UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________
FORM 10-K
_________________________________
(MARK ONE)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2018
OR
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
(State or Other Jurisdiction of Incorporation or Organization)
77-0553536
(I.R.S. Employer Identification Number)
Clarendon House, 2 Church Street
Hamilton HM 11, Bermuda
(Address of Principal Registered
Offices including Zip Code)
(408) 830-9742
(Registrant's Telephone Number, Including Area Code)
__________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Shares, $0.002 par value per share
Name of each exchange on which registered
The NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o
No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o
No x
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 x
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). Yes x
No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or smaller reporting company. See definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
Accelerated filer x
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company o
Emerging growth company o
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
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
The aggregate market value of the voting shares held by non-affiliates of the registrant as of December 29, 2017 was approximately $317 million based on the closing price
of the registrant's common share as reported on the NASDAQ Global Select Market on December 29, 2017 (the last business day of the registrant's most recently completed
second fiscal quarter). The common shares of the registrant held by each executive officer and director and certain affiliated shareholders who beneficially owned 10% or more
of the outstanding common stock of the registrant have been excluded in such calculation as such persons and entities may be deemed to be affiliates of the registrant. This
determination of affiliate status is not necessarily a conclusive determination for other purposes.
There were 23,862,847 shares of the registrant's common shares outstanding as of July 31, 2018 .
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the registrant's 2018 Annual General Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K
to the extent stated herein. The Definitive Proxy Statement is expected to be filed within 120 days of the registrant's fiscal year ended June 30, 2018 .
Alpha and Omega Semiconductor Limited
Form 10-K
For the Year Ended June 30, 2018
TABLE OF CONTENTS
Part I.
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Part II.
Item 5.
Item 6.
Item 7.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Item 9A.
Item 9B.
Part III.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Part IV.
Item 15.
Signatures
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits and Financial Statement Schedules
Page
1
13
33
34
36
36
37
37
40
42
59
60
60
60
63
64
64
64
64
64
64
65
65
111
(This page intentionally left blank.)
Item 1.
Business
Forward Looking Statements
PART I
This
Annual
Report
on
Form
10-K
and
the
documents
incorporated
herein
by
reference
contain
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,
which
are
subject
to
the
“safe
harbor”
created
by
those
sections.
Forward-looking
statements
are
based
on
our
management's
beliefs
and
assumptions
and
on
information
currently
available
to
our
management.
In
some
cases,
you
can
identify
forward-looking
statements
by
terms
such
as
“may,”
“will,”
“should,”
“could,”
“intend,”
“would,”
“expect,”
“plan,”
“anticipate,”
“believe,”
“estimate,”
“project,”
“predict,”
“potential”
and
similar
expressions
intended
to
identify
forward-looking
statements.
These
statements
involve
known
and
unknown
risks,
uncertainties
and
other
factors,
which
may
cause
our
actual
results,
performance,
time
frames
or
achievements
to
be
materially
different
from
any
future
results,
performance,
time
frames
or
achievements
expressed
or
implied
by
the
forward-looking
statements.
We
discuss
many
of
these
risks,
uncertainties
and
other
factors
in
this
Annual
Report
on
Form
10-K
in
greater
detail
in
Item
1A.“Risk
Factors.”
Given
these
risks,
uncertainties
and
other
factors,
you
should
not
place
undue
reliance
on
these
forward-looking
statements.
Also,
these
forward-looking
statements
represent
our
estimates
and
assumptions
only
as
of
the
date
of
this
filing.
You
should
read
this
Annual
Report
on
Form
10-K
in
its
entirety
and
with
the
understanding
that
our
actual
future
results
may
be
materially
different
from
what
we
expect.
We
hereby
qualify
our
forward-looking
statements
by
these
cautionary
statements.
Except
as
required
by
law,
we
assume
no
obligation
to
update
these
forward-looking
statements
publicly,
or
to
update
the
reasons
actual
results
could
differ
materially
from
those
anticipated
in
these
forward-looking
statements,
even
if
new
information
becomes
available
in
the
future.
Overview
We are a designer, developer and global supplier of a broad portfolio of power semiconductors. Our portfolio of power semiconductors includes
approximately 1,900 products, and has grown significantly with the introduction of 200 new products during the fiscal year ended June 30, 2018 , and over 80 and
90 new products in each of the fiscal years ended June 30, 2017 and 2016 , respectively. Our teams of scientists and engineers have developed extensive
intellectual properties and technical knowledge that encompass major aspects of power semiconductors, which we believe enable 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 722
patents and 108 patent applications in the United States as of June 30, 2018 . We differentiate ourselves by integrating our expertise in technology, design,
manufacturing capability and advanced packaging to optimize product performance and cost. Our portfolio of products targets high-volume applications, including
personal computers, flat panel TVs, smart phones, battery packs, quick chargers, home appliances, consumer and industrial motor controls and power supplies for
TVs, computers, servers and telecommunications equipment.
During the fiscal year ended June 30, 2018 , we continued our diversification strategy 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, portfolio
expanded significantly across a full range of voltage applications. We also developed new technologies and products designed to penetrate into markets beyond our
MOSFET computing base, including the consumer, communications and industrial markets as well as power IC for the next generation computing applications.
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 primarily in Asia. We operate a 8-inch wafer fabrication facility located in Hillsboro, Oregon, or the
Oregon fab, which enables us to accelerate proprietary technology development, new product introduction and improve our financial 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, costs and sales cycle time.
On March 29, 2016, we entered into a joint venture contract (the “JV Agreement”) with two investment funds affiliated with the municipalities of Chongqing
(the “Chongqing Funds”), pursuant to which we and Chongqing Funds form 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”). As of June 30, 2018, we own 51%, and the Chongqing Funds own 49%, of the
equity interest in the JV Company. The JV Company substantially completed its assembly and testing and 12-inch
1
wafer fab facilities during the quarter ended June 30, 2018. We expect to commence limited mass production for assembly and testing in the second half of
calendar year 2018, and trial production for the 12-inch wafer fabrication facility toward the end of calendar year 2018.
In September 2017, we entered into a license agreement with STMicroelectronics International N.V. (“STMicro”), which allows us to develop and market
certain digital power multi-phase controller products and enter into new markets, primarily in server and telecommunications. We are in the process of developing
this new digital power business. We hired approximately two-thirds of the team that we plan to build. The team has been engaging with potential customers in
product designs.
We were incorporated in Bermuda on September 27, 2000 as an exempted limited liability company. The address of our registered office is Clarendon House,
2 Church Street, Hamilton HM 11, Bermuda. Our agent for service of process in the U.S. for the purpose of our securities filings is our Chief Executive Officer,
Mike F. Chang, c/o Alpha and Omega Semiconductor Incorporated, 475 Oakmead Parkway, Sunnyvale, CA 94085. Telephone number of our agent is (408) 830-
9742.
We have incorporated various wholly-owned subsidiaries in different jurisdictions, and a subsidiary (the JV Company) in which we have a controlling
interest. Please refer to Exhibit 21.1 for a complete list of our subsidiaries.
Our industry
Semiconductors are electronic devices that perform a variety of functions, such as converting or controlling signals, processing data and delivering or
managing power. With advances in semiconductor technology, the functionality and performance of semiconductors have generally increased over time, while size
and cost have generally decreased. These advances have led to a proliferation of more complex semiconductors being used in a wide variety of consumer,
computing, communications and industrial markets and have contributed to the growth of the semiconductor industry.
Analog
semiconductors
The semiconductor industry is segmented into analog and digital. Analog semiconductors process light, sound, motion, radio waves and electrical currents
and voltages. In contrast, digital semiconductors process binary signals represented by a sequence of ones and zeros.
As a result of these fundamental differences, the analog semiconductor industry is distinct from the digital semiconductor industry in terms of the complexity
of design and the length of product cycle. Improper interactions between analog circuit elements can potentially render an electronic system inoperable.
Experienced engineers engaged in the design process are necessary because computer-aided design cannot fully model the behavior of analog circuitry. Therefore,
experienced analog engineers with requisite knowledge are in great demand but short supply worldwide. In addition, analog semiconductors tend to have a longer
product life cycle because original design manufacturers, or ODMs and original equipment manufacturers, or OEMs typically design the analog portions of a
system to span multiple generations of their products. Once designed into an application, the analog portion is rarely modified because even a slight change to the
analog portion can cause unexpected interactions with other components, resulting in system instability.
Power
semiconductors
Power semiconductors are a subset of the analog semiconductor sector with their own set of characteristics unique to power architecture and function. Power
semiconductors transfer, manage and switch electricity to deliver the appropriate amount of voltage or current to a broad range of electronic systems and also
protect electronic systems from damage resulting from excessive or inadvertent electrical charges.
Power semiconductors can be either discrete devices, which typically comprise only a few transistors or diodes, or ICs, which incorporate a greater number of
transistors. The function of power discrete devices is power delivery by switching, transferring or converting electricity. Power transistors comprise the largest
segment of the power discrete device market. Power ICs, sometimes referred to as power management ICs, perform power delivery and power management
functions, such as controlling and regulating voltage and current and controlling power discrete devices.
The growth of the power semiconductor market in recent years has several key drivers. The proliferation of computer and consumer electronics, such as
notebooks, tablets, smart phones, flat panel displays and portable media players created the need for sophisticated power management to improve power efficiency
and extend battery life. The evolution of these products is characterized by increased functionality, thinner or smaller form factors and decreasing prices. Our
Power IC and low voltage (5V-40V) MOSFET products address this market. In the area of AC-DC power supplies for electronic equipment, data centers
2
and servers, the market is characterized by a continuous demand for energy conservation through higher efficiency, which is driving the need for our medium
voltage (40V-400V) and high voltage (500V-1000V) MOSFET products. The increased application of power semiconductors to control motors in white goods and
industrial applications, is driving demand for Insulated Gate Bipolar Transistors, or IGBTs. IGBTs are also being used in renewable energy and automotive
applications.
The evolution toward smaller form factors and complex power requirements in the low voltage areas has driven further integration in power semiconductors,
resulting in power ICs that incorporate the functionalities of both power management and power delivery in a single device. Power ICs can be implemented by
incorporating all necessary power functions either on one piece of silicon or multiple silicon chips encapsulated into a single device. Additionally, the advancement
in semiconductor packaging technology enables increased power density and shrinking form factors.
Power semiconductor suppliers develop and manufacture their products using various approaches which tend to fall across a wide spectrum of balancing cost
savings with proprietary technology advantages. At one end of the spectrum are integrated design manufacturers, or IDMs, which own and operate the equipment
used in the manufacturing process and design and manufacture products at their in-house facilities. IDMs exercise full control over the implementation of process
technologies and have maximum flexibility in setting priorities for their production and delivery schedules. At the other end of the spectrum are completely-
outsourced fabless semiconductor companies, which rely entirely on off-the-shelf technologies and processes provided by their manufacturing partners. These
companies seek to reduce or eliminate fixed costs by outsourcing both product manufacturing and development of process technologies to third parties. Our model
seeks to achieve the best balance between technological advancement and cost effectiveness by using a dedicated in-house technology laboratory to drive rapid
new product developments, while utilizing third-party foundry capacity for mature products. This is particularly important in the development of power
semiconductor products due to the unique nature of their technology. While digital technologies are highly standardized in leading foundries, power semiconductor
technologies tend to be more unique as they seek to accommodate a wider range of voltage applications. Accordingly, third-party foundries, which are primarily
designed and established for digital technologies, can be limited when it comes to the development of new power semiconductor technologies.
Our strategies
Our strategy is to advance our position as a designer, developer and global supplier of a broad portfolio of power semiconductors. To accomplish this, we
have adopted a strategy that allows us to accelerate the development of our proprietary technology at our Oregon fab, bring new products to market faster, and
improve our financial performance in the long run. This model also provides quicker response to our customer demands, enhances relationships with strategic
customers, and provides flexibility in capacity management and geographic diversification of our wafer supply chain. Our in-house manufacturing capability
allows us to retain a higher level of control over the development and application of our proprietary process technology, thereby reducing certain operational risks
and costs associated with utilizing third-party foundries. In addition, we expect to expand our manufacturing capacity through the JV Transaction, which we
believe will also allow us to expand and diversify our markets in China, as well as to accelerate the development of our proprietary process technology through our
Chongqing manufacturing facilities.
In addition to our products targeting the PC market, we execute our strategies of diversifying our portfolio of products and expanding into other market
segments, including the consumer, communications, power supplies and industrial market segments, and improving gross margin and profit by implementing cost
control measures. We have been making progress in reducing our reliance on the PC market, but we are also committed to continue to support our PC business by
expanding bill-of-material content, expanding market share, and acquiring new customers.
We plan to further expand the breadth of our product portfolio to increase our total bill-of-materials within an electronic system and to address the power
requirements of additional electronic systems. Our product portfolio currently consists of approximately 1,900 products and we have introduced over 200 new
products in this past fiscal year. We will continue to leverage our expertise to further increase our product lines, including higher performance power ICs, IGBTs
and high, medium and low voltage MOSFETs, in order to broaden our addressable market and improve our margin profile. We are also in the process of
developing a digital power controller product line based on the technology that we licensed from STMicro. We believe that our increased product offerings will
allow us to penetrate new end-market applications and provide us with an important competitive advantage. OEMs and ODMs generally prefer to limit their
supplier base to a smaller set of vendors capable of providing a comprehensive menu of products across multiple electronic platforms.
Leverage
our
power
semiconductor
expertise
to
drive
new
technology
platforms
3
We believe that the ever-increasing demand for power efficiency in power semiconductors requires expertise in and a deep understanding of the
interrelationship among device physics, process technologies, design and packaging. We also believe that engineers with experience and understanding of these
multiple disciplines are in great demand but short supply. Within this context, we believe that we are well positioned to be a leader in providing total power
management solutions due to our extensive pool of experienced scientists and engineers and our strong IP portfolio. Accordingly, we intend to leverage our
expertise to increase the number of power discrete technology platforms and power IC designs, including future digital power controller products that are currently
under development, to expand our product offerings and deliver complete power solutions for our targeted applications. In addition, our ability to develop new
technology is enhanced by the operation of our own manufacturing facilities in Oregon and Chongqing, including the new 12-inch fab that is near completion.
Increase
direct
relationships
and
product
penetration
with
OEM
and
ODM
customers
We have developed direct relationships with key OEMs who are responsible for branding, designing and marketing a broad array of electronic products, as
well as ODMs who have traditionally been responsible for manufacturing these products. While OEMs typically focus their design efforts on their flagship
products, as the industry has evolved, ODMs are increasingly responsible for designing portions, or entire systems, of the products they manufacture for the OEMs.
In addition, several ODMs are beginning to design, manufacture and brand their own proprietary products which they sell directly to consumers. We intend to
strengthen our existing relationships and form new ones with both OEMs and ODMs by aligning our product development efforts with their product requirements,
increasing the number of our products used within their systems, and leveraging our relationships to penetrate their other products. In addition, we are refocusing
our research and development efforts to respond more directly to the market demand by designing and developing new products based on feedback from our
customers, which also allows us to reduce time-to-market and sales cycles.
Leverage
global
business
model
for
cost-effective
growth
We intend to continue to leverage our global resources and regional strengths. We will continue to deploy marketing, sales and technical support teams in
close proximity to our end customers. We plan to further expand and align our technical marketing and application support teams along with our sales team to
better understand and address the needs of our end customers and their end-market applications, in particular for those with the new technology platforms
developed in this past year and in the future. This will assist us in identifying and defining new technology trends and products and to help us gain additional
design wins. In addition, we have established a joint venture with investment funds affiliated with the municipalities of Chongqing, China for the purpose of
constructing a power semiconductor packaging, testing and wafer fabrication and we have made significant progress in the past fiscal year towards the completion
of the joint venture facilities and commencement of production. We expect our collaboration with Chongqing will, in the long term, reduce the cost of
manufacturing our products and accelerate the development of new products, while allowing us to gain valuable access to new customers in China.
Our products
To serve the large and diverse analog market for power semiconductors, we have created a broad product portfolio consisting of two major categories: power
discretes and power ICs.
Our power discretes products consist primarily of low, medium and high voltage power MOSFETs. Our low voltage MOSFET series is based on our
proprietary silicon and package technologies, with deep application know how in various market segments. We have precisely defined technology platforms to
address different requirements from various applications. Our medium voltage MOSFETs provide best optimized performance with high efficiency, high
robustness and high reliability, and are widely used in applications such as TV backlighting, telecom power supplies, and industrial applications. We expanded our
high voltage MOSFET portfolio by releasing our newest aMOS5 technology platform targeted to address robust consumer and industrial applications. Our high-
voltage portfolio includes our proprietary insulated-gate bipolar transistor ("IGBT") technology, which we developed highly robust and easy-to-use solutions
designed for industrial motor control and white goods applications.
Our power ICs deliver power as well as control and regulate the power management variables, such as the flow of current and level of voltage. We continued
to expand our EZBuck power IC family with products that feature lower on-resistance, less power consumption, small footprint and thermally enhanced packages.
While we derive the majority of our revenue from the sales of power discretes products, sales of power ICs continue to gain traction during the past years.
4
The following table lists our product families and the principal end uses of our products:
Product Family
Power Discretes
Description
Low on-resistance switch used for
routing current and switching
voltages in power control circuits
High power switches used for
power circuits
Power ICs
Integrated devices used for power
management and power delivery
Analog power devices used for
circuit protection and signal
switching
Power
discrete
products
Product Categories
within Product Type
DC-DC for CPU/GPU
DC-AC conversion
AC-DC conversion
Load switching
Motor control
Battery protection
Power factor correction
DC-DC Buck conversion
DC-DC Boost conversion
Smart load switching DrMOS
power stage
Transient voltage protection
Analog switch
Electromagnetic interference
filter
Typical Application
Smart phone chargers, battery packs, notebooks,
desktop and servers, data centers, base stations,
graphics card, game boxes, TVs, AC adapters,
power supplies, motor control, power tools, E-
vehicles, white goods and industrial motor
drives, UPS systems, solar inverters and
industrial welding
Flat panel displays, TVs, Notebooks, Ultrabooks,
servers, DVD/Blu-Ray players, set-top boxes,
and networking equipment
Notebooks, Ultrabooks, desktop PCs, tablets, flat
panel displays, TVs, smart phones, and portable
electronic devices
Power discretes are used across a wide voltage and current spectrum, requiring them to operate efficiently and reliably under harsh conditions. Due to this
wide applicability across diverse end-market applications, we market general purpose MOSFETs that are used in multiple applications as well as MOSFETs
targeted for specific applications.
Our current power discrete product line includes industry standard trench MOSFETs, SRFETs, XSFET, electrostatic discharge, protected MOSFETs, high
and mid-voltage MOSFETs and IGBTs.
Power
IC
products
In addition to the traditional monolithic or single chip design, we employ a multi-chip approach for the majority of our power ICs. This multi-chip technique
leverages our proprietary MOSFET and advanced packaging technologies to offer integrated solutions to our customers. This allows us to update product portfolios
by interchanging only the MOSFETs without changing the power management IC, thereby reducing the time required for new product introduction and providing
optimal solutions to our customers. We believe that our power IC products improve our competitive position by enabling us to provide higher power density
solutions to our end customers than our competitors.
The incorporation of both power delivery and power management functions tends to make power ICs more application specific because these two functions
have to be properly matched to a particular end product. We have local technical marketing and applications engineers who closely collaborate with our end
customers to help ensure that power IC specifications are properly defined at the beginning of the design stage.
New
Product
Introduction
We introduced several new products based on our proprietary technology platform and continue to expand our product family by introducing new solutions to
computing, battery protection, and smart phone fast chargers. During the fourth quarter of fiscal year of 2018, we introduced new family of EZBuck™ regulators
featuring I2C control. The new devices provide a compact, efficient power converter solution for next-generation chipsets and FPGAs used in high-end TVs, set-
top boxes, data storage systems, servers and other embedded systems. We also introduced the AONX38168, which utilizes the latest 25V N-
5
Channel MOSFET technology platform, combining the low-side and high-side in a leadless surface mount package to offer high power density for server and
telecommunication markets. During the third quarter of fiscal year of 2018, we introduced AONE36132, a 25V N-Channel MOSFET in a compact dual DFN
3.3x3.3 package, offering lower switch node ringing and lower parasitic inductance. Also we introduced a new Type-C Power Delivery compliant load switch with
up to 28V over-voltage protection. This new device offers low RDS(ON) (40mohm) in a thermally enhanced 3x3mm DFN package, making it an ideal solution for
the latest notebooks, ultrabooks, desktops, monitors, dockings/dongles, and Thunderbolt/USB Type-C PD applications. 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 enables higher efficiency and robustness to critical high density telecom and server applications.
During the first quarter of fiscal year of 2018, we released AOTF190A60L, the first product in the new AMOS5TMHV 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 machines.
Distributors and customers
We have developed direct relationships with key OEMs, including Dell Inc., Hewlett-Packard Company, LG Electronics, Inc. and Samsung Group, most of
which we serve through our distributors and ODMs. We sell to Samsung Group directly which accounted for 5.1%, 10.6% and 12.3% of our revenue for the fiscal
years ended June 30, 2018 , 2017 and 2016 , respectively. In addition, based on our historical design win activities, our power semiconductors are also incorporated
into products sold to certain OEMs.
Through our distributors, we provide products to ODMs who traditionally are contract manufacturers for OEMs. As the industry has evolved, ODMs are
increasingly responsible for designing portions, or entire systems, of the products they manufacture for the OEMs. In addition, several ODMs are beginning to
design, manufacture and brand their own proprietary products, which they sell directly to consumers. Our ODM customers include Compal Electronics, Inc.,
Foxconn, Quanta Computer Incorporated, Pegatron, Wistron Corporation and AOC International.
In order to take advantage of the expertise of end-customer fulfillment logistics and shorter payment cycles, we sell most of our products to distributors. In
general, under the agreements with our distributors, they have limited rights to return unsold merchandise, subject to time and volume limitations. As of June 30,
2018 , 2017 and 2016 , our two largest distributors were WPG Holdings Limited, or WPG, and Promate Electronic Co. Ltd., or Promate. Sales to WPG and
Promate accounted for 35.2% and 28.3% of our revenue, respectively, for the fiscal year ended June 30, 2018 , 35.8% and 26.9% of our revenue, respectively, for
the fiscal year ended June 30, 2017 , and 37.2% and 23.8% of our revenue, respectively, for fiscal year ended June 30, 2016 , respectively.
Sales and marketing
Our marketing division is responsible for identifying high growth markets and applications where we believe our technology can be effectively deployed. We
believe that the technical background of our marketing team, including application engineers, helps us better define new products and identify potential end
customers and geographic and product market opportunities. For example, as part of our market diversification strategy, we have deployed and plan to recruit more
for our new market segments, field application engineers, or FAEs, who provide real-time and on-the-ground responses to our end customer needs. FAEs work
with our end customers to understand their requirements, resolve technical problems, strive to anticipate future customer needs and facilitate the design-in of our
products into the end products of our customers. We believe this strategy increases our share of revenue opportunities within the applications we currently serve, as
well as in new end-market applications.
Our sales team consists of sales persons, field application engineers, customer service representatives and customer quality engineers who are responsible for
key accounts. We strategically position our team near our end customers through our offices in Taipei, Hong Kong, Shenzhen, Shanghai, Tokyo, Seoul, Heilbronn,
Germany, and Sunnyvale, California, complemented by our applications centers in Sunnyvale and Shanghai. In addition, our distributors and sales representatives
assist us in our sales and marketing efforts by identifying potential customers, sourcing additional demand and promoting our products, in which case we may pay a
sales commission to these distributors.
6
Our sales cycle varies depending on the types of products and can range from six to eighteen months. In general, our traditional power discrete products in
the PC and TV applications are moving more rapidly through the design and marketing processes, therefore they generally have shorter sales cycle. In contrast, our
newer Power IC and IGBT products, mostly in the power supply, home appliance and industrial applications, require a more extended design and marketing
timeline and thus have longer sales cycle. Typically, our sales cycle for all products comprises of the following steps:
•
•
•
•
identification of a customer design opportunity;
qualification of the design opportunity by our FAEs through comparison of the power requirements against our product portfolio;
provision of a product sample to the end customer to be included in the customer's pre-production model with the goal of being included in the final bill of
materials; and
placement by the customer, or through its distributor, of a full production order as the end customer increases to full volume production.
Competition
The power semiconductor industry is characterized by fragmentation with many competitors. We compete with different power semiconductor suppliers,
depending on the type of product lines and geographical area. Our key competitors in power discretes and power ICs are primarily headquartered in the United
States, Japan, Europe and Taiwan. Our major competitors in power discretes include Infineon Technologies AG, MagnaChip Semiconductor Corporation, ON
Semiconductor Corp., STMicroelectronics N.V., Toshiba Corporation, Diodes Incorporated and Vishay Intertechnology, Inc. Our major competitors for our power
ICs include Global Mixed-mode Technology Inc., Monolithic Power Systems, Inc., Richtek Technology Corp., Semtech Corporation and Texas Instruments Inc..
Our ability to compete depends on a number of factors, including:
our success in expanding and diversifying our serviceable markets, and our ability to develop technologies and product solutions for these markets;
our capability in quickly developing and introducing proprietary technology and best in class products;
the performance and cost-effectiveness of our products relative to that of our competitors;
our ability and capacity to manufacture, package and deliver products in large volume on a timely basis at a competitive price;
our success in utilizing new and proprietary technologies to offer products and features previously not available in the marketplace;
our ability to recruit and retain analog semiconductor designers and application engineers; and
our ability to protect our intellectual property.
•
•
•
•
•
•
•
Some of our competitors have longer operating histories, more brand recognition, and significantly greater financial, technical, research and development,
sales and marketing, manufacturing and other resources. However, we believe that we can compete effectively through our integrated and innovative technology
platform and design capabilities, including our multi-chip approach to power IC products, strategic global business model, expanding portfolio of products,
diversified and broad customer base, and excellent on-the-ground support and quick time to market for our products.
Seasonality
As we provide power semiconductors used in consumer electronic products, our business is subject to seasonality. Our sales seasonality is affected by a
number of 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.
Backlog
7
Our sales are made primarily pursuant to standard purchase orders from distributors and direct customers. The amount of backlog to be shipped during any
period depends on various factors, and all orders are subject to cancellation or modification, usually with no penalty to customers. The quantities actually
purchased by customers, as well as shipment schedules, are frequently revised to reflect changes in both the customers' requirements and in manufacturing
availability. Therefore, our backlog at any point in time is not a reliable indicator of our future revenue.
Research and development
Because we view technology as a competitive advantage, we invest significant time and capital into research and development to address the technology
intensive needs of our end customers. Our research and development expenditures for the fiscal years of 2018 , 2017 and 2016 were $37.3 million , $29.8 million
and $26.0 million , respectively. Our research and development expenditures primarily consist of personnel compensation, prototypes, engineering materials,
simulation and design tools and test and analyzer equipment. Our new product development efforts continue to focus on developing products with higher speed,
higher efficiency and reliability, higher power density, greater performance and lower costs. We have research and development teams in Silicon Valley
(Sunnyvale, California), Oregon, Taipei, Taiwan, and Shanghai, China. We believe that these diverse research and development teams enable us to develop leading
edge technology platforms and new products. Our areas of research and development focus include:
Packaging
technologies
: Consumer demand for smaller and more compact electronic devices with higher power density is driving the need for advanced
packaging technology. Our group of dedicated packaging engineers focuses on smaller form factor, higher power output with efficient heat dissipation and cost-
effectiveness. We have invested resources to develop and enhance our proprietary packaging technologies, including the establishment of our in-house packaging
and testing facilities. We believe that our efforts to develop innovative packaging technologies will continue to provide new and cost-effective solutions with
higher power density to our customers. During the fiscal year ended June 30, 2018 , we continued our diversification strategies by developing new silicon and
packaging platforms to expand our SAM and offer higher performance products.
Process
technology
and
device
physics:
We focus on specialized process technology in the manufacturing of our products, including vertical DMOS,
Shielded Gate Trench, Trench field stop IGBTs, charge-balance high voltage MOSFETs, Schottky Diode and BCDMOS processes. Our process engineers work
closely with our design team to deploy and implement our proprietary manufacturing processes at our Oregon fab, and more recently, at the Chongqing
manufacturing facility under the JV, as well as the third-party foundries that fabricate our wafers. We also expect our Chongqing manufacturing facility under the
JV, including the 12-inch fab, will provide us with enhanced ability to develop and accelerate new process technology for advanced products. To improve our
process technology, we continue to develop and enhance our expertise in device physics in order to better understand the physical characteristics of materials and
the interactions among these materials during the manufacturing process.
New
products
and
new
technology
platforms:
We also invest significantly in the development of new technology platforms and introduction of new products.
Because power management affects all electronic systems, we believe that developing a wide portfolio of products enables us to target new applications in addition
to expanding our share of power management needs served within existing applications.
As a technology company, we will continue our significant investment in research and development in our low voltage and high voltage power discretes and
power ICs by developing new technology platforms and new products that allow for better product performance, more efficient packages and higher levels of
integration.
Operations
The manufacture of our products is divided into two major steps: wafer fabrication and packaging and testing.
Wafer
fabrication
Our Oregon fab allows us to accelerate the development of our technology and products, as well as to provide better services to our customers. We allocate
our wafer production between our in-house facility and third-party foundries, although in the past three years, we have gradually reduced our reliance on third-party
foundries and increased allocation of capacity to our Oregon fab. Currently our main third-party foundry is Shanghai Hua Hong Grace Electronic Company
Limited, ("HHGrace"), or formerly HHNEC, located in Shanghai. HHGrace has been manufacturing wafers for us since 2002. HHGrace manufactured 15.4% ,
18.6% and 25.0% of the wafers used in our products for the fiscal years ended June 30, 2018 , 2017 and 2016 , respectively.
8
On March 29, 2016, we entered into the JV agreement with two investment funds affiliated with the municipalities of Chongqing for the purpose of
constructing a power semiconductor packaging, testing and 12-inch wafer fabrication facility in the Liangjiang New Area of Chongqing. We substantially
completed our assembly and testing and 12-inch wafer fab facilities during the quarter ended June 30, 2018. We expect to commence limited mass production for
assembly and testing in the second half of calendar year 2018, and the trial production of the 12-inch wafer fabrication facility toward the end of calendar year
2018. We believe the joint venture will increase and diversify our customer base, particularly in China, and accelerate the development of proprietary process
technology.
Packaging
and
testing
Completed wafers from the foundries are sent to our in-house packaging and testing facilities or to our subcontractors, where the wafers are cut into
individual die, soldered to lead frames, wired to terminals and then encapsulated in protective packaging. After packaging, all devices are tested in accordance with
our specifications and substandard or defective devices are rejected. We have established quality assurance procedures that are intended to control quality
throughout the manufacturing process, including qualifying new parts for production at each packaging facility, conducting root cause analysis, testing for lots with
process defects and implementing containment and preventive actions. The final tested products are then shipped to our distributors or customers.
Our in-house and wholly-owned packaging and testing facilities are located in Shanghai, China which handle most of our packaging and testing requirements
for our products. During the quarter ended September 30, 2016, we fulfilled our obligations to contribute certain packaging equipment as required by the JV
agreement by transferring the legal titles of such equipment to the JV Company and we expect the JV Company to handle a portion of our packaging and testing
requirement following the commencement of production. We continuously increase the outsourcing portion of our packaging and testing requirements to other
contract manufacturers to minimize the effect of market fluctuation. Our facilities have the combined capacity to package and test over 600 million parts per month
and have available floor space for new package introductions. We believe our ability to package and test our products internally represents a strategic advantage as
it protects our proprietary packaging technology, increases the rate of new package introductions, reduces operating expenses and ultimately improves our profit
margins.
Quality
assurance
Our quality assurance practices aim to consistently provide our end customers with products that are reliable, durable and free of defects. We strive to do so
through design for manufacturing, and continuous improvement in our product design and manufacturing and close collaboration with our manufacturing partners.
Our manufacturing operations in China and our manufacturing facility in Oregon are certified to the ISO9001 and IATF16949:2016. These Quality Management
System certifications are in recognition of our quality assurance standards. Both ISO9001 and IATF16949:2016 are sets of criteria and procedures established by
International Organization of Standardization for developing a fundamental quality management system and focusing on continuous improvement, defect
prevention and the reduction of variation and waste. Our products are also in compliance with Restrictions on the use of Hazardous Substances, or RoHS 2.0.
We maintain a supplier management and process engineering team in Shanghai that works with our third-party foundries and packaging and testing
subcontractors to monitor the quality of our products, which is designed to ensure that manufacturing of our products, is in strict compliance with our process
controls, monitoring procedures and product requirements. We also conduct periodic reviews and annual audits to ensure supplier performance. For example, we
examine the results of statistical process control systems, implement preventive maintenance, verify the status of quality improvement projects and review delivery
time metrics. In addition, we rate and rank each of our suppliers every quarter based on factors such as their quality and performance. Our facility in Oregon
integrates manufacturing process controls through our manufacturing execution system coupled with wafer process controls that include monitoring procedures,
preventative maintenance, statistical process control, and testing to ensure that finished wafers delivered will meet and exceed quality and reliability requirements.
All materials used to manufacture wafers are controlled through a strict qualification process.
Our manufacturing processes use many raw materials, including silicon wafers, gold, copper, molding compound, petroleum and plastic materials and various
chemicals and gases. We obtain our raw materials and supplies from a large number of sources. Although supplies for the raw materials used by us are currently
adequate, shortages could occur in various essential materials due to interruption of supply or increased demand in the industry.
Intellectual property rights
Intellectual property is a critical component of our business strategy, and we intend to continue to invest in the growth, maintenance and protection of our
intellectual property portfolio. We own significant intellectual property in many aspects of
9
power semiconductor technology, including device physics and structure, wafer processes, circuit designs, packaging, modules and subassemblies. We have also
entered into intellectual property licensing agreements with other companies, including On Semiconductor Corp. and Giant Semiconductor Corporation, to use
selected third-party technology for the development of our products, although we do not believe our business is dependent to any significant degree on any
individual third-party license agreement. 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 offered previously by STMicro. This license agreement allows us to develop a new digital power business that
will design and offer a full suite of advance digital power controller products.
While we focus our patent efforts in the United States, we file corresponding foreign patent applications in other jurisdictions, such as China and Taiwan,
when filing is justified by cost and strategic importance. The patents are increasingly important to remain competitive in our industry, and a strong patent portfolio
will facilitate the entry of our products into new markets. As of June 30, 2018 , we had 722 patents issued in the United States, of which 9 were acquired, 2 were
licensed and 711 were based on our research and development efforts, and these patents are set to expire between 2018 and 2037 . Within these patents, 4 patents
will expire in 2018 . We do not expect that the expiration of these 4 patents will have a material adverse impact on our patent position. We also had a total of 667
foreign patents, including 259 Chinese patents, 383 Taiwanese patents, 17 Korean patents, 4 Hong Kong patents and 4 Japanese patents as of June 30, 2018 .
Substantially all of our foreign patents were based on our research and development efforts. These foreign patents will expire in the years between 2018 and 2037 .
In addition, as of June 30, 2018 , we had a total of 278 patent applications, of which 108 patents were pending in the United States, 93 patents were pending in
China, 45 patents were pending in Taiwan and 32 patents were pending in other countries.
As our technologies are deployed in new applications and as we diversify our product portfolio based on new technology platforms, we may be subject to
new potential infringement claims. Patent litigation, if and when instituted against us, could result in substantial costs and a diversion of our management's
attention and resources. However, we are committed to vigorously defending and protecting our investment in our intellectual property. Therefore, the strength of
our intellectual property program, including the breadth and depth of our portfolio, will be critical to our success in the new markets we intend to pursue.
In addition to patent protection, we also rely on a combination of trademark, copyright (including mask work protection), trade secret laws, contractual
provisions and similar laws in other jurisdictions. We also enter into confidentiality and invention assignment agreements with our employees, consultants,
suppliers, distributors and customers and seek to control access to, and distribution of, our proprietary information.
Environmental matters
The semiconductor production process, including the semiconductor wafer manufacturing and packaging process, generates air emissions, liquid wastes,
waste water and other industrial wastes. We have installed various types of pollution control equipment for the treatment of air emissions and liquid waste and
equipment for recycling and treatment of water in our packaging and testing facilities in China and wafer manufacturing facility in Oregon, USA. Waste generated
at our manufacturing facilities, including but not limited to acid waste, alkaline waste, flammable waste, toxic waste, oxide waste and self-igniting waste, is
collected and sorted for proper disposal. Our operations in China are subject to regulation and periodic monitoring by China's State Environmental Protection
Bureau, as well as local environmental protection authorities, including those under the Shanghai Municipal Government, which may in some cases establish
stricter standards than those imposed by the State Environmental Protection Bureau. Our operation in Oregon is subject to Oregon Department of Environmental
Regulations, Federal Environmental Protection Agency laws and regulations, and local jurisdictional regulations. We believe that we have been in material
compliance with applicable environmental regulations and standards and have not had a material or adverse effect on our results of operations from complying with
these regulations.
We have implemented an ISO 14001 environmental management system in our manufacturing facilities in China and Oregon. We also require our
subcontractors, including foundries and assembly houses, to meet ISO14001 standards. We believe that we have adopted pollution control measures for the
effective maintenance of environmental protection standards consistent with the requirements applicable to the semiconductor industry in China and the U.S.
Our products sold in worldwide are subject to RoHS in Electrical and Electronic Equipment, which requires that the products do not contain more than agreed
levels of lead, cadmium, mercury, hexavalent chromium, polybrominated biphenyl and polybrominated diphenyl ether flame retardants. Our manufacturing
facilities in China also obtained QC080000 certification, which is an IECQ Certificate of Conformity Hazardous Substance Process Management for European
Directive
10
2002/95/EC requirements and a Certificate of Green Partner for Sony Green Partner Program. We avoid using these restricted materials to the extent possible when
we design our products.
We are also subject to SEC rules that require diligence, disclosure and reporting on whether certain minerals and metals, known as conflict minerals, used in
our products originate from the Democratic Republic of Congo and adjoining countries. As of June 30, 2018 , 2017 and 2016 , we were in compliance with the
related conflict minerals rule.
Employees
As of June 30, 2018 , we had approximately 3,340 employees, of which approximately 590 were located in the United States, 2,630 were located in China,
and 120 were located in other parts of Asia. None of our employees is represented by a collective bargaining agreement. We consider our relationships with our
employees to be good.
Executive Officers
The following table lists the names, ages and positions of our executive officers as of July 31, 2018 . There are no family relationships between any executive
officer.
Name
Mike F. Chang, Ph.D.
Yueh-Se Ho, Ph.D.
Yifan Liang
Daniel Kuang Ming Chang
Age
73
66
54
63
Position
Chairman of the Board and Chief Executive Officer
Director and Chief Operating Officer
Chief Financial Officer and Corporate Secretary
Senior Vice President of Strategic Business and World-wide Applications Engineering
Mike F. Chang, Ph.D ., is the founder of our company and has served as our Chairman of the Board and Chief Executive Officer since the incorporation of
our company. Dr. Chang has extensive experience in both technology development and business operations in the power semiconductor industry. Prior to
establishing our company, Dr. Chang served as the Executive Vice President at Siliconix Incorporated, a subsidiary of Vishay Intertechnology Inc., a global
manufacturer and supplier of discrete and other power semiconductors, or Siliconix, from 1998 to 2000. Dr. Chang also held various management positions at
Siliconix from 1987 to 1998. Earlier in his career, Dr. Chang focused on product research and development in various management positions at General Electric
Company from 1974 to 1987. Dr. Chang received his B.S. in electrical engineering from National Cheng Kung University, Taiwan, and M.S. and Ph.D. in
electrical engineering from the University of Missouri.
Yueh-Se Ho, Ph.D ., is a co-founder of our company and has served as our Chief Operating Officer since January 2006 and our director since March 2006.
Dr. Ho has held various operational management positions in our company since our inception, including the Vice President of Worldwide Operations from 2003
to 2006 and the Vice President of Back End Operations from 2000 to 2003. Prior to co-founding our company, Dr. Ho served as the Director of Packaging
Development and Foundry Transfer at Siliconix from 1998 to 2000. Dr. Ho received his B.S. in chemistry from Tamkang University, Taiwan, and Ph.D. in
chemistry from the University of Pittsburgh.
Yifan Liang has been serving as our Chief Financial Officer since August 2014 and Corporate Secretary since November 2013. Mr. Liang served as our
Interim Chief Financial Officer from November 2013 to August 2014, our Chief Accounting Officer since October 2006, and our Assistant Corporate Secretary
from November 2009 to November 2013. Mr. Liang joined our company in August 2004 as our Corporate Controller. Prior to joining us, Mr. Liang held various
positions at PricewaterhouseCoopers LLP, or PwC, from 1995 to 2004, including Audit Manager in PwC's San Jose office. Mr. Liang received his B.S. in
management information system from the People's University of China and M.A. in finance and accounting from the University of Alabama.
D aniel Kuang Ming Chang has been serving as our Senior Vice President of Business Development and World-wide Applications Engineering since
November 13, 2017. Mr. Chang served as our Senior Vice President of Marketing from August 3, 2015 to November 12, 2017, our Vice President of Power IC
Product Line and Applications Engineering from October 2011 to August 2, 2015, our Vice President of Strategic Marketing and Applications Engineering from
May 2010 to October 2011, and our Director of Strategic Marketing and Applications Engineering from February 2009 to April 2010. Prior to joining our
company, Mr. Chang served as Vice President of new product line at Richtek Inc, a power management company in Taiwan, from 2005 to 2009. He also served as
Vice President of System Engineering at Lovoltech Inc, a startup semiconductor company in Sunnyvale, California from 2001 to 2005. Mr. Chang received his
M.S. in physics from National Tsing Hua University of Taiwan, and a B.S. in electrical engineering from Taiwan National University.
11
Available Information
Our filing documents and information with the Securities and Exchange Commission (the "SEC") are available free of charge electronically through our
Internet website, www.aosmd.com.
as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Additionally, these
filings may be obtained by visiting the Public Reference Room of the SEC at 100 F Street, NE, Washington, DC 20549 or by calling the SEC at 1-800-SEC-0330,
by sending an electronic message to the SEC at publicinfo@sec.gov. In addition, the SEC maintains a website (www.sec.gov) that contains reports, proxy
statements, and other information that we file electronically.
12
Item 1A.
Risk Factors
Risks Related to Our Business
Our joint venture with the Chongqing government may not succeed as expected.
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 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. The JV Company is expected to commence assembly and testing mass production in the second
half of calendar year 2018, and trial production of the 12-inch wafer fabrication facilities toward the end of calendar year 2018. The initial ramp up of the JV
Company’s operations is costly and for the short term will negatively impact our results of operations. While we believe the JV Transaction will enhance our
ability to accelerate growth and improve our profitability, there is no guarantee that it will succeed as we initially expected. We may encounter unanticipated
difficulties and obstacles that may delay or prevent the commencement of the JV Company's operation, some of which are outside of our control. These difficulties
may include unexpected costs and delays in transferring our assembly and testing operations to the new facility; inability to coordinate and integrate the labor
forces; failure of the Chongqing Funds to meet their obligations under the JV Agreement, such as delays in capitalizing the JV Company based on our original
timeline; and inability to provide customers with required services.
Even after the JV Company commences 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-inch fabrication facility;
High cost and unexpected expenses relating to upgrading and improving the packaging and testing and fabrication facilities;
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 addition, we may be subject to the risk of under-utilization of the facilities at the JV Company. The operation of the JV Company’s facilities, including
the assembly and testing facilities and the fab, requires significant fixed cost. In order to manage the capacity of the wafer fabrication facility efficiently, we must
perform a forecast of long-term market demand and general economic conditions for our products. Because market conditions may vary significantly and
unexpectedly, our forecast may change significantly at any time, and we may not be able to make timely adjustments to our fabrication capacity in response to
these changes. If our forecast is incorrect or if we are not able to fully utilize the capacities of the facilities at the JV Company, we may not be able to absorb the
cost of operation, which will adversely affect our results of operations.
Any of the foregoing risks could materially reduce the expected return of our investment in the JV Transaction and adversely affects our business
operations, financial performance and the trading price of our shares.
13
Possible new tariffs on imported goods from China could adversely affect our business operations.
The President of the United States has recently ordered U.S. government agencies to consider a proposed 25% tariff on a wide range of goods and materials
imported from China, in addition to the U.S. tariffs already imposed. These goods may include products and applications, including consumer electronics, that
incorporate our power discrete and power IC products. In response, China announced a plan to impose tariffs on certain American products if these additional U.S.
tariffs are imposed. The resulting trade war could have a significant adverse effect on world trade and the world economy. While it is too early to predict if the
additional potential U.S. tariffs will be imposed, or how the recently enacted tariffs will impact our business, we believe that the imposition of the potential
additional tariffs by the U.S. government on products incorporating our power semiconductors could deter our U.S. customers from purchasing our products
originating from China. If so, this could reduce demand for our power semiconductor products or result in pricing adjustments that would lower our gross margin,
which could have a material adverse effect on our business and results of operations.
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 power 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 the hiring and compensation 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, and there is no guarantee that our attempt to develop a profitable digital business will ultimately
succeed. The success of our new digital power business depends on a number of factors, including the following:
•
•
•
•
•
competition from other companies with greater resources and experiences in the digital power market;
the availability of and our ability to recruit and attract qualified personnel;
our lack of experience and reputation in the digital power market;
difficulties in designing products acceptable to customers; and
sales and marketing capability.
Any one of these factors may negatively impact our ability to create a successful digital power business, which would adversely affect our financial condition
and results of operations.
The decline of personal computing (“PC”) markets may have a material adverse effect on our results of operations.
A significant amount of our revenue is derived from sales of products in the PC markets such as notebooks, motherboards and notebook battery packs. Our
revenue from the PC markets accounted for approximately 41.6% , 39.1% and 38.5% of our total revenue for the years ended 2018 , 2017 and 2016 , respectively.
The increasing popularity of smaller, mobile computing devices such as tablets and smart phones with touch interfaces is rapidly changing the PC markets both in
the United States and abroad. In the past, we experienced a significant reduction in the demand for our products due to the declining PC markets, which had
negatively impacted our revenue, profitability and gross margin. The decline of the PC markets also adversely affected our ability to adjust inventory levels in
response to the lower shipments, which had negatively impacted our gross margins.
Our diversification into different market segments may not succeed according to our expectations and may expose us to new risks and place significant strains
on our management, operational, financial and other resources.
As part of the growth strategy to diversify our product portfolio and in response to the rapid decline of the PC markets, we have been developing new
technologies and products designed to penetrate into other markets and applications, including merchant power supplies, flat panel TVs, smart phones, tablets,
gaming consoles, lighting, datacom, telecommunications, home appliances and industrial motor controls. However, there is no guarantee that these diversification
efforts will be successful. As a new entrant to some of these markets, we may face intense competition from existing and more established providers and encounter
other unexpected difficulties, any of which may hinder or delay our efforts to achieve success. In addition, our new products may have long design and sales
cycles, therefore if our diversification efforts fail to keep pace with the declining PC markets, we may not be able to alleviate its negative impact on our results of
operations.
Our diversification into different market segments may place a significant strain on our management, operational, financial and other resources. To manage
this diversification effectively, we will need to take various actions, including:
14
•
•
enhancing management information systems, including forecasting procedures;
further developing our operating, administrative, financial and accounting systems and controls;
• managing our working capital and sources of financing;
• maintaining close coordination among our engineering, accounting, finance, marketing, sales and operations organizations;
•
•
•
•
retaining, training and managing our employee base;
enhancing human resource operations and improving employee hiring and training programs;
realigning our business structure to more effectively allocate and utilize our internal resources;
improving and sustaining our supply chain capability; and
• managing both our direct and distribution sales channels in a cost-efficient and competitive manner.
Our failure to execute any of the above actions successfully or timely may have an adverse effect on our business and financial results.
Our operating results may fluctuate from period to period due to many factors, which may make it difficult to predict our future performance.
Our periodic operating results may fluctuate as a result of a number of factors, many of which are beyond our control. These factors include, among others:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
a deterioration in general demand for electronic products, particularly the PC market, as a result of global or regional financial crises and associated
macro-economic slowdowns, and/or the cyclicality of the semiconductor industry;
a deterioration in business conditions at our distributors and /or end customers;
adverse general economic conditions in the countries where our products are sold or used;
the emergence and growth of markets for products we are currently developing;
our ability to successfully develop, introduce and sell new or enhanced products in a timely manner and the rate at which our new products replace
declining orders for our older products;
the anticipation, announcement or introduction of new or enhanced products by us or our competitors;
the amount and timing of operating costs and capital expenditures, including expenses related to the maintenance and expansion of our business
operations and infrastructure;
the announcement of significant acquisitions, disposition or partnership arrangements;
changes and delays in our JV Transaction;
operation of the JV Company;
changes in the utilization of our in-house manufacturing capacity;
supply and demand dynamics and the resulting price pressure on the products we sell;
the unpredictable volume and timing of orders, deferrals, cancellations and reductions for our products, which may depend on factors such as our end
customers' sales outlook, purchasing patterns and inventory adjustments based on general economic conditions or other factors;
changes in the selling prices of our products and in the relative mix in the unit shipments of our products, which have different average selling prices and
profit margins;
changes in laws and regulations affecting our business operations;
changes in costs associated with manufacturing of our products, including pricing of wafer, raw materials and assembly services;
announcement of significant share repurchase programs;
our concentration of sales in consumer applications and changes in consumer purchasing patterns and confidence; and
the adoption of new industry standards or changes in our regulatory environment.
Any one or a combination of the above factors and other risk factors described in this section may cause our operating results to fluctuate from period to
period, making it difficult to predict our future performance. Therefore, comparing our
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operating results on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance.
Our revenue may fluctuate significantly from period to period due to ordering patterns from our distributors and seasonality.
Demand for our products from our end customers fluctuates depending on their sales outlooks and market and economic conditions. Accordingly, our
distributors place purchase orders with us based on their forecasts of end customer demand. Because these forecasts may not be accurate, channel inventory held at
our distributors may fluctuate significantly due to the difference between the forecasts and actual demand. As a result, distributors adjust their purchase orders
placed with us in response to changing channel inventory levels, as well as their assessment of the latest market demand trends. A significant decrease in our
distributors' channel inventory in one period may lead to a significant rebuilding of channel inventory in subsequent periods, or vice versa, which may cause our
quarterly revenue and operating results to fluctuate significantly.
In addition, because our power semiconductors are used in consumer electronics products, our revenue is subject to seasonality. Our sales seasonality is
affected by a number of 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 year, broad fluctuations in the semiconductor markets and the global economic conditions, in particular
the decline of the PC market conditions, have had a more significant impact on our results of operations, than seasonality, and have made it difficult to assess the
impact of seasonal factors on our business.
If we are unable to introduce or develop new and enhanced products that meet or are compatible with our customer's product requirements in a timely manner,
it may harm our business, financial position and operating results.
Our success depends upon our ability to develop and introduce new and enhanced products that meet or are compatible with our customer's specifications,
performance standards and other product requirements in a timely manner. The development of new and enhanced products involves highly complex processes,
and at times we have experienced delays in the introduction of new products. Successful product development and introduction of new products depends on a
number of factors, including the accurate product specification; timely completion of design; achievement of manufacturing yields; timely response to changes in
customers' product requirements; quality and cost-effective production; and effective marketing. Since many of our products are designed for specific applications,
we must frequently develop new and enhanced products jointly with our customers. In the past, we have encountered product compatibility issues with a major
OEM that has negatively impacted our financial results, and although we have resolved fully such issues with the OEM, there is no guarantee that the same
compatibility issues will not occur in the future with other OEMS. If we are unable to develop or acquire new products that meet or are compatible with our
customer's specification and other product requirements in a timely manner, we may lose revenue or market shares with our customers, which could have a material
adverse effect on our business, financial position and operating results.
We may not win sufficient designs, or our design wins may not generate sufficient revenue for us to maintain or expand our business.
We invest significant resources to compete with other power semiconductor companies to obtain winning competitive bids for our products in selection
processes, known as “design wins.” Our effort to obtain design wins may detract us from or delay the completion of other important development projects, impair
our relationships with existing end customers and negatively impact sales of products under development. In addition, we cannot be assured that these efforts
would result in a design win, that our product would be incorporated into an end customer's initial product design, or that any such design win would lead to
production orders and generate sufficient revenue. Furthermore, even after we have qualified our products with a customer and made sales, subsequent changes to
our products, manufacturing processes or suppliers may require a new qualification process, which may result in delay and excess inventory. If we cannot achieve
sufficient design wins in the future, or if we fail to generate production orders following design wins, our ability to grow our business and improve our financial
results will be harmed.
Our success depends upon the ability of our OEM end customers to successfully sell products incorporating our products.
The consumer end markets, in particular the PC market, in which our products are used are highly competitive. Our OEM end customers may not
successfully sell their products for a variety of reasons, including:
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general global and regional economic conditions;
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late introduction or lack of market acceptance of their products;
lack of competitive pricing;
shortage of component supplies;
excess inventory in the sales channels into which our end customers sell their products;
changes in the supply chain; and
changes as a result of regulatory restrictions applicable to China-exported products.
Our success depends on the ability of our OEM end customers to sell their products incorporating our products. In addition, we have expanded our business
model to include more OEMs in our direct customer base. The failure of our OEM end customers to achieve or maintain commercial success for any reason could
harm our business, results of operations, and financial condition and prospects.
The operation of our Oregon fab subjects us to additional risks and the need for additional capital expenditures which may negatively impact our results of
operations.
The operation of the Oregon fab requires significant fixed manufacturing cost. In order to manage the capacity of the wafer fabrication facility efficiently, we
must perform a forecast of long-term market demand and general economic conditions for our products. Because market conditions may vary significantly and
unexpectedly, our forecast may change significantly at any time, and we may not be able to make timely adjustments to our fabrication capacity in response to
these changes. During periods of continued decline in market demand, in particular the decline of the PC market, we may not be able to absorb the excess inventory
and additional costs associated with operating the facility at higher capacity, which may adversely affect our operating results. Similarly, during periods of
unexpected increase in customer demand, we may not be able to ramp up production quickly to meet these demands, which may lead to the loss of significant
revenue opportunities. The manufacturing processes of a fabrication facility are complex and subject to interruptions. We may experience production difficulties,
including lower manufacturing yields or products that do not meet our or our customers' specifications, and problems in ramping production and installing new
equipment. These difficulties could result in delivery delays, quality problems and lost revenue opportunities. Any significant quality problems could also damage
our reputation with our customers and distract us from the development of new and enhanced product which may have a significant negative impact on our
financial results.
In addition, semiconductor manufacturing has historically required an upgrading of process technology from time to time to remain competitive, as new and
enhanced semiconductor processes are developed which permit smaller, more efficient and more powerful semiconductor devices. Accordingly, we may have to
incur substantial capital expenditures and install significant production capacity at our in-house fabrication facility to support new technologies and increased
production volume, which may cause delay in our ability to deliver new products or negatively impact our results of operations.
Defects and poor performance in our products could result in loss of customers, decreased revenue, unexpected expenses and loss of market share, and we may
face warranty and product liability claims arising from defective products.
Our products are complex and must meet stringent quality requirements. Products as complex as ours may contain undetected errors or defects, especially
when first introduced or when new versions are released. Errors, defects or poor performance can arise due to design flaws, defects in raw materials or components
or manufacturing anomalies, which can affect both the quality and the yield of the product. It can also be potentially dangerous as defective power components, or
improper use of our products by customers, may lead to power overloads, which could result in explosion or fire. As our products become more complex, we face
higher risk of undetected defects, because our testing protocols may not be able to fully test the products under all possible operating conditions. In the past, we
have experienced defects in our products and these products were returned to us and subsequently scrapped or sold at a discount. Any actual or perceived errors,
defects or poor performance in our products could result in the replacement or recall of our products, shipment delays, rejection of our products, damage to our
reputation, lost revenue, diversion of our engineering personnel from our product development efforts in order to address or remedy any defects and increases in
customer service and support costs, all of which could have a material adverse effect on our business and operations.
Furthermore, as our products are typically sold at prices much lower than the cost of the equipment or other devices incorporating our products, any
defective, inefficient or poorly performing products, or improper use by customers of power components, may give rise to warranty and product liability claims
against us that exceed any revenue or profit we receive from the affected products. Historically, we have received claims from our customers for charges such as
their labor and other costs replacing defective parts, their lost profit, and/or penalty. We could incur significant costs and liabilities if we are sued
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and if damages are awarded against us. There is no guarantee that our insurance policies will be available or adequate to protect against such claims. Costs or
payments we may make in connection with warranty and product liability claims or product recalls may adversely affect our financial condition and results of
operations.
If we do not forecast demand for our products accurately, we may experience product shortages, delays in product shipment, excess product inventory, or
difficulties in planning expenses, which will adversely affect our business and financial condition.
We manufacture our products according to our estimates of customer demand. This process requires us to make numerous forecasts and assumptions relating
to the demand of our end customers, channel inventory, and general market conditions. Because we sell most of our products to distributors, who in turn sell to our
end customers, we have limited visibility as to end customer demand. Furthermore, we do not have long-term purchase commitments from our distributors or end
customers, and our sales are generally made by purchase orders that may be cancelled, changed or deferred without notice to us or penalty. As a result, it is difficult
to forecast future customer demand to plan our operations.
The utilization of our manufacturing facilities and the provisions for inventory write-downs are important factors in our profitability. If we overestimate
demand for our products, or if purchase orders are canceled or shipments delayed, we may have excess inventory, which may result in adjustments to our
production plans. These adjustments to our productions may affect the utilization of our own wafer fabrication and packaging facilities. If we cannot sell certain
portion of the excess inventory, it will affect our provisions for inventory write-downs. Our inventory write-down provisions are subject to adjustment based on
events that may not be known at the time the provisions are made, and such adjustments could be material and impact our financial results negatively.
If we underestimate demand, we may not have sufficient inventory to meet end-customer demand, and we may lose market share and damage relationships
with our distributors and end customers and we may have to forego potential revenue opportunities. Obtaining additional supply in the face of product shortages
may be costly or impossible, particularly in the short term, which could prevent us from fulfilling orders in a timely manner or at all.
In addition, we plan our operating expenses, including research and development expenses, hiring needs and inventory investments, base in part on our
estimates of customer demand and future revenue. If customer demand or revenue for a particular period is lower than we expect, we may not be able to
proportionately reduce our fixed operating expenses for that period, which would harm our operating results.
We face intense competition and may not be able to compete effectively which could reduce our revenue and market share.
The power semiconductor industry is highly competitive and fragmented. If we do not compete successfully against current or potential competitors, our
market share and revenue may decline. Our main competitors are primarily headquartered in the United States, Japan, Taiwan and Europe. Our major competitors
for our power discretes include Infineon Technologies AG, MagnaChip Semiconductor Corporation, ON Semiconductor Corp., STMicroelectronics N.V., Toshiba
Corporation, Diodes Incorporated and Vishay Intertechnology, Inc. Our major competitors for our power ICs include Global Mixed-mode Technology Inc.,
Monolithic Power Systems, Inc., Richtek Technology Corp., Semtech Corporation and Texas Instruments Inc.
We expect to face competition in the future from our competitors, other manufacturers, designers of semiconductors and start-up semiconductor design
companies. Many of our competitors have competitive advantages over us, including:
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significantly greater financial, technical, research and development, sales and marketing and other resources, enabling them to invest substantially more
resources than us to respond to the adoption of new or emerging technologies or changes in customer requirements;
greater brand recognition and longer operating histories;
larger customer bases and longer, more established relationships with distributors or existing or potential end customers, which may provide them with
greater reliability and information regarding future trends and requirements that may not be available to us;
the ability to provide greater incentives to end customers through rebates, and marketing development funds or similar programs;
• more product lines, enabling them to bundle their products to offer a broader product portfolio or to integrate power management functionality into other
products that we do not sell; and
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captive manufacturing facilities, providing them with guaranteed access to manufacturing facilities in times of global semiconductor shortages.
In addition, the semiconductor industry has experienced increased consolidation over the past several years that may adversely affect our competitive
position. For example, On Semiconductor Corporation acquired Fairchild Semiconductor International Inc. in September 2016; Avago Technologies Limited (now
Broadcom Limited (“Broadcom”)) acquired Broadcom Corporation in February 2016 and LSI Corporation in May 2014; Intel acquired Altera Corporation in
December 2015; and NXP Semiconductors acquired Freescale Semiconductor, Ltd. in December 2015. Consolidation among our competitors could lead to a less
favorable competitive landscape, capabilities and market share, which could harm our business and results of operations.
If we are unable to compete effectively for any of the foregoing or other reasons, our business, results of operations, and financial condition and prospects
will be harmed.
We depend partly on third-party semiconductor foundries to manufacture our products and implement our fabrication processes, and any failure to maintain
sufficient foundry capacity and control the cost of production could significantly delay our ability to ship our products, damage our relationships with
customers, reduce our sales and increase expenses.
The allocation of our wafer production between in-house facility and third-party foundries may fluctuate from time to time. We expect to continue to rely in
part on third party foundries to meet our wafer requirements. Although we use several independent foundries, our primary third-party foundry is HHGrace, which
manufactured 15.4% , 18.6% and 25.0% of the wafers used in our products for the fiscal years ended June 30, 2018 , 2017 and 2016 , respectively.
We place our purchase orders with foundries based on sales forecasts for our products. If any third-party foundry does not provide competitive pricing or is
not able to meet our required capacity for any reason, we may not be able to obtain the required capacity to manufacture our products timely or efficiently. From
time to time, third party suppliers may extend lead-times, limit supplies or increase prices due to capacity constraints or other factors, and we may experience a
shortage of capacity on an industry-wide basis that may last for an extended period of time. There is no assurances of that we will be able to maintain sufficient
capacity to meet the full demand from our customers, and failure to do so will adversely affect our results of operations. If we cannot maintain sufficient capacity
or control pricing with our existing third-party foundries, we may need to increase our own manufacturing capacity, and there is no assurance that we can ramp up
the production of the Oregon fab timely to meet the increased demand. If not, we may need to seek alternative foundries, which may not be available on
commercially reasonable terms, or at all. In addition, the process for qualifying a new foundry is time consuming, difficult and may not be successful, particularly
if we cannot integrate our proprietary process technology with the process used by the new foundry. Using a foundry with which we have no established
relationship could expose us to potentially unfavorable pricing, unsatisfactory quality or insufficient capacity allocation.
In addition, even though we have been transferring more new product developments to our Oregon fab, we still rely on third-party foundries significantly to
effectively implement certain of our proprietary technology and processes and also require their cooperation in developing new fabrication processes. Any failure
to do so may impair our ability to introduce new products and on time delivery of wafers for our existing products. In order to maintain our profit margins and to
meet our customer demand, we need to achieve acceptable production yields and timely delivery of silicon wafers. As is common in the semiconductor industry,
we have experienced, and may experience from time to time, difficulties in achieving acceptable production yields and timely delivery from third-party foundry
vendors. Minute impurities in a silicon wafer can cause a substantial number of wafers to be rejected or cause numerous die on a wafer to be defective. Low yields
often occur during the production of new products, the migration of processes to smaller geometries or the installation and start up of new process technologies.
We face a number of other significant risks associated with outsourcing fabrication, including:
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limited control over delivery schedules, quality assurance and control and production costs;
discretion of foundries to reduce deliveries to us on short notice, allocate capacity to other customers that may be larger or have long-term customer or
preferential arrangements with foundries that we use;
unavailability of, or potential delays in obtaining access to, key process technologies;
limited warranties on wafers or products supplied to us;
damage to equipment and facilities, power outages, equipment or materials shortages that could limit manufacturing yields and capacity at the foundries;
potential unauthorized disclosure or misappropriation of intellectual property, including use of our technology by the foundries to make products for our
competitors;
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financial difficulties and insolvency of foundries; and
acquisition of foundries by third parties.
Any of the foregoing risks could delay shipment of our products, result in higher expenses and reduced revenue, damage our relationships with customers
and otherwise adversely affect our business and operating results.
Our operation of two wholly-owned packaging and testing facilities are subject to risks that could adversely affect our business and financial results.
We have two wholly-owned packaging and testing facilities located in Shanghai, China that handle most of our packaging and testing requirements. The
operation of high-volume packaging and testing facilities and implementation of our advanced packaging technology are complex and demand a high degree of
precision and may require modification to improve yields and product performance. We have committed substantial resources to ensure that our packaging and
testing facilities operate efficiently and successfully, including the acquisition of equipment and raw materials, and training and management of a large number of
technical personnel and employees. Due to the fixed costs associated with operating our own packaging and testing facilities, if we are unable to utilize our in-
house facilities at a desirable level of production, our gross margin and results of operations may be adversely affected. For example, a significant decline in our
market share or sales orders may negatively impact our factory utilization and reduce our ability to achieve profitability.
In addition, the operation of our packaging and testing facilities is subject to a number of risks, including the following:
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unavailability of equipment, whether new or previously owned, at acceptable terms and prices;
facility equipment failure, power outages or other disruptions;
shortage of raw materials, including packaging substrates, copper, gold and molding compound;
failure to maintain quality assurance and remedy defects and impurities;
changes in the packaging requirements of customers; and
our limited experience in operating a high-volume packaging and testing facility.
Any of the foregoing risks could adversely affect our capacity to package and test our products, which could delay shipment of our products, result in higher
expenses, reduce revenue, damage our relationships with customers and otherwise adversely affect our business, results of operations, financial condition and
prospects.
Our reliance on distributors to sell a substantial portion of our products subjects us to a number of risks.
We sell a substantial portion of our products to distributors, who in turn sell to our end customers. Our distributors typically offer power semiconductor
products from several different companies, including our direct competitors. The distributors assume collection risk and provide logistical services to end
customers, including stocking our products. Two distributors, WPG and Promate, collectively accounted for 63.5% , 62.7% and 61.0% of our revenue for the fiscal
years ended June 30, 2018 , 2017 and 2016 , respectively. Our agreements with Promate and WPG were renewed in July 2017 and are automatically renewed for
each one-year period continuously unless terminated earlier pursuant to the provisions in the agreements. We believe that our success will continue to depend upon
these distributors. Our reliance on distributors subjects us to a number of risks, including:
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write-downs in inventories associated with stock rotation rights and increases in provisions for price adjustments granted to certain distributors;
potential reduction or discontinuation of sales of our products by distributors;
failure to devote resources necessary to sell our products at the prices, in the volumes and within the time frames that we expect;
focusing their sales efforts on products of our competitors;
dependence upon the continued viability and financial resources of these distributors, some of which are small organizations with limited working capital
and all of which depend on general economic conditions and conditions within the semiconductor industry;
dependence on the timeliness and accuracy of shipment forecasts and resale reports from our distributors;
• management of relationships with distributors, which can deteriorate as a result of conflicts with efforts to sell directly to our end customers; and
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our agreements with distributors which are generally terminable by either party on short notice.
If any significant distributor becomes unable or unwilling to promote and sell our products, or if we are not able to renew our contracts with the distributors
on acceptable terms, we may not be able to find a replacement distributor on reasonable terms or at all and our business could be harmed.
We have made and may continue to make strategic acquisitions of other companies, assets or businesses and these acquisitions introduce significant risks and
uncertainties, including risks related to integrating the acquired assets or businesses, incurring additional debt, assuming contingent liabilities or diluting our
existing shareholders.
In order to position ourselves to take advantage of growth opportunities, we have made, and may continue to make, strategic acquisitions, mergers and
alliances that involve significant risks and uncertainties. Successful acquisitions and alliances in the semiconductor industry are difficult to accomplish because
they require, among other things, efficient integration and aligning of product offerings and manufacturing operations and coordination of sales and marketing and
research and development efforts. The difficulties of integration and alignment may be increased by the necessity of coordinating geographically separated
organizations, the complexity of the technologies being integrated and aligned and the necessity of integrating personnel with disparate business backgrounds and
combining different corporate cultures. Furthermore, there is no guarantee that we will be able to identify a viable target for strategic acquisition, and we may incur
significant costs and resources in such effort that may not result in a successful acquisition.
In addition, we may also issue equity securities to pay for future acquisitions or alliances, which could be dilutive to existing shareholders. We may also incur
debt or assume contingent liabilities in connection with acquisitions and alliances, which could impose restrictions on our business operations and harm our
operating results.
If we are unable to obtain raw materials in a timely manner or if the price of raw materials increases significantly, production time and product costs could
increase, which may adversely affect our business.
Our fabrication and packaging processes depend on raw materials such as silicon wafers, gold, copper, molding compound, petroleum and plastic materials
and various chemicals and gases. From time to time, suppliers may extend lead times, limit supplies or increase prices due to capacity constraints or other factors.
If the prices of these raw materials rise significantly, we may be unable to pass on the increased cost to our customers. Our results of operations could be adversely
affected if we are unable to obtain adequate supplies of raw materials in a timely manner or at reasonable price. In addition, from time to time, we may need to
reject raw materials because they do not meet our specifications or the sourcing of such materials do not comply with our conflict mineral policies, resulting in
potential delays or declines in output. Furthermore, problems with our raw materials may give rise to compatibility or performance issues in our products, which
could lead to an increase in customer returns or product warranty claims. Errors or defects may arise from raw materials supplied by third parties that are beyond
our detection or control, which could lead to additional customer returns or product warranty claims that may adversely affect our business and results of
operations.
Our operations may be delayed or interrupted and our business may be adversely affected as a result of our efforts to comply with environmental regulations
applicable to our in-house wafer manufacturing, packaging and testing facility.
Our in-house manufacturing operations, including wafer manufacturing, packaging and testing, are subject to a variety of environmental regulations relating
to the use, handling, discharge and disposal of toxic or otherwise hazardous materials. See “Item 1. Business - Environmental matters.” Compliance with
environmental regulations could require us to acquire expensive pollution control equipment or to incur other substantial expenses or investigate and remediate
contamination at our current facilities. Any failure, or any claim that we have failed, to comply with these regulations could cause delays in our production and
capacity expansion and affect our public image, either of which could harm our business. In addition, any failure to comply with these regulations could subject us
to substantial fines or other liabilities, result in the suspension of our operating permit, or require us to terminate or adversely modify our in-house manufacturing
operations.
We may not be able to accurately estimate provisions at fiscal period end for price adjustment and stock rotation rights under our agreements with distributors,
and our failure to do so may impact our operating results.
We sell a majority of our products to distributors under arrangements allowing price adjustments and returns under stock rotation programs, subject to certain
limitations. As a result, we are required to estimate allowances for price adjustments and stock rotation for our products as inventory at distributors at each
reporting period end. Our ability to reliably estimate these allowances enables us to recognize revenue upon delivery of goods to distributors instead of upon resale
of goods by distributors to end customers.
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We estimate the allowance for price adjustment based on factors such as distributor inventory levels, pre-approved future distributor selling prices, distributor
margins and demand for our products. Our estimated allowances for price adjustments, which we offset against accounts receivable from distributors, were $18.9
million and $19.6 million at June 30, 2018 and 2017 , respectively.
Our accruals for stock rotation are estimated based on historical returns and individual distributor agreement, and stock rotation rights, which are recorded as
accrued liabilities on our consolidated balance sheets, are contractually capped based on the terms of each individual distributor agreement. Our estimated
liabilities for stock rotation at June 30, 2018 and 2017 were $1.8 million and $1.9 million , respectively.
Our estimates for these allowances and accruals may be inaccurate. If we subsequently determine that any allowance and accrual based on our estimates is
insufficient, we may be required to increase the size of our allowances and accrual in future periods, which would adversely affect our results of operations and
financial condition.
We depend on the continuing services of our senior management team and other key personnel, and if we lose a member of our senior management or are
unable to successfully retain, recruit and train key personnel, our ability to develop and market our products could be harmed.
Our success depends upon the continuing services of members of our senior management team and various engineering and other technical personnel. In
particular, our engineers and other sales and technical personnel are critical to our future technological and product innovations. Our industry is characterized by
high demand and intense competition for talent and the pool of qualified candidates is limited. We have entered into employment agreements with certain senior
executives, but we do not have employment agreements with most of our employees. Many of these employees could leave our company with little or no prior
notice and would be free to work for a competitor. If one or more of our senior executives or other key personnel are unable or unwilling to continue in their
present positions, we may not be able to replace them easily or at all and other senior management may be required to divert attention from other aspects of our
business. In addition, we do not have “key person” life insurance policies covering any member of our management team or other key personnel. The loss of any of
these individuals or our inability to attract or retain qualified personnel, including engineers and others, could adversely affect our product introductions, overall
business growth prospects, results of operations and financial condition.
Failure to protect our patents and our other proprietary information could harm our business and competitive position.
Our success depends, in part, on our ability to protect our intellectual property. We rely on a combination of patent, copyright (including mask work
protection), trademark and trade secret laws, as well as nondisclosure agreements, license agreements and other methods to protect our intellectual property rights,
which may not be sufficient to protect our intellectual property. As of June 30, 2018 , we owned 722 issued U.S. patents expiring between 2018 and 2037 and had
108 pending patent applications with the United States Patent and Trademark Office. In addition, we own additional patents and have filed patent applications in
several jurisdictions outside of the U.S, including China, Taiwan, Japan and Korea.
Our patents and patent applications may not provide meaningful protection from our competitors, and there is no guarantee that patents will be issued from
our patent applications. The status of any patent or patent application involves complex legal and factual determinations and the breadth of a claim is uncertain. In
addition, our efforts to protect our intellectual property may not succeed due to difficulties and risks associated with:
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policing any unauthorized use of or misappropriation of our intellectual property, which is often difficult and costly and could enable third parties to
benefit from our technologies without paying us;
others independently developing similar proprietary information and techniques, gaining authorized or unauthorized access to our intellectual property
rights, disclosing such technology or designing around our patents;
the possibility that any patent or registered trademark owned by us may not be enforceable or may be invalidated, circumvented or otherwise challenged
in one or more countries and the rights granted there under may not provide competitive advantages to us;
uncertainty as to whether patents will be issued from any of our pending or future patent applications with the scope of the claims sought by us, if at all;
and
intellectual property laws and confidentiality laws may not adequately protect our intellectual property rights, including, for example, in China where
enforcement of China intellectual property-related laws have historically been less effective, primarily because of difficulties in enforcement and low
damage awards.
We also rely on customary contractual protection with our customers, suppliers, distributors, employees and consultants, and we implement security
measures to protect our trade secrets. We cannot assure you that these contractual protections and
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security measures will not be breached, that we will have adequate remedies for any such breach or that our suppliers, employees, distributors or consultants will
not assert rights to intellectual property arising out of such contracts.
In addition, we have a number of third-party patent and intellectual property license agreements, one of which requires us to make ongoing royalty payments.
In the future, we may need to obtain additional licenses, renew existing license agreements or otherwise replace existing technology. We are unable to predict
whether these license agreements can be obtained or renewed or the technology can be replaced on acceptable terms, or at all.
Intellectual property disputes could result in lengthy and costly arbitration, litigation or licensing expenses or prevent us from selling our products.
As is typical in the semiconductor industry, we or our customers may receive claims of infringement from time to time or otherwise become aware of
potentially relevant patents or other intellectual property rights held by other parties that may cover some of our technology, products and services or those of our
end customers. The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights which has resulted in protracted and
expensive arbitration and litigation for many companies. Patent litigation has increased in recent years due to increased assertions made by intellectual property
licensing entities or non-practicing entities and increasing competition and overlap of product functionality in our markets.
Any litigation or arbitration regarding patents or other intellectual property could be costly and time consuming and could divert our management and key
personnel from our business operations. We have in the past and may from time to time in the future become involved in litigation that requires our management to
commit significant resources and time. In addition, as part of our strategy to diversify our serviceable markets, we launched several key product families and
technologies to enable high efficiency power conversion solutions and we plan to develop and commercialize new products in other power semiconductor markets.
Our entry into the commercial markets for high-voltage power semiconductors and other markets as a result of our diversification strategy may subject us to
additional and increased risk of disputes or litigation relating to these products.
Because of the complexity of the technology involved and the uncertainty of litigation generally, any intellectual property arbitration or litigation involves
significant risks. Any claim of intellectual property infringement against us may require us to:
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incur substantial legal and personnel expenses to defend the claims or to negotiate for a settlement of claims;
pay substantial damages or settlement to the party claiming infringement;
refrain from further development or sale of our products;
attempt to develop non-infringing technology, which may be expensive and time consuming, if possible at all;
enter into costly royalty or license agreements that might not be available on commercially reasonable terms or at all;
cross-license our technology with a competitor to resolve an infringement claim, which could weaken our ability to compete with that competitor; and
indemnify our distributors, end customers, licensees and others from the costs of and damages of infringement claims by our distributors, end customers,
licensees and others, which could result in substantial expenses for us and damage our business relationships with them.
Any intellectual property claim or litigation could harm our business, results of operations, financial condition and prospects.
Global or regional economic, political and social conditions could adversely affect our business and operating results.
External factors such as potential terrorist attacks, acts of war, financial crises, such as the global or regional economic recession, or geopolitical and social
turmoil in those parts of the world that serve as markets for our products could have significant adverse effect on our business and operating results in ways that
cannot presently be predicted. Any future economic downturn or recession in the global economy in general and, in particular, on the economies in China, Taiwan
and other countries where we market and sell our products, will have an adverse effect on our results of operations.
Our business operations could be significantly harmed by natural disasters or global epidemics.
We have research and development facilities located in Taiwan and the Silicon Valley in Northern California. Historically, these regions have been
vulnerable to natural disasters and other risks, such as earthquakes, fires and floods,
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which may disrupt the local economy and pose physical risks to our property. We also have sales offices located in Taiwan and Japan where similar natural
disasters and other risks may disrupt the local economy and pose physical risks to our operations. We are not currently covered by insurance against business
disruption caused by earthquakes. In addition, we currently do not have redundant, multiple site capacity in the event of a natural disaster or other catastrophic
event. In the event of such an occurrence, our business would suffer.
Our business could be adversely affected by natural disasters such as epidemics, outbreaks or other health crisis. An outbreak of avian flu or H1N1 flu in the
human population, or another similar health crisis, could adversely affect the economies and financial markets of many countries, particularly in Asia. Moreover,
any related disruptions to transportation or the free movement of persons could hamper our operations and force us to close our offices temporarily.
The occurrence of any of the foregoing or other natural or man-made disasters could cause damage or disruption to us, our employees, operations, distribution
channels, markets and customers, which could result in significant delays in deliveries or substantial shortages of our products and adversely affect our business
results of operations, financial condition or prospects.
Our insurance may not cover all losses, including losses resulting from business disruption or product liability claims.
We have limited product liability, business disruption or other business insurance coverage for our operations. In addition, we do not have any business
insurance coverage for our operations to cover losses that may be caused by litigation or natural disasters. Any occurrence of uncovered loss could harm our
business, results of operations, financial condition and prospects.
We may be adversely affected by any disruption in our information technology systems.
Our operations are dependent upon our information technology systems, which encompass all of our major business functions across offices internationally.
We rely upon such information technology systems to manage and replenish inventory, complete and track customer orders, coordinate sales activities across all of
our products and services, maintain vital data and information, perform financial and accounting tasks and manage and perform various administrative and human
resources functions. A substantial disruption in our information technology systems for any extended time period (arising from, for example, system capacity limits
from unexpected increases in our volume of business, outages or delays in our service) could result in delays in receiving inventory and supplies or filling customer
orders and adversely affect our customer service and relationships. Our systems might be damaged or interrupted by natural or man−made events or by computer
viruses, physical or electronic break−ins, cyber attacks and similar disruptions affecting the global Internet. There can be no assurance that such delays, problems,
or costs will not have a material adverse effect on our cash flows, results of operations and financial condition.
Our international operations subject our company to risks not faced by companies without international operations.
We have adopted a global business model under which we maintain significant operations and facilities through our subsidiaries located in the U.S., China,
Taiwan and Hong Kong. Our main research and development center is located in Silicon Valley, and our manufacturing and supply chain is located in China. We
also have sales offices and customers throughout Asia, the U.S. and elsewhere in the world. Our international operations may subject us to the following risks:
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economic and political instability;
costs and delays associated with transportations and communications;
coordination of operations through multiple jurisdictions and time zones;
fluctuations in foreign currency exchange rates;
trade restrictions, changes in laws and regulations relating to, amongst other things, import and export tariffs, taxation, environmental regulations, land
use rights and property; and
the laws of, including tax laws, and the policies of the U.S. toward, countries in which we operate.
If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent
fraud.
Our management may conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our
internal control over financial reporting is effective, our independent registered public accounting firm may decline to issue an opinion as to the effectiveness of
our internal control over financial reporting, or may
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issue a report that is qualified or adverse. During the course of the initial evaluation of internal control over financial reporting, we or our independent registered
public accounting firm may identify control deficiencies that we may not be able to remediate prior to the date of our first assessment of internal control over
financial reporting. Our failure to achieve and maintain effective internal control over financial reporting could result in the loss of investor confidence in the
reliability of our financial statements or prevent fraud, which in turn could harm our business and negatively impact the trading price of our shares.
We are subject to the risk of increased income taxes and changes in existing tax rules.
We conduct our business in multiple jurisdictions, including Hong Kong, Macau, the U.S., China, Taiwan, South Korea Japan and Germany. The calculation
of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in various taxing jurisdictions. Any of these
jurisdictions may assert that we have unpaid taxes. Our effective tax rate was 12.5% , 28.3% and 406.6% for the fiscal years ended June 30, 2018 , 2017 and 2016 ,
respectively. Any tax rate changes in the tax jurisdictions in which we operate could result in adjustments to our deferred tax assets, if applicable, which would
affect our effective tax rate and results of operations. We base our tax position upon the anticipated nature and conduct of our business and upon our understanding
of the tax laws of the various countries in which we have assets or conduct activities. However, our tax position is subject to review and possible challenge by tax
authorities and to possible changes in law, which may have a retroactive effect. In particular, various proposals over the years have been made to change certain
U.S. tax laws relating to foreign entities with U.S. connections. In addition, the U.S. government has proposed various other changes to the U.S. international tax
system, certain of which could adversely impact foreign-based multinational corporate groups, and increased enforcement of U.S. international tax laws. It is
possible that these or other changes in the U.S. tax laws, foreign tax laws, or proposed actions by international bodies such as the Organization of Economic
Cooperation and Development (OECD) could significantly increase our U.S. or foreign income tax liability in the future. We summarize below our initial analysis
of the impact of the recently enacted U.S. Tax Cuts and Jobs Act (see below section titled “U.S. Tax Cuts and Jobs Act, Enacted December 22, 2017”).
In addition, our subsidiaries provide products and services to, and may from time to time undertake certain significant transactions with, us and other
subsidiaries in different jurisdictions. We have adopted transfer pricing arrangements for transactions among our subsidiaries. Related party transactions are
generally subject to close review by tax authorities, including requirements that transactions be priced at arm's length and be adequately documented. If any tax
authorities were successful in challenging our transfer pricing policies or other tax judgments, our income tax expense may be adversely affected and we could also
be subject to interest and penalty charges which may harm our business, financial condition and operating results.
Our debt agreements include financial covenants that may limit our ability to pursue business and financial opportunities and subject us to risk of default.
We have entered into debt agreements with certain financial institutions, which generally require us to maintain certain financial covenants that has the effect
of limiting our ability to take certain actions, including actions to incur debt, pay dividends, repurchase stock, make certain investments and capital expenditures.
These restrictions may limit our ability to pursue business and financial opportunities that are available or beneficial to us in response to changing and competitive
economic environment, which may have an adverse effect on our financial conditions. In addition, a breach of any of these financial covenants, if not waived by
the lenders, could trigger an event of default under the debt agreements, which may result in the acceleration of our indebtedness or the loss of our collateral used
to secure such indebtedness.
The imposition of U.S. corporate income tax on our Bermuda parent and non-U.S. subsidiaries could adversely affect our results of operations.
We believe that our Bermuda parent and non-U.S. subsidiaries each operate in a manner that they would not be subject to U.S. corporate income tax because
they are not engaged in a trade or business in the United States. Nevertheless, there is a risk that the U.S. Internal Revenue Service may assert that our Bermuda
parent and non-U.S. subsidiaries are engaged in a trade or business in the United States. If our Bermuda parent and non-U.S. subsidiaries were characterized as
being so engaged, we would be subject to U.S. tax at regular corporate rates on our income that is effectively connected with U.S. trade or business, plus an
additional 30% “branch profits” tax on the dividend equivalent amount, which is generally effectively connected income with certain adjustments, deemed
withdrawn from the United States. Any such tax could materially and adversely affect our results of operations.
We may be classified as a passive foreign investment company, which could result in adverse U.S. federal income tax consequences for U.S. holders.
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Based on the current and anticipated valuation of our assets and the composition of our income and assets, we do not expect to be considered a passive
foreign investment company, or PFIC, for U.S. federal income tax purposes for the foreseeable future. However, we must make a separate determination for each
taxable year as to whether we are a PFIC after the close of each taxable year and we cannot assure you that we will not be a PFIC for our 2018 taxable year or any
future taxable year. Under current law, a non-U.S. corporation will be considered a PFIC for any taxable year if either (1) at least 75% of its gross income is
passive income or (2) at least 50% of the value of its assets, generally based on an average of the quarterly values of the assets during a taxable year, is attributable
to assets that produce or are held for the production of passive income. PFIC status depends on the composition of our assets and income and the value of our
assets, including, among others, a pro rata portion of the income and assets of each subsidiary in which we own, directly or indirectly, at least 25% by value of the
subsidiary's equity interests, from time to time. Because we currently hold and expect to continue to hold a substantial amount of cash or cash equivalents, and
because the calculation of the value of our assets may be based in part on the value of our common shares, which may fluctuate considerably given that market
prices of technology companies historically often have been volatile, we may be a PFIC for any taxable year. If we were treated as a PFIC for any taxable year
during which a U.S. holder held common shares, certain adverse U.S. federal income tax consequences could apply for such U.S. holder.
Risks Related to Our Industry
The average selling prices of products in our markets have historically decreased rapidly and will likely do so in the future, which could harm our revenue and
gross margins.
As is typical in the semiconductor industry, the average selling price of a particular product has historically declined significantly over the life of the product.
In the past, we have reduced the average selling prices of our products in anticipation of future competitive pricing pressures, new product introductions by us or
our competitors and other factors. We expect that we will have to similarly reduce prices in the future for older generations of products. Reductions in our average
selling prices to one customer could also impact our average selling prices to all customers. A decline in average selling prices would harm our gross margins for a
particular product. If not offset by sales of other products with higher gross margins, our overall gross margins may be adversely affected. Our business, results of
operations, financial condition and prospects will suffer if we are unable to offset any reductions in our average selling prices by increasing our sales volumes,
reducing our costs and developing new or enhanced products on a timely basis, with higher selling prices or gross margins.
We may be adversely affected by the cyclicality of the semiconductor industry.
Our industry is highly cyclical and is characterized by constant and rapid technological change such as the introduction of smart phones and tablets that
contributed to the decline in the PC market, product obsolescence and price erosion, evolving standards, uncertain product life cycles and wide fluctuations in
product supply and demand. The industry has, from time to time, experienced significant and sometimes prolonged, downturns, and often connected with or in
anticipation of, maturing product cycles and declines in general economic conditions. These downturns have been characterized by diminished product demand,
production overcapacity, high inventory levels and accelerated erosion of average selling prices. Any future downturns, in particular the PC markets or in any other
markets in which we sell our products, may reduce our revenue and result in us having excess inventory. By contrast, any upturn in the semiconductor industry
could result in increased competition for access to limited third-party foundry and packaging and testing capacity, which could prevent us from benefiting from
such an upturn or reduce our profit margins.
Changes in industry standards, technology, customer requirements and government regulation could limit our ability to sell our products.
The semiconductor industry is characterized by changing demand for new and advanced functions, long design and sales cycles, rapid product obsolescence
and price erosion, intense competition, evolving industry standards and wide fluctuations in product supply and demand. Changes in industry standards, or the
development of new industry standards, or, when applicable, government approval or disapproval of industry standards may make our products obsolete or negate
the cost advantages we believe we have in our products. We may be required to invest significant effort and to incur significant expense to redesign our products in
order to address relevant standards, technological developments, customer requirements or regulations but may not have the financial resources to respond to these
changes effectively or in a timely manner. Any inability to meet these standards, regulations and requirements could harm our business, results of operations,
financial condition and prospects.
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Risks Related to Doing Business in China
China's economic, political and social conditions, as well as government policies, could affect our business and growth.
Our financial results have been, and are expected to continue to be, affected by the economy in China. If China’s economy is slowing down, it may negatively
affect our business operation and financial results. The China economy differs from the economies of most developed countries in many respects, including:
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higher level of government involvement;
early stage of development of a market-oriented economy;
rapid growth rate;
higher level of control over foreign currency exchange; and
less efficient allocation of resources.
The Chinese economy has been transitioning from a planned economy to a more market-oriented economy. Although in recent years the China government
has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the
establishment of corporate governance in business enterprises, the China government continues to retain significant control over the business and productive assets
in China. Any changes in China's government policy or China's political, economic and social conditions, or in relevant laws and regulations, may adversely affect
our current or future business, results of operations or financial condition. These changes in government policy may be implemented through various means,
including changes in laws and regulations, implementation of anti-inflationary measures, change of basic interest rate, changes in the tax rate or taxation system
and the imposition of additional restrictions on currency conversion and imports. Furthermore, given China's largely export-driven economy, any changes in the
economies of the China's principal trading partners and other export-oriented nations may adversely affect our business, results of operations, financial condition
and prospects.
Our ability to successfully expand our business operations in China depends on a number of factors, including macroeconomic and other market conditions,
and credit availability from lending institutions. In response to the recent global and Chinese economic recession, the China government has promulgated several
measures aimed at expanding credit and stimulating economic growth. We cannot assure you that the various macroeconomic measures, monetary policies and
economic stimulus package adopted by the China government to guide economic growth will be effective in maintaining or sustaining the growth rate of the
Chinese economy. If measures adopted by the China government fail to achieve further growth in the Chinese economy, it may adversely affect our growth,
business strategies and operating results. In addition, changes in political and social conditions of China may adversely affect our ability to conduct our business in
the region. For example, geopolitical disputes and increased tensions between China and its neighboring countries in which we conduct business could make it
more difficult for us coordinate and manage our international operations in such countries.
Changes in China's laws, legal protections or government policies on foreign investment in China may harm our business.
Our business and corporate transactions, including our operations through the JV Company, are subject to laws and regulations applicable to foreign
investment in China as well as laws and regulations applicable to foreign-invested enterprises. These laws and regulations frequently change, and their
interpretation and enforcement involves uncertainties that could limit the legal protections available to us. Regulations and rules on foreign investments in China
impose restrictions on the means that a foreign investor like us may apply to facilitate corporate transactions we may undertake. In addition, the Chinese legal
system is based in part on government policies and internal rules, some of which are not published on a timely basis or at all, that may have a retroactive effect. As
a result, we may not be aware of our violation of these policies and rules until sometime after the violation. If any of our past operations are deemed to be non-
compliant with Chinese law, we may be subject to penalties and our business and operations may be adversely affected. For instance, under the catalogue for the
Guidance of Foreign Investment Industries, some industries are categorized as sectors which are encouraged, restricted or prohibited for foreign investment. As the
catalogue for the Guidance of Foreign Investment Industries is updated every few years, there can be no assurance that the China government will not change its
policies in a manner that would render part or all of our business to fall within the restricted or prohibited categories. If we cannot obtain approval from relevant
authorities to engage in businesses which become prohibited or restricted for foreign investors, we may be forced to sell or restructure a business which has become
restricted or prohibited for foreign investment. Furthermore, the China government has broad discretion in dealing with violations of laws and regulations,
including levying fines, revoking business and other licenses and requiring actions necessary for compliance. In particular, licenses and permits issued or granted to
us by relevant governmental bodies may be revoked at a later time by higher regulatory bodies. If we are forced to adjust our corporate structure or business as a
result of changes in government policy on foreign investment or changes in the interpretation and
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application of existing or new laws, our business, financial condition, results of operations and prospects may be harmed. Moreover, uncertainties in the Chinese
legal system may impede our ability to enforce contracts with our business partners, customers and suppliers, or otherwise pursue claims in litigation to recover
damages or loss of property, which could adversely affect our business and operations.
Substantial uncertainties exist with respect to the enactment timetable, interpretation and implementation of draft PRC Foreign Investment Law and how it
may impact the viability of our current corporate structure, corporate governance and business operations.
The Ministry of Commerce (MOC) published a discussion draft of the proposed Foreign Investment Law in January 2015 aiming to, upon its enactment,
replace the trio of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign
Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations. The
draft Foreign Investment Law embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing
international practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic investments. The MOC is currently
soliciting comments on this draft and substantial uncertainties exist with respect to its enactment timetable, interpretation and implementation. On September 3,
2016, the Standing Committee of China's National People's Congress, passed the Decision on Amendment of Four Laws including the Foreign-Invested Enterprise
Law, or the FIE Amendment, which was implemented starting on October 1, 2016. According to the FIE Amendment, establishment and changes of an FIE in a
sector not subject to special entry administrative measures will be simplified by going through government filing instead of government approval process. The
special entry administrative measures will be separately promulgated or approved to be promulgated by the State Council. Subsequently, the National Development
and Reform Commission and MOC issued the Announcement 2016 No. 22 on October 8, 2016, which provides that the special entry administrative measures shall
be implemented with reference to the relevant requirement on equity percentage and senior management in relation to the restricted foreign investment industries,
prohibited foreign investment industries and encouraged foreign investment industries as stipulated in the Catalogue for the Guidance of Foreign Investment
Industries. Further, the MOC published the Provisional Measures on Filing Administration for Establishment and Change of Foreign-Invested Enterprises on
October 8, 2016, which implements and elaborates the procedures, supervision and related matters of the filings for formation and changes of foreign-invested
enterprises in a sector not subject to special entry administrative measures. The draft Foreign Investment Law, if enacted as proposed, may materially impact the
viability of our current corporate structure, corporate governance and business operations in many aspects.
The draft Foreign Investment Law, if enacted as proposed, may also materially impact our corporate governance practice and increase our compliance costs.
For instance, the draft Foreign Investment Law imposes stringent ad hoc and periodic information reporting requirements on foreign investors and the applicable
foreign invested entities. Aside from an investment implementation report and an investment amendment report that are required for each investment and alteration
of investment specifics, an annual report is mandatory, and large foreign investors meeting certain criteria are required to report on a quarterly basis. Any company
found to be non-compliant with these information reporting obligations may potentially be subject to fines and/or administrative or criminal liabilities, and the
persons directly responsible may be subject to criminal liabilities.
Limitations on our ability to transfer funds to our China subsidiaries could adversely affect our ability to expand our operations, make investments that could
benefit our businesses and otherwise fund and conduct our business.
The transfer of funds from us to our China subsidiaries, either as a shareholder loan or as an increase in registered capital, is subject to registration with or
approval by the China's governmental authorities, including the State Administration of Foreign Exchange, or SAFE, or the relevant examination and approval
authority. Our subsidiaries may also experience difficulties in converting our capital contributions made in foreign currencies into RMB due to changes in the
China's foreign exchange control policies. Therefore, it may be difficult to change capital expenditure plans once the relevant funds have been remitted from us to
our China subsidiaries. These limitations and the difficulties our China subsidiaries may experience on the free flow of funds between us and our China subsidiaries
could restrict our ability to act in response to changing market situations in a timely manner.
China's currency exchange control and government restrictions on investment repatriation may impact our ability to transfer funds outside of China.
A significant portion of our business is conducted in China where the currency is the Renminbi. Regulations in China permit foreign owned entities to freely
convert the Renminbi into foreign currency for transactions that fall under the “current account,” which includes trade related receipts and payments, interest and
dividends. Accordingly, our Chinese subsidiaries may use Renminbi to purchase foreign exchange for settlement of such “current account” transactions without
pre-approval. However, pursuant to applicable regulations, foreign‑invested enterprises in China may pay dividends only out of their
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accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In calculating accumulated profits, foreign investment
enterprises in China are required to allocate at least 10% of their accumulated profits each year, if any, to fund certain reserve funds, including mandated employee
benefits funds, unless these reserves have reached 50% of the registered capital of the enterprises.
Other transactions that involve conversion of Renminbi into foreign currency are classified as “capital account” transactions; examples of “capital account”
transactions include repatriations of investment by or loans to foreign owners, or direct equity investments in a foreign entity by a China domiciled entity. “Capital
account” transactions require prior approval from China's State Administration of Foreign Exchange (SAFE) or its provincial branch to convert a remittance into a
foreign currency, such as U.S. dollars, and transmit the foreign currency outside of China.
As a result of these and other restrictions under PRC laws and regulations, our China subsidiaries are restricted in their abil ity to transfer a portion of their
net assets to the parent; such restricted portion amounted to approximate ly $279.6 million, or 65.6% of our total consolidated net assets as of June 30, 2018 . We
have no assurance that the relevant Chinese governmental authorities in the future will not limit further or eliminate the ability of our China subsidiaries to
purchase foreign currencies and transfer such funds to us to meet our liquidity or other business needs. Any inability to access funds in China, if and when needed
for use by the Company outside of China, could have a material and adverse effect on our liquidity and our business.
The M&A Rules and certain other PRC regulations establish complex procedures for some acquisitions of Chinese companies by foreign investors, which
could make it more difficult for us to pursue growth through acquisitions in China.
The Regulations on Mergers and Acquisitions of Domestic Companies by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory agencies in
August 2006 and amended in 2009, and some other regulations and rules concerning mergers and acquisitions established additional procedures and requirements
that could make merger and acquisition activities by foreign investors more time consuming and complex, including requirements in some instances that the MOC
be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise. Moreover, the Anti-Monopoly
Law requires that the MOC shall be notified in advance of any concentration of undertaking if certain thresholds are triggered. In addition, the security review rules
issued by the MOC that became effective in September 2011 specify that mergers and acquisitions by foreign investors that raise “national defense and security”
concerns and mergers and acquisitions through which foreign investors may acquire de facto control over domestic enterprises that raise “national security”
concerns are subject to strict review by the MOC, and the rules prohibit any activities attempting to bypass a security review, including by structuring the
transaction through a proxy or contractual control arrangement. In the future, we may grow our business by acquiring complementary businesses. Complying with
the requirements of the above-mentioned regulations and other relevant rules to complete such transactions could be time consuming, and any required approval
processes, including obtaining approval from the MOC or its local counterparts may delay or inhibit our ability to complete such transactions, which could affect
our ability to expand our business or maintain our market share.
Our results of operations may be negatively impacted by fluctuations in foreign currency exchange rates between U.S. dollars and Chinese Yuan, or RMB.
While U.S. dollars is our main functional currency and our revenue and a significant portion of our operating expenses are denominated in U.S. dollars, we
are required to maintain local currencies, primarily the RMB, in our cash balances in connection with the funding of our oversea operations. As a result, our costs
and operating expenses may be exposed to adverse movements in foreign currency exchange rates between the U.S. dollars and RMB. We also do not utilize any
financial instruments to hedge or reduce potential losses due to the fluctuation of foreign currency exchange rates. In general, any appreciation of U.S. dollars
against a weaker RMB could reduce the value of our cash and cash equivalent balance, which could increase our operating expenses and negatively affect our cash
flow, income and profitability. The value of RMB against the U.S. dollars may fluctuate and is affected by many factors outside of our control, including changes
in political and economic conditions, implementation of new monetary policies by the Chinese government and changes in banking regulations, and there is no
guarantee that we will be able to mitigate or recoup any losses due to a significant fluctuation in the U.S. dollars/RMB exchange rates.
PRC labor laws may adversely affect our results of operations.
On June 29, 2007, the PRC government promulgated the Labor Contract Law of the PRC, effective on January 1, 2008, to govern the establishment of
employment relationships between employers and employees, and the conclusion, performance, termination of and the amendment to employment contracts. The
Labor Contract Law imposes greater liabilities on employers and significantly affects the cost of an employer’s decision to reduce its workforce. Further, it requires
that certain
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terminations be based upon seniority and not merit. In the event our subsidiaries decide to significantly change or decrease their workforce in China, the Labor
Contract Law could adversely affect their ability to effect such changes in a manner that is most advantageous to our business or in a timely and cost-effective
manner, thus materially and adversely affecting our financial condition and results of operations.
In recent years, compensation in various industries in China has increased and may continue to increase in the future. In order to attract and retain skilled
personnel, we may need to increase the compensation of our employees. Compensation may, also, increase as inflationary pressure increases in China. In addition,
under the Regulations on Paid Annual Leave for Employees, which became effective on January 1, 2008, employees who have served more than one year for a
specific employer are entitled to a paid vacation ranging from 5 to 15 days, depending on length of service. Employees who waive such vacation time at the request
of employers must be compensated for three times their normal salaries for each waived vacation day. This mandated paid-vacation regulation, coupled with the
trend of increasing compensation, may result in increase in our employee-related costs and expenses and decrease in our profit margins.
Controversies affecting China's trade with the United States could harm our business.
Controversies between the United States and China may arise that threaten the trading relationship between the two countries. At various times during recent
years, the United States and China have had disagreements over political and economic issues, including the recent imposition of tariffs by U.S. against goods
imported from China. See risk factor on page 14 entitled “Possible new tariffs on imported goods from China could adversely affect our business operations”
above. In addition, disagreements between the United States and China with respect to their political, military or economic policies toward Taiwan may contribute
to further controversies. These controversies and trade frictions could have a material adverse effect on our business by, among other things, making it more
difficult for us to coordinate our operations between the United States and China or causing a reduction in the demand for our products by customers in the United
States or China.
Relations between Taiwan and China could negatively affect our business, financial condition and operating results and, therefore, the market value of our
common shares.
Taiwan has a unique international political status. China does not recognize the sovereignty of Taiwan. Although significant economic and cultural relations
have been established during recent years between Taiwan and China, relations have often been strained. A substantial number of our key customers and some of
our essential sales and engineering personnel are located in Taiwan, and we have a large number of operational personnel and employees located in China.
Therefore, factors affecting military, political or economic relationship between China and Taiwan could have an adverse effect on our business, financial
condition and operating results.
Risks Related to Our Corporate Structure and Our Common Shares
Our share price may be volatile and you may be unable to sell your shares at or above the purchase price, if at all.
Limited trading volumes and liquidity of our common shares on the NASDAQ Global Select Market may limit the ability of shareholders to purchase or sell
our common shares in the amounts and at the times they wish. In addition, the financial markets in the United States and other countries have experienced
significant price and volume fluctuations, and market prices of technology companies have been and continue to be extremely volatile. The trading price of our
common shares on The NASDAQ Global Select Market ranged from a low of $6.83 to high of $23.43 from the commencement of the public trading of our
common shares on April 29, 2010, to July 31, 2018 and from a low of $13.94 to high of $18.62 from July 1, 2017 to June 30, 2018 . At July 31, 2018, the trading
price of our common shares was $13.36. Volatility in the price of our shares may be caused by factors outside our control and may be unrelated or disproportionate
to our operating results.
The market price for our common shares may be volatile and subject to wide fluctuations in response to factors, including:
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actual or anticipated fluctuations in our operating results;
general economic, industry, regional and global market conditions, including the economic conditions of specific market segments for our products,
including the PC markets;
our failure to meet analysts' expectations, including expectation regarding our revenue, gross margin and operating expenses;
changes in financial estimates and outlook by securities research analysts;
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our ability to increase our gross margin;
announcements by us or our competitors of new products, acquisitions, strategic partnerships, joint ventures or capital commitments;
announcements of technological or competitive developments;
announcement of acquisition, partnership and major corporate transactions;
regulatory developments in our target markets affecting us, our customers or our competitors;
our ability to enter into new market segments, gain market share, diversify our customer base and successfully secure manufacturing capacity;
announcements regarding intellectual property disputes or litigation involving us or our competitors;
changes in the estimation of the future size and growth rate of our markets;
additions or departures of key personnel;
repurchase of shares under our repurchase program;
announcement of sales of our securities by us or by our major shareholders;
general economic or political conditions in China and other countries in Asia; and
other factors.
In the past, securities class action litigation has often been brought against a company following periods of volatility in such company's share price. This
type of litigation could result in substantial costs and divert our management's attention and resources which could negatively impact our business and financial
conditions.
If securities or industry analysts do not publish research or reports about our business, or if they adversely change their recommendations regarding our
common shares or if our operating results do not meet their expectations, the trading price of our common shares could decline.
The market price of our common shares is influenced by the research and reports that industry or securities analysts publish about us or our business. There is
no guarantee that these analysts will understand our business and results, or that their reports will be accurate or correctly predict our operating results or prospects.
If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in
turn could cause the market price of our common shares or its trading volume to decline. Moreover, if one or more of the analysts who cover our company
downgrade our common shares or if our operating results or prospects do not meet their expectations, the market price of our common shares could decline
significantly.
Anti-takeover provisions in our bye-laws could make an acquisition of us more difficult and may prevent attempts by our shareholders to replace or remove our
current management.
Certain provisions in our bye-laws may delay or prevent an acquisition of us or a change in our management. In addition, by making it more difficult for
shareholders to replace members of our board of directors, these provisions also may frustrate or prevent any attempts by our shareholders to replace or remove our
current management because our board of directors is responsible for appointing the members of our management team. These provisions include:
•
•
•
the ability of our board of directors to determine the rights, preferences and privileges of our preferred shares and to issue the preferred shares without
shareholder approval;
advance notice requirements for election to our board of directors and for proposing matters that can be acted upon at shareholder meetings; and
the requirement to remove directors by a resolution passed by at least two-thirds of the votes cast by the shareholders having a right to attend and vote at
the shareholder meeting.
These provisions could make it more difficult for a third-party to acquire us, even if the third-party's offer may be considered beneficial by many
shareholders. As a result, shareholders may be limited in their ability to obtain a premium for their shares.
Insiders have substantial control over us, which could adversely affect the market price of our shares.
31
Our Chief Executive Officer, certain members of our management and directors, beneficially owned, in the aggregate, approximately 21.2% of our
outstanding common shares as of June 30, 2018 . As a result, these shareholders will be able to exert significant control over all matters requiring shareholder
approval, including the election of directors and approval of significant corporate transactions, such as a merger, consolidation, takeover or other business
combination involving us. This concentration of ownership may also discourage, delay or prevent a change in control of our company, which could deprive our
shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and may reduce the trading price of our shares. Furthermore,
the interests of these insiders could conflict with the interests of our other shareholders and, accordingly, any of them may take actions that favor their own interests
and which may not be in the best interests of our other shareholders. These actions may be taken even if they are opposed by our other shareholders.
We are a Bermuda company and the rights of shareholders under Bermuda law may be different from U.S. laws.
We are a Bermuda limited liability exempted company. As a result, the rights of holders of our common shares will be governed by Bermuda law and our
memorandum of association and bye-laws. The rights of shareholders under Bermuda law may differ from the rights of shareholders of companies incorporated in
other jurisdictions, including the U.S. For example, some of our directors are not residents of the United States, and a substantial portion of our assets are located
outside the United States. As a result, it may be difficult for investors to effect service of process on those persons in the U.S. or to enforce in the U.S. judgments
obtained in U.S. courts against us or those persons based on civil liability provisions of the U.S. securities laws. It is doubtful whether courts in Bermuda will
enforce judgments obtained in other jurisdictions, including the U.S., against us or our directors or officers under the securities laws of those jurisdictions or
entertain actions in Bermuda against us or our directors or officers under the securities laws of other jurisdictions.
32
Item 1B.
Unresolved Staff Comments
None.
33
Table of Contents
Item 2. Properties
As of July 31, 2018 , our primary U.S. facility, which houses our research and design function, as well as elements of marketing and administration, is
located in Sunnyvale, California. We conduct our manufacturing, research and development, sales and marketing and administration in Asia and North America.
We lease all properties used in our business except the wafer fabrication facility in Oregon acquired in January 2012 and wafer fabrication facility in Chongqing,
China under construction. The following table sets forth the location, size and primary use of our properties:
Location
Square Footage
Primary Use
475 Oakmead Parkway
Sunnyvale, California, USA 94085
3131 Northeast Brookwood Parkway
Hillsboro, Oregon, USA 97124
Suite160, Rialto I, 7500 Rialto Boulevard,
Austin, Texas, USA 78735
Unit 701 Tesbury Centre, 28 Queen's
Road East, Wanchai, Hong Kong
Room 68, 27 Andar Centro
Comercial Praia Grande no.
429 Avenida da Praia Grande, Macau
Building 8/9, No. 91, Lane 109, Rongkang
Road, Songjiang District, Shanghai,
China 201614
57,000
Research and development, marketing, sales and
administration
245,000 Wafer fabrication facility
5,142 Research and development (under construction)
1,188 Sales and distribution
81 Manufacturing support
194,269 Packaging and testing, manufacturing support
Building B1, Dongkai Industrial Park,
Songjiang Export Process Zone, Area B, Songjiang, Shanghai, China
201614
250,198 Packaging and testing, manufacturing support
Room 1002-1005, 1007, Building 1
Jiali BuYeCheng
No. 218 Tianmu W. Road
Zhabei District, Shanghai, China 200070
East 10F., Matshunichi Building,
No.9996 Shennan Blvd,
Shenzhen High-tech Park,
Nanshan District, Shenzhen, China 518057
No.5-407, Yunhan Road,
Shuitu Hi-Tech Industrial Zone,
Beibei District, Chongqing, China 400714
9F, No.292, Yangguang St., Neihu
Dist., Taipei City 11491, Taiwan
R.O.C.
8,267 Marketing and field application engineering support
8,364 Marketing and field application engineering support
Wafer fabrication facility and assembly and testing
facility (land size 2,459,002, phase 1 building size
1,002,240)
2,459,002
17,642
Marketing and field application engineering support,
research and development
34
Table of Contents
Location
Square Footage
Primary Use
7F, Unit 3 & 5, 16F, Unit 1, No.32, Gaotie 2nd Rd.,
Zhubei City, Hsinchu County 30274, Taiwan
R.O.C.
10th Floor, Bandi Building, Bongeunsa-ro 114,
Gangnam-gu, Seoul,
Korea, 135-907
Sampyeong-dong 621, Pangyo Innovally, C-501,
253, Pangyo-ro, Bundang-gu, Seongnam-si,
Gyeonggi-do, Korea
10F, Koujimachi Sunrise Building,
Koujimachi 2-2-31, Chiyoda-ku,
Tokyo, Japan 102-0083
5/F, No. 521 Yurakucyo building,
10-1, Yurakucho 1-chome, Chiyoda-ku,
Tokyo, Japan 100-0006
9,443 Research and development
2,500 Marketing and field application engineering support
3,173 Marketing and field application engineering support
884 Marketing and field application engineering support
1,625 Marketing and field application engineering support
We believe that our current facilities are adequate and that additional space will be available on commercially reasonable terms for the foreseeable future.
35
Item 3.
Legal Proceedings
We are currently not a party to any material legal proceedings. 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 our operations.
Item 4. Mine Safety Disclosures
Not Applicable.
36
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Price of Our Common Shares
Our common shares have traded on the NASDAQ Global Select Market since April 29, 2010 under the symbol AOSL. The following table sets forth, for the
periods indicated, the high and low sales prices of our common share as reported by the NASDAQ Global Select Market.
PART II
Fiscal 2017
Quarterly Periods
High
Low
First Fiscal Quarter :
Second Fiscal Quarter:
Third Fiscal Quarter:
Fourth Fiscal Quarter:
July 1, 2016 - September 30, 2016
October 1, 2016 - December 31, 2016
January 1, 2017- March 31, 2017
April 1, 2017 - June 30, 2017
Fiscal 2018
First Fiscal Quarter :
Second Fiscal Quarter:
Third Fiscal Quarter:
Fourth Fiscal Quarter:
Holders of Our Common Shares
July 1, 2017 - September 30, 2017
October 1, 2017 - December 31, 2017
January 1, 2018- March 31, 2018
April 1, 2018 - June 30, 2018
$
$
$
$
$
$
$
$
23.03 $
23.43 $
22.89 $
20.02 $
18.37 $
18.62 $
17.74 $
16.09 $
13.44
18.40
16.77
16.07
14.92
16.36
13.94
14.18
As of July 31, 2018 , there were approximately 116 holders of record of our common shares, not including those shares held in street or nominee name.
Dividend Policy
We have never declared or paid cash dividends on our common shares. We currently intend to retain all available funds and any future earnings for use in the
operation of our business and do not anticipate paying any dividends on our common share in the foreseeable future. Any future determination to declare dividends
will be made at the discretion of our board of directors and will depend on our financial condition, operating results, capital requirements, general business
conditions and other factors that our board of directors may deem relevant.
Securities Authorized for Issuance Under Equity Compensation Plans
See Item 12 of Part III of this report regarding information about securities authorized for issuance under our equity compensation plans.
37
Share Performance Graph
The following graph compares the total cumulative shareholder return on our common shares with the total cumulative return of the NASDAQ Composite
Index and the Philadelphia Semiconductor Index for the last five fiscal year ended June 30, 2018 , assuming an investment of $100 at the beginning of such period
and the reinvestment of any dividends.
The comparisons in the graph below are required by the SEC and are not intended to forecast or be indicative of possible future performance of our common
shares.
The
above
Stock
Performance
Graph
and
related
information
shall
not
be
deemed
“soliciting
material”
or
to
be
“filed”
with
the
Securities
and
Exchange
Commission,
nor
shall
such
information
be
incorporated
by
reference
into
any
future
filing
under
the
Securities
Act
of
1933
or
Securities
Exchange
Act
of
1934,
each
as
amended,
except
to
the
extent
that
the
Company
specifically
incorporates
it
by
reference
into
such
filing.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
In September 2017, the Board of Directors terminated the repurchase program that was previously approved in April 2015 and approved a new repurchase
program (the “Repurchase Program”), which allows 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. There is no
guarantee that any 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. As of June 30, 2018 , we had $14.9 million available
under this repurchase program.
The following table sets for the share repurchases under this program during the fourth quarter of fiscal year 2018:
38
Period
May 7, 2018 to May 31, 2018
June 1, 2018
Total repurchase during the three
months ended June 30, 2018
Total Number of
Shares Purchased
Average Price Paid
per Share
195,710
5,400
201,110
$
$
$
15.29
15.65
15.30
Total Number of Shares
Purchased as Part of
Publicly Announced Plans
or Programs
195,710
5,400
Maximum Dollar Value of Shares
that May Be Purchased Under the
Plans or Programs
201,110
$
14,930,000
39
Item 6. Selected Financial Data
We have derived the selected consolidated statements of operations data for the fiscal years ended June 30, 2018 , 2017 and 2016 and selected consolidated
balance sheet data as of June 30, 2018 and 2017 from our audited consolidated financial statements and related notes included elsewhere in this report. We have
derived the selected consolidated statements of operations data for the fiscal years ended June 30, 2015 and 2014 and selected consolidated balance sheets as of
June 30, 2016 , 2015 and 2014 from consolidated financial statements not included in this report. The information set forth below is not necessarily indicative of
results of future operations, and should be read in conjunction with Item 7, “Management's Discussion and Analysis of Financial Condition and Results of
Operations” in this Annual Report on Form 10-K.
Consolidated Statements of Operations:
Revenue
Cost of goods sold
Gross profit
Operating expenses:
Research and development
Selling, general and administrative
Impairment of long-lived assets
Total operating expenses
Operating income (loss)
Interest income and other income (loss), net
Interest expense
Income (loss) before income taxes
Income tax expense
Net income (loss) including noncontrolling interest
Net loss attributable to noncontrolling interest
Net income (loss) attributable to Alpha and Omega Semiconductor
Limited
Basic
Diluted
Weighted average number of common share attributable to Alpha and
Omega Semiconductor Limited used to compute net income (loss) per
share:
Year Ended June 30,
2018
2017
2016
2015
2014
(in thousands, except per share data)
$
421,553 $
383,337 $
335,661 $
327,935 $
318,121
309,625
291,516
269,839
267,453
111,928
91,821
65,822
60,482
259,050
59,071
37,344
66,164
—
103,508
8,420
(1,943)
(821)
5,656
708
4,948
(9,315)
29,835
48,842
—
78,677
13,144
(141)
(91)
12,912
3,652
9,260
(4,569)
26,006
37,874
432
64,312
1,510
(498)
(23)
989
4,021
(3,032)
(104)
27,075
37,625
—
64,700
(4,218)
533
(181)
(3,866)
3,897
(7,763)
—
24,409
34,554
—
58,963
108
(177)
(266)
(335)
2,769
(3,104)
—
14,263 $
13,829 $
(2,928) $
(7,763) $
(3,104)
0.60 $
0.57 $
0.59 $
0.56 $
(0.13) $
(0.13) $
(0.29) $
(0.29) $
(0.12)
(0.12)
$
$
$
Basic
Diluted
23,901
24,844
23,526
24,826
22,452
22,452
26,429
26,429
25,952
25,952
40
Consolidated Balance Sheet Data:
Cash and cash equivalents
Working capital
Total assets
Bank borrowings - long term
Capital leases - long term
Current portion of bank borrowings
Current portion of capital leases
Total Alpha and Omega Semiconductor Limited shareholders’ equity
As of June 30,
2018
2017
2016
2015
2014
(in thousands)
131,535 $
115,708 $
87,774 $
106,085 $
117,788
130,532 $
130,566 $
118,450 $
147,351 $
151,322
667,049 $
398,408 $
318,505 $
347,904 $
362,925
26,786 $
56,791 $
3,811 $
4,491 $
— $
866 $
— $
828 $
— $
1,695 $
— $
819 $
— $
64 $
— $
—
1,005
—
941 $
1,061
278,594 $
270,770 $
242,142 $
276,639 $
283,388
$
$
$
$
$
$
$
$
41
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
You
should
read
the
following
discussion
of
the
financial
condition
and
results
of
our
operations
in
conjunction
with
our
consolidated
financial
statements
and
the
notes
to
those
statements
included
elsewhere
in
this
annual
report.
Our
consolidated
financial
statements
contained
in
this
annual
report
are
prepared
in
accordance
with
U.S.
GAAP.
Overview
We are a designer, developer and global supplier of a broad portfolio of power semiconductors. Our portfolio of power semiconductors includes
approximately 1,900 products, and has grown significantly with the introduction of 200 new products during the fiscal year of 2018 , and over 80 and 90 new
products in each of the fiscal years ended June 30, 2017 and 2016 , respectively. 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 722 patents and
108 patent applications in the United States as of June 30, 2018 . 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 computers,
flat panel TVs, LED lighting, smart phones, battery packs, 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 8-inch wafer fabrication facility located in Hillsboro, Oregon, or the Oregon fab, which is
critical for us to accelerate proprietary technology development, new product introduction and improve our financial performance in the long run. 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 a joint venture contract (the “JV Agreement”) 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”). As of June 30, 2018, the Chongqing Funds contributed a total of $162.0 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. As of June 30, 2018, we own 51%, and the Chongqing Funds own 49%, of the
equity interest in the JV Company. 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 us. We substantially completed our assembly and testing and 12-inch wafer fab facilities during the quarter ended June 30, 2018. We expect to
commence limited mass production for assembly and testing in the second half of calendar year 2018, and trial production at the 12-inch wafer fabrication facility
toward the end of calendar year 2018. During fiscal years 2018, 2017 and 2016, we recorded $9.3 million , $4.6 million and $0.1 million in net loss attributable to
noncontrolling interest, respectively, representing 49% of the net loss incurred in the JV Company. In the long-term, we expect the joint venture to deliver
significant cost savings, and enhance our market positions in China, and drive meaningful improvements in working capital and capital expenditures.
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
42
(including compliance with safety and aesthetic requirements) (“Construction Fees”). 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. The payment may be subject to volatility as
a result of exposure to fluctuations in RMB foreign exchange rates. As of June 30, 2018 , the JV Company paid approximately $66.4 million (RMB 439.5 million ),
and expects to pay the remaining of $15.2 million (RMB 100.5 million ) in fiscal year 2019.
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 June 30, 2018,
we recorded $15.8 million of intangible assets related to STMicro.
During the fiscal year ended June 30, 2018 , 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, portfolio
expanded significantly across a full range of voltage applications. For example, during the fourth quarter of fiscal year of 2018, we introduced new family of
EZBuck™ regulators featuring I2C control. The new devices provide a compact, efficient power converter solution for next-generation chipsets and FPGAs used in
high-end TVs, set-top boxes, data storage systems, servers and other embedded systems. We also introduced the AONX38168, which utilizes the latest 25V N-
Channel MOSFET technology platform, combining the low-side and high-side in a leadless surface mount package to offer high power density for server and
telecommunication markets. During the third quarter of fiscal year of 2018, we introduced AONE36132, a 25V N-Channel MOSFET in a compact dual DFN
3.3x3.3 package, offering lower switch node ringing and lower parasitic inductance. Also we introduced a new Type-C Power Delivery compliant load switch with
up to 28V over-voltage protection. This new device offers low RDS(ON) (40mohm) in a thermally enhanced 3x3mm DFN package, making it an ideal solution for
the latest notebooks, ultrabooks, desktops, monitors, dockings/dongles, and Thunderbolt/USB Type-C PD applications. 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 enables higher efficiency and robustness to critical high density telecom and server applications.
During the first quarter of fiscal year of 2018, we released AOTF190A60L, the first product in the new AMOS5TMHV 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 AOK40B120H1 has 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 machines.
Factors affecting our performance
Our performance is affected by several key factors, including the following:
Costs
of
JV
Company
and
digital
power
business:
We are incurring an increase in operating expenses due to the additional costs associated with ramping up
pre-production activities of the JV Company, as well as the initial startup work to develop and establish our new digital power business will have the significant
impact on our financial performance. We substantially completed our assembly and testing and 12-inch wafer fab facilities during the quarter ended June 30, 2018.
We expect to commence limited mass production for assembly and testing in the second half of calendar year 2018, and trial production at our 12-inch wafer
fabrication facility toward the end of calendar year 2018. The pre-production costs include costs relating to the installation of equipment; performance of the
qualification process; increased demand for electrical power and other utilities; increased headcount as a result of hiring of additional personnel, staff and
operators; and establishment of administrative and management functions and systems. In addition, a portion of these pre-production expenses and production
ramp-up costs cannot be capitalized under U.S. GAAP accounting, therefore such costs impact our profitability. Furthermore, we are in the process of developing
our digital power business following the execution of the STMicro license agreement in September 2017, 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 hiring and compensation of
qualified engineers and technical staff and other research and development and management activities, as we are building this new 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 costs, which will likely negatively
impact our results of operations.
43
Manufacturing
costs
: Our gross margin may be affected by our manufacturing costs, including utilization of our manufacturing facilities, pricing of wafers
from third party foundries and semiconductor raw materials, which may fluctuate from time to time largely due to the market demand and supply. Capacity
utilization affects our gross margin because we have certain fixed costs associated with our packaging and testing facilities and our Oregon fab and our Chongqing
fabrication facility. 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. Furthermore, from time to time, we may
experience wafer capacity constraints, particularly at third party foundries, that may prevent us from 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
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.
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. 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 PC markets accounted for
approximately 41.6% , 39.1% and 38.5% of our total revenue for the years ended June 30, 2018 , 2017 and 2016 , respectively. In the past, we have experienced a
significant global decline in the PC markets 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, 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 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.
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 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. The JV Company substantially completed its assembly and testing and 12-inch wafer fab facilities during the
quarter ended June 30, 2018. We expect to commence limited mass production of assembly and testing in the second half of calendar year 2018, and trial
production of power semiconductors at the 12-inch wafer fabrication facility toward the end of calendar year 2018. However, we may experience delays in the
commencement or ramp up of the production at the JV Company. Even if we are able to commence JV operation 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
44
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.
Principal line items of statements of income
The following describes the principal line items set forth in our 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-year to 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 through one of our
subsidiaries.
Our product revenue 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 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 them less vulnerable to market fluctuations. We believe our market diversification strategy and product
growth will drive higher 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 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
45
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.
Impairment
of
Long-Lived
Assets:
Long-lived assets or asset groups are reviewed for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset might not be recoverable. The recoverability of an asset or asset group is assessed by determining if the carrying value of the asset
or asset group exceeds the sum of the projected undiscounted cash flows expected to result from the use and eventual disposition of the assets over the remaining
economic life. The impairment loss is measured based on the difference between the carrying amount and estimated fair value.
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 as a 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 in 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 and Jobs Act, Enacted December 22, 2017
On December 22, 2017, the United States enacted tax reform legislation through the Tax Cuts and Jobs Act (“the Tax Act”), which significantly changes the
existing U.S. tax laws, including, but not limited to, (1) a reduction in the corporate tax rate from 35% to 21%, (2) a move from a worldwide tax system to a
territorial system, (3) eliminating the corporate alternative minimum tax (AMT) and changing how existing AMT credits can be realized, (4) bonus depreciation
that will allow for full expensing of qualified property, (5) creating a new limitation on deductible interest expense and (6) changing rules related to uses and
limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.
The SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118"), which provides guidance on accounting for the tax effects of 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 estimate 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.
46
In connection with our initial analysis of the impact of the Tax Act, we reported a second quarter of fiscal year 2018 discrete tax benefit of $2.7 million
related to the re-measurement of certain deferred tax assets and liabilities. The $2.7 million tax benefit related to the tax rate re-measurement estimated in the
second quarter of fiscal year 2018 was reduced downward by $0.2 million in the fourth quarter of fiscal year 2018, to $2.5 million. 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 that could impact our fiscal year 2018 financial statements. We are still
analyzing the provisions of the Act that may impact future periods. Our management expects the Act to favorably impact our 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.
Operating results
The following tables set forth our results of operations and as a percentage of revenue for the fiscal years ended June 30, 2018 , 2017 and 2016 . Our
historical results of operations are not necessarily indicative of the results for any future period.
Revenue
Cost of goods sold (1)
Gross profit
Operating expenses:
Research and development (1)
Selling, general and administrative (1)
Impairment of long-lived assets
Total operating expenses
Operating income
Interest income and other income (loss), net
Interest expense
Income before income taxes
Income tax expense
Net income (loss) including noncontrolling interest
Net loss attributable to noncontrolling interest
Net income (loss) attributable to Alpha and Omega
Semiconductor Limited
(1) Includes share-based compensation expense as follows:
Year Ended June 30,
2018
2017
2016
2018
2017
2016
(in thousands)
(% of revenue)
$
421,553 $
383,337 $
335,661
100.0 %
100.0 %
100.0 %
309,625
291,516
269,839
111,928
91,821
65,822
37,344
66,164
—
103,508
8,420
(1,943)
(821)
29,835
48,842
—
78,677
13,144
(141)
(91)
5,656
12,912
708
4,948
(9,315)
3,652
9,260
(4,569)
26,006
37,874
432
64,312
1,510
(498)
(23)
989
4,021
(3,032)
(104)
73.4 %
26.6 %
8.9 %
15.7 %
— %
24.6 %
2.0 %
(0.5)%
(0.2)%
1.3 %
0.2 %
1.1 %
(2.2)%
76.0 %
24.0 %
7.8 %
12.7 %
— %
20.5 %
3.5 %
— %
— %
3.5 %
1.0 %
2.5 %
(1.2)%
80.4 %
19.6 %
7.7 %
11.3 %
0.1 %
19.1 %
0.5 %
(0.1)%
— %
0.4 %
1.2 %
(0.8)%
— %
$
14,263 $
13,829 $
(2,928)
3.3 %
3.7 %
(0.8)%
Cost of goods sold
Research and development
Selling, general and administrative
Revenue
Year Ended June 30,
2018
2017
2016
2018
2017
2016
(in thousands)
1,641 $
1,041 $
1,855
7,916
1,361
4,232
11,412 $
6,634 $
$
$
636
1,115
2,562
4,313
0.4%
0.4%
1.9%
2.7%
(% of revenue)
0.3%
0.4%
1.1%
1.8%
0.2%
0.3%
0.8%
1.3%
47
The following is a summary of revenue by product type:
Year Ended June 30,
Change
2018
2017
2016
2018
Power discrete
$
342,148 $
288,788 $
252,063 $
(in thousands)
(in thousands)
53,360
Power IC
67,083
82,389
69,344
(15,306)
Packaging and testing
services
Fiscal
2018
vs
2017
12,322
12,160
14,254
$
421,553 $
383,337 $
335,661 $
162
38,216
(in percentage)
18.5 % $
(18.6)%
1.3 %
10.0 % $
(in thousands)
36,725
13,045
(2,094)
47,676
2017
(in percentage)
14.6 %
18.8 %
(14.7)%
14.2 %
Total revenue was $421.6 million for fiscal year 2018 , an increase of $38.2 million , or 10.0% , as compared to $383.3 million for fiscal year 2017 . The
increase was primarily due to an increase of $53.4 million in sales of power discrete products, partially offset by a decrease of $15.3 million in sales of power IC
products. The net increase in product sales was primarily due to a 2.1% increase in unit shipments, as well as an 8.1% increase in average selling price as compared
to last fiscal year due to a shift in product mix. The increase in revenue of packaging and testing services for fiscal year 2018 as compared to last fiscal year was
primarily due to increased demand. During fiscal year 2018, we accelerated the development of new technology platforms which allowed us to introduce 43
medium and high voltage MOSFET products, targeting primarily the industrial markets, as well as 37 low voltage MOSFET products primarily for the computing
and communication markets. In addition, we introduced 66 Power IC new products for consumer, computing applications and communication markets.
Fiscal
2017
vs
2016
Total revenue was $383.3 million for fiscal year 2017, an increase of $47.7 million, or 14.2%, as compared to $335.7 million for fiscal year 2016. The
increase consisted of $36.7 million and $13.0 million in sales of power discrete products and sales of power IC products, respectively, partially offset by a $2.1
million decrease in sales of packaging and testing services. The increase in power discrete and power IC products was primarily due to a 17.5% increase in unit
shipments, partially offset by a 1.9% decrease in average selling price as compared to last fiscal year due to a shift in product mix. The decrease in revenue of
packaging and testing services as compared to last year was primarily due to reduced demand.
Cost of goods sold and gross profit
Year Ended June 30,
Change
2018
2017
2016
2018
2017
Cost of goods sold
$
309,625
$
(in thousands)
291,516
$
269,839
$
18,109
6.2% $
21,677
8.0%
(in thousands)
(in percentage)
(in thousands)
(in percentage)
Percentage of revenue
73.4%
76.0%
80.4%
Gross profit
$
111,928
$
91,821
$
65,822
$
20,107
21.9% $
25,999
39.5%
Percentage of revenue
26.6%
24.0%
19.6%
Fiscal
2018
vs
2017
Cost of goods sold was $309.6 million for fiscal year 2018 , an increase of $18.1 million , or 6.2% , as compared to $291.5 million for fiscal year 2017 . The
increase was primarily due to increased unit shipments. Gross margin increased by 2.6 percentage points to 26.6% for fiscal year 2018 , as compared to 24.0% for
fiscal year 2017 . The increase in gross margin was primarily due to a shift in product mix and higher factory utilization, as well as approximately $2.0 million of
specific reserve that was release during the fiscal year 2018. We expect our gross margin to continue to fluctuate in the future as a result of variations in our
product mix, factory utilization, semiconductor wafer and raw material pricing, manufacturing labor cost and general economic and PC market conditions.
48
Fiscal
2017
vs
2016
Cost of goods sold was $291.5 million for fiscal year 2017, an increase of $21.7 million, or 8.0%, as compared to $269.8 million for fiscal year 2016. The
increase was primarily due to increased unit shipments. The increase was partially offset by the overall manufacturing cost reduction due to improved factory
utilization as compared to last fiscal year. Gross margin increased by 4.4 percentage points to 24.0% for fiscal year 2017, as compared to 19.6% for fiscal year
2016. The increase in gross margin was primarily due to better product mix and higher factory utilization, partially offset by lower average selling prices.
Research and development expenses
Year Ended June 30,
Change
2018
2017
2016
2018
2017
Research and development
$
37,344 $
29,835 $
26,006 $
(in thousands)
(in thousands)
7,509
(in percentage)
25.2% $
(in thousands)
3,829
(in percentage)
14.7%
Fiscal
2018
vs
2017
Research and development expenses were $37.3 million for fiscal year 2018 , an increase of $7.5 million , or 25.2% , as compared to $29.8 million for fiscal
year 2017 . The increase was primarily attributable to a $3.0 million increase in employee compensation and benefit expenses mainly due to higher bonus expenses
and increased headcount to ramp up our digital power business, a $2.7 million increase in product prototyping engineering expenses as a result of increased
engineering activities, a $0.5 million increase in share-based compensation expense as a result of an increase of stock awards granted, a $0.5 million increase in
consulting expenses due to more consulting activities, and a $0.3 million increase in depreciation expenses. We continue to evaluate and invest resources in
developing new technologies and products utilizing our own fabrication and packaging facilities. We expect that our research and development expenses will
fluctuate from time to time.
Fiscal
2017
vs
2016
Research and development expenses were $29.8 million for fiscal year 2017, an increase of $3.8 million, or 14.7%, as compared to $26.0 million for fiscal
year 2016. The increase was primarily attributable to a $2.6 million increase in employee compensation and benefit expenses mainly due to increased headcount
and higher bonus expenses, a $1.0 million increase in product prototyping engineering expenses as a result of increased engineering activities, and a $0.2 million
increase in share-based compensation expense as a result of an increase of stock awards granted.
Selling, general and administrative expenses
Year Ended June 30,
Change
2018
2017
2016
2018
2017
(in thousands)
(in thousands)
(in percentage)
(in thousands)
(in percentage)
$
66,164 $
48,842 $
37,874 $
17,322
35.5% $
10,968
29.0%
Selling, general and
administrative
Fiscal
2018
vs
2017
Selling, general and administrative expenses were $66.2 million for fiscal year 2018 , an increase of $17.3 million , or 35.5% , as compared to $48.8 million
for fiscal year 2017 . The increase was primarily due to a $12.3 million increase in employee compensation and benefits expense as a result of pre-production costs
in the JV Company, increased headcount and higher bonus expenses, a $3.7 million increase in share-based compensation expense due to increased grant of equity
awards, and a $1.0 million increase in employee business expenses due to increased travel expenses during the current fiscal year.
Fiscal
2017
vs
2016
Selling, general and administrative expenses were $48.8 million for fiscal year 2017, an increase of $11.0 million, or 29.0%, as compared to $37.9 million for
fiscal year 2016. The increase was primarily due to a $6.6 million increase in
49
employee compensation and benefits expense as a result of increased headcount and higher bonus expenses, a $1.7 million increase in share-based compensation
expense as a result of an increase of stock awards granted and a decrease in the cancellation of numbers of shares, a $1.0 million increase in consulting fees
primarily due to increased professional services costs and recruiting costs, a $0.3 million increase in audit and tax consulting fees due to increased consulting
activities, as well as a $0.6 million in employee business expenses due to increased travel expenses.
Impairment of long-lived assets
Year Ended June 30,
Change
2018
2017
2016
2018
2017
(in thousands)
(in thousands)
(in percentage)
(in thousands)
(in percentage)
Impairment of long-lived
assets
$
— $
— $
432 $
—
100.0% $
(432)
(100.0)%
During the quarter ended December 31, 2015, we identified certain manufacturing equipment purchased for projects that were subsequently canceled.
Because the equipment had no alternative uses, we recorded an asset impairment expense of approximately $0.4 million related to these equipment during the
quarter ended December 31, 2015.
Interest income and other income (loss), net
Year Ended June 30,
Change
2018
2017
2016
2018
2017
(in thousands)
(in thousands)
(in percentage)
(in thousands)
(in percentage)
Interest income and other
income (loss), net
$
(1,943) $
(141) $
(498) $
(1,802)
1,278.0% $
357
(71.7)%
Interest income and other, net was primarily related to interest earned from cash and cash equivalents, as well as foreign exchange gains (losses). The
decrease in interest income and others, net in fiscal year 2018 as compared to fiscal year 2017 was primarily due to a $2.1 million increase in foreign exchange
losses as a result of recent depreciation of USD, partially offset by a $0.3 million increase in interest income as a result of an increase in average cash balances. The
increase in interest income and others, net in fiscal year 2017 as compared to fiscal year 2016 was primarily due to increase in average cash balances, as well as
lower foreign exchange losses as a result of appreciation of USD against RMB.
Interest Expense
Year Ended June 30,
Change
2018
2017
2016
2018
2017
Interest expense
$
(821) $
(91) $
(23) $
(730)
802.2% $
(68)
295.7%
(in thousands)
(in thousands)
(in percentage)
(in thousands)
(in percentage)
Interest expense was primarily related to bank borrowings. The increase in interest expenses for fiscal year 2018 was primarily due to an increase in bank
borrowings, including the $13.2 million of term loan drew down in January 2018 for the purpose of purchasing certain equipment for our Oregon fab, $17.8 million
term loan obtained in May 2018 and approximately $60.4 million (400 million RMB) financing lease in May 2018 for the acquisition and installation of the 12"
fabrication equipment and other expenses of the JV Company relating to the completion of the fabrication facility located in Chongqing. The interest expense in
fiscal year 2017 remained flat as the fiscal year 2016.
Income tax expense
50
Year Ended June 30,
Change
2018
2017
2016
2018
2017
(in thousands)
(in thousands)
(in percentage)
(in thousands)
(in percentage)
Income tax expense
$
708 $
3,652 $
4,021 $
(2,944)
(80.6)% $
(369)
(9.2)%
Fiscal
2018
vs
2017
Income tax expense for fiscal years 2018 and 2017 was $0.7 million and $3.7 million , respectively. Income tax expense decreased by $2.9 million , or 80.6%
, in fiscal year 2018 as compared to fiscal year 2017 primarily due to a $2.5 million tax benefit from re-measuring our U.S. deferred tax liabilities following the
enactment of the 2017 U.S. Tax Cuts and Jobs Act in December 2017. Additional tax savings were generated in fiscal year 2018 due to changes in the mix of
earnings in various geographic jurisdictions between the respective periods and a lower U.S. tax rate in fiscal year 2018. Excluding the discrete income tax items,
the effective tax rate for the current fiscal year was 61.7%, compared to 36.6% for the last fiscal year. The changes in the effective tax rate and tax expense between
the fiscal years resulted primarily from changes in the mix of earnings in various geographic jurisdictions between the current year and prior year, partially offset
by the reduction in the U.S. corporate tax rate following the enactment of the 2017 U.S. Tax Cut and Jobs Act.
Fiscal
2017
vs
2016
Income tax expense for fiscal years 2017 and 2016 was $3.7 million and $4.0 million, respectively. Income tax expense decreased by $0.4 million, or 9.2% in
fiscal year 2017 as compared to fiscal year 2016 primarily due to a reduction in our uncertain positions, partially offset by changes in the mix of earnings in various
geographic jurisdictions between the respective periods.
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 fuel the growth of our business. To date, we finance our operations and capital expenditures primarily through funds generated from operations and
borrowings under our term loans and financing lease.
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 Chinese Renminbi
(RMB) 400.0 million, or $62.8 million based on the currency exchange rate between RMB and U.S. Dollars 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 will be used primarily for the acquisition and installation of the
12” 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 are 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. We are in compliance with these covenants. As of June 30, 2018, the
outstanding balance of the Lease Financing was 400 million RMB (equivalent of $60.4 million based on the currency exchange rate as of June 30, 2018). In
addition, pursuant to the terms of the Agreement, we made an additional $25.0 million of cash contribution to the JV company, which resulted in the Company
owning 54%, and the Chongqing Funds owning 46%, of the equity interest in the JV Company.
On May 1, 2018, our Oregon subsidiary, Jireh Semiconductor Incorporated (“Jireh”) entered into a loan agreement with the Bank that provided a term loan in
an 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, including
AOS US. The loan has a five-year term and matures on June 1, 2023. Beginning June 1, 2018, Jireh shall make consecutive monthly payments of principal and
interest to the Bank. The outstanding principal shall accrue interest at a fixed rate of 5.042% per annum on the basis of a 360-day year.
51
The loan agreement contains customary restrictive covenants and includes certain financial covenants that require us to maintain, on a consolidated basis, specified
financial ratios. We are in compliance with these covenants. As of June 30, 2018, the outstanding balance of the term loan was $17.7 million.
On August 15, 2017, Jireh entered into a credit agreement with a financial institution (the “Bank”) that provided a term loan in an amount up to $30.0 million
for the purpose of purchasing certain equipment for our fabrication facility located in Oregon. The obligation under the credit agreement is secured by substantially
all of the assets of Jireh and guaranteed by the Company, including our subsidiary, Alpha and Omega Semiconductor Incorporated ("AOS US"). The credit
agreement has a five-year term and matures on August 15, 2022. In January 2018 and July 2018, Jireh drew down on the loan in the amount of $13.2 million and
$16.7 million, respectively. Beginning September 2018, Jireh is required to pay to the Bank on each payment date, the outstanding principal amount of the loan in
monthly installments. The monthly loan interest is based on an adjusted London Interbank Offered Rate ("LIBOR") as defined in the credit agreement, plus
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. We are in compliance with these covenants. As of June 30, 2018 , the outstanding balance of the term loan was $13.2 million.
In March 2016, we entered into the JV Agreement with an initial capitalization of $330.0 million. As of June 30, 2018 , the Chongqing Funds contributed a
total of $162.0 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. The JV Company substantially completed its assembly and
testing and 12-inch wafer fab facilities during the quarter ended June 30, 2018. We expect to commence limited mass production for assembly and testing in the
second half of calendar year 2018, and trial production of the 12-inch wafer fabrication facility toward the end of 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 the balance of the JV Company's assets to us.
In January 2017, the JV Company entered into the EPC Contract. The total price payable by the JV Company under the EPC Contract is 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 June 30, 2018 , the JV Company paid approximately $66.4 million
(RMB 439.5 million ), and expect to pay the remaining of $15.2 million (RMB 100.5 million ) in fiscal year 2019.
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 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 the Purchase Program will enhance the value of our shares. Since the inception of the program in 2010, we repurchased an aggregate of
6,673,139 shares from the open market under the Repurchase Trading Plan for a total cost of $65.8 million, at an average price of $9.87 per share, excluding fees
and related expenses of $0.4 million. No repurchased shares have been retired. Shares repurchased are accounted for as treasury shares and the total cost of shares
repurchased is recorded as a reduction of shareholders' equity. During fiscal years 2018 and 2017, the Company repurchased an aggregate of 950,046 shares and 0
shares, respectively. As of June 30, 2018 , of the 6,673,139 repurchased shares, 132,728 shares with a weighted average repurchase price of $10.50 per share, were
reissued at an average price of $5.81 per share for option exercises and vested restricted share units. We had $14.9 million available under our repurchase program
as of June 30, 2018 .
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 offered by STMicro. Under the license
52
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 June 30, 2018, we recorded $15.8 million of intangible assets related to
STMicro.
The Chinese government imposes certain currency exchange controls on cash transfers out of China. Regulations in China permit foreign owned entities to
freely convert the Renminbi into foreign currency for transactions that fall under the "current account," which includes trade related receipts and payments,
interests, and dividend payments. Accordingly, subject to the review and verification of the underlying transaction documents and supporting documents by the
account banks in China, our Chinese subsidiaries may use Renminbi to purchase foreign exchange currency for settlement of such "current account" transactions
without the pre-approval from China's State Administration of Foreign Exchange (SAFE) or its provincial branch. Pursuant to applicable regulations, foreign-
invested enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and
regulations. In calculating accumulated profits, foreign-invested enterprises in China are required to allocate at least 10% of their profits each year, if any, to fund
the equity reserve account unless the reserve has reached 50% of the registered capital of the enterprises. While SAFE approval is not statutorily required for
eligible dividend payments to the foreign parent, in practice, before making the dividend payment, the account bank may seek SAFE's opinion with respect to a
dividend payment if the payment involves a relatively large amount, which may delay the dividend payment depending on the then overall status of cross-border
payments and receipts of China.
Transactions that involve conversion of Renminbi into foreign currency in relation to foreign direct investments and provision of debt financings in China are
classified as "capital account" transactions. Examples of "capital account" transactions include repatriations of investments by foreign owners and repayments of
loan principal to foreign lenders. "Capital account" transactions require prior approval from SAFE or its provincial branch or an account bank delegated by SAFE
to convert a remittance into a foreign currency, such as U.S. dollars, and transmit the foreign currency outside of China. As a result of this and other restrictions
under PRC laws and regulations, our China subsidiaries are restricted in their ability to transfer a portion of their net assets to the parent, and such restriction may
adversely affect our ability to generate sufficient liquidity to fund our operations or other expenditures. As of June 30, 2018 and 2017 , such restricted portion
amounted to approximately $279.6 million and $140.1 million, or 65.6% and 51.7% , of our total consolidated net assets, respectively. The increase of restricted
net assets was primarily from the JV Company in China.
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. The sale of additional equity securities could result in dilution to our shareholders.
Cash and cash equivalents
As of June 30, 2018 and 2017 , we had $131.5 million and $115.7 million of cash and cash equivalents, respectively. Our cash and cash equivalents primarily
consist of cash on hand and short-term bank deposits with original maturities of three months or less. Of the $131.5 million and $115.7 million cash and cash
equivalents, $100.9 million and $73.9 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:
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
$
3,480 $
42,648 $
(in thousands)
(194,095)
206,953
(511)
(55,618)
40,809
95
Net increase (decrease) in cash and cash equivalents
$
15,827 $
27,934 $
40,182
(21,721)
(36,686)
(86)
(18,311)
Year Ended June 30,
2018
2017
2016
Cash flows from operating activities
53
Net cash provided by operating activities of $3.5 million for fiscal year 2018 resulted primarily from net income of $4.9 million , non-cash charges of $38.6
million and net change in assets and liabilities providing net cash of $40.1 million . The non-cash charges of $38.6 million included depreciation and amortization
expenses of $29.4 million , share-based compensation expense of $11.4 million , and net deferred income taxes of $2.2 million . The net change in assets and
liabilities providing net cash of $40.1 million was primarily due to $5.3 million increase in accounts receivable due to timing of billings and collection of payments,
$13.9 million increase in inventories, $34.6 million increase in other current and long-term assets primarily due to increase in advance payments to suppliers,
partially offset by $4.9 million increase in accounts payable primarily due to timing of payment, $8.5 million increase in accrued and other liabilities, and $0.5
million increase in income taxes payable.
Net cash provided by operating activities of $42.6 million for fiscal year 2017 resulted primarily from net income of $9.3 million, non-cash charges of $40.6
million and net change in assets and liabilities providing net cash of $7.2 million. The non-cash charges of $40.6 million included depreciation and amortization
expenses of $27.2 million, share-based compensation expense of $6.6 million, net deferred income taxes of $7.2 million, and gain on disposal of property and
equipment of $0.4 million. The net change in assets and liabilities providing net cash of $7.2 million was primarily due to $1.8 million increase in accounts
receivable due to timing of billings and collection of payments, $7.4 million increase in inventories, $4.6 million increase in other current and long-term assets
primarily due to increase in advance payments to suppliers, and $1.3 million decrease in income taxes payable, partially offset by $3.3 million increase in accrued
and other liabilities, and $4.5 million increase in accounts payable primarily due to timing of payment.
Net cash provided by operating activities of $40.2 million for fiscal year 2016 resulted primarily from net loss of $3.0 million, non-cash charges of $33.0
million and net change in assets and liabilities providing net cash of $10.2 million. The non-cash charges of $33.0 million included depreciation and amortization
expenses of $27.3 million, share-based compensation expense of $4.3 million, net deferred income taxes of $0.9 million, loss on disposal of property and
equipment of $0.1 million, and impairment of long-lived assets of $0.4 million. The net change in assets and liabilities providing net cash of $10.2 million was
primarily due to $12.2 million decrease in accounts receivable due to timing of billings and collection of payments, $3.2 million increase in accrued and other
liabilities, and $1.0 million increase in income taxes payable, partially offset by $4.7 million increase in inventories, $1.2 million decrease in accounts payable
primarily due to timing of payment, and $0.3 million increase in other current and long-term assets primarily due to increase in advance payments to suppliers.
Cash flows from investing activities
Net cash used in investing activities of $194.1 million for the fiscal year 2018 was primarily attributable to $177.7 million purchases of property and
equipment, including $128.4 million purchase in JV Company, and $16.4 million purchase of intangible assets to develop our digital power business.
Net cash used in investing activities of $55.6 million for the fiscal year 2017 was primarily attributable to $55.6 million purchases of property and equipment,
including $16.1 million purchase in JV Company, and $8.7 million of land use rights to increase our in-house production capacity and to support the JV Company,
as well as $0.6 million investment in a privately held company, partially offset by $0.6 million of proceeds from sale of property and equipment.
Net cash used in investing activities of $21.7 million for the fiscal year 2016 was primarily attributable to $21.9 million purchase of property and equipment
to increase our in-house production capacity.
Cash flows from financing activities
Net cash used in financing activities of $207.0 million for the fiscal year 2018 was primarily attributable to $129.0 million proceeds from investment by
Chongqing Funds, $31.0 million of proceeds from borrowings under our term loans in Jireh, $60.4 million of proceeds from financing lease in the JV Company,
and $5.0 million of proceeds from exercises of share options and issuance of shares under the ESPP, partially offset by $2.4 million in common shares acquired to
settle withholding tax related to vesting of restricted stock units, $15.1 million for repurchase of our common shares under the repurchase program, $0.8 million in
payment of capital lease obligations, and $0.1 million in repayments of borrowings.
Net cash used in financing activities of $40.8 million for the fiscal year 2017 was primarily attributable to $33.0 million proceeds from investment by
Chongqing Funds, and $10.7 million of proceeds from exercises of share options and issuance of shares under the ESPP, partially offset by $2.1 million in common
shares acquired to settle withholding tax related to vesting of restricted stock units, and $0.8 million in payment of capital lease obligations.
54
Net cash used in financing activities of $36.7 million for the fiscal year 2016 was primarily attributable to $42.1 million for repurchase of our common shares
under the repurchase program, and $0.9 million in payment of capital lease obligations, and $1.0 million in common shares acquired to settle withholding tax
related to vesting of restricted stock units, partially offset by a $7.4 million of proceeds from exercises of share options and issuance of shares under the ESPP.
Contractual Obligations
Our contractual obligations as of June 30, 2018 are as follows:
Payments Due by Period
Less than
More than
Total
1 year
1-3 years
3-5years
5 years
Bank borrowings
Capital leases
Operating leases
Capital commitments with respect to property and equipment
Purchase commitments with respect to inventories and others
$
36,117 $
5,299 $
10,650 $
20,168 $
(in thousands)
71,351
9,794
58,321
38,036
7,837
3,967
58,321
38,036
33,220
30,294
4,360
—
—
900
—
—
Total contractual obligations
$
213,619 $
113,460 $
48,230 $
51,362 $
—
—
567
—
—
567
As of June 30, 2018 , we had recorded liabilities of $0.8 million for uncertain tax positions and $0.1 million for potential interest and penalties, which are not
included in the above table because we are unable to reliably estimate the amount of payments in individual years that would be made in connection with these
uncertain tax positions.
Commitments
See Note 13 of the Notes to the Consolidated Financial Statements contained in this Annual Report on Form 10-K for a description of commitments.
Off-Balance Sheet Arrangements
As of June 30, 2018 , we had no material off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.
55
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements requires us 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, our consolidated financial statements will
be affected. On an ongoing basis, we evaluate the estimates, judgments and assumptions including those related to revenue recognition, inventory reserves,
warranty accrual, income taxes, share-based compensation, and useful lives for property and equipment and intangible assets.
Revenue recognition
We recognize revenue when there is persuasive evidence that an arrangement exists, delivery has occurred, the price to the buyer is fixed or determinable and
when collectability is reasonably assured. We recognize revenue when product is shipped to the customer, net of estimated stock rotation returns and price
adjustments to certain distributors.
We sell our products primarily to distributors, who in turn sell our products globally to various end customers. Our revenue is net of the effect of the
estimated stock rotation returns and price adjustments that we expect to provide to certain distributors. Stock rotation returns are governed by contract and are
limited to a specified percentage of the monetary value of the products purchased by distributors during a specified period. We estimate provision for stock rotation
returns based on historical returns and individual distributor agreements. We also provide special pricing to certain distributors primarily based on volume, to
encourage resale of our products. We estimate the expected price adjustments at the time the revenue is recognized based on distributor inventory levels, pre-
approved future distributor selling prices, distributor margins and demand for our products. If actual stock rotation returns or price adjustments differ from our
estimates, adjustments may be recorded in the period when such actual information is known. Allowance for price adjustments is recorded against accounts
receivable and provision for stock rotation is recorded in accrued liabilities on the consolidated balance sheets.
Revenue from certain distributors is deferred until the distributor resells the products to end customers due to price protection adjustments and right of returns
that cannot be reliably measured. The deferred revenue, net of the associated deferred cost of the inventory, is recorded as deferred margin on the consolidated
balance sheets.
Packaging and testing services revenue is recognized upon shipment of serviced products to the customer.
We will recognize revenue in accordance with ASC 606 "Revenue from Contracts with Customers" beginning on July 1, 2018. The change for us under ASC
606 relates to the timing of revenue recognition with two U.S.-based distributors. Sales to these distributors are governed under the terms of agreements providing
extended price protection and other return rights. Prior to the adoption of ASC 606, revenue and costs related to these sales were deferred until distributors sold the
products to end customers and the amount of price adjustments was fixed and finalized. Upon the adoption of ASC 606, the transaction price takes into
consideration the effect of variable consideration, such as price adjustments and returns rights, which are estimated and recorded at the time the products are
delivered. Accordingly, starting July 1, 2018, we will recognize revenue at the time of shipment or delivery to these two distributors, adjusted for estimates of the
price adjustments and product returns based on historical data and other available information.
Inventory reserves
We carry inventories at the lower of cost (determined on a first-in, first-out basis) or market value. Cost primarily consists of semiconductor wafers and raw
materials, labor, depreciation expenses and other manufacturing expenses and overhead, and packaging and testing fees paid to third parties if subcontractors are
used. Inventory reserves are made based on our periodic review of inventory quantities on hand as compared with our sales forecasts, historical usage, aging of
inventories, production yield levels and current product selling prices. If actual market conditions are less favorable than those forecasted by us, additional future
inventory write-downs may be required that could adversely affect our operating results. Inventory reserves once established are not reversed until the related
inventory has been sold or scrapped. If actual market conditions are more favorable than expected and the products that have previously been written down are
sold, our gross margin would be favorably impacted.
Product warranty
We provide a standard one-year warranty for the products from the date of purchase by the end customers. We accrue for estimated warranty costs at the time
revenue is recognized. Our warranty obligation is affected by product failure rates, labor and material costs for replacing defective parts, related freight costs for
failed parts and other quality assurance costs. We monitor our product returns for warranty claims and maintain warranty reserve based on our historical
experiences and anticipated warranty claims known at the time of estimation. If actual warranty costs differ significantly from our estimates, revisions to the
estimated warranty accrual would be required and any such adjustments could be material.
56
Accounting for income taxes
We are subject to income taxes in a number of jurisdictions. We must make certain estimates and judgments in determining income tax expense for financial
statement purposes. These estimates and judgments occur in the calculation of tax credits, benefits and deductions, and in the calculation of certain tax assets and
liabilities which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes, as well as interest and
penalties related to uncertain tax positions. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary
course of business. We establish accruals for certain tax contingencies based on estimates of whether additional taxes may be due. While the final tax outcome of
these matters may differ from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in
which such determination is made. As a result, significant changes to these estimates may result in an increase or decrease to our tax provision in a subsequent
period.
Significant management judgment is also required in determining whether deferred tax assets will be realized in full or in part. When it is more likely than not
that all or some portion of specific deferred tax assets such as net operating losses or foreign tax credit carryforwards will not be realized, a valuation allowance
must be established for the amount of the deferred tax assets that cannot be realized. We consider all available positive and negative evidence on a jurisdiction-by-
jurisdiction basis when assessing whether it is more likely than not that deferred tax assets are recoverable. We consider evidence such as our past operating results,
the existence of cumulative losses in recent years and our forecast of future taxable income. We will maintain a partial valuation allowance equal to the state
research and development credit carryfowards until sufficient positive evidence exists to support reversal of the valuation allowance.
We have not provided for withholding taxes on the undistributed earnings of our foreign subsidiaries because we intend to reinvest such earnings indefinitely.
As of June 30, 2018 , the cumulative amount of undistributed earnings of our foreign subsidiaries considered permanently reinvested was $118.6 million . The
determination of the unrecognized deferred tax liability on these earnings is not practicable. Should we decide to remit this income to the Bermuda parent company
in a future period, our provision for income taxes may increase materially in that period.
The Financial Accounting Standards Board ("FASB") has issued guidance which clarifies the accounting for income taxes by prescribing a minimum
probability threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold is defined as a tax position that is
more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based
on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely to be
realized upon ultimate settlement. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax law and regulations in a
multitude of jurisdictions. Although the guidance on the accounting for uncertainty in income taxes prescribes the use of a recognition and measurement model, the
determination of whether an uncertain tax position has met those thresholds will continue to require significant judgment by management. If the ultimate resolution
of tax uncertainties is different from what is currently estimated, a material impact on income tax expense could result.
Our provision for income taxes is subject to volatility and could be adversely impacted by changes in earnings or tax laws and regulations in various
jurisdictions. We are subject to the continuous examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess
the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that
the outcomes from these continuous examinations will not have an adverse effect on our operating results and financial condition. To the extent that the final tax
outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such
determination is made. The provision for income taxes includes the impact of changes to reserves, as well as the related net interest and penalties.
Share-based compensation expense
We maintain an equity-settled, share-based compensation plan to grant share options and restricted share units. We recognize share-based compensation
expense based on the estimated fair value of the awards, using the accelerated attribution method. Share-based compensation expense is significant to the
consolidated financial statements and is calculated using our best estimates, which involve inherent uncertainties and the application of management's judgment.
The Black-Scholes option valuation model requires the input of subjective assumptions, including the expected term and stock price volatility. In addition,
judgment is also required in estimating the number of stock-based awards that are expected to be forfeited. Forfeitures are estimated based on historical experience
at the time of grant. Changes in estimated forfeitures are recognized
57
in the period of change and impact the amount of stock compensation expenses to be recognized in future periods, which could be material if actual results differ
significantly from estimates.
Estimated Useful Lives for Property, Plant and Equipment and Intangible Assets
Property, plant and equipment are recorded at cost and are depreciated using the straight-line method over estimated useful lives of the assets. Patents and
exclusive technology rights purchased from third parties are amortized on a straight-line basis over their estimated useful lives of three to seven years. Trade name
and customer relationships acquired in a business combination are recognized at fair values at the acquisition date and amortized on a straight-line basis over their
estimated economic lives of three years and four years, respectively.
Recently Issued Accounting Pronouncements
See Note 1 of the Notes to the consolidated financial statements under Item 15 in this Annual Report on Form 10-K for a full description of recent accounting
pronouncements, including the expected dates of adoption and estimated effects on results of operations and financial condition.
58
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Foreign currency risk
We and our principal subsidiaries use U.S. dollars as our functional currency because most of the transactions are conducted and settled in U.S. dollars. All of
our revenue and a significant portion of our operating expenses are denominated in U.S. dollars. The functional currency for our in-house packaging and testing
facilities in China is U.S. dollars and a significant portion of our capital expenditures are denominated in U.S. dollars. However, foreign currencies are required to
fund our overseas operations, primarily in Taiwan and China. Operating expenses of overseas operations are denominated in their respective local currencies. In
order to minimize exposure to foreign currencies, we maintained cash and cash equivalent balances in foreign currencies, including Chinese Yuan (“RMB”) as
operating funds for our foreign operating expenses. For our subsidiaries which use the local currency as the functional currency, including the JV Company, the
results and financial position are translated into U.S. dollars using exchange rates at balance sheet dates for assets and liabilities and using average exchange rates
for income and expenses items. The resulting translation differences are presented as a separate component of accumulated other comprehensive income (loss) and
noncontrolling interest in the consolidated statements of equity. Our management believes that our exposure to foreign currency translation risk is not significant
based on a 10% sensitivity analysis in foreign currencies due to the fact that the net assets denominated in foreign currencies pertaining to foreign operations,
principally in Taiwan and China, are not significant to our consolidated net assets.
Interest rate risk
Our interest-bearing assets comprise mainly interest-bearing short-term bank balances. We manage our interest rate risk by placing such balances in
instruments with various short-term maturities. Borrowings expose us to interest rate risk. Borrowings are drawn down after due consideration of market conditions
and expectation of future interest rate movements. As of June 30, 2018, we had $13.2 million outstanding under our term loan with the Bank and $60.4 million
outstanding under our financing lease with the Lenders, which were subject to fluctuations in interest rates. We do not believe that a 10% change in interest rates
would materially affect our results of operations.
Commodity Price Risk
We are subject to risk from fluctuating market prices of certain commodity raw materials, particularly gold, that are used in our manufacturing process and
incorporated into our end products. Supplies for such commodities may from time-to-time become restricted, or general market factors and conditions may affect
the pricing of such commodities. Over the past few years, the price of gold increased significantly and certain of our supply chain partners assess surcharges to
compensate for the rising commodity prices. We have been converting some of our products to use copper wires instead of gold wires. Our results of operations
may be materially and adversely affected if we have difficulty obtaining these raw materials, the quality of available raw materials deteriorates, or there are
significant price changes for these raw materials. For periods in which the prices of these raw materials are rising, we may be unable to pass on the increased cost
to our customers which would result in decreased margins for the products in which they are used and could have a material adverse effect on our net earnings. We
also may need to record losses for adverse purchase commitments for these materials in periods of declining prices. We do not enter into formal hedging
arrangements to mitigate against commodity risk. We estimate that a 10% increase or decrease in the costs of raw materials subject to commodity price risk, such
as gold, would decrease or increase our current year's net earnings by $0.6 million, assuming that such changes in our costs have no impact on the selling prices of
our products and that we have no pending commitments to purchase metals at fixed prices.
59
Item 8.
Financial Statements and Supplementary Data
See Part IV, Item 15 "Exhibits and Financial Statement Schedules" for our consolidated financial statements and the notes and schedules thereto filed as part
of this annual report.
Selected Quarterly Consolidated Financial Data
The following tables present our unaudited consolidated financial information for each of the eight quarters in the period ended June 30, 2018 . Net income
(loss) per share for the four quarters of each fiscal year may not sum to the total for the fiscal year because of difference in the number of shares outstanding during
each period. The operating results for any quarter should not be relied upon as necessarily indicative of results for any future period. We expect our quarterly
operating results to fluctuate in future periods due to a variety of reasons, including those discussed in Item 1A. “Risk Factors.”
Revenue
Gross profit
Operating income (loss)
Net income (loss) including noncontrolling interest
Net 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
Revenue
Gross profit
Operating income
Net income including noncontrolling interest
Net 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
Quarter Ended
June 30,
2018
March 31,
2018
December 31,
2017
September 30,
2017
(in thousands, except per share data)
109,897
29,183
(75)
(3,025)
(4,046)
1,021
0.04
0.04
$
$
$
$
$
$
$
$
102,902
27,133
681
(488)
(2,139)
1,651
0.07
0.07
$
$
$
$
$
$
$
$
103,896
28,082
3,224
5,122
(1,669)
6,791
0.28
0.27
$
$
$
$
$
$
$
$
104,858
27,530
4,590
3,339
(1,461)
4,800
0.20
0.19
June 30,
2017
March 31,
2017
December 31,
2016
September 30,
2016
Quarter Ended
(in thousands, except per share data)
98,007
25,086
3,561
2,787
(1,332)
4,119
$
$
$
$
$
$
$
$
93,281
22,697
3,005
2,386
(1,170)
3,556
0.15
0.14
$
$
$
$
$
$
$
$
94,687
22,094
2,836
1,657
(1,190)
2,847
0.12
0.11
$
$
$
$
$
$
$
$
97,362
21,944
3,742
2,430
(877)
3,307
0.14
0.14
Basic
Diluted
$
$
0.17
0.17
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
60
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 June 30, 2018 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.
Management's Annual Report on Internal Control over Financial Reporting
Our management, including our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control
over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external purposes in accordance with
generally accepted accounting principles, and includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are made only in accordance with
authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of our assets that could have a material effect on our financial statements.
Our management conducted an assessment of the effectiveness of our internal control over financial reporting based on the criteria set forth in Internal
Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), as amended from time to
time. Based on the assessment, our management has concluded that our internal control over financial reporting was effective as of June 30, 2018 to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. GAAP.
The effectiveness of the Company's internal control over financial reporting as of June 30, 2018 has been audited by Grant Thornton LLP, an independent
registered public accounting firm, as stated in their report, included on the following page.
Limitation on the 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.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2018 that have materially affected or
are reasonably likely to materially affect, our internal control over financial reporting.
61
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Alpha and Omega Semiconductor Limited
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Alpha and Omega Semiconductor Limited (a Bermuda corporation) and subsidiaries (the
“Company”) as of June 30, 2018, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of June 30, 2018, based on criteria established in the 2013 Internal
Control-Integrated
Framework
issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial
statements of the Company as of and for the year ended June 30, 2018, and our report dated August 23, 2018 expressed an unqualified opinion on those financial
statements and schedules.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to
express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and
are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
/s/ GRANT THORNTON LLP
San Francisco, California
August 23, 2018
62
Table of Contents
Item 9B.
Other Information
None
63
PART III
Certain information required by Part III is omitted from this Annual Report on Form 10-K because we intend to file our definitive proxy statement for our
next annual general meeting of shareholders, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended (the “ 2018 Proxy Statement”), no
later than 120 days after the end of fiscal year 2018 , and certain information to be included in the 2018 Proxy Statement is incorporated herein by reference.
Item 10.
Directors, Executive Officers and Corporate Governance
The information required by this item concerning our directors, executive officers, Section 16 compliance and corporate governance matters is contained in
part under the caption "Business - Executive Officers" in Part I of this report, and the remainder is incorporated by reference to the information set forth in the
sections titled “Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the 2018 Proxy Statement.
Item 11.
Executive Compensation
The information required by this item regarding executive compensation is incorporated by reference from the information set forth under the captions
“Compensation of Non-Employee Directors” and “Executive Compensation,” in the 2018 Proxy Statement.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item regarding security ownership of certain beneficial owners and management is incorporated by reference to the
information set forth in the section titled “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in the
2018 Proxy Statement.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
The information required by this item regarding related party transactions and director independence is incorporated by reference from the information set
forth under the captions “Board of Directors and Committees of the Board", and “Related Party Transactions" in the 2018 Proxy Statement.
Item 14.
Principal Accounting Fees and Services
The information required by this item regarding principal accountant fees and services is incorporated by reference from the information set forth under the
caption “Principal Accounting Fees and Services” in the 2018 Proxy Statement.
64
Item 15.
Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of this annual report:
PART IV
(1) Consolidated Financial Statements. The index to the consolidated financial statements is below.
Item
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income (Loss )
Consolidated Statements of Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
(2) Financial Statement Schedules.
S chedule I - Condensed Financial Information of Registrant
Schedule II - Valuation and Qualifying accounts
(b) Exhibits
Page
66
67
68
69
70
71
73
101
106
The exhibits listed on the accompanying Index to Exhibits in Item 15(b) below are filed as part of, or hereby incorporated by reference into, this Annual
Report on Form 10-K.
65
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Alpha and Omega Semiconductor Limited
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Alpha and Omega Semiconductor Limited (a Bermuda corporation) and subsidiaries (the
“Company”) as of June 30, 2018 and 2017, and the related consolidated statements of operations, comprehensive income (loss), equity, and cash flows for each of
the three years in the period ended June 30, 2018 and the related notes and schedules (collectively referred to as the “financial statements”). In our opinion, the
financial statements present fairly, in all material respects, the financial position of Alpha and Omega Semiconductor Limited and subsidiaries as of June 30, 2018
and 2017, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2018 in conformity with accounting principles
generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal
control over financial reporting as of June 30, 2018, based on criteria established in the 2013 Internal
Control-Integrated
Framework
issued by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated August 23, 2018 expressed an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements
based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance
with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB .
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to
assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2012.
San Francisco, California
August 23, 2018
66
ALPHA AND OMEGA SEMICONDUCTOR LIMITED
CONSOLIDATED BALANCE SHEETS
(in thousands except par value per share)
ASSETS
June 30,
2018
2017
$
131,535 $
115,708
LIABILITIES AND EQUITY
$
$
Current assets:
Cash and cash equivalents
Restricted cash
Accounts receivable, net
Inventories
Other current assets
Total current assets
Property, plant and equipment, net
Intangible assets, net
Deferred income tax assets - long-term
Other long-term assets
Total assets
Current liabilities:
Accounts payable
Accrued liabilities
Income taxes payable
Short-term debt
Deferred margin
Capital leases
Total current liabilities
Long-term debt
Income taxes payable - long-term
Deferred income tax liabilities
Capital leases - long-term
Other long-term liabilities
Total liabilities
Commitments and contingencies ( Note 13 )
Equity:
Preferred shares, par value $0.002 per share:
Authorized: 10,000 shares; Issued and outstanding: none at June 30, 2018 and 2017
Common shares, par value $0.002 per share:
Authorized: 100,000 shares; issued and outstanding: 30,400 shares and 23,860 shares at June 30, 2018 and
29,600 shares and 23,992 shares at June 30, 2017
Treasury shares at cost; 6,540 shares at June 30, 2018 and 5,608 shares at June 30, 2017
Additional paid-in capital
Accumulated other comprehensive income
Retained earnings
Total Alpha and Omega Semiconductor Limited shareholders’ equity
Noncontrolling interest
Total equity
Total liabilities and equity
The accompanying notes are an integral part of these consolidated financial statements.
67
$
667,049 $
189
33,755
90,182
29,551
285,212
331,656
16,591
4,892
28,698
667,049 $
92,661 $
49,841
2,211
3,811
1,665
4,491
154,680
26,786
924
713
56,791
993
240,887
—
61
(64,790)
220,244
440
122,639
278,594
147,568
426,162
221
28,410
76,254
4,883
225,476
148,191
282
4,594
19,865
398,408
63,134
28,386
1,748
—
814
828
94,910
—
922
2,659
866
502
99,859
—
59
(49,836)
206,332
306
113,909
270,770
27,779
298,549
398,408
ALPHA AND OMEGA SEMICONDUCTOR LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year Ended June 30,
2018
2017
2016
$
421,553 $
383,337 $
309,625
111,928
291,516
91,821
335,661
269,839
65,822
Revenue
Cost of goods sold
Gross profit
Operating expenses:
Research and development
Selling, general and administrative
Impairment of long-lived assets
Total operating expenses
Operating income
Interest income and other income (loss), net
Interest expense
Income before income taxes
Income tax expense
Net income (loss) including noncontrolling interest
Net loss attributable to noncontrolling interest
37,344
66,164
—
103,508
8,420
(1,943)
(821)
5,656
708
4,948
(9,315)
29,835
48,842
—
78,677
13,144
(141)
(91)
12,912
3,652
9,260
(4,569)
26,006
37,874
432
64,312
1,510
(498)
(23)
989
4,021
(3,032)
(104)
(2,928)
(0.13)
(0.13)
Net income (loss) attributable to Alpha and Omega Semiconductor Limited
$
14,263 $
13,829 $
Net income (loss) per common share attributable to Alpha and Omega Semiconductor Limited
Basic
Diluted
$
$
0.60 $
0.57 $
0.59 $
0.56 $
Weighted average number of common share attributable to Alpha and Omega Semiconductor
Limited used to compute net income (loss) per share:
Basic
Diluted
23,901
24,844
23,526
24,826
22,452
22,452
The accompanying notes are an integral part of these consolidated financial statements.
68
ALPHA AND OMEGA SEMICONDUCTOR LIMITED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
Net income (loss) including noncontrolling interest
Other comprehensive loss, net of tax
Foreign currency translation adjustment
Comprehensive income (loss)
Noncontrolling interest
Comprehensive income (loss) attributable to Alpha and Omega Semiconductor Limited
Year ended June 30,
2018
2017
2016
4,948 $
9,260 $
(3,032)
244
5,192
(9,205)
(1,012)
8,248
(5,118)
14,397 $
13,366 $
(135)
(3,167)
(103)
(3,064)
$
$
The accompanying notes are an integral part of these consolidated financial statements.
69
ALPHA AND OMEGA SEMICONDUCTOR LIMITED
CONSOLIDATED STATEMENTS OF EQUITY
(in thousands)
Convertible Preferred
Shares
Common Shares
Treasury Stock
Shares
— $
—
Amount
Shares
— 27,314
$
—
926
Amount
Shares
(998)
Additional
Paid-In
Capital
$ 181,040
Accumulated
Other
Comprehensive
Income
$
905
Retained
Earnings
$ 103,232
Amount
$ (8,593)
Total AOS
Shareholders'
Equity
Noncontrolling
Interest
Total Equity
$
276,639
$
— $
276,639
—
—
5,329
—
—
5,330
55
1
—
—
1
57
2
42
—
—
475
—
—
—
(1,036)
1,798
— (4,695)
(42,081)
—
—
—
—
—
—
—
—
—
—
4,313
—
—
—
—
—
—
—
—
(136)
(233)
242
—
—
—
—
(2,928)
—
(1,036)
1,799
(42,081)
4,313
(2,928)
(136)
(5,651)
(50,199)
191,444
769
100,071
242,142
(103)
242,039
—
—
7,788
—
—
7,790
13,829
13,829
(4,569)
—
—
—
—
—
—
—
43
—
—
—
—
—
—
363
—
—
—
—
—
—
—
(2,071)
2,537
6,634
—
—
—
—
—
—
—
—
(463)
—
9
—
—
—
372
(2,071)
2,537
6,634
—
—
(463)
—
59
1
(5,608)
(49,836)
206,332
306
113,909
270,770
—
—
1,543
—
—
1,544
—
—
1
—
—
—
—
—
—
18
—
—
144
—
—
(950)
(15,098)
—
—
—
—
—
—
—
—
—
—
—
(2,363)
3,320
—
11,412
—
—
—
—
—
—
—
—
—
—
—
134
—
(53)
91
—
—
—
—
14,263
(2,363)
3,321
(15,098)
11,412
14,263
$
61
(6,540)
$ (64,790)
$ 220,244
$
440
$ 122,639
$
278,594
$
147,568
$
The accompanying notes are an integral part of these consolidated financial statements.
70
(5,480)
(5,480)
—
—
134
—
—
110
128,994
(5,480)
244
128,994
426,162
Balance, June 30, 2015
Exercise of common stock options
and release of RSUs
Reissuance of treasury stock upon
exercise of common stock options
and release of RSUs
Withholding tax on restricted
stock units
Issuance of common shares under
Employee Stock Purchase Plan
Repurchase of common shares
under shares repurchase program
Share-based compensation
expense
Net loss including noncontrolling
interest
Cumulative translation adjustment
Balance, June 30, 2016
Exercise of common stock options
and release of RSUs
Reissuance of treasury stock upon
exercise of common stock options
and release of RSUs
Withholding tax on restricted
stock units
Issuance of common shares under
Employee Stock Purchase Plan
Share-based compensation
expense
Net income (loss) including
noncontrolling interest
Cumulative translation adjustment
Contributions by noncontrolling
interest
Balance, June 30, 2017
Exercise of common stock options
and release of RSUs
Reissuance of treasury stock upon
exercise of common stock options
and release of RSUs
Withholding tax on restricted
stock units
Issuance of common shares under
Employee Stock Purchase Plan
Repurchase of common shares
under shares repurchase program
Share-based compensation
expense
Net income (loss) including
noncontrolling interest
Deferred tax asset related to ASU
2016-06 adoption
Cumulative translation adjustment
Contributions by noncontrolling
interest
Balance, June 30, 2018
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
(93)
258
—
—
—
—
—
—
— 28,405
—
1,015
—
—
—
—
—
—
—
(112)
292
—
—
—
—
—
— 29,600
—
645
—
—
—
—
—
—
—
—
—
(145)
300
—
—
—
—
—
—
—
— 30,400
—
—
—
—
—
—
5,330
242
(1,036)
1,799
(42,081)
4,313
(104)
(3,032)
1
(135)
—
—
—
—
—
7,790
372
(2,071)
2,537
6,634
9,260
(549)
(1,012)
33,000
27,779
—
—
—
—
—
—
33,000
298,549
1,544
91
(2,363)
3,321
(15,098)
11,412
(9,315)
4,948
ALPHA AND OMEGA SEMICONDUCTOR LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities
Net income (loss) including noncontrolling interest
$
4,948 $
9,260 $
(3,032)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Year Ended June 30,
2018
2017
2016
Depreciation and amortization
Share-based compensation expense
Deferred income taxes, net
(Gain) loss on disposal of property and equipment
Impairment of long-lived assets
Changes in assets and liabilities:
Accounts receivable
Inventories
Other current and long-term assets
Accounts payable
Income taxes payable
Accrued and other liabilities
Net cash provided by operating activities
Cash flows from investing activities
Purchase of property and equipment excluding JV Company
Purchase of property and equipment in JV Company
Purchases of land use rights in JV Company
Purchases of intangible assets
Proceeds from sale of property and equipment
(Increase) decrease in restricted cash
Investment in a privately held company
Net cash used in investing activities
Cash flows from financing activities
Proceeds from investment by noncontrolling interest
Withholding tax on restricted stock units
Proceeds from exercise of stock options and ESPP
Proceeds from borrowings
Proceeds from financing lease
Payment for repurchase of common shares
Repayments of borrowings
Principal payments on capital leases
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
29,419
11,412
(2,244)
45
—
(5,345)
(13,928)
(34,625)
4,872
466
8,460
3,480
(49,390)
(128,359)
—
(16,384)
6
32
—
27,188
6,634
7,224
(425)
—
(1,816)
(7,406)
(4,584)
4,515
(1,264)
3,322
42,648
(30,799)
(16,052)
(8,737)
—
603
(33)
(600)
27,303
4,313
871
95
432
12,187
(4,674)
(310)
(1,162)
960
3,199
40,182
(21,901)
—
—
—
—
180
—
(194,095)
(55,618)
(21,721)
128,994
(2,363)
4,956
30,950
60,416
(15,098)
(74)
(828)
206,953
(511)
15,827
115,708
33,000
(2,071)
10,699
—
—
—
—
(819)
40,809
95
27,934
87,774
$
131,535 $
115,708 $
—
(1,036)
7,371
—
—
(42,081)
—
(940)
(36,686)
(86)
(18,311)
106,085
87,774
71
ALPHA AND OMEGA SEMICONDUCTOR LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Supplemental disclosures of cash flow information:
Cash paid for interest
Cash paid for income taxes
Supplemental disclosures of non-cash investing and financing information:
Property and equipment purchased but not yet paid
Property and equipment acquired under capital leases
Reissuance of treasury stock
Year Ended June 30,
2018
2017
2016
$
$
$
$
$
700 $
2,985 $
70 $
2,550 $
68,156 $
23,155 $
— $
53 $
— $
(9) $
9
3,139
5,711
2,449
233
The accompanying notes are an integral part of these consolidated financial statements.
72
ALPHA AND OMEGA SEMICONDUCTOR LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 computers, flat panel TVs, LED lighting, 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.
Basis of Preparation
The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, and a subsidiary in which it has a controlling
interest after elimination of inter-company balances and transactions. The consolidated financial statements have been prepared in conformity with accounting
principles generally accepted in the United States of America ("U.S. GAAP").
Use of Estimates
The preparation of our 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 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, share-based compensation, and useful lives for property, plant and equipment and intangible assets.
Foreign Currency Transactions and Translation
Most of the Company's principal subsidiaries use U.S. dollars as their functional currency because their transactions are primarily conducted and settled in
U.S. dollars. All of their revenues and a significant portion of their operating expenses are denominated in U.S. dollars. The functional currencies for the
Company's in-house packaging and testing facilities in China are U.S. dollars, and a majority of their capital expenditures are denominated in U.S. dollars. Foreign
currency transactions are translated into the functional currencies using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and
losses, resulting from the settlement of such transactions and from the re-measurement of monetary assets and liabilities denominated in foreign currencies using
exchange rates at balance sheet date and non-monetary assets and liabilities using historical exchange rates, are recognized in the consolidated statements of
operations.
For the Company's subsidiaries which use the local currency as their functional currency, including a Joint Venture Company ("JV Company"), their results
and financial position are translated into U.S. dollars using exchange rates at balance sheet dates for assets and liabilities and using average exchange rates for
income and expenses items. The resulting translation differences are presented as a separate component of accumulated other comprehensive income (loss) and
noncontrolling interest in the consolidated statements of equity.
Cash and Cash Equivalents
Cash and cash equivalents primarily consist of cash on hand and short-term bank deposits with original maturities of three months or less. Cash equivalents
are highly liquid investments with stated maturities of three months or less as of the dates of purchase. The carrying amounts reported for cash and cash equivalents
are considered to approximate fair values based upon their short maturities.
Cash and cash equivalents are maintained with reputable major financial institutions. If, due to current economic conditions or other factors, one or more of
the financial institutions with which the Company maintains deposits fails, the Company's cash and cash equivalents may be at risk. Deposits with these banks may
exceed the amount of insurance provided on such deposits; however, these deposits typically may be redeemed upon demand and, therefore, bear minimal risk.
73
Accounts Receivable
The allowance for doubtful accounts is based on assessment of the collectability of accounts receivable from customers. The Company reviews the allowance
by considering factors such as historical collection experience, credit quality, age of the accounts receivable balances and current economic conditions that may
affect a customer's ability to pay. The Company writes off a receivable and charges against its recorded allowance when it has exhausted its collection efforts
without success.
Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure
fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy is based on three levels of inputs, of
which the first two are considered observable and the last unobservable, that may be used to measure fair value, which are the following:
•
•
•
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices
in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the
assets or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Fair Value of Financial Instruments
The fair value of cash equivalents are based on observable market prices and have been 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 and terms of the debts.
Inventories
The Company carries inventories at the lower of cost (determined on a first-in, first-out basis) or market value. Cost includes semiconductor wafer and raw
materials, labor, depreciation expenses and other manufacturing expenses and overhead, and packaging and testing fees paid to third parties if subcontractors are
used. Inventory reserves are made based on the Company's periodic review of inventory quantities on hand as compared with its sales forecasts, historical usage,
aging of inventories, production yield levels and current product selling prices. If actual market conditions are less favorable than those forecasted by management,
additional future inventory write-downs may be required that could adversely affect the Company's operating results. Inventory reserves once established are not
reversed until the related inventory has been sold or scrapped.
Property, Plant and Equipment
Property, plant and equipment are stated at historical cost less accumulated depreciation. Historical cost includes expenditures that are directly attributable to
the acquisition of the items and the costs incurred to make the assets ready for their intended use.
Depreciation is provided for on a straight-line basis over the estimated useful lives of the related assets as follows:
Building
Manufacturing machinery and equipment
Equipment and tooling
Computer equipment and software
Office furniture and equipment
Leasehold improvements
Land use rights
20 years
3 to 10 years
5 years
3 to 5 years
5 years
2 to 15 years based on shorter of expected economic useful life or the
lease term
50 years
74
There is no private land ownership in China. Individuals and companies are permitted to acquire land use rights for specific purpose. 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.
Equipment and construction in progress represent equipment received but the necessary installation has not been fully performed or building construction and
leasehold improvements have been started but not yet completed. Equipment and construction in progress are stated at cost and transferred to respective asset class
when fully completed and ready for their intended use.
Internal-use software development costs are capitalized to the extent that the costs are directly associated with the development of identifiable and unique
software products controlled by the Company that will probably generate economic benefits beyond one year. Costs incurred during the application development
stage are required to be capitalized. The application development stage is characterized by software design and configuration activities, coding, testing and
installation. Training costs and maintenance are expensed as incurred, while upgrades and enhancements are capitalized if it is probable that such expenditures will
result in additional functionality. Costs include employee costs incurred and fees paid to outside consultants for the software development and implementation.
Internal developed software is amortized over its estimated useful life of five years starting from the date when it is ready for its intended use.
Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognized as selling, general and administrative
expenses in the consolidated statements of operations. Costs of maintenance and repairs that do not improve or extend the lives of the respective assets are
expensed as incurred.
Intangible Assets
Intangible assets are stated at cost less accumulated amortization. Intangible assets include patents and exclusive technology rights, trade names and customer
relationships. Intangible assets with finite lives are amortized on a straight-line basis over the estimated periods of benefit, as follows:
Patents and technology rights
Trade name
Customer relationships
3 to 7 years
3 years
4 years
The Company evaluates its finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of
such assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset group to future
undiscounted net cash flows expected to be generated by the asset group. If such assets are considered to be impaired, the impairment to be recognized is measured
by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying
amount and fair value less costs to sell. Intangible assets are recorded in other long-term assets in the Company's consolidated balance sheets. There was no
indication of intangible assets impairment for the fiscal year of 2018 , 2017 and 2016.
Impairment of Long-Lived Assets
The Company evaluates the carrying value of its long-lived assets whenever events or changes in circumstances indicate that the carrying value of the asset
may be impaired. An impairment loss is recognized when estimated future cash flows expected to result from the use of the asset, including disposition, are less
than the carrying value of the asset. Such an impairment charge would be measured as the excess of the carrying value of the asset over its fair value.
There was no impairment of long-lived assets for the fiscal year of 2018 and 2017. During the fiscal year of 2016, the Company identified certain
manufacturing equipment purchased for projects that were subsequently canceled. Because the equipment had no alternative uses, the Company recorded an asset
impairment expense of approximately of $ 0.4 million related to this equipment.
Joint Venture
In March 2016, the Company executed an agreement with two strategic investment funds owned by the Municipality of Chongqing, China to form a joint
venture for a new state-of-the-art power semiconductor packaging, testing and wafer fabrication facility in Liangjiang New Area of Chongqing (the "Joint
Venture"). The initial capitalization of the JV Company
75
under the agreement is $330.0 million , which includes cash contribution from the Chongqing funds and contributions of cash, equipment and intangible assets
from the Company. As of June 30, 2018, the Company owns 51% and the Chongqing funds own 49% of the equity interest of the JV Company. The Joint Venture
is accounted under the provisions of the consolidation guidance since the Company has controlling financial interest.
Revenue Recognition
The Company recognizes revenue when there is persuasive evidence that an arrangement exists, delivery has occurred, the price to the buyer is fixed or
determinable and when collectability is reasonably assured. The Company recognizes revenue 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 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. The Company estimates the expected price adjustments at the time revenue is recognized based on distributor inventory levels, pre-approved future
distributor selling prices, distributor margins and demand for its products. If actual stock rotation returns or price adjustments differ from their estimates,
adjustments are recorded in the period when the actual information is known. Allowance for price adjustments is recorded against accounts receivable and the
provision for stock rotation rights is included in accrued liabilities on the consolidated balance sheets.
Revenue from certain distributors is deferred until the distributor resells the products to end customers due to price protection adjustments and right of returns
that cannot be reliably measured. The deferred revenue, net of the associated deferred cost of the inventory, is recorded as deferred margin on the consolidated
balance sheets.
Packaging and testing services revenue is recognized upon shipment of serviced products to the customer.
The Company will recognize revenue in accordance with ASC 606 "Revenue from Contracts with Customers" beginning on July 1, 2018. The change for the
Company under ASC 606 relates to the timing of revenue recognition with two U.S.-based distributors. Sales to these distributors are governed under the terms of
agreements providing extended price protection and other return rights. Prior to the adoption of ASC 606, revenue and costs related to these sales were deferred
until distributors sold the products to end customers and the amount of price adjustments was fixed and finalized. Upon adoption of ASC 606, the transaction price
takes into consideration the effect of variable consideration, such as price adjustments and returns rights, which are estimated and recorded at the time the goods
are delivered. Accordingly, effective July 1, 2018, the Company recognized revenue at the time of shipment or delivery to these two distributors, adjusted for
estimates of the price adjustments and product returns based on historical data and other available information.
Product Warranty
The Company provides a standard one-year warranty for the products from the date of purchase by the end customers. The Company accrues for estimated
warranty costs at the time revenue is recognized. The Company's warranty obligation is affected by product failure rates, labor and material costs for replacing
defective parts, related freight costs for failed parts and other quality assurance costs. The Company monitors its product returns for warranty claims and maintains
warranty reserves based on historical experiences and anticipated warranty claims known at the time of estimation.
Shipping and Handling Costs
Shipping and handling costs are included in cost of goods sold.
Research and Development
Research and development costs are expensed as incurred.
Provision for Income Taxes
Income tax expense or benefit is based on income or loss before taxes. Deferred tax assets and liabilities are recognized principally for the expected tax
consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts.
76
The Company is subject to income taxes in a number of jurisdictions. Significant judgment is required in determining the worldwide provision for income
taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Company
establishes accruals for certain tax contingencies based on estimates of whether additional taxes may be due. While the final tax outcome of these matters may
differ from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such
determination is made.
Significant management judgment is also required in determining whether deferred tax assets will be realized in full or in part. When it is more likely than not
that all or some portion of specific deferred tax assets such as net operating losses or research and experimentation tax credit carryforwards will not be realized, a
valuation allowance must be established for the amount of the deferred tax assets that cannot be realized. The Company considers all available positive and
negative evidence on a jurisdiction-by-jurisdiction basis when assessing whether it is more likely than not that deferred tax assets are recoverable. The Company
considers evidence such as our past operating results, the existence of cumulative losses in recent years and our forecast of future taxable income.
The Financial Accounting Standards Board, or FASB, issued guidance which clarifies the accounting for income taxes by prescribing a minimum probability
threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold is defined as a tax position that is more likely
than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the
technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely to be realized
upon ultimate settlement. Although the guidance on the accounting for uncertainty in income taxes prescribes the use of a recognition and measurement model, the
determination of whether an uncertain tax position has met those thresholds will continue to require significant judgment by management. If the ultimate resolution
of tax uncertainties is different from what is currently estimated, a material impact on income tax expense could result.
Our provision for income taxes is subject to volatility and could be adversely impacted by changes in earnings or tax laws and regulations in various
jurisdictions. We are subject to the continuous examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess
the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. To the extent that the final tax
outcome of these matters is different from the amounts recorded, such differences will impact the provision for income taxes in the period in which such
determination is made. The provision for income taxes includes the impact of changes to reserves, as well as the related net interest and penalties.
Share-based Compensation Expense
The Company maintains an equity-settled, share-based compensation plan to grant share options and restricted share units. 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. 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.
In May 2010, the Company adopted the Employee Share Purchase Plan (the "ESPP"). The fair value of common stock issued under the ESPP is determined at
the date of grant using the Black-Scholes option valuation model.
The Black-Shcoles option valuation model requires the input of subjective assumptions, including the expected term and stock price volatility. In addition,
judgment is also required in estimating the number of stock-based awards that are expected to be forfeited. Forfeitures are estimated based on historical experience
at the time of grant. Changes in estimated forfeitures are recognized in the period of change and impact the amount of stock compensation expenses to be
recognized in future periods, which could be material if actual results differ significantly from estimates.
Advertising
Advertising expenditures are expensed as incurred. Advertising expense was $0.4 million in each of the fiscal years ended June 30, 2018 , 2017 , and 2016 ,
respectively.
Comprehensive Income (Loss)
77
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.
Leases
Leases entered into by the Company as a lessee are classified as capital or operating leases. Leases that transfer to the Company substantially the entire risks
and benefits incidental to ownership are classified as capital leases. At the inception of a capital lease, an asset and an obligation are recorded at an amount equal to
the lesser of the present value of the minimum lease payments and the asset’s fair market value at the beginning of each lease. Rental payments under operating
leases are expensed as incurred.
Risks and Uncertainties
The Company is subject to certain risks and uncertainties. The Company believes changes in any of the following areas could have a material adverse
effect on the Company's future financial position or results of operations or cash flows: new product development, including market receptiveness, operation of in-
house manufacturing facilities, litigation or claims against the Company based on intellectual property, patent, product regulatory or other factors, competition
from other products, general economic conditions, the ability to attract and retain qualified employees, the ability to successfully operate joint venture and
ultimately to sustain profitable operations, and ability to diversify products and develop new digital business. Additional risks and uncertainties that the Company
is unaware of, or that the Company currently believes are not material, may also become important factors that adversely affect its business.
The semiconductor industry is characterized by rapid technological change, competition, competitive pricing pressures and cyclical market patterns. The
Company's financial results are affected by a wide variety of factors, including general economic conditions specific to the semiconductor industry and the
Company's particular market, such as the personal computing (PC) markets, the timely implementation of new products, new manufacturing process technology
and the ability to safeguard patents and intellectual property in a rapidly evolving market. In addition, the semiconductor market has historically been cyclical and
subject to significant economic downturns. As a result, the Company may experience significant period-to-period fluctuations in operating results due to the factors
mentioned above or other factors.
The Company's business model allocates its wafer manufacturing requirements to both in-house capacity and selected third-party foundries. The Company
also deploys and implements its proprietary power discrete processes and equipment at third-party foundries to maximize the performance and quality of its
products.
The Company's revenue may be impacted by its ability to obtain adequate wafer supplies from third-party foundries and utilize wafer production and
packaging and testing capacity from its in-house facilities. Currently the Company's main third-party foundry is Shanghai Hua Hong Grace Electronic Company
Limited, or HHGrace, located in Shanghai, China. HHGrace has been manufacturing wafers for the Company since 2002. HHGrace manufactured approximately
15.4% , 18.6% and 25.0% of the wafers used in the Company's products for the fiscal years ended June 30, 2018 , 2017 and 2016 , respectively. Although the
Company believes that its volume of production allows the Company to secure favorable pricing and priority in allocation of capacity in its third-party foundries, if
the foundries' capacities are constrained due to market demands, HHGrace, together with other foundries from which the Company purchases wafers, may not be
willing or able to satisfy all of the Company's manufacturing requirements on a timely basis and/or at favorable prices. The Company is also subject to the risks of
service disruptions and raw material shortages by its foundries. Such disruptions, shortages and price increases could harm the Company's operating results. In
addition, manufacturing facilities' capacity affects the Company's gross margin because the Company has certain fixed costs associated with its Oregon fab and in-
house packaging and testing facilities. If the Company fails to utilize its manufacturing facilities' capacity at a desirable level, its financial condition and results of
operations will be adversely affected.
78
Recent Accounting Pronouncements
In June 2018, the FASB issued Accounting Standard Updates ("ASU") ASU 2018-07, "Compensation -Stock Compensation: Improvement to Nonemployees
Share-Based Payment Accounting ("ASU 2018-07"), which expands the scope of Topic 718 to include all share-based payment transactions for acquiring goods
and services from nonemployees. ASU 2018-07 specifies that Topic 718 applies to all share-based payment transactions in which the grantor acquires goods and
services to be used or consumed in its own operations by issuing share-based payment awards. ASU 2018-07 also clarifies that Topic 718 does not apply to share-
based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a
contract accounted for under ASC 606. ASU 2018-07 is effective fiscal years beginning after December 15, 2018, including interim periods within that fiscal year,
with early adoption permitted, but no earlier than our adoption of ASC 606. 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 May 2017, the FASB issued ASU 2017-09, "Compensation -Stock Compensation: Scope of Modification Accounting ("ASU 2017-09"). ASU 2017-09 is
an update to the existing guidance to clarify when modification accounting would be applied 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. This ASU will be effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017
with early adoption permitted. The Company does not regularly modify the terms and conditions of its share-based awards and does not expect 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 amounts for
the periods shown on the statement of cash flows. This ASU will be effective for fiscal years beginning after December 15, 2017, and interim periods within those
fiscal years, with early adoption permitted and requires retrospective adoption. 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 October 2016, the FASB issued ASU No. 2016-16, "Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory ("ASU 2016-16"). ASU 2016-
16 requires entities to recognize income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amended
guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. On July
1, 2017, the Company adopted ASU 2016-16. As of June 30, 2017 the Company had $5.5 million of prepaid tax assets related to an inter-company packaging
equipment transfer. As a result of adopting ASU 2016-16, the Company de-recognized the $5.5 million of prepaid tax assets as of July 1, 2017 with an offsetting
reduction to retained earnings. In addition, the Company recorded a $6.5 million deferred tax asset and a $6.5 million related valuation allowance concerning the
inter-company packaging equipment transfer as of July 1, 2017; thus, there was no change to the Company’s net deferred tax assets.
In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230): Classification 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 in the Statement of Cash Flows under Topic
230. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption
permitted. Upon adoption, entities must apply the guidance retrospectively to all periods presented. The Company does not expect the adoption of this guidance
will have a material impact on its consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases (ASC 842). This guidance requires a dual approach for lessee accounting under which a lessee 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. The issued ASU 2016-02 requires a modified
retrospective transition method for all leases existing or entered into after the beginning of the earliest comparative period in the consolidated financial statements.
In July 2018, the FASB issued ASU 2018-11, Targeted Improvements to Topic 842, Leases, which provides entities with an alternative transition method for
adopting the new lease standard. Entities can elect to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to
the opening balance of retained earnings. The Company expects to adopt the guidance on July 1, 2019. The Company is currently assessing the impact that
adoption of this guidance will have on its consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (ASC 606). The standard provides companies with a single
model for use in accounting for revenue arising from contracts with customers and
79
supersedes current revenue recognition guidance, including industry-specific revenue guidance. The core principle of the model 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 adopted the new revenue standard on July 1, 2018 utilizing the modified retrospective transition method. In the first quarter of
fiscal year 2019, the Company will record $1.3 million , before tax, to retained earnings related to the cumulative effect of adopting ASC 606, due to the change in
revenue recognition for its two U.S.-based distributors as discussed below.
The Company has completed its assessment and implemented policies, processes, and controls to support the standard measurement and disclosure
requirements. Under ASC 606, the Company's product sales consist of a single performance obligation that is satisfied at a point in time. The Company recognizes
product revenue from distributors and other customers when the products are shipped or delivered to the customers based on the terms of the purchase orders and
sales agreements, primarily because the distributors and customers have legal title and physical possession of the product; can direct the use of the product; are
obligated to pay the Company for the product; and bear significant risks and rewards of ownership of the products.
The change for the Company under ASC 606 relates to the timing of revenue recognition with two U.S.-based distributors. Sales to these distributors are
governed under the terms of agreements providing extended price protection and other return rights. Prior to the adoption of ASC 606, revenue and costs related to
these sales were deferred until distributors sold the products to end customers and the amount of price adjustments was fixed and finalized. Upon adoption of ASC
606, the transaction price takes into consideration the effect of variable consideration, such as price adjustments and returns rights, which are estimated and
recorded at the time the goods are delivered. Accordingly, effective July 1, 2018, the Company recognized revenue at the time of shipment or delivery to these two
distributors, adjusted for estimates of the price adjustments and product returns based on historical data and other available information.
Revenue from other non-U.S. distributors and direct customers, which consists of majority of the Company's total revenue, was already recognized at the
time of shipment or delivery to the distributors and direct customers prior to the adoption of ASC 606, Accordingly, revenue recognition with these distributors and
direct customers remains unchanged upon adoption of ASC 606.
80
2. Net Income (loss) Per Common Share Attributable to Alpha and Omega Semiconductor Limited
Basic net income (loss) per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income (loss)
per share is computed using the weighted-average number of common shares outstanding, plus potential shares of common stock during the period. Potential shares
of common stock include dilutive shares attributable to the assumed exercise of share options, ESPP shares and vesting of RSUs using the treasury stock method
and contingent issuances of common shares related to convertible preferred shares, if dilutive. Under the treasury stock method, potential common shares
outstanding are not included in the computation of diluted net income per share if their effect is anti-dilutive.
The following table presents the calculation of basic and diluted net income (loss) per share attributable to common shareholders:
Numerator:
Net income (loss) attributable to Alpha and Omega Semiconductor
Limited
$
14,263 $
13,829 $
(2,928)
Year Ended June 30,
2018
2017
2016
(in thousands, except per share data)
Denominator:
Basic:
Weighted average number of common shares used to compute basic net
income (loss) per share
23,901
23,526
22,452
Diluted:
Weighted average number of common shares used to compute basic net
income (loss) per share
23,901
23,526
22,452
Effect of potentially dilutive securities:
Stock options, RSUs and ESPP shares
Weighted average number of common shares used to compute diluted
net income (loss) per share
943
1,300
—
24,844
24,826
22,452
Net income (loss) per share attributable to Alpha and Omega Semiconductor
Limited:
Basic
Diluted
$
$
0.60 $
0.57 $
0.59 $
0.56 $
(0.13)
(0.13)
The following potential dilutive securities were excluded from the computation of diluted net income (loss) per share as their effect would have been anti-
dilutive:
Employee stock options and RSUs
ESPP
Total potential dilutive securities
Year Ended June 30,
2018
2017
2016
(in thousands)
186
182
368
105
19
124
3,206
414
3,620
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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 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 standards, while sales to new
customers or customers with low credit ratings are usually made on an advance payment basis. The Company considers its financial assets to be of good credit
quality because its key distributors and direct customers have long-standing business relationships with the Company and the Company has not experienced any
significant bad debt write-offs of accounts receivable in the past. The Company closely monitors the aging of accounts receivable from its distributors and direct
customers, and regularly reviews their financial positions, where available.
Summarized below are individual customers whose revenue or accounts receivable balances were 10% or higher than the respective total consolidated
amounts:
Percentage of revenue
Customer A
Customer B
Customer C
* Less than 10%
Percentage of accounts receivable
Customer A
Customer B
Customer C
Year Ended June 30,
2018
2017
2016
28.3%
35.2%
*
26.9%
35.8%
10.6%
June 30,
2018
2017
17.1%
35.5%
10.6%
23.8%
37.2%
12.3%
33.2%
13.2%
16.4%
82
4. Balance Sheet Components
Accounts receivable
Accounts receivable
Less: Allowance for price adjustments
Less: Allowance for doubtful accounts
Accounts receivable, net
Inventories
Raw materials
Work in-process
Finished goods
Other current assets:
VAT receivable
Other prepaid expenses
Prepaid insurance
Prepaid maintenance
Prepayment to supplier
Prepaid income tax
Customs deposit
Lease financing cost
Other receivables
Property, plant and equipment, net
83
June 30,
2018
2017
(in thousands)
52,687 $
(18,902)
(30)
33,755 $
48,039
(19,599)
(30)
28,410
June 30,
2018
2017
(in thousands)
47,097 $
35,243
7,842
90,182 $
32,118
36,081
8,055
76,254
$
$
$
$
June 30,
2018
2017
$
(in thousands)
17,601 $
2,121
906
556
227
761
5,749
960
670
$
29,551 $
591
1,129
621
421
148
1,356
—
—
617
4,883
Land
Building
Manufacturing machinery and equipment
Equipment and tooling
Computer equipment and software
Office furniture and equipment
Leasehold improvements
Land use rights
Less: accumulated depreciation
Equipment and construction in progress
Property, plant and equipment, net
June 30,
2018
2017
$
(in thousands)
4,877 $
4,325
265,192
16,605
25,686
2,314
29,900
9,089
357,988
(225,184)
132,804
198,852
$
331,656 $
4,877
4,325
215,275
13,549
24,346
1,935
29,136
8,849
302,292
(194,882)
107,410
40,781
148,191
Total depreciation expense was $29.2 million , $27.2 million and $27.3 million for fiscal year 2018 , 2017 and 2016 , respectively.
The gross amount of computer software recorded under capital leases was $8.2 million and $8.2 million and the related accumulated depreciation was $7.3
million and $6.5 million , respectively, at June 30, 2018 and 2017 .
The Company capitalized $ 0.3 million , $ 0.2 million and 0.2 million of software development costs for fiscal year 2018 , 2017 and 2016 , respectively.
Amortization of capitalized software development costs was $ 0.6 million in each of the fiscal year 2018 , 2017 and 2016 , respectively. Unamortized capitalized
software development costs in each of the periods presented
at June 30, 2018 and 2017 were $ 0.7 million and $ 1.1 million , respectively.
There is no private land ownership in China. Individuals and companies are permitted to acquire land use rights for specific purpose. 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.
Other long-term assets
Prepayments for property and equipment
Investments in privately held companies
Prepaid income tax
Lease financing costs
VAT long-term receivable
Customs deposit
Other long-term deposits
Office leases deposits
Other
June 30,
2018
2017
(in thousands)
17,599 $
700
—
1,922
3,396
1,589
2,252
853
387
28,698 $
12,964
700
4,377
—
—
1,118
—
490
216
19,865
$
$
84
Intangible assets, net
Patents and technology rights
Trade name
Customer relationships
Less: accumulated amortization
Goodwill
Intangible assets, net
June 30,
2018
2017
(in thousands)
17,633 $
268
1,150
19,051
(2,729)
16,322
269
16,591 $
1,248
268
1,150
2,666
(2,653)
13
269
282
$
$
The carrying value of goodwill was $0.3 million for fiscal years 2018, 2017 and 2016.
Intangible assets of patents and technology rights 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 , and $0.2 million in calendar year 2017, 2018 and
2019, respectively. As of June 30, 2018 , the Company recorded $15.8 million of intangible assets related to STMicro. The Company begins amortizing such
license fees when the technology has met the Company's qualification.
Amortization expense for intangible assets was $76,000 , $2,000 and $2,000 for the years ended June 30, 2018 , 2017 and 2016 , respectively.
Future minimum amortization expense of intangible assets is as follows (in thousands):
Year ending June 30,
2019
2020
2021
2022
2023
Thereafter
$
$
113
113
113
113
39
2
493
85
Accrued liabilities
Accrued compensation and benefits
Warranty accrual
Stock rotation accrual
Accrued professional fees
Accrued inventory
Accrued facilities related expenses
Accrued financing lease costs
Accrued property, plant and equipment
Other accrued expenses
June 30,
2018
2017
(in thousands)
18,484 $
535
1,750
1,922
667
2,163
1,510
18,145
4,665
49,841 $
$
$
The activity in the warranty accrual, included in accrued liabilities is as follows:
Beginning balance
Addition
Released
Utilization
Ending balance
2018
Year Ended June 30,
2017
(in thousands)
$
$
1,866 $
(147)
(1,000)
(184)
535 $
1,495 $
1,476
(580)
(525)
1,866 $
The activity in the stock rotation accrual, included in accrued liabilities is as follows:
13,727
1,866
1,871
2,500
410
1,501
—
2,241
4,270
28,386
2016
Beginning balance
Addition
Utilization
Ending balance
Deferred margin
Deferred margin consists of the following:
Deferred revenue
Deferred costs
Deferred margin
2018
Year Ended June 30,
2017
(in thousands)
2016
$
$
1,871 $
2,714
(2,835)
1,750 $
1,988 $
4,819
(4,936)
1,871 $
June 30,
2018
2017
$
$
(in thousands)
2,555 $
(890)
1,665 $
1,232
(418)
814
86
1,957
881
—
(1,343)
1,495
1,894
6,578
(6,484)
1,988
5. Bank borrowings
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 Chinese Renminbi
(RMB) 400.0 million , or $62.8 million based on the currency exchange rate between RMB and U.S. Dollars 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 will be 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. In addition, the Company made an additional
$25.0 million of cash contribution to the JV Company in August 2018. The Agreements also contain customary events of default, including but are 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. As of June 30, 2018, the outstanding balance of the Lease Financing of 400 million RMB (equivalent of $60.4 million
based on the currency exchange rate as of June 30, 2018) was recorded under capital lease liability.
Capital leases
Capital lease liabilities include the following:
Financing lease
Computer software
Exclusive technology rights
Less: current portion
Capital leases - long-term portion
June 30,
2018
2017
(in thousands)
60,416 $
843
23
61,282
(4,491)
56,791 $
—
1,650
44
1,694
(828)
866
$
$
The computer software and exclusive technology rights under capital leases were included in property, plant and equipment and intangible assets,
respectively.
Future minimum lease payments at June 30, 2018 are as follows (in thousands):
Year ending June 30,
2019
2020
2021
2022
2023
Thereafter
Total minimum lease payments
Less amount representing interest
Total capital lease liabilities
87
$
$
7,837
14,753
18,467
17,563
12,731
—
71,351
(10,069)
61,282
On May 1, 2018, Jireh entered into a loan agreement with the Bank that provided a term loan in an 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, including AOS US. The loan has a five-year term and matures on June
1, 2023. Beginning June 1, 2018, Jireh shall make consecutive monthly payments of principal and interest to the Bank. The outstanding principal shall accrue
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 is in compliance with these covenants.
As of June 30, 2018, the outstanding balance of the term loan was $17.7 million .
On August 15, 2017, Jireh entered into a credit agreement with a financial institution (the “Bank”) that provided a term loan in an amount up to $30.0
million for the purpose of purchasing certain equipment for our fabrication facility located in Oregon. The obligation under the credit agreement is secured by
substantially all assets of Jireh and guaranteed by the Company, including the Company's subsidiary, Alpha and Omega Semiconductor Incorporated ("AOS US").
The credit agreement has a five -year term and matures on August 15, 2022. In January 2018 and July 2018, Jireh drew down on the loan in the amount of $13.2
million and $16.7 million , respectively. Beginning in September 2018, Jireh is required to pay to the Bank on each payment date, the outstanding principal
amount of the loan in monthly installments. The monthly loan interest is based on an adjusted London Interbank Offered Rate ("LIBOR") as defined in the credit
agreement, plus 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 is in compliance with these covenants. As of June 30, 2018 , the outstanding balance of the term loan was $13.2
million .
At June 30, 2018, maturities of Jireh debt were as follows (in thousands):
Year ending June 30,
2019
2020
2021
2022
2023
Thereafter
Total debt, excluding debt issuance costs
Less: debt issuance costs
Total debt, less debt issuance costs
Principal amount
Less: debt issuance costs
Total debt, less debt issuance costs
6. Joint Venture
$
$
3,904
4,177
4,177
4,177
14,440
—
30,875
(278)
30,597
Short-term Debt
Long-term Debt
$
$
3,903 $
(92)
3,811 $
26,972
(186)
26,786
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 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 includes cash contribution from the
Chongqing Funds and contributions of cash, equipment and intangible assets from the Company. As of June 30, 2018, the Company owns 51% , and the
Chongqing Funds own 49% , of the equity interest in the JV Company. 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.
88
The Company began consolidating the financial statements of the JV Company in the quarter ended June 30, 2016. As of June 30, 2018, the Chongqing
Funds contributed $162.0 million of initial capital in cash and the Company contributed cash of $10.0 million 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. The JV Company substantially
completed its assembly and testing and 12-inch wafer fab facilities by the quarter ended June 30, 2018. The Company expects to commence small mass production
for assembly and testing in the second half of calendar year 2018, and the 12-inch wafer fabrication trial production of power semiconductors toward the end of
calendar year 2018.
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
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, approximately $58.3 million and $19.7 million in calendar year 2017 and 2018, respectively. The payment may be subject to volatility as a
result of exposure to fluctuations in RMB foreign exchange rates. As of June 30, 2018 , the JV Company paid approximately $66.4 million (RMB 439.5 million ),
and expects to pay the remaining of $15.2 million (RMB 100.5 million ) in fiscal year 2019.
The changes in total stockholders' equity and noncontrolling interest were as follows (in thousands):
Total AOS Stockholders'
Equity
Noncontrolling Interest
Total Equity
Balance, June 30, 2017
Exercise of common stock options and release of RSUs
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
Repurchase of common shares under shares repurchase program
Stock-based compensation expense
Net income (loss)
Deferred tax asset related to ASU 2016-06 adoption
Cumulative translation adjustment
Contributions from noncontrolling interest
Balance, June 30, 2018
7. Shareholders' Equity
Common Shares
$
270,770 $
1,544
91
(2,363)
3,321
(15,098)
11,412
14,263
(5,480)
134
—
$
278,594 $
89
27,779 $
—
—
—
—
—
—
(9,315)
—
110
128,994
147,568 $
298,549
1,544
91
(2,363)
3,321
(15,098)
11,412
4,948
(5,480)
244
128,994
426,162
On November 8, 2017, the shareholders of the Company approved the Company to increase the authorized number of common shares from 50,000,000 shares
to 100,000,000 shares with par value of $0.002 . Each common share is entitled to one vote. The holders of common shares are also entitled to receive dividends
whenever funds are legally available and when and if declared by the board of directors in accordance with the Company's Bye-laws. No dividends had been
declared as of June 30, 2018 .
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 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 stock-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 fiscal year 2017, the Company did not repurchase any shares pursuant to the repurchase program. During fiscal years 2018, and 2016 , the Company
repurchased an aggregate of 950,046 shares and 4,695,499 shares, respectively, from the open market for a total cost of approximately $15.1 million and $41.8
million, excluding fees and related expenses, at an average price of $15.86 and $8.90 per share, respectively.
As of June 30, 2018 , the Company had repurchased an aggregate of 6,673,139 shares for a total cost of $65.8 million, at an average price of $9.87 per share,
excluding fees and related expenses, since inception of the program. No repurchased shares have been retired. Of the 6,673,139 repurchased shares, 132,728 shares
with a weighted average repurchase price of $10.50 per share, were reissued at an average price of $5.81 per share for option exercises and vested restricted stock
units ("RSU"). As of June 30, 2018 , $14.9 million remain available under the share repurchase program.
8. Share-based Compensation
2009 Share Option/Share Issuance Plan
The 2009 Share Option/Share Issuance Plan (the “2009 Plan”), as approved in September 2009 at the annual general meeting of shareholders, and as
amended and restated in connection with the Company's IPO, authorized the board of directors to grant incentive share options, non-statutory share options and
restricted shares to employees, directors, and consultants of the Company and its subsidiaries for up to 1,250,000 common shares. The number of common shares
available for issuance under the 2009 Plan shall automatically increase in January each calendar year during the term of the 2009 Plan, beginning with calendar
year 2011, by the lesser of 3% of the total number of common shares outstanding or 750,000 shares. This increase was 717,251 shares, 707,830 shares and 668,915
shares for the years ended June 30, 2018 , 2017 and 2016 , respectively. As of June 30, 2018 , 3,027,708 shares were available for grant under the 2009 Plan.
The 2009 Plan is divided into three incentive compensation programs: Discretionary Grant Program, Share Issuance Program and Automatic Grant Program.
Under the Discretionary Grant Program, eligible individuals may be granted options to purchase common shares and share appreciation rights tied to the value of
the Company's common shares. Under the Share Issuance Program, eligible individuals may be issued common shares pursuant to restricted share awards,
restricted share units, performance shares or other share-based awards which vest upon the attainment of pre-established performance milestones or the completion
of a designated service period. Beginning with the 2014 Annual Shareholders Meeting, on the date of each annual shareholders meeting, each individual who
commences service as a non-employee Board member by reason of his or her election to the Board at such annual meeting and each individual who is to continue
to serve as a non-employee Board member, whether or not that individual is standing for re-election to the Board at that particular annual meeting, will
automatically be granted an award in the form of restricted share units ("RSU") covering that number of common shares determined by dividing ninety-five
thousand dollars ( $95,000 ) by the average fair market value per share for the ninety (90)-day period preceding the grant date.
Under the 2009 Plan, incentive share options and RSU are to be granted at a price that is not less than 100% and nonstatutory share options are to be granted
at not less than 85% of the fair value of the common shares, at the date of grant for employees and consultants. Options and RSUs generally vest over a four -year
to five -year period, and are exercisable for a maximum period of ten years after the date of grant. Incentive share options granted to shareholders who own more
than 10%
90
of the outstanding shares of all classes of shares of the Company at the time of grant must be issued at an exercise price not less than 110% of the fair value of the
common shares on the date of grant.
A summary of the stock option activities under the 2009 Plan is as follows:
Weighted
Average
Number of
Exercise Price
Weighted
Average
Remaining
Contractual
Aggregate
Shares
Per Share
Term (in years)
Intrinsic Value
2,836,217 $
— $
(666,445) $
(310,512) $
1,859,260 $
— $
(693,393) $
(112,500) $
1,053,367 $
— $
(166,389) $
— $
886,978 $
886,975 $
886,561 $
10.77
—
8.36
12.34
11.37
—
11.76
12.72
10.98
—
11.00
—
10.97
10.97
10.98
4.64
$
1,746,173
4.71
$
5,681,783
4.43
$
959,257
4.03 $
4.03 $
4.03 $
3,557,248
3,557,234
3,555,092
Outstanding at June 30, 2015
Granted
Exercised
Canceled or forfeited
Outstanding at June 30, 2016
Granted
Exercised
Canceled or forfeited
Outstanding at June 30, 2017
Granted
Exercised
Canceled or forfeited
Outstanding at June 30, 2018
Options vested and expected to vest
Exercisable at June 30, 2018
The aggregate intrinsic value for options outstanding at June 30, 2018 in the table above is based on the Company’s common stock closing price on June 30,
2018 .
Information with respect to stock options outstanding and exercisable as of June 30, 2018 is as follows:
Range of Exercise Prices
$7.21 - $7.21
$7.44 - $7.44
$7.56 - $9.90
$10.50 - $15.00
$17.90 - $18.00
$7.21 - $18.00
Options Outstanding
Weighted-Average
Remaining
Contractual Life
(Years)
Number
Outstanding
Options Exercisable
Weighted-Average
Exercise Price
Number
Exercisable
Weighted-Average
Exercise Price
6,875
331,139
195,150
188,814
165,000
886,978
5.58 $
5.71 $
4.71 $
2.27 $
1.83 $
4.03 $
7.21
7.44
8.93
13.29
17.99
10.97
6,875 $
331,139 $
194,733 $
188,814 $
165,000 $
886,561 $
7.21
7.44
8.93
13.29
17.99
10.98
The fair value of RSU, including time-based restricted stock units and performance-based restricted stock units is based on the market price of the Company's
share on the date of grant.
Time-based Restricted Stock Units ("TRSU")
91
The following table summarizes the Company's TRSU activities:
Nonvested at June 30, 2015
Granted
Vested
Forfeited
Nonvested at June 30, 2016
Granted
Vested
Forfeited
Nonvested at June 30, 2017
Granted
Vested
Forfeited
Nonvested at June 30, 2018
Number of
Restricted Stock
Units
Weighted Average
Grant Date Fair
Value Per Share
873,946
466,255
(301,695)
(105,443)
933,063
446,719
(364,567)
(40,850)
974,365
482,397
(468,051)
(69,688)
919,023
$
$
$
$
$
$
$
$
$
$
$
$
$
8.64
11.28
10.97
8.85
9.18
18.26
8.34
12.74
13.51
16.46
13.24
14.25
15.14
Weighted Average
Remaining
Recognition
Period (Years)
Aggregate Intrinsic
Value
1.77 $
7,638,288
1.73 $
12,997,568
1.68 $
16,244,748
1.62 $
13,086,888
Performance-based Restricted Stock Units ("PRSU")
During fiscal year 2018 and 2017, the Company granted 298,000 and 170,000 PRSUs to its certain personnel. The number of shares to be ultimately earned
under the PRSU is determined based on the level of attainment of predetermined financial goals. The PRSU vests in four equal annual installments from the first
anniversary date after the grant date if certain predetermined financial goals were met. During fiscal year 2018, 153,000 shares related to PRSUs granted in fiscal
year 2017 were earned, and no shares related to PRSUs granted in fiscal year 2018 were earned. The Company recorded approximately $1.9 million and $0.5
million of expenses for these PRSUs during the years ended June 30, 2018 and 2017 , respectively.
The following table summarizes the Company's PRSU activities:
Nonvested at June 30, 2016
Granted
Vested
Forfeited
Nonvested at June 30, 2017
Granted
Vested
Forfeited
Nonvested at June 30, 2018
Employee Share Purchase Plan
Number of Performance-
based Restricted Stock
Units
Weighted Average
Grant Date Fair
Value Per Share
—
170,000
$
—
—
170,000
298,050
(38,247)
(7,503)
422,300
$
$
$
$
$
—
17.58
—
—
17.58
16.22
17.58
17.26
16.63
Weighted Average
Remaining
Recognition
Period (Years)
Aggregate Intrinsic
Value
—
—
2.21 $
2,833,900
2.06 $
6,013,552
The Employee Share Purchase Plan (“Purchase Plan” or “ESPP”) was established in May 2010 upon the completion of the Company's IPO. The Purchase
Plan provided for a series of overlapping offering periods with a duration of 24 months, with new offering periods, generally beginning on May 15 and
November 15 of each year. The Purchase Plan allows employees to purchase common shares through payroll deductions of up to 15% of their eligible
compensation. Such deductions will accumulate over a six-month accumulation period without interest. After such accumulation period, common shares will be
purchased at a price equal to 85% of the fair market value per share on either the first day of the offering period or the last date of the accumulation period,
whichever is less. The maximum number of shares that may be purchased on any
92
purchase date may not exceed 875 shares for a total of 3,500 shares per a 24 -month offering period. In addition, no participant may purchase more than $25,000
worth of common stock in any one calendar year period.
The Company initially reserved 600,000 common shares for issuance under the ESPP. The share reserve will automatically increase in January of each
calendar year during the term of the ESPP, beginning with calendar year 2011, by the lesser of 0.75% of the outstanding common shares or 250,000 shares. This
increase was 179,313 shares, 176,957 shares and 167,229 shares for the years ended June 30, 2018 , 2017 and 2016 , respectively.
The ESPP is compensatory and results in compensation expense. The fair values of common shares to be issued under the ESPP were determined using the
Black-Scholes option pricing model with the following assumptions:
Volatility rate
Risk-free interest rate
Expected term
Dividend yield
2018
42.1% - 45.3%
1.4% - 2.6%
1.3 years
—%
Year Ended June 30,
2017
39.1% - 44.7%
0.6% - 1.3%
1.3 years
—%
2016
32.2% - 34.8%
0.3% - 0.9%
1.3 years
—%
The weighted-average estimated fair value of employee stock purchase rights granted pursuant to the ESPP during the years ended June 30, 2018 , 2017 and
2016 was $5.81 , $6.11 and $2.85 per share, respectively.
Share-based Compensation Expenses
The total share-based compensation expense related to stock options, ESPP, TRSU and PRSUs described above, recognized in the consolidated statements of
operations for the years presented was as follows:
Cost of goods sold
Research and development
Selling, general and administrative
2018
Year Ended June 30,
2017
(in thousands)
2016
$
$
1,641 $
1,855
7,916
11,412 $
1,041 $
1,361
4,232
6,634 $
636
1,115
2,562
4,313
Total unrecognized share-based compensation expense as of June 30, 2018 was $15.0 million including estimated forfeitures, which is expected to be
recognized over a weighted-average period of 1.6 years.
9. Employee Benefit Plans
The Company maintains a 401(k) retirement plan for the benefit of qualified employees in the U.S. Employees who participate may elect to make salary
deferral contributions to the plan up to 100% of the employees' eligible salary subject to annual Internal Revenue Code maximum limitations. The employer's
contribution is discretionary. The Company had not made any contributions for eligible employees as of June 30, 2018 .
The Company makes mandatory contributions for its employees to the respective local governments in terms of retirement, medical insurance and
unemployment insurance, where applicable, according to labor and social security laws and regulations of the countries and areas in which the Company operates.
The retirement contribution rate is 7.7% in the U.S., 12.0% to 20.0% in China, and 6.0% in Taiwan. The Company has no obligations for the payment of such
social benefits beyond the required contributions as set out above.
93
10. Income Taxes
The provision for income taxes is comprised of:
U.S. federal taxes:
Current
Deferred
Non-U.S. taxes:
Current
Deferred
State taxes, net of federal benefit:
Current
Total provision for income taxes
Year Ended June 30,
2018
2017
2016
(in thousands)
$
$
55 $
(1,943)
1,043 $
(325)
2,898
(298)
(4,615)
7,548
(4)
1
708 $
3,652 $
152
650
3,382
(169)
6
4,021
The reconciliation of the federal statutory income tax rate to our effective income tax rate is as follows (in percentage):
United States statutory rate
State taxes, net of federal benefit
Stock-based compensation
Foreign taxes, net
Research and development credit
Non-deductible expenses
U.S. Tax Act deferred tax re-measurement
Other
The domestic and foreign components of income before taxes are:
U.S. operations
Non-U.S. operations
Income before income taxes
Year Ended June 30,
2018
2017
2016
28.1 %
—
(1.4)
39.5
(17.1)
7.0
(44)
0.4
12.5 %
34.0 %
—
(0.4)
(0.7)
(4.9)
0.2
—
0.1
28.3 %
34.0 %
0.4
(0.4)
440.3
(69.3)
1.7
—
(0.1)
406.6 %
Year Ended June 30,
2018
2017
2016
$
$
4,219 $
1,437
5,656 $
(in thousands)
4,016 $
8,896
12,912 $
4,259
(3,270)
989
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and liabilities are as follows:
94
Deferred tax assets:
Accrued compensation
Net operating loss carryforwards
Depreciation
Tax credits
Capitalized Costs
Accruals and reserves
Total deferred tax assets
Valuation allowance
Total deferred tax assets, net of valuation allowance
Deferred tax liabilities:
Depreciation and amortization
Accruals and reserves
Total deferred tax liabilities
Net deferred tax assets
The breakdown between deferred tax assets and liabilities is as follows:
Long-term deferred tax assets
Long-term deferred tax liabilities
Net deferred tax assets
June 30,
2018
2017
(in thousands)
$
2,121 $
7,213
10,968
8,380
2,292
1,197
32,171
(17,163)
15,008
(10,819)
(10)
(10,829)
4,179 $
2,322
1,509
4,533
6,309
412
1,038
16,123
(6,178)
9,945
(7,979)
(31)
(8,010)
1,935
June 30,
2018
2017
(in thousands)
4,892 $
(713)
4,179 $
4,594
(2,659)
1,935
$
$
$
During the quarter ended September 30, 2016, the Company fulfilled its obligations to contribute 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 is amortized to tax expense over the useful life of the assets. 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.
At June 30, 2018 and 2017 , the Company provided a valuation allowance for its state research and development credit carryforward deferred tax assets of
$4.4 million and $3.3 million , respectively, as it generated more state tax credits each year than it can utilize. The Company intends to maintain a partial valuation
allowance equal to the state research and development credit carryforwards. Furthermore, the Company provided a valuation allowance mainly for the net
operating loss, fixed asset and intangible asset related to deferred tax assets of the JV Company totaling $12.8 million and $2.9 million as of June 30, 2018 and
2017 , respectively. The Company intends to maintain a valuation allowance equal to the JV Company’s net deferred tax assets until sufficient positive evidence
exists to support reversal of the valuation allowance.
At June 30, 2018 , the Company had federal net operating loss and research and development tax credit carryforwards of approximately $19.3 million and
$3.8 million , respectively. The federal net operating losses do not expire and the tax credits begin to expire in 2032 , if not utilized. At June 30, 2018 , the
Company had no state net operating loss carryforwards and had tax credit carryforwards of approximately $5.7 million . Approximately $0.5 million of the state
tax credits begin to expire in 2019, if not utilized. The remaining $5.2 million of the state tax credits carryforward indefinitely. At June 30, 2018 , the JV Company
had $21.0 million of net operating loss carryforwards which begin to expire in 2021, if not utilized.
95
The Company has not provided for withholding taxes on the undistributed earnings of its foreign subsidiaries because it intends to reinvest such earnings
indefinitely. As of June 30, 2018 , the cumulative amount of undistributed earnings of its foreign entities considered permanently reinvested is $118.6 million . The
determination of the unrecognized deferred tax liability on these earnings is not practicable. Should the Company decide to remit this income to its Bermuda parent
company in a future period, its provision for income taxes may increase materially in that period.
A reconciliation of the beginning and ending amount of unrecognized tax benefits from July 1, 2015 to June 30, 2018 is as follows:
Balance at beginning of year
Additions based on tax positions related to the current year
Reductions based on tax positions related to prior years
Reductions due to lapse of applicable statute of limitations
Balance at end of year
Year Ended June 30,
2018
2017
2016
$
$
(in thousands)
6,589 $
6,743 $
721
(11)
(156)
401
(4)
(551)
7,143 $
6,589 $
6,412
388
—
(57)
6,743
At June 30, 2018 , the total unrecognized tax benefits of $7.1 million included $6.3 million of unrecognized tax benefits that have been netted against the
related deferred tax assets. The remaining $0.8 million of unrecognized tax benefits was recorded within long-term income tax payable on the Company's
consolidated balance sheet as of June 30, 2018 .
The total unrecognized tax benefits of $7.1 million at June 30, 2018 included $4.4 million that, if recognized, would reduce the effective income tax rate in
future periods. It is reasonably possible that the Company will recognize approximately $0.2 million reduction to its uncertain tax positions during the next twelve
months.
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. To the extent accrued interest and penalties do not
ultimately become payable, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision in the period that such determination
is made. The amount of interest and penalties accrued at June 30, 2018 was $0.1 million , of which $(0.01) million was recognized in the year ended June 30, 2018
. The amount of interest and penalties accrued at June 30, 2017 was $0.1 million , of which $(0.1) million was recognized in the year ended June 30, 2017 .
The Company files its income tax returns in the United States and in various foreign jurisdictions. The tax years 2001 to 2018 remain open to examination by
U.S. federal and state tax authorities. The tax years 2011 to 2018 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. 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.
On July 27, 2015, in Altera Corp. v. Commissioner, the U.S. Tax Court issued an opinion related to the treatment of stock-based compensation expense in an
intercompany cost-sharing arrangement. A final decision has yet to be issued by the Tax Court due to other outstanding issues related to the case. At this time, the
U.S. Department of the Treasury has not withdrawn the requirement to include stock-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 the Tax Court’s decision being overturned upon appeal, the
Company has not recorded any benefit as of June 30, 2018. The Company will continue to monitor ongoing developments and potential impacts to its financial
statements.
96
Table of Contents
11. Segment and Geographic Information
The Company is organized as, and operates in, one operating segment: the design, development and supply of power semiconductor products for computing,
consumer electronics, communication and industrial applications. The chief operating decision-maker is the Chief Executive Officer. The financial information
presented to the Company's Chief Executive Officer is on a consolidated basis, accompanied by information about revenue by customer and geographic region, for
purposes of evaluating financial performance and allocating resources. The Company has one business segment, and there are no segment managers who are held
accountable for operations, operating results and plans for products or components below the consolidated unit level. Accordingly, the Company reports as a single
operating segment.
The Company sells its products primarily to distributors in the Asia Pacific region, who in turn sell these products to end customers. Because the Company's
distributors sell their products to end customers which may have global presence, revenue by geographical location is not necessarily representative of the
geographical distribution of sales to end user markets.
The revenue by geographical location in the following tables is based on the country or region in which the products were shipped to:
Hong Kong
China
South Korea
United States
Other countries
The following is a summary of revenue by product type:
Power discrete
Power IC
Packaging and testing services
Year Ended June 30,
2018
2017
2016
(in thousands)
340,178 $
315,223 $
71,213
1,061
5,658
3,443
59,360
1,505
4,037
3,212
290,555
37,444
1,960
3,110
2,592
421,553 $
383,337 $
335,661
2018
Year Ended June 30,
2017
(in thousands)
342,148 $
288,788 $
67,083
12,322
82,389
12,160
421,553 $
383,337 $
2016
252,063
69,344
14,254
335,661
$
$
$
$
Long-lived assets, consisting of property, plant and equipment and land use rights, net by geographical area are as follows:
China
United States
Other countries
June 30,
2018
2017
(in thousands)
248,003 $
83,040
613
331,656 $
85,691
61,787
713
148,191
$
$
97
Table of Contents
12. Restricted Net Assets
Laws and regulations in China permit payments of dividends by the Company's subsidiaries in China only out of their retained earnings, if any, as determined
in accordance with China accounting standards and regulations. Each China subsidiary is also required to set aside at least 10% of its after-tax profit, if any, based
on China accounting standards each year to its statutory reserves until the cumulative amount of such reserves reaches 50% of its registered capital. As a result of
these China laws and regulations, the Company's China subsidiaries are restricted in their abilities to transfer a portion of their net assets to the Company. As of
June 30, 2018 and 2017 , such restricted portion amounted to approximately $279.6 million and $140.1 million, or 65.6% and 51.7% , of our total consolidated net
assets, respectively. As the Company's China subsidiaries are not revenue generating operating units, the Company does not expect to repatriate funds in the form
of dividends, loans or advances from its China subsidiaries for working capital and other funding purposes.
13. Commitments and Contingencies
Operating lease obligations
The Company leases its office facilities and certain office equipment under non-cancelable operating leases that expire through 2026. Rent expense related to
the Company's operating leases was $3.8 million , $3.4 million and $3.5 million for the fiscal years ended June 30, 2018 , 2017 and 2016 , respectively. Certain
leases contain escalation clauses calling for increased rents.
Future minimum lease payments of these leases at June 30, 2018 are as follows:
Year ending June 30,
2019
2020
2021
2022
2023
Thereafter
Operating
Leases
(in thousands)
3,967
3,329
1,031
468
432
567
9,794
$
$
Purchase commitments
As of June 30, 2018 and 2017 , the Company had approximately $38.0 million and $25.7 million , respectively, of outstanding purchase commitments
primarily for purchases of semiconductor raw materials, wafers, spare parts and packaging and testing services.
As of June 30, 2018 and 2017 , the Company had approximately $58.3 million , primarily for the JV Company, and $69.2 million , respectively, of capital
commitments for the purchase of property and equipment.
Contingencies and indemnities
The Company is currently not a party to any material legal proceedings. The Company has in the past, and may from time to time in the future, becomes
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 thereof or could suffer adverse effects on its operations.
The Company is a party to a variety of agreements that it contracted with various 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
98
claim. Further, the Company's obligations under these agreements maybe limited in time and/or amount, and in some instances, the Company may have recourse
against third parties for certain payments made by it under these agreements. The Company has not historically paid or recorded any material indemnifications and
no accrual was made at June 30, 2018 and 2017 .
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.
Joint Venture
In March 2016, the Company executed the JV Agreement with the Chongqing Funds to form a joint venture for the construction of a new state-of -the-art
power semiconductor packaging, testing and wafer fabrication facility in Liangjiang New Area of Chongqing. The Company expects to commence initial
packaging production upon the achievement of specified milestones as set forth in the JV Agreement, including certain construction and funding milestones.
In January 2017, 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 total price payable by the JV Company under the EPC
Contract is approximately $78.0 million , which consists of $2.8 million of design fees and $75.2 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, approximately
$58.3 million and $19.7 million in calendar year 2017 and 2018, respectively. As of June 30, 2018 , the JV Company paid approximately $66.4 million , and
expects to pay the remaining of $15.2 million in fiscal year 2019.
Environmental matters
The Company is subject to various federal, state, local, and foreign laws and regulations governing environmental
matters, including the use, handling, discharge, and disposal of hazardous materials. The Company believes that it has been in material compliance with applicable
environmental regulations and standards. Complying with current laws and regulations has not had a material adverse effect on the Company’s financial condition
and results of operations. However, it is possible that additional environmental issues may arise in the future, which the Company cannot currently predict.
99
14. Subsequent Event
In August 2017, Jireh entered into a credit agreement with a financial institution that provided a term loan in an amount up to $30.0 million for the purpose
of purchasing certain equipment for our fabrication facility located in Oregon. The obligation under the credit agreement is secured by substantially all assets of
Jireh and guaranteed by the Company. The credit agreement has a five -year term and matures on August 15, 2022. In January 2018, Jireh drew down on the loan
in the amount of $13.2 million . In July 2018, Jireh drew down the remaining of the loan in the amount of $16.7 million .
In March 2016, the Company entered into a joint venture contract 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 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 includes cash contribution 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 in
the JV Company. In August 2018, the Company invested additional $25.0 million of cash contribution to the JV Company, which resulted in the Company owning
54% , and the Chongqing Funds owning 46% , of the equity interest in the JV Company effective as of August 2018.
100
ALPHA AND OMEGA SEMICONDUCTOR LIMITED (PARENT COMPANY BASIS)
CONDENSED UNCONSOLIDATED BALANCE SHEETS
(in thousands, except par value per share)
SCHEDULE I
ASSETS
June 30,
2018
2017
Current assets:
Cash and cash equivalents
Accounts receivable - Intercompany
Other current assets
Total current assets
Property, plant and equipment, net
Other long-term assets
Investment in subsidiaries
Total assets
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable and accrued liabilities
Total liabilities
Equity:
Preferred shares, par value $0.002 per share:
Authorized: 10,000 shares; issued and outstanding: none at June 30, 2018 and 2017
Common shares, par value $0.002 per share:
Authorized: 100,000 shares; issued and outstanding: 30,400 shares and 23,860 shares at June 30, 2018 and
29,600 shares and 23,992 shares at June 30, 2017
Treasury shares at cost; 6,540 shares at June 30, 2018 and 5,608 shares at June 30, 2017
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
$
$
$
4,738 $
3,937
362
9,037
343
339
417,185
426,904 $
742 $
742
—
61
(64,790)
220,244
440
122,639
278,594
147,568
426,162
$
426,904 $
12,717
18,253
402
31,372
806
100
267,193
299,471
922
922
—
59
(49,836)
206,332
306
113,909
270,770
27,779
298,549
299,471
The accompanying notes to Schedule I are an integral part of these financial statements.
101
ALPHA AND OMEGA SEMICONDUCTOR LIMITED (PARENT COMPANY BASIS)
CONDENSED UNCONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
SCHEDULE I
Revenue
Cost of revenue
Gross profit
Operating expenses:
Selling, general and administrative
Total operating expenses
Operating loss
Interest income
Income (loss) on equity investment in subsidiaries
Net income (loss) including noncontrolling interest
Net loss attributable to noncontrolling interest
Year Ended June 30,
2018
2017
2016
$
4,096 $
—
4,096
3,772 $
—
3,772
4,479
4,479
(383)
7
5,324
4,948
(9,315)
3,938
3,938
(166)
20
9,406
9,260
(4,569)
Net income (loss) attributable to Alpha and Omega Semiconductor Limited
$
14,263 $
13,829 $
The accompanying notes to Schedule I are an integral part of these financial statements.
102
3,345
—
3,345
3,438
3,438
(93)
7
(2,946)
(3,032)
(104)
(2,928)
ALPHA AND OMEGA SEMICONDUCTOR LIMITED (PARENT COMPANY BASIS)
CONDENSED UNCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
SCHEDULE I
Net income (loss) including noncontrolling interest
Other comprehensive loss, net of tax
Foreign currency translation adjustment
Comprehensive income (loss)
Noncontrolling interest
Comprehensive income (loss) attributable to Alpha and Omega Semiconductor Limited
Year ended June 30,
2018
2017
2016
4,948 $
9,260 $
(3,032)
244
5,192
(9,205)
(1,012)
8,248
(5,118)
14,397 $
13,366 $
(135)
(3,167)
(103)
(3,064)
$
$
The accompanying notes to Schedule I are an integral part of these financial statements.
103
ALPHA AND OMEGA SEMICONDUCTOR LIMITED (PARENT COMPANY BASIS)
CONDENSED UNCONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
SCHEDULE I
Cash flows from operating activities
Net income (loss) including noncontrolling interest
$
4,948 $
9,260 $
(3,032)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Year Ended June 30,
2018
2017
2016
Depreciation
Share-based compensation expense
Equity in net (income) loss of subsidiaries
Other
Changes in assets and liabilities:
Accounts receivable - intercompany
Other current assets
Accounts payable and accrued liabilities
Net cash provided by (used in) operating activities
Cash flows from investing activities
Purchase of property and equipment
Investment in subsidiaries
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
Payment for repurchase of common shares
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
464
503
(5,324)
—
14,316
(199)
(182)
14,526
—
(10,000)
(10,000)
(2,363)
4,956
(15,098)
(12,505)
(7,979)
12,717
469
428
(9,406)
33
(4,868)
(134)
256
(3,962)
—
—
—
(2,071)
10,699
—
8,628
4,666
8,051
Cash and cash equivalents at end of year
$
4,738 $
12,717 $
The accompanying notes to Schedule I are an integral part of these financial statements.
104
545
190
2,946
—
25,620
23
174
26,466
(67)
—
(67)
(1,036)
7,371
(42,080)
(35,745)
(9,346)
17,397
8,051
ALPHA AND OMEGA SEMICONDUCTOR LIMITED (PARENT COMPANY BASIS)
NOTES TO THE CONDENSED UNCONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
Alpha and Omega Semiconductor Limited is the parent company of all Alpha and Omega Semiconductor subsidiaries. It was incorporated in Bermuda on
September 27, 2000 as an exempted limited liability company. The address of its registered office is Clarendon House, 2 Church Street, Hamilton HM 11,
Bermuda.
The accompanying condensed parent company financial statements have been prepared in accordance with Rule 12-04, Schedule I of Regulation S-X, as the
restricted net assets of its subsidiaries exceed 25% of the consolidated net assets of Alpha and Omega Semiconductor Limited and its subsidiaries (the
“Company”).
The parent company records its investment in subsidiaries under the equity method of accounting. Such investment is presented on the balance sheet as
"Investment in subsidiaries" and the subsidiaries' net income (loss) are recognized based on the effective shareholding percentage as income on equity investment
in subsidiaries on the statement of operations. Intercompany balances and transactions have not been eliminated. The revenue recorded represents intercompany
administrative service fees charged by the parent company starting in fiscal year 2013.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or
omitted. The footnote disclosures contain supplemental information relating to the operations of the Company and, as such, these statements should be read in
conjunction with the notes to the consolidated financial statements of the Company.
2. Restricted net assets of subsidiaries
For a discussion of the Company’s restricted net assets of subsidiaries, see Note 12 of the Company’s consolidated financial statements.
3. Commitments and contingencies
In March 2016, the Company executed the JV Agreement with the Chongqing Funds to form a joint venture for the construction of a new state-of -the-art
power semiconductor packaging, testing and wafer fabrication facility in Liangjiang New Area of Chongqing. The Company expects to commence initial
packaging production as soon as the required milestones, including certain construction and funding milestones, have been met, and there is no assurance that we
can meet these milestones in a timely manner.
In January 2017, 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 total price payable by the JV Company under the EPC
Contract is approximately $78.0 million , which consists of $2.8 million of design fees and $75.2 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, approximately
$58.3 million and $19.7 million in calendar year 2017 and 2018, respectively. As of June 30, 2018 , we had paid approximately $66.4 million , and expects to pay
the remaining of $15.2 million in fiscal year 2019.
For a discussion of the Company’s commitments and contingencies, see Note 13 to the Company’s consolidated financial statements.
105
June 30, 2015
Additions
Reductions
June 30, 2016
Additions
Reductions
June 30, 2017
Additions
Reductions
June 30, 2018
ALPHA AND OMEGA SEMICONDUCTOR LIMITED
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
SCHEDULE II
Allowance
for Doubtful
Allowance
for Price
Allowance
for Deferred
Accounts
Adjustments
Tax Assets
$
30 $
19,438 $
—
—
30
—
—
30
—
—
90,967
(93,705)
16,700
113,970
(111,071)
19,599
124,694
(125,391)
$
30 $
18,902 $
2,700
194
—
2,894
3,284
—
6,178
10,985
—
17,163
106
(b) Index to Exhibits:
Number
Description
3.1
3.2
3.3
4.1
10.1
10.2
10.3(+)
10.4(+)
10.5(+)
10.6(+)
10.7††
10.8††
10.9††
10.10††
10.11
10.12††
10.13††
Memorandum of Association of Registrant (incorporated by reference to Exhibit 3.1 from Registration Statement on Form
F-1 (File No. 333-165823) filed with the Commission on March 31, 2010)
Amended and Restated Bye-laws of Registrant (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-
K filed with the Commission on November 12, 2015)
Amendment No. 1 to Amended and Restated Bye-Laws of Registrant (incorporated by reference to Exhibit 3.1 to the
Current Report on Form 8-K filed with the Commission on November 14, 2017)
Form of Common Share Certificate (incorporated by reference to Exhibit 4.2 from Registration Statement on Form F-1
(File No. 333-165823) filed with the Commission on March 31, 2010)
2000 Share Plan (incorporated by reference to Exhibit 10.1 from Registration Statement on Form F-1 (File No. 333-
165823) filed with the Commission on March 31, 2010)
Form of Option Agreement under 2000 Share Plan (incorporated by reference to Exhibit 10.2 from Registration Statement
on Form F-1 (File No. 333-165823) filed with the Commission on March 31, 2010)
2009 Share Option/Share Issuance Plan (incorporated by reference to Exhibit 10.3 from Registration Statement on Form F-
1 (File No. 333-165823) filed with the Commission on March 31, 2010)
Form of Option Agreement under 2009 Share Plan (incorporated by reference to Exhibit 4.4 from Annual Report on Form
20-F (File No. 001-34717) filed with the Commission on September 2, 2010)
Form of Restricted Share Unit Issuance Agreement under 2009 Share Plan (incorporated by reference to Exhibit 4.5 from
Annual Report on Form 20-F (File No. 001-34717) filed with the Commission on September 2, 2010)
Employee Share Purchase Plan (incorporated by reference to Exhibit 10.15 from Registration Statement on Form F-1 (File
No. 333-165823) filed with the Commission on March 31, 2010)
Foundry Agreement dated as of January 10, 2002 between the Registrant and Shanghai Hua Hong NEC Electronics
Company, Limited (incorporated by reference to Exhibit 10.16 from Registration Statement on Form F-1 (File No. 333-
165823) filed with the Commission on March 31, 2010)
First Addendum to Foundry Agreement dated as of July 28, 2005 between the Registrant and Shanghai Hua Hong NEC
Electronics Company, Limited (incorporated by reference to Exhibit 10.17 from Registration Statement on Form F-1 (File
No. 333-165823) initially filed with the Commission on March 31, 2010)
Second Addendum to Foundry Agreement dated as of April 11, 2007 between the Registrant and Shanghai Hua Hong NEC
Electronics Company, Limited (incorporated by reference to Exhibit 10.18 from Registration Statement on Form F-1 (File
No. 333-165823) filed with the Commission on March 31, 2010)
Foundry Service Agreement dated as of November 2, 2009 between Alpha & Omega Semiconductor (Macau), Ltd. and
Shanghai Hua Hong NEC Electronics Company, Limited (incorporated by reference to Exhibit 10.6 from Registration
Statement on Form F-1 (File No. 333-165823) filed with the Commission on March 31, 2010)
Non-Exclusive Distributor Agreement dated as of July 27, 2010 between Alpha & Omega Semiconductor (Hong Kong)
Limited and Frontek Technology Corporation (incorporated by reference to Exhibit 4.17 from Annual Report on Form 20-
F (File No. 001-34717) filed with the Commission on September 2, 2010)
Supplement to Non-Exclusive Distributor Agreement dated as of July 27, 2010 between Alpha & Omega Semiconductor
(Hong Kong) Limited and Frontek Technology Corporation (incorporated by reference to Exhibit 4.18 from Annual Report
on Form 20-F (File No. 001-34717) filed with the Commission on September 2, 2010)
First Amendment of Supplement to Distribution Agreement dated as of April 21, 2011 between Alpha & Omega
Semiconductor (Hong Kong) Limited and Frontek Technology Corporation(incorporated by reference to Exhibit 10.15
from Annual Report Form 10-K (File No. 001-34717) filed with the Commission on September 9, 2011)
107
10.14
10.15
10.16††
10.17††
10.18
10.19
10.20
10.21(+)
10.22(+)
10.23(+)
10.24
10.25(+)
10.26(+)
10.27(+)
10.28(+)
10.29(+)
10.30(+)
Supplement to Distribution Agreement dated as of July 27, 2010 between the Registrant and Frontek Technology
Corporation (incorporated by reference to Exhibit 10.1 from Quarterly Report on Form 10-Q (File No. 001-34717) filed
with the Commission on February 6, 2015)
Non-Exclusive Distributor Agreement dated as of July 27, 2010 between Alpha & Omega Semiconductor (Hong Kong)
Limited and Promate Electronic Co., Ltd. (incorporated by reference to Exhibit 4.19 from Annual Report on Form 20-F
(File No. 001-34717) filed with the Commission on September 2, 2010)
Supplement to Non-Exclusive Distributor Agreement dated as of July 27, 2010 between Alpha & Omega Semiconductor
(Hong Kong) Limited and Promate Electronic Co., Ltd. (incorporated by reference to Exhibit 4.20 from Annual Report on
Form 20-F (File No. 001-34717) filed with the Commission on September 2, 2010)
First Amendment of Supplement to Distribution Agreement dated as of April 21, 2011 between Alpha & Omega
Semiconductor (Hong Kong) Limited and Promate Electronic Co., Ltd. (incorporated by reference to Exhibit 10.18 from
Annual Report Form 10-K (File No. 001-34717) filed with the Commission on September 9, 2011)
Supplement to Distribution Agreement dated as of July 27, 2010 between the Registrant and Promate Electronic Co., Ltd
(incorporated by reference to Exhibit 10.2 from Quarterly Report on Form 10-Q (File No. 001-34717) filed with the
Commission on February 6, 2015)
Lease dated as of December 23, 2009 between Alpha and Omega Semiconductor Incorporated and OA Oakmead II, LLC
(incorporated by reference to Exhibit 10.19 from Registration Statement on Form F-1 (File No. 333-165823) filed with the
Commission on March 31, 2010)
Guarantee dated as of January 5, 2010 between the Registrant and OA Oakmead II, LLC (incorporated by reference to
Exhibit 10.20 from Registration Statement on Form F-1 (File No. 333-165823) filed with the Commission on March 31,
2010)
Form of Employment Agreement between the Registrant and Mike F. Chang (incorporated by reference to Exhibit 10.13
from Registration Statement on Form F-1 (File No. 333-165823) filed with the Commission on March 31, 2010)
Form of Retention Agreement (incorporated by reference to Exhibit 10.14 from Registration Statement on Form F-1 (File
No. 333-165823) filed with the Commission on March 31, 2010)
Form of Restricted Shares Purchase Agreement (incorporated by reference to Exhibit 10.21 from Registration Statement
on Form F-1 (File No. 333-165823) filed with the Commission on March 31, 2010)
Third Addendum to Foundry Agreement dated as of March 6, 2012 by and among the Registrant and Shanghai Hua Hong
NEC Electronics Company, Limited (incorporated by reference to Exhibit 10.34 from Annual Report on Form 10-K (File
No.: 001-34717) filed with the Commission on August 31, 2012)
Amended Form of Restricted Share Unit Issuance Agreement (incorporated by reference to Exhibit 10.35 from Annual
Report on Form 10-K (File No.: 001-34717) filed with the Commission on August 31, 2012)
Summary of Fiscal Year 2014 Executive Incentive Plan (incorporated by reference to Exhibit 10.34 from Annual Report
on Form 10-K (File No: 001-34717) filed with the Commission on August 30, 2013)
Form of Director's Share Option Agreement under the Automatic Grant Program (incorporated by reference to Exhibit
10.1 from Quarterly Report on Form 10-Q (File No: 001-34717)filed with the Commission on November 6, 2013)
Amendment to Automatic Grant Program for Non-Employee Directors under the 2009 Share Option/Share Issuance Plan
(incorporated by reference to Exhibit 10.2 from Quarterly Report on Form 10-Q (File No: 001-34717) filed with the
Commission on May 9, 2014)
Form of Restricted Share Unit Agreement (incorporated by reference to Exhibit 10.3 from Quarterly Report on Form 10-Q
(File No: 001-34717) filed with the Commission on May 9, 2014)
Summary of Fiscal Year 2015 Executive Incentive Plan (incorporated by reference to Exhibit 10.39 from Annual Report
on Form 10-K (File No. 001-34717) filed with the Commission on August 29, 2014)
108
10.31††
10.32 (+)
10.33 (+)
10.34 (+)
10.35††
10.36††
10.37(+)
10.38*†
10.39*†
21.1*
23.1*
31.1*
31.2*
32.1*
32.2*
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
Joint Venture Contract on Incorporation of Chongqing Alpha and Omega Semiconductor Limited, dated as of March 29,
2016, among the Registrant, certain subsidiaries of the Registrant, Chongqing Strategic Emerging Industry Equity
Investment Fund Partnership (LP), and Chongqing Liangjiang New Area Strategic Emerging Industry Equity Investment
Fund Partnership (LP) (English Translation) (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form
10-Q (File No. 001-34717) filed with the Commission on May 10, 2016)
Alpha and Omega Semiconductor Limited Calendar Year 2016 Executive Incentive Plan (incorporated by reference to
Exhibit 10.2 to the Quarterly Report on Form 10-Q (File No. 001-34717) filed with the Commission on May 10, 2016)
Form of Indemnification Agreement (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q (File
No. 001-34717) filed with the Commission on February 9, 2017)
Alpha and Omega Semiconductor Limited 2017 Executive Incentive Cash Bonus Plan (incorporated by reference to
Exhibit 10.1 to the Quarterly Report on Form 10-Q (File No. 001-34717) filed with the Commission on May 4, 2017)
Engineering, Procurement and Construction Contract dated January 10, 2017 between Chongqing Alpha and Omega
Semiconductor Limited and The IT Electronics Eleventh Design & Research Institute Scientific and Technological
Engineering Corporation Limited (the “EPC Contract”) (English Translation) (incorporated by reference to Exhibit 10.2 to
the Quarterly Report on Form 10-Q (File No. 001-34717) filed with the Commission on May 4, 2017)
Amendment No. 1 to EPC Contract effective as of January 10, 2017 (English Translation) (incorporated by reference to
Exhibit 10.3 to the Quarterly Report on Form 10-Q (File No. 001-34717) filed with the Commission on May 4, 2017)
Alpha and Omega Semiconductor Limited Amended and Restated 2017 Executive Incentive Plan (incorporated by
reference to Exhibit 10.1to the Current Report on Form 8-K filed with the Commission on November 21, 2017)
Financing Lease Contract, dated May 9, 2018, by and between Chongqing Alpha and Omega Semiconductor Limitedand
Chongqing YinHai Financing Lease Co., Ltd. (English Translation)
Real Estate Mortgage Contract, dated May 14, 2018, by and between Chongqing Alpha and Omega Semiconductor
Limitedand the Export-Import Bank of China (English Translation)
List of Subsidiaries of the Registrant
Consent of Grant Thornton LLP, independent registered public accounting firm of Registrant
Certification of Chief Executive Officer required by Rule 13(a)-14(a) under the Exchange Act
Certification of Chief Financial Officer required by Rule 13(a)-14(a) under the Exchange Act
Certification of Chief Executive Officer required by Rule 13a-14(b) under the Exchange Act and Section 1350 of Chapter
63 of Title 18 of the United States Code
Certification of Chief Financial Officer required by Rule 13a-14(b) under the Exchange Act and Section 1350 of Chapter
63 of Title 18 of the United States Code
XBRL Instance
XBRL Taxonomy Extension Schema
XBRL Taxonomy Extension Calculation
XBRL Taxonomy Extension Definition
XBRL Taxonomy Extension Labels
XBRL Taxonomy Extension Presentation
* Filed with this Annual Report on Form 10-K.
109
† Confidential treatment has been requested for certain information in this exhibit. Such information has been omitted and filed separately with the Securities and
Exchange Commission.
†† Confidential treatment has been granted for certain information contained in this document pursuant to an order of the Securities and Exchange Commission.
Such information has been omitted and filed separately with the Securities and Exchange Commission.
(+) Indicates management contract or compensatory plan or arrangement.
110
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its
SIGNATURES
behalf by the undersigned, thereunto duly authorized.
August 23, 2018
ALPHA AND OMEGA SEMICONDUCTOR LIMITED
By:
/s/ MIKE F. CHANG
Mike F. Chang
Chief Executive Officer
(Principal Executive Officer)
111
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS , that each person whose signature appears below constitutes and appoints Mike F. Chang and Yifan
Liang, and each or any one of them, his or her true and lawful attorney-in-fact and agent, with full power of substitution and re-substitution, for him or her and in
his or her name, place and stead, in any and all capacities, to sign any and all amendments to this report, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or
she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his or her substitutes or
substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
Signature
/s/ MIKE F. CHANG
Mike F. Chang, Ph.D.
Title
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
Date
August 23, 2018
/s/ YIFAN LIANG
Chief Financial Officer and Corporate Secretary
August 23, 2018
Yifan Liang
(Principal Financial Officer and Principal Accounting Officer)
/s/ YUEH-SE HO
Director and Chief Operating Officer
August 23, 2018
Yueh-Se Ho, Ph.D.
/s/ LUCAS S. CHANG
Director
Lucas S. Chang
/s/ ROBERT I. CHEN
Director
Robert I. Chen
/s/ KING OWYANG
Director
King Owyang
/s/ MICHAEL L. PFEIFFER
Director
Michael L. Pfeiffer
/s/ MICHAEL J. SALAMEH
Director
Michael J. Salameh
112
August 23, 2018
August 23, 2018
August 23, 2018
August 23, 2018
August 23, 2018
NOTE: Portions of this Exhibit are the subject of a Confidential Treatment Request by the Registrant to the Securities and
Exchange Commission (the “Commission”). Such portions have been redacted and are marked with a “[***]” in the place of
the redacted language. The redacted information has been filed separately with the Commission.
Exhibit 10.38
AOS Confidential
Financing Lease Contract
(Sale and Leaseback)
Contract No: YZ(2018) 0401
Lessor (Party A): Chongqing Yinhai Financing Lease Co., Ltd.
Lessee (Part B): Chongqing Alpha and Omega Semiconductor Limited
Date of Signing: May 9, 2018
Place of Signing: Yubei, Chongqing
WHEREAS:
(1) For the purpose of the Financing Lease between the Lessor and the Lessee, the Lessor will purchase the leased items owned by
the Lessee from the Lessee and lease it back to the Lessee for use.
(2) According to relevant laws and regulations of the People's Republic of China, both parties voluntarily enter into this Financing
Lease Contract by consensus.
Part 1 Commercial Terms
Parties
Lessor:
Chongqing Yinhai
(hereinafter referred to as “Party A”)
Financing Lease Co.,
Ltd.
Legal Representative: Pang Xianwei
Registered Address: No. 2, 3/F, Tower A, Haiwangxing
Technology Building, No. 62 Xingguang Road, North
New District, Chongqing
Lessee: [Chongqing Alpha and Omega Semiconductor Limited]
(hereinafter referred to as "Party B")
Legal Representative: [MIKE FUSHING CHANG]
Registered Address: [No.5-407, Yuhan Avenue, Shuitu High-
tech Industrial Park, Beibei District, Chongqing]
No.
Name of Leased Items
Seller Name
Specifications and
Models
Invoice No. Quantity
Unit
Price
Total Price
Assessed
Value
Leased items (see Annex I List of Leased Items for Details)
leased items use location: No.5-407, Yuhan Avenue, Shuitu High-tech Industrial Park, Beibei District, Chongqing
Assessed Value of the Leased Items
(can be Omitted If Assessment is
Exempted)
In figures: ¥ [***]. In words: [***]
Lease Conditions
Lease Funds
(Purchase Price of the Leased Items)
In figures: ¥ [475,000,000.00]. In words: [RMB four hundred and seventy-five million]
*** CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION
1 / 30
Down Payment of the Rents
Lease Principal
Lease Rate of Interest
Purchase Price
Term of Lease
In figures: ¥ [75,000,000.00]. In words: [RMB seventy-five million]. Party B shall
deliver a one-off down payment of rents to Party A or a third party designated by Party
A before May 11, 2018 .
In figures: ¥ [400,000,000.00]. In words: [RMB four hundred million]
[5.4625]% (15% over the benchmark interest rate for the same period), floated interest
rate [√], fixed interest rate [/]
In figures: ¥ [1.00]. In words: [RMB one]
60 months in total, starting from the Lease Commencement Date
Purpose of Funds
Operation
Payment of Rents
Payment Method of the Rents
Pay interest on a quarterly basis and the total is 20 periods. The grace periods of repayment of
principal are from 1 st period to 3 rd period. The proportion of repayment of principal of each
period is 3% of the actual investment amount from the 4 th to 7 th period, 6.75% of the actual
investment amount from the 8 th to 19 th period, and 7% of the actual investment amount for
the 20 th period. If the project is to be invested by stages, the rent payment method shall be
determined in accordance with this principle.
Rent Payable for Each Period
For details, please refer to Annex II Rent Payment Estimates
Accounts for Payment Collection of the Parties
Information of Party A's account for payment collection:
Bank: Chongqing Branch of China Export-Import Bank
Account Name: Chongqing Yinhai Financing Lease Co., Ltd.
Account No.: 2100000100000237876
Information of Party B 's account for payment collection:
Bank: Chongqing Branch of China Export-Import Bank
Account Name: Chongqing Alpha and Omega Semiconductor
Limited
Account No.:
Security Method (All Security Methods are Listed in this Article and can be Added)
Guarantee
Mortgage
Pledge
/
/
/
Insurance
2 / 30
Insurance Type
All-Risk Property Insurance
Policyholder
Beneficiary
Insured Period
Insured Amount
Insurance
Premium
Entity to Assume the Premium
Party B
Party A or any third party designated by Party A
Cover the entire lease period
Cover at least the lease principal
Subject to the approved amount of the insurance company
Party B
Contact Information
Party A’s contact information:
Contact: Liu Ying
Tel.: 18623457667
E-mail: 2851719785@qq.com
Fax: 023-67680191
Address: No. 2, 3/F, Tower A, Haiwangxing Technology Building, No.
62 Xingguang Road, North New District, Chongqing
Party B’s contact information:
Contact: Yang Liyan
Tel.: 13795368681
E-mail: lyla.yang@cqaos.com
Fax:
Address: No. 117, Yunhan Road, Shuitu Hi-Tech Industrial
Park, Liangjiang New District, Chongqing (Room 205,
Office Building, Administrative Committee of the Park)
Number
Counterparts
of
Contract
This Contract is made in sextuplicate with each party holding two and the rest two of which
remain.
Other
3 / 30
Article 1 Definition
Part 2 General Terms
1.1
Financing Lease: refers to the trading activities that the Lessor, according to the choice or approval of the Lessee regarding the leased items and
supplier, leases the leased items it acquires from the supplier to the Lessee for the Lessee to possess and use according to the contract, and
collects the rents from the Lessee.
1.2
Sale and Leaseback: refers to the type of Financing Lease that the Lessee sells its own items to the Lessor, signs a Financing Lease contract
with the Lessor at the same time, and then rents the items back from the Lessor.
1.3
1.4
1.5
1.6
Lease Commencement Date: refers to the date on which Party A pays Party B the first payment for the purchase price of the leased items.
Lease Funds: refers to the total price that Party A purchases the leased items from Party B.
Down Payment of Rents: refers to the one-off payment for the first-time rent paid by Party B to Party A on the lease commencement date.
Lease Principal: refers to the financing amount actually provided by Party A for Party B after deduction of the Down Payment of Rents from
the Lease Funds.
1.7
Lease Costs: refers to the sum of the contract price, pre-lease interest and grace-period interest paid by Party A for purchase of the leased items,
and other expenses that both Parties agree to count into costs.
1.8
1.9
Lease Interest Rate: refers to the annual interest rate used to calculate the rents within the lease term agreed upon by both Parties.
Interest-Bearing Method: The interest of the lease payments under this Contract is calculated from the Lease Commencement Date (delivery
day of the Lease Funds). The calculation formula of daily accrued interest is: daily accrued interest = balance of the Lease Principal of the day
× Lease Interest Rate/360.
1.10
Lease Term: refers to the lease term agreed in Part 1 of this Contract.
1.11
The Purchase Price refers to the price of the leased items repurchased by Party B after Party B pays off all the rents and other payables
(including the possible overdue interest penalty and economic loss compensation, etc.) in accordance with the provisions of this Contract.
1.12
Overdue Interest: All Overdue Interest under this Contract is calculated based on 0.0005 of the overdue amount.
4 / 30
Article 2 Leased Items
2.1
The leased items as stipulated in this Contract are originally owned by Party B. Party B transfers the leased items to Party A according to the
Contract, and Party A leases back the equipment and other assets used by Party B. The specific content is shown in Annex I List of Leasing
Items.
2.2
Party B guarantees that it has independent, complete and legal ownership of the leased items it transfers to Party A, no mortgage, pledge and
other security rights have been set on the leased items in any way, and there is no priority or any other defect of right.
Article 3 Purchase of the Leased Items
3.1
Party B shall transfer the leased items to Party A in the form of sale and leaseback for the purpose of financing; Party A shall accept the leased
items transferred by Party B according to Party B's above-mentioned purpose and lease it back to Party B for use.
3.2
Party B shall submit to Party A an assessment report of the leased items, a capital verification report of the leased items or the purchase contract
(if any) and the original copy of the invoice (if any) within ten working days after the signing of the Contract.
3.3
The leased items transferred by Party B to Party A shall be deemed to be owned by Party A on the date that Party A pays Party B the first
payment of the Lease Funds in accordance with Article 4 of this Contract. Party B shall issue to Party A the Certificate of Ownership Transfer I
(Lessee to Lessor) (see Annex VII for details) of the leased items within three working days after receiving the first payment of the Lease
Funds. Party B’s failure of issuance will not affect Party A's ownership of the leased items.
3.4
If Party A fails to complete the second payment of the Lease Funds within 10 working days after the first payment of the Lease Funds, Party A
agrees to refund the service charges and security deposit to Party B in full (without interest) after Party B returns Party A's actual payment of
the Lease Funds (without interest) to Party A. In addition, Party A agrees that the ownership of the leased items shall be transferred to Party B
after all the payments of Party A and Party B are returned.
Article 4 Lease Funds and Payment
4.1
4.2
Both Parties agreed that the Lease Funds of the leased items shall be determined in accordance with Part 1 Commercial Terms.
Way of payment of the Lease Funds: Party A and Party B agree to pay in accordance with the following (3 rd ) way upon negotiation:
5 / 30
(1)
One-off payment:
Party A shall pay Party B a lump sum of the Lease Funds within 5 working days after all the payment conditions agreed in this
Contract are satisfied.
(2)
Installments:
Party A shall pay Party B the down payment of the Lease Funds of RMB / within 5 working days after all the payment conditions
agreed in this Contract are satisfied. The remaining Lease Funds shall be paid in installments. The specific payment time and amount shall be: /
.
(3)
Other payment methods: Party A shall pay Party B the down payment of the Lease Funds of RMB 96,000,000.00 (in words: RMB
ninety-six million) within 5 working days after the payment conditions agreed in this Contract are all satisfied; the remaining Lease
Funds is RMB 379,000,000.00 (in words: RMB three hundred and seventy nine million), which shall be paid in full within 10 working
days after the down payment of the Lease Funds and the payment of Party B’s security deposit are paid.
4.3
After all the following conditions of Item (1), (2), (3), (4) and (5) are met, Party A shall pay the down payment of the Lease Funds to Party B in
accordance with the payment method stipulated in Article 4.2 of this Contract. The bank account information designated by Party B for
payment collection is as follows:
Account Name: Chongqing Alpha and Omega Semiconductor Limited
Bank: Chongqing Branch of China Export-Import Bank
Account No.:
(1)
(2)
All contracts required between Party A and Party B on the Financing Lease have been fully signed and become effective;
If Party B or other related parties provide Party A with any guarantee in relation to the performance of obligations of Party B under
this Contract, relevant security contract has been signed and becomes effective, related procedures under the security contract
(including but not limited to notarization, mortgage/pledge registration of the guarantee and insurance etc.) have been completed, and
the asset lists of Party B and the guarantor and other materials have been provided in accordance with Party A's request;
(3)
Party B has remitted the Down Payment of Rents, service charges and other payables payable to Party A under this Contract to bank
account designated by Party A;
6 / 30
(4)
Party B has provided Party A with an assessment report of the leased items, a capital verification report of the leased items or the
purchase contract (if any) and the original copy of the invoice (if any);
(5)
Other conditions: a formal assessment report to acquire the leased items.
4.4
Party B shall use the Lease Funds paid by Party A according to the agreed purpose of both parties, and shall bear the taxes and expenses (if
any) arising from the transfer of the leased items under this Contract.
Article 5 Delivery of the Leased Items and Handling of Quality Defects
5.1
This Contract is a sale-and-leaseback contract. The leased items originally belong to Party B and has been occupied, used, and kept by Party B.
Party A and Party B do not need to go through the procedures for transfer and physical handover of the leased items. After Party A pays Party
B the down payment of the Lease Funds, it is deemed that the leased items are received and accepted by Party B (as the Lessee) in the complete
state. Party B shall issue the Proof of Receipt of the Leased Items to Party A. Party B’s failure to do so will not affect the recognition of the fact
that Party B has received and accepted the leased items upon acceptance check. However, Party B shall not, at any time, object to any of the
accepted leased items on the ground that the Proof of Receipt of the Leased Items has not been issued.
5.2
Any quality issues or any other problems that affect the normal use of the leased items during the term of this Contract shall be the
responsibility of Party B. Party A shall not bear any responsibility. Party B shall not thereby refuse to pay the rents or perform other obligations
agreed in the Contract.
5.3
As Party B has purchased and used the leased items before signing of this Contract, Party B shall bear full responsibility for its own choice and
decision. If the quality, specifications, technical performance and quantity etc. of the goods delivered by the original supplier are not in
conformity with the contract signed by the original supplier and Party B, or any quality problem occurs within the warranty period as stipulated
in the sales contract, Party B shall directly file a claim with the original supplier and Party A shall not bear any responsibility for such issues.
However, Party A may provide Party B with certain assistance within a reasonable range. All costs incurred therefrom shall be borne by Party
B (including but not limited to litigation fees, arbitration fees, property preservation fees, preservation guarantee fees, travel expenses,
implementation fees, assessment fees, auction fees, notary fees, delivery fees, announcement fees and attorney fees, etc.) The results of the
claim are enjoyed by Party B. Regardless of whether Party B can be compensated through the claim, and whether or not the claim is in
progress, Party B's rent payment and other obligations under this Contract will not be affected.
Article 6 Ownership and Public Notification of the Leased Items
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6.1
After Party A pays the down payment of the Lease Funds for the leased items to Party B according to the provisions in this Contract, the owner
of the leased items shall be changed to Party A (such ownership covers the auxiliary items, accessory rights and Fructus etc. of the leased
items). Before all payments due under this Contract are settled, Party B shall guarantee that the proprietary applications, software, licenses and
technical documents of the leased items are in a valid state and that performance and configuration standards (except for normal depreciation
and wear) of the leased items are not lower than the corresponding indicators when this Contract becomes effective.
Party A shall have the right to mark in a conspicuous place on the leased items that the owner of the leased items is Party A, by means
including but not limited to posting signs, painting marks, as well as registration and public announcement in the Unified Registration and
Public Announcement System for Movable Property Financing of the Credit Reference Center of the People's Bank. If any third party claims
rights over the leased items and thus causes legal disputes, Party B shall bear relevant responsibility. If Party A suffers losses thereby, Party B
shall bear the liability of compensation for Party A's reasonable direct economic loss according to law.
6.2
Unless prior written consent from Party A is obtained, Party B shall not transfer, mortgage and pledge the leased items, or use the leased items
for investment in shares and compensation, or establish a lawsuit guarantee over the leased items, or in any way infringe Party A's ownership of
the leased items. If it is really necessary for the leased items to be used by a third party due to the needs of production and operation, the third
person shall be listed as a joint lessee.
6.3
If Party B upgrades the leased items during the lease term, Party B shall bear the cost of the upgrade. The components added to the leased items
that are inseparable from the leased items or are separable, but the separation will lead to functional impairment of the leased items shall be
owned by Party A free of charge. Party B shall guarantee that, before all payables are paid under this Contract, the production performance and
configuration standards of the leased items (except for normal depreciation and wear) owned by Party A shall not be lower than the
corresponding indicators when the Contract takes effect.
6.4
If Party B replaces the parts of the leased items with other replacement parts for maintenance, repair or its use needs during the lease period,
related costs incurred from the replacement shall be borne by Party B. In addition, the replacement parts shall be owned by Party A from the
date of replacement.
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6.5
6.6
The binding of the leased items to other movable assets and real estate will not change Party A's rights over the leased items.
Without prejudice to Party B’s possession and use of the leased items, Party A may mortgage the leased items to a third party as required.
However, Party A shall notify Party B ten working days in advance. Party B is obligated to assist Party A in handling the mortgage and other
related procedures. When Party A transfers the ownership of the leased items to Party B according to this Contract, Party A shall be responsible
for releasing the mortgage within ten working days.
6.7
During the lease period, Party B shall not express or imply its ownership or disposition right over the leased items in any form or allow any
incident that makes other people reasonably think that Party B is the owner.
6.8
Before Party B clears all the debts under this Contract, the ownership of the leased items always belongs to Party A, and anyone except Party A
has no right to dispose of the leased items.
Article 7 Use, Repair and Maintenance of the Leased Items
7.1
Party B owns the right of possession and use of the leased items during the Lease Term. Except for Party B's major breach of contract, Party A
shall not interfere with the legitimate and independent’s possession and use of the leased items of Party B. Otherwise, Party A shall be liable for
the losses caused by Party B. If any third party claims any right to the leased items due to Party A's reasons, Party A shall bear full
responsibility and Party B's rights to use shall not be affected.
7.2
Party B shall properly use and keep the leased items, repair, preserve and maintain the leased items and accessories through regular repairs and
irregular inspections, and bear all expenses incurred therefrom. Any replaced, added, or updated parts, devices and services automatically
become part of the leased items and are owned by Party A free of charge. All repairs and maintenance are included in the lease period. If Party
B is negligent in performing its obligations of repairing and maintaining the leased items, Party A shall be entitled to recover the leased items
from Party B without prejudice to any other claims that Party A may have against Party B under this Contract.
7.3
Party B shall, at the request of Party A, submit to Party A the maintenance schedule and repair records of the leased items so that Party A can
keep abreast of the use conditions of the leased items. Both Parties shall jointly confirm the submission interval and specific format of the
maintenance schedule and repair records within 30 working days after the signing of the Contract.
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7.4
Party B shall use the leased items in strict accordance with the user manual or operation manual of the leased items, shall not assign unqualified
personnel to operate the leased items and shall keep the leased items continuously in a good state of operation.
7.5
Party B shall bear all responsibility for the leased items and any personal injury or property damage caused to any third party by the leased
items during the period of possession and use of the leased items by Party B. Party A shall not bear any responsibility. If Party A suffers any
reasonable and direct economic loss, Party B shall pay full compensation.
7.6
In the event that changes in national policies result in the forced elimination of the leased items during the lease period, Party A has the right to
request Party B to provide equivalent replacement equipment approved by Party A as the leased items of the Contract. If the replacement
equipment is not approved by Party A, Party A has the right to request Party B to make a one-off payment with the following amount within
fifteen working days after receiving the payment notice from Party A:
(1)
Total remaining Lease Principal and interest due (according to actual use period of funds), unpaid service charges (if any) that have
expired and overdue interest (if any);
(2)
(3)
The Purchase Price and other payments (if any) that the Lessee shall make to the Lessor when the lease term expires;
Other payables related to this Contract (including but not limited to litigation fees, arbitration fees, property preservation fees,
preservation guarantee fees, travel expenses, implementation fees, assessment fees, auction fees, notary fees, delivery fees,
announcement fees and attorney fees, etc.) (if any).
7.7
During the lease period, Party A shall have the right to inspect the use and maintenance conditions of the leased items at any time during
normal working hours without affecting the normal use of the leased items by Party B upon written notice (including email) provided ten
working days in advance. Party B shall provide necessary conveniences for the inspections and cooperate with Party A for the inspection of the
leased items.
7.8
During the lease period, Party B shall bear related expenses and losses arising from removal of the leased items from the bonded area.
Article 8 Loss and Damage of the Leased Items
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8.1
Party B shall bear all risks of loss or damage to the leased items. In the event of such damage or loss, Party B’s payment obligations for rents
and other payables and other obligations under this Contract are not affected.
8.2
If any damage or loss of the leased items for a single time exceeds 5% of the Lease Funds of the Contract for any reason during the lease term,
but the damage or loss does not constitute total loss or constructive total loss, Party B shall promptly notify Party A and shall repair the leased
items to the state of normal operation at its own expense. The repair period is included in the lease term. Therefore, Party B shall pay the rent as
agreed in this Contract. Party B shall bear all risks of loss or damage to the leased items, including but not limited to risks within the insurance
scope or other uninsured risks. In the event of such damage or loss, Party B’s payment obligations for rents and other payables and other
obligations under this Contract are not affected.
8.3
If the leased items have actually been fully lost or if constructive total loss is formed based on reasonable judgment during the lease term, Party
B is required to make a one-off payment with the following amount within five working days after receiving the payment notice from Party A.
After Party B pays Party A all the following amounts, Party B's obligations under this Contract are automatically discharged and all the benefits
of the leased items, including those under the insurance contract, are owned by Party B.
(1)
Total remaining Lease Principal and interest due (according to actual use period of funds), unpaid service charges (if any) that have
(2)
(3)
expired, liquidated damages (due to Party B's fault) and overdue interest (if any);
The Purchase Price and other payments (if any) that the Lessee shall make to the Lessor when the lease term expires;
Other payables related to this Contract (including but not limited to litigation fees, arbitration fees, property preservation fees,
preservation guarantee fees, travel expenses, implementation fees, assessment fees, auction fees, notary fees, delivery fees,
announcement fees and attorney fees, etc.) (if any).
Article 9 Contract Term and Lease Commencement Date
9.1
Contract Term: The term of this Contract shall be valid from the effective date of the Contract to Party A's receipt of all rents and other
payables paid by Party B under this Contract. If Party B chooses to purchase the leased items after the lease term expires, the term of this
Contract shall expire on the date that Party B fully pays the Purchase Price of the leased items to Party A and completes the registration of
ownership change of the leased items (if any).
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9.2
Lease Commencement Date: The Lease Commencement Date of the Contract is the date on which Party A pays Party B the down payment of
the Lease Funds.
Article 10 Rent
a)
10.1
Rent and Payment
10.1.1 Party B shall deliver the one-off Down Payment of Rent to Party A or a third party designated by Party A in accordance with the time
stipulated in Part 1 Commercial Terms. Party B shall remit rents to Party A's account on or before the date of payment on the basis of the time
and amount stipulated in Annex II Rent Payment Estimates. If the Rent Payment Estimates is inconsistent with the Actual Rent Payment Table,
the Actual Rent Payment Table shall prevail.
10.2 Rent Calculation and Reasonable Change
10.2.1 The rents consist of the Lease Costs and the lease interest. The Lessor will charge the rents based on the total Lease Costs from the Lease
Commencement Date. The Lease Interest Rate will be determined in accordance with the following B way:
A.
The fixed interest rate remains unchanged during the lease term and will not be adjusted with the changes of the benchmark interest
rates for loan of the People's Bank of China for the same period.
B.
The floating interest rate will be adjusted in proportion to the benchmark interest rates for loan of the People's Bank of China for the
same period.
If a floating interest rate is adopted, Party A shall make a corresponding adjustment to the rent in Annex III Actual Rent
Payment Table within ten working days after the People’s Bank of China announces the adjustment of the loan interest rate for the
same period. In case of interest rate adjustment, the Lease Interest Rate shall be adjusted on the next interest adjustment date after the
date of interest rate adjustment (the dates of interest adjustment are March 21, June 21, September 21 and December 21 of each year),
and the previous rents remain unchanged. Party A informs Party B with Annex IV Rent Adjustment Notice and Party B agrees to this
change. The Rent Adjustment Notice is an integral part of this Contract. The actual rent adjustment date shall be subject to the Rent
Adjustment Notice issued by Party B in accordance with the format of Annex IV.
10.2.2 With respect to the rents overdue by Party B, adjustments shall be made based on the new interest rates in case of raised interest rates or
according to the original interest rates in case of lowered interest rates, regardless of any type of interest rate (fixed interest rate or floating
interest rate) selected.
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10.2.3 Party B's obligation to pay rents under this Contract is absolute and unconditional, and is not affected or deducted for any reason, including but
not limited to the quality defects of the leased items, unusable leased items, and loss or damage of the leased items.
Article 11 Lease Service Charges, Security Deposit and Other Expenses
11.1
Lease service charges: After Party A collects the lease service charges from Party B, the lease service charges will not be refunded unless the
Contract is cancelled due to Party A's fault.
11.2
Lease Security Deposit
11.2.1 In order to ensure that the rent is paid in full and on time and other obligations are performed under this Contract, Party B shall deposit the
lease security deposit into the bank account designated by Party A within seven working days after signing of this Contract in accordance with
Part 1 Commercial Terms of this Contract.
11.2.2 Party A will refund the full amount of the lease security deposit to Party B within seven working days after Party B make all the payments in
accordance with this Contract. When Party A refunds the lease security deposit, only the principal will be refunded and no interest will accrue.
11.2.3 Within ten working days after Party A’s written notification, if Party B fails to perform its payment obligations under this Contract, Party A is
entitled to use the lease security deposit to offset the amounts that Party B shall pay to Party A in accordance with the order of other payables,
overdue interest, liquidated damages, rents payable, service charges and Purchase Price. After the above offset, Party B shall promptly make up
the lease security deposit according to Party A's notice. If Party B fails to do so, Party A is entitled to make up for the lease security deposit
with the rents subsequently paid by Party B.
11.3
Other fees that Party B shall pay to Party A: None .
Article 12 Insurance of the Leased Items
12.1
During the lease period, if Party A has corresponding requirements, Party B shall insure the leased items for Party A as the insured and the
beneficiary with the full amount of property insurance and its additional insurance accepted by Party A, and make them valid for the duration of
the Contract (if the leased items can only be insured in phases in accordance with relevant regulations of the insurance industry, Party B shall
complete the renewal of the insurance 10 working days before expiration of the insurance period). In addition, the insurance amount shall cover
the principal and
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interest of the lease, and the insurance premium shall be borne by Party B. Party B shall provide Party A with insurance payment documents
and vouchers at the request of Party A.
12.2
If Party B fails to insure the leased items or renew the insurance on time according to Party A's request, Party A shall have the right to insure
the leased items or renew the insurance on behalf of Party B. Party B shall bear the costs incurred. If Party A pays for the insurance fees, Party
A shall have the right to seek repayment from Party B and collect interest at the rate of 0.0005 of the amount from the date of Party A’s
advance payment to the date of repayment by Party B. If Party B fails to promptly repay Party A's advance payment within ten working days
after Party A's written notification in accordance with this Contract, Party A shall be entitled to deduct it from the lease deposit. In the process
of insuring the leased items, Party B shall truthfully inform the insurance company in writing of the financing lease relationship between Party
A and Party B and the fact that Party A is the sole owner of the leased items.
12.3
If Party B insures the leased items according to the requirements of Party A under this Contract, the original insurance copy of the policy shall
be handed over by Party B to Party A for keeping. After the original insurance policy is submitted to Party A, Party B and the insurance
company shall not change the insurance terms without Party A’s prior written consent.
12.4
After the occurrence of any insurance accident, Party B must immediately notify Party A and the insurance company to handle loss assessment
and damage claim. Party B shall provide all necessary documents and take all necessary measures so that Party A can receive insurance
compensation. If Party B fails to cooperate with Party A to handle the damage claim and causes Party A’s failure to obtain compensation from
the insurance company, Party B shall bear reasonable direct economic losses.
12.5
After the occurrence of any insured accident, Party B shall take reasonable measures to reduce the loss or avoid further loss. If Party B fails to
promptly notify Party A or fails to take reasonable remedial measures, Party B shall bear corresponding responsibilities and compensate Party
A for reasonable direct economic losses suffered thereby.
12.6
(12.7)Party B shall ensure that the insurance coverage and amount are sufficient to cause the actual amount paid by the insurance company to
be not less than the total amount of all payments payable by Party B under this Contract (including all remaining interest of the Lease Principal
and service charges) in the event that the entire leased items suffer total loss or constructive total loss.
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12.7
(12.8)When any insured accident occurs, all insurance compensation shall be paid to Party A and handled in the following manner:
(1)
If the accident does not constitute a total loss of the leased items and Party B does not default on rent or other payables, the insurance
compensation shall be used to compensate Party B for the expenses incurred in repairing the leased items under Article 8; if Party B
has arrears of rent or other payables, the insurance compensation shall be used to offset the payment that Party B shall pay to Party A.
If Party A’s insurance compensation is insufficient to pay the aforesaid amounts, Party B still has the obligation to make up for the
insufficiency of Party A, including but not limited to the compensation that the insurance company refuses to pay or insufficiency of
compensation. In case of any surplus after the offset, the remaining portion shall be paid to Party B.
(2)
If the accident constitutes a total loss of the leased items, the insurance compensation shall be used to offset the payment of Party A
payable by Party B under Article 8.3. If Party A’s insurance compensation is insufficient to pay the aforesaid amount, Party B still has
the obligation to make up for the insufficiency of Party A, including but not limited to the compensation that the insurance company
refuses to pay or insufficiency of compensation. In case of any surplus after the offset, the remaining portion shall be paid to Party B.
12.8
(12.9)The risk of damage or loss of the leased items shall be borne by Party B. The occurrence of an insurance accident and whether the
insurance compensation is paid will not constitute a reason for Party B to delay any payment or reduce any payment under this Contract. Party
B shall still perform the obligation of paying rents and other payables in accordance with the provisions of this Contract after the occurrence of
any insurance accident.
Article 13 Representations and Warranties
13.1
Representations and Warranties of Party A
13.1.1 Party A is a professional financing lease company that has been established in accordance with relevant laws and regulations of China and has
been validly subsisting, has qualifications for engaging in financing lease business, and has the qualification and ability to sign and execute this
Contract;
13.1.2 The financing lease business stipulated in this Contract does not exceed the business scope of Party A's articles of association and business
license, and complies with relevant national policies and industry regulations;
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13.1.3 Party A has taken all necessary internal measures for the performance of this Contract and has obtained all the necessary rights and approvals
required for the signing and performance of the Contract. The representative who has signed this Contract has obtained legal authorization.
13.1.4 Party A carefully read all the terms of this Contract, has fully understood the meaning of each clause, and signed this Contract is the expression
of its true meaning;
13.1.5 In terms of exempting or restricting its own responsibilities in the Contract, Party A has taken reasonable steps to bring it to the attention of
Party B and explained the terms to Party B.
13.2
Representations and Warranties of Party B
13.2.1 Party B is a legal person/other organization legally established and validly existing in accordance with relevant laws and regulations of China.
It has the necessary civil capacity and performance capacity to sign and perform this Contract, and can independently bear civil liabilities;
13.2.2 Party B has taken all necessary internal measures and has obtained all the necessary rights and approvals for signing and performance of this
Contract. Their authorized representatives who sign this Contract have obtained legal authorization;
13.2.3 Before this transfer, Party B owns legal, complete and valid ownership of the leased items, and has the right to transfer the leased items to Party
A according to the Contract; Party B guarantees that the leased items are not being seized or detained by judicial or administrative authorities
during the transfer. The leased items or any part of them have not been transferred to any third party in any way and are not bound by third-
party rights (including but not limited to ownership, security interest and usufructuary right, etc.); any contract, rights, and obligations between
Party B and other third parties do not affect the performance effectiveness of this Contract. If any third party claims rights to the leased items
and thereby causes legal disputes, Party B shall bear relevant responsibilities. If Party A suffers losses arising therefrom, Party B shall bear
corresponding liability;
13.2.4 Party B's signing and performance of this Contract will not violate any laws, regulations, articles of association or any contract or agreement
with any third party;
13.2.5 Before the signing of the Contract, Party B guarantees to provide Party A with true and accurate financial statements and asset lists, and
guarantees to fully disclose to Party A the circumstances that involve its assets or rights and may affect the performance of the Contract
including mortgage, pledge, litigation, arbitration and administrative penalty;
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13.2.6 Within the validity period of this Contract, Party B shall submit a set of originals of the following statements and reports to Party A within 15
working days after completing them:
(1)
(2)
(3)
(4)
Annual financial statements;
Half-year financial statements;
Quarterly financial statements;
The year-end audit report issued by the accounting firm.
13.2.7 Before completion of all the obligations of this Contract, Party B shall obtain Party A's written consent in advance if Party B intends to carry
out asset reorganization, equity acquisition, asset transfer and other activities that may affect realization of Party A’s rights and interests;
13.2.8 Party B guarantees that if it involves any major breach of contract, litigation, arbitration, administrative punishment, restrictive measures such
as seizure, detention or freezing of assets, it shall notify Party A in writing within three working days from the date of occurrence of such
events, and shall take corresponding measures to prevent such events from causing adverse effects on Party A's rights and interests;
13.2.9 Party B shall ensure that the leased items are used only for legitimate and rightful commercial purposes and may not be used for any illegal
purpose.
Article 14 Prepayment
14.1
During the lease period, Party B may partially or fully repay the loan in advance if Party A agrees in writing and Party B meets the following
conditions:
(1)
(2)
(3)
(4)
(5)
Party B submits a written application to Party A 60 days in advance;
All service charges due have been paid;
All rents due have been paid;
The Lease Principal not yet due has been paid (applicable to all repayments in advance);
Other payables have been paid.
14.2
Party B may, within five days after Party A agrees, pay Party A a lump sum of all remaining Lease Principal, interest at maturity (calculated
according to the actual life of the funds), due service charges, overdue interest (if any), and liquidated damages (if any) and other payables
(including but not limited to litigation fees, arbitration fees, property preservation fees, preservation guarantee fees, travel expenses,
implementation fees, assessment fees, auction fees, notary fees, delivery fees,
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announcement fees and attorney fees, etc.). Party B shall pay Party A the remaining Purchase Price and other payables. After receiving such
payments, Party A will cooperate with Party B in handling the ownership transfer procedures for the leased items, including but not limited to
issuance of the Certificate of Ownership Transfer II (Lessor to Lessee) to Party B in accordance with the format of Annex VIII. Taxes and fees
(if any) arising from the transfer of ownership of the leased items shall be borne by Party B.
14.3
If Party B makes part of the repayments in advance according to the provisions of this Article, this Contract will continue to be valid. Party A
shall re-adjust the rent payment form for the outstanding principal in accordance with the Rent Adjustment Notice attached to Annex IV of this
Contract and inform Party B in writing. Party B hereby confirms that Party A's above adjustments are binding on it and undertakes to pay rents
to Party A according to the adjusted rent payment form. Party B confirms that its early repayments will not affect Party A's full ownership of
the leased items.
Article 15 Breach of Contract and Remedy
15.1
Party A's Liability for Breach of Contract
Party B owns the right of possession and use of the leased items during the lease term. Except for Party B's major breach of contract,
Party A shall not interfere with the legitimate and independent’s possession and use of the leased items of Party B. Otherwise, Party A shall be
liable for the losses caused to Party B.
15.2
Party B's Liability for Breach of Contract
15.2.1 The occurrence of any of the following circumstances during the lease period shall be deemed as Party B's breach of contract:
(1)
(2)
(3)
Party B fails to pay rents and/or other payables in accordance with the time and amount stipulated in this Contract;
Party B violates the representations and warranties made in this Contract;
Party B violates other terms of this Contract, including but not limited to failure to provide guarantees in accordance with this Contract
and to complete the required registration formalities;
(4)
Party B fails to insure the leased items in accordance with this Contract and fails to perform the obligation of proper use and
maintenance of the leased items, etc.;
(5)
Party B has overdue payment or breach of contract in other contracts signed with Party A or other circumstances that affect Party B's
performance of this Contract;
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15.2.2 In the event of Party B’s breach of Article 15.2.1, Party A has the right to take one or more of the following measures if Party B fails to make
any correction within 10 working days upon Party A’s written notice:
(1)
Require Party B to pay overdue interest. If Party B fails to pay rents and/or other payables on schedule, Party A shall have the right to
request Party B to pay overdue interest from the date of payment of the rents or other payables to the date of actual payment.
Overdue interest is calculated at 0.0005 of the amount payable per day until the full payment date. The overdue amounts shall
be paid out by Party B in the following order: other payables, overdue interest, liquidated damages, rents payable, service
charges and Purchase Price;
(2)
Take other remedies permitted by law.
15.2.3 Where Party B has any behavior indicated in Paragraph (1), (2), (3) and (5) of Article 15.2.1, violates Article 13.2 Representations and
Warranties (except for Article 13.2.6), and makes no correction within fifteen working days after written notice of Party A, it constitutes a
major breach of contract. Party A has the right to take one or more of the following measures:
(1)
Require Party B to pay overdue interest. If Party B fails to pay rents and/or other payables on schedule, Party A shall have the right to
request Party B to pay overdue interest from the date of payment of the rents or other payables to the date of actual payment.
Overdue interest is calculated at 0.0005 of the amount payable per day until the full payment date. The overdue amounts shall
be paid out by Party B in the following order: other payables, overdue interest (if any), liquidated damages (if any), rents
payable, service charges and Purchase Price;
(2)
Require early expiry of rents and request Party B to immediately pay all remaining rents, service charges, overdue interest, liquidated
damages, Purchase Price and other payables (including but not limited to litigation fees, arbitration fees, property preservation
fees, preservation guarantee fees, travel expenses, implementation fees, assessment fees, auction fees, notary fees, delivery
fees, announcement fees and attorney fees, etc.);
(3)
Terminate the Contract, directly recover the leased items without judicial procedure and require Party B to compensate Party A for all
losses. Party A’s losses include but are not limited to Party A’s costs for recovering the leased items, costs of realizing the
leased items and the insufficient part after repayment of all rents, service charges, overdue interest (if any), Purchase Price,
liquidated damages (if any) and all other payables (including but not limited to litigation fees, arbitration fees, property
preservation fees, preservation guarantee fees, travel expenses, implementation fees, assessment fees, auction fees, notary
fees, delivery fees, announcement fees and attorney fees, etc.) with the proceeds of realization of the leased items;
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(4)
(5)
(6)
Take measures to prevent the leased items from malfunction;
Take other remedies permitted by law;
Party A agrees to negotiate with Party B on relevant payment amounts before adopting the measures in Item (2) of this Article. If they
reach a new agreement, they may implement the measures according to the new agreement.
15.2.4 If Party A chooses to rescind the Contract and retrieves the leased items, Party A may request Party B to send the leased items in good
condition to Party A at the time and place indicated by Party A, or Party A appoints personnel to directly enter the place of the leased items to
immediately occupy and transfer them. Party B shall bear the resulting costs and reasonable direct economic losses caused to Party B or any
third party arising from the transfer or recovery of the leased items.
15.2.5 After the leased items is retrieved, Party A can directly dispose of the leased items, select any appraisal agency at its own discretion to appraise
the leased items, and take the appraised price as the price basis for disposal of the leased items; or directly sell the leased items according to the
state of the leased items at the time of recovery. The sales target is any legal person or natural person who needs the leased items. The sales
income is the value of the leased items. Party B agrees and confirms Party A's above-mentioned disposal method for the leased items and
criteria for determining the value of the leased items.
15.2.6 For the proceeds from disposal of the leased items, Party A has the right to make deductions with the proceeds from disposal of the leased
items in the following order:
(1)
All costs and expenses (including but not limited to litigation fees, arbitration fees, property preservation fees, preservation guarantee
fees, travel expenses, implementation fees, assessment fees, auction fees, notary fees, delivery fees, announcement fees and
attorney fees, etc.) incurred by Party A for repossession, transfer, safekeeping, repair or disposal of the leased items or
execution of this Contract.
Any other payables to be paid by Party B to Party A pursuant to this Contract;
Overdue interest, default penalty and service charges that Party B shall pay to Party A in accordance with this Contract and any loss
(2)
(3)
incurred by Party A;
(4)
The total remaining rents that Party B shall pay to Party A according to this Contract;
If the proceeds are not sufficient to cover the above-mentioned payments that Party B shall pay to Party A, Party A shall have the right
to claim the insufficient part from Party B; if the proceeds exceed the above-mentioned payments, Party A shall return the excess amount to
Party B.
20 / 30
15.2.7 If Party A decides not to dispose of the leased items after retrieving them, or needs to determine the value of the leased items in any case, the
value of the leased items shall be determined by Party A at its discretion in any of the following ways. Party B has no objection.
(1)
The appraisal agency entrusted by Party A appraises and determines the value. Relevant expenses thereby incurred shall be borne by
Party B;
(2)
The Party A determines the value through other methods as chosen by Party A.
15.2.8 If the appraisal agency entrusted by Party A appraises and determines the value, relevant expenses thereby incurred shall be borne by Party B;
if Party B does not approve the appraisal results of the appraisal agency entrusted by Party A, Party B may propose to conduct an additional
appraisal of the value of the leased items or require the auction of the leased items. Relevant costs shall be borne by Party B. In the event that
the judicial organ entrusts any appraisal agency to appraise or auction the leased items additionally according to the request of Party B, and the
value of the leased items determined by the appraisal or auction is higher than that determined by Party A through the way it selects according
to the above-mentioned provisions in this Paragraph, Party B shall, within 30 days from the date of determination of the value of the leased
items through additional appraisal or the auction procedure, find out a third party to purchase the leased items from Party A at a price not lower
than the value of the leased items determined by the additional appraisal or auction procedure and to pay for the purchase price in full.
Otherwise, the value determined by Party A shall prevail. For the avoidance of ambiguity, if the buyer of the leased items is determined
through an auction procedure or other means, the purchase price paid by the buyer shall be owned by Party A. Party A shall use it to deduct the
amounts owed by Party B under this Contract.
15.2.9 Party A's adoption of any of the above measures shall not affect Party A's other rights under this Contract. Before Party A takes any of the
above measures and obtains full compensation, Party B will not be released from continuing to perform its obligations under this Contract.
15.2.10 If Party A finds that Party B’s operating conditions deteriorate seriously, or Party B transfers assets to evade repayment of debts, surreptitiously
withdraws funds, or commits fraudulent acts in the performance of this Contract, or has any other circumstances in which Party A believes that
Party B has lost or may lose its ability to perform the Contract, Party B may immediately notify Party B and request Party B to provide a
guarantee approved by Party A within a reasonable period of time. Where Party B fails to do so within the time required by Party A, Party A
can adopt the measures agreed in Article 15.2.2.
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15.2.11 Party A’s adoption of the aforesaid measures does not therefore exempt Party B from its obligations under this Contract. At the same time,
Party B shall bear the expenses incurred by Party A in taking such measures, including but not limited to litigation fees, arbitration fees,
property preservation fees, preservation guarantee fees, travel expenses, implementation fees, assessment fees, auction fees, notary fees,
delivery fees, announcement fees and attorney fees, etc.
15.2.12 If Party A pays the fees that Party B shall pay under this Contract on behalf of Party B, including but not limited to the taxes and fees related to
the leased items, Party B shall reimburse Party A for the fees paid in advance by Party A and shall pay Party A the interest of such fees at the
rate of 0.0005 per day from the date of advance payment made by Party A to the date of repayment made by Party B.
Article 16 Transfer of Contract Rights and Obligations
16.1 Without prejudice to Party B’s possession and use of the leased items, Party A has the right to transfer all or part of the rights and obligations
under this Contract to a third party and has the right to pledge all or part of the rights granted to Party A under this Contract to a third party, or
to mortgage the leased items to a third party. Party A's above transfer/pledge/mortgage does not affect Party B's performance of its obligations
under this Contract. Once Party A's above transfer/pledge/mortgage occurs, Party B shall promptly notify Party B in writing. Party B hereby
confirms that it agrees with Party A’s above transfer/pledge/mortgage and will actively cooperate with Party A’s implementation of the above
transfer/pledge/mortgage.
16.2 Without Party A's prior written consent, Party B shall not transfer any of the rights and obligations under this Contract.
Article 17 Handling of Significant Changes
17.1
Party B shall notify Party A immediately if any of the following circumstances occurs. Party A is entitled to request Party B to provide a valid
guarantee approved by Party A to ensure Party B's performance of its obligations under this Contract. If Party B fails to provide a valid
guarantee approved by Party A, Party A may adopt the remedies agreed in Article 15 of this Contract:
22 / 30
(1)
Party B experiences closure, suspension of business, production suspension, merger, division, bankruptcy and major legal disputes,
etc., or deterioration of business conditions;
(2)
Party B conducts asset reorganization, equity acquisition or transfer/pledge of some or all assets/rights, which may affect the normal
performance of this Contract;
(3)
Party B makes major adjustments to production plans and sales plans, etc. which are sufficient to affect normal production and may
affect Party B’s ability to perform this Contract;
(4)
Except for Party A's reasons, the leased items are frozen, detained, executed, seized or have other conditions affecting their normal
(5)
(6)
operation;
Other major events that may affect the normal performance of the contractual debts;
Party B's failure to notify Party A in accordance with this Article does not affect Party A's immediate adoption of the remedies agreed
in Article 15 of this Contract after it learns the circumstance on its own. However, Party B shall be liable for all losses caused
to Party A due to time delay.
17.2
Changes in Party B’s legal address and legal representative etc. shall not affect the execution of this Contract, but Party B shall promptly notify
Party A in writing.
17.3
If any of the following circumstances occurs when Party B uses the leased items or any project invested with the leased item has any of the
following circumstances, Party B shall immediately terminate the use of the leased items, notify Party A of the situation in writing and correct
it completely within the reasonable period required by Party A:
(1)
(2)
(3)
(4)
Any project invested with the leased items violates the national industrial policy;
The project invested with the leased items fails to obtain the approval procedures and documents approved by Party A;
There are other situations in which the use of the leased items is in violation of the mandatory or restrictive provisions of the law;
If Party B fails to completely correct the above circumstances within a reasonable period of time agreed by both Parties, Party A shall
have the right to unilaterally terminate this Contract, recover the leased items, and request Party B to pay all the remaining
rents, service charges, overdue interest (if any), liquidated damages (if any), Purchase Price, other payables (including but not
limited to litigation fees, arbitration fees, property preservation fees, preservation guarantee fees, travel expenses,
implementation fees, assessment fees, auction fees, notary fees, delivery fees, announcement fees and attorney fees, etc.)
within five days after receiving Party A's written notice, and to make full compensation for all reasonable direct economic
losses.
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17.4
If the leased items are expropriated or required by a government department or damaged or lost due to a third party, the rent payment and other
obligations of Party B under this Contract shall not be affected. When any of such circumstances occurs, Party A is entitled to terminate this
Contract in advance and use the compensation obtained to offset all the remaining rents, service charges, overdue interest, liquidated damages,
Purchase Price and other fees payable by Party B under this Contract. If the compensation received is not sufficient to make up for the
aforementioned amounts payable by Party B, Party B shall be responsible for the insufficient part.
Article 18 Disposal of the Leased Items after Expiry of the Lease Term
18.1
After the lease term expires and Party B completes repayment of all the rents and other payables that it shall pay to Party A under this Contract,
both Parties will handle the leased items in the following (1) manner:
(1)
Party B shall purchase the leased items according to the Purchase Price stipulated in the “present status quo” and Commercial Terms
and obtain the ownership of the leased items. As Party B has always occupied and used the leased items, Party A will make no
statement or guarantee on the then-current performance and status of the leased items.
If Party B intends to purchase the leased items, Party A shall cooperate with Party B in processing the procedures of
ownership transfer of the leased items, including but not limited to issuing a certificate of ownership transfer of the leased items to
Party B, and releasing all the guarantee rights (if any) set up over the leased items for the Financing Lease agreed in the Contract
within 20 working days etc. Relevant taxes and fees arising from the transfer of ownership of the leased items shall be borne by Party
B (if any).
(2)
Renewal of lease: Party B may continue to rent the leased items. The parties shall negotiate the lease renewal issue and sign a written
agreement.
(3)
Return of the leased items: Party B returns the leased items to Party A within 10 days after the expiry of the Contract and guarantees
that the leased items are intact (except for normal wear and tear).
Article 19 Security
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19.1
Party B shall implement the security contract entered into by and between relevant guarantee obligor and Party A in accordance with the
Security Methods stipulated in this Contract, which at the same time shall be taken as the entry-into-force condition for this Contract.
19.2 Where the financial status of the guarantee obligor significantly deteriorates, or the value of the guarantee/pledge may be derogated or lost,
Party B shall provide other guarantee measures approved by Party A separately.
Article 20 Force Majeure
20.1
“Force majeure” refers to the incidents which are beyond the control scope of the Parties to this Contract, unforeseeable, unavoidable or
insurmountable, or render either party hereunder partially or wholly unable to perform this Contract. Such incidents include but are not limited
to earthquakes, typhoons, floods, fires, wars, strikes, riots, government actions, legal provisions or their applicable changes.
20.2 When force majeure occurs, the party affected by force majeure shall promptly notify the other party in writing and take remedial measures to
reduce losses.
20.3
The party affected by force majeure shall provide the other party with details of the force majeure, the report of losses and relevant supporting
documents within seven days from the occurrence of force majeure.
20.4
If a party affected by force majeure fails to perform or delay performance of its obligations under this Contract due to force majeure, it may be
exempted from liability in part or in whole within the influence scope of force majeure. However, force majeure shall not relieve the affected
party of its obligations in accordance with this Contract prior to the occurrence of such events.
20.5
After the force majeure is over or the influence is eliminated, the party affected by force majeure shall notify the other party immediately. The
parties shall continue to perform their contractual obligations after the force majeure is over or the influence is eliminated. At the same time,
the duration of the Contract shall be extended accordingly.
20.6
If the influence of force majeure persists for more than 30 days, resulting in failure of either party to continue to perform the contractual
obligations, either party has the right to notify the other party in writing to terminate the Contract.
Article 21 Information Disclosure
21.1
Party B agrees that Party A has the right to exercise the following actions:
(1)
Party A announces Party B's performance of this Contract on Party A's own website;
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(2)
Party B authorizes Party A to obtain the credit information of Party B and its legal representatives, actual controllers, shareholders,
financial controllers and other credit information of the company or individuals from the Basic Database of Financial Credit
Information of the People's Bank of China and other credit investigation agencies or databases, to report the Party B’s
credit condition of the performance of this Contract to the above-mentioned organizations, and to complete public
announcement and registration of the leased items on the financing lease system of the People's Bank;
(3)
In the event that Party B has overdue payments under the Contract and fails to make any correction within 15 days after Party A’s
written reminder, Party A has the right to disclose Party B’s breaches in the Basic Database of Financial Credit
Information of the People's Bank of China and other credit investigation agencies.
21.2
Party A agrees that Party B has the right to exercise the following actions:
Party B and its shareholders are entitled to publicly disclose the contents of this Contract, its supplementary agreements and related
materials in accordance with relevant applicable laws, regulations as well as rules and management requirements of stock exchanges.
Article 22 Governing Law and Dispute Resolution
22.1
This Contract and its performance are governed by the laws of the People's Republic of China and interpreted in accordance with the laws of
the People's Republic of China.
22.2
Any dispute arising from this Contract or related to this Contract shall be settled by the Parties through friendly negotiation. If the negotiation
fails, the Parties agree to adopt the following (2) way for resolution:
(1)
(2)
Apply to the / Arbitration Committee for arbitration;
File a lawsuit with the local people's court of Party A.
Article 23 Change, Termination and Rescission of the Contract
23.1
Any amendment, addition or change to this Contract shall be made in writing separately and shall take effect after the legal representatives of
Party A and Party B or their authorized agents sign/sign and seal it. The aforementioned amendment, addition or change shall be deemed as an
integral part of this Contract.
23.2
Except as otherwise provided in this Contract, neither party shall rescind or early terminate this Contract without the consent of both Parties.
26 / 30
Article 24 Annexes to the Contract
The annexes to this Contract is an integral part of this Contract and have the same legal effect as this Contract.
Annex I: List of Leasing Items
Annex II: Rent Payment Estimates
Annex III: Actual Rent Payment Table
Annex IV: Rent Adjustment Notice
Annex V: Rent Payment Notice
Annex VI: Notice of Top-Up of the Lease Security Deposit
Annex VII: Certificate of Ownership Transfer I (Lessee to Lessor)
Annex VIII: Certificate of Ownership Transfer II (Lessor to Lessee)
Annex IX: Proof of Receipt of the Leased Items
Annex X: Other Annexes Approved by the Parties
Article 25 Effectiveness of the Contract
25.1
This Contract shall take effect on the date on which the legal representatives of both Parties or their authorized representatives sign/sign and
seal it or affix the official seal to it.
Article 26 Notice and Delivery
26.1
Any notice given by either party to the other party in relation to this Contract must be in writing. If the notice is delivered by hand, it will be
deemed to be served after the addressee signs for receipt. If it is sent by e-mail or fax, it will be deemed to be served at the time of sending; if it
is served by post, it will be deemed to be served after the other party signs for receipt or refuses to sign for receipt. If the address or name is
incorrect or the other party is not notified in writing for any change, the date of indicating the cause for failure to deliver the mail shall be
deemed that the notice has been served. Unless otherwise notified in writing, the Parties shall confirm the addresses for communication
services (see Part 1 Commercial Terms);
26.2
Both Parties confirm that the above-mentioned domiciles of both Parties contained in this Contract is their addresses for delivery of their legal
documents. A written document sent by one party to the other party to the address of the Contract (regardless of whether or not the mail is
rejected or returned for any reason) will be deemed served on the third day after mailing. In case of any change in the address of either party,
the party shall notify the other party in writing of the address change issue and the new address of service on the day of the change of the
address. Before either party delivers
27 / 30
the notice of change of service address to the other party, the written notice sent by the other party to the original address of service of such
party shall be still deemed to be validly served.
Article 27 Special Terms
If the contents agreed in the special terms of this Article conflict with the contents of other terms of this Contract, the special terms
shall prevail:
(1)
Party A shall notify Party B immediately in writing if it confronts any difficulty in raising funds which cannot be predicted. Both
Parties shall, based on changes in specific circumstances, jointly confirm the adjustment plan of the mode and timing of the
funds release, or confirm the suspension and termination of release of the Lease Funds, and guarantee that Parties will not
raise any right claim in this condition.
(2)
If Party B fails to provide Party A with a written proof of receipt of the increased capital of US$25 million from Alpha and Omega
Semiconductor Limited, Party B’s shareholder, within three months from the date of full payment of Party A's Lease Funds,
Party A has the right to request early termination of the Contract and require Party B to make an one-off payment to Party A
for the remaining Lease Principal, Interest Due, due service charges, Overdue Interest (if any), liquidated damages (the
amount of liquidated damage is 5% of the Purchase Price of the leased items paid by Party A), other payables (if any,
including but not limited to litigation fees, arbitration fees, property preservation fees, preservation guarantee fees, travel
expenses, implementation fees, assessment fees, auction fees, notary fees, delivery fees, announcement fees and attorney fees,
etc.). The security deposits and service charges already paid by Party B will not be refunded. In case of any other loss caused
by Party A, Party B shall also bear corresponding liability for compensation.
The Parties confirm hereby that they carefully read all the terms of this Contract, fully understand the meaning of each term, and signing of
this Contract and the annexes is presentation of their true meaning. The Parties accept the terms of exemption or limitation of the
other party’s liabilities in this Contract. The Parties have taken reasonable steps to draw the other party’s attention and explain such
terms.
(No text below)
28 / 30
Party A (Seal): Chongqing Yinhai Financing Lease Co., Ltd.
Legal Representative or Authorized Representative (Signature/Signature and Seal):
By : /s/ Xianwei Pang
Party B (Seal): Chongqing Alpha and Omega Semiconductor Limited
Legal Representative or Authorized Representative (Signature/Signature and Seal):
By: Mike F. Chang
Date: May 9, 2018
29 / 30
Annex I: List of Leased Items
[***]
*** CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION
30 / 30
Annex 2 : Schedule of Estimated Rent Payments
1. Lease Term
Tenancy Term is 60 months, for total 20 payment periods, effective from April 10, 2018.
Due Date
Principal to be Paid
Interests to be Paid
Total Payment
Note
Currency: RMB Unit:Yuan
2018/4/10
2018/6/21
2018/9/21
2018/12/21
2019/3/21
2019/6/21
2019/9/21
2019/12/21
2020/3/21
2020/6/21
2020/9/21
2020/12/21
2021/3/21
2021/6/21
2021/9/21
2021/12/21
2022/3/21
2022/6/21
2022/9/21
2022/12/21
2023/3/21
75,000,000.00
0.00
0.00
0.00
12,000,000.00
12,000,000.00
12,000,000.00
12,000,000.00
27,000,000.00
27,000,000.00
27,000,000.00
27,000,000.00
27,000,000.00
27,000,000.00
27,000,000.00
27,000,000.00
27,000,000.00
27,000,000.00
27,000,000.00
27,000,000.00
28,000,000.00
475,000,000.00
0.00
4,560,000.00
5,826,666.67
5,763,333.33
5,700,000.00
5,651,866.67
5,477,066.67
5,244,633.33
5,071,733.33
4,734,166.67
4,340,866.67
3,904,658.33
3,477,000.00
3,160,966.67
2,767,666.67
2,348,558.33
1,938,000.00
1,587,766.67
1,194,466.67
792,458.33
399,000.00
73,940,875.00
75,000,000.00
4,560,000.00
5,826,666.67
5,763,333.33
17,700,000.00
17,651,866.67
17,477,066.67
17,244,633.33
32,071,733.33
31,734,166.67
31,340,866.67
30,904,658.33
30,477,000.00
30,160,966.67
29,767,666.67
29,348,558.33
28,938,000.00
28,587,766.67
28,194,466.67
27,792,458.33
28,399,000.00
548,940,875.00
Period #
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Total
Note : Actual rent shall be based on the Schedule of Actual Rent Payments and the Notice of Rent Payment . If Party A fails to
deliver the Statement and the Notice to Party B, this Schedule shall prevail.
Party A: Chongqing Yinhai Leasing Co., Ltd. (Seal)
Authorized Representative (Signature/Seal):
Party B: Chongqing Alpha and Omega Semiconductor, Inc.(Seal)
Authorized Representative (Signature/Seal)
[2018/5/ ]
31 / 30
Annex 3: Schedule of Actual Rent Payments (Sample Form)
1. Lease Term
Tenancy term is [ ] months, total for [ ] payment periods; rented from and including [Date]
Due Date
Principal
Interests
Total
Note
Currency: RMB Unit:Yuan
Period#
1
2
3
Total
Note : If there is any inconsistency between the Schedule of Estimated Rent Payments and this Schedule, this Schedule shall
prevail.
Payment by Wire Transfer
Account Name : Chongqing Yinhai Leasing Co. Ltd.
Bank : The Export-Import Bank of China, Chongqing Branch
Account : 2100000100000237876
Party A: Chongqing Yinhai Leasing Co., Ltd. (Seal)
Authorized Representative (Signature/Seal):
Party B: Chongqing Alpha and Omega Semiconductor, Inc. (Seal)
Authorized Representative (Signature/Seal)
Date:
32 / 30
To: Chongqing Alpha and Omega Semiconductor, Inc.
Annex 4: Notice of Rent Adjustment (Sample Form)
Pursuant to the Finance Lease (Series Number [ ]), executed by both parties, and given one of the following situations has
occurred:
(1) The Central Bank of China adjusted the benchmark interest rate of [ ]-year loan on the date of [ ]; the current benchmark
interest rate is now at [ ].
(2) Other: [ ]
Our Company does hereby adjust the rent as follows: starting from [year/month/day], the lease rate is adjusted to ___. Please
make payment to our company according to the “amount due after adjustment” in the chart below.
Currency: RMB Unit: Yuan
Period
Due Date
Amount Due before Adjustment Amount Due after Adjustment
…
…
…
Total
Account Name : Chongqing Yinhai Leasing Co. Ltd.
Bank : The Export-Import Bank of China, Chongqing Branch
Account : 2100000100000237876
Party A : Chongqing Yinhai Leasing Co., Ltd.(Seal)
Authorized Representative (Signature/Seal):
Party B: Chongqing Alpha and Omega Semiconductor, Inc.(Seal)
Authorized Representative (Signature/Seal)
Date
33 / 30
Annex 5: Notice of Rent Payment (Sample Form)
To: Chongqing Alpha and Omega Semiconductor, Inc.
Pursuant to the Finance Lease (Series Number [ ]), executed by both parties, as well as the Annexes herein attached, this
notice is to inform you that the rent for period [ ] is due soon. Please see the chart below for more details.
Period #
…
Amount to be Paid (RMB））
Due Date
Currency: RMB Unit: Yuan
Please make your payment to the following account by the due date
Account Name : Chongqing Yinhai Leasing Co. Ltd.
Bank : The Export-Import Bank of China, Chongqing Branch
Account : 2100000100000237876
Please note: In the event your Company delays the payment or does not pay the full amount of the rent, we have the right to impose
penalties, pursuant to the amount specified in the Finance Lease, and request your Company to bear other liabilities due to the
breach.
Party A: Chongqing Yinhai Leasing Co., Ltd. (Seal)
Authorized Representative (Signature/Seal):
Date:
34 / 30
To: Chongqing Alpha and Omega Semiconductor, Inc.
Annex 6: Notice to Pay Additional Deposits (Sample Form)
Pursuant to the Finance Lease (Series Number [ ]), executed by both parties, as well as the herein attached Annexes,
the total amount of deposits which shall be paid to our Company are insufficient. Please see more details in the chart below.
Minimum Deposits
Current Available Deposits
Amount to be Paid
Currency: RMB Unit: Yuan
Note : the deposits were deducted for the purpose of …
Payment must be made on the next day after the receipt of this notice. Please make your deposit payment to the account
below.
Account Name : Chongqing Yinhai Leasing Co. Ltd.
Bank : The Export-Import Bank of China, Chongqing Branch
Account : 2100000100000237876
Please note: In the event your Company delays the payment or does not pay the full amount of the deposits, we have the right to use
your subsequent rent payments to make up for the minimum deposits required by the Lease, to impose penalties pursuant to the
amount specified in the Lease, and to request your Company to bear other liabilities due to the breach.
Party A: Chongqing Yinhai Leasing Co., Ltd. (Seal)
Authorized Representative (Signature/Seal):
Party B: Chongqing Alpha and Omega Semiconductor, Inc. (Seal)
Authorized Representative (Signature/Seal)
Date:
35 / 30
Annex 7 : Proof if Ownership Transfer 1
To: Chongqing Yinhai Leasing Co., Ltd.
We hereby certify that, on [year/month/day], our Company received the initial payment of [ ]RMB made by your company via
wire transfer from [ ] bank for the purchase of leased items. Pursuant to the Finance Lease (Series Number xx), executed by both
parties, the ownership of the leased item listed under this lease will be transferred to your Company starting from [Date].
Party A: Chongqing Yinhai Leasing Co., Ltd. (Seal)
Authorized Representative (Signature/Seal):
Party B: Chongqing Alpha and Omega Semiconductor, Inc.༈Seal)
Authorized Representative (Signature/Seal)
[Date]
36 / 30
Annex 8: Proof of Ownership Transfer 2 (Sample Form)
To: Chongqing Alpha and Omega Semiconductor, Inc.
As of [year/month/day], our Company has received all the rent payments, deposits, and other payments required by the terms
of the Finance Lease. We hereby certify that, effective from [year/month/day], the ownership of leased items specified in the Finance
Lease will be transferred to your company.
Party A: Chongqing Yinhai Leasing Co., Ltd. (Seal)
Authorized Representative (Signature/Seal):
Party B: Chongqing Alpha and Omega Semiconductor, Inc.(Seal)
Authorized Representative (Signature/Seal)
Date
37 / 30
Annex 9: Receipt of Transferred Items (Sample Form)
To: Chongqing Yinhai Leasing Co., Ltd. (Party A)
Pursuant to the Finance Lease (Series Number [ ]), executed by both parties on [year/month/day], we have received all the
leased items, which your company has complete ownership of, in good and normal operating condition without any quality defect
upon delivery of the items.
Hereby Certify.
Party B: Chongqing Alpha and Omega Semiconductor, Inc. (Seal)
Authorized Representative (Signature/Seal)
Date
38 / 30
NOTE: Portions of this Exhibit are the subject of a Confidential Treatment Request by the Registrant to the Securities and
Exchange Commission (the “Commission”). Such portions have been redacted and are marked with a “[***]” in the place of
the redacted language. The redacted information has been filed separately with the Commission.
Exhibit 10.39
Real Estate Mortgage Contract
Contract No.: Jinchuyinyu Zubao Zi (2008) No.004 DY02
Contents
CHAPTER 1 INTERPRETATION....................................................................................................3
CHAPTER 2 MORTGAGE AND SCOPE OF THE MORTGAGE............................................... 4
CHAPTER 3 MORTGAGE REGISTRATION................................................................................ 5
CHAPTER 4 DOCUMENTS TO BE SUBMITTED BY THE MORTGAGOR............................ 5
CHAPTER 5 ASSIGNMENT AND LEASE OF THE MORTGAGED PROPERTY................... 6
CHAPTER 6 SUSPENSE ACCOUNT............................................................................................... 7
CHAPTER 7 ADMINISTRATION OF THE MORTGAGED PROPERTY.................................. 8
CHAPTER 8 INSURANCE OF THE MORTGAGED PROPERTY.............................................. 9
CHAPTER 9 NATURE AND EFFECT OF THE SECURITY...................................................... 10
CHAPTER 10 MORTGAGOR’S REPRESENTATIONS AND WARRANTIES........................ 11
CHAPTER 11 MORTGAGOR’S UNDERTAKINGS.................................................................... 14
CHAPTER 12 EVENT OF DEFAULT............................................................................................. 16
CHAPTER 13 REALIZATION OF MORTGAGE RIGHT.......................................................... 17
CHAPTER 14 EXPENSES AND COMPENSATIONS.................................................................. 19
CHAPTER 15 EFFECTIVENESS AND RELEASE OF MORTGAGE...................................... 20
CHAPTER 16 APPLICABLE LAW AND DISPUTE SETTLEMENT........................................ 20
CHAPTER 17 MISCELLANEOUS................................................................................................. 21
CHAPTER 18 SUPPLEMENTARY PROVISIONS....................................................................... 25
ANNEX I............................................................................................................................................. 28
ANNEX II........................................................................................................................................... 29
- 1 -
This Real Estate Mortgage Contract (Contract No.: Jinchuyinyu Zubao Zi (2018) No.004 DY02) is made on May 14, 2018
BETWEEN:
(1) Mortgagor: Chongqing Alpha and Omega Semiconductor Limited (“Mortgagor”)
Address: No.5-407, Yuhan Avenue, Shuitu High-tech Industrial Park, Beibei District, Chongqing
Postcode: /
T ID Number: /
R Legal Representative: MIKE FUSHING CHANG
R Account-opening Financial Institution: China Construction Bank, Chongqing Liangjiang Sub-branch
R Account No.:
Telephone Number༚_______________________________
Fax Number༚_______________________________
(2) Mortgagee: The Export-Import Bank of China (“Mortgagee”)
Legal Representative: HU Xiaolian
Address: No.30, FuXingMenNei Street, XiCheng District, Beijing
Postcode: 100031
Telephone Number༚010-83578899
Fax Number༚010-66060636
WHEREAS:
Mortgagee and Chongqing Yinhai Financing Leasing Co., Ltd (“Debtor”) entered into the Rentals Factoring Contractor (Contract
No.: Jinchuyinyu Zubao Zi (2018) No.004)
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(“Principal Contract”) on May 14, 2018. Pursuant to the Principal Contract, the Mortgagee provides services to the Debtor regarding
T RMB & Foreign Currency Loan T Letter of Credit Issuance T Letter of Guarantee Issuance R Rentals Factoring Business
(“Services”). R Mortgagee hereby authorizes the Export-Import Bank of China Chongqing Branch to provide the Services under the
Principal Contract and handle any matters relating to the administration of the Services and under this Contract. Any acts for the
purposes of the provision, supervision and management of the Services under the Principal Contract and any acts under this Contract
made by the Export-Import Bank of China Chongqing Branch shall be deemed to be the acts of the Mortgagee.
As one of the Conditions Precedent to the provision of the said Services to the Debtor by the Mortgagee, the Mortgagor agrees to
mortgage to the Mortgagee the title or the use right of the real property and the land use right of the construction land to which the
Mortgagor is legally entitled in order to secure that the debt under the Principal Contract should be duly paid in full by the debtor.
The Mortgagor and the Mortgagee hereby in agreement enter into this Contract.
Where there is a blank “□” under this Contract, please use the mark “√”to indicate “Yes” and use the mark “×” to indicate “No”.
Chapter 1 Interpretation
1.
Unless the context requires otherwise, in this Contract:
(1) “Mortgaged Property” means all the real estates listed under Schedule 1 of this Contract of which the title or the use right
regarding the real property and the land use right regarding the construction land legally owned by the Mortgagor.
(2) “Events of Default” means any events provided under Chapter 12 of this Contract.
(3) “Suspense Account” means pursuant to Chapter 6 of this Contract, the RMB suspense account opened by the Mortgagor at
Tthe Mortgagee, Tthe supervision bank/bank branch designated by the Mortgagor, for the purposes of collecting the deposits
of the Mortgaged Property, the rentals and any payments arising from any other disposals of the Mortgaged Property.
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(4) “Registration Authority” means the competent authority of buildings and land and its authorized registration agency at the
place of the Mortgaged Property.
Chapter 2 Mortgage and Scope of the Mortgage
2. The Mortgagor shall mortgage to the Mortgagee as the beneficiary the Mortgaged Property and all existing and future rights,
interests and proceeds arising from the Mortgaged Property, including but not limited to any rights arising from any sale or lease
contracts in connection with the Mortgaged Property and executed by the Mortgagor as a party of the contracts, and any
compensations payable to the Mortgagor as a result of the seizure or expropriation of the Mortgaged Property.
3. The claims secured by the Mortgagor under this Contract are as follows:
Category: Rentals Factoring
Amount: RMB 379,000,000 Yuan
Duration: 60 months
4. Notwithstanding the Mortgaged Property is created under this Contract, the Mortgagee is not required to perform any obligations
and liabilities of the Mortgagor in connection with the Mortgaged Property. The Mortgagor acknowledges that the Mortgagor
will continue to comply with and fulfil all obligations and liabilities relating to the Mortgaged Property.
5. The scope of the security for the Mortgagor under this Contract includes the following two items (“Secured Debt”):
(I)
All debts payable by the Debtor to the Mortgagee under the Principal Contract, including but not limited to the principal,
financed funds and other accounts payable, interests (including but not limited to statutory interests, agreed interests,
interests on overdue payments and default interests), handling charges, telecommunications charges, miscellaneous
charges and other charges, liquidated damages, damages, expenses for the realization of the creditors’ claims (including
but not limited to litigation fees, lawyers' fees, notarization fees and enforcement costs) and any other amounts payable
by
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the Debtor (notwithstanding such amounts are payable when the Services are due or under any other circumstances) ;
(II)
All costs incurred by the Mortgagee for the realization of the security interest under this Contract (including but not
limited to litigation fees, lawyers' fees, notarization fees and enforcement costs) and any other amounts payable by the
Mortgagor".
6. The evidence by the Mortgagee to demonstrate the Secured Debt or any amounts payable by the Mortgagee under this Contract,
unless the Mortgagor provides sufficient and valid evidence to prove there are obvious errors, shall be the final evidence of the
debtor-creditor relationship between the parties and shall be binding upon the Mortgagor.
Chapter 3 Mortgage Registration
7. On the signing date of this Contract or no later than 30 days after the signing date of this Contract, the Mortgagor shall, together
with the Mortgagee or the persons authorized by the Mortgagee, register the mortgage with Registration Authority. The
certificate of other rights relating to the registration of the mortgage issued by the Registration Authority shall be placed under
the control of the Mortgagee.
8. Upon the request of the Mortgagee, the Mortgagor shall immediately take any action reasonably required by the Mortgagee
(including executing any documents, securing any approvals, and completing any registrations, filings or recordings) to perfect
or protect the mortgage created under this Contract or pursuant to this Contract.
Chapter 4 Documents to be Submitted by the Mortgagor
9. The Mortgagor shall ensure that R before the first application for the withdrawal, T before the first handling of relevant business,
by the Debtor under the Principal Contract, the Mortgagee receives the following documents submitted by the Mortgagor:
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(1) This Contract duly executed by T the Mortgagor personally (applicable to an individual), R the legal representative or
the authorized signatory of the Mortgagor (applicable to a company);
(2) R The articles of association of the Mortgagor and the latest annually inspected business license of the Mortgagor
(applicable to a company);
(3) R Board Resolution, T Shareholders’ Resolution, in writing resolved by R the Board T the Shareholders’ (General)
Meeting consenting the Mortgagor gives security to the Mortgagee by way of mortgage over the Mortgaged Property
(applicable to a company);
(4) T Effective identity certificate of the Mortgagor and the title deed showing the Mortgagor has the title or the right to
dispose of the Mortgaged Property (applicable to an individual);
(5) T Proof of the shares of the property possessed by the joint owners of Mortgaged Property, if any, and the written
document in which the joint owners consent that the Mortgagor mortgages the Mortgaged Property (applicable to an
individual);
(6) Proof document that the mortgage under this Contract has been registered or filed with relevant authorities;
(7) The confirmation letter issued by an insurance company in accordance with the form of Schedule 2 or the confirmation
letter issued by an insurance company, accepted by the Mortgagee, conforming to the substance of Schedule 2;
(8) Other documents to be provided by the Mortgagor as the Mortgagee may request.
If the above documents submitted by the Mortgagor are photocopies, T the Mortgagor shall sign and confirm that the documents
are true, complete and valid (applicable to an individual), R the authorized signatory of the Mortgagor shall sign and confirm the
documents as true, complete and valid, and affix the official seal in accordance with the reserved seal by the Mortgagor at the
place of the Mortgagee (applicable to a company).
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Chapter 5 Assignment and Lease of the Mortgaged Property
10. On the signing date of this Contract, the Mortgagor shall submit to the Mortgagee a detailed description of the Mortgaged
Property (including but not limited to the lease of the Mortgaged Property). The Mortgagor confirms to the Mortgagee, other
than those specified in the above list (if any), the Mortgagor does not lease, assign, grant, abandon or otherwise dispose of the
Mortgaged Property in whole or in part.
11. The Mortgagor, with the written consent of the Mortgagee, may lease, assign or otherwise dispose of the Mortgaged Property or
change the lessee.
12. All funds received arising from the lease, assignment or otherwise disposal of the Mortgaged Property by the Mortgagor with the
consent of the Mortgagee shall be immediately deposited into the Suspense Account.
Chapter 6 Suspense Account
13. The Mortgagor shall open a Suspense Account within [ ] days after/at the signing date of this Contract.
T The Mortgagor shall pledge the Suspense Account and entrust it to the Mortgagee for administration, and the Mortgagee shall
supervise and administer all the funds under the Suspense Account. The specific details shall be agreed by both parties under a
separate escrow contract for the pledge of the account, as a supplement to this Contract.
14. When the Mortgagor, with the prior written consent of the Mortgagee, leases, assigns or otherwise disposes of any part of the
Mortgaged Property, pursuant to the provisions of Chapter 5 of this Contract, all deposits, rentals or any other funds received by
the Mortgagor shall be remitted to the Suspense Account.
15. Without the prior written consent of the Mortgagee, the Mortgagor shall not use or withdraw any funds from the Suspense
Account.
16. During the period of mortgage, if the Mortgagor with the consent of the Mortgagee assigns the Mortgaged Property, the
Mortgagor shall pay off the Secured Debt in advance or lodge it with the Mortgagee using the funds received from such
assignment.
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17. When any events of default under this Contract occur and the Mortgagee declares to enforce the mortgage created under this
Contract, the Mortgagee may directly withdraw any funds from the Suspense Account (except for the deposit charged for the
lease of the Mortgaged Property), which may be used in the order pursuant to Clause 53 to pay off the Secured Debt.
Chapter 7 Administration of the Mortgaged Property
18. Before the Mortgagee realizes the mortgage created under this Contract, the Mortgaged Property shall be possessed and
administered by Mortgagor. The Mortgagor shall maintain the Mortgaged Property in proper condition, and use the Mortgaged
Property for the purposes permitted by the Chinese law and by the Mortgagee under this Contract, subject to inspection by the
Mortgagee at any time.
19. Without the written consent of the Mortgagee, the Mortgagor shall not make any material or structural alterations to the
Mortgaged Property, except those normal changes made during the decoration period. To the extent permitted by the law, any
building, facility or fixture added to the Mortgaged Property as a result of a breach of this clause shall automatically become part
of the Mortgaged Property under this Contract
20. Any defects (significant or potential), if any, in the Mortgaged Property and any losses or damages incurred arising from such
defect shall be none of the business of the Mortgagee. The Mortgagee shall not be liable for any such losses or damages. If such
defects result in a reduced price of the Mortgaged Property, the Mortgagor shall, upon request, provide the Mortgagee with
additional property as security for the Secured Debt. If the Mortgagee suffers losses as a result of any defects (significant or
potential) in the Mortgaged Property, the Mortgagor shall immediately indemnify the Mortgagee for such losses.
21. If the Mortgagor’s acts result in a reduced price of the Mortgaged Property, the Mortgagee is entitled to demand the Mortgagor
stop its acts. For the reduced price of the Mortgaged Property, the Mortgagee is entitled to demand the restoration of the price of
the Mortgaged Property, or provision of security corresponding to the reduced
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price. If the Mortgagor does not restore the price of the Mortgaged Property or to provide security, the Mortgagee is entitled to
require the Debtor to pay off the debts in advance.
22. Where the Debtor fails to perform the due obligations under the Principal Contract, or where the mortgage is realized pursuant to
this Contract, resulting in the seizure of the Mortgaged Property by the Courts according to law, from the date of seizure, the
Mortgagee is entitled to collect the natural profits or civil profits arising from the Mortgaged Property, and the Mortgagor shall
notify those who are obliged to pay such profits as the Mortgagee requires.
23. If the Mortgaged Property is damaged, destructed or sized during the mortgage period, the Mortgagee has the preferential right to
satisfaction of a claim for the insurance premiums, compensations or indemnities, etc., and in the event of the undue Secured
Debt, may lodge the insurance premiums, compensations or indemnities, etc.
Chapter 8 Insurance of the Mortgaged Property
24. The Mortgagor shall, R before the first application for the withdrawal, T before the first handling of relevant business, by the
Debtor under the Principal Contract, insure the Mortgaged Property according to the insurance types required by the Mortgagee
with an insurance company in China approved by the Mortgagee, and the amount of the insurance shall not be less than the price
of the Mortgaged Property (as set out in Schedule 1 in detail). All insurance policies, underwriting, insurance contracts and other
relevant documents or corresponding copies, as the case may be, shall be placed under the control of the Mortgagee. All
insurance charges shall be borne by the Mortgagor.
25. The Mortgagor shall urge the insurance company to specify in its insurance policy created for the Mortgaged Property that the
insurance compensation shall be paid directly to the Mortgagee, and issue to Mortgagee a confirmation letter conforming to the
substance of Schedule 2 of this Contract immediately upon acquring the executed insurance policy from the insurance company.
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26. If the Mortgagor delays or fails to arrange such insurance, the Mortgagee is entitled (but no obliged) to arrange the insurance in
the manner described above or otherwise, provided that the Mortgagor shall indemnify the Mortgagee for all costs and interests
incurred as a result of arranging for such insurance.
27. Without the prior written consent of the Mortgagee, the Mortgagor shall not suspend, cancel or vary any insurance against the
Mortgaged Property until the Secured debt is paid in full. In the event of an insured accident specified under the policy, the
Mortgagor shall notify the insurance company and the Mortgagee promptly within the time specified under the policy. All losses
arising from the failure of the Mortgagor to notify the insurance company timely shall be borne by the Mortgagor.
28. The Mortgagor shall pay the premium in a timely manner until the Secured Debt is paid in full and shall take all measures to
maintain such insurance valid and updated at any time. The Mortgagor shall, in accordance with the requirements of the
Mortgagee, provide to the Mortgagee the payment vouchers certifying the full payment of the insurance premium. The
Mortgagor shall not, by act or by omission, prejudice the rights and interests of the Mortgagee under insurance policy. If the
Mortgagor breaches this clause, the Mortgagee may (but is not obliged) to take any measures as it deems necessary in its own
name, in joint action with the Mortgagor or in the name of the Mortgagor according to law, to maintain such insurance updated
and valid, and recognize the rights and interests of the Mortgagee under the insurance policy. The costs incurred shall be borne
by the Mortgagor.
29. Before the Secured Debt is paid in full, the insurance compensations under the aforesaid insurance policy shall be paid directly to
the Mortgagee. The Mortgagee may, at its discretion, use any amounts of the compensations received under any insurance policy
to repair the Mortgaged Property or to pay the Secured Debt in whole or in part. If for any reason the Mortgagor receives any
insurance compensations, the Mortgagor shall immediately notify the Mortgagee and hold and keep such amounts on behalf of
the Mortgagee, and dispose of and use such amounts as directed in writing by the Mortgagee.
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Chapter 9 Nature and Effect of the Security
30. The mortgage under this Contract is a continuing security with full effect until the Secured Debt is paid in full.
R The validity of this Contract shall not be prejudiced by the liquidation, merger, division, restructuring, bankruptcy or other
changes of the organizational structure of the Mortgagor or any other person, or by any other arrangement for the debts of the
Debtor (applicable to a company).
T The validity of this Contract shall not be prejudiced by any changes in the personal circumstances of the Mortgagor, such as
the health status, marital relationship, job title, change of domicile, or by any other arrangements made with respect to the debts
of the Debtor (application of the individual).
31. The security created under this Contract is independent of any other security acquired by the Mortgagee for the Secured Debt.
Before exercising his rights under this Contract, the Mortgagee is not required to first enforce any other security it holds, or to
first take any other relief. Subject to the applicable law, this Contract is independent of the Principal Contract, and, for any
reason, the invalidity or rescission of the Principal Contract shall not prejudice the validity of this Contract or the obligations and
liabilities of the Mortgagor under this Contract. And, this Contract shall not be void or rescinded by reason of the invalidity or
rescission of the Principal Contract secured.
Where the Mortgagor and the Debtor are not the same person and the Debtor creates a mortgage over his own property for the
interest of the Mortgagee, the Mortgagor hereby agrees and undertakes that if the Mortgagee waives the security interest or the
priority of the mortgage or varies the mortgage provided by the Debtor, any security obligation or liability of the Mortgagor
under this Contract shall not be prejudiced or excluded.
Chapter 10 Mortgagor’s Representations and Warranties
32. The Mortgagor hereby represents and warrants to the Mortgagee as follows:
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(1) R The Mortgagor is a company duly incorporated, validly existing as an independent person. The Mortgagor has the full
authority and capacity to enter into this Contract and perform the obligations under this Contract (applicable to a company).
T The Mortgagor is a citizen of Chinese nationality who has the necessary legal capacity and capacity to enter into and perform
this Contract and can independently bear the civil liability (applicable to an individual).
(2) R The Mortgagor has been engaged in business activities according to law and has not engaged in any acts beyond the
scope of business registered with the Administration for Industry and Commerce (applicable to a company).
(3) The Mortgagor is the sole lawful owner of the Mortgaged Property, and the Mortgagor does not create or permit the
creation of any other security on the Mortgaged Property except the security created under this Contract. There is no dispute
over the title of the Mortgaged Property. The Mortgaged Property is enforceable and transferrable, and has not been
foreclosed, seized or placed under any preservative measures in litigation, and can be used as the subject matter of mortgage
according to law.
T The Mortgagor is legally entitled to the title and the right to dispose of the Mortgaged Property, and the other co-owners (if
any) of the "mortgage" are fully aware of the guaranty act of the "mortgagor" and have agreed in writing to the "mortgagor" to
do the above-mentioned act (applicable to an individual).
(4) The Mortgagor T together with other co-owners (if any) (applicable to an individual) has read this Contract carefully and
has fully understood and accepted the contents of this Contract and the Principal Contract. The Mortgagor acts with free
will to execute and perform this contract, and the whole is the manifestation of true intentions.
(5) The Mortgagor has obtained all approvals from the government agency necessary to execute this Contract.
R The Mortgagor has completed the authorizations from the company necessary to execute this Contract and this Contract is
effectively executed by the legal representative or the authorized signatory of the Mortgagor (applicable to a company).
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T This Contract is effectively executed by the Mortgagor personally (applicable to an individual).
(6) The Mortgagor has not entered into any agreement (other than this Contract) to sell, grant, assign or otherwise dispose of
any rights or interests of the Mortgaged Property in whole or in part.
(7) The description of the titles under Schedule 1 of this Contract relating to the Mortgaged Property is true, accurate, and
not misleading.
(8) The Mortgagor has duly paid any charges and fees payable (including but not limited to various taxes) relating to the
Mortgaged Property, and has fully complied with and performed other contracts and conditions relating to the Mortgaged
Property.
(9) This Contract constitutes lawful, effective and legally binding obligations against the Mortgagor. The security created
under this Contract is not subject to the preferential rights of any other person.
(10)
In order to ensure this Contract is lawful, effective, preferential, enforceable and acceptable as evidence, and to secure
and perfect the interests of the Mortgagee under this Contract, the Mortgagor has completed all necessary registration
or filing formalities, including but not limited to the registration with the Registration Authority by the Mortgagor
against the Mortgaged Property.
(11)
The Mortgagor’s execution of this Contract and the performance of the obligations under this Contract shall not be in
breach of any of the following:
(a) R The articles of association of the Mortgagor (applicable to a company);
(b) Any other agreements entered into by the Mortgagor;
(c) Any laws and regulations applicable to the Mortgagor.
(12)
No litigation, arbitration or administration proceedings is currently taking place in relating to the Mortgagor or the
Mortgaged Property, which has material adverse effects on the financial standings of the Mortgagor, the price of the
Mortgaged Property or the capacity of the Mortgagor to perform its obligations under this Contract.
(13)
All materials, documents and certificates provided by the Mortgagor to the Mortgagee are true, accurate, complete
and effective, and photocopies of the documents provided are in conformity with the originals.
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(14)
R The Mortgagor hereby represents that he is fully aware that the Export-Import Bank of China Chongqing Branch is
authorized by the Mortgagee to provide the Services under the Principal Contract and handle any matters relating to
the administration of the Services and under this Contract. This Contract is directly binding upon the Mortgagor and
the Mortgagee.
T The Mortgagor hereby represents that he is fully aware and agrees that the Mortgagee under the Principal Contract
provides T the whole, T the part of, /Yuan ((Capital Letter) RMB /Yuan), T US$ ((Capital Letter) /Dollars), for the purposes of T
repaying the loan unpaid by the Debtor under the loan contract (Contract No.: /) entered into between the Mortgagee and the Debt on
Year/Month/Date, □repaying the bridging loan provided by the bank.
T The Mortgagor hereby acknowledges that he is fully aware that the limit under the Principal Contract secured under this
Contract can be re-used by the Debtor.
33. The above representations and warranties made by the Mortgagor shall remain correct and not misleading within the term of this
Contract, and the Mortgagor warrants to provide further documents at any time as the Mortgagee may request.
Chapter 11 Mortgagor’s Undertakings
34. The Mortgagor shall comply with all laws and regulations relating to this Contract, strictly perform and abide by its obligations
and liabilities under this Contract, and take all necessary measures to ensure that the title of the Mortgaged Property remains
lawful and effective."
35. The Mortgagor shall obtain and complete all approvals or registration procedures and handle any other matters necessary to
maintain this Contract lawful and effective.
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36. The Mortgagor shall maintain and keep the Mortgaged Property in good condition and shall not demolish, disassemble or remove
any part of it, unless conducted otherwise in the course of normal use, repair, maintenance or improvement.
37. The Mortgagor shall duly pay all taxes and charges payable incurred to the Mortgaged Property, and abide by and perform the
terms and conditions provided under the title deeds of the Mortgaged Property.
38. The Mortgagor shall inform the Mortgagee of the contents of any notice or order relating to the Mortgaged Property issued by
any government agency or administrative authority within three days of the receipt of such notice or order; The Mortgagor shall,
within the period specified in such notice or order, take necessary measures to comply with such provisions. And, at the request
of the Mortgagee, the Mortgagor shall, on its own or jointly with the Mortgagee, raise any objection or statement in favor of the
Mortgagee relating to such notice or order, and all related costs and expenses shall be borne by the Mortgagor.
39. The Mortgagor shall allow the Mortgagee or its person to be appointed to enter the Mortgaged Property at any reasonable time
and to inspect the Mortgaged Property and register such status.
40. The Mortgagor shall submit the original certificate of other rights of the Mortgaged Property to the Mortgagee for safekeeping.
41. The Mortgagor shall promptly notify the Mortgagee of any event that may affect the Mortgaged Property or its price.
42. The Mortgagor shall promptly notify the Mortgagee of any of the following:
(1) Any occurrence of Events of Default;
(2) Any litigation, arbitration or administrative proceedings relating to the Mortgagor or the Mortgaged Property;
(3) T Changes in the health status, marital relationship, job duties, domicile address of the Mortgagor that may adversely affect
the financial standing of the Mortgagor or the capability of the Mortgagor to perform the obligations under this Contract.
(application of the individual)
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43. During the period of the Contract, the Mortgagor shall not perform any of the following acts without the written consent of the
Mortgagee, until the Secured Debt has not been paid in full:
(1) to sell, transfer, or partition the Mortgaged Property or any part of it;
(2) to create any other mortgage or security interest over the Mortgaged Property (other than the mortgage created under this
Contract);
(3) to use of the Mortgaged Property for purposes other than such property designed for or for purposes not permitted under any
insurance policy relating to the Mortgaged Property; and
(4) to conduct any act against Mortgaged Property in breach of the existing laws and regulations, or any act which is likely to
affect or reduce the value of the security interest of the Mortgagee under this Contract.
44. As long as any Secured Debt remains unsatisfied, the Mortgagor shall not pursue or claim a right against the Debtor in respect of
any Mortgaged Property that has been disposed of by the Mortgagee without the written consent of the Mortgagee.
45. If the Mortgagee and the Debtor agree to amend the Principal Contract, the Mortgagor will undertake the security obligations
within the amended scope of the security without the consent of the Mortgagor, except for the parts where the amount, term,
currency and interest rate under the Principal Contract are varied by the Mortgagee and the Debtor and the liability of the
Mortgagor is increased.
46. Without the prior consent of the Mortgagor, the Mortgagee may assign the debt claim secured under this Contract to any third
party and assign the mortgage under this Contract to such third party at the same time. The Mortgagor shall complete the
corresponding legal formalities for such purpose.
47. The Mortgagor hereby agrees and undertakes that where the Mortgagee allows the Debtor to assign the debts under the Principal
Contract in whole or in part, the Mortgagor shall, as required by the Mortgagee, issue a written document agreeing to continue to
undertake the security liability.
Chapter 12 Event of Default
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48. Each of the following events or matters will constitute an “Event of Default” of the “Mortgagor” under this Contract:
(1) The “Debtor” fails to pay any amount owed to the “Mortgagee” in full amount on time as agreed in the “Principal Contract”,
any other Events of Default under the “Principal Contract” occur, or the maturity of the “Secured Debt” is accelerated for any
reason.
(2) The statement or warranty made by the “Debtor” under this Contract is recognized as incorrect, unfaithful, or misleading or
the “Debtor” breaches or refuses to fulfill any covenant made hereunder.
(3) The "Debtor" transfers, sells, leases out, or otherwise disposes the “Mortgaged Property” without consent or places any
security interest on any part of the “Mortgaged Property”, or any third party claims any right to the “Mortgaged Property”.
(4) All or any part of the “Mortgaged Property” or important assets of the “Mortgagor” have been confiscated, expropriated or
acquired, no matter whether any compensation has been paid therefor.
(5) R The “Mortgagor” suspends its business or closes down, files for bankruptcy, liquidation, discontinuance of business, or
other similar proceedings, is declared bankrupt or liquidated, or is closed down or suspended from business by the competent
authority. (Applicable to corporate guarantee)
(6) Any litigation, arbitration, or administrative proceeding, which is filed against the “Mortgagor” or the “Mortgaged Property”
and will have material adverse impact on the financial status of the “Mortgagor”, the value of the “Mortgaged Property”, or
the capacity of the “Mortgagor” to perform its obligations according to this Contract, occurs.
(7) The value of the “Mortgaged Property” decreases due to the act of the “Mortgagor”, and the “Mortgaged Property” is
insufficient to repay the “secured debt” as a result.
(8) The “Mortgagor” breaches its obligations hereunder or other events that the “Mortgagee” believes will cause material adverse
impact on its rights hereunder occur.
49. When the said “Event of Breach” occurs, the “Mortgagee” has the right to:
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(1) Declare that all amounts that the “Debtor” owes to the “Mortgagee” under the “Principal Contract” immediately fall due and
request the “Debtor” to immediately repay all amounts owed to the “Mortgagee” under the “Principal Contract”;
(2) Declare abrogation of the rights of the “Debtor” to further application for the “Services”;
(3) Declare implementation or realization of the mortgage right hereunder.
Chapter 13 Realization of Mortgage Right
50. In case of any event of default under this Contract, the “Mortgagee” has the right to implement and realize the mortgage right
placed hereunder according to law by means it deems appropriate, including that the “Mortgagee” and the “Mortgagor” may
reach an agreement on selling the “Mortgaged Property” at a discount or auction the “Mortgaged Property” and the receipt from
selling of the “Mortgaged Property” shall be preferentially used for repayment of the debts. If the “Mortgagee” and the
“Mortgagor” do not reach an agreement on the means to realize the mortgage right, the “Mortgagee” may request the people’s
court to auction or sell off the “Mortgaged Property”.
51. In the course of the “Mortgagee’s” disposal of the “Mortgaged Property” according to the foregoing provision, the “Mortgagee”
has the right to take the following actions according to law:
(1) Possessing all or a part of the “Mortgaged Property”;
(2) Requesting the “Mortgagor” to reimburse the necessary expenses paid by the “Mortgagee” for exercising any right granted
by this Contract or laws;
(3) Possessing the right to sell the “Mortgaged Property” to the extent allowed by law at such market price as deemed
appropriate by the “Mortgagee” at appropriate time, and assuming no responsibility for any loss caused thereby to the
“Mortgagor”;
(4) With respect to any claim made by any person in relation to the “Mortgaged Property”, resolving, reconciling, filing for
arbitration or litigation, or exercising or allowing other persons to exercise any right in relation to the “Mortgaged Property”
by other means it deems appropriate;
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(5) Applying to the competent authority for enforcement;
(6) In order to realize any right hereunder, exercising or taking all the other rights or actions permitted by law.
The “Mortgagee” has the right to choose to exercise all or any part of the said rights or postpone exercising any right.
52. Upon the request of the “Mortgagee”, the “Mortgagor” must assist the “Mortgagee” in obtaining all necessary permits or
consents in relation to the “Mortgagee’s” realization of its creditor’s rights, or assist the “Mortgagee” in going through all the
other necessary formalities.
53. Any receipt from the “Mortgagee’s” disposal of the “Mortgaged Property” hereunder shall be treated in the following order:
First, the receipts will be used for payment of all expenses incurred to the “Mortgagee” for realization of the security interest
hereunder (including but not limited to legal fees, attorney’s fees, notarial fees, execution fees, etc.);
Second, the receipts will be used for payment of taxes payable by the “Mortgagee” for disposal of the “Mortgaged Property”;
Third, the receipts will be used for repayment of the “Secured Debt”. If the receipts are insufficient for repayment of the
“Secured Debt”, they shall be used for the following purposes in order:
(a)
(b)
(c)
(d)
Any other amount payable by the “Mortgagor”;
Principal creditor’s rights under the “Principal Contract”;
Interests under the “Principal Contract”;
Other payables under the “Principal Contract”.
The “Mortgagee” shall pay the balance net of the said payments and repayments, if any, to the “Mortgagor”.
54. When the “Mortgagee” exercises its rights under this Contract according to law, it will not assume any responsibility for any loss
caused to the “Mortgagor” or the “Mortgaged Property” by exercise of its rights, unless such exercise of rights are unlawful.
- 19 -
Chapter 14 Expenses and Compensations
55. All expenses incurred for conclusion of this Contract, handling necessary record-filing or notarization formalities, and
performance and enforcement of this Contract (including but not limited to attorney’s fees and legal fees paid by the
“Mortgagee” therefor) shall be borne by the “Mortgagor”. Expenses on mortgage registration shall be borne by T the
“Mortgagee” R the “Mortgagor” T /.
56. The “Mortgagor” shall reimburse and compensate the “Mortgagee” for the following expenses and losses upon the request of the
“Mortgagee”:
(1) All expenses incurred to the “Mortgagee” for realization of the security interest under this Contract (including but not limited
to legal fees, attorney’s fees, notarial fees, execution expenses, etc.); and
(2) Any other amount payable by the “Mortgagor” to the “Mortgagee” under this Contract.
The said expenses and losses constitute a part of the “Secured Debt”.
Chapter 15 Effectiveness and Release of the Mortgage
57. T This Contract will become effective on the day when the “Mortgagor” signs in person and the legal representative or
authorized signatory of the “Mortgagee” signs and affixes its official seal onto this Contract. (Applicable to personal guarantee)
R This Contract will become effective on the day when the legal representatives or authorized signatories of the “Mortgagor” and
the “Mortgagee” sign and affix their official seals onto this Contract. (Applicable to corporate guarantee)
The mortgage hereunder is created from the day when the mortgage is registered with the Registration Authority.
58. When the Secured Debt is repaid in full amount, the “Mortgagor” may go through the formalities for cancellation of mortgage
registration with the Registration Authority of this Contract, and the “Mortgagee” shall provide necessary assistance. All costs
incurred therefrom shall be borne by the “Mortgagor”.
- 20 -
Chapter 16 Applicable Laws and Dispute Settlement
59. This Contract is governed by the law of the People’s Republic of China and shall be construed in accordance with the law of the
People’s Republic of China.
60. During the performance of this Contract, any controversy or dispute arising out of performance of this Contract or in relation to
this Contract may be settled by the Parties through consultation. If such consultation fails, either Party may bring an action before
the people’s court according to law. The Parties agree that, the litigation initiated out of performance of this Contract or in
relation to this Contract shall be brought before the people’s court with jurisdiction over the place where the “Mortgagee” is
domiciled.
Chapter 17 Miscellaneous
61. Without the prior consent of the “Mortgagee”, the “Mortgagor” shall not transfer or otherwise dispose all or any part of its
obligations hereunder.
62. Under this Contract, the “Mortgagor” shall pay any payable in full amount without claiming for any offset or attaching any
requirement.
63. Under the precondition allowed by applicable laws, the “Mortgagee’s” granting any leniency, grace, privilege, or moratorium to
the “Mortgagor” shall not affect, prejudice, or restrict any rights that the “Mortgagee” is entitled to according to this Contract and
applicable laws and regulations, be deemed the “Mortgagee’s” waiver of its rights and interests hereunder, or affect any liability
and obligation of the “Mortgagor” under this Contract.
64. This Contract may be amended or supplemented upon the written consent of the Parties. Any amendment and addition hereto
shall constitute an integral part of this Contract.
- 21 -
65. The Parties hereto agree as follows on the address for service and legal consequences of all notices and requirements in relation
to this Contract and related documents and legal documents in the case of disputes arising out of the Contract:
(1) Notices and requirements given between the Parties hereto in relation to this Contract shall be made in writing. All notices
and requirements in relation to this Contract and related documents and legal instruments in the case of disputes arising out of
this Contract will be sent to T the addresses of the parties concerned as stated in the first page of this Contract R the
following addresses:
Address of the “Mortgagor”: No. 407 attached to No. 5, Yunhan Avenue, Shuitu New& High-tech Industry Park, Beibei
District, Chongqing
Address of the “Mortgagee”: 19/F, Muxing Science & Technology Building, No. 7, Huangshang Avenue Middle, New North
Zone, Chongqing.
Of them, service of related documents and legal instruments in case of disputes arising out of this Contract includes service
of such documents and instruments when the dispute is brought into arbitration or civil litigation proceedings (including
proceedings in first instance, proceedings in second instance, proceedings of retrial, and execution procedure).
(2) Correspondence between the Parties shall be deemed as served upon delivery if they are delivered by hand; they shall be
deemed as served after three (3) days of posting if they are sent by registered mail; and they shall be deemed served as served
when the terminal of the sender receives the confirmation signal if they are sent by telex or facsimile. The documents sent by
the “Mortgagor” to the “Mortgagee”, however, shall be deemed as served when the “Mortgagee” actually receives such
documents.
(3) If either Party hereto changes its address, it shall timely notify the other Party in writing. If the address of either Party hereto
changes in the course of arbitration and civil proceedings, the Party concerned shall fulfill its obligation of notifying the
arbitration organization and court of the change to the address for service within three (3) working days of such change.
If either Party thereto fails to fulfill its obligation of notification by the said method, the addresses for service confirmed by
the Parties shall still be deemed as effective
- 22 -
addresses for service. If the legal instruments cannot be actually received or delivered to either Party hereto by mail because
the address for service provided or confirmed by such Party is not accurate, the other Party and the court are not timely
notified of any change to such address according to specified procedure, or such Party or its designated recipient refuses to
sign for the instruments, the date of service shall be the date when the instruments are returned; if the legal documents are
sent by hand, the date of service shall be the date when the server records the details of non-service on the receipt. If the Party
fulfills its obligation of notification of change to the address for service, the effective address for service shall be the changed
address for service.
(4) When any dispute in relation to this Contract is brought into arbitration or civil proceedings, if any Party hereto directly
submits confirmation of address for service to the arbitration organization or court after responding to action and such
confirmed address is inconsistent with the address confirmed before the action, the service for address shall be that submitted
to and confirmed with the arbitration organization or court.
66. In accordance with the Administrative Regulations on Credit Reporting Industry and application laws and regulations of China,
the “Mortgagor” acknowledges that he/she is informed of and understands the meanings agree herein and hereby irrevocably
authorize the “Mortgagee” (including the branches of the “Mortgagee”) as follows:
a.
In order to timely learn about the credit status of the “Mortgagor”, rule out the “Mortgagor’s” engagement in any unlawful
acts or violations, and ensure security of businesses under the Principal Contract and this Contract, the “Mortgagee” may,
according to applicable provisions of the country, use the basic financial credit information database R and / to R inquire and
use the related information of the “Mortgagor” (applicable to corporate guarantee) T personal information and credit
information, including credit and loan information, of the “Mortgagor” that comply with applicable provisions, for
assessment of the “Mortgagor” or his/her spouse as the guarantor (applicable to personal guarantee).
b. According to applicable provisions of the country, the “Mortgagee” may provide R related information under all the
contracts, agreements, and legal documents of any form entered into by and between the “Mortgagor” and the “Mortgagee”
- 23 -
and other information in relation to the “Mortgagor” that the “Mortgagee” have access to through the said contracts,
agreements and legal documents (applicable to corporate guarantee) T personal information and credit information,
including the credit and loan information, of the “Mortgagor” that complies with applicable provisions (including bad record
information generated when the “Mortgagor” applies for services at the “Mortgagee”) (applicable to personal guarantee) to
the basic financial credit information database R and /.
c. According to applicable laws, regulations, and regulatory requirements, the “Mortgagee” may provide R related information
of the “Mortgagor” (applicable to corporate guarantee) T personal information and credit information, including the credit
and loan information, of the “Mortgagor” that complies with applicable provisions (including bad record information
generated when the “Mortgagor” applies for services at the “Mortgagee”) (applicable to personal guarantee) to China
Banking Regulatory Commission and other competent regulatory authority and competent jurisdiction and administration
authorities.
d. For the purpose of provision of financial services, the “Mortgagee” may share within its organization R related information
of the “Mortgagor” (applicable to corporate guarantee) T personal information and credit information, including the credit
and loan information, of the “Mortgagor” that complies with applicable provisions (including bad record information
generated when the “Mortgagor” applies for services at the “Mortgagee”) (applicable to personal guarantee), including
sharing among the branches.
e. According to the needs of collection of arrearages, transfer of creditor’s right, and financial service outsourcing, the
“Mortgagee” may provide R related information of the “Mortgagor” (applicable to corporate guarantee) T personal
information and credit information, including the credit and loan information, of the “Mortgagor” that complies with
applicable provisions (including bad record information generated when the “Mortgagor” applies for services at the
“Mortgagee”) (applicable to personal guarantee) to related third parties.
f. This authorization will be valid from the execution date of this Contract to the date when all rights and obligations hereunder
are fulfilled.
- 24 -
g. The “Mortgagee” shall take the legal responsibilities arising from the “Mortgagor’s” inquiry, use, and disclosure of the
related information of the “Mortgagor” beyond the scope of authorization agreed herein.
67. The Parties hereto are obliged to keep confidential any information that is made available by each other and marked confidential.
The Parties, however, has the right to the following:
(1) disclosing the information that has become known to the public (excluding the information that is known to the public
because the disclosing Party violates this provision);
(2) disclosing the information to be disclosed in any litigation or arbitration;
(3) disclosing such information according to any law and regulation to the extent required by such law and regulation;
(4) disclosing such information according to the rules on trading of listed shares of the stock exchanges on which the Parties are
listed;
(5) disclosing such information to any government, financial, taxation, or other administrative organs to the extent required by
such administrative organs;
(6) disclosing such information to their directors, management, staff, or professional advisors (including but not limited to
lawyers and auditors), provided that the Party to which such information is disclosed has undertaken to observe their non-
disclosing obligations hereunder;
(7) disclosing such information upon the consent of the Party providing such confidential information.
The “Mortgagee” may disclose the following to its affiliates or any person who may reach or has reached an agreement on
any transfer or participation of the Principal Contract or this Contract: 1) photocopy of this Contract; 2) any information that
the “Mortgagee” has had access to in relation to the “Mortgagor”, this Contract, and/or transactions under the Principal
Contract. The Party receiving the confidential information, however, must undertake to the “Mortgagee” to observe the non-
disclosing obligations hereunder before it receives any of such information.
The “Mortgagor” shall strictly keep the service conditions, guarantee conditions, and contract terms of the related Principal
Contract and related guarantee
- 25 -
documents confidential and shall not provide or disclose such information to any third party. If the “Mortgagor” breaches this
provision, the “Mortgagee” has the right to all remedies for default, and the “Mortgagor” shall compensate the “Mortgagee”
for all losses incurred thereby.
The non-disclosure obligation provided herein will survive the termination of this Contract.
68. Special agreements:
Chapter 18 Supplementary Provisions
When the factory built on the land mortgaged under this Contract is completed, the “Mortgagor” may deposit RMB 10,000,000
with the “Mortgagee” as the cash deposit and release the land from mortgage for application for the purpose of property
ownership certificate. When the property ownership certificate is obtained, the property built shall be appraised by the appraisal
agency recognized by the “Mortgagee” and the land shall be re-mortgaged to the “Mortgagee” at a mortgage rate of no higher
than 60% within sixty (60) working days of release of the land. The mortgage and pledge value of this mortgage, lease factoring
guarantee, and other guarantee measures shall cover the balance of lease factoring. At that time, the deposit of RMB 10,000,000
can be released.
69. The annexes to this Contract are an integral part of this Contract and have the same legal effect with this Contract.
70. The original copy of this Contract is made in three copies, with each of the “Mortgagor”, the “Mortgagee”, and the Registration
Authority handling mortgage registration holding one copy. The duplicate copy is made in / copies. Each copy shall have the
same legal effect.
(The remainder is intentionally left blank.)
- 26 -
Signature Page
Mortgagor: Chongqing Alpha and Omega Semiconductor Limited
(Seal)
Legal representative or authorized signatory (signature): /s/ Mike F. Chang (applicable to corporate guarantee)
Mortgagee: The Export-Import Bank of China
(Seal)
Legal representative or authorized signatory (signature): /s/HU Xiaolian
- 27 -
Annex I
List of Collateral
Details of the Land
Nature of Title:
Certificate No.:
Purpose:
Land Lot No.:
Drawing No.:
Service life:
Total area:
Right to the use of state-owned construction land
Yu (2017) Liang Jiang Xin Qu Bu Dong Chan Zheng No. 000207338
Land for industrial use
Land lot C47-1/03 located in Section C, Shuitu Sub-Community, Liangjiang New Area
500109 202003 GB00026
Expire on November 30, 2066
228449 m 2
The Parties agree that the value of the Collateral is in figures, [***].
Value
*** CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION
Annex II
Confirmation Letter
To: The Export-Import Bank of China
Subject: Insurance Contract / Policy No. _______________ ("Policy")
Dear Sir or Madam:
We hereby confirm with you and undertake that:
1.
2.
3.
Without your written consent in advance, we will not make any amendment or alteration to any content of the Policy;
Once we learn of any insurance accident under this Policy, we will immediately notify you of such accident;
In case of any insurance claim under the Policy, we will immediately notify you of such claim and deposit any insurance compensation payable
by us under the Policy in the following bank account according to the provisions of the Policy:
Bank of deposit:
Account name:
Account No.:
4.
Once we learn that the policy holder under the Policy breaches any provision under the Policy, we will immediately notify you of such breach;
- 29 -
5.
We will not suspend or termination the Policy for any reason, unless we suspend or terminate the Policy according to the provisions on
suspension or termination of the Policy and we have granted you a remedial period of ____ days prior to the request for suspension or
termination of the Policy.
________________ Insurance Company
(Seal)
[insert date]
- 30 -
Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
Subsidiary Name
Incorporated Location
Percentage Owned
Alpha and Omega Semiconductor Incorporated
California, United States
100% owned by AOS
Alpha and Omega Semiconductor (Cayman) Ltd.
Cayman
Alpha and Omega Semiconductor (Shanghai) Co., Ltd.
China
Alpha & Omega Semiconductor (Shenzhen) Limited
China
Alpha & Omega Semiconductor (Hong Kong) Limited
Hong Kong
Alpha & Omega Semiconductor (Macau), Ltd.
Alpha & Omega Semiconductor (Taiwan) Limited
Alpha & Omega Semiconductor (Germany) GmbH
Agape Package Manufacturing Ltd.
Agape Package Manufacturing (Shanghai) Ltd.
Agape Limited
Macau
Taiwan
Germany
Cayman
China
Hong Kong
100% owned by AOS
100% owned by AOS
100% owned by AOS
100% owned by AOS
100% owned by AOS
100% owned by AOS
100% owned by AOS
100% owned by AOS
100% owned by AOS
100% owned by AOS
Jireh Semiconductor Incorporated
Oregon, United States
100% owned by AOS
Chongqing Alpha and Omega Semiconductor Limited
Chongqing, China
51% owned by AOS
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23.1
We have issued our reports dated August 23, 2018 , with respect to the consolidated financial statements, schedules, and internal control over financial reporting in
the Annual Report of Alpha and Omega Semiconductor Limited on Form 10-K for the year ended June 30, 2018 . We consent to the incorporation by reference of
said reports in the Registration Statements of Alpha Omega Semiconductor Limited and on Forms S-8 (File Nos. 333-207987, 333-190935, 333-186480, 333-
180126, 333-172173, and 333-166403); Form S-3 and Form S-3/A (File No. 333-214666).
/s/ GRANT THORNTON LLP
San Francisco, California
August 23, 2018
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.1
I, Mike F. Chang, certify that:
1.
2.
3.
4.
I have reviewed this report on Form 10-K of Alpha and Omega Semiconductor Limited;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
a.
b.
c.
d.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a.
b.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control
over financial reporting.
Date: August 23, 2018
/s/ MIKE F. CHANG
Mike F. Chang
Chief Executive Officer
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Yifan Liang, certify that:
1.
2.
3.
4.
I have reviewed this report on Form 10-K of Alpha and Omega Semiconductor Limited;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
a.
b.
c.
d.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a.
b.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control
over financial reporting.
Date: August 23, 2018
/s/ YIFAN LIANG
Yifan Liang
Chief Financial Officer and Corporate Secretary
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. § 1350, AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
I, Mike F. Chang, the chief executive officer of Alpha and Omega Semiconductor Limited (the “Company”), certify for the purposes of 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge,
a.
b.
the Annual Report of the Company on Form 10-K for the fiscal year ended June 30, 2018 (the “Report”), fully complies with the requirements of
section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: August 23, 2018
/s/ MIKE F. CHANG
Mike F. Chang
Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. § 1350, AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
I, Yifan Liang, the chief financial officer of Alpha and Omega Semiconductor Limited (the “Company”), certify for the purposes of 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge,
a.
b.
the Annual Report of the Company on Form 10-K for the fiscal year ended June 30, 2018 (the “Report”), fully complies with the requirements of
section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: August 23, 2018
/s/ YIFAN LIANG
Yifan Liang
Chief Financial Officer and Corporate Secretary