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

The following is a summary of option activity (in thousands, except per share data):

																*Weighted*				*Weighted*

				Weighted				Weighted
		Weighted		Average				Average
		Average		Share Price		Weighted		Remaining	Aggregate
	Number of	Exercise		on Date of		Average		Contractual	Intrinsic
	shares	Price		Exercise		Fair Value		Life	Value
Outstanding, January 1, 2017	1,130	$	9.40			$	4.90		$	15,872
														*Weighted*		*Average*				*Average*
														*Average*		*Share Price*		*Weighted*		*Remaining*		*Aggregate*
											*Number of*			*Exercise*		*on Date of*		*Average*		*Contractual*		*Intrinsic*
											*shares*			*Price*		*Exercise*		*Fair Value*		*Life*		*Value*
											(in thousands, except price data)
Outstanding at January 1, 2021												276		$	10.29			$	5.41		2.67	$	54
Exercised	(357)		8.35	$	61.81		4.41			19,056		(2	)	$	6.00		0	$	0.40				7
Forfeited	(110)		9.10				4.89			6,125		(4	)	$	10.46			$	5.64				1
Outstanding, September 30, 2017	663	$	10.01			$	5.17	5.89	$	36,266
Exercisable, September 30, 2017	652	$	9.94					5.89	$	35,698
Outstanding, September 30, 2021												270		$	10.32			$	5.44		1.94		6
Exercisable, September 30, 2021												270		$	10.32						1.94		6
Vested and expected to vest	663	$	10.01					5.89	$	36,266		270		$	10.33						1.94		6

As of September 30, ~~2017,~~2021, there was ~~approximately $0.1 million of~~no unrecognized stock option ~~expense, which is expected to be recognized over 0.3 years.~~expense.

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Restricted Stock Units/Awards

~~RSUs or RSAs have been granted to the Company’s employees under the 2013 Plan and generally vest over a period of four years with 25% of the shares vesting over each of the one-year periods.~~

The following is a summary of RSU/RSA activity (in thousands, except per share data):

											*Weighted*
		Weighted
		Average Share		Weighted		Aggregate
	Number of	Price on Date		Average Fair		Intrinsic
	shares	of Release		Value		Value
Outstanding at January 1, 2017	517			$	14.79	$	12,128
											*Average Share*		*Weighted*		*Aggregate*
								*Number of*			*Price on Date*		*Average Fair*		*Intrinsic*
								*shares*			*of Release*		*Value*		*Value*
								(in thousands, except price data)
Outstanding at January 1, 2021									1,325				$	14.97	$	11,279
Granted	507				38.85		19,676		1,732					10.12		16,007
Released	(232)	$	66.03		19.97		15,294		(590	)	$	8.59		15.87		5,069
Cancelled/Forfeited	(27)				22.27		1,787		(73	)				13.05		527
Outstanding, September 30, 2017	765			$	28.89	$	49,444
Exercisable, September 30, 2017	2					$	120
Outstanding, September 30, 2021									2,394					11.30		17,189
Vested and expected to vest	765					$	49,444		2,394					11.30		17,189

As of September 30, ~~2017,~~2021, there was ~~$20.6~~$24.5 million of unrecognized compensation expense related to these RSUs and RSAs. This expense is expected to be recognized over 32.65 years.

Performance Based Incentive Plan

In June 2021, the Company approved to grant performance stock units (“PSUs”) to senior executives as a part of our long-term equity compensation program. The number of shares of common stock that will ultimately be issued to settle PSUs granted ranges from 0% to 200% of the number granted and is determined based on certain performance criteria over a three-year measurement period. The performance criteria for the PSUs are based on a combination of the performance of our stock price and the Total Shareholder Return (“TSR”) for the performance period compared with the TSR of certain peer companies or index for the performance period. PSUs granted vest 100% on the third anniversary of their grant, assuming achievement of the applicable performance criteria. We estimated the fair value of the PSUs using a Monte Carlo simulation model on the date of grant. Compensation expense is recognized ratably over the explicit service period.

Share-Based Compensation

Employee share-based compensation expenses recognized for the periods indicated (in thousands):

									*Three months ended*				*Nine months ended*
	Three months ended September 30,				Nine months ended September 30,
	2017		2016		2017		2016
									*September 30,*				*September 30,*
									*2021*		*2020*		*2021*		*2020*
Share-based compensation - by expense type
Cost of goods sold	$	124	$	53	$	336	$	140	$	222	$	230	$	689	$	712
Research and development		400		165		1,106		437		489		706		1,682		2,098
Sales and marketing		118		97		367		264		272		298		820		884
General and administrative		1,439		732		4,040		1,989		2,146		2,031		5,731		6,110
Total share-based compensation expense	$	2,081	$	1,047	$	5,849	$	2,830	$	3,129	$	3,265	$	8,922	$	9,804

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Three months ended September 30,

Nine months ended September 30,

2017

2016

2017

2016

Share-based compensation - by award type

Employee stock options

$
263

$
374

$
810

$
1,111

Restricted stock units

1,818

673

5,039

1,719

Total share-based compensation expense

$
2,081

$
1,047

$
5,849

$
2,830

Note 16. Income Taxes

~~Note 13. Stockholders’ Equity~~

~~Common Stock~~The Company’s effective tax rate for the three months ended September 30, 2021 and 2020 was 0% and (30.69)%, respectively. For the three months ended September 30, 2021, the effective tax rate varied from the federal statutory rate of 21% primarily due to the change of the valuation allowance on federal, state, Taiwan, and China deferred tax assets ("DTA"). For the three months ended September 30, 2020, the effective tax rate varied from the federal statutory rate of 21% primarily due to the change of valuation allowance on the federal, state, and Taiwan deferred tax assets, and the recording of a valuation allowance on China deferred tax assets.

The ~~Company’s Amended~~ Company's effective tax rate for the nine months ended September 30, 2021 and ~~Restated Certificate~~2020 was 0% and (19.15%), respectively. For the nine months ended September 30, 2021, the effective tax rate varied from the federal statutory rate of ~~Incorporation authorizes~~21% primarily due to the ~~issuance~~benefit of upthe nontaxable PPP loan forgiveness, offset by the change of the valuation allowance on federal, state, Taiwan and China deferred tax assets. For the nine months ended September 30, 2020, the effective tax rate varied from the federal statutory rate of 21% primarily due to ~~45,000,000 shares~~the change of ~~common stock, all~~the valuation allowance on the federal, and state deferred tax assets, and the recording of ~~which have been designated voting common stock.~~a valuation allowance on Taiwan and China deferred tax assets.

~~Preferred Stock~~

The ~~Company’s Amended~~Company continually monitors and ~~Restated Certificate~~performs an assessment of ~~Incorporation authorizes~~ the ~~issuance~~realizability of ~~up to 5,000,000 shares~~its DTAs, including an analysis of ~~preferred stock.~~

~~Public Offerings~~factors such as future taxable income, reversal of ~~Common Stock~~

~~On October 17, 2016,~~existing taxable temporary differences, and tax planning strategies. In assessing the need for a valuation allowance, the Company ~~filed~~considered both positive and negative evidence related to the likelihood of realization of deferred tax assets using a ~~Registration Statement~~“more likely than not” standard. In making such assessment, more weight was given to evidence that could be objectively verified, including recent cumulative losses. Based on ~~Form S-3 with~~ the ~~Securities and Exchange Commission effective November 1, 2016, providing for the public offer and sale~~Company’s review of certain securities of the Company from time to time, at its discretion, up to an aggregate amount of $250 million. In connection with such Form S-3, the Company entered into an Equity Distribution Agreement with Raymond James & Associates, Inc. pursuant to which the Company may issue and sell sharesthis evidence, management determined that a full valuation allowance against all of the Company’s stock having an aggregate offering price of up to $50.0 million (the “ATM Offering”) from time to time through Raymond James & Associates, Inc. On November 22, 2016, the Company commenced sales of common stock through the ATM Offering. The Company completed its ATM Offering in March 2017 and sold 1.6 million shares of common stocknet deferred tax assets at ~~a weighted average price of $31.55 per share, providing proceeds of $48.8 million, net of expenses and underwriting discounts and commissions.~~September 30, 2021 was appropriate.

In response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Stability Act (the "CARES Act") was signed into law on March 27, 2020. The CARES Act, among other things, includes tax provisions relating to refundable payroll tax credits, deferment of employer social security payments, net operating loss utilization and carryback periods, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property (“QIP”). On December 27, 2020, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 was enacted as part of the Consolidated Appropriations Act, 2021, followed by the American Rescue Plan Act on March 1, 2021. These recent laws, among many other provisions, expand and extend the Paycheck Protection Program (“PPP”), refundable employee retention tax credits previously made available under the CARES Act and allow a full deduction for business meals for the 2021 and 2022 tax years. At this point we do not believe that these changes will have a material impact on our income tax provision for 2021. We will continue to evaluate the impact of new legislation on our financial position, results of operations, and cash flows.

Note ~~14.~~17. Geographic Information

The Company operates in ~~one~~1 reportable segment. The Company’s Chief Executive Officer, who is considered to be the chief operating decision maker, manages the Company’s operations as a whole and reviews financial information presented on a consolidated basis, accompanied by information about product revenue, for purposes of evaluating financial performance and allocating resources.

The following tables set forth the Company’s revenue and asset information by geographic region. Revenue is classified based on the location of where the product is manufactured. Long-lived assets in the tables below comprise only property, plant, equipment and intangible assets (in thousands):

									*Three months ended September 30,*				*Nine months ended September 30,*
	Three months ended September 30,				Nine months ended September 30,
	2017		2016		2017		2016
									*2021*		*2020*		*2021*		*2020*
Revenues:
United States	$	4,887	$	7,277	$	13,519	$	15,314	$	4,547	$	4,887	$	11,451	$	13,383
Taiwan		19,405		44,723		183,906		126,991		19,562		45,821		75,282		105,196
China		64,587		18,137		105,049		33,508		29,158		25,900		70,424		63,719
	$	88,879	$	70,137	$	302,474	$	175,813
									$	53,267	$	76,608	$	157,157	$	182,298

	*As of the period ended*
	*September 30,*		*December 31,*
	*2021*		*2020*
Long-lived assets:
United States	$	87,241	$	90,999
Taiwan		65,394		71,080
China		106,826		108,575
	$	259,461	$	270,654

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As of the period ended

September 30,

December 31,


2017

2016

Long-lived assets:

United States

$
71,023

$
66,028

Taiwan

62,697


48,728

China

52,598


34,113

$
186,318

$
148,869

Note 18. Contingencies

Litigation

Overview

~~Note 15. Contingencies~~

~~Litigation~~

~~Overview~~

From time to time, the Company may be subject to legal proceedings and litigation arising in the ordinary course of business, including, but not limited to, inquiries, investigations, audits and other regulatory proceedings, such as described below. The Company records a loss provision when it believes it is both probable that a liability has been incurred and the amount can be reasonably estimated. Unless otherwise disclosed, the Company is unable to estimate the possible loss or range of loss for the legal proceeding described below.

Except for the ~~lawsuit~~lawsuits described below, the Company believes that there are no claims or actions pending or threatened against it, the ultimate disposition of which would have a material adverse effect on it.

Class Action and Shareholder Derivative Litigation

On August ~~5, 2017,~~ 7, 2018, a derivative lawsuit was filed in the ~~U.S.~~United States District Court for the Southern District of Texas ~~against~~styled Lei Jin, derivatively on behalf ofApplied Optoelectronics, Inc. v. Chih-Hsiang (“Thompson”) Lin, Stefan J. Murry, William H. Yeh, Alex Ignatiev, Richard B. Black, Min-Chu Chen, Alan Moore, and Che-Wei Lin and Applied Optoelectronics, Inc., No.4:18-cv-02713 alleging breaches of fiduciary duties, unjust enrichment, and violations of Section 14(a) of the ~~Company and two of its officers~~Exchange Act based on similar factual allegations as in the securities class action captioned Mona Abouzied v. Applied Optoelectronics, Inc., Chih-Hsiang (Thompson) Lin, and Stefan J. Murry, et al., Case No.4:~~17-cv-02399. The complaint in this matter~~~~seeks class action status on behalf of the Company’s shareholders, alleging violations of Sections 10(b) and 20(a) of the Exchange Act~~17-cv-02399, which had been previously filed against the Company ~~its chief executive officer,~~ and ~~its chief financial officer, arising out~~was dismissed following a settlement in 2020. On December 18, 2018, a second derivative complaint was filed styled Yiu Kwong Ng v.Chih-Hsiang (“Thompson”) Lin, Stefan J. Murry, William H. Yeh, Alex Ignatiev, Richard B. Black, Min-Chu Chen, Alan Moore, and Che-Wei Lin and Applied Optoelectronics, Inc., No.4:18-cv-4751 alleging the same causes of ~~its~~actions as the Jin complaint and additional factual allegations regarding our announcement on September 28, 2018 that we had “identified an issue with a small percentage of 25G lasers within a specific customer environment.” On January 11, 2019, the Court consolidated these two derivative actions, and on January 15, 2019, the Court entered an order staying the actions pending the resolution of the securities class actions. On June 24, 2020, the plaintiffs filed a notice that the stay of proceedings had been terminated, and on July 2, 2020, the parties filed a Joint Stipulation and Proposed Scheduling Order. The Court entered the stipulated scheduling order on the same date, under which Defendants were required to file and serve their response or responsive pleading to the complaint by August 3, ~~2017~~2020. By agreement of the parties, the Court subsequently extended the deadline for Defendants to file and serve their response or responsive pleading to December 2, 2020. On December 2, 2020, Defendants filed their motion to dismiss the consolidated derivative complaint. On December 7, 2020, Plaintiffs filed a notice alerting the Court that ~~“we see softer than expected demand~~they were intending to file an amended complaint, which was subsequently filed by Plaintiffs on January 13, 2021. Defendants filed a motion to dismiss all claims on March 1, 2021. On June 25, 2021, the parties filed a stipulation indicating that they had reached a settlement-in-principle of the action. On June 28, 2021, the Court stayed all deadlines in the action for ~~our 40G solutions with one~~30 days to allow the parties to finalize the settlement. The deadline was extended to late August.On August 30, 2021, the Plaintiffs filed an unopposed Motion for Preliminary Approval of ~~our large customers that will offset~~ the ~~sequential growth~~ Settlement agreed to by the parties. This motion was granted on August 31, 2021 and ~~increased demand we expect in 100G.” The complaint requests unspecified damages and other relief.~~ the Court set the Settlement Hearing date for November 4, 2021. The Company ~~disputes~~has complied with all requirements of the ~~allegations~~Settlement Agreement and ~~intends~~the Settlement Hearing is on schedule to ~~vigorously contest~~take place on November 4, 2021. The Company has agreed to implement various corporate governance reforms as specified in the ~~matter.~~Settlement Agreement in addition to having its D&O insurance carrier make a payment to the Plaintiffs in exchange for a full dismissal of all claims and customary releases.

Note ~~16.~~19. Subsequent Events

The Company ~~has evaluated subsequent events through~~repaid its revolving bank line of credit with Truist Bank in the ~~date the financial statements were available to be issued.~~amount of $19.3 million in October 2021.

On October 5, 2017, the Company’s Taiwan branch entered into an Early Termination Agreement (the “Termination Agreement”) with Chailease Finance Co., Ltd. (“Chailease”), pursuant to which the Finance Lease Agreement executed on March 31, 2016 (the “Original Agreement”) was terminated effective on October 6, 2017. Under the terms of the Termination Agreement, the Company agreed to pay Chailease 124,788,007 New Taiwan Dollars, or approximately $4.1 million, which includes all costs and expenses associated with the early termination, and Chailease agreed to transfer title to the Company of all property contemplated under the Original Agreement.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the accompanying notes appearing elsewhere in this Quarterly Report on Form 10-Q for the period ended September 30, ~~2017~~2021 and the audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations for the fiscal year ended December 31, ~~2016~~2020 included in our Annual ~~Report on Form 10-K.~~Report. References to “Applied ~~Optoelectronics”~~Optoelectronics,” “we,” “our” and “us” are to Applied Optoelectronics, Inc. and its subsidiaries unless otherwise specified or the context otherwise requires.

This Quarterly Report on Form 10-Q contains “forward-looking statements” that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Quarterly Report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Terminology such as "believe," "may," "estimate," "continue," "anticipate," "intend," "should," "could," "would," "target," "seek," "aim," "believe," "predicts," "think," "objectives," "optimistic," "new," "goal," "strategy," "potential," "is likely," "will," "expect," "plan," "project," "permit," or by other similar expressions that convey uncertainty of future events or outcomes are intended to identify forward-looking statements.

We have based these forward-looking statements largely on our current expectations and projections about future events and industry and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified in “Part II —Item 1A. Risk Factors” provided below, and those discussed in other documents we file with the ~~SEC.~~SEC, including our Report on Form 10-K for the year ended December 31, 2020 and subsequent Quarterly Reports on Form 10-Q. Furthermore, such forward-looking statements speak only as of the date of this Quarterly Report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of this Quarterly Report.

Overview

We are a leading, vertically integrated provider of fiber-optic networking ~~products, primarily for~~products. We target four networking end-markets: internet data ~~center, cable television, or~~centers, CATV, ~~fiber-to-the-home, or FTTH,~~telecom and ~~telecommunication, or telecom.~~FTTH. We design and manufacture a range of optical communications products at varying levels of integration, from components, subassemblies and modules to complete turn-key equipment.

In designing products for our customers, we typically begin with the fundamental building blocks of lasers and laser components. From these foundational products, we design and manufacture a wide range of products to meet our customers’ needs and specifications, and such products differ from each other by their end market, intended use and level of integration. We are primarily focused on the higher-performance segments within ~~all four of our target~~the internet data center, CATV, telecom and FTTH markets which increasingly demand faster connectivity and innovation. Our vertically integrated manufacturing model provides us several advantages, including rapid product development, fast response times to customer requests and control over product quality and manufacturing costs.

The four end markets we target are all driven by significant bandwidth demand fueled by the growth of network-connected devices, video traffic, cloud computing and online social networking. To address this increased bandwidth demand, CATV and telecommunications service providers are competing directly against each other by providing bundles of voice, video and data services to their subscribers and investing to enhance the capacity, reliability and capability of their networks. The trend of rising bandwidth consumption also impactsWithin the internet data center market, we benefit from the increasing use of higher-capacity optical networking technology as ~~reflected~~a replacement for copper cables, particularly as speeds reach 100 Gbps and above, as well as the movement to open internet data center architectures and the increasing use of in-house equipment design among leading internet companies. Within the CATV market, we benefit from a number of ongoing trends including the build-out of CATV infrastructure in the ~~shift~~US and other countries, the move to higher ~~speed server connections. As a result~~bandwidth networks among CATV service providers and the outsourcing of ~~these trends,~~system design among CATV networking equipment companies. In the FTTH market, we benefit from continuing PON deployments and system upgrades among telecom service providers. In the telecom market, we benefit from deployment of new high-speed fiber-optic ~~networking technology is becoming essential in all four~~networks by telecom network operators, including 5G networks.

Table of ~~our target markets, as it is often the only economic way to deliver the desired bandwidth.~~

Contents

Our vertically integrated manufacturing model provides us several advantages, including rapid product development, fast response times to customer requests and greater control over product quality and manufacturing costs. We design, manufacture and integrate our own analog and digital lasers using a proprietary Molecular Beam Epitaxy, or MBE, and Metal Organic Chemical Vapor Deposition (MOCVD) fabrication process, which we believe is unique in our industry. We manufacture the majority of the laser chips and optical components that are used in our products. The lasers

~~Table of Contents~~

we manufacture are ~~proven~~tested extensively to beenable reliable operation over time and our devices are often highly tolerant of changes in temperature and humidity, making them well-suited to the CATV, FTTH and ~~FTTH~~5G telecom markets where networking equipment is often installed outdoors.

We have three manufacturing sites: Sugar Land, Texas, Ningbo, China and Taipei, Taiwan. WeOur research and development functions are generally partnered with our manufacturing locations, and we have an additional research and development ~~center~~facility in ~~Lawrenceville,~~Duluth, Georgia. In our Sugar Land facility, we manufacture laser chips (utilizing our MBE and MOCVD processes), subassemblies and components. The subassemblies are used in the manufacture of components by our other manufacturing facilities or sold to third parties as modules. We manufacture our laser chips only within our Sugar Land facility, where our laser design team is located. In our Taiwan location, we manufacture optical components, such as our butterfly lasers, which incorporate laser chips, subassemblies and components manufactured within our ~~U.S.~~Sugar Land facility. ~~In addition,~~Additionally, in our Taiwan location, we manufacture transceivers for the internet data center, telecom, FTTH ~~telecom,~~ and other markets. In our China facility, we take advantage of lower labor costs and manufacture certain more labor intensive components and optical equipment systems, such as optical subassemblies and transceivers for the internet data center market, CATV transmitters (at the headend) and CATV outdoor equipment (at the node). Each manufacturing facility conducts testing on the components, modules or subsystems it manufactures and each ~~such~~ facility is certified to ISO 9001:~~2008.~~2015. Our facilities in Ningbo, China, Taipei, Taiwan, and Sugar Land, TXTexas are all certified to ISO 14001:~~2004.~~2015.

Our business depends on winning competitive bid selection processes to develop components, systems and equipment for use in our customers’ products. These selection processes are typically lengthy, and as a result our sales ~~model focuses~~cycles will vary based on ~~direct engagement~~the level of customization required, market served, whether the design win is with an existing or new customer and ~~close coordination~~whether our solution being designed in our customers’ product is our first generation or subsequent generation product. We do not have any long-term purchase commitments (in excess of one year) with any of our customers, ~~to determine product design, qualifications, and performance through coordination~~most of whom purchase our products on a purchase order basis. However, once one of our ~~sales, product engineering and manufacturing teams. Our strategy~~solutions is to use our direct sales force to sell to key accounts within our markets, increasing product penetration within those customers while also growing our overall customer base in certain international and domestic markets. We have direct sales personnel in each of our U.S., Taiwan and China locations focusing onincorporated into a ~~direct and local interaction with our internet data center, CATV, FTTH and telecom customers. Throughout our sales cycle, we work closely with our customers to achieve~~customer’s design, ~~wins that~~ we believe ~~provide long-lasting relationships~~that our solution is likely to continue to be purchased for that design throughout that product’s life cycle because of the time and ~~promote higher customer retention.~~expense associated with redesigning the product or substituting an alternative solution.

Our principal executive offices are located at 13139 Jess Pirtle Blvd., Sugar Land, TX 77478, and our telephone number is (281) 295-1800.

COVID-19 Pandemic

We are subject to risks and uncertainties as a result of the COVID-19 pandemic. The extent of the impact of the COVID-19 pandemic on our business is highly uncertain and difficult to predict as coronavirus continues to spread around the world. In March 2020, we instituted travel restrictions and implemented sanitation and disinfection procedures to safeguard the health and safety of our employees which continue today. Recently, we began allowing certain employee travel, but continue strict sanitation procedures in our facilities. With increased vaccinations and the potential significant reduction of infections, we have implemented procedures for a safe return to the office environment for all of our employees.

The spread of COVID-19 has impacted our supply chain operations through restrictions, reduced capacity and shutdown of business activities by suppliers whom we rely on for sourcing components and materials and third-party partners whom we rely on for manufacturing, warehousing and logistics services. In the quarter ended September 30, 2021, we estimate the revenue loss associated with these supply chain disruptions was approximately $3 million. We anticipate continued supply chain disruption through the remainder of 2021. Currently, the suppliers who are responsible for most of our supply-chain constraints have begun the process of returning to normal operations and have expressed optimism that their deliveries in 2022 will return to normal. However, this is uncertain and we also cannot predict if other suppliers could encounter similar difficulties. In order to minimize the impact of these and any similar disruptions, we have added additional suppliers for many key components, where it is practical to do so. We believe that these additional suppliers will be able to augment our supply of needed components, although in some cases these new suppliers' materials are more expensive than the pre-existing suppliers so a switch to these alternate suppliers could have a negative impact on gross margins and profitability.

Although demand for many of our products has been strong in the short-term as subscribers seek more bandwidth, customers’ purchasing decisions over the long-term may be impacted by the pandemic and its impact on the economy, which could in turn impact our revenue and results of operations. The extent to which the COVID-19 pandemic may materially impact our financial condition, liquidity or results of operations is therefore uncertain.

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Results of Operations

The following table set forth our consolidated results of operations for the periods presented and as a percentage of our revenue for those periods (in ~~thousands)~~thousands, except percentages):

																	Three months ended					Three months ended					Nine months ended					Nine months ended
	Three months ended September 30,				Three months ended September 30,				Nine months ended September 30,				Nine months ended September 30,
	2017				2016				2017				2016
																	September 30,					September 30,					September 30,					September 30,
																	2021					2020					2021					2020
Revenue, net	$	88,879	100.0	%	$	70,137	100.0	%	$	302,474	100.0	%	$	175,813	100.0	%	$	53,267		100.0	%	$	76,608		100.0	%	$	157,157		100.0	%	$	182,298		100.0	%
Cost of goods sold		49,507	55.7	%		46,976	67.0	%		168,348	55.7	%		121,097	68.9	%		45,143		84.7	%		57,418		75.0	%		127,537		81.2	%		143,034		78.5	%
Gross profit		39,372	44.3	%		23,161	33.0	%		134,126	44.3	%		54,716	31.1	%		8,124		15.3	%		19,190		25.0	%		29,620		18.8	%		39,264		21.5	%
Operating expenses
Research and development		9,190	10.3	%		8,362	11.9	%		24,695	8.2	%		24,572	14.0	%		10,149		19.1	%		11,206		14.6	%		31,990		20.4	%		32,567		17.9	%
Sales and marketing		2,551	2.9	%		1,594	2.3	%		6,612	2.2	%		4,884	2.8	%		2,783		5.2	%		4,491		5.9	%		8,576		5.5	%		10,858		6.0	%
General and administrative		9,580	10.8	%		6,445	9.2	%		26,188	8.7	%		18,084	10.3	%		10,645		20.0	%		10,272		13.4	%		32,195		20.5	%		31,520		17.3	%
Total operating expenses		21,321	24.0	%		16,401	23.4	%		57,495	19.0	%		47,540	27.0	%		23,577		44.3	%		25,969		33.9	%		72,761		46.3	%		74,945		41.1	%
Income from operations		18,051	20.3	%		6,760	9.6	%		76,631	25.3	%		7,176	4.1	%
Loss from operations																		(15,453	)	(29.0	)%		(6,779	)	(8.8	)%		(43,141	)	(27.5	)%		(35,681	)	(19.6	)%
Other income (expense)
Interest income		61	0.1	%		40	0.1	%		166	0.1	%		206	0.1	%		17		0.0	%		26		0.0	%		49		0.0	%		220		0.1	%
Interest expense		(248)	(0.3)	%		(462)	(0.7)	%		(792)	(0.3)	%		(1,313)	(0.7)	%		(1,359	)	(2.6	)%		(1,480	)	(1.9	)%		(4,158	)	(2.6	)%		(4,424	)	(2.4	)%
Other income (expense), net		(354)	(0.4)	%		66	0.1	%		(898)	(0.3)	%		(532)	(0.3)	%
Total other income (expense)		(541)	(0.6)	%		(356)	(0.5)	%		(1,524)	(0.5)	%		(1,639)	(0.9)	%
Income before income taxes		17,510	19.7	%		6,404	9.1	%		75,107	24.8	%		5,537	3.1	%
Income tax (expense) benefit		1,865	2.1	%		11,332	16.2	%		(6,872)	(2.3)	%		11,472	6.5	%
Net income	$	19,375	21.8	%	$	17,736	25.3	%	$	68,235	22.6	%	$	17,009	9.7	%
Other income, net																		998		1.9	%		866		1.1	%		7,628		4.9	%		2,096		1.1	%
Total other income (expense), net																		(344	)	(0.6	)%		(588	)	(0.8	)%		3,519		2.2	%		(2,108	)	(1.2	)%
Loss before income taxes																		(15,797	)	(29.7	)%		(7,367	)	(9.6	)%		(39,622	)	(25.2	)%		(37,789	)	(20.7	)%
Income tax expense																		-		(0.0	)%		(2,249	)	(2.9	)%		-		(0.0	)%		(7,224	)	(4.0	)%
Net loss																	$	(15,797	)	(29.7	)%	$	(9,616	)	(12.6	)%	$	(39,622	)	(25.2	)%	$	(45,013	)	(24.7	)%

~~Table of Contents~~

Comparison of Financial Results

Revenue

We generate revenue through the sale of our products to equipment providers and network operators for the internet data center, CATV, ~~FTTH~~telecom and ~~telecom~~FTTH markets. We derive a significant portion of our revenue from our top ten customers, and we anticipate that we will continue to do so for the foreseeable future. The following charts provide the revenue contribution from each of the markets we served for the three and nine months ended September 30, ~~2017~~2021 and ~~2016~~2020 (in ~~thousands)~~thousands, except percentages):

	Three months ended September 30,										Change
			% of					% of
	2021		Revenue			2020		Revenue			Amount			%
Data Center	$	23,929		44.9	%	$	55,336		72.2	%	$	(31,407	)		(56.8	)%
CATV		23,101		43.4	%		11,642		15.2	%		11,459			98.4	%
Telecom		5,148		9.7	%		8,870		11.6	%		(3,722	)		(42.0	)%
FTTH		62		0.0	%		67		0.1	%		(5	)		0.0	%
Other		1,027		1.9	%		693		0.9	%		334			48.2	%
Total Revenue	$	53,267		100.0	%	$	76,608		100.0	%	$	(23,341	)		(30.5	)%

	Nine months ended September 30,										Change
			% of					% of
	2021		Revenue			2020		Revenue			Amount			%
Data Center	$	72,259		46.0	%	$	141,133		77.4	%	$	(68,874	)		(124.5	)%
CATV		69,339		44.1	%		22,007		12.1	%		47,332			215.1	%
Telecom		12,959		8.2	%		17,600		9.7	%		(4,641	)		(26.4	)%
FTTH		784		0.0	%		69		0.0	%		715			0.0	%
Other		1,816		1.2	%		1,489		0.8	%		327			22.0	%
Total Revenue	$	157,157		100.0	%	$	182,298		100.0	%	$	(25,141	)		(13.8	)%

Three months ended September 30,

Nine months ended September 30,


2017


2016


2017


2016

CATV

21.3
%

18.4
%

15.4
%

17.1
%

Data Center

74.1
%

75.5
%

80.9
%

75.8
%

FTTH

0.2
%

0.7
%

0.1
%

0.8
%

Telecom

3.9
%

4.9
%

3.2
%

5.7
%

Other

0.5
%

0.5
%

0.4
%

0.6
%

100.0
%

100.0
%

100.0
%

100.0
%

Three months ended September 30,

Change

Nine months ended September 30,

Change


2017

2016

Amount

%


2017

2016

Amount

%

CATV

$
18,932

$
12,891

$
6,041

46.9
%

$
46,430

$
30,143

$
16,287

54.0
%

Data Center

65,819

52,949

12,870

24.3
%

244,711

133,209

111,502

83.7
%

FTTH

182

476

(294)

(61.8)
%

405

1,333

(928)

(69.6)
%

Telecom

3,474

3,441

33

1.0
%

9,722

10,082

(360)

(3.6)
%

Other

472

380

92

24.2
%

1,206

1,046

160

15.3
%

Total Revenue

$
88,879

$
70,137

$
18,742

26.7
%

$
302,474

$
175,813

$
126,661

72.0
%

Table of Contents

~~Growth~~The decrease in revenue during the three and nine months ended September 30, ~~2017~~2021 was driven primarily by ~~increasing~~decreased demand for the datacenter products; this slowdown was related to inventory normalization following the surge in demand that was driven by the shift to working from home early last year. We believe datacenter demand will improve in 2022. The decreased demand for datacenter products was offset by increased demand for CATV products from several existing customers. The increase in demand from CATV multiple-system operators ("MSOs") resulted in strong demand for our CATV products, especially those products that are related to architecture improvements to enable delivery of additional bandwidth to consumers. This increase in bandwidth demand is particularly acute in the upstream direction, and sales of products associated with increased return-path bandwidth were notably strong in the quarter. Based on forecasts and current order bookings, we believe that this CATV demand will likely continue through 2021 and 2022.

For the three months ended September 30, 2021 and 2020, our top ten customers represented 86.0% and 84.9% of our revenue, respectively. For the nine months ended September 30, 2021 and 2020, our top ten customers represented 86.5% and 84.9% of our revenue, respectively. We believe that diversifying our customer base is critical for our future success, since reliance on a small number of key customers makes our ability to forecast future results dependent upon the accuracy of the forecasts we receive from those key customers. The growth in revenue from our ~~internet data center~~top ten customers ~~with significant~~in the six months ended June 30, 2021 is primarily due to growth ~~also coming from~~in sales of our CATV ~~customers.~~products. We continue to prioritize new customer acquisition and growth of diverse revenue streams.

Cost of goods sold and gross margin

	Three months ended September 30,
	2021					2020					Change
			% of					% of
	Amount		Revenue			Amount		Revenue			Amount			%
	(in thousands, except percentages)
Cost of goods sold	$	45,143		84.7	%	$	57,418		75.0	%	$	(12,275	)		(21.4	)%
Gross margin		8,124		15.3	%		19,190		25.0	%

	Nine months ended September 30,
	2021					2020					Change
			% of					% of
	Amount		Revenue			Amount		Revenue			Amount			%
	(in thousands, except percentages)
Cost of goods sold	$	127,537		81.2	%	$	143,034		78.5	%	$	(15,497	)		(10.8	)%
Gross margin		29,620		18.8	%		39,264		21.5	%

~~During~~Cost of goods sold decreased by $12.3 million, or 21.4%, for the three months ended September 30, ~~2017, revenues~~2021 as compared to the three months ended September 30, 2020, primarily due to a 30.5% decrease in sales during the ~~internet data center market were driven primarily~~period. Cost of goods sold decreased by ~~increasing demand~~$15.5 million, or 10.8%, for ~~our 100 Gbps transceivers, partially offset by a decline in our 40 Gpbs transceiver sales, as our customers continued to upgrade their technology infrastructure. In~~ the nine months ended September 30, ~~2017, revenues in the internet datacenter market were driven~~2021 as compared to nine months ended September 30, 2020September 30, 2021, primarily ~~by increasing demand for our 40 Gpbs and 100 Gpbs transceivers as our customers upgraded their technology infrastructure. The~~due to 13.8% decrease in ~~revenue in our FTTH market is due to a decline in demand for certain older legacy products. Demand for these legacy products is expected to continue to fluctuate. The increase in revenues in~~sales during the ~~CATV market~~period.

Gross margin decreased for the three and nine months ended September 30, 2017 was a result of increased demand from customers who are supplying equipment for CATV network upgrades which began during the year. Revenue in our telecom market remained relatively unchanged for the three month period ended September 30, 2017 and decreased modestly for the nine month period ended September 30, 2017,2021 as compared to the ~~prior year. The decrease was primarily attributable to reduced orders for some of our telecom customers, particularly in China.~~

~~For the~~ three ~~months ended September 30, 2017~~ and ~~2016, our top ten customers represented 91.6% and 95.5%, respectively. For the~~ nine months ended September 30, ~~2017~~2020 primarily as a result of changes in the mix of our datacenter and ~~2016, our top ten customers represented 94.8%~~CATV products. In particular, we saw an increase in sales of certain CATV products relative to sales of transceivers. In addition, we experienced higher costs of certain raw materials and ~~95.2%, respectively.~~global supply chain disruptions due to COVID-19 closures of ports and factories in Asia (see the section above on the COVID 19 pandemic for more details of these challenges).

Table of Contents

~~Cost of goods sold and gross margin~~

Three months ended September 30,

2017

2016

Change

% of

% of


Amount

Revenue

Amount

Revenue

Amount

%

(in thousands, except percentages)

Cost of goods sold

$
49,507

55.7
%
$
46,976

67.0
%
$
2,531

5.4
%

Gross margin

39,372

44.3
%

23,161

33.0
%

Operating expenses

Nine months ended September 30,

2017

2016

Change

% of

% of


Amount

Revenue

Amount

Revenue

Amount

%

(in thousands, except percentages)

Cost of goods sold

$
168,348

55.7
%
$
121,097

68.9
%
$
47,251

39.0
%

Gross margin

134,126

44.3
%

54,716

31.1
%

	Three months ended September 30,
	2021					2020					Change
			% of					% of
	Amount		revenue			Amount		revenue			Amount			%
	(in thousands, except percentages)
Research and development	$	10,149		19.1	%	$	11,206		14.6	%	$	(1,057	)		(9.4	)%
Sales and marketing		2,783		5.2	%		4,491		5.9	%		(1,708	)		(38.0	)%
General and administrative		10,645		20.0	%		10,272		13.4	%		373			3.6	%
Total operating expenses	$	23,577		44.3	%	$	25,969		33.9	%	$	(2,392	)		(9.2	)%

	Nine months ended September 30,
	2021					2020					Change
			% of					% of
	Amount		revenue			Amount		revenue			Amount			%
	(in thousands, except percentages)
Research and development	$	31,990		20.4	%	$	32,567		17.9	%	$	(577	)		(1.8	)%
Sales and marketing		8,576		5.5	%		10,858		6.0	%		(2,282	)		(21.0	)%
General and administrative		32,195		20.5	%		31,520		17.3	%		675			2.1	%
Total operating expenses	$	72,761		46.3	%	$	74,945		41.1	%	$	(2,184	)		(2.9	)%

Research and development expense

~~Cost of goods sold increased~~

Research and development expense decreased by ~~$2.5~~$1.1 million, or ~~5.4%,~~9.4% for the three months ended September 30, ~~2017,~~2021 as compared to the three months ended September 30, ~~2016, primarily due to the increase in sales over the prior year. Cost of goods sold increased~~2020. Research and development expense decreased by ~~$47.3~~$0.6 million, or ~~39.0%,~~1.8% for the nine months ended September 30, ~~2017,~~2021 as compared to the nine months ended September 30, 2016, primarily due to the increase in sales over the prior year. The increase in gross margin for the three and nine months ended September 30, 2017 compared to the same periods ended September 30, 2016 was primarily the result of lower production costs associated with certain 40 Gbps and 100 Gbps products. Production costs were reduced due mainly to improved product yields, related to process improvements and automation, as well as raw material cost reduction.

~~Operating expenses~~

Three months ended September 30,

2017

2016

Change

% of

% of


Amount

revenue

Amount

revenue

Amount

%

(in thousands, except percentages)

Research and development

$
9,190

10.3
%
$
8,362

11.9
%
$
828

9.9
%

Sales and marketing

2,551

2.9
%

1,594

2.3
%

957

60.0
%

General and administrative

9,580

10.8
%

6,445

9.2
%

3,135

48.6
%

Total operating expenses

$
21,321

24.0
%
$
16,401

23.4
%
$
4,920

30.0
%

Nine months ended September 30,

2017

2016

Change

% of

% of


Amount

revenue

Amount

revenue

Amount

%

(in thousands, except percentages)

Research and development

$
24,695

8.2
%
$
24,572

14.0
%
$
123

0.5
%

Sales and marketing

6,612

2.2
%

4,884

2.8
%

1,728

35.4
%

General and administrative

26,188

8.7
%

18,084

10.3
%

8,104

44.8
%

Total operating expenses

$
57,495

19.0
%
$
47,540

27.0
%
$
9,955

20.9
%

~~Research and development expense~~

Research and development expense increased by $0.8 million, or 9.9%, for the three months ended September 30, 2017 as compared to the three months ended September 30, 2016. Research and development expense increased by $0.1 million, or 0.5%, for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016.2020. Research and development costs consist of R&D work orders, R&D material usage and other project related costs related to ~~40 Gbps,~~ 100 Gbps, ~~and~~ 200/400 Gbps data center products, DOCSIS ~~3.1-capable~~3.1 capable CATV ~~products, including remote-PHY~~ products and other new product development, and depreciation expense resulting from R&D equipment investments. ~~Research~~These decreases were primarily due to decrease in personnel-related costs, and ~~development costs increased~~share-based compensation expense.

Sales and marketing expense

Sales and marketing expense decreased by $1.7 million, or 38.0% for the three ~~and nine~~ months ended September 30,

~~Table of Contents~~

~~2017~~ 2021 as compared to the three months ended September 30, 2020. Selling and marketing expense decreased by 2.3 million, or 21.0% for the nine months ended September 30, ~~2016~~2021 as compared to the nine months ended September 30, 2020. These decreases were primarily due ~~mainly~~ to ~~an increase in personnel-related costs and increased overhead costs associated with our new building in Sugar Land, offset by a~~ decrease in ~~materials~~shipping and ~~supplies used in R&D activities~~handling charges and ~~a decrease in costs from R&D work orders.~~tradeshow expense.

~~Sales~~General and ~~marketing~~administrative expense

~~Sales~~General and ~~marketing~~administrative expense increased by ~~$1.0~~$0.4 million, or ~~60.0%,~~3.6% for the three months ended September 30, ~~2017~~2021 compared to the three months ended September 30, 2020. General and administrative expense increased by $0.7 million, or 2.1% for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. These increases were primarily due to an increase in depreciation expense and expenses related to winter storm Uri.These increases were partially offset by a decrease in personnel-related costs and professional service fees.

Table of Contents

Other income (expense), net

	Three months ended September 30,
	2021						2020						Change
				% of						% of
	Amount			revenue			Amount			revenue			Amount			%
	(in thousands, except percentages)
Interest income	$	17			0.0	%	$	26			0.0	%	$	(9	)		(34.6	)%
Interest expense		(1,359	)		(2.6	)%		(1,480	)		(1.9	)%		121			(8.2	)%
Other income (expense), net		998			1.9	%		866			1.1	%		132			15.2	%
Total other income (expense), net	$	(344	)		(0.6	)%	$	(588	)		(0.8	)%	$	244			(41.5	)%

	Nine months ended September 30,
	2021						2020						Change
				% of						% of
	Amount			revenue			Amount			revenue			Amount			%
	(in thousands, except percentages)
Interest income	$	49			0.0	%	$	220			0.1	%	$	(171	)		(77.7	)%
Interest expense		(4,158	)		(2.6	)%		(4,424	)		(2.4	)%		266			(6.0	)%
Other income (expense), net		7,628			4.9	%		2,096			1.1	%		5,532			263.9	%
Total other income (expense), net	$	3,519			2.2	%	$	(2,108	)		(1.2	)%	$	5,627			266.9	%

Interest income decreased slightly for the three months ended September 30, 2021 compared to the three months ended September 30, 2020. Interest income decreased by $0.2 million, or 77.7% for the nine months ended September 30, 2021 compared to the three months ended September 30, 2020. The changes are similar to expected rates of fluctuation with the interest rates and cash balances.

Interest expense decreased slightly for the three months ended September 30, 2021 compared to the three months ended September 30, 2020. Interest expense decreased by $0.3 million, or 6.0% for the nine months ended September 30, 2021 compared to the three months ended September 30, 2020. This decrease was due to lower average debt balances during the period.

Other income (expense), net increased slightly for the three months ended September 30, 2021 as compared to the three months ended September 30, ~~2016. Sales and marketing expense~~2020. Other income (expense), net increased by ~~$1.7~~$5.5 million, or ~~35.4%,~~263.9% for the nine months ended September 30, ~~2017~~2021 as compared to the nine months ended September 30, ~~2016. These increases were due to an~~2020. The increase ~~in personnel costs, including sales commissions, an increase in customs taxes and duties, partially offset by decreased commissions payable to third parties.~~

~~General and administrative expense~~

General and administrative expense increased by $3.1 million, or 48.6%, for the three months ended September 30, 2017 compared to the three months ended September 30, 2016. General and administrative expense increased by $8.1 million, or 44.8%, for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. These increases werewas primarily due to ~~an increase in personnel-related costs, share-based compensation expenses, overhead costs due to our new building in Sugar Land, and additional professional service fees.~~forgiveness by the SBA of the Company's PPP Loan forgiveness application for the entire PPP Loan balance of $6.23 million.

General and administrative expenses include costs to comply with Section 404 of the Sarbanes-Oxley Act, or SOX, and other regulations governing public companies, costs of directors' and officers' liability insurance and investor relations activities. As of June 30, 2017, the market value of our common stock held by non-affiliates exceeded $700 million. Commencing December 31, 2017, we will be a "large accelerated filer" and, accordingly, will no longer qualify as an emerging growth company and no longer be able to rely on certain exemptions that were available to us as an emerging growth company. We anticipate that general and administrative expenses will continue to increase in absolute dollars in the future as we continue to incur both increased external audit fees as well as additional spending to ensure continued SOX and other regulatory compliance. We expect such expenses to decline as a percentage of our revenues over time as our revenues grow.

~~Other income (expense), net~~

Three months ended September 30,

2017

2016

Change

% of

% of


Amount

revenue

Amount

revenue

Amount

%

(in thousands, except percentages)

Interest income

$
61

0.1
%
$
40

0.1
%
$
21

52.5
%

Interest expense

(248)

(0.3)
%

(462)

(0.7)
%

214

(46.3)
%

Other income (expense), net

(354)

(0.4)
%

66

0.1
%

(420)

(636.4)
%

Total other expense, net

$
(541)

(0.6)
%
$
(356)

(0.5)
%
$
(185)

52.0
%

Nine months ended September 30,

2017

2016

Change

% of

% of


Amount

revenue

Amount

revenue

Amount

%

(in thousands, except percentages)

Interest income

$
166

0.1
%
$
206

0.1
%
$
(40)

(19.4)
%

Interest expense

(792)

(0.3)
%

(1,313)

(0.7)
%

521

(39.7)
%

Other income (expense), net

(898)

(0.3)
%

(532)

(0.3)
%

(366)

68.8
%

Total other expense, net

$
(1,524)

(0.5)
%
$
(1,639)

(0.9)
%
$
115

(7.0)
%

Interest income increased 52.5% for the three months ended September 30, 2017 as compared to the three months ended September 30, 2016, due to larger cash balances. Interest income decreased 19.4% for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016, due to lower investment balances during the period.

Interest expense decreased 46.3% for the three months ended September 30, 2017 as compared to the three months ended September 30, 2016. Interest expense decreased 39.7% for the nine months ended September 30, 2017 as

~~Table of Contents~~

~~compared to the nine months ended September 30, 2016. These decreases were due to repayment of debt that had been previously borrowed to fund expansion projects.~~

Other income (expense) for the three months ended September 30, 2017 was expense of $0.4 million, an $0.4 million unfavorable increase as compared to the three months ended September 30, 2016. Other income (expense) for the nine months ended September 30, 2017 was expense of $0.9 million, an unfavorable increase as compared to the nine months ended September 30, 2016. These increases were due to the increase of foreign exchange losses resulting from the unfavorable fluctuation of certain Asian currencies against the U.S. dollar. We qualify as a high-tech enterprise in China, as determined by the Chinese government, and are paid subsidies from time to time by the Chinese government to foster local high-tech manufacturing. We received $0.1 million of government subsidies during the three and nine months ended September 30, 2017, as compared to the same amounts for the three and nine months ended September 30, 2016, respectively.

Benefit (provision) for income taxes

	Three months ended September 30,
	2021		2020			Change
	(in thousands, except percentages)
Benefit (provision) for income taxes	$	-	$	(2,249	)		2,249	(100.0	)%

	Nine months ended September 30,
	2021		2020			Change
	(in thousands, except percentages)
Benefit (provision) for income taxes	$	-	$	(7,224	)		7,224	(100.0	)%

Three months ended September 30,


2017

2016

Change

(in thousands, except percentages)

Benefit (provision) for income taxes

$
1,865

$
11,332

(9,467)

(83.5)
%

Nine months ended September 30,


2017

2016

Change

(in thousands, except percentages)

Benefit (provision) for income taxes

$
(6,872)

$
11,472

(18,344)

159.9
%

Our tax provision or benefit from income taxes for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Our quarterly tax provision, and our quarterly estimate of our annual effective tax rate, is subject to significant variation due to several factors, including variability in accurately predicting our pre-tax income and loss and the mix of jurisdictions to which they relate, tax law developments, and relative changes in permanent tax benefits or expenses.

~~Our~~

The Company’s effective tax rate for the three months ended September 30, ~~2017~~2021 and ~~2016~~2020 was ~~(10.65%)~~0% and ~~(176.97%)~~(30.69)%, respectively. For the three months ended September 30, ~~2017,~~2021, the effective tax rate varied from the federal statutory rate of ~~35%~~21% primarily due to the ~~level and mix~~change of earnings among tax jurisdictions and excess tax benefits due to employee share-based compensation. We recognized a tax benefit of $5.8 million for excess tax benefits due to employee share-based compensation in accordance with ASU 2016-09. Additionally, we recognized a tax benefit of $0.1 million related to the ~~release of our~~ valuation allowance on federal, state, Taiwan, and China deferred tax assets ~~in China.~~("DTA"). For the three months ended September 30, ~~2016,~~2020, the effective tax rate varied from the federal statutory rate of ~~35%~~21% primarily due to the ~~level~~change of valuation allowance on the federal, state, and ~~mix of earnings among tax jurisdictions and as a result of the release of our valuation allowances recorded on the~~Taiwan deferred tax assets, inand the ~~US and Taiwan.~~

recording of a valuation allowance on China deferred tax assets.

~~Our~~The Company's effective tax rate for the nine months ended September 30, ~~2017~~2021 and ~~2016~~2020 was ~~9.15%~~0% and ~~(207.21%~~(19.15%), respectively. For the nine months ~~ending~~ended September 30, ~~2017,~~2021, the effective tax rate varied from the federal statutory rate of ~~35%~~21% primarily due to the ~~level and mix of earnings among tax jurisdictions and excess tax benefits due to employee share-based compensation. We recognized a tax~~ benefit of ~~$9.4 million for excess tax benefits due to employee share-based compensation in accordance with ASU 2016-09. Additionally, we recognized a tax benefit~~the nontaxable PPP loan forgiveness, offset by the change of ~~$0.4 million related to~~ the ~~release of our~~ valuation allowance on federal, state, Taiwan and China deferred tax ~~assets in China.~~assets. For the nine months ended September 30, ~~2016,~~2020, the effective tax rate varied from the federal statutory rate of ~~35%~~21% primarily due to the ~~level and mix of earnings among tax jurisdictions and as a result of the release of our valuation allowances recorded on the deferred tax assets in the US and Taiwan.~~

On January 1, 2017, we adopted ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting." The new standard requires that the tax impact related to the difference between share-based compensation for book and tax purposes be recognized as income tax benefit or expense in our condensed consolidated statement of operations in the reporting period in which such awards vest. The standard also required a modified retrospective adoption for previously unrecognized excess tax benefits. Accordingly, we recognized a deferred tax asset of $1.2 million and a corresponding credit to retained earnings in conjunction with the adoption. The effects of adopting the

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~~other provisions of ASU 2016-09 were not significant. See also Note 2 —Significant Accounting Policies —Recent Accounting Pronouncements for additional information.~~

~~We recorded a valuation allowance against our deferred tax assets in China as of March 31, 2017 and December 31, 2016.~~ ~~During the three months ending June 30, 2017, we removed the valuation allowance that had been recorded against our China deferred tax assets.~~ ~~Release~~change of the valuation allowance ~~resulted in~~on the ~~recognition of $0.4 million of~~federal, and state deferred tax assets, and the recording of a ~~decrease to income tax expense for the same amount.~~

~~As of each reporting date, management considers new evidence, both positive~~valuation on Taiwan and ~~negative, that could affect its view of the future realization of~~China deferred tax assets. ~~During the second quarter~~

Table of 2017, in part because in the current period we achieved cumulative pretax income in China and anticipate future earnings, we determined that there is sufficient positive evidence to conclude that it is more likely than not that additional deferred taxes of $0.3 million are realizable. We therefore reduced the valuation allowance accordingly.

Contents

Liquidity and Capital Resources

From inception until our initial public offering in September 2013, we financed our operations through private sales of equity securities, cash generated from operations and from various lending arrangements. As of September 30, ~~2017,~~2021, we had ~~$14.0~~$4.9 million of unused borrowing capacity from all of our loan agreements. As of September 30, ~~2017,~~2021, our cash, cash equivalents and restricted cash ~~and short-term investments~~ totaled ~~$72.0~~$48.9 million. Cash and cash equivalents are held for working capital purposes and are invested primarily in money market or time deposit funds. We do not enter into investments for trading or speculative purposes.

On October ~~17, 2016,~~24, 2019, we filed a Registration Statement on Form S-3 with the Securities and Exchange Commission, which was declared effective on ~~November 1, 2016,~~January 9, 2020, providing for the public offer and sale of certain securities of the Company from time to time, at our discretion, up to an aggregate amount of $250 million. ~~Between November 22, 2016 and March 2, 2017,~~

On February 28, 2020, we entered into an Equity Distribution Agreement with Raymond James & Associates, Inc. (the “Sales Agent”) pursuant to which the Company may issue and sell shares of the Company’s common stock having an aggregate offering price of up to $55 million (the “Initial ATM Offering”), from time to time through the Sales Agent. In January 2021, the Company completed its Initial ATM Offering and sold ~~1.6~~5.9 million shares ~~of common stock~~ at a weighted average price of ~~$31.55~~$9.12 per share, providing proceeds of ~~$48.8~~$53.9 million, net of expenses and underwriting discounts and commissions.

On February 26, 2021, we entered into another Equity Distribution Agreement (the “Agreement”) with the Sales Agent pursuant to which the Company may issue and sell shares of the Company’s common stock, par value $0.001 per share (the “Shares”) having an aggregate offering price of up to $35 million (the “Second ATM Offering”), respectively, from time to time through the Sales Agent. Upon delivery of a placement notice and subject to the terms and conditions of the Agreement, sales, if any, of the Shares will be made through the Sales Agent in transactions that are deemed to be “at the market” offerings as defined in Rule 415 of the Securities Act of 1933, as amended (the “Securities Act”), including sales made through the facilities of the Nasdaq Global Market, the principal trading market for the Company’s common stock, on any other existing trading market for the Company’s common stock, to or through a market maker or as otherwise agreed by the Company and the Sales Agent. In the placement notice, the Company will designate the maximum number of Shares to be sold through the Sales Agent, the time period during which sales are requested to be made, the minimum price for the Shares to be sold, and any limitation on the number of Shares that may be sold in any one day. Subject to the terms and conditions of the Agreement, the Sales Agent will use its commercially reasonable efforts to sell Shares on the Company’s behalf up to the designated amount specified in the placement notice. The Company has no obligation to sell any Shares under the Agreement and may at any time suspend offers and sales of the Shares under the Agreement.

The Agreement provides that the Sales Agent will be entitled to compensation of up to 2% of the gross sales price of the Shares sold through the Sales Agent from time to time. The Company has also agreed to reimburse the Sales Agent for certain specified expenses in connection with the registration of Shares under state blue sky laws and any filing with, and clearance of the offering by, the Financial Industry Regulatory Authority Inc., not to exceed $10,000 in the aggregate, and any associated application fees incurred. Additionally, if the Agreement is terminated under certain circumstances, and the Company fails to sell a minimum amount of the Shares as set forth in the Agreement, then the Company has agreed to reimburse the Sales Agent for reasonable out-of-pocket expenses, including the reasonable fees and disbursements of counsel incurred by the Sales Agent, up to a maximum of $30,000 in the aggregate. The Company agreed to indemnify the Sales Agent against certain liabilities, including liabilities under the Securities Act, or to contribute to payments that the Sales Agent may be required to make because of any of those liabilities.

In March 2021, we commenced sales of common stock through the Second ATM Offering. The details of the shares of common stock sold through the Second ATM Offering through September 30, 2021 are as follows (in thousands, except shares and weighted average per share price):

Distribution Agent	Month	Weighted Average Per Share Price		Number of Shares Sold		Net Proceeds		Compensation to Distribution Agent
Raymond James & Associates, Inc.	March 2021	$	9.0622		65,748	$	584	$	12
Raymond James & Associates, Inc.	June 2021	$	9.1115		34,686	$	310	$	6
Raymond James & Associates, Inc.	July 2021	$	9.1061		6,740	$	60	$	1

As of September 30, 2021, the total gross sales were $1.0 million and thus remaining amount of common stock we have available to sell under the ATM Offering is $34.0 million.

On March 5, 2019, the Company issued $80.5 million of 5% convertible senior notes due 2024, bearing interest at a rate of 5% per year maturing on March 15, 2024, unless earlier repurchased, redeemed or converted in accordance with their terms. The sale of the Notes generated net proceeds of $76.4 million, after expenses. Also refer to Note 12 “Convertible Senior Notes” to the consolidated financial statements for further discussion of the Notes.

The table below sets forth selected cash flow data for the periods presented (in thousands):

	Nine months ended September 30,
	2021			2020
Net cash used in operating activities	$	(11,383	)	$	(29,905	)
Net cash used in investing activities		(7,909	)		(15,075	)
Net cash provided by financing activities		18,975			36,978
Effect of exchange rates on cash and cash equivalents		(900	)		(958	)
Net decrease in cash and cash equivalents	$	(1,217	)	$	(8,960	)

Nine months ended September 30,

2017

2016

Net cash provided by operating activities

$
57,498

$
28,368

Net cash used in investing activities

(49,118)

(31,906)

Net cash provided by financing activities

11,874

26,168

Effect of exchange rates on cash and cash equivalents

(208)

4,769

Net increase in cash

$
20,046

$
27,399

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Operating activities

For the nine months ended September 30, 2021, net cash used in operating activities was $11.4 million. Net cash used in operating activities consisted of our net loss of $39.6 million after exclusion of non-cash items of $33.0 million. Cash decreased due to an increase in accounts receivable and note receivables from our customers of $0.9 million and $8.1 million, respectively, a decrease in accrued liabilities of $2.4 million, a decrease in accounts payable to our vendors of $1.1 million, offset by a decrease in inventory of $13.6 million.

For the nine months ended September 30, 2020, net cash used in operating activities was $29.9 million. Net cash used in operating activities consisted of our net loss of $45.0 million after exclusion of non-cash items of $39.2 million, cash decreased due to an increase in inventory of $27.3 million and accounts receivable from our customers of $16.8 million, offset by an increase in accounts payable to our vendors of $23.3 million.

Investing activities

For the nine months ended September 30, 2021, net cash used in investing activities was $7.9 million, mainly from the purchase of additional plant, machinery and equipment.

For the nine months ended September 30, ~~2017,~~2020, net cash ~~provided by operating~~used in investing activities was ~~$57.5 million. Net cash~~$15.1 million, mainly from the purchase of additional plant, machinery and equipment.

Financing activities

For the nine months ended September 30, 2021, our financing activities provided ~~by operating activities consisted of our net income of $68.3~~$19.0 million ~~after the exclusion of non-cash items of $18.8 million as well as an~~in cash. This increase in ~~accounts payable~~cash was due to $15.4 million of net proceeds from our ~~vendors~~At The Market (ATM) Offerings, $17.0 million proceeds from line of ~~$14.6~~credit, offset by repayment of loan and bank acceptance of $3.3 million and ~~an increase in accrued liabilities of $1.9~~ $9.4 million, and accrued income taxes of $4.4 million. These cash increases were offset by an increase in accounts receivable from our customers of $23.2 million, an increase in inventories of $21.1 million and an increase in prepaid assets of $6.1 million.respectively.

For the nine months ended September 30, 2016, net cash provided by operating activities was $28.4 million. During the nine months ended September 30, 2016, we recorded net income of $17.0 million. The net income included non-cash charges, including depreciation and amortization of $9.9 million, share-based compensation expense of $2.8 million, non-cash increases to our inventory reserve account of $2.8 million, deferred income tax benefit of $11.9 million from the release of our valuation allowance and an unrealized exchange gain of $3.5 million. Cash provided by operating activities primarily related to a $9.4 million decrease in inventory related to sales orders and cash provided by the increase of accounts payable to our vendors of $3.9 million. These increases were offset by an increase in our accounts receivable of $5.4 million from the sale of our products in excess of collection of trade receivables.

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~~Investing activities~~

~~For the nine months ended September 30, 2017, net cash used in investing activities was $49.1 million mainly for the purchase of additional machinery and equipment.~~

For the nine months ended September 30, 2016, net cash used in investing activities was $31.9 million mainly for the purchase of additional machinery and equipment and investment in construction of our U.S. plant of $40.3 million, offset by the maturity of short term investments of $7.7 million.

~~Financing activities~~

~~For the nine months ended September 30, 2017,~~2020, our financing activities provided ~~$11.9~~$37.0 million in cash. ~~We received $21.6 million in net proceeds from the sale of our common stock pursuant to an at-the market offering.~~ This increase in cash was ~~offset by the repayment of net borrowings of $2.6 million and $8.5 million of withholding taxes paid on behalf of employees related~~due to ~~share-based compensation.~~

For the nine months ended September 30, 2016, our financing activities provided $26.2 million in cash. We received $28.9 million in net long-term borrowings associated with our bank loans, offset by $4.0 million of principal payment. In addition, we received net $1.3 million cash from our line of credit facility and $0.3$22.6 million of net ~~cash receipt~~proceeds from our At The Market (ATM) Offering, $6.2 million proceeds from PPP term loan, $6.3 million net proceeds from lines of credit and $6.7 million net proceeds from acceptances payable.

Loans and commitments

We have lending arrangements with several financial ~~institutions, including~~institutions. In the US, we have a revolving line of credit with ~~Branch, Banking and Trust Company (“BB&T”) in the U.S. and lines~~Truist Bank. The line of credit contains financial covenants that may limit the amount and ~~financing agreements for our Taiwan branch.~~types of debt that we may incur. As of September 30, ~~2017,~~2021, we were in compliance with these covenants.

In Taiwan, we have equipment finance agreements with Chailease Finance Co., Ltd. for Prime World’s Taiwan Branch. In China, we have revolving lines of credit with China Merchants Bank Co., Ltd. and Shanghai Pudong Development Bank Co., Ltd. and credit facilities with China Zheshang Bank Co., Ltd. for our China Subsidiary, Global.

As of September 30, 2021, we had ~~$14.0~~$4.9 million of unused borrowing capacity.

On ~~June 14, 2016,~~March 5, 2019, we ~~executed a Change~~issued $80.5 million of 5% convertible senior notes due 2024. The Notes will mature on March 15, 2024, unless earlier repurchased, redeemed or converted in ~~Terms Agreement, Notice of Final Agreement~~accordance with their terms.

See Note 11 “Notes Payable and Modification of the Construction Loan Agreement (the “Modification Agreement”) in connection with our Construction Loan Agreement with East West Bank for up to $22.0 million dollars to finance the constructionLong-term Debt” and Note 12 “Convertible Senior Notes” of our campus expansion plan in Sugar Land, Texas, originally dated January 26, 2015 (the “Construction Loan Agreement”). Upon signing the original Construction Loan Agreement, we deposited $11.0 million intoCondensed Consolidated Financial Statements for a ~~restricted bank account for owner’s contribution~~description of ~~construction costs. The Modification Agreement had a fifteen-month draw down period with monthly interest payments commencing on February 26, 2015~~our notes payable and ~~ending on July 31, 2016. Thereafter, the entire outstanding principal balance shall be converted to a sixty-six month term loan with principal~~long-term debt and interest payments due monthly amortized over three hundred months. The first principal and interest payment commenced on August 26, 2016, and continue the same day of each month thereafter. The final principal and interest payment would have been due on January 26, 2022 and would have included all unpaid principal and all accrued and unpaid interest. We may pay without penalty all or a portion of the amount owed earlier than due. Under the Construction Loan Agreement, the loan bears interest at an annual rate based on the one-month LIBOR Borrowing Rate plus 2.75%, and the interest rate was adjusted to LIBOR Borrowing Rate plus 2.0% under the Modification Agreement. convertible senior notes.

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China factory construction

On ~~June 24, 2016,~~February 8, 2018, we entered into a ~~First Amendment~~construction contract with Zhejiang Xinyu Construction Group Co., Ltd. for the construction of a new factory and other facilities at our Ningbo, China location. Construction costs for these facilities under this contract are estimated to the Credit Agreement with East West Bank and Comerica Bank (the “First Amendment”), a second lien deed of trust, multiple security agreements and promissory notes evidencing two credit facilities and a term loan originally entered into on June 30, 2015. The First Amendment increased our revolving lines of credit from $25 million to $40 million, which would have matured on June 30, 2018, and retained a $10.0 million term loan which would have matured on June 30, 2020. The First Amendment also provided for an additional $10.0 million equipment term loan with a one year drawdown period commencing on April 1, 2016 and maturing five years from the closing date of the First Amendment. The interest rate on these loans was adjusted by the First Amendment from the LIBOR Borrowing Rate plus 2.75% or 3.0% to LIBOR Borrowing Rate plus 2.0%. On September 28, 2017, the Company terminated the credit agreement and all outstanding balances of the loans had been repaid.

We also had a term loan with East West Bank of $5.0 million with monthly payments of principal and interest that would have matured on July 31, 2019. On February 27, 2017, we repaid the outstanding balance of $2.8 million and terminated the loan.

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On October 5, 2016, we executed a Change in Terms Agreement, Notice of Final Agreement and Second Modification to the Construction Loan Agreement (the “Second Modifications”) to the Construction Loan Agreement with East West Bank. The Second Modifications amended and restated in part our Promissory Note and Construction Loan Agreement, which was originally executed on January 26, 2015, and the Modification Agreement. The draw down period end date, under the Second Modifications, was amended from July 31, 2016 to September 30, 2016. And thereafter, the entire outstanding principal balance shall be converted to a sixty-four (64) month term loan, amended from a sixty-six (66) month term loan, with principal and interest payments due monthly amortized over three hundred (300) months. The first principal and interest payment was due on October 26, 2016 and would have continued on the same day of each month thereafter. The final principal and interest payment would have been due on January 26, 2022 and would have included all unpaid principal and all accrued and unpaid interest. Except as expressly changed by the Second Modifications, the terms of the original obligation and the Modification Agreement remained unchanged. On September 28, 2017, we repaid the outstanding balance of $11.2 million and terminated the loan.

On September 28, 2017, we entered into a Loan Agreement, a Promissory Note, an Addendum to the Promissory Note, a BB&T Security Agreement, a Trademark Security Agreement, and a Patent Security Agreement (together the “Credit Facility”) with BB&T. The Credit Facility provides us with a three year, $50 million, revolving line of credit. Borrowings under the Credit Facility will be used for general corporate purposes. We will make monthly payments of accrued interest with the final monthly payment being for all principal and all accrued interest not yet paid. Our obligations under the Credit Facility will be secured by our accounts receivable, inventory, intellectual property, all business assets with the exception of real estate and equipment. Borrowings under the Credit Facility will bear interest at a rate equal to the one-month LIBOR plus 1.50%. The Credit Facility requires us to maintain certain financial covenants and also contains representations and warranties, and events of default applicable to us that are customary for agreements of this type.total approximately $27.5 million. As of September 30, ~~2017, we were~~2021, construction of the building is complete, and approximately $27.4 million of this total cost has been paid and the remaining portion will be paid in ~~compliance with all covenants under the Credit Facility. As of September 30, 2017, $36.0 million was outstanding under the Credit Facility.~~

On May 27, 2015, our Taiwan branch entered into a Purchase and Sale Contract and a Finance Lease Agreement with Chailease Finance Co, Ltd. (“Chailease”) in connection with certain equipment, structured as a sale lease-back transaction. Pursuantyearly installments for three years after final inspection. We anticipate additional expenses for building improvements to the ~~Purchase~~factory and ~~Sale Contract, our Taiwan branch sold certain equipment to Chailease~~we are in the process of evaluating the timing of these expenditures and obtaining bids for ~~a purchase price~~any such work. Based on forecasts, we believe factory will be placed in service in first half of 180,148,532 New Taiwan dollars, approximately $6 million, and simultaneously leased the equipment back from Chailease pursuant to the Finance Lease Agreement. The monthly lease payments range from 3,784,000 New Taiwan dollars, approximately $0.1 million, to 3,322,413 New Taiwan dollars, approximately $0.1 million, during the term of the Finance Lease Agreement, including an initial payment in an amount of 60,148,532 New Taiwan dollars, approximately $2 million. The Finance Lease Agreement has a three-year term, with monthly payments, maturing on May 27, 2018. The title to the equipment2022, property will be transferred from construction in progress to ~~our Taiwan branch upon the expiration of the Finance Lease Agreement. As of September 30, 2017, $0.9 million was outstanding under this Finance Lease Agreement.~~building and improvement at that time.

On March 31, 2016, our Taiwan branch entered into a Purchase and Sale Contract and a Finance Lease Agreement with Chailease in connection with certain equipment, structured as a sale lease-back transaction. Pursuant to the Purchase and Sale Contract, our Taiwan branch sold certain equipment to Chailease for a purchase price of 312,927,180 New Taiwan dollars, approximately $10.1 million, and simultaneously leased the equipment back from Chailease pursuant to the Finance Lease Agreement. The Finance Lease Agreement has a three-year term with monthly lease payments range from 6,772,500 New Taiwan dollars, approximately $0.2 million, to 7,788,333 New Taiwan dollars, approximately $0.3 million, during the term of the Finance Lease Agreement, including an initial payment in an amount of 62,927,180 New Taiwan dollars, approximately $2.0 million. Based on the payments made under the Finance Lease Agreement, the annual interest rate is calculated to be 4.0%. The title to the equipment will be transferred to our Taiwan branch upon the expiration of the Finance Lease Agreement. As of September 30, 2017, $4.1 million was outstanding under this Finance Lease Agreement.

Our Chinese subsidiary had credit facilities with China Construction Bank totaling $13.2 million, which could be drawn in U.S. currency, RMB currency, issuing bank acceptance notes to vendors with different interest rates or issuing standby letters of credit. We pledged the land use rights and buildings of our Chinese subsidiary as collateral for the credit facility. Our Chinese subsidiary used $10.0 million of its credit facility to issue standby letters of credit as collateral for our Taiwan branch line of credit with China Construction Bank. On March 29, 2017, we repaid the outstanding balance and terminated the loan.

~~As of September 30, 2017, there were no security deposits associated with the loan facilities.~~

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Frequently, we also direct our banking partners to issue bank acceptance notes payable to our suppliers in China in exchange for accounts payable. Our China subsidiary’s banks issue the notes to vendors and issue payment to vendors upon redemption. We owe the payable balance to the issuing bank. The notes payable are non-interest bearing and are generally due within nine months of issuance. As a condition of the notes payable lending arrangements, we are required to keep a compensating balance at the issuing banks that is a percentage of the total notes payable balance until the notes payable are paid by our China subsidiary. These balances are classified as restricted cash on our consolidated balance sheets.

Future liquidity needs

We believe that our existing cash and cash equivalents, ~~and~~ cash flows from our operating activities, and ~~borrowings from our lenders,~~available credit will be sufficient to meet our anticipated cash needs for the next 12 months. Our future capital requirements will depend on many factors including our growth rate, the timing and extent of spending to support our research and development efforts, the expansion of our sales and marketing activities, the introduction of new and enhanced products, the ~~expansion~~building improvement of a new factory and other facilities at our Ningbo, China location, changes in our manufacturing capacity and the continuing market acceptance of our products. In the event ~~that~~we need additional liquidity, ~~is required to meet our long-term investments,~~ we ~~may need to~~will explore additional sources of liquidity. These additional sources of liquidity ~~by additional bank credit facilities~~could include one, or ~~raising capital through additional~~a combination, of the following: (i) issuing equity or debt ~~financing including~~securities, (ii) incurring indebtedness secured by our ~~equity financing under~~assets and (iii) selling product lines, other assets and/or portions of our ~~Registration Statement filed with the SEC in October 2016. The sale of additional equity or debt security could result in additional dilution to our stockholders, and its terms and prices may not~~business. There can be ~~acceptable to us. If~~no guarantee that we ~~are unable~~will be able to raise additional ~~capital when desired, our business, operating results and financial condition would be adversely affected.~~funds on terms acceptable to us, or at all.

Contractual Obligations and Commitments

The following summarizes our contractual obligations as of September 30, ~~2017:~~2021 (in thousands):

											Payments due by period
	Payments due by period
			Less than 1						More than
	Total		Year		1-3 Years		3-5 Years		5 Years
	(in thousands)
													Less than 1						More than
											Total		Year		1-3 Years		3-5 Years		5 Years
Notes payable and long-term debt(1)	$	41,154	$	3,767	$	37,387	$	—	$	—	$	60,525	$	41,254	$	19,271	$	—	$	—
Operating leases(2)		12,317		1,098		2,008		2,029		7,182
Convertible senior notes⁽²⁾												90,261		4,025		86,236		—		—
Operating leases⁽³⁾												9,510		1,300		2,560		2,453		3,197
Financing leases⁽³⁾												93		22		71		—		—
Total commitments	$	53,471	$	4,865	$	39,395	$	2,029	$	7,182	$	160,389	$	46,601	$	108,138	$	2,453	$	3,197

(1)

We have several loan and security agreements in China, Taiwan and the U.S. that provide various credit facilities, including lines of credit, bank acceptance payable and term loans. The amount presented in the table represents the principal portion and ~~term loans. The amount presented in~~estimated interest expense for the ~~table represents the principal portion and estimated interest expense for the~~ obligations.

(2)

We issued convertible senior notes due 2024. The amount present in the table represents the principal portion and estimated interest expense for the obligations.

(3)

We have entered into various non-cancellable ~~operating~~ lease agreements for our offices in Taiwan and in ~~Taiwan and in~~ the U.S.

Inflation

We believe that the relatively low rate of inflation in the U.S. over the past few years has not had a significant impact on our net sales and revenues or ~~operating results~~on income from continuing operations or on the prices of raw materials. ToHowever, recently we have begun to see increases in shipping costs and in costs of some raw materials. We currently believe these increases are related to the COVID-19 pandemic ( please refer to our discussion on COVID-19 in the MD&A section of this document), however we cannot be sure when or if prices will return to pre-pandemic levels. In addition, to the extent we expand our operations in China and Taiwan, such actions may result in inflation having a more significant impact on our operating results in the future.

Off-Balance Sheet Arrangements

For the ~~three and~~ nine months ended September 30, ~~2017,~~2021, we did not, and we do not currently, have any off-balance sheet arrangements.

Critical Accounting Policies and Estimates

In our ~~annual report on Form 10-K~~Annual Report for the year ended December 31, ~~2016~~2020 and in the Notes to the Financial Statements herein, we identify our most critical accounting policies. In preparing the financial statements, we make assumptions, estimates and judgments that affect the amounts reported. We periodically evaluate our estimates and judgments that are most critical in nature which are related to revenue ~~recognition;~~recognition, allowance for ~~doubtful accounts;~~

~~Table of Contents~~

credit losses, inventory ~~reserves;~~reserves, impairment of long-lived assets (excluding goodwill and other indefinite-lived intangible assets);, goodwill and other indefinite-lived intangible ~~assets;~~assets, purchase price allocation of ~~acquisitions;~~acquisitions, service and product ~~warranties;~~warranties, and income taxes. Our estimates are based on historical experience and on our future expectations that we believe are reasonable. The combination of these factors forms the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results are likely to differ from our current estimates and those differences may be material.

~~JOBS Act~~

~~The Jumpstart Our Business Startups Act~~

Table of 2012, or JOBS Act, contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As defined in the JOBS Act, a public company whose initial public offering of common equity securities occurred after December 8, 2011 and whose annual gross revenues are less than $1.07 billion will, in general, qualify as an “emerging growth company” until the earliest of:

~~the last day of its fiscal year following the fifth anniversary of the date of its initial public offering of common equity securities;~~

Contents

~~the last day of its fiscal year in which it has annual gross revenue of $1.07 billion or more;~~

~~the date on which it has, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; and~~

the date on which it is deemed to be a “large accelerated filer,” which will occur at such time as the company (a) has an aggregate worldwide market value of common equity securities held by non-affiliates of $700 million or more as of the last business day of its most recently completed second fiscal quarter, (b) has been required to file annual and quarterly reports under the Exchange Act for a period of at least 12 months and (c) has filed at least one annual report pursuant to the Securities Act of 1934, as amended.

Under this definition, we are an “emerging growth company.” On June 30, 2017, the last day of our second fiscal quarter, the value of common equity securities held by non-affiliates exceeded $700 million. As such, we will no longer be an “emerging growth company” on December 31, 2017.

As an “emerging growth company” we have chosen to rely on such exemptions and are therefore not required to, among other things, (i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act, (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, (iii) comply with any requirement that may be adopted by the Public Company Accounting Oversight Board, or PCAOB, regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis) and (iv) disclose certain executive compensation-related items such as the correlation between executive compensation and performance and comparisons of the Chief Executive Officer’s compensation to median employee compensation. Commencing December 31, 2017, we can no longer qualify as an emerging growth company and are no longer able to rely on such exemptions.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

For quantitative and qualitative disclosures about market risk affecting the Company, see Item 7A – Quantitative and Qualitative Disclosures about Market Risk in our Annual Report ~~on Form 10-K~~ for the fiscal year ended December 31, ~~2016.~~2020. We do not believe the Company’s exposure to market risk has changed materially since December 31, ~~2016.~~2020.

Item 4. Controls and Procedures

The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in

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the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their control objectives.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, ~~2017.~~2021. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the three month period covered by this Quarterly Report on Form 10-Q, which were identified in connection with management’s evaluation required by the Rules 13a-15(d) and 15d-15(d) under the Exchange Act that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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Part II. Other Information

Item 1. Legal Proceedings

~~From time to time, we may be subject~~

Information with respect to legal proceedings ~~and litigation arising~~can be found under the heading "Contingencies" in Note 18 to the ~~ordinary course~~Condensed Consolidated Financial Statements contained in Part 1, Item 1 of business, including, but not limited to, inquiries, investigations, audits and other regulatory proceedings, such as described below. Except for the lawsuit described below, we believe that there are no claims or actions pending or threatened against us, the ultimate disposition of which would have a material adverse effect on us.

~~On August 5, 2017, a lawsuit was filed in the U.S. District Court for the Southern District of Texas against us and two of our officers in~~ ~~Mona Abouzied v. Applied Optoelectronics, Inc., Chih-Hsiang (Thompson) Lin, and Stefan J. Murry, et al., Case No. 4:17-cv-02399. The complaint in~~ this ~~matter~~seeks class action status on behalf of our shareholders, alleging violations of Sections 10(b) and 20(a) of the Exchange Act against the Company, our chief executive officer, and our chief financial officer, arising out of our announcement on August 3, 2017 that “we see softer than expected demand for our 40G solutions with one of our large customers that will offset the sequential growth and increased demand we expect in 100G.” The complaint requests unspecified damages and other relief. We dispute the allegations and intend to vigorously contest the matter.report.

Item 1A. Risk Factors

Investing in our common stock involves a high degree of risk. ~~You should carefully consider the following risk factors and all other information contained in~~See Part I, Item 1A, Risk Factors, of our ~~Quarterly~~Annual Report on Form 10-Q, including our consolidated financial statements and related notes. If any of the following risks actually occur, we may be unable to conduct our business as currently planned and our financial condition and results of operations could be seriously harmed. In addition, the trading price of our common stock could decline due to the occurrence of any of these risks and you may lose all or part of your investment.

~~Risks Inherent in Our Business~~

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

We generate much of our revenue from a limited number of customers. In 2016, 2015 and 2014 and the three and nine months ended September 30, 2017, our top ten customers represented 95.5%, 88.7%, 87.2%, 91.6% and 94.8% of our revenue, respectively. In 2016, Amazon represented 54.6% of our revenue and Microsoft represented 18.3% of our revenue. As a result, the loss of, or a significant reduction in orders from any of our key customers would materially and adversely affect our revenue and results of operations. We typically do not have long-term contracts with our customers and instead rely on recurring purchase orders. If our key customers do not continue to purchase our existing products or fail to purchase additional products from us, our revenue would decline and our results of operations would be adversely affected.

Adverse events affecting our key customers could also negatively affect our ability to retain their business and obtain new purchase orders, which could adversely affect our revenue and results of operations. For example, in recent years, there has been consolidation among various network equipment manufacturers and this trend is expected to continue. For example, in January 2016, Arris completed its purchase of Pace Plc (“Pace”). Pace and Arris have historically been our customers, and if we fail to achieve historical levels of sales of our products to the new entity, the loss or reduction in sales could have an adverse effect on our business, financial condition, results of operations, and cash flows. We are unable to predict the impact that industry consolidation would have on our existing or potential customers. We may not be able to offset any potential decline in revenue arising from the consolidation of our existing customers with revenue from new customers or additional revenue from the merged company.

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

We make planning and spending decisions, including determining the levels of business that we will seek and accept, production schedules, component procurement commitments, personnel needs and other resource requirements,

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

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

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

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

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

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

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

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

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

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

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

~~Product development delays may result from numerous factors, including:~~

~~modification of product specifications and customer requirements;~~

~~unanticipated engineering complexities;~~

~~difficulties in reallocating engineering resources and overcoming resource limitations; and~~

~~rapidly changing technology or competitive product requirements.~~

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

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

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

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

In each of our target markets, including the CATV market, our sales depend on the aggregate capital expenditures of service providers as they build out and upgrade their network infrastructure. These markets are highly cyclical and characterized by constant and rapid technological change, price erosion, evolving standards and wide fluctuations in product supply and demand. In the past, these markets have experienced significant downturns, often connected with, or in anticipation of, the maturation of product cycles. These downturns have been characterized by diminished product demand, production overcapacity, high inventory levels and accelerated erosion of average selling

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prices. Our historical results of operations have been subject to these cyclical fluctuations, and we may experience substantial period-to-period fluctuations in our future results of operations. Any future downturn in any of the markets in which we compete could significantly reduce the demand for our products and therefore may result in a significant reduction in our revenue. Our revenue and results of operations may be materially and adversely affected in the future due to changes in demand from individual customers or cyclical changes in any of the markets utilizing our products. We may not be able to accurately predict these cyclical fluctuations and the impact of these fluctuations may have on our revenue and operating results.

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

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

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

Historically, we have generated much of our revenue from the CATV market. In 2016, 2015 and 2014, the CATV market represented 16.7%, 28.3% and 36.3% of our revenue, respectively. In the CATV market, we are relying on expected increasing demand for bandwidth-intensive services and applications such as on-demand television programs, high-definition television channels, or HDTV, social media, peer-to-peer file sharing and online video creation and viewing from network service providers. Without network and bandwidth growth, the need for our products will not increase and may decline, adversely affecting our financial condition and results of operations. Although demand for broadband access is increasing, network and bandwidth growth may be limited by several factors, including an uncertain regulatory environment, high infrastructure costs to purchase and install equipment and uncertainty as to which competing content delivery solution, such as telecommunications, wireless or satellite, will gain the most widespread acceptance. If the trend of outsourcing10-K for the design and manufacture of CATV equipment does not continue, or continues at a slower pace than currently expected, our customers’ demand for our design and manufacturing services may not grow as quickly as expected. If expectations for the growth of the CATV market are not realized, our financial condition or results of operations will be adversely affected. In addition, if the CATV market is adversely impacted, whether due to competitive pressure from telecommunication service providers, regulatory changes, or otherwise, our business would be adversely affected. We may not be able to offset any potential decline in revenue from the CATV market with revenue from new customers in other markets.

~~We have limited operating history in the FTTH market, and our business could be harmed if this market does not develop as we expect.~~

For 2016 and 2015, respectively, we generated 0.6%, and 1.3% of our revenue from the FTTH market. We have only recently begun offering products to the FTTH market, and our WDM-PON products designed for this market have not yet, and may never, gain widespread acceptance by large internet service providers. Our business in this market is dependent on the deployment of our optical components, modules and subassemblies. We are relying on increasing demand for bandwidth-intensive services and telecommunications service providers’ acceptance and deployment of WDM-PON as a technology supporting 1 Gbps service to the home. Without network and bandwidth growth and adoption of our solutions by operators in these markets, we will not be able to sell our products in these markets in high volume or at our targeted margins, which would adversely affect our financial condition and results of operations. For example, WDM-PON technology may not be adopted by equipment and service providers in the FTTH market as rapidly as we expect or in the volumes we need to achieve acceptable margins. Network and bandwidth growth may be limited by several factors, including an uncertain regulatory environment, high infrastructure costs to purchase and install equipment and uncertainty as to which competing content delivery solution, such as CATV, will gain the most widespread acceptance. In addition, as we enter new markets or expand our product offerings in existing markets, our margins may be adversely affected due to competition in those markets and commoditization of competing products. If our expectations for the growth of these markets are not realized, our financial condition or results of operations will be adversely affected.

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

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

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

We have a high fixed cost base due to our vertically integrated business model, including the fact that 2,171 of our employees as of December 31, 2016 were employed in manufacturing and research and development operations. We may not be able to adjust these fixed costs quickly to adapt to rapidly changing market conditions. Our gross profit and gross margin are greatly affected by our sales volume and volatility on a quarterly basis and the corresponding absorption of fixed manufacturing overhead expenses. In addition, because we are a vertically integrated manufacturer, insufficient demand for our products may subject us to the risk of high inventory carrying costs and increased inventory obsolescence. Given our vertical integration, the rate at which we turn inventory has historically been low when compared to our cost of sales. We do not expect this to change significantly in the future and believe that we will have to maintain a relatively high level of inventory compared to our cost of sales. As a result, we continue to expect to have a significant amount of working capital invested in inventory. We may be required to write down inventory costs in the future and our high inventory costs may have an adverse effect on our gross profits and our results of operations.

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

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

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

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

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

~~new product introductions and enhancements by us or our competitors;~~

~~the gain or loss of key customers;~~

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

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

~~seasonality of certain of our products;~~

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~~quality control or yield problems in our manufacturing operations;~~

~~supply disruption for certain raw materials and components used in our products;~~

~~capacity constraints of our outside contract manufacturers for a portion of the manufacturing process for some of our products;~~

~~length and variability of the sales cycles of our products;~~

~~unanticipated increases in costs or expenses;~~

~~the loss of key employees;~~

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

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

~~fluctuations in foreign currency exchange rates;~~

~~changes in accounting rules;~~

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

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

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

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

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

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

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

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

~~We depend upon outside contract manufacturers for a portion of the manufacturing process for some of our products.~~

Almost all of our products are manufactured internally. However we also rely upon manufacturers in China, Taiwan and other Asia locations to provide back-end manufacturing and produce the finished portion of a few of our products. Our reliance on a contract manufacturer for these products makes us vulnerable to possible capacity constraints and reduced control over delivery schedules, manufacturing yields, manufacturing quality/controls and costs. If one of our contract manufacturers is unable to meet all of our customer demand in a timely fashion, this could have a material adverse effect on the revenue from our products. If the contract manufacturer for one of our products was unable or unwilling to manufacture such product in required volumes and at high quality levels or to continue our existing supply arrangement, we would have to identify, qualify and select an acceptable alternative contract manufacturer or move these manufacturing operations to our internal manufacturing facilities. An alternative contract manufacturer may not be available to us when needed or may not be in a position to satisfy our quality or production requirements on commercially reasonable terms, including price. Any significant interruption in manufacturing our products would require us to reduce our supply of products to our customers, which in turn, would reduce our revenue, harm our relationships with the customer of these products and cause us to forego potential revenue opportunities.

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

Our products are complex and undergo quality testing as well as formal qualification by our customers. Our customers’ testing procedures are limited to evaluating our products under likely and foreseeable failure scenarios and over varying amounts of time. For various reasons, such as the occurrence of performance problems that are unforeseeable in testing or that are detected only when products age or are operated under peak stress conditions, our products may fail to perform as expected long after customer acceptance. Failures could result from faulty components or design, problems in manufacturing or other unforeseen reasons. As a result, we could incur significant costs to repair or replace defective products under warranty, particularly when such failures occur in installed systems. Our products are typically embedded in, or deployed in conjunction with, our customers’ products, which incorporate a variety of components, modules and subsystems and may be expected to interoperate with modules produced by third parties. As a result, not all defects are immediately detectable and when problems occur, it may be difficult to identify the source of the problem. While we have not experienced material failures in the past, we will continue to face this risk going forward because our products are widely deployed in many demanding environments and applications worldwide. In addition, we may in certain circumstances honor warranty claims after the warranty has expired or for problems not covered by warranty to maintain customer relationships. Any significant product failure could result in litigation, damages, repair costs and lost future sales of the affected product and other products, divert the attention of our engineering personnel from our product development efforts and cause significant customer relations problems, all of which would harm our

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~~business. Although we carry product liability insurance, this insurance may not adequately cover our costs arising from defects in our products or otherwise.~~

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

We currently derive, and expect to continue to derive, a significant portion of our revenue from sales to international customers. In 2016, 2015 and 2014, 15.8%, 19.0% and 29.5% of our revenue was derived from sales that occurred outside of North America, respectively. In addition, a significant portion of our manufacturing operations is based in Ningbo, China and Taipei, Taiwan. Our international revenue and operations are subject to a number of material risks, including:

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

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

~~fewer legal protections for intellectual property in foreign jurisdictions;~~

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

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

~~fluctuations in foreign economies;~~

~~fluctuations in the value of foreign currencies and interest rates;~~

~~trade and travel restrictions;~~

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

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

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

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

Our business operations conducted in China and Taiwan are important to our success. A substantial portion of our property, plant and equipment is located in China and Taiwan. We expect to make further investments in China and Taiwan in the future. Therefore, our business, financial condition, results of operations and prospects are subject to economic, political, legal, and social events and developments in China and Taiwan. Factors affecting military, political or economic conditions in China and Taiwan could have a material adverse effect on our financial condition and results of operations, as well as the market price and the liquidity of our common shares.

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

Although we primarily sell our products through direct sales, we also sell our products to some of our customers through third party sales representatives and distributors. Many of such third parties also market and sell products from our competitors. Our third party sales representatives and distributors may terminate their relationships with us at any

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time, or with short notice. Our future performance will also depend, in part, on our ability to attract additional third party sales representatives and distributors that will be able to market and support our products effectively, especially in markets in which we have not previously distributed our products. If our current third party sales representatives and distributors fail to perform as expected, our revenue and results of operations could be harmed.

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

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

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

We have lending arrangements with several financial institutions, including loan agreements with BB&T Bank in the U.S., and our Taiwan location has several lines of credit arrangements. Our loan agreements governing our long-term debt obligations in the U.S. contain certain financial and operating covenants that limit our management’s discretion with respect to certain business matters. Among other things, these covenants require us to maintain certain financial ratios and restrict our ability to incur additional debt, create liens or other encumbrances, change the nature of our business, sell or otherwise dispose of assets and merge or consolidate with other entities. These restrictions may limit our flexibility in responding to business opportunities, competitive developments and adverse economic or industry conditions. Any failure by us or our subsidiaries to comply with these agreements could harm our business, financial condition and operating results. In addition, our obligations under our loan agreements with BB&T are secured by substantially all of our U.S. assets, other than real estate and equipment. A breach of any of covenants under our loan agreements, or a failure to pay interest or indebtedness when due under any of our credit facilities could result in a variety of adverse consequences, including the acceleration of our indebtedness.

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

We operate in a market that makes our prospects difficult to evaluate and, to remain competitive, we will be required to make continued investments in capital equipment, facilities and technological improvements. We expect that substantial capital will be required to expand our manufacturing capacity and fund working capital for anticipated growth. If we do not generate sufficient cash flow from operations or otherwise have the capital resources to meet our future capital needs, we may need additional financing to implement our business strategy, which includes:

~~expansion of research and development;~~

~~expansion of manufacturing capabilities;~~

~~hiring of additional technical, sales and other personnel; and~~

~~acquisitions of complementary businesses.~~

If we raise additional funds through the issuance of our common stock or convertible securities, the ownership interests of our stockholders could be significantly diluted. These newly issued securities may have rights, preferences or privileges senior to those of existing stockholders. Additional financing may not, however, be available on terms favorable to us, or at all, if and when needed, and our ability to fund our operations, take advantage of unanticipated opportunities, develop or enhance our infrastructure or respond to competitive pressures could be significantly limited. If we cannot raise required capital when needed, including under our Registration Statement filed with the SEC in October 2016, we may be unable to meet the demands of existing and prospective customers, adversely affecting our sales and market opportunities and consequently our business, financial condition and results of operations.

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

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

~~difficulties integrating the acquired business;~~

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

~~diversion of financial and management resources from our existing business;~~

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

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

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

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

~~We may be subject to disruptions or failures in information technology systems and network infrastructures that could have a material adverse effect on our business and financial condition.~~

We rely on the efficient and uninterrupted operation of complex information technology systems and network infrastructures to operate our business. A disruption, infiltration or failure of our information technology systems as a result of software or hardware malfunctions, system implementations or upgrades, computer viruses, third-party security breaches, employee error, theft or misuse, malfeasance, power disruptions, natural disasters or accidents could cause a breach of data security, loss of intellectual property and critical data and the release and misappropriation of sensitive competitive information and partner, customer, and employee personal data. Any of these events could harm our competitive position, result in a loss of customer confidence, cause us to incur significant costs to remedy any damages and ultimately materially adversely affect our business and financial condition.

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

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

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

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

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

~~Natural disasters or other catastrophic events could harm our operations.~~

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

~~Our business could be negatively impacted as a result of shareholder activism.~~

In recent years, shareholder activists have become involved in numerous public companies. Shareholder activists frequently propose to involve themselves in the governance, strategic direction, and operations of the company. We may in the future become subject to such shareholder activity and demands. Such demands may disrupt our business and divert the attention of our management and employees, and any perceived uncertainties as to our future direction resulting from such a situation could result in the loss of potential business opportunities, be exploited by our competitors, cause concern to our current or potential customers, and make it more difficult to attract and retain qualified personnel and business partners, all of which could adversely affect our business. In addition, actions of activist shareholders may cause significant fluctuations in our stock price based on temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business.

~~The unfavorable outcome of any pending or future litigation or administrative action and expenses incurred in connection with litigation could result in financial losses or harm to our business.~~

We are, and in the future may be, subject to legal actions in the ordinary course of our operations, both domestically and internationally. There can be no assurances as to the favorable outcome of any litigation. In addition it can be costly to defend litigation and these costs could negatively impact our financial results. As disclosed in “Item 1. Legal Proceedings,” on August 5, 2017, a purported shareholder class action lawsuit was filed in the U.S. District Court for the Southern District of Texas against us and two of our officers. The complaint in this matter alleges that we made materially false and misleading statements or failed to disclose material facts and requests damages and other relief. Such lawsuit and any other such litigation could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.

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

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

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patents or trademark registrations or a successful challenge to our registrations in the U.S. or other foreign countries may limit our ability to protect the intellectual property rights that these applications and registrations intended to cover.

Policing unauthorized use of our technology is difficult and we cannot be certain that the steps we have taken will prevent the misappropriation, unauthorized use or other infringement of our intellectual property rights. Further, we may not be able to effectively protect our intellectual property rights from misappropriation or other infringement in foreign countries where we have not applied for patent protections, and where effective patent, trademark, trade secret and other intellectual property laws may be unavailable, or may not protect our proprietary rights as fully as U.S. law. We may seek to secure comparable intellectual property protections in other countries. However, the level of protection afforded by patent and other laws in other countries may not be comparable to that afforded in the U.S.

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

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

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

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

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

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

~~pay substantial monetary damages; or~~

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

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

In any potential intellectual property dispute, our customers could also become the target of litigation. Because we often indemnify our customers for intellectual property claims made against them with respect to our products, any claims against our customers could trigger indemnification claims against us. These obligations could result in

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substantial expenses such as legal expenses, damages for past infringement or royalties for future use. Any indemnity claim could also adversely affect our relationships with our customers and result in substantial costs to us.

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

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

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

Preparing our consolidated financial statements involves a number of complex manual and automated processes, which are dependent upon individual data input or review and require significant management judgment. One or more of these elements may result in errors that may not be detected and could result in a material misstatement of our consolidated financial statements. The Sarbanes-Oxley Act requires, among other things, that as a publicly-traded company we disclose whether our internal control over financial reporting and disclosure controls and procedures are effective.

In addition, since we will no longer qualify as an “emerging growth company” under the JOBS Act as of December 31, 2017, we will have to provide an auditor’s attestation report on our internal controls in future annual reports on Form 10-K as required by Section 404(b) of the Sarbanes-Oxley Act. During the course of any evaluation, documentation or attestation, we or our independent registered public accounting firm may identify weaknesses and deficiencies that we may not otherwise identify in a timely manner or at all as a result of the deferred implementation of this additional level of review.

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

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

As of December 31, 2016, we had U.S. accumulated net operating losses, or NOLs, of approximately $37.7 million for U.S. federal income tax purposes. Under Section 382 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change NOLs, R&D credits and other pre-change tax attributes to offset its post-change income may be limited. An ownership change is generally defined as a greater than 50% change in equity ownership by value over a 3-year period. Based upon an analysis of our equity ownership, we believe that we have experienced ownership changes and therefore our annual utilization of our NOLs is limited. In addition, should we experience additional ownership changes, our NOL carry forwards may be further limited.

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

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

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

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

~~We are exposed to risks and increased expenses and business risk as a result of Restriction on Hazardous Substances, or RoHS directives.~~

Following the lead of the European Union, or EU, various governmental agencies have either already put into place or are planning to introduce regulations that regulate the permissible levels of hazardous substances in products sold in various regions of the world. For example, the RoHS directive for EU took effect on July 1, 2006. The labeling provisions of similar legislation in China went into effect on March 1, 2007. Consequently, many suppliers of products sold into the EU have required their suppliers to be compliant with the new directive. Many of our customers have adopted this approach and have required our full compliance. Though we have devoted a significant amount of resources and effort in planning and executing our RoHS program, it is possible that some of our products might be incompatible with such regulations. In such events, we could experience the following consequences: loss of revenue, damages reputation, diversion of resources, monetary penalties, and legal action.

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

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

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

We are subject to export and import control laws, trade regulations and other trade requirements that limit which products we sell and where and to whom we sell our products. Specifically, the Bureau of Industry and Security of the U.S. Department of Commerce is responsible for regulating the export of most commercial items that are so called dual-use goods that may have both commercial and military applications. A limited number of our products are exported by license under the Export Control Classification Number, or ECCN, of 5A991. Export Control Classification requirements are dependent upon an item’s technical characteristics, the destination, the end-use, the end-user, and other activities of the end-user. Should the regulations applicable to our products change, or the restrictions applicable to countries to which we ship our products change, then the export of our products to such countries could be restricted. As a result, our ability to export or sell our products to certain countries could be restricted, which could adversely affect our business, financial condition and results of operations. Changes in our products or any change in export or import regulations or related legislation, shift in approach to the enforcement or scope of existing regulations, or change in the countries, persons or technologies targeted by such regulations, could result in delayed or decreased sales of our products to existing or potential customers. In such event, our business and results of operations could be adversely affected.

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

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

~~Compliance with regulations related to conflict minerals could increase costs and affect the manufacturing and sale of our products.~~

Public companies are required to disclose the use of tin, tantalum, tungsten and gold (collectively, “conflict minerals”) mined from the Democratic Republic of the Congo and adjoining countries (the “covered countries”) if a conflict mineral(s) is necessary to the functionality of a product manufactured, or contracted to be manufactured, by the company. We filed our latest conflict minerals report on Form SD on May 26, 2017. We may determine, as part of our compliance efforts, that certain products or components we obtain from our suppliers contain conflict minerals. If we are unable to conclude that all our products are free from conflict minerals originating from covered countries, this could have a negative impact on our business, reputation and/or results of operations. We may also encounter challenges to satisfy customers who require that our products be certified as conflict free, which could place us at a competitive disadvantage if we are unable to substantiate such a claim. Compliance with these rules could also affect the sourcing and availability of some of the minerals used in the manufacture of products or components we obtain from our suppliers, including our ability to obtain products or components in sufficient quantities and/or at competitive prices. Certain of our customers are requiring additional information from us regarding the origin of our raw materials, and complying with these customer requirements may cause us to incur additional costs, such as costs related to determining the origin of any minerals used in our products. Our supply chain is complex and we may be unable to verify the origins for all metals used in our products. We may also encounter challenges with our customers and stockholders if we are unable to certify that our products are conflict free.

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

Certain provisions contained in our employment agreements with our named executive officers regarding change of control or separation of service may obligate us to make lump sum severance payments and related payments

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upon the termination of their employment with us, other than such executive officer’s resignation without good reason or our termination of their employment as a result of their disability or for cause. In the event we are required to make these separation payments, it could have a material adverse effect on our results of operations for the fiscal period in which such payments are made.

~~Risks Related to Our Operations in China~~

~~Our business operations conducted in China are critical to our success. A total of $57.4 million, $20.6 million and $22.0 million or 22.0%, 11.0% and 16.9%, of our revenue in the years~~year ended December 31, ~~2016, 2015 and 2014 was attributable~~2020 for a detailed discussion of the risk factors affecting our Company. As of September 30, 2021, there have been no material changes to our product manufacturing plants in China, respectively. Additionally, a substantial portion of our property, plant and equipment, 23% and 22% as of December 31, 2016 and 2015, was located in China, respectively. We expect to make further investments in China in the foreseeable future. Therefore, our business, financial condition, results of operations and prospects are to a significant degree subject to economic, political, legal, and social events and developments in China.those risk factors.

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

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

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

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

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

Prior to January 1, 2008, entities established in China were generally subject to a 30% state and 3% local enterprise income tax rate. In accordance with the China Income Tax Law for Enterprises with Foreign Investment and Foreign Enterprises, effective through December 31, 2007, our China subsidiary enjoyed preferential income tax rates. Effective January 1, 2008, the China Enterprise Income Tax Law, or the EIT law, imposes a single uniform income tax rate of 25% on all Chinese enterprises, including FIEs, and eliminates or modifies most of the tax exemptions, reductions and preferential treatment available under the previous tax laws and regulations. As a result, our China subsidiary may be subject to the uniform income tax rate of 25% unless we are able to qualify for preferential status. Currently, we have qualified for a preferential 15% tax rate that is available for state-encouraged new high technology enterprises. The preferential rate has applied to calendar years 2012 through 2016. If we fail to continue to qualify for this preferential rate in the future, we may incur higher tax rates on our income in China. In order to retain the preferential tax rate, we must meet certain operating conditions, satisfy certain product requirements, meet certain headcount requirements and maintain certain levels of research expenditures. We applied for an additional three years of preferential status with the

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Chinese government in 2014 and received approval as a high-technology enterprise through September 2017. We have applied to extend this preferential tax treatment beyond September 2017, however this application is still under consideration by China’s tax authorities. Based on our prior experience, we believe that this preferential tax rate will be approved, but this is not certain at this time. Any future increase in the enterprise income tax rate applicable to us or the expiration or other limitation of preferential tax rates available to us could increase our tax liabilities and reduce our net income.

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

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

China regulation of loans to and direct investment by offshore holding companies in China entities may delay or prevent us from making loans or additional capital contributions to our China subsidiary.

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

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

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

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

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

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

~~Table of Contents~~

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

Businesses in China have historically not adopted a western style of management and financial reporting concepts and practices, which includes strong corporate governance, internal controls and computer, financial and other control systems. Moreover, familiarity with U.S. GAAP principles and reporting procedures is less common in China. As a consequence, we may have difficulty finding accounting personnel experienced with U.S. GAAP, and we may have difficulty training and integrating our China-based accounting staff with our U.S.-based finance organization. As a result of these factors, we may experience difficulty in establishing management and financial controls over our China operations. These difficulties include collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet U.S. public-company reporting requirements. We may, in turn, experience difficulties in implementing and maintaining adequate internal controls as required under Section 404 of the Sarbanes-Oxley Act.

~~Risks Related to Our Common Stock~~

~~Our stock price has been and is likely to be volatile.~~

The market price of our common stock has been and is likely to be subject to wide fluctuations in response to, among other things, the risk factors described in this section of this Quarterly Report on Form 10-Q, and other factors beyond our control, such as fluctuations in the valuation of companies perceived by investors to be comparable to us. For example, announcements made by competitors regarding factors influencing their business may cause fluctuations in the valuation of companies throughout our industry, including fluctuations in the valuation of our stock.

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

In the past, many companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We have been and may become the target of this type of litigation in the future. For example, on August 3, 2017 we provided guidance for the third quarter of 2017, and on August 4, 2017 the market price of our stock decreased significantly. We subsequently learned of potential class action litigation based on volatility in the market price for our stock. See “~~Item 1. Legal Proceedings.”~~ ~~Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.~~

We have incurred and will continue to incur significant increased expenses and administrative burdens as a public company, which could have a material adverse effect on our operations and financial results.

We face increased legal, accounting, administrative and other costs and expenses as a public company that we did not incur as a private company, and greater expenditures may be necessary in the future with the advent of new laws, regulations and stock exchange listing requirements pertaining to public companies. These increased costs will require us to divert a significant amount of money that we could otherwise use to expand our business and achieve our strategic objectives. The Sarbanes-Oxley Act, including the requirements of Section 404, as well as rules and regulations subsequently implemented by the SEC, the Public Company Accounting Oversight Board and the NASDAQ Global Market, impose additional reporting and other obligations on public companies. Compliance with public company requirements has increased our costs and made some activities more time-consuming. For example, we have created board committees and adopted internal controls and disclosure controls and procedures. In addition, we will have incurred and will continue to incur additional expenses associated with our SEC reporting requirements. Furthermore, if we identify any issues in complying with those requirements (for example, if we or our auditors identify a material weakness or significant deficiency in our internal control over financial reporting), we could incur additional costs rectifying those issues, and the existence of those issues could adversely affect us, our reputation or investor perceptions of us. Advocacy efforts by stockholders and third parties may also prompt additional changes in governance and reporting requirements, which could further increase our costs. Commencing December 31, 2017, we will be a "large accelerated filer" and, accordingly, will no longer qualify as an emerging growth company and will no longer be able to rely on certain exemptions that were available to us as an emerging growth company. Legal, accounting, administrative

~~Table of Contents~~

~~and other costs and expenses may increase in the future as we continue to incur both increased external audit fees as well as additional spending to ensure continued regulatory compliance.~~

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

We currently do not plan to declare or pay dividends on shares of our common stock in the foreseeable future. Consequently, your only opportunity to achieve a return on any shares of our common stock that you may acquire will be if the market price of our common stock appreciates and you sell your shares at a profit. There is no guarantee that the price of our common stock in the market will ever exceed the price that you pay.

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

Our amended and restated certificate of incorporation and our amended and restated bylaws and our stock incentive plans contain provisions that could delay or prevent a change in control of our company. These provisions could also make it more difficult for stockholders to elect directors and take other corporate actions. These provisions include:

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

~~not providing for cumulative voting in the election of directors;~~

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

~~prohibiting stockholder action by written consent;~~

~~limiting the persons who may call special meetings of stockholders;~~

~~requiring advance notification of stockholder nominations and proposals; and~~

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

In addition, we are governed by the provisions of Section 203 of the Delaware General Corporate Law. These provisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding common stock, from engaging in certain business combinations without the approval of substantially all of our stockholders for a certain period of time.

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

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

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

~~Table of Contents~~

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

We are currently an emerging growth company within the meaning of the rules under the Securities Act. We have in this Quarterly Report on Form 10-Q utilized, and we plan in future filings with the SEC to continue to utilize, the modified disclosure requirements available to emerging growth companies, including reduced disclosure about our executive compensation and omission of compensation discussion and analysis, and an exemption from the requirement of holding a nonbinding advisory vote on executive compensation and an exemption from the requirement that outside auditors attest as to our internal control over financial reporting. As a result, our stockholders may not have access to certain information they may deem important.

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

We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. We will cease to be an “emerging growth company” on the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which will occur on December 31, 2017 because the market value of our common stock that was held by non-affiliates exceeded $700 million as of the last business day of our most recently completed second fiscal quarter.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

See Exhibit Index.

Table of Contents

EXHIBIT INDEX


Number	Description
3.1*	Amended and Restated Certificate of Incorporation, as currently in effect (filed as Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 14, 2013).

3.2*	Amended and Restated Bylaws, as currently in effect (filed as Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 14, 2013).

4.1*	Common Stock Specimen (filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 15, 2015).

4.2*
10.2*	~~Promissory Note,~~Indenture, dated ~~September 28, 2017,~~as of March 5, 2019 between Applied Optoelectronics, Inc. and ~~Branch Banking~~Wells Fargo Bank, National Association, as trustee, paying agent, and ~~Trust Company~~conversion agent (filed as Exhibit ~~10.2~~4.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on ~~October 4, 2017)~~March 5, 2019).
10.3*
4.3*	~~Addendum~~Form of Note representing the Company’s 5.00% Convertible Senior Notes due 2024 (included as Exhibit A to the ~~Promissory Note, dated September 28, 2017, between Applied Optoelectronics, Inc. and Branch Banking and Trust Company. (filed~~Indenture filed as Exhibit ~~10.3~~4.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on ~~October 4, 2017)~~March 5, 2019).
10.4*	BB&T Security Agreement, dated September 28, 2017, between Applied Optoelectronics, Inc. and Branch Banking and Trust Company (filed as Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 4, 2017).
10.5*	Trademark Security Agreement, dated September 28, 2017, between Applied Optoelectronics, Inc. and Branch Banking and Trust Company (filed as Exhibit 10.5 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 4, 2017).
10.6*	Patent Security Agreement, dated September 28, 2017, between Applied Optoelectronics, Inc. and Branch Banking and Trust Company (filed as Exhibit 10.6 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 4, 2017).
31.1**	Certification of Chief Executive Officer pursuant to Exchange Act Rule, 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2**	Certification of Chief Financial Officer pursuant to Exchange Act Rule, 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1**	Certification pursuant to 18 U.S.C. 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Chief Executive Officer and Chief Financial Officer.

101.INS**	Inline XBRL Instance ~~Document.~~	– the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH**	Inline XBRL Taxonomy Extension Schema Document.

101.CAL**	Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF**	Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB**	Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE**	Inline XBRL Taxonomy Extension Presentation Linkbase Document.

104**	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

~~Table of Contents~~

* Incorporated herein by reference to the indicated filing.

** Filed herewith.

† Management contract, compensatory plan or arrangement.

Table of Contents

~~SIGNATURES~~SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	APPLIED OPTOELECTRONICS, INC.

Date: November ~~8, 2017~~4, 2021	By:	/s/ ~~Stefan~~STEFAN J. ~~Murry~~MURRY
		Stefan J. Murry
		Chief Financial Officer
		(principal financial officer and principal accounting officer)

Delaware	76-0533927
~~Delaware~~(State or other jurisdiction of incorporation or organization)	~~76-0533927~~(I.R.S. Employer Identification No.)
~~(State or other jurisdiction of incorporation or organization)~~	~~(I.R.S. Employer Identification No.)~~

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

	Large accelerated filer	☐		Accelerated filer	☒

Non-accelerated filer	☐	~~(Do not check if a smaller reporting company)~~	Smaller reporting company	☐☒

			Emerging growth company	☒☐

					*September 30,*			*December 31,*
	September 30,		December 31,
	2017		2016
					*2021*			*2020*
ASSETS
Current Assets
Cash and cash equivalents	$	70,930	$	50,224	$	43,534		$	43,425
Restricted cash		1,072		1,732		5,363			6,689
Short-term investments		36		44
Accounts receivable - trade, net of allowance of $31		73,029		49,766
Accounts receivable - trade, net of allowance of $62 and $62, respectively						43,942			43,042
Notes receivable						8,505			401
Inventories		74,552		51,817		94,507			110,397
Prepaid income tax						2			2
Prepaid expenses and other current assets		10,448		3,969		4,717			5,213
Total current assets		230,067		157,552		200,570			209,169
Cash restricted for construction in progress		—		8
Property, plant and equipment, net		181,481		144,098		242,452			252,984
Land use rights, net		797		778		5,790			5,854
Operating right of use asset						7,277			7,729
Financing right of use asset						65			88
Intangible assets, net		4,041		3,993		3,877			3,999
Deferred income tax assets		15,167		11,421
Other assets, net		7,151		4,468		2,493			982
TOTAL ASSETS	$	438,704	$	322,318	$	462,524		$	480,805
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of notes payable and long-term debt	$	3,638	$	7,865	$	41,254		$	38,265
Accounts payable		50,993		36,375		28,333			29,482
Bank acceptance payable		—		307		6,481			15,860
Accrued income taxes		5,459		974
Current lease liability - operating						1,045			1,012
Current lease liability - financing						18			18
Accrued liabilities		16,801		14,452		16,204			18,511
Total current liabilities		76,891		59,973		93,335			103,148
Notes payable and long-term debt, less current portion		37,371		34,961		19,271			13,904
Convertible senior notes						78,472			77,854
Non-current lease liability - operating						7,410			7,926
Non-current lease liability - financing						68			82
TOTAL LIABILITIES		114,262		94,934		198,556			202,914
Stockholders' equity:
Preferred Stock; 5,000 shares authorized at $0.001 par value; no shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively		—		—
Common Stock; 45,000 shares authorized at $0.001 par value; 19,359 and 18,400 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively		19		18
Preferred Stock; 5,000 shares authorized at $0.001 par value; no shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively						0			0
Common Stock; 45,000 shares authorized at $0.001 par value; 27,175 and 25,110 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively						27			25
Additional paid-in capital		285,600		265,264		378,207			354,685
Accumulated other comprehensive gain (loss)		6,400		(885)
Retained earnings (accumulated deficit)		32,423		(37,013)
Accumulated other comprehensive income						13,865			11,690
Accumulated deficit						(128,131	)		(88,509	)
TOTAL STOCKHOLDERS' EQUITY		324,442		227,384		263,968			277,891
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	438,704	$	322,318	$	462,524		$	480,805

												*Accumulated*
	*Preferred Stock*				*Common Stock*				*Additional*			*other*
	*Number*				*Number*				*paid-in*			*comprehensive*			*Accumulated*			*Stockholders'*
	*of shares*		*Amount*		*of shares*		*Amount*		*capital*			*gain (loss)*			*deficit*			*equity*
June 30, 2021		0	$	0		26,919	$	27	$	375,312		$	14,286		$	(112,334	)	$	277,291
Public offering of common stock, net		0		0		7		0		1			0			0			1
Issuance of restricted stock, net of shares withheld for employee tax		0		0		249		0		(236	)		0			0			(236	)
Share-based compensation		—		0		—		0		3,130			0			0			3,130
Foreign currency translation adjustment		—		0		—		0		0			(421	)		0			(421	)
Net loss		—		0		—		0		0			0			(15,797	)		(15,797	)
September 30, 2021		0	$	0		27,175	$	27	$	378,207		$	13,865		$	(128,131	)	$	263,968

		Page
Part I. Financial Information

Item 1.	Condensed Consolidated Financial Statements (Unaudited)	3

	Condensed Consolidated Balance Sheets as of September 30, ~~2017~~2021 (Unaudited) and December 31, ~~2016~~2020	3

	Condensed Consolidated Statements of Operations for the Three and Nine Months ended September 30, ~~2017~~2021 and ~~2016~~2020 (Unaudited)	4

	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months ended September 30, ~~2017~~2021 and ~~2016~~2020 (Unaudited)	5

	Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months ended September 30, ~~2017~~2021 and 2020 (Unaudited)	6

	Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, ~~2017~~2021 and ~~2016~~2020 (Unaudited)	7

	Notes To Condensed Consolidated Financial Statements (Unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20 23

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31 32

Item 4.	Controls and Procedures	31 32

Part II. Other Information

Item 1.	Legal Proceedings	33

Item 1A.	Risk Factors	33

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52
		33
Item 3.	Defaults Upon Senior Securities	52
		33
Item 4.	Mine Safety Disclosures	52
		33
Item 5.	Other Information	52
		33
Item 6.	Exhibits	52
		33
	Signatures	55 35


									Accumulated		Retained
	Preferred Stock			Common Stock			Additional		other		earnings/
	Number			Number			paid-in		comprehensive		(Accumulated		Stockholders'
	of shares	Amount		of shares	Amount		capital		gain (loss)		deficit)		equity

January 1, 2017	—	$	—	18,400	$	18	$	265,264	$	(885)	$	(37,013)	$	227,384
Public offering of common stock, net	—		—	459		1		21,571		—		—		21,572
Stock options exercised, net of shares withheld for employee tax	—		—	356		—		(4,930)		—		—		(4,930)
Issuance of restricted stock, net of shares withheld for employee tax	—		—	144		—		(2,161)		—		—		(2,161)
Share based compensation	—		—	—		—		5,849		—		—		5,849
Cumulative effect of previously unrecognized tax benefits	—		—	—		—		—		—		1,207		1,207
Foreign currency translation adjustment	—		—	—		—		—		7,285		—		7,285
Other	—		—	—		—		7		—		(6)		1
Net income	—		—	—		—		—		—		68,235		68,235
September 30, 2017	—	$	—	19,359	$	19	$	285,600	$	6,400	$	32,423	$	324,442

	*Three months ended September 30,*
			*% of*					*% of*
	*2021*		*Revenue*			*2020*		*Revenue*
Data Center	$	23,929		44.9	%	$	55,336		72.2	%
CATV		23,101		43.4	%		11,642		15.2	%
Telecom		5,148		9.7	%		8,870		11.6	%
FTTH		62		0.1	%		67		0.1	%
Other		1,027		1.9	%		693		0.9	%
Total Revenue	$	53,267		100.0	%	$	76,608		100.0	%

		*Operating*			*Financing*
2022	$	1,300		$	22
2023		1,311			22
2024		1,249			49
2025		1,244			0
2026		1,209			0
2027 and thereafter		3,197			0
Total lease payments	$	9,510		$	93
Less imputed interest		(1,055	)		(7	)
Present value	$	8,455		$	86

	*September 30, 2021*		*December 31, 2020*
Raw materials	$	31,157	$	25,555
Work in process and sub-assemblies		42,242		52,544
Finished goods		21,108		32,298
Total inventories	$	94,507	$	110,397

	*September 30, 2021*			*December 31, 2020*
Land improvements	$	806		$	806
Building and improvements		89,061			88,280
Machinery and equipment		261,041			253,738
Furniture and fixtures		5,617			5,540
Computer equipment and software		12,612			11,912
Transportation equipment		709			699
		369,846			360,975
Less accumulated depreciation and amortization		(161,307	)		(142,434	)
		208,539			218,541
Construction in progress		32,812			33,342
Land		1,101			1,101
Total property, plant and equipment, net	$	242,452		$	252,984

	*September 30, 2021*
	*Gross*		*Accumulated*			*Intangible*
	*Amount*		*amortization*			*assets, net*
Patents	$	8,494	$	(4,626	)	$	3,868
Trademarks		25		(16	)		9
Total intangible assets	$	8,519	$	(4,642	)	$	3,877

																	*As of September 30, 2021*								*As of December 31, 2020*
	As of September 30, 2017								As of December 31, 2016
	(Level 1)		(Level 2)		(Level 3)		Total		(Level 1)		(Level 2)		(Level 3)		Total
																	*(Level 1)*		*(Level 2)*		*(Level 3)*		*Total*		*(Level 1)*		*(Level 2)*		*(Level 3)*		*Total*
Assets:
Cash and cash equivalents	$	70,930	$	—	$	—	$	70,930	$	50,224	$	—	$	—	$	50,224	$	43,534	$	0	$	0	$	43,534	$	43,425	$	0	$	0	$	43,425
Restricted cash		1,072		—		—		1,072		1,740		—		—		1,740		5,363		0		0	$	5,363		6,689		0		0	$	6,689
Short term investments		36		—		—		36		44		—		—		44
Note receivable																		0		8,505		0		8,505		0		401		0		401
Total assets	$	72,038	$	—	$	—	$	72,038	$	52,008	$	—	$	—	$	52,008	$	48,897	$	8,505	$	0	$	57,402	$	50,114	$	401	$	0	$	50,515
Liabilities:
Bank acceptance payable		—		—		—		—		—		307		—		307	$	0	$	6,481	$	0	$	6,481	$	0	$	15,860	$	0		15,860
Convertible senior notes																		0		67,701		0		67,701		0		70,225		0		70,225
Total liabilities	$	—	$	—	$	—	$	—	$	—	$	307	$	—	$	307	$	0	$	74,182	$	0	$	74,182	$	0	$	86,085	$	0	$	86,085


	September 30, 2017		December 31, 2016
Raw materials	$	22,574	$	21,518
Work in process and sub-assemblies		30,906		24,334
Finished goods		21,072		5,965
	$	74,552	$	51,817


	September 30, 2017
	Gross		Accumulated		Intangible
	Amount		amortization		assets, net
Patents	$	6,425	$	(2,387)	$	4,038
Trademarks		14		(11)		3
Total intangible assets	$	6,439	$	(2,398)	$	4,041

	*September 30, 2021*			*December 31, 2020*
Revolving line of credit with a U.S. bank up to $20,000 with interest at 2.25% , maturing October 15, 2022	$	19,300		$	18,700
Paycheck Protection Program Term Note with interest at fixed rate 1.0%, maturing April 16, 2022		0			6,229
Revolving line of credit with a Taiwan bank up to $3,436 with 2.2% interest, maturing April 14, 2021		0			1,756
Notes payable to a finance company due in monthly installments with 3.5% interest, maturing January 21, 2022		361			1,941
Notes payable to a finance company due in monthly installments with 3.1% interest, maturing January 21, 2022		676			2,149
Revolving line of credit with a China bank up to $8,917 with interest ranging from 4.5%, maturing October 14, 2020		0			2,299
Revolving line of credit with a China bank up to $25,449 with interest from 3.01% to 4.57%, maturing May 24, 2024		17,924			11,603
Credit facility with a China bank up to $14,125 with interest of 3.5%, maturing January 5, 2024		14,892			0
Credit facility with a China bank up to $7,167 with interest of 5.7%, maturing from June 20, 2022		7,401			7,510
Sub-total		60,554			52,187
Less debt issuance costs, net		(29	)		(18	)
Grand total		60,525			52,169
Less current portion		(41,254	)		(38,265	)
Non-current portion	$	19,271		$	13,904

Bank Acceptance Notes Payable
Bank acceptance notes issued to vendors with a zero percent interest rate	$	6,481		$	15,860


2018	$	3,638
2019		1,371
2020		36,000
2021		—
2022		—
2023 and thereafter		—
Total outstanding	$	41,009

	*September 30, 2021*		*December 31, 2020*
Accrued payroll	$	8,348	$	10,517
Accrued employee benefits		3,247		3,057
Accrued state and local taxes		1,390		251
Accrued interest		351		1,256
Advance payments		480		303
Accrued product warranty		272		703
Accrued commission expenses		903		974
Accrued professional fees		293		377
Accrued shipping and tariff expenses		235		526
Accrued other		685		547
Total accrued liabilities	$	16,204	$	18,511


	As of the period ended
	September 30,		December 31,
	2017		2016
Long-lived assets:
United States	$	71,023	$	66,028
Taiwan		62,697		48,728
China		52,598		34,113
	$	186,318	$	148,869