ALPHA & OMEGA SEMICONDUCTOR Ltd 10-Q

ITEM 1. FINANCIAL STATEMENTS ALPHA AND OMEGA SEMICONDUCTOR LIMITED CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited, in thousands except par value per share) March 31, 2021 June 30, 2020 ASSETS Current assets: Cash and cash equivalents $ 192,113 $ 158,536 Restricted cash 229 2,190 Accounts receivable, net 33,721 13,272 Inventories 145,110 135,528 Other current assets 11,183 8,807 Total current assets 382,356 318,333 Property, plant and equipment, net 432,569 412,340 Operating lease right-of-use assets, net 33,036 32,948 Intangible assets, net 14,250 16,770 Deferred income tax assets 5,008 4,766 Restricted cash - long-term 2,133 1,978 Other long-term assets 5,039 5,804 Total assets $ 874,391 $ 792,939 LIABILITIES AND EQUITY Current liabilities: Accounts payable $ 81,858 $ 86,181 Accrued liabilities 62,683 54,986 Income taxes payable 2,431 1,360 Short-term debt 43,280 30,114 Finance lease liabilities 16,462 15,258 Operating lease liabilities 5,202 4,159 Total current liabilities 211,916 192,058 Long-term debt 90,868 99,775 Income taxes payable - long-term 930 903 Deferred income tax liabilities 1,470 496 Finance lease liabilities - long-term 16,615 26,842 Operating lease liabilities - long-term 29,758 30,254 Other long-term liabilities 36,056 10,723 Total liabilities 387,613 361,051 Commitments and contingencies (Note 10) Equity: Preferred shares, par value $ 0.002 per share: Authorized: 10,000 shares; issued and outstanding: none at March 31, 2021 and June 30, 2020 — — Common shares, par value $ 0.002 per share: Authorized: 100,000 shares; issued and outstanding: 32,710 shares and 26,085 shares, respectively at March 31, 2021 and 31,944 shares and 25,305 shares, respectively at June 30, 2020 65 64 Treasury shares at cost: 6,625 shares at March 31, 2021 and 6,639 shares at June 30, 2020 ( 66,064 ) ( 66,184 ) Additional paid-in capital 252,934 246,103 Accumulated other comprehensive income (loss) 996 ( 5,127 ) Retained earnings 157,356 118,833 Total Alpha and Omega Semiconductor Limited shareholder's equity 345,287 293,689 Noncontrolling interest 141,491 138,199 Total equity 486,778 431,888 Total liabilities and equity $ 874,391 $ 792,939 See accompanying notes to these condensed consolidated financial statements. 1 Table of Contents ALPHA AND OMEGA SEMICONDUCTOR LIMITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited, in thousands except per share data) Three Months Ended March 31, Nine Months Ended March 31, 2021 2020 2021 2020 Revenue $ 169,212 $ 106,852 $ 479,593 $ 342,514 Cost of goods sold 116,521 84,393 335,630 268,717 Gross profit 52,691 22,459 143,963 73,797 Operating expenses Research and development 15,557 13,569 45,671 38,084 Selling, general and administrative 19,338 16,909 56,579 47,723 Impairment of privately-held investment — 600 — 600 Total operating expenses 34,895 31,078 102,250 86,407 Operating income (loss) 17,796 ( 8,619 ) 41,713 ( 12,610 ) Interest expense and other income (loss), net ( 1,815 ) ( 2,282 ) ( 2,745 ) ( 3,744 ) Income (loss) before income taxes 15,981 ( 10,901 ) 38,968 ( 16,354 ) Income tax expense (benefit) 1,014 ( 1,015 ) 2,694 ( 37 ) Net income (loss) including noncontrolling interest 14,967 ( 9,886 ) 36,274 ( 16,317 ) Net loss attributable to noncontrolling interest ( 1,133 ) ( 3,391 ) ( 2,303 ) ( 9,826 ) Net income (loss) attributable to Alpha and Omega Semiconductor Limited $ 16,100 $ ( 6,495 ) $ 38,577 $ ( 6,491 ) Net income (loss) per common share attributable to Alpha and Omega Semiconductor Limited Basic $ 0.62 $ ( 0.26 ) $ 1.51 $ ( 0.26 ) Diluted $ 0.58 $ ( 0.26 ) $ 1.42 $ ( 0.26 ) Weighted average number of common shares attributable to Alpha and Omega Semiconductor Limited used to compute net income (loss) per share Basic 25,882 24,894 25,631 24,711 Diluted 27,716 24,894 27,128 24,711 See accompanying notes to these condensed consolidated financial statements. 2 Table of Contents ALPHA AND OMEGA SEMICONDUCTOR LIMITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited, in thousands) Three Months Ended March 31, Nine Months Ended March 31, 2021 2020 2021 2020 Net income (loss) including noncontrolling interest $ 14,967 $ ( 9,886 ) $ 36,274 $ ( 16,317 ) Other comprehensive income (loss), net of tax Foreign currency translation adjustment ( 799 ) ( 2,208 ) 11,718 ( 5,304 ) Comprehensive income (loss) 14,168 ( 12,094 ) 47,992 ( 21,621 ) Less: Noncontrolling interest ( 1,447 ) ( 4,430 ) 3,292 ( 12,415 ) Comprehensive income (loss) attributable to Alpha and Omega Semiconductor Limited $ 15,615 $ ( 7,664 ) $ 44,700 $ ( 9,206 ) See accompanying notes to these condensed consolidated financial statements. 3 ALPHA AND OMEGA SEMICONDUCTOR LIMITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited, in thousands) Common Shares Treasury Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings Total AOS Shareholders' Equity Noncontrolling Interest Total Equity Balance, December 31, 2020 $ 65 $ ( 66,097 ) $ 254,980 $ 1,481 $ 141,289 $ 331,718 $ 142,938 $ 474,656 Exercise of common stock options and release of restricted stock units — — 129 — — 129 — 129 Reissuance of treasury stock upon exercise of common stock options and release of restricted stock units — 33 — — ( 33 ) — — — Withholding tax on restricted stock units — — ( 5,200 ) — — ( 5,200 ) — ( 5,200 ) Share-based compensation — — 3,025 — — 3,025 — 3,025 Net income (loss) — — — — 16,100 16,100 ( 1,133 ) 14,967 Cumulative translation adjustment — — — ( 485 ) — ( 485 ) ( 314 ) ( 799 ) Balance, March 31, 2021 $ 65 $ ( 66,064 ) $ 252,934 $ 996 $ 157,356 $ 345,287 $ 141,491 $ 486,778 Common Shares Treasury Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings Total AOS Shareholders' Equity Noncontrolling Interest Total Equity Balance, June 30, 2020 $ 64 $ ( 66,184 ) $ 246,103 $ ( 5,127 ) $ 118,833 $ 293,689 $ 138,199 $ 431,888 Exercise of common stock options and release of restricted stock units — — 1,624 — — 1,624 — 1,624 Reissuance of treasury stock upon exercise of common stock options and release of restricted stock units — 120 — — ( 54 ) 66 — 66 Withholding tax on restricted stock units — — ( 6,153 ) — — ( 6,153 ) — ( 6,153 ) Issuance of shares under ESPP 1 — 1,635 — — 1,636 — 1,636 Share-based compensation — — 7,725 — — 7,725 — 7,725 Restricted stock units settlement in connection with service — — 2,000 — — 2,000 — 2,000 Net income (loss) — — — — 38,577 38,577 ( 2,303 ) 36,274 Cumulative translation adjustment — — — 6,123 — 6,123 5,595 11,718 Balance, March 31, 2021 $ 65 $ ( 66,064 ) $ 252,934 $ 996 $ 157,356 $ 345,287 $ 141,491 $ 486,778 4 ALPHA AND OMEGA SEMICONDUCTOR LIMITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited, in thousands) Common Shares Treasury Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings Total AOS Shareholders' Equity Noncontrolling Interest Total Equity Balance, December 30, 2019 $ 63 $ ( 66,227 ) $ 240,797 $ ( 4,239 ) $ 125,476 $ 295,870 $ 144,280 $ 440,150 Reissuance of treasury stock upon exercise of common stock options and release of restricted stock units — 43 — — ( 43 ) — — — Withholding tax on restricted stock units — — ( 1,203 ) — — ( 1,203 ) — ( 1,203 ) Share-based compensation — — 2,876 — — 2,876 — 2,876 Net loss — — — — ( 6,495 ) ( 6,495 ) ( 3,391 ) ( 9,886 ) Cumulative translation adjustment — — — ( 1,169 ) — ( 1,169 ) ( 1,039 ) ( 2,208 ) Balance, March 31, 2020 $ 63 $ ( 66,184 ) $ 242,470 $ ( 5,408 ) $ 118,938 $ 289,879 $ 139,850 $ 429,729 Common Shares Treasury Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings Total AOS Shareholders' Equity Noncontrolling Interest Total Equity Balance, June 30, 2019 $ 62 $ ( 66,240 ) $ 234,410 $ ( 2,693 ) $ 125,485 $ 291,024 $ 152,265 $ 443,289 Exercise of common stock options and release of RSUs — — 26 — — 26 — 26 Reissuance of treasury stock upon exercise of common stock options and release of restricted stock units — 56 — — ( 56 ) — — — Withholding tax on restricted stock units — — ( 1,398 ) — — ( 1,398 ) — ( 1,398 ) Issuance of shares under ESPP 1 — 1,700 — — 1,701 — 1,701 Share-based compensation — — 7,732 — — 7,732 — 7,732 Net loss — — — — ( 6,491 ) ( 6,491 ) ( 9,826 ) ( 16,317 ) Cumulative translation adjustment — — — ( 2,715 ) — ( 2,715 ) ( 2,589 ) ( 5,304 ) Balance, March 31, 2020 $ 63 $ ( 66,184 ) $ 242,470 $ ( 5,408 ) $ 118,938 $ 289,879 $ 139,850 $ 429,729 See accompanying notes to these condensed consolidated financial statements. 5 Table of Contents ALPHA AND OMEGA SEMICONDUCTOR LIMITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited, in thousands) Nine Months Ended March 31, 2021 2020 Cash flows from operating activities Net income (loss) including noncontrolling interest $ 36,274 $ ( 16,317 ) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 39,434 33,538 Share-based compensation expense 9,925 7,732 Deferred income taxes, net 732 85 (Gain) loss on disposal of property and equipment 40 ( 206 ) Impairment of privately-held investment — 600 Changes in operating assets and liabilities: Accounts receivable ( 20,448 ) 6,826 Inventories ( 9,582 ) ( 14,660 ) Other current and long-term assets ( 2,297 ) 2,715 Accounts payable ( 224 ) ( 3,366 ) Income taxes payable 1,097 ( 1,256 ) Accrued and other liabilities 29,573 6,332 Net cash provided by operating activities 84,524 22,023 Cash flows from investing activities Purchases of property and equipment excluding JV Company ( 24,913 ) ( 33,417 ) Purchases of property and equipment in JV Company ( 15,628 ) ( 15,787 ) Proceeds from sale of property and equipment 10 295 Government grant related to equipment 119 1,254 Net cash used in investing activities ( 40,412 ) ( 47,655 ) Cash flows from financing activities Withholding tax on restricted stock units ( 6,153 ) ( 1,398 ) Proceeds from exercise of stock options and ESPP 3,326 1,727 Proceeds from borrowings 42,858 49,146 Repayments of borrowings ( 44,087 ) ( 25,768 ) Principal payments on finance leases ( 12,267 ) ( 7,213 ) Net cash provided by (used in) financing activities ( 16,323 ) 16,494 Effect of exchange rate changes on cash, cash equivalents and restricted cash 3,982 ( 636 ) Net increase (decrease) in cash, cash equivalents and restricted cash 31,771 ( 9,774 ) Cash, cash equivalents and restricted cash at beginning of period 162,704 124,295 Cash, cash equivalents and restricted cash at end of period $ 194,475 $ 114,521 Supplemental disclosures of non-cash investing and financing information: Property and equipment purchased but not yet paid $ 16,912 $ 15,911 See accompanying notes to these condensed consolidated financial statements. 6 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. The Company and Significant Accounting Policies The Company Alpha and Omega Semiconductor Limited and its subsidiaries (the “Company”, "AOS", "we" or "us") design, develop and supply a broad range of power semiconductors. The Company's portfolio of products targets high-volume applications, including personal and portable computers, graphic cards, flat panel TVs, home appliances, smart phones, battery packs, quick chargers, home appliances, consumer and industrial motor controls and power supplies for TVs, computers, servers and telecommunications equipment. The Company conducts its operations primarily in the United States of America (“USA”), Hong Kong, China, and South Korea. Basis of Preparation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and with the instructions to Article 10 of Securities and Exchange Commission Regulation S-X, as amended. They do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with U.S. GAAP for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2020. All significant intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, all adjustments (consisting of normal recurring adjustments and accruals) considered necessary for a fair presentation of the results of operations for the periods presented have been included in the interim periods. Operating results for the three and nine months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2021 or any other interim period. The condensed consolidated balance sheet at June 30, 2020 is derived from the audited financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2020. Reclassification The Company has reclassified certain amounts previously reported in its financial statements to conform to the current presentation. These reclassifications did not have a material impact on our consolidated financial statements. Joint Venture On March 29, 2016, the Company 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 the Company and the Chongqing Funds formed a joint venture, (the “JV Company”), for the purpose of constructing and operating a power semiconductor packaging, testing and 12-inch wafer fabrication facility ("Fab") in the LiangJiang New Area of Chongqing, China (the “JV Transaction”). The Fab is being built in phases. As of March 31, 2021, the Company owned 51 %, and the Chongqing Funds owned 49 % of the equity interest in the JV Company. The Joint Venture is accounted under the provisions of the consolidation guidance since the Company has controlling financial interest. 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 the Company. The JV Company has reached its targeted production in assembly and testing and is currently ramping up its Phase I of the 12-inch wafer fabrication. Certain Significant Risks and Uncertainties Related to Outbreak of Coronavirus Disease 2019 (“COVID-19”) The COVID-19 pandemic has had and continues to have a negative impact on business and economic activities across the globe. As a result of the COVID-19 pandemic and the global economic downturn and changing consumer behaviors due to various restrictions imposed by governments, the Company has experienced shifting market trends, including an increasing demand in the markets for notebooks, PCs and gaming devices and decreasing demand for mobile phone and industrial products, as more consumers are staying at and working from home. While the Company has recently benefited from the 7 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) increasing demand of PC related products, there is no guarantee that this trend will continue, and such increasing demand may discontinue or decline as government authorities relax COVID-19 related restrictions and consumer behaviors change. Furthermore, as the COVID-19 pandemic continues and global economic downturn and high unemployment persists, consumer spending may slow down substantially, in which case the Company may experience a significant decline of customer orders for its products, including those designed for PC-related applications, and such decline will adversely affect its financial conditions and results of operations. The extent to which the COVID-19 pandemic may impact the Company's business will depend on future developments which are uncertain, such as the duration of the outbreak, travel restrictions, governmental mandates issued to mitigate the spread of the disease, business closures, economic disruptions, and the effectiveness of actions taken to contain and treat the virus. Accordingly, the COVID-19 pandemic may have a negative impact on the Company's sales and results of operations, the size and duration of which is difficult to predict. Use of Estimates The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires the Company to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. To the extent there are material differences between these estimates and actual results, the Company's condensed consolidated financial statements will be affected. On an ongoing basis, the Company evaluates 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 the economic implications of the COVID-19 pandemic. Leases The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use ("ROU") assets, current operating lease liabilities and long-term operating lease liabilities on the Company's condensed consolidated balance sheets. Finance leases are included in property, plant and equipment, current finance lease liabilities and long-term finance leases liabilities on the condensed consolidated balance sheets. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. The Company uses an estimate of its incremental borrowing rate based on the information available at the lease commencement date. The operating lease ROU assets also include any lease payments made and exclude lease incentives. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise such options. Operating lease expense is generally recognized on a straight-line basis over the lease term. Variable lease payments are expensed as incurred and are not included within the operating lease ROU asset and lease liability calculation. The Company does not record leases on the condensed consolidated balance sheet with a term of one year or less. Revenue recognition The Company determines revenue recognition through the following steps: (1) identification of the contract with a customer; (2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recognition of revenue when, or as, a performance obligation is satisfied. The Company recognizes revenue when product is shipped to the customer, net of estimated stock rotation returns and price adjustments to certain distributors. Packaging and testing services revenue is recognized upon shipment of serviced products to the customer. Share-based Compensation Expense The Company maintains an equity-settled, share-based compensation plan to grant restricted share units and stock options. The Company recognizes expense related to share-based compensation awards that are ultimately expected to vest based on estimated fair values on the date of grant. 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-Carlo pricing model. The fair value of stock options is estimated 8 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) on the date of grant using the Black-Scholes option valuation model. Share-based compensation expense is recognized on the accelerated attribution basis over the requisite service period of the award, which generally equals the vesting period. Restricted Cash As a condition of certain loan agreement, the Company is required to keep a compensating balance at the issuing bank (see Note 5). In addition, the Company maintains restricted cash in connection with cash balances temporarily restricted for regular business operations, including the possibility of a dispute with a vendor. These balances have been excluded from the Company’s cash and cash equivalents balance and are classified as restricted cash in the Company’s condensed consolidated balance sheets. As of March 31, 2021 and June 30, 2020, the amount of restricted cash was $ 2.4 million and $ 4.2 million, respectively. Fair Value of Financial Instruments The fair value of cash equivalents is categorized in Level 1 in the fair value hierarchy. Cash equivalents consist primarily of short-term bank deposits. The carrying values of financial instruments such as cash and cash equivalents, accounts receivable and accounts payable approximate their carrying values due to their short-term maturities. The carrying value of the company's debt is considered a reasonable estimate of fair value which is estimated by considering the current rates available to the Company for debt of the same remaining maturities, structure, credit risk and terms of the debts. Government Grants The Company occasionally receives government grants that provide financial assistance for certain eligible expenditures in China. These grants include reimbursements on interest expense on bank borrowings, payroll tax credits, credit for property, plant and equipment in a particular geographical location, employment credits, as well as business expansion credits. Government grants are not recognized until there is reasonable assurance that the Company will comply with the conditions attaching to it, and that the grant will be received. The Company records such grants either as a reduction of the related expense, a reduction of the cost of the related asset, or as other income depending upon the nature of the grant. As a result of such grants, during the three and nine months ended March 31, 2021, the Company reduced interest expense by $ 0.7 million and $ 2.2 million, property, plant and equipment by nil and $ 0.1 million, and operating expenses by $ 0.0 million and $ 3.7 million, respectively. During the three and nine months ended March 31, 2020, the Company reduced interest expense by $ 0.7 million and $ 4.1 million , property, plant and equipment by nil and $ 1.3 million, and operating expenses by $ 1.8 million and $ 2.0 million, respectively. Long-lived Assets The Company evaluates its long-lived assets for impairment whenever events or changes indicate that the carrying amount of such assets may not be recoverable. Due to the COVID-19 pandemic, the Company assessed the changes in circumstances that occurred since the March 2020 quarter. These factors included operating losses, a decrease in the Company's share price in February and March of 2020, which reduced its market capitalization, expectation of lower business growth for the coming quarters, increased and prolonged economic and regulatory uncertainty in the global economies, and the expectation of higher supply chain costs and increased competition. Therefore, the Company performed a recoverability test by comparing the sum of the estimated undiscounted future cash flows of its long-lived assets to their carrying amount as of June 30, 2020. Some of the more significant assumptions used in the estimated future cash flows include net sales, cost of goods sold, operating expenses, working capital, capital expenditures, income tax rates, and long-term growth rates that appropriately reflects the risks inherent in the future cash flow stream. The Company selected the assumptions used in the financial forecasts by referencing to historical data, supplemented by current and anticipated market conditions, estimated product growth rates and management's plans. These estimated future cash flows were consistent with those the Company uses in its internal planning. The result of the recoverability test indicated that the sum of the expected future cash flows (undiscounted and without interest charges) was greater than the carrying amount of the long-lived assets. Therefore, the Company concluded that the carrying amount of the long-lived assets was recoverable as of June 30, 2020. 9 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Comprehensive Income (Loss) Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The Company's accumulated other comprehensive income (loss) consists of cumulative foreign currency translation adjustments. Total comprehensive income (loss) is presented in the condensed consolidated statements of comprehensive income (loss). Recent Accounting Pronouncements Recently Issued Accounting Standards not yet adopted In August 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which, among other things, provides guidance on how to account for contracts on an entity’s own equity. This ASU simplifies the accounting for certain financial instruments with characteristics of liabilities and equity. Specifically, the ASU eliminated the need for the Company to assess whether a contract on the entity’s own equity (1) permits settlement in unregistered shares, (2) whether counterparty rights rank higher than shareholder’s rights, and (3) whether collateral is required. In addition, the ASU requires incremental disclosure related to contracts on the entity’s own equity and clarifies the treatment of certain financial instruments accounted for under this ASU on earnings per share. For public business entities, the ASU is effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. The Company does not expect the adoption of this guidance will have a material impact on its consolidated financial position, results of operations or cash flows. In January 2020, the FASB issued ASU No. 2020-01, “Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.” The ASU is based on a consensus of the Emerging Issues Task Force and is expected to increase comparability in accounting for these transactions. ASU 2016-01 made targeted improvements to accounting for financial instruments, including providing an entity the ability to measure certain equity securities without a readily determinable fair value at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Among other topics, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting. For public business entities, the amendments in the ASU are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company does not expect the adoption of this guidance will have a material impact on its consolidated financial position, results of operations or cash flows. In December 2019, the FASB issued ASU No. 2019-12 “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12") by removing certain exceptions to the general principles. The amendments will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption of the amendments is permitted. Depending on the amendment, adoption may be applied on a retrospective, modified retrospective or prospective basis. The Company is currently evaluating the impacts of adoption of the new guidance to its consolidated financial statements. Recently Adopted Accounting Standards In August 2018, the FASB issued ASU 2018-15 “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract". These amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contact with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by these amendments. ASU 2018-15 had no material impact on the Company's consolidated financial statements. 10 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13”). ASU 2018-13 amends existing fair value measurement disclosure requirements by adding, changing, or removing certain disclosures. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. ASU 2018-13 had no material impact on the Company's consolidated financial statements. In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326). Topic 326 adds to U.S. GAAP the current expected credit loss ("CECL") model, a measurement model based on expected losses rather than incurred losses. Under this new standard, an entity recognizes its estimate of expected credit losses as an allowance. The new standard is also intended to reduce the complexity of U.S. GAAP by decreasing the number of credit loss models that entities use to account for debt instruments. The new guidance significantly changes the accounting for credit losses. The Company adopted ASU 2016-13 using the modified-retrospective approach in the first quarter of fiscal 2021 with no impact to its condensed consolidated financial statements. The adoption of Topic 326 did not significantly change the Company's approach to the valuation of trade receivables. The Company determines whether there is an expected loss on its accounts receivable by reviewing all available data, including its customers' latest available financial statements, their credit standing and historical collection experience, as well as current and future market and economic conditions. As of March 31, 2021, the allowance for credit losses on the Company's trade receivables remained immaterial. 11 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 2. Net Income (Loss) Per Common Share Attributable to Alpha and Omega Semiconductor Limited The following table presents the calculation of basic and diluted net income (loss) per share attributable to common shareholders: Three Months Ended March 31, Nine Months Ended March 31, 2021 2020 2021 2020 (in thousands, except per share data) Numerator: Net income (loss) attributable to Alpha and Omega Semiconductor Limited $ 16,100 $ ( 6,495 ) $ 38,577 $ ( 6,491 ) Denominator: Basic: Weighted average number of common shares used to compute basic net income per share 25,882 24,894 25,631 24,711 Diluted: Weighted average number of common shares used to compute basic net income per share 25,882 24,894 25,631 24,711 Effect of potentially dilutive securities: Stock options, RSUs and ESPP shares 1,834 — 1,497 — Weighted average number of common shares used to compute diluted net income per share 27,716 24,894 27,128 24,711 Net income (loss) per share attributable to Alpha and Omega Semiconductor Limited: Basic $ 0.62 $ ( 0.26 ) $ 1.51 $ ( 0.26 ) Diluted $ 0.58 $ ( 0.26 ) $ 1.42 $ ( 0.26 ) The following potential dilutive securities were excluded from the computation of diluted net income (loss) per share as their effect would have been anti-dilutive: Three Months Ended March 31, Nine Months Ended March 31, 2021 2020 2021 2020 (in thousands) (in thousands) Employee stock options and RSUs 107 2,038 80 2,043 ESPP — 627 89 782 Total potential dilutive securities 107 2,665 169 2,825 3. Concentration of Credit Risk and Significant Customers The Company manages its credit risk associated with exposure to distributors and direct customers on outstanding accounts receivable through the application and review of credit approvals, credit ratings and other monitoring procedures. In some instances, the Company also obtains letters of credit from certain customers. Credit sales, which are mainly on credit terms of 30 to 60 days, are only made to customers who meet the Company's credit requirements, while sales to new customers or customers with low credit ratings are usually made on an advance payment basis. The Company considers its trade accounts receivable to be of good credit quality because its key distributors and direct customers have long-standing business relationships with the Company and the Company has not experienced any significant bad debt write-offs of accounts receivable in the past. The Company closely monitors the aging of accounts receivable from its distributors and direct customers, and regularly reviews their financial positions, where available. 12 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) In the past, the Company shipped its product indirectly to Huawei and its affiliates (collectively, “Huawei”) through distributors. Typically, the Company sold its products to distributors who then sold to original design manufacturers (“ODMs”) that incorporated our products into end applications that were then shipped to Huawei. While distributor point of sale reports summarize distributor sales to ODMs, the Company must make certain assumptions and estimates in order to determine the amount of revenues attributed to indirect shipment to Huawei. During the fiscal year ended June 30, 2019, the estimated revenues attributed to indirect shipments to Huawei were approximately 2 % of total revenues. During the period from May 2019 to December 2019, estimated revenues earned by the Company from shipments indirectly made to Huawei were in the range of $ 11 million to $ 13 million. The Company has not shipped any products to Huawei after December 31, 2019. See Note 10. Summarized below are individual customers whose revenue or accounts receivable balances were 10% or higher than the respective total consolidated amounts: Three Months Ended March 31, Nine Months Ended March 31, Percentage of revenue 2021 2020 2021 2020 Customer A 30.2 % 27.5 % 29.1 % 29.2 % Customer B 35.2 % 36.4 % 34.9 % 36.2 % March 31, 2021 June 30, 2020 Percentage of accounts receivable Customer A 27.4 % * Customer B 21.8 % * Customer C 17.8 % 29.8 % Customer E * 20.1 % Customer F * 10.4 % Customer G * 10.3 % Customer H * 10.9 % * Less than 10% 13 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 4. Balance Sheet Components Accounts receivable, net: March 31, 2021 June 30, 2020 (in thousands) Accounts receivable $ 52,089 $ 43,394 Less: Allowance for price adjustments ( 18,338 ) ( 30,092 ) Less: Allowance for doubtful accounts ( 30 ) ( 30 ) Accounts receivable, net $ 33,721 $ 13,272 Inventories: March 31, 2021 June 30, 2020 (in thousands) Raw materials $ 63,172 $ 55,377 Work in-process 62,730 61,863 Finished goods 19,208 18,288 $ 145,110 $ 135,528 Other current assets: March 31, 2021 June 30, 2020 (in thousands) VAT receivable $ 1,643 $ 1,639 Other prepaid expenses 2,817 1,900 Prepaid insurance 1,244 1,520 Prepaid maintenance 1,003 587 Prepayment to supplier 2,618 938 Prepaid income tax 1,790 1,991 Customs deposit — 163 Other receivables 68 69 $ 11,183 $ 8,807 14 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Property, plant and equipment, net: March 31, 2021 June 30, 2020 (in thousands) Land $ 4,877 $ 4,877 Building 68,115 58,875 Manufacturing machinery and equipment 501,595 447,079 Equipment and tooling 27,360 25,398 Computer equipment and software 41,108 38,779 Office furniture and equipment 3,761 3,529 Leasehold improvements 74,433 68,224 Land use rights 9,173 8,502 730,422 655,263 Less: accumulated depreciation ( 335,976 ) ( 291,515 ) 394,446 363,748 Equipment and construction in progress 38,123 48,592 Property, plant and equipment, net $ 432,569 $ 412,340 Intangible assets, net: March 31, 2021 June 30, 2020 (in thousands) Patents and technology rights $ 18,037 $ 18,037 Trade name 268 268 Customer relationships 1,150 1,150 19,455 19,455 Less: accumulated amortization ( 5,474 ) ( 2,954 ) 13,981 16,501 Goodwill 269 269 Intangible assets, net $ 14,250 $ 16,770 Estimated future minimum amortization expense of intangible assets is as follows (in thousands): Year ending June 30, 2021 (Remaining) $ 840 2022 3,360 2023 3,286 2024 3,249 2025 3,246 $ 13,981 15 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Other long-term assets: March 31, 2021 June 30, 2020 (in thousands) Prepayments for property and equipment $ 1,243 $ 2,242 Investment in a privately held company 100 100 Customs deposit 1,391 1,662 Other long-term deposits 912 850 Office leases deposits 1,088 766 Other 305 184 $ 5,039 $ 5,804 Accrued liabilities: March 31, 2021 June 30, 2020 (in thousands) Accrued compensation and benefits $ 25,030 $ 19,968 Warranty accrual 836 709 Stock rotation accrual 4,085 3,358 Accrued professional fees 3,476 5,868 Accrued inventory 720 775 Accrued facilities related expenses 1,744 1,831 Accrued property, plant and equipment 12,360 11,039 Other accrued expenses 5,502 8,017 Customer deposit 6,852 2,813 ESPP payable 2,078 608 $ 62,683 $ 54,986 The activities in the warranty accrual, included in accrued liabilities, are as follows: Nine Months Ended March 31, 2021 2020 (in thousands) Beginning balance $ 709 $ 623 Additions 338 852 Utilization ( 211 ) ( 803 ) Ending balance $ 836 $ 672 The activities in the stock rotation accrual, included in accrued liabilities, are as follows: Nine Months Ended March 31, 2021 2020 (in thousands) Beginning balance $ 3,358 $ 1,921 Additions 4,498 7,413 Utilization ( 3,771 ) ( 6,027 ) Ending balance $ 4,085 $ 3,307 16 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Other long-term liabilities: March 31, 2021 June 30, 2020 (in thousands) Customer deposits $ 33,000 * $ 8,000 * Computer software liabilities 483 1,897 Equipment liabilities 1,354 — Deferred payroll taxes 1,219 826 Other long-term liabilities $ 36,056 $ 10,723 * Customer deposits are from Customer A and Customer B for securing future product shipments from the Company. 17 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 5. Bank Borrowings Short-term borrowings 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 Chinese Renminbi ("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 China one-year loan prime rate ("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 $ 7.6 million, at a n interest rate of 5.25 % per annum. As of March 31, 2021, the outstanding balance of this loan was $ 7.6 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. 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 March 31, 2021, the JV Company borrow ed $ 11.9 million at a fixed interest rat e of 2.7 % per an num and repaid 12.1 million. As of March 31, 2021, the total outstanding balance under the loan w as $ 14.9 million w hich included RMB 20 million or $ 3.0 million borrowed during the three months ended June 30, 2020. 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. In October 2020, this line of credit was renewed with the same terms and a maturity date of April 21, 2022. As of March 31, 2021, there was no outstanding balance under the loan. 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. As of March 31, 2021, there was no outstanding b alance 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 December 2020, this line of credit was renewed with the same terms and a maturity date of December 31, 2021. As of March 31, 2021, there was no outsta nding balance under the loan. Accounts Receivable Factoring Agreement 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 Offered Rate ("LIBOR") plus 1.75 % per annum. The Company is the guarantor for this agreement. The Company is accounting for this transaction as a secured borrowing under the Transfers and Servicing of Financial Assets guidance. In addition, any cash held in the restricted bank account controlled by HSBC has a legal right of offset against the borrowing. This agreement, with certain financial covenants required, has no expiration date. The Borrower was in compliance with these covenants as of March 31, 2021. During the three and nine months ended March 31, 2021, the Company borro wed $ 10.0 million and $ 46.7 million, respectively, and repaid each amount in full. As of March 31, 2021, there was no outstanding balance and the Company had unused credit of approximately $ 30.0 million. Credit Facilities 18 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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 agreed 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 agreed to transfer title of its assembly and testing equipment to the Lenders, and the Lenders leased 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 were 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 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 March 31, 2021, the outstanding balance of the Lease Financ ing of 217.0 million RMB (equivalent of $ 33.1 million based on the currency exchange rate as of March 31, 2021) was recorded under short-term and long-term finance lea se liabilities. See future minimum lease payment table for finance lease liabilities in Note 6. Long-term debt 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 payments are due on March 20, June 20, September 20 and December 20 of each year based o n the LPR pl us 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 March 31, 2021, the outstanding balance of the loan was $ 35.8 million. 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 March 31, 2021, the outstanding balance of the loan was $ 21.6 million. 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 l oan 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 arrangement, 14 million RMB (approximately $ 2.0 million) of cash is held as restricted cash by the JV Company as a compensating balance at the 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. As of March 31, 2021, the outstanding balance of the loan was 189 million R MB (equivalent of $ 28.8 million based on th e currency exchange rate as of March 31, 2021). 19 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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. 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 accrues interest at a fixed rate of 5.04 % per annum on the basis of a 360-day year. The loan agreement contains customary restrictive covenants and includes certain financial covenants that require the Company to maintain, on a consolidated basis, specified financial ratios. The Company was in compliance with these covenants as of March 31, 2021. As of March 31, 2021, the outstanding balance of the term loa n was $ 15.3 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 the Company's 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. 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 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 March 31, 2021. As of March 31, 2021, the outstanding balance of the term loan was $ 11.2 million. Maturities of short-term debt and long-term debt were as follows (in thousands): Year ending June 30, 2021 (Remaining) $ 22,432 2022 35,032 2023 38,186 2024 24,044 2025 15,508 Total principal 135,202 Less: debt issuance costs ( 1,054 ) Total principal, less debt issuance costs $ 134,148 Short-term Debt Long-term Debt Principal amount $ 43,738 $ 91,464 Less: debt issuance costs ( 458 ) ( 596 ) Total debt, less debt issuance costs $ 43,280 $ 90,868 20 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 6. Leases The Company evaluates contracts for lease accounting at contract inception and assesses lease classification at the lease commencement date. Operating leases are included in operating lease right-of-use ("ROU") assets, operating lease liabilities and operating lease liabilities - long-term on the Company's condensed consolidated balance sheets. Finance leases are included in property, plant and equipment, finance lease liabilities and finance lease liabilities-long-term on the condensed consolidated balance sheets. The Company recognizes a ROU asset and corresponding lease obligation liability at the lease commencement date where the lease obligation liability is measured at the present value of the minimum lease payments. As most of the leases do not provide an implicit rate, the Company uses its incremental borrowing rate at lease commencement. The Company uses an interest rate commensurate with the interest rate to borrow on a collateralized basis over a similar term with an amount equal to the lease payments. Operating leases are primarily related to offices, research and development facilities, sales and marketing facilities, and manufacturing facilities. In addition, long-term supply agreements to lease gas tank equipment and purchase industrial gases are accounted for as operating leases. Lease agreements frequently include renewal provisions and require the Company to pay real estate taxes, insurance and maintenance costs. For operating leases, the amortization of the ROU asset and the accretion of its lease obligation liability result in a single straight-line expense recognized over the lease term. The finance lease is related to the RMB 400.0 million of lease financing of the JV Company with YinHai Leasing Company and The Export-Import Bank of China. See Note 5 - Bank Borrowings for details. The Company does not record leases on the condensed consolidated balance sheets with a term of one year or less. The components of the Company’s operating and finance lease expenses are as follows for the periods presented (in thousands): Nine Months Ended March 31, 2021 2020 Operating leases: Fixed rent expense $ 5,089 $ 4,480 Variable rent expense 599 623 Finance lease: Amortization of equipment 1,682 2,304 Interest 1,699 2,142 Short-term leases Short-term lease expenses 164 224 Total lease expenses $ 9,233 $ 9,773 21 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Supplemental balance sheets information related to the Company’s operating and finance leases is as follows (in thousands, except lease term and discount rate): March 31, 2021 June 30, 2020 Operating Leases : ROU assets associated with operating leases $ 33,036 $ 32,948 Finance Lease: Property, plant and equipment, gross $ 112,613 $ 104,374 Accumulated depreciation ( 94,580 ) ( 86,540 ) Property, plant and equipment, net $ 18,033 $ 17,834 Weighted average remaining lease term (in years) Operating leases 8.45 9.57 Finance lease 1.97 2.72 Weighted average discount rate Operating leases 4.65 % 4.45 % Finance lease 5.46 % 5.46 % Supplemental cash flow information related to the Company’s operating and finance lease is as follows (in thousands): Nine Months Ended March 31, 2021 2020 Cash paid from amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 4,721 $ 3,828 Operating cash flows from finance lease $ 1,699 $ 2,142 Financing cash flows from finance lease $ 12,267 $ 7,213 Non-cash investing and financing information: Operating lease right-of-use assets obtained in exchange for lease obligations $ 2,843 $ 15,699 Future minimum lease payments are as follows as of March 31, 2021 (in thousands): Year ending June 30, Operating Leases Finance Leases The remainder of fiscal 2021 $ 1,707 $ 4,577 2022 6,674 17,724 2023 5,547 12,848 2024 4,283 — 2025 3,611 — Thereafter 21,414 — Total minimum lease payments 43,236 35,149 Less amount representing interest ( 8,276 ) ( 2,072 ) Total lease liabilities $ 34,960 $ 33,077 22 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 7. Shareholders' Equity and Share-based Compensation Share Repurchase In September 2017, the Board of Directors approved a repurchase program (the “Repurchase Program”) that allowed the Company to repurchase its common shares from the open market pursuant to a pre-established Rule 10b5-1 trading plan or through privately negotiated transactions up to an aggregate of $ 30.0 million. The amount and timing of any repurchases under the Repurchase Program depend on a number of factors, including but not limited to, the trading price, volume and availability of the Company's common shares. Shares repurchased under this program are accounted for as treasury shares and the total cost of shares repurchased is recorded as a reduction of shareholders' equity. From time to time, treasury shares may be reissued as part of the Company's share-based compensation programs. Gains on re-issuance of treasury stock are credited to additional paid-in capital; losses are charged to additional paid-in capital to offset the net gains, if any, from previous sales or re-issuance of treasury stock. Any remaining balance of the losses is charged to retained earnings. During the nine months ended March 31, 2021, the Company did no t repurchase any shares pursuant to the Repurchase Program. Since the inception of the program, the Company 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. No repurchased shares have been retired. Of the 6,784,648 repurchased shares, 159,645 shares with a weighted average repurchase price of $ 10.15 per share, were reissued at an average price of $ 5.24 per share pursuant to option exercises and vested restricted share units ("RSU"). As of March 31, 2021, approximately $ 13.4 million remained available under the Repurchase Program. Time-based Restric ted Stock Units ("TRSU") The following table summarizes the Company's TRSU activities for the nine months ended March 31, 2021: Number of Restricted Stock Units Weighted Average Grant Date Fair Value Per Share Weighted Average Remaining Contractual Term (Years) Aggregate Intrinsic Value Nonvested at June 30, 2020 932,138 $ 11.36 1.66 $ 10,141,661 Granted 627,173 $ 29.83 Vested ( 481,484 ) $ 14.17 Forfeited ( 14,850 ) $ 10.72 Nonvested at March 31, 2021 1,062,977 $ 21.00 1.90 $ 34,759,348 Market-based Restricted Stock Units ("MSUs") During the quarter ended September 30, 2018, the Company granted 1.3 million market-based restricted stock units ("MSUs") to certain personnel. The number of shares to be earned at the end of performance period is determined based on the Company’s achievement of specified stock prices and revenue thresholds during the performance period from January 1, 2019 to December 31, 2021 as well as the recipients remaining in continuous service with the Company through such period. The MSUs vest in four equal annual installments after the end of each performance period. The Company estimated the grant date fair values of its MSUs using a Monte-Carlo simulation model. On August 31, 2020, the Compensation Committee of the Board approved a modification of the terms of MSU to (i) extend the performance period through December 31, 2022 and (ii) change the commencement date for the four-year time-based service period to January 1, 2023. The fair value of these MSUs was recalculated to reflect the change as of August 31, 2020 and the unrecognized compensation amount was adjusted to reflect the increase in fair value. The incremental expenses for the three and nine months ended March 31, 2021 were immaterial. The Company recorded approximatel y $ 0.3 million and $ 0.9 million of expenses for MSUs during the three and nine months ended March 31, 2021, respectively, and approximately $ 0.1 million and $ 0.4 million during the three and nine months ended March 31, 2020, respectively. Performance-based Restricted Stock Units ("PRSUs") In March each year since year 2017, the Company granted performance-based RSUs (“PRSUs”) to certain personnel. The number of shares to be earned under the PRSUs is determined based on the level of attainment of predetermined financial goals. The PRSUs vest in four equal annual installments from the first anniversary date after the grant date if certain predetermined financial 23 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) goals were met. The Company recorded approximatel y $ 0.5 million and $ 1.3 million of expens e for these PRSUs during the three and nine months ended March 31, 2021, respectively, and approximately $ 0.4 million and $ 1.1 million during the three and nine months ended March 31, 2020, respectively. During the three months ended June 30, 2019, the Company announced an incentive program. Under this program, each participant’s award is denominated in stock and subject to achievement of certain objective goals within certain timelines. In June 2020, the Company believed it was most likely that predetermined goal measures would be met. Therefore, the Company reported such expenses in the other current liabilities line on the condensed consolidated balance sheets as the amount of bonus is to be settled in variable number of RSU’s at the completion of the objective goals. Such non-cash compensation expense was recorded as part of share-based compensation exp ense in the condensed consolidated statements of operations. During the three and nine months ended March 31, 2021, the Company recorded $ 0.8 million and $ 2.2 million such non-cash compensation expense, respectively. As of March 31, 2021, the Company granted RSUs valued at $ 2.0 million to participants, which were fully vested due to achievement of certain objective measures. The following table summarizes the Company's PRSUs activities for the nine months ended March 31, 2021: Number of Performance-based Restricted Stock Units Weighted Average Grant Date Fair Value Per Share Weighted Average Remaining Contractual Term (Years) Aggregate Intrinsic Value Nonvested at June 30, 2020 342,775 $ 12.38 1.60 $ 3,729,392 Granted 165,500 $ 36.27 Vested ( 148,211 ) $ 14.24 Forfeited ( 5,865 ) $ 17.29 Nonvested at March 31, 2021 354,199 $ 22.68 1.99 $ 11,582,307 Stock Options The Company did no t grant any stock options during the three and nine months ended March 31, 2021 and 2020. The following table summarizes the Company's stock option activities for the nine months ended March 31, 2021: Weighted Weighted Average Average Remaining Number of Exercise Price Contractual Aggregate Shares Per Share Term (in years) Intrinsic Value Outstanding at June 30, 2020 643,978 $ 8.79 2.89 $ 1,544,664 Exercised ( 150,289 ) $ 11.24 Outstanding at March 31, 2021 493,689 $ 8.05 2.54 $ 12,170,703 Options vested and expected to vest 493,689 $ 8.05 2.54 $ 12,170,703 Exercisable at March 31, 2021 493,689 $ 8.05 2.54 $ 12,170,703 Employee Share Purchase Plan ("ESPP") The assumptions used to estimate the fair values of common shares issued under the ESPP were as follows: Nine Months Ended March 31, 2021 Volatility rate 63.1 % Risk-free interest rate 0.2 % Expected term 1.3 years Dividend yield 0 % 24 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Share-based Compensation Expense T he total share-based compensation expense recognized in the condensed consolidated statements of operations for the periods presented was as follows: Three Months Ended March 31, Nine Months Ended March 31, 2021 2020 2021 2020 (in thousands) (in thousands) Cost of goods sold $ 427 $ 357 $ 1,195 $ 1,197 Research and development 1,316 991 3,639 1,987 Selling, general and administrative 2,082 1,528 5,091 4,548 $ 3,825 $ 2,876 $ 9,925 $ 7,732 As of March 31, 2021, total unrecognized compensation cost under the Company's equity plans w as $ 30.6 million, which is expected to be recognized over a weighted-average period of 2.3 years. 8. Income Taxes The Company recognized income tax expense of approximately $ 1.0 million and income tax benefit of approximately $ 1.0 million for the three months ended March 31, 2021 and 2020, respectively. The income tax expense of $ 1.0 million for the three months ended March 31, 2021 included immaterial discrete tax. The income tax benefit of $ 1.0 million for the three months ended March 31, 2020 included a $ 1.3 million discrete tax benefit, $ 1.1 million related to re-measuring the tax benefit of net operating losses that can be carried back to prior years following the passage of the U.S. CARES Act, and $ 0.2 million related primarily to a prior year reserve release. Excluding the discrete income tax items, the effective tax rate for the three months ended March 31, 2021 and 2020 was 6.3 % and ( 2.3 )%, respectively. The changes in the effective tax rate and tax expense between the periods resulted primarily from the Company reporting pretax book income of $ 16.0 million for the three months ended March 31, 2021 as compared to a pretax book loss of $ 10.9 million for the three months ended March 31, 2020. The Company recognized income tax expense of approximately $ 2.7 million and income tax benefit of approximately $ 0.04 million for the nine months ended March 31, 2021 and 2020, respectively. The income tax expense of $ 2.7 million for the nine months ended March 31, 2021 included a $ 0.04 million discrete tax benefit. The income tax benefit of $ 0.04 million for the nine months ended March 31, 2020 included a $ 1.30 million discrete tax benefit, $ 1.1 million of which related to remeasuring the tax benefit of net operating losses that can be carried back to prior years following the passage of the U.S. CARES Act, and $ 0.2 million of which related to a prior year reserve release. Excluding the discrete income tax items, the effective tax rate for the nine months ended March 31, 2021 and 2020 was 7.0 % and ( 7.4 )%, respectively. The changes in the effective tax rate and tax expense between the periods resulted primarily from the Company reporting pretax book income of $ 39.0 million for the nine months ended March 31, 2021 as compared to a pretax book loss of $ 16.4 million for the nine months ended March 31, 2020. The Company files its income tax returns in the United States and in various foreign jurisdictions. The tax years 2001 to 2020 remain open to examination by U.S. federal and state tax authorities. The tax years 2013 to 2020 remain open to examination by foreign tax authorities. The Company's income tax returns are subject to examinations by the Internal Revenue Service and other tax authorities in various jurisdictions. In accordance with the guidance on the accounting for uncertainty in income taxes, the Company regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of its provision for income taxes. These assessments can require considerable estimates and judgments. As of March 31, 2021, the gross amount of unrecognized tax benefits was approximately $ 7.2 million, of which $ 4.3 million, if recognized, would reduce the effective income tax rate in future periods. If the Company's estimate of income tax liabilities proves to be less than the ultimate assessment, then a further charge to expense would be required. If events occur and the payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when the Company determines the liabilities are no longer necessary. The Company does not anticipate any material changes to its uncertain tax positions during the next twelve months. "U.S. Coronavirus Aid, Relief and Economic Security Act” (“CARES Act”), Enacted March 27, 2020 25 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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) eliminating 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, the Company 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. “U.S. 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. tax laws. There was no material impact of the tax law changes included in the Consolidated Appropriations Act, 2021 to the Company. “The American Rescue Plan Act of 2021”, Enacted March 11, 2021 On March 11, 2021, the United States enacted the American Rescue Plan Act of 2021, which made changes to existing U.S. tax laws. There was no material impact of the tax law changes included in the American Rescue Plan Act of 2021 to the Company. On July 27, 2015, in Altera Corp. v. Commissioner, the U.S. Tax Court issued an opinion related to the treatment of stock-based compensation expense in an intercompany cost-sharing arrangement. In the July 2015 ruling, the Tax Court concluded that the sharing of the cost of employee stock compensation in a company’s cost-sharing arrangement was invalid under the U.S. Administrative Procedures Act. In June 2019, a panel of the Ninth Circuit of the U.S. Court of Appeals reversed this decision. In July 2019, Altera petitioned U.S. Court of Appeals for the Ninth Circuit to hold an en banc rehearing of the case. The petition was subsequently denied by the Ninth Circuit. Altera appealed the case to the U.S. Supreme Court in February 2020, but the U.S. Supreme Court declined to hear the case in June 2020, leaving intact the U.S. Court of Appeals for the Ninth Circuit’s decision. AOS has no t recorded any benefit related to the Altera Corporation Tax Court decision in any period through March 2021. The Company will continue to monitor ongoing developments and potential impact to its financial statements. 26 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 9. Segment and Geographic Information The Company is organized as, and operates in, one operating segment: the design, development and supply of power semiconductor products for computing, consumer electronics, communication and industrial applications. The chief operating decision-maker is the Chief Executive Officer. The financial information presented to the Company's Chief Executive Officer is on a consolidated basis, accompanied by information about revenue by customer and geographic region, for purposes of evaluating financial performance and allocating resources. The Company has one business segment, and there are no segment managers who are held accountable for operations, operating results and plans for products or components below the consolidated unit level. Accordingly, the Company reports as a single operating segment. The Company sells its products primarily to distributors in the Asia Pacific region, who in turn sell these products to end customers. Because the Company's distributors sell their products to end customers which may have a global presence, revenue by geographical location is not necessarily representative of the geographical distribution of sales to end user markets. The revenue by geographical location in the following tables is based on the country or region in which the products were shipped to: Three Months Ended March 31, Nine Months Ended March 31, 2021 2020 2021 2020 (in thousands) (in thousands) Hong Kong $ 139,708 $ 90,050 $ 400,814 $ 280,396 China 27,955 13,607 74,015 46,690 South Korea 87 1,861 369 10,130 United States 1,088 830 3,683 2,829 Other countries 374 504 712 2,469 $ 169,212 $ 106,852 $ 479,593 $ 342,514 The following is a summary of revenue by product type: Three Months Ended March 31, Nine Months Ended March 31, 2021 2020 2021 2020 (in thousands) (in thousands) Power discrete $ 122,615 $ 87,519 * $ 355,487 $ 285,520 * Power IC 43,385 18,112 115,224 52,522 Packaging and testing services 3,212 1,221 8,882 4,472 $ 169,212 $ 106,852 $ 479,593 $ 342,514 * Certain products were reclassified from power discrete to Power IC. Long-lived assets, net consisting of property, plant and equipment and land use rights, by geographical area are as follows: March 31, 2021 June 30, 2020 (in thousands) China $ 328,121 $ 310,600 United States 103,692 100,984 Other countries 756 756 $ 432,569 $ 412,340 27 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 10. Commitments and Contingencies Purchase Commitments As of March 31, 2021 and June 30, 2020, the Company had approxim ately $ 66.1 million and $ 43.9 million, respectively, of outstanding purchase commitments primarily for purchases of semiconductor raw materials, wafers, spare parts, packaging and testing services and others. As of March 31, 2021 and June 30, 2020, the Company had approximately $ 52.2 million and $ 18.0 million, primarily for the JV Company, respectively, of capital commitments for the purchase of property and equipment. Other Commitments See Note 1, Note 5 and Note 6 of the Notes to the Condensed Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q for descriptions of commitments including Joint Venture, bank borrowings and leases. Contingencies and Indemnities The Company has in the past, and may from time to time in the future, become involved in legal proceedings arising from the normal course of business activities. The semiconductor industry is characterized by frequent claims and litigation, including claims regarding patent and other intellectual property rights as well as improper hiring practices. Irrespective of the validity of such claims, the Company could incur significant costs in the defense of such claims and suffer adverse effects on its operations. In December 2019, the U.S. Department of Justice ("DOJ") commenced an investigation into the Company's compliance with export control regulations relating to its business transactions with Huawei and its affiliates (“Huawei”), which were added to the “Entity List” maintained by the Department of Commerce (“DOC”) on May 16, 2019. The Company is cooperating fully with federal authorities in the investigation, including responding to requests for documents, information and interviews from DOJ in connection with the investigation. The Company has maintained an export control compliance program and has been committed to comply fully with all applicable laws and regulations. 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 (see Note 3). The Company is currently working with DOC to resolve this issue. Given the case is in still ongoing and neither DOJ nor DOC have provided the Company with any clear indication of the timing and schedule for the investigation, the Company cannot estimate the reasonably possible loss or range of loss that may occur. Also, the Company is unable to predict the duration, scope, result or related costs of the investigation, although the Company expects to incur additional professional fees as a result of this matter. In addition, the Company is unable to predict what, if any, further action that may be taken by the government in connection with the investigation, or what, if any, penalties, sanctions or remedial actions may be sought. On March 19, 2020, Darryl Gray, a stockholder of the Company (the “Plaintiff”), filed a putative class action complaint in the United States District Court for the Southern District of New York (the “Gray Action”), alleging that the Company and its management members made material misstatements or omissions regarding the Company’s business and operations, including its export control practices relating to business transactions with Huawei and its affiliate. The Gray Action asserts claims under Section 10(b) of the Exchange Act against the Company, its Chief Executive Officer and Chief Financial Officer (collectively, the Defendants”), as well as claims under Section 20(a) of the Exchange Act against the Chief Executive Officer and Chief Financial Officer. Among other remedies, the Gray Action seeks to recover compensatory and other damages as well as attorney’s fees and costs. On May 18, 2020, Plaintiff moved for an order appointing him as Lead Plaintiff pursuant to Section 21D of the Exchange Act and approving Glancy Prongay & Murray LLP as Lead Counsel for the putative class (the “Motion”). On July 1, 2020, the Court entered an order granting the Motion and requiring that: (i) Lead Plaintiff file an amended complaint or designate the current complaint as operative within sixty days; (ii) Defendants answer the complaint or otherwise move within sixty days of such filing or designation; (iii) Lead Plaintiff file an opposition, if any, within forty-five days; and (iv) Defendants file a reply, if any, forty-five days thereafter. On August 28, 2020, Plaintiff filed an amended complaint asserting the same claims against the Defendants, and adding the Company’s Executive Vice President of Product Line as a defendant on both claims. On October 27, 2020, the Defendants moved to dismiss the action in its entirety. Plaintiff filed his opposition on December 11, 28 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 2020 and Defendants filed their reply brief on January 25, 2021. The Company believes the claims in the Gray Action are without merit and intends to vigorously defend this litigation. Given the case is in its early stages and still on going, the Company cannot estimate the reasonably possible loss or range of loss that may occur. The Company is a party to a variety of agreements that it has contracted with various third parties. Pursuant to these agreements, the Company may be obligated to indemnify another party to such an agreement with respect to certain matters. Typically, these obligations arise in the context of contracts entered into by the Company, under which the Company customarily agrees to hold the other party harmless against losses arising from a breach of representations and covenants related to such matters as title to assets sold, certain intellectual property rights, specified environmental matters and certain income taxes. In these circumstances, payment by the Company is customarily conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, which procedures typically allow the Company to challenge the other party's claim. Further, the Company's obligations under these agreements may be limited in time and/or amount, and in some instances, the Company may have recourse against third parties for certain payments made by it under these agreements. The Company has not historically paid or recorded any material indemnifications, and no accrual was made at March 31, 2021 and June 30, 2020. The Company has agreed to indemnify its directors and certain employees as permitted by law and pursuant to its Bye-laws, and has entered into indemnification agreements with its directors and executive officers. The Company has not recorded a liability associated with these indemnification arrangements, as it historically has not incurred any material costs associated with such indemnification obligations. Costs associated with such indemnification obligations may be mitigated by insurance coverage that the Company maintains. However, such insurance may not cover any, or may cover only a portion of, the amounts the Company may be required to pay. In addition, the Company may not be able to acquire, maintain or renew such insurance coverage in the future under favorable terms or at all. 29