What changed in this filing

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Item 7. Management’s Discussion and Analysis

2020-09-02 compared with 2019-08-23 · 255 added, 183 removed, 363 unchanged (55% of the section changed)

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We are a designer, developer and global supplier of a broad portfolio of power semiconductors.

Our portfolio of power semiconductors includes over 2,100 products, and has grown significantly with the introduction of more than 200 new products in each of the fiscal years ended June 30, 2019 and 2018, respectively, and over 80 new products during the fiscal year ended June 30, 2017 .

Our portfolio of power semiconductors includes approximately 2,300 products, and has grown significantly with the introduction of over 160 new products in the fiscal year ended June 30, 2020 , and over 200 new products in each of the fiscal year ended June 30, 2019 and 2018 , respectively.

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.

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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 computers, flat panel TVs, LED lighting, smart phones, battery packs, quick chargers, home appliances, consumer and industrial motor controls and power supplies for TVs, computers, servers and telecommunications equipment.

Our portfolio of products targets high-volume applications, including portable computers, graphic cards, flat panel TVs, home appliances, smart phones, battery packs, 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 in the United States and Asia.

Our sales and technical support teams are localized in several growing markets.

We operate an 8-inch wafer fabrication facility located in Hillsboro, Oregon, or the Oregon fab, which is critical for us to accelerate proprietary technology development, new product introduction and improve our financial performance in the long run.

To meet the market demand for the more mature high volume products, we also utilize the wafer manufacturing capacity of selected third party foundries.

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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.

On March 29, 2016, we entered into a joint venture contract (the “JV Agreement”) with two investment funds owned by the Municipality of Chongqing (the “Chongqing Funds”), pursuant to which we and the Chongqing Funds formed a joint venture, (the “JV Company”), for the purpose of constructing a power semiconductor packaging, testing and wafer fabrication facility in the Liangjiang New Area of Chongqing, China (the “JV Transaction”).

The total initial capitalization of the JV Company was $330.0 million (the “Initial Capitalization”).

As of June 30, 2019, the Chongqing Funds contributed a total of $186.0 million of initial capital in cash, including a $24.0 million cash contribution in December 31, 2018 and we contributed cash of $35.0 million, including a $25.0 million contribution in August 2018, and certain intangible assets, as well as certain packaging equipment as required by the JV Agreement by transferring the legal titles of such equipment to the JV Company.

As of June 30, 2019 , we own 50.9%, and the Chongqing Funds own 49.1%, of the equity interest in the JV Company.

If both parties agree that the termination of the JV Company is the best interest of each party or the JV Company is bankrupt or insolvent where either party may terminate early, after paying the debts of the JV Company, the remaining assets of the JV Company shall be paid to the Chongqing Funds to cover the principal of its total paid-in contributions plus interest at 10% simple annual rate prior to distributing the balance of the JV Company's assets to us.

In addition, as part of the JV Transaction, the JV Company entered into a construction contract in the total price of 540.0 million RMB, or approximately $78.0 million in January 2017.

As of June 30, 2019 , the JV Company paid approximately $69.9 million (RMB 480.0 million), and expects to pay the remaining of $8.7 million (RMB 60.0 million) in the near term.

The JV Company started its assembly and testing production in the September quarter of 2018 and continued its ramp up during the fiscal year 2019.

We also completed installation of equipment and trial production at the 12-inch wafer fabrication facility in fiscal year 2019.

In July 2019, we commenced limited mass production at the 12-inch wafer fabrication facility.

During fiscal years 2019 , 2018 and 2017 , we recorded $16.5 million , $9.3 million and $4.6 million in net loss attributable to noncontrolling interest, respectively, representing 49.1% of the net loss incurred in the JV Company.

In the long-term, we expect the JV Company to deliver significant cost savings, and enhance our market positions in China, and drive meaningful improvements in working capital and capital expenditures.

We operate a power semiconductor packaging, testing and wafer fabrication facility in the Liangjiang New Area of Chongqing, China through our joint venture (the “JV Company”) with two investment funds owned by the Municipality of Chongqing (the “Chongqing Funds”), (the “JV Company”).

We currently own 51%, and the Chongqing Funds own 49%, of the equity interest in the JV Company.

The Company’s consolidated financial statements for the fiscal years ended June 30, 2020, 2019 and 2018 reflect net losses attributable to the non-controlling interest in the JV Company of $11.7 million , $16.5 million and $9.3 million , respectively.

While the JV Company is our consolidated subsidiary for purpose of financial reporting, it operates as an independent and separate legal entity.

As a result, the JV Company’s assets and liabilities are generally segregated from our companies.

For example, the JV 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 the JV 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 built the JV Company to fulfill growing customer demand.

In fact, in the quarter ended June 30, 2020, the JV Company made a major contribution to capturing increasing demand for our products.

Even though the COVID-19 pandemic has slowed its production, we are continuing to make progress.

The JV Company had been ramping up its production of assembly and testing during the fiscal year 2020.

The 12-inch wafer fabrication facility commenced its limited mass production in the quarter ended September 30, 2019 and continued its ramp in the year ended June 30, 2020.

Importantly, the JV Company achieved a positive EBITDAS in the fourth quarter of fiscal year 2020.

For the quarter ending September 30, 2020, we expect the JV Company to sequentially increase its production of its 12-inch wafer fabrication and assembly and test.

Our current goal is to achieve Phase 1 target run rate in the quarter ending September 30, 2021.

However, the impact of the global COVID-19 pandemic and related economic downturn, intensified geopolitical tensions, logistical difficulties and other factors beyond our control could delay our plan.

We will continue to monitor and evaluate market conditions closely during this period and react quickly to the changing environment as necessary to achieve an optimal production level at the JV Company.

We expect the joint venture to provide much needed capacity to support our future growth, enhance our market positions in China, and drive improvements in capital expenditures.

On September 5, 2017, we entered into a license agreement with STMicroelectronics International N.V.

(“STMicro”), pursuant to which STMicro granted us a world-wide, royalty-free and fully-paid license to use its technologies to develop, market and distribute certain digital multi-phase controller products, which have been previously offered by STMicro.

Under the license agreement, we agreed to pay a total price in cash of $17.0 million based on the payment schedule as set forth in the agreement of approximately $10.1 million, $6.7 million and $0.2 million in calendar year 2017, 2018 and 2019, respectively.

As of June 30, 2020 , we recorded $16.2 million as intangible assets.

We will begin to amortize this intangible asset when the technology has met our qualification and is ready for its intended use in production.

We will begin to amortize such intangible asset during the

September 2020 quarter, which is when the technology meets qualification requirements and becomes ready for its intended use in production.

During the fiscal year ended June 30, 2020 , 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, portfolio expanded significantly across a full range of voltage applications.

For example, during the fourth quarter of fiscal year of 2019, we released the new αMOS5 family, which is our latest generation of high voltage MOSFET, designed to meet the high efficiency and high-density needs for Quick Charger, Adapter, PC Power, Server, Industrial Power, Telecom, and Hyperscale Datacenter applications.

In addition, we released Super Low Capacitance TVS for high-speed line protection using the latest Super Low Cap TVS platform.

This new device is ideal for USB Type-C applications such as notebooks and mobile devices.

During the third quarter of fiscal year of 2019, we introduced a new family of EZBuck™ regulators.

The new devices provide a compact, efficient power converter solution for next-generation chipsets used in high-end TVs, servers, data storage systems, networking and other compact PC systems.

We also introduced a high SOA MOSFET for hot swap applications.

This new device delivers low Rdson with a high Safe Operating Area (SOA) capabilities ideally suited for demanding applications such as hot swap and efuse.

High SOA is essential in server hot swap applications where the MOSFET needs to be robust to manage the high in-rush current effectively.

Moreover, we launched a new 650V áGaN™ product family.

These high voltage MOSFETs ideally suited for high efficiency and high-density power supplies in the telecom, server, and consumer adapter markets.

High-efficiency server power supplies are needed to reduce cooling requirements, maximize rack area, and minimize the associated energy cost.

In addition, we announced latest XSPairFET™ buck-boost MOSFET for type-c applications such as notebook, USB hubs, and power banks.

During the first quarter of fiscal year of 2019, we announced a new Type-C Power Delivery compliant input protection switch with up to 28V over-voltage protection.

This new device offers low RDS(ON) (20mohm) in a thermally enhanced 3x3mm DFN package, made possible by our advanced co-packaging technology, combining a high performance IC with protection features and our latest high SOA MOSFET.

We also announced new TO-Leadless (TOLL) packaging technology for high current 400A applications.

The TOLL packaging technology offers very low package resistance and inductance due to the clip technology in comparison to other TO-Leadless packages using standard wire-bonding technology which enables improved EMI performance.

Factors affecting our performance

Our performance is affected by several key factors, including the following:

Impact of COVID-19 Pandemic to 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 of California, Oregon and Texas in the U.S.

and countries throughout the Asia 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 “stay-at-home” restrictions, we have experienced shifting market trends, including an increasing demand in markets for notebooks, PCs and gaming devices and decreasing demand for mobile phone 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 as government authorities relax COVID-19 related restrictions.

Furthermore, as the COVID-19 pandemic continues and global economic downturn and high unemployment persist, consumer spending in general may slow down substantially, in which case we may experience a significant decline of customer orders for our products, including those designed for PC-related applications, and such decline is expected to adversely affect our financial conditions and results of operations.

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 from the early signs of the COVID-19 outbreak in China 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.

As the COVID-19 pandemic reached the U.S., and federal and state authorities imposed “stay-at-home” orders, we have taken similar proactive actions in California, Oregon and Texas where we have business activities in order to protect the health and safety of our employees, while maintaining our core operations.

We expect these measures will result in difficulties and logistical challenges in our business operations, and in some cases, reduce the productivity of our workforce and cause disruptions and delays in shipping products to our customers.

This may impact our ability to respond quickly and effectively to changing market demands as the COVID-19 pandemic continues to cause economic disruption and recession around the globe.

In addition, the COVID-19 pandemic and related events have slowed the pace of ramp-up activities at the JV Company, and our current goal is to achieve Phase 1 target run rate in the quarter ending September 30, 2021.

We cannot predict the long-term economic impact of the COVID-19 pandemic, but we will continue to actively monitor the situation and may take further actions altering our business operations that we determine are in the best interests of our employees, customers, partners, suppliers, and stakeholders, or as required by federal, state, or local authorities.

The ultimate effects that any such alterations or modifications may have on our business are not clear, including the effects on our customers, employees, and prospects, or on our financial results for the remainder of calendar year 2020.

Other Factors affecting our performance

In addition to the COVID-19 pandemic and related events as described above, our performance is affected by several key factors, including the following:

Costs of JV Company and digital power business:

We are incurring an increase in operating expenses due to the additional costs associated with ramping up pre-production activities of the JV Company, as well as the initial startup work to develop and establish our new digital power business, both of which will have the significant impact on our financial performance.

The JV Company started its assembly and testing production in the September quarter of 2018 and continued its ramp up during fiscal year 2019.

We also completed installation of equipment and trial production at the 12-inch wafer fabrication facility in fiscal year 2019.

In July 2019, we commenced limited mass production at the 12-inch wafer fabrication facility.

We have incurred an increase in operating expenses due to the additional costs associated with pre-production and production ramp-up activities of the JV Company, as well as the initial startup work to develop and establish our new digital power business, both of which have had a significant impact on our financial performance.

Even though the COVID-19 pandemic has slowed its production, we are making persistent progress.

The JV Company had been ramping up its production of assembly and testing during the fiscal year 2020.

The 12-inch wafer fabrication facility commenced its limited mass production in the quarter ended September 30, 2019 and continued its ramp in the year ended June 30, 2020.

For the quarter ending September 30, 2020, we expect the JV Company to sequentially increase

its production of its 12-inch wafer fabrication and assembly and test.

The pre-production costs include costs relating to the installation of equipment;

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and establishment of administrative and management functions and systems.

Certain of such pre-production costs can be capitalized under U.S.

Certain of such pre-production costs could be capitalized under U.S.

GAAP accounting.

However, the majority of such pre-production costs and all of the production ramp-up costs cannot be capitalized, therefore such costs impact our profitability.

However, the majority of such pre-production costs and all of the production ramp-up costs cannot be capitalized, and such costs have and may continue to have a negative impact on our profitability.

We did not incur pre-production costs after July 2019 as the JV Company has commenced limited mass production.

In addition, we are developing our digital power business based on the STMicro license agreement, which will allow us to design and distribute a full suite of advanced low-voltage power IC products.

We have incurred and expect to continue to incur additional costs, including costs relating to compensation of qualified engineers and technical staff and other research and development and management activities, as we continue to build this new business.

In the short term, we will not be able to generate sufficient amount of revenue from either of these two business initiatives to offset the increase costs, which will likely negatively impact our results of operations.

In the short term, we will not be able to generate sufficient amount of revenue from either of these two business initiatives to offset the increased costs, which will likely negatively impact our results of operations.

Manufacturing costs :

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Our revenue from the PC markets accounted for approximately 41.1% , 45.9% and 41.6% of our total revenue for the years ended June 30, 2020 , 2019 and 2018 , respectively.

In the past, we have experienced a significant global decline in the PC markets 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 negative impact on the demand for our products, revenue, factory utilization, gross margin, our ability to resell excess inventory, and other performance measures.

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.

While recently we have experienced an increase of demand in PC market due to the impact of the COVID-19 pandemic, we cannot predict whether and how long this trend will continue.

A decline of the PC market may have 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 in reducing 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.

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.

Product introductions and customers' product requirements :

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We believe that the JV Transaction will increase and diversify our customer base, particularly in China, in the long term.

The JV Company started its assembly and testing production in the September quarter of 2018 and continued its ramp up during the fiscal year 2019.

The JV Company also completed installation of equipment and trial production at the 12-inch wafer fabrication facility in fiscal year 2019.

In July 2019, we commenced limited mass production at the 12-inch wafer fabrication facility.

Even if we are able to ramp up the operation of the JV Company timely, we may not be successful in acquiring a sufficient number of new customers to offset the additional costs due to various factors, including but are not limited to, competition from other semiconductor companies in the region, our lack of history and prior relationships with customers as a new entrant, difficulties in executing our joint venture strategies, lack of control over our operations and the general economic conditions in Chongqing and China.

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 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 of history and prior relationships with customers as a new entrant, difficulties in executing our joint venture strategies, lack of control over our operations and the general economic conditions in Chongqing and China.

Distributor ordering patterns, customer demand and seasonality :

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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.

Principal line items of statements of income

Regulatory Development:

Department of Justice commenced an investigation into the Company’s compliance with export control regulations relating to certain business transactions with Huawei and its affiliates (“Huawei”), which were added to the “Entity List” by the Department of Commerce (“DOC”) in May 2019.

In connection with this investigation, DOC requested the Company to suspend shipments of its products to Huawei, and the Company complied with such request, and the Company has not shipped any product to Huawei after December 31, 2019.

The Company is currently working with DOC to resolve this issue and seeks permission to reinstate shipment to Huawei.

As of the date of this report, DOC has not provided the Company with any definitive timeline or schedule for responding to the Company's request.

We expect the financial performance will be negatively impacted by the Huawei shipment interruption until such time when DOC permits us to continue shipment to Huawei.

There is no guarantee that DOC will agree to permit us to resume shipment to Huawei on a timely basis, or at all, and we may not be able to acquire new or additional customers or demand to offset such loss of shipment.

Our failure to do so will negatively impact our revenue and profitability.

Furthermore, the Company is expected to incur significant costs and expenses, including legal fees, in connection with the government investigation, which may reduce our profitability and margin.

See “Risk Factor-The current government investigation and evolving export control regulations may adversely affect our financial performance and business operations”.

Principal line items of statements of operations

The following describes the principal line items set forth in our consolidated statements of operations:

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We expect our selling, general and administrative expenses to fluctuate in the near future as we continue to exercise cost control measures.

Impairment of privately-held investment

During fiscal year 2017, we purchased shares of common stock in a privately-held company at a total cost of $0.6 million.

We accounted for the investment on a cost basis.

During the fiscal year ended June 30, 2020, we recorded impairment charges of $0.6 million in connection with this investment as we concluded the impairment to be other-than-temporary.

Income tax expense

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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 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.

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On December 22, 2017, the United States enacted tax reform legislation through the Tax Cuts and Jobs Act (“the Tax Act”), which significantly changes the existing U.S.

tax laws, including, but not limited to, (1) a reduction in the corporate tax rate from 35% to 21%, (2) a move 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 after December 31, 2017.

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 after December 31, 2017.

The SEC staff issued Staff Accounting Bulletin No.

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If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax law that were in effect immediately before the enactment of the Tax Act.

In connection with our initial analysis of the impact of the Tax Act, we reported a second quarter of fiscal year 2018 discrete tax benefit of $2.7 million related to the re-measurement of certain deferred tax assets and liabilities.

In connection with our initial analysis of the impact of the Tax Act, we reported a discrete tax benefit of $2.7 million for the second quarter of fiscal year 2018 related to the re-measurement of certain deferred tax assets and liabilities.

The $2.7 million tax benefit related to the tax rate re-measurement estimated in the second quarter of fiscal year 2018 was reduced downward by $0.2 million in the fourth quarter of fiscal year 2018, to $2.5 million.

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federal income tax rate used in first quarter of fiscal year 2018.

Coronavirus Aid, Relief and Economic Security Act” (“CARES Act”), Enacted March 27, 2020

On March 27, 2020, the United States enacted the Coronavirus Aid, Relief and Economic Security Act (“the CARES Act”), which made the changes to existing U.S.

tax laws, including, but not limited to, (1) allowing U.S.

federal net operating losses originated in the 2018, 2019 or 2020 tax years to be carried back five years to recover taxes paid based upon taxable income in the prior five years, (2) eliminated the 80% of taxable income limitation on net operating losses for the 2018, 2019 and 2020 tax years (the 80% limitation will be reinstated for tax years after 2020), (3) accelerating the refund of prior year alternative minimum tax credits, (4) modifying the bonus depreciation for qualified improvement property and (5) modifying the limitation on deductible interest expense.

As a result of the ability to carryback net operating losses from the June 2018 and June 2019 years to the June 2015 to June 2017 tax years, net operating losses which were previously tax-effected using the current 21% U.S.

federal tax rate were revalued to the U.S.

tax rates in effect for the June 2015 to June 2017 tax years due to the ability of receiving tax refunds for the taxes paid in these years.

Accordingly, we reported a discrete tax benefit of $1.1 million in the third quarter of fiscal year 2020 related to the re-measurement of the net operating losses that could be realized via the new net operating loss carryback provisions.

Operating results

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Operating income (loss)

Interest income and other income (loss), net

Interest expense

Interest expense and other income (loss), net

Net income (loss) before income taxes

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Net loss attributable to noncontrolling interest

Net income attributable to Alpha and Omega Semiconductor Limited

Net income (loss) attributable to Alpha and Omega Semiconductor Limited

(1) Includes share-based compensation expense as follows:

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Total revenue was $464.9 million for fiscal year 2020 , an increase of $14.0 million , or 3.1% , as compared to $450.9 million for fiscal year 2019 .

The increase was primarily due to an increase of $29.7 million and $3.1 million in sales of power discrete products and in sales of power IC products, respectively.

The increase in power discrete and power IC was primarily

due to a 18.8% increase in average selling price as compared to last fiscal year due to a shift in product mix, partially offset by a 8.8% decrease in unit shipments.

The decrease in revenue of packaging and testing services for fiscal year 2019 as compared to last fiscal year was primarily due to decreased demand.

The increase was primarily due to an increase of $20.1 million in sales of power discrete products, partially offset by a decrease of $3.9 million in sales of power IC products.

The net increase in product sales was primarily due to a 6.0% increase in average selling price as compared to last fiscal year due to a shift in product mix, partially offset by a 2.3% decrease in unit shipments.

The decrease in revenue of packaging and testing services for fiscal year 2020 as compared to last fiscal year was primarily due to the fluctuation of demand on these services externally.

During fiscal year 2020, we accelerated the development of new technology platforms which allowed us to introduce 48 medium and high voltage MOSFET products, targeting primarily the power supply, as well as 42 low voltage MOSFET products primarily for the computing and communication markets.

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Total revenue was $450.9 million for fiscal year 2019, an increase of $29.4 million, or 7.0%, as compared to $421.6 million for fiscal year 2018.

The increase was primarily due to an increase of $53.4 million in sales of power discrete products, partially offset by a decrease of $15.3 million in sales of power IC products.

The net increase in product sales was primarily due to a 2.1% increase in unit shipments, as well as an 8.1% increase in average selling price as compared to last fiscal year due to a shift in product mix.

The increase in revenue of packaging and testing services for fiscal year 2018 as compared to last fiscal year was primarily due to increased demand.

The increase was primarily due to an increase of $29.7 million and $3.1 million in sales of power discrete products and in sales of power IC products, respectively.

The increase in power discrete and power IC was primarily due to a 18.8% increase in average selling price as compared to last fiscal year due to a shift in product mix, partially offset by a 8.8% decrease in unit shipments.

The decrease in revenue of packaging and testing services for fiscal year 2019 as compared to last fiscal year was primarily due to decreased demand.

Cost of goods sold and gross profit

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Cost of goods sold was $362.2 million for fiscal year 2020 , an increase of $26.6 million , or 7.9% , as compared to $335.5 million for fiscal year 2019 .

The increase was primarily due to the 7.0% increase of revenue and the production ramp up costs related to our Chongqing joint venture.

The increase was primarily due to limited mass production in our JV Company and the 3.1% increase of revenue.

Gross margin decreased by 3.5 percentage points to 22.1% for fiscal year 2020 , as compared to 25.6% for fiscal year 2019 .

The decrease in gross margin was primarily due to production ramp up costs related to our Chongqing joint venture.

The decrease in gross margin was primarily the result of low capacity utilization due to the limited mass production in our Chongqing joint venture during the fiscal year 2020.

We expect our gross margin to continue to fluctuate in the future as a result of variations in our product mix, ramp up costs related to our Chongqing joint venture, factory utilization, semiconductor wafer and raw material pricing, manufacturing labor cost and general economic and PC market conditions.

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Cost of goods sold was $335.5 million for fiscal year 2019, an increase of $25.9 million, or 8.4%, as compared to $309.6 million for fiscal year 2018.

The increase was primarily due to increased unit shipments.

Gross margin increased by 2.6 percentage points to 26.6% for fiscal year 2018, as compared to 24.0% for fiscal year 2017.

The increase in gross margin was primarily due to a shift in product mix and higher factory utilization, as well as approximately $2.0 million of specific reserve that was released during the fiscal year 2018.

The increase was primarily due to the 7.0% increase of revenue and the production ramp up costs related to our Chongqing joint venture.

Gross margin decreased by 1.0 percentage points to 25.6% for fiscal year 2019, as compared to 26.6% for fiscal year 2018.

The decrease in gross margin was primarily due to production ramp up costs related to our Chongqing joint venture.

Research and development expenses

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Research and development expenses were $51.3 million for fiscal year 2020 , an increase of $4.8 million , or 10.4% , as compared to $46.4 million for fiscal year 2019 .

The increase was primarily attributable to a $4.3 million increase in employee compensation and benefit expenses mainly due to increased headcount to ramp up our digital power business, a $2.0 million increase in product prototyping engineering expenses as a result of increased engineering activities, a $0.6 million increase in share-based compensation expense as a result of an increase of stock awards granted, a $0.8 million increase in professional services expense as a result of higher consulting activities, $0.8 million increase in equipment supplies as a result of higher patent expenses and higher computer software expense, $0.2 million increase in facility expenses as a result of higher office rental expenses, and a $0.4 million increase in depreciation expenses.

The increase was primarily attributable to a $1.4 million increase in employee compensation and benefit expense mainly due to annual merit increase, partially offset by lower bonus accrual, a $2.1 million increase in professional fees, a $0.9 million increase in depreciation expenses, and a $0.4 million increase in share-based compensation expense due to more grants in stock awards.

We continue to evaluate and invest resources in developing new technologies and products utilizing our own fabrication and packaging facilities.

We believe the investment in research and development are important meet our strategic objectives.

We believe the investment in research and development are important to meet our strategic objectives.

Fiscal 2019 vs 2018

Research and development expenses were $46.4 million for fiscal year 2019, an increase of $9.1 million, or 24.3%, as compared to $37.3 million for fiscal year 2018.

The increase was primarily attributable to a $3.0 million increase in employee compensation and benefit expenses mainly due to higher bonus expenses and increased headcount to ramp up our digital power business, a $2.7 million increase in product prototyping engineering expenses as a result of increased engineering activities, a $0.5 million increase in share-based compensation expense as a result of an increase of stock awards granted, a $0.5 million increase in consulting expenses due to more consulting activities, and a $0.3 million increase in depreciation expenses.

Selling, general and administrative expenses

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Fiscal 2020 vs 2019

Selling, general and administrative expenses were $76.0 million for fiscal year 2019 , an increase of $9.8 million , or 14.8% , as compared to $66.2 million for fiscal year 2018 .

The increase was primarily due to a $6.4 million increase in employee compensation and benefits expense as a result of the costs for the 12-inch fab facility in the JV Company and increased headcount, partially offset by lower bonus expenses, a $2.0 million increase in facility expenses as a result of an increase of equipment rental costs and higher utility costs, a $0.8 million increase in share-based compensation expense due to increased grant of equity awards, and a $0.7 million increase in depreciation expenses during the current fiscal year.

Selling, general and administrative expenses were $64.8 million for fiscal year 2020 , a decrease of $11.2 million , or 14.7% , as compared to $76.0 million for fiscal year 2019 .

The decrease was primarily due to a $14.9 million reduction in pre-production costs as a result of the commencement of limited mass production at the 12-inch fab facility at the JV Company, and a $2.7 million decrease in share-based compensation expense.

The net decrease was partially offset by a $1.0 million increase in depreciation expenses and a $5.4 million increase in legal expenses primarily due to the government investigation.

Fiscal 2019 vs 2018

Selling, general and administrative expenses were $76.0 million for fiscal year 2019, an increase of $9.8 million, or 14.8%, as compared to $66.2 million for fiscal year 2018.

The increase was primarily due to a $12.3 million increase in employee compensation and benefits expense as a result of pre-production costs in the JV Company, increased headcount and higher bonus expenses, a $3.7 million increase in share-based compensation expense due to increased grant of equity awards, and a $1.0 million increase in employee business expenses due to increased travel expenses.

Interest income and other income (loss), net

Impairment of privately-held investment

Year Ended June 30,

4 unchanged sentences

(in percentage)

Interest income and other income (loss), net

Interest income and other, net was primarily related to interest earned from cash and cash equivalents, as well as foreign exchange gains (losses).

The increase in interest income and others, net in fiscal year 2019 as compared to fiscal year 2018 was

primarily due to $2.7 million increase in foreign exchange gains as a result of recent appreciation of USD against RMB, partially offset by a $0.2 million decrease in interest income as a result of a decrease in average cash balances.

The decrease in interest income and others, net in fiscal year 2018 as compared to fiscal year 2017 was primarily due to a $2.1 million increase in foreign exchange losses as a result of recent depreciation of USD, partially offset by a $0.3 million increase in interest income as a result of an increase in average cash balances.

Interest Expense

Impairment of privately-held investment

During the fiscal year 2020, we recorded an other-than-temporary impairment charge for our investment of $0.6 million in a privately-held start-up company.

As of June 30, 2020, we have a remaining $0.1 million of privately-held investment.

Interest expense and other income (loss), net

Year Ended June 30,

4 unchanged sentences

(in percentage)

Interest expense

Interest expense and other income (loss), net

Interest expense was primarily related to bank borrowings.

The increase in interest expenses for fiscal year 2019 and 2018 was primarily due to a significant increase in bank borrowings.

The decrease in interest expenses during the fiscal year 2020 as compared to the last fiscal year was primarily due to $6.1 million of interest refund from the Chinese government in the JV Company, partially offset by higher interest expense as a result of an increase in bank borrowings.

The increase in interest expenses during the fiscal year 2019 as compared to the fiscal year 2018 was primarily due to an increase in bank borrowings.

Interest income and others were primarily related to interest earned from cash and cash equivalents, as well as foreign exchange gains (losses).

The increase in interest income and others, net during the fiscal year 2020 as compared to the last fiscal year was primarily due to higher foreign currency exchange losses as a result of the depreciation of USD against RMB.

The decrease in interest income and others, net during the fiscal year 2019 as compared to the fiscal year 2018 was primarily due to lower foreign currency exchange losses as a result of the appreciation of USD against RMB.

Income tax expense

8 unchanged sentences

Income tax expense for fiscal years 2020 and 2019 was $0.3 million and $1.3 million , respectively.

Income tax expense decreased by $0.9 million , or 72.3% in fiscal year 2020 as compared to fiscal year 2019 primarily due to a $1.1 million tax benefit in fiscal year 2020 from re-measuring the tax benefit of our U.S.

net operating losses that could be carried back to the fiscal 2015, 2016 and 2017 years following the enactment of the U.S.

CARES Act in March 2020, partially offset by decreased research credits generated in fiscal year 2020 vs.

fiscal year 2019 and changes in the mix of earnings in various geographic jurisdictions between the respective periods in fiscal year 2020 compared to fiscal year 2019.

Excluding the discrete income tax items, the effective tax rate for the current fiscal year was (9.6%), compared to (14.6%) for the last fiscal year.

The changes in the effective tax rate and tax expense between the fiscal years resulted primarily from changes in the mix of earnings in various geographic jurisdictions between the current fiscal year and prior fiscal year and decreased research credits generated in fiscal year 2020.

Fiscal 2019 vs 2018

Income tax expense for fiscal years 2019 and 2018 was $1.3 million and $0.7 million, respectively.

Income tax expense increased by $0.5 million, or 77.4% in fiscal year 2019 as compared to fiscal year 2018 primarily due to a $2.5 million tax benefit in fiscal year 2018 from re-measuring our U.S.

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Tax Cut and Jobs Act.

Fiscal 2018 vs 2017

Income tax expense for fiscal years 2018 and 2017 was $0.7 million and $3.7 million, respectively.

Income tax expense decreased by $2.9 million, or 80.6%, in fiscal year 2018 as compared to fiscal year 2017 primarily due to a $2.5 million tax benefit from re-measuring our U.S.

deferred tax liabilities following the enactment of the 2017 U.S.

Tax Cuts and Jobs Act in December 2017.

Additional tax savings were generated in fiscal year 2018 due to changes in the mix of earnings in various geographic jurisdictions between the respective periods and a lower U.S.

tax rate in fiscal year 2018.

Excluding the discrete income tax items, the effective tax rate for the current fiscal year was 61.7%, compared to 36.6% for the last fiscal year.

The changes in the effective tax rate and tax expense between the fiscal years resulted primarily from changes in the mix of earnings in various geographic jurisdictions between the current year and prior year, partially offset by the reduction in the U.S.

corporate tax rate following the enactment of the 2017 U.S.

Tax Cut and Jobs Act.

Liquidity and Capital Resources

1 unchanged sentence

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.

On August 15, 2017, our Oregon subsidiary, Jireh Semiconductor Incorporated (“Jireh”), entered into a credit agreement with a financial institution (the “Bank”) that provides a term loan in an amount up to $30.0 million for the purpose of purchasing certain equipment for our fabrication facility located in Oregon.

In October 2019, the Company's subsidiary in China entered into a line of credit facility with Bank of Communications Limited in China.

This line of credit matures on February 14, 2021 and is based on the China Base Rate multiplied by 1.05, or 4.99% on October 31, 2019.

The purpose of the credit facility is to provide short-term borrowings.

The Company could borrow up to approximately RMB 60.0 million or $8.5 million based on the currency exchange rate between the RMB and the U.S.

Dollar on October 31, 2019.

As of June 30, 2020, there was no outstanding balance under the loan.

On November 16, 2018, the Company's subsidiary in China entered into a line of credit facility with Industrial and Commercial Bank of China, which expired on September 30, 2019.

The purpose of the credit facility was to provide short-term borrowings.

The Company could borrow up to approximately RMB 72.0 million or $10.3 million based on currency exchange rate between RMB and U.S.

Dollar on November 16, 2018.

In October 2019, this line of credit was renewed with the same terms and a maturity date of September 30, 2020.

As of June 30, 2020, there was no outstanding balance under the line of credit.

On August 9, 2019, one of the Company's wholly-owned subsidiaries (the "Borrower") entered into a factoring agreement with the Hongkong 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 Offer 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.

The Borrower was in compliance with these covenants as of June 30, 2020.

During the fiscal year ended June 30, 2020, the Company borrowed $20.0 million and repaid it in full.

As of June 30, 2020, there was no outstanding balance and the Company had unused credit of approximately $30.0 million.

On May 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 an 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 on June 1, 2023.

Beginning June 1, 2018, Jireh made consecutive monthly payments of principal and interest to the Bank.

The outstanding principal shall accrue 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.

The Company was in compliance with these covenants as of June 30, 2020.

As of June 30, 2020, the outstanding balance of the term loan was $15.9 million.

On August 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 our fabrication facility located in Oregon.

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 on August 15, 2022.

In January 2018 and July 2018, Jireh drew down the loan in the amount of $13.2 million and $16.7 million, respectively.

The loan accrues interest based on an adjusted London Interbank Offered Rate ("LIBOR") as defined in the credit agreement, plus 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, including certain financial covenants that require the Company to maintain, on a consolidated basis, specified financial ratios and fixed charge coverage ratio.

We were in compliance with these covenants as of June 30, 2019.

In January 2018 and July 2018, Jireh drew down on the loan

in the amount of $13.2 million and $16.7 million, respectively.

Beginning in October 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 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.

The Company was in compliance with these covenants as of June 30, 2020.

As of June 30, 2020, the outstanding balance of the term loan was $16.8 million.

On May 1, 2018, Jireh entered into a credit agreement with the Bank that provided a term loan in an amount of $17.8 million.

The obligation under the credit agreement is secured by certain assets of Jireh and guaranteed by the Company.

The loan accrues interest based on a fixed rate of 5.04% based on the outstanding balance of the loan.

The credit agreement contains customary restrictive covenants and includes certain financial covenants that require us to maintain, on a consolidated basis, specified financial ratios.

We were in compliance with these covenants as of June 30, 2019.

As of June 30, 2019, the outstanding balance of this term loan was $16.8 million .

In March 2016, we entered into the JV Agreement with an initial capitalization of $330.0 million.

As of June 30, 2019, the Chongqing Funds contributed a total of $186.0 million of initial capital in cash, including $24.0 million cash contribution in December 2018, and we contributed $35.0 million, including $25.0 million contribution in August 2018, in cash and certain intangible assets, as well as certain packaging equipment as required by the JV Agreement by transferring the legal titles of such equipment to the JV Company.

In addition, if both parties agree that the termination of the JV Company is the best interest of each party or the JV Company is bankrupt or insolvent where either party may terminate early, after paying the debts of the JV Company, the remaining assets of the JV Company shall be paid to the Chongqing Funds to cover the principal of its total paid-in contributions plus the interest at 10% simple annual rate prior to distributing the balance of the JV Company's assets to us.

In January 2017, the JV Company entered into the EPC Contract to build the Chongqing manufacturing facility.

The total price payable by the JV Company under the EPC Contract is Chinese Renminbi (RMB) 540.0 million, or approximately $78.0 million based on the currency exchange rate between RMB and U.S.

Dollar on the effective date of the EPC Contract.

The payment is subject to volatility as a result of exposure to fluctuations in RMB foreign currency exchange rates.

As of June 30, 2019, the JV Company paid approximately $69.9 million (RMB 480.0 million), and expect to pay the remaining of $8.7 million (RMB 60.0 million) in the near term.

We expect the JV Company to obtain additional financing in order to fund the remaining portion of the acquisition of equipment and working capital.

However, there is no guarantee that the JV Company will be able to secure the required amount of financing from the lenders, or if such financing will be available on terms favorable to us.

If the JV Company cannot secure sufficient financing, we may use a portion of our cash reserve to further capitalize and finance the JV Company.

On May 9, 2018 (the “Effective Date”), the JV Company entered into a lease finance agreement and a security agreement (the “Agreements”) with YinHai Leasing Company and China Import/Export Bank (the “Lenders”).

Pursuant to the Agreements, the Lenders agree to provide an aggregate of Chinese Renminbi (RMB) 400.0 million, or $62.8 million based on the currency exchange rate between RMB and U.S.

Dollar on the Effective Date, of financing to the JV Company (the “Lease Financing”).

The interest under the Lease Financing is accrued based on the China 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 the JV 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 the JV Company.

As of June 30, 2019, the outstanding balance of the Lease Financing was approximately 376.0 million RMB (equivalent of $54.7 million based on the currency exchange rate as of June 30, 2019 ).

On March 12, 2019, the JV Company entered into a loan agreement with The Export-Import Bank of China in the aggregate principal amount of 200 million RMB (approximately $29.8 million based on currency exchange rate between RMB and U.S.

Dollar on March 31, 2019).

The loan will mature on February 20, 2025.

The JV Company drew down 190 million RMB (approximately $28.3 million based on the currency exchange rate between RMB and U.S.

Dollar on March 31, 2019) in March 2019.

The loan withdraw window will expire on February 28, 2020.

The interest is accrued based on the China Base Rate multiplied by 1.1 , or 5.39% on March 12, 2019.

The loan requires quarterly interest payments.

The principal payments are required to pay every 6 months over the term of loan commencing in October 2019.

The obligation under this loan agreement is secured by the buildings and certain equipment owned by the JV Company.

As a condition of the loan

arrangements, 14 million RMB (approximately $2.0 million ) of cash is held as restricted cash by the JV Company as a compensating balance at the JV Company's bank until the principal is paid off.

As of June 30, 2019 , the outstanding balance of the loan was 190 million RMB (equivalent of $27.7 million based on the currency exchange rate as of June 30, 2019 ).

On March 21, 2019, the JV Company entered into a one-year loan agreement with China Everbright Bank in China to provide a loan for 20 million RMB, or $3.0 million based on currency exchange rate between RMB and U.S.

Dollar on March 31, 2019 at fixed interest rate of 5.44% per annum.

Interest payments are due monthly with the entire principal due on March 21, 2020.

As of June 30, 2019, the outstanding balance under the loan was 20 million RMB (equivalent of $2.9 million based on the currency exchange rate as of June 30, 2019).

On November 29 and December 4, 2018, the JV Company entered into two one-year loan agreements with China Merchant Bank in China to provide loans for 80 million RMB and 20 million RMB or $14.5 million in total based on currency exchange rate between RMB and U.S.

Dollar on December 31, 2018 at varying interest rates, respectively.

Interest payments are due monthly and quarterly with the entire principal due not later than December 18 and December 5, 2019, respectively.

As of June 30, 2019, the outstanding balance under the loans was 100 million RMB (equivalent of $14.6 million in total based on the currency exchange rate as of June 30, 2019).

On November 16, 2018, the Company's subsidiary in China entered into a line of credit facility with Industrial and Commercial Bank of China, which expires in September 30, 2019.

The purpose the credit facility is to provide short-term borrowings.

The Company can borrow up to approximately 72 million RMB or $10.3 million based on currency exchange rate between RMB and U.S.

Dollar on November 16, 2018.

As of June 30, 2019, there was no outstanding balance under the line of credit.

In September 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.

1 unchanged sentence

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.

There is no guarantee that such repurchases under the Repurchase Program will enhance the value of our shares.

Since the inception of the program in 2010, we repurchased an aggregate of 6,784,648 shares from the open market under the Repurchase Trading Plan for a total cost of $67.3 million, at an average price of $9.92 per share, excluding fees and related expenses of $0.4 million .

We did not repurchase any shares under the Repurchase Program during the three months ended June 30, 2019.

During fiscal year 2020, we did not repurchase any shares pursuant to the repurchase program.

During fiscal years 2019 and 2018, we repurchased an aggregate of 111,509 shares and 950,046 shares, respectively, from the open market for a total cost of approximately $1.5 million and $15.1 million, excluding fees and related expenses, at an average price of $13.43 and $15.86 per share, respectively.

As of June 30, 2020, we had 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, since inception of the program.

No repurchased shares have been retired.

Shares repurchased are accounted for as treasury shares and the total cost of shares repurchased is recorded as a reduction of shareholders' equity.

During fiscal years 2019 and 2018, the Company repurchased an aggregate of 111,509 shares and 950,046 shares, respectively.

As of June 30, 2019 , of the 6,784,648 repurchased shares, 138,828 shares with a weighted average repurchase price of $10.41 per share, were reissued at an average price of $5.55 per share for option exercises and vested restricted share units.

We had $13.4 million available under our repurchase program as of June 30, 2019 .

Of the 6,784,648 repurchased shares, 145,428 shares with a weighted average repurchase price of $10.32 per share, were reissued at an average price of $5.30 per share for option exercises and vested restricted stock units ("RSU").

As of June 30, 2020, $13.4 million remain available under the share repurchase program.

On September 5, 2017, we entered into a license agreement with STMicroelectronics International N.V.

As of June 30, 2020, we recorded $16.2 million of intangible assets related to STMicro.

We begin amortizing such license fees when the technology has met our qualification and is ready for intended use in production.

We will begin to amortize such license fees during the September 2020 quarter, which is when the technology meets qualification requirements and becomes ready for its intended use in production.

The Chinese government imposes certain currency exchange controls on cash transfers out of China.

3 unchanged sentences

In calculating accumulated profits, foreign-invested enterprises in China are required to allocate at least 10% of their profits each year, if any, to fund the equity reserve account unless the reserve has reached 50% of the registered capital of the enterprises.

While SAFE approval is not statutorily required for eligible dividend payments to the foreign parent, in practice, before making the

dividend payment, the account bank may seek SAFE's opinion with respect to a dividend payment if the payment involves a relatively large amount, which may delay the dividend payment depending on the then overall status of cross-border payments and receipts of China.

While SAFE approval is not statutorily required for eligible dividend payments to the foreign parent, in practice, before making the dividend payment, the account bank may seek SAFE's opinion with respect to a dividend payment if the payment involves a relatively large amount, which may delay the dividend payment depending on the then overall status of cross-border payments and receipts of China.

Transactions that involve conversion of Renminbi into foreign currency in relation to foreign direct investments and provision of debt financings in China are classified as "capital account" transactions.

6 unchanged sentences

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.

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.

2 unchanged sentences

We cannot be certain that any financing will be available in the amounts we need or on terms acceptable to us, if at all.

Cash and cash equivalents

As of June 30, 2019 and 2018 , we had $121.9 million and $131.5 million of cash and cash equivalents, respectively.

Our cash and cash equivalents primarily consist of cash on hand and short-term bank deposits with original maturities of three months or less.

Of the $121.9 million and $131.5 million cash and cash equivalents, $68.2 million and $100.9 million, respectively, are deposited with financial institutions outside the United States.

JV Company Financing Transactions

From time to time the JV 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 in Chongqing.

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 for JV Company’s debt, nor do we have direct access to any cash proceeds borrowed from such loan agreements.

Pursuant to the Agreements, the Lenders agree to provide an aggregate of RMB 400.0 million, or $62.8 million based on the currency exchange rate between RMB and U.S.

Dollar on the Effective Date, of financing to the JV Company (the “Lease Financing”).

In exchange for the Lease Financing, the JV Company agrees to transfer title of its assembly and testing equipment to the Lenders, and the Lenders lease such equipment to the JV Company under a five-year lease arrangement, pursuant to which the JV 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 the China 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 the JV 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 the JV Company (the “Collateral”).

The proceeds from the Lease Financing will be used primarily for the acquisition and installation of the 12-inch fabrication equipment and other expenses of the JV Company relating to the completion of the fabrication facility located in Chongqing.

The Agreements contain customary representation, warranties and covenants, including restrictions on the transfer of the Collateral.

The Agreements also contain customary events of default, including but are 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 the JV Company.

On June 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 in China plus 0.8125%, or 5.4625%.

Other terms of this agreement remain the same.

As of June 30, 2020, the outstanding balance of the Lease Financing of 298.0 million RMB (equivalent of $42.1 million based on the currency exchange rate as of June 30, 2020) was recorded under both short-term and long-term finance lease liabilities.

On November 29 and December 4, 2018, the JV Company entered into two, one-year loan agreements with China Merchant Bank and Chongqing LiangJiang New District China Merchants Group Limited Company in China to provide loans for RMB 80 million and RMB 20 million, respectively, or $14.5 million in total based on the currency exchange rate between RMB and U.S.

Dollar on December 31, 2018, at varying interest rates.

On January 20, 2020, the JV Company renewed the loan agreements with the same terms.

Interest payments are due monthly and quarterly with the entire principal due not later than January 21, 2021.

During the three months ended June 30, 2020, the JV Company repaid the loan in full.

As of June 30, 2020, there was no outstanding balance under the loan.

On September 23, 2019, the JV Company entered into a short-term revolving loan agreement with China Everbright bank in China.

The JV Company can borrow up to RMB 50.0 million, or $7.1 million based on the currency exchange rate between RMB and U.S.

Dollar on September 23, 2019, at varying interest rates, in RMB or USD.

Interest payments with the entire principal are due no later than 90 days from each borrowing date.

In January and February 2020, the JV Company borrowed $1.6 million and $5.5 million, respectively, under this loan.

During the three months ended June 30, 2020, the JV Company repaid the loan in full.

As of June 30, 2020, there was no outstanding balance under the loan.

On March 12, 2019, the JV Company entered into a loan agreement with The Export-Import Bank of China in the aggregate principal amount of RMB 200 million (approximately $29.8 million based on currency exchange rate between RMB and U.S.

Dollar on March 31, 2019).

The loan will mature on February 20, 2025.

The JV Company drew down RMB 190 million and RMB 10 million in March 2019 and December 2019, respectively.

The loan withdraw window expired on February 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 in October 2019.

This loan is secured by the buildings and certain equipment owned by the JV Company.

As a condition of

the loan arrangements, 14 million RMB (approximately $2.0 million) of cash is held as restricted cash by the JV Company as a compensating balance at the JV Company's bank until the principal is paid.

On June 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 in China plus 0.74%, or 5.39%.

Other terms of this loan remain the same.

During the three months ended December 31, 2019, the JV Company paid 6.0 million RMB under this agreement.

As of June 30, 2020, the outstanding balance of the loan was 194 million RMB (equivalent of $27.4 million based on the currency exchange rate as of June 30, 2020).

On March 21, 2019, the JV Company entered into a one-year loan agreement with China Everbright Bank in China to provide a loan for RMB 20 million, or $3.0 million based on currency exchange rate between RMB and U.S.

Dollar on March 31, 2019 at fixed interest rate of 5.44% per annum.

Interest payments were due monthly with the entire principal due on March 21, 2020.

As of June 30, 2020, there was no outstanding balance under the loan.

In December 2019, the JV Company entered into a loan agreement with China Development Bank in the amount of $24.0 million.

The obligation under the loan agreement is secured by certain assets of the JV Company.

Beginning December 18, 2020, the JV Company will make consecutive semi-annual payments of principal until December 8, 2024.

The interest is accrued based on the LIBOR rate plus 2.8%.

The interest is required to be paid on March 21 and September 21 each year.

As of June 30, 2020, the outstanding balance of the loan was $24.0 million.

On April 15, 2020, the JV Company entered into a one-year loan agreement with China Everbright Bank in China to provide a loan of a maximum of Chinese Renminbi (RMB) 100 million (approximately $14.3 million based on the currency exchange rate between RMB and U.S.

Dollar on April 15, 2020) in the amount in RMB or USD.

Interest payments are due on the 20th of each month, and the entire principal is due on April 16, 2021.

The loan consists of RMB 20 million for working capital borrowing in Chinese yuan and RMB 80 million for borrowing in US dollars that is collateralized by eligible accounts receivable.

During the three months ended June 30, 2020, the JV Company borrowed RMB 20 million, or $2.8 million based on the currency exchange rate between RMB and U.S.

Dollar, at a fixed interest rate of 5.1375% per annum under the working capital loan .

The JV Company also borrowed $7.1 million and $1.9 million at a fixed interest rate of 2.7% and 2.8% per annum, respectively, during the same period under the accounts receivable collateralized loan .

As of June 30, 2020, the total outstanding balance under the loan was $11.8 million.

On April 26, 2020, the JV Company entered into a loan agreement with China Development Bank, Agricultural Bank of China, China Merchants Bank and Chongqing Rural Commercial Bank (collectively, "the Banks") in the aggregate principal amount of RMB 250 million, (approximately $35.7 million based on the currency exchange rate between RMB and U.S.

Dollar on April 26, 2020).

The obligation under the loan agreement is secured by certain assets of the JV Company.

Beginning December 18, 2020, the JV Company is required to make consecutive semi-annual payments of principal until December 8, 2024.

Interest payment is due on March 20, June 20, September 20 and December 20 of each year based on China one-year loan prime rate ("LPR") plus 1.3%.

The JV Company drew down RMB 250 million (approximately $35.3 million based on the currency exchange rate between RMB and U.S.

Dollar on June 30, 2020) in April 2020.

As of June 30, 2020, the outstanding balance of the loan was $35.3 million.

Cash, cash equivalents and restricted cash

As of June 30, 2020 and 2019 , we had $162.7 million and $124.3 million of cash, cash equivalents and restricted cash, respectively.

Our cash, cash equivalents and restricted cash primarily consisted of cash on hand, restricted cash and short-term bank deposits with original maturities of three months or less.

Of the $162.7 million and $124.3 million cash and cash equivalents, $120.3 million and $70.6 million, respectively, were deposited with financial institutions outside the United States.

The following table shows our cash flows from operating, investing and financing activities for the periods indicated:

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Net cash provided by operating activities of $62.3 million for fiscal year 2020 resulted primarily from net loss of $18.3 million , non-cash charges of $56.1 million and net change in assets and liabilities providing net cash of $24.4 million .

The non-cash charges of $56.1 million included depreciation and amortization expenses of $45.1 million , share-based compensation expense of $10.5 million , impairment of our investment in a privately-held start-up company of $0.6 million, gain on disposal of property and equipment of $0.1 million, and net deferred income taxes of $0.1 million .

The net change in assets and liabilities providing net cash of $24.4 million was primarily due to $27.3 million decrease in other current and long-term assets primarily due to increase in advance payments to suppliers, $11.0 million decrease in accounts receivable due to timing of billings and collection of payments, and $11.0 million increase in accrued and other liabilities, partially offset by $22.8 million increase in inventories, $1.8 million decrease in accounts payable primarily due to timing of payments, and $0.3 million decrease in income taxes payable.

Net cash provided by operating activities of $31.4 million for fiscal year 2019 resulted primarily from net loss of $14.6 million, non-cash charges of $44.8 million and net change in assets and liabilities providing net cash of $1.3 million.

The non-cash charges of $44.8 million included depreciation and amortization expenses of $32.0 million, share-based compensation expense of $13.2 million, and net deferred income taxes of $0.5 million.

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The net change in assets and liabilities providing net cash of $40.1 million was primarily due to $5.3 million increase in accounts receivable due to timing of billings and collection of payments, $13.9 million increase in inventories, $34.6 million increase in other current and long-term assets primarily due to increase in advance payments to suppliers, partially offset by $4.9 million increase in accounts payable primarily due to timing of payments, $8.5 million increase in accrued and other liabilities, and $0.5 million increase in income taxes payable.

Net cash provided by operating activities of $42.6 million for fiscal year 2017 resulted primarily from net income of $9.3 million, non-cash charges of $40.6 million and net change in assets and liabilities providing net cash of $7.2 million.

The non-cash charges of $40.6 million included depreciation and amortization expenses of $27.2 million, share-based compensation expense of $6.6 million, net deferred income taxes of $7.2 million, and gain on disposal of property and equipment of $0.4 million.

The net change in assets and liabilities providing net cash of $7.2 million was primarily due to $1.8 million increase in accounts receivable due to timing of billings and collection of payments, $7.4 million increase in inventories, $4.6 million increase in other current and long-term assets primarily due to increase in advance payments to suppliers, and $1.3 million decrease in income taxes payable, partially offset by $3.3 million increase in accrued and other liabilities, and $4.5 million increase in accounts payable primarily due to timing of payments.

Cash flows from investing activities

Net cash used in investing activities of $60.8 million for the fiscal year 2020 was primarily attributable to $62.4 million purchases of property and equipment, including $20.0 million purchases in JV Company, which was partially offset by $1.3 million government grant related to equipment in the JV Company and $0.3 million of proceeds from sale of property and equipment.

Net cash used in investing activities of $112.4 million for the fiscal year 2019 was primarily attributable to $112.1 million purchases of property and equipment, including $76.0 million purchases in JV Company, and $0.4 million purchases of intangible assets.

Net cash used in investing activities of $194.1 million for the fiscal year 2018 was primarily attributable to $177.7 million purchases of property and equipment, including $128.4 million purchases in JV Company, and $16.4 million purchases of intangible assets to develop our digital power business.

Net cash used in investing activities of $55.6 million for the fiscal year 2017 was primarily attributable to $55.6 million purchases of property and equipment, including $16.1 million purchases in JV Company, and $8.7 million of land use rights to increase our in-house production capacity and to support the JV Company, as well as $0.6 million investment in a privately held company, partially offset by $0.6 million of proceeds from sale of property and equipment.

Cash flows from financing activities

Net cash provided by financing activities of $37.7 million for the fiscal year 2020 was primarily attributable to $96.2 million of proceeds from borrowings, and $3.4 million of proceeds from exercises of share options and issuance of shares under the ESPP, partially offset by $1.5 million in common shares acquired to settle withholding tax related to vesting of restricted stock units, $11.0 million in payments of capital lease obligations, and $49.4 million in repayments of borrowings.

Net cash provided by financing activities of $75.1 million for the fiscal year 2019 was primarily attributable to $24.0 million proceeds from investment by Chongqing Funds, $77.9 million of proceeds from borrowings, and $3.0 million of proceeds from exercises of share options and issuance of shares under the ESPP, partially offset by $2.0 million in common shares acquired to settle withholding tax related to vesting of restricted stock units, $1.5 million for repurchase of our common shares under the repurchase program, $4.4 million in payments of capital lease obligations, and $21.9 million in repayments of borrowings.

Net cash provided by financing activities of $207.0 million for the fiscal year 2018 was primarily attributable to $129.0 million proceeds from investment by Chongqing Funds, $31.0 million of proceeds from borrowings under our term loans in Jireh, $60.4 million of proceeds from financing lease in the JV Company, and $5.0 million of proceeds from exercises of share options and issuance of shares under the ESPP, partially offset by $2.4 million in common shares acquired to settle withholding tax related to vesting of restricted stock units, $15.1 million for repurchases of our common shares under the repurchase program, $0.8 million in payments of capital lease obligations, and $0.1 million in repayments of borrowings.

Net cash provided by financing activities of $40.8 million for the fiscal year 2017 was primarily attributable to $33.0 million proceeds from investment by Chongqing Funds, and $10.7 million of proceeds from exercises of share options and issuance of shares under the ESPP, partially offset by $2.1 million in common shares acquired to settle withholding tax related to vesting of restricted stock units, and $0.8 million in payments of capital lease obligations.

Contractual Obligations

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Bank borrowings

Capital leases

Finance leases

Operating leases

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To the extent there are material differences between these estimates and actual results, our consolidated financial statements will be affected.

On an ongoing basis, we evaluate the estimates, judgments and assumptions including those related to revenue recognition, inventory reserves, warranty accrual, income taxes, share-based compensation, and useful lives for property and equipment and intangible assets.

On an ongoing basis, we evaluate the estimates, judgments and assumptions including those related to stock rotation returns, price adjustments, allowance for doubtful accounts, inventory reserves, warranty accrual, income taxes, leases, share-based compensation, recoverability of and useful lives for property, plant and equipment and intangible assets, as well as economic implications of the COVID-19 pandemic.

Revenue recognition

As a result of the adoption of the Accounting Standards Codification Topic 606 ("ASC 606") "Revenue from Contracts with Customers" on July 1, 2018, at the beginning of the first quarter of fiscal year 2019, we determine revenue recognition through the following steps:

We determine revenue recognition through the following steps:

(1) identification of the contract with a customer;

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Allowance for price adjustments is recorded against accounts receivable and provision for stock rotation is recorded in accrued liabilities on the consolidated balance sheets.

The change for us under ASC 606 relates to the timing of revenue recognition with two U.S.-based distributors.

Sales to these distributors are governed under the terms of agreements providing extended price protection and other return rights.

Prior to the adoption of ASC 606, revenue and costs related to these sales were deferred until distributors sold the products to end customers and the amount of price adjustments was fixed and finalized.

Upon the adoption of ASC 606, the transaction price takes into consideration the effect of variable consideration, such as price adjustments and returns rights, which are estimated and recorded at the time the products are delivered.

Accordingly, starting in July 1, 2018, we recognize revenue at the time of shipment or delivery to these two distributors, adjusted for estimates of the price adjustments and product returns based on historical data and other available information.

Packaging and testing services revenue is recognized upon shipment of serviced products to the customer.

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These estimates and judgments occur in the calculation of tax credits, benefits and deductions, and in the calculation of certain tax assets and liabilities which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes, as well as interest and penalties related to uncertain tax positions.

There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business.

There are many transactions and calculations for which the ultimate tax determination is

uncertain during the ordinary course of business.

We establish accruals for certain tax contingencies based on estimates of whether additional taxes may be due.

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We consider evidence such as our past operating results, the existence of cumulative losses in recent years and our forecast of future taxable income.

We will maintain a partial valuation allowance equal to the state research and development credit carryfowards until sufficient positive evidence exists to support reversal of the valuation allowance.

We will maintain a partial valuation allowance equal to the state research and development credit carryforwards until sufficient positive evidence exists to support reversal of the valuation allowance.

We have not provided for withholding taxes on the undistributed earnings of our foreign subsidiaries because we intend to reinvest such earnings indefinitely.

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The fair value of restricted share units is based on the fair value of the Company's common share on the date of grant.

For restricted stock awards subject to market conditions, the fair value of each restricted stock award is estimated at the date of grant using the Monte-Carol pricing model.

For restricted stock awards subject to market conditions, the fair value of each restricted stock award is estimated at the date of grant using the Monte-Carlo pricing model.

Share-based compensation expense is significant to the consolidated financial statements and is calculated using our best estimates, which involve inherent uncertainties and the application of management's judgment.

The Black-Scholes option valuation model requires the input of subjective assumptions, including the expected term and stock price volatility.

In addition, judgment is also required in estimating the number of stock-based

awards that are expected to be forfeited.

In addition, judgment is also required in estimating the number of stock-based awards that are expected to be forfeited.

Forfeitures are estimated based on historical experience at the time of grant.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis