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 June 30, 2022 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 charte ...

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 March 31, 2022 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 chart ...

Financial Performance - In 2021, the company's revenue was $211.6 million, with a gross margin of 17.8% and a net loss of $53.7 million[16]. - In 2021, revenue from the internet data center market, CATV market, telecom market, FTTH market, and other markets contributed 46.1%, 44.6%, 7.7%, 0.5%, and 1.2% of total revenue, respectively[66]. - The top ten customers represented 84.7% of the company's revenue in 2021, with ATX accounting for 25.6%, Microsoft for 14.1%, and Cisco for 11.9%[103]. - As of December 31, 2021, the company had U.S. accumulated net operating losses (NOLs) of approximately $104.8 million, federal and state R&D credits of $9.9 million, business interest expense of $13.5 million, and foreign tax credits of $4.6 million[137]. - The company had approximately $141.6 million of consolidated indebtedness as of December 31, 2021, which could limit cash flow and expose the company to risks that may adversely affect its financial condition[153]. Market Segments - The internet data center market accounted for 46.1% of total revenue, while the CATV market contributed 44.6% in 2021[16]. - Microsoft Corp. was a key customer, contributing 14.1% of revenue in 2021, down from 38.3% in 2020[16]. - The telecom market is seeing increased demand for WDM components due to the expansion of mobile networks, particularly with the rollout of 5G[21]. - The company aims to capture a larger share of the FTTH market by delivering optical modules that enable 1 Gbps synchronous service to homes[37]. Product Development and Technology - The company plans to develop new products specifically for the telecom market to address its relatively small product portfolio in this segment[36]. - The company is committed to investing in new products and technology to strengthen its competitive position[38]. - The company has developed a hybrid WDM-PON solution to address historical impediments in fiber-optic networks, making it a cost-effective alternative for deployment[46]. - The company has developed laser enhancement circuitry to correct deficiencies in traditional semiconductor lasers, which is expected to be essential for higher capacity systems[44]. - The company leverages proprietary technologies in semiconductor laser manufacturing and mixed-signal semiconductor design to maintain its technology leadership[41]. Competition and Market Risks - The company faces intense competition in the optical networking market, with major competitors including EMCORE Corporation and Lumentum Holdings, Inc.[70]. - Customer demand is difficult to forecast, leading to potential mismatches between production and demand[106]. - The company may experience significant fluctuations in revenues and operating results due to factors outside its control, including customer order timing and size[121]. - The lengthy product development cycle may take 18 months or longer before the company receives its first order, leading to significant upfront expenses[115]. Supply Chain and Operations - The company has added additional suppliers for key components to mitigate supply chain disruptions, although this may lead to higher costs and impact gross margins[100]. - The company relies on a limited number of suppliers for critical raw materials and maintains ongoing communications to prevent supply interruptions[90]. - The company has implemented a supply-chain management program to maintain quality and lower purchase prices through standardized purchasing efficiencies[90]. - Manufacturing problems could lead to delays in product shipments and damage customer relationships[122]. - The company faces risks of high inventory carrying costs and increased inventory obsolescence due to its vertically integrated business model[124]. Employee and Organizational Structure - The company has a total of 226 employees in the R&D department, including ten with Ph.D. degrees, and continues to recruit talented engineers[58]. - As of December 31, 2021, the company employed 2,534 full-time employees, with 1,653 located in China, 514 in Taiwan, and 367 in the U.S.[77]. - The company has committed to providing a wide range of professional development experiences for employees, including leadership development programs for executives[78]. - The company employs 2,178 employees in manufacturing and R&D operations as of December 31, 2021, contributing to a high fixed cost base[124]. Environmental and Regulatory Compliance - The company aims to obtain at least 20% of the energy used in operations from renewable sources and to reduce hazardous waste generation by at least 10% over the five-year period starting in 2021[85]. - The company has not incurred material costs related to compliance with environmental regulations to date, but future violations could lead to significant liabilities[81]. - The company is subject to risks from U.S. tariffs on imports from China, which could adversely affect its business and financial condition[168]. Cybersecurity and IT Risks - Cybersecurity threats have increased, posing risks to the company's operations and customer data security[162]. - The company has implemented network security measures but cannot guarantee complete protection against unauthorized access or data breaches[164]. - The company relies on complex information technology systems, and any disruptions could materially affect its business and financial condition[166]. International Operations and Economic Factors - The company raised $97.7 million, $85.2 million, and $83.3 million from its operations in China for the years ended December 31, 2021, 2020, and 2019, representing 46.2%, 36.3%, and 43.6% of total revenue respectively[189]. - A significant portion of the company's property, plant, and equipment was located in China, accounting for 42.2%, 40.6%, and 37.1% as of December 31, 2021, 2020, and 2019 respectively[189]. - The company faces potential disruptions due to changes in international trade policies, particularly regarding China, which may impact its operating results[167]. - The Chinese economy is transitioning from a planned economy to a more market-oriented economy, with significant government control over resource allocation and monetary policy[191]. Legal and Financial Risks - Legal actions could result in substantial costs and divert management's attention, potentially harming the company's business[151]. - The company’s loan agreements contain restrictive covenants that may limit its operational flexibility and ability to respond to business opportunities[156]. - Future capital needs for expansion and technological improvements may require additional financing, which could be difficult to obtain on favorable terms[158]. - The market price of the company's common stock is subject to wide fluctuations due to various external factors, including economic conditions and competitor announcements[202].

Table of Contents 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 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 per ...

Part I. Financial Information This section provides a comprehensive overview of the company's financial performance and related disclosures [Item 1. Condensed Consolidated Financial Statements](index=3&type=section&id=Item%201.%20Condensed%20Consolidated%20Financial%20Statements) This section presents unaudited condensed consolidated financial statements, including balance sheets, statements of operations, comprehensive income, equity, and cash flows, with detailed notes [Condensed Consolidated Balance Sheets](index=3&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Total Assets: | Metric | June 30, 2020 (in thousands) | December 31, 2019 (in thousands) | | :----- | :--------------------------- | :------------------------------- | | Total Assets | $478,091 | $478,091 | Current Assets (June 30, 2020 vs. Dec 31, 2019): | Metric | June 30, 2020 (in thousands) | December 31, 2019 (in thousands) | Change (in thousands) | | :----------------------------------- | :--------------------------- | :------------------------------- | :-------------------- | | Cash and cash equivalents | $51,131 | $59,977 | $(8,846) | | Accounts receivable - trade, net | $50,029 | $34,655 | $15,374 | | Inventories | $97,251 | $85,028 | $12,223 | Total Liabilities (June 30, 2020 vs. Dec 31, 2019): | Metric | June 30, 2020 (in thousands) | December 31, 2019 (in thousands) | | :----------------------------------- | :--------------------------- | :------------------------------- | | Total Liabilities | $220,636 | $204,336 | [Condensed Consolidated Statements of Operations](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) Revenue, Net (YoY Change): | Period | 2020 (in thousands) | 2019 (in thousands) | Change (in thousands) | % Change | | :------------------- | :------------------ | :------------------ | :-------------------- | :------- | | Three months ended June 30 | $65,222 | $43,411 | $21,811 | 50.2% | | Six months ended June 30 | $105,689 | $96,130 | $9,559 | 9.9% | Net Loss (YoY Change): | Period | 2020 (in thousands) | 2019 (in thousands) | Change (in thousands) | % Change | | :------------------- | :------------------ | :------------------ | :-------------------- | :------- | | Three months ended June 30 | $(18,600) | $(11,366) | $(7,234) | 63.6% | | Six months ended June 30 | $(35,397) | $(21,840) | $(13,557) | 62.1% | Gross Profit (YoY Change): | Period | 2020 (in thousands) | 2019 (in thousands) | Change (in thousands) | % Change | | :------------------- | :------------------ | :------------------ | :-------------------- | :------- | | Three months ended June 30 | $13,736 | $10,538 | $3,198 | 30.3% | | Six months ended June 30 | $20,074 | $22,889 | $(2,815) | (12.3)% | [Condensed Consolidated Statements of Comprehensive Income (Loss)](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income%20(Loss)) Comprehensive Loss (YoY Change): | Period | 2020 (in thousands) | 2019 (in thousands) | Change (in thousands) | % Change | | :------------------- | :------------------ | :------------------ | :-------------------- | :------- | | Three months ended June 30 | $(17,146) | $(14,695) | $(2,451) | 16.7% | | Six months ended June 30 | $(36,345) | $(22,821) | $(13,524) | 59.3% | [Condensed Consolidated Statements of Stockholders' Equity](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders'%20Equity) Total Stockholders' Equity: | Date | Amount (in thousands) | | :----------- | :-------------------- | | January 1, 2020 | $273,794 | | June 30, 2020 | $257,455 | - Key Changes in Stockholders' Equity (Six Months Ended June 30, 2020): * Public offering of common stock, net: **$14,004 thousand**[10](index=10&type=chunk) * Share-based compensation: **$3,302 thousand**[10](index=10&type=chunk) * Net loss: **$(18,600) thousand**[10](index=10&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash (YoY Change): | Period | 2020 (in thousands) | 2019 (in thousands) | Change (in thousands) | | :------------------- | :------------------ | :------------------ | :-------------------- | | Six months ended June 30 | $(8,119) | $25,983 | $(34,102) | Cash Flow from Operating Activities (YoY Change): | Period | 2020 (in thousands) | 2019 (in thousands) | Change (in thousands) | | :------------------- | :------------------ | :------------------ | :-------------------- | | Six months ended June 30 | $(23,769) | $7,167 | $(30,936) | Cash Flow from Investing Activities (YoY Change): | Period | 2020 (in thousands) | 2019 (in thousands) | Change (in thousands) | | :------------------- | :------------------ | :------------------ | :-------------------- | | Six months ended June 30 | $(9,219) | $(20,838) | $11,619 | [Notes To Condensed Consolidated Financial Statements](index=8&type=section&id=Notes%20To%20Condensed%20Consolidated%20Financial%20Statements) [Note 1. Description of Business](index=8&type=section&id=Note%201.%20Description%20of%20Business) - Applied Optoelectronics, Inc. (AOI) is a leading, vertically integrated provider of fiber-optic networking products[14](index=14&type=chunk) - The company targets four networking end-markets: internet data center, cable television (CATV), telecommunications (telecom), and fiber-to-the-home (FTTH)[14](index=14&type=chunk) - Manufacturing and research and development facilities are located in the U.S., Taiwan, and China[15](index=15&type=chunk) [Note 2. Significant Accounting Policies](index=9&type=section&id=Note%202.%20Significant%20Accounting%20Policies) - Adopted ASU 2016-13 (Credit Losses) and ASU 2020-03 (Codification Improvements to Financial Instruments) in 2020, neither of which had a material impact[19](index=19&type=chunk)[20](index=20&type=chunk) - Currently assessing the impact of ASU 2019-12 (Income Taxes) and ASU 2020-04 (Reference Rate Reform) on financial statements[21](index=21&type=chunk)[22](index=22&type=chunk) [Note 3. Revenue Recognition](index=9&type=section&id=Note%203.%20Revenue%20Recognition) Revenue by Major Product Category (Three Months Ended June 30, 2020 vs. 2019): | Category | 2020 (in thousands) | % of Revenue (2020) | 2019 (in thousands) | % of Revenue (2019) | | :--------- | :------------------ | :------------------ | :------------------ | :------------------ | | Data Center | $52,533 | 80.5% | $31,806 | 73.3% | | CATV | $6,141 | 9.4% | $9,818 | 22.6% | | Telecom | $6,170 | 9.5% | $1,630 | 3.8% | Revenue by Major Product Category (Six Months Ended June 30, 2020 vs. 2019): | Category | 2020 (in thousands) | % of Revenue (2020) | 2019 (in thousands) | % of Revenue (2019) | | :--------- | :------------------ | :------------------ | :------------------ | :------------------ | | Data Center | $85,797 | 81.2% | $70,305 | 73.1% | | CATV | $10,364 | 9.8% | $21,780 | 22.7% | | Telecom | $8,730 | 8.3% | $3,368 | 3.5% | [Note 4. Leases](index=10&type=section&id=Note%204.%20Leases) Total Lease Expense (Three Months Ended June 30, 2020 vs. 2019): | Type | 2020 (in thousands) | 2019 (in thousands) | | :------------------- | :------------------ | :------------------ | | Operating lease expense | $296 | $318 | | Financing lease expense | $8 | $0 | | Short Term lease expense | $37 | $51 | | **Total lease expense** | **$341** | **$369** | Weighted Average Lease Terms and Discount Rates (Six Months Ended June 30, 2020): | Metric | 2020 | 2019 | | :------------------------------------------------- | :----- | :----- | | Weighted Average Remaining Lease Term (Years) - operating leases | 8.65 | 9.69 | | Weighted Average Discount Rate - operating leases | 3.16% | 3.13% | [Note 5. Cash, Cash Equivalents and Restricted Cash](index=11&type=section&id=Note%205.%20Cash,%20Cash%20Equivalents%20and%20Restricted%20Cash) Cash, Cash Equivalents and Restricted Cash: | Category | June 30, 2020 (in thousands) | December 31, 2019 (in thousands) | | :---------------------------------------------------------------- | :--------------------------- | :------------------------------- | | Cash and cash equivalents | $51,131 | $59,977 | | Restricted cash | $7,778 | $7,051 | | **Total cash, cash equivalents and restricted cash** | **$58,909** | **$67,028** | - Restricted cash includes guarantee deposits for customs duties, R&D equipment additions, and compensating balances for credit facilities[31](index=31&type=chunk) [Note 6. Earnings (Loss) Per Share](index=12&type=section&id=Note%206.%20Earnings%20(Loss)%20Per%20Share) Net Loss Per Share (Basic and Diluted, YoY Change): | Period | 2020 | 2019 | Change | % Change | | :------------------- | :----- | :----- | :------- | :------- | | Three months ended June 30 | $(0.89) | $(0.57) | $(0.32) | 56.1% | | Six months ended June 30 | $(1.72) | $(1.10) | $(0.62) | 56.4% | - Potentially dilutive securities were excluded from diluted net loss per share as their effect would have been antidilutive, making basic and diluted EPS the same[33](index=33&type=chunk)[35](index=35&type=chunk) [Note 7. Inventories](index=12&type=section&id=Note%207.%20Inventories) Total Inventories: | Category | June 30, 2020 (in thousands) | December 31, 2019 (in thousands) | | :--------------------------- | :--------------------------- | :------------------------------- | | Raw materials | $33,808 | $15,570 | | Work in process and sub-assemblies | $53,049 | $50,787 | | Finished goods | $10,394 | $18,671 | | **Total inventories** | **$97,251** | **$85,028** | Direct Inventory Write-offs (YoY Change): | Period | 2020 (in thousands) | 2019 (in thousands) | Change (in thousands) | % Change | | :------------------- | :------------------ | :------------------ | :-------------------- | :------- | | Three months ended June 30 | $3,700 | $2,400 | $1,300 | 54.2% | | Six months ended June 30 | $6,200 | $5,200 | $1,000 | 19.2% | [Note 8. Property, Plant & Equipment](index=14&type=section&id=Note%208.%20Property,%20Plant%20%26%20Equipment) Total Property, Plant and Equipment, Net: | Date | Amount (in thousands) | | :--------------------------- | :-------------------- | | June 30, 2020 | $248,444 | | December 31, 2019 | $248,444 | Depreciation Expense (YoY Change): | Period | 2020 (in thousands) | 2019 (in thousands) | | :------------------- | :------------------ | :------------------ | | Three months ended June 30 | $6,000 | $5,900 | | Six months ended June 30 | $11,900 | $11,700 | - No impairment charge was recorded after a recoverability test, as future undiscounted cash flows exceeded the carrying amount of long-lived assets despite continued loss history[40](index=40&type=chunk) [Note 9. Intangible Assets, net](index=14&type=section&id=Note%209.%20Intangible%20Assets,%20net) Total Intangible Assets, Net: | Category | June 30, 2020 (in thousands) | December 31, 2019 (in thousands) | | :-------------------- | :--------------------------- | :------------------------------- | | Patents, net | $4,000 | $4,078 | | Trademarks, net | $6 | $3 | | **Total intangible assets, net** | **$4,006** | **$4,081** | - Amortization expense for intangible assets was **$0.1 million** for both three-month periods and **$0.3 million** for both six-month periods ended June 30, 2020 and 2019[41](index=41&type=chunk) - The remaining weighted average amortization period for intangible assets is approximately **7 years**[41](index=41&type=chunk) [Note 10. Fair Value of Financial Instruments](index=15&type=section&id=Note%2010.%20Fair%20Value%20of%20Financial%20Instruments) Financial Instruments at Fair Value (June 30, 2020): | Category | Level 1 (in thousands) | Level 2 (in thousands) | Level 3 (in thousands) | Total (in thousands) | | :-------------------- | :--------------------- | :--------------------- | :--------------------- | :------------------- | | Cash and cash equivalents | $51,131 | $0 | $0 | $51,131 | | Restricted cash | $7,778 | $0 | $0 | $7,778 | | Bank acceptance payable | $0 | $9,866 | $0 | $9,866 | | Convertible senior notes | $0 | $68,591 | $0 | $68,591 | - The fair value of convertible senior debt is measured for disclosure purposes and classified as a **Level 2** fair value measurement, based on observable market prices in less active markets[44](index=44&type=chunk) [Note 11. Notes Payable and Long-Term Debt](index=16&type=section&id=Note%2011.%20Notes%20Payable%20and%20Long-Term%20Debt) Total Notes Payable and Long-Term Debt: | Date | Amount (in thousands) | | :--------------------------- | :-------------------- | | June 30, 2020 | $57,776 | | December 31, 2019 | $49,923 | - Includes a new **$6.23 million** Paycheck Protection Program (PPP) Term Note, bearing **1.00% interest** and maturing April 2022, with forgiveness application pending[54](index=54&type=chunk) - As of June 30, 2020, the company was in compliance with all covenants under the Fourth Amendment of its Truist Bank loan agreement and had **$26.9 million** of unused borrowing capacity[53](index=53&type=chunk)[68](index=68&type=chunk) [Note 12. Convertible Senior Notes](index=23&type=section&id=Note%2012.%20Convertible%20Senior%20Notes) - Issued **$80.5 million** of **5%** convertible senior notes due 2024 on March 5, 2019, with net proceeds of **$76.4 million**[70](index=70&type=chunk)[71](index=71&type=chunk) - The notes are convertible at an initial rate of **56.9801 shares** of common stock per **$1,000** principal amount (conversion price of approximately **$17.55 per share**)[72](index=72&type=chunk) Effective Interest Rate: | Period | 2020 | 2019 | | :------------------- | :----- | :----- | | Three months ended June 30 | 5.1% | 5.1% | | Six months ended June 30 | 5.1% | 5.1% | [Note 13. Accrued Liabilities](index=24&type=section&id=Note%2013.%20Accrued%20Liabilities) Total Accrued Liabilities: | Date | Amount (in thousands) | | :--------------------------- | :-------------------- | | June 30, 2020 | $15,557 | | December 31, 2019 | $17,864 | - The decrease in total accrued liabilities was primarily due to a reduction in accrued payroll[81](index=81&type=chunk) [Note 14. Other Income and Expense](index=24&type=section&id=Note%2014.%20Other%20Income%20and%20Expense) Total Other Income, Net (YoY Change): | Period | 2020 (in thousands) | 2019 (in thousands) | Change (in thousands) | % Change | | :------------------- | :------------------ | :------------------ | :-------------------- | :------- | | Three months ended June 30 | $974 | $451 | $523 | 116.0% | | Six months ended June 30 | $1,230 | $296 | $934 | 315.5% | - The increase was mainly due to a rise in government subsidy income in China and Taiwan, including **$0.5 million** related to the COVID-19 pandemic for the six months ended June 30, 2020[82](index=82&type=chunk)[130](index=130&type=chunk) [Note 15. Share-Based Compensation](index=25&type=section&id=Note%2015.%20Share-Based%20Compensation) Total Share-Based Compensation Expense (YoY Change): | Period | 2020 (in thousands) | 2019 (in thousands) | Change (in thousands) | % Change | | :------------------- | :------------------ | :------------------ | :-------------------- | :------- | | Three months ended June 30 | $3,302 | $3,019 | $283 | 9.4% | | Six months ended June 30 | $6,540 | $5,961 | $579 | 9.7% | - As of June 30, 2020, there was **$23.5 million** of unrecognized compensation expense related to RSUs and RSAs, expected to be recognized over **2.55 years**[87](index=87&type=chunk) [Note 16. Income Taxes](index=27&type=section&id=Note%2016.%20Income%20Taxes) Effective Tax Rate (YoY Change): | Period | 2020 | 2019 | | :------------------- | :----- | :----- | | Three months ended June 30 | 258.2% | 22.0% | | Six months ended June 30 | (16.25)% | 20.6% | - The effective tax rate varied primarily due to the level and mix of earnings among tax jurisdictions, changes in valuation allowance on US and state deferred tax assets, and the recording of a **$5.2 million** valuation allowance on Taiwan deferred tax assets due to cumulative losses[91](index=91&type=chunk)[92](index=92&type=chunk)[94](index=94&type=chunk) - No material tax impacts from the CARES Act were recorded for the six months ended June 30, 2020[95](index=95&type=chunk) [Note 17. Geographic Information](index=27&type=section&id=Note%2017.%20Geographic%20Information) Revenue by Geographic Region (Six Months Ended June 30, 2020 vs. 2019): | Region | 2020 (in thousands) | 2019 (in thousands) | Change (in thousands) | % Change | | :------------ | :------------------ | :------------------ | :-------------------- | :------- | | United States | $8,496 | $3,650 | $4,846 | 132.8% | | Taiwan | $64,486 | $46,128 | $18,358 | 39.8% | | China | $32,707 | $46,352 | $(13,645) | (29.4)% | Long-Lived Assets by Geographic Region (June 30, 2020 vs. Dec 31, 2019): | Region | 2020 (in thousands) | 2019 (in thousands) | | :------------ | :------------------ | :------------------ | | United States | $93,604 | $94,507 | | Taiwan | $72,420 | $73,816 | | China | $95,219 | $97,687 | | **Total** | **$261,243** | **$266,010** | [Note 18. Contingencies](index=29&type=section&id=Note%2018.%20Contingencies) - An agreement in principle was reached on June 2, 2020, to settle the class action lawsuit for **$15.5 million**, funded by AOI's directors' and officers' insurance policies, pending court approval[102](index=102&type=chunk)[103](index=103&type=chunk) - A shareholder derivative lawsuit remains pending, with the deadline for response extended to September 2, 2020; the likelihood of loss is not yet determinable[105](index=105&type=chunk) - The company believes the eventual outcome of the class action settlement will not have a material adverse effect on its overall financial condition, results of operations, or cash flows, and no accrual has been recorded[104](index=104&type=chunk) [Note 19. Subsequent Events](index=30&type=section&id=Note%2019.%20Subsequent%20Events) - As of the reporting date, the company repaid **$18.6 million** of its revolving bank line of credit with Truist Bank[106](index=106&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=31&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's discussion and analysis of the company's financial condition, results of operations, liquidity, and capital resources [Overview](index=31&type=section&id=Overview) - Applied Optoelectronics, Inc. is a leading, vertically integrated provider of fiber-optic networking products for internet data centers, CATV, telecom, and FTTH markets[111](index=111&type=chunk) - The company's vertically integrated manufacturing model offers advantages in rapid product development, fast response times, and control over product quality and manufacturing costs[111](index=111&type=chunk)[113](index=113&type=chunk) - Manufacturing sites are located in Sugar Land, Texas; Ningbo, China; and Taipei, Taiwan, with R&D facilities in Sugar Land, Texas, and Duluth, Georgia[114](index=114&type=chunk) [Results of Operations](index=32&type=section&id=Results%20of%20Operations) [Revenue](index=33&type=section&id=Revenue) Total Revenue (YoY Change): | Period | 2020 (in thousands) | 2019 (in thousands) | Change (in thousands) | % Change | | :------------------- | :------------------ | :------------------ | :-------------------- | :------- | | Three months ended June 30 | $65,222 | $43,411 | $21,811 | 50.2% | | Six months ended June 30 | $105,689 | $96,130 | $9,559 | 9.9% | - Revenue increase was driven by increased demand for **100 Gbps transceivers** in the data center market and laser chips for **5G wireless communications** in the telecom market[119](index=119&type=chunk) - The increase was partially offset by a decrease in demand for CATV products due to reduced capital expenditure by multiple-system operators (MSOs)[119](index=119&type=chunk) [Cost of goods sold and gross margin](index=34&type=section&id=Cost%20of%20goods%20sold%20and%20gross%20margin) Cost of Goods Sold (YoY Change): | Period | 2020 (in thousands) | 2019 (in thousands) | Change (in thousands) | % Change | | :------------------- | :------------------ | :------------------ | :-------------------- | :------- | | Three months ended June 30 | $51,486 | $32,873 | $18,613 | 56.6% | | Six months ended June 30 | $85,615 | $73,241 | $12,374 | 16.9% | Gross Margin (YoY Change): | Period | 2020 | 2019 | Change (percentage points) | | :------------------- | :----- | :----- | :------------------------- | | Three months ended June 30 | 21.1% | 24.3% | (3.2)% | | Six months ended June 30 | 19.0% | 23.8% | (4.8)% | - Gross margin decreased primarily due to a shift in product mix towards lower-cost **100 Gbps transceivers**, production inefficiencies, higher raw material costs, and increased shipping costs due to the COVID-19 pandemic[123](index=123&type=chunk) [Operating expenses](index=34&type=section&id=Operating%20expenses) Total Operating Expenses (YoY Change): | Period | 2020 (in thousands) | 2019 (in thousands) | Change (in thousands) | % Change | | :------------------- | :------------------ | :------------------ | :-------------------- | :------- | | Three months ended June 30 | $24,844 | $24,366 | $478 | 2.0% | | Six months ended June 30 | $48,976 | $48,586 | $390 | 0.8% | [Research and development expense](index=34&type=section&id=Research%20and%20development%20expense) R&D Expense (YoY Change): | Period | 2020 (in thousands) | 2019 (in thousands) | Change (in thousands) | % Change | | :------------------- | :------------------ | :------------------ | :-------------------- | :------- | | Three months ended June 30 | $10,803 | $11,151 | $(348) | (3.1)% | | Six months ended June 30 | $21,361 | $22,336 | $(975) | (4.4)% | - Decreases were mainly due to reduced costs from R&D work orders, partially offset by increased personnel-related costs[125](index=125&type=chunk) [Sales and marketing expense](index=34&type=section&id=Sales%20and%20marketing%20expense) Sales and Marketing Expense (YoY Change): | Period | 2020 (in thousands) | 2019 (in thousands) | Change (in thousands) | % Change | | :------------------- | :------------------ | :------------------ | :-------------------- | :------- | | Three months ended June 30 | $3,430 | $2,331 | $1,099 | 47.1% | | Six months ended June 30 | $6,366 | $4,926 | $1,440 | 29.2% | - Increases were primarily due to higher commission expenses, duties, and freight, partially offset by decreased trade show and travel-related costs due to the COVID-19 pandemic[126](index=126&type=chunk) [General and administrative expense](index=34&type=section&id=General%20and%20administrative%20expense) G&A Expense (YoY Change): | Period | 2020 (in thousands) | 2019 (in thousands) | Change (in thousands) | % Change | | :------------------- | :------------------ | :------------------ | :-------------------- | :------- | | Three months ended June 30 | $10,611 | $10,884 | $(273) | (2.5)% | | Six months ended June 30 | $21,249 | $21,324 | $(75) | (0.4)% | - Decreases were primarily due to lower legal expenses (some paid by insurance), partially offset by increases in personnel-related costs, share-based compensation expenses, and insurance expenses[127](index=127&type=chunk)[128](index=128&type=chunk) [Other income (expense), net](index=35&type=section&id=Other%20income%20(expense),%20net) Total Other Income (Expense), Net (YoY Change): | Period | 2020 (in thousands) | 2019 (in thousands) | Change (in thousands) | % Change | | :------------------- | :------------------ | :------------------ | :-------------------- | :------- | | Three months ended June 30 | $(468) | $(729) | $261 | (35.8)% | | Six months ended June 30 | $(1,519) | $(1,808) | $289 | 16.0% | - The increase was mainly due to a significant rise in government subsidy income in China and Taiwan, including **$0.5 million** related to the COVID-19 pandemic for the six months ended June 30, 2020[130](index=130&type=chunk) - Interest expense increased by **$0.5 million (18.4%)** for the six months ended June 30, 2020, due to higher average debt balances[129](index=129&type=chunk) [Benefit for income taxes](index=35&type=section&id=Benefit%20for%20income%20taxes) Income Tax Benefit (Expense) (YoY Change): | Period | 2020 (in thousands) | 2019 (in thousands) | Change (in thousands) | % Change | | :------------------- | :------------------ | :------------------ | :-------------------- | :------- | | Three months ended June 30 | $(7,024) | $3,191 | $(10,215) | (320.1)% | | Six months ended June 30 | $(4,976) | $5,665 | $(10,641) | (187.8)% | Effective Tax Rate (YoY Change): | Period | 2020 | 2019 | | :------------------- | :----- | :----- | | Three months ended June 30 | 258.2% | 22.0% | | Six months ended June 30 | (16.25)% | 20.6% | - Rate variations were primarily due to the mix of earnings among tax jurisdictions, changes in valuation allowance on US and state deferred tax assets, and the recording of a valuation allowance on Taiwan deferred tax assets due to cumulative losses[132](index=132&type=chunk)[133](index=133&type=chunk) [Liquidity and Capital Resources](index=36&type=section&id=Liquidity%20and%20Capital%20Resources) [Operating activities](index=37&type=section&id=Operating%20activities) Net Cash Provided by (Used in) Operating Activities (YoY Change): | Period | 2020 (in thousands) | 2019 (in thousands) | Change (in thousands) | | :------------------- | :------------------ | :------------------ | :-------------------- | | Six months ended June 30 | $(23,769) | $7,167 | $(30,936) | - Net cash used in operating activities for the six months ended June 30, 2020, was primarily due to a net loss of **$35.4 million** and increases in inventory (**$15.4 million**) and accounts receivable (**$9.7 million**), partially offset by an increase in accounts payable (**$12.7 million**)[143](index=143&type=chunk) [Investing activities](index=37&type=section&id=Investing%20activities) Net Cash Used in Investing Activities (YoY Change): | Period | 2020 (in thousands) | 2019 (in thousands) | Change (in thousands) | | :------------------- | :------------------ | :------------------ | :-------------------- | | Six months ended June 30 | $(9,219) | $(20,838) | $11,619 | - Net cash used in investing activities for the six months ended June 30, 2020, was mainly from the purchase of additional machinery and equipment[145](index=145&type=chunk) [Financing activities](index=37&type=section&id=Financing%20activities) Net Cash Provided by Financing Activities (YoY Change): | Period | 2020 (in thousands) | 2019 (in thousands) | Change (in thousands) | | :------------------- | :------------------ | :------------------ | :-------------------- | | Six months ended June 30 | $25,101 | $39,337 | $(14,236) | - Key sources of cash from financing activities in 2020 included **$13.9 million** from the At The Market (ATM) Offering, **$6.2 million** from the PPP term loan, **$1.7 million** net from lines of credit, and **$3.7 million** net from acceptances payable[146](index=146&type=chunk) [Loans and commitments](index=37&type=section&id=Loans%20and%20commitments) - The company has various lending arrangements in the US, Taiwan, and China, including revolving lines of credit and equipment finance agreements[147](index=147&type=chunk)[148](index=148&type=chunk) - As of June 30, 2020, the company had **$26.9 million** of unused borrowing capacity[148](index=148&type=chunk) - Outstanding **$80.5 million** of **5%** convertible senior notes due 2024, issued March 5, 2019[149](index=149&type=chunk) [China factory construction](index=38&type=section&id=China%20factory%20construction) - The company is constructing a new factory and facilities in Ningbo, China, with an estimated total cost of approximately **$27.5 million**[150](index=150&type=chunk) - Approximately **$21.2 million** of the total cost has been incurred as of June 30, 2020, with construction expected to be completed by the end of 2020[150](index=150&type=chunk) [Future liquidity needs](index=38&type=section&id=Future%20liquidity%20needs) - Existing cash and cash equivalents, cash flows from operating activities, and available credit are believed to be sufficient to meet anticipated cash needs for the next **12 months**[151](index=151&type=chunk) - Future capital requirements depend on growth rate, R&D spending, sales and marketing expansion, new product introductions, and manufacturing capacity changes[151](index=151&type=chunk) - Additional liquidity sources may include issuing equity or debt securities, incurring secured indebtedness, or selling product lines/assets[151](index=151&type=chunk) [Contractual Obligations and Commitments](index=38&type=section&id=Contractual%20Obligations%20and%20Commitments) Contractual Obligations (June 30, 2020, in thousands): | Obligation | Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | | :--------------------------- | :------ | :--------------- | :---------- | :---------- | :---------------- | | Notes payable and long-term debt | $57,776 | $42,234 | $15,542 | $0 | $0 | | Convertible senior notes | $94,588 | $4,025 | $8,050 | $82,513 | $0 | | Operating leases | $10,474 | $1,268 | $2,398 | $2,236 | $4,572 | | Financing leases | $121 | $22 | $44 | $55 | $0 | | **Total commitments** | **$162,959** | **$47,549** | **$26,034** | **$84,804** | **$4,572** | [Inflation](index=38&type=section&id=Inflation) - Low U.S. inflation has not significantly impacted net sales, revenues, or income from continuing operations[153](index=153&type=chunk) - Expansion in China and Taiwan may lead to inflation having a more significant impact on operating results in the future[153](index=153&type=chunk) [Off-Balance Sheet Arrangements](index=39&type=section&id=Off-Balance%20Sheet%20Arrangements) - The company did not have any off-balance sheet arrangements for the three and six months ended June 30, 2020, and does not currently have any[154](index=154&type=chunk) [Critical Accounting Policies and Estimates](index=39&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) - Critical accounting policies and estimates include revenue recognition, allowance for credit losses, inventory reserves, impairment of long-lived assets, goodwill and other indefinite-lived intangible assets, purchase price allocation of acquisitions, service and product warranties, and income taxes[155](index=155&type=chunk) - These estimates are based on historical experience and future expectations, and actual results may differ materially[155](index=155&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=39&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's exposure to market risk has not materially changed since December 31, 2019, as previously disclosed in its Annual Report on Form 10-K - The company's exposure to market risk has not materially changed since December 31, 2019[156](index=156&type=chunk) [Item 4. Controls and Procedures](index=39&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded disclosure controls and procedures were effective as of June 30, 2020, with no material changes in internal control over financial reporting - Disclosure controls and procedures were evaluated as effective as of June 30, 2020[158](index=158&type=chunk) [Changes in Internal Control over Financial Reporting](index=39&type=section&id=Changes%20in%20Internal%20Control%20over%20Financial%20Reporting) - No changes in internal control over financial reporting during the three-month period materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[159](index=159&type=chunk) Part II. Other Information This section covers other required information, including legal proceedings, risk factors, equity sales, defaults, and exhibits [Item 1. Legal Proceedings](index=39&type=section&id=Item%201.%20Legal%20Proceedings) This section outlines the company's ongoing legal proceedings, including a class action lawsuit and a shareholder derivative lawsuit [Class Action and Shareholder Derivative Litigation](index=40&type=section&id=Class%20Action%20and%20Shareholder%20Derivative%20Litigation) - An agreement in principle was reached on June 2, 2020, to settle the class action lawsuit for **$15.5 million**, funded by D&O insurance policies, contingent upon court approval[163](index=163&type=chunk)[164](index=164&type=chunk) - A derivative lawsuit, alleging breaches of fiduciary duties, remains pending, with the company unable to determine the likelihood of loss at this stage[164](index=164&type=chunk) - The company believes the class action settlement will not have a material adverse effect on its overall financial condition, results of operations, or cash flows[164](index=164&type=chunk) [Item 1A. Risk Factors](index=41&type=section&id=Item%201A.%20Risk%20Factors) Investing in the company's common stock involves high risks, including customer dependence, demand forecasting, competition, trade tensions, and COVID-19 impacts [Risks Inherent in Our Business](index=41&type=section&id=Risks%20Inherent%20in%20Our%20Business) - The company is highly dependent on a limited number of key customers, with its top ten customers representing **86.9%** and **86.0%** of revenue for the three and six months ended June 30, 2020, respectively[167](index=167&type=chunk) - Difficulty in accurately forecasting customer demand and the cyclical nature of target markets can lead to production imbalances and impact financial results[170](index=170&type=chunk)[191](index=191&type=chunk) - The COVID-19 pandemic has negatively impacted operations, supply chains, and customer demand, with the extent and duration of future impacts remaining uncertain[197](index=197&type=chunk)[199](index=199&type=chunk)[200](index=200&type=chunk) [Risks Related to Our Operations in China](index=55&type=section&id=Risks%20Related%20to%20Our%20Operations%20in%20China) - Business operations in China are subject to significant economic, political, legal, and social events and developments, including potential adverse changes in government policies and uncertain enforcement of laws[295](index=295&type=chunk)[298](index=298&type=chunk) - The preferential **15% tax rate** for high-tech enterprises in China is set to expire in November 2020; failure to re-qualify could increase tax liabilities[301](index=301&type=chunk) - High direct labor turnover and increasing labor costs in China's manufacturing sector could adversely affect production, shipments, and profitability[303](index=303&type=chunk)[308](index=308&type=chunk) [Risks Related to Our Common Stock](index=57&type=section&id=Risks%20Related%20to%20Our%20Common%20Stock) - The market price of the company's common stock has been and is likely to be volatile due to various factors, including market fluctuations, competitive announcements, and litigation[311](index=311&type=chunk)[312](index=312&type=chunk)[313](index=313&type=chunk) - The company does not plan to declare or pay dividends on its common stock in the foreseeable future, meaning returns depend solely on stock price appreciation[317](index=317&type=chunk) - Charter documents, stock incentive plans, and Delaware law contain provisions that could delay or prevent a change in control, potentially reducing the market price of the stock[318](index=318&type=chunk)[319](index=319&type=chunk)[320](index=320&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=59&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) There were no unregistered sales of equity securities or use of proceeds to report for the period - No unregistered sales of equity securities or use of proceeds to report[326](index=326&type=chunk) [Item 3. Defaults Upon Senior Securities](index=59&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) There were no defaults upon senior securities to report for the period - No defaults upon senior securities to report[326](index=326&type=chunk) [Item 4. Mine Safety Disclosures](index=59&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not applicable[326](index=326&type=chunk) [Item 5. Other Information](index=59&type=section&id=Item%205.%20Other%20Information) No other information was required to be reported under this item - No other information to report[326](index=326&type=chunk) [Item 6. Exhibits](index=59&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed with the Form 10-Q, including organizational documents, debt instruments, certifications, and XBRL documents - Key exhibits include the Amended and Restated Certificate of Incorporation, Bylaws, Indenture for Convertible Senior Notes, Paycheck Protection Program Loan Promissory Note, CEO/CFO Certifications (pursuant to Sections 302 and 906 of Sarbanes-Oxley Act), and Inline XBRL documents[326](index=326&type=chunk) [Signatures](index=61&type=section&id=Signatures) - The report was signed by Stefan J. Murry, Chief Financial Officer of Applied Optoelectronics, Inc., on August 6, 2020[329](index=329&type=chunk)

Table of Contents 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 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 March 31, 2020 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period ...