Form 10-Q ALPHA & OMEGA SEMICONDUC For: Dec 31
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________
FORM 10-Q
_________________________________
(MARK ONE)
For the quarterly period ended December 31, 2021
OR
FOR THE TRANSITION PERIOD FROM TO
Commission file number 001-34717
__________________________
(Exact name of Registrant as Specified in its Charter)
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number) | ||||
(Address of Principal Registered
Offices including Zip Code)
(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. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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). Yes ☒ No ☐
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 filer | ☐ | ☒ | Non-accelerated filer | ☐ | |||||||||||||
| (Do not check if a smaller reporting company) | |||||||||||||||||
| Smaller reporting company | Emerging growth company | ||||||||||||||||
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. ☐
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Number of common shares outstanding as of January 28, 2021: 26,707,430 25,770,998
Alpha and Omega Semiconductor Limited
Form 10-Q
Fiscal Second Quarter Ended December 31, 2021
TABLE OF CONTENTS
| Page | ||||||||
| Part I. | ||||||||
| Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Part II. | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
PART I. FINANCIAL INFORMATION
Deconsolidation of the Joint Venture ("the JV Company") effective December 2, 2021
As fully discussed in Notes 1 and 2 to the unaudited Condensed Consolidated Financial Statements provided herein, effective December 2, 2021, Alpha and Omega Semiconductor ("AOS" or the “Company”) deconsolidated the Joint Venture ("the JV Company") due to the reduction of AOS's percentage of equity interest in the JV Company to below 50%. Prior to that date, the JV Company was a majority-owned and consolidated subsidiary of the Company. On December 2, 2021, AOS’s equity ownership percentage of the JV Company decreased to below 50% as a result of a sale by the Company of its equity interest in the JV Company to a third-party investor. Also, the Company’s right to designate directors on the board of the JV Company was modified to three (3) out of seven (7) directors, instead of four (4) directors prior to the transaction. These, among other factors discussed in Note 1, resulted in a loss of control of the JV Company under generally accepted accounting principles. Accordingly, since December 2, 2021, AOS has accounted for its investment in the JV Company using the equity method of accounting.
AOS’s audited Consolidated Balance Sheet at June 30, 2021 included the JV Company’s assets and liabilities, after intercompany eliminations. However, the JV Company's assets and liabilities were not included in AOS’s unaudited Consolidated Balance Sheet at December 31, 2021 due to the deconsolidation of the JV Company on December 2, 2021.
AOS’s unaudited Condensed Consolidated Statements of Operations for the three and six months ended December 31, 2021 included the JV Company's results of operations for the period through December 1, 2021, the day immediately preceding the deconsolidation. For the three and six months ended December 31, 2020, AOS's unaudited consolidated results included the JV Company's results for the full periods presented.
Since the Company is unable to obtain accurate financial information from the JV Company in a timely manner, the Company records its share of earnings or losses of the JV Company on a one quarter lag. Therefore, the Company’s share of earnings or losses of the JV Company for the period from December 2, 2021 to December 31, 2021 has not been recorded in the Consolidated Statement of Operations for the three and six months ended December 31, 2021. Such equity earnings or losses will be recorded in the Company’s Consolidated Statement of Operations for the three and nine months ended March 31, 2022.
1
ITEM 1. FINANCIAL STATEMENTS
| ALPHA AND OMEGA SEMICONDUCTOR LIMITED | |||||||||||
| CONDENSED CONSOLIDATED BALANCE SHEETS | |||||||||||
| (Unaudited, in thousands except par value per share) | |||||||||||
| December 31, 2021 | June 30, 2021 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
| Accounts receivable, net | |||||||||||
| Other receivable, equity investee | |||||||||||
| Inventories | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
| Property, plant and equipment, net | |||||||||||
| Operating lease right-of-use assets, net | |||||||||||
| Intangible assets, net | |||||||||||
| Equity method investment | |||||||||||
| Deferred income tax assets | |||||||||||
| Restricted cash - long-term | |||||||||||
| Other long-term assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued liabilities | |||||||||||
| Income taxes payable | |||||||||||
| Short-term debt | |||||||||||
| Finance lease liabilities | |||||||||||
| Operating lease liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt | |||||||||||
| Income taxes payable - long-term | |||||||||||
| Deferred income tax liabilities | |||||||||||
| Finance lease liabilities - long-term | |||||||||||
| Operating lease liabilities - long-term | |||||||||||
| Other long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (Note 12) | |||||||||||
| Equity: | |||||||||||
Preferred shares, par value $ | |||||||||||
Authorized: | |||||||||||
Common shares, par value $ | |||||||||||
Authorized: | |||||||||||
Treasury shares at cost: | ( | ( | |||||||||
| Additional paid-in capital | |||||||||||
| Accumulated other comprehensive income | |||||||||||
| Retained earnings | |||||||||||
| Total Alpha and Omega Semiconductor Limited shareholder's equity | |||||||||||
| Noncontrolling interest | |||||||||||
| Total equity | |||||||||||
| Total liabilities and equity | $ | $ | |||||||||
See accompanying notes to these condensed consolidated financial statements.
1
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, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Revenue | $ | $ | $ | $ | |||||||||||||||||||
| Cost of goods sold | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| Selling, general and administrative | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Operating income | |||||||||||||||||||||||
| Interest expense and other income (loss), net | ( | ( | ( | ( | |||||||||||||||||||
| Gain on deconsolidation of the JV Company | |||||||||||||||||||||||
| Loss on changes of equity interest in the JV Company, net | ( | ( | |||||||||||||||||||||
| Net income before income taxes | |||||||||||||||||||||||
| Income tax expense | |||||||||||||||||||||||
| Net income | |||||||||||||||||||||||
| Net gain (loss) attributable to noncontrolling interest | ( | ( | |||||||||||||||||||||
| Net income attributable to Alpha and Omega Semiconductor Limited | $ | $ | $ | $ | |||||||||||||||||||
| Net income per common share attributable to Alpha and Omega Semiconductor Limited | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
| Weighted average number of common shares attributable to Alpha and Omega Semiconductor Limited used to compute net income per share | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
See accompanying notes to these condensed consolidated financial statements.
2
ALPHA AND OMEGA SEMICONDUCTOR LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, in thousands)
| Three Months Ended December 31, | Six Months Ended December 31, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net income including noncontrolling interest | $ | $ | $ | $ | |||||||||||||||||||
| Other comprehensive income, net of tax | |||||||||||||||||||||||
| Foreign currency translation adjustment | |||||||||||||||||||||||
| Cumulative translation adjustment removal due to deconsolidation of the JV Company | ( | ( | |||||||||||||||||||||
| Comprehensive income | |||||||||||||||||||||||
| Less: Noncontrolling interest | ( | ||||||||||||||||||||||
| Comprehensive income attributable to Alpha and Omega Semiconductor Limited | $ | $ | $ | $ | |||||||||||||||||||
See accompanying notes to these condensed consolidated financial statements.
3
ALPHA AND OMEGA SEMICONDUCTOR LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited, in thousands)
| Common Shares | Treasury Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Total AOS Shareholders' Equity | Noncontrolling Interest | Total Equity | |||||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2020 | $ | $ | ( | $ | $ | ( | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||
| Exercise of common stock options and release of restricted stock units | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Reissuance of treasury stock upon exercise of common stock options and release of restricted stock units | — | — | — | ( | — | |||||||||||||||||||||||||||||||||||||||||||||
| Withholding tax on restricted stock units | — | — | ( | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares under ESPP | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock units settlement in connection with service | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) including noncontrolling interest | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2020 | $ | $ | ( | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||
| 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 | $ | $ | ( | $ | $ | ( | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||
| Exercise of common stock options and release of restricted stock units | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Reissuance of treasury stock upon exercise of common stock options and release of restricted stock units | — | — | — | ( | — | |||||||||||||||||||||||||||||||||||||||||||||
| Withholding tax on restricted stock units | — | — | ( | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares under ESPP | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock units settlement in connection with service | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) including noncontrolling interest | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2020 | $ | $ | ( | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||
4
ALPHA AND OMEGA SEMICONDUCTOR LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited, in thousands)
| Common Shares | Treasury Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Total AOS Shareholders' Equity | Noncontrolling Interest | Total Equity | |||||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2021 | $ | $ | ( | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||
| Exercise of common stock options and release of restricted stock units | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Reissuance of treasury stock upon exercise of common stock options and release of RSUs | — | — | — | ( | — | |||||||||||||||||||||||||||||||||||||||||||||
| Withholding tax on restricted stock units | — | — | ( | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares under ESPP | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock units settlement in connection with service | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Net income including noncontrolling interest through December 1, 2021 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Deconsolidation of the JV company | — | — | — | ( | — | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2021 | $ | $ | ( | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||
| Common Shares | Treasury Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Total AOS Shareholders' Equity | Noncontrolling Interest | Total Equity | |||||||||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2021 | $ | $ | ( | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||
| Exercise of common stock options and release of restricted stock units | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Reissuance of treasury stock upon exercise of common stock options and release of RSUs | — | — | — | ( | — | |||||||||||||||||||||||||||||||||||||||||||||
| Withholding tax on restricted stock units | — | — | ( | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares under ESPP | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock units settlement in connection with service | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Net income including noncontrolling interest | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Deconsolidation of noncontrolling interest | — | — | — | ( | — | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2021 | $ | $ | ( | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||
See accompanying notes to these condensed consolidated financial statements.
5
ALPHA AND OMEGA SEMICONDUCTOR LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
| Six Months Ended December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Cash flows from operating activities | |||||||||||
| Net income including noncontrolling interest through December 1, 2021 | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Gain on deconsolidation of the JV Company | ( | ||||||||||
| Loss on changes of equity interest in the JV Company, net | |||||||||||
| Deferred income tax on deconsolidation and changes of equity interest in the JV Company | |||||||||||
| Depreciation and amortization | |||||||||||
| Share-based compensation expense | |||||||||||
| Deferred income taxes, net | |||||||||||
| Loss on disposal of property and equipment | |||||||||||
| Changes in operating assets and liabilities, net of effects of a divestiture | |||||||||||
| Accounts receivable | ( | ||||||||||
| Inventories | ( | ( | |||||||||
| Other current and long-term assets | ( | ( | |||||||||
| Other receivable, equity investee | ( | ||||||||||
| Accounts payable | ( | ||||||||||
| Income taxes payable | |||||||||||
| Income taxes payable on deconsolidation and changes of equity interest in the JV Company | |||||||||||
| Accrued and other liabilities | |||||||||||
| Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities | |||||||||||
| Proceeds from sale of equity interest in the JV Company | |||||||||||
| Deconsolidation of cash and cash equivalents of the JV Company | ( | ||||||||||
| Purchases of property and equipment excluding the JV Company | ( | ( | |||||||||
| Purchases of property and equipment in JV Company | ( | ( | |||||||||
| Proceeds from sale of property and equipment | |||||||||||
| Government grant related to equipment | |||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities | |||||||||||
| Withholding tax on restricted stock units | ( | ( | |||||||||
| Proceeds from exercise of stock options and ESPP | |||||||||||
| Proceeds from borrowings | |||||||||||
| Repayments of borrowings | ( | ( | |||||||||
| Principal payments on finance leases | ( | ( | |||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | |||||||||||
| Net increase in cash, cash equivalents and restricted cash | |||||||||||
| Cash, cash equivalents and restricted cash at beginning of period | |||||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | $ | |||||||||
| Supplemental disclosures of non-cash investing and financing information: | |||||||||||
| Property and equipment purchased but not yet paid | $ | $ | |||||||||
See accompanying notes to these condensed consolidated financial statements.
6
ALPHA AND OMEGA SEMICONDUCTOR LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The Company and Significant Accounting Policies
The Company
Alpha and Omega Semiconductor Limited and its subsidiaries (the “Company”, “AOS”, “we” or “us”) design, develop and supply a broad range of power semiconductors. The Company's portfolio of products targets high-volume applications, including personal and portable computers, graphic cards, flat panel TVs, home appliances, smart phones, battery packs, quick chargers, home appliances, consumer and industrial motor controls and power supplies for TVs, computers, servers and telecommunications equipment. The Company conducts its operations primarily in the United States of America (“USA”), Hong Kong, China, and South Korea.
Basis of Preparation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and with the instructions to Article 10 of Securities and Exchange Commission Regulation S-X, as amended. They do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with U.S. GAAP for complete financial statements. These Condensed Consolidated Financial Statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2021. All significant intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, all adjustments (consisting of normal recurring adjustments and accruals) considered necessary for a fair presentation of the results of operations for the periods presented have been included in the interim periods. Operating results for the six months ended December 31, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2022 or any other interim period. The consolidated balance sheet at June 30, 2021 is derived from the audited financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2021.
Reclassification
The Company has reclassified certain amounts previously reported in its financial statements to conform to the current presentation. These reclassifications did not have a material impact on our Condensed Consolidated Financial Statements. See Note 11.
Joint Venture and Deconsolidation
On March 29, 2016, the Company entered into a joint venture contract (the “JV Agreement”) with two investment funds owned by the Municipality of Chongqing (the “Chongqing Funds”), pursuant to which the Company and the Chongqing Funds formed a joint venture, (the “JV Company”), for the purpose of constructing and operating a power semiconductor packaging, testing and 12-inch wafer fabrication facility (“Fab”) in the LiangJiang New Area of Chongqing, China (the “JV Transaction”). The Fab is being built in phases. As of December 1, 2021, the Company owned 50.9 %, and the Chongqing Funds owned 49.1 % of the equity interest in the JV Company. The Joint Venture was accounted under the provisions of the consolidation guidance since the Company had controlling financial interest until December 1, 2021.
Effective December 1, 2021, the Company entered into a share transfer agreement (the “STA”) with a third-party investor (the “Investor”), pursuant to which the Company sold to the Investor approximately 2.1 % of outstanding equity interest held by the Company in the JV Company for an aggregate purchase price of RMB 108 million or approximately $16.9 million (the “Transaction”). The Transaction was closed on December 2, 2021 (the “Closing Date”). As a result of the Transaction, as of the Closing Date, the Company’s equity interest in the JV Company decreased from 50.9 % to 48.8 %, Also, the Company’s right to designate directors on the board of JV Company was reduced to three (3) out of seven (7) directors from four (4) directors prior to the Transaction. As a result of the Transaction, AOS no longer has a controlling financial interest in the JV Company under generally accepted accounting principles. Loss of control is deemed to have occurred when, among other things, a parent company owns less than a majority of the outstanding equity interest in the subsidiary, lacks a controlling financial interest in the subsidiary and, is unable to unilaterally control the subsidiary through other means such as having, or the ability to obtain or represent, a majority of the subsidiary’s Board of Directors. Because of these factors, as of December 2, 2021, the Company ceased having control over the JV Company. Therefore, the Company deconsolidated the financial
7
ALPHA AND OMEGA SEMICONDUCTOR LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
statements of the JV Company as of that date. Subsequently, the Company has accounted for its investment in the JV Company using the equity method of accounting.
On December 24, 2021, the Company entered into a share transfer agreement with another third-party investor, pursuant to which the Company sold to this investor 1.1 % of outstanding equity interest held by the Company in the JV Company for an aggregate purchase price of RMB 60 million, or approximately $9.4 million. In addition, the JV Company adopted an employee equity incentive plan and issued an equity interest equivalent to 3.99 % of the JV Company to exchange in cash. As a result, the Company owned 45.8 % of the equity interest in the JV Company as of December 31, 2021.
On January 26, 2022, the JV Company completed a financing transaction pursuant to a corporate financing agreement (the “Financing Agreement”) between the JV Company and certain third-party investors (the “New Investors”). Under the Financing Agreement, the New Investors purchased newly issued equity interest of JV for a total purchase price of RMB 509 million (or approximately $80 million based on the currency exchange rate as of January 26, 2022) (the “Investment”). Immediately following the closing of the Investment, the percentage of outstanding JV equity interest beneficially owned by the Company was further reduced to 42.2 % (see Note 13).
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 consumer electronics and PC related products, there is no guarantee that this trend will continue, and such increasing demand may discontinue or decline as government authorities relax and terminate COVID-19 related restrictions and consumer behaviors change. Furthermore, as the COVID-19 pandemic continues and global economic downturn and high unemployment persists, consumer spending may slow down substantially, in which case the Company may experience a significant decline of customer orders for its products, including those designed for PC-related applications, and such decline will adversely affect its financial conditions and results of operations. The full extent of the future impact of the COVID-19 pandemic on the Company’s operational and financial performance is currently uncertain and will depend on many factors outside the Company’s control, including, without limitation, the timing, extent, trajectory and duration of the pandemic; the availability, distribution and effectiveness of vaccines; the spread of new variants of COVID-19; the continued or renewed imposition of protective public safety measures and government mandates; the continuing disruption of global supply chain affecting the semiconductor industry; and the impact of the pandemic on the global economy and demand for consumer products.
Use of Estimates
The preparation of the Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires the Company to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. To the extent there are material differences between these estimates and actual results, the Company's Condensed Consolidated Financial Statements will be affected. On an ongoing basis, the Company evaluates the estimates, judgments and assumptions including those related to stock rotation returns, price adjustments, allowance for doubtful accounts, inventory reserves, warranty accrual, income taxes, leases, share-based compensation, recoverability of and useful lives for property, plant and equipment and intangible assets, as well as the economic implications of the COVID-19 pandemic.
Leases
The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, current operating lease liabilities and long-term operating lease liabilities on the Company's Condensed Consolidated Balance Sheets. Finance leases are included in property, plant and equipment, finance lease liabilities and long-term finance leases liabilities on the Condensed Consolidated Balance Sheets.
Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. The Company uses an estimate of its incremental borrowing rate based on the information available at the lease commencement date. The operating lease ROU assets also include any lease payments made and exclude lease incentives. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise such options. Operating lease expense is generally
8
ALPHA AND OMEGA SEMICONDUCTOR LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Revenue recognition
The Company determines revenue recognition through the following steps: (1) identification of the contract with a customer; (2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recognition of revenue when, or as, a performance obligation is satisfied. The Company recognizes product revenue at a point in time when product is shipped to the customer, net of estimated stock rotation returns and price adjustments that it expects to provide to certain distributors. The Company presents revenue net of sales taxes and any similar assessments. Our standard payment terms range from 30 to 90 days.
The Company sells its products primarily to distributors, who in turn sell the products globally to various end customers. The Company allows stock rotation returns from certain distributors. Stock rotation returns are governed by contract and are limited to a specified percentage of the monetary value of products purchased by distributors during a specified period. The Company records an allowance for stock rotation returns based on historical returns and individual distributor agreements. The Company also provides special pricing to certain distributors, primarily based on volume, to encourage resale of the Company’s products. Allowance for price adjustments is recorded against accounts receivable and the provision for stock rotation rights is included in accrued liabilities on the Condensed Consolidated Balance Sheets.
The Company’s performance obligations relate to contracts with a duration of less than one year. The Company elected to apply the practical expedient provided in ASC 606, “Revenue from Contracts with Customers”. Therefore, the Company is not required to disclose the aggregate amount of transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period.
The Company recognizes the incremental direct costs of obtaining a contract, which consist of sales commissions, when control over the products they relate to transfers to the customer. Applying the practical expedient, the Company recognizes commissions as expense when incurred, as the amortization period of the commission asset the Company would have otherwise recognized is less than one year.
Share-based Compensation Expense
The Company maintains an equity-settled, share-based compensation plan to grant restricted share units and stock options. The Company recognizes expense related to share-based compensation awards that are ultimately expected to vest based on estimated fair values on the date of grant. The fair value of restricted share units is based on the fair value of the Company's common share on the date of grant. For restricted stock awards subject to market conditions, the fair value of each restricted stock award is estimated at the date of grant using the Monte-Carlo pricing model. The fair value of stock options is estimated on the date of grant using the Black-Scholes option valuation model. Share-based compensation expense is recognized on the accelerated attribution basis over the requisite service period of the award, which generally equals the vesting period. The Employee Share Purchase Plan (the “ESPP”) is accounted for at fair value on the date of grant using the Black-Scholes option valuation model.
9
ALPHA AND OMEGA SEMICONDUCTOR LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Equity method investment
The Company uses the equity method of accounting when it has the ability to exercise significant influence, but not control, as determined in accordance with general accepted accounting principles, over the operating and financial policies of the investee. Effective December 2, 2021, the Company reduced its equity interest in the JV Company and experienced a loss of control of the JV Company. As a result, beginning December 2, 2021, the Company records its investment under equity method of accounting. Since the Company is unable to obtain accurate financial information from the JV Company in a timely manner, the Company records its share of earnings or losses of such affiliate on a one quarter lag. Therefore, the Company’s share of earnings or losses of the JV Company for the period from December 2, 2021 to December 31, 2021 has not been recorded in the Consolidated Statement of Operations for the three and six months ended December 31, 2021. Such equity earnings or losses will be recorded in the Company’s Consolidated Statement of Operations for the three and nine months ended March 31, 2022. The Company discloses and recognizes intervening events at the JV Company in the lag period that could materially affect our consolidated financial statements, if applicable.
The Company records its interest in the net earnings of its equity method investees, along with adjustments for unrealized profits or losses on intra-entity transactions and amortization of basis differences, within earnings or loss from equity interests in the Consolidated Statements of Operations. Profits or losses related to intra-entity sales with its equity method investees are eliminated until realized by the investor and investee. Basis differences represent differences between the cost of the investment and the underlying equity in net assets of the investment and are generally amortized over the lives of the related assets that gave rise to them. Equity method goodwill is not amortized or tested for impairment; instead the equity method investment is tested for impairment. The Company reviews for impairment whenever factors indicate that the carrying amount of the investment might not be recoverable. In such a case, the decrease in value is recognized in the period the impairment occurs in the Condensed Consolidated Statements of Operations.
Fair Value of Financial Instruments
The fair value of cash equivalents is categorized in Level 1 in the fair value hierarchy. Cash equivalents consist primarily of short-term bank deposits. The carrying values of financial instruments such as cash and cash equivalents, accounts receivable and accounts payable approximate their carrying values due to their short-term maturities. The carrying value of the Company's debt is considered a reasonable estimate of fair value which is estimated by considering the current rates available to the Company for debt of the same remaining maturities, structure, credit risk and terms of the debts.
Long-lived Assets
The Company evaluates its long-lived assets for impairment whenever events or changes indicate that the carrying amount of such assets may not be recoverable. Due to the COVID-19 pandemic, the Company assessed the changes in circumstances that occurred during the March and June 2020 quarters. These factors included continued operating losses, a decrease in the Company's share price in February and March of 2020, which reduced its market capitalization, expectation of lower business growth for the coming quarters, increased and prolonged economic and regulatory uncertainty in the global economies, and the expectation of higher supply chain costs and increased competition. Therefore, the Company performed a recoverability test by comparing the sum of the estimated undiscounted future cash flows of its long-lived assets to their carrying amount as of June 30, 2020. Some of the more significant assumptions used in the estimated future cash flows involve net sales, cost of goods sold, operating expenses, working capital, capital expenditures, income tax rates, long-term growth rates that appropriately reflect the risks inherent in the future cash flow stream and terminal value. The Company selected the assumptions used in the
10
ALPHA AND OMEGA SEMICONDUCTOR LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Recent Accounting Pronouncements
Recently Issued Accounting Standards not yet adopted
In November 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance. This ASU requires business entities to make annual disclosures about transactions with a government they account for by analogizing to a grant or contribution accounting model under ASC 958-605. The ASU is effective for all entities within their scope for
financial statements issued for annual periods beginning after December 15, 2021. The Company does not expect the adoption of this guidance will have a material impact on its consolidated financial position, results of operations or cash flows.
In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which, among other things, provides guidance on how to account for contracts on an entity’s own equity. This ASU simplifies the accounting for certain financial instruments with characteristics of liabilities and equity. Specifically, the ASU eliminated the need for the Company to assess whether a contract on the entity’s own equity (1) permits settlement in unregistered shares, (2) whether counterparty rights rank higher than shareholder’s rights, and (3) whether collateral is required. In addition, the ASU requires incremental disclosure related to contracts on the entity’s own equity and clarifies the treatment of certain financial instruments accounted for under this ASU on earnings per share. For public business entities, the ASU is effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. The Company does not expect the adoption of this guidance will have a material impact on its consolidated financial position, results of operations or cash flows.
Recently Adopted Accounting Standards
In January 2020, the FASB issued ASU No. 2020-01, “Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.” The ASU is based on a consensus of the Emerging Issues Task Force and is expected to increase comparability in accounting for these transactions. ASU 2016-01 made targeted improvements to accounting for financial instruments, including providing an entity the ability to measure certain equity securities without a readily determinable fair value at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Among other topics, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting. The adoption of ASU 2020-01 had no material impact on the Company's Consolidated Financial Statements.
In December 2019, the FASB issued ASU No. 2019-12 “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12") by removing certain exceptions to the general principles. The Company adopted ASU 2019-12 as of July 1, 2021. ASU 2019-12 had no material impact on the Company's Consolidated Financial Statements.
11
ALPHA AND OMEGA SEMICONDUCTOR LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. Deconsolidation of the JV Company and Equity Method Investment in Equity Investee
On December 1, 2021 (the “Effective Date”), Alpha & Omega Semiconductor (Shanghai) Ltd. (“AOS SH”) and Agape Package Manufacturing (Shanghai) Limited (“APM SH” and, together with AOS SH, the “Sellers”), each a wholly-owned subsidiary of the Company, entered into a share transfer agreement ("STA") with a third-party investor to sell a portion of the Company's equity interest in the JV Company which consists of a power semiconductor packaging, testing and 12-inch wafer fabrication facility in Chongqing, China (the “Transaction”). The Transaction closed on December 2, 2021 (the “Closing Date”), which reduced the Company’s equity interest in the JV Company from 50.9 % to 48.8 %. Also, the Company’s right to designate directors on the board of JV Company was reduced to three (3) out of seven (7) directors, from four (4) directors prior to the Transaction. As a result of the Transaction and other factors, the Company no longer has a controlling financial interest in the JV Company and has determined that the JV Company was deconsolidated from the Company’s Consolidated Financial Statements effective as of the Closing Date.
In connection with the deconsolidation and in accordance with ASC 810-10-40-5, the Company recorded a gain on deconsolidation of $399.1 million during the three months ended December 31, 2021 in the Condensed Consolidated Statements of Operations. The gain on deconsolidation of the JV Company was calculated as follows:
| (in thousands) | ||||||||||||||
| Cash received for sales of shares in the JV Company | $ | |||||||||||||
| Fair value of retained equity method investment | ||||||||||||||
| Carrying amount of non-controlling interest | ||||||||||||||
| Cumulative translation adjustment removal | ||||||||||||||
| Carrying amount of net assets of the JV Company at December 1, 2021 | ( | |||||||||||||
| Gain on deconsolidation of the JV Company | $ | |||||||||||||
The Company retained significant influence over the operating and financial policies of the JV Company and measured the fair value of the retained investment based on their share of the fair value of the JV Company, which was calculated using the market approach based on the Transaction.
On December 24, 2021, the Company entered into a share transfer agreement with another third-party investor, pursuant to which the Company sold to this investor 1.1 % of outstanding equity interest held by the Company in the JV Company. In addition, the JV Company adopted an employee equity incentive plan and issued an equity interest equivalent to 3.99 % of the JV Company to exchange in cash. As a result of these two transactions, the Company owned 45.8 % of the equity interest in the JV Company as of December 31, 2021. The net loss associated with these two sales of JV Company equity interest held by the Company were recorded in the three months ended December 31, 2021 as follows:
| (in thousands) | |||||||||||
| Gain on 1.1% equity interest sold | $ | ||||||||||
| Loss on diluted equity interest due to employee equity incentive plan issued | ( | ||||||||||
| Loss on changes on equity interest of the JV Company, net | $ | ( | |||||||||
The Company accounts for its investment in the JV Company as an equity method investment and reports its equity in earnings or loss of the JV Company on a three-month lag due to an inability to timely obtain financial information of the JV Company. Because the Company will record its equity in earnings or loss of the JV Company using lag reporting, there is no equity in earnings or loss of the JV Company included in the Company’s results of operations for the three and six months ended December 31, 2021. The Company plans to begin including its equity earnings or loss related to the JV Company in the three months ended March 31, 2022, at which time the Company expects to also provide summary financial information for the JV Company.
12
ALPHA AND OMEGA SEMICONDUCTOR LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Related Party Transactions
13
ALPHA AND OMEGA SEMICONDUCTOR LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Net Income Per Common Share Attributable to Alpha and Omega Semiconductor Limited
| Three Months Ended December 31, | Six Months Ended December 31, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| (in thousands, except per share data) | |||||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net income attributable to Alpha and Omega Semiconductor Limited | $ | $ | $ | $ | |||||||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Basic: | |||||||||||||||||||||||
| Weighted average number of common shares used to compute basic net income per share | |||||||||||||||||||||||
| Diluted: | |||||||||||||||||||||||
| Weighted average number of common shares used to compute basic net income per share | |||||||||||||||||||||||