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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

(Mark One)
        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
OR
        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from        to
Commission File Number: 001-35061
NeoPhotonics Corporation
(Exact name of registrant as specified in its charter)
 
   
Delaware 94-3253730
(State or other jurisdiction
of incorporation or organization)
 (I.R.S. Employer
Identification No.)
3081 Zanker Road
San Jose, California 95134
(Address of principal executive offices, zip code)
(408) 232-9200
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:Trading symbol(s):Name of each exchange on which registered
Common Stock, $0.0025 par valueNPTNThe New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (“Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes       No        
    Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes       No    
    Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company  
    If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
    Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes       No    
    As of April 22, 2022, there were approximately 53,473,745 shares of the registrant’s Common Stock outstanding. 


NEOPHOTONICS CORPORATION
For the Quarter Ended March 31, 2022
Table of Contents
  Page
  
 
 
 
 
 
  
 
 


PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3

NEOPHOTONICS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
 As of
(In thousands, except par value data)March 31, 2022December 31, 2021
ASSETS
Current assets:  
Cash and cash equivalents$79,044 $77,833 
Short-term investments27,677 27,675 
Restricted cash87 87 
Accounts receivable, net63,838 55,324 
Inventories59,737 52,896 
Prepaid expenses and other current assets20,022 16,246 
Total current assets250,405 230,061 
Property, plant and equipment, net53,058 54,190 
Operating lease right-of-use assets12,694 13,201 
Purchased intangible assets, net839 844 
Goodwill1,115 1,115 
Other long-term assets6,123 6,156 
Total assets$324,234 $305,567 
LIABILITIES AND STOCKHOLDERS’ EQUITY  
Current liabilities:  
Accounts payable$61,499 $58,125 
Short-term borrowing, net 14,914 
Current portion of long-term debt2,722 2,928 
Accrued and other current liabilities33,348 30,008 
Total current liabilities97,569 105,975 
Long-term debt, net of current portion24,880 25,753 
Related party long-term debt29,977  
Operating lease liabilities, noncurrent12,814 13,441 
Other noncurrent liabilities7,483 7,437 
Total liabilities172,723 152,606 
Commitments and contingencies (Note 11)
Stockholders’ equity:   
Preferred stock, $0.0025 par value, 10,000 shares authorized, no shares issued
or outstanding
  
Common stock, $0.0025 par value, 100,000 shares authorized; at March 31, 2022,
53,210 shares issued and outstanding; at December 31, 2021, 53,113 shares issued
and outstanding
133 133 
Additional paid-in capital
612,946 610,085 
Accumulated other comprehensive income1,368 2,376 
Accumulated deficit
(462,936)(459,633)
Total stockholders’ equity151,511 152,961 
Total liabilities and stockholders’ equity$324,234 $305,567 
See accompanying Notes to Condensed Consolidated Financial Statements.
4

NEOPHOTONICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 Three Months Ended
March 31,
 
(In thousands, except per share data)20222021
Revenue$89,268 $60,926 
Cost of goods sold61,979 47,587 
Gross profit
27,289 13,339 
Operating expenses:  
Research and development
15,098 13,098 
Sales and marketing
3,686 3,865 
General and administrative
9,794 7,294 
Acquisition and asset sale related costs905 163 
Asset impairment charges413  
Facility shut down related costs300  
Litigation settlements49  
Gain on asset sale(114) 
Total operating expenses
30,131 24,420 
Loss from operations(2,842)(11,081)
Interest income
71 105 
Interest expense
(355)(227)
Other income, net395 1,143 
Total interest and other income, net111 1,021 
Loss before income taxes(2,731)(10,060)
Income tax provision(572)(632)
Net loss$(3,303)$(10,692)
Basic net loss per share$(0.06)$(0.21)
Diluted net loss per share$(0.06)$(0.21)
Weighted average shares used to compute basic net loss per share53,146 50,717 
Weighted average shares used to compute diluted net loss per share53,146 50,717 
 
See accompanying Notes to Condensed Consolidated Financial Statements.
5

 NEOPHOTONICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
 
 Three Months Ended
March 31,
 
(in thousands)20222021
Net loss$(3,303)$(10,692)
Other comprehensive income (loss):  
Foreign currency translation adjustments, net of zero tax
(1,008)(2,343)
Total other comprehensive loss(1,008)(2,343)
Comprehensive loss$(4,311)$(13,035)

See accompanying Notes to Condensed Consolidated Financial Statements.
6

NEOPHOTONICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY  
(Unaudited)
Three Months Ended March 31, 2022Common stockAdditional paid-in capitalAccumulated other comprehensive income (loss)Accumulated deficitTotal stockholders’ equity
(In thousands)SharesAmount
Balances at December 31, 202153,113 $133 $610,085 $2,376 $(459,633)$152,961 
Comprehensive loss— — — (1,008)(3,303)(4,311)
Issuance of common stock upon exercise of stock options74 — 366 — — 366 
Issuance of common stock for vested restricted stock units26   — —  
Tax withholding related to vesting of restricted stock units(3)— (47)— — (47)
Stock-based compensation costs— — 2,542 — — 2,542 
Balances at March 31, 202253,210 $133 $612,946 $1,368 $(462,936)$151,511 
Three Months Ended March 31, 2021Common stockAdditional paid-in capitalAccumulated other comprehensive income (loss)Accumulated deficitTotal stockholders’ equity
(In thousands)SharesAmount
Balances at December 31, 202050,457 $126 $597,460 $1,735 $(418,914)$180,407 
Comprehensive loss— — — (2,343)(10,692)(13,035)
Issuance of common stock upon exercise of stock options199 — 1,109 — — 1,109 
Issuance of common stock for vested restricted stock units503 2 (2)— —  
Tax withholding related to vesting of restricted stock units(150) (1,835)— — (1,835)
Stock-based compensation costs— — 3,012 — — 3,012 
Balances at March 31, 202151,009 $128 $599,744 $(608)$(429,606)$169,658 
See accompanying Notes to Condensed Consolidated Financial Statements.




7

NEOPHOTONICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 Three Months Ended
March 31,
 
(In thousands)20222021
Cash flows from operating activities  
Net loss$(3,303)$(10,692)
Adjustments to reconcile net loss to net cash used in operating activities:  
Depreciation and amortization
4,062 6,381 
Stock-based compensation expense
2,615 3,277 
Deferred taxes
356 344 
Others
169 108 
Gain on sale of assets and other write-offs
(116)(17)
Write-down of inventories
2,659 2,267 
Amortization of operating lease right-of-use assets
512 508 
Foreign currency remeasurement
(416)(968)
Change in operating assets and liabilities:
  
Accounts receivable
(8,515)5,255 
Inventories
(10,046)(2,260)
Prepaid expenses and other assets
(4,407)3,441 
Accounts payable
2,771 (5,526)
Accrued and other liabilities
2,220 (11,062)
Net cash used in operating activities(11,439)(8,944)
Cash flows from investing activities  
Purchase of property, plant and equipment
(2,043)(1,908)
Proceeds from sale of property, plant and equipment and other assets
197 358 
Purchase of marketable securities
(17,002)(13,503)
Proceeds from sale of marketable securities
17,000 13,501 
Net cash used in investing activities
(1,848)(1,552)
Cash flows from financing activities  
Proceeds from exercise of stock options and issuance of stock under ESPP
351 1,548 
Tax withholding on restricted stock units
(48)(1,835)
Proceeds from related party term loan, net of debt issuance costs29,941  
Repayment of bank loans
(15,635)(794)
Repayment of finance lease liabilities
(25)(24)
Net cash provided by (used in) financing activities14,584 (1,105)
Effect of exchange rates on cash, cash equivalents and restricted cash
(86)(449)
Net increase (decrease) in cash, cash equivalents and restricted cash1,211 (12,050)
Cash, cash equivalents and restricted cash at the beginning of the period
77,920 95,606 
Cash, cash equivalents and restricted cash at the end of the period
$79,131 $83,556 
Supplemental disclosure of non-cash investing and financing activities:
Unpaid property, plant and equipment in accounts payable$2,564 $862 

See accompanying Notes to Condensed Consolidated Financial Statements.
8

NeoPhotonics Corporation Notes to Condensed Consolidated Financial Statements
(Unaudited)


Note 1. The Company, basis of presentation and significant accounting policies
Basis of Presentation and Consolidation
The condensed consolidated financial statements of NeoPhotonics Corporation (“NeoPhotonics” or the “Company”) as of March 31, 2022 and for the three months ended March 31, 2022 and 2021, have been prepared in accordance with the instructions on Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In accordance with those rules and regulations, the Company has omitted certain information and notes normally provided in the Company’s annual consolidated financial statements. In the opinion of management, the condensed consolidated financial statements contain all adjustments, consisting only of normal recurring items, except as otherwise noted, necessary for the fair presentation of the Company’s financial position and results of operations for the interim periods. These condensed consolidated financial statements do not include all disclosures required by U.S. generally accepted accounting principles (“U.S. GAAP”) and should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021. The results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results expected for the entire fiscal year. All intercompany accounts and transactions have been eliminated.
Proposed Merger with Lumentum Holdings Inc.
On November 3, 2021, we entered into an Agreement and Plan of Merger with Lumentum Holdings Inc., a Delaware corporation (“Lumentum”) and Neptune Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Lumentum (“Merger Sub”), (the “Merger Agreement”). Pursuant to the terms of the Merger Agreement, we will be acquired by Lumentum through a merger of Merger Sub with and into us (the “Merger”), with NeoPhotonics Corporation surviving the Merger as a wholly owned subsidiary of Lumentum.
Consummation of the Merger is subject to customary closing conditions, including (1) the absence of certain legal impediments, the expiration or termination of the required waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (“HSR Act”), and (2) approval by the holders of a majority of the outstanding shares of our common stock. The waiting period under the HSR Act expired as of January 21, 2022 and the required approval from our stockholders was obtained on February 1, 2022. The remaining requirements for closure of the Merger are (3) customary closing conditions set forth in the Merger Agreement and (4) approval from the State Administration for Market Regulation of the People’s Republic of China ("SAMR"). The Merger is expected to close in the second half of calendar year 2022, as previously announced.
Certain Significant Risks and Uncertainties
The Company operates in a dynamic industry, and accordingly, can be affected by a variety of factors. For example, any of the following areas could have a negative effect on the Company in terms of its future financial position, results of operations or cash flows: the general state of the U.S., China and world economies; the highly cyclical nature of the industries the Company serves; successful and timely completion of product design efforts; the ability of the Company to sell its new products into new market segments; trade restrictions by the United States against the Company's customers in China, as well
as potential retaliatory trade actions taken by China; the loss of any of its larger customers; restrictions on the Company's ability to sell to foreign customers due to additional U.S. or new China trade laws, regulations and requirements; disruptions of the supply chain of components needed for its products; ability to obtain additional financing; inability to meet certain debt covenants; fundamental changes in the technology underlying the Company’s products; the hiring, training and retention of key employees; and new product design introductions by competitors. The inputs into the Company’s judgments and estimates consider the economic implications of the Covid-19 pandemic as the Company knows them, on its critical and significant accounting estimates. The extent to which the Covid-19 pandemic may impact its business will depend on future developments, which are highly uncertain, such as the duration of the outbreak, travel restrictions, governmental mandates issued to mitigate the spread of the disease, business closures, economic disruptions, and the effectiveness of actions taken to contain and treat the virus. Accordingly, future adverse developments with respect to the Covid-19 pandemic may have a negative impact on its sales, supply chain and results of operations. The inputs into the Company's judgments and estimates also consider the Department of Commerce Entities List restrictions on Huawei Technologies effective September 2020 for the Company and loss of business from Huawei Technologies.
Concentration
In the three months ended March 31, 2022, two customers were each greater than 10% of the Company’s total revenue, representing 59% of total revenue, and the Company's top five customers represented approximately 79% of the Company’s total revenue. In the three months ended March 31, 2021, four customers each were greater than 10% of revenue, representing 74% of total revenue, and our top five customers during this period represented 80% of total revenue.
As of March 31, 2022, three customers accounted for a total of 65% of the Company’s total accounts receivable. As of December 31, 2021, three customers accounted for a total of 35% of the Company’s total accounts receivable.
9

Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Use of Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported revenue and expenses during the reporting period. Significant estimates made by management include: the useful lives and recoverability of long-lived assets; valuation allowances for deferred tax assets; valuation of excess and obsolete inventories; warranty reserves; and recognition of stock-based compensation, among others. Actual results could differ from these estimates.

Long-lived Assets

The Company assesses the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss would be recognized when the sum of the future net cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. The estimated future cash flows are based upon, among other things, assumptions about expected future operating performance and may differ from actual cash flows.

Due to the additional restrictions imposed by the U.S. Bureau of Industry and Security ("BIS"), an agency of the U.S. Department of Commerce, which became effective in September 2020, and the expected loss of business from Huawei, the Company performed a recoverability test in the fourth quarter of 2021 and determined there was no impairment of long-lived assets.
Leases
The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use ("ROU") assets, other current liabilities and operating lease liabilities on the Company's condensed consolidated balance sheets. Finance leases are included in property, plant and equipment, current portion of long-term debt and long-term debt, net of current portion on the condensed consolidated balance sheets.

Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of the Company's leases do not provide an implicit rate, the Company uses an estimate of its incremental borrowing rate based on observed market data and other information available at the lease commencement date. The operating lease ROU assets also include any lease payments made and exclude lease incentives. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise such options. The Company does not record leases on the condensed consolidated balance sheet with a term of one year or less. The Company does not separate lease and non-lease components but rather account for each separate component as a single lease component for all underlying classes of assets. Variable lease payments are expensed as incurred and are not included within the operating lease ROU asset and lease liability calculation. Variable lease payments primarily include reimbursements of costs incurred by lessors for common area maintenance and utilities. Lease expense for minimum operating lease payments is recognized on a straight-line basis over the lease term.
Accounting Pronouncements Recently Adopted
In December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12), which simplifies the accounting for income taxes. This guidance became effective for fiscal years beginning after December 15, 2020. The Company adopted this ASU in the first quarter of 2021 and the adoption of this standard did not have a material impact on the Company's consolidated financial statements.
Recent Accounting Pronouncements Not Yet Effective 
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 amends existing guidance on the impairment of financial assets and adds an impairment model that is based on expected losses rather than incurred losses and requires an entity to recognize as an allowance its estimate of expected credit losses for its financial assets. An entity will apply this guidance through a cumulative-effect adjustment to retained earnings upon adoption (a modified-retrospective approach) while a prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. In November 2019, the FASB issued ASU 2019-10, according to which, the new standard is effective for smaller reporting companies (“SRC”) as defined by the SEC, for fiscal years beginning after December 15, 2022 including interim periods within those fiscal years. The Company is in the process of evaluating the impact and timing of the adoption on its consolidated financial statements and related disclosures.
Note 2. Revenue
Product revenue
The Company develops, manufactures and sells lasers and other high-speed optoelectronic products that transmit, receive, modify and switch high-speed digital optical signals for communications networks. Revenue is derived primarily from the sale of optoelectronic laser, component and module hardware products. The Company sells its products worldwide, primarily to leading network equipment manufacturers.
10

Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Revenue recognition
Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company generally bears all costs, risk of loss or damage and retains title to the goods up to the point of transfer of control of promised products to customer. Revenue related to the sale of consignment inventories at customer vendor managed locations is not recognized until the products are pulled from consignment inventories by customers. In instances where acceptance of the product or solutions is specified by the customer, revenue is deferred until such required acceptance criteria have been met. Shipping and handling costs are included in the cost of goods sold. The Company presents revenue net of sales taxes and any similar assessments.

The Company’s performance obligations relate to contracts with a duration of less than one year. The Company elected to apply the practical expedient provided in Accounting Standard Codification Topic 606, “Revenue from Contracts with Customers” and, therefore, is not required to disclose the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period.

Nature of products
Revenue from the sale of hardware products is recognized upon transfer of control to the customer. The performance obligation for the sale of hardware products is satisfied at a point in time. The Company has aligned its products in two groups - High Speed Products and Network Products and Solutions. The following presents revenue by product group (in thousands):
 Three Months Ended
March 31,
 20222021
High Speed Products$83,582 $57,273 
Network Products and Solutions5,686 3,653 
Total revenue$89,268 $60,926 

The following table presents the Company's revenue information by geographical region. Revenue is classified based on the ship to location requested by the customer. Such classification recognizes that for many customers, including those in North America or in Europe, designated shipping points are often in China or elsewhere in Asia (in thousands):
 Three Months Ended
March 31,
 20222021
China$20,028$15,244
Americas13,6955,191
Rest of world55,54540,491
Total revenue$89,268$60,926
Deferred revenue
The Company records deferred revenue when cash payments are received or due in advance of the Company's performance. The deferred revenue balances were immaterial as of March 31, 2022 and December 31, 2021.
Contract assets
Contract assets are rights to consideration in exchange for goods or services that the Company has transferred to a customer when such right is conditional on something other than the passage of time. Contract assets exclude any amounts presented as an accounts receivable. There were no contract assets balances as of March 31, 2022 and December 31, 2021.
Refund liabilities
The Company recognizes a refund liability if the Company receives consideration from a customer and expects to refund some or all of that consideration to the customer. The refund liabilities as of March 31, 2022 and December 31, 2021 were immaterial.
11

Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 3. Net loss per share 
The following table sets forth the computation of the basic and diluted net loss per share for the periods indicated (in thousands, except per share amounts): 
 Three Months Ended
March 31,
 20222021
Numerator:     
Net loss$(3,303)$(10,692)
Denominator:  
Weighted average shares used to compute per share amount:  
Basic53,146 50,717 
Diluted53,146 50,717 
Basic net loss per share$(0.06)$(0.21)
Diluted net loss per share$(0.06)$(0.21)
 
The Company has excluded the impact of the following outstanding employee stock options and restricted stock units as well as the shares that were expected to be issued under its employee stock purchase plan from the computation of diluted net loss per share, as their effect would have been antidilutive (in thousands): 
 Three Months Ended
March 31,
20222021
Employee stock options1,205 1,897 
Restricted stock units3,340 3,365 
Market-based restricted stock units134 305 
Performance-based restricted stock units240 90 
Employee stock purchase plan 344 
 4,919 6,001 
12

Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 4. Cash, cash equivalents, short-term investments and restricted cash 
The following table summarizes the Company’s cash, cash equivalents and restricted cash (in thousands):
 March 31, 2022December 31, 2021
Cash and cash equivalents$79,044 $77,833 
Restricted cash87 87 
Total cash, cash equivalents and restricted cash shown in the statement of cash flows$79,131 $77,920 
As a result of sanctions imposed by the U.S. Treasury on the country of Russia's financial institutions in February 2022, the total cash balance held in our Russian subsidiary NeoPhotonics Technics LLC, of $0.3 million, was written off to Asset impairment charges during the three months ended March 31, 2022.
The following table summarizes the Company’s unrealized gains and losses related to its short-term investments in marketable securities designated as available-for-sale (in thousands): 
 As of March 31, 2022As of December 31, 2021
 Amortized CostGross Unrealized GainsGross Unrealized LossFair ValueAmortized CostGross Unrealized GainsGross Unrealized LossFair Value
Marketable securities:        
Money market funds$27,677 $ $ $27,677 $27,675 $ $ $27,675 
Reported as:        
Short-term investments$27,677 $27,675 
 
As of March 31, 2022 and December 31, 2021, maturities of marketable securities were less than one year. There were no realized gains and losses on the sale of marketable securities during the three months ended March 31, 2022 and 2021. The Company did not recognize any impairment losses on its marketable securities during the three months ended March 31, 2022 or 2021. As of March 31, 2022, the Company did not have any investments in marketable securities that were in an unrealized loss position for a period in excess of 12 months.
Note 5. Fair value disclosures
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents the Company's assets that are measured at fair value on a recurring basis (in thousands):  
 As of March 31, 2022As of December 31, 2021
 Level 1Level 2Level 3TotalLevel 1Level 2Level 3Total
Assets        
Short-term investments:
Money market funds$27,677 $ $ $27,677 $27,675 $ $ $27,675 
Other long-term assets:
Mutual funds held in Rabbi Trust$807 $ $ $807 $894 $ $ $894 

 The Company offers a Non-Qualified Deferred Compensation Plan (“NQDC Plan”) to a select group of its highly compensated employees. The NQDC Plan provides participants the opportunity to defer payment of certain compensation as defined in the NQDC Plan. A Rabbi Trust has been established to fund the NQDC Plan obligation, which was fully funded at March 31, 2022. The assets held by the Rabbi Trust are substantially in the form of exchange traded mutual funds and are included in the Company’s other long-term assets on its condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021.
There were no liabilities that are measured at fair value on a recurring basis as of March 31, 2022.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
As of March 31, 2022 and December 31, 2021 the Company had no assets or liabilities required to be measured at fair value on a nonrecurring basis. 
Assets and Liabilities Not Measured at Fair Value 
13

Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
The carrying values of accounts receivable, accounts payable and short-term borrowings approximate their fair values due to the short-term nature and liquidity of these financial instruments.  
Note 6. Balance sheet components 
Accounts receivable, net
Accounts receivable, net, consists of the following (in thousands):
 March 31, 2022December 31, 2021
Accounts receivable$63,838 $55,324 
Allowance for doubtful accounts  
 $63,838 $55,324 

Inventories
Inventories consist of the following (in thousands):
 March 31, 2022December 31, 2021
Raw materials$37,453 $32,809 
Work in process17,675 14,851 
Finished goods(1)
4,609 5,236 
 $59,737 $52,896 
________________________________________________________

(1)Finished goods inventory at customer vendor managed inventory locations was $1.8 million and $1.8 million as of March 31, 2022 and December 31, 2021, respectively.
Prepaid expenses and other current assets
Prepaid expenses and other current assets consist of the following (in thousands):
 March 31, 2022December 31, 2021
Prepaid taxes and taxes receivable$7,330 $5,825 
Receivables due from suppliers8,556 6,728 
Deposits and other prepaid expenses3,167 2,682 
Other receivable969 1,011 
 $20,022 $16,246 
Purchased intangible assets, net 
Purchased intangible assets, net, consist of the following (in thousands):
 March 31, 2022December 31, 2021
 Gross
Assets
Accumulated
Amortization
Net
Assets
Gross
Assets
Accumulated
Amortization
Net
Assets
Technology and patents$37,850 $(37,850)$ $37,814 $(37,814)$ 
Customer relationships15,502 (15,502) 15,535 (15,535) 
Leasehold interest1,342 (503)839 1,339 (495)844 
 $54,694 $(53,855)$839 $54,688 $(53,844)$844 
For the three months ended March 31, 2022 and 2021, amortization expense relating to technology and patents is included within cost of goods sold and totaled $0.0 million and $0.2 million in each period, respectively.
14

Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
The estimated future amortization expense of purchased intangible assets as of March 31, 2022, was as follows (in thousands): 
2022 (remaining nine months)$23 
202330 
202430 
202530 
202630 
Thereafter696 
 $839 
Accrued and other current liabilities
Accrued and other current liabilities consist of the following (in thousands): 
 March 31, 2022December 31, 2021
Employee-related$16,413 $14,956 
Transition services agreement payable (refer to Note 11) 823 
Operating lease liabilities, current2,443 2,356 
Income and other taxes payable2,814 2,703 
Accrued warranty966 977 
Other accrued expenses10,712 8,193 
 $33,348 $30,008 
Warranty accrual
The table below summarizes the movement in the warranty accrual, which is included in accrued and other current liabilities (in thousands):
 Three Months Ended
March 31,
 20222021
Beginning balance$977 $1,111 
Warranty accruals64 61 
Settlements(75)(76)
Ending balance$966 $1,096 

Other noncurrent liabilities 
Other noncurrent liabilities consist of the following (in thousands):
 
 March 31, 2022December 31, 2021
Pension and other employee-related$3,049 $3,266 
Asset retirement obligations3,524 3,508 
Government grant695 369 
Other215 294 
 $7,483 $7,437 
15

Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 7. Restructuring Charges 
A summary of the current period activity in accrued restructuring costs is as follows (in thousands):
 Employee SeveranceOtherTotal
Restructuring obligations December 31, 2021$302 $ $302 
 Recoveries(18) (18)
    Cash payments(284) (284)
Restructuring obligations March 31, 2022$ $ $ 
For the three months ended March 31, 2022, the restructuring recoveries were included within cost of goods sold.
In a second phase of restructuring actions taken in 2020, related to reducing operating expenses and manufacturing costs while maintaining the Company's focus on its core capabilities, in December 2021 the Company exercised its early exit right to terminate the facility lease in Fremont, California. The remaining lease commitment will end in April 2022.

Note 8. Debt 
The table below summarizes the carrying amounts and weighted average interest rates of the Company’s debt (in thousands, except percentages):
  
 March 31, 2022December 31, 2021
 Carrying
Amount
Interest
Rate
Carrying
Amount
Interest
Rate
Short-term borrowing:
Note payable to Shanghai Pudong Development Bank$  %$15,000 0.60 %
Unaccreted discount and issuance costs (86)
Short-term borrowing, net$ $14,914 
Long-term debt, current and noncurrent:    
Related party term loan with Lumentum Holdings Inc.$30,000 3.50 %$  %
Borrowing under Wells Fargo Credit Facility20,436 2.57 %20,338 1.94 %
Mitsubishi Bank loans4,283 
1.06%-1.46%
5,000 
1.06%-1.46%
Mitsubishi Bank and Yamanashi Chuo Bank loan2,990 1.07 %3,429 1.06 %
Finance lease liability69 94 
Total long-term debt57,778 28,861 
Unaccreted discount and issuance costs(199) (180) 
Total long-term debt, net of unaccreted discount and issuance costs$57,579  $28,681  
Reported as:    
Current portion of long-term debt$2,722  $2,928  
Long-term debt, net of current portion24,880  25,753  
Related party long-term debt29,977  
Total long-term debt, net of unaccreted discount and issuance costs$57,579  $28,681  
Notes payable and short-term borrowing 
In June 2021, NeoPhotonics (China) Co., Ltd., ("NeoPhotonics China"), a subsidiary of the Company, entered into a credit line agreement with Shanghai Pudong Development Bank Shenzhen Branch (“SPDB”) providing for a line of credit to NeoPhotonics China in an amount of RMB 120,000,000 (approximately $18.9 million) for short-term loans at varying interest rates. The line of credit facility expired on February 23, 2022.
16

Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
In June 2021, NeoPhotonics Dongguan Co., Ltd (“NeoPhotonics Dongguan”), also a subsidiary of the Company, entered into a credit line agreement with SPDB providing for a line of credit to NeoPhotonics Dongguan in an amount of RMB 30,000,000 (approximately $4.7 million) for short-term loans at varying interest rates. As of March 31, 2022, there was not an amount outstanding under this credit facility. The line of credit facility expired on February 23, 2022.
The Company regularly issues notes payable to its suppliers in China. These notes are supported by non-interest bearing bank acceptance drafts issued under the Company’s existing line of credit facilities and are due three to six months after issuance. As a condition of the notes payable arrangements, the Company is required to keep a compensating balance at the issuing banks that is a percentage of the total notes payable balance until the amounts are settled.
As of March 31, 2022 and December 31, 2021, there was $0 and $15 million outstanding under the NeoPhotonics China credit facility, respectively. The note payable bore interest at 3.0% (2.4% of which was charged to NeoPhotonics China as a loan fee and paid in the fourth quarter of 2021) and was repaid in March 2022.
There was no amount outstanding under the NeoPhotonics Dongguan line of credit as of March 31, 2022 and December 31, 2021.
As of March 31, 2022 and December 31, 2021, there were no bank acceptance drafts issued in connection under the NeoPhotonics China and the NeoPhotonics Dongguan credit facility.
There were no compensating balances relating to these credit facilities as of March 31, 2022 and December 31, 2021, respectively. Compensating balances are classified as restricted cash on the Company’s condensed consolidated balance sheets.
Credit facilities
In June 2021, the Company entered into an Amended and Restated Credit Agreement (the “A&R Credit Agreement”) with Wells Fargo Bank, National Association ("Wells Fargo"), as administrative agent for a lender group. The A&R Credit Agreement amends and restates in full that certain Credit Agreement dated as of September 8, 2017 (as amended, the "Former Credit Agreement"), by and among the Company and Wells Fargo. The A&R Credit Agreement provides for continuation of the $50 million revolving credit facility (the "Credit Facility").
The A&R Credit Facility provides for borrowings equal to the lower of (a) a maximum revolver amount of $50.0 million, or (b) an amount up to 80% - 90% of eligible accounts receivable plus 100% of qualified cash balances up to $15.0 million, less certain discretionary adjustments ("Borrowing Base"). The maximum revolver amount may be increased by up to $25.0 million, subject to certain conditions.
The A&R Credit Facility matures on June 30, 2026 and borrowings bear interest, at the Company's option, at an interest rate of either (a) the LIBOR rate, plus an applicable margin ranging from 1.50% to 1.75% per annum, based upon the average excess availability (as defined in the Credit Facility), or (b) the prime lending rate, plus an applicable margin ranging from 0.50% to 0.75% per annum, based upon the average excess availability. The Company is also required to pay a commitment fee equal to 0.25% of the unused portion of the Credit Facility, monthly, in arrears.

The A&R Credit Facility requires a mandatory prepayment of the borrowings to the extent the outstanding balance is greater than the lesser of (a) the most recently calculated Borrowing Base, or (b) the maximum revolver amount. The Company was required to maintain a combination of certain defined cash balances and unused borrowing capacity under the A&R Credit Facility of at least $20.0 million, of which at least $5.0 million shall include unused borrowing capacity. As a result of the delayed draw term loan with Lumentum, the defined cash balances and unused borrowing capacity under the A&R Credit Facility has changed to $30.0 million, of which at least $6.25 million shall include unused borrowing capacity. The Agreement also restricts the Company's ability to dispose of assets, to permit change in control, merge or consolidate, make acquisitions, incur indebtedness, grant liens, make investments and make certain restricted payments. Borrowings under the Credit Facility are collateralized by substantially all of the Company's assets.
The Company was in compliance with the covenants of the A&R Credit Facility as of March 31, 2022 and December 31, 2021. As of March 31, 2022, the outstanding balance under the A&R Credit Facility was $20.4 million and the weighted average rate under the LIBOR option was 2.57%. The remaining borrowing capacity as of March 31, 2022 was $19.0 million.
During the three months ended March 31, 2022, $0.1 million of accrued interest was included as a component of the principal amount of the Wells Fargo Credit Facility.
On November 3, 2021, the Company entered into the Merger Agreement, with Lumentum Holdings Inc. (“Lumentum”) and Neptune Merger Sub, Inc., a wholly owned subsidiary of Lumentum. In connection with the Merger with Lumentum "Related Party", a subordinated unsecured delayed draw term loan facility was agreed to on January 14, 2022. Lumentum will provide up to $50 million in interim debt financing to the Company, which would provide financing that may be necessary to operate the Company's business during the pendency of the Merger on terms that are, taken as a whole, likely better than those that could otherwise be obtained from an unrelated third party. As of March 31, 2022, the Company had drawn $30 million from the facility. The loan has a two-year term and bears interest at the prime rate.

17

Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
The Lumentum credit facility is subordinated to the Existing Wells Fargo Facility in right of payment and otherwise pursuant to a subordination agreement entered into between Wells, the Company and Lumentum. The Lumentum credit facility shall be available to the Company commencing on the closing date of the Lumentum credit facility ("Credit Facility Closing Date") or such later date as agreed to by Lumentum and the Company until the earlier of (a) the date the Merger Agreement is terminated for any reason without the closing of the Merger or (b) the Closing Date.

The Lumentum credit Facility has a financial covenant whereby the Company agrees that, until the termination of all of the commitments and the payment in full of the obligations, the Company will not permit liquidity to be less than (i) $20.0 million at all times prior to the Initial Advance, or (ii) $30.0 million at all times after the Initial Advance a change from the $20.0 million stated in the A&R Credit Facility. The minimum unused borrowing capacity was increased from $5.0 million as stated in the A&R Credit Facility to $6.25 million. The Company was in compliance with all covenants as of March 31, 2022. The Company is subject to a number of affirmative and restrictive covenants pursuant to the credit agreement, including minimum liquidity, compliance with applicable laws and regulations, payment of taxes, maintenance of insurance, business combinations, occurrence of additional indebtedness, prepayments of other indebtedness and transactions with affiliates, among other covenants.

As part of the Credit Facility, there are certain clauses where if triggered, the loan would become payable immediately. The Loan Agreement states that the loan, together with all accrued and unpaid interest thereon, shall become due and payable upon the trigger of the following contingencies: (a) if the Merger Agreement is terminated by either Lumentum or the Company, the Parent Termination Fee as defined in the Merger Agreement ($55.1 million) is payable on the date of the termination of the Merger Agreement (the "Merger Termination Date"), (b) if the Merger Agreement is terminated by Lumentum and a new buyer assumes all the rights and obligations of Lumentum, the date that is two years after the Credit Facility Closing Date, (c) if the Merger Agreement is terminated by the Company and the new buyer does not assume all the rights and obligations of Lumentum, the Merger Termination Date, (d) if the Merger Agreement is terminated and no Parent Termination Fee is payable, the date that is two years after the Credit Facility Closing Date.

Mitsubishi Bank loans
On February 25, 2015, the Company entered into certain loan agreements and related agreements with MUFG Bank, Ltd. (the “Mitsubishi Bank”) that provided for (i) a term loan in the aggregate principal amount of 500.0 million JPY ($4.4 million) (the “Term Loan A”) and (ii) a term loan in the aggregate principal amount of one billion JPY (approximately $8.2 million) (the “Term Loan B” and together with the Term Loan A, the “2015 Mitsubishi Bank Loans”). The 2015 Mitsubishi Bank Loans are secured by a mortgage on certain real property and buildings owned by the Company’s Japanese subsidiary. Interest on the 2015 Mitsubishi Bank Loans accrues and is paid monthly based upon the annual rate of the monthly Tokyo Interbank Offer Rate ("TIBOR") plus 1.40%. The Term Loan A required interest only payments until the maturity date of February 23, 2018, with a lump sum payment of the aggregate principal amount on the maturity date. The Term Loan B requires equal monthly payments of principal equal to 8.3 million JPY (approximately $0.1 million) until the maturity date of February 25, 2025, with a lump sum payment of the balance of 8.4 million JPY (approximately $0.1 million) on the maturity date. Interest on the Term Loan B is accrued based upon monthly TIBOR plus 1.40% and is secured by real estate collateral. In conjunction with the execution of the Bank Loans, the Company paid a loan structuring fee, including consumption tax, of 40.5 million JPY (approximately $0.4 million). The Term Loan A of 500.0 million JPY (approximately $4.4 million) was repaid to the Mitsubishi Bank in January 2018.
The 2015 Mitsubishi Bank Loans contain customary representations and warranties and customary affirmative and negative covenants applicable to the Company’s Japanese subsidiary, including, among other things, restrictions on cessation in business, management, mergers or acquisitions. The 2015 Mitsubishi Bank Loans contain financial covenants relating to minimum net assets, maximum ordinary loss and a coverage ratio covenant. The Company was in compliance with the related covenants as of March 31, 2022 and December 31, 2021. Outstanding principal balance for the Mitsubishi Term Loans was 291.7 million JPY (approximately $2.4 million) as of March 31, 2022.
In March 2017, the Company entered into a loan agreement and related agreements with the Mitsubishi Bank for a term loan of 690.0 million JPY (approximately $5.7 million) (the “2017 Mitsubishi Bank Loan”) to acquire manufacturing equipment for its Japanese subsidiary. This loan is secured by the manufacturing equipment owned by the Company's subsidiary in Japan. Interest on the 2017 Mitsubishi Bank Loan is based on the annual rate of the monthly TIBOR rate plus 1.00%. The 2017 Mitsubishi Bank Loan matures on March 29, 2024 and requires monthly interest and principal payments over 72 months commencing in April 2018. The loan contains customary covenants relating to minimum net assets, maximum ordinary loss and a coverage ratio covenant. The Company was in compliance with these covenants as of March 31, 2022 and December 31, 2021. The loan was available from March 31, 2017 to March 30, 2018 and 690.0 million JPY (approximately $5.7 million) under this loan was fully drawn in March 2017. Outstanding principal balance for the 2017 Mitsubishi Bank Loan was approximately 230.0 million JPY (approximately $1.9 million) as of March 31, 2022. 
Mitsubishi Bank and Yamanashi Chuo Bank loan
In January 2018, the Company entered into a term loan agreement with Mitsubishi Bank and The Yamanashi Chuo Bank, Ltd. for a term loan in the aggregate principal amount of 850.0 million JPY (approximately $7.0 million) (the “Term Loan C”). The purpose of the Term Loan C is to obtain machinery for the core parts of the manufacturing line and payments for related expenses by the Company's subsidiary in Japan. The Term Loan C requires no additional security. The Term Loan C
18

Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
was available from January 29, 2018 to January 29, 2025. The full amount of the Term Loan C was drawn in January 2018. Interest on the Term Loan C is based upon the annual rate of the three months TIBOR rate plus 1.00%. The Term Loan C requires quarterly interest payments, along with the principal payments, over 82 months commencing in April 2018. The Term Loan C loan agreement contains customary representations and warranties and customary affirmative and negative covenants applicable to the Japanese Subsidiary, including, among other things, restrictions on cessation in business, management, mergers or acquisitions. The Term Loan C loan agreement contains financial covenants relating to minimum net assets and maximum ordinary loss. The Company was in compliance with these covenants as of March 31, 2022 and December 31, 2021. Outstanding principal balance for the Mitsubishi Bank and Yamanashi Chuo Bank Loan was approximately 364.3 million JPY (approximately $3.0 million) as of March 31, 2022.
As of March 31, 2022, maturities of long-term borrowings are as follows (in thousands):
2022 (remaining nine months)$2,140 
20232,762 
202432,054 
2025386 
202620,436 
 $57,778 

19

Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 9. Leases 
The Company has operating leases for offices, research and development facilities and manufacturing facilities. Leases have remaining terms of two years to six years, some of which include options to extend the leases and some of which may include options to terminate the leases within one year. As of March 31, 2022 and December 31, 2021, an asset recorded in property, plant and equipment under a finance lease was immaterial.
The components of lease expense were as follows (in thousands):
Three Months Ended
March 31,
20222021
Operating lease cost$759 $774 
Variable and short-term lease cost677 629 
Total lease cost
$1,436 $1,403 
Other information related to leases was as follows (in thousands, except lease term and discount rate):
Three Months Ended
March 31,
20222021
Supplemental cash flow information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
$827 $878 
Weighted average remaining lease term
Operating leases
5.2 years6.2 years
Weighted average discount rate
Operating leases
6.3 %6.5 %
Future minimum lease payments under non-cancelable leases as of March 31, 2022 were as follows (in thousands):
Operating Leases
2022 (remaining nine months)$2,492 
20233,378 
20243,352 
20253,429 
20263,282 
Thereafter2,128 
Total future minimum lease payments
18,061 
Less imputed interest(2,804)
Total
$15,257 
As of March 31, 2022 and December 31, 2021, the future minimum lease payments are captured in the Company's Consolidated Balance Sheets as follows:
Operating leases:March 31, 2022December 31, 2021
Accrued and other current liabilities$2,443 $2,356 
Operating lease liabilities, noncurrent12,814