SEC Company Response from APPLIED OPTOELECTRONICS, INC. (AAOI) (CIK 0001158114) (AAOI) — Aug 13, 2013
APPLIED OPTOELECTRONICS, INC. (AAOI) (CIK 0001158114)
Date: Aug. 13, 2013 · CIK: 0001158114 · Accession: 0001104659-13-063207
AI Filing Summary & Sentiment
Reasoning
Referenced dates: July 16, 2013
Letter
DLA Piper LLP (US)
1000 Louisiana Street, Suite 2800
Houston, Texas 77002-5005
www.dlapiper.com
Frank Wu
frank.wu@dlapiper.com
T
713.425.8446
F
713.300.6046
August 13, 2013
VIA EDGAR AND OVERNIGHT DELIVERY
Securities and Exchange Commission
Division of Corporation Finance
100 F Street, N.E.
Washington, D.C. 20549
Attention: Russell Mancuso
Tom Jones
Praveen Kartholy
Gary Todd
Re: Applied Optoelectronics, Inc. Amendment No. 2 to Confidential Draft Registration Statement on Form S-1 Submitted June 28, 2013 CIK No. 0001158114
Ladies and Gentlemen:
We are submitting this letter on behalf of Applied Optoelectronics, Inc. (the “Company”) in response to comments from the staff (the “Staff”) of the Securities and Exchange Commission (the “Commission”) received by letter dated July 16, 2013 (the “Staff Letter”) relating to the Company’s Amendment No. 2 to Confidential Draft Registration Statement on Form S-1 (“Amendment No. 2”).
Additionally, on behalf of the Company, we are supplementally providing with this letter a folder including materials in support of various statements in the Registration Statement (the “Supplemental Materials”). We have included cross-references to the Supplemental Materials in this letter where appropriate. Because of the commercially sensitive nature of certain information contained in the Supplemental Materials, this submission is accompanied by the Company’s request for confidential treatment for selected portions of the Supplemental Materials pursuant to Rule 83 of the Commission’s Rules on Information and Requests, 17 C.F.R. § 200.83, and the Freedom of Information Act. Pursuant to Rule 418(b) of the Securities Act of 1933, as amended, the Company respectfully requests that the Staff return upon completion of its review each of the Supplemental Materials furnished to the Staff. The Company confirms to the Staff that the Supplemental Materials were not filed in electronic format.
In response to the comments set forth in the Staff Letter, the Company has revised the Registration Statement and, together with this response, is publicly filing a revised Registration Statement (the “Registration Statement”). For the convenience of the Staff, we are providing by overnight delivery to the Staff a copy of this letter, four marked copies of the Registration Statement (against Amendment No. 2, which was confidentially submitted on June 28, 2013) and four copies of the Supplemental Materials.
The Company is also supplementally providing to the Staff the relevant portions of the industry data from Akamai, Cisco and Infonetics as cited in the Registration Statement on pages 79 through 82 thereof. Please refer to the materials attached as Annex A to the Supplemental Materials. To expedite the Staff’s review, we have marked the industry data so that the Staff can easily locate and review the relevant data.
In this letter, we have recited the comments from the Staff Letter in italicized, bold type and followed each comment with the Company’s response. Except as otherwise specifically indicated, page references in the Company’s responses correspond to the page of the Registration Statement.
Prospectus Summary, page 1
1. We note your revisions in response to prior comment 4; however, given the retained focus in your summary on detail regarding your markets and industry, it remains unclear what are your “fiber-optic networking solutions” and “optical communications ... components, subassemblies and modules” that you mention in the first paragraph of the overview. Please state clearly, directly and prominently without technical jargon what your products are and do, and relocate detail that is more appropriate for another section of your prospectus.
Response: In response to the Staff’s comment, the Company has further revised the prospectus summary to relocate the details noted by the Staff to other portions of the Registration Statement. The Company has also revised the prospectus summary to further reduce the use of technical jargon. The Company added language in the first paragraph on page 1 to further describe its products. The Company considered adding additional detail to the prospectus summary regarding its products; however, since the Company offers several thousand different products (as described on pages 88 to 91 of the Registration Statement), the Company believes that adding even more detail would make the summary too long and would potentially be confusing to investors.
2. If your disclosure in the third paragraph of the overview about your leadership positions is based on sales data that excludes categories of products, please expand your disclosure to clarify the basis of your leadership claims. If the expanded disclosure is inappropriate for a prospectus summary, please relocate your leadership claims to a section of your document where you can provide sufficient explanation for investors to understand the basis for and limitations of your claims.
Response: The Company advises the Staff that the Company’s leadership positions are based on sales data as presented by Ovum Limited (“Ovum”) that excludes certain categories of products from the CATV optical component market and the subsystems market, specifically pump lasers, Erbium-doped Fiber Amplifiers (EDFAs), and certain EDFA components (optical fiber and inline isolators). These products were excluded in the Ovum Report on the basis that sales of such excluded products are small relative to the other components and subsystems that are included in the Ovum Report. As noted in the Ovum Report, neither the Company nor the Company’s principal competitors make such excluded products. The inclusion of the excluded categories of products in the Ovum Report would not have changed the Company’s ranking as shown in the Ovum Report. The Company has confirmed the accuracy of the above information with Ovum by telephone.
3. Although we are not objecting to your summary disclosure regarding your two largest customers, please address that part of comment 3 regarding relocation of the other disclosure in the first paragraph on page 2 and your statements about Amazon, Facebook, Google and Microsoft to a more appropriate section of your prospectus after your prospectus summary. In your relocated disclosure, please ensure that you have disclosed the criteria that you used to determine which entities to name, that you disclose all entities that satisfy those criteria, and that the extent of each identified entity’s current contribution to your business is clear.
Response: The Company has revised the Registration Statement on pages 2 and 3 to relocate the disclosure in the first paragraph on page 2 of Amendment No. 2 and deleted the references to Amazon, Facebook, Google and Microsoft in response to the Staff’s comments. The Company has also revised the Registration Statement on page 79 to describe the criteria and contribution that were used to determine which entities to name.
4. We note your responses to prior comments 2 and 4 regarding the $2.2 billion “revenue opportunity” now mentioned on page 2. Please relocate such disclosure from the prospectus summary to a section of your document that appears after you have explained the results that you have achieved and the related risks. Also, if the $2.2 [billion] opportunity includes either (1) sales from products you do not offer, or (2) potential customers other than those who operate open system architectures that you say on page 87 you target, please tell us why you believe it is appropriate to claim a $2.2 billion opportunity.
Response: The Company advises the Staff that the Company has removed the $2.2 billion “revenue opportunity” from the Prospectus Summary. In addition, the Company advises the Staff that the Company estimates the $2.2 billion “revenue opportunity” as the Company’s current addressable market based on the data prepared by Ovum. Please refer to Annex B of the Supplemental Materials for support in response to the SEC’s comment regarding the $2.2 billion “revenue opportunity”.
The Offering, page 7
5. Please reconcile your disclosure on pages 7-8 about the number and types of securities to be outstanding after the offering with your disclosure on page 128.
Response: The Company advises the Staff that, once the price range for the Company’s common stock in this offering is known and specified in the Company’s preliminary prospectus, the Company will revise the Registration Statement on pages 7 and 8 to reflect the assumed effect of the issuance of additional shares of common stock upon the conversion of certain warrants into common stock and the number of shares outstanding immediately prior to the offering will be revised to be presented in the following format (subject to change based on warrant exercises occurring after the date of this letter):
The number of shares of our common stock to be outstanding after this offering is based on [ ] shares of our common stock outstanding as of June 30, 2013.
This number of shares does not include:
· 22,083,499 shares of common stock subject to outstanding options as of June 30, 2013, with a weighted average exercise price of $0.25436 per share;
· 650,000 shares of Series F preferred stock issuable upon the exercise of outstanding warrants, with a weighted average exercise price of $0.31277 per share, which, if not exercised pursuant to their terms prior to the completion of this offering, will convert to be exercisable for an aggregate of 780,011 shares of common stock at a weighted average exercise price of $0.32051 per share;
· 200,000 shares of Series G preferred stock issuable upon the exercise of an outstanding warrant with an exercise price of $0.35 per share, which, if not exercised pursuant to its terms prior to the completion of this offering, will convert to be exercisable for of 200,000 shares of common stock at an exercise price of $0.35 per share; and
· 24,000,000 shares of common stock available for future sale or issuance under our stock option plans.
Unless otherwise indicated, this prospectus reflects and assumes the following:
· the automatic conversion of all of our outstanding shares of preferred stock into 261,286,610 shares of our common stock upon the closing of this offering;
· the automatic conversion of certain outstanding warrants to purchase shares of preferred stock that, if not exercised prior to the completion of this offering, are expected to automatically convert in the aggregate into [ ] shares of common stock, based on the midpoint of the price range on the front cover of this prospectus;
· the filing of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws immediately prior to the closing of this offering; and
· no exercise of the underwriters’ over-allotment option.
We are subject to governmental export and import controls, page 29
6. From your disclosure on pages 97-98 in response to prior comment 10, it remains unclear what controls would have the effects that you mention in this risk factor. Please revise or advise.
Response: The Company has revised the Registration Statement on pages 29 and 30 to modify the risk factor to specifically identify the export/import controls affecting the Company in response to the Staff’s comment.
Use of Proceeds, page 39
7. It is unclear how your revised disclosure addresses the last sentence of prior comment 12. If you do not have a specific plan for a significant portion of the proceeds, please say so clearly in this section and disclose the principal reasons for the offering.
Response: The Company has revised the Registration Statement on page 39 to address the Staff’s comment.
Factors affecting our performance, page 48
8. Given your responses to prior comments 5 and 16 and your disclosure that design wins are a key factor affecting your performance, it is unclear why you believe the disclosure in your prospectus provides sufficient information for investors to evaluate how the design wins affected your performance in the periods presented and what the design win trends are. Please advise or revise.
Response: The Company has revised the Registration Statement on page 49 to remove design wins as a factor affecting the Company’s performance to address the Staff’s comment.
Comparison of the three months ended March 31, 2013 and March 31, 2012, page 55
9. Please disclose why your revenues from the CATV and FTTH markets declined in the three months ended March 31, 2013.
Response: The Company has revised the Registration Statement on page 54 to reflect results from the first half of 2013 (Q1 and Q2), and has indicated in that disclosure the reason for the decline in CATV revenue during the first half of 2013 in comparison to the first half of 2012.
Gross margin, page 56
10. Please expand your response to prior comment 18 to clarify how you know that “gross margin was primarily the result of an unfavorable product mix” but you are unable to disclose to investors how or why the mix changed unfavorably. Also, please tell us whether any of the “product categories” disclosed on your web site contributed 15% or more of your consolidated revenue during any of the last three years.
Response: The Company has revised the Registration Statement on page 55 to provide additional information regarding its gross margin within various markets and how product mix within a market can differ by geography. The Company has also expanded the disclosure in such section to indicate that the Company sells similar products in different geographic regions at different prices, resulting in different gross margins among those similar products. The decrease in gross margin in the first half of 2013 was primarily the result of an unfavorable product mix in the Asian market, leading to higher than normal direct labor and overhead charges during such period. Additionally, the Company recorded a higher than normal inventory reserve from discontinued products associated with inventory on hand in the Company’s Asia operations.
The Company advises the Staff that the product categories identified on the Company’s website are used only to group products by identifying certain similarities among the Company’s products for potential customers. In the Registration Statement, the Company discloses classes of products by reference to the markets in which they are used and groups its products by the CATV, internet data center, FTTH and other markets for illustrative purposes, which groupings the Company believes are more meaningful to potential investors. As disclosed on page 49 of the Registration Statement, the CATV market represented the only end-market from which the Company derived more than 15% of its revenue for fiscal year 2012. With respect to the product categories on the Company’s website, some of these categories are not market specific, such as TOSA, Digital, Transceivers and Sub-Assemblies, and others are partially overlapping, such as CATV and Sub-As
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DLA Piper LLP (US)
1000 Louisiana Street, Suite 2800
Houston, Texas 77002-5005
www.dlapiper.com
Frank Wu
frank.wu@dlapiper.com
T
713.425.8446
F
713.300.6046
August 13, 2013
VIA EDGAR AND OVERNIGHT DELIVERY
Securities and Exchange Commission
Division of Corporation Finance
100 F Street, N.E.
Washington, D.C. 20549
Attention: Russell Mancuso
Tom Jones
Praveen Kartholy
Gary Todd
Re: Applied Optoelectronics, Inc.
Amendment No. 2 to Confidential Draft Registration Statement on Form S-1
Submitted June 28, 2013
CIK No. 0001158114
Ladies and Gentlemen:
We are submitting this letter on behalf of Applied Optoelectronics, Inc. (the “Company”) in response to comments from the staff (the “Staff”) of the Securities and Exchange Commission (the “Commission”) received by letter dated July 16, 2013 (the “Staff Letter”) relating to the Company’s Amendment No. 2 to Confidential Draft Registration Statement on Form S-1 (“Amendment No. 2”).
Additionally, on behalf of the Company, we are supplementally providing with this letter a folder including materials in support of various statements in the Registration Statement (the “Supplemental Materials”). We have included cross-references to the Supplemental Materials in this letter where appropriate. Because of the commercially sensitive nature of certain information contained in the Supplemental Materials, this submission is accompanied by the Company’s request for confidential treatment for selected portions of the Supplemental Materials pursuant to Rule 83 of the Commission’s Rules on Information and Requests, 17 C.F.R. § 200.83, and the Freedom of Information Act. Pursuant to Rule 418(b) of the Securities Act of 1933, as amended, the Company respectfully requests that the Staff return upon completion of its review each of the Supplemental Materials furnished to the Staff. The Company confirms to the Staff that the Supplemental Materials were not filed in electronic format.
In response to the comments set forth in the Staff Letter, the Company has revised the Registration Statement and, together with this response, is publicly filing a revised Registration Statement (the “Registration Statement”). For the convenience of the Staff, we are providing by overnight delivery to the Staff a copy of this letter, four marked copies of the Registration Statement (against Amendment No. 2, which was confidentially submitted on June 28, 2013) and four copies of the Supplemental Materials.
The Company is also supplementally providing to the Staff the relevant portions of the industry data from Akamai, Cisco and Infonetics as cited in the Registration Statement on pages 79 through 82 thereof. Please refer to the materials attached as Annex A to the Supplemental Materials. To expedite the Staff’s review, we have marked the industry data so that the Staff can easily locate and review the relevant data.
In this letter, we have recited the comments from the Staff Letter in italicized, bold type and followed each comment with the Company’s response. Except as otherwise specifically indicated, page references in the Company’s responses correspond to the page of the Registration Statement.
Prospectus Summary, page 1
1. We note your revisions in response to prior comment 4; however, given the retained focus in your summary on detail regarding your markets and industry, it remains unclear what are your “fiber-optic networking solutions” and “optical communications ... components, subassemblies and modules” that you mention in the first paragraph of the overview. Please state clearly, directly and prominently without technical jargon what your products are and do, and relocate detail that is more appropriate for another section of your prospectus.
Response: In response to the Staff’s comment, the Company has further revised the prospectus summary to relocate the details noted by the Staff to other portions of the Registration Statement. The Company has also revised the prospectus summary to further reduce the use of technical jargon. The Company added language in the first paragraph on page 1 to further describe its products. The Company considered adding additional detail to the prospectus summary regarding its products; however, since the Company offers several thousand different products (as described on pages 88 to 91 of the Registration Statement), the Company believes that adding even more detail would make the summary too long and would potentially be confusing to investors.
2. If your disclosure in the third paragraph of the overview about your leadership positions is based on sales data that excludes categories of products, please expand your disclosure to clarify the basis of your leadership claims. If the expanded disclosure is inappropriate for a prospectus summary, please relocate your leadership claims to a section of your document where you can provide sufficient explanation for investors to understand the basis for and limitations of your claims.
Response: The Company advises the Staff that the Company’s leadership positions are based on sales data as presented by Ovum Limited (“Ovum”) that excludes certain categories of products from the CATV optical component market and the subsystems market, specifically pump lasers, Erbium-doped Fiber Amplifiers (EDFAs), and certain EDFA components (optical fiber and inline isolators). These products were excluded in the Ovum Report on the basis that sales of such excluded products are small relative to the other components and subsystems that are included in the Ovum Report. As noted in the Ovum Report, neither the Company nor the Company’s principal competitors make such excluded products. The inclusion of the excluded categories of products in the Ovum Report would not have changed the Company’s ranking as shown in the Ovum Report. The Company has confirmed the accuracy of the above information with Ovum by telephone.
3. Although we are not objecting to your summary disclosure regarding your two largest customers, please address that part of comment 3 regarding relocation of the other disclosure in the first paragraph on page 2 and your statements about Amazon, Facebook, Google and Microsoft to a more appropriate section of your prospectus after your prospectus summary. In your relocated disclosure, please ensure that you have disclosed the criteria that you used to determine which entities to name, that you disclose all entities that satisfy those criteria, and that the extent of each identified entity’s current contribution to your business is clear.
Response: The Company has revised the Registration Statement on pages 2 and 3 to relocate the disclosure in the first paragraph on page 2 of Amendment No. 2 and deleted the references to Amazon, Facebook, Google and Microsoft in response to the Staff’s comments. The Company has also revised the Registration Statement on page 79 to describe the criteria and contribution that were used to determine which entities to name.
4. We note your responses to prior comments 2 and 4 regarding the $2.2 billion “revenue opportunity” now mentioned on page 2. Please relocate such disclosure from the prospectus summary to a section of your document that appears after you have explained the results that you have achieved and the related risks. Also, if the $2.2 [billion] opportunity includes either (1) sales from products you do not offer, or (2) potential customers other than those who operate open system architectures that you say on page 87 you target, please tell us why you believe it is appropriate to claim a $2.2 billion opportunity.
Response: The Company advises the Staff that the Company has removed the $2.2 billion “revenue opportunity” from the Prospectus Summary. In addition, the Company advises the Staff that the Company estimates the $2.2 billion “revenue opportunity” as the Company’s current addressable market based on the data prepared by Ovum. Please refer to Annex B of the Supplemental Materials for support in response to the SEC’s comment regarding the $2.2 billion “revenue opportunity”.
2
The Offering, page 7
5. Please reconcile your disclosure on pages 7-8 about the number and types of securities to be outstanding after the offering with your disclosure on page 128.
Response: The Company advises the Staff that, once the price range for the Company’s common stock in this offering is known and specified in the Company’s preliminary prospectus, the Company will revise the Registration Statement on pages 7 and 8 to reflect the assumed effect of the issuance of additional shares of common stock upon the conversion of certain warrants into common stock and the number of shares outstanding immediately prior to the offering will be revised to be presented in the following format (subject to change based on warrant exercises occurring after the date of this letter):
The number of shares of our common stock to be outstanding after this offering is based on [ ] shares of our common stock outstanding as of June 30, 2013.
This number of shares does not include:
· 22,083,499 shares of common stock subject to outstanding options as of June 30, 2013, with a weighted average exercise price of $0.25436 per share;
· 650,000 shares of Series F preferred stock issuable upon the exercise of outstanding warrants, with a weighted average exercise price of $0.31277 per share, which, if not exercised pursuant to their terms prior to the completion of this offering, will convert to be exercisable for an aggregate of 780,011 shares of common stock at a weighted average exercise price of $0.32051 per share;
· 200,000 shares of Series G preferred stock issuable upon the exercise of an outstanding warrant with an exercise price of $0.35 per share, which, if not exercised pursuant to its terms prior to the completion of this offering, will convert to be exercisable for of 200,000 shares of common stock at an exercise price of $0.35 per share; and
· 24,000,000 shares of common stock available for future sale or issuance under our stock option plans.
Unless otherwise indicated, this prospectus reflects and assumes the following:
· the automatic conversion of all of our outstanding shares of preferred stock into 261,286,610 shares of our common stock upon the closing of this offering;
· the automatic conversion of certain outstanding warrants to purchase shares of preferred stock that, if not exercised prior to the completion of this offering, are expected to automatically convert in the aggregate into [ ] shares of common stock, based on the midpoint of the price range on the front cover of this prospectus;
· the filing of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws immediately prior to the closing of this offering; and
· no exercise of the underwriters’ over-allotment option.
3
We are subject to governmental export and import controls, page 29
6. From your disclosure on pages 97-98 in response to prior comment 10, it remains unclear what controls would have the effects that you mention in this risk factor. Please revise or advise.
Response: The Company has revised the Registration Statement on pages 29 and 30 to modify the risk factor to specifically identify the export/import controls affecting the Company in response to the Staff’s comment.
Use of Proceeds, page 39
7. It is unclear how your revised disclosure addresses the last sentence of prior comment 12. If you do not have a specific plan for a significant portion of the proceeds, please say so clearly in this section and disclose the principal reasons for the offering.
Response: The Company has revised the Registration Statement on page 39 to address the Staff’s comment.
Factors affecting our performance, page 48
8. Given your responses to prior comments 5 and 16 and your disclosure that design wins are a key factor affecting your performance, it is unclear why you believe the disclosure in your prospectus provides sufficient information for investors to evaluate how the design wins affected your performance in the periods presented and what the design win trends are. Please advise or revise.
Response: The Company has revised the Registration Statement on page 49 to remove design wins as a factor affecting the Company’s performance to address the Staff’s comment.
Comparison of the three months ended March 31, 2013 and March 31, 2012, page 55
9. Please disclose why your revenues from the CATV and FTTH markets declined in the three months ended March 31, 2013.
Response: The Company has revised the Registration Statement on page 54 to reflect results from the first half of 2013 (Q1 and Q2), and has indicated in that disclosure the reason for the decline in CATV revenue during the first half of 2013 in comparison to the first half of 2012.
Gross margin, page 56
10. Please expand your response to prior comment 18 to clarify how you know that “gross margin was primarily the result of an unfavorable product mix” but you are unable to disclose to investors how or why the mix changed unfavorably. Also, please tell us whether any of the “product categories” disclosed on your web site contributed 15% or more of your consolidated revenue during any of the last three years.
Response: The Company has revised the Registration Statement on page 55 to provide additional information regarding its gross margin within various markets and how product mix within a market can differ by geography. The Company has also expanded the disclosure in such section to indicate that the Company sells similar products in different geographic regions at different prices, resulting in different gross margins among those similar products. The decrease in gross margin in the first half of 2013 was primarily the result of an unfavorable product mix in the Asian market, leading to higher than normal direct labor and overhead charges during such period. Additionally, the Company recorded a higher than normal inventory reserve from discontinued products associated with inventory on hand in the Company’s Asia operations.
The Company advises the Staff that the product categories identified on the Company’s website are used only to group products by identifying certain similarities among the Company’s products for potential customers. In the Registration Statement, the Company discloses classes of products by reference to the markets in which they are used and groups its products by the CATV, internet data center, FTTH and other markets for illustrative purposes, which groupings the Company believes are more meaningful to potential investors. As disclosed on page 49 of the Registration Statement, the CATV market represented the only end-market from which the Company derived more than 15% of its revenue for fiscal year 2012. With respect to the product categories on the Company’s website, some of these categories are not market specific, such as TOSA, Digital, Transceivers and Sub-Assemblies, and others are partially overlapping, such as CATV and Sub-As