APPLIED OPTOELECTRONICS, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

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You should read the following discussion and analysis of our financial condition
and results of operations in conjunction with our consolidated financial
statements and the accompanying notes appearing elsewhere in this Quarterly
Report on Form 10-Q for the period ended March 31, 2022 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, 2021 included in our Annual Report. References to
"Applied Optoelectronics," "we," "our" and "us" are to Applied Optoelectronics,
Inc. and its subsidiaries unless otherwise specified or the context otherwise
requires.

This Quarterly Report on Form 10-Q 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 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," "estimate," "continue,"
"anticipate," "intend," "should," "could," "would," "target," "seek," "aim,"
"believe," "predicts," "think," "objectives," "optimistic," "new," "goal,"
"strategy," "potential," "is likely," "will," "expect," "plan," "project,"
"permit,"  or by other similar expressions that convey uncertainty of future
events or outcomes are 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" provided below, and
those discussed in other documents we file with the SEC, including our Report on
Form 10-K for the year ended December 31, 2021 and subsequent Quarterly Reports
on Form 10-Q. Furthermore, such forward-looking statements speak only as of the
date of this Quarterly 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 this Quarterly Report.

Insight

We are a leading, vertically integrated provider of fiber-optic networking
products. We target four networking end-markets: internet data centers, CATV,
telecom and FTTH. We design and manufacture a range of optical communications
products at varying levels of integration, from components, subassemblies and
modules to complete turn-key equipment. In designing products for our customers,
we typically begin with the fundamental building blocks of lasers and laser
components. From these foundational products, we design and manufacture a wide
range of products to meet our customers' needs and specifications, and such
products differ from each other by their end market, intended use and level of
integration. We are primarily focused on the higher-performance segments within
the internet data center, CATV, telecom and FTTH markets which increasingly
demand faster connectivity and innovation. Our vertically integrated
manufacturing model provides us several advantages, including rapid product
development, fast response times to customer requests and control over product
quality and manufacturing costs.

The four end markets we target are all driven by significant bandwidth demand
fueled by the growth of network-connected devices, video traffic, cloud
computing and online social networking. Within the internet data center market,
we benefit from the increasing use of higher-capacity optical networking
technology as a replacement for copper cables, particularly as speeds reach 100
Gbps and above, as well as the movement to open internet data center
architectures and the increasing use of in-house equipment design among leading
internet companies. Within the CATV market, we benefit from a number of ongoing
trends including the build-out of CATV infrastructure in the US and other
countries, the move to higher bandwidth networks among CATV service providers
and the outsourcing of system design among CATV networking equipment companies.
In the FTTH market, we benefit from continuing PON deployments and system
upgrades among telecom service providers. In the telecom market, we benefit from
deployment of new high-speed fiber-optic networks by telecom network operators,
including 5G networks.

Our vertically integrated manufacturing model provides us several advantages,
including rapid product development, fast response times to customer requests
and greater control over product quality and manufacturing costs. We design,
manufacture and integrate our own analog and digital lasers using a proprietary
Molecular Beam Epitaxy, or MBE, and Metal Organic Chemical Vapor Deposition
(MOCVD) fabrication process, which we believe is unique in our industry. We
manufacture the majority of the laser chips and optical components that are used
in our products. The lasers we manufacture are tested extensively to enable
reliable operation over time and our devices are often highly tolerant of
changes in temperature and humidity, making them well-suited to the CATV, FTTH
and 5G telecom markets where networking equipment is often installed outdoors.



We have three manufacturing sites: Sugar Land, Texas, Ningbo, China and Taipei,
Taiwan. Our research and development functions are generally partnered with our
manufacturing locations, and we have an additional research and development
facility in Duluth, Georgia. In our Sugar Land facility, we manufacture laser
chips (utilizing our MBE and MOCVD processes), subassemblies and components. The
subassemblies are used in the manufacture of components by our other
manufacturing facilities or sold to third parties as modules. We manufacture our
laser chips only within our Sugar Land facility, where our laser design team is
located. In our Taiwan location, we manufacture optical components, such as our
butterfly lasers, which incorporate laser chips, subassemblies and components
manufactured within our Sugar Land facility. Additionally, in our Taiwan
location, we manufacture transceivers for the internet data center, telecom,
FTTH and other markets. In our China facility, we take advantage of lower labor
costs and manufacture certain more labor intensive components and optical
equipment systems, such as optical subassemblies and transceivers for the
internet data center market, CATV transmitters (at the headend) and CATV outdoor
equipment (at the node). Each manufacturing facility conducts testing on the
components, modules or subsystems it manufactures and each facility is certified
to ISO 9001:2015. Our facilities in Ningbo, China, Taipei, Taiwan, and Sugar
Land, Texas are all certified to ISO 14001:2015.



Our business depends on winning competitive bid selection processes to develop
components, systems and equipment for use in our customers' products. These
selection processes are typically lengthy, and as a result our sales cycles will
vary based on the level of customization required, market served, whether the
design win is with an existing or new customer and whether our solution being
designed in our customers' product is our first generation or subsequent
generation product. We do not have any long-term purchase commitments (in excess
of one year) with any of our customers, most of whom purchase our products on a
purchase order basis. However, once one of our solutions is incorporated into a
customer's design, we believe that our solution is likely to continue to be
purchased for that design throughout that product's life cycle because of the
time and expense associated with redesigning the product or substituting an
alternative solution.

Our main executive offices are located at 13139 Jess Pirtle Blvd., Sugar Land, TX 77478, and our phone number is (281) 295-1800.

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COVID-19 Pandemic



We are subject to risks and uncertainties as a result of the COVID-19 pandemic.
The extent of the impact of the COVID-19 pandemic on our business is highly
uncertain and difficult to predict as coronavirus continues to spread around the
world. In March 2020, we instituted travel restrictions and implemented
sanitation and disinfection procedures to safeguard the health and safety of our
employees which continue today. Recently, we began allowing certain employee
travel, but continue strict sanitation procedures in our facilities.  With
increased vaccinations and the potential significant reduction of infections, we
have implemented procedures for a safe return to the office environment for all
of our employees.



The spread of COVID-19 has impacted our supply chain operations through
restrictions, reduced capacity and shutdown of business activities by suppliers
whom we rely on for sourcing components and materials and third-party partners
whom we rely on for manufacturing, warehousing and logistics services.
Currently, the suppliers who are responsible for most of our supply-chain
constraints in 2021 have begun the process of returning to normal operations and
have expressed optimism that their deliveries in 2022 will return to normal.
However, late in the first quarter of 2022, certain areas of China began to
experience severe restrictions due to COVID-19 outbreaks there. Currently, it is
not possible to estimate the impact (if any) of these restrictions because it is
not clear how long the restrictions will be in place or the extent to which the
restrictions will curtail production by our suppliers in the affected areas. In
order to minimize the impact of these and any similar disruptions, we have added
additional suppliers for many key components, where it is practical to do so.
We believe that these additional suppliers will be able to augment our supply of
needed components, although in some cases these new suppliers' materials are
more expensive than the pre-existing suppliers so a switch to these alternate
suppliers could have a negative impact on gross margins and
profitability. However, this is uncertain and we also cannot predict if other
suppliers could encounter similar difficulties.



Although demand for many of our products has been strong in the short-term as
subscribers seek more bandwidth, customers' purchasing decisions over the
long-term may be impacted by the pandemic and its impact on the economy, which
could in turn impact our revenue and results of operations. The extent to which
the COVID-19 pandemic may materially impact our financial condition, liquidity
or results of operations is therefore uncertain.



Operating results

The following table sets forth our consolidated results of operations for the periods presented and as a percentage of our revenues for such periods (in thousands, except percentages):

                                      Three months ended           Three months ended
                                           March 31,                    March 31,
                                             2022                         2021
Revenue, net                        $    52,242       100.0 %    $    49,701       100.0 %
Cost of goods sold                       43,217        82.7 %         38,982        78.4 %
Gross profit                              9,025        17.3 %         10,719        21.6 %
Operating expenses
Research and development                  9,486        18.2 %         10,928        22.0 %
Sales and marketing                       2,558         4.9 %          2,960         6.0 %
General and administrative               11,220        21.5 %         10,869        21.9 %
Total operating expenses                 23,264        44.5 %         24,757        49.8 %
Loss from operations                    (14,239 )     (27.3 )%       (14,038 )     (28.2 )%
Other income (expense)
Interest income                              28         0.1 %             16         0.0 %
Interest expense                         (1,401 )      (2.7 )%        (1,431 )      (2.9 )%
Other income, net                          (450 )      (0.9 )%          (169 )      (0.3 )%
Total other income (expense), net        (1,823 )      (3.5 )%        (1,584 )      (3.2 )%
Loss before income taxes                (16,062 )     (30.7 )%       (15,622 )     (31.4 )%
Income tax expense                            -        (0.0 )%             0        (0.0 )%
Net loss                            $   (16,062 )     (30.7 )%   $   (15,622 )     (31.4 )%

Comparison of financial results

Revenue

We generate revenue through the sale of our products to equipment providers and
network operators for the internet data center, CATV, telecom and FTTH markets.
We derive a significant portion of our revenue from our top ten customers, and
we anticipate that we will continue to do so for the foreseeable future. The
following charts provide the revenue contribution from each of the markets we
served for the three months ended March 31, 2022 and 2021 (in thousands, except
percentages):

                         Three months ended March 31,                      Change
                               % of                      % of
                  2022       Revenue        2021       Revenue       Amount              %
Data Center     $ 21,415         41.0 %   $ 25,939         52.2 %   $ (4,524 )     (17.4 )%
CATV              24,980         47.8 %     18,638         37.5 %      6,342        34.0 %
Telecom            5,265         10.1 %      4,479          9.0 %        786        17.5 %
FTTH                  98          0.0 %        423          0.9 %       (325 )      (1.3 )%
Other                484          0.9 %        222          0.4 %        262       118.0 %
Total Revenue   $ 52,242        100.0 %   $ 49,701        100.0 %   $  2,541         5.1 %


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The increase in revenue during the three months ended March 31, 2022 was driven
primarily by increased demand for CATV products. The increase in demand from
CATV multiple-system operators ("MSOs") resulted in strong demand for our CATV
products, especially those products that are related to architecture
improvements to enable delivery of additional bandwidth to consumers. This
increase in bandwidth demand is particularly acute in the upstream direction,
and sales of products associated with increased return-path bandwidth were
notably strong in the quarter. Based on forecasts and current order bookings, we
believe that this elevated CATV demand will likely continue through
2022. The increased demand in CATV was offset by decrease demand for datacenter
products; this slowdown was related to inventory normalization following the
surge in demand that was driven by the shift to working from home during the
early stage of COVID-19. In the three months ended March 31, 2022, we began to
increase manufacture of our latest generation 400G products for the datacenter.
This increase in production is necessary to satisfy orders we began to receive
from our customers for these products. We anticipate that as customers begin to
order more 400G products, our datacenter business will resume growth.



For the three months ended March 31, 2022 and 2021, our top ten customers
represented 88.6% and 90.5% of our revenue, respectively. We believe that
diversifying our customer base is critical for our future success, since
reliance on a small number of key customers makes our ability to forecast future
results dependent upon the accuracy of the forecasts we receive from those key
customers. We continue to prioritize new customer acquisition and growth of
diverse revenue streams.

Cost of Goods Sold and Gross Margin

                               Three months ended March 31,
                              2022                       2021                    Change
                                    % of                       % of
                      Amount       Revenue       Amount       Revenue      Amount        %
                                        (in thousands, except percentages)

Cost of Goods Sold $43,217 82.7% $38,982 78.4% $4,235 10.9% Gross margin

            9,025          17.3 %     10,719          21.6 %


Cost of goods sold increased by $4.2 millionor 10.9%, for the three months ended March 31, 2022 compared to the three months ended March 31, 2021mainly due to a 5.1% increase in sales during the period.



Gross margin decreased for the three months ended March 31, 2022 as compared to
the three months ended March 31, 2021 primarily as a result of changes in the
mix of our datacenter and CATV products. In particular, we saw an increase in
sales of certain CATV products relative to sales of transceivers. In addition,
we experienced higher costs of certain raw materials and global supply chain
disruptions due to COVID-19 closures of ports and factories in Asia (see the
section above on the COVID-19 pandemic for more details of these challenges).

Operating expenses

                                         Three months ended March 31,
                                       2022                         2021                       Change
                                              % of                         % of
                              Amount        revenue        Amount        revenue        Amount                 %
                                                    (in thousands, except percentages)
Research and development     $   9,486           18.2 %   $  10,928           22.0 %   $  (1,442 )       (13.2 )%
Sales and marketing              2,558            4.9 %       2,960            6.0 %        (402 )       (13.6 )%
General and administrative      11,220           21.5 %      10,869           21.9 %         351           3.2 %
Total operating expenses     $  23,264           44.5 %   $  24,757           49.8 %   $  (1,493 )        (6.0 )%

Research and development costs

Research and development expense decreased by $1.4 million, or 13.2% for the
three months ended March 31, 2022 as compared to the three months ended March
31, 2021. Research and development costs consist of R&D work orders, R&D
material usage and other project related costs related to 100 Gbps, 200/400 Gbps
data center products, DOCSIS 3.1 capable CATV products and other new product
development, and depreciation expense resulting from R&D equipment investments.
These decreases were primarily due to a decrease in personnel-related
costs,share-based compensation expense, and less materials and supplies used in
R&D activities.



Sales and marketing expense

Sales and marketing expense decreased by $0.4 million, or 13.6% for the three
months ended March 31, 2022 as compared to the three months ended March 31,
2021. These decreases were primarily due to a decrease in personnel-related
costs, commission expenses, duties and freight. These decreases were partially
offset by a increase in trade show expenses.

General and administrative costs

General and administrative expense increased by $0.4 million, or 3.2% for the
three months ended March 31, 2022 compared to the three months ended March 31,
2021. These increases were primarily due to an increase in depreciation expense
and performance based  incentive expenses. These increases were partially
offset by a decrease in personnel-related costs and professional service fees.


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Other income (expense), net

                                        Three months ended March 31,
                                     2022                          2021                         Change
                                            % of                          % of
                            Amount        revenue         Amount        revenue          Amount           %
                                                    (in thousands, except percentages)
Interest income            $      28            0.1 %    $      16            0.0 %    $       12          75.0 %
Interest expense              (1,401 )         (2.7 )%      (1,431 )         (2.9 )%           30          (2.1 )%
Other expense, net              (450 )         (0.9 )%        (169 )         (0.3 )%         (281 )       166.3 %
Total other expense, net   $  (1,823 )         (3.5 )%   $  (1,584 )         (3.2 )%   $     (239 )        15.1 %


Interest income increased slightly for the three months ended March 31, 2022
compared to the three months ended March 31, 2021. The changes are similar to
expected rates of fluctuation with the interest rates and cash balances.

Interest expense decreased slightly for the three months ended March 31, 2022
compared to the three months ended March 31, 2021. This decrease is due to lower average debt balances over the period.



Other expense increased by $0.3 million, or 166.3%, for the three months ended
ended March 31, 2022 as compared to the three months ended March 31, 2021. This
increase was mainly due to loss in foreign currency transaction.



Benefit (provision) for income tax

                                                Three months ended March 31,
                                        2022            2021              Change
                                             (in thousands, except percentages)
Benefit (provision) for income taxes   $     -         $     -           -  


The Company's effective tax rate for the three months ended March 31, 2022 and
2021 was 0%. For the three months ended March 31, 2022 and 2021, the effective
tax rate varied from the federal statutory rate of 21% primarily due to the
change of the valuation allowance on federal, state, Taiwan, and China deferred
tax assets ("DTA").


Cash and capital resources

As of March 31, 2022, we had $4.3 million of unused borrowing capacity from all
of our loan agreements. As of March 31, 2022, our cash, cash equivalents and
restricted cash totaled $40.1 million. Cash and cash equivalents are held for
working capital purposes and are invested primarily in money market or time
deposit funds. We do not enter into investments for trading or speculative
purposes.



 On October 24, 2019, we filed a Registration Statement on Form S-3 with the
Securities and Exchange Commission, which was declared effective on January 9,
2020, providing for the public offer and sale of certain securities of the
Company from time to time, at our discretion, up to an aggregate amount of $250
million.



On February 28, 2020, we entered into an Equity Distribution Agreement with
Raymond James & Associates, Inc. (the "Sales Agent") pursuant to which the
Company may issue and sell shares of the Company's common stock having an
aggregate offering price of up to $55 million (the "Initial ATM Offering"), from
time to time through the Sales Agent. In January 2021, the Company completed its
Initial ATM Offering and sold 5.9 million shares at a weighted average price of
$9.12 per share, providing proceeds of $53.9 million, net of expenses and
underwriting discounts and commissions.



On February 26, 2021, we entered into another Equity Distribution Agreement (the
"Agreement") with the Sales Agent pursuant to which the Company may issue and
sell shares of the Company's common stock, par value $0.001 per share (the
"Shares") having an aggregate offering price of up to $35 million (the "Second
ATM Offering"), from time to time through the Sales Agent. Upon delivery of a
placement notice and subject to the terms and conditions of the Agreement,
sales, if any, of the Shares will be made through the Sales Agent in
transactions that are deemed to be "at the market" offerings as defined in Rule
415 of the Securities Act of 1933, as amended (the "Securities Act"), including
sales made through the facilities of the Nasdaq Global Market, the principal
trading market for the Company's common stock, on any other existing trading
market for the Company's common stock, to or through a market maker or as
otherwise agreed by the Company and the Sales Agent. In the placement notice,
the Company will designate the maximum number of Shares to be sold through the
Sales Agent, the time period during which sales are requested to be made, the
minimum price for the Shares to be sold, and any limitation on the number of
Shares that may be sold in any one day. Subject to the terms and conditions of
the Agreement, the Sales Agent will use its commercially reasonable efforts to
sell Shares on the Company's behalf up to the designated amount specified in the
placement notice. The Company has no obligation to sell any Shares under the
Agreement and may at any time suspend offers and sales of the Shares under the
Agreement.



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The Agreement provides that the Sales Agent will be entitled to compensation of
up to 2% of the gross sales price of the Shares sold through the Sales Agent
from time to time. The Company has also agreed to reimburse the Sales Agent for
certain specified expenses in connection with the registration of Shares under
state blue sky laws and any filing with, and clearance of the offering by, the
Financial Industry Regulatory Authority Inc., not to exceed $10,000 in the
aggregate, and any associated application fees incurred. Additionally, if the
Agreement is terminated under certain circumstances, and the Company fails to
sell a minimum amount of the Shares as set forth in the Agreement, then the
Company has agreed to reimburse the Sales Agent for reasonable out-of-pocket
expenses, including the reasonable fees and disbursements of counsel incurred by
the Sales Agent, up to a maximum of $30,000 in the aggregate. The Company agreed
to indemnify the Sales Agent against certain liabilities, including liabilities
under the Securities Act, or to contribute to payments that the Sales Agent may
be required to make because of any of those liabilities.



In March 2021, we began selling common stock through the second ATM offering. From March 31, 2022total gross sales were $1.0 million and therefore the remaining amount of common stock we have available to sell under the ATM offering is $34.0 million.



On March 5, 2019, the Company issued $80.5 million of 5% convertible senior
notes due 2024 (the "Notes"), bearing interest at a rate of 5% per year maturing
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 expenses. Also refer to Note 12 "Convertible Senior Notes"
to the consolidated financial statements for further discussion of the Notes.

The table below sets forth selected cash flow data for the periods presented (in
thousands):

                                                            Three months ended March 31,
                                                             2022                  2021
Net cash used in operating activities                   $        (3,603 )     $       (15,214 )
Net cash used in investing activities                            (1,051 )              (2,422 )
Net cash provided by financing activities                         3,736                17,475
Effect of exchange rates on cash and cash equivalents              (110 )                (615 )
Net decrease in cash and cash equivalents               $        (1,028 )     $          (776 )


Operating activities

For the three months ended March 31, 2022, net cash used in operating activities
was $3.6 million. Net cash used in operating activities consisted of our net
loss of $16.1 million after exclusion of non-cash items of $11.8 million. Cash
decreased due to a decrease in accrued liabilities of $2.3 million and an
increase in inventory of $2.0 million , offset with an decrease in trade
receivables from our customers of $7.0 million.

For the three months ended March 31, 2021, net cash used in operating activities
was $15.2 million. Net cash used in operating activities consisted of our net
loss of $15.6 million after exclusion of non-cash items of $11.0 million, cash
decreased due to a decrease in accrued liabilities of $4.5 million, a decrease
in accounts payable to our vendors of $3.3 million, and an increase in accounts
receivable from our customers of $4.5 million, offset by a decrease in inventory
of $2.8 million.



Investing activities

For the three months ended March 31, 2022, net cash used in investing activities
was $1.1 million, mainly from the purchase of additional plant, machinery and
equipment.



For the three months ended March 31, 2021, net cash used in investing activities
was $2.4 million, mainly from the purchase of additional plant, machinery and
equipment.



Financing activities

For the three months ended March 31, 2022, our financing activities provided
$3.7 million in cash. This increase in cash was due to $2.3 million net proceeds
from lines of credit and $1.7 million net proceeds from acceptances payable.



For the three months ended March 31, 2021, our financing activities provided
$17.5 million in cash. This increase in cash was due to $15.1 million of net
proceeds from our At The Market (ATM) Offerings, $13.2 million net proceeds from
lines of credit offset by net loan repayment of $1.0 million and net repayment
of acceptances payable of $9.5 million.



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Loans and commitments

We have lending arrangements with several financial institutions. In the US, we
have a revolving line of credit with Truist Bank. The line of credit contains
financial covenants that may limit the amount and types of debt that we may
incur. As of March 31, 2022, we were in compliance with these covenants.

In Taiwan, we do not currently have banking facilities for Prime World's Taiwan
Branch. In China, we have revolving lines of credit with Shanghai Pudong
Development Bank Co., Ltd. and credit facilities with China Zheshang Bank Co.,
Ltd. for our China Subsidiary, Global .

From March 31, 2022we have had $4.3 million unused borrowing capacity.

On March 5, 2019we issued $80.5 million 5% Convertible Senior Notes due 2024. The Notes will mature on March 15, 2024unless they have been previously redeemed, redeemed or converted in accordance with their terms.

See Note 11 "Notes Payable and Long-term Debt" and Note 12 "Convertible Senior
Notes" of our Condensed Consolidated Financial Statements for a description of
our notes payable and long-term debt and convertible senior notes.



China factory building

On February 8, 2018, we entered into a construction contract with Zhejiang Xinyu
Construction Group Co., Ltd. for the construction of a new factory and other
facilities at our Ningbo, China location. Construction costs for these
facilities under this contract are estimated to total approximately $27.5
million. As of September 30, 2020, construction of the building is complete, and
approximately $27.4 million of this total cost has been paid and the remaining
portion will be paid in yearly installments for three years after final
inspection. We anticipate additional expenses for building improvements to the
factory and we are in the process of evaluating the timing of these expenditures
and obtaining bids for any such work. Based on forecasts, we believe that the
factory will be placed in service in second half of 2022 or early 2023, and at
this time the factory property will be transferred from construction in progress
to building and improvements.



Future liquidity needs

We believe that our existing cash and cash equivalents, cash flows from our
operating activities, and available credit will be sufficient to meet our
anticipated cash needs for 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 our research and development efforts, the expansion of our
sales and marketing activities, the introduction of new and enhanced products,
the building improvement of a new factory and other facilities at our Ningbo,
China location, changes in our manufacturing capacity and the continuing market
acceptance of our products.  In the event we need additional liquidity, we will
explore additional sources of liquidity. These additional sources of liquidity
could include one, or a combination, of the following: (i) issuing equity or
debt securities, (ii) incurring indebtedness secured by our assets and (iii)
selling product lines, other assets and/or portions of our business. There can
be no guarantee that we will be able to raise additional funds on terms
acceptable to us, or at all.

Contractual obligations and commitments



Please refer to Item 7 "Mangement's Discussion and Analysis of Financial
Condition and Results of Operations" in the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2021 for a complete discussion of its
contractual obligations and commitments.





Inflation



The annual inflation rate in the US and Taiwan accelerated more than 7% in 2021.
Cost inflation included increases in shipping costs, labor rates, and in costs
of some raw materials. We currently  believe these increases are related to the
COVID-19 pandemic (see the section above on the COVID-19 pandemic for more
details of these challenges), however we cannot be sure when or if prices will
return to pre-pandemic levels. There is no guarantee that we can increase
selling prices or reduce costs to fully mitigate the effect of inflation on our
costs, which may adversely impact our sales margins and profitability. Compared
to other major economies in the world, China has a stable level of inflation,
which has not had a significant impact on our sales or operating results.

Significant Accounting Policies and Estimates

In our Annual Report for the year ended December 31, 2021 and in the Notes to
the Financial Statements herein, we identify our most critical accounting
policies. In preparing the financial statements, we make assumptions, estimates
and judgments that affect the amounts reported. We periodically evaluate our
estimates and judgments that are most critical in nature which are related to
revenue recognition, allowance for credit losses, inventory reserves, impairment
of long-lived assets (excluding goodwill and other indefinite-lived intangible
assets), goodwill and other indefinite-lived intangible assets, purchase price
allocation of acquisitions, service and product warranties, and income taxes.
Our estimates are based on historical experience and on our future expectations
that we believe are reasonable. The combination of these factors forms the basis
for making judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results are likely to differ
from our current estimates and those differences may be material.



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