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NEOPHOTONICS CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge)
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the unaudited condensed
consolidated financial statements and the related notes thereto included
elsewhere in this Quarterly Report on Form 10-Q for the period ended
September 30, 2012 and the audited consolidated financial statements and notes
thereto and management's discussion and analysis of financial condition and
results of operations for the fiscal year ended December 31, 2011 included in
our Annual Report on Form 10-K. References to "NeoPhotonics" "we," "our" and
"us" are to NeoPhotonics Corporation unless otherwise specified or the context
otherwise requires.
This Quarterly Report on Form 10-Q for the period ended September 30, 2012
contains "forward-looking statements" that involve risks and uncertainties, as
well as assumptions that, if they never materialize or prove incorrect, could
cause our results to differ materially from those expressed or implied by such
forward-looking statements. The statements contained in this Quarterly Report on
Form 10-Q for the period ended September 30, 2012 that are not purely historical
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Terminology such as "believe," "may," "might,"
"objective," "estimate," "continue," "anticipate," "intend," "should," "plan,"
"expect," "predict," "potential," or the negative of these terms or other
similar expressions is intended to identify forward-looking statements.
We have based these forward-looking statements largely on our current
expectations and projections about future events and industry and financial
trends that we believe may affect our financial condition, results of
operations, business strategy and financial needs. Such forward-looking
statements are subject to risks, uncertainties and other important factors that
could cause actual results and the timing of events to differ materially from
future results expressed or implied by such forward-looking statements. Factors
that could cause or contribute to such differences include, but are not limited
to, those identified in "Part II -Item 1A. Risk Factors" below, and those
discussed in the sections titled "Special Note Regarding Forward-Looking
Statements" and "Risk Factors" included in our Annual Report on Form 10-K for
the fiscal year ended December 31, 2011, as filed with the SEC on March 30,
2012. Furthermore, such forward-looking statements speak only as of the date of
this report. Except as required by law, we undertake no obligation to update any
forward-looking statements to reflect events or circumstances after the date of
such statements.
Business overview
We are a leading designer and manufacturer of photonic integrated circuit, or
PIC-based modules and subsystems for bandwidth-intensive, high-speed
communications networks.
Our products are designed to enable high-speed transmission rates and efficient
allocation of bandwidth over optical networks with high quality and low costs.
Our PIC technology utilizes proprietary design elements that provide optical
functionality on a silicon or indium phosphide or hybrid chip. PIC devices can
integrate many more functional elements than discretely packaged components,
enabling increased functionality in a small form factor while reducing packaging
and interconnection costs. In addition, the cost advantages of PIC-based
components are similar to the economics of semiconductor wafer mass
manufacturing, where the marginal cost of producing an incremental chip is much
less than that of a discrete component.
We have research and development and wafer fabrication facilities in San Jose
and Fremont, California which coordinate with our research and development and
manufacturing facilities in Shenzhen and Wuhan, China, Tokyo, Japan, and Ottawa,
Canada. We utilize proprietary design tools and design-for-manufacturing
techniques to align our design process with our precision nanoscale, vertically
integrated manufacturing and testing capabilities. We sell our products to the
leading network equipment vendors globally, including ADVA AG Optical Networking
Ltd., Alcatel-Lucent SA, Ciena Corporation, Cisco Systems, Inc., ECI Telecom
Ltd., Telefonaktiebolaget LM Ericsson, FiberHome Technologies Group, Fujitsu
Limited, Huawei Technologies Co., Ltd., Juniper Networks, Inc., Mitsubishi
Electric Corporation, NEC Corporation, Nokia Siemens Networks B.V. and ZTE
Corporation. We refer to these companies as our Tier 1 customers.
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We operate a sales model that focuses on direct alignment with our customers
through coordination of our sales, product engineering and manufacturing teams.
Our sales and marketing organizations support our strategy of increasing product
penetration with our Tier 1 customers while also serving our broader customer
base. We use a direct sales force in the U.S., China, Canada, Israel, Japan, the
Russian Federation and the European Union. These individuals work with our
product engineers, and product marketing and sales operations teams, in an
integrated approach to address our customers' current and future needs. We also
engage independent commissioned representatives worldwide to extend our global
reach.
In February 2011, we completed our initial public offering of 8,625,000 shares
of common stock, including the full underwriters' over-allotment option, at a
public offering price of $11.00 per share. Our initial public offering generated
net proceeds of $88.2 million before offering expenses. In connection with the
closing of the initial public offering, all of the shares of our Series 1,
Series 2 and Series 3 preferred stock then outstanding automatically converted
into 6,639,513 shares of common stock on a 1-for-1 basis and all of the shares
of our Series X preferred stock then outstanding automatically converted into
7,398,976 shares of common stock on a 400-for-1 basis.
In October 2011, we acquired Santur Corporation, a designer and manufacturer of
Indium Phosphide (InP) based PIC products. The acquisition of Santur enhances
the Company's position in PIC-based modules and subsystems for high speed
networks.
On April 27, 2012, we issued and sold approximately 4.97 million shares of our
common stock in a private placement transaction at a price of $8.00 per share
for gross proceeds of approximately $39.8 million. The shares of common stock
are restricted from transfer pursuant to a lockup agreement for up to two years,
at the end of which we are obligated to file one or more registration statements
covering the potential resale of the shares of common stock. We intend to use a
portion of the net proceeds from the sale of the shares of common stock for
general corporate purposes and to establish a presence in the Russian
Federation. In addition, we intend to establish a production facility in the
Russian Federation, in accordance with the terms of a rights agreement entered
into in connection with the private placement, for the benefit of the global
organization. The expansion into the Russian Federation is targeted for
completion by July 31, 2014.
For the nine months of fiscal 2012 compared to the same period in fiscal 2011,
we experienced an increase in demand for our 40Gbps and 100Gbps speed products
as carriers continued to accelerate deployment of high capacity optical
transport networks. Additionally, we experienced an increase in demand for our
products as ROADM deployments continued. In the first nine months of fiscal
2012, demand for our access products also increased as fiber-to-the-home
deployments continued around the world, particularly in China. The market for
optical communications products remains highly competitive. We expect to
continue to experience competition from companies that range from large
international companies offering a wide range of products to smaller companies
specializing in narrow markets. We anticipate macroeconomic conditions,
including the slow recovery in the U.S., European sovereign debt issues, and
concerns relating to inflation in China, could impact our Company's results.
Critical accounting policies and estimates
There have been no material changes to our critical accounting policies and
estimates during the nine months ended September 30, 2012 from those disclosed
in Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations in our 2011 Form 10-K.
Results of operations
Revenue
We sell substantially all of our products to original equipment manufacturers,
or OEMs. Revenue is recognized upon delivery of our product to the OEM. We price
our products based on market and competitive conditions and may periodically
reduce the price of our products as market and competitive conditions change and
as manufacturing costs are reduced. Our sales transactions to customers are
denominated primarily in Renminbi ("RMB") or U.S. dollars. For the three and
nine months ended September 30, 2012, 42% and 46% of our sales were derived from
our China-based subsidiaries, respectively, the majority of which were
denominated in RMB. Revenue is driven by the volume of shipments and may be
impacted by pricing pressures. We have generated most of our revenue from a
limited number of customers. Given the high concentration of network equipment
vendors in our industry, our top ten customers represented 91% of our revenue in
both of the three months ended September 30, 2012 and 2011, and 90% and 91% of
our revenue in the nine months ended September 30, 2012 and 2011, respectively.
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Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 2012 2011 2012 2011
Total revenue $ 66,152 $ 42,848 $ 183,400 $ 143,845
Revenue increased by $23.3 million in the three months ended September 30, 2012
compared to the three months ended September 30, 2011, representing a 54%
increase. Total revenue increased by $39.6 million in the nine months ended
September 30, 2012, compared to the nine months ended September 30, 2011,
representing a 27% increase. The increase was primarily attributable to growth
in our speed and agility products as carriers increased deployments of 40Gbps
and 100Gbps telecommunications networks. The increase included NeoPhotonics
developed products, as well as those derived from Santur, which was acquired by
us in October of 2011. The increase was partially offset by decrease in revenue
from our access products and other telecom products primarily as a result of
decrease in demand relating to applications below 10Gbps.
Typically, revenue from our top 5 customers comprises more than 50% of our total
revenue. In addition, our largest customer, Huawei Technologies, represented 29%
and 35% of our total revenue for the three and nine month periods ended
September 30, 2012, respectively, and 43% and 52% of our total revenue for the
three and nine month periods ended September 30, 2011, respectively.
Alcatel-Lucent SA and Ciena Corporation represented 20% and 18% of our total
revenue for the three months ended September 30, 2012, respectively, and 16% and
15% of our total revenue for the nine months ended September 30, 2012,
respectively. We expect that a significant portion of our revenue will continue
to be derived from a limited number of customers. As a result, the loss of, or a
significant reduction in orders from, Huawei Technologies or any of our other
key customers would materially and adversely affect our revenue and results of
operations.
In addition, we expect a significant portion of our sales to be denominated in
foreign currencies in the future, and therefore may continue to be affected by
changes in foreign exchange rates.
Cost of goods sold and gross margin
Our cost of goods sold consists primarily of the cost to produce wafers and to
manufacture and test our products. We have a global set of suppliers to help
balance considerations related to product availability, quality and cost.
Components of our cost of goods sold are denominated primarily in RMB. Our
manufacturing process extends from wafer fabrication through final module and
subsystem assembly and test. The cost of our manufacturing, assembly and test
processes includes the cost of personnel and the cost of our manufacturing
equipment and facilities. Our cost of goods sold is impacted by manufacturing
variances such as assembly and test yields and production volume. We typically
experience lower yields and higher associated costs on new products. In general,
our cost of goods sold associated with a particular product declines over time
as a result of decreases in wafer costs associated with the increase in the
volume of wafers produced, as well as yield improvements and assembly and test
enhancements. Additionally, our cost of goods sold includes stock-based
compensation, reserves for excess and obsolete inventory, royalty payments,
amortization of certain purchased intangible assets and acquisition-related fair
value adjustments, warranty, shipping and allocated facilities costs.
Gross profit as a percentage of total revenue, or gross margin, has been and is
expected to continue to be affected by a variety of factors, including the
introduction of new products, production volume, production volume compared to
sales over time, the mix of products sold, inventory changes, changes in the
average selling prices of our products, changes in the cost and volumes of
materials purchased from our suppliers, changes in labor costs, changes in
overhead costs or requirements, revaluation of stock appreciation unit awards
that are impacted by our stock price, and any reserves for excess and obsolete
inventories. Our newer and more advanced products typically have higher average
selling prices and higher gross margins. Average selling prices by product
typically decline as a result of periodic negotiations with our customers and
competitive pressures. We strive to increase our gross margin as we seek to
manage the costs of our supply chain and increase productivity in our
manufacturing processes.
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Three Months Ended September 30, Nine Months Ended September 30,
2012 2011 2012 2011
% of % of % of % of
(in thousands, except percentages) Amount Revenue Amount Revenue Amount Revenue Amount Revenue
Cost of goods sold $ 45,536 69 % $ 30,827 72 % $ 135,773 74 % $ 106,034 74 %
Three Months Ended Nine Months Ended
September 30, September 30,
2012 2011 2012 2011
Gross margin 31 % 28 % 26 % 26 %
Cost of goods sold increased by $14.7 million in the three months ended
September 30, 2012 compared to the three months ended September 30, 2011,
representing a 48% increase. Cost of goods sold increased primarily from higher
sales volumes, additional direct labor and overhead costs, as a result of
increased salary and employee benefit costs, and the amortization of intangible
assets. The acquisition of Santur significantly increased our cost of goods
sold. Gross margin was 31% for the three months ended September 30, 2012,
compared to 28% for the three months ended September 30, 2011. The increase in
gross margin was primarily due to higher revenue during the quarter as a result
of higher demand of our speed and agility products for 40Gbps and 100Gbps
telecommunications networks.
Cost of goods sold increased by $29.7 million in the nine months ended
September 30, 2012, compared to the nine months ended September 30, 2011,
representing a 28% increase. $28.0 million of the increase was due primarily to
the acquisition of Santur. Gross margin was 26% for the nine months ended
September 30, 2012 and 2011, which remained relatively constant notwithstanding
a change in product and customer mix.
We expect to experience increased demand for certain of our products that can
have lower than average margins, which can cause our gross margin to be lower
than the comparable year-ago periods. In addition, we may experience higher
China manufacturing labor cost due to future laws and regulations in China, and
our gross margins and results of operations may be adversely affected.
Operating expenses
Our operating expenses consist of research and development, sales and marketing,
general and administrative, amortization of purchased intangible assets, and
adjustment to the fair value of contingent consideration. Personnel costs are
the most significant component of operating expenses and consist of costs such
as salaries, benefits, bonuses, stock-based compensation and, with regard to
sales and marketing expense, sales commissions. Although our operating expenses
are denominated primarily in RMB and U.S. dollars, most are denominated in U.S.
dollars.
Three Months Ended September 30, Nine Months Ended September 30,
2012 2011 2012 2011
% of % of % of % of
(in thousands, except percentages) Amount Revenue Amount Revenue Amount Revenue Amount Revenue
Research and development $ 9,893 15 % $ 7,059 16 % $ 29,753 16 % $ 19,816 14 %
Sales and marketing 3,354 5 % 3,103 7 % 9,783 5 % 8,318 6 %
General and administrative 6,770 10 % 5,877 14 % 20,616 11 % 14,613 10 %
Amortization of purchased intangible assets 321 0 % 104 0 % 996 1 % 668 0 %
Adjustment to fair value of contingent
consideration (850 ) (1 )% 0 0 % (246 ) 0 % 0 0 %
Total operating expenses $ 19,488 29 % $ 16,143 38 % $ 60,902 33 % $ 43,415 30 %
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Research and development
Research and development expense consists of personnel costs, including
stock-based compensation, for our research and development personnel, and
product development costs, including engineering services, development software
and hardware tools, depreciation of capital equipment and facility costs. We
record all research and development expense as incurred.
Research and development expense increased by $2.8 million in the three months
ended September 30, 2012, compared to the three months ended September 30, 2011,
representing a 40% increase. This increase was primarily due to a $3.0 million
increase in additional payroll and employee-related costs mainly due to our
acquisition of Santur.
Research and development expense increased by $9.9 million in the nine months
ended September 30, 2012, compared to the nine months ended September 30, 2011,
representing a 50% increase. This increase was primarily due to a $9.7 million
increase in additional payroll and employee-related costs mainly due to the
result of our acquisition of Santur.
We intend to continue to invest in research and development and expect this
expense to increase as we grow our business. As a percentage of total revenue,
our research and development expense may vary as our revenue changes over time.
Sales and marketing
Sales and marketing expense consists primarily of personnel costs, including
stock-based compensation and sales commissions, costs related to sales and
marketing programs and services and facility costs.
Sales and marketing expense increased by $0.3 million in the three months ended
September 30, 2012 compared to the three months ended September 30, 2011,
representing an 8% increase. This increase was primarily due to a $0.2 million
increase in additional payroll and employee-related costs mainly as the result
of our acquisition of Santur.
Sales and marketing expense increased by $1.5 million in the nine months ended
September 30, 2012 compared to the nine months ended September 30, 2011,
representing an 18% increase. This increase was primarily due to a $1.5 million
increase in additional payroll and employee-related costs.
We expect our sales and marketing expense to increase as a result of the
acquisition of Santur and as we grow our business, expand our marketing
activities, increase the number of sales and marketing professionals and incur
higher stock-based compensation expense and employee-related costs accordingly.
As a percentage of total revenue, our sales and marketing expense may vary as
our revenue changes over time.
General and administrative
General and administrative expense consists primarily of personnel costs,
including stock-based compensation, for our finance, human resources and
information technology personnel and certain executive officers, as well as
professional services costs related to accounting, tax, banking, legal and
information technology services, depreciation of capital equipment, facility
costs and restructuring charges.
General and administrative expense increased by $0.9 million in the three months
ended September 30, 2012, compared to the three months ended September 30, 2011,
representing a 15% increase. This increase was primarily due to a $1.0 million
increase in payroll and employee-related costs.
General and administrative expense increased by $6.0 million in the nine months
ended September 30, 2012, compared to the nine months ended September 30, 2011,
representing a 41% increase. This increase was primarily due to a $3.5 million
increase in payroll and employee-related costs, $1.2 million increase in overall
expense as a result of our acquisition of Santur, a $0.6 million increase in
integration expenses as a result of acquisition activities, a $0.3 million
increase in professional services expense related to public company compliance
expenses and legal fees, and a $0.2 million increase in depreciation expense.
We expect our general and administrative expense to increase as we incur costs
associated with being a public company and as we expand and grow our operations
and business. As a percentage of total revenue, our general and administrative
expense may vary as our revenue changes over time.
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Amortization of purchased intangible assets
We completed a series of business acquisitions in 2005 and 2006 and, more
recently, in the fourth quarter of 2011, which included the acquisition of
intangible assets. These intangible assets are being amortized over their
estimated useful lives. Amortization expense relating to technology and patents
and leasehold interests are includes within cost of goods sold, while customer
relationships and noncompete agreements are recorded within operating expenses.
Amortization of purchased intangible assets increased by $0.2 million in the
three months ended September 30, 2012, compared to the three months ended
September 30, 2011, representing a 209% increase. Amortization of purchased
intangible assets increased by $0.3 million in the nine months ended
September 30, 2012, compared to the nine months ended September 30, 2011,
representing a 49% increase. The increases were primarily due to amortization of
purchased intangible related to our acquisition of Santur.
Adjustment to the fair value of contingent consideration
In connection with our acquisition of Santur in October 2011, we may be required
to pay the former stockholders of Santur up to an additional $7.5 million in
cash, contingent upon Santur's gross profit performance during 2012. The fair
value of the contingent consideration was measured at the date of acquisition
and is remeasured each reporting period and any changes in the fair value of the
contingent consideration are recognized as a gain or loss in the consolidated
statements of operations. As of December 31, 2011, the fair value of the
contingent consideration was $1.5 million. As of September 30, 2012, the fair
value of the contingent consideration was $1.3 million and is included in other
current liabilities on our consolidated balance sheet. During the three and nine
months ended September 30, 2012, we recorded adjustments to the fair value of
the consideration of $(0.9) million and $(0.2) million, respectively. We expect
the amount of contingent consideration accrued to fluctuate throughout the
remainder of the fiscal year as a result of changes and other economic
conditions.
Interest and other income (expense), net
Interest income consists of income earned on our cash, cash equivalents and
short-term investments. Interest expense consists of amounts paid for interest
on our short-term and long-term debt borrowings. Other income (expense), net
primarily consists of gains from the sale of equity shares of an unconsolidated
investee, government subsidies, and foreign currency transaction gains and
losses. The functional currency of our subsidiaries in China is RMB and the
foreign currency transaction gains and losses of our subsidiaries in China
primarily result from their transactions in U.S. dollars.
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 2012 2011 2012 2011
Interest income $ 147 $ 76 $ 424 $ 155
Interest expense (135 ) (52 ) (434 ) (230 )
Other income (expense), net 154 191 (538 ) 14,299
Total $ 166 $ 215 $ (548 ) $ 14,224
Total interest and other income (expense), net decreased by $0.05 million in the
three months ended September 30, 2012, compared to the three months ended
September 30, 2011. Total interest and other income (expense), net decreased by
$14.8 million in the nine months ended September 30, 2012, compared to the nine
months ended September 30, 2011. The decrease for the nine months ended
September 30, 2012 compared to same period in 2011 was primarily related to a
gain of $13.8 million from the sale of an unconsolidated investee recorded in
the second quarter of 2011.
We expect our interest income to remain relatively modest given the low yields
available in the marketplace and lower investable balances.
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Income taxes
We conduct our business globally. Therefore, our operating income is subject to
varying rates of tax in the U.S., China and other various foreign jurisdictions.
Consequently, our effective tax rate is dependent upon the geographic
distribution of our earnings or losses and the tax laws and regulations in each
geographical region. We expect that our income taxes will vary in relation to
our profitability and the geographic distribution of our profits. Historically,
we have experienced net losses in the U.S. and in the short term, we expect this
trend to continue. In China, one of our subsidiaries has qualified for a
preferential 15% tax rate available for high technology enterprises as opposed
to the statutory 25% tax rate. The preferential rate applies to 2012 and 2011,
and we have been approved for the rate to remain at 15% for 2013 and 2014.
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands, except percentages) 2012 2011 2012 2011
Provision for income taxes $ (571 ) $ (258 ) $ (888 ) $ (1,177 )
Effective tax rate 44 % (7 )% (6 )% 14 %
Our income tax expense for the three months ended September 30, 2012 is
primarily related to income taxes of our non U.S. operations. We recorded an
income tax provision of $0.6 million in the three months ended September 30,
2012, compared with an income tax provision of $0.3 million in the three months
ended September 30, 2011. We had an effective tax rate of 44% and negative 6% in
the three and nine months ended September 30, 2012, respectively, primarily due
to the level of foreign withholding tax and income taxes paid based on earnings
generated by our foreign subsidiaries, compared with an effective tax rate of
negative 7% and 14% in the three and nine months ended September 30, 2011,
primarily due to our operating profit realized in our non-U.S. operations,
despite a consolidated loss before income taxes.
Liquidity and capital resources
We have financed our operations through issuances of equity securities and cash
generated from operations and from various lending arrangements. As of
September 30, 2012, our cash and cash equivalents totaled $38.6 million, and our
short-term investments totaled $67.3 million. Cash and cash equivalents were
held for working capital purposes and were invested primarily in money market
funds. We do not enter into investments for trading or speculative purposes.
On April 27, 2012, we issued and sold approximately 4.97 million shares of our
common stock in a private placement transaction at a price of $8.00 per share
for gross proceeds of approximately $39.6 million. The shares of common stock
are restricted from transfer pursuant to a lockup agreement for up to two years,
at the end of which we are obligated to file one or more registration statements
covering the potential resale of the shares of common stock. We intend to use a
portion of the net proceeds from the sale of the shares of common stock for
general corporate purposes and to establish a presence in the Russian
Federation. In addition, we intend to establish a production facility in the
Russian Federation, in accordance with the terms of a rights agreement entered
into in connection with the private placement, for the benefit of the global
organization. The expansion into the Russian Federation is targeted for
completion by July 31, 2014. Of the common stock, $5.0 million is considered
redeemable, as we may be required to pay this amount if we are unable to achieve
our performance obligations by the date specified.
We believe that our existing cash and cash equivalents, and cash flows from our
operating activities, will be sufficient to meet our anticipated cash needs for
at least the next 12 months. Our future capital requirements will depend on many
factors including our growth rate, the timing and extent of spending to support
development efforts, the expansion of sales and marketing activities, the
introduction of new and enhanced products, the costs to increase our
manufacturing capacity, the continuing market acceptance of our products and
acquisitions of businesses and technology. In the event that additional
financing is required from outside sources, we may not be able to raise it on
terms acceptable to us or at all. If we are unable to raise additional capital
when desired, our business, operating results and financial condition would be
adversely affected.
A customary business practice in China is for customers to exchange our accounts
receivable with notes receivable issued by their bank. From time to time we
accept notes receivable from certain of our customers in China. These notes
receivable are non-interest bearing and are generally due within nine months,
and such notes receivable may be redeemed with the issuing bank prior to
maturity at a discount. Historically, we have collected on the notes receivable
in full at the time of maturity.
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Frequently, we also direct our banking partners to issue notes payable to our
suppliers in China in exchange for accounts payable. Our Chinese subsidiaries'
banks issue the notes to vendors and issue payment to the vendors upon
redemption. We owe the payable balance to the issuing bank. The notes payable
are non-interest bearing and are generally due within nine months of issuance.
As a condition of the notes payable lending arrangements, we are required to
keep a compensating balance at the issuing banks that is a percentage of the
total notes payable balance until the notes payable are paid by our subsidiaries
in China. These balances are classified as restricted cash on our consolidated
balance sheets. As of September 30, 2012, our restricted cash totaled $2.7
million.
We have lending arrangements with several financial institutions, including a
loan and security agreement with Comerica Bank in the U.S. and several line of
credit arrangements for our subsidiaries in China.
As of September 30, 2012, our loan and security agreement in the U.S. included
the following:
• An $8.0 million revolving line of credit available through September 2014
and bearing interest at a rate of LIBOR plus 2%. As of September 30, 2012,
$8.0 million was outstanding under the revolving line of credit and $0.0
million was available for borrowing.
• A $20.0 million acquisition advance, expiring in September 2015 and bearing interest at a rate of LIBOR plus 2%. Proceeds of the acquisition
advance may be used to make permitted business acquisitions. Advances may
be drawn in two tranches and are due and payable in equal monthly
installments of principal and interest such that all amounts will be
repaid by the acquisition line maturity date. In October 2011, we drew down the full $20.0 million in connection with its acquisition of Santur.
As of September 30, 2012, $15.4 million was outstanding under the
acquisition advance and the total available borrowing capacity under this
facility was $4.6 million.
• A $7.0 million equipment line advance for capital expenditures in the U.S.
Advances may be drawn in four tranches and are due and payable in equal
monthly installments of principal and interest such that all amounts will
be repaid by September 2015. Borrowings under this facility bear interest
at a rate of LIBOR plus 2%. As of September 30, 2012, no amount was
outstanding under the acquisition advance and the total available
borrowing capacity under this facility was $7.0 million.
Our U.S. loan and security agreement requires us to maintain specified financial
covenants, including a liquidity ratio, and restricts our ability to incur
additional debt or to engage in specified transactions and is secured by
substantially all of our U.S. assets, other than intellectual property assets.
As of September 30, 2012, we were in compliance with all covenants contained in
this agreement.
Our subsidiaries in China have short-term line of credit facilities with several
banking institutions. These short-term loans have an original maturity date of
one year or less as of September 30, 2012. Amounts requested by us are not
guaranteed and are subject to the banks' funds and currency availability. The
short-term loan agreements do not contain financial covenants and one such loan
agreement is secured by our main manufacturing facility in China. As of
September 30, 2012, we had no short-term loans outstanding.
The table below sets forth selected cash flow data for the periods presented:
Nine Months Ended September 30,
(in thousands) 2012 2011
Net cash used in operating activities $ (7,377 ) $ (9,910 )
Net cash used in investing activities (20,115 ) (59,479 )
Net cash provided by financing activities 33,590 75,192
Effect of exchange rates on cash and cash equivalents (4 ) 234
Net increase in cash and cash equivalents $ 6,094 $ 6,037
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Operating activities
During the nine months ended September 30, 2012, net cash used in operating
activities was $7.4 million. Cash used in operating activities was primarily
related to cash payments to our employees and suppliers in excess of cash
receipts from customers. During the nine months ended September 30, 2012, we
recognized a net loss of $14.5 million. However, that net loss incorporated
non-cash charges, including depreciation and amortization of $14.3 million,
stock-based compensation expenses of $3.4 million, and non-cash increases to our
asset reserve accounts of $3.6 million, partially offset by $0.8 million gain on
sale of Shenzhen Photon Broadband Technology Co., Ltd. ("Broadband"), a China
subsidiary. During the nine months ended September 30, 2012, there was an
increase of $1.2 million in accounts payable, accrued and other liabilities.
These amounts were partially offset by an increase of $12.7 million in the
purchase of inventory to replenish our inventories in preparation for expected
higher potential customer demands in future periods.
During the nine months ended September 30, 2011, net cash used in operating
activities was $9.9 million. Cash used in operating activities was primarily
related to cash payments to our employees and suppliers in excess of cash
receipts from customers. During the nine months ended September 30, 2011, we
recognized net income of $7.6 million, which incorporated gain on sale of an
unconsolidated investee, net of direct cost, of $13.9 million, and non-cash
charges, including depreciation and amortization of $8.2 million and stock-based
compensation expenses of $2.4 million. These amounts were partially offset by
the purchase of inventory of $15.7 million to replenish our inventories in
preparation for higher customer demands in future periods and extended payment
terms with certain suppliers, as evidenced by the net increase in accounts
payable and accrued liabilities of $0.7 million during the period.
Investing activities
Our investing activities consisted primarily of purchases and sales of
investments and capital expenditures and in the nine months ended September 30,
2011, and included purchases and sales of debt securities and the sale of equity
shares of Ignis ASA ("Ignis").
During the nine months ended September 30, 2012, net cash used in investing
activities was $20.1 million, mainly due to the purchase of available-for-sale
securities of $151.9 million and the purchase of capital equipment of $9.0
million, partially offset by proceeds from the sale and maturity of equity
securities of $138.4 million and proceeds from the sale of Broadband of $1.8
million.
During the nine months ended September 30, 2011, net cash used in investing
activities was $59.5 million, mainly due to the purchase of available-for-sale
securities of $148.9 million and the purchase of capital equipment of $8.6
million, partially offset by proceeds from sale and maturity of securities of
$76.4 million and proceeds from the sale of our equity investment in Ignis of
$21.4 million.
We expect our purchases of capital equipment to increase over the remainder of
2012 as we invest in manufacturing capacity to help meet anticipated demand for
certain of our products.
Financing activities
Our financing activities consisted primarily of proceeds from the issuance of
stock and activity associated with our various lending arrangements.
During the nine months ended September 30, 2012, net cash provided by financing
activities was $33.6 million. Our private placement transaction generated
proceeds of $39.6 million, net of offering expenses, which was partially offset
by $3.4 million for the repayment of notes payable, net of proceeds, and $3.8
million for the repayment of debt.
During the nine months ended September 30, 2011, net cash provided by financing
activities was $75.2 million. Our initial public offering generated proceeds of
$86.5 million, net of offering expenses paid during the nine months ended
September 30, 2011, partially offset by $11.9 million of net payments on our
outstanding bank loans.
30
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Table of Contents
Contractual obligations and commitments
The following summarizes our contractual obligations as of September 30, 2012:
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