Applied Optoelectronics(AAOI) - 2019 Q2 - Quarterly Report

Part I. Financial Information Condensed Consolidated Financial Statements (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 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 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 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 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][20] - 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][76] 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][105][106] Management's Discussion and Analysis of Financial Condition and Results of Operations 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 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] - 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] - 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] 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 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] - 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] 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 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] Controls and Procedures 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] - 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] Part II. Other Information Legal Proceedings 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] - 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] - 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] Risk Factors 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] - 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][231][232] - 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][197] - 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][218] Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities or use of proceeds during the period - None[326] Defaults Upon Senior Securities The company reported no defaults upon senior securities - None[326] Mine Safety Disclosures This item is not applicable to the company - Not applicable[326] Other Information The company reported no other information for this item - None[326] Exhibits 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][329]