What changed in this filing

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Item 5. Market for Registrant’s Common Equity

2023-02-27 compared with 2022-02-24 · 125 added, 184 removed, 334 unchanged (48% 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, 2021 there were 36 holders of record of our common stock (not including beneficial holders of our common stock holding in street name).

As of February 21, 2023 there were 36 holders of record of our common stock (not including beneficial holders of our common stock holding in street name).

For equity compensation plan information refer to Item 12 of this Form 10-K.

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This section generally discusses the results of our operations for the year ended December 31, 2022 compared to the year ended December 31, 2021.

For a discussion of the year ended December 31, 2020 compared to the year ended December 31, 2019, please refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Result of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2020, as amended.

For a discussion of the year ended December 31, 2021 compared to the year ended December 31, 2020, please refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2021, as amended.

Overview  

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We target four networking end-markets:

internet data centers, CATV, telecom and FTTH.

CATV, internet data centers, telecom and FTTH.

We design and manufacture a range of optical communications products at varying levels of integration, from components, subassemblies and modules to complete turn-key equipment.

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needs and specifications, and such products differ from each other by their end market, intended use and level of integration.

We are primarily focused on the higher-performance segments within the internet data center, CATV, telecom and FTTH markets which increasingly demand faster connectivity and innovation.

We are primarily focused on the higher-performance segments within the CATV, internet data center, telecom and FTTH markets which increasingly demand faster connectivity and innovation.

Our vertically integrated manufacturing model provides us several advantages, including rapid product development, fast response times to customer requests and control over product quality and manufacturing costs.

The four end markets we target are all driven by significant bandwidth demand fueled by the growth of network-connected devices, video traffic, cloud computing and online social networking.

Within the internet data center market, we benefit from the increasing use of higher-capacity optical networking technology as a replacement for copper cables, particularly as speeds reach 10 Gbps and above, as well as the movement to open internet data center architectures and the increasing use of in-house equipment design among leading internet companies.

Within the CATV market, we benefit from a number of ongoing trends including the move to higher bandwidth networks among CATV service providers and the outsourcing of system design among CATV networking equipment companies.

In the FTTH market, we benefit from continuing PON deployments and system upgrades among telecom service providers.

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

In 2021, 2020 and 2019 , our revenue was $211.57 million, $234.6 million, and $190.9 million and our gross margin was 17.8%, 21.5%, and 24.2%.

We have grown our annual revenue at a compound annual growth rate, or CAGR, of 16.0% between 2011 and 2021 .

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.

In 2022, 2021 and 2020 , our revenue was $222.8 million, $211.6 million, and $234.6 million, and our gross margin was 15.1%, 17.8%, and 21.5%, respectively.

We have grown our annual revenue at a compound annual growth rate, or CAGR, of 11.0% between 2013 and 2022 .

In the years ended December 31, 2022, 2021 and 2020 , we had net loss of $66.4 million, $54.2 million , and $58.5 million, respectively.

At December 31, 2022 and 2021 , our accumulated deficit was $209.1 million and $142.7 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 2022 , we earned 53.0% of our total revenue from the CATV market and 34.6% of our total revenue from the internet data center market.

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

In 2021 , revenue from the internet data center market, CATV market, telecom market and FTTH markets provided 46.1%, 44.6%, 7.7%, and 0.5% of our revenue, respectively, compared to73.9%, 16.2%, 9.0%, and 0.0% of our 2020 revenue, respectively.

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

In 2022 , revenue from the CATV market, internet data center market, telecom market and FTTH markets provided 53.0%, 34.6%, 11.1%, and 0.1% of our revenue, respectively, compared to 44.6%, 46.1%, 7.7%, and 0.5% of our 2021 revenue, respectively.

In 2022 , our key customers in the CATV market included, ATX, Cisco, and CommScope . In 2022 , 

2021 , and 2020 , ATX accounted for 47.3%, 25.6%, and 3.7% of our revenue, Cisco accounted for 1.9%, 11.9% and 7.5% of our revenue and CommScope accounted for 1.7%, 3.3% and 2.1% of our revenue, respectively.

Data center market included, Microsoft, a U.S.

based large datacenter operator and a U.S.

based NEM company.

In 2022 , 

2020 , and 2019 , Microsoft accounted for 25.6%, 38.3%, and 32.2% of our revenue, the US based large datacenter operator accounted for 8.3%.

8.0%, and 0.4% of our revenue, and the US based NEM company accounted for 7.2%, 7.9% and 1.6% of our revenue, respectively.

In 2021 , our key customers in the CATV market included ATX, Cisco, and CommScope.

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. 

In 2021 , our revenue decrease of 9.8% over the prior-year was driven primarily by decreased demand for the datacenter products;

this slowdown was related to inventory normalization following the surge in demand that was driven by the shift to working from home in 2020.

We believe datacenter demand will improve in 2022.

The decreased demand for datacenter products was offset by increased demand for CATV products from several existing customers.

The increase in demand from CATV multiple-system operators ("MSOs") resulted in strong demand for our CATV products, especially those products that are related to architecture improvements to enable delivery of additional bandwidth to consumers. 

This increase in bandwidth demand is particularly acute in the upstream direction, and sales of products associated with increased return-path bandwidth were notably strong in the fourth quarter.

Based on forecasts and current order bookings, we believe that this CATV demand will likely continue through 2022. 

2021 , and 2020 , Microsoft accounted for 18.4%, 14.11%, and 38.3% of our revenue, the U.S.

based large datacenter operator accounted for 5.9%, 8.3%, and 8.0% of our revenue, and the U.S.

based NEM company accounted for 3.6%, 7.2% and 7.9% of our revenue, respectively. 

In 2022 , our revenue increase of 5.3% over the prior-year was driven primarily by strong demand in CATV product sales arising from products with architecture improvements to enable delivery of additional bandwidth to consumers.

The increase in bandwidth demand was particularly acute in the upstream direction, and sales of products associated with increased return-path bandwidth were notably strong in the year.

The increase was offset by the decrease of data center sales related to inventory normalization and demand decrease.

Based on customer forecasts and order backlog we believe that this elevated CATV demand will likely continue into 2023.

We expect continued sales of our 40 Gbps and 100 Gbps products in 2023, 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, global supply chain situation, 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 2022.

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, global supply chain situation, 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 2023.

Our sales model focuses on direct engagement and close coordination with our customers to determine product design, qualifications, performance and price.

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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 2021, 2020 and 2019 , we had 20, 30, and 31 design wins, respectively.

In 2022, 2021 and 2020 , we had 12, 20, and 30 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.

Divestiture Agreement with Yuhan Optoelectronic Technology (Shanghai) Co., Ltd

On September 15, 2022, we entered into a definitive agreement and announced the planned divesture to sell the manufacturing facilities in the People’s Republic of China ("PRC") and certain assets related to our transceiver business and multi-channel optical sub-assembly products to Yuhan Optoelectronic Technology (Shanghai) Co., Ltd.

("Purchaser"), which is a company incorporated in the PRC.

The transaction is expected to close within 2023 subject to the satisfaction of certain closing conditions, including the CFIUS approval.

The purchase price for this transaction will be an amount equal to the $150 million USD equivalent of Renminbi less a holdback amount.

Prior to the closing of this transaction, the Company anticipates investing an amount equal to between 4% and 10% of the estimated proceeds from the transaction in exchange for a 10% equity interest in the Purchaser.

The proceeds from the transaction will enable the Company to make strategic investments in higher margin and higher growth opportunities.

By exiting the transceiver market, the Company will focus its resources on its CATV business and manufacturing lasers and laser components for the CATV, datacenter, telecom and FTTH markets.

Our management has performed an evaluation as required by ASC-360-10-45-9 to determine whether to classify certain of our assets and liabilities as held for sale as of December 31, 2022.

ASC 360 requires that a company classifies a business as held for sale in the period in which management commits to a plan to sell the business, the business is available for immediate sale in its present condition, an active program to complete the plan to sell the business is initiated, the sale of the business within one year is probable and the business is being marketed at a reasonable price in relation to its fair value.

Although we have announced the execution of a definitive purchase agreement regarding the Divestiture, completion of this transaction is not certain for reasons that include the fact that the proposed sale is subject to regulatory approval in the US and China, the timing and likelihoodof which is uncertain and beyond our control, and the fact that we cannot be certain that the buyer will not request modification of terms within the definitive purchase agreement.

As a result, we have concluded that at the present time the business is not "available for immediate sale" under the meaning defined in ASC 360 and therefore none of our assets or liabilities should be classified as held for sale.

COVID-19 Pandemic

The COVID-19 pandemic has had, and continues to have, a significant impact around the world.

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

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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 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 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.

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

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 in 2021. China experienced the world's largest COVID-19 surge of the pandemic in December 2022 after the end of the zero-COVID policy.

Yet there is minimum impact to the labor force in China due to less government's restrictions on quarantine and testing.

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

Our supply chain restrictions due to COVID-19 have improved during the latter part of 2022, and we continue to expect improvements in 2023.

Factors Affecting Our Performance  

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Customer Concentration within End Markets.

 Historically, our revenue has been significantly concentrated within the data center market, and for 2021  our revenue now tends to be split between data center market and CATV market.

 Historically, our revenue has been significantly concentrated within the data center market, and starting from 2021, our revenue tends to be split between CATV market and 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 three and two customers that accounted for more than 10% of our revenue in 2021 and 2020 , respectively.

We had two and three customers that accounted for more than 10% of our revenue in 2022 and 2021, respectively. 

Product Development.

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Revenue  

We generate revenue through the sale of our products to equipment providers for the internet data center, CATV, telecom, FTTH and other markets.

We generate revenue through the sale of our products to equipment providers for the CATV, internet data center, telecom, FTTH and other markets.

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

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Our cost of goods sold is impacted by variances arising from changes in yields and production volume, as well as increases or decreases in the cost of raw materials used in production.

We typically experience lower yields and higher associated costs on new products.

We typically experience lower yields and higher associated costs on new products, especially during the initial phase of the production.

For our mature products, we can experience lower yields and higher production costs if customer requirements change or if we experience manufacturing difficulties or quality issues during our production process.

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We manufacture products in three of our four facilities located in the U.S., Taiwan and China.

Generally, laser chips and optical components are manufactured in our Sugar Land facility, optical components and subassemblies are manufactured in our Taiwan facility, and optical components, subassemblies and optical equipment are manufactured in our China facility.

Generally, laser chips and optical components are manufactured in our Sugar Land facility, and optical components, subassemblies and optical equipment are manufactured in our Taiwan and China facility.

Because of our vertical integration model, we generally utilize our own optical component products in our semi-finished and finished goods that we sell between and among our respective manufacturing operations.

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

In 2021 our effective tax rate was (0.0%).

In 2020 and 2019 , our effective tax rate was (14.1%) and (28.5%), respectively. 

In 2022 and 2021 our effective tax rate was (0.0%) .

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

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

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Seasonality  

We are uncertain whether the demand for our internet data center, CATV, telecom and FTTH products is seasonal, as our sales data does not indicate a significant trend with respect to these products.

We began to manufacture a meaningful quantity of internet data center and CATV products in our Ningbo, China factory in 2017 and 2020, respectively.

We are uncertain whether the demand for our CATV, internet data center, telecom and FTTH products is seasonal, as our sales data does not indicate a significant trend with respect to these products.

We began to manufacture a meaningful quantity of CATV and internet data center products in our Ningbo, China factory in 2017 and 2020, respectively.

This factory experiences a lengthy shut-down associated with the Lunar New Year holiday which occurs in Q1 of each year.

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Results of Operations  

The following table set forth our results of operations for the periods presented and as a percentage of our revenue for those periods.

The following table sets forth our results of operations for the periods presented as a percentage of our revenue for those periods.

The period-to-period comparison of our financial results is not necessarily indicative of our financial results to be achieved in future periods.

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Total operating expenses

Income (loss) from operations

Interest and other income (expense), net

Income (loss) before income taxes

Income tax benefit (expense)

Net income (loss)

Loss from operations

Interest and other expense, net

Loss before income taxes

Income tax expense

Comparison of Years Ended 

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Revenue  

We generate revenue through the sale of our products to equipment providers and network operators for the internet data center, CATV, telecom, FTTH and other markets.

We generate revenue through the sale of our products to equipment providers and network operators for the CATV, internet data center, telecom, FTTH and other markets.

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

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Total Revenue

The decrease in revenue for the year was driven primarily by decreased demand for the datacenter products;

this slowdown was related to inventory normalization following the surge in demand that was driven by the shift to working from home in 2020. We believe datacenter demand will improve in 2022.

The decreased demand for datacenter products was offset by increased demand for CATV products from several existing customers.

This increase in bandwidth demand is particularly acute in the upstream direction, and sales of products associated with increased return-path bandwidth were notably strong in the quarter.

Based on forecasts and current order bookings, we believe that this CATV demand will likely continue through 2022. 

Revenue increased by $11.2 million or 5.3% from 2021 to 2022.

The increase was driven primarily by strong demand in CATV product sales arising from products with architecture improvements to enable delivery of additional bandwidth to consumers.

The increase in bandwidth demand was particularly acute in the upstream direction, and sales of products associated with increased return-path bandwidth were notably strong in the year.

The increase was offset by the decrease of data center sales related to inventory normalization and demand decrease.

Based on customer forecasts and order backlog we believe that this elevated CATV demand will likely continue into 2023.

In the years ended December 31, 2022 and 2021 , our top ten customers represented 87.2% and 84.7% 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.

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Cost of goods sold

Cost of goods sold decreased by $10.2 million, or 5.6%, from 

2020  to 2021 , primarily due to a 9.8% decrease in sales over the prior year.

Cost of goods sold increased by $15.3 million, or 8.8%, from 

2021  to 2022 , primarily due to a 5.3% increase in sales over the prior year.

The decrease in gross margin for the year ended December 31, 2022 compared to the same period ended 

December 31, 2020 was primarily the result of changes in the mix of datacenter and CATV products.

In particular, we saw an increase in sales of certain CATV products relative to sales of transceivers.

In addition, we experienced higher costs of certain raw materials and global supply chain disruptions due to COVID-19 closures of ports and factories in Asia (see the section above on the COVID-19 pandemic for more details of these challenges).

December 31, 2021 was primarily the result of changes in the mix of products in our CATV and datacenter segments.

In addition, we also experienced higher costs of certain raw materials and global supply chain disruptions due to COVID-19 closures of ports and factories in Asia (see the section above on the COVID-19 pandemic for more details of these challenges). 

Operating expenses  

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Research and development expense  

Research and development expense decreased $2.2 million, or 5.0% from 

2020  and 

Research and development expense decreased $5.0 million, or 12.1% from 

2021  to 

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. These decreases were primarily due to decrease in personnel-related costs, and share-based compensation expense.

These decreases were partically offset by an increase in sale and use tax on R&D purchase.

and other new product development, and depreciation expense resulting from R&D equipment investments. The decreases were primarily due to less R&D work orders, renovation depreciation ended in October 2021 in China site and less indirect materials usage.

Sales and marketing expense  

Sales and marketing expense decreased by $1.2 million, or 10.8%, from 2021  to 2022 .

These decreases were primarily due to decrease in shipping and handling charges and tradeshow expense. 

These decreases were primarily due to the less sales from certain customers which include commission incentives, and partially offset by an increase in tradeshow expenses in 2022 due to the increase in number of tradeshows attended because of 

less COVID-19 restrictions. 

General and administrative expense

General and administrative expense increased by $0.5 million, or 1.1%, from 2020  to 2021 .

These increases were primarily due to an increase in depreciation expense and expenses related to winter storm Uri.

These increases were partially offset by a decrease in personnel-related costs and professional service fees. 

General and administrative expense increased by $4.3 million, or 10.1%, from 2021  to 2022 .

These increases were primarily due to the idle asset allocation from production to general and administrative section and additional bonus expense in 2022 for meeting the target. 

Other income (expense), net  

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Total other income (expense), net

Interest income decreased by $0.2

Interest income increased by $0.1

million, or 80.0% from 2021  to 2022 .

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

Interest expense was comparable between 

2020  and 

2021  due to comparable debt balances during the year.

Other income increased by $5.2 million, or 172.0% from 

2020  to 2021 .This increases was primarily due to approval by the SBA of the Company's PPP Loan forgiveness application for the entire PPP Loan balance of $6.23 million.

This increase was offset with less receipt of government subsidies.

In 2020, we received $1.4 million government subsidies associated with COVID-19 pandemic in Taiwan.  

Interest expense increased by $0.7 million, or 12.4% from 2021  to 2022 .

The increase was primarily due to the debt balance increase and the interest rate fluctuation during the year.

Other income decreased by $9.4 million, or 114.8% from 

2021  to 2022 .This decrease was primarily due to the $6.23 million government's PPP Loan forgiveness stimulus obtained in year 2021.

The remaining decrease was mainly due to the foreign exchange loss. 

Benefit (provision) for income taxes  

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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 no federal tax expense for the year ended December 31, 2021 as compared to $7.2 million for the year ended December 31, 2020 .

The income tax expense in the year ended December 31, 2021 was primarily related to the state tax provision.

The income tax expense recorded 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.

Comparison of Years Ended December 31, 2020 and 2019

Revenue  

We generate revenue through the sale of our products to equipment providers and network operators for the internet data center, CATV, FTTH, telecom and other markets.

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

The following charts provide the revenue contribution from each of the markets we served for the years ended 

December 31, 2020 and 2019 (in thousands, except percentages):

Years ended December 31,

Total Revenue

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. 

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. 

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  

Years ended December 31,

(in thousands, except percentages)

Cost of goods sold

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 production inefficiencies, and higher costs of certain raw materials. 

Operating expenses  

Years ended December 31,

(in thousands, except percentages)

Research and development

Sales and marketing

General and administrative

Total operating expenses

Research and development expense  

Research and development expense was comparable between 2019 and 2020.

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.

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 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  

Years ended December 31,

(in thousands, except percentages)

Interest income

Interest expense

Other income (expense), net

Total other income (expense), net

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

Years ended December 31,

(in thousands, except percentages)

Benefit (provision) for income taxes

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 $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. 

We recorded no federal tax expense for the years ended December 31, 2022 and December 31, 2021.

The income tax expense in the years ended December 31, 2022 and December 31, 2021 was primarily related to the state tax provision and the recording of a valuation allowance on our deferred tax assets.

Liquidity and Capital Resources

As of December 31, 2021 , we had $7.4 million of unused borrowing capacity from all of our loan agreements.

As of December 31, 2021 , our cash, cash equivalents, restricted cash and short-term investments totaled $41.1 million.

As of December 31, 2022 , we had $13.3 million of unused borrowing capacity from all of our loan agreements.

As of December 31, 2022 , our cash, cash equivalents, restricted cash and short-term investments totaled $35.6 million.

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

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In March 2021, we commenced sales of common stock through the Second ATM Offering.

The details of the shares of common stock sold through the Second ATM Offering through December 31, 2021 are as follows (in thousands, except shares and weighted average per share price): 

The details of the shares of common stock sold through the Second ATM Offering through December 31, 2022 are as follows (in thousands, except shares and weighted average per share price): 

Distribution Agent

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Raymond James & Associates, Inc.

As of December 31, 2021, the total gross sales were $1.0 million and thus remaining amount of common stock we have available to sell under the Second ATM Offering is $34.0 million. 

Raymond James & Associates, Inc.

September 2022

Raymond James & Associates, Inc.

November 2022

As of December 31, 2022, the total gross sales were $2.2 million and thus remaining amount of common stock we have available to sell under the Second ATM Offering is $32.8 million. 

On January 5, 2023, the Company filed a Registration Statement on Form S-3 with the Securities and Exchange Commission, which has not yet been declared effective, 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 $185 million.

Pursuant to Rule 415(a)(6) under the Securities Act, the securities registered pursuant to this registration statement include unsold securities previously registered for sale pursuant to our previously filed registration statement on Form S-3, which became effective on January 9, 2020.

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 (the "Notes"), unless earlier repurchased, redeemed or converted in accordance with their terms.

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Years ended December 31,

Net cash provided by (used in) operating activities

Net cash used in operating activities

Net cash used in investing activities

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Effect of exchange rates on cash and cash equivalents

Net increase (decrease) in cash

Net decrease in cash

Operating activities

In 2022, net cash used in operating activities was $14.0 million.

Net cash used in operating activities consisted of our net loss of $66.4 million, after the exclusion of non-cash items of $40.5 million, an increase in accounts receivable from our customers of $12.7 million and an increase in other current assets of $2.4 million.

These cash decreases were offset by a decrease of notes receivable of $7.8 million, decrease in inventory of $1.2 million, increase in accounts payable to our vendors of $13.0 million and increase in accrued liabilities of $5.3 million. 

In 2021, net cash used in operating activities was $11.6 million.

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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.

These cash decreases were offset by a decrease in inventory of $1.6 million, an increase in accounts payable to our vendors of $3.2 million, a decrease in prepaid tax of $1.0 million and a decrease in other current assets of $5.5 million.

Investing activities  

Our investing activities consisted primarily of capital expenditures and purchases of intangible assets.

In 2022, net cash used in investing activities was $3.8 million.

The net cash used consisted of spending on purchase and prepaid of additional property, plant and equipment of $3.7 million and purchase of intangible assets of $0.5 million. 

In 2021, net cash used in investing activities was $10.5 million.

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The net cash used consisted of spending on China factory construction, purchase and prepaid of additional property, plant and equipment of $19.1 million.

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

Financing activities  

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

In 2022, our financing activities provided $10.8 million in cash.

This increase in cash was due to $12.2 million of net proceeds from line of credit borrowing, $5.1 million of net proceeds from bank acceptance payable and $1.2 million of net proceeds from our At-The-Market (ATM) Offering.

These activities were offset by $7.3 million debt repayment and $0.5 million related to tax withholding associated with employee share-based compensation. 

In 2021, our financing activities provided $14.1 million in cash.

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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 bank debt. 

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

We received $76.4 million proceeds from the issuance of convertible senior notes offset by net bank loan and bank acceptance notes repayments of $32.9 million.

These activities were offset by $0.9 million related to tax withholding associated with employee share-based compensation.

Loans and commitments

We have lending arrangements with several financial institutions.

In the U.S., we have a revolving line of credit with Truist Bank.

In the U.S., we entered a Loan Security and Guarantee Agreement with CIT Northbridge Credit, LLC in November 2022 and fully repaid the loan 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, 2022 , we were in compliance with these covenants. 

In Taiwan, we have an equipment finance agreement with Chailease Finance Co., Ltd.

for Prime World’s Taiwan Branch.

In China, we have a revolving line of credit with China Merchants Bank Co., Ltd.

and Shanghai Pudong Development Bank Co., Ltd and a credit facility with China Zheshang Bank Co., Ltd.

In Taiwan, the Company has fully repaid the finance agreement with Chailease Finance Co, Ltd.

for Prime World's Taiwan Branch.

In China, we have a revolving line of credit with Shanghai Pudong Development Bank Co., Ltd and a credit facility with China Zheshang Bank Co., Ltd.

for our China subsidiary, Global.

December 31, 2022

, we had $7.4 million of unused borrowing capacity. 

, we had $13.3 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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On February 8, 2018, we entered into a construction contract with Zhejiang Xinyu Construction Group Co., Ltd.

for the construction of a new factory and other facilities at our Ningbo, China location.  Construction costs for these facilities under this contract are estimated to total approximately $27.5 million. As of December 31, 2021 , construction of the building is complete, and approximately $27.4 million of this total cost has been paid and the remaining portion will be paid in 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. 

Based on forecasts, we believe the factory will be placed in service in the first half of 2022, property will be transferred from construction in progress to building and improvement at that time.

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, 2022, construction of the building shell 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. Based on forecasts, we believe the factory will be placed in service in the second half of 2023 after the construction is completed for the building interior.

Property will be transferred from construction in progress to building and improvement at that time.

Future liquidity needs  

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We have outstanding notes payable with varying maturities.

As of December 31, 2021, our notes payable had an aggregate amount of $54.7 million, with $49.7 million payable witin 12 months.

As of December 31, 2022, our notes payable had an amount of $57.1 million, and the entire balance is within 12 months.

Further information regarding our note payable is provided in Note K Notes Payable and Long-Term Debt in the Notes to Consolidated Financial Statements in this Form 10-K.

We also have a fixed-rate convertible senior note.

As of December 31, 2021, our convertible senior note had an aggregate principle amount of $80.5 million and future interest payments associated with our senior notes totaled $10.1 million.

As of December 31, 2022, our convertible senior note had an aggregate principle amount of $80.5 million and future interest payments associated with our senior notes totaled $6.0 million.

Further information regarding our convertible senior notes is provided in Note L –

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In addition, we have operating and financial lease for certain property and equipment with an expected term at the commencement date of more than 12 months.

As of December 31, 2021, the future minimum payments required under these leases totaled $9.3 million, with $1.3 million payable within 12 months.

As of December 31, 2022, the future minimum payments required under these leases totaled $7.3 million, with $1.2 million payable within 12 months.

Further information regarding our leases is provided in Note D –

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Inflation  

The annual inflation rate in the US and Taiwan accelerated more than 7% in 2021.

Cost inflation including increases in shipping costs, labor rates, and in costs of some raw materials;

we currently

believe these increases are related to the COVID-19 pandemic (please refer to our discussion on COVID-19 in the MD&A section of this Form 10-K), however we cannot be sure when or if prices will return to pre-pandemic levels.

There is no guarantee that we can increase selling prices or reduce costs to fully mitigate the effect of inflation on our costs, which may adversely impact our sales margins and profitability.

The annual inflation rate in the US and Taiwan accelerated more than 7% in 2021 and closed out at 6.5% and 2.71% in December 2022 for US and Taiwan, respectively.

The cost of inflation was reflected in increases in shipping costs, labor rates, and in costs of some raw materials;

we believe these increases are related to the COVID-19 pandemic (please refer to our discussion on COVID-19 in the MD&A section of this Form 10-K), however we cannot be sure when or if prices will return to pre-pandemic levels.

Compared to other major economies in the world, China has a stable level of inflation, which has not had a significant impact on our sales or operating results.

However, there is no guarantee that we may increase selling prices or reduce costs to fully mitigate the effect of inflation on our costs, which may adversely impact our sales margins and profitability.

Critical Accounting Policies and Estimates

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When indicators exist, recoverability of assets is measured by a comparison of the carrying value of the asset group to the estimated undiscounted future net cash flows expected to be generated by the asset.

Examples of such triggering events include a significant disposal of a portion of such assets, an adverse change in the market involving the business employing the related asset, a significant decrease in the benefits realized from an acquired business, difficulties or delays in integrating the business, and a significant change in the operations of an acquired business.

Examples of such triggering events include a significant disposal of a portion of such assets, an adverse change in the market involving the business employing the related asset, a significant decrease in the benefits realized from an acquired business, difficulties or delays in integrating the business, and a significant change in the operations of an acquired business.

If such assets are determined not to be recoverable we perform an analysis of the fair value of the asset group and will recognize an impairment loss when the fair value is less than the carrying amount of such assets.

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We consider the likelihood of possible outcomes in determining the best estimate for the fair value of the assets.

We did not record any asset impairment charges in 2021, 2020, and 2019.

We did not record any asset impairment charges in 2022, 2021 and 2020. 

Valuation of inventories

Inventories are stated at the lower of cost (average-cost method) or market.

Inventories are stated at the lower of cost (average-cost method) or net realizable value.

Work in process and finished goods includes materials, labor and allocated overhead.

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, 2021, 2020 and 2019 , we recorded excess and obsolete inventory reserve charges of $3.9 million, $3.9 million, and $6.8 million, respectively.

For the years December 2021, 2020 and 2019 , the direct inventory write-offs related to scrap, discontinued products and damaged inventories were $16.8 million, $20.4 million, and $13.4 million, respectively.

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

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. Inventory reserves are recorded to account for the excess and obsolete inventory combined with the lower of cost or net realizable value assessments. To develop the reserve, we developed certain percentages that determine the extent of inventory reserve adjustments based on the age of the inventory.

Such percentages were determined through analysis of the inventory to determine each product's lifespan, a review historical write-offs or scrapped inventory, and an assessment by product engineers of the possibility of obsolescence for each product.

During the years ended December 31, 2022, 2021 and 2020, we recorded excess and obsolete inventory reserve charges of $4.9 million, $3.9 million, and $3.9 million, respectively.

For the years December 2022, 2021 and 2020, the direct inventory write-offs related to scrap, discontinued products and damaged inventories were $10.4 million, $16.8 million, and $20.4 million, respectively.

We have an accounting policy to record a reserve for inventory encompassing the value of excess or obsolete items combined with the lower of cost or net reliable value.

We considered the following factors in our determination of the appropriate reserve level:

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The ability to realize deferred tax assets is evaluated annually and a valuation allowance is provided if it is unlikely that the deferred tax assets will not give rise to future benefits in our tax returns.

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, 2022, a valuation allowance of $69.7 million has been recorded related to 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.

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% likely to be realized upon ultimate settlement with the related tax authority.

We recognize interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying consolidated statement of operations.

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