NEOPHOTONICS CORP MANAGEMENT DISCUSSION AND ANALYSIS OF THE FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-Q)

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The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the unaudited condensed
consolidated financial statements and the related notes thereto included
elsewhere in this Quarterly Report on Form 10-Q for the period ended September
30, 2021 and the audited consolidated financial statements and notes thereto and
management's discussion and analysis of financial condition and results of
operations for the year ended December 31, 2020 included in our Annual Report on
Form 10-K. References to "NeoPhotonics," "we," "our," and "us" are to
NeoPhotonics Corporation unless otherwise specified or the context otherwise
requires.
This Quarterly Report on Form 10-Q for the period ended September 30, 2021
contains "forward-looking statements" that involve risks and uncertainties, as
well as assumptions that, if they never materialize or prove incorrect, could
cause our results to differ materially from those expressed or implied by such
forward-looking statements. The statements contained in this Quarterly Report on
Form 10-Q for the period ended September 30, 2021 that are not purely historical
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Terminology such as "believe," "may," "might,"
"objective," "estimate," "continue," "anticipate," "intend," "should," "plan,"
"expect," "predict," "potential," or the negative of these terms or other
similar expressions is intended to identify forward-looking statements.
We have based these forward-looking statements largely on our current
expectations and projections about future events and industry and financial
trends that we believe may affect our financial condition, results of
operations, business strategy and financial needs. Such forward-looking
statements are subject to risks, uncertainties and other important factors that
could cause actual results and the timing of events to differ materially from
future results expressed or implied by such forward-looking statements. Factors
that could cause or contribute to such differences include, but are not limited
to, those identified in "Part II -Item 1A. Risk Factors" below, and those
discussed in the sections titled "Special Note Regarding Forward-Looking
Statements" and "Risk Factors" included in our Annual Report on Form 10-K for
the year ended December 31, 2020, as filed with the SEC on February 25,
2021. Furthermore, such forward-looking statements speak only as of the date of
this report. Except as required by law, we undertake no obligation to update any
forward-looking statements to reflect events or circumstances after the date of
such statements.
Overview
We develop, manufacture and sell optoelectronic products that transmit and
receive high-speed digital optical signals that connect the Cloud and hyperscale
data center and telecom networks. We are the world's primary supplier of
ultra-pure light tunable lasers that are required for the highest
speed-over-distance fiber optic communications links. We believe our annual
production volumes for these products significantly exceeds all of our
competitors combined at these data rates. Our external cavity tunable laser
products, given their low phase noise, compact size, high output power, and low
electrical power consumption are the lasers of choice at 400G and above data
rates. Even more, our Nano ECL tunable laser, is the laser of choice for use in
coherent 400G pluggable high speed modules, including in 400ZR pluggable
coherent DCO modules. As the industry moves to ramping 400ZR deployments, we
believe demand for our Nano laser is strong. (Herein, "Cloud" refers to the vast
constellation of servers that are located in data centers around the world and
which are accessed through the internet, along with the associated software and
data bases that run on them and the communications links that interconnect
them.)

Fortunately, because of our high volume laser capacity, we believe we are able
to fulfill demand for these products as the supply pipeline readies for
increasing 400ZR deployment rates that are just beginning. This is important, as
our Nano tunable laser is a core component of the 400ZR module products from a
majority of 400ZR module producers to the Cloud and to hyperscalers.

Our products, including our tunable lasers, provide data rates of 400 Gigabits per second (“G”), 600G and 800G and beyond for each wavelength. We sell high performance integrated pluggable coherent optical transceiver modules that directly transmit high speed data using industry standard Internet Protocol (“IP”) encoding on Dense Wavelength Division Multiplexing (“DWDM”), dramatically simplifying data networks, thereby reducing costs and energy consumption. .

With the adoption of coherent transmission using pluggable high speed optical modules in cloud and hyperscale data centers, we believe our total addressable market is growing.

Our recently introduced 400ZR and 400ZR+ pluggable transceiver modules enable
new, lower cost network architectures using IP over DWDM protocols that
addresses new, rapidly expanding major market segments. Such modules can replace
a chassis-based line card with the same much smaller form factor as a pluggable
client side transceiver, so that interconnects between data centers can be as
simple as interconnects within a data center.

Over the past decade we have been first to deliver commercial mass production
volumes of coherent optical components for each of the speed advances as maximum
speeds per wavelength, or color, have advanced from 100G to 200G, 400G, 600G and
now 800G.

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We believe that we are well positioned to continue world market leadership in
these laser, component and module solutions based on our leadership in the
ultra-pure light lasers which power them and our comprehensive technologies for
Silicon Photonics and Indium Phosphide Photonic Integrated Circuits ("PICs") and
optical ICs.

Our high-speed optical communications products use coherent technology to encode
optical signals from electronic signals for transmission and to decode them for
receiving. Ultra-high speeds require coherent technology that encodes
information using the phase, amplitude and polarization of an optical
wavelength, packing in far more information than simple on/off encoding. We
believe that we are a global leader in coherent transmission technology, based
on our achieved data rates or speeds, over distance, leadership in ultra-pure
color lasers and optical integration for miniaturization and low power
consumption.

Coherent has become the technology of choice for high speed over distance data
transmission in Cloud infrastructure and data center interconnection, in
addition to telecom networks. The move to 400G and above transmission speeds is
a fulcrum for the industry as it marks the next major step-up in speed. 400G is
becoming the basic building block for network deployments for all distances
greater than 40km, all of which require coherent transmission technology.

We sell to virtually all of the leading telecom network equipment companies such
as Ciena, Cisco Systems, including its acquisition of Acacia Communications,
Fiberhome, Fujitsu, Huawei, Infinera, NEC, Nokia and ZTE. Our shipments to
Huawei and its affiliates in 2021 were limited to a small number of products
that are compliant with the new restrictions.

We believe that use cases for 400ZR and 400ZR+ system-level modules will extend
across data center interconnect to backhaul for 5G wireless networks and to
metro networks. The lower power, higher port density and interoperability of
pluggable solutions drive this forecast. These architectures are driven by
hyperscale operators and we believe they will be adopted in metro telecom
networks using 400ZR+ pluggable modules in areas where reach and density make it
the clear economic winner with much lower total costs. Furthermore, we believe
that our high performance optics combined with next generation digital signal
processors ("DSPs") will enable 800ZR and 800ZR+ pluggable modules within the
next few years.

Our High Speed Products for data rates of 100G, 400G, 600G, 800G and above were
94% of our revenues for the three and nine months ended September 30, 2021
compared to 92% for the same periods a year ago. Our sales concentration in High
Speed Products has increased each year for more than 10 years. "High Speed
Products" refers to transmitter and receiver products as well as switching and
other component products designed for 100G and beyond optical transmission
applications. Our high speed 100G and beyond products are based on our Advanced
Hybrid Photonic Integration technologies, which support 100 gigabits or more per
second of information transmitted over a single channel. Our 400G and above
products are a subset of our High Speed Products.

Revenue from products for 400G and above applications was $41.7 million in the
three months ending September 30, 2021 representing 50% of total revenues and
growth of 54% over the same period a year ago. Revenue from products for 400G
and above applications was $102.9 million in the nine months ending September
30, 2021 representing 49% of total revenues and growth of 86% over the same
period a year ago. Products capable of data rates of 400G and above have
accounted for more than 10% of our revenue since 2018 and have nearly doubled
from $44 million in 2019 to $86 million in 2020, and was $103 million for the
nine months ended September 30, 2021. We believe that the market for 400G and
above products will grow at a 5-year compound annual growth rate of
approximately 70 percent through 2024. We therefore expect our 400G and above
revenues will continue to grow at an accelerated rate over the immediate and
longer term.

The Covid-19 pandemic continues to impact our business and the business of our
customers and suppliers, as well as how we execute our business. We have
implemented strict measures to ensure and maintain safety, including working
remotely where possible with enhanced protocols in each of our global
facilities. As local health regulations allow in each of our locations, we are
moving toward increased in-office work while maintaining a flexible hybrid
approach.

Our operations and products support essential communications networks globally.
We continue to adjust comprehensive business continuity plans to ensure that we
are able to deliver for our customers. We are working closely with our supply
chain partners globally to ensure we have access to critical components, as we
see strong demand for our products supporting increased network bandwidth, and
as key semiconductor components globally have moved into shortage.
Our Solutions
Three critical optical components are required to make a coherent transceiver:
(1) a laser with a very narrow linewidth for very pure light; (2) a coherent
modulator capable of changing both the intensity and phase of the optical signal
to code data onto it; and (3) a coherent receiver capable of detecting both the
intensity and phase of the received optical signal to "understand" its content,
plus an electronic DSP IC.

We have been a leading volume supplier of these optical components since
coherent systems were first deployed in volume for telecommunications networks a
decade ago, in 2010. We are now the leading supplier of narrow linewidth tunable
lasers and coherent receivers to the coherent market, and we have introduced new
high-speed coherent modulators for 400G,
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600G and above applications. We use our coherent components to design,
manufacture and sell complete coherent pluggable transceivers including our 400G
QSFP-DD, OSFP and CFP2-DCO modules.

Our core capabilities in coherent optics open further opportunities for us in
adjacent markets outside of communications. Coherent technology improves
sensitivity and performance for such applications as inter-satellite
communication links including for low earth orbit ("LEO") satellites, sensing
for industrial applications, LIDAR for autonomous vehicle navigation, and
medical imaging.
Critical accounting policies and estimates
We prepare our condensed consolidated financial statements in accordance with
generally accepted accounting principles in the United States. The preparation
of condensed consolidated financial statements also requires us to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues, costs and expenses and related disclosures. We base our
estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances. Actual results could differ
significantly from the estimates made by our management.
There have been no material changes to our critical accounting policies and
estimates from those disclosed in our Annual Report on Form 10-K for the year
ended December 31, 2020.
Results of Operations
Revenue
Our business is focused on the highest speed digital optics and signal
processing communications applications. In the three and nine months ended
September 30, 2021, our High Speed Products for data rates of 100G and beyond
comprised 94% in each period.
We sell substantially all of our products to original equipment manufacturers
("OEMs") and their contract manufacturers. Revenue is recognized upon transfer
of control of the product to the buyer. 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 or as manufacturing costs are
reduced. Our first quarter revenue is typically seasonally lower than the rest
of the year primarily due to the impact of annual price negotiations with
customers that occur at the end of the prior year and lower capacity utilization
during the holidays in China. Our sales transactions to customers are
denominated primarily in U.S. dollars.

                                                   Three Months Ended                                                           Nine Months Ended
                                                      September 30,                                                               September 30,
(in thousands, except
percentages)                 2021               2020             $ Change           % Change              2021               2020             $ Change           % Change
Total revenue             $ 83,742          $ 102,398          $ (18,656)             (18)%           $ 209,677          $ 302,970          $ (93,293)             (31)%



 We generate most of our revenue from a limited number of customers. In the
three months ended September 30, 2021, three customers each were greater than
10% of our revenue, representing 60% of total revenue, and our top five
customers during this period represented 79% of total revenue. In the three
months ended September 30, 2020, three customers each were greater than 10% of
revenue, representing 71% of revenue, and our top five customers during this
period represented 82% of total revenue. In the nine months ended September 30,
2021, four customers were each greater than 10% of revenue, representing 67% of
total revenue, and the Company's top five customers represented approximately
77% of the total revenue. In the nine months ended September 30, 2020, two
customers accounted for approximately 67% of the Company's total revenue, and
the Company's top five customers represented approximately 82% of the Company's
total revenue.

Huawei was our largest customer in 2020, with $148.4 million in revenue during
the first three quarters of 2020. In the first three quarters of 2021, Huawei
represented $23.3 million of total revenue.

Three Months Ended September 30, 2021 Compared With Three Months Ended September
30, 2020
Total revenue decreased by $18.7 million, or 18%, in the three months ended
September 30, 2021 compared to the same period in 2020. The majority of the
decrease is the result of the additional BIS restrictions on Huawei effective in
the third quarter of 2020, partially offset by an increase in our high
performance products. Huawei revenue was 10% in the three months ended September
30, 2021 and was 44% for the same period in 2020. Excluding Huawei, revenue in
the third quarter of 2021 grew 30% and High Speed product revenue grew 39%. Our
400G and above product revenue in the third quarter of 2021 increased $14.7
million compared to the same period a year ago and comprised 50% of revenue, up
from 26% of revenue in the third quarter of 2020.

Nine months ended September 30, 2021 Compared to the nine months ended September 30, 2020

Total revenue decreased by $93.3 million, or 31%, in the nine months ended
September 30, 2021 compared to the same period in 2020. The majority of the
decrease is the result of the additional BIS restrictions on Huawei, partially
offset by an increase in our high performance products. Huawei revenue was 11%
in the nine months ended September 30, 2021 and 49%
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during the same period in 2020. Excluding Huawei, revenue in the nine months
ended September 30, 2021 increased by $31.7 million, or 21%, driven by growth in
our High Speed products, which increased 32% compared to the same period during
2020.

In the past three and nine months September 30, 2021 and 2020, respectively, the revenues of China, Americas and the rest of the world, based on the shipping location requested by the customer, was as follows:

                      Three Months Ended                Nine Months Ended
                        September 30,                     September 30,
                       2021             2020             2021            2020
China                         31  %      56  %                 32  %      59  %
Americas                      13  %      17  %                 10  %      17  %
Rest of world                 56  %      27  %                 58  %      24  %
Total revenue                100  %     100  %                100  %     100  %


Geographic revenue represents the shipment location and frequently changes based
on the location of contract manufacturing, rather than end customer location.
Shipments to the Americas and to the rest of the world are mainly to contract
manufacturers for non-China based network equipment manufacturers ("NEMs").

We believe we will continue to be an industry leader for the highest speed over
distance network solutions, supplying customers with components and modules
which deliver the highest bandwidth per wavelength and per fiber for long
distances. Our High Speed Product market segment consistently represents 94% or
more of our business. Since launching 400ZR and 400ZR+ pluggable coherent
modules in the fourth quarter of 2019, we have been shipping units for
qualification and our first production lines have been installed and are being
readied for volume ramping and we continue to invest in production lines for
additional capacity. Our QSFP-DD and OSFP 400ZR modules are now in general
availability. In addition, we are shipping initial quantities of our newest
96Gbaud component suite for superb 800G DCI and 400G long-haul transmissions. We
believe these high-performance products will bring revenue growth and potential
expansion into other markets. While we expect a significant portion of our
revenue will continue to be derived from a limited number of customers, we
continue to see some customer diversification with three customers greater than
10% of our revenue in the nine months ended September 30, 2021, and expect a
further increase in diversification with expansion of our high-performance
products.
Cost of Goods Sold and Gross Margin
Our cost of goods sold consists primarily of the cost to produce wafers, modules
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 charges,
warranty costs, logistics and allocated facilities costs.

Gross profit as a percentage of total revenue, or gross margin, has been and is
expected to continue to be affected by a variety of factors including the
introduction of new products, production volume, factory utilization, 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,
stock-based compensation, 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 in which the negotiations occurred.

As a manufacturing company, our margins are sensitive to changes in volume and
factory utilization. We have made significant operational improvements with
solid progress on cost reductions, yield improvement and effective cost
absorption through higher volume in addition to reducing depreciation costs.
Because of the additional BIS restrictions on Huawei, the business volume in the
nine months ended September 30, 2021 was significantly lower, by 31%, as
compared to the same period in 2020, impacting our factory utilization and cost
absorption.

                                                        Three Months Ended                                                            Nine Months Ended
                                                          September 30,                                                                 September 30,
(in thousands, except
percentages)                     2021              2020             $ Change            % Change               2021               2020             $ Change            % Change
Cost of goods sold            $ 59,968          $ 77,994          $ (18,026)                  (23) %       $ 162,689          $ 215,338          $ (52,649)                  (24) %
Gross profit                  $ 23,774          $ 24,404          $    (630)                   (3) %       $  46,988          $  87,632          $ (40,644)                  (46) %



                                      Three Months Ended               Nine Months Ended
                                         September 30,                   September 30,
                                        2021             2020            2021            2020
Gross profit as a % of revenue                 28  %     24  %              

22% 29%

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Three Months Ended September 30, 2021 Compared With Three Months Ended September
30, 2020
Gross profit decreased by $0.6 million, to $23.8 million, in the three months
ended September 30, 2021, compared to $24.4 million in the same period in 2020.
Gross margin increased to 28% in the three months ended September 30, 2021,
compared to 24% in the same period a year ago. The decrease in gross profit is
primarily related to the reduction in business volume with Huawei of $35.9
million, $3.7 million of utilization and related charges, annual price
adjustments offset by continuous cost reductions and approximately $1.9 million
increase in inventory write-downs mostly due to end-of-life products reserves.

Nine Months Ended September 30, 2021 Compared With Nine Months Ended September
30, 2020
Gross profit decreased by $40.6 million, or 46%, to $47.0 million in the nine
months ended September 30, 2021, compared to $87.6 million in the same period in
2020. The decrease in gross profit was primarily related to the reduction in
business volume with Huawei of $125.1 million, $13.0 million of utilization and
related charges, annual price adjustments offset by continuous cost reductions
and $1.7 million increase in inventory write-downs mostly due to end-of-life
products reserves.
Operating Expenses
Personnel costs are the most significant component of operating expenses and
consist of costs such as salaries, benefits, bonuses, stock-based compensation
and other variable compensation.
                                                      Three Months Ended                                      Nine Months Ended
                                                        September 30,                                           September 30,

(in thousands, except percentages) 2021 2020 $ Variation

    % Change        2021          2020        $ Change      % Change
Research and development             $ 13,875      $ 15,276      $ (1,401)          (9) %    $ 42,383      $ 40,849      $  1,534            4  %
Sales and marketing                     3,498         3,692          (194)          (5) %      10,725        11,630          (905)          (8) %
General and administrative              7,719         7,758           (39)          (1) %      22,411        23,350          (939)          (4) %
Asset sale related costs                   28            87           (59)         (68) %         155           219           (64)         (29) %
Restructuring charges                     (12)          141          (153)        (109) %          10           141          (131)         (93) %
Total operating expenses             $ 25,108      $ 26,954      $ (1,846)          (7) %    $ 75,684      $ 76,189      $   (505)          (1) %



Research and development
Research and development expense consists of personnel costs, including
stock-based compensation, for our research and development personnel, and
product development costs, including engineering services, development software
and hardware tools, depreciation of equipment and facility costs. We record all
research and development expense as incurred.

Three months ended September 30, 2021 Compared to the three months ended September 30, 2020

We focus our research and development efforts to continue pushing the
performance leadership boundaries. Research and development expense of $13.9
million, or 17% of revenue, decreased $1.4 million, or 9%, in the three months
ended September 30, 2021, compared to the same period in 2020. The decrease was
primarily related to our 400ZR product reaching commercial production in the
third quarter of 2020 and such costs are now being charged to cost of goods sold
and are no longer being charged to research and development expense.

Nine months ended September 30, 2021 Compared to the nine months ended September 30, 2020

Research and development expense of $42.4 million, or 20% of revenue, increased
$1.5 million, or 4%, in the nine months ended September 30, 2021, compared to
the same period in 2020. The increase was primarily due to $0.9 million
additional investment in the development of 400ZR and $0.6 million depreciation.

We believe that investments in research and development are important to help
meet our strategic objectives. We plan to continue to invest in research and
development activities, including new products that we believe will further
enhance our competitive position and expand our revenue stream. As a percentage
of total revenue, our research and development expense may vary as our
investment and revenue levels change over time.









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Sales and marketing

Sales and marketing expense consists primarily of personnel costs, including
stock-based compensation and other variable compensation, costs related to sales
and marketing programs and services and facility costs.

Three months ended September 30, 2021 Compared to the three months ended September 30, 2020

Selling and marketing expenses remained stable during the three months ended September 30, 2021 compared to the same period a year ago.

Nine months ended September 30, 2021 Compared to the nine months ended September 30, 2020

Sales and marketing expense decreased by $0.9 million, or 8%, in the nine months
ended September 30, 2021, compared to the same period in 2020 primarily from a
decrease in variable compensation.

We expect to continue to expand our high speed market focus and increase sales
and marketing coverage of the DCI, Cloud and hyperscale data center markets,
particularly the 400ZR and 400ZR+ products as well as the 64 Gbaud and 96 Gbaud
component suites. 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.

Three months ended September 30, 2021 Compared to the three months ended September 30, 2020

General and administrative expense in the three months ended September 30, 2021,
decreased by an amount of less than $0.1 million and is primarily related to a
decrease in variable compensation, compared to the same period a year ago.

Nine months ended September 30, 2021 Compared to the nine months ended September 30, 2020

General and administrative expense decreased by $0.9 million or 4%, in the nine
months ended September 30, 2021, compared to the same period in 2020. The
decrease was mainly from $1.5 million decrease in variable compensation, offset
by $0.5 million increase in information technology service and license costs and
other related expenses.
Interest and other income (expense), net
Interest income consists of income earned on our cash, cash equivalents and
short-term investments, as well as restricted cash. Interest expense consists of
amounts incurred for interest on our bank and other borrowings. Other income
(expense), net is primarily made up of government subsidies as well as foreign
currency transaction gains and losses. The functional currency of our
subsidiaries in China is the RMB and of our subsidiary in Japan is the JPY. The
foreign currency transaction gains and losses of our subsidiaries in China and
Japan primarily result from the mark-to-market of U.S. dollar based assets in
China and Japan.
                                                                                   Three Months Ended                                                       Nine Months Ended
                                                                                     September 30,                                                            September 30,
(in thousands, except percentages)                           2021            2020            $ Change            % Change             2021            2020            $ Change            % Change
Interest income                                            $  94          $     21          $     73                   348  %       $ 339          $    141          $    198                   140  %
Interest expense                                            (207)             (263)               56                   (21) %        (654)             (942)              288                   (31) %
Other income (expense), net                                   43            (3,317)            3,360                  (101) %         306            (2,314)            2,620                  (113) %
Total                                                      $ (70)         $ (3,559)         $  3,489                   (98) %       $  (9)         $ (3,115)         $  3,106                  (100) %


Three Months Ended September 30, 2021 Compared With Three Months Ended September
30, 2020
Interest income and expense remained flat in the three months ended September
30, 2021 compared to the same period a year ago. Other income (expense), net
decreased by $3.4 million in the three months ended September 30, 2021, as
compared to the same period in 2020, due to U.S. dollar appreciation against
both the Chinese Renminbi and Japanese Yen.
Nine Months Ended September 30, 2021 Compared With Nine Months Ended September
30, 2020

Interest expense decreased by $0.3 million in the nine months ended September
30, 2021, as compared to the same period in 2020. The decrease in interest
expense was due to a $5.0 million decrease in outstanding borrowings from
September 30, 2021 to September 30, 2020 and a reduction in the interest rate on
our Wells Fargo loan. Other income (expense), net, decreased $2.6 million in the
nine months ended September 30, 2021, as compared to the same period in 2020,
primarily due to U.S. dollar appreciation against both the Chinese Renminbi and
Japanese Yen.
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Income taxes
We conduct our business globally and our operating income is subject to varying
rates of tax in the U.S., China, Japan and other various foreign jurisdictions.
Consequently, our effective tax rate is dependent upon the geographic
distribution of our earnings or losses and the tax laws and regulations in each
geographical region.

                                                                               Three Months Ended                                                              Nine Months Ended
                                                                                 September 30,                                                                   September 30,
(in thousands, except percentages)                       2021             2020           $ Change            % Change                  2021                   2020             $ Change            % Change
Income tax (provision) benefit                         $ (456)         $ 1,206          $ (1,662)                 (138) %                 (1,279)            (1,199)         $     (80)                    7  %



Our income tax provision in the three and nine months ended September 30, 2021
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.

Our income tax benefit in the three months ended September 30, 2020 was
primarily related to updating the projected pretax profit forecast on our U.S.
and non-U.S. operations, which was related to the restructuring actions
initiated by the Company in the third quarter of 2020. Our income tax provision
for the nine months ended September 30, 2020 was primarily related to the
operating profit realized in our foreign subsidiaries in Japan and China.
Liquidity and capital resources
As of September 30, 2021, our principal source of liquidity consisted of
approximately $104.7 million of cash and cash equivalents and our short-term
investments, of which approximately $45.5 million was held by subsidiaries
outside of the United States. Cash, short-term investments and restricted cash
held outside of the U.S. may be subject to taxes if repatriated and may not be
immediately available for our working capital needs.
Approximately $10.0 million of our retained earnings within our total
accumulated deficit as of December 31, 2020 was subject to restrictions due to
the fact that our subsidiaries in China are required to set aside at least 10%
of their respective accumulated profits each year end to fund statutory common
reserves. This restricted amount is not distributable as cash dividends except
in the event of liquidation.
As of September 30, 2021, our total indebtedness was primarily comprised of
short-term notes payable and borrowings under our credit facilities totaling
$44.8 million (at gross amounts exclusive of debt discounts and issuance costs)
consisting of:
•Borrowings under our Wells Fargo credit facility of $20.2 million
•Short-term note payable of $15.0 million from our credit facilities in China
•Notes payable of $9.4 million from our credit facilities in Japan
In addition to our cash, we had approximately $15.9 million of additional
liquidity available to us, of which $5.0 million is required to be maintained as
unused borrowing capacity, under our $50 million credit facility with Wells
Fargo Bank. We also have additional liquidity available to us of $8.2 million
from our $23.2 million credit facilities in China.
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 and the continuing market
acceptance of our products. 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.
                                       30
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Table of Contents
Cash flow discussion
The table below sets forth selected cash flow data for the periods presented:
                                                                                Nine Months Ended
                                                                                  September 30,
(in thousands)                                                               2021               2020
Net cash provided by (used in) operating activities                      $ (21,617)         $  49,514
Net cash used in investing activities                                       (8,132)           (28,765)
Net cash used in financing activities                                       11,277             (7,416)

Effect of exchange rates on cash, cash equivalents and restricted cash

    (61)               502

Net increase (decrease) in cash, cash equivalents and restricted cash $ (18,533) $ 13,835


Operating activities
Net cash used in operating activities was $21.6 million in the nine months ended
September 30, 2021, compared to $49.5 million net cash provided by operating
activities in the same period in 2020. The net cash used in operating activities
increased by $71.1 million due to the decrease in net income of $37.1 million.
Cash outflow from working capital of $27.4 million was primarily driven by
increases in accounts receivable and inventories, offset by an increase in
accounts payable and a decrease in accrued and other liabilities. The increase
in accounts receivable is primarily due to increased sales from our high speed
products, as well as the timing of shipments due to ongoing supply chain
challenges. The increase in inventory and accounts payable is due to increased
procurement to support our future growth. The decrease in accrued and other
liabilities is primarily related to a settlement payment of all APAT accounts as
a result of the litigation settlement from the fourth quarter of 2020 and the
payment of our variable compensation.
Investing activities
Net cash used in investing activities was $8.1 million in the nine months ended
September 30, 2021, compared to $28.8 million used in investing activities in
the same period in 2020. The decrease in cash flows used in investing activities
was primarily due to a net increase in proceeds from the investment in and sale
of marketable securities of $20.0 million when compared to the same period in
2020.
Financing activities
Net cash provided by financing activities was $11.3 million in the nine months
ended September 30, 2021, compared to $7.4 million used in financing activities
in the same period in 2020. The decrease in cash flows used in financing
activities was primarily due to proceeds received from a short-term note payable
of $15.0 million offset by a decrease in net payments under our note payable and
debt arrangements of $4.7 million when compared to the same period in 2020.
Off-balance Sheet Arrangements
As of September 30, 2021, we did not have any significant off-balance sheet
arrangements.
Recent Accounting Pronouncements
Refer to Note 1 "Basis of presentation and significant accounting policies" in
the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of
this Quarterly Report on Form 10-Q for a description of recent accounting
pronouncements and accounting changes.

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