UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(MARK ONE)

x☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~December 31, 2017~~September 30, 2020

o☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

Commission file number 001-34717

__________________________

Alpha and Omega Semiconductor Limited

(Exact name of Registrant as Specified in its Charter)



Bermuda	77-0553536
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification Number)

Clarendon House, 2 Church Street

HamiltonHM 11, Bermuda

(Address of Principal Registered

Offices including Zip Code)

~~(408)~~ (408) 830-9742

(Registrant's Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx☒ No o☐

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesx☒ No o☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filero	☐	Accelerated filerx	☒	Non-accelerated filero	☐
				(Do not check if a smaller reporting company)
Smaller reporting companyo	☐	Emerging growth companyo	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Shares	AOSL	The NASDAQ Global Select Market

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o☐ No x☒

Number of common shares outstanding as of ~~January 31, 2018: 23,948,076~~October 23, 2020: 25,487,415

Alpha and Omega Semiconductor Limited

Form 10-Q

Fiscal First Quarter Ended ~~December 31, 2017~~September 30, 2020

TABLE OF CONTENTS



		Page
Part I.	FINANCIAL INFORMATION
Item 1.	Financial Statements:	1
	Condensed Consolidated Balance Sheets as of ~~December 31, 2017~~September 30, 2020 and June 30, ~~2017~~2020 (Unaudited)	1
	Condensed Consolidated Statements of Operations for the Three ~~and Six~~ Months Ended ~~December 31, 2017~~September 30, 2020 and ~~2016~~2019 (Unaudited)	23
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three ~~and Six~~ Months Ended ~~December 31, 2017~~September 30, 2020 and ~~2016~~2019 (Unaudited)	3
	~~Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2017 and 2016 (Unaudited)~~	4
	Condensed Consolidated Statements of Changes in Equity for the Three Months Ended September 30, 2020 and 2019 (Unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2020 and 2019 (Unaudited)	6
	Notes to Condensed Consolidated Financial Statements (Unaudited)	57
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	1929
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3142
Item 4.	Controls and Procedures	3142
Part II.	OTHER INFORMATION
Item 1.	Legal Proceedings	3243
Item 1A.	Risk Factors	3243
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3445
Item 3.	Defaults Upon Senior Securities	3546
Item 4.	Mine Safety Disclosures	3546
Item 5.	Other Information	3546
Item 6.	Exhibits	3647
	Signatures	3748

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

													ALPHA AND OMEGA SEMICONDUCTOR LIMITED	CONDENSED CONSOLIDATED BALANCE SHEETS	(Unaudited, in thousands except par value per share)
	December 31, 2017			June 30, 2017			September 30, 2020			June 30, 2020
ASSETS
Current assets:
Cash and cash equivalents	$	146,209		$	115,708		$	154,698		$	158,536
Restricted cash	192			221			2,274			2,190
Accounts receivable, net	24,283			28,410			26,317			13,272
Inventories	85,672			76,254			137,700			135,528
Other current assets	8,942			4,883			10,479			8,807
Total current assets	265,298			225,476			331,468			318,333
Property, plant and equipment, net	193,253			148,191			421,642			412,340
Operating lease right-of-use assets, net							32,407			32,948
Intangible assets, net	14,599			282			15,930			16,770
Deferred income tax assets - long-term	4,600			4,594
Deferred income tax assets							4,774			4,766
Restricted cash - long-term							2,054			1,978
Other long-term assets	42,801			19,865			3,473			5,804
Total assets	$	520,551		$	398,408		$	811,748		$	792,939
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	70,521		$	63,134		$	87,604		$	86,181
Accrued liabilities	51,238			28,386			55,875			54,986
Income taxes payable	1,280			1,748			2,100			1,360
Deferred margin	1,386			814
Capital leases	846			828
Short-term debt							32,746			30,114
Finance lease liabilities							15,844			15,258
Operating lease liabilities							4,095			4,159
Total current liabilities	125,271			94,910			198,264			192,058
Long-term debt							99,970			99,775
Income taxes payable - long-term	941			922			912			903
Deferred income tax liabilities	442			2,659			521			496
Capital leases - long-term	449			866
Finance lease liabilities - long-term							23,913			26,842
Operating lease liabilities - long-term							29,813			30,254
Other long-term liabilities	396			502			9,133			10,723
Total liabilities	127,499			99,859			362,526			361,051
Commitments and contingencies (Note 10)
Equity:
Preferred shares, par value $0.002 per share:
Authorized: 10,000 shares, issued and outstanding: none at December 31, 2017 and June 30, 2017	—			—
Authorized: 10,000 shares; issued and outstanding: none at September 30, 2020 and June 30, 2020							0			0
Common shares, par value $0.002 per share:
Authorized: 100,000 shares, issued and outstanding: 29,856 shares and 23,908 shares, respectively at December 31, 2017 and 29,600 shares and 23,992 shares, respectively at June 30, 2017	60			59
Treasury shares at cost, 5,948 shares at December 31, 2017 and 5,608 shares at June 30, 2017	(55,799		)	(49,836		)
Authorized: 100,000 shares; issued and outstanding: 32,021 shares and 25,383 shares, respectively at September 30, 2020 and 31,944 shares and 25,305 shares, respectively at June 30, 2020							64			64
Treasury shares at cost: 6,638 shares at September 30, 2020 and 6,639 shares at June 30, 2020							(66,171		)	(66,184		)
Additional paid-in capital	212,771			206,332			248,967			246,103
Accumulated other comprehensive income	2,455			306
Accumulated other comprehensive loss							(2,146		)	(5,127		)
Retained earnings	120,023			113,909			128,394			118,833
Total Alpha and Omega Semiconductor Limited shareholder's equity	279,510			270,770			309,108			293,689
Noncontrolling interest	113,542			27,779
Total equity	393,052			298,549
Total liabilities and equity	$	520,551		$	398,408

Table of Contents

ALPHA AND OMEGA SEMICONDUCTOR LIMITED

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands except par value per share)



Noncontrolling interest	140,114		138,199
Total equity	449,222		431,888
Total liabilities and equity	$	811,748	$	792,939

See accompanying notes to these condensed consolidated financial statements.

Table of Contents

ALPHA AND OMEGA SEMICONDUCTOR LIMITED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands except per share data)



	Three Months Ended December 31,						Six Months Ended December 31,						Three Months Ended September 30,
	2017			2016			2017			2016			2020			2019
Revenue	$	103,896		$	94,687		$	208,754		$	192,049		$	151,551		$	117,802
Cost of goods sold	75,814			72,593			153,142			148,011			109,028			90,870
Gross profit	28,082			22,094			55,612			44,038			42,523			26,932
Operating expenses
Research and development	9,102			7,284			17,427			14,303			14,691			12,368
Selling, general and administrative	15,756			11,974			30,371			23,157			17,505			15,185
Total operating expenses	24,858			19,258			47,798			37,460			32,196			27,553
Operating income	3,224			2,836			7,814			6,578
Interest income and other loss, net	(160		)	(70		)	(120		)	(119		)
Interest expense	(14		)	(24		)	(31		)	(50		)
Net income before income taxes	3,050			2,742			7,663			6,409
Income tax expense (benefit)	(2,072		)	1,085			(798		)	2,322
Net income including noncontrolling interest	5,122			1,657			8,461			4,087
Operating income (loss)													10,327			(621		)
Interest expense and other income (loss), net													(549		)	(827		)
Income (loss) before income taxes													9,778			(1,448		)
Income tax expense													1,011			410
Net income (loss) including noncontrolling interest													8,767			(1,858		)
Net loss attributable to noncontrolling interest	(1,669		)	(1,190		)	(3,130		)	(2,067		)	(807		)	(2,867		)
Net income attributable to Alpha and Omega Semiconductor Limited	$	6,791		$	2,847		$	11,591		$	6,154		$	9,574		$	1,009
Net income per common share attributable to Alpha and Omega Semiconductor Limited
Basic	$	0.28		$	0.12		$	0.48		$	0.26		$	0.38		$	0.04
Diluted	$	0.27		$	0.11		$	0.46		$	0.25		$	0.36		$	0.04
Weighted average number of common shares attributable to Alpha and Omega Semiconductor Limited used to compute net income per share
Basic	23,925			23,481			23,973			23,256			25,340			24,538
Diluted	25,033			24,977			24,997			24,695			26,314			25,130

See accompanying notes to these condensed consolidated financial statements.

Table of Contents

ALPHA AND OMEGA SEMICONDUCTOR LIMITED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited, in thousands)



	Three Months Ended September 30,
	2020		2019
Net income (loss) including noncontrolling interest	$	8,767	$	(1,858	)
Other comprehensive income (loss), net of tax
Foreign currency translation adjustment	5,703		(6,151		)
Comprehensive income (loss)	14,470		(8,009		)
Less: Noncontrolling interest	1,915		(5,835		)
Comprehensive income (loss) attributable to Alpha and Omega Semiconductor Limited	$	12,555	$	(2,174	)

Three Months Ended December 31, Six Months Ended December 31,
2017 2016 2017 2016
Net income including noncontrolling interest $ 5,122
$ 1,657
8,461
4,087
Other comprehensive income, net of tax
Foreign currency translation adjustment 3,347
(2,326 ) 4,048
(2,256 )
Comprehensive income (loss) 8,469
(669 ) 12,509
1,831
Noncontrolling interest (104 ) (2,234 ) (1,231 ) (3,132 )
Comprehensive income attributable to Alpha and Omega Semiconductor Limited $ 8,573
$ 1,565
$ 13,740
$ 4,963

See accompanying notes to these condensed consolidated financial statements.

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 restricted stock units	—		13			—			—			(13		)	0			—			0
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)	—		—			—			—			9,574			9,574			(807		)	8,767
Cumulative 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, 2019	$	62	$	(66,240	)	$	234,410		$	(2,693	)	$	125,485		$	291,024		$	152,265		$	443,289
Reissuance of treasury stock upon exercise of common stock options and release of restricted stock units	—		13			—			—			(13		)	0			—			0
Withholding tax on restricted stock units	—		—			(96		)	—			—			(96		)	—			(96		)
Share-based compensation	—		—			2,369			—			—			2,369			—			2,369
Net income (loss)	—		—			—			—			1,009			1,009			(2,867		)	(1,858		)
Cumulative translation adjustment	—		—			—			(3,183		)	—			(3,183		)	(2,968		)	(6,151		)
Balance, September 30, 2019	$	62	$	(66,227	)	$	236,683		$	(5,876	)	$	126,481		$	291,123		$	146,430		$	437,553

See accompanying notes to these condensed consolidated financial statements.

Table of Contents

ALPHA AND OMEGA SEMICONDUCTOR LIMITED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)


	Six Months Ended December 31,						Three Months Ended September 30,
	2017			2016			2020			2019
Cash flows from operating activities
Net income	$	8,461		$	4,087
Adjustments to reconcile net income to net cash provided by operating activities:
Net income (loss) including noncontrolling interest							$	8,767		$	(1,858	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization	14,386			13,263			12,489			10,904
Share-based compensation expense	6,017			2,870			2,876			2,369
Deferred income taxes, net	(2,224		)	6,581			17			(32		)
Loss (Gain) on disposal of property and equipment	55			(370		)
Loss on disposal of property and equipment							47			36
Changes in assets and liabilities:
Accounts receivable, net	4,127			2,112			(13,044		)	(15,033		)
Inventories	(9,418		)	(1,391		)	(2,172		)	(5,823		)
Other current and long-term assets	(9,081		)	(7,032		)	(1,011		)	3,756
Accounts payable	1,877			(4,605		)	1,930			753
Income taxes payable	(448		)	257			749			47
Accrued and other liabilities	8,102			2,297			(800		)	3,654
Net cash provided by operating activities	21,854			18,069
Net cash provided by (used in) operating activities							9,848			(1,227		)
Cash flows from investing activities
Purchases of property and equipment excluding JV Company	(23,192		)	(11,371		)	(7,944		)	(8,292		)
Purchases of property and equipment in JV Company	(41,576		)	(3,632		)	(3,393		)	(7,506		)
Purchases of land use rights in JV Company	—			(8,737		)
Purchase of intangible assets	(10,384		)	—
Proceeds from sale of property and equipment	—			411
(Increase) decrease in restricted cash	29			(135		)
Net cash used in investing activities	(75,123		)	(23,464		)	(11,337		)	(15,798		)
Cash flows from financing activities
Proceeds from investment by noncontrolling interest	86,994			33,000
Withholding tax on restricted stock units	(249		)	(348		)	(412		)	(96		)
Proceeds from exercise of stock options and ESPP	2,205			8,729
Payment for repurchases of common shares	(6,022		)	—
Principal payments on capital leases	(399		)	(408		)
Net cash provided by financing activities	82,529			40,973
Effect of exchange rate changes on cash and cash equivalents	1,241			(559		)
Net increase in cash and cash equivalents	30,501			35,019
Cash and cash equivalents at beginning of period	115,708			87,774
Cash and cash equivalents at end of period	$	146,209		$	122,793
Proceeds from borrowings							11,300			2,790
Repayments of borrowings							(11,085		)	(2,085		)
Principal payments on finance leases							(3,989		)	(1,691		)
Net cash used in financing activities							(4,186		)	(1,082		)
Effect of exchange rate changes on cash, cash equivalents and restricted cash							1,997			(805		)
Net decrease in cash, cash equivalents and restricted cash							(3,678		)	(18,912		)
Cash, cash equivalents and restricted cash at beginning of period							162,704			124,295
Cash, cash equivalents and restricted cash at end of period							$	159,026		$	105,383

Supplemental disclosures of non-cash investing and financing information:
Property and equipment purchased but not yet paid	$	43,235		$	5,153		$	6,877		$	8,334
Re-issuance of treasury stock	$	3		$	59

See accompanying notes to these condensed consolidated financial statements.

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,"~~“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, ~~LED lighting,~~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, ~~Taiwan, Korea, Germany~~ and ~~Japan.~~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, ~~2017~~.2020. All significant intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, all adjustments (consisting of normal recurring adjustments and accruals) considered necessary for a fair presentation of the results of operations for the periods presented have been included in the interim periods. Operating results for the ~~six~~three months ended ~~December 31, 2017~~September 30, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, ~~2018~~.2021 or any other interim period. The condensed consolidated balance ~~sheet~~sheets at June 30, ~~2017~~2020 is derived from the audited financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, ~~2017~~.2020.

Joint Venture

InOn March 29, 2016, the Company ~~executed an agreement~~entered into a joint venture contract (the “JV Agreement”) with two ~~strategic~~ investment funds owned by the Municipality of Chongqing ~~China~~ (the ~~"Chongqing Funds"~~“Chongqing Funds”), pursuant to ~~form~~which the Company and the Chongqing Funds formed a joint venture, (the “JV Company”), for the purpose of constructing and operating a ~~new state-of-the-art~~ power semiconductor packaging, testing and 12-inch wafer fabrication facility in the Liangjiang New Area of Chongqing, China (the ~~"Joint Venture"~~“JV Transaction”). The ~~initial capitalization~~fab is being built in phases. As of September 30, 2020, the ~~Joint Venture under the agreement is $330.0 million, which includes cash contributions from the Chongqing Funds and contributions of cash, equipment and intangible assets from the Company. The~~ Company owns 51%, and the Chongqing Funds own 49% of the equity interest ofin the ~~Joint Venture.~~JV Company. The Joint Venture is accounted under the provisions of the consolidation guidance since the Company has a 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 of assembly and testing and is currently ramping up its Phase I of the 12-inch wafer fabrication.

Certain Significant Risks and Uncertainties Related to Outbreak of Coronavirus Disease 2019 (“COVID-19”)

The COVID-19 pandemic has had and continues to have a negative impact on business and economic activities across the globe. As a result of the COVID-19 pandemic and the global economic downturn and changing consumer behaviors due to various restrictions imposed by governments, the Company has experienced shifting market trends, including an increasing demand in the markets for notebooks, PCs and gaming devices and decreasing demand for mobile phone and industrial products, as more consumers are staying at and working from home. While the Company has recently benefited from the increasing demand of PC related products, there is no guarantee that this trend will continue, and such increasing demand may discontinue or decline as government authorities relax COVID-19 related restrictions. Furthermore, as the COVID-19 pandemic continues and global economic downturn and high unemployment persists, consumer spending may slow down substantially, in which case the Company may experience a significant decline of customer orders for its products, including those designed for PC-related applications, and such decline will adversely affect its financial conditions and results of operations. The extent to which the COVID-19 pandemic may impact the Company's business will depend on future

ALPHA AND OMEGA SEMICONDUCTOR LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

developments which are uncertain, such as the duration of the outbreak, travel restrictions, governmental mandates issued to mitigate the spread of the disease, business closures, economic disruptions, and the effectiveness of actions taken to contain and treat the virus. Accordingly, the COVID-19 pandemic may have a negative impact on the Company's sales and results of operations, the size and duration of which is difficult to predict.

Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires the Company to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. To the extent there are material differences between these estimates and actual results, the Company's condensed consolidated financial statements will be affected. On an ongoing basis, the Company evaluates the estimates, judgments and assumptions including those related to stock rotation returns, price adjustments, allowance for doubtful accounts, inventory reserves, warranty accrual, income taxes, leases, share-based compensation, recoverability of and useful lives for property, plant and equipment and intangible ~~assets.~~assets, as well as 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.

Revenue recognition

The Company determines revenue recognition through the following steps: (1) identification of the contract with a customer; (2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recognition of revenue when, or as, a performance obligation is satisfied. The Company recognizes revenue when product is shipped to the customer, net of estimated stock rotation returns and price adjustments to certain distributors.

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

Share-based Compensation Expense

The Company maintains an equity-settled, share-based compensation plan to grant restricted share units and stock options. The Company recognizes expense related to share-based compensation awards that are ultimately expected to vest based on estimated fair values on the date of grant. The fair value of restricted share units is based on the fair value of the Company's common share on the date of grant. For restricted stock awards subject to market conditions, the fair value of each restricted stock award is estimated at the date of grant using the Monte-Carlo pricing model. The fair value of stock options is estimated 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.

ALPHA AND OMEGA SEMICONDUCTOR LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Restricted Cash

As a condition of the 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, 2020 and June 30, 2020, the amount of restricted cash was $4.3 million and $4.2 million, respectively.

Fair Value of Financial Instruments

The fair ~~values~~value of cash equivalents ~~are~~is based on observable market prices ~~and~~which have been categorized in Level 1 in the fair value hierarchy. Cash equivalents consist primarily of ~~short term~~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 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, 2020, the Company reduced interest expense and operating expenses by $0.8 million and $1.9 million, respectively. During the three months ended September 30, 2019, the Company reduced interest expense by $2.3 million.

Long-lived Assets

The Company evaluates its long-lived assets for impairment whenever events or changes indicate that the carrying amount of such assets may not be recoverable. Due to the COVID-19 pandemic, the Company assessed the changes in circumstances that occurred since the March 2020 quarter. These factors included operating losses, a decrease in the Company's share price in February and March of 2020, which reduced its market capitalization, expectation of lower business growth for the coming quarters, increased and prolonged economic and regulatory uncertainty in the global economies, and the expectation of higher supply chain costs and increased competition. Therefore, the Company performed a recoverability test by comparing the sum of the estimated undiscounted future cash flows of its long-lived assets to their carrying amount as of June 30, 2020. Some of the more significant assumptions used in the estimated future cash flows include net sales, cost of goods sold, operating expenses, working capital, capital expenditures, income tax rates, and long-term growth rates that appropriately reflects the risks inherent in the future cash flow stream. The Company selected the assumptions used in the financial forecasts by referencing to historical data, supplemented by current and anticipated market conditions, estimated product growth rates and management's plans. These estimated future cash flows were consistent with those the Company uses in its internal planning. The result of the recoverability test indicated that the sum of the expected future cash flows (undiscounted and without interest charges) was greater than the carrying amount of the long-lived assets. Therefore, the Company concluded that the carrying amount of the long-lived assets is recoverable as of June 30, 2020. As of September 30, 2020, the Company performed a qualitative assessment and concluded that indicators of potential impairment did not exit. Therefore, there was 0 impairment of long-lived assets as of September 30, 2020.

Comprehensive Income (Loss)

~~ALPHA AND OMEGA SEMICONDUCTOR LIMITED~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

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).

ALPHA AND OMEGA SEMICONDUCTOR LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Recent Accounting Pronouncements

Recently Issued Accounting Standards not yet adopted

In ~~May 2017,~~August 2020, the ~~FASB~~Financial Accounting Standards Board (FASB) issued Accounting ~~Standard Updates ("ASU") ASU 2017-09, "Compensation -Stock Compensation: Scope of Modification~~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 ~~("ASU 2017-09"). ASU 2017-09 is~~for Convertible Instruments and Contracts in an ~~update~~Entity’s Own Equity, which, among other things, provides guidance on how to ~~the existing guidance to clarify when modification accounting would be applied~~account for a change to the terms or conditions of a share-based award. Under this new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award changes as a result of the change in terms or conditions.contracts on an entity’s own equity. This ASU ~~will be effective~~simplifies the accounting for ~~annual periods,~~certain financial instruments with characteristics of liabilities and ~~interim periods within those annual periods, beginning after December 15, 2017 with early adoption permitted. The Company does not regularly modify~~equity. Specifically, the ~~terms and conditions of its share-based awards and does not expect~~ASU eliminated the ~~adoption of this guidance to have a significant impact on its financial statements.~~

In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows: Restricted Cash ("ASU 2016-18"). ASU 2016-18 requires amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the total beginning and ending amountsneed for the ~~periods shown~~Company to assess whether a contract on the ~~statement~~entity’s own equity (1) permits settlement in unregistered shares, (2) whether counterparty rights rank higher 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 ~~cash flows. This~~certain financial instruments accounted for under this ASU ~~will be~~on earnings per share. For public business entities, the ASU is effective for fiscal years beginning after December 15, ~~2017,~~2021, and interim periods within those fiscal ~~years, with early adoption permitted and requires retrospective adoption.~~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.

This ASU may be applied on a full retrospective of modified retrospective basis. This ASU is effective January 1, 2022 and interim periods presented. Early adoption of the ASU is permitted by the Company effective January 1, 2021. The Company is in the process of assessing the adoption of the ASU on the Company’s financial statements.

In ~~August 2016,~~January 2020, the FASB issued ASU No. ~~2016-15, "Statement~~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 ~~Cash Flows (Topic 230): Classification~~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 ~~Certain Cash Receipts and Cash Payments ("ASU 2016-15"). ASU 2016-15 identifies how certain cash receipts and cash payments are presented and classified~~the same issuer. Among other topics, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting. For public business entities, the amendments in the ~~Statement of Cash Flows under Topic 230.~~ ASU ~~2016-15 is~~are effective for fiscal years beginning after December 15, ~~2017,~~2020, and interim periods within those fiscal ~~years, with early adoption permitted. Upon adoption, entities must apply the guidance retrospectively to all periods presented.~~years. The Company ~~is currently evaluating the impact~~does not expect the adoption of ~~ASU 2016-15~~this guidance will have a material impact on its consolidated financial ~~statements.~~position, results of operations or cash flows.

In ~~February 2016,~~December 2019, the FASB issued ASU ~~2016-02, Leases. This guidance requires a dual approach~~No. 2019-12 “Income Taxes (Topic 740): Simplifying the Accounting for ~~lessee accounting under which a lessee~~Income Taxes ("ASU 2019-12") by removing certain exceptions to the general principles. The amendments will account for leases as finance leases or operating leases. Both finance and operating leases will result in the lessee recognizing a right-of-use asset and a corresponding liability on its balance sheet, with differing methodology for income statement recognition. This guidance isbe effective ~~for public business entities~~ for fiscal years, and interim periods within those fiscal years, beginning after December 15, ~~2018, and early~~2020. Early adoption of the amendments is permitted. ADepending on the amendment, adoption may be applied on a retrospective, modified retrospective ~~approach is required for all leases existing~~ or ~~entered into after the beginning of the earliest comparative period in the consolidated financial statements.~~prospective basis. The Company is currently ~~assessing~~evaluating the ~~impact that~~impacts of adoption of ~~this~~the new guidance ~~will have on~~to its consolidated financial statements.

Recently Adopted Accounting Standards

In ~~May 2014,~~August 2018, the FASB issued ASU ~~No. 2014-09, Revenue from Contracts~~2018-15 “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract". These amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contact with ~~Customers.~~the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The ~~standard provides companies with a single model for use in~~ accounting for ~~revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific revenue guidance. The core principle~~the service element of ~~the model~~a hosting arrangement that is to recognize revenue when control of the goods or services transfers to the customer, as opposed to recognizing revenue when the risks and rewards transfer to the customer under the existing revenue guidance. The Company will adopt the new revenue standards in its first quarter of fiscal year 2019 utilizing the modified retrospective method. The Companya service contract is ~~still in the process of completing its analysis~~not affected by these amendments. ASU 2018-15 had no material impact on the ~~transition of all revenue from distributors from sell-through to the sell-in basis of accounting, as well as impact of related disclosures and its internal controls over~~Company's consolidated financial ~~reporting.~~statements.

610

ALPHA AND OMEGA SEMICONDUCTOR LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13”). ASU 2018-13 amends existing fair value measurement disclosure requirements by adding, changing, or removing certain disclosures. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. ASU 2018-13 had no material impact on the Company's consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326). Topic 326 adds to U.S. GAAP the current expected credit loss ("CECL") model, a measurement model based on expected losses rather than incurred losses. Under this new standard, an entity recognizes its estimate of expected credit losses as an allowance. The new standard is also intended to reduce the complexity of U.S. GAAP by decreasing the number of credit loss models that entities use to account for debt instruments. The new guidance significantly changes the accounting for credit losses. The Company adopted ASU 2016-13 using the modified-retrospective approach in the first quarter of fiscal 2021 with no impact to its condensed consolidated financial statements.

The adoption of Topic 326 did not significantly change the Company's approach to the valuation of trade receivables. The Company determines whether there is an expected loss on its accounts receivable by reviewing all available data, including its customers' latest available financial statements, their credit standing and historical collection experience, as well as current and future market and economic conditions. As of September 30, 2020 and June 30, 2020, the allowance for credit losses on the Company's trade receivables remained immaterial.

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,
	2020		2019
	(in thousands, except per share data)
Numerator:
Net income attributable to Alpha and Omega Semiconductor Limited	$	9,574	$	1,009

Denominator:
Basic:
Weighted average number of common shares used to compute basic net income per share	25,340		24,538
Diluted:
Weighted average number of common shares used to compute basic net income per share	25,340		24,538
Effect of potentially dilutive securities:
Stock options, RSUs and ESPP shares	974		592
Weighted average number of common shares used to compute diluted net income per share	26,314		25,130
Net income per share attributable to Alpha and Omega Semiconductor Limited:
Basic	$	0.38	$	0.04
Diluted	$	0.36	$	0.04

ALPHA AND OMEGA SEMICONDUCTOR LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Three Months Ended December 31, Six Months Ended December 31,
2017 2016 2017 2016
(in thousands, except per share data)
Numerator:
Net income attributable to Alpha and Omega Semiconductor Limited $ 6,791
$ 2,847
$ 11,591
$ 6,154

Denominator:
Basic:
Weighted average number of common shares used to compute basic net income per share 23,925
23,481
23,973
23,256
Diluted:
Weighted average number of common shares used to compute basic net income per share 23,925
23,481
23,973
23,256
Effect of potentially dilutive securities:
Stock options, RSUs and ESPP shares 1,108
1,496
1,024
1,439
Weighted average number of common shares used to compute diluted net income per share 25,033
24,977
24,997
24,695
Net income per share attributable to Alpha and Omega Semiconductor Limited:
Basic $ 0.28
$ 0.12
$ 0.48
$ 0.26
Diluted $ 0.27
$ 0.11
$ 0.46
$ 0.25

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,
	2020	2019
	(in thousands)
Employee stock options and RSUs	124	338
ESPP	233	961
Total potential dilutive securities	357	1,299

Three Months Ended December 31, Six Months Ended December 31,
2017 2016 2017 2016
(in thousands) (in thousands)
Employee stock options and RSUs 165
—
169
123
ESPP —
16
45
8
Total potential dilutive securities 165
16
214
131

~~ALPHA AND OMEGA SEMICONDUCTOR LIMITED~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

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, ~~when~~where available.

In the past, the Company shipped its product indirectly to Huawei and its affiliates (collectively, “Huawei”) through distributors. Typically, the Company sold its products to distributors who then sold to original design manufacturers (“ODMs”) that incorporated our products into end applications that were then shipped to Huawei. While distributor point of sale reports summarize distributor sales to ODMs, the Company must make certain assumptions and estimates in order to determine the amount of revenues attributed to indirect shipment to Huawei. During the fiscal year ended June 30, 2019, the estimated revenues attributed to indirect shipments to Huawei were approximately 2% of total revenues. During the period from May 2019 to December 2019, estimated revenues earned by the Company from shipments indirectly made to Huawei were in the range of $11 million to $13 million. The Company has not shipped any products to Huawei after December 31, 2019. See Note 10.

Summarized below are individual customers whose revenue or accounts receivable balances were ~~more~~10% or higher than~~10%~~ of the respective total consolidated amounts:



	Three Months Ended September 30,
Percentage of revenue	2020		2019
Customer A	28.8	%	28.8	%
Customer B	33.1	%	35.1	%

Three Months Ended December 31, Six Months Ended December 31,
Percentage of revenue 2017 2016 2017 2016
Customer A 30.8 % 27.0 % 29.2 % 25.6 %
Customer B 33.7 % 35.8 % 33.8 % 36.2 %
Customer C *
10.7 % *
12.3 %



	September 30, 2020		June 30, 2020
Percentage of accounts receivable	September 30, 2020		June 30, 2020
Customer A	10.5	%	*
Customer B	18.8	%	*
Customer C	25.6	%	29.8	%
Customer E	*		20.1	%
Customer F	*		10.4	%
Customer G	*		10.3	%
Customer H	*		10.9	%

* Less than 10%

December 31,
2017 June 30,
2017
Percentage of accounts receivable
Customer A 35.7 % 33.2 %
Customer B 19.1 % 13.2 %
Customer C 12.6 % 16.4 %

812

ALPHA AND OMEGA SEMICONDUCTOR LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

4. Balance Sheet Components

Accounts receivable, ~~net:~~net



	September 30, 2020			June 30, 2020
	(in thousands)
Accounts receivable	$	57,876		$	43,394
Less: Allowance for price adjustments	(31,529		)	(30,092		)
Less: Allowance for doubtful accounts	(30		)	(30		)
Accounts receivable, net	$	26,317		$	13,272

December 31,
2017 June 30,
2017
(in thousands)
Accounts receivable $ 45,438
$ 48,039
Less: Allowance for price adjustments (21,125 ) (19,599 )
Less: Allowance for doubtful accounts (30 ) (30 )
Accounts receivable, net $ 24,283
$ 28,410

~~Inventories:~~Inventories



	September 30, 2020		June 30, 2020
	(in thousands)
Raw materials	$	54,949	$	55,377
Work in-process	67,033		61,863
Finished goods	15,718		18,288
	$	137,700	$	135,528

December 31,
2017 June 30,
2017
(in thousands)
Raw materials $ 39,198
$ 32,118
Work in-process 34,994
36,081
Finished goods 11,480
8,055
$ 85,672
$ 76,254

~~Property, plant and equipment, net:~~Other current assets



	September 30, 2020		June 30, 2020
	(in thousands)
VAT receivable	$	1,255	$	1,639
Other prepaid expenses	2,432		1,900
Prepaid insurance	2,761		1,520
Prepaid maintenance	923		587
Prepayment to supplier	1,266		938
Prepaid income tax	1,790		1,991
Customs deposit	23		163
Other receivables	29		69
	$	10,479	$	8,807

December 31,
2017 June 30,
2017
(in thousands)
Land $ 4,877
$ 4,877
Building 4,325
4,325
Manufacturing machinery and equipment 241,206
215,275
Equipment and tooling 14,641
13,549
Computer equipment and software 25,066
24,346
Office furniture and equipment 2,055
1,935
Leasehold improvements 29,507
29,136
Land use rights 9,242
8,849
330,919
302,292
Less: accumulated depreciation (212,058 ) (194,882 )
118,861
107,410
Equipment and construction in progress 74,392
40,781
Property, plant and equipment, net $ 193,253
$ 148,191

~~Intangible assets, net:~~

913

ALPHA AND OMEGA SEMICONDUCTOR LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Property, plant and equipment, net:



	September 30, 2020			June 30, 2020
	(in thousands)
Land	$	4,877		$	4,877
Building	61,008			58,875
Manufacturing machinery and equipment	477,461			447,079
Equipment and tooling	25,931			25,398
Computer equipment and software	39,212			38,779
Office furniture and equipment	3,595			3,529
Leasehold improvements	71,298			68,224
Land use rights	8,828			8,502
	692,210			655,263
Less: accumulated depreciation	(306,956		)	(291,515		)
	385,254			363,748
Equipment and construction in progress	36,388			48,592
Property, plant and equipment, net	$	421,642		$	412,340

December 31,
2017 June 30,
2017
(in thousands)
License fees $ 15,584
$ 1,248
Trade name 268
268
Customer relationships 1,150
1,150
17,002
2,666
Less: accumulated amortization (2,672 ) (2,653 )
14,330
13
Goodwill 269
269
Intangible assets, net $ 14,599
$ 282

Intangible assets, net:



	September 30, 2020			June 30, 2020
	(in thousands)
Patents and technology rights	$	18,037		$	18,037
Trade name	268			268
Customer relationships	1,150			1,150
	19,455			19,455
Less: accumulated amortization	(3,794		)	(2,954		)
	15,661			16,501
Goodwill	269			269
Intangible assets, net	$	15,930		$	16,770

Estimated future minimum amortization expense of license fees are primarily related to a license agreement that the Company entered into with STMicroelectronics International N.V. (“STMicro”) on September 5, 2017, pursuant to which STMicro granted the Company a world-wide, royalty-free and fully-paid license to use its technologies to develop, market and distribute certain digital multi-phase controller products, which have been offered by STMicro. This agreement allows the Company to develop and market products in a new market, primarily in the computer server segment. Under the license agreement, the Company agreed to pay a total price in cash of $17.0 million based on the payment schedule of, approximately $10.1 million, $6.7 million, $0.2 million in calendar year 2017, 2018 and 2019, respectively. As of December 31, 2017, the Company recorded $13.8 million in intangible assets ~~of which $9.8 million in cash was paid to STMicro. The Company begins amortizing such license fees when the technology has met the Company's qualification.~~is as follows (in thousands):



Year ending June 30,
2021 (Remaining)	$	2,520
2022	3,360
2023	3,286
2024	3,249
2025	3,246
	$	15,661

~~Other long-term assets:~~

December 31,
2017 June 30,
2017
(in thousands)
Prepayments for property and equipment $ 36,359
$ 12,964
Investment in a privately held company 700
700
Prepaid income tax —
4,377
Long-term deposits 5,386
1,608
Other 356
216
$ 42,801
$ 19,865

~~Accrued liabilities:~~

December 31,
2017 June 30,
2017
(in thousands)
Accrued compensation and benefits $ 21,963
$ 13,727
Warranty accrual 767
1,866
Stock rotation accrual 1,611
1,871
Accrued professional fees 1,856
2,500
Accrued inventory 1,008
410
Accrued facilities related expenses 1,820
1,501
Accrued property, plant and equipment 16,321
2,241
Other accrued expenses 5,892
4,270
$ 51,238
$ 28,386

~~The activities in the warranty accrual, included in accrued liabilities, are as follows:~~

1014

ALPHA AND OMEGA SEMICONDUCTOR LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Other long-term assets:



	September 30, 2020		June 30, 2020
	(in thousands)
Prepayments for property and equipment	$	482	$	2,242
Investment in a privately held company	100		100
Customs deposit	1,076		1,662
Other long-term deposits	880		850
Office leases deposits	771		766
Other	164		184
	$	3,473	$	5,804

Six Months Ended December 31,
2017 2016
(in thousands)
Beginning balance $ 1,866
$ 1,495
Additions (Reductions) (1,063 ) * 1,040
Utilization (36 ) (153 )
Ending balance $ 767
$ 2,382
Accrued liabilities:

* Released a specific



	September 30, 2020		June 30, 2020
	(in thousands)
Accrued compensation and benefits	$	22,625	$	19,968
Warranty accrual	707		709
Stock rotation accrual	3,743		3,358
Accrued professional fees	3,712		5,868
Accrued inventory	776		775
Accrued facilities related expenses	2,157		1,831
Accrued property, plant and equipment	10,327		11,039
Other accrued expenses	7,129		8,017
Customer deposit	2,777		2,813
ESPP payable	1,922		608
	$	55,875	$	54,986

The activities in the warranty ~~reserve of approximately $1.0 million due to expired warranty period.~~accrual, included in accrued liabilities, are as follows:



	Three Months Ended September 30,
	2020			2019
	(in thousands)
Beginning balance	$	709		$	623
Additions	71			21
Utilization	(73		)	(3		)
Ending balance	$	707		$	641

The activities in the stock rotation accrual, included in accrued liabilities, are as follows:



	Three Months Ended September 30,
	2020			2019
	(in thousands)
Beginning balance	$	3,358		$	1,921
Additions	3,016			2,565
Utilization	(2,631		)	(1,869		)
Ending balance	$	3,743		$	2,617

ALPHA AND OMEGA SEMICONDUCTOR LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Six Months Ended December 31,
2017 2016
(in thousands)
Beginning balance $ 1,871
$ 1,988
Additions 992
3,008
Utilization (1,252 ) (3,289 )
Ending balance $ 1,611
$ 1,707

Other long-term liabilities:



	September 30, 2020			June 30, 2020
	(in thousands)
Customer deposits	$	6,000	*	$	8,000	*
Computer software liabilities	1,431			1,897
Deferred payroll taxes	1,702			826
Other long-term liabilities	$	9,133		$	10,723

* Customer deposits are from Customer A and Customer B for securing future product shipments from the Company. The Company reclassified $2.0 million of the customer deposit to short term accrued liabilities during the three months ended September 30, 2020 since the repayment of this amount is due within a year.

ALPHA AND OMEGA SEMICONDUCTOR LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

5. ~~Debt~~Bank Borrowings

Short-term borrowings

On April 15, 2020, the JV Company entered into a one-year loan agreement with China Everbright Bank in China to borrow a maximum of Chinese Renminbi (RMB) 100 million (approximately $14.3 million based on the currency exchange rate between RMB and U.S. Dollar on April 15, 2020), in the amount in RMB or USD. Interest payments are due on the 20th of each month, and the entire principal is due on April 16, 2021. The loan consists of RMB 20 million for working capital borrowing in Chinese yuan and RMB 80 million for borrowing in US dollars that is collateralized by eligible accounts receivable. During the three months ended June 30, 2020, the JV Company borrowed RMB 20 million, or $2.8 million based on the currency exchange rate between RMB and U.S. Dollar, at a fixed interest rate of 5.1375% per annum under the working capital loan. The JV Company also borrowed $7.1 million and $1.9 million at a fixed interest rate of 2.7% and 2.8% per annum, respectively, during the same period under the accounts receivable collateralized loan. During the three months ended September 30, 2020, the JV Company repaid $9.0 million and borrowed $11.3 million at a fixed interest rate of 2.7% per annum under the accounts receivable collateralized loan. As of September 30, 2020, the total outstanding balance under the loan was $14.2 million.

In October 2019, the Company's subsidiary in China entered into a line of credit facility with Bank of Communications Limited in China. This line of credit matures on February 14, 2021 and is based on the China Base Rate multiplied by 1.05, or 4.99% on October 31, 2019. The purpose of the credit facility is to provide short-term borrowings. The Company could borrow up to approximately RMB 60.0 million or $8.5 million based on the currency exchange rate between the RMB and the U.S. Dollar on October 31, 2019. As of September 30, 2020, there was 0 outstanding balance under the loan.

On September 23, 2019, the JV Company entered into a short-term revolving loan agreement with China Everbright bank in China. The JV Company can borrow up to RMB 50.0 million, or $7.1 million based on the currency exchange rate between RMB and U.S. Dollar on September 23, 2019, at varying interest rates, in RMB or USD. Interest payments with the entire principal were due no later than 90 days from each borrowing date. As of September 30, 2020, there was 0 outstanding balance under the loan.

On November 29 and December 4, 2018, the JV Company entered into two, one-year loan agreements with China Merchant Bank and Chongqing LiangJiang New District China Merchants Group Limited Company in China to provide loans for RMB 80 million and RMB 20 million, respectively, or $14.5 million in total based on the currency exchange rate between RMB and U.S. Dollar on December 31, 2018, at varying interest rates. On January 20, 2020, the JV Company renewed the loan agreements with the same terms. Interest payments are due monthly and quarterly with the entire principal due not later than January 21, 2021. As of September 30, 2020, there was 0 outstanding balance under the loan.

On November 16, 2018, the Company's subsidiary in China entered into a line of credit facility with Industrial and Commercial Bank of China, which expired on September 30, 2019. The purpose of the credit facility was to provide short-term borrowings. The Company could borrow up to approximately RMB 72.0 million or $10.3 million based on currency exchange rate between RMB and U.S. Dollar on November 16, 2018. In October 2019, this line of credit was renewed with the same terms and a maturity date of September 30, 2020. On September 30, 2020, there was 0 outstanding balance under the line of credit and the line of credit expired.

Accounts Receivable Factoring Agreement

On August 9, 2019, one of the Company's wholly-owned subsidiaries (the "Borrower") entered into a factoring agreement with the Hongkong and Shanghai Banking Corporation Limited ("HSBC"), whereby the Borrower assigns certain of its accounts receivable with recourse. This factoring agreement allows the Borrower to borrow up to 70% of the net amount of its eligible accounts receivable of the Borrower with a maximum amount of $30.0 million. The interest rate is based on one month London Interbank Offered Rate ("LIBOR") plus 1.75% per annum. The Company is the guarantor for this agreement. The Company is accounting for this transaction as a secured borrowing under the Transfers and Servicing of Financial Assets guidance. In addition, any cash held in the restricted bank account controlled by HSBC has a legal right of offset against the borrowing. This agreement, with certain financial covenants required, has no expiration date. The Borrower was in compliance with these covenants as of September 30, 2020. During the three months ended September 30, 2020, the Company borrowed $29.7 million and repaid this amount in full. As of September 30, 2020, there was 0 outstanding balance and the Company had unused credit of approximately $30.0 million.

ALPHA AND OMEGA SEMICONDUCTOR LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Credit Facilities

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, 2020, the outstanding balance of the Lease Financing of 271.0 million RMB (equivalent of $39.8 million based on the currency exchange rate as of September 30, 2020) was recorded under short-term and long-term finance lease liabilities.

See future minimum lease payment table for finance lease liabilities in Note 6.

Long-term debt

On April 26, 2020, the JV Company entered into a loan agreement with China Development Bank, Agricultural Bank of China, China Merchants Bank and Chongqing Rural Commercial Bank (collectively, "the Banks") in the aggregate principal amount of RMB 250 million (approximately $35.7 million based on the currency exchange rate between RMB and U.S. Dollar on April 26, 2020). The obligation under the loan agreement is secured by certain assets of the JV Company. Beginning December 18, 2020, the JV Company is required to make consecutive semi-annual payments of principal until December 8, 2024. Interest payment is due on March 20, June 20, September 20 and December 20 of each year based on China one-year loan prime rate ("LPR") plus 1.3%. The JV Company drew down RMB 250 million (approximately $35.3 million based on the currency exchange rate between RMB and U.S. Dollar on June 30, 2020) in April 2020. As of September 30, 2020, the outstanding balance of the loan was $36.7 million.

In December 2019, the JV Company entered into a loan agreement with China Development Bank in the amount of $24.0 million. The obligation under the loan agreement is secured by certain assets of the JV Company. Beginning December 18, 2020, the JV Company will make consecutive semi-annual payments of principal until December 8, 2024. The interest is accrued based on the LIBOR rate plus 2.8%. The interest is required to be paid on March 21 and September 21 each year. As of September 30, 2020, the outstanding balance of the loan was $24.0 million.

On March 12, 2019, the JV Company entered into a loan agreement with The Export-Import Bank of China in the aggregate principal amount of RMB 200 million (approximately $29.8 million based on currency exchange rate between RMB and U.S. Dollar on March 31, 2019). The loan will mature on February 20, 2025. The JV Company drew down RMB 190 million and RMB 10 million in March 2019 and December 2019, respectively. The loan withdraw window expired on February 28, 2020. The interest is accrued based on the China Base Rate multiplied by 1.1, or 5.39%. The loan requires quarterly interest payments. The principal payments are required to be paid every 6 months over the term of loan commencing in October 2019. This loan is secured by the buildings and certain equipment owned by the JV Company. As a condition of the loan arrangement, 14 million RMB (approximately $2.0 million) of cash is held as restricted cash by the JV Company as a compensating balance at the bank until the principal is paid. On June 24, 2020, a modification of this loan was signed, pursuant to which the interest rate was changed to be based on the five-year loan prime rate in China plus 0.74%, or 5.39%. Other terms of this loan remain the same. During the three months ended December 31, 2019, the JV Company paid 6.0 million RMB

ALPHA AND OMEGA SEMICONDUCTOR LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

On May 1, 2018, Jireh Semiconductor Incorporated ("Jireh"), a wholly-owned subsidiary of the Company, entered into a loan agreement with a financial institution (the "Bank") that provided a term loan in the amount of $17.8 million. The obligation under the loan agreement is secured by certain real estate assets of Jireh and guaranteed by the Company. The loan has a five-year term and matures on June 1, 2023. Beginning June 1, 2018, Jireh made consecutive monthly payments of principal and interest to the Bank. The outstanding principal accrues interest at a fixed rate of 5.04% per annum on the basis of a 360-day year. The loan agreement contains customary restrictive covenants and includes certain financial covenants that require the Company to maintain, on a consolidated basis, specified financial ratios. The Company was in compliance with these covenants as of September 30, 2020. As of September 30, 2020, the outstanding balance of the term loan was $15.7 million.

On August 15, 2017, ~~the Company's Oregon subsidiary,~~ Jireh ~~Semiconductor Incorporated (“Jireh”),~~ entered into a credit agreement with ~~a financial institution (the “Bank”)~~the Bank that ~~provides~~provided a term loan in an amount up to $30.0 million for the purpose of purchasing certain equipment for ~~our~~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. OnIn January ~~12,~~2018 and July 2018, Jireh drew down the loan in the amount of $13.2 ~~million.~~million and $16.7 million, respectively. Beginning ~~of September~~in October 2018, Jireh iswas 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 ~~London Interbank Offered Rate ("LIBOR")~~LIBOR as defined in the credit agreement, plus a specified applicable margin in the range of 1.75% to 2.25%, based on the outstanding balance of the loan. The credit agreement contains customary restrictive covenants and includes certain financial covenants that require the Company to maintain, on a consolidated basis, specified financial ratios and fixed charge coverage ratio. The Company was in compliance with these covenants as of September 30, 2020. As of ~~December 31, 2017,~~September 30, 2020, the ~~Company recorded approximately $0.1 million~~outstanding balance of ~~transaction costs.~~the term loan was $14.9 million.

Maturities of short-term debt and long-term debt were as follows (in thousands):



Year ending June 30,
2021 (Remaining)				$	31,157
2022				26,890
2023				37,579
2024				23,352
2025				15,017
Total principal of debts				133,995
Less: debt issuance costs				(1,279		)
Total principal of debt, less debt issuance costs				$	132,716

	Short-term Debt			Long-term Debt
Principal amount	$	33,243		$	100,752
Less: debt issuance costs	(497		)	(782		)
Total debt, less debt issuance costs	$	32,746		$	99,970

ALPHA AND OMEGA SEMICONDUCTOR LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

6. ~~Joint Venture~~Leases

~~On March 29, 2016,~~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 ~~entered into~~uses its incremental borrowing rate at lease commencement. The Company uses an interest rate commensurate with the interest rate to borrow on a ~~joint venture contract (the “JV Agreement”)~~collateralized basis over a similar term with ~~two investment funds owned by~~an amount equal to the ~~Municipality of Chongqing (the “Chongqing Funds”), pursuant~~lease payments. Operating leases are primarily related to ~~which~~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 ~~Chongqing Funds formed~~accretion of its lease obligation liability result in a ~~joint venture, (the “JV Company”), for~~single straight-line expense recognized over the ~~purpose~~lease term. The finance lease is related to the RMB 400.0 million of constructing and operating a power semiconductor packaging, testing and 12-inch wafer fabrication facility in the Liangjiang New Area of Chongqing, China (the “JV Transaction”). The total initial capitalizationlease financing of the JV Company ~~is $330.0 million (the “Initial Capitalization”), which includes cash contribution from the Chongqing Funds~~with YinHai Leasing Company and ~~contributions~~The Export-Import Bank of ~~cash, equipment and intangible assets from the Company. The Initial Capitalization is expected to be completed in stages.~~China. See Note 5 - Bank Borrowings for details. The Company ~~owns 51%, and~~does not record leases on the ~~Chongqing Funds own 49%,~~condensed consolidated balance sheets with a term of one year or less.

The components of the ~~equity interest in~~Company’s operating and finance lease expenses are as follows for the JV Company. If both parties agree that the termination of the JV Company is in 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 Company expects the JV Company to commence initial production in mid-calendar year 2018.periods presented (in thousands):

There is no private land ownership in China. Individuals and companies are permitted to acquire land use rights for specific purpose. In September 2016, the JV Company paid approximately $8.7 million for land use rights to build the manufacturing facility. In March 2017, the JV Company received the necessary land use right certificate from the PRC government. The land use rights will expire on November 30, 2066.

As part of the JV Transaction, the JV Company entered into an Engineering, Procurement and Construction Contract (the “EPC Contract”) with The IT Electronics Eleventh Design & Research Institute Scientific and Technological Engineering Corporation Limited (the “Contractor”), effective as of January 10, 2017 (the "Effective Date"), pursuant which the Contractor was engaged to construct the manufacturing facility contemplated under the JV Agreement. Under the EPC Contract, the Contractor’s obligations include, but are not limited to: (i) the development of conceptual design, initial design, construction drawing design and optimization, and submission of such designs to the JV Company for examination and confirmation; and (ii) the construction of the assembly and wafer fabrication facilities and related procurement services, including the selection and engagement of subcontractors, in accordance with a construction schedule agreed upon by the parties. The total price payable under the EPC Contract is Chinese Renminbi (RMB) 540.0 million, or approximately $78.0 million based on the currency exchange rate between RMB and U.S. Dollars on the Effective Date, which consists of $2.8 million (RMB 19.5 million) of design fees (“Design Fees”) and $75.2 million (RMB 520.5 million) of construction and procurement fees (including compliance with safety and aesthetic requirements) (“Construction Fees”). The payment is subject to volatility as a result of exposure to fluctuations in RMB foreign exchange rates. The Design Fees and Construction Fees are paid by the JV Company pursuant to a payment schedule based on the progress of the construction and the achievements of specified milestones. As of December 31, 2017, the JV Company paid approximately $37.0 million (RMB 243.8 million), and expects to pay the remaining of $44.9 million (RMB 296.2 million) in calendar year 2018.



	Three Months Ended September 30,
	2020		2019
Operating Leases:
Fixed rent expense	$	1,688	$	1,281
Variable rent expense	203		207
Finance Lease:
Amortization of equipment	559		1,093
Interest	615		740
Short-term leases
Short-term lease expenses	58		75
Total lease expenses	$	3,123	$	3,396

ALPHA AND OMEGA SEMICONDUCTOR LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~The changes in total stockholders' equity~~Supplemental balance sheets information related to the Company’s operating and ~~noncontrolling interest were~~finance leases is as follows (in thousands, except lease term and discount rate):



	September 30, 2020			June 30, 2020
Operating Leases:
ROU assets associated with operating leases	$	32,407		$	32,948
Finance Lease:
Property, plant and equipment, gross	$	108,387		$	104,374
Accumulated depreciation	(90,251		)	(86,540		)
Property, plant and equipment, net	$	18,136		$	17,834

Weighted average remaining lease term (in years)
Operating leases	9.46			9.57
Finance lease	2.47			2.72

Weighted average discount rate
Operating leases	4.83		%	4.45		%
Finance lease	5.46		%	5.46		%

Supplemental cash flow information related to the Company’s operating and finance lease is as follows (in thousands):



	Three Months Ended September 30,
	2020		2019
Cash paid from amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	1,642	$	1,160
Operating cash flows from finance lease	$	615	$	740
Financing cash flows from finance lease	$	3,989	$	1,691

Future minimum lease payments are as follows as of September 30, 2020 (in thousands):



	Operating Leases			Finance Leases
The remainder of 2021	$	4,216		$	13,366
2022	5,401			17,059
2023	4,481			12,365
2024	4,001			0
2025	3,563			0
Thereafter	21,041			0
Total minimum lease payments	42,703			42,790
Less amount representing interest	(8,795		)	(3,033		)
Total lease liabilities	$	33,908		$	39,757

ALPHA AND OMEGA SEMICONDUCTOR LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Total AOS Stockholders' Equity Noncontrolling Interest Total Equity
Balance, June 30, 2017 $ 270,770
$ 27,779
$ 298,549
Exercise of common stock options and release of RSUs 827
—
827
Reissuance of treasury stock upon exercise of common stock options and release of RSUs (61 ) —
(61 )
Withholding tax on restricted stock units (249 ) —
(249 )
Issuance of shares under ESPP 1,439
—
1,439
Repurchase of common shares under shares repurchase program (6,022 ) —
(6,022 )
     Stock-based compensation expense 4,546
—
4,546
     Net income (loss) 11,591
(3,130 ) 8,461
Deferred tax asset related to ASU 2016-16 adoption (5,480 ) —
(5,480 )
     Cumulative translation adjustment 2,149
1,899
4,048
     Contributions from noncontrolling interest —
86,994
86,994
Balance, December 31, 2017 $ 279,510
$ 113,542
$ 393,052

7. Shareholders' Equity and Share-based Compensation

Share Repurchase

In September 2017, the Board of Directors ~~terminated the repurchase program that was previously approved in 2015 and~~ approved a ~~new~~ repurchase program (the “Repurchase Program”)~~, which allows~~ 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 ~~six~~three months ended ~~December 31, 2017,~~September 30, 2020, the Company did not repurchase any shares pursuant to the Repurchase Program. Since the inception of the program, the Company repurchased an aggregate of ~~346,621~~6,784,648 shares ~~from the open market,~~ for a total cost of ~~$6.0~~$67.3 million, at an average price of $17.34 per share. Since the inception of the prior repurchase program in 2010, the Company repurchased an aggregate of 6,069,714 shares from the open market including shares purchased in a dutch tender offer for a total cost of $56.8 million, at an average price of $9.35$9.92 per share, excluding fees and related expenses. No repurchased shares have been retired. Of the ~~6,069,714~~6,784,648 repurchased shares, ~~122,154~~146,928 shares with a weighted average repurchase price of ~~$10.70~~$10.30 per share, were reissued at an average price of ~~$6.06~~$5.25 per share pursuant to option exercises and vested restricted share ~~units.~~units ("RSU"). As of ~~December 31, 2017,~~September 30, 2020, approximately ~~$24.0~~$13.4 million remained available under the Repurchase Program.

Time-based Restricted Stock ~~Options~~Units ("TRSU")

The ~~Company did not grant any stock options during~~following table summarizes the ~~six~~Company's TRSU activities for the three months ended ~~December 31, 2017.~~September 30, 2020:



	Number of Restricted Stock Units		Weighted Average Grant Date Fair Value Per Share		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Nonvested at June 30, 2020	932,138		$	11.36	1.66	$	10,141,661
Granted	109,425		$	12.91
Vested	(110,495	)	$	13.51
Forfeited	(4,625	)	$	10.86
Nonvested at September 30, 2020	926,443		$	11.29	1.49	$	11,876,999

Market-based Restricted Stock Units ("MSUs")

During the quarter ended September 30, 2018, the Company granted 1.3 million market-based restricted stock units ("MSUs") to certain personnel. The number of ~~options expected~~shares to be earned at the end of performance period is determined based on the Company’s achievement of specified stock prices and revenue thresholds during the performance period from January 1, 2019 to December 31, 2021 as well as the recipients remaining in continuous service with the Company through such period. The MSUs vest in four equal annual installments after the end of each performance period. The Company estimated the grant date fair values of its MSUs using a Monte-Carlo simulation model. On August 31, 2020, the Compensation Committee of the Board approved a modification of the terms of MSU to extend the performance period through December 31, 2022 and change the commencement date for the four-year time-based service period January 1, 2023. The fair value of these MSUs was recalculated to reflect the change as of August 31, 2020 and the unrecognized compensation amount was adjusted to reflect the increase in fair value. The incremental expenses for the three months ended September 30, 2020 was immaterial. The Company recorded approximately $0.2 million and $0.2 million of expenses for MSUs during the three months ended September 30, 2020 and 2019, respectively.

Performance-based Restricted Stock Units ("PRSUs")

In March each year since year 2017, The Company granted performance-based RSUs (“PRSUs”) to certain personnel. The number of shares to be earned under the PRSUs is determined based on the ~~result~~level of ~~applying~~attainment of predetermined financial goals. The PRSUs vest in four equal annual installments from the ~~pre-vesting forfeiture rate assumption to total outstanding options.~~first anniversary date after the grant date if certain predetermined financial

1322

ALPHA AND OMEGA SEMICONDUCTOR LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

goals were met. The Company recorded approximately $0.4 million and $0.2 million of expense for these PRSUs during the three months ended September 30, 2020 and 2019, respectively.

During the three months ended June 30, 2019, the Company announced an incentive program. Under this program, each participant’s award is denominated in stock and subject to achievement of certain objective goals within certain timelines. In June 2020, the Company believed it was most likely that predetermined goal measures would be met. Therefore, started June 2020 quarter the Company recorded $0.6 million of non-cash compensation expense each quarter for these awards. The expense was reported 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 expense in the condensed consolidated statements of operations. In September 2020, the Company granted RSUs total valued at $1.0 million to participants, which were fully vest immediately due to achievement of certain objective measures.

The following table summarizes the Company's PRSUs activities for the three months ended September 30, 2020:



	Number of Performance-based Restricted Stock Units		Weighted Average Grant Date Fair Value Per Share		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Nonvested at June 30, 2020	342,775		$	12.38	1.60	$	3,729,392
Forfeited	(1,500	)	$	16.67
Nonvested at September 30, 2020	341,275		$	12.36	1.34	$	4,375,146

Stock Options

The Company did not grant any stock options during the three months ended September 30, 2020 and 2019. The following table summarizes the Company's stock option activities for the ~~six months ended December 31, 2017:~~

Weighted
Weighted Average
Average Remaining
Number of Exercise Price Contractual Aggregate
Shares Per Share Term (in years) Intrinsic Value
Outstanding at June 30, 2017 1,053,367
$ 10.98
4.43 $ 6,212,660
Granted —
$ —

Exercised (64,521 ) $ 11.85
$ 344,085
Canceled or forfeited —
$ —

Outstanding at December 31, 2017 988,846
$ 10.92
4.17 $ 5,646,519
Options vested and expected to vest 988,473
$ 10.92
4.16 $ 5,643,340
Exercisable at December 31, 2017 953,428
$ 11.04
4.09 $ 5,337,845

~~Restricted Stock Units ("RSU")~~

~~The following table summarizes the Company's RSU activities for the six months ended December 31, 2017:~~

Number of Restricted Stock
Units

Weighted Average
Grant Date Fair
Value Per Share

Weighted Average
Remaining
Recognition
Period (Years)
Aggregate Intrinsic Value
Nonvested at June 30, 2017 1,144,865
$ 14.11
1.76 $ 19,084,900
Granted 93,907
$ 17.25

Vested (64,312 ) $ 14.20

Forfeited (17,900 ) $ 14.03

Nonvested at December 31, 2017 1,156,560
$ 14.36
1.36 $ 18,921,322
RSUs vested and expected to vest 1,050,575
1.28 $ 17,187,413

~~The fair value of RSU is based on the market price of the Company's share on the date of grant.~~

In March 2017, the Company granted 170,000 performance-based RSUs (“PRSUs”) to its key personnel. The number shares to be issued under the PRSU will be determined based on the level of attainment of predetermined financial goals. The PRSU will vest in four equal annual installments from March 15, 2018 if certain predetermined financial goals were met. The Company recorded approximately $0.5 million and $0.7 million of expenses for these PRSUs during the three and six months ended December 31, 2017.

The Board previously approved the incentive cash bonus plan (the “Plan”) for the calendar year commencing January 1, 2017 pursuant to which each executive officer of the Company who continues in service through the end of the calendar year will be eligible to receive an incentive award, payable solely in cash, based on the level of attainment of certain specified Company performance goals. On November 15, 2017, the Board approved an amendment to the Plan that permits the Company to pay up to 50% of such incentive awards in common shares of the Company. The Company recorded $1.5 million of such RSUs expenses in the three months ended December 31, 2017. The expenses are reported in the accrued liabilities line in the condensed consolidated balance sheet as the total amount of bonus is to be settled in variable number of shares. Such non-cash compensation expenses are recorded as part of stock-based compensation expense in the condensed consolidated statements of operations.September 30, 2020:



				Weighted
		Weighted		Average
		Average		Remaining
	Number of	Exercise Price		Contractual	Aggregate
	Shares	Per Share		Term (in years)	Intrinsic Value
Outstanding at June 30, 2020	643,978	$	8.79	2.89	$	1,544,664
Outstanding at September 30, 2020	643,978	$	8.79	2.64	$	2,593,702
Options vested and expected to vest	643,978	$	8.79	2.64	$	2,593,702
Exercisable at September 30, 2020	643,978	$	8.79	2.64	$	2,593,702

Employee Share Purchase Plan ("ESPP")

~~ALPHA AND OMEGA SEMICONDUCTOR LIMITED~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

The assumptions used to estimate the fair values of common shares issued under the ESPP were as follows:




	~~Six~~Three Months Ended ~~December 31,~~September 30,
	~~2017~~2020
Volatility rate	~~45.32%~~58.3%
Risk-free interest rate	~~1.4% - 1.7%~~0.2%
Expected term	1.3 years
Dividend yield	0%

ALPHA AND OMEGA SEMICONDUCTOR LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Share-based Compensation Expense

The total share-based compensation expense ~~related to stock options, RSUs and ESPP described above,~~ recognized in the condensed consolidated statements of operations for the periods presented was as follows:



	Three Months Ended September 30,
	2020		2019
	(in thousands)
Cost of goods sold	$	385	$	436
Research and development	1,080		524
Selling, general and administrative	1,411		1,409
	$	2,876	$	2,369

Three Months Ended December 31, Six Months Ended December 31,
2017 2016 2017 2016
(in thousands) (in thousands)
Cost of goods sold $ 415
$ 205
$ 731
$ 400
Research and development 617
383
979
743
Selling, general and administrative 2,977
966
4,307
1,727
$ 4,009
$ 1,554
$ 6,017
$ 2,870

As of ~~December 31, 2017,~~September 30, 2020, total unrecognized compensation cost under the Company's equity plans was ~~$9.7~~$13.1 million, which is expected to be recognized over a weighted-average period of ~~1.2~~2.5 years.

8. Income Taxes

For the three months ended December 31, 2017, the Company recognized income tax benefit of approximately $2.1 million, which included a discrete tax benefit of $2.7 million related to re-measuring the Company’s U.S. deferred tax assets and liabilities following enactment of the 2017 U.S. Tax Cut and Jobs Act in December 2017. For the three months ended December 31, 2016, the

The Company recognized income tax expense of approximately ~~$1.1 million.~~$1.0 million and $0.4 million for the three months ended September 30, 2020 and 2019, respectively. The income tax expense of $1.0 million for the three months ended September 30, 2020 included a $0.03 million discrete tax benefit. The income tax expense of $0.4 million for the three months ended September 30, 2019 included a $0.02 million discrete tax expense. Excluding the discrete income tax items, the ~~estimated~~ effective tax rate for the three months ended ~~December 31, 2017~~September 30, 2020 and 2019 was ~~31.4% compared to 39.1% for the three months ended December 31, 2016.~~10.7% and (27.3)%, respectively. The changes in the effective tax rate and tax expense between the periods resulted primarily from the ~~reduction in the U.S. corporate tax rate following the enactment~~Company reporting pretax book income of ~~the 2017 U.S. Tax Cut and Jobs Act along with changes in the mix of earnings in various geographic jurisdictions between the current year and the same period of last year.~~

~~For the six months ended December 31, 2017, the Company recognized an income tax benefit of approximately $0.8~~$9.8 million which included a discrete tax benefit of $2.7 million related to remeasuring the Company’s U.S. deferred tax assets and liabilities following enactment of the 2017 U.S. Tax Cut and Jobs Act in December 2017. For the six months ended December 31, 2016, the Company recognized income tax expense of approximately $2.3 million. Excluding the discrete income tax items, the estimated effective tax rate for the ~~six~~three months ended December 31, 2017 was 24.0% compared to 35.6% for the six months ended December 31, 2016. The changes in the effective tax rate and tax expense between the periods resulted primarily from the reduction in the U.S. corporate tax rate following the enactment of the 2017 U.S. Tax Cut and Jobs Act along with changes in the mix of earnings in various geographic jurisdictions between the current year and the same period of last year.

~~During the quarter~~ ended September 30, ~~2016,~~2020 vs. a pretax book loss of $1.4 million for the Company contributed certain packaging equipment as required by the JV Agreement by transferring the legal titles of such equipment to the JV Company. As a result of the transfer, the Company reduced its deferred tax assets by $6.6 million and recorded a $6.6 million in prepaid tax asset, which was amortized to tax expense over the useful life of the assets. As of Junethree months ended September 30, 2017, the prepaid tax asset was amortized down to $5.5 million, of which $1.1 million and $4.4 million were included in prepaid and other current assets and other long-term assets on the Company's balance sheet, respectively. On July 1, 2017, the Company adopted ASU 2016-16, ~~Intra-Entity Transfers of Assets other than Inventory,~~ ~~which resulted in a de-recognition of a prepaid tax asset of $5.5 million related to the prior period intra-~~2019.

~~ALPHA AND OMEGA SEMICONDUCTOR LIMITED~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

entity asset transfer with the JV Company, with an offsetting reduction to retained earnings. Because the JV Company has a full valuation allowance, there was no change to the Company’s net deferred tax assets.

The Company files its income tax returns in the United States and in various foreign jurisdictions. The tax years ~~2002~~2001 to ~~2017~~2020 remain open to examination by U.S. federal and state tax authorities. The tax years ~~2010~~2013 to ~~2017~~2020 remain open to examination by foreign tax authorities.

The Company's income tax returns are subject to examinations by the Internal Revenue Service and other tax authorities in various jurisdictions. In accordance with the guidance on the accounting for uncertainty in income taxes, the Company regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of its provision for income taxes. These assessments can require considerable estimates and judgments. As of ~~December 31, 2017~~,September 30, 2020, the gross amount of unrecognized tax benefits was approximately ~~$6.8~~$7.2 million, of which ~~$4.1~~$4.3 million, if recognized, would reduce the effective income tax rate in future periods. If the Company's estimate of income tax liabilities proves to be less than the ultimate assessment, then a further charge to expense would be required. If events occur and the payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when the Company determines the liabilities are no longer necessary. The Company does not anticipate any material changes to its uncertain tax positions during the next twelve ~~months~~.months.

U.S. 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

ALPHA AND OMEGA SEMICONDUCTOR LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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.

On July 27, 2015, in Altera Corp. v. Commissioner,, the U.S. Tax Court issued an opinion related to the treatment of ~~share-based~~stock-based compensation expense in an intercompany cost-sharing arrangement. ~~A final decision has yet to be issued by~~In the July 2015 ruling, the Tax Court ~~due~~concluded that the sharing of the cost of employee stock compensation in a company’s cost-sharing arrangement was invalid under the U.S. Administrative Procedures Act. In June 2019, a panel of the Ninth Circuit of the U.S. Court of Appeals reversed this decision. In July 2019, Altera petitioned U.S. Court of Appeals for the Ninth Circuit to ~~other outstanding issues~~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 0t recorded any benefit related to the case. At this time, the U.S. Department of the Treasury has not withdrawn the requirement to include share-based compensation from its regulations. Due to the uncertainty surrounding the status of the current regulations, questions related to the scope of potential benefits, and the risk of theAltera Corporation Tax ~~Court’s~~Court decision ~~being overturned upon appeal, the Company has not recorded~~in any ~~benefit as of December 31, 2017.~~period through September 2020. The Company will continue to monitor ongoing developments and potential ~~impacts~~impact to its financial statements.

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~~1 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~~1 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 toin which the products were shipped to:


	Three Months Ended December 31,				Six Months Ended December 31,				Three Months Ended September 30,
	2017		2016		2017		2016		2020		2019
	(in thousands)				(in thousands)				(in thousands)
Hong Kong	$	82,440	$	78,253	$	167,670	$	161,088	$	126,600	$	93,102
China	19,153		14,383		36,273		26,825		23,209		16,512
South Korea	301		393		588		759		136		5,990
United States	1,314		798		2,692		1,692		1,456		1,101
Other Countries	688		860		1,531		1,685
Other countries									150		1,097
	$	103,896	$	94,687	$	208,754	$	192,049	$	151,551	$	117,802

~~ALPHA AND OMEGA SEMICONDUCTOR LIMITED~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

The following is a summary of revenue by product type:

Three Months Ended December 31, Six Months Ended December 31,
2017 2016 2017 2016
(in thousands) (in thousands)
Power discrete $ 85,094
$ 69,822
$ 168,772
$ 141,250
Power IC 15,758
21,859
33,855
44,857
Packaging and testing services 3,044
3,006
6,127
5,942
$ 103,896
$ 94,687
$ 208,754
$ 192,049



	Three Months Ended September 30,
	2020		2019
	(in thousands)
Power discrete	$	119,375	$	100,541
Power IC	29,455		15,724
Packaging and testing services	2,721		1,537
	$	151,551	$	117,802

Long-lived assets, net consisting of property, plant and equipment and land use rights, by geographical area are as follows:

December 31,
2017 June 30,
2017
(in thousands)
China $ 123,885
$ 85,691
United States 68,701
61,787
Other Countries 667
713
$ 193,253
$ 148,191



	September 30, 2020		June 30, 2020
	(in thousands)
China	$	318,143	$	310,600
United States	102,734		100,984
Other countries	765		756
	$	421,642	$	412,340

ALPHA AND OMEGA SEMICONDUCTOR LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

10. Commitments and Contingencies

Purchase Commitments

As of ~~December 31, 2017~~September 30, 2020 and June 30, ~~2017~~,2020, the Company had approximately ~~$34.7~~$44.4 million and ~~$25.7~~$43.9 million, respectively, of outstanding purchase commitments primarily for purchases of semiconductor raw materials, wafers, spare parts, ~~and~~ packaging and testing services and others.

As of September 30, 2020 and June 30, 2020, the Company had approximately ~~$128.7~~$19.8 million and ~~$69.2~~$18.0 million, primarily for the JV Company, respectively, of capital commitments for the purchase of property and ~~equipment and EPC construction.~~equipment.

Other Commitments

See Note 4,1, 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 ~~STMicro license, debt~~Joint Venture, bank borrowings and ~~Joint Venture~~.leases.

Contingencies and Indemnities

~~The Company is currently not a party to any pending material legal proceedings.~~ 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 and information from DOJ in connection with the investigation. The Company has maintained an export control compliance program and has been committed to comply fully with all applicable laws and regulations. In connection with this investigation, DOC requested the Company to suspend shipments of its products to Huawei, and the Company complied with such request, and the Company has not shipped any product to Huawei after December 31, 2019 (see Note 3). The Company is currently working with DOC to resolve this issue. Given the case is in still ongoing and neither DOJ nor DOC have provided the Company with any clear indication of the timing and schedule for the investigation, the Company cannot estimate the reasonably possible loss or range of loss that may occur. Also, the Company is unable to predict the duration, scope, result or related costs of the investigation, although the Company expects to incur additional professional fees as a result of this matter. In addition, the Company is unable to predict what, if any, further action that may be taken by the government in connection with the investigation, or what, if any, penalties, sanctions or remedial actions may be sought.

On March 19, 2020, Darryl Gray, a stockholder of the Company (the “Plaintiff”), filed a putative class action complaint in the United States District Court for the Southern District of New York (the “Gray Action”), alleging that the Company and its management members made material misstatements or omissions regarding the Company’s business and operations, including its export control practices relating to business transactions with Huawei and its affiliate. The Gray Action asserts claims under Section 10(b) of the Exchange Act against the Company, its Chief Executive Officer and Chief Financial Officer (collectively, the Defendants”), as well as claims under Section 20(a) of the Exchange Act against the Chief Executive Officer and Chief Financial Officer. Among other remedies, the Gray Action seeks to recover compensatory and other damages as well as attorney’s fees and costs.

On May 18, 2020, Plaintiff moved for an order appointing him as Lead Plaintiff pursuant to Section 21D of the Exchange Act and approving Glancy Prongay & Murray LLP as Lead Counsel for the putative class (the “Motion”). On July 1, 2020, the Court entered an order granting the Motion and requiring that: (i) Lead Plaintiff file an amended complaint or designate the current complaint as operative within sixty days; (ii) Defendants answer the complaint or otherwise move within sixty days of such filing or designation; (iii) Lead Plaintiff file an opposition, if any, within forty-five days; and (iv) Defendants file a reply, if any, forty-five days thereafter. On August 28, 2020, Plaintiff filed an amended complaint asserting the same claims against the Defendants, and adding the Company’s Executive Vice President of Product Line as a defendant on both claims. On October 27, 2020, the Defendants moved to dismiss the action in its entirety. The Company believes the claims in the Gray Action are

ALPHA AND OMEGA SEMICONDUCTOR LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

without merit and intends to vigorously defend this litigation. Given the case is in its early stages and still on going, the Company cannot estimate the reasonably possible loss or range of loss that may occur.

The Company is a party to a variety of agreements that it has contracted with various third parties. Pursuant to these agreements, the Company may be obligated to indemnify another party to such an agreement with respect to certain matters. Typically, these obligations arise in the context of contracts entered into by the Company, under which the Company customarily agrees to hold the other party harmless against losses arising from a breach of representations and covenants related to such matters as title to assets sold, certain intellectual property rights, specified environmental matters and certain income taxes. In these circumstances, payment by the Company is customarily conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, which procedures typically allow the Company to challenge the other party's claim. Further, the Company's obligations under these agreements may be limited in time and/or amount, and in some instances, the Company may have recourse against third parties for certain payments made by it under these agreements. The Company has not historically paid or recorded any material indemnifications, and no0 accrual ~~has been~~was made at ~~December 31, 2017~~September 30, 2020 and June 30, ~~2017.~~2020.

The Company has agreed to indemnify its directors and certain employees as permitted by law and pursuant to its Bye-laws, and has entered into indemnification agreements with its directors and executive officers. The Company has not recorded a liability associated with these indemnification arrangements, as it historically has not incurred any material costs associated with such indemnification obligations. Costs associated with such indemnification obligations may be mitigated by insurance coverage that the Company maintains. However, such insurance may not cover any, or may cover only a portion of, the amounts the Company may be required to pay. In addition, the Company may not be able to maintain such insurance coverage in the future.

1828

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Except for the historical information contained herein, the matters addressed in this Item 2 constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward looking statements include, but are not limited to, statements regarding future financial performance of the Company; the expected ramp up timeline of the 12-inch fab at the JV Company; the impact of government investigation and coronavirus on our financial performance; and other statements and information set forth under the heading “Factors Affecting Our Performance”. Such forward-looking statements are subject to a variety of risks and uncertainties, including those discussed below under the heading “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, that could cause actual results to differ materially from those anticipated by the Company’s management. The Private Securities Litigation Reform Act of 1995 (the “Act”) provides certain “safe harbor” provisions for forward-looking statements. All forward-looking statements made in this Quarterly Report on Form 10-Q are made pursuant to the Act. The Company undertakes no obligation to publicly release the results of any revisions to its forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unexpected events. 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, ~~2017~~,2020, filed with the Securities and Exchange Commission on September ~~5, 2017.~~2, 2020.

Overview

We are a designer, developer and global supplier of a broad portfolio of power semiconductors. Our portfolio of power semiconductors includes approximately ~~1,700~~2,300 products, and has grown significantly with the introduction of 80over 160 new products ~~during~~in the fiscal year ended June 30, ~~2017,~~2020, and over 90200 new products ~~during~~in each of the fiscal ~~years~~year ended June 30, ~~2016~~2019 and ~~2015.~~2018, respectively. During the ~~six~~three months ended ~~December 31, 2017,~~September 30, 2020, we introduced an additional 9344 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 ~~703~~832 patents and ~~116~~70 patent applications in the United States as of ~~December 31, 2017~~September 30, 2020. We also ~~had~~have a total of ~~635~~861 foreign patents, which ~~substantially~~ were based primarily on our research and development efforts ~~as of December 31, 2017.~~through September 30, 2020. We differentiate ourselves by integrating our expertise in technology, design and advanced manufacturing and packaging to optimize product performance and cost. Our portfolio of products targets high-volume applications, including personal and portable computers, graphic cards, flat panel TVs, ~~LED lighting,~~home appliances, smart phones, battery packs, game consoles, consumer and industrial motor controls and power supplies for TVs, computers, servers and telecommunications equipment.

Our business model leverages global resources, including research and development and manufacturing in the United States and Asia. Our sales and technical support teams are localized in several growing markets. We operate ~~a 200mm~~an 8-inch wafer fabrication facility located in Hillsboro, Oregon, or the Oregon fab, which is critical for us to accelerate proprietary technology development, ~~and~~ new product introduction ~~as well as to~~and improve our financial ~~performance in the long run.~~performance. To meet the market demand for the more mature high volume products, we also utilize the wafer manufacturing capacity of selected third party foundries. For assembly and test, we primarily rely upon our in-house facilities in China. In addition, we utilize subcontracting partners for industry standard packages. We believe our in-house packaging and testing capability provides us with a competitive advantage in proprietary packaging technology, product quality, cost and sales cycle time.

~~On March 29, 2016, we entered into~~We formed a joint venture ~~contract~~ (the “JV ~~Agreement”~~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”), pursuant to which we and the Chongqing Funds formed a joint venture, (the “JV Company”), for the purpose of constructing a power semiconductor packaging, testing and wafer fabrication facility in the Liangjiang New Area of Chongqing, China (the “JV Transaction”). The total initial capitalization of the JV Company is $330.0 million (the “Initial Capitalization”), which will be completed in stages. As of December 31, 2017, the Chongqing Funds contributed a total of $120.0 million of initial capital in cash and we contributed $10.0 million in cash and certain intangible assets, as well as certain packaging equipment as required by the JV Agreement by transferring the legal titles of such equipment to the JV Company. We currently own 51%, and the Chongqing Funds own 49%, of the equity interest in the JV Company. ~~If both parties agree that the termination of~~While the JV Company is our consolidated subsidiary for purpose of financial reporting, it operates as an independent and separate legal entity. As a result, the ~~best interest of each party or~~JV Company’s assets and liabilities are generally segregated from our company's assets and liabilities. For example, the JV Company ~~is bankrupt~~incurs debt through its own financing and bank loan agreements, and our parent company and other subsidiaries are not parties to these agreements and do not provide any guarantee or ~~insolvent where either party may terminate early, after paying the debts of~~security for the JV ~~Company, the remaining assets~~Company’s debt, nor do we have direct access to any cash proceeds borrowed from such loan agreements. As part of the JV Company shall be paid to the Chongqing Funds to cover the principal of its total paid-in contributions plus interest at 10% simple annual rate prior to distributing the balance of the JV Company's assets to us. We expectour strategic plan, we built the JV Company to commence initial production in mid-calendar year 2018. During the three and six months ended December 31, 2017, we recorded $1.7 million and $3.1 million in net loss attributable to noncontrolling interest, representing 49% of the net loss incurred in the JV Company, which was attributable to operating expenses and depreciation expenses offset by equipment lease income and interest income. In the long-term, the JV

~~Company plans to construct and operate a 12-inch wafer fabrication facility for the production of power semiconductors.~~fulfill growing customer demand. We expect the joint venture to ~~deliver significant cost savings, and~~provide much needed capacity to support our future growth, enhance our market positions in China, and drive ~~meaningful~~ improvements in ~~working capital and~~ capital expenditures.

~~As part of~~ During the ~~JV Transaction,~~quarter ended September 30, 2020, the additional capacity at the JV Company ~~entered into an Engineering, Procurement~~contributed significantly

to meeting the increasing demand for our products. The JV Company has reached its targeted production of assembly and ~~Construction Contract (the “EPC Contract”) with The IT Electronics Eleventh Design & Research Institute Scientific~~testing and ~~Technological Engineering Corporation Limited (the “Contractor”), effective as~~is currently ramping up its Phase I of ~~January 10, 2017 (the "Effective Date"), pursuant which~~ the ~~Contractor was engaged~~12-inch wafer fabrication. During the three months ended September 30, 2020, we recorded $0.8 million in net loss attributable to ~~construct~~ the ~~manufacturing facility contemplated under~~noncontrolling interest in the JV ~~Agreement. Under~~Company. Our current goal is to achieve Phase I target run rate in the ~~EPC Contract,~~quarter ending September 30, 2021, but our goal may be affected by the ~~Contractor’s obligations include, but are~~impact of the global COVID-19 pandemic and related economic downturn, intensified geopolitical tensions between China and U.S., logistical difficulties and other factors beyond our control. We will continue to monitor and evaluate market conditions closely during this period and react quickly to the changing environment as necessary to achieve an optimal production level at the JV Company.

During the fiscal quarter ended September 30, 2020, we continued our diversification program by developing new silicon and packaging platforms to expand our serviceable available market, or SAM and offer higher performance products. Our metal-oxide-semiconductor field-effect transistors, or MOSFET, an power IC product portfolio expanded significantly. Our high performance products and deepened customer relationships with our OEM and ODM customers resulted in our record high quarterly revenue of $151.6 million, a 28.6% growth compared to the same quarter last year.

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. Numerous governmental jurisdictions, including the States of California, Oregon and Texas in the U.S. and countries throughout the Asia Pacific region have imposed “stay-at-home” orders, quarantines, travel bans and similar governmental orders and restrictions to control the spread of COVID-19. Such orders and restrictions have resulted in business closures, work stoppages, slowdowns and delays in commercial activities, unprecedented and widespread unemployment, disruptions to ports and other shipping infrastructure, border closures, and other travel or health-related restrictions, thereby negatively impacting our customers, suppliers, distributors, employees, offices, and the entire semiconductor ecosystem.

As a result of the COVID-19 pandemic and changing consumer behaviors due to various 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 and decreasing demand for mobile phone products. While we have recently benefited from the increasing demand for PC related products, there is no guarantee that this trend will continue, and such increasing demand may discontinue or decline as government authorities relax COVID-19 related restrictions. Furthermore, as the COVID-19 pandemic continues and global economic downturn and high unemployment persist, consumer spending in general may slow down substantially, in which case we may experience a significant decline of customer orders for our products, including those designed for PC-related applications, and such decline is expected to adversely affect our financial conditions and results of operations. While some government authorities recently have permitted some reopening of businesses and approved gradual easing of various restrictions, many businesses may decide not ~~limited to: (i)~~to open fully or at all due to ongoing concerns with safety at the ~~development~~workplace, and there is no guarantee that governmental orders will not be re-imposed or modified to reinstate prior restrictions if the COVID-19 pandemic continues or caseloads deteriorate.

In an effort to protect the health and safety of ~~conceptual design, initial design, construction drawing design~~our employees and ~~optimization,~~to comply with various government and ~~submission~~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 ~~such designs~~employees attending meetings, reducing the number of people in our sites at any one time, and suspending employee travel. In the U.S., federal and state authorities imposed “stay-at-home” orders, we have taken similar proactive actions in California, Oregon and Texas where we have business activities in order to protect the health and safety of our employees, while maintaining our core operations. We expect these measures will result in difficulties and logistical challenges in our business operations, and in some cases, reduce the productivity of our workforce and cause disruptions and delays in shipping products to our customers. 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, ~~for examination~~ and ~~confirmation;~~we have modified our goal and ~~(ii)~~currently we expect to achieve Phase I target run rate in the ~~construction~~quarter ending September 30, 2021.

We cannot predict the long-term economic impact of the ~~assembly~~COVID-19 pandemic, but we will continue to actively monitor the situation and ~~wafer fabrication facilities~~may take further actions altering our business operations that we determine are in the best interests of our employees, customers, partners, suppliers, and ~~related procurement services,~~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 ~~selection~~effects on our customers, employees, and ~~engagement of subcontractors, in accordance with a construction schedule agreed upon by the parties. The total price payable under the EPC Contract is Chinese Renminbi (RMB) 540.0 million,~~prospects, or ~~approximately $78.0 million, based~~ on the currency exchange rate between RMB and U.S. Dollars on the Effective Date, which consists of $2.8 million (RMB 19.5 million) of design fees (“Design Fees”) and $75.2 million (RMB 520.5 million) of construction and procurement fees (including compliance with safety and aesthetic requirements) (“Construction Fees”). The payment is subject to volatility as a result of exposure to fluctuations in RMB foreign exchange rates. The Design Fees and Construction Fees are paid by the JV Company pursuant to a payment schedule based on the progress of the construction and the achievements of specified milestones. As of December 31, 2017, the JV Company paid approximately $37.0 million (RMB 243.8 million), and expects to pay the remaining of $44.9 million (RMB 296.2 million) in calendar year 2018. The payment is subject to volatility as a result of exposure to fluctuations in RMB foreign exchange rates.our financial results.

On September 5, 2017, we entered into a license agreement with STMicroelectronics International N.V. (“STMicro”), pursuant to which STMicro granted us a world-wide, royalty-free and fully-paid license to use its technologies to develop, market and distribute certain digital multi-phase controller products, which have been previously offered by STMicro. Under the license agreement, we agreed to pay a total price in cash of $17.0 million based on the payment schedule as set forth in the agreement of approximately $10.1 million, $6.7 million and $0.2 million in calendar year 2017, 2018 and 2019, respectively. As of December 31, 2017, we recorded $13.8 million of such intangible assets, of which $9.8 million in cash was paid to STMicro.

During the second quarter of fiscal year of 2018, we introduced AONR21357, which uses the improved P-Channel MOSFET process to achieve low power loss and reliable startup. This new P-Channel MOSFET is ideal for load switch applications in Notebook Adapter-In/ Battery In sockets. We also released AONS66916 production utilizing the latest Alpha Shield Gate Technology Generation 2 (AlphaSGT2), which attributes enable higher efficiency and robustness to critical high density telecom and server applications. During the first quarter of fiscal year of 2018, we released OTF190A60L, the first product in the new αMOS5TMHV MOSFET platform. This device provides high-efficiency performance in an easy-to-use solution optimized for server power supplies, high-end computers, charging stations and other high-performance applications. We also introduced AOZ5131QI, the latest generation of power modules. The new device enables high power-density voltage regulator solutions ideal for CPU and GPU power regulation in notebook PCs, servers, and graphic cards. In addition, we expanded our recently launched fast turn-off switched 650V H-series IGBT family with a 1200V rating. The new AOK40B120H1has been developed to address needs of industrial welding and high-frequency converters with 3-phase ac or high voltage dc input. The device offers excellent performance in high switching frequency applications, which can be a perfect fit for high voltage industrial welding machine.

Other Factors affecting our performance

~~Our~~

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

Costs of JV Company and digital power business: We ~~expect our~~have incurred an increase in operating expenses ~~to increase in the short term~~ due to the additional costs associated with ~~ramping up~~ pre-production and production ramp-up activities of the JV Company, as well as the initial startup work to develop and establish our new digital power ~~business. As~~business, both of which have had a significant impact on our financial performance. Even though the COVID-19 pandemic has slowed its production, we are making persistent progress. The JV Company has reached its targeted production of assembly and testing and is currently ramping up its Phase I of the 12-inch wafer fabrication. For the quarter ending December 31, 2020, we expect the JV Company ~~is expected~~ to ~~complete on schedule~~gradually increase the ~~construction~~production of its 12-inch wafer fabrication and assembly and ~~testing facilities during the quarter ending March 31, 2018, the~~test. We did not incur pre-production costs ~~will increase significantly, including costs relating to~~after July 2019 as the installation of equipment; performance of qualification process; increased demand for electrical power and utility; increased headcounts as a result of hiring of additional personnel, staff and operators; and establishment of administrative and management functions and systems. JV Company has commenced limited mass production.

In addition, ~~a portion of these pre-production costs cannot be capitalized under GAAP accounting. Furthermore, following the execution of~~we are developing our digital power business based on the STMicro license agreement, ~~in September 2017, we are accelerating the development of our digital power business~~which will allow us to design and distribute a full suite of advanced low-voltage power IC products. We have incurred and expect to continue to incur additional costs, including costs relating to ~~recruiting and hiring~~compensation of qualified engineers and technical staff and other research and development and management activities, as we ~~start~~continue to build this n

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

Manufacturing costs: Our gross margin ~~may be~~is affected by a number of factors including our manufacturing costs, ~~including~~ utilization of our manufacturing facilities, the production mixtures of our sales, pricing of wafers from third party foundries and pricing of semiconductor raw ~~materials, which may fluctuate from time to time largely due to the market demand and supply.~~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 ~~Oregon fab.~~Chongqing fabrication facility operated by the JV Company. We expect that in the long term our JV Company will reduce our cost of manufacturing. If we are unable to utilize our manufacturing facilities at a desired level, our gross margin may be adversely affected. In addition, we expect that in the long term our joint venture agreement with the Chongqing Funds will reduce our costs of manufacturing. However, our manufacturing costs may increase in the short term prior to the commencement of operation of the JV Company, because we may be required to incur additional costs to acquire packaging and testing capacity in order make up for the reduced capacity during the period in which we transfer our equipment from Shanghai to Chongqing. Furthermore, from time to time, we may experience wafer capacity constraints, particularly at third party foundries, that may prevent us from meeting fully ~~meeting~~ 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.

Erosion and fluctuation of average selling price: Erosion of average selling prices of established products is typical in our industry. Consistent with this historical trend, we expect our average selling prices of existing products to decline in the future. However, in the normal course of business, we seek to offset the effect of declining average selling price by introducing new and higher value products, expanding existing products for new applications and new customers and reducing the manufacturing cost of existing products. These strategies may cause the average selling price of our products to fluctuate significantly from time to time, thereby affecting our financial performance and profitability.

The global, regional economic and PC market conditions: Because our products primarily serve consumer electronic applications, a deterioration of the global and regional economic conditions could materially affect our revenue and results of operations. ~~In particular,~~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 significant decline or downturn in the PC market can have a material adverse effect on our revenue and results of operations. ~~Our revenue from the~~The PC market accounted for approximately 42.6% and 38.4% of our total revenue for the three months ended December 31, 2017 and 2016, respectively, and 40.7% and 37.2% of our total revenue for the six months ended December 31, 2017 and 2016, respectively. In the past, wemarkets have experienced a ~~significant~~modest global decline in ~~the PC markets~~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 ~~negative~~ impact on the demand for our ~~products,~~products. While recently we have experienced an increase of demand in PC market due to the impact of the COVID-19 pandemic and resulting shift in market trend, we cannot predict whether and how long this trend will continue. A decline of the PC market may have a negative impact on our revenue, factory utilization, gross margin, our ability to resell excess inventory, and other performance measures.

We have executed and continue to execute strategies to diversify our product portfolio, penetrate ~~into~~ other market segments, including the consumer, communications and industrial markets, and improve gross margins and profit by implementing cost control measures. While making ~~progress in reducing~~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. However, if the rate of decline in the PC markets is faster than we expect, or if we cannot successfully diversify or introduce new products~~strategy to ~~keep pace with the declining PC markets, we may not be able to alleviate its negative impact on our results of operations.~~gain market share.

Product introductions and customers' product requirements: Our success depends on our ability to introduce products on a timely basis that meet or are compatible with our customers' specifications and performance requirements. Both factors, timeliness of product introductions and conformance to customers' requirements, are equally important in securing design wins with our customers. As we accelerate the development of new technology platforms, we expect to increase the pace at which we introduce new products and ~~obtain~~seek and acquire design wins. Our failure to introduce new products on a timely basis that meet

customers' specifications and performance requirements, particularly those products with major OEM customers, and our inability to continue to expand our serviceable markets, could adversely affect our financial performance, including loss of market share. We believe that the JV Transaction will increase and diversify our customer base, particularly in China, in the long term. ~~We expect~~However, the ramp-activities and production schedule of our JV Company ~~to commence initial production in mid-calendar year 2018. However, there is no guarantee that~~have been impacted by the ~~JV Company will commence timely or at all,~~COVID-19 pandemic and ~~we may experience delays in the construction of the facility.~~related events, as discussed above. Even if we are able to ~~commence~~ramp up the operation of the JV ~~operation,~~Company timely, we may not be successful in acquiring a sufficient number of new customers to offset ~~the~~ additional costs due to various factors, including but are not limited to, competition from other semiconductor companies in the region, our lack of history and prior relationships with customers as a new entrant, difficulties in executing our joint venture strategies ~~lack of control over our operations~~ and the general economic conditions in Chongqing and China.

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. In addition, because our products are used in consumer electronics products, our revenue is subject to seasonality. Our sales seasonality is affected by numerous factors, including global and regional economic conditions as well as the PC market conditions, revenue generated from new products, changes in distributor ordering patterns in response to channel inventory adjustments and end customer demand for our products and fluctuations in consumer purchase patterns prior to major holiday seasons. In recent periods, broad fluctuations in the semiconductor markets and the global and regional economic conditions, in particular the decline of the PC market conditions, have had a more significant impact on our results of operations than seasonality. Furthermore, our revenue may be impacted by the level of demand from our major customers due to factors outside of our control. 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: The U.S. Department of Justice commenced an investigation into the Company’s compliance with export control regulations relating to certain business transactions with Huawei and its affiliates (“Huawei”), which were added to the “Entity List” by the Department of Commerce (“DOC”) in May 2019. In connection with this investigation, DOC requested the Company to suspend shipments of its products to Huawei, and the Company complied with such request, and the Company has not shipped any product to Huawei after December 31, 2019. The Company is currently working with DOC to resolve this issue and seeks permission to reinstate shipment to Huawei. As of the date of this report, DOC has not provided the Company with any definitive timeline or schedule for responding to the Company's request. We expect the financial performance will be negatively impacted by the Huawei shipment interruption until such time when DOC permits us to continue shipment to Huawei. There is no guarantee that DOC will agree to permit us to resume shipment to Huawei on a timely basis, or at all, and we may not be able to acquire new or additional customers or demand to offset such loss of shipment. Our failure to do so will negatively impact our revenue and profitability. Furthermore, the Company is expected to incur significant costs and expenses, including legal and professional fees, in connection with the government investigation, which may reduce our profitability and margin.

Principal line items of statements of operations

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

Revenue

We generate revenue primarily from the sale of power semiconductors, consisting of power discretes and power ICs. Historically, a majority of our revenue has been derived from power discrete products. Because our products typically have ~~three~~three-year to ~~five year~~five-year life cycles, the rate of new product introduction is an important driver of revenue growth over time. We believe that expanding the breadth of our product portfolio is important to our business prospects, because it provides us with an opportunity to increase our total bill-of-materials within an electronic system and to address the power requirements of additional electronic systems. In addition, a small percentage of our total revenue is generated by providing packaging and testing services to ~~third-parties~~third parties through one of our subsidiaries.

Our product revenue ~~includes~~is reported net of the effect of the estimated stock rotation returns and price adjustments that we expect to provide to our distributors. Stock rotation returns are governed by contract and are limited to a specified percentage of the monetary value of products purchased by the distributor during a specified period. At our discretion or upon our direct negotiations with the original design manufacturers ("ODMs") or original equipment manufacturers ("OEMs"), we may elect to grant special pricing that is below the prices at which we sold our products to the distributors. In these situations, we will grant

price adjustments to the distributors reflecting such special pricing. We estimate the price adjustments for inventory at the distributors based on factors such as distributor inventory levels, pre-approved future distributor selling prices, distributor margins and demand for our products.

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 ~~cost~~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. We implemented a process to improve our factory capacity utilization rates by transferring more wafer production to our Oregon fab and reducing our reliance on outside foundries. While our utilization rates cannot be immune to the market conditions, our goal is to make ~~such rates~~them less vulnerable to market fluctuations. We believe our market diversification strategy and product growth will drive higher ~~volumes~~volume of manufacturing which will improve our factory utilization rates and gross margin in the long run.

Operating expenses

Our operating expenses consist of research and development, selling, general and administrative ~~expenses.~~expenses and impairment of long-lived assets. We expect our operating expenses as a percentage of revenue to fluctuate from period to period as we continue to exercise cost control measures in response to the declining PC market as well as align our operating expenses to the revenue level.

Research and development expenses. Our research and development expenses consist primarily of salaries, bonuses, benefits, share-based compensation expense, expenses associated with new product prototypes, travel expenses, fees for engineering services provided by outside contractors and consultants, amortization of software and design tools, depreciation of equipment and overhead costs. We continue to invest in developing new technologies and products utilizing our own fabrication and packaging facilities as it is critical to our long-term success. We also evaluate appropriate investment levels and stay focused on new product introductions to improve our competitiveness. We expect that our research and development expenses will fluctuate from time to time.

Selling, general and administrative expenses. Our selling, general and administrative expenses consist primarily of salaries, bonuses, benefits, share-based compensation expense, product promotion costs, occupancy costs, travel expenses, expenses related to sales and marketing activities, amortization of software, depreciation of equipment, maintenance costs and other expenses for general and administrative functions as well as costs for outside professional services, including legal, audit and accounting services. We expect our selling, general and administrative expenses to fluctuate in the near future as we continue to exercise cost control ~~measures in response to the declining PC market.~~measures.

Income tax expense

We are subject to income taxes in various jurisdictions. Significant judgment and estimates are required in determining our worldwide income tax expense. The calculation of tax liabilities involves dealing with uncertainties in the application of complex tax regulations of different jurisdictions globally. We establish accruals for potential liabilities and contingencies based on a more likely than not threshold to the recognition and de-recognition of uncertain tax positions. If the recognition threshold is met, the applicable accounting guidance permits us to recognize a tax benefit measured at the largest amount of tax benefit that is more likely than not to be realized upon settlement with a taxing authority. If the actual tax outcome of such exposures is different from the amounts that were initially recorded, the differences will impact the income tax and deferred tax provisions in the period in which such determination is made. Changes in the location of taxable income (loss) could result in significant changes in our income tax expense.

We record a valuation allowance against deferred tax assets if it is more likely than not that a portion of the deferred tax assets will not be realized, based on historical profitability and our estimate of future taxable income in a particular jurisdiction. Our judgments regarding future taxable income may change due to changes in market conditions, changes in tax laws, tax planning strategies or other factors. If our assumptions and consequently our estimates change in the future, the deferred tax assets may increase or decrease, resulting in corresponding changes in income tax expense. 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.

During the quarter ended September 30, 2016, we contributed certain packaging equipment as required by the JV Agreement by transferring the legal title of such equipment to the JV Company. As a result of the transfer, we reduced our deferred tax assets by $6.6 million and recorded a $6.6 million in prepaid tax asset, which was amortized to tax expense over the useful life of the assets. As of June 30, 2017, the prepaid tax asset was amortized down to $5.5 million, of which $1.1 million and $4.4 million were included in prepaid and other current assets and other long-term assets on our balance sheet, respectively. On July 1, 2017, we adopted ASU 2016-16, ~~Intra-Entity Transfers of Assets other than Inventory,~~ which resulted in a de-recognition of a prepaid tax asset of $5.5 million related to the prior period intra-entity asset transfer with the JV Company, with an offsetting reduction to retained earnings. Because the JV Company has a full valuation allowance, there was no change to our net deferred tax assets.

U.S. ~~Tax Cuts~~Coronavirus Aid, Relief and ~~Jobs Act,~~Economic Security Act” (“CARES Act”), Enacted ~~December 22, 2017~~March 27, 2020

On ~~December 22, 2017,~~March 27, 2020, the United States enacted ~~tax reform legislation through~~ the ~~Tax Cuts~~Coronavirus Aid, Relief and ~~Jobs~~Economic Security Act (“the ~~Tax~~CARES Act”), which ~~significantly~~made the changes ~~the~~to existing U.S. tax laws, including, but not limited to, (1) ~~a reduction~~allowing U.S. federal net operating losses originated in the ~~corporate~~2018, 2019 or 2020 tax ~~rate from 35%~~years to ~~21%,~~be carried back five years to recover taxes paid based upon taxable income in the prior five years, (2) ~~a move from a worldwide tax system to a territorial system, (3)~~ eliminating the ~~corporate~~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 ~~(AMT) and changing how existing AMT~~ credits, ~~can be realized,~~ (4) modifying the bonus depreciation ~~that will allow~~ for ~~full expensing of~~ qualified improvement property and (5) ~~creating a new~~modifying the limitation on deductible interest ~~expense and (6) changing rules related~~expense.

As a result of the ability to ~~uses and limitations of~~carryback net operating ~~loss carryforwards created in~~losses from the June 2018 and June 2019 years to the June 2015 to June 2017 tax years, ~~beginning after December 31, 2017.~~

~~The SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118"),~~net operating losses which ~~provides guidance on accounting~~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 ~~effects~~years due to the ability of receiving tax refunds for the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under Accounting Standards Codification Topic 740 ("ASC 740"). In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimatetaxes paid in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax law that were in effect immediately before the enactment of the Tax Act.

~~In connection with our initial analysis of the impact of the Tax Act,~~these years. Accordingly, we reported a ~~second quarter of fiscal year 2018~~ discrete tax benefit of ~~$2.7~~$1.1 million in the quarter ended March 31, 2020 related to the re-measurement of ~~certain deferred tax assets and liabilities. In addition, we are using a~~

~~28% U.S. federal tax rate to measure our U.S. federal income tax expense for fiscal year 2018, down from~~ the ~~34% U.S. federal income tax rate used in first quarter of fiscal year 2018.~~

~~Our accounting for the impact of the Tax Act is complete for provisions of the Act~~net operating losses that could ~~impact our fiscal year 2018 financial statements. We are still analyzing~~be realized via the ~~provisions of the Act that may impact future periods. Our management expects the Act to favorably impact our~~new net income, diluted earnings per share, and cash flows in future periods, due primarily to the reduction in the federal corporate tax rate from 35% to 21% effective for periods beginning January 1, 2018. Our management currently estimates that our blended consolidated effective income tax rate (“tax rate”) for full-year fiscal 2018 will approximate 27% before discrete items, compared with nearly 33% for the prior year.operating loss carryback provisions.

Results of Operations

The following tables set forth statements of operations, also expressed as a percentage of revenue, for the three ~~and six~~ months ended ~~December 31, 2017~~September 30, 2020 and ~~2016~~.2019. Our historical results of operations are not necessarily indicative of the results for any future period.


	Three Months Ended December 31,										Six Months Ended December 31,										Three Months Ended September 30,
	2017			2016			2017		2016		2017			2016			2017		2016		2020			2019			2020		2019
	(in thousands)						(% of revenue)				(in thousands)						(% of revenue)				(in thousands)						(% of revenue)
Revenue	$	103,896		$	94,687		100.0	%	100.0	%	$	208,754		$	192,049		100.0	%	100.0	%	$	151,551		$	117,802		100.0	%	100.0	%
Cost of goods sold	75,814			72,593			73.0	%	76.7	%	153,142			148,011			73.4	%	77.1	%	109,028			90,870			71.9	%	77.1	%
Gross profit	28,082			22,094			27.0	%	23.3	%	55,612			44,038			26.6	%	22.9	%	42,523			26,932			28.1	%	22.9	%
Operating expenses
Research and development	9,102			7,284			8.8	%	7.7	%	17,427			14,303			8.3	%	7.4	%	14,691			12,368			9.7	%	10.5	%
Selling, general and administrative	15,756			11,974			15.2	%	12.6	%	30,371			23,157			14.5	%	12.1	%	17,505			15,185			11.6	%	12.9	%
Total operating expenses	24,858			19,258			24.0	%	20.3	%	47,798			37,460			22.8	%	19.5	%	32,196			27,553			21.3	%	23.4	%
Operating income	3,224			2,836			3.0	%	3.0	%	7,814			6,578			3.8	%	3.4	%
Interest income and other loss, net	(160		)	(70		)	(0.2	)%	(0.1	)%	(120		)	(119		)	(0.1	)%	(0.1	)%
Interest expense	(14		)	(24		)	—	%	—	%	(31		)	(50		)	—	%	—	%
Net income before income taxes	3,050			2,742			2.8	%	2.9	%	7,663			6,409			3.7	%	3.3	%
Income tax expense (benefit)	(2,072		)	1,085			(2.0	)%	1.1	%	(798		)	2,322			(0.4	)%	1.2	%
Net income including noncontrolling interest	5,122			1,657			4.8	%	1.8	%	8,461			4,087			4.1	%	2.1	%
Operating income (loss)																					10,327			(621		)	6.8	%	(0.5	)%
Interest expense and other income (loss), net																					(549		)	(827		)	(0.3	)%	(0.7	)%
Income (loss) before income taxes																					9,778			(1,448		)	6.5	%	(1.2	)%
Income tax expense																					1,011			410			0.7	%	0.3	%
Net income (loss) including noncontrolling interest																					8,767			(1,858		)	5.8	%	(1.5	)%
Net loss attributable to noncontrolling interest	(1,669		)	(1,190		)	(1.6	)%	(1.3	)%	(3,130		)	(2,067		)	(1.5	)%	(1.1	)%	(807		)	(2,867		)	(0.5	)%	(2.4	)%
Net income attributable to Alpha and Omega Semiconductor Limited	$	6,791		$	2,847		6.4	%	3.1	%	$	11,591		$	6,154		5.6	%	3.2	%	$	9,574		$	1,009		6.3	%	0.9	%

Share-based compensation expense was ~~allocated~~recorded as ~~follow:~~follows:


	Three Months Ended December 31,								Six Months Ended December 31,								Three Months Ended September 30,
	2017		2016		2017		2016		2017		2016		2017		2016		2020		2019		2020		2019
	(in thousands)				(% of revenue)				(in thousands)				(% of revenue)				(in thousands)				(% of revenue)
Cost of goods sold	$	415	$	205	0.4	%	0.2	%	$	731	$	400	0.4	%	0.2	%	$	385	$	436	0.3	%	0.4	%
Research and development	617		383		0.6	%	0.4	%	979		743		0.5	%	0.4	%	1,080		524		0.7	%	0.4	%
Selling, general and administrative	2,977		966		2.9	%	1.0	%	4,307		1,727		2.1	%	0.9	%	1,411		1,409		0.9	%	1.2	%
Total	$	4,009	$	1,554	3.9	%	1.6	%	$	6,017	$	2,870	3.0	%	1.5	%	$	2,876	$	2,369	1.9	%	2.0	%

The Board previously approved the incentive cash bonus plan (the “Plan”) for the calendar year commencing January 1, 2017 pursuant to which each our executive officer who continues in service through the end of the calendar year will be eligible

2434

to receive an incentive award, payable solely in cash, based on the level of attainment of certain specified our performance goals. On November 15, 2017, the Board approved an amendment to the Plan that permits the Company to pay up to 50% of such incentive awards in the common shares of the Company. We recorded $1.5 million of such stock-based expenses in the three month ended December 31, 2017. The expenses are reported in the accrued liabilities line in the condensed consolidated balance sheet as the total amount of bonus is to be settled in variable number of common shares. Such non-cash compensation expenses are recorded as part of stock-based compensation expense in the condensed consolidated statements of operations.

Three ~~And Six~~ Months Ended ~~December 31, 2017~~September 30, 2020 and ~~2016~~2019

Revenue

The following is a summary of revenue by product type:


	Three Months Ended December 31,									Six Months Ended December 31,									Three Months Ended September 30,
	2017		2016		Change					2017		2016		Change					2020		2019		Change
	(in thousands)				(in thousands)			(in percentage)		(in thousands)				(in thousands)			(in percentage)		(in thousands)				(in thousands)		(in percentage)
Power discrete	$	85,094	$	69,822	$	15,272		21.9	%	$	168,772	$	141,250	$	27,522		19.5	%	$	119,375	$	100,541	$	18,834	18.7	%
Power IC	15,758		21,859		(6,101		)	(27.9	)%	33,855		44,857		(11,002		)	(24.5	)%	29,455		15,724		13,731		87.3	%
Packaging and testing services	3,044		3,006		38			1.3	%	6,127		5,942		185			3.1	%	2,721		1,537		1,184		77.0	%
	$	103,896	$	94,687	$	9,209		9.7	%	$	208,754	$	192,049	$	16,705		8.7	%	$	151,551	$	117,802	$	33,749	28.6	%

Total revenue was ~~$103.9~~$151.6 million for the three months ended ~~December 31, 2017,~~September 30, 2020, an increase of ~~$9.2~~$33.7 million, or ~~9.7%~~28.6%, as compared to ~~$94.7~~$117.8 million for the same quarter last year. The increase was primarily due to an increase of ~~$15.3~~$18.8 million and $13.7 million in sales of power discrete products ~~partially offset by a decrease of $6.1 million in~~and sales of power IC ~~products.~~products, respectively. The ~~net~~ increase in power discrete and power IC product sales was primarily due to a ~~4.3%~~39.7% increase in unit shipments, ~~as well as a 5.6% increase~~partially offset by an 8.4% decrease in average selling price as compared to ~~the~~ same quarter last year ~~due to a shift in product mix. The revenue of packaging and testing services revenue for~~ ~~the three months ended December 31, 2017~~ ~~and 2016 remained flat.~~

Total revenue was $208.8 million for the six months ended December 31, 2017, an increase of $16.7 million, or 8.7%, as compared to $192.0 million for the same period last year. The increase primarily due to $27.5 million in sales of power discrete products, partially offset by $11.0 million in power IC products. The net increase in product revenue, including power discrete and power IC product was primarily due to a 4.6% increase in unit shipments, as well as a 4.1% increase in average selling price as compared to the same period of last year mainly due to a shift in product mix. The increase in revenue of packaging and testing services for the ~~six~~three months ended ~~December 31, 2017~~September 30, 2020, as compared to ~~the~~ same ~~period~~quarter last year, was primarily due to increased demand.

Cost of goods sold and gross profit


	Three Months Ended December 31,										Six Months Ended December 31,										Three Months Ended September 30,
	2017			2016			Change				2017			2016			Change				2020			2019			Change
	(in thousands)						(in thousands)		(in percentage)		(in thousands)						(in thousands)		(in percentage)		(in thousands)						(in thousands)		(in percentage)
Cost of goods sold	$	75,814		$	72,593		$	3,221	4.4	%	$	153,142		$	148,011		$	5,131	3.5	%	$	109,028		$	90,870		$	18,158	20.0	%
Percentage of revenue	73.0		%	76.7		%					73.4		%	77.1		%					71.9		%	77.1		%

Gross profit	$	28,082		$	22,094		$	5,988	27.1	%	$	55,612		$	44,038		$	11,574	26.3	%	$	42,523		$	26,932		$	15,591	57.9	%
Percentage of revenue	27.0		%	23.3		%					26.6		%	22.9		%					28.1		%	22.9		%

Cost of goods sold was ~~$75.8~~$109.0 million for the three months ended ~~December 31, 2017,~~September 30, 2020, an increase of ~~$3.2~~$18.2 million, or ~~4.4%~~20.0%, as compared to ~~$72.6~~$90.9 million for the same quarter last year. The increase was primarily due to ~~increased unit shipments.~~28.6% increase in revenue. Gross margin increased by ~~3.7~~5.2 percentage points to ~~27.0%~~28.1% for the three months ended ~~December 31, 2017~~September 30, 2020, as compared to ~~23.3%~~22.9% for the same quarter last year. The increase in gross margin was primarily due to ~~increased average selling prices due to~~ a ~~shift~~reduction of production ramp-up costs in ~~product mix and approximately $1.0 million of specific reserve was released~~our JV Company during the three months ended ~~December 31, 2017.~~

Cost of goods sold was $153.1 million for the six months ended December 31, 2017, an increase of $5.1 million, or 3.5%, as compared to $148.0 million for the same period last year, primarily due to increased unit shipments. Gross margin increased

by 3.7 percentage point to 26.6% for the six months ended December 31, 2017 as compared to 22.9% for the same period last year. The increase in gross margin was primarily due to a shift in product mix and approximately $1.0 million of specific reserve was released during the current period.September 30, 2020.

Research and development expenses

Three Months Ended December 31, Six Months Ended December 31,
2017 2016 Change 2017 2016 Change
(in thousands) (in thousands) (in percentage) (in thousands) (in thousands) (in percentage)
Research and development $ 9,102
$ 7,284
$ 1,818
25.0 % $ 17,427
$ 14,303
$ 3,124
21.8 %



	Three Months Ended September 30,
	2020		2019		Change
	(in thousands)				(in thousands)		(in percentage)
Research and development	$	14,691	$	12,368	$	2,323	18.8	%

Research and development expenses were ~~$9.1~~$14.7 million for the three months ended ~~December 31, 2017,~~September 30, 2020, an increase of ~~$1.8~~$2.3 million, or ~~25.0%~~18.8%, as compared to ~~$7.3~~$12.4 million for the same quarter last year. The increase was primarily attributable to a ~~$0.4~~$0.6 million increase in employee compensation and ~~benefit~~benefits expense mainly due to ~~increased headcount and~~ higher ~~bonus expenses,~~bonuses, a ~~$0.9~~$0.8 million increase in product prototyping engineering expense as a result of increased engineering activities, a ~~$0.2~~$0.3 million increase in professional services expense as a result of higher consulting fees. partially offset by lower recruiting fees, as well as a $0.6 million increase in share-based compensation expense ~~as a result of~~due to an increase ofin stock awards granted ~~and a $0.1 million increase in recruiting fee in~~during the current quarter.

Research and development expenses were $17.4 million for the six months ended December 31, 2017, an increase of $3.1 million, or 21.8%, as compared to $14.3 million for the same period last year. The increase was primarily attributable to a $1.2 million increase in employee compensation expenses mainly due to increased headcount and higher bonus expenses, a $1.3 million increase in product prototyping engineering expense as a result of increased engineering activities, as well as a $0.2 million increase in share-based compensation expense as a result of an increase of stock awards, and $0.1 million in recruiting fee during the current period as compared to the same period last year.

Selling, general and administrative expenses

Three Months Ended December 31, Six Months Ended December 31,
2017 2016 Change 2017 2016 Change
(in thousands) (in thousands) (in percentage) (in thousands) (in thousands) (in percentage)
Selling, general and administrative $ 15,756
$ 11,974
$ 3,782
31.6 % $ 30,371
$ 23,157
$ 7,214
31.2 %



	Three Months Ended September 30,
	2020		2019		Change
	(in thousands)				(in thousands)		(in percentage)
Selling, general and administrative	$	17,505	$	15,185	$	2,320	15.3	%

Selling, general and administrative expenses were ~~$15.8~~$17.5 million for the three months ended ~~December 31, 2017,~~September 30, 2020, an increase of ~~$3.8~~$2.3 million, or ~~31.6%~~15.3%, as compared to ~~$12.0~~$15.2 million for the same quarter last year. The increase was primarily attributable to a $1.5 million increase in employee compensation and benefit expenses mainly due to increased headcount and higher bonus expenses, a $2.0 million increase in share-based compensation expense due to increased grant of equity awards, and a $0.2 million increase in employee business expenses due to increased travel expenses during the current quarter.

Selling, general and administrative expenses were $30.4 million for the six months ended December 31, 2017, an increase of $7.2 million, or 31.2%, as compared to $23.2 million for the same period last year. The increase was primarily attributable to a $4.1$1.6 million increase in employee compensation and benefits expenses, ~~primarily~~mainly due to increased headcount, ~~and~~ higher bonus expenses and increased employee insurance expenses. The increase was also attributable a ~~$2.6~~$1.2 million increase in ~~share-based compensation expense due~~legal expenses related to ~~increased grant of equity awards, and~~the government investigation. These increases were partially offset by a ~~$0.3~~$0.4 million ~~increase~~decrease in employee business expenses due to ~~increased~~decreased travel expenses as a result of the COVID-19 pandemic.

Interest expense and other income (loss), net



	Three Months Ended September 30,
	2020			2019			Change
	(in thousands)						(in thousands)		(in percentage)
Interest expense and other income (loss), net	$	(549	)	$	(827	)	$	278	(33.6	)%

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

Interest income and others ~~net~~

Three Months Ended December 31, Six Months Ended December 31,
2017 2016 Change 2017 2016 Change
(in thousands) (in thousands) (in percentage) (in thousands) (in thousands) (in percentage)
Interest income and other loss, net $ (160 ) $ (70 ) $ (90 ) 128.6 % $ (120 ) $ (119 ) $ (1 ) 0.8 %

~~Interest income and others, net was~~were primarily related to interest earned from cash and cash equivalents, as well as foreign exchange gains (losses). The decrease in interest income and ~~other loss,~~others, net during the three months ended ~~December 31, 2017~~September 30, 2020 as compared to the same ~~period~~quarter last year was primarily due to higher foreign currency exchange ~~losses~~gains as a result of ~~recent~~the depreciation of USD against ~~RMB, partially offset by higher interest income as a result of an increase in average cash balances.~~RMB.

Income tax expense

Three Months Ended December 31, Six Months Ended December 31,
2017 2016 Change 2017 2016 Change
(in thousands) (in thousands) (in percentage) (in thousands) (in thousands) (in percentage)
Income tax expense (benefit) $ (2,072 ) $ 1,085
$ (3,157 ) (291.0 )% $ (798 ) $ 2,322
$ (3,120 ) (134.4 )%



	Three Months Ended September 30,
	2020		2019		Change
	(in thousands)				(in thousands)		(in percentage)
Income tax expense	$	1,011	$	410	$	601	146.6	%

For the three months ended ~~December 31, 2017, we recognized income tax benefit of approximately $2.1 million, which included a discrete tax benefit of $2.7 million related to re-measuring~~September 30, 2020, the ~~Company’s U.S. deferred tax assets and liabilities following enactment of the 2017 U.S. Tax Cut and Jobs Act in December 2017. For the three months ended December 31, 2016, we~~Company recognized income tax expense of ~~$1.1 million.~~approximately $1.0 million, compared to income tax expense of $0.4 million for the three months ended September 30, 2019. The income tax expense of $1.0 million for the three months ended September 30, 2020 included a $0.03 million discrete tax benefit. The income tax expense of $0.4 million for the three months ended September 30, 2019 included a $0.02 million discrete tax expense. Excluding the discrete income tax ~~expense,~~items, the ~~estimated~~ effective tax rate for the three months ended ~~December 31, 2017~~September 30, 2020 and 2019 was ~~31.4% compared to 39.1% for the three months ended December 31, 2016.~~10.7% and (27.3)%, respectively. The changes in the effective tax rate and tax expense between the periods resulted primarily from the ~~reduction in~~Company reporting pretax book income of $9.8 million for the U.S. corporate tax rate following the enactment of the 2017 U.S. Tax Cut and Jobs Act along with changes in the mix of earnings in various geographic jurisdictions between the current year and the same period of last year.

~~For the six~~three months ended ~~December 31, 2017, we recognized an income tax benefit~~September 30, 2020 vs. a pretax book loss of ~~approximately $0.8~~$1.4 million ~~which included a discrete tax benefit of $2.7 million largely related to re-measuring our U.S. deferred tax assets and liabilities following enactment of~~for the ~~2017 U.S. Tax Cut and Jobs Act in December 2017. For the six~~three months ended December 31, 2016, we recognized income tax expense of approximately $2.3 million. Excluding the discrete income tax items, the estimated effective tax rate for the six months ended December 31, 2017 was 24.0% compared to 35.6% for the six months ended December 31, 2016. The changes in the effective tax rate and tax expense between the periods resulted primarily from the reduction in the U.S. corporate tax rate following the enactment of the 2017 U.S. Tax Cut and Jobs Act along with changes in the mix of earnings in various geographic jurisdictions between the current year and the same period of last year.September 30, 2019.

Liquidity and Capital Resources

Our principal need for liquidity and capital resources is to maintain sufficient working capital to support our operations and to invest adequate capital expenditures to grow of our business. To date, we finance our operations and capital expenditures primarily through funds generated from operations and ~~borrowing~~borrowings under our term ~~loan.~~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. 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 RMB 60.0 million or $8.5 million based on the currency exchange rate between the RMB and the U.S. Dollar on October 31, 2019. As of September 30, 2020, there was no outstanding balance under the loan.

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. 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. Dollar on November 16, 2018. In October 2019, this line of credit was renewed with the same terms and a maturity date of September 30, 2020. On September 30, 2020, there was no outstanding balance under the line of credit and the line of credit expired.

On August 9, 2019, one of our wholly-owned subsidiaries (the "Borrower") entered into a factoring agreement with the Hongkong and Shanghai Banking Corporation Limited ("HSBC"), whereby the Borrower assigns certain of its accounts receivable with recourse. 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. 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 September 30, 2020. During the three months ended September 30, 2020, the Borrower borrowed $29.7 million and repaid this amount in full. As of September 30, 2020, there was no outstanding balance and the Borrower had unused credit of approximately $30.0 million.

On May 1, 2018, Jireh Semiconductor Incorporated ("Jireh"), a wholly-owned subsidiary of the Company, entered into a loan agreement with a financial institution (the "Bank") that provided a term loan in the amount of $17.8 million. The obligation under the loan agreement is secured by certain real estate assets of Jireh and guaranteed by the Company. The loan has a five-year term and matures on June 1, 2023. Beginning June 1, 2018, Jireh made consecutive monthly payments of principal and interest to the Bank. The outstanding principal accrues interest at a fixed rate of 5.04% per annum on the basis of a 360-day year. The loan agreement contains customary restrictive covenants and includes certain financial covenants that require the Company to maintain, on a consolidated basis, specified financial ratios. We were in compliance with these covenants as of September 30, 2020. As of September 30, 2020, the outstanding balance of the term loan was $15.7 million.

On August 15, 2017, ~~our Oregon subsidiary,~~ Jireh ~~Semiconductor Incorporated (“Jireh”),~~ entered into a credit agreement with ~~a financial institution (the “Bank”)~~the Bank that ~~provides~~provided a term loan in an amount up to $30.0 million for the purpose of purchasing certain equipment for our fabrication facility located in Oregon. The obligation under the credit agreement is secured by substantially all assets of Jireh and guaranteed by ~~the Company.~~us. The credit agreement has a five-year term and matures on August 15, 2022. OnIn January ~~12,~~2018 and July 2018, Jireh drew down the loan in the amount of $13.2 million and ~~as of January 31, 2018, the total outstanding balance under the loan was $13.2 million.~~$16.7 million, respectively. Beginning ~~of September~~in October 2018, Jireh iswas 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 ~~London Interbank Offered Rate ("LIBOR")~~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 ~~including~~and includes certain financial covenants that require ~~the Company~~us to maintain, on a consolidated basis, specified financial ratios and fixed charge coverage ratio. We ~~are~~were in compliance with these ~~covenants.~~

~~In March 2016, we entered into~~covenants as of September 30, 2020. As of September 30, 2020, the JV Agreement with an initial capitalization of $330.0 million. By December 31, 2017, the Chongqing Funds contributed a total of $120.0 million of initial capital in cash, and we contributed $10.0 million in cash and certain intangible assets, as well as certain packaging equipment as required by the JV Agreement by transferring the legal titles of such equipment to the JV Company. We expect the JV Company to commence initial production in mid-calendar year 2018. Over the long-term, the JV Company plans to construct and operate a 12-inch wafer fabrication facility for the manufacturing or semiconductor products. If both parties agree that the termination of the JV Company is the best interest of each party or the JV Company is bankrupt or insolvent where either party may terminate early, after paying the debts of the JV Company, the remaining assets of the JV Company shall be paid to the Chongqing Funds to cover the principal of its total paid-in contributions plus the interest at 10% simple annual rate prior to distributing theoutstanding balance of the ~~JV Company's assets to us.~~term loan was $14.9 million.

In January 2017, the JV Company entered into the EPC Contract. The total price payable by the JV Company under the EPC Contract is Chinese Renminbi (RMB) 540.0 million, or approximately $78.0 million based on the currency exchange rate between RMB and U.S. Dollars on the Effective Date, which consists of $2.8 million (RMB 19.5 million) of design fees and $75.2 million (RMB 520.5 million) of construction and procurement fees. These fees will be paid by the JV Company pursuant to a payment schedule based on the progress of the construction and the achievements of specified milestones. The payment is subject to volatility as a result of exposure to fluctuations in RMB foreign exchange rates. The Design Fees and Construction Fees are paid by the JV Company pursuant to a payment schedule based on the progress of the construction and the achievements of specified milestones. As of December 31, 2017, the JV Company paid approximately $37.0 million (RMB 243.8 million), and expect to pay the remaining of $44.9 million (RMB 296.2 million) in calendar year 2018. In addition, we expect that during the fiscal quarter ending March 31, 2018, the Chongqing Funds will make additional cash contribution to the JV Company pursuant to the terms of the JV Agreement, primarily to cover the remaining costs of the building construction and a portion of the purchase of equipment. Notwithstanding such contribution, we expect the JV Company will be required to obtain additional financing in order to fund the remaining portion of the acquisition of equipment necessary to commence production at the facility. However, there is no guarantee that the JV Company will be able to secure the required amount of financing from the lenders, or if such financing will be available on terms favorable to us. If the JV Company cannot secure sufficient financing, we may use a portion of our cash reserve to further capitalize and finance the JV Company.

In September 2017, the Board of Directors ~~terminated our prior repurchase program that was approved in 2015 and~~ approved a ~~new~~ repurchase program (the “Repurchase Program”)~~. The Repurchase Program allows~~ 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 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. ~~There is no guarantee that such repurchases under~~We did not repurchase any shares pursuant to the ~~Purchase Program will enhance the value of our shares.~~

~~During~~Repurchase Plan during the three ~~and six~~ months ended ~~December 31, 2017,~~September 30, 2020. Since the inception of the program, we repurchased ~~346,621~~an aggregate of 6,784,648 shares ~~from the open market,~~ for a total cost of ~~$6.0~~$67.3 million, at an average price of $17.34 per share, under the share repurchase program. Since the inception of the prior repurchase program in 2010, we repurchased an aggregate of 6,069,714 shares from the open market including shares purchased in the Tender Offer for a total cost of $56.8 million, at an average price of $9.35$9.92 per share, excluding fees and related expenses. As of ~~December 31, 2017,~~September 30, 2020, of the ~~6,069,714~~6,784,648 repurchased shares, ~~122,154~~146,928 shares with a weighted average repurchase

price of ~~$10.70~~$10.30 per share, were reissued at an average price of ~~$6.06~~$5.25 per share pursuant to option exercises and vested restricted share units. We had ~~$24.0~~$13.4 million remained available under the Repurchase Program as of ~~December 31, 2017.~~September 30, 2020.

We believe that our current cash and cash equivalents and cash flows from operations will be sufficient to meet our anticipated cash needs, including working capital and capital expenditures, for at least the next twelve months. In the long-term, we may require additional capital due to changing business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If our cash is insufficient to meet our needs, we may seek to raise capital through equity or debt financing. The sale of additional equity securities could result in dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and may include operating and financial covenants that would restrict our operations. We cannot be certain that any financing will be available in the amounts we need or on terms acceptable to us, if at all.

JV Company Financing Transactions

From time to time the JV Company entered into financing and loan agreements with banks and other third parties to fund capital expenditures and other operational expenses in connection with the constructions and ramp-up of the manufacturing facility in Chongqing. The JV Company incurs debt through its own financing agreements, and our parent company and other subsidiaries are not parties to these agreements and do not provide any guarantee or security for JV Company’s debt, nor do we have direct access to any cash proceeds borrowed from such loan agreements.

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. Dollar on the Effective Date, of financing to the JV Company (the “Lease Financing”). In exchange for the Lease Financing, the JV Company agrees to transfer title of its assembly and testing equipment to the Lenders, and the Lenders lease such equipment to the JV Company under a five-year lease arrangement, pursuant to which the JV Company makes quarterly lease payments to the Lenders consisting of principal and interest based on a repayment schedule mutually agreed by the parties. The interest under the Lease Financing is accrued based on the China Base Rate multiplied by 1.15, or 5.4625% on the Effective Date. Under the Agreements, at the end of the five-year lease term, the Lenders agree to sell such equipment back to the JV Company for a nominal amount (RMB 1). The JV Company’s obligations under the Lease Financing are secured by the land and building owned by the JV Company (the “Collateral”). The proceeds from the Lease Financing 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, 2020, the outstanding balance of the Lease Financing was approximately $39.8 million based on the currency exchange rate as of September 30, 2020.

On September 23, 2019, the JV Company entered into a short-term loan agreement with China Everbright bank in China. The JV Company can borrow up to RMB 50.0 million or $7.1 million based on the currency exchange rate between RMB and U.S. Dollar on September 23, 2019 at varying interest rates, in RMB or USD. Interest payments with the entire principal are due no later than 90 days from each borrowing date. As of September 30, 2020, there was no outstanding balance under the loan.

On March 12, 2019, the JV Company entered into a loan agreement with The Export-Import Bank of China in the aggregate principal amount of RMB 200 million (approximately $29.8 million based on currency exchange rate between RMB and U.S. Dollar on March 31, 2019). The loan will mature on February 20, 2025. The JV Company drew down RMB 190 million and RMB 10 million in March 2019 and December 2019, respectively. The loan withdraw window expired on February 28, 2020. The interest is accrued based on the China Base Rate multiplied by 1.1, or 5.39%. The loan requires quarterly interest payments. The principal payments are required to be paid every 6 months over the term of loan commencing in October 2019. This loan is secured by the buildings and certain equipment owned by the JV Company. As a condition of the loan arrangements, 14 million RMB (approximately $2.0 million) of cash is held as restricted cash by the JV Company as a

compensating balance at the JV Company's bank until the principal is paid. On June 24, 2020, a modification of this loan was signed, pursuant to which the interest rate was changed to be based on the five-year loan prime rate in China plus 0.74%, or 5.39%. Other terms of this loan remain the same. During the three months ended December 31, 2019, the JV Company paid 6.0 million RMB under this agreement. As of September 30, 2020, the outstanding balance of the loan was 194 million RMB (equivalent of $28.5 million based on the currency exchange rate as of September 30, 2020).

In December 2019, the JV Company entered into a loan agreement with China Development Bank in the amount of $24.0 million. The obligation under the loan agreement is secured by certain assets of the JV Company. Beginning December 18, 2020, the JV Company will make consecutive semi-annual payments of principal until December 8, 2024. The interest is accrued based on the LIBOR rate plus 2.8%. The interest is required to be paid March 21 and September 21 each year. As of September 30, 2020, the outstanding balance of the loan was $24.0 million.

On April 15, 2020, the JV Company entered into a one-year loan agreement with China Everbright Bank in China to borrow a maximum of Chinese Renminbi (RMB) 100 million (approximately $14.3 million based on the currency exchange rate between RMB and U.S. Dollar on April 15, 2020) in the amount in RMB or USD. Interest payments are due on the 20th of each month, and the entire principal is due on April 16, 2021. The loan consists of RMB 20 million for working capital borrowing in Chinese yuan and RMB 80 million for borrowing in US dollars that is collateralized by eligible accounts receivable. During the three months ended June 30, 2020, the JV Company borrowed RMB 20 million, or $2.8 million based on the currency exchange rate between RMB and U.S. Dollar, at a fixed interest rate of 5.1375% per annum under the working capital loan. The JV Company also borrowed $7.1 million and $1.9 million at a fixed interest rate of 2.7% and 2.8% per annum, respectively, during the same period under the accounts receivable collateralized loan. During the three months ended September 30, 2020, the JV Company repaid $9.0 million and borrowed $11.3 million at a fixed interest rate of 2.7% per annum under the accounts receivable collateralized loan. As of September 30, 2020, the total outstanding balance under the loan was $14.2 million.

On April 26, 2020, the JV Company entered into a loan agreement with China Development Bank, Agricultural Bank of China, China Merchants Bank and Chongqing Rural Commercial Bank (collectively, "the Banks") in the aggregate principal amount of RMB 250 million, (approximately $35.7 million based on the currency exchange rate between RMB and U.S. Dollar on April 26, 2020). The obligation under the loan agreement is secured by certain assets of the JV Company. Beginning December 18, 2020, the JV Company is required to make consecutive semi-annual payments of principal until December 8, 2024. Interest payment is due on March 20, June 20, September 20 and December 20 of each year based on China one-year loan prime rate ("LPR") plus 1.3%. The JV Company drew down RMB 250 million (approximately $35.3 million based on the currency exchange rate between RMB and U.S. Dollar on June 30, 2020) in April 2020. As of September 30, 2020, the outstanding balance of the loan was $36.7 million.

Cash, ~~and~~ cash equivalents and restricted cash

As of ~~December 31, 2017~~September 30, 2020 and June 30, ~~2017,~~2020, we had ~~$146.2~~$159.0 million and ~~$115.7~~$162.7 million of cash, ~~and~~ cash equivalents and restricted cash, respectively. Our cash, ~~and~~ 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. Of the ~~$146.2~~$159.0 million and ~~$115.7~~$162.7 million cash, ~~and~~ cash equivalents ~~$130.5~~and restricted cash, $138.3 million and ~~$73.9~~$120.3 million, respectively, are deposited with financial institutions outside the United States.

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

Six Months Ended December 31,
2017 2016
(in thousands)
Net cash provided by operating activities $ 21,854
$ 18,069
Net cash used in investing activities (75,123 ) (23,464 )
Net cash provided by financing activities 82,529
40,973
Effect of exchange rate changes on cash and cash equivalents 1,241
(559 )

Net increase in cash and cash equivalents $ 30,501
$ 35,019



	Three Months Ended September 30,
	2020			2019
	(in thousands)
Net cash provided by (used in) operating activities	$	9,848		$	(1,227	)
Net cash used in investing activities	(11,337		)	(15,798		)
Net cash used in financing activities	(4,186		)	(1,082		)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	1,997			(805		)
Net decrease in cash, cash equivalents and restricted cash	$	(3,678	)	$	(18,912	)

Cash flows from operating activities

Net cash provided by operating activities of ~~$21.9~~$9.8 million for the ~~six~~three months ended ~~December 31, 2017~~September 30, 2020 resulted primarily from net income of ~~$8.5~~$8.8 million and non-cash expenses of ~~$18.2~~$15.4 million, partially offset by net changes in assets and liabilities using net cash of ~~$4.8~~$14.3 million. The non-cash expenses of ~~$18.2~~$15.4 million primarily included ~~a $14.4~~$12.5 million of depreciation and amortization expenses ~~a $6.0~~and $2.9 million of share-based compensation ~~expense, and a $(2.2) million of deferred income taxes.~~expense. The net changes in assets and liabilities using cash of ~~$4.8~~$14.3 million were primarily due to a ~~9.4~~$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 ~~$9.1~~continued ramp of the JV Company, and a $1.0 million increase in other current and ~~long term~~long-term assets due to increase in advance payments to vendors, and a ~~$0.4~~$0.8 million decrease ~~in income taxes payable, partially offset by a $4.1 million decrease in accounts receivable from timing of billings and collection of payments, a $8.1 million increase~~ in accrued and other liabilities, ~~and~~partially offset by a $1.9 million increase in accounts payable due to timing of ~~payment.~~payments, and a $0.7 million increase in income taxes payable.

Net cash ~~provided by~~used in operating activities of ~~$18.1~~$1.2 million for the ~~six~~three months ended ~~December 31, 2016~~September 30, 2019 resulted primarily from net ~~income~~loss of ~~$4.1~~$1.9 million and ~~non-cash expenses of $22.3 million, offset by~~ net changes in assets and liabilities of ~~$8.4~~$12.6 million, partially offset by non-cash expenses of $13.3 million. The non-cash expenses of ~~$22.3~~$13.3 million ~~include a $13.3~~primarily included $10.9 million of depreciation and amortization expenses ~~a $2.9~~and $2.4 million of share-based compensation ~~expense, a $0.4 million of gain on disposal of property and equipment, and a $6.6 million of deferred income taxes.~~expense. The net changes in assets and liabilities of ~~$8.4~~$12.6 million were primarily due to a ~~$7.0~~$5.8 million increase in inventories and a $15.0 million increase in accounts receivable from a one day delay of $9.2 million receivable payment from one of our major distributors due to the bank shut down on September 30, 2019 due to Typhoon Mitag in Taiwan, as well as increased billings in the current quarter as compared to the prior quarter, partially offset by a $3.8 million decrease in other current and long term assets due to ~~increase~~decrease in advance payments to vendors, ~~a $4.6~~$0.8 million ~~decrease~~increase in accounts payable due to timing of payment, and a ~~$1.4 million increase in inventories, partially offset by $2.1 million decrease in accounts receivable from timing of billings and collection of payments, a $2.3~~$3.7 million increase in accrued and other ~~liabilities and $0.3 million increase in income taxes payable.~~liabilities.

Cash flows from investing activities

Net cash used in investing activities of ~~$75.1~~$11.3 million for the ~~six~~three months ended ~~December 31, 2017~~September 30, 2020 was primarily attributable to ~~$64.8~~$11.3 million purchases of property and equipment, including ~~$41.6~~$3.4 million ~~purchase in~~purchased by the ~~Joint Venture Company and $10.4 million in purchases of intangible asset during the quarter.~~

JV Company.

Net cash used in investing activities of ~~$23.5~~$15.8 million for the ~~six~~three months ended ~~December 31, 2016~~September 30, 2019 was primarily attributable to ~~$23.7~~$15.8 million purchases of property and equipment, ~~and land to increase our in-house production capacity and to support~~including $7.5 million purchased by the ~~Joint Venture Company, as well as $0.1 million increase in restricted cash, partially offset by $0.4 million proceeds from sale of certain equipment.~~JV Company.

Cash flows from financing activities

Net cash used in financing activities of ~~$82.5~~$4.2 million for the ~~six~~three months ended ~~December 31, 2017~~September 30, 2020 was primarily attributable to ~~$87.0~~$11.1 million ~~proceeds from investment by noncontrolling interest and $2.2 million~~in repayments of ~~proceeds from exercise of stock options and issuance of shares und the ESPP, partially offset by $6.0 million for repurchase of our common shares under the repurchase program, $0.4~~borrowings, $4.0 million in payment of ~~capital~~finance lease obligations, and ~~$0.2~~$0.4 million in common shares acquired to settle withholding tax related to vesting of restricted stock ~~units.~~units, partially offset by $11.3 million proceeds from borrowings.

Net cash used in financing activities of ~~$41.0~~$1.1 million for the ~~six~~three months ended ~~December 31, 2016~~September 30, 2019 was primarily attributable to ~~$33.0~~$2.1 million ~~proceeds from investment by noncontrolling interest and $8.7 million~~in repayments of ~~proceeds from exercise of stock options and issuance of shares under the ESPP, partially offset by $0.4~~borrowings, $1.7 million in payment of ~~capital~~finance lease obligations, and ~~$0.3~~$0.1 million in common shares acquired to settle withholding tax related to vesting of restricted stock ~~units.~~units, partially offset by $2.8 million proceeds from borrowings.

~~Capital expenditures~~

Capital expenditures were $64.8 million and $23.7 million for the six months ended December 31, 2017 and 2016, respectively. The increase in capital expenditure was primarily due to EPC construction payment in connection with the JV Transaction, additional purchase of equipment and assets, and investment in R&D to improve our technology and support our new product introductions. In general, our capital expenditures primarily consists of purchases of equipment for our packaging and testing services and for our Oregon fab, purchases of equipment and construction payment in Chongqing for the Joint Venture Company, investment in new technology as well as for upgrading our operational and financial systems. We expect that our capital expenditures will continue to increase in order to support the JV Transaction, including additional costs associated with pre-production activities of the JV Company. We also expect capital expenditure to increase as we accelerate the development of our new digital power business.

Commitments

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 ~~December 31, 2017~~,September 30, 2020, we had no material off-balance sheet arrangements as defined in Regulation S-K 303(a)(4)(ii) arrangements.

Contractual Obligations

There were no material changes outside of our ordinary course of business in our contractual obligations from those disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, ~~2017.~~2020.

Recent Accounting Pronouncements

See Note 1 of the Notes to the Condensed Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q for a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on results of operations and financial condition, which is incorporated herein by reference.

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ITEM 3. 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, ~~2017~~2020, filed with the SEC on September ~~5, 2017.~~2, 2020.

ITEM 4. CONTROLS AND PROCEDURES

Management's Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”)), as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of ~~December 31, 2017~~September 30, 2020 have been designed and are functioning effectively to provide reasonable assurance that the information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the three months ended ~~December 31, 2017~~September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitation on Effectiveness of Controls

While our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance that their respective objectives will be met, we do not expect that our disclosure controls and procedures or our internal control over financial reporting are or will be capable of preventing or detecting all errors and all fraud. Any control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

As previously disclosed, 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” by the Department of Commerce (“DOC”) in May 2019. The Company is cooperating fully with federal authorities in the investigation. The Company has 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. In connection with this investigation, DOC previously requested the Company to suspend shipments of its products to Huawei. 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.

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 45 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. The Company believes the claims in the Gray Action are ~~currently not a party~~without merit and intends to ~~any material legal proceedings.~~ vigorously defend this litigation.

We have 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, we could incur significant costs in the defense thereof or could suffer adverse effects on ~~its~~our operations.

ITEM 1A. RISK FACTORS

Item 1A of Part I of our Annual Report on Form 10-K for the year ended June 30, ~~2017,~~2020, filed with the SEC on September ~~5, 2017,~~2, 2020, contains risk factors identified by the Company. Except as ~~set forth~~noted below, there have been no material changes to the risk factors we previously disclosed in our filings with the SEC. Our operations could also be affected by additional factors that are not presently known to us or by factors that we currently consider immaterial to our business.

Our business operation and financial performance may be adversely affected by the COVID-19 pandemic and related events.

We ~~may not be able~~are subject to ~~fully realize~~risks related to the ~~anticipated benefits and advantages from our joint venture~~global pandemic associated with the ~~Chongqing government.~~COVID-19 disease, which has spread globally from China to the U.S. and other countries where we have operations. Numerous governmental jurisdictions, including the States of California, Oregon and Texas and countries throughout the Asia Pacific region, have imposed “stay-at-home” orders, quarantines, travel bans and similar governmental orders and restrictions to control the spread of COVID-19. Such orders or restrictions have resulted in business closures, work stoppages, slowdowns and delays in commercial activities, unprecedented

~~In March 2016, we entered into a joint venture contract (the “JV Agreement”) with two investment funds owned by the municipalities of Chongqing, China (the “Chongqing Funds”), pursuant~~

and widespread unemployment, disruptions to ~~which we~~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 ~~Chongqing Funds formed~~entire semiconductor ecosystem.

As a ~~joint venture (the “JV Company”) for the purpose of constructing a power semiconductor packaging/testing and wafer fabrication facility. The total initial capitalization~~result of the ~~JV Company is $330.0 million (the “Initial Capitalization”), which consists of (i) a total of $162.0 million of cash contribution~~COVID-19 pandemic and changing consumer behaviors due to “stay-at-home” restrictions, we have 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 related products. While we have recently benefited from the ~~Chongqing Funds; (ii) $74.0 million~~increasing demand of ~~existing packaging~~PC related products, there is no guarantee that this trend will continue, and ~~testing equipment owned by us located~~such increasing demand may discontinue as government authorities relax COVID-19 related restrictions. Furthermore, as the COVID-19 pandemic continues and global economic downturn and high unemployment persist, consumer spending may slow down substantially, in ~~Shanghai, China; (iii) certain intellectual property rights,~~which case we may experience a significant decline of customer orders for our products, including ~~patents, held by us relating~~those designed for PC-related applications, and such decline will adversely affect our financial conditions and results of operations. While we are implementing measures to enhance our marketing and sales opportunities, there is no guarantee that such measures will succeed and be sufficient to mitigate the rapidly shifting market demand. Furthermore, we are experiencing and may continue to experience supply chain challenges in our manufacturing technology valued at $84.0 million; and (iv) $10.0 million of cash contribution by us. We own 51%, and the Chongqing Funds owns 49%, of the equity interest in the JV Company. The Initial Capitalization will be completed in stages.

As the JV Company is completing the construction of its assembly and wafer fabrication facilities, we anticipate the pre-production costs of the facilities will increase significantly in the short term, including costs relating to the installation of equipment; the performance of qualification procedures; increased demand for electrical power and utility; increased headcountsactivities as a result of ~~hiring additional personnel, staff~~various government-imposed restrictions and ~~operators;~~limitations. Our JV Company has also slowed ramp-up activities, which may cause delay and ~~establishment of additional administrative~~disruption to our timeline to reach full production for the 12” fabrication facility in Chongqing, China, and ~~management functions~~we recently adjusted our timeline for reaching our target Phase I run rate to the quarter ending September 30, 2021.

In addition to the impact on our financial performance and ~~systems. In~~manufacturing process, we are subject to the ~~short term,~~following risks resulting from the COVID-19 pandemic and related events:

the economic recession and deteriorating financial market in the U.S. and globally resulting from the COVID-19 pandemic may make it more difficult for us to obtain credit and secure debt financing on terms favorable to us, or at all, and we may not be able to comply with financial covenants in our existing credit agreements or service our existing debt if we do not generate sufficient ~~revenue to offset these costs, and in the long term, the JV Company may not succeed in producing the anticipated level of revenue, in which case these increased costs will negatively impact~~cash flow from our ~~results of operations.~~operations;

We expect the JV Company to commence initial packaging production upon the achievement of certain milestones set forth in the JV Agreement, including construction and funding milestones. Over the long-term, the JV Company expects to construct a 12-inch wafer fabrication facility for the production of power semiconductors. Wewe may encounter ~~unanticipated~~ difficulties and ~~obstacles that~~disruptions in communication and coordination among our employees, partners, customers and others, which may ~~delay or prevent~~reduce our productivity and interfere with our ability to serve our customers;

widespread COVID-19 disease could damage the ~~commencement~~health of our employees and management team, which may disrupt our business operations;

the ~~JV Company's operation, some~~value of ~~which are~~our common shares may decline significantly as a result of factors outside of our ~~control. These difficulties may include unexpected costs and delays in transferring~~control, such as stock market volatility, which will cause our ~~assembly and testing operations~~shareholders to ~~the new facility; inability to coordinate and integrate the labor forces; failure~~lose their investment.

The impact of the ~~Chongqing Funds~~COVID-19 pandemic is highly uncertain and subject to meet their obligations under the JV Agreement, such as delays in capitalizing the JV Company based on our original timeline; inability to secure sufficient financing from third parties to fund the operationchange. We cannot predict when this pandemic will end and ~~capital expenditure of the JV Company;~~when related governmental orders and inability to provide customers with required services. In addition, we may not be able to fully utilize our packaging and testing capacity during the period when our facilities are being transferred from Shanghai to Chongqing, which may negatively impact our business and results of operations.

Even if the joint venture is able to commence operation, we may not fully realize the anticipated benefits of the project, such as cost savings, improvement in working capital, increased gross margin, revenue and profitability, enhanced market share for our products; and increased diversification of our products and customers. The establishment and operation of a new manufacturing facility involve significant risks and challenges, including, but are not limited to, the following:

~~Inability to gain or sustain sufficient new customers and market shares to offset the additional costs of building and operating a new facility;~~

~~Lack of sufficient control over the operation and finances of the joint venture;~~

~~Insufficient personnel with requisite expertise and experiences to operate a 12-in fabrication facility;~~

~~Inability to fully integrate the joint venture with our existing fabrication facility in Oregon, and inability to fully utilize both fabrication facilities;~~

~~Failure of Chongqing Funds to meet its obligations under the JV Agreement;~~

~~Difficulties in protecting and enforcing our intellectual property rights;~~

~~Difficulties in maintaining international communications and coordination between our locations in the U.S. and China;~~

~~Inability to take advantage of the expected tax savings;~~

~~Changes or uncertainties in economic, legal, regulatory, social and political conditions in China, and lack of transparency and certainty in the Chinese regulatory process;~~

~~Labor disputes and difficulties in recruiting new employees; and~~

~~Additional costs and complexity with compliance of local and state regulations of Chongqing.~~

In January 2017, we entered into the EPC Contract with the Contractor for the purpose of constructing the manufacturing facility contemplated under the JV Agreement. The EPC Contract requires us to make payments to the Contractor pursuant to a schedule based on the progress of the construction and the achievements of specified milestones. However, we do not have full control over the work performed by the Contractor. If the Contractor is not able to complete its work in accordance with the schedule we initially agreed, or if the quality of work performed by the Contractor fails to meet our standard, or a dispute occurs between us and the Contractor regarding such work, the JV Transactionrestrictions will be ~~delayed, which will~~eased or lifted. While some government authorities recently have ~~an adverse effect on our business operation~~permitted some reopening of businesses and ~~financial conditions. Furthermore,~~approved gradual easing of various restrictions, many businesses may decide not to open fully or at all due to ongoing concerns with safety at the EPC Contract contemplates a specified design and architecture for the manufacturing facility based on our current projection. As the construction proceeds, we or the Contractor may encounter difficulties or unexpected events that would require us to make material modifications to such design and architecture, which will increase our costs significantly and delay the progress of the JV Transaction.

Any of the foregoing risks could materially reduce the expected return on our investment in the JV Transaction and adversely affects our business operations, financial performance and the trading price of our shares.

~~We may not be able to successfully develop our digital power business.~~

In September 2017, we entered into a license agreement with STMicro, which allows us to develop and market certain digital multi-phase controller products and enter into a new market, primarily in the computer server segment. We are in the process of developing this new digital power business and expect to incur significant startup costs, including costs relating to recruiting and hiring of qualified engineers and technical staff; development of marketing and sales infrastructure, particularly in the computer server market; and other research and development and management activities. We do not expect this new business to generate sufficient revenue to offset our costs in the short term,workplace, and there is no guarantee that ~~our attempt~~governmental orders will not be re-imposed or modified to ~~develop a profitable digital business will ultimately succeed. The success of our new digital power business depends on a number of factors, including~~reinstate prior restrictions if the ~~following:~~

~~competition from other companies with greater resources;~~

~~the availability of and our ability to recruit and attract qualified personnel;~~

~~our lack of experience in the digital power market;~~

~~difficulties in designing products acceptable to customers; and~~

~~sales and marketing capability.~~

COVID-19 pandemic continues or caseloads deteriorate. Any ~~one~~extension or prolonged implementation of these ~~factors may negatively impact our ability to create a successful digital power business, which~~restrictions will further adversely affect our business, customers and financial ~~condition~~results. Even after such orders and ~~results~~restrictions are eased or lifted, the severe economic harm inflicted upon the jurisdictions and areas in which we operate may last for an extended period of ~~operation.~~time and continue to adversely affect our business and financial performance, and there is no guarantee that we will be able to act quickly and effectively to return to our normal operations.

3344

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

In September 2017, the Board of Directors ~~terminated our prior repurchase program that was approved in 2015 and~~ approved a ~~new~~ repurchase program (the “Repurchase Program”)~~, which allows~~ 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 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. There is no guarantee that such repurchases under the Repurchase Program will enhance the value of our 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. ~~There is no guarantee that such repurchases~~During the three months ended September 30, 2020, we did not repurchase any shares under the Repurchase ~~Program will enhance the value of our shares.~~Program. As of ~~December 31, 2017,~~September 30, 2020, approximately ~~$24.0~~$13.4 million remained available under the Repurchase Program.

~~The following table sets for the share repurchases under this program during the second fiscal quarter ended December 31, 2017.~~

Period Total Number of Shares (or Units) Purchased Average Price Paid per Share (or Unit) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Be Purchased Under the Plans or Programs
October 1, 2017 to October 31, 2017 171,023
$ 17.27
171,023

November 1, 2017 to November 30, 2017 58,469
$ 17.47
58,469

December 1, 2017 to December 31, 2017 117,129
$ 17.38
117,129

Total repurchase during the three months ended December 31, 2017 346,621
$ 17.34
346,621
$ 23,989,000

3445

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

3546

ITEM 6. EXHIBITS



~~3.1~~10.1	Amendment ~~No. 1 (incorporated by reference~~ to Exhibit 3.1 to the Current Report on Form 8-K (File No. 001-34717) filed with the Commission on November 14, 2017) to the Amended and Restated Bye-laws (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K (File No. 001-34717) filed with the Commission on November 12, 2015)Market Performance Restricted Share Unit Agreement
~~10.1(+)~~10.2	~~Amended~~Supplemental Agreement to Financing Lease Contract, dated August 3, 2020 between YinHai Leasing Company and ~~Restated 2017 Executive Incentive Plan(incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Commission on November 21, 2017)~~Chongqing Alpha and Omega Semiconductor Technology Co., Ltd (English Translation)
31.1	Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	Inline XBRL Instance
101.SCH	Inline XBRL Taxonomy Extension Schema
101.CAL	Inline XBRL Taxonomy Extension Calculation
101.DEF	Inline XBRL Taxonomy Extension Definition
101.LAB	Inline XBRL Taxonomy Extension Labels
101.PRE	Inline XBRL Taxonomy Extension Presentation
104	Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

~~(+) Indicates management contract or compensatory plan or arrangement.~~

3647

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

~~February 8, 2018~~November 6, 2020



ALPHA AND OMEGA SEMICONDUCTOR LIMITED

By:	/s/ YIFAN LIANG
	Yifan Liang
	Chief Financial Officer and Corporate Secretary
	(Principal Financial Officer)

3748



	Total AOS Stockholders' Equity			Noncontrolling Interest			Total Equity
Balance, June 30, 2017	$	270,770		$	27,779		$	298,549
Exercise of common stock options and release of RSUs	827			—			827
Reissuance of treasury stock upon exercise of common stock options and release of RSUs	(61		)	—			(61		)
Withholding tax on restricted stock units	(249		)	—			(249		)
Issuance of shares under ESPP	1,439			—			1,439
Repurchase of common shares under shares repurchase program	(6,022		)	—			(6,022		)
Stock-based compensation expense	4,546			—			4,546
Net income (loss)	11,591			(3,130		)	8,461
Deferred tax asset related to ASU 2016-16 adoption	(5,480		)	—			(5,480		)
Cumulative translation adjustment	2,149			1,899			4,048
Contributions from noncontrolling interest	—			86,994			86,994
Balance, December 31, 2017	$	279,510		$	113,542		$	393,052



	Number of Restricted Stock Units		Weighted Average Grant Date Fair Value Per Share		Weighted Average Remaining Recognition Period (Years)	Aggregate Intrinsic Value
Nonvested at June 30, 2017	1,144,865		$	14.11	1.76	$	19,084,900
Granted	93,907		$	17.25
Vested	(64,312	)	$	14.20
Forfeited	(17,900	)	$	14.03
Nonvested at December 31, 2017	1,156,560		$	14.36	1.36	$	18,921,322
RSUs vested and expected to vest	1,050,575				1.28	$	17,187,413



Period	Total Number of Shares (or Units) Purchased	Average Price Paid per Share (or Unit)		Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Be Purchased Under the Plans or Programs
October 1, 2017 to October 31, 2017	171,023	$	17.27	171,023
November 1, 2017 to November 30, 2017	58,469	$	17.47	58,469
December 1, 2017 to December 31, 2017	117,129	$	17.38	117,129
Total repurchase during the three months ended December 31, 2017	346,621	$	17.34	346,621	$	23,989,000