NEOPHOTONICS CORPORATION 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 endedJune 30, 2022 and the audited consolidated financial statements and notes thereto and management's discussion and analysis of financial condition and results of operations for the year endedDecember 31, 2021 included in our Annual Report on Form 10-K. References to "NeoPhotonics ," "we," "our," and "us" are toNeoPhotonics Corporation unless otherwise specified or the context otherwise requires. This Quarterly Report on Form 10-Q for the period endedJune 30, 2022 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 endedJune 30, 2022 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 endedDecember 31, 2021 , as filed with theSEC onFebruary 25, 2022 . 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 for Cloud and hyperscale data center internet content provider and telecom networks. We are the world's primary supplier of tunable lasers that emit the ultra-pure light that is required for the highest speed over distance fiber optic communications links. (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.) Our products operate at the highest speed over distance, at speeds of 400 Gigabits per Second ("G"), 600G and 800G and beyond data rates in a single wavelength. Versions of these products have the speed, size, output power and low power consumption that enable interoperable pluggable transceivers in standard form factors which directly transmit data using industry standard Internet Protocol coding, or IP over DWDM wavelengths, greatly simplifying data networks, thereby lowering costs and reducing the total electrical power required. We integrate our lasers and our high performance coherent optical components into transmit/receive modules, or transceivers. Our high-speed transceiver modules, which can operate at data rates including 400G, for example our 400ZR and 400ZR+ coherent pluggable modules, enable new, lower cost network architectures using IP over DWDM protocols. The emergence of such 400ZR and 400ZR+ pluggable modules extends our capabilities to a new, rapidly expanding market. Such modules put the full coherent transmission capabilities of a line card into the same form factor as a pluggable client side transceiver, enabling interconnects between data centers to be nearly as simple as interconnects within a data center, substantially reducing costs and complexity. Over the past decade we have been first to deliver commercial mass production volumes for each of the highest speed advances in coherent optical components and lasers, as maximum speeds have advanced for each wavelength, or color, from 100G to 200G, 400G, 600G and 800G. We are a specialist in developing and producing products for the highest speed over distance applications, where high baud rate, laser signal clarity and high sensitivity are keys to achieving longer distances for a given speed. We believe we are well positioned to attain and maintain industry leadership in these lasers, component and module solutions based on our leadership in the ultra-pure light lasers which power them and our comprehensive Silicon Photonics and compound semiconductor technologies for optical devices and optical ICs. 26 -------------------------------------------------------------------------------- Table of Contents Coherent is 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 has been a fulcrum for the industry as it marked a major step-up in speed, as well as enabling new network architecture alternatives to dramatically lower costs by deploying 400ZR architectures in networks. 400G is now the basic building block for network deployments for all reaches from 40km to long haul distances of 2000kms or more, all of which require coherent transmission technology. We believe we are a global leader in coherent transmission technology, based on our leadership in ultra-pure light lasers, Silicon Photonics and optical integration for miniaturization and low power consumption. We sell to virtually all of the leading telecom network equipment companies such as ADVA, Arista Networks, Ciena, Cisco Systems,Fiberhome , Fujitsu, Huawei, Infinera, NEC, Nokia and ZTE, as well as to certain Cloud and hyperscale data center operators. Furthermore, we believe that use cases for 400ZR and 400ZR+ system-level modules will extend across data center interconnect, backhaul for 5G wireless networks and metro networks. Key attributes of power and power density, and interoperability of coherent pluggable solutions, drive this forecast. These architectures are now being deployed by hyperscale operators and will be adopted in metro telecom networks using 400ZR+ coherent 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 DSPs will enable 800ZR and 800ZR+ coherent pluggable modules within the next few years, followed by 1.6T (Terabits per second) implementations. With 400G as a fulcrum for the expansion of the market for the highest speeds, we believe we are well positioned to take advantage of this rapidly developing, high growth market.
Extension of coherent modules into metro networks will be driven by substantially lower costs achieved through elimination of network equipment proprietary chassis, and the reduction in the number of ROADMs required, compared to current network architectures.
Our High Speed Products for data rates of 100G, 400G, 600G, 800G and above were 94% of our revenues for the three months endedJune 30, 2022 and 2021. "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 designed for use in 400G and above applications was$61.2 million in the three months endedJune 30, 2022 representing 64% of total revenues and growth of 105% over the same period a year ago. Products capable of data rates of 400G and above have accounted for more than 10 percent of our revenue since 2018 and have increased from$44 million in 2019 to$86 million in 2020, to$148 million in 2021, such that revenue from products for 400G and above applications reached 51% of revenues in 2021. (Our 400G capable products are defined as products capable of 50 Gbaud and above operation plus lasers purchased specifically for systems with maximum data rates of 400G or higher.) We believe that the market for 400G and above products will grow at a five-year compound annual growth rate of 60 percent through 2025. We therefore expect our 400G and above revenues will continue to grow at an accelerated rate over the immediate and longer term. Macroeconomic Factors
We continue to manage through external macro situations that have had a material
impact on our business: The Covid-19 Pandemic and associated supply chain
disruptions, increasing inflation and the
The Covid-19 pandemic continues to impact our business, the business of our customers and suppliers and how we execute our business. The pandemic is currently causing industry wide supply chain shortages, particularly for semiconductor chips. In the second quarter of 2022, these shortages had a negative impact on our revenue of approximately$10 million . We expect the supply chain disruption will continue at some level for several quarters. Our priorities to address the impacts of the global pandemic on our operations are as follows:
•The health and well-being of our employees and supply chain partners is our top priority.
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•We continue to use enhanced measures to ensure and maintain safety, including
hybrid work where possible, social distancing and enhanced protocols in each of
our global facilities.
•We closely monitor evolving conditions and adhere to local and federal
guidelines in each location in which we operate.
•We are working closely with our supply chain partners globally to secure
sufficient inventory, with buffer stock where possible, and to support the
health and safety of their employees.
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. To ensure
continued supply, we continually access the spot buy markets and we are impacted
by increases in the cost of some components.
On May 16, 2019 , BIS added Huawei and certain affiliates to the Entity List, and
in May 2020 , BIS added Fiberhome Technologies Group to the Entity List, denying
both the ability to purchase products, software and technology that are subject
to EAR. We are committed to EAR compliance in each of the locations in which we
do business. On August 17, 2020 , BIS increased restrictions on Huawei and its
affiliates on the Entity List related to items produced domestically and abroad
that use U.S. technology or software and imposed additional requirements for
items subject to Commerce export control. On October 5, 2020 , we announced that
we will manage the business without relying on future revenue contributions from
Huawei. We subsequently determined that one product category is not produced
with U.S. technology and we subsequently resumed shipments to Huawei. These
shipments declined to modest single digit percentage of revenue in the first
quarter of 2022 and remained there in the second quarter. We expect revenue from
Huawei to remain at this level or below.
Proposed Merger with Lumentum Holdings Inc.
On
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 digital signal processor IC ("DSP").
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 other coherent components for 400G, 600G and above applications.
The capabilities of coherent optics continue to grow with increasing photonic
integration for higher performance and smaller size. These are core capabilities
of NeoPhotonics and therefore open further opportunities for us in adjacent
markets. Outside of communications, coherent technology improves sensitivity and
performance for a variety of applications such as inter-satellite communication
links including for low earth orbit ("LEO") satellites, plus industrial
applications, 3D sensing 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 inthe 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
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Table of Contents Results of Operations Revenue Our business is focused on the highest speed digital optics and signal processing communications applications. In the three and six months endedJune 30, 2022 , our High Speed Products for data rates of 100G and beyond comprised 94% of our revenues. 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 change the price of our products as market and competitive conditions change or as manufacturing costs change. 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 inChina . Our sales transactions to customers are denominated primarily inU.S. dollars. Three Months Ended Six Months Ended June 30, June 30, (in thousands, except percentages) 2022 2021 $ Change % Change 2022 2021 $ Change % Change High Speed Products$ 88,999 $ 61,032 $ 27,967 46%$ 172,580 $ 118,305 $ 54,275 46% Network Products and Solutions 6,007 3,978 2,029 51% 11,694 7,630 4,064 53% Total revenue$ 95,006 $ 65,010 $ 29,996 46%$ 184,274 $ 125,935 $ 58,339 46% We generate most of our revenue from a limited number of customers. In the three months endedJune 30, 2022 , three customers each were greater than 10% of our revenue and our top five customers during this period represented 83% of total revenue. In the three months endedJune 30, 2021 , three customers each were greater than 10% of revenue and our top five customers during this period represented 77% of total revenue. In the six months endedJune 30, 2022 , three customers were each greater than 10% of the Company's total revenue and the Company's top five customers represented approximately 81% of the Company's total revenue. In the six months endedJune 30, 2021 , four customers were greater than 10% and the Company's top five customers represented approximately 76% of the Company's total revenue.
Huawei declined to less than 5% of revenue for the three and six months ended
Three Months Ended
Total revenue increased by$30.0 million , or 46%, in the three months endedJune 30, 2022 compared to the same period in 2021 primarily on increased volume of shipments. Our High Speed Product revenue increased$28.0 million , or 46%, and our Networking Products and Solutions revenue increased$2.0 million , or 51% for the three months endedJune 30, 2022 compared to the same period for 2021. Our highest speed 400G and above product revenue increased by 105% for the three months endedJune 30, 2022 compared to the same period in 2021. The 400G and above product revenue represented 64% of total revenue compared to 46% for the three months endedJune 30, 2021 .
Six Months Ended
Total revenue increased by$58.3 million , or 46%, in the six months endedJune 30, 2022 compared to the same period in 2021 primarily on increased volume of shipments. Our High Speed Product revenue increased$54.3 million , or 46%, and our Networking Products and Solutions revenue increased$4.1 million , or 53% for the six months endedJune 30, 2022 compared to the same period for 2021. Our highest speed 400G and above product revenue increased by 89% for the six months endedJune 30, 2022 compared to the same period in 2021. The 400G and above product revenue represented 63% of total revenue compared to 49% for the six months endedJune 30, 2021 .
Three and Six Months Ended
In the three and six months ended
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Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
China 17 % 38 % 20 % 32 %
Americas 14 % 9 % 14 % 9 %
Rest of world 69 % 53 % 66 % 59 %
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 group consistently represents 94% or more of
our business. Since launching 400ZR and 400ZR+ pluggable coherent modules in the
fourth quarter of 2019, we have shipped units for qualification to multiple
hyper scale customers. In addition, we are shipping initial quantities of our
newest 96 Gbaud component suite for 800G DCI and 400G long-haul transmissions.
We believe these high-performance products will bring accelerating revenue
growth and our technology enables potential expansion into other adjacent
markets.
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. With our higher business volume in the three and six months endedJune 30, 2022 compared toJune 30, 2021 , we were better able to utilize our factories and improve cost absorption. Three Months Ended Six Months Ended June 30, June 30, (in thousands, except percentages) 2022 2021 $ Change % Change 2022 2021 $ Change % Change Cost of goods sold$ 61,935 $ 55,135 $ 6,800 12 %$ 123,914 $ 102,721 $ 21,193 21 % Gross profit$ 33,071 $ 9,875 $ 23,196 235 %$ 60,360 $ 23,214 $ 37,146 160 % Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 Gross profit as a % of revenue 35 % 15 %
33 % 18 %
Three Months Ended
Gross profit increased by$23.2 million , to$33.1 million , in the three months endedJune 30, 2022 , compared to$9.9 million in the same period in 2021. Gross margin increased to 35% in the three months endedJune 30, 2022 , compared to 15% in the same period a year ago. The increase in gross profit is primarily related to the increase in volume, product cost reduction and lower inventory reserves, with additional benefit from improved factory utilization.
Six Months Ended
Gross profit increased by$37.1 million , to$60.4 million , in the six months endedJune 30, 2022 , compared to$23.2 million in the same period in 2021. Gross margin increased to 33% in the six months endedJune 30, 2022 , compared to 18% in the same period a year ago. The increase in gross profit is primarily related to the increase in volume, product cost reductions with additional benefit from improved factory utilization. 30
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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 Six Months Ended
June 30, June 30,
(in thousands, except percentages) 2022 2021 $ Change % Change 2022 2021 $ Change % Change
Research and development $ 14,736 $ 15,410 $ (674) (4) % $ 29,834 $ 28,508 $ 1,326 5 %
Sales and marketing 3,742 3,362 380 11 % 7,428 7,227 201 3 %
General and administrative 9,228 7,398 1,830 25 % 19,022 14,692 4,330 29 %
Acquisition and asset sale related costs 638 (36) 674 1,872 % 1,543 127 1,416 1,115 %
Restructuring charges - 22 (22) (100) % - 22 (22) (100) %
Asset impairment charges 30 - 30 - % 443 - 443 - %
Facility shut down related costs 209 - 209 - % 509 - 509 - %
Litigation settlements (12) - (12) - % 37 - 37 - %
Gain on asset sales (1,866) - (1,866) - % (1,980) - (1,980) - %
Total operating expenses $ 26,705 $ 26,156 $ 549 2 % $ 56,836 $ 50,576 $ 6,260 12 %
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
Research and development expense of$14.7 million , or 16% of revenue, decreased$0.7 million in the three month period endedJune 30, 2022 , compared to$15.4 million for the same period in 2021. The decrease was due to a combination of lower depreciation expense and lower professional and outside service fees, off-set by increased employee compensation.
Six Months Ended
Research and development expenses of$29.8 million or 16% of revenue, increased$1.3 million in the six months endedJune 30, 2022 compared to$28.5 million for the same period in 2021. The increase was due to a combination of higher materials expenses and employee compensation, off-set by lower depreciation expense. We focus our research and development efforts to continue pushing the performance leadership boundaries and believe that investments 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.
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
Sales and marketing expense increased by 11% to$3.7 million in the three months endedJune 30, 2022 compared to$3.4 million for the three months endedJune 30, 2021 , primarily due to employee compensation.
Six Months Ended
Sales and marketing expense increased by 3% to$7.4 million in the six months endedJune 30, 2022 compared to$7.2 million for the six months endedJune 30, 2021 , primarily due to employee compensation. 31 -------------------------------------------------------------------------------- Table of Contents 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.
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
General and administrative expense increased$1.8 million to$9.2 million in the three months endedJune 30, 2022 , compared to$7.4 million for the same period in 2021. The increase is due to$1.4 million of retention costs related to the acquisition and the remainder is primarily due to increased use of outside consultants.
Six Months Ended
General and administrative expense increased$4.3 million to$19.0 million in the six months endedJune 30, 2022 compared to$14.7 million for the same period in 2021. The increase is due to$2.8 million of retention costs related to the acquisition and the remainder is primarily due to increased use of outside consultants.
Acquisition and asset sale related costs
Acquisition and asset sale related costs consist of legal, advisory, and other fees related to actual and potential future acquisition and divestiture activity by the Company.
Three Months Ended
For the three months ended
Six Months Ended
For the three months endedJune 30, 2022 , we incurred$1.5 million of acquisition and asset sale related costs, compared to a$0.1 million for the same period in 2021. The increase was primarily due to advisory and support fees that were related to the proposed merger.
Other Operating Expenses
Other operating expenses for the three and six months ended
Asset impairment charges were less than$0.1 million for the three months endedJune 30, 2022 and were$0.4 million for the six months endedJune 30, 2022 . The charges were primarily for a write-down of cash held in the Company's Russian subsidiaryNeoPhotonics Technics LLC as a result of sanctions imposed by theU.S. Treasury on the country ofRussia's financial institutions inFebruary 2022 . Facility shut down related costs were$0.2 million for the three months endedJune 30, 2022 and$0.5 million for the six months endedJune 30, 2022 . The costs were incurred as a result of closure of ourFremont, California facility, as the Company exercised its early exit right to terminate the facility lease. As ofJune 30, 2022 , the Company was in the process of completing final requirements for closure of the lease commitments.
Litigation settlements were for legal fees on various litigation issues and
resulted in a small credit for the three months ended
Gain on asset sale was$1.9 million and$2.0 million for the three and six months endedJune 30, 2022 , respectively. OnMarch 23, 2022 , the Company entered into an Asset Purchase Agreement and Subscription Agreement withBluGlass Inc. whereby the Company would sell its equipment and other assets at the Company's facility inFremont, California , in exchange for cash consideration and publicly traded shares of BluGlass Limited (BLG.AX), of whichBluGlass Inc. is a wholly-owned subsidiary. The transaction was completed in the second quarter of 2022 and the Company received$1.8 million in cash and an additional$0.4 million in cash from the sale of the shares, resulting in a gain of$1.9 million for the three months endedJune 30, 2022 . The gain for the six months endedJune 30, 2022 included the gain from the agreement withBluGlass Inc. and a net gain on dispositions of various assets inthe United States andJapan . 32
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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 inChina is the RMB and of our subsidiary inJapan is the JPY. The foreign currency transaction gains and losses of our subsidiaries inChina andJapan primarily include unrealized foreign exchange gains and losses from the mark-to-market ofU.S. dollar based assets and liabilities inChina andJapan . Three Months Ended Six Months Ended June 30, June 30, (in thousands, except percentages) 2022 2021 $ Change % Change 2022 2021 $ Change % Change Interest income$ 147 $ 140 $ 7 5 %$ 218 $ 245 $ (27) (11) % Interest expense (510) (220) (290) 132 % (865) (447) (418) 94 % Other income (expense), net 5,823 (880) 6,703 762 % 6,218 263 5,955 2,264 % Total$ 5,460 $ (960) $ 6,420 669 %$ 5,571 $ 61 $ 5,510 9,033 %
Three Months Ended
Interest income remained relatively flat in the three months endedJune 30, 2022 compared to the same period a year ago. Interest expense increased by$0.3 million in the same period due to Lumentum term loan interest incurred in the three months endedJune 30, 2022 . Other income (expense), net increased by$6.7 million in the three months endedJune 30, 2022 , as compared to the same period in 2021, primarily due to theU.S. dollar appreciation against both the Chinese Renminbi and Japanese Yen for the current period compared to weakening in the prior year period.
Six Months Ended
Interest income remained relatively flat in the six months endedJune 30, 2022 compared to the same period a year ago. Interest expense increase by$0.4 million in the same period due to Lumentum term loan interest incurred in the six months endedJune 30, 2022 . Other income (expense), net increased by$5.9 million in the six months endedJune 30, 2022 compared to the same period in 2021 primarily due to theU.S. dollar appreciation against both the Chinese Renminbi and Japanese Yen for the current period compared to weakening against the Chinese Renminbi and a smaller appreciation against the Japanese Yen in the prior year period. Income taxes We conduct our business globally and our operating income is subject to varying rates of tax in theU.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 Six Months Ended June 30, June 30, (in thousands, except percentages) 2022 2021 $ Change % Change 2022 2021 $ Change % Change Income tax (provision)$ (2,521) $ (192) $ (2,329) 1,213 %$ (3,093) $ (823) $ (2,270) 276 % Our income tax provision in the three and six months endedJune 30, 2022 and 2021 was primarily related to the operating profit realized in our foreign subsidiaries inJapan andChina . Historically, we have experienced net losses in theU.S. and in the short term, we expect this trend to continue.
Liquidity and capital resources
As ofJune 30, 2022 , our principal source of liquidity consisted of approximately$104.8 million of cash and cash equivalents and our short-term investments, of which approximately$35.0 million was held by subsidiaries outside ofthe United States . Cash, short-term investments and restricted cash held outside of theU.S. may be subject to taxes if repatriated and may not be immediately available for our working capital needs. Approximately$10.5 million of our retained earnings within our total accumulated deficit as ofDecember 31, 2021 was subject to restrictions due to the fact that our subsidiaries inChina 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
•Borrowings under our Wells Fargo credit facility of
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•Borrowings of $5.9 million from our credit facilities in Japan .
In addition to our cash, we had approximately $15.4 million of additional
liquidity available to us, of which $6.25 million is required to be maintained
as unused borrowing capacity, under our $50.0 million credit facility with Wells
Fargo Bank . We also have additional liquidity available to us of up to $20.0
million from our credit facility with Lumentum.
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.
Cash flow discussion
The table below sets forth selected cash flow data for the periods presented:
Six Months Ended
June 30,
(in thousands) 2022 2021
Net cash used in operating activities $ (10,077) $ (21,675)
Net cash used in investing activities (2,802) (4,451)
Net cash provided by (used in) financing activities 13,291 (2,248)
Effect of exchange rates on cash, cash equivalents and restricted cash (1,215)
99
Net decrease in cash, cash equivalents and restricted cash $ (803) $ (28,275)
Operating activities
Net cash used in operating activities decreased to $10.1 million in the six
months ended June 30, 2022 compared to $21.7 million net cash used in operating
activities in the same period in 2021. The decrease is due to the increase in
net income of $34.1 million . Cash outflow from working capital of $25.4 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
the ongoing supply chain challenges. The increase in inventory and accounts
payable is due to increased procurement to support our future growth.
Investing activities
Net cash used in investing activities was$2.8 million in the six months endedJune 30, 2022 , compared to$4.5 million used in investing activities in the same period in 2021. The decrease in cash flows used in investing activities was primarily due to higher proceeds from sales of assets.
Financing activities
Net cash provided by financing activities was$13.3 million in the six months endedJune 30, 2022 , compared to$2.2 million used in financing activities in the same period in 2021. The increase in cash flows provided by financing activities was primarily due to the$30.0 million in proceeds received from Lumentum under the term loan, offset by the repayment of the Shanghai Pudong Development Bank note.
Off-balance Sheet Arrangements
As of
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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