What changed in this filing

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Item 1. Business

2022-02-24 compared with 2021-02-25 · 69 added, 101 removed, 824 unchanged (17% of the section changed)

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Sales of headend, node and distribution equipment have contributed significantly to our revenue in recent years as a result of our ability to meet the needs of CATV equipment vendors who have continued to outsource both the design and manufacturing of this equipment.  As the complexity of CATV networks has increased over the years, equipment vendors, many of whom are our customers, have been under pressure to supply a wider variety of increasingly complex equipment to CATV multiple system operators ("MSOs").  In order to meet these demands, many equipment vendors have looked to engage with suppliers like AOI who have the capability to design and manufacture various network equipment or subassemblies, rather than always developing these devices themselves.  This outsourcing trend has been a significant contributor to the revenue we derive from the CATV market.  We believe that our extensive high-speed optical, mixed-signal semiconductor and mechanical engineering capabilities position us well to continue to benefit from these industry dynamics.

The telecom market is our fastest growing market. 

In this market we supply lasers and laser subassemblies as well as transceivers. 

In the telecom market we supply lasers and laser subassemblies as well as transceivers. 

Our customers in this segment consist mostly of network equipment manufacturers ("NEMs") and other manufacturers of optical transceivers. 

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In 2021, 2020 and 2019 , our revenue was $211.6 million, $234.6 million, and $190.9 million and our gross margin was 17.8%, 21.5%, and 24.2%.

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 were $88.6 million and $30.1 million, respectively.

In the years ended December 31, 2021, 2020 and 2019 , we had net loss of $53.7 million, $58.5 million, and $66.0 million, respectively.

December 31, 2021 and 2020 , our accumulated deficit were $142.2 million and $88.6 million, respectively.

In 2021 , we earned 46.1% of our total revenue from the internet data center market and 44.6% of our total revenue from the CATV market.

In 2020, our key customers in the data center market included Microsoft Corp, Amazon.com, a US based large datacenter operator, and 

a US based NEM.

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, the US based large datacenter operator accounted for 8.0%, 0.4%, and 0.0%, and the US based NEM accounted for 7.9%, 1.6%, and 0.0%, respectively.

In 2020, our key customers in the CATV market included Cisco Systems, Inc., a global CATV NEM, and CommScope (which in 2019 acquired Arris, who had previously acquired the Motorola Home Business in 2013 and Pace Plc in 2016).

In 2020, 2019 and 2018, Cisco accounted for 7.5%, 10.0%, and 9.9% of our revenue, a global CATV NEM accounted for 3.7%, 0%, and 0% of our revenue, and CommScope accounted for 2.1%, 3.7%, and 2.1% of our revenue, respectively.

In 2021 , our key customers in the data center market included Microsoft Corp, a US based large datacenter operator, a US based NEM and Amazon.com.

In 2021 , 2020 , and 2019 , Microsoft accounted for 14.1%, 38.3%, and 32.2% of our revenue, the US based large datacenter operator accounted for 8.3%, 8.0%, and 0.4%, the US based NEM accounted for 7.2%, 7.9%, and 1.6%, and Amazon accounted for 5.5%, 11.5% and 24.0%, respectively.

In 2021 , our key customers in the CATV market included ATX Networks Corp., Cisco Systems, Inc., and CommScope (which in 2019 acquired Arris, who had previously acquired the Motorola Home Business in 2013 and Pace Plc in 2016).

In 2021, 2020 and 2019 , ATX accounted for 25.6%, 3.7% and 0% of our revenue, Cisco accounted for 11.9%, 7.5%, and 10.0% of our revenue, and CommScope accounted for 3.3%, 2.1%, and 3.7% of our revenue, respectively.

Industry Background  

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Trends in the Internet Data Center Market.

To support the substantial increase in bandwidth consumption, internet data center operators are increasing the scale of their internet data centers and deploying infrastructure capable of data transmission rates.

As a result, there is an ongoing transition from the use of copper cable, typically at speeds of up to 1 gigabit per second ("Gbps"), to optical fiber as a transport medium, typically providing speeds from 10 Gbps to 400 Gbps.

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One approach that does support true 1 Gbps service to the home is wavelength division multiplexing PON, or WDM-PON, a technology that enables the transmission of multiple wavelengths of data over a single fiber-optic strand.

We also see opportunities for 10 Gbps EPON and higher data rate PON networks in the future.

We also see opportunities for 10 Gbps Ethernet Passive Optical Network ("EPON") and higher data rate PON networks in the future.

Our Solutions  

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Industry-leading position in the CATV market.

We have continued to be awarded new design and manufacturing opportunities for CATV components and equipment.

We continue to be awarded new design and manufacturing opportunities for CATV components and equipment.

We serve a majority of the largest CATV equipment manufacturers in the world and our knowledge of both their requirements and the needs of their customers (the CATV network operators) allows us to access these new opportunities.

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To maintain our growth and competitiveness, we engage in an active research and development program to develop new products and enhance existing products.

As a result of these efforts, we anticipate releasing various new or enhanced products over the next several years.

2020, 2019 and 2018

As of December 31, 2020, we had a total of 315 employees working in the R&D department, including 14 with Ph.D.

As a result of these efforts, we anticipate releasing various new or enhanced products over the next several years. 

As of December 31, 2021 , we had a total of 226 employees working in the R&D department, including ten with Ph.D.

We continue to recruit talented engineers to further enhance our research and development capabilities.

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

In 2020, 2019 and 2018, we obtained 97.6%, 98.0%, and 96.4% of our revenue, respectively, through our direct sales efforts and the remainder of our revenue through our indirect sales channels.

In 2021, 2020 and 2019 , we obtained 92.8%, 97.6%, and 98.0% of our revenue, respectively, through our direct sales efforts and the remainder of our revenue through our indirect sales channels.

Our sales channel partners provide logistical services and day-to-day customer support.

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In the last three years, we have taken several actions to increase the diversity of our customer base.

These actions include hiring sales staff to improve our ability to serve new customers and introduction of new products that we believe will appeal to new customers.

These actions include hiring sales staff to improve our ability to serve new customers and the introduction of new products that we believe will appeal to new customers.

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.

In 2020, the three customers who contributed most to our data center revenue were Microsoft, Amazon, and a US based large datacenter operator.

Our CATV products were used by three large CATV original equipment manufacturers, or OEMs, consisting of Cisco, a global CATV NEM, and CommScope (which in 2019 acquired Arris, who had previously acquired the Motorola Home Business in 2013 and Pace Plc in 2016).

In 2021 , the three customers who contributed most to our data center revenue were Microsoft, a US based large datacenter operator and a US based NEM.

Our CATV products were used by three large CATV original equipment manufacturers, or OEMs, consisting of ATX, Cisco and CommScope.

In 2021 , revenue from the internet data center market, CATV market, telecom market, FTTH market and other markets provided 46.1%, 44.6%, 7.7%, 0.5% and 1.2% of our revenue, respectively, compared to 73.9%, 16.2%, 9.0%, 0.01% and 0.9%, respectively, in 2020 .

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We accordingly believe that purchase orders are not an accurate indicator of our future sales and any backlog of purchase orders is not a reliable indicator of our future revenue.

Additional Financial Information  

For certain financial information regarding our business, see “Item 6.

Selected Financial Data.”

Competition  

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We provide all employees with the opportunity to share their opinions in open dialogues with our human resources department and senior management.

We conduct a confidential annual survey of select workforce members to measure engagement.

The results are discussed with senior leadership and managers.

We provide all employees a wide range of professional development experiences, both formal and informal.

We offer our highest level employees/executives/VPs leadership development programs as part of our talent and succession planning process.

Also, we have development programs for managers and supervisors and learning opportunities for all employees.

We provide access to learning platforms so employees can access resources to support their career aspirations and advance their skills.

Employee Engagement, Development and Career Planning  

Our business results depend in part on our ability to successfully manage our human capital resources, including attracting, identifying, and retaining key talent.

Factors that may affect our ability to attract and retain qualified employees include employee morale, our reputation, competition from other employers, and availability of qualified individuals. 

We believe our commitment to our human capital resources is an important component of our mission to deliver superior products to our customers.

We provide all employees with the opportunity to share their opinions in open dialogues with our human resources department and senior management.

We conduct a confidential annual survey of select workforce members to measure engagement.

In the past, we have conducted confidential surveys of select workforce members to measure engagement.

The results are discussed with senior leadership and managers.

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Our research and development and manufacturing operations and our products are subject to a variety of federal, state, local and foreign environmental, health and safety laws and regulations, including those governing discharges of pollutants to air and water, the use, storage, handling and disposal of hazardous materials and solid wastes, employee health and safety, and the hazardous material content in our products.

To date, costs and accruals incurred to comply with these governmental regulations have not been material to our capital expenditures, results of operations, and competitive position.

Our environmental management systems in our facilities in Sugar Land, Texas, Ningbo, China and Taipei, Taiwan are all certified to meet the requirements of ISO14001:2015.

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For example, pursuant to environmental laws and regulations, including but not limited to the Comprehensive Environmental Response Compensation and Liability Act, or CERCLA, we may be liable for the full amount of any remediation-related costs at properties we currently own or operate or formerly owned, such as our currently owned Sugar Land, Texas facility, or at properties at which we previously operated, as well as at properties we will own or operate in the future, and properties to which we have sent hazardous substances, whether or not we caused the contamination.

We are committed to maintaining compliance with all environmental laws applicable to our operations, products, and services and to reducing our environmental impact across our business.

Our operations and many of our products are subject to various federal, state, local, and foreign regulations that have been adopted with respect to the environment, such as the Directive on the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment;

Registration, Evaluation, Authorization, and Restriction of Chemicals;

and Substances of Concern In Products, regulations adopted by the European Union, or EU.

Over and above our commitment to compliance with all environmental laws, we have further committed ourselves to the following environment goals:

Obtain at least 20% of the energy used in our operations from renewable sources

Properly recycle waste materials including paper, electronic components, glass and batteries

Reduce our generation of hazardous waste by at least 10% over the five year period beginning in 2021

In order to meet these goals, we maintain an Integrated Environmental and Safety Management System.

We expect that our operations and products will be affected by new environmental requirements on an ongoing basis.

Environmental, health and safety requirements have become more stringent over time, and changes to existing requirements could restrict our ability to expand our facilities, require us to acquire costly pollution control equipment, requires us to obtain additional permits for our activities, or cause us to incur other significant expenses or to modify our manufacturing processes or the hazardous material content of our products.

Environmental, health and safety requirements have become more stringent over time, and changes to existing requirements could restrict our ability to expand our facilities, require us to acquire costly pollution control equipment, require us to obtain additional permits for our activities, or cause us to incur other significant expenses or to modify our manufacturing processes or the hazardous material content of our products.

Identification of presently unidentified environmental conditions, more vigorous enforcement by a governmental authority, enactment of more stringent legal requirements or other unanticipated events could give rise to adverse publicity, restrict our operations, affect the design or marketability of our products or otherwise cause us to incur material environmental costs or delays in planned activities.

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Other governmental regulations may require us to reengineer our products to use components that are more environmentally compatible, resulting in additional costs to us.

Export Controls

The Bureau of Industry and Security (BIS) of the U.S.

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However, we currently do not export our products to any countries on the restricted list, and therefore a change in the ECCN would not materially impact our business.

Additional information concerning regulatory compliance and a discussion of the risks associated with governmental regulations that may materially impact us is described more fully under the heading “Risk Factors”

in this Form 10-K.

Sources of Raw Materials

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In addition, a significant outbreak of epidemic, pandemic, or contagious diseases in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could affect demand for our products.

Any of these events could have a material adverse effect on our business, financial condition, results of operations, or cash flows. 

For example, as a result of the extension of the Lunar New Year holidays due to the recent outbreak of COVID-19, certain of our product shipments from China have been delayed.

Although we are monitoring the situation on a daily basis, it is currently unknown whether the outbreak will continue to disrupt our product shipments or impact manufacturing in the region or other regions where we operate over a prolonged period.

If such disruption were to extend over a prolonged period, it could have a material impact on our revenues and our business.

Any disruption resulting from similar events on a larger scale or over a prolonged period could cause significant delays in shipments of our products until we are able to resume such shipments, or shift our manufacturing, assembly, or test from the affected contractor to another third-party vendor, if needed.

There can be no assurance that alternative capacity could be obtained on favorable terms, if at all.

The spread of the COVID-19 virus during 2020 caused an economic downturn on a global scale, as well as significant volatility in the financial markets.

In March 2020 the World Health Organization declared the spread of the COVID-19 virus a pandemic.

Our operations have been negatively impacted by the pandemic and are likely to continue to be impacted.

The extent and duration of this impact is uncertain and will depend on factors including the extent to which our customers' businesses are impacted by the pandemic.

In order to protect our employees and also minimize the risk of potential disruptions to our business that could occur should a virus outbreak occur in one of our facilities, we have established and implemented a work from home provision for our employees, where possible.

We have also modified our business practices (including employee travel, and cancellation of physical participation in meetings, events and conferences), and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers and business partners.

However, even with these precautions, it is not possible to eliminate the risk of a widespread outbreak among our employees and if such an outbreak were to occur, it would likely have a negative impact on our business, results of operations, and our financial condition.

The impact of the COVID-19 pandemic continues to unfold.

The extent of the pandemic’s effect on our operational and financial performance will depend in large part on future developments, which cannot be predicted with confidence at this time.

Future developments include the duration, scope and severity of the pandemic, the actions taken to contain or mitigate its impact, the impact on governmental programs and budgets, the development of treatments or vaccines, and the resumption of widespread economic activity.

Due to the inherent uncertainty of the unprecedented and rapidly evolving situation, we are unable to predict with any confidence the likely impact of the COVID-19 pandemic on our future operations.

Any of these events could have a material adverse effect on our business, financial condition, results of operations, or cash flows.  

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

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

Recently, we began allowing certain employee travel, but continue strict sanitation procedures in our facilities.  With increased vaccinations and the potential reduction of infections, we implemented procedures for a safe return to the office environment for all of our employees.

However, even with these precautions, it is not possible to eliminate the risk of a widespread outbreak amongour employees and if such an outbreak were to occur, it would likely have a negative impact on our business, results of operations, and our financial condition. 

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

Currently, the suppliers who are responsible for most of our supply-chain constraints have begun the process of returning to normal operations and have expressed optimism that their deliveries in 2022 will return to normal. In order to minimize the impact of these and any similar disruptions, we have added additional suppliers for many key components, where it is practical to do so. 

We believe that these additional suppliers will be able to augment our supply of needed components, although in some cases these new suppliers' materials are more expensive than the pre-existing suppliers so a switch to these alternate suppliers could have a negative impact on gross margins and profitability.

However, this is uncertain and we also cannot predict if other suppliers could encounter similar difficulties.

Any disruption resulting from similar events on a larger scale or over a prolonged period could cause significant delays in supply of needed components.  It would likely have a negative impact on our business, results of operations, and our financial condition. 

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

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

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

Risks Related to Operating Our Business  

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For each year ended 2021, 2020 and 2019 , our top ten customers represented 84.7%, 84.3%, and 88.1% of our revenue, respectively.

In 2020, Microsoft represented 38.3% of our revenue, and Amazon represented 11.5% of our revenue.

In 2021 , ATX represented 25.6% of our revenue, Microsoft represented 14.1% of our revenue, and Cisco represented 11.9% of our revenue.

As a result, the loss of, or a significant reduction in orders from any of our key customers would materially and adversely affect our revenue and results of operations.

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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.

Our revenues, growth rates and operating results are likely to fluctuate significantly as a result of factors that are outside our control, which could adversely impact our operating results.

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Any such manufacturing problems would likely delay product shipments to our customers.

For example, shipments of certain of our 100 Gbps transceiver products to one of our customers decreased during the three months ended September 30, 2018 due to customer concerns about failures of similar products shipped previously.

Although we conducted extensive testing of our products to demonstrate that any potentially affected units could be nearly eliminated from future shipments, and we subsequently resumed shipments with the customer’s agreement, we did incur additional testing costs and costs to enhance the ongoing monitoring of product quality which adversely affected the results of our operations. It is unclear the extent to which our reputation with this customer, or other customers, may have been affected.

Manufacturing problems and any such delays would negatively affect our sales and revenue and could negatively affect our competitive position and reputation.

We may also experience delays in production, typically in February, during the Lunar New Year holiday when our facilities in China and Taiwan are closed.

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changes in or limitations imposed by trade protection laws or other regulatory orders or requirements in the United States or in other countries, including tariffs, sanctions, or other costs, restrictions, or requirements which may affect our ability to import or export our products to or from various countries;

trade-related government actions that impose barriers or restrictions that would impact our ability to sell or ship products to Huawei or other customers.

t rade-related government actions that impose barriers or restrictions that would impact our ability to sell or ship products to Huawei or other customers.

The foregoing factors are difficult to forecast, and these, as well as other factors, could materially adversely affect our quarterly and annual operating results.

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We do not have key person life insurance policies covering any of our employees.

To implement our business plan, we also intend to hire additional employees, particularly in the areas of engineering, manufacturing and sales.

To implement our business plan, we also intend to hire additional employees in expanding areas of our business.

Our ability to continue to attract and retain highly skilled employees is a critical factor in our success.

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Our inability to obtain sufficient quantities of critical materials or components could adversely affect our ability to meet demand for our products, adversely affecting our financial condition and results of operations.

Also see the section above on the COVID-19 pandemic for details related to global supply chain disruptions. 

We typically have not entered into long-term agreements with our suppliers and, therefore, our suppliers could stop supplying materials and components to us at any time or fail to supply adequate quantities of materials or components to us on a timely basis.

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Any such failures could delay product shipments to our customers or result in a loss of customers.

As a result, we could incur significant costs to repair or replace defective products under warranty, particularly when such failures occur in installed systems.

Our products are typically embedded in, or deployed in conjunction with, our customers’

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December 31, 2021

accumulated net operating losses, or NOLs, of approximately $87.0 million, federal and state research and development credits (“R&D credits”) of $9.0 million, interest expense of $1.8 million and foreign tax credits of $4.6 million for U.S.

accumulated net operating losses, or NOLs, of approximately $104.8 million, federal and state research and development credits (“R&D credits”) of $9.9 million, business interest expense of $13.5 million and foreign tax credits of $4.6 million for U.S.

federal income tax purposes.

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A failure to evaluate and execute an acquisition appropriately or otherwise adequately address these risks may adversely affect our financial condition and results of operations.

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

We frequently evaluate our portfolio of products and may consider divestitures or exits of businesses that we no longer believe to be an appropriate strategic fit.

Divestitures may adversely impact our results if we are unable to offset the dilutive impacts from the loss of revenue associated with the divested products or businesses, or mitigate overhead costs allocated to those businesses.

Furthermore, the divestitures could adversely affect our ongoing business operations, including by enhancing our competitors' positions or reducing customer confidence in our ongoing brand and products. 

The inability to effectively and efficiently manage divestitures with the results we expect or in the timeframe we anticipate could adversely affect our financial condition and results of operations.

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

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Department of Commerce is responsible for regulating the export of most commercial items that are so called dual-use goods that may have both commercial and military applications.

Our products are classified under Export Control Classification Numbers, or ECCNs, 5A991 and 6A995.

Export Control Classification requirements are dependent upon an item’s technical characteristics, the destination, the end-use, the end-user, and other activities of the end-user.

Our products are primarily classified under Export Control Classification Numbers, or ECCNs 5A991 EAR99.

Export Control Classification requirements are dependent upon an item’s technical characteristics, and dictate the destination, end-use, end-user, and other activities of the end-user.

Should the regulations applicable to our products change, or the restrictions applicable to countries to which we ship our products change, then the export of our products to such countries could be restricted.

As a result, our ability to export or sell our products to certain countries could be restricted, which could adversely affect our business, financial condition and results of operations.

Furthermore, due to the recent administration change in the U.S., and the appointment of a new United States Trade Representative, new policy priorities may lead to additional or new import risks affecting the flow of our products into the U.S.

Changes in our products or any change in export or import regulations or related legislation, shift in approach to the enforcement or scope of existing regulations, or change in the countries, persons or technologies targeted by such regulations, could result in delayed or decreased sales of our products to existing or potential customers.

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In addition it can be costly to defend litigation and these costs could negatively impact our financial results.

As disclosed in “Item 3.

Legal Proceedings,”

on August 5, 2017, we and certain of our officers are currently subject to class action litigation related to allegations that we made materially false and misleading statements or failed to disclose material facts.

Such litigation includes requests for damages and other relief.

As further described in that section, subsequent derivative actions and securities class actions have since been filed. 

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Our indebtedness and liabilities could limit the cash flow available for our operations, expose us to risks that could adversely affect our business, financial condition and results of operations and impair our ability to satisfy our obligations under our indebtedness.

December 31, 2020, we had approximately $145.9 million of consolidated indebtedness.

December 31, 2021

, we had approximately $141.6 million of consolidated indebtedness.

We may also incur additional indebtedness to meet future financing needs.

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If we fail to comply with these covenants or to make payments under our indebtedness when due, then we would be in default under that indebtedness, which could, in turn, result in that and our other indebtedness becoming immediately payable in full.

Our Paycheck Protection Program loan may not be forgiven and could subject us to enhanced scrutiny.

On April 17, 2020, we were granted a loan of $6.2 million under the Paycheck Protection Program ("PPP"), which is a component of the Coronavirus Aid, Relief, and Economic Security ("CARES") Act.

This program was implemented hastily in response to the unprecedented economic downturn related to the COVID-19, and provides for loans of up to $10 million for eligible small businesses (defined generally as businesses with less than 500 U.S.

resident employees).

Due to the speed of implementation of this program, official guidance and interpretations of the requirements of the program have been limited and have changed over time.

On April 29, 2020, the U.S.

Department of the Treasury updated its "Frequently Asked Questions" (FAQ) document regarding the PPP program to indicate its intention to review all loans obtained under the program that exceed $2 million.

We have diligently considered all known guidance and determined that we meet all the requirements for the program; however, we cannot predict with certainty how such a review might be conducted or what new information or interpretations might emerge prior to the completion of the review.

As such, we cannot be certain whether our loan may be forgiven, even if we meet the currently understood requirements for forgiveness.

The review could also subject us to additional scrutiny which could adversely affect our financial condition and results of operations.

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

We have lending arrangements with several financial institutions, including loan agreements with Truist Bank in the U.S., credit facilities with Taishin International Bank and equipment finance agreements with Chailease Finance Co., Ltd.

We have lending arrangements with several financial institutions, including loan agreements with Truist Bank in the U.S., equipment finance agreements with Chailease Finance Co., Ltd.

in Taiwan and credit facilities with China Merchants Bank Co.

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Any failure by us or our subsidiaries to comply with these agreements could harm our business, financial condition and operating results.

In addition, our obligations under our loan agreements with Truist Bank are secured by our accounts receivable, inventory, intellectual property, and all business assets including real estate and equipment.

In addition, our obligations under our loan agreements with Truist Bank are secured by our accounts receivable, inventory, intellectual property, and all business assets except real estate and equipment.

Our credit facilities with Shanghai Pudong Development Bank Co., Ltd.

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Changes in U.S.

and international trade policies, particularly with regard to China, may materially and adversely impact our business and operating results.

and international trade policies, particularly regarding China, may materially and adversely impact our business and operating results.

government has made statements and taken certain actions that have led and may lead to further changes to U.S.

and international trade policies, including recently-imposed tariffs affecting certain products manufactured in China.

Since the beginning of 2018, there has been increasing rhetoric, in some cases coupled with legislative or executive action, from several U.S.

and international trade policies, including imposing additional tariffs on certain products manufactured in China.

Since the beginning of 2018, there has been increasing rhetoric, in some cases coupled with legislative, administrative, or executive action, from several U.S.

and foreign leaders regarding the possibility of instituting tariffs on the foreign imports of certain materials. Five rounds of U.S.

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Tariffs on China Imports.

It is unknown whether and to what extent new tariffs (or other new laws or regulations) will be adopted, or the effect that any such actions would have on us or our industry.

Despite an administration change in the U.S., and the appointment of a new United States Trade Representative, it is unknown whether and to what extent new tariffs (or other new laws or regulations) will be adopted, or the effect that any such actions would have on us or our industry.

A significant portion of our manufacturing operations are based in Ningbo, China;

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In addition, a significant portion of our manufacturing operations is based in Ningbo, China and Taipei, Taiwan.

Trade-related government actions, by China or other countries that impose barriers or restrictions that would impact our ability to sell or ship products to customers or potential customers may have a negative impact on our financial condition and results of operations.

Trade-related government actions, by the U.S., China or other countries that impose barriers or restrictions that would impact our ability to sell or ship products to customers or potential customers may have a negative impact on our financial condition and results of operations.

We cannot predict the actions government entities may take in this context and may be unable to quickly offset or effectively react to government actions that restrict our ability to sell to certain customers or in certain jurisdictions.

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foreign and U.S.

taxation issues and international trade barriers, including the adoption or expansion of governmental trade tariffs;

taxation issues and international trade barriers, including the adoption or expansion of governmental trade tariffs, export controls, and fluctuating changes to end use and user rules;

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

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difficulties and increased expenses in complying with a variety of U.S.

and foreign laws, regulations and trade standards, including the Foreign Corrupt Practices Act;

and foreign laws, regulations, and trade standards, including the Foreign Corrupt Practices Act, and various modifications by the Bureau of Industry and Security of the U.S.

Department of Commerce to export policy;

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

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Any indemnity claim could also adversely affect our relationships with our customers and result in substantial costs to us.

Risks Related to Our Operations in China

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We have been and may become the target of this type of litigation in the future.

For example, on August 3, 2017 we provided guidance for the third quarter of 2017, and on August 4, 2017 the market price of our stock decreased significantly.

As disclosed in “Item 3.

Legal Proceedings,”

on August 5, 2017, a class action lawsuit was filed against us and two of our officers.

The complaint in this matter alleges that we made materially false and misleading statements or failed to disclose material facts and requests damages and other relief.

On August 7, 2018, a derivative class action lawsuit was filed against our chief executive officer, chief financial officer and board of directors.

The allegations are substantially similar to those under the August 5, 2017 lawsuit.

On October 1, 2018, another class action lawsuit was filed in the U.S.

District Court for the Southern District of Texas against us and two of our officers.

The complaint in this matter alleges that we made materially false and misleading statements or failed to disclose material facts and a related action was filed on October 10, 2018.

These lawsuits and any other such litigation could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.

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

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Unresolved Staff Comments

Not Applicable.

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 1. Business