10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________
FORM 10-Q
_________________________________
(MARK ONE)
x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2015

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
77-0553536
(State or Other Jurisdiction of Incorporation or Organization)
(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)
__________________________________________

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 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
Smaller reporting company   o
 
 
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
Number of common shares outstanding as of January 31, 2016: 22,137,610.



Alpha and Omega Semiconductor Limited
Form 10-Q
Fiscal Second Quarter Ended December 31, 2015
TABLE OF CONTENTS
 
 
 
Page
Part I.
FINANCIAL INFORMATION
 
    Item 1.
 
 
 
 
 
    Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
    Item 3.
    Item 4.
Part II.
OTHER INFORMATION
 
    Item 1.
    Item 1A.
Risk Factors
    Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
    Item 3.
Defaults Upon Senior Securities
    Item 4.
Mine Safety Disclosures
    Item 5.
Other Information
    Item 6.
Exhibits
 






PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ALPHA AND OMEGA SEMICONDUCTOR LIMITED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands except par value per share)
 
December 31,
2015
 
June 30,
2015
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
81,858

 
$
106,085

Restricted cash
231

 
368

Accounts receivable, net
26,054

 
38,781

Inventories
61,102

 
64,175

Deferred income tax assets
2,403

 
2,205

Other current assets
3,220

 
4,279

Total current assets
174,868

 
215,893

Property, plant and equipment, net
112,057

 
119,579

Intangible assets, net
16

 
17

Goodwill
269

 
269

Deferred income tax assets - long term
10,316

 
10,848

Other long-term assets
2,240

 
2,011

Total assets
$
299,766

 
$
348,617

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
33,875

 
$
44,083

Accrued liabilities
20,103

 
19,225

Income taxes payable
1,710

 
1,372

Deferred margin
761

 
716

Capital leases
485

 
941

Total current liabilities
56,934

 
66,337

Income taxes payable - long term
1,626

 
1,601

Deferred income tax liabilities
3,720

 
3,548

Capital leases - long term
64

 
64

Other long term liabilities
851

 
953

Total liabilities
63,195

 
72,503

Commitments and contingencies (Note 8)

 

Shareholders' equity:
 
 
 
Preferred shares, par value $0.002 per share:
 
 
 
Authorized: 10,000 shares, issued and outstanding: none at December 31, 2015 and June 30, 2015

 

Common shares, par value $0.002 per share:
 
 
 
Authorized: 50,000 shares, issued and outstanding: 27,783 shares and 22,297 shares, respectively at December 31, 2015 and 27,314 shares and 26,316 shares, respectively at June 30, 2015
56

 
55

Treasury shares at cost, 5,486 shares at December 31, 2015 and 998 shares at June 30, 2015
(48,808
)
 
(8,593
)
Additional paid-in capital
185,495

 
181,040

Accumulated other comprehensive income
750

 
905

Retained earnings
99,078

 
102,707

Total shareholders’ equity
236,571

 
276,114

Total liabilities and shareholders’ equity
$
299,766

 
$
348,617

See accompanying notes to these condensed consolidated financial statements.

1

Table of Contents

ALPHA AND OMEGA SEMICONDUCTOR LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands except per share data)



 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
2015
 
2014
 
2015
 
2014
Revenue
$
79,825

 
$
81,328

 
$
161,264

 
$
169,545

Cost of goods sold
64,853

 
66,086

 
131,231

 
136,143

Gross profit
14,972

 
15,242

 
30,033

 
33,402

Operating expenses
 
 
 
 
 
 
 
Research and development
5,941

 
6,430

 
12,105

 
13,226

Selling, general and administrative
9,197

 
9,135

 
18,856

 
18,739

Impairment of long-lived assets
432

 

 
432

 

Total operating expenses
15,570

 
15,565

 
31,393

 
31,965

Operating income (loss)
(598
)
 
(323
)
 
(1,360
)
 
1,437

Interest income and other, net
9

 
26

 
20

 
74

Interest expense
(7
)
 
(43
)
 
(17
)
 
(116
)
Income (loss) before income taxes
(596
)
 
(340
)
 
(1,357
)
 
1,395

Income tax expense
1,015

 
957

 
2,229

 
2,128

Net loss
$
(1,611
)
 
$
(1,297
)
 
$
(3,586
)
 
$
(733
)
Net loss per share
 
 
 
 
 
 
 
Basic
$
(0.07
)
 
$
(0.05
)
 
$
(0.16
)
 
$
(0.03
)
Diluted
$
(0.07
)
 
$
(0.05
)
 
$
(0.16
)
 
$
(0.03
)
Weighted average number of common shares used to compute net loss per share
 
 
 
 
 
 
 
Basic
22,269

 
26,577

 
22,483

 
26,481

Diluted
22,269

 
26,577

 
22,483

 
26,481
























See accompanying notes to these condensed consolidated financial statements.


2

Table of Contents

ALPHA AND OMEGA SEMICONDUCTOR LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited, in thousands)


 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
2015
 
2014
 
2015
 
2014
Net loss
$
(1,611
)
 
$
(1,297
)
 
$
(3,586
)
 
$
(733
)
Foreign currency translation adjustment, net of tax
11

 
(98
)
 
(155
)
 
(146
)
Total comprehensive loss
$
(1,600
)
 
$
(1,395
)
 
$
(3,741
)
 
$
(879
)









z


































See accompanying notes to these condensed consolidated financial statements.


3

Table of Contents
ALPHA AND OMEGA SEMICONDUCTOR LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)



 
Six Months Ended December 31,
 
2015
 
2014
Cash flows from operating activities
 
 
 
Net loss
$
(3,586
)
 
$
(733
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation
13,777

 
13,911

Amortization
1

 
139

Share-based compensation expense
1,874

 
2,379

Deferred income taxes, net
506

 
(174
)
Loss on disposal of property and equipment

 
36

Impairment of long-lived assets
432

 

Government grant via forgiven loan

 
(250
)
Changes in assets and liabilities:
 
 
 
Accounts receivable
12,727

 
9,830

Inventories
3,073

 
(3,422
)
Other current and long-term assets
831

 
307

Accounts payable
(6,454
)
 
(6,940
)
Income taxes payable
364

 
(502
)
Accrued and other liabilities
897

 
471

Net cash provided by operating activities
24,442

 
15,052

Cash flows from investing activities
 
 
 
Purchases of property and equipment
(10,770
)
 
(6,938
)
Restricted cash released
137

 
40

Net cash used in investing activities
(10,633
)
 
(6,898
)
Cash flows from financing activities
 
 
 
Proceeds from exercise of stock options and ESPP
2,772

 
1,759

Payment for repurchase of common shares
(40,257
)
 

Repayments of borrowings

 
(6,429
)
Principal payments on capital leases
(456
)
 
(551
)
Net cash used in financing activities
(37,941
)
 
(5,221
)
Effect of exchange rate changes on cash and cash equivalents
(95
)
 
(74
)
Net increase (decrease) in cash and cash equivalents
(24,227
)
 
2,859

Cash and cash equivalents at beginning of period
106,085

 
117,788

Cash and cash equivalents at end of period
$
81,858

 
$
120,647

 
 
 
 
Supplemental disclosures of non-cash investing and financing information:
 
 
 
Property and equipment purchased but not yet paid
$
1,645

 
$
5,673

Re-issuance of treasury stock
$
43

 
$
35



See accompanying notes to these condensed consolidated financial statements.

4

ALPHA AND OMEGA SEMICONDUCTOR LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


1. The Company and Significant Accounting Policies
The Company
Alpha and Omega Semiconductor Limited and its subsidiaries (the “Company,” "AOS," "we" or "us") design, develop and supply a broad range of power semiconductors. The Company's portfolio of products targets high-volume applications, including personal 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. The Company conducts its operations primarily in the United States of America (“USA”), Hong Kong, China, Taiwan, Korea and Japan.
Basis of Preparation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and with the instructions to Article 10 of Securities and Exchange Commission Regulation S-X, as amended. They do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with U.S. GAAP for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2015. All significant intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, all adjustments (consisting of normal recurring adjustments and accruals) considered necessary for a fair presentation of the results of operations for the period presented have been included in the interim periods. Operating results for the six months ended December 31, 2015 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2016. The condensed consolidated balance sheet at June 30, 2015 is derived from the audited financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2015.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires the Company to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. To the extent there are material differences between these estimates and actual results, the Company's condensed consolidated financial statements will be affected. On an ongoing basis, the Company evaluates the estimates, judgments and assumptions including those related to stock rotation returns, price adjustments, allowance for doubtful accounts, inventory reserves, warranty accrual, income taxes, share-based compensation, and useful lives for property, plant and equipment and intangible assets.
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.

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. Factors that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or any other significant adverse change that would indicate that the carrying amount of an asset or group of assets may not be recoverable. Where such factors indicate potential impairment, 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.

5

ALPHA AND OMEGA SEMICONDUCTOR LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The Company's accumulated other comprehensive income (loss) consists of cumulative foreign currency translation adjustments. Total comprehensive income (loss) is presented in the condensed consolidated statements of comprehensive income (loss).

Recent Accounting Pronouncements
    
In July 2015, the FASB issued No. 2015-11, Inventory - Simplifying the Measurement of Inventory ("ASU 2015-11"). ASU 2015-11 is additional guidance regarding the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value. This guidance is effective for fiscal years and interim periods beginning after December 15, 2016. Early adoption is permitted. 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 April 2015, the FASB issued ASU No. 2015-03, Interest -Imputation of Interest(Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts and the accounting for debt issue costs under IFRS. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. ASU 2015-03 is effective for the annual period ending after December 15, 2015, and interim periods within those fiscal years. Early adoption of the amendments in this Update is permitted for financial statements that have not been previously issued. 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 February 2015, the FASB issued ASU No. 2015-2, “Consolidation (Topic 820): Amendments to the Consolidation Analysis.” ASU 2015-2 provides a revised consolidation model for all reporting entities to use in evaluating whether they should consolidate certain legal entities. All legal entities will be subject to reevaluation under this revised consolidation model. The revised consolidation model, among other things, (i) modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities, (ii) eliminates the presumption that a general partner should consolidate a limited partnership, and (iii) modifies the consolidation analysis of reporting entities that are involved with VIEs through fee arrangements and related party relationships. ASU 2015-2 is effective for fiscal years, and interim reporting periods within those fiscal years, beginning after December 15, 2015. The Company does not expect the adoption of this guidance will have a material impact on its consolidated financial position, results of operations or cash flows.

In August 2014, the FASB issued amended standards No. 2014-15, Presentation of Financial Statements - Going Concern ("ASU 2014-15"), to provide guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures requirement. The amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation for each annual and interim reporting period, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early adoption is permitted. 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 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers(“ASU 2014-09”). The standard provides companies with a single model for use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific revenue guidance. The core principle 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. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016. The guidance permits companies to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through a cumulative adjustment.  In July 2015, the FASB voted to amend ASU 2014-09 by approving a one-year deferral of the effective date as well as providing the option to early adopt the standard on the original effective date. In August 2015 the FASB issued ASU 2015-14, Revenue from Contracts with customers - Deferral of the Effective Date", that defers by one year the effective date of ASU 2014-09.  The ASU is effective for annual reporting periods beginning after December 15, 2017, including interim periods

6

ALPHA AND OMEGA SEMICONDUCTOR LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

within that reporting period.  The Company is in the process of evaluating the timing of its adoption and the impact of adoption on its consolidated financial statements.




7

ALPHA AND OMEGA SEMICONDUCTOR LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

2. Net Loss Per Share
The following table presents the calculation of basic and diluted net loss per share:
 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
2015
 
2014
 
2015
 
2014
 
(in thousands, except per share data)
Numerator:
 
 
 
 
 
 
 
Net loss
$
(1,611
)
 
$
(1,297
)
 
$
(3,586
)
 
$
(733
)
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
Weighted average number of common shares used to compute basic net loss per share
22,269

 
26,577

 
22,483

 
26,481

Diluted:
 
 
 
 
 
 
 
Weighted average number of common shares used to compute diluted net loss per share
22,269

 
26,577

 
22,483

 
26,481

Net loss per share:
 
 
 
 
 
 
 
Basic
$
(0.07
)
 
$
(0.05
)
 
$
(0.16
)
 
$
(0.03
)
Diluted
$
(0.07
)
 
$
(0.05
)
 
$
(0.16
)
 
$
(0.03
)
The following potential dilutive securities were excluded from the computation of diluted net loss per share as their effect would have been anti-dilutive:
 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Employee stock options and RSUs
3,299

 
3,694

 
3,458

 
3,758

ESPP to purchase common shares
551

 
462

 
369

 
441

Total potential dilutive securities
3,850

 
4,156

 
3,827

 
4,199




8

ALPHA AND OMEGA SEMICONDUCTOR LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

3. Concentration of Credit Risk and Significant Customers
The Company manages its credit risk associated with exposure to distributors and direct customers on outstanding accounts receivable through the application of credit approvals, credit ratings and other monitoring procedures. In some instances, the Company also obtains letters of credit from certain customers.
Credit sales, which are mainly on credit terms of 30 to 60 days, are only made to customers who meet the Company's credit requirements, while sales to new customers or customers with low credit ratings are usually made on an advance payment basis. The Company considers its trade accounts receivable to be of good credit quality because its key distributors and direct customers have long-standing business relationships with the Company and the Company has not experienced any significant bad debt write-offs of accounts receivable in the past. The Company closely monitors the aging of accounts receivable from its distributors and direct customers, and regularly reviews their financial positions, when available.
Summarized below are individual customers whose revenue or accounts receivable balances were 10% or higher than the respective total consolidated amounts:
 
Three Months Ended December 31,
 
Six Months Ended December 31,
Percentage of revenue
2015
 
2014
 
2015
 
2014
Customer A
24.0
%
 
24.2
%
 
23.6
%
 
24.2
%
Customer B
39.6
%
 
37.1
%
 
37.8
%
 
38.4
%
Customer C
10.8
%
 
11.5
%
 
12.6
%
 
12.2
%

 
December 31,
2015
 
June 30,
2015
Percentage of accounts receivable
 
Customer A
28.5
%
 
29.4
%
Customer B
18.4
%
 
27.7
%
Customer C
21.8
%
 
14.7
%

 
4. Balance Sheet Components
Accounts receivable:
 
December 31,
2015
 
June 30,
2015
 
(in thousands)
Accounts receivable
$
42,489

 
$
58,249

Less: Allowance for price adjustments
(16,405
)
 
(19,438
)
Less: Allowance for doubtful accounts
(30
)
 
(30
)
Accounts receivable, net
$
26,054

 
$
38,781


Inventories:
 
December 31,
2015
 
June 30,
2015
 
(in thousands)
Raw materials
$
18,917

 
$
19,423

Work in-process
33,015

 
31,269

Finished goods
9,170

 
13,483

 
$
61,102

 
$
64,175


9

ALPHA AND OMEGA SEMICONDUCTOR LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Property, plant and equipment, net:
 
December 31,
2015
 
June 30,
2015
 
(in thousands)
Land
$
4,877

 
$
4,877

Building
4,243

 
4,243

Manufacturing machinery and equipment
187,862

 
172,467

Equipment and tooling
12,125

 
11,261

Computer equipment and software
20,931

 
20,602

Office furniture and equipment
1,780

 
1,762

Leasehold improvements
28,098

 
27,568

 
259,916

 
242,780

Less: Accumulated depreciation
(155,416
)
 
(141,883
)
 
104,500

 
100,897

Equipment and construction in progress
7,557

 
18,682

Property, plant and equipment, net
$
112,057

 
$
119,579

Other long-term assets:
 
December 31,
2015
 
June 30,
2015
 
(in thousands)
Prepayments for property and equipment
$
324

 
$
692

Investment in a privately held company
100

 
100

Office leases deposits
1,814

 
1,215

Other
2

 
4

 
$
2,240

 
$
2,011

Accrued liabilities:
 
December 31,
2015
 
June 30,
2015
 
(in thousands)
Accrued compensation and benefit
$
6,387

 
$
5,600

Accrued vacation
1,771

 
1,830

Accrued bonuses
1,292

 
1,152

Warranty accrual
1,596

 
1,957

Stock rotation accrual
1,872

 
1,894

Accrued professional fees
1,631

 
1,402

ESPP payable
357

 
343

Customer deposits
830

 
149

Accrued inventory
268

 
697

Accrued facilities related expenses
1,469

 
1,367

Other accrued expenses
2,630

 
2,834

 
$
20,103

 
$
19,225




10

ALPHA AND OMEGA SEMICONDUCTOR LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The activities in the warranty accrual, included in accrued liabilities, are as follows:
 
Six Months Ended December 31,
 
2015
 
2014
 
(in thousands)
Beginning balance
$
1,957

 
$
1,346

Additions
747

 
910

Utilization
(1,108
)
 
(1,068
)
Ending balance
$
1,596

 
$
1,188

The activities in the stock rotation accrual, included in accrued liabilities, are as follows:
 
Six Months Ended December 31,
 
2015
 
2014
 
(in thousands)
Beginning balance
$
1,894

 
$
1,645

Additions
3,120

 
2,820

Utilization
(3,142
)
 
(2,802
)
Ending balance
$
1,872

 
$
1,663

Other Long-term liabilities:
 
December 31,
2015
 
June 30,
2015
 
(in thousands)
Deferred rent
$
851

 
$
953



5. Shareholders' Equity and Share-based Compensation
Share Repurchase

In April 2015, the Board of Directors approved an increase in the remaining available amount under the Company’s then effective share repurchase program from approximately $17.8 million to $50.0 million. The repurchases may be made from the open market pursuant to a pre-established Rule 10b5-1 trading plan (as amended, the "Repurchase Trading Plan") or through privately negotiated transactions. The amount and timing of any repurchases depend on a number of factors, including but not limited to, the Company's trading price, volume and availability of its common shares, applicable legal requirements, its business and financial conditions an general market environment. There is no guarantee that any repurchases under the Program will be made or that such repurchases would enhance the value of our shares. The Company accounts for treasury stock under the cost method. Shares repurchased 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 are charged to retained earnings.

In June 2015, the Company commenced a modified Dutch auction tender offer (the "Tender Offer") to repurchase an aggregate of $30.0 million of its outstanding common shares with a price range between $8.50 and $9.20 per share. In July 2015, the Company completed the Tender Offer in which it purchased 3,296,703 shares of its common shares, at a purchase price of $9.10 per share, for an aggregate purchase price of $30.0 million, excluding fees and expenses relating to the Tender Offer. These shares represented approximately 12.53% of the total number of the Company's common shares issued and outstanding as of June 30, 2015. The Tender Offer was part of the $50.0 million share repurchase program approved by the Board in April 15, 2015. Immediately following the completion of the Tender Offer, approximately $18.2 million remained available under the share repurchase program.

11

ALPHA AND OMEGA SEMICONDUCTOR LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 
During the six months ended December 31, 2015, the Company repurchased 4,491,375 shares from the open market, including 3,296,703 shares in the Tender Offer, for a total cost of $40.0 million, at an average price of $8.90 per share, excluding fees and related expenses of $0.3 million, under the share repurchase program.  Since the inception of the program in 2010, the Company repurchased an aggregate of 5,518,969 shares from the open market for a total cost of $48.9 million, at an average price of $8.87 per share, excluding fees and related expenses.  No repurchased shares have been retired. Of the 5,518,969 repurchased shares, 32,766 shares with a weighted average repurchase price of $13.85 per share, were reissued at an average price of $1.98 per share for option exercises and vested restricted share units.

Stock Options
The following table summarizes the Company's stock option activities for the six months ended December 31, 2015:
 
 
 
Weighted
 
 
 
 
 
Average
 
 
 
Number of
 
Exercise Price
 
Aggregate
 
Shares
 
Per Share
 
Intrinsic Value
Outstanding at June 30, 2015
2,836,217

 
$
10.77

 
$
1,410,538

Granted

 
$

 
 
Exercised
(277,916
)
 
$
7.05

 
$
458,006

Canceled or forfeited
(304,012
)
 
$
12.45

 
 
Outstanding at December 31, 2015
2,254,289

 
$
11.01

 
$
1,226,993


Information with respect to stock options outstanding and exercisable at December 31, 2015 is as follows:
 
Options Outstanding  
 
Options Vested and Exercisable  
 
Number Outstanding
 
Weighted-Average
Remaining Contractual Life (years) 
 
Weighted-Average
Exercise Price
 
Number Exercisable
 
Weighted-Average
Exercise Price
Total options outstanding
2,254,289

 
4.85
 
$
11.01

 
1,890,474

 
$
11.62

Options vested and expected to vest
2,222,601

 
4.80
 
$
11.05

 
 
 
 
Options expected to vest are the result of applying the pre-vesting forfeiture rate assumption to total outstanding options.
The fair value of stock options granted were estimated at the date of grant using the Black-Scholes option valuation model for the six months ended December 31, 2015 with the following weighted average assumptions:
 
Six Months Ended December 31,
 
2015
Volatility rate
39.91%
Risk-free interest rate
1.6% - 1.7%
Expected term
5.5 years
Dividend yield
0%
Historically, the Company estimates its expected volatility based on that of the publicly traded shares of industry peers over a period equivalent to the expected term of the stock awards granted. Beginning in July 2015, the Company's publicly traded shares history is also included in estimating the volatility rate.



12

ALPHA AND OMEGA SEMICONDUCTOR LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Restricted Stock Units ("RSU")
The following table summarizes the Company's RSU activities for the six months ended December 31, 2015:
 
Number of Restricted Stock
Units
 
Weighted Average
Grant Date Fair
Value Per Share
 
Weighted Average
Remaining
Recognition
Period (Years)
 
Aggregate Intrinsic Value
Nonvested at June 30, 2015
873,946

 
$
8.64

 
1.77
 
$
7,638,288

Granted
89,402

 
$
8.41

 
 
 
 
Vested
(87,676
)
 
$
9.35

 
 
 
 
Forfeited
(79,143
)
 
$
8.74

 
 
 
 
Nonvested at December 31, 2015
796,529

 
$
8.53

 
1.45
 
$
7,320,102

RSUs vested and expected to vest
701,811

 
 
 
1.35
 
$
6,449,648

The fair value of RSU is estimated based on the market price of the Company's share on the date of grant.
Employee Share Purchase Plan ("ESPP")
The assumptions used to estimate the fair values of common shares issued under the ESPP were as follows:
 
 
 
Six Months Ended December 31,
 
2015
Volatility rate
32.2%
Risk-free interest rate
0.3% - 0.9%
Expected term
1.3 years
Dividend yield
0%
Share-based Compensation Expense
The total share-based compensation expense related to stock options, ESPP and RSUs described above, recognized in the condensed consolidated statements of operations for the periods presented was as follows:
 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
 
(in thousands)
Cost of goods sold
$
157

 
$
174

 
$
288

 
$
328

Research and development
264

 
293

 
457

 
499

Selling, general and administrative
664

 
810

 
1,129

 
1,552

 
$
1,085

 
$
1,277

 
$
1,874

 
$
2,379

Total unrecognized stock-based compensation expense as of December 31, 2015 was $4.2 million, which includes estimated forfeitures and is expected to be recognized over a weighted-average period of 1.3 years.

6. Income Taxes
The Company recognized income tax expense of approximately $1.0 million for both of the three months ended December 31, 2015 and 2014, respectively. The Company recognized income tax expense of approximately $2.2 million and $2.1 million for the six months ended December 31, 2015 and 2014, respectively. The estimated effective tax rate for the three months ended December 31, 2015 was (170.3)% compared to (281.5)% for the three months ended December 31, 2014. The estimated effective tax rate for the six months ended December 31, 2015 was (164.3)% compared to 152.5% for the six months ended December 31, 2014. The changes in the effective tax rate and tax expense between the periods resulted primarily from changes in the mix of earnings in various geographic jurisdictions between the current and same period of last year.

13

ALPHA AND OMEGA SEMICONDUCTOR LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The Company files its income tax returns in the United States and in various foreign jurisdictions. The tax years 2001 to 2015 remain open to examination by U.S. federal and state tax authorities. The tax years 2009 to 2015 remain open to examination by foreign tax authorities.
The Company's income tax returns are subject to examinations by the Internal Revenue Service and other tax authorities in various jurisdictions. In accordance with the guidance on the accounting for uncertainty in income taxes, the Company regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of its provision for income taxes. These assessments can require considerable estimates and judgments. As of December 31, 2015, the gross amount of unrecognized tax benefits was approximately $6.6 million, of which $4.4 million, if recognized, would reduce the effective income tax rate in future periods. If the Company's estimate of income tax liabilities proves to be less than the ultimate assessment, then a further charge to expense would be required. If events occur and the payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when the Company determines the liabilities are no longer necessary. The Company does not anticipate any material changes to its uncertain tax positions during the next twelve months.

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 December 31, 2015. The Company will continue to monitor ongoing developments and potential impacts to its financial statements.



14

ALPHA AND OMEGA SEMICONDUCTOR LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

7. Segment and Geographic Information
The Company is organized as, and operates in, one operating segment: the design, development and supply of power semiconductor products for computing, consumer electronics, communication and industrial applications. The chief operating decision-maker is the Chief Executive Officer. The financial information presented to the Company's Chief Executive Officer is on a consolidated basis, accompanied by information about revenue by customer and geographic region, for purposes of evaluating financial performance and allocating resources. The Company has one business segment, and there are no segment managers who are held accountable for operations, operating results and plans for products or components below the consolidated unit level. Accordingly, the Company reports as a single operating segment.
The Company sells its products primarily to distributors in the Asia Pacific region, who in turn sell these products to end customers. Because the Company's distributors sell their products to end customers which may have a global presence, revenue by geographical location is not necessarily representative of the geographical distribution of sales to end user markets.
The revenue by geographical location in the following tables is based on the country or region to which the products were shipped to:
 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
 
(in thousands)
Hong Kong
$
69,904

 
$
70,278

 
$
140,357

 
$
145,525

China
7,922

 
8,823

 
16,938

 
19,780

South Korea
442

 
524

 
1,100

 
1,163

United States
784

 
881

 
1,501

 
1,564

Other Countries
773

 
822

 
1,368

 
1,513

 
$
79,825

 
$
81,328

 
$
161,264

 
$
169,545

The following is a summary of revenue by product type:
 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
 
(in thousands)
Power discrete
$
59,392

 
$
61,203

 
$
119,305

 
$
126,094

Power IC
16,400

 
16,109

 
$
33,913

 
$
35,265

Packaging and testing services
4,033

 
4,016

 
$
8,046

 
$
8,186

 
$
79,825

 
$
81,328

 
$
161,264

 
$
169,545

 
Long-lived assets, net consisting of property, plant and equipment, by geographical area are as follows:
 
December 31,
2015
 
June 30,
2015
 
(in thousands)
China
$
66,907

 
$
71,618

United States
44,572

 
47,439

Other Countries
578

 
522

 
$
112,057

 
$
119,579



15

ALPHA AND OMEGA SEMICONDUCTOR LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

8. Commitments and Contingencies
Purchase Commitments
As of December 31, 2015 and June 30, 2015, the Company had approximately $39.0 million and $29.2 million, respectively, of outstanding purchase commitments primarily for purchases of semiconductor raw materials, wafers, spare parts and packaging and testing services, and approximately $5.2 million and $3.7 million, respectively, of capital commitments for the purchase of property and equipment.
Contingencies and Indemnities
The Company is currently not a party to any pending material legal proceedings. The Company has in the past, and may from time to time in the future, become involved in legal proceedings arising from the normal course of business activities.  The semiconductor industry is characterized by frequent claims and litigation, including claims regarding patent and other intellectual property rights as well as improper hiring practices. Irrespective of the validity of such claims, the Company could incur significant costs in the defense of such claims and suffer adverse effects on its operations.
The Company is a party to a variety of agreements that it has contracted with various third parties. Pursuant to these agreements, the Company may be obligated to indemnify another party to such an agreement with respect to certain matters. Typically, these obligations arise in the context of contracts entered into by the Company, under which the Company customarily agrees to hold the other party harmless against losses arising from a breach of representations and covenants related to such matters as title to assets sold, certain intellectual property rights, specified environmental matters and certain income taxes. In these circumstances, payment by the Company is customarily conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, which procedures typically allow the Company to challenge the other party's claim. Further, the Company's obligations under these agreements may be limited in time and/or amount, and in some instances, the Company may have recourse against third parties for certain payments made by it under these agreements. The Company has not historically paid or recorded any material indemnifications and no accrual has been made at December 31, 2015 and June 30, 2015.
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.


16


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for the historical information contained herein, the matters addressed in this Item 2 constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements are subject to a variety of risks and uncertainties, including those discussed below under the heading “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, that could cause actual results to differ materially from those anticipated by the Company’s management. The Private Securities Litigation Reform Act of 1995 (the “Act”) provides certain “safe harbor” provisions for forward-looking statements. All forward-looking statements made in this Quarterly Report on Form 10-Q are made pursuant to the Act. The Company undertakes no obligation to publicly release the results of any revisions to its forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unexpected events. Unless the context otherwise requires, the words “AOS,” the “Company,” “we,” “us” and “our” refer to Alpha and Omega Semiconductor Limited and its subsidiaries.
This management’s discussion should be read in conjunction with the management’s discussion included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2015, filed with the Securities and Exchange Commission on August 27, 2015.
Overview

We are a designer, developer and global supplier of a broad portfolio of power semiconductors. Our portfolio of power semiconductors includes approximately 1,500 products, and has grown significantly with the introduction of over 100 new products during each of the fiscal years ended June 30, 2015, 2014 and 2013. During the six months ended December 31, 2015, we introduced an additional 26 new products. Our teams of scientists and engineers have developed extensive intellectual properties and technical knowledge that encompass major aspects of power semiconductors, which we believe enables us to introduce and develop innovative products to address the increasingly complex power requirements of advanced electronics. We have an extensive patent portfolio that consists of 566 patents and 161 patent applications in the United States as of December 31, 2015. We differentiate ourselves by integrating our expertise in technology, design and advanced 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 200mm wafer fabrication facility located in Hillsboro, Oregon, or the Oregon fab, which is critical for us to accelerate proprietary technology development and new product introduction as well as to improve our financial performance in the long run. To meet the market demand for 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.

During the second quarter of fiscal year of 2016, we introduced the industry's first single n-channel 45V MOSFET with an ultra-low on-resistance of 1.15Ohms at 10V. This addition to our medium voltage product portfolio is designed to address a wide range of applications including secondary-side synchronous rectification in AC/DC and DC/DC converters, as well as industrial and motor drive applications. We also released AOC3864, a common-drain 20V dual n-channel MOSFET with an ultra-low on-resistance of 5.7mOhms at 4.5V. This new device offers the best approach in designing battery protection circuit modules, while providing a strong and reliable solution. In addition, we introduced the new generation of high efficiency PairFETs. The AOE6930 is an asymmetric package with integrated high-side and low-side MOSFETs. The product is designed with our latest silicon technology to optimize the conducting resistance and the switching characteristics of both MOSFETs in order to attain the highest efficiency over the whole output range when working as the power stage for a Vcore power supply circuit. The combination of AOS's XSFET™ technology in this new generation PairFET package, gives the device an extra advantage in thermal dissipation. Moreover, we released the AOZ3101, a high efficiency, simple-to-use synchronous buck regulator, with an operating input voltage range from 4.5V to 18V, supplying 2A of continuous current. The device offers a low on-resistant power stage in a thermally enhanced 3mm x 3mm DFN package, allowing cooler power conversion for a variety of consumer electronics application such as LCD TVs, set-top boxes, as well as DVD players and recorders. During the first quarter of fiscal year of 2016, we released AO4294, the latest addition to our family of high efficiency charging solutions. This new device is offered in an easy-to-use SO-8 package, which helps manufacturers keep the mounting cost low, while still getting the best efficiency and

17




power dissipation possible. The AO4294 is an ideal solution for synchronours rectification in high efficiency chargers and adapters for mobile devices. We also released AOZ3053, a 5A EZBuck DC/DC regulator with smart mode adaption functions, available in a thermally enhanced exposed pad SO-8 package. The AOZ3053 is the first of this new smart platform, which allows for more thermally efficient DC/DC solutions for consumer, networking and industrial applications such as LCD TVs, set-top boxes, cable modems, and power supplies.
In September 2015 we entered into a preliminary agreement with the state authority of Chongqing, China, to form a joint venture for a new state-of-the-art power semiconductor manufacturing facility in the Liangjiang New Area of Chongqing. Under the proposed agreement, the initial capitalization of the joint venture is expected to be approximately $300 million. The Chongqing authority would own 49% of the venture's equity and invest in cash. We would own 51% of the equity and contribute primarily our existing assembly and testing equipment as well as certain intellectual property related to the operation of the facility. The joint venture offers the prospect of creating new competitive advantages that can fuel growth of our business. We expect the joint venture to deliver significant cost savings for us and allow us to reduce our tangible assets as well as drive meaningful improvements in working capital and capital expenditures. We are currently negotiating a definitive joint venture agreement with Chongqing government to provide for the specific terms of the collaboration. There is no guarantee that we will be able to successfully negotiate such an agreement on terms favorable to us, or at all,
Factors affecting our performance
Our performance is affected by several key factors, including the following:

The global, regional economic and PC market conditions: Because our products primarily serve consumer electronic applications, a deterioration of the global and regional economic conditions could materially affect our revenue and results of operations. In particular, 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 markets can have a material adverse effect on our revenue and results of operations.  Our revenue from the PC markets accounted for approximately 44.4% and 46.7% of our total revenue for the three months ended December 31, 2015 and 2014, respectively, and 45.2% and 47.0% for the six months ended December 31, 2015 and 2014, respectively. Since the beginning of calendar year 2013, 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.

In response to this trend, we have been executing and are continuing to execute our strategies to diversify our product portfolio and penetrate into other market segments, including the consumer, communications and industrial market segments, improve gross margin ad profit by implementing cost control measures. We are making progress in reducing our reliance on the computing market, and we are also committed to continue to support our computing business and capitalize on the opportunity with a more focused and competitive PC product strategy. However, as we develop and sell new products that serve more diversified markets, we expect that sales based on the PC markets, as a percentage of the total revenue, will continue to decline. If the rate of decline in the PC markets is faster than we expected, or if we cannot successfully diversify or introduce new products to keep pace with the declining PC markets, we may not be able to alleviate its negative impact, which will adversely affect our results of operations.

Manufacturing costs:  Our gross margin may be affected by our manufacturing costs, including utilization of our own manufacturing facilities, pricing of wafers from other 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 in-house packaging and testing facilities and our Oregon fab.  If we are unable to utilize the capacity of our in-house manufacturing facilities at a desired level, our gross margin may be adversely affected.  For example, we may experience lower capacity utilization at our factories as a result of declining PC markets, which could adversely affect our gross margin and profitability. 

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 that average selling prices of our existing products will continue to decline in the future. However, in the normal course of business, we seek to offset the effect of declining average selling prices by introducing new and higher value products, expanding existing products for new applications and new customers, and reducing the manufacturing cost of existing products.
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,

18




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 shares with customers.
Distributor ordering patterns 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 outlooks and market and economic conditions of end customers. Because these forecasts may not be accurate, channel inventory held at our distributors may fluctuate significantly, which in turn may prompt distributors to make significant adjustments to their purchase orders placed with us. As a result, our revenue and operating results may fluctuate significantly from quarter to quarter. In addition, because our products are used in consumer electronics products, our revenue is subject to seasonality. Our sales seasonality is affected by numerous factors, including global and regional economic conditions as well as the PC market conditions, revenue generated from new products, changes in distributor ordering patterns in response to channel inventory adjustments and end customer demand for our products and fluctuations in consumer purchase patterns prior to major holiday seasons. In recent periods, broad fluctuations in the semiconductor markets and the global and regional economic conditions, in particular the decline of the PC market conditions, have had a more significant impact on our results of operations than seasonality.
Principal line items of statements of operations
The following describes the principal line items set forth in our condensed consolidated statements of operations:
Revenue
We generate revenue primarily from the sale of power semiconductors, consisting of power discretes and power ICs. Historically, a majority of our revenue was derived from power discrete products and a smaller amount was derived from power IC 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 includes the effect of the estimated stock rotation returns and price adjustments that we expect to provide to our distributors. Stock rotation returns are governed by contract and are limited to a specified percentage of the monetary value of products purchased by the distributor during a specified period. At our discretion or upon our direct negotiations with the original design manufacturers ("ODMs") or original equipment manufacturers ("OEMs"), we may elect to grant special pricing that is below the prices at which we sold our products to the distributors. In these situations, we will grant price adjustments to the distributors reflecting such special pricing. We estimate the price adjustments for inventory at the distributors based on factors such as distributor inventory levels, pre-approved future distributor selling prices, distributor margins and demand for our products.
Cost of goods sold

Our cost of goods sold primarily consists of costs associated with semiconductor wafers, packaging and testing, personnel, including share-based compensation expense, overhead attributable to manufacturing, operations and procurement, and cost 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 market conditions, our goal is to make such rates less vulnerable to market fluctuations. We believe our market diversification strategy and product growth will drive higher volumes 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. 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 markets as well as align our operating expenses to the revenue level.

19




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 for research and development personnel. We continue to invest in developing new technologies and products utilizing our own fabrication and packaging facilities as it is critical to our long-term success. We also evaluate appropriate investment levels and stay focused on new product introductions to improve our competitiveness. We expect that our research and development expenses will fluctuate from time to time.
Selling, general and administrative expenses.  Our selling, general and administrative expenses consist primarily of salaries, bonuses, benefits, share-based compensation expense, product promotion costs, occupancy costs, travel expenses, expenses related to sales and marketing activities, amortization of software, depreciation of equipment, maintenance costs and other expenses for general and administrative functions as well as costs for outside professional services, including legal, audit and accounting services. We expect our selling, general and administrative expenses to fluctuate in the near future as we continue to exercise cost control measures in response to the declining PC markets.
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.
Results of Operations
The following tables set forth statements of operations, also expressed as a percentage of revenue, for the three and six months ended December 31, 2015 and 2014. Our historical results of operations are not necessarily indicative of the results for any future period.

20




 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
 
(% of revenue)
 
(in thousands)
 
(% of revenue)
Revenue
$
79,825

 
$
81,328

 
100.0
 %
 
100.0
 %
 
$
161,264

 
$
169,545

 
100.0
 %
 
100.0
 %
Cost of goods sold
64,853

 
66,086

 
81.2
 %
 
81.3
 %
 
131,231

 
136,143

 
81.4
 %
 
80.3
 %
Gross profit
14,972

 
15,242

 
18.8
 %
 
18.7
 %
 
30,033

 
33,402

 
18.6
 %
 
19.7
 %
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Research and development
5,941

 
6,430

 
7.4
 %
 
7.9
 %
 
12,105

 
13,226

 
7.5
 %
 
7.8
 %
Selling, general and administrative
9,197

 
9,135

 
11.5
 %
 
11.2
 %
 
18,856

 
18,739

 
11.7
 %
 
11.1
 %
Impairment of long-lived assets
432

 

 
0.5
 %
 
 %
 
432

 

 
0.3
 %
 
 %
Total operating expenses
15,570

 
15,565

 
19.4
 %
 
19.1
 %
 
31,393

 
31,965

 
19.5
 %
 
18.9
 %
Operating income (loss)
(598
)
 
(323
)
 
(0.6
)%
 
(0.4
)%
 
(1,360
)
 
1,437

 
(0.8
)%
 
0.8
 %
Interest income and other, net
9

 
26

 
 %
 
 %
 
20

 
74

 
 %
 
 %
Interest expense
(7
)
 
(43
)
 
 %
 
 %
 
(17
)
 
(116
)
 
 %
 
(0.1
)%
Income (loss) before income taxes
(596
)
 
(340
)
 
(0.6
)%
 
(0.4
)%
 
(1,357
)
 
1,395

 
(0.8
)%
 
0.8
 %
Income tax expense
1,015

 
957

 
1.3
 %
 
1.2
 %
 
2,229

 
2,128

 
1.4
 %
 
1.3
 %
Net loss
$
(1,611
)
 
$
(1,297
)
 
(1.9
)%
 
(1.6
)%
 
$
(3,586
)
 
$
(733
)
 
(2.2
)%
 
(0.4
)%
Share-based compensation expense was allocated as follow:
 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
 
(% of revenue)
 
(in thousands)
 
(% of revenue)
Cost of goods sold
$
157

 
$
174

 
0.2
%
 
0.2
%
 
$
288

 
$
328

 
0.2
%
 
0.2
%
Research and development
264

 
293

 
0.3
%
 
0.4
%
 
457

 
499

 
0.3
%
 
0.3
%
Selling, general and administrative
664

 
810

 
0.8
%
 
1.0
%
 
1,129

 
1,552

 
0.7
%
 
0.9
%
Total
$
1,085

 
$
1,277

 
1.3
%
 
1.6
%
 
$
1,874

 
$
2,379

 
1.2
%
 
1.4
%

21




Revenue
The following is a summary of revenue by product type:
 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
2015
 
2014
 
Change
 
2015
 
2014
 
Change
 
(in thousands)
 
(in thousands)
 
(in percentage)
 
(in thousands)
 
(in thousands)
 
(in percentage)
Power discrete
$
59,392

 
$
61,203

 
$
(1,811
)
 
(3.0
)%
 
$
119,305

 
$
126,094

 
$
(6,789
)
 
(5.4
)%
Power IC
16,400

 
16,109

 
291

 
1.8
 %
 
33,913

 
35,265

 
(1,352
)
 
(3.8
)%
Packaging and testing services
4,033

 
4,016

 
17

 
0.4
 %
 
8,046

 
8,186

 
(140
)
 
(1.7
)%
 
$
79,825

 
$
81,328

 
$
(1,503
)
 
(1.8
)%
 
$
161,264

 
$
169,545

 
$
(8,281
)
 
(4.9
)%

Total revenue was $79.8 million for the three months ended December 31, 2015, a decrease of $1.5 million, or 1.8%, as compared to $81.3 million for the same quarter last year. The decrease was primarily due to $1.8 million decrease in sales of power discrete products, partially offset by $0.3 million increase in sales of power IC products. The net decrease in product revenue, including power discrete and power IC products was mainly a result of a 12.5% decrease in unit shipments, partially offset by a 12.1% increase in average selling price mainly due to a shift in product mix. The revenue of packaging and testing services for the three months ended December 31, 2015 and 2014 remained flat.

Total revenue was $161.3 million for the six months ended December 31, 2015, an decrease of $8.3 million, or 4.9%, as compared to $169.5 million for the same period last year. The decrease primarily consisted of $6.8 million and $1.4 million in sales of power discrete products and power IC products, respectively. The decrease in power discrete and power IC products was primarily due to a 10.4% decrease in unit shipments, partially offset by a 6.3% increase in average selling price as compared to the same period of last year mainly due to a shift in product mix. The decrease in revenue of packaging and testing services for the six months ended December 31, 2015 as compared to the same period last year was primarily due to reduced demand as a result of the declining PC markets.

Cost of goods sold and gross profit
 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
2015
 
2014
 
Change
 
2015
 
2014
 
Change
 
(in thousands)
 
(in thousands)
 
(in percentage)
 
(in thousands)
 
(in thousands)
 
(in percentage)
Cost of goods sold
$
64,853

 
$
66,086

 
$
(1,233
)
 
(1.9
)%
 
$
131,231

 
$
136,143

 
$
(4,912
)
 
(3.6
)%
  Percentage of revenue
81.2
%
 
81.3
%
 


 
 
 
81.4
%
 
80.3
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross profit
$
14,972

 
$
15,242

 
$
(270
)
 
(1.8
)%
 
$
30,033

 
$
33,402

 
$
(3,369
)
 
(10.1
)%
  Percentage of revenue
18.8
%
 
18.7
%
 


 
 
 
18.6
%
 
19.7
%
 
 
 
 

Cost of goods sold was $64.9 million for the three months ended December 31, 2015, a decrease of $1.2 million, or 1.9%, as compared to $66.1 million for the same quarter last year, primarily due to decreased unit shipments. The decrease was partially offset by the overall manufacturing cost increase due to lower factory utilization as compared to the same period last year. Gross margin for the three months ended December 31, 2015 and 2014 remained flat.

Cost of goods sold was $131.2 million for the six months ended December 31, 2015, a decrease of $4.9 million, or 3.6%, as compared to $136.1 million for the same period last year, primarily due to decreased unit shipments. The decrease was partially offset by the overall manufacturing cost increase due to lower factory utilization as compared to the same period last year. Gross margin decreased by 1.1 percentage point to 18.6% for the six months ended December 31, 2015 as compared to 19.7% for the same period last year. The decrease in gross margin was primarily due to lower factory utilization partially offset by increased average selling prices and positive impact of continued cost control during the current period.
Research and development expenses

22




 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
2015
 
2014
 
Change
 
2015
 
2014
 
Change
 
(in thousands)
 
(in thousands)
 
(in percentage)
 
(in thousands)
 
(in thousands)
 
(in percentage)
Research and development
$
5,941

 
$
6,430

 
$
(489
)
 
(7.6
)%
 
$
12,105

 
$
13,226

 
$
(1,121
)
 
(8.5
)%
Research and development expenses were $5.9 million for the three months ended December 31, 2015, a decrease of $0.5 million, or 7.6%, as compared to $6.4 million for the same quarter last year. The decrease was primarily attributable to a $0.4 million decrease in product prototyping engineering expense as a result of reduced engineering activities, as well as a $0.1 million decrease in employee compensation expenses primarily due to less headcount and continued cost control effort during the current quarter as compared to the same quarter last year.
Research and development expenses were $12.1 million for the six months ended December 31, 2015, a decrease of $1.1 million, or 8.5%, as compared to $13.2 million for the same period last year. The decrease was primarily attributable to a $0.8 million decrease in product prototyping engineering expense as a result of reduced engineering activities, as well as a $0.4 million decrease in employee compensation expenses primarily due to less headcount and continued cost control effort during the current period as compared to the same period last year.
Selling, general and administrative expenses
 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
2015
 
2014
 
Change
 
2015
 
2014
 
Change
 
(in thousands)
 
(in thousands)
 
(in percentage)
 
(in thousands)
 
(in thousands)
 
(in percentage)
Selling, general and administrative
$
9,197

 
$
9,135

 
$
62

 
0.7
%
 
$
18,856

 
$
18,739

 
$
117

 
0.6
%
Selling, general and administrative expenses were $9.2 million and $9.1 million for the three months ended December 31, 2015 and 2014, respectively. The slight increase was primarily due to $0.3 million increase in foreign exchange losses mainly due to recent appreciation of USD against RMB during the current quarter, and a $0.1 million increase in employee compensation and benefits mainly due to an increase in headcount and less number of days of temporary Company shut down in the current quarter as part of our cost control measures. These increases were partially offset by a $0.2 million decrease in depreciation and amortization expense as a result of certain assets being fully depreciated since fiscal year of 2014, and a $0.1 million decrease in share-based compensation expense primarily as a result of increased cancellation of stock options and restricted share unit awards during the current quarter.
Selling, general and administrative expenses were $18.9 million for the six months ended December 31, 2015, an increase of $0.1 million, or 0.6%, as compared to $18.7 million for the same period last year. The increase was primarily due to $0.5 million increase in foreign exchange losses mainly due to recent appreciation of USD against RMB for current period over prior year same period, a $0.1 million increase in audit and tax consulting fees due to increased related consulting activities, and a $0.2 million increase in employee compensation and benefits mainly due to an increase in headcount and less number of days of temporary Company shut down in the current period as part of our cost control measures. These increases were partially offset by a $0.3 million decrease in depreciation and amortization expense as a result of certain assets being fully depreciated since fiscal year of 2014, and a $0.4 million decrease in share-based compensation expense primarily as a result of a decrease of equity awards granted and increased cancellation of shares stock options and restricted share unit awards related to the resignation of an executive officer during the current period.
Impairment of long-lived assets

During the quarter ended December 31, 2015, we identified certain manufacturing equipment purchased for projects that were subsequently canceled. Because the equipment did not have values for other purposes, we recorded an asset impairment charge of approximately $0.4 million related to these equipment during the quarter ended December 31, 2015.
Interest income and expenses
Interest income was primarily related to interest earned from cash and cash equivalents. The decrease in interest income during the three and six months ended December 31, 2015 as compared to the same periods last year was primarily due to the decrease in average cash balances.

23




Interest expense was primarily related to bank borrowings. The decrease in interest expenses during the three and six months ended December 31, 2015 as compared to the same periods last year was primarily due to the $20 million term loan obtained in May 2012 for our Oregon fab was fully repaid in May 2015.
Income tax expense
 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
2015
 
2014
 
Change
 
2015
 
2014
 
Change
 
(in thousands)
 
(in thousands)
 
(in percentage)
 
(in thousands)
 
(in thousands)
 
(in percentage)
Income tax expense
$
1,015

 
$
957

 
$
58

 
6.1
%
 
$
2,229

 
$
2,128

 
$
101

 
4.7
%
We recognized income tax expense of approximately $1.0 million for both of the three months ended December 31, 2015 and 2014, respectively. The income tax expense for the three months ended December 31, 2015 was slightly higher than that for the same period last year primarily due to the changes in the mix of earnings in various geographic jurisdictions between the current and same period of last year.
We recognized income tax expense of approximately $2.2 million and $2.1 million for the six months ended December 31, 2015 and 2014, respectively. The income tax expense for the six months ended December 31, 2015 was slightly higher than that for the same period last year primarily due to the changes in the mix of earnings in various geographic jurisdictions between the current and same period of last year.



24




Liquidity and Capital Resources
Our principal need for liquidity and capital resources is to maintain sufficient working capital to support our operations and to invest adequate capital expenditures to grow of our business. Currently, we financed our operations and capital expenditures primarily through funds generated from operations.

In April 2015, our Board of Directors of the Company approved an increase in the remaining available amount under the Company’s then effective share repurchase program from approximately $17.8 million to $50.0 million. The repurchases may be made from the open market pursuant to a pre-established Rule 10b5-1 trading plan (as amended, the "Repurchase Trading Plan") or through privately negotiated transactions. The amount and timing of any repurchases depend on a number of factors, including but not limited to, the trading price, volume and availability of our common shares, applicable legal requirements, our business and financial conditions and general market environment. There is no guarantee that any repurchases under the Program will be made or that such repurchases would enhance the value of our shares.

In June 2015, we commenced a modified Dutch auction tender offer (the "Tender Offer") to repurchase an aggregate of $30.0 million of our outstanding common shares with a price range between $8.50 and $9.20 per share. In July 2015, we completed the Tender Offer in which we purchased 3,296,703 shares of its common shares, at a purchase price of $9.10 per share, for an aggregate purchase price of $30.0 million, excluding fees and expenses relating to the Tender Offer. These shares represented approximately 12.53% of the total number of the Company's common shares issued and outstanding as of June 30, 2015. The Tender Offer was part of the $50.0 million share repurchase program approved by the Board on April 15, 2015.

During the six months ended December 31, 2015, we repurchased a total of 4,491,375 shares from the open market, including 3,296,703 common shares in the Tender Offer, for a total cost of $40.0 million, at an average price of $8.90 per share, excluding fees and related expenses of $0.3 million, under the share repurchase program.  Since the inception of the program in 2010, the Company repurchased an aggregate of 5,518,969 shares from the open market for a total cost of $48.9 million, at an average price of $8.87 per share, excluding fees and related expenses.  As of December 31, 2015, approximately $8.2 million remained available under the share repurchase program. Shares repurchased are accounted for as treasury shares and the total cost of shares repurchased is recorded as a reduction of shareholders' equity.

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. We may require additional capital due to changing business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If our cash is insufficient to meet our needs, we may seek to raise capital through equity or debt financing. The sale of additional equity securities could result in dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and may include operating and financial covenants that would restrict our operations. We cannot be certain that any financing will be available in the amounts we need or on terms acceptable to us, if at all.
Cash and cash equivalents
As of December 31, 2015 and June 30, 2015, we had $81.9 million and $106.1 million of cash and cash equivalents, respectively. Our cash and cash equivalents primarily consisted of cash on hand and short-term bank deposits with original maturities of three months or less.
The following table shows our cash flows from operating, investing and financing activities for the periods indicated:

 
Six Months Ended December 31,
 
2015
 
2014
 
(in thousands)
Net cash provided by operating activities
$
24,442

 
$
15,052

Net cash used in investing activities
(10,633
)
 
(6,898
)
Net cash used in financing activities
(37,941
)
 
(5,221
)
Effect of exchange rate changes on cash and cash equivalents
(95
)
 
(74
)
 
 
 
 
Net increase (decrease) in cash and cash equivalents
$
(24,227
)
 
$
2,859

 
 
 
 

25




Cash flows from operating activities
Net cash provided by operating activities of $24.4 million for the six months ended December 31, 2015 resulted primarily from net loss of $3.6 million, non-cash charges of $16.6 million, and net change in assets and liabilities providing net cash of $11.4 million. The non-cash charges of $16.6 million included a $13.8 million of depreciation and amortization expenses, a $1.9 million of share-based compensation expense, a $0.4 million of impairment of long-lived assets, and a $0.5 million of deferred income taxes. The net change in assets and liabilities providing net cash of $11.4 million was primarily due to a $12.7 million decrease in accounts receivable due to the timing of billings and collection of payments, a $3.1 million decrease in inventories as we reduced our inventories, a $0.9 million increase in accrued and other liabilities, a $0.8 million decrease in other current and long term assets primarily due to decrease in advance payments to vendors, and a $0.4 million increase in income taxes payable, partially offset by a $6.5 million decrease in accounts payable primarily due to timing of payment.
Net cash provided by operating activities of $15.1 million for the six months ended December 31, 2014 resulted primarily from net loss of $0.7 million, non-cash charges of $16.0 million, and net change in assets and liabilities using net cash of $0.3 million. The non-cash charges of $16.0 million included $14.1 million of depreciation and amortization expenses and $2.4 million of share-based compensation expense, partially offset by $0.3 million of forgiveness of the loan from the State of Oregon during the period and $0.2 million of net deferred income taxes. The net change in assets and liabilities using net cash of $0.3 million was primarily due to a $9.8 million decrease in accounts receivable due to the timing of billings and collection of payments, a $0.3 million decrease in other current and long term assets primarily due to decrease in advance payments to vendors, and a $0.5 million increase in accrued and other liabilities, partially offset by a $3.4 million increase in inventories to meet market demand, a $6.9 million decrease in accounts payable primarily due to timing of payment, as well as a $0.5 million decrease in income taxes payable.
Cash flows from investing activities    
Net cash used in investing activities of $10.6 million for the six months ended December 31, 2015 was primarily attributable to purchase of property and equipment of $10.8 million to increase our in-house production capacity, partially offset by $0.1 million decrease in restricted cash during the period.
Net cash used in investing activities of $6.9 million for the six months ended December 31, 2014 was primarily attributable to purchase of property and equipment of $6.9 million to increase our in-house production capacity.
Cash flows from financing activities
Net cash used in financing activities of $37.9 million for the six months ended December 31, 2015 was primarily attributable to $40.3 million for repurchase of common shares, including repurchases in the Tender Offer, and $0.5 million in payment of capital lease obligations, partially offset by $2.8 million of proceeds from exercise of stock options and issuance of shares under the ESPP.
Net cash used in financing activities of $5.2 million for the six months ended December 31, 2014 was primarily attributable to $6.4 million of repayment of our borrowings and $0.6 million in payment of capital lease obligations, partially offset by $1.8 million of proceeds from exercise of stock options and issuance of shares under the ESPP.
Capital expenditures

Capital expenditures were $10.8 million and $6.9 million for the six months ended December 31, 2015 and 2014, respectively. Our capital expenditures primarily consisted of purchases of equipment for our packaging and testing services and for our Oregon fab as well as for upgrading our operational and financial systems. The increase in capital expenditure was primarily due to the additional purchases of equipment and assets to improve our technology and support our new product introductions to fuel business growth.
Commitments
As of December 31, 2015 and June 30, 2015, we had approximately $39.0 million and $29.2 million, respectively, of outstanding purchase commitments primarily for purchases of semiconductor raw materials, wafers, spare parts and packaging and testing services.
As of December 31, 2015 and June 30, 2015, we had approximately $5.2 million and $3.7 million, respectively, of capital commitments for the purchase of property and equipment.

26




Off-Balance Sheet Arrangements
As of December 31, 2015, we had no material off-balance sheet arrangements as defined in Regulation S-K 303(a)(4)(ii) arrangements.

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


27





ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in the market risks previously disclosed in Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," of our Annual Report on Form 10-K for the year ended June 30, 2015, filed with the SEC on August 27, 2015.

ITEM 4. CONTROLS AND PROCEDURES
Management's Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”)), as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of December 31, 2015 have been designed and are functioning effectively to provide reasonable assurance that the information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the three months ended December 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitation on Effectiveness of Controls
While our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance that their respective objectives will be met, we do not expect that our disclosure controls and procedures or our internal control over financial reporting are or will be capable of preventing or detecting all errors and all fraud. Any control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met.


28





PART II. OTHER INFORMATION

ITEM 1. 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 its operations.

ITEM 1A. RISK FACTORS

In addition to the risk factors below, Item 1A of Part I of our Annual Report on Form 10-K for the year ended June 30, 2015, filed with the SEC on August 27, 2015, contains risk factors identified by the Company. Except for the risk factors below, there have been no material changes to the risk factors we previously disclosed. Our operations could also be affected by additional factors that are not presently known to us or by factors that we currently consider immaterial to our business.

We may not be able to successfully negotiate and execute the joint venture agreement with Chongqing government, and even if such agreement is executed, we may not fully realize the anticipated benefits of the proposed joint venture.

In September 2015, we announced a preliminary agreement with the state authority of Chongqing, China, to form a joint venture for a new state-of-the-art power semiconductor manufacturing and assembly/testing facility in the Liangjiang New Area of Chongqing.  We are in the process of negotiating a definitive joint venture agreement with the Chongqing government for the proposed project.  The negotiation of a complex joint venture agreement require substantial commitment of time and efforts from our management.  There is no guarantee that we will be able to successfully negotiate such an agreement on terms favorable to us, or at all, and we may encounter difficulties and disagreements with the Chongqing government that may delay or prevent us from entering into such an agreement.  Our failure to negotiate or execute a joint venture agreement in a timely manner, or at all, would adversely affect our business operations, financial performance and the trading price of our shares.

Even if we are able to enter into a definitive execute a joint venture agreement with the Chongqing government, we may not fully realize the anticipated benefits of the project, such as cost savings, improvement in working capital and gross margin, increased revenue and profitability, and enhanced market share for our products.  The joint venture is expected to require a multi-year commitment from us to gradually move our existing assembly and testing equipment from Shanghai, China to the new facility in Chongqing.  In addition, at a later date, the joint venture is expected to construct a 12-inch fabrication facility suited for the production of power semiconductors.  The establishment and operation of a new manufacturing facility involves significant risks and challenges, including, but are not limited to, the following:

Unexpected costs or delays in transferring our assembly and testing operations to the new facility;
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 the requisite expertise and experiences to operate a 12-in fabrication facility;
Inability to fully integrate the joint venture with our existing fabrication facility in Oregon, and inability to fully utilize both fabrication facilities;
Failure of Chongqing government to meet its obligations under the joint venture agreement;
Difficulties in protecting and enforcing our intellectual property rights;
Inability to take advantage of the expected tax savings;
Changes or uncertainties in economic, legal, regulatory, social and political conditions in China;
Labor disputes and difficulties in recruiting new employees; and

29




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

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

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

In April 2015, our Board of Directors of the Company approved an increase in the remaining available amount under the Company’s then existing share repurchase program from approximately $17.8 million to $50.0 million. Under this program, the repurchases may be made from the open market pursuant to a pre-established Rule 10b5-1 trading plan (as amended, the "Repurchase Trading Plan") or through privately negotiated transactions. The amount and timing of any repurchases depend on a number of factors, including but not limited to, the trading price, volume and availability of our common shares, applicable legal requirements, our business and financial conditions an general market environment. There is no guarantee that any repurchases under the program will be made or that such repurchases would enhance the value of our shares.

In June 2015, the Company commenced a modified Dutch auction tender offer (the "Tender Offer") to repurchase an aggregate of $30.0 million of its outstanding common shares with a price range between $8.50 and $9.20 per share. In July 2015, the Company completed the Tender Offer in which it purchased 3,296,703 shares of its common shares, at a purchase price of $9.10 per share, for an aggregate purchase price of $30.0 million, excluding fees and expenses relating to the Tender Offer. These shares represented approximately 12.53% of the total number of the Company's common shares issued and outstanding as of June 30, 2015. The Tender Offer was part of the $50.0 million share repurchase program approved by the Board in April 15, 2015.

The following table sets for the share repurchases under this program during the second fiscal quarter ended December 31, 2015.

Period
 
Total Number of Shares (or Units) Purchased
 
Average Price Paid per Share (or Unit)
 
Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Be Purchased Under the Plans or Programs
October 1, 2015 to October 31, 2015
 
397,458

 
 
 
$
8.68

 
 
 
397,458

 
 
 
 
 
 
 
November 1, 2015 to November 30, 2015
 
138,411

 
 
 
$
9.29

 
 
 
138,411

 
 
 
 
 
 
 
December 1, 2015 to December 31, 2015
 
25,400

 
 
 
$
9.76

 
 
 
25,400

 
 
 
 
 
 
 
Total repurchase during the three months ended December 31, 2015
 
561,269

 
 
 
$
8.88

 
 
 
561,269

 
 
 
$
8,221,000

 
 





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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.

ITEM 5. OTHER INFORMATION
Not applicable.



31




ITEM 6. EXHIBITS

3.1
Amended and Restated Bye-laws (incorporated by reference to Exhibit 3.1 to the Form 8-K filed on November 12, 2015.)
31.1
Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
XBRL Instance
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation
101.DEF
XBRL Taxonomy Extension Definition
101.LAB
XBRL Taxonomy Extension Labels
101.PRE
XBRL Taxonomy Extension Presentation





32




SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
February 4, 2016
ALPHA AND OMEGA SEMICONDUCTOR LIMITED
 
 
By:
/s/  YIFAN LIANG
 
Yifan Liang
 
Chief Financial Officer and Corporate Secretary
 
(Principal Financial Officer)

 


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