UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(cid:2)
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
OR
For the transition period from to
001-35061
(Commission File No.)
NeoPhotonics Corporation
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction
of incorporation or organization)
94-3253730
(I.R.S. Employer
Identification No.)
2911 Zanker Road
San Jose, California 95134
(Address of principal executive offices, zip code)
Registrant’s telephone number, including area code:
+1 (408) 232-9200
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, par value $0.0025 per share
Name of Exchange on Which Registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933. Yes (cid:2) No
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:2) No
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the 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 (cid:2)
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and
posted 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 and post
such files). Yes No (cid:2)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Non-accelerated filer
(cid:2)
(cid:2) (Do not check if a smaller reporting Company)
Accelerated filer
Small reporting company
(cid:2)
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes (cid:2) No
As of June 30, 2015, the approximate aggregate market value of voting stock held by non-affiliates of the Registrant, based upon the last sale price of the Registrant’s common
stock on the last business day of the Registrant’s most recently completed second fiscal quarter, June 30, 2015 (based upon the closing sale price of the Registrant’s common stock on
the New York Stock Exchange), was approximately $266,804,000. This calculation excludes 10,922,270 shares held by directors, executive officers and stockholders affiliated with our
directors and executive officers.
As of February 29, 2016, the Registrant had 41,100,326 outstanding shares of Common Stock.
The Registrant has incorporated by reference into Part III of this Annual Report on Form 10-K portions of its Proxy Statement for its 2016 Annual Meeting of Stockholders to be
filed pursuant to Regulation 14A. The Proxy Statement will be filed within 120 days of Registrant’s fiscal year ended December 31, 2015.
DOCUMENTS INCORPORATED BY REFERENCE
NEOPHOTONICS CORPORATION
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended December 31, 2015
Table of Contents
Item 1.
Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
Part I
Part II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Item 10. Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Part III
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
Item 15.
Exhibits, Financial Statements Schedules
Part IV
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ITEM 1.
BUSINESS
FORWARD-LOOKING STATEMENTS
PART I
You should read the following discussion in conjunction with our Consolidated Financial Statements and the
related “Notes to Consolidated Financial Statements”, and “Financial Statements and Supplementary Data” included
in this Annual Report on Form 10-K. This discussion contains forward-looking statements including statements
concerning our possible or assumed future results of operations, business strategies, competitive position, industry
environment, potential growth opportunities and the effects of competition. Such statements are based upon our
management’s beliefs and assumptions and on information currently available to us. Forward-looking statements
include statements that are not historical facts and can be identified by terms such as “anticipates,” “believes,”
“could,” “seeks,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,”
“will,” “would” or similar expressions. Forward-looking statements involve known and unknown risks, uncertainties
and other factors that may cause our actual results, performance or achievements to be materially different from any
future results, performance or achievements expressed or implied by the forward-looking statements. These risks,
uncertainties and other factors in this Annual Report on Form 10-K are discussed in greater detail under the heading
“Risk Factors.” Given these uncertainties, you should not place undue reliance on these forward-looking statements.
Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Annual
Report on Form 10-K. You should read this Annual Report on Form 10-K completely and with the understanding that
our actual future results may be materially different from what we expect. Except as required by law, we assume no
obligation to update these forward-looking statements, or to update the reasons actual results could differ materially
from those anticipated in these forward-looking statements, even if new information becomes available in the future.
CONVENTIONS THAT APPLY IN THIS ANNUAL REPORT ON FORM 10-K
Unless otherwise indicated, references in this Annual Report on Form 10-K to:
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“3G” refers to third-generation wireless architecture;
“4G” refers to fourth-generation wireless architecture;
“10G” refers to 10 Gbps;
“100G products” collectively refers to all products sold by us designed for use at 100Gbps (“100G”), and in
coherent transmission systems designed for use at 100Gbps or higher data rates. Some customers may use
components designed for use at 100G at lower speeds. Our 100G products include both coherent
transmission products and 100G network products that are not coherent;
“III-V compound semiconductors” refers to compound semiconductor materials made from group III and
group V elements of the periodic table, such as Indium Phosphide and Gallium Arsenide;
“Access” refers to the portion of the telecommunications network that connects subscribers to their carriers
network;
“Advanced Hybrid Photonic Integration” refers to state-of-the-art integration of multi-platform materials and
devices;
“CDC” refers to Colorless, Directionless, and Contentionless;
“China” refers to the People’s Republic of China;
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“Coherent” refers to optical transmission systems that encode information in the phase of an optical signal
and decode such information through comparison with an independent laser at the receiver and digital signal
processing;
“Contentionless” refers to the ability to switch two or more channels of the same wavelength or color from
different directions through the same switch, such as a Multi-Cast Switch (MCS);
“DCI” refers to Datacenter Interconnect;
“Design win” refers to a confirmation by a customer that a product or group of products may be used as part
of a customer’s product and we have a purchase order for such products;
“Drop Modules” refers to wavelength multiplexer modules;
“ECL” refers to External Cavity Laser;
“EML” refers to Externally Modulated Laser;
“Gbps” refers to gigabits per second;
“High Speed Products” refers to transmitter and receiver products as well as switching and other component
products for 100G optical transmission applications over distances of 2 to 2,000 kilometers. Our high speed
100G and beyond products are based on our Advanced Hybrid Photonic Integration technology. These
technologies support encoding 100 gigabits or more per second of information for transmitting over a single
channel and decoding the information at the receiver. Through 2014, our use of this term included our
products designed for use at 40Gbps (“40G”) and that comprised less than 1% of our total revenue and
approximately 1% of our revenue from high speed products in the year ended December 31, 2014. From
2015 onward, High Speed Products refers exclusively to products sold by us and designed for use at
100Gbps or higher data rates;
“ICR” refers to Integrated Coherent Receiver;
“ICT” refers to Integrated Coherent Transmitter;
“ITLA” refers to Integrable Tunable Laser Assembly;
“Long Haul” refers to fiber optic communications between central offices in different cities, where distances
range from a few hundred to two thousand kilometers;
“LTE” refers to Long-Term Evolution wireless architecture;
“Metro” refers to fiber optic communications between central offices within and around cities, with
distances up to a few hundred kilometers;
“MCS” refers to Multi-Cast Switch;
“MPEG-2” refers to the Moving Picture Experts Group standard for compressed coding of moving pictures
and associated audio information;
“Network Products and Solutions” collectively refers to all products sold by us for use in optical
communications networks and a variety of other applications that are designed for use at data rates that are
less than 100Gbps, including 40G, 10G and lower data rates. These products include certain passive
products that do not explicitly have a data rate specification, but that are most commonly used in networks at
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these data rates. From 2015 onward, Network Products and Solutions includes products sold by us and
designed for use at 40G that, prior to 2015, were included with High Speed Products;
“NLW” refers to Narrow Line Width;
“PAM” or “PAM4” refers to Pulse Amplitude Modulation or PAM with four amplitude levels;
“petabytes” refers to one million billion bytes;
“PIC” refers to Photonic Integrated Circuit;
“PLC” refers to Planar Lightwave Circuit;
“PON” refers to a Passive Optical Network;
“PSM” or “PSM4” refers to Parallel Single Mode or PSM with four parallel lanes or fibers;
“QSFP” refers to 40G and 100G Quad Small Form-factor modules that are pluggable into standard industry
interfaces for switches, routers and other telecommunications equipment;
“ROADM” refers to Reconfigurable Optical Add Drop Multiplexer;
“SDN” refers to Software Defined Networks;
“SFP+” refers to 10G Small Form-factor modules that are pluggable into standard industry interfaces for
switches, routers and other telecommunications equipment;
“U.S. GAAP” refers to generally accepted accounting principles in the United States;
“WDM” refers to Wavelength-Division Multiplexing and is a technology that combines multiple channels
onto a single fiber using different wavelengths, or colors, of light;
“well-characterized” refers to the ability to predict the outcome of manufacturing processes based upon
known statistics of various manufacturing inputs; and
“WSS” refers to Wavelength Selective Switch.
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Unless the context indicates otherwise, we use the terms “NeoPhotonics,” “we,” “us,” “our” and “the Company” in this
Annual Report on Form 10-K to refer to NeoPhotonics Corporation and, where appropriate, its subsidiaries.
BUSINESS
Overview
We develop, manufacture and sell optoelectronic products that transmit, receive and switch high speed digital
optical signals for communications networks. We focus on growth in our 100Gbps (“100G”) and beyond products and
we report our product group as “High Speed Products” and “Network Products and Solutions”. High Speed Products
includes products designed for 100G and beyond for telecom and datacenter or content provider networks and
applications. Network Products and Solutions comprises all products designed for applications below 100G, and
includes 40G products. This group also includes passive optical products that do not have a specific data rate and are
generally used in 10G and other low speed networks. 100G networks are among the highest growth segments of the
optical communications market, supporting the rapid expansion of telecom backbone and content provider networks and
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accommodating increased mobile traffic. The high speed 100G and beyond market, which requires advanced photonic
integration technology, is the core focus of our strategy.
Our Advanced Hybrid Photonic Integration technology progressively increases performance, reduces cost and
reduces size of our products. This technology is an enabler to the development and manufacturing of products for 100G
and beyond applications. In addition, the cost reductions and performance increases enabled by this technology are
required for the growth of network capacity.
Our 100G and beyond products require our Advanced Hybrid Photonic Integration technology. We produce
photonic integrated circuits (PICs) that comprise both arrayed and individual photonic functional elements using
optimized materials systems and processes from our in-house Silicon, Indium Phosphide and Gallium Arsenide wafer
fabrication. These individual PICs from different materials are then combined using our hybrid integration technology to
make complete products, such as our Integrated Coherent Receiver (ICR) for 100G coherent transport applications.
According to Infonetics, the percent of WDM system revenue that is attributable to 100G network applications has
grown from 12% of this market in 2012 and is forecasted to grow to 52% of this market in 2016.
For telecom and inter-datacenter interconnections Coherent transmission is the technology of choice, providing an
efficient path for transition from 100G to 400G data rates. For intra-datacenter interconnections, the release of 25G
switches, itself part of a full upgrade cycle in the datacenter, is rapidly driving data lanes to 25G data rates and
interconnections to use single mode fiber and single mode lasers.
Service and content providers are demanding increasing levels of network capacity from their communications
infrastructure investments in order to meet their growing network bandwidth needs. These applications utilize optical
products in the switching, routing and transport systems they provide to service and content providers globally as the
build, operate and expand their networks.
Content providers increasingly design, build and operate their own datacenters, wide area networks and related
optical network elements. This trend expands the potential demand for our products beyond the traditional providers of
communications equipment. Our integration technologies provide methodologies for creating multiple functions in
individual components, thereby reducing costs, saving space and lowering power. In addition, the increasing use of 25G
data lanes in client side telecom networks and in intra-datacenter connections is directly creating new demand for the
range of 25G devices and high speed IC products we provide.
The introduction of contentionless network architectures that incorporate “Colorless”, “Directionless” and
“Contentionless” functionality is rapidly gaining momentum. The need to eliminate contention is being driven by the
move to “software defined networks” or SDN, which is important to both telecom networks and content provider
networks. A “contentionless” architecture in coherent networks uses both traditional “Wavelength Selective Switches”
and newer “Multicast Switches”, which we supply. While it is notable that Verizon has chosen this architecture, it is
also the case that a substantial amount of current demand derives from content providers and webscale customers. As
one or more multicast switches are deployed initially with each ROADM node, and then additional multicast switches
are deployed over time as traffic growth demands, networks are enabled to expand as needed.
The percentage of our total revenue derived from our High Speed Products (100G and beyond) increased to 58%
in the year ended December 31, 2015, up from 42% in the year ended December 31, 2014, reaching $195.8 million of
revenue in the year ended December 31, 2015. Since 2011, our High Speed Product revenues have increased at a
compound annual growth rate (CAGR) of 182% and since 2012 revenues from these products have increased at a CAGR
of 47%.
The 100G optical module and component market is growing rapidly, and it is steadily becoming a larger part of the
total optical module and component market. At the same time, we are reducing production of certain of our product
offerings for slower speeds that do not have good prospects for high growth and reasonable profitability. We continually
seek to drive down our cost of goods, and are continuing to implement initiatives that are designed to reduce our
infrastructure and operating expenses and to strengthen our balance sheet.
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We sell our products to the world’s leading network equipment manufacturers, including Alcatel-Lucent SA
(which was acquired by Nokia Corporation in January 2016), Ciena Corporation, Cisco Systems, Inc. and Huawei
Technologies Co., Ltd . These four companies are among our largest customers and together with emerging content
developers and datacenter operators are the focus of our strategy due to their leading market positions. These four
companies accounted for approximately 79% of our revenue in 2015 and approximately 68% of our revenue in 2014.
We have research and development and wafer fabrication facilities in San Jose and Fremont, California and in
Tokyo, Japan that coordinate with our research and development and manufacturing facilities in Dongguan, Shenzhen
and Wuhan, China and Ottawa, Canada. We use proprietary design tools and design-for-manufacturing techniques to
align our design process with our precision nanoscale, vertically integrated manufacturing and testing. We believe we are
one of the highest volume PIC manufacturers in the world and that we can further expand our manufacturing capacity to
meet market needs.
In October 2011, we acquired Santur Corporation (Santur), a leading producer of tunable lasers and of 100G
transceiver modules. Santur’s capabilities included array DFB (distributed feedback) lasers, silicon photonics and
photonic integration of such active elements as lasers, modulators and photodiodes.
In March 2013, we acquired the optical component business unit of LAPIS Semiconductor Co., Ltd., located in
Japan, now known as NeoPhotonics Semiconductor, which is a leading producer of high performance communications
lasers, photodiodes and optical control electronic devices. NeoPhotonics Semiconductor was built over 30 years as part
of OKI Electric, and earned a reputation as a leading developer and supplier of the highest speed optoelectronic devices.
This business produces high speed EML lasers and photodiodes from Indium Phosphide, and semiconductor drivers and
high sensitivity amplifiers from Gallium Arsenide.
In January 2015, we acquired certain assets and assumed certain liabilities of EMCORE Corporation’s (EMCORE)
tunable laser product lines. The EMCORE ultra narrow linewidth tunable laser products are used in the industry’s
highest speed applications and have strong complementary with our highest speed and most sensitive receiver products at
speeds of 400G and beyond.
We believe our technology is well positioned to serve the highest speed and most demanding applications. These
three acquisitions, together with other internal developments, and acquisitions conducted prior to 2011, continue our path
spanning more than ten years to develop complete Advanced Hybrid Photonic Integration capabilities.
In November 2015, we acquired the assets of EigenLight Corporation (EigenLight) and their precision optical
power monitoring technology and product lines. These optical power monitors are among the highest performance
devices of their class and are used in high speed optical transmission systems together with other NeoPhotonics products.
As a result, we see strong complementary with our existing product suite in applications having data rates at 40G, 100G
and beyond.
Industry Background
The realm of communications, having become almost entirely digital, has moved from electronic signals over
copper wire to optical signals over thin glass fibers, which achieves the speed and capacity necessary for the current and
future communications market.
Increasingly, the most ubiquitous data link to users is via mobile devices through broadband wireless access.
Smartphones now incorporate the most sophisticated and powerful applications which were developed at great cost over
the last four decades for consumer electronics. Originally priced in the $100s, or $1,000s or $10,000s for earlier
computing platforms, these applications, when migrated onto smartphones, are usually priced at cents to a few dollars
per application. As cost performance has improved for applications by many orders of magnitude over the four decades
since the introduction of the personal computer, so too has end user hardware advanced many orders of magnitude in
cost performance, while network data rates have also increased a comparable magnitude.
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Further the deployment of networks has rapidly expanded from being the domain of telecom service providers to
today’s deployment rate by enterprises and content providers. The rapid rise of internet traffic that is going through
mega datacenters operated primarily by leading content companies including Amazon, Google, Microsoft, Apple and
Facebook has created a large and rapidly growing new market for optical modules and components in general, but more
specifically for high speed optical modules and components.
This new era of connectedness is increasingly universal and demands that the capacity of the digital
communications networks must increase exponentially. Smartphones and related wearable devices have emerged as the
vehicle connecting the entire digital world, with more than one billion current smartphone users and a rapidly increasing
volume of wearables. Not only are more people connected to the mobile web, they are connecting at increasingly higher
data rates requiring higher bandwidths. Wireless network deployments have progressed from second generation (2G) to
third generation (3G) to fourth generation (4G/LTE) and moving toward fifth generation (5G) to provide end-users ever-
increasing download speeds. Fiber to the Home (FTTH) connections have also continued apace, with more than 100
million homes receiving such service, according to the FTTH Council, and with download speeds reaching as high as 1
Gbps.
Industry Growth Dynamics
The revolution in the power of low cost computing devices is associated with Moore’s Law. Moore’s Law refers to
an observation made by Intel co-founder Gordon Moore in 1965 that the number of transistors per square inch on
integrated circuits had doubled every two years since their invention and a prediction that this trend would continue. In
the domain of optical communications, a similar revolution, progressing at a similar rate, is driven by the increased
speed, smaller size and lower cost achieved by photonic integration.
Bandwidth capacity of communications networks continues to expand at a rapid rate. According to Infonetics, total
deployed telecom bandwidth capacity is expected to grow at a compound annual growth rate of 32% from 2013 to 2018,
reaching more than 50 petabytes per second in 2018, while total deployed datacenter bandwidth capacity is expected to
grow even faster, at a compound annual growth rate of 44% from 2013 to 2018 and reaching more than 900 petabytes
per second in 2018.
According to Infonetics, datacom 100G transceiver revenue is projected to grow at a 29% compound annual
growth rate from 2013 to 2018, reaching $1 billion in 2018. In contrast, revenue from slower speed products such as 10G
datacom transceivers is forecast to grow at only a 2% compound annual growth rate from 2013 to 2018.
Digital Optical Communications Market Structure
The digital optical communications market has two main sectors, telecom (long haul, metro, access) and datacom.
The telecom sector includes the global backbone of Long Haul and Metro communications. It also includes local access
links to end users. Telecom, with its historical background as a public utility, is driven by reliability, telecom
communications protocols and standards, and the long life of its infrastructure capital investment. The service life
objective for products used in telecom infrastructure historically has been 20 years.
The Long Haul telecom sector is the first adopter of the highest speed and most advanced communication links,
which migrate over time into the Metro sector as costs are reduced such that they are economical in the shorter Metro
network links, with its commensurate lower traffic densities prior to aggregation for Long Haul transport.
The datacom market can be described primarily as an “enterprise” market, in contrast to the historical public utility
nature of the telecom market. In addition to the broad enterprise market, datacom also includes data centers and
infrastructure for cloud based services. Companies, including Amazon, Apple, Facebook, Google and Microsoft, are
steadily increasing investments in very large datacenters as they implement cloud-based “big data” services that can be
crowd-sourced and crowd-distributed, and that utilize machine-to-machine and inter-datacenter transactions to power the
mobile web. Such very large datacenters are an emerging high growth market for “big pipes” using dedicated 100G and
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beyond digital optical connections from datacenter to datacenter (inter-datacenter and datacenter interconnect, or DCI),
datacenter to telecommunications carrier and within datacenters (intra-datacenter).
Generations of hardware installations for datacom, such as server farms and “big data” network storage facilities,
have relatively short lives, typically about five years, as computing and storage technology advances rapidly. Therefore,
the datacom market for optoelectronic devices generates more rapid changes in form factors, energy efficiency and
compactness than the telecom market.
The datacom market is often the most cost sensitive sector of digital optical communications, and therefore it
begins to adopt leading edge speeds after those speeds penetrate the Metro sector of the telecom market segment.
From this market structure, it can be concluded that a technology leader must achieve a leadership position in the
Long Haul telecom sector as the basis for commercializing the most advanced technology and then extending that
technology to additional applications in datacenters and other datacom applications.
Digital Optical Communications Network Equipment
The structure of the industry that supplies the network equipment for the telecom digital optical communications
network has largely concentrated down to leading vendors which include: Alcatel-Lucent (which was acquired by Nokia
Corporation in January 2016), Ciena, Cisco, Coriant (including Tellabs, which was acquired by Coriant in 2013), Fujitsu
Limited, Huawei, Infinera, NEC and ZTE.
Major suppliers of network equipment to the datacom and datacenter market include Alcatel-Lucent (which was
acquired by Nokia Corporation in January 2016), Brocade, Cisco, Huawei and Juniper. At the optical module and
component level, Broadcom Ltd. (resulting from the acquisition of Broadcom by Avago Technologies), Finisar and
Sumitomo Device Innovations are leading merchant suppliers and some larger network equipment companies like
Huawei and Cisco have divisions or affiliates (such as HiSilicon in the case of Huawei) that are captive suppliers.
Furthermore some of the largest investors in datacenters, for example, Google, are beginning to design and source their
own optical network systems equipment from Asia-based OEMs. While the speeds for most of the datacom market today
are at 10G, recent changes in switch architectures and interconnection has moved most new installations to higher 25G
speeds, plus a fast growing 100G module market has emerged that provides “big pipes” connecting datacenters at 100G
and even 200G data rates.
A single optical fiber can carry nearly 100 individual wavelengths (colors), each of which can now support 100
gigabits per second of capacity. Each of these wavelengths requires a 100G transmitter and receiver, which can be tuned
to any of the 100 separate channels. Thus, using 100G coherent technology and industry standard compression (MPEG-
2), a single fiber can carry approximately 500,000 individual high definition full motion movies simultaneously over one
fiber.
The main photonic modules required for digital optical communications are transmitters, receivers and, where the
network is branched, optical switches. Transmitters and receivers are often combined into single modules which are
called transceivers. At the high end, such as Long Haul, a transmitter and receiver can be paired and combined with
signal processing electronics to error correct and restore degradation which affects the signal after traveling long
distances, in which case the unit is referred to as a transponder. For high speeds each of these product types requires
photonic integration at the most advanced and complete level.
Switching products, which switch different colors, or signal channels, down different branches of the network,
have thus far been Reconfigurable Optical Add/Drop Multiplexers (ROADMs) consisting of Wavelength Selective
Switches (WSSs). For 100G coherent networks, a new type of optical switch, the Multi-Cast Switch (MCS), has been
developed and introduced to eliminate contention in 100G coherent switching. The need to eliminate contention is being
driven by the move to “software defined networks” or SDN, which is important to both telecom network requirements
and content provider networks. A “contentionless” architecture uses both traditional “Wavelength Selective Switches”
and the new MCS, which is supplied by NeoPhotonics. One or more MCSs are deployed initially with each ROADM
node, and then additional multicast switches are deployed over time as traffic growth demands, allowing networks to
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efficiently expand as needed. This type of switch is Colorless, Directionless, Contentionless (CDC), and its function is
optimized for 100G and beyond coherent networks.
Digital Optical Communications Technology Background
Advances in cost performance in photonic integration have followed a path that has been similar to electronic
integrated circuits.
The main objectives for technology advances in electronic digital integrated circuits and in integrated optical
digital devices are similar, and are based on the drive towards lower cost and higher performance. In integrated optics
these main objectives also include higher speed, lower power, smaller or denser form factor, and lower cost.
In both electronics and optics these objectives require ever increasing integration and miniaturization. In optics,
however, advanced hybrid integration is required for the highest performance products. Hybrid integration for digital
optical devices incorporates multiple types of materials substrates, rather than just one, as in silicon, for an electronic
integrated circuit.
Complete advanced photonics integration capability requires at least three materials substrate systems: Indium
Phosphide for active devices such as lasers, photodiode detectors, modulators, and amplifiers; Silicon or planar doped
silicon dioxide (silica) for wave guides, filters, interferometers and other passive devices; and Gallium Arsenide or
Silicon Germanium for drivers and control functions at the speeds necessary for 100G. The integration of more than one
material substrate is called hybrid integration, and Advanced Hybrid Photonic Integration enables products in the 100G
and beyond domain.
Advent of Coherent Transmission
The recent advent of coherent digital optical transmission has increased the native capacity of a fiber optic link
tenfold, versus a transmission modulation of simple on/off such as in 10G WDM networks. Coherent transmission
modulation encodes information via phase and polarization, and the permutations of these variables are many times
greater than on/off.
To create a detectable error-free signal in the coherent modality requires that each color (wavelength) transmitted
be much purer than would be required for lower speed protocols. The primary enabler of ultra-narrow line width (NLW),
that is, ultra pure color, is a new generation of the most advanced lasers. These NLW lasers must be paired with a new
generation of receivers that decode phase and polarization through comparison with another NLW laser in a PIC-
interferometer. Ultra-narrow line width lasers are built on Indium Phosphide substrates while the receivers utilize a
Silicon or Indium Phosphide interferometer and Indium Phosphide photo detectors.
These 100G and beyond coherent optical transmission devices require tighter tolerances of material thickness and
other critical dimensions than do components operating at 10G. For 100G, a new generation of technologies, including
faster Gallium Arsenide drivers, is required to suitably process transmission signals in both the laser transmitter or the
detector and receiver. As transmission speeds move to 200G and 400G through higher order modulation protocols and
higher symbol rates, even higher performance optical components are required. We believe we have established and
characterized the full range of driver, laser and detector technologies required for implementing 100G, 200G and 400G
coherent systems, a capability that we believe is held by only a few companies.
Our Advanced Hybrid Photonic Integration Platform
We believe we have developed or acquired all necessary capabilities required for producing high performance
Advanced Hybrid Photonic Integrated optoelectronic devices for the most stringent performance requirements and
operating conditions. Our multi-material platform leverages:
Indium Phosphide (InP): Indium Phosphide is used to produce efficient lasers, sensitive photo detectors and
modulators in the wavelength window typically used for telecommunications, i.e. 1.55 micron wavelengths, as it is a
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direct bandgap III-V compound semiconductor material. InP is the most important material for the generation of laser
signals and the detection and conversion of those signals back to electronic form.
Silicon (Silicon Photonics or Planar Lightwave Circuits): Silicon is very inefficient in generating or detecting light
in the telecom wavelength window as it is an indirect bandgap semiconductor material. Consequently, waveguides of
Silicon or doped silicon dioxide (silica) exhibit very low optical loss and are ideal for switching, filtering or
interferometric applications. We are now developing modulators using Silicon waveguides.
Gallium Arsenide (GaAs): Gallium Arsenide can operate at very high speeds and is well suited to make analog
integrated circuit drivers for high speed lasers and modulators due to its high electron mobility. GaAs is a direct bandgap
III-V compound semiconductor material, but unlike InP, GaAs does not lase in the telecom wavelength window.
Silicon Germanium (SiGe): Silicon Germanium is an alloy of Silicon and Germanium that is used to manufacture
mixed signal and analog integrated circuits and is well suited for high speed amplifiers used in 100G systems. SiGe
devices are made using standard silicon processing techniques in commercial foundries.
We have developed design, integration and manufacturing approaches and techniques to produce advanced, high
speed integrated solutions leveraging each of these in-house materials technology platforms.
Hybrid Photonic Integration
Products
Integrated Coherent Receiver
100G Transceiver
Multi-Cast Switch
Narrow Line Width Tunable Laser
100G EML Lasers/Photodiodes/Drivers
Coherent Modulator/Driver
Our Strategy
Indium Phosphide Silicon/Silica
Gallium
Arsenide/Silicon
Germanium
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• Continue innovating to develop industry-leading comprehensive technology for Advanced Hybrid Photonic
Integration. Over the past three years, we have strengthened our technology platforms for comprehensive
advanced photonic integration, in part from acquisitions and in part from internally funded development. We
expect to continue to combine our mixed platform approach to design and produce the highest performance
optical signal processing solutions.
• Capture major customer share for the most advanced modules and components at the top suppliers of state
of the art network equipment. We intend to deepen our relationships with our strategic customers by
increasing design wins in their systems, including Alcatel-Lucent (which was acquired by Nokia
Corporation in January 2016), Ciena and Huawei and certain others, which are market leaders in 100G
coherent systems.
• Offer complete optoelectronic solutions for 100G and beyond for leading edge telecom and datacom market
segments. We expect to continue to introduce Coherent Transmitter products that are optimized for the
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highest speeds and introduce Multi-Cast Switches so that our product line will include each of the major
types of the most advanced products.
• Achieve growth in integrated optical applications that leverage our core technology of advanced
optoelectronic products. We intend to provide state of the art products and solutions to industry leading
customers to advance our goal of achieving continuous improvement in operating performance, profitability
and growth.
• Focus on high growth segments that leverage our leadership in Advanced Hybrid Photonic Integration and
that contribute to our profitable growth. We plan to continue to develop our products and solutions to
capture new opportunities, such as emerging 400G connections in both carrier networks and within and
between large datacenters.
• Extend our product line into additional segments of the network that will benefit from ultra-high speed
performance. We intend to penetrate the emerging market for 100G connections both within and between
mega-datacenters. In this segment we are targeting major users and builders of datacenters and datacenter
equipment, such as Amazon, Apple, Facebook, Google and Microsoft, as they develop some of their own
network equipment. We believe our technology and product line is well positioned to penetrate this market.
• Pursue acquisitions that extend our leadership position in advanced optoelectronic integration. We may
opportunistically pursue acquisitions that we believe provide complementary technology and that can
accelerate our growth and strengthen our market position.
Our Technology
We have developed expertise in the design, large-scale fabrication, high-volume module manufacturing and
commercial deployment of our Advanced Hybrid Photonic Integration products and technologies. The process of
designing and manufacturing advanced optoelectronic integrated devices in high volume with predictable, well-
characterized performance and low manufacturing costs is complex and multi-faceted. We have developed the
technologies, using multiple materials platforms for photonic integration, that are required to design and manufacture
complex, high-performance optoelectronic components, modules and subsystems for fiber optic networks. The basic
elements of our technology are as follows:
Mixed-material platform and optoelectronic integration technology. We utilize a set of proprietary integration
platforms that provide optoelectronic functionality on silicon and other integrated compound semiconductor substrates
including Indium Phosphide, Gallium Arsenide and Silicon Germanium and integrated combinations of these platforms.
We utilize micron and sub-micron scale structures of multiple silicon dioxide and Indium Phosphide waveguides to
fabricate optoelectronic functional elements such as lasers, detectors, modulators, interferometers, integrated optical
filters, switches and variable attenuators. We integrate these functional design elements into optoelectronic devices to
achieve a desired functionality and specification that is incorporated into our products. Similarly, we use Gallium
Arsenide and Silicon Germanium integration platforms for drivers, amplifiers and related high-speed electronic control
functions for our integrated optoelectronic devices.
Advanced Hybrid Photonic Integration. Through precise fabrication and positioning of physical features, we can
integrate numerous different optoelectronic devices, which are fabricated on separate wafers from different
semiconductor and related materials, matching the material to the function to create improved performance by using the
highest performance elements of each type. For example, our hybrid integration allows us to integrate active devices,
such as photodiodes or lasers fabricated using Indium Phosphide, with high-performance passive devices, such as
interferometers, switches, routers and filters, fabricated on silicon, and to mate electronic amplifiers made with Silicon
Germanium or drivers made with Gallium Arsenide directly to optical elements made with Silicon or Indium Phosphide.
This ability to combine specific functional elements out of optimized materials not only allows for very compact
and low power components, but also through the intimate coupling of different elements, makes possible completely new
functions. An example of this multi-platform architecture is found in the coherent optical communications domain where
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we intimately couple a passive interferometer with separate quadrature components carrying information and with photo
detectors to turn a high speed optical signal into data-rich electrical signals for processing.
Hardware and firmware integration. We also sell our products as modules and subsystems which contain
electronic hardware and firmware controls that interface directly with our customers’ systems. We design the electronic
hardware and develop the firmware for control of our optical products and subsystems, and so that our optical products
meet customer specifications.
Devices, Components, Modules & Subsystems. We are vertically integrated from the design of photonic integrated
devices through manufacturing in our own wafer fabs and assembly and test in our own factories. We design and
manufacture modules and subsystems that combine our key products with other elements to offer customers a complete
solution. We sell products at each level of product utility and can achieve the highest performance and capture the
greatest value. We utilize some contract manufacturers for assembly operations where it is cost effective.
Fabrication and manufacturing processes. We have developed expertise in the technology domains relevant to
high-volume fabrication and manufacturing of our optoelectronic integrated circuit products using wafer-scale processes
and including the complex interaction of electro-optic, thermal-optic and mechanical micro-thermal features. Our
complex manufacturing steps are analogous to many processes used in the semiconductor industry. Each integrated
element is tested and characterized using our proprietary test equipment before incorporation into our products.
Circuit design and design-for-manufacturing tools. We use a comprehensive set of proprietary as well as industry
standard software design tools, to model relevant geometries, dimensions and thermal management for a broad range of
photonic devices. With these tools, we develop products with minimal design iterations and manage precision
manufacturing to a narrow range of high performance specifications.
Our Products
We develop and manufacture Transmitter Products, Receiver Products and Switch Products that are used in ultra-
high speed digital optical communications, high speed switching and provisioning, and access connections for wireless
and fiber-to-the-home communications networks. We combine our transmitter and receiver products into Transceiver
modules. Our Switching Products, such as Multi-Cast Switches, are used primarily in ROADM nodes that dynamically
and efficiently allocate bandwidth to adjust for fast changing traffic patterns and for provisioning software defined
networks. Our products can be categorized into groups, including High Speed Products for ultra high speed 100G and
beyond applications, including in coherent networks, and Network Products and Solutions, for lower speed networks
including Access, 10G networks and other telecom products.
High Speed Products: We produce transmitter and receiver products as well as switching products for 100G and
beyond optical transmission applications over distances of 2 to 2,000 kilometers. In addition we combine 100G and
beyond transmitter and receiver products into pluggable modules for both line side coherent and client side datacenter
applications. All of our high speed 100G and beyond products are based on our Advanced Hybrid Photonic Integration
technology. This technology supports encoding 100 gigabits or more per second of information for transmitting over a
single channel and decoding the information at the receiver. Through 2014, our use of the term High Speed Products
included products designed for use at 40G rates. From 2015 onward, High Speed Products will refer exclusively to
products sold by us and designed for use at 100Gbps or higher data rates.
For long distance transport of 100 to 2,000 kilometers, we design and manufacture optical components for
coherent systems, which manipulate light to encode ten times or more the amount of information in the same wavelength
channel than is possible with traditional methods. This manipulation can only be accomplished using advanced photonic
integration to intimately couple functional elements together. Our Coherent Products include Narrow Linewidth Tunable
transmit and local oscillator lasers (NLW-ITLA), which generate the ultra-pure wavelength, or color, necessary for
coherent transmission, and Integrated Coherent Receivers (ICRs), which decode the phase and polarization encoded
coherent signal. We support platforms for Narrow Linewidth Tunable transmission based on ECLs.
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We are introducing new generations of pluggable coherent modules which combine our NLW-ITLA with our ICR
and with a coherent modulator. Our first such product is a new CFP2-ACO module, which will be first sold in Class 3
configuration. We expect to be shipping these products in 2016.
We also sell 100G products for the client side and datacenter applications, including our CFP2 pluggable module,
as well as components, such as EMLs and high-speed drivers, which are used in 100G CFP and CFP2 pluggable
modules.
We are extending this product range with our new 100G QSFP28 modules, which are expected to ramp to volume
shipments in the middle of 2016 for high-density, telecom-client and datacenter applications. Further, we are developing
400G client side modules in CFP8 configurations that will be based on our leading 28 Gbaud lasers at 50 Gbps using a
PAM4 architecture. Taking this development one step further, we will also introduce an ultra-high-speed 56 Gbaud
EML and driver IC set which will enable single wavelength PAM4 100G applications as well as eventually four
wavelength 400G intra-datacenter transmission.
Also, for mega-datacenter applications we have introduced a series of new high power laser diode array products
designed to power short reach Silicon Photonics based 100G intra-datacenter interconnections using which use parallel
single-mode architectures, or PSM4.
We provide a proprietary switching solution for 100G coherent systems such as our Multi-Cast Switch (MCS)
product line. Our 4x4 and cascadable 4x16 Multi-Cast Switch modules for CDC ROADMs efficiently allocate
bandwidth and signal routing in 100G and higher data rate networks. The Multi-Cast Switch provides scalable
contentionless operation to achieve the highest traffic management efficiency, optimizing traffic flows in coherent
transmission systems. Our MCS uses our PLC photonic integration platform and consists of a complex array of switches,
waveguides, taps, crossings and other functional elements manufactured on Silicon wafers using standard semiconductor
processing equipment.
Network Products and Solutions: We design and manufacture a broad range of products for optical
communications networks and a variety of other applications, where the networks operate at speeds less than 100G. We
offer a wide range of application-specific passive optical functionalities in modules or sub-system configurations. These
include arrayed waveguide grating based drop modules for multiplexing and demultiplexing in conventional ROADM
nodes as well as variable optical attenuators and tap power monitors for network monitoring and control. We combine
several of these functions together in subsystems such as our VMUX, which combines up to 48 variable optical
attenuators and an arrayed waveguide grating multiplexer in a single compact unit. In addition, many of these products
provide high-bandwidth connections to base station antennas for mobile devices and to people and machines over fixed
and wireless networks. As consumer connectivity speeds have increased through the transitions from 2G to 3G to
4G/LTE, the bandwidths necessary to aggregate and connect wireless traffic into the backbone network, including
Mobile Backhaul, have also increased. We offer 10G EMLs, laser drivers, modulator drivers, photodiode receivers, as
well as complete transceiver modules, SFP+ modules and bidirectional transceiver modules designed with the necessary
bandwidth for connecting 4G/LTE wireless base station antennas. From 2015 onward, Network Products and Solutions
will include products sold by us and designed for use at 40G that, prior to 2015, were included with High Speed
products.
For applications under 100G, we also design and produce Switch Products which are manufactured using our
Silicon wafer based waveguide integration platform. These products include Drop Modules used in current ROADM
nodes.
In addition to products for fiber optic communications, we also sell products for test and measurement,
instrumentation, industrial and research applications.
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Our Infrastructure, Intellectual Properties and Our Employees
We have product development and product sustaining engineering teams in Silicon Valley (San Jose and Fremont,
California), Tokyo, Japan, and Shenzhen and Wuhan, China. In our Silicon Valley and Tokyo facilities we conduct
research, product development and product roadmap definitions, including for our PIC products. In our Shenzhen
facilities, we conduct new product development, manufacturing and process engineering, quality control, continuous
improvement and cost reduction relating to product manufacturing, assembly and test. In our Wuhan, China and Ottawa,
Canada facilities we conduct new product development.
We seek to establish and maintain proprietary rights in our technology and products through the use of patents,
copyrights and trade secret laws. We have filed applications for patents to protect certain of our intellectual property in
the U.S. and in other countries, including Australia, Canada, Japan, Korea, Hong Kong, China, Russia, India, Taiwan
and several European Union countries. As of December 31, 2015, we had over 650 issued patents, expiring between
2016 and 2033 covering various aspects of our technologies.
We have manufacturing operations in the U.S., Japan, China and Russia. Our wafer fabrication operations are
located in our San Jose and Fremont, California facilities, as well as in our Japan facilities, and include chip design, clean
room fabrication, integration and related facilities for PICs. Our manufacturing, assembly and test operations are located
in our Shenzhen and Dongguan, China facilities, and in Silicon Valley, California. In addition we have established
manufacturing capability in Russia.
As of December 31, 2015, we had 2,304 employees and non-employee contractors, of which 267 were based in the
U.S., 1,889 in China, 109 in Japan, 30 in Russia and Europe and 9 in Canada.
None of our U.S. employees are represented by a labor union. Chinese law allows that all employees be members
of a union that is overseen by the Chinese government. The majority of the employees in our Japanese subsidiaries are
also members of a union. We have never experienced employment-related work stoppages and we consider our
employee relations to be good.
Our Customers
In 2015, 2014 and 2013, our ten largest customers accounted for 91%, 88% and 86% of our total revenue,
respectively. In 2015, Huawei, together with its affiliate HiSilicon Technologies Co. Ltd. (collectively “Huawei”), and
Ciena Corporation accounted for 44% and 21% of our total revenue, respectively. In 2014, Huawei, Ciena Corporation,
and Alcatel-Lucent SA accounted for 38%, 15% and 10% of our total revenue, respectively. In 2013, Huawei, Ciena
Corporation, and Alcatel-Lucent SA accounted for 27%, 16% and 14% of our total revenue, respectively.
Our Sales and Marketing
We operate a sales model that focuses on alignment with our customers through coordination of our sales, product
application engineering and manufacturing teams. Our sales cycles typically require a significant amount of time and a
substantial expenditure of resources before we can realize revenue from the sale of products. The length of our sales
cycle, from initial request to design win, is typically 6 to 12 months for an existing product and 12 to 18 months or
longer for a new product.
We use a global direct sales force based in North America, Europe, Russia and Asia, including China and Japan.
These individuals work with our product application engineers, and product marketing and sales operations teams, in an
integrated approach to address our customers’ current and future needs. We believe that these collaborative engineering
activities provide us insight into our customers’ broader and longer term needs. We expect to continue to add sales and
related support personnel as we grow our business.
Our marketing team focuses on product strategy, product development, roadmap development, new product
introduction processes, program management, product demand stimulation and assessment, and competitive analysis.
Our marketing team also seeks to educate the market about our products by communicating the value proposition and
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product differentiation in direct customer interactions and presentations and at industry tradeshows and at technical
conferences.
Our Research and Development
We have invested and expect to continue to invest significant time and capital into our research and development
operations. Research and development expenses were $44.5 million, $46.0 million and $45.9 million in 2015, 2014 and
2013, respectively.
Our Suppliers
We use suppliers from the U.S., China, Japan and other locations. Although there are multiple sources for most of
the component parts of our products, some components are sourced from single or, in some cases, limited sources. We
typically do not have written agreements with the majority of these component manufacturers to guarantee the supply of
the key components used in our products. We also use contract manufacturers in Japan, China and other Asia locations
for the backend manufacturing of certain of our products.
Our Backlog
Sales of our products generally are made pursuant to purchase orders, often with short lead times. These purchase
orders are typically made without deposits and may be subject to revision or cancellation. The quantities actually
purchased by our customers, as well as the shipment schedules, are frequently revised to reflect changes in our
customers’ needs and in our supply of products.
Certain of our customers use vendor managed inventory (VMI) arrangements under which we manufacture at a
customer’s request, then ship to its facility or a designated contract manufacturer for the customer, to be held until it is
used by the customer. We maintain title to vendor managed inventory until the customer uses the inventory. At that time
the customer takes title to the products, it reports the consumption to us and we recognize the revenue for the product
sale. The increased use of VMI by our customers may increase the possibility of changes to our backlog since customers
may consume VMI more quickly or more slowly than we had planned.
Because of the possibility of changes in delivery or acceptance schedules, cancellations, modifications or price
reductions with limited or no penalties and the increasing use by customers of VMI, we do not believe that backlog is a
firm or reliable indicator of our future revenue and do not rely on backlog to manage our business or evaluate our
performance. Changes in the amount of our backlog do not necessarily reflect a corresponding change in the level of
actual or potential sales.
Seasonality
Historically, our first quarter revenue is generally seasonally lower than the rest of the year primarily due to lower
capacity utilization during the holidays in China and the impact of typical price negotiations during this period. This
historical pattern should not be considered a reliable indicator of our future revenue or financial performance.
Financial Information by Geographic Region
For information regarding our revenue and long-lived assets by geographic region, see Note 16 to the Consolidated
Financial Statements. For risks relating to our operations see “Item 1A. Risk Factors” and particularly the risks under the
caption “Risks related to our operations in China” and the risk factors “Our future results of operations may be subject to
volatility as a result of exposure to fluctuations in foreign exchange rates, primarily the Chinese Renminbi (RMB) and
Japanese Yen (JPY) exchange rates”, “We face a variety of risks associated with international sales and operations,
which if not adequately managed could adversely affect our business and financial results” and “We are subject to
governmental export and import controls that could subject us to liability or impair our ability to compete in international
markets”.
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Competition
The market for optical communications systems is highly competitive. While no single company competes against
us in all of our product areas, our competitors range from large international companies offering a wide range of products
to smaller companies specializing in narrow markets. We believe the principal competitive factors in this market are:
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ability to provide leading edge technologies for high speed communications;
ability to design and manufacture high quality, reliable products, including customized solutions;
breadth of product solutions;
price to performance characteristics;
financial stability;
ability to quickly and consistently produce in high volume and high quality;
ability to meet customers’ specific requirements;
ability to meet customer lead time demands; and
depth of relationships with and proximity to key customers globally.
We believe we compete favorably with respect to these factors. We believe our principal competitors include
Accelink Technologies Co., Ltd., Broadcom Limited (formerly Avago Technologies Limited), Finisar Corporation,
Innolight Technology Corporation, Lumentum Holdings, Inc. (formerly JDS Uniphase Corporation), NTT Electronics
Corporation, Source Photonics, Inc., Oclaro, Inc., Sumitomo Electric Device Innovations, Inc., and others.
Our competitors may have substantially greater name recognition and technical, financial and marketing resources
than we do. Many of our competitors have greater resources to develop products or pursue acquisitions, and more
experience in developing or acquiring new products and technologies and in creating market awareness for these
products and technologies than we do. In addition, a number of our competitors have the financial resources to offer
competitive products at below market pricing levels that could prevent us from competing effectively and which could
adversely affect our financial performance.
We also face competition from some of our customers, including Huawei Technologies and its affiliate, HiSilicon
Technologies Co., Ltd., who evaluate our capabilities against the merits of manufacturing products internally. These
customers may have the ability to manufacture competitive products at a lower cost than we would charge as a result of
their higher levels of integration. As a result, these customers may purchase less of our products and there would be
additional pressure to lower our selling prices which, accordingly, would negatively impact our revenue and gross
margin.
Environmental, Health and Safety Matters
Our research and development and manufacturing operations and our products are subject to a variety of
environmental, health and safety laws and regulations in the jurisdictions in which we operate. These regulations govern,
among other things, the discharge of pollutants to air, water, and soil; the remediation of soil and groundwater
contamination; the use, handling and disposal of hazardous materials; employee health and safety; and the hazardous
material content and recycling of our products. We use, store and dispose of hazardous materials in our manufacturing
operations and as components in our products. We incur costs to comply with existing environmental, health and safety
requirements, and any failure to comply, or the identification of contamination for which we are found liable, could
cause us to incur additional costs, including cleanup costs, monetary fines, or civil or criminal penalties, or result in the
curtailment of our operations. In addition, environmental, health and safety requirements have become more stringent
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over time, and changes to existing requirements could restrict our ability to expand our facilities, require us to acquire
costly pollution control equipment, or cause us to incur other significant expenses or to modify our manufacturing
processes or the contents of our products. Some jurisdictions in which we operate or sell our products have enacted
requirements regarding the recycling of waste electronic equipment, and/or the packaging and hazardous material
content of certain products. For example, jurisdictions including China and the European Union, among a growing
number of jurisdictions, have placed restrictions on the use of lead, among other chemicals, in electronic products, which
affects the composition and packaging of our products. The passage of such requirements in additional jurisdictions, or
the tightening of standards or elimination of certain exemptions in jurisdictions where our products are already subject to
such requirements, could cause us to incur significant expenditures to make our products compliant with new
requirements, or could limit the markets into which we may sell our products.
Additionally, increasing efforts to control emissions of greenhouse gases, or GHG, may also impact us. For
example, our semiconductor manufacturing operations in California use perfluorocarbons, which are classified as a high
global warming potential greenhouse gas. Under California’s Global Warming Solutions Act, we designed and installed
additional pollution control equipment at our San Jose, California, manufacturing plant to reduce our perfluorocarbon
emissions beginning in 2012. As of December 31, 2012 and continuing through December 31, 2015, our San Jose and
Fremont, California, manufacturing facilities have maintained compliance with the Global Warming Solutions Act
through the monitoring and reviewing of our Greenhouse Gas Emissions including permits issued locally by the Bay
Area Air Quality Management District (BAAQMD), and we have submitted reports annually to verify such compliance.
In the U.S., the Environmental Protection Agency has announced a finding relating to GHG emissions that may result in
promulgation of federal GHG air quality standards. The U.S. Congress has considered various options, including a cap
and trade system which would impose a limit and a price on GHG emissions and establish a market for trading GHG
credits. China has agreed to join the Copenhagen Climate Accord, a voluntary (and non-binding) GHG agreement.
Globally, negotiations for a treaty to succeed the 1997 Kyoto Protocol Treaty are ongoing, and it is not yet known
whether (or on what terms) agreement will be reached on a successor treaty. Additional restrictions, limits, taxes, or
other controls on GHG emissions could significantly increase our operating costs and, while it is not possible to estimate
the specific impact any final GHG regulations will have on our operations, there can be no assurance that these measures
will not have significant additional impact on us. In addition, some of our operations might be affected by the physical
impacts of climate change. For example, some of our facilities are located in coastal areas that might be vulnerable to
changes in sea level.
Available Information
We were incorporated in the State of Delaware in October 1996 as NanoGram Corporation, and we changed our
name to NeoPhotonics Corporation in 2002. Our principal offices are located at 2911 Zanker Road, San Jose, CA 95134,
USA and our telephone number is +1 (408) 232-9200. Our website address is www.neophotonics.com. Information
found on, or accessible through, our website is not a part of, and is not incorporated into, this Annual Report on
Form 10-K.
We file electronically with the U.S. Securities and Exchange Commission, or SEC, our annual reports on Form 10-
K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended. We make available on our
website at www.neophotonics.com, free of charge, copies of these reports as soon as reasonably practicable after filing
these reports with, or furnishing them to, the SEC.
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ITEM 1A. RISK FACTORS
Risks related to our business
If spending for communications networks does not continue to grow as expected, our business and financial results
may suffer.
Our future success as a provider of modules and subsystems to leading network equipment vendors depends on
their continued capital spending on global communications networks. Network traffic has experienced rapid growth
driven primarily by bandwidth-intensive content, including cloud services, mobile video and data services, wireless
4G/LTE services, social networking, video conferencing and other multimedia. This growth is intensified by the
proliferation of fixed and wireless devices that are enabling consumers to access content at increasing data rates anytime
and anywhere. Our future success depends on continued demand for high-bandwidth, high-speed communications
networks and the ability of network equipment vendors to meet this demand. We cannot be certain that demand for
bandwidth-intensive content will continue to grow in the future. If expectations for growth of communications networks
and bandwidth consumption are not realized and investment in communications networks does not grow as anticipated,
our business could be harmed.
We are dependent on Huawei Technologies Co., Ltd. and their affiliate HiSilicon Technologies Co., Ltd., Ciena,
Alcatel-Lucent SA and our other key customers for a significant portion of our revenue and the loss of, or a
significant reduction in orders from any of our key customers may reduce our revenue and adversely impact our
results of operations.
Historically, we have generated most of our revenue from a limited number of customers. In the year ended
December 31, 2015, Huawei Technologies Co. Ltd., together with its affiliate HiSilicon Technologies Co., Ltd.
(collectively “Huawei”), and Ciena Corporation accounted for approximately 44% and 21% of our total revenue,
respectively, and our top ten customers represented 91% of our total revenue. In 2014, Huawei, Ciena Corporation, and
Alcatel-Lucent SA accounted for 38%, 15% and 10% of our total revenue, respectively, and our top ten customers
represented 88% of our total revenue. As a result, the loss of, or a significant reduction in orders from these major
customers or any of our other key customers would materially and adversely affect our revenue and results of operations.
Adverse events affecting our customers could also adversely affect our revenue and results of operations.
We are under continuous pressure to reduce the prices of our products, which has adversely affected, and may
continue to adversely affect, our gross margins.
The communications networks industry has been characterized by declining product prices over time. We have
reduced the prices of many of our products in the past and we expect to continue to experience pricing pressure for our
products in the future, including from our major customers. When seeking to maintain or increase their market share, our
competitors may also reduce the prices of their products. In addition, our customers may have the ability or seek to
internally develop and manufacture competing products at a lower cost than we would otherwise charge, which would
add additional pressure on us to lower our selling prices. If we are unable to offset any future reductions in our average
selling prices by increasing our sales volume, reducing our costs and expenses or introducing new products, our gross
margin would be adversely affected.
Our revenues and costs will fluctuate over time, making it difficult to predict our future results of operations.
Our revenue, gross margin and results of operations have varied significantly and are likely to continue to vary
from quarter to quarter due to a number of factors, many of which are not within our control. For instance, changes in
gross margin may result from various factors, such as changes in pricing, changes in our fixed costs, changes in the cost
of labor, changes in the mix of our products sold, changes in the amount of product manufactured versus the amount of
product sold over time, and charges for excess and obsolete inventory. It is difficult for us to accurately forecast our
future revenue and gross margin and plan expenses accordingly and, therefore, it is difficult for us to predict our future
results of operations.
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We have a history of losses which may continue in the future.
We have a history of losses and we may incur additional losses in future periods. As of December 31, 2015, our
accumulated deficit was $298.5 million. We also expect to continue to make significant expenditures related to the
ongoing operation and development of our business. These include expenditures related to the sales, marketing and
development of our products and to maintain our manufacturing facilities and research and development operations.
Customer demand is difficult to accurately forecast and, as a result, we may be unable to optimally match production
with customer demand, which could adversely affect our business and financial results.
We make planning and spending decisions based on our estimates of customer requirements. The short-term
nature of commitments by many of our customers, and the possibility of unexpected changes in demand for their
products, reduce our ability to accurately estimate future customer requirements. On occasion, customers may require
rapid increases in production, which can strain our resources, cause our manufacturing to be negatively impacted by
materials shortages, necessitate higher or more restrictive procurement commitments, increase our manufacturing yield
loss and scrapping of excess materials, and reduce our gross margin. We may not have sufficient capacity at any given
time to meet the volume demands of our customers, or one or more of our suppliers may not have sufficient capacity at
any given time to meet our volume demands. Conversely, a downturn in the markets in which our customers compete
can cause, and in the past have caused, our customers to significantly reduce or delay the amount of products ordered
from us or to cancel existing orders, leading to lower utilization of our facilities. Because many of our costs and
operating expenses are relatively fixed, reduction in customer demand due to market downturns or other reasons would
have a material adverse effect on our gross margin, operating income and cash flow.
Our products are typically sold pursuant to individual purchase orders or by use of a vendor-managed inventory, or
VMI, model, which is a process by which we ship agreed quantities of products to a customer-designated location and
those products remain our inventory and we retain the title and risk of loss for those products until the customer takes
possession of the products. While our customers generally provide us with their demand forecasts and may give us a
promised market share award, they are typically not contractually committed to buy any quantity of products beyond
firm purchase orders. Many of our customers may increase, decrease, cancel or delay purchase orders already in place.
We have experienced and expect to continue to experience wide fluctuations in demand from customers using VMI,
particularly Huawei Technologies Co., Ltd. and their affiliate HiSilicon Technologies Co., Ltd., even in instances where
we have built and shipped products to the customer-designated locations as VMI. In recent periods, there has been an
increase in the number of our customers utilizing VMI, which may increase our exposure to risks of wide fluctuations in
demand from VMI customer locations. If any of our major customers decrease, stop or delay purchasing our products for
any reason, our business and results of operations would be harmed. Cancellation or delays of such orders, as well as
fluctuations in VMI utilization by our customers, may cause us to incur an adverse effect on our revenues, as well as
adversely affect our overall results of operations.
We are subject to global governmental export and import controls that could subject us to liability, impair our ability
to compete in international markets, or restrict our sales to certain customers.
We are subject to export and import control laws, trade regulations and other trade requirements that limit which
products we sell and where and to whom we sell our products, especially laser-dependent products. In some cases, it is
possible that export licenses would be required from the U.S. or other government agencies outside the U.S. such as, but
not limited to, Japan, China or Russia for some of our products in accordance with various statutes. In addition, various
countries regulate the import of certain technologies and have enacted laws that could limit our ability to distribute our
products. We may not be successful in obtaining the necessary export and import licenses. Failure to comply with these
and similar laws on a timely basis, or at all, or any limitation on our ability to export or sell our products or to obtain any
required licenses would adversely affect our business, financial condition and results of operations.
Changes in our products or changes in export and import laws and implementing regulations may create delays in
the introduction of new products in international markets, prevent our customers from deploying our products
internationally or, in some cases, prevent the export or import of our products to certain countries altogether. For
instance, if export restrictions or import restrictions were placed on any of our major customers, we could be restricted
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from selling our products to such customer(s), which could result in an immediate and material reduction in our sales to
such customer(s) and adversely affect our business and results of operations. Any change in export or import regulations
or related legislation, shift in approach to the enforcement or scope of existing regulations, or change in the countries,
persons or technologies targeted by such regulations, could result in decreased use of our products by, or in our
decreased ability to export or sell our products to, existing or potential customers with international operations. In such
event, our business and results of operations could be adversely affected.
We face intense competition which could negatively impact our results of operations and market share.
The communications networks industry is highly competitive. Our competitors range from large international
companies offering a wide range of products to smaller companies specializing in niche markets.
Some of our competitors have substantially greater name recognition, technical, financial, and marketing resources,
and greater manufacturing capacity, as well as better-established relationships with customers, than we do. Some of our
competitors have more resources to develop or acquire, and more experience in developing or acquiring, new products
and technologies and in creating market awareness for these products and technologies. Some of our competitors may be
able to develop new products more quickly than us and may be able to develop products that are more reliable or which
provide more functionality than ours. In addition, some of our competitors have the financial resources on business
strategy to offer competitive products at below-market pricing levels that could prevent us from competing effectively
and result in a loss of sales or market share or cause us to lower prices for our products.
In particular we have developed new technologies and products that we believe are key components in our
customers’ systems for 100Gbps and higher data transmission. The emergence of technologies and products from our
competitors and their success in competing against our technologies and products for 100Gbps data transmission could
render our existing products uncompetitive from a pricing standpoint, obsolete or otherwise unmarketable.
We also face competition from some of our customers who evaluate our capabilities against the merits of
manufacturing products internally, including Huawei Technologies Co., Ltd. and its affiliate, HiSilicon Technologies Co.,
Ltd. Due to the fact that such customers are not seeking to make a comparable profit directly from the manufacture of
these products, they may have the ability to provide competitive products at a lower total cost than we would charge such
customers. As a result, these customers may purchase less of our products and there would be additional pressure to
lower our selling prices which, accordingly, would negatively impact our revenue and gross margin.
Intense competition in our markets could result in aggressive business tactics by our competitors, including
aggressively pricing their products or selling older inventory at a discount. If our current or future competitors utilize
aggressive business tactics, including those described above, demand for our products could decline, we could
experience delays or cancellations of customer orders, or we could be required to reduce our sales prices.
Increasing costs may adversely impact our gross margins.
The rate of increase in our costs and expenses, including as a result of rising labor costs in China, may exceed the
rate of increase in our revenue, which would materially and adversely affect our business, our results of operations and
our financial condition.
Manufacturing problems could impact manufacturing yields or result in delays in product shipments to customers
and could adversely affect our revenue, competitive position and reputation.
We may experience delays, disruptions or quality control problems in our manufacturing operations, which could
adversely impact manufacturing yields or delay product shipments. As a result, we could incur additional costs that
would adversely affect our gross margin, and product shipments to our customers could be delayed beyond the shipment
schedules requested by our customers, which would negatively affect our revenue, competitive position and reputation.
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Additionally, manufacturing yields depend on a number of factors, including the stability and manufacturability of
the product design, manufacturing improvements gained over cumulative production volumes, the quality and
consistency of component parts and the nature and extent of customization requirements by customers. Capacity
constraints, raw materials shortages, logistics issues, labor shortages, volatility in utilization of manufacturing operations,
supporting utility services and other manufacturing supplies, the introduction of new product lines, rapid increases in
production demands and changes in customer requirements, manufacturing facilities or processes, or those of some third
party contract manufacturers and suppliers of raw materials and components have historically caused, and may in the
future cause, reduced manufacturing yields, negatively impacting the gross margin on, and our production capacity for,
those products. Moreover, an increase in the rejection and rework rate of products during the quality control process
before, during or after manufacture would result in our experiencing lower yields, gross margin and production capacity.
Our ability to maintain sufficient manufacturing yields is particularly challenging with respect to PICs due to the
complexity and required precision of a large number of unique manufacturing process steps. Manufacturing yields for
PICs can also suffer if contaminated materials or materials that do not meet highly precise composition requirements are
inadvertently utilized. Because a large portion of our PIC manufacturing costs are fixed, PIC manufacturing yields have
a substantial effect on our gross margin. Lower than expected manufacturing yields could also delay product shipments
and decrease our revenue. It can be hard to cost-effectively increase our production output rapidly, and we can
experience yield loss and excess material scrap, which can increase our cost of goods sold and harm our profitability.
Also, if we do not have sufficient demand for our PIC-based products our cost of goods sold can increase as the fixed
costs of our fabrication facilities are spread over lower production.
We are subject to the cyclical nature of the markets in which we compete and any future downturn may reduce
demand for our products and revenue.
The markets in which we compete are tied to the aggregate capital expenditures of telecommunications service
providers as they build out and upgrade their network infrastructure. These markets are highly cyclical and characterized
by constant and rapid technological change, price erosion, evolving standards and wide fluctuations in product supply
and demand. In the past, including recently to varying degrees in China, the U.S. and Europe, these markets have
experienced significant downturns, often connected with, or in anticipation of, the maturation of product cycles—for
both manufacturers’ and their customers’ products—or in response to over or under purchasing of inventory by our
customers relative to ultimate carrier demand, and with declining general economic conditions. These downturns have
been characterized by diminished product demand, production overcapacity, high inventory levels and accelerated
erosion of average selling prices. To respond to a downturn, many service providers may slow their capital expenditures,
cancel or delay new developments, reduce their workforces and inventories and take a cautious approach to acquiring
new equipment and technologies from original equipment manufacturers, which would have a negative impact on our
business.
Our historical results of operations have been subject to substantial fluctuations, and we may experience
substantial period-to-period fluctuations in future results of operations. Any future downturn in the markets in which we
compete could significantly reduce the demand for our products and therefore may result in a significant reduction in
revenue. Our revenue and results of operations may be materially and adversely affected in the future due to changes in
demand from individual customers or cyclical changes in the markets utilizing our products.
It could be discovered that our products contain defects that may cause us to incur significant costs, divert our
attention, result in a loss of customers and result in product liability claims.
Our products are complex and undergo quality testing as well as formal qualification, both by our customers and
by us. However, defects may occur from time to time. For various reasons, such as the occurrence of performance
problems that are unforeseeable in testing or that are detected only when products age or are operated under peak stress
conditions, our products may fail to perform as expected long after customer acceptance. Failures could result from
faulty components or design, problems in manufacturing or other unforeseen reasons. As a result, we could incur
significant costs to repair or replace defective products under warranty, particularly when such failures occur in installed
systems. Any significant product failure could result in lost future sales of the affected product and other products, as
well as customer relations problems, litigation and damage to our reputation.
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In addition, our products are typically embedded in, or deployed in conjunction with, our customers’ products,
which incorporate a variety of components, modules and subsystems and may be expected to interoperate with modules
produced by third parties. As a result, not all defects are immediately detectable and when problems occur, it may be
difficult to identify the source of the problem. These problems may cause us to incur significant damages or warranty
and repair costs, divert the attention of our engineering personnel from our product development efforts and cause
significant customer relations problems or loss of customers, all of which would harm our business.
The occurrence of any defects in our products could give rise to liability for damages caused by such defects. They
could, moreover, impair our customers’ acceptance of our products. Both could have a material adverse effect on our
business and financial condition. Although we carry product liability insurance which covers this risk, this insurance may
not adequately cover our costs arising from defects in our products or otherwise.
We depend upon outside contract manufacturers for a portion of the manufacturing process for some of our products.
Our operations and revenue related to these products could be adversely affected if we encounter problems with a
contract manufacturer.
The majority of our products are manufactured internally. However, we also rely upon contract manufacturers in
China, Japan and other Asia locations to provide back-end manufacturing and produce the finished portion of some of
our products. Our reliance on contract manufacturers for these products makes us vulnerable to possible capacity
constraints and reduced control over delivery schedules, manufacturing yields, manufacturing quality/controls and costs.
If one of our contract manufacturers is unable to meet all of our customer demand in a timely fashion, this could have a
material adverse effect on the revenue from our products. If the contract manufacturer for one of our product were unable
or unwilling to manufacture such product in required volumes and at high quality levels or to continue our existing
supply arrangement, we would have to identify, qualify and select an acceptable alternative contract manufacturer or
move these manufacturing operations to our internal manufacturing facilities. Any significant interruption in
manufacturing our products would require us to reduce our supply of products to our customers, which in turn would
reduce our revenue, harm our relationships with the customers of these products and cause us to forego potential revenue
opportunities.
We must continually achieve new design wins and enhance existing products or our business and future revenue may
be harmed.
The markets for our products are characterized by frequent new product introductions, changes in customer
requirements and evolving industry standards, all with an underlying pressure to reduce cost and meet stringent
reliability and qualification requirements. Our future performance will depend on our successful development,
introduction and market acceptance of new and enhanced products that address these challenges. The anticipated or
actual introduction of new and enhanced products by us and by our competitors may cause our customers to defer or
cancel orders for our existing products. In addition, the introduction of new products by us or our competitors could
result, and in the past, has resulted, in a slowdown in demand for our existing products and could result, and in the past,
has resulted, in a write-down in the value of inventory. We have both recently and in the past experienced a slowdown in
demand for existing products and delays in new product development, and such delays may occur in the future. To the
extent customers defer or cancel orders for our products for any reason or we fail to achieve new design wins, our
competitive position would be adversely affected and our ability to grow revenue would be impaired.
Furthermore, fast time-to-market with new products can be critical to success in our markets. It is difficult to
displace an existing supplier for a particular type of product once a network equipment vendor has chosen a supplier,
even if a later-to-market product provides superior performance or cost efficiency. If we are unable to make our new or
enhanced products commercially available on a timely basis, we may lose existing and potential customers and our
financial results would suffer.
The development of new, technologically-advanced products is a complex and uncertain process requiring
frequent innovation, highly-skilled engineering and development personnel and significant capital, as well as the
accurate anticipation of technological and market trends. We cannot assure you that we will be able to identify, develop,
manufacture, market or support new or enhanced products successfully, if at all, or on a timely basis. Further, we cannot
23
assure you that our new products will gain market acceptance or that we will be able to respond effectively to product
introductions by competitors, technological changes or emerging industry standards. We also may not be able to develop
the underlying core technologies necessary to create new products and enhancements, license these technologies from
third parties, or remain competitive in our markets.
Our success will depend on our ability to anticipate and quickly respond to evolving technologies and customer
requirements.
The communications networks industry is characterized by substantial investment in new technology and the
development of diverse and changing technologies and industry standards. For example, new technologies are required
to satisfy the emerging standards for 100Gbps, 400 Gbps and higher data transmission in communications networks.
Our ability to anticipate and respond to evolving technology, industry standards, customer requirements and
product offerings, and to develop and introduce new and enhanced products and technologies, will be critical factors in
our ability to succeed. If we are unable to anticipate and respond to such changes in the future, our competitive position
could be adversely affected. In addition, the introduction of new products by other companies embodying new
technologies, or the emergence of new industry standards, could render our existing products uncompetitive from a
pricing standpoint, obsolete or otherwise unmarketable.
If our customers do not qualify our products for use, then our results of operations may suffer.
Prior to placing volume purchase orders with us, most of our customers require us to obtain their approval—called
qualification in our industry—of our new and existing products, and our customers often audit our manufacturing
facilities and perform other vendor evaluations during this process. The qualification process involves product sampling
and reliability testing and collaboration with our product management and engineering teams in the design and
manufacturing stages. If we are unable to qualify our products with customers, then our revenue would be lower than
expected and we may not be able to recover the costs associated with the qualification process which would have an
adverse effect on our results of operations.
In addition, due to evolving technological changes in our markets, a customer may cancel or modify a design
project before we have qualified our product or begun volume manufacturing of a qualified product. It is unlikely that we
would be able to recover the expenses for cancelled or unutilized custom design projects. It is difficult to predict with
any certainty whether our customers will delay or terminate product qualification or the frequency with which customers
will cancel or modify their projects, but any such delay, cancellation or modification would have a negative effect on our
results of operations.
In particular, we have developed new technologies and products that we believe are key components in our
customers’ systems for 100Gbps data transmission. There are multiple modulation approaches for these systems and not
all are likely to be equally successful. While we are shipping certain products for 100Gbps system designs today, many
of our products for these systems are currently being qualified for use by our customers. Our ability to successfully
qualify and scale capacity for these new technologies and products is important to our ability to grow our business and
market presence. If we are unable to qualify and sell any of these products in volume on time, or at all, our results of
operations may be adversely affected.
If we fail to retain our key personnel or if we fail to attract additional qualified personnel, we may not be able to
achieve our anticipated level of growth and our business could suffer.
Our success and ability to implement our business strategy depends upon the continued contributions of our senior
management team and others, including senior management in foreign subsidiaries and our technical and operations
employees in all locations. Our future success depends, in part, on our ability to attract and retain key personnel,
including our senior management and others. The loss of services of members of our senior management team or key
personnel or the inability to continue to attract and retain qualified personnel could have a material adverse effect on our
business. Competition for highly skilled technical and operations people where we operate is extremely intense, and we
continue to face challenges identifying, hiring and retaining qualified personnel in many areas of our business. If we fail
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to retain our senior management and other key personnel or if we fail to attract additional qualified personnel, our
business could suffer.
The communications networks industry has long product development cycles requiring us to incur product
development costs without assurances of an acceptable investment return.
The communications networks industry is highly capital-intensive. Large volumes of equipment and support
structures are installed with considerable expenditures of funds and other resources, and long investment return period
expectations. At the component supplier level, these cycles create considerable, typically multi-year, gaps between the
commencement of new product development and volume purchases. Accordingly, we and our competitors often incur
significant research and development and sales and marketing costs for products that, initially, will be purchased by our
customers long after much of the cost is incurred and, in some cases, may never be purchased due to changes in industry
or customer requirements in the interim.
Due to changing industry and customer requirements, we are constantly developing new products, including
seeking to further integrate functions on PICs and developing and using new technologies in our products. These
development activities can and are expected to necessitate significant investment of capital. Our new products often
require a long time to develop because of their complexity and rigorous testing and qualification requirements.
Additionally, developing a manufacturing approach with an acceptable cost structure and yield for new products can be
expensive and time-consuming. Due to the costs and length of research and development and manufacturing process
cycles, we may not recognize revenue from new products until long after such expenditures are incurred, if at all, and our
gross margin may decrease if our costs are higher than expected.
While we rely on many suppliers, there are a few which, if they stopped, decreased or delayed shipments to us, it could
have an adverse effect on our business and financial results.
We depend on a limited number of suppliers for certain components and materials we have qualified to use in the
manufacture of certain of our products. Some of these suppliers could disrupt our business if they stop, decrease or delay
shipments or if the components they ship have quality, consistency, or business continuity issues. Some of these
components and materials are available only from a sole source, or have been qualified only from a single source. For
example, we use various types of adhesives that are sourced from various manufacturers, which presently are sole
sources for these particular adhesives. Furthermore, there are a limited number of entities from which we could obtain
certain other components and materials. We may also face component shortages if we experience increased demand for
components beyond what our qualified suppliers can deliver. We have experienced component shortages from certain
key suppliers, which has resulted and, if this occurs in the future, may result in an inability to meet customer demand,
higher purchasing costs, or both. Although we engage in various actions to mitigate the impact of these shortages, any
inability on our part to obtain sufficient quantities of critical components at reasonable costs could adversely affect our
ability to meet demand for our products, which could cause our revenue, results of operations, or both to suffer.
Our customers generally restrict our ability to change the component parts in our modules without their approval.
For more critical components, such as PICs, lasers and photo detectors, any changes may require repeating the entire
qualification process. We typically have not entered into long-term or written agreements with our suppliers to guarantee
the supply of the key components used in our products, and, therefore, our suppliers could stop supplying materials and
equipment at any time or fail to supply adequate quantities of component parts on a timely basis. It is difficult, costly,
time consuming and, on short notice, sometimes impossible for us to identify and qualify new component suppliers. The
reliance on a sole supplier, single qualified vendor or limited number of suppliers could result in delivery and quality
problems, reduced control over product pricing, reliability and performance and an inability to identify and qualify
another supplier in a timely manner. We have in the past had to change suppliers, which has, in some instances, resulted
in delays in product development and manufacturing and loss of revenue. Any such delays in the future may limit our
ability to respond to changes in customer and market demands. Any supply deficiencies relating to the quality, quantities
or timeliness of delivery of components that we use to manufacture our products could adversely affect our ability to
fulfill our customer orders and our results of operations.
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If we fail to protect, or incur significant costs in defending, our intellectual property and other proprietary rights, our
business and results of operations could be materially harmed.
Our success depends to a significant degree on our ability to protect our intellectual property and other proprietary
rights. We rely on a combination of patent, trademark, copyright, trade secret and unfair competition laws, as well as
license agreements and other contractual provisions, to establish and protect our intellectual property and other
proprietary rights. We have applied for patent registrations in the U.S. and in other foreign countries, some of which
have been issued. We cannot guarantee that our pending applications will be approved by the applicable governmental
authorities. Moreover, our existing and future patents and trademarks may not be sufficiently broad to protect our
proprietary rights or may be held invalid or unenforceable in court. A failure to obtain patents or trademark registrations
or a successful challenge to our registrations in the U.S. or other foreign countries may limit our ability to protect the
intellectual property rights that these applications and registrations intended to cover.
Policing unauthorized use of our technology is difficult and we cannot be certain that the steps we have taken will
prevent the misappropriation, unauthorized use or other infringement of our intellectual property rights. Further, we may
not be able to effectively protect our intellectual property rights from misappropriation or other infringement in foreign
countries where we have not applied for patent protections, and where effective patent, trademark, trade secret and other
intellectual property laws may be unavailable, or may not protect our proprietary rights as fully as U.S. or Japan law.
Particularly, our U.S. patents do not afford any intellectual property protection in China, Japan, Canada or other Asia
locations where we have company operations, or in Russia, where we intend to expand operations. We seek to secure, to
the extent possible, comparable intellectual property protections in China and other areas in which we operate. However,
while we have issued patents and pending patent applications in China, portions of our intellectual property portfolio are
not yet protected by patents in China. Moreover, the level of protection afforded by patent and other laws in countries
such as China and Russia may not be comparable to that afforded in the U.S. or Japan.
We attempt to protect our intellectual property, including our trade secrets and know-how, through the use of trade
secret and other intellectual property laws, and contractual provisions. We enter into confidentiality and invention
assignment agreements with our employees and independent consultants. We also use non-disclosure agreements with
other third parties who may have access to our proprietary technologies and information. Such measures, however,
provide only limited protection, and there can be no assurance that our confidentiality and non-disclosure agreements
will not be breached, especially after our employees or those of our third-party contract manufacturers end their
employment or engagement, and that our trade secrets will not otherwise become known by competitors or that we will
have adequate remedies in the event of unauthorized use or disclosure of proprietary information. Unauthorized third
parties may try to copy or reverse engineer our products or portions of our products, otherwise obtain and use our
intellectual property, or may independently develop similar or equivalent trade secrets or know-how. If we fail to protect
our intellectual property and other proprietary rights, or if such intellectual property and proprietary rights are infringed
or misappropriated, our business, results of operations or financial condition could be materially harmed.
In the future, we may need to take legal actions to prevent third parties from infringing upon or misappropriating
our intellectual property or from otherwise gaining access to our technology. Protecting and enforcing our intellectual
property rights and determining their validity and scope could result in significant litigation costs and require significant
time and attention from our technical and management personnel, which could significantly harm our business. In
addition, we may not prevail in such proceedings. An adverse outcome of such proceedings may reduce our competitive
advantage or otherwise harm our financial condition and our business.
We may be involved in intellectual property disputes in the future, which could divert management’s attention, cause
us to incur significant costs and prevent us from selling or using the challenged technology.
Participants in the markets in which we sell our products have experienced frequent litigation regarding patent and
other intellectual property rights. Numerous patents in these industries are held by others, including our competitors. In
addition, from time to time, we have been notified that we may be infringing certain patents or other intellectual property
rights of others. Regardless of their merit, responding to such claims can be time consuming, divert management’s
attention and resources and may cause us to incur significant expenses. In addition, there can be no assurance that third
parties will not assert infringement claims against us. While we believe that our products do not infringe in any material
26
respect upon intellectual property rights of other parties and/or meritorious defense would exist with respect to any
assertions to the contrary, we cannot be certain that our products would not be found infringing the intellectual property
rights of others. Intellectual property claims against us could invalidate our proprietary rights and force us to do one or
more of the following:
• obtain from a third party claiming infringement a license to sell or use the relevant technology, which may not
be available on commercially reasonable terms;
• stop manufacturing, selling, incorporating or using our products that use the challenged intellectual property;
• pay substantial monetary damages; or
• expend significant resources to redesign the products that use the technology and to develop non-infringing
technology.
Any of these actions could result in a substantial reduction in our revenue and could result in losses over an
extended period of time.
In January 2010, Finisar Corporation, or Finisar, filed a complaint in the U.S. District Court for the Northern
District of California against us and three other co-defendants. In the complaint, Finisar alleged infringement of certain
of its U.S. patents arising from the co-defendants’ respective manufacture, importation, use, sale of or offer to sell certain
optical transceiver products in the U.S. In March 2010, we filed an answer to the complaint and counterclaims, asserting
two claims of patent infringement and additional claims asserting that Finisar has violated state and federal competition
laws and violated its obligations to license on reasonable and non-discriminatory terms. In May 2010, the court
dismissed without prejudice all co-defendants (including us) except Source Photonics, Inc., on grounds that such claims
should have been asserted in four separate lawsuits, one against each co-defendant. This dismissal without prejudice does
not prevent Finisar from bringing a new similar lawsuit against us. In May 2012, we and Finisar agreed to toll our
respective claims until the refiling of certain of the previously asserted claims from this dispute. As a result, Finisar is
permitted to bring a new lawsuit against us if it chooses to do so, and we may bring new claims against Finisar upon
seven days written notice prior to filing such claims.
If we are unsuccessful in our defense of the Finisar patent infringement claims, a license to use the allegedly
infringing technology may not be available on commercially reasonable terms and therefore may limit or preclude us
from competing in the market for optical transceivers in the U.S., which may have a material adverse effect on our
results of operations and financial condition, and otherwise materially harm our business.
Although we believe that we would have meritorious defenses to the infringement allegations and intend to defend
any new similar lawsuit vigorously, there can be no assurance that we will be successful in our defense. Even if we are
successful, we may incur substantial legal fees and other costs in defending the lawsuit. Further, a new lawsuit, if
brought by either party, would be likely to divert the efforts and attention of our management and technical personnel,
which could harm our business.
If we fail to obtain the right to use the intellectual property rights of others which are necessary to operate our
business, and to protect their intellectual property, our business and results of operations will be adversely affected.
From time to time we may choose to or be required to license technology or intellectual property from third parties
in connection with the development of our products. We cannot assure you that third-party licenses will be available to
us on commercially reasonable terms, if at all. Generally, a license, if granted, would include payments of up-front fees,
ongoing royalties or both. These payments or other terms could have a significant adverse impact on our results of
operations. The inability to obtain a necessary third-party license required for our product offerings or to develop new
products and product enhancements could require us to substitute technology of lower quality or performance standards,
or of greater cost, either of which could adversely affect our business. If we are not able to obtain licenses from third
parties, if necessary, then we may also be subject to litigation to defend against infringement claims from these third
parties. Our competitors may be able to obtain licenses or cross-license their technology on better terms than we can,
which could put us at a competitive disadvantage. Also, we typically enter into confidentiality agreements with such
third parties in which we agree to protect and maintain their proprietary and confidential information, including requiring
27
our employees to enter into agreements protecting such information. There can be no assurance that the confidentiality
agreements will not be breached by any of our employees or that such third parties will not make claims that their
proprietary information has been disclosed.
Any potential dispute involving our patents or other intellectual property could also include our customers using our
products, which could trigger our indemnification obligations to them and result in substantial expenses to us.
In any potential dispute involving our patents or other intellectual property, our customers could also become the
target of litigation. Because we often indemnify our customers for intellectual property claims made against them for
products incorporating our technology, any claims against our customers could trigger indemnification obligations in
some of our supply agreements, which could result in substantial expenses such as increased legal expenses, product
recalls, damages for past infringement or royalties for future use. While we have not incurred any material
indemnification expenses to date, any future indemnity claim could adversely affect our relationships with our customers
and result in substantial costs to us. Our insurance does not cover intellectual property infringement.
If we fail to adequately manage our long-term growth and expansion requirements, our business and financial results
will suffer.
In recent years, we have experienced significant growth through, among other things, internal expansion programs,
product development and acquisitions of other businesses and products. Our business has expanded to numerous
locations, including foreign locations, and as a result become more complex, more demanding of management’s attention
and subject to new laws and regulations. If we fail to comply with new laws and regulations related to the expansion of
our business, our business could suffer.
We expect to continue to grow, which could require us to expand our manufacturing operations, including hiring
new personnel, purchasing additional equipment, leasing or purchasing additional facilities, developing the management
infrastructure and developing our suppliers to manage any such expansion. If we fail to secure these expansion
requirements or manage our future growth effectively, our business could suffer.
We have pursued and may continue to pursue acquisitions. Acquisitions could be difficult to integrate, divert the
attention of key personnel, disrupt our business, dilute stockholder value and impair our financial results.
As part of our business strategy, we have pursued and intend to continue to pursue acquisitions of complementary
businesses, products, services or technologies that we believe could accelerate our ability to compete in our existing
markets or allow us to enter new markets. Any of these transactions could be material to our financial condition and
results of operations. For instance, in October 2011, we completed the acquisition of Santur Corporation, a designer and
manufacturer of InP-based PIC products, and in March 2013 we completed the acquisition of the optical semiconductor
business unit of LAPIS Semiconductor Co., Ltd., now known as NeoPhotonics Semiconductor. We purchased the
tunable laser product lines of EMCORE in January 2015 and the power monitoring products business of EigenLight
Corporation in November 2015. If we fail to properly evaluate or integrate acquisitions, we may not achieve the
anticipated benefits of any such acquisitions, and we may incur costs in excess of what we anticipate.
Acquisitions involve numerous risks, any of which could harm our business, including:
• difficulties in integrating the operations, technologies, products, existing contracts, accounting and personnel of
the target company;
• difficulties in realizing our expectations for the financial performance of the target company;
• difficulties in supporting and transitioning customers, if any, of the target company;
• difficulties in managing and integrating different cultures with respect to our international acquisitions;
• dependence or reliance on subcontractors or suppliers to the acquired company that may not have been fully
qualified or evaluated for their position in supplying the acquired company previously;
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• diversion of management time and potential business disruption;
• the incurrence of debt to provide capital for any cash-based acquisitions;
• the price we pay or other resources that we devote may exceed the value we realize, or the value we could have
realized if we had allocated the purchase price or other resources to another opportunity;
• risks of entering new markets in which we have limited or no experience;
• potential loss of key employees, customers and strategic alliances from either our current business or the target
company’s business;
• assumption of unanticipated problems or latent liabilities, such as problems with the quality of the target
company’s products;
• exposure to environmental liabilities that have not yet been discovered associated with acquired businesses’
facilities;
• expenses, distractions and actual or threatened claims or litigation resulting from acquisitions, whether or not
they are completed;
• unexpected capital expenditure requirements
• inability to generate sufficient revenue to offset increased expenses association with any acquisition;
• issues arising from weaknesses or deficiencies in internal controls over financial reporting for acquired
businesses that were not previously subject to internal control requirements of a U.S. public company;
• in the event of international acquisitions, risks associated with accounting and business practices that are
different from applicable U.S. practices and requirements;
• dilutive effect on our stock as a result of any equity-based acquisitions;
• incurring potential write-offs, contingent liabilities and amortization expense; and
• opportunity costs of committing capital to such acquisitions.
The failure to successfully evaluate and execute acquisitions or otherwise adequately address these risks could
materially harm our business and financial results.
Acquisitions also frequently result in the recording of goodwill and other intangible assets which are subject to
potential impairments which have occurred in the past and which, were they to occur in the future, could harm our
financial results. As a result, if we fail to properly evaluate acquisitions or investments, we may not achieve the
anticipated benefits of any such acquisitions, and we may incur costs in excess of what we anticipate. The failure to
successfully evaluate and execute acquisitions or investments or otherwise adequately address these risks could
materially harm our business and financial results.
Failure to realize the anticipated benefits from our past and future acquisitions may affect our future results of
operations and financial condition.
In connection with our acquisitions of Santur, NeoPhotonics Semiconductor, EMCORE’s tunable laser products
and EigenLight’s power monitor products, we have integrated the commercial operations and personnel into our existing
infrastructure. If there are unexpected difficulties in our integration of these acquired businesses and/or the product lines
we have acquired from EMCORE, the anticipated benefits of these acquisitions may not be realized or may take longer
to realize than expected. The anticipated benefits of these acquisitions could be materially reduced by a number of
factors, including the following:
• the future revenue and gross margins of the acquired products may be materially different from those we
originally anticipated;
• we could incur material unanticipated expenses;
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• acquired products may not achieve the performance levels or specifications required by our customers;
• claims or lawsuits may arise from the acquisition transaction or from their previous business operations;
• we may experience difficulties in managing inventory and other operational processes in facilities that we
acquire or lease as a result of the acquisitions;
• we may experience difficulties in implementing effective internal controls over financial reporting as part of our
integration actions, particularly since neither of these businesses were historically subject as a stand-alone
entity to the internal control requirements of a U.S. public company;
• potential growth, expected financial results, perceived synergies and anticipated opportunities may not be
realized through the ongoing integration actions;
• we may face competition from existing customers as well as new competitors;
• some existing customers of the acquired businesses may view our company as a competitor, and therefore may
reduce or end their purchases of NeoPhotonics products for competitive reasons;
• a potential decline in revenues could occur from NeoPhotonics Semiconductor’s legacy products for network
applications that are declining within our customer base (such as NeoPhotonics Semiconductor’s gallium
arsenide integrated circuits for 10G network applications)
• we could have difficulty implementing and maintaining financial reporting requirements for the acquired
business operations, which have not been previously audited nor subject to the internal compliance structure
of a U.S. public company;
• we could incur additional costs associated with known and unknown environmental contamination of the real
estate acquired from NeoPhotonics Semiconductor; and
• we could incur costs associated with new export or compliance issues associated with NeoPhotonics
Semiconductor products or the product lines we recently acquired from EMCORE or EigenLight.
The occurrence of any or all of these events may have an adverse effect on our business and results of operations.
We may not be able to obtain capital when desired on favorable terms, if at all, or without dilution to our stockholders.
We believe that our existing cash and cash equivalents, and cash flows from our operating activities and funds
available under our credit facilities, will be sufficient to meet our anticipated cash needs for at least the next 12 months.
We operate in an industry, however, that makes our prospects difficult to evaluate. It is possible that we may not
generate sufficient cash flow from operations or otherwise have the capital resources to meet our future capital needs. If
this occurs, we may need additional financing to continue operations or execute on our current or future business
strategies, including to:
• invest in our research and development efforts, including by hiring additional technical and other personnel;
• maintain and expand our operating or manufacturing infrastructure;
• acquire complementary businesses, products, services or technologies; or
• otherwise pursue our strategic plans and respond to competitive pressures.
If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership
of our stockholders could be significantly diluted, and these newly-issued securities may have rights, preferences or
privileges senior to those of existing stockholders. We cannot assure you that additional financing will be available on
terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, if and when
needed, our ability to fund our operations, take advantage of unanticipated opportunities, develop or enhance our
products, or otherwise respond to competitive pressures could be significantly limited. Furthermore, in the event
adequate capital is not available to us as required, or is not available on favorable terms, our business, financial condition,
results of operations, and cash flows may be materially and adversely affected.
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Natural disasters, terrorist attacks or other catastrophic events could harm our operations and our financial results.
Our worldwide operations could be subject to natural disasters and other business disruptions, which could harm
our future revenue and financial condition and increase our costs and expenses. For example, our corporate headquarters
and wafer fabrication facility in Silicon Valley, California and our Tokyo, Japan facility are located near major
earthquake fault lines, and our manufacturing facilities are located in Shenzhen and Dongguan, China, areas that are
susceptible to typhoons. In the event that an earthquake, tsunami, typhoon, terrorist attack or other natural or man-made
catastrophe were to destroy any part of our facilities, destroy or disrupt vital infrastructure systems or interrupt our
operations or the facilities or operations of our suppliers or customers for any extended period of time, our business,
financial condition and results of operations would be materially and adversely affected. We are not insured against
many natural disasters, including earthquakes.
Similarly, our worldwide operations could be subject to secondary effects of natural disasters and other business
disruptions, which could harm our future revenue and financial condition and increase our costs and expenses. For
instance, natural disasters and other business disruptions have created significant secondary effects in the past (such as
the 2011 floods in Thailand and the 2011 earthquakes, tsunami and subsequent crisis relating to nuclear power facilities
in Japan). Any of these types of events in the future could result in a slowdown of business or inability to manufacture
products by our customers or others in the industry that are located in the affected areas; a disruption to the global supply
chain for products manufactured in the affected areas that are included in the products either by us or by our customers; a
disruption to manufacturing resulting from power shortages or other rationing of inputs to production; an increase in the
cost of products that we purchase due to reduced supply; and other unforeseen impacts. These secondary effects could
have a material and adverse effect on our business, financial condition, and results of operations.
Rapidly changing standards and regulations could make our products obsolete, which would cause our revenue and
results of operations to suffer.
We design our products to conform to regulations established by governments and to standards set by industry
standards bodies worldwide, such as The American National Standards Institute, the European Telecommunications
Standards Institute, the International Telecommunications Union and the Institute of Electrical and Electronics Engineers.
Various industry organizations are currently considering whether and to what extent to create standards for elements
used in 100Gbps systems. Because certain of our products are designed to conform to current specific industry standards,
if competing or new standards emerge that are preferred by our customers, we would have to make significant
expenditures to develop new products. If our customers adopt new or competing industry standards with which our
products are not compatible, or the industry groups adopt standards or governments issue regulations with which our
products are not compatible, our existing products would become less desirable to our customers and our revenue and
results of operations would suffer.
Failure to realize the anticipated benefits from our planned expansion in the Russian Federation may affect our
future results of operations and financial condition.
In connection with our raising capital in an April 2012 private placement of common stock, we have established a
wholly-owned subsidiary and company operations in the Russian Federation. The establishment of successful operations
in the Russian Federation requires capital expenditure over several years, and is in part dependent on the cooperation of
Russian entities that could include the Russia government and other third parties. If there are delays in our efforts to
establish operations in the Russian Federation, the anticipated benefits of our Russian expansion may not be realized or
may take longer to realize than expected. The anticipated benefits of our Russian expansion could be materially reduced
by a number of factors, including the following:
• the future revenue and gross margins of products produced in the Russian Federation may be materially
different from those we originally anticipated;
• we could incur material unanticipated expenses; and
• we could have difficulty managing a business in the Russian Federation, where we did not previously have a
material business presence.
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In addition, in connection with the private placement transaction, we entered into a rights agreement with the
sponsoring investor. Pursuant to the rights agreement, we have agreed to make a $30.0 million investment towards our
Russian operations. We are currently required to satisfy this total investment commitment over a period from 2012 to
2019. Pursuant to the rights agreement, failure to perform our investment commitments for specific years within this
time period may result in an obligation to pay damages to the investor, up to a maximum amount of penalties of $5.0
million.
Our business operations conducted in Russia are relatively small compared to our overall business. A portion of
our revenue in the twelve months ended December 31, 2015 was recognized from customers for whom we shipped
products to a location in Russia. Additionally, a portion of our property, plant and equipment was located in Russia. We
expect to make further investments in Russia in the foreseeable future. Therefore, our business, financial condition,
results of operations and prospects are to a degree subject to economic, political, legal, and social events and
developments in Russia. In recent years the Russian Federation has undergone substantial political, economic and social
change. The business, legal and regulatory infrastructure in the Russian Federation is less well-developed that would
generally exist in a more mature free market economy. In addition, the tax, currency and customs legislation within the
Russian Federation is subject to varying interpretations and changes, which can occur frequently. The future economic
direction of the Russian Federation remains largely dependent upon the effectiveness of economic, financial and
monetary measures undertaken by the government, together with tax, legal, regulatory and political developments. Our
failure to manage the risks associated with our planned Russian expansion could have a material adverse effect upon our
results of operations.
We could be adversely affected by any actions taken by Russia in response to U.S. or international sanctions,
including but not limited to actions such as restrictions placed by Russia on U.S. companies doing business in Russia.
The occurrence of any or all of these events may have an adverse effect on our business, and results of operations
and financial condition.
Potential changes in our effective tax rate could negatively affect our future results.
We are subject to income taxes in the U.S., China, Japan and other various foreign jurisdictions, and our domestic
and international tax liabilities are subject to the allocation of expenses in differing jurisdictions. Our tax rate is affected
by changes in the mix of earnings and losses in countries with differing statutory tax rates, certain non-deductible
expenses and the valuation of deferred tax assets and liabilities, including our ability to utilize our net operating losses.
Increases in our effective tax rate could negatively affect our results of operations.
Our future results of operations may be subject to volatility as a result of exposure to fluctuations in foreign exchange
rates, primarily the Chinese Renminbi (RMB) and Japanese Yen (JPY) exchange rates.
We are exposed to foreign exchange risks. Foreign currency fluctuations may adversely affect our revenue and our
costs and expenses, and hence our results of operations. A substantial portion of our business is conducted through our
subsidiaries based in China, whose functional currency is the RMB and Japan, whose functional currency is the JPY. The
value of the RMB against the U.S. dollar and other currencies and the value of the JPY against the U.S. dollar and other
currencies fluctuate and are affected by, among other things, changes in political and economic conditions.
The People’s Bank of China regularly intervenes in the foreign exchange market to manage fluctuations in RMB
exchange rates and achieve policy goals. In the year ended December 31, 2015, the Chinese government had allowed the
RMB to devalue against the U.S. dollar by approximately 6%. It is difficult to predict how market forces or Chinese or
U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in the future. There remains
significant international pressure on the Chinese government to adopt a more flexible currency policy, which could result
in greater fluctuation of the RMB against the U.S. dollar.
To the extent that transactions by our subsidiaries in China and Japan are denominated in currencies other than the
RMB and JPY, we bear the risk that fluctuations in the exchange rates of the RMB and JPY in relation to other
32
currencies could decrease our revenue or increase our costs and expenses, therefore having an adverse effect on our
future results of operations.
While we generate a significant portion of our revenue in U.S dollars, a significant portion of our cost of goods
sold are in RMB. Therefore appreciation in RMB against the U.S. dollar would negatively impact our cost of goods sold
upon translation to U.S. dollars.
We also transact in other currencies that have had historical volatility, including the Russian Rubles (RUB).
Fluctuations in the exchange rates of these currencies may cause us to recognize additional transaction gains or losses
which could impact our results of operations. While the RUB weakened against the U.S. dollar, the related impact on our
operating results has been immaterial. However, as we expect to expand our Russian operations, our risk associated with
fluctuation of the RUB against the U.S. dollar could increase in the future.
To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency
exchange risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of
these hedging transactions may be limited and we may not be able to successfully hedge our exposure. In addition, our
currency exchange variations may be magnified by Chinese exchange control regulations that restrict our ability to
convert RMB into foreign currency.
We face a variety of risks associated with international sales and operations, which if not adequately managed could
adversely affect our business and financial results.
We currently derive, and expect to continue to derive, a significant portion of our revenue from international sales
in various markets. In addition, a major portion of our operations is based in Shenzhen and Dongguan, China as well as
our having additional operations in Japan, Russia and Canada. Our international revenue and operations are subject to a
number of material risks, including, but not limited to:
• difficulties in staffing, managing and supporting operations in more than one country;
• difficulties in enforcing agreements and collecting receivables through foreign legal systems;
• fewer legal protections for intellectual property in foreign jurisdictions;
• compliance with local regulations;
• foreign and U.S. taxation issues and international trade barriers;
• general economic and political conditions in the markets in which we operate;
• difficulties in obtaining any necessary governmental authorizations for the export of our products to certain
foreign jurisdictions;
• imposition of export restrictions on sales to any of our major foreign customers;
• fluctuations in foreign economies;
• fluctuations in the value of foreign currencies and interest rates;
• trade and travel restrictions;
• outbreaks of contagious disease;
• domestic and international economic or political changes, hostilities and other disruptions; and
• difficulties and increased expenses in complying with a variety of U.S. and foreign laws, regulations and trade
standards, including the Foreign Corrupt Practices Act. Negative developments in any of these areas in China,
Japan, Russia or other countries could result in a reduction in demand for our products, the cancellation or
delay of orders already placed, difficulties in producing and delivering our products, threats to our intellectual
property, difficulty in collecting receivables, and a higher cost of doing business.
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In addition, although we maintain an anti-corruption compliance program throughout our company, violations of
our compliance program may result in criminal or civil sanctions, including material monetary fines, penalties and other
costs against us or our employees, and may have a material adverse effect on our business.
If we fail to maintain effective internal control over financial reporting in the future, the accuracy and timing of our
financial reporting may be adversely affected.
Our management is responsible for establishing and maintaining adequate internal control over our financial
reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended, or the Exchange Act.
Preparing our consolidated financial statements involves a number of complex manual and automated processes,
which are dependent upon individual data input or review and require significant management judgment. One or more of
these elements may result in errors that may not be detected and could result in a material misstatement of our
consolidated financial statements. For instance, during 2013, we identified material weaknesses in our internal control
over financial reporting, which resulted in material misstatements in our consolidated financial statements for the first
two quarters of 2013, which required us to file restatements of these financial statements. We subsequently remediated
these material weaknesses, and our management concluded that our internal control over financial reporting was
effective as of the end of both 2014 and 2015. However, if material weaknesses in our internal control are discovered or
occur in the future, our consolidated financial statements may contain material misstatements and we could be required
to restate our financial results.
We may also experience difficulties in implementing effective internal controls over financial reporting as part of
our integration of acquired businesses or products, particularly the product lines acquired from EMCORE or EigenLight.
The product lines we acquired from EMCORE or EigenLight were not subject as a stand-alone entity to the internal
control requirements of a U.S. public company. We could also experience unanticipated additional operating costs in
implementing and managing effective internal controls over financial reporting or EMCORE or EigenLight operations,
which could adversely affect our financial performance.
If a material misstatement occurs in the future, we may fail to meet our future reporting obligations, we may need
to restate our financial results and the price of our common stock may decline. Our internal control over financial
reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human
error, the circumvention or overriding of controls, or fraud. Even effective internal controls can provide only reasonable
assurance with respect to the preparation and fair presentation of financial statements. If we fail to maintain the adequacy
of our internal controls, including any failure to implement required new or improved controls, or if we experience
difficulties in the implementation, our business and operating results may be harmed and we may fail to meet our
financial reporting obligations. Any failure of our internal controls could also adversely affect the results of the periodic
management evaluations and annual independent registered public accounting firm attestation reports regarding the
effectiveness of our internal control over financial reporting that is now applicable to us under the rules of the Securities
and Exchange Commission, or the SEC. Effective internal controls are necessary for us to produce reliable financial
reports and are important to helping prevent financial fraud. If we cannot provide reliable financial reports or prevent
fraud, our business and results of operations could be harmed, investors could lose confidence in our reported financial
information, and the trading price of our stock could drop significantly.
We may be subject to disruptions or failures in information technology systems and network infrastructures that
could have a material adverse effect on our business and financial condition.
We rely on the efficient and uninterrupted operation of complex information technology systems and network
infrastructures to operate our business. A disruption, infiltration or failure of our information technology systems as a
result of software or hardware malfunctions, system implementations or upgrades, computer viruses, cyber attacks, third-
party security breaches, employee error, theft or misuse, malfeasance, power disruptions, natural disasters or accidents
could cause breaches of data security, loss of intellectual property and critical data and the release and misappropriation
of sensitive competitive information and partner, customer and employee personal data. Any of these events could harm
our competitive position, result in a loss of customer confidence, cause us to incur significant costs to remedy any
damages and ultimately materially adversely affect our business and financial condition.
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Covenants in our credit facilities may limit our flexibility in responding to business opportunities and competitive
developments and increase our vulnerability to adverse economic or industry conditions.
We have lending arrangements with several financial institutions, including a revolving credit agreement with
Comerica Bank in the U.S. Our U.S. revolving credit agreement requires us to maintain certain financial covenants and
limits our ability to take certain actions such as incurring some kinds of additional debt, paying dividends, or engaging in
certain transactions like mergers and acquisitions, investments and asset sales without the lenders’ consent.
These restrictions may limit our flexibility in responding to business opportunities, competitive developments and
adverse economic or industry conditions. In addition, our obligations under our U.S. revolving credit agreement with
Comerica Bank are secured by substantially all of our assets other than intellectual property assets, which limit our
ability to provide collateral for additional financing. A breach of any of these covenants, or a failure to pay interest or
indebtedness when due under any of our credit facilities, could result in a variety of adverse consequences, including the
acceleration of our indebtedness.
We may be unable to utilize our net operating loss carryforwards to reduce our income taxes, which could adversely
affect our future financial results.
As of December 31, 2015, we had net operating loss, or NOL, carryforwards for U.S. federal and state tax
purposes of $207.0 million and $69.2 million, respectively. As these net operating losses have not been utilized, a
portion expired in 2015 and will continue to expire further in the current and future years. The utilization of the NOL and
tax credit carryforwards are subject to a substantial limitation imposed by Section 382 of the Internal Revenue Code of
1986, as amended, or the Code, and similar state provisions. We recorded deferred tax assets, net of valuation allowance,
for the NOL carryforwards currently available after considering the existing Section 382 limitation. If we incur an
additional limitation under Section 382, then the NOL carryforwards, as disclosed, could be reduced by the impact of
any future limitation that would result in existing NOL carryforwards and tax credit carryforwards expiring unutilized
and increases in future tax liabilities.
We are subject to government regulations that could adversely impact our business.
The Federal Communications Commission, or FCC, has jurisdiction over the entire U.S. telecommunications
industry and, as a result, our products and our U.S. customers are subject to FCC rules and regulations. Current and
future FCC regulations affecting communications services, our products or our customers’ businesses could negatively
affect our business. In addition, international regulatory standards could impair our ability to develop products for
international customers in the future. Delays caused by our compliance with regulatory requirements could result in
postponements or cancellations of product orders. Further, we may not be successful in obtaining or maintaining any
regulatory approvals that may, in the future, be required to operate our business. Any failure to obtain such approvals
could harm our business and results of operations.
We may utilize conflict minerals in our production or rely on suppliers who utilize conflict minerals in their
production, and the use of such conflict minerals may negatively impact our results of operations.
In August 2012, the SEC adopted its final rule to implement Section 1502 of the Dodd-Frank Wall Street Reform
and Consumer Protection Act regarding reporting obligations for the use of conflict minerals originating in the
Democratic Republic of the Congo and adjoining countries, and beginning on January 1, 2013, we became subject to
these reporting obligations and subsequently have timely filed our conflict minerals reports with the SEC. In connection
with these requirements, we regularly communicate with customers and suppliers regarding the new conflict mineral
rules and reporting obligations and continue to work with these customers and suppliers to implement any necessary or
requested compliance programs. As a result of these new rules, our results in operations may suffer for a variety of
reasons, including:
• difficulty in obtaining supplies that are conflict-free;
• shipping delays or the cancellation of orders for our products;
35
• costs associated with the implementation of the conflict minerals reporting obligations; and
• reputational damage in the event that we determine our products do incorporate conflict minerals or cannot be
verified as not incorporating conflict minerals.
In some instances, we rely on third-party sales representatives to assist in selling our products, and the failure of these
representatives to perform as expected could reduce our future revenue.
Although we primarily sell our products through direct sales to systems vendors, we also sell our products to some
of our customers through third-party sales representatives. Many of our third-party sales representatives also market and
sell competing products from our competitors. Our third-party sales representatives may terminate their relationships
with us at any time, or with short notice. Our future performance will also depend, in part, on our ability to attract
additional third-party sales representatives that will be able to market and support our products effectively, especially in
markets in which we have not previously distributed our products. If our current third-party sales representatives fail to
perform as expected, our revenue and results of operations could be harmed.
We are subject to environmental, health and safety laws and regulations, which could subject us to liabilities, increase
our costs, or restrict our business or operations in the future.
Our manufacturing operations and our products are subject to a variety of federal, state, local and international
environmental, health and safety laws and regulations in each of the jurisdictions in which we operate or sell our
products. Our failure to comply with present and future environmental, health or safety requirements, or the
identification of contamination, could cause us to incur substantial costs, including cleanup costs, monetary fines, civil or
criminal penalties, or curtailment of operations. In addition, the enactment of more stringent laws and regulations, or
other unanticipated events could restrict our ability to expand our facilities, require us to install costly pollution control
equipment or incur other additional expenses, or require us to modify our manufacturing processes or the contents of our
products, which could have a material adverse effect on our business, financial condition and results of operations.
With our acquisition of NeoPhotonics Semiconductor, we own and operate a semiconductor facility in Japan
which is subject to local environmental laws and regulations, including the Japanese Environmental Quality Standards
(“JEQS”) and the Water Pollution Control Law (“Water Law”), which includes provisions for periodic monitoring of
groundwater quality. The JEQS provides guidelines for specified substances in groundwater, primarily including metals
and volatile organic compounds, include some that are either used in our operations or have been used in our facilities in
prior years. In addition, the Soil Contamination Countermeasures Law includes regulatory standards for many of the
same substances regulated under the Water Law, some that are either used in our operations or have been used in our
facilities in prior years. Should any of these regulated materials be detected in local water or soil, we could be subject to
local law remedies, which could affect our ability to operate or could negatively affect our results of operations.
Additionally, increasing efforts to control emissions of greenhouse gases, or GHG, may also impact us. Additional
climate change or GHG control requirements are under consideration at the federal level in the U.S. and in China.
Additional restrictions, limits, taxes, or other controls on GHG emissions could increase our operating costs and, while it
is not possible to estimate the specific impact any final GHG regulations will have on our operations, there can be no
assurance that these measures will not have significant additional impact on us.
Adoption of international labor standards may increase our direct labor costs.
International standards of corporate social responsibility include strict requirements on labor work practices and
overtime. As global service providers and their network equipment vendors adopt these standards, we have in the past
incurred and may be required in the future to incur additional direct labor costs associated with our compliance with
these standards.
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Risks related to our operations in China
Our business operations conducted in China are critical to our success. A significant portion of our revenue in the
twelve months ended December 31, 2015 was recognized from customers for whom we shipped products to a location in
China. Additionally, a substantial portion of our property, plant and equipment, approximately 39% as of December 31,
2015, was located in China. We expect to make further investments in China in the foreseeable future. Therefore, our
business, financial condition, results of operations and prospects are to a significant degree subject to economic, political,
legal, and social events and developments in China.
Adverse changes in economic and political policies in China, or Chinese laws or regulations could have a material
adverse effect on business conditions and the overall economic growth of China, which could adversely affect our
business.
The Chinese economy differs from the economies of most developed countries in many respects, including the
level of government involvement, level of development, growth rate and control of foreign exchange and allocation of
resources. The Chinese economy has been transitioning from a planned economy to a more market-oriented economy.
Despite reforms, the government continues to exercise significant control over China’s economic growth by way of the
allocation of resources, control over foreign currency-denominated obligations and monetary policy and provision of
preferential treatment to particular industries or companies. Moreover, the laws, regulations and legal requirements in
China, including the laws that apply to foreign-invested enterprises are relatively new and are subject to frequent changes.
The interpretation and enforcement of such laws is uncertain. Any adverse changes to these laws, regulations and legal
requirements, including tax laws, or their interpretation or enforcement, or the creation of new laws or regulations
relating to our business, could have a material adverse effect on our business. For example, the Chinese government’s
recent crackdown on alleged antitrust violations and bribery of local officials by multinational companies could signal a
broad trend toward elevated scrutiny of foreign corporations operating in the country.
Furthermore, while China’s economy has experienced rapid growth in the past 20 years, its rate of growth has
slowed over the past several quarters. Any continuing or worsening slowdown could significantly reduce domestic
commerce in China. An economic downturn, whether actual or perceived, a further decrease in economic growth rates or
an otherwise uncertain economic outlook in China could have a material adverse effect on our business, financial
condition and results of operation.
Our cost advantage from having our manufacturing and part of our research and development in China may
diminish over time due to increasing labor costs, which could materially and adversely affect our operating results.
The labor market in China, particularly in the manufacturing-heavy Southeast region of China where our
manufacturing facilities are located, has experienced higher costs due to increased wages. We were required to pay
additional employee benefits taxes beginning in late 2010 and were subject to increases in the minimum wage in each
year from 2011 to 2015. We expect that we will be subject to further increases in personnel costs and taxes in the future
due to market conditions and/or government mandates. If labor costs in China continue to increase, our gross margins
and profit margins and results of operations may be adversely affected. In addition, our competitive advantage against
competitors with manufacturing in traditionally higher cost countries would be diminished.
The termination, expiration or unavailability of our preferential income tax treatment in China may have a material
adverse effect on our operating results.
Effective January 1, 2008, the China Enterprise Income Tax Law, or the EIT law, imposes a single uniform
income tax rate of 25% on all Chinese enterprises, including foreign-invested enterprises, and eliminates or modifies
most of the tax exemptions, reductions and preferential treatment available under the previous tax laws and regulations.
As a result, our subsidiaries in China may be subject to the uniform income tax rate of 25% unless we are able to qualify
for preferential status. Historically, we have qualified for a preferential 15% tax rate that is available for new and high
technology enterprises. The preferential tax rate applied to 2015, 2014 and 2013. We realized benefits from this 10%
reduction in tax rate of $0.9 million, $0.5 million and $0.2 million for 2015, 2014 and 2013, respectively. In order to
retain the preferential tax rate, we must meet certain operating conditions, satisfy certain product requirements, meet
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certain headcount requirements and maintain certain levels of research expenditures. The preferential tax rate that we
enjoy could be modified or discontinued altogether at any time, which could materially and adversely affect our financial
condition and results of operations.
Our subsidiaries in China may be subject to restrictions on dividend payments, on making other payments to us or
any other affiliated company, and on borrowing or allocating tax losses among our subsidiaries.
Current Chinese regulations permit our subsidiaries in China to pay dividends only out of their accumulated profits,
if any, determined in accordance with Chinese accounting standards and regulations, which are different than U.S.
accounting standards and regulations. In addition, our subsidiaries in China are required to set aside at least 10% of their
respective accumulated profits each year, if any, to fund their statutory common reserves until such reserves have
reached at least 50% of their respective registered capital, as well as to allocate a discretional portion of their after-tax
profits to their staff welfare and bonus fund. As of December 31, 2015, our Chinese subsidiaries’ common reserves had
not reached this threshold and, accordingly, these entities are required to continue funding such reserves with
accumulated net profits. The statutory common reserves are not distributable as cash dividends except in the event of
liquidation. In addition, current Chinese regulations prohibit inter-company borrowings or allocation of tax losses among
subsidiaries in China. Further, if our subsidiaries in China incur debt on their own behalf in the future, the instruments
governing the debt may restrict their ability to pay dividends or make other payments to us. Accordingly, we may not be
able to move our capital easily, which could harm our business.
Restrictions on currency exchange may limit our ability to receive and use our revenue and cash effectively.
Because a substantial portion of our revenue is denominated in RMB, any restrictions on currency exchange may
limit our ability to use revenue generated in RMB to fund any business activities we may have outside China or to make
dividend payments in U.S. dollars. Under relevant Chinese rules and regulations, the RMB is currently convertible under
the “current account,” which includes dividends, trade and service-related foreign exchange transactions, but not under
the “capital account,” which includes foreign direct investment and loans, without the prior approval of the State
Administration of Foreign Exchange, or SAFE. Currently, our subsidiaries in China may purchase foreign exchange for
settlement of “current account transactions,” including the payment of dividends to us, without the approval of SAFE.
Although Chinese government regulations now allow greater convertibility of the RMB for current account transactions,
significant restrictions remain. For example, foreign exchange transactions under our primary Chinese subsidiary’s
capital account, including principal payments in respect of foreign currency-denominated obligations, remain subject to
significant foreign exchange controls and the approval of SAFE. These limitations could affect the ability of our
subsidiaries in China to obtain foreign exchange for capital expenditures through debt or equity financing, including by
means of loans or capital contributions from us. We cannot be certain that Chinese regulatory authorities will not impose
more stringent restrictions on the convertibility of the RMB, especially with respect to foreign exchange transactions. If
such restrictions are imposed, our ability to adjust our capital structure or engage in foreign exchange transactions may
be limited.
In August 2008, SAFE promulgated the Circular on the Relevant Operating Issues Concerning the Improvement
of the Administration of Payment and Settlement of Foreign Currency Capital of Foreign-invested Enterprises, or
Circular 142, a notice regulating the conversion by foreign-invested enterprises or FIE of foreign currency into RMB by
restricting how the converted RMB may be used. Circular 142 requires that RMB converted from the foreign currency-
dominated capital of a FIE may only be used for purposes within the business scope approved by the applicable
government authority and may not be used for equity investments within China unless specifically provided for
otherwise. In addition, SAFE strengthened its oversight over the flow and use of RMB funds converted from the foreign
currency-dominated capital of a FIE. The use of such RMB may not be changed without approval from SAFE.
Violations of Circular 142 may result in severe penalties, including substantial fines set forth in the Foreign Exchange
Administration Regulations. As a result of Circular 142, our subsidiaries in China may not be able to convert our capital
contributions to them into RMB for equity investments or acquisitions in China.
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The Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules,
establish complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it
more difficult for us to pursue growth through acquisitions in China.
The M&A Rules establish procedures and requirements that could make some acquisitions of Chinese companies
by foreign investors more time-consuming and complex, including requirements in some instances that the Ministry of
Commerce be notified in advance of any change-of-control transaction in which a foreign investor takes control of a
Chinese domestic enterprise. We may seek to expand our business in part by acquiring complementary businesses.
Complying with the requirements of the M&A Rules to complete such transactions could be time-consuming, and any
required approval processes, including obtaining approval from the Ministry of Commerce, may delay or inhibit our
ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.
Uncertainties with respect to China’s legal system could adversely affect the legal protection available to us.
Our operations in China are governed by Chinese laws and regulations. Our subsidiaries in China are generally
subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable to wholly
foreign-owned enterprises. China’s legal system is a civil law system based on written statutes. Unlike common law
systems, it is a legal system where decided legal cases have limited value as precedents. Since 1979, Chinese legislation
and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China.
However, China has not developed a fully-integrated legal system, and recently-enacted laws and regulations may not
sufficiently cover all aspects of economic activities in China. In particular, because these laws and regulations are
relatively new, the interpretation and enforcement of these laws and regulations involve uncertainties, including regional
variations within China. For example, we may have to resort to administrative and court proceedings to enforce the legal
protection under contracts or law. However, since Chinese administrative and court authorities have significant
discretion in interpreting and implementing statutory and contract terms, it may be more difficult to evaluate the outcome
of administrative and court proceedings and the level of legal protection we would receive compared to more developed
legal systems. These uncertainties may impede our ability to enforce the contracts we have entered into with our
distributors, business partners, customers and suppliers. In addition, protections of intellectual property rights and
confidentiality in China may not be as effective as in the U.S. or other countries or regions with more developed legal
systems. Furthermore, the legal system in China is based in part on government policies and internal rules (some of
which are not published on a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware
of our violation of these policies and rules until sometime after the violation. In addition, any litigation in China may be
protracted and result in substantial costs and diversion of resources and management attention. All the uncertainties
described above could limit the legal protections available to us and could materially and adversely affect our business
and operations.
Chinese regulations relating to offshore investment activities by Chinese residents and employee stock options
granted by overseas-listed companies may increase our administrative burden, restrict our overseas and cross-border
investment activity or otherwise adversely affect the implementation of our acquisition strategy. If our stockholders
who are Chinese residents, or our Chinese employees who are granted or exercise stock options, fail to make any
required registrations or filings under such regulations, we may be unable to distribute profits and may become
subject to liability under Chinese laws.
Chinese foreign exchange regulations require Chinese residents and corporate entities to register with local
branches of SAFE in connection with their direct or indirect offshore investment activities. These regulations apply to
our stockholders who are Chinese residents and may apply to any offshore acquisitions that we make in the future.
Pursuant to these foreign exchange regulations, Chinese residents who make, or have previously made, direct or indirect
investments in offshore companies, will be required to register those investments. In addition, any Chinese resident who
is a direct or indirect stockholder of an offshore company is required to file or update the registration with the local
branch of SAFE, with respect to that offshore company, including any material change involving its round-trip
investment, capital variation, such as an increase or decrease in capital, transfer or swap of shares, merger, division,
long-term equity or debt investment or creation of any security interest. If any Chinese stockholder fails to make the
required SAFE registration or file or update the registration, subsidiaries in China of that offshore parent company may
be prohibited from distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation,
to their offshore parent company, and the offshore parent company may also be prohibited from injecting additional
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capital into their subsidiaries in China. Moreover, failure to comply with the various foreign exchange registration
requirements described above could result in liability under Chinese laws for evasion of applicable foreign exchange
restrictions. We cannot provide any assurances that all of our stockholders who are Chinese residents have made or
obtained, or will make or obtain, any applicable registrations or approvals required by these foreign exchange regulations.
The failure or inability of our stockholders in China to comply with the required registration procedures may subject us
to fines and legal sanctions, restrict our cross-border investment activities, or limit our Chinese subsidiaries’ ability to
distribute dividends or obtain foreign-exchange-dominated loans. Moreover, because of the uncertainties in the
interpretation and implementation of these foreign exchange regulations, we cannot predict how they will affect our
business operations or future strategy. For example, we may be subject to a more stringent review and approval process
with respect to our foreign exchange activities, such as remittance of dividends and foreign-currency-denominated
borrowings, which may adversely affect our results of operations and financial condition. In addition, if we decide to
acquire a domestic company in China, we cannot assure you that we or the owners of such company, as the case may be,
will be able to obtain the necessary approvals or complete the necessary filings and registrations required by these
foreign exchange regulations. This may restrict our ability to implement our acquisition strategy and could adversely
affect our business and prospects.
On March 28, 2007, SAFE promulgated the Application Procedure of Foreign Exchange Administration for
Domestic Individuals Participating in Employee Stock Holding Plan or Stock Option Plan of Overseas-Listed Company,
or the Stock Option Rule. Under the Stock Option Rule, Chinese residents who are granted stock options by an overseas
publicly-listed company are required, through a Chinese agent or Chinese subsidiary of such overseas publicly-listed
company, to register with SAFE and complete certain other procedures. We and our Chinese employees who have been
granted stock options are subject to the Stock Option Rule. We have completed the process of registering our stock
option and appreciation plans with SAFE. On February 20, 2012, SAFE issued the Circular on Relevant Issues
concerning Foreign Exchange Administration for Individuals in PRC Participating in Equity Incentive Plan of Overseas-
Listed Companies, or Circular 7, which provides detailed procedures for conducting foreign exchange matters related to
domestic individuals’ participation in the equity incentive plans of overseas listed companies and supersedes the Stock
Option Rule in its entirety. If we or our optionees in China fail to comply with the applicable regulations, we or our
optionees in China may be subject to fines and legal sanctions. Several of our employees in China have exercised their
stock options prior to our becoming an overseas publicly-listed company. Since there is not yet a clear regulation on how
and whether Chinese employees can exercise their stock options granted by overseas private companies, it is unclear
whether such exercises were permitted by Chinese laws and it is uncertain how SAFE or other government authorities
will interpret or administer such regulations. Therefore, we cannot predict how such exercises will affect our business or
operations. For example, we may be subject to more stringent review and approval processes with respect to our foreign
exchange activities, such as remittance of dividends and foreign-currency-denominated borrowings, which may affect
our results of operations and financial condition.
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We may be obligated to withhold and pay individual income tax in China on behalf of our employees who are subject
to individual income tax in China arising from the exercise of stock options. If we fail to withhold or pay such
individual income tax in accordance with applicable Chinese regulations, we may be subject to certain sanctions and
other penalties and may become subject to liability under Chinese laws.
The State Administration of Taxation has issued several circulars concerning employee stock options. Under these
circulars, our Chinese employees (which could include both employees in China and expatriate employees subject to
individual income tax in China) who exercise stock options will be subject to individual income tax in China. Our
subsidiaries in China have obligations to file documents related to employee stock options with relevant tax authorities
and withhold and pay individual income taxes for those employees who exercise their stock options. However, since
there was not yet a clear regulation on how and whether Chinese employees could exercise stock options granted by
overseas private companies and how Chinese employers shall withhold and pay individual taxes, the relevant tax
authority verbally advised us that due to the difficulty in determining the fair market value of our shares as a private
company, we did not need to withhold and pay the individual income tax for the exercises until after we completed our
initial public offering in February 2011. Thus, we have not withheld or paid the individual income tax for the option
exercises through the date of our initial public offering. However, we cannot be assured that the Chinese tax authorities
will not act otherwise and request us to pay the individual income tax immediately and impose sanctions on us.
If the Chinese government determines that we failed to obtain approvals of, or registrations with, the requisite
Chinese regulatory authority with respect to our current and past import and export of technologies, we could be
subject to sanctions, which could adversely affect our business.
China imposes controls on technology import and export. The term “technology import and export” is broadly
defined to include, without limitation, the transfer or license of patents, software and know-how, and the provision of
services in relation to technology. Depending on the nature of the relevant technology, the import and export of
technology to or from China requires either approval by, or registration with, the relevant Chinese governmental
authorities.
If we are found to be, or to have been, in violation of Chinese laws or regulations, the relevant regulatory
authorities have broad discretion in dealing with such violation, including, but not limited to, issuing a warning, levying
fines, restricting us from benefiting from these technologies inside or outside of China, confiscating our earnings
generated from the import or export of such technology or even restricting our future export and import of any
technology. If the Chinese government determines that our past import and export of technology were inconsistent with,
or insufficient for, the proper operation of our business, we could be subject to similar sanctions. Any of these or similar
sanctions could cause significant disruption to our business operations or render us unable to conduct a substantial
portion of our business operations and may adversely affect our business and result of operations.
China regulation of loans and direct investment by offshore holding companies to China entities may delay or prevent
us from using the proceeds we received from our initial public offering to make loans or additional capital
contributions to our China subsidiaries.
From time to time, we may make loans or additional capital contributions to our China subsidiaries. Any loans to
our China subsidiaries are subject to China regulations and approvals. For example, any loans to our China subsidiaries
to finance their activities cannot exceed statutory limits, must be registered with SAFE, or its local counterpart, and must
be approved by the relevant government authorities. Any capital contributions to our China subsidiaries must be
approved by the Ministry of Commerce of China or its local counterpart. In addition, under Circular 142, our China
subsidiaries, as FIEs, may not be able to convert our capital contributions to them into RMB for equity investments or
acquisitions in China.
We cannot assure you that we will be able to obtain these government registrations or approvals on a timely basis,
if at all, with respect to our future loans or capital contributions to our China subsidiaries. If we fail to receive such
registrations or approvals, our ability to capitalize our China subsidiaries may be negatively affected, which could
materially and adversely affect our liquidity and ability to fund and expand our business.
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Dividends paid to us by our Chinese subsidiaries may be subject to Chinese withholding tax.
The EIT Law and the implementation regulations provide that a 10% withholding tax may apply to dividends
payable to investors that are “non-resident enterprises,” to the extent such dividends are derived from sources within
China and in the absence of any tax treaty that may reduce such withholding tax rate. The comprehensive Double
Taxation Arrangement between China and Hong Kong generally reduces the withholding tax on dividends paid from a
Chinese company to a Hong Kong company to 5%. Dividends paid to us by our Chinese subsidiaries will be subject to
Chinese withholding tax if, as expected, we are considered a “non-resident enterprise” under the EIT Law. If dividends
from our Chinese subsidiaries are subject to Chinese withholding tax, our financial condition may be adversely impacted
to the extent of such tax.
Our worldwide income may be subject to Chinese tax under the EIT Law.
The EIT Law provides that enterprises established outside of China whose “de facto management bodies” are
located in China are considered “resident enterprises” and are generally subject to the uniform 25% enterprise income
tax on their worldwide income. Under the implementation regulations for the EIT Law issued by the State Council, a “de
facto management body” is defined as a body that has material and overall management and control over the
manufacturing and business operations, personnel and human resources, finances and treasury, and acquisition and
disposition of properties and other assets of an enterprise. If we are deemed to be a resident enterprise for Chinese tax
purposes, we will be subject to Chinese tax on our worldwide income at the 25% uniform tax rate, which could have an
impact on our effective tax rate and an adverse effect on our net income (loss), however, dividends paid to us by our
Chinese subsidiaries may not be subject to withholding if we are deemed to be a resident enterprise.
Dividends payable by us to our investors and gains on the sale of our common stock by our foreign investors may be
subject to tax under Chinese law.
Under the EIT Law and implementation regulations issued by the State Council, a 10% withholding tax is
applicable to dividends payable to investors that are “non-resident enterprises.” Similarly, any gain realized on the
transfer of common stock by such investors is also subject to a 10% withholding tax if such gain is regarded as income
derived from sources within China. If we are determined to be a “resident enterprise,” dividends and other income we
pay on our common stock, or the gain you may realize from the transfer of our common stock, would be treated as
income derived from sources within China. If we are required under the EIT Law to withhold tax from dividends payable
to investors that are “non-resident enterprises,” or if a gain realized on the transfer of our common stock is subject to
withholding, the value of your investment in our common stock may be materially and adversely affected.
Our contractual arrangements with our subsidiaries in China may be subject to audit or challenge by the Chinese tax
authorities, and a finding that our subsidiaries in China owe additional taxes could substantially reduce our net
income and the value of our stockholders’ investment.
Under the applicable laws and regulations in China, arrangements and transactions among related parties may be
subject to audit or challenge by the Chinese tax authorities. We would be subject to adverse tax consequences if the
Chinese tax authorities were to determine that the contracts with or between our subsidiaries were not executed on an
arm’s length basis, and as a result the Chinese tax authorities could require that our Chinese subsidiaries adjust their
taxable income upward for Chinese tax purposes. Such an adjustment could adversely affect us by increasing our tax
expenses.
Because a substantial portion of our business is located in China, we may have difficulty maintaining adequate
management, legal and financial controls, which we are required to do in order to comply with Section 404 of the
Sarbanes-Oxley Act and securities laws, and which could cause a material adverse impact on our consolidated
financial statements, the trading price of our common stock and our business.
Chinese companies have historically not adopted a western style of management and financial reporting concepts
and practices, which includes strong corporate governance, internal controls and computer, financial and other control
systems. Most of our middle management staff and some of our top management staff in China are not educated and
42
trained in the western system, and we may have difficulty hiring new employees in China with experience and expertise
relating to accounting principles generally accepted in the U.S. and U.S. public-company reporting requirements. As a
result of these factors, we may experience difficulty in maintaining management, legal and financial controls, collecting
financial data and preparing financial statements, books of account and corporate records and instituting business
practices that meet U.S. public-company reporting requirements. We may, in turn, experience difficulties in maintaining
adequate internal controls as required under Section 404 of the Sarbanes-Oxley Act. This may result in material
weaknesses in our internal controls which could impact the reliability of our consolidated financial statements and
prevent us from complying with SEC rules and regulations and the requirements of the Sarbanes-Oxley Act. Any such
material weaknesses or lack of compliance with SEC rules and regulations could result in restatements of our historical
consolidated financial statements, cause investors to lose confidence in our reported financial information, have an
adverse impact on the trading price of our common stock, adversely affect our ability to access the capital markets and
our ability to recruit personnel, lead to the delisting of our securities from the stock exchange on which they are traded.
This could lead to litigation claims, thereby diverting management’s attention and resources, and which may lead to the
payment of damages to the extent such claims are not resolved in our favor, lead to regulatory proceedings, which may
result in sanctions, monetary or otherwise, and have a material adverse effect on our reputation and business.
See also the risk factor “If we fail to maintain effective internal control over financial reporting in the future, the
accuracy and timing of our financial reporting may be adversely affected.”
Our consolidated affiliated entities in China are audited by auditors who are not inspected by the Public Company
Accounting Oversight Board and, as such, you are deprived of the benefits of such inspection.
Publicly traded companies in the United States are audited by independent registered public accounting firms
registered with the U.S. Public Company Accounting Oversight Board, or the PCAOB, and are required by the laws of
the United States to undergo regular inspections by the PCAOB to assess its compliance with the laws of the United
States and professional standards. Because the auditors of our consolidated affiliated entities in China are located in
China, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese
authorities, such auditors are not currently inspected by the PCAOB. On May 24, 2013, the PCAOB announced that it
had entered into a memorandum of understanding on enforcement cooperation with the China Securities Regulatory
Commission and the Ministry of Finance of China that establishes a cooperative framework between the parties for the
production and exchange of audit documents relevant to investigations in the United States and China. However, direct
PCAOB inspections of independent registered accounting firms in China are still not permitted by Chinese authorities.
Inspections of auditing firms that the PCAOB has conducted outside China have identified deficiencies in those
firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to
improve future audit quality. This lack of PCAOB inspections in China prevents the PCAOB from regularly evaluating
our Chinese auditor’s audits and its quality control procedures. As a result, investors may be deprived of the benefits of
PCAOB inspections.
The turnover of direct labor in manufacturing industries in China is high, which could adversely affect our
production, shipments, and results of operations.
Employee turnover of direct labor in the manufacturing sector in China is typically high and retention of such
personnel is a challenge to companies located in or with operations in China. Although direct labor cost does not
represent a high proportion of our overall manufacturing costs, direct labor is required for the manufacture of our
products. If our direct labor turnover rates are higher than we expect, or we otherwise fail to adequately manage our
direct labor turnover rates, then our results of operations could be adversely affected.
Our subsidiaries in China are subject to Chinese labor laws and regulations. Changes to Chinese labor laws and
regulations may increase our operating costs in China, which could adversely affect our financial results.
China Labor Contract Law, effective January 1, 2008, together with its implementing rules, effective
September 18, 2008 and its amendments, effective July 1, 2013, provides certain protections to Chinese employees.
Under the current rules, the probation period varies depending on contract terms and the employment contract can only
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be terminated during the probation period for cause upon three days’ notice. Additionally, an employer may not be able
to terminate a contract during the probation period on the grounds of a material change of circumstances or a mass layoff.
The current law also has specific provisions on conditions when an employer has to sign an employment contract with
open-ended terms. If an employer fails to enter into an open-ended contract in certain circumstances, the employer must
pay the employee twice their monthly wage beginning from the time the employer should have executed an open-ended
contract. Additionally an employer must pay severance for nearly all terminations, including when an employer decides
not to renew a fixed-term contract.
On January 1, 2008, the Regulations on Paid Annual Leaves of Staff and Workers also took effect, followed by its
implementing measures effective September 18, 2008. These regulations provide that employees who have worked
consecutively for one year or more are entitled to paid annual leave. An employer must guarantee that employees receive
the same wage income during the annual leave period as that for the normal working period. Where an employer cannot
arrange annual leave for an employee due to production needs, upon agreement with the employee, the employer must
pay daily wages equal to 300% of the employee’s daily salary for each day of annual leave forfeited by such employee.
The Shenzhen municipal government, effective December 2010, issued a measure to require all government
agencies, public institutions, and enterprises in Shenzhen to pay a monthly housing fund. The housing fund is designed
to enhance the welfare and increase the funds available to Shenzhen employees when buying, building, renovating, or
overhauling owner-occupied houses. Employee and employers are required to make equal contributions to the housing
fund, which generally can range between 5% and 20% of the employees’ average salary of the most recent year and we
commenced making these contributions in the fourth quarter of 2010.
From time to time, the Chinese government has implemented requirements to increase the minimum wage for
employees in China. These requirements have resulted in the past, and may result in the future, in higher employee costs
for our personnel in China. Minimum wage rates generally vary by city and province within China and have historically
increased as much as 20% on an annual basis. We were required to increase wages to comply with these requirements
and it may be necessary for us to increase wages more than the minimum wage adjustment requires due to market
conditions or additional government mandates. If labor costs in China continue to increase, our gross margins, profit
margins and results of operations may be adversely affected. In addition, our competitive advantage against competitors
with personnel costs or manufacturing in traditionally higher cost countries may be diminished. Future changes to labor
laws and regulations may materially increase the costs of our operations in China.
If any of our subsidiaries in China becomes the subject of a bankruptcy or liquidation procedures, we may lose or
diminish the ability to use its assets.
Because a substantial portion of our business and revenue are derived from China, if any of our subsidiaries in
China goes bankrupt and all or part of its assets become subject to liens or rights of third-party creditors, we may be
unable to continue some or all of our operations in China. Any delay, interruption or cessation of all or a part of our
operations in China would negatively impact our ability to generate revenue and otherwise adversely affect our business.
We may be exposed to liabilities under the FCPA and Chinese anti-corruption laws, and any determination that we
violated these laws could have a material adverse effect on our business.
We are subject to the Foreign Corrupt Practice Act of 1977, or FCPA, and other laws that prohibit improper
payments or offers of payments to foreign governments and their officials and political parties by U.S. persons and
issuers as defined by the statute, for the purpose of obtaining or retaining business. We have operations, agreements with
third parties and we make significant sales in China. China also strictly prohibits bribery of government officials. Our
activities in China create the risk of unauthorized payments or offers of payments by our employees, consultants, sales
agents or distributors, even though they may not always be subject to our control. Although we have implemented
policies and procedures to discourage these practices by our employees, our existing safeguards and any future
improvements may prove to be less than effective, and our employees, consultants, sales agents or distributors may
engage in conduct for which we might be held responsible. Violations of the FCPA or Chinese anti-corruption laws may
result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our
44
business, operating results and financial condition. In addition, the U.S. government may seek to hold us liable for
successor liability FCPA violations committed by companies in which we invest or that we acquire.
Risks related to ownership of our common stock
Our financial results may vary significantly from quarter-to-quarter due to a number of factors, which may lead to
volatility in our stock price.
Our quarterly revenue and results of operations have varied in the past and may continue to vary significantly from
quarter to quarter. This variability may lead to volatility in our stock price as research analysts and investors respond to
these quarterly fluctuations. These fluctuations are due to numerous factors, including:
• fluctuations in demand for our products;
• the timing, size and product mix of sales of our products;
• changes in our pricing and sales policies or the pricing and sales policies of our competitors;
• our ability to design, manufacture and deliver products to our customers in a timely and cost-effective manner
and that meet customer requirements;
• quality control or yield problems in our manufacturing operations;
• our ability to timely obtain adequate quantities of the components used in our products;
• length and variability of the sales cycles of our products;
• unanticipated increases in costs or expenses; and
• fluctuations in foreign currency exchange rates.
The foregoing factors are difficult to forecast, and these, as well as other factors, could materially adversely affect
our quarterly and annual results of operations in the future. In addition, a significant amount of our operating expenses is
relatively fixed in nature due to our internal manufacturing, research and development, sales and general administrative
efforts. Any failure to adjust spending quickly enough to compensate for a revenue shortfall could magnify the adverse
impact of such revenue shortfall on our results of operations. Moreover, our results of operations may not meet our
announced financial outlook or the expectations of research analysts or investors, in which case the price of our common
stock could decrease significantly. There can be no assurance that we will be able to successfully address these risks.
Our failure to comply with conditions required for our common stock to be listed on the NYSE could result in
delisting of our common stock from the NYSE and have a significant negative effect on the value and liquidity of our
securities as well as other matters.
We are required to comply with the NYSE Listed Company Manual as a condition for our common stock to
continue to be listed on the NYSE. If we are unable to comply with such conditions such as non-timely filing of our
Annual Report on Form 10-K or our Quarterly Reports on Form 10-Q, then our shares of common stock are subject to
delisting from the NYSE.
If our common stock is delisted from the NYSE, such securities may be traded over-the-counter on the “pink
sheets.” The alternative market, however, is generally considered to be less efficient than, and not as broad as, the
NYSE. Accordingly, delisting of our common stock from the NYSE could have a significant negative effect on the value
and liquidity of our securities. In addition, the delisting of such stock could adversely affect our ability to raise capital on
terms acceptable to us or at all. In addition, delisting of our common stock may preclude us from using exemptions from
certain state and federal securities regulations.
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Our stock price may be volatile.
The market price of our common stock could be subject to wide fluctuations in response to, among other things,
the risk factors described in this section of our Annual Report on Form 10-K, and other factors beyond our control, such
as fluctuations in the valuation of companies perceived by investors to be comparable to us.
The stock markets have experienced price and volume fluctuations that have affected and continue to affect the
market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate
to the operating performance of those companies. These broad market and industry fluctuations, as well as general
economic, political and market conditions, such as recessions, sovereign debt or liquidity issues, interest rate changes or
international currency fluctuations, may negatively affect the market price of our common stock.
In the past, many companies that have experienced volatility in the market price of their stock have been subject to
securities class action litigation. We may become the target of this type of litigation in the future. Securities litigation
against us could result in substantial costs and divert our management’s attention from other business concerns, which
could seriously harm our business.
If research analysts do not publish research about our business or if they issue unfavorable commentary or
downgrade our common stock, our stock price and trading volume could decline.
The trading market for our common stock depends in part on the research and reports that research analysts
publish about us and our business. The price of our common stock could decline if one or more research analysts
downgrade our stock or if those analysts issue other unfavorable commentary or cease publishing reports about us or our
business. If one or more of the research analysts ceases coverage of our company or fails to publish reports on us
regularly, demand for our common stock could decrease, which could cause our stock price or trading volume to decline.
The concentration of our capital stock ownership with our principal stockholders, executive officers and directors and
their affiliates may limit other stockholders’ ability to influence corporate matters.
As of December 31, 2015, our executive officers and directors, and entities that are affiliated with them or that
have a right to designate a director, beneficially own an aggregate of approximately 34% of our outstanding common
stock. This significant concentration of share ownership may adversely affect the trading price for our common stock
because investors often perceive disadvantages in owning stock in companies with controlling stockholders. Also, as a
result, these stockholders, acting together, may be able to control our management and affairs and matters requiring
stockholder approval, including the election of directors and approval of significant corporate transactions. Consequently,
this concentration of ownership may have the effect of delaying or preventing a change in control, including a merger,
consolidation or other business combination involving us, or discouraging a potential acquirer from making a tender
offer or otherwise attempting to obtain control, even if such a change in control would benefit our other stockholders.
We currently do not intend to pay dividends on our common stock and, consequently, your only opportunity to
achieve a return on your investment is if the price of our common stock appreciates.
We currently do not plan to declare dividends on shares of our common stock in the foreseeable future. In addition,
the terms of our U.S. revolving credit agreement with Comerica Bank restrict our ability to pay dividends. Consequently,
your only opportunity to achieve a return on your investment in our company will be if the market price of our common
stock appreciates and you sell your shares at a profit. There is no guarantee that the price of our common stock that will
prevail in the market will ever exceed the price that you pay.
Our charter documents and Delaware law could prevent a takeover that stockholders consider favorable and could
also reduce the market price of our stock.
Our amended and restated certificate of incorporation and our amended and restated bylaws contain provisions that
could delay or prevent a change in control of our company. These provisions could also make it more difficult for
stockholders to elect directors and take other corporate actions. These provisions include:
46
• providing for a classified board of directors with staggered, three-year terms;
• not providing for cumulative voting in the election of directors;
• authorizing our board of directors to issue, without stockholder approval, preferred stock rights senior to those
of common stock;
• prohibiting stockholder action by written consent;
• limiting the persons who may call special meetings of stockholders; and
• requiring advance notification of stockholder nominations and proposals.
In addition, we have been governed by the provisions of Section 203 of the Delaware General Corporate Law
since the completion of our initial public offering. These provisions may prohibit large stockholders, in particular those
owning 15% or more of our outstanding common stock, from engaging in certain business combinations without
approval of substantially all of our stockholders for a certain period of time.
These and other provisions in our amended and restated certificate of incorporation, our amended and restated
bylaws and under Delaware law could discourage potential takeover attempts, reduce the price that investors might be
willing to pay for shares of our common stock in the future and result in the market price being lower than it would be
without these provisions.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2.
PROPERTIES
Our properties consist primarily of owned and leased office and manufacturing facilities. Our corporate
headquarters are located in San Jose, California and our manufacturing facilities are primarily located in Shenzhen and
Dongguan, China and Tokyo, Japan. The following schedule presents the approximate square footage of our facilities as
of December 31, 2015:
Location
Square Feet
Commitment and Use
San Jose, California
Fremont, California
Shenzhen, China (1)
39,314 Leased; 1 building used for corporate headquarters offices and wafer fabrication.
73,186 Leased; 2 buildings used for wafer fabrication and research and development.
236,853
Owned; 1 building and 1 floor of a building. Used for manufacturing, research and
development, and sales and marketing.
Shenzhen, China
Dongguan, China
Tokyo, Japan
Moscow, Russia
26,253 Leased; 3 buildings used for staff dormitory.
93,431 Leased; 2 buildings used for manufacturing and staff dormitory.
143,875 Owned; 1 building used for manufacturing, research and development and marketing.
Leased; 2 floors of buildings used for manufacturing, research and development and
8,859
administrative.
(1)
The owned floor of the building in Shenzhen, representing 23,361 square feet, was leased to a tenant effective
February 2014.
In addition, we lease a number of smaller offices for warehouse, manufacturing, research and other functions.
47
ITEM 3.
LEGAL PROCEEDINGS
From time to time, we are involved in litigation that we believe is of the type common to companies engaged in
our line of business, including commercial disputes and employment issues. As of the date of this Annual Report on
Form 10-K, other than as described below, we are not involved in any pending legal proceedings that we believe could
have a material adverse effect on our financial condition, results of operations or cash flows. However, as described
below, a certain dispute involves a claim by a third party that our activities infringe their intellectual property rights. This
and other types of intellectual property rights claims generally involve the demand by a third party that we cease the
manufacture, use or sale of the allegedly infringing products, processes or technologies and/or pay substantial damages
or royalties for past, present and future use of the allegedly infringing intellectual property. Claims that our products or
processes infringe or misappropriate any third-party intellectual property rights (including claims arising through our
contractual indemnification of our customers) often involve highly complex, technical issues, the outcome of which is
inherently uncertain. Moreover, from time to time, we may pursue litigation to assert our intellectual property rights.
Regardless of the merit or resolution of any such litigation, complex intellectual property litigation is generally costly
and diverts the efforts and attention of our management and technical personnel which could adversely affect our
business.
For a discussion of our current legal proceedings, please refer to the information set forth under the “Litigation”
section in Note 12, Commitments and Contingencies, in Notes to Consolidated Financial Statements in Item 8 of Part II
of this Annual Report on Form 10-K, which is incorporated herein by reference.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
48
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
As of February 29, 2016, there were approximately 95 holders of record of our common stock (not including
beneficial holders of our common stock holder in street names). We have not paid cash dividends on our common stock
since our inception, and we do not anticipate paying any in the foreseeable future. Any future determination as to the
declaration and payment of dividends, if any, will be at the discretion of our board of directors and will depend on then
existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements,
business prospects, consent from our existing credit facility lender in the U.S., and other factors our board of directors
may deem relevant.
The following table sets forth, for the periods indicated, the high and low closing prices of our common stock as
reported by the New York Stock Exchange.
Fiscal Year 2015:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year 2014:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Low High
$ 2.81 $ 6.88
$ 5.45 $ 11.05
$ 5.76 $ 9.44
$ 6.57 $ 11.40
$ 6.61 $ 8.41
$ 3.82 $ 8.10
$ 2.42 $ 4.04
$ 2.46 $ 3.78
49
The graph below shows the cumulative total stockholder return of an investment of $100 (and the reinvestment of
any dividends thereafter) on February 2, 2011 (the first trading day of NeoPhotonics Corporation common stock) in
(i) our common stock, (ii) the S&P 500 Index and (iii) the NASDAQ Telecommunications Index. Our stock price
performance shown in the graph below is not indicative of future stock price performance. The following graph and
related information shall not be deemed “soliciting material” or be deemed to be “filed” with the SEC, nor shall such
information be incorporated by reference into any future filing, except to the extent that we specifically state that such
graph and related information are incorporated by reference into such filing.
2/2/2011
12/31/2011
12/31/2012
12/31/2013
12/31/2014
12/31/2015
NeoPhotonics S&P 500
100 $
35 $
43 $
53 $
26 $
82 $
100 $
96 $
109 $
142 $
158 $
157 $
$
$
$
$
$
$
NASDAQ
Telecom
100
83
84
105
114
105
For equity compensation plan information refer to Item 12 of this Annual Report on Form 10-K.
Use of Proceeds
In 2015, we completed our follow-on offering of 6,866,689 shares of our common stock in a registered public
offering at $7.25 per share. We raised approximately $45.6 million, net of underwriting costs and other offering expenses
of approximately $4.1 million. We held the proceeds received our follow-on public offering as cash, cash equivalent and
short-term investments and intend to continue to invest the funds in money market accounts and short-term marketable
securities including money market funds, Government-sponsored enterprise obligations, commercial paper and U.S.
government securities. There has been no material change in the planned use of proceeds from our follow-on public
offering as described in our final prospectus filed with the SEC on May 22, 2015 pursuant to Rule 424(b).
50
In 2015, we filed a resale registration statement, which registered 4,972,905 shares of the Company’s common
stock, at a par value of $0.0025 per share, held by Rusnano. We do not receive any proceeds from any sales of our
common stock held by Rusnano.
ITEM 6.
SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read together with our consolidated financial
statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” appearing elsewhere in this Annual Report on Form 10-K. The selected consolidated financial data in this
section is not intended to replace our consolidated financial statements and the related notes.
We derived the consolidated statements of operations data for the years ended December 31, 2015, 2014 and 2013
and the consolidated balance sheet data as of December 31, 2015 and 2014 from our consolidated financial statements
appearing elsewhere in this Annual Report on Form 10-K. The consolidated statements of operations data for the years
ended December 31, 2012 and 2011 and the consolidated balance sheet data as of December 31, 2013, 2012 and 2011
are derived from our consolidated financial statements, which are not included in this Annual Report on Form 10-K. Our
historical results are not necessarily indicative of our future results.
Consolidated Statement of Operations Data:
Revenue
Cost of goods sold
Gross profit
Operating expenses
Income (loss) from operations
Interest and other income (expense), net (5)
Provision for income taxes
Income (loss) from continuing operations
Income from discontinued operations, net of tax
Net income (loss)
Basic net income (loss) per share from continuing
operations (6)
Diluted net income (loss) per share from continuing
operations (6)
Basic net income (loss) per share
Diluted net income (loss) per share
Consolidated Balance Sheet Data:
Cash and cash equivalents
Short-term investments
Restricted cash and investments
Working capital (7)
Total assets
Long-term debt (including current portion)
Common stock and additional paid-in capital (8)
Total equity
2015 (1)
2011 (4)(9)
Years ended December 31,
2012 (9)
2014 (2)
2013 (3)
(in thousands, except per share data)
$ 339,439 $ 306,177 $ 282,242 $ 245,423 $ 201,029
150,944
217,069
240,358
50,085
65,173
99,081
78,551
95,128
98,846
(28,466)
(33,673)
3,953
14,231
538
2,819
(1,155)
(3,104)
(1,204)
(15,390)
(34,339)
3,668
636
—
—
3,668 $ (19,719) $ (34,339) $ (17,530) $ (14,754)
235,059
71,118
90,250
(19,132)
1,932
(2,519)
(19,719)
—
184,163
61,260
78,167
(16,907)
599
(1,364)
(17,672)
142
$
$
$
$
$
0.10 $
(0.61) $
(1.11) $
(0.62) $
(1.45)
0.09 $
0.10 $
0.09 $
(0.61) $
(0.61) $
(0.61) $
(1.11) $
(1.11) $
(1.11) $
(0.62) $
(0.62) $
(0.62) $
(1.45)
(1.42)
(1.42)
2015
2014
2012
2011
Years ended December 31,
2013
(in thousands)
$ 76,088 $ 43,035 $ 57,101 $ 36,940 $ 32,321
54,063
3,227
124,199
277,049
27,166
392,854
173,654
23,294
2,660
151,211
341,878
11,519
511,852
211,656
64,301
2,626
152,374
295,632
22,167
438,934
202,680
—
21,254
102,130
286,284
23,336
456,271
159,456
17,916
2,138
124,298
302,227
34,475
447,546
176,811
51
(1) We acquired the tunable laser product lines of EMCORE Corporation on January 2, 2015 and the optical power
monitoring business of EigenLight Corporation on November 2, 2015 and the results of operations from these
acquisitions are included from the date of acquisition.
(2) In 2014, we recognized total escrow settlement gain of $4.9 million, of which $3.9 million pertained to certain
indemnification claims by us in connection with the acquisition of Santur in 2011 and $1.0 million pertained to our
acquisition of NeoPhotonics Semiconductor in 2013.
(3) We acquired NeoPhotonics Semiconductor on March 29, 2013 and its results of operations are included from the
date of acquisition.
(4) We acquired Santur on October 12, 2011 and its results of operations are included from the date of acquisition. Due
to the decrease in our market capitalization as of the end of the fourth quarter of 2011, we determined that the
indicators of impairment existed and that the carrying value of our goodwill was not recoverable. As a result, we
recorded a goodwill impairment charge of $13.1 million, of which $8.8 million was related to the acquisition of
Santur in October 2011.
(5) In 2010, we purchased shares of Ignis ASA (“Ignis”), a Norwegian company traded on the Oslo Borse (Norway
stock exchange) for $8.1 million. In 2011, we sold our shares in Ignis for $21.3 million and recognized a gain of
$13.8 million. The gain was recognized as other income in the consolidated statement of operations for the year
ended December 31, 2011.
(6) See Note 5 to the Consolidated Financial Statements for a description of our calculation of net income (loss) per
share.
(7) Working capital is defined as total current assets less total current liabilities.
(8) In connection with the closing of our initial public offering in February 2011, all of the shares of Series 1, Series 2,
Series 3 and Series X preferred stock outstanding automatically converted into shares of common stock.
(9) In the fourth quarter of 2011, we initiated a plan to sell a component of our business, Shenzhen Photon Broadband
Technology Co., Ltd. (Broadband), a subsidiary in China. In January 2012, we entered into a purchase agreement
with a third party to dispose of our 100% equity interest in Broadband for a total cash consideration of RMB 13.0
million ($2.1 million), and the transaction closed in March 2012. As such, the net assets of Broadband were
classified as held-for-sale in our consolidated balance sheets and the results of operations associated with Broadband
were presented as discontinued operations in our consolidated statements of operations for all periods presented
through 2012.
52
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion and analysis by our management of our financial condition and results of
operations in conjunction with our consolidated financial statements and the accompanying notes.
The following discussion contains forward-looking statements that involve risks and uncertainties, such as
statements of our plans, objectives, expectations and intentions. Our actual results could differ materially from those
discussed in the forward-looking statements. Please also see the cautionary language at the beginning of Part I of this
Annual Report on Form 10-K regarding forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in “Risk Factors” of this Annual Report on Form 10-K.
Business overview
We develop, manufacture and sell optoelectronic products that transmit, receive and switch high speed digital
optical signals for communications networks. We sell our products to the world’s leading network equipment
manufacturers, including Alcatel-Lucent SA (which was acquired by Nokia Corporation in January 2016), Ciena
Corporation, Cisco Systems, Inc., HiSilicon Technologies, Ltd., an affiliate of Huawei Technologies, Co., Ltd. and
Huawei Technologies Co., Ltd. (collectively “Huawei”). These companies are among our largest customers and a focus
of our strategy due to their leading market positions.
We have research and development and wafer fabrication facilities in San Jose and Fremont, California and in
Tokyo, Japan that coordinate with our research and development and manufacturing facilities in Dongguan, Shenzhen
and Wuhan, China and Ottawa, Canada. We use proprietary design tools and design-for-manufacturing techniques to
align our design process with our precision nanoscale, vertically integrated manufacturing and testing. We believe we are
one of the highest volume PIC manufacturers in the world and that we can further expand our manufacturing capacity to
meet market needs.
Recognizing our focus on growth in our 100Gbps (“100G”) and beyond products, we realigned our product group
reporting for 2015 to “High Speed Products” which includes products designed for 100G and beyond applications and
“Network Products and Solutions”, which comprises all products designed for applications below 100G, and includes
40G products previously included in our “High Speed Products” group. In 2015, High Speed Products represented
approximately 58% of total revenue and Network Products and Solutions represented approximately 42% of total
revenue. In 2014, High Speed Products represented approximately 42% of total revenue and Network Products and
Solutions represented approximately 58% of total revenue.
On January 2, 2015, we closed an acquisition of the tunable laser product lines of EMCORE Corporation
(“EMCORE”) for $17.0 million. Consideration for the transaction consisted of $1.5 million in cash and a final
promissory note (the “EMCORE Note”) of approximately $15.5 million, which had a maturity of two years from the
closing of the transaction and an interest rate of 5% per annum for the first year and 13% per annum for the second year.
We accounted for the acquisition as a business combination and included EMCORE’s revenue and expense for the
acquired products in our consolidated financial results from the acquisition close date. The EMCORE Note was repaid in
full in April 2015.
On November 2, 2015, we closed an acquisition of the optical power monitoring business of EigenLight
Corporation (“EigenLight”) for approximately $0.4 million in cash. We accounted for the acquisition as a business
combination and included revenue and expense of the acquired business in our consolidated financial results from the
acquisition close date.
In 2015, our revenue growth of 11% compared to 2014 was driven primarily by demand for our High Speed
Products, which includes the tunable laser products acquired from EMCORE in January 2015, as carriers continued to
accelerate deployment of high capacity optical transport networks worldwide, particularly in China. Our gross margin
increased to 29.2% in the year ended December 31, 2015 compared to 23.2% in the year ended December 31, 2014,
53
primarily attributable to a volume increase in High Speed Products designed for 100G and above operation, our efforts to
phase out low margin products and our ongoing efforts to reduce costs.
In 2016, we expect continued volume growth for our High Speed Products, although quarter-to-quarter results may
show considerable variability as is usual in a rapid initial ramp-up for a new technology. Similar to revenue, our gross
margins may fluctuate materially depending on a variety of factors including average selling price changes, product mix,
volume, manufacturing utilization and ongoing manufacturing process improvements.
We have completed the phase-out of certain products that accounted for approximately $4 million and $23 million
of total revenue in 2015 and 2014, respectively. In addition, we are expecting to phase out additional products that
accounted for approximately $15 million of total revenue in 2015. These products, which are in the end of life, had
relatively low gross margins. We recognized a $2.8 million inventory write-down within cost of goods sold in 2015 as a
result of the phasing-out of our earlier-generation tunable laser products.
Follow-On Public Offering
On May 27, 2015, we completed our follow-on offering of 5,971,034 shares of our common stock in a registered
public offering at $7.25 per share. On May 27, 2015, the underwriters in our follow-on offering exercised an option to
purchase 895,655 shares of our common stock at a price of $7.25 per share, which was completed on June 1, 2015. We
raised approximately $45.6 million, net of underwriting costs and other directly related costs of approximately $4.1
million.
Amendment to Rights Agreement with Rusnano
In July 2015, we entered into an Amendment to Rights Agreement relating to the Rights Agreement dated as of
April 27, 2012 between us and Joint Stock Company “RUSNANO” (formerly Open Joint Stock Company
“RUSNANO”), or Rusnano. The Amendment to Rights Agreement became effective on June 30, 2015. It provides for an
updated investment plan for our Russian subsidiaries that includes the licensing of non-cash intellectual property, non-
cash transfers of existing equipment and commitments to complete the remaining investment milestones of
approximately one-half of the overall investment requirement of $30.0 million through fiscal year 2019, and provides
that the maximum amount of penalties to be paid by us will not exceed $5.0 million in the aggregate. We achieved our
investment milestone for 2015. If certain of the investment commitments are not achieved in the indicated time frames in
2016 and 2019, we also have the ability to pay exit fees. For more information, see “—Liquidity and capital resources—
Rusnano Rights Agreement” below.
Debt Refinancing Arrangements
In 2015, we restructured our term loan led by Comerica Bank to eliminate a restricted cash requirement and
increased our borrowing capacity from $20.0 million as of December 31, 2014 to $30.0 million as of December 31, 2015.
In February 2015, we entered into a financing arrangement with Bank of Tokyo-Mitsubishi UFJ, Ltd. (the “Mitsubishi
Bank”) through two long-term mortgage instruments totaling 1.5 billion JPY ($12.6 million) to pay off our mortgage
from the semiconductor Optical Components Business Unit of LAPIS Semiconductor Co., Ltd. (“LAPIS”), a wholly-
owned subsidiary of Rohm Co., Ltd. of Japan and increase our available cash balances. By restructuring our debt, we
eliminated certain cash restrictions and improved our cash availability for 2015.
Critical accounting policies and estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated
financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S.
(“U.S. GAAP”). These principles require us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenue, expenses and cash flow, and related disclosure of contingent assets and liabilities. Our estimates
include those related to revenue recognition, stock-based compensation expense, impairment analysis of goodwill and
long-lived assets, valuation of inventory, purchased intangibles, warranty liabilities and accounting for income taxes. We
base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the
54
circumstances. Actual results may differ from these estimates. To the extent that there are material differences between
these estimates and our actual results, our future financial statements will be affected.
We believe that of our significant accounting policies, which are described in Note 2 of Notes to Consolidated
Financial Statements, the following accounting policies involve a greater degree of judgment and complexity.
Accordingly, we believe these are the most critical to fully understand and evaluate our financial condition and results of
operations.
Revenue recognition
We recognize revenue from the sale of our products provided that persuasive evidence of an arrangement exists,
delivery has occurred, the price is fixed or determinable and collectability is reasonably assured. Contracts and/or
customer purchase orders are used to determine the existence of an arrangement. Shipping documents and customer
acceptance, when applicable, are used to verify delivery. We assess whether the fee is fixed or determinable based on the
payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. We assess
collectability based primarily on the creditworthiness of the customer as determined by credit checks and the customer’s
payment history.
We recognize revenue when the product is shipped and title has transferred to the buyer. We bear all costs and
risks of loss or damage to the goods up to that point. On most orders, our terms of sale provide that title passes to the
buyer upon shipment by us. In certain cases, our terms of sale may provide that title passes to the buyer upon delivery of
the goods to the buyer. Revenue related to the sale of consignment inventory at customer vendor managed locations is
not recognized until the product is pulled from inventory stock by customers. Payments made to third-party sales
representatives are recorded to sales and marketing expense and not a reduction of revenue as the sales agent services
they provide have an identifiable benefit and are made at similar rates of other sales agent service providers. Shipping
and handling costs are included in the cost of goods sold. We present revenue net of sales taxes and any similar
assessments.
Stock-based compensation expense
We grant stock options, stock appreciation units and restricted stock units to employees, directors and consultants.
Stock purchase rights are granted to our employees. Stock-based awards are accounted for at fair value as of the
measurement date using the Black-Scholes-Merton option-pricing model, the lattice-binominal option-pricing model or
stock prices. For stock options and restricted stock units, the measurement date is the grant date and for employee stock
purchase rights the measurement date is the first day of the offering period. Stock appreciation units are subject to re-
measurement each reporting period.
We recognize the fair value over the period during which an employee is required to provide services in exchange
for the award, known as the requisite service period (usually the vesting period) on a straight-line basis. Stock-based
compensation expense includes the impact of estimated forfeitures. We estimate future forfeitures at the date of grant and
revise the estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Determining the appropriate fair value model and calculating the fair value of stock-based awards requires
judgment, including estimating stock price volatility, forfeiture rates and expected life. If any of these assumptions, or
the market price of our common shares, used in the option-pricing models change, our stock-based compensation
expense could change on our consolidated financial statements.
Business Combinations
We allocate the fair value of purchase consideration to the tangible and intangible assets acquired and liabilities
assumed based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values
of these identifiable assets and liabilities is recorded as goodwill. When determining the fair values of assets acquired
and liabilities assumed, management makes significant estimates and assumptions, especially with respect to intangible
assets.
55
Fair value estimates are based on the assumptions management believes a market participant would use in pricing
the asset or liability. Critical estimates in valuing certain intangible assets include but are not limited to future expected
cash flows from customer relationships and acquired patents and developed technology; and discount rates.
Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently
uncertain and unpredictable and, as a result, actual results may differ from estimates.
Amounts recorded in a business combination may change during the measurement period, which is a period not to
exceed one year from the date of acquisition, as additional information about conditions existing at the acquisition date
becomes available.
Goodwill and long-lived assets
Our methodology for allocating the purchase price relating to purchase acquisitions is determined through
established valuation techniques. Goodwill represents a residual value as of the acquisition date, which generally results
in measuring goodwill as an excess of the purchase consideration transferred plus the fair value of any noncontrolling
interest in the acquired company over the fair value of net assets acquired, including any contingent consideration.
We perform annual goodwill impairment test in the fourth fiscal quarter by reporting unit. We could be subject to
additional goodwill impairment tests in the event of changes in industry and market conditions, our business and
reporting structure. During the fourth quarter of fiscal 2015, we performed a sensitivity analysis for goodwill impairment
and determined that the estimated fair value substantially exceeded the carrying value of the underlying goodwill and a
hypothetical 10% decline in the fair value of each reporting unit would not result in an impairment of goodwill.
We assess the impairment of long-lived assets whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. An impairment loss would be recognized when the sum of the future net cash
flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. The
estimated future cash flows are based upon, among other things, assumptions about expected future operating
performance and may differ from actual cash flows. If our estimates regarding future cash flows derived from such assets
were to change, we may record an impairment to the value of these assets.
Valuation of inventories
We record inventories at the lower of cost (using the first-in, first-out method) or market, after we give appropriate
consideration to obsolescence and inventories in excess of anticipated future demand. In assessing the ultimate
recoverability of inventories, we are required to make estimates regarding future customer demand, the timing of new
product introductions, economic trends and market conditions. If the actual product demand is significantly lower than
forecasted, we could be required to record additional inventory write-downs which would be charged to cost of goods
sold. Obsolescence is determined from several factors, including competitiveness of product offerings, market conditions
and product life cycles. Write-downs of excess and obsolete inventory are charged to cost of goods sold. At the point of
the loss recognition, a new, lower cost basis for that inventory is established, and subsequent changes in facts and
circumstances do not result in the restoration or increase in that newly established cost basis. If this lower-cost inventory
is subsequently sold, it will result in lower costs and higher gross margin for those products. Any write-downs would
have an adverse impact on our gross margin. In 2015, we recorded inventory write-down charges of $6.5 million, which
included a $2.8 million charge resulting from the phasing-out of our earlier-generation tunable laser products. In 2014
and 2013, inventory write-down charges were $1.5 million and $3.2 million, respectively.
Warranty liabilities
We provide warranties to cover defects in workmanship, materials and manufacturing of our products for a period
of one to two years to meet stated functionality specifications. From time to time, we have agreed, and may agree, to
warranty provisions providing for extended terms or with a greater scope. We test products against specified
functionality requirements prior to delivery, but we nevertheless from time to time experience claims under our warranty
guarantees. We accrue for estimated warranty costs under those guarantees based upon historical experience, and for
56
specific items at the time their existence is known and the amounts are determinable. We charge a provision for
estimated future costs related to warranty activities to cost of goods sold based upon historical product failure rates and
historical costs incurred in correcting product failures. If we experience an increase in warranty claims compared with
our historical experience, or if the cost of servicing warranty claims is greater than expected, our gross margin and
profitability would be adversely affected. We recorded warranty expense of $0.1 million, $0.9 million and $1.5 million
for each of the years ended December 31, 2015, 2014 and 2013, respectively.
Accounting for income taxes
We record income taxes using the asset and liability method, which requires the recognition of deferred tax assets
and liabilities for the expected future tax consequences of events that have been recognized in our consolidated financial
statements or tax returns. In estimating future tax consequences, generally we consider all expected future events, other
than enactments or changes in tax law or rates. We provide valuation allowances when necessary to reduce deferred tax
assets to the amount expected to be realized.
We operate in various tax jurisdictions and are subject to audit by various tax authorities. We provide for tax
contingencies whenever it is deemed probable that a tax asset has been impaired or a tax liability has been incurred for
events such as tax claims or changes in tax laws. Tax contingencies are based upon their technical merits, relevant tax
law and the specific facts and circumstances as of each reporting period. Changes in facts and circumstances could result
in material changes to the amounts recorded for such tax contingencies.
As part of the process of preparing our consolidated financial statements, we are required to estimate our taxes in
each of the jurisdictions in which we operate. We estimate actual current tax exposure together with assessing temporary
differences resulting from differing treatment of items, such as accruals and allowances not currently deductible for tax
purposes. These differences result in deferred tax assets.
We make estimates and judgments about our future taxable income that are based on assumptions that are
consistent with our plans and estimates. Should the actual amounts differ from our estimates, the amount of our valuation
allowance could be materially impacted. Any adjustment to the deferred tax asset valuation allowance would be recorded
in the consolidated statement of operations in the period that the adjustment is determined to be required.
Results of operations
We acquired the tunable laser product lines of EMCORE Corporation in January 2015 and the optical power
monitoring business of EigenLight Corporation in November 2015 and the results of operations from these acquisitions
are included from the date of acquisition. The following table presents certain consolidated statements of operations data
for the periods indicated as a percentage of total revenue:
Revenue
Gross profit
Operating expenses
Income (loss) from operations
Interest and other income (expense), net
Income (loss) before income taxes
Net income (loss)
Revenue
(in thousands, except percentages)
Total revenue
2015
$ 339,439
57
Years Ended December 31,
2015 2014 2013
100 % 100 % 100 %
23 %
23 %
29 %
35 %
(6)% (12)%
1 % — %
(5)% (12)%
(6)% (12)%
29 %
28 %
1 %
1 %
2 %
1 %
% Change
2015 to 2014
11%
2014
$ 306,177
% Change
2014 to 2013
8%
2013
$ 282,242
We sell substantially all of our products to original equipment manufacturers, or OEMs. We recognize revenue
upon delivery of our products to the OEM. We price our products based on market and competitive conditions and may
periodically reduce the price of our products as market and competitive conditions change and as manufacturing costs
are reduced. Our sales transactions to customers are denominated primarily in U.S. dollars, Chinese Renminbi (“RMB”)
and JPY. Revenue is driven by the volume of shipments and may be impacted by pricing pressures. We have generated
most of our revenue from a limited number of customers.
Customers accounting for more than 10% of our total revenue and revenue from our top ten customers for the
years ended December 31, 2015, 2014 and 2013 were as follows:
Percent of revenue from customers accounting for 10% or more of total revenue:
Huawei Technologies Co., Ltd(1)
Ciena Corporation
Alcatel-Lucent SA
Percent of revenue from top ten customers
Years Ended December 31,
2013
2014
2015
44 %
21 %
* %
91 %
38 %
15 %
10 %
88 %
27 %
16 %
14 %
86 %
* revenue less than 10%
(1) Huawei’s percentage of revenue included its affiliate, HiSilicon. Revenue from HiSilicon represented
approximately 23%, 15% and 8% of total revenue, respectively, in 2015, 2014 and 2013.
For the years ended December 31, 2015, 2014 and 2013, our percentage of sales from our China-based
subsidiaries, the majority of which were denominated in RMB, were 5%, 20% and 31%, respectively.
Total revenue increased by $33.3 million, or 11%, in 2015 compared to 2014. The increase was primarily
attributable to an increase in revenue from our High Speed Products driven by customer demand and acquisition of the
tunable laser products from EMCORE. Our High Speed Products increased from 42% in 2014 to 58% of total revenue in
2015 and our Network Products and Solutions revenue decreased from 58% in 2014 to 42% in 2015. The increase in
High Speed Products revenue was partially offset by a decrease in Network Products and Solutions revenue largely due
to our product phase-out efforts to improve our gross margin. In 2015, revenue from the United States increased $21.3
million, or 38%, and revenue from China increased $21.0 million, or 13%, partially offset by decreases in Japan and
other regions, compared to 2014. In 2015, Revenue from China, the United States, Japan and rest of the world was
$182.5 million, $77.9 million, $12.7 million and $66.4 million, respectively. Revenue related to products acquired from
EMCORE was approximately $55.8 million in 2015.
Total revenue increased by $23.9 million, or 8%, in 2014 compared to 2013. This increase was primarily
attributable to an increase in revenue from our High Speed 100Gbps products as carriers continued to accelerate
deployments of 4G-LTE networks in China which required increases in backbone capacity, partially offset by a decline
in our other products. In 2014, our High Speed Products increased to 42% of total revenue from 38% of total revenue in
2013 while our Network Products and Solutions decreased to 58% of total revenue in 2014, compared to 62% of total
revenue in 2013. In 2014, revenue from China increased $39.1 million, or 32%, and revenue from the United States
increased $11.6 million, or 26%, due to the relative strength in these regions, partially offset by decreases in Japan and
other regions in 2014 compared to 2013. In 2014, Revenue from China, the United States, Japan and rest of the world
was $161.5 million, $56.6 million, $16.3 million and $71.8 million, respectively.
In 2016, we expect continued growth in revenue from our High Speed Products. We also expect that a significant
portion of our revenue will continue to be derived from a limited number of customers. As a result, the loss of, or a
significant reduction in orders from our largest customers, including Huawei, Ciena Corporation and Alcatel-Lucent SA
(which was acquired by Nokia Corporation in January 2016), or any of our other key customers would materially affect
our revenue and results of operations. We expect a significant portion of our sales to continue to be denominated in
foreign currencies, including RMB, and, to a lesser extent, in JPY and therefore may be affected by changes in foreign
exchange rates.
58
Cost of goods sold and gross margin
(in thousands, except percentages)
Cost of goods sold
2015
$ 240,358
% Change
2015 to 2014
2%
2014
$ 235,059
% Change
2014 to 2013
8%
2013
$ 217,069
Gross margin
2015 2014 2013
29 % 23 % 23 %
Our cost of goods sold consists primarily of the cost to produce wafers and to manufacture and test our products.
Additionally, our cost of goods sold includes stock-based compensation, write-downs of excess and obsolete inventory,
royalty payments, amortization of certain purchased intangible assets, depreciation, acquisition-related fair value
adjustments, restructuring cost, warranty, shipping and allocated facilities costs.
In 2015, gross profit increased $28.0 million, or 39%, to $99.1 million in 2015, compared to 2014, attributable to
revenue growth partially offset by a $3.2 million increase in manufacturing costs, a $2.8 million inventory-related charge
due to the phase out of our earlier-generation tunable laser products, and a $0.5 million increase in intangible assets
related amortization expenses due to our acquisition of the tunable laser products from EMCORE.
Gross margin increased six percentage points to 29% in 2015 from 23% in 2014, primarily attributable to
favorable product mix resulting from an increase in sales volume of our High Speed Products, our product cost reduction
activities and product phase out efforts of low margin products, partially offset by price adjustments.
Gross margin was consistent at 23% in 2014 compared to 2013, primarily due to a reduction in overall
manufacturing costs, lower vendor cost reductions and lower warranty expenses, offset by higher standard costs
compared to 2013. In 2014, overall manufacturing costs decreased $5.4 million and warranty expenses decreased $0.7
million, partially offset by a $0.3 million increase in intangible assets related amortization expenses, resulting in a $5.9
million increase in gross profit, compared to 2013.
We expect that our gross margin is likely to continue to fluctuate due to a variety of factors, including the
introduction of new products, production volume, production volume compared to sales over time, the mix of products
sold, inventory changes, changes in the average selling prices of our products, changes in the cost and volumes of
materials purchased from our suppliers, changes in labor costs, changes in overhead costs or requirements, revaluation of
stock appreciation unit awards that are impacted by our stock price, write-downs of excess and obsolete inventories and
warranty costs. In addition, we periodically negotiate pricing with certain customers which can cause our gross margins
to fluctuate, particularly in the quarters subsequent to the periods in which the negotiations occurred.
59
Operating expenses
(in thousands, except percentages)
Research and development
Sales and marketing
General and administrative
Amortization of purchase intangible assets
Acquisition-related costs
Asset impairment charge
Restructuring charges
Adjustment to fair value of contingent consideration
Escrow settlement gain
Total operating expenses
Research and development
% Change
2014 to
% Change
2013 to
2015
$ 44,533
15,823
31,635
1,791
934
368
44
—
—
$ 95,128
2015
2014
2014
2013
(3)% $ 45,959
15 % 13,725
— % 31,570
1,502
19 %
615
52 %
1,130
(67)%
662
(93)%
—
— %
100 % (4,913)
5 % $ 90,250
— % $ 45,853
(4)% 14,242
5 % 30,012
1,532
(2)%
5,406
(89)%
—
100 %
775
(15)%
1,026
(100)%
—
(100)%
(9)% $ 98,846
Research and development expense consists of personnel costs, including stock-based compensation, for our
research and development personnel, and product development costs, including engineering services, development
software and hardware tools, depreciation of equipment and facility costs. We record all research and development
expense as incurred.
Research and development expense decreased $1.4 million, or 3%, in 2015 compared to 2014. The decrease was
primarily attributable to a $3.3 million decrease in development expenses driven by lower prototype and material
spending, a $0.5 million decrease in depreciation expense and a $0.4 million decrease in administrative and travel
expenses, partially offset by a $1.8 million increase in consulting fees for new product development and a $1.0 million
increase in variable compensation expenses.
Research and development expense increased $0.1 million in 2014 compared to 2013. The increase was
attributable to a $0.5 million increase in depreciation and amortization expense and a $0.2 million increase in stock-
based compensation expense, offset by a $0.4 million decrease in payroll expenses due to headcount reductions and a
$0.2 million reduction in development materials related spending.
We believe that investments in research and development are important to help meet our strategic objectives. In
2016, we plan to continue to invest in research and development activities, including new products that we believe will
further enhance our competitive position. As a percentage of total revenue, our research and development expense may
vary as our investment and revenue levels change over time.
Sales and marketing
Sales and marketing expense consists primarily of personnel costs, including stock-based compensation and sales
commissions, costs related to sales and marketing programs and services and facility costs.
Sales and marketing expense increased by $2.1 million, or 15%, in 2015 compared to 2014, primarily due to a $0.9
million increase in bad debt provision largely due to a customer filing for bankruptcy and specific doubtful accounts, a
$0.8 million increase in variable compensation expenses, a $0.5 million increase in payroll and benefits, a $0.4 million
increase in stock-based compensation expense largely driven by the increase in the price of our common stock, a $0.3
million increase in product demo spending and a $0.3 million increase in travel costs, partially offset by a $0.7 million
decrease in net allocated overhead charges and a $0.5 million decrease in commission expense.
Sales and marketing expense decreased by $0.5 million in 2014 compared to 2013, representing a 4% decrease,
primarily due to a $0.6 million decrease in payroll and benefit expenses and a $0.3 million decrease in product demo
expenses, partially offset by a $0.3 million increase in stock-based compensation expense.
60
We expect to continue to focus on controlling our sales and marketing expenses in 2016 even as our business
continues to expand geographically. As a percentage of total revenue, our sales and marketing expense may vary as our
revenue changes over time.
General and administrative
General and administrative expense consists of personnel costs, including stock-based compensation, for our
finance, human resources and information technology personnel and certain executive officers, as well as professional
services costs related to accounting, tax, banking, legal and information technology services, depreciation and facility
costs.
General and administrative expense increased by $0.1 million in 2015 compared to 2014. The increase was
primarily due to a $2.6 million increase in payroll and benefits, a $1.7 million increase in variable compensation
expenses, a $0.6 million increase in stock-based compensation primarily driven by higher stock price of our common
stock, partially offset by a $2.0 million decrease in audit fees, a $1.3 million decrease in consulting fees, a $0.8 million
decrease in depreciation expense, and a $0.7 million decrease in facility charges largely driven by lower utility expenses.
General and administrative expense increased by $1.6 million in 2014 compared to 2013, representing a 5%
increase. The increase was primarily due to a $2.6 million increase in audit and tax fees primarily related to the
restatement of our Quarterly Reports on Forms 10-Q for the quarters ended March 31 and June 30, 2013, a $1.1 million
increase in bonus expense and a $0.9 million in payroll expenses, partially offset by a $2.1 million decrease in consulting
fees, a $0.5 million decrease in benefit expenses, and a $0.2 million decrease in computer equipment expenses.
We expect to continue to focus on controlling our general and administrative expense in 2016. As a percentage of
total revenue, our general and administrative expense may vary as our revenue changes over time.
Amortization of purchased intangible assets
Our intangible assets are being amortized over their estimated useful lives. Amortization expense relating to
technology and patents and leasehold interests are included within cost of goods sold, while customer relationships and
non-compete agreements are recorded within operating expenses.
In 2015, amortization of purchased intangible assets was $5.1 million, comprising of $3.3 million in cost of goods
sold and $1.8 million in operating expenses. Amortization of purchased intangible assets increased by $0.8 million in
2015 compared to 2014, primarily due to intangible assets from our acquisition of the tunable laser product business
from EMCORE in 2015.
In 2014, amortization of purchased intangible assets was $4.3 million, of which $2.8 million was included in cost
of goods sold and $1.5 million in operating expenses, which remained relatively consistent compared to 2013.
Acquisition-related costs
In 2015 we incurred $0.9 million in acquisition-related transaction costs related to legal, accounting and other
professional services for our acquisition activities, including our acquisitions of EMCORE’s tunable laser product lines
and EigenLight’s optical power monitoring business.
In 2014, we incurred $0.6 million in acquisition-related costs related to our acquisition of EMCORE’s tunable
laser product lines.
In connection with our acquisition of NeoPhotonics Semiconductor in 2013, we incurred $5.4 million in
acquisition-related costs during the year ended December 31, 2013 related to investment banking, legal, accounting and
other professional services and fees as well as transfer and acquisition taxes related to real property acquired.
61
Asset impairment charge
In 2015, we recognized asset impairment charges of $0.4 million of which $0.2 million was attributable to a write-
down of held-for-sale assets acquired from EMCORE and $0.2 million was attributable to charges for equipment related
to our product phase out effort.
In 2014, we wrote off certain leasehold improvements in our facilities in Fremont, California and recorded an
asset impairment charge of $1.1 million in 2014 as a result of our business re-alignment initiatives.
Restructuring charges
In 2014, we initiated a restructuring plan (the “2014 Restructuring Plan”) to refocus on our strategy execution,
optimize our structure, and improve operational efficiencies. The 2014 Restructuring Plan consisted of workforce
reductions primarily in the U.S and in China. We recorded $0.2 million and $1.1 million in related restructuring charges
in 2015 and 2014, respectively, within cost of goods sold and operating expenses.
Escrow settlement gain and adjustment to the fair value of contingent consideration
In October 2014, we entered into a settlement agreement covering the outstanding claims in connection with our
2013 acquisition of LAPIS Semiconductor Co., Ltd. Under the terms of the settlement agreement, we received a
payment of $1.0 million (JPY 111.0 million) from the escrow account that was set up under the original merger
agreement for disputed excess inventories, which we recorded as an escrow settlement gain in 2014.
In May 2014, we entered into a settlement agreement covering the outstanding claims in connection with our 2011
acquisition of Santur. Under the terms of the settlement agreement, a net amount of $1.9 million was paid to us from the
escrow account that was set up under the original merger agreement, which was comprised of $3.9 million related to
certain indemnification claims by us (“Indemnification Amount”), partially offset by $2.0 million related to additional
consideration for the business acquisition that was contingent upon Santur’s gross profit performance during 2012
(“Contingent Consideration Amount”). Prior to this settlement, we had recorded $1.0 million as our estimated fair value
of the Contingent Consideration Amount. As a result of this settlement, we recorded an additional $1.0 million in our
operating expenses in 2013 to adjust the fair value of the Contingent Consideration Amount to the full $2.0 million
settlement amount and recorded the $3.9 million Indemnification Amount in 2014.
Interest and other income, net
(in thousands, except percentages)
Interest and other income, net
2015
$ 2,819
% Change
2014 to 2015
46%
2014
$ 1,932
% Change
2013 to 2014
259%
2013
$ 538
Interest and other income, net consists of interest income, interest expense and other income, net. Interest income
consists of income earned on our cash, cash equivalents and short-term investments. Interest expense consists of amounts
incurred for interest on our outstanding debt. Other income, net includes foreign currency transaction gains and losses
along with government subsidies. The functional currency of our subsidiaries in China and Japan is the RMB and the
JPY, respectively.
Interest and other income, net increased $0.9 million, or 46%, in 2015 from $1.9 million in 2014. The increase
was primarily due to a $0.1 million decrease in the penalty payment derivative liability related to the Rights Agreement
with Rusnano in 2015, compared to a $0.3 million increase in 2014, and a $0.4 million increase in foreign exchange gain
primarily attributable to stronger U.S. dollars in 2015.
Interest and other income, net increased $1.4 million, or 259%, in 2014, from $0.5 million in 2013. The increase
was primarily due to a $1.9 million increase in net foreign exchange gain largely attributable to a weaker JPY against the
U.S. dollar, partially offset by a $0.3 million increase in interest expense related to higher debt balances and a $0.2
million decrease in interest income.
62
Income taxes
(in thousands, except percentages)
Provision for income taxes
Effective tax rate
$
Years ended December 31,
2014
(2,519)
$
$
2015
(3,104)
2013
(1,204)
46 %
(15) %
(4)%
In 2015, our income tax provision was primarily related to the operating profit realized in our foreign subsidiaries
in Japan and China. Historically, we have experienced net losses in the U.S. and in the short term, we expect this trend to
continue. In China, one of our subsidiaries has qualified for a preferential 15% tax rate available for high technology
enterprises. The preferential rate applied to 2015, 2014 and 2013. We realized benefits from this 10% reduction in the tax
rate of $0.9 million, $0.5 million and $0.2 million for 2015, 2014 and 2013, respectively. In order to retain the
preferential rate, we must meet certain operating conditions, satisfy certain product requirements, meet certain
employment level requirements and maintain certain levels of research expenditures. The preferential tax rate that we
enjoy could be modified or discontinued altogether at any time, which could materially and adversely affect our financial
condition and results of operations.
The effective tax rate in 2015 of 46% was 31 percentage points higher than the 2014 effective tax rate due to
higher earnings in foreign jurisdictions and reduced net loss generated in the U.S.
The effective tax rate in 2014 of 15% was 11 percentage points higher than the 4% effective rate in 2013, primarily
due to higher earnings in foreign subsidiaries.
Liquidity and capital resources
At December 31, 2015, we had working capital of $151.2 million and total cash, cash equivalents and short-term
investments of $99.4 million, of which 15% was held in accounts by our subsidiaries in China and 2% was held in
accounts by our subsidiaries in Japan. In the aggregate, approximately 17% of our cash, cash equivalents and short-term
investments were held by our foreign subsidiaries.
Approximately $7.9 million of retained earnings with our accumulated deficit at December 31, 2015 was subject to
restriction due to the fact that our subsidiaries in China are required to set aside at least 10% of their respective
accumulated profits each year to fund statutory common reserves as well as allocate a discretional portion of their after-
tax profits to their staff welfare and bonus fund. This restricted amount is not distributable as cash dividends except in
the event of liquidation.
On May 27, 2015, we completed our follow-on offering of 5,971,034 shares of our common stock in a registered
public offering at $7.25 per share. On May 27, 2015, the underwriters in our follow-on offering exercised an option to
purchase 895,655 shares of our common stock at a price of $7.25 per share, which was completed on June 1, 2015. We
raised approximately $45.6 million, net of underwriting costs and other directly related costs of approximately $4.1
million.
We have a bank credit agreement with Comerica Bank in the U.S. which restricts our ability to incur certain
additional debt or to engage in specified transactions, restricts the payment of dividends and is secured by substantially
all of our U.S. assets, other than intellectual property assets. Our original credit agreement with Comerica Bank required
the maintenance of specified financial covenants, including a debt to EBITDA ratio and liquidity ratios. On May 19,
2014, we executed an amendment to the credit agreement that waived the testing of certain covenants for compliance,
provided that we maintain compensating balances equal to outstanding amounts under the credit agreement in accounts
for which the bank will have sole access. In January 2015, we executed an amended credit agreement with Comerica to
(1) eliminate the compensating balance requirement and modify the financial covenants to include the maintenance of at
least half of our projected EBITDA and a minimum liquidity ratio of 1.50 to 1.0 and (2) replace our $20.0 million
revolving credit facility with a $25.0 million senior secured revolving credit line. We repaid the remaining Comerica
63
term loan balance in conjunction with this amendment. In March 2015, we further amended our credit agreement with
Comerica to increase our borrowing capacity from $25.0 million to $30.0 million. We were in compliance with our
covenants as of December 31, 2015 and expect to be in compliance for the next 12 months.
Amounts borrowed under the Comerica Bank credit facility, as amended, are due on or before November 2, 2016
and borrowings bear interest at an interest rate option of a base rate as defined in the agreement plus 1.75% or LIBOR
plus 2.75%. As of December 31, 2015, the rate on the LIBOR option was 2.99% and the outstanding balance was $23.8
million, which was repaid in full in January 2016.
As of December 31, 2015 and 2014, the amount of our cash and investments in compensating balance accounts for
the credit arrangement with Comerica Bank was zero and $17.5 million, respectively, which was classified as current and
non-current restricted cash and investments on our consolidated balance sheets.
We regularly issue notes payable to our suppliers in China in exchange for accounts payable. These notes are
supported by non-interest bearing bank acceptance drafts and are due three to six months after issuance. As a condition
of the notes payable arrangements, we are required to keep a compensating balance at the issuing banks that is a
percentage of the total notes payable balance until the amounts are settled.
As of December 31, 2015, our subsidiary in China had two short-term line of credit facilities with banking
institutions. Under the first agreement, which expires in June 2016, RMB 120.0 million ($18.5 million) can be used for
short-term loans, which will bear interest at varying rates or up to RMB 171.4 million ($26.4 million) can be used for
bank acceptance drafts (with a 30% compensating balance requirement). Under the second agreement, which expires in
September 2016, RMB 133.0 million ($20.5 million) can be used for short-term loans or up to approximately RMB
190.0 million ($29.3 million) can be used for bank acceptance drafts (with a 30% compensating balance requirement).
As of December 31, 2015 and 2014, the non-interest bearing bank acceptance drafts issued in connection with our notes
payable to our suppliers in China under these line of credit facilities had an outstanding balance of $8.9 million and
$12.8 million, respectively.
As of December 31, 2015 and 2014, compensating balances relating to these credit facilities totaled $2.7 million
and $3.8 million, respectively. Compensating balances are classified as restricted cash and investments on our
consolidated balance sheets.
As of December 31, 2014, our subsidiary in China had $10.0 million outstanding under two short-term advance
financing agreements under its line of credit facilities. The borrowings were made against export sales to its parent
company and bore interest and other fees at rates ranging from 2.33% to 4.02% per annum. Interest and principal were
due and repaid in full in 2015.
On February 25, 2015, we entered into certain loan agreements and related special agreements (collectively, the
“Loan Arrangements”) with the Bank of Tokyo-Mitsubishi UFJ, Ltd. (the “Mitsubishi Bank”) that provided for (i) a term
loan in the aggregate principal amount of 500 million JPY ($4.2 million) (the “Term Loan A”) and (ii) a term loan in the
aggregate principal amount of one billion JPY ($8.4 million) (the “Term Loan B” and together with the Term Loan A,
the “Mitsubishi Bank Loans”). The Mitsubishi Bank Loans are secured by a mortgage on certain real property and
buildings owned by our Japanese subsidiary in Japan. The full amount of each of the Mitsubishi Bank Loans was drawn
on the closing date of February 25, 2015. Interest on the Mitsubishi Bank Loans accrues and is paid monthly based upon
the annual rate of the monthly Tokyo Interbank Offer Rate (TIBOR) plus 1.40%. The Term Loan A requires interest only
payments until the maturity date of February 23, 2018, with a lump sum payment of the aggregate principal amount on
the maturity date. The Term Loan B requires equal monthly payments of principal equal to 8,333,000 JPY until the
maturity date of February 25, 2025, with a lump sum payment of the balance of 8,373,000 JPY on the maturity date.
Interest on the Term Loan B is accrued based upon monthly TIBOR plus 1.40% and is secured by real estate collateral.
In conjunction with the execution of the Mitsubishi Bank Loans, we paid a loan structuring fee, including consumption
tax, of 40,500,000 JPY ($0.3 million).
The Mitsubishi Bank Loans contain customary representations and warranties and customary affirmative and
negative covenants applicable to our Japanese subsidiary, including, among other things, restrictions on cessation in
64
business, management, mergers or acquisitions. The Mitsubishi Bank Loans contain financial covenants relating to
minimum net assets, maximum ordinary loss and a dividends covenant. The Mitsubishi Bank Loans also include
customary events of default, including but not limited to the nonpayment of principal or interest, violations of covenants,
restraint on business, dissolution, bankruptcy, attachment and misrepresentations. In February 2015, we used a portion of
the proceeds of the Mitsubishi Bank Loans to repay the then-outstanding outstanding principal and interest amount of
approximately 710 million JPY ($6.0 million) under the loan from the acquisition of NeoPhotonics Semiconductor.
As of December 31, 2015, our total outstanding balance under the two Mitsubishi Banks Loans was 1.4 billion
JPY (approximately $11.8 million).
On January 2, 2015, we closed an acquisition of the tunable laser product lines of EMCORE for approximately
$17.5 million. Consideration for the transaction consisted of $1.5 million in cash and a promissory note of approximately
$16.0 million, which was subject to certain adjustments for inventory, net accounts receivable and pre-closing revenues
and was subsequently adjusted to $15.5 million and was fully repaid in April 2015.
From time to time we accept notes receivable in exchange for accounts receivable from certain of our customers in
China. These notes receivable are non-interest bearing and are generally due within six months. Historically, we have
collected on the notes receivable in full at the time of maturity.
In March 2016, the United States Department of Commerce added Zhongxing Telecommunications Equipment
Corporation and its subsidiary, ZTE Kangxun Telecommunications Ltd. (collectively “ZTE”) to the list maintained by
the Department for actions contrary to the national security and foreign policy interests of the United States. While we
had accounts receivable and notes receivable from ZTE totaling approximately $2.3 million as of December 31, 2015,
this event is not expected to have a material adverse impact on our liquidity or financial results.
We believe that our existing cash, cash equivalents and cash flows from our operating activities will be sufficient
to meet our anticipated cash needs for at least the next 12 months. Our future capital requirements will depend on many
factors including our growth rate, the timing and extent of spending to support development efforts, the expansion of
sales and marketing activities, the introduction of new and enhanced products, the costs to increase our manufacturing
capacity and our foreign operations, the continuing market acceptance of our products and acquisitions of businesses and
technology. In the event that additional financing is required from outside sources, we may not be able to raise it on
terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results
and financial condition would be adversely affected.
Rusnano Rights Agreement
In April 2012, we entered into a rights agreement with Rusnano, one of our principal stockholders. Under the
rights agreement, we agreed to make a $30.0 million investment commitment (the “Investment Commitment”) toward
our Russian operations. The Investment Commitment can be partially satisfied by cash and/or non-cash investment
inside or outside of Russia and/or by way of non-cash asset transfers.
In July 2015, we amended our rights agreement with Rusnano. The amendment to the rights agreement became
effective on June 30, 2015 and provides for an updated investment plan for our Russian subsidiaries that includes a non-
cash transfer of licensing rights to intellectual property, non-cash transfers of exiting equipment and commitments to
complete the remaining milestones of approximately one-half of the overall investment through fiscal year 2019. It also
provides that the maximum amount of penalties to be paid by us will not exceed $5.0 million in the aggregate, with the
following penalties for failure to meet specified milestones and exit options at the end of the following years, subject to a
90-day cure period (“Cure Period”) following such years:
• By December 31, 2015, if the actual cumulative investment and spending to our Russian subsidiaries was
less than $13.0 million, or if we had not sold any products manufactured by our Russian subsidiary, or if
we had not completed agreed-upon manufacturing milestones, then we would have been subject to a $5.0
million penalty within 30 days after the end of the applicable Cure Period; if the cumulative investments
and spending to our Russian subsidiaries were less than $15.4 million but more than $13.0 million by
December 31, 2015 and was not cured within the applicable Cure Period, we would have been subject to a
65
$1.5 million penalty within 30 days after the end of the applicable Cure Period. We fulfilled this milestone
and have contributed over $15.4 million in cash and assets to our Russian subsidiaries as of December 31,
2015.
• By December 31, 2016, if the actual cumulative investment and spending to our Russian subsidiaries is
less than $18.8 million, we will be subject to a $1.5 million penalty within 30 days after the end of the
applicable Cure Period.
• At the end of 2016, we will be subject to pay an exit fee of $3.5 million to Rusnano should we decide to
cease the operations of our Russian subsidiaries, provided that the cumulative investments and spending
including the tangible asset transfers, other than intangible asset transfers which is limited to a maximum
valuation of $5.7 million, exceed $10.0 million.
• At the end of 2019, we will be subject to pay an exit fee of $2.0 million to Rusnano should we decide to
cease the operations of our Russian subsidiaries, if the cumulative investments and spending are less than
$30.0 million.
Separately, on December 18, 2014, we entered into a Commitment to file a Registration Statement and Related
Waiver of Registration Rights, whereby Rusnano waived certain registration rights in connection with a potential
offering by us of shares of our common stock, and we committed to file with the SEC a resale registration statement on
Form S-1 covering the resale of all shares of our common stock held by Rusnano. We filed such resale registration
statement on April 6, 2015 to register 4,972,905 shares of our common stock held by Rusnano. Rusnano also waived its
demand registration rights under the original rights agreement and agreed to enter into a lock up agreement with us
whereby it would agree not to sell any shares of our common stock, or engage in certain other transactions relating to our
securities, for a period of 60 days from the filing date of the resale registration statement. Rusnano signed such lock up
agreement with us on April 2, 2015. In connection with our public stock offering completed in the second quarter of
2015, Rusnano entered into a separate lock up agreement with Needham & Company, LLC, the lead underwriter of the
offering, whereby it agreed not to sell any shares of our common stock, or engage in certain other transactions relating to
our securities, for a period of 180 days from May 21, 2015. We do not receive any proceeds from any sales of our
common stock held by Rusnano.
Cash flow discussion
The table below sets forth selected cash flow data for the periods presented:
(in thousands)
Net cash provided by (used in) operating activities
Net cash (used in) provided by investing activities
Net cash provided by financing activities
Effect of exchange rates on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Operating activities
2013
Years ended December 31,
2014
2015
$ 26,138 $
(21,906)
29,623
(802)
(451) $ 4,511
13,304
2,515
(169)
$ 33,053 $ (14,066) $ 20,161
(13,945)
3,029
(2,699)
In 2015, net cash provided by operating activities was $26.1 million, a $26.6 million increase compared to 2014.
The increase was primarily due to a $23.4 million increase in net income, a $15.8 million increase driven by lower
accounts receivable due to collections, a $5.7 million increase in accrued and other liabilities, a $4.2 million increase in
prepaid and other assets, partially offset by a $19.9 million decrease related to inventory increases due to anticipated
demand and a $5.7 million decrease in accounts payable due to timing of payments.
In 2014, net cash used in operating activities was $0.5 million, which was a $5.0 million decrease compared to the
$4.5 million cash provided by operating activities in 2013. The decrease was primarily attributable to an increase in
accounts receivable due to higher revenue in 2014 while days sales outstanding improved compared to 2013. Additional
contributing factors to the increase in net cash used in operating activities included lower accounts payable related
66
payments and higher accrued and other liabilities in 2013 and an increase in prepaid expenses and other assets in 2014
primarily attributable to sales tax refunds, partially offset by a reduction in net loss, net of non-cash charges, and a lower
inventory level in 2014, compared to 2013.
In 2013, net cash provided by operating activities was $4.5 million, which was a $13.3 million increase over the
$8.8 million cash used in operating activities in 2012. Contributing to the increase was a decrease in accounts receivable,
particularly in China where days sales outstanding declined and revenue was lower at the end of 2013 compared to the
end of 2012. Additionally, operating cash flow benefitted from an increase in accounts payable primarily due to higher
inventory purchases in China near the end of 2013 and higher accrued and other current liabilities, partially offset by a
higher net loss in 2013.
Investing activities
In 2015, net cash used in investing activities was $21.9 million, an $8.0 million increase compared to $13.9 million
used in 2014. The increase in net cash used in investment activities was primarily attributable to a $27.5 million increase
in purchased marketable securities, a $5.8 million increase in property, plant and equipment purchases and a $5.4 million
reduction in proceeds from maturity of securities, partially offset by a $21.0 million increase as a result of decreases in
restricted cash balances and an $8.5 million increase in proceeds from sales of marketable securities.
In 2014, net cash used in investing activities was $13.9 million, a $27.2 million decrease compared to the $13.3
million provided by investing activities in 2013, primarily due to a $85.1 million decrease in proceeds from sales and
maturities of marketable securities and an $11.4 million increase in restricted cash, partially offset by a $49.2 million
decrease in marketable securities purchases and a $8.5 million decrease in capital equipment purchases. In addition, net
cash used in acquisition was $1.5 million in 2014 for the asset purchase arrangement with EMCORE, compared to a
payment of $12.7 million for the acquisition of NeoPhotonics Semiconductor in 2013.
In 2013, net cash provided by investing activities was $13.3 million, which was a $34.3 million increase from the
$21.0 million used in investing activities in 2012. The increase was due to $56.0 million in higher net proceeds from the
sale and maturity of marketable securities, partially offset by $13.1 million cash used to purchase NeoPhotonics
Semiconductor and $6.8 million in higher purchases of property and equipment in 2013.
Financing activities
In 2015, net cash provided by financing activities was $29.6 million, a $26.6 million increase compared to 2014.
The increase was primarily attributable to a $62.2 million increase in net proceeds from bank and acquisition-related
loans, a $45.6 million net proceeds from issuance of common stock in public offering, partially offset by a $75.6 million
decrease in loans and acquisition-related loan payments, a $4.0 million decrease in proceeds from issuance of notes
payable and a $3.4 million decrease in the repayments of notes payable.
In 2014, net cash provided by financing activities was $3.0 million, an increase of $0.5 million compared to $2.5
million in 2013. The increase was primarily attributable to a $5.7 million increase in proceeds from notes payable
issuances and a $5.7 million decrease in repayment of bank loans, partially offset by an $8.4 million decrease in proceeds
from bank loans, a $2.0 million payment for the contingent consideration liability related to the Santur acquisition and a
$0.6 million decrease in net proceeds from exercises of stock options and issuance of restricted stock units.
Net cash provided by financing activities was $2.5 million and $34.1 million in 2013 and 2012, respectively. In
2012, the major factor was $39.6 million generated from the private placement transaction. Additionally, 2013 cash from
financing activities benefitted from $7.4 million in lower net payments of bank loans and notes payable and $1.3 million
in higher proceeds from the exercise of stock options and stock issued under the ESPP.
67
Contractual obligations and commitments
The following summarizes our contractual obligations as of December 31, 2015:
Payments due by period
(in thousands)
Notes payable (1)
Bank borrowings (1)
Retirement obligations (2)
Operating leases (3)
Purchase commitments (4)
Penalty payment derivative (5)
Asset retirement obligations (6)
Expected interest payments (7)
Total
Restricted retained earnings (uncertainty in timing of future
payments)
Deferred compensation plan (uncertainty in timing of future
payments)
Total commitments
$
3-5
1-3
Years
Years
Less than
1 Year
More than
5 Years
Total
8,857 $ 8,857 $ — $ — $ —
3,461
5,815
2,938
911
578
2,137
—
—
—
—
85
—
113
258
91,666 $ 70,455 $ 9,121 $ 4,915 $ 7,175
24,631
497
1,225
34,759
—
312
174
1,662
740
1,455
—
389
536
133
35,569
5,086
5,395
34,759
389
933
678
7,917
447
$ 100,030
(1) See Note 10, Debt, in Notes to Consolidated Financial Statements in Item 8 of Part II of this Report for additional
information regarding our debt.
(2) See Note 11, Pension Plans, in Notes to Consolidated Financial Statements in Item 8 of Part II of this Report for
additional information regarding our retirement obligations.
(3) We have entered into various non-cancelable operating lease agreements for our offices in China, U.S. and
Canada.
(4) This is an estimate of the amount outstanding under open purchase orders for the purchase of inventory and other
goods at December 31, 2015. Certain of these open purchase orders may be cancellable without penalty.
(5) See Note 12, Commitments and contingencies, in Notes to Consolidated Financial Statements in Item 8 of Part II
of this Report for additional information regarding our penalty payment derivative.
(6) We have an asset retirement obligation of $0.8 million associated with our facility lease in California which is
included in other noncurrent liabilities in the consolidated balance sheet as of December 31, 2015. We also have a
$0.1 million asset retirement obligation in Japan.
(7) We calculate the expected interest payments based on our long-term debt at prevailing interest rates as of
December 31, 2015.
Uncertain Tax Positions
As of December 31, 2015, the liability for uncertain tax positions was $0.2 million. We cannot conclude on the
timing of cash payments associated with our uncertain tax positions.
Rusnano Rights Agreement
In connection with our April 2012 common stock private placement transaction, we entered into a rights agreement
with Rusnano. Refer to the discussion in the “Liquidity and Capital Resources – Rusnano Rights Agreement” section.
Off-balance sheet arrangements
During the years ended December 31, 2015 and 2014, we did not have any significant off-balance sheet
arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.
68
Recent accounting pronouncements
See Note 2, Summary of Significant Accounting Policies, in Notes to the Consolidated Financial Statements in Item
8 of Part II of this Report, for a full description of recent accounting pronouncements, including the expected dates of
adoption and estimated effects on financial condition and results of operations, which is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate fluctuation risk
The primary objective of our investment activities is to preserve principal while at the same time maximizing the
income we receive from our investments without significantly increasing risk. To achieve this objective, we invest our
excess cash in a variety of securities, including U.S. government agency securities, corporate notes and bonds and money
market funds meeting certain criteria. These securities are classified as available-for-sale which are recorded on the
balance sheet at fair value. We have determined that the gross unrealized gains or losses on the available-for-sale
securities at December 31, 2015 are temporary in nature. We may sell these marketable securities investments in the
future to fund future operating needs.
As of December 31, 2015 we had $23.8 million outstanding under our U.S. credit facilities and $11.8 million
outstanding under our term loans with the Mitsubishi Bank, which were subject to fluctuations in interest rates. For the
year ended December 31, 2015, a hypothetical 10% increase in the interest rate could result in approximately $89,000 of
additional annual interest expense. The hypothetical assumptions made above will be different from what actually occurs
in the future. Furthermore, the computations do not anticipate actions that may be taken by our management should the
hypothetical market changes actually occur over time. As a result, actual impacts on our results of operations in the
future will differ from those quantified above.
Foreign currency exchange risk
Foreign currency exchange rates are subject to fluctuation and may cause us to recognize transaction gains and
losses in our statements of operations. A large portion of our business is conducted through our subsidiaries in China,
whose functional currency is the RMB and Japan, whose functional currency is the JPY. To the extent that transactions
by these subsidiaries are in currencies other than their functional currencies, we bear the risk that fluctuations in the
exchange rates of the RMB and JPY in relation to other currencies could increase our costs and expenses. During the
year ended December 31, 2015, we recognized foreign currency transaction gains of $3.4 million. We use the U.S. dollar
as the reporting currency for our consolidated financial statements. Any significant revaluation of the RMB or JPY may
materially and adversely affect our results of operations upon translation of these subsidiaries’ financial statements into
U.S. dollars. While we generate a significant portion of our revenue in U.S. dollars, a significant portion of our cost of
goods sold are in RMB. Therefore appreciation in RMB against the U.S. dollar would negatively impact our cost of
goods sold upon translation to U.S. dollars. For example, for the year ended December 31, 2015, a 10% appreciation in
RMB against the U.S. dollar would have resulted in an approximately $1.7 million increase in our cost of goods sold.
To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency
exchange risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of
these hedging transactions may be limited and we may not be able to successfully hedge our exposure. In addition, our
currency exchange variations may be magnified by any Chinese exchange control regulations that restrict our ability to
convert RMB into foreign currency.
Inflation risk
Inflationary factors, such as increases in our cost of goods sold and operating expenses, may adversely affect our
results of operations. Although we do not believe that inflation has had a material impact on our financial position or
results of operations to date, an increase in the rate of inflation in the future, particularly in China, may have an adverse
69
effect on our levels of gross profit and operating profit as a percentage of revenue if the sales prices for our products do
not proportionately increase with these increased expenses.
70
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of December 31, 2015 and 2014
Consolidated Statements of Operations for the years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013
Notes to Consolidated Financial Statements
Page
72
73
74
75
76
77
78
71
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of NeoPhotonics Corporation
San Jose, California
We have audited the accompanying consolidated balance sheets of NeoPhotonics Corporation and subsidiaries (the
"Company") as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive
loss, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2015. These
financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on
the financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of
NeoPhotonics Corporation and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and
their cash flows for each of the three years in the period ended December 31, 2015, in conformity with accounting
principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the Company's internal control over financial reporting as of December 31, 2015 based on the criteria established
in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated March 14, 2016 expressed an unqualified opinion on the Company's internal
control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
March 14, 2016
72
NEOPHOTONICS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except par data)
ASSETS
Current assets:
Cash and cash equivalents
Short-term investments
Restricted cash and investments
Accounts receivable, net of allowance for doubtful accounts
Inventories
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment, net
Restricted cash and investments, non-current
Purchased intangible assets, net
Goodwill
Other long-term assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Notes payable and short-term borrowing
Current portion of long-term debt
Accrued and other current liabilities
Total current liabilities
Long-term debt, net of current portion
Deferred income tax liabilities
Other noncurrent liabilities
Total liabilities
December 31,
2015
2014
$
76,088 $
23,294
2,660
83,161
65,602
12,393
263,198
62,618
—
9,852
1,115
5,095
43,035
—
5,504
77,597
57,347
15,540
199,023
57,657
15,750
10,263
—
3,591
$ 341,878 $ 286,284
$
50,620 $
32,657
760
27,950
111,987
10,759
88
7,388
130,222
48,949
22,771
2,445
22,728
96,893
20,891
1,818
7,226
126,828
Commitments and contingencies (Note 12)
Stockholders’ equity:
Preferred stock, $0.0025 par value, 10,000 shares authorized, no shares issued or
outstanding
Common stock, $0.0025 par value, 100,000 shares authorized
At December 31, 2015, 40,986 shares issued and outstanding; at December 31,
2014, 32,752 shares issued and outstanding
Additional paid-in capital
Accumulated other comprehensive (loss) income
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
—
—
82
102
456,189
511,750
5,326
(1,723)
(302,141)
(298,473)
211,656
159,456
$ 341,878 $ 286,284
See Accompanying Notes to Consolidated Financial Statements.
73
NEOPHOTONICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Revenue
Cost of goods sold
Gross profit
Operating expenses:
Research and development
Sales and marketing
General and administrative
Amortization of purchased intangible assets
Acquisition-related costs
Asset impairment charge
Restructuring charges
Adjustment to fair value of contingent consideration
Escrow settlement gain
Total operating expenses
Income (loss) from operations
Interest income
Interest expense
Other income, net
Total interest and other income (expense), net
Income (loss) before income taxes
Provision for income taxes
Net income (loss)
Basic net income (loss) per share
Diluted net income (loss) per share
Weighted average shares used to compute basic net income (loss) per share
Weighted average shares used to compute diluted net income (loss) per share
2015
Years Ended December 31,
2014
$ 339,439 $ 306,177 $ 282,242
217,069
235,059
240,358
65,173
71,118
99,081
2013
45,853
45,959
44,533
14,242
13,725
15,823
30,012
31,570
31,635
1,532
1,502
1,791
5,406
615
934
—
1,130
368
775
662
44
1,026
—
—
—
(4,913)
—
98,846
90,250
95,128
(33,673)
(19,132)
3,953
348
189
121
(996)
(1,269)
(1,243)
1,186
3,012
3,941
538
1,932
2,819
(33,135)
(17,200)
6,772
(3,104)
(1,204)
(2,519)
3,668 $ (19,719) $ (34,339)
0.10 $
0.09 $
(0.61) $
(0.61) $
37,421
38,686
32,109
32,109
(1.11)
(1.11)
31,000
31,000
$
$
$
See Accompanying Notes to Consolidated Financial Statements.
74
NEOPHOTONICS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
Net income (loss)
Other comprehensive loss:
Foreign currency translation adjustments, net of zero tax
Unrealized (losses) gains on available-for-sale securities, net of zero tax
Defined benefit pension plans:
Loss arising during the period
Curtailments, settlements and other
Tax
Total other comprehensive loss
Comprehensive loss
Years ended December 31,
2014
2013
2015
$ 3,668 $ (19,719) $ (34,339)
(6,987)
(35)
(6,411)
3
41
(65)
(191)
(113)
(40)
—
191
—
73
(31)
13
(7,049)
(142)
(6,361)
$ (3,381) $ (26,080) $ (34,481)
See Accompanying Notes to Consolidated Financial Statements.
75
NEOPHOTONICS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Accumulated
other
income (loss)
Additional
paid-in
capital
comprehensive Accumulated stockholders’
Total
(In thousands)
Balances at December 31, 2012
Comprehensive loss
Issuance of common stock upon exercise of stock options
Issuance of common stock under employee stock purchase
plan
Issuance of common stock for vested restricted stock units
Tax withholding related to vesting of restricted stock units
Stock-based compensation costs
Balances at December 31, 2013
Comprehensive loss
Issuance of common stock upon exercise of stock options
Issuance of common stock under employee stock purchase
plan
Issuance of common stock for vested restricted stock units
Tax withholding related to vesting of restricted stock units
Stock-based compensation costs
Balances at December 31, 2014
Comprehensive loss
Issuance of common stock from public stock offering, net of
discount and offering costs
Issuance of common stock upon exercise of stock options
Issuance of common stock under employee stock purchase
plan
Issuance of common stock for vested restricted stock units
Tax withholding related to vesting of restricted stock units
Stock-based compensation costs
Balances at December 31, 2015
Common stock
Shares Amount
30,546 $
76 $ 438,858 $
—
261
—
1
—
1,212
2
—
—
—
79
—
1
1
1
—
—
82
—
2,155
—
(565)
5,807
447,467
—
738
1,833
(1)
(387)
6,539
456,189
—
488
277
—
—
31,572
—
174
591
524
(109)
—
32,752
—
6,867
304
17
1
1
1
—
—
45,621
1,177
1,538
(1)
(727)
7,953
102 $ 511,750 $
600
558
(95)
—
40,986 $
11,829 $
(142)
—
—
—
—
—
11,687
(6,361)
—
—
—
—
—
5,326
(7,049)
—
—
deficit
(248,083) $
(34,339)
—
equity
202,680
(34,481)
1,213
—
—
—
—
(282,422)
(19,719)
—
—
—
—
—
(302,141)
3,668
—
—
2,157
—
(565)
5,807
176,811
(26,080)
739
1,834
—
(387)
6,539
159,456
(3,381)
45,638
1,178
—
—
—
—
(1,723) $
—
—
—
—
(298,473) $
1,539
—
(727)
7,953
211,656
See Accompanying Notes to Consolidated Financial Statements.
76
NEOPHOTONICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities
Net income (loss)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization
Stock-based compensation expense
Deferred taxes
Investment and debt related amortization
Loss on disposal of property and equipment
Asset impairment charges
Adjustment to fair value of penalty payment derivative
Adjustment to fair value of contingent consideration
Allowance for doubtful accounts
Write-down of inventories
Foreign currency remeasurement and other, net
Change in assets and liabilities, net of effects of acquisitions:
Accounts receivable
Inventories
Prepaid expenses and other assets
Accounts payable
Accrued and other liabilities
Cash flows from investing activities
Net cash provided by (used in) operating activities
Purchase of property, plant and equipment
Proceeds from sale of property, plant and equipment and other assets
Purchase of marketable securities
Proceeds from sale of marketable securities
Proceeds from maturity of securities
Decrease (increase) in restricted cash
Acquisition of business
Net cash (used in) provided by investing activities
Cash flows from financing activities
Proceeds from (payment for) public stock offering, net of discount and offering costs
Proceeds from exercise of stock options and issuance of stock under ESPP
Tax withholding on restricted stock units
Proceeds from bank loans
Repayment of bank and acquisition-related loans
Proceeds from issuance of notes payable
Repayment of notes payable
Payment of acquisition-related contingent consideration
Net cash provided by financing activities
Effect of exchange rates on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the period
Cash and cash equivalents at the end of the period
Supplemental disclosure of cash flow information:
Cash paid for interest
Cash paid for income taxes
Supplemental disclosure of noncash investing and financing activities:
Modification of bank loan with Comerica
Issuance of note to seller of acquired business
Transfer of restricted investments to short-term investments
Transfer of short-term investments to restricted investments
Unpaid deferred offering costs
Changes in unpaid property, plant and equipment
Years ended December 31,
2014
2013
2015
$
3,668
$ (19,719)
$ (34,339)
22,875
7,763
(641)
296
394
368
(141)
—
640
6,486
(2,992)
2,529
(14,899)
(1,691)
(4,692)
6,175
26,138
(16,837)
245
(37,130)
18,103
4,000
10,135
(422)
(21,906)
45,648
2,717
(727)
80,256
(94,032)
21,259
(25,498)
—
29,623
(802)
33,053
43,035
$ 76,088
23,403
6,841
1,175
86
162
1,130
291
—
(266)
1,517
(2,343)
(13,269)
4,990
(5,912)
979
484
(451)
(11,027)
9
(9,662)
9,634
9,448
(10,847)
(1,500)
(13,945)
(10)
2,571
(387)
18,089
(18,423)
25,264
(22,090)
(1,985)
3,029
(2,699)
(14,066)
57,101
$ 43,035
20,381
5,736
(469)
1,003
710
—
101
1,026
(253)
3,207
(667)
7,234
(10,458)
(1,795)
7,712
5,382
4,511
(19,566)
92
(58,860)
53,847
50,358
561
(13,128)
13,304
—
3,370
(565)
26,443
(24,110)
19,543
(22,166)
—
2,515
(169)
20,161
36,940
57,101
$
$
878
264
$
1,176
3,919
$
837
1,013
15,786
15,482
8,296
—
—
(396)
—
—
—
8,297
364
(746)
—
11,130
—
—
—
(1,397)
See Accompanying Notes to Consolidated Financial Statements.
77
NEOPHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. The Company and basis of presentation
Business and organization
NeoPhotonics Corporation and its subsidiaries (NeoPhotonics or the Company) develops, manufactures and sells
optoelectronic products that transmit, receive and switch high speed digital optical signals for communications networks.
The Company sells its products worldwide, primarily to leading network equipment manufacturers.
Certain Significant Risks and Uncertainties
The Company operates in a dynamic industry and, accordingly, can be affected by a variety of factors. For
example, any of the following areas could have a negative effect on the Company in terms of its future financial position,
results of operations or cash flows: the general state of the U.S. and world economies, the highly cyclical nature of the
industries the Company serves; the loss of any of a small number of its larger customers; ability to obtain additional
financing; inability to meet certain debt covenants; failure to successfully integrate completed acquisitions; fundamental
changes in the technology underlying the Company’s products; the hiring, training and retention of key employees;
successful and timely completion of product design efforts; and new product design introductions by competitors.
Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries.
Intercompany accounts and transactions have been eliminated in consolidation.
Reclassification
Reclassification has been made within other accrued expense amount to separate income and other taxes payable
and accrued warranty from other in the prior year (Note 8) in order to conform to the current year’s presentation.
2. Summary of significant accounting policies
Use of estimates
The preparation of financial statements in accordance with U.S. generally accepted accounting principles (“U.S.
GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
revenue and expenses during the reporting period. Significant estimates made by management include: the useful lives of
property, plant and equipment and intangible assets as well as future cash flows to be generated by those assets; fair
values of identifiable assets acquired and liabilities assumed in business combinations; allowances for doubtful accounts;
valuation allowances for deferred tax assets; write off of excess and obsolete inventories; the valuation of the penalty
payment derivative and the valuations and recognition of stock-based compensation, among others. Actual results could
differ from these estimates.
Concentration of credit risk and significant customers
Financial instruments that potentially subject the Company to concentrations of credit risk are primarily cash and
cash equivalents and trade accounts receivable. The Company’s investment policy requires cash and cash equivalents to
be placed with high-credit quality institutions and limits on the amount of credit risk from any one issuer. The Company
performs ongoing credit evaluations of its customers’ financial condition whenever deemed necessary and generally does
not require collateral. The Company maintains an allowance for doubtful accounts based upon the expected collectability
of all accounts receivable, which takes into consideration an analysis of historical bad debts, specific customer
creditworthiness and current economic trends.
78
NEOPHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the year ended December 31, 2015, two customers accounted for 44% and 21% of the Company’s total
revenue. For the year ended December 31, 2014, three customers accounted for 38%, 15% and 10% of the Company’s
total revenue. For the year ended December 31, 2013, three customers accounted for 27%, 16% and 14% of the
Company’s total revenue. No other customers accounted for 10% or more of total revenue in any year presented.
As of December 31, 2015, one customer accounted for 59% of the Company’s total accounts receivable and as of
December 31, 2014, three customers accounted for 26%, 19% and 10% of the Company’s total accounts receivable. No
other customers accounted for 10% or more of total accounts receivable as of December 31, 2015 or 2014.
Restricted cash
As a condition of the notes payable lending arrangements of the Company’s subsidiaries in China and, in 2014, the
Company’s bank term loan agreement, the Company is required to keep a compensating balance at the issuing banks.
These balances have been excluded from the Company’s cash and cash equivalents balance and are classified as
restricted cash and investments in the Company’s consolidated balance sheets. As of December 31, 2015 and 2014, the
amount of restricted cash and investments was $2.7 million and $21.3 million, respectively.
Cash, cash equivalents and investments
Highly liquid investments with a maturity of 90 days or less at the date of purchase are considered cash
equivalents, with the exception of money market funds and commercial paper which are classified as short-term
investments.
The Company regularly reviews its investment portfolio to identify and evaluate investments that have indications
of possible impairment. Factors considered in determining whether a loss is other-than-temporary include: the length of
time and extent to which the fair market value has been lower than the cost basis, the financial condition and near-term
prospects of the investee, credit quality, likelihood of recovery, and the Company’s ability to hold the investment for a
period of time sufficient to allow for any anticipated recovery in fair market value.
Unrealized gains and losses, net of tax, are included in accumulated other comprehensive (loss) income as a
separate component of stockholders’ equity on the consolidated balance sheets. The amortization of premiums and
discounts on the investments, and realized gains and losses on available-for-sale securities are included in other income
(expense), net in the consolidated statements of operations. The Company uses the specific-identification method to
determine cost in calculating realized gains and losses upon sale of its marketable securities.
Marketable securities are reported at fair value and are classified as available-for-sale investments in our current
assets because they represent investments of cash available for current operations.
Fair Value Measurements
Fair value is defined as the price at which an asset could be exchanged in a current transaction between
knowledgeable, willing parties. A liability’s fair value is defined as the amount that would be paid to transfer the liability
to a new obligor, not the amount that would be paid to settle the liability with the creditor. Where available, fair value is
based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or
inputs are not available, valuation models are applied. These valuation techniques involve some level of management
estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and
the instruments’ complexity. Valuation techniques used to measure fair value must maximize the use of observable
inputs and minimize the use of unobservable inputs. The authoritative accounting guidance describes a fair value
hierarchy based on three levels of inputs that may be used to measure fair value, of which the first two are considered
observable and the last is considered unobservable. These levels of inputs are as follows:
Level 1—Observable inputs such as unadjusted, quoted prices in active markets for identical assets or liabilities at
the measurement date.
79
NEOPHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Level 2—Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the
asset or liability. These include quoted prices for similar assets or liabilities in active markets and quoted prices for
identical or similar assets or liabilities in markets that are not active.
Level 3—Unobservable inputs that reflect management’s best estimate of what market participants would use in
pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation
technique and the risk inherent in the inputs to the model.
For marketable securities measured at fair value using Level 2 inputs, we review trading activity and pricing for
these investments as of the measurement date. When sufficient quoted pricing for identical securities is not available, we
use market pricing and other observable market inputs for similar securities obtained from various third party data
providers. These inputs either represent quoted prices for similar assets in active markets or have been derived from
observable market data.
Accounts receivable
Accounts receivable include trade receivables and notes receivable from customers. The notes are generally due
within six months. The Company receives notes receivable in exchange for accounts receivable from certain customers
in China that are secured by the customer’s affiliated financial institution.
An allowance for doubtful accounts is calculated based on the aging of the Company’s trade receivables, historical
experience, and management judgment. The Company writes off trade receivables against the allowance when
management determines a balance is uncollectible and is no longer actively pursuing collection of the receivable.
Inventories
Inventories consist of on-hand raw materials, work-in-progress inventories and finished goods. Raw materials and
work-in-progress inventories are stored mainly on the Company’s premises. Finished goods are stored on the Company’s
premises as well as on consignment at certain customer sites.
Inventories are stated at the lower of standard cost, which approximates actual cost determined on the weighted
average basis, or market value. Inventories are recorded using the first-in, first-out method. The Company routinely
evaluates quantities and values of inventories in light of current market conditions and market trends, and records a
write-down for quantities in excess of demand and product obsolescence. The evaluation may take into consideration
historic usage, expected demand, anticipated sales price, new product development schedules, the effect new products
might have on the sale of existing products, product obsolescence, customer concentrations, product merchantability and
other factors. Market conditions are subject to change and actual consumption of inventory could differ from forecasted
demand. The Company also regularly reviews the cost of inventories against their estimated market value and records a
lower of cost or market write-down for inventories that have a cost in excess of estimated market value, resulting in a
new cost basis for the related inventories which is not reversed.
Business Combinations
We allocate the fair value of purchase consideration to the tangible and intangible assets acquired and liabilities
assumed based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values
of these identifiable assets and liabilities is recorded as goodwill. When determining the fair values of assets acquired
and liabilities assumed, management makes significant estimates and assumptions.
Fair value estimates are based on the assumptions management believes a market participant would use in pricing
the asset or liability. Critical estimates in valuing certain intangible assets include, but are not limited to, future expected
cash flows from customer relationships and acquired patents and developed technology; and discount rates.
Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently
uncertain and unpredictable and, as a result, actual results may differ from estimates.
80
NEOPHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Amounts recorded in a business combination may change during the measurement period, which is a period not to
exceed one year from the date of acquisition, as additional information about conditions existing at the acquisition date
becomes available.
Goodwill
Goodwill is reviewed for impairment annually in the fourth fiscal quarter or more frequently if events or changes
in circumstances indicate that the carrying value of goodwill may not be recoverable. The Company will assess the
qualitative factors to determine whether it is more likely than not that the fair value of its single reporting operating unit
is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill
impairment. If the Company determines that it is more likely than not that its fair value is less than its carrying amount,
then the two-step goodwill impairment test is performed. The first step, identifying a potential impairment, compares the
fair value of the reporting unit with its carrying amount. If the carrying amount exceeds its fair value, the second step
would need to be performed; otherwise, no further steps are required. The second step, measuring the impairment loss,
compares the implied fair value of the goodwill with the carrying amount of the goodwill. Any excess of the goodwill
carrying amount over the implied fair value is recognized as an impairment loss, and the carrying value of goodwill is
written down to fair value. The Company did not have any goodwill impairment in 2015. There was no goodwill as of
December 31, 2014.
Long-lived assets
Property, plant and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation
and amortization is computed using the straight-line method over the following estimated useful lives:
Buildings
Machinery and equipment
Furniture, fixtures and office equipment
Software
Leasehold improvements
Repairs and maintenance costs are expensed as incurred.
20-30 years
2-7 years
3-5 years
5-7 years
life of the asset or lease term, if shorter
Intangible assets acquired in a business combination are recorded at fair value. Identifiable finite-lived intangible
assets are amortized over the period of estimated benefit using the straight-line method, reflecting the pattern of
economic benefits associated with these assets. The estimated useful lives of the Company’s finite-lived intangible assets
generally range from two to seven years. The acquired land use rights in China have an estimated useful life of 45 years.
The carrying value of intangible assets and other long-lived assets is reviewed on a regular basis for the existence
of facts or circumstances, both internally and externally, that may suggest impairment. Some factors which the Company
considers to be triggering events for impairment review include a significant decrease in the market value of an asset, a
significant change in the extent or manner in which an asset is used, a significant adverse change in the business climate
that could affect the value of an asset, an accumulation of costs for an asset in excess of the amount originally expected,
a current period operating loss or cash flow decline combined with a history of operating loss or cash flow uses or a
projection that demonstrates continuing losses and a current expectation that, it is more likely than not, a long-lived asset
will be disposed of at a loss before the end of its estimated useful life.
If one or more of such facts or circumstances exist, the Company will evaluate the carrying value of long-lived
assets to determine if impairment exists by comparing it to estimated undiscounted future cash flows over the remaining
useful life of the assets. If the carrying value of the assets is greater than the estimated future cash flow, the assets are
written down to the estimated fair value. The Company’s cash flow estimates contain management’s best estimates,
using appropriate and customary assumptions and projections at the time. Any write-down would be treated as a
permanent reduction in the carrying amount of the asset and an operating loss would be recognized.
81
NEOPHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company recorded asset impairment charges of $0.4 million in 2015 related to certain held-for-sale assets
property, plant and equipment and $1.1 million in 2014 related to certain leasehold improvements. The Company had no
asset impairment charge in 2013.
Revenue recognition
Revenue is derived from the sale of the Company’s products. The Company recognizes revenue provided that
persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and collectability
is reasonably assured. Contracts and/or customer purchase orders are used to determine the existence of an arrangement.
Delivery is considered to have occurred when title and risk of loss have transferred to the customer. The price is equal to
the amount invoiced to the customer and is not subject to adjustment and customers do not have the right of return. The
Company evaluates the creditworthiness of its customers to determine that appropriate credit limits are established prior
to the acceptance of an order.
Revenue is recognized when the product is shipped and title has transferred to the buyer. The Company bears all
costs and risks of loss or damage to the goods up to that point. On most orders, the Company’s shipment terms provide
that title passes to the buyer upon shipment by the Company. Other shipment terms may provide that title passes to the
buyer upon delivery of the goods to the buyer. Revenue related to the sale of consignment inventory at customer vendor
managed locations is not recognized until the product is pulled from inventory stock by customers. Shipping and
handling costs are included in the cost of goods sold. The Company presents revenue net of sales taxes and any similar
assessments.
Product warranties
The Company generally provides warranties to cover defects in workmanship, materials and manufacturing for a
period of one to three years to meet the stated functionality as agreed to in each sales arrangement. Products are tested
against specified functionality requirements prior to delivery, but the Company nevertheless from time to time
experiences claims under its warranty guarantees. The Company accrues for estimated warranty costs under those
guarantees based upon historical experience, and for specific items, at the time their existence is known and the amounts
are determinable.
Research and development
Research and development expense consists of personnel costs, including stock-based compensation expense, for
the Company’s research and development personnel and product development costs, including engineering services,
development software and hardware tools, depreciation of capital equipment and facility costs. Research and
development costs are expensed as incurred.
Advertising costs
Advertising costs are expensed as incurred and, to date, have not been significant.
Stock-based compensation
The Company grants stock-based awards to employees, consultants and directors. The stock-based awards,
including stock options, restricted stock units, employee stock purchase rights, stock appreciation units and market-based
awards, are accounted for at estimated fair values.
The Company generally determines the fair value of stock options and stock appreciation rights utilizing the
Black-Scholes-Merton option-pricing model, or a lattice-binomial option-pricing model for stock-based awards with a
market condition. The fair value of employee options is measured on the date of grant and then recognized over the
period during which an employee is required to provide services in exchange for the award, known as the requisite
service period (usually the vesting period) on a straight-line basis.
82
NEOPHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company records expense and an equal adjustment to the liability for stock appreciation units equal to the fair
value of the vested portion of the awards as of each period end. Each reporting period thereafter, compensation expense
will be recorded based on the remaining service period and the then fair value of the award until vesting of the award is
completed. After vesting is completed, the Company will continue to re-measure the fair value of the liability each
reporting period until the award is exercised or expires, with changes in the fair value of the liability recorded in the
consolidated statements of operations.
Restricted stock units are valued at the closing sales price as quoted on the New York Stock Exchange on the date
of grant, and are converted into shares of common stock upon vesting on a one-for-one basis. Vesting of restricted stock
units is subject to the employee’s continuing service to the Company. The compensation expense related to the restricted
stock units is determined using the fair value of common stock on the date of grant, and the expense is recognized on a
straight-line basis over the vesting period.
Employee stock purchase rights are accounted for at fair value, utilizing the Black-Scholes-Merton option-pricing
model. The expense for each purchase period is recognized on a straight-line basis over the requisite service period, from
the beginning of the offering period through the respective purchase date.
Stock-based compensation expense for modified stock-based awards are recognized using the pool approach,
under which the remaining compensation cost from the original awards plus the incremental costs, if any, of the related
modified awards is recognized in its entirety over the remaining portion of the requisition service period of the
corresponding modified awards.
Stock-based compensation expense recognized at fair value includes the impact of estimated forfeitures. The
Company estimates future forfeitures at the date of grant and revises the estimates, if necessary, in subsequent periods if
actual forfeitures differ from those estimates.
Income taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between the carrying amounts of existing assets
and liabilities in the financial statements and their respective tax bases, and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities from a change in tax rates is recognized in the consolidated statement of operations in the period
that includes the enactment date.
The Company operates in various tax jurisdictions and is subject to audit by various tax authorities. In preparing
the Company’s consolidated financial statements, the Company is required to estimate its taxes in each of the
jurisdictions in which it operates. The Company estimates actual current tax exposure as well as assesses temporary
differences resulting from different treatment of items, such as accruals and allowances not currently deductible for tax
purposes. These differences result in deferred tax assets which represent future tax benefits to be received when certain
expenses previously recognized in the financial statements become deductible expenses under applicable income tax
laws, or loss credit carryforwards are utilized.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that
some portion or all of a deferred tax asset will be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which those temporary differences become
deductible. A valuation allowance is recorded for loss carryforwards and other deferred tax assets where it is more likely
than not that such deferred tax assets will not be realized.
In November 2015, the Financial Accounting Standards Board (“FASB”) issued ASU 2015-17, Income Taxes
(Topic 740): Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”). ASU 2015-17 eliminates the current
requirement for organizations to present deferred tax liabilities and assets as current and noncurrent in a classified
balance sheet. Instead, organizations will be required to classify all deferred tax assets and liabilities as noncurrent.
83
NEOPHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ASU 2015-17 is effective for the Company’s annual and interim reporting periods beginning after December 15, 2016,
with early adoption permitted. The Company early adopted this standard, on a prospective basis, for its financial
statements as of and for the year ended December 31, 2015. The Company’s adoption of this standard reduced its
prepaid and other current assets and its accrued and other current liabilities while increased its other long-term assets and
long term deferred tax liabilities by the corresponding amounts on its consolidated balance sheet as of December 31,
2015.
Foreign currency
Generally the functional currency of the Company’s international subsidiaries is the local currency. The Company
translates the financial statements of these subsidiaries to U.S. dollars using month-end rates of exchange for assets and
liabilities, and average rates of exchange for revenue, costs, and expenses. Translation gains and losses are recorded in
accumulated other comprehensive (loss) income as a component of stockholders’ equity. Net gains resulting from
foreign exchange transactions were $3.4 million, $3.1 million, and $0.9 million for the years ended December 31, 2015,
2014, and 2013, respectively. These gains and losses were recorded as other income, net in the Company’s consolidated
statements of operations.
Net income (loss) per share
Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted average number of
common shares outstanding for the period. Diluted net income (loss) per share is calculated by dividing net income (loss)
by the weighted average number of common shares and potential dilutive common share equivalents outstanding during
the period if the effect is dilutive.
Recent accounting pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 introduces
a lessee model that requires recognition of assets and liabilities arising from qualified leases on the consolidated balance
sheets and consolidated statements of operations and to disclose qualitative and quantitative information about lease
transactions. This guidance is effective for interim and annual periods beginning after December 15, 2018. Early
adoption is permitted. The Company is in the process of evaluating the impact of adoption on its consolidated financial
statements.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition
and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). ASU 2016-01 revises an entity’s
accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation
of certain fair value changes for financial liabilities measured at fair value. It also amends certain disclosure
requirements associated with the fair value of financial instruments. ASU 2016-01 is effective for the Company’s annual
and interim reporting periods beginning after December 15, 2017, with early adoption permitted. The Company is in the
process of evaluating the impact of adoption on its consolidated financial statements.
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory
(“ASU 2015-11”). ASU 2015-11 requires entities to measure most inventory “at the lower of cost and net realizable
value” but does not apply to inventories that are measured by using either the last-in, first-out method or the retail
inventory method. For the Company, this ASU is effective for annual and interim periods beginning after December 15,
2016. Early adoption is permitted. The Company is in the process of evaluating the impact of adoption on its
consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). The
standard provides companies with a single model for use in accounting for revenue arising from contracts with customers
and supersedes current revenue recognition guidance, including industry-specific revenue guidance. The core principle
of the model is to recognize revenue when control of the goods or services transfers to the customer, as opposed to
recognizing revenue when the risks and rewards transfer to the customer under the existing revenue guidance. ASU
2014-09 is effective for annual and interim reporting periods beginning after December 15, 2016. Early adoption is not
84
NEOPHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
permitted. In August 2015, the FASB issued an accounting standard update for a one-year deferral of the effective date
of ASU 2014-09 to annual and interim periods beginning after December 15, 2017 and permits entities to early adopt the
standard of ASU 2014-09 for annual and interim reporting periods beginning after December 15, 2016. Companies are
permitted to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the
year of adoption, through a cumulative adjustment. The Company is in the process of evaluating the impact of adoption
on its consolidated financial statements.
3. Cash, cash equivalents and short-term investments and restricted cash and investments
The following table summarizes the Company’s cash, cash equivalents, short-term investments, and restricted cash and
investments at December 31, 2015 and 2014 (in thousands):
Cash and cash equivalents:
Cash
Cash equivalents
Cash and cash equivalents
Short-term investments
Restricted cash and investments:
Restricted cash and investments, current
Restricted cash and investments, non-current
Total restricted cash and investments
December 31, December 31,
2015
2014
$
29,133 $
46,955
$
$
76,088 $
23,294 $
43,035
—
43,035
—
$
$
2,660 $
—
2,660 $
5,504
15,750
21,254
85
NEOPHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes the Company’s unrealized gains and losses related to the cash equivalents, short-
term investments and restricted investments in marketable securities designated as available-for-sale (in thousands):
As of December 31, 2015
Gross
Gross
As of December 31, 2014
Gross
Gross
Marketable securities:
Cost
Gains
Losses
Amortized Unrealized Unrealized
Amortized Unrealized Unrealized
Fair
Value
Cost
Gains
Losses
Fair
Value
11,318
5,694
Money market accounts $ 46,955 $
Money market funds
Corporate bonds
Government-sponsored
enterprise obligations
Commercial paper
U.S. government
securities
Sovereign government
bonds
Variable rate demand
notes
3,290
1,398
1,000
623
—
Total
Reported as:
$ 70,278 $
Cash equivalents
Short-term investments
Restricted cash and
investments, non-
current
Total
$ 46,955 $
23,323
—
$ 70,278 $
— $
—
—
— $ 46,955 $
—
(18)
11,318
5,676
— $
4,587
2,004
— $
—
6
— $
—
—
—
4,587
2,010
—
—
—
—
—
— $
(6)
—
3,284
1,398
—
—
—
—
—
—
—
—
(3)
(2)
997
—
—
—
—
621
—
—
(29) $ 70,249 $ 8,291 $
1,700
—
—
1,700
— $ 8,297
6 $
— $
—
— $ 46,955 $
(29)
23,294
— $
—
— $
—
— $
—
—
—
—
— $
—
—
(29) $ 70,249 $ 8,291 $
8,291
6
6 $
—
8,297
— $ 8,297
As of December 31, 2015 and 2014, maturities of marketable securities were as follows (in thousands):
Less than 1 year
Due in 1 to 2 years
Due after 5 years
Total
December 31, December 31,
2015
66,974 $
3,275
—
70,249 $
2014
6,597
—
1,700
8,297
$
$
The Company may sell its investments in the future to fund operating needs and for strategic reasons. As a result,
the Company recorded all its marketable securities in short-term investments as of December 31, 2015 and 2014,
regardless of the contractual maturity date of the securities. Variable rate demand notes (“VRDNs”) are floating rate
municipal bonds with embedded put options that allow the bondholder to sell the security at par plus accrued interest. All
of the put options were secured by a pledged liquidity source.
Realized gains and losses on the sale of marketable securities during the years ended December 31, 2015, 2014 and
2013 were immaterial. The Company did not recognize any impairment losses on its marketable securities during the
years ended December 31, 2015, 2014 or 2013. As of December 31, 2015, the Company did not have any investments in
marketable securities that were in an unrealized loss position for a period in excess of 12 months.
86
NEOPHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Fair value measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents the Company’s assets that are measured at fair value on a recurring basis (in
thousands):
Cash equivalents, short-term
investments and restricted
investments:
As of December 31, 2015
As of December 31, 2014
Level 1
Level 2
Level 3 Total
Level 1 Level 2 Level 3 Total
Money market funds
Money market accounts
Corporate bonds
Government-sponsored
enterprise obligations
Commercial papers
U.S. government securities
Sovereign government
bonds
Variable rate demand notes
Total
Mutual funds held in Rabbi
Trust, recorded in other long-
term assets
$ 11,318 $
— $
—
—
46,955
5,676
—
—
997
—
—
3,284
1,398
—
621
—
$ 12,315 $ 57,934 $
— $ 11,318 $ 4,587 $ — $ — $ 4,587
—
—
2,010
—
—
—
—
2,010
—
—
46,955
5,676
—
—
—
3,284
1,398
997
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $ 70,249 $ 4,587 $ 3,710 $
—
—
—
1,700
621
—
—
—
—
1,700
— $ 8,297
$
435 $
— $
— $
435 $
424 $ — $ — $
424
The Company offers a Non-Qualified Deferred Compensation Plan (“NQDC Plan”) to a select group of its highly
compensated employees. The NQDC Plan provides participants the opportunity to defer payment of certain
compensation as defined in the NQDC Plan. A Rabbi Trust has been established to fund the NQDC Plan obligation,
which was fully funded at December 31, 2015. The assets held by the Rabbi Trust are in the form of exchange traded
mutual funds and are included in the Company’s other long-term assets on its consolidated balance sheets at
December 31, 2015 and 2014. Level 1 assets are determined by using quoted prices in active markets for identical assets.
The fair values of Level 2 assets are priced based on quoted market prices for similar instruments or non-binding market
prices that are corroborated by observable market data using inputs such as benchmark yields, broker quotes and other
similar data.
The following table presents the Company’s liabilities that are measured at fair value on a recurring basis (in
thousands):
Penalty payment derivative
(Note 12)
As of December 31, 2015
As of December 31, 2014
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
$ — $ — $
389 $
389 $ — $ — $
530 $
530
In 2015, the Company reduced its liabilities related to the penalty payment derivative and recorded a benefit of
$0.1 million within other income, net. There were no transfers between levels of the fair value hierarchy during either
2015 or 2014.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
In 2015, the Company wrote off $0.2 million of property, plant and equipment and $0.2 million of held-for-sale
assets recognized and recognized asset impairment charges of $0.4 million within operating expenses (Level 3). In 2014,
certain leasehold improvements were written off, resulting in a $1.1 million asset impairment charge within operating
expenses (Level 3). These assets were measured at fair value due to events or circumstances the Company identified as
87
NEOPHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
having significant impact on their fair value during the respective periods. To arrive at the valuation of these assets, the
Company considered the discounted cash flows and categorized the fair value measurement as Level 3 as significant
unobservable inputs were used in the valuation.
Assets and Liabilities Not Measured at Fair Value
The carrying values of cash, restricted cash, accounts receivable, accounts payable, notes payable and short-term
borrowings approximate their fair values due to the short-term nature and liquidity of these financial instruments.
The fair values of the Company’s long-term debt have been calculated using an estimate of the interest rate the
Company would have had to pay on the issuance of liabilities with a similar maturity and discounting the cash flows at
that rate which it considers to be a level 2 fair value measurement. The fair values do not necessarily give an indication
of the amount that the Company would currently have to pay to extinguish any of this debt.
At December 31, 2015 and 2014, the fair value of the Company’s variable rate bank borrowings were not
materially different than their carrying value as the interest rates approximated rates currently available to the Company
and the fair value of the Company’s acquisition-related debt at December 31, 2014 approximated its carrying value.
5. Net income (loss) per share
The following table sets forth the computation of the basic and diluted net income (loss) per share attributable to
NeoPhotonics Corporation common stockholders for the periods indicated (in thousands, except per share amounts):
Years Ended December 31,
2014
2013
2015
Numerator:
Net income (loss)
Denominator:
Weighted average shares used to compute per share amount:
Basic
Dilutive effect of equity awards
Diluted
Basic net income (loss) per share
Diluted net income (loss) per share
$
3,668
$ (19,719) $ (34,339)
37,421
1,265
38,686
32,109
—
32,109
31,000
—
31,000
$
$
0.10
0.09
$
$
(0.61) $
(0.61) $
(1.11)
(1.11)
The Company has excluded the impact of the following outstanding employee stock options, restricted stock units,
common stock warrants and shares expected to be issued under its employee stock purchase plan from the computation
of diluted net income (loss) per share, as their effect would have been antidilutive (in thousands):
Employee stock options
Restricted stock units
Employee stock purchase plan
Common stock warrants
2015
2,176
954
318
—
3,448
December 31,
2014
4,900
656
623
—
6,179
2013
4,104
1,170
403
4
5,681
88
NEOPHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Business Combinations
EMCORE Corporation
On January 2, 2015, the Company closed an acquisition of the tunable laser product lines of EMCORE Corporation
(“EMCORE”) for an original purchase price of $17.5 million, pursuant to the terms of the Asset Purchase Agreement
between the parties dated October 22, 2014, under which the Company purchased certain assets and assumed certain
liabilities of EMCORE’s tunable laser product lines. Consideration for the transaction consisted of $1.5 million in cash
and a promissory note (the “EMCORE Note”) of approximately $16.0 million, which was subject to certain adjustments
for inventory, net accounts receivable and pre-closing revenues, and was subsequently adjusted to $15.5 million in
connection with a True-Up Confirmation Agreement (the “True-Up Agreement”) executed by and between the Company
and EMCORE on April 16, 2015. The True-Up Agreement made several final adjustments to the Asset Purchase
Agreement, including, among other things, (i) adjusting the principal amount of the EMCORE Note from approximately
$16.0 million to approximately $15.5 million, (ii) agreeing upon final amounts for inventory value adjustment, net
accounts receivable adjustment, and revenue purchase price adjustment, and (iii) resolving the treatment of certain
accounts receivable for products sold by EMCORE prior to the closing of the transaction. The adjusted purchase price
for the acquisition was approximately $17.0 million.
The Company accounted for this acquisition as a business combination. With the acquisition of the EMCORE ultra
narrow linewidth tunable laser products, the Company aims to strengthen its portfolio of High Speed Products.
In connection with the acquisition, the Company incurred approximately $0.9 million in total acquisition-related
costs related to legal, accounting and other professional services. The acquisition costs were expensed as incurred and
included in operating expenses in the Company’s consolidated statement of operations.
The Company’s allocation of the purchase price to tangible and identifiable intangible assets acquired and
liabilities assumed was based on estimated fair values as of the close of the acquisition. The fair values assigned to
intangible assets acquired were based on valuations using estimates and assumptions provided by management, with the
assistance of an independent third party appraisal firm. The excess purchase price over those fair values was recorded as
goodwill. These estimates were determined through established and generally accepted valuation techniques. While the
Company uses best estimates and assumptions as part of the purchase price allocation process to value assets acquired
and liabilities assumed at the acquisition date, estimates and assumptions are subject to refinement, including the
acquired property, plant and equipment, prepaid and other current assets, which primarily consisted of held-for-sale
assets, and accounts payable, during the Company’s process of obtaining further information. As a result, during the
measurement period which was completed during 2015, the Company recorded adjustments to the assets acquired and
liabilities assumed with the corresponding offset to goodwill. Subsequent to the initial allocation of the assets acquired
and liabilities assumed, the Company adjusted the acquired net accounts receivable, the acquired net inventories, the
assumed sales tax accrual and the acquired prepaid expenses and other current assets by immaterial amounts, and
decreased goodwill by a corresponding net amount.
Goodwill recorded consisted of a valuable assembled workforce and market synergy. The amounts assigned to
goodwill are deductible for income tax purposes.
89
NEOPHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes the allocation of the assets acquired and liabilities assumed as of the acquisition
date and subsequent adjustments (in thousands):
Total purchase consideration:
Cash paid
Notes payable
Total
Fair value of assets acquired:
Accounts receivable
Inventories
Prepaid expenses and other current assets
Property, plant and equipment
Intangible assets acquired:
Developed technology
Customer relationships
Total
Less: fair value of liabilities assumed:
Accounts payable
Accrued liabilities
Total
Goodwill
$
1,500
15,482
$ 16,982
$
9,274
1,693
670
6,917
4,100
700
$ 23,354
$ (7,427)
(60)
$ (7,487)
1,115
$
Purchased intangibles with finite lives will be amortized on a straight-line basis over their respective estimated
useful lives. The following table presents details of the purchase price allocated to the acquired intangible assets at the
acquisition date:
Developed technology
Customer relationships
Total purchased intangible assets
Useful
Life
(In years)
7
2
Purchased
intangible assets
(In thousands)
$
$
4,100
700
4,800
The following unaudited supplemental pro forma information presents the combined results of operations of
NeoPhotonics Corporation for the years ended December 31, 2015 and 2014 as though the companies had been
combined as of the beginning of 2014. In the year ended December 31, 2015, revenue related to products acquired from
EMCORE was approximately $55.8 million. The pro forma financial information reflects adjustments related to
transactions costs of $0.3 million and $0.6 million in the years ended December 31, 2015 and 2014, respectively, as well
as immaterial employee expense in the year ended December 31, 2015. Incremental intangible amortization, inventory
and depreciation adjustments were also added to the 2014 period. There were no sales between the business acquired
from EMCORE and the Company in the years ended December 31, 2015 or 2014.
90
NEOPHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The unaudited pro forma results do not assume any operating efficiencies as a result of the consolidation of
operations (in thousands, except per share data):
Revenue
Net income (loss)
Basic net income (loss) per share
Diluted net income (loss) per share
EigenLight Corporation
Year ended December 31,
2015
2014
$ 339,439 $ 353,003
4,088 $ (23,221)
$
(0.72)
0.11 $
$
(0.72)
0.11 $
$
In November 2015 the Company closed an acquisition of the business and products of EigenLight Corporation for
cash consideration of $0.4 million in an asset transaction. The Company accounted for this as a business combination
and the majority of the purchase price was allocated to inventory and property, plant and equipment.
NeoPhotonics Semiconductor
On March 29, 2013 the Company acquired certain assets and assumed certain liabilities related to the
semiconductor Optical Components Business Unit of LAPIS Semiconductor Co., Ltd., a wholly owned subsidiary of
Rohm Co., Ltd (“LAPIS”) of Japan.
Total consideration for NeoPhotonics Semiconductor was approximately $24.3 million, including cash of $13.1
million and notes payable of $11.1 million. The cash paid included $2.0 million that was withheld and placed into
escrow to cover certain indemnity obligations.
In October 2014, the Company entered into a settlement agreement covering certain outstanding claims in
connection with this acquisition. Under the terms of the settlement agreement, the Company received a payment of $1.0
million (JPY 111.0 million) from the escrow account that was set up under the original merger agreement for disputed
excess inventories, which the Company recorded as an escrow settlement gain in 2014.
In connection with the acquisition, the Company incurred approximately $5.4 million in acquisition-related costs
related to investment banking, legal, accounting and other professional services and transfer taxes related to real property
acquired. The acquisition costs were expensed as incurred and are included in operating expenses in the Company’s 2013
consolidated statement of operations.
91
NEOPHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company accounted for its acquisition of the NeoPhotonics Semiconductor assets and assumed liabilities as a
business combination. NeoPhotonics Semiconductor’s tangible and identifiable intangible assets acquired and liabilities
assumed were recorded based upon their estimated fair values as of the closing date of the acquisition. The estimated fair
values of the identifiable assets acquired and liabilities assumed approximated the purchase price; therefore, no goodwill
was recorded. The following table summarizes the acquisition accounting and the tangible and intangible assets acquired
as of the date of acquisition and subsequent adjustments (in thousands):
Total purchase consideration:
Cash paid
Notes payable
Liabilities assumed:
Pension and retirement obligations
Other compensation-related liabilities
Other current liabilities
Fair value of assets acquired:
Inventory
Other current assets
Land, property, plant and equipment
Intangible assets acquired:
Developed technology
Customer relationships
$
$
$
$
$
$
13,128
11,130
24,258
6,471
1,083
1,265
8,819
13,309
35
14,433
2,120
3,180
33,077
The approach for measuring the fair value of the assets acquired and liabilities assumed is described below:
Net Tangible Assets
NeoPhotonics Semiconductor’s tangible assets acquired and liabilities assumed as of March 29, 2013 were
recorded at estimated fair value. The Company estimated fair value by adjusting NeoPhotonics Semiconductor’s
historical value of property, plant and equipment to an estimate of depreciated replacement cost, adjusted for economic
obsolescence. The Company depreciates property, plant and equipment over estimated lives of 2 to 20 years, and records
the expense to cost of goods sold and operating expense. The fair value of inventory acquired was determined using a net
realizable value approach based upon the expected sales value of the inventory, less any costs to complete and selling
costs along with a reasonable profit margin based on historical and expected results.
92
NEOPHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Intangible Assets
Developed technology represents products that have reached technological feasibility. NeoPhotonics
Semiconductor’s current product offerings include high speed semiconductor and high speed laser and photodetector
devices for communication networks. The fair value of developed technology intangibles acquired was determined by
using a royalty-avoidance method. The share of future revenue relating to current technology was forecasted, using an
estimate for obsolescence such that the share declines over time. A royalty rate of two percent was used to calculate
royalty savings on that revenue that are avoided since the Company owns the technology and does not need to license it
from other parties. The after-tax royalty savings was then discounted to present value using the Company’s discount rate.
The Company amortizes the developed technology intangible assets over estimated lives of 4 to 5 years, and
amortization expense is recorded to cost of goods sold.
The customer relationships asset represents the value of the ability to sell existing, in-process, and future versions
of the technology to the NeoPhotonics Semiconductor existing customer base. The Company utilized the excess earnings
method, estimating future cash flows that will result from existing customers given assumed retention rates, and then
discounting those flows to their present value using the Company’s discount rate. The Company amortizes the customer
relationships intangible asset over an average estimated life of 6 years, and amortization expense is recorded to operating
expenses.
The following unaudited supplemental pro forma information presents the combined results of operations of
NeoPhotonics Corporation and NeoPhotonics Semiconductor for the years presented as if the NeoPhotonics
Semiconductor acquisition had been completed at the beginning of 2012. The pro forma financial information includes
adjustments related to one time charges, amortization of fair value adjustments and elimination of NeoPhotonics
Semiconductor’s revenues and cost of goods sold from its sales to the Company prior to the acquisition. As a result of
the elimination adjustments, revenues were reduced by $1.9 million and cost of goods sold was reduced by $1.8 million
for 2013. The pro forma financial information for 2013 also included elimination of $5.4 million in transaction costs and
a decrease in cost of goods sold of $3.2 million due to a change in the value of inventory as a result of acquisition
accounting. Incremental intangible amortization, inventory and depreciation adjustments of $0.3 million, net of tax
impact, were added to the 2015 period for assets that would have been fully amortized.
The following unaudited pro forma results for the years ended December 31, 2015, 2014 and 2013 do not assume
any operating efficiencies as a result of the consolidation of operations (in thousands, except per share data):
Revenue
Net income (loss)
Basic net income (loss) per share
Diluted net income (loss) per share
$
$
$
$
2015
339,437 $
3,931 $
0.11 $
0.10 $
2013
2014
306,177 $ 294,933
(19,719 ) $ (23,340 )
(0.75 )
(0.75 )
(0.61 ) $
(0.61 ) $
The unaudited pro forma financial information is presented for informational purposes only and is not indicative of
the results of operations that would have been achieved had the acquisition taken place as of January 1, 2012, nor does it
intend to be a projection of future results.
93
NEOPHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Purchased intangible assets
Purchased intangible assets consist of the following (in thousands):
December 31, 2015
December 31, 2014
Technology and patents
Customer relationships
Leasehold interest
Supplier relationships and other
Gross
Assets
$ 37,430 $
15,101
1,312
—
$ 53,843 $
Accumulated
Amortization
Net
Assets
Gross
Assets
Accumulated
Amortization Assets
Net
(12,623)
(307)
—
(31,061) $ 6,369 $ 34,023 $ (28,402) $ 5,621
3,549
14,725
1,093
1,386
—
862
(43,991) $ 9,852 $ 50,996 $ (40,733) $ 10,263
(11,176)
(293)
(862)
2,478
1,005
—
Amortization expense relating to technology and patents and the leasehold interest intangible assets is included
within cost of goods sold, and customer relationships and the non-compete agreements within operating expenses. The
following table presents details of the amortization expense of the Company’s purchased intangible assets as reported in
the consolidated statements of operations (in thousands):
Cost of goods sold
Operating expenses
Total
2015
Years ended December 31,
2014
$ 3,349 $ 2,833 $ 2,543
1,791
1,532
1,502
$ 5,140 $ 4,335 $ 4,075
2013
The estimated future amortization expense of purchased intangible assets as of December 31, 2015, is as follows
(in thousands):
2016
2017
2018
2019
2020
Thereafter
$
$
4,458
1,323
1,146
793
689
1,443
9,852
94
NEOPHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. Balance sheet components
Restricted Cash and Investments
Restricted cash and investments were as follows (See Note 10) (in thousands):
Restricted in connection with notes payable
Restricted in connection with Comerica Bank term loan
Total restricted cash and investments
Reported as:
Restricted cash and investments
Restricted cash and investments, non-current
Total restricted cash and investments
Accounts receivable, net
Accounts receivable, net were as follows (in thousands):
Accounts receivable
Trade notes receivable
Allowance for doubtful accounts
December 31,
2015
2,660 $
—
2,660 $
2014
3,754
17,500
21,254
2,660 $
—
2,660 $
5,504
15,750
21,254
$
$
$
$
December 31,
2015
2014
$ 82,235 $ 69,839
7,999
(241)
$ 83,161 $ 77,597
1,769
(843)
The table below summarizes the movement in the Company’s allowance for doubtful accounts (in thousands):
Balance at December 31, 2012
Provision for bad debt
Write-offs, net of recoveries
Balance at December 31, 2013
Provision for bad debt
Write-offs, net of recoveries
Balance at December 31, 2014
Provision for bad debt
Write-offs, net of recoveries
Balance at December 31, 2015
Inventories
Inventories were as follows (in thousands):
Raw materials
Work in process
Finished goods
$ (963)
253
179
(531)
266
24
(241)
(640)
38
$ (843)
December 31,
2015
2014
$ 23,793 $ 23,804
13,600
12,165
29,644
19,943
$ 65,602 $ 57,347
Included in finished goods was $14.2 million and $6.4 million of inventory at customer vendor managed inventory
locations at December 31, 2015 and 2014, respectively.
95
NEOPHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Property, plant and equipment, net
Property, plant and equipment, net were as follows (in thousands):
Land
Buildings
Machinery and equipment
Furniture, fixtures, software and office equipment
Leasehold improvements
Less: Accumulated depreciation
December 31,
2015
2,768 $
21,791
117,758
9,661
10,534
162,512
(99,894)
62,618 $
2014
2,778
22,338
105,406
8,730
8,569
147,821
(90,164)
57,657
$
$
Depreciation expense was $17.7 million $19.1 million and $16.3 million for the years ended December 31, 2015,
2014 and 2013, respectively. In 2014, the Company wrote off certain leasehold improvements in its facility in Fremont,
California and recorded an asset impairment charge of $1.1 million in connection with the Company’s business re-
alignment initiatives.
Accrued and other current liabilities
Accrued and other current liabilities were as follows (in thousands):
Employee-related
Income and other taxes payable
Accrued warranty
Penalty payment derivative
Deferred income tax liabilities
Other accrued expenses
Accrued warranty
December 31,
2015
2014
$ 17,420 $ 13,635
2,071
1,751
530
181
4,560
$ 27,950 $ 22,728
3,720
1,175
389
—
5,246
The table below summarizes the movement in the warranty accrual, which is included in accrued and other current
liabilities (in thousands):
Years ended December 31,
2014
$ 1,737
861
—
(847)
$ 1,751
2013
$ 1,072
1,514
135
(984)
$ 1,737
2015
$ 1,751
79
—
(655)
$ 1,175
Beginning balance
Warranty accruals
Assumed warranty from acquisitions
Settlements
Ending balance
96
NEOPHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Other noncurrent liabilities
Other noncurrent liabilities were as follows (in thousands):
Pension and other employee-related
Other
9. Restructuring
December 31,
2015
2014
$ 5,036 $ 5,355
1,871
$ 7,388 $ 7,226
2,352
In 2014, the Company initiated a restructuring plan (the “2014 Restructuring Plan”) to refocus on its strategy
execution, optimize its structure, and improve operational efficiencies. The 2014 Restructuring Plan consisted of
workforce reductions primarily in the U.S and in China. The Company recorded $0.2 million and $1.1 million in
restructuring charges related to the 2014 Restructuring Plan in 2015 and 2014, respectively, which were included within
cost of goods sold and operating expenses.
During 2013, the Company exited and closed one facility at its headquarters location to align its facilities usage
with its current size. Additionally, the Company approved and implemented a restructuring action to reduce its
workforce and close a facility in China and to exit its contract manufacturing activities in Malaysia. The Company
recorded a restructuring charge of $1.5 million during 2013 related to these actions, of which $0.8 million was recorded
in operating expenses with the remainder recorded in cost of goods sold. The balance related to facilities was fully paid
at December 31, 2015.
The following table summarizes the activities associated with the restructuring plans during the years ended
December 31, 2015, 2014 and 2013 (in thousands):
Workforce
Reduction
Contract
Facilities Termination
Total
Restructuring obligations, December 31, 2012
Restructuring costs incurred
Cash payments
Non-cash settlements and other
Restructuring obligations, December 31, 2013
Restructuring costs incurred
Cash payments
Restructuring obligations, December 31, 2014
Restructuring costs incurred
Cash payments
Restructuring obligations, December 31, 2015
$
— $
— $
699
(699)
—
—
1,086
(1,032)
54
169
(223)
318
(178)
71
211
—
(111)
100
—
(100)
— $
— $
457
(391)
—
66
—
(66)
—
—
—
— $
—
1,474
(1,268)
71
277
1,086
(1,209)
154
169
(323)
—
$
— $
97
NEOPHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. Debt
The table below summarizes the carrying amount and weighted average interest rate of the Company’s notes
payable and long-term debt (in thousands, except percentages):
December 31, 2015
December 31, 2014
Notes payable
Bank borrowings-Comerica Bank
Short-term borrowing
Total notes payable and short-term borrowing
Long-term debt, current and non-current:
Bank borrowings-Comerica Bank
Bank borrowings-Mitsubishi Bank
Acquisition-related debt
Total long-term debt, current and non-current
Unaccreted discount within current portion of long-term debt
Unaccreted discount within long-term debt, net of current portion
Total long-term debt, net of unaccreted discount
Reported as:
Current portion of long-term debt
Long-term debt, net of current portion
Total long-term debt, net of unaccreted discount
Notes payable
Weighted
Average
Interest
Rate
—
—
3.18 %
3.16 %
—
1.50 %
Weighted
Average
Interest
Rate
Carrying
Amount
$
8,857
23,800
—
$ 32,657
Carrying
Amount
— $ 12,771
—
10,000
$ 22,771
2.99 %
—
$
—
11,769
—
11,769
(71)
(179)
$ 11,519
1.53 %
—
— $ 17,500
—
5,836
23,336
—
—
$ 23,336
$
760
10,759
$ 11,519
$
2,445
20,891
$ 23,336
The Company regularly issues notes payable to its suppliers in China in exchange for accounts payable. These
notes are supported by noninterest bearing bank acceptance drafts issued under the Company’s existing line of credit
facility and are due three to six months after issuance. As a condition of the notes payable arrangements, the Company is
required to keep a compensating balance at the issuing banks that is a percentage of the total notes payable balance until
the amounts are settled.
At December 31, 2015, the Company’s subsidiary in China had two short-term line of credit facilities with banking
institutions. Under the first agreement, which has been renewed to expire in June 2016, RMB 120.0 million ($18.5
million) can be used for short-term loans, which will bear interest at varying rates or up to RMB 171.4 million ($26.4
million) can be used for bank acceptance drafts (with a 30% compensating balance requirement). Under the second
agreement, which has been renewed to expire in September 2016, RMB 133.0 million ($20.5 million) can be used for
short-term loans or up to approximately RMB 190.0 million ($29.3 million) can be used for bank acceptance drafts (with
a 30% compensating balance requirement). As of December 31, 2015 and 2014, the non-interest bearing bank
acceptance drafts issued in connection with the Company’s notes payable to its suppliers in China under these line of
credit facilities had an outstanding balance of $8.9 million and $12.8 million, respectively.
As of December 31, 2015 and 2014, compensating balances relating to these credit facilities totaled $2.7 million
and $3.8 million, respectively. Compensating balances are classified as restricted cash and investments on the
Company’s consolidated balance sheets.
Acquisition-related
As part of the purchase consideration to acquire the tunable laser products of EMCORE in January 2015 (See
Note 6), the Company issued the EMCORE Note, as amended, of $15.5 million, which had a maturity of two years from
the closing of the transaction and an interest rate of 5% per annum for the first year and 13% per annum for the second
98
NEOPHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
year. The interest was payable semi-annually in cash. In addition, the EMCORE Note was subject to prepayment under
certain circumstances and was secured by certain of the assets to be sold pursuant to the asset purchase agreement with
EMCORE. The EMCORE Note was subordinated to the Company’s existing bank debt in the U.S. The EMCORE Note,
as amended, was repaid in full in April 2015.
In connection with the acquisition of NeoPhotonics Semiconductor on March 29, 2013, the Company was
obligated to pay 1,050 million Japanese Yen (the “JPY”) in three equal installments on the anniversaries of the closing
date for the purchase of the real estate used by NeoPhotonics Semiconductor of which 700 million JPY( $5.8 million)
was outstanding at December 31, 2014. The obligation bore interest at 1.5% per year, payable annually, and was secured
by the acquired real estate property. This loan was repaid in full in February 2015.
Bank borrowings
In April 2015, the Company’s subsidiary in China executed a $5.0 million advance financing agreement under one
of its credit line facilities at an interest rate based on a six-month LIBOR plus 330 basis points, or approximately 3.71%.
Both interest and principal were due and repaid in full in 2015.
At December 31, 2014, the Company’s subsidiary in China had $10.0 million outstanding under two short-term
advance financing agreements under its line of credit facilities. The borrowings were made against export sales to its
parent company and bore interest and other fees at rates ranging from 2.33% to 4.02% per annum. Interest and principal
were due and repaid in full in 2015.
The Company has a credit agreement with Comerica Bank as lead bank in the U.S. In January 2015, the Company
executed an amendment to its credit agreement with Comerica Bank to refinance the then-outstanding Comerica term
loan. Under the Credit Amendment, the $20.0 million revolving credit facility was replaced with a $25.0 million senior
secured revolving credit line with a maturity date on November 2, 2016. In March 2015, the senior secured revolving
credit line was further amended to increase the borrowing capacity from $25.0 million to $30.0 million. Borrowings
under the amended revolving credit facility bear interest at an interest rate option of a base rate as defined in the
agreement plus 1.75% or LIBOR plus 2.75%. The base rate is the greater of (a) the effective prime rate, (b) the Federal
Funds effective rate plus one percent, and (c) the daily adjusting LIBOR rate plus one percent. The Credit Amendment
also modified the EBITDA and liquidity covenants and eliminated the need to maintain compensating balances
(restricted cash). The credit agreement also restricts the Company’s ability to incur certain additional debt or to engage in
specified transactions, restricts the payment of dividends to its stockholders in the event of a default and is secured by
substantially all of the Company’s U.S. assets, other than intellectual property assets.
The components of the Comerica credit facilities are as follows:
• A $30.0 million revolving credit facility subject to covenant requirements, under which there was $23.8
million outstanding at December 31, 2015 which was repaid in full in January 2016. There was no outstanding
borrowing as of December 31, 2014. Amounts borrowed are due on or before November 2, 2016 and bear
interest at an interest rate option of a base rate as defined in the agreement plus 1.75% or LIBOR plus 2.75%.
As of December 31, 2015 the rate on the LIBOR option was 2.99%.
• Under the term loan facility, $17.5 million was outstanding at December 31, 2014 which was repaid in full in
January 2015. Prior to the repayment, borrowings under the term loan bore interest at an interest rate option of
a base rate as defined in the agreement plus 2.0% or LIBOR plus 3.0%.
The Company’s original credit agreement with Comerica Bank required the maintenance of specified financial
covenants, including a debt to EBITDA ratio and liquidity ratios. The Company was not in compliance with the debt to
EBITDA covenant at December 31, 2014, which noncompliance was effectively waived in an amendment to the credit
agreement the Company executed, during 2014, that waived the testing of certain covenants for compliance, provided
that the Company maintained compensating balances equal to outstanding amounts under the credit agreement in
accounts for which the bank had sole access. The Company’s amended credit agreement with Comerica executed in
January 2015 modified the financial covenants to replace the compensating balance requirement with the maintenance of
at least half of the projected EBITDA and a minimum liquidity ratio of 1.5 to 1.0. The Company was in compliance with
99
NEOPHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
the modified covenants as of December 31, 2015 and expects to be in compliance for the next 12 months. As of
December 31, 2015 and 2014, the amount of the Company’s cash and investments in its compensating balance accounts
for the term loan facility with Comerica Bank was zero and $17.5 million, respectively, which was classified as current
and non-current restricted cash and investments on the Company’s consolidated balance sheet.
On February 25, 2015, the Company entered into certain loan agreements and related special agreements
(collectively, the “Loan Arrangements”) with the Bank of Tokyo-Mitsubishi UFJ, Ltd. (the “Mitsubishi Bank”) that
provided for (i) a term loan in the aggregate principal amount of 500 million JPY ($4.2 million) (the “Term Loan A”)
and (ii) a term loan in the aggregate principal amount of one billion JPY ($8.4 million) (the “Term Loan B” and together
with the Term Loan A, the “Mitsubishi Bank Loans”). The Mitsubishi Bank Loans are secured by a mortgage on certain
real property and buildings owned by our Japanese subsidiary. The full amount of each of the Mitsubishi Bank Loans
was drawn on the closing date of February 25, 2015. Interest on the Mitsubishi Bank Loans accrues and is paid monthly
based upon the annual rate of the monthly Tokyo Interbank Offer Rate (TIBOR) plus 1.40%. The Term Loan A requires
interest only payments until the maturity date of February 23, 2018, with a lump sum payment of the aggregate principal
amount on the maturity date. The Term Loan B requires equal monthly payments of principal equal to 8,333,000 JPY
until the maturity date of February 25, 2025, with a lump sum payment of the balance of 8,373,000 JPY on the maturity
date. Interest on the Term Loan B is accrued based upon monthly TIBOR plus 1.40% and is secured by real estate
collateral. In conjunction with the execution of the Bank Loans, the Company paid a loan structuring fee, including
consumption tax, of 40,500,000 JPY ($0.3 million).
The Mitsubishi Bank Loans contain customary representations and warranties and customary affirmative and
negative covenants applicable to the Company’s Japanese subsidiary, including, among other things, restrictions on
cessation in business, management, mergers or acquisitions. The Mitsubishi Bank Loans contain financial covenants
relating to minimum net assets, maximum ordinary loss and a dividends covenant. The Mitsubishi Bank Loans also
include customary events of default, including but not limited to the nonpayment of principal or interest, violations of
covenants, restraint on business, dissolution, bankruptcy, attachment and misrepresentations. In February 2015, the
Company used a portion of the proceeds of the Mitsubishi Bank Loans to repay the then-outstanding loan related to the
acquisition of NeoPhotonics Semiconductor, which had an outstanding principal and interest amount of approximately
710 million JPY ($6.0 million) and the remainder will be used for general working capital. As of December 31, 2015, the
outstanding principal balance under the Mitsubishi Bank Loans was approximately 1.4 billion JPY (approximately $11.8
million) and the Company was in compliance with the related covenants.
At December 31, 2015, maturities of long-term debt were as follows (in thousands):
2016
2017
2018
2019
2020
Thereafter
11. Pension Plans
Japan defined benefit pension plans
$
831
831
4,984
831
831
3,461
$ 11,769
In connection with its acquisition of NeoPhotonics Semiconductor in 2013, the Company assumed responsibility
for two defined benefit plans that provide retirement benefits to its NeoPhotonics Semiconductor employees in Japan: the
Retirement Allowance Plan (“RAP”) and the Defined Benefit Corporate Pension Plan (“DBCPP”). The RAP is an
unfunded plan administered by the Company. Effective February 28, 2014, the DBCPP was converted to a defined
contribution plan (“DCP”). In May 2014, LAPIS transferred approximately $2.0 million into the newly formed DCP
which was the allowable amount that can be transferred according to the Japanese regulations. LAPIS also paid the
Company approximately $0.3 million in connection with the conversion of the plan. Additionally, the Company
transferred the net unfunded projected benefit obligation amount from the DBCPP to the RAP and froze the RAP benefit
100
NEOPHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
at the February 28, 2014 amount. Under the RAP, lump sum benefits are provided upon retirement or upon certain
instances of termination. In 2014, the Company reclassified $0.2 million and $0.1 million from accumulated other
comprehensive income to cost of goods sold and operating expenses, respectively.
The funded status of these plans for the years ended December 31, 2015 and 2014 was as follows (in thousands):
2015
RAP
RAP
2014
DBCPP
Change in projected benefit obligation:
Projected benefit obligation, beginning of period
Service cost
Interest cost
Benefits paid
Actuarial (gain)/loss
Curtailment/Settlement
Transfer from DBCPP to RAP
Currency translation adjustment
Projected benefit obligation, end of period
Change in plan assets:
Plan assets at fair value, beginning of period
Employer contributions
Benefits paid
Actual return on plan assets
Transfer to DCP
Currency translation adjustment
Plan assets at calculated amount, end of period
Amounts recognized in consolidated balance sheets:
Accrued and other current liabilities
Other noncurrent liabilities
Amount recognized in accumulated other comprehensive loss:
Defined benefit pension plans adjustment
Accumulated benefit obligation, end of period
$ 5,054
—
10
—
40
—
—
(18)
$ 5,086
$
—
—
—
—
—
—
—
$
$ 5,446
39
29
(23)
154
(408)
490
(673)
$ 5,054
$
—
—
—
—
—
—
—
$
$
2,508
14
7
(76)
88
(2,022)
(569)
50
—
2,072
15
(76)
—
(1,766)
(245)
—
$
$
$
497
$
$ 4,589
123
$
$ 4,931
$
153
$ 5,086
$
113
$ 5,054
$
$
$
$
—
—
—
—
Net periodic pension cost associated with these plans for the years ended December 31, 2015 and 2014 and the
period from March 29, 2013 to December 31, 2013 included the following components (in thousands):
Service cost
Interest cost
Expected return on plan assets
Other
Curtailment/settlement (gain) loss
Net periodic pension (gain) costs
Year ended
December 31, Year ended December 31, Period from March 28, 2013
2015
RAP
2014
RAP
DBCPP
to December 31, 2013
DBCPP
RAP
$
$
—
10
—
—
—
10
$
$
39 $
29
—
—
(249)
(181) $
14 $
7
—
1
133
155 $
175 $
39
—
—
—
214 $
78
18
(30)
—
—
66
The projected and accumulated benefit obligations for the RAP were calculated as of December 31, 2015 and 2014
using a discount rate assumption of 0.2% and 0.2%, respectively.
101
NEOPHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Estimated future benefit payments under the RAP are as follows (in thousands):
2016
2017
2018
2019
2020
2021 - 2025
Thereafter
401(k) Plan
$
497
375
536
249
491
1,703
1,235
$ 5,086
The Company maintains a savings and retirement plan qualified under Section 401(k) of the Internal Revenue
Code of 1986, as amended (the "IRC"). Employees meeting the eligibility requirements, as defined under the IRC, may
contribute up to the statutory limits each year. The Company currently matches a portion of all eligible employee
contributions which vest immediately. The Company’s matching contributions to the plan totaled $0.3 million for each
of the years ended December 31, 2015, 2014, and 2013.
12. Commitments and contingencies
Leases
The Company leases various facilities under non-cancelable operating leases. As of December 31, 2015, the future
minimum commitments under the Company’s non-cancelable operating leases are as follows (in thousands):
Years ending December 31,
2016
2017
2018
2019
2020
Thereafter
$ 1,225
1,058
1,079
973
482
578
$ 5,395
The total minimum lease commitment amount above does not include minimum sublease rent income of $1.4
million receivable in the future under non-cancelable sublease agreements.
The Company recognizes rent expense on a straight-line basis over the lease period. Rent expense under the
Company’s operating leases was $2.2 million in each of the years ended December 31, 2015, 2014, and 2013.
Litigation
From time to time, the Company is subject to various claims and legal proceedings, either asserted or unasserted,
that arise in the ordinary course of business. The Company accrues for legal contingencies if the Company can estimate
the potential liability and if the Company believes it is probable that the case will be ruled against it. If a legal claim for
which the Company did not accrue is resolved against it, the Company would record the expense in the period in which
the ruling was made. The Company believes that the likelihood of an ultimate amount of liability, if any, for any pending
claims of any type (alone or combined) that will materially affect the Company’s financial position, results of operations
or cash flows is remote. The ultimate outcome of any litigation is uncertain, however, and unfavorable outcomes could
have a material negative impact on the Company’s financial condition and operating results. Regardless of outcome,
litigation can have an adverse impact on the Company because of defense costs, negative publicity, diversion of
management resources and other factors.
102
NEOPHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
On January 5, 2010, Finisar Corporation, or Finisar, filed a complaint in the U.S. District Court for the Northern
District of California against Source Photonics, Inc., MRV Communications, Inc., Oplink Communications, Inc. and the
Company, or collectively, the co-defendants. In the complaint Finisar alleged infringement of certain of its U.S. patents.
In 2010 the Company filed an answer to the complaint and counterclaims, asserting two claims of patent infringement
and additional claims. The court dismissed without prejudice all co-defendants (including the Company) except Source
Photonics, Inc., on grounds that such claims should have been asserted in four separate lawsuits, one against each
defendant. This dismissal does not prevent Finisar from bringing a new similar lawsuit against the Company. In 2011 the
Company and Finisar agreed to suspend their respective claims and in 2012 they further agreed to toll their respective
claims. While there has been no action on this matter since 2012, the Company is currently unable to predict the outcome
of this dispute and therefore cannot determine the likelihood of loss nor estimate a range of possible loss.
On January 2, 2013, the Company was served with a lawsuit, filed in Belgium by a distributor called Laser 2000
Beneluo SA (“Laser 2000”) claiming unpaid commissions. The distributor agreement was formally terminated as of
January 3, 2012. The Company paid $492,000 to Laser 2000 as partial settlement of claims and to avoid penalties from
the Court and submitted a legal brief to court on September 16, 2013. Laser 2000 filed a response on December 16, 2013
and the Company filed the final rebuttal brief on January 30, 2014. On March 23, 2015, the Belgian Court issued a ruling
awarding Laser 2000 approximately one million euros in damages (approximately $1,100,000 at current exchange rates).
The Company was served with the judgment on September 28, 2015. The Company filed an appeal to the verdict in
December 2015, but is unable to predict the duration or outcome of the appeal or the overall lawsuit at this time. The
Company does not believe it will ultimately be liable for the full amount of damage; however, in light of developments
in the case, the Company increased its accrual for estimated probable litigation expense relating to this matter in March
2015.
Indemnifications
In the normal course of business, the Company enters into agreements that contain a variety of representations and
warranties and provide for general indemnification. The Company’s exposure under these agreements is unknown
because it involves claims that may be made against the Company in the future, but have not yet been made. To date, the
Company has not paid any claims or been required to defend any action related to its indemnification obligations.
However, the Company may record charges in the future as a result of these indemnification obligations. As of
December 31, 2015, the Company does not have any material indemnification claims that were probable or reasonably
possible.
Purchase obligations
The Company has open purchase orders with its suppliers for the purchase of inventory and other items in the
ordinary course of its business. As of December 31, 2015, the Company’s estimate of outstanding amounts under these
purchase orders was approximately $34.8 million, primarily expected to be purchased within the next 12 months. Certain
of these open purchase orders may be cancellable without penalty.
103
NEOPHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Penalty Payment Derivative
In connection with a private placement transaction in 2012, the Company agreed to certain performance obligations
including establishing a wholly-owned subsidiary in Russia and making a $30.0 million investment commitment (the
‘Investment Commitment’) towards the Company’s Russian operations, which could be partially satisfied by cash and/or
non-cash investment inside or outside of Russia and/or by way of non-cash asset transfers.
In March 2015, the Company extended the Investment Commitment deadline from March 31, 2015 to June 30,
2015 and then further amended the Investment Commitment in July 2015. The latter amendment became effective on
June 30, 2015 and provides that the maximum amount of penalties (the ‘Penalty Payment’) to be paid by the Company
will not exceed $5.0 million in the aggregate. In addition, the amendment also provides for an updated investment plan
for the Company’s Russian subsidiaries that includes non-cash transfer of licensing rights to intellectual property, non-
cash transfers of existing equipment and commitments to complete the remaining investment milestones through fiscal
year 2019. If the Company’s cumulative investment and spending to its Russian subsidiaries is less than $18.8 million by
December 31, 2016, the Company will be subject to a $1.5 million penalty within 30 days after the end of a 90-day cure
period. If certain of the Investment Commitments are achieved in the indicated time frames in 2016 and 2019, the
Company also has the ability to cease the operations of its Russian subsidiaries by paying exit fees of $3.5 million or
$2.0 million at the end of 2016 or 2019, respectively. The Company fulfilled the investment commitment required by the
end of 2015 and has contributed over $15.4 million in cash and assets to its Russian subsidiaries as of December 31,
2015.
The purchaser of the common stock has non-transferable veto rights over the Company’s Russian subsidiaries’
annual budget during the investment period and must approve non-cash asset transfers to be made in satisfaction of the
Investment Commitment. Spending and/or commitments to spend for general working capital and research and
development do not require approval by the purchaser. There are no legal restrictions on the specific usage of the $39.8
million received in the private placement transaction or on withdrawal from the Company’s bank accounts for use in
general corporate purposes.
The Company has accounted for the $5.0 million Penalty Payment as an embedded derivative instrument (the
“Penalty Payment Derivative”), with the underlying being the performance or nonperformance of meeting the
Investment Commitment and initially classified $4.9 million of the $5.0 million as additional paid-in capital and the
remaining $0.1 million, representing the estimated fair value of the Penalty Payment derivative, in other noncurrent
liabilities. The fair value of the Penalty Payment Derivative has been estimated at the date of the original common stock
sale (April 27, 2012) and at each subsequent balance sheet date using a probability-weighted discounted future cash flow
approach using unobservable inputs, which are classified as Level 3 within the fair value hierarchy. The primary inputs
for this approach include the probability of achieving the Investment Commitment and a discount rate that approximates
the Company’s incremental borrowing rate. After the initial measurement, changes in the fair value of this derivative
were recorded in other income, net. The estimated fair value of this derivative was $0.4 million and $0.5 million as of
December 31, 2015 and December 31, 2014, respectively.
Separately, in December 2014, the Company entered into a Commitment to File a Registration Statement and
Related Waiver of Registration Rights, whereby Joint Stock Company “RUSNANO” (formerly Open Joint Stock
Company “RUSNANO"), or Rusnano, waived certain registration rights in connection with a potential offering by the
Company of shares of the Company’s common stock, and the Company committed to file with the U.S. Securities and
Exchange Commission a resale registration statement on Form S-1 covering the resale of all shares of the Company’s
common stock held by Rusnano. The Company filed such resale registration statement in April 2015 (See Note
13). Rusnano also waived its demand registration rights under the original rights agreement and agreed to enter into a
lock up agreement with the Company whereby it would agree not to sell any shares of the Company’s common stock, or
engage in certain other transactions relating to the Company’s securities, for a period of 60 days from the filing date of
the resale registration statement. Rusnano signed such lock up agreement with the Company on April 2, 2015. In
addition, in connection with the Company’s public stock offering completed in the second quarter of 2015 (see Note 13),
Rusnano entered into a separate lock up agreement with Needham & Company, LLC, the lead underwriter of the offering,
whereby it agreed not to sell any shares of the Company’s common stock, or engage in certain other transactions relating
to the Company’s securities. The lock-up agreement expired 180 days after May 21, 2015.
104
NEOPHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Escrow Settlement with Santur
In May 2014, the Company entered into an escrow settlement agreement covering the outstanding claims in
connection with its 2011 acquisition of Santur Corporation (“Santur”). Under the terms of the escrow settlement
agreement, a net amount of $1.9 million was paid to the Company from the escrow account that was set up under the
original merger agreement. This amount comprised a $3.9 million gain related to indemnification claims by the
Company (“Indemnification Amount”) which was partially offset by $2.0 million in additional consideration to Santur
that was contingent upon Santur’s gross profit performance during 2012 (“Contingent Consideration Amount”). The
Company had recorded the entire $2.0 million Contingent Consideration Amount as of December 31, 2013. The $3.9
million Indemnification Amount was recognized as settlement gain in 2014.
13. Stockholders’ Equity
Common stock
As of December 31, 2015, the Company had reserved 6,926,534 shares of common stock for issuance under its
stock option plans and 378,503 shares of common stock for issuance under its stock purchase plan.
Resale Registration Statement
In April 2015, the Company filed a resale registration statement, which registered 4,972,905 shares of the
Company’s common stock, at a par value of $0.0025 per share, held by Rusnano. The Company does not receive any
proceeds from any sales of the Company’s common stock held by Rusnano (See Note 12).
Follow-On Public Offering
In the second quarter of 2015, the Company completed a follow-on offering, in which the Company sold 6,866,689
shares of its common stock, including 895,655 shares of common stock sold upon the exercise in full of the
overallotment option by the underwriters, at a public offering price of $7.25 per share. The Company raised
approximately $45.6 million, net of underwriting discounts of $3.0 million and other offering expenses of approximately
$1.2 million.
Accumulated Other Comprehensive (Loss) Income
The following table shows the components of accumulated other comprehensive (loss) income, net of taxes, as of
December 31, 2015, 2014 and 2013 (in thousands):
Foreign currency translation adjustments
Unrealized gains on available-for-sale securities
Defined benefit pension plan adjustment
2013
2015
2014
$ (1,595) $ 5,391 $ 11,802
3
(118)
$ (1,723) $ 5,326 $ 11,687
(29)
(99)
6
(71)
No material amounts were reclassified out of accumulated other comprehensive income during the years ended
December 31, 2015, 2014 or 2013.
Accumulated Deficit
Approximately $7.9 million and $7.1 million of the Company’s retained earnings within its accumulated deficit at
December 31, 2015 and 2014, respectively, was subject to restriction due to a requirement that its subsidiaries in China
105
NEOPHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
set aside at least 10% of their respective accumulated profits each year to fund statutory common reserves as well as
allocate a discretional portion of their after-tax profits to their staff welfare and bonus fund.
14. Stock-based compensation
Equity incentive programs
2004 Stock Option Plan
In March 2004, the Company adopted the 2004 Stock Option Plan (the “2004 Plan”) for the benefit of its eligible
employees, consultants and independent directors. In February 2011, in connection with the closing of the Company’s
initial public offering and execution of the associated underwriting agreement, shares authorized for issuance under the
2004 Plan were cancelled (except for those shares reserved for issuance upon exercise of outstanding stock options). As
of December 31, 2015, options to purchase 1,131,570 shares were outstanding under the 2004 Plan and no shares were
available for future grant.
2007 Stock Appreciation Grants Plan
In October 2007, the Company adopted its 2007 Stock Appreciation Grants Plan (the “2007 Plan”). The 2007 Plan
provides for the grant of units (“stock appreciation units”) entitling the holder upon exercise to receive cash in an amount
equal to the amount by which the Company’s common stock has appreciated in value. Each stock appreciation unit
entitles a participant to a cash payment in the amount of the excess of the fair market value of a share of common stock
on the exercise date over the fair market value of a share of common stock on the award date.
The total appreciation available to a participant from the exercise of an award is equal to the number of stock
appreciation units being exercised, multiplied by the amount of appreciation per stock appreciation unit. The stock
appreciation units granted under the 2007 Plan were primarily granted to employees or consultants of the Company’s
subsidiaries in China.
The Company re-measures the fair value (based on the market price of the Company’s common stock at the
relevant period end) of all vested and outstanding stock appreciation units and adjusts compensation expense and
corresponding liability accordingly. The Company also recognizes compensation expense for additional vested stock
appreciation units. As of December 31, 2015, 342,316 stock appreciation units were outstanding, of which 17,142 stock
appreciation units were vested. The Company does not intend to grant additional stock appreciation units under the 2007
Plan.
2010 Equity Incentive Plan
In April 2010, the Company adopted its 2010 Equity Incentive Plan (the “2010 Plan”). The 2010 Plan will
terminate on April 13, 2020, unless sooner terminated by the board of directors.
The 2010 Plan provides for the grant of incentive stock options, non-statutory stock options, stock appreciation
rights, restricted stock awards, restricted stock unit awards, market-based stock awards, and other forms of equity
compensation, or collectively, stock awards, all of which may be granted to employees, including officers, and to non-
employee directors and consultants. Additionally, the 2010 Plan provides for the grant of market-based cash awards.
Incentive stock options may be granted only to employees. All other awards may be granted to employees, including
officers, and to non-employee directors and consultants.
Under the terms of the 2010 Plan, awards may be granted at prices not less than 100% of the fair value of the
Company’s common stock, as determined by the Company’s board of directors, on the date of grant for an incentive
stock option and not less than 85% of the fair value of the Company’s common stock on the date of grant for a non-
qualified stock option. Options vest over a period of time as determined by the board of directors, generally over a three
to four year period, and expire ten years from date of grant.
106
NEOPHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Initially, the aggregate number of shares of the Company’s common stock that may be issued pursuant to stock
awards under the 2010 Plan was 865,420 shares. The number of shares of the Company’s common stock reserved for
issuance under the 2010 Plan automatically increase on January 1st each year, starting on January 1, 2012 and continuing
through January 1, 2020, by 3.5% of the total number of shares of the Company’s common stock outstanding on
December 31 of the preceding calendar year, or such lesser number of shares of common stock as determined by the
Company’s board of directors. The maximum number of shares that may be issued pursuant to the exercise of incentive
stock options under the 2010 Plan is 8,000,000 shares. As of December 31, 2015, stock options to purchase and
restricted stock units to convert to a total of 3,480,080 shares of common stock were outstanding under the 2010 Plan
and 323,493 shares were reserved for future issuance.
2010 Employee Stock Purchase Plan
In February 2011, the Company adopted its 2010 Employee Stock Purchase Plan (the “2010 ESPP”). The 2010
ESPP was implemented through a series of offerings of purchase rights to eligible U.S. employees. The offering period is
for 12 months beginning November 16th of each year, with two purchase dates on May 15th and November 15th. Due to
the delay in filing its 2013 Annual Report on Form 10-K, in May 2014 the Compensation Committee of the Company’s
Board of Directors (the “Committee”) rescheduled the May 15 purchase date under the then offering period to June 17,
2014. Additionally, the Committee waived the existing purchase limits for the June 17, 2014 purchase only and created a
modification of the purchase price formula for such offering period. In connection with this modification, the Company
recorded an immaterial charge as stock based compensation expense in its 2014 consolidated statements of operations.
The 2010 ESPP initially authorized the issuance of 342,568 shares of the Company’s common stock pursuant to
purchase rights granted to employees or to employees of designated affiliates. The number of shares of common stock
reserved for issuance automatically increase on January 1st of each year, starting January 1, 2012 and continuing through
January 1, 2020, in an amount equal to the lesser of (1) 3.5% of the total number of shares of common stock outstanding
on December 31st of the preceding calendar year, (2) 600,000 shares of common stock or (3) such lesser number of
shares of common stock as determined by the Company’s board of directors. As of December 31, 2015, the Company
had 378,503 shares reserved for future issuance. The Company issued 599,879 shares during the year ended
December 31, 2015.
2011 Inducement Award Plan
In September 2011, the Company adopted its 2011 Inducement Award Plan (the “2011 Plan”). The 2011 Plan
provides for awarding options, stock appreciation rights, restricted stock grants, restricted stock units and other awards to
new employees of the Company and its affiliates, including as a result of future business acquisitions. All options under
this plan will be designated as non-statutory stock options.
The number of shares initially reserved for issuance under the 2011 Plan was 750,000 shares. The exercise price of
awards shall be not less than 100% of the fair market value of the Company’s common stock on the date of grant. Each
stock appreciation right grant will be denominated in shares of common stock equivalents. Options and stock
appreciation rights have a maximum term of ten years measured from the date of grant, subject to earlier termination
following the individual’s cessation of service with the Company. In 2015, an additional 100,000 shares were authorized
for issuance by the Company’s board of directors. As of December 31, 2015, stock options to purchase a total of 396,147
shares of common stock were outstanding under the 2011 Plan and 381,558 shares were reserved for future issuance.
107
NEOPHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Determining Fair Value
The Company estimated the fair value of certain stock-based awards using a Black-Scholes-Merton valuation
model with the following assumptions:
Stock options
Weighted-average expected term (years)
Weighted-average volatility
Risk-free interest rate
Expected dividends
Stock appreciation units
Weighted-average expected term (years)
Weighted-average volatility
Risk-free interest rate
Expected dividends
ESPP
Weighted-average expected term (years)
Weighted-average volatility
Risk-free interest rate
Expected dividends
2015
5.33
60%
Years ended December 31,
2014
5.36
62%
1.37%-1.85% 1.62% – 2.00% 1.08% – 1.86%
— %
2013
6.49
74%
— %
— %
3.54
62%
2.34
56%
0.25%-1.57% 0.13% – 1.07% 0.10% – 0.63%
— %
1.90
58%
— %
— %
0.69
58%
0.65
54%
0.03%-0.14% 0.05% – 0.13% 0.09% – 0.16%
— %
0.73
48%
— %
— %
Expected term. The expected term for stock options was estimated using the Company’s historical exercise
behavior and expected future exercise behavior. Vested stock appreciation units first became exercisable upon the
expiration of the lock-up period associated with the initial public offering. Therefore, the Company estimated the term of
the award based on an average of the weighted-average exercise period and the remaining contractual term. The expected
term for the ESPP represents the period of time from the beginning of the offering period to the purchase date.
Volatility. Due to the limited history of the trading of the Company’s common stock since the initial public
offering in February 2011, the expected volatility used by the Company is based on a combination of its own volatility
and the volatility of similar entities. In evaluating similarity, factors such as industry, stage of life cycle, size, and
financial leverage are taken into consideration. The term over which volatility was measured was commensurate with the
expected term.
Risk-free interest rate. The risk-free rate that the Company uses in the Black-Scholes-Merton option valuation
model is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options.
Expected dividends. The Company has never declared or paid any cash dividends and does not plan to pay cash
dividends in the foreseeable future, and, therefore, used an expected dividend yield of zero in the valuation model.
Stock-Based Compensation Expense
The following table summarizes the stock-based compensation expense recognized for the years ended
December 31, 2015, 2014 and 2013. Unamortized stock-based compensation costs capitalized as part of inventory were
immaterial in each of the periods presented (in thousands):
Cost of goods sold
Research and development
Sales and marketing
General and administrative
$
$
108
2013
Years ended December 31,
2014
1,148 $
2,269
1,429
1,995
6,841 $
2015
1,335 $
2,049
1,794
2,585
7,763 $
924
2,060
1,167
1,585
5,736
NEOPHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2014 Stock Option and Stock Appreciation Rights Repricing Offer
On December 18, 2014, the Company completed an offer to certain of its current employees (or engaged as a
consultant to the Company) to receive the opportunity to reduce the exercise price of certain outstanding eligible options
or eligible stock appreciation rights to the closing trading price of the Company’s common stock on December 18, 2014,
in exchange for such holders’ agreement to accept a new vesting schedule (the “Repricing Offer”). The eligible stock
options and stock appreciation rights covered an aggregate of 2,373,692 shares of the Company’s common stock. On
December 18, 2014, options to purchase 1,948,631 shares of the Company’s common stock and stock appreciation rights
to purchase 87,354 shares of the Company’s common stock were repriced in the Repricing Offer. The repriced eligible
options and eligible stock appreciation rights had a grant date compensation cost, net of forecasted forfeitures, of
approximately $2.6 million, which included incremental compensation cost of approximately $0.9 million.
The new exercise price per share for each repriced eligible option or eligible stock appreciation right is $3.50. Each
of the repriced eligible options or eligible stock appreciation rights is subject to a new vesting schedule as follows: 50%
of the shares subject to such repriced eligible option or eligible stock appreciation right shall vest and become
exercisable on January 1, 2016, and the remaining 50% shall vest and become exercisable in 12 equal monthly
installments on each monthly anniversary thereafter, in each case subject to continued service with the Company on each
applicable vesting date; provided, however, that alternative vesting applies to certain eligible options or eligible stock
appreciation rights if the expiration date of such eligible options or eligible stock appreciation rights is after January 30,
2016, but on or before January 1, 2017, then 50% of the shares subject to the repriced awards will vest and become
exercisable on January 1, 2016 and the remaining shares will be subject to ratable monthly vesting over the remaining
term ending 60 days prior to the expiration date of the repriced awards; if the expiration date of such eligible options or
eligible stock appreciation rights is prior to January 30, 2016, then 100% of the shares subject to the repriced awards will
vest and become exercisable on the 60th day prior to the expiration date.
Stock Option and Restricted Stock Unit Activity
The following table summarizes the Company’s stock option and restricted stock unit, or RSU, activity during the
year ended December 31, 2015:
Stock Options
Restricted Stock Units
Balance at December 31, 2014
Authorized for issuance
Granted
Exercised/Converted
Cancelled/Forfeited
Balance at December 31, 2015
Shares
Weighted
Average
Exercise Number of
Price
Units
Number of
Available
Shares
for Grant
895,311 4,899,713 $ 4.07
—
1,246,325
550,380 $ 6.65 1,149,334 $
(1,699,714)
(557,828) $
(304,385) $ 3.87
—
(33,549) $
(137,911) $ 4.76
263,129
705,051 5,007,797 $ 4.34 1,213,686 $
655,729 $
— $
Weighted
Average
Grant Date
Fair Value
6.19
— $ —
7.46
6.06
5.89
7.46
The following table summarizes information about stock options outstanding as of December 31, 2015:
Options Outstanding
Weighted
Weighted Average
Average
Remaining
Exercise Contractual
Price
Number of
Shares
4,609,563 $ 4.25
849,680 $ 4.17
Aggregate
Intrinsic Value
Term (Years) (in Thousands)
30,510
5,713
6.59 $
6.71 $
Vested and expected to vest
Exercisable
109
NEOPHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The fair value of options vested during the years ended December 31, 2015, 2014 and 2013 was $1.3 million, $1.2
million and $1.1 million, respectively. The intrinsic value of options vested and expected to vest and exercisable as of
December 31, 2015 is calculated based on the difference between the exercise price and the fair value of the Company’s
common stock as of December 31, 2015. The intrinsic value of options exercised during the years ended December 31,
2015, 2014 and 2013, was $1.6 million, $0.4 million and $0.7 million, respectively.
The weighted-average fair value of options granted was $3.87, $1.89 and $4.65 per share for the years ended
December 31, 2015, 2014 and 2013, respectively. At December 31, 2015, there was $7.1 million of unrecognized stock-
based compensation expense for stock options, net of estimated forfeitures, which will be recognized over the remaining
weighted-average period of 2.0 years.
Included in the outstanding stock options at December 31, 2015 are 1.1 million shares of market-based stock
options granted to key employees. These options will vest if the average closing price of the Company’s common stock
over a period of 20 consecutive trading days is equal to or greater than $15.00 per share and the recipients remain in
continuous service with the Company through such period, or fully accelerate and vest in December 2019. The Company
estimated the fair value of its market-based option grants as $4.72 for 2015, $1.65 for 2014 and $4.11-$5.97 for 2013
using a Monte Carlo simulation model with the assumptions discussed above. The Company recorded approximately
$0.9 million of compensation expense for these options in 2015.
The following table summarizes information about RSUs outstanding as of December 31, 2015:
Restricted Stock Units Outstanding
Vested and expected to vest
Weighted
Average
Weighted
Average
Aggregate
Remaining
Intrinsic Value
Contractual
Exercise Price Term (Years) (in Thousands)
11,670
1.66 $
—
Number of
Shares
1,074,552 $
The fair value of RSUs vested during the years ended December 31, 2015, 2014 and 2013 was $3.3 million, $3.4
million and $2.1 million, respectively. The intrinsic value of RSUs vested and expected to vest as of December 31, 2015
is calculated based on the fair value of the Company’s common stock as of December 31, 2015. The intrinsic value of
RSUs converted during the years ended December 31, 2015, 2014 and 2013, was $4.3 million, $1.8 million and $2.9
million, respectively.
The weighted-average fair value of RSUs granted was $7.46, $4.54 and $6.96 per share for the years ended
December 31, 2015, 2014 and 2013, respectively. At December 31, 2015, the Company had $7.1 million of
unrecognized stock-based compensation expense for RSUs, net of estimated forfeitures, which will be recognized over
the remaining weighted-average period of 2.4 years.
The majority of the Company’s RSUs that were converted during the years ended December 31, 2015, 2014 and
2013 were net share settled. Upon each settlement date, RSUs were withheld to cover the required withholding tax and
the remaining amounts were delivered to the recipient as shares of the Company’s common stock. In 2015, 2014 and
2013, the Company withheld 95,227, 108,623 and 68,390 shares, respectively, which represented the employees’
minimum statutory obligation for income and other employment taxes and remitted cash of $0.7 million, $0.4 million
and $0.6 million, respectively, to the appropriate tax authorities.
110
NEOPHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Stock Appreciation Unit Activity
The following table summarizes the Company’s stock appreciation unit activity during the year ended
December 31, 2015:
Stock appreciation units outstanding as of December 31, 2014
Stock appreciation units exercised
Stock appreciation units cancelled
Stock appreciation units outstanding as of December 31, 2015
Stock
Appreciation
Units
Weighted-
Average
Exercise
Price
375,833 $
(24,707) $
(8,810) $
342,316 $
4.85
4.36
6.39
4.85
The fair value of stock appreciation units vested in 2015 and 2014 was immaterial. The fair value of stock
appreciation units vested in 2013 was $0.1 million. The intrinsic value of stock appreciation units is calculated based on
the difference between the exercise price and the fair value of the Company’s common stock as of December 31, 2015.
Cash paid for stock appreciation units exercised was $0.1 million in 2015, immaterial in 2014 and $0.1 million in 2013.
As of December 31, 2015 and 2014, the liability for settlement of stock appreciation units was $0.7 million and
$0.1 million, respectively, and was included in accrued and other current liabilities on the consolidated balance sheet.
Based on the fair value of the stock appreciation units as of December 31, 2015, the Company has $1.7 million of
unrecognized stock-based compensation expense for stock appreciation units that will be recognized over the remaining
weighted-average period of 3.1 years.
Included in the outstanding stock appreciation units at December 31, 2015 were 0.2 million shares of market-based
stock appreciation units granted to key employees which were granted during 2013. These market-based units will vest if
the average closing price of the Company’s common stock over a period of 20 consecutive trading days is equal to or
greater than $15.00 per share and the recipient remains in continuous service with the Company through such period, or
will fully accelerate and vest in December 2019.
Employee Stock Purchase Plan
The Company issued 599,879 shares under the 2010 ESPP during the year ended December 31, 2015. As of
December 31, 2015, there was $0.9 million of unrecognized stock-based compensation expense for stock purchase rights
that will be recognized over the remaining offering period, through November 2016.
15. Income taxes
The provision for income taxes is based upon the income (loss) before income taxes as follows (in thousands):
2015
Years Ended December 31,
2014
$ (7,212) $ (30,046) $ (39,618)
6,483
12,846
6,772 $ (17,200) $ (33,135)
13,984
$
2013
U.S. operations
Non-U.S. operations
111
NEOPHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The components of the provision for income taxes consisted of the following (in thousands):
Years Ended December 31,
2014
2013
2015
Current
Federal
State
Foreign
Deferred
Federal
State
Foreign
Total provision
$
(48) $
(8)
(3,725)
(3,781)
(71) $
(18)
(1,218)
(1,307)
7
(11)
(1,658)
(1,662)
(22)
—
699
—
—
458
$ (3,104) $ (2,519) $ (1,204)
—
—
(1,212)
The provision for income taxes differs from the amount obtained by applying the U.S. federal statutory tax rate as
follows (in thousands, except percentages):
Years Ended December 31,
2014
2013
2015
35 %
35 %
35 %
$ (2,378) $
5,969 $ 11,597
1,058
—
(260)
(385)
(13,042)
1,077
(2,129)
(359)
—
—
1,756
(391)
(126)
$ (3,104) $ (2,519) $ (1,204)
(18)
(18,986)
(125)
(542)
(724)
539
1,246
—
1,360
9,208
(308)
—
(138)
(8)
(66)
(135)
(465)
(958)
1,017
(844)
—
—
30
417
—
286
Federal statutory rate
Tax at federal statutory rate
State taxes, net of federal benefit
Subpart F income
Nondeductible expenses
Stock-based compensation
Change in valuation allowance
Research and development
Foreign rate differences
Earn out adjustment not taxable
Escrow settlement
Foreign tax credit
Change in prior year deferred balances
Acquisition-related costs
Other
Total provision for income taxes from continuing operations
112
NEOPHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Deferred income tax assets and liabilities comprise the following (in thousands):
Deferred Tax Assets:
Net operating loss carryforwards
Federal and state credits
Reserves, accruals and other
Fixed assets and intangibles
Total deferred tax assets
Valuation allowance
Total deferred tax assets, net of valuation allowance
Deferred tax liabilities:
Acquired intangibles
Net deferred tax assets
Reported as:
Current deferred tax assets, included within prepaid expenses and other
current assets
Long term deferred tax assets, included within other long-term assets
Current deferred income tax liabilities
Deferred income tax liabilities
Net deferred tax assets
December 31,
2015
2014
60,063 $
21,752
10,325
1,459
93,599
(88,940)
4,659
67,898
19,443
8,842
1,161
97,344
(91,278)
6,066
(3,878)
781 $
(5,930)
136
— $
869
—
(88)
781 $
1,954
181
(181)
(1,818)
136
$
$
$
$
The net valuation allowance decreased by $2.3 million in 2015, primarily due to the current year utilization and
expiration of U.S. deferred tax assets, and increased by $0.2 million in 2014. The Company did not record a full
valuation allowance against its net deferred tax assets in foreign jurisdictions as it believes these deferred tax assets were
realizable on a more likely than not basis as of December 31, 2015. Based upon the weight of available evidence, which
includes the Company’s historical operating performance and the reported cumulative net losses to date, the Company
continues to maintain a full valuation allowance against its net U.S. deferred tax assets with the exception of indefinite
deferred tax liabilities. As of December 31, 2015, the Company had federal and state net operating loss, or NOL,
carryforwards of $207.0 million and $69.2 million, respectively. Federal NOL carryforwards start to expire in 2018 and a
portion of the California NOL carryforwards will begin to expire in 2016. There are $2.7 million in NOL carryforwards
related to excess tax benefits from stock options which will be credited to additional paid-in capital when realized. At
December 31, 2015, the Company also had federal and state research credit carryovers of $6.3 million and $13.1 million,
respectively. The federal credits will begin to expire in 2018 and the state credits can be carried forward indefinitely. The
Company also had $10.2 million of foreign tax credit carryforwards which will start to expire in 2022 if not utilized.
Utilization of NOL carryforwards and carried over tax credits may be subject to substantial annual limitation due to
federal and state ownership limitations. The annual limitation may result in the expiration of NOL and tax credit
carryforwards before utilization. The deferred tax assets listed above do not include NOL carryforwards that are
expected to expire unutilized as a result of existing ownership changes.
As of December 31, 2015, the Company’s substantial foreign earnings and profits were included in the U.S.
taxable income calculation. The undistributed foreign earnings are immaterial. The Company maintains its position for
undistributed foreign earnings to be indefinite, accordingly no tax provision for federal and state income taxes have been
provided thereon. Upon distribution of those earnings in the forms of dividends or otherwise, the Company would be
subject to U.S. income taxes (subject to adjustment for foreign tax credits). The amount is expected to be immaterial.
Effective January 1, 2008, the China Enterprise Income Tax Law, or the EIT law, imposed a single uniform
income tax rate of 25% on all China enterprises, including foreign invested enterprises, and eliminates or modifies most
of the tax exemptions, reductions and preferential treatment available under the previous tax laws and regulations. As a
result, the Company’s China subsidiaries may be subject to the uniform income tax rate of 25% unless they are able to
qualify for preferential status. Currently, one of the Company’s China subsidiaries qualified for a preferential 15% tax
rate that is available for new and high technology enterprises and has been granted for a 15% tax rate for tax years
113
NEOPHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
through 2016. The Company realized benefits from the reduced tax rate of $0.9 million, $0.5 million and $0.2 million in
the years ended December 31, 2015, 2014 and 2013, respectively.
At December 31, 2015, the Company’s gross unrecognized tax benefits were approximately $20.7 million, of
which $0.2 million would impact the effective tax rate if recognized. One or more of these unrecognized tax benefits
could be subject to a valuation allowance if and when recognized in a future period, which could impact the timing of
any related effective tax rate benefit. The Company does not believe that the amount of unrecognized tax benefits will
change significantly in the next twelve months. There were no interest or penalties related to unrecognized tax benefits.
The Company’s policy is to classify interest and penalties associated with unrecognized tax benefits as income tax
expense.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
Balance at December 31, 2012
Gross increases for tax positions of prior years
Gross increases for tax positions of current year
Reductions resulting from lapse of applicable statute of limitations
Balance at December 31, 2013
Gross increases for tax positions of prior years
Gross increases for tax positions of current year
Reductions resulting from lapse of applicable statute of limitations
Balance at December 31, 2014
Gross increases for tax positions of prior years
Gross increases for tax positions of current year
Reductions resulting from lapse of applicable statute of limitations
Balance at December 31, 2015
$ 11,993
155
4,361
(57)
16,452
—
2,090
(170)
18,372
—
2,314
—
$ 20,686
The Company’s material tax jurisdictions are the United States federal, California, Japan and China. As a result of
NOL carryforwards, substantially all of the Company’s tax years remain open to US federal and state tax examination.
All of Japan’s tax years remain open for Japanese tax examination. Tax years for 2010 and forward remain open for
Chinese tax examination.
16. Segment and geographic information
The Company’s Chief Executive Officer, who is considered to be the chief operating decision maker, manages the
Company’s operations as a whole and reviews financial information presented on a consolidated basis for purposes of
evaluating financial performance and allocating resources. In 2015, 2014 and 2013, the Company operated in one
reportable segment.
The Company has aligned its products to High Speed Products and Network Products and Solutions. The
following presents revenue by product group (in thousands):
Revenue:
High Speed Products
Network Products and Solutions
Total revenue
Years Ended December 31,
2015
2014
2013
$
$
195,831
143,608
339,439
$
$
129,595
176,582
306,177
$
$
107,705
174,537
282,242
The following tables set forth the Company’s revenue and asset information by geographic region. Revenue is
classified based on the ship to location of the customer. Such classification recognizes that for many customers,
114
NEOPHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
including those in North America or in Europe, designated shipping points are often in China or elsewhere in Asia.
Long-lived assets in the table below comprise only property, plant and equipment (in thousands):
Revenue:
China
United States
Japan
Rest of world
Total revenue
Long-lived assets:
China
United States
Japan
Rest of world
Total long-lived assets
Years Ended December 31,
2014
2013
2015
$
182,504 $
77,867
12,713
66,355
$
339,439 $
161,509
56,603
16,261
71,804
306,177
$
$
122,387
45,036
25,451
89,368
282,242
As of December 31,
2014
2015
$
$
24,334 $
19,308
15,603
3,373
62,618 $
28,807
14,877
13,150
823
57,657
17. Selected Quarterly Financial Data (unaudited)
The following tables set forth a summary of the Company’s quarterly financial information for each of the four
quarters for the years ended December 31, 2015 and 2014:
Year ended December 31, 2015
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(In thousands, except per share data)
Net revenues
Gross profit
Net income
Basic and diluted net income per share
Weighted averages shares used to compute basic net income per share
Weighted averages shares used to compute diluted net income per share
24,053
100
$ 81,384 $ 85,372 $ 83,560 $ 89,123
25,110
399
0.01
40,739
42,668
26,146
1,791
0.05 $
23,772
1,378
0.03 $
32,780
33,031
40,367
42,217
35,684
37,294
— $
$
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(In thousands, except per share data)
$ 68,168 $ 77,451 $ 81,576 $ 78,982
22,686
1,585
0.05
(0.40) $ (0.21) $ (0.06) $
13,800
(12,588)
14,568
(6,779)
20,064
(1,937)
$
31,610
31,790
32,383
32,640
31,610
31,790
32,383
32,710
Year ended December 31, 2014
Net revenues
Gross profit
Net (loss) income
Basic and diluted net (loss) income per share
Weighted averages shares used to compute basic net (loss) income per
share
Weighted averages shares used to compute diluted net (loss) income per
share
115
NEOPHOTONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
18. Subsequent Event
Subsequent event, through the filing of this report, included the following:
Repayment of Comerica Credit Facility
In January 2016, the Company repaid the outstanding balance under the Comerica credit facility, which was $23.8
million as of December 31, 2015.
116
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the
effectiveness of our disclosure controls and procedures as of December 31, 2015. The term “disclosure controls and
procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures
of a company that are designed to provide reasonable assurance that information required to be disclosed by a company
in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the
time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it
files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its
principal executive and principal financial officers, as appropriate to allow timely decisions regarding required
disclosure.
Based upon that evaluation as of the end of the period covered in this Annual Report on Form 10-K, our Chief
Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective
as of December 31, 2015 at a reasonable assurance level.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting,
as defined in Rules 13a-15(f) and 15d-15(f) as defined in the Exchange Act. Internal control over financial reporting
consists of policies and procedures that are designed and operated to provide reasonable assurance regarding the
reliability of our financial reporting and our process for the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting using the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated
Framework (2013). Based on the results of our assessment, using the criteria in Internal Control – Integrated
Framework (2013), our management has concluded that we maintained effective internal control over financial reporting
as of December 31, 2015.
The effectiveness of our internal control over financial reporting as of December 31, 2015 has been audited by
Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report, which appears below.
Changes in Internal Control Over Financial Reporting
There have not been any changes in our internal control over financial reporting (as defined in Rule 13a-15(f)
under the Securities and Exchange Act of 1934, as amended) in the fourth quarter of 2015 that materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
117
Inherent Limitation on the Effectiveness of Internal Controls
The effectiveness of any system of internal control over financial reporting is subject to inherent limitations,
including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures,
and the inability to eliminate misconduct completely. Accordingly, any system of internal control over financial
reporting can only provide reasonable, not absolute, assurances. In addition, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to
monitor and upgrade our internal controls as necessary or appropriate for our business, but cannot assure that such
improvements will be sufficient to provide us with effective internal control over financial reporting.
118
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of NeoPhotonics Corporation
San Jose, California
We have audited the internal control over financial reporting of NeoPhotonics Corporation and subsidiaries (the
"Company") as of December 31, 2015, based on criteria established in Internal Control — Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is
responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness
of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control
Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the
company's principal executive and principal financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of
collusion or improper management override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control
over financial reporting to future periods are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting
as of December 31, 2015, based on the criteria established in Internal Control — Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated financial statements as of and for the year ended December 31, 2015 of the Company
and our report dated March 14, 2016 expressed an unqualified opinion on those consolidated financial statements.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
March 14, 2016
119
ITEM 9B.
OTHER INFORMATION
Not applicable.
120
Part III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required regarding our directors is incorporated herein by reference from the information
contained in the section entitled “Proposal 1—Election of Directors” in our definitive Proxy Statement for the 2016
Annual Meeting of Stockholders (our “Proxy Statement”), a copy of which will be filed with the SEC on or before
April 29, 2016.
The information required regarding our executive officers is incorporated herein by reference from the information
contained in the section entitled “Management” in our Proxy Statement.
The information required regarding Section 16(a) beneficial ownership reporting compliance is incorporated by
reference from the information contained in the section entitled “Section 16(a) Beneficial Ownership Reporting
Compliance” in our Proxy Statement.
The information required with respect to procedures by which security holders may recommend nominees to our
board of directors, the composition of our Audit Committee, and whether the Company has an “audit committee
financial expert”, is incorporated by reference from the information contained in the section entitled “Proposal 1—
Election of Directors” in our Proxy Statement.
Adoption of Code of Ethics
We have adopted a Code of Business Conduct and Ethics (the “Code”) applicable to all of our board of director
members, employees and executive officers, including our Chief Executive Officer (Principal Executive Officer), and
Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer). We have made the Code
available on our website at http://www.neophotonics.com.
We intend to satisfy the public disclosure requirements regarding (1) any amendments to the Code, or (2) any
waivers under the Code given to our Principal Executive Officer, Principal Financial Officer and Principal Accounting
Officer by posting such information on our website at http://www.neophotonics.com. There were no amendments to the
Code or waivers granted thereunder relating to the Principal Executive Officer, Principal Financial Officer or Principal
Accounting Officer during 2015.
ITEM 11. EXECUTIVE COMPENSATION
The information required regarding the compensation of our directors and executive officers is incorporated herein
by reference from the information contained in the sections entitled “Executive Compensation,” “Director
Compensation,” “Compensation Committee Report” and “Compensation Committee Interlocks and Insider
Participation” in our Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required regarding security ownership of our 5% or greater stockholders and of our directors and
management is incorporated herein by reference from the information contained in the section entitled “Security
Ownership of Certain Beneficial Owners and Management” in our Proxy Statement.
The information required regarding securities authorized for issuance our equity compensation plans is
incorporated herein by reference from the information contained in the section entitled “Equity Compensation Plan
Information” in our Proxy Statement.
121
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
The information required regarding related transactions is incorporated herein by reference from the
information contained in the section entitled “Certain Relationships and Related Transactions” and, with respect to
director independence, the section entitled “Proposal 1—Election of Directors” in our Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required is incorporated herein by reference from the information contained in the sections
entitled “Principal Accountant Fees and Services” and “Pre-Approval Policies and Procedures” in the section entitled
“Proposal 2—Ratification of Appointment of Independent Registered Public Accounting Firm” in our Proxy Statement.
122
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
We have filed the following documents as part of this Form 10-K:
1. Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Loss
Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Page No.
72
73
74
75
76
77
78
All schedules have been omitted because they are not required, not applicable, not present in amounts sufficient to
require submission of the schedule, or the required information is otherwise included.
3. Exhibits
See the Exhibit Index which follows the signature page of this Annual Report on Form 10-K, which is
incorporated herein by reference.
123
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has
duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
NeoPhotonics Corporation
By:
/S/ TIMOTHY S. JENKS
Timothy S. Jenks
President, Chief Executive Officer and
Chairman of the Board of Directors
March 14, 2016
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints Timothy S. Jenks and Clyde Raymond Wallin, and each of them, jointly and severally, his attorneys-in-fact,
each with the power of substitution, for him in any and all capacities, to sign any and all amendments to this Annual
Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following
persons on March 14, 2016 on behalf of the Registrant and in the capacities and on the dates indicated:
Signature
Title
Date
/s/ TIMOTHY S. JENKS
Timothy S. Jenks
President, Chief Executive Officer and
Chairman of the Board of Directors
March 14, 2016
(Principal Executive Officer)
/s/ CLYDE RAYMOND WALLIN
Clyde Raymond Wallin
Senior Vice President and Chief
Financial Officer (Principal Financial and
Accounting Officer)
/s/ CHARLES J. ABBE
Charles J. Abbe
Director
/s/ DMITRY AKHANOV
Dmitry Akhanov
Director
/s/ BANDEL L. CARANO
Bandel L. Carano
Director
/s/ RAJIV RAMASWAMI
Rajiv Ramaswami
Director
/s/ MICHAEL J. SOPHIE
Michael J. Sophie
Director
/s/ IHAB S. TARAZI
Ihab S. Tarazi
/s/ LEE SEN TING
Lee Sen Ting
Director
Director
124
March 14, 2016
March 14, 2016
March 14, 2016
March 14, 2016
March 14, 2016
March 14, 2016
March 14, 2016
March 14, 2016
Exhibit
no.
2.1
2.2
2.3
2.4
2.5
3.1
3.2
4.1
4.2
4.3
EXHIBIT INDEX
Description of exhibit
Form
SEC File No. Exhibit Filing Date
Filed Herewith
Agreement and Plan of Merger, dated as of September
29, 2011, by and among NeoPhotonics Corporation,
Dulcimer Acquisition Corp., Santur and Shareholder
Representative Services LLC, solely in its capacity as
the Stockholder Representative.
Agreement and Plan of Demerger, dated as of January
18, 2013, by and among NeoPhotonics Corporation,
LAPIS Semiconductor Co., Ltd., and NeoPhotonics
Semiconductor GK.
Asset Purchase Agreement by and between
NeoPhotonics Corporation and EMCORE Corporation,
dated October 22, 2014.
Amendment to Asset Purchase Agreement by and
between NeoPhotonics Corporation and EMCORE
Corporation dated January 2, 2015
True-Up Confirmation Agreement, dated as of April 16,
2015, by and between NeoPhotonics Corporation and
EMCORE Corporation
Form 8-K 001-35061
2.1
October 18, 2011
Form 10-K 001-35061
2.2
March 15, 2013
Form 8-K 001-35061
10.1
October 27, 2014
Form 8-K 001-35061
99.1
January 8, 2015
Form 8-K 001-35061
10.2
April 21, 2015
Amended and Restated Certificate of Incorporation of
NeoPhotonics Corporation.
Form 8-K 001-35061
3.1
February 10, 2011
Amended and Restated Bylaws of NeoPhotonics
Corporation.
Specimen Common Stock Certificate of NeoPhotonics
Corporation.
2008 Investors’ Rights Agreement by and between
NeoPhotonics Corporation and the investors listed on
Exhibit A thereto, dated May 14, 2008.
Form S-1
333-166096 3.4
November 22, 2010
Form S-1
333-166096 4.1
April 15, 2010
Form S-1
333-166096 4.2
April 15, 2010
Commitment to File Registration Statement and Related
Waiver of Registration Rights by and between
NeoPhotonics Corporation and Open Join Stock
Company “RUSNANO” dated as of December 18, 2014. Form S-1
333-201180 4.4
December 19, 2014
10.1
10.2+
10.3+
10.4+
10.5+
Form of Indemnification Agreement entered into by and
between NeoPhotonics Corporation and each of its
directors and officers.
2004 Stock Option Plan, as amended, and related
documents.
2007 Stock Appreciation Grants Plan and related
documents.
2010 Equity Incentive Plan, as amended and forms of
agreement thereunder.
Amended and Restated Non-Employee Director
compensation Policy of NeoPhotonics Corporation.
Form S-1
333-166096 10.1
April 15, 2010
Form S-1
333-166096 10.2
April 15, 2010
Form S-1
333-166096 10.3
April 15, 2010
Form S-8
333-189577 99.1
June 25, 2013
Form 10-Q 001-35061
10.2
August 8, 2013
10.6+
2010 Employee Stock Purchase Plan.
Form S-1
333-166096 10.5
April 15, 2010
10.7
Lease by and between BRE/PCCP Orchard, LLC and
NeoPhotonics Corporation, dated April 7, 1999 with the
Summary of Basic Lease Terms and Addendum No. 1 to
Lease, as amended by First Amendment to Lease dated
November 22, 2002, the Second Amendment to Lease
dated December 15, 2003, the Third Amendment to
Lease dated March 13, 2007 and the Fourth Amendment
to Lease dated May 28, 2010.
Form S-1
333-166096 10.6
July 23, 2010
125
Exhibit
no.
10.8
10.9*
10.10
10.11
10.12+
10.13+
10.14+
10.15*+
10.16+
10.17+
10.18
10.19
Description of exhibit
Form
SEC File No. Exhibit Filing Date
Filed Herewith
First Lease Amendment by and between NeoPhotonics
Corporation and Landlord as defined in the recitals
thereto, dated May 21, 2013.
Maximum Comprehensive Credit Line Contract and
Maximum Mortgage Contract by and between
Agricultural Bank of China and NeoPhotonics (China)
Co., Ltd. dated November 3, 2008 and December 25,
2008, respectively.
Property Lease Contract between NeoPhotonics (China)
Co., Ltd. and Dongguan Conrad Hi-Tech Park Ltd.,
dated May 13, 2011.
Form 10-Q 001-35061
10.3
August 8, 2013
Form S-1
333-166096 10.9
April 15, 2010
Form 10-Q 001-35061
10.3
November 10, 2011
Building Lease Agreement between NeoPhotonics Japan
Godo Kaisha and Jones Lang Lasalle K.K., dated
September 8, 2011.
Form 10-Q 001-35061
10.4
November 10, 2011
Employment Letter by and between NeoPhotonics
Corporation and Timothy S. Jenks, dated March 30,
2010.
Offer Letter by and between NeoPhotonics Corporation
and Clyde R. Wallin, dated December 20, 2013.
Offer Letter by and between NeoPhotonics Corporation
and Dr. Wupen Yuen, dated January 2, 2005.
Offer Letter by and between NeoPhotonics (China) Co.,
Ltd. and Chi Yue “Raymond” Cheung, dated August 14,
2007.
Severance Agreement by and between NeoPhotonics
Corporation and Benjamin L. Sitler dated April 14,
2010.
Amended and Restated Severance Agreement by and
between NeoPhotonics Corporation and Dr. Wupen
Yuen, dated April 13, 2010.
Form S-1
333-166096 10.17
April 15, 2010
Form 10-K 001-35061
10.18
June 4, 2014
Form S-1
333-166096 10.19
April 15, 2010
Form S-1
333-166096 10.20
April 15, 2010
Form S-1
333-166096 10.23
April 15, 2010
Form S-1
333-166096 10.24
April 15, 2010
Third Amendment To Loan And Security Agreement
And Waiver And Consent by and between NeoPhotonics
Corporation and Comerica Bank, dated September 29,
2011.
Form 10-Q 001-35061
10.5
November 10, 2011
Libor/Prime Referenced Rate Addendum To Loan And
Security Agreement by and between NeoPhotonics
Corporation and Comerica Bank, dated September 29,
2011.
Form 10-Q 001-35061
10.6
November 10, 2011
10.20+
2011 Inducement Award Plan and related documents.
Form S-8
333-177306 99.1
October 13, 2011
10.21
10.22+
10.23
10.24+
10.25
Lease between Santur Corporation and 40915
Encyclopedia Circle, LLC, dated June 28, 2010.
Amendment to Severance Rights Agreement, dated
April 30, 2012, by and between the Company and
Timothy S. Jenks.
Form 10-K 001-35061
10.35
March 30, 2012
Form 10-Q 001-35061
10.1
May 10, 2012
Industrial Space Lease between Santur Corporation and
The Kaye Building, LLC, dated March 7, 2001.
Form 10-K 001-35061
10.36
March 30, 2012
Amendment to Severance Rights Agreement, dated
April 30, 2012, by and between the Company and Dr.
Wupen Yuen.
Share Purchase Agreement, dated April 27, 2012 by and
between the Company and Open Joint Stock Company
“RUSNANO”.
Form 10-Q 001-35061
10.3
May 10, 2012
Form 8-K 001-35061
10.1
May 1, 2012
126
Exhibit
no.
10.26
10.27
10.28
10.29
10.30
10.31
10.32+
10.33+
10.34**
10.35**
10.36
10.37
10.38*
10.39
10.40
Description of exhibit
Form
SEC File No. Exhibit Filing Date
Filed Herewith
Rights Agreement, dated April 27, 2012 by and between
the Company and Open Joint Stock Company
“RUSNANO”.
Revolving Credit and Term Loan Agreement, dated
March 21, 2013, by and among NeoPhotonics
Corporation, Comerica Bank, as agent, and the lenders
party thereto.
Form 8-K 001-35061
10.2
May 1, 2012
Form 8-K 001-35061
10.1
March 27, 2013
First Amendment to Credit Agreement, dated January
16, 2014, by and among NeoPhotonics Corporation,
Comerica Bank, as Agent, and the lenders party thereto. Form 8-K 001-35061
10.1
January 17, 2014
Second Amendment to Credit Agreement, dated
February 14, 2014, by and among NeoPhotonics
Corporation, Comerica Bank, as Agent, and the lenders
party thereto.
Form 8-K 001-35061
10.1
February 18, 2014
Third Amendment to Credit Agreement, dated March 6,
2014, by and among NeoPhotonics Corporation,
Comerica Bank, as Agent, and the lenders party thereto. Form 8-K 001-35061
10.1
March 10, 2014
Fourth Amendment to Credit Agreement, dated May 19,
2014, by and among NeoPhotonics Corporation,
Comerica Bank, as Agent, and the lenders party thereto. Form 8-K 001-35061
10.1
May 20, 2014
Severance Rights Agreement, dated January 6, 2014, by
and between NeoPhotonics Corporation and Clyde R.
Wallin.
Amended and Restated Severance Agreement by and
between NeoPhotonics Corporation and Benjamin L.
Sitler dated October 8, 2014
Loan Agreement by and between NeoPhotonics
Semiconductor GK and The Bank of Tokyo-Mitsubishi
UFJ, Ltd. dated February 25, 2015 (Contract A)
Loan Agreement by and between NeoPhotonics
Semiconductor GK and The Bank of Tokyo-Mitsubishi
UFJ, Ltd. dated February 25, 2015 (Contract B)
Letter Agreement by and between NeoPhotonics
Corporation and Open Joint Stock Company
RUSNANO dated March 2, 2015
Amendment to Rights Agreement, dated as of July 13,
2015, by and between NeoPhotonics Corporation and
Open Joint Stock Company “RUSNANO”.
Amendment to Credit Agreement and Amendment to
Security Agreement, dated October 20, 2015, by and
between NeoPhotonics Corporation and CITIC Bank.
Sixth Amendment to Credit Agreement and Amendment
to Security Agreement, dated January 23, 2015, by and
between NeoPhotonics Corporation, Comerica Bank, as
Agent and sole Lender.
Seventh Amendment to Credit Agreement and
Amendment to Security Agreement, dated March 31,
2015, by and between NeoPhotonics Corporation,
Comerica Bank, as Agent and sole Lender.
Form 10-Q 001-35061
10.4
June 24, 2014
Form 10-Q 001-35061
10.1
November 10, 2014
Form 10-K 001-35061
10.42
March 16, 2015
Form 10-K 001-35061
10.43
March 16, 2015
Form 10-K 001-35061
10.44
March 16, 2015
Form 8-K 001-35061
10.1
July 15, 2015
Form 10-Q 001-35061
10.2
November 6, 2015
Form 8-K 001-35061
10.2
January 28, 2015
Form 8-K 001-35061
10.1
April 1, 2015
10.41+
2015 Executive Officer Bonus Program.
Form 10-Q 001-35061
10.7
May 11, 2015
10.42*
Comprehensive Credit Granting Contract, dated October
20, 2015, by and between Neophotonics (China) Co.,
Ltd., Neophotonics Dongguan Co., Ltd. and Shenzhen
Branch CITIC Bank.
X
127
Exhibit
no.
10.43*
10.44
21.1
23.1
24.1
31.1
31.2
32.1
Description of exhibit
Form
SEC File No. Exhibit Filing Date
Filed Herewith
Credit Line Agreement, dated July 9, 2015, by and
between NeoPhotonics (China) Co., Ltd and Shanghai
Pudong Development Bank Corporation.
First Lease Amendment to the Industrial Space Lease
between NeoPhotonics Corporation, a successor-in-
interest to Santur Corporation, and The Kaye Building,
LLC, dated February 20, 2014.
List of subsidiaries of NeoPhotonics Corporation.
Consent of Deloitte & Touche LLP, independent
registered public accounting firm.
Power of Attorney (incorporated by reference to the
signature page of this Annual Report on Form 10-K).
Certification pursuant to Rule 13a-14(a)/15d-14(a).
Certification pursuant to Rule 13a-14(a)/15d-14(a).
Certification of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
X
X
X
X
X
X
X
X
101.INS
XBRL Instance Document.
101.SCH XBRL Taxonomy Extension Schema Document.
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
Document.
101.DEF
XBRL Taxonomy Extension Definition Linkbase
Document.
101.LAB XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
Document.
* Translation to English of an original Chinese document.
** Translation to English of an original Japanese document.
+ Management compensatory plan or arrangement.
128
LIST OF SUBSIDIARIES OF NEOPHOTONICS CORPORATION
Exhibit 21.1
SUBSIDIARY
JURISDICTION
Hong Kong
NeoPhotonics Corporation Limited
People’s Republic of China
NeoPhotonics (China) Co., Ltd.
People’s Republic of China
NeoPhotonics Dongguan Co., Ltd.
British Virgin Islands
Novel Centennial Limited
Japan
NeoPhotonics Japan, Godo Kaisha
Japan
NeoPhotonics Semiconductor, Godo Kaisha
NeoPhotonics Corporation, LLC
Russia
NeoPhotonics Technics Limited Liability Company Russia
129
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-202942, 333-189577, 333-
179453, 333-177306, 333-172031 and 333-197657 on Form S-8 of our reports dated March 14, 2016, relating
to the consolidated financial statements of NeoPhotonics Corporation and subsidiaries, and the effectiveness
of NeoPhotonics Corporation and subsidiaries’ internal control over financial reporting, appearing in this
Annual Report on Form 10-K of NeoPhotonics Corporation for the year ended December 31, 2015.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
March 14, 2016
130
Exhibit 31.1
I, Timothy S. Jenks, certify that:
CERTIFICATION
1. I have reviewed this Annual Report on Form 10-K of NeoPhotonics Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and
for, the periods presented in this report;
4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financing
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the
Registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the Registrant’s internal control over financial reporting
that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
Registrant’s internal control over financial reporting.
5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record,
process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the Registrant’s internal control over financial reporting.
Date: March 14, 2016
/s/ TIMOTHY S. JENKS
Timothy S. Jenks
President, Chief Executive Officer and
Chairman of the Board of Directors
131
Exhibit 31.2
I, Clyde Raymond Wallin, certify that:
CERTIFICATION
1. I have reviewed this Annual Report on Form 10-K of NeoPhotonics Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and
for, the periods presented in this report;
4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financing
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the
Registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the Registrant’s internal control over financial reporting
that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
Registrant’s internal control over financial reporting.
5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record,
process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the Registrant’s internal control over financial reporting.
Date: March 14, 2016
/S/ CLYDE RAYMOND WALLIN
Clyde Raymond Wallin
Chief Financial Officer and Senior Vice President
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CERTIFICATION
Exhibit 32.1
Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), and Section 1350 of Chapter 63 of Title 18 of the U.S. Code (18 U.S.C. § 1350), Timothy S. Jenks,
President, Chief Executive Officer and Chairman of the Board of Directors of NeoPhotonics Corporation (the
“Company”), and Clyde Raymond Wallin, Chief Financial Officer and Senior Vice President of the Company, each
hereby certifies that, to the best of his knowledge:
1. The Company’s Annual Report on Form 10-K for the period ended December 31, 2015, to which this
Certification is attached as Exhibit 32.1 (the “Annual Report”) fully complies with the requirements of Section 13(a) or
Section 15(d) of the Exchange Act, as amended; and
2. The information contained in the Annual Report fairly presents, in all material respects, the financial condition
and results of operations of the Company.
In Witness Whereof, the undersigned have set their hands hereto as of the 14th day of March, 2016.
/S/ TIMOTHY S. JENKS
Timothy S. Jenks
President, Chief Executive Officer and
Chairman of the Board of Directors
/S/ CLYDE RAYMOND WALLIN
Clyde Raymond Wallin
Chief Financial Officer and Senior Vice President
This certification accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange
Commission and is not to be incorporated by reference into any filing of NeoPhotonics Corporation under the Securities
Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of
the Form 10-K), irrespective of any general incorporation language contained in such filing.
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