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 ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2019 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 (St ...

Part I [Item 1. Condensed Consolidated Financial Statements (Unaudited)](index=4&type=section&id=Item%201.%20Condensed%20Consolidated%20Financial%20Statements%20(Unaudited)) Unaudited Q3 and YTD 2019 financials reflect declining revenue and profitability, net losses, increased liabilities, and reduced operating cash flow [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2019 | Dec 31, 2018 | Change | | :--- | :--- | :--- | :--- | | **Total current assets** | $190,647 | $194,275 | ($3,628) | | Inventories | $82,118 | $93,256 | ($11,138) | | **Total Assets** | **$483,878** | **$466,840** | **$17,038** | | **Total current liabilities** | $64,423 | $77,418 | ($12,995) | | Convertible senior notes | $76,835 | $0 | $76,835 | | **Total Liabilities** | **$181,593** | **$137,746** | **$43,847** | | **Total Stockholders' Equity** | **$302,285** | **$329,094** | **($26,809)** | [Condensed Consolidated Statements of Operations](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) Condensed Consolidated Statements of Operations (in thousands, except per share data) | Metric | Q3 2019 | Q3 2018 | 9 Months 2019 | 9 Months 2018 | | :--- | :--- | :--- | :--- | :--- | | Revenue, net | $46,084 | $56,386 | $142,214 | $209,447 | | Gross profit | $11,976 | $17,537 | $34,865 | $77,236 | | Income (loss) from operations | ($10,996) | ($9,604) | ($36,693) | $1,509 | | Net income (loss) | ($8,780) | ($3,732) | ($30,620) | $6,422 | | Diluted EPS | ($0.44) | ($0.19) | ($1.54) | $0.32 | [Condensed Consolidated Statements of Cash Flows](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Condensed Consolidated Statements of Cash Flows (in thousands) | Activity | Nine Months ended Sep 30, 2019 | Nine Months ended Sep 30, 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $1,411 | $25,625 | | Net cash used in investing activities | ($26,997) | ($71,025) | | Net cash provided by financing activities | $39,586 | $17,936 | | **Net increase (decrease) in cash** | **$14,372** | **($25,873)** | [Notes To Condensed Consolidated Financial Statements (Unaudited)](index=9&type=section&id=Notes%20To%20Condensed%20Consolidated%20Financial%20Statements%20(Unaudited)) - The company is a vertically integrated provider of fiber-optic networking products for internet data centers, cable television (CATV), telecommunications (telecom), and fiber-to-the-home (FTTH) markets, with manufacturing and R&D facilities in the U.S., Taiwan, and China[21](index=21&type=chunk)[22](index=22&type=chunk) Revenue by Market Segment (in thousands) | Market Segment | Q3 2019 Revenue | Q3 2018 Revenue | 9 Months 2019 Revenue | 9 Months 2018 Revenue | | :--- | :--- | :--- | :--- | :--- | | Data Center | $34,006 | $38,954 | $104,311 | $158,577 | | CATV | $8,797 | $14,295 | $30,577 | $39,047 | | Telecom | $2,868 | $2,656 | $6,236 | $10,399 | | **Total Revenue** | **$46,084** | **$56,386** | **$142,214** | **$209,447** | - On March 5, 2019, the company issued **$80.5 million** of 5% convertible senior notes due 2024, generating net proceeds of **$76.4 million**. A portion of the proceeds was used to repay existing debt[79](index=79&type=chunk)[80](index=80&type=chunk) - The company is involved in several legal proceedings, including class action and shareholder derivative lawsuits alleging violations of the Exchange Act, and a books and records request. The company disputes the allegations and intends to defend against these claims vigorously[106](index=106&type=chunk)[109](index=109&type=chunk)[110](index=110&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=42&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management attributes Q3 2019 revenue decline to softer data center and CATV demand, impacting gross margin, with liquidity bolstered by convertible note proceeds [Results of Operations](index=45&type=section&id=Results%20of%20Operations) Revenue Change by Market (Q3 2019 vs Q3 2018, in thousands) | Market | Q3 2019 Revenue | Q3 2018 Revenue | Change Amount | Change % | | :--- | :--- | :--- | :--- | :--- | | Data Center | $34,006 | $38,954 | ($4,948) | (12.7)% | | CATV | $8,797 | $14,295 | ($5,498) | (38.5)% | | **Total Revenue** | **$46,084** | **$56,386** | **($10,302)** | **(18.3)%** | - The decrease in revenue was primarily driven by reduced shipments of 100 Gbps transceiver products to a specific customer, believed to be due to their excess inventory. A decrease in sales of CATV products also contributed to the decline[130](index=130&type=chunk) - Gross margin decreased year-over-year due to additional production costs for 100 Gbps datacenter products related to enhanced quality control testing, combined with lower selling prices and lower production volumes[132](index=132&type=chunk) - Research and development expenses decreased by **$3.7 million (26.2%)** in Q3 2019 compared to Q3 2018, mainly due to lower costs from R&D work orders, depreciation, and materials usage[136](index=136&type=chunk) [Liquidity and Capital Resources](index=53&type=section&id=Liquidity%20and%20Capital%20Resources) - As of September 30, 2019, the company had **$72.4 million** in cash, cash equivalents, and restricted cash, and **$57.3 million** of unused borrowing capacity[148](index=148&type=chunk) - In March 2019, the company issued **$80.5 million** of 5% convertible senior notes, generating net proceeds of **$76.4 million**, which significantly bolstered its cash position[149](index=149&type=chunk) Cash Flow Summary (Nine Months ended Sep 30, in thousands) | Cash Flow Activity | 2019 | 2018 | | :--- | :--- | :--- | | Operating Activities | $1,411 | $25,625 | | Investing Activities | ($26,997) | ($71,025) | | Financing Activities | $39,586 | $17,936 | [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=59&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company states that its exposure to market risk has not changed materially since December 31, 2018, as detailed in its Annual Report on Form 10-K for that fiscal year - The company's exposure to market risk is not believed to have changed materially since the end of the previous fiscal year (December 31, 2018)[168](index=168&type=chunk) [Item 4. Controls and Procedures](index=59&type=section&id=Item%204.%20Controls%20and%20Procedures) Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of September 30, 2019, with no material changes in internal control over financial reporting during the quarter - Based on an evaluation as of September 30, 2019, the CEO and CFO concluded that the company's disclosure controls and procedures were effective[170](index=170&type=chunk) - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[171](index=171&type=chunk) Part II. Other Information [Item 1. Legal Proceedings](index=60&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in multiple legal proceedings, including securities class action and shareholder derivative lawsuits, which it is vigorously defending - The company and two of its officers are defendants in the *Mona Abouzied v. Applied Optoelectronics, Inc.* class action lawsuit, filed in August 2017, related to statements about demand for 40G solutions. The case is currently in the discovery phase[174](index=174&type=chunk) - A second class action lawsuit, *Gaurav Taneja v. Applied Optoelectronics, Inc.*, was filed in October 2018 concerning the company's revised third-quarter revenue guidance due to an issue with 25G lasers. A motion to dismiss is pending[175](index=175&type=chunk) - A shareholder derivative action has been filed and is currently stayed, and a stockholder has filed a complaint in Delaware seeking to inspect corporate books and records, which is also stayed[174](index=174&type=chunk)[177](index=177&type=chunk) [Item 1A. Risk Factors](index=62&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant risks from customer concentration, demand volatility, manufacturing disruptions, and geopolitical uncertainties, particularly concerning its China operations and trade tensions [Risks Inherent in Our Business](index=62&type=section&id=Risks%20Inherent%20in%20Our%20Business) - The company is highly dependent on key customers, with the top ten accounting for **88.3%** of revenue in the first nine months of 2019. In 2018, Facebook, Microsoft, and Amazon represented **38.3%**, **22.1%**, and **12.1%** of revenue, respectively[180](index=180&type=chunk) - Customer demand is difficult to forecast, and purchase orders can be increased, decreased, or canceled with little notice, creating risks of excess or insufficient inventory and manufacturing capacity[183](index=183&type=chunk)[185](index=185&type=chunk) - Manufacturing is subject to risks, including potential disruptions at the single Sugar Land, Texas facility where proprietary MBE and MOCVD laser fabrication processes are conducted[209](index=209&type=chunk)[210](index=210&type=chunk) - The company faces risks from U.S.-China trade tensions, as tariffs imposed by both governments have increased the cost of goods sold and could adversely affect business if they escalate[205](index=205&type=chunk)[206](index=206&type=chunk) [Risks Related to Our Operations in China](index=98&type=section&id=Risks%20Related%20to%20Our%20Operations%20in%20China) - A significant portion of manufacturing and assets are located in China, making the business susceptible to adverse changes in Chinese economic and political policies, laws, and regulations[311](index=311&type=chunk)[312](index=312&type=chunk) - The company's China subsidiary benefits from a preferential **15%** tax rate for high-tech enterprises, which expires in November 2020. Failure to renew this status would increase the tax rate to **25%**, impacting net income[319](index=319&type=chunk) - High turnover of direct labor in China's manufacturing sector and rising labor costs could adversely affect production and profitability[320](index=320&type=chunk)[328](index=328&type=chunk) [Risks Related to Our Common Stock](index=102&type=section&id=Risks%20Related%20to%20Our%20Common%20Stock) - The company's stock price has been and is likely to remain volatile. The company is currently subject to securities class action litigation, which can result in substantial costs and divert management's attention[331](index=331&type=chunk)[333](index=333&type=chunk)[334](index=334&type=chunk) - The company does not intend to pay dividends on its common stock in the foreseeable future, meaning a return on investment is dependent on stock price appreciation[337](index=337&type=chunk)[338](index=338&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=106&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reported no unregistered sales of equity securities during the period - None[346](index=346&type=chunk) [Item 3. Defaults Upon Senior Securities](index=106&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) The company reported no defaults upon senior securities during the period - None[346](index=346&type=chunk) [Item 4. Mine Safety Disclosures](index=106&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This section is not applicable to the company - Not applicable[346](index=346&type=chunk) [Item 5. Other Information](index=106&type=section&id=Item%205.%20Other%20Information) The company reported no other information required to be disclosed in this section - None[346](index=346&type=chunk) [Item 6. Exhibits](index=106&type=section&id=Item%206.%20Exhibits) This section provides an index of the exhibits filed with the Form 10-Q, including certifications by the CEO and CFO and documents related to debt agreements and corporate governance - The Exhibit Index lists all documents filed as part of the quarterly report, including corporate governance documents, debt agreements, and required certifications[347](index=347&type=chunk)[348](index=348&type=chunk)

Part I. [Financial Information](index=4&type=section&id=Part%20I.%20Financial%20Information) [Condensed Consolidated Financial Statements (Unaudited)](index=4&type=section&id=Item%201.%20Condensed%20Consolidated%20Financial%20Statements%20(Unaudited)) This section presents the unaudited condensed consolidated financial statements for Applied Optoelectronics, Inc., showing a significant revenue decline and shift to net loss for the periods ended June 30, 2019 [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) As of June 30, 2019, total assets increased to **$495.1 million** while total liabilities rose to **$183.4 million** due to convertible notes, leading to a decrease in stockholders' equity Condensed Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | June 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $81,070 | $55,646 | | Inventories | $81,475 | $93,256 | | Total current assets | $201,035 | $194,275 | | Property, plant and equipment, net | $247,887 | $234,211 | | **Total Assets** | **$495,122** | **$466,840** | | **Liabilities & Equity** | | | | Total current liabilities | $68,127 | $77,418 | | Convertible senior notes | $76,630 | $— | | **Total Liabilities** | **$183,407** | **$137,746** | | **Total Stockholders' Equity** | **$311,715** | **$329,094** | [Condensed Consolidated Statements of Operations](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) The company experienced a significant downturn, with **Q2 2019 revenue** falling **50.6%** to **$43.4 million** and a **net loss** of **$11.4 million**, contrasting with prior year's **net income** Statement of Operations Summary (in thousands, except per share data) | Metric | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Revenue, net | $43,411 | $87,822 | $96,130 | $153,061 | | Gross Profit | $10,538 | $33,863 | $22,889 | $59,699 | | Income (Loss) from Operations | $(13,828) | $8,943 | $(25,697) | $11,113 | | Net Income (Loss) | $(11,366) | $8,034 | $(21,840) | $10,154 | | Diluted EPS | $(0.57) | $0.40 | $(1.10) | $0.51 | [Condensed Consolidated Statements of Cash Flows](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Net cash provided by operating activities decreased to **$7.2 million** for the six months ended June 30, 2019, while financing activities, driven by convertible notes, led to a **$26.0 million** net increase in cash Cash Flow Summary (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $7,167 | $18,079 | | Net cash used in investing activities | $(20,838) | $(35,220) | | Net cash provided by financing activities | $39,337 | $9,304 | | **Net increase (decrease) in cash** | **$25,983** | **$(6,005)** | [Notes To Condensed Consolidated Financial Statements](index=10&type=section&id=Notes%20To%20Condensed%20Consolidated%20Financial%20Statements) The notes detail accounting policies, **revenue** disaggregation highlighting **Data Center** reliance, new lease accounting, debt instruments including a new **$80.5 million** convertible note, and pending litigation - The company is a vertically integrated provider of fiber-optic networking products for the internet **data center**, cable television (**CATV**), telecom, and fiber-to-the-home (**FTTH**) markets, with manufacturing and R&D in the U.S., Taiwan, and China[19](index=19&type=chunk)[20](index=20&type=chunk) - On March 5, 2019, the company issued **$80.5 million** of **5%** convertible senior notes due 2024, generating **net proceeds** of **$76.4 million**. A portion of the proceeds (**$37.8 million**) was used to repay existing debt[75](index=75&type=chunk)[76](index=76&type=chunk) Revenue by Market (in thousands) | Market | Q2 2019 Revenue | Q2 2019 % | Q2 2018 Revenue | Q2 2018 % | | :--- | :--- | :--- | :--- | :--- | | Data Center | $31,806 | 73.3% | $69,040 | 78.6% | | CATV | $9,818 | 22.6% | $14,184 | 16.2% | | Telecom | $1,630 | 3.8% | $4,157 | 4.7% | | FTTH & Other | $157 | 0.3% | $441 | 0.5% | - The company is involved in several legal proceedings, including class action and shareholder derivative lawsuits alleging violations of the Exchange Act, and a books and records request. The company disputes the allegations and is unable to estimate the likelihood or range of loss[103](index=103&type=chunk)[105](index=105&type=chunk)[106](index=106&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=39&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the **37.2% revenue** decline for the first six months of 2019, primarily due to softer **data center** demand, impacting **gross margin**, and details liquidity bolstered by convertible notes and capital resources for factory construction [Results of Operations](index=43&type=section&id=Results%20of%20Operations) **Q2 2019 revenue** decreased **50.6%** to **$43.4 million**, primarily from a **53.9%** drop in **Data Center** sales, leading to a significant **gross margin** decline and an **operating loss** - The decrease in **revenue** was primarily driven by decreased shipments of **100 Gbps** transceiver products to one of our large customers, which management believes is due to excess inventory held by that customer[125](index=125&type=chunk) - **Gross margin** declined due to additional production costs for **100 Gbps** products related to enhanced quality control testing, combined with lower selling prices and lower production volume[128](index=128&type=chunk) - General and administrative expenses increased by **10.0%** for the three months ended June 30, 2019, primarily due to higher share-based compensation and professional service fees[133](index=133&type=chunk) Revenue Change by Market - Q2 2019 vs Q2 2018 (in thousands) | Market | Q2 2019 | Q2 2018 | Change Amount | Change % | | :--- | :--- | :--- | :--- | :--- | | Data Center | $31,806 | $69,040 | $(37,234) | (53.9)% | | CATV | $9,818 | $14,184 | $(4,366) | (30.8)% | | Telecom | $1,630 | $4,157 | $(2,527) | (60.8)% | | **Total Revenue** | **$43,411** | **$87,822** | **$(44,411)** | **(50.6)%** | [Liquidity and Capital Resources](index=50&type=section&id=Liquidity%20and%20Capital%20Resources) As of June 30, 2019, the company had **$84.0 million** in cash, bolstered by **$80.5 million** in convertible notes, with sufficient liquidity for the next 12 months despite ongoing factory construction commitments - On March 5, 2019, the company issued **$80.5 million** of **5%** convertible senior notes, generating **net proceeds** of **$76.4 million**[143](index=143&type=chunk) - The company is constructing a new factory in Ningbo, China, with estimated total costs of **$27.5 million**. As of June 30, 2019, **$17.7 million** had been incurred, with the remainder due as construction progresses[150](index=150&type=chunk) Contractual Obligations as of June 30, 2019 (in thousands) | Obligation | Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | | :--- | :--- | :--- | :--- | :--- | :--- | | Notes payable and long-term debt | $52,678 | $22,014 | $26,591 | $4,073 | $— | | Convertible senior notes | $95,447 | $4,025 | $8,050 | $83,372 | $— | | Operating leases | $10,944 | $1,212 | $2,238 | $2,097 | $5,397 | | **Total commitments** | **$159,069** | **$27,251** | **$36,879** | **$89,542** | **$5,397** | [Quantitative and Qualitative Disclosures About Market Risk](index=55&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, 2018 - The company's exposure to market risk has not changed materially since December 31, 2018[158](index=158&type=chunk) [Controls and Procedures](index=55&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective as of June 30, 2019, with no material changes in internal control over financial reporting during the quarter - Based on an evaluation as of June 30, 2019, the CEO and CFO concluded that the company's disclosure controls and procedures were effective[160](index=160&type=chunk) - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, the company's internal controls[161](index=161&type=chunk) Part II. [Other Information](index=58&type=section&id=Part%20II.%20Other%20Information) [Legal Proceedings](index=58&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in multiple legal proceedings, including securities class action and shareholder derivative lawsuits, and a books and records request, with all allegations disputed - A class action lawsuit (**Abouzied v. Applied Optoelectronics**) was filed in August 2017 following a guidance update, alleging violations of the Exchange Act. The company's motion to dismiss was denied, and the case is in the early stages of discovery[164](index=164&type=chunk) - A second class action lawsuit (**Taneja v. Applied Optoelectronics**) was filed in October 2018 after the company revised its **Q3 revenue** guidance due to an issue with **25G lasers**. The company has filed a motion to dismiss[165](index=165&type=chunk) - A stockholder filed a complaint in April 2019 seeking to inspect corporate books and records. The case has been stayed by agreement of the parties to seek resolution outside of litigation[167](index=167&type=chunk) [Risk Factors](index=60&type=section&id=Item%201A.%20Risk%20Factors) This section details significant business risks, including heavy customer dependence, intense competition, market cyclicality, manufacturing issues, international operations, trade policies, and intellectual property disputes - The company is highly dependent on a few key customers. In 2018, **Facebook**, **Microsoft**, and **Amazon** represented **38.3%**, **22.1%**, and **12.1%** of **revenue**, respectively. The loss of any key customer would materially harm results[170](index=170&type=chunk) - The business faces risks from potential changes in U.S. and international trade policies, particularly tariffs on products manufactured in China, where a significant portion of its operations are based[230](index=230&type=chunk)[231](index=231&type=chunk)[232](index=232&type=chunk) - The company's vertically integrated model has high fixed costs, making **gross profits** sensitive to sales volume. Insufficient demand can lead to high inventory carrying costs and potential write-downs[195](index=195&type=chunk)[197](index=197&type=chunk) - Manufacturing is subject to risks, including potential disruptions at its sole laser fabrication facility in Sugar Land, Texas, and quality control issues, such as the one that affected **100 Gbps** transceivers in 2018[194](index=194&type=chunk)[218](index=218&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=104&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reported no unregistered sales of equity securities or use of proceeds during the period - None[326](index=326&type=chunk) [Defaults Upon Senior Securities](index=104&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) The company reported no defaults upon senior securities - None[326](index=326&type=chunk) [Mine Safety Disclosures](index=104&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not applicable[326](index=326&type=chunk) [Other Information](index=104&type=section&id=Item%205.%20Other%20Information) The company reported no other information for this item - None[326](index=326&type=chunk) [Exhibits](index=104&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the quarterly report, including corporate governance documents, debt agreements, and certifications - The report includes an index of all exhibits filed, such as corporate governance documents, debt indentures, credit agreements, and Sarbanes-Oxley certifications[328](index=328&type=chunk)[329](index=329&type=chunk)