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Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2020

OR

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

For the transition period from __________ to __________

Commission File Number: 001-36083

Applied Optoelectronics, Inc.

(Exact name of registrant as specified in its charter)

Delaware

76-0533927

(State or other jurisdiction of incorporation or organization)

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

13139 Jess Pirtle Blvd.

Sugar Land, TX 77478

(Address of principal executive offices)

(281295-1800

(Registrant’s telephone number)

 

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

 

Title of each class

Trading Symbol(s)

Trading Name of each exchange on which registered

Common Stock, Par value $0.001

AAOI

NASDAQ Global Market

 

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

 

 

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

 

 

 

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

 

 

 

Large accelerated filer

☐ 

Accelerated filer

 

Non-accelerated filer

☐ 

Smaller reporting company

 

 

  

Emerging growth company

 

 

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

 

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

 

As of November 2, 2020, there were 22,976,246 shares of the registrant’s Common Stock outstanding.

 

 

 

 

 

Applied Optoelectronics, Inc.

Table of Contents

   

Page

Part I. Financial Information

   

 

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

3

   

 

 

Condensed Consolidated Balance Sheets as of September 30, 2020 (Unaudited) and December 31, 2019

3

   

 

 

Condensed Consolidated Statements of Operations for the Three and Nine months ended September 30, 2020 and 2019 (Unaudited)

4

   

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months ended September 30, 2020 and 2019 (Unaudited)

5

   

 

 

Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months ended September 30, 2020 and 2019 (Unaudited)

6

   

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2020 and 2019 (Unaudited)

7

   

 

 

Notes To Condensed Consolidated Financial Statements (Unaudited)

8

   

 

Item 2.

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

26

   

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

35

   

 

Item 4.

Controls and Procedures

35

   

 

Part II. Other Information

Item 1.

Legal Proceedings

36

Item 1A.

Risk Factors

37

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

59

Item 3.

Defaults Upon Senior Securities

59

Item 4.

Mine Safety Disclosures

59

Item 5.

Other Information

59

Item 6.

Exhibits

59

 

Signatures

61

 

2

 

 

Part I. Financial Information

Item 1. Condensed Consolidated Financial Statements

Applied Optoelectronics, Inc. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands)

  

September 30,

  

December 31,

 

 

2020

  

2019

 

ASSETS

 

  

 

Current Assets

 

  

 

Cash and cash equivalents

 $46,772  $59,977 

Restricted cash

  11,296   7,051 

Accounts receivable - trade, net of allowance of $30 and $30, respectively

  51,453   34,655 

Inventories

  111,427   85,028 

Prepaid income tax

  177   224 

Prepaid expenses and other current assets

  8,805   5,869 

Total current assets

  229,930   192,804 

Property, plant and equipment, net

  249,740   248,444 

Land use rights, net

  5,640   5,598 

Operating right of use asset

  7,792   7,768 
Financing right of use asset  96   119 

Intangible assets, net

  4,031   4,081 

Deferred income tax assets

  -   7,287 

Other assets, net

  558   724 

TOTAL ASSETS

 $497,787  $466,825 

LIABILITIES AND STOCKHOLDERS' EQUITY

    

 

Current liabilities

 

    

Current portion of notes payable and long-term debt

 $44,292  $33,371 

Accounts payable

  56,134   32,828 

Bank acceptance payable

  13,366   6,310 

Current lease liability - operating

  983   965 
Current lease liability - financing  17   17 

Accrued liabilities

  17,526   17,864 

Total current liabilities

  132,318   91,355 

Notes payable and long-term debt, less current portion

  14,564   16,552 

Convertible senior notes

  77,646   77,041 

Non-current lease liability - operating

  8,007   7,983 
Non-current lease liability - financing  86   100 

TOTAL LIABILITIES

  232,621   193,031 

Stockholders' equity:

 

  

 

Preferred Stock; 5,000 shares authorized at $0.001 par value; no shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively

  -   - 

Common Stock; 45,000 shares authorized at $0.001 par value; 22,887 and 20,140 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively

  23   20 

Additional paid-in capital

  335,035   303,401 

Accumulated other comprehensive (loss) and income

  5,178   430 

Accumulated deficit

  (75,070)  (30,057)

TOTAL STOCKHOLDERS' EQUITY

  265,166   273,794 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 $497,787  $466,825 

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

3

 

 

Applied Optoelectronics, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

  

Three months ended September 30,

  

Nine months ended September 30,

 

 

2020

  

2019

  

2020

  

2019

 

Revenue, net

 $76,608  $46,084  $182,298  $142,214 

Cost of goods sold

  57,418   34,108   143,034   107,349 

Gross profit

  19,190   11,976   39,264   34,865 

Operating expenses

 

  

  

  

 

Research and development

  11,206   10,466   32,567   32,802 

Sales and marketing

  4,491   2,518   10,858   7,444 

General and administrative

  10,272   9,988   31,520   31,312 

Total operating expenses

  25,969   22,972   74,945   71,558 

Loss from operations

  (6,779)  (10,996)  (35,681)  (36,693)

Other income (expense)

 

  

  

  

 

Interest income

  26   347   220   729 

Interest expense

  (1,480)  (1,517)  (4,424)  (4,003)

Other income (expense), net

  866   1,446   2,096   1,742 

Total other income (expense), net

  (588)  276   (2,108)  (1,532)

Loss before income taxes

  (7,367)  (10,720)  (37,789)  (38,225)

Income tax benefit (expense)

  (2,249)  1,940   (7,224)  7,605 

Net loss

 $(9,616) $(8,780) $(45,013) $(30,620)

Net loss per share

 

  

  

  

 

Basic

 $(0.42) $(0.44) $(2.12) $(1.54)

Diluted

 $(0.42) $(0.44) $(2.12) $(1.54)

 

  

  

  

 

Weighted average shares used to compute net loss per share:

 

  

  

  

 

Basic

  22,744,361   20,022,520   21,275,778   19,939,605 

Diluted

  22,744,361   20,022,520   21,275,778   19,939,605 

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

4

 

 

Applied Optoelectronics, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited, in thousands)

 

Three months ended September 30,

  

Nine months ended September 30,

 

 

2020

  

2019

  

2020

  

2019

 

Net loss

 $(9,616) $(8,780) $(45,013) $(30,620)

(Gain) loss on foreign currency translation adjustment

  5,696   (3,453)  4,748   (4,434)

Comprehensive loss

 $(3,920) $(12,233) $(40,265) $(35,054)

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

 

5

 

 

Applied Optoelectronics, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Three and Nine Months ended September 30, 2020 and 2019

(Unaudited, in thousands)

                 Accumulated       

 

Preferred Stock

  

Common Stock

  

Additional

  

other

  

  

 

 

Number

  

  

Number

  

  

paid-in

  

comprehensive

  

Accumulated

  

Stockholders'

 

 

of shares

  

Amount

  

of shares

  

Amount

  

capital

  

gain (loss)

  

deficit

  

equity

 

June 30, 2020

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

Public offering of common stock, net

        780   1   8,702         8,703 
Stock options exercised, net of shares withheld for employee tax        2      11         11 

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

        165      (348)        (348)

Share-based compensation

              3,265         3,265 

Foreign currency translation adjustment

                 5,696      5,696 

Net loss

                    (9,616)  (9,616)

September 30, 2020

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

  

  

  

  

  

  

Accumulated

  

  

 

 

Preferred Stock

  

Common Stock

  

Additional

  

other

  

  

 

 

Number

  

  

Number

  

  

paid-in

  

comprehensive

  

Retained

  

Stockholders'

 

 

of shares

  

Amount

  

of shares

  

Amount

  

capital

  

gain (loss)

  

earnings

  

equity

 

June 30, 2019

    $   19,951  $20  $297,922  $(379) $14,152  $311,715 
Stock options exercised, net of shares withheld for employee tax        1      1         1 

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

        109      (176)        (176)

Share-based compensation

              2,978         2,978 

Foreign currency translation adjustment

                 (3,453)     (3,453)

Net loss

                    (8,780)  (8,780)

September 30, 2019

    $   20,061  $20  $300,725  $(3,832) $5,372  $302,285 

 

  

  

  

  

  

  

Accumulated

  

  

 

 

Preferred Stock

  

Common Stock

  

Additional

  

other

  

  

 

 

Number

  

  

Number

  

  

paid-in

  

comprehensive

  

Accumulated

  

Stockholders'

 

 

of shares

  

Amount

  

of shares

  

Amount

  

capital

  

gain (loss)

  

deficit

  

equity

 

January 1, 2020

    $   20,140  $20  $303,401  $430  $(30,057) $273,794 
Public offering of common stock, net        2,362   2   22,629         22,631 
Stock options exercised, net of shares withheld for employee tax        2      14         14 

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

        383   1   (813)        (812)
Share-based compensation              9,804         9,804 

Foreign currency translation adjustment

                 4,748      4,748 

Other

                        

Net loss

                    (45,013)  (45,013)

September 30, 2020

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

 

  

  

  

  

  

  

Accumulated

  

  

 

 

Preferred Stock

  

Common Stock

  

Additional

  

other

  

  

 

 

Number

  

  

Number

  

  

paid-in

  

comprehensive

  

Retained

  

Stockholders'

 

 

of shares

  

Amount

  

of shares

  

Amount

  

capital

  

gain (loss)

  

earnings

  

equity

 

January 1, 2019

    $   19,810  $20  $292,480  $602  $35,992  $329,094 

Stock options exercised, net of shares withheld for employee tax

        1      8         8 

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

        250      (702)        (702)

Share-based compensation

              8,939         8,939 

Foreign currency translation adjustment

                 (4,434)     (4,434)

Net loss

                    (30,620)  (30,620)

September 30, 2019

    $   20,061  $20  $300,725  $(3,832) $5,372  $302,285 

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

 

6

 

 

Applied Optoelectronics, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

  

Nine months ended September 30,

 

 

2020

  

2019

 

Operating activities:

 

  

 

Net loss

 $(45,013) $(30,620)

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

  

 

Lower of cost or market reserve adjustment to inventory

  3,340   6,615 

Depreciation and amortization

  18,350   17,982 

Amortization of debt issuance costs

  673   673 

Deferred income taxes, net

  7,358   (7,710)

Loss on disposal of assets

  15   10 

Share-based compensation

  9,804   8,939 

Unrealized foreign exchange gain

  (323)  (220)

Changes in operating assets and liabilities:

      

Accounts receivable, trade

  (16,799)  825 

Notes receivable

  3   (3)

Prepaid income tax

  13   426 

Inventories

  (27,303)  3,197 

Other current assets

  (2,692)  5,577 

Operating right of use asset

  189   738 

Accounts payable

  23,306   (1,836)

Accrued liabilities

  (620)  (2,405)

Lease liability

  (206)  (777)

Net cash (used in) provided by operating activities

  (29,905)  1,411 

Investing activities:

 

  

 

Purchase of property, plant and equipment

  (12,132)  (25,982)

Proceeds from disposal of equipment

  166   2 

Deposits and prepaid for equipment

  (2,733)  (520)

Purchase of intangible assets

  (376)  (497)

Net cash used in investing activities

  (15,075)  (26,997)

Financing activities:

 

  

 

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

  6,229   13,661 

Principal payments of long-term debt and notes payable

  (4,066)  (42,272)

Proceeds from line of credit borrowings

  73,700   59,296 

Repayments of line of credit borrowings

  (67,430)  (66,299)
Proceeds from bank acceptance payable  26,341   8,214 

Repayments of bank acceptance payable

  (19,598)  (8,682)

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

  (18)  76,362 

Principal payments of financing lease

  (13)   

Exercise of stock options

  14   8 
Payments of tax withholding on behalf of employees related to share-based compensation  (813)  (702)

Proceeds from common stock offering, net

  22,632    

Net cash provided by financing activities

  36,978   39,586 

Effect of exchange rate changes on cash

  (958)  372 

Net increase (decrease) in cash, cash equivalents and restricted cash

  (8,960)  14,372 

Cash, cash equivalents and restricted cash at beginning of period

  67,028   58,004 

Cash, cash equivalents and restricted cash at end of period

 $58,068  $72,376 
Supplemental disclosure of cash flow information:     
Cash paid (received) for:     

Interest, net of amounts capitalized

 $4,739  $2,933 
Income taxes  (192)  (329)

Non-cash investing and financing activities:

    

 

Net change in accounts payable related to property and equipment additions

  1,173   (4,626)

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

  36   6,370 

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

 

7

 

Applied Optoelectronics, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1.   Description of Business​

Business Overview

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

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

Interim Financial Statements

The unaudited condensed consolidated financial statements of the Company as of September 30, 2020 and December 31, 2019 and for the three and nine months ended September 30, 2020 and September 30, 2019, have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim information and with the instructions on Form 10-Q and Rule 10-01 of Regulation S-X pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In accordance with those rules and regulations, the Company has omitted certain information and notes required by GAAP for annual consolidated financial statements. In the opinion of management, the condensed consolidated financial statements contain all adjustments, except as otherwise noted, necessary for the fair presentation of the Company’s financial position and results of operations for the periods presented. The year-end condensed balance sheet data was derived from audited financial statements. These condensed consolidated financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report on Form 10-K (“Annual Report”) for the fiscal year ended December 31, 2019. The results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results expected for the entire fiscal year. All significant inter-company accounts and transactions have been eliminated.

Use of Estimates

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

 

 

Note 2.  Significant Accounting Policies

There have been no changes in the Company’s significant accounting policies for the three and nine months ended September 30, 2020, as compared to the significant accounting policies described in its 2019 Annual Report, except as described below.

Recent Accounting Pronouncements

Recent Accounting Pronouncements Adopted in 2020

 

In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13 Financial Instruments - Credit Losses, Measurement of Credit Losses on Financial Instruments, which changes the way entities measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net earnings. The Company adopted this ASU as of January 1, 2020. The adoption of the new standard did not have a material impact on the Company's condensed consolidated financial statements as current processes for estimating expected credit losses for trade receivables align with the expected credit loss model. The Company estimates its allowance for credit losses based on historical collection trends, the age of outstanding receivables, geographical location of the customer, existing economic conditions and reasonable forecasts. If events or changes in circumstances indicate that specific receivable balances may be impaired, further consideration is given to the collectability of those balances and the allowance is adjusted accordingly.

 

In March 2020, the FASB issued ASU 2020-03, “Codification Improvements to Financial Instruments”, which improves and clarifies various financial instruments topics. This ASU includes seven different issues that describe the areas of improvement and the related amendments to GAAP, and is intended to make the standards easier to understand and apply by eliminating inconsistencies and providing clarifications. The Company adopted ASU 2020-03 upon issuance, which did not have a material effect on the Company’s current financial position, results of operations or financial statement disclosures.

 

Recent Accounting Pronouncements Yet to be Adopted

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”. The Accounting Standards Codification (“ASC”) aims to identify, evaluate, and improve areas of GAAP for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. The Company is currently assessing the impact of this pronouncement to the financial statements.

 

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting”, which provides temporary optional expedients and exceptions to the GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. This ASU is effective beginning on March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022. The Company is currently assessing the impact of this pronouncement to the financial statements.

 

In August 2020, the FASB issued ASU 2020-06, “Debt - Debt with Conversion and Other Options (Subtopic 470-20)” and “Derivatives and Hedging - Contracts in Entities Own Equity” (Subtopic 815-40). This ASU simplifies accounting for convertible instruments by eliminating two of the three models in ASC 470-20 that requires separating embedded conversion features from convertible instruments. The guidance is effective for fiscal years beginning after December 15, 2021. The Company is currently assessing the impact of this pronouncement to the financial statements. 

 

 

 

Note 3.  Revenue Recognition

Disaggregation of Revenue

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

 

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

  

Three months ended September 30,

 

     

% of

      

% of

 

 

2020

  

Revenue

  

2019

  

Revenue

 

Data Center

 $55,336   72.2% $34,006   73.8%

CATV

  11,642   15.2%  8,797   19.1%

Telecom

  8,870   11.6%  2,868   6.2%

FTTH

  67   0.1%  39   0.1%

Other

  693   0.9%  374   0.8%

Total Revenue

 $76,608   100.0% $46,084   100.0%

  

Nine months ended September 30,

 

     

% of

      

% of

 

 

2020

  

Revenue

  

2019

  

Revenue

 

Data Center

 $141,133   77.4% $104,311   73.3%

CATV

  22,007   12.1%  30,577   21.5%

Telecom

  17,600   9.7%  6,236   4.4%

FTTH

  69   0.0%  149   0.1%

Other

  1,489   0.8%  941   0.7%

Total Revenue

 $182,298   100.0% $142,214   100.0%

 

Note 4.  Leases

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

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

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

 

  

Three months ended September 30,

  

Nine months ended September 30,

 

 

2020

  

2019

  

2020

  

2019

 

Operating lease expense

 $299  $287  $890  $929 

Financing lease expense

  8      24    

Short Term lease expense

  35   20   104   100 

Total lease expense

 $342  $307  $1,018  $1,029 

 

 

Maturities of lease liabilities are as follows for the future one-year periods ending  September 30, 2020 (in thousands):

   Operating   Financing 

2021

 $1,297  $22 

2022

  1,305   22 

2023

  1,225   22 

2024

  1,162   49 

2025

  1,180    

2026 and thereafter

  4,352    

Total lease payments

 $10,521  $115 

Less imputed interest

  (1,531)  (12)

Present value

 $8,990  $103 

 

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

  

September 30,

 

 

2020

  

2019

 

Weighted Average Remaining Lease Term (Years) - operating leases

  8.41   9.46 

Weighted Average Remaining Lease Term (Years) - financing leases

  3.08    

Weighted Average Discount Rate - operating leases

  3.23%  3.13%

Weighted Average Discount Rate - financing leases

  5.00%   

 

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

 

  

Nine months ended September 30,

 

 

2020

  

2019

 

Cash paid for amounts included in the measurement of lease liabilities

 

  

 

Operating cash flows from operating leases

  983   1,002 

Operating cash flows from financing lease

  4    

Financing cash flows from financing lease

  13    

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

  699   39 

 

 

 

Note 5.  Cash, Cash Equivalents and Restricted Cash

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

 

  

September 30,

  

December 31,

 

 

2020

  

2019

 

Cash and cash equivalents

 $46,772  $59,977 

Restricted cash

  11,296   7,051 

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

 $58,068  $67,028 

Restricted cash includes guarantee deposits for customs duties, China government subsidy fund, and compensating balances required for certain credit facilities. As of September 30, 2020 and December 31, 2019, there was $4.1 million and $1.9 million of restricted cash required for bank acceptance notes issued to vendors, respectively. In addition, there was $5.9 million and $4.2 million certificate of deposit associated with credit facilities with a bank in China as of September 30, 2020 and December 31, 2019 respectively. 

 

 

Note 6.  Earnings (Loss) Per Share

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

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

  

Three months ended September 30,

  

Nine months ended September 30,

 

 

2020

  

2019

  

2020

  

2019

 

Numerator:

 

  

  

  

 

Net loss

 $(9,616) $(8,780) $(45,013) $(30,620)

Denominator:

 

  

  

  

 

Weighted average shares used to compute net loss per share

 

  

  

  

 

Basic

  22,744   20,023   21,276   19,940 

Diluted

  22,744   20,023   21,276   19,940 

Net loss per share

 

  

  

  

 

Basic

 $(0.42) $(0.44) $(2.12) $(1.54)

Diluted

 $(0.42) $(0.44) $(2.12) $(1.54)

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

  

Three months ended September 30,

  

Nine months ended September 30,

 

 

2020

  

2019

  

2020

  

2019

 

Employee stock options

  51   16   27   50 

Restricted stock units

  113   19   9   - 

Shares for convertible senior notes

  4,587   4,587   4,587   4,587 

Total antidilutive shares

  4,751   4,622   4,623   4,637 

 

Note 7.  Inventories

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

 

September 30, 2020

  

December 31, 2019

 

Raw materials

 $33,222  $15,570 

Work in process and sub-assemblies

  58,515   50,787 

Finished goods

  19,690   18,671 

Total inventories

 $111,427  $85,028 

The lower of cost or market adjustment expensed for inventory for the three months ended September 30, 2020 and 2019 was $0.4 million and $1.4 million, respectively. The lower of cost or market adjustment expensed for inventory for the nine months ended September 30, 2020 and 2019 was $3.3 million and $6.6 million, respectively.

 

For the three months ended September 30, 2020 and 2019, the direct inventory write-offs related to scrap, discontinued products, and damaged inventories were $8.4 million and $3.1 million, respectively. For the nine months ended September 30, 2020 and 2019, the direct inventory write-offs related to scrap, discontinued products, and damaged inventories were $14.7 million and $8.4 million, respectively. 

 
 

Note 8.  Property, Plant & Equipment

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

 

September 30, 2020

  

December 31, 2019

 

Land improvements

 $806  $806 

Building and improvements

  86,524   83,846 

Machinery and equipment

  244,976   237,464 

Furniture and fixtures

  5,444   5,105 

Computer equipment and software

  11,355   10,506 

Transportation equipment

  676   658 

  349,781   338,385 

Less accumulated depreciation and amortization

  (133,561)  (116,979)

  216,220   221,406 

Construction in progress

  32,419   25,937 

Land

  1,101   1,101 

Total property, plant and equipment, net

 $249,740  $248,444 

For the three months ended September 30, 2020 and 2019, depreciation expense of property, plant and equipment was $6.1 million and $5.9 million, respectively. For the nine months ended September 30, 2020 and 2019, depreciation expense of property, plant and equipment was $17.9 million and $17.6 million, respectively. For the three and nine months ended September 30, 2020, the capitalized interest was $0.1 million and $0.3 million, respectively.

 

As of September 30, 2020, the Company concluded that its continued loss history constitutes a triggering event as described in ASC 360-10-35-21,Property, Plant, and Equipment.  The Company performed a recoverability test and concluded that future undiscounted cash flows exceed the carrying amount of the Company’s long-lived assets and therefore no impairment charge was recorded. 

 

 

Note 9.  Intangible Assets, net

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

  

September 30, 2020

 

 

Gross

  

Accumulated

  

Intangible

 

 

Amount

  

amortization

  

assets, net

 

Patents

 $8,029  $(4,005) $4,024 

Trademarks

  22   (15)  7 

Total intangible assets

 $8,051  $(4,020) $4,031 

  

December 31, 2019

 

 

Gross

  

Accumulated

  

Intangible

 

 

Amount

  

amortization

  

assets, net

 

Patents

 $7,638  $(3,560) $4,078 

Trademarks

  17   (14)  3 

Total intangible assets

 $7,655  $(3,574) $