Item 7. Managements Discussion
and Analysis of Financial Condition and Results of Operations
The following discussion should be read
in conjunction with our Consolidated Financial Statements and Notes thereto
included elsewhere in this report.
Recent Accounting
Pronouncements
See Note 1 to the Consolidated Financial
Statements for a full description of recent accounting pronouncements, including
the expected dates of adoption and estimated effects on our results of
operations and financial condition, which is incorporated herein by
reference.
18
Critical Accounting Policies
and Estimates
General
Managements discussion and analysis of our financial condition and
results of operations is based on our Consolidated Financial Statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an ongoing basis, we evaluate our estimates,
including those related to revenue recognition, bad debts, inventories, asset
impairments, income taxes, contingencies, and litigation. We base our estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values for assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We believe the following critical
accounting policies affect managements more significant judgments and estimates
used in the preparation of our Consolidated Financial Statements:
Revenue
Recognition
We recognize revenue upon shipment of our
products to customers, provided that we have received a purchase order, the
price is fixed, collection of the resulting receivable is reasonably assured and
transfer of title and risk of loss has occurred. Subsequent to the sale of our
products, we have no obligation to provide any modification or customization
upgrades, enhancements or post contract customer support.
Stock-based Compensation
Expense
We measure and recognize compensation
expense for stock options, RSUs and shares purchased pursuant to our ESPP based
on their estimated fair value and recognize the costs in the financial
statements under Accounting Standards Codification (ASC) 718. The fair value
of RSUs is equal to the market value of our common stock on the date the award
is granted. We estimate the fair value of stock options and ESPP shares using
the Black-Scholes
valuation model. We expense the estimated fair value to earnings on a
straight-line basis.
Allowance for Doubtful
Accounts
Allowances are provided for estimated
returns and potential uncollectable trade receivables. Provisions for return
allowances are recorded at the time revenue is recognized based on our
historical product returns, current economic trends and changes in customer
demand. Such allowances are adjusted periodically to reflect actual and
anticipated experience. We also identify specific accounts considered to have a
high risk of uncollectibility and reserve the full amount. Material differences
may result in the amount and timing of our revenue for any period if management
made different judgments or utilized different estimates.
Inventories
Inventories are stated at the lower of
cost or market, with cost being determined using standard cost, which
approximates actual cost on a first-in, first-out basis. Market value is
determined as the lower of replacement cost or net realizable value. Provisions
are made for excess and obsolete inventory based on historical usage and
managements estimates of future demand. Inventory reserves, once established,
are only reversed upon sale or disposition of related inventory.
Short-Term and Long-Term
Investments
We generally invest our cash in
certificates of deposit and corporate bonds. Such investments are made in
accordance our investment policy, which establishes guidelines relative to
diversification and maturities designed to maintain safety and liquidity. These
guidelines are periodically reviewed and modified in light of trends in yields
and interest rates.
Valuation of Long-Lived
Assets
We review the valuation of long-lived
assets and assess the impairment of the assets whenever events or changes in
circumstances indicate that the carrying value may not be recoverable due to:
significant underperformance relative to expected historical or projected future
operating results; significant changes in the manner of our use of the assets or
the strategy for the overall business; and significant negative industry or
economic trends. When we determine that the carrying value of long-lived assets
may not be recoverable based on the existence of one or more of the above
indicators of impairment, we measure any impairment based on a projected
discounted cash flow method using a discount rate determined by our management
to be commensurate with the risk inherent in our current business model. We did
not record any asset impairment charge for the year ended December 31, 2013 or
2012.
19
Income Taxes
We account for income taxes in accordance
with ASC 740-10. ASC 740-10 requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
included in the financial statements. Under this method, deferred tax assets and
liabilities are determined based on the differences between the financial
statements and tax basis of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. The effect
of a change in tax rates on deferred tax assets and liabilities is recognized in
income in the period that includes the enactment date.
We record net deferred tax assets to the
extent we believe these assets will more likely than not be realized. In making
such determination, we consider all available positive and negative evidence,
including future reversals of existing taxable temporary differences, projected
future taxable income, tax planning strategies and recent financial operations.
In the event we were to determine that we would be able to realize our deferred
income tax assets in the future in excess of their net recorded amount, we would
make an adjustment to the valuation allowance, which would reduce the provision
for income taxes.
Management assesses the available
positive and negative evidence to estimate if sufficient future taxable income
will be generated to utilize the existing deferred tax assets. Based on this
assessment, as of December 31, 2013, a reduction in valuation allowance in the
amount of $8.2 million has been recorded. The amount of
the deferred tax asset considered realizable, however, could be adjusted if
estimates of future taxable income are reduced.
ASC 740-10 also prescribes a recognition
threshold and a measurement attribute for the financial statement recognition
and measurement of tax positions taken or expected to be taken in a tax return.
For those benefits to be recognized, a tax position must be more likely than not
to be sustained upon examination by taxing authorities. Differences between tax
positions taken or expected to be taken in a tax return and the benefit
recognized and measured pursuant to the interpretation are referred to as
unrecognized benefits. A liability is recognized for an unrecognized tax
benefit because it represents an enterprises potential future obligation to the
taxing authority for a tax position that was not recognized as a result of
applying the provisions of ASC 740-10. As of December 31, 2013 and 2012, the
total amount of unrecognized tax benefits were $0.7 million and $0 million
respectively.
Deferred tax assets pertaining to
windfall tax benefits on exercise of share awards and the corresponding credit
to additional paid-in capital are recorded if the related tax deduction reduces
tax payable. We have elected the with-and-without approach regarding ordering
of windfall tax benefits to determine whether the windfall tax benefit did
reduce taxes payable in the current year. Under this approach, the windfall tax
benefits would be recognized in additional paid-in capital only if an
incremental tax benefit is realized after considering all other tax benefits
presently available to us.
We consider the earnings of certain
non-U.S. subsidiaries to be indefinitely invested outside the United States on
the basis of estimates that future domestic cash generation will be sufficient
to meet future domestic cash needs. We have not recorded a deferred tax
liability of approximately $1.3 million related to U.S. federal and state income
taxes and foreign withholding taxes on approximately $3.4 million of
undistributed earnings of foreign subsidiaries indefinitely invested outside the
United States. Should we decide to repatriate the foreign earnings, we would
have to adjust the income tax provision in the period we determined that the
earnings will no longer be indefinitely invested outside the United States.
Overview
We were founded in December 1995 and
commenced operations to design, manufacture and market fiber optic interconnect
products, which we call our connectivity products. We have broadened our
connectivity product line to include attenuators, planar lightwave circuit
splitters, and fused fiber products. We started selling our optical passive
products and other wavelength management products in July 2000. Since
introduction, sales of optical passive products have fluctuated with the overall
market for these products.
20
We market
and sell our products predominantly through our direct sales force. From our
inception through December 31, 2013, we derived the majority of our revenues
from our connectivity product line. Our optical passive products contributed as
a percentage of revenues 24.2% and 30.0% for the years ended December 31, 2013
and 2012, respectively. Our cost of revenues consists of raw materials,
components, direct labor, manufacturing overhead and production start-up costs.
We expect that our cost of revenues as a percentage of revenues will fluctuate
from period to period based on a number of factors including:
-
changes in manufacturing
volume;
-
costs incurred in establishing additional
manufacturing lines and facilities;
-
inventory write-downs and impairment charges
related to manufacturing assets;
-
mix of products sold;
-
changes in our pricing and pricing by our
competitors;
-
mix of sales channels through which our
products are sold; and
-
mix of domestic and international sales.
Research and development expenses consist
primarily of salaries and related personnel expenses, fees paid to outside
service providers, materials costs, test units, facilities, overhead and other
expenses related to the design, development, testing and enhancement of our
products. We expense our research and development costs as they are incurred. We
believe that a significant level of investment for product research and
development is required to remain competitive. We expect research and
development expenses may increase as we intend to continue to invest in our
research and product development efforts during 2014.
Sales, marketing, and administrative
expenses consist of salaries, commissions and related expenses for personnel
engaged in marketing, sales and technical support functions, as well as the
costs associated with trade shows, promotional activities and travel expenses.
It also consists of salaries and related expenses for executive, finance,
administrative, accounting and human resources personnel, insurance and
professional fees for legal and accounting support. We intend to continue to
invest amounts similar to our spending levels in 2013 in our sales and marketing
efforts, both domestically and internationally, in order to increase market
awareness and to generate sales of our products. We expect administrative
expenses will increase in absolute dollars to support our revenue growth, higher
insurance premiums, and costs associated with compliance with Section 404 of the
Sarbanes-Oxley Act of 2002.
We cannot be certain that our
expenditures will result in higher revenues. In addition, we believe our future
success depends upon establishing and maintaining successful relationships with
a variety of key customers.
We own one hundred percent interest in
the outstanding common stock of Alliance Fiber Optic Products, Ltd (formally
named Transian Technology Ltd. Co.), a Taiwan corporation. This wholly owned
subsidiary is engaged in design and manufacturing of our products.
In December 2000, we established a wholly
owned subsidiary, Alliance Fiber Optic Products, in the Peoples Republic of
China, which we have developed as a manufacturing facility. We commenced
production at this facility in the third quarter of 2003.
Results of Operations
The following table sets forth the
relationship between various components of operations, stated as a percentage of
revenues, for the periods indicated.
21
|
|
Years Ended December 31,
|
|
|
2013
|
|
2012
|
Revenues
|
|
100.0
|
%
|
|
100.0
|
%
|
|
|
|
|
|
|
|
Cost of
revenues:
|
|
61.7
|
|
|
65.7
|
|
Gross
profit
|
|
38.3
|
|
|
34.3
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
Research and development
|
|
4.9
|
|
|
7.1
|
|
Selling, marketing and
administrative
|
|
10.9
|
|
|
14.9
|
|
Total operating expenses
|
|
15.8
|
|
|
22.0
|
|
|
Income from
operations
|
|
22.5
|
|
|
12.3
|
|
Interest and other income,
net
|
|
0.9
|
|
|
1.6
|
|
Income before
benefit for income taxes
|
|
23.4
|
|
|
13.9
|
|
Benefit for income
taxes
|
|
1.3
|
|
|
6.8
|
|
Net
income
|
|
24.7
|
%
|
|
20.7
|
%
|
Comparison of Fiscal Year 2013
and Fiscal Year 2012
Revenues.
Revenues were $76.1
million and $46.6 million for the years ended December 31, 2013 and 2012,
respectively. Connectivity products revenue increased to $57.7 million in 2013
from $32.6 million in 2012. Optical passive products revenue increased to $18.4
million in 2013 from $14.0 million in 2012. Revenues increased mainly due to
increased orders for our products by our customers which resulted in higher
volume shipments.
Cost of Revenues.
Cost of revenues for the year ended December 31, 2013
increased to $47.0 million from $30.6 million in fiscal year 2012. Cost of
revenues as a percentage of net revenues decreased to 61.7% in the year ended
December 31, 2013 from 65.7% in fiscal year 2012. The lower cost of revenues
percentage in 2013 resulted from increased factory utilization due to higher
production levels.
Gross Profit
. Gross profit for the year ended December 31, 2013 was
$29.1 million, or 38.3% of revenues, compared with gross profit of $16.0
million, or 34.3% of revenues, in fiscal year 2012. Gross profit on connectivity
products increased to $25.2 million in 2013 from $13.0 million in 2012. Gross
profit on optical passive products increased to $3.9 million in 2013 from $3.0
million in 2012. For the year ended December 31, 2013, the utilization of our
factories was higher due to the increased volume shipments of our products,
which contributed to higher gross margins. However, our average selling prices
are declining, which we believe may negatively impact our gross profit and may
offset any benefits from improved absorption.
Research and Development
Expenses
. Research and development
expenses increased to $3.7 million in the year ended December 31, 2013 from $3.3
million in fiscal year 2012. As a percentage of revenues, research and
development expenses decreased to 4.9% in 2013 from 7.1% in 2012 as a result of
increased revenues. We expect research and development expenses may increase as
we intend to continue to invest in our research and product development efforts.
Sales, Marketing and Administrative
Expenses
. Sales, marketing and
administrative expenses increased to $8.3 million in the year ended December 31,
2013 from $7.0 million in fiscal year 2012. The higher sales, marketing and
administrative expenses were due to higher stock based compensation charges and
higher bonuses and commissions as a result of higher revenues. As a percentage
of revenues, sales, marketing and administrative expenses decreased to 10.9% in
2013 from 14.9% in 2012 as a result of increased revenues. We intend to continue
to invest amounts similar to our spending levels in 2013 in our sales,
marketing, and administrative efforts, both domestically and internationally, as
we work to increase market awareness and to generate additional sales of our
products.
Stock-Based Compensation.
Total stock-based compensation was $1.9
million and $1.1 million for the years ended December 31, 2013 and 2012,
respectively. The increase was due to restricted stock units granted in 2011 and
2013 and stock options granted in 2012 and 2013, and resulted in higher
stock-based compensation expense.
22
Interest and Other Income, Net.
Interest and other income, net, was $0.7 million for each of the years
ended December 31, 2013 and 2012. These amounts consisted primarily of interest
income, which fluctuated based on cash balances and changes in interest
rates.
Income Taxes
. An income tax benefit of $1.0 million and $3.2 million
were recorded for the years ended December 31, 2013 and 2012, respectively. The
benefit for the years ended December 31, 2013 and 2012 were as a result of
reduction of valuation allowances for deferred tax assets which offset current taxes due.
In prior periods, California tax law
suspended the use of net operating losses (NOLs). Beginning in 2012, the
moratorium on the utilization of the NOLs was lifted.
As of December 31, 2013, we had
approximately $7.5 million and $6.5 million of NOL carryforwards for federal and
state tax purposes, respectively, which will expire after 2022 for federal and
after 2016 for state purposes, if not utilized.
As of December 31, 2013, we had
approximately $1.2 million and $0.9 million of research credit carryforwards for
federal and state tax purposes, respectively, which will expire after 2018 for
federal tax purposes. The state tax credit can be carried forward indefinitely.
Liquidity and Capital
Resources
Comparison of Fiscal
Year 2013 and Fiscal Year 2012
Net cash provided by operating activities
was $19.7 million in 2013. The increase in our cash provided by operating
activities in 2013 was primarily due to net income of $18.8 million, an increase
in accounts payable of $5.1 million, an increase in accrued expenses of $3.0
million, and contribution from adjustments for non-cash charges, including
depreciation and stock based compensation of $2.8 million. These were offset by
an increase in inventory of $3.7 million, an increase in accounts receivable of
$3.5 million, an increase in deferred tax assets of $2.3 million, and an
increase in prepaid expenses of $0.5 million.
Net cash provided by operating activities
was $9.3 million in 2012. The increase in our cash provided by operating
activities in 2012 was primarily due to net income of $9.6 million, an increase
in accounts payable of $ 2.9 million, and contribution from adjustments for
non-cash charges, including depreciation of $1.6 million and stock based
compensation of $1.1 million. These were offset by an increase in deferred tax
assets of $3.7 million and an increase in accounts receivable of $1.4 million.
Net cash used in investing activities was
$7.6 million and $4.3 million in 2013 and 2012, respectively. In 2013, we spent
$7.8 million to acquire property and equipment and $0.2 million in purchases of
long-term investments, which was offset in part by net proceeds from the sale of
short-term securities of $0.4 million. In 2012, we spent $1.5 million to acquire
property and equipment and the net purchase of short-term and long-term
investments were $2.8 million.
Net cash generated by financing
activities was $2.1 million in 2013. Cash generated by financing activities in
2013 comprised $5.2 million proceeds from the exercise of options to purchase
shares of our common stock and $0.5 million from common stock issued through our
ESPP, which was offset by $2.8 million used to pay cash dividends and $0.9
million used to repurchase common stock pursuant to our stock repurchase
program.
Net cash used in financing activities was
$14.7 million in 2012. Net cash used in financing activities was primarily due
to $11.0 million used to pay cash dividends and $4.8 million used to repurchase
common stock pursuant to our stock repurchase program, which was offset by
proceeds from the exercise of options to purchase shares of our common stock and
common stock issued through our ESPP.
Our principal source of liquidity as of
December 31, 2013 consisted of $18.6 million in cash and cash equivalents, $28.1
million interest bearing marketable securities, and $10.4 in long-term
investments. We believe that our current cash, cash equivalents, short-term and
long-term investments will be sufficient to meet our anticipated cash needs for
working capital and capital expenditures for at least the next 12 months.
However, our future growth, including potential acquisitions, may require
additional funding. If cash generated from operations is insufficient to satisfy
our long-term liquidity requirements, we may need to raise capital through
additional equity or debt financings, additional credit facilities, strategic
relationships or other arrangements. If additional funds are raised through the
issuance of securities, these securities could have rights, preferences and
privileges senior to those of the holders of our common stock, and the terms of
any debt facility could impose restrictions on our operations. The sale of
additional equity or debt securities could result
in additional dilution to our stockholders, and additional financing may not be
available in amounts or on terms acceptable to us, if at all. If we are unable
to obtain additional funding, we may be required to reduce our research and
development and marketing expenses. Strategic arrangements, if necessary to
raise additional funds, may require us to relinquish our rights to certain of
our technologies or products. Our failure to raise capital when needed could
harm our business, financial condition and operating results.
23
Contractual Obligations
The lease
on our corporate headquarters in Sunnyvale, California, has a six-year term
commencing on July 22, 2004. In June 2010, we renewed the lease for an 18,088
square foot facility in the same building, which lease will expire in January
2016.
In Taiwan, we lease a total of
approximately 33,052 square feet in one facility located in Tu-Cheng City,
Taiwan. This lease expires at various times from May 2013 to January 2015. In
December 2000, we purchased approximately 8,200 square feet of space immediately
adjacent to the leased facility for $0.8 million. In November 2013, we purchased
approximately 5,748 square feet of space which we previous leased for $1.6
million, bringing the total square footage to approximately 47,000 square
feet.
We lease a 132,993 square foot facility
in Shenzhen, China, which lease will expire in October 2014.
The following summarizes our contractual
obligations at December 31, 2013 (in thousands):
|
|
Payments Due By Period
|
|
|
|
|
Less than
|
|
|
|
|
|
More
than
|
Contractual obligations
|
|
Total
|
|
1 year
|
|
1-3 Years
|
|
4-5 Years
|
|
5 Years
|
Operating Lease
Obligations
|
|
984
|
|
684
|
|
298
|
|
2
|
|
-
|
Off-Balance Sheet Arrangements
We do not have any off-balance sheet
arrangements, as such term is defined in rules promulgated by the Securities and
Exchange Commission, that have or are reasonably likely to have a current or
future material effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources.
Item 8. Financial Statements
and Supplementary Data
24
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS
|
|
Page
|
Consolidated Financial
Statements
|
|
|
Report of Independent
Registered Public Accounting Firm
|
|
27
|
Consolidated Balance
Sheets
|
|
28
|
Consolidated Statements of
Income and Comprehensive Income
|
|
29
|
Consolidated Statements of Cash
Flows
|
|
30
|
Consolidated Statements of
Stockholders Equity
|
|
31
|
Notes to Consolidated Financial
Statements
|
|
32
|
25
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the Audit Committee of
the
Board of Directors and Stockholders
of Alliance Fiber Optic Products,
Inc.
We have audited the accompanying
consolidated balance sheets of Alliance Fiber Optic Products, Inc. (the
Company) as of December 31, 2013 and 2012, and the related consolidated
statements of income and comprehensive income, stockholders equity and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Alliance Fiber Optic Products, Inc., as
of December 31, 2013 and 2012, and the consolidated results of its operations
and its cash flows for the year
s
then ended in conformity with
accounting principles generally accepted in the United States of
America.
We have also audited, in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), Alliance Fiber Optic Products, Inc.s internal control over
financial reporting as of December 31, 2013, based on the criteria established
in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission in 1992 and our report dated March 14,
2014 expressed an unqualified opinion on the effectiveness of the Companys
internal control over financial reporting.
Marcum
LLP
San Francisco,
California
March 14, 2014
26
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
To the Audit Committee of
the
Board of Directors and Shareholders
of Alliance Fiber Optic Products,
Inc.
We have audited Alliance Fiber
Optic Products, Inc.s (the "Company") internal control over financial reporting
as of December 31, 2013, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission in 1992. The Company's management is responsible for
maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying "Management Annual Report on Internal Control Over
Financial Reporting". Our responsibility is to express an opinion on the
Company's internal control over financial reporting based on our audit.
We conducted our audit in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit of
internal control over financial reporting included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also
included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles. A company's internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent
limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that degree of compliance with the policies or
procedures may deteriorate.
In our opinion, Alliance Fiber
Optic Products, Inc. maintained, in all material aspects, effective internal
control over financial reporting as of December 31, 2013, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission in 1992.
We have also audited, in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets as of December 31, 2013 and
2012 and the related consolidated statements of income and comprehensive income,
shareholders equity, and cash flows for the years then ended of the Company and
our report dated March 14, 2014 expressed an unqualified opinion on those
financial statements.
Marcum
LLP
San Francisco,
California
March 14, 2014
27
ALLIANCE FIBER OPTIC PRODUCTS, INC.
Consolidated Balance Sheets
(in thousands, except share data)
|
|
December 31,
|
|
2013
|
|
2012
|
Assets
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
18,603
|
|
|
$
|
4,793
|
|
Short-term investments
|
|
28,076
|
|
|
|
28,482
|
|
Accounts receivable, net
|
|
11,566
|
|
|
|
8,046
|
|
Inventories, net
|
|
10,630
|
|
|
|
6,933
|
|
Deferred tax asset, net
|
|
6,036
|
|
|
|
1,234
|
|
Prepaid
expense and other current assets
|
|
1,745
|
|
|
|
1,166
|
|
Total current assets
|
|
76,656
|
|
|
|
50,654
|
|
|
Long-term
investments
|
|
10,453
|
|
|
|
10,274
|
|
Property and equipment,
net
|
|
13,258
|
|
|
|
7,708
|
|
Deferred tax
asset, net
|
|
-
|
|
|
|
2,468
|
|
Other assets
|
|
198
|
|
|
|
249
|
|
Total assets
|
$
|
100,565
|
|
|
$
|
71,353
|
|
|
Liabilities and
Stockholders' Equity
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
Accounts payable
|
$
|
11,657
|
|
|
$
|
6,591
|
|
Accrued
expenses and other current liabilities
|
|
7,134
|
|
|
|
4,115
|
|
Total current liabilities
|
|
18,791
|
|
|
|
10,706
|
|
|
Long-term
liabilities:
|
|
600
|
|
|
|
616
|
|
Total liabilities
|
|
19,391
|
|
|
|
11,322
|
|
|
Commitments and
contingencies (Note 10)
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
|
|
|
|
|
Preferred stock, par value $0.001: 5,000,000 shares authorized;
|
|
|
|
|
|
|
|
no
shares issued and outstanding at December 31, 2013 and 2012,
|
|
|
|
|
|
|
|
respectively
|
|
-
|
|
|
|
-
|
|
Common stock, par value $0.001:
100,000,000 shares authorized;
|
|
|
|
|
|
|
|
18,408,261 and 17,264,926 shares issued and outstanding at
|
|
|
|
|
|
|
|
December 31, 2013 and 2012, respectively
|
|
18
|
|
|
|
18
|
|
Additional paid-in-capital
|
|
117,369
|
|
|
|
111,891
|
|
Accumulated deficit
|
|
(38,625
|
)
|
|
|
(54,672
|
)
|
Accumulated other comprehensive income
|
|
2,412
|
|
|
|
2,794
|
|
Total stockholders' equity
|
|
81,174
|
|
|
|
60,031
|
|
Total liabilities and stockholders' equity
|
$
|
100,565
|
|
|
$
|
71,353
|
|
The accompanying notes are an
integral part of these Consolidated Financial Statements.
28
ALLIANCE FIBER OPTIC PRODUCTS,
INC.
Consolidated Statements of
Income and Comprehensive Income
(in thousands, except per share
data)
|
Years Ended December 31,
|
|
2013
|
|
2012
|
Revenues
|
$
|
76,070
|
|
|
$
|
46,611
|
Cost of revenues
|
|
46,952
|
|
|
|
30,617
|
Gross profit
|
|
29,118
|
|
|
|
15,994
|
Operating expenses:
|
|
|
|
|
|
|
Research and development
|
|
3,702
|
|
|
|
3,298
|
Selling, marketing and administrative
|
|
8,315
|
|
|
|
6,967
|
Total
operating expenses
|
|
12,017
|
|
|
|
10,265
|
|
|
|
|
|
|
|
Income from
operations
|
|
17,101
|
|
|
|
5,729
|
Interest and other income,
net
|
|
708
|
|
|
|
727
|
Income before
benefit for income taxes
|
|
17,809
|
|
|
|
6,456
|
Benefit for income
taxes
|
|
999
|
|
|
|
3,185
|
Net
income
|
|
18,808
|
|
|
|
9,641
|
|
Foreign currency translation
adjustments
|
|
(392
|
)
|
|
|
792
|
Net
unrealized gain on investments available for sale
|
|
10
|
|
|
|
1
|
Comprehensive
income
|
$
|
18,426
|
|
|
$
|
10,434
|
|
|
|
|
|
|
|
Net income per
share:
|
|
|
|
|
|
|
Basic
|
$
|
1.06
|
|
|
$
|
0.55
|
Diluted
|
$
|
1.02
|
|
|
$
|
0.54
|
Shares used in computing net
income per share:
|
|
|
|
|
|
|
Basic
|
|
17,785
|
|
|
|
17,596
|
Diluted
|
|
18,481
|
|
|
|
17,861
|
The accompanying notes are an
integral part of these Consolidated Financial Statements.
29
ALLIANCE FIBER OPTIC PRODUCTS,
INC.
Consolidated Statements of Cash Flows
(in thousands)
|
Years Ended December 31,
|
|
2013
|
|
2012
|
Cash flows from
operating activities:
|
|
|
|
|
|
|
|
Net
income
|
$
|
18,808
|
|
|
$
|
9,641
|
|
Adjustments to reconcile
net income to net cash
|
|
|
|
|
|
|
|
provided by operating activities:
|
|
|
|
|
|
|
|
Depreciation
|
|
2,175
|
|
|
|
1,609
|
|
Amortization of stock based compensation
|
|
1,917
|
|
|
|
1,066
|
|
Loss on disposal of property and equipment
|
|
107
|
|
|
|
13
|
|
Deferred restricted stock unit compensation
|
|
(1,326
|
)
|
|
|
(647
|
)
|
Provision for inventory valuation
|
|
(84
|
)
|
|
|
88
|
|
Deferred tax assets
|
|
(2,334
|
)
|
|
|
(3,702
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
Accounts receivable
|
|
(3,520
|
)
|
|
|
(1,416
|
)
|
Inventories
|
|
(3,613
|
)
|
|
|
(258
|
)
|
Prepaid expenses and other current assets
|
|
(579
|
)
|
|
|
(452
|
)
|
Other assets
|
|
51
|
|
|
|
(87
|
)
|
Accounts payable
|
|
5,066
|
|
|
|
2,944
|
|
Accrued expenses and other current liabilities
|
|
3,019
|
|
|
|
491
|
|
Other long-term liabilities
|
|
(16
|
)
|
|
|
53
|
|
Net cash provided by operating activities
|
|
19,671
|
|
|
|
9,343
|
|
|
Cash flows from
investing activities:
|
|
|
|
|
|
|
|
Purchase of short-term investments
|
|
(21,492
|
)
|
|
|
(32,140
|
)
|
Proceeds from sales and
maturities of short-term investments
|
|
21,908
|
|
|
|
29,427
|
|
Purchase of long-term investments
|
|
(179
|
)
|
|
|
(176
|
)
|
Purchase of property and
equipment
|
|
(7,830
|
)
|
|
|
(1,450
|
)
|
Net cash used in investing activities
|
|
(7,593
|
)
|
|
|
(4,339
|
)
|
|
Cash flows from
financing activities:
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock under ESPP
|
|
521
|
|
|
|
416
|
|
Proceeds from the exercise
of common stock options and RSUs
|
|
5,239
|
|
|
|
888
|
|
Repurchase of common stock
|
|
(873
|
)
|
|
|
(4,780
|
)
|
Payment of
dividends
|
|
(2,761
|
)
|
|
|
(10,960
|
)
|
Repayment of bank borrowings
|
|
-
|
|
|
|
(230
|
)
|
Net cash provided by (used in) financing activities
|
|
2,126
|
|
|
|
(14,666
|
)
|
|
Effect of
exchange rate changes on cash and cash equivalents
|
|
(394
|
)
|
|
|
635
|
|
Net increase (decrease) in cash
and cash equivalents
|
|
13,810
|
|
|
|
(9,027
|
)
|
Cash and cash
equivalents at beginning of year
|
|
4,793
|
|
|
|
13,820
|
|
Cash and cash equivalents at end
of year
|
$
|
18,603
|
|
|
$
|
4,793
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
Cash paid for interest
|
$
|
-
|
|
|
$
|
(4
|
)
|
Cash paid for
income taxes
|
$
|
(433
|
)
|
|
$
|
(450
|
)
|
The accompanying notes are an
integral part of these Consolidated Financial Statements.
30
ALLIANCE FIBER OPTIC PRODUCTS,
INC.
Consolidated Statements of Stockholders' Equity
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
Deferred
|
|
Earnings
|
|
Other
|
|
|
|
|
|
|
Common Stock
|
|
Paid-in
|
|
Stock-based
|
|
(Accumulated
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Compensation
|
|
Deficit)
|
|
Income/(Loss)
|
|
Total
|
Balance at December
31, 2011
|
|
17,783
|
|
|
$
|
18
|
|
$
|
112,961
|
|
|
$
|
1,987
|
|
|
$
|
(53,353
|
)
|
|
$
|
2,001
|
|
|
$
|
63,614
|
|
Deferred stock-based
compensation
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
1,066
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,066
|
|
Issuance of stock on exercise of
options and RSUs
|
|
340
|
|
|
|
-
|
|
|
888
|
|
|
|
(647
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
241
|
|
Issuance of stock purchased through
ESPP
|
|
118
|
|
|
|
-
|
|
|
416
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
416
|
|
Issuance of cash
dividends
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
(10,960
|
)
|
|
|
-
|
|
|
|
(10,960
|
)
|
Repurchase of common stock
|
|
(976
|
)
|
|
|
-
|
|
|
(4,780
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,780
|
)
|
Net income for the
year
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
9,641
|
|
|
|
-
|
|
|
|
9,641
|
|
Other comprehensive gain
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
793
|
|
|
|
793
|
|
Balance at December
31, 2012
|
|
17,265
|
|
|
|
18
|
|
|
109,485
|
|
|
|
2,406
|
|
|
|
(54,672
|
)
|
|
|
2,794
|
|
|
|
60,031
|
|
Deferred stock-based
compensation
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
1,917
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,917
|
|
Issuance of stock on exercise of
options and RSUs
|
|
1,083
|
|
|
|
-
|
|
|
5,239
|
|
|
|
(1,326
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
3,913
|
|
Issuance of stock purchased through
ESPP
|
|
66
|
|
|
|
-
|
|
|
521
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
521
|
|
Issuance of cash
dividends
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,761
|
)
|
|
|
-
|
|
|
|
(2,761
|
)
|
Repurchase of common stock
|
|
(6
|
)
|
|
|
-
|
|
|
(873
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(873
|
)
|
Net income for the
year
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
18,808
|
|
|
|
-
|
|
|
|
18,808
|
|
Other comprehensive loss
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(382
|
)
|
|
|
(382
|
)
|
Balance at December
31, 2013
|
|
18,408
|
|
|
$
|
18
|
|
$
|
114,372
|
|
|
$
|
2,997
|
|
|
$
|
(38,625
|
)
|
|
$
|
2,412
|
|
|
$
|
81,174
|
|
The accompanying notes are an
integral part of these Consolidated Financial Statements.
31
1. The Company and summary of
significant accounting policies
The Company
Alliance
Fiber Optic Products, Inc. (the Company) was incorporated in California on
December 12, 1995 and reincorporated in Delaware on October 19, 2000. The
Company designs, manufactures and markets fiber optic components for
communications equipment manufacturers. The Companys headquarters are located
in Sunnyvale, California, and it has operations in Taiwan and China.
Use of estimates
The preparation of consolidated financial
statements in accordance with generally accepted accounting principles in the
United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates involve those required in the assessment
of the allowance for sales returns, doubtful accounts and/or potential excess
obsolete inventory. Actual results could differ from those estimates.
Basis of presentation
The consolidated financial statements
include the accounts of the Company and its subsidiaries. All material
intercompany accounts and transactions have been eliminated in
consolidation.
Foreign currency
translation
The Companys operations through foreign
subsidiaries use the local currency as their functional currency. All assets and
liabilities of the subsidiaries are translated at rates of exchange as of the
balance sheet date. Revenues and expenses are translated at the average rate of
exchange for the period. Gains and losses resulting from foreign currency
translation are recorded as a separate component of other comprehensive income
in stockholders equity. Foreign currency transaction gains and losses are
recorded in interest and other income and have not been material.
Cash, cash equivalents,
short-term and long-term investments
The Company considers all highly liquid
instruments with a maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents consist of cash deposited in money
market, certificate of deposit, and checking accounts.
The Company accounts for its investments
under the provisions of Accounting Standards Codification (ASC) 320
Investments - Debt and Equity Securities. Investments in highly liquid
financial instruments with remaining maturities greater than three months and
maturities of less than one year are classified as short-term investments.
Financial instruments with remaining maturities greater than one year are
classified as long-term investments. Investments in related party companies are
included in Other Assets in the Consolidated Balance Sheets. All investments
are classified as available-for-sale and are reported at fair value using the
specific identification method with net unrealized gain/(loss) reported, net of
tax as other comprehensive gain/(loss) in stockholders equity. The fair value
of the Companys available-for-sale securities are based on quoted market prices
or other methodologies for those investments with no quoted market prices at the
balance sheet dates.
The Companys financial instruments also
include accounts receivable, accounts payable and debts, and are carried at
cost, which approximates the fair value of these instruments.
32
Fair value of financial
instruments
The
Company applies fair value accounting for all financial assets and liabilities
and non-financial assets and liabilities that are recognized or disclosed at
fair value in the financial statements on a recurring basis. The Company defines
fair value as the price that would be received from selling an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date. When determining the fair value measurements for assets
and liabilities, which are required to be recorded at fair value, the Company
considers the principal or most advantageous market in which the Company would
transact and the market-based risk measurements or assumptions that market
participants would use in pricing the asset or liability, such as risks inherent
in valuation techniques, transfer restrictions and credit risk. Fair value is
estimated by applying the following hierarchy, which prioritizes the inputs used
to measure fair value into three levels and bases the categorization within the
hierarchy upon the lowest level of input that is available and significant to
the fair value measurement:
Level 1
Quoted prices in active
markets for identical assets or liabilities.
Level 2
Observable inputs other
than quoted prices in active markets for identical assets and liabilities,
quoted prices for identical or similar assets or liabilities in inactive
markets, or other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the assets or
liabilities.
Level 3
Inputs that are
generally unobservable and typically reflect managements estimate of
assumptions that market participants would use in pricing the asset or
liability.
The
Companys valuation techniques used to measure the fair value of money market
funds and certain marketable equity securities were derived from quoted prices
in active markets for identical assets or liabilities.
In accordance with the fair value
accounting requirements, companies may choose to measure eligible financial
instruments and certain other items at fair value. The Company has not elected
the fair value option for any eligible financial instruments.
Allowance for doubtful accounts
The Company performs periodic credit
evaluations of its customers financial condition. The Company maintains an
allowance for doubtful accounts for estimated losses resulting from the
inability or unwillingness of customers to make required payments. When the
Company becomes aware that a specific customer is unable to meet its financial
obligations, for example, as a result of bankruptcy or deterioration in the
customers operating results or financial position, the Company records a
specific allowance to reflect the level of credit risk in the customers
outstanding receivable balance. In addition, the Company records additional
allowances based on historical sales returns. The Company is not able to predict
changes in the financial condition of customers, and if circumstances related to
customers deteriorate, estimates of the recoverability of trade receivables
could be materially affected and the Company may be required to record
additional allowances. Alternatively, if the Company provides more allowances
than the Company needs, the Company may reverse a portion of such provisions in
future periods based on actual collection experience.
Inventories
Inventories are stated at the lower of
cost or market, with cost being determined using standard cost, which
approximates actual cost on a first-in, first-out basis. Market value is
determined as the lower of replacement cost or net realizable value. Provisions
are made for excess and obsolete inventory based on historical usage and
managements estimates of future demand. Inventory reserves, once established,
are only reversed upon sale or disposition of related inventory.
Property and equipment
Property and equipment is stated at cost
less accumulated depreciation and impairment charges. Depreciation is computed
using the straight-line method using estimated useful lives of 25 years for
building, two to 10 years for machinery and equipment and five years for
furniture and fixtures. Amortization of leasehold improvements is computed using
the straight-line method over the shorter of the estimated life of the assets,
generally two to four years, or the lease term. Depreciation and amortization
expense was $2.1 million in 2013 and $1.6 million in 2012.
33
Impairment of Long-lived Assets
The
Company reviews its long-lived assets for impairment whenever events or changes
in business circumstances indicate that the carrying amount of assets may not be
fully recoverable or that the useful lives of these assets are no longer
appropriate. Each impairment test is based on a comparison of the undiscounted
future cash flows to the recorded value of the asset. If an impairment is
indicated, the asset is written down to its estimated fair value based on fair
market values.
Revenue recognition
The Company recognizes revenue upon
shipment of its products to its customers, provided that the Company has
received a purchase order, the price is fixed, collection of the resulting
receivable is reasonably assured and transfer of title and risk of loss has
occurred. Subsequent to the sale of its products, the Company has no obligation
to provide any modification or customization upgrades, enhancements or post
contract customer support.
Allowances are provided for estimated
returns. A provision for estimated sales return allowances is recorded at the
time revenue is recognized based on historical returns, current economic trends
and changes in customer demand. Such allowances are adjusted periodically to
reflect actual and anticipated experience. Such adjustments, which are recorded
against revenue in the period, have generally not been material. The Company accrued $0.06
million and $0.02 million for warranty reserves as of December 31, 2013 and
2012, respectively.
Shipping and handling expenses
Shipping and handling expenses are
included in cost of revenue.
Research and development
expenses
Research and development costs are
charged to expense as incurred.
Advertising expenses
Advertising costs are charged to expense
as incurred and have not been material in 2013 and 2012.
Sales taxes
The Company accounts for taxes charged to
its customers and collected on behalf of taxing authorities on a net basis.
Income taxes
The Company accounts for income taxes in
accordance with ASC 740 which requires that the Company recognize deferred tax
liabilities and assets based on the differences between the financial statement
carrying amounts and the tax bases of assets and liabilities, using enacted tax
rates in effect in the years the differences are expected to reverse. Deferred
income tax benefit (expense) results from the change in net deferred tax assets
or deferred tax liabilities. A valuation allowance is recorded when it is more
likely than not that some or all deferred tax assets will not be realized.
The Company applies ASC 740 which
utilizes a two-step approach wherein a tax benefit is recognized if a position
is more-likely-than-not to be sustained. The amount of the benefit is then
measured to be the highest tax benefit that is greater than 50% likely to be
realized. The Company has elected to include interest and penalties related to
its tax contingencies in income tax expense. The Company files a U.S. federal
tax return and a return with the State of California. The Company has determined
that its major tax jurisdictions are the United States, California, Taiwan and
China. The tax years of 2008 through 2013 remain open and subject to examination
by the appropriate aforementioned governmental agencies.
The Company follows the provisions of ASC
740-10-25, Income Taxes: Recognition ("ASC 740-10-25"). The total amount of
unrecognized tax benefit as of December 31, 2013 and 2012 was $0.7 million and
$0 million respectively. The total amount of unrecognized tax benefit that, if
recognized, would affect the effective tax rate was $0.3 million and $0 million
as of December 31, 2013 and 2012, respectively. The increase in unrecognized tax
benefit during the year ended December 31, 2013 was mainly
due to the increase in the valuation of the Companys research credit for
federal and state income taxes purposes.
34
A
reconciliation of the beginning and ending balances of the total amounts of
unrecognized tax benefit for the year ended December 31, 2013 is as follows:
Balance at
January 1, 2013
|
|
$
|
-
|
Additions based on tax positions
related to the current year
|
|
|
683
|
|
Balance at
December 31, 2013
|
|
$
|
683
|
The Company recognizes interest and
penalties accrued related to unrecognized tax benefits in the provision for
income taxes. During the years ended December 31, 2013 and 2012, the Company
recognized approximately $0.1 million and $0 million, respectively, for interest
and penalties.
Deferred tax assets pertaining to
windfall tax benefits on the exercise of share awards and the corresponding
credit to additional paid-in capital are recorded if the related tax deduction
reduces tax payable. The Company has elected the with-and-without approach
regarding ordering of windfall tax benefits to determine whether the windfall
tax benefit did reduce taxes payable in the current year. Under this approach,
the windfall tax benefits would be recognized in additional paid-in capital only
if an incremental tax benefit is realized after considering all other tax
benefits presently available to the Company. The Companys deferred tax assets
as of December 31, 2013 do not include $0.6 million of excess tax benefits from
employee stock option exercises that are a component of its net operating loss
carryovers. Stockholders equity will be increased by $0.6 million if and when
such excess tax benefits are ultimately realized.
The Company files income tax returns in
the United States (federal) and in various state and local jurisdictions. In
most instances, the Company is no longer subject to federal, state and local
income tax examinations by tax authorities for years prior to 2010, and is not
currently under examination by any federal, state or local jurisdiction. It is
not anticipated that unrecognized tax benefits will significantly change in the
next twelve months.
Stock-based compensation
The Company estimates the fair value of
the share-based payment awards on the date of grant using an option pricing
model. The value of awards that are ultimately expected to vest is recognized as
an expense over the requisite employee service period.
Comprehensive
income
Comprehensive income is defined as the
change in equity of a company from transactions and other events and
circumstances excluding transactions resulting from investments from owners and
distributions to owners. Accumulated other comprehensive income consists of
cumulative translation adjustments and unrealized gains on short-term
investments and is disclosed in the consolidated statements of stockholders
equity.
Recent accounting
pronouncements
In July 2013, FASB issued guidance on the
presentation of an unrecognized tax benefit when a net operating loss
carryforward, similar tax loss or tax carryforward exists. The FASB concluded
that an unrecognized tax benefit should be presented as a reduction of a
deferred tax asset except in certain circumstances the unrecognized tax benefit
should be presented as a liability and should not be combined with deferred tax
assets. The amendment is effective prospectively for fiscal years, and interim
periods within those years, beginning after December 15, 2013, with early
adoption permitted. The Company is currently evaluating the impact this
amendment may have on its consolidated financial statements.
In March 2013, the FASB issued guidance
to clarify when to release cumulative foreign currency translation adjustments
when an entity ceases to have a controlling financial interest in a subsidiary
or group of assets within a foreign entity. The amendment is effective
prospectively for fiscal years, and interim periods within those years,
beginning after December 15, 2013 and should be applied prospectively to
derecognition events occurring after the effective date. Early adoption is
permitted. The Company does not expect the adoption of this guidance to have a
material impact on its consolidated financial statements.
35
In
February 2013, the FASB issued guidance requiring presentation of amounts
reclassified from each component of accumulated other comprehensive income. In
addition, disclosure is required of the effects of significant reclassifications
on income statement line items either on the face of the statement where net
income is presented or as a separate disclosure in the notes to the financial
statements. For public entities, this guidance is effective prospectively for
reporting periods beginning after December 15, 2012. The adoption of this
guidance did not have a material impact on the Companys consolidated financial
statements.
2. Stockholders Equity
Preferred Stock.
The Company is authorized to issue 5,000,000 shares of
preferred stock, none of which was outstanding as of December 31, 2013. The
Board of Directors may determine the rights, preferences and privileges of any
preferred stock issued in the future.
Common Stock.
On November 1, 2013, the Company amended its Amended and
Restated Certificate of Incorporation to increase the number of shares of common
stock authorized for issuance from 20,000,000 to 100,000,000.
On August 30, 2013, the Company effected
a 2-for-1 split of its outstanding common stock, pursuant to previously obtained
stockholder authorization. The number of authorized shares of common stock was
not changed. The stock split increased the Companys issued and outstanding
shares of common stock as of August 30, 2013 from approximately 9,061,568 shares
to approximately 18,123,136 shares. All share and per share numbers reflect the
split and were applied on a retroactive basis.
Stock Repurchase Program.
On November 30, 2011, the Company
announced a program to repurchase up to $6.0 million worth of the Companys
outstanding common stock. Repurchases under the program may be made in open
market and privately negotiated transactions in compliance with Securities and
Exchange Commission Rule 10b-18, subject to market conditions, applicable legal
requirements and other factors. The Company is not required to repurchase any
amount of common stock in any period and the program may be modified or
suspended at any time. The duration of the repurchase program is open-ended. As
of December 31, 2013, an aggregate of 602,256 shares of common stock had been
repurchased under the program.
Dividends.
On November 7, 2013, the Company announced it had
declared a cash dividend of fifteen cents per share, which was payable on
December 23, 2013 to holders of record on December 6, 2013.
Stockholder Rights Plan.
On March 10, 2011, the Board of
Directors entered into an Amended and Restated Rights Agreement (the Restated
Rights Plan), which amended and restated the original rights agreement dated as
of May 29, 2001 (the Original Agreement). In connection with the adoption of
the Original Agreement, one preferred stock purchase right (a Right) was
distributed for each outstanding share of common stock. Since the occurrence of
a one-for-five reverse split of the common stock at the close of business on
August 7, 2010, five Rights had been associated with each outstanding share of
common stock. The Restated Rights Plan restores the initial one Right per share
of common stock ratio of the Original Agreement, but is also subject to
adjustment as provided in the Restated Rights Plan. Rights continue to be
attached to all outstanding shares of common stock, and no separate Rights
certificates have been distributed.
Rights will separate from the common
stock and a "Distribution Date" will occur upon the earliest of the following:
(i) a public announcement that a person, entity or group of affiliated or
associated persons and/or entities (an "Acquiring Person") has acquired, or
obtained the right to acquire, beneficial ownership of fifteen percent (15%) or
more of the outstanding shares of common stock (other than (A) as a result of
repurchases of stock by the Company or certain inadvertent actions by
institutional or certain other stockholders, (B) the Company, any subsidiary of
the Company or any employee benefit plan of the Company or any subsidiary, (C)
Foxconn Holding Limited (which owned in excess of fifteen percent (15%) of the
outstanding shares of common stock when the Original Agreement was implemented),
so long as such entity, together with its affiliated or associated persons
and/or entities, does not increase its beneficial ownership by more than one
percent (1%) of the outstanding shares of common stock above the percentage held
in May 2001 (or such lesser percentage as may result following any transfer of
securities after such date until Foxconn beneficially owns less than fifteen
percent (15%) of the outstanding shares of common stock)) and (D) certain other
instances set forth in the Restated Rights Plan); or (ii) ten (10) business days
(unless such date is extended by the Board of Directors) following the
commencement of a tender offer or exchange offer which would result in any
person, entity or group of affiliated or associated persons and/or entities
becoming an Acquiring Person (unless such tender offer or exchange offer is a
Permitted Offer as defined in the Restated Rights Plan). As soon as practicable
following the Distribution Date, separate certificates evidencing the Rights
("Rights Certificates") will be mailed to holders of record of the common stock
as of the close of business on the Distribution Date, and the separate Rights
Certificates alone will evidence the Rights.
36
The Rights are not exercisable until the
Distribution Date. The Rights will expire on the earliest of (i) May 29, 2021,
(ii) consummation of a merger transaction with a person, entity or group who (x)
acquired common stock pursuant to a Permitted Offer and (y) is offering in the
merger the same price per share and form of consideration paid in the Permitted
Offer or (iii) redemption or exchange of the Rights by the Company as described
in the Amended Rights Plan.
3. Stock-based Compensation
ASC 718 requires companies to record
compensation expense for stock options measured at fair value, on the date of
grant, using an option-pricing model. The fair value of stock options granted
and stock purchased pursuant to the Employee Stock Purchase Plan (ESPP) prior
to June 30, 2010 was determined using the Binomial Lattice Model. The Company
adopted the Black-Scholes valuation model for stock options granted and stock
purchased pursuant to the ESPP after June 30, 2010. The Company believes that
the Black-Scholes model is more appropriate in determining fair value of its
stock-based compensation and does not differ materially from the previous
valuation model used.
At December 31, 2013, the Company had one
stock-based compensation plan, the 2000 Stock Incentive Plan (the Stock
Incentive Plan), which is described below.
In November 2000, the Company adopted the
Stock Incentive Plan under which 300,000 shares of common stock were reserved
for issuance to eligible employees, directors and consultants upon exercise of
stock options and stock purchase rights. On October 21, 2013, the stockholders
approved an increase by 900,000 the number of shares of common stock available
for issuance under the Stock Incentive Plan. The number of shares reserved for
issuance under the Companys 2000 Stock Incentive Plan may be increased on the
first day of the Companys fiscal year by the lesser of 680,000 shares, 5% of
the fully diluted outstanding shares of the Companys common stock on that date
or a lesser amount determined by the Companys Board of Directors. There was no
increase on January 1, 2013, because the Board determined there were enough
shares available for issuance in 2013 pursuant to the Plan. Stock options,
restricted stock, restricted stock units (RSUs) or stock appreciation rights
may be awarded under the 2000 Stock Incentive Plan.
The plan was amended and restated in 2010
to, among other things, extend the term under which awards may be granted under
the plan until March 17, 2020, eliminate a 10 million share ceiling on the
aggregate number of shares of common stock that may be issued under the plan,
and to include certain qualifying performance criteria and annual award limits
so that awards granted under the plan qualify as performance-based
compensation" under the requirements of Section 162(m) of the Internal Revenue
Code of 1986, as amended.
Under the Stock Incentive Plan,
participants may be granted RSUs, representing an unfunded, unsecured right to
receive common stock on the date specified in the recipients award. The RSUs
granted under the plan generally vest over two years at a rate of 50 percent per
year, over three years at a rate of 33.3 percent per year, or over five years at
a rate of 20 percent per year. The Company recognizes compensation expense on a
straight-line basis over the applicable vesting term of the award.
During the year ended December 31, 2011,
the Company granted 546,000 RSUs with a total grant-date fair value of $2.5
million. The resulting compensation expense recorded in the year ended December
31, 2013 and 2012 was approximately $0.5 million and $0.7 million, respectively.
At December 31, 2013, there was $0.8 million of unrecognized compensation cost
related to RSUs, which is expected to be realized over three years.
During the year ended December 31, 2013,
the Company granted 342,000 RSUs with a total grant-date fair value of $2.3
million. The resulting compensation expense recorded in the year ended December
31, 2013 was approximately $0.6 million. At December 31, 2013, there was $1.6
million of unrecognized compensation cost related to RSUs, of which $0.1 million
is expected to be realized over one year, $0.7 million is expected to be
realized over two years and $0.8 million is expected to be realized over three
years.
Options granted under the Stock Incentive
Plan generally vest over four years and are exercisable for not more than ten
years. However, most options granted in the past four years have been fully
vested at the time of grant.
37
The
following information relates to stock option activity for the year ended
December 31, 2013:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
Remaining
|
|
Aggregate
|
|
|
|
|
|
Exercise
|
|
Contractual
|
|
Intrinsic
|
Options
|
|
Shares
|
|
Price
|
|
Life
|
|
Value
|
Outstanding at December 31,
2012
|
|
1,436,360
|
|
|
$
|
3.92
|
|
|
|
|
|
Granted
|
|
212,800
|
|
|
|
7.12
|
|
|
|
|
|
Exercised
|
|
(1,082,920
|
)
|
|
|
3.84
|
|
|
|
|
|
Forfeited
|
|
(600
|
)
|
|
|
3.90
|
|
|
|
|
|
Outstanding at December 31,
2013
|
|
565,640
|
|
|
$
|
5.28
|
|
7.89
Years
|
|
$
|
5,528,898
|
|
Vested and expected to vest
at December 31, 2013
|
|
565,640
|
|
|
$
|
5.28
|
|
7.89
Years
|
|
$
|
5,528,898
|
Exercisable at December 31, 2013
|
|
115,400
|
|
|
$
|
4.01
|
|
4.45 Years
|
|
$
|
1,273,598
|
The aggregate intrinsic value in the
table above represents the total pre-tax intrinsic value (the difference between
the closing stock price on the last trading day of the fourth quarter of fiscal
2012 and 2013 and the exercise price, multiplied by the number of in-the-money
options) that would have been received by the option holders had all option
holders exercised their options on December 31, 2013 and 2012. This amount
changes based on the fair market value of the Companys common stock. The total
intrinsic value of options exercised for the years ended December 31, 2013 and
2012 were $12.8 million and $1.3 million, respectively.
The dividend rate was 0.15% and 1.25% for
the years ended December 31, 2013 and 2012, respectively.
Cash received from option exercises
during the year ended December 31, 2013 and 2012 was approximately $5.2 million
and $0.9 million, respectively, and is included within the financing activities
section in the accompanying consolidated statements of cash flows.
Information relating to stock options
outstanding at December 31, 2013 is as follows:
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
Weighted
|
|
|
|
Weighted
|
Range of
|
|
Number
|
|
Remaining
|
|
Average
|
|
Number
|
|
Average
|
Exercise
|
|
Outstanding
|
|
Contractual
|
|
Exercise
|
|
Exercisable
|
|
Exercise
|
Price
|
|
As of 12/31/13
|
|
Term
|
|
Price
|
|
As of 12/31/13
|
|
Price
|
$2.03
|
-
|
$3.88
|
|
103,140
|
|
6.03
|
|
$
|
3.35
|
|
33,840
|
|
$
|
2.29
|
$3.91
|
-
|
$4.45
|
|
168,100
|
|
7.62
|
|
$
|
4.26
|
|
33,465
|
|
$
|
4.11
|
$4.50
|
-
|
$5.15
|
|
69,600
|
|
7.73
|
|
$
|
4.79
|
|
36,095
|
|
$
|
4.88
|
$6.03
|
-
|
$6.03
|
|
12,000
|
|
3.58
|
|
$
|
6.03
|
|
12,000
|
|
$
|
6.03
|
$6.87
|
-
|
$6.87
|
|
170,400
|
|
9.29
|
|
$
|
6.87
|
|
-
|
|
$
|
-
|
$8.17
|
-
|
$8.17
|
|
42,400
|
|
9.38
|
|
$
|
8.17
|
|
-
|
|
$
|
-
|
|
|
|
|
565,640
|
|
7.89
|
|
$
|
5.28
|
|
115,400
|
|
$
|
4.01
|
Options exercisable as of December 31,
2013 and 2012 were 115,400 and 489,110 at an average exercise price of $4.01 and
$7.59 per share, respectively.
There were 990,524 shares available for
future issuance under the Stock Incentive Plan as of December 31, 2013.
38
Employee Stock Purchase Plan
In
November 2000, the Company adopted its ESPP. The Company reserved 600,000 shares
of common stock for issuance under the ESPP. The ESPP was amended and restated
in 2010. On April 29, 2011, the stockholders approved an increase by 600,000 in
the number of shares of common stock available for issuance. On the first day of
January of each year beginning January 1, 2001 through December 31, 2010,
additional shares of common stock were reserved for issuance under the ESPP as
determined by the Board of Directors. The ESPP limited the annual increase to
the lesser of 1% of the Companys issued and outstanding common stock or 400,000
shares. The ESPP provides eligible employees with the opportunity to acquire
shares of common stock at a price of 85% of the lower of the fair market value
of the common stock on the first day of the offering period or the last day of
the offering period, whichever is lower. The ESPP is structured as a qualified
employee stock purchase plan under Section 423 of the Internal Revenue Code of
1986, as amended. However, the ESPP is not intended to be a qualified pension,
profit sharing or stock bonus plan under Section 401(a) of the 1986 Code and is
not subject to the provisions of the Employee Retirement Security Act of 1974.
The Board may amend, suspend, or terminate the Plan at any time without notice.
A total of 92,111 and 117,920 shares were issued under the ESPP in 2013 and
2012, respectively.
There were 318,900 shares available for
future issuance under the ESPP as of December 31, 2013.
The following information relates to the
ESPP:
|
|
2013
|
|
2012
|
Weighted average
fair value per share of shares purchased
|
|
$
|
5.66
|
|
$
|
7.07
|
Total compensation expense for
ESPP
|
|
$
|
409,079
|
|
$
|
139,595
|
Total amount of
cash received from the purchase of stock through ESPP
|
|
$
|
521,308
|
|
$
|
416,741
|
Total intrinsic value of ESPP
stock purchased at December 31st
|
|
$
|
863,120
|
|
$
|
291,958
|
The following table summarizes employee
stock-based compensation expense resulting from stock options, RSUs, and the
ESPP (in thousands):
|
|
Years Ended December 31,
|
|
|
2013
|
|
2012
|
Included in cost
of revenue
|
|
$
|
373
|
|
$
|
119
|
Included in operating
expenses:
|
|
|
|
|
|
|
Research and development
|
|
|
232
|
|
|
125
|
Sales,
marketing and administrative
|
|
|
1,312
|
|
|
822
|
Total
|
|
|
1,544
|
|
|
947
|
Total stock-based compensation
expenses
|
|
$
|
1,917
|
|
$
|
1,066
|
4. Net Income per
Share
Basic net income per share is computed by
dividing net income for the period by the weighted average number of shares of
common stock outstanding during the period. Diluted net income per share is
computed by dividing the net income for the period by the combination of
dilutive common share equivalents, comprised of shares issuable under the
Companys stock-based compensation plans, and the weighted average number of
common shares outstanding during the period. There were no incremental dilutive
common share equivalents in the periods presented.
39
The following table sets forth the
computation of basic and diluted net income per share for the years indicated
(in thousands, except per share amounts):
|
|
Years Ended December 31,
|
|
|
2013
|
|
2012
|
Numerator:
|
|
|
|
|
|
|
Net
income attributable to common stockholders
|
|
$
|
18,808
|
|
$
|
9,641
|
|
Denominator:
|
|
|
|
|
|
|
Shares
used in computing net income per share:
|
|
|
|
|
|
|
Weighted average of common shares outstanding
|
|
|
|
|
|
|
Basic
|
|
|
17,785
|
|
|
17,596
|
Diluted
|
|
|
18,481
|
|
|
17,861
|
|
Net income per share attributable to
common stockholders:
|
|
|
|
|
|
|
Basic
|
|
$
|
1.06
|
|
$
|
0.55
|
Diluted
|
|
$
|
1.02
|
|
$
|
0.54
|
The
following outstanding options that were out-of-the money were excluded from the
computation of diluted net income per share (in thousands) as the effect would
have been anti-dilutive:
|
|
Years Ended December 31,
|
|
|
2013
|
|
2012
|
Options to
purchase common stock
|
|
|
-
|
|
133
|
40
5. Balance Sheet Components (in
thousands)
|
|
December 31,
|
|
|
2013
|
|
2012
|
Cash and cash
equivalents:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
17,676
|
|
|
$
|
3,392
|
|
Money market instruments
and funds
|
|
|
927
|
|
|
|
1,401
|
|
|
|
$
|
18,603
|
|
|
$
|
4,793
|
|
|
Accounts
receivable, net:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
11,687
|
|
|
$
|
8,167
|
|
Less: Allowance for
doubtful accounts and sales returns
|
|
|
(121
|
)
|
|
|
(121
|
)
|
|
|
$
|
11,566
|
|
|
$
|
8,046
|
|
|
Allowance for
doubtful accounts and sales returns:
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
$
|
121
|
|
|
$
|
121
|
|
Utilized
|
|
|
-
|
|
|
|
-
|
|
Balance
at end of year
|
|
$
|
121
|
|
|
$
|
121
|
|
|
Inventories,
net:
|
|
|
|
|
|
|
|
|
Finished goods
|
|
$
|
2,455
|
|
|
$
|
1,824
|
|
Work-in-process
|
|
|
4,134
|
|
|
|
2,546
|
|
Raw
materials
|
|
|
4,041
|
|
|
|
2,563
|
|
|
|
$
|
10,630
|
|
|
$
|
6,933
|
|
|
Accrued expenses
and other current liabilities:
|
|
|
|
|
|
|
|
|
Compensation costs
|
|
$
|
5,104
|
|
|
$
|
2,976
|
|
Professional fees
|
|
|
38
|
|
|
|
62
|
|
Outside
commissions
|
|
|
112
|
|
|
|
90
|
|
Royalities
|
|
|
74
|
|
|
|
32
|
|
ESPP
|
|
|
151
|
|
|
|
107
|
|
Deferred rent
|
|
|
57
|
|
|
|
74
|
|
Warranty
|
|
|
57
|
|
|
|
21
|
|
Operating related (Taiwan
and China)
|
|
|
289
|
|
|
|
529
|
|
Income
tax
|
|
|
890
|
|
|
|
55
|
|
Others
|
|
|
362
|
|
|
|
169
|
|
|
|
$
|
7,134
|
|
|
$
|
4,115
|
|
|
Long-term
liabilities:
|
|
|
|
|
|
|
|
|
Accrued pension liability
(Taiwan)
|
|
$
|
600
|
|
|
$
|
591
|
|
Other liabilities
|
|
|
-
|
|
|
|
25
|
|
|
|
$
|
600
|
|
|
$
|
616
|
|
Accumulated
other comprehensive Income:
|
|
|
|
|
|
|
|
|
Cumulative translation adjustments
|
|
$
|
2,408
|
|
|
$
|
2,800
|
|
Unrealized gain/(loss) on
short-term investments
|
|
|
4
|
|
|
|
(6
|
)
|
|
|
$
|
2,412
|
|
|
$
|
2,794
|
|
41
6. Property and Equipment,
Net
|
|
December 31,
|
(in thousands)
|
|
2013
|
|
2012
|
Machinery and
equipment
|
|
$
|
20,696
|
|
|
$
|
15,678
|
|
Furniture and fixtures
|
|
|
673
|
|
|
|
618
|
|
Leasehold
improvements
|
|
|
986
|
|
|
|
901
|
|
Building and equipment
prepayments
|
|
|
2,948
|
|
|
|
1,098
|
|
|
|
$
|
25,303
|
|
|
$
|
18,295
|
|
Less: Accumulated
depreciation
|
|
|
(12,045
|
)
|
|
|
(10,587
|
)
|
Total property
and equipment, net
|
|
$
|
13,258
|
|
|
$
|
7,708
|
|
7. Income Taxes
The components of income (loss) before
income taxes are as follows (in thousands):
|
|
Years Ended December 31,
|
|
|
2013
|
|
2012
|
Income subject to domestic
income taxes only
|
|
17,645
|
|
4,000
|
Income subject to foreign income taxes
only
|
|
164
|
|
2,456
|
|
|
17,809
|
|
6,456
|
The
following is a reconciliation of the effective tax rates and the United States
statutory federal income tax rate:
|
|
Years Ended December
31,
|
|
|
2013
|
|
2012
|
Statutory federal income tax rate
|
|
(34.0
|
)%
|
|
(34.0
|
)%
|
State income
tax
|
|
(5.8
|
)
|
|
(5.8
|
)
|
Effect of permanent differences
|
|
(1.1
|
)
|
|
-
|
|
Stock
compensation
|
|
10.1
|
|
|
2.4
|
|
Deferred compensation
|
|
(2.9
|
)
|
|
(1.5
|
)
|
Minimum tax
|
|
(1.7
|
)
|
|
(1.4
|
)
|
Foreign tax
differential
|
|
(0.1
|
)
|
|
(4.4
|
)
|
Research and development credits
|
|
-
|
|
|
1.1
|
|
Investment
credits
|
|
0.9
|
|
|
0.3
|
|
Valuation allowance
|
|
47.4
|
|
|
88.7
|
|
Accrual of
uncertain tax positions
|
|
(2.3
|
)
|
|
-
|
|
Other
|
|
(4.9
|
)
|
|
4.0
|
|
Effective tax
rate
|
|
5.6
|
%
|
|
49.3
|
%
|
42
Deferred tax assets consisted of the
following (in thousands):
|
|
Years Ended December
31,
|
|
|
2013
|
|
2012
|
Deferred tax
assets:
|
|
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$
|
3,501
|
|
|
$
|
8,230
|
|
Windfall tax benefit
carryforwards
|
|
|
(580
|
)
|
|
|
-
|
|
Credit
carryforwards
|
|
|
1,841
|
|
|
|
2,245
|
|
Depreciation and
amortization
|
|
|
6
|
|
|
|
-
|
|
Stock
compensation
|
|
|
(264
|
)
|
|
|
649
|
|
Accruals and allowances
|
|
|
1,532
|
|
|
|
788
|
|
|
|
|
6,036
|
|
|
|
11,912
|
|
Less: valuation
allowance
|
|
|
-
|
|
|
|
(8,210
|
)
|
Net deferred tax
assets
|
|
$
|
6,036
|
|
|
$
|
3,702
|
|
|
|
|
Years Ended December
31,
|
|
|
2013
|
|
2012
|
Valuation
allowance on deferred tax assets:
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
$
|
8,210
|
|
|
$
|
13,397
|
|
Addition
|
|
|
-
|
|
|
|
-
|
|
Utilized
|
|
|
(8,210
|
)
|
|
|
(5,187
|
)
|
Balance at end
of year
|
|
$
|
-
|
|
|
$
|
8,210
|
|
|
The income tax provision (benefit) is
composed of the following (in thousands):
|
|
|
|
Years Ended December
31,
|
Current:
|
|
2013
|
|
2012
|
Federal
|
|
$
|
382
|
|
|
$
|
107
|
|
State
|
|
|
1
|
|
|
|
-
|
|
Foreign
|
|
|
953
|
|
|
|
409
|
|
|
|
|
1,336
|
|
|
|
516
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(1,450
|
)
|
|
|
(3,160
|
)
|
State
|
|
|
(232
|
)
|
|
|
(541
|
)
|
Foreign
|
|
|
(653
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total benefit
for income taxes
|
|
$
|
(999
|
)
|
|
$
|
(3,185
|
)
|
The Company accounts for income taxes
under the asset and liability method, which requires the recognition of deferred
tax assets and liabilities for the expected future tax consequences of events
that have been included in the financial statements. Under this method, deferred
tax assets and liabilities are determined based on the differences between the
financial statements and tax basis of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
The effect of a change in tax rates on deferred tax assets and liabilities is
recognized in income in the period that includes the enactment date.
The Companys effective tax rate was
below the U.S. statutory rate primarily because of the tax benefit arising from
a reduction in the valuation allowance. The Company is subject to income tax in both
the United States and various foreign jurisdictions. The effective tax rate is
also affected by the taxable earnings in foreign jurisdictions with various
different statutory tax rates. The Company reviews its expected annual effective
income tax rates and makes changes on a quarterly basis as necessary based on
certain factors such as forecasted annual operating income and valuation of
deferred tax assets.
43
The Company records net deferred tax
assets to the extent it believes these assets will more likely than not be
realized. In making such determination, management considers all available
positive and negative evidence, including future reversals of existing taxable
temporary differences, projected future taxable income, tax planning strategies
and recent financial operations. In the event the Company was to determine that
it would be able to realize its deferred income tax assets in the future in
excess of their net recorded amount, the Company would make an adjustment to the
valuation allowance, which would reduce the provision for income taxes.
Management assesses the available
positive and negative evidence to estimate if sufficient future taxable income
will be generated to utilize the existing deferred tax assets. Based on this
assessment, as of December 31, 2013, the Companys valuation allowance was fully
released. The amount of the deferred tax asset considered realizable, however,
could be adjusted if estimates of future taxable income are reduced.
As of December 31, 2013, the Company has
a net operating loss carryforward of approximately $7.5 million for federal and
$6.5 million for state income tax purposes. If not utilized, these carryforwards
will begin to expire after 2022 for federal and after 2016 for state purposes.
As of December 31, 2013, the Company has
research credit carryforwards of approximately $1.2 million and $0.9 million for
federal and state income tax purposes, respectively. If not utilized, the
federal carryforwards will expire in various amounts beginning in 2019. The
California tax credits can be carried forward indefinitely.
Internal Revenue Code Section 382 limits
the use of net operating loss and tax credit carryforwards in certain situations
where changes occur in the stock ownership of a company. In the event the
Company has had a change in ownership, utilization of the carryforwards could be
restricted. The Company has concluded no change in stock ownership has occurred
during 2013.
8. Concentrations of Certain
Risks
Financial instruments that potentially
subject the Company to significant concentrations of credit risk consist
primarily of cash, cash equivalents, short-term and long-term investments and
accounts receivable. The Company limits the amount of deposits in any one
financial institution and any one financial instrument. The Company invests its
excess cash principally in certificates of deposit, debt instruments issued by
high-credit quality financial institutions and corporations and money market
accounts with financial institutions in the United States.
The Company performs periodic credit
evaluations of its customers financial condition, and limits the amount of
credit extended when deemed necessary, but generally does not require
collateral.
Two customers accounted for 46.0% and
18.0% of the Companys accounts receivable at December 31, 2013 and 2012,
respectively.
One customer accounted for 35.3% and
another customer accounted for 10.0% of revenues in the year ended December 31,
2013 and 2012, respectively.
Certain components used in manufacturing
the Companys products have relatively few alternative sources of supply, and
establishing additional or replacement suppliers for such components may not be
accomplished quickly.
9. Geographic Segment
Information
The Company operates in a single industry
segment. This industry segment is characterized by rapid technological change
and significant competition.
44
The following is a summary of the
Companys revenues generated by geographic segments, revenues generated by
product lines and identifiable assets located in these segments (in thousands):
|
|
Years Ended December 31,
|
|
|
2013
|
|
2012
|
Revenues
|
|
|
|
|
|
|
North
America
|
|
$
|
42,815
|
|
$
|
27,299
|
Europe
|
|
|
15,604
|
|
|
8,933
|
Asia
|
|
|
17,651
|
|
|
10,379
|
|
|
$
|
76,070
|
|
$
|
46,611
|
|
|
|
|
Years Ended December 31,
|
|
|
2013
|
|
2012
|
Revenues
|
|
|
|
|
|
|
Connectivity Products
|
|
$
|
57,660
|
|
$
|
32,622
|
Optical Passive Products
|
|
|
18,410
|
|
|
13,989
|
|
|
$
|
76,070
|
|
$
|
46,611
|
|
|
|
|
Years Ended December 31,
|
|
|
2013
|
|
2012
|
Property and
Equipment, net
|
|
|
|
|
|
|
United
States
|
|
$
|
40
|
|
$
|
43
|
Taiwan
|
|
|
7,148
|
|
|
3,473
|
China
|
|
|
6,070
|
|
|
4,192
|
|
|
$
|
13,258
|
|
$
|
7,708
|
10. Commitments and
Contingencies
Litigation
From time
to time, the Company may be involved in litigation in the normal course of
business. As of the date of these financial statements, the Company is not aware
of any material legal proceedings pending or threatened against the
Company.
Off-Balance Sheet Arrangements
The Company had no off-balance sheet
arrangements as of December 31, 2013 and 2012, respectively.
Indemnification and Product
Warranty
The Company indemnifies certain
customers, suppliers and subcontractors for attorney fees and damages and costs
awarded against these parties in certain circumstances in which products are
alleged to infringe third party intellectual property rights, including patents,
trade secrets, trademarks or copyrights. In all cases, there are limits on and
exceptions to the potential liability for indemnification relating to
intellectual property infringement claims. The Company cannot estimate the
amount of potential future payments, if any, that it might be required to make
as a result of these agreements. As of December 31, 2013, the Company has not
paid any claim or been required to defend any action related to indemnification
obligations, and accordingly, the Company has not accrued any amounts for such
indemnification obligations. However, the Company may record charges in the
future as a result of these indemnification obligations.
The Company generally warrants products
against defects in materials and workmanship and non-conformance to
specifications for varying lengths of time. If there is a material increase in
customer claims compared with historical experience, or if costs of servicing
warranty claims are greater than expected, the Company may record a charge
against cost of revenues. The Company accrued $0.06 million and $0.02 million
warranty reserves as of December 31, 2013 and 2012, respectively.
45
Operating Leases
The
Company leases certain office space under long-term operating leases expiring at
various dates through 2017. Total rent expense under these operating leases was
approximately $0.7 million for each of the years ended December 31, 2013 and
2012.
Total future minimum lease payments under
operating leases as of December 31, 2013 are summarized below (in thousands):
Years ending
December 31,
|
|
|
|
2014
|
|
|
684
|
2015
|
|
|
275
|
2016
|
|
|
23
|
2017 and
after
|
|
|
2
|
Total
|
|
$
|
984
|
11. Bank Loans
In November 2004, the Company entered
into a ten-year loan of $0.5 million in Taiwan with an interest rate of 2.3% for
the first two years and 3.6% for the following years. In November 2006, the
Company entered into a seven-year loan of $0.2 million in Taiwan with an
interest rate of 2.8%. Both loans were secured by the Companys building in
Taiwan. In September 2007, the Company also entered a five-year equipment loan
of $0.1 million with an interest rate of 3.68%. In July 2012, the Company
repaid all of the loans.
12. Related Party Transactions
As of December
31, 2013, and based on information filed with the Securities and Exchange Commission on January 4, 2002 for the year ended
December 31, 2000, Foxconn Holding Limited (Foxconn) and Hon Hai Precision Industry Co. Ltd. (Hon
Hai) held 17.38% of the Companys common stock. In the normal course of business, the Company sells products to
and purchases raw materials from Hon Hai, who is the parent company of Foxconn. These transactions were made at prices and
terms consistent with those of unrelated third parties.
Sales of products to Hon Hai Precision
Co., Ltd. were $0.01 million and $0.06 million in the years ended December 31,
2013 and 2012, respectively. Amounts due from Hon Hai Precision Co., Ltd. were
$0.01 and $0 at December 31, 2013 and 2012, respectively.
Purchases of raw materials from Hon Hai
Precision Co., Ltd. were $1.5 million and $1.0 million in the years ended
December 31, 2013 and 2012 respectively. Amounts due to Hon Hai Precision Co.,
Ltd. were $0.3 million at each of the years ended December 31, 2013 and 2012.
13. Fair Value of Financial
instruments
U.S. GAAP defines fair value as the price
that would be received from selling an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date. When
determining the fair value measurements for assets and liabilities required to
be recorded at fair value, the Company considers the principal or most
advantageous market in which the Company would transact a purchase or sale and
the market-based risk measurements or assumptions that market participants would
use in pricing the asset or liability.
The Company uses a fair value hierarchy
established by U.S. GAAP that established a three-tiered fair value hierarchy of
valuation techniques based on whether the inputs to those valuation techniques
are observable or unobservable to prioritize inputs used to measure fair value.
Observable inputs reflect market data obtained from independent sources, while
unobservable inputs reflect the Companys market assumptions. A financial
instruments categorization within the fair value hierarchy is based upon the
lowest level of input that is available and significant to the fair value
measurement. Those tiers are defined as follows:
|
Level 1
|
|
inputs are quoted prices in
active markets for identical assets or liabilities.
|
|
|
|
Level 2
|
|
inputs other than quoted prices
included within Level 1 that are observable, either directly or
indirectly.
|
|
|
|
Level 3
|
|
inputs are unobservable and
shall be used to the extent that observable inputs are not available in
the overall fair value measurement.
|
46
In 2012,
the Company adopted Accounting Standards Update (ASU) No. 2011-04 Amendments
to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S.
GAAP and International Financial Reporting Standards (IFRS) (ASU 2011-04).
ASU 2011-04 includes common requirements for measurement of and disclosure about
fair value between U.S. GAAP and IFRS. ASU 2011-04 requires a reporting entity
to disclose the reason for the measurement where, for recurring fair value
measurements, the reason for measuring an asset or liability at fair value is
often that either 1) it is required under other existing U.S. GAAP codification
guidance or 2) the reporting entity has elected the fair value option under ASC
825. In regards to the Company, it is required under U.S. GAAP.
ASU 2011-04 also requires reporting
entities to disclose the following information for all Level 2 and Level 3 fair
value measurement, where it requires that an entity must disclose a description
of the valuation techniques and the inputs used in those
measurements.
For its Level 2 investments, the Company
uses quoted prices in markets that are not active, or other inputs that are
observable or can be corroborated by observable market data for substantially
the full term of the asset.
For all Level 3 measurements, ASU 2011-04
requires that an entity disclose quantitative information about the significant
unobservable inputs used in those measurements. The Company has no Level 3
measurements.
In addition, ASU 2011-04 requires
reporting entities to make disclosure about amounts and reasons for all the
transfers out of Level 1 and Level 2 fair value measurements. The Company had no
such transfers for the year ended December 31, 2013.
The adoption of ASU 2011-04 did not have
a significant impact on the Companys financial statements.
The following table represents the fair
value hierarchy for the Companys financial assets (investments) measured at
fair value on a recurring basis at December 31, 2013 and December 31, 2012 (in
thousands):
|
|
Fair Value
Measurements at
|
|
|
Reporting Date Using
|
|
|
|
|
|
Quoted
Prices
|
|
Significant
|
|
|
|
|
|
|
|
|
in
Active
|
|
Other
|
|
Significant
|
|
|
Balance
at
|
|
Markets
for
|
|
Observable
|
|
Unobservable
|
|
|
December
31,
|
|
Identical
Assets
|
|
Inputs
|
|
Inputs
|
|
|
2013
|
|
(Level 1)
|
|
(level 2)
|
|
(Level 3)
|
Cash
equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market mutual funds
|
|
$
|
927
|
|
$
|
927
|
|
$
|
-
|
|
$
|
-
|
Short-term
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Time
deposits
|
|
|
15,065
|
|
|
15,065
|
|
|
-
|
|
|
-
|
Corporate bonds
|
|
|
13,011
|
|
|
-
|
|
|
13,011
|
|
|
-
|
Long-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
|
10,453
|
|
|
10,453
|
|
|
-
|
|
|
-
|
Total
|
|
$
|
39,456
|
|
$
|
26,445
|
|
$
|
13,011
|
|
$
|
-
|
47
|
|
Fair Value Measurements at
|
|
|
Reporting Date Using
|
|
|
|
|
|
Quoted Prices
|
|
Significant
|
|
|
|
|
|
|
|
|
in Active
|
|
Other
|
|
Significant
|
|
|
Balance at
|
|
Markets for
|
|
Observable
|
|
Unobservable
|
|
|
December 31,
|
|
Identical Assets
|
|
Inputs
|
|
Inputs
|
|
|
2012
|
|
(Level 1)
|
|
(level 2)
|
|
(Level 3)
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market mutual funds
|
|
$
|
1,401
|
|
$
|
1,401
|
|
$
|
-
|
|
$
|
-
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
|
19,378
|
|
|
19,378
|
|
|
-
|
|
|
-
|
Corporate bonds
|
|
|
9,104
|
|
|
-
|
|
|
9,104
|
|
|
-
|
Long-term
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
|
10,274
|
|
|
10,274
|
|
|
-
|
|
|
-
|
Total
|
|
$
|
40,157
|
|
$
|
31,053
|
|
$
|
9,104
|
|
$
|
-
|
As of
December 31, 2013, the Company held investments in corporate bonds, certificates
of deposit, and money market securities. The Companys cash and cash equivalents
consist of investments with original maturities of 90 days or less from the date
of purchase. The Companys short-term investments consist of corporate bonds and
certificates of deposit with original maturities of 91 days or more from the
date of purchase. The Companys long-term investments are comprised of
certificates of deposit with original maturities of 365 days or more from the
date of purchase.