UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
____________________
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September
30, 2014
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from
__________ to __________
Commission File Number
0-31857
ALLIANCE FIBER OPTIC
PRODUCTS, INC. |
(Exact name of registrant as specified in its
charter) |
|
Delaware |
|
77-0554122 |
(State or other jurisdiction of |
|
(I.R.S. employer |
Incorporation or organization) |
|
identification number) |
|
275 Gibraltar Drive,
Sunnyvale, California 94089 |
(Address of principal executive offices) (Zip
Code) |
|
(408) 736-6900 |
(Registrants telephone number, including area
code) |
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes
þ No o
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large
accelerated filer o |
Accelerated
Filer þ |
Non-accelerated
filer o |
Smaller
reporting company o |
(Do not check if a smaller reporting
company) |
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
On October 31, 2014, 18,652,605 shares
of the registrants Common Stock, $0.001 par value per share, were outstanding.
ALLIANCE FIBER OPTIC PRODUCTS, INC.
FORM 10-Q
QUARTERLY PERIOD ENDED SEPTEMBER 30,
2014
INDEX
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|
Page |
PART I: FINANCIAL INFORMATION |
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1 |
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ITEM 1: FINANCIAL STATEMENTS |
|
1 |
|
|
Condensed Consolidated Balance
Sheets |
|
1 |
|
|
Condensed
Consolidated Statements of Income and Comprehensive Income |
|
2 |
|
|
Condensed Consolidated
Statements of Cash Flows |
|
3 |
|
|
Notes To
Condensed Consolidated Financial Statements |
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4 |
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ITEM 2: MANAGEMENTS DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND |
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|
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RESULTS OF
OPERATIONS |
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11 |
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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK |
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16 |
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ITEM 4: CONTROLS AND
PROCEDURES |
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16 |
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PART II: OTHER INFORMATION |
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17 |
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ITEM 1A: RISK
FACTORS |
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17 |
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ITEM 6: EXHIBITS |
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26 |
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SIGNATURES |
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28 |
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PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL
STATEMENTS
ALLIANCE FIBER OPTIC PRODUCTS,
INC.
Condensed Consolidated Balance
Sheets
(In thousands, except share data)
|
|
September
30, |
|
December
31, |
|
|
2014 |
|
2013 |
|
|
(Unaudited) |
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash
equivalents |
|
$ |
33,425 |
|
|
$ |
18,603 |
|
Short-term
investments |
|
|
29,201 |
|
|
|
28,076 |
|
Accounts receivable,
net |
|
|
10,654 |
|
|
|
11,566 |
|
Inventories,
net |
|
|
8,905 |
|
|
|
10,630 |
|
Deferred tax asset |
|
|
3,411 |
|
|
|
6,036 |
|
Prepaid
expense and other current assets |
|
|
1,604 |
|
|
|
1,745 |
|
Total
current assets |
|
|
87,200 |
|
|
|
76,656 |
|
|
Long-term investments |
|
|
10,589 |
|
|
|
10,453 |
|
Property and equipment,
net |
|
|
14,529 |
|
|
|
13,258 |
|
Other assets |
|
|
165 |
|
|
|
198 |
|
Total
assets |
|
$ |
112,483 |
|
|
$ |
100,565 |
|
|
Liabilities and
Stockholders' Equity |
|
|
|
|
|
|
|
|
Current
liabilities: |
|
|
|
|
|
|
|
|
Accounts
payable |
|
$ |
9,345 |
|
|
$ |
11,657 |
|
Accrued expenses |
|
|
8,240 |
|
|
|
7,134 |
|
Total
current liabilities |
|
|
17,585 |
|
|
|
18,791 |
|
|
Other long-term
liabilities |
|
|
620 |
|
|
|
600 |
|
Total
liabilities |
|
|
18,205 |
|
|
|
19,391 |
|
|
Commitments and
contingencies (Note 8) |
|
|
|
|
|
|
|
|
|
Stockholders' equity: |
|
|
|
|
|
|
|
|
Preferred stock, par value
$0.001: 5,000,000 shares authorized: |
|
|
|
|
|
|
|
|
no
shares issued and outstanding at September 30, 2014 and |
|
|
|
|
|
|
|
|
December
31, 2013, respectively |
|
|
- |
|
|
|
- |
|
Common stock,
$0.001 par value: 100,000,000 shares authorized; |
|
|
|
|
|
|
|
|
18,649,105
and 18,408,261 shares issued and outstanding at |
|
|
|
|
|
|
|
|
September
30, 2014 and December 31, 2013. |
|
|
18 |
|
|
|
18 |
|
Additional
paid-in-capital |
|
|
117,760 |
|
|
|
117,369 |
|
Accumulated
deficit |
|
|
(25,526 |
) |
|
|
(38,625 |
) |
Accumulated other comprehensive
income |
|
|
2,026 |
|
|
|
2,412 |
|
Stockholders'
equity |
|
|
94,278 |
|
|
|
81,174 |
|
Total
liabilities and stockholders' equity |
|
$ |
112,483 |
|
|
$ |
100,565 |
|
The accompanying notes are an integral
part of these Condensed Consolidated Financial Statements
1
ALLIANCE FIBER OPTIC PRODUCTS,
INC.
Condensed Consolidated Statements
of Income and Comprehensive Income
(Unaudited, in thousands, except per
share data)
|
|
Three Months Ended September
30, |
|
Nine Months Ended September
30, |
|
|
2014 |
|
2013 |
|
2014 |
|
2013 |
Revenues |
|
$ |
18,096 |
|
|
$ |
23,074 |
|
|
$ |
67,177 |
|
|
$ |
54,266 |
|
Cost of revenues |
|
|
10,957 |
|
|
|
14,218 |
|
|
|
40,429 |
|
|
|
33,722 |
|
Gross
profit |
|
|
7,139 |
|
|
|
8,856 |
|
|
|
26,748 |
|
|
|
20,544 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and
development |
|
|
1,068 |
|
|
|
1,024 |
|
|
|
3,243 |
|
|
|
2,696 |
|
Selling,
marketing and administrative |
|
|
1,924 |
|
|
|
2,174 |
|
|
|
6,321 |
|
|
|
5,978 |
|
Total
operating expenses |
|
|
2,992 |
|
|
|
3,198 |
|
|
|
9,564 |
|
|
|
8,674 |
|
Income from operations |
|
|
4,147 |
|
|
|
5,658 |
|
|
|
17,184 |
|
|
|
11,870 |
|
Interest and other income,
net |
|
|
226 |
|
|
|
173 |
|
|
|
559 |
|
|
|
469 |
|
Net income before income tax |
|
|
4,373 |
|
|
|
5,831 |
|
|
|
17,743 |
|
|
|
12,339 |
|
Income tax |
|
|
(70 |
) |
|
|
(210 |
) |
|
|
(4,643 |
) |
|
|
(586 |
) |
Net income |
|
$ |
4,303 |
|
|
$ |
5,621 |
|
|
$ |
13,100 |
|
|
$ |
11,753 |
|
|
Cumulative
translation adjustments |
|
|
(319 |
) |
|
|
183 |
|
|
|
(380 |
) |
|
|
(97 |
) |
Unrealized
(loss) gain on investments |
|
|
(2 |
) |
|
|
3 |
|
|
|
(6 |
) |
|
|
2 |
|
Comprehensive
income |
|
$ |
3,982 |
|
|
$ |
5,807 |
|
|
$ |
12,714 |
|
|
$ |
11,658 |
|
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.23 |
|
|
$ |
0.31 |
|
|
$ |
0.71 |
|
|
$ |
0.67 |
|
Diluted |
|
$ |
0.23 |
|
|
$ |
0.30 |
|
|
$ |
0.69 |
|
|
$ |
0.65 |
|
Shares used in computing
net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
18,629 |
|
|
|
18,056 |
|
|
|
18,529 |
|
|
|
17,584 |
|
Diluted |
|
|
19,103 |
|
|
|
18,754 |
|
|
|
19,036 |
|
|
|
18,107 |
|
The accompanying notes are an integral
part of these Condensed Consolidated Financial Statements.
2
ALLIANCE FIBER OPTIC PRODUCTS, INC.
Condensed Consolidated Statements of
Cash Flows
(Unaudited, in thousands)
|
|
Nine Months
Ended September 30, |
|
|
2014 |
|
2013 |
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net
Income |
|
$ |
13,100 |
|
|
$ |
11,753 |
|
Adjustments to reconcile net
income to net cash provided by |
|
|
|
|
|
|
|
|
operating
activities: |
|
|
|
|
|
|
|
|
Depreciation
and amortization |
|
|
2,140 |
|
|
|
1,513 |
|
Loss
(Gain) on disposal of property and equipment |
|
|
3 |
|
|
|
(5 |
) |
Amortization
of stock-based compensation |
|
|
1,683 |
|
|
|
1,254 |
|
Provision
for inventory |
|
|
(115 |
) |
|
|
(222 |
) |
Deferred
tax assets |
|
|
2,625 |
|
|
|
- |
|
Changes in assets and
liabilities: |
|
|
|
|
|
|
|
|
Accounts
receivable |
|
|
912 |
|
|
|
(4,318 |
) |
Inventories |
|
|
1,840 |
|
|
|
(3,081 |
) |
Prepaid
expenses and other assets |
|
|
141 |
|
|
|
(956 |
) |
Other
assets |
|
|
32 |
|
|
|
53 |
|
Accounts
payable |
|
|
(2,312 |
) |
|
|
5,651 |
|
Accrued
expenses |
|
|
1,106 |
|
|
|
1,923 |
|
Other
long-term liabilities |
|
|
20 |
|
|
|
(12 |
) |
Net
cash provided by operating activities |
|
|
21,175 |
|
|
|
13,553 |
|
|
Cash flows from
investing activities: |
|
|
|
|
|
|
|
|
Purchase of short-term
investments |
|
|
(25,620 |
) |
|
|
(16,028 |
) |
Proceeds from
sales and maturities of short-term investments |
|
|
24,489 |
|
|
|
14,075 |
|
Purchase of long-term
investments |
|
|
(136 |
) |
|
|
(134 |
) |
Purchase of
property and equipment |
|
|
(3,615 |
) |
|
|
(4,025 |
) |
Net
cash used in investing activities |
|
|
(4,882 |
) |
|
|
(6,112 |
) |
|
Cash flows from
financing activities: |
|
|
|
|
|
|
|
|
Proceeds from issuance of
common stock under ESPP |
|
|
340 |
|
|
|
235 |
|
Proceeds from
the exercise of stock options |
|
|
580 |
|
|
|
5,131 |
|
Tax payments related to net
share settlements of RSUs |
|
|
(2,211 |
) |
|
|
(1,326 |
) |
Repurchase of
common stock |
|
|
- |
|
|
|
(873 |
) |
Net
cash (used in) provided by financing activities |
|
|
(1,291 |
) |
|
|
3,167 |
|
|
Effect of exchange rate changes on cash and
cash equivalents |
|
|
(180 |
) |
|
|
(164 |
) |
Net increase in cash and
cash equivalents |
|
|
14,822 |
|
|
|
10,444 |
|
Cash and cash equivalents at beginning of
period |
|
|
18,603 |
|
|
|
4,793 |
|
Cash and cash equivalents
at end of period |
|
$ |
33,425 |
|
|
$ |
15,237 |
|
|
Supplemental disclosure
of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid for income
tax |
|
$ |
(922 |
) |
|
$ |
(340 |
) |
The accompanying notes are an integral
part of these Condensed Consolidated Financial Statements.
3
ALLIANCE
FIBER OPTIC PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
1. 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.
Basis of Presentation
The accompanying condensed consolidated
balance sheet as of December 31, 2013, which has been derived from audited
financial statements, and the unaudited interim condensed consolidated financial
statements as of September 30, 2014 and for the three and nine months ended
September 30, 2014 and 2013 have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission (the SEC) and include
the accounts of Alliance Fiber Optic Products, Inc. and its wholly-owned
subsidiaries. All inter-company accounts and transactions have been eliminated.
Certain information and footnote disclosures normally included in the financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America (U.S. GAAP) have been condensed or omitted
pursuant to such rules and regulations.
These unaudited condensed consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and notes thereto included in the Companys Annual Report
on Form 10-K for the year ended December 31, 2013. The unaudited condensed
consolidated financial statements as of September 30, 2014, and for the three
and nine months ended September 30, 2014 and 2013, reflect, in the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary to state fairly the financial information set forth herein. The
results of operations for the interim periods are not necessarily indicative of
the results to be expected for any subsequent interim period or for an entire
year.
There have been no significant changes
in the Companys critical accounting policies during the nine months ended
September 30, 2014 as compared to what was previously disclosed in the Companys
Form 10-K for the fiscal year ended December 31, 2013.
Revenue Recognition
The Company recognizes revenue upon
shipment of its products to customers, provided that it 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 products, the Company has no obligation to provide any modification or
customization upgrades, enhancements or post contract customer
support.
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 historical
returns, current economic trends and changes in customer demand. Such allowances
are adjusted periodically to reflect actual and anticipated experience. The
Company also identifies specific accounts considered to have a high risk of
un-collectability and reserves the full amount. Material differences may result
in the amount and timing of revenue for any period than if management had made
different judgments or utilized different estimates.
4
Reclassifications
Certain prior year items have been
reclassified to conform to current year presentation.
Cash and Cash Equivalents
The Company considers all highly liquid
instruments with a maturity of three months or less when purchased to be cash
equivalents. Cash equivalents consist primarily of market rate accounts,
corporate bonds and certificates of deposit.
Short-Term and Long-Term
Investments
The Company generally invests its
excess cash in certificates of deposit, corporate bonds. Such investments are
made in accordance with the Companys investment policy, which establishes
guidelines relative to diversification and maturities designed to maintain
safety and liquidity. These guidelines are periodically reviewed and modified to
take advantage of trends in yields and interest rates.
Concentrations of Risk
Connectivity products contributed 77.1%
and 76.2% of the Companys revenues for the three months ended September 30,
2014 and 2013, respectively. The Companys optical passive products contributed
22.9% and 23.8% of the Companys revenues for the three months ended September
30, 2014 and 2013, respectively.
Connectivity products contributed 74.6%
and 75.5% of the Companys revenues for the nine months ended September 30, 2014
and 2013, respectively. The Companys optical passive products contributed 25.4%
and 24.5% of the Companys revenues for the nine months ended September 30, 2014
and 2013, respectively.
In the three months ended September 30,
2014 and 2013, the Companys 10 largest customers comprised 71.2% and 79.1% of
the Companys revenues, respectively. For the three months ended September 30,
2014, one customer accounted for 35.5% of the Companys revenues. Amounts due
from this customer was $2.7 million at September 30, 2014. For the three months
ended September 30, 2013, two customers accounted for 40.1% and 11.2% of the
Companys revenues, respectively.
In the nine months ended September 30,
2014 and 2013, the Companys 10 largest customers comprised 76.2% and 74.5% of
the Companys revenues, respectively. For the nine months ended September 30,
2014, two customers accounted for 40.5% and 10.0% of the Companys revenues,
respectively. For the nine months ended September 30, 2013, two customers
accounted for 32.4% and 10.4% of the Companys revenues,
respectively.
2. Recent Accounting Pronouncements
and Accounting Changes
In August 2014, the Financial
Accounting Standards Board (FASB) issued a new accounting standard which
requires management to evaluate whether there is substantial doubt about an
entitys ability to continue as a going concern for each annual and interim
reporting period and to provide related footnote disclosures in certain
circumstances. The accounting standard is effective for annual reporting periods
(including interim reporting periods within those periods) beginning after
December 15, 2016. Early adoption is permitted. The Company is currently
evaluating the impact of this accounting standard.
In May 2014, the FASB issued a new
financial accounting standard which outlines a single comprehensive model for
entities to use in accounting for revenue arising from contracts with customers
and supersedes current revenue recognition guidance. The accounting standard is
effective for annual reporting periods (including interim reporting periods
within those periods) beginning after December 15, 2016. Early adoption is not
permitted. The Company is currently evaluating the impact of this accounting
standard on its consolidated financial statements.
In July 2013, the 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 adoption of this guidance did not have a material impact
on the Companys consolidated financial statements.
5
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 adoption of this guidance did not have a material impact on the
Companys consolidated financial statements.
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.
3. Stock-based Compensation
The Accounting Standards Codification
(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) was determined using the Black-Scholes Model.
Pursuant to the Companys 2000 Stock
Incentive Plan, participants may be granted restricted stock units (RSUs),
representing an unfunded, unsecured right to receive shares of the Companys
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 vesting term of each award.
Options granted under the 2000 Stock
Incentive Plan generally vest over four years. Options are exercisable for not
more than ten years.
The following information relates to
stock option activity for the nine months ended September 30, 2014:
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
Weighted |
|
Average |
|
|
|
|
|
|
|
|
Average |
|
Remaining |
|
Aggregate |
|
|
|
|
|
Exercise |
|
Contractual |
|
Intrinsic |
Options |
|
Shares |
|
Price |
|
Life |
|
Value |
Outstanding at December 31,
2013 |
|
565,640 |
|
|
$ |
5.28 |
|
|
|
|
|
Granted |
|
274,400 |
|
|
|
12.50 |
|
|
|
|
|
Exercised |
|
(124,640 |
) |
|
|
4.65 |
|
|
|
|
|
Forfeited |
|
(90,000 |
) |
|
|
- |
|
|
|
|
|
Outstanding at September
30, 2014 |
|
625,400 |
|
|
$ |
8.69 |
|
8.39 Years |
|
$ |
2,359,538 |
Vested and
expected to vest at September 30, 2014 |
|
588,281 |
|
|
$ |
8.63 |
|
8.35 Years |
|
$ |
2,251,683 |
Exercisable at September
30, 2014 |
|
118,661 |
|
|
$ |
4.81 |
|
5.94 Years |
|
$ |
903,966 |
6
The aggregate intrinsic value in the
table above represents the total pre-tax intrinsic value (the difference between
the Companys closing stock price on the last trading day of the third quarter
of fiscal 2014 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 September 30, 2014.
This amount changes were based on the fair market value of the Companys stock.
The total intrinsic value of options exercised was $0.3 million and $1.3 million
for the three and nine months ended September 30, 2014, respectively. The total
intrinsic value of options exercised was $9.5 million and $12.3 million for the
three and nine months ended September 30, 2013, respectively.
No options were granted during the
three months ended September 30, 2014. Options to purchase 274,400 shares of
common stock were granted during the nine months ended September 30, 2014. As of
September 30, 2014, there was $3.6 million of unrecognized compensation cost
related to share-based compensation arrangements granted under the Plan. The
compensation cost is expected to be realized over four years.
Cash received from option exercises
during the nine months ended September 30, 2014 and 2013 were $0.6 million and
$5.1 million, respectively, and are included within the financing activities
section in the accompanying condensed consolidated statements of cash flows.
During the nine months ended September
30, 2014, a total of 21,579 shares were issued under the Companys ESPP and cash
received from purchases of common stock was $0.3 million. Compensation expense
recorded in the quarter ended September 30, 2014 related to the ESPP was
approximately $0.06 million. As of September 30, 2014, there was $0.02 million
of unrecognized compensation cost related to the ESPP which is expected to be
realized over the next month.
The following table summarizes employee
stock-based compensation expense resulting from stock options, RSUs, and the
ESPP (in thousands):
|
|
Three Months Ended September
30, |
|
Nine Months Ended September
30, |
|
|
2014 |
|
2013 |
|
2014 |
|
2013 |
Included in cost of
revenue |
|
$ |
87 |
|
$ |
116 |
|
$ |
379 |
|
$ |
215 |
Included in operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Research and
development |
|
|
44 |
|
|
71 |
|
|
191 |
|
|
149 |
Selling,
marketing and administrative |
|
|
305 |
|
|
376 |
|
|
1,113 |
|
|
890 |
Total |
|
|
349 |
|
|
447 |
|
|
1,304 |
|
|
1,039 |
Total stock-based compensation
expense |
|
$ |
436 |
|
$ |
563 |
|
$ |
1,683 |
|
$ |
1,254 |
4. Inventories, net (in thousands)
|
|
September
30, |
|
December
31, |
|
|
2014 |
|
2013 |
Inventories: |
|
|
|
|
|
|
Finished
goods |
|
$ |
2,206 |
|
$ |
2,455 |
Work-in-process |
|
|
2,929 |
|
|
4,134 |
Raw
materials |
|
|
3,770 |
|
|
4,041 |
|
|
$ |
8,905 |
|
$ |
10,630 |
5. 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 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 shares of
common stock outstanding during the period. There were no incremental dilutive
common share equivalents in the periods presented.
7
The following table sets forth the
computation of basic and diluted net income per share for the periods indicated
(in thousands, except per share data):
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
2014 |
|
2013 |
|
2014 |
|
2013 |
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
Net
income |
|
$ |
4,303 |
|
$ |
5,621 |
|
$ |
13,100 |
|
$ |
11,753 |
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in
computing net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
18,629 |
|
|
18,056 |
|
|
18,529 |
|
|
17,584 |
Diluted |
|
|
19,103 |
|
|
18,754 |
|
|
19,036 |
|
|
18,107 |
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.23 |
|
$ |
0.31 |
|
$ |
0.71 |
|
$ |
0.67 |
Diluted |
|
$ |
0.23 |
|
$ |
0.30 |
|
$ |
0.69 |
|
$ |
0.65 |
6. Comprehensive
Income
Comprehensive income is defined as the
change in equity of a company during a period resulting from transactions and
other events and circumstances, excluding transactions resulting from
investments by owners and distributions to owners. The difference between net
income and comprehensive income for the Company is due to foreign exchange
translations adjustments and unrealized gain on available-for-sale
securities.
7. Income Taxes
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 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. The Companys effective tax rate was 26.2% and 4.8% for the
nine months ended September 30, 2014 and 2013, respectively. The Company's
effective tax rate for the September 30, 2014 and 2013 period differs from its
expected federal statutory rate primarily as a result of state taxes, foreign
tax rate differences, permanent items and the change in valuation allowance.
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.
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. The Company
increased its deferred tax asset by $0.2 million and reduced its deferred tax
asset by $2.6 million for the three and nine months ended September 30, 2014,
respectively, as a result of net operating losses utilized against current
taxable income.
8. 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.
8
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 September 30, 2014, 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 nonconformance 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 $0.09 million and $0.06 million
for warranty reserves at each of September 30, 2014 and 2013, respectively.
Operating Leases
The Company leases office space under
long-term operating leases expiring at various dates through 2018.
The Companys aggregate future minimum
facility lease payments are as follows (in thousands):
Years ending December
31: |
|
|
2014
(remainning three months of the year) |
$ |
140 |
2015 |
|
317 |
2016 |
|
68 |
2017 |
|
3 |
2018 and
after |
|
1 |
Total |
$ |
529 |
9. Related Party Transactions
As of September 30, 2014, 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 17.2% 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 were zero
and $0.03 million for the nine months ended September 30, 2014. Purchases of raw
materials from Hon Hai were $1.4 million for the nine months ended September 30,
2014. Amounts due from Hon Hai were $0.01 million for the nine months ended at
September 30, 2014. Amounts due to Hon Hai were $0.4 million for the nine months
ended at September 30, 2014.
There were no sales of products to Hon
Hai in either of the nine months ended September 30, 2013. Purchases of raw
materials from Hon Hai were $1.2 million for the nine months ended September 30,
2013. No amounts were due from Hon Hai at September 30, 2013. Amounts due to Hon
Hai were $0.4 million at September 30, 2013.
10. 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.
9
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. |
In accordance with the U.S. GAAP
Codification Topic 820, the following table represents the fair value hierarchy
for the Companys financial assets (investments) measured at fair value on a
recurring basis as of September 30, 2014:
|
|
Fair Value Measurements
at |
|
|
Reporting Date Using |
|
|
|
|
|
Quoted Prices |
|
Significant |
|
|
|
|
|
|
|
|
in Active |
|
Other |
|
Significant |
|
|
Balance at |
|
Markets for |
|
Observable |
|
Unobservable |
|
|
September 30, |
|
Identical Assets |
|
Inputs |
|
Inputs |
|
|
2014 |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
Cash
equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
Money market
mutual funds |
|
$ |
3,931 |
|
$ |
3,931 |
|
$ |
- |
|
$ |
- |
Marketable
Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Time
deposits |
|
|
19,046 |
|
|
19,046 |
|
|
- |
|
|
- |
Corporate bonds |
|
|
10,155 |
|
|
- |
|
|
10,155 |
|
|
- |
Long-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits |
|
|
10,589 |
|
|
10,589 |
|
|
- |
|
|
- |
Total |
|
$ |
43,721 |
|
$ |
33,566 |
|
$ |
10,155 |
|
$ |
- |
As of September 30, 2014, 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 comprise certificates of deposit with original
maturities of 365 days or more from the date of purchase.
11. Geographic Segment Information
The Company operates in a single
industry segment. This industry segment is characterized by rapid technological
change and significant competition.
10
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):
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
2014 |
|
2013 |
|
2014 |
|
2013 |
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
11,594 |
|
$ |
13,085 |
|
$ |
40,202 |
|
$ |
32,260 |
Europe |
|
|
2,596 |
|
|
4,379 |
|
|
14,754 |
|
|
10,519 |
Asia |
|
|
3,906 |
|
|
5,610 |
|
|
12,221 |
|
|
11,487 |
|
|
$ |
18,096 |
|
$ |
23,074 |
|
$ |
67,177 |
|
$ |
54,266 |
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
2014 |
|
2013 |
|
2014 |
|
2013 |
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Connectivity
Products |
|
$ |
13,943 |
|
$ |
17,572 |
|
$ |
50,143 |
|
$ |
40,990 |
Optical
Passive Products |
|
|
4,153 |
|
|
5,502 |
|
|
17,034 |
|
|
13,276 |
|
|
$ |
18,096 |
|
$ |
23,074 |
|
$ |
67,177 |
|
$ |
54,266 |
|
|
September
30, |
|
December
31, |
|
|
2014 |
|
2013 |
Property and Equipment |
|
|
|
|
|
|
United
States |
|
$ |
166 |
|
$ |
40 |
Taiwan |
|
|
9,113 |
|
|
7,148 |
China |
|
|
5,250 |
|
|
6,070 |
|
|
$ |
14,529 |
|
$ |
13,258 |
ITEM 2: MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
When used in this Report, the words
expects, anticipates, believes, estimates, plans, intends, could,
will, may and similar expressions are intended to identify forward-looking
statements. These are statements that relate to future periods and include
statements as to our operating results, revenues, sources of revenues, cost of
revenues, gross margin, profitability, the amount and mix of investments,
expenditures and expenses, our liquidity and the adequacy of our capital
resources, our uses of cash, our intent and ability to pay dividends in the
future and the amount of any such dividends, if any, the impact of the economic
environment on our business, exposure to interest rate or currency fluctuations,
anticipated working capital and capital expenditures, reliance on our
connectivity products, our cash flow, trends in average selling prices, our
reliance on the commercial success of our optical passive products, plans for
future products and enhancements of existing products, features, benefits and
uses of our products, demand for our products, our success being tied to
relationships with key customers, industry trends and market demand, our ability
to protect our intellectual property, the potential benefit of indemnification
agreements, increases in the number of possible requests for licenses and patent
infringement claims, our competitive position, sources of competition,
consolidation in our industry, our international strategy, inventory management,
our factory utilization levels, our employee relations, the adequacy of our
internal controls, and the effect of recent, future and changing accounting
pronouncements and our critical accounting policies, estimates, models,
judgments and assumptions on our financial results. Forward-looking statements
are subject to risks and uncertainties that could cause actual results to differ
materially from those expected. These risks and uncertainties include, but are
not limited to, those risks discussed elsewhere in this report, as well as risks
related to the development of the metropolitan, last mile access, and enterprise
networks, customer acceptance of our products, our ability to retain and obtain
customers, industry-wide overcapacity and shifts in supply and demand for
optical components and modules, our ability to meet customer demand and manage
inventory, fluctuations in demand for our products, declines in average selling
prices, pricing pressures from customers or potential customers, development of
new products by us and our competitors, increased competition, inability to
obtain sufficient quantities of raw materials or components, loss of a key
supplier, integration of acquired businesses or technologies, financial
stability in foreign markets, foreign currency exchange rates, interest rates,
costs associated with being a public company, failure to meet customer
requirements, our ability to license intellectual property on commercially
reasonable terms, the impact of the economic environment, and the risks set
forth below under Part II, Item 1A, Risk Factors.
These forward-looking statements speak only as of the date hereof. We expressly
disclaim any obligation or undertaking to release publicly any updates or
revisions to any forward-looking statements contained herein to reflect any
change in our expectations with regard thereto or any change in events,
conditions or circumstances on which any such statement is based.
11
The following discussion should be read
in conjunction with our Condensed Consolidated Financial Statements and Notes
thereto.
Critical Accounting Policies and
Estimates
Managements discussion and analysis of
financial condition and results of operations is based on our Condensed
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.
For additional information regarding
our critical accounting policies and estimates, see the section entitled
Managements Discussion and Analysis of Financial Condition and Results of
Operations in our Annual Report on Form 10-K for the year ended December 31,
2012.
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 started selling our
optical passive products in July 2000. Since their introduction, sales of
optical passive products have fluctuated with the overall market for these
products. We market and sell our products predominantly through our direct sales
force.
Our connectivity products contributed
revenues of $13.9 million, or 77.1%, and $17.6 million, or 76.2%, for the three
months ended September 30, 2014 and 2013, respectively. Our optical passive
products contributed revenues of $4.2 million, or 22.9%, and $5.5 million, or
23.8%, for the three months ended September 30, 2014 and 2013, respectively.
Our connectivity products contributed
revenues of $50.1 million, or 74.5%, and $41.0 million, or 75.5%, for the nine
months ended September 30, 2014 and 2013, respectively. Our optical passive
products contributed revenues of $17.0 million, or 25.4%, and $13.3 million, or
24.5%, for the nine months ended September 30, 2014 and 2013, respectively.
In the three months ended September 30,
2014 and 2013, our 10 largest customers comprised 71.2% and 79.1% of our
revenues, respectively. For the three months ended September 30, 2014, one
customer accounted for 35.5% of our total revenues. For the three months ended
September 30, 2013, two customers accounted for 40.1% and 11.2% of our total
revenues.
In the nine months ended September 30,
2014 and 2013, our 10 largest customers comprised 76.2% and 74.5% of our
revenues, respectively. For the nine months ended September 30, 2014, two
customers accounted for 40.5% and 10.0% of our total revenues. For the nine
months ended September 30, 2013, two customers accounted for 32.4% and 10.4% of
our total revenues.
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;
12
- inventory write-downs and impairment charges
related to manufacturing assets;
- mix of products sold;
- changes in our pricing and pricing from 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.
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 and with being a public company.
Results of Operations
The following table sets forth the
relationship between various components of operations as a percentage of
revenues for the periods indicated:
|
|
Three Months Ended September
30, |
|
Nine Months Ended September
30, |
|
|
2014 |
|
2013 |
|
2014 |
|
2013 |
Revenues |
|
100.0 |
% |
|
100.0 |
% |
|
100.0 |
% |
|
100.0 |
% |
Cost of revenues |
|
60.6 |
|
|
61.6 |
|
|
60.2 |
|
|
62.1 |
|
Gross
profit |
|
39.4 |
|
|
38.4 |
|
|
39.8 |
|
|
37.9 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Research and
development |
|
5.9 |
|
|
4.5 |
|
|
4.8 |
|
|
5.0 |
|
Selling, marketing
and administrative |
|
10.6 |
|
|
9.4 |
|
|
9.4 |
|
|
11.0 |
|
Total
operating expenses |
|
16.5 |
|
|
13.9 |
|
|
14.2 |
|
|
16.0 |
|
Income from operations |
|
22.9 |
|
|
24.5 |
|
|
25.6 |
|
|
21.9 |
|
Interest and other income,
net |
|
1.3 |
|
|
0.8 |
|
|
0.8 |
|
|
0.9 |
|
Net income before tax |
|
24.2 |
|
|
25.3 |
|
|
26.4 |
|
|
22.8 |
|
Income tax |
|
(0.4 |
) |
|
(0.9 |
) |
|
(6.9 |
) |
|
(1.1 |
) |
Net income |
|
23.8 |
% |
|
24.4 |
% |
|
19.5 |
% |
|
21.7 |
% |
Revenues. Revenues were $18.1 million and $23.1 million for the three
months ended September 30, 2014 and 2013, respectively. Revenues decreased 21.6%
in the three months ended September 30, 2014 from the same period in 2013. The
decrease was mainly due to decreased volume shipments of products to a few
leading customers in datacom and telecom market applications. Revenues were
$67.2 million and $54.3 million for the nine months ended September 30, 2014 and
2013, respectively. Revenues increased 23.8% in the nine months ended September
30, 2014 from the same period in 2013. The increase was mainly due to increased
volume shipments of products into telecom and datacom market applications.
13
Cost of Revenues. Cost of revenues was $11.0 million and $14.2 million for the
three months ended September 30, 2014 and 2013, respectively. Cost of revenues
as a percentage of revenues decreased to 60.6% for the three months ended
September 30, 2014 from 61.6% for the three months ended September 30, 2013.
Cost of revenues was $40.4 million and $33.7 million for the nine months ended
September 30, 2014 and 2013, respectively. Cost of revenues as a percentage of
revenues decreased to 60.2% for the nine months ended September 30, 2014 from
62.1% for the nine months ended September 30, 2013. The lower cost of revenues
percentage for the three and nine months ended September 30, 2014 resulted from
favorable product mixes and increased factory utilization due to higher product sales in
the nine months ended September 30, 2014.
Gross Profit. Gross profit decreased to $7.1 million, or 39.5% of revenues,
for the three months ended September 30, 2014 from $8.9 million, or 38.4% of
revenues, for the same period in 2013. Gross profit increased to $26.7 million,
or 39.8% of revenues, for the nine months ended September 30, 2014 from $20.5
million, or 37.9% of revenues, for the same period in 2013. For the three months
ended September 30, 2014, the lower gross profit was due to decreased revenues.
For the nine months ended September 30, 2014, the higher gross profit was due to
the higher utilization of our factories as a result of increased volume
shipments to our customers.
Research and Development
Expenses. Research and development expenses
were $1.1 million and $1.0 million for the three months ended September 30, 2014
and 2013, respectively. Research and development expenses increased to $3.2
million for the nine months ended September 30, 2014 from $2.7 million for the
same period in 2013. The higher research and development expenses were due to
higher capital investments for new product development, higher costs associated
with testing our products and higher stock based compensation
charges.
As a percentage of revenues, research
and development expenses increased to 5.9% in the three months ended September
30, 2014 from 4.5% for the same period in 2013. The higher research and
development expenses as a percentage of revenues were mainly due to decreased
revenue levels. As a percentage of revenues, research and development expenses
decreased to 4.8% in the nine months ended September 30, 2014 from 5.0% for the
same period in 2013. The lower research and development expenses as a percentage
of revenues were mainly due to increased revenue levels. We expect research and
development expenses will 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 decreased to $1.9 million for the three months ended September 30, 2014
compared to $2.2 million for the three months ended September 30, 2013. The
lower expenses were due to lower outside sales commission charges as the result
of lower revenue for the three months ended September 30, 2014. Sales, marketing
and administrative expenses increased to $6.3 million for the nine months ended
September 30, 2014 from $6.0 million for the same period in 2013. The higher
expenses were due to higher stock based compensation charges and cost associated
with compliance with Section 404 of the Sarbanes-Oxley Act of 2002.
As a percentage of revenues, sales,
marketing and administrative expenses increased to 10.6% in the three months
ended September 30, 2014 from 9.4% for the same period in 2013. The higher
expenses as a percentage of revenues were mainly due to decreased revenue
levels. As a percentage of revenues, sales and marketing expenses decreased to
9.4% in the nine months ended September 30, 2014 from 11.0% for the same period
in 2013. The lower expenses as a percentage of revenues were mainly due to
increased revenue levels for the nine months ended September 30, 2014. We expect
sales, marketing and administrative expenses will remain relatively flat in the
next quarter.
Stock-Based
Compensation. Total stock-based compensation
decreased to $0.4 million for the three months ended September 30, 2014 compared
to $0.6 million for the three months ended September 30, 2013. The decreased was
due to fully amortized stock options and RSUs. Total stock-based compensation
increased to $1.7 million for the nine months ended September 30, 2014 from $1.3
million for the same period in 2013. This increase was due to RSUs granted in
2013 and stock options granted in 2013 and 2014.
Interest and Other Income, Net.
Interest and other income, net, was $0.2
million for each of the three months ended September 30, 2014 and 2013. Interest
and other income, net, was $0.6 million and $0.5 million for the nine months
ended September 30, 2014 and 2013, respectively. These amounts consisted
primarily of interest income which fluctuated based on cash balances and changes
in interest rates.
14
Income Tax Expense. Income tax expense was $0.1 million and $0.2 million for the
three months ended September 30, 2014 and 2013. The decrease was due to a
deferred tax assets benefit adjustment. Income tax expense was $4.6 million and
$0.6 million for the nine months ended September 30, 2014 and 2013. The increase
was due to the reduction of our deferred tax assets as a result of utilization
of net operating losses.
Liquidity and Capital Resources
At September 30, 2014, we had cash and
cash equivalents of $33.4 million and short-term investments of $29.2 million.
Long-term investments at September 30, 2014 were $10.6 million.
Net cash provided by operating
activities was $21.2 million for the nine months ended September 30, 2014. Net
cash provided by operating activities was primarily due to net income of $13.1
million, a decrease in deferred tax assets of $2.6 million, a decrease in
inventory of $1.7 million, an increase in accrued expenses of $1.1 million, a
decreased in accounts receivable of $0.9 million, and contribution from
adjustment for non-cash charges, including depreciation and amortization and
stock based compensation of $3.8 million. These were offset by a $2.3 million
decrease in accounts payable.
Net cash provided by operating
activities was $13.6 million for the nine months ended September 30, 2013. Net
cash provided by operating activities was primarily due to net income of $11.8
million, an increase in accounts payable of $5.7 million, an increase in accrued
expenses of $1.9 million, and contribution from adjustment for non-cash charges,
including depreciation and amortization and stock based compensation of $2.8
million. These were offset by a $4.3 million increase in accounts receivable, a
$3.3 million increase in inventory, a $1.0 million increase in prepaid expenses.
Net cash used in investing activities
was $4.9 million for the nine months ended September 30, 2014. This resulted
primarily from $3.6 million of equipment purchases and $1.1 million in net
purchases of short-term investments.
Net cash used in investing activities
was $6.1 million for the nine months ended September 30, 2013. This resulted
from $4.0 million of equipment purchases and $2.1 million in net purchases of
short-term investments.
Net cash used in financing activities
was $1.3 million for the nine months ended September 30, 2014. Net cash used in
financing activities was primarily due to $2.2 million used to pay tax
withholdings related to net share settlements of RSUs, which offset proceeds of
$0.6 million from the exercise of options to purchase shares of our common stock
and $0.3 million from the sale of our common stock through our ESPP.
Net cash provided by financing
activities was $3.2 million for the nine months ended September 30, 2013. Net
cash provided by financing activities was primarily due to proceeds of $5.4
million from the exercise of options to purchase our common stock and the sale
of our common stock through our ESPP, which was offset by $1.3 million used to
pay tax withholdings related to net share settlements of RSUs and $0.9 million
used to repurchase common stock pursuant to our stock repurchase program.
On October 29, 2014, we announced a program to repurchase up to $15 million worth of our 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 requirement and other factors. We are not required to repurchase any amount of common stock in any period and the program may be modified or suspended at any time. As of November 6, 2014, approximately $13 million is remaining under this repurchase program. The duration of the repurchase program is open-ended.
We believe that our current cash, cash
equivalents and short-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 any 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 holders of 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 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 the scope of our planned product
development and marketing efforts. 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.
15
Off Balance Sheet Arrangements
We did not have any off-balance sheet
arrangements at September 30, 2014.
Contractual Obligations
The lease on our corporate headquarters
in Sunnyvale, California, had 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 39,201
square feet in one facility located in Tu-Cheng City, Taiwan. This lease expires
at various times from December 2014 to December 2016. In December 2000, we
purchased 10,623 square feet of space immediately adjacent to our leased
facility for $0.8 million, In November 2013, we purchased 6,960 square feet of
space we previous leased for $1.6 million. In April 2014, we also purchased
10,633 square feet of space we previously leased for $1.6 million, bringing the
total square footage to 62,622 square feet.
We lease a 132,993 square foot facility
in Shenzhen, China, which lease expired in October 2014. Currently, we are
negotiating a new lease, including for more square footage, and we expect to
sign the new lease in November 2014.
Recent Accounting Pronouncements
See Note 2 of our Notes to Unaudited
Condensed Consolidated Financial Statements included in this Quarterly Report on
Form 10-Q for information on recent accounting pronouncements.
ITEM 3: QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
We are exposed to risks associated with
the translation of Taiwan (NT) and China (RMB) denominated financial results and
accounts into U.S. dollars for financial reporting purposes. The carrying value
of the assets and liabilities held in our Taiwan and China subsidiaries will be
affected by fluctuations in the value of the U.S. dollar as compared to the NT
and RMB. Changes in the value of the U.S. dollar as compared to the NT and RMB
could have an adverse effect on our reported results of operations and financial
condition. As the net positions of our unhedged foreign currency transactions
fluctuate, our earnings might be negatively affected. In addition, the reported
carrying value of our NT and RMB denominated assets and liabilities held in our
Taiwan and China subsidiaries will be affected by fluctuations in the value of
the U.S. dollar compared to the NT and RMB. As of September 30, 2014, we had a
net asset balance, excluding intercompany payables and receivables, in our
Taiwan and China subsidiaries denominated in NT and RMB. If the NT and RMB were
to weaken 10% against the dollar, our net asset balance would decrease by
approximately $2.2 million as of this date.
ITEM 4: CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. We maintain disclosure controls and procedures, as such term
is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the
Exchange Act), that are designed to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized, and reported within the time periods specified
in Securities and Exchange Commission rules and forms, and that such information
is accumulated and communicated to our management, including our Chief Executive
Officer and Acting Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. In designing and evaluating our
disclosure controls and procedures, management recognized that disclosure
controls and procedures, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the disclosure
controls and procedures are met. Our disclosure controls and procedures have
been designed to meet reasonable assurance standards. Additionally, in designing
disclosure controls and procedures, our management necessarily was required to
apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and
procedures. The design of any disclosure controls and procedures also is based
in part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions. Based on their evaluation as of the
end of the period covered by this Quarterly Report on Form 10-Q, our Chief
Executive Officer and Acting Chief Financial Officer have concluded that, as of
such date, our disclosure controls and procedures were effective at the
reasonable assurance level.
16
(b)
Changes in internal controls. There was no
change in our internal control over financial reporting (as defined in Rule
13a-15(f) under the Exchange Act) identified in connection with the evaluation
described in Item 4(a) above that occurred during our last fiscal quarter that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART II: OTHER INFORMATION
ITEM 1A: RISK FACTORS
We have a history of losses, may
experience future losses and may not be able to generate sufficient revenues in
the future to sustain profitability.
We had net income of $4.3 million in
the quarter ended September 30, 2014. Although we generated a profit in the
quarter, we may not be able to sustain profitability and our cash flows may be
negative again in the future. As of September 30, 2014, we had an accumulated
deficit of $25.5 million.
We continue to experience fluctuating
demand for our products. If demand for our products declines, we may not be able
to decrease our expenses on a timely basis or at levels that offset any such
decreases. If demand for our products continues to increase in the future, we
may incur significant and increasing expenses for expansion of our manufacturing
operations, research and development, sales and marketing, and administration,
and in expanding our direct sales and distribution channels. Given the rate at
which competition in our industry intensifies and the fluctuations in demand for
our products, we may not be able to adequately control our costs and expenses or
achieve or maintain adequate operating margins. As a result, to maintain
profitability, we will need to generate and sustain substantially higher
revenues while maintaining reasonable cost and expense levels. We may not be
able to sustain profitability on a quarterly or an annual basis.
Our connectivity products have
historically represented a significant part of our revenues, and if we are
unsuccessful in selling our optical passive products, our business may be
harmed.
Sales of our connectivity products
accounted for 77.1% and 76.2% of our revenues in the quarter ended September 30,
2014 and 2013, respectively, and a majority of our historical revenues. We
expect to substantially depend on these products for the majority of our
near-term revenues. We have and expect to continue to experience declines in
average selling prices. Any significant decline in the price of, or demand for,
these products, or failure to increase their market acceptance, would seriously
harm our business. In addition, we believe that our future growth and a
significant portion of our future revenues will depend on the commercial success
of our optical passive products. If demand for these products does not continue
to increase and our target customers do not continue to adopt and purchase our
optical passive products, our revenues may decline.
Continuing weak general economic or
business conditions may have a negative impact on our business.
Continuing concerns over inflation,
deflation, another recession, energy costs, geopolitical issues, the
availability and cost of credit, Federal budget proposals, the Federal deficit
and credit rating, unemployment, global economic instability, slowing growth in
China, and an uncertain real estate market in the U.S. have contributed to
increased volatility and diminished expectations for the global economy and
expectations of slower global economic growth. These factors, combined with
volatile oil prices, declining business and consumer confidence, and increased
unemployment, have precipitated an economic slowdown. If the economic climate in
the U.S. and abroad does not improve or continues to deteriorate, our business,
including our customers and our suppliers, could be negatively affected,
resulting in a negative impact on our revenues.
17
We depend on a small number of
customers for a significant portion of our revenues and the loss of, or a
significant reduction in orders from, any of these customers, would
significantly reduce our revenues and harm our operating results.
In the quarters ended September 30,
2014 and 2013, our 10 largest customers comprised 71.2% and 79.1% of our
revenues, respectively. In the nine months ended September 30, 2014 and 2013,
our 10 largest customers comprised 76.2% and 74.5% of our revenues,
respectively. One customer accounted for 35.5% of our revenues for the three
months ended September 30, 2014. Two customers accounted for 40.5% and 10.0% of
our revenues for the nine months ended September 30, 2014.
We derive a significant portion of our
revenues from a small number of customers, and we anticipate that we will
continue to do so in the foreseeable future. These customers may decide not to
purchase our products at all, to purchase fewer products than they did in the
past, to demand price concessions, or to alter their purchasing patterns in some
other way. For example, a significant customer ordered fewer products in the
second quarter of 2014 than we expected, and several customers, including a
significant customer, ordered fewer products in the third quarter of 2014 than
we expected. The
loss of any significant customer, a significant reduction in sales we make to a
customer, or any problems collecting receivables from one or more of our
significant customers would likely harm our financial condition and results of
operations.
Our quarterly and annual financial
results have historically fluctuated due primarily to introduction of, demand
for, and sales of our products, and future fluctuations may cause our stock
price to decline.
We believe that period-to-period
comparisons of our operating results are not a good indication of our future
performance. Our quarterly operating results have fluctuated in the past and are
likely to fluctuate significantly in the future due to a number of factors. For
example, the timing and expenses associated with product introductions and
establishing additional manufacturing lines and facilities, changes in
manufacturing volume, declining average selling prices of our products, the
timing and extent of product sales, the mix of domestic and international sales,
the mix of sales channels through which our products are sold, the mix of
products sold and significant fluctuations in demand for our products have
caused our operating results to fluctuate. Because we incur operating expenses
based on anticipated revenue levels; and a significant percentage of our
expenses are fixed in the short term, any delay in generating or recognizing
revenues or any decrease in revenues could significantly harm our quarterly
results of operations. Other factors, many of which are more fully discussed
elsewhere in this report, may also cause our results to fluctuate. Many of the
factors that may cause our results to fluctuate are outside of our control. If
our quarterly or annual operating results do not meet the expectations of
investors and securities analysts, the trading price of our common stock could
significantly decline.
If we cannot attract more optical
communications equipment manufacturers to purchase our products, we may not be
able to increase or sustain our revenues.
Our future success will depend on our
ability to migrate existing customers to our new products and our ability to
attract additional customers. Some of our present customers are relatively new
companies. The growth of our customer base could be adversely affected
by:
- customer unwillingness to implement our
products;
- any delays or difficulties that we may incur in
completing the development and introduction of our planned products or product enhancements;
- the success of our customers;
- excess inventory in the telecommunications
industry;
- new product introductions by our
competitors;
- any failure of our products to perform as
expected; or
- any difficulty we may incur in meeting customers
delivery requirements or product specifications.
18
The fluctuations in the economy have
affected the telecommunications industry. Telecommunications companies have cut
back on their capital expenditure budgets, which has and may continue to further
decrease demand for equipment and parts, including our products. This decrease
has had and may continue to have an adverse effect on the demand for fiber optic
products and negatively impact the growth of our customer base.
We are exposed to risks and
increased expenses and business risk as a result of Restriction on Hazardous
Substances, or RoHS, directives.
Following the lead of the European
Union, or EU, various governmental agencies have either already put into place
or are planning to introduce regulations that regulate the permissible levels of
hazardous substances in products sold in various regions of the world. For
example, the RoHS directive for EU took effect on July 1, 2006. The labeling
provisions of similar legislation in China went into effect on March 1, 2007.
Consequently, many suppliers of products sold into the EU have required their
suppliers to be compliant with the new directive. Many of our customers have adopted this
approach and have required our full compliance. Though we have devoted a
significant amount of resources and effort planning and executing our RoHS
program, it is possible that some of our products might be incompatible with
such regulations. In such event, we could experience the following consequences:
loss of revenue, damaged reputation, diversion of resources, monetary penalties,
and legal action.
The market for fiber optic
components is increasingly competitive, and if we are unable to compete
successfully our revenues could decline.
The market for fiber optic components
is intensely competitive. We believe that our principal competitors are the
major manufacturers of optical components and integrated modules, including
vendors selling to third parties and business divisions within communications
equipment suppliers. Our principal competitors in the components market include
Oclaro Inc., JDS Uniphase Corp., Oplink Communications Inc., Senko Advanced
Components and TE Connectivity. We believe that we primarily compete with
diversified suppliers for the majority of our product line and to a lesser
extent with niche companies that offer a more limited product line. Competitors
in any portion of our business may also rapidly become competitors in other
portions of our business.
Many of our current and potential
competitors have significantly greater financial, technical, marketing,
purchasing, manufacturing and other resources than we do. As a result, these
competitors may be able to respond more quickly to new or emerging technologies
and to changes in customer requirements, to devote more resources to the
development, promotion and sale of products, to negotiate lower prices on raw
materials and components, or to deliver competitive products at lower prices.
Several of our existing and potential
customers are also current and potential competitors of ours. These companies
may develop or acquire additional competitive products or technologies in the
future and subsequently reduce or cease their purchases from us. In light of the
consolidation in the optical networking industry, we also believe that the size
of suppliers will be an increasingly important part of a purchasers
decision-making criteria in the future. We may not be able to compete
successfully with existing or new competitors, and we cannot ensure that the
competitive pressures we face will not result in lower prices for our products,
loss of market share, or reduced gross margins, any of which could harm our
business.
New and competing technologies are
emerging due to increased competition and customer demand. The introduction of
products incorporating new or competing technologies or the emergence of new
industry standards could make our existing products noncompetitive. For example,
there are technologies for the design of wavelength division multiplexers that
compete with the technology that we incorporate in our products. If our products
do not incorporate technologies demanded by customers, we could lose market
share causing our business to suffer.
19
If we fail to effectively manage
our operations, specifically given the past history of sudden and dramatic
downturn in demand for our products, our operating results could be harmed.
As of September 30, 2014 we had 36
full-time employees in Sunnyvale, California, 341 full-time employees in Taiwan,
and 1011 full-time employees in China. Matching the scale of our operations with
demand fluctuations, combined with the challenges of expanding and managing
geographically dispersed operations, has placed, and will
continue to place, a significant strain on our management and resources. To
manage the expected fluctuations in our operations and personnel, we will be
required to:
- improve existing and implement new operational,
financial and management controls, reporting systems and procedures;
- hire, train, motivate and manage additional
qualified personnel, especially if we experience a significant increase in demand for our products;
- effectively expand or reduce our manufacturing
capacity, attempting to adjust it to customer demand; and
- effectively manage relationships with our
customers, suppliers, representatives and other third parties.
In addition, we will need to continue
coordinate our domestic and international operations and establish and maintain
the necessary infrastructure to implement our international strategy. If we are
not able to manage our operations in an efficient and timely manner, our
business will be severely harmed.
Our success also depends, to a large
degree, on the efficient and uninterrupted operation of our facilities. We have
expanded our manufacturing facilities in China and manufacture many of our
products there. Our facility in Taiwan also houses a substantial portion of our
manufacturing operations. There is significant political tension between Taiwan
and China. If there is an outbreak of hostilities between Taiwan and China, our
manufacturing operations may be disrupted or we may have to relocate our
manufacturing operations. Relocating a portion of our employees could cause
temporary disruptions in our operations and divert managements
attention.
Because of the time it takes to
develop fiber optic components, we incur substantial expenses for which we may
not earn associated revenues.
The development of new or enhanced
fiber optic products is a complex and uncertain process. We may experience
difficulties in design, manufacturing, marketing and other areas that could
delay or prevent the development, introduction or marketing of new products and
enhancements. Development costs and expenses are incurred before we generate
revenues from sales of products resulting from these efforts. Our research and
development expenses were $1.1 million and $3.2 million for the three and nine
months ended September 30, 2014, respectively. We intend to continue to invest
in our research and product development efforts and the amount of our future
investments may be substantial, which could have a negative impact on our
earnings in future periods.
If we are unable to develop new
products and product enhancements that achieve market acceptance, sales of our
fiber optic components could decline, which could reduce our revenues.
The communications industry is
characterized by continued changing technology, frequent new product
introductions, changes in customer requirements, evolving industry standards
and, more recently, significant variations in customer demand. Our future
success depends on our ability to anticipate market needs and develop products
that address those needs. As a result, our products could quickly become
obsolete if we fail to predict market needs accurately or develop new products
or product enhancements in a timely manner. Our failure to predict market needs
accurately or to develop new products or product enhancements in a timely manner
will harm market acceptance and sales of our products. If the development or
enhancement of these products or any other future products takes longer than we
anticipate, or if we are unable to introduce these products to market, our sales
will not increase. Even if we are able to develop and commercially introduce
them, these new products may not achieve the widespread market acceptance
necessary to provide an adequate return on our investment.
Current and future demand for our
products depends on the continued growth of the Internet and the communications
industry, which is experiencing consolidation, realignment, and fluctuating
demand for fiber optic products.
Our future success depends on the
continued growth of the Internet as a widely used medium for communications and
commerce, and the growth of optical networks to meet the increased demand for
capacity to transmit data, or bandwidth. If the Internet does not continue to
expand as a medium for communications and commerce, the need to significantly
increase bandwidth across networks and the market for fiber optic components may
not continue to develop. If this growth does not continue, sales of our products
may decline, which would adversely affect our revenues. Our customers have
experienced an oversupply of inventory due to fluctuating demand for their
products that has resulted in inconsistent demand for our products. Future
demand for our products is uncertain and will depend heavily on the continued
growth and upgrading of optical networks, especially in the metropolitan, last
mile, and enterprise access segments of the networks.
20
Inconsistent spending by
telecommunication companies over the past several years has resulted in
fluctuating demand for our products. The rate at which communication service
providers and other fiber optic network users have built new fiber optic
networks or installed new systems in their existing fiber optic networks has
fluctuated in the past and these fluctuations may continue in the future. These
fluctuations may result in reduced demand for new or upgraded fiber optic
systems that utilize our products and therefore, may result in reduced demand
for our products. Declines in the development of new networks and installation
of new systems have resulted in the past in a decrease in demand for our
products, an increase in our inventory, and erosion in the average selling
prices of our products.
The communications industry is
experiencing continued consolidation and realignment, as industry participants
seek to capitalize on the rapidly changing competitive landscape developing
around the Internet and new communications technologies such as fiber optic
networks. As the communications industry consolidates and realigns to
accommodate technological and other developments, our customers may consolidate
or align with other entities in a manner that results in a decrease in demand
for our products.
We have experienced fluctuations in
market demand due to overcapacity in our industry and an economy that is stymied
by current financial and economic conditions, international terrorism, war and
political instability.
The United States economy has
experienced and continues to experience significant fluctuations in consumption
and demand. We have in the past and may in the future experience decreases in
demand for our products due to a weak domestic and international economy as the
fiber optics industry copes with the effects of oversupply of products,
international terrorism, war and political and economic instability. Even if the
general economy experiences a recovery, the activity of the United States
telecommunications industry may lag behind the recovery of the overall United
States economy.
The optical networking component
industry often experiences declining average selling prices and declines in
average selling prices of products could cause our gross margins to decline.
The optical networking component
industry often experiences declining average selling prices as a result of
increasing competition and from pricing pressures resulting in greater unit
volumes purchases as communication service providers continue to deploy fiber
optic networks. We expect that average selling prices will continue to decrease
over time in response to new product and technology introductions by us or
competitors, price pressures from significant customers, greater manufacturing
efficiencies achieved through increased automation in the manufacturing process
and inventory build-up due to decreased demand. Average selling price declines
may contribute to a decline in our gross margins, which could harm our results
of operations.
We will not attract new orders for
our fiber optic components unless we can deliver sufficient quantities of our
products to optical communications equipment manufacturers.
Communications service providers and
optical systems manufacturers typically require that suppliers commit to provide
specified quantities of products over a given period of time. If we are unable
to commit to deliver quantities of our products to satisfy a customers
anticipated needs, we will lose the order and the opportunity for significant
sales to that customer for a lengthy period of time. In addition, we would be
unable to fill large orders if we do not have sufficient manufacturing capacity
to enable us to commit to provide customers with specified quantities of
products. However, if we build our manufacturing capacity and inventory in
excess of demand, as we have done in the past, we may produce excess inventory
that may have to be reserved or written off.
21
Because we experience long lead
times for materials and components, we may not be able to effectively manage our
inventory levels or manufacturing capacity, which could harm our operating
results.
Because we experience long lead times
for materials and components and are often required to purchase significant
amounts of materials and components far in advance of product shipments, we may
not effectively manage our inventory levels, which could harm our operating
results. Alternatively, if we underestimate our raw material requirements, we
may have inadequate inventory, which could result in delays in shipments and
loss of customers. If we purchase raw materials and increase production in
anticipation of orders that do not materialize or that shift to another quarter,
we will, as we have in the past, have to carry or write off excess inventory and
our gross margins will decline. Both situations could cause our results of
operations to be below the expectations of investors and public market analysts,
which could, in turn, cause the price of our common stock to decline. The time
our customers require to incorporate our products into their own can vary
significantly and generally exceeds several months, which further complicates
our planning processes and reduces the predictability of our forecasts. Even if
we receive these orders, the additional manufacturing capacity that we add to
meet our customers requirements may be underutilized in a subsequent quarter.
If we are unable to maintain
effective internal control over financial reporting, investors may lose
confidence in the accuracy and completeness of our reported financial
information and the market price of our common stock may be negatively
affected.
As a public company, we are required to
comply with Section 404 of the Sarbanes-Oxley Act of 2002 which requires that we
evaluate and determine the effectiveness of our internal control over financial
reporting and provide a management report on our internal controls. We have
implemented an ongoing program to perform the system and process evaluation and
testing we believe to be necessary to comply with this requirement, however, we
cannot assure you that we will be successful in our efforts. If we have a
material weakness in our internal control over financial reporting, we may not
detect errors on a timely basis and our financial statements may be materially
misstated. During the evaluation and testing process, if we identify one or more
material weaknesses in our internal control over financial reporting, our
management will be unable to conclude that our internal control over financial
reporting is effective.
Our independent registered public
accounting firm is also required to issue an attestation report on the
effectiveness of our internal control over financial reporting on an annual
basis. Even if our management concludes that our internal control over financial
reporting is effective, our independent registered public accounting firm may
conclude that there are material weaknesses with respect to our internal
controls or the level at which our internal controls are documented, designed,
implemented or reviewed. If we are unable to conclude that our internal control
over financial reporting is effective or if our auditors were to express an
adverse opinion on the effectiveness of our internal control over financial
reporting because we had one or more material weaknesses, investors could lose
confidence in the accuracy and completeness of our financial disclosures, which
could cause the price of our common stock to decline. Internal control
deficiencies could also result in a restatement of our financial results.
We depend on key personnel to
operate our business effectively in the rapidly changing fiber optic components
market, and if we are unable to hire and retain appropriate management and
technical personnel, our ability to develop our business could be harmed.
Our success depends to a significant
degree upon the continued contributions of the principal members of our
technical sales, marketing, engineering and management personnel, many of whom
perform important management functions and would be difficult to replace. We
particularly depend upon the continued services of our executive officers,
particularly Peter Chang, our President and Chief Executive Officer; David
Hubbard, our Executive Vice President, Sales and Marketing; Anita Ho, our Acting
Chief Financial Officer; and other key engineering, sales, marketing, finance,
manufacturing and support personnel. In addition, we depend upon the continued
services of key management personnel at our Taiwanese subsidiary and at our
facility in China. None of our officers or key employees is bound by an
employment agreement for any specific term, and may terminate their employment
at any time. We do not have key person life insurance policies covering any of
our employees.
Our ability to continue to attract and
retain highly skilled personnel will be a critical factor in determining whether
we will be successful in the future. We may have difficulty hiring skilled
engineers at our manufacturing facilities in the United States, Taiwan, and
China. If we are not successful in attracting, assimilating or retaining
qualified personnel to fulfill our current or future needs, our business may be
harmed.
22
If we are not able to achieve
acceptable manufacturing yields and sufficient product reliability in the
production of our fiber optic components, we may incur increased costs and
delays in shipping products to our customers, which could impair our operating
results.
Complex and precise processes are
required for the manufacture of our products. Changes in our manufacturing
processes or those of our suppliers, or the inadvertent use of defective
materials, could significantly reduce our manufacturing yields and product
reliability. Because the majority of our manufacturing costs are relatively
fixed, manufacturing yields are critical to our results of operations. Lower
than expected production yields could delay product shipments, impair our
operating results and harm our reputation. We may not obtain acceptable yields
in the future.
In some cases, existing manufacturing
techniques, which involve substantial manual labor, may not allow us to
cost-effectively meet our production goals so that we maintain acceptable gross
margins while meeting the cost targets of our customers. We may not achieve
adequate manufacturing cost efficiencies.
Because we plan to introduce new
products and product enhancements, we must effectively transfer production
information from our product development department to our manufacturing group
and coordinate our efforts with our suppliers to rapidly achieve volume
production. In our experience, our yields have been lower during the early
stages of introducing new product to manufacturing. If we fail to effectively
manage this process or if we experience delays, disruptions or quality control
problems in our manufacturing operations, our shipments of products to our
customers could be delayed.
Because the qualification and sales
cycle associated with fiber optic components is lengthy and varied, it is
difficult to predict the timing of a sale or whether a sale will be made, which
may cause us to have excess manufacturing capacity or inventory and negatively
impact our operating results.
In the communications industry, service
providers and optical systems manufacturers often undertake extensive
qualification processes prior to placing orders for large quantities of products
such as ours, because these products must function as part of a larger system or
network. This process may range from three to six months and sometimes longer.
Once they decide to use a particular suppliers product or component, these
potential customers design the product into their system, which is known as a
design-in win. Suppliers whose products or components are not designed in are
unlikely to make sales to that customer until at least the adoption of a future
redesigned system. Even then, many customers may be reluctant to incorporate
entirely new products into their new systems, as this could involve significant
additional redesign efforts. If we fail to achieve design-in wins in our
potential customers qualification processes, we will lose the opportunity for
significant sales to those customers for a lengthy period of time.
In addition, some of our customers
require that our products be subjected to standards-based qualification testing,
which can take up to nine months or more. While our customers are evaluating our
products and before they place an order with us, we may incur substantial sales
and marketing and research and development expenses, expend significant
management efforts, increase manufacturing capacity and order long lead-time
supplies. Even after the evaluation process, it is possible a potential customer
will not purchase our products. In addition, product purchases are frequently
subject to unplanned processing and other delays, particularly with respect to
larger customers for which our products represent a very small percentage of
their overall purchase activity. Accordingly, our revenues and operating results
may vary significantly and unexpectedly from quarter to quarter.
If our customers do not qualify our
manufacturing lines for volume shipments, our optical networking components may
be dropped from supply programs and our revenues may decline.
Customers generally will not purchase
any of our products, other than limited numbers of evaluation units, before they
qualify our products, approve our manufacturing process and approve our quality
assurance system. Our existing manufacturing lines, as well as each new
manufacturing line, must pass through various levels of approval with our
customers. For example, customers may require that we be registered under
international quality standards. Our products may also have to be qualified to
specific customer requirements. This customer approval process determines
whether the manufacturing line achieves the customers quality, performance and
reliability standards. Delays in product qualification may cause a product to be
dropped from a long-term supply program and result in significant lost revenue
opportunity over the term of that program.
23
Our fiber optic components are
deployed in large and complex communications networks and may contain defects
that are not detected until after our products have been installed, which could
damage our reputation and cause us to lose customers.
Our products are designed for
deployment in large and complex optical networks. Because of the nature of these
products, they can only be fully tested for reliability when deployed in
networks for long periods of time. Our fiber optic products may contain
undetected defects when first introduced or as new versions are released, and
our customers may discover defects in our products only after they have been
fully deployed and operated under peak stress conditions. In addition, our
products are combined with products from other vendors. As a result, should
problems occur, it may be difficult to identify the source of the problem. If we
are unable to fix defects or other problems, we could experience, among other
things:
- loss of customers;
- damage to our reputation;
- failure to attract new customers or achieve market
acceptance;
- diversion of development and engineering
resources; and
- legal actions by our customers.
The occurrence of any one or more of
the foregoing factors could negatively impact our revenues.
The market for fiber optic
components is unpredictable, characterized by rapid technological changes,
evolving industry standards, and significant changes in customer demand, which
could result in decreased demand for our products, erosion of average selling
prices, and could negatively impact our revenues.
The market for fiber optic components
is characterized by rapid technological change, frequent new product
introductions, changes in customer requirements and evolving industry standards.
Because this market is new, it is difficult to predict its potential size or
future growth rate. Widespread adoption of optical networks, especially in the
metropolitan, last mile, enterprise access, and datacenter segments of the
networks, is critical to our future success. Potential end-user customers who
have invested substantial resources in their existing copper lines or other
systems may be reluctant or slow to adopt a new approach, such as optical
networks. Our success in generating revenues in this market will depend on:
- the education of potential end-user customers and
network service providers about the benefits of optical networks; and
- the continued growth of the metropolitan, last
mile, and enterprise access segments of the communications network.
If we fail to address changing market
conditions, sales of our products may decline, which would adversely impact our
revenues.
Disclosure requirements relating to
conflict minerals could increase our costs and limit the supply of certain
metals that may be used in our products and affect our reputation with customers
and stockholders.
24
As required under the Dodd-Frank Wall
Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), the
Securities and Exchange Commission promulgated final rules regarding annual
disclosures by public companies of their use of certain minerals and metals,
known as conflict minerals, which are mined from the Democratic Republic of
the Congo (DRC), and adjoining countries, and their efforts to prevent the
sourcing of such conflict minerals from these countries. These new rules require
us to engage in due diligence efforts to ascertain and disclose the origin of
some of the raw materials used in the production process on an annual basis. We
may incur costs associated with complying with these disclosure requirements,
including due diligence to determine the sources of conflict minerals, if any,
used in our products and other potential changes to our products, processes, or
sources of supply as a consequence of such due diligence activities. These rules
and our compliance procedures could adversely affect the supply and pricing of
materials used in our products. Not all suppliers offer conflict free conflict
minerals, so we cannot be certain that we will be able to obtain sufficient
quantities of conflict minerals from such suppliers or at competitive prices.
Also, our reputation with our customers and stockholders could be damaged if we
determine that certain of our products contain minerals not determined to be
conflict free or if we are unable to sufficiently verify the origins of conflict
minerals used in our products through the procedures we may implement. If we
cannot determine that our products exclude conflict minerals sourced from the
DRC or adjoining countries, some of our customers may discontinue, or materially
reduce, purchases of our products, which could negatively affect our results of
operations. In addition, our customers may require us to report to them on our
conflict minerals compliance, and if we do not perform this function to a
customers satisfaction, they may cease to do business with us.
We may be unable to successfully
integrate acquired businesses or assets with our business, which may disrupt our
business, divert managements attention and slow our ability to expand the range
of our proprietary technologies and products.
To expand the range of our proprietary
technologies and products, we may acquire complementary businesses, technologies
or products, if appropriate opportunities arise. We may be unable to identify
other suitable acquisitions at reasonable prices or on reasonable terms, or
consummate future acquisitions or other investments, any of which could slow our
growth strategy. We may have difficulty integrating the acquired products,
personnel or technologies of any company or acquisition that we may make.
Similarly, we may not be able to attract or retain key management, technical or
sales personnel of any other companies that we acquire or from which we acquire
assets. These difficulties could disrupt our ongoing business, distract our
management and employees and increase our expenses.
If we fail to protect our
intellectual property rights, competitors may be able to use our technologies,
which could weaken our competitive position, reduce our revenues or increase our
costs.
The fiber optic component market is a
highly competitive industry in which we, and most other participants, rely on a
combination of patent, copyright, trademark and trade secret laws,
confidentiality procedures and licensing arrangements to establish and protect
proprietary rights. The competitive nature of our industry, rapidly changing
technology, frequent new product introductions, changes in customer requirements
and evolving industry standards heighten the importance of protecting
proprietary technology rights. Since the United States Patent and Trademark
Office keeps patent applications confidential until a patent is issued, our
pending patent applications may attempt to protect proprietary technology
claimed in a third party patent application. Our existing and future patents may
not be sufficiently broad to protect our proprietary technologies as to policing
the unauthorized use of our products is difficult and we cannot be certain that
the steps we have taken will prevent the misappropriation or unauthorized use of
our technologies, particularly in foreign countries where the laws may not
protect our proprietary rights as fully as United States laws. Our competitors
and suppliers may independently develop similar technology, duplicate our
products, or design around any of our patents or other intellectual property. If
we are unable to adequately protect our proprietary technology rights, others
may be able to use our proprietary technology without having to compensate us,
which could reduce our revenues and negatively impact our ability to compete
effectively.
Litigation may be necessary to enforce
our intellectual property rights or to determine the validity or scope of the
proprietary rights of others. As a result of any such litigation, we could lose
our proprietary rights and incur substantial unexpected operating costs. Any
action we take to protect our intellectual property rights could be costly and
could absorb significant management time and attention. In addition, failure to
adequately protect our trademark rights could impair our brand identity and our
ability to compete effectively.
25
We may be subject to intellectual
property infringement claims that are costly to defend and could limit our
ability to use some technologies in the future.
Our industry is very competitive and is
characterized by frequent intellectual property litigation based on allegations
of infringement of intellectual property rights. Numerous patents in our
industry have already been issued, and as the market further develops and
participants in our industry obtain additional intellectual property protection,
litigation is likely to become more frequent. From time to time, third parties
may assert patent, copyright, trademark and other intellectual property rights
to technologies or rights that are important to our business. In addition, we
have and we may continue to enter into agreements to indemnify our customers for
any expenses or liabilities resulting from claimed infringements of patents,
trademarks or copyrights of third parties. Any litigation arising from claims
asserting that our products infringe or may infringe the proprietary rights of
third parties, whether the litigation is with or without merit, could be
time-consuming, resulting in significant expenses and diverting the efforts of
our technical and management personnel. We do not have insurance against our
alleged or actual infringement of intellectual property of others. These claims
could cause us to stop selling our products, which incorporate the challenged
intellectual property, and could also result in product shipment delays or
require us to redesign or modify our products or to enter into licensing
agreements. These licensing agreements, if required, would increase our product
costs and may not be available on terms acceptable to us, if at all.
Although we are not aware of any
intellectual property lawsuits filed against us, we may be a party to litigation
regarding intellectual property in the future. We may not prevail in any such
actions, given their complex technical issues and inherent uncertainties.
Insurance may not cover potential claims of this type or may not be adequate to
indemnify us for all liability that may be imposed. If there is a successful
claim of infringement or we fail to develop non-infringing technology or license
the proprietary rights on a timely basis, our business could be harmed.
Because our manufacturing operations
are located in active earthquake fault zones in Taiwan, and our Taiwan location
is susceptible to the effects of a typhoon, we face the risk that a natural
disaster could limit our ability to supply products.
One of our manufacturing operations is
located in an active earthquake fault zone in Taiwan. This region has
experienced large earthquakes in the past and may likely experience them in the
future. In September 2001, a typhoon hit Taiwan causing businesses, including
our manufacturing facility, and the financial markets to close for two days.
Because most of our manufacturing is performed in Taiwan, a large earthquake or
typhoon in Taiwan could disrupt our manufacturing operations for an extended
period of time, which would limit our ability to supply our products to our
customers in sufficient quantities on a timely basis, harming our customer
relationships.
ITEM 6: EXHIBITS
Exhibit
Number |
|
Title |
31.1 |
|
Rule 13a-14(a) Certification of Chief Executive
Officer |
31.2 |
|
Rule 13a-14(a) Certification of
Acting Chief Financial Officer |
32.1* |
|
Statement of Chief Executive Officer under Section 906 of
the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350). |
32.2* |
|
Statement of Acting Chief Financial
Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §
1350). |
101.INS** |
|
XBRL Taxonomy Instance
Document |
101.SCH** |
|
XBRL Taxonomy Schema Document |
101.PRE** |
|
XBRL Taxonomy Presentation Linkbase
Document |
101.LAB** |
|
XBRL Taxonomy Label Linkbase Document |
101.CAL** |
|
XBRL Taxonomy Calculation Linkbase
Document |
101.DEF** |
|
XBRL Taxonomy Definition Linkbase
document |
____________________
26
* In accordance with Item
601(b)(32)(ii) of Regulation S-K and SEC Release No. 34-47986, the
certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to
accompany this Form 10-Q and will not be deemed filed for purposes of Section
18 of the Securities Exchange Act of 1934 (the Exchange Act). Such
certifications will not be deemed to be incorporated by reference into any
filing under the Securities Act of 1933 (the Securities Act) or the Exchange
Act, except to the extent that the registrant specifically incorporates it by
reference.
** In accordance with Rule 406T of
Regulation S-T, the information furnished in these exhibits will not be deemed
filed for purpose of Section 18 of the Exchange Act. Such exhibits will not be
deemed to be incorporated by reference into any filing under the Securities Act
or the Exchange Act.
27
SIGNATURE
Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly authorized.
Dated: November 7, 2014
|
ALLIANCE FIBER OPTIC
PRODUCTS, INC. |
|
|
|
|
|
By |
/s/ Anita K. Ho |
|
|
Anita K. Ho |
|
Acting Chief Financial
Officer |
|
(Principal Financial and
Accounting Officer and Duly |
|
Authorized
Signatory) |
28
Alliance Fiber Optic Products, Inc.
Exhibit Index
Exhibit
Number |
|
Title |
31.1 |
|
Rule 13a-14(a) Certification of Chief Executive
Officer |
31.2 |
|
Rule 13a-14(a) Certification of
Acting Chief Financial Officer |
32.1* |
|
Statement of Chief Executive Officer under Section 906 of
the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350). |
32.2* |
|
Statement of Acting Chief Financial
Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §
1350). |
101.INS** |
|
XBRL Taxonomy Instance Document |
101.SCH** |
|
XBRL Taxonomy Schema
Document |
101.PRE** |
|
XBRL Taxonomy Presentation Linkbase Document |
101.LAB** |
|
XBRL Taxonomy Label Linkbase
Document |
101.CAL** |
|
XBRL Taxonomy Calculation Linkbase Document |
101.DEF** |
|
XBRL Taxonomy Definition Linkbase
document |
____________________
* In accordance with Item
601(b)(32)(ii) of Regulation S-K and SEC Release No. 34-47986, the
certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to
accompany this Form 10-Q and will not be deemed filed for purposes of Section
18 of the Securities Exchange Act of 1934 (the Exchange Act). Such
certifications will not be deemed to be incorporated by reference into any
filing under the Securities Act of 1933 (the Securities Act) or the Exchange
Act, except to the extent that the registrant specifically incorporates it by
reference.
** In accordance with Rule 406T of
Regulation S-T, the information furnished in these exhibits will not be deemed
filed for purpose of Section 18 of the Exchange Act. Such exhibits will not be
deemed to be incorporated by reference into any filing under the Securities Act
or Exchange Act.
29
Exhibit 31.1
Certification of the Chief Executive
Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Period
Ended September 30, 2014
CERTIFICATION
I, Peter C. Chang, certify
that:
1. I have reviewed this quarterly
report on Form 10-Q of Alliance Fiber Optic Products, Inc.;
2. Based on my knowledge, this report
does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect
to the period covered by this report;
3. Based on my knowledge, the financial
statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this
report;
4. The registrants other certifying
officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls
and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this
report is being prepared;
b) Designed such internal control over
financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, 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;
c) Evaluated the effectiveness of the
registrants disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this report based on such evaluation;
and
d) Disclosed in this report any change
in the registrants internal control over financial reporting that occurred
during the registrants most recent fiscal quarter (the registrants fourth
fiscal quarter in the case of an annual report) that has materially affected, or
is reasonably likely to materially affect, the registrants internal control
over financial reporting;
5. The registrants other certifying
officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies and
material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material,
that involves management or other employees who have a significant role in the
registrants internal control over financial reporting.
|
Date: November 7,
2014 |
|
|
|
By |
/s/Peter C.
Chang |
|
|
Peter C.
Chang |
|
Chief Executive
Officer |
|
(Principal Executive
Officer) |
30
Exhibit 31.2
Certification of the Chief Financial
Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Period
Ended September 30, 2014
CERTIFICATION
I, Anita K. Ho, certify
that:
1. I have reviewed this quarterly
report on Form 10-Q of Alliance Fiber Optic Products, Inc.;
2. Based on my knowledge, this report
does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect
to the period covered by this report;
3. Based on my knowledge, the financial
statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this
report;
4. The registrants other certifying
officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls
and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this
report is being prepared;
b) Designed such internal control over
financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, 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;
c) Evaluated the effectiveness of the
registrants disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this report based on such evaluation;
and
d) Disclosed in this report any change
in the registrants internal control over financial reporting that occurred
during the registrants most recent fiscal quarter (the registrants fourth
fiscal quarter in the case of an annual report) that has materially affected, or
is reasonably likely to materially affect, the registrants internal control
over financial reporting;
5. The registrants other certifying
officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrants auditors and the audit
committee of the Registrants board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies and
material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material,
that involves management or other employees who have a significant role in the
registrants internal control over financial reporting.
|
Date: November 7,
2014 |
|
|
|
By |
/s/Anita K. Ho |
|
|
Anita K.
Ho |
|
Acting Chief
Financial Officer |
|
(Principal
Accounting Officer) |
31
Exhibit 32.1
STATEMENT OF CHIEF EXECUTIVE OFFICER
UNDER 18 U.S.C. § 1350
I, Peter C. Chang, the chief executive
officer of Alliance Fiber Optic Products, Inc. (the Company), certify for the
purposes of section 1350 of chapter 63 of title 18 of the United States Code
that, to the best of my knowledge,
(i) the Quarterly Report of the Company
on Form 10-Q for the period ended September 30, 2014 (the Report), fully
complies with the requirements of section 13(a) of the Securities Exchange Act
of 1934, and
(ii) the information contained in the
Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
|
/s/
Peter C. Chang |
|
|
Peter C. Chang |
|
|
|
|
|
November 7, 2014 |
|
32
Exhibit 32.2
STATEMENT OF ACTING CHIEF FINANCIAL
OFFICER UNDER 18 U.S.C. § 1350
I, Anita K. Ho, the acting chief
financial officer of Alliance Fiber Optic Products, Inc. (the Company),
certify for the purposes of section 1350 of chapter 63 of title 18 of the United
States Code that, to the best of my knowledge,
(i) the Quarterly Report of the Company
on Form 10-Q for the period ended September 30, 2014 (the Report), fully
complies with the requirements of section 13(a) of the Securities Exchange Act
of 1934, and
(ii) the information contained in the
Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
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/s/Anita K. Ho |
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Anita K.
Ho |
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November 7, 2014 |
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33
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