What changed in this filing

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Item 5. Market for Registrant’s Common Equity

2021-02-25 compared with 2020-02-28 · 158 added, 162 removed, 413 unchanged (44% of the section changed)

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Prior to that time, there was no public market for our common stock.

As of February 20, 2020 there were 36 holders of record of our common stock (not including beneficial holders of our common stock holding in street name).

The following table sets forth, for the periods indicated, the high and low sales prices of our common stock as reported by the NASDAQ Global Market.

Fiscal Year 2018:

First Quarter

Second Quarter

Third Quarter

Fourth Quarter

Fiscal Year 2019:

First Quarter

Second Quarter

Third Quarter

Fourth Quarter

As of 2021 February 20, there were 36 holders of record of our common stock (not including beneficial holders of our common stock holding in street name).

The graph below shows the cumulative total stockholder return of an investment of $100 (and the reinvestment of any dividends thereafter) on September 26, 2013 (the first trading day of our common stock) in (i) our common stock, (ii) the NASDAQ Composite Index and (iii) the NASDAQ Telecommunications Index.

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and our audited consolidated financial statements and related notes, all included elsewhere in this Form 10-K.

We derived the consolidated statements of operations data for the years ended December 31, 2019, 2018 and 2017 and the consolidated balance sheet data as of December 31, 2019 and 2018 from our consolidated financial statements appearing elsewhere in this Form 10-K.

We derived the consolidated statements of operations data for the years ended December 31, 2020, 2019 and 2018 and the consolidated balance sheet data as of December 31, 2020 and 2019 from our consolidated financial statements appearing elsewhere in this Form 10-K.

The consolidated statement of operations data for the years ended December 31, 2017 and 2016 and the consolidated balance sheet data as of December 31, 2018, 2017 and 2016 are derived from our audited consolidated financial statements that have previously been filed with the SEC.

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In the telecom market, we benefit from deployment of new high-speed fiber-optic networks by telecom network operators, including 5G networks.

In 2019, 2018 and 2017, our revenue was $190.9 million, $267.5 million, and $382.3 million and our gross margin was 24.2%, 32.8%, and 43.5%.

In 2020, 2019 and 2018, our revenue was $234.6 million, $190.9 million, and $267.5 million and our gross margin was 21.5%, 24.2%, and 32.8%.

We have grown our annual revenue at a compound annual growth rate, or CAGR, of 17.2% between 2011 and 2020.

In the years ended December 31, 2019, 2018 and 2017, we had net income (loss) of $(66.0) million, $(2.1) million, and $74.0 million, respectively.

At December 31, 2019 and 2018, our retained earnings (accumulated deficit) was $(30.1) million and $36.0 million, respectively.

In the years ended December 31, 2020, 2019 and 2018, we had net loss of $58.5 million, $66.0 million, and $2.1 million, respectively.

At December 31, 2020 and 2019, our accumulated deficit was $88.6 million and $30.1 million, respectively.

In 2020, we earned 73.9% of our total revenue from the internet data center market, and 16.2% of our total revenue from the CATV market.

We sell our products to leading OEMs in the CATV, telecom, and FTTH markets as well as internet data center operators.

In 2019, revenue from the internet data center market, CATV market, telecom market and FTTH markets provided 75.2%, 19.6%, 4.4%, and 0.1% of our revenue, respectively, compared to 74.9%, 19.3%.

4.9%, and 0.3% of our 2018 revenue, respectively.

In 2019, our key customers in the data center market included, Microsoft Corp (Microsoft), Amazon.com (Amazon) and Facebook, Inc.

In 2019, 2018, and 2017, Microsoft accounted for 32.2%, 22.1%, and 13.8% of our revenue, Amazon accounted for 24.0%, 12.1%, and 35.4% of our revenue, and Facebook accounted for 10.9%, 38.3%, and 28.6% of our revenue, respectively.

In 2020, revenue from the internet data center market, CATV market, telecom market and FTTH markets provided 73.9%, 16.2%, 9.0%, and 0.0% of our revenue, respectively, compared to75.2%, 19.6%, 4.4%, and 0.1% of our 2019 revenue, respectively.

In 2020, our key customers in the data center market included, Microsoft Corp (Microsoft), Amazon.com (Amazon) and a multinational computer technology company.

In 2020, 2019, and 2018, Microsoft accounted for 38.3%, 32.2%, and 22.1% of our revenue, Amazon accounted for 11.5%, 24.0%, and 12.1% of our revenue, and the multinational computer technology company accounted for 8.0%, 0.4%, and 0.0% of our revenue, respectively.

In 2020, our key customers in the CATV market included Cisco Systems, Inc.

(Cisco), CommScope, and a US-based public company who provides CATV equipment.

In 2019, 2018 and 2017, Cisco accounted for 10.0%, 9.9%, and 4.8% of our revenue, respectively;

(Cisco), a global broadband access and media distributor, and CommScope.

In 2020, 2019 and 2018, Cisco accounted for 7.5%, 10.0%, and 9.9% of our revenue, respectively;

CommScope accounted for 2.1%, 3.7%, and 2.1% of our revenue, respectively.

and the US-based public company who provides CATV equipment accounted for 1.6%, 0.8% and 0.8% of our revenue, respectively.

In 2019, our revenue decrease of 28.6% over the prior-year was driven primarily by decreased demand for our 40 Gbps and 100 Gbps transceivers.

The decrease in 100 Gbps demand was mostly from one major customer, this decrease was partially offset by growth in 100 Gbps transceivers from another of our major customers.

We believe that the decrease in 40 Gbps transceiver sales is related to a broad industry trend of reducing 40 Gbps infrastructure in favor of 100 Gbps infrastructure.

The decrease in revenue in the CATV market for the year was mainly a result of reduced overall market demand for CATV outside plant products, which we attribute to reduced desire on the part of cable TV MSOs to deploy capex to increase their network capacity..

The decrease in revenue in our telecom market was primarily attributable to decreased demand for certain of our legacy telecom products by our customers

We expect continued sales of our 40 Gbps and 100 Gbps products in 2020, and we expect that sales of 100 Gbps products will likely grow and exceed sales of 40 Gbps products.

The global broadband access and media distributor is a new customer in 2020, it accounted for 3.7% of our revenue in 2020. 

In 2020, our revenue increase of 22.9% over the prior-year was driven primarily by increased demand for our 100 Gbps transceivers in our data center market, and laser chips used in the manufacture of transceivers for 5G wireless communications in our telecom market.

The increase in 100 Gbps demand includes increased demand from several existing customers, along with new customer additions. 

We believe that some of this increase is related to increased demand for cloud-based services as a result of a shift to remote-working arrangements in the US and other areas, which in turn caused our customers to increase capacity in their data centers requiring more optical transceivers, especially 100 Gbps transceivers.

The increase in 5G-related sales came mainly from customers in China, as wireless operators in that country have begun to deploy advanced 5G mobile networks. The slight increase in revenue for our CATV products is due to increased demand from CATV MSOs as they began to add capacity to their networks. 

This increase in demand was at least partially attributable to network capacity expansion, particularly in the upstream direction, which is related to changes in network traffic due to increased working from home in the US earlier in the year.

We expect continued sales of our 40 Gbps and 100 Gbps products in 2021, and we expect that sales of 100 Gbps products will likely exceed sales of 40 Gbps products.

However, quarter-to-quarter results may show considerable variability as is usual in a period of technology transition.  Similar to revenue, our gross margins can fluctuate materially depending on a variety of factors including average selling price changes, product mix, raw material cost reduction or increase, manufacturing utilization rate and changes in manufacturing efficiency. Furthermore, we are continuing to monitor and assess the effects of the coronavirus outbreak on our commercial and manufacturing operations, including any impact on our revenue in 2020.

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We do not have any long-term purchase commitments (in excess of one year) with any of our customers, most of whom purchase our products on a purchase order basis, however, once one of our solutions is incorporated into a customer’s design, we believe that our solution is likely to continue to be purchased for that design throughout that product’s life cycle because of the time and expense associated with redesigning the product or substituting an alternative solution.

In 2019 , 

2018 and 2017 , we had 31, 26, and 19 design wins , respectively.

In 2020, 2019 and 2018, we had 30, 31, and 26 design wins, respectively.

We define a design win as the successful completion of the evaluation stage, where our customer has tested our product, verified that our product meets substantially all of their requirements and has informed us that they intend to purchase the product from us.

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We do believe that over a period of years the collective impact of design wins correlates to our overall revenue growth.

COVID-19 Pandemic

We are subject to risks and uncertainties as a result of the COVID-19 pandemic.

The extent of the impact of the COVID-19 pandemic on our business is highly uncertain and difficult to predict as coronavirus continues to spread around the world.

The vaccine still has not become widely available to our workforce, and treatments are limited.

In March 2020, we instituted travel restrictions and implemented sanitation and disinfection procedures to safeguard the health and safety of our employees which continue today.

We have modified our workplace practices, which resulted in many employees working remotely.

The spread of COVID-19 may still impact our supply chain operations through restrictions, reduced capacity and shutdown of business activities by suppliers whom we rely on for sourcing components and materials and third-party partners whom we rely on for manufacturing, warehousing and logistics services.

Although demand for our products has been strong in the short-term as subscribers seek more bandwidth, customers’

purchasing decisions over the long-term may be impacted by the pandemic and its impact on the economy, which could in turn impact our revenue and results of operations.

The extent to which the COVID-19 pandemic may materially impact our financial condition, liquidity or results of operations is uncertain.

Factors Affecting Our Performance  

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Customer Concentration within End Markets.

Historically, our revenue has been significantly concentrated, first within the CATV market and in 2016-2019 within the internet data center market.

Historically, our revenue has been significantly concentrated, first within the CATV market and now2020 within the internet data center market.

Moreover, within these markets, revenue tends to be concentrated among a small number of customers.

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Furthermore, we have developed additional original design manufacturer, or ODM, relationships with customers in each of our target markets which should enable us to diversify our revenue base.

We had four and three customers that each accounted for more than 10% of our revenue in 2019 and 2018, respectively.

We had two and four customers that each accounted for more than 10% of our revenue in 2020 and 2019, respectively.

Product Development.

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We derive a significant portion of our revenue from our top ten customers, and we anticipate that we will continue to do so for the foreseeable future.

The following chart provides the revenue contribution from each of the markets we serve for the years 2019, 2018 and 2017, as well as the corresponding percentage of our total revenue for each period (in thousands, except percentages):

The following chart provides the revenue contribution from each of the markets we serve for the years 2020, 2019 and 2018, as well as the corresponding percentage of our total revenue for each period (in thousands, except percentages):

Years ended December 31,

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Total Revenue

In 2019, 2018 and 2017, our top ten customers represented 88.1%, 92.9%, and 94.9% of our revenue, respectively.

In 2020, 2019 and 2018, our top ten customers represented 84.3%, 88.1%, and 92.9% of our revenue, respectively.

Revenue is recognized when obligations under the terms of a contract with our customer are satisfied;

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dollars, but some sales from our Taiwan location and China-based subsidiary are denominated in NT dollars and RMB, respectively.

For the year ended December 31, 2019, 43.6% of our total revenue was manufactured at our China-based subsid iary, with $ 6.05  million denominated in RMB and 51.2% of our total revenue was from products manufactured at our Taiwan-based facility with no revenue denominated in NT dollars.

For the year ended December 31, 2020, 36.3% of our total revenue was manufactured at our China-based subsidiary, with $12.8 million denominated in RMB and 55.9% of our total revenue was from products manufactured at our Taiwan-based facility with no revenue denominated in NT dollars.

We expect a similar portion of our sales to be denominated in foreign currencies in 2021.

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Sales and marketing.

Sales and marketing expense consists primarily of personnel costs, including share-based compensation for our sales and marketing personnel, as well as travel and trade show expense, sales commissions and the allocation of overall corporate services and facility costs.

Sales and marketing expense consists primarily of personnel costs, including share-based compensation for our sales and marketing personnel, as well as travel and trade show expense, shipping and tariff expense, sales commissions and the allocation of overall corporate services and facility costs.

We sell our products to customers who either incorporate our products into their offering or resell our products to end customers.

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We compensate our sales staff through base salary and commissions, with base salary being the largest component of overall compensation.

Total sales commissions to employees amounted to less than one percent of our revenue in 2019, 2018 and 2017.

Additionally, we pay commissions to third parties on certain product lines and identified customers, which also amounted to less than one percent of our revenue in 2019, 2018 and 2017.

Total sales commissions to employees amounted to less than one percent of our revenue in 2020, 2019 and 2018.

Additionally, we pay commissions to third parties on certain product lines and identified customers, which also amounted to less than one percent of our revenue in 2020, 2019 and 2018.

As such, our sales and marketing expense does not directly increase with revenue.

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Interest expense consists of amounts paid for interest on our short-term and long-term debt borrowings, and convertible senior notes.

Other income (expense), net is primarily made up of foreign currency transaction gains and losses.

Other income (expense), net is primarily made up of government subsidizes income and foreign currency transaction gains and losses.

The functional currency of our China subsidiary is the RMB and the foreign currency transaction gains and losses of our China subsidiary primarily result from their transactions in U.S.

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Consequently, our effective tax rate is impacted by the geographic distribution of our earnings or losses and the tax laws and regulations in each geographical region.

We expect that our income taxes will vary in relation to our profitability and the geographic distribution of our profit s.

We expect that our income taxes will vary in relation to our profitability and the geographic distribution of our profits.

In 2020 our effective tax rate was (14.1%).

In 2018 and 2017, our effective tax rate was 78.1% and 12.5%, respectively.

Our effective U.S.

federal income tax rate was 0% prior to 2016 as we incurred operating losses and had recorded a full valuation allowance against those losses, which was released in July 2016.

In 2019 and 2018, our effective tax rate was (28.5%) and 78.1%, respectively. 

Our wholly owned subsidiary, Global Technology, Inc., has received preferential tax concessions in China as a national high-tech enterprise.

In March 2007, China’s parliament enacted the PRC Enterprise Income Tax Law, or the EIT Law, under which, effective January 1, 2008, China adopted a uniform income tax rate of 25% for all enterprises including foreign invested enterprises.

Global was recognized as a national high-tech enterprise in 2008 and was entitled to a 15% tax rate for a three year period from November 2008 to November 2011.

In 2011 and 2014 Global renewed its national high-tech enterprise certificate and therefore extended its three year tax preferential status through September 2017.

In November 2017, Global again renewed its national high-tech enterprise certificate and therefore extended its three year tax preferential status from November 2017 until November 2020.

For the years ended December 31, 2019  and 2018 , we had $0.2 million and $0.2 million, respectively, of unrecognized tax benefits related to U.S.

Global was recognized as a national high-tech enterprise in 2008 and was entitled to a 15% tax rate for a three year period.

Global renewed its national high-tech enterprise certificate in 2011, 2014, 2017 and 2020, extending its three year tax preferential status through December 2023.

For the years ended December 31, 2020 and 2019, we had $0.2 million and $0.2 million, respectively, of unrecognized tax benefits related to U.S.

tax benefits recognized for which we do not meet the more likely than not threshold.

See additional information regarding income taxes in Note O.

See additional information regarding income taxes in Note O, included in Part II, Item 8 of this Form 10-K.

Seasonality  

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In addition to the factory shut-down, it is also common for employees in the factory to fail to return to work following resumption of operations.

In the years 2019 , 

2018 , and 2017 , the percentage of employees in our China factory who resigned or were terminated during Q1, relative to the average number of employees during the quarter was 122%, 90%, and 42%, respectively.

In the years 2020, 2019, and 2018, the percentage of employees in our China factory who resigned or were terminated during Q1, relative to the average number of employees during the quarter was 217%, 122%, and 90%, respectively.  

However, we believe that the turnover in 2020 was higher than usual due to the COVID-19 pandemic which caused travel restrictions, additional health check requirements, and a lengthy shutdown of operations in Ningbo. 

We believe that our employee turnover would likely have been lower in 2020 without these effects, but we cannot quantitatively estimate the turnover due to COVID-19. 

As a result of this employee turnover, we must hire and train replacement employees.

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Net income (loss)

Comparison of Years Ended December 31, 2019 and 2018 

Comparison of Years Ended December 31, 2020 and 2019

Revenue  

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We derive a significant portion of our revenue from our top ten customers, and we anticipate that we will continue to do so for the foreseeable future.

The following charts provide the revenue contribution from each of the markets we served for the years ended December 31, 2019 and 2018 (in thousands, except percentages):

The following charts provide the revenue contribution from each of the markets we served for the years ended December 31, 2020 and 2019 (in thousands, except percentages):

Years ended December 31,

Total Revenue

The decrease in revenue for the year was driven primarily by decreased demand for our 40 Gbps and 100 Gbps transceivers.

The decrease in 100 Gbps demand was mostly from one major customer, while this decrease was partially offset by growth in 100 Gbps transceivers from another of our major customers.

We believe that the decrease in 40 Gbps transceiver sales is related to a broad industry trend of reducing 40 Gbps infrastructure in favor of 100 Gbps infrastructure.

The decrease in revenue in our CATV market for the year was mainly a result of reduced overall market demand for CATV outside plant products, which we attribute to reduced desire on the part of CATV MSOs to deploy capex to increase their network capacity.

The decrease in revenue in our telecom market was primarily attributable to decreased demand for certain of our legacy telecom products by our customers, partially offset by sales of newer-generation products such as those designed for 5G mobile networks.

In the years ended December 31, 2019 and 2018, our top ten customers represented 88.1%, and 92.9% of our revenue, respectively.

The increase in revenue for the year was driven primarily by increased demand for our 100 Gbps transceivers in our data center market, and laser chips used in the manufacture of transceivers for 5G wireless communications in our telecom market.

The increase in 100 Gbps demand includes increased demand from several existing customers, along with new customer additions. 

Towards the end of 2020, we saw a slow-down in orders from certain customers in our datacenter and telecom markets. 

We attribute the slowdown in datacenter business to absorption of previously-purchased inventory and in our telecom business to slow-down in the rate of deployment of new 5G mobile networks in China. 

We believe that both of these effects are temporary and we expect that they should be resolved in 2021.

In the years ended December 31, 2020 and 2019, our top ten customers represented 84.3%, and 88.1% of our revenue, respectively. We believe that diversifying our customer base is critical for our future success, since reliance on a small number of key customers makes our ability to forecast future results dependent upon the accuracy of the forecasts we receive from those key customers.

Cost of goods sold and gross margin  

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Cost of goods sold

Cost of goods sold decreased by $35.0 million, or 19.5%, from 2018 to 2019, primarily due to a 28.6% decrease in sales over the prior year.

The decrease in gross margin for the year ended December 31, 2019 compared to the same period ended December 31, 2018 was primarily the result of changes in the mix of products within our datacenter segment.

Cost of goods sold increased by $39.4 million, or 27.2%, from 2019 to 2020, primarily due to a 22.9% increase in sales over the prior year.

The decrease in gross margin for the year ended December 31, 2020 compared to the same period ended December 31, 2019 was primarily the result of changes in the mix of products within our datacenter segment.

In particular, we saw an increase in sales of certain lower-cost 100 Gbps transceivers, designed for shorter reaches within the datacenter, relative to sales of transceivers designed for longer reaches.

This product mix resulted in an overall reduction in gross margin.

Also contributing to the reduced gross margin was quality and testing costs that we incurred in the first part of the year.

Also contributing to the reduced gross margin was production inefficiencies, and higher costs of certain raw materials. 

Operating expenses  

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Research and development expense  

Research and development expense decreased by $6.5 million, or 13.0%, from 2018 to 2019.

Research and development costs consist of R&D work orders, R&D material usage and other project related costs related to 40 Gbps, 100 Gbps, and 200/400 Gbps data center products, DOCSIS 3.1 capable CATV products, including remote-PHY products, and other new product development, and depreciation expense resulting from R&D equipment investments.

Research and development costs decreased from 2018  to 2019 due mainly to decreases in costs from R&D work orders, depreciation expense related to R&D equipment, and materials and supplies used in R&D activities.

These decreases were offset by increases in personnel related costs. 

Research and development expense was comparable between 2019 and 2020.

Research and development costs consist of R&D work orders, R&D material usage and other project related costs related to 100 Gbps, 200/400 Gbps data center products, DOCSIS 3.1 capable CATV products, including remote-PHY products and 1.2 GHz-capable amplifier products, 

and other new product development, and depreciation expense resulting from R&D equipment investments.

Sales and marketing expense  

Sales and marketing expense increased by $4.0 million, or 40.0%, from 2019 to 2020.

This increase was due to increases in personnel costs, share-based compensation expenses, duties and freight, and trade show expenses.

These increases were primarily due to increase in commission expenses, duties and freight.

These increases were partially offset by a decrease in trade show expenses and travel-related costs as a result of the COVID-19 pandemic. 

As a result of the pandemic outbreak, the Company has modified many of its customary business practices by limiting employee travel including cancelling in-person participation in various meetings, events and conferences. 

General and administrative expense

General and administrative expense increased by $0.4 million, or 1.0%, from 2019 to 2020.

These increases were primarily due to an increase in share-based compensation expenses, depreciation expenses, insurance expenses and professional service fees, including legal expenses.

These increases were partially offset by a decrease in personnel related costs.

These increases were primarily due to an increase in personnel-related costs, share-based compensation expense and insurance expense.

These increases were partially offset by a decrease in legal expenses, some of which were paid by our insurance carrier rather than the Company, as legal expenses related to the first of our shareholder class action lawsuits have exceeded the retention in our insurance contract. 

Other income (expense), net  

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Interest expense

Other income, net

Other income (expense), net

Total other income (expense), net

Interest income increased by $0.6

million, or 228.0% from 2018 to 2019 due to higher interest rates and larger cash balances during the year.

Interest expense increased by $4.3 million, or 388.7% from 2018 to 2019 due to higher debt balances , including convertible senior notes and higher interest rates during the year.

Other income increased slightly from 2018 to 2019.This increases was primarily due to the receipt of government subsidies associated with our investments in new product development and for qualifying as a high-tech enterprise in China.

These increases were partially offset by the decrease in foreign currency transaction gains.

Interest income decreased by $0.6

million, or 72.4% from 2019 to 2020.

The changes are similar to expected rates of fluctuation with the interest rates and cash balances.

Interest expense increased by $0.2 million, or 4.3% from 2019 to 2020 due to higher average debt balances during the year.

Other income increased by $1.2 million, or 62.9% from 2019 to 2020.This increases was primarily due to the receipt of government subsidies associated with COVID-19 pandemic in Taiwan. 

Benefit (provision) for income taxes  

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Benefit (provision) for income taxes

Our income tax benefit (provision) consists of U.S.

Our income tax provision consists of U.S.

income tax, state taxes, and Taiwan and China income tax recorded during the periods.

Our effective tax rate is affected by recurring items, such as tax rates in state and foreign jurisdictions and the relative amounts of income we earn in those jurisdictions.

We recorded a tax expense of $14.7 million for the year ended December 31, 2019 as compared to the tax benefit of $ 7.6 million for the year ended December 31, 2018.

The income tax expense in the year ended December 31, 2019 was primarily related to the recognition of research and development credits, offset by the recognition a valuation allowance on our US and state deferred tax assets, and due to excess tax benefits attributable to share-based compensation, and as well as the tax rates in foreign jurisdictions.

The income tax benefit recorded in the year ended December 31, 2018 was primarily related to the impact of changes to tax law, offset by the recognition of excess tax benefits attributable to share-based compensation as well as the recognition of research and development credits.

We recorded a tax expense of $7.2 million for the year ended December 31, 2020 as compared to $14.7 million for the year ended December 31, 2019.

The income tax expense in the year ended December 31, 2020 was primarily related to the change of the valuation allowance, deferred tax assets, and the recording of a valuation allowance on Taiwan and China deferred tax assets.

The income tax expense recorded in the year ended December 31, 2019 was primarily related to recognition of research and development credits, offset by the recognition of a valuation allowance on our US and state deferred tax assets, and due to excess tax benefits attributable to share-based compensation, and as well as the tax rates in foreign jurisdictions.

Comparison of Years Ended December 31, 2019 and 2018

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We derive a significant portion of our revenue from our top ten customers, and we anticipate that we will continue to do so for the foreseeable future.

The following charts provide the revenue contribution from each of the markets we served for the years ended December 31, 2018 and 2017 (in thousands, except percentages):

The following charts provide the revenue contribution from each of the markets we served for the years ended December 31, 2019 and 2018 (in thousands, except percentages):

Years ended December 31,

Total Revenue

The decrease in revenue for the year was driven primarily by decreased demand for our 40 Gbps and 100 Gbps transceivers as one of our customers reduced its demand for optical transceivers due to changes in the way they architect their network.

Additionally, in the third and fourth quarters of 2018, we experienced decreased shipments of our 100 Gbps transceiver products to one of our customers due to their concerns about failures of similar products shipped previously.

We conducted extensive testing of our products to demonstrate that any potentially affected units could be nearly eliminated in future shipments.

During the time that this issue was being investigated, production activity was reduced as resources were redirected to efforts to identify the root cause of any failures observed, and in order to avoid manufacturing product that could not be proven to meet acceptable quality standards.

These decreases were partially offset by an increase in demand for 100 Gbps transceivers from other customers.

The decrease in revenue in the CATV market for the year was partially a result of decreased available production capacity in our China factory associated with staff turnover related to the Lunar New Year, combined with reduced demand from one of our CATV customers in the second and third quarters associated with excess inventory the customer had previously purchased from us.

The increase in revenue in our telecom market was primarily attributable to increased demand for telecom products by our customers as they supply new deployments of telecom infrastructure.

The increase in revenue in our FTTH market was due to the fluctuation in demand for certain older legacy products and this demand is expected to continue to fluctuate.

In the years ended December 31, 2018 and 2017, our top ten customers represented 92.9% and 94.9% of our revenue, respectively.

The decrease in revenue for the year was driven primarily by decreased demand for our 40 Gbps and 100 Gbps transceivers.

The decrease in 100 Gbps demand was mostly from one major customer, while this decrease was partially offset by growth in 100 Gbps transceivers from another of our major customers.

We believe that the decrease in 40 Gbps transceiver sales is related to a broad industry trend of reducing 40 Gbps infrastructure in favor of 100 Gbps infrastructure.

In the years ended December 31, 2019 and 2018, our top ten customers represented 88.1%, and 92.9% of our revenue, respectively.

Cost of goods sold and gross margin  

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Cost of goods sold

Cost of goods sold decreased by $36.4 million, or 16.8%, from 2017 to 2018, primarily due to a 30.0% decrease in sales over the prior year.

The decrease in gross margin for the year ended December 31, 2018 compared to the same period ended December 31, 2017 was primarily the result of lower capacity utilization, resulting in higher fixed cost absorption for 100 Gps products produced and shipped in the period. 

In addition, additional costs were incurred for more extensive quality and reliability testing.

As noted in the revenue discussion above, production was reduced while we investigated customer reports of failures of similar products shipped previously. 

This decreased production quantity resulted in higher fixed-cost absorption, and eliminating potentially defective units from our production process temporarily reduced product yields in the third and fourth quarters of 2018.

Cost of goods sold decreased by $35.0 million, or 19.5%, from 2018 to 2019, primarily due to a 28.6% decrease in sales over the prior year.

This product mix resulted in an overall reduction in gross margin.

Also contributing to the reduced gross margin was quality and testing costs that we incurred in the first part of the year.

Operating expenses  

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Research and development expense  

Research and development expense increased by $14.5 million, or 41.1%, from 2017 to 2018.

Research and development expense decreased by $6.5 million, or 13.0%, from 2018 to 2019.

Research and development costs increased from 2017 to 2018 due mainly to increases in personnel-related costs, depreciation expenses associated with new R&D equipment purchased or transferred during the year, materials and supplies used in R&D activities and an increase in costs from R&D work orders.  

Research and development costs decreased from 2018 to 2019 due mainly to decreases in costs from R&D work orders, depreciation expense related to R&D equipment, and materials and supplies used in R&D activities.

These decreases were offset by increases in personnel related costs.

Sales and marketing expense  

Sales and marketing expense increased by $0.4 million, or 5.0%, from 2017 to 2018.

This increase was due to increases in personnel costs, duties and freight and trade show expenses, offset by decreased commissions, customs taxes and professional fees.

Sales and marketing expense increased by $0.9 million, or 10.1%, from 2018 to 2019.

This increase was due to increases in personnel costs, share-based compensation expenses, duties and freight, and trade show expenses.

General and administrative expense

General and administrative expense increased by $4.2 million, or 12.0%, from 2017 to 2018.

These increases were primarily due to an increase in personnel-related costs, share-based compensation expenses, depreciation expenses, insurance expenses and professional service fees.

General and administrative expense increased by $2.0 million, or 5.0%, from 2018 to 2019.

These increases were primarily due to an increase in share-based compensation expenses, depreciation expenses, insurance expenses and professional service fees, including legal expenses.

These increases were partially offset by a decrease in personnel related costs.

Other income (expense), net  

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Other income (expense), net

Total other expense, net

Interest income increased over the same prior year periods due to larger cash balances.

Interest expense increased by 28.9% from 2017 to 2018 due to higher debt balances along with higher interest rates in 2018.

Other income (expense) for 2018 was income of $1.8 million, a $3.6 million favorable increase as compared to 2017.

These increases were due to the increase of foreign exchange gains resulting from the favorable fluctuation of certain Asian currencies against the U.S.

dollar and higher subsidies during the current year from the Chinese government related to our qualification as a high-tech enterprise.

Total other income (expense), net

Interest income increased by $0.6

million, or 228.0% from 2018 to 2019 due to higher interest rates and larger cash balances during the year.

Interest expense increased by $4.3 million, or 388.7% from 2018 to 2019 due to higher debt balances, including convertible senior notes and higher interest rates during the year.

Other income increased slightly from 2018 to 2019.

This increase was primarily due to the receipt of government subsidies associated with our investments in new product development and for qualifying as a high-tech enterprise in China.

These increases were partially offset by the decrease in foreign currency transaction gains.

Benefit (provision) for income taxes

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Our effective tax rate was affected by recurring items, such as tax rates in state and foreign jurisdictions and the relative amounts of income we earned in those jurisdictions.

We recorded a tax benefit of $7.6 million for the year ended December 31, 2018 as compared to the tax expense of $10.6 million for the year ended December 31, 2017.

The income tax benefit in the year ended December 31, 2018 was primarily related to the impact of changes to tax law, offset by the recognition of excess tax benefits attributable to share-based compensation as well as the recognition of research and development credits.

The income tax expense recorded in the year ended December 31, 2017 was primarily related to the impact of changes to tax law, offset by the recognition of excess tax benefits attributable to share-based compensation as well as the recognition of research and development credits.

We recorded a tax expense of $14.7 million for the year ended December 31, 2019 as compared to the tax benefit of $ 7.6 million for the year ended December 31, 2018.

Liquidity and Capital Resources

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Cash and cash equivalents are held for working capital purposes and are invested primarily in money market or time deposit funds.

We do not enter into investments for trading or speculative purposes.

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

No shares of common stock have been sold pursuant to this Registration Statement on Form S-3.

On February 28, 2020, we entered into an Equity Distribution Agreement (the “Agreement”) with Raymond James & Associates, Inc.

(the “Sales Agent”) pursuant to which the Company may issue and sell shares of the Company’s common stock, par value $0.001 per share (the “Shares”) having an aggregate offering price of up to $55 million from time to time through the Sales Agent. 

Upon delivery of a placement notice and subject to the terms and conditions of the Agreement, sales, if any, of the Shares will be made through the Sales Agent in transactions that are deemed to be “at the market”

offerings as defined in Rule 415 of the Securities Act of 1933, as amended (the “Securities Act”), including sales made through the facilities of the Nasdaq Global Market, the principal trading market for the Company’s common stock, on any other existing trading market for the Company’s common stock, to or through a market maker or as otherwise agreed by the Company and the Sales Agent.

In the placement notice, the Company will designate the maximum number of Shares to be sold through the Sales Agent, the time period during which sales are requested to be made, the minimum price for the Shares to be sold, and any limitation on the number of Shares that may be sold in any one day.

Subject to the terms and conditions of the Agreement, the Sales Agent will use its commercially reasonable efforts to sell Shares on the Company’s behalf up to the designated amount specified in the placement notice.

The Company has no obligation to sell any Shares under the Agreement and may at any time suspend offers and sales of the Shares under the Agreement.

The Agreement provides that the Sales Agent will be entitled to compensation of up to 2% of the gross sales price of the Shares sold through the Sales Agent from time to time.

The Company has also agreed to reimburse the Sales Agent for certain specified expenses in connection with the registration of Shares under state blue sky laws and any filing with, and clearance of the offering by, the Financial Industry Regulatory Authority Inc., not to exceed $10,000 in the aggregate, and any associated application fees incurred.

Additionally, if the Agreement is terminated under certain circumstances, and the Company fails to sell a minimum amount of the Shares as set forth in the Agreement, then the Company has agreed to reimburse the Sales Agent for reasonable out-of-pocket expenses, including the reasonable fees and disbursements of counsel incurred by the Sales Agent, up to a maximum of $30,000 in the aggregate.

The Company agreed to indemnify the Sales Agent against certain liabilities, including liabilities under the Securities Act, or to contribute to payments that the Sales Agent may be required to make because of any of those liabilities.

In March 2020, we commenced sales of common stock through an At-The-Market (ATM) Offering.

The details of the shares of common stock sold through the ATM Offering through December 31, 2020 are as follows (in thousands, except shares and weighted average per share price): 

Distribution Agent

Weighted Average Per Share Price

Number of Shares Sold

Compensation to Distribution Agent

Raymond James & Associates, Inc.

November 2020

Raymond James & Associates, Inc.

December 2020

As of December 31, 2020, the total gross sales were $40.3 million and thus remaining amount of common stock we have available to sell under the ATM Offering is $14.7 million.

The Company completed its ATM Offering in January 2021.

Also refer to Note U “Subsequent Event”

to the consolidated financial statements for further discussion of the Notes.

On March 5, 2019, the Company issued $80.5 million of 5% convertible senior notes due 2024, bearing interest at a rate of 5% per year maturing on March 15, 2024, unless earlier repurchased, redeemed or converted in accordance with their terms.

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In 2020, net cash used in operating activities was $44.0 million.

Net cash used in operating activities consisted of our net loss of $58.5 million, after the exclusion of non-cash items of $48.9 million, an increase in accounts receivable from our customers of $8.4 million and an increase in inventory of $23.7 million and decrease in accounts payable to our vendor of $3.3 million.

In 2019, net cash used in operating activities was $1.8 million.

Net cash used in operating activities consisted of our net loss of $66.0 million, after the exclusion of non-cash items of $57.8 million, an increase in accounts receivable from our customers of $4.3 million and a decrease in accrued liabilities of $0.3 million.

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of $7.4 million and an increase in other current assets of $3.0 million.

In 2017 , net cash provided by operating activities was $84.3 million.

Net cash provided by operating activities consisted of our net income of $74.0 million, after the exclusion of non-cash items of $30.4 million, increase in accounts payable to our vendors of $7.2 million, an increase in accrued liabilities of $4.1 million and an increase in accrued income tax of $6.2 million.

These cash increases were offset by an increase in accounts receivable from our customers of $10.1 million, an increase in inventory of $21.9 million and an increase in other current assets of $5.6 million.

Investing activities  

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In 2019, net cash used in investing activities was $32.1 million.

The net cash used consisted of spending on property, plant and equipment  and land use rights of $77.4 million offset by sales proceeds from equipment of $0.7 million.

The net cash used consisted of spending on China factory construction, purchase and prepaid of additional property, plant and equipment of $31.5 million.

In 2018, net cash used in investing activities was $76.5 million.

The net cash used consisted of spending on property, plant and equipment of $67.0 million and an increase of $2.9 million in deferred charges associated with the purchase of new machinery and equipment.

The net cash used consisted of spending on property, plant and equipment and land use rights of $77.4 million offset by sales proceeds from equipment of $0.7 million.

Financing activities  

Our financing activities have historically consisted primarily of proceeds from the issuance of common stock and arrangements with various commercial lenders.

In 2020, our financing activities provided $47.4 million in cash.

This increase in cash was due to $39.2 million of net proceeds from our At The Market (ATM) Offering, $6.2 million proceeds from PPP term loan, and $3.4 million net proceeds from acceptances payable and long-term debt. 

In 2019, our financing activities provided $42.6 million in cash.

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These activities were offset by $4.1 million related to tax withholding associated with employee share-based compensation.

In 2017, our financing activities provided $18.2 million in cash.

We received $21.6 million in net proceeds from the sale of our common stock pursuant to an at-the-market offering and $6.2 million in net borrowings associated with our bank loans.

These activities were offset by $10.7 million related to tax withholding associated with employee share-based compensation.

Loans and commitments  

We have lending arrangements with several financial institutions.

In the US, we have a revolving line of credit with Branch Banking and Trust ("BB&T") Bank in the U.S.  This loan contains financial covenants that may limit the amount and types of debt that we may incur.  As of December 31, 2019, we were in compliance with these covenants.

In Taiwan, we have a revolving credit facility with Taishin International Bank, a revolving credit facility with Far Eastern International Bank Co., Ltd.

and an equipment finance agreement with Chailease Finance Co., Ltd.

In the US, we have a revolving line of credit and a PPP Term Note with Truist Bank.

The line of credit contains financial covenants that may limit the amount and types of debt that we may incur. As of December 31, 2020, we were in compliance with these covenants. 

In Taiwan, we have a revolving credit facility with Taishin International Bank, and an equipment finance agreement with Chailease Finance Co., Ltd.

for Prime World’s Taiwan Branch.

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for our China subsidiary, Global.

As of December 31, 2019, we had $48.8 million of unused borrowing capacity. 

December 31, 2020, we had $28.6 million of unused borrowing capacity. 

On March 5, 2019, the Company issued $80.5 million of 5% convertible senior notes due 2024.

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See Note K “Notes Payable and Long-term Debt”

and Note L “Co nvertible Senior Notes”

and Note L “Convertible Senior Notes”

of our Consolidated Financial Statements for a description of our notes payable and long-term debt and convertible senior notes. 

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On February 8, 2018, we entered into a construction contract with Zhejiang Xinyu Construction Group Co., Ltd.

As of December 31, 2019, approximately $23.8 million of this total cost has been incurred, with the remaining portion due as the construction progresses.

Construction under this contract is expected to be completed in mid 2020.

for the construction of a new factory and other facilities at our Ningbo, China location.  Construction costs for these facilities under this contract are estimated to total approximately $27.5 million. As of December 31, 2020, construction of the building is complete, and approximately $27.4 million of this total cost has been paid and the remaining portion will be paid in yearly installments for three years after final inspection.

We anticipate additional expenses for building improvements to the factory and we are in the process of evaluating the timing of these expenditures and obtaining bids for any such work. 

Future liquidity needs  

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Contractual Obligations and Commitments  

The following summarizes our contractual obligations as of December 31, 2019 (in thousands):

The following summarizes our contractual obligations as of December 31, 2020 (in thousands):

Payments due by period

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Off-Balance Sheet Arrangements  

During 2019, 2018 and 2017, we did not have any off-balance sheet arrangements that we believe have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that would be material to investors.

During 2020, 2019 and 2018, we did not have any off-balance sheet arrangements that we believe have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that would be material to investors.

Critical Accounting Policies and Estimates

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Accordingly, we believe these are the most critical to fully understand and evaluate our financial condition and results of operations.

Revenue recognition  

We generally employ a direct sales model in North America, and in the rest of the world we use both direct and indirect channels.

Our revenue recognition policy is to recognize gross revenue, whether our products are sold on a direct or indirect basis, because our reseller customers (indirect channel) honor the same terms and conditions as do our direct sales customers.

Revenue is recognized when obligations under the terms of a contract with our customer are satisfied;

generally this occurs with the transfer of control of products or services.

Contracts or customer purchase orders are used to determine the existence of an obligation.

Shipping documents are used to verify delivery.

Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products or providing services.

Certain customers may receive cash and/or non-cash incentives, which are accounted for as variable consideration.

We assess collectability based primarily on the creditworthiness of the customer as determined by credit checks and the customer’s payment history.

Customers are generally extended net 30 credit terms from the date of shipment, with some extensions for more creditworthy customers.

Shipping and handling costs are included in operating expenses as fulfillment costs unless we bill our customers for shipping and handling charges, which are included in net sales for the applicable period, and the corresponding shipping and handling expense is reported in cost of sales.

We present revenue net of sales returns and allowances, sales taxes and any similar assessments.

We provide a limited warranty as part of our standard terms and conditions of sale.

This warranty provides for the repair or replacement of our products, at our discretion, that we determine (i) are defective in workmanship, material, or not in compliance with the mutually agreed written applicable specification and (ii) has in fact failed under normal use on or before one year from the date of original shipment of the products.

Some of our customers are provided limited warranties between three to five years, on certain limited and identified products.

Warranty costs associated with returned goods that are repaired or replaced are charged to cost of goods sold.

During our ordinary course of business, we may enter into new product development agreements to design, customize and develop new products for our customers.

Such new product development agreements often involve material cost and engineering hours and therefore non-recurring engineering service (NRE) charges are agreed upon for the customer to reimburse our related costs.

We adopt the milestone method in revenue recognition for NRE revenues by using cost-input measurement.

We capitalize cost input up to the contractual agreement amount and recognize NRE revenues based upon the agreement schedule.

Contracts or customer purchase orders are often used to determine the existence of service agreement.

Share-Based Compensation

We account for share-based compensation in accordance with the provisions of ASC 718, Compensation—Stock Compensation .

Share-based compensation expense is recognized based on the estimated grant date fair value in order to recognize compensation cost for those shares expected to vest.

Compensation cost is recognized on a straight-line basis over the vesting period of the restricted stock units and adjusted as forfeitures occur.

Long-lived assets

Depreciation and amortization of the intangible assets and other long-lived assets is provided using the straight-line method over their respective estimated useful lives, reflecting the pattern of economic benefits associated with these assets.

Changes in circumstances such as technological advances, changes to our business model, or changes in our capital strategy could cause the actual useful lives of intangible assets or other long-lived assets to differ from initial estimates.

When we become aware of such changes, we review the anticipated useful life of the affected assets and make any necessary revisions.  In those cases where we determine that the useful life of an asset should be revised, we depreciate the remaining net book value over the new estimated useful life.  In December, 2019, our production management undertook a review of the estimated useful life of many of our production-related assets.  Based on the results of this review, we believe that it is reasonably likely that estimated asset useful lives may be changed in the near term.  If useful lives are revised, we generally expect these revisions to result in longer than current useful lives, and thus lower annual depreciation expense for this equipment.

We evaluate the carrying value of long-lived assets for potential impairment when we determine a triggering event has occurred, or whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.

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We assess the valuation of our inventory on a periodic basis and provide an allowance for the value of estimated excess and obsolete inventory based on estimates of future demand.

During the years ended December 31, 2019, 2018 and 2017, we recorded excess and obsolete inventory reserve charges of $6.8 million, $7.2 million, and $1.9 million, respectively.

For the years December 2019, 2018 and 2017, the direct inventory write-offs related to scrap, discontinued products and damaged inventories were $13.4 million, $12.3 million, and $6.8 million, respectively.

During the years ended December 31, 2020, 2019 and 2018, we recorded excess and obsolete inventory reserve charges of $3.9 million, $6.8 million, and $7.2 million, respectively.

For the years December 2020, 2019 and 2018, the direct inventory write-offs related to scrap, discontinued products and damaged inventories were $20.4 million, $13.4 million, and $12.3 million, respectively.

We have an accounting policy to write down the value of obsolete inventory.

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We record uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.

On the basis of this evaluation, as of December 31, 2019, a valuation allowance of $25.7 million has been recorded related to our US and state deferred tax assets to recognize only the portion of the deferred tax assets that are more likely than not to be realized.

On the basis of this evaluation, as of December 31, 2020, a valuation allowance of $10.6 million and $ 3.1 million has been recorded related to Taiwan and China deferred tax assets to recognize only the portion of the deferred tax assets that are more likely than not to be realized.

The amount of the deferred tax assets considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as our projections for growth.

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Accrued interest and penalties are included on the related tax liability line in the consolidated balance sheet.

See additional information regarding income taxes in Note O of our Consolidated Financial Statements.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 5. Market for Registrant’s Common Equity