Neophotonics (NPTN) 10-Q 2016 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2016

OR

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

For the transition period from        to        

Commission File Number: 001-35061

NeoPhotonics Corporation

(Exact name of registrant as specified in its charter)

Delaware	94-3253730
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

2911 Zanker Road

San Jose, California 95134

(Address of principal executive offices, zip code)

(408) 232-9200

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  ☒     No   ☐ 

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

Large accelerated filer	☐		Accelerated filer	☒
Non-accelerated filer	☐	(do not check if a smaller reporting company)	Smaller reporting company	☐

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

As of October 31, 2016, there were approximately 42,324,000 shares of the registrant’s Common Stock outstanding.

NEOPHOTONICS CORPORATION

For the Quarter Ended September 30, 2016

Table of Contents

		Page
	Part I. Financial Information
Item 1.	Condensed Consolidated Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015	3
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2016 and 2015	4
	Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2016 and 2015	5
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40
Item 4.	Controls and Procedures	40
	Part II. Other Information
Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	72
Item 3.	Defaults Upon Senior Securities	72
Item 4.	Mine Safety Disclosures	72
Item 5.	Other Information	72
Item 6.	Exhibits	75
	Signature	76

PART I. FINANCIAL INFORMATION

ITEM 1.CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NEOPHOTONICS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	As of
	September 30,		December 31,
(In thousands, except par data)	2016		2015
ASSETS
Current assets:
Cash and cash equivalents	$	71,625	$	76,088
Short-term investments		28,470		23,294
Restricted cash		2,813		2,660
Accounts receivable, net of allowance for doubtful accounts		95,677		83,161
Inventories		60,219		65,602
Prepaid expenses and other current assets		14,932		12,393
Total current assets		273,736		263,198
Property, plant and equipment, net		95,846		62,618
Purchased intangible assets, net		6,217		9,852
Goodwill		1,115		1,115
Other long-term assets		7,672		5,095
Total assets	$	384,586	$	341,878
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	76,341	$	50,620
Notes payable and short-term borrowing		31,508		32,657
Current portion of long-term debt		908		760
Accrued and other current liabilities		28,184		27,950
Total current liabilities		136,941		111,987
Long-term debt, net of current portion		12,116		10,759
Other noncurrent liabilities		9,044		7,476
Total liabilities		158,101		130,222
Commitments and contingencies (Note 10)
Stockholders’ equity:
Preferred stock, $0.0025 par value, 10,000 shares authorized, no shares issued or outstanding		—		—
Common stock, $0.0025 par value, 100,000 shares authorized
At September 30, 2016, 42,315 shares issued and outstanding; at December 31, 2015, 40,986 shares issued and outstanding		106		102
Additional paid-in capital		528,451		511,750
Accumulated other comprehensive loss		(1,398)		(1,723)
Accumulated deficit		(300,674)		(298,473)
Total stockholders’ equity		226,485		211,656
Total liabilities and stockholders’ equity	$	384,586	$	341,878

See accompanying Notes to Condensed Consolidated Financial Statements.

3

NEOPHOTONICS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(In thousands, except per share data)	2016		2015		2016		2015
Revenue	$	103,312	$	83,560	$	301,586	$	250,316
Cost of goods sold		75,863		59,788		215,486		176,345
Gross profit		27,449		23,772		86,100		73,971
Operating expenses:
Research and development		17,474		10,763		42,206		32,702
Sales and marketing		5,936		3,789		13,674		11,439
General and administrative		9,822		7,384		26,747		22,999
Amortization of purchased intangible assets		462		447		1,375		1,344
Acquisition-related costs		148		180		923		467
Restructuring charges		—		18		—		44
Asset impairment charges		—		368		—		368
Total operating expenses		33,842		22,949		84,925		69,363
Income (loss) from operations		(6,393)		823		1,175		4,608
Interest income		95		31		227		84
Interest expense		(103)		(171)		(304)		(1,133)
Other income (expense), net		18		1,852		(828)		2,408
Total interest and other income (expense), net		10		1,712		(905)		1,359
Income (loss) before income taxes		(6,383)		2,535		270		5,967
Provision for income taxes		(804)		(1,157)		(2,471)		(2,698)
Net income (loss)	$	(7,187)	$	1,378	$	(2,201)	$	3,269
Basic net income (loss) per share	$	(0.17)	$	0.03	$	(0.05)	$	0.09
Diluted net income (loss) per share	$	(0.17)	$	0.03	$	(0.05)	$	0.09
Weighted average shares used to compute basic net income (loss) per share		42,038		40,367		41,589		36,303
Weighted average shares used to compute diluted net income (loss) per share		42,038		42,217		41,589		37,537

See accompanying Notes to Condensed Consolidated Financial Statements.

4

NEOPHOTONICS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS 

(Unaudited)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands)	2016		2015		2016		2015
Net income (loss)	$	(7,187)	$	1,378	$	(2,201)	$	3,269
Other comprehensive income (loss):
Foreign currency translation adjustments, net of zero tax		(22)		(4,687)		292		(4,098)
Unrealized gains (losses) on available-for-sale securities, net of zero tax		—		(1)		33		(5)
Total other comprehensive income (loss)		(22)		(4,688)		325		(4,103)
Comprehensive loss	$	(7,209)	$	(3,310)	$	(1,876)	$	(834)

See accompanying Notes to Condensed Consolidated Financial Statements.

5

NEOPHOTONICS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended
	September 30,
(In thousands)	2016			2015
Cash flows from operating activities
Net income (loss)	$	(2,201)		$	3,269
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		16,921			17,511
Stock-based compensation expense		14,445			5,418
Deferred taxes		(1,162)			719
Investment, debt and other related amortization		125	��		248
Gain on disposal of property and equipment		(18)			(22)
Asset impairment charges		—			368
Adjustment to fair value of penalty payment derivative		—			(141)
Allowance for doubtful accounts		(415)			628
Write-down of inventories		1,995			3,556
Foreign currency remeasurement and other, net		(556)			(1,867)
Change in assets and liabilities, net of effects of acquisitions:
Accounts receivable		(12,169)			8,035
Inventories		4,518			(16,971)
Prepaid expenses and other assets		(3,439)			1,962
Accounts payable		12,610			(1,718)
Accrued and other liabilities		(3,937)			117
Net cash provided by operating activities		26,717			21,112
Cash flows from investing activities
Purchase of property, plant and equipment		(29,962)			(11,051)
Proceeds from sale of property, plant and equipment and other assets		139			200
Purchase of marketable securities		(69,520)			(28,936)
Proceeds from sale of marketable securities		48,979			12,938
Proceeds from maturity of securities		15,373			1,000
Change in restricted cash		(226)			9,784
Net cash used in investing activities		(35,217)			(16,065)
Cash flows from financing activities
Proceeds from (payments for) public stock offering, net of offering costs		(25)			45,646
Proceeds from exercise of stock options and issuance of stock under ESPP		5,083			1,186
Tax withholding on restricted stock units		(570)			(688)
Proceeds from bank loans		71,400			56,512
Repayment of bank and acquisition-related loans		(72,090)			(70,162)
Proceeds from issuance of notes payable		13,144			16,999
Repayment of notes payable		(14,069)			(20,072)
Proceeds from government grants		608			—
Net cash provided by financing activities		3,481			29,421
Effect of exchange rates on cash and cash equivalents		556			(253)
Net increase (decrease) in cash and cash equivalents		(4,463)			34,215
Cash and cash equivalents at the beginning of the period		76,088			43,035
Cash and cash equivalents at the end of the period	$	71,625		$	77,250
Supplemental disclosure of noncash investing and financing activities:
Changes in unpaid property, plant and equipment	$	(12,494)		$	(768)
Modification of bank loan with Comerica	$	—		$	15,786
Issuance of note to seller of acquired business	$	—		$	15,482
Transfer of restricted investments to short-term investments	$	—		$	8,296
Unpaid deferred offering costs	$	76		$	—

See accompanying Notes to Condensed Consolidated Financial Statements.

6

NeoPhotonics Corporation

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 1. Basis of presentation and significant accounting policies

Basis of Presentation and Consolidation

The condensed consolidated financial statements of NeoPhotonics Corporation (“NeoPhotonics” or the “Company”) as of September 30, 2016 and for the three and nine months ended September 30, 2016 and 2015, have been prepared in accordance with the instructions on Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In accordance with those rules and regulations, the Company has omitted certain information and notes normally provided in the Company’s annual consolidated financial statements. In the opinion of management, the condensed consolidated financial statements contain all adjustments, consisting only of normal recurring items, except as otherwise noted, necessary for the fair presentation of the Company’s financial position and results of operations for the interim periods. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. generally accepted accounting principles (“U.S. GAAP”). These condensed consolidated financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015. The results of operations for the three and nine months ended September 30, 2016 are not necessarily indicative of the results expected for the entire fiscal year. All intercompany accounts and transactions have been eliminated.

Certain Significant Risks and Uncertainties

The Company operates in a dynamic industry and, accordingly, can be affected by a variety of factors.  For example, any of the following areas could have a negative effect on the Company in terms of its future financial position, results of operations or cash flows: the general state of the U.S., China and world economies; the highly cyclical nature of the industries the Company serves; the loss of any of a small number of its larger customers; ability to obtain additional financing; inability to meet certain debt covenants; fundamental changes in the technology underlying the Company’s products; the hiring, training and retention of key employees; successful and timely completion of product design efforts; and new product design introductions by competitors.

Reclassification

Reclassification has been made to combine deferred income tax liabilities amount into other noncurrent liabilities in the prior year to conform to the current year’s presentation.

Concentration

In the three months ended September 30, 2016, Huawei Technologies Co. Ltd. and their affiliate HiSilicon Technologies (together with Huawei Technologies Co. Ltd., “Huawei”) and Ciena Corporation (“Ciena”) accounted for approximately 48% and 15% of the Company’s total revenue, respectively, and the Company’s top ten customers represented approximately 91% of the Company’s total revenue.  In the three months ended September 30, 2015, Huawei and Ciena accounted for approximately 41% and 26% of the Company’s total revenue, respectively, and the Company’s top ten customers represented approximately 92% of the Company’s total revenue. In the nine months ended September 30, 2016, Huawei and Ciena each accounted for approximately 49% and 15% of the Company’s total revenue, respectively, and the top ten customers represented approximately 91% of its total revenue.  In the nine months ended September 30, 2015, Huawei and Ciena accounted for approximately 40% and 24% of the Company’s total revenue, respectively, and the Company’s top ten customers represented approximately 91% of its total revenue.

As of September 30, 2016 and December 31, 2015, one customer accounted for approximately 45% and 59%, respectively, of the Company’s total accounts receivable.

7

NeoPhotonics Corporation

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Use of Estimates

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported revenue and expenses during the reporting period. Significant estimates made by management include: the useful lives of property, plant and equipment and intangible assets as well as future cash flows to be generated by those assets; fair values of identifiable assets acquired and liabilities assumed in business combinations; allowances for doubtful accounts; valuation allowances for deferred tax assets; valuation of excess and obsolete inventories; warranty reserves; litigation accrual and recognition of stock-based compensation, among others. Actual results could differ from these estimates.

Summary of Significant Accounting Policies

There have been no significant changes in the Company’s significant accounting policies in the three and nine months ended September 30, 2016, as compared to the significant accounting policies described in its Annual Report on Form 10-K for the year ended December 31, 2015.

Recent accounting pronouncements

In October 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”). Under ASU 2016-16, the transferring (selling) entity is required to recognize a current tax expense or benefit upon transfer of the asset. Similarly, the purchasing (receiving) entity is required to recognize a deferred tax asset or deferred tax liability, as well as the related deferred tax benefit or expense, upon receipt of the asset. The resulting deferred tax asset or deferred tax liability is measured by (1) computing the difference between the tax basis of the asset in the buyer’s jurisdiction and its financial reporting carrying value in the consolidated financial statements and (2) multiplying such difference by the enacted tax rate in the buyer’s jurisdiction. ASU 2016-16 is effective for the Company’s interim and annual periods beginning after December 15, 2017 and should be applied on a modified retrospective basis, recognizing the effects in retained earnings as of the beginning of the year of adoption. Early adoption is permitted for the beginning of a fiscal year. The Company is in the process of evaluating the impact of adoption on its consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments(“ASU 2016-15”). ASU 2016-15 eliminates the diversity in practice related to the classification of certain cash receipts and payments in the statement of cash flows, by adding or clarifying guidance which will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for the Company’s annual and interim reporting periods beginning after December 15, 2017 and must be applied retrospectively to all periods presented or prospectively from the earliest data practicable if retrospective application is impracticable. Early adoption is permitted. The Company is in the process of evaluating the impact of adoption on its consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 amends existing guidance on the impairment of financial assets and adds an impairment model that is based on expected losses rather than incurred losses. Under this guidance, an entity recognizes as an allowance its estimate of expected credit losses for its financial assets. An entity will apply this guidance through a cumulative-effect adjustment to retained earnings upon adoption (a modified-retrospective approach) while a prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. ASU 2016-13 is effective for the Company’s annual and interim reporting periods beginning after December 15, 2019. Early adoption is permitted. The Company is in the process of evaluating the impact of adoption on its consolidated financial statements.

8

NeoPhotonics Corporation

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 is effective for the Company’s annual and interim reporting periods beginning after December 15, 2016. Early adoption is permitted. A retrospective transition method is required for the changes related to the recognition timing of excess tax benefits, minimum statutory withholding requirements, forfeitures and intrinsic value. A retrospective transition method is required for changes related to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirement. A prospective transition method is required for the recognition of excess tax benefits and tax deficiencies in the income statement for estimating expected term. Changes related to the presentation of excess tax benefits on the statement of cash flows can be applied using either a prospective transition method or a retrospective transition method. The Company is in the process of evaluating the impact of adoption on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”).  ASU 2016-02 introduces a lessee model that requires recognition of assets and liabilities arising from qualified leases on the consolidated balance sheets and consolidated statements of operations and to disclose qualitative and quantitative information about lease transactions. This guidance is effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. A modified retrospective transition is required with certain optional practical expedients allowed. The Company is in the process of evaluating the impact of adoption on its consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”).  ASU 2016-01 revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value.  It also amends certain disclosure requirements associated with the fair value of financial instruments.  A modified retrospective transition method is required except for the equity securities without readily determinable fair values which will require a prospective transition method. ASU 2016-01 is effective for the Company’s annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted for certain provisions.  The Company is in the process of evaluating the impact of adoption on its consolidated financial statements.

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory (“ASU 2015-11”). ASU 2015-11 requires entities to measure most inventory “at the lower of cost and net realizable value” but does not apply to inventories that are measured by using either the last-in, first-out method or the retail inventory method. For the Company, this ASU is effective for annual and interim periods beginning after December 15, 2016. Prospective transition method is required and early adoption is permitted. The Company is in the process of evaluating the impact of adoption on its consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). The standard provides companies with a single model for use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific revenue guidance. The core principle of the model is to recognize revenue when control of the goods or services transfers to the customer, as opposed to recognizing revenue when the risks and rewards transfer to the customer under the existing revenue guidance. In August 2015, the FASB issued an accounting standard update for a one-year deferral of the effective date of ASU 2014-09 to annual and interim periods beginning after December 15, 2017 and permits entities to early adopt the standard of ASU 2014-09 for annual and interim reporting periods beginning after December 15, 2016. Companies are permitted to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through a cumulative adjustment.  In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (“ASU 2016-08”), which amends the principal-versus-agent implementation guidance in ASU 2014-09. In April 2016, the FASB

9

NeoPhotonics Corporation

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606: Identifying performance obligations and Licensing amending certain aspects of ASU 2014-09 on (1) identifying performance obligations and (2) licensing. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients amending certain aspects of ASU 2016-09 including collectability, presentation of sales tax and other similar taxes collected from customers, noncash transaction, contract modifications and completed contracts at transition and the disclosure requirements for entities that use the full retrospective transition method.The Company is in the process of evaluating the impact of adoption on its consolidated financial statements.

Note 2. Net income (loss) per share

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015
Numerator:
Net income (loss)	$	(7,187)	$	1,378	$	(2,201)	$	3,269
Denominator:
Weighted average shares used to compute per share amount:
Basic		42,038		40,367		41,589		36,303
Dilutive effect of equity awards		-		1,850		-		1,234
Diluted		42,038		42,217		41,589		37,537
Basic net income (loss) per share	$	(0.17)	$	0.03	$	(0.05)	$	0.09
Diluted net income (loss) per share	$	(0.17)	$	0.03	$	(0.05)	$	0.09

The Company has excluded the impact of the following employee stock options, restricted stock units and shares expected to be issued under its employee stock purchase plan from the computation of diluted net income (loss) per share, as their effect would have been antidilutive (in thousands):

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2016	2015	2016	2015
Employee stock options	4,344	1,256	4,344	1,670
Restricted stock units	2,044	26	2,044	26
Employee stock purchase plan	151	—	151	—
	6,539	1,282	6,539	1,696

10

NeoPhotonics Corporation

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 3. Cash, cash equivalents, short-term investments, and restricted cash

The following table summarizes the Company’s cash, cash equivalents, short-term investments, and restricted cash at September 30, 2016 and December 31, 2015 (in thousands):

	September 30,		December 31,
	2016		2015
Cash and cash equivalents:
Cash	$	47,666	$	29,133
Cash equivalents		23,959		46,955
Cash and cash equivalents	$	71,625	$	76,088
Short-term investments	$	28,470	$	23,294
Restricted cash	$	2,813	$	2,660

The following table summarizes the Company’s unrealized gains and losses related to its cash equivalents and short-term investments in marketable securities designated as available-for-sale (in thousands):

	As of September 30, 2016								As of December 31, 2015
		Amortized Cost	Gross Unrealized Gains		Gross Unrealized Loss		Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Loss		Fair Value
Marketable securities:
Money market accounts	$	23,959	$	—	$	—	$	23,959	$	46,955	$	—	$	—	$	46,955
Money market funds		4,703		—		—		4,703		11,318		—		—		11,318
Corporate bonds		7,810		4		(3)		7,811		5,694		—		(18)		5,676
Government-sponsored enterprise obligations		4,292		1		(1)		4,292		3,290		—		(6)		3,284
Commercial paper		6,285		—		—		6,285		1,398		—		—		1,398
U.S. government securities		4,755		2		—		4,757		1,000		—		(3)		997
Sovereign government bonds		621		1		—		622		623		—		(2)		621
Total	$	52,425	$	8	$	(4)	$	52,429	$	70,278	$	—	$	(29)	$	70,249
Reported as:
Cash equivalents	$	23,959	$	—	$	—	$	23,959	$	46,955	$	—	$	—	$	46,955
Short-term investments		28,466		8		(4)		28,470		23,323		—		(29)		23,294
Total	$	52,425	$	8	$	(4)	$	52,429	$	70,278	$	—	$	(29)	$	70,249

As of September 30, 2016 and December 31, 2015, maturities of marketable securities were as follows (in thousands):

	September 30,		December 31,
	2016		2015
Less than 1 year	$	46,645	$	66,974
Due in 1 to 2 years		5,784		3,275
Due after 5 years		—		—
Total	$	52,429	$	70,249

11

NeoPhotonics Corporation

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Realized gains and losses on the sale of marketable securities during the three and nine months ended September 30, 2016 and 2015 were immaterial. The Company did not recognize any impairment losses on its marketable securities during the three and nine months ended September 30, 2016 or 2015. As of September 30, 2016 and December 31, 2015, the Company did not have any investments in marketable securities that were in an unrealized loss position for a period in excess of 12 months.

Note 4.  Fair value disclosures

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table presents the Company's assets that are measured at fair value on a recurring basis (in thousands):

	As of September 30, 2016								As of December 31, 2015
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Cash equivalents and short-term investments:
Money market funds	$	4,703	$	—	$	—	$	4,703	$	11,318	$	—	$	—	$	11,318
U.S. government securities		4,757		—		—		4,757		997		—		—		997
Money market accounts		—		23,959		—		23,959		—		46,955		—		46,955
Corporate bonds		—		7,811		—		7,811		—		5,676		—		5,676
Government-sponsored enterprise obligations		—		4,292		—		4,292		—		3,284		—		3,284
Commercial papers		—		6,285		—		6,285		—		1,398		—		1,398
Sovereign government bonds		—		622		—		622		—		621		—		621
Variable rate demand notes		—		—		—		—		—		—		—		—
Total	$	9,460	$	42,969	$	—	$	52,429	$	12,315	$	57,934	$	—	$	70,249
Foreign currency forward contracts	$	—	$	*	$	—	$	*	$	—	$	—	$	—	$	—
Mutual funds held in Rabbi Trust, recorded in other long-term assets	$	599	$	—	$	—	$	599	$	435	$	—	$	—	$	435

*Fair values of the foreign currency forward contracts were immaterial as of September 30, 2016.

The Company offers a Non-Qualified Deferred Compensation Plan (“NQDC Plan”) to a select group of its highly compensated employees.  The NQDC Plan provides participants the opportunity to defer payment of certain compensation as defined in the NQDC Plan.  A Rabbi Trust has been established to fund the NQDC Plan obligation, which was fully funded at September 30, 2016.  The assets held by the Rabbi Trust are substantially in the form of exchange traded mutual funds and are included in the Company’s other long-term assets on its condensed consolidated balance sheets as of September 30, 2016 and December 31, 2015.

Effective July 1, 2016, the Company has established a hedging program using forward exchange contracts as economic hedges, to protect against volatility of foreign exchange rate exposure when it is deemed economical to do so, based on a cost-benefit analysis that considers the magnitude of the exposure, the volatility of the exchange rate and the cost of the hedging instrument. The forward contracts are not designated for hedge accounting.

Under the hedging program, the Company enters into monthly forward exchange contracts, that have average maturities of one month, to offset the effects of exchange rate exposures for its net intercompany activities denominated in Japanese Yen, or JPY, and Chinese Renminbi, or RMB, by buying and selling foreign currencies in the future at fixed

12

NeoPhotonics Corporation

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

exchange rates, to offset the consequences of changes in foreign exchange on the balance sheet. If the U.S. dollar strengthens relative to the currency of the hedged assets, the increase in the fair value of the forward contracts offsets the decrease in the expected future U.S. dollar cash flows of the hedged foreign currency sales. Conversely, if the U.S. dollar weakens, the decrease in the fair value of the forward contracts offsets the increase in the value of the anticipated foreign currency cash flows. Accordingly, fair value changes in the forward contracts help mitigate the changes in the value of the re-measured assets and liabilities attributable to changes in foreign currency exchange rates, except to the extent of the spot-forward differences. The net effect of fair value changes is reported inother (income) expense, net. As of September 30, 2016, the fair values of the Company’s foreign currency forward contracts were immaterial due to the short-term nature of the contracts, which generally expire at each quarter-end. The total notional value of our foreign currency exchange contracts as of September 30, 2016 were approximately $39.2 million and $2.4 million for RMB and JPY, respectively.

The following table presents the Company's liabilities that are measured at fair value on a recurring basis (in thousands):

	As of September 30, 2016								As of December 31, 2015
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Penalty payment derivative (Note 10)	$	—	$	—	$	389	$	389	$	—	$	—	$	389	$	389

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

There were no assets or liabilities measured at fair value on a nonrecurring basis as of September 30, 2016. In the year ended December 31, 2015, the Company wrote off $0.2 million of property, plant and equipment and $0.2 million of held-for-sale assets. These assets were measured at fair value due to events or circumstances the Company identified as having significant impact on their fair value during the period. To arrive at the valuation of these assets, the Company considered the discounted cash flows to determine fair value using best estimates and unobservable inputs (Level 3).

Assets and Liabilities Not Measured at Fair Value

The carrying values of accounts receivable, accounts payable, notes payable and short-term borrowings approximate their fair values due to the short-term nature and liquidity of these financial instruments.

The fair values of the Company’s long-term debt have been calculated using an estimate of the interest rate the Company would have had to pay on the issuance of liabilities with a similar maturity and discounting the cash flows at that rate which it considers to be a level 2 fair value measurement. The fair values, which approximate the carrying value of the long-term debt, do not necessarily give an indication of the amount that the Company would currently have to pay to extinguish any of this debt.

Note 5. Business combination

EMCORE Corporation

On January 2, 2015, the Company closed an acquisition of the tunable laser product lines of EMCORE Corporation (“EMCORE”) for an original purchase price of $17.5 million, pursuant to the terms of the Asset Purchase Agreement between the parties dated October 22, 2014, under which the Company purchased certain assets and assumed certain liabilities of EMCORE’s tunable laser product lines. Consideration for the transaction consisted of $1.5 million in cash and a promissory note (the “EMCORE Note”) of approximately $16.0 million, which was subject to certain adjustments for inventory, net accounts receivable and pre-closing revenues, and was subsequently adjusted to $15.5 million in connection with a True-Up Confirmation Agreement (the “True-Up Agreement”) executed by and between the Company and EMCORE on April 16, 2015.The True-Up Agreement made several final adjustments to the Asset Purchase

13

NeoPhotonics Corporation

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Agreement, including, among other things, (i) adjusting the principal amount of the EMCORE Note from approximately $16.0 million to approximately $15.5 million, (ii) agreeing upon final amounts for inventory value adjustment, net accounts receivable adjustment, and revenue purchase price adjustment, and (iii) resolving the treatment of certain accounts receivable for products sold by EMCORE prior to the closing of the transaction. The adjusted purchase price for the acquisition was approximately $17.0 million.

The Company accounted for this acquisition as a business combination. With this acquisition, the Company strengthens its narrow line width tunable laser product portfolio.

In connection with the acquisition, the Company incurred approximately $0.9 million in total acquisition-related costs related to legal, accounting and other professional services. The acquisition costs were expensed as incurred and included in operating expenses in the Company’s condensed consolidated statement of operations.

The Company’s preliminary allocation of the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed was based on estimated fair values as of the close of the acquisition. The fair values assigned to intangible assets acquired are based on valuations using estimates and assumptions provided by management, with the assistance of an independent third party appraisal firm. The excess purchase price over those fair values is recorded as goodwill. These estimates were determined through established and generally accepted valuation techniques. While the Company used best estimates and assumptions as part of the purchase price allocation process to value assets acquired and liabilities assumed at the acquisition date, estimates and assumptions were subject to refinement, including the acquired property, plant and equipment, prepaid and other current assets and accounts payable, as the Company was in the process of obtaining further information. As a result, during the preliminary measurement period, which was completed in 2015, the Company recorded adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Subsequent to the initial allocation of the assets acquired and liabilities assumed, the Company adjusted the acquired net accounts receivable, the acquired net inventories, the assumed sales tax accrual and the acquired prepaid expenses and other current assets by immaterial amounts, and decreased goodwill by a corresponding net amount.

As of September 30, 2016 and December 31, 2015, goodwill was $1.1 million, which represented the excess of the purchase price over the aggregate net estimated fair values of the assets acquired and liabilities assumed in the acquisition.

The following table summarizes the allocation of the assets acquired and liabilities assumed from EMCORE as of the acquisition date and subsequent adjustments (in thousands): 

Total purchase consideration:
Cash paid	$	1,500
Notes payable		15,482
Total	$	16,982
Fair value of assets acquired:
Accounts receivable	$	9,274
Inventories		1,693
Prepaid expenses and other current assets		670
Property, plant and equipment		6,917
Intangible assets acquired:
Developed technology		4,100
Customer relationships		700
Total	$	23,354
Less: fair value of liabilities assumed:
Accounts payable	$	(7,427)
Accrued liabilities		(60)
Total	$	(7,487)
Goodwill	$	1,115

14

NeoPhotonics Corporation

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Purchased intangibles with finite lives will be amortized on a straight-line basis over their respective estimated useful lives. The following table presents details of the purchase price allocated to the acquired intangible assets at the acquisition date:

	Useful		Purchased
	Life		intangible assets
	(In years)		(In thousands)
Developed technology	7	$	4,100
Customer relationships	2		700
Total purchased intangible assets		$	4,800

The following unaudited supplemental pro forma information presents the combined results of operations of NeoPhotonics Corporation for the three and nine months ended September 30, 2016 and 2015 as though the companies had been combined as of the beginning of 2014. In the three months ended September 30, 2016 and 2015, revenue related to products acquired from EMCORE was $20.2 million and $13.2 million, respectively.  In the nine months ended September 30, 2016 and 2015, revenue related to products acquired from EMCORE was $58.3 million and $39.5 million, respectively. The following table reflects the actual results for the 2016 periods and the pro forma financial information for the 2015 periods and includes adjustments related to zero transaction costs in the three months ended September 30, 2016 and 2015 and zero and $0.3 million transactions costs, respectively, in the nine months ended September 30, 2016 and 2015, as well as immaterial employee expense during the 2015 periods. There were no sales between the business acquired from EMCORE and the Company in the three and nine months ended September 30, 2016 and 2015.

The unaudited pro forma results do not assume any operating efficiencies as a result of the consolidation of operations (in thousands, except per share data):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015
Revenue	$	103,312	$	83,560	$	301,586	$	250,316
Net income (loss)	$	(7,187)	$	1,404	$	(2,201)	$	3,689
Basic net income (loss) per share	$	(0.17)	$	0.03	$	(0.05)	$	0.10
Diluted net income (loss) per share	$	(0.17)	$	0.03	$	(0.05)	$	0.10

EigenLight Corporation

In November 2015, the Company closed an acquisition of the business and products of EigenLight Corporation for cash consideration of $0.4 million in an asset transaction. The Company accounted for this as a business combination and the majority of the purchase price was allocated to inventory and property, plant and equipment.

15

NeoPhotonics Corporation

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 6. Balance sheet components

Accounts receivable, net

Accounts receivable, net consists of the following (in thousands):

	September 30, 2016		December 31, 2015
Accounts receivable	$	93,967	$	82,235
Trade notes receivable		2,102		1,769
Allowance for doubtful accounts		(392)		(843)
	$	95,677	$	83,161

Inventories, net

Inventories, net consist of the following (in thousands):

	September 30, 2016		December 31, 2015
Raw materials	$	22,189	$	23,793
Work in process		17,918		12,165
Finished goods(1)		20,112		29,644
	$	60,219	$	65,602

⁽¹⁾ Finished goods inventory at customer vendor managed inventory locations was $7.7 million and $14.2 million as of September 30, 2016 and December 31, 2015, respectively.

Purchased intangible assets

Purchased intangible assets consist of the following (in thousands):

	September 30, 2016						December 31, 2015
	Gross		Accumulated		Net		Gross		Accumulated		Net
	Assets		Amortization		Assets		Assets		Amortization		Assets
Technology and patents	$	37,387	$	(33,463)	$	3,924	$	37,430	$	(31,061)	$	6,369
Customer relationships		15,391		(14,054)		1,337		15,101		(12,623)		2,478
Leasehold interest		1,277		(321)		956		1,312		(307)		1,005
	$	54,055	$	(47,838)	$	6,217	$	53,843	$	(43,991)	$	9,852

16

NeoPhotonics Corporation

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Amortization expense relating to technology and patents and the leasehold interest intangible assets is included within cost of goods sold and customer relationships within operating expenses. The following table presents details of the amortization expense of the Company’s purchased intangible assets as reported in the condensed consolidated statements of operations (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015
Cost of goods sold	$	853	$	836	$	2,542	$	2,512
Operating expenses		462		447		1,375		1,344
Total	$	1,315	$	1,283	$	3,917	$	3,856

The estimated future amortization expense of purchased intangible assets as of September 30, 2016, is as follows (in thousands):

2016 (remaining three months)	$	566
2017		1,432
2018		1,226
2019		811
2020		688
Thereafter		1,494
	$	6,217

Accrued and other current liabilities

Accrued and other current liabilities consist of the following (in thousands):

	September 30, 2016		December 31, 2015
Employee-related	$	18,290	$	17,420
Income and other taxes payable		4,188		3,720
Accrued warranty		685		1,175
Penalty payment derivative		389		389
Other accrued expenses		4,632		5,246
	$	28,184	$	27,950

Warranty Accrual

The table below summarizes the movement in the warranty accrual, which is included in accrued and other current liabilities (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015
Beginning balance	$	669	$	1,254	$	1,175	$	1,751
Warranty accruals		126		90		25		(85)
Settlements		(110)		(184)		(515)		(506)
Ending balance	$	685	$	1,160	$	685	$	1,160

17

NeoPhotonics Corporation

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Other noncurrent liabilities

Other noncurrent liabilities consist of the following (in thousands):

	September 30, 2016		December 31, 2015
Pension and other employee-related	$	6,071	$	5,036
Deferred income tax liabilities		40		88
Other		2,933		2,352
	$	9,044	$	7,476

Note 7. Restructuring

In 2014, the Company initiated a restructuring plan (the “2014 Restructuring Plan”) to refocus on its strategy execution, optimize its structure, and improve operational efficiencies. The 2014 Restructuring Plan consisted of workforce reductions primarily in the U.S. and in China. The remaining restructuring liability was paid through October 2015. There were no  restructuring charges recorded in the three and nine months ended September 30, 2016. There were no restructuring liabilities as of September 30, 2016 or December 31, 2015.

Note 8. Debt

The table below summarizes the carrying amount and weighted average interest rate of the Company’s debt (in thousands, except percentages): 

	September 30, 2016				December 31, 2015
	Carrying		Interest		Carrying		Interest
	Amount		Rate		Amount		Rate
Notes payable	$	7,708	—		$	8,857	—
Bank borrowings-Comerica Bank		23,800	3.28	%		23,800	2.99	%
Total notes payable and short-term borrowing	$	31,508			$	32,657
Long-term debt, current and non-current:
Bank borrowings-Mitsubishi Bank	$	13,258	1.43	%	$	11,769	1.53	%
Total long-term debt, current and non-current	$	13,258			$	11,769
Unaccreted discount within current portion of long-term debt		(80)				(71)
Unaccreted discount within long-term debt, net of current portion		(154)				(179)
Total long-term debt, net of unaccreted discount	$	13,024			$	11,519
Reported as:
Current portion of long-term debt	$	908			$	760
Long-term debt, net of current portion		12,116				10,759
Total long-term debt, net of unaccreted discount	$	13,024			$	11,519

Notes payable

The Company regularly issues notes payable to its suppliers in China. These notes are supported by non-interest bearing bank acceptance drafts issued under the Company’s existing line of credit facilities and are due three to six months after issuance. As a condition of the notes payable arrangements, the Company is required to keep a

18

NeoPhotonics Corporation

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

compensating balance at the issuing banks that is a percentage of the total notes payable balance until the amounts are settled.

In July 2016, the Company’s China subsidiary renewed its short-term line of credit facility with a banking institution that expired in June 2016. Under the agreement, the Company could borrow up to RMB 120.0 million ($18.0 million) for short-term loans, which bear interest at varying rates, or up to approximately RMB 171.4 million ($25.8 million) for bank acceptance drafts (with a 30% compensating balance requirement). This short-term line of credit facility was renewed in August 2016 and will expire in July 2019. In September 2015, the Company’s China subsidiary renewed its second short-term line of credit facility with a banking institution, under which the Company can borrow up to RMB 133.0 million ($19.9 million) for short-term loan, which bore interest at varying rates, or up to approximately RMB 190.0 million ($28.5 million) for bank acceptance drafts (with a 30% compensating balance requirement). This line of credit facility expired on September 30, 2016 and was renewed in October 2016. Under the renewed credit line, which will expire in September 2017, the Company can borrow up to RMB 266.0 million (approximately $39.9 million) for short-term loans at varying interest rates or up to approximately RMB 380.0 million (approximately $57.0 million) for bank acceptance drafts (with a 30% compensating balance requirement).  

In August 2016, the Company’s China subsidiary entered into a third line of credit facility with a banking institution that expires in July 2019. Under this line of credit, the Company can borrow up to RMB 30.0 million ($4.5 million) for short-term loans, which bear interest at varying rates, or up to approximately RMB 42.9 million ($6.4 million) for bank acceptance drafts (with a 30% compensating balance requirement).

Under these line of credit facilities, the non-interest bearing bank acceptance drafts issued in connection with the Company’s notes payable to its suppliers in China, had an outstanding balance of $7.7 million and $8.9 million as of September 30, 2016 and December 31, 2015, respectively. In addition to the outstanding notes payable, two letters of credit totaling $1.3 million to its suppliers were issued in August 2016 and September 2016 for future equipment purchases that are expected to be delivered by December 2016. These letters of credit require a 30% compensating balance requirement.

As of September 30, 2016 and December 31, 2015, compensating balances relating to these bank acceptance drafts and letters of credit issued to suppliers and the Company’s subsidiaries totaled $2.8 million and $2.7 million, respectively. Compensating balances are classified as restricted cash on the Company’s condensed consolidated balance sheets.

Short-term borrowing

In April 2015, the Company repaid the interest and principal of its $5.0 million short-term advance financing agreement, dated October 2014, under one of its China subsidiary’s line of credit facilities. This financing agreement bore interest at 4.02% per annum.

In May 2015, the Company repaid the interest and principal of its second $5.0 million short-term advance financing agreement, dated November 2014, under one of its China subsidiary’s line of credit facilities. This financing agreement bore interest at 2.33% per annum and service fees at 1.00% per annum.

In September 2015, the Company repaid the interest and principal of its $5.0 million advance financing agreement, dated April 2015, under one of its China subsidiary’s line of credit facilities. This financing agreement bore interest at a six-month LIBOR plus 330 basis points, or approximately 3.71% per annum.

19

NeoPhotonics Corporation

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Acquisition-related

In connection with the purchase consideration to acquire the tunable laser products of EMCORE in January 2015 (See Note 5), the Company issued the EMCORE Note, as amended, of $15.5 million, which had a maturity of two years from the closing of the transaction and an interest rate of 5% per annum for the first year and 13% per annum for the second year. The interest was payable semi-annually in cash. The EMCORE Note was subordinated to the Company’s existing bank debt in the U.S. and was repaid in fullin April 2015.

Bank borrowings

The Company has a credit agreement with Comerica Bank as lead bank in the U.S. (the “Comerica Bank Credit Facility”). The Comerica Bank Credit Facility requires the maintenance of a modified EBITDA and certain liquidity covenants. The credit agreement also restricts the Company’s ability to incur certain additional debt or to engage in specified transactions, restricts the payment of dividends and is secured by substantially all of the Company’s U.S. assets, other than intellectual property assets.

The Company amended the Comerica Bank Credit Facility in January 2015 to modify the EBITDA and liquidity covenants and eliminate the need to maintain compensating balances (restricted cash). In March 2015, the Company further amended the Comerica Bank Credit Facility to increase borrowing capacity to $30.0 million. 

In September 2016, the Company amended the Comerica Bank Credit Facility to increase the limitation on the Company’s capital expenditures to $62.0 million for fiscal year 2016 and to provide for an extension of the maturity date to January 31, 2017. As of each of September 30, 2016 and December 31, 2015, the Company was in compliance with the covenants of the credit facility.

Borrowings under the Comerica Bank Credit Facility bear interest at an interest rate option of a base rate as defined in the agreement plus 1.75% or LIBOR plus 2.75%. Base rate is based on the greater of (a) the effective prime rate, (b) the Federal Funds effective rate plus one percent, and (c) the daily adjusting LIBOR rate plus one percent. Amounts borrowed, if any, are due on or before January 31, 2017. As of September 30, 2016, the rate on the LIBOR option was 3.28%. As of each of September 30, 2016 and December 31, 2015, there was $23.8million outstanding.  On February 25, 2015, the Company entered into certain loan agreements and related special agreements with the Bank of Tokyo-Mitsubishi UFJ, Ltd. (the “Mitsubishi Bank”) that provided for (i) a term loan in the aggregate principal amount of 500 million JPY ($4.2 million) (the “Term Loan A”) and (ii) a term loan in the aggregate principal amount of one billion JPY ($8.4 million) (the “Term Loan B” and together with the Term Loan A, the “Mitsubishi Bank Loans”). The Mitsubishi Bank Loans are secured by a mortgage on certain real property and buildings owned by our Japanese subsidiary. The full amount of each of the Mitsubishi Bank Loans was drawn on the closing date of February 25, 2015. Interest on the Mitsubishi Bank Loans accrues and is paid monthly based upon the annual rate of the monthly Tokyo Interbank Offer Rate (TIBOR) plus 1.40%. The Term Loan A requires interest only payments until the maturity date of February 23, 2018, with a lump sum payment of the aggregate principal amount on the maturity date. The Term Loan B requires equal monthly payments of principal equal to 8,333,000 JPY until the maturity date of February 25, 2025, with a lump sum payment of the balance of 8,373,000 JPY on the maturity date. Interest on the Term Loan B is accrued based upon monthly TIBOR plus 1.40% and is secured by real estate collateral. In conjunction with the execution of the Bank Loans, the Company paid a loan structuring fee, including consumption tax, of 40,500,000 JPY ($0.3 million).

The Mitsubishi Bank Loans contain customary representations and warranties and customary affirmative and negative covenants applicable to the Company’s Japanese subsidiary, including, among other things, restrictions on cessation in business, management, mergers or acquisitions. The Mitsubishi Bank Loans contain financial covenants relating to minimum net assets, maximum ordinary loss and a dividends covenant. The Mitsubishi Bank Loans also include customary events of default, including but not limited to the nonpayment of principal or interest, violations of

20

NeoPhotonics Corporation

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

covenants, restraint on business, dissolution, bankruptcy, attachment and misrepresentations. In February 2015, the Company used a portion of the proceeds of the Mitsubishi Bank Loans to repay the then-outstanding loan related to the acquisition of NeoPhotonics Semiconductor, which had an outstanding principal and interest amount of approximately 710 million JPY ($6.0 million) and the remaining proceeds will be used for general working capital. Outstanding principal balance under the Mitsubishi Bank Loans was approximately 1.3 billion JPY (approximately $13.3 million), net of unamortized debt issuance costs of 23.7 million JPY (approximately $0.2 million), as of September 30, 2016 and 1.4 billion JPY (approximately $11.5 million), net of unamortized debt issuance costs of 30.1 million JPY (approximately $0.3 million) as of December 31, 2015. The Company was in compliance with the related covenants.

At September 30, 2016, maturities of long-term debt were as follows (in thousands):

2016 (remaining three months)	$	247
2017		988
2018		5,929
2019		988
2020		988
Thereafter		4,118
	$	13,258

Note 9. Japan pension plans

In connection with its acquisition of NeoPhotonics Semiconductor on March 29, 2013 from LAPIS Semiconductor Co., Ltd. (“LAPIS”), the Company assumed responsibility for two defined benefit plans that provide retirement benefits to its NeoPhotonics Semiconductor employees in Japan: the Retirement Allowance Plan (“RAP”) and the Defined Benefit Corporate Pension Plan (“DBCPP”). The RAP is an unfunded plan administered by the Company.  Effective February 28, 2014, the DBCPP was converted to a defined contribution plan (“DCP”).  In May 2014, in accordance with the acquisition agreements, the seller transferred approximately $2.0 million into the newly formed DCP which is the allowable amount that can be transferred according to the Japanese regulations. LAPIS also paid the Company approximately $0.3 million in connection with the conversion of the plan. Additionally, the Company transferred the net unfunded projected benefit obligation amount from the DBCPP to the RAP and froze the RAP benefit at the February 28, 2014 amount.

The pension liability at September 30, 2016 and December 31, 2015 was $5.7 million and $5.1 million, respectively, of which $0.3 million and $0.1 million, respectively, was recorded in accrued and other current liabilities and the remainder in other noncurrent liabilities on the Company’s condensed consolidated balance sheet.

As the Company transitioned the DBCPP to the DCP effective February 2014, no further contributions to the DBCPP are required.

Net periodic pension cost associated with these plans was immaterial in the three and nine months ended September 30, 2016 and 2015.

21

NeoPhotonics Corporation

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 10. Commitments and contingencies

Litigation

From time to time, the Company is subject to various claims and legal proceedings, either asserted or unasserted, that arise in the ordinary course of business. The Company accrues for legal contingencies if the Company can estimate the potential liability and if the Company believes it is probable that the case will be ruled against it. If a legal claim for which the Company did not accrue is resolved against it, the Company would record the expense in the period in which the ruling was made. The Company believes that the likelihood of an ultimate amount of liability, if any, for any pending claims of any type (alone or combined) that will materially affect the Company’s financial position, results of operations or cash flows is remote. The ultimate outcome of any litigation is uncertain, however, and unfavorable outcomes could have a material negative impact on the Company’s financial condition and operating results. Regardless of outcome, litigation can have an adverse impact on the Company because of defense costs, negative publicity, diversion of management resources and other factors.

On January 5, 2010, Finisar Corporation, or Finisar, filed a complaint in the U.S. District Court for the Northern District of California, or the Court, against Source Photonics, Inc., MRV Communications, Inc., Oplink Communications, Inc. and the Company, or collectively, the co-defendants. In the complaint Finisar alleged infringement of certain of its U.S. patents. In 2010 the Company filed an answer to the complaint and counterclaims, asserting two claims of patent infringement and additional claims. The Court dismissed without prejudice all co-defendants (including the Company) except Source Photonics, Inc., on grounds that such claims should have been asserted in four separate lawsuits, one against each defendant. This dismissal does not prevent Finisar from bringing a new similar lawsuit against the Company. In 2011 the Company and Finisar agreed to suspend their respective claims and in 2012 the Company and Finisar further agreed to toll their respective claims. While there has been no action on this matter since 2012, the Company is currently unable to predict the outcome of this dispute and therefore cannot determine the likelihood of loss nor estimate a range of possible loss.

On January 2, 2013, the Company was served with a lawsuit, filed in Belgium by a distributor called Laser 2000 Beneluo SA (“Laser 2000”) claiming unpaid commissions. The distributor agreement was formally terminated as of January 3, 2012. The Company paid $492,000 to Laser 2000 as partial settlement of claims and to avoid penalties from the Belgian Court and submitted a legal brief to court on September 16, 2013. Laser 2000 filed a response on December 16, 2013 and the Company filed the final rebuttal brief on January 30, 2014. On March 23, 2015, the Belgian Court issued a ruling awarding Laser 2000 approximately one million euros in damages (approximately $1,100,000 at current exchange rates). The Company was served with the judgment on September 28, 2015. The Company is appealing this verdict, but is unable to predict the duration or outcome of the appeal or the overall lawsuit at this time. The Company does not believe it will ultimately be liable for the full amount of damage; however, in light of developments in the case, the Company increased its accrual for estimated probable net litigation expense relating to this matter in March 2015. There has been no change in such accrual subsequent to March 2015.

Indemnifications

In the normal course of business, the Company enters into agreements that contain a variety of representations and warranties and provide for general indemnification. The Company’s exposure under these agreements is unknown because it involves claims that may be made against the Company in the future, but have not yet been made. To date, the Company has not paid any claims or been required to defend any action related to its indemnification obligations. However, the Company may record charges in the future as a result of these indemnification obligations. As of September 30, 2016, the Company did not have any material indemnification claims that were probable or reasonably possible.

22

NeoPhotonics Corporation

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Leases

The Company leases various facilities under non-cancelable operating leases expiring through 2027. As of September 30, 2016, future minimum payments under these operating leases totaled approximately $27.8 million and future minimum sublease receipts was approximately $1.1 million. Rent expense was $0.6 million and $1.7 million in the three and nine months ended September 30, 2016, respectively, and $0.5 million and $1.7 million in the three and nine months ended September 30, 2015, respectively.

In the nine months ended September 30, 2016, the Company renewed one of its leases for its facility in Fremont, California. In September 2016, the Company entered into an office lease for approximately 64,000 square feet of office and laboratory space located adjacent to the Company’s current headquarters in San Jose (the “Lease”).

The term of the Lease is scheduled to commence on January 1, 2017. Upon commencement, the Lease has an initial term of one hundred and twenty-nine (129) months, ending on September 30, 2027 (the “Initial Term”), with a monthly rental rate of $144,000, escalating annually to a maximum monthly rental rate of approximately $194,000 in the last year of the Initial Term. The Landlord has agreed to provide the office and laboratory space to the Company free of charge for the first nine months of the Initial Term through September 30, 2017. Upon termination of the Lease, the Company anticipates a restoration cost of approximately $2.8 million.

Penalty Payment Derivative

In connection with a private placement transaction with Joint Stock Company “Rusnano” (formerly Open Joint Stock Company “RUSNANO” ), or Rusnano, or in 2012, the Company agreed to certain performance obligations including establishing a wholly-owned subsidiary in Russia and making a $30.0 million investment commitment (the ‘Investment Commitment’) towards the Company’s Russian operations, which could be partially satisfied by cash and/or non-cash investment inside or outside of Russia and/or by way of non-cash asset transfers.

In March 2015, the Company extended the Investment Commitment deadline to June 30, 2015 and then further amended the Investment Commitment in July 2015. The latter amendment, or the Rights Agreement, became effective on June 30, 2015 and provides that the maximum amount of penalties, or the Penalty Payment, to be paid by the Company will not exceed $5.0 million in the aggregate. In addition, the amendment also provides for an updated investment plan for the Company’s Russian subsidiaries that includes non-cash transfer of licensing rights to intellectual property, non-cash transfers of existing equipment and commitments to complete the remaining investment milestones through fiscal year 2019. The Company fulfilled its investment commitment required by 2015 and had contributed over $15.4 million in cash and assets to its subsidiaries in Russia as of December 31, 2015.  Although the Company met its investment commitment for 2015, certain required equipment was delivered but not fully installed and operational as of the required date to fulfill certain manufacturing milestones under the Rights Agreement. The Company has remediated these issues and, in August 2016, entered into the second amendment to the Rights Agreement with Rusnano (the “Amended Rights Agreement”) to address this matter. The amendment extended the foregoing manufacturing deadlines to June 30, 2016 and confirmed that the Company had completed these milestones as of June 30, 2016. Therefore, the Company will not be held liable for the $5.0 million Penalty Payment as of each of December 31, 2015 and September 30, 2016.

In the event the Company’s cumulative investment and spending contributed to its subsidiaries in Russia is less than $18.8 million by December 31, 2016, the Company will be subject to a $1.5 million penalty within 30 days after the end of a 90-day cure period. If certain of the Investment Commitments are not achieved in the indicated time frames in 2016 and 2019, the Company also has the ability to cease the operations of its Russian subsidiaries by paying exit fees of $3.5 million or $2.0 million at the end of 2016 or 2019, respectively.  

In August 2016, the Company entered into a letter of agreement with Rusnano to agree to transfer a product line and incur expected costs of approximately $0.1 million by July 30, 2017.

Rusnano has non-transferable veto rights over the Company’s Russian subsidiaries’ annual budget during the investment period and must approve non-cash asset transfers to be made in satisfaction of the Investment Commitment. 

23

NeoPhotonics Corporation

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Spending and/or commitments to spend for general working capital and research and development do not require approval by Rusnano. There are no legal restrictions on the specific usage of the $39.8 million received in the private placement transaction or on withdrawal from the Company’s bank accounts for use in general corporate purposes.

The Company accounted for the Penalty Payment as an embedded derivative instrument, with the underlying being the performance or nonperformance of meeting the Investment Commitment and initially classified $4.9 million of the $5.0 million as additional paid-in capital and the remaining $0.1 million, representing the estimated fair value of the Penalty Payment derivative, in other noncurrent liabilities.

The fair value of the Penalty Payment derivative has been estimated at the date of the original common stock sale (April 27, 2012) and at each subsequent balance sheet date using a probability-weighted discounted future cash flow approach using unobservable inputs, which are classified as Level 3 within the fair value hierarchy. The primary inputs for this approach include the probability of achieving the Investment Commitment and a discount rate that approximates the Company’s incremental borrowing rate. After the initial measurement, changes in the fair value of this derivative were recorded in other expense, net. The estimated fair value of this derivative, after taking into consideration the non-compliance regarding the manufacturing milestone and the Amended Rights Agreement, was $0.4 million as of each of September 30, 2016 and December 31, 2015, and reported within accrued and other current liabilities on the Company’s condensed consolidated balance sheets (see Note 4).

Separately, in December 2014, the Company entered into a Commitment to File a Registration Statement and Related Waiver of Registration Rights, whereby Rusnano waived certain registration rights in connection with a potential offering by the Company of shares of the Company’s common stock, and the Company committed to file with the U.S. Securities and Exchange Commission a resale registration statement on Form S-1 covering the resale of all shares of the Company’s common stock held by Rusnano, or the 2015 Registration Statement. The Company filed the 2015 Registration Statement in April 2015 (See Note 11).  Rusnano also waived its demand registration rights under the original rights agreement and agreed to enter into a lock up agreement with the Company whereby it would agree not to sell any shares of the Company’s common stock, or engage in certain other transactions relating to the Company’s securities, for a period of 60 days from the filing date of the 2015 Registration Statement. Rusnano signed such lock up agreement with the Company on April 2, 2015. In addition, in connection with the Company’s public stock offering completed in the second quarter of 2015, or the 2015 Follow-On Offering, Rusnano entered into a separate lock up agreement with Needham & Company, LLC, the lead underwriter of the 2015 Follow-On Offering, whereby it agreed not to sell any shares of the Company’s common stock, or engage in certain other transactions relating to the Company’s securities, for a period of 180 days from May 21, 2015. Such lock up agreement expired in November 2015.

Note 11. Stockholders’ equity

Common Stock

As of September 30, 2016, the Company had reserved 7,220,893 common stock shares for issuance under its stock option plans and 776,613 common stock shares for issuance under its employee stock purchase plan.

Resale Registration Statement

In April 2015, the Company filed the 2015 Registration Statement, which registered 4,972,905 shares of the Company’s common stock, at a par value of $0.0025 per share, held by Rusnano. The Company does not receive any proceeds from any sales of the Company’s common stock held by Rusnano (See Note 10).

24

NeoPhotonics Corporation

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Follow-On Public Offering

In the second quarter of 2015, the Company completed the 2015 Follow-On Offering, in which the Company sold 6,866,689 shares of its common stock, including 895,655 shares of common stock sold upon the exercise in full of the overallotment option by the underwriters, at a public offering price of $7.25 per share. The Company raised approximately $45.6 million, net of underwriting discounts of $3.0 million and other offering expenses of approximately $1.2 million.

Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss, net of related taxes, were as follows (in thousands):

	Foreign Currency Translation Adjustments		Unrealized Gain (Loss) on Available-For-Sale Securities		Defined Benefit Pension Plan Adjustment		Total Accumulated Other Comprehensive Loss
Balance at December 31, 2015	$	(1,595)	$	(29)	$	(99)	$	(1,723)
Other comprehensive income, net of taxes of zero and reclassifications		292		33		—		325
Balance at September 30, 2016	$	(1,303)	$	4	$	(99)	$	(1,398)

No material amounts were reclassified out of accumulated other comprehensive income during the three and nine months ended September 30, 2016 and 2015 for realized gains or losses on available-for-sale securities.

Accumulated Deficit

Approximately $7.9 million of the Company’s retained earnings within its total accumulated deficit at December 31, 2015 was subject to restriction due to the fact that the Company’s subsidiaries in China are required to set aside at least 10% of their respective accumulated profits each year end to fund statutory common reserves as well as allocate a discretional portion of their after-tax profits to their staff welfare and bonus fund.

25

NeoPhotonics Corporation

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Note 12. Stock-based compensation

The following table summarizes the stock-based compensation expense recognized in the three and nine months ended September 30, 2016 and 2015 (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015
Cost of goods sold	$	297	$	339	$	1,605	$	1,119
Research and development		2,981		363		4,508		1,357
Sales and marketing		2,352		275		3,604		1,175
General and administrative		3,146		459		4,728		1,767
	$	8,776	$	1,436	$	14,445	$	5,418

Stock-based compensation expense in the three and nine months ended September 30, 2016 included approximately $5.8 million in stock-based compensation expense, net of approximately $0.8 million capitalized in inventory, associated with the accelerated vesting of stock options covering approximately 1.1 million shares of the Company’s common stock and stock appreciation units (“SAUs”) of approximately 0.2 million shares with a market-based vesting condition. In September 2016, the market-based condition of these stock options and SAUs was satisfied when the average closing price of the Company’s common stock over a period of 20 consecutive trading days equal to or exceeded $15.00 per share and the recipients remained in the continuous service with the Company.

Determining Fair Value

The Company estimated the fair value of certain stock-based awards using a Black-Scholes-Merton valuation model or a binomial lattice model with the following assumptions:  

	Three Months Ended September 30,		Nine Months Ended September 30,
Stock options	2016	2015	2016	2015
Weighted-average expected term (years)	5.9	5.6	5.8	5.4
Weighted-average volatility	65%	63%	65%	64%
Risk-free interest rate	1.01%-1.15%	1.63% – 1.85%	1.01%-1.76%	1.37% – 1.65%
Expected dividends	—  %	—  %	—  %	—  %
Stock appreciation units
Weighted-average expected term (years)	2.6	3.5	2.8	3.6
Weighted-average volatility	62%	60%	62%	62%
Risk-free interest rate	0.45%-0.71%	0.28% – 1.38%	0.45%-1.47%	0.25% – 1.57%
Expected dividends	—  %	—  %	—  %	—  %
ESPP
Weighted-average expected term (years)	—	—	0.7	0.7
Weighted-average volatility	—  %	—  %	70%	58%
Risk-free interest rate	—  %	—  %	0.08%-0.39%	0.03% – 0.14%
Expected dividends	—  %	—  %	—  %	—  %

26

NeoPhotonics Corporation

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Stock Options and Restricted Stock Units (RSUs)

The following table summarizes the Company’s stock option and RSU activity during the nine months ended September 30, 2016:

	Stock Options			Restricted Stock Units
		Weighted			Weighted
		Average			Average
	Number of	Exercise		Number of	Grant Date
	Shares	Price		Units	Fair Value
Balance at December 31, 2015	5,007,797	$	4.34	1,213,686	$	7.46
Granted	358,186		12.22	1,071,230		12.18
Exercised/Converted	(962,366)		3.62	(211,388)		7.02
Cancelled/Forfeited	(59,961)		4.99	(29,694)		7.36
Balance at September 30, 2016	4,343,656	$	5.14	2,043,834	$	9.99

Stock appreciation units

SAUs are liability classified share-based awards. The Company did not grant any SAUs during the three and nine months ended September 30, 2016 or 2015. As of September 30, 2016 and December 31, 2015, there were 293,457 and 342,316 SAUs outstanding. Outstanding SAUs are re-measured each reporting period at fair value until settlement.

Employee Stock Purchase Plan (“ESPP”)

As of September 30, 2016, there was $0.1 million of unrecognized stock-based compensation expense for employee stock purchase rights that will be recognized over the remaining offering period through November 2016.

Note 13. Income taxes

The provision for income taxes in the periods presented is based upon the income (loss) before income taxes:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands)	2016		2015		2016		2015
Provision for income taxes	$	(804)	$	(1,157)	$	(2,471)	$	(2,698)

The Company’s income tax provision in the three and nine months ended September 30, 2016 and 2015 was primarily related to income taxes of the Company’s non-U.S. operations.

The Company conducts its business globally and its operating income is subject to varying rates of tax in the U.S., China and Japan. Consequently, the Company’s effective tax rate is dependent upon the geographic distribution of its earnings or losses and the tax laws and regulations in each geographical region. Historically, the Company has experienced net losses in the U.S. and in the short term, expects this trend to continue. One of the Company’s subsidiaries in China historically qualified for a preferential 15% tax rate available for high technology enterprises as opposed to the statutory 25% tax rate. In June 2016, the State Administration of Taxation issued a notice to adjust the requirements for high technology enterprise status. As a result, the Company believes that it is more likely than not that the Company’s China subsidiary will not meet the requirements for the tax year 2016 as of September 30, 2016. Therefore, the Company has computed its China subsidiary’s tax provision for 2016 based on a 25% regular corporate income tax rate and remeasured its deferred tax assets accordingly. The preferential tax rate is subject to renewal for periods after 2016.

27

NeoPhotonics Corporation

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Due to historic losses in the U.S., the Company has a full valuation allowance on its U.S. federal and state deferred tax assets. Management continues to evaluate the realizability of deferred tax assets and the related valuation allowance. If management's assessment of the deferred tax assets or the corresponding valuation allowance were to change, the Company would record the related adjustment to income during the period in which management makes the determination.

As of September 30, 2016, there were no material changes to either the nature or the amounts of the uncertain tax positions previously determined for the year ended December 31, 2015.

Note 14. Subsequent events

Subsequent events, through the filing of this report, included the following:

Repayment of Comerica Credit Facility

In October 2016, the Company repaid the outstanding balance under its Comerica Bank Credit Facility, which was $23.8 million as of September 30, 2016.

Shelf Registration

In October 2016, the Company filed a shelf registration statement on Form S-3 with the U.S. Securities and Exchange Commission through which it may offer to sell $80.0 million of its common stock from time-to-time. In addition, the registration statement registered 8,261,882 shares of the Company’s common stock held by certain stockholders. The Company will not receive any proceeds from the sales of the Company’s common stock held by its selling stockholders.

28

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q for the period ended September 30, 2016 and the audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2015 included in our Annual Report on Form 10-K. References to “NeoPhotonics,” “we,” “our,” and “us” are to NeoPhotonics Corporation unless otherwise specified or the context otherwise requires.

This Quarterly Report on Form 10-Q for the period ended September 30, 2016 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 on Form 10-Q for the period ended September 30, 2016 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,” “might,” “objective,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “predict,” “potential,” or the negative of these terms or other similar expressions is 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” below, and those discussed in the sections titled “Special Note Regarding Forward-Looking Statements” and “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the SEC on March 15, 2016.  Furthermore, such forward-looking statements speak only as of the date of this 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 such statements.

Business overview

We develop, manufacture and sell optoelectronic products that transmit, receive and switch high speed digital optical signals for communications networks. We sell our products to the world’s leading network equipment manufacturers, including Ciena Corporation, Cisco Systems, Inc., HiSilicon Technologies, Ltd., an affiliate of Huawei Technologies, Co., Ltd. and Huawei Technologies Co., Ltd. (collectively “Huawei”) and Nokia Corporation (formerly Alcatel-Lucent SA which was acquired by Nokia Corporation in January 2016). These companies are among our largest customers and a focus of our strategy due to their leading market positions.

We have research and development and wafer fabrication facilities in San Jose and Fremont, California and in Tokyo, Japan that coordinate with our research and development and manufacturing facilities in Dongguan, Shenzhen and Wuhan, China, Ottawa, Canada, and Moscow, Russia. We use proprietary design tools and design-for-manufacturing techniques to align our design process with our precision nanoscale, vertically integrated manufacturing and testing. We believe we are one of the highest volume Photonic Integrated Circuit, or PIC, manufacturers in the world and that we can further expand our manufacturing capacity to meet market needs.

Recognizing our focus on growth in our 100Gbps (“100G”) and beyond products, we aligned our product group reporting to “High Speed Products” which includes products designed for 100G and beyond applications and “Network Products and Solutions” which comprises all products designed for applications below 100G and includes 40G products previously included in our “High Speed Products” group. Our High Speed Products primarily implement coherent technology and include those designed for 100G and beyond data rates for telecom and datacenter or content provider networks and applications.

29

In the three and nine months ended September 30, 2016, High Speed Products represented approximately 67% and 66%, respectively, of total revenue and Network Products and Solutions represented approximately 33% and 34%, respectively, of total revenue.  In the three and nine months ended September 30, 2015, High Speed Products was 56% and 58%, respectively, of total revenue and Network Products and Solutions represented approximately 44% and 42%, respectively, of total revenue.

Revenue grew 24% and 20%, respectively, in the three and nine months ended September 30, 2016, compared to 2% and 10%, respectively, in the same periods in 2015. The revenue growth was driven primarily by demand for our High Speed Products, as carriers continued to accelerate deployment of high capacity optical transport networks particularly in China. Our gross profit was 26.6% and 28.5% of revenue, respectively, in the three and nine months ended September 30, 2016, compared to 28.4% and 29.6% of revenue, respectively, in the three and nine months ended September 30, 2015, primarily attributable to pricing and a bankruptcy filing by one of our distributors, partially offset by cost savings, yields and, to a lesser extent, favorable product mix.

We are planning to reduce volume and end the production for certain low speed passive optical network, or PON, products that accounted for approximately $6.5 million and $25.9 million of total revenue, respectively, in the three and nine months ended September 30, 2016 and are expected to represent approximately $30 million of total revenue in 2016. These products are focused on passive optical network applications and are nearing their end-of-life with relatively low gross margins. The end-of-life process is expected to span approximately three fiscal quarters to complete and is part of our product evolution cycle to reduce legacy products that may no longer meet our requirements for gross margin and profitability.

We expect continued volume growth for our High Speed Products, although quarter-to-quarter results may show considerable variability as is usual in a rapid initial ramp-up for a new technology.  Similar to revenue, our gross margins may fluctuate materially depending on a variety of factors including average selling price changes, product mix, volume, manufacturing utilization and ongoing manufacturing process improvements.

In October 2016, we filed a shelf registration statement on Form S-3 with the U.S. Securities and Exchange Commission through which we may offer to sell $80.0 million of our common stock from time-to-time. In addition, the registration statement registered 8,261,882 shares of our outstanding common stock held by certain stockholders. We will not receive any proceeds from the sales of our common stock held by our selling stockholders.

Critical accounting policies and estimates

There have been no material changes to our critical accounting policies and estimates during the three and nine months ended September 30, 2016 from those disclosed in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2015.

30

Results of operations

Revenue

We sell substantially all of our products to original equipment manufacturers, or OEMs. Revenue is recognized when the product is shipped and title has transferred to the buyer. We price our products based on market and competitive conditions and may periodically reduce the price of our products as market and competitive conditions change and as manufacturing costs are reduced. Historically, our first quarter revenue is generally seasonally lower than the rest of the year primarily due to lower capacity utilization during the holidays in China and customer pricing schedules. However, this historical pattern should not be considered a reliable indicator of our future revenue or financial performance. In 2016, this historical pattern shifted from the first quarter to the second quarter due to certain price reductions being delayed beyond the first quarter in part due to surging volumes in the first quarter supporting 100G build-outs, notably in China. Our sales transactions to customers are denominated primarily in U.S. dollars, with some portions in Chinese Renminbi (“RMB”) or Japanese Yen (“JPY”).

	Three Months Ended								Nine Months Ended
	September 30,								September 30,
(in thousands)	2016		2015		$ Change		% Change		2016		2015		$ Change		% Change
Total revenue	$	103,312	$	83,560	$	19,752	24	%	$	301,586	$	250,316	$	51,270	20	%

We have generated most of our revenue from a limited number of customers. Customers accounting for more than 10% of our total revenue and revenue from our top ten customers in the three and nine months ended September 30, 2016 and 2015 were as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015
Percent of revenue from customers accounting for 10% or more of total revenue:
Huawei Technologies Co., Ltd (1)	48	%	41	%	49	%	40	%
Ciena Corporation	15	%	26	%	15	%	24	%
Percent of revenue from top ten customers	91	%	92	%	91	%	91	%

⁽¹⁾ Huawei’s percentage of revenue included its affiliate, HiSilicon Technologies Co. Ltd. (“HiSilicon”). Revenue from HiSilicon represented approximately 34% and 18% of total revenue, respectively, in the three months ended September 30, 2016 and 2015, and approximately 33% and 19% of total revenue, respectively, in the nine months ended September 30, 2016 and 2015.

We expect that a significant portion of our revenue will continue to be derived from a limited number of customers. As a result, the loss of, or a significant reduction in, orders from any of our key customers would materially affect our revenue and results of operations. Similarly, our accounts receivable are from a limited number of customers. As of September 30, 2016 and December 31, 2015, one customer accounted for 45% and 59%, respectively, of our total accounts receivable.

Three Months Ended September 30, 2016 Compared With Three Months Ended September 30, 2015

Revenue increased $19.8 million, or 24%, in the three months ended September 30, 2016, compared to the same period in 2015, primarily due to an increase in revenue from our High Speed Products driven by strong demand for 100G products.  The increase from High Speed Products revenue was partially offset by a decrease in revenue from our Network Products and Solutions group primarily due to a decline in revenue from low speed PON products and a $2.2 million revenue that cannot be recognized as a result of a distributor’s bankruptcy reorganization. In the three months ended September 30, 2016, High Speed Products represented approximately 67% of total revenue, compared to 56% of total revenue in the same period in 2015 while Network Products and Solutions represented approximately 33% of total revenue in the three months ended September 30, 2016, compared to approximately 44% of total revenue in the same period in 2015. Revenue from China, Americas, Japan and rest of the world was 61%, 19%, 1% and 19% of total

31

revenue, respectively, in the three months ended September 30, 2016, compared to 50%, 28%, 4% and 18% of total revenue, respectively, in the same period in 2015.

Nine Months Ended September 30, 2016 Compared With Nine Months Ended September 30, 2015

Revenue increased $51.3 million, or 20%, in the nine months ended September 30, 2016, compared to the same period in 2015, primarily due to an increase in revenue from our High Speed Products driven by strong demand for 100G products, notably in China.  The increase from High Speed Products revenue was partially offset by a decrease in revenue from our Network Products and Solutions group partly attributable to a decline in revenue from low speed PON products and a $2.2 million revenue that cannot be recognized as a result of a distributor’s bankruptcy reorganization. In the nine months ended September 30, 2016, High Speed Products represented approximately 66% of total revenue, compared to 58% of total revenue in the same period in 2015 while Network Products and Solutions represented approximately 34% of total revenue in the nine months ended September 30, 2016, compared to approximately 42% of total revenue in the same period in 2015. Revenue from China, Americas, Japan and rest of the world was 61%, 14%, 4% and 21% of total revenue, respectively, in the nine months ended September 30, 2016, compared to 49%, 29%, 4% and 18% of total revenue, respectively, in the same period in 2015.

Cost of Goods Sold and Gross Profit

Our cost of goods sold consists primarily of the cost to produce wafers and to manufacture and test our products. Additionally, our cost of goods sold generally includes stock-based compensation, write-downs of excess and obsolete inventory, amortization of certain purchased intangible assets, depreciation, acquisition-related fair value adjustments, restructuring charges, warranty costs, royalty payments, logistics and allocated facilities costs. 

Gross profit as a percentage of total revenue, or gross margin, has been and is expected to continue to be affected by a variety of factors including the introduction of new products, production volume, production volume compared to sales over time, the mix of products sold, inventory changes, changes in the average selling prices of our products, changes in the cost and volumes of materials purchased from our suppliers, changes in labor costs, changes in overhead costs or requirements, stock-based compensation, write-downs of excess and obsolete inventories and warranty costs. In addition, we periodically negotiate pricing with certain customers which can cause our gross margins to fluctuate, particularly in the quarters in which the negotiations occurred. Historically, our first quarter gross margins are generally seasonally lower than the fourth quarter of the prior year due to customer pricing schedules as well as lower capacity utilization during the holidays in China and the lower installment of outside plant equipment by customers in winter.  In 2016, this historical pattern shifted from the first quarter to the second quarter due to certain price reductions being delayed beyond the first quarter in part due to surging volumes in the first quarter supporting 100G build-outs, notably in China. 

	Three Months Ended									Nine Months Ended
	September 30,									September 30,
(in thousands, except percentages)	2016		2015		$ Change		% Change			2016		2015		$ Change		% Change
Cost of goods sold	$	75,863	$	59,788	$	16,075		27	%	$	215,486	$	176,345	$	39,141	22	%
Gross profit		27,449		23,772		3,677		15	%		86,100		73,971		12,129	16	%

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015
Gross profit as a % of revenue	27	%	28	%	29	%	30	%

Three Months Ended September 30, 2016 Compared With Three Months Ended September 30, 2015

Gross profit increased $3.7 million, or 15%, to $27.4 million in the three months ended September 30, 2016, compared to $23.8 million in the same period in 2015. The increase is primarily attributable to an increase in sales volume and continuous costs reduction efforts. Gross margin decreased in the three months ended September 30, 2016, compared to the same period in 2015, primarily due to pricing and a $1.4 million unfavorable cost of goods sold impact

32

as a result of the unrecoverable inventory associated with the bankruptcy reorganization by one of our distributors, partially offset by cost savings, yields and, to a lesser extent, favorable product mix. 

Nine Months Ended September 30, 2016 Compared With Nine Months Ended September 30, 2015

Gross profit increased $12.1 million, or 16%, to $86.1 million in the nine months ended September 30, 2016, compared to $74.0 million in the same period in 2015. This increase is primarily attributable to an increase in sales volume as well as an increase in sales toward our High Speed Products, driven by the strong 100G product demand and the associated strong manufacturing utilization. Gross margin decreased in the nine months ended September 30, 2016, compared to the same period in 2015, primarily due to pricing and a $1.4 million unfavorable cost of goods sold impact as a result of the unrecoverable inventory associated with the bankruptcy reorganization by one of our distributors, partially offset by cost savings, yield and, to a lesser extent, favorable product mix.

Operating expenses

Personnel costs are the most significant component of operating expenses and consist of costs such as salaries, benefits, bonuses, stock-based compensation and, with regard to sales and marketing expense, other variable compensation. In the three and nine months ended September 30, 2016, stock-based compensation expense of approximately $5.8 million was recorded in our operating expenses attributable to the accelerated vesting of our stock options and stock appreciation units (“SAUs”) with a market-based vesting condition as such condition was satisfied when the average closing price of our common stock over a period of 20 consecutive trading days exceeded $15.0 per share in September 2016. Stock-based compensation related to outstanding SAUs are subject to remeasurement until settlement dates. Our operating expenses are denominated primarily in U.S. dollars, or USD, Chinese Renminbi, or RMB and Japanese Yen, or JPY.

	Three Months Ended September 30,									Nine Months Ended September 30,
(in thousands, except percentages)	2016		2015		$Change		% Change			2016		2015		$ Change		% Change
Research and development	$	17,474	$	10,763	$	6,711		62	%	$	42,206	$	32,702	$	9,504	29	%
Sales and marketing		5,936		3,789		2,147		57	%		13,674		11,439		2,235	20	%
General and administrative		9,822		7,384		2,438		33	%		26,747		22,999		3,748	16	%
Amortization of purchased intangible assets		462		447		15		3	%		1,375		1,344		31	2	%
Restructuring charges		—		18		(18)		(100)	%		—		44		(44)	(100)	%
Acquisition-related costs		148		180		(32)		(18)	%		923		467		456	98	%
Asset impairment charge		—		368		(368)		(100)	%		—		368		(368)	(100)	%
Total operating expenses	$	33,842	$	22,949	$	10,893		47	%	$	84,925	$	69,363	$	15,562	22	%

Research and development

Research and development expense consists of personnel costs, including stock-based compensation, for our research and development personnel, and product development costs, including engineering services, development software and hardware tools, depreciation of equipment and facility costs. We record all research and development expense as incurred.

Three Months Ended September 30, 2016 Compared With Three Months Ended September 30, 2015

Research and development expense increased by $6.7 million, or 62%, in the three months ended September 30, 2016 compared to the same period in 2015. The increase was primarily due to a $2.6 million increase in stock-based compensation expense largely driven by higher market price of the Company’s common stock and the accelerated vesting of our market-based stock awards, a $2.4 million increase in development projects including prototype and materials, a $0.8 million net increase in payroll and related expenses and a $0.7 million increase in outside development services in the three months ended September 30, 2016, compared to the same 2015 period.

Nine Months Ended September 30, 2016 Compared With Nine Months Ended September 30, 2015

33

Research and development expense increased by $9.5 million, or 29%, in the nine months ended September 30, 2016 compared to the same period in 2015. The increase was primarily due to a $3.2 million increase in stock-based compensation expense largely due to the higher market price of our common stock and the accelerated vesting of our market-based stock awards, a $2.6 million increase in development spending including prototype and materials, a $2.0 million increase in payroll and related costs, a $1.0 million increase in outsider services, a $0.4 million reduction in administrative reimbursements and a $0.3 million increase in net allocated costs in the nine months ended September 30, 2016, compared to the same 2015 period.

Sales and marketing

Sales and marketing expense consists primarily of personnel costs, including stock-based compensation and other variable compensation, costs related to sales and marketing programs and services and facility costs.

Three Months Ended September 30, 2016 Compared With Three Months Ended September 30, 2015

Sales and marketing expense increased by $2.1 million, or 57%, in the three months ended September 30, 2016 compared to the same period in 2015 primarily due to a $2.1 million increase in stock-based compensation expense largely due to the higher market price of our common stock and the accelerated vesting of our market-based stock awards and a $0.3 million increase in payroll and related costs, partially offset by a $0.6 million decrease in the doubtful account provision. 

Nine Months Ended September 30, 2016 Compared With Nine Months Ended September 30, 2015

Sales and marketing expense increased by $2.2 million, or 20%, in the nine months ended September 30, 2016 compared to the same period in 2015 primarily due to a $2.4 million increase in stock-based compensation expense largely due to the higher market price of our common stock and the accelerated vesting of our market-based stock awards, a $0.5 million increase in payroll and related costs and a $0.3 million increase in variable compensation, partially offset by a $1.0 million decrease in the doubtful account provision due to collections.

General and administrative

General and administrative expense consists primarily of personnel costs, including stock-based compensation, for our finance,  human resources and information technology personnel and certain executive officers, as well as professional services costs related to accounting, tax, banking, legal and information technology services, depreciation and facility costs.

Three Months Ended September 30, 2016 Compared With Three Months Ended September 30, 2015

General and administrative expense increased by $2.4 million, or 33%, in the three months ended September 30, 2016 compared to the same period in 2015, mainly due to a $2.7 million increase in stock-based compensation expense largely due to the higher market price of our common stock and the accelerated vesting of our market-based stock awards, a $0.2 million increase in payroll and related costs, partially offset by a $0.5 million reduction in variable compensation and $0.2 million decrease in accrued sales and export taxes.

Nine Months Ended September 30, 2016 Compared With Nine Months Ended September 30, 2015

General and administrative expense increased by $3.7 million, or 16%, in the nine months ended September 30, 2016 compared to the same period in 2015, mainly due to a $3.0 million increase in stock-based compensation expense largely due to the higher market price of our common stock and the accelerated vesting of our market-based stock awards, a $0.7 million increase in payroll and related costs, a $0.6 million increase in accrued sales and export taxes and a $0.2 million increase in employee related expenses, partially offset by a $0.6 million decrease in facility charges, a $0.5 milion increase in governmental incentives and a $0.4 million decrease in variable compensation expense.

34

Amortization of purchased intangible assets

Our intangible assets are being amortized over their estimated useful lives.  Amortization expense relating to technology, patents and leasehold interests are included within cost of goods sold, while customer relationships and other agreements are recorded within operating expenses. Amortization of purchased intangibles included in operating expenses was relatively consistent in the three and nine months ended September 30, 2016 and included the amortization of intangible assets from our acquisition of EMCORE’s tunable laser products in January 2015. 

Acquisition-related transaction costs

We incurred $0.1 million and $0.9 million in acquisition-related costs primarily related to legal, accounting and other professional services in the three and nine months ended September 30, 2016, respectively. Acquisition related costs were $0.2 million and $0.5 million in the three and nine months ended September 30, 2015, respectively, related to legal, accounting and other professional services for our acquisition activities, including our acquisition of tunable laser products from EMCORE.

Restructuring charges

There were no restructuring charges in the three and nine months ended September 30, 2016. Restructuring charges in the three and nine months ended September 30, 2015 were immaterial and were related to our restructuring plan initiated in 2014 (the “2014 Restructuring Plan”) to refocus on our strategy execution, optimize our structure, and improve operational efficiencies. The 2014 Restructuring Plan consisted of workforce reductions primarily in the U.S and in China and was completed in October 2015.

Interest and other income (expense), net

Interest income consists of income earned on our cash, cash equivalents and short-term investments, as well as restricted cash and investments. Interest expense consists of amounts paid for interest on our bank and other borrowings. Other expense, net is primarily made up of government subsidies as well as foreign currency transaction gains and losses. The functional currency of our subsidiaries in China is the RMB and of our subsidiary in Japan is the JPY.  The foreign currency transaction gains and losses of our subsidiaries in China and Japan primarily result from their transactions in U.S. dollars.

	Three Months Ended									Nine Months Ended
	September 30,									September 30,
(in thousands)	2016		2015		$ Change		% Change			2016		2015		$ Change		% Change
Interest income	$	95	$	31	$	64		206	%	$	227	$	84	$	143	170	%
Interest expense		(103)		(171)		68		(40)	%		(304)		(1,133)		829	(73)	%
Other income (expense), net		18		1,852		(1,834)		(99)	%		(828)		2,408		(3,236)	(134)	%
Total	$	10	$	1,712	$	(1,702)		(99)	%	$	(905)	$	1,359	$	(2,264)	(167)	%

Total interest and other income (expense), net decreased by $1.7 million in the three months ended September 30, 2016, compared to the same period in 2015. The decrease was primarily due to a $1.8 million unfavorable change in other income (expense), net primarily attributable to a foreign exchange related loss as a result of stronger RMB against the U.S. dollar in the 2016 period.

Total interest and other income (expense), net decreased by $2.3 million in the nine months ended September 30, 2016, compared to the same period in 2015, mainly due to a $3.2 million unfavorable change in other income (expense), net primarily driven by a foreign exchange related loss as a result of stronger JPY and RMB against the U.S. dollar, partially offset by a $0.8 million decrease in interest expense primarily attributable to less borrowing activities in the U.S. and China in the 2016 period.

35

Income taxes

We conduct our business globally and our operating income is subject to varying rates of tax in the U.S., China, Japan and other various foreign jurisdictions. Consequently, our effective tax rate is dependent upon the geographic distribution of our earnings or losses and the tax laws and regulations in each geographical region. Historically, we have experienced net losses in the U.S. and in the short term, we expect this trend to continue. In China, one of our subsidiaries has historically qualified for a preferential 15% tax rate available for high technology enterprises as opposed to the statutory 25% tax rate. In June 2016, the State Administration of Taxation issued a notice to adjust the requirements for high technology enterprise status. As a result, we believe that it is more likely than not that our China subsidiary will not meet the requirements for the tax year 2016 as of September 30, 2016. Therefore, we have computed our China subsidiary’s tax provision for 2016 based on a 25% regular corporate income tax rate and remeasured our deferred tax assets accordingly. The preferential tax rate is subject to renewal for periods after 2016.

	Three Months Ended									Nine Months Ended
	September 30,									September 30,
(in thousands)	2016		2015		$ Change		% Change			2016		2015		$ Change		% Change
Provision for income taxes	$	(804)	$	(1,157)	$	353		(31)	%	$	(2,471)	$	(2,698)	$	227		(8)	%

Our income tax provision in the three and nine months ended September 30, 2016 and 2015 was primarily related to income taxes of our non-U.S. operations.

Liquidity and capital resources

At September 30, 2016, we had working capital of $136.8 million and total cash, cash equivalents and short-term investments of $100.1 million. Approximately 37% of our total cash, cash equivalents and short-term investments was held by our foreign entities, including approximately $24.8 million held in accounts by our subsidiaries in China and approximately $12.3 million held in accounts by our subsidiary in Japan. In addition, we had $2.8 million in restricted cash in accounts held by our subsidiaries in China as of September 30, 2016. Cash, cash equivalents, investments and restricted cash held outside of the U.S. may be subject to taxes if repatriated and may not be immediately available for our working capital needs.

Approximately $7.9 million of our retained earnings within our total accumulated deficit at December 31, 2015 was subject to restrictions due to the fact that our subsidiaries in China are required to set aside at least 10% of their respective accumulated profits each year end to fund statutory common reserves as well as allocate a discretionary portion of their after-tax profits to their staff welfare and bonus fund.  This restricted amount is not distributable as cash dividends except in the event of liquidation.

In the U.S., we have a bank credit agreement with Comerica Bank. Our credit agreement, as amended, with Comerica Bank, or the Comerica Bank Credit Facility, restricts our ability to incur certain additional debt or to engage in specified transactions, restricts the payment of dividends and is secured by substantially all of its U.S. assets, other than intellectual property assets, and requires us to maintain certain financial covenants, including the maintenance of a modified EBITDA and certain liquidity covenants. As of September 30, 2016, our borrowing capacity under our Comerica Bank Credit Facility was $30.0 million, subject to covenant requirements. Amounts borrowed under the Comerica Bank Credit Facility are due on or before January 31, 2017 and borrowings bear interest at an interest rate option of a base rate as defined in the agreement plus 1.75% or LIBOR plus 2.75%. As of September 30, 2016, the rate on the LIBOR option was 3.28% and the outstanding balance was $23.8 million, which was repaid in October 2016.

We regularly issue notes payable to our suppliers in China in exchange for accounts payable. These notes are supported by non-interest bearing bank acceptance drafts and are due three to six months after issuance. As a condition of the notes payable 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 amounts are settled.

Our subsidiary in China has three short-term line of credit facilities with two banking institutions. Under the short-term line of credit facility agreement renewed in June 2015, up to RMB 120.0 million ($18.0 million) could be used for

36

short-term loans, which bore interest at varying rates, or up to approximately RMB 171.4 million ($25.8 million) could be used for bank acceptance drafts (with a 30% compensating balance requirement). This line of credit facility expired in June 2016 and was renewed in August 2016 and will expire in July 2019. Under our China subsidiary’s second short-term line of credit facility, up to RMB 133.0 million ($19.9 million) can be used for short-term loan or up to approximately RMB 190.0 million ($28.5 million) can be used for bank acceptance drafts (with a 30% compensating balance requirement). This line of credit facility expired in September 2016 and, in October 2016, was renewed to extend the expiration date to September 2017 and to increase the credit limit to RMB 266.0 million (approximately $39.9 million) for short-term loans at varying interest rates or up to RMB 380.0 million (approximately $57.0 million) with a 30% compensating balance. In August 2016, our China subsidiary entered into a third line of credit facility with a banking institution that expires in July 2019. Under this line of credit, we can borrow up to RMB 30.0 million ($4.5 million) for short-term loans, which bear interest at varying rates, or up to approximately RMB 42.9 million ($6.4 million) for bank acceptance drafts (with a 30% compensating balance requirement).

As of September 30, 2016 and December 31, 2015, the non-interest bearing bank acceptance drafts issued in connection with our notes payable to our suppliers in China under these line of credit facilities had an outstanding balance of $7.7 million and $8.9 million, respectively. The compensating balance for these bank acceptance drafts totaled $2.8 million and $2.7 million, respectively, as of September 30, 2016 and December 31, 2015, and was classified as restricted cash on our condensed consolidated balance sheets.

On February 25, 2015, our subsidiary in Japan entered into certain loan agreements and related special agreements with the Bank of Tokyo-Mitsubishi UFJ, Ltd. (the “Mitsubishi Bank”) that provided for (i) a term loan in the aggregate principal amount of 500 million JPY ($4.2 million) (the “Term Loan A”) and (ii) a term loan in the aggregate principal amount of one billion JPY ($8.4 million) (the “Term Loan B” and together with the Term Loan A, the “Mitsubishi Bank Loans”). The Mitsubishi Bank Loans are secured by a mortgage on certain real property and buildings owned by our Japanese subsidiary in Japan. The full amount of each of the Mitsubishi Bank Loans was drawn on the closing date of February 25, 2015. Interest on the Mitsubishi Bank Loans accrues and is paid monthly based upon the annual rate of the monthly Tokyo Interbank Offer Rate (TIBOR) plus 1.40%. The Term Loan A requires interest only payments until the maturity date of February 23, 2018, with a lump sum payment of the aggregate principal amount on the maturity date. The Term Loan B requires equal monthly payments of principal equal to 8,333,000 JPY until the maturity date of February 25, 2025, with a lump sum payment of the balance of 8,373,000 JPY on the maturity date. Interest on the Term Loan B is accrued based upon monthly TIBOR plus 1.40% and is secured by real estate collateral. In conjunction with the execution of the Mitsubishi Bank Loans, we paid a loan structuring fee, including consumption tax, of 40,500,000 JPY ($0.3 million).

The Mitsubishi Bank Loans contain customary representations and warranties and customary affirmative and negative covenants including, among other things, restrictions on cessation in business, management, mergers or acquisitions. The Mitsubishi Bank Loans also contain financial covenants relating to minimum net assets, maximum ordinary loss and a dividends covenant. The Mitsubishi Bank Loans also include customary events of default, including but not limited to the nonpayment of principal or interest, violations of covenants, restraint on business, dissolution, bankruptcy, attachment and misrepresentations. In February 2015, we used a portion of the proceeds of the Mitsubishi Bank Loans to repay the then-outstanding outstanding principal and interest amount of approximately 710 million JPY ($6.0 million) under the loan from the acquisition of NeoPhotonics Semiconductor.  

Our total outstanding balance under the Mitsubishi Bank Loans was 1.3 billion JPY (approximately $13.3 million), net of unamortized debt issuance costs of 23.7 million JPY (approximately $0.2 million), as of September 30, 2016 and $1.4 billion JPY (approximately $11.5 million), net of unamortized debt issuance costs of 30.1 million JPY (approximately $0.3 million), as of December 31, 2015.

On January 2, 2015, we closed an acquisition of the tunable laser product lines of EMCORE for approximately $17.5 million. Consideration for the transaction consisted of $1.5 million in cash and a promissory note of approximately $16.0 million, which was subject to certain adjustments for inventory, net accounts receivable and pre-closing revenues and was subsequently adjusted to $15.5 million and was fully repaid in April 2015.

37

From time to time we accept notes receivable in exchange for accounts receivable from certain of our customers in China. These notes receivable are non-interest bearing and are generally due within six months.  Historically, we have collected on the notes receivable in full at the time of maturity.

We believe that our existing cash, cash equivalents and cash flows from our operating activities will be sufficient to meet our anticipated cash needs for at least 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 development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced products, the costs to increase our manufacturing capacity and our foreign operations, the continuing market acceptance of our products and acquisitions of businesses and technology. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results and financial condition would be adversely affected.

Private placement transaction

In April 2012, we entered into a rights agreement with Rusnano, one of our principal stockholders. Under the rights agreement, we agreed to make a $30.0 million investment commitment, or the Investment Commitment, toward our Russian operations. The Investment Commitment can be partially satisfied by cash and/or non-cash investment inside or outside of Russia and/or by way of non-cash asset transfers.

In July 2015, we amended our rights agreement with Rusnano. The amendment to the rights agreement became effective on June 30, 2015 and provides for an updated investment plan for our Russian subsidiaries that includes a non-cash transfer of licensing rights to intellectual property, non-cash transfers of exiting equipment and commitments to complete the remaining milestones of approximately one-half of the overall investment through fiscal year 2019. It also provides that the maximum amount of penalties to be paid by us will not exceed $5.0 million in the aggregate, with the following penalties for failure to meet specified milestones and exit options at the end of the following years, subject to a 90-day cure period (“Cure Period”) following such years:

· By December 31, 2015, if the actual cumulative investment and spending to our Russian subsidiaries was less than $13.0 million, or if we had not sold any products manufactured by its Russian subsidiary, or if we had not completed agreed-upon manufacturing milestones, then we would be subject to a $5.0 million penalty within 30 days after the end of the applicable Cure Period; if the cumulative investments and spending to our Russian subsidiaries were less than $15.4 million but more than $13.0 million by December 31, 2015 and was not cured within the applicable Cure Period, we would be subject to a $1.5 million penalty within 30 days after the end of the applicable Cure Period. We fulfilled our investment commitment required by 2015 and had contributed over $15.4 million in cash and assets to our subsidiaries in Russia as of December 31, 2015. We also satisfied the requirement related to sale of products manufactured by our Russian subsidiary as of December 31, 2015. However, we were not in full compliance with the completion of agreed-upon manufacturing milestones as of December 31, 2015 (and as of the end of the Cure Period ended March 30, 2016) since certain required equipment was delivered but not fully installed and operational as of that date. We have remediated these issues and, in August 2016, entered into the second amendment to the Rights Agreement with Rusnano (the “Amended Rights Agreement”) to address this matter. The amendment extended the foregoing manufacturing deadlines to June 30, 2016 and confirmed that we had completed these milestones as of June 30, 2016. As a result, we will not be held liable for the $5.0 million penalty.

· By December 31, 2016, if the actual cumulative investment and spending to our subsidiaries in Russia is less than $18.8 million, we will be subject to a $1.5 million penalty within 30 days after the end of the applicable Cure Period.

· At the end of 2016, we will be subject to pay an exit fee of $3.5 million to Rusnano should we decide to cease the operations of our subsidiaries in Russia, provided that the cumulative investments and spending including the tangible asset transfers, other than intangible asset transfers which is limited to a maximum valuation of $5.7 million, exceed $10.0 million.

38

· At the end of 2019, we will be subject to pay an exit fee of $2.0 million to Rusnano should we decide to cease the operations of our subsidiaries in Russia, if the cumulative investments and spending are less than $30.0 million.

In August 2016, we entered into a letter of agreement with Rusnano to agree to transfer a product line and incur expected costs of approximately $0.1 million by July 30, 2017.

Separately, on December 18, 2014, we entered into a Commitment to file a Registration Statement and Related Waiver of Registration Rights, whereby Rusnano waived certain registration rights in connection with a potential offering by us of shares of our common stock, and we committed to file with the SEC a resale registration statement on Form S-1 covering the resale of all shares of our common stock held by Rusnano, or the 2015 Registration Statement. We filed the 2015 Registration Statement on April 6, 2015 to register 4,972,905 shares of our common stock held by Rusnano. Rusnano also waived its demand registration rights under the original rights agreement and agreed to enter into a lock up agreement with us whereby it would agree not to sell any shares of our common stock, or engage in certain other transactions relating to our securities, for a period of 60 days from the filing date of the 2015 Registration Statement. Rusnano signed such lock up agreement with us on April 2, 2015. In connection with our public stock offering completed in the second quarter of 2015, or the 2015 Follow-On Offering, Rusnano entered into a separate lock up agreement with Needham & Company, LLC, the lead underwriter of the offering, whereby it agreed not to sell any shares of our common stock, or engage in certain other transactions relating to our securities, for a period of 180 days from May 21, 2015. Such lock up agreement expired in November 2015. We do not receive any proceeds from any sales of our common stock held by Rusnano.

Cash flow discussion

The table below sets forth selected cash flow data for the periods presented:

	Nine Months Ended September 30,
(in thousands)	2016		2015
Net cash provided by operating activities	$	26,717	$	21,112
Net cash used in investing activities		(35,217)		(16,065)
Net cash provided by financing activities		3,481		29,421
Effect of exchange rates on cash and cash equivalents		556		(253)
Net increase (decrease) in cash and cash equivalents	$	(4,463)	$	34,215

Operating activities

Net cash provided by operating activities was $26.7 million in the nine months ended September 30, 2016, compared to $21.1 million provided by operating activities in the same 2015 period. The increase was primarily attributable to a $21.5 million increase in cash flows from inventories primarily due to increases in shipments driven by customer demand and a $14.3 million increase in cash flows related to accounts payable due to timing of payments, partially offset by a $20.2 million decrease in cash flows from accounts receivable primarily driven by timing of billings and collections in the 2016 period, a $5.4 million decrease in cash flows from prepaid and other assets primarily due to a reduction in prepaid taxes in the 2015 period that did not recur in 2016 and a $4.1 million decrease in cash flows related to accrued and other liabilities primarily due to variable compensation payments in the 2016 period.

Investing activities

Net cash used in investing activities was $35.2 million in the nine months ended September 30, 2016, compared to $16.1 million provided by investing activities in the same 2015 period. Cash used increased primarily attributable to a $40.6 million increase in marketable securities purchases, a $18.9 million increase in property, plant and equipment purchases to meet our product demand and a $10.0 million increase largely attributable to a reduction in restricted cash in the 2015 period as a result of the modification of our credit agreement with the Comerica Bank, partially offset by a

39

$36.0 million increase in proceeds from sales of marketable securities and a $14.4 million increase in proceeds from maturities of marketable securities.

We expect to invest approximately $50 million in property, plant and equipment purchases in 2016 as we expand our capacity to meet product demand.

Financing activities

Net cash provided by financing activities was $3.5 million in the nine months ended September 30, 2016, compared to $29.4 million provided by financing activities in the same 2015 period. The decrease was largely due to a $45.6 million net proceeds from our public stock offering completed in the 2015 period, a $3.9 million decrease in proceeds from issuance of notes payable and a $1.9 million increase in repayment of bank and acquisition-related loans, partially offset by a $14.9 million increase in proceeds from bank borrowings, a $6.0 million reduction in repayment of notes payable, a $3.9 million increase in proceeds from stock option exercises and issuance of stock under our employee stock purchase plan driven by higher stock price of our common stock and a $0.6 million increase in proceeds from government grants.

Contractual obligations and commitments

As of September 30, 2016, our principle commitments consisted of obligations under operating leases, purchase commitments, debt and other contractual obligations. Except for the new office lease in San Jose, California we executed in September 2016, there have been no significant changes to these obligations during the nine months ended September 30, 2016 compared to the contractual obligations disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations, set forth in Part II, Item 7, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

Off-balance sheet arrangements

During the nine months ended September 30, 2016, we did not have any significant off-balance sheet arrangements except for two letters of credit, totaling $1.3 million, outstanding as of September 30, 2016.

Recent accounting pronouncements

See Note 1 “Basis of presentation and significant accounting policies” in the Notes to Condensed Consolidated Financial Statements on this Quarterly Report on Form 10-Q for a description of recent accounting pronouncements and accounting changes.

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Effective July 1, 2016, we have entered into foreign currency forward contracts to minimize the short-term impact of foreign currency exchange rate fluctuations, primarily related to RMB and JPY, on our inter-company receivables and payables. Our exposures to other market risk have not changed materially since December 31, 2015. For quantitative and qualitative disclosures about market risk, see Item 7A Quantitative and Qualitative Disclosures About Market Risk, in our Annual Report on Form 10-K for the year ended December 31, 2015.

ITEM 4.CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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, 2016. 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

40

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 reasonably ensure that information required to be disclosed by a company in 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.

Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered in this report, our disclosure controls and procedures were effective at a reasonable assurance level.

Changes in Internal Control over Financial Reporting

There have not been any changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities and Exchange Act of 1934, as amended) for the quarter ended September 30, 2016 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 

Inherent Limitation on the Effectiveness of Internal Controls

The effectiveness of any system of internal control over financial reporting is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely.  Accordingly, any system of internal control over financial reporting can only provide reasonable, not absolute assurances.  In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but cannot assure that such improvements will be sufficient to provide us with effective internal control over financial reporting.

41

PART II. OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

From time to time, we are involved in litigation that we believe is of the type common to companies engaged in our line of business, including commercial disputes and employment issues. As of the date of this Quarterly Report on Form 10-Q, other than as described below, we are not involved in any pending legal proceedings that we believe could have a material adverse effect on our financial condition, results of operations or cash flows. However, as described below, a certain dispute involves a claim by a third party that our activities infringe their intellectual property rights. This and other types of intellectual property rights claims generally involve the demand by a third party that we cease the manufacture, use or sale of the allegedly infringing products, processes or technologies and/or pay substantial damages or royalties for past, present and future use of the allegedly infringing intellectual property. Claims that our products or processes infringe or misappropriate any third-party intellectual property rights (including claims arising through our contractual indemnification of our customers) often involve highly complex, technical issues, the outcome of which is inherently uncertain. Moreover, from time to time, we may pursue litigation to assert our intellectual property rights. Regardless of the merit or resolution of any such litigation, complex intellectual property litigation is generally costly and diverts the efforts and attention of our management and technical personnel which could adversely affect our business.

For a discussion of our current legal proceedings, please refer to the information set forth under the “Litigation” section in Note 10, Commitments and Contingencies, in Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

ITEM 1A.RISK FACTORS 

Except for those risk factors denoted by an asterisk (*), the risk factors facing our company have not changed materially from those set forth in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the SEC on March 15, 2016, which risk factors are set forth below.

Risks related to our business

*We are dependent on Huawei Technologies Co., Ltd. and its affiliate HiSilicon Technologies Co., Ltd., Ciena, Nokia and our other 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 may reduce our revenue and adversely impact our results of operations.

Historically, we have generated most of our revenue from a limited number of customers. In the nine months ended September 30, 2016, Huawei Technologies Co. Ltd., together with its affiliate HiSilicon Technologies Co., Ltd. (collectively “Huawei”), and Ciena Corporation accounted for approximately 49% and 15% of our revenue, respectively, and our top ten customers represented 91% of our revenue. In the year ended December 31, 2015, Huawei and Ciena Corporation accounted for approximately 44% and 21% of our revenue, respectively, and our top ten customers represented 91% of our revenue. In the year ended December 31, 2014, Huawei, Ciena Corporation, and Nokia Corporation accounted for 38%, 15% and 10% of our revenue, respectively, and our top ten customers represented 88% of our revenue. As a result, the loss of, or a significant reduction in orders from these major customers or any of our other key customers would materially and adversely affect our revenue and results of operations. In addition, the industry in which our customers operate is subject to a trend of consolidation. To the extent this trend continues, we may become dependent on even fewer customers to maintain and grow our revenue. Adverse events, including but not limited to any bankruptcy reorganization, affecting our customers could also adversely affect our revenue and results of operations.

Manufacturing problems could impact manufacturing yields or result in delays in product shipments to customers and could adversely affect our revenue, competitive position and reputation.

We may experience delays, disruptions or quality control problems in our manufacturing operations, which could adversely impact manufacturing volumes, yields or delay product shipments. As a result, we could incur additional costs

42

that would adversely affect our gross margin, and product shipments to our customers could be delayed beyond the shipment schedules requested by our customers, which would negatively affect our revenue, competitive position and reputation.

Additionally, manufacturing yields depend on a number of factors, including the stability and manufacturability of the product design, manufacturing improvements gained over cumulative production volumes, the quality and consistency of component parts and the nature and extent of customization requirements by customers. Capacity constraints, raw materials shortages, logistics issues, labor shortages, volatility in utilization of manufacturing operations, supporting utility services and other manufacturing supplies, the introduction of new product lines, rapid increases in production demands and changes in customer requirements, manufacturing facilities or processes, or those of some third party contract manufacturers and suppliers of raw materials and components have historically caused, and may in the future cause, reduced manufacturing yields, negatively impacting the gross margin on, and our production capacity for, those products. Moreover, an increase in the rejection and rework rate of products during the quality control process before, during or after manufacture would result in our experiencing lower yields, gross margin and production capacity. Our ability to maintain sufficient manufacturing yields is particularly challenging with respect to PICs due to the complexity and required precision of a large number of unique manufacturing process steps. Manufacturing yields for PICs can also suffer if contaminated materials or materials that do not meet highly precise composition requirements are inadvertently utilized. Because a large portion of our PIC manufacturing costs are fixed, PIC manufacturing yields have a substantial effect on our gross margin. Lower than expected manufacturing yields could also delay product shipments and decrease our revenue. It can be hard to cost-effectively increase our production output rapidly, and we can experience yield loss and excess material scrap, which can increase our cost of goods sold and harm our profitability. Also, if we do not have sufficient demand for our PIC-based products our cost of goods sold can increase as the fixed costs of our fabrication facilities are spread over lower production.

We depend upon outside contract manufacturers for a portion of the manufacturing process for some of our products. Our operations and revenue related to these products could be adversely affected if we encounter problems with a contract manufacturer.

The majority of our products are manufactured internally. However, we also rely upon contract manufacturers in Thailand, China, Japan and other Asia locations to provide back-end manufacturing and produce the finished portion of some of our products. Our reliance on contract manufacturers for these products makes us vulnerable to possible capacity constraints and reduced control over their supply chains, 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 product were 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. 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 customers of these products and cause us to forego potential revenue opportunities.

We are under continuous pressure to reduce the prices of our products, which has adversely affected, and may continue to adversely affect, our gross margins.

The communications networks industry has been characterized by declining product prices over time, resulting from increased competition, overcapacity and the introduction of new products. We have reduced the prices of many of our products in the past and we expect to continue to experience pricing pressure for our products in the future, including from our major customers. When seeking to maintain or increase their market share, our competitors may also reduce the prices of their products. In addition, our customers may have the ability or seek to internally develop and manufacture competing products at a lower cost than we would otherwise charge, which would add additional pressure on us to lower our selling prices. If we are unable to offset any future reductions in our average selling prices by increasing our sales volume, reducing our costs and expenses or introducing new products, our gross margin would be adversely affected.

43

*We are subject to risks and uncertainties related to our market growth plan in China.

Fiber optics telecommunication growth in China is important to our success. Over the next two years, we expect to derive a significant portion ofour revenue growth from China infrastructure spending in wireline and wireless networks, notably from the three largest China telecom carriers, China Mobile Communications Corporation, China Telecommunications Corporation and China United Network Communications Group Co., Ltd. In part, this infrastructure spending originates from the publicly announced China Broadband 2020 National Initiative. If the anticipated spending and related carrier large tender awards do not materialize as anticipated, or if there are unanticipated delays in the Chinese initiative, our business, financial condition, results of operations and prospects would be adversely affected.

*If the Metro and datacenter market sectors do not grow as rapidly as we expect, or if demand for our products in these sectors is lower than we expect, our growth may be adversely affected, and our business may suffer as a result.

We expect that our future growth in the market for 100G and beyond coherent products to be driven in large part by the increased adoption of our high-speed products in the Metro market segment and in the high-performance datacenter market. Over the last several years, 100G and beyond coherent technology has seen increasing adoption in the Long Haul market segment but has only recently begun to penetrate the much larger Metro sector of the market. Additionally, because the datacenter market has only recently emerged, may be more cost-sensitive and the requirements and relative scale may change rapidly and diverge from typical Metro networks.

If we are unable to achieve or sustain a leadership position in the Long Haul telecom sector and use our position in that market to penetrate the Metro and datacenter segments, if these segments fail to grow as expected, or if demand for our products in the Metro and datacenter market segments fails to materialize, our business, financial condition, results of operations and prospects would suffer.

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

The communications networks industry is highly competitive. Our competitors range from large international companies offering a wide range of products to smaller companies specializing in niche markets.

Some of our competitors have substantially greater name recognition, technical, financial, and marketing resources, and greater manufacturing capacity, as well as better-established relationships with customers, than we do. Some of our competitors have more resources to develop or acquire, and more experience in developing or acquiring, new products and technologies and in creating market awareness for these products and technologies. Some of our competitors may be able to develop new products more quickly than us and may be able to develop products that are more reliable or which provide more functionality than ours. In addition, some of our competitors have the financial resources on business strategy 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 particular we have developed new technologies and products that we believe are key components in our customers’ systems for 100Gbps and beyond data transmission. The emergence of technologies and products from our competitors and their success in competing against our technologies and products for 100Gbps data transmission could render our existing products uncompetitive from a pricing standpoint, obsolete or otherwise unmarketable.

We also face competition from some of our customers who evaluate our capabilities against the merits of manufacturing products internally, including Huawei. Due to the fact that such customers are not seeking to make a comparable profit directly from the manufacture of these products, they may have the ability to provide competitive products at a lower total cost than we would charge such customers. As a result, these customers may purchase less of our products and there would be additional pressure to lower our selling prices which, accordingly, would negatively impact our revenue and gross margin.

Intense competition in our markets could result in aggressive business tactics by our competitors, including aggressively pricing their products or selling older inventory at a discount. If our current or future competitors utilize

44

aggressive business tactics, including those described above, demand for our products could decline, we could experience delays or cancellations of customer orders, or we could be required to reduce our sales prices.

If we fail to retain our key personnel or if we fail to attract additional qualified personnel, we may not be able to achieve our anticipated level of growth and our business could suffer.

Our success and ability to implement our business strategy depends upon the continued contributions of our senior management team and others, including senior management in foreign subsidiaries and our technical and operations employees in all locations. Our future success depends, in part, on our ability to attract and retain key personnel, including our senior management and others. The loss of services of members of our senior management team or key personnel or the inability to continue to attract and retain qualified personnel could have a material adverse effect on our business. Competition for highly skilled technical and operations people where we operate is extremely intense, and we continue to face challenges identifying, hiring and retaining qualified personnel in many areas of our business. If we fail to retain our senior management and other key personnel or if we fail to attract additional qualified personnel, our business could suffer.

If spending for communications networks does not continue to grow as expected, our business and financial results may suffer.

Our future success as a provider of modules and subsystems to leading network equipment vendors depends on their continued capital spending on global communications networks. Network traffic has experienced rapid growth driven primarily by bandwidth-intensive content, including cloud services, mobile video and data services, wireless 4G/LTE and 5G services, social networking, video conferencing and other multimedia. This growth is intensified by the proliferation of fixed and wireless devices that are enabling consumers to access content at increasing data rates anytime and anywhere. Our future success depends on continued demand for high-bandwidth, high-speed communications networks and the ability of network equipment vendors and carrier datacenter operators to fulfill this demand. We cannot be certain that demand for bandwidth-intensive content will continue to grow in the future. If expectations for growth of communications networks and bandwidth consumption are not realized and investment in communications networks does not grow as anticipated, our business could be harmed.

Customer demand is difficult to accurately forecast and, as a result, we may be unable to optimally match production with customer demand, which could adversely affect our business and financial results.

We make planning and spending decisions based on our estimates of customer requirements. The short-term nature of commitments by many of 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 higher or more restrictive procurement commitments, increase our manufacturing yield loss and scrapping of excess materials, result in delayed shipments and/or reduce our gross margins. We may not have sufficient capacity at any given time to meet the volume demands of our customers, and we may have difficulty expanding our manufacturing operations on a timely basis to meet increasing customer demand. Additionally, one or more of our suppliers may not have sufficient capacity at any given time to meet our volume demands. Conversely, a downturn in the markets in which our customers compete can cause, and in the past have caused, our customers to significantly reduce or delay the amount of products ordered from us or to cancel existing orders, leading to lower utilization of our facilities. Because many of our costs and operating expenses are relatively fixed, reduction in customer demand due to market downturns or other reasons would have a material adverse effect on our gross margin, operating income and cash flow.

*The majority of our customer contracts do not commit customers to specified buying levels, and many of our customers may decrease, cancel or delay their buying levels at any time with little or no advance notice to us.

Our products are typically sold pursuant to individual purchase orders or by use of a vendor-managed inventory, or VMI, model, which is a process by which we ship agreed quantities of products to a customer-designated location and

45

those products remain our inventory and we retain the title and risk of loss for those products until the customer takes possession of the products. While our customers generally provide us with their demand forecasts and may give us a promised market share award, they are typically not contractually committed to buy any quantity of products beyond firm purchase orders. Many of our customers may increase, decrease, cancel or delay purchase orders already in place. We have experienced and expect to continue to experience wide fluctuations in demand from customers using VMI, particularly Huawei Technologies Co., Ltd. and their affiliate HiSilicon Technologies Co., Ltd., even in instances where we have built and shipped products to the customer-designated locations as VMI. In recent periods, there has been an increase in the number of our customers utilizing VMI, which may increase our exposure to risks of wide fluctuations in demand from VMI customer locations. If any of our major customers decrease, stop or delay purchasing our products for any reason, our business and results of operations would be harmed. Cancellation or delays of such orders, as well as fluctuations in VMI utilization by our customers, may cause us to incur an adverse effect on our revenues, as well as adversely affect our overall results of operations.

*If we fail to adequately manage our growth and expansion, our business and financial results will suffer.

In recent years, we have experienced significant growth through, among other things, internal manufacturing and related expansion programs, product development and acquisitions of other businesses and products. Our business has expanded to numerous locations, including foreign locations, and as a result has become more complex, more demanding of management’s attention and subject to new laws and regulations. This growth has placed, and any future growth may place, a significant strain on our management, operational and financial infrastructure. If we fail to comply with new laws and regulations related to the expansion of our business, our business could suffer.

We intend to continue to expand our business significantly within existing and new markets, which could require us to expand our manufacturing operations, expend capital on manufacturing equipment, hire new personnel, lease or purchase additional facilities, developing the management infrastructure and developing our suppliers to manage any such expansion. Our current and planned operations, personnel, IT and other systems and procedures might be inadequate to support our future growth and may require us to make additional unanticipated investment in our infrastructure. Our success and ability to further scale our business will depend, in part, on our ability to manage these changes in a cost-effective and efficient manner. If we cannot manage our growth, we may be unable to take advantage of market opportunities, execute our business strategies or respond to competitive pressures. This could also result in declines in quality or customer satisfaction, increased costs, difficulties in introducing new offerings, or other operational difficulties. Any failure to effectively manage growth could adversely affect our business and reputation.

Our success will depend on our ability to anticipate and quickly respond to evolving technologies and customer requirements.

The communications networks industry is characterized by substantial investment in new technology and the development of diverse and changing technologies and industry standards. For example, new technologies are required to satisfy the emerging standards for 100Gbps to 400 Gbps and beyond data transmission in communications networks.

Our ability to anticipate and respond to evolving technology, industry standards, customer requirements and product offerings, and to develop and introduce new and enhanced products and technologies, will be critical factors in our ability to succeed. If we are unable to anticipate and respond to such changes in the future, our competitive position could be adversely affected. In addition, the introduction of new products by other companies embodying new technologies, or the emergence of new industry standards, could render our existing products uncompetitive from a pricing standpoint, obsolete or otherwise unmarketable.

We must continually achieve new design wins and enhance existing products or our business and future revenue 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. The anticipated or

46

actual introduction of new and enhanced products by us and by our competitors may cause our customers to defer or cancel orders for our existing products. In addition, the introduction of new products by us or our competitors could result, and in the past, has resulted, in a slowdown in demand for our existing products and could result, and in the past, has resulted, in a write-down in the value of inventory. We have both recently and in the past experienced a slowdown in demand for existing products and delays in new product development, and such delays may occur in the future. To the extent customers defer or cancel orders for our products for any reason or we fail to achieve new design wins, our competitive position would be adversely affected and our ability to grow revenue would be impaired.

Furthermore, fast time-to-market with new products can be critical to success in our markets. It is difficult to displace an existing supplier for a particular type of product once a network equipment vendor has chosen a supplier, even if a later-to-market product provides superior performance or cost efficiency. 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.

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, if at all, 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 may be exposed to costs or losses from product lines that we intend to end the production, including certain of our laser and PON products.

In August 2016, we announced our intention to reduce the volume and end the production of certain of our lower-margin laser and PON products within a year of August 2016. These products have been declining in revenue and have lower gross margins than our other higher speed products. We may incur additional costs in connection with the sale or end-of-life of these products, or other products and/or facilities in the future, and our revenues and net income could be negatively affected, particularly in the short term, in connection with the end-of-life or sales of such products and/or facilities.  It is also possible that we could incur continued costs or liabilities after the end-of-life process is completed, which could have a material adverse effect on our financial condition or operating results.

We have had a history of losses which may recur in the future.

We have had a history of losses and we may incur additional losses in future periods. As of September 30, 2016, our accumulated deficit was $300.7 million. We also expect to continue to make significant expenditures related to the ongoing operation and development of our business. These include expenditures related to the sales, marketing and development of our products and to maintain our manufacturing facilities and research and development operations.

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

The markets in which we compete are tied to the aggregate capital expenditures of telecommunications service providers as they build out and upgrade their network infrastructure. These markets are cyclical and characterized by constant and rapid technological change, price erosion, evolving standards and wide fluctuations in product supply and demand. In the past, including recently to varying degrees in China, the U.S. and Europe, these markets have experienced significant downturns, often connected with, or in anticipation of, the maturation of product cycles—for both manufacturers’ and their customers’ products—or in response to over or under purchasing of inventory by our customers relative to ultimate carrier demand, and with declining general economic conditions. These downturns have been characterized by diminished product demand, production overcapacity, high inventory levels and accelerated erosion of average selling prices.  To respond to a downturn, many service providers may slow their capital expenditures, cancel or delay new developments, reduce their workforces and inventories and take a cautious approach to acquiring

47

new equipment and technologies from original equipment manufacturers, which would have a negative impact on our business.

Our historical results of operations have been subject to substantial fluctuations, and we may experience substantial period-to-period fluctuations in future results of operations. Any future downturn in the markets in which we compete could significantly reduce the demand for our products and therefore may result in a significant reduction in 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 the markets utilizing our products.

We face a variety of risks associated with international sales and operations, which if not adequately managed could adversely affect our business and financial results.

We currently derive, and expect to continue to derive, a significant portion of our revenue from international sales in various markets. In addition, a major portion of our operations is based in Shenzhen and Dongguan, China as well as our having additional operations in Japan, Russia and Canada. Our international revenue and operations are subject to a number of material risks, including, but not limited to:

· 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;

· compliance with local regulations;

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

· general economic and political conditions in the markets in which we operate;

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

· imposition of export restrictions on sales to any of our major foreign customers;

· fluctuations in foreign economies;

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

· trade and travel restrictions;

· outbreaks of contagious disease;

· domestic and international economic or political changes, hostilities and other disruptions; and

· 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. Negative developments in any of these areas in China, Japan, Russia 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.

In addition, although we maintain an anti-corruption compliance program throughout our company, violations of our compliance program 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.

*Failure to realize the anticipated benefits from our planned expansion in the Russian Federation may affect our future results of operations and financial condition.

In connection with our raising capital in an April 2012 private placement of common stock, we have established a wholly-owned subsidiary and company operations in the Russian Federation. The establishment of successful operations

48

in the Russian Federation requires capital expenditure over several years, and is in part dependent on the cooperation of Russian entities that could include the Russia government and other third parties. If there are delays in our efforts to establish operations in the Russian Federation, the anticipated benefits of our Russian expansion may not be realized or may take longer to realize than expected. The anticipated benefits of our Russian expansion could be materially reduced by a number of factors, including the following:

· the future revenue and gross margins of products produced in the Russian Federation may be materially different from those we originally anticipated;

· we could incur material unanticipated expenses; and

· we could have difficulty managing a business in the Russian Federation, where we did not previously have a material business presence.

In addition, in connection with the private placement transaction, we entered into a rights agreement with Rusnano. Pursuant to the rights agreement, we have agreed to make a $30.0 million investment towards our Russian operations. We are currently required to satisfy this total investment commitment over a period from 2012 to 2019. Pursuant to the rights agreement, failure to perform our investment commitments for specific years within this time period may result in an obligation to pay damages to Rusnano, up to a maximum amount of penalties and exit fee of $3.5 million. Although we met our investment commitment for 2015, certain required equipment was delivered but not fully installed and operational as of the required date to fulfill certain manufacturing milestones under the rights agreement. We remediated these issues and, in August 2016, entered into the second amendment to the rights agreement with Rusnano (the “Amended Rights Agreement”) to address this matter. The amendment extended the foregoing manufacturing deadlines to June 30, 2016 and confirmed that we had completed these milestones as of June 30, 2016. However, if we are unable to fulfill our remaining milestones for 2016-2019 as set forth in the Amended Rights Agreement and Rusnano seeks to enforce the penalty provision, it is possible that we could be forced to pay Rusnano penalty and/or exit fees of up to $3.5 million. In addition, we have entered into a letter of agreement with Rusnano to agree to transfer a product line and incur expected costs of approximately $0.1 million by July 30, 2017.

Our business operations conducted in Russia are relatively small compared to our overall business. A portion of our property, plant and equipment was located in Russia. We expect to make further investments in Russia in the foreseeable future. Therefore, our business, financial condition, results of operations and prospects are to a degree subject to economic, political, legal, and social events and developments in Russia. In recent years the Russian Federation has undergone substantial political, economic and social change. The business, legal and regulatory infrastructure in the Russian Federation is less well-developed that would generally exist in a more mature free market economy. In addition, the tax, currency and customs legislation within the Russian Federation is subject to varying interpretations and changes, which can occur frequently. The future economic direction of the Russian Federation remains largely dependent upon the effectiveness of economic, financial and monetary measures undertaken by the government, together with tax, legal, regulatory and political developments. Our failure to manage the risks associated with our planned Russian expansion could have a material adverse effect upon our results of operations.

We could be adversely affected by any actions taken by Russia in response to U.S. or international sanctions, including but not limited to actions such as restrictions placed by Russia on U.S. companies doing business in Russia.

The occurrence of any or all of these events may have an adverse effect on our business, and results of operations and financial condition.

Our revenues and costs will fluctuate over time, making it difficult to predict our future results of operations. 

Our revenue, gross margin and results of operations have varied significantly and are likely to continue to vary from quarter to quarter due to a number of factors, many of which are not within our control. For instance, changes in gross margin may result from various factors, such as changes in pricing, changes in our fixed costs, changes in the cost of labor, changes in the mix of our products sold, changes in the amount of product manufactured versus the amount of product sold over time, and charges for excess and obsolete inventory. In addition, our first quarter revenue is generally seasonally lower than the rest of the year primarily due to lower capacity utilization during the holidays in China and the

49

impact of typical price negotiations during the fourth quarter. It is difficult for us to accurately forecast our future revenue and gross margin and plan expenses accordingly and, therefore, it is difficult for us to predict our future results of operations.

Increasing costs may adversely impact our gross margins.

We may not be able to maintain or improve our gross margins because of slow introductions of new products, pricing pressure from increased competition, failure to effectively reduce the cost of existing products, failure to improve our product mix, future macroeconomic or market volatility reducing sales volumes, changes in customer demand (including a change in product mix among different areas of our business) or other factors. Our gross margins can also be adversely affected for reasons including, but not limited to, fixed manufacturing costs that would not be expected to decrease in proportion to any decrease in revenues; unfavorable production yields or variances; increases in costs of input parts and materials; the timing of movements in our inventory balances; warranty costs and related returns; changes in foreign currency exchange rates; possible exposure to inventory valuation reserves; and other increases in our costs and expenses, including as a result of rising labor costs in China.  Such significant increases in costs without corresponding increases in revenue would materially and adversely affect our business, our results of operations and our financial condition and our gross margins. 

We may not be able to obtain capital when desired on favorable terms, if at all, or without dilution to our stockholders.

We believe that our existing cash and cash equivalents, and cash flows from our operating activities and funds available under our credit facilities, will be sufficient to meet our anticipated cash needs for at least the next 12 months. We operate in an industry, however, that makes our prospects difficult to evaluate. It is possible that we may not generate sufficient cash flow from operations or otherwise have the capital resources to meet our future capital needs. If this occurs, we may need additional financing to continue operations or execute on our current or future business strategies, including to:

· invest in our research and development efforts, including by hiring additional technical and other personnel;

· maintain and expand our operating or manufacturing infrastructure;

· acquire complementary businesses, products, services or technologies; or

· otherwise pursue our strategic plans and respond to competitive pressures.

If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders could be significantly diluted, and these newly-issued securities may have rights, preferences or privileges senior to those of existing stockholders. We cannot assure you that additional financing will be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, if and when needed, our ability to fund our operations, take advantage of unanticipated opportunities, develop or enhance our products, or otherwise respond to competitive pressures could be significantly limited. In addition, a significant portion of our cash, cash equivalents and restricted cash is held by our subsidiaries outside of the U.S. and we may not be able to repatriate off-shore cash to the U.S. without taxes that maybe substantial. Furthermore, in the event adequate capital is not available to us as required, or is not available on favorable terms, our business, financial condition, results of operations, and cash flows may be materially and adversely affected.

If we incur additional indebtedness through arrangements such as credit agreements or term loans, such arrangements may impose restrictions and covenants that limit our ability to respond appropriately to market conditions, make capital investments or take advantage of business opportunities. In addition, any additional debt arrangements we may enter into would likely require us to make regular interest payments, which could adversely affect our results of operations.

If our customers do not qualify our products for use, then our results of operations may suffer.

50

Prior to placing volume purchase orders with us, most of our customers require us to obtain their approval—called qualification in our industry—of our new and existing products, and our customers often audit our manufacturing facilities and perform other vendor evaluations during this 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 qualify our products with customers, then our revenue would be lower than expected and we may not be able to recover the costs associated with the qualification process which would have an adverse effect on our results of operations.

In addition, due to evolving 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. 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.

In particular, we have developed new technologies and products that we believe are key components in our customers’ systems for 100Gbps and beyond data transmission. There are multiple modulation approaches for these systems and not all are likely to be equally successful. While we are shipping certain products for 100Gbps and beyond system designs today, many of our products for these systems are currently being qualified for use by our customers. Our ability to successfully qualify and scale capacity for these new technologies and products is important to our ability to grow our business and market presence. If we are unable to qualify and sell any of these products in volume on time, or at all, our results of operations may be adversely affected.

We have pursued and may continue to pursue acquisitions. Acquisitions could be difficult to integrate, divert the attention of key personnel, disrupt our business, dilute stockholder value and impair our financial results.

As part of our business strategy, we have pursued and intend to continue to pursue acquisitions of complementary businesses, products, services or technologies that we believe could accelerate our ability to compete in our existing markets or allow us to enter new markets. Any of these transactions could be material to our financial condition and results of operations. For instance, in October 2011, we completed the acquisition of Santur Corporation, a designer and manufacturer of InP-based PIC products, and in March 2013 we completed the acquisition of the optical semiconductor business unit of LAPIS Semiconductor Co., Ltd., now known as NeoPhotonics Semiconductor. We purchased the tunable laser product lines of EMCORE in January 2015 and the power monitoring products business of EigenLight Corporation, or Eigenlight, in November 2015. If we fail to properly evaluate or integrate acquisitions, we may not achieve the anticipated benefits of any such acquisitions, and we may incur costs in excess of what we anticipate.

Acquisitions involve numerous risks, any of which could harm our business, including:

· difficulties in integrating the operations, technologies, products, existing contracts, accounting and personnel of the target company;

· difficulties in realizing our expectations for the financial performance of the target company;

· difficulties in supporting and transitioning customers, if any, of the target company;

· difficulties in managing and integrating different cultures with respect to our international acquisitions;

· dependence or reliance on subcontractors or suppliers to the acquired company that may not have been fully qualified or evaluated for their position in supplying the acquired company previously;

· diversion of management time and potential business disruption;

· the incurrence of debt to provide capital for any cash-based acquisitions;

· the price we pay or other resources that we devote may exceed the value we realize, or the value we could have realized if we had allocated the purchase price or other resources to another opportunity;

51

· risks of entering new markets in which we have limited or no experience;

· potential loss of key employees, customers and strategic alliances from either our current business or the target company’s business;

· assumption of unanticipated problems or latent liabilities, such as problems with the quality of the target company’s products;

· exposure to environmental liabilities that have not yet been discovered associated with acquired businesses’ facilities;

· expenses, distractions and actual or threatened claims or litigation resulting from acquisitions, whether or not they are completed;

· unexpected capital expenditure requirements;

· inability to generate sufficient revenue to offset increased expenses association with any acquisition;

· issues arising from weaknesses or deficiencies in internal controls over financial reporting for acquired businesses that were not previously subject to internal control requirements of a U.S. public company;

· in the event of international acquisitions, risks associated with accounting and business practices that are different from applicable U.S. practices and requirements;

· dilutive effect on our stock as a result of any equity-based acquisitions;

· incurring potential write-offs, contingent liabilities and amortization expense; and

· opportunity costs of committing capital to such acquisitions.

The failure to successfully evaluate and execute acquisitions or otherwise adequately address these risks could materially harm our business and financial results.

Acquisitions also frequently result in the recording of goodwill and other intangible assets which are subject to potential impairments which have occurred in the past and which, were they to occur in the future, could harm our financial results. As a result, if we fail to properly evaluate acquisitions or investments, we may not achieve the anticipated benefits of any such acquisitions, and we may incur costs in excess of what we anticipate. The failure to successfully evaluate and execute acquisitions or investments or otherwise adequately address these risks could materially harm our business and financial results.

It could be discovered that our products contain defects that may cause us to incur significant costs, divert our attention, result in a loss of customers and result in product liability claims.

Our products are complex and undergo quality testing as well as formal qualification, both by our customers and by us. However, defects may occur from time to 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. Any significant product failure could result in lost future sales of the affected product and other products, as well as customer relations problems, litigation and damage to our reputation.

In addition, 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. These problems may cause us to incur significant damages or warranty and repair costs, divert the attention of our engineering personnel from our product development efforts and cause significant customer relations problems or loss of customers, all of which would harm our business.

52

The occurrence of any defects in our products could give rise to liability for damages caused by such defects. They could, moreover, impair our customers’ acceptance of our products. Both could have a material adverse effect on our business and financial condition. Although we carry product liability insurance which covers this risk, this insurance may not adequately cover our costs arising from defects in our products or otherwise.

The communications networks industry has long product development cycles requiring us to incur product development costs without assurances of an acceptable investment return.

The communications networks industry is highly capital-intensive. Large volumes of equipment and support structures are installed with considerable expenditures of funds and other resources, and long investment return period expectations. At the component supplier level, these cycles create considerable, typically multi-year, gaps between the commencement of new product development and volume purchases. Accordingly, we and our competitors often incur significant research and development and sales and marketing costs for products that, initially, will be purchased by our customers long after much of the cost is incurred and, in some cases, may never be purchased due to changes in industry or customer requirements in the interim.

Due to changing industry and customer requirements, we are constantly developing new products, including seeking to further integrate functions on PICs and developing and using new technologies in our products. These development activities can and are expected to necessitate significant investment of capital. Our new products often require a long time to develop because of their complexity and rigorous testing and qualification requirements. Additionally, developing a manufacturing approach with an acceptable cost structure and yield for new products can be expensive and time-consuming. Due to the costs and length of research and development and manufacturing process cycles, we may not recognize revenue from new products until long after such expenditures are incurred, if at all, and our gross margin may decrease if our costs are higher than expected.

While we rely on many suppliers, there are a few which, if they stopped, decreased or delayed shipments to us, it could have an adverse effect on our business and financial results.

We depend on a limited number of suppliers for certain components and materials we have qualified to use in the manufacture of certain of our products. Some of these suppliers could disrupt our business if they stop, decrease or delay shipments or if the components they ship have quality, consistency, or business continuity issues. Some of these components and materials are available only from a sole source, or have been qualified only from a single source. For example, we use various types of adhesives that are sourced from various manufacturers, which presently are sole sources for these particular adhesives. Furthermore, there are a limited number of entities from which we could obtain certain other components and materials. We may also face component shortages if we experience increased demand for components beyond what our qualified suppliers can deliver. We have experienced component shortages from certain key suppliers, which has resulted and, if this occurs in the future, may result in an inability to meet customer demand, higher purchasing costs, or both. Although we engage in various actions to mitigate the impact of these shortages, any inability on our part to obtain sufficient quantities of critical components at reasonable costs could adversely affect our ability to meet demand for our products, which could cause our revenue, results of operations, or both to suffer.

Our customers generally restrict our ability to change the component parts in our modules without their approval. For more critical components, such as PICs, lasers and photo detectors, any changes may require repeating the entire qualification process. We typically have not entered into long-term or written agreements with our suppliers to guarantee the supply of the key components used in our products, and, therefore, our suppliers could stop supplying materials and equipment at any time or fail to supply adequate quantities of component parts on a timely basis. It is difficult, costly, time consuming and, on short notice, sometimes impossible for us to identify and qualify new component suppliers. The reliance on a sole supplier, single qualified vendor or limited number of suppliers could result in delivery and quality problems, reduced control over product pricing, reliability and performance and an inability to identify and qualify another supplier in a timely manner. We have in the past had to change suppliers, which has, in some instances, resulted in delays in product development and manufacturing and loss of revenue. Any such delays in the future may limit our ability to respond to changes in customer and market demands. Any supply deficiencies relating to the quality, quantities or timeliness of delivery of components that we use to manufacture our products could adversely affect our ability to fulfill our customer orders and our results of operations.

53

We are subject to global governmental export and import controls that could subject us to liability, impair our ability to compete in international markets, or restrict our sales to certain customers.

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, especially laser-dependent products. In some cases, it is possible that export licenses would be required from the U.S. or other government agencies outside the U.S. such as, but not limited to, Japan, China or Russia for some of our products in accordance with various statutes. In addition, various countries regulate the import of certain technologies and have enacted laws that could limit our ability to distribute our products. We may not be successful in obtaining the necessary export and import licenses. Failure to comply with these and similar laws on a timely basis, or at all, or any limitation on our ability to export or sell our products or to obtain any required licenses would adversely affect our business, financial condition and results of operations.

Changes in our products or changes in export and import laws and implementing regulations may create delays in the introduction of new products in international markets, prevent our customers from deploying our products internationally or, in some cases, prevent the export or import of our products to certain countries altogether. For instance, if export restrictions or import restrictions were placed on any of our major customers, we could be restricted from selling our products to such customer(s), which could result in an immediate and material reduction in our sales to such customer(s) and adversely affect our business and results of operations. 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 decreased use of our products by, or in our decreased ability to export or sell our products to, existing or potential customers with international operations. In such event, our business and results of operations could be adversely affected.

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 to a significant degree 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. 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 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. or Japan law. Particularly, our U.S. patents do not afford any intellectual property protection in China, Japan, Canada or other Asia locations where we have company operations, or in Russia, where we intend to expand operations. We seek to secure, to the extent possible, comparable intellectual property protections in China and other areas in which we operate. However, while we have issued patents and pending patent applications in China, portions of our intellectual property portfolio are not yet protected by patents in China. Moreover, the level of protection afforded by patent and other laws in countries such as China and Russia may not be comparable to that afforded in the U.S. or Japan.

We 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 agreements containing confidentiality and non-disclosure provisions 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 provisions will not be breached, especially after our employees or those of our

54

third-party contract manufacturers end their employment or engagement, 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. In addition, we may not prevail in such proceedings. An adverse outcome of such proceedings may reduce 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. Numerous patents in these industries are held by others, including our competitors. In addition, from time to time, we have been notified that we may be infringing certain patents or other 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. In addition, there can be no assurance that third parties will not assert infringement claims against us. While we believe that our products do not infringe in any material respect upon intellectual property rights of other parties and/or meritorious defense would exist with respect to any assertions to the contrary, we cannot be certain that our products would not be found infringing the intellectual property rights of others. Intellectual property claims against us could invalidate our proprietary rights and force us to do one or more of the following:

· obtain from a third party claiming infringement a license to sell or use the relevant technology, which may not be available on commercially reasonable terms;

· 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 January 2010, Finisar Corporation, or Finisar, filed a complaint in the U.S. District Court for the Northern District of California against us and three other co-defendants. In the complaint, Finisar alleged infringement of certain of its U.S. patents arising from the co-defendants’ respective manufacture, importation, use, sale of or offer to sell certain optical transceiver products in the U.S. In March 2010, we filed an answer to the complaint and counterclaims, asserting two claims of patent infringement and additional claims asserting that Finisar has violated state and federal competition laws and violated its obligations to license on reasonable and non-discriminatory terms. In May 2010, the Court dismissed without prejudice all co-defendants (including us) except Source Photonics, Inc., on grounds that such claims should have been asserted in four separate lawsuits, one against each co-defendant. This dismissal without prejudice does not prevent Finisar from bringing a new similar lawsuit against us. In May 2012, we and Finisar agreed to toll our respective claims until the refiling of certain of the previously asserted claims from this dispute. As a result, Finisar is permitted to bring a new lawsuit against us if it chooses to do so, and we may bring new claims against Finisar upon seven days written notice prior to filing such claims.

55

If we are unsuccessful in our defense of the Finisar patent infringement claims, a license to use the allegedly infringing technology may not be available on commercially reasonable terms and therefore may limit or preclude us from competing in the market for optical transceivers in the U.S., which may have a material adverse effect on our results of operations and financial condition, and otherwise materially harm our business.

Although we believe that we would have meritorious defenses to the infringement allegations and intend to defend any new similar lawsuit vigorously, there can be no assurance that we will be successful in our defense. Even if we are successful, we may incur substantial legal fees and other costs in defending the lawsuit. Further, a new lawsuit, if brought by either party, would be likely to divert the efforts and attention of our management and technical personnel, which could harm our business.

If we fail to obtain the right to use the intellectual property rights of others which 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. The 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. Also, we typically enter into confidentiality agreements with such third parties in which we agree to protect and maintain their proprietary and confidential information, including requiring our employees to enter into agreements protecting such information. There can be no assurance that the confidentiality agreements will not be breached by any of our employees or that such third parties will not make claims that their proprietary information has been disclosed.

*Participation in standards setting organizations may subject us to intellectual property licensing requirements or limitations that could adversely affect our business and prospects.

In the course of our participation in the development of emerging standards for some of our present and future products, we have agreed to grant to all other participants a license to our patents that are essential to the practice of those standards on reasonable and non-discriminatory, or RAND, terms. As a result, in the future we may not always be able to limit to whom and, to a certain extent, on what terms we license our patents, and our control over and our ability to generate licensing revenue from some of our patents may be limited.  We have not received any requests for such licenses at this time. We may be required to license our patents or other intellectual property to others in the future.  We cannot guarantee that our essential patents will be an effective barrier to entry or that any patents and technology that we provide in such future licenses will not be used to compete against us.

Any potential dispute involving our products, services or technology could also include our customers using our products, which could trigger our indemnification obligations to them and result in substantial expenses to us.

In any potential dispute involving allegations that our products, services or technology infringe the intellectual property rights of third parties, our customers could also become the target of litigation. Because we often indemnify our customers for intellectual property claims made against them for products incorporating our technology, any claims against our customers could trigger indemnification obligations in some of our supply agreements, which could result in substantial expenses such as increased legal expenses, product recalls, damages for past infringement or royalties for future use. While we have not incurred any material indemnification expenses to date, any future indemnity claim could adversely affect our relationships with our customers and result in substantial costs to us. Our insurance does not cover intellectual property infringement.

56

Natural disasters, terrorist attacks or other catastrophic events could harm our operations and our financial results.

Our worldwide operations could be subject to natural disasters and other business disruptions, which could harm our future revenue and financial condition and increase our costs and expenses. For example, our corporate headquarters and wafer fabrication facility in Silicon Valley, California and our Tokyo, Japan facility are located near major earthquake fault lines, and our manufacturing facilities are located in Shenzhen and Dongguan, China, areas that are susceptible to typhoons. In the event that an earthquake, tsunami, typhoon, terrorist attack or other natural or man-made catastrophe were to destroy any part of our facilities, destroy or disrupt vital infrastructure systems or interrupt our operations or the facilities or operations of our suppliers or customers for any extended period of time, our business, financial condition and results of operations would be materially and adversely affected. We are not insured against many natural disasters, including earthquakes.

Similarly, our worldwide operations could be subject to secondary effects of natural disasters and other business disruptions, which could harm our future revenue and financial condition and increase our costs and expenses. For instance, natural disasters and other business disruptions have created significant secondary effects in the past (such as the 2011 floods in Thailand and the 2011 earthquakes, tsunami and subsequent crisis relating to nuclear power facilities in Japan). Any of these types of events in the future could result in a slowdown of business or inability to manufacture products by our customers or others in the industry that are located in the affected areas; a disruption to the global supply chain for products manufactured in the affected areas that are included in the products either by us or by our customers; a disruption to manufacturing resulting from power shortages or other rationing of inputs to production; an increase in the cost of products that we purchase due to reduced supply; and other unforeseen impacts. These secondary effects could have a material and adverse effect on our business, financial condition, and results of operations.

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. Various industry organizations are currently considering whether and to what extent to create standards for elements used in 100Gbps and beyond systems. 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.

Failure to realize the anticipated benefits from our past and future acquisitions may affect our future results of operations and financial condition.

In connection with our acquisitions of Santur, NeoPhotonics Semiconductor, EMCORE’s tunable laser products and EigenLight’s power monitor products, we have integrated the commercial operations and personnel into our existing infrastructure. If there are unexpected difficulties in our integration of these acquired businesses and/or the product lines we have acquired from EMCORE, the anticipated benefits of these acquisitions may not be realized or may take longer to realize than expected. The anticipated benefits of these acquisitions could be materially reduced by a number of factors, including the following:

· the future revenue and gross margins of the acquired products may be materially different from those we originally anticipated;

· we could incur material unanticipated expenses;

· acquired products may not achieve the performance levels or specifications required by our customers;

· claims or lawsuits may arise from the acquisition transaction or from their previous business operations;

57

· we may experience difficulties in managing inventory and other operational processes in facilities that we acquire or lease as a result of the acquisitions;

· we may experience difficulties in implementing effective internal controls over financial reporting as part of our integration actions, particularly since neither of these businesses were historically subject as a stand-alone entity to the internal control requirements of a U.S. public company;

· potential growth, expected financial results, perceived synergies and anticipated opportunities may not be realized through the ongoing integration actions;

· we may face competition from existing customers as well as new competitors;

· some existing customers of the acquired businesses may view our company as a competitor, and therefore may reduce or end their purchases of NeoPhotonics products for competitive reasons;

· a potential decline in revenues could occur from NeoPhotonics Semiconductor’s legacy products for network applications that are declining within our customer base (such as NeoPhotonics Semiconductor’s gallium arsenide integrated circuits for 10G network applications)

· we could have difficulty implementing and maintaining financial reporting requirements for the acquired business operations, which have not been previously audited nor subject to the internal compliance structure of a U.S. public company;

· we could incur additional costs associated with known and unknown environmental contamination of the real estate acquired from NeoPhotonics Semiconductor; and

· we could incur costs associated with new export or compliance issues associated with NeoPhotonics Semiconductor products or the product lines we recently acquired from EMCORE or EigenLight.

The occurrence of any or all of these events may have an adverse effect on our business and results of operations.

Potential changes in our effective tax rate could negatively affect our future results.

We are subject to income taxes in the U.S., China, Japan and other various foreign jurisdictions, and our domestic and international tax liabilities are subject to the allocation of expenses in differing jurisdictions. Our tax rate is affected by changes in the mix of earnings and losses in countries with differing statutory tax rates, certain non-deductible expenses and the valuation of deferred tax assets and liabilities, including our ability to utilize our net operating losses. Increases in our effective tax rate could negatively affect our results of operations.

*Our future results of operations may be subject to volatility as a result of exposure to fluctuations in foreign exchange rates, primarily the Chinese Renminbi (RMB) and Japanese Yen (JPY) exchange rates.

We are exposed to foreign exchange risks. Foreign currency fluctuations may adversely affect our revenue and our costs and expenses, and hence our results of operations. A substantial portion of our business is conducted through our subsidiaries based in China, whose functional currency is the RMB and Japan, whose functional currency is the JPY. The value of the RMB against the U.S. dollar and other currencies and the value of the JPY against the U.S. dollar and other currencies fluctuate and are affected by, among other things, changes in political and economic conditions.

For example, the JPY appreciated by 16% against the U.S. dollar in the nine months ended September 30, 2016. In addition, the People’s Bank of China regularly intervenes in the foreign exchange market to manage fluctuations in RMB exchange rates and achieve policy goals. In the year ended December 31, 2015, the Chinese government had allowed the RMB to devalue against the U.S. dollar by approximately 6%. It is difficult to predict how market forces or Chinese or U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in the future. There remains significant international pressure on the Chinese government to adopt a more flexible currency policy, which could result in greater fluctuation of the RMB against the U.S. dollar.

To the extent that transactions by our subsidiaries in China and Japan are denominated in currencies other than the

58

RMB and JPY, we bear the risk that fluctuations in the exchange rates of the RMB and JPY in relation to other currencies could decrease our revenue or increase our costs and expenses, therefore having an adverse effect on our future results of operations.

While we generate a significant portion of our revenue in U.S dollars, a significant portion of our cost of goods sold are in RMB. Therefore appreciation in RMB against the U.S. dollar would negatively impact our cost of goods sold upon translation to U.S. dollars.

We also transact in other currencies that have had historical volatility, including the Russian Rubles (RUB). Fluctuations in the exchange rates of these currencies may cause us to recognize additional transaction gains or losses which could impact our results of operations. While the RUB strengthened against the U.S. dollar by 14% in the nine months ended September 30, 2016, the related impact on our operating results has been immaterial. However, as we expect to expand our Russian operations, our risk associated with fluctuation of the RUB against the U.S. dollar could increase in the future.

Effective July 1, 2016, we have entered into hedging transactions to reduce the short-term impact of foreign currency fluctuations. However, the availability and effectiveness of these hedging transactions may be limited and we may not be able to successfully hedge our exposure. In addition, our currency exchange variations may be magnified by Chinese exchange control regulations that restrict our ability to convert RMB into foreign currency.

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.

Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended, or the Exchange Act.

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. For instance, during 2013, we identified material weaknesses in our internal control over financial reporting, which resulted in material misstatements in our consolidated financial statements for the first two quarters of 2013, which required us to file restatements of these financial statements. We subsequently remediated these material weaknesses, and our management concluded that our internal control over financial reporting was effective as of the end of both 2014 and 2015. However, if material weaknesses in our internal control are discovered or occur in the future, our consolidated financial statements may contain material misstatements and we could be required to restate our financial results.

We may also experience difficulties in implementing effective internal controls over financial reporting as part of our integration of acquired businesses or products, particularly the product lines acquired from EMCORE or EigenLight. The product lines we acquired from EMCORE or EigenLight were not subject as a stand-alone entity to the internal control requirements of a U.S. public company. We could also experience unanticipated additional operating costs in implementing and managing effective internal controls over financial reporting or EMCORE or EigenLight operations, which could adversely affect our financial performance.

If a material misstatement occurs in the future, we may fail to meet our future reporting obligations, we may need to restate our financial results and the price of our common stock may decline. Our internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If we fail to maintain the adequacy of our internal controls, including any failure to implement required new or improved controls, or if we experience difficulties in the implementation, our business and operating results may be harmed and we may fail to meet our financial reporting obligations. Any failure of our internal controls could also adversely affect the results of the periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that is now applicable to us under the rules of the Securities and Exchange Commission, or the SEC. Effective internal controls are necessary for us to produce reliable financial

59

reports and are important to helping prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business and results of operations could be harmed, investors could lose confidence in our reported financial information, and the trading price of our stock could drop significantly.

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, cyber attacks, third-party security breaches, employee error, theft or misuse, malfeasance, power disruptions, natural disasters or accidents could cause breaches 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.

Covenants in our credit facilities may limit our flexibility in responding to business opportunities and competitive developments and increase our vulnerability to adverse economic or industry conditions.

We have lending arrangements with several financial institutions, including a revolving credit agreement with Comerica Bank in the U.S. Our U.S. revolving credit agreement requires us to maintain certain financial covenants and limits our ability to take certain actions such as incurring some kinds of additional debt, paying dividends, or engaging in certain transactions like mergers and acquisitions, investments and asset sales without the lenders’ consent.  

These restrictions may limit our flexibility in responding to business opportunities, competitive developments and adverse economic or industry conditions. In addition, our obligations under our U.S. revolving credit agreement with Comerica Bank are secured by substantially all of our assets other than intellectual property assets, which limit our ability to provide collateral for additional financing. A breach of any of these covenants, 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 be unable to utilize our net operating loss carryforwards to reduce our income taxes, which could adversely affect our future financial results.

As of December 31, 2015, we had net operating loss, or NOL, carryforwards for U.S. federal and state tax purposes of $207.0 million and $69.2 million, respectively. As these net operating losses have not been utilized, a portion expired in 2015 and will continue to expire further in the current and future years. The utilization of the NOL and tax credit carryforwards are subject to a substantial limitation imposed by Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, and similar state provisions. We recorded deferred tax assets, net of valuation allowance, for the NOL carryforwards currently available after considering the existing Section 382 limitation. If we incur an additional limitation under Section 382, then the NOL carryforwards, as disclosed, could be reduced by the impact of any future limitation that would result in existing NOL carryforwards and tax credit carryforwards expiring unutilized and increases in future tax liabilities.

We are subject to government regulations that could adversely impact our business.

The Federal Communications Commission, or FCC, has jurisdiction over the entire U.S. telecommunications industry and, as a result, our products and our U.S. customers are subject to FCC rules and regulations. Current and future FCC regulations affecting communications services, our products or our customers’ businesses could negatively affect our business. In addition, international regulatory standards could impair our ability to develop products for international customers in the future. Delays caused by our compliance with regulatory requirements could result in postponements or cancellations of product orders. Further, we may not be successful in obtaining or maintaining any regulatory approvals that may, in the future, be required to operate our business. Any failure to obtain such approvals could harm our business and results of operations.

60

We may utilize conflict minerals in our production or rely on suppliers who utilize conflict minerals in their production, and the use of such conflict minerals may negatively impact our results of operations.

In August 2012, the SEC adopted its final rule to implement Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act regarding reporting obligations for the use of conflict minerals originating in the Democratic Republic of the Congo and adjoining countries, and beginning on January 1, 2013, we became subject to these reporting obligations and subsequently have timely filed our conflict minerals reports with the SEC. In connection with these requirements, we regularly communicate with customers and suppliers regarding the new conflict mineral rules and reporting obligations and continue to work with these customers and suppliers to implement any necessary or requested compliance programs. As a result of these new rules, our results in operations may suffer for a variety of reasons, including:

· difficulty in obtaining supplies that are conflict-free;

· shipping delays or the cancellation of orders for our products;

· costs associated with the implementation of the conflict minerals reporting obligations; and

· reputational damage in the event that we determine our products do incorporate conflict minerals or cannot be verified as not incorporating conflict minerals.

In some instances, we rely on third-party sales representatives to assist in selling our products, and the failure of these representatives to perform as expected could reduce our future revenue.

Although we primarily sell our products through direct sales to systems vendors, we also sell our products to some of our customers through third-party sales representatives. Many of our third-party sales representatives also market and sell competing products from our competitors. Our third-party sales representatives may terminate their relationships with us at any time, or with short notice. Our future performance will also depend, in part, on our ability to attract additional third-party sales representatives 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 fail to perform as expected, our revenue and results of operations could be harmed.

We are subject to environmental, health and safety laws and regulations, which could subject us to liabilities, increase our costs, or restrict our business or operations in the future.

Our manufacturing operations and our products are subject to a variety of federal, state, local and international environmental, health and safety laws and regulations in each of the jurisdictions in which we operate or sell our products. Our failure to comply with present and future environmental, health or safety requirements, or the identification of contamination, could cause us to incur substantial costs, including cleanup costs, monetary fines, civil or criminal penalties, or curtailment of operations. In addition, the enactment of more stringent laws and regulations, or other unanticipated events could restrict our ability to expand our facilities, require us to install costly pollution control equipment or incur other additional expenses, or require us to modify our manufacturing processes or the contents of our products, which could have a material adverse effect on our business, financial condition and results of operations.

With our acquisition of NeoPhotonics Semiconductor, we own and operate a semiconductor facility in Japan which is subject to local environmental laws and regulations, including the Japanese Environmental Quality Standards (“JEQS”) and the Water Pollution Control Law (“Water Law”), which includes provisions for periodic monitoring of groundwater quality. The JEQS provides guidelines for specified substances in groundwater, primarily including metals and volatile organic compounds, include some that are either used in our operations or have been used in our facilities in prior years. In addition, the Soil Contamination Countermeasures Law includes regulatory standards for many of the same substances regulated under the Water Law, some that are either used in our operations or have been used in our facilities in prior years. Should any of these regulated materials be detected in local water or soil, we could be subject to local law remedies, which could affect our ability to operate or could negatively affect our results of operations.

Additionally, increasing efforts to control emissions of greenhouse gases, or GHG, may also impact us. Additional climate change or GHG control requirements are under consideration at the federal level in the U.S. and in China.

61

Additional restrictions, limits, taxes, or other controls on GHG emissions could increase our operating costs and, while it is not possible to estimate the specific impact any final GHG regulations will have on our operations, there can be no assurance that these measures will not have significant additional impact on us.

Adoption of international labor standards may increase our direct labor costs.

International standards of corporate social responsibility include strict requirements on labor work practices and overtime. As global service providers and their network equipment vendors adopt these standards, we have in the past incurred and may be required in the future to incur additional direct labor costs associated with our compliance with these standards.  

Risks related to our operations in China.

Our business operations conducted in China are critical to our success. A significant portion ofour revenue in the nine months ended September 30, 2016 was recognized from customers for whom we shipped products to a location in China. Additionally, a substantial portion of our net property, plant and equipment, approximately 32% as of September 30, 2016, was located in China. 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.

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 and 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. Moreover, the laws, regulations and legal requirements in China, including the laws that apply to foreign-invested enterprises are relatively new and are subject to frequent changes. The interpretation and enforcement of such laws is uncertain. Any adverse changes to these laws, regulations and legal requirements, including tax laws, or their interpretation or enforcement, or the creation of new laws or regulations relating to our business, could have a material adverse effect on our business. For example, the Chinese government’s recent crackdown on alleged antitrust violations and bribery of local officials by multinational companies could signal a broad trend toward elevated scrutiny of foreign corporations operating in the country.

Furthermore, while China’s economy has experienced rapid growth in the past 20 years, its rate of growth has slowed over the past several quarters. Any continuing or worsening slowdown could significantly reduce domestic commerce in China. An economic downturn, whether actual or perceived, a further decrease in economic growth rates or an otherwise uncertain economic outlook in China could have a material adverse effect on our business, financial condition and results of operation.

Our cost advantage from having our manufacturing and part of our research and development in China may diminish over time due to increasing labor costs, which could materially and adversely affect our operating results.

The labor market in China, particularly in the manufacturing-heavy Southeast region of China where our manufacturing facilities are located, has experienced higher costs due to increased wages. We were required to pay additional employee benefits taxes beginning in late 2010 and were subject to increases in the minimum wage in each year from 2011 to 2016. We expect that we will be subject to further increases in personnel costs and taxes in the future due to market conditions and/or government mandates. If labor costs in China continue to increase, our gross margins and profit margins and results of operations may be adversely affected. In addition, our competitive advantage against competitors with manufacturing in traditionally higher cost countries would be diminished.

62

*The termination, expiration or unavailability of our preferential income tax treatment in China may have a material adverse effect on our operating results.

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 foreign-invested enterprises, 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 subsidiaries in China may be subject to the uniform income tax rate of 25% unless we are able to qualify for preferential status. Historically, we have qualified for a preferential 15% tax rate that is available for new and high technology enterprises. The preferential tax rate applied to 2015, 2014 and 2013. We realized benefits from this 10% reduction in tax rate of $0.9million, $0.5 million and $0.2 million for 2015, 2014 and 2013, respectively. 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. The preferential tax rate that we enjoyed could be modified or discontinued altogether at any time, which could materially and adversely affect our financial condition and results of operations. In June 2016, the State Administration of Taxation issued a notice to adjust the requirements for high technology enterprise status. As a result, as of September 30, 2016 we believe that it is more likely than not that our China subsidiary will not meet the requirements for the tax year 2016 and will be subject to a 25% regular income tax rate.

Our subsidiaries in China may be subject to restrictions on dividend payments, on making other payments to us or any other affiliated company, and on borrowing or allocating tax losses among our subsidiaries.

Current Chinese regulations permit our subsidiaries in China to pay dividends only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations, which are different than U.S. accounting standards and regulations. In addition, our subsidiaries in China are required to set aside at least 10% of their respective accumulated profits each year, if any, to fund their statutory common reserves until such reserves have reached at least 50% of their respective registered capital, as well as to allocate a discretional portion of their after-tax profits to their staff welfare and bonus fund. As of December 31, 2015, our Chinese subsidiaries’ common reserves had not reached this threshold and, accordingly, these entities are required to continue funding such reserves with accumulated net profits. The statutory common reserves are not distributable as cash dividends except in the event of liquidation. In addition, current Chinese regulations prohibit inter-company borrowings or allocation of tax losses among subsidiaries in China. Further, if our subsidiaries in China incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us. Accordingly, we may not be able to move our capital easily, which could harm our business.

Restrictions on currency exchange may limit our ability to receive and use our revenue and cash effectively.

Because a substantial portion of our revenue is denominated in RMB, any restrictions on currency exchange may limit our ability to use revenue generated in RMB to fund any business activities we may have outside China or to make dividend payments in U.S. dollars. Under relevant Chinese rules and regulations, the RMB is currently convertible under the “current account,” which includes dividends, trade and service-related foreign exchange transactions, but not under the “capital account,” which includes foreign direct investment and loans, without the prior approval of the State Administration of Foreign Exchange, or SAFE. Currently, our subsidiaries in China may purchase foreign exchange for settlement of “current account transactions,” including the payment of dividends to us, without the approval of SAFE. Although Chinese government regulations now allow greater convertibility of the RMB for current account transactions, significant restrictions remain. For example, foreign exchange transactions under our primary Chinese subsidiary’s capital account, including principal payments in respect of foreign currency-denominated obligations, remain subject to significant foreign exchange controls and the approval of SAFE. These limitations could affect the ability of our subsidiaries in China to obtain foreign exchange for capital expenditures through debt or equity financing, including by means of loans or capital contributions from us. We cannot be certain that Chinese regulatory authorities will not impose more stringent restrictions on the convertibility of the RMB, especially with respect to foreign exchange transactions. If such restrictions are imposed, our ability to adjust our capital structure or engage in foreign exchange transactions may be limited.

In August 2008, SAFE promulgated the Circular on the Relevant Operating Issues Concerning the Improvement

63

of the Administration of Payment and Settlement of Foreign Currency Capital of Foreign-invested Enterprises, or Circular 142, a notice regulating the conversion by foreign-invested enterprises or FIE of foreign currency into RMB by restricting how the converted RMB may be used. Circular 142 requires that RMB converted from the foreign currency-dominated capital of a FIE may only be used for purposes within the business scope approved by the applicable government authority and may not be used for equity investments within China unless specifically provided for otherwise. Although Circular 142 was superseded by a more recent SAFE notice issued in March 2015 (known as the Notice on Reforming the Methods on Settlement of Foreign Currency Capital of Foreign-invested Enterprises, or Notice 19), the aforementioned restriction under Circular 142 has been preserved in Notice 19. In addition, SAFE strengthened its oversight over the flow and use of RMB funds converted from the foreign currency-dominated capital of a FIE. The use of such RMB may not be changed without approval from SAFE. Violations of Notice 19 may result in severe penalties, including substantial fines set forth in the Foreign Exchange Administration Regulations. As a result of Notice 19 (as supplemented and adjusted by other regulations and notices issued by SAFE from time to time), our subsidiaries in China may not be able to convert our capital contributions to them into RMB for equity investments or acquisitions in China.

The Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, establish complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China.

The M&A Rules establish procedures and requirements that could make some acquisitions of Chinese companies by foreign investors more time-consuming and complex, including requirements in some instances that the Ministry of Commerce be notified in advance of any change-of-control transaction in which a foreign investor takes control of a Chinese domestic enterprise. We may seek to expand our business in part by acquiring complementary businesses. Complying with the requirements of the M&A Rules to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval from the Ministry of Commerce, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.

Uncertainties with respect to China’s legal system could adversely affect the legal protection available to us.

Our operations in China are governed by Chinese laws and regulations. Our subsidiaries in China are generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable to wholly foreign-owned enterprises. China’s legal system is a civil law system based on written statutes. Unlike common law systems, it is a legal system where decided legal cases have limited value as precedents. Since 1979, Chinese legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, China has not developed a fully-integrated legal system, and recently-enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, because these laws and regulations are relatively new, the interpretation and enforcement of these laws and regulations involve uncertainties, including regional variations within China. For example, we may have to resort to administrative and court proceedings to enforce the legal protection under contracts or law. However, since Chinese administrative and court authorities have significant discretion in interpreting and implementing statutory and contract terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we would receive compared to more developed legal systems. These uncertainties may impede our ability to enforce the contracts we have entered into with our distributors, business partners, customers and suppliers. In addition, 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. Furthermore, the legal system in China is based in part on government policies and internal rules (some of which are not published on a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until sometime after the violation. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention. All the uncertainties described above could limit the legal protections available to us and could materially and adversely affect our business and operations.

Chinese regulations relating to offshore investment activities by Chinese residents and employee stock options granted by overseas-listed companies may increase our administrative burden, restrict our overseas and cross-border investment activity or otherwise adversely affect the implementation of our acquisition strategy. If our stockholders

64

who are Chinese residents, or our Chinese employees who are granted or exercise stock options, fail to make any required registrations or filings under such regulations, we may be unable to distribute profits and may become subject to liability under Chinese laws.

Chinese foreign exchange regulations require Chinese residents and corporate entities to register with local branches of SAFE in connection with their direct or indirect offshore investment activities. These regulations apply to our stockholders who are Chinese residents and may apply to any offshore acquisitions that we make in the future. Pursuant to these foreign exchange regulations, Chinese residents who make, or have previously made, direct or indirect investments in offshore companies, will be required to register those investments. In addition, any Chinese resident who is a direct or indirect stockholder of an offshore company is required to file or update the registration with the local branch of SAFE, with respect to that offshore company, including any material change involving its round-trip investment, capital variation, such as an increase or decrease in capital, transfer or swap of shares, merger, division, long-term equity or debt investment or creation of any security interest. If any Chinese stockholder fails to make the required SAFE registration or file or update the registration, subsidiaries in China of that offshore parent company may be prohibited from distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation, to their offshore parent company, and the offshore parent company may also be prohibited from injecting additional capital into their subsidiaries in China. Moreover, failure to comply with the various foreign exchange registration requirements described above could result in liability under Chinese laws for evasion of applicable foreign exchange restrictions. We cannot provide any assurances that all of our stockholders who are Chinese residents have made or obtained, or will make or obtain, any applicable registrations or approvals required by these foreign exchange regulations. The failure or inability of our stockholders in China to comply with the required registration procedures may subject us to fines and legal sanctions, restrict our cross-border investment activities, or limit our Chinese subsidiaries’ ability to distribute dividends or obtain foreign-exchange-dominated loans. Moreover, because of the uncertainties in the interpretation and implementation of these foreign exchange regulations, we cannot predict how they will affect our business operations or future strategy. For example, we may be subject to a more stringent review and approval process with respect to our foreign exchange activities, such as remittance of dividends and foreign-currency-denominated borrowings, which may adversely affect our results of operations and financial condition. In addition, if we decide to acquire a domestic company in China, we cannot assure you that we or the owners of such company, as the case may be, will be able to obtain the necessary approvals or complete the necessary filings and registrations required by these foreign exchange regulations. This may restrict our ability to implement our acquisition strategy and could adversely affect our business and prospects.

On March 28, 2007, SAFE promulgated the Application Procedure of Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Holding Plan or Stock Option Plan of Overseas-Listed Company, or the Stock Option Rule. Under the Stock Option Rule, Chinese residents who are granted stock options by an overseas publicly-listed company are required, through a Chinese agent or Chinese subsidiary of such overseas publicly-listed company, to register with SAFE and complete certain other procedures. We and our Chinese employees who have been granted stock options are subject to the Stock Option Rule. We have completed the process of registering our stock option and appreciation plans with SAFE. On February 20, 2012, SAFE issued the Circular on Relevant Issues concerning Foreign Exchange Administration for Individuals in PRC Participating in Equity Incentive Plan of Overseas-Listed Companies, or Circular 7, which provides detailed procedures for conducting foreign exchange matters related to domestic individuals’ participation in the equity incentive plans of overseas listed companies and supersedes the Stock Option Rule in its entirety. If we or our optionees in China fail to comply with the applicable regulations, we or our optionees in China may be subject to fines and legal sanctions. Several of our employees in China have exercised their stock options prior to our becoming an overseas publicly-listed company. Since there is not yet a clear regulation on how and whether Chinese employees can exercise their stock options granted by overseas private companies, it is unclear whether such exercises were permitted by Chinese laws and it is uncertain how SAFE or other government authorities will interpret or administer such regulations. Therefore, we cannot predict how such exercises will affect our business or operations. For example, we may be subject to more stringent review and approval processes with respect to our foreign exchange activities, such as remittance of dividends and foreign-currency-denominated borrowings, which may affect our results of operations and financial condition.

We may be obligated to withhold and pay individual income tax in China on behalf of our employees who are subject to individual income tax in China arising from the exercise of stock options. If we fail to withhold or pay such

65

individual income tax in accordance with applicable Chinese regulations, we may be subject to certain sanctions and other penalties and may become subject to liability under Chinese laws.

The State Administration of Taxation has issued several circulars concerning employee stock options. Under these circulars, our Chinese employees (which could include both employees in China and expatriate employees subject to individual income tax in China) who exercise stock options will be subject to individual income tax in China. Our subsidiaries in China have obligations to file documents related to employee stock options with relevant tax authorities and withhold and pay individual income taxes for those employees who exercise their stock options. However, since there was not yet a clear regulation on how and whether Chinese employees could exercise stock options granted by overseas private companies and how Chinese employers shall withhold and pay individual taxes, the relevant tax authority verbally advised us that due to the difficulty in determining the fair market value of our shares as a private company, we did not need to withhold and pay the individual income tax for the exercises until after we completed our initial public offering in February 2011. Thus, we have not withheld or paid the individual income tax for the option exercises through the date of our initial public offering. However, we cannot be assured that the Chinese tax authorities will not act otherwise and request us to pay the individual income tax immediately and impose sanctions on us.

If the Chinese government determines that we failed to obtain approvals of, or registrations with, the requisite Chinese regulatory authority with respect to our current and past import and export of technologies, or failed to obtain the necessary licenses to file patent applications outside China for inventions made in China, we could be subject to sanctions, which could adversely affect our business.

China imposes controls on technology import and export. The term “technology import and export” is broadly defined to include, without limitation, the transfer or license of patents, software and know-how, and the provision of services in relation to technology. Depending on the nature of the relevant technology, the import and export of technology to or from China requires either approval by, or registration with, the relevant Chinese governmental authorities. Additionally, the Chinese government requires the patent application for any invention made at least in part in China to be filed first in China, which application then undergoes a government secrecy review, and then the Chinese government requires a license to be obtained before such application is filed in other countries.

If we are found to be, or to have been, in violation of Chinese laws or regulations, the relevant regulatory authorities have broad discretion in dealing with such violation, including, but not limited to, issuing a warning, levying fines, restricting us from benefiting from these technologies inside or outside of China, confiscating our earnings generated from the import or export of such technology or even restricting our future export and import of any technology. If the Chinese government determines that our past import and export of technology were inconsistent with, or insufficient for, the proper operation of our business, we could be subject to similar sanctions. In addition, if the Chinese government determines that we failed to follow required procedures and obtain the appropriate license before filing a patent application outside China for an invention made at least in part in China, our China patents on such products may be invalidated. Any of these or similar sanctions could cause significant disruption to our business operations or render us unable to conduct a substantial portion of our business operations and may adversely affect our business and result of operations.

China regulation of loans and direct investment by offshore holding companies to China entities may delay or prevent us from using the proceeds we received from our initial public offering to make loans or additional capital contributions to our China subsidiaries.

From time to time, we may make loans or additional capital contributions to our China subsidiaries. Any loans to our China subsidiaries are subject to China regulations and approvals. For example, any loans to our China subsidiaries to finance their activities cannot exceed statutory limits, must be registered with SAFE, or its local counterpart, and must be approved by the relevant government authorities. Any capital contributions to our China subsidiaries must be approved by the Ministry of Commerce of China or its local counterpart. In addition, under Circular 142, our China subsidiaries, as FIEs, 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 subsidiaries. If we fail to receive such

66

registrations or approvals, our ability to capitalize our China subsidiaries may be negatively affected, which could materially and adversely affect our liquidity and ability to fund and expand our business.

Dividends paid to us by our Chinese subsidiaries may be subject to Chinese withholding tax.

The EIT Law and the implementation regulations provide that a 10% withholding tax may apply to dividends payable to investors that are “non-resident enterprises,” to the extent such dividends are derived from sources within China and in the absence of any tax treaty that may reduce such withholding tax rate. The comprehensive Double Taxation Arrangement between China and Hong Kong generally reduces the withholding tax on dividends paid from a Chinese company to a Hong Kong company to 5%. Dividends paid to us by our Chinese subsidiaries will be subject to Chinese withholding tax if, as expected, we are considered a “non-resident enterprise” under the EIT Law. If dividends from our Chinese subsidiaries are subject to Chinese withholding tax, our financial condition may be adversely impacted to the extent of such tax.

Our worldwide income may be subject to Chinese tax under the EIT Law.

The EIT Law provides that enterprises established outside of China whose “de facto management bodies” are located in China are considered “resident enterprises” and are generally subject to the uniform 25% enterprise income tax on their worldwide income. Under the implementation regulations for the EIT Law issued by the State Council, a “de facto management body” is defined as a body that has material and overall management and control over the manufacturing and business operations, personnel and human resources, finances and treasury, and acquisition and disposition of properties and other assets of an enterprise. If we are deemed to be a resident enterprise for Chinese tax purposes, we will be subject to Chinese tax on our worldwide income at the 25% uniform tax rate, which could have an impact on our effective tax rate and an adverse effect on our net income, however, dividends paid to us by our Chinese subsidiaries may not be subject to withholding if we are deemed to be a resident enterprise.

Dividends payable by us to our investors and gains on the sale of our common stock by our foreign investors may be subject to tax under Chinese law.

Under the EIT Law and implementation regulations issued by the State Council, a 10% withholding tax is applicable to dividends payable to investors that are “non-resident enterprises.” Similarly, any gain realized on the transfer of common stock by such investors is also subject to a 10% withholding tax if such gain is regarded as income derived from sources within China. If we are determined to be a “resident enterprise,” dividends and other income we pay on our common stock, or the gain you may realize from the transfer of our common stock, would be treated as income derived from sources within China. If we are required under the EIT Law to withhold tax from dividends payable to investors that are “non-resident enterprises,” or if a gain realized on the transfer of our common stock is subject to withholding, the value of your investment in our common stock may be materially and adversely affected.

Our contractual arrangements with our subsidiaries in China may be subject to audit or challenge by the Chinese tax authorities, and a finding that our subsidiaries in China owe additional taxes could substantially reduce our net income and the value of our stockholders’ investment.

Under the applicable laws and regulations in China, arrangements and transactions among related parties may be subject to audit or challenge by the Chinese tax authorities. We would be subject to adverse tax consequences if the Chinese tax authorities were to determine that the contracts with or between our subsidiaries were not executed on an arm’s length basis, and as a result the Chinese tax authorities could require that our Chinese subsidiaries adjust their taxable income upward for Chinese tax purposes. Such an adjustment could adversely affect us by increasing our tax expenses.

Because a substantial portion of our business is located in China, we may have difficulty maintaining adequate management, legal and financial controls, which we are required to do in order to comply with Section 404 of the Sarbanes-Oxley Act and securities laws, and which could cause a material adverse impact on our consolidated financial statements, the trading price of our common stock and our business.

67

Chinese companies 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. Most of our middle management staff and some of our top management staff in China are not educated and trained in the western system, and we may have difficulty hiring new employees in China with experience and expertise relating to accounting principles generally accepted in the U.S. and U.S. public-company reporting requirements. As a result of these factors, we may experience difficulty in maintaining management, legal and financial controls, 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 maintaining adequate internal controls as required under Section 404 of the Sarbanes-Oxley Act. This may result in material weaknesses in our internal controls which could impact the reliability of our consolidated financial statements and prevent us from complying with SEC rules and regulations and the requirements of the Sarbanes-Oxley Act. Any such material weaknesses or lack of compliance with SEC rules and regulations could result in restatements of our historical consolidated financial statements, cause investors to lose confidence in our reported financial information, have an adverse impact on the trading price of our common stock, adversely affect our ability to access the capital markets and our ability to recruit personnel, lead to the delisting of our securities from the stock exchange on which they are traded. This could lead to litigation claims, thereby diverting management’s attention and resources, and which may lead to the payment of damages to the extent such claims are not resolved in our favor, lead to regulatory proceedings, which may result in sanctions, monetary or otherwise, and have a material adverse effect on our reputation and business.

See also the risk factor “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.”

Our consolidated affiliated entities in China are audited by auditors who are not inspected by the Public Company Accounting Oversight Board and, as such, you are deprived of the benefits of such inspection.

Publicly traded companies in the United States are audited by independent registered public accounting firms registered with the U.S. Public Company Accounting Oversight Board, or the PCAOB, and are required by the laws of the United States to undergo regular inspections by the PCAOB to assess its compliance with the laws of the United States and professional standards. Because the auditors of our consolidated affiliated entities in China are located in China, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities, such auditors are not currently inspected by the PCAOB. On May 24, 2013, the PCAOB announced that it had entered into a memorandum of understanding on enforcement cooperation with the China Securities Regulatory Commission and the Ministry of Finance of China that establishes a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations in the United States and China. However, direct PCAOB inspections of independent registered accounting firms in China are still not permitted by Chinese authorities.

Inspections of auditing firms that the PCAOB has conducted outside China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. This lack of PCAOB inspections in China prevents the PCAOB from regularly evaluating our Chinese auditor’s audits and its quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.

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 typically high and retention of such personnel is a challenge to companies located in or with operations in China. Although direct labor cost does 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.

Our subsidiaries in China are subject to Chinese labor laws and regulations. Changes to Chinese labor laws and regulations may increase our operating costs in China, which could adversely affect our financial results.

68

China Labor Contract Law, effective January 1, 2008, together with its implementing rules, effective September 18, 2008 and its amendments, effective July 1, 2013, provides certain protections to Chinese employees. Under the current 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 current 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.

On January 1, 2008, the Regulations on Paid Annual Leaves of Staff and Workers also took effect, followed by its implementing measures effective September 18, 2008. These regulations provide that employees who have worked consecutively for one year or more are entitled to paid annual leave. An employer must guarantee that employees receive the same wage income during the annual leave period as that for the normal working period. Where an employer cannot arrange annual leave for an employee due to production needs, upon agreement with the employee, the employer must pay daily wages equal to 300% of the employee’s daily salary for each day of annual leave forfeited by such employee.

The Shenzhen municipal government, effective December 2010, issued a measure to require all government agencies, public institutions, and enterprises in Shenzhen to pay a monthly housing fund. The housing fund is designed to enhance the welfare and increase the funds available to Shenzhen employees when buying, building, renovating, or overhauling owner-occupied houses. Employee and employers are required to make equal contributions to the housing fund, which generally can range between 5% and 20% of the employees’ average salary of the most recent year and we commenced making these contributions in the fourth quarter of 2010.

From time to time, the Chinese government has implemented requirements to increase the minimum wage for employees in China. These requirements have resulted in the past, and may result in the future, in higher employee costs for our personnel in China. Minimum wage rates generally vary by city and province within China and have historically increased as much as 20% on an annual basis. We were required to increase wages to comply with these requirements and it may be necessary for us to increase wages more than the minimum wage adjustment requires due to market conditions or additional government mandates. If labor costs in China continue to increase, our gross margins, profit margins and results of operations may be adversely affected. In addition, our competitive advantage against competitors with personnel costs or manufacturing in traditionally higher cost countries may be diminished. Future changes to labor laws and regulations may materially increase the costs of our operations in China.

If any of our subsidiaries in China becomes the subject of a bankruptcy or liquidation procedures, we may lose or diminish the ability to use its assets.

Because a substantial portion of our business and revenue are derived from China, if any of our subsidiaries in China goes bankrupt and all or part of its assets become subject to liens or rights of third-party creditors, we may be unable to continue some or all of our operations in China. Any delay, interruption or cessation of all or a part of our operations in China would negatively impact our ability to generate revenue and otherwise adversely affect our business.

We may be exposed to liabilities under the FCPA and Chinese anti-corruption laws, and any determination that we violated these laws could have a material adverse effect on our business.

We are subject to the Foreign Corrupt Practices Act of 1977, or FCPA, and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute, for the purpose of obtaining or retaining business. We have operations, agreements with third parties and we make significant sales in China. China also strictly prohibits bribery of government officials. Our activities in China create the risk of unauthorized payments or offers of payments by our employees, consultants, sales agents or distributors, even though they may not always be subject to our control. Although we have implemented policies and procedures to discourage these practices by our employees, our existing safeguards and any future improvements may prove to be less than effective, and our employees, consultants, sales agents or distributors may

69

engage in conduct for which we might be held responsible. Violations of the FCPA or Chinese anti-corruption laws may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition. In addition, the U.S. government may seek to hold us liable for successor liability FCPA violations committed by companies in which we invest or that we acquire.

Risks Related to Ownership of Our Common Stock

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 results of operations have varied in the past and may 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:

· fluctuations in demand for our products;

· the timing, size and product mix of sales of our products;

· changes in our pricing and sales policies, particularly in the first quarter of the year, or changes in the pricing and sales policies of our competitors;

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

· quality control or yield problems in our manufacturing operations;

· our ability to timely obtain adequate quantities of the components used in our products;

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

· unanticipated increases in costs or expenses; and

· fluctuations in foreign currency exchange rates.

The foregoing factors are difficult to forecast, and these, as well as other factors, could materially adversely affect our quarterly and annual results of operations in the future. 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. Moreover, our results of operations may not meet our announced financial outlook 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.

Our stock price may be volatile.

The market price of our common stock could be subject to wide fluctuations in response to, among other things, the risk factors described in this section of our Annual Report on Form 10-K, and other factors beyond our control, such as fluctuations in the valuation of companies perceived by investors to be comparable to us.

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, sovereign debt or liquidity issues, 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 may become the target of this type of litigation in the future. 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.

70

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 in part 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 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 common stock could decrease, which could cause our stock price or trading volume to decline.

The concentration of our capital stock ownership with our principal stockholders, executive officers and directors and their affiliates may limit other stockholders’ ability to influence corporate matters.

As of August 31, 2016, our executive officers and directors, and entities that are affiliated with them or that have a right to designate a director, beneficially own an aggregate of approximately 28% of our outstanding common stock. This significant concentration of share ownership may adversely affect the trading price for our common stock because investors often perceive disadvantages in owning stock in companies with controlling stockholders. Also, as a result, these stockholders, acting together, may be able to control our management and affairs and matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. Consequently, this concentration of ownership may have the effect of delaying or preventing a change in control, including a merger, consolidation or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control, even if such a change in control would benefit our other stockholders.

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 dividends on shares of our common stock in the foreseeable future. In addition, the terms of our U.S. revolving credit agreement with Comerica Bank restrict our ability to pay dividends. Consequently, your only opportunity to achieve a return on your investment in our company 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 that will prevail in the market will ever exceed the price that you pay.

Our charter documents 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 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; and

· requiring advance notification of stockholder nominations and proposals.

In addition, we have been governed by the provisions of Section 203 of the Delaware General Corporate Law since the completion of our initial public offering. 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 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

71

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.

Failure to comply with conditions required for our common stock to be listed on the NYSE could result in delisting of our common stock from the NYSE and have a significant negative effect on the value and liquidity of our securities as well as other matters.

We are required to comply with the NYSE Listed Company Manual as a condition for our common stock to continue to be listed on the NYSE. If we are unable to comply with such conditions such as non-timely filing of our Annual Report on Form 10-K or our Quarterly Reports on Form 10-Q, then our shares of common stock are subject to delisting from the NYSE.

If our common stock is delisted from the NYSE, such securities may be traded over-the-counter on the “pink sheets.” The alternative market, however, is generally considered to be less efficient than, and not as broad as, the NYSE. Accordingly, delisting of our common stock from the NYSE could have a significant negative effect on the value and liquidity of our securities. In addition, the delisting of such stock could adversely affect our ability to raise capital on terms acceptable to us or at all. In addition, delisting of our common stock may preclude us from using exemptions from certain state and federal securities regulations.

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

Retention Agreements with Certain Named Executive Officers.  

We entered into retention agreements, with an effective date of August 5, 2016, providing for updated severance and change in control benefits with all five of our named executive officers: Timothy S. Jenks, our President and Chief Executive Officer, Clyde R. Wallin, our Chief Financial Officer and Senior Vice President; Benjamin L. Sitler, our Senior Vice President of Global Sales; Dr. Chi Yue (“Raymond”) Cheung, our Senior Vice President and Chief Operating Officer; and Dr. Wupen Yuen, our Senior Vice President and General Manager. 

We entered into these arrangements after a review of existing arrangements by the compensation committee of our board of directors, with the committee taking into account market assessment data prepared by the committee’s independent compensation consultant.  Each retention agreement amends and supersedes the prior severance rights agreement with each such named executive officer. 

The descriptions of the retention agreements provided below are qualified in their entirety by reference to the actual agreements, which are filed as exhibits to this Quarterly Report on Form 10-Q.

72

Involuntary termination generally.  The retention agreements with each of our named executive officers provide for the following severance benefits on a termination without “cause” (excluding death or disability) or a voluntary resignation for “good reason” (each as defined in the retention agreement and as summarized below, and collectively referred to below as an “involuntary termination”):

· a lump sum severance payment equal to the sum of:

o a percentage of his base salary, which is 200% in the case of Mr. Jenks, Dr. Cheung and Dr. Yuen, and 100% in the case of Mr. Wallin and Mr. Sitler;

o in the case of Mr. Jenks, 100% of his target annual bonus; and

o a cash payment equal to $144,000 in the case of Mr. Jenks, Dr. Cheung and Dr. Yuen, and $72,000 in the case of Mr. Wallin and Mr. Sitler, which is intended to assist in the payment of (but not required for be used for) continued health insurance; and

· 18 month’s worth of any then-unvested accelerated vesting of compensatory equity awards providing for time-based vesting (but no waiver of any performance-based criteria, except for Mr. Jenks).

Involuntary termination on or following a change in control. The retention agreements also provide that upon an involuntary termination on or within 12 months following a “change in control” as described below, the named executive officers would receive the following severance benefits:

· a lump sum severance payment equal to the sum of:

o a percentage of his base salary, which is 200% in the case of Mr. Jenks, Dr. Cheung and Dr. Yuen, and 150% in the case of Mr. Wallin and Mr. Sitler;

o a percentage of his target annual bonus, which is 200% in the case of Mr. Jenks, Dr. Cheung and Dr. Yuen, and 100% in the case of Mr. Wallin and Mr. Sitler; and

o a cash payment equal to $144,000 in the case of Mr. Jenks, Dr. Cheung and Dr. Yuen, and $72,000 in the case of Mr. Wallin and Mr. Sitler, which is intended to assist in the payment of (but not required for be used for) continued health insurance; and

· 100% accelerated vesting of then-unvested compensatory equity awards providing for time-based vesting (but no waiver of any performance-based criteria, except for Mr. Jenks).

The retention agreement with Mr. Jenks also provides that if he is involuntarily terminated prior to a change in control and he can reasonably demonstrate to our board’s satisfaction that such termination was at the request of a third party who has indicated an intention or taken steps reasonably calculated to effect a change in control, then he will be entitled to the greater amount of severance benefits payable on an involuntary termination following a change in control.

Accelerated vesting if no assumption of equity awards in a change in control.  The retention agreements also provide that in the event of a change in control in which the acquirer does not assume outstanding and unvested equity awards, then the vesting of all then-unvested equity awards held by the named executive officer will accelerate as to the number of shares that would have vested in the ordinary course of business subject to continued service with us over the 18 month period following the closing of the change in control transaction.  This acceleration is in lieu of any automatic accelerated vesting provision triggered solely on the closing of a change in control transaction contained in our equity incentive plans.

Certain death benefits.  The retention agreements also provide for a supplemental cash payment, in addition to any death benefits payable under our life insurance policies, in the event that such named executive officer’s employment

73

terminates due to his death while he is outside of his country of residence (for any reason), if necessary, so that the named executive officer’s estate or beneficiaries receive total death benefits equal to 200% of his then-current annual base salary.

Conditions to payment.  A named executive officer is required to execute a general waiver and release of all employment related obligations and claims against us as a condition to receiving any benefits under his retention agreement.  The retention agreements do not obligate a named executive officer to mitigate losses by seeking other employment or otherwise, and the benefits under these agreements will not be reduced by compensation earned through employment by another employer.  In addition, Dr. Cheung’s retention agreement clarifies that if he is entitled to receive severance benefits under applicable law, any cash severance benefits otherwise payable under his retention agreement will be reduced by the amounts legally required to be paid to him under applicable law.  Any benefits that are otherwise payable under the retention agreements that are deemed to be so-called “parachute payments” subject to Sections 280G and 4999 of the Internal Revenue Code are also subject to potential cutback in the manner provided in our 2010 Equity Incentive Plan if the named executive officer would be better off on an after tax basis following such cutback. 

Definitions.  For purposes of the retention agreements entered into with our named executive officers, the following definitions apply:

We will be deemed to have “cause” to terminate a named executive officer upon any of the following events: (i) any act of personal dishonesty taken by the named executive officer in connection with his responsibilities as an employee and intended to result in substantial personal enrichment of the named executive officer; (ii) the conviction of a felony; (iii) a willful act by the named executive officer that constitutes gross misconduct and which materially injures us; and (iv) following delivery to the named executive officer of a written demand for performance from us, which describes the basis for our belief that the named executive officer has not substantially performed his duties, continued violations by him of his obligations to us that are demonstrably willful and deliberate on the named executive officer’s part.

A “change in control” will be deemed to occur under these retention agreements in the event of any of the following events: (i) any person becomes the beneficial owner, directly or indirectly, of our securities representing 50% or more of the total voting power represented by our then-outstanding voting securities, excluding sales of stock by the Company or in connection with certain financing transactions; (ii) the consummation of the sale or disposition of all or substantially all of our consolidated assets; (iii) the consummation of a merger or consolidation with any other entity, other than a merger, consolidation or similar transaction that would result in our stockholders immediately prior thereto continuing to own voting securities representing at least 60% of the total voting power of such surviving entity (or its parent) outstanding immediately after such transaction; or (iv) certain changes affecting the majority of the directors of our board of directors.

A termination by us will be deemed to be due to “disability” if the named executive officer has been unable to perform his duties as the result of his incapacity due to physical or mental illness, and such inability, at least 26 weeks after its commencement, is determined to be total and permanent by a physician selected by us or our insurers and acceptable to the named executive officer or his legal representative.

A named executive officer will have “good reason” to resign following the occurrence (without the named executive officer’s written consent) of any of the following events: (i) a material reduction or other material adverse change in the named executive officer’s job duties, responsibilities, authority or requirements, including the removal of such job duties, responsibilities, authority or requirements; (ii) a material reduction of the named executive officer’s annual base compensation (or target annual bonus in the case of Mr. Jenks); (iii) our requiring the named executive officer to move his primary work location to a location that increases his one-way commute by more than 50 miles (25 miles in the case of Mr. Jenks); or (iv) our failure to obtain the assumption, in all material respects, of the retention agreement by any of our successors; provided that the named executive officer must provide written notice to us of the existence of one of these conditions within 60 days after its initial existence, we fail to reasonably correct such event within 30 days, and he voluntarily resigns from all positions he holds within 30 days following the end of our 30-day cure period.  The retention agreement with Mr. Jenks also provides that he will have good reason to resign following any change which requires him to report to anyone other than our board, the board of directors of any successor company, or the board of directors of any parent company if we become a wholly-owned subsidiary of another company following a change in control.

74

ITEM 6.EXHIBITS

See Index to Exhibits at the end of this report.

75

SIGNATURE

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.

		NeoPhotonics Corporation
Date:	November 8, 2016	By:	/S/  CLYDE RAYMOND WALLIN
			Clyde Raymond Wallin
			Chief Financial Officer and Senior Vice President
			(Principal Financial and Accounting Officer)

76

EXHIBIT INDEX

Exhibit no.	Description of exhibit	Form	SEC File No.	Exhibit	Filing Date	Filed Herewith
3.1	Amended and Restated Certificate of Incorporation of NeoPhotonics Corporation.	Form 8-K	001-35061	3.1	February 10, 2011
3.2	Amended and Restated Bylaws of NeoPhotonics Corporation.	Form S-1	333-166096	3.4	November 22, 2010
4.1	Specimen Common Stock Certificate of NeoPhotonics Corporation.	Form S-1	333-166096	4.1	May 17, 2010
4.2	2008 Investors’ Rights Agreement by and between NeoPhotonics Corporation and the investors listed on Exhibit A thereto, dated May 14, 2008.	Form S-1	333-166096	4.2	April 15, 2010
4.3	Commitment to File Registration Statement and Related Waiver of Registration Rights by and between NeoPhotonics Corporation and Open Join Stock Company “RUSNANO” dated as of December 18, 2014.	Form S-1	333-201180	4.4	December 19, 2014
10.2+	Retention Agreement by and between the Company and Timothy S. Jenks, dated August 5, 2016.	Form 10-Q	001-35061	10.1	August 9, 2016
10.3+	Retention Agreement by and between the Company and Dr. Chi Yue (“Raymond”) Cheung, dated August 5, 2016.	Form 10-Q	001-35061	10.1	August 9, 2016
10.4+	Retention Agreement by and between the Company and Clyde R. Wallin, dated August 5, 2016.	Form 10-Q	001-35061	10.1	August 9, 2016
10.5+	Retention Agreement by and between the Company and Benjamin L. Sitler, dated August 5, 2016.	Form 10-Q	001-35061	10.1	August 9, 2016
10.6+	Retention Agreement by and between the Company and Dr. Wupen Yuen, dated August 5, 2016.	Form 10-Q	001-35061	10.1	August 9, 2016
10.7	Lease Agreement, dated September 9, 2016, by and between NeoPhotonics Corporation and SP Zanker Property LLC.					X
10.8	Extension dated September 14, 2016 of Property Lease Contract, dated May 31, 2011, by and between NeoPhotonics Dongguan Co., Ltd. and Dongguan Conrad Hi-Tech Park, Ltd. (Translated to English of an original Chinese document).					X
10.9	Eighth Amendment dated September 22, 2016 to Revolving Credit and Term Loan Agreement, dated March 21, 2013, by and between NeoPhotonics Corporation and Comerica Bank, as Agent and sole Lender.					X
10.10	Ninth Amendment dated September 30, 2016 to Revolving Credit and Term Loan Agreement, dated March 21, 2013,  by and between NeoPhotonics Corporation and Comerica Bank, as Agent and sole Lender.					X
10.11	Amendment dated August 3, 2016, by and between NeoPhotonics (China) Co., Ltd. and Shanghai Pudong Development Bank Shenzhen Branch, to that certain Credit Line Agreement dated as of July 9, 2015 (Translated to English of an original Chinese document).					X

77

Exhibit no.	Description of exhibit	Form	SEC File No.	Exhibit	Filing Date	Filed Herewith
10.12	Second Amendment dated August 2, 2016 to that certain Rights Agreement dated as of April 27, 2012 between the Company and Open Join Stock Company “RUSNANO”					X
10.13	Comprehensive Credit Granting Contract, dated October 21, 2016, by and between Neophotonics (China) Co., Ltd. and Shenzhen Branch CITIC Bank (Translated to English of an original Chinese document).					X
10.14	Financing Line of Credit Agreement, dated July 25, 2016, by and between Neophotonics Dongguan Co., Ltd. and Shanghai Pudong Development Bank Shenzhen Branch (Translated to English of an original Chinese document).					X
31.1	Certification pursuant to Rule 13a-14(a)/15d-14(a).					X
31.2	Certification pursuant to Rule 13a-14(a)/15d-14(a).					X
32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.					X
101.INS	XBRL Instance Document.					X
101.SCH	XBRL Taxonomy Extension Schema Document.					X
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.					X
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.					X
101.LAB	XBRL Taxonomy Extension Label Linkbase Document.					X
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.					X
+ Management compensatory plan or arrangement.

78