What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-05 compared with 2021-05-07 · 194 added, 204 removed, 230 unchanged (63% of the section changed)

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Unless the context otherwise requires, the words “AOS,” the “Company,” “we,” “us” and “our” refer to Alpha and Omega Semiconductor Limited and its subsidiaries.

This management’s discussion should be read in conjunction with the management’s discussion included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2020, filed with the Securities and Exchange Commission on September 2, 2020.

This management’s discussion should be read in conjunction with the management’s discussion included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2021, filed with the Securities and Exchange Commission on August 30, 2021.

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

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 nine months ended March 31, 2021, we introduced an additional 136 new products.

Our portfolio of power semiconductors includes approximately 2,400 products, and has grown significantly with the introduction of over 160 new products in the fiscal years ended June 30, 2021 and 2020, respectively, and 200 new products in the fiscal year ended June 30, 2019, respectively.

During the three months ended September 30, 2021, we introduced an additional 17 new products.

Our teams of scientists and engineers have developed extensive intellectual properties and technical knowledge that encompass major aspects of power semiconductors, which we believe enables us to introduce and develop innovative products to address the increasingly complex power requirements of advanced electronics.

We have an extensive patent portfolio that consists of 893 patents and 65 patent applications in the United States as of March 31, 2021.

We also have a total of 885 foreign patents, which were based primarily on our research and development efforts through March 31, 2021.

We have an extensive patent portfolio that consists of 870 patents and 56 patent applications in the United States as of September 30, 2021.

We also have a total of 907 foreign patents, which were based primarily on our research and development efforts through September 30, 2021.

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

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We believe our in-house packaging and testing capability provides us with a competitive advantage in proprietary packaging technology, product quality, cost and sales cycle time.

We formed a joint venture (the “JV Company”) which consists of a power semiconductor packaging, testing and 12-inch wafer fabrication facility in Chongqing, China with two investment funds owned by the Municipality of Chongqing (the “Chongqing Funds”).

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

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

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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 nine months ended March 31, 2021, 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 three and nine months ended March 31, 2021, we recorded $1.1 million and $2.3 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 risk 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 March 31, 2021, we continued our diversification program by developing new silicon and packaging platforms to expand our serviceable available market, or SAM and offer higher performance products.

The JV Company has reached its targeted production of assembly and testing, and has ramped up its Phase I target run rate of the 12-inch wafer fabrication in the quarter ended September 30, 2021.

During the three months ended September 30, 2021, we recorded $2.0 million in net loss attributable to the noncontrolling interest in the JV Company.

The additional capacity at the JV Company contributed significantly to meeting the increasing demand for our products.

However, the financial performance of the JV Company is

affected by various factors, including the impact of the global COVID-19 pandemic and related economic downturn, intensified geopolitical tensions between China and U.S., logistical difficulties, the JV Company’s ability to obtain financing and other risk factors beyond our control.

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

In addition, the JV Company is currently pursuing various financing options to fund its future expansion and repay its debt obligations, and there is no guarantee that the JV Company will be able obtain such financing with favorable terms, or at all.

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

During the fiscal quarter ended September 30, 2021, we continued our diversification program by developing new silicon and packaging platforms to expand our serviceable available market, or SAM and offer higher performance products.

Our metal-oxide-semiconductor field-effect transistors, or MOSFET, and power IC product portfolio expanded significantly.

Our high performance products and deepened customer relationships with our OEM and ODM customers have contributed to the achievement of our record high quarterly revenue of $169.2 million for the three months ended March 31, 2021, a 58.4% growth compared to the same quarter last year.

Our high performance products and deepened customer relationships with our OEM and ODM customers have contributed to the achievement of our record high quarterly revenue of $187.0 million for the three months ended September 30, 2021, a 23.4% growth compared to the same quarter last year.

Impact of COVID-19 Pandemic to our Business

Our business operations have been impacted, and expect to continue to be impacted, by the global COVID-19 pandemic and the resulting economic downturn.

Our business operations have been impacted by the global COVID-19 pandemic and the resulting economic downturn.

Numerous governmental jurisdictions, including the States of California, Oregon and Texas in the U.S.

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Such orders and restrictions have resulted in business closures, work stoppages, slowdowns and delays in commercial activities, unprecedented and widespread unemployment, disruptions to ports and other shipping infrastructure, border closures, and other travel or health-related restrictions, thereby negatively impacting our customers, suppliers, distributors, employees, offices, and the entire semiconductor ecosystem.

As a result of the COVID-19 pandemic and changing consumer behaviors due to various government restrictions, including "stay-at-home" orders, we have experienced shifting market trends, including an increasing demand in markets for notebooks, PCs and gaming devices.

As a result of the COVID-19 pandemic and changing consumer behaviors due to various government restrictions, including “stay-at-home” orders, we have experienced shifting market trends, including an increasing demand in markets for notebooks, PCs, gaming devices and other products.

While we have recently benefited from the increasing demand for PC related products, there is no guarantee that this trend will continue, and such increasing demand may discontinue or decline if government authorities relax or terminate COVID-19 related restrictions and consumer behaviors change in response to the reopening of certain economic activities.

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

In an effort to protect the health and safety of our employees and to comply with various government and regulatory guidelines, we took proactive actions 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 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.

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

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

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

Since the start of the second quarter of 2021, there have been increasing availability and administration of vaccines against COVID-19, as well as an easing of restrictions on social, business, travel, and government activities and functions, and a gradual resumption of economic activities and consumer spending in our industries.

On the other hand, infection rates continue to fluctuate in various regions and new strains of the virus remain a risk.

In addition, there are ongoing global impacts resulting from the pandemic, including disruption of the product supply chains, shortages of semiconductor components, and delays in shipments, product development, and product launches.

The full extent of the future impact of the COVID-19 pandemic on our operational and financial performance is uncertain and will depend on many factors outside our control, including, without limitation, the timing, extent, trajectory and duration of the pandemic;

the availability, distribution and effectiveness of vaccines;

the spread of new variants of COVID-19;

the continued and renewed imposition of protective public safety measures;

the disruption of global supply chain;

and the impact of the pandemic on the global economy and demand for consumer products.

Although we are unable to predict the full impact and duration of the COVID-19 pandemic on our business, we are actively managing our business operations and financial expenditures in response to continued uncertainty.

Other Factors affecting our performance

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

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

The global, regional economic and PC market conditions :

Because our products primarily serve consumer electronic applications, any significant change in global and regional economic conditions could materially affect our revenue and results of operations.

For example, because a significant amount of our revenue is derived from sales of products in the personal computing ("PC") markets, such as notebooks, motherboards and notebook battery packs, a substantial decline or downturn in the PC market can have a material adverse effect on our revenue and results of operations.

For example, because a significant amount of our revenue is derived from sales of products in the personal computing (“PC”) markets, such as notebooks, motherboards and notebook battery packs, a substantial decline or downturn in the PC market could have a material adverse effect on our revenue and results of operations.

The PC markets have experienced a modest global decline in recent years due to continued growth of demand in tablets and smart phones, worldwide economic conditions and the industry inventory correction which had and may continue to have a material impact on the demand for our products.

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While making efforts to reduce our reliance on the computing market, we continue to support our computing business and capitalize on the opportunities in this market with a more focused and competitive PC product strategy to gain market share.

Manufacturing costs :

Our gross margin is affected by a number of factors including our manufacturing costs, utilization of our manufacturing facilities, the production mixtures of our sales, pricing of wafers from third party foundries and pricing of semiconductor raw materials.

Capacity utilization affects our gross margin because we have certain fixed costs associated with our packaging and testing facilities at our Oregon fab and our Chongqing fabrication facility operated by the JV Company.

We expect that in the long term our JV Company will reduce our cost of manufacturing.

Manufacturing costs and capacity availability :

Our gross margin is affected by a number of factors including our manufacturing costs, utilization of our manufacturing facilities, the product mixes of our sales, pricing of wafers from third party foundries and pricing of semiconductor raw materials.

Capacity utilization affects our gross margin because we have certain fixed costs at our Shanghai facilities, our Oregon fab and our Chongqing fabrication facility operated by the JV Company.

If we are unable to utilize our manufacturing facilities at a desired level, our gross margin may be adversely affected.

In addition, from time to time, we may experience wafer capacity constraints, particularly at third party foundries, that may prevent us from meeting fully the demand of our customers.

While we can mitigate such constraints by increasing and re-allocating capacity at our own fab, we may not be able to do so quickly or at sufficient level, which could adversely affect our financial conditions and results of operations.

For example, the recent global shortage of semiconductor manufacturing capacity has provided us with both challenges and opportunities in the market, and highlighted the importance of maintaining sufficient and independent in-house manufacturing capabilities to meet increasing customer demands.

While we can mitigate these constraints by increasing and re-allocating capacity at our own fab, we may not be able to do so quickly or at sufficient level, which could adversely affect our financial conditions and results of operations.

In addition, we recently commenced a plan to enhance the manufacturing capability and capacity of our Oregon fab by investing in new equipment and expanding our factory facilities, which we expect will have a positive impact on our future new product development and revenue, particularly during the period of global shortage of capacity.

We also rely on the JV Company to provide foundry capacity to manufacture our products, therefore it is critical that we maintain continuous access to such capacity, which may not be available at sufficient level or at a pricing terms favorable to us if our control over the JV Company’s operation is diminished.

Our control may be reduced if the JV Company completes an equity financing or/and issues more shares that dilute our equity interests in the JV Company, or if the management of the JV Company operates more independently without our supervision.

Erosion and fluctuation of average selling price:

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However, the ramp-activities and production schedule of our JV Company have been impacted by the COVID-19 pandemic and related events, as discussed above.

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

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

Distributor ordering patterns, customer demand and seasonality :

Our distributors place purchase orders with us based on their forecasts of end customer demand, and this demand may vary significantly depending on the sales outlook and market and economic conditions of end customers.

Because these forecasts may not be accurate, channel inventory held at our distributors may fluctuate significantly, which in turn may prompt distributors to make significant adjustments to their purchase orders

placed with us.

As a result, our revenue and operating results may fluctuate significantly from quarter to quarter.

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If these major customers experience significant decline in the demand of their products, encounter difficulties or defects in their products, or otherwise fail to execute their sales and marketing strategies successfully, it may adversely affect our revenue and results of operations.

Regulatory Development:

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

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

The Company 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 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 operating margin.

Regulatory Matters :

As previously disclosed, the DOJ commenced an investigation into our compliance with export control regulations relating to business transactions with Huawei, which were added to the “Entity List” by the DOC in May 2019.

We continue to cooperate fully with federal authorities in the investigation.

We have continued to respond to inquiries and requests from DOJ for documents and information relating to the investigation, and the matter is currently pending at DOJ.

However, DOJ and DOC have not provided us any clear or definitive response regarding the timeline of the investigation and potential resolutions or outcome.

In the meantime, we continue to incur significant costs and expenses, including legal and professional fees, in connection with the government investigation, which may reduce our profitability and operating margin.

Principal line items of statements of operations

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Cost of goods sold

Our cost of goods sold primarily consists of costs associated with semiconductor wafers, packaging and testing, personnel, including share-based compensation expense, overhead attributable to manufacturing, operations and procurement, and costs associated with yield improvements, capacity utilization, warranty and inventory reserves.

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

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Our effective tax rate is highly dependent upon the geographic distribution of our worldwide profits or losses, the tax laws and regulations in each geographical region where we have operations, the availability of tax credits and carry-forwards and the effectiveness of our tax planning strategies.

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

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

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

federal net operating losses originated in the 2018, 2019 or 2020 tax years to be carried back five years to recover taxes paid based upon taxable income in the prior five years, (2) 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, 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.

Tax Cuts and Jobs Act, Enacted December 22, 2017

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

tax laws, including, but not limited to, (1) a reduction in the corporate tax rate from 35% to 21%, (2) a shift from a worldwide tax system to a territorial system, (3) eliminating the corporate alternative minimum tax (AMT) and changing how existing AMT credits can be realized, (4) bonus depreciation that will allow for full expensing of qualified property, (5) creating a new limitation on deductible interest expense and (6) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.

The company is not currently subject to the Base Erosion and Anti-Abuse ( BEAT) tax , which is a tax imposed on certain entities who make payments to their non US affiliates, where such payments reduce the US tax base .

The BEAT tax is imposed at a rate of 10% on Adjusted Taxable Income, excluding certain payments to foreign related entities.

It is an incremental tax over and above the corporate income tax and is recorded as a period cost.

possible that this tax could be applicable in future periods, which would cause an increase to the effective tax rate and cash taxes.

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

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Results of Operations

The following tables set forth statements of operations, also expressed as a percentage of revenue, for the three and nine months ended March 31, 2021 and 2020.

The following tables set forth statements of operations, also expressed as a percentage of revenue, for the three months ended September 30, 2021 and 2020.

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

Three Months Ended March 31, Nine Months Ended March 31,

Three Months Ended September 30,

2021 2020 2021 2020

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

(in thousands) (% of revenue)

Revenue $ 187,035 $ 151,551 100.0 % 100.0 %

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Selling, general and administrative 21,806 17,505 11.7 % 11.6 %

Impairment of privately-held investment — 600 — % 0.6 % — 600 — % 0.2 %

Total operating expenses 39,618 32,196 21.2 % 21.3 %

Operating income (loss) 17,796 (8,619) 10.5 % (8.1) % 41,713 (12,610) 8.7 % (3.7) %

Operating income 24,949 10,327 13.3 % 6.8 %

Interest expense and other income (loss), net (2,192) (549) (1.3) % (0.3) %

Income (loss) before income taxes 15,981 (10,901) 9.3 % (10.2) % 38,968 (16,354) 8.1 % (4.8) %

Income tax expense (benefit) 1,014 (1,015) 0.6 % (0.9) % 2,694 (37) 0.6 % — %

Net income (loss) including noncontrolling interest 14,967 (9,886) 8.7 % (9.3) % 36,274 (16,317) 7.5 % (4.8) %

Income before income taxes 22,757 9,778 12.0 % 6.5 %

Income tax expense 1,320 1,011 0.7 % 0.7 %

Net income including noncontrolling interest 21,437 8,767 11.3 % 5.8 %

Net loss attributable to noncontrolling interest (1,987) (807) (1.1) % (0.5) %

Net income (loss) attributable to Alpha and Omega Semiconductor Limited $ 16,100 $ (6,495) 9.4 % (6.1) % $ 38,577 $ (6,491) 8.0 % (1.9) %

Net income attributable to Alpha and Omega Semiconductor Limited $ 23,424 $ 9,574 12.4 % 6.3 %

Share-based compensation expense was recorded as follows:

Three Months Ended March 31, Nine Months Ended March 31,

Three Months Ended September 30,

2021 2020 2021 2020

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

(in thousands) (% of revenue)

Cost of goods sold $ 569 $ 385 0.3 % 0.3 %

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Total $ 4,635 $ 2,876 2.5 % 1.9 %

Three and Nine Months Ended March 31, 2021 and 2020

Three Months Ended September 30, 2021 and 2020

The following is a summary of revenue by product type:

Three Months Ended March 31, Nine Months Ended March 31,

2021 2020 Change 2021 2020 Change

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

Three Months Ended September 30,

2021 2020 Change

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

Power discrete $ 130,688 $ 119,375 $ 11,313 9.5 %

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$ 187,035 $ 151,551 $ 35,484 23.4 %

Total revenue wa s $169.2 million for the three months ended March 31, 2021, an increase of $62.4 million, or 58.4%, as compared to $106.9 million for the same quarter last year.

The increase was primarily due to an increase of $35.1 million and $25.3 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 32.7% increase in unit shipments and a 18.4% 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 March 31, 2021, as compared to same quarter last year, was primarily due to increased demand.

Total revenue wa s $479.6 million fo r the nine months ended March 31, 2021, an increase of $137.1 million, or 40.0%, as compared to $342.5 million for the same period last year.

Total revenue wa s $187.0 million fo r the three months ended September 30, 2021, an increase of $35.5 million, or 23.4%, as compared to $151.6 million for the same quarter last year.

The increase was primarily due to an increase of $11.3 million and $22.9 million in sales of power discrete products and sales of power IC products, respectively.

The increase in power discrete and power IC product sales was primarily due to a 29.3% increase in unit shipments and a 8.1% 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 nine months ended March 31, 2021, as compared to same period last year, was primarily due to increased demand.

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, 2021, as compared to same quarter last year, was primarily due to increased demand.

Cost of goods sold and gross profit

Three Months Ended March 31, Nine Months Ended March 31,

2021 2020 Change 2021 2020 Change

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

Three Months Ended September 30,

2021 2020 Change

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

Cost of goods sold $ 122,468 $ 109,028 $ 13,440 12.3 %

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Percentage of revenue 34.5 % 28.1 %

Cost of goods sold was $116.5 million for the three months ended March 31, 2021, an increase of $32.1 million, or 38.1%, as compared to $84.4 million for the same quarter last year.

The increase was primarily due to 58.4% increase in revenue.

Gross margin increased by 10.1 percentage points to 31.1% for the three months ended March 31, 2021, as compared to 21.0% for the same quarter last year.

Our JV Company continued its ramp during the three months ended March 31, 2021, which contributed to the increase in gross margin.

Cost of goods sold was $335.6 million for the nine months ended March 31, 2021, an increase of $66.9 million, or 24.9%, as compared to $268.7 million for the same period last year.

Cost of goods sold was $122.5 million for the three months ended September 30, 2021, an increase of $13.4 million, or 12.3%, as compared to $109.0 million for the same quarter last year.

The increase was primarily due to 23.4% increase in revenue.

Gross margin increased by 8.5 percentage points to 30.0% for the nine months ended March 31, 2021, as compared to 21.5% 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 nine months ended March 31, 2021.

Gross margin increased by 6.4 percentage points to 34.5% for the three months ended September 30, 2021, as compared to 28.1% for the same quarter last year.

Our JV Company continued its ramp during the three months ended September 30, 2021, which resulted in an increase in the capacity utilization and contributed to the increase in gross margin during the three months ended September 30, 2021.

Research and development expenses

Three Months Ended March 31, Nine Months Ended March 31,

2021 2020 Change 2021 2020 Change

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

Research and development $ 15,557 $ 13,569 $ 1,988 14.7 % $ 45,671 $ 38,084 $ 7,587 19.9 %

Research and development expenses were $15.6 million for the three months ended March 31, 2021, an increase of $2.0 million, or 14.7%, as compared to $13.6 million for the same quarter last year.

The increase was primarily attributable to a $0.8 million increase in employee compensation and benefits expense mainly due to higher bonuses, a $1.2 million increase in product prototyping engineering expense as a result of increased engineering activities, and a $0.3 million increase in share-based compensation expense due to an increase in stock awards granted, partially offset by a $0.3 million decrease in professional services expense as a result of lower consulting fees during the current quarter.

Research and development expenses were $45.7 million for the nine months ended March 31, 2021 , an increase of $7.6 million, or 19.9%, as compared to $38.1 million for the same period last year.

The increase was primarily attributable to a $2.6 million increase in employee compensation and benefits expense mainly due to higher bonuses, a $2.9 million increase in product prototyping engineering expense as a result of increased engineering activities, a $1.7 million increase in share-based compensation expense due to an increase in stock awards granted, as well as a $0.1 million increase in professional services expense as a result of higher consulting fees, partially offset by lower recruiting fees during the current period.

Three Months Ended September 30,

2021 2020 Change

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

$ 17,812 $ 14,691 $ 3,121 21.2 %

Research and development expenses were $17.8 million for the three months ended September 30, 2021, an increase of $3.1 million, or 21.2%, as compared to $14.7 million for the same quarter last year.

The increase was primarily attributable to a $2.7 million increase in employee compensation and benefits expense mainly due to higher bonuses accrual, a $0.2 million increase in product prototyping engineering expense as a result of increased engineering activities, and a $0.1 million increase in depreciation expenses during the current quarter.

Selling, general and administrative expenses

Three Months Ended March 31, Nine Months Ended March 31,

2021 2020 Change 2021 2020 Change

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

Three Months Ended September 30,

2021 2020 Change

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

Selling, general and administrative $ 21,806 $ 17,505 $ 4,301 24.6 %

Selling, general and administrative expenses were $19.3 million for the three months ended March 31, 2021, an increase of $2.4 million, or 14.4%, as compared to $16.9 million for the same quarter last year .

The increase was primarily attributable to a $4.3 million increase in employee compensation and benefits expenses, mainly due to increased headcount, higher bonus expenses and increased employee insurance expenses.

The increase was partially offset by a $1.7 million decrease in legal expense related to the government investigation, and $0.2 million decrease in marketing demo and trade shows costs as a result of the COVID-19 pandemic.

Selling, general and administrative expenses were $56.6 million for the nine months ended March 31, 2021 , an increase of $8.9 million, or 18.6%, as compared to $47.7 million for the same period last year.

The increase was primarily attributable to a $9.4 million increase in employee compensation and benefits expenses, mainly due to increased headcount, higher bonus expenses and increased employee insurance expenses, and $0.7 million increase in audit and tax related costs.

These increases were partially offset by a $1.0 million decrease in employee business expenses due to decreased travel expenses, as well as $0.3 million decrease in marketing demo and trade shows costs as a result of the COVID-19 pandemic.

Impairment of privately-held investmen t

Three Months Ended March 31, Nine Months Ended March 31,

2021 2020 Change 2021 2020 Change

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

Impairment of privately-held investment $ — $ 600 $ (600) (100.0) % $ — $ 600 $ (600) (100.0) %

During the quarter of March 31, 2020, we recorded an other-than temporary impairment charge for our investment of $0.6 million in a privately-held start-up company.

As of March 31, 2021, we have $0.1 million of privately-held investment.

Selling, general and administrative expenses were $21.8 million for the three months ended September 30, 2021, an increase of $4.3 million, or 24.6%, as compared to $17.5 million for the same quarter last year .

The increase was primarily attributable to a $4.2 million increase in employee compensation and benefits expenses mainly due to higher bonus expenses accrual and increased business insurance expenses, as well as $1.6 million increase in share-based compensation expense due to higher stock rewards price.

The increase was partially offset by a $0.7 million decrease in legal expense related to the government investigation, a $0.2 million decrease in marketing demo and trade shows costs as a result of the COVID-19 pandemic, and a $0.5 million decrease in audit and tax consulting fees during the current quarter.

Interest expense and other income (loss), net

Three Months Ended March 31, Nine Months Ended December 31,

2021 2020 Change 2021 2020 Change

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

Three Months Ended September 30,

2021 2020 Change

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

Interest expense and other income (loss), net $ (2,192) $ (549) $ (1,643) 299.3 %

Interest expense was primarily related to bank borrowings.

The increase in interest expense during the three and nine months ended March 31, 2021 as compared to the same period last year was primarily due to an increase in bank borrowings, partially offset by an interest refund from the Chinese government in the JV Company in the same period last year.

Interest expense increased by $0.5 million during the three months ended September 30, 2021 as compared to the same period last year was primarily due to an increase in bank borrowings, as well as an interest refund from the Chinese government in 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 and nine months ended March 31, 2021 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.

Interest income and others, net decreased by $1.1 million during the three months ended September 30, 2021 as compared to the same period last year was primarily due to lower foreign currency exchange gains as a result of the depreciation of RMB against USD.

Income tax expense

Three Months Ended March 31, Nine Months Ended March 31,

2021 2020 Change 2021 2020 Change

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

Income tax expense (benefit) $ 1,014 $ (1,015) $ 2,029 (199.9) % $ 2,694 $ (37) $ 2,731 (7,381.1) %

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 benefit.

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 benefit of 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 $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 $1.3 million discrete tax benefit, a $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 primarily 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 7.4% 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.

Three Months Ended September 30,

2021 2020 Change

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

Income tax expense $ 1,320 $ 1,011 $ 309 30.6 %

The Company recognized income tax expense of approximately $1.3 million and $1.0 million for the three months ended September 30, 2021 and 2020, respectively.

The income tax expense of $1.3 million for the three months ended September 30,

2021 included a $.09 million discrete tax expense.

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

Excluding the discrete income tax items, the effective tax rate for the three months ended September 30, 2021 and 2020 was 5.4% and 10.7%, respectively.

The changes in the effective tax rate and tax expense between the periods resulted primarily from the Company reporting pretax book income of $22.8 million for the three months ended September 30, 2021 as compared to a pretax book income of $9.8 million for the three months ended September 30, 2020.

Liquidity and Capital Resources

1 unchanged sentence

To date, we finance our operations and capital expenditures primarily through funds generated from operations and borrowings under our term loans, financing lease and other debt agreements.

In October 2019, our subsidiary in China entered into a line of credit facility with Bank of Communications Limited in China.

On August 18, 2021, Jireh entered into a term loan agreement with a financial institution (the "Bank") in an amount up to $45.0 million for the purpose of expanding and upgrading the Company’s fabrication facility located in Oregon.

The obligation under the loan agreement is secured by substantially all assets of Jireh and guaranteed by the Company.

The agreement has a 5.5 year term and matures on February 16, 2027.

Jireh is required to make consecutive quarterly payments of principal and interest.

The loan accrues interest based on adjusted LIBOR plus the applicable margin based on the outstanding balance of the loan.

This agreement contains customary restrictive covenants and includes certain financial covenants that require the Company to maintain.

As of September 30, 2021, there was no outsta nding balance under the loan.

On 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.

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.

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 wa s no ou tstanding 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.

In September 2021, this line of credit was renewed with maximum borrowings up to RMB 140.0 million with the same terms and a maturity date of September 18, 2022.

As of September 30, 2021, there was no outstanding balance under the loan.

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

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

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

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 wa s no ou tstanding balance under the loan.

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.

The RMB 72.0 million consists of RMB 27.0 million for trade borrowings with a maturity date of December 31, 2021, and RMB 45.0 million for working capital borrowings or trade borrowings with a maturity date of September 13, 2022.

As of September 30, 2021, there was no outstanding balance under the loan.

On August 9, 2019, one of the Company's wholly-owned subsidiaries (the "Borrower") entered into a factoring agreement with the Hongkong and Shanghai Banking Corporation Limited ("HSBC"), whereby the Borrower assigns certain of its accounts receivable with recourse.

This factoring agreement allows the Borrower to borrow up to 70% of the net amount of its eligible accounts receivable of the Borrower with a maximum amount of $30.0 million.

The interest rate is based on one month London Interbank Offer Rate ("LIBOR") plus 1.75% per annum.

We are the guarantor for this agreement.

We are accounting for this transaction as a secured borrowing under the Transfers and Servicing of Financial Assets guidance.

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 three and nine months ended March 31, 2021, the Borrower borrowed $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 Borrower had unused credit of approximately $30.0 million.

On August 11, 2021, the Borrower signed an agreement with HSBC to decrease the borrowing maximum amount to $8.0 million with certain financial covenants required.

Other terms remain the same.

As of September 30, 2021, the Borrower was in compliance with these covenants.

As of September 30, 2021, there was no outstanding balance and the Company had unused credit of approxim ately $8.0 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 March 31, 2021.

As of March 31, 2021, the outstanding balance of the term loa n wa s $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 our fabrication facility located in Oregon.

The obligation under the credit agreement is secured by substantially all assets of Jireh and guaranteed by us.

In August 2021, Jireh signed an amendment of this loan with the Bank to modify the financial covenants requirement to align with the new term loan agreement entered into on August 18, 2021 discussed above.

The amendment was accounted for as a debt modification and no gain or loss

was recognized.

The Company was in compliance with these covenants as of September 30, 2021.

As of September 30, 2021, the outstanding balance of the term loa n was $14.8 million.

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.

2 unchanged sentences

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 March 31, 2021.

As of March 31, 2021, the outstanding balance of the term loan wa s $11.2 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.

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 amendment was accounted for as a debt modification and no gain or loss was recognized.

The Company was in compliance with these covenants as of September 30, 2021.

As of September 30, 2021, the outstanding balance of the term loan was $7.5 million.

The amount and timing of any repurchases under the Repurchase Program depend on a number of factors, including but not limited to, the trading price, volume and availability of our common shares.

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

We did not repurchase any shares pursuant to the Repurchase Plan during the nine months ended March 31, 2021.

We did not repurchase any shares pursuant to the Repurchase Plan during the three months ended September 30, 2021.

Since the inception of the program, we repurchased an aggregate of 6,784,648 shares for a total cost of $67.3 million, at an average price of $9.92 per share, excluding fees and related expenses.

As of March 31, 2021, 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.

We had $13.4 million remained available under the Repurchase Program as of March 31, 2021.

As of September 30, 2021, of the 6,784,648 repurchased shares, 161,145 shares with a weighted average repurchase price of $10.13 per share, were reissued at an average price of $5.19 per share pursuant to option exercises and vested restricted share units.

We had $13.4 million remained available under the Repurchase Program as of September 30, 2021.

We believe that our current cash and cash equivalents and cash flows from operations will be sufficient to meet our anticipated cash needs, including working capital and capital expenditures, for at least the next twelve months.

8 unchanged sentences

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

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

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 agrees to transfer title of its assembly and testing equipment to the Lenders, and the Lenders lease such equipment to the JV Company under a five-year lease arrangement, pursuant to which the JV Company makes quarterly lease payments to the Lenders consisting of principal and interest based on a repayment schedule mutually agreed by the parties.

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.

3 unchanged sentences

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 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.

1 unchanged sentence

Other terms of this agreement remain the same.

As of March 31, 2021, the outstanding balance of the Lease Financing was approxima tely $33.1 million b ased on the currency exchange rate as of March 31, 2021.

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 balance under the loan.

As of September 30, 2021, the outstanding balance of the Lease Financ ing of 163.0 million R MB (equivalent of $25.2 million based on the currency exchange rate as of September 30, 2021) was recorded under short-term and long-term finance lea se liabilities.

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 200.0 million (approximately $29.8 million based on currency exchange rate between RMB and U.S.

1 unchanged sentence

The loan will mature on February 20, 2025.

The JV Company drew down RMB 190

million and RMB 10 million in March 2019 and December 2019, respectively.

The loan withdraw window expired on February 28, 2020.

The JV Company drew down RMB 190.0 million and RMB 10.0 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%.

1 unchanged sentence

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

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

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

This loan is secured by the buildings and certain equipment owned by the JV Company with a carrying value of $88.1 million as of September 30, 2021.

As a condition of the loan arrangement, RMB 14.0 million (approximately $2.0 million) of cash is held as restricted cash by 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 l oan was 189 million RMB (equivalent of $28.8 million based on the currency exchange rate as of March 31, 2021).

As of September 30, 2021, the outstanding balance of the loan was RMB 184.0 million (equivalent of $28.5 million based on th e currency exchange rate as of September 30, 2021).

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 obligation under the loan agreement is secured by certain assets of the JV Company with a carrying value of $111.7 million as of September 30, 2021.

The JV Company is required to 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 March 21 and September 21 each year.

As of March 31, 2021, 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.

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 borrowed $11.9 million at a fixed interest rate of 2.7% per annum.

As of March 31, 2021, the total outstanding balance under the loan was $14.9 million which included RMB 20 million or $3.0 million borrowed during the three months ended June 30, 2020.

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

As of September 30, 2021, the outstanding balance of the loan was $19.2 million .

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

1 unchanged sentence

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 on China one-year loan prime rate ("LPR") plus 1.3%.

The obligation under the loan agreement is secured by certain assets of the JV Company with a carrying value of $111.7 million as of September 30, 2021.

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 250.0 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 wa s $35.8 million.

As of September 30, 2021, the outstanding balance of the loan was $34.1 million.

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

1 unchanged sentence

Dollar on November 13, 2020.

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

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 an interest rate of 5.25% per annum.

As of March 31, 2021, the outstanding balance of this loan was $7.6 million .

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 September 30, 2021, the outstanding balance of this loan was $7.7 million .

On April 19, 2021, the JV Company entered into a loan agreement with China Everbright Bank in China to borrow a maximum of RMB 100 million.

The borrowing can be in RMB or U.S.

Dollar (“USD”).

The loan consists of RMB 50 million for working capital borrowings in Chinese yuan and RMB 50 million for borrowing in USD.

The loan is collateralized by eligible accounts receivable.

On April 19, 2021, the JV Company borrowed RMB 50.0 million, or $7.7 million based on the currency exchange rate between RMB and USD on April 19, 2021, at an interest rate of 5.1% per annum.

The interest payments are due quarterly with the entire principal due no later than May 19, 2022.

On June 16, 2021 and June 24, 2021, the JV Company borrowed $4.2 million and $3.5 million at interest rate of 2.7% per annum, and repaid in full during the quarter ended September 30, 2021.

On August 17, 2021 and September 22, 2021, the JV Company also borrowed $4.2 million and $3.4 million at interest rate of 2.7% per annum, with principal due on November 9, 2021 and December 12, 2021, respectively.

As of September 30, 2021, the total outstanding balance of these loans was $15.3 million.

On June 29, 2021, the JV Company entered into a P1Y-year loan agreement with China CITIC Bank in China to borrow a maximum of $7.7 million.

Interest payments are due on the 20th of each quarter commencing on September 20, 2021, and the

entire principal is due on June 29, 2022.

As of September 30, 2021, the outstanding balance of this loan was $7.7 million at an interest rate of 3.49% per annum.

Cash, cash equivalents and restricted cash

As of March 31, 2021 and June 30, 2020, we h ad $194.5 million a nd $162.7 million of cash, cash equivalents and restricted cash, respectively.

As of September 30, 2021 and June 30, 2021, we h ad $255.0 million a nd $204.8 million of cash, cash equivalents and restricted cash, respectively.

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

1 unchanged sentence

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

Nine Months Ended March 31,

Three Months Ended September 30,

(in thousands)

1 unchanged sentence

Net cash used in investing activities (23,911) (11,337)

Net cash provided by (used in) financing activities (16,323) 16,494

Net cash used in financing activities (6,535) (4,186)

Effect of exchange rate changes on cash, cash equivalents and restricted cash (11) 1,997

1 unchanged sentence

Cash flows from operating activities

Net cash provided by operating activities of $84.5 million for the nine months ended March 31, 2021 resulted primarily from net income of $36.3 million and non-cash expenses of $50.1 million, partially offset by net changes in assets and liabilities using cash of $1.9 million.

Net cash provided by operating activities of $80.6 million for the three months ended September 30, 2021 resulted primarily from net income of $21.4 million and non-cash expenses of $19.0 million, partially offset by net changes in assets and liabilities using cash of $40.1 million.

The non-cash expenses of $19.0 million primarily included $13.7 million of depreciation and amortization expenses, $4.6 million of share-based compensation expense, and $0.7 million of deferred income taxes.

The net changes in assets and liabilities of $1.9 million were primarily due to a $20.4 million increase in accounts receivable as a result of higher revenue, a $9.6 million increase in inventories due to a continued ramp of the JV Company, a $2.3 million increase in other current and long-term assets due to increase in advance payments to vendors, and a $0.2 million decrease in accounts payable due to timing of payments, partially offset by a $29.6 million increase in accrued and other liabilities and a $1.1 million increase in income taxes payable.

Net cash used in operating activities of $22.0 million for the nine months ended March 31, 2020 resulted primarily from net loss of $16.3 million and net changes in assets and liabilities of $3.4 million, partially offset by non-cash expenses of $41.7 million.

The non-cash expenses of $41.7 million primarily included $33.5 million of depreciation and amortization expenses, $7.7 million of share-based compensation expense, $0.6 million of impairment of our investment in a privately-held start-up company and $0.2 million of gain on disposal of property and equipment.

The net changes in assets and liabilities of $3.4 million were primarily due to a $14.7 million increase in inventories, a $3.4 million decrease in accounts payable due to timing of payment, and $1.3 million decrease in income taxes payable, partially offset by a $6.8 million decrease in accounts receivable from timing of billings and collection of payments as well as lower revenue, a $2.7 million decrease in other current and long term assets due to decrease in advance payments to vendors, and a $6.3 million increase in accrued and other liabilities.

The net changes in assets and liabilities of $40.1 million were primarily due to a $52.9 million increase in accrued and other liabilities, a $2.1 million increase in accounts payable due to timing of payments, and a $0.4 million increase in income taxes payable, partially offset by a $3.5 million increase in accounts receivable as a result of higher revenue, a $9.1 million increase in inventories due to a continued ramp of the JV Company, and a $2.6 million increase in other current and long-term assets due to increase in advance payments to suppliers.

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

Cash flows from investing activities

Net cash used in investing activities of $40.4 million fo r the nine months ended March 31, 2021 was primarily attributable to $40.5 million purchases of property and equipment, including $15.6 million purc hased by the JV Company.

Net cash used in investing activities of $47.7 million for the nine months ended March 31, 2020 was primarily attributable to $49.2 million purchases of property and equipment, including $15.8 million purchased by the JV Company, partially offset by $1.3 million government grant related to equipment in the JV Company and $0.3 million of proceeds from sale of property and equipment.

Net cash used in investing activities of $23.9 million fo r the three months ended September 30, 2021 was primarily attributable to purchases of property and equipment of $8.4 million for the JV Company and purchases of property and equipment of $16.6 million for other than the JV Company, net of government grants of $1.1 million.

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.

Cash flows from financing activities

Net cash used in financing activities of $16.3 million for the nine months ended March 31, 2021 was primarily attributable to $44.1 million in repayments of borrowings, $12.3 million in payment of finance lease obligations, and $6.2 million in common shares acquired to settle withholding tax related to vesting of restricted stock units, partially offset by $42.9 million proceeds from borrowings and $3.3 million of proceeds from exercise of stock options and ESPP.

Net cash provided by financing activities of $16.5 million for the nine months ended March 31, 2020 was primarily attributable to $49.1 million proceeds from borrowings and $1.7 million of proceeds from exercise of stock options and ESPP, partially offset by $25.8 million in repayments of borrowings, $7.2 million in payment of finance lease obligations, and $1.4 million in common shares acquired to settle withholding tax related to vesting of restricted stock units.

Net cash used in financing activities of $6.5 million for the three months ended September 30, 2021 was primarily attributable to $9.7 million in repayments of borrowings, $4.2 million in payment of finance lease obligations, and $0.2 million in common shares acquired to settle withholding tax related to vesting of restricted stock units, partially offset by $7.6 million proceeds from borrowings.

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

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 March 31, 2021, we had no material off-balance sheet arrangements as defined in Regulation S-K 303(a)(4)(ii) arrangements.

As of September 30, 2021, 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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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in the market risks previously disclosed in Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," of our Annual Report on Form 10-K for the year ended June 30, 2020, filed with the SEC on September 2, 2020.

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