NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A—ORGANIZATION AND OPERATIONS
Applied Optoelectronics, Inc. (“AOI” or the “Company”) was incorporated in the State of Texas on February 28, 1997. In March 2013, the Company converted into a Delaware corporation. The Company is a leading, vertically integrated provider of fiber-optic networking products, primarily for four networking end-markets: internet data center, CATV, telecom and FTTH. The Company designs and manufactures a wide range of optical communications products at varying levels of integration, from components, subassemblies and modules to complete turn-key equipment.
The Company has manufacturing and research and development facilities located in the U.S., Taiwan and China. At its corporate headquarters and manufacturing facilities in Sugar Land, Texas, the Company primarily manufactures lasers and laser components and performs research and development activities for laser component and optical module products. The Company operates in Taipei, Taiwan and Ningbo, China through its wholly-owned subsidiary Prime World International Holdings, Ltd. (“Prime World”, incorporated in the British Virgin Islands). Prime World is the parent of Global Technology, Inc. (“Global”, incorporated in the People’s Republic of China). Through Global, the Company primarily manufactures certain of its data center transceiver products, including subassemblies and transceivers, as well as Cable TV Broadband (“CATV”) systems and equipment, and performs research and development activities for the CATV products. Prime World also operates a branch in Taiwan, which primarily manufactures transceivers. The Company also has a research and development center in Duluth, Georgia.
On September 15, 2022, we entered into a definitive purchase agreement with Yuhan Optoelectronic Technology (Shanghai) Co., Ltd ("Purchaser"), which is a company incorporated in the People's Republic of China ("PRC"), to divest the Company's manufacturing facilities in the PRC and certain assets related to our transceiver business and multi-channel optical sub-assembly products (collectively, the "Divestiture"). The closing of the transaction is subject to the satisfaction of certain closing conditions, including the approval from the Committee on Foreign Investment in the United States ("CFIUS").
The purchase price will be an amount equal to the $150 million USD equivalent of Renminbi, less a holdback amount. Prior to the closing of the transaction the Company anticipates investing an amount equal to between 4% and 10% of the estimated proceeds from the transaction in exchange for a 10% equity interest in the Purchaser. The transaction is expected to close in 2023, subject to customary closing conditions and regulatory approval.
Our management has performed an evaluation as required by ASC-360-10-45-9 to determine whether to classify certain of our assets and liabilities as held for sale as of December 31, 2022. ASC 360 requires that a company classifies a business as held for sale in the period in which management commits to a plan to sell the business, the business is available for immediate sale in its present condition, an active program to complete the plan to sell the business is initiated, the sale of the business within one year is probable and the business is being marketed at a reasonable price in relation to its fair value. Although we have announced the execution of a definitive purchase agreement regarding the Divestiture, completion of this transaction is not certain for reasons that include the fact that the proposed sale is subject to regulatory approval in the US and China, the timing and likelihood of which is uncertain and beyond our control, and the fact that we cannot be certain that the buyer will not request modification of terms within the definitive purchase agreement. As a result, we have concluded that at the present time the business is not "available for immediate sale" under the meaning defined in ASC 360 and therefore none of our assets or liabilities should be classified as held for sale.
NOTE B—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of the Company and all of its wholly-owned subsidiaries and are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). All intercompany balances and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported. Actual results could differ from those estimates in the consolidated financial statements and accompanying notes. Significant estimates and assumptions that impact these financial statements relate to, among other things, allowance for doubtful accounts, inventory reserve, product warranty costs, share-based compensation expense, estimated useful lives of property and equipment, and taxes.
3. | Foreign Currency Translation |
The functional currency for the Company’s foreign operations is the local currency. The assets and liabilities of these operations are translated at the rate of exchange in effect on the balance sheet date and sales and expenses are translated at monthly average rates. The resulting gains or losses from translation are included in a separate component of other comprehensive income. There is no tax effect on the foreign currency translation because management has concluded that no deferred tax asset (DTA) should be recorded because at the present time management cannot conclude that the temporary book-tax basis difference that would create this DTA will reverse in the foreseeable future due to the uncertainties in the timing of the Divestiture described above in Note A. Transaction gains and losses resulting from re-measuring monetary asset and liability accounts that are denominated in a currency other than a subsidiary’s functional currency are included in net foreign exchange gain and loss and are included in net income except for those intercompany balances that are long-term investments in nature. The translation gain or losses from the long-term investment nature of intercompany balances are treated as translation adjustments and included in comprehensive income.
The carrying value of cash, cash equivalents and short-term investments, accounts receivable, accounts payable, and note receivable approximate their historical fair values due to their short-term maturities. The carrying value of the debt approximates its fair value due to the short-term nature of the debt since it renews frequently at current interest rates. Management believes that the interest rates in effect at each year end represent the current market rates for similar borrowings.
The fair value measurement standard defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard characterizes inputs used in determining fair value according to a hierarchy that prioritized inputs based on the degree to which they are observable. The three levels of the fair value hierarchy are as follows:
Level 1—Inputs represent quoted prices in active markets for identical assets or liabilities.
Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3—Inputs that are not observable from objective sources, such as management’s internally developed assumptions used in pricing an asset or liability.
Assets and liabilities that are required to be fair valued on a recurring basis include money market funds, marketable securities, equity instruments and contingent consideration.
Money market funds are valued with Level 1 inputs, using quoted market prices, and are included in cash and cash equivalents on the Company’s consolidated balance sheets.
5. | Cash and Cash Equivalents |
The Company considers all highly liquid securities with an original maturity of ninety days or less from the date of purchase to be cash equivalents. Cash in foreign accounts was approximately $17.5 million and $17.3 million at December 31, 2022 and 2021, respectively.
The Company maintains cash and cash equivalents at U.S. financial institutions for which the combined account balances in individual institutions may exceed Federal Deposit Insurance Corporation (“FDIC”) insurance coverage and, as a result, there is a concentration of credit risk related to amounts on deposit in excess of FDIC insurance coverage. As of December 31, 2022, approximately $18.3 million of U.S. deposits were not covered by FDIC insurance. The Company has not experienced any losses and believes it is not exposed to any significant risk with such accounts.
6. | Restricted Cash/Compensating Balances |
Restricted cash includes guarantee deposits for customs duties and compensating balances associated with credit facilities.
7. | Accounts Receivable/Allowance for Doubtful Accounts |
The Company carries its accounts receivable at the net amount that it estimates to be collectible. An allowance for uncollectable accounts is maintained through a charge against operations. The allowance is determined by management review of outstanding amounts per customer, historical payments and the aging of accounts.
8. | Concentration of Credit Risk and Significant Customers |
Financial instruments which potentially subject the Company to concentrations of credit risk include cash, cash equivalents and accounts receivable. The Company places all cash and cash equivalents with high-credit quality financial institutions.
The Company performs ongoing credit valuations of its customers’ financial condition whenever deemed necessary and generally does not require deposits or collateral to support customer receivables. The historical amount of losses on uncollectible accounts has been within the Company’s estimates. The Company generates much of its revenue from a limited number of customers. In 2022, 2021 and 2020, its top five customers represented 78.2%, 67%, and 73.3% of its revenue, respectively. In 2022, ATX and Microsoft represented 47.3% and 18.4% of its revenue, respectively. In 2021, ATX, Microsoft and Cisco represented 25.6%, 14.1% and 11.9% of its revenue, respectively.
The five largest receivable balances for customers represented an aggregate of 86.9% and 70.6% of total accounts receivable at December 31, 2022 and 2021, respectively. As of December 31, 2022, ATX represented 64.9% of total accounts receivable. As of December 31, 2021, ATX and Microsoft represented 41.7%, and 13.3% of total accounts receivable, respectively. No other customer represented greater than ten percent of revenue in 2022, 2021 or 2020 had greater than ten percent of total accounts receivable at December 31, 2022 or 2021.
Inventories are stated at the lower of cost (average-cost method) or net realizable value. Work in process and finished goods includes materials, labor and allocated overhead. The Company assesses the valuation of its inventory on a periodic basis and provides write-offs for the value of estimated excess and obsolete inventory based on estimates of future demand. Inventory reserves are recorded to account for the excess and obsolete inventory combined with the lower of cost or net realizable value assessments. To develop the reserve, the Company developed certain percentages that determine the extent of inventory reserve adjustments based on the age of the inventory. Such percentages were determined through analysis of the inventory to determine each product's lifespan, a review historical write-offs or scrapped inventory, and an assessment by product engineers of the possibility of obsolescence for each product.
10. | Property, Plant and Equipment |
Property, plant and equipment are stated at cost, net of accumulated depreciation and amortization. The Company calculates depreciation using the straight-line method over the following estimated useful lives:
| | Useful lives (in years) | |
| | | | |
Buildings | | | 20 - 42 | |
Land improvements | | | 10 | |
Machinery and equipment | | | 2 - 20 | |
Furniture and fixtures | | | 3 - 7 | |
Computer equipment and software | | | 3 - 10 | |
Leasehold improvements | | | The shorter of the life of the applicable lease or the useful life of the improvement | |
Transportation equipment | | | 5 | |
Major improvements are capitalized and expenditures for maintenance and repairs are expensed as incurred. Construction in progress represents property, plant and equipment under construction or being installed. Costs include original cost, installation, construction and other direct costs which include interest on borrowings used to finance the asset. Construction in progress is transferred to the appropriate fixed asset account and depreciation commences when the asset has been substantially completed and placed in service.
Land use rights allow the Company rights for 50 years to certain land in Ningbo, China on which the Company built a facility that included office space, manufacturing operations and employee dormitories. The land use rights are recorded at cost and are amortized on the straight-line basis over the useful life of the related contract. The land use rights expire on October 7, 2054 and December 28, 2067.
Intangible assets consist of intellectual property that is stated at cost less accumulated amortization. As of December 31, 2022, the Company had 304 total patents issued. The costs incurred to obtain such patents have been capitalized and are being amortized over an estimated life between 10 and 20 years. The Company periodically evaluates its intangible assets to determine whether events or changes in circumstances indicate that a patent or trademark may not be applicable to the Company’s current products or is no longer in use. If such a determination is made, the intangible asset is impaired and the remaining value of the patent or trademark will be expensed at that time.
12. | Impairment of Long-Lived Assets |
The Company accounts for impairment of long-lived assets in accordance with Accounting Standards Codification (“ASC”) 360, Property, Plant and Equipment, (“ASC 360”). Long-lived assets consist primarily of property, plant and equipment, right-of-use assets and intangible assets. In accordance with ASC 360, the Company evaluates the carrying value of long-lived assets when it determines a triggering event has occurred, or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When indicators exist, recoverability of assets is measured by a comparison of the carrying value of the asset group to the estimated undiscounted future net cash flows expected to be generated by the asset. Examples of such triggering events include a significant disposal of a portion of such assets, an adverse change in the market involving the business employing the related asset, a significant decrease in the benefits realized from an acquired business, difficulties or delays in integrating the business, and a significant change in the operations of an acquired business. If such assets are determined not to be recoverable, the Company performs an analysis of the fair value of the asset group and will recognize an impairment loss when the fair value is less than the carrying amounts of such assets. The fair value, based on reasonable and supportable assumptions and projections, require subjective judgments. Depending on the assumptions and estimates used, the appraised fair value projected in the evaluation of long-lived assets can vary within a range of outcomes. The Company considers the likelihood of possible outcomes in determining the best estimate for the fair value of the assets. The Company did not record any asset impairment charges in 2022, 2021 or 2020.
13. | Comprehensive Income (Loss) |
ASC 220, Comprehensive Income, (“ASC 220”) establishes rules for reporting and display of comprehensive income (loss) and its components. ASC 220 requires that unrealized gains and losses on the Company’s foreign currency translation adjustments be included in comprehensive income (loss).
14. | Share-based Compensation |
The Company accounts for share-based compensation in accordance with the provisions of ASC 718, Compensation—Stock Compensation. Share-based compensation expense is recognized based on the grant date fair value in order to recognize compensation cost for those shares expected to vest. Compensation cost is recognized on a straight-line basis over the vesting period of the restricted stock units and adjusted as forfeitures occur.
The Company derives revenue from the manufacture and sale of fiber optic networking products. Revenue recognition follows the criteria of ASC 606, Revenue from Contracts with Customers. Specifically, the Company recognizes revenue when obligations under the terms of a contract with its customer are satisfied; generally this occurs with the transfer of control of products or services at point of time or over times. When the company receives payments and its obligations to customers are not satisfied, the company will recognize the payment as Deferred Revenue from customers.
The Company generally offers a one-year limited warranty for its products but it can extend for longer periods of three to five years for certain products sold to certain customers. The Company estimates the costs that may be incurred under its basic limited warranty and records a liability for the amount of such costs at the time when product defects occur. Factors that affect the Company’s warranty liability include the historical and anticipated rates of warranty claims and cost to repair. While the Company believes that its warranty accrual is adequate, the actual warranty costs may exceed the accrual, in which case the cost of sales will increase in the future. As of December 31, 2022 and 2021, the amount of accrued warranty was $0.1 million and $0.3 million, respectively. Changes in products warranty were as follows (in thousands):
| | Year ended December 31, | |
| | 2022 | | | 2021 | |
Beginning Balance, January 1 | | $ | 263 | | | $ | 703 | |
Warranty costs incurred | | | (85 | ) | | | (826 | ) |
Provision for warranty | | | (38 | ) | | | 386 | |
Ending Balance, December 31 | | $ | 140 | | | $ | 263 | |
Advertising costs are charged to operations as incurred and amounted to approximately $0.8 million, $0.1 million, and $0.4 million for the years ended December 31, 2022, 2021 and 2020, respectively.
18. | Research and Development |
Research and development costs are charged to operations as incurred. The Company receives reimbursement for certain development costs, which offset with expense up to the reimbursable amount.
19. | Shipping and Handling Costs |
Shipping and handling costs are included in operating expenses as fulfillment costs unless we bill our customers for shipping and handling charges, which are included in net sales for the applicable period, and the corresponding shipping and handling expense is reported in cost of sales.
The Company accounts for income taxes in accordance with the provisions of ASC 740, Income Taxes. The liability method is used to account for deferred income taxes. Under the liability method, deferred tax assets and liabilities are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The ability to realize deferred tax assets is evaluated annually and a valuation allowance is provided if it is unlikely that the deferred tax assets will not give rise to future benefits in the Company’s tax returns.
The Company records uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) it determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, it recognizes the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement with the related tax authority.
The Company recognizes interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying consolidated statement of operations. Accrued interest and penalties are included on the related tax liability line in the consolidated balance sheet.
21. | Global Intangible Low-taxed Income Provisions ("GILTI") |
One of the base broadening provisions of the U.S. Tax Cuts and Jobs Act of 2017 (“the 2017 Act”) is the global intangible low-taxed income provisions ("GILTI"). In accordance with guidance issued by the FASB staff, the Company has adopted an accounting policy to treat any GILTI inclusions as a period cost if and when incurred. Thus, for the fiscal years ended December 31, 2022, December 31, 2021, and December 31, 2020, deferred taxes were computed without consideration of the possible future impact of the GILTI provisions, and any current year impact was recorded as a part of the current portion of income tax expense.
22. | Recent Accounting Pronouncements |
Recent Accounting Pronouncements Adopted in 2022
There was no accounting pronouncement adopted in 2022.
Recent Accounting Pronouncements Adopted in 2021
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting”, which provides temporary optional expedients and exceptions to the GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. This ASU is effective beginning on March 12, 2020 and the Company may elect to apply the amendments prospectively through December 31, 2022. The Company adopted this ASU on January 1, 2021, with no impact on its consolidated financial statements
In August 2020, the FASB issued ASU 2020-06, “Debt - Debt with Conversion and Other Options (Subtopic 470-20)” and “Derivatives and Hedging - Contracts in Entities Own Equity” (Subtopic 815-40). This ASU simplifies accounting for convertible instruments by eliminating two of the three models in ASC 470-20 that requires separating embedded conversion features from convertible instruments. The Company adopted this ASU on January 1, 2021, with no impact on its consolidated financial statements.
In November 2020, the SEC issued a new rule that modernizes and simplifies various aspects and financial disclosure requirements in Regulation S-K, specifically related to Item 301 “Selected Financial Data”, Item 302 “Supplementary Financial Information” and Item 303 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”). The intent of this new rule is to (i) eliminate duplicative disclosures, (ii) enhance and promote more principles-based MD&A disclosures with the objective of making them more meaningful for investors, all while (iii) simplifying the compliance requirements and efforts for registrants, by providing them with the flexibility to present management’s perspective on the registrant’s financial condition and results of operations. While most of the changes involve reducing or eliminating previously required information and disclosures, the rule does expand the disclosure requirements surrounding certain aspects of the various items in Regulation S-K discussed above. The final rule was published in the Federal Register on January 11, 2021, is effective thirty days after its publication date, or February 10, 2021, and registrants are required to comply with this final rule in the registrant’s first fiscal year ending on or after the date that is 210 days after the publication date. The Company evaluated this SEC final rule, which was adopted and incorporated in this filing, and it did not have a material impact on this current SEC filing nor is it expected to have a material impact on future SEC filings.
Recent Accounting Pronouncements Yet to be Adopted
To date, there have been no recent accounting pronouncement not yet effective that have significance, or potential significance, to our Consolidated Financial Statements.
NOTE C—REVENUE RECOGNITION
Revenue from Contracts with Customers
The Company derives revenue from the manufacture and sale of fiber optic networking products. Revenue is recognized when obligations under the terms of a contract with its customer are satisfied; generally this occurs with the transfer of control of products or services. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products or providing services. Certain customers may receive cash and/or non-cash incentives, which are accounted for as variable consideration. To achieve this core principle, the Company applies the following five steps:
1. Identify the contract with a customer
A contract with a customer exists when (i) the Company enters into an agreement with a customer that defines each party's rights regarding the products or services to be transferred and identifies the payment terms related to these products or services, (ii) both parties to the contract are committed to perform their respective obligations, (iii) the contract has commercial substance, and (iv) the Company determines that collection of substantially all consideration for products or services that are transferred is probable based on the customer's intent and ability to pay the promised consideration. The Company applies judgment in determining the customer's ability and intention to pay, which is based on a variety of factors including the customer's payment history or, in the case of a new customer, published credit and financial information pertaining to the customer.
2. Identify the performance obligations in the contract
Performance obligations promised in a contract are identified based on the products or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the product or service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the products or services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised products or services, the Company must apply judgment to determine whether promised products or services are capable of being distinct and distinct in the context of the contract. If these criteria are not met, the promised products or services are accounted for as a combined performance obligation. The Company has elected to account for shipping and handling activities as a fulfillment cost as permitted by the standard.
3. Determine the transaction price
The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring products or services to the customer. To the extent the transaction price is variable, revenue is recognized at an amount equal to the consideration to which the Company expects to be entitled. This estimate includes customer sales incentives which are accounted for as a reduction to revenue and estimated using either the expected value method or the most likely amount method, depending on the nature of the program. The Company will adjust its consideration for any rebates if it is more likely than not that the rebate conditions will be met.
4. Allocate the transaction price to performance obligations in the contract
If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis unless a portion of the variable consideration related to the contract is allocated entirely to a performance obligation. The Company determines standalone selling price based on the price at which the performance obligation is sold separately. The company recognizes revenues over times for services obligations. Based on ASC 606-10-32-34 methods, expected cost plus a margin approach is adopted to allocate the transaction price.
5. Recognize revenue when or as the Company satisfies a performance obligation
The Company generally satisfies performance obligations at a point in time. Revenue is recognized based on the transaction price at the time the related performance obligation is satisfied by transferring a promised product or service to a customer.
Disaggregation of Revenue
Revenue is classified based on the location of where the product is manufactured. For additional information on the disaggregated revenues by geographical region, see Note R, "Segments and Geographic Information.”
Revenue is also classified by major product category and is presented below (in thousands):
| | Years ended December 31, | |
| | | | | | % of | | | | | | | % of | | | | | | | % of | |
| | 2022 | | | Revenue | | | 2021 | | | Revenue | | | 2020 | | | Revenue | |
CATV | | $ | 118,169 | | | | 53.0 | % | | $ | 94,266 | | | | 44.6 | % | | $ | 37,944 | | | | 16.2 | % |
Data Center | | | 77,094 | | | | 34.6 | % | | | 97,461 | | | | 46.1 | % | | | 173,437 | | | | 73.9 | % |
Telecom | | | 24,727 | | | | 11.1 | % | | | 16,247 | | | | 7.7 | % | | | 21,092 | | | | 9.0 | % |
FTTH | | | 129 | | | | 0.1 | % | | | 957 | | | | 0.5 | % | | | 110 | | | | 0.0 | % |
Other | | | 2,699 | | | | 1.2 | % | | | 2,634 | | | | 1.2 | % | | | 2,040 | | | | 0.9 | % |
Total Revenue | | $ | 222,818 | | | | 100.0 | % | | $ | 211,565 | | | | 100.0 | % | | $ | 234,623 | | | | 100.0 | % |
NOTE D— Leases
The Company leases space under non-cancellable operating leases for manufacturing facilities, research and development offices and certain storage facilities and apartments. These leases do not contain contingent rent provisions. The Company also leases certain machinery, office equipment and a vehicle under operating leases. Many of its leases include both lease (e.g. fixed payments including rent, taxes, and insurance costs) and non-lease components (e.g. common-area or other maintenance costs) which are accounted for as a single lease component as the Company has elected the practical expedient to group lease and non-lease components for all leases. Several of the leases include one or more options to renew which have been assessed and either included or excluded from the calculation of the lease liability of the ROU asset based on management’s intentions and individual fact patterns. Several warehouses and apartments have non-cancellable lease terms of less than one-year and therefore, the Company has elected the practical expedient to exclude these short-term leases from its ROU asset and lease liabilities.
As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. Based on the applicable lease terms and current economic environment, the Company applies a location approach for determining the incremental borrowing rate.
Lease expense is included under general and administrative expenses and was $1.2 million, $1.3 million, and $1.4 million, respectively, for the years ended December 31, 2022, 2021 and 2020, respectively. The Components of lease expense were as follows for the periods indicated (in thousands):
| | Year ended December 31, | | | Year ended December 31, | |
| | 2022 | | | 2021 | |
Operating lease expense | | $ | 1,161 | | | $ | 1,230 | |
Financing lease expense | | | 32 | | | | 32 | |
Short Term lease expense | | | 27 | | | | 19 | |
Total lease expense | | $ | 1,220 | | | $ | 1,281 | |
Maturities of lease liabilities are as follows for the future one-year periods ending December 31, (in thousands):
| | Operating | | | Financing | | | Total | |
2023 | | $ | 1,237 | | | $ | 65 | | | | 1,302 | |
2024 | | | 1,127 | | | | — | | | | 1,127 | |
2025 | | | 1,207 | | | | — | | | | 1,207 | |
2026 | | | 1,078 | | | | — | | | | 1,078 | |
2027 | | | 1,084 | | | | — | | | | 1,084 | |
2028 and thereafter | | | 1,551 | | | | — | | | | 1,551 | |
Total lease payments | | $ | 7,284 | | | $ | 65 | | | | 7,349 | |
Less imputed interest | | | (738 | ) | | | (2 | ) | | | (740 | ) |
Present value | | $ | 6,546 | | | $ | 63 | | | | 6,609 | |
The weighted average remaining lease term and discount rate for operating leases were as follows for the periods indicated:
| | December 31, | | | December 31, | |
| | 2022 | | | 2021 | |
Weighted Average Remaining Lease Term (Years) - operating leases | | | 6.16 | | | | 7.15 | |
Weighted Average Remaining Lease Term (Years) - financing leases | | | 0.83 | | | | 1.83 | |
Weighted Average Discount Rate - operating leases | | | 3.21 | % | | | 3.22 | % |
Weighted Average Discount Rate - financing leases | | | 5.00 | % | | | 5.00 | % |
Supplemental cash flow information related to operating leases was as follows for the periods indicated (in thousands):
| | Year ended December 31, | | | Year ended December 31, | |
| | 2022 | | | 2021 | |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | |
Operating cash flows from operating leases | | | 1,234 | | | | 1,287 | |
Operating cash flows from financing lease | | | 4 | | | | 5 | |
Financing cash flows from financing lease | | | 19 | | | | 18 | |
Right-of-use assets obtained in exchange for new operating lease liabilities | | | - | | | | 124 | |
NOTE E—CASH, CASH EQUIVALENTS AND RESTRICTED CASH
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the balance sheet that sum to the total of the same such amounts in the statement of cash flows (in thousands):
| | December 31, | | | December 31, | |
| | 2022 | | | 2021 | |
Cash and cash equivalents | | $ | 24,685 | | | $ | 34,656 | |
Restricted cash | | | 10,902 | | | | 6,480 | |
Total cash, cash equivalents and restricted cash shown in the statement of cash flows | | $ | 35,587 | | | $ | 41,136 | |
Restricted cash includes guarantee deposits for customs duties, China government subsidy fund, and compensating balances associated with certain credit facilities. As of December 31, 2022 and 2021, there was $8.7 million and $3.0 million of restricted cash required for bank acceptance notes issued to vendors, respectively. There was $1.1 million and $2.4 million certificate of deposit with original maturity of 90 days or less associated with credit facilities with a bank in China as of December 31, 2022 and 2021 respectively. There was $1.0 million guarantee deposits for customs duties as of December 31, 2022 and December 31, 2021.
NOTE F—EARNINGS PER SHARE
Basic net loss per share has been computed using the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share has been computed using the weighted-average number of shares of common stock and dilutive potential common shares from options and restricted stock units outstanding during the period. In periods with net losses, normally dilutive shares become anti-dilutive. Therefore, basic and dilutive earnings per share are the same.
The following table presents the computation of the basic and diluted net loss per share for the periods indicated (in thousands):
| | Year ended December 31, | |
| | 2022 | | | 2021 | | | 2020 | |
Numerator: | | | | | | | | | | | | |
Net loss | | $ | (66,397 | ) | | $ | (54,162 | ) | | $ | (58,452 | ) |
Denominator: | | | | | | | | | | | | |
Weighted average shares used to compute net loss per share | | | | | | | | | | | | |
Basic | | | 27,846 | | | | 26,912 | | | | 21,867 | |
Effect of dilutive options and restricted stock units | | | — | | | | — | | | | — | |
Diluted | | | 27,846 | | | | 26,912 | | | | 21,867 | |
Net loss per share | | | | | | | | | | | | |
Basic | | $ | (2.38 | ) | | $ | (2.01 | ) | | $ | (2.67 | ) |
Diluted | | $ | (2.38 | ) | | $ | (2.01 | ) | | $ | (2.67 | ) |
The following potentially dilutive securities were excluded from diluted net loss per share as their effect would have been antidilutive (in thousands):
| | As of December 31, | |
| | 2022 | | | 2021 | |
Employee stock options | | | - | | | | 3 | |
Restricted stock units | | | 1 | | | | 3 | |
Shares for convertible senior notes | | | 4,587 | | | | 4,587 | |
Total antidilutive shares | | | 4,588 | | | | 4,593 | |
NOTE G—INVENTORIES
At December 31, 2022 and 2021, inventories consisted of the following (in thousands):
| | As of December 31, | |
| | 2022 | | | 2021 | |
Raw materials | | $ | 25,732 | | | $ | 29,469 | |
Work in process and sub-assemblies | | | 39,563 | | | | 41,528 | |
Finished goods | | | 14,384 | | | | 21,519 | |
Total inventory | | $ | 79,679 | | | $ | 92,516 | |
For the years ended December 31, 2022, 2021 and 2020, the inventory reserve adjustment expensed for inventory was $4.9 million, $3.9 million, and $3.9 million, respectively. For the years December 31, 2022, 2021 and 2020, the direct inventory write-offs related to scrap, discontinued products, and damaged inventories were $10.4 million, $16.8 million, and $20.4 million, respectively.
NOTE H—PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following for the periods indicated (in thousands):
| | December 31, 2022 | | | December 31, 2021 | |
Land improvements | | $ | 806 | | | $ | 806 | |
Building and improvements | | | 86,372 | | | | 89,698 | |
Machinery and equipment | | | 251,216 | | | | 266,386 | |
Furniture and fixtures | | | 5,382 | | | | 5,658 | |
Computer equipment and software | | | 11,713 | | | | 12,727 | |
Transportation equipment | | | 679 | | | | 726 | |
| | | 356,168 | | | | 376,001 | |
Less accumulated depreciation and amortization | | | (177,519 | ) | | | (167,772 | ) |
| | | 178,649 | | | | 208,229 | |
Construction in progress | | | 30,434 | | | | 33,705 | |
Land | | | 1,101 | | | | 1,101 | |
Total property, plant and equipment, net | | $ | 210,184 | | | $ | 243,035 | |
For the years ended December 31, 2022, 2021 and 2020, depreciation expense of property, plant and equipment was $22.6 million, $24.8 million, and $24.2 million, respectively. For the years December 31, 2022, 2021 and 2020, the capitalized interest was $0.2 million, $0.9 million, and $0.4 million, respectively.
As of December 31, 2022, the Company concluded that its continued loss history constitutes a triggering event as described in ASC 360-10-35-21, Property, Plant, and Equipment. The Company performed a recoverability test and concluded that future undiscounted cash flows exceed the carrying amount of the Company’s long-lived assets and therefore no impairment charge was recorded.
NOTE I—INTANGIBLE ASSETS
Intangible assets consisted of the following for the periods indicated (in thousands):
| | December 31, 2022 | |
| | Gross | | | Accumulated | | | Intangible | |
| | Amount | | | amortization | | | assets, net | |
Patents | | $ | 8,994 | | | $ | (5,330 | ) | | $ | 3,664 | |
Trademarks | | | 56 | | | | (21 | ) | | $ | 35 | |
Total intangible assets | | $ | 9,050 | | | $ | (5,351 | ) | | $ | 3,699 | |
| | December 31, 2021 | |
| | Gross | | | Accumulated | | | Intangible | |
| | Amount | | | amortization | | | assets, net | |
Patents | | $ | 8,597 | | | $ | (4,779 | ) | | $ | 3,818 | |
Trademarks | | | 35 | | | | (17 | ) | | | 18 | |
Total intangible assets | | $ | 8,632 | | | $ | (4,796 | ) | | $ | 3,836 | |
For the years ended December 31, 2022, 2021 and 2020, amortization expense for intangible assets, included in general and administrative expenses on the income statement, was $0.6 million, $0.5 million and $0.5 million, respectively. The remaining weighted average amortization period for intangible assets is approximately six years.
At December 31, 2022, future amortization expense for intangible assets is estimated to be (in thousands):
| | December 31, 2022 | |
2023 | | $ | 627 | |
2024 | | | 627 | |
2025 | | | 627 | |
2026 | | | 627 | |
2027 | | | 627 | |
2028 | | | 564 | |
thereafter | | | - | |
Total | | $ | 3,699 | |
NOTE J—FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents a summary of the Company’s financial instruments measured at fair value on a recurring basis as of December 31, 2022 (in thousands):
| | Quoted prices | | | Significant | | | | | | | | | |
| | in active | | | other | | | | | | | | | |
| | markets for | | | observable | | | Significant | | | | | |
| | identical | | | remaining | | | unobservable | | | | | |
| | assets (Level 1) | | | inputs (Level 2) | | | inputs (Level 3) | | | Total | |
Assets: | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 24,685 | | | $ | — | | | $ | — | | | $ | 24,685 | |
Restricted cash | | | 10,902 | | | | — | | | | — | | | | 10,902 | |
Note receivable | | | — | | | | 339 | | | | — | | | | 339 | |
Total assets | | $ | 35,587 | | | $ | 339 | | | $ | — | | | $ | 35,926 | |
Liabilities: | | | | | | | | | | | | | | | | |
Bank acceptance payable | | | — | | | $ | 12,337 | | | | — | | | $ | 12,337 | |
Convertible senior notes | | | — | | | | 58,314 | | | | — | | | | 58,314 | |
Total liabilities | | $ | — | | | $ | 70,651 | | | $ | — | | | $ | 70,651 | |
The following table presents a summary of the Company’s financial instruments measured at fair value on a recurring basis as of December 31, 2021 (in thousands):
| | Quoted prices | | | Significant | | | | | | | | | |
| | in active | | | other | | | | | | | | | |
| | markets for | | | observable | | | Significant | | | | | |
| | identical | | | remaining | | | unobservable | | | | | |
| | assets (Level 1) | | | inputs (Level 2) | | | inputs (Level 3) | | | Total | |
Assets: | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 34,656 | | | $ | — | | | $ | — | | | $ | 34,656 | |
Restricted cash | | | 6,480 | | | | — | | | | — | | | | 6,480 | |
Note receivable | | | — | | | | 8,148 | | | | — | | | | 8,148 | |
Total assets | | $ | 41,136 | | | $ | 8,148 | | | $ | — | | | $ | 49,284 | |
Liabilities: | | | | | | | | | | | | | | | | |
Bank acceptance payable | | | — | | | $ | 8,198 | | | | — | | | $ | 8,198 | |
Convertible senior notes | | | — | | | | 67,588 | | | | — | | | | 67,588 | |
Total liabilities | | $ | — | | | $ | 75,786 | | | $ | — | | | $ | 75,786 | |
NOTE K—NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consisted of the following for the periods indicated (in thousands):
| | December 31, 2022 | | | December 31, 2021 | |
Revolving line of credit with a U.S. bank up to $20,000 with interest at 4.063% , matured November 16, 2022 | | | — | | | $ | 14,373 | |
Notes payable to a finance company due in monthly installments with 3.1% interest, matured January 21, 2022 | | | — | | | | 170 | |
Revolving line of credit with a U.S. bank up to $27.8 million with interest at 8.984%, maturing the earlier of either 12/14/2023 or 11/16/2025 if the convertible debt remained in effect | | | 25,000 | | | | — | |
Revolving line of credit with a China bank up to $19,902 with interest from 2.95% to 4.57%, maturing May 24, 2024 | | | 13,102 | | | | 19,595 | |
Credit facility with a China bank up to $26,636 with interest of 4.45% ~ 6.6%, maturing June 7, 2027 | | | 20,140 | | | | 13,044 | |
Credit facility with a China bank up to $7,167 with interest of 5.7%, matured June 27, 2022 | | | | | | | 7,529 | |
Sub-total | | | 58,242 | | | | 54,711 | |
Less debt issuance costs, net | | | (1,168 | ) | | | (22 | ) |
Grand total | | | 57,074 | | | | 54,689 | |
Less current portion | | | (57,074 | ) | | | (49,689 | ) |
Non-current portion | | $ | - | | | $ | 5,000 | |
| | | | | | | | |
Bank Acceptance Notes Payable | | | | | | | | |
Bank acceptance notes issued to vendors with a zero percent interest rate | | $ | 12,337 | | | $ | 8,198 | |
The current portion of long-term debt is the amount payable within one year of the balance sheet date of December 31, 2022.
On September 28, 2017, the Company entered into a Loan Agreement (“Loan Agreement”), a Promissory Note, an Addendum to the Promissory Note, a Truist Bank Security Agreement, a Trademark Security Agreement, and a Patent Security Agreement (together the “Credit Facility”) with Truist Bank. The Company’s obligations under the Credit Facility are secured by the Company’s accounts receivable, inventory, intellectual property, and all business assets with the exception of real estate and equipment. The Company amended the Loan Agreement on December 29, 2021.
On December 29, 2021, the Company executed a Sixth Amendment to the Loan Agreement (the "Sixth Amendment") and a Fifth Amendment to Security Agreement, a Note Modification Agreement, and an Addendum to Promissory Note (together the "Sixth Amended Credit Facility") with Truist Bank. The Sixth Amended Credit Facility extends the $20 million line of credit, originally entered into on September 28, 2017, until April 15, 2023. Borrowings will bear interest at a rate equal to the Secured Overnight Financing Rate (SOFR) plus 1.56%, with a SOFR floor of 0.75%. As of December 31, 2022, the Company has fully repaid loan under the Sixth Amended Credit Facility.
On November 16, 2022, the Company entered into a Loan Security and Guarantee Agreement (the “Credit Facility”) with CIT Northbridge Credit, LLC, as agent for secured parties. The Credit Facility provides the Company with a three-year, $27.78 million revolving line of credit. Borrowings under the Credit Facility will be used to repay senior debt with Truist Bank and for working capital needs, capital expenditures, and other corporate purposes. The Company's obligations under the Credit Facility are secured by the Company's inventory, accounts receivable, instruments, equipment, intellectual property, and all business assets with the exception of real estate and all foreign assets. Borrowings will bear interest at a rate equal to the Secured Overnight Financing Rate (SOFR) plus 3.75%, while monthly average usage is less than 50% of the Credit Facility, otherwise SOFR plus 4.75%. The Credit Facility will become due at the earlier date of either November 16, 2025 or 91 days prior to the maturity of the Convertible Notes. As of December 31, 2022, $25.0 million was outstanding under the Credit Facility.
On September 15, 2020, Prime World entered into an Amendment to the Finance Lease Agreements dated November 29, 2018 and January 21, 2019 (the “Amendment”) with Chailease Finance Co., Ltd. (“Chailease”). The Amendment amends the Finance Lease Agreements, dated November 29, 2018 and January 21, 2019 (hereafter collectively referred to as the “Original Finance Agreements”). Pursuant to the Amendment, Prime World agrees to pay Chailease NT$22,311,381, or approximately $0.8 million for certain leased equipment listed in the Amendment (the “Leased Equipment”). This payment includes all outstanding lease payments, costs and expenses; simultaneously, Chailease agrees to transfer title of such Leased Equipment back to Prime World. Regarding all other equipment contemplated in the Original Finance Agreements but not listed in the Amendment, pursuant to the terms and conditions made under the Original Finance Agreements, Prime World is obligated to pay Chailease monthly lease payments which total NT$159,027,448, or approximately $5.5 million (the “Lease Payments”). The Lease Payments began on September 21, 2020 with the last Lease Payment due on January 21, 2022, title of all other equipment contemplated under the Original Finance Agreements but not listed in the Amendment transferred to Prime World upon completion of the Lease Payments and expiration of the Original Finance Agreements. As of December 31, 2022, the Company has fully repaid the loan under the Original Finance Agreements and Amendment.
On May 24, 2019, the Company’s China subsidiary, Global, entered into a five-year revolving credit line agreement, totaling 180,000,000 RMB (the “SPD Credit Line”), or approximately $25.4 million, and a mortgage security agreement (the “Security Agreement”), with Shanghai Pudong Development Bank Co., Ltd ("SPD"). Borrowing under the SPD Credit Line will be used for general corporate and capital investment purposes, including the issuance of bank acceptance notes to Global’s vendors. The total SPD Credit Line of 180 million RMB is inclusive of all credit facilities previously entered into with SPD including: a 30 million RMB credit facility entered into on May 7, 2019; and a 9.9 million RMB credit facility entered into on April 30, 2019 and $2 million credit facility entered into on May 8, 2019. Global may draw upon the SPD Credit Line on an as-needed basis at any time during the 5-year term; however, draws under the SPD Credit Line may become due and repayable to SPD at SPD’s discretion due to changes in Chinese government regulations and/or changes in Global’s financial and operational condition. Each draw will bear interest equal to SPD’s commercial banking interest rate effective on the day of the applicable draw. Global’s obligations under the SPD Credit Line will be secured by real property owned by Global and mortgaged to the Bank under the terms of the Security Agreement. As of December 31, 2022, $13.1 million was outstanding under the SPD Credit Line and the outstanding balance of bank acceptance notes issued to vendors was $8.2 million.
On June 21, 2019, the Company’s China subsidiary, Global, entered into an 18 month credit facility totaling 100,000,000 RMB (the “¥100M Credit Facility”), or approximately $14.1 million, with China Zheshang Bank Co., Ltd., in Ningbo City, China (“CZB”). Borrowing under the ¥100M Credit Facility will be used by Global for general corporate purposes. On January 6, 2021, the ¥100M Credit Facility with CZB was extended for three (3) years until January 5, 2024. The Company replaced the ¥100M Credit Facility on June 7, 2022.
On June 7, 2022, the Company's China Subsidiary, Global, entered a security agreement with China Zheshang Bank in Ningbo City, China ("CZB") for a five-year credit line agreement, totaling 200,000,000 RMB (the "¥200M Credit Facility"), or approximately $29.9 million. Global may draw upon the ¥200M Credit Facility between June 7, 2022 and June 6, 2027 (" ¥200M Credit Period"). During the ¥200M Credit Period, Global may request to draw upon the ¥200M Credit Facility on an as-needed basis; however, draws under the ¥200M Credit Facility may become due and repayable to CZB at CZB’s discretion due to changes in Chinese government regulations and/or changes in Global’s financial and operational condition. Each draw will be facilitated by a separate credit agreement specifying the terms of each draw and will bear interest equal to CZB's commercial banking interest rate effective on the day of the applicable draw. Global’s obligations under the ¥200M Credit Facility will be secured by real property owned by Global and mortgaged to CZB under the terms of the Real Estate Security Agreement. As of December 31, 2022, $20.1 million was outstanding under the ¥200M Credit Facility and the outstanding balance of bank acceptance notes issued to vendors was $4.2 million.
On June 21, 2019, the Company’s China subsidiary, Global, entered into a three-year credit facility totaling 50,000,000 RMB (the “¥50M Credit Facility”), or approximately $7.1 million, with CZB. Borrowing under the ¥50M Credit Facility will be used by Global for general corporate purposes. Global may draw upon the ¥50M Credit Facility from June 21, 2019 until June 20, 2022 (the “¥50M Credit Period”). During the ¥50M Credit Period, Global may request to draw upon the ¥50M Credit Facility on an as-needed basis; however, draws under the ¥50M Credit Facility may become due and repayable to CZB at CZB’s discretion due to changes in Chinese government regulations and/or changes in Global’s financial and operational condition. Each draw will bear interest equal to CZB’s commercial banking interest rate effective on the day of the applicable draw. Global’s obligations under the ¥50M Credit Facility will be secured by machinery and equipment owned by Global and mortgaged to CZB under the terms of the Machinery and Equipment Security Agreement. As of December 31, 2022, the Company has fully repaid the loan under the ¥50M Credit Facility.
As of December 31, 2022 and December 31, 2021, the Company had $13.3 million and $7.4 million of unused borrowing capacity, respectively.
As of December 31, 2022 and December 31, 2021, there was $9.9 million and $5.4 million of restricted cash, investments or security deposits associated with the loan facilities, respectively.
NOTE L—Convertible Senior Notes
On March 5, 2019, the Company issued $80.5 million of 5% convertible senior notes due 2024 (the “Notes”). The Notes were issued pursuant to an indenture, dated as of March 5, 2019 (the “Indenture”), between the Company and Wells Fargo Bank, National Association, as trustee, paying agent, and conversion agent (the “Trustee”). The Notes bear interest at a rate of 5.00% per year, payable in cash semi-annually in arrears on March 15 and September 15 of each year, beginning on September 15, 2019. The Notes will mature on March 15, 2024, unless earlier repurchased, redeemed or converted in accordance with their terms.
The sale of the Notes generated net proceeds of $76.4 million, after deducting the Initial Purchasers’ discounts and offering expenses payable by the Company. The Company used approximately $37.8 million of the net proceeds from the offering to fully repay the CapEx Loan and Term Loan with BB&T and the remainder will be used for general corporate purposes.
The following table presents the carrying value of the Notes for the periods indicated (in thousands):
| | December 31, 2022 | |
Principal | | $ | 80,500 | |
Unamortized debt issuance costs | | | (994 | ) |
Net carrying amount | | $ | 79,506 | |
The Notes are convertible at the option of holders of the Notes at any time until the close of business on the scheduled trading day immediately preceding the maturity date. Upon conversion, holders of the Notes will receive shares of the Company’s common stock, together, if applicable, with cash in lieu of any fractional share, at the then-applicable conversion rate. The initial conversion rate is 56.9801 shares of the Company’s common stock per $1,000 principal amount of Notes (representing an initial conversion price of approximately $17.55 per share of common stock, which represents an initial conversion premium of approximately 30% above the closing price of $13.50 per share of the Company’s common stock on February 28, 2019), subject to customary adjustments. If a make-whole fundamental change (as defined in the Indenture) occurs, and in connection with certain other conversions before March 15, 2022, the Company will in certain circumstances increase the conversion rate for a specified period of time.
Initially and as of December 31, 2022, there are no guarantors of the Notes, but the Notes will be fully and unconditionally guaranteed, on a senior, unsecured basis by certain of the Company’s future domestic subsidiaries. The Notes are the Company’s senior, unsecured obligations and are equal in right of payment with existing and future senior, unsecured indebtedness, senior in right of payment to the Company’s existing and future indebtedness that is expressly subordinated to the Notes and effectively subordinated to the Company’s existing and future secured indebtedness, to the extent of the value of the collateral securing that indebtedness. The Note Guarantee (as defined in the Indenture) of each future guarantor, if any, will be such guarantor’s senior, unsecured obligations and are equal in right of payment with existing and future senior, unsecured indebtedness, senior in right of payment to such future guarantor’s existing and future indebtedness that is expressly subordinated to the Notes and effectively subordinated to such future guarantor’s existing and future secured indebtedness, to the extent of the value of the collateral securing that indebtedness.
Holders may require the Company to repurchase their Notes upon the occurrence of a fundamental change (as defined in the Indenture) at a cash purchase price equal to the principal amount thereof plus accrued and unpaid interest, if any.
After March 15, 2022, the Company may redeem for cash all or part of the Notes if the last reported sale price per share of the Company’s common stock exceeds 130% of the conversion price on (i) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately before the date the Company sends the related redemption notice; and (ii) the trading day immediately before the date the Company sends such redemption notice. The redemption price is equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. In addition, calling any Note for redemption will constitute a “make-whole fundamental change” with respect to that Note, in which case the conversion rate applicable to the conversion of that Note will be increased in certain circumstances if it is converted after it is called for redemption.
The Indenture contains covenants that limit the Company’s ability and the ability of our subsidiaries to, among other things: (i) incur or guarantee additional indebtedness or issue disqualified stock; and (ii) create or incur liens.
Pursuant to the guidance in ASC 815-40, Contracts in Entity’s Own Equity, the Company evaluated whether the conversion feature of the note needed to be bifurcated from the host instrument as a freestanding financial instrument. Under ASC 815-40, to qualify for equity classification (or non-bifurcation, if embedded) the instrument (or embedded feature) must be both (1) indexed to the issuer’s own stock and (2) meet the requirements of the equity classification guidance. Based upon the Company’s analysis, it was determined the conversion option is indexed to its own stock and also met all the criteria for equity classification contained in ASC 815-40-25-7 and 815-40-25-10. Accordingly, the conversion option is not required to be bifurcated from the host instrument as a freestanding financial instrument. Since the conversion feature meets the equity scope exception from derivative accounting, the Company then evaluated whether the conversion feature needed to be separately accounted for as an equity component under ASC 470-20, Debt with Conversion and Other Options. The Company determined that notes should be accounted for in their entirety as a liability.
The following table sets forth interest expense information related to the Notes (in thousands):
| | Year ended December 31, | |
| | 2022 | | | 2021 | |
Contractual interest expense | | $ | 4,025 | | | $ | 4,025 | |
Amortization of debt issuance costs | | | 826 | | | | 826 | |
Total interest cost | | $ | 4,851 | | | $ | 4,851 | |
Effective interest rate | | | 5.1 | % | | | 5.1 | % |
NOTE M—ACCRUED LIABILITIES
Accrued liabilities consisted of the following for the periods indicated (in thousands):
| | December 31, 2022 | | | December 31, 2021 | |
Accrued payroll | | $ | 9,702 | | | $ | 6,516 | |
Accrued employee benefits | | | 3,265 | | | | 3,471 | |
Accrued state and local taxes | | | 588 | | | | 1,897 | |
Accrued interest | | | 1,597 | | | | 1,475 | |
Accrued shipping and tariff expenses | | | — | | | | 33 | |
Advance payments | | | 3,216 | | | | 195 | |
Accrued commission | | | 937 | | | | 1,003 | |
Accrued professional fees | | | 409 | | | | 346 | |
Accrued product warranty | | | 140 | | | | 263 | |
Accrued other | | | 368 | | | | 388 | |
Total accrued liabilities | | $ | 20,222 | | | $ | 15,587 | |
NOTE N—OTHER INCOME AND EXPENSE
Other income and expense consisted of the following for the periods indicated (in thousands):
| | Year ended December 31, | |
| | 2022 | | | 2021 | | | 2020 | |
Foreign exchange transaction gain (loss) | | $ | (1,488 | ) | | $ | 454 | | | $ | 1 | |
Government subsidy income | | | 160 | | | | 1,345 | | | | 2,708 | |
Other non-operating gain | | | 76 | | | | 129 | | | | 304 | |
Loan forgiveness | | | — | | | | 6,229 | | | | — | |
Gain (loss) on disposal of assets | | | 47 | | | | (1 | ) | | | (15 | ) |
Total other gain (loss), net | | $ | (1,205 | ) | | $ | 8,156 | | | $ | 2,998 | |
NOTE O—INCOME TAXES
The sources of the Company’s loss from operations before income taxes were as follows (in thousands):
| | Years ended December 31, | |
| | 2022 | | | 2021 | | | 2020 | |
Domestic | | $ | (45,404 | ) | | $ | (21,229 | ) | | | (20,288 | ) |
Foreign | | | (20,992 | ) | | | (32,931 | ) | | | (30,936 | ) |
Total loss before income taxes | | $ | (66,396 | ) | | $ | (54,160 | ) | | | (51,224 | ) |
The provision for income tax expense (benefit) for the years ended December 31, was as follows (in thousands):
Current: | | 2022 | | | 2021 | | | 2020 | |
Federal | | $ | — | | | $ | — | | | $ | 41 | |
State | | | 1 | | | | 2 | | | | 2 | |
Foreign | | | — | | | | — | | | | — | |
Total | | $ | 1 | | | $ | 2 | | | $ | 43 | |
Deferred: | | | | | | | | | | | | |
Federal | | $ | — | | | $ | — | | | $ | (172 | ) |
State | | | — | | | | — | | | | — | |
Foreign | | | — | | | | — | | | | 7,357 | |
Total | | $ | — | | | $ | — | | | $ | 7,185 | |
| | | | | | | | | | | | |
Income tax (benefit) expense | | $ | 1 | | | $ | 2 | | | $ | 7,228 | |
Deferred income tax assets and liabilities result principally from net operating losses, different methods of recognizing depreciation, reserves for doubtful accounts and inventory, research and development credits and foreign tax credits. At December 31, the net deferred tax assets and liabilities are comprised of the following approximate amounts (in thousands):
| | 2022 | | | 2021 | |
NOL carryforward | | $ | 47,901 | | | $ | 44,448 | |
Inventory reserves | | | 2,892 | | | | 2,872 | |
Unrealized gains and losses | | | 363 | | | | 69 | |
Share-based compensation | | | 914 | | | | 645 | |
Foreign tax credit | | | 4,599 | | | | 4,599 | |
Research and development credits | | | 10,505 | | | | 9,879 | |
Interest | | | 3,966 | | | | 2,840 | |
ASC 842 Assets | | | 1,602 | | | | 1,740 | |
Other | | | 776 | | | | 728 | |
Deferred tax assets | | | 73,518 | | | | 67,820 | |
Less valuation allowance | | | (69,680 | ) | | | (57,721 | ) |
Deferred tax assets, net | | | 3,838 | | | | 10,099 | |
Depreciation and amortization | | | (2,441 | ) | | | (8,600 | ) |
ASC 842 Liabilities | | | (1,397 | ) | | | (1,499 | ) |
Deferred tax liabilities | | | (3,838 | ) | | | (10,099 | ) |
Deferred tax assets, net | | $ | — | | | $ | — | |
The Company has a U.S. net operating loss carry forward of approximately $111.5 million, $32.7 million of which, if unused, expires between 2026 and 2032 and $78.8 million of which, can be carried forward indefinitely. The Company has U.S. and state research and development tax credits of $10.5 million, which, if unused, expire between 2028 and 2042. In addition, the Company has foreign tax credits of $4.6 million, which, if unused, will expire in 2028. Utilization of U.S. net operating losses and tax credit carry forwards are subject to an annual limitation due to the ownership change limitations set forth in Internal Revenue Code Section 382. As of December 31, 2022, the Company had Taiwan net operating loss carry forwards of approximately $72.5 million and China net operating loss carry forwards of approximately $58.8 million. The carryforward period for the Taiwan net operating loss carry forwards is ten years, and the expiration period begins 2028. The carryforward period for China net operating loss carry forwards is ten years, and the expiration period begins 2029.
Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended December 31, 2022. Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future growth.
On the basis of this evaluation, as of December 31, 2022 and December 31, 2021, a valuation allowance of $69.7 million and $57.7 million, respectively, has been recorded to recognize only the portion of the deferred tax asset that is more likely than not to be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as our projections for growth.
The following table shows the change in the deferred tax valuation as follows:
| | 2022 | | | 2021 | | | 2020 | |
Beginning Balance, January 1 | | $ | 57,721 | | | $ | 43,462 | | | $ | 25,736 | |
Change charged to expense/(income) | | | 14,196 | | | | 13,822 | | | | 17,137 | |
Change charged to currency translation adjustment | | | (2,237 | ) | | | 437 | | | | 589 | |
Ending Balance, December 31 | | $ | 69,680 | | | $ | 57,721 | | | $ | 43,462 | |
A reconciliation of the U.S. federal income tax rate of 21% for the years ended December 31, 2022, 2021 and 2020, respectively, to the Company’s effective income tax rate follows (in thousands):
| | 2022 | | | 2021 | | | 2020 | |
Expected taxes at statutory rate | | $ | (13,943 | ) | | $ | (11,374 | ) | | $ | (10,775 | ) |
PPP loan forgiveness | | | — | | | | (1,308 | ) | | | — | |
Non-deductible/non-taxable items | | | 33 | | | | 897 | | | | 1,132 | |
Foreign rate differences | | | 552 | | | | 107 | | | | 1,153 | |
Foreign permanent differences | | | (1,407 | ) | | | (1,320 | ) | | | (1,002 | ) |
Changes in valuation allowance | | | 14,196 | | | | 13,822 | | | | 17,137 | |
Share-based compensation | | | 879 | | | | 468 | | | | 426 | |
Research and development credits | | | (626 | ) | | | (872 | ) | | | (744 | ) |
Alternative Minimum Tax | | | — | | | | — | | | | (172 | ) |
Foreign other | | | — | | | | — | | | | 12 | |
Other, net | | | 317 | | | | (418 | ) | | | 61 | |
Tax (benefit) expense | | $ | 1 | | | $ | 2 | | | $ | 7,228 | |
The Company's provision for income taxes in 2022 was lower than 2021 primarily due to state taxes.
The Company's provision for income taxes in 2021 was lower than 2020 due to the recognition of a valuation allowance on the deferred tax assets, along with excess tax expense from stock-based compensation, partially offset by differences in pre-tax income and recording research and development credits.
The Company’s wholly owned subsidiary, Prime World is a tax-exempt entity under the Income Tax Code of the British Virgin Islands.
The Company’s wholly owned subsidiary, Global Technology, Inc., has enjoyed preferential tax concessions in China as a national high-tech enterprise. In March 2007, China’s parliament enacted the PRC Enterprise Income Tax Law, or the EIT Law, under which, effective January 1, 2008, China adopted a uniform income tax rate of 25% for all enterprises including foreign invested enterprises. However, Global Technology, Inc. has been recognized as a National high-tech enterprise since 2008 and entitled to a 15% reduced tax rate. In December 2020, Global Technology, Inc. again renewed its National high-tech enterprise certificate and therefore extended its three-year tax preferential status until December 2023. This tax holiday reduced its 2022, 2021 and 2020 income tax provision by approximately $0.0 million, $0.0 million, and $1.4 million, respectively. This tax holiday reduced its fiscal 2022, 2021, and 2020 diluted earnings per share by approximately $0.00, $0.00, and $0.05 respectively. Effective January 1, 2016, China expanded the scope of the National high-tech enterprise to include additional deductions for qualifying research and development.
As of December 31, 2022, 2021 and 2020, the total amount of unrecognized tax benefit was $0.2 million, $0.2 million, and $0.2 million, respectively. The following is a tabular reconciliation of the total amounts of unrecognized tax benefits (in thousands):
| | 2022 | | | 2021 | | | 2020 | |
Unrecognized tax benefits — January 1 | | $ | 181 | | | $ | 181 | | | $ | 181 | |
Gross increases — tax positions in prior period | | | — | | | | — | | | | — | |
Gross decreases — tax positions in prior period | | | — | | | | — | | | | — | |
Unrecognized tax benefits — December 31 | | $ | 181 | | | $ | 181 | | | $ | 181 | |
The Company recognizes interest accrued related to unrecognized tax benefits and penalties as income tax expense. Related to the unrecognized tax benefits noted above, it has not accrued penalties or interest during 2022 as a result of net operating losses. During 2021 or 2020, the Company also accrued no penalties or interest.
The Company is subject to taxation in the United States and various states and foreign jurisdictions. The Company’s open tax years subject to examination in the U.S. federal and state jurisdictions are 2019 through 2021. To the extent allowed by law, the taxing authorities may have the right to examine prior periods where net operating losses or tax credits were generated and carried forward, and make adjustments up to the amount of the net operating loss or tax credit carryforward. The Company is subject to examination for tax years 2011 forward for various foreign jurisdictions.
In response to the COVID-19 pandemic, the CARES Act was signed into law on March 27, 2020. The CARES Act, among other things, includes tax provisions relating to refundable payroll tax credits, deferment of employer social security payments, net operating loss utilization and carryback periods, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property (“QIP”). On December 27, 2020, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 was enacted as part of the Consolidated Appropriations Act, 2021, followed by the American Rescue Plan Act on March 1, 2021. These laws, among many other provisions, expand and extend the Paycheck Protection Program (“PPP”), refundable employee retention tax credits previously made available under the CARES Act and allow a full deduction for business meals for the 2021 and 2022 tax years. During 2021, the Company recognized a tax benefit of $1.3 million on the non-taxable forgiveness of the PPP loan. However, the legislation had no material impact to income tax expense on the Company’s financial statements as a result of our valuation allowance.
On August 9, 2022, the Creating Helpful Incentives to Produce Semiconductors and Science Act, (the “CHIPS Act”) was signed into law. Among other things, the CHIPS Act provides for refundable tax credits and certain other financial incentives to further investments in domestic manufacturing. The Company is evaluating the provisions of the new law and the potential impacts to the Company.
On August 16, 2022, legislation commonly known as the Inflation Reduction Act was signed into law. Among other things, the Inflation Reduction Act includes a 1% excise tax on corporate stock repurchases, applicable to repurchases after December 31, 2022, and also a new minimum tax based on book income. We are in the process of evaluating the potential impacts of the Inflation Reduction Act to us. While we do not currently expect the Inflation Reduction Act to have a material impact on our effective tax rate, our analysis of the effect of the Inflation Reduction Act on us is ongoing and incomplete, and it is possible that the Inflation Reduction Act (or implementing regulations and other guidance, which have not yet been issued) could adversely impact our current and deferred federal tax liability.
The Company does not expect any earnings of foreign subsidiaries to be indefinitely invested outside the United States. As of December 31, 2022, however, the Company does not have any accumulated undistributed earnings generated by foreign subsidiaries and has estimated that its tax basis in foreign subsidiaries exceeds its book basis. The Company has concluded that no deferred tax asset (DTA) should be recorded because at the present time it cannot conclude that the temporary book-tax basis difference that would create this DTA will reverse in the foreseeable future due to the uncertainties in the timing of the Divestiture described above.
NOTE P—SHARE-BASED COMPENSATION
Equity Plans
The Company’s board of directors and stockholders approved the following equity plans:
| ‑ | the 2006 Share Incentive Plan |
| ‑ | the 2013 Equity Incentive Plan (“2013 Plan”) |
| ‑ | the 2021 Equity Incentive Plan (“2021 Plan”) |
The Company issued stock options, restricted stock awards (“RSAs”) and restricted stock units (“RSUs”) to employees, consultants and non-employee directors. Stock option awards generally vest over a four year period and have a maximum term of ten years. Stock options under these plans have been granted with an exercise price equal to the fair market value on the date of the grant. Nonqualified and Incentive Stock Options, RSAs and RSUs may be granted from these plans. Prior to the Company’s initial public offering in September 2013, the fair market value of the Company’s stock had been historically determined by the board of directors and from time to time with the assistance of third party valuation specialists.
Stock Options
Options have been granted to the Company’s employees under the two incentive plans and generally become exercisable as to 25% of the shares on the first anniversary date following the date of grant and 12.5% on a semi-annual basis thereafter. All options expire ten years after the date of grant.
The following is a summary of option activity (in thousands, except per share data):
| | | | | | | | | | Weighted | | | | | | | Weighted | | | | | |
| | | | | | Weighted | | | Average | | | | | | | Average | | | | | |
| | | | | | Average | | | Share Price | | | Weighted | | | Remaining | | | Aggregate | |
| | Number of | | | Exercise | | | on Date of | | | Average | | | Contractual | | | Intrinsic | |
| | shares | | | Price | | | Exercise | | | Fair Value | | | Life | | | Value | |
| | (in thousands, except price data) | |
Outstanding, January 1, 2022 | | | 270 | | | $ | 10.32 | | | | | | | $ | 5.44 | | | | 1.69 | | | $ | — | |
Exercised | | | — | | | | — | | | | — | | | | — | | | | | | | | — | |
Forfeited | | | (6 | ) | | | 6.54 | | | | | | | | 5.03 | | | | | | | | — | |
Outstanding, December 31, 2022 | | | 264 | | | | 10.41 | | | | | | | | 5.45 | | | | 0.71 | | | | — | |
Exercisable, December 31, 2022 | | | 264 | | | | 10.41 | | | | | | | | 5.45 | | | | 0.71 | | | | — | |
Vested and expected to vest | | | 264 | | | | 10.41 | | | | | | | | 5.45 | | | | 0.71 | | | | — | |
As of December 31, 2022, there was no unrecognized stock option expense.
Performance Based Incentive Plan/Restricted Stock Unit
The Company approved to grant restricted performance stock units (“PSUs”) to senior executives as a part of our long-term equity compensation program starting from June 2021. The number of shares of common stock that will ultimately be issued to settle PSUs granted ranges from 0% to 200% of the number granted and is determined based on certain performance criteria over a three-year measurement period. The performance criteria for the PSUs are based on a combination of the performance of our stock price and the Total Shareholder Return (“TSR”) for the performance period compared with the TSR of certain peer companies or index for the performance period. PSUs granted vest 100% on the third anniversary of their grant, assuming achievement of the applicable performance criteria. We estimated the fair value of the PSUs using a Monte Carlo simulation model on the date of grant. Compensation expense is recognized ratably over the explicit service period. The Company recognized PSU expenses for the twelve months ended December 31, 2022 and 2021 was $1.7 million and $0.7 million, respectively.
Restricted stock units are issued to employees through a vesting plan and distribution schedule after employee remains with the Company for a particular length of time. The following is a total summary of PSU/RSU activity (in thousands, except per share data):
| | | | | | Weighted | | | | | | | | | |
| | | | | | Average Share | | | Weighted | | | Aggregate | |
| | Number of | | | Price on Date | | | Average Fair | | | Intrinsic | |
| | shares | | | of Release | | | Value | | | Value | |
| | (in thousands, except price data) | |
Outstanding at January 1, 2022 | | | 2,170 | | | | | | | $ | 11.15 | | | $ | 11,156 | |
Granted | | | 1,977 | | | | | | | | 2.04 | | | | 3,687 | |
Released | | | (1,023 | ) | | $ | 2.75 | | | | 8.65 | | | | 2,818 | |
Cancelled/Forfeited | | | (149 | ) | | | | | | | 10.02 | | | | 281 | |
Outstanding, December 31, 2022 | | | 2,975 | | | | | | | | 6.01 | | | | 5,623 | |
Vested and expected to vest | | | 2,975 | | | | | | | | 6.01 | | | | 5,623 | |
As of December 31, 2022, there was $13.8 million of unrecognized compensation expense related to these RSUs. This expense is expected to be recognized over 1.95 years.
Share-Based Compensation
The Company recognizes compensation expense on a straight-line basis over the applicable vesting term of the award and expense is adjusted as forfeitures occur.
In 2014, the Company ceased issuing stock options and began issuing RSUs and RSAs as share-based compensation to employees. The Company estimates the fair value of RSUs and RSAs at the fair market value on the grant date.
Employee share-based compensation expenses recognized for the years ended December 31, were as follows (in thousands):
Share-Based compensation - by expense type:
| | 2022 | | | 2021 | | | 2020 | |
Cost of goods sold | | $ | 488 | | | $ | 885 | | | $ | 937 | |
Research and development | | | 1,332 | | | | 2,173 | | | | 2,812 | |
Sales and marketing | | | 857 | | | | 1,115 | | | | 1,191 | |
General and administrative | | | 6,923 | | | | 7,948 | | | | 8,106 | |
Total share-based compensation expense | | $ | 9,600 | | | $ | 12,121 | | | $ | 13,046 | |
NOTE Q—STOCKHOLDERS’ EQUITY
Common Stock
The Company’s Amended and Restated Certificate of Incorporation authorizes the issuance of up to 45,000,000 shares of common stock, all of which have been designated voting common stock.
Preferred Stock
The Company’s Amended and Restated Certificate of Incorporation authorizes the issuance of up to 5,000,000 shares of preferred stock.
Public Offerings of Common Stock
On October 24, 2019, we filed a Registration Statement on Form S-3 with the Securities and Exchange Commission, which was declared effective on January 9, 2020, providing for the public offer and sale of certain securities of the Company from time to time, at our discretion, up to an aggregate amount of $250 million.
On February 28, 2020, we entered into an Equity Distribution Agreement with Raymond James & Associates, Inc. (the “Sales Agent”) pursuant to which the Company may issue and sell shares of the Company’s common stock having an aggregate offering price of up to $55 million (the “Initial ATM Offering”), from time to time through the Sales Agent. In January 2021, the Company completed its Initial ATM Offering and sold 5.9 million shares at a weighted average price of $9.12 per share, providing proceeds of $53.9 million, net of expenses and underwriting discounts and commissions.
On February 26, 2021, we entered into another Equity Distribution Agreement (the “Agreement”) with the Sales Agent pursuant to which the Company may issue and sell shares of the Company’s common stock, par value $0.001 per share (the “Shares”) having an aggregate offering price of up to $35 million (the “Second ATM Offering”), from time to time through the Sales Agent. Upon delivery of a placement notice and subject to the terms and conditions of the Agreement, sales, if any, of the Shares will be made through the Sales Agent in transactions that are deemed to be “at the market” offerings as defined in Rule 415 of the Securities Act of 1933, as amended (the “Securities Act”), including sales made through the facilities of the Nasdaq Global Market, the principal trading market for the Company’s common stock, on any other existing trading market for the Company’s common stock, to or through a market maker or as otherwise agreed by the Company and the Sales Agent. In the placement notice, the Company will designate the maximum number of Shares to be sold through the Sales Agent, the time period during which sales are requested to be made, the minimum price for the Shares to be sold, and any limitation on the number of Shares that may be sold in any one day. Subject to the terms and conditions of the Agreement, the Sales Agent will use its commercially reasonable efforts to sell Shares on the Company’s behalf up to the designated amount specified in the placement notice. The Company has no obligation to sell any Shares under the Agreement and may at any time suspend offers and sales of the Shares under the Agreement.
The Agreement provides that the Sales Agent will be entitled to compensation of up to 2% of the gross sales price of the Shares sold through the Sales Agent from time to time. The Company has also agreed to reimburse the Sales Agent for certain specified expenses in connection with the registration of Shares under state blue sky laws and any filing with, and clearance of the offering by, the Financial Industry Regulatory Authority Inc., not to exceed $10,000 in the aggregate, and any associated application fees incurred. Additionally, if the Agreement is terminated under certain circumstances, and the Company fails to sell a minimum amount of the Shares as set forth in the Agreement, then the Company has agreed to reimburse the Sales Agent for reasonable out-of-pocket expenses, including the reasonable fees and disbursements of counsel incurred by the Sales Agent, up to a maximum of $30,000 in the aggregate. The Company agreed to indemnify the Sales Agent against certain liabilities, including liabilities under the Securities Act, or to contribute to payments that the Sales Agent may be required to make because of any of those liabilities.
In March 2021, we commenced sales of common stock through the Second ATM Offering. The details of the shares of common stock sold through the Second ATM Offering are as follows (in thousands, except shares and weighted average per share price):
Distribution Agent | | Month | | Weighted Average Per Share Price | | | Number of Shares Sold | | | Net Proceeds | | | Compensation to Distribution Agent | |
Raymond James & Associates, Inc. | | March 2021 | | | 9.0622 | | | | 65,748 | | | $ | 584 | | | | 12 | |
Raymond James & Associates, Inc. | | June 2021 | | | 9.1115 | | | | 34,686 | | | | 310 | | | | 6 | |
Raymond James & Associates, Inc. | | July 2021 | | | 9.1061 | | | | 6,740 | | | | 60 | | | | 1 | |
Raymond James & Associates, Inc. | | September 2022 | | | 2.9045 | | | | 94,491 | | | | 269 | | | | 5 | |
Raymond James & Associates, Inc. | | October 2022 | | | 2.8947 | | | | 313,333 | | | | 889 | | | | 18 | |
Raymond James & Associates, Inc. | | November 2022 | | | 2.7830 | | | | 29,426 | | | | 80 | | | | 2 | |
Total | | | | | | | 544,424 | | | $ | 2,192 | | | | 44 | |
| | | | | | | | | | | | | | | | |
NOTE R—SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one reportable segment. The Company’s Chief Executive Officer, who is considered to be the chief operating decision maker, manages the Company’s operations as a whole and reviews financial information presented on a consolidated basis, accompanied by information about product revenue, for purposes of evaluating financial performance and allocating resources.
The following tables set forth the Company’s revenue and asset information by geographic region. Revenue is classified based on the location of where the product is manufactured. Long-lived assets in the tables below comprise only property, plant, equipment and intangible assets (in thousands):
| | Year ended December 31, | |
| | 2022 | | | 2021 | | | 2020 | |
Revenues: | | | | | | | | | | | | |
United States | | $ | 7,423 | | | $ | 14,633 | | | $ | 18,380 | |
Taiwan | | | 164,144 | | | | 99,201 | | | | 131,076 | |
China | | | 51,251 | | | | 97,731 | | | | 85,167 | |
| | $ | 222,818 | | | $ | 211,565 | | | $ | 234,623 | |
| | As of December 31, | |
| | 2022 | | | 2021 | | | 2020 | |
Long-lived assets: | | | | | | | | | | | | |
United States | | $ | 80,048 | | | $ | 87,709 | | | $ | 90,999 | |
Taiwan | | | 50,777 | | | | 63,644 | | | | 71,080 | |
China | | | 93,888 | | | | 108,509 | | | | 108,575 | |
| | $ | 224,713 | | | $ | 259,862 | | | $ | 270,654 | |
The Company serves four primary markets, CATV, the internet data center, telecom and FTTH markets. Of the Company’s total revenues in 2022, the Company earned $118.2 million, or 53.0%, from the CATV market, $77.1 million, or 34.6%, from the internet data center market, $24.7 million, or 11.1%, from the telecom market and $0.1 million, or 0.1%, from the FTTH market. Of the Company’s total revenues in 2021, the Company earned $94.3 million, or 44.6%, from the CATV market, $97.5 million, or 46.1%, from the internet data center market, $16.2 million, or 7.7%, from the telecom market and $1.0 million, or 0.5%, from the FTTH market. Of the Company’s total revenues in 2020, the Company earned $37.9 million, or 16.2%, from the CATV market, $173.4 million, or 73.9%, from the internet data center market, $21.1 million, or 9.0%, from the telecom market and $0.1 million, or 0.0%, from the FTTH market.
NOTE S—EMPLOYEE BENEFIT PLANS
Employees of Global participate in a state-mandated social security program in China. Under this program, pension costs are recorded on the basis of required monthly contributions to employees’ individual accounts during their service periods. Under the regulations of the People’s Republic of China, Global is required to make fixed contributions to a fund, which is under the administration of the local labor departments. Pension expense for Global was $1.0 million, $1.0 million, and $1.2 million for the years ended December 31, 2022, 2021 and 2020, respectively.
Employees of Prime World’s Taiwan branch participate in a pension program under the Taiwan Labor Pension Act. Pension expense for the Prime World’s Taiwan branch was $0.5 million, $0.7 million, and $0.8 million for the years ended December 31, 2022, 2021 and 2020, respectively.
NOTE T—COMMITMENTS AND CONTINGENCIES
Employment Agreements and Consultancy Agreements
The Company has entered into employment and indemnification agreements with three executive officers. These agreements provide that if their employment is terminated as a result of a change of control of the Company, or if their employment is terminated for certain other reasons set forth in the agreements, the Company will be required to pay a severance payment in an amount equal to their annual base salary, and other additional compensation due under the terms of the agreements.
The Company has also entered into employment and indemnification agreements with one other executive officer. This agreement provides that if his employment is terminated as a result of a change of control of the Company, the Company will be required to pay a severance payment in an amount equal to six months of his annual base salary and other additional compensation due under the terms of the agreements.
Contingencies
From time to time, the Company may be subject to legal proceedings and litigation arising in the ordinary course of business, including, but not limited to, inquiries, investigations, audits and other regulatory proceedings, such as described below. The Company records a loss provision when it believes it is both probable that a liability has been incurred and the amount can be reasonably estimated. Unless otherwise disclosed, the Company is unable to estimate the possible loss or range of loss for the legal proceeding described below.
The Company believes that there are no claims or actions pending or threatened against it, the ultimate disposition of which would have a material adverse effect on it.
Other Contingencies
On August 9, 2021, the Company has received a Taxes Notification of Audit Result (“Notice”) from the Texas Comptroller’s Office (the “Comptroller”), for fiscal years between 2016 and 2019, informing the Company that the Comptroller believes the Company did not qualify for certain sales and use tax exemptions on various Research and Development purchases and accordingly the Company is liable for Sale and Use Tax in the amount of approximately $1.0 million including interest charges. The Company paid $0.4 million for the tax notice, but challenged the remaining tax assessments and vigorously defended its position. The Comptroller’s office exhausted its redetermination period and therefore moved AOI’s case to hearing process. AOI has not received its hearing schedule. The management estimated that the additional tax assessment will be in the range of $0.2 million to $0.4 million including interest charges
NOTE U—SUBSEQUENT EVENTS
The Company has evaluated subsequent events through the date the financial statements were issued.
In February 2023, the Company repaid its revolving bank line of credit of $8.3 million.