Applied Optoelectronics, Inc.AAOI

Human capital and workforce · Key personnel dependence and succession

We depend on key personnel to develop and maintain our technology and manage our business in a rapidly changing market. The continued services of our executive officers and other key engineering, sales, marketing, manufacturing and support personnel is essential to our success.

Human capital and workforce · Labor relations and union negotiations

Our China subsidiary is subject to Chinese labor laws and regulations, and Chinese labor laws may increase our operating costs in China. Chinese labor laws and regulations provide certain protections for our employees located in China, and changes to those labor laws and regulations may increase our costs and reduce our flexibility.

Human capital and workforce · Workforce management and productivity

The turnover of direct labor in manufacturing industries in China is high, which could adversely affect our production, shipments and results of operations. Employee turnover of direct labor in the manufacturing sector in China is extremely high and retention of such personnel is a challenge to companies located in or with operations in China.

Supply chain and procurement · Raw material availability and cost volatility

Manufacturing yields depend on a number of factors, including the quality of available raw materials, the degradation or change in equipment calibration and the rate and timing of the introduction of new products. Changes in manufacturing processes required as a result of changes in product specifications may significantly reduce our manufacturing yields.

Core operations · Quality control and product defects

If we encounter manufacturing problems, we may lose sales and damage our customer relationships. We may experience delays, disruptions or quality control problems in our manufacturing operations. These and other factors may cause less than acceptable yields at our facility.

Human capital and workforce · Talent acquisition and retention

Our ability to retain or recruit key personnel could be adversely affected by the lack of available shares under our equity incentive plan. The success of our business and results of operations is dependent on our executive officers and other key personnel. If the Company is not able to obtain shareholder approval for additional shares of common stock under the 2021 Plan in the future, the Company may have to incur additional cash expenditures to settle such awards in cash.

Core operations · Operational disruption and business continuity

If our MBE or MOCVD fabrication facility in Sugar Land, Texas were to be damaged or destroyed for any reason, our manufacturing process would be severely disrupted. We may also experience delays in production, typically in February, during the Lunar New Year holiday when our facilities in China and Taiwan are closed.

Core operations · Capacity utilization and efficiency

Given the high fixed costs associated with our vertically integrated business, a reduction in demand for our products will likely adversely impact our gross profits and our results of operations. We have a high fixed cost base due to our vertically integrated business model, including the fact that 4,116 of our employees as of December 31, 2025 were employed in manufacturing and research and development operations.

Economic and market conditions · Market volatility and financial crises

Our stock price has been and is likely to be volatile. The market price of our common stock has been and is likely to be subject to wide fluctuations in response to, among other things, the risk factors described in this section of this Form 10-K, and other factors beyond our control.

Economic and market conditions · Economic recession and downturns

Adverse global economic conditions could have a negative effect on our business, results of operations and financial condition and liquidity. A general slowdown in the global economy or in a particular region or industry, other unfavorable changes in economic conditions, such as inflation, higher interest rates, tightening of the credit markets, recession or slowing growth could negatively impact our business.

Natural and catastrophic events · Natural disasters and extreme weather

Natural disasters or other catastrophic events could harm our operations. Our operations in the U.S., China and Taiwan could be subject to significant risk of natural disasters, including earthquakes, hurricanes, typhoons, flooding and tornadoes. Our corporate headquarters and wafer fabrication facility in Sugar Land, Texas is located near the Gulf of Mexico, an area that is susceptible to hurricanes.

Innovation and product development · Intellectual property protection and infringement

If we fail to protect, or incur significant costs in defending, our intellectual property and other proprietary rights, our business and results of operations could be materially harmed. Our success depends on our ability to protect our intellectual property and other proprietary rights. We rely on a combination of patent, trademark, copyright, trade secret and unfair competition laws.

Customer and revenue · Customer concentration and key customer dependence

We generate much of our revenue from a limited number of customers. For each year ended 2025, 2024 and 2023, our top ten customers represented 96.6%, 95% and 92.7% of our revenue, respectively. In 2025, Digicomm represented 53.1% of our revenue and Microsoft represented 28.8% of our revenue.

Customer and revenue · Changing customer preferences and behavior

Customer demand is difficult to forecast accurately and, as a result, we may be unable to match production with customer demand. Our products are typically purchased pursuant to individual purchase orders. While our customers may provide us with their demand forecasts, they are typically not contractually committed to buy any quantity of products beyond firm purchase orders.

Technology infrastructure · Technology systems and infrastructure failure

We may be subject to disruptions or failures in information technology systems and network infrastructures that could have a material adverse effect on our business and financial condition. We rely on the efficient and uninterrupted operation of complex information technology systems and network infrastructures to operate our business.

Industry regulation · Regulatory compliance and changes

We are subject to governmental export and import controls that could subject us to liability or impair our ability to compete in international markets. We are subject to export and import control laws, trade regulations, and other trade requirements that limit which products we sell and where and to whom we sell our products.

Tax and financial reporting · Tax compliance and changes in tax law

Our ability to use our net operating losses and certain other tax attributes may be limited. As of December 31, 2025, we had U.S. accumulated net operating loss carryforwards, or NOLs, of approximately $253.0 million. Sections 382 and 383 of the Internal Revenue Code limit the use of NOLs and tax credits after a cumulative change in corporate ownership of more than 50% occurs within a three-year period.

Capital structure and performance · Financial performance volatility

Our financial results may vary significantly from quarter-to-quarter due to a number of factors, which may lead to volatility in our stock price. Our quarterly revenue and operating results have varied in the past and will likely continue to vary significantly from quarter-to-quarter.

Market and investment · Market volatility and economic cycles

Our revenues, growth rates and operating results are likely to fluctuate significantly as a result of factors that are outside our control, which could adversely impact our operating results. Our revenues, growth rates and operating results are likely to fluctuate significantly in the future as a result of factors that are outside our control.

Corporate governance · Shareholder rights and activism

Our charter documents, stock incentive plans and Delaware law could prevent a takeover that stockholders consider favorable and could also reduce the market price of our stock. Our Restated Certificate of Incorporation and our Amended and Restated Bylaws and our stock incentive plans contain provisions that could delay or prevent a change in control of our company.