UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
____________________
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March
31, 2012
Commission File Number 0-31857
ALLIANCE FIBER OPTIC
PRODUCTS, INC.
|
(Exact name of registrant as specified in its
charter)
|
|
Delaware
|
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77-0554122
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(State or other jurisdiction of
|
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(I.R.S. employer
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Incorporation or organization)
|
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identification number)
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275 Gibraltar Drive,
Sunnyvale, California 94089
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(Address of Principal Executive Offices)
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(408) 736-6900
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(Issuers telephone
number)
|
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes
þ
No
¨
Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files).
Yes
þ
No
¨
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).
Large
accelerated filer
¨
|
|
Accelerated Filer
¨
|
|
Non-accelerated filer
¨
|
|
Smaller reporting company
þ
|
|
|
(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
þ
On April 30, 2012, 8,781,988 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 MARCH 31,
2012
INDEX
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|
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Page
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PART I:
FINANCIAL INFORMATION
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1
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ITEM 1: FINANCIAL STATEMENTS
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1
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Condensed Consolidated
Balance Sheets
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1
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Condensed Consolidated
Statements of Income
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|
2
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Condensed Consolidated
Statements of Cash Flows
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3
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Notes to Condensed
Consolidated Financial Statements
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4
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ITEM 2: MANAGEMENTS DISCUSSION
AND ANALYSIS OF FINANCIAL
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CONDITION AND RESULTS OF
OPERATIONS
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11
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ITEM 3: QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET
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RISK
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16
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ITEM 4: CONTROLS AND
PROCEDURES
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16
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PART II: OTHER
INFORMATION
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17
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ITEM 1A: RISK FACTORS
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17
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ITEM 5. MARKET FOR REGISTRANTS COMMON
EQUITY, RELATED
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STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY
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SECURITIES
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26
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ITEM 6: EXHIBITS
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27
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SIGNATURE
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28
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PART I: FINANCIAL
INFORMATION
ITEM 1: FINANCIAL
STATEMENTS
ALLIANCE FIBER OPTIC PRODUCTS,
INC.
Condensed Consolidated
Balance Sheets
(In thousands, except share data)
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March 31,
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December 31,
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|
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2012
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|
2011
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(Unaudited)
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Assets
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Current assets:
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|
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Cash and cash equivalents
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$
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14,281
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|
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$
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13,820
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Short-term investments
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26,141
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25,768
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Accounts receivable, net
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7,159
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6,630
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Inventories, net
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6,376
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6,763
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Prepaid expense and other current
assets
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1,158
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|
|
|
714
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Total
current assets
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55,115
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|
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53,695
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Long-term
investments
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10,141
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|
|
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10,098
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Property and equipment,
net
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7,578
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|
|
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7,718
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Other
assets
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|
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170
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|
|
|
162
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Total
assets
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$
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73,004
|
|
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$
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71,673
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|
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Liabilities and Stockholders'
Equity
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Current liabilities:
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|
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|
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Accounts payable
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$
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4,318
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|
|
$
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3,647
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Accrued
expenses
|
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3,360
|
|
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3,624
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Current portion of bank
loan
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93
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|
|
|
97
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Total
current liabilities
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|
|
7,771
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|
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7,368
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|
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Other long-term
liabilities
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|
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|
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Bank
loan
|
|
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112
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|
|
|
129
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Other long-term
liabilities
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|
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584
|
|
|
|
562
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Total
long term liabilities
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|
696
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|
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691
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Total
liabilities
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|
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8,467
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|
|
|
8,059
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|
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Commitments and
contingencies (Note 10)
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|
|
|
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Stockholders'
equity:
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Preferred stock, par value $0.001: 5,000,000 shares authorized:
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no
shares issued and outstanding at March 31, 2012 and
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|
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December 31, 2011, respectively
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-
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-
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Common stock, $0.001 par value:
20,000,000 shares authorized;
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8,806,090 and 8,891,219 shares issued and outstanding at
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|
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March
31, 2012 and December 31, 2011.
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9
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9
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Additional paid-in-capital
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114,451
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114,957
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Accumulated deficit
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(52,432
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)
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(53,353
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)
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Accumulated other comprehensive income
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2,509
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2,001
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Stockholders' equity
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64,537
|
|
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63,614
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Total
liabilities and stockholders' equity
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$
|
73,004
|
|
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$
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71,673
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The accompanying notes are an
integral part of these Condensed Consolidated Financial Statements.
1
ALLIANCE FIBER OPTIC PRODUCTS,
INC.
Condensed Consolidated
Statements of Income
(Unaudited, in thousands, except per share
data)
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Three Months Ended March
31,
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2012
|
|
2011
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Revenues
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$
|
10,535
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$
|
9,450
|
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Cost of
revenues
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7,091
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|
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6,415
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Gross profit
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3,444
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|
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3,035
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Operating
expenses:
|
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|
|
|
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Research and development
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807
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|
718
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Sales and marketing
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675
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550
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General and administrative
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1,082
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|
1,028
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Total
operating expenses
|
|
|
2,564
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|
|
2,296
|
|
Income from operations
|
|
|
880
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|
|
739
|
|
Interest and
other income, net
|
|
|
150
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|
|
129
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|
Net income before tax
|
|
|
1,030
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|
|
868
|
|
Income
tax
|
|
|
109
|
|
|
(153
|
)
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Net income
|
|
$
|
921
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|
$
|
1,021
|
|
Cumulative translation
adjustments
|
|
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499
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|
|
34
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|
Unrealized gain (loss) on
investments
|
|
|
9
|
|
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(11
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)
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Comprehensive income
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$
|
1,429
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$
|
1,044
|
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Net income per share:
|
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|
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Basic
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$
|
0.10
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$
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0.12
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Diluted
|
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$
|
0.10
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$
|
0.11
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Shares used in computing net income per share:
|
|
|
|
|
|
|
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Basic
|
|
|
8,846
|
|
|
8,823
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Diluted
|
|
|
9,085
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|
|
9,258
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|
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)
|
|
Three Months Ended March
31,
|
|
|
2012
|
|
2011
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
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Net income
|
|
$
|
921
|
|
|
$
|
1,021
|
|
Adjustments
to reconcile net income to net cash provided by
|
|
|
|
|
|
|
|
|
operating
activities:
|
|
|
|
|
|
|
|
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Depreciation
|
|
|
389
|
|
|
|
353
|
|
Amortization of stock-based compensation
|
|
|
247
|
|
|
|
83
|
|
Loss
on disposal of property and equipment
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|
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3
|
|
|
|
-
|
|
Provision for inventory valuation
|
|
|
106
|
|
|
|
(105
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)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(529
|
)
|
|
|
710
|
|
Inventories
|
|
|
281
|
|
|
|
(433
|
)
|
Prepaid expenses and other current assets
|
|
|
(444
|
)
|
|
|
49
|
|
Other assets
|
|
|
(9
|
)
|
|
|
(8
|
)
|
Accounts payable
|
|
|
671
|
|
|
|
(147
|
)
|
Accrued expenses
|
|
|
(264
|
)
|
|
|
(1,403
|
)
|
Other long-term liabilities
|
|
|
22
|
|
|
|
11
|
|
Net cash provided by operating activities
|
|
|
1,394
|
|
|
|
131
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of
short-term investments
|
|
|
(3,977
|
)
|
|
|
(1,772
|
)
|
Proceeds
from sales and maturities of short-term investments
|
|
|
3,613
|
|
|
|
2,400
|
|
Purchase of long-term
investments
|
|
|
(43
|
)
|
|
|
-
|
|
Purchase of
property and equipment
|
|
|
(149
|
)
|
|
|
(552
|
)
|
Net cash (used in) provided by investing activities
|
|
|
(556
|
)
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from the exercise of stock
options
|
|
|
95
|
|
|
|
236
|
|
Repurchase
of common stock
|
|
|
(848
|
)
|
|
|
-
|
|
Payment of bank loans
|
|
|
(28
|
)
|
|
|
(28
|
)
|
Net cash (used in) provided by financing activities
|
|
|
(781
|
)
|
|
|
208
|
|
|
Effect of exchange rate changes on cash and cash
equivalents
|
|
|
404
|
|
|
|
5
|
|
Net increase
(decrease) in cash and cash equivalents
|
|
|
461
|
|
|
|
420
|
|
Cash and cash equivalents at beginning of period
|
|
|
13,820
|
|
|
|
8,040
|
|
Cash and cash
equivalents at end of period
|
|
$
|
14,281
|
|
|
$
|
8,460
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
(2
|
)
|
|
$
|
(2
|
)
|
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, 2010, which has been derived from
audited financial statements, and the unaudited interim condensed consolidated
financial statements as of March 31, 2012 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, 2011. The unaudited
condensed consolidated financial statements as of March 31, 2012, and for the
three months ended March 31, 2012 and 2011, 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 three months
ended March 31, 2012 as compared to what was previously disclosed in the
Companys Form 10-K for the fiscal year ended December 31, 2011.
Revenue
Recognition
The Company recognizes revenue
upon shipment of its products to customers, provided that it has received a
purchase order, the price is fixed, collection of the resulting receivable is
reasonably assured and transfer of title and risk of loss has occurred.
Subsequent to the sale of products, the Company has no obligation to provide any
modification or customization upgrades, enhancements or post contract customer
support.
Allowance for Doubtful
Accounts
Allowances are provided for
estimated returns and potential uncollectable trade receivables. Provisions for
return allowances are recorded at the time revenue is recognized based on
historical returns, current economic trends and changes in customer demand. Such
allowances are adjusted periodically to reflect actual and anticipated
experience. The Company also identifies specific accounts considered to have a
high risk of uncollectibility and reserves the full amount. Material differences
may result in the amount and timing of revenue for any period than if management
had made different judgments or utilized different estimates.
4
Cash and Cash
Equivalents
The Company considers all highly
liquid instruments with a maturity of three months or less when purchased to be
cash equivalents. Cash equivalents consist primarily of market rate accounts,
corporate bonds, certificates of deposit, and commercial paper.
Short-Term and Long-Term
Investments
The Company generally invests its
excess cash in certificates of deposit, corporate bonds, and commercial paper.
Such investments are made in accordance with the Companys investment policy,
which establishes guidelines relative to diversification and maturities designed
to maintain safety and liquidity. These guidelines are periodically reviewed and
modified to take advantage of trends in yields and interest rates.
Concentrations of
Risk
Connectivity products contributed
77.8% and 77.2% of the Companys revenues for the quarters ended March 31, 2012
and 2011, respectively. Optical passive products contributed 22.2% and 22.8% of
the Companys revenues for the quarters ended March 31, 2012 and 2011,
respectively.
In the three month ended March 31,
2012 and 2011, the Companys top 10 customers comprised 62.2% and 60.9% of the
Companys revenues, respectively. For the three months ended March 31, 2012, no
customer accounted for over 10% of the Companys total revenues. For the three
months ended March 31, 2011, one customer accounted for 16.7% of the Companys
total revenues. Amounts due from this customer were $1.4 million at March 31,
2011.
2. Recent Accounting
Pronouncements
In January 2012, we adopted Accounting Standards Update (“ASU”) 2011-12 Comprehensive Income (topic 220) which required additional disclosures for comprehensive income. As permitted under this standard, we have elected to present comprehensive income in two separate but consecutive financial statements, consisting of a statement of income followed by a separate statement of comprehensive income. This standard is required to be applied retrospectively beginning January 1, 2012, except for certain provisions for which adoption was delayed.
In May 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-04, Fair Value Measurement (“ASU 2011-04”), which amended ASC 820, Fair Value Measurements (“ASC 820”), providing a consistent definition and measurement of fair value, as well as similar disclosure requirement between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles, clarifies the application of existing fair value measurement and expands the disclosure requirements. ASU 2011-04 is effective for us beginning January 1, 2012. The adoption of ASU 2011-04 did not have a material effect on our consolidated financial statements or disclosures.
3. Stock-based
Compensation
The Accounting Standards Council
(ASC) 718 requires companies to record compensation expense for stock options
measured at fair value, on the date of grant, using an option-pricing model. The
fair value of stock options granted and stock purchased pursuant to the Employee
Stock Purchase Plan (ESPP) prior to June 30, 2010 was determined using the
Binomial Lattice Model. The Company adopted the Black-Scholes valuation model
for stock options granted and stock purchased pursuant to the ESPP after June
30, 2010. The Company believes that the newly adopted model is more appropriate
in determining fair value of its stock-based compensation and does not differ
materially from the previous valuation model used.
At March 31, 2012, the Company had
one stock-based compensation plan, the 2000 Stock Incentive Plan, which is
described below.
In November 2000, the Company
adopted its 2000 Stock Incentive Plan under which 1,500,000 shares of common
stock were reserved for issuance to eligible employees, directors and
consultants upon exercise of stock options and stock purchase rights. The plan
was amended and restated in 2010 to, among other things, extend the term under
which awards may be granted under the plan until March 17, 2020, eliminate a 10
million share ceiling on the aggregate number of shares of common stock that may
be issued under the plan, and to include certain qualifying performance criteria
and annual award limits so that awards granted under the plan qualify as
performance-based compensation" under the requirements of Section 162(m) of the
Internal Revenue Code of 1986, as amended.
5
Under the 2000 Stock Incentive
Plan, participants may be granted restricted stock units (RSUs), representing
an unfunded, unsecured right to receive a Company common share 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 or five years at a rate of
20 percent per year. The Company recognizes compensation expense on a
straight-line basis over the vesting term of each award.
Options granted under the 2000
Stock Incentive Plan generally vest over four years and are exercisable for not
more than ten years. However, most options granted in the past four years have
been fully vested at the time of grant. Options are exercisable for not more
than ten years.
The following information relates
to stock option activity for the three months ended March 31, 2012:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
Remaining
|
|
Aggregate
|
|
|
|
|
|
Exercise
|
|
Contractual
|
|
Intrinsic
|
Options
|
|
Shares
|
|
Price
|
|
Life
|
|
Value
|
Outstanding at December 31,
2011
|
|
824,280
|
|
|
$
|
7.26
|
|
|
|
|
|
Granted
|
|
59,000
|
|
|
|
7.76
|
|
|
|
|
|
Exercised
|
|
(19,000
|
)
|
|
|
5.02
|
|
|
|
|
|
Forfeited
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31,
2012
|
|
864,280
|
|
|
$
|
7.34
|
|
5.08
Years
|
|
$
|
2,071,663
|
|
Vested and expected to vest
at March 31, 2012
|
|
864,280
|
|
|
$
|
7.34
|
|
5.08
Years
|
|
$
|
2,071,663
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2012
|
|
660,611
|
|
|
$
|
7.15
|
|
3.94 Years
|
|
$
|
1,743,511
|
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 first
quarter of fiscal 2012 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 March 31, 2012. This amount
changes based on the fair market value of the Companys stock. The total
intrinsic value of options exercised for the three months ended March 31, 2012
and 2011 was $0.09 million and $0.2 million, respectively.
Expected dividend rate is 0% for
both three month periods ended March 31, 2012 and 2011, respectively.
Cash received from option
exercises during the three months ended March 31, 2012 and 2011 were $95,000 and
$236,000, respectively. Such amounts are included within the financing
activities section in the accompanying condensed consolidated statements of cash
flows.
During the year ended December 31,
2011, the Company granted 273,000 RSUs with a total grant-date fair value of
$2.5 million. The resulting compensation expense recorded in the year ended
December 31, 2011 and March 31, 2012 was approximately $0.4 million and $0.2
million, respectively. At March 31, 2012, there was $1.9 million of unrecognized
compensation cost related to RSUs, of which $0.4 million is expected to be
realized over two years and $1.5 million is expected to be realized over five
years. No RSUs were granted in the three months ended March 31, 2012.
6
The following table summarizes
employee stock-based compensation expense resulting from stock options, RSUs and
the ESPP (in thousands):
|
|
Three Months Ended March 31,
|
|
|
2012
|
|
2011
|
Included in cost of
revenue
|
|
$
|
26
|
|
$
|
23
|
Included in operating expenses:
|
|
|
|
|
|
|
Research and development
|
|
|
27
|
|
|
8
|
Sales and
marketing
|
|
|
59
|
|
|
15
|
General
and administrative
|
|
|
135
|
|
|
37
|
Total
|
|
|
221
|
|
|
60
|
Total stock-based compensation
expense
|
|
$
|
247
|
|
$
|
83
|
4. Inventories, net (in
thousands)
|
|
March 31,
|
|
December 31,
|
|
|
2012
|
|
2011
|
Inventories
|
|
|
|
|
|
|
Finished goods
|
|
$
|
1,952
|
|
$
|
2,263
|
Work-in-process
|
|
|
2,414
|
|
|
2,475
|
Raw materials
|
|
|
2,010
|
|
|
2,025
|
|
|
$
|
6,376
|
|
$
|
6,763
|
5. Net Income Per
Share
Basic net income per share is
computed by dividing net income for the period by the weighted average number of
shares of common stock outstanding during the period. Diluted net income per
share is computed by dividing net income for the period by the combination of
dilutive common share equivalents, comprised of shares issuable under the
Companys stock-based compensation plans, and the weighted average number of
common shares outstanding during the period. There were no incremental dilutive
common share equivalents in the periods presented.
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 March
31,
|
|
|
2012
|
|
2011
|
Numerator:
|
|
|
|
|
|
|
Net
income
|
|
$
|
921
|
|
$
|
1,021
|
Denominator:
|
|
|
|
|
|
|
Shares
used in computing net income per share:
|
|
|
|
|
|
|
Basic
|
|
|
8,846
|
|
|
8,823
|
Diluted
|
|
|
9,085
|
|
|
9,258
|
Net income per
share:
|
|
|
|
|
|
|
Basic
|
|
$
|
0.10
|
|
$
|
0.12
|
Diluted
|
|
$
|
0.10
|
|
$
|
0.11
|
6. Comprehensive
Income
Comprehensive income is defined as
the change in equity of a company during a period resulting from transactions
and other events and circumstances, excluding transactions resulting from
investments by owners and distributions to owners. The difference between net
income and comprehensive income for the Company is due to foreign exchange
translations adjustments and unrealized loss on available-for-sale
securities.
7
7. Income Taxes
The Company adopted ASC 740,
Accounting for Uncertainty in Income Taxes on January 1, 2007. It is the
Company's accounting policy to record income tax interest and penalties in the
income tax provision. The Company did not have any material unrecognized tax
benefits or uncertain tax positions at March 31, 2012.
8. Commitments and
Contingencies
Litigation:
From time to time, the Company may
be involved in litigation in the normal course of business. As of the date of
these financial statements, the Company is not aware of any material legal
proceedings pending or threatened against the Company.
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 might be required to make as a
result of these agreements. As of March 31, 2012, the Company has not paid any
claim or been required to defend any action related to indemnification
obligations, and accordingly, the Company has not accrued any amounts for such
indemnification obligations. However, the Company may record charges in the
future as a result of these indemnification obligations.
The Company generally warrants
products against defects in materials and workmanship and nonconformance to
specifications for varying lengths of time. If there is a material increase in
customer claims compared with historical experience, or if costs of servicing
warranty claims are greater than expected, the Company may record a charge
against cost of revenues. The Company accrued $0.02 million for warranty
reserves at each of March 31, 2012 and 2011.
Operating
Leases:
The Company leases certain office
space under long-term operating leases expiring at various dates through
2016.
8
The Companys aggregate future
minimum facility lease payments are as follows (in thousands):
Years ending
December 31:
|
|
|
|
2012 (remaining nine months of the
year)
|
|
$
|
515
|
2013
|
|
|
417
|
2014
|
|
|
358
|
2015
|
|
|
212
|
2016 and after
|
|
|
18
|
Total
|
|
$
|
1,520
|
9. Bank Loans
In November 2004, the Company
entered into a ten-year loan of $0.5 million in Taiwan with an interest rate of
2.3% for the first two years and 3.6% for the following years. In November 2006,
the Company entered into a seven-year loan of $0.2 million in Taiwan with an
interest rate of 2.8%. Both loans are secured by the Companys building in
Taiwan. In September 2007, the Company also entered a five-year equipment loan
of $0.1 million with an interest rate of 3.68%.
Payments due under the Companys
bank loans as of March 31, 2012 were as follows (in thousands):
Years ending December
31,
|
|
|
|
|
2012
|
|
|
76
|
|
2013
|
|
|
82
|
|
2014
|
|
|
53
|
|
Total
payment
|
|
|
211
|
|
Less: Amounts representing
interest
|
|
|
(6
|
)
|
Present value of net remaining
payments
|
|
|
205
|
|
Less: current portion
|
|
|
(93
|
)
|
Long-term portion
|
|
$
|
112
|
|
10. Related Party Transactions
As of March 31, 2012, based on
information it filed with the SEC, Foxconn Holding Limited was a holder of 18.0%
of the Companys common stock. In the normal course of business, the Company
sells products to and purchases raw materials from Hon Hai Precision Company
Limited, who is the parent company of Foxconn Holding Limited. These
transactions were made at prices and terms consistent with those of unrelated
third parties. Sales of products to Hon Hai Precision Industry Company Limited
were $16,900 and $6,500 in the quarters ended March 31, 2012 and 2011,
respectively. Purchases of raw materials from Hon Hai Precision Company Limited
were $0.3 million and $0.3 million in the quarters ended March 31, 2011 and
2010, respectively. Amounts due from Hon Hai Precision Company Limited were
$17,066 and $6,500 at March 31, 2012 and 2011, respectively. Amounts due to Hon
Hai Precision Company Limited were $0.4 million and $0.3 million at March 31,
2012 and 2011, respectively.
11. Fair Value of Financial
instruments
Effective January 1, 2008, the
Company adopted ASC 820 which provides a definition of fair value, establishes a
hierarchy for measuring fair value under generally accepted accounting
principles, and requires certain disclosures about fair values used in the
financial statements. ASC 820 does not extend the use of fair value beyond what
is currently required by other pronouncements, and it does not pertain to
stock-based compensation under ASC 718,
Share-Based Payments
or to leases
under ASC 840,
Accounting for
Leases
.
In February 2008, FASB ASC 820 was
issued. This FASB Staff Position provides a one year deferral of the effective
date of ASC 820 for non-financial assets and non-financial liabilities, except
those that are recognized or disclosed in the financial statements at fair value
at least annually. Therefore, the Company has adopted the provisions of ASC 820
with respect to financial assets and liabilities only.
9
ASC 820 defines fair value as the
exchange price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the
measurement date. Valuation techniques used to measure fair value under ASC 820
must maximize the use of observable inputs and minimize the use of unobservable
inputs. The standard describes a fair value hierarchy based on three levels of
inputs, of which the first two are considered observable and the last
unobservable, that may be used to measure fair value, which are the
following:
-
Level 1 Inputs are based upon quoted prices
in active markets for identical assets or liabilities.
-
Level 2 Are based upon inputs other than
Level 1 that are observable, either directly or indirectly, such as quoted
prices for similar assets or liabilities; quoted prices in markets that are
not active; or other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the assets or
liabilities.
-
Level 3 Inputs are generally unobservable
inputs that are supported by little or no market activity and that are
significant to the fair value of the assets or liabilities.
The Company measures the following
financial assets at fair value on a recurring basis. The fair value of these
financial assets at March 31, 2012 (in thousands) was as follows:
|
|
Fair Value
Measurements at
|
|
|
Reporting Date Using
|
|
|
|
|
|
Quoted
Prices
|
|
Significant
|
|
|
|
|
|
|
|
|
in
Active
|
|
Other
|
|
Significant
|
|
|
Balance
at
|
|
Markets
for
|
|
Observable
|
|
Unobservable
|
|
|
March
31,
|
|
Identical
Assets
|
|
Inputs
|
|
Inputs
|
|
|
2012
|
|
(Level 1)
|
|
(level 2)
|
|
(Level 3)
|
Cash
equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market mutual funds
|
|
$
|
13,168
|
|
$
|
13,168
|
|
$
|
-
|
|
$
|
-
|
Marketable
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Time
deposits
|
|
|
21,528
|
|
|
21,528
|
|
|
-
|
|
|
-
|
Corporate bonds
|
|
|
4,613
|
|
|
-
|
|
|
4,613
|
|
|
-
|
Long-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
|
10,141
|
|
|
10,141
|
|
|
-
|
|
|
-
|
Total
|
|
$
|
49,450
|
|
$
|
44,837
|
|
$
|
4,613
|
|
$
|
-
|
As of March 31, 2012, the Company
held investments in corporate bonds, commercial paper, certificates of deposit,
and money market securities. The Companys cash and cash equivalents are
comprised of investments with original maturities of 90 days or less from the
date of purchase. The Companys short-term investments are comprised of
corporate bonds, commercial paper and certificates of deposit with original
maturities of 91 days or more from the date of purchase. The Companys long-term
investments are comprised of certificates of deposit with original maturities
of 365 days or more from the date of purchase.
12. Geographic Segment
Information
The Company operates in a single
industry segment. This industry segment is characterized by rapid technological
change and significant competition.
10
The following is a summary of the
Companys revenues generated by geographic segments, revenues generated by
product lines and identifiable assets located in these segments (in
thousands):
|
|
Three Months Ended March
31,
|
|
|
2012
|
|
2011
|
Revenues
|
|
|
|
|
|
|
North
America
|
|
$
|
5,994
|
|
$
|
5,082
|
Europe
|
|
|
2,120
|
|
|
1,457
|
Asia
|
|
|
2,421
|
|
|
2,911
|
|
|
$
|
10,535
|
|
$
|
9,450
|
|
|
|
Three Months Ended March
31,
|
|
|
2012
|
|
2011
|
Revenues
|
|
|
|
|
|
|
Connectivity Products
|
|
$
|
8,191
|
|
$
|
7,294
|
Optical Passive Products
|
|
|
2,344
|
|
|
2,156
|
|
|
$
|
10,535
|
|
$
|
9,450
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2012
|
|
2011
|
Property and Equipment
|
|
|
|
|
|
|
United States
|
|
$
|
90
|
|
$
|
91
|
Taiwan
|
|
|
3,425
|
|
|
3,491
|
China
|
|
|
4,063
|
|
|
4,136
|
|
|
$
|
7,578
|
|
$
|
7,718
|
13. Subsequent
Event
We evaluated subsequent events
through the time of the filing of this report on Form 10-Q. We are not aware of
any significant events that occurred subsequent to the balance sheet date prior
to the filing of this report that would have a material impact on our condensed
consolidated financial statements.
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
anticipated investments, expenditures and expenses, our liquidity and the
adequacy of our capital resources, our uses of our 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 efforts
to protect our intellectual property, the potential benefit of indemnification
agreements, increases in the number of possible license offers and patent
infringement claims, our competitive position, sources of competition,
consolidation in our industry, our international strategy, inventory management,
our employee relations, the adequacy of our internal controls, and the effect of
recent, future and changing accounting pronouncements and our critical
accounting policies, estimates, models, judgments and assumptions on our
financial results. Forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
expected. These risks and uncertainties include, but are not limited to, those
risks discussed elsewhere in this report, as well as risks related to the
development of the metropolitan, last mile access, and enterprise networks,
customer acceptance of our products, our ability to retain and obtain customers,
industry-wide overcapacity and shifts in supply and demand for optical
components and modules, our ability to meet customer demand and manage
inventory, fluctuations in demand for our products, declines in average selling
prices, development of new products by us and our competitors, increased
competition, inability to obtain sufficient quantities of a raw material
component, 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
remain listed on the Nasdaq Capital Market, 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. The Company expressly disclaims any
obligation or undertaking to release publicly any updates or revisions to any
forward-looking statements contained herein to reflect any change in the
Companys 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, 2011.
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.
Our connectivity products
contributed revenues of $8.2 million and $7.3 million for the three months ended
March 31, 2012 and 2011, respectively. Our optical passive products contributed
revenues of $2.3 million and $2.1 million for the three months ended March 31,
2012 and 2011, respectively. Our connectivity products contributed 77.8% and
77.2% of our revenues for the three months ended March 31, 2012 and 2011,
respectively. Our optical passive products contributed 22.2% and 22.8% of our
revenues for the three months ended March 31, 2012 and 2011, respectively.
In the three months ended March
31, 2012 and 2011, our top 10 customers comprised 62.2% and 60.9% of our
revenues, respectively. For the three months ended March 31, 2012 no customer
accounted for over 10% of our total revenues. For the three months ended March
31, 2011, one customer accounted for 16.7% of our total revenues. We market and
sell our products predominantly through our direct sales force.
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.
12
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 and marketing expenses
consist primarily of salaries, commissions and related expenses for personnel
engaged in marketing, sales and technical support functions, as well as costs
associated with trade shows, promotional activities and travel expenses. We
intend to continue to invest in our sales and marketing efforts, both
domestically and internationally, in order to increase market awareness and to
generate sales of our products. However, we cannot be certain that our
expenditures will result in higher revenues. In addition, we believe that our
future success depends upon establishing successful relationships with a variety
of key customers.
General and administrative
expenses consist primarily of salaries and related expenses for executive,
finance, administrative, accounting and human resources personnel, insurance and
professional fees for legal and accounting services.
Results of
Operations
The following table sets forth the
relationship between various components of operations, stated as a percentage of
revenues for the periods indicated:
|
|
Three Months Ended Mar.
31,
|
|
|
2012
|
|
2011
|
Revenues
|
|
100.0
|
%
|
|
100.0
|
%
|
|
|
|
|
|
|
|
Cost of
revenues
|
|
67.3
|
|
|
67.9
|
|
Gross
profit
|
|
32.7
|
|
|
32.1
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
Research and development
|
|
7.7
|
|
|
7.6
|
|
Sales and marketing
|
|
6.4
|
|
|
5.8
|
|
General
and administrative
|
|
10.3
|
|
|
10.9
|
|
Total
operating expenses
|
|
24.4
|
|
|
24.3
|
|
|
Income from
operations
|
|
8.3
|
|
|
7.8
|
|
Interest and other income,
net
|
|
1.4
|
|
|
1.4
|
|
Net income
before tax
|
|
9.7
|
%
|
|
9.2
|
%
|
Income tax
|
|
1.0
|
|
|
(1.6
|
)
|
Net
income
|
|
8.7
|
%
|
|
10.8
|
%
|
Revenues.
Revenues were $10.5 million and $9.5 million for the
three months ended March 31, 2012 and 2011, respectively. Revenues increased
11.5% in the quarter ended March 31, 2012 from the same period in 2011,
primarily due to increased volume shipments of telecom and enterprise
applications related products.
Cost of Revenues.
Cost of revenues was $7.1 million and
$6.4 million for the three months ended March 31, 2012 and 2011, respectively.
Cost of revenues as a percentage of revenues decreased to 67.3% for the three
months ended March 31, 2012 from 67.9% for the three months ended March 31,
2010. The lower percentage cost of revenues for the three months ended March 31,
2012 resulted from increased factory utilization due to higher
revenues.
13
Gross Profit.
Gross profit increased in dollars to $3.4 million, or
32.7% of revenues, for the three months ended March 31, 2012 from $3.0 million,
or 32.1% of revenues, for the same period in 2011. The higher gross profit was
due to higher sales volume. We expect our gross profit as a percentage of
revenues to improve with higher production volumes, which we anticipate will
result in improved absorption of overhead expenses. However, decreasing average
selling prices will have a negative impact our gross profit and may offset
benefits, if any, from improved absorption.
Research and Development
Expenses
. Research and development
expenses increased to $0.8 million for the three months ended March 31, 2012
from $0.7 million for the same period in 2011. The higher research and
development expenses were due to higher testing fees and stock based
compensation charges. As a percentage of revenues, research and development
expenses increased to 7.7% in the three months ended March 31, 2012 from 7.6%
for the same period in 2011. We expect research and development expenses will
increase as we intend to continue to invest in our research and product
development efforts.
Sales and Marketing
Expenses
. Sales and marketing expenses
increased to $0.7 million for the three months ended March 31, 2012 from $0.6
million for the same period in 2011. The higher sales and marketing expenses
were due to new hire and stock based compensation charges. As a percentage of
revenues, sales and marketing expenses increased to 6.4% in the three months
ended March 31, 2012 from 5.8% in the three months ended March 31, 2011. We
expect sales and marketing expenses to decline slightly in the next few quarters
as a result of fewer trade- show activities.
General and Administrative
Expenses
. General and administrative
expenses increased to $1.1 million for the three months ended March 31, 2012
from $1.0 million for the same period in 2011. The higher general and
administrative expenses were mainly due to higher stock based compensation
charges. As a percentage of revenues, general and administrative expenses
decreased to 10.3% in the three months ended March 31, 2012 from 10.9% in the
three months ended march 31, 2011. We expect general and administrative expenses
will remain relatively flat in the next quarter due in part to continued
emphasis on expense control.
Stock-Based
Compensation
. Total stock based
compensation increased to $0.2 million for the three months ended March 31, 2012
from $0.08 million for the same period in 2011. This increase was due to
restricted stock units granted in June 2011 and stock options granted in January
2012 and resulted in higher stock based compensation expenses.
Interest and Other Income, Net.
Interest and other income, net, was
$0.15 million and $0.13 million for the three months ended March 31, 2012 and
2011, respectively. These amounts consisted primarily of interest income which
fluctuated based on cash balances and changes in interest rates.
Income tax expense.
Income tax expenses was $0.11 million
and income tax benefit was $0.15 million for the three months ended March 31,
2012 and 2011, respectively. The credit for the three months ended March 31,
2011 was due to the reversal of over accrual for the California state tax in
2010. We did not incur income tax expense for the three months ended March 31,
2011 because we utilized tax credits due to our accumulated deficit.
Liquidity and Capital Resources
At March 31, 2012, we had cash and
cash equivalents of $14.3 million and short-term investments of $26.1 million.
During the quarter ended June 30, 2011, we also moved $10.0 million from
short-term investments to long-term investments comprised of a certificate of
deposit. Long-term investments at March 31, 2012 were $10.1 million.
Net cash provided by operating
activities was $1.4 million for the three months ended March 31, 2012. Net cash
provided by operating activities was primarily due to net income of $0.9
million, a $0.7 million increase in accounts payable, depreciation and
amortization of $0.6 million, and a $0.3 million decrease in inventory, which
were offset by a $0.5 million increase in accounts receivable, a $0.3 million
increase in prepaid expenses, and a $0.3 million decrease in accrued
expenses.
14
Net cash provided by operating
activities was $0.1 million for the three months ended March 31, 2011. Net cash
provided by operating activities was primarily due to net income of $1.0
million, a $0.7 million decrease in accounts receivable, and total depreciation
and amortization expenses of $0.4 million, which was offset by a $0.5 million
increase in inventory, and $1.4 million decrease in accrued expenses.
Net cash used in investing
activities was $0.6 million for the three months ended March 31, 2012. In the
three months ended March 31, 2012, we spent a net of $0.4 million for the
purchase of short-term securities, and we used $0.2 million to purchase
equipment.
Cash provided by investing
activities was $0.08 million for the three months ended March 31, 2011. In the
three months ended March 31, 2011, we had a net of $0.6 million from the
proceeds from sales and maturities of short-term securities, and we used $0.6
million to purchase equipment.
Cash used in financing activities
was $0.8 million for the three months ended March 31, 2012. Net cash used in
financing activities was primarily due to repurchase our common stock pursuant
to our stock repurchase program.
Cash provided by financing
activities was $0.2 million for the three months ended March 31, 2011. Net cash
provided by financing activities was primarily due to proceeds from the exercise
of options to purchase our common stock, which was offset in part by repayment
of bank borrowings.
We believe that our current cash,
cash equivalents and short-term investments will be sufficient to meet our
anticipated cash needs for working capital and capital expenditures for at least
the next 12 months. However, our future growth, including any potential
acquisitions, may require additional funding. If cash generated from operations
is insufficient to satisfy our long-term liquidity requirements, we may need to
raise capital through additional equity or debt financings, additional credit
facilities, strategic relationships or other arrangements. If additional funds
are raised through the issuance of securities, these securities could have
rights, preferences and privileges senior to holders of common stock, and the
terms of any debt facility could impose restrictions on our operations. The sale
of additional equity or debt securities could result in additional dilution to
our stockholders, and additional financing may not be available in amounts or on
terms acceptable to us, if at all. If we are unable to obtain additional
financing, 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 March 31, 2012.
Contractual Obligations
Our long-term debt obligations are
for principal and interest on mortgage and equipment loans from financial
institutions in Taiwan.
In July 2004, we moved into our
corporate headquarters in Sunnyvale, California. The lease has a six-year term
commencing on July 22, 2004. In June 2010, we renewed the lease for an 18,088
square foot facility in the same building, which lease will expire in January
2016.
In Taiwan, we lease a total of
approximately 38,800 square feet in one facility located in Tu-Cheng City,
Taiwan. This lease expires at various times from December 2012 to December 2014.
In December 2000, We purchased approximately 8,200 square feet of space
immediately adjacent to our leased facility for $0.8 million, bringing the total
square footage to approximately 47,000 square feet.
We lease a 132,993 square foot
facility in Shenzhen, China which lease will expire in October 2014.
15
Recent Accounting
Pronouncements
See Note 2 of our Notes to
Unaudited Condensed Consolidated Financial Statements included with this
Quarterly Report on Form 10-Q for information on recent accounting
pronouncements.
ITEM 3: QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required.
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 to ensure that material information relating to us, including our
consolidated subsidiaries, is made known to them by others within those
entities, particularly during the period in which this Quarterly Report on Form
10-Q was being prepared.
(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.
16
PART II: OTHER INFORMATION
ITEM 1A: RISK FACTORS
We have a history of losses,
may experience future losses and may not be able to generate sufficient revenues
in the future to sustain profitability.
We had net income of approximately
$0.9 million and $1.0 million in the quarter ended March 31, 2012 and 2011,
respectively. Although we generated a profit in the first quarter of fiscal 2012
and 2011, we may not be able to sustain profitability in the future and our cash
flows may be negative again in the future. As of March 31, 2012, we had an
accumulated deficit of approximately $52.4 million.
We continue to experience
fluctuating demand for our products. If demand for our products continues to
decline, 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 increases in
the future, we expect to incur significant and increasing expenses for expansion
of our manufacturing operations, research and development, sales and marketing,
and administration, and in expanding direct sales and distribution channels.
Given the rate at which competition in our industry intensifies and the
fluctuations in demand for our products, we may not be able to adequately
control our costs and expenses or achieve or maintain adequate operating
margins. As a result, to maintain profitability, we will need to generate and
sustain substantially higher revenues while maintaining reasonable cost and
expense levels. We may not be able to sustain profitability on a quarterly or an
annual basis.
Our connectivity products have
historically represented a significant part of our revenues, and if we are
unsuccessful in commercially selling our optical passive products, our business
will be seriously harmed.
Sales of our connectivity products
accounted for over 78% of our revenues in the quarter ended March 31, 2012 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 in the past, and
may in the future 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, which we
began shipping commercially in July 2000. Demand for these products has
fluctuated over the past few years, declining sharply starting in mid fiscal
2001 and then increasing beginning in 2003. 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 and we may have
to write-off additional inventory that is currently on our books.
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, unemployment, global
economic stability, the U.S. mortgage market 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 going
forward. These factors, combined with volatile oil prices, declining business
and consumer confidence, a volatile stock market and increased 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.
We depend on a small number of
customers for a significant portion of our total revenues and the loss of, or a
significant reduction in orders from, any of these customers, would
significantly reduce our revenues and harm our operating results.
In the quarters ended March 31,
2012 and 2011, our top 10 customers comprised 62.2% and 60.9% of our revenues,
respectively. For the three months ended March 31, 2012, no customer accounted
for over 10% of our total revenues. For the three
months ended March 31, 2011, one customer accounted for 16.7% of our total
revenues.
17
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, or to alter their purchasing patterns in some other way. The loss of any
significant customer, a significant reduction in sales we make to them, or any
problems collecting receivables from them would likely harm our financial
condition and results of operations.
Our quarterly and annual
financial results have historically fluctuated due primarily to introduction of,
demand for, and sales of our products, and future fluctuations may cause our
stock price to decline.
We believe that period-to-period
comparisons of our operating results are not a good indication of our future
performance. Our quarterly operating results have fluctuated in the past and are
likely to fluctuate significantly in the future due to a number of factors. For
example, the timing and expenses associated with product introductions and
establishing additional manufacturing lines and facilities, changes in
manufacturing volume, declining average selling prices of our products, the
timing and extent of product sales, the mix of domestic and international sales,
the mix of sales channels through which our products are sold, the mix of
products sold and significant fluctuations in the demand for our products have
caused our operating results to fluctuate in the past. Because we incur
operating expenses based on anticipated revenue trends, and a high 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 in
other risk factors below, may also cause our results to fluctuate. Many of the
factors that may cause our results to fluctuate are outside of our control. If
our quarterly or annual operating results do not meet the expectations of
investors and securities analysts, the trading price of our common stock could
significantly decline.
If we cannot attract more
optical communications equipment manufacturers to purchase our products, we may
not be able to increase or sustain our revenues.
Our future success will depend on
our ability to migrate existing customers to our new products and our ability to
attract additional customers. Some of our present customers are relatively new
companies. The growth of our customer base could be adversely affected
by:
-
customer unwillingness to implement our
products;
-
any delays or difficulties that we may incur
in completing the development and introduction of our planned products or
product enhancements;
-
the success of our
customers;
-
excess inventory in the telecommunications
industry;
-
new product introductions by our
competitors;
-
any failure of our products to perform as
expected; or
-
any difficulty we may incur in meeting
customers delivery requirements or product specifications.
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.
18
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. DiCon Fiberoptics, Inc., JDS Uniphase Corp., Oplink
Communications Inc., Senko Advanced Components and Tyco Electronics Corporation.
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 greater resources to the
development, promotion and sale of products, to negotiate lower prices on raw
materials and components, or to deliver competitive products at lower prices.
Several of our existing and
potential customers are also current and potential competitors of ours. These
companies may develop or acquire additional competitive products or technologies
in the future and subsequently reduce or cease their purchases from us. In light
of the consolidation in the optical networking industry, we also believe that
the size of suppliers will be an increasingly important part of a purchasers
decision-making criteria in the future. We may not be able to compete
successfully with existing or new competitors, and we cannot ensure that the
competitive pressures we face will not result in lower prices for our products,
loss of market share, or reduced gross margins, any of which could harm our
business.
New and competing technologies are
emerging due to increased competition and customer demand. The introduction of
products incorporating new or competing technologies or the emergence of new
industry standards could make our existing products noncompetitive. For example,
there are technologies for the design of wavelength division multiplexers that
compete with the technology that we incorporate in our products. If our products
do not incorporate technologies demanded by customers, we could lose market
share causing our business to suffer.
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 March 31, 2012, we had a
total of 33 full-time employees in Sunnyvale, California, 296 full-time
employees in Taiwan, and 719 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.
19
In addition, we will need to
coordinate our domestic and international operations and establish 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. Tensions between Taiwan and China may also affect our
facility in China. 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 total research
and development expenses were approximately $0.8 million and $0.7 million for
the quarters ended March 31, 2012 and 2011, respectively. We intend to continue
to invest in our research and product development efforts and the amount of our
future investments may be substantial, which could have a negative impact on our
earnings in future periods if we do not earn associated revenue from such
efforts.
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 rapidly 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
fluctuation in product inventory and demand for fiber optic products.
Our future success depends on the
continued growth of the Internet as a widely used medium for communications and
commerce, and the growth of optical networks to meet the increased demand for
capacity to transmit data, or bandwidth. If the Internet does not continue to
expand as a medium for communications and commerce, the need to significantly
increase bandwidth across networks and the market for fiber optic components may
not continue to develop. If this growth does not continue, sales of our products
may decline, which would adversely affect our revenues. Our customers have
experienced an oversupply of inventory due to fluctuating demand for their
products that has resulted in inconsistent demand for our products. Future
demand for our products is uncertain and will depend heavily on the continued growth and upgrading of optical networks,
especially in the metropolitan, last mile, and enterprise access segments of the
networks.
20
Inconsistent spending by
telecommunication companies over the past several years has resulted in
fluctuating demand for our products. The rate at which communication service
providers and other fiber optic network users have built new fiber optic
networks or installed new systems in their existing fiber optic networks has
fluctuated in the past and these fluctuations may continue in the future. These
fluctuations may result in reduced demand for new or upgraded fiber optic
systems that utilize our products and therefore, may result in reduced demand
for our products. Declines in the development of new networks and installation
of new systems have resulted in the past in a decrease in demand for our
products, an increase in our inventory, and erosion in the average selling
prices of our products.
The communications industry is
experiencing continued consolidation and realignment, as industry participants
seek to capitalize on the rapidly changing competitive landscape developing
around the Internet and new communications technologies such as fiber optic
networks. As the communications industry consolidates and realigns to
accommodate technological and other developments, our customers may consolidate
or align with other entities in a manner that results in a decrease in demand
for our products.
We are experiencing
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. During the past several years, telecommunication companies have
mostly decreased their spending, which has resulted in excess inventory,
overcapacity and a decrease in demand for our products. We may experience
further decreases in the 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 instability.
Even if the general economy experiences a recovery, the activity of the United
States telecommunications industry may lag behind the recovery of the overall
United States economy.
The optical networking
component industry has in the past, is now, and may in the future experience
declining average selling prices, which could cause our gross margins to
decline.
The optical networking component
industry has in the past experienced declining average selling prices as a
result of increasing competition and greater unit volumes as communication
service providers continue to deploy fiber optic networks. Average selling
prices are currently decreasing and may continue to decrease in the future in
response to product introductions by competitors, price pressures from
significant customers, greater manufacturing efficiencies achieved through
increased automation in the manufacturing process and inventory build-up due to
decreased demand. Average selling price declines may contribute to a decline in
our gross margins, which could harm our results of operations.
We will not attract new orders
for our fiber optic components unless we can deliver sufficient quantities of
our products to optical communications equipment manufacturers.
Communications service providers
and optical systems manufacturers typically require that suppliers commit to
provide specified quantities of products over a given period of time. If we are
unable to commit to deliver quantities of our products to satisfy a customers
anticipated needs, we will lose the order and the opportunity for significant
sales to that customer for a lengthy period of time. In addition, we would be
unable to fill large orders if we do not have sufficient manufacturing capacity
to enable us to commit to provide customers with specified quantities of
products. However, if we build our manufacturing capacity and inventory in
excess of demand, as we have done in the past, we may produce excess inventory
that may have to be reserved or written off.
21
We depend on a limited number
of third parties to supply key materials, components and equipment, such as
ferrules, optical filters and lenses, and if we are not able to obtain
sufficient quantities of these items at acceptable prices, our ability to fill
orders would be limited and our operating results could be harmed.
We depend on third parties to
supply the raw materials and components we use to manufacture our products. To
be competitive, we must obtain from our suppliers, on a timely basis, sufficient
quantities of raw materials and components at acceptable prices. We obtain most
of our critical raw materials and components from a single or limited number of
suppliers and generally do not have long-term supply contracts with them. As a
result, our suppliers could terminate the supply of a particular material or
component at any time without penalty. Finding alternative sources may involve
significant expense and delay, if these sources can be found at all. One
component, GRIN lenses, is only available from one supplier. Difficulties in
obtaining raw materials or components in the future may delay or limit our
product shipments, which could result in lost orders, increase our costs, reduce
our control over quality and delivery schedules and require us to redesign our
products. If a supplier became unable or unwilling to continue to manufacture or
ship materials or components in required volumes, we would have to identify and
qualify an acceptable replacement. A delay or reduction in shipments or any need
to identify and qualify replacement suppliers would harm our
business.
Because we experience long lead
times for materials and components, we may not be able to effectively manage our
inventory levels and 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.
We are exposed to risks and
increased expenses as a result of laws requiring companies to evaluate internal
controls over financial reporting.
Although we will not have to
comply with the auditor attestation requirements of Section 404(b) of the
Sarbanes-Oxley Act of 2002 until we become an accelerated filer, we are still
required to perform an assessment of our internal control over financial
reporting and to disclose managements assessment of the same under Section
404(a) of Sarbanes-Oxley. 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. In the event that our chief executive officer, acting chief
financial officer or, when applicable, our independent registered public
accounting firm, determines that our internal control over financial reporting
is not effective as defined under Section 404(a), investor perceptions of our
company may be negatively affected and this could cause a decline in our stock
price.
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.
22
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 and impair our
operating results. We may not obtain acceptable yields in the future.
In some cases, existing
manufacturing techniques, which involve substantial manual labor, may not allow
us to cost-effectively meet our production goals so that we maintain acceptable
gross margins while meeting the cost targets of our customers. We may not
achieve adequate manufacturing cost efficiencies.
Because we plan to introduce new
products and product enhancements, we must effectively transfer production
information from our product development department to our manufacturing group
and coordinate our efforts with our suppliers to rapidly achieve volume
production. In our experience, our yields have been lower during the early
stages of introducing new product to manufacturing. If we fail to effectively
manage this process or if we experience delays, disruptions or quality control
problems in our manufacturing operations, our shipments of products to our
customers could be delayed.
Because the qualification and
sales cycle associated with fiber optic components is lengthy and varied, it is
difficult to predict the timing of a sale or whether a sale will be made, which
may cause us to have excess manufacturing capacity or inventory and negatively
impact our operating results.
In the communications industry,
service providers and optical systems manufacturers often undertake extensive
qualification processes prior to placing orders for large quantities of products
such as ours, because these products must function as part of a larger system or
network. This process may range from three to six months and sometimes longer.
Once they decide to use a particular suppliers product or component, these
potential customers design the product into their system, which is known as a
design-in win. Suppliers whose products or components are not designed in are
unlikely to make sales to that customer until at least the adoption of a future
redesigned system. Even then, many customers may be reluctant to incorporate
entirely new products into their new systems, as this could involve significant
additional redesign efforts. If we fail to achieve design-in wins in our
potential customers qualification processes, we will lose the opportunity for
significant sales to those customers for a lengthy period of time.
In addition, some of our customers
require that our products be subjected to standards-based qualification testing,
which can take up to nine months or more. While our customers are evaluating our
products and before they place an order with us, we may incur substantial sales
and marketing and research and development expenses, expend significant
management efforts, increase manufacturing capacity and order long lead-time
supplies. Even after the evaluation process, it is possible a potential customer
will not purchase our products. In addition, product purchases are frequently
subject to unplanned processing and other delays, particularly with respect to
larger customers for which our products represent a very small percentage of
their overall purchase activity. Accordingly, our revenues and operating results
may vary significantly and unexpectedly from quarter to quarter.
23
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.
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, and enterprise access 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.
24
We may be unable to
successfully integrate acquired businesses or assets with our business, which
may disrupt our business, divert managements attention and slow our ability to
expand the range of our proprietary technologies and products.
To expand the range of our proprietary technologies and
products, we may acquire complementary businesses, technologies or products, if
appropriate opportunities arise. We may be unable to identify other suitable
acquisitions at reasonable prices or on reasonable terms, or consummate future
acquisitions or other investments, any of which could slow our growth strategy.
We may have difficulty integrating the acquired products, personnel or
technologies of any company or acquisition that we may make. Similarly, we may
not be able to attract or retain key management, technical or sales personnel of
any other companies that we acquire or from which we acquire assets. These
difficulties could disrupt our ongoing business, distract our management and
employees and increase our expenses.
If our common stock is not
relisted on the Nasdaq Global Market, we may be subject to certain provisions of
the California General Corporation Law that may affect our charter documents and
result in additional expenses.
Beginning at the commencement of
trading on November 8, 2002, the listing of our common stock was transferred
from the Nasdaq Global Market to the Nasdaq Capital Market. As a result, we may
become subject to certain sections of the California General Corporation Law
that will affect our charter documents if our common stock is not returned to
being listed on the Nasdaq Global Market. A recent Delaware decision has called
into question the applicability of the California General Corporation Law to
Delaware corporations. However, if the California General Corporation Law
applies to our Company, we will not be able to continue to have a classified
board or continue to eliminate cumulative voting by our stockholders. In
addition, certain provisions of our Certificate of Incorporation that call for
supermajority voting may need to be approved by stockholders every two years or
be eliminated. Also, in the event of a reorganization, stockholders will have
dissenting stockholder rights under both California and Delaware law. Any of
these changes will result in additional expense as we will have to comply with
certain provisions of the California General Corporation Law as well as the
Delaware General Corporation Law. We included these provisions in our charter
documents in order to delay or discourage a change of control or changes in our
management. Because of the California General Corporation Law, we may not be
able to avail ourselves of these provisions.
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 it is
difficult to police the unauthorized use of our products and we cannot be
certain that the steps we have taken will prevent the misappropriation or
unauthorized use of our technologies, particularly in foreign countries where
the laws may not protect our proprietary rights as fully as United States laws.
Our competitors and suppliers may independently develop similar technology,
duplicate our products, or design around any of our patents or other
intellectual property. If we are unable to adequately protect our proprietary
technology rights, others may be able to use our proprietary technology without
having to compensate us, which could reduce our revenues and negatively impact
our ability to compete effectively.
Litigation may be necessary to
enforce our intellectual property rights or to determine the validity or scope
of the proprietary rights of others. As a result of any such litigation, we
could lose our proprietary rights and incur substantial unexpected operating
costs. Any action we take to protect our intellectual property rights could be
costly and could absorb significant management time and attention. In addition,
failure to adequately protect our trademark rights could impair our brand
identity and our ability to compete effectively.
25
We may be subject to
intellectual property infringement claims that are costly to defend and could
limit our ability to use some technologies in the future.
Our industry is very competitive
and is characterized by frequent intellectual property litigation based on
allegations of infringement of intellectual property rights. Numerous patents in
our industry have already been issued, and as the market further develops and
participants in our industry obtain additional intellectual property protection,
litigation is likely to become more frequent. From time to time, third parties
may assert patent, copyright, trademark and other intellectual property rights
to technologies or rights that are important to our business. In addition, we
have and we may continue to enter into agreements to indemnify our customers for
any expenses or liabilities resulting from claimed infringements of patents,
trademarks or copyrights of third parties. Any litigation arising from claims
asserting that our products infringe or may infringe the proprietary rights of
third parties, whether the litigation is with or without merit, could be
time-consuming, resulting in significant expenses and diverting the efforts of
our technical and management personnel. We do not have insurance against our
alleged or actual infringement of intellectual property of others. These claims
could cause us to stop selling our products, which incorporate the challenged
intellectual property, and could also result in product shipment delays or
require us to redesign or modify our products or to enter into licensing
agreements. These licensing agreements, if required, would increase our product
costs and may not be available on terms acceptable to us, if at all.
Although we are not aware of any
intellectual property lawsuits filed against us, we may be a party to litigation
regarding intellectual property in the future. We may not prevail in any such
actions, given their complex technical issues and inherent uncertainties.
Insurance may not cover potential claims of this type or may not be adequate to
indemnify us for all liability that may be imposed. If there is a successful
claim of infringement or we fail to develop non-infringing technology or license
the proprietary rights on a timely basis, our business could be harmed.
Because our manufacturing
operations are located in active earthquake fault zones in Taiwan, and our
Taiwan locations are susceptible to the effects of a typhoon, we face the risk
that a natural disaster could limit our ability to supply products.
Our manufacturing operations in
Taiwan are located in active earthquake fault zones. This region has experienced
large earthquakes in the past and may likely experience them in the future. In
September 2001, a typhoon hit Taiwan causing businesses, including our
manufacturing facility, and the financial markets to close for two days. Because
of our manufacturing operations are located in Taiwan, a large earthquake or
typhoon in Taiwan could disrupt our manufacturing operations for an extended
period of time, which would limit our ability to supply our products to our
customers in sufficient quantities on a timely basis, harming our customer
relationships.
ITEM 5. MARKET FOR REGISTRANTS
COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Stock Repurchase Program
On November 30, 2011, we announced
a program to repurchase up to $6 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 March
31, 2012, approximately $4.8 million is remaining under this repurchase program.
The duration of the repurchase program is open-ended.
26
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 *
|
December 1 -
December 31, 2011
|
|
41,487
|
|
$
|
7.8228
|
|
41,487
|
|
$
|
5,675,456
|
January 1 - January 31,
2012
|
|
35,325
|
|
$
|
8.0258
|
|
35,325
|
|
$
|
5,391,945
|
February 1 -
February 29, 2012
|
|
36,222
|
|
$
|
8.9509
|
|
36,222
|
|
$
|
5,067,725
|
March 1 - March 31,
2012
|
|
30,186
|
|
$
|
9.3443
|
|
30,186
|
|
$
|
4,785,658
|
Total
|
|
143,220
|
|
$
|
8.4789
|
|
143,220
|
|
$
|
4,785,658
|
____________________
* Represents dollar
amount
ITEM 6: EXHIBITS
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 Exchange Act. Such certifications will
not be deemed to be incorporated by reference into any filing under the
Securities Act or the Exchange Act, except to the extent that the registrant
specifically incorporates it by reference.
** In accordance with Rule 406T of
Regulation S-T, the information furnished in these exhibits will not be deemed
filed for purpose of Section 18 of the Exchange Act. Such exhibits will not be
deemed to be incorporated by reference into any filing under the Securities Act
or Exchange Act.
27
SIGNATURE
In accordance with the
requirements of the Exchange Act, the registrant caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Dated: May 14, 2012
|
ALLIANCE FIBER
OPTIC PRODUCTS, INC.
|
|
|
|
By
|
|
/s/ Anita K.
Ho
|
|
|
|
|
Anita K. Ho
|
|
|
Acting Chief
Financial Officer
|
|
(Principal
Financial and Accounting Officer and Duly
|
|
Authorized
Signatory)
|
28
Alliance Fiber Optic Products,
Inc.
Exhibit Index
Exhibit
|
|
|
Number
|
|
Title
|
31.1
|
|
Rule 13a-14(a) certification of Chief Executive
Officer.
|
31.2
|
|
Rule 13a-14(a)
certification of Acting Chief Financial Officer.
|
32.1*
|
|
Statement of Chief Executive Officer under Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350).
|
32.2*
|
|
Statement of
Acting Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act
of 2002 (18 U.S.C. § 1350).
|
101.INS**
|
|
XBRL Taxonomy Instance Document
|
101.SCH**
|
|
XBRL Taxonomy
Schema Document
|
101.PRE**
|
|
XBRL Taxonomy Presentation Linkbase Document
|
101.LAB**
|
|
XBRL Taxonomy
Label Linkbase Document
|
101.CAL**
|
|
XBRL Taxonomy Calculation Linkbase Document
|
101.DEF**
|
|
XBRL Taxonomy
Definition Linkbase
document
|
____________________
* In accordance with Item
601(b)(32)(ii) of Regulation S-K and SEC Release No. 34-47986, the
certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to
accompany this Form 10-Q and will not be deemed filed for purposes of Section
18 of the Exchange Act. Such certifications will not be deemed to be
incorporated by reference into any filing under the Securities Act or the
Exchange Act, except to the extent that the registrant specifically incorporates
it by reference.
** In accordance with Rule 406T of
Regulation S-T, the information furnished in these exhibits will not be deemed
filed for purpose of Section 18 of the Exchange Act. Such exhibits will not be
deemed to be incorporated by reference into any filing under the Securities Act
or Exchange Act.
29
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