange for new operating lease liabilities

    121       699  

 

Note 5.  Cash, Cash Equivalents and Restricted Cash

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the statement of financial position that sum to the total of the same such amounts in the statement of cash flows (in thousands):

 

  

September 30,

  

December 31,

 

 

2021

  

2020

 

Cash and cash equivalents

 $43,534  $43,425 

Restricted cash

  5,363   6,689 

Total cash, cash equivalents and restricted cash shown in the statement of cash flows

 $48,897  $50,114 

Restricted cash includes guarantee deposits for customs duties, China government subsidy fund, and compensating balances required for certain credit facilities. As of September 30, 2021 and December 31, 2020, there was $2.3 million and $4.9 million of restricted cash required for bank acceptance notes issued to vendors, respectively. In addition, there was $2.0 million and $0.5 million certificate of deposit associated with credit facilities with a bank in China as of September 30, 2021 and December 31, 2020, respectively. There was $1.0 million guarantee deposits for customs duties as of  September 30, 2021 and December 31, 2020.

11

 
 

Note 6.  Earnings (Loss) Per Share

Basic net loss per share has been computed using the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share has been computed using the weighted-average number of shares of common stock and dilutive potential common shares from stock options, restricted stock units and senior convertible notes outstanding during the period. In periods with net losses, normally dilutive shares become anti-dilutive. Therefore, basic and diluted loss per share are the same.

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

   

Three months ended September 30,

   

Nine months ended September 30,

 

 

2021

   

2020

   

2021

   

2020

 

Numerator:

 

   

   

   

 

Net loss

  $ (15,797 )   $ (9,616 )   $ (39,622 )   $ (45,013 )

Denominator:

 

   

   

   

 

Weighted average shares used to compute net loss per share

 

   

   

   

 

Basic

    27,097       22,744       26,791       21,276  

Diluted

    27,097       22,744       26,791       21,276  

Net loss per share

 

   

   

   

 

Basic

  $ (0.58 )   $ (0.42 )   $ (1.48 )   $ (2.12 )

Diluted

  $ (0.58 )   $ (0.42 )   $ (1.48 )   $ (2.12 )

 

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

   

Three months ended September 30,

   

Nine months ended September 30,

 

 

2021

   

2020

   

2021

   

2020

 

Employee stock options

    1       51       3       27  

Restricted stock units

    2       113       6       9  

Shares for convertible senior notes

    4,587       4,587       4,587       4,587  

Total antidilutive shares

    4,590       4,751       4,596       4,623  

 

Note 7.  Inventories

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

 

September 30, 2021

  

December 31, 2020

 

Raw materials

 $31,157  $25,555 

Work in process and sub-assemblies

  42,242   52,544 

Finished goods

  21,108   32,298 

Total inventories

 $94,507  $110,397 

The lower of cost or market adjustment expensed for inventory for the three months ended September 30, 2021 and 2020 was $1.1 million and $0.4 million, respectively. The lower of cost or market adjustment expensed for inventory for the nine months ended September 30, 2021 and 2020 was each $3.3 million. 

 

For the three months ended September 30, 2021 and 2020, the direct inventory write-offs related to scrap, discontinued products, and damaged inventories were $4.2 million and $8.4 million, respectively. For the nine months ended September 30, 2021 and 2020, the direct inventory write-offs related to scrap, discontinued products, and damaged inventories were $15.0 million and $14.7 million, respectively. 

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Note 8.  Property, Plant & Equipment

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

 

September 30, 2021

  

December 31, 2020

 

Land improvements

 $806  $806 

Building and improvements

  89,061   88,280 

Machinery and equipment

  261,041   253,738 

Furniture and fixtures

  5,617   5,540 

Computer equipment and software

  12,612   11,912 

Transportation equipment

  709   699 

  369,846   360,975 

Less accumulated depreciation and amortization

  (161,307)  (142,434)

  208,539   218,541 

Construction in progress

  32,812   33,342 

Land

  1,101   1,101 

Total property, plant and equipment, net

 $242,452  $252,984 

For the three months ended September 30, 2021 and 2020, the depreciation expense of property, plant and equipment was $6.2 million and $6.1 million, respectively. For the nine months ended September 30, 2021 and 2020, the depreciation expense of property, plant and equipment was $18.7 million and $17.9 million, respectively. For the three months ended September 30, 2021 and 2020, the capitalized interest was $0.3 million and 0.1 million, respectively. For the nine months ended September 30, 2021 and 2020, the capitalized interest was $0.6 million and $0.3 million, respectively.

 

As of September 30, 2021, the Company concluded that its continued loss history constitutes a triggering event as described in ASC 360-10-35-21,Property, Plant, and Equipment.  The Company performed a recoverability test and concluded that future undiscounted cash flows exceed the carrying amount of the Company’s long-lived assets and therefore no impairment charge was recorded. 

 

 

Note 9.  Intangible Assets, net

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

  

September 30, 2021

 

 

Gross

  

Accumulated

  

Intangible

 

 

Amount

  

amortization

  

assets, net

 

Patents

 $8,494  $(4,626) $3,868 

Trademarks

  25   (16)  9 

Total intangible assets

 $8,519  $(4,642) $3,877 

  

December 31, 2020

 

 

Gross

  

Accumulated

  

Intangible

 

 

Amount

  

amortization

  

assets, net

 

Patents

 $8,158  $(4,165) $3,993 

Trademarks

  21   (15)  6 

Total intangible assets

 $8,179  $(4,180) $3,999 

For the three months ended September 30, 2021 and 2020, amortization expense for intangible assets, included in general and administrative expenses on the income statement, was each $0.1 million. For the nine months ended September 30, 2021 and 2020, amortization expense for intangible assets, included in general and administrative expenses on the income statement, was $0.5 million and $0.4 million, respectively. The remaining weighted average amortization period for intangible assets is approximately 7 years.

 

At September 30, 2021, future amortization expense for intangible assets is estimated to be (in thousands):

 

2022

 $584 

2023

  584 

2024

  584 

2025

  584 

2026

  584 

thereafter

  957 
  $3,877 

 

13

 
 

Note 10.  Fair Value of Financial Instruments​

The following table represents a summary of the Company’s financial instruments measured at fair value on a recurring basis for the periods indicated (in thousands):

   

As of September 30, 2021

   

As of December 31, 2020

 

 

(Level 1)

   

(Level 2)

   

(Level 3)

   

Total

   

(Level 1)

   

(Level 2)

   

(Level 3)

   

Total

 

Assets:

 

   

   

   

   

   

   

   

 

Cash and cash equivalents

  $ 43,534     $     $     $ 43,534     $ 43,425     $     $     $ 43,425  

Restricted cash

    5,363                 $ 5,363       6,689                 $ 6,689  

Note receivable

          8,505             8,505       -       401             401  

Total assets

  $ 48,897     $ 8,505     $     $ 57,402     $ 50,114     $ 401     $     $ 50,515  

Liabilities:

 

   

   

   

   

   

   

   

 

Bank acceptance payable

  $     $ 6,481     $     $