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) September 30, 2021 June 30, 2021 ASSETS Current assets: Cash and cash equivalents $ 252,453 $ 202,412 Restricted cash 342 233 Accounts receivable, net 39,317 35,789 Inventories 163,437 154,293 Other current assets 17,518 14,595 Total current assets 473,067 407,322 Property, plant and equipment, net 441,279 436,977 Operating lease right-of-use assets, net 33,437 34,660 Intangible assets, net 12,570 13,410 Deferred income tax assets 5,216 5,167 Restricted cash - long-term 2,168 2,168 Other long-term assets 23,941 18,869 Total assets $ 991,678 $ 918,573 LIABILITIES AND EQUITY Current liabilities: Accounts payable $ 81,681 $ 80,699 Accrued liabilities 92,207 69,494 Income taxes payable 3,004 2,604 Short-term debt 57,955 58,030 Finance lease liabilities 16,722 16,724 Operating lease liabilities 5,537 5,679 Total current liabilities 257,106 233,230 Long-term debt 75,991 77,990 Income taxes payable - long-term 1,332 1,319 Deferred income tax liabilities 3,136 2,448 Finance lease liabilities - long-term 8,516 12,698 Operating lease liabilities - long-term 29,342 30,440 Other long-term liabilities 74,265 44,123 Total liabilities 449,688 402,248 Commitments and contingencies (Note 10) Equity: Preferred shares, par value $ 0.002 per share: Authorized: 10,000 shares; issued and outstanding: none at September 30, 2021 and June 30, 2021 — — Common shares, par value $ 0.002 per share: Authorized: 100,000 shares; issued and outstanding: 32,996 shares and 26,373 shares, respectively at September 30, 2021 and 32,975 shares and 26,350 shares, respectively at June 30, 2021 66 66 Treasury shares at cost: 6,623 shares at September 30, 2021 and 6,625 shares at June 30, 2021 ( 66,052 ) ( 66,064 ) Additional paid-in capital 264,321 259,993 Accumulated other comprehensive income 2,229 2,315 Retained earnings 200,307 176,895 Total Alpha and Omega Semiconductor Limited shareholder's equity 400,871 373,205 Noncontrolling interest 141,119 143,120 Total equity 541,990 516,325 Total liabilities and equity $ 991,678 $ 918,573 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 September 30, 2021 2020 Revenue $ 187,035 $ 151,551 Cost of goods sold 122,468 109,028 Gross profit 64,567 42,523 Operating expenses Research and development 17,812 14,691 Selling, general and administrative 21,806 17,505 Total operating expenses 39,618 32,196 Operating income 24,949 10,327 Interest expense and other income (loss), net ( 2,192 ) ( 549 ) Income before income taxes 22,757 9,778 Income tax expense 1,320 1,011 Net income including noncontrolling interest 21,437 8,767 Net loss attributable to noncontrolling interest ( 1,987 ) ( 807 ) Net income attributable to Alpha and Omega Semiconductor Limited $ 23,424 $ 9,574 Net income per common share attributable to Alpha and Omega Semiconductor Limited Basic $ 0.89 $ 0.38 Diluted $ 0.85 $ 0.36 Weighted average number of common shares attributable to Alpha and Omega Semiconductor Limited used to compute net income per share Basic 26,365 25,340 Diluted 27,638 26,314 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 September 30, 2021 2020 Net income including noncontrolling interest $ 21,437 $ 8,767 Other comprehensive income (loss), net of tax Foreign currency translation adjustment ( 100 ) 5,703 Comprehensive income 21,337 14,470 Less: Noncontrolling interest ( 2,001 ) 1,915 Comprehensive income attributable to Alpha and Omega Semiconductor Limited $ 23,338 $ 12,555 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, June 30, 2020 $ 64 $ ( 66,184 ) $ 246,103 $ ( 5,127 ) $ 118,833 $ 293,689 $ 138,199 $ 431,888 Reissuance of treasury stock upon exercise of common stock options and release of RSUs — 13 — — ( 13 ) — — — Withholding tax on restricted stock units — — ( 412 ) — — ( 412 ) — ( 412 ) Share-based compensation — — 2,276 — — 2,276 — 2,276 Restricted stock units settlement in connection with service — — 1,000 — — 1,000 — 1,000 Net income (loss) including noncontrolling interest — — — — 9,574 9,574 ( 807 ) 8,767 Foreign currency translation adjustment — — — 2,981 — 2,981 2,722 5,703 Balance, September 30, 2020 $ 64 $ ( 66,171 ) $ 248,967 $ ( 2,146 ) $ 128,394 $ 309,108 $ 140,114 $ 449,222 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, 2021 $ 66 $ ( 66,064 ) $ 259,993 $ 2,315 $ 176,895 $ 373,205 $ 143,120 $ 516,325 Reissuance of treasury stock upon exercise of common stock options and release of RSUs — 12 — — ( 12 ) — — — Withholding tax on restricted stock units — — ( 174 ) — — ( 174 ) — ( 174 ) Share-based compensation — — 4,502 — — 4,502 — 4,502 Net income (loss) including noncontrolling interest — — — — 23,424 23,424 ( 1,987 ) 21,437 Foreign currency translation adjustment — — — ( 86 ) — ( 86 ) ( 14 ) ( 100 ) Balance, September 30, 2021 $ 66 $ ( 66,052 ) $ 264,321 $ 2,229 $ 200,307 $ 400,871 $ 141,119 $ 541,990 See accompanying notes to these condensed consolidated financial statements. 4 Table of Contents ALPHA AND OMEGA SEMICONDUCTOR LIMITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited, in thousands) Three Months Ended September 30, 2021 2020 Cash flows from operating activities Net income including noncontrolling interest $ 21,437 $ 8,767 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 13,722 12,489 Share-based compensation expense 4,635 2,876 Deferred income taxes, net 638 17 Loss on disposal of property and equipment 28 47 Changes in operating assets and liabilities: Accounts receivable ( 3,528 ) ( 13,044 ) Inventories ( 9,145 ) ( 2,172 ) Other current and long-term assets ( 2,561 ) ( 1,011 ) Accounts payable 2,081 1,930 Income taxes payable 414 749 Accrued and other liabilities 52,886 ( 800 ) Net cash provided by operating activities 80,607 9,848 Cash flows from investing activities Purchases of property and equipment excluding JV Company ( 16,642 ) ( 7,944 ) Purchases of property and equipment in JV Company ( 8,351 ) ( 3,393 ) Government grant related to equipment 1,082 — Net cash used in investing activities ( 23,911 ) ( 11,337 ) Cash flows from financing activities Withholding tax on restricted stock units ( 174 ) ( 412 ) Proceeds from borrowings 7,550 11,300 Repayments of borrowings ( 9,735 ) ( 11,085 ) Principal payments on finance leases ( 4,176 ) ( 3,989 ) Net cash used in financing activities ( 6,535 ) ( 4,186 ) Effect of exchange rate changes on cash, cash equivalents and restricted cash ( 11 ) 1,997 Net increase (decrease) in cash, cash equivalents and restricted cash 50,150 ( 3,678 ) Cash, cash equivalents and restricted cash at beginning of period 204,813 162,704 Cash, cash equivalents and restricted cash at end of period $ 254,963 $ 159,026 Supplemental disclosures of non-cash investing and financing information: Property and equipment purchased but not yet paid $ 11,285 $ 6,877 See accompanying notes to these condensed consolidated financial statements. 5 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, 2021. 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 months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2022 or any other interim period. The consolidated balance sheet at June 30, 2021 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, 2021. 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 condensed 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 September 30, 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 completed the ramp on 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 increasing demand of PC related products, there is no guarantee that this trend will continue, and such increasing demand may 6 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) discontinue or decline as government authorities relax and terminate 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 full extent of the future impact of the COVID-19 pandemic on the Company’s operational and financial performance is currently uncertain and will depend on many factors outside the Company’s 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 or renewed imposition of protective public safety measures; the continuing disruption of global supply chain affecting the semiconductor industry; and the impact of the pandemic on the global economy and demand for consumer products. 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, 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. The Company elected to combine its lease and non-lease components as a single lease component for all asset classes. 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 product revenue at a point in time when product is shipped to the customer, net of estimated stock rotation returns and price adjustments that it expects to provide to certain distributors. The Company presents revenue net of sales taxes and any similar assessments. Our standard payment terms range from 30 to 90 days. The Company sells its products primarily to distributors, who in turn sell the products globally to various end customers. The Company allows stock rotation returns from certain distributors. Stock rotation returns are governed by contract and are limited to a specified percentage of the monetary value of products purchased by distributors during a specified period. The Company records an allowance for stock rotation returns based on historical returns and individual distributor agreements. The Company also provides special pricing to certain distributors, primarily based on volume, to encourage resale of the Company’s products. Allowance for price adjustments is recorded against accounts receivable and the provision for stock rotation rights is included in accrued liabilities on the condensed consolidated balance sheets. The Company’s performance obligations relate to contracts with a duration of less than one year. The Company elected to apply the practical expedient provided in ASC 606, “Revenue from Contracts with Customers”. Therefore, the Company is not 7 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) required to disclose the aggregate amount of transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period. The Company recognizes the incremental direct costs of obtaining a contract, which consist of sales commissions, when control over the products they relate to transfers to the customer. Applying the practical expedient, the Company recognizes commissions as expense when incurred, as the amortization period of the commission asset the Company would have otherwise recognized is less than one year. Packaging and testing services revenue is recognized at a point in time 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 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. The Employee Share Purchase Plan (the “ESPP”) is accounted for at fair value on the date of grant using the Black-Scholes option valuation model. 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 September 30, 2021 and June 30, 2021, the amount of restricted cash was $ 2.5 million and $ 2.4 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 months ended September 30, 2021, the Company reduced the carrying value of property, plant and equipment by $ 1.1 million. During the three months ended September 30, 2020, the Company reduced interest expense by $ 0.8 million , and operating expenses by $ 1.9 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 during the March and June 2020 quarters. These factors included continued operating losses, a decrease in the 8 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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 involve net sales, cost of goods sold, operating expenses, working capital, capital expenditures, income tax rates, long-term growth rates that appropriately reflect the risks inherent in the future cash flow stream and terminal value. 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 is recoverable as of June 30, 2021. 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. Recently Adopted Accounting Standards 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. ASU 2020-01 had no material impact on the Company's consolidated financial statements. 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 Company adopted ASU 2019-12 as of July 1, 2021. ASU 2019-12 had no material impact on the Company's consolidated financial statements. 9 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 2. Net Income Per Common Share Attributable to Alpha and Omega Semiconductor Limited The following table presents the calculation of basic and diluted net income per share attributable to common shareholders: Three Months Ended September 30, 2021 2020 (in thousands, except per share data) Numerator: Net income attributable to Alpha and Omega Semiconductor Limited $ 23,424 $ 9,574 Denominator: Basic: Weighted average number of common shares used to compute basic net income per share 26,365 25,340 Diluted: Weighted average number of common shares used to compute basic net income per share 26,365 25,340 Effect of potentially dilutive securities: Stock options, RSUs and ESPP shares 1,273 974 Weighted average number of common shares used to compute diluted net income per share 27,638 26,314 Net income per share attributable to Alpha and Omega Semiconductor Limited: Basic $ 0.89 $ 0.38 Diluted $ 0.85 $ 0.36 The following potential dilutive securities were excluded from the computation of diluted net income per share as their effect would have been anti-dilutive: Three Months Ended September 30, 2021 2020 (in thousands) Employee stock options and RSUs 510 124 ESPP 33 233 Total potential dilutive securities 543 357 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. Summarized below are individual customers whose revenue or accounts receivable balances were 10% or higher than the respective total consolidated amounts: 10 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Three Months Ended September 30, Percentage of revenue 2021 2020 Customer A 27.4 % 28.8 % Customer B 36.6 % 33.1 % September 30, 2021 June 30, 2021 Percentage of accounts receivable Customer A 16.0 % 12.4 % Customer B 17.3 % 22.1 % Customer C 18.2 % 21.9 % 11 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 4. Balance Sheet Components Accounts receivable, net: September 30, 2021 June 30, 2021 (in thousands) Accounts receivable $ 53,017 $ 48,234 Less: Allowance for price adjustments ( 13,670 ) ( 12,415 ) Less: Allowance for doubtful accounts ( 30 ) ( 30 ) Accounts receivable, net $ 39,317 $ 35,789 Inventories: September 30, 2021 June 30, 2021 (in thousands) Raw materials $ 71,881 $ 68,900 Work in-process 72,969 68,824 Finished goods 18,587 16,569 $ 163,437 $ 154,293 Other current assets: September 30, 2021 June 30, 2021 (in thousands) VAT receivable $ 2,542 $ 1,539 Other prepaid expenses 2,768 1,465 Prepaid insurance 3,453 2,615 Prepaid maintenance 2,251 1,670 Prepayment to supplier 1,434 2,540 Prepaid income tax 2,233 2,221 Interest receivable 2,206 2,207 Customs deposit 561 270 Other receivables 70 68 $ 17,518 $ 14,595 12 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Property, plant and equipment, net: September 30, 2021 June 30, 2021 (in thousands) Land $ 4,877 $ 4,877 Building 71,576 71,454 Manufacturing machinery and equipment 519,732 515,320 Equipment and tooling 27,500 27,017 Computer equipment and software 41,949 41,518 Office furniture and equipment 3,941 3,814 Leasehold improvements 75,178 74,733 Land use rights 9,317 9,319 754,070 748,052 Less: accumulated depreciation ( 360,510 ) ( 348,749 ) 393,560 399,303 Equipment and construction in progress 47,719 37,674 Property, plant and equipment, net $ 441,279 $ 436,977 Intangible assets, net: September 30, 2021 June 30, 2021 (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 ( 7,154 ) ( 6,314 ) 12,301 13,141 Goodwill 269 269 Intangible assets, net $ 12,570 $ 13,410 Estimated future minimum amortization expense of intangible assets is as follows (in thousands): Year ending June 30, 2022 (Remaining) $ 2,520 2023 3,286 2024 3,249 2025 3,246 $ 12,301 13 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Other long-term assets: September 30, 2021 June 30, 2021 (in thousands) Prepayments for property and equipment $ 20,099 $ 14,882 Investment in a privately held company 100 100 Customs deposit 1,146 1,120 Other long-term deposits 926 927 Office leases deposits 1,022 1,100 Other 648 740 $ 23,941 $ 18,869 Accrued liabilities: September 30, 2021 June 30, 2021 (in thousands) Accrued compensation and benefits $ 43,775 $ 32,756 Warranty accrual 2,824 2,795 Stock rotation accrual 3,782 3,917 Accrued professional fees 3,467 3,017 Accrued inventory 1,204 1,138 Accrued facilities related expenses 2,751 2,536 Accrued property, plant and equipment 8,473 8,688 Other accrued expenses 6,524 6,793 Customer deposit 17,137 7,139 ESPP payable 2,270 715 $ 92,207 $ 69,494 The activities in the warranty accrual, included in accrued liabilities, are as follows: Three Months Ended September 30, 2021 2020 (in thousands) Beginning balance $ 2,795 $ 709 Additions 139 71 Utilization ( 110 ) ( 73 ) Ending balance $ 2,824 $ 707 The activities in the stock rotation accrual, included in accrued liabilities, are as follows: Three Months Ended September 30, 2021 2020 (in thousands) Beginning balance $ 3,917 $ 3,358 Additions 701 3,016 Utilization ( 836 ) ( 2,631 ) Ending balance $ 3,782 $ 3,743 14 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Other long-term liabilities: September 30, 2021 June 30, 2021 (in thousands) Deferred payroll taxes $ 1,219 $ 1,219 Customer deposits 72,592 42,000 Other 454 904 Other long-term liabilities $ 74,265 $ 44,123 Customer deposits are payments received from customers for securing future product shipments. As of September 30, 2021, $ 57.0 million were from Customer A and Customer B, and $ 15.6 million were from other customers. As of June 30, 2021, $ 42.0 million were from Customer A and Customer B. 15 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 5. Bank Borrowings Short-term borrowings On June 29, 2021, the JV Company entered into a one-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. On April 19, 2021, the JV Company entered into a loan agreement with China Everbright Bank in China to borrow a maximum of Chinese Renminbi (“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 November 13, 2020, the JV Company entered into a one-year loan agreement with China Merchant Bank in China. The JV Company can borrow up to RMB 50.0 million, or $ 7.6 million, based on the currency exchange rate between RMB and U.S. Dollar on November 13, 2020. The loan's interest rates are based on the 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 September 30, 2021, the outstanding balance of this loan was $ 7.7 million . 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. 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 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. 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. 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 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. 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. Credit Facilities 16 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 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 balance sheets and summarized in the future minimum lease payment table for finance lease liabilities in Note 6. Long-term debt 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 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. 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 September 30, 2021, the outstanding balance of the loan was $ 34.1 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 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 on March 21 and September 21 each year. As of September 30, 2021, the outstanding balance of the loan was $ 19.2 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 200.0 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 190.0 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 %. 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 with a carrying value of $ 88.1 million as of September 30, 2021. As a condition of the loan arrangement, 14.0 million RMB (approximately $ 2.0 17 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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 September 30, 2021, the outstanding balance of the loan was 184.0 million R MB (equivalent of $ 28.5 million based on th e currency exchange rate as of September 30, 2021). On May 1, 2018, Jireh entered into a loan agreement with 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. 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. 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. 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 loan was $ 7.5 million. Maturities of short-term debt and long-term debt were as follows (in thousands): Year ending June 30, 2022 (Remaining) $ 56,278 2023 38,440 2024 24,335 2025 15,715 Total principal 134,768 Less: debt issuance costs ( 822 ) Total principal, less debt issuance costs $ 133,946 Short-term Debt Long-term Debt Total Principal amount $ 58,359 $ 76,409 $ 134,768 Less: debt issuance costs ( 404 ) ( 418 ) ( 822 ) Total debt, less debt issuance costs $ 57,955 $ 75,991 $ 133,946 18 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): Three Months Ended September 30, 2021 2020 Operating leases: Fixed rent expense $ 1,801 $ 1,688 Variable rent expense 298 203 Finance lease: Amortization of equipment 468 559 Interest 410 615 Short-term leases Short-term lease expenses 54 58 Total lease expenses $ 3,031 $ 3,123 19 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): September 30, 2021 June 30, 2021 Operating Leases : ROU assets associated with operating leases $ 33,437 $ 34,660 Finance Lease: Property, plant and equipment, gross $ 114,389 $ 114,404 Accumulated depreciation ( 96,809 ) ( 96,470 ) Property, plant and equipment, net $ 17,580 $ 17,934 Weighted average remaining lease term (in years) Operating leases 8.30 8.44 Finance lease 1.47 1.72 Weighted average discount rate Operating leases 4.68 % 4.67 % Finance lease 5.46 % 5.46 % Supplemental cash flow information related to the Company’s operating and finance lease is as follows (in thousands): Three Months Ended September 30, 2021 2020 Cash paid from amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 1,811 $ 1,642 Operating cash flows from finance lease $ 410 $ 615 Financing cash flows from finance lease $ 4,176 $ 3,989 Non-cash investing and financing information: Operating lease right-of-use assets obtained in exchange for lease obligations $ 164 $ 137 Future minimum lease payments are as follows as of September 30, 2021 (in thousands): Year ending June 30, Operating Leases Finance Leases The remainder of fiscal 2022 $ 5,481 $ 13,413 2023 6,132 13,050 2024 4,729 — 2025 3,765 — 2026 3,743 — Thereafter 18,849 — Total minimum lease payments 42,699 26,463 Less amount representing interest ( 7,820 ) ( 1,225 ) Total lease liabilities $ 34,879 $ 25,238 20 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 three months ended September 30, 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, 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 (“RSU”). As of September 30, 2021, approximately $ 13.4 million remained available under the Re purchase Program. Time-based Restric ted Stock Units ( “ TRSU ” ) The following table summarizes the Company's TRSU activities for the three months ended September 30, 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, 2021 1,053,524 $ 21.60 1.73 $ 32,016,594 Granted 52,500 $ 27.38 Vested ( 28,853 ) $ 16.48 Forfeited ( 25,125 ) $ 22.29 Nonvested at September 30, 2021 1,052,046 $ 22.01 1.56 $ 33,002,683 Market-based Restricted Stock Units ( “ MSU ” ) During the quarter ended September 30, 2018, the Company granted 1.3 million 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 the 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 Company recorded approximatel y $ 0.4 million and $ 0.2 million of expenses for MSUs during the three months ended September 30, 2021 and 2020, respectively. Performance-based Restricted Stock Units (“PRSUs”) In March each year since year 2017, the Company granted 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 goals were met. The Company recorded approximatel y $ 1.0 million and $ 0.4 million of expens e for these PRSUs during the three months ended September 30, 2021 and 2020, respectively. 21 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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. As of September 30, 2021 and June 30, 2021, the Company recorded $ 0.2 million and $ 0.1 million such expenses in the other current liabilities, respectively. During the three months ended September 30, 2021 and 2020 , the Company recorded $ 0.1 million and $ 0.6 million such non-cash compensation expense, respectively. As of September 30, 2021, the Company granted RSUs valued at $ 3.6 million to p articipants, which were fully vested due to achievement of certain objective measures. The following table summarizes the Company’s PRSUs activities for the three months ended September 30, 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, 2021 353,824 $ 22.69 1.74 $ 10,752,711 Forfeited ( 250 ) $ 16.22 Nonvested at September 31, 2021 353,574 $ 22.69 1.48 $ 11,091,616 Stock Options The Company did no t grant any stock options during the three months ended September 30, 2021 and 2020. The following table summarizes the Company's stock option activities for the three months ended September 30, 2021: Weighted Weighted Average Average Remaining Number of Exercise Price Contractual Aggregate Shares Per Share Term (in years) Intrinsic Value Outstanding at June 30, 2021 487,875 $ 7.99 2.32 $ 10,928,653 Outstanding at September 30, 2021 487,875 $ 7.99 2.07 $ 11,406,770 Options vested and expected to vest 487,875 $ 7.99 2.07 $ 11,406,770 Exercisable at September 30, 2021 487,875 $ 7.99 2.07 $ 11,406,770 Employee Share Purchase Plan (“ESPP”) The assumptions used to estimate the fair values of common shares issued under the ESPP were as follows: Three Months End September 30, 2021 Volatility rate 68.5 % Risk-free interest rate 0.1 % Expected term 1.3 years Dividend yield 0 % 22 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 September 30, 2021 2020 (in thousands) Cost of goods sold $ 569 $ 385 Research and development 1,043 1,080 Selling, general and administrative 3,023 1,411 $ 4,635 $ 2,876 As of September 30, 2021, total unrecognized compensation cost under the Company's equity plans w as $ 24.5 million, which is expected to be recognized over a weighted-average period of 1.9 years. 8. Income Taxes 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 $ 0.09 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. The Company files its income tax returns in the United States and in various foreign jurisdictions. The tax years 2001 to 2021 remain open to examination by U.S. federal and state tax authorities. The tax years 2013 to 2021 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 September 30, 2021, the gross amount of unrecognized tax benefits was approximately $ 7.7 million, of which $ 4.7 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. 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. 23 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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 not recorded any benefit related to the Altera Corporation Tax Court decision in any period through September 2021. The Company will continue to monitor ongoing developments and potential impact to its financial statements. 24 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 September 30, 2021 2020 (in thousands) Hong Kong $ 148,655 $ 125,508 China 32,840 23,263 South Korea 2,854 1,174 United States 2,305 1,456 Other countries 381 150 $ 187,035 $ 151,551 During the three months ended September 30, 2021, the Company corrected an immaterial error to reduce revenues in Hong Kong by $ 1.1 million, to increase the revenues in China and South Korea by $ 54,000 and $ 1.0 million, respectively, for the three months ended September 30, 2020. The following is a summary of revenue by product type: Three Months Ended September 30, 2021 2020 (in thousands) Power discrete $ 130,688 $ 119,375 Power IC 52,330 29,455 Packaging and testing services 4,017 2,721 $ 187,035 $ 151,551 25 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Long-lived assets, net consisting of property, plant and equipment and land use rights, net, as well as operating lease right-of-use assets, net by geographical area are as follows: September 30, 2021 June 30, 2021 (in thousands) China $ 353,844 $ 350,387 United States 118,160 118,756 Other countries 2,712 2,494 $ 474,716 $ 471,637 10. Commitments and Contingencies Purchase Commitments As of September 30, 2021 and June 30, 2021, the Company had approximately $ 86.7 million and $ 81.8 million, respectively, of outstanding purchase commitments primarily for purchases of semiconductor raw materials, wafers, spare parts, packaging and testing services and others. As of September 30, 2021 and June 30, 2021, the Company had approximately $ 128.2 million and $ 90.0 million, primarily for the Jireh and JV Company, respectively, of capital commitments for the purchase of property and equip ment. 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. 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 26 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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, 2020 and Defendants filed their reply brief on January 25, 2021. On September 27, 2021, the Court entered an opinion and order granting Defendants’ motion and dismissing the amended complaint in its entirety. In so doing, the Court found, among other things, that Plaintiff failed adequately to allege that any of AOS’s indirect sales to Huawei were illegal, and therefore none of the Company’s statements regarding its positive performance or its efforts to contend with a difficult geopolitical climate and trade tensions could plausibly be seen as “inaccurate, incomplete, or misleading.” The Court’s order allowed Plaintiff an opportunity to file a second amended complaint by October 27, 2021, attempting to cure the various deficiencies, barring which the matter would be dismissed with prejudice. As of that date, however, no such filing was made and the Company anticipates that the matter will be dismissed with prejudice. 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 September 30, 2021 and June 30, 2021. 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. 27