ITEM 1A: RISK FACTORS
We have a history of losses,
may experience future losses and may not be able to generate sufficient revenues
in the future to sustain profitability.
We had net income of $4.3 million
in the quarter ended June 30, 2013. Although we generated a profit in the
quarter, we may not be able to sustain profitability and our cash flows may be
negative again in the future. As of June 30, 2013, we had an accumulated deficit
of $48.5 million.
We continue to experience
fluctuating demand for our products. If demand for our products declines, we may
not be able to decrease our expenses on a timely basis or at levels that offset
any such decreases. If demand for our products continues to increase in the
future, we may incur significant and increasing expenses for expansion of our
manufacturing operations, research and development, sales and marketing, and
administration, and in expanding our direct sales and distribution channels.
Given the rate at which competition in our industry intensifies and the
fluctuations in demand for our products, we may not be able to adequately
control our costs and expenses or achieve or maintain adequate operating
margins. As a result, to maintain profitability, we will need to generate and
sustain substantially higher revenues while maintaining reasonable cost and
expense levels. We may not be able to sustain profitability on a quarterly or an
annual basis.
Our connectivity products have
historically represented a significant part of our revenues, and if we are
unsuccessful in selling our optical passive products, our business may be
harmed.
Sales of our connectivity products
accounted for over 76% of our revenues in the quarter ended June 30, 2013 and a
majority of our historical revenues. We expect to substantially depend on these
products for the majority of our near-term revenues. We have in the past, and
may in the future experience declines in average selling prices. Any significant
decline in the price of, or demand for, these products, or failure to increase
their market acceptance, would seriously harm our business. In addition, we
believe that our future growth and a significant portion of our future revenues
will depend on the commercial success of our optical passive products. If demand
for these products does not continue to increase and our target customers do not
continue to adopt and purchase our optical passive products, our revenues may
decline.
Continuing weak general
economic or business conditions may have a negative impact on our business.
Continuing concerns over
inflation, deflation, another recession, energy costs, geopolitical issues, the
availability and cost of credit, Federal budget proposals, the Federal deficit
and credit rating, unemployment, global economic instability, slowing growth in
China and an uncertain real estate market in the U.S. have contributed to
increased volatility and diminished expectations for the global economy and
expectations of slower global economic growth going forward. These factors,
combined with volatile oil prices, declining business and consumer confidence, a
volatile stock market and increased unemployment, have precipitated an economic
slowdown and recession. If the economic climate in the U.S. and abroad does not
improve or continues to deteriorate, our business, including our customers and
our suppliers, could be negatively affected, resulting in a negative impact on
our revenues.
We depend on a small number of
customers for a significant portion of our total revenues and the loss of, or a
significant reduction in orders from, any of these customers, would
significantly reduce our revenues and harm our operating results.
In the quarters ended June 30,
2013 and 2012, our 10 largest customers comprised 72.9% and 63.0% of our total
revenues, respectively. Two customers accounted for 33.3% and 12.8% of our total
revenues for the three months ended June 30, 2013. Two customers accounted for
26.7% and 11.9% of our total revenues for the six months ended June 30, 2013,
and one customer accounted for 12.3% of our total revenues for the three months
ended June 30, 2012.
18
We derive a significant portion of
our revenues from a small number of customers, and we anticipate that we will
continue to do so in the foreseeable future. These customers may decide not to
purchase our products at all, to purchase fewer products than they did in the
past, or to alter their purchasing patterns in some other way. The loss of any
significant customer, a significant reduction in sales we make to a customer, or
any problems collecting receivables from our significant customers would likely
harm our financial condition and results of operations.
Our quarterly and annual
financial results have historically fluctuated due primarily to introduction of,
demand for, and sales of our products, and future fluctuations may cause our
stock price to decline.
We believe that period-to-period
comparisons of our operating results are not a good indication of our future
performance. Our quarterly operating results have fluctuated in the past and are
likely to fluctuate significantly in the future due to a number of factors. For
example, the timing and expenses associated with product introductions and
establishing additional manufacturing lines and facilities, changes in
manufacturing volume, declining average selling prices of our products, the
timing and extent of product sales, the mix of domestic and international sales,
the mix of sales channels through which our products are sold, the mix of
products sold and significant fluctuations in demand for our products have
caused our operating results to fluctuate in the past. Because we incur
operating expenses based on anticipated revenue levels, and a significant
percentage of our expenses are fixed in the short term, any delay in generating
or recognizing revenues or any decrease in revenues could significantly harm our
quarterly results of operations. Other factors, many of which are more fully
discussed elsewhere in this report, may also cause our results to fluctuate.
Many of the factors that may cause our results to fluctuate are outside of our
control. If our quarterly or annual operating results do not meet the
expectations of investors and securities analysts, the trading price of our
common stock could significantly decline.
If we cannot attract more
optical communications equipment manufacturers to purchase our products, we may
not be able to increase or sustain our revenues.
Our future success will depend on
our ability to migrate existing customers to our new products and our ability to
attract additional customers. The growth of our customer base could be adversely
affected by:
-
customer unwillingness to implement
our products;
-
any delays or difficulties that we
may incur in completing the development and introduction of our
planned products or product enhancements;
-
the success of our
customers;
-
excess inventory in the
telecommunications industry;
-
new product introductions by our
competitors;
-
any failure of our products to
perform as expected; or
-
any difficulty we may incur in
meeting customers delivery requirements or product specifications.
The fluctuations in the economy
have affected the telecommunications industry. Telecommunications companies have
cut back on their capital expenditure budgets, which has and may continue to
further decrease demand for equipment and parts, including our products. This
decrease has had and may continue to have an adverse effect on the demand for
fiber optic products and negatively impact the growth of our customer base.
We are exposed to risks and
increased expenses and business risk as a result of Restriction on Hazardous
Substances, or RoHS directives.
Following the lead of the European
Union, or EU, various governmental agencies have either already put into place
or are planning to introduce regulations that regulate the permissible levels of
hazardous substances in products sold in various
regions of the world. For example, the RoHS directive for EU took effect on July
1, 2006. The labeling provisions of similar legislation in China went into
effect on March 1, 2007. Consequently, many suppliers of products sold into the
EU have required their suppliers to be compliant with the new directive. Many
of our customers have adopted this approach and have required our full
compliance. Though we have devoted a significant amount of resources and effort
planning and executing our RoHS program, it is possible that some of our
products might be incompatible with such regulations. In such event, we could
experience the following consequences: loss of revenue, damaged reputation,
diversion of resources, monetary penalties, and legal action.
19
The market for fiber optic
components is increasingly competitive, and if we are unable to compete
successfully our revenues could decline.
The market for fiber optic
components is intensely competitive. We believe that our principal competitors
are the major manufacturers of optical components and integrated modules,
including vendors selling to third parties and business divisions within
communications equipment suppliers. Our principal competitors in the components
market include Oclaro Corp., JDS Uniphase Corp., Oplink Communications Inc.,
Senko Advanced Components and TE Connectivity. We believe that we primarily
compete with diversified suppliers for the majority of our product line and to a
lesser extent with niche companies that offer a more limited product line.
Competitors in any portion of our business may also rapidly become competitors
in other portions of our business.
Many of our current and potential
competitors have significantly greater financial, technical, marketing,
purchasing, manufacturing and other resources than we do. As a result, these
competitors may be able to respond more quickly to new or emerging technologies
and to changes in customer requirements, to devote more resources to the
development, promotion and sale of products, to negotiate lower prices on raw
materials and components, or to deliver competitive products at lower prices.
Several of our existing and
potential customers are also current and potential competitors of ours. These
companies may develop or acquire additional competitive products or technologies
in the future and subsequently reduce or cease their purchases from us. In light
of the consolidation in the optical networking industry, we also believe that
the size of suppliers will be an increasingly important part of a purchasers
decision-making criteria in the future. We may not be able to compete
successfully with existing or new competitors, and we cannot ensure that the
competitive pressures we face will not result in lower prices for our products,
loss of market share, or reduced gross margins, any of which could harm our
business.
New and competing technologies are
emerging due to increased competition and customer demand. The introduction of
products incorporating new or competing technologies or the emergence of new
industry standards could make our existing products noncompetitive. For example,
there are technologies for the design of wavelength division multiplexers that
compete with the technology that we incorporate in our products. If our products
do not incorporate technologies demanded by customers, we could lose market
share causing our business to suffer.
If we fail to effectively
manage our operations, specifically given the past history of sudden and
dramatic downturn in demand for our products, our operating results could be
harmed.
As of June 30, 2013, we had 33
full-time employees in Sunnyvale, California, 406 full-time employees in Taiwan,
and 1,002 full-time employees in China. Matching the scale of our operations
with demand fluctuations, combined with the challenges of expanding and managing
geographically dispersed operations, has placed, and will continue to place, a
significant strain on our management and resources. To manage the expected
fluctuations in our operations and personnel, we will be required to:
-
improve existing and implement new
operational, financial and management controls, reporting
systems and procedures;
-
hire, train, motivate and manage
additional qualified personnel, especially if we experience a
significant increase in demand for our products;
-
effectively expand or reduce our
manufacturing capacity, attempting to adjust it to customer
demand; and
-
effectively manage relationships with our customers, suppliers,
representatives and other third parties.
20
In addition, we will need to
continue coordinate our domestic and international operations and establish and
maintain the necessary infrastructure to implement our international strategy.
If we are not able to manage our operations in an efficient and timely manner,
our business will be severely harmed.
Our success also depends, to a
large degree, on the efficient and uninterrupted operation of our facilities. We
have expanded our manufacturing facilities in China and manufacture many of our
products there. Our facility in Taiwan also houses a substantial portion of our
manufacturing operations. There is significant political tension between Taiwan
and China. If there is an outbreak of hostilities between Taiwan and China, our
manufacturing operations may be disrupted or we may have to relocate our
manufacturing operations. Relocating a portion of our employees could cause
temporary disruptions in our operations and divert managements
attention.
Because of the time it takes to
develop fiber optic components, we incur substantial expenses for which we may
not earn associated revenues.
The development of new or enhanced
fiber optic products is a complex and uncertain process. We may experience
difficulties in design, manufacturing, marketing and other areas that could
delay or prevent the development, introduction or marketing of new products and
enhancements. Development costs and expenses are incurred before we generate
revenues from sales of products resulting from these efforts. Our research and
development expenses were approximately $0.9 million and $1.7 million for the
three and six months ended June 30, 2013, respectively. We intend to continue to
invest in our research and product development efforts and the amount of our
future investments may be substantial, which could have a negative impact on our
earnings in future periods.
If we are unable to develop new
products and product enhancements that achieve market acceptance, sales of our
fiber optic components could decline, which could reduce our revenues.
The communications industry is
characterized by continued changing technology, frequent new product
introductions, changes in customer requirements, evolving industry standards
and, more recently, significant variations in customer demand. Our future
success depends on our ability to anticipate market needs and develop products
that address those needs. As a result, our products could quickly become
obsolete if we fail to predict market needs accurately or develop new products
or product enhancements in a timely manner. Our failure to predict market needs
accurately or to develop new products or product enhancements in a timely manner
will harm market acceptance and sales of our products. If the development or
enhancement of these products or any other future products takes longer than we
anticipate, or if we are unable to introduce these products to market, our sales
will not increase. Even if we are able to develop and commercially introduce
them, these new products may not achieve the widespread market acceptance
necessary to provide an adequate return on our investment.
Current and future demand for
our products depends on the continued growth of the Internet and the
communications industry, which is experiencing consolidation, realignment, and
fluctuation in product inventory and demand for fiber optic products.
Our future success depends on the
continued growth of the Internet as a widely used medium for communications and
commerce, and the growth of optical networks to meet the increased demand for
capacity to transmit data, or bandwidth. If the Internet does not continue to
expand as a medium for communications and commerce, the need to significantly
increase bandwidth across networks and the market for fiber optic components may
not continue to develop. If this growth does not continue, sales of our products
may decline, which would adversely affect our revenues. Our customers have
experienced an oversupply of inventory due to fluctuating demand for their
products that has resulted in inconsistent demand for our products. Future
demand for our products is uncertain and will depend heavily on the continued
growth and upgrading of optical networks, especially in the metropolitan, last
mile, and enterprise access segments of the networks.
21
Inconsistent spending by
telecommunication companies over the past several years has resulted in
fluctuating demand for our products. The rate at which communication service
providers and other fiber optic network users have built new fiber optic
networks or installed new systems in their existing fiber optic networks has
fluctuated in the past and these fluctuations may continue in the future. These
fluctuations may result in reduced demand for new or upgraded fiber optic
systems that utilize our products and therefore, may result in reduced demand
for our products. Declines in the development of new networks and installation
of new systems have resulted in the past in a decrease in demand for our
products, an increase in our inventory, and erosion in the average selling
prices of our products.
The communications industry is
experiencing continued consolidation and realignment, as industry participants
seek to capitalize on the rapidly changing competitive landscape developing
around the Internet and new communications technologies such as fiber optic
networks. As the communications industry consolidates and realigns to
accommodate technological and other developments, our customers may consolidate
or align with other entities in a manner that results in a decrease in demand
for our products.
We have experienced
fluctuations in market demand due to overcapacity in our industry and an economy
that is stymied by current financial and economic conditions, international
terrorism, war and political instability.
The United States economy has
experienced and continues to experience significant fluctuations in consumption
and demand. We have in the past and may in the future experience decreases in
demand for our products due to a weak domestic and international economy as the
fiber optics industry copes with the effects of oversupply of products,
international terrorism, war and political and economic instability. Even if the
general economy experiences a recovery, the activity of the United States
telecommunications industry may lag behind the recovery of the overall United
States economy.
The optical networking
component industry often experiences declining average selling prices, and
declines in average selling prices of products could cause our gross margins to
decline.
The optical networking component
industry often experiences declining average selling prices as a result of
increasing competition and from pricing pressures resulting in greater unit
volumes purchases as communication service providers continue to deploy fiber
optic networks. We expect that average selling prices will continue to decrease
over time in response to new product and technology introductions by us or
competitors, price pressures from significant customers, greater manufacturing
efficiencies achieved through increased automation in the manufacturing process
and inventory build-up due to decreased demand. Average selling price declines
may contribute to a decline in our gross margins which could harm our results of
operations.
We will not attract new orders
for our fiber optic components unless we can deliver sufficient quantities of
our products to optical communications equipment manufacturers.
Communications service providers
and optical systems manufacturers typically require that suppliers commit to
provide specified quantities of products over a given period of time. If we are
unable to commit to deliver quantities of our products to satisfy a customers
anticipated needs, we will lose the order and the opportunity for significant
sales to that customer for a lengthy period of time. In addition, we would be
unable to fill large orders if we do not have sufficient manufacturing capacity
to enable us to commit to provide customers with specified quantities of
products. However, if we build our manufacturing capacity and inventory in
excess of demand, as we have done in the past, we may produce excess inventory
that may have to be reserved or written off.
We depend on a limited number
of third parties to supply key materials, components and equipment, such as
ferrules, optical filters and lenses, and if we are not able to obtain
sufficient quantities of these items at acceptable prices, our ability to fill
orders would be limited and our operating results could be harmed.
We depend on third parties to
supply the raw materials and components we use to manufacture our products. To
be competitive, we must obtain from our suppliers, on a timely basis, sufficient
quantities of raw materials and components at acceptable prices. We obtain most
of our critical raw materials and components from a single or limited number of
suppliers and generally do not have long-term supply contracts with them. As a
result, our suppliers could terminate the supply of a particular material or
component at any time without penalty. Finding alternative sources may involve
significant expense and delay, if these sources can
be found at all. One component, GRIN lenses, are only available from one
supplier. Difficulties in obtaining raw materials or components in the future
may delay or limit our product shipments, which could result in lost orders,
increase our costs, reduce our control over quality and delivery schedules and
require us to redesign our products. If a supplier became unable or unwilling to
continue to manufacture or ship materials or components in required volumes, we
would have to identify and qualify an acceptable replacement. A delay or
reduction in shipments or any need to identify and qualify replacement suppliers
would harm our business.
22
Because we experience long lead
times for materials and components, we may not be able to effectively manage our
inventory levels and manufacturing capacity, which could harm our operating
results.
Because we experience long lead
times for materials and components and are often required to purchase
significant amounts of materials and components far in advance of product
shipments, we may not effectively manage our inventory levels, which could harm
our operating results. Alternatively, if we underestimate our raw material
requirements, we may have inadequate inventory, which could result in delays in
shipments and loss of customers. If we purchase raw materials and increase
production in anticipation of orders that do not materialize or that shift to
another quarter, we will, as we have in the past, have to carry or write off
excess inventory and our gross margins will decline. Both situations could cause
our results of operations to be below the expectations of investors and public
market analysts, which could, in turn, cause the price of our common stock to
decline. The time our customers require to incorporate our products into their
own can vary significantly and generally exceeds several months, which further
complicates our planning processes and reduces the predictability of our
forecasts. Even if we receive these orders, the additional manufacturing
capacity that we add to meet our customers requirements may be underutilized in
a subsequent quarter.
If we are unable to maintain
effective internal control over financial reporting, investors may lose
confidence in the accuracy and completeness of our reported financial
information and the market price of our common stock may be negatively affected.
As a public company, we are
required to comply with Section 404 of the Sarbanes-Oxley Act of 2002 which
requires that we evaluate and determine the effectiveness of our internal
control over financial reporting and provide a management report on the internal
control over financial reporting. We are required to perform an assessment of
our internal control over financial reporting and to disclose managements
assessment of the same under Section 404(a) of Sarbanes-Oxley. We have
implemented an ongoing program to perform the system and process evaluation and
testing we believe to be necessary to comply with this requirement, however, we
cannot assure you that we will be successful in our efforts. If we have a
material weakness in our internal control over financial reporting, we may not
detect errors on a timely basis and our financial statements may be materially
misstated. During the evaluation and testing process, if we identify one or more
material weaknesses in our internal control over financial reporting, our
management will be unable to conclude that our internal control over financial
reporting is effective. Beginning with our annual report for the year ending
December 31, 2013, our independent registered public accounting firm will be
required to issue an attestation report on the effectiveness of our internal
control over financial reporting. Even if our management concludes that our
internal control over financial reporting is effective, our independent
registered public accounting firm may conclude that there are material
weaknesses with respect to our internal controls or the level at which our
internal controls are documented, designed, implemented or reviewed. If we are
unable to conclude that our internal control over financial reporting is
effective or if our auditors were to express an adverse opinion on the
effectiveness of our internal control over financial reporting because we had
one or more material weaknesses, investors could lose confidence in the accuracy
and completeness of our financial disclosures, which could cause the price of
our common stock to decline. Internal control deficiencies could also result in
a restatement of our financial results.
We depend on key personnel to
operate our business effectively in the rapidly changing fiber optic components
market, and if we are unable to hire and retain appropriate management and
technical personnel, our ability to develop our business could be harmed.
Our success depends to a
significant degree upon the continued contributions of the principal members of
our technical sales, marketing, engineering and management personnel, many of
whom perform important management functions and would be difficult to replace.
We particularly depend upon the continued services
of our executive officers, particularly Peter Chang, our President and Chief
Executive Officer; David Hubbard, our Executive Vice President, Sales and
Marketing; Anita Ho, our Acting Chief Financial Officer; and other key
engineering, sales, marketing, finance, manufacturing and support personnel. In
addition, we depend upon the continued services of key management personnel at
our Taiwanese subsidiary and at our facility in China. None of our officers or
key employees is bound by an employment agreement for any specific term, and may
terminate their employment at any time. We do not have key person life
insurance policies covering any of our employees.
23
Our ability to continue to attract
and retain highly skilled personnel will be a critical factor in determining
whether we will be successful in the future. We may have difficulty hiring
skilled engineers at our manufacturing facilities in the United States, Taiwan,
and China. If we are not successful in attracting, assimilating or retaining
qualified personnel to fulfill our current or future needs, our business may be
harmed.
If we are not able to achieve
acceptable manufacturing yields and sufficient product reliability in the
production of our fiber optic components, we may incur increased costs and
delays in shipping products to our customers, which could impair our operating
results.
Complex and precise processes are
required for the manufacture of our products. Changes in our manufacturing
processes or those of our suppliers, or the inadvertent use of defective
materials, could significantly reduce our manufacturing yields and product
reliability. Because the majority of our manufacturing costs are relatively
fixed, manufacturing yields are critical to our results of operations. Lower
than expected production yields could delay product shipments, impair our
operating results and harm our reputation. We may not obtain acceptable yields
in the future.
In some cases, existing
manufacturing techniques, which involve substantial manual labor, may not allow
us to cost-effectively meet our production goals so that we maintain acceptable
gross margins while meeting the cost targets of our customers. We may not
achieve adequate manufacturing cost efficiencies.
Because we plan to introduce new
products and product enhancements, we must effectively transfer production
information from our product development department to our manufacturing group
and coordinate our efforts with our suppliers to rapidly achieve volume
production. In our experience, our yields have been lower during the early
stages of introducing new product to manufacturing. If we fail to effectively
manage this process or if we experience delays, disruptions or quality control
problems in our manufacturing operations, our shipments of products to our
customers could be delayed.
Because the qualification and
sales cycle associated with fiber optic components is lengthy and varied, it is
difficult to predict the timing of a sale or whether a sale will be made, which
may cause us to have excess manufacturing capacity or inventory and negatively
impact our operating results.
In the communications industry,
service providers and optical systems manufacturers often undertake extensive
qualification processes prior to placing orders for large quantities of products
such as ours, because these products must function as part of a larger system or
network. This process may range from three to six months and sometimes longer.
Once they decide to use a particular suppliers product or component, these
potential customers design the product into their system, which is known as a
design-in win. Suppliers whose products or components are not designed in are
unlikely to make sales to that customer until at least the adoption of a future
redesigned system. Even then, many customers may be reluctant to incorporate
entirely new products into their new systems, as this could involve significant
additional redesign efforts. If we fail to achieve design-in wins in our
potential customers qualification processes, we will lose the opportunity for
significant sales to those customers for a lengthy period of time.
In addition, some of our customers
require that our products be subjected to standards-based qualification testing,
which can take up to nine months or more. While our customers are evaluating our
products and before they place an order with us, we may incur substantial sales
and marketing and research and development expenses, expend significant
management efforts, increase manufacturing capacity and order long lead-time
supplies. Even after the evaluation process, it is possible a potential customer
will not purchase our products. In addition, product purchases are frequently
subject to unplanned processing and other delays,
particularly with respect to larger customers for which our products represent a
very small percentage of their overall purchase activity. Accordingly, our
revenues and operating results may vary significantly and unexpectedly from
quarter to quarter.
24
If our customers do not qualify
our manufacturing lines for volume shipments, our optical networking components
may be dropped from supply programs and our revenues may decline.
Customers generally will not
purchase any of our products, other than limited numbers of evaluation units,
before they qualify our products, approve our manufacturing process and approve
our quality assurance system. Our existing manufacturing lines, as well as each
new manufacturing line, must pass through various levels of approval with our
customers. For example, customers may require that we be registered under
international quality standards. Our products may also have to be qualified to
specific customer requirements. This customer approval process determines
whether the manufacturing line achieves the customers quality, performance and
reliability standards. Delays in product qualification may cause a product to be
dropped from a long-term supply program and result in significant lost revenue
opportunity over the term of that program.
Our fiber optic components are
deployed in large and complex communications networks and may contain defects
that are not detected until after our products have been installed, which could
damage our reputation and cause us to lose customers.
Our products are designed for
deployment in large and complex optical networks. Because of the nature of these
products, they can only be fully tested for reliability when deployed in
networks for long periods of time. Our fiber optic products may contain
undetected defects when first introduced or as new versions are released, and
our customers may discover defects in our products only after they have been
fully deployed and operated under peak stress conditions. In addition, our
products are combined with products from other vendors. As a result, should
problems occur, it may be difficult to identify the source of the problem. If we
are unable to fix defects or other problems, we could experience, among other
things:
-
loss of customers;
-
damage to our reputation;
-
failure to attract new customers or
achieve market acceptance;
-
diversion of development and
engineering resources; and
-
legal actions by our
customers.
The occurrence of any one or more
of the foregoing factors could negatively impact our revenues.
The market for fiber optic
components is unpredictable, characterized by rapid technological changes,
evolving industry standards, and significant changes in customer demand, which
could result in decreased demand for our products, erosion of average selling
prices, and could negatively impact our revenues.
The market for fiber optic
components is characterized by rapid technological change, frequent new product
introductions, changes in customer requirements and evolving industry standards.
Because this market is new, it is difficult to predict its potential size or
future growth rate. Widespread adoption of optical networks, especially in the
metropolitan, last mile, and enterprise access segments of the networks, is
critical to our future success. Potential end-user customers who have invested
substantial resources in their existing copper lines or other systems may be
reluctant or slow to adopt a new approach, such as optical networks. Our success
in generating revenues in this market will depend on:
-
the education of potential end-user
customers and network service providers about the benefits of
optical networks; and
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the continued growth of the metropolitan,
last mile, and enterprise access segments of the communications
network.
25
If we fail to address changing
market conditions, sales of our products may decline, which would adversely
impact our revenues.
Disclosure requirements
relating to conflict minerals could increase our costs and limit the supply of
certain metals that may be used in our products and affect our reputation with
customers and stockholders.
As required under the Dodd-Frank
Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), the
Securities and Exchange Commission promulgated final rules regarding annual
disclosures by public companies of their use of certain minerals and metals,
known as conflict minerals, which are mined from the Democratic Republic of
the Congo (DRC), and adjoining countries, and their efforts to prevent the
sourcing of such conflict minerals from these countries. These new rules will
require us to engage in due diligence efforts beginning with the 2014 calendar
year to ascertain and disclose the origin of some of the raw materials used in
the production process. Initial disclosures will be required no later than May
31, 2015, with subsequent disclosures required no later than May 31 of each
following year. We expect to incur costs associated with complying with these
disclosure requirements, including due diligence to determine the sources of
conflict minerals, if any, used in our products and other potential changes to
our products, processes, or sources of supply as a consequence of such due
diligence activities. The implementation of these rules and our compliance
procedures could adversely affect the supply and pricing of materials used in
our products. Not all suppliers offer conflict free conflict minerals, so we
cannot be certain that we will be able to obtain sufficient quantities of
conflict minerals from such suppliers or at competitive prices. Also, our
reputation with our customers and stockholders could be damaged if we determine
that certain of our products contain minerals not determined to be conflict free
or if we are unable to sufficiently verify the origins of conflict minerals used
in our products through the procedures we may implement. If we cannot determine
that our products exclude conflict minerals sourced from the DRC or adjoining
countries, some of our customers may discontinue, or materially reduce,
purchases of our products, which could negatively affect our results of
operations. In addition, our customers may require us to report to them on our
conflict minerals compliance, and if we do not perform this function to a
customers satisfaction, they may cease to do business with us.
We may be unable to
successfully integrate acquired businesses or assets with our business, which
may disrupt our business, divert managements attention and slow our ability to
expand the range of our proprietary technologies and products.
To expand the range of our
proprietary technologies and products, we may acquire complementary businesses,
technologies or products, if appropriate opportunities arise. We may be unable
to identify other suitable acquisitions at reasonable prices or on reasonable
terms, or consummate future acquisitions or other investments, any of which
could slow our growth strategy. We may have difficulty integrating the acquired
products, personnel or technologies of any company or acquisition that we may
make. Similarly, we may not be able to attract or retain key management,
technical or sales personnel of any other companies that we acquire or from
which we acquire assets. These difficulties could disrupt our ongoing business,
distract our management and employees and increase our expenses.
If we fail to protect our
intellectual property rights, competitors may be able to use our technologies,
which could weaken our competitive position, reduce our revenues or increase our
costs.
The fiber optic component market
is a highly competitive industry in which we, and most other participants, rely
on a combination of patent, copyright, trademark and trade secret laws,
confidentiality procedures and licensing arrangements to establish and protect
proprietary rights. The competitive nature of our industry, rapidly changing
technology, frequent new product introductions, changes in customer requirements
and evolving industry standards heighten the importance of protecting
proprietary technology rights. Since the United States Patent and Trademark
Office keeps patent applications confidential until a patent is issued, our
pending patent applications may attempt to protect proprietary technology
claimed in a third party patent application. Our existing and future patents may
not be sufficiently broad to protect our proprietary technologies as to policing
the unauthorized use of our products is difficult and we cannot be certain that
the steps we have taken will prevent the misappropriation or unauthorized use of
our technologies, particularly in foreign countries where the laws may not
protect our proprietary rights as fully as United States laws. Our competitors
and suppliers may independently develop similar technology, duplicate our
products, or design around any of our patents or other intellectual property. If
we are unable to adequately protect our proprietary technology rights, others
may be able to use our proprietary technology without having to compensate us,
which could reduce our revenues and negatively impact our ability to compete
effectively.
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Litigation may be necessary to
enforce our intellectual property rights or to determine the validity or scope
of the proprietary rights of others. As a result of any such litigation, we
could lose our proprietary rights and incur substantial unexpected operating
costs. Any action we take to protect our intellectual property rights could be
costly and could absorb significant management time and attention. In addition,
failure to adequately protect our trademark rights could impair our brand
identity and our ability to compete effectively.
We may be subject to
intellectual property infringement claims that are costly to defend and could
limit our ability to use some technologies in the future.
Our industry is very competitive
and is characterized by frequent intellectual property litigation based on
allegations of infringement of intellectual property rights. Numerous patents in
our industry have already been issued, and as the market further develops and
participants in our industry obtain additional intellectual property protection,
litigation is likely to become more frequent. From time to time, third parties
may assert patent, copyright, trademark and other intellectual property rights
to technologies or rights that are important to our business. In addition, we
have and we may continue to enter into agreements to indemnify our customers for
any expenses or liabilities resulting from claimed infringements of patents,
trademarks or copyrights of third parties. Any litigation arising from claims
asserting that our products infringe or may infringe the proprietary rights of
third parties, whether the litigation is with or without merit, could be
time-consuming, resulting in significant expenses and diverting the efforts of
our technical and management personnel. We do not have insurance against our
alleged or actual infringement of intellectual property of others. These claims
could cause us to stop selling our products, which incorporate the challenged
intellectual property, and could also result in product shipment delays or
require us to redesign or modify our products or to enter into licensing
agreements. These licensing agreements, if required, would increase our product
costs and may not be available on terms acceptable to us, if at all.
Although we are not aware of any
intellectual property lawsuits filed against us, we may be a party to litigation
regarding intellectual property in the future. We may not prevail in any such
actions, given their complex technical issues and inherent uncertainties.
Insurance may not cover potential claims of this type or may not be adequate to
indemnify us for all liability that may be imposed. If there is a successful
claim of infringement or we fail to develop non-infringing technology or license
the proprietary rights on a timely basis, our business could be
harmed.
Because our manufacturing
operations are located in active earthquake fault zones in Taiwan, and our
Taiwan locations are susceptible to the effects of a typhoon, we face the risk
that a natural disaster could limit our ability to supply
products.
Our primary manufacturing
operations are located in Tu-Change City, Taiwan, an active earthquake fault
zone. This region has experienced large earthquakes in the past and may likely
experience them in the future. In September 2001, a typhoon hit Taiwan causing
businesses, including our manufacturing facility, and the financial markets to
close for two days. Because most of our manufacturing is performed in Taiwan, a
large earthquake or typhoon in Taiwan could disrupt our manufacturing operations
for an extended period of time, which would limit our ability to supply our
products to our customers in sufficient quantities on a timely basis, harming
our customer relationships.