What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-02-08 compared with 2020-11-06 · 151 added, 139 removed, 272 unchanged (52% of the section changed)

13 unchanged sentences

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.

During the three months ended September 30, 2020 , we introduced an additional 44 new products.

During the six months ended December 31, 2020, we introduced an additional 96 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 832 patents and 70 patent applications in the United States as of September 30, 2020 .

We also have a total of 861 foreign patents, which were based primarily on our research and development efforts through September 30, 2020 .

We have an extensive patent portfolio that consists of 845 patents and 67 pa tent applications in the United States as of December 31, 2020.

We also have a total o f 876 foreign patents, which were based primarily on our research and development efforts through December 31, 2020.

We differentiate ourselves by integrating our expertise in technology, design and advanced manufacturing and packaging to optimize product performance and cost.

12 unchanged sentences

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.

As part of our strategic plan, we formed the JV Company to fulfill growing customer demand.

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.

During the quarter ended September 30, 2020, the additional capacity at the JV Company contributed significantly

to meeting the increasing demand for our products.

During the six months ended December 31, 2020, the additional capacity at the JV Company contributed

significantly to meeting the increasing demand for our products.

The JV Company has reached its targeted production of assembly and testing and is currently ramping up its Phase I of the 12-inch wafer fabrication.

During the three months ended September 30, 2020, we recorded $0.8 million in net loss attributable to the noncontrolling interest in the JV Company.

During the three and six months ended December 31, 2020, we recorded $0.4 million and $1.2 million in net loss attributable to the noncontrolling interest in the JV Company.

Our current goal is to achieve Phase I target run rate in the quarter ending September 30, 2021, but our goal may be affected by the impact of the global COVID-19 pandemic and related economic downturn, intensified geopolitical tensions between China and U.S., logistical difficulties and other factors beyond our control.

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.

During the fiscal quarter ended September 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, an power IC product portfolio expanded significantly.

Our high performance products and deepened customer relationships with our OEM and ODM customers resulted in our record high quarterly revenue of $151.6 million, a 28.6% growth compared to the same quarter last year.

During the fiscal quarter ended December 31, 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, and power IC product portfolio expanded significantly.

Our high performance products and deepened customer relationships with our OEM and ODM customers have contributed to us achieving our record high quarterly revenue of $158.8 million for the three months ended December 31, 2020, a 34.8% growth compared to the same quarter last year.

Impact of COVID-19 Pandemic to our Business

6 unchanged sentences

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.

While some government authorities recently have permitted some reopening of businesses and approved gradual easing of various restrictions, many businesses may decide not to open fully or at all due to ongoing concerns with safety at the workplace, and there is no guarantee that governmental orders will not be re-imposed or modified to reinstate prior restrictions if the COVID-19 pandemic continues or caseloads deteriorate.

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.

In the U.S., 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.

In the U.S., federal and state authorities imposed “stay-at-home” orders or similar restrictions, we have taken 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.

These measures may 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.

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

Costs of JV Company and digital power business:

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 has reached its targeted production of assembly and testing and is currently ramping up its Phase I of the 12-inch wafer fabrication.

For the quarter ending December 31, 2020, we expect the JV Company to gradually increase the production of its 12-inch wafer fabrication and assembly and test.

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 increased costs, which will likely negatively impact our results of operations.

Manufacturing costs :

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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 and resulting shift in market trend, we cannot predict whether and how long this trend will continue.

However, we recently have experienced an increase of demand in PC market due to the impact of the COVID-19 pandemic and resulting shift in market trend and consumer behavior.

We cannot predict whether and how long this trend will continue.

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.

5 unchanged sentences

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.

Our failure to introduce new products on a timely basis that meet

customers' specifications and performance requirements, particularly those products with major OEM customers, and our inability to continue to expand our serviceable markets, could adversely affect our financial performance, including loss of market share.

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.

5 unchanged sentences

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.

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.

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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.

The Company continues to work with DOC to resolve this issue and requested DOC to grant permission to reinstate the Company’s shipments to Huawei.

As part of this process and in response to DOC’s request, the Company provided certain documents and materials relating to the Company’s supply chain and shipment process to DOC for its review.

DOC has not informed the Company of any specific timeline or schedule under which DOC will provide a response to the Company’s request.

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.

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

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

9 unchanged sentences

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.

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.

2 unchanged sentences

As the volume of sales increases, we expect cost of goods sold to increase.

We implemented a process to improve our factory capacity utilization rates by transferring more wafer production to our Oregon fab and reducing our reliance on outside foundries.

Our Oregon fab was running at full capacity during the quarter ended December 31, 2020.

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.

30 unchanged sentences

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 quarter ended March 31, 2020 related to the re-measurement of the net operating losses that could be realized via the new net operating loss carryback provisions.

Accordingly, we reported a discrete tax benefit of $1.1 million in the quarter ended March 31, 2020

related to the re-measurement of the net operating losses that could be realized via the new net operating loss carryback provisions.

Consolidated Appropriations Act, 2021” (“CAA 2021”), Enacted December 27, 2020

On December 27, 2020, the United States enacted the Consolidated Appropriations Act, 2021, which made changes to existing U.S.

There was no material impact of the tax law changes included in the Consolidated Appropriations Act, 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 ended September 30, 2020 and 2019 .

The following tables set forth statements of operations, also expressed as a percentage of revenue, for the three and six months ended December 31, 2020 and 2019.

Our historical results of operations are not necessarily indicative of the results for any future period.

Three Months Ended September 30,

(in thousands)

(% of revenue)

Three Months Ended December 31, Six Months Ended December 31,

2020 2019 2020 2019 2020 2019 2020 2019

(in thousands) (% of revenue) (in thousands) (% of revenue)

Revenue $ 158,830 $ 117,860 100.0 % 100.0 % $ 310,381 $ 235,662 100.0 % 100.0 %

Cost of goods sold 110,081 93,454 69.3 % 79.3 % 219,109 184,324 70.6 % 78.2 %

Gross profit 48,749 24,406 30.7 % 20.7 % 91,272 51,338 29.4 % 21.8 %

Operating expenses

8 unchanged sentences

Net loss attributable to noncontrolling interest (363) (3,568) (0.2) % (3.0) % (1,170) (6,435) (0.4) % (2.7) %

Net income attributable to Alpha and Omega Semiconductor Limited

Net income (loss) attributable to Alpha and Omega Semiconductor Limited $ 12,903 $ (1,005) 8.1 % (0.9) % $ 22,477 $ 4 7.3 % — %

Share-based compensation expense was recorded as follows:

Three Months Ended September 30,

(in thousands)

(% of revenue)

Three Months Ended December 31, Six Months Ended December 31,

2020 2019 2020 2019 2020 2019 2020 2019

(in thousands) (% of revenue) (in thousands) (% of revenue)

Cost of goods sold $ 383 $ 404 0.2 % 0.3 % $ 768 $ 840 0.2 % 0.4 %

1 unchanged sentence

Selling, general and administrative 1,598 1,611 1.0 % 1.4 % 3,009 3,020 1.0 % 1.3 %

Three Months Ended September 30, 2020 and 2019

Total $ 3,224 $ 2,487 2.0 % 2.1 % $ 6,100 $ 4,856 1.9 % 2.1 %

Three and Six Months Ended December 31, 2020 and 2019

The following is a summary of revenue by product type:

Three Months Ended September 30,

(in thousands)

(in percentage)

Three Months Ended December 31, Six Months Ended December 31,

2020 2019 Change 2020 2019 Change

(in thousands) (in thousands) (in percentage) (in thousands) (in thousands) (in percentage)

Power discrete $ 118,500 $ 99,321 $ 19,179 19.3 % $ 232,872 $ 198,001 $ 34,871 17.6 %

Power IC 37,381 16,825 20,556 122.2 % 71,839 34,410 37,429 108.8 %

Packaging and testing services 2,949 1,714 1,235 72.1 % 5,670 3,251 2,419 74.4 %

Total revenue was $151.6 million for the three months ended September 30, 2020 , an increase of $33.7 million , or 28.6% , as compared to $117.8 million for the same quarter last year.

$ 158,830 $ 117,860 $ 40,970 34.8 % $ 310,381 $ 235,662 $ 74,719 31.7 %

Total revenue wa s $158.8 million for the three months ended December 31, 2020, an increase of $41.0 million, or 34.8%, as compared to $117.9 million for the same quarter last year.

The increase was primarily due to an increase of $19.2 million and $20.6 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 ended September 30, 2020, as compared to same quarter last year, was primarily due to increased demand.

The increase in power discrete and power IC product sales was primarily due to a 16.6% increase in unit shipments and a 14.7% increase 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 ended December 31, 2020, as compared to same quarter last year, was primarily due to increased demand.

Total revenue was $310.4 million for the six months ended December 31, 2020, an increase of $74.7 million, or 31.7%, as compared to $235.7 million for the same period last year.

The increase was primarily due to an increase of $34.9 million and $37.4 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 27.7% increase in unit shipments and a 2.8% increase in average selling price as compared to same period last year due to a shift in product mix.

The increase in revenue of packaging and testing services for the six months ended December 31, 2020, as compared to same period last year, was primarily due to increased demand.

Cost of goods sold and gross profit

Three Months Ended September 30,

(in thousands)

(in percentage)

Three Months Ended December 31, Six Months Ended December 31,

2020 2019 Change 2020 2019 Change

(in thousands) (in thousands) (in percentage) (in thousands) (in thousands) (in percentage)

Cost of goods sold $ 110,081 $ 93,454 $ 16,627 17.8 % $ 219,109 $ 184,324 $ 34,785 18.9 %

Percentage of revenue 69.3 % 79.3 % 70.6 % 78.2 %

Gross profit $ 48,749 $ 24,406 $ 24,343 99.7 % $ 91,272 $ 51,338 $ 39,934 77.8 %

Percentage of revenue 30.7 % 20.7 % 29.4 % 21.8 %

Cost of goods sold was $109.0 million for the three months ended September 30, 2020 , an increase of $18.2 million , or 20.0% , as compared to $90.9 million for the same quarter last year.

Cost of goods sold was $110.1 million for the three months ended December 31, 2020, an increase of $16.6 million, or 17.8%, as compared to $93.5 million for the same quarter last year.

The increase was primarily due to 34.8% increase in revenue.

Gross margin increased by 5.2 percentage points to 28.1% for the three months ended September 30, 2020 , as compared to 22.9% for the same quarter last year.

The increase in gross margin was primarily due to a reduction of production ramp-up costs in our JV Company during the three months ended September 30, 2020 .

Gross margin increased by 10 percentage points to 30.7% for the three months ended December 31, 2020, as compared to 20.7% for the same quarter last year.

Our JV Company continued its ramp during the three months ended December 31, 2020, which contributed to gross margin increased.

Cost of goods sold was $219.1 million for the six months ended December 31, 2020, an increase of $34.8 million, or 18.9%, as compared to $184.3 million for the same period last year.

The increase was primarily due to 31.7% increase in revenue.

Gross margin increased by 7.6 percentage points to 29.4% for the six months ended December 31, 2020, as compared to 21.8% for the same period last year.

The increase in gross margin was primarily due to a reduction of production ramp-up costs in our JV Company during the six months ended December 31, 2020.

Research and development expenses

Three Months Ended September 30,

(in thousands)

(in percentage)

Three Months Ended December 31, Six Months Ended December 31,

2020 2019 Change 2020 2019 Change

(in thousands) (in thousands) (in percentage) (in thousands) (in thousands) (in percentage)

Research and development $ 15,423 $ 12,147 $ 3,276 27.0 % $ 30,114 $ 24,515 $ 5,599 22.8 %

Research and development expenses were $14.7 million for the three months ended September 30, 2020 , an increase of $2.3 million , or 18.8% , as compared to $12.4 million for the same quarter last year.

The increase was primarily attributable to a $0.6 million increase in employee compensation and benefits expense mainly due to higher bonuses, a $0.8 million increase in product prototyping engineering expense as a result of increased engineering activities, a $0.3 million increase in professional services expense as a result of higher consulting fees.

partially offset by lower recruiting fees, as well as a $0.6 million increase in share-based compensation expense due to an increase in stock awards granted during the current quarter.

Research and development expenses were $15.4 million for the three months ended December 31, 2020, an increase of $3.3 million, or 27.0%, as compared to $12.1 million for the same quarter last year.

The increase was primarily attributable to a $1.2 million increase in employee compensation and benefits expense mainly due to higher bonuses, a $0.8 million increase in product prototyping engineering expense as a result of increased engineering activities, a $0.2 million increase in professional services expense as a result of higher consulting fees, as well as a $0.8 million increase in share-based compensation expense due to an increase in stock awards granted during the current quarter.

Research and development expenses were $30.1 million for the six months ended December 31, 2020, an increase of $5.6 million, or 22.8%, as compared to $24.5 million for the same period last year.

The increase was primarily attributable to a $1.8 million increase in employee compensation and benefits expense mainly due to higher bonuses, a $1.6 million increase in product prototyping engineering expense as a result of increased engineering activities, a $0.5 million increase in professional services expense as a result of higher consulting fees, partially offset by lower recruiting fees, as well as a $1.3 million increase in share-based compensation expense due to an increase in stock awards granted during the current period.

Selling, general and administrative expenses

Three Months Ended September 30,

(in thousands)

(in percentage)

Three Months Ended December 31, Six Months Ended December 31,

2020 2019 Change 2020 2019 Change

(in thousands) (in thousands) (in percentage) (in thousands) (in thousands) (in percentage)

Selling, general and administrative $ 19,736 $ 15,629 $ 4,107 26.3 % $ 37,241 $ 30,814 $ 6,427 20.9 %

Selling, general and administrative expenses were $17.5 million for the three months ended September 30, 2020 , an increase of $2.3 million , or 15.3% , as compared to $15.2 million for the same quarter last year.

Selling, general and administrative expenses were $19.7 million for the three months ended December 31, 2020, an increase of $4.1 million, or 26.3%, as compared to $15.6 million for the same quarter last year .

The increase was primarily attributable to a $3.5 million increase in employee compensation and benefits expenses, mainly due to increased headcount, higher bonus expenses and increased employee insurance expenses.

The increase was also attributable a $1.2 million increase in legal expenses related to the government investigation.

The increase was also attributable a $0.6 million increase in legal expenses related to the government investigation and a $0.4 million increase in audit costs.

These increases were partially offset by a $0.5 million decrease in employee business expenses due to decreased travel expenses as a result of the COVID-19 pandemic.

Selling, general and administrative expenses were $37.2 million for the six months ended December 31, 2020, an increase of $6.4 million, or 20.9%, as compared to $30.8 million for the same period last year.

The increase was primarily attributable to a $5.1 million increase in employee compensation and benefits expenses, mainly due to increased headcount, higher bonus expenses and increased employee insurance expenses.

The increase was also attributable to a $1.8 million increase in legal expenses related to the government investigation and $0.5 million increase in audit and tax related costs.

These increases were partially offset by a $0.9 million decrease in employee business expenses due to decreased travel expenses as a result of the COVID-19 pandemic.

Interest expense and other income (loss), net

Three Months Ended September 30,

(in thousands)

(in percentage)

Three Months Ended December 31, Six Months Ended December 31,

2020 2019 Change 2020 2019 Change

(in thousands) (in thousands) (in percentage) (in thousands) (in thousands) (in percentage)

Interest expense and other income (loss), net $ (381) $ (635) $ 254 (40.0) % $ (930) $ (1,462) $ 532 (36.4) %

Interest expense was primarily related to bank borrowings.

The increase in interest expenses during the three months ended September 30, 2020 as compared to the same period last year was primarily due to an increase in bank borrowings, partially offset by a $2.7 million interest refund from the Chinese government in the JV Company in the same period last year.

The increase in interest expenses during the three and six months ended December 31, 2020 as compared to the same period last year was primarily due to an increase in bank borrowings, partially offset by interest refund from the Chinese government in the JV 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).

The decrease in interest income and others, net during the three months ended September 30, 2020 as compared to the same quarter last year was primarily due to higher foreign currency exchange gains as a result of the depreciation of USD against RMB.

The decrease in interest income and others, net during the three and six months ended December 31, 2020 as compared to the same period last year was primarily due to higher foreign currency exchange gains as a result of the depreciation of USD against RMB.

Income tax expense

Three Months Ended September 30,

(in thousands)

(in percentage)

Three Months Ended December 31, Six Months Ended December 31,

2020 2019 Change 2020 2019 Change

(in thousands) (in thousands) (in percentage) (in thousands) (in thousands) (in percentage)

Income tax expense $ 669 $ 568 $ 101 17.8 % $ 1,680 $ 978 $ 702 71.8 %

For the three months ended September 30, 2020 , the Company recognized income tax expense of approximately $1.0 million , compared to income tax expense of $0.4 million for the three months ended September 30, 2019 .

The income tax expense of $1.0 million for the three months ended September 30, 2020 included a $0.03 million discrete tax benefit.

The income tax expense of $0.4 million for the three months ended September 30, 2019 included a $0.02 million discrete tax expense.

Excluding the discrete income tax items, the effective tax rate for the three months ended September 30, 2020 and 2019 was 10.7% and (27.3)%, respectively.

The changes in the effective tax rate and tax expense between the periods resulted primarily from the Company reporting pretax book income of $9.8 million for the three months ended September 30, 2020 vs.

a pretax book loss of $1.4 million for the three months ended September 30, 2019.

The Company recognized income tax expense of approxim ately $0.7 million and $0.6 million for the three months ended December 31, 2020 and 2019, respectively.

The income tax expense of $0.7 million for the th ree months ended December 31, 2020 included a $0.01 million discrete tax expense.

The income tax expense of $0.6 million for the three months ended December 31, 2019 included a $0.01 million discrete tax expense.

Excluding the discrete income tax items, the effective tax rate for the three months ended December 31, 2020 and 2019 was 5 .0% and (13.8)%, respectively.

The changes in the effective tax rate and tax expense between the periods resulted primarily from the Company reporting pretax book incom e of $13.2 million for the three months ended December 31, 2020 as compared to a pretax book loss of $4.0 million for the three months ended December 31, 2019.

The Company recognized income tax expense of approximate ly $1.7 million and $1.0 million for the six months ended December 31, 2020 and 2019, respectively.

The income tax expense of $1.7 million for the s ix months ended December 31, 2020 included a $0.02 million discrete tax benefit.

The income tax expense of $1.0 million for the six months ended December 31, 2019 included a $0.03 million discrete tax expense.

Excluding the discrete income tax items, the effective tax rate for the six months ended December 31, 2020 and 2019 was 7.4 % and (17.4)%, respectively.

The changes in the effective tax rate and tax expense between the periods resulted primarily from the Company reporting pretax book inc ome of $23.0 m illion for the six months ended December 31, 2020 as compared to a pretax book loss of $5.5 million for the six months ended December 31, 2019.

Liquidity and Capital Resources

4 unchanged sentences

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

We 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.

We could borrow up to approximately Chinese Renminbi ("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 September 30, 2020 , there was no outstanding balance under the loan.

In October 2020, this line of credit was renewed with the same terms and a maturity date of April 21, 2022.

As of December 31, 2020, there was no outstanding balance under the loan.

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

2 unchanged sentences

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.

On September 30, 2020 , there was no outstanding balance under the line of credit and the line of credit expired.

On August 9, 2019, one of our 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.

In December 2020, this line of credit was renewed with the same terms and a maturity date of December 31, 2021.

As of December 31, 2020, there was no outstanding balance under the loan.

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.

4 unchanged sentences

This agreement, with certain financial covenants required, has no expiration date.

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

During the three months ended September 30, 2020, the Borrower borrowed $29.7 million and repaid this amount in full.

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

The Borrower was in compliance with these covenants as of December 31, 2020.

During the three and six months ended December 31, 2020, the Borrower borrowed $7.0 million and $36.7 million, respectively, and repaid each amount in full.

As of December 31, 2020, there was no outstanding balance and the Borrower 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 the amount of $17.8 million.

4 unchanged sentences

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.

We were in compliance with these covenants as of September 30, 2020 .

As of September 30, 2020 , the outstanding balance of the term loan was $15.7 million .

We were in compliance with these covenants as of December 31, 2020.

As of December 31, 2020, the outstanding balance of the term loa n was $15.5 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.

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

Beginning in October 2018, Jireh was required to pay to the Bank on each payment date, the outstanding principal amount of the loan in monthly installments.

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 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 us to maintain, on a consolidated basis, specified financial ratios and fixed charge coverage ratio.

We were in compliance with these covenants as of September 30, 2020 .

As of September 30, 2020 , the outstanding balance of the term loan was $14.9 million .

We were in compliance with these covenants as of December 31, 2020.

As of December 31, 2020, the outstanding balance of the term loan wa s $13.0 million.

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.

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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 ended September 30, 2020 .

We did not repurchase any shares pursuant to the Repurchase Plan during the six months ended December 31, 2020.

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 of September 30, 2020 , of the 6,784,648 repurchased shares, 146,928 shares with a weighted average repurchase price of $10.30 per share, were reissued at an average price of $5.25 per share pursuant to option exercises and vested restricted share units.

We had $13.4 million remained available under the Repurchase Program as of September 30, 2020 .

As of December 31, 2020, of the 6,784,648 repurchased shares, 155,670 shares with a weighted average repurchase price of $10.19 per share, were reissued at an average price of $5.37 per share pursuant to option exercises and vested restricted share units.

We had $13.4 million remained available under the Repurchase Program as of December 31, 2020.

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.

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Other terms of this agreement remain the same.

As of September 30, 2020 , the outstanding balance of the Lease Financing was approximately $39.8 million based on the currency exchange rate as of September 30, 2020 .

As of December 31, 2020, the outstanding balance of the Lease Financing was approxima tely $37.4 million b ased on the currency exchange rate as of December 31, 2020.

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.

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

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

On September 23, 2019, the JV Company entered into a short-term 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.

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

As of December 31, 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.

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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.

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 September 30, 2020 , the outstanding balance of the loan was 194 million RMB (equivalent of $28.5 million based on the currency exchange rate as of September 30, 2020 ).

As of December 31, 2020, the outstanding balance of the l oan was 189 million RMB (equivalent of $28.9 million based on the currency exchange rate as of December 31, 2020).

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

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

As of September 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 borrow a maximum of Chinese Renminbi (RMB) 100 million (approximately $14.3 million based on the currency exchange rate between RMB and U.S.

As of December 31, 2020, the outstanding balance of the loan w as $21.6 million.

On April 15, 2020, the JV Company entered into a one-year loan agreement with China Everbright Bank in China to borrow a maximum of RMB 100.0 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.

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.

During the three months ended September 30, 2020, the JV Company repaid $9.0 million and borrowed $11.3 million at a fixed interest rate of 2.7% per annum under the accounts receivable collateralized loan.

As of September 30, 2020, the total outstanding balance under the loan was $14.2 million.

During the three months ended December 31, 2020, the JV Company borrowed $12.1 million at a fixed interest rate of 2.7% per annum.

As of December 31, 2020, the total outstanding balance under the loan wa s $15.2 mi llion which included RMB 20 million or $3.1 million borrowed during the three months ended June 30, 2020.

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.

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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%.

Interest payments are 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 September 30, 2020, the outstanding balance of the loan was $36.7 million .

As of December 31, 2020, the outstanding balance of the loan wa s $36.0 million .

On November 13, 2020, the JV Company entered into a one-year loan agreement with China Merchant Bank in China.

The JV Company can borrow up to RMB 50.0 million, or $7.6 million, based on the currency exchange rate between RMB and U.S.

Dollar on November 13, 2020.

The loan's interest rates are based on the LPR plus 1.4% per annum.

Interest payments are due quarterly with the entire principal due not later than November 19, 2021.

During the three months ended December 31, 2020, the JV Company borrowed RMB 50.0 million, or $7.7 million, at an interest rate of 5.25% per annum.

As of December 31, 2020, the outstanding balance of this loan was $7.7 million.

Cash, cash equivalents and restricted cash

As of September 30, 2020 and June 30, 2020 , we had $159.0 million and $162.7 million of cash, cash equivalents and restricted cash, respectively.

As of December 31, 2020 and June 30, 2020, we h ad $183.3 million a nd $162.7 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.

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

Three Months Ended September 30,

Six Months Ended December 31,

(in thousands)

Net cash provided by (used in) operating activities

Net cash provided by operating activities $ 45,933 $ 7,711

Net cash used in investing activities (24,639) (31,167)

Net cash used in financing activities

Net cash provided by (used in) financing activities (4,779) 10,974

Effect of exchange rate changes on cash, cash equivalents and restricted cash 4,120 (347)

Net decrease in cash, cash equivalents and restricted cash

Net increase (decrease) in cash, cash equivalents and restricted cash $ 20,635 $ (12,829)

Cash flows from operating activities

Net cash provided by operating activities of $9.8 million for the three months ended September 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 the JV 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.

Net cash used in operating activities of $1.2 million for the three months ended September 30, 2019 resulted primarily from net loss of $1.9 million and net changes in assets and liabilities of $12.6 million, partially offset by non-cash expenses of $13.3 million.

The non-cash expenses of $13.3 million primarily included $10.9 million of depreciation and amortization expenses and $2.4 million of share-based compensation expense.

The net changes in assets and liabilities of $12.6 million were primarily due to a $5.8 million increase in inventories and a $15.0 million increase in accounts receivable from a one day delay of $9.2 million receivable payment from one of our major distributors due to the bank shut down on September 30, 2019 due to Typhoon Mitag in Taiwan, as well as increased billings in the current quarter as compared to the prior quarter, partially offset by a $3.8 million decrease in other current and long term assets due to decrease in advance payments to vendors, $0.8 million increase in accounts payable due to timing of payment, and a $3.7 million increase in accrued and other liabilities.

Net cash provided by operating activities of $45.9 million for the six months ended December 31, 2020 resulted primarily from net income of $21.3 million and non-cash expenses of $32.1 million, partially offset by net changes in assets and liabilities using cash of $7.5 million.

The non-cash expenses of $32.1 million primarily included $25.7 million of depreciation and amortization expenses, $6.1 million of share-based compensation expense and $0.3 million of deferred income taxes.

The net changes in assets and liabilities of $7.5 million were primarily due to a $11.7 million increase in accounts receivable as a result of higher revenue, a $8.8 million increase in inventories due to a continued ramp of the JV Company, a $1.8 million increase in other current and long-term assets due to increase in advance payments to vendors, and a $0.4 million decrease in accounts payable due to timing of payments, partially offset by a $14.3 million increase in accrued and other liabilities and a $0.8 million increase in income taxes payable.

Net cash provided by operating activities of $7.7 million for the six months ended December 31, 2019 resulted primarily from non-cash expenses of $26.6 million, partially offset by net loss of $6.4 million and net changes in assets and liabilities using cash of $12.4 million.

The non-cash expenses of $26.6 million primarily included $21.8 million of depreciation and

amortization expenses and $4.9 million of share-based compensation expense.

The net changes in assets and liabilities of $12.4 million were primarily due to a $4.9 million increase in inventories, a $9.6 million increase in accounts receivable from timing of billings and collection of payments, and a $5.7 million decrease in accounts payable due to timing of payment, partially offset by a $6.3 million increase in accrued and other liabilities, a $0.9 million decrease in other current and long-term assets due to decrease in advance payments to vendors, and a $0.5 million increase in income taxes payable.

Cash flows from investing activities

Net cash used in investing activities of $11.3 million for the three months ended September 30, 2020 was primarily attributable to $11.3 million purchases of property and equipment, including $3.4 million purchased by the JV Company.

Net cash used in investing activities of $15.8 million for the three months ended September 30, 2019 was primarily attributable to $15.8 million purchases of property and equipment, including $7.5 million purchased by the JV Company.

Net cash used in investing activities of $24.6 million fo r the six months ended December 31, 2020 was primarily attributable to $24.8 million purchases of property and equipment, including $9.9 million purc hased by the JV Company.

Net cash used in investing activities of $31.2 million for the six months ended December 31, 2019 was primarily attributable to $32.4 million purchases of property and equipment, including $12.1 million purchased by the JV Company, partially offset by $1.3 million government grant related to equipment in the JV Company.

Cash flows from financing activities

Net cash used in financing activities of $4.2 million for the three months ended September 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.

Net cash used in financing activities of $1.1 million for the three months ended September 30, 2019 was primarily attributable to $2.1 million in repayments of borrowings, $1.7 million in payment of finance lease obligations, and $0.1 million in common shares acquired to settle withholding tax related to vesting of restricted stock units, partially offset by $2.8 million proceeds from borrowings.

Net cash used in financing activities of $4.8 mil lion for the six months ended December 31, 2020 was primarily attributabl e to $29.9 million in repayments of borrowings, $8.1 million in payment of finance lease obligations, and $1.0 million in common shares acquired to settle withholding tax related to vesting of restricted stock units, partially offset by $31.0 million proceeds from borrowings and $3.2 million of proceeds from exercise of stock options and ESPP.

Net cash provided by financing activities of $11.0 million for the six months ended December 31, 2019 was primarily attributable to $33.7 million proceeds from borrowings and $1.7 million of proceeds from ESPP, partially offset by $20.9 million in repayments of borrowings, $3.4 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.

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 of September 30, 2020 , we had no material off-balance sheet arrangements as defined in Regulation S-K 303(a)(4)(ii) arrangements.

As of December 31, 2020, we had no material off-balance sheet arrangements as defined in Regulation S-K 303(a)(4)(ii) arrangements.

Contractual Obligations

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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-Q

Item 2. Management’s Discussion and Analysis