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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 September 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)

(281) 295-1800

(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 November 2, 2020, there were 22,976,246 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 September 30, 2020 (Unaudited) and December 31, 2019

3

   

 

 

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

4

   

 

 

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

5

   

 

 

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

6

   

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 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)

   

September 30,

   

December 31,

 

 

2020

   

2019

 

ASSETS

 

   

 

Current Assets

 

   

 

Cash and cash equivalents

  $ 46,772     $ 59,977  

Restricted cash

    11,296       7,051  

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

    51,453       34,655  

Inventories

    111,427       85,028  

Prepaid income tax

    177       224  

Prepaid expenses and other current assets

    8,805       5,869  

Total current assets

    229,930       192,804  

Property, plant and equipment, net

    249,740       248,444  

Land use rights, net

    5,640       5,598  

Operating right of use asset

    7,792       7,768  
Financing right of use asset     96       119  

Intangible assets, net

    4,031       4,081  

Deferred income tax assets

    -       7,287  

Other assets, net

    558       724  

TOTAL ASSETS

  $ 497,787     $ 466,825  

LIABILITIES AND STOCKHOLDERS' EQUITY

       

 

Current liabilities

 

       

Current portion of notes payable and long-term debt

  $ 44,292     $ 33,371  

Accounts payable

    56,134       32,828  

Bank acceptance payable

    13,366       6,310  

Current lease liability - operating

    983       965  
Current lease liability - financing     17       17  

Accrued liabilities

    17,526       17,864  

Total current liabilities

    132,318       91,355  

Notes payable and long-term debt, less current portion

    14,564       16,552  

Convertible senior notes

    77,646       77,041  

Non-current lease liability - operating

    8,007       7,983  
Non-current lease liability - financing     86       100  

TOTAL LIABILITIES

    232,621       193,031  

Stockholders' equity:

 

   

 

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

    -       -  

Common Stock; 45,000 shares authorized at $0.001 par value; 22,887 and 20,140 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively

    23       20  

Additional paid-in capital

    335,035       303,401  

Accumulated other comprehensive (loss) and income

    5,178       430  

Accumulated deficit

    (75,070 )     (30,057 )

TOTAL STOCKHOLDERS' EQUITY

    265,166       273,794  

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

  $ 497,787     $ 466,825  

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

 

 

Applied Optoelectronics, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

   

Three months ended September 30,

   

Nine months ended September 30,

 

 

2020

   

2019

   

2020

   

2019

 

Revenue, net

  $ 76,608     $ 46,084     $ 182,298     $ 142,214  

Cost of goods sold

    57,418       34,108       143,034       107,349  

Gross profit

    19,190       11,976       39,264       34,865  

Operating expenses

 

   

   

   

 

Research and development

    11,206       10,466       32,567       32,802  

Sales and marketing

    4,491       2,518       10,858       7,444  

General and administrative

    10,272       9,988       31,520       31,312  

Total operating expenses

    25,969       22,972       74,945       71,558  

Loss from operations

    (6,779 )     (10,996 )     (35,681 )     (36,693 )

Other income (expense)

 

   

   

   

 

Interest income

    26       347       220       729  

Interest expense

    (1,480 )     (1,517 )     (4,424 )     (4,003 )

Other income (expense), net

    866       1,446       2,096       1,742  

Total other income (expense), net

    (588 )     276       (2,108 )     (1,532 )

Loss before income taxes

    (7,367 )     (10,720 )     (37,789 )     (38,225 )

Income tax benefit (expense)

    (2,249 )     1,940       (7,224 )     7,605  

Net loss

  $ (9,616 )   $ (8,780 )   $ (45,013 )   $ (30,620 )

Net loss per share

 

   

   

   

 

Basic

  $ (0.42 )   $ (0.44 )   $ (2.12 )   $ (1.54 )

Diluted

  $ (0.42 )   $ (0.44 )   $ (2.12 )   $ (1.54 )

 

   

   

   

 

Weighted average shares used to compute net loss per share:

 

   

   

   

 

Basic

    22,744,361       20,022,520       21,275,778       19,939,605  

Diluted

    22,744,361       20,022,520       21,275,778       19,939,605  

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

 

 

Applied Optoelectronics, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited, in thousands)

 

Three months ended September 30,

   

Nine months ended September 30,

 

 

2020

   

2019

   

2020

   

2019

 

Net loss

  $ (9,616 )   $ (8,780 )   $ (45,013 )   $ (30,620 )

(Gain) loss on foreign currency translation adjustment

    5,696       (3,453 )     4,748       (4,434 )

Comprehensive loss

  $ (3,920 )   $ (12,233 )   $ (40,265 )   $ (35,054 )

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

 

 

 

Applied Optoelectronics, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Three and Nine Months ended September 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

 

June 30, 2020

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

Public offering of common stock, net

                780       1       8,702                   8,703  
Stock options exercised, net of shares withheld for employee tax                 2             11                   11  

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

                165             (348 )                 (348 )

Share-based compensation

                            3,265                   3,265  

Foreign currency translation adjustment

                                  5,696             5,696  

Net loss

                                        (9,616 )     (9,616 )

September 30, 2020

        $       22,887     $ 23     $ 335,035     $ 5,178     $ (75,070 )   $ 265,166  

   

   

   

   

   

   

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

 

June 30, 2019

        $       19,951     $ 20     $ 297,922     $ (379 )   $ 14,152     $ 311,715  
Stock options exercised, net of shares withheld for employee tax                 1             1                   1  

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

                109             (176 )                 (176 )

Share-based compensation

                            2,978                   2,978  

Foreign currency translation adjustment

                                  (3,453 )           (3,453 )

Net loss

                                        (8,780 )     (8,780 )

September 30, 2019

        $       20,061     $ 20     $ 300,725     $ (3,832 )   $ 5,372     $ 302,285  

 

   

   

   

   

   

   

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                 2,362       2       22,629                   22,631  
Stock options exercised, net of shares withheld for employee tax                 2             14                   14  

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

                383       1       (813 )                 (812 )
Share-based compensation                             9,804                   9,804  

Foreign currency translation adjustment

                                  4,748             4,748  

Other

                                               

Net loss

                                        (45,013 )     (45,013 )

September 30, 2020

        $       22,887     $ 23     $ 335,035     $ 5,178     $ (75,070 )   $ 265,166  

 

   

   

   

   

   

   

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

                1             8                   8  

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

                250             (702 )                 (702 )

Share-based compensation

                            8,939                   8,939  

Foreign currency translation adjustment

                                  (4,434 )           (4,434 )

Net loss

                                        (30,620 )     (30,620 )

September 30, 2019

        $       20,061     $ 20     $ 300,725     $ (3,832 )   $ 5,372     $ 302,285  

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

 

 

 

Applied Optoelectronics, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

   

Nine months ended September 30,

 

 

2020

   

2019

 

Operating activities:

 

   

 

Net loss

  $ (45,013 )   $ (30,620 )

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

 

   

 

Lower of cost or market reserve adjustment to inventory

    3,340       6,615  

Depreciation and amortization

    18,350       17,982  

Amortization of debt issuance costs

    673       673  

Deferred income taxes, net

    7,358       (7,710 )

Loss on disposal of assets

    15       10  

Share-based compensation

    9,804       8,939  

Unrealized foreign exchange gain

    (323 )     (220 )

Changes in operating assets and liabilities:

           

Accounts receivable, trade

    (16,799 )     825  

Notes receivable

    3       (3 )

Prepaid income tax

    13       426  

Inventories

    (27,303 )     3,197  

Other current assets

    (2,692 )     5,577  

Operating right of use asset

    189       738  

Accounts payable

    23,306       (1,836 )

Accrued liabilities

    (620 )     (2,405 )

Lease liability

    (206 )     (777 )

Net cash (used in) provided by operating activities

    (29,905 )     1,411  

Investing activities:

 

   

 

Purchase of property, plant and equipment

    (12,132 )     (25,982 )

Proceeds from disposal of equipment

    166       2  

Deposits and prepaid for equipment

    (2,733 )     (520 )

Purchase of intangible assets

    (376 )     (497 )

Net cash used in investing activities

    (15,075 )     (26,997 )

Financing activities:

 

   

 

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

    6,229       13,661  

Principal payments of long-term debt and notes payable

    (4,066 )     (42,272 )

Proceeds from line of credit borrowings

    73,700       59,296  

Repayments of line of credit borrowings

    (67,430 )     (66,299 )
Proceeds from bank acceptance payable     26,341       8,214  

Repayments of bank acceptance payable

    (19,598 )     (8,682 )

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

    (18 )     76,362  

Principal payments of financing lease

    (13 )      

Exercise of stock options

    14       8  
Payments of tax withholding on behalf of employees related to share-based compensation     (813 )     (702 )

Proceeds from common stock offering, net

    22,632        

Net cash provided by financing activities

    36,978       39,586  

Effect of exchange rate changes on cash

    (958 )     372  

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

    (8,960 )     14,372  

Cash, cash equivalents and restricted cash at beginning of period

    67,028       58,004  

Cash, cash equivalents and restricted cash at end of period

  $ 58,068     $ 72,376  
Supplemental disclosure of cash flow information:          
Cash paid (received) for:          

Interest, net of amounts capitalized

  $ 4,739     $ 2,933  
Income taxes     (192 )     (329 )

Non-cash investing and financing activities:

       

 

Net change in accounts payable related to property and equipment additions

    1,173       (4,626 )

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

    36       6,370  

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

 

 

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 September 30, 2020 and December 31, 2019 and for the three and nine months ended September 30, 2020 and September 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 nine months ended September 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.

 

 

Note 2.  Significant Accounting Policies

There have been no changes in the Company’s significant accounting policies for the three and nine months ended September 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”, which 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, and is 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.

 

In August 2020, the FASB issued ASU 2020-06, “Debt - Debt with Conversion and Other Options (Subtopic 470-20)” and “Derivatives and Hedging - Contracts in Entities Own Equity” (Subtopic 815-40). This ASU simplifies accounting for convertible instruments by eliminating two of the three models in ASC 470-20 that requires separating embedded conversion features from convertible instruments. The guidance is effective for fiscal years beginning after December 15, 2021. 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 where the product is manufactured. For additional information on the disaggregated revenues by geographical region, see Note 17, "Geographic Information.”

 

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

   

Three months ended September 30,

 

         

% of

           

% of

 

 

2020

   

Revenue

   

2019

   

Revenue

 

Data Center

  $ 55,336       72.2 %   $ 34,006       73.8 %

CATV

    11,642       15.2 %     8,797       19.1 %

Telecom

    8,870       11.6 %     2,868       6.2 %

FTTH

    67       0.1 %     39       0.1 %

Other

    693       0.9 %     374       0.8 %

Total Revenue

  $ 76,608       100.0 %   $ 46,084       100.0 %

   

Nine months ended September 30,

 

         

% of

           

% of

 

 

2020

   

Revenue

   

2019

   

Revenue

 

Data Center

  $ 141,133       77.4 %   $ 104,311       73.3 %

CATV

    22,007       12.1 %     30,577       21.5 %

Telecom

    17,600       9.7 %     6,236       4.4 %

FTTH

    69       0.0 %     149       0.1 %

Other

    1,489       0.8 %     941       0.7 %

Total Revenue

  $ 182,298       100.0 %   $ 142,214       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 September 30,

   

Nine months ended September 30,

 

 

2020

   

2019

   

2020

   

2019

 

Operating lease expense

  $ 299     $ 287     $ 890     $ 929  

Financing lease expense

    8             24        

Short Term lease expense

    35       20       104       100  

Total lease expense

  $ 342     $ 307     $ 1,018     $ 1,029  

 

 

Maturities of lease liabilities are as follows for the future one-year periods ending  September 30, 2020 (in thousands):

      Operating       Financing  

2021

  $ 1,297     $ 22  

2022

    1,305       22  

2023

    1,225       22  

2024

    1,162       49  

2025

    1,180        

2026 and thereafter

    4,352        

Total lease payments

  $ 10,521     $ 115  

Less imputed interest

    (1,531 )     (12 )

Present value

  $ 8,990     $ 103  

 

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

   

September 30,

 

 

2020

   

2019

 

Weighted Average Remaining Lease Term (Years) - operating leases

    8.41       9.46  

Weighted Average Remaining Lease Term (Years) - financing leases

    3.08        

Weighted Average Discount Rate - operating leases

    3.23 %     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):

 

   

Nine months ended September 30,

 

 

2020

   

2019

 

Cash paid for amounts included in the measurement of lease liabilities

 

   

 

Operating cash flows from operating leases

    983       1,002  

Operating cash flows from financing lease

    4        

Financing cash flows from financing lease

    13        

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

    699       39  

 

 

 

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):

 

   

September 30,

   

December 31,

 

 

2020

   

2019

 

Cash and cash equivalents

  $ 46,772     $ 59,977  

Restricted cash

    11,296       7,051  

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

  $ 58,068     $ 67,028  

Restricted cash includes guarantee deposits for customs duties, China government subsidy fund, and compensating balances required for certain credit facilities. As of September 30, 2020 and December 31, 2019, there was $4.1 million and $1.9 million of restricted cash required for bank acceptance notes issued to vendors, respectively. In addition, there was $5.9 million and $4.2 million certificate of deposit associated with credit facilities with a bank in China as of September 30, 2020 and December 31, 2019 respectively. 

 

 

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 September 30,

   

Nine months ended September 30,

 

 

2020

   

2019

   

2020

   

2019

 

Numerator:

 

   

   

   

 

Net loss

  $ (9,616 )   $ (8,780 )   $ (45,013 )   $ (30,620 )

Denominator:

 

   

   

   

 

Weighted average shares used to compute net loss per share

 

   

   

   

 

Basic

    22,744       20,023       21,276       19,940  

Diluted

    22,744       20,023       21,276       19,940  

Net loss per share

 

   

   

   

 

Basic

  $ (0.42 )   $ (0.44 )   $ (2.12 )   $ (1.54 )

Diluted

  $ (0.42 )   $ (0.44 )   $ (2.12 )   $ (1.54 )

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 September 30,

   

Nine months ended September 30,

 

 

2020

   

2019

   

2020

   

2019

 

Employee stock options

    51       16       27       50  

Restricted stock units

    113       19       9       -  

Shares for convertible senior notes

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

Total antidilutive shares

    4,751       4,622       4,623       4,637  

 

Note 7.  Inventories

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

 

September 30, 2020

   

December 31, 2019

 

Raw materials

  $ 33,222     $ 15,570  

Work in process and sub-assemblies

    58,515       50,787  

Finished goods

    19,690       18,671  

Total inventories

  $ 111,427     $ 85,028  

The lower of cost or market adjustment expensed for inventory for the three months ended September 30, 2020 and 2019 was $0.4 million and $1.4 million, respectively. The lower of cost or market adjustment expensed for inventory for the nine months ended September 30, 2020 and 2019 was $3.3 million and $6.6 million, respectively.

 

For the three months ended September 30, 2020 and 2019, the direct inventory write-offs related to scrap, discontinued products, and damaged inventories were $8.4 million and $3.1 million, respectively. For the nine months ended September 30, 2020 and 2019, the direct inventory write-offs related to scrap, discontinued products, and damaged inventories were $14.7 million and $8.4 million, respectively. 

 
 

Note 8.  Property, Plant & Equipment

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

 

September 30, 2020

   

December 31, 2019

 

Land improvements

  $ 806     $ 806  

Building and improvements

    86,524       83,846  

Machinery and equipment

    244,976       237,464  

Furniture and fixtures

    5,444       5,105  

Computer equipment and software

    11,355       10,506  

Transportation equipment

    676       658  

    349,781       338,385  

Less accumulated depreciation and amortization

    (133,561 )     (116,979 )

    216,220       221,406  

Construction in progress

    32,419       25,937  

Land

    1,101       1,101  

Total property, plant and equipment, net

  $ 249,740     $ 248,444  

For the three months ended September 30, 2020 and 2019, depreciation expense of property, plant and equipment was $6.1 million and $5.9 million, respectively. For the nine months ended September 30, 2020 and 2019, depreciation expense of property, plant and equipment was $17.9 million and $17.6 million, respectively. For the three and nine months ended September 30, 2020, the capitalized interest was $0.1 million and $0.3 million, respectively.

 

As of September 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):

   

September 30, 2020

 

 

Gross

   

Accumulated

   

Intangible

 

 

Amount

   

amortization

   

assets, net

 

Patents

  $ 8,029     $ (4,005 )   $ 4,024  

Trademarks

    22       (15 )     7  

Total intangible assets

  $ 8,051     $ (4,020 )   $ 4,031  

   

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 September 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 nine months ended September 30, 2020 and 2019, amortization expense for intangible assets, included in general and administrative expenses on the income statement, was each $0.4 million. The remaining weighted average amortization period for intangible assets is approximately 7 years.

 

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

 

2021

  $ 570  

2022

    570  

2023

    570  

2024

    570  

2025

    570  

thereafter

    1,181  
    $ 4,031  

 

 

 

Note 10.  Fair Value of Financial Instruments​

The following table represents a summary of the Company’s financial instruments measured at fair value on a recurring basis for the periods indicated (in thousands):

   

As of September 30, 2020

   

As of December 31, 2019

 

 

(Level 1)

   

(Level 2)

   

(Level 3)

   

Total

   

(Level 1)

   

(Level 2)

   

(Level 3)

   

Total

 

Assets:

 

   

   

   

   

   

   

   

 

Cash and cash equivalents

  $ 46,772     $     $     $ 46,772     $ 59,977     $     $     $ 59,977  

Restricted cash

    11,296                   11,296       7,051                   7,051  

Total assets

  $ 58,068     $     $     $ 58,068     $ 67,028     $     $     $ 67,028  

Liabilities:

 

   

   

   

   

   

   

   

 

Bank acceptance payable

  $     $ 13,366     $     $ 13,366     $     $ 6,310     $       6,310  

Convertible senior notes

          74,240             74,240             77,191             77,191  

Total liabilities

  $     $ 87,606     $     $ 87,606     $     $ 83,501     $     $ 83,501  

The carrying value amounts of accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses and other current liabilities approximate fair value because of the short-term maturity of these instruments. The carrying value amounts of bank acceptances approximate fair value due to the short-term nature of the debt since it renews frequently at current interest rates. The Company believes that the interest rates in effect at each period end represent the current market rates for similar borrowings.

 

The fair value of its convertible senior debt is measured for disclosure purpose. The fair value is based on observable market prices for this debt, which is traded in less active markets and are therefore classified as a Level 2 fair value measurement.

 

Note 11.  Notes Payable and Long-Term Debt

Notes payable and long-term debt consisted of the following for the periods indicated (in thousands):

   

September 30, 2020

   

December 31, 2019

 

Revolving line of credit with a U.S. bank up to $20,000 with interest at LIBOR plus 1.5% , maturing April 2, 2021

  $ 18,700     $ 20,000  
Paycheck Protection Program Term Note with interest at fixed rate 1.0%, maturing April 16, 2022     6,229        

Revolving line of credit with a Taiwan bank up to $3,336 with 2.2% interest, maturing October 16, 2020

    3,436       3,336  
Notes payable to a finance company due in monthly installments with 3.5% interest, maturing January 21, 2022     2,419       4,262  

Notes payable to a finance company due in monthly installments with 3.1% interest, maturing January 21, 2022

    2,588       4,633  

Revolving line of credit with a Taiwan bank up to $2,668 with interest of 1.7%, maturing April 11, 2020

          2,668  
Revolving line of credit with a China bank up to $8,917 with interest ranging from 4.5%, maturing October 14, 2020     1,016        

Revolving line of credit with a China bank up to $25,449 with interest from 3.01% to 4.57%, maturing May 24, 2024

    12,162       7,919  
Credit facility with a China bank up to $14,125 with interest of 3.5%, maturing November 7, 2020     4,999        
Credit facility with a China bank up to $7,167 with interest of 5.7%, maturing from June 20, 2022     7,342       7,167  

Sub-total

    58,891       49,985  

Less debt issuance costs, net

    (35 )     (62 )

Grand total

    58,856       49,923  

Less current portion

    (44,292 )     (33,371 )

Non-current portion

  $ 14,564     $ 16,552  

 

   

 

Bank Acceptance Notes Payable

 

   

 

Bank acceptance notes issued to vendors with a zero percent interest rate

  $ 13,366     $ 6,310  

 

 

The current portion of long-term debt is the amount payable within one year of the balance sheet date of September 30, 2020.

Maturities of long-term debt are as follows for the future one-year periods ending September 30, (in thousands):

2021

  $ 44,292  

2022

    14,564  

Total outstanding

  $ 58,856  

On September 28, 2017, the Company entered into a Loan Agreement (“Loan Agreement”), a Promissory Note, an Addendum to the Promissory Note, a Truist Bank Security Agreement, a Trademark Security Agreement, and a Patent Security Agreement (together the “Credit Facility”) with Truist Bank (which acquired Branch Banking and Trust Company or BB&T in connection with a merger in December 2019). The Credit Facility provides the Company with a three-year, $50 million, revolving line of credit. Borrowings under the Credit Facility will be used for general corporate purposes. The Company makes monthly payments of accrued interest with the final monthly payment being for all principal and all accrued interest not yet paid. The Company’s obligations under the Credit Facility are secured by the Company’s accounts receivable, inventory, intellectual property, and all business assets with the exception of real estate and equipment. Borrowings under the Credit Facility bear interest at a rate equal to the one-month LIBOR plus 1.50%. The Credit Facility requires the Company to maintain certain financial covenants and also contains representations and warranties, and events of default applicable to the Company that are customary for agreements of this type.

On March 30, 2018, the Company executed a First Amendment to Loan Agreement, a Note Modification Agreement and Addendum to Promissory Note for $60 million, a Promissory Note and Addendum to Promissory Note for $26 million, a Promissory Note and Addendum to Promissory Note for $21.5 million, a Texas Deed of Trust and Security Agreement, an Assignment of Lease and Rent, and an Environmental Certification and Indemnity Agreement, (collectively, the “Amended Credit Facility”), with Truist Bank. The Amended Credit Facility amends the Company’s three-year $50 million line of credit with Truist Bank, originally executed on September 28, 2017. The Amended Credit Facility (1) increases the principal amount of the three-year line of credit from $50 million to $60 million (the “Line of Credit”); (2) allows the Company to borrow an additional $26 million from Truist Bank in the form of a five-year capital expenditure loan (the “CapEx Loan”) and (3) allows the Company to borrow an additional $21.5 million in the form of a seventy-month real estate term loan (the “Term Loan”) to refinance the Company’s plant and facilities in Sugar Land, Texas. Borrowings under the Line of Credit bear interest at a rate equal to the one-month LIBOR plus a Line of Credit margin ranging between 1.40% and 2.0%. Borrowings under the CapEx Loan bear interest at a rate equal to the one-month LIBOR plus a CapEx Loan margin ranging between 1.30% and 2.0%. Borrowings under the Term Loan bear interest at a rate equal to the one-month LIBOR plus a Term Loan margin ranging between 1.15% and 2.0%. The Company is required to make monthly payments of principal and accrued interest with the final monthly payments being for all principal and accrued interest not yet paid. The Company’s obligations under the Amended Credit Facility are secured by the Company’s accounts receivable, inventory, equipment, intellectual property, real property, and virtually all business assets.

On February 1, 2019, the Company executed a Second Amendment to Loan Agreement ("Second Amendment") with Truist Bank. The original loan agreement with Truist Bank, executed on September 28, 2017, and a first amendment to the original loan agreement, executed on March 30, 2018, provided the Company with a three-year $60 million line of credit; a $26 million five-year CapEx Loan and a $21.5 million seventy-month real estate term loan for the Company’s plant and facilities in Sugar Land, Texas. The Second Amendment extends the CapEx Loan draw-down date from March 30, 2019 to September 30, 2020, requires the Company to provide Truist Bank monthly financial statements and allows additional unfinanced capital expenditures.

On March 5, 2019, the Company executed a Third Amendment to Loan Agreement (the “Third Amendment”) with Truist Bank pursuant to which the Company has established a revolving credit line used for working capital purposes.  The Third Amendment, among other things: (i) contemplates the issuance of the Notes (as defined in Note 12 below) and the subsequent conversion of the Notes into common stock in accordance with the terms of the Indenture, including the payment of cash for any fractional shares; (ii) adjusts pricing of the unused line fee to 0.20% per annum; (iii) reduces the maximum commitment under the line of credit from $60,000,000 to $25,000,000; and (iv) provides that, so long as the Company’s utilization of the revolving credit line is not greater than 60% of the available commitment, the Company will not be required to comply with its financial covenants, including its fixed charge coverage ratio or funded debt to EBITDA covenant, and provided that, such restriction on utilization will not apply during the period of time commencing seven business days prior to the end of any fiscal quarter through seven business days after the subsequent fiscal quarter.

 

On March 5, 2019, the Company used approximately $37.8 million of the net proceeds from the offering of the Notes to fully repay the CapEx Loan and Term Loan with Truist Bank.

On September 30, 2019, the Company executed a Fourth Amendment to Loan Agreement (the “Fourth Amendment”) with Truist Bank. Under the terms of the Fourth Amendment (i) the maximum commitment under the line of credit was reduced from $25,000,000 to $20,000,000; (ii) the maturity date of the line of credit was extended from September 28, 2020 to April 2, 2021; (iii) pricing of the unused line fee was adjusted to 0.30% per annum; and (iv) the Covenant Threshold Amount test created in the Third Amendment was removed and replaced with the requirement that if, at any time during any reporting period and pursuant to the most recent loan base report received by Truist Bank, the principal balance outstanding under the line of credit exceeds the lesser of the approved maximum amount of the line of credit commitment amount or the collateral loan value reduced by the reserves, the Company shall immediately prepay the line of credit to the extent necessary to eliminate such excess. Such reserves shall, at any time that the fixed charge coverage ratio for the loan is less than 1.5 to 1.0, tested for the period of twelve months ended on the applicable covenant measurement date, equal to an amount equal to seventy-five percent (75%) of the lesser of the line of credit commitment amount or collateral loan value reduced by the sum of (i) the principal balance outstanding under the line of credit, (ii) the letter of credit exposure reserve, and (iii) the availability reserve as determined by Truist Bank from the most recent loan base report and otherwise in the sole discretion of Truist Bank after consideration of collections.

As of September 30, 2020, the Company was in compliance with all covenants under the Fourth Amendment. As of September 30, 2020, $18.7 million was outstanding under the Fourth Amendment line of credit.

 

On April 17, 2020, the Company entered into a term note ("PPP Term Note") with Truist Bank, with a principal amount of $6.23 million pursuant to the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The PPP loan is evidenced by a promissory note. The PPP Term Note bears interest at a fixed annual rate of 1.00%, with the first six months of interest deferred. Beginning in November 2020, the Company will make 18 equal monthly payments of principal and interest with the final payment due in April 2022. The PPP Term Note may be accelerated upon the occurrence of an event of default. The PPP Term Note is unsecured and guaranteed by the United States Small Business Administration ("SBA"). The Company applied for forgiveness of the principal amount of the PPP Term Note on September 14, 2020 and currently expects the application to get approved. The forgiveness application is being reviewed by Truist Bank.  Under current SBA guidelines, due to the size of the loan we anticipate a further review by the SBA upon completion of the review by Truist Bank.  The timing of the completion of the review by Truist Bank and the subsequent review by SBA is currently uncertain.  Until such time as the forgiveness assessment has been completed by the SBA, the Company will not be required to make any payments under the terms of the PPP Term Note.

 

 

On November 29, 2018, Prime World entered into a Purchase and Sale Contract (the “Sale Contract”) and an Equipment Finance Agreement with Chailease Finance Co., Ltd. (“Chailease”) in connection with certain equipment. Pursuant to the Sale Contract, Prime World sold certain equipment to Chailease for a purchase price of NT$267,340,468, or approximately $8.7 million. Simultaneously, Prime World financed the equipment back from Chailease for a term of three-years, pursuant to the Equipment Finance Agreement. Prime World is obligated to pay an initial payment of NT$67,340,468, or approximately $2.2 million, thereafter the monthly payments range from NT$5,571,229, or $0.2 million, to NT$6,139,188, or approximately $0.2 million. Based on the monthly payments made under the Equipment Finance Agreement, the annual interest rate is calculated to be 3.5%. Upon an event of default under the Equipment Finance Agreement, Prime World’s payment obligation will be secured by a promissory note to Chailease in the amount of NT$210,601,605, or approximately $6.8 million, subject to certain terms and conditions. The title of the equipment will be transferred to Prime World upon expiration of the Equipment Finance Agreement. As of September 30, 2020, $2.4 million was outstanding under the Equipment Finance Agreement.

 

On January 21, 2019, Prime World entered into a Second Purchase and Sale Contract (the “Second Sales Contract”), Promissory Note, and a Second Equipment Finance Agreement with Chailease in connection with certain equipment. Pursuant to the Second Sales Contract, Prime World sold certain equipment to Chailease for a purchase price of NT$267,333,186, or approximately $8.7 million. Simultaneously, Prime World financed the equipment back from Chailease for a term of three-years, pursuant to the Second Equipment Finance Agreement. Prime World is obligated to pay an initial monthly payment of NT$67,333,186, or approximately $2.2 million, thereafter the monthly payments range from NT$5,570,167, or approximately $0.2 million to NT$6,082,131, or approximately $0.2 million. Based on the monthly payments made under the Second Equipment Finance Agreement, the annual interest rate is calculated to be 3.1%. Upon an event of default under the Second Equipment Finance Agreement, Prime World’s payment obligation will be secured by a promissory note to Chailease at the amount of NT$209,555,736 or approximately $6.8 million, subject to certain terms and conditions. The title of the equipment will be transferred to Prime World upon expiration of the Second Equipment Finance Agreement. As of September 30, 2020, $2.6 million was outstanding under the Second Equipment Finance Agreement. 

 

​ On September 15, 2020, Prime World entered into an Amendment to the Sale Contract and Second Sales Contract (the “Amendment”) with Chailease Finance Co., Ltd. (“Chailease”). The Amendment amends the Sales Contract, dated November 29, 2018 and the Second Sales Contract, dated January 21, 2019 (hereafter collectively referred to as the “Original Sales Contracts”). Pursuant to the Amendment, Prime World agrees to pay Chailease NT$22,311,381, or approximately $0.8 million for certain leased equipment listed in the Amendment (the “Leased Equipment”). This payment will include all outstanding lease payments, costs and expenses; simultaneously, Chailease agrees to transfer title of such Leased Equipment back to Prime World. Regarding all other equipment contemplated in the Original Sales Contracts but not listed in the Amendment, pursuant to the terms and conditions made under the Original Sales Contracts, Prime World is obligated to pay Chailease monthly lease payments which total NT$159,027,448, or approximately $5.5 million (the “Lease Payments”). The Lease Payments will begin on September 21, 2020 with the last Lease Payment due on January 21, 2022, title of all other equipment contemplated under the Original Sales Contracts but not listed in the Amendment will transfer to Prime World upon completion of the Lease Payments and expiration of the Original Sales Contracts. 

 

On April 11, 2019, Prime World entered into a one-year credit facility totaling NT$80 million, or approximately $2.6 million, (the “Far Eastern Credit Facility”) with Far Eastern International Bank Co., Ltd. (“Far Eastern”). Prime World may draw upon the Far Eastern Credit Facility from April 11, 2019 until April 11, 2020. The term of each draw shall be up to 180 days. Under the Far Eastern Credit Facility borrowing in NT dollars will bear interest at a rate equal to Far Eastern’s published one-year fixed term time deposits rate, plus 0.655%; for all foreign currency borrowing, interest shall be the TAIFX3 rate for the length of time equal to the term of the loan or the next longer tenor for which rates are quoted, plus 0.7%. As of the execution of the Far Eastern Credit Facility, Far Eastern’s published one-year fixed term time deposits rate and TAIFX3 rate are 1.045 % and 2.75%, respectively. Prime World’s obligations under the Far Eastern Credit Facility will be secured by a promissory note executed between Prime World and Far Eastern. On April 9, 2020, Prime World repaid the Far Eastern Credit Facility without penalty and terminated the agreement.

 

On July 23, 2019, Prime World entered into a one-year revolving credit facility totaling NT$100 million, or approximately $3.3 million, (the “NT$100M Credit Line”) and $1 million (the “US$1M Credit Line”) with Taishin International Bank in Taiwan ("Taishin"). Borrowing under the NT$100M Credit Line will be used for short-term working capital; the borrowing under the US$1M Credit Line will be strictly used for spot transactions in the foreign exchange market. The NT$100M Credit Line and US$1M Credit Line are collectively referred to as the “Taishin Credit Facility”. On July 20, 2020, the NT$100M Credit Line with Taishin was extended for three (3) months until October 16, 2020.The term of each draw shall be either 90 or 120 days. Borrowings under the NT$100M Credit Line will bear interest at a rate of 2.25% for 90 day draws and 2.2% for 120 day draws; borrowings under the US$1M Credit Line will bear interest equal to the Taishin’s foreign exchange rate effective on the day of the applicable draw. At the end of the draw term Prime World will make payment for all principal and accrued interest. Prime World’s obligations under the Taishin Credit Facility will be secured by a promissory note executed between Prime World and Taishin. The agreements for the Taishin Credit Facility contain representations and warranties, and events of default applicable to Prime World that are customary for agreements of this type. As of September 30, 2020, $3.4 million was outstanding under the Taishin Credit Facility.

 

 

 

On April 19, 2019, the Company’s China subsidiary, Global, entered into a twelve (12) month revolving line of credit agreement, totaling 60,000,000 RMB, or approximately $8.9 million, (the “China Merchants Credit Line”), with China Merchants Bank Co., Ltd., in Ningbo, China (“China Merchants”). The China Merchants Credit Line will be used by Global for general corporate purposes, including the issuance of bank acceptance notes to Global’s vendors. On April 14, 2020, Global extended the revolving line of credit agreement with China Merchants by six (6) months. Global  may draw upon the China Merchants Credit Line from April 19, 2019 until October 14, 2020 (the “Credit Period”). During the Credit Period, Global may request to draw upon the China Merchants Credit Line on an as-needed basis; however, the amount of available credit under the China Merchants Credit Line and the approval of each draw may be reduced or declined by China Merchants due to changes in Chinese government regulations and/or changes in Global’s financial and operational condition at the time of each requested draw. Each draw will bear interest equal to China Merchants’ commercial banking interest rate effective on the day of the applicable draw. Global’s obligations under the China Merchants Credit Line are unsecured. As of September 30, 2020, $1.0 million was outstanding under the China Merchants Credit Line and there was no outstanding balance of bank acceptance notes issued to vendors under this facility.

On April 30, 2019, the Company’s China subsidiary, Global, entered into a one-year credit facility totaling 9,900,000 RMB, or approximately $1.5 million, (the “SPD ¥9.9M Credit Facility”), with Shanghai Pudong Development Bank Co., Ltd., in Builun District, Ningbo City, (China) ("SPD"). Borrowing under the SPD ¥9.9M Credit Facility will be used for short-term working capital. Global may draw upon the SPD ¥9.9M Credit Facility from April 30, 2019 until May 9, 2019. Borrowing under the SPD ¥9.9M Credit Facility will mature on April 30, 2020 and will bear interest equal to SPD’s published twelve (12) month prime loan rate in effect on the date of the draw, plus 0.2475%. Under the SPD ¥9.9M Credit Facility, Global will make monthly payments of accrued interest and the principal shall be repaid upon maturity. Global’s obligations under the SPD ¥9.9M Credit Facility are unsecured. The SPD ¥9.9M Credit Facility was replaced by the SPD Credit Line on May 24, 2019.

On May 7, 2019, the Company’s China subsidiary, Global, entered into a one-year credit facility totaling 30,000,000 RMB, or approximately $4.5 million, (the “SPD ¥30M Credit Facility”), with SPD. Borrowing under the SPD ¥30M Credit Facility will be used to repay Global’s outstanding loans with China Construction Bank Co., Ltd., in Ningbo, China ("CCB"). Borrowing under the SPD ¥30M Credit Facility will mature on May 7, 2020 and will bear interest equal to the Bank’s published twelve (12) month prime loan rate in effect on the date of the draw, plus 0.2475%. As of the execution of the SPD ¥30M Credit Facility agreement, the Bank’s published twelve (12) months prime loan rate is 4.32%. Under the SPD ¥30M Credit Facility, Global will make monthly payments of accrued interest; principal shall be repaid upon maturity. Global’s obligations under the SPD ¥30M Credit Facility are unsecured. The SPD ¥30M Credit Facility was replaced by the SPD Credit Line on May 24, 2019.

 

On May 8, 2019, the Company’s China subsidiary, Global, entered into a six-month credit facility totaling $2,000,000 (the “$2M Credit Facility”) with SPD. Borrowing under the $2M Credit Facility will be used to repay Global’s outstanding loans with CCB and for general corporate purposes. Borrowing under the $2M Credit Facility will mature on November 7, 2019 and will bear interest equal to SPD’s published six (6) month LIBOR in effect on the date of the draw, plus 1.48%. As of the execution of the $2M Credit Facility agreement, the SPD published 6 months LIBOR rate was 2.59438%. Under the $2M Credit Facility, Global will make quarterly payments of accrued interest; principal shall be repaid upon maturity. Global’s obligations under the $2M Credit Facility are unsecured. The $2M Credit Facility was replaced by the SPD Credit Line on May 24, 2019.

 

 

On May 24, 2019, the Company’s China subsidiary, Global, entered into a five-year revolving credit line agreement, totaling 180,000,000 RMB (the “SPD Credit Line”), or approximately $25.4 million, and a mortgage security agreement (the “Security Agreement”), with SPD. Borrowing under the SPD Credit Line will be used for general corporate and capital investment purposes, including the issuance of bank acceptance notes to Global’s vendors. The total SPD Credit Line of 180 million RMB is inclusive of all credit facilities previously entered into with SPD including: a 30 million RMB credit facility entered into on May 7, 2019; and a 9.9 million RMB credit facility entered into on April 30, 2019 and $2 million credit facility entered into on May 8, 2019. Global may draw upon the SPD Credit Line on an as-needed basis at any time during the 5-year term; however, draws under the SPD Credit Line may become due and repayable to SPD at SPD’s discretion due to changes in Chinese government regulations and/or changes in Global’s financial and operational condition. Each draw will bear interest equal to SPD’s commercial banking interest rate effective on the day of the applicable draw. Global’s obligations under the SPD Credit Line will be secured by real property owned by Global and mortgaged to the Bank under the terms of the Security Agreement. As of September 30, 2020, $12.2 million was outstanding under the SPD Credit Line and the outstanding balance of bank acceptance notes issued to vendors was $13.4 million.

On June 21, 2019, the Company’s China subsidiary, Global, entered into an 18 month credit facility totaling 100,000,000 RMB (the “¥100M Credit Facility”), or approximately $14.1 million, with China Zheshang Bank Co., Ltd., in Ningbo City, China (“CZB”). Borrowing under the ¥100M Credit Facility will be used by Global for general corporate purposes. Global may draw upon the ¥100M Credit Facility from June 21, 2019 until January 4, 2021 (the “¥100M Credit Period”). During the ¥100M Credit Period, Global may request to draw upon the ¥100M Credit Facility on an as-needed basis; however, draws under the ¥100M Credit Facility may become due and repayable to CZB at CZB’s discretion due to changes in Chinese government regulations and/or changes in Global’s financial and operational condition. Each draw will bear interest equal to CZB’s commercial banking interest rate effective on the day of the applicable draw. Global’s obligations under the ¥100M Credit Facility will be secured by real property owned by Global and mortgaged to CZB under the terms of the Real Estate Security Agreement. The agreements for the ¥100M Credit Facility and the Real Estate Security Agreement also contain rights and obligations, representations and warranties, and events of default applicable to the Company that are customary for agreements of this type. As of September 30, 2020, $5.0 million was outstanding under the ¥100M Credit Facility and there was no outstanding balance of bank acceptance notes issued to vendors under this facility.

On June 21, 2019, the Company’s China subsidiary, Global, entered into a three-year credit facility totaling 50,000,000 RMB (the “¥50M Credit Facility”), or approximately $7.1 million, with CZB. Borrowing under the ¥50M Credit Facility will be used by Global for general corporate purposes. Global may draw upon the ¥50M Credit Facility from June 21, 2019 until June 20, 2022 (the “¥50M Credit Period”). During the ¥50M Credit Period, Global may request to draw upon the ¥50M Credit Facility on an as-needed basis; however, draws under the ¥50M Credit Facility may become due and repayable to CZB at CZB’s discretion due to changes in Chinese government regulations and/or changes in Global’s financial and operational condition. Each draw will bear interest equal to CZB’s commercial banking interest rate effective on the day of the applicable draw. Global’s obligations under the ¥50M Credit Facility will be secured by machinery and equipment owned by Global and mortgaged to CZB under the terms of the Machinery and Equipment Security Agreement. As of September 30, 2020, $7.3 million was outstanding under the ¥50M Credit Facility.

As of September 30, 2020 and December 31, 2019, the Company had $23.7 million and $34.7 million of unused borrowing capacity, respectively.

One-month LIBOR rates were 0.1% and 1.8% at September 30, 2020 and December 31, 2019, respectively.

As of September 30, 2020 and December 31, 2019, there was $10.0 million and $6.1 million of restricted cash, investments or security deposits associated with the loan facilities, respectively.

 

 

Note 12.  Convertible Senior Notes

On March 5, 2019, the Company issued $80.5 million of 5% convertible senior notes due 2024 (the “Notes”). The Notes were issued pursuant to an indenture, dated as of March 5, 2019 (the “Indenture”), between the Company and Wells Fargo Bank, National Association, as trustee, paying agent, and conversion agent (the “Trustee”). The Notes bear interest at a rate of 5.00% per year, payable in cash semi-annually in arrears on March 15 and September 15 of each year, beginning on September 15, 2019. The Notes will mature on March 15, 2024, unless earlier repurchased, redeemed or converted in accordance with their terms.

The sale of the Notes generated net proceeds of $76.4 million, after deducting the Initial Purchasers’ discounts and offering expenses payable by the Company. The Company used approximately $37.8 million of the net proceeds from the offering to fully repay the CapEx Loan and Term Loan with Truist Bank and the remainder will be used for general corporate purposes.

The following table presents the carrying value of the Notes for the periods indicated (in thousands):

   

September 30,

   

December 31,

 

 

2020

   

2019

 

Principal

  $ 80,500     $ 80,500  

Unamortized debt issuance costs

    (2,854 )     (3,459 )

Net carrying amount

  $ 77,646     $ 77,041  

The Notes are convertible at the option of holders of the Notes at any time until the close of business on the scheduled trading day immediately preceding the maturity date. Upon conversion, holders of the Notes will receive shares of the Company’s common stock, together, if applicable, with cash in lieu of any fractional share, at the then-applicable conversion rate. The initial conversion rate is 56.9801 shares of the Company’s common stock per $1,000 principal amount of Notes (representing an initial conversion price of approximately $17.55 per share of common stock, which represents an initial conversion premium of approximately 30% above the closing price of $13.50 per share of the Company’s common stock on February 28, 2019), subject to customary adjustments. If a make-whole fundamental change (as defined in the Indenture) occurs, and in connection with certain other conversions before March 15, 2022, the Company will in certain circumstances increase the conversion rate for a specified period of time.

 

Initially there are no guarantors of the Notes, but the Notes will be fully and unconditionally guaranteed, on a senior, unsecured basis by certain of the Company’s future domestic subsidiaries.  The Notes are the Company’s senior, unsecured obligations and are equal in right of payment with existing and future senior, unsecured indebtedness, senior in right of payment to the Company’s existing and future indebtedness that is expressly subordinated to the Notes and effectively subordinated to the Company’s existing and future secured indebtedness, to the extent of the value of the collateral securing that indebtedness.  The Note Guarantee (as defined in the Indenture) of each future guarantor, if any, will be such guarantor’s senior, unsecured obligations and are equal in right of payment with existing and future senior, unsecured indebtedness, senior in right of payment to such future guarantor’s existing and future indebtedness that is expressly subordinated to the Notes and effectively subordinated to such future guarantor’s existing and future secured indebtedness, to the extent of the value of the collateral securing that indebtedness.

 

Holders may require the Company to repurchase their Notes upon the occurrence of a fundamental change (as defined in the Indenture) at a cash purchase price equal to the principal amount thereof plus accrued and unpaid interest, if any.

 

The Company may not redeem the Notes prior to March 15, 2022.  On or after March 15, 2022, the Company may redeem for cash all or part of the Notes if the last reported sale price per share of the Company’s common stock exceeds 130% of the conversion price on (i) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately before the date the Company sends the related redemption notice; and (ii) the trading day immediately before the date the Company sends such redemption notice.  The redemption price is equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.  In addition, calling any Note for redemption will constitute a “make-whole fundamental change” with respect to that Note, in which case the conversion rate applicable to the conversion of that Note will be increased in certain circumstances if it is converted after it is called for redemption.

 

 

The Indenture contains covenants that limit the Company’s ability and the ability of our subsidiaries to, among other things: (i) incur or guarantee additional indebtedness or issue disqualified stock; and (ii) create or incur liens.

Pursuant to the guidance in ASC 815-40, Contracts in Entity’s Own Equity, the Company evaluated whether the conversion feature of the note needed to be bifurcated from the host instrument as a freestanding financial instrument. Under ASC 815-40, to qualify for equity classification (or non-bifurcation, if embedded) the instrument (or embedded feature) must be both (1) indexed to the issuer’s own stock and (2) meet the requirements of the equity classification guidance. Based upon the Company’s analysis, it was determined the conversion option is indexed to its own stock and also met all the criteria for equity classification contained in ASC 815-40-25-7 and 815-40-25-10. Accordingly, the conversion option is not required to be bifurcated from the host instrument as a freestanding financial instrument. Since the conversion feature meets the equity scope exception from derivative accounting, the Company then evaluated whether the conversion feature needed to be separately accounted for as an equity component under ASC 470-20, Debt with Conversion and Other Options.  The Company determined that notes should be accounted for in their entirety as a liability.

 

The Company incurred approximately $4.1 million in transaction costs in connection with the issuance of the Notes. These costs were recognized as a reduction of the carrying amount of the Notes utilizing the effective interest method and are being amortized over the term of the notes.

The following table sets forth interest expense information related to the Notes (in thousands):

   

Three months ended September 30,

   

Nine months ended September 30,

 

 

2020

   

2019

   

2020

   

2019

 
Contractual interest expense   $ 1,006     $ 984     $ 3,018     $ 2,270  

Amortization of debt issuance costs

    209       207       623       473  

Total interest cost

  $ 1,215     $ 1,191     $ 3,641     $ 2,743  

Effective interest rate

    5.1 %     5.1 %     5.1 %     5.1 %

 

 

Note 13.  Accrued Liabilities​

Accrued liabilities consisted of the following for the periods indicated (in thousands):

   

September 30, 2020

   

December 31, 2019

 

Accrued payroll

  $ 9,695     $ 11,009  

Accrued employee benefits

    2,906       2,288  

Accrued state and local taxes

    962       1,215  
Accrued interest     232       1,208  

Advance payments

    404       312  

Accrued product warranty

    977       821  
Accrued commission expenses     1,077       420  

Accrued professional fees

    272       222  

Accrued utility expenses

    105       155  

Accrued other

    896       214  

Total accrued liabilities

  $ 17,526     $ 17,864  

 

Note 14.  Other Income and Expense

Other income and (expense) consisted of the following for the periods indicated (in thousands):

   

Three months ended September 30,

   

Nine months ended September 30,

 

 

2020

   

2019

   

2020

   

2019

 

Foreign exchange transaction (loss) gain

  $ (271 )   $ 322     $ (18 )   $ 305  
Government subsidy income     847       1,138       1,828       1,360  

Other non-operating gain (loss)

    296       (14 )     301       87  

Loss on disposal of assets

    (6 )           (15 )     (10 )

Total other income, net

  $ 866     $ 1,446     $ 2,096     $ 1,742  

 

 

Note 15.  Share-Based Compensation

Equity Plans

The Company’s board of directors and stockholders approved the following equity plans:

 

the 2006 Share Incentive Plan

 

the 2013 Equity Incentive Plan (“2013 Plan”)

The Company issued stock options, restricted stock awards (“RSAs”) and restricted stock units (“RSUs”) to employees, consultants and non-employee directors. Stock option awards generally vest over a four year period and have a maximum term of ten years. Stock options under these plans have been granted with an exercise price equal to the fair market value on the date of the grant. Nonqualified and Incentive Stock Options, RSAs and RSUs may be granted from these plans. Prior to the Company’s initial public offering in September 2013, the fair market value of the Company’s stock had been historically determined by the board of directors and from time to time with the assistance of third party valuation specialists.

Stock Options

Options have been granted to the Company’s employees under the two incentive plans and generally become exercisable as to 25% of the shares on the first anniversary date following the date of grant and 12.5% on a semi-annual basis thereafter. All options expire ten years after the date of grant.

The following is a summary of option activity (in thousands, except per share data):

   

   

   

Weighted

   

   

Weighted

   

 

 

   

Weighted

   

Average

   

   

Average

   

 

 

   

Average

   

Share Price

   

Weighted

   

Remaining

   

Aggregate

 

 

Number of

   

Exercise

   

on Date of

   

Average

   

Contractual

   

Intrinsic

 

 

shares

   

Price

   

Exercise

   

Fair Value

   

Life

   

Value

 

 

(in thousands, except price data)

 

Outstanding at January 1, 2020

    281     $ 10.22    

    $ 5.32           $ 573  

Exercised

    (2 )        

           

       

Outstanding, September 30, 2020

    279     $ 10.25    

    $ 5.36       2.89       418  

Exercisable, September 30, 2020

    279     $ 10.25    

   

      2.89       418  

Vested and expected to vest

    279     $ 10.25    

   

      2.89       418  

As of September 30, 2020, there was no unrecognized stock option expense.

 

Restricted Stock Units/Awards

The following is a summary of RSU/RSA activity (in thousands, except per share data):

   

   

Weighted

   

   

 

 

   

Average Share

   

Weighted

   

Aggregate

 

 

Number of

   

Price on Date

   

Average Fair

   

Intrinsic

 

 

shares

   

of Release

   

Value

   

Value

 

 

(in thousands, except price data)

 

Outstanding at January 1, 2020

    770    

    $ 25.18     $ 9,143  
Granted     1,185           11.42       13,536  

Released

    (465 )   $ 11.77       21.17       5,472  

Cancelled/Forfeited

    (38 )  

      15.14       426  
Outstanding, September 30, 2020     1,452           15.5       16,333  
Vested and expected to vest     1,452           15.5