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Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File Number: 001-36083

Applied Optoelectronics, Inc.

(Exact name of registrant as specified in its charter)

Delaware

76-0533927

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

13139 Jess Pirtle Blvd.

Sugar Land, TX 77478

(Address of principal executive offices)

(281295-1800

(Registrant’s telephone number)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Trading Name of each exchange on which registered

Common Stock, Par value $0.001

AAOI

NASDAQ Global Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒    No ☐ 

 

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes ☒    No ☐ 

 

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

Large accelerated filer

☐ 

Accelerated filer

 

Non-accelerated filer

☐ 

Smaller reporting company

 

 

  

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.                     ☐ 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).                                       Yes   No ☒

 

As of July 31, 2020 there were 22,773,963 shares of the registrant’s Common Stock outstanding.

 

 

                             

 


 

 

 

 

 

Applied Optoelectronics, Inc.

Table of Contents

   

Page

Part I. Financial Information

   

 

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

3

   

 

 

Condensed Consolidated Balance Sheets as of June 30, 2020 (Unaudited) and December 31, 2019

3

   

 

 

Condensed Consolidated Statements of Operations for the Three and Six months ended June 30, 2020 and 2019 (Unaudited)

4

   

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months ended June 30, 2020 and 2019 (Unaudited)

5

   

 

 

Condensed Consolidated Statements of Stockholders’ Equity for the Three and Six Months ended June 30, 2020 and 2019 (Unaudited)

6

   

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2020 and 2019 (Unaudited)

7

   

 

 

Notes To Condensed Consolidated Financial Statements (Unaudited)

8

   

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

26

   

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

35

   

 

Item 4.

Controls and Procedures

35

   

 

Part II. Other Information

Item 1.

Legal Proceedings

36

Item 1A.

Risk Factors

37

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

59

Item 3.

Defaults Upon Senior Securities

59

Item 4.

Mine Safety Disclosures

59

Item 5.

Other Information

59

Item 6.

Exhibits

59

 

Signatures

61

 

 

 

Part I. Financial Information

Item 1. Condensed Consolidated Financial Statements

Applied Optoelectronics, Inc. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands)

  

June 30,

  

December 31,

 

 

2020

  

2019

 

ASSETS

 

  

 

Current Assets

 

  

 

Cash and cash equivalents

 $51,131  $59,977 

Restricted cash

  7,778   7,051 

Accounts receivable - trade, net of allowance of $30 and $30, respectively

  50,029   34,655 

Inventories

  97,251   85,028 

Prepaid income tax

  210   224 

Prepaid expenses and other current assets

  6,610   5,869 

Total current assets

  213,009   192,804 

Property, plant and equipment, net

  244,126   248,444 

Land use rights, net

  5,455   5,598 

Operating right of use asset

  7,552   7,768 
Financing right of use asset  104   119 

Intangible assets, net

  4,006   4,081 

Deferred income tax assets

  2,136   7,287 

Other assets, net

  1,703   724 

TOTAL ASSETS

 $478,091  $466,825 

LIABILITIES AND STOCKHOLDERS' EQUITY

    

 

Current liabilities

 

    

Current portion of notes payable and long-term debt

 $42,234  $33,371 

Accounts payable

  51,154   32,828 

Bank acceptance payable

  9,866   6,310 

Current lease liability - operating

  941   965 
Current lease liability - financing  17   17 

Accrued liabilities

  15,557   17,864 

Total current liabilities

  119,769   91,355 

Notes payable and long-term debt, less current portion

  15,542   16,552 

Convertible senior notes

  77,439   77,041 

Non-current lease liability - operating

  7,795   7,983 
Non-current lease liability - financing  91   100 

TOTAL LIABILITIES

  220,636   193,031 

Stockholders' equity:

 

  

 

Preferred Stock; 5,000 shares authorized at $0.001 par value; no shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively

  -   - 

Common Stock; 45,000 shares authorized at $0.001 par value; 21,941 and 20,141 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively

  22   20 

Additional paid-in capital

  323,405   303,401 

Accumulated other comprehensive (loss) and income

  (518)  430 

Accumulated deficit

  (65,454)  (30,057)

TOTAL STOCKHOLDERS' EQUITY

  257,455   273,794 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 $478,091  $466,825 

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

 

 

Applied Optoelectronics, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except share and per share data)

   

Three months ended June 30,

   

Six months ended June 30,

 

 

2020

   

2019

   

2020

   

2019

 

Revenue, net

  $ 65,222     $ 43,411     $ 105,689     $ 96,130  

Cost of goods sold

    51,486       32,873       85,615       73,241  

Gross profit

    13,736       10,538       20,074       22,889  

Operating expenses

 

   

   

   

 

Research and development

    10,803       11,151       21,361       22,336  

Sales and marketing

    3,430       2,331       6,366       4,926  

General and administrative

    10,611       10,884       21,249       21,324  

Total operating expenses

    24,844       24,366       48,976       48,586  

Loss from operations

    (11,108 )     (13,828 )     (28,902 )     (25,697 )

Other income (expense)

 

   

   

   

 

Interest income

    47       310       194       382  

Interest expense

    (1,489 )     (1,490 )     (2,944 )     (2,486 )

Other income (expense), net

    974       451       1,231       296  

Total other income (expense), net

    (468 )     (729 )     (1,519 )     (1,808 )

Loss before income taxes

    (11,576 )     (14,557 )     (30,421 )     (27,505 )

Income tax benefit (expense)

    (7,024 )     3,191       (4,976 )     5,665  

Net loss

  $ (18,600 )   $ (11,366 )   $ (35,397 )   $ (21,840 )

Net loss per share

 

   

   

   

 

Basic

  $ (0.89 )   $ (0.57 )   $ (1.72 )   $ (1.10 )

Diluted

  $ (0.89 )   $ (0.57 )   $ (1.72 )   $ (1.10 )

 

   

   

   

 

Weighted average shares used to compute net loss per share:

 

   

   

   

 

Basic

    20,858,450       19,931,745       20,533,417       19,897,602  

Diluted

    20,858,450       19,931,745       20,533,417       19,897,602  

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

 

 

Applied Optoelectronics, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited, in thousands)

 

Three months ended June 30,

   

Six months ended June 30,

 

 

2020

   

2019

   

2020

   

2019

 

Net loss

  $ (18,600 )   $ (11,366 )   $ (35,397 )   $ (21,840 )

Loss (gain) on foreign currency translation adjustment

    1,454       (3,329 )     (948 )     (981 )

Comprehensive loss

  $ (17,146 )   $ (14,695 )   $ (36,345 )   $ (22,821 )

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5

 

 

Applied Optoelectronics, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Three and Six Months ended June 30, 2020 and 2019

(Unaudited, in thousands)

                                  Accumulated              

 

Preferred Stock

   

Common Stock

   

Additional

   

other

   

   

 

 

Number

   

   

Number

   

   

paid-in

   

comprehensive

   

Accumulated

   

Stockholders'

 

 

of shares

   

Amount

   

of shares

   

Amount

   

capital

   

gain (loss)

   

deficit

   

equity

 

March 31, 2020

        $       20,249     $ 20     $ 306,305     $ (1,972 )   $ (46,854 )   $ 257,499  

Public offering of common stock, net

                1,578       2       14,002                   14,004  
Stock options exercised, net of shares withheld for employee tax                             3                   3  

Issuance of restricted stock, net of shares withheld for employee tax

                113             (207 )                 (207 )

Share-based compensation

                            3,302                   3,302  

Foreign currency translation adjustment

                                  1,454             1,454  

Net loss

                                        (18,600 )     (18,600 )

June 30, 2020

        $       21,940     $ 22     $ 323,405     $ (518 )   $ (65,454 )   $ 257,455  

   

   

   

   

   

   

Accumulated

   

   

 

 

Preferred Stock

   

Common Stock

   

Additional

   

other

   

   

 

 

Number

   

   

Number

   

   

paid-in

   

comprehensive

   

Retained

   

Stockholders'

 

 

of shares

   

Amount

   

of shares

   

Amount

   

capital

   

gain (loss)

   

earnings

   

equity

 

March 31, 2019

        $       19,888     $ 20     $ 295,130     $ 2,950     $ 25,518     $ 323,618  

Issuance of restricted stock, net of shares withheld for employee tax

                63             (227 )                 (227 )

Share-based compensation

                            3,019                   3,019  

Foreign currency translation adjustment

                                  (3,329 )           (3,329 )

Net loss

                                        (11,366 )     (11,366 )

June 30, 2019

        $       19,951     $ 20     $ 297,922     $ (379 )   $ 14,152     $ 311,715  

 

   

   

   

   

   

   

Accumulated

   

   

 

 

Preferred Stock

   

Common Stock

   

Additional

   

other

   

   

 

 

Number

   

   

Number

   

   

paid-in

   

comprehensive

   

Accumulated

   

Stockholders'

 

 

of shares

   

Amount

   

of shares

   

Amount

   

capital

   

gain (loss)

   

deficit

   

equity

 

January 1, 2020

        $       20,140     $ 20     $ 303,401     $ 430     $ (30,057 )   $ 273,794  

Public offering of common stock, net

                1,582       2       13,928                   13,930  
Stock options exercised, net of shares withheld for employee tax                             3                   3  

Issuance of restricted stock, net of shares withheld for employee tax

                218             (467 )                 (467 )
Share-based compensation                             6,540                   6,540  

Foreign currency translation adjustment

                                  (948 )           (948 )

Net loss

                                        (35,397 )     (35,397 )

June 30, 2020

        $       21,940     $ 22     $ 323,405     $ (518 )   $ (65,454 )   $ 257,455  

 

   

   

   

   

   

   

Accumulated

   

   

 

 

Preferred Stock

   

Common Stock

   

Additional

   

other

   

   

 

 

Number

   

   

Number

   

   

paid-in

   

comprehensive

   

Retained

   

Stockholders'

 

 

of shares

   

Amount

   

of shares

   

Amount

   

capital

   

gain (loss)

   

earnings

   

equity

 

January 1, 2019

        $       19,810     $ 20     $ 292,480     $ 602     $ 35,992     $ 329,094  

Stock options exercised, net of shares withheld for employee tax

                            7                   7  

Issuance of restricted stock, net of shares withheld for employee tax

                141             (526 )                 (526 )

Share-based compensation

                            5,961                   5,961  

Foreign currency translation adjustment

                                  (981 )           (981 )

Net loss

                                        (21,840 )     (21,840 )

June 30, 2019

        $       19,951     $ 20     $ 297,922     $ (379 )   $ 14,152     $ 311,715  

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

6

 

 

Applied Optoelectronics, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

  

Six months ended June 30,

 

 

2020

  

2019

 

Operating activities:

 

  

 

Net loss

 $(35,397) $(21,840)

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

  

 
Provision for losses on accounts receivable  1    

Lower of cost or market reserve adjustment to inventory

  2,924   5,207 

Depreciation and amortization

  12,154   11,964 

Amortization of debt issuance costs

  444   457 

Deferred income taxes, net

  5,147   (5,770)

Loss on disposal of assets

  9   10 

Share-based compensation

  6,540   5,961 

Unrealized foreign exchange gain

  (134)  (171)

Changes in operating assets and liabilities:

    

 

Accounts receivable, trade

  (9,690)  2,128 

Notes receivable

  (49)  (137)

Prepaid income tax

  13   (127)

Inventories

  (15,362)  6,346 

Other current assets

  (725)  5,579 

Operating right of use asset

  300   561 

Accounts payable

  12,688   1,615 

Accrued liabilities

  (2,323)  (4,043)

Lease liability

  (309)  (573)

Net cash provided by (used in) operating activities

  (23,769)  7,167 

Investing activities:

 

  

 

Purchase of property, plant and equipment

  (6,759)  (26,286)

Proceeds from disposal of equipment

  52   1 

Deposits and prepaid for equipment

  (2,304)  5,763 

Purchase of intangible assets

  (208)  (316)

Net cash used in investing activities

  (9,219)  (20,838)

Financing activities:

 

  

 

Proceeds from issuance of notes payable and long-term debt, net of debt issuance costs

  6,229   10,537 

Principal payments of long-term debt and notes payable

  (2,221)  (41,203)

Proceeds from line of credit borrowings

  52,637   38,473 

Repayments of line of credit borrowings

  (48,689)  (42,211)
Proceeds from bank acceptance payable  14,080   4,471 

Repayments of bank acceptance payable

  (10,377)  (6,575)

Proceeds from issuance of convertible senior notes, net of debt issuance costs

  (16)  76,364 

Principal payments of financing lease

  (8)   

Exercise of stock options

  3   7 
Payments of tax withholding on behalf of employees related to share-based compensation  (466)  (526)

Proceeds from common stock offering, net

  13,929    

Net cash provided by financing activities

  25,101   39,337 

Effect of exchange rate changes on cash

  (232)  317 

Net increase (decrease) in cash, cash equivalents and restricted cash

  (8,119)  25,983 

Cash, cash equivalents and restricted cash at beginning of period

  67,028   58,004 

Cash, cash equivalents and restricted cash at end of period

 $58,909  $83,987 
Supplemental disclosure of cash flow information:     
Cash paid (received) for:     

Interest, net of amounts capitalized

 $2,478  $498 

Income taxes

  (192)  224 

Non-cash investing and financing activities:

    

 
       Purchase of property and equipment with line of credit borrowings  941    

Net change in accounts payable related to property and equipment additions

  (710)  777 

Net change in deposits and prepaid for equipment related to property and equipment additions

  1,327    

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

7

 

Applied Optoelectronics, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1.   Description of Business​

Business Overview

Applied Optoelectronics, Inc. (“AOI” or the “Company”) is a Delaware corporation. The Company is a leading, vertically integrated provider of fiber-optic networking products, primarily for four networking end-markets: internet data center, cable television ("CATV"), telecommunications ("telecom") and fiber-to-the-home ("FTTH"). The Company designs and manufactures a wide range of optical communications products at varying levels of integration, from components, subassemblies and modules to complete turn-key equipment.

The Company has manufacturing and research and development facilities located in the U.S., Taiwan and China. In the U.S., at its corporate headquarters and manufacturing facilities in Sugar Land, Texas, the Company primarily manufactures lasers and laser components and performs research and development activities for laser component and optical module products. In addition, the Company also has a research and development facility in Duluth, Georgia. The Company operates in Taipei, Taiwan and Ningbo, China through its wholly-owned subsidiary Prime World International Holdings, Ltd. (“Prime World”, incorporated in the British Virgin Islands). Prime World operates a branch in Taipei, Taiwan, which primarily manufactures transceivers and performs research and development activities for the transceiver products. Prime World is also the parent of Global Technology, Inc. (“Global”, incorporated in the People’s Republic of China). Through Global, the Company primarily manufactures certain of its data center transceiver products, including subassemblies, as well as CATV systems and equipment, and performs research and development activities for the CATV products.

Interim Financial Statements

The unaudited condensed consolidated financial statements of the Company as of June 30, 2020 and December 31, 2019 and for the three and six months ended June 30, 2020 and June 30, 2019, have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim information and with the instructions on Form 10-Q and Rule 10-01 of Regulation S-X pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In accordance with those rules and regulations, the Company has omitted certain information and notes required by GAAP for annual consolidated financial statements. In the opinion of management, the condensed consolidated financial statements contain all adjustments, except as otherwise noted, necessary for the fair presentation of the Company’s financial position and results of operations for the periods presented. The year-end condensed balance sheet data was derived from audited financial statements. These condensed consolidated financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report on Form 10-K (“Annual Report”) for the fiscal year ended December 31, 2019. The results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of the results expected for the entire fiscal year. All significant inter-company accounts and transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported. Actual results could differ from those estimates in the consolidated financial statements and accompanying notes. Significant estimates and assumptions that impact these financial statements and the accompanying notes relate to, among other things, allowance for credit losses, inventory reserve, product warranty costs, share-based compensation expense, estimated useful lives of property and equipment, and taxes.

8

 
 

Note 2.  Significant Accounting Policies

There have been no changes in the Company’s significant accounting policies for the three and six months ended June 30, 2020, as compared to the significant accounting policies described in its 2019 Annual Report, except as described below.

Recent Accounting Pronouncements

Recent Accounting Pronouncements Adopted in 2020

 

In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13 Financial Instruments - Credit Losses, Measurement of Credit Losses on Financial Instruments, which changes the way entities measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net earnings. The Company adopted this ASU as of January 1, 2020. The adoption of the new standard did not have a material impact on the Company's condensed consolidated financial statements as current processes for estimating expected credit losses for trade receivables align with the expected credit loss model. The Company estimates its allowance for credit losses based on historical collection trends, the age of outstanding receivables, geographical location of the customer, existing economic conditions and reasonable forecasts, If events or changes in circumstances indicate that specific receivable balances may be impaired, further consideration is given to the collectability of those balances and the allowance is adjusted accordingly.

 

In March 2020, the FASB issued ASU 2020-03, “Codification Improvements to Financial Instruments” improves and clarifies various financial instruments topics. This ASU includes seven different issues that describe the areas of improvement and the related amendments to GAAP, intended to make the standards easier to understand and apply by eliminating inconsistencies and providing clarifications. The Company adopted ASU 2020-03 upon issuance, which did not have a material effect on the Company’s current financial position, results of operations or financial statement disclosures.

Recent Accounting Pronouncements Yet to be Adopted

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”. The Accounting Standards Codification ("ASC") aims to identify, evaluate, and improve areas of GAAP for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. The Company is currently assessing the impact of this pronouncement to the financial statements.

 

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting”, which provides temporary optional expedients and exceptions to the GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. This ASU is effective beginning on March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022. The Company is currently assessing the impact of this pronouncement to the financial statements.

 

 

 

 

Note 3.  Revenue Recognition

Disaggregation of Revenue

Revenue is classified based on the location of where the product is manufactured. For additional information on the disaggregated revenues by geographical region, see Note 17, "Geographic Information.”

9

 

Revenue is also classified by major product category and is presented below (in thousands):

  

Three months ended June 30,

 

     

% of

      

% of

 

 

2020

  

Revenue

  

2019

  

Revenue

 

Data Center

 $52,533   80.5% $31,806   73.3%

CATV

  6,141   9.4%  9,818   22.6%

Telecom

  6,170   9.5%  1,630   3.8%

FTTH

  1   0.0%  16   0.0%

Other

  377   0.6%  141   0.3%

Total Revenue

 $65,222   100.0% $43,411   100.0%

  

Six months ended June 30,

 

     

% of

      

% of

 

 

2020

  

Revenue

  

2019

  

Revenue

 

Data Center

 $85,797   81.2% $70,305   73.1%

CATV

  10,364   9.8%  21,780   22.7%

Telecom

  8,730   8.3%  3,368   3.5%

FTTH

  1   0.0%  110   0.1%

Other

  797   0.7%  567   0.6%

Total Revenue

 $105,689   100.0% $96,130   100.0%

 

Note 4.  Leases

The Company leases space under non-cancellable operating leases for manufacturing facilities, research and development offices and certain storage facilities and apartments. These leases do not contain contingent rent provisions. The Company also leases certain machinery, office equipment and a vehicle. Many of its leases include both lease (e.g. fixed payments including rent, taxes, and insurance costs) and non-lease components (e.g. common-area or other maintenance costs) which are accounted for as a single lease component as the Company has elected the practical expedient to group lease and non-lease components for all leases. Several of the leases include one or more options to renew which have been assessed and either included or excluded from the calculation of the lease liability of the right of use ("ROU") asset based on management’s intentions and individual fact patterns. Several warehouses and apartments have non-cancellable lease terms of less than one-year and therefore, the Company has elected the practical expedient to exclude these short-term leases from its ROU asset and lease liabilities.

As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. Based on the applicable lease terms and current economic environment, the Company applies a location approach for determining the incremental borrowing rate.

The Components of lease expense were as follows for the periods indicated (in thousands):

  Three months ended June 30, 

 

2020

  

2019

 

Operating lease expense

 $296  $318 

Financing lease expense

  8    

Short Term lease expense

  37   51 

Total lease expense

 $341  $369 

 

10

 

Maturities of lease liabilities are as follows for the future one-year periods ending June 30, (in thousands):

   Operating   Financing 

2021

 $1,268  $22 

2022

  1,227   22 

2023

  1,171   22 

2024

  1,113   55 

2025

  1,123    

2026 and thereafter

  4,572    

Total lease payments

 $10,474  $121 

Less imputed interest

  (1,738)  (13)

Present value

 $8,736  $108 

 

The weighted average remaining lease term and discount rate for operating leases were as follows for the periods indicated:

  

Six months ended June 30,

 

 

2020

  

2019

 

Weighted Average Remaining Lease Term (Years) - operating leases

  8.65   9.69 

Weighted Average Remaining Lease Term (Years) - financing leases

  3.33    

Weighted Average Discount Rate - operating leases

  3.16%  3.13%

Weighted Average Discount Rate - financing leases

  5.00%   

 

Supplemental cash flow information related to operating leases was as follows for the periods indicated (in thousands):

 

  

Six months ended June 30,

 

 

2020

  

2019

 

Cash paid for amounts included in the measurement of lease liabilities

 

  

 

Operating cash flows from operating leases

  640   676 

Operating cash flows from financing lease

  3    

Financing cash flows from financing lease

  8    

Right-of-use assets obtained in exchange for new operating lease liabilities

  261   15 

 

 

 

Note 5.  Cash, Cash Equivalents and Restricted Cash

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the statement of financial position that sum to the total of the same such amounts in the statement of cash flows (in thousands):

 

  

June 30,

  

December 31,

 

 

2020

  

2019

 

Cash and cash equivalents

 $51,131  $59,977 

Restricted cash

  7,778   7,051 

Total cash, cash equivalents and restricted cash shown in the statement of cash flows

 $58,909  $67,028 

Restricted cash includes guarantee deposits for customs duties, research and development equipment additions, and compensating balances required for certain credit facilities. As of June 30, 2020 and December 31, 2019, there was $3.2 million and $1.9 million of restricted cash required for bank acceptance notes issued to vendors, respectively. In addition, there was $1.9 million and $4.2 million certificate of deposit associated with credit facilities with a bank in China as of June 30, 2020 and December 31, 2019 respectively. 

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Note 6.  Earnings (Loss) Per Share

Basic net loss per share has been computed using the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share has been computed using the weighted-average number of shares of common stock and dilutive potential common shares from stock options, restricted stock units and senior convertible notes outstanding during the period. In periods with net losses, normally dilutive shares become anti-dilutive. Therefore, basic and diluted loss per share are the same.

The following table sets forth the computation of the basic and diluted net loss per share for the periods indicated (in thousands):

   

Three months ended June 30,

   

Six months ended June 30,

 

 

2020

   

2019

   

2020

   

2019

 

Numerator:

 

   

   

   

 

Net loss

  $ (18,600 )   $ (11,366 )   $ (35,397 )   $ (21,840 )

Denominator:

 

   

   

   

 

Weighted average shares used to compute net loss per share

 

   

   

   

 

Basic

    20,858       19,932       20,533       19,898  

Diluted

    20,858       19,932       20,533       19,898  

Net loss per share

 

   

   

   

 

Basic

  $ (0.89 )   $ (0.57 )   $ (1.72 )   $ (1.10 )

Diluted

  $ (0.89 )   $ (0.57 )   $ (1.72 )   $ (1.10 )

The following potentially dilutive securities were excluded from the diluted net loss per share as their effect would have been antidilutive (in thousands):

   

Three months ended June 30,

   

Six months ended June 30,

 

 

2020

   

2019

   

2020

   

2019

 

Employee stock options

    11       29       13       63  

Restricted stock units

    10             13       2  

Shares for convertible senior notes

    4,587       4,587       4,587       4,587  

Total antidilutive shares

    4,608       4,616       4,613       4,652  

 

Note 7.  Inventories

Inventories, net of inventory write-downs, consist of the following for the periods indicated (in thousands):

 

June 30, 2020

  

December 31, 2019

 

Raw materials

 $33,808  $15,570 

Work in process and sub-assemblies

  53,049   50,787 

Finished goods

  10,394   18,671 

Total inventories

 $97,251  $85,028 

The lower of cost or market adjustment expensed for inventory for the three months ended June 30, 2020 and 2019 was $1.3 million and $2.9 million, respectively. The lower of cost or market adjustment expensed for inventory for the six months ended June 30, 2020 and 2019 was $2.9 million and $5.2 million, respectively.

 

For the three months ended June 30, 2020 and 2019, the direct inventory write-offs related to scrap, discontinued products, and damaged inventories were $3.7 million and $2.4 million, respectively. For the six months ended June 30, 2020 and 2019, the direct inventory write-offs related to scrap, discontinued products, and damaged inventories were $6.2 million and $5.2 million, respectively. 

 

 

 

 

 

Note 8.  Property, Plant & Equipment

Property, plant and equipment consisted of the following for the periods indicated (in thousands):

 

June 30, 2020

   

December 31, 2019

 

Land improvements

  $ 806     $ 806  

Building and improvements

    84,375       83,846  

Machinery and equipment

    239,213       237,464  

Furniture and fixtures

    5,276       5,105  

Computer equipment and software

    11,123       10,506  

Transportation equipment

    657       658  

    341,450       338,385  

Less accumulated depreciation and amortization

    (126,778 )     (116,979 )

    214,672       221,406  

Construction in progress

    28,353       25,937  

Land

    1,101       1,101  

Total property, plant and equipment, net

  $ 244,126     $ 248,444  

For the three months ended June 30, 2020 and 2019, depreciation expense of property, plant and equipment was $6.0 million and $5.9 million, respectively. For the six months ended June 30, 2020 and 2019, depreciation expense of property, plant and equipment was $11.9 million and $11.7 million, respectively. As of June 30, 2020 and December 31, 2019, there was $0.4 million and $0.2 million of capitalized interest. 

 

As of June 30, 2020, the Company concluded that its continued loss history constitutes a triggering event as described in ASC 360-10-35-21,Property, Plant, and Equipment.  The Company performed a recoverability test and concluded that future undiscounted cash flows exceed the carrying amount of the Company’s long-lived assets and therefore no impairment charge was recorded. 

 

Note 9.  Intangible Assets, net

Intangible assets consisted of the following for the periods indicated (in thousands):

  

June 30, 2020

 

 

Gross

  

Accumulated

  

Intangible

 

 

Amount

  

amortization

  

assets, net

 

Patents

 $7,850  $(3,850) $4,000 

Trademarks

  20   (14)  6 

Total intangible assets

 $7,870  $(3,864) $4,006 

  

December 31, 2019

 

 

Gross

  

Accumulated

  

Intangible

 

 

Amount

  

amortization

  

assets, net

 

Patents

 $7,638  $(3,560) $4,078 

Trademarks

  17   (14)  3 

Total intangible assets

 $7,655  $(3,574) $4,081 

For the three months ended June 30, 2020 and 2019, amortization expense for intangible assets, included in general and administrative expenses on the income statement, was each $0.1 million. For the six months ended June 30, 2020 and 2019, amortization expense for intangible assets, included in general and administrative expenses on the income statement, was each $0.3 million. The remaining weighted average amortization period for intangible assets is approximately 7 years.

 

At June 30, 2020, future amortization expense for intangible assets is estimated to be (in thousands):

 

2021

 $561 

2022

  561 

2023

  561 

2024

  561 

2025

  561 

thereafter

  1,201 
  $4,006 

 

13