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As filed with the Securities and Exchange Commission on September 20, 2013

Registration Statement No. 333-190591

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



Amendment No. 3 to
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933



Applied Optoelectronics, Inc.
(Exact Name of Registrant as Specified in Its Charter)

Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
  3674
(Primary Standard Industrial
Classification Code Number)
  76-0533927
(I.R.S. Employer
Identification Number)



13115 Jess Pirtle Blvd.
Sugar Land, TX 77478
(281) 295-1800
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices)

Chih-Hsiang (Thompson) Lin
President and Chief Executive Officer
13115 Jess Pirtle Blvd.
Sugar Land, TX 77478
(281) 295-1800
(Name, Address Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)



Copies of All Communications to:

Frank S. Wu, Esq.
Philip Russell, Esq.
DLA Piper LLP (US)
1000 Louisiana Street
Suite 2800
Houston, TX 77002
(713) 425-8400
  David C. Kuo, Esq.
General Counsel
Applied Optoelectronics, Inc.
13115 Jess Pirtle Blvd.
Sugar Land, TX 77478
(281) 295-1800
  J. Robert Suffoletta, Esq.
Wilson Sonsini Goodrich & Rosati, PC
900 South Capital of Texas Highway
Las Cimas IV, Fifth Floor
Austin, TX 78746
(512) 338-5400



  Approximate date of commencement of proposed
sale to the public:
  As soon as practicable after this Registration
Statement becomes effective.

         If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. o

         If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

         If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

         If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

         Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o   Accelerated filer o   Non-accelerated filer ý
(Do not check if a smaller reporting company)
  Smaller reporting company o



         The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to Section 8(a), may determine.

   


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

Subject to Completion, Dated September 20, 2013

PRELIMINARY PROSPECTUS

3,600,000 shares

GRAPHIC

Common stock



        This is our initial public offering of common stock. We are offering 3,600,000 shares. In addition, the selling stockholders identified in this prospectus have granted the underwriters an option for a period of 30 days to purchase up to 540,000 additional shares of common stock to cover over-allotments. We will not receive any of the proceeds from the sale of the shares being sold by the selling stockholders. Prior to this offering, no public market has existed for our common stock. We currently estimate that the initial public offering price will be between $13.00 and $15.00 per share. Our common stock has been approved for listing on the NASDAQ Global Market under the symbol "AAOI."

Investing in our common stock involves a high degree of risk. See "Risk Factors" beginning on page 13.



 
  Per share   Total  

Initial public offering price

  $     $    

Underwriting discounts and commissions(1)

  $     $    

Proceeds to us, before expenses

  $     $    

        We have agreed to reimburse the underwriters for certain expenses. See the section titled "Underwriting."



        We are an "emerging growth company" as defined under the federal securities laws and, as such, have elected to comply with certain reduced public company reporting requirements.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed on the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

        The underwriters expect to deliver the shares of common stock to purchasers on or about                         , 2013.



RAYMOND JAMES   PIPER JAFFRAY



COWEN AND COMPANY   ROTH CAPITAL PARTNERS

The date of this prospectus is                          , 2013


GRAPHIC


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TABLE OF CONTENTS

 
  Page  

THE OFFERING

    7  

SUMMARY CONSOLIDATED FINANCIAL DATA

    9  

RISK FACTORS

    13  

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

    38  

USE OF PROCEEDS

    39  

DIVIDEND POLICY

    39  

CAPITALIZATION

    40  

DILUTION

    43  

SELECTED CONSOLIDATED FINANCIAL DATA

    45  

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

    47  

BUSINESS

    81  

MANAGEMENT

    100  

EXECUTIVE COMPENSATION

    110  

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

    121  

PRINCIPAL AND SELLING STOCKHOLDERS

    125  

DESCRIPTION OF CAPITAL STOCK

    130  

SHARES ELIGIBLE FOR FUTURE SALE

    136  

MATERIAL U.S. FEDERAL TAX CONSIDERATIONS FOR NON-U.S. HOLDERS

    139  

UNDERWRITING

    143  

LEGAL MATTERS

    151  

EXPERTS

    151  

WHERE YOU CAN FIND MORE INFORMATION

    151  



        You should rely only on the information contained in this prospectus and any free writing prospectus prepared by or on behalf of us in connection with this offering. We have not, the selling stockholders have not and the underwriters have not, authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, the selling stockholders are not and the underwriters are not, making an offer to sell these securities in any jurisdiction where an offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate as of the date on the front cover of this prospectus only. Our business, financial condition, results of operations and prospects may have changed since that date.



        Until                      , 2013 (25 days after the commencement of this offering), all dealers that buy, sell or trade shares of our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

        No action is being taken in any jurisdiction outside the United States of America, or U.S., to permit a public offering of the common stock or possession or distribution of this prospectus in that jurisdiction. Persons who come into possession of this prospectus in jurisdictions

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outside the U.S. are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus applicable to that jurisdiction.



        "Applied Optoelectronics, Inc.," "AOI" and our logo are registered trademarks of Applied Optoelectronics, Inc. This prospectus contains additional trade names, trademarks and service marks of ours and of other companies.



        Unless the context otherwise requires, we use the terms "AOI," "we," "us" and "our" in this prospectus to refer to Applied Optoelectronics, Inc. and its subsidiaries.

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PROSPECTUS SUMMARY

        This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our common stock, you should carefully read this entire prospectus, including our consolidated financial statements and the related notes thereto and the information set forth under the sections "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," in each case appearing elsewhere in this prospectus.

Overview

        We are a leading, vertically integrated provider of fiber-optic networking products, primarily for three networking end-markets: cable television, or CATV, fiber-to-the-home, or FTTH, and internet data centers. 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 all three of our target markets, which increasingly demand faster connectivity and innovation.

        The three end markets we target are all driven by significant bandwidth demand fueled by the growth of network-connected devices, video traffic, cloud computing and online social networking. To address this increased bandwidth demand, CATV and telecommunications service providers are competing directly against each other by providing bundles of voice, video and data services to their subscribers and investing to enhance the capacity, reliability and capability of their networks. The trend of rising bandwidth consumption also impacts the internet data center market, as reflected in the shift to higher speed server connections. As a result of these trends, fiber-optic networking technology is becoming essential in all three of our target markets, as it is often the only economic way to deliver the desired bandwidth.

        The CATV market is our largest and most established market, for which we supply a broad array of products including lasers, transmitters and turn-key equipment. In 2012, we were the leading provider of optical components and the second largest provider of subsystems to the CATV industry, according to research firm Ovum Limited, or Ovum. Sales of headend, node and distribution equipment have contributed significantly to our growth in recent years as a result of our ability to meet the needs of CATV equipment vendors who have begun to outsource both the design and manufacture of this equipment. While equipment vendors have relied upon third parties to assemble portions of their products, within the past four years certain of our customers have accelerated the outsourcing of both the design and manufacturing of both headend equipment and node equipment to third parties. The shift is due in part to the sophisticated engineering expertise needed to perform this work. We believe that our extensive high-speed optical, mixed-signal semiconductor and mechanical engineering capabilities position us well to benefit from these industry dynamics.

        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. We design, manufacture and integrate our own analog and digital lasers using a proprietary Molecular Beam Epitaxy, or MBE, fabrication process, which we believe is unique in our industry. We manufacture the majority of the laser chips and optical

 

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components that are used in our products. The lasers we manufacture are proven to be reliable over time and highly tolerant of changes in temperature and humidity, making them well-suited to the CATV and FTTH markets where networking equipment is often installed outdoors.

        In 2012, our revenue was $63.4 million and our gross margin was 29.8%. For the six month period ended June 30, 2013, our revenue was $33.9 million and our gross margin was 29.6%. We have grown our annual revenue at a CAGR of 36.4% between 2009 and 2012. In the years ended December 31, 2010, 2011 and 2012, and in the six-month periods ended June 30, 2012 and 2013, we incurred losses of $3.4 million, $5.3 million, $0.9 million, $0.6 million and $1.3 million, respectively, and our accumulated deficit at December 31, 2012 and June 30, 2013 was $81.9 million and $83.2 million, respectively. Our key customers in the CATV market include Cisco Systems and Biogenomics Corp., a distributor. In 2010, 2011 and 2012, Cisco Systems accounted for 18.9%, 26.8% and 33.2%, respectively, of our revenue and Biogenomics Corp. accounted for 13.8%, 11.7% and 11.2%, respectively, of our revenue.

Industry Background

        Our three target markets of CATV, FTTH and internet data centers share a common trend of a significant growth in bandwidth consumption, and the corresponding need for network infrastructure improvement to support it.

        The prevailing themes in our target markets include:

    Trends in the CATV Market.  In recent years, CATV service providers have invested extensively to support high speed, two-way communications, and we expect that they will continue to do so, particularly in countries with less developed CATV networks, such as China.


    While equipment vendors have historically only relied upon third parties to assemble portions of their products, within the past four years certain of our customers have accelerated the outsourcing of both the design and manufacturing of both headend equipment and node equipment to third parties. The shift is due in part to the sophisticated engineering expertise needed to perform this work.

    Trends in the FTTH Market.  The FTTH market generally refers to the Passive Optical Networks, or PONs, that telecommunications service providers are deploying. The most commonly deployed PON technology is Gigabit PON, or GPON, which delivers up to 2.5 gigabits per second of data, but due to the splitting of the bandwidth among multiple users, the actual bandwidth delivered to an individual subscriber is far less than 2.5 gigabits per second. One approach that does support true 1 gigabit per second service to the home is wavelength division multiplexing PON, or WDM-PON, a technology that enables the transmission of multiple wavelengths of data over a single fiber-optic strand.

    Trends in the Internet Data Center Market.  To support the substantial increase in bandwidth consumption, internet data center operators are increasing the scale of their internet data centers and accelerating data transmission rates. As a result, there is an ongoing transition from the use of copper cable to optical fiber as a transport medium. In recent years, a number of leading Internet companies have begun to adopt more open internet data center architectures, using a mix of systems and components from a variety of vendors, and in some cases designing their own equipment. For these companies, compatibility of new networking equipment with legacy infrastructure is not as important, and as a consequence, these companies are more willing to work with

 

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      non-traditional equipment vendors, which creates an open and growing opportunity for optical device vendors.

        We experience certain challenges within our target markets, including continuous pressure to innovate and deliver highly integrated products that perform reliably in harsh, demanding environments and to produce high-quality devices in large volumes.

Our Solutions

        By addressing the challenges in our target markets, we provide the following benefits to our customers:

    Enable customers to deliver innovative products.  We leverage our deep expertise in high-speed optical, mixed-signal semiconductor and mechanical engineering and our proprietary MBE laser fabrication process to deliver technologically advanced products to our customers.

    Enhance efficiency and cost effectiveness of our customers' supply chain.  We design and sell products at the level of integration desired by a customer, from components to turn-key equipment, providing our customers a dependable, cost-effective and simplified supply chain.

    Deliver high quality, reliable products in high volume.  As a vertically integrated supplier, we are able to monitor and maintain quality control throughout the production process, using our internally produced components where possible for our final products. With manufacturing facilities in the U.S., Taiwan and China, we can support high volume production and timely delivery for our customers around the world.

    Provide sophisticated design solutions to our customers.  We believe our in-house expertise in both analog and digital optical engineering enables us to design comprehensive solutions that meet many of the different network architectures and protocols used by our customers.

Our Strengths

        Our key competitive strengths include the following:

    Industry-leading position in the CATV market.  We are the leading provider of optical components and the second largest provider of subsystems to the CATV market, according to Ovum.

    Proprietary technological expertise and track record of innovation.  We continue to develop innovative products by leveraging our technological expertise, including our proprietary MBE laser fabrication process.

    Highly customized products.  Most of our products have some level of customization, making it more difficult for our customers to switch rapidly to another supplier. We believe this element of customization contributes to longer product lifecycles and more stable product pricing.

    Proven system design capabilities.  We have deep expertise and proven design capabilities in high-speed optical, mixed-signal semiconductor and mechanical

 

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      engineering, which we believe position us to take advantage of the continuing shift to outsourced design and manufacturing among CATV equipment vendors.

    Vertically integrated, geographically distributed manufacturing model.  Our vertically integrated design and manufacturing process encompasses various steps from laser design and fabrication to complete optical system design and assembly. Furthermore, we have geographically distributed our manufacturing by strategically locating our operations in the U.S., China and Taiwan to reduce development time and production costs, to better support our customers and to help protect our intellectual property.

Our Strategy

        We seek to be the leading global provider of optical components, modules and equipment for each of our three target markets, CATV, FTTH and internet data centers. Our strategy includes the following key elements:

    Extend our leadership in CATV networking.  We intend to maintain our position as the leading producer of optical components used in CATV networks, and to capture an increasing share of the CATV equipment market as the major equipment vendors continue to outsource the design and manufacturing of such products.

    Continue to penetrate FTTH and internet data center markets.  We believe our WDM-PON technology is a cost-effective solution for delivering substantially greater bandwidth to a residence. In the internet data center, we target internet data center operators who have adopted an open system architecture—one in which the optical connectivity solutions can be provided by a different vendor than the vendor which provides their servers and switches.

    Continue to invest in our capabilities and infrastructure.  We intend to continue to invest in new products, new technology and our production infrastructure and facilities to maintain and strengthen our competitive position.

    Selectively pursue other opportunities that leverage our existing expertise.  Our expertise in designing and manufacturing outdoor equipment for the CATV industry positions us well to pursue applications that are also characterized by having varying and demanding environments, including wireless and wireline telecom infrastructure, industrial robotics, aerospace and defense, and oil and gas exploration.

    Pursue complementary acquisition and strategic alliance opportunities.  We evaluate and selectively pursue acquisition opportunities or strategic alliances that we believe will enhance or complement our current product offerings, augment our technology roadmap, or diversify our revenue base.

Risk Factors

        Our business is subject to numerous risks and uncertainties, such as those highlighted in the "Risk Factors" section immediately following this prospectus summary, including:

    We are dependent on our key customers for a significant portion of our revenue and the loss of, or a significant reduction in orders from, any of our key customers would adversely impact our revenue and results of operations;

 

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    If our customers do not qualify our products for use on a timely basis, our results of operations may suffer;

    Customer demand is difficult to forecast accurately and, as a result, we may be unable to match production with customer demand;

    We are subject to the cyclical nature of the markets in which we compete and any future downturn will likely reduce demand for our products and revenue;

    If the CATV, FTTH and internet data center markets do not continue to develop as we expect, or if there is any downturn in these markets, our business would be materially adversely affected;

    If we encounter manufacturing problems, we may lose sales and damage our customer relationships;

    We must continually develop successful new products and enhance existing products, and if we fail to do so or if our release of new or enhanced products is delayed, our business may be harmed;

    Given the high fixed costs associated with our vertically integrated business, a reduction in demand for our products could materially adversely impact our gross profits and our results of operations;

    We face intense competition which could negatively impact our results of operations and market share; and

    We have substantial manufacturing assets in China, and in 2012 we derived approximately 29% of our revenue from sales in China.

 

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Corporate Information

        We were incorporated in the State of Texas in 1997. In March 2013, Applied Optoelectronics, Inc., a Texas corporation, converted into a Delaware corporation. Our principal executive offices are located at 13115 Jess Pirtle Blvd., Sugar Land, TX 77478, and our telephone number is (281) 295-1800. Our website address is www.ao-inc.com. Information contained on our website is not incorporated by reference into this prospectus, and you should not consider information contained on our website as part of this prospectus or in deciding whether to purchase shares of our common stock.

        We have registered the trademarks APPLIED OPTOELECTRONICS, INC., AOI and its respective logo with the U.S. Patent and Trademark Office. These marks are also registered in, or have applications for registration pending in, various foreign trademark offices. Other trademarks and trade names appearing in this prospectus are the property of their respective owners.

 

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THE OFFERING

Common stock offered by us

  3,600,000 Shares

Over-allotment option granted by selling stockholders

 

540,000 Shares

Total common stock to be outstanding after this offering

 

12,609,648 Shares

Use of proceeds

 

We estimate that the net proceeds of the sale of our common stock in this offering will be approximately $44.2 million, based on an assumed initial public offering price of $14.00 per share, which is the midpoint of the range listed on the cover page of this prospectus. We may use approximately $13.0 million of our net proceeds to repay outstanding indebtedness, which currently has interest rates ranging from 4.375% to 6.875% per annum and maturity dates ranging from September 2013 to November 2014, and we may use approximately $10.0 million to invest in capital expenditures. We intend to use the remaining net proceeds from this offering for working capital and other general corporate purposes. Our management will have broad discretion in the application of our net proceeds from this offering, and investors will be relying on management's judgment regarding the application of these net proceeds. See "Use of Proceeds."

NASDAQ Global Market Symbol

 

AAOI

        The number of shares of our common stock to be outstanding after this offering is based on 9,009,648 shares of our common stock outstanding as of June 30, 2013. This number of shares does not include:

    736,138 shares of common stock subject to outstanding options as of June 30, 2013, with a weighted average exercise price of $6.65327 per share;

    21,666 shares of Series F preferred stock issuable upon the exercise of outstanding warrants, with a weighted average exercise price of $11.5384 per share, which will automatically adjust upon the completion of this offering to be exercisable for 26,000 shares of common stock at a weighted average exercise price of $9.6152 per share;

    6,667 shares of Series G preferred stock issuable upon the exercise of outstanding warrants, with an exercise price of $10.50 per share, which will automatically adjust

 

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      upon the completion of this offering to be exercisable for 6,667 shares of common stock at $10.50 per share; and

    800,000 shares of common stock available for future sale or issuance under our 2013 Long-Term Incentive Plan and 297,729 shares of common stock available for future sale or issuance under our prior stock option plans.

        Unless otherwise indicated, this prospectus reflects and assumes the following:

    a 30-to-one reverse stock split with respect to our securities effected on August 20, 2013, including corresponding adjustments to the number of shares outstanding, the conversion price of our preferred stock, the number of shares of common stock into which our preferred stock is convertible, and the exercise price and number of shares subject to and issuable upon the exercise of our outstanding stock options and warrants;

    the automatic conversion of all of our outstanding shares of preferred stock into 8,708,895 shares of our common stock upon the closing of this offering;

    the automatic conversion of certain outstanding warrants to purchase shares of our preferred stock that, if not exercised prior to the completion of this offering, will automatically convert in the aggregate into 16,474 shares of common stock, based on the midpoint of the range on the front cover of this prospectus;

    the filing of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws immediately prior to the closing of this offering; and

    no exercise of the underwriters' over-allotment option.

 

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SUMMARY CONSOLIDATED FINANCIAL DATA

        The following tables summarize the consolidated financial and operating data for the periods indicated. This summary consolidated financial data should be read together with our consolidated financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this prospectus. The consolidated statements of operations data for the years ended December 31, 2010, 2011 and 2012 are derived from our consolidated financial statements appearing elsewhere in this prospectus. The consolidated statements of operations data for the six months ended June 30, 2012 and 2013 and the consolidated balance sheet data as of June 30, 2013 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of our future results. You should read the summary financial data presented below in conjunction with our consolidated financial statements and related notes and the sections of this prospectus titled "Selected Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations."

 
  Years ended December 31,   Six months
ended June 30,
 
 
  2010   2011   2012   2012   2013  
 
   
   
   
  (unaudited)
 
 
  (in thousands, except percentages, share and per share data)
 

Consolidated statements of operations data:

                               

Revenue

  $ 40,489   $ 47,840   $ 63,421   $ 28,144   $ 33,914  

Cost of goods sold (1)

    27,539     34,468     44,492     19,331     23,882  
                       

Gross profit

  $ 12,950   $ 13,372   $ 18,929   $ 8,813   $ 10,032  
                       

Gross margin

    32.0%     28.0%     29.8%     31.3%     29.6%  

Operating expenses:

                               

Research and development (1)            

    5,176     6,451     7,603     3,284     3,902  

Sales and marketing (1)

    1,993     2,412     3,135     1,614     1,959  

General and administrative (1)            

    8,382     8,243     8,012     3,912     4,822  

Asset impairment charges

    492                  
                       

Total operating expenses

  $ 16,043   $ 17,106   $ 18,750   $ 8,810   $ 10,683  
                       

Income (loss) from operations

    (3,093 )   (3,734 )   179     3     (651 )

Interest and other income (expense), net

    (287 )   (1,594 )   (1,124 )   (620 )   (625 )
                       

Income (loss) before income taxes

  $ (3,380 ) $ (5,328 ) $ (945 ) $ (617 ) $ (1,276 )

Benefit from (provision for) income taxes

                     
                       

Net income (loss)

  $ (3,380 ) $ (5,328 ) $ (945 ) $ (617 ) $ (1,276 )
                       

Net income (loss) attributable to common stockholders

  $ (3,380 ) $ (5,328 ) $ (945 ) $ (617 ) $ (1,276 )
                       

Net income (loss) per share attributable to common stockholders:

                               

Basic and diluted

  $ (13.06 ) $ (20.21 ) $ (3.56 ) $ (2.33 ) $ (4.77 )

Weighted average shares used to compute net income (loss) per share attributable to common stockholders:

                               

Basic and diluted

    258,901     263,658     265,576     265,252     267,711  
                       

Pro forma net income (loss) per share attributable to common stockholders (2):

                               

Basic and diluted

              $ (0.11 )       $ (0.14 )

Weighted average shares used to compute pro forma net income (loss) per share attributable to common stockholders (2):

                               

Basic and diluted

                8,380,216           8,949,838  

 

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  Years ended December 31,   Six months
ended June 30,
 
 
  2010   2011   2012   2012   2013  
 
  (in thousands, except percentages, share and per share data)
 

Additional Financial Data:

                               

Non-GAAP gross profit (3)

  $ 13,011   $ 13,407   $ 18,936   $ 8,817   $ 10,058  

Non-GAAP income (loss) from operations (3)

    (1,922 )   (3,000 )   441     74     (343 )

Non-GAAP net income (loss) (3)

    (1,780 )   (5,026 )   (503 )   (551 )   (780 )

Adjusted EBITDA (3)

    2,881     (638 )   3,734     1,607     1,310  

(1)
These expenses include stock-based compensation expense. Stock-based compensation expense is accounted for at fair value, using the Black-Scholes option-pricing model. Stock-based compensation expense is recognized over the vesting period of the stock options and was included in cost of goods sold and operating expenses as follows:

 
  Years ended
December 31,
  Six months ended
June 30,
 
 
  2010   2011   2012   2012   2013  
 
   
   
   
  (unaudited)
 
 
  (in thousands)
 

Cost of goods sold

  $ 61   $ 35   $ 7   $ 4   $ 26  

Research and development

    60     50     8     4     24  

Sales and marketing

    80     58     9     4     21  

General and administrative

    579     420     137     24     169  
                       

Total stock-based compensation expense

  $ 780   $ 563   $ 161   $ 36   $ 240  
                       
(2)
The pro forma basic and diluted net loss per share attributable to our common stockholders calculations reflect the 30-to-one reverse stock split effected on August 20, 2013 and assume the conversion of all outstanding shares of preferred stock into shares of common stock using the as-if-converted method as though the conversion had occurred at the beginning of the period presented and the resulting reclassification of the preferred stock warrant liability to additional paid-in capital, but do not reflect the automatic conversion of certain warrants that, if unexercised, will convert into an aggregate of 16,474 shares of common stock upon the completion of this offering, based upon the midpoint of the price range on the front cover of this prospectus.

(3)
We prepare Adjusted EBITDA and our other non-GAAP measures to eliminate the impact of items that we do not consider indicative of our overall operating performance. To arrive at our non-GAAP gross profit, we exclude stock-based compensation expense from our GAAP gross profit. To arrive at our non-GAAP income (loss) from operations, we exclude all amortization of intangible assets, stock-based compensation expense and non-recurring consulting fees, if any, from our GAAP net income (loss) from operations. To arrive at Adjusted EBITDA, we exclude these same items and, additionally, exclude asset impairment charges, loss (gain) from disposal of idle assets, unrealized exchange loss (gain), interest (income) expense, on a net basis, provision for (benefit from) income taxes and depreciation expense, from our GAAP net income (loss).

        We believe that our non-GAAP measures are useful to investors in evaluating our operating performance for the following reasons:

    We believe that elimination of items such as stock-based compensation expense, depreciation and amortization, income tax expense and other income, net, is appropriate because treatment of these items may vary for reasons unrelated to our overall operating performance;

    We use non-GAAP measures in conjunction with our GAAP financial measures for planning purposes, including the preparation of our annual operating budget, as a measure of operating performance and the effectiveness of our business strategies and in communications with our board of directors concerning our financial performance;

    We believe that non-GAAP measures provide better comparability with our past financial performance, facilitates better period-to-period comparisons of operational results and also facilitates comparisons with our peer companies, many of which also use similar non-GAAP financial measures to supplement their GAAP reporting; and

    We anticipate that, after consummating this offering, our investor presentations and those of securities analyst will include non-GAAP measures to evaluate our overall operating performance.

 

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        Adjusted EBITDA and other non-GAAP measures should not be considered as an alternative to gross profit, income (loss) from operations, net income (loss) or any other measure of financial performance calculated and presented in accordance with GAAP. Our Adjusted EBITDA and other non-GAAP measures may not be comparable to similarly titled measures of other organizations because other organizations may not calculate Adjusted EBITDA or such other non-GAAP measures in the same manner. You are encouraged to evaluate these adjustments and the reason we consider them appropriate.

        The following table reflects the reconciliation of U.S. GAAP financial measures to non-GAAP financial measures:

 
  Years ended December 31,   Six months
ended June 30,
 
 
  2010   2011   2012   2012   2013  
 
  (in thousands)
 

Gross profit

  $ 12,950   $ 13,372   $ 18,929   $ 8,813   $ 10,032  

Non-GAAP adjustment:

                               

Stock-based compensation expense

    61     35     7     4     26  
                       

Non-GAAP gross profit

  $ 13,011   $ 13,407   $ 18,936   $ 8,817   $ 10,058  
                       

Income (loss) from operations

 
$

(3,093

)

$

(3,734

)

$

179
 
$

3
 
$

(651

)

Non-GAAP adjustments:

                               

Amortization of intangible assets

    41     46     60     29     34  

Stock-based compensation expense

    780     563     161     36     240  

Non-recurring consultant fee

    350     125     41     6     34  
                       

Non-GAAP income (loss) from operations

  $ (1,922 ) $ (3,000 ) $ 441   $ 74   $ (343 )
                       

Net income (loss)

 
$

(3,380

)

$

(5,328

)

$

(945

)

$

(617

)

$

(1,276

)

Non-GAAP adjustments:

                               

Amortization of intangible assets

    41     46     60     29     34  

Stock-based compensation expense

    780     563     161     36     240  

Non-recurring consultant fee

    350     125     41     6     34  

Loss (gain) from disposal of idle assets

    23     (80 )   (37 )   (36 )    

Unrealized exchange loss (gain)

    406     (352 )   217     31     188  
                       

Non-GAAP net income (loss)

  $ (1,780 ) $ (5,026 ) $ (503 ) $ (551 ) $ (780 )
                       

Net income (loss)

 
$

(3,380

)

$

(5,328

)

$

(945

)

$

(617

)

$

(1,276

)

Non-GAAP adjustments:

                               

Amortization of intangible assets

    41     46     60     29     34  

Stock-based compensation expense

    780     563     161     36     240  

Asset impairment charges

    492                  

Depreciation expense

    3,299     3,066     2,882     1,449     1,522  

Non-recurring consultant fee

    350     125     41     6     34  

Loss (gain) from disposal of idle assets

    23     (80 )   (37 )   (36 )    

Unrealized exchange loss (gain)

    406     (352 )   217     31     188  

Interest (income) expense, net

    872     1,323     1,355     710     568  

Provision for (benefit from) income taxes

                     
                       

Adjusted EBITDA

  $ 2,881   $ (638 ) $ 3,734   $ 1,607   $ 1,310  
                       

 

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  June 30, 2013  
 
  Actual   Pro forma (4)   Pro forma
as adjusted (5)
 
 
  (in thousands)
 

Consolidated Balance Sheet Data:

                   

Total cash (1)

  $ 10,854   $ 10,854   $ 42,026  

Working capital (2)

    14,003     14,003     58,175  

Total assets

    71,996     71,996     116,168  

Total debt (3)

    25,922     25,922     12,922  

Redeemable convertible preferred stock and convertible preferred stock

    105,614          

Common stock and additional paid-in capital

    5,864     111,478     155,650  

Total stockholders' equity

    30,540     30,540     74,712  

(1)
Total cash is defined as cash, cash equivalents and restricted cash.

(2)
Working capital is defined as total current assets less total current liabilities.

(3)
Total debt is defined as short-term loans, notes payable and total long-term debt.

(4)
On a pro forma basis to give effect to the 30-to-one reverse stock split effected on August 20, 2013 and the automatic conversion of all of our outstanding shares of preferred stock into 8,708,895 shares of common stock using the as-if-converted method as though the conversion had occurred at the beginning of the period presented and the resulting reclassification of the preferred stock warrant liability to additional paid-in capital, but without giving effect to the automatic conversion of certain warrants that, if unexercised, will convert into an aggregate of 16,474 shares of common stock upon the completion of this offering, based upon the midpoint of the price range on the front cover of this prospectus.

(5)
On a pro forma as adjusted basis to reflect the pro forma adjustments described in note 4 above and the sale by us of 3,600,000 shares of common stock in this offering, at an assumed initial public offering price of $14.00 per share, the midpoint of the price range on the front cover of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses.

 

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RISK FACTORS

        Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors and all other information contained in this prospectus before purchasing our common stock. If any of the following risks actually occur, we may be unable to conduct our business as currently planned and our financial condition and results of operations could be seriously harmed. In addition, the trading price of our common stock could decline due to the occurrence of any of these risks, and you may lose all or part of your investment.

Risks Inherent in Our Business

We are dependent on our key customers for a significant portion of our revenue and the loss of, or a significant reduction in orders from, any of our key customers would adversely impact our revenue and results of operations.

        We generate much of our revenue from a limited number of customers. In 2010, 2011, 2012 and in the six months ended June 30, 2013, our top ten customers represented 80.5%, 76.6%, 77.6% and 79.2% of our revenue, respectively. In 2012, Cisco Systems, Inc. represented 33.2% of our revenue and Biogenomics Corp., a distributor, represented 11.2% of our total revenue. As a result, the loss of, or a significant reduction in orders from any of our key customers would materially and adversely affect our revenue and results of operations. We typically do not have long-term contracts with our customers and instead rely on recurring purchase orders. If our key customers do not continue to purchase our existing products or fail to purchase additional products from us, our revenue would decline and our results of operations would be adversely affected.

        Adverse events affecting our key customers could also negatively affect our ability to retain their business and obtain new purchase orders, which could adversely affect our revenue and results of operations. For example, in recent years, there has been consolidation among various network equipment manufacturers and this trend is expected to continue. We are unable to predict the impact that industry consolidation would have on our existing or potential customers. For instance, upon the closing of Arris Group Inc.'s acquisition of Motorola Mobility Holdings, Inc., which is expected to occur in the middle of this year, changes in strategy or management may affect purchasing decisions and other strategic objectives involving our products that were pursued prior to that acquisition. We may not be able to offset any potential decline in revenue arising from the consolidation of our existing customers with revenue from new customers or additional revenue from the merged company.

If our customers do not qualify our products for use on a timely basis, our results of operations may suffer.

        Prior to the sale of new products, our customers typically require us to obtain their approval and qualify our products for use in their applications. Additionally, new customers often audit our manufacturing facilities and perform other evaluations during this process. The qualification process involves product sampling and reliability testing and collaboration with our product management and engineering teams in the design and manufacturing stages. If we are unable to accurately predict the amount of time required to qualify our products with customers, or are unable to qualify our products with certain customers at all, then our ability to generate revenue could be delayed or our revenue would be lower than expected and we may not be able to recover the costs associated with the qualification process or with our product development efforts, which would have an adverse effect on our results of operations.

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        In addition, due to rapid technological changes in our markets, a customer may cancel or modify a design project before we have qualified our product or begun volume manufacturing of a qualified product. It is unlikely that we would be able to recover the expenses for cancelled or unutilized custom design projects. It is difficult to predict with any certainty whether our customers will delay or terminate product qualification or the frequency with which customers will cancel or modify their projects, but any such delay, cancellation or modification would have a negative effect on our results of operations.

        Our ability to successfully qualify and scale capacity for new technologies and products is important to our ability to grow our business and market presence. If we are unable to qualify and sell any of our new products in volume, on time, or at all, our results of operations may be adversely affected.

Customer demand is difficult to forecast accurately and, as a result, we may be unable to match production with customer demand.

        We make planning and spending decisions, including determining the levels of business that we will seek and accept, production schedules, component procurement commitments, personnel needs and other resource requirements, based on our estimates of product demand and customer requirements. Our products are typically purchased pursuant to individual purchase orders. While our customers may provide us with their demand forecasts, they are typically not contractually committed to buy any quantity of products beyond firm purchase orders. Furthermore, many of our customers may increase, decrease, cancel or delay purchase orders already in place without significant penalty. The short-term nature of commitments by our customers and the possibility of unexpected changes in demand for their products reduce our ability to accurately estimate future customer requirements. On occasion, customers may require rapid increases in production, which can strain our resources, cause our manufacturing to be negatively impacted by materials shortages, necessitate more onerous procurement commitments and reduce our gross margin. We may not have sufficient capacity at any given time to meet the volume demands of our customers, or one or more of our suppliers may not have sufficient capacity at any given time to meet our volume demands. If any of our major customers decrease, stop or delay purchasing our products for any reason, we will likely have excess manufacturing capacity or inventory and our business and results of operations would be harmed.

We are subject to the cyclical nature of the markets in which we compete and any future downturn will likely reduce demand for our products and revenue.

        In each of our target markets, including the CATV market, our sales depend on the aggregate capital expenditures of service providers as they build out and upgrade their network infrastructure. These markets are highly cyclical and characterized by constant and rapid technological change, price erosion, evolving standards and wide fluctuations in product supply and demand. In the past, these markets have experienced significant downturns, often connected with, or in anticipation of, the maturation of product cycles. These downturns have been characterized by diminished product demand, production overcapacity, high inventory levels and accelerated erosion of average selling prices. Our historical results of operations have been subject to these cyclical fluctuations, and we may experience substantial period-to-period fluctuations in our future results of operations. Any future downturn in any of the markets in which we compete could significantly reduce the demand for our products and therefore may result in a significant reduction in our revenue. Our revenue and results of operations may be materially and adversely affected in the future due to changes in demand from individual customers or cyclical changes in any of the markets utilizing our products. We may not be able

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to accurately predict these cyclical fluctuations and the impact of these fluctuations may have on our revenue and operating results.

If the CATV market does not continue to develop as we expect, or if there is any downturn in this market, our business would be adversely affected.

        Historically, we have generated much of our revenue from the CATV market. In 2010, 2011 and 2012, the CATV market represented 81.4%, 81.4% and 78.6% of our revenue, respectively. In the CATV market, we are relying on expected increasing demand for bandwidth-intensive services and applications such as on-demand television programs, high-definition television channels, or HDTV, social media, peer-to-peer file sharing and online video creation and viewing from network service providers. Without network and bandwidth growth, the need for our products will not increase and may decline, adversely affecting our financial condition and results of operations. Although demand for broadband access is increasing, network and bandwidth growth may be limited by several factors, including an uncertain regulatory environment, high infrastructure costs to purchase and install equipment and uncertainty as to which competing content delivery solution, such as telecommunications, wireless or satellite, will gain the most widespread acceptance. If the trend of outsourcing for the design and manufacture of CATV equipment does not continue, or continues at a slower pace than currently expected, our customers' demand for our design and manufacturing services may not grow as quickly as expected. If expectations for the growth of the CATV market are not realized, our financial condition or results of operations will be adversely affected. In addition, if the CATV market is adversely impacted, whether due to competitive pressure from telecommunication service providers, regulatory changes, or otherwise, our business would be adversely affected. We may not be able to offset any potential decline in revenue from the CATV market with revenue from new customers in other markets.

We have limited operating history in the FTTH and internet data center markets, and our business could be harmed if these markets do not develop as we expect.

        We have only recently begun offering products to the FTTH and internet data center markets. Our business in these markets is dependent on the deployment of our optical components, modules and subassemblies. In the FTTH market, we are relying on increasing demand for bandwidth-intensive services and telecommunications service providers' acceptance and deployment of WDM-PON as a technology supporting 1 gigabit per second service to the home. In the internet data center market, we are relying on the emergence of new internet data center providers and their adoption of open internet data center architectures that use a mix of systems and components from a variety of vendors, including non-traditional equipment vendors. Without network and bandwidth growth and adoption of our solutions by operators in these markets, we will not be able to sell our products in these markets in high volume or at our targeted margins, which would adversely affect our financial condition and results of operations. For example, WDM-PON technology may not be adopted by equipment and service providers in the FTTH market as rapidly as we expect or in the volumes we need to achieve acceptable margins, and internet data centers may elect to use larger vendors that require internet data center operators to purchase the optical modules for their systems from such larger vendors. Network and bandwidth growth may be limited by several factors, including an uncertain regulatory environment, high infrastructure costs to purchase and install equipment and uncertainty as to which competing content delivery solution, such as CATV, will gain the most widespread acceptance. In addition, as we enter new markets or expand our product offerings in existing markets, our margins may be adversely affected due to competition in those markets and commoditization of competing products. If our expectations for the growth of these markets are not realized, our financial condition or results of operations will be adversely affected.

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If we encounter manufacturing problems, we may lose sales and damage our customer relationships.

        We may experience delays, disruptions or quality control problems in our manufacturing operations. These and other factors may cause less than acceptable yields at our wafer fabrication facility. Manufacturing yields depend on a number of factors, including the quality of available raw materials, the degradation or change in equipment calibration and the rate and timing of the introduction of new products. Changes in manufacturing processes required as a result of changes in product specifications, changing customer needs and the introduction of new product lines may significantly reduce our manufacturing yields, resulting in low or negative margins on those products. In addition, we use an MBE fabrication process to make our lasers, rather than Metal Organic Chemical Vapor Deposition, or MOCVD, the technique most commonly used in optical manufacturing by communications optics vendors, and our MBE fabrication process relies on custom-manufactured equipment. If our MBE fabrication facility in Sugar Land, Texas were to be damaged or destroyed for any reason, our manufacturing process would be severely disrupted. Any such manufacturing problems would likely delay product shipments to our customers, which would negatively affect our sales, competitive position and reputation. We may also experience delays in production, typically in February, during the Chinese New Year holiday when our facilities in China and Taiwan are closed.

We must continually develop successful new products and enhance existing products, and if we fail to do so or if our release of new or enhanced products is delayed, our business may be harmed.

        The markets for our products are characterized by frequent new product introductions, changes in customer requirements and evolving industry standards, all with an underlying pressure to reduce cost and meet stringent reliability and qualification requirements. Our future performance will depend on our successful development, introduction and market acceptance of new and enhanced products that address these challenges. If we are unable to make our new or enhanced products commercially available on a timely basis, we may lose existing and potential customers and our financial results would suffer.

        In addition, due to the costs and length of research, development and manufacturing process cycles, we may not recognize revenue from new products until long after such expenditures, if at all, and our margins may decrease if our costs are higher than expected, adversely affecting our financial condition and results of operation.

        Although the length of our product development cycle varies widely by product and customer, it may take 18 months or longer before we receive our first order. As a result, we may incur significant expenses long before customers accept and purchase our products.

        Product development delays may result from numerous factors, including:

    modification of product specifications and customer requirements;

    unanticipated engineering complexities;

    difficulties in reallocating engineering resources and overcoming resource limitations; and

    rapidly changing technology or competitive product requirements.

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        The introduction of new products by us or our competitors could result in a slowdown in demand for our existing products and could result in a write-down in the value of our inventory. We have in the past experienced a slowdown in demand for existing products and delays in new product development, and such delays will likely occur in the future. To the extent we experience product development delays for any reason or we fail to qualify our products and obtain their approval for use, which we refer to as a design win, our competitive position would be adversely affected and our ability to grow our revenue would be impaired.

        Furthermore, our ability to enter a market with new products in a timely manner can be critical to our success because it is difficult to displace an existing supplier for a particular type of product once a customer has chosen a supplier, even if a later-to-market product provides better performance or cost efficiency.

        The development of new, technologically advanced products is a complex and uncertain process requiring frequent innovation, highly-skilled engineering and development personnel and significant capital, as well as the accurate anticipation of technological and market trends. We cannot assure you that we will be able to identify, develop, manufacture, market or support new or enhanced products successfully or on a timely basis. Further, we cannot assure you that our new products will gain market acceptance or that we will be able to respond effectively to product introductions by competitors, technological changes or emerging industry standards. We also may not be able to develop the underlying core technologies necessary to create new products and enhancements, license these technologies from third parties, or remain competitive in our markets.

Increasing costs and shifts in product mix may adversely impact our gross margins.

        Our gross margins on individual products and among products fluctuate over each product's life cycle. Our overall gross margins have fluctuated from period to period as a result of shifts in product mix, the introduction of new products, decreases in average selling prices and our ability to reduce product costs, and these fluctuations are expected to continue in the future. We may not be able to accurately predict our product mix from period to period, and as a result we may not be able to forecast accurately our overall gross margins. The rate of increase in our costs and expenses may exceed the rate of increase in our revenue, either of which would materially and adversely affect our business, our results of operations and our financial condition.

Given the high fixed costs associated with our vertically integrated business, a reduction in demand for our products will likely adversely impact our gross profits and our results of operations.

        We have a high fixed cost base due to our vertically integrated business model, including the fact that 631 of our employees as of June 30, 2013 were employed in manufacturing engineering and manufacturing operations. We may not be able to adjust these fixed costs quickly to adapt to rapidly changing market conditions. Our gross profit and gross margin are greatly affected by our sales volume and volatility on a quarterly basis and the corresponding absorption of fixed manufacturing overhead expenses. In addition, because we are a vertically integrated manufacturer, insufficient demand for our products may subject us to the risk of high inventory carrying costs and increased inventory obsolescence. Given our vertical integration, the rate at which we turn inventory has historically been low when compared to our cost of sales. We do not expect this to change significantly in the future and believe that we will have to maintain a relatively high level of inventory compared to our cost of sales. As a result, we continue to expect to have a significant amount of working capital invested in inventory. We

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may be required to write down inventory costs in the future and our high inventory costs may have an adverse effect on our gross profits and our results of operations.

We have a history of losses which may continue in the future.

        We have a history of losses and we may incur additional losses in future periods. In the years ended December 31, 2010, 2011 and 2012 and in the six months ended June 30, 2012 and June 30, 2013, we experienced net losses of $3.4 million, $5.3 million, $0.9 million, $0.6 million and $1.3 million, respectively. As of December 31, 2012 and June 30, 2013, our accumulated deficit was $81.9 million and $83.2 million, respectively. These losses were due to expenditures made to expand our business, including expenditures for hiring additional research and development and sales and marketing personnel, and expenditures to expand and maintain our manufacturing facilities and research and development operations. We expect to continue to make significant expenditures related to our business, including expenditures for hiring additional research and development and sales and marketing personnel, and expenditures to maintain and expand our manufacturing facilities and research and development operations. In addition, as a public company, we will incur significant additional time demands and legal, accounting and other expenses that we did not incur as a private company. Our management and other personnel will need to devote a substantial amount of time to complying with the applicable rules and requirements of being a public company.

Our financial results may vary significantly from quarter-to-quarter due to a number of factors, which may lead to volatility in our stock price.

        Our quarterly revenue and operating results have varied in the past and will likely continue to vary significantly from quarter to quarter. This variability may lead to volatility in our stock price as research analysts and investors respond to these quarterly fluctuations. These fluctuations are due to numerous factors, including:

    the timing, size and mix of sales of our products;

    fluctuations in demand for our products, including the increase, decrease, rescheduling or cancellation of significant customer orders;

    our ability to design, manufacture and deliver products to our customers in a timely and cost-effective manner and that meet customer requirements;

    new product introductions and enhancements by us or our competitors;

    the gain or loss of key customers;

    the rate at which our present and potential customers and end users adopt our technologies;

    changes in our pricing and sales policies or the pricing and sales policies of our competitors;

    quality control or yield problems in our manufacturing operations;

    length and variability of the sales cycles of our products;

    unanticipated increases in costs or expenses;

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    the loss of key employees;

    different capital expenditure and budget cycles for our customers, affecting the timing of their spending for our products;

    political stability in the areas of the world in which we operate;

    fluctuations in foreign currency exchange rates;

    changes in accounting rules;

    the evolving and unpredictable nature of the markets for products incorporating our solutions; and

    general economic conditions and changes in such conditions specific to our target markets.

        The foregoing factors are difficult to forecast, and these, as well as other factors, could materially adversely affect our quarterly and annual operating results. In addition, a significant amount of our operating expenses is relatively fixed in nature due to our internal manufacturing, research and development, sales and general administrative efforts. Any failure to adjust spending quickly enough to compensate for a revenue shortfall could magnify the adverse impact of such revenue shortfall on our results of operations. For these reasons, you should not rely on quarter-to-quarter comparisons of our results of operations as an indicator of future performance. Moreover, our operating results may not meet our announced guidance or the expectations of research analysts or investors, in which case the price of our common stock could decrease significantly. There can be no assurance that we will be able to successfully address these risks.

We face intense competition which could negatively impact our results of operations and market share.

        The markets into which we sell our products are highly competitive. Our competitors range from large, international companies offering a wide range of products to smaller companies specializing in niche markets. Current and potential competitors may have substantially greater name recognition, financial, marketing, research and manufacturing resources than we do, and there can be no assurance that our current and future competitors will not be more successful than us in specific product lines or markets. Certain of our competitors may also have better-established relationships with our current or potential customers. Some of our competitors have more resources to develop or acquire new products and technologies and create market awareness for their products and technologies. In addition, some of our competitors have the financial resources to offer competitive products at below-market pricing levels that could prevent us from competing effectively and result in a loss of sales or market share or cause us to lower prices for our products. In recent years, there has been consolidation in our industry and we expect such consolidation to continue. Consolidation involving our competitors could result in even more intense competition. Network equipment manufacturers, who are our customers, and network service providers may decide to manufacture the optical subsystems incorporated into their network systems in-house instead of outsourcing such products to companies such as us. We also encounter potential customers that, because of existing relationships with our competitors, are committed to the products offered by our competitors.

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We depend on key personnel to develop and maintain our technology and manage our business in a rapidly changing market.

        The continued services of our executive officers and other key engineering, sales, marketing, manufacturing and support personnel is essential to our success. For example, our ability to achieve new design wins depends upon the experience and expertise of our engineers. Any of our key employees, including our Chief Executive Officer, Chief Financial Officer, Chief Strategy Officer, Senior Vice President of Network Equipment Module Business Unit and Asia General Manager, may resign at any time. We do not have key person life insurance policies covering any of our employees. To implement our business plan, we also intend to hire additional employees, particularly in the areas of engineering and manufacturing. Our ability to continue to attract and retain highly skilled employees is a critical factor in our success. Competition for highly skilled personnel is intense. We may not be successful in attracting, assimilating or retaining qualified personnel to satisfy our current or future needs. Our ability to develop, manufacture and sell our products, and thus our financial condition and results of operations, would be adversely affected if we are unable to retain existing personnel or hire additional qualified personnel.

We depend on a limited number of suppliers and any supply interruption could have an adverse effect on our business.

        We depend on a limited number of suppliers for certain raw materials and components used in our products. Some of these suppliers could disrupt our business if they stop, decrease or delay shipments or if the materials or components they ship have quality or reliability issues. Some of the raw materials and components we use in our products are available only from a sole source or have been qualified only from a single supplier. Furthermore, other than our current suppliers, there are a limited number of entities from whom we could obtain certain materials and components. We may also face shortages if we experience increased demand for materials or components beyond what our qualified suppliers can deliver. Our inability to obtain sufficient quantities of critical materials or components could adversely affect our ability to meet demand for our products, adversely affecting our financial condition and results of operation.

        We typically have not entered into long-term agreements with our suppliers and, therefore, our suppliers could stop supplying materials and components to us at any time or fail to supply adequate quantities of materials or components to us on a timely basis. It is difficult, costly, time consuming and, on short notice, sometimes impossible for us to identify and qualify new suppliers. Our customers generally restrict our ability to change the components in our products. For more critical components, any changes may require repeating the entire qualification process. Our reliance on a limited number of suppliers or a single qualified vendor may result in delivery and quality problems, and reduced control over product pricing, reliability and performance.

Our products could contain defects that may cause us to incur significant costs or result in a loss of customers.

        Our products are complex and undergo quality testing as well as formal qualification by our customers. Our customers' testing procedures are limited to evaluating our products under likely and foreseeable failure scenarios and over varying amounts of time. For various reasons, such as the occurrence of performance problems that are unforeseeable in testing or that are detected only when products age or are operated under peak stress conditions, our products may fail to perform as expected long after customer acceptance. Failures could result from faulty components or design, problems in manufacturing or other unforeseen reasons. As a result, we could incur significant costs to repair or replace defective products under warranty, particularly

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when such failures occur in installed systems. Our products are typically embedded in, or deployed in conjunction with, our customers' products, which incorporate a variety of components, modules and subsystems and may be expected to interoperate with modules produced by third parties. As a result, not all defects are immediately detectable and when problems occur, it may be difficult to identify the source of the problem. While we have not experienced material failures in the past, we will continue to face this risk going forward because our products are widely deployed in many demanding environments and applications worldwide. In addition, we may in certain circumstances honor warranty claims after the warranty has expired or for problems not covered by warranty to maintain customer relationships. Any significant product failure could result in litigation, damages, repair costs and lost future sales of the affected product and other products, divert the attention of our engineering personnel from our product development efforts and cause significant customer relations problems, all of which would harm our business. Although we carry product liability insurance, this insurance may not adequately cover our costs arising from defects in our products or otherwise.

We face a variety of risks associated with our international sales and operations.

        We currently derive, and expect to continue to derive, a significant portion of our revenue from international sales. In 2010, 2011, 2012 and in the six months ended June 30, 2013, 60.8%, 66.9%, 75.0% and 87.9% of our revenue was derived from sales that occurred outside of the U.S., respectively. In addition, a significant portion of our manufacturing operations is based in Ningbo, China and Taipei, Taiwan. Our international revenue and operations are subject to a number of material risks, including:

    difficulties in staffing, managing and supporting operations in more than one country;

    difficulties in enforcing agreements and collecting receivables through foreign legal systems;

    fewer legal protections for intellectual property in foreign jurisdictions;

    foreign and U.S. taxation issues and international trade barriers;

    difficulties in obtaining any necessary governmental authorizations for the export of our products to certain foreign jurisdictions;

    fluctuations in foreign economies;

    fluctuations in the value of foreign currencies and interest rates;

    trade and travel restrictions;

    domestic and international economic or political changes, hostilities and other disruptions in regions where we currently operate or may operate in the future;

    difficulties and increased expenses in complying with a variety of U.S. and foreign laws, regulations and trade standards, including the Foreign Corrupt Practices Act; and

    different and changing legal and regulatory requirements in the jurisdictions in which we currently operate or may operate in the future.

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        Negative developments in any of these factors in China or Taiwan or other countries could result in a reduction in demand for our products, the cancellation or delay of orders already placed, difficulties in producing and delivering our products, threats to our intellectual property, difficulty in collecting receivables, and a higher cost of doing business. Although we maintain certain compliance programs throughout the company, violations of U.S. and foreign laws and regulations may result in criminal or civil sanctions, including material monetary fines, penalties and other costs against us or our employees, and may have a material adverse effect on our business.

        Our business operations conducted in China and Taiwan are important to our success. A substantial portion of our property, plant and equipment is located in China and Taiwan. We expect to make further investments in China and Taiwan in the future. Therefore, our business, financial condition, results of operations and prospects are subject to economic, political, legal, and social events and developments in China and Taiwan. China does not recognize the sovereignty of Taiwan. Although significant economic and cultural relations have been established during recent years between China and Taiwan, relations have often been strained and the government of China has previously threatened to use military force to gain control over Taiwan. Factors affecting military, political or economic conditions in China and Taiwan could have a material adverse effect on our financial condition and results of operations, as well as the market price and the liquidity of our common shares.

In some instances, we rely on third parties to assist in selling our products, and the failure of those parties to perform as expected could reduce our future revenue.

        Although we primarily sell our products through direct sales, we also sell our products to some of our customers through third party sales representatives and distributors. Many of such third parties also market and sell products from our competitors. Our third party sales representatives and distributors may terminate their relationships with us at any time, or with short notice. Our future performance will also depend, in part, on our ability to attract additional third party sales representatives and distributors that will be able to market and support our products effectively, especially in markets in which we have not previously distributed our products. If our current third party sales representatives and distributors fail to perform as expected, our revenue and results of operations could be harmed.

Failure to manage our growth effectively may adversely affect our financial condition and results of operations.

        Successful implementation of our business plan in our target markets requires effective planning and management. We plan to continue to expand the scope of our operations. We currently operate facilities in Sugar Land, Texas, Ningbo, China and Taipei, Taiwan. We currently manufacture our lasers using a proprietary process and customized equipment located only in our Sugar Land, Texas facility, and it will be costly to duplicate that facility to scale our laser manufacturing capacity or to mitigate the risks associated with operating a single facility. The challenges of managing our geographically dispersed operations have increased and will continue to increase the demand on our management systems and resources. Moreover, we are continuing to improve our financial and managerial controls, reporting systems and procedures. Any failure to manage our expansion and the resulting demands on our management systems and resources effectively may adversely affect our financial condition and results of operations.

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Our loan agreements contain restrictive covenants that may adversely affect our ability to conduct our business.

        We have lending arrangements with several financial institutions, including loan agreements with East West Bank in the U.S., and our China subsidiary has a line of credit arrangement. Our loan agreements governing our long-term debt obligations in the U.S. contain certain financial and operating covenants that limit our management's discretion with respect to certain business matters. Among other things, these covenants require us to maintain certain financial ratios and restrict our ability to incur additional debt, create liens or other encumbrances, change the nature of our business, pay dividends, sell or otherwise dispose of assets and merge or consolidate with other entities. These restrictions may limit our flexibility in responding to business opportunities, competitive developments and adverse economic or industry conditions. Any failure by us or our subsidiaries to comply with these agreements could harm our business, financial condition and operating results. In addition, our obligations under our U.S. loan agreements with East West Bank are secured by substantially all of our U.S. assets, including our intellectual property assets, our Sugar Land facility and our equity interests in our subsidiaries, which limits our ability to provide collateral for additional financing. A breach of any of covenants under our loan agreements, or a failure to pay interest or indebtedness when due under any of our credit facilities, could result in a variety of adverse consequences, including the acceleration of our indebtedness.

We may not be able to obtain additional capital when desired, on favorable terms or at all.

        We anticipate that the net proceeds we receive from this offering, together with our current cash, cash provided by operating activities and funds available through our bank loans and credit facilities, will be sufficient to meet our current and anticipated needs for general corporate purposes for the next 12 to 24 months. We operate in a market, however, that makes our prospects difficult to evaluate and, to remain competitive, we will be required to make continued investments in capital equipment, facilities and technological improvements. We expect that substantial capital will be required to expand our manufacturing capacity and fund working capital for anticipated growth. If we do not generate sufficient cash flow from operations or otherwise have the capital resources to meet our future capital needs, we may need additional financing to implement our business strategy, which includes:

    expansion of research and development;

    expansion of manufacturing capabilities;

    hiring of additional technical, sales and other personnel; and

    acquisitions of complementary businesses.

        If we raise additional funds through the issuance of our common stock or convertible securities, the ownership interests of our stockholders could be significantly diluted. These newly issued securities may have rights, preferences or privileges senior to those of existing stockholders acquiring shares of our common stock in this offering. Additional financing may not, however, be available on terms favorable to us, or at all, if and when needed, and our ability to fund our operations, take advantage of unanticipated opportunities, develop or enhance our infrastructure or respond to competitive pressures could be significantly limited. If we cannot raise required capital when needed, we may be unable to meet the demands of existing and prospective customers, adversely affecting our sales and market opportunities and consequently our business, financial condition and results of operations.

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Future acquisitions may adversely affect our financial condition and results of operations.

        As part of our business strategy, we may pursue acquisitions of companies that we believe could enhance or complement our current product portfolio, augment our technology roadmap or diversify our revenue base. Acquisitions involve numerous risks, any of which could harm our business, including:

    difficulties integrating the acquired business;

    unanticipated costs, capital expenditures or liabilities or changes related to research in progress and product development;

    diversion of financial and management resources from our existing business;

    difficulties integrating the business relationships with suppliers and customers of the acquired business with our existing business relationships;

    risks associated with entering markets in which we have little or no prior experience; and

    potential loss of key employees, particularly those of the acquired organizations.

        Acquisitions may also result in the recording of goodwill and other intangible assets subject to potential impairment in the future, adversely affecting our operating results. We may not achieve the anticipated benefits of an acquisition if we fail to evaluate it properly, and we may incur costs in excess of what we anticipate. A failure to evaluate and execute an acquisition appropriately or otherwise adequately address these risks may adversely affect our financial condition and results of operations.

Our future results of operations may be subject to volatility as a result of exposure to fluctuations in currency exchange rates.

        We have significant foreign currency exposure, and are affected by fluctuations among the U.S. dollar, the Chinese renminbi, or RMB, and the New Taiwan, or NT, dollar because a substantial portion of our business is conducted in China and Taiwan. Our sales, raw materials, components and capital expenditures are denominated in U.S. dollars, RMB and NT dollars in varying amounts.

        Foreign currency fluctuations may adversely affect our revenue and our costs and expenses, and hence our results of operations. The value of the NT dollar or the RMB against the U.S. dollar and other currencies may fluctuate and be affected by, among other things, changes in political and economic conditions. The RMB currency is no longer being pegged solely to the value of the U.S. dollar. While the international reaction to the RMB revaluation has generally been positive, there remains significant international pressure on the Chinese government to adopt an even more flexible currency policy, which may result in a further and more significant appreciation of the RMB against the U.S. dollar. In the long term, the RMB may appreciate or depreciate significantly in value against the U.S. dollar, depending upon the fluctuation of the basket of currencies against which it is currently valued, or it may be permitted to enter into a full float, which may also result in a significant appreciation or depreciation of the RMB against the U.S. dollar. In addition, our currency exchange variations may be magnified by Chinese exchange control regulations that restrict our ability to convert RMB into foreign currency.

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        Our sales in Europe are denominated in U.S. dollars, and fluctuations in the Euro or our customers' other local currencies relative to the U.S. dollar may impact our customers and affect our financial performance. If our customers' local currencies weaken against the U.S. dollar, we may need to lower our prices to remain competitive in our international markets which could have a material adverse effect on our margins. If our customers' local currencies strengthen against the U.S. dollar and if the local sales prices cannot be raised due to competitive pressures, we will experience a deterioration of our margins.

        To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedging transactions may be limited and we may not be able to successfully hedge our exposure.

Natural disasters or other catastrophic events could harm our operations.

        Our operations in the U.S., China and Taiwan could be subject to significant risk of natural disasters, including earthquakes, hurricanes, typhoons, flooding and tornadoes, as well as other catastrophic events, such as epidemics, terrorist attacks or wars. For example, our corporate headquarters and wafer fabrication facility in Sugar Land, Texas, is located near Gulf of Mexico, an area that is susceptible to hurricanes. We use a proprietary MBE laser manufacturing process that requires customized equipment, and this process is currently conducted and located solely at our wafer fabrication facility in Sugar Land, Texas, such that a natural disaster, terrorist attack or other catastrophic event that affects that facility would materially harm our operations. In addition, our manufacturing facility in Taipei, Taiwan, is susceptible to typhoons, and our manufacturing facility in Ningbo, China, has from time to time, suffered electrical outages. Any disruption in our manufacturing facilities arising from these and other natural disasters or other catastrophic events could cause significant delays in the production or shipment of our products until we are able to shift production to different facilities or arrange for third parties to manufacture our products. We may not be able to obtain alternate capacity on favorable terms or at all. Our property insurance coverage with respect to natural disaster is limited and is subject to deductible and coverage limits. Such coverage may not be adequate or continue to be available at commercially reasonable rates and terms. The occurrence of any of these circumstances may adversely affect our financial condition and results of operation.

If we fail to protect, or incur significant costs in defending, our intellectual property and other proprietary rights, our business and results of operations could be materially harmed.

        Our success depends on our ability to protect our intellectual property and other proprietary rights. We rely on a combination of patent, trademark, copyright, trade secret and unfair competition laws, as well as license agreements and other contractual provisions, to establish and protect our intellectual property and other proprietary rights. We have applied for patent registrations in the U.S. and in other foreign countries, some of which have been issued. In addition, we have registered certain trademarks in the U.S. We cannot guarantee that our pending applications will be approved by the applicable governmental authorities. Moreover, our existing and future patents and trademarks may not be sufficiently broad to protect our proprietary rights or may be held invalid or unenforceable in court. A failure to obtain patents or trademark registrations or a successful challenge to our registrations in the U.S. or other foreign countries may limit our ability to protect the intellectual property rights that these applications and registrations intended to cover.

        Policing unauthorized use of our technology is difficult and we cannot be certain that the steps we have taken will prevent the misappropriation, unauthorized use or other infringement of our intellectual property rights. Further, we may not be able to effectively protect our intellectual property rights from misappropriation or other infringement in foreign countries

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where we have not applied for patent protections, and where effective patent, trademark, trade secret and other intellectual property laws may be unavailable, or may not protect our proprietary rights as fully as U.S. law. We may seek to secure comparable intellectual property protections in other countries. However, the level of protection afforded by patent and other laws in other countries may not be comparable to that afforded in the U.S.

        We also attempt to protect our intellectual property, including our trade secrets and know-how, through the use of trade secret and other intellectual property laws, and contractual provisions. We enter into confidentiality and invention assignment agreements with our employees and independent consultants. We also use non-disclosure agreements with other third parties who may have access to our proprietary technologies and information. Such measures, however, provide only limited protection, and there can be no assurance that our confidentiality and non-disclosure agreements will not be breached, especially after our employees end their employment, and that our trade secrets will not otherwise become known by competitors or that we will have adequate remedies in the event of unauthorized use or disclosure of proprietary information. Unauthorized third parties may try to copy or reverse engineer our products or portions of our products, otherwise obtain and use our intellectual property, or may independently develop similar or equivalent trade secrets or know-how. If we fail to protect our intellectual property and other proprietary rights, or if such intellectual property and proprietary rights are infringed or misappropriated, our business, results of operations or financial condition could be materially harmed.

        In the future, we may need to take legal actions to prevent third parties from infringing upon or misappropriating our intellectual property or from otherwise gaining access to our technology. Protecting and enforcing our intellectual property rights and determining their validity and scope could result in significant litigation costs and require significant time and attention from our technical and management personnel, which could significantly harm our business. We may not prevail in such proceedings, and an adverse outcome may adversely impact our competitive advantage or otherwise harm our financial condition and our business.

We may be involved in intellectual property disputes in the future, which could divert management's attention, cause us to incur significant costs and prevent us from selling or using the challenged technology.

        Participants in the markets in which we sell our products have experienced frequent litigation regarding patent and other intellectual property rights. While we have a policy in place that is designed to reduce the risk of infringement of intellectual property rights of others and we have conducted a limited review of other companies' relevant patents, there can be no assurance that third parties will not assert infringement claims against us. We cannot be certain that our products would not be found infringing the intellectual property rights of others. Regardless of their merit, responding to such claims can be time consuming, divert management's attention and resources and may cause us to incur significant expenses. Intellectual property claims against us could force us to do one or more of the following:

    obtain from a third party claiming infringement a license to the relevant technology, which may not be available on reasonable terms, or at all;

    stop manufacturing, selling, incorporating or using our products that use the challenged intellectual property;

    pay substantial monetary damages; or

    expend significant resources to redesign the products that use the technology and to develop non-infringing technology.

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        Any of these actions could result in a substantial reduction in our revenue and could result in losses over an extended period of time.

        In any potential intellectual property dispute, our customers could also become the target of litigation. Because we often indemnify our customers for intellectual property claims made against them with respect to our products, any claims against our customers could trigger indemnification claims against us. These obligations could result in substantial expenses such as legal expenses, damages for past infringement or royalties for future use. Any indemnity claim could also adversely affect our relationships with our customers and result in substantial costs to us.

If we fail to obtain the right to use the intellectual property rights of others that are necessary to operate our business, and to protect their intellectual property, our business and results of operations will be adversely affected.

        From time to time we may choose to or be required to license technology or intellectual property from third parties in connection with the development of our products. We cannot assure you that third party licenses will be available to us on commercially reasonable terms, if at all. Generally, a license, if granted, would include payments of up-front fees, ongoing royalties or both. These payments or other terms could have a significant adverse impact on our results of operations. Our inability to obtain a necessary third party license required for our product offerings or to develop new products and product enhancements could require us to substitute technology of lower quality or performance standards, or of greater cost, either of which could adversely affect our business. If we are not able to obtain licenses from third parties, if necessary, then we may also be subject to litigation to defend against infringement claims from these third parties. Our competitors may be able to obtain licenses or cross-license their technology on better terms than we can, which could put us at a competitive disadvantage.

If we fail to maintain effective internal control over financial reporting in the future, the accuracy and timing of our financial reporting may be adversely affected.

        Preparing our consolidated financial statements involves a number of complex manual and automated processes, which are dependent upon individual data input or review and require significant management judgment. One or more of these elements may result in errors that may not be detected and could result in a material misstatement of our consolidated financial statements. In connection with the audit of our financial statements for the period ended December 31, 2012, we identified a material weakness related to the inappropriate recording of certain inventory returned for re-work in China as a reduction in cost of sales. This error arose as a result of the configuration of our ERP system, which lacked an automated control within the system to prevent overrides. In addition, the monitoring controls were not operating with sufficient precision to enable the errors to be detected and corrected by management in a timely manner. We believe we have remediated this material weakness by updating our ERP system with respect to the monitoring of returned inventory, providing additional training to certain personnel and adding management oversight. Also, in connection with the audit of our financial statements for the period ended December 31, 2012, three significant deficiencies were identified related to the reclassification of transactions within current liabilities between accounts payable and accrued liabilities, the cut-off of certain expenses for the December 31, 2012 closing related to our Asian operations, and the allocation of standard costing applied among cost of goods sold and inventory at our China subsidiary for the period ended December 31, 2012. We believe we have remediated these three significant deficiencies by providing additional staff training, developing additional procedures, enhancing our end of period closing processes, and providing for the allocation of standard cost of goods sold and inventory for the U.S., Taiwan and China locations.

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        We have not performed an evaluation of our internal control over financial reporting, such as would be required by Section 404 of the Sarbanes-Oxley Act, nor have we engaged our independent registered public accounting firm to perform an audit of our internal control over financial reporting. In addition, for so long as we qualify as an "emerging growth company" under the JOBS Act, which may be up to five years following this offering, we will not have to provide an auditor's attestation report on our internal controls in future annual reports on Form 10-K as otherwise required by Section 404(b) of the Sarbanes-Oxley Act. During the course of any evaluation, documentation or attestation, we or our independent registered public accounting firm may identify weaknesses and deficiencies that we may not otherwise identify in a timely manner or at all as a result of the deferred implementation of this additional level of review.

        We have implemented internal controls that we believe provide reasonable assurance that we will be able to avoid accounting errors or material weaknesses in future periods. However, our internal controls cannot guarantee that no accounting errors exist or that all accounting errors, no matter how immaterial, will be detected because a control system, no matter how well designed and operated, can provide only reasonable, but not absolute assurance that the control system's objectives will be met. If we are unable to implement and maintain effective internal control over financial reporting, our ability to accurately and timely report our financial results could be adversely impacted. This could result in late filings of our annual and quarterly reports under the Securities Exchange Act of 1934, or the Exchange Act, restatements of our consolidated financial statements, a decline in our stock price, suspension or delisting of our common stock by NASDAQ, or other material adverse effects on our business, reputation, results of operations or financial condition.

Our ability to use our net operating losses and certain other tax attributes may be limited.

        As of December 31, 2012, we had U.S. accumulated net operating losses, or NOLs, of approximately $66.7 million for U.S. federal income tax purposes. We also had research and development credit carry-forwards totaling $1.5 million as of December 31, 2012, which begin to expire in 2024. Under Section 382 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an "ownership change," the corporation's ability to use its pre-change NOLs, capital loss carry-forwards and other pre-change tax attributes to offset its post-change income may be limited. An ownership change is generally defined as a greater than 50% change in equity ownership by value over a 3-year period. Based upon an analysis of our equity ownership, we have experienced an ownership change and our NOL carryforwards are limited in dollar amount. As of December 31, 2012, of the total accumulated NOL, only $38.7 million is available for utilization in 2013 and thereafter to shelter federal taxable income. Each year after 2013, an additional $0.3 million is added to the total available NOL, until a maximum of $64.1 million is reached. The amount of NOL available each year may decrease by the amount of NOL utilized and may increase by the amount of any operating losses incurred. Should we experience additional ownership changes, our NOL carryforwards may be further limited.

Changes in our effective tax rate may adversely affect our results of operation and our business.

        We are subject to income taxes in the U.S. and other foreign jurisdictions, including China. We base our tax position on the anticipated nature and conduct of our business and our understanding of the tax laws of the countries in which we have assets or conduct activities. Our tax position may be reviewed or challenged by tax authorities. Moreover, the tax laws currently in effect may change, and such changes may have retroactive effect. We have inter-company arrangements in place providing for administrative and financing services and transfer pricing, which involve a significant degree of judgment and are often subject to close review by tax authorities. The tax authorities may challenge our positions related to these agreements. If the

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tax authorities successfully challenge our positions, our effective tax rate may increase, adversely affecting our results of operation and our business.

Our manufacturing operations are subject to environmental regulation that could limit our growth or impose substantial costs, adversely affecting our financial condition and results of operations.

        Our properties, operations and products are subject to the environmental laws and regulations of the jurisdictions in which we operate and sell products. These laws and regulations govern, among other things, air emissions, wastewater discharges, the management and disposal of hazardous materials, the contamination of soil and groundwater, employee health and safety and the content, performance, packaging and disposal of products. Our failure to comply with current and future environmental laws and regulations, or the identification of contamination for which we are liable, could subject us to substantial costs, including fines, clean-up costs, third-party property damages or personal injury claims, and make significant investments to upgrade our facilities or curtail our operations. Liability under environmental, health and safety laws can be joint and several and without regard to fault or negligence. For example, pursuant to environmental laws and regulations, including but not limited to the Comprehensive Environmental Response Compensation and Liability Act, or CERCLA, we may be liable for the full amount of any remediation-related costs at properties we currently own or formerly owned, such as our currently owned Sugar Land, Texas facility, or at properties at which we operated, as well as at properties we will own or operate in the future, and properties to which we have sent hazardous substances, whether or not we caused the contamination. Identification of presently unidentified environmental conditions, more vigorous enforcement by a governmental authority, enactment of more stringent legal requirements or other unanticipated events could give rise to adverse publicity, restrict our operations, affect the design or marketability of our products or otherwise cause us to incur material environmental costs, adversely affecting our financial condition and results of operations.

Failure to comply with the U.S. Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.

        As a public company, we will be subject to the U.S. Foreign Corrupt Practices Act which generally prohibits U.S. companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. In addition, we are required to maintain records that accurately and fairly represent our transactions and have an adequate system of internal accounting controls. Foreign companies, including some that may compete with us, may not be subject to these prohibitions, and therefore may have a competitive advantage over us. If we are not successful in implementing and maintaining adequate preventative measures, we may be responsible for acts of our employees or other agents engaging in such conduct. We could suffer severe penalties and other consequences that may have a material adverse effect on our financial condition and results of operations.

We are subject to governmental export and import controls that could subject us to liability or impair our ability to compete in international markets.

        We are subject to export and import control laws, trade regulations and other trade requirements that limit which products we sell and where and to whom we sell our products. Specifically, the Bureau of Industry and Security of the U.S. Department of Commerce is responsible for regulating the export of most commercial items that are so called dual-use goods that may have both commercial and military applications. A limited number of our products are exported by license under the Export Control Classification Number, or ECCN, of 5A991. Export Control Classification requirements are dependent upon an item's technical characteristics, the destination, the end-use, and the end-user, and other activities of the end-user. Should the

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regulations applicable to our products change, or the restrictions applicable to countries to which we ship our products change, then the export of our products to such countries could be restricted. As a result, our ability to export or sell our products to certain countries could be restricted, which could adversely affect our business, financial condition and results of operations. Changes in our products or any change in export or import regulations or related legislation, shift in approach to the enforcement or scope of existing regulations, or change in the countries, persons or technologies targeted by such regulations, could result in delayed or decreased sales of our products to existing or potential customers. In such event, our business and results of operations could be adversely affected.

Rapidly changing standards and regulations could make our products obsolete, which would cause our revenue and results of operations to suffer.

        We design our products to conform to regulations established by governments and to standards set by industry standards bodies worldwide, such as The American National Standards Institute, the European Telecommunications Standards Institute, the International Telecommunications Union and the Institute of Electrical and Electronics Engineers, Inc. Various industry organizations are currently considering whether and to what extent to create standards applicable to our products. Because certain of our products are designed to conform to current specific industry standards, if competing or new standards emerge that are preferred by our customers, we would have to make significant expenditures to develop new products. If our customers adopt new or competing industry standards with which our products are not compatible, or the industry groups adopt standards or governments issue regulations with which our products are not compatible, our existing products would become less desirable to our customers and our revenue and results of operations would suffer.

Customer demands and new regulations related to conflict-free minerals may adversely affect us.

        The Dodd-Frank Wall Street Reform and Consumer Protection Act imposes new disclosure requirements regarding the use of "conflict" minerals mined from the Democratic Republic of Congo and adjoining countries in products, whether or not these products are manufactured by third parties. These new requirements could affect the pricing, sourcing and availability of minerals used in the manufacture of our products. Certain of our customers are requiring additional information from us regarding the origin of our raw materials, and complying with these customer requirements may cause us to incur additional costs, such as costs related to determining the origin of any minerals used in our products. Our supply chain is complex and we may be unable to verify the origins for all metals used in our products. We may also encounter challenges with our customers and stockholders if we are unable to certify that our products are conflict free.

Risks Related to Our Operations in China

Adverse changes in economic and political policies in China, or Chinese laws or regulations could have a material adverse effect on business conditions and the overall economic growth of China, which could adversely affect our business.

        The Chinese economy differs from the economies of most developed countries in many respects, including the level of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. The Chinese economy has been transitioning from a planned economy to a more market-oriented economy. Despite reforms, the government continues to exercise significant control over China's economic growth by way of the allocation of resources, control over foreign currency-denominated obligations and monetary policy and provision of preferential treatment to particular industries or companies.

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        In addition, the laws, regulations and legal requirements in China, including the laws that apply to foreign-invested enterprises, or FIEs, are subject to frequent changes. The interpretation and enforcement of such laws is uncertain. Protections of intellectual property rights and confidentiality in China may not be as effective as in the U.S. or other countries or regions with more developed legal systems. Any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention. Any adverse changes to these laws, regulations and legal requirements or their interpretation or enforcement could have a material adverse effect on our business.

        Furthermore, while China's economy has experienced rapid growth in the past 20 years, growth has been uneven across different regions, among various economic sectors and over time. China has also in the past and may in the future experience economic downturns due to, for example, government austerity measures, changes in government policies relating to capital spending, limitations placed on the ability of commercial banks to make loans, reduced levels of exports and international trade, inflation, lack of financial liquidity, stock market volatility and global economic conditions. Any of these developments could contribute to a decline in business and consumer spending in addition to other adverse market conditions, which could adversely affect our business.

The termination and expiration or unavailability of our preferential tax treatments in China may have a material adverse effect on our operating results.

        Prior to January 1, 2008, entities established in China were generally subject to a 30% state and 3% local enterprise income tax rate. In accordance with the China Income Tax Law for Enterprises with Foreign Investment and Foreign Enterprises, effective through December 31, 2007, our China subsidiary enjoyed preferential income tax rates. Effective January 1, 2008, the China Enterprise Income Tax Law, or the EIT law, imposes a single uniform income tax rate of 25% on all Chinese enterprises, including FIEs, and eliminates or modifies most of the tax exemptions, reductions and preferential treatment available under the previous tax laws and regulations. As a result, our China subsidiary may be subject to the uniform income tax rate of 25% unless we are able to qualify for preferential status. Currently, we have qualified for a preferential 15% tax rate that is available for new and high technology enterprises. The preferential rate applies to calendar years 2012, 2013 and 2014. We have not yet realized benefits from this reduction in tax rate because we have not yet generated taxable income in China. Any future increase in the enterprise income tax rate applicable to us or the expiration or other limitation of preferential tax rates available to us could increase our tax liabilities and reduce our net income.

China regulation of loans and direct investment by offshore holding companies to China entities may delay or prevent us from using the proceeds we receive from this offering to make loans or additional capital contributions to our China subsidiary.

        In utilizing the proceeds we receive from this offering, we may make loans or additional capital contributions to our China subsidiary. Any loans to our China subsidiary are subject to China regulations and approvals. For example, any loans to our China subsidiary to finance their activities cannot exceed statutory limits, must be registered with State Administration of Foreign Exchange, or SAFE, or its local counterpart, and must be approved by the relevant government authorities. Any capital contributions to our China subsidiary must be approved by the Ministry of Commerce or its local counterpart. In addition, under Circular 142, our China subsidiary, as a FIE, may not be able to convert our capital contributions to them into RMB for equity investments or acquisitions in China.

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        We cannot assure you that we will be able to obtain these government registrations or approvals on a timely basis, if at all, with respect to our future loans or capital contributions to our China subsidiary. If we fail to receive such registrations or approvals, our ability to use the proceeds of this offering and to capitalize our China subsidiary may be negatively affected, which could materially and adversely affect our liquidity and ability to fund and expand our business.

Our China subsidiary is subject to Chinese labor laws and regulations and Chinese labor laws may increase our operating costs in China.

        The China Labor Contract Law, together with its implementing rules, provides increased rights to Chinese employees. Previously, an employer had discretionary power in deciding the probation period, not to exceed six months. Additionally, the employment contract could only be terminated for cause. Under these rules, the probation period varies depending on contract terms and the employment contract can only be terminated during the probation period for cause upon three days' notice. Additionally, an employer may not be able to terminate a contract during the probation period on the grounds of a material change of circumstances or a mass layoff. The new law also has specific provisions on conditions when an employer has to sign an employment contract with open-ended terms. If an employer fails to enter into an open-ended contract in certain circumstances, the employer must pay the employee twice their monthly wage beginning from the time the employer should have executed an open-ended contract. Additionally an employer must pay severance for nearly all terminations, including when an employer decides not to renew a fixed-term contract. These laws may increase our costs and reduce our flexibility.

The turnover of direct labor in manufacturing industries in China is high, which could adversely affect our production, shipments and results of operations.

        Employee turnover of direct labor in the manufacturing sector in China is high and retention of such personnel is a challenge to companies located in or with operations in China. Although direct labor costs do not represent a high proportion of our overall manufacturing costs, direct labor is required for the manufacture of our products. If our direct labor turnover rates are higher than we expect, or we otherwise fail to adequately manage our direct labor turnover rates, then our results of operations could be adversely affected.

An increase in our labor costs in China may adversely affect our business and our profitability.

        A significant portion of our workforce is located in China. Labor costs in China have been increasing recently due to labor unrest, strikes and changes in employment laws. If labor costs in China continue to increase, our costs will increase. If we are not able to pass these increases on to our customers, our business, profitability and results of operations may be adversely affected.

We may have difficulty establishing and maintaining adequate management and financial controls over our China operations.

        Businesses in China have historically not adopted a western style of management and financial reporting concepts and practices, which includes strong corporate governance, internal controls and computer, financial and other control systems. Moreover, familiarity with U.S. GAAP principles and reporting procedures is less common in China. As a consequence, we may have difficulty finding accounting personnel experienced with U.S. GAAP, and we may have difficulty training and integrating our China-based accounting staff with our U.S.-based

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finance organization. As a result of these factors, we may experience difficulty in establishing management and financial controls over our China operations. These difficulties include collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet U.S. public-company reporting requirements. We may, in turn, experience difficulties in implementing and maintaining adequate internal controls as required under Section 404 of the Sarbanes-Oxley Act.

Risks Related to This Offering and Our Common Stock

There is no existing market for our common stock and we do not know if one will develop to provide our stockholders liquidity for the shares they hold or purchase in this offering.

        There has not been a public trading market for shares of our common stock prior to this offering. An active trading market may not develop or be sustained after this offering. The initial public offering price for the shares of common stock sold in this offering will be determined by negotiations between us, the selling stockholders and representatives of the underwriters. This price may not be indicative of the price at which our common stock will trade after this offering.

Our principal stockholders, executive officers and directors own a significant percentage of our stock and will continue to have significant control of our management and affairs after the offering, and they can take actions that may be against your best interests.

        Following the completion of this offering, our executive officers and directors, and entities that are affiliated with them, will beneficially own an aggregate of approximately 15.4% of our outstanding common stock, on an as-converted basis, based on an assumed initial offering price of $14.00 per share, the midpoint of the price range set forth on the front cover of this prospectus. As a result, these stockholders, acting together, may have significant influence over our management and affairs and matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as mergers, consolidations or the sale of substantially all of our assets. Consequently, this concentration of ownership may have the effect of delaying or preventing a change in control, including a merger, consolidation or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control, even if such a change in control would benefit our other stockholders.

Our stock price could decline due to the large number of outstanding shares of our common stock eligible for future sale.

        Sales of substantial amounts of our common stock in the public market following this offering, or the perception that these sales could occur, could cause the market price of our common stock to decline. These sales could also make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate.

        Upon completion of this offering, we will have an aggregate of 12,609,648 shares of common stock outstanding, assuming no exercise of outstanding options or warrants, other than the automatic conversion of those warrants that expire upon the completion of this offering into an aggregate of 16,474 shares of common stock, based on the midpoint of the price range set forth on the cover of this prospectus. The 3,600,000 shares sold pursuant to this offering will be immediately tradable without restriction. Of the remaining 9,009,648 shares:

    approximately 0.1 million shares will be eligible for sale immediately upon completion of this offering;

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    approximately 0.1 million shares will become eligible for sale between the completion of this offering and the expiration of lock-up agreements, subject in some cases to volume and other restrictions of Rule 144 under the Securities Act of 1933, as amended, or the Securities Act; and

    approximately 8.8 million shares will be eligible for sale upon the expiration of lock-up agreements, subject in some cases to volume and other restrictions of Rule 144 under the Securities Act.

        The lock-up agreements expire 180 days after the date of this prospectus, subject to potential extension in the event we release earning results or material news or a material event relating to us occurs near the end of the lock-up period and in the event that we cease to be an emerging growth company. Raymond James & Associates, Inc. and Piper Jaffray & Co., as representatives of the underwriters, may, in their sole discretion and at any time without notice, release all or any portion of the securities subject to lock-up agreements. After the completion of this offering, we intend to register approximately 1.5 million shares of our common stock that have been issued or reserved for future issuance under our stock incentive plans.

Because our initial public offering price is substantially higher than the pro forma as adjusted net tangible book value per share of our outstanding common stock, new investors will incur immediate and substantial dilution.

        The initial public offering price is substantially higher than the pro forma as adjusted net tangible book value per share of our common stock based on the expected total value of our total assets, less our goodwill and other intangible assets, less our total liabilities immediately following this offering. Therefore, if you purchase shares of our common stock in this offering, you will experience immediate and substantial dilution of $8.22 per share in the price you pay for our common stock compared to the pro forma as adjusted net tangible book value as of June 30, 2013. Furthermore, investors purchasing our common stock in this offering will own only 28.5% of our shares outstanding even though they will have contributed 32.1% of the total consideration received by us in connection with our sales of common stock. To the extent outstanding options to purchase common stock are exercised, there will be further dilution. For a further description of the dilution that you will experience immediately after this offering, see the section titled "Dilution."

We currently do not intend to pay dividends on our common stock and, consequently, your only opportunity to achieve a return on your investment is if the price of our common stock appreciates.

        We currently do not plan to declare or pay dividends on shares of our common stock in the foreseeable future. In addition, the terms of our loan and security agreement with East West Bank restrict our ability to pay dividends. See "Dividend Policy" for more information. Consequently, your only opportunity to achieve a return on the shares you purchase in this offering will be if the market price of our common stock appreciates and you sell your shares at a profit. There is no guarantee that the price of our common stock in the market after this offering will ever exceed the price that you pay.

Our charter documents, stock incentive plans and Delaware law could prevent a takeover that stockholders consider favorable and could also reduce the market price of our stock.

        Our amended and restated certificate of incorporation and our amended and restated bylaws to be effective immediately prior to closing of this offering and our stock incentive plans contain

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provisions that could delay or prevent a change in control of our company. These provisions could also make it more difficult for stockholders to elect directors and take other corporate actions. These provisions include:

    providing for a classified board of directors with staggered, three-year terms;

    not providing for cumulative voting in the election of directors;

    authorizing our board of directors to issue, without stockholder approval, preferred stock rights senior to those of common stock;

    prohibiting stockholder action by written consent;

    limiting the persons who may call special meetings of stockholders;

    requiring advance notification of stockholder nominations and proposals; and

    change of control provisions in our stock incentive plans, and the individual stock option agreements, which provide that a change of control may accelerate the vesting of the stock options issued under such plans.

        In addition, the provisions of Section 203 of the Delaware General Corporate Law will govern us upon completion of this offering. These provisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding common stock, from engaging in certain business combinations without the approval of substantially all of our stockholders for a certain period of time.

        These and other provisions in our amended and restated certificate of incorporation, our amended and restated bylaws and under Delaware law could discourage potential takeover attempts, reduce the price that investors might be willing to pay for shares of our common stock in the future and result in the market price being lower than it would be without these provisions. See "Description of Capital Stock—Preferred stock" and "Description of Capital Stock—Anti-takeover effects of Delaware law."

Our current loan agreement could make a takeover that stockholders consider favorable more difficult and could also reduce the price an acquiror would be willing to pay of our stock.

        Our current loan agreement with East West Bank contains a provision that prevents us from terminating or replacing our Chief Executive Officer, Chief Financial Officer or other executive level officer without the prior approval from East West Bank. This provision in our loan agreement could also discourage potential takeover attempts or, reduce the price that an acquiror might be willing to pay to acquire us in the future.

Some provisions of our named executive officers' agreements regarding change of control or separation of service contain obligations for us to make separation payments to them upon their termination.

        Certain provisions contained in our employment agreements with our named executive officers regarding change of control or separation of service may obligate us to make lump sum severance payments and related payments upon the termination of their employment with us, other than such executive officer's resignation without good reason or our termination of their

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employment as a result of their disability or for cause. In the event we are required to make these separation payments, it could have a material adverse effect on our results of operations for the fiscal period in which such payments are made. For a further description of the separation benefits that we may be obligated to pay upon such termination of these executives, see the section titled "Management—Agreements with Executive Officers."

Our stock price may be volatile and you may be unable to sell your shares at or above the offering price.

        The market price of our common stock could be subject to wide fluctuations in response to, among other things, the risk factors described in this section of this prospectus, and other factors beyond our control, such as fluctuations in the valuation of companies perceived by investors to be comparable to us.

        Furthermore, the stock markets have experienced price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions, such as recessions, interest rate changes or international currency fluctuations, may negatively affect the market price of our common stock.

        In the past, many companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may become the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management's attention from other business concerns, which could seriously harm our business.

As an "emerging growth company" within the meaning of the Securities Act, we will utilize certain modified disclosure requirements, and we cannot be certain if these reduced requirements will make our common stock less attractive to investors.

        We are an emerging growth company within the meaning of the rules under the Securities Act. We have in this prospectus utilized, and we plan in future filings with the SEC to continue to utilize, the modified disclosure requirements available to emerging growth companies, including reduced disclosure about our executive compensation and omission of compensation discussion and analysis, and an exemption from the requirement of holding a nonbinding advisory vote on executive compensation and an exemption from the requirement that outside auditors attest as to our internal control over financial reporting. As a result, our stockholders may not have access to certain information they may deem important.

        In addition, Section 107 of the JOBS Act also provides that an emerging growth company can utilize the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to utilize this extended transition period. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards as they become applicable to public companies.

        We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. We could remain an "emerging growth company" for up to five years, or until the

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earliest of (i) the last day of the first fiscal year in which our annual gross revenue exceed $1 billion, (ii) the date that we become a "large accelerated filer" as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period.

If research analysts do not publish research about our business or if they issue unfavorable commentary or downgrade our common stock, our stock price and trading volume could decline.

        The trading market for our common stock will depend on the research and reports that research analysts publish about us and our business. The price of our common stock could decline if one or more research analysts downgrade our common stock or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business. If one or more of the research analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price or trading volume to decline.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

        This prospectus contains forward-looking statements. All statements other than statements of historical facts contained in this prospectus are forward-looking statements, including statements regarding our future financial position, sources of revenue, business strategy and plans, prospective products, product approvals or products under development, costs, timing and likelihood of success, gross margins, and objectives of management for future operations. In particular, many of the statements under the headings "Prospectus summary," "Risk Factors," "Management's discussion and analysis of financial condition and results of operations" and "Business" constitute forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continue," the negative of these terms, or by other similar expressions that convey uncertainty of future events or outcomes to identify these forward-looking statements. These statements are only predictions, involving known and unknown risks, uncertainties and other factors that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. We discuss many of these factors, risks and uncertainties in greater detail under the heading "Risk Factors" and elsewhere in this prospectus. These factors expressly qualify all oral and written forward-looking statements attributable to us or persons acting on our behalf.

        You should not rely on forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Actual results may differ materially from those suggested by the forward-looking statements for various reasons, including those discussed under "Risk Factors" in this prospectus. Except as required by law, we assume no obligation to update forward-looking statements for any reason after the date of this prospectus to conform these statements to actual results or to changes in our expectations.

        This prospectus contains market data and certain other statistical information based on independent industry publications, governmental publications, reports by market research firms or other independent sources, including those generated by Akamai, Cisco, Infonetics and Ovum Limited, as well as our internal research. Some data is also based on our internal estimates. Industry publications, surveys and market research reports generally state that the information contained in them has been obtained from sources believed by the sources' authors to be reliable, but we have not independently verified any of the data from third party sources nor have we investigated the underlying economic assumptions on which such data are based. We commissioned certain Ovum research referenced in the sections "Prospectus Summary" and "Business" in this prospectus and contributed to its preparation. This information involves a number of assumptions and limitations. The markets in which we operate are subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the section of this prospectus titled "Risk Factors."

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USE OF PROCEEDS

        We estimate that the net proceeds of the sale by us of our common stock in this offering will be approximately $44.2 million, based on an assumed initial public offering price of $14.00 per share, which is the midpoint of the price range listed on the cover page of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 increase or decrease in the assumed initial public offering price of $14.00 per share would increase or decrease the net proceeds to us from the offering by $3.3 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and offering expenses payable by us. The selling stockholders will sell shares in this offering only if the over-allotment option is exercised. We will not receive any proceeds from the sale of shares by the selling stockholders.

        The primary purposes for this offering are to allow us to increase our amount of working capital, to allow the possibility of repaying some portion of our indebtedness in advance of its maturity date, to fund capital expenditures or make investments in or acquisitions of other businesses, products, or technologies, and to create a public market for shares of our common stock. We anticipate that we may use approximately $13.0 million of our net proceeds to repay outstanding indebtedness, which currently has interest rates ranging from 4.375% to 6.875% and maturity dates ranging from September 2013 to November 2014. We anticipate that we may use $10.0 million of our net proceeds on capital expenditures over the next twelve months to purchase equipment to support the manufacturing of our products and the development of our technologies. We may also use a portion of net proceeds to expand our current business through strategic alliances with, or acquisitions of, other businesses, products or technologies. Because we currently have no agreements or commitments for any such specific alliances or acquisitions, we have not identified what portion, if any, of the net proceeds will be used for this purpose. Other than as described above, we do not have current specific plans for the use of the net proceeds from this offering. Pending any use above, we plan to invest the net proceeds in investment-grade, short-term, interest-bearing securities.

        Management will have significant flexibility in applying the net proceeds of the offering. The amount and timing of our actual spending for these purposes may vary significantly from our plans and will depend on a number of factors, including our future revenues, cash generated by operations and other factors described under the heading "Risk Factors." We may find it necessary or advisable to use portions of the proceeds for other purposes.


DIVIDEND POLICY

        We have never declared or paid any cash dividends on our capital stock, and we do not anticipate paying any cash dividends on our common stock for the foreseeable future. We currently intend to retain all available funds and future earnings for use in the operation and expansion of our business. Any future determination to pay cash dividends will be at the discretion of our board of directors and will depend upon our financial condition, results of operations, terms of financing arrangements, applicable Delaware law, capital requirements and such other factors as our board of directors deems relevant. In addition, the terms of our loan agreements governing our long-term debt obligations prohibit us from paying dividends.

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CAPITALIZATION

        The following table sets forth our consolidated cash and cash equivalents and capitalization as of June 30, 2013 on:

    an actual basis;

    a pro forma basis to reflect the 30-to-one reverse stock split effected on August 20, 2013 and the conversion of all outstanding shares of our preferred stock into an aggregate of 8,708,895 shares of common stock; and

    a pro forma as adjusted basis to reflect the pro forma adjustments described above and the sale by us of 3,600,000 shares of common stock in this offering, at an assumed initial public offering price of $14.00 per share, the midpoint of the price range set forth on the front cover of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses.

        The information below is illustrative only and our capitalization following the completion of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. The terms of our preferred stock provide that our preferred stock will automatically convert into shares of our common stock upon the closing of our first underwritten public offering under an effective registration statement covering the offering and sale of our common stock for our account on a firm commitment basis for proceeds of at least $30 million (for which this offering will qualify). You should read the information in this table together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the accompanying notes appearing elsewhere in this prospectus.

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  As of June 30, 2013  
 
  Actual   Pro forma   Pro forma
as adjusted (8)
 
 
  (in thousands, except share data)
 

Total debt

  $ 25,922   $ 25,922   $ 12,922  

Stockholders' equity (deficit)

                   

Redeemable Series A preferred stock, $0.001 par value, 4,900,000 shares authorized and 160,180 shares outstanding, actual; and no shares issued or outstanding pro forma or pro forma as adjusted (1)

  $ 7,105   $   $  

Series C preferred stock, $0.001 par value, 17,500,000 shares authorized and 582,284 shares outstanding, actual; and no shares issued or outstanding pro forma or pro forma as adjusted (2)

    21,802          

Series D preferred stock, $0.001 par value, 11,800,000 shares authorized and 380,441 shares outstanding, actual; and no shares issued or outstanding pro forma or pro forma as adjusted (3)

    14,185          

Series E preferred stock, $0.001 par value, 11,000,000 shares authorized and 344,581 shares outstanding, actual; and no shares issued or outstanding pro forma or pro forma as adjusted (4)

    28,055          

Series F preferred stock, $0.001 par value, 82,000,000 shares authorized and 2,676,954 shares outstanding, actual; and no shares issued or outstanding pro forma or pro forma as adjusted (5)

    19,476          

Series G preferred stock, $0.001 par value, 45,000,000 shares authorized and 1,431,307 shares outstanding, actual; and no shares issued or outstanding pro forma or pro forma as adjusted (6)

    14,993          

Common stock, $0.001 par value: 300,000,000 shares authorized; 284,279 shares outstanding, actual; 9,009,648 shares issued and outstanding, pro forma; and 12,609,648 shares issued and outstanding pro forma as adjusted (7)

    1,184     9     13  

Additional paid-in capital

    4,679     111,469     155,637  

Accumulated other comprehensive income

    2,255     2,255     2,255  

Accumulated deficit

    (83,193 )   (83,193 )   (83,193 )
               

Total stockholders' equity (deficit)

  $ 30,540   $ 30,540   $ 74,712  
               

Total capitalization

  $ 56,462   $ 56,462   $ 87,634  
               

(1)
The 160,180 shares of our redeemable Series A preferred stock outstanding on an actual basis will convert into 508,244 shares of common stock upon the closing of this offering.

(2)
The 582,284 shares of our Series C preferred stock outstanding on an actual basis will convert into 1,345,403 shares of common stock upon the closing of this offering.

(3)
The 380,441 shares of our Series D preferred stock outstanding on an actual basis will convert into 964,746 shares of common stock upon the closing of this offering.

(4)
The 344,581 shares of our Series E preferred stock outstanding on an actual basis will convert into 1,246,857 shares of common stock upon the closing of this offering.

(5)
The 2,676,954 shares of our Series F preferred stock outstanding on an actual basis will convert into 3,212,338 shares of common stock upon the closing of this offering.

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(6)
The 1,431,307 shares of our Series G preferred stock outstanding on an actual basis will convert into 1,431,307 shares of common stock upon the closing of this offering.

(7)
Certain outstanding warrants to purchase shares of our preferred stock will, if unexercised, automatically convert upon the completion of this offering into an aggregate of 16,474 shares of our common stock, based on the midpoint of the price range set forth on the cover of this prospectus.

(8)
A $1.00 increase (decrease) in the assumed initial public offering price of $14.00 per share, which is the midpoint of the price range listed on the cover page of this prospectus, would increase (decrease) each of pro forma as adjusted additional paid-in capital, total stockholders' equity (deficit) and total capitalization by approximately $3.3 million.

        The number of shares of our common stock to be outstanding after this offering is based on 9,009,648 shares of our common stock outstanding as of June 30, 2013. This number of shares includes shares of common stock with respect to certain outstanding warrants to purchase shares of our preferred stock that, if not exercised prior to the completion of this offering, will automatically convert in the aggregate into 16,474 shares of common stock, based on the midpoint of the price range on the front cover of this prospectus. This number of shares does not include:

    736,138 shares of common stock subject to outstanding options as of June 30, 2013, with a weighted average exercise price of $6.65327 per share;

    21,666 shares of Series F preferred stock issuable upon the exercise of outstanding warrants, with a weighted average exercise price of $11.5384 per share, which will automatically be adjusted upon the completion of this offering to be exercisable for an aggregate of 26,000 shares of common stock, with a weighted average exercise price of $9.6152 per share;

    6,667 shares of Series G preferred stock issuable upon the exercise of outstanding warrants, with an exercise price of $10.50 per share, which will automatically be adjusted upon the completion of this offering to be exercisable for 6,667 shares of common stock, with an exercise price of $10.50 per share; and

    800,000 shares of common stock available for future sale or issuance under our 2013 Long-Term Incentive Plan and 297,729 shares of common stock available for future sale or issuance under our prior stock option plans.

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DILUTION

        If you invest in our common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock after this offering. We calculate actual net tangible book value per share by dividing the net tangible book value, or tangible assets less total liabilities, by the number of outstanding shares of common stock. Our actual net tangible book value at June 30, 2013, was $28.8 million, or $101.15 per share. We calculate pro forma net tangible book value per share by dividing the net tangible book value, tangible assets less total liabilities, by the number of outstanding shares of common stock after giving effect to the assumed conversion of all of our convertible preferred stock. Our pro forma net tangible book value at June 30, 2013, was $28.8 million, or $3.19 per share.

        After giving effect to the sale of the 3,600,000 shares of common stock by us at the assumed initial public offering price of $14.00 per share, which is the midpoint of the price range listed on the cover page of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value at June 30, 2013, would be $72.9 million, or $5.78 per share. This represents an immediate increase in the pro forma net tangible book value of $2.59 per share to existing stockholders and an immediate dilution of $8.22 per share to new investors purchasing shares at the initial public offering price of $14.00 per share. The following table illustrates this per share dilution:

Assumed initial public offering price per share

  $ 14.00  

Actual net tangible book value per share at June 30, 2013

 
$

101.15
 

Dilution per share to existing investors from conversion of preferred stock

 
$

97.96
 

Pro forma net tangible book value per share at June 30, 2013

 
$

3.19
 

Increase per share attributable to new investors

 
$

2.59
 

Pro forma as adjusted net tangible book value per share after this offering

 
$

5.78
 

Dilution per share to new investors in this offering

 
$

8.22
 

        A $1.00 increase or decrease in the assumed initial public offering price of $14.00 would increase or decrease, respectively, our pro forma as adjusted net tangible book value per share after this offering by $0.27 per share and the dilution in pro forma as adjusted net tangible book value to new investors by $0.27 per share, assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same. Similarly, each increase or decrease of 250,000 shares in the number of common stock offered by us would increase or decrease, respectively, our pro forma as adjusted net tangible book value per share by $0.14 per share and the dilution in pro forma as adjusted net tangible book value to new investors by $0.14 per share, assuming the assumed initial public offering price remains the same.

        The following table shows on a pro forma as adjusted basis at June 30, 2013 and after giving effect to this offering the differences between existing stockholders and new investors with respect to the number of shares of common stock purchased from us, the total consideration paid to us and the average price paid per share by existing stockholders and by new investors purchasing common stock in this offering before deducting underwriting discounts and

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commissions. The calculation below is based on an assumed initial public offering price of $14.00 per share:

 
   
   
  Total consideration    
 
 
  Shares purchased    
 
 
  Amount
(in thousands)
   
  Average price
per share
 
 
  Number   Percent   Percent  

Existing stockholders

    9,009,648     71.5 % $ 106,799     67.9 % $ 11.85  

New investors

    3,600,000     28.5 %   50,400     32.1 % $ 14.00  
                         

Total

    12,609,648     100.0 % $ 157,199     100.0 % $ 12.47  

        The number of shares of our common stock to be outstanding after this offering is based on 9,009,648 shares of our common stock outstanding as of June 30, 2013. This number of shares includes shares of common stock with respect to certain outstanding warrants to purchase shares of our preferred stock that, if not exercised prior to the completion of this offering, will automatically convert in the aggregate into 16,474 shares of common stock, based on the midpoint of the price range on the front cover of this prospectus. This number of shares does not include:

    736,138 shares of common stock subject to outstanding options as of June 30, 2013, with a weighted average exercise price of $6.65327 per share;

    21,666 shares of Series F preferred stock issuable upon the exercise of outstanding warrants, with a weighted average exercise price of $11.5384 per share, which will automatically be adjusted upon the completion of this offering to be exercisable for an aggregate of 26,000 shares of common stock, with a weighted average exercise price of $9.6152 per share;

    6,667 shares of Series G preferred stock issuable upon the exercise of outstanding warrants, with an exercise price of $10.50 per share, which will automatically be adjusted upon the completion of this offering to be exercisable for 6,667 shares of common stock, with an exercise price of $10.50 per share; and

    800,000 shares of common stock available for future sale or issuance under our 2013 Long-Term Incentive Plan and 297,729 shares of common stock available for future sale or issuance under our prior stock option plans.

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SELECTED CONSOLIDATED FINANCIAL DATA

        The selected consolidated financial data in this section is not intended to replace our consolidated financial statements and the related notes. You should read this summary consolidated financial data together with the sections titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our audited consolidated financial statements and related notes, all included elsewhere in this prospectus. We derived the consolidated statements of operations data for the years ended December 31, 2010, 2011 and 2012 and the consolidated balance sheet data as of December 31, 2011 and 2012 from our consolidated financial statements appearing elsewhere in this prospectus. The consolidated statements of operations data for the six months ended June 30, 2012 and 2013 and the consolidated balance sheet data as of June 30, 2013 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results to be expected in the future and results of interim periods are not necessarily indicative of results for the entire year.

 
  Years ended December 31,   Six months ended
June 30,
 
 
  2008   2009   2010   2011   2012   2012   2013  
 
   
   
   
   
   
  (unaudited)
 
 
  (in thousands, except share and per share data)
 

Consolidated Statements of Operations Data:

                                           

Revenue

  $ 31,224   $ 24,969   $ 40,489   $ 47,840   $ 63,421   $ 28,144   $ 33,914  

Cost of goods sold (1)

    25,562     21,525     27,539     34,468     44,492     19,331     23,882  
                               

Gross profit

  $ 5,662   $ 3,444   $ 12,950   $ 13,372   $ 18,929   $ 8,813   $ 10,032  
                               

Operating expenses:

                                           

Research and development (1)

    7,117     5,707     5,176     6,451     7,603     3,284     3,902  

Sales and marketing (1)

    2,907     2,018     1,993     2,412     3,135     1,614     1,959  

General and administrative (1)

    10,171     7,298     8,382     8,243     8,012     3,912     4,822  

Asset impairment charges

    3,651         492                  
                               

Total operating expenses

  $ 23,846   $ 15,023   $ 16,043   $ 17,106   $ 18,750   $ 8,810   $ 10,683  
                               

Income (loss) from operations

    (18,184 )   (11,580 )   (3,093 )   (3,734 )   179     3     (651 )

Interest and other income (expense), net:

                                           

Interest income

    12     7     34     15     26     7     35  

Interest expense

    (983 )   (1,038 )   (906 )   (1,338 )   (1,381 )   (717 )   (602 )

Other income (expense), net

    (187 )   68     585     (271 )   231     90     (58 )
                               

Total interest and other income (expense), net

  $ (1,159 ) $ (964 ) $ (287 ) $ (1,594 ) $ (1,124 ) $ (620 ) $ (625 )
                               

Income (loss) before income taxes

    (19,342 )   (12,543 )   (3,380 )   (5,328 )   (945 )   (617 )   (1,276 )

Benefit from (provision for) income taxes

    (54 )   38                      
                               

Net income (loss) attributable to common stockholders

  $ (19,397 ) $ (12,505 ) $ (3,380 ) $ (5,328 ) $ (945 ) $ (617 ) $ (1,276 )

Accretion of redeemable convertible preferred stock and convertible preferred stock

                             
                               

Net income (loss) attributable to common stockholders

  $ (19,397 ) $ (12,505 ) $ (3,380 ) $ (5,328 ) $ (945 ) $ (617 ) $ (1,276 )
                               

Net income (loss) per share attributable to common stockholders:

                                           

Basic and diluted

  $ (76.36 ) $ (48.39 ) $ (13.06 ) $ (20.21 ) $ (3.56 ) $ (2.33 ) $ (4.77 )
                               

Weighted average shares used to compute net income (loss) per share attributable to common stockholders:

                                           

Basic and diluted

    254,009     258,414     258,901     263,658     265,576     265,252     267,711  
                               

(1)
These expenses include stock-based compensation expense. Stock-based compensation expense is accounted for at fair value, using the Black-Scholes option-pricing model. Stock-based compensation expense is recognized over the vesting period of the stock options and was included in cost of goods sold and operating expenses as follows:

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  Years ended December 31,   Six
months
ended
June 30,
 
 
  2008   2009   2010   2011   2012   2012   2013  
 
   
   
   
   
   
  (unaudited)
 
 
  (in thousands)
 

Cost of goods sold

  $ 110   $ 102   $ 61   $ 35   $ 7   $ 4   $ 26  

Research and development

    143     98     60     50     8     4     24  

Sales and marketing

    112     119     80     58     9     4     21  

General and administrative

    668     594     579     420     137     24     169  
                               

Total stock-based compensation expense

  $ 1,033   $ 913   $ 780   $ 563   $ 161   $ 36   $ 240  
                               

 

 

 
  Years ended December 31,   Six
months
ended
June 30,
 
 
  2008   2009   2010   2011   2012   2013  
 
   
   
   
   
   
  (unaudited)
 
 
  (in thousands)
 

Consolidated balance sheet data:

                                     

Total cash (1)

  $ 1,395   $ 2,867   $ 4,643   $ 2,074   $ 11,226   $ 10,854  

Working capital (2)

    (875 )   7,511     (2,322 )   (1,911 )   13,669     14,003  

Total assets

    47,405     45,560     52,934     53,723     65,748     71,996  

Total debt (3)

    23,417     14,300     23,071     22,597     24,584     25,922  

Redeemable convertible preferred stock and convertible preferred stock

    71,145     90,423     90,423     94,373     105,367     105,614  

Common stock and additional paid-in-capital

    3,025     3,939     4,723     5,303     5,542     5,864  

Total deficit

    (59,758 )   (72,263 )   (75,643 )   (80,972 )   (81,917 )   (83,193 )

(1)
Total cash is defined as cash, cash equivalents and restricted cash.

(2)
Working capital is defined as total current assets less total current liabilities.

(3)
Total debt is defined as short-term loans, notes payable and total long-term debt.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        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 prospectus. This discussion and other parts of this prospectus contain forward-looking statements that involve risks and uncertainties, such as statements 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."

Overview

        We are a leading, vertically integrated provider of fiber-optic networking products. We target three networking end-markets: CATV, FTTH and internet data centers. 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 CATV, FTTH and internet data center 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.

        The three end markets we target are all driven by significant bandwidth demand fueled by the growth of network-connected devices, video traffic, cloud computing and online social networking. Within the CATV market, we benefit from a number of ongoing trends including the global build-out of CATV infrastructure, the move to higher bandwidth networks among CATV service providers and the outsourcing of system design among CATV networking equipment companies. In the FTTH market, we benefit from continuing PON deployments and system upgrades among telecommunication service providers. Within the internet data center market, we benefit from the increasing use of higher-capacity optical networking technology as a replacement for copper cables, particularly as speeds reach 10 gigabits per second and above, as well as the movement to open internet data center architectures and the increasing use of in-house equipment design among leading internet companies.

        We sell our products to leading original equipment manufacturers, or OEMs, in the CATV and FTTH markets as well as internet data center operators. In 2012, our products were used by the five largest CATV OEMs, consisting of Arris Group Inc., Aurora Networks, Inc., Cisco Systems, Inc., Harmonic Inc. and Motorola Mobility Holdings, Inc. and sales to such customers represented an aggregate of 42.5% of our total revenue in 2012. Specifically, in 2012, Cisco Systems, Inc. accounted for 33.2% of our revenue and the other four largest CATV OEMs accounted for an aggregate of 9.3% of our revenue. In 2013, Arris Group Inc. acquired the Motorola Home business and Aurora Networks, Inc. acquired the Harmonic optical business. In addition to our OEM customers, Biogenomics Corp., a distributor, represented 11.2% of our revenue in 2012. The two customers that contributed most to our revenue in the FTTH market in 2012 were Genexis B.V. and Askey, which accounted for 3.4% and 1.1% of our total revenue, respectively. In 2012, the two customers that contributed most to our revenue in the internet data center market were Microsoft Corporation and a leading internet retail company, which accounted for 2.6% and 5.7% of our total revenue, respectively. In 2012, 78.6% of our revenue

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was attributable to sales of our products into the CATV market, 8.3% of our revenue was attributable to sales of our products into the internet data center market, 5.8% of our revenue was attributable to sales of our products into the FTTH market and the remaining 7.2% was attributable to other markets (including telecom networking). During the first six months of 2013, 55.4% of our revenue was attributable to sales of our products in the CATV market, 30.3% of our revenue was attributable to sales of our products in the internet data center market, 5.3% of our revenue was attributable to sales of our products in the FTTH market, and 9.0% of our revenue is attributable to sales of our products in other markets.

        Our sales model focuses on direct engagement and close coordination with our customers to determine product design, qualifications, performance and price. Our strategy is to use our direct sales force to sell to key accounts and to expand our use of distributors for increased coverage in certain international markets and certain domestic market segments. We have direct sales personnel that cover the U.S., Taiwan and China focusing primarily on major OEM customers and internet data center operators. Throughout our sales cycle, we work closely with our customers to qualify our products into their product lines. As a result, we strive to build strategic and long-lasting customer relationships and deliver products that are customized to our customers' requirements.

        Our business depends on winning competitive bid selection processes to develop components, systems and equipment for use in our customers' products. These selection processes are typically lengthy, and as a result, our sales cycles will vary based on the level of customization required, market served, whether the design win is with an existing or new customer and whether our solution being designed in our customers' product is our first generation or subsequent generation product. We do not have any long-term purchase commitments (in excess of one year) with any of our customers, all of whom purchase our products on a purchase order basis. Once one of our solutions is incorporated into a customer's design, however, we believe that our solution is likely to continue to be purchased for that design throughout that product's life cycle because of the time and expense associated with redesigning the product or substituting an alternative solution.

        In 2010, 2011, 2012 and the six months ended June 30, 2013, we had 12, 11, 15 and 13 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.

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        We believe we have an attractive financial profile, with strong revenue performance and control over our manufacturing costs through our vertically integrated manufacturing model. While we have incurred substantial losses since our inception, and as of December 31, 2012 had an accumulated deficit of $81.9 million, we achieved profitability (net income on a GAAP basis) in the fourth quarter of 2012. We have grown our revenue at a 36.4% CAGR between 2009 and 2012, including 32.6% growth year-over-year from 2011 to 2012.

Factors Affecting Our Performance

        Increasing Consumer Demand for Bandwidth.    Bandwidth demand in all of our target markets is driving service provider investment in new equipment and in turn generating demand for our products. Increasingly, optical networking technologies are being incorporated into networking equipment, replacing legacy copper-based networking technologies. This shift to optical networking solutions benefits us as a provider of those solutions.

        Pricing, Product Cost and Margins.    Our solution pricing varies depending upon the end market, the complexity of the product and the level of competition. Our product costs also vary with complexity as well as the degree to which we can utilize components designed and manufactured ourselves. We tend to realize higher gross margins on products that incorporate a higher percentage of our own components. We often initially experience lower gross margins on new products, as our pricing is based upon anticipated volume-driven cost reductions over the life of the design win. Thus, if we are unable to realize our expected cost reductions, we may experience declining gross margins on such products.

        Our product pricing is established when the product is initially introduced to the market, and thereafter through periodic negotiations with customers. We generally do not agree to periodic automatic price reductions. Furthermore, due to the dynamics in the CATV market and the value of our outsourced design services to our customers, we believe we face less downward price pressure than many of our competitors. We sell a wide variety of products among our three target markets and our gross margin is heavily dependent in any quarter on the product mix achieved during that period.

        Decreasing Customer Concentration within End Markets.    Historically, our revenue has been significantly concentrated within the CATV market and among a few customers within this market. Over the past two years, we have developed new products within the FTTH and internet data center markets. 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. Although we expect the CATV market to remain our largest market for the next several years, we anticipate that sales in the FTTH and internet data center markets will continue to account for a more significant percentage of our total revenue into the future. We believe that our entry into the FTTH and internet data center markets with new customers and with new products will continue to facilitate revenue growth and customer diversification.

        Product Development.    We invest heavily to develop new and innovative products. The majority of our research and development expense is allocated to product development, usually with a specific customer and customer platform in mind. We believe our close coordination with our customers regarding their future product requirements enhances the efficiency of our research and development expenditures.

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Discussion of Financial Performance

Revenue

        We generate revenue through the sale of our products to equipment providers for the CATV, FTTH and internet data center 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. We also anticipate that our revenue derived from the FTTH and internet data center markets will increase as a percentage of our revenue as we further penetrate and extend our products into these markets. The following chart provides the revenue contribution from each of the markets we serve for the years ended 2010, 2011 and 2012, and the six month periods ended June 30, 2012 and 2013, as well as the corresponding percentage of our total revenue for each period:

 
  Years ended
December 31,
  Six Months Ended June 30,  
Market
  2010   2011   2012   2012   2013  
 
  (in thousands, except percentages)
 

CATV

  $ 32,959   $ 38,939   $ 49,842   $ 23,035   $ 18,773  

Data Center

        14     5,293     1,317     10,260  

FTTH

    1,969     3,314     3,690     1,480     1,792  

Other

    5,561     5,573     4,596     2,312     3,089  
                       

Total

  $ 40,489   $ 47,840   $ 63,421   $ 28,144   $ 33,914  
                       

    Percentage of Revenue  

CATV

    81.4 %   81.4 %   78.6 %   81.8 %   55.4 %

Data Center

    0.0 %   0.0 %   8.3 %   4.7 %   30.3 %

FTTH

    4.9 %   6.9 %   5.8 %   5.3 %   5.3 %

Other

    13.7 %   11.7 %   7.3 %   8.2 %   9.0 %

Total

    100.0 %   100.0 %   100.0 %   100.0 %   100.0 %

        In 2010, 2011 and 2012, our top ten customers represented 80.5% 76.6% and 77.6% of our revenue, respectively. Our largest customer Cisco Systems, Inc. represented 18.9%, 26.8% and 33.2% of our revenue in 2010, 2011 and 2012, respectively. Biogenomics Corp., a distributor, accounted for 13.8%, 11.7% and 11.2%, of our revenue in 2010, 2011 and 2012, respectively. In 2010, Aurora Networks, Inc. accounted for 10.8% of our revenue and Electroline Systems accounted for 10.2% of our revenue. No other customer represented more than 10.0% of our revenue in 2010, 2011 or 2012.

        Revenue is recognized when the product is shipped and title has transferred to the customer. We bear all costs and risks of loss or damage to the goods up to that point. On most orders, our terms of sale provide that title passes to the customer upon placement by us with a common carrier (upon shipment). 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, 2012, 18.1% of our total revenue was derived from our China-based subsidiary, with $11.4 million denominated in RMB, and an immaterial amount sold directly by our Taiwan location. We expect a similar portion of our sales to be denominated in foreign currencies in 2013.

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        During 2012 compared to 2011, our average sales price across our product lines declined less than 8.0%. Certain of our competitors in the optical industry, who may have narrower market focus than us or broader product lines within a market, have publically stated that they typically experience annual price declines of 10-15%. Revenue from period to period is driven by the volume of shipments and may be impacted by pricing pressures, among other factors.

Cost of goods sold and gross margin

        Our cost of goods sold consists of material costs, direct labor, allocated overhead and periodic cost variances, including reserves for excess and obsolete inventory, with each representing approximately 69.5%, 9.3%, 16.1%, and 5.1% of our total cost of goods sold, respectively, in 2012.

        Our cost of goods sold is impacted by variances arising from changes in yields and production volume. We typically experience lower yields and higher associated costs on new products. In general, our cost of goods sold for a particular product declines over time as a result of increasing efficiencies in the manufacturing processes, or supply cost declines, as well as yield improvements and testing enhancements.

        We manufacture our products in all three of our facilities in the U.S., Taiwan and China. Generally, laser chips and optical components are manufactured in our U.S. facility, optical components and subassemblies are manufactured in our Taiwan facility, and equipment is manufactured in our China facility. Because of our vertical integration model, we utilize our own products in our semi-finished and finished goods that we sell between and among our respective manufacturing operations. We base those internal sales upon established transfer pricing methodologies. However, we eliminate all of those internal sales, and cost of goods sold transactions, to arrive at total revenue and cost of goods sold on a consolidated basis.

        We have a global set of suppliers to help balance considerations related to product availability, quality and cost. Components of our cost of goods sold are denominated in U.S. or NT dollars or RMB, depending upon the manufacturing location.

        Gross profit as a percentage of total revenue, or gross margin, has been and is expected to continue to be affected by a variety of factors, including the introduction of new products, production volumes, the mix of products sold, the geographic region in which products are sold, changes in the cost and volumes of materials purchased from our suppliers, changes in labor costs, changes in overhead costs, reserves for excess and obsolete inventories and changes in the average selling prices of our products. Although our overall gross margins over the past three years have been between 28.0% and 32.0%, our gross margins vary more broadly on a product-by-product basis. Our newer and more advanced products typically have higher average selling prices and higher gross margins; however, until the product volumes scale, the gross margin from newer and advanced products may initially be lower. Within our markets, we sell similar products to different geographic regions at different prices, and therefore realize different gross margins among those similar products. We generally realize a lower gross margin in sales to Asian markets. Our strategy is to improve our gross margins through vertical integration such as utilization of our own laser chips and optical sub-components in our solutions. We expect that our gross margins are likely to continue to fluctuate from quarter to quarter because of the variety of products we sell and the relative product mix within a quarter.

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Operating expenses

        Our operating expenses consist of research and development, sales and marketing, and general and administrative expenses. Personnel costs are the most significant component of operating expenses and include salaries, benefits, bonuses and stock-based compensation. With regard to sales and marketing expense, personnel costs also include sales commissions.

        Research and development.    Research and development, or R&D, expense consists primarily of personnel costs, including stock-based compensation for R&D personnel, and R&D work orders (that include material, direct labor and allocated overhead), as well as allocated development costs, such as engineering services, software and hardware tools, depreciation of capital equipment and facility costs. We record all research and development expense as incurred. Customers rely upon us to assist them with the development of new products and modification of existing products because of our extensive optical design and manufacturing expertise. We work closely with our customers in the critical design phase of product development, and are often reimbursed for those development efforts. By virtue of our overseas R&D operations and by focusing on customer-specific projects, our research and development expenses have tended to represent a lower percentage of revenue compared to some of our competitors. In the future, we expect research and development expense to increase on a dollar basis, but continue to decline as a percentage of revenue, to the extent our revenue increases over time.

        Sales and marketing.    Sales and marketing expense consists primarily of personnel costs, including stock-based compensation for our sales and marketing personnel, as well as travel and trade show expense, sales commissions and the allocation of overall corporate services and facility costs. We sell our products to customers who either incorporate our products into their offering or resell our products to end customers. Because we sell to a limited number of well-established customers, we employ a limited number of sales professionals who are able to cover large markets. We compensate our sales staff through base salary and commissions, with base salary being the largest component of overall compensation. Total sales commissions to employees amounted to less than one percent of our revenue in 2012. Additionally, we pay commissions to third parties on certain product lines and identified customers, which also amounted to less than one percent of our revenue in 2012. As such, our sales and marketing expense does not directly increase with revenue. In the future, we expect sales and marketing expense to increase on a dollar basis as we incrementally increase our overall sales activities, but expect our sales and marketing expense to decline as a percentage of revenue, to the extent our revenue increases over time.

        General and administrative.    General and administrative expense consists primarily of personnel costs, including stock-based compensation, primarily for our finance, human resources and information technology personnel and certain executive officers, as well as professional services costs related to accounting, tax, banking, legal and information technology services, depreciation of capital equipment and facility costs. We expect general and administrative expense to increase in the short term, as we develop the infrastructure necessary to operate as a public company, including increased audit and legal fees, costs to comply with the Sarbanes-Oxley Act and the rules and regulations applicable to companies listed on a national stock exchange, as well as investor relations expense and higher insurance premiums. In the future, we expect general and administrative expense to increase on a dollar basis but continue to decline as a percentage of revenue, to the extent our revenue increases over time.

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Other income (expense)

        Interest income consists of income earned on our cash, cash equivalents and short-term investments. Interest expense consists of amounts paid for interest on our short-term and long-term debt borrowings.

        Other income (expense), net is primarily made up of foreign currency transaction gains and losses. The functional currency of our China subsidiary is the RMB and the foreign currency transaction gains and losses of our China subsidiary primarily result from their transactions in U.S. dollars. The functional currency of our Taiwan location is the NT dollar and the foreign currency transaction gains and losses of our Taiwan location primarily result from their transactions in U.S. dollars.

Income taxes

        We conduct our business globally. However, our operating income is subject to varying rates of tax in the U.S., Taiwan and China. Consequently, our effective tax rate is dependent upon the geographic distribution of our earnings or losses and the tax laws and regulations in each geographical region. We expect that our income taxes will vary in relation to our profitability and the geographic distribution of our profits. Our effective U.S. federal income tax rate was 0% in the past three years as we have incurred operating losses. At December 31, 2012, our U.S. accumulated net operating loss, or NOL, was $66.7 million. As we earn profits in the U.S., we expect to reduce our cash tax obligations by the utilization of NOL carry-forwards. Our NOL benefits expire over the twelve-year period from 2020 to 2032. Under Section 382 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an "ownership change," the corporation's ability to use its pre-change NOLs, capital loss carry-forwards and other pre-change tax attributes to offset its post-change income may be limited going forward. Based upon an analysis of our equity ownership, we have experienced an ownership change and our NOL carryforwards are limited in dollar amount. As of December 31, 2012, of the total accumulated NOL only $38.7 million is available for utilization in 2013 and thereafter to shelter federal taxable income. Each year after 2013, an additional $0.3 million is added to the total available NOL, until a maximum of $64.1 million is reached. The amount of NOL available each year may decrease by the amount of NOL utilized and may increase by the amount of any operating losses incurred. Should we experience additional ownership changes our NOL carryforwards may be further limited.

        In China, our wholly owned China subsidiary has enjoyed preferential tax concessions as a "high-tech enterprise." Pursuant to China's State Council's Regulations on Encouraging Investment in and Development, our China subsidiary is entitled to full exemption from China's Foreign Enterprise Income Tax, or FEIT, for the first two years and a 50% reduction for the next three years, commencing from the first profit making year after offsetting all tax losses carried forward from the previous five years. In March 2007, China enacted the PRC Enterprise Income Tax Law, or EIT Law, under which, effective January 1, 2008, China adopted a uniform income tax rate of 25% for all enterprises (including foreign invested enterprises) and cancelled several tax incentives enjoyed previously by foreign invested enterprises. For foreign invested enterprises like our China subsidiary that were established before the promulgation of the EIT Law, a five-year transition period is provided during which reduced income tax rates will apply but gradually be phased out. The Chinese government has not yet announced implementation measures for the transitional policy concerning such preferential tax rates, so we are unable at this time to estimate the financial impact of the new tax law. We expect that our income tax liability from China profits will vary based upon the implementation of that tax policy and the utilization of our NOL carry-forwards. At December 31, 2012, our accumulated NOLs for our China subsidiary were $9.0 million, which expire over a four year period from 2013 to 2016. As

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we earn profits in China, we expect to reduce our cash tax obligations by the utilization of NOL carry-forwards. The NOL benefits are available to reduce our tax obligations in future periods.

Results of Operations

        The following table set forth our results of operations for the periods presented and as a percentage of our revenue for those periods. The period-to-period comparison of our financial results is not necessarily indicative of our financial results to be achieved in future periods.

 
  Years ended
December 31,
  Six months ended
June 30,
 
 
  2010   2011   2012   2012   2013  
 
  (in thousands, except percentages)
 

Consolidated Statements of Operations Data:

                               

Revenue

  $ 40,489   $ 47,840   $ 63,421   $ 28,144   $ 33,914  

Cost of goods sold (1)

    27,539     34,468     44,492     19,331     23,882  
                       

Gross profit

  $ 12,950   $ 13,372   $ 18,929   $ 8,813   $ 10,032  
                       

Gross margin

    32.0%     28.0%     29.8%     31.3%     29.6%  

Operating expenses:

                               

Research and development (1)          

    5,176     6,451     7,603     3,294     3,902  

Sales and marketing (1)

    1,993     2,412     3,135     1,614     1,959  

General and administrative (1)          

    8,341     8,197     7,952     3,883     4,788  

Amortization of intangible assets          

    41     46     60     29     34  

Asset impairment charges

    492                  
                       

Total operating expenses

  $ 16,043   $ 17,106   $ 18,750   $ 8,810   $ 10,683  
                       

Income (loss) from operations

  $ (3,093 )   (3,734 )   179     3     (651 )

Interest and other income (expense), net

    (287 )   (1,594 )   (1,124 )   (620 )   (625 )
                       

Income (loss) before income taxes          

  $ (3,380 ) $ (5,328 ) $ (945 ) $ (617 ) $ (1,276 )
                       

Benefit from (provision for) income taxes

                     
                       

Net income (loss)

  $ (3,380 ) $ (5,328 ) $ (945 ) $ (617 ) $ (1,276 )
                       

Additional Financial Data:

                               

Non-GAAP gross profit (2)

  $ 13,011   $ 13,407   $ 18,936   $ 8,817   $ 10,058  

Non-GAAP income (loss) from operations (2)

    (1,923 )   (3,000 )   441     74     (343 )

Non-GAAP net income (loss) (2)

    (1,780 )   (5,026 )   (503 )   (551 )   (780 )

Adjusted EBITDA (2)

    2,881     (638 )   3,734     1,607     1,310  

(1)
These expenses include stock-based compensation expense, which is accounted for at fair value, using the Black-Scholes option-pricing model. Stock-based compensation expense is recognized over the vesting period of the stock options and was included in cost of goods sold and operating expenses as follows:

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  Years ended December 31,   Six
months
ended
June 30,
 
 
  2010   2011   2012   2012   2013  
 
  (in thousands)
   
   
 

Cost of goods sold

  $ 61   $ 35   $ 7   $ 4   $ 26  

Research and development

    60     50     8     4     24  

Sales and marketing

    80     58     9     4     21  

General and administrative

    579     420     137     24     169  
                       

Total stock-based compensation expense

  $ 780   $ 563   $ 161   $ 36   $ 240  
                       
(2)
We prepare Adjusted EBITDA and our other non-GAAP measures to eliminate the impact of items that we do not consider indicative of our overall operating performance. To arrive at our non-GAAP gross profit, we exclude stock-based compensation expense from our GAAP gross profit. To arrive at our non-GAAP income (loss) from operations we exclude all amortization of intangible assets, stock-based compensation expense and non-recurring consulting fees, if any, from our GAAP net income (loss) from operations. To arrive at our Adjusted EBITDA, we exclude these same items and, additionally, exclude asset impairment charges, loss (gain) from disposal of idle assets, unrealized exchange loss (gain), interest (income) expense, on a net basis, provision for (benefit from) income taxes and all depreciation expense from our GAAP net income (loss).


We believe that our non-GAAP measures are useful to investors in evaluating our operating performance for the following reasons:

We believe that elimination of items, such as stock-based compensation expense, adjusted depreciation and amortization, income tax expense and other income, net, is appropriate because treatment of these items may vary for reasons unrelated to our overall operating performance;

We use non-GAAP measures in conjunction with our GAAP financial measures for planning purposes, including the preparation of our annual operating budget, as a measure of operating performance and the effectiveness of our business strategies and in communications with our board of directors concerning our financial performance;

We believe that non-GAAP measures provide better comparability with our past financial performance, facilitates better period-to-period comparisons of operational results and also facilitates comparisons with our peer companies, many of which also use similar non-GAAP financial measures to supplement their GAAP reporting; and

We anticipate that, after consummating this offering, our investor presentations and those of securities analyst will include non-GAAP measures to evaluate our overall operating performance.


Adjusted EBITDA and other non-GAAP measures should not be considered as an alternative to gross profit, income (loss) from operations, net income (loss) or any other measure of financial performance calculated and presented in accordance with GAAP. Our Adjusted EBITDA and other non-GAAP measures may not be comparable to similarly titled measures of other organizations because other organizations may not calculate Adjusted EBITDA or such other non-GAAP measures in the same manner. You are encouraged to evaluate these adjustments and the reason we consider them appropriate. For a reconciliation between GAAP and Non-GAAP measures, see footnote (3) to the table in the section titled "Summary Consolidated Financial Data" on page 9 of this prospectus.

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Comparison of the Six Months Ended June 30, 2013 and 2012

Revenue

 
  Six months ended
June 30,
  Change  
 
  2012   2013   Amount   %  
 
  (in thousands, except percentages)
 

Revenue

  $ 28,144   $ 33,914   $ 5,770     20.5 %

        Of our total revenue in the six months ended June 30, 2013, we generated $18.8 million, or 55.4%, from the CATV market, $10.3 million, or 30.3%, from the internet data center market, $1.8 million, or 5.3%, in the FTTH market, and $3.1 million, or, 9.0%, from other markets.

        The increase in revenue was attributable to a $8.9 million increase from the internet data center market, and a $1.1 million increase from the other markets, which increases were partially offset by a $4.3 million decrease in the CATV market. Revenues in the internet data center market were driven by increasing sales to new customers acquired late in 2012. Revenues in the FTTH and other markets were driven by the addition of new customers in the FTTH market and increasing sales to existing customers in the other markets. The decline in revenues in the CATV market in 2013 was a result of market-wide weakness in the first half of 2013, particularly in China, as well as delays in orders as a consequence of mergers among several of our CATV customers.

Cost of goods sold and gross margin

 
  Six months ended June 30,    
   
 
 
  2012   2013    
   
 
 
  Change  
 
   
  % of
revenue
   
  % of
revenue
 
 
  Amount   Amount   Amount   %  
 
  (in thousands, except percentages)
 

Cost of goods sold

  $ 19,331     68.7 % $ 23,882     70.4 % $ 4,551     23.5 %

Gross margin

          31.3 %         29.6 %            

        Cost of goods sold increased by $4.6 million, or 23.5%, from the six months ended June 30, 2012 to the six months ended June 30, 2013, primarily due to a combination of a $3.3 million increase in direct material costs and a $0.7 million increase in labor and overhead costs, both of which were associated with our increase in revenues. Within our markets, we sell similar products in different geographic regions at different prices, and therefore realize different gross margins among those similar products. The decrease in gross margin was primarily the result of an unfavorable product mix in the Asian market, leading to higher than normal direct labor and overhead charges in the three-months ended June 30, 2013. Additionally, in the six-month period ended June 30, 2013, we recorded a higher than normal inventory reserve from discontinued products associated with inventory on hand in our Asia operations.

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Operating expenses

 
  Six months ended June 30,    
   
 
 
  2012   2013    
   
 
 
  Change  
 
   
  % of
revenue
   
  % of
revenue
 
 
  Amount   Amount   Amount   %  
 
  (in thousands, except percentages)
 

Research and development

  $ 3,284     11.7 % $ 3,902     11.5 % $ 618     18.8 %

Sales and marketing

    1,614     5.7 %   1,959     5.8 %   345     21.4 %

General and administrative

    3,883     13.8 %   4,788     14.1 %   905     23.3 %

Amortization of intangible assets

    29     0.1 %   34     0.1 %   5     18.3 %
                           

Total operating expenses

  $ 8,810     31.3 % $ 10,683     31.5 % $ 1,873     21.3 %
                           

Research and development expense

        Research and development expense increased by $0.6 million, or 18.8%, from the six months ended June 30, 2012 to the six months ended June 30, 2013. This was primarily due to increases in personnel costs and R&D work order and project costs related to new product development.

Sales and marketing expense

        Sales and marketing expense increased by $0.3 million, or 21.4%, from the six months ended June 30, 2012 to the six months ended June 30, 2013. This was primarily due to an increase in personnel costs due to additional sales and marketing staff.

General and administrative expense

        General and administrative expense increased by $0.9 million, or 23.3%, from the six months ended June 30, 2012 to the six months ended June 30, 2013. This was primarily due to an increase in personnel costs, professional fees and travel expenses.

Other income (expense), net

 
  Six months ended June 30,    
   
 
 
  2012   2013    
   
 
 
  Change  
 
   
  % of
revenue
   
  % of
revenue
 
 
  Amount   Amount   Amount   %  
 
  (in thousands, except percentages)
 

Interest income

  $ 7     0.0 % $ 35     0.1 % $ 28     400.0 %

Interest expense

    (717 )   (2.5 )%   (602 )   (1.8 )%   115     (16.0 )%

Other income (expense), net

    90     0.3 %   (58 )   (0.2 )%   (148 )   (164.4 )%
                           

Total other income (expense), net

  $ (620 )   (2.2 )% $ (625 )   (1.8 )% $ (5 )   0.8 %
                           

        Total other income (expense), net remained relatively unchanged from the six months ended June 30, 2012 to the six months ended June 30, 2013.

        Interest expense decreased for the six months ended June 30, 2012 to the six months ended June 30, 2013 due to the benefit of lower interest rates on relatively unchanged loan balances.

        Other income (expense) increased due to government subsidies received in China offset by an unrealized foreign exchange loss recognized resulting from the depreciation of the NT dollar

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against the U.S. dollar. We qualify as a high-tech enterprise and are paid subsidies from time to time based upon the revenue earned in China by the Chinese government to foster local high-tech manufacturing.

Benefit from (provision for) income taxes

 
  Six
Months
ended
June 30,
   
 
 
  2012   2013   Change  
 
  (in thousands,
except percentages)

 

Benefit from (provision for) income taxes

  $   $   $  

Effective tax rate

    0.0 %   0.0 %   0.0 %

        Our effective tax rate was 0.0% for the six months ended June 30, 2013 and the six months ended June 30, 2012, as we did not generate positive taxable income.

Comparison of Years Ended December 31, 2012 and 2011

Revenue

 
  Years ended December 31,   Change  
 
  2011   2012   Amount   %  
 
  (in thousands, except percentages)
 

Revenue

  $ 47,840   $ 63,421   $ 15,581     32.6 %

        Of our total revenue in 2012, we generated $49.8 million, or 78.6%, from the CATV market, $5.3 million, or 8.3%, from the internet data center market, $3.7 million, or 5.8%, from the FTTH market, and $4.6 million, or 7.3%, from other markets. Total revenue increased by $15.6 million, or 32.6%, from 2011 to 2012. The increase in revenue was attributable to an $11.0 million increase in revenue from our CATV market, a $5.3 million increase from the internet data center market, and a $0.4 million increase in the FTTH market, which increases were partially offset by a $1.0 million decrease from other markets. Our CATV market revenue increased in 2012 primarily due to increased capital expenditures by CATV service providers and increased shipments of our CATV equipment products. Revenues in 2012 were also driven by sales increases from two customers in the internet data center market. Our FTTH market revenue increased primarily because of the sale of new transceiver products to existing customers. Revenue declined in other markets because of a de-emphasis by our sales staff and the decline in sales of certain legacy products within those markets.

Cost of goods sold and gross margin

 
  Years ended December 31,    
   
 
 
  2011   2012    
   
 
 
  Change  
 
   
  % of
revenue
   
  % of
revenue
 
 
  Amount   Amount   Amount   %  
 
  (in thousands, except percentages)
 

Cost of goods sold

  $ 34,468     72.0 % $ 44,492     70.2 % $ 10,024     29.1 %

Gross margin

          28.0 %         29.8 %            

        Cost of goods sold increased by $10.0 million, or 29.1%, from 2011 to 2012, primarily due to a combination of an $8.5 million increase in direct material costs and a $1.3 million increase

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in labor and overhead costs, both of which were associated with our increase in revenues. The increase in gross margin was caused by lower direct labor costs and lower overhead from improved efficiency, combined with a reduction in our inventory reserve. The inventory reserves were higher in 2011 primarily due to discontinued products and aging of inventory on hand.

Operating expenses

 
  Years ended December 31,    
   
 
 
  2011   2012    
   
 
 
  Change  
 
   
  % of
revenue
   
  % of
revenue
 
 
  Amount   Amount   Amount   %  
 
  (in thousands, except percentages)
 

Research and development

  $ 6,451     13.5 % $ 7,603     12.0 % $ 1,152     17.9 %

Sales and marketing

    2,412     5.0 %   3,135     4.9 %   723     30.0 %

General and administrative

    8,197     17.1 %   7,952     12.5 %   (245 )   (3.0 )%

Amortization of intangible assets

    46     0.1 %   60     0.1 %   14     29.4 %
                           

Total operating expenses

  $ 17,106     35.8 % $ 18,750     29.6 % $ 1,644     9.6 %
                           

Research and development expense

        Research and development expense increased by $1.2 million, or 17.9%, from 2011 to 2012, $0.7 million of which was attributable to R&D material expenses associated with new product development. The remaining $0.5 million increase was a result of a reallocation of existing personnel costs to R&D work orders and an increase in R&D staffing. Because our R&D staff is integral to new product development, our R&D staff often rotate between R&D work orders (non-production orders) and production orders. As we shift those personnel from production back to R&D, our R&D expenses vary.

Sales and marketing expense

        Sales and marketing expense increased by $0.7 million, or 30.0%, from 2011 to 2012. This was due to a $0.5 million increase in personnel costs due to additional sales and marketing staff to better serve our customers, and an increase in sales commissions of $0.2 million because of our revenue growth.

General and administrative expense

        General and administrative expense decreased by $0.2 million, or 3.0%, from 2011 to 2012. This was primarily due to a decrease in stock option compensation expense because of the use of a reduced volatility assumption and prior grants becoming fully vested.

Other income (expense), net

 
  Years ended December 31,    
   
 
 
  2011   2012    
   
 
 
  Change  
 
   
  % of
revenue
   
  % of
revenue
 
 
  Amount   Amount   Amount   %  
 
  (in thousands, except percentages)
 

Interest income

  $ 15     0.0 % $ 26     0.0 % $ 11     71.3 %

Interest expense

    (1,338 )   (2.8 )%   (1,381 )   (2.2 )%   (45 )   3.3 %

Other income (expense), net

    (271 )   (0.6 )%   231     0.4 %   502     186.0 %
                           

Total Other income (expense), net

  $ (1,594 )   (3.3 )% $ (1,124 )   (1.8 )% $ 470     29.5 %
                           

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        Total net other expense decreased by $0.5 million, or 29.5%, from 2011 to 2012. Interest expense remained relatively unchanged from 2011 to 2012. While average loan balances increased from 2011 to 2012 by about $2.0 million, we benefited from a reduction in interest rates in 2012. The net other expense decreased by $0.5 million from 2011 to 2012 primarily due to foreign currency revaluation gains from U.S. denominated accounts in 2012 when the NT dollar appreciated against the U.S. dollar.

Benefit from (provision for) income taxes

 
  Years ended
December 31,
   
 
 
  2011   2012   Change  
 
  (in thousands, except percentages)
 

Benefit from (provision for) income taxes

  $   $   $  

Effective tax rate

    0.0 %   0.0 %   0.0 %

        Our effective tax rate was 0.0% for 2011 and 2012, as we did not generate positive taxable income.

Comparison of Years Ended December 31, 2011 and 2010

Revenue

 
  Years ended
December 31,
  Change  
 
  2010   2011   Amount   %  
 
  (in thousands, except percentages)
 

Revenue

  $ 40,489   $ 47,840   $ 7,351     18.2 %

        Of our total revenue in 2011, we generated $38.9 million, or 81.4%, from the CATV market, $3.3 million, or 6.9%, from the FTTH market, $5.6 million, or 11.6%, from other markets and an immaterial amount from the internet data center market. Total revenue increased by $7.4 million, or 18.2%, from 2010 to 2011. The increase in revenue was attributable to a $5.9 million increase in revenue from our CATV market, a $1.4 million increase in the FTTH market, and immaterial increases from other markets, including the internet data center market. Our CATV market revenue increased in 2011 primarily due to increased capital expenditures by CATV service providers and increased shipments of our CATV equipment products. Our FTTH market revenue increased primarily because of the sale of new transceiver products within our existing customer base. Revenue in other markets was flat because of a de-emphasis by our sales staff on certain legacy products within those markets.

Cost of goods sold and gross margin

 
  Years ended December 31,    
   
 
 
  2010   2011    
   
 
 
  Change  
 
   
  % of
revenue
   
  % of
revenue
 
 
  Amount   Amount   Amount   %  
 
  (in thousands, except percentages)
 

Cost of goods sold

  $ 27,539     68.0 % $ 34,468     72.0 % $ 6,930     25.2 %

Gross margin

          32.0 %         28.0 %            

        Cost of goods sold increased by $6.9 million, or 25.2%, from 2010 to 2011. The increase was primarily due to higher sales volumes in the CATV market. Cost of goods sold in 2011 was also affected by an increase in inventory reserves of $0.7 million, including a specific write-off of discontinued products in the fourth quarter of 2011.

        The decrease in gross margin was primarily the result of an unfavorable product mix in the CATV market in addition to the $0.7 million in higher inventory loss reserve through the application of our inventory reserve policy.

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Operating expenses

 
  Years ended December 31,    
   
 
 
  2010   2011    
   
 
 
  Change  
 
   
  % of
revenue
   
  % of
revenue
 
 
  Amount   Amount   Amount   %  
 
  (in thousands, except percentages)
 

Research and development

  $ 5,176     12.8 % $ 6,451     13.5 % $ 1,275     24.6 %

Sales and marketing

    1,993     4.9 %   2,412     5.0 %   419     21.0 %

General and administrative

    8,341     20.6 %   8,197     17.1 %   (145 )   (1.7 )%

Amortization of intangible assets

    41     0.1 %   46     0.1 %   5     13.3 %

Asset impairment charges

    492     1.2 %       0.0 %   (492 )   (100.0 )%
                           

Total operating expenses

  $ 16,043     39.6 % $ 17,106     35.8 % $ 1,063     6.6 %
                           

Research and development expense

        Research and development expense increased by $1.3 million, or 24.6%, from 2010 to 2011. This was primarily due to a $0.6 million increase in personnel costs and a $0.4 million increase in R&D work order and project costs.

Sales and marketing expense

        Sales and marketing expense increased by $0.4 million, or 21.0%, from 2010 to 2011. The increase was primarily attributable to a $0.2 million increase in personnel costs from additional sales personnel, and a $0.2 million increase in shipping and samples expense as we expanded our customer base and markets.

General and administrative expense

        General and administrative expense decreased by $0.1 million, or 1.7%, from 2010 to 2011. The decrease was due primarily to a change in accounting for stock-based compensation expense and other savings and lower professional service fees, offset by an increase in personnel costs.

Asset impairment charges

        In 2010, we recognized a $0.5 million asset impairment charge related to equipment with carrying values lower than the estimated fair values.

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Other income (expense), net

 
  Years ended December 31,    
   
 
 
  2010   2011    
   
 
 
  Change  
 
   
  % of
revenue
   
  % of
revenue
 
 
  Amount   Amount   Amount   %  
 
  (in thousands, except percentages)
 

Interest income

  $ 34     0.1 % $ 15     0.0 % $ (19 )   (56.2 )%

Interest expense

    (906 )   (2.2 )%   (1,338 )   (2.8 )%   (431 )   47.6 %

Other income (expense), net

    585     1.4 %   (271 )   (0.6 )%   (857 )   (146.3 )%
                           

Total Other income (expense), net

  $ (287 )   (0.7 )% $ (1,594 )   (3.3 )% $ (1,307 )   455.6 %
                           

        The increase in interest expense of $0.4 million, or 47.7%, from 2010 to 2011 was due to additional debt in 2011 related to loans for our China subsidiary and loans from stockholders in 2010.

        Other income (expense), net decreased by $0.9 million, or 146.4%, from 2010 to 2011 primarily related to an unrealized foreign exchange loss recognized resulting from the depreciation of the NT dollar against the U.S. dollar.

Benefit from (provision for) income taxes

 
  Years ended
December 31,
   
 
 
  2010   2011   Change  
 
  (in thousands, except percentages)
 

Benefit from (provision for) income taxes

  $   $   $  

Effective tax rate

    0.0 %   0.0 %   0.0 %

        Our effective tax rate was 0.0% for 2010 and 2011, as we did not generate positive taxable income.

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Quarterly Results of Operations

        The following tables set forth selected unaudited quarterly statements of operations data for our last ten completed fiscal quarters. The information for each of these quarters has been prepared on the same basis as the consolidated financial statements appearing elsewhere in this prospectus and, in the opinion of management, includes all adjustments necessary for the fair presentation of the results of operations for these periods. These data should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this prospectus. These quarterly operating results are not necessarily indicative of our operating results for any future period.

 
  Mar. 31,
2011
  Jun. 30,
2011
  Sep. 30,
2011
  Dec. 31,
2011
  Mar. 31,
2012
  Jun. 30,
2012
  Sep. 30,
2012
  Dec. 31,
2012
  Mar. 31,
2013
  Jun. 30,
2013
 
 
  (in thousands, except percentages)
   
 

Revenue

  $ 9,507   $ 11,489   $ 12,094   $ 14,750   $ 12,506   $ 15,638   $ 16,416   $ 18,861   $ 14,317   $ 19,597  

Cost of goods sold (1)

    6,844     7,956     8,297     11,371     8,393     10,938     11,743     13,418     9,732     14,150  
                                           

Gross profit

  $ 2,663   $ 3,533   $ 3,797   $ 3,379   $ 4,113   $ 4,700   $ 4,673   $ 5,443   $ 4,585   $ 5,447  
                                           

Gross margin

    28.0 %   30.8 %   31.4 %   22.9 %   32.9 %   30.1 %   28.5 %   28.9 %   32.0 %   27.8 %

Operating expenses:

                                                             

Research and development (1)

  $ 1,520   $ 1,396   $ 1,758   $ 1,777   $ 1,575   $ 1,708   $ 2,178   $ 2,144   $ 2,004   $ 1,898  

Sales and marketing (1)

    492     560     625     736     809     806     759     756     907     1,053  

General and administrative (1)

    2,043     2,064     2,048     2,087     1,965     1,947     1,892     2,213     2,374     2,447  
                                           

Total operating expenses

  $ 4,056   $ 4,020   $ 4,431   $ 4,601   $ 4,349   $ 4,460   $ 4,829   $ 5,112   $ 5,285   $ 5,398  
                                           

Income (loss) from operations

  $ (1,392 ) $ (487 ) $ (634 ) $ (1,221 ) $ (236 ) $ 240   $ (156 ) $ 331     (700 )   49  

Interest and other income (expense), net

    (279 )   (334 )   (634 )   (347 )   (287 )   (332 )   (225 )   (280 )   (294 )   (331 )
                                           

Net income (loss)

  $ (1,671 ) $ (821 ) $ (1,268 ) $ (1,568 ) $ (523 ) $ (92 ) $ (381 ) $ 51   $ (994 ) $ (282 )
                                           

Additional Financial Data:

                                                             

Non-GAAP gross profit (2)

  $ 2,672   $ 3,542   $ 3,806   $ 3,388   $ 4,115   $ 4,702   $ 4,675   $ 5,445   $ 4,597   $ 5,460  

Non-GAAP income (loss) from operations (2)

    (1,160 )   (280 )   (483 )   (1,076 )   (203 )   278     (108 )   474     (555 )   212  

Non-GAAP net income (loss) (2)

    (1,469 )   (832 )   (1,340 )   (1,385 )   (443 )   (106 )   (215 )   262     (686 )   (93 )

Adjusted EBITDA (2)

    (432 )   255     (214 )   (245 )   656     953     851     1,275     350     960  

(1)
These expenses include stock-based compensation expense as follows:

   
  Mar. 31,
2011
  Jun. 30,
2011
  Sep. 30,
2011
  Dec. 31,
2011
  Mar. 31,
2012
  Jun. 30,
2012
  Sep. 30,
2012
  Dec. 31,
2012
  Mar. 31,
2013
  Jun. 30,
2013
 
   
  (in thousands)
   
 
 

Cost of goods sold

  $ 9   $ 9   $ 9   $ 9   $ 2   $ 2   $ 2   $ 2   $ 12   $ 24  
 

Research and development

    13     13     13     12     2     2     2     2     11     22  
 

Sales and marketing

    16     16     13     12     2     2     2     2     10     19  
 

General and administrative

    108     108     104     99     12     12     9     104     78     65  
                                             
 

Total stock-based compensation expense

  $ 146   $ 146   $ 139   $ 132   $ 18   $ 18   $ 15   $ 110   $ 111   $ 130  
                                             

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(2)
See footnote 3 to the table in the section titled "Summary Consolidated Financial Data" on page 9 of this prospectus for further discussion regarding Non-GAAP measures. The following table reflects the reconciliation of U.S. GAAP financial measures to non-GAAP financial measures:

 
  Mar. 31,
2011
  Jun. 30,
2011
  Sep. 30,
2011
  Dec. 31,
2011
  Mar. 31,
2012
  Jun. 30,
2012
  Sep. 30,
2012
  Dec. 31,
2012
  Mar. 31,
2013
  Jun. 30,
2013
 
 
  (in thousands)
   
 

Gross profits

  $ 2,663   $ 3,533   $ 3,797   $ 3,379   $ 4,113   $ 4,700   $ 4,673   $ 5,443   $ 4,585   $ 5,447  

Non-GAAP adjustment:

                                                             

Stock-based compensation expense

    9     9     9     9     2     2     2     2     12     14  
                                           

Non-GAAP gross profit

  $ 2,672   $ 3,542   $ 3,806   $ 3,388   $ 4,115   $ 4,702   $ 4,675   $ 5,445   $ 4,597   $ 5,461  
                                           

Income (loss) from operations

 
$

(1,392

)

$

(487

)

$

(634

)

$

(1,221

)

$

(236

)

$

240
 
$

(156

)

$

331
 
$

(700

)

$

49
 

Non-GAAP adjustments:

                                                             

Amortization of intangible assets

    11     11     12     13     15     14     15     16     17     17  

Stock-based compensation expense

    146     146     139     132     18     18     15     110     111     129  

Non-recurring consultant fee

    75     50                 6     18     17     17     17  
                                           

Non-GAAP income (loss) from operations

  $ (1,160 ) $ (280 ) $ (483 ) $ (1,076 ) $ (203 ) $ 278   $ (108 ) $ 474   $ (555 ) $ 212  
                                           

Net income (loss)

 
$

(1,671

)

$

(821

)

$

(1,268

)

$

(1,568

)

$

(523

)

$

(92

)

$

(381

)

$

51
 
$

(994

)

$

(282

)

Non-GAAP adjustments:

                                                             

Amortization of intangible assets

    11     11     12     13     15     14     15     16     17     17  

Stock-based compensation expense

    146     146     139     132     18     18     15     110     111     129  

Non-recurring consultant fee

    75     50                 6     18     17     17     17  

Loss (gain) from disposal of idle assets

        (9 )   (85 )   15     (36 )       (1 )            

Unrealized exchange loss (gain)

    (30 )   (209 )   (138 )   24     83     (52 )   119     68     163     25  
                                           

Non-GAAP net income (loss)

  $ (1,469 ) $ (832 ) $ (1,340 ) $ (1,385 ) $ (443 ) $ (106 ) $ (215 ) $ 262   $ (686 ) $ (94 )
                                           

Net income (loss)

 
$

(1,671

)

$

(821

)

$

(1,268

)

$

(1,568

)

$

(523

)

$

(92

)

$

(381

)

$

51
 
$

(994

)

$

(282

)

Non-GAAP adjustments:

                                                             

Amortization of intangible assets

    11     11     12     13     15     14     15     16     17     17  

Stock-based compensation expense

    146     146     139     132     18     18     15     110     111     129  

Depreciation expense

    763     768     752     783     725     724     721     712     751     771  

Non-recurring consultant fee

    75     50                 6     18     16     17     17  

Loss (gain) from disposal of idle assets

        (9 )   (85 )   15     (36 )       (1 )            

Unrealized exchange loss (gain)

    (29 )   (209 )   (138 )   24     83     (53 )   119     68     163     25  

Interest expense

    274     319     374     356     374     336     345     301     285     283  
                                           

Adjusted EBITDA

  $ (432 ) $ 255   $ (214 ) $ (245 ) $ 656   $ 953   $ 851   $ 1,275   $ 350   $ 960  
                                           

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Table of Contents

        The following table provides the unaudited quarterly results as a percentage of revenue.

 
  Mar. 31,
2011
  Jun. 30,
2011
  Sep. 30,
2011
  Dec. 31,
2011
  Mar. 31,
2012
  Jun. 30,
2012
  Sep. 30,
2012
  Dec. 31,
2012
  Mar. 31,
2013
  Jun. 30,
2013
 

Revenue

    100.0 %   100.0 %   100.0 %   100.0 %   100.0 %   100.0 %   100.0 %   100.0 %   100.0 %   100.0 %

Cost of goods sold

    72.0 %   69.2 %   68.6 %   77.1 %   67.1 %   69.9 %   71.5 %   71.1 %   68.0 %   72.2 %
                                           

Gross profit

    28.0 %   30.8 %   31.4 %   22.9 %   32.9 %   30.1 %   28.5 %   28.9 %   32.0 %   27.8 %
                                           

Operating expenses:

                                                             

Research and development

    16.0 %   12.2 %   14.5 %   12.0 %   12.6 %   10.9 %   13.3 %   11.4 %   14.0 %   9.7 %

Sales and marketing

    5.2 %   4.9 %   5.2 %   5.0 %   6.5 %   5.2 %   4.6 %   4.0 %   6.3 %   5.4 %

General and administrative

    21.5 %   18.0 %   16.9 %   14.2 %   15.7 %   12.4 %   11.5 %   11.7 %   16.6 %   12.5 %
                                           

Total operating expenses

    42.7 %   35.0 %   36.6 %   31.2 %   34.8 %   28.5 %   29.4 %   27.1 %   36.9 %   27.5 %
                                           

Income (loss) from operations

    (14.6 )%   (4.2 )%   (5.2 )%   (8.3 )%   (1.9 )%   1.5 %   (0.9 )%   1.8 %   (4.9 )%   0.3 %

Interest and other income (expense), net

    (2.9 )%   (2.9 )%   (5.2 )%   (2.3 )%   (2.3 )%   (2.1 )%   (1.4 )%   (1.5 )%   (2.1 )%   (1.7 )%
                                           

Net income (loss)

    (17.6 )%   (7.1 )%   (10.5 )%   (10.6 )%   (4.2 )%   (0.6 )%   (2.3 )%   0.3 %   (6.9 )%   (1.4 )%
                                           

Additional Financial Data:

                                                             

Non-GAAP gross profit (1)

    28.1 %   30.8 %   31.5 %   23.0 %   32.9 %   30.1 %   28.5 %   28.9 %   32.1 %   27.9 %

Non-GAAP income (loss) from operations (1)

    (12.2 )%   (2.4 )%   (4.0 )%   (7.3 )%   (1.6 )%   1.8 %   (0.7 )%   2.5 %   (3.9 )%   1.1 %

Non-GAAP net income (loss) (1)

    (15.5 )%   (7.2 )%   (11.1 )%   (9.4 )%   (3.5 )%   (0.7 )%   (1.3 )%   1.4 %   (4.8 )%   (0.5 )%

Adjusted EBITDA (1)

    (4.5 )%   2.2 %   (1.8 )%   (1.7 )%   5.2 %   6.1 %   5.2 %   6.8 %   2.4 %   4.9 %

(1)
See footnote 2 to the preceding table.

Quarterly revenue trends and seasonality

        Our quarterly results reflect seasonality in the sale of our products. Historically, our revenue has been highest in the fourth quarter and lowest in the first quarter. The first quarter of the year has historically been negatively affected by reduced economic activity due to the Chinese New Year holiday and the lower level of deployment of outdoor CATV equipment in cold weather environments.

Quarterly gross margin trends

        Our gross margin varies quarter to quarter but has been within a range of 27.8% and 32.9% over the past ten quarters, except for the fourth quarter of 2011 when we incurred an additional charge to inventory of $0.7 million from the application of our inventory reserve policy. Our gross margin varies primarily due to the product mix in a particular quarter, as well as from the

65


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level of manufacturing efficiencies, production yields (particularly in the laser chip fabrication process) and overall supply costs.

Quarterly operating result trends

        Our quarterly operating results are likely to fluctuate due to seasonality and other factors such as:

    general economic, industry and market conditions in our target markets;

    our CATV customers' willingness to outsource more of their internal design and manufacturing;

    changes in the mix of products within a quarter or changes in the volume of products sold within a particular target market;

    our ability to obtain new orders, and the timing of such orders;

    the level of revenues from our orders;

    pricing policies by us or our competitors;

    our ability to fulfill sales orders in a timely manner within normal lead times or as otherwise demanded by customers;

    our ability to adjust our production in response to quarter-over-quarter variations in revenue;

    our ability to adjust sales, general and administrative costs in response to changes in revenue; and

    our ability to control costs and capital expenditures.

        The occurrence of one or more of these factors could cause our revenue and corresponding operating results to vary widely. As such, we believe that our quarterly levels of revenue and expenses may vary significantly in the future, and that period-to-period comparisons of our results may not be meaningful and should not be relied upon as an indication of future performance.

Liquidity and Capital Resources

        Since inception, we have financed our operations through private sales of equity securities and cash generated from operations and from various lending arrangements. At June 30, 2013, our cash, cash equivalents and restricted cash totaled $10.9 million. Cash and cash equivalents were held for working capital purposes and were invested primarily in money market funds. We do not enter into investments for trading or speculative purposes.

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Table of Contents

        The table below sets forth selected cash flow data for the periods presented:

 
  Years Ended December 31,    
 
 
  Six months ended
June 30, 2013
 
 
  2010   2011   2012  
 
   
   
   
  (unaudited)
 
 
  (in thousands)
 

Net cash provided by (used in) operating activities

  $ (3,209 ) $ (4,125 ) $ (358 ) $ 1,499  

Net cash used in investing activities

    (2,914 )