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Except for the historical information contained herein, the matters addressed in this Item 2 constitute "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. These forward looking statements include, but are not limited to, statements regarding future financial performance of the Company; the expected ramp up timeline of the 12-inch fab at theJV Company ; the impact of government investigation and coronavirus on our financial performance; and other statements and information set forth under the heading "Factors Affecting Our Performance". Such forward-looking statements are subject to a variety of risks and uncertainties, including those discussed below under the heading "Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q, that could cause actual results to differ materially from those anticipated by the Company's management. The Private Securities Litigation Reform Act of 1995 (the "Act") provides certain "safe harbor" provisions for forward-looking statements. All forward-looking statements made in this Quarterly Report on Form 10-Q are made pursuant to the Act. The Company undertakes no obligation to publicly release the results of any revisions to its forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unexpected events. Unless the context otherwise requires, the words "AOS," the "Company," "we," "us" and "our" refer toAlpha and Omega Semiconductor Limited and its subsidiaries. This management's discussion should be read in conjunction with the management's discussion included in the Company's Annual Report on Form 10-K for the fiscal year endedJune 30, 2021 , filed with theSecurities and Exchange Commission onAugust 30, 2021 . Overview We are a designer, developer and global supplier of a broad portfolio of power semiconductors. Our portfolio of power semiconductors includes approximately 2,400 products, and has grown significantly with the introduction of over 160 new products in the fiscal years endedJune 30, 2021 and 2020, respectively, and 200 new products in the fiscal year endedJune 30, 2019 , respectively. During the three months endedSeptember 30, 2021 , we introduced an additional 17 new products. Our teams of scientists and engineers have developed extensive intellectual properties and technical knowledge that encompass major aspects of power semiconductors, which we believe enables us to introduce and develop innovative products to address the increasingly complex power requirements of advanced electronics. We have an extensive patent portfolio that consists of 870 patents and 56 patent applications inthe United States as ofSeptember 30, 2021 . We also have a total of 907 foreign patents, which were based primarily on our research and development efforts throughSeptember 30, 2021 . We differentiate ourselves by integrating our expertise in technology, design and advanced manufacturing and packaging to optimize product performance and cost. Our portfolio of products targets high-volume applications, including personal and portable computers, graphic cards, flat panel TVs, home appliances, smart phones, battery packs, game consoles, consumer and industrial motor controls and power supplies for TVs, computers, servers and telecommunications equipment. Our business model leverages global resources, including research and development and manufacturing inthe United States andAsia . Our sales and technical support teams are localized in several growing markets. We operate an 8-inch wafer fabrication facility located inHillsboro, Oregon , or theOregon fab, which is critical for us to accelerate proprietary technology development, new product introduction and improve our financial performance. To meet the market demand for the more mature high volume products, we also utilize the wafer manufacturing capacity of selected third party foundries. For assembly and test, we primarily rely upon our in-house facilities inChina . In addition, we utilize subcontracting partners for industry standard packages. We believe our in-house packaging and testing capability provides us with a competitive advantage in proprietary packaging technology, product quality, cost and sales cycle time. We operate a power semiconductor packaging, testing and wafer fabrication facility in the Liangjiang New Area ofChongqing, China through our joint venture (the "JV Company ") with two investment funds owned by the Municipality ofChongqing (the "Chongqing Funds"). We currently own 51%, and theChongqing Funds own 49%, of the equity interest in theJV Company . While theJV Company is our consolidated subsidiary for purpose of financial reporting, it operates as an independent and separate legal entity. As a result, theJV Company's assets and liabilities are segregated from our company's assets and liabilities. For example, theJV Company incurs debt through its own financing and bank loan agreements, and our parent company and other subsidiaries are not parties to these agreements and do not provide any guarantee or security for theJV Company's debt, nor do we have direct access to any cash proceeds borrowed from such loan agreements. As part of our strategic plan, we formed theJV Company to fulfill growing customer demand.The JV Company has reached its targeted production of assembly and testing, and has ramped up its Phase I target run rate of the 12-inch wafer fabrication in the quarter endedSeptember 30, 2021 . During the three months endedSeptember 30, 2021 , we recorded$2.0 million in net loss attributable to the noncontrolling interest in theJV Company . The additional capacity at theJV Company contributed significantly to meeting the increasing demand for our products. However, the financial performance of theJV Company is 28 -------------------------------------------------------------------------------- affected by various factors, including the impact of the global COVID-19 pandemic and related economic downturn, intensified geopolitical tensions betweenChina andU.S. , logistical difficulties, theJV Company's ability to obtain financing and other risk factors beyond our control. We will continue to monitor and evaluate market conditions closely and react quickly to the changing environment as necessary to achieve an optimal production level at theJV Company . In addition, theJV Company is currently pursuing various financing options to fund its future expansion and repay its debt obligations, and there is no guarantee that theJV Company will be able obtain such financing with favorable terms, or at all. We expect the joint venture to provide important capacity to support our future growth, enhance our market positions inChina , and drive improvements in capital expenditures. During the fiscal quarter endedSeptember 30, 2021 , we continued our diversification program by developing new silicon and packaging platforms to expand our serviceable available market, or SAM and offer higher performance products. Our metal-oxide-semiconductor field-effect transistors, or MOSFET, and power IC product portfolio expanded significantly. Our high performance products and deepened customer relationships with our OEM and ODM customers have contributed to the achievement of our record high quarterly revenue of$187.0 million for the three months endedSeptember 30, 2021 , a 23.4% growth compared to the same quarter last year.
Impact of the COVID-19 pandemic on our business
Our business operations have been impacted by the global COVID-19 pandemic and the resulting economic downturn. Numerous governmental jurisdictions, including the States ofCalifornia ,Oregon andTexas in theU.S. and countries throughout theAsia Pacific region have imposed "stay-at-home" orders, quarantines, travel bans and similar governmental orders and restrictions to control the spread of COVID-19. Such orders and restrictions have resulted in business closures, work stoppages, slowdowns and delays in commercial activities, unprecedented and widespread unemployment, disruptions to ports and other shipping infrastructure, border closures, and other travel or health-related restrictions, thereby negatively impacting our customers, suppliers, distributors, employees, offices, and the entire semiconductor ecosystem. As a result of the COVID-19 pandemic and changing consumer behaviors due to various government restrictions, including "stay-at-home" orders, we have experienced shifting market trends, including an increasing demand in markets for notebooks, PCs, gaming devices and other products. While we have recently benefited from the increasing demand for PC related products, there is no guarantee that this trend will continue, and such increasing demand may discontinue or decline if government authorities relax or terminate COVID-19 related restrictions and consumer behaviors change in response to the reopening of certain economic activities. In an effort to protect the health and safety of our employees and to comply with various government and regulatory guidelines, we took proactive actions to adopt policies and protocols at our locations around the world, including social distancing guidelines, working from home, limiting the number of employees attending meetings, reducing the number of people in our sites at any one time, and suspending employee travel, and these measures may result in difficulties and logistical challenges in our business operations. Since the start of the second quarter of 2021, there have been increasing availability and administration of vaccines against COVID-19, as well as an easing of restrictions on social, business, travel, and government activities and functions, and a gradual resumption of economic activities and consumer spending in our industries. On the other hand, infection rates continue to fluctuate in various regions and new strains of the virus remain a risk. In addition, there are ongoing global impacts resulting from the pandemic, including disruption of the product supply chains, shortages of semiconductor components, and delays in shipments, product development, and product launches. The full extent of the future impact of the COVID-19 pandemic on our operational and financial performance is uncertain and will depend on many factors outside our control, including, without limitation, the timing, extent, trajectory and duration of the pandemic; the availability, distribution and effectiveness of vaccines; the spread of new variants of COVID-19; the continued and renewed imposition of protective public safety measures; the disruption of global supply chain; and the impact of the pandemic on the global economy and demand for consumer products. Although we are unable to predict the full impact and duration of the COVID-19 pandemic on our business, we are actively managing our business operations and financial expenditures in response to continued uncertainty. 29 --------------------------------------------------------------------------------
Other factors affecting our performance
In addition to the COVID-19 pandemic and related events described above, our performance is affected by several key factors, including the following:
The global, regional economic and PC market conditions: Because our products
primarily serve consumer electronic applications, any significant change in
global and regional economic conditions could materially affect our revenue and
results of operations. For example, because a significant amount of our revenue
is derived from sales of products in the personal computing ("PC") markets, such
as notebooks, motherboards and notebook battery packs, a substantial decline or
downturn in the PC market could have a material adverse effect on our revenue
and results of operations. The PC markets have experienced a modest global
decline in recent years due to continued growth of demand in tablets and smart
phones, worldwide economic conditions and the industry inventory correction
which had and may continue to have a material impact on the demand for our
products. However, we recently have experienced a significant increase of demand
in PC market due to the impact of the COVID-19 pandemic and resulting shift in
market trend and consumer behaviors. We cannot predict whether and how long this
trend will continue due to the uncertainty and unpredictability of COVID-19
pandemic. A decline of the PC market may have a negative impact on our revenue,
factory utilization, gross margin, our ability to resell excess inventory, and
other performance measures. We have executed and continue to execute strategies
to diversify our product portfolio, penetrate other market segments, including
the consumer, communications and industrial markets, and improve gross margins
and profit by implementing cost control measures. While making efforts to reduce
our reliance on the computing market, we continue to support our computing
business and capitalize on the opportunities in this market with a more focused
and competitive PC product strategy to gain market share.
Manufacturing costs and capacity availability: Our gross margin is affected by
a number of factors including our manufacturing costs, utilization of our
manufacturing facilities, the product mixes of our sales, pricing of wafers from
third party foundries and pricing of semiconductor raw materials. Capacity
utilization affects our gross margin because we have certain fixed costs at our
Shanghai facilities, our Oregon fab and our Chongqing fabrication facility
operated by the JV Company . If we are unable to utilize our manufacturing
facilities at a desired level, our gross margin may be adversely affected. In
addition, from time to time, we may experience wafer capacity constraints,
particularly at third party foundries, that may prevent us from meeting fully
the demand of our customers. For example, the recent global shortage of
semiconductor manufacturing capacity has provided us with both challenges and
opportunities in the market, and highlighted the importance of maintaining
sufficient and independent in-house manufacturing capabilities to meet
increasing customer demands. While we can mitigate these constraints by
increasing and re-allocating capacity at our own fab, we may not be able to do
so quickly or at sufficient level, which could adversely affect our financial
conditions and results of operations. In addition, we recently commenced a plan
to enhance the manufacturing capability and capacity of our Oregon fab by
investing in new equipment and expanding our factory facilities, which we expect
will have a positive impact on our future new product development and revenue,
particularly during the period of global shortage of capacity. We also rely on
the JV Company to provide foundry capacity to manufacture our products,
therefore it is critical that we maintain continuous access to such capacity,
which may not be available at sufficient level or at a pricing terms favorable
to us if our control over the JV Company's operation is diminished. Our control
may be reduced if the JV Company completes an equity financing or/and issues
more shares that dilute our equity interests in the JV Company , or if the
management of the JV Company operates more independently without our
supervision.
Erosion and fluctuation of average selling price: Erosion of average selling
prices of established products is typical in our industry. Consistent with this
historical trend, we expect our average selling prices of existing products to
decline in the future. However, in the normal course of business, we seek to
offset the effect of declining average selling price by introducing new and
higher value products, expanding existing products for new applications and new
customers and reducing the manufacturing cost of existing products. These
strategies may cause the average selling price of our products to fluctuate
significantly from time to time, thereby affecting our financial performance and
profitability.
Product introductions and customers' product requirements: Our success depends
on our ability to introduce products on a timely basis that meet or are
compatible with our customers' specifications and performance requirements. Both
factors, timeliness of product introductions and conformance to customers'
requirements, are equally important in securing design wins with our customers.
As we accelerate the development of new technology platforms, we expect to
increase the pace at which we introduce new products and seek and acquire design
wins. If we were to fail to introduce new products on a timely basis that meet
customers' specifications and performance requirements, particularly those
products with major OEM customers, and continue to expand our serviceable
markets, then we would lose market share and our financial performance would be
adversely affected. We believe that the JV Transaction will increase and
diversify our customer base, particularly in China , in the long term. However,
the ramp-activities and production schedule of our JV Company have been impacted
by the COVID-19 pandemic and related events, as discussed above. Even if we are
able to ramp up the operation of the JV Company timely, we may not be successful
in acquiring or maintaining a sufficient number of new customers to offset
additional costs due to various factors, including but are not limited to,
competition from other semiconductor companies in the region, our lack
30
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of history and prior relationships with customers as a new entrant, difficulties
in executing our joint venture strategies and the general economic conditions in
Chongqing and China .
Distributor ordering patterns, customer demand and seasonality: Our distributors
place purchase orders with us based on their forecasts of end customer demand,
and this demand may vary significantly depending on the sales outlook and market
and economic conditions of end customers. Because these forecasts may not be
accurate, channel inventory held at our distributors may fluctuate
significantly, which in turn may prompt distributors to make significant
adjustments to their purchase orders placed with us. As a result, our revenue
and operating results may fluctuate significantly from quarter to quarter. In
addition, because our products are used in consumer electronics products, our
revenue is subject to seasonality. Our sales seasonality is affected by numerous
factors, including global and regional economic conditions as well as the PC
market conditions, revenue generated from new products, changes in distributor
ordering patterns in response to channel inventory adjustments and end customer
demand for our products and fluctuations in consumer purchase patterns prior to
major holiday seasons. In recent periods, broad fluctuations in the
semiconductor markets and the global and regional economic conditions, in
particular the decline of the PC market conditions, have had a more significant
impact on our results of operations than seasonality. Furthermore, our revenue
may be impacted by the level of demand from our major customers due to factors
outside of our control. If these major customers experience significant decline
in the demand of their products, encounter difficulties or defects in their
products, or otherwise fail to execute their sales and marketing strategies
successfully, it may adversely affect our revenue and results of operations.
Regulatory Matters: As previously disclosed, the DOJ commenced an investigation
into our compliance with export control regulations relating to business
transactions with Huawei, which were added to the "Entity List" by the DOC in
May 2019 . We continue to cooperate fully with federal authorities in the
investigation. We have continued to respond to inquiries and requests from DOJ
for documents and information relating to the investigation, and the matter is
currently pending at DOJ. However, DOJ and DOC have not provided us any clear or
definitive response regarding the timeline of the investigation and potential
resolutions or outcome. In the meantime, we continue to incur significant costs
and expenses, including legal and professional fees, in connection with the
government investigation, which may reduce our profitability and operating
margin.
Principal line items of statements of operations
The following describes the principal line items set forth in our condensed
consolidated statements of operations:
Revenue
We generate revenue primarily from the sale of power semiconductors, consisting
of power discretes and power ICs. Historically, a majority of our revenue has
been derived from power discrete products. Because our products typically have
three-year to five-year life cycles, the rate of new product introduction is an
important driver of revenue growth over time. We believe that expanding the
breadth of our product portfolio is important to our business prospects, because
it provides us with an opportunity to increase our total bill-of-materials
within an electronic system and to address the power requirements of additional
electronic systems. In addition, a small percentage of our total revenue is
generated by providing packaging and testing services to third parties through
one of our subsidiaries.
Our product revenue is reported net of the effect of the estimated stock
rotation returns and price adjustments that we expect to provide to our
distributors. Stock rotation returns are governed by contract and are limited to
a specified percentage of the monetary value of products purchased by the
distributor during a specified period. At our discretion or upon our direct
negotiations with the original design manufacturers ("ODMs") or original
equipment manufacturers ("OEMs"), we may elect to grant special pricing that is
below the prices at which we sold our products to the distributors. In these
situations, we will grant price adjustments to the distributors reflecting such
special pricing. We estimate the price adjustments for inventory at the
distributors based on factors such as distributor inventory levels, pre-approved
future distributor selling prices, distributor margins and demand for our
products.
Cost of goods sold
Our cost of goods sold primarily consists of costs associated with semiconductor
wafers, packaging and testing, personnel, including share-based compensation
expense, overhead attributable to manufacturing, operations and procurement, and
costs associated with yield improvements, capacity utilization, warranty and
valuation of inventories. As the volume of sales increases, we expect cost of
goods sold to increase. We continued to ramp up the 12-inch fab at the JV
Company to meet the increasing demand on our products. While our utilization
rates cannot be immune to the market conditions, our goal is to make them less
vulnerable to market fluctuations. We believe our market diversification
strategy and product growth will drive higher volume of manufacturing which will
improve our factory utilization rates and gross margin in the long run.
Operating expenses
31
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Our operating expenses consist of research and development, selling, general and
administrative expenses and impairment of long-lived assets. We expect our
operating expenses as a percentage of revenue to fluctuate from period to period
as we continue to exercise cost control measures in response to the declining PC
market as well as align our operating expenses to the revenue level.
Research and development costs. Our research and development expenses mainly include salaries, bonuses, benefits, stock-based compensation expenses, expenses associated with new product prototypes, travel expenses, fees for engineering services provided by external contractors and consultants, depreciation of software and design tools, depreciation of equipment costs and overheads. We continue to invest in the development of new technologies and products using our own manufacturing and packaging facilities, as this is critical to our long term success. We also assess the appropriate investment levels and remain focused on launching new products to improve our competitiveness. We expect our research and development expenses to fluctuate from time to time.
Selling, general and administrative expenses. Our selling, general and administrative expenses consist primarily of salaries, bonuses, benefits, share-based compensation expense, product promotion costs, occupancy costs, travel expenses, expenses related to sales and marketing activities, amortization of software, depreciation of equipment, maintenance costs and other expenses for general and administrative functions as well as costs for outside professional services, including legal, audit and accounting services. We expect our selling, general and administrative expenses to fluctuate in the near future as we continue to exercise cost control measures. Income tax expense We are subject to income taxes in various jurisdictions. Significant judgment and estimates are required in determining our worldwide income tax expense. The calculation of tax liabilities involves dealing with uncertainties in the application of complex tax regulations of different jurisdictions globally. We establish accruals for potential liabilities and contingencies based on a more likely than not threshold to the recognition and de-recognition of uncertain tax positions. If the recognition threshold is met, the applicable accounting guidance permits us to recognize a tax benefit measured at the largest amount of tax benefit that is more likely than not to be realized upon settlement with a taxing authority. If the actual tax outcome of such exposures is different from the amounts that were initially recorded, the differences will impact the income tax and deferred tax provisions in the period in which such determination is made. Changes in the location of taxable income (loss) could result in significant changes in our income tax expense. We record a valuation allowance against deferred tax assets if it is more likely than not that a portion of the deferred tax assets will not be realized, based on historical profitability and our estimate of future taxable income in a particular jurisdiction. Our judgments regarding future taxable income may change due to changes in market conditions, changes in tax laws, tax planning strategies or other factors. If our assumptions and consequently our estimates change in the future, the deferred tax assets may increase or decrease, resulting in corresponding changes in income tax expense. Our effective tax rate is highly dependent upon the geographic distribution of our worldwide profits or losses, the tax laws and regulations in each geographical region where we have operations, the availability of tax credits and carry-forwards and the effectiveness of our tax planning strategies.
OnDecember 22, 2017 ,the United States enacted tax reform legislation through the Tax Cuts and Jobs Act ("the Tax Act"), which significantly changes the existingU.S. tax laws, including, but not limited to, (1) a reduction in the corporate tax rate from 35% to 21%, (2) a shift from a worldwide tax system to a territorial system, (3) eliminating the corporate alternative minimum tax (AMT) and changing how existing AMT credits can be realized, (4) bonus depreciation that will allow for full expensing of qualified property, (5) creating a new limitation on deductible interest expense and (6) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning afterDecember 31, 2017 . The company is not currently subject to the Base Erosion and Anti-Abuse ( BEAT) tax , which is a tax imposed on certain entities who make payments to their non US affiliates, where such payments reduce the US tax base . The BEAT tax is imposed at a rate of 10% on Adjusted Taxable Income, excluding certain payments to foreign related entities. It is an incremental tax over and above the corporate income tax and is recorded as a period cost. It is possible that this tax could be applicable in future periods, which would cause an increase to the effective tax rate and cash taxes.
“
32 -------------------------------------------------------------------------------- OnDecember 27, 2020 ,the United States enacted the Consolidated Appropriations Act, 2021, which made changes to existingU.S. tax laws. There was no material impact of the tax law changes included in the Consolidated Appropriations Act, 2021 to the Company.
“US bailout law 2021” promulgated
OnMarch 11, 2021 ,the United States enacted the American Rescue Plan Act of 2021, which made changes to existingU.S. tax laws. There was no material impact of the tax law changes included in the American Rescue Plan Act of 2021 to the Company. Results of Operations The following tables set forth statements of operations, also expressed as a percentage of revenue, for the three months endedSeptember 30, 2021 and 2020. Our historical results of operations are not necessarily indicative of the results for any future period. Three Months Ended September 30, 2021 2020 2021 2020 (in thousands) (% of revenue) Revenue$ 187,035 $ 151,551 100.0 % 100.0 % Cost of goods sold 122,468 109,028 65.5 % 71.9 % Gross profit 64,567 42,523 34.5 % 28.1 % Operating expenses Research and development 17,812 14,691 9.5 % 9.7 % Selling, general and administrative 21,806 17,505 11.7 % 11.6 % Total operating expenses 39,618 32,196 21.2 % 21.3 % Operating income 24,949 10,327 13.3 % 6.8 % Interest expense and other income (loss), net (2,192) (549) (1.3) % (0.3) % Income before income taxes 22,757 9,778 12.0 % 6.5 % Income tax expense 1,320 1,011 0.7 % 0.7 % Net income including noncontrolling interest 21,437 8,767 11.3 % 5.8 % Net loss attributable to noncontrolling interest (1,987) (807) (1.1) % (0.5) % Net income attributable to Alpha and Omega Semiconductor Limited$ 23,424 $ 9,574 12.4 % 6.3 %
Stock-based compensation expense was recognized as follows:
Three Months Ended September 30,
2021 2020 2021 2020
(in thousands) (% of revenue)
Cost of goods sold $ 569 $ 385 0.3 % 0.3 %
Research and development 1,043 1,080 0.6 % 0.7 %
Selling, general and administrative 3,023 1,411 1.6 % 0.9 %
Total $ 4,635 $ 2,876 2.5 % 1.9 %
33
-------------------------------------------------------------------------------- Three Months EndedSeptember 30, 2021 and 2020 Revenue The following is a summary of revenue by product type: Three Months Ended September 30, 2021 2020 Change (in thousands) (in thousands) (in percentage) Power discrete$ 130,688 $ 119,375 $ 11,313 9.5 % Power IC 52,330 29,455 22,875 77.7 % Packaging and testing services 4,017 2,721 1,296 47.6 %$ 187,035 $ 151,551 $ 35,484 23.4 % Total revenue was$187.0 million for the three months endedSeptember 30, 2021 , an increase of$35.5 million , or 23.4%, as compared to$151.6 million for the same quarter last year. The increase was primarily due to an increase of$11.3 million and$22.9 million in sales of power discrete products and sales of power IC products, respectively. The increase in power discrete and power IC product sales was primarily due to a 39.7% increase in unit shipments, partially offset by an 8.4% decrease in average selling price as compared to same quarter last year due to a shift in product mix. The increase in revenue of packaging and testing services for the three months endedSeptember 30, 2021 , as compared to same quarter last year, was primarily due to increased demand. Cost of goods sold and gross profit Three Months Ended September 30, 2021 2020 Change (in thousands) (in thousands) (in percentage) Cost of goods sold$ 122,468 $ 109,028 $ 13,440 12.3 % Percentage of revenue 65.5 % 71.9 % Gross profit$ 64,567 $ 42,523 $ 22,044 51.8 % Percentage of revenue 34.5 % 28.1 % Cost of goods sold was$122.5 million for the three months endedSeptember 30, 2021 , an increase of$13.4 million , or 12.3%, as compared to$109.0 million for the same quarter last year. The increase was primarily due to 23.4% increase in revenue. Gross margin increased by 6.4 percentage points to 34.5% for the three months endedSeptember 30, 2021 , as compared to 28.1% for the same quarter last year. OurJV Company continued its ramp during the three months endedSeptember 30, 2021 , which resulted in an increase in the capacity utilization and contributed to the increase in gross margin during the three months endedSeptember 30, 2021 . 34 --------------------------------------------------------------------------------
Research and development costs
Three Months Ended September 30,
2021 2020 Change
(in thousands) (in thousands) (in percentage)
$ 17,812 $ 14,691 $ 3,121 21.2 %
Research and development expenses were $17.8 million for the three months ended
September 30, 2021 , an increase of $3.1 million , or 21.2%, as compared to $14.7
million for the same quarter last year. The increase was primarily attributable
to a $2.7 million increase in employee compensation and benefits expense mainly
due to higher bonuses accrual, a $0.2 million increase in product prototyping
engineering expense as a result of increased engineering activities, and a $0.1
million increase in depreciation expenses during the current quarter.
Selling, general and administrative expenses
Three Months Ended September 30,
2021 2020 Change
(in thousands) (in thousands) (in percentage)
Selling, general and administrative $ 21,806 $ 17,505 $ 4,301 24.6 %
Selling, general and administrative expenses were $21.8 million for the three
months ended September 30, 2021 , an increase of $4.3 million , or 24.6%, as
compared to $17.5 million for the same quarter last year. The increase was
primarily attributable to a $4.2 million increase in employee compensation and
benefits expenses mainly due to higher bonus expenses accrual and increased
business insurance expenses, as well as $1.6 million increase in share-based
compensation expense due to higher stock rewards price. The increase was
partially offset by a $0.7 million decrease in legal expense related to the
government investigation, a $0.2 million decrease in marketing demo and trade
shows costs as a result of the COVID-19 pandemic, and a $0.5 million decrease in
audit and tax consulting fees during the current quarter.
Interest expense and other income (loss), net
Three Months Ended September 30,
2021 2020 Change
(in thousands) (in thousands) (in percentage)
Net interest expense and other income (losses)
299.3 % Interest expense was primarily related to bank borrowings. Interest expense increased by$0.5 million during the three months endedSeptember 30, 2021 as compared to the same period last year was primarily due to an increase in bank borrowings, as well as an interest refund from the Chinese government in theJV Company in the same period last year. Interest income and others were primarily related to interest earned from cash and cash equivalents, as well as foreign exchange gains (losses). Interest income and others, net decreased by$1.1 million during the three months endedSeptember 30, 2021 as compared to the same period last year was primarily due to lower foreign currency exchange gains as a result of the depreciation of RMB against USD. Income tax expense Three Months Ended September 30, 2021 2020 Change (in thousands) (in thousands) (in percentage) Income tax expense$ 1,320 $ 1,011 $ 309 30.6 % The Company recognized income tax expense of approximately$1.3 million and$1.0 million for the three months endedSeptember 30, 2021 and 2020, respectively. The income tax expense of$1.3 million for the three months endedSeptember 30 , 35 -------------------------------------------------------------------------------- 2021 included a$.09 million discrete tax expense. The income tax expense of$1.0 million for the three months endedSeptember 30, 2020 included a$0.03 million discrete tax benefit. Excluding the discrete income tax items, the effective tax rate for the three months endedSeptember 30, 2021 and 2020 was 5.4% and 10.7%, respectively. The changes in the effective tax rate and tax expense between the periods resulted primarily from the Company reporting pretax book income of$22.8 million for the three months endedSeptember 30, 2021 as compared to a pretax book income of$9.8 million for the three months endedSeptember 30, 2020 . Liquidity and Capital Resources Our principal need for liquidity and capital resources is to maintain sufficient working capital to support our operations and to invest adequate capital expenditures to grow our business. To date, we finance our operations and capital expenditures primarily through funds generated from operations and borrowings under our term loans, financing lease and other debt agreements. OnAugust 18, 2021 , Jireh entered into a term loan agreement with a financial institution (the "Bank") in an amount up to$45.0 million for the purpose of expanding and upgrading the Company's fabrication facility located inOregon . The obligation under the loan agreement is secured by substantially all assets of Jireh and guaranteed by the Company. The agreement has a 5.5 year term and matures onFebruary 16, 2027 . Jireh is required to make consecutive quarterly payments of principal and interest. The loan accrues interest based on adjusted LIBOR plus the applicable margin based on the outstanding balance of the loan. This agreement contains customary restrictive covenants and includes certain financial covenants that require the Company to maintain. As ofSeptember 30, 2021 , there was no outstanding balance under the loan. OnOctober 2019 , the Company's subsidiary inChina entered into a line of credit facility withBank of Communications Limited inChina . This line of credit matures onFebruary 14, 2021 and is based on the China Base Rate multiplied by 1.05, or 4.99% onOctober 31, 2019 . The purpose of the credit facility is to provide short-term borrowings. The Company could borrow up to approximatelyRMB 60.0 million or$8.5 million based on the currency exchange rate between the RMB and theU.S. Dollar onOctober 31, 2019 . InSeptember 2021 , this line of credit was renewed with maximum borrowings up toRMB 140.0 million with the same terms and a maturity date ofSeptember 18, 2022 . As ofSeptember 30, 2021 , there was no outstanding balance under the loan. OnNovember 16, 2018 , the Company's subsidiary inChina entered into a line of credit facility with Industrial and Commercial Bank of China. The purpose of the credit facility was to provide short-term borrowings. The Company could borrow up to approximatelyRMB 72.0 million or$10.3 million based on currency exchange rate between RMB andU.S. Dollar onNovember 16, 2018 . TheRMB 72.0 million consists ofRMB 27.0 million for trade borrowings with a maturity date ofDecember 31, 2021 , andRMB 45.0 million for working capital borrowings or trade borrowings with a maturity date ofSeptember 13, 2022 . As ofSeptember 30, 2021 , there was no outstanding balance under the loan. OnAugust 9, 2019 , one of the Company's wholly-owned subsidiaries (the "Borrower") entered into a factoring agreement with theHongkong and Shanghai Banking Corporation Limited ("HSBC"), whereby the Borrower assigns certain of its accounts receivable with recourse. This factoring agreement allows the Borrower to borrow up to 70% of the net amount of its eligible accounts receivable of the Borrower with a maximum amount of$30.0 million . The interest rate is based on one month London Interbank Offered Rate ("LIBOR") plus 1.75% per annum. The Company is the guarantor for this agreement. The Company is accounting for this transaction as a secured borrowing under the Transfers and Servicing of Financial Assets guidance. In addition, any cash held in the restricted bank account controlled by HSBC has a legal right of offset against the borrowing. This agreement, with certain financial covenants required, has no expiration date. OnAugust 11, 2021 , the Borrower signed an agreement with HSBC to decrease the borrowing maximum amount to$8.0 million with certain financial covenants required. Other terms remain the same. As ofSeptember 30, 2021 , the Borrower was in compliance with these covenants. As ofSeptember 30, 2021 , there was no outstanding balance and the Company had unused credit of approximately$8.0 million . OnMay 1, 2018 ,Jireh Semiconductor Incorporated ("Jireh"), a wholly-owned subsidiary of the Company, entered into a loan agreement with a financial institution (the "Bank") that provided a term loan in the amount of$17.8 million . The obligation under the loan agreement is secured by certain real estate assets of Jireh and guaranteed by the Company. The loan has a five-year term and matures onJune 1, 2023 . BeginningJune 1, 2018 , Jireh made consecutive monthly payments of principal and interest to the Bank. The outstanding principal accrues interest at a fixed rate of 5.04% per annum on the basis of a 360-day year. The loan agreement contains customary restrictive covenants and includes certain financial covenants that require the Company to maintain, on a consolidated basis, specified financial ratios. InAugust 2021 , Jireh signed an amendment of this loan with the Bank to modify the financial covenants requirement to align with the new term loan agreement entered into onAugust 18, 2021 discussed above. The amendment was accounted for as a debt modification and no gain or loss 36 --------------------------------------------------------------------------------
has been recognized. The Company was in compliance with these restrictive covenants
OnAugust 15, 2017 , Jireh entered into a credit agreement with the Bank that provided a term loan in an amount up to$30.0 million for the purpose of purchasing certain equipment for the Company's fabrication facility located inOregon . The obligation under the credit agreement is secured by substantially all assets of Jireh and guaranteed by the Company. The credit agreement has a five-year term and matures onAugust 15, 2022 . InJanuary 2018 andJuly 2018 , Jireh drew down the loan in the amount of$13.2 million and$16.7 million , respectively. Beginning inOctober 2018 , Jireh is required to pay to the Bank on each payment date, the outstanding principal amount of the loan in monthly installments. The loan accrues interest based on an adjusted LIBOR as defined in the credit agreement, plus a specified applicable margin in the range of 1.75% to 2.25%, based on the outstanding balance of the loan. The credit agreement contains customary restrictive covenants and includes certain financial covenants that require the Company to maintain, on a consolidated basis, specified financial ratios and fixed charge coverage ratio. InAugust 2021 , Jireh signed an amendment of this loan with the Bank to modify the financial covenants requirement to align with the new term loan agreement entered into onAugust 18, 2021 discussed above. The amendment was accounted for as a debt modification and no gain or loss was recognized. The Company was in compliance with these covenants as ofSeptember 30, 2021 . As ofSeptember 30, 2021 , the outstanding balance of the term loan was$7.5 million . InSeptember 2017 , the Board of Directors approved a repurchase program (the "Repurchase Program") that allowed us to repurchase our common shares from the open market pursuant to a pre-established Rule 10b5-1 trading plan or through privately negotiated transactions up to an aggregate of$30.0 million . The amount and timing of any repurchases under the Repurchase Program depend on a number of factors, including but not limited to, the trading price, volume and availability of our common shares. Shares repurchased under this program are accounted for as treasury shares and the total cost of shares repurchased is recorded as a reduction of shareholders' equity. We did not repurchase any shares pursuant to the Repurchase Plan during the three months endedSeptember 30, 2021 . Since the inception of the program, we repurchased an aggregate of 6,784,648 shares for a total cost of$67.3 million , at an average price of$9.92 per share, excluding fees and related expenses. As ofSeptember 30, 2021 , of the 6,784,648 repurchased shares, 161,145 shares with a weighted average repurchase price of$10.13 per share, were reissued at an average price of$5.19 per share pursuant to option exercises and vested restricted share units. We had$13.4 million remained available under the Repurchase Program as ofSeptember 30, 2021 . We believe that our current cash and cash equivalents and cash flows from operations will be sufficient to meet our anticipated cash needs, including working capital and capital expenditures, for at least the next twelve months. In the long-term, we may require additional capital due to changing business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If our cash is insufficient to meet our needs, we may seek to raise capital through equity or debt financing. The sale of additional equity securities could result in dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and may include operating and financial covenants that would restrict our operations. We cannot be certain that any financing will be available in the amounts we need or on terms acceptable to us, if at all.
Financing operations of the company JV
From time to time theJV Company entered into financing and loan agreements with banks and other third parties to fund capital expenditures and other operational expenses in connection with the constructions and ramp-up of the manufacturing facility inChongqing .The JV Company incurs debt through its own financing agreements, and our parent company and other subsidiaries are not parties to these agreements and do not provide any guarantee or security forJV Company's debt, nor do we have direct access to any cash proceeds borrowed from such loan agreements. OnMay 9, 2018 (the "Effective Date"), theJV Company entered into a lease finance agreement and a security agreement (the "Agreements") withYinHai Leasing Company andChina Import/Export Bank (the "Lenders"). Pursuant to the Agreements, the Lenders agreed to provide an aggregate ofRMB 400.0 million , or$62.8 million based on the currency exchange rate between RMB andU.S. Dollar on the Effective Date, of financing to theJV Company (the "Lease Financing"). In exchange for the Lease Financing, theJV Company agreed to transfer title of its assembly and testing equipment to the Lenders, and the Lenders leased such equipment to theJV Company under a five-year lease arrangement, pursuant to which theJV Company makes quarterly lease payments to the Lenders consisting of principal and interest based on a repayment schedule mutually agreed by the parties. The interest under the Lease Financing is accrued based on theChina Base Rate multiplied by 1.15, or 5.4625% on the Effective Date. Under the Agreements, at the end of the five-year lease term, the Lenders agree to sell such equipment back to theJV Company for a nominal amount (RMB 1 ). The JV Company's obligations under the Lease Financing are secured by the land and building owned by theJV Company (the "Collateral"). The proceeds from the Lease Financing were used primarily for the acquisition and installation of the 12-inch fabrication equipment and other expenses of theJV Company relating to the completion of the fabrication facility located inChongqing . The Agreements contain customary representation, warranties and covenants, including restrictions on the transfer of the Collateral. The Agreements also contain 37 -------------------------------------------------------------------------------- customary events of default, including but not limited to, failure to make payments and breach of material terms under the Agreements. The Agreements include certain customary closing conditions, including the payment of deposit by theJV Company . OnJune 28, 2020 , the parties entered into a modification to this agreement, pursuant to which the interest rate was changed to be the five-year loan prime rate inChina plus 0.8125%, or 5.4625%. Other terms of this agreement remain the same. As ofSeptember 30, 2021 , the outstanding balance of the Lease Financing of163.0 million RMB (equivalent of$25.2 million based on the currency exchange rate as ofSeptember 30, 2021 ) was recorded under short-term and long-term finance lease liabilities. OnMarch 12, 2019 , theJV Company entered into a loan agreement withThe Export-Import Bank of China in the aggregate principal amount ofRMB 200.0 million (approximately$29.8 million based on currency exchange rate between RMB andU.S. Dollar onMarch 31, 2019 ). The loan will mature onFebruary 20, 2025 .The JV Company drew downRMB 190.0 million andRMB 10.0 million inMarch 2019 andDecember 2019 , respectively. The loan withdraw window expired onFebruary 28, 2020 . The interest is accrued based on the China Base Rate multiplied by 1.1, or 5.39%. The loan requires quarterly interest payments. The principal payments are required to be paid every 6 months over the term of loan commencing inOctober 2019 . This loan is secured by the buildings and certain equipment owned by theJV Company with a carrying value of$88.1 million as ofSeptember 30, 2021 . As a condition of the loan arrangement,RMB 14.0 million (approximately$2.0 million ) of cash is held as restricted cash by theJV Company as a compensating balance at the bank until the principal is paid. OnJune 24, 2020 , a modification of this loan was signed, pursuant to which the interest rate was changed to be based on the five-year loan prime rate inChina plus 0.74%, or 5.39%. Other terms of this loan remain the same. As ofSeptember 30, 2021 , the outstanding balance of the loan wasRMB 184.0 million (equivalent of$28.5 million based on the currency exchange rate as ofSeptember 30, 2021 ). InDecember 2019 , theJV Company entered into a loan agreement withChina Development Bank in the amount of$24.0 million . The obligation under the loan agreement is secured by certain assets of theJV Company with a carrying value of$111.7 million as ofSeptember 30, 2021 .The JV Company is required to make consecutive semi-annual payments of principal untilDecember 8, 2024 . The interest is accrued based on the LIBOR rate plus 2.8%. The interest is required to be paid onMarch 21 andSeptember 21 each year. As ofSeptember 30, 2021 , the outstanding balance of the loan was$19.2 million . OnApril 26, 2020 , theJV Company entered into a loan agreement withChina Development Bank , Agricultural Bank of China, China Merchants Bank and Chongqing Rural Commercial Bank (collectively, the "Banks") in the aggregate principal amount ofRMB 250 million (approximately$35.7 million based on the currency exchange rate between RMB andU.S. Dollar onApril 26, 2020 ). The obligation under the loan agreement is secured by certain assets of theJV Company . The obligation under the loan agreement is secured by certain assets of theJV Company with a carrying value of$111.7 million as ofSeptember 30, 2021 .The JV Company is required to make consecutive semi-annual payments of principal untilDecember 8, 2024 . Interest payments are due onMarch 20 ,June 20 ,September 20 andDecember 20 of each year based on the LPR plus 1.3%.The JV Company drew downRMB 250.0 million (approximately$35.3 million based on the currency exchange rate between RMB andU.S. Dollar onJune 30, 2020 ) inApril 2020 . As ofSeptember 30, 2021 , the outstanding balance of the loan was$34.1 million . OnNovember 13, 2020 , theJV Company entered into a one-year loan agreement withChina Merchant Bank inChina .The JV Company can borrow up toRMB 50.0 million , or$7.6 million , based on the currency exchange rate between RMB andU.S. Dollar onNovember 13, 2020 . The loan's interest rates are based on theChina one-year loan prime rate ("LPR") plus 1.4% per annum. Interest payments are due quarterly with the entire principal due not later thanNovember 19, 2021 . During the three months endedDecember 31, 2020 , theJV Company borrowedRMB 50.0 million , or$7.6 million , at an interest rate of 5.25% per annum. As ofSeptember 30, 2021 , the outstanding balance of this loan was$7.7 million . OnApril 19, 2021 , theJV Company entered into a loan agreement with China Everbright Bank inChina to borrow a maximum ofRMB 100 million . The borrowing can be in RMB orU.S. Dollar ("USD"). The loan consists ofRMB 50 million for working capital borrowings in Chinese yuan andRMB 50 million for borrowing in USD. The loan is collateralized by eligible accounts receivable. OnApril 19, 2021 , theJV Company borrowedRMB 50.0 million , or$7.7 million based on the currency exchange rate between RMB and USD onApril 19, 2021 , at an interest rate of 5.1% per annum. The interest payments are due quarterly with the entire principal due no later thanMay 19, 2022 . OnJune 16, 2021 andJune 24, 2021 , theJV Company borrowed$4.2 million and$3.5 million at interest rate of 2.7% per annum, and repaid in full during the quarter endedSeptember 30, 2021 . OnAugust 17, 2021 andSeptember 22, 2021 , theJV Company also borrowed$4.2 million and$3.4 million at interest rate of 2.7% per annum, with principal due onNovember 9, 2021 andDecember 12, 2021 , respectively. As ofSeptember 30, 2021 , the total outstanding balance of these loans was$15.3 million . OnJune 29, 2021 , theJV Company entered into a P1Y-year loan agreement with China CITIC Bank inChina to borrow a maximum of$7.7 million . Interest payments are due on the 20th of each quarter commencing onSeptember 20, 2021 , and the 38 -------------------------------------------------------------------------------- entire principal is due onJune 29, 2022 . As ofSeptember 30, 2021 , the outstanding balance of this loan was$7.7 million at an interest rate of 3.49% per annum. Cash, cash equivalents and restricted cash As ofSeptember 30, 2021 andJune 30, 2021 , we had$255.0 million and$204.8 million of cash, cash equivalents and restricted cash, respectively. Our cash, cash equivalents and restricted cash primarily consist of cash on hand, restricted cash, and short-term bank deposits with original maturities of three months or less. Of the$255.0 million and$204.8 million cash, cash equivalents and restricted cash,$225.8 million and$134.6 million , respectively, are deposited with financial institutions outsidethe United States . The following table shows our cash flows from operating, investing and financing activities for the periods indicated:
Three months ended
2021 2020
(in thousands)
Net cash provided by operating activities $ 80,607 $ 9,848
Net cash used in investing activities (23,911) (11,337)
Net cash used in financing activities (6,535) (4,186)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(11) 1,997 Net increase (decrease) in cash, cash equivalents and restricted cash $ 50,150$ (3,678)
Cash flow from operating activities
Net cash provided by operating activities of$80.6 million for the three months endedSeptember 30, 2021 resulted primarily from net income of$21.4 million and non-cash expenses of$19.0 million , partially offset by net changes in assets and liabilities using cash of$40.1 million . The non-cash expenses of$19.0 million primarily included$13.7 million of depreciation and amortization expenses,$4.6 million of share-based compensation expense, and$0.7 million of deferred income taxes. The net changes in assets and liabilities of$40.1 million were primarily due to a$52.9 million increase in accrued and other liabilities, a$2.1 million increase in accounts payable due to timing of payments, and a$0.4 million increase in income taxes payable, partially offset by a$3.5 million increase in accounts receivable as a result of higher revenue, a$9.1 million increase in inventories due to a continued ramp of theJV Company , and a$2.6 million increase in other current and long-term assets due to increase in advance payments to suppliers. Net cash provided by operating activities of$9.8 million for the three months endedSeptember 30, 2020 resulted primarily from net income of$8.8 million and non-cash expenses of$15.4 million , partially offset by net changes in assets and liabilities using net cash of$14.3 million . The non-cash expenses of$15.4 million primarily included$12.5 million of depreciation and amortization expenses and$2.9 million of share-based compensation expense. The net changes in assets and liabilities using cash of$14.3 million were primarily due to a$13.0 million increase in accounts receivable as a result of better-than-expected revenue, a$2.2 million increase in inventories due to a continued ramp of theJV Company , and a$1.0 million increase in other current and long-term assets due to increase in advance payments to vendors, and a$0.8 million decrease in accrued and other liabilities, partially offset by a$1.9 million increase in accounts payable due to timing of payments, and a$0.7 million increase in income taxes payable. Cash flows from investing activities Net cash used in investing activities of$23.9 million for the three months endedSeptember 30, 2021 was primarily attributable to purchases of property and equipment of$8.4 million for theJV Company and purchases of property and equipment of$16.6 million for other than theJV Company , net of government grants of$1.1 million . Net cash used in investing activities of$11.3 million for the three months endedSeptember 30, 2020 was primarily attributable to$11.3 million purchases of property and equipment, including$3.4 million purchased by theJV Company . Cash flows from financing activities 39 -------------------------------------------------------------------------------- Net cash used in financing activities of$6.5 million for the three months endedSeptember 30, 2021 was primarily attributable to$9.7 million in repayments of borrowings,$4.2 million in payment of finance lease obligations, and$0.2 million in common shares acquired to settle withholding tax related to vesting of restricted stock units, partially offset by$7.6 million proceeds from borrowings. Net cash used in financing activities of$4.2 million for the three months endedSeptember 30, 2020 was primarily attributable to$11.1 million in repayments of borrowings,$4.0 million in payment of finance lease obligations, and$0.4 million in common shares acquired to settle withholding tax related to vesting of restricted stock units, partially offset by$11.3 million proceeds from borrowings.
Commitments
See Note 10 of the Notes to the Condensed Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q for a description of commitments. Off-Balance Sheet Arrangements As ofSeptember 30, 2021 , we had no material off-balance sheet arrangements as defined in Regulation S-K 303(a)(4)(ii) arrangements. Contractual Obligations There were no material changes outside of our ordinary course of business in our contractual obligations from those disclosed in our Annual Report on Form 10-K for the fiscal year endedJune 30, 2021 . Recent Accounting Pronouncements See Note 1 of the Notes to the Condensed Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q for a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on results of operations and financial condition, which is incorporated herein by reference. 40
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