UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
____________________
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September
30, 2015
☐ 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 ☑ No ☐
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 ☑ No ☐
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 ☐ |
Accelerated
Filer ☑ |
Non-accelerated
filer ☐ |
Smaller
reporting company ☐ |
(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 ☐ No ☑
On October 30, 2015, 17,384,733 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,
2015
INDEX
|
|
|
Page |
PART
I: FINANCIAL INFORMATION |
|
1 |
|
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 |
|
4 |
|
ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS |
|
11 |
|
ITEM 3:
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
|
17 |
|
ITEM 4: CONTROLS AND
PROCEDURES |
|
17 |
PART II: OTHER
INFORMATION |
|
17 |
|
ITEM 1A: RISK FACTORS |
|
17 |
|
ITEM 2:
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
|
28 |
|
ITEM 6: EXHIBITS |
|
29 |
SIGNATURE |
|
30 |
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, |
|
2015 |
|
2014 |
|
(Unaudited) |
|
|
|
|
Assets |
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
Cash and cash
equivalents |
$
|
14,115 |
|
|
$
|
22,723 |
|
Short-term
investments |
|
34,369 |
|
|
|
31,857 |
|
Accounts
receivable, net |
|
10,549 |
|
|
|
10,806 |
|
Inventories,
net |
|
10,184 |
|
|
|
9,305 |
|
Deferred tax
asset |
|
3,955 |
|
|
|
3,690 |
|
Prepaid expenses and other current
assets |
|
2,265 |
|
|
|
2,077 |
|
Total
current assets |
|
75,437 |
|
|
|
80,458 |
|
|
Long-term investments |
|
10,774 |
|
|
|
10,635 |
|
Property and equipment,
net |
|
16,117 |
|
|
|
13,868 |
|
Other assets |
|
245 |
|
|
|
212 |
|
Total
assets |
$ |
102,573 |
|
|
$ |
105,173 |
|
|
Liabilities and
Stockholders' Equity |
|
|
|
|
|
|
|
Current
liabilities: |
|
|
|
|
|
|
|
Accounts
payable |
$ |
7,014 |
|
|
$ |
9,236 |
|
Accrued
expenses |
|
7,927 |
|
|
|
8,699 |
|
Total
current liabilities |
|
14,941 |
|
|
|
17,935 |
|
|
Other long-term
liabilities |
|
966 |
|
|
|
978 |
|
Total
liabilities |
|
15,907 |
|
|
|
18,913 |
|
|
Commitments and
contingencies (Note 9) |
|
|
|
|
|
|
|
|
Stockholders' equity: |
|
|
|
|
|
|
|
Preferred stock,
par value $0.001: 5,000,000 shares authorized: |
|
|
|
|
|
|
|
no
shares issued and outstanding at September 30, 2015 and |
|
|
|
|
|
|
|
December
31, 2014. |
|
- |
|
|
|
- |
|
Common stock, par
value $0.001: 100,000,000 shares authorized; |
|
|
|
|
|
|
|
17,424,477
and 17,942,595 shares issued and outstanding at |
|
|
|
|
|
|
|
September
30, 2015 and December 31, 2014, respectively. |
|
17 |
|
|
|
18 |
|
Additional
paid-in-capital |
|
100,812 |
|
|
|
111,622 |
|
Accumulated
deficit |
|
(14,567 |
) |
|
|
(26,817 |
) |
Accumulated other
comprehensive income |
|
404 |
|
|
|
1,437 |
|
|
Stockholders'
equity |
|
86,666 |
|
|
|
86,260 |
|
|
Total
liabilities and stockholders' equity |
$ |
102,573 |
|
|
$ |
105,173 |
|
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, |
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
Revenues |
|
$ |
18,060 |
|
|
$ |
18,096 |
|
|
$ |
64,768 |
|
|
$ |
67,177 |
|
Cost of revenues |
|
|
10,963 |
|
|
|
10,957 |
|
|
|
38,384 |
|
|
|
40,429 |
|
Gross profit |
|
|
7,097 |
|
|
|
7,139 |
|
|
|
26,384 |
|
|
|
26,748 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and
development |
|
|
1,009 |
|
|
|
1,068 |
|
|
|
3,321 |
|
|
|
3,243 |
|
Selling,
marketing and administrative |
|
|
2,373 |
|
|
|
1,924 |
|
|
|
7,171 |
|
|
|
6,321 |
|
Total
operating expenses |
|
|
3,382 |
|
|
|
2,992 |
|
|
|
10,492 |
|
|
|
9,564 |
|
Income from operations |
|
|
3,715 |
|
|
|
4,147 |
|
|
|
15,892 |
|
|
|
17,184 |
|
Interest and other income,
net |
|
|
148 |
|
|
|
226 |
|
|
|
536 |
|
|
|
559 |
|
Income before income taxes |
|
|
3,863 |
|
|
|
4,373 |
|
|
|
16,428 |
|
|
|
17,743 |
|
Provision for income
taxes |
|
|
(210 |
) |
|
|
(70 |
) |
|
|
(4,177 |
) |
|
|
(4,643 |
) |
Net income |
|
$ |
3,653 |
|
|
$ |
4,303 |
|
|
$ |
12,251 |
|
|
$ |
13,100 |
|
Cumulative
translation adjustments |
|
|
(1,732 |
) |
|
|
(319 |
) |
|
|
(1,036 |
) |
|
|
(380 |
) |
Unrealized gain
(loss) on investments |
|
|
15 |
|
|
|
(2 |
) |
|
|
2 |
|
|
|
(6 |
) |
Comprehensive
income |
|
$ |
1,936 |
|
|
$ |
3,982 |
|
|
$ |
11,217 |
|
|
$ |
12,714 |
|
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.20 |
|
|
$ |
0.23 |
|
|
$ |
0.69 |
|
|
$ |
0.71 |
|
Diluted |
|
$ |
0.20 |
|
|
$ |
0.23 |
|
|
$ |
0.67 |
|
|
$ |
0.69 |
|
Shares used in computing
net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
17,850 |
|
|
|
18,629 |
|
|
|
17,848 |
|
|
|
18,529 |
|
Diluted |
|
|
18,227 |
|
|
|
19,103 |
|
|
|
18,199 |
|
|
|
19,036 |
|
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, |
|
|
2015 |
|
2014 |
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net
Income |
|
$ |
12,251 |
|
|
$ |
13,100 |
|
Adjustments to
reconcile net income to net cash provided by |
|
|
|
|
|
|
|
|
operating
activities: |
|
|
|
|
|
|
|
|
Depreciation
and amortization |
|
|
1,987 |
|
|
|
2,140 |
|
Loss on disposal of
property and equipment |
|
|
8 |
|
|
|
3 |
|
Stock-based
compensation |
|
|
2,120 |
|
|
|
1,683 |
|
Provision
for inventory |
|
|
60 |
|
|
|
(115 |
) |
Deferred
tax assets |
|
|
1,013 |
|
|
|
2,625 |
|
Changes in
assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts
receivable |
|
|
162 |
|
|
|
912 |
|
Inventories |
|
|
(1,240 |
) |
|
|
1,840 |
|
Prepaid
expenses and other current assets |
|
|
94 |
|
|
|
141 |
|
Other
assets |
|
|
(39 |
) |
|
|
32 |
|
Accounts
payable |
|
|
(1,912 |
) |
|
|
(2,312 |
) |
Accrued
expenses |
|
|
(852 |
) |
|
|
1,106 |
|
Other
long-term liabilities |
|
|
13 |
|
|
|
20 |
|
Net
cash provided by operating activities |
|
|
13,665 |
|
|
|
21,175 |
|
|
Cash flows from
investing activities: |
|
|
|
|
|
|
|
|
Purchase of
short-term investments |
|
|
(55,380 |
) |
|
|
(25,620 |
) |
Proceeds from
sales and maturities of investments |
|
|
52,161 |
|
|
|
24,489 |
|
Purchase of
long-term investments |
|
|
(139 |
) |
|
|
(136 |
) |
Purchase of
property and equipment |
|
|
(4,692 |
) |
|
|
(3,615 |
) |
Net
cash used in investing activities |
|
|
(8,050 |
) |
|
|
(4,882 |
) |
|
Cash flows from
financing activities: |
|
|
|
|
|
|
|
|
Proceeds from
issuance of common stock under ESPP |
|
|
343 |
|
|
|
340 |
|
Proceeds from
the exercise of stock options |
|
|
664 |
|
|
|
580 |
|
Tax payments
related to net share settlements of RSUs |
|
|
(329 |
) |
|
|
(2,211 |
) |
Repurchase of
common stock |
|
|
(14,887 |
) |
|
|
- |
|
Net
cash used in financing activities |
|
|
(14,209 |
) |
|
|
(1,291 |
) |
|
Effect of exchange rate changes on cash and
cash equivalents |
|
|
(14 |
) |
|
|
(180 |
) |
Net (decrease) increase in
cash and cash equivalents |
|
|
(8,608 |
) |
|
|
14,822 |
|
Cash and cash equivalents at beginning of
period |
|
|
22,723 |
|
|
|
18,603 |
|
Cash and cash equivalents
at end of period |
|
$ |
14,115 |
|
|
$ |
33,425 |
|
|
Supplemental disclosure
of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid for
income taxes |
|
$ |
3,374 |
|
|
$ |
922 |
|
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, 2014, which has been derived from audited
financial statements, and the unaudited interim condensed consolidated financial
statements as of September 30, 2015 and for the three and nine months ended
September 30, 2015 and 2014 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, 2014. The unaudited condensed
consolidated financial statements as of September 30, 2015, and for the three
and nine months ended September 30, 2015 and 2014, 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, 2015 as compared to what was previously disclosed in the Companys
Form 10-K for the fiscal year ended December 31, 2014.
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
and Returns
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
uncollectability and records an allowance for 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
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 money market, corporate bonds
and certificates of deposit.
Short-Term and Long-Term
Investments
The Company generally invests its
excess cash in certificates of deposit and 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 69.3%
and 77.1% of the Companys revenues for the three months ended September 30,
2015 and 2014, respectively. The Companys optical passive products contributed
30.7% and 22.9% of the Companys revenues for the three months ended September
30, 2015 and 2014, respectively.
Connectivity products contributed 76.5%
and 74.6% of the Companys revenues for the nine months ended September 30, 2015
and 2014, respectively. The Companys optical passive products contributed 23.5%
and 25.4% of the Companys revenues for the nine months ended September 30, 2015
and 2014, respectively.
In the three months ended September 30,
2015 and 2014, the Companys 10 largest customers comprised 70.7% and 71.2% of
the Companys revenues, respectively. For the three months ended September 30,
2015, two customers accounted for 13.9% and 10.7% of the Companys revenues,
respectively. The amount due from these two customers was $2.1 million at
September 30, 2015. For the three months ended September 30, 2014, one customer
accounted for 35.5% of the Companys revenues.
In the nine months ended September 30,
2015 and 2014, the Companys 10 largest customers comprised 75.4% and 76.2% of
the Companys revenues, respectively. For the nine months ended September 30,
2015, one customer accounted for 33.4% of the Companys revenues. For the nine
months ended September 30, 2014, two customers accounted for 40.5% and 10.0% of
the Companys revenues.
2. Recent Accounting Pronouncements
and Accounting Changes
In July 2015, the Financial Accounting
Standards Board (FASB) issued new accounting guidance on simplifying the
measurement of inventory which requires that inventory within the scope of the
guidance be measured at the lower of cost and net realizable value. Prior to the
issuance of the standard, inventory was measured at the lower of cost or market
(where market was defined as replacement cost, with a ceiling of net realizable
value and floor of net realizable value less a normal profit margin). The
accounting guidance is effective for annual reporting periods (including interim
periods within those periods) beginning after December 15, 2016. Early adoption
is permitted. The adoption of this standard is not expected to have a material
impact on the Companys financial position or results of operations.
In January 2015, the FASB issued
guidance which eliminates the concept of extraordinary items in an entitys
income statement. The changes in ASU 2015-01 are effective for fiscal years
beginning after December 15, 2015 and interim periods within those fiscal years.
Early adoption is permitted provided that the guidance is applied from the
beginning of the fiscal year of adoption. The adoption of this guidance is not
expected to have a material impact on the Companys consolidated financial
statements.
In August 2014, 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 on its
consolidated financial statements.
5
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, 2017. Early adoption is not permitted. The Company is currently evaluating the impact of this accounting standard on its consolidated financial statements.
3. Stockholders Equity
Stock Repurchase Programs. On August 24, 2015, October 29, 2014, and November 30, 2011 the Company announced programs to repurchase up to $25 million, $15 million, and $6 million, respectively, worth of the Companys outstanding common stock. Repurchases under the programs may be made in open market and privately negotiated transactions in compliance with Securities and Exchange Commission Rule 10b-18, subject to market conditions, applicable legal requirements and other factors. The Company is not required to repurchase any amount of common stock in any period and the programs may be modified or suspended at any time. The duration of the repurchase programs is open-ended.
For the three months ended September, 30, 2015, an aggregate of 528,038 shares of common stock had been repurchased under the August 2015 program.
For the nine months ended September, 30, 2015, an aggregate of 313,477 shares of common stock had been repurchased under the October 2014 program and an aggregate of 1,082 shares of common stock had been repurchased under the November 2011 program.
As of September 30, 2015, both of the October 2014 and November 2011 repurchase programs were closed.
4. 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 (the 2000 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, over four years at a rate of 25 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 Plan generally vest over four years. Options have a ten year contractual term.
The following information relates to stock option activity for the nine months ended September 30, 2015:
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Weighted |
|
Average |
|
|
|
|
|
|
|
Average |
|
Remaining |
|
Aggregate |
|
|
|
|
Exercise |
|
Contractual |
|
Intrinsic |
Options |
Shares |
|
Price |
|
Life |
|
Value |
Outstanding at
December 31, 2014 |
693,100 |
|
|
$ |
9.08 |
|
|
|
|
|
Granted |
22,000 |
|
|
|
16.60 |
|
|
|
|
|
Exercised |
(98,700 |
) |
|
|
6.73 |
|
|
|
|
|
Forfeited |
(62,400 |
) |
|
|
12.16 |
|
|
|
|
|
Outstanding at
September 30, 2015 |
554,000 |
|
|
$ |
9.45 |
|
7.72 Years |
|
$ |
4,245,879 |
Vested and expected
to vest at September 30, 2015 |
539,695 |
|
|
$ |
9.43 |
|
7.70 Years |
|
$ |
4,149,051 |
Exercisable at
September 30, 2015 |
140,467 |
|
|
$ |
5.83 |
|
5.99 Years |
|
$ |
1,583,529 |
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 2015 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, 2015. This amount changes based
on the fair market value of the Companys stock. The total intrinsic value of
options exercised was $0.5 million and $1.1 million for the three and nine
months ended September 30, 2015, respectively. 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.
No options were granted during the
three months ended September 30, 2015. Options to purchase 22,000 shares of
common stock were granted during the nine months ended September 30, 2015. As of
September 30, 2015, there was $6.7 million of unrecognized compensation expense
related to share-based compensation arrangements granted under the 2000 Plan.
The compensation expense is expected to be realized over four years.
Cash received from option exercises
during the nine months ended September 30, 2015 and 2014 was $0.7 million and
$0.6 million, respectively, and is included within the financing activities
section in the accompanying condensed consolidated statements of cash flows.
During the nine months ended September
30, 2015, a total of 31,279 shares were issued under the ESPP and cash received
from purchases of common stock pursuant to the ESPP was $0.3 million.
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, |
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
Included in cost of
revenue |
|
$ |
137 |
|
$ |
87 |
|
$ |
395 |
|
$ |
379 |
Included in operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Research and
development |
|
|
51 |
|
|
44 |
|
|
155 |
|
|
191 |
Selling, marketing
and administrative |
|
|
666 |
|
|
305 |
|
|
1,570 |
|
|
1,113 |
Total |
|
|
717 |
|
|
349 |
|
|
1,725 |
|
|
1,304 |
Total stock-based compensation
expense |
|
$ |
854 |
|
$ |
436 |
|
$ |
2,120 |
|
$ |
1,683 |
5. Inventories, net (in thousands)
|
September
30, |
|
December
31, |
|
2015 |
|
2014 |
Inventories: |
|
|
|
|
|
Finished
goods |
$ |
2,808 |
|
$ |
2,545 |
Work-in-process |
|
4,216 |
|
|
2,970 |
Raw
materials |
|
3,160 |
|
|
3,790 |
|
$ |
10,184 |
|
$ |
9,305 |
The inventory balances shown above are
presented net of an allowance for excess and obsolete inventories of $1.5
million and $2.4 million at September 30, 2015 and December 31, 2014,
respectively.
6. 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.
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, |
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
Net
income |
|
$ |
3,653 |
|
$ |
4,303 |
|
$ |
12,251 |
|
$ |
13,100 |
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in
computing net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
17,850 |
|
|
18,629 |
|
|
17,848 |
|
|
18,529 |
Diluted |
|
|
18,227 |
|
|
19,103 |
|
|
18,199 |
|
|
19,036 |
Net income per
share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.20 |
|
$ |
0.23 |
|
$ |
0.69 |
|
$ |
0.71 |
Diluted |
|
$ |
0.20 |
|
$ |
0.23 |
|
$ |
0.67 |
|
$ |
0.69 |
7. 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/loss on available-for-sale
securities.
8. 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 25.4% and 26.2% for
the nine months ended September 30, 2015 and 2014, respectively.
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.
9. 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.
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, 2015, 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.
8
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 $0.07 million and $0.08 million
for warranty reserves at September 30, 2015 and December 31, 2014, respectively.
Operating Leases
The Company leases office space under
long-term operating leases expiring at various dates through 2019.
The Companys aggregate future minimum
facility lease payments as of September 30, 2015 were as follows (in thousands):
Years ending December 31: |
|
|
2015 (remaining
three months of the year) |
$ |
243 |
2016 |
|
1,024 |
2017 |
|
657 |
2018 |
|
430 |
2019 |
|
377 |
Total |
$ |
2,731 |
10. Related Party Transactions
As of September 30, 2015, based on
information filed with the Securities and Exchange Commission in September 2015,
Foxconn Holding Limited (Foxconn) and Hon Hai Precision Industry Co. Ltd.
(Hon Hai) held 15.6% of the Companys common stock. In the normal course of
business, the Company sells products to and purchases raw materials from Hon
Hai, 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 $0.01
million and $0.02 million for the three and nine months ended September 30,
2015, respectively. Purchases of raw materials from Hon Hai were $0.5 million
and $1.7 million for the three and nine months ended September 30, 2015,
respectively. Amounts due from Hon Hai were $0.01 million at September 30, 2015.
Amounts due to Hon Hai were $0.5 million at September 30, 2015.
Sales of products to Hon Hai were $0.01
million and $0.03 million for the three and nine months ended September 30,
2014, respectively. Purchases of raw materials from Hon Hai were $0.4 million
and $1.4 million for the three and nine months ended September 30, 2014,
respectively. Amounts due from Hon Hai were $0.01 million at September 30, 2014.
Amounts due to Hon Hai were $0.4 million at September 30, 2014.
11. 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, 2015 and December 31, 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 |
|
|
2015 |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
Cash
equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
Money market
mutual funds |
|
$ |
2,325 |
|
$ |
2,325 |
|
$ |
- |
|
$ |
- |
Marketable
Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Time
deposits |
|
|
19,273 |
|
|
19,273 |
|
|
- |
|
|
- |
Corporate
bonds |
|
|
15,096 |
|
|
- |
|
|
15,096 |
|
|
- |
Long-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
Time
deposits |
|
|
10,774 |
|
|
10,774 |
|
|
- |
|
|
- |
Total |
|
$ |
47,468 |
|
$ |
32,372 |
|
$ |
15,096 |
|
$ |
- |
|
|
|
|
Fair Value Measurements
at |
|
|
Reporting Date Using |
|
|
|
|
Quoted Prices |
|
Significant |
|
|
|
|
|
|
|
|
in Active |
|
Other |
|
Significant |
|
|
Balance at |
|
Markets for |
|
Observable |
|
Unobservable |
|
|
December 31, |
|
Identical Assets |
|
Inputs |
|
Inputs |
|
|
2014 |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
Cash
equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
Money market
mutual funds |
|
$ |
4,070 |
|
$ |
4,070 |
|
$ |
- |
|
$ |
- |
Marketable
Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Time
deposits |
|
|
21,782 |
|
|
21,782 |
|
|
- |
|
|
- |
Corporate
bonds |
|
|
10,075 |
|
|
- |
|
|
10,075 |
|
|
- |
Long-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
Time
deposits |
|
|
10,635 |
|
|
10,635 |
|
|
- |
|
|
- |
Total |
|
$ |
46,562 |
|
$ |
36,487 |
|
$ |
10,075 |
|
$ |
- |
As of September 30, 2015 and December
31, 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 consist certificates of deposit with original maturities of 365 days
or more from the date of purchase.
10
12. Geographic Segment Information
The Company operates in a single
industry segment. This industry segment is characterized by rapid technological
change and significant competition.
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, |
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
7,736 |
|
$ |
11,594 |
|
$ |
37,872 |
|
$ |
40,202 |
Europe |
|
|
4,058 |
|
|
2,596 |
|
|
13,691 |
|
|
14,754 |
Asia |
|
|
6,266 |
|
|
3,906 |
|
|
13,205 |
|
|
12,221 |
|
|
$ |
18,060 |
|
$ |
18,096 |
|
$ |
64,768 |
|
$ |
67,177 |
|
|
|
|
Three Months Ended September
30, |
|
Nine Months Ended September
30, |
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Connectivity
Products |
|
$ |
12,512 |
|
$ |
13,943 |
|
$ |
49,578 |
|
$ |
50,143 |
Optical Passive
Products |
|
|
5,548 |
|
|
4,153 |
|
|
15,190 |
|
|
17,034 |
|
|
$ |
18,060 |
|
$ |
18,096 |
|
$ |
64,768 |
|
$ |
67,177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
|
|
|
|
|
|
|
2015 |
|
2014 |
|
|
|
|
|
|
Property and Equipment |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
192 |
|
$ |
185 |
|
|
|
|
|
|
Taiwan |
|
|
8,624 |
|
|
8,568 |
|
|
|
|
|
|
China |
|
|
7,301 |
|
|
5,115 |
|
|
|
|
|
|
|
|
$ |
16,117 |
|
$ |
13,868 |
|
|
|
|
|
|
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, 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, risks associated with our international operations, cyber-security
risks, 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,
2014.
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 $12.5 million, or 69.3%, and $13.9 million, or 77.1%, for the three
months ended September 30, 2015 and 2014, respectively. Our optical passive
products contributed revenues of $5.5 million, or 30.7%, and $4.2 million, or
22.9%, for the three months ended September 30, 2015 and 2014, respectively.
Our connectivity products contributed
revenues of $49.6 million, or 76.5%, and $50.1 million, or 74.6%, for the nine
months ended September 30, 2015 and 2014, respectively. Our optical passive
products contributed revenues of $15.2 million, or 23.5%, and $17.0 million, or
25.4%, for the nine months ended September 30, 2015 and 2014, respectively.
In the three months ended September 30,
2015 and 2014, our 10 largest customers comprised 70.7% and 71.2% of our
revenues, respectively. For the three months ended September 30, 2015, two
customers accounted for 13.9% and 10.7% of our revenues. For the three months
ended September 30, 2014, one customer accounted for 35.5% of our
revenues.
12
In the nine months ended September 30,
2015 and 2014, our 10 largest customers comprised 75.4% and 76.2% of our
revenues, respectively. For the nine months ended September 30, 2015, one
customer accounted for 33.4% of our revenues. For the nine months ended
September 30, 2014, two customers accounted for 40.5% and 10.0% of our
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; |
● |
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 2014 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.
13
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, |
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
Revenues |
|
100.0 |
% |
|
100.0 |
% |
|
100.0 |
% |
|
100.0 |
% |
Cost of revenues |
|
60.7 |
|
|
60.6 |
|
|
59.3 |
|
|
60.2 |
|
Gross profit |
|
39.3 |
|
|
39.4 |
|
|
40.7 |
|
|
39.8 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
5.6 |
|
|
5.9 |
|
|
5.1 |
|
|
4.8 |
|
Selling, marketing
and administrative |
|
13.1 |
|
|
10.6 |
|
|
11.1 |
|
|
9.4 |
|
Total operating
expenses |
|
18.7 |
|
|
16.5 |
|
|
16.2 |
|
|
14.2 |
|
|
Income from operations |
|
20.6 |
|
|
22.9 |
|
|
24.5 |
|
|
25.6 |
|
Interest and other income,
net |
|
0.8 |
|
|
1.3 |
|
|
0.9 |
|
|
0.8 |
|
Net income before income taxes |
|
21.4 |
|
|
24.2 |
|
|
25.4 |
|
|
26.4 |
|
Provision for income
taxes |
|
(1.2 |
) |
|
(0.4 |
) |
|
(6.4 |
) |
|
(6.9 |
) |
Net income |
|
20.2 |
% |
|
23.8 |
% |
|
19.0 |
% |
|
19.5 |
% |
Revenues. Revenues were $18.1 million for each
of the three months ended September 30, 2015 and 2014. Our largest customer reduced its orders compared to the same period
in 2014, but additional orders from other customers resulted in total revenue that was similar for the three months ended
September 30, 2015 and 2014. Revenues were $64.8 million and $67.2 million for the nine months ended September 30, 2015 and
2014, respectively. Revenues decreased 3.6% in the nine months ended September 30, 2015 from the same period in 2014. The
decrease was mainly due to decreased volume shipments of products in telecom and datacom market applications.
Cost of Revenues. Cost of revenues was $11.0 million for each of the three
months ended September 30, 2015 and 2014. Cost of revenues as a percentage of
revenues increased to 60.7% for the three months ended September 30, 2015 from
60.6% for the three months ended September 30, 2014.
Cost of revenues was $38.4 million and
$40.4 million for the nine months ended September 30, 2015 and 2014,
respectively. Cost of revenues as a percentage of revenues decreased to 59.3%
for the nine months ended September 30, 2015 from 60.2% for the nine months
ended September 30, 2014. The lower percentage cost of revenues for the nine
months ended September 30, 2015 resulted from lower sales and the change in the mix of products sold.
Gross Profit. Gross profit was $7.1 million for each of the three months
ended September 30, 2015 and 2014. Gross profit as a percentage of revenue
decreased to 39.3% for the three months ended September 30, 2015 from 39.4% for
the three months ended September 30, 2014.
Gross profit decreased to $26.4
million, or 40.7% of revenues, for the nine months ended September 30, 2015 from
$26.7 million, or 39.8% of revenues, for the same period in 2014. For the three
and nine months ended September 30, 2015, the lower gross profit was due to
decreased revenues.
Research and Development
Expenses. Research and development expenses
were $1.0 million and $1.1 million for the three months ended September 30, 2015
and 2014, respectively. Research and development expenses increased to $3.3
million for the nine months ended September 30, 2015 from $3.2 million for the
same period in 2014. The higher research and development expenses were due to
higher capital investments for new product development.
As a percentage of revenues, research
and development expenses decreased to 5.6% in the three months ended September
30, 2015 from 5.9% for the same period in 2014. As a percentage of revenues,
research and development expenses increased to 5.1% in the nine months ended
September 30, 2015 from 4.8% for the same period in 2014. The higher research
and development expenses as a percentage of revenues were mainly due to
decreased revenue levels. We expect research and development expenses will
increase as we intend to continue to invest in our research and product
development efforts.
14
Sales, Marketing and Administrative
Expenses. Sales, marketing and administrative
expenses increased to $2.4 million for the three months ended September 30, 2015
compared to $1.9 million for the three months ended September 30, 2014. Sales,
marketing and administrative expenses increased to $7.2 million for the
nine months ended September 30, 2015 from $6.3 million for the same period in
2014. The higher expenses for the three and nine months ended September 30, 2015
were primarily due to higher stock based compensation charges and costs
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 13.1% in the three months
ended September 30, 2015 from 10.6% for the same period in 2014. As a percentage
of revenues, sales and marketing expenses increased to 11.1% in the nine months
ended September 30, 2015 from 9.4% for the same period in 2014. The higher
expenses as a percentage of revenues for the three and nine months ended
September 30, 2015 were mainly due to decreased revenue levels. We expect sales,
marketing and administrative expenses will remain relatively flat in the next
quarter.
Stock-Based
Compensation. Stock-based compensation
expense increased to $0.9 million for the three months ended September 30, 2015
from $0.4 million for the same period in 2014. Stock-based compensation expense
increased to $2.1 million for the nine months ended September 30, 2015 from $1.7
million for the same period in 2014. The increase was primarily due to RSUs
granted in April 2015.
Interest and Other Income, Net.
Interest and other income, net, was $0.1
million and $0.2 million for the three months ended September 30, 2015 and 2014,
respectively. Interest and other income, net, was $0.5 million and $0.6 million
for the nine months ended September 30, 2015 and 2014, respectively. These
amounts consisted primarily of interest income which fluctuated based on cash
balances and changes in interest rates.
Income Tax Expense. Income tax expense was $0.2 million and $0.1 million for the
three months ended September 30, 2015 and 2014, respectively.
Income tax expense was $4.2 million and
$4.6 million for the nine months ended September 30, 2015 and 2014,
respectively. The decrease in income tax expense for the nine months ended
September 30, 2015 was due to utilization of research credits as well as a
higher percentage of income attributed to operations in China and Taiwan, which
are generally subject to lower income taxes.
Liquidity and Capital Resources
At September 30, 2015, we had cash and
cash equivalents of $14.1 million and short-term investments of $34.4 million.
Long-term investments at September 30, 2015 were $10.8 million.
Net cash provided by operating
activities was $13.7 million for the nine months ended September 30, 2015. Net
cash provided by operating activities was primarily due to net income of $12.3
million, an increase in total depreciation and stock based compensation of $4.1
million, and an increase in deferred tax assets of $1.0 million which were
offset by a $1.9 million decrease in accounts payable, a $1.2 million increase
in inventory, and an $0.8 million decrease in accrued liabilities.
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 an increase in total
depreciation and stock based compensation of $3.8 million. These were offset by
a $2.3 million decrease in accounts payable.
Net cash used in investing activities
was $8.0 million for the nine months ended September 30, 2015. This resulted
from $4.7 million of equipment purchases and $3.2 million in net purchases of
short-term investments.
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 financing activities
was $14.2 million for the nine months ended September 30, 2015. Net cash used in
financing activities was primarily due to $14.9 million used to repurchase
common stock pursuant to our stock repurchase program, and $0.3 million used to
pay tax withholdings related to net share settlements of
RSUs, which offset proceeds of $0.7 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.
15
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.
On August 24, 2015, we announced a
program to repurchase up to $25 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
September 30, 2015, approximately $15 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 also 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.
Off Balance Sheet Arrangements
We did not have any off-balance sheet
arrangements at September 30, 2015.
Contractual Obligations
The lease on our corporate headquarters
in Sunnyvale, California, has a six-year term commencing on July 22, 2004. In
June 2010, we renewed the lease for an 18,088 square foot facility in the same
building, which lease will expire in January 2016.
In Taiwan, we lease a total of 34,406
square feet in one facility located in Tu-Cheng City, Taiwan. This lease expires
at various times from January 2016 to January 2017.
In China, we lease a 132,993 square
foot facility in Shenzhen, pursuant to a lease which will expire in October
2019. In December 2014, we entered into two lease agreements for our
manufacturing facilities next to our facility in Shenzhen, China. Each facility
is 55,285 square feet and both leases expire in December 2019.
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.
16
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,
2015, 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 $1.8 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.
(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.
From inception through September 30,
2015, we had an accumulated deficit of $14.6 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, we will need to
generate and sustain substantially higher revenues while maintaining reasonable
cost and expense levels.
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.
17
In the three months ended September 30,
2015 and 2014, our 10 largest customers comprised 70.7% and 71.2% of our
revenues, respectively. In the nine months ended September 30, 2015 and 2014,
our 10 largest customers comprised 75.4% and 76.2% of our revenues,
respectively. One Web 2.0 customer accounted for 13.9% and 33.4% of our revenues
for the three and nine months ended September 30, 2015.
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
third quarter of 2015 and 2014 than we expected, and this had an adverse effect
on our operating results. The loss of any significant customer, a significant
reduction or fluctuations in sales we make to a customer, or any problems
collecting receivables from one or more significant customers would likely harm
our financial condition and results of operations. Changes in purchasing levels
by these customers may also cause our operating results to fluctuate from period
to period.
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 69.3% and 77.1% of our revenues in the quarter ended September 30,
2015 and 2014, 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, weak business and consumer confidence, a volatile stock
market and prolonged unemployment, have precipitated an economic slowdown and
recession. 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.
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.
18
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. |
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., Molex 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.
19
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.
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, 2015, we had 33
full-time employees in Sunnyvale, California, 373 full-time employees in Taiwan,
and 1240 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
to 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 $1.0 million and $3.3 million for the three and nine
months ended September 30, 2015, 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.
20
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.
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.
21
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.
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.
22
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.
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.
23
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.
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.
24
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.
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 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. Annual disclosures are
required no later than May 31 of each year. We have and will continue to 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.
25
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.
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.
We have significant manufacturing
operations in China, which exposes us to risks inherent in doing business in
China.
A significant portion of our
manufacturing is conducted at our facilities in Shenzhen, China, and we also
conduct research and development-related activities in Shenzhen. Employee
turnover in China is high due to the intensely competitive and fluid market for
skilled labor. We will need to continue to hire appropriate personnel, obtain
and retain required legal authorization to hire such personnel, and expend time
and financial resources to hire and train such personnel. In addition, we
believe that salary inflation rates for the skilled personnel we hire and seek
to retain in China are likely to be higher than inflation rates elsewhere.
Operating in China subjects us to
political, legal and economic risks. In particular, the political, legal and
economic climate in China, both nationally and regionally, is fluid and
unpredictable. Our ability to operate in China may be adversely affected by
changes in Chinese laws and regulations such as those related to, among other
things, taxation, import and export tariffs, environmental regulations, land use
rights, intellectual property, currency controls, employee benefits and other
matters. In addition, we may not obtain or retain the requisite legal permits to
continue to operate in China, and costs or operational limitations may be
imposed in connection with obtaining and complying with such permits.
26
We intend to continue to export the
products manufactured at our facilities in China. Under current regulations,
upon application and approval by the relevant governmental authorities, we will
not be subject to certain Chinese taxes and will be exempt from certain duties
on imported materials that are used in the manufacturing process and
subsequently exported from China as finished products. However, Chinese trade
regulations are in a state of flux, and we may become subject to other forms of
taxation and duties in China or may be required to pay export fees in the
future. In the event that we become subject to new taxation or export fees in
China, our business and results of operations could be materially adversely
affected.
We are subject to anti-corruption
laws in the jurisdictions in which we operate, including the U.S. Foreign
Corrupt Practices Act. Our failure to comply with these laws could result in
penalties which could harm our reputation and have a material adverse effect on
our business, results of operations and financial condition.
Because of our worldwide operations, we
are subject to risks associated with compliance with applicable anti-corruption
laws, including the U.S. Foreign Corrupt Practices Act, or FCPA, which generally
prohibits U.S. companies and their employees and intermediaries from making
payments to foreign officials for the purpose of obtaining or keeping business,
securing an advantage, or directing business to another, and requires public
companies to maintain accurate books and records and a system of internal
accounting controls. Under the FCPA, U.S. companies may be held liable for
actions taken by directors, officers, employees, agents, or other strategic or
local partners or representatives. If we or our intermediaries fail to comply
with the requirements of the FCPA or similar laws, governmental authorities in
the United States and elsewhere could seek to impose civil and criminal fines
and penalties which could have a material adverse effect on our business,
results of operations and financial condition.
We are subject to complex taxation
rules and practices, which may affect our results of operations.
As a multinational company, we are
required to comply with increasingly complex taxation rules and practices in the
U.S. and abroad. The development of our tax strategies requires expertise and
may impact how we conduct our business. Our future effective tax rates could be
unfavorably affected by changes in, or interpretations of, tax rules and
regulations in the jurisdictions in which we do business, by lapses of the
availability of the U.S. research and development tax credit or by changes in
the valuation of our deferred tax assets and liabilities. Furthermore, we
provide for certain tax liabilities that involve significant judgment. We are
subject to the examination of our tax returns by federal, state and foreign tax
authorities, which could focus on our intercompany transfer pricing methodology
as well as other matters. If our tax strategies are ineffective or we are not in
compliance with domestic and international tax laws, our financial position,
operating results and cash flows could be adversely affected.
We face risks associated with
currency exchange rate fluctuations, which could adversely affect our operating
results.
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, 2015, 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 percent against the dollar, our net asset balance would decrease by
approximately $1.8 million as of this date. Although we have implemented hedging strategies designed to mitigate foreign
currency risk, these strategies may not eliminate our exposure to foreign
exchange rate fluctuations and involve costs and risks of their own, such as
ongoing management time and expertise, external costs to implement the
strategies and potential accounting implications.
27
ITEM 2: UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS
Stock Repurchase Program
On August 24, 2015, we announced a
program to repurchase up to $25.0 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 requirements 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
September 30, 2015, approximately $15.4 million was remaining to purchase shares
of our common stock under the August 2015 repurchase program.
The following table sets forth
information with respect to purchases of our common stock pursuant to the
repurchase program during the periods indicated:
|
|
|
|
|
|
|
|
|
Maximum |
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
|
Total Number |
|
Shares that |
|
|
|
|
|
|
|
of Shares |
|
May Yet Be |
|
|
|
|
|
|
|
Purchased as |
|
Purchased |
|
|
Total Number |
|
Average |
|
Part of Publicly |
|
Under the |
|
|
of Shares |
|
Price Paid |
|
Announced |
|
Plans or |
Period |
|
Purchased |
|
Per Share |
|
Programs |
|
Programs * |
July 1 - July 31, 2015 |
|
- |
|
|
- |
|
- |
|
|
- |
August 1 - August 31, 2015 |
|
24,100 |
|
$ |
17.9754 |
|
24,100 |
|
$ |
24,566,374 |
September 1 - September 30,
2015 |
|
503,938 |
|
$ |
17.8531 |
|
503,938 |
|
$ |
15,434,465 |
Total |
|
528,038 |
|
$ |
15.9740 |
|
528,038 |
|
$ |
15,434,465 |
____________________
* Represents dollar amount
28
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 |
____________________
* 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.
29
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 6, 2015
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) |
|
30
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 |
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XBRL
Taxonomy Instance Document |
101.SCH |
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XBRL Taxonomy Schema Document |
101.PRE |
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XBRL
Taxonomy Presentation Linkbase Document |
101.LAB |
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XBRL Taxonomy Label Linkbase
Document |
101.CAL |
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XBRL
Taxonomy Calculation Linkbase Document |
101.DEF |
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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.
31
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, 2015
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 6, 2015 |
|
|
By |
/s/Peter C. Chang |
|
Peter C.
Chang |
Chief
Executive Officer |
(Principal
Executive Officer) |
32
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, 2015
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 6,
2015 |
|
By |
/s/Anita K.
Ho |
|
Anita K. Ho |
Acting Chief Financial
Officer |
(Principal Accounting
Officer) |
33
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, 2015 (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 6, 2015 |
|
|
34
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, 2015 (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/Anita K.
Ho |
|
|
|
Anita K. Ho |
|
|
|
|
|
|
|
November 6, 2015 |
|
|
35
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