Form 6-K

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 6-K

 

 

REPORT OF FOREIGN PRIVATE ISSUER

PURSUANT TO RULE 13a-16 OR 15d-16 UNDER

THE SECURITIES EXCHANGE ACT OF 1934

FOR THE MONTH OF MAY 2011

001-34717

(Commission File Number)

 

 

Alpha and Omega Semiconductor Limited

(Translation of registrant’s name into English)

 

 

Clarendon House

2 Church Street

Hamilton HM 11

Bermuda

(Address of principal registered office)

 

 

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F:

Form 20-F  x            Form 40-F  ¨

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):  ¨

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):  ¨

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934:

Yes  ¨            No  x

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): N/A

 

 

 


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report includes forward-looking statements that relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Words such as, but not limited to, “believe,” “expect,” “predict,” “anticipate,” “estimate,” “intend,” “plan,” “targets,” “likely,” “will,” “may,” “should,” “would,” “could,” and similar expressions or phrases identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. Forward-looking statements include, but are not limited to, statements about:

 

   

anticipated trends and challenges in our business and the markets in which we operate;

 

   

our ability to anticipate market needs or develop new or enhanced products to meet those needs;

 

   

our ability to integrate our expertise in developing power semiconductors;

 

   

our ability to maintain relationships with third-party foundries and subcontractors;

 

   

our ability to compete in our industry;

 

   

our expectation relating to capital expenditure and manufacturing costs;

 

   

our ability to defend ourselves in intellectual property infringement lawsuits against us and protect our confidential information and intellectual property rights;

 

   

our ability to successfully identify and manage any potential acquisitions;

 

   

our investment in our in-house packaging and testing facility;

 

   

our ability to build and maintain relationships and achieve additional design wins with leading original design manufacturers, or ODMs and original equipment manufacturers, or OEMs;

 

   

our expectations regarding the use of proceeds from our initial public offering;

 

   

our ability to retain senior management and key personnel and recruit qualified engineers and other skilled employees;

 

   

our ability to manage growth; and

 

   

economic and business conditions in China.

All forward-looking statements involve risks, assumptions and uncertainties. The occurrence of the events described, and the achievement of the expected results, depend on many factors, some or all of which are not predictable or within our control. Actual results may differ materially from expected results. For a more complete discussion of these risks, assumptions and uncertainties and for other risks and uncertainties, see our filings with the Securities and Exchange Commission, including the section titled “Risk Factors” contained in the annual report on Form 20-F. These risks, assumptions and uncertainties are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could harm our results.

 

1


Alpha and Omega Semiconductor Limited

LOGO

Interim Financial Report

Fiscal Third Quarter Ended March 31, 2011

 

2


ALPHA AND OMEGA SEMICONDUCTOR LIMITED

CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)

 

     Note      March 31,
2011
     June 30,
2010
 

ASSETS

        

Noncurrent assets:

        

Property, plant and equipment

     6       $ 115,896       $ 44,163   

Intangible assets

     7         4,069         3,820   

Investment in an associate

     8         —           25,693   

Deferred income tax assets

     16         10,866         2,296   

Other noncurrent assets

     9         5,474         458   
                    

Total noncurrent assets

        136,305         76,430   

Current assets:

        

Inventories

     11         53,652         28,315   

Trade receivables

     10         39,647         30,639   

Other current assets

        3,898         3,075   

Restricted cash

        79         707   

Cash and cash equivalents

     15         112,253         119,001   
                    

Total current assets

        209,529         181,737   
                    

Total assets

      $ 345,834       $ 258,167   
                    

EQUITY

        

Capital and reserves

        

Share capital

     12       $ 49       $ 44   

Share premium

     12         129,512         103,803   

Other reserves

        22,537         17,946   

Retained earnings

        96,453         67,603   
                    

Total equity

        248,551         189,396   
                    

LIABILITIES

        

Noncurrent liabilities:

        

Deferred income tax liabilities

     16         35         25   

Deferred rent

        901         670   

Finance lease liabilities

     13         130         436   
                    

Total noncurrent liabilities

        1,066         1,131   

Current liabilities:

        

Trade and other payables

     17         73,421         47,584   

Current income tax liabilities

     21         6,522         3,917   

Borrowings

     14         13,245         3,680   

Trade and other payable to an associate

     26         —           10,100   

Finance lease liabilities

     13         449         571   

Provisions

     18         2,580         1,788   
                    

Total current liabilities

        96,217         67,640   
                    

Total liabilities

        97,283         68,771   
                    

Total equity and liabilities

      $ 345,834       $ 258,167   
                    

The accompanying notes are an integral part of these consolidated financial statements

 

3


ALPHA AND OMEGA SEMICONDUCTOR LIMITED

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

(unaudited)

 

            Three Months Ended
March 31,
    Nine Months Ended
March 31,
 
     Note      2011     2010     2011     2010  

Revenue

     5       $ 91,074      $ 77,672      $ 264,473      $ 216,371   

Cost of goods sold

     19,20         63,029        56,845        188,159        158,730   
                                   

Gross profit

     19,20         28,045        20,827        76,314        57,641   

Research and development expenses

     19,20         7,609        5,447        20,541        15,040   

Selling, general and administrative expenses

     19,20         9,556        6,093        27,892        17,597   
                                   

Total operating expenses

        17,165        11,540        48,433        32,637   

Operating profit

        10,880        9,287        27,881        25,004   

Finance income

        60        11        141        30   

Finance cost

        (78     (31     (187     (162
                                   

Finance income (cost), net

        (18     (20     (46     (132

Gain on equity interest

     25         —          —          998        —     

Share of profit of an associate

     8         —          815        1,984        4,914   
                                   

Profit before income tax

        10,862        10,082        30,817        29,786   

Income tax expense

     21         839        494        1,967        1,140   
                                   

Net profit for the period

      $ 10,023      $ 9,588      $ 28,850      $ 28,646   
                                   

Earnings per share

           

Basic

     22       $ 0.41      $ 1.20      $ 1.25      $ 3.60   

Diluted

     22       $ 0.39      $ 0.47      $ 1.17      $ 1.42   

Weighted-average number of shares used in computing earnings per share

           

Basic shares

     22         24,372        7,970        23,155        7,949   

Diluted shares

     22         25,887        20,601        24,673        20,180   

The accompanying notes are an integral part of these consolidated financial statements.

 

4


ALPHA AND OMEGA SEMICONDUCTOR LIMITED

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

 

 

     Three Months Ended
March 31,
     Nine Months Ended
March 31,
 
     2011      2010      2011      2010  

Net profit

   $ 10,023       $ 9,588       $ 28,850       $ 28,646   

Other comprehensive income

           

Currency translation differences

     41         8         240         34   
                                   

Total comprehensive income

   $ 10,064       $ 9,596       $ 29,090       $ 28,680   
                                   

The accompanying notes are an integral part of these consolidated financial statements.

 

5


ALPHA AND OMEGA SEMICONDUCTOR LIMITED

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(in thousands)

(unaudited)

 

           Other
Reserves
               
     Share
Capital
and Share
Premium
    Share-Based
Payment
Reserve
     Translation
Differences
     Retained
Earnings
     Total  

Balance at June 30, 2009

   $ 50,296      $ 13,925       $ 566       $ 30,012       $ 94,799   

Currency translation differences

     —          —           34         —           34   

Profit for the period

     —          —           —           28,646         28,646   

Share-based compensation expense

     —          1,898         —           —           1,898   

Proceeds from exercise of share options

     98        —           —           —           98   
                                           

Balance at March 31, 2010

   $ 50,394      $ 15,823       $ 600       $ 58,658       $ 125,475   
                                           

Balance at June 30, 2010

   $ 103,847      $ 17,369       $ 577       $ 67,603       $ 189,396   

Currency translation differences

     —          —           240         —           240   

Profit for the period

     —          —           —           28,850         28,850   

IPO issuance costs

     (117     —           —           —           (117

Common shares issued for APM acquisition

     23,066        —           —           —           23,066   

Proceeds from Employee Share Purchase Plan

     840        —           —           —           840   

Share-based compensation expense

     —          4,351         —           —           4,351   

Proceeds from exercise of share options

     1,925        —           —           —           1,925   
                                           

Balance at March 31, 2011

   $ 129,561      $ 21,720       $ 817       $ 96,453       $ 248,551   
                                           

The accompanying notes are an integral part of these consolidated financial statements.

 

6


ALPHA AND OMEGA SEMICONDUCTOR LIMITED

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

            Nine Months Ended  
            March 31,  
     Note      2011     2010  

Cash flows from operating activities

       

Cash generated from operations

     23       $ 38,669      $ 23,604   

Interest paid

        (187     (162

Income tax paid

        (1,149     (1,152
                   

Net cash generated from operating activities

        37,333        22,290   
                   

Cash flows from investing activities

       

APM Acquisition, net of cash acquired

     25         (1,569     —     

Increase equity interest in APM

     8         (1,831     —     

Deposit for manufacturing capacity

     9         (5,000     —     

Purchase of property, plant and equipment

     6         (36,195     (9,147

Purchases of intangible assets

     7         (84     (30

Restricted cash released

        628        —     
                   

Net cash used in investing activities

        (44,051     (9,177
                   

Cash flows from financing activities

       

Proceeds from Employee Share Purchase Plan

     12         840        —     

Proceeds from exercise of share options

     12         1,908        98   

Proceeds from borrowings

     14         22,253        —     

Repayment of borrowings

     14         (24,034     (13,856

Payments of IPO related costs

        (610     (1,269

Principal payment on finance leases

     13         (428     (264
                   

Net cash used in financing activities

        (71     (15,291
                   

Net decrease in cash and cash equivalents

        (6,789     (2,178

Cash and cash equivalents at beginning of period

        119,001        60,416   

Exchange gains on cash and cash equivalents

        41        14   
                   

Cash and cash equivalents at end of period

      $ 112,253      $ 58,252   
                   

Supplemental cash flow disclosures:

       

Increase (decrease) of property, plant and equipment included in trade and other payable

      ($ 5,180   $ 1,606   

Capitalized IPO costs included in trade and other payables

        —        $ 1,189   

Prepayments for purchase of property, plant and equipment

      $ 911        —     

Issuance of common shares for APM Acquisition

      $ 23,066        —     

The accompanying notes are an integral part of these consolidated financial statements.

 

7


ALPHA AND OMEGA SEMICONDUCTOR LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1—THE COMPANY:

Alpha and Omega Semiconductor Limited and its subsidiaries (the “Company”) design, develop and supply a broad range of analog semiconductors, specializing in power semiconductors. The Company conducts its operations primarily in the United States of America (“USA”), Hong Kong, Macau, China, Taiwan, Korea, Japan. As disclosed in Note 25 to the consolidated financial statements, on December 3, 2010, the Company acquired control of Agape Package Manufacturing Ltd. (“APM”) in a cash and stock transaction with a purchase price of $40,045,000 (the “APM Acquisition”). The Company had a 43% equity interest in APM prior to the acquisition, which was accounted for under the equity method of accounting. After the acquisition, APM became a wholly owned subsidiary of the Company.

Alpha and Omega Semiconductor Limited was incorporated in Bermuda on September 27, 2000 as an exempted limited liability company. The address of its registered office is Clarendon House, 2 Church Street, Hamilton HM 11, Bermuda.

The unaudited consolidated financial statements for the three and nine months ended March 31, 2011 were authorized for the issuance by an officer of the Company, pursuant to authority granted by the audit committee of the Board of Directors, on May 11, 2011.

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

The accounting policies applied are consistent with those of the annual financial statements for the year ended June 30, 2010, as described in those annual financial statements, except as described in Note 4 to the consolidated financial statements. The consolidated financial statements are presented in the United States dollars (“U.S. dollars”).

Basis of Preparation

This consolidated interim financial information for the three and nine months ended March 31, 2011 has been prepared in accordance with IAS 34, ‘Interim financial reporting’. The consolidated interim financial information should be read in conjunction with the annual financial statements for the year ended June 30, 2010, which have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board.

In the opinion of management, the unaudited interim consolidated financial statements have been prepared in accordance with IAS 34 and include all adjustments, consisting only of normal and recurring adjustments, necessary for the fair statement of the Company’s financial statements. The results of the three and nine months ended March 31, 2011 are not necessarily indicative of the results to be expected for the fiscal year ending June 30, 2011.

The preparation of consolidated financial statements in conformity with IAS 34 requires the use of accounting estimates. It also requires management to exercise judgment in the process of applying the Company’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial information are disclosed in Note 4 to the consolidated financial statements.

Change in an Accounting Estimate

During the nine months ended March 31, 2011, upon the APM acquisition, the Company performed a review and assessment of the useful lives of the Company’s property, plant and equipment. Based on the results of management’s review, the Company revised the estimated useful life of its manufacturing and facility equipment for depreciation purposes from 5 years to 8 years starting from December 1, 2010 on a prospective basis. The effect of this change was to decrease depreciation expense by $2,166,000 and $2,927,000, increase net income by $1,677,000 and $2,253,000, net of tax effect, and increase basic earnings per share by $0.07 and $0.10 and diluted earnings per share by $0.06 and $0.09 for the three and nine months ended March 31, 2011, respectively. The effect of this change is expected to decrease depreciation expense by approximately $2,166,000 for the three months ending June 30, 2011 and approximately $5,093,000 for the fiscal year ending June 30, 2011.

 

8


ALPHA AND OMEGA SEMICONDUCTOR LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(UNAUDITED)

 

New standards, amendments and interpretations effective

We had considered the impact of new standards, amendments and interpretations that were effective for financial years beginning on and after July 1, 2010 and the adoption of these new standards, amendments and interpretations did not have a material impact to the Company’s consolidated financial statements.

New standards, amendments and interpretations that are not yet effective and have not been early adopted by the Company

 

   

IFRS 9, “Financial instruments”, issued in December 2009. It addresses the classification and measurement of financial assets. IFRS 9 only permits the recognition of fair value gains and losses in other comprehensive income if they relate to equity investments that are not held for trading. Fair value gains and losses on available-for-sale debt investments, for example, will therefore have to be recognized directly in profit or loss. The standard is effective for financial years beginning on or after January 1, 2013 but is available for early adoption. The Company has not yet assessed IFRS 9’s full impact but does not believe that it will have a material impact to the Company’s consolidated financial statements.

 

   

Revised IAS 24, “Related party disclosures”, issued in November 2009. It supersedes IAS 24, “Related party disclosures’, issued in 2003. The revision simplifies the definition of a related party, clarifying its intended meaning and eliminating inconsistencies from the definition and provides a partial exemption from the disclosure requirements for government-related entities. The revised IAS 24 is required to be applied for financial years beginning on or after January 1, 2011. Earlier application, in whole or in part, is permitted. The Company has not yet assessed the revised IAS 24’s full impact but does not believe that it will have a material impact to the Company’s consolidated financial statements.

 

9


ALPHA AND OMEGA SEMICONDUCTOR LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(UNAUDITED)

 

NOTE 3—FINANCIAL RISK MANAGEMENT:

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

 

     Three Months Ended     Nine Months Ended  
     March 31,     March 31,  
     2011     2010     2011     2010  

Percentage of revenue

        

Customer A

     26.9     30.7     31.4     33.1

Customer B

     38.1     40.0     35.7     42.4

Customer C

     12.9     11.8     12.3     9.6

 

     As of
March 31,
2011
   As of
June 30,
2010
 

Percentage of trade receivables

     

Customer A

   28.5%      56.3

Customer B

   22.2%      8.2

Customer C

   17.4%      20.6

The Company monitors its capital risk on the basis of the debt-to-equity ratio, which is calculated by dividing its total debt (including borrowings, trade and other payables, current and deferred income tax liabilities, provisions and other noncurrent liabilities as shown in the consolidated balance sheets) by the total shareholders’ equity.

The debt-to equity ratios are as follows:

 

(in thousands, except for ratio)

   As of
March 31,
2011
     As of
June 30,
2010
 

Trade and other payables

   $ 73,421       $ 47,584   

Trade and other payable to an associate

     —           10,100   

Provisions

     2,580         1,788   

Borrowings

     13,245         3,680   

Current income tax payable

     6,522         3,917   

Finance lease liabilities

     579         1,007   

Deferred income tax liabilities

     35         25   

Deferred Rent

     901         670   
                 

Total debt

   $ 97,283       $ 68,771   
                 

Total equity

   $ 248,551       $ 189,396   
                 

Debt-to-equity ratio

     0.4         0.4   
                 

 

10


ALPHA AND OMEGA SEMICONDUCTOR LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(UNAUDITED)

 

NOTE 4—CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS:

The preparation of the Company’s consolidated financial statements requires the Company to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. On an ongoing basis, the Company evaluates the estimates, judgments and assumptions including those related to revenue recognition, inventory reserve, warranty reserve, income taxes, share-based compensation, estimated useful life for property, plant and equipment and useful life for intangibles.

Revenue Recognition

The Company sells its products primarily to distributors, who in turn sell the products globally to various end customers. The Company’s revenue is net of the effect of the estimated stock rotation returns and price adjustments that it expects to provide to certain distributors. Stock rotation returns are governed by contract and are limited to a specified percentage of the monetary value of products purchased by distributors during a specified period. The Company estimates provision for stock rotation returns based on historical returns and individual distributor agreements. The Company also provides special pricing to certain distributors, primarily based on volume, to encourage resale of the Company’s products. The Company estimates the expected price adjustments at the time revenue is recognized based on distributor inventory levels, pre-approved future distributor selling prices, distributor margins and demand for its products. If actual stock rotation returns or price adjustments differ from its estimates, adjustments may be recorded in the period when such actual information is known. Provision for price adjustments is recorded as contra trade receivables and provision for stock rotations is recorded as provisions in the consolidated balance sheets.

The Company recognizes packaging and testing services revenue upon shipments of serviced products to customers.

The Company’s revenue is subject to seasonality. Typically in the past, the Company has experienced sales peaks two to three months ahead of major holidays such as Christmas and the Lunar New Year. However, this seasonal pattern has been in the past, and may in the future be, changed due to a number of factors, including revenue generated from new products or changes in distributor ordering patterns in response to channel inventory adjustments and end customer demand. For example, this departure from the normal pattern was demonstrated by the strong revenue for the third fiscal quarter ended March 31 of both fiscal years 2010 and 2011, which typically had the lowest quarter revenue in our seasonal pattern. As a result, the Company’s revenue and operating results may fluctuate significantly from quarter to quarter.

Inventory Reserves

The Company carries inventories at the lower of cost or market on a first-in first-out basis. The Company records inventory reserves to adjust inventories to net realizable value when it believes that the net realizable value is less than the cost. Inventory reserves are made based on its periodic review of inventory quantities on hand as compared with its sales forecasts, historical usage, aging of inventories, production yield levels and current product selling prices. The Company’s sales forecasts may differ from actual results due to changes in market and economic conditions and changes in technologies. The difference between the actual and estimated reserves could have a material effect on the Company’s recorded inventory values and cost of goods sold.

Warranty Reserve

The Company provides a standard one-year warranty for the products it sells. The Company accrues for estimated warranty costs at the time revenue is recognized. The Company’s warranty obligation is affected by product failure rates, the cost of replacement product, freight costs for failed parts and their replacement and other quality assurance costs. The Company monitors its product returns for warranty claims and maintains a reserve for the related warranty costs based on its historical data and anticipated warranty claims known at the time that the estimate is made. If actual warranty costs differ significantly from estimates, revisions to the estimated warranty reserve would be required and any such adjustments could have a material impact to the Company’s consolidated financial statements.

 

11


ALPHA AND OMEGA SEMICONDUCTOR LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(UNAUDITED)

 

Accounting for Income Taxes

The Company is subject to income taxes in a number of jurisdictions. Significant judgment is required in determining the worldwide provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Company establishes accruals for certain tax contingencies based on estimates of whether additional taxes may be due. While the final tax outcome of these matters may differ from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.

The Company records deferred tax assets if, based on the estimate of future taxable income in a particular jurisdiction, it is probable that the Company will be able to utilize deferred tax assets. The Company’s judgments regarding future taxable income may change due to changes in market conditions, tax laws, tax planning strategies or other factors. If the Company’s assumptions and consequently the estimates change in the future, the deferred tax assets we have established may increase or decrease, resulting in changes in income tax expense. The Company’s effective tax rate is highly dependent upon the geographic distribution of the worldwide earnings or losses, the tax laws and regulations in each geographical region, the availability of tax credits and carry forwards and the effectiveness of tax planning strategies. Income taxes in the interim periods are accrued using the tax rate that would be applicable to expected total annual earnings.

Share-Based Compensation Expense

The Company recognizes share-based compensation expenses based on the estimated fair value of the share award. The fair values of share options and employee share purchase plan shares are determined by the Black-Scholes option pricing model, using the accelerated vesting attribution method. The fair value of the restricted stock unit is calculated based on fair value of its stock on the date of grant. Share-based compensation expense is significant to the consolidated financial statements and is calculated using the Company’s best estimates, which involve inherent uncertainties and the application of management’s judgment. Significant estimates include fair value of the underlying common shares prior to the initial public offering (the “IPO”), expected term, share price volatility and forfeiture rates.

The Company establishes the expected term based on the historical data of similar entities’ data as adjusted for expected changes in future exercise patterns. The Company estimates forfeiture rates based on historical average period of time that options were outstanding and forfeited. The Company estimates expected volatility based on the volatility of similar entities whose shares are publicly available. The risk-free interest rate is based on the U.S. Treasury yields at the time of grant for periods corresponding to the expected term of the options. The expected dividend yield is zero based on the fact that the Company has not historically paid dividends and has no current intention to pay dividends.

Prior to the Company’s IPO that became effective on April 28, 2010, the absence of a public market for its common shares required the Company’s compensation committee of the board of directors, the members of which the Company believes have extensive business, industry, finance and venture capital experience, to estimate the fair value of the Company’s common shares for the purpose of granting options and for determining share-based compensation expense for the periods presented. In response to these requirements, the compensation committee, with input from management, estimated the fair value of the common shares at each meeting when options were granted. The Company commissioned an independent third party to conduct contemporaneous valuations to assist in the determination of the fair value of the common shares, except for the grant of options on March 1, 2010. The exercise price of options granted on March 1, 2010 was determined after considering a preliminary valuation analysis provided to the Company by the representatives of the Company’s underwriters, the valuation of the common shares performed by an independent third party at December 31, 2009 and other factors.

 

12


ALPHA AND OMEGA SEMICONDUCTOR LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(UNAUDITED)

 

The Company’s contemporaneous valuations, using the AICPA Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation , employed a two step process to arrive at an estimate of the value of the common shares. The first step of the analysis was to estimate the total enterprise value. The Company primarily relied on an income approach, specifically a discounted cash flow analysis, to estimate the total enterprise value. The discounted cash flow analysis involves applying appropriate risk-adjusted discount rates to estimated cash flows, based on forecasted revenue and costs. The assumptions used in connection with these valuations were based on the Company’s expected operating performance over the discrete forecast period. A terminal value was estimated for the value of the business beyond the discrete forecasted earnings period. This value was estimated by applying a multiple to the Company’s projections in the final year of the forecast period. The multiple was selected based on the data of a peer group of public companies in the industry. The discrete period cash flows and terminal value were then discounted to the present at the Company’s estimated cost of capital, which was developed through an analysis of required returns for companies in a similar stage of development. The results of the income approach were tested for reasonableness based on an analysis of the multiples of similar public companies.

The second step was to allocate our total enterprise value to the preferred and common classes of securities based on the relative rights and preferences of each class. The Company relied on the option pricing method, which treats the securities as call options on the underlying assets (or enterprise value) to allocate the enterprise value. Significant estimates required in the option pricing method include the expected time to liquidity, risk-free interest rate for the expected time to liquidity, expected dividend yield, fair value of the aggregate enterprise value and expected volatility of the underlying enterprise value.

Additionally, the Company considered a probability-weighted expected return method to estimate the value of the common shares. This methodology considers various scenarios of future exit events, including a public offering, sale, liquidation or remaining private. An estimate of future exit periods and events are made and the exit values are allocated to each class of security based on the rights and preferences that would be exercised to maximize the value of each class, based on seniority. The allocated values are then discounted to the present and weighted based on an assessment of the probability of each scenario. Probabilities of each scenario have been assessed by management at each date, based on consideration of then-current market conditions and changes in the underlying prospects of the Company.

The Company also reviewed a variety of factors in determining the deemed fair value of the common shares such as its own operating and financial performance, the introduction of new products, the price of the preferred share financings with third-party investors in arm’s length transactions, the lack of a public market for its common shares, industry growth and volume, the performance of similarly situated companies in our industry and stock market indices, emerging trends and issues, trends in consumer confidence and spending, overall economic indicators and the general economic outlook.

Investment in an Associate

Prior to the APM Acquisition, the Company held a 40.3% equity interest in APM at June 30, 2010. The Company made an additional equity investment of $1,830,000 in APM in October 2010 and held a 43% equity interest in APM. APM was considered to be an associate after due consideration of the provisions under IAS 27, Consolidated and Separate Financial Statements, IAS 28, Investments in Associates and SIC Interpretation 12, Consolidation—Special Purpose Entities , including criteria such as the level of control or influence over the financial and operating policies of APM, the composition of APM’s board of directors, and the existence of any contractual obligation for APM to provide services to, or conduct its activities on behalf of the Company. The investment in APM was accounted for under the equity method of accounting. Upon the APM Acquisition was completed on December 3, 2010, APM became a wholly owned subsidiary of the Company and APM’s operating results were fully consolidated in the Company’s consolidated financial statements.

 

13


ALPHA AND OMEGA SEMICONDUCTOR LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(UNAUDITED)

 

Estimated Useful Life for Property, Plant and Equipment and for Intangibles

Property, plant and equipment are recorded at cost and are depreciated using the straight-line method over estimated useful lives of the assets. Identified intangibles acquired in a business combination are recognized at fair value at the acquisition date and amortized on a straight-line basis over their estimated economic lives of three to four years. Prior to December 3, 2010, the APM acquisition date, the Company’s manufacturing machinery and equipment were depreciated over a useful life of 5 years. Upon the completion of the APM Acquisition, the Company revised the estimated useful life of its manufacturing and facility equipment for depreciation purposes from 5 years to 8 years on a prospective basis.

NOTE 5—SEGMENT INFORMATION

The Company is organized as, and operates in, one operating segment: design, development and marketing 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 revenue by geographic locations in which the Company operates, for purposes of evaluating financial performance and allocating resources. The Company has one business activity, 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 is domiciled in Bermuda. Substantially all of the Company’s revenue is derived from external customers outside the place of domicile. The Company sells its products primarily to distributors in the Asia Pacific region, who in turn sell these products to end customers. Because the Company’s distributors sell their products to end customers which may have global presence, revenue by geographical location are not necessarily representative of the geographical distribution of sales to end user markets. The revenue by geographical location in the following tables are based on the country or region in which the products were shipped to:

 

     Three Months Ended
March 31,
     Nine Months Ended
March 31,
 
     2011      2010      2011      2010  
     (in thousands)      (in thousands)  

Hong Kong

   $ 80,391       $ 75,204       $ 244,863       $ 213,403   

Korea

     3,402         2,105         7,387         2,303   

China

     6,000         —           7,847         —     

United States

     272         212         1,496         320   

Other countries

     1,009         151         2,880         345   
                                   
   $ 91,074       $ 77,672       $ 264,473       $ 216,371   
                                   

 

14


ALPHA AND OMEGA SEMICONDUCTOR LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(UNAUDITED)

 

The following is a summary of revenue by product type:

 

     Three Months Ended
March 31,
     Nine Months Ended
March 31,
 
     2011      2010      2011      2010  
     (in thousands)      (in thousands)  

Power discrete

   $ 68,767       $ 66,106       $ 207,417       $ 188,327   

Power IC

     16,179         11,566         49,081         28,044   

Packaging and testing services

     6,128         —           7,975         —     
                                   
   $ 91,074       $ 77,672       $ 264,473       $ 216,371   
                                   

The following is a summary of noncurrent assets by geographic region where the assets are located:

 

     As of
March 31,
2011
     As of
June 30,
2010
 
     (in thousands)  

United States

   $ 15,067       $ 5,821   

Taiwan

     560         473   

China

     119,596         69,311   

The Cayman Islands

     887         639   

Other countries

     195         186   
                 
   $ 136,305       $ 76,430   
                 

The Company’s noncurrent assets located in the Cayman Islands represent patents and exclusive licenses acquired by the Company.

 

15


ALPHA AND OMEGA SEMICONDUCTOR LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(UNAUDITED)

 

NOTE 6—PROPERTY, PLANT AND EQUIPMENT:

 

     Manufacturing
Machinery
and
Equipment
    Equipment
and
Tooling
    Computer
Equipment
    Office
Furniture
and
Equipment
    Leasehold
Improvements
    Equipment
and
Construction
in Progress
     Total  
     (in thousands)  

As of July 1, 2009

               

Cost

   $ 19,679      $ 7,072      $ 4,971      $ 650      $ 7,668      $ 935       $ 40,975   

Accumulated depreciation

     (3,352     (4,261     (3,605     (411     (1,092     —           (12,721
                                                         

Net book amount

   $ 16,327      $ 2,811      $ 1,366      $ 239      $ 6,576      $ 935       $ 28,254   
                                                         

For the Nine Months Ended March 31, 2010

               

Opening net book amount

   $ 16,327      $ 2,811      $ 1,366      $ 239      $ 6,576      $ 935       $ 28,254   

Additions (net of transfer)

     4,726        859        335        110        330        4,395         10,755   

Disposals

     —          (2     —          —          —          —           (2

Depreciation

     (3,248     (902     (666     (88     (617     —           (5,521
                                                         

Closing net book amount

   $ 17,805      $ 2,766      $ 1,035      $ 261      $ 6,289      $ 5,330       $ 33,486   
                                                         

As of March 31, 2010

               

Cost

   $ 24,405      $ 7,917      $ 5,306      $ 760      $ 7,998      $ 5,330       $ 51,716   

Accumulated depreciation

     (6,600     (5,151     (4,271     (499     (1,709     —           (18,230
                                                         

Net book amount

   $ 17,805      $ 2,766      $ 1,035      $ 261      $ 6,289      $ 5,330       $ 33,486   
                                                         

 

16


ALPHA AND OMEGA SEMICONDUCTOR LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(UNAUDITED)

 

     Manufacturing
Machinery
and
Equipment
    Equipment
and
Tooling
    Computer
Equipment
    Office
Furniture
and
Equipment
    Leasehold
Improvements
    Equipment
and
Construction
in Progress
     Total  
     (in thousands)  

As of July 1, 2010

               

Cost

   $ 32,417      $ 8,314      $ 5,417      $ 1,080      $ 9,626      $ 7,635       $ 64,489   

Accumulated depreciation

     (7,894     (5,454     (4,471     (537     (1,970     —           (20,326
                                                         

Net book amount

   $ 24,523      $ 2,860      $ 946      $ 543      $ 7,656      $ 7,635       $ 44,163   
                                                         

For the Nine Months Ended March 31, 2011

               

Opening net book amount

   $ 24,523      $ 2,860      $ 946      $ 543      $ 7,656      $ 7,635       $ 44,163   

Foreign Exchange differences

     —          (54     (26     (17     (10     —           (107

APM acquisition

     44,772        158        134        154        3,260        3,413         51,891   

Additions (net of transfer)

     19,791        1,078        392        98        2,225        6,520         30,104   

Disposal

     —          (41     —          —          —          —           (41

Depreciation

     (7,554     (783     (487     (169     (1,121     —           (10,114
                                                         

Closing net book amount

   $ 81,532      $ 3,218      $ 959      $ 609      $ 12,010      $ 17,568       $ 115,896   
                                                         

As of March 31, 2011

               

Cost

   $ 96,966      $ 9,192      $ 5,915      $ 1,317      $ 14,794      $ 17,568       $ 145,752   

Accumulated depreciation

     (15,434     (5,974     (4,956     (708     (2,784     —           (29,856
                                                         

Net book amount

   $ 81,532      $ 3,218      $ 959      $ 609      $ 12,010      $ 17,568       $ 115,896   
                                                         

Depreciation expense was charged to the consolidated statements of income as follows:

 

     Three Months Ended
March 31,
     Nine Months Ended
March 31,
 
     2011      2010      2011      2010  
     (in thousands)      (in thousands)  

Cost of goods sold

   $ 3,981       $ 1,566       $ 8,961       $ 4,436   

Research and development expenses

     308         255         670         738   

Selling, general and administrative expenses

     161         100         483         347   
                                   
   $ 4,450       $ 1,921       $ 10,114       $ 5,521   
                                   

 

17


ALPHA AND OMEGA SEMICONDUCTOR LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(UNAUDITED)

 

NOTE 7-INTANGIBLE ASSETS:

 

     Patents and
Exclusive Rights
    Computer
Software
    Trade Name     Customer
Relationships
    Total  
     (in thousands)  

As of July 1, 2009

          

Cost

   $ 1,566      $ 5,594      $ —        $ —        $ 7,160   

Accumulated amortization

     (708     (1,332     —          —          (2,040
                                        

Net book amount

   $ 858      $ 4,262      $ —        $ —        $ 5,120   
                                        

For the Nine Months Ended March 31, 2010

          

Opening net book amount

   $ 858      $ 4,262      $ —        $ —        $ 5,120   

Additions

     —          30        —          —          30   

Amortization charge

     (191     (901     —          —          (1,092
                                        

Closing net book amount

   $ 667      $ 3,391      $ —        $ —        $ 4,058   
                                        

As of March 31, 2010

          

Cost

   $ 1,566      $ 5,624      $ —        $ —        $ 7,190   

Accumulated amortization

     (899     (2,233     —          —          (3,132
                                        

Net book amount

   $ 667      $ 3,391      $ —        $ —        $ 4,058   
                                        

As of July 1, 2010

          

Cost

   $ 1,566      $ 5,740      $ —        $ —        $ 7,306   

Accumulated amortization

     (950     (2,536     —          —          (3,486
                                        

Net book amount

   $ 616      $ 3,204      $ —        $ —        $ 3,820   
                                        

For the Nine Months Ended March 31, 2011

          

Opening net book amount

   $ 616      $ 3,204      $ —        $ —        $ 3,820   

Additions

     —          84        250        1,150        1,484   

Disposals

     —          (6     —          —          (6

Amortization charge

     (150     (955     (28     (96     (1,229
                                        

Closing net book amount

   $ 466      $ 2,327      $ 222      $ 1,054      $ 4,069   
                                        

As of March 31, 2011

          

Cost

   $ 1,566      $ 5,818      $ 250      $ 1,150      $ 8,784   

Accumulated amortization

     (1,100     (3,491     (28     (96     (4,715
                                        

Net book amount

   $ 466      $ 2,327      $ 222      $ 1,054      $ 4,069   
                                        

Trade name and customer relationship were acquired during the nine months ended March 31, 2011 through the APM Acquisition as described in Note 25.

 

18


ALPHA AND OMEGA SEMICONDUCTOR LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(UNAUDITED)

 

Amortization of the Company’s intangible assets has been included in the statements of income as follows:

 

     Three Months Ended
March 31,
     Nine Months Ended
March 31,
 
     2011      2010      2011      2010  
     (in thousands)      (in thousands)  

Cost of goods sold

   $ —         $ 8       $ —         $ 41   

Research and development expenses

     164         151         487         452   

Selling, general and administrative expenses

     299         200         742         599   
                                   
   $ 463       $ 359       $ 1,229       $ 1,092   
                                   

NOTE 8—INVESTMENT IN AN ASSOCIATE:

 

     Three Months Ended
March 31,
     Nine Months Ended
March 31,
 
     2011      2010      2011     2010  
     (in thousands)      (in thousands)  

Beginning of the period

   $ —         $ 23,498       $ 25,693      $ 19,399   

Share of profit

     —           815         1,984        4,914   

Additional investment made

     —           —           1,831        —     

APM Acquisition (Note 25)

     —           —           (29,508     —     
                                  

End of the period

   $ —         $ 24,313       $ —        $ 24,313   
                                  

NOTE 9—OTHER NONCURRENT ASSETS:

 

     As of
March 31,
2011
     As of
June 30,
2010
 
     (in thousands)  

Deposit for manufacturing capacity

   $ 5,000       $ —     

Operating leases deposits

     474         458   
                 
   $ 5,474       $ 458   
                 

On October 1, 2010, the Company entered into an agreement with a third-party manufacturer and paid a non-refundable fee of $5,000,000 that provides the Company with the ability in the future to increase its manufacturing capacity.

NOTE 10—TRADE RECEIVABLES:

 

     As of
March 31,
2011
    As of
June 30,
2010
 
     (in thousands)  

Net billings

   $ 53,698      $ 39,120   

Less: Provision for price adjustments

     (14,021     (8,451

Less: Provision for impairment

     (30     (30
                

Trade receivables

   $ 39,647      $ 30,639   
                

 

19


ALPHA AND OMEGA SEMICONDUCTOR LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(UNAUDITED)

 

The carrying amounts of trade receivables approximate their fair values due to their short maturity terms, and they are denominated in U.S. dollars.

The following is the aging analysis of net billings which were past due but not impaired. These relate to a number of distributors and non-distributors with no recent history of default.

 

     As of
March 31,
2011
     As of
June 30,
2010
 
     (in thousands)  

Past due but not impaired

     

1-30 days past due

   $ 1,758       $ 1,104   

31-60 days past due

     396         52   

over 61 days past due

     566         —     
                 
   $ 2,720       $ 1,156   
                 

Changes in the provision for price adjustments are as follows:

 

    

Three Months Ended

March 31,

    Nine Months Ended
March 31,
 
     2011     2010     2011     2010  
     (in thousands)     (in thousands)  

Beginning of the period

   $ 10,941      $ 11,635      $ 8,451      $ 11,002   

Provision for the period

     20,163        22,029        56,541        67,784   

Utilized

     (17,083     (23,731     (50,971     (68,853
                                

End of the period

   $ 14,021      $ 9,933      $ 14,021      $ 9,933   
                                

NOTE 11—INVENTORIES:

 

     As of
March 31,
2011
     As of
June 30,
2010
 
     (in thousands)  

Raw materials

   $ 25,267       $ 8,953   

Work in progress

     20,247         8,949   

Finished goods

     8,138         10,413   
                 
   $ 53,652       $ 28,315   
                 

 

20


ALPHA AND OMEGA SEMICONDUCTOR LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(UNAUDITED)

 

NOTE 12—SHARE CAPITAL AND SHARE PREMIUM:

Common Shares

On March 17, 2010, the shareholders of the Company approved a 2-to-1 reverse share split of the Company’s common and preferred shares which became effective on March 17, 2010. All share and per share information included in the accompanying financial statements has been adjusted to reflect this reverse share split.

On April 28, 2010, the Company’s initial public offering (the “IPO”) became effective and closed on May 4, 2010, in which 5,085,985 common shares were sold, including 3,400,000 shares newly issued and 1,685,985 shares sold by the Company’s selling shareholders, at the IPO price of $18.00 per share. Gross proceeds received by the Company from the 3,400,000 shares were $61,200,000, and net proceeds were $53,262,000 after deducting $4,284,000 for underwriting discounts and commissions and approximately $3,654,000 for other offering related costs. All of the Company’s outstanding preferred shares were automatically converted into common shares and these preferred shares ceased to exist upon the closing of the IPO.

As disclosed in Note 25 to the consolidated financial statements, on December 3, 2010, the Company issued 1,766,159 common shares valued at $13.06 per share as part of the consideration in the APM Acquisition.

The Company’s bye-laws, as amended, authorized the Company to issue 50,000,000 common shares with par value of $0.002. Each common share is entitled to one vote. The holders of common shares are also entitled to receive dividends whenever funds are legally available and when and if declared by the Board of Directors, subject to the prior rights of holders of all classes of shares outstanding. No dividends had been declared as of March 31, 2011.

The changes in the Company’s issued and fully paid common shares were as follows:

 

     Number of
Shares
     Amount of
Share
Capital
     Amount of
Share
Premium
    Total
Amount
 
     (in thousands)  

As of July 1, 2009

     7,919       $ 16       $ 89      $ 105   

Proceeds from exercise of share options

     51         —           98        98   
                                  

As of March 31, 2010

     7,970       $ 16       $ 187      $ 203   
                                  

As of July 1, 2010

     22,101       $ 44       $ 103,803      $ 103,847   

IPO issuance costs

     —           —           (117     (117

Proceeds from Employee Share Purchase Plan

     84         —           840        840   

APM acquisition

     1,766         4         23,062        23,066   

Proceeds from exercise of share options

     446         1         1,924        1,925   
                                  

As of March 31, 2011

     24,397       $ 49       $ 129,512      $ 129,561   
                                  

 

21


ALPHA AND OMEGA SEMICONDUCTOR LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(UNAUDITED)

 

2000 Share Plan

The 2000 Share Plan (the “2000 Plan”), as amended, authorized the Board of Directors to grant incentive share options and nonstatutory share options to employees, directors and consultants of the Company for up to 5,425,000 common shares. Under the 2000 Plan, incentive share options and nonstatutory share options are to be granted at a price that is not less than 100% and 85% of the fair value of the common share at the date of grant for employees and consultants, respectively. Options generally vest over a five-year period, 20% on the first anniversary from the grant date and ratably each month over the remaining 48-month period, and are exercisable for a maximum period of ten years after date of grant. Incentive share options granted to shareholders who own more than 10% of the outstanding shares of all classes of shares of the Company at the time of grant must be issued at an exercise price not less than 110% of the fair value of the common shares on the date of grant.

In connection with the adoption of the 2009 Share Option/Share Issuance Plan (“2009 Plan”) on September 18, 2009, the 2000 Share Plan was terminated and no further awards were granted under the 2000 Share Plan since then.

2009 Share Option/Share Issuance Plan

The 2009 Share Plan (the “2009 Plan”), as approved in September 2009 at the annual general meeting of shareholders, and as amended and restated in connection with the Company’s IPO, authorized the Board of Directors to grant incentive share options, nonstatutory share options and restricted shares to employees, directors, and consultants of the Company. The Company has initially reserved 1,250,000 common shares under the 2009 Plan. The number of common shares available for issuance under the Plan shall automatically increase in January each calendar year during the term of the Plan, beginning with calendar year 2011, by the lesser of 3% of the total number of common shares outstanding or 750,000 shares. This increase was 729,243 shares for calendar year 2011.

Under the 2009 Plan, incentive share options and restricted stock units are to be granted at a price that is not less than 100% and nonstatutory share options are to be granted not less than 85% of the fair value of the common shares, at the date of grant for employees and consultants. Options and restricted stock units generally vest over a five-year period, 20% on the first anniversary from the grant date and ratably each month over the remaining 48-month period, and are exercisable for a maximum period of ten years after date of grant. Incentive share options granted to shareholders who own more than 10% of the outstanding shares of all classes of shares of the Company at the time of grant must be issued at an exercise price not less than 110% of the fair value of the common shares on the date of grant.

The 2009 Plan is divided into three incentive compensation programs: Discretionary Grant Program, Share Issuance Program and Automatic Grant Program. Under the Discretionary Grant Program, eligible individuals may be granted options to purchase common shares and share appreciation rights tied to the value of the Company’s common shares. Under the Share Issuance Program, eligible individuals may be issued common shares pursuant to restricted share awards, restricted share units, performance shares or other share-based awards which vest upon the attainment of pre-established performance milestones or the completion of a designated service period. Under the Automatic Grant Program, eligible non-employee board members will automatically receive options to purchase common shares at designated intervals over their period of continued board service. Each non-employee board members was granted an option to purchase 7,500 common shares on April 28, 2010 equal to the IPO price. On the date of each annual shareholders meeting beginning in 2010, each individual who commences service as a non-employee board member by reason of his or her election to the board at such meeting and each individual who will continue to serve as a non-employee board member will automatically be granted an option to purchase 7,500 common shares.

 

22


ALPHA AND OMEGA SEMICONDUCTOR LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(UNAUDITED)

 

A summary of the status of the 2000 Plan and 2009 Plan and changes during the nine months ended March 31, 2011 and 2010 is presented as follows:

 

     Number of
Options
Outstanding
    Weighted
Average
Exercise Price
 

As of June 30, 2009

     4,111,292      $ 7.26   

Options granted

     367,750        10.96   

Options exercised

     (50,875     1.92   

Options cancelled or forfeited

     (201,163     9.91   
          

As of March 31, 2010

     4,227,004      $ 7.52   
          

As of June 30, 2010

     4,733,133      $ 8.70   

Options granted

     394,000        12.82   

Options exercised

     (445,901     4.28   

Options cancelled or forfeited

     (127,061     11.73   
          

As of March 31, 2011

     4,554,171      $ 9.41   
          

The weighted average fair values of the options granted on the date of grant were $6.70 and $5.25 during the nine months ended March 31, 2011 and 2010, respectively. They were determined using the Black-Scholes option pricing model. The significant inputs into the model were as follows:

 

     Three Months Ended
March 31,
  

Nine Months Ended

March 31,

     2011    2010    2011    2010

Fair value of common shares at grant dates

   $12.68-$13.83    $15.00    $10.22-$13.83    $8.40 - $15.00

Exercise price

   $12.68-$13.83    $15.00    $10.22-$13.83    $8.40 - $15.00

Volatility rate

   48% - 49%    51%    48% - 49%    49% - 51%

Risk-free interest rate

   2.1% - 2.4%    2.3%    1.0% - 2.4%    2.2% - 2.6%

Expected option life

   5.5 years    5.5 years    5.5 years    5.5 years

Dividend yield

   0%    0%    0%    0%

Restricted Stock Unit Activity

A summary of the restricted stock unit activities under the 2009 Plan and changes during the nine months ended March 31, 2011 is presented as follows:

 

     Restricted Stock
Units
    Weighted Average
Grant Date Fair
Value Per Share
     Weighted Average
Remaining
Recognition
Period (Years)
 

Outstanding at July 1, 2010

     —          —           —     

Awards granted

     210,500      $ 12.33         4.68   

Awards forfeited

     (12,700     —           —     
                         

Outstanding at March 31, 2011

     197,800      $ 12.33         4.68   
                         

The estimated fair value of restricted stock units is based on the market price of the Company’s stock on the grant date.

 

23


ALPHA AND OMEGA SEMICONDUCTOR LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(UNAUDITED)

 

Employee Share Purchase Plan (the “ESPP”)

The Employee Share Purchase Plan (“Purchase Plan” or “ESPP”) was established in May 2010 upon the completion of the Company’s IPO. The Purchase Plan provided for a series of overlapping offering periods with a duration of 24 months, with new offering periods, except the first offering period, which commenced on April 28, 2010, generally beginning on May 15 and November 15 of each year. The Purchase Plan allows employees to purchase common shares through payroll deductions of up to 15% of their eligible compensation. Such deductions will accumulate over a six-month accumulation period without interest. After such accumulation period, common shares will be purchased at a price equal to 85% of the fair market value per share on either the first day the offering period or the last date of the accumulation period, whichever is less. No participant may purchase more than $25,000 worth of common stock in any one calendar year period.

The Company has initially reserved 600,000 common shares for issuance under the ESPP. The share reserve will automatically increase in January of each calendar year during the term of the ESPP, beginning with calendar year 2011, by the lesser of 0.75% of the outstanding common shares or 250,000 shares. This increase was 182,311 shares for calendar year 2011.

The ESPP is compensatory and results in compensation expense. The fair values of common shares to be issued under the ESPP were determined using the Black-Scholes pricing model. The significant inputs into the model were as follows:

 

     Nine Months Ended
March 31, 2011

Volatility rate

   50%

Risk-free interest rate

   0.2% - 1.0%

Expected term

   1.3 years

Dividend yield

   0%

The total share-based compensation expense, including share options, the ESPP and restricted stock units described above, recognized in the consolidated statement of income for the three and nine months ended March 31, 2011 and 2010 are as follows:

 

     Three Months Ended
March 31,
     Nine Months Ended
March 31,
 
     2011      2010      2011      2010  
     (in thousands)  

Cost of goods sold

   $ 126       $ 81       $ 399       $ 133   

Research and development expenses

     420         193         1,202         596   

Selling, general and administrative expenses

     897         400         2,750         1,169   
                                   
   $ 1,443       $ 674       $ 4,351       $ 1,898   
                                   

 

24


ALPHA AND OMEGA SEMICONDUCTOR LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(UNAUDITED)

 

NOTE 13—FINANCE LEASE LIABILITIES:

Finance lease liabilities include the following:

 

     As of
March 31,
2011
     As of
June 30,
2010
 
     (in thousands)  

Software license

   $ 435       $ 851   

Technology license

     144         156   
                 
     579         1,007   

Less: current portion

     449         571   
                 

Long-term finance lease liabilities

   $ 130       $ 436   
                 

Future minimum lease payments at March 31, 2011 and June 30, 2010 are as follows:

 

     As of
March 31,
2011
     As of
June 30,
2010
 
     (in thousands)  

No later than one year

   $ 474       $ 624   

Later than one year and no later than five years

     100         399   

Later than five years

     75         100   
                 
     649         1,123   

Less amount representing interest

     70         116   
                 

Total finance lease liabilities

   $ 579       $ 1,007   
                 

Finance lease liabilities are recognized at the present value of the minimum lease payments at the inception of the lease. The discount rate used in calculating the present value of the minimum lease payments is the Company’s incremental borrowing rate.

NOTE 14—BORROWINGS:

In April 2010, one of the Company’s subsidiaries in China entered into a line of credit arrangement with a Chinese bank to allow the Company to draw down, from time to time, up to 80% of the balance of the subsidiary’s accounts receivable with a maximum amount of 40 million Chinese Yuan (equivalent of $6,098,000 as of March 31, 2011) to finance the subsidiary’s accounts receivable on a maximum of 120-day repayment term. The interest rate on each drawdown varies and indexes to the published London Interbank Offered Rate per annum. The outstanding loan balances were $4,700,000 and $3,680,000 at March 31, 2011 and June 30, 2010, respectively. The carrying amounts of the borrowings at March 31, 2011 and June 30, 2010 approximated their fair value. The effective interest rate for the borrowing was 3.5% for both the three and nine months ended March 31, 2011.

 

25


ALPHA AND OMEGA SEMICONDUCTOR LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(UNAUDITED)

 

In December 2010 the Company acquired APM and assumed APM’s bank borrowing liabilities. The outstanding balance from these bank borrowings was $8,545,000 at March 31, 2011. These borrowings were made under various line of credit agreements with local banks. The interest rate on each drawdown from these lines of credit varies and indexes to the published London Interbank Offered Rate per annum. The following summaries these lines of credit and balances at March 31, 2011:

 

Line of
Credit

  

Maturity Date

   Maximum Limit
in Chinese
Yuan
     Maximum Limit
in U.S. Dollar
Equivalent
     Borrowing
Balance at
March 31,
2011
     Available credit
at March 31,
2011
 
          (in thousands)  
A    July 16, 2011      105,000       $15,909       $ 961       $ 14,948   
B    August 16, 2011      40,000       6,061         6,022         39   
C    July 20, 2011      30,000       4,545         —           4,545   
D    June 12, 2011      15,000       2,273         —           2,273   
E    July 31, 2011      —         3,000         1,562         1,438   
                                   
      $ 31,788       $ 8,545       $ 23,243   
                                   

The proceeds from these loan agreements are used to finance APM’s purchases of property, plant and equipment and inventory materials on a short term basis. The carrying amounts of the borrowings at March 31, 2011 approximated their fair values. APM’s property, plant and equipment with carrying amount of $60,492,000 were pledged as collateral for one of the borrowings at March 31, 2011. The effective interest rate for these borrowings was 3.0% and 2.9% for the three and nine months ended March 31, 2011, respectively.

NOTE 15—CASH AND CASH EQUIVALENTS:

 

     As of      As of  
     March 31, 2011      June 30, 2010  
     (in thousands)  

Cash at bank and on hand

   $ 61,574       $ 43,601   

Short-term bank deposits

     50,679         75,400   
                 

Cash and cash equivalents

   $ 112,253       $ 119,001   
                 

Denominated in

     

U.S. Dollar

   $ 97,433       $ 117,257   

Chinese Yuan (RMB)

     14,128         1,327   

Others

     692         417   
                 
   $ 112,253       $ 119,001   
                 

NOTE 16—DEFERRED INCOME TAX:

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes relate to the same fiscal authority. The offset amounts are as follows:

 

     As of     As of  
     March 31,     June 30,  
     2011     2010  
     (in thousands)  

Deferred tax assets

    

Deferred tax asset to be recovered after more than 12 months

   $ 9,349      $ 1,483   

Deferred tax asset to be recovered within 12 months

     1,517        813   
                
   $ 10,866      $ 2,296   
                

Deferred tax liabilities

    

Deferred tax liabilities to be recovered after more than 12 months

   $ (35   $ (25
                
   $ (35   $ (25
                

 

26


ALPHA AND OMEGA SEMICONDUCTOR LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(UNAUDITED)

 

The gross movement in the deferred income tax account is as follows:

 

     Three Months Ended
March 31,
     Nine Months Ended
March 31,
 
     2011      2010      2011      2010  
     (in thousands)      (in thousands)  

Beginning of the period

   $ 10,499       $ 1,518       $ 2,271       $ 1,123   

Charged to statement of income

     254         679         665         1,074   

Purchase accounting adjustment

     —           —           7,748         —     

Exchange differences

     77         —           146         —     
                                   

End of the period

   $ 10,830       $ 2,197       $ 10,830       $ 2,197   
                                   

The changes in deferred income tax assets and liabilities during the nine months ended March 31, 2011, without taking into consideration the offsetting of balances within the same tax jurisdiction, are as follows:

Deferred Income Tax Assets

 

     Tax
Credits
    Accrued
Compensation
     Accelerated
Tax
Depreciation
     Others     Total  
     (in thousands)  

At June 30, 2010

   $ 812      $ 730       $ 1,295       $ 450      $ 3,287   

Charged/(credited) to the income statement

     (33     52         757         (72     704   

Purchase accounting adjustment

     —          307         7,389         402        8,098   

Exchange differences

     —          12         133         13        158   
                                          

At March 31, 2011

   $ 779      $ 1,101       $ 9,574       $ 793      $ 12,247   
                                          

Deferred Income Tax Liabilities

 

     Accelerated
Tax
Depreciation
    Intangible
Assets
    Others     Total  
     (in thousands)  

At June 30, 2010

   $ (759   $ —        $ (257   $ (1,016

Charged/(credited) to statement of income

     (54     37        (21     (38

Purchase accounting adjustment

     —          (350     —          (350

Exchange differences

     (3 )     (6     (4 )     (13
                                

At March 31, 2011

   $ (816   $ (319   $ (282   $ (1,417
                                

 

27


ALPHA AND OMEGA SEMICONDUCTOR LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(UNAUDITED)

 

Deferred income tax assets are recognized for credits carried forward to the extent that the realization of the related tax benefit through future taxable profits is probable. The Company recognized $779,000 and $812,000 of U.S. federal research tax credit carried forward as of March 31, 2011 and June 30, 2010, respectively. The U.S. federal tax research credit at March 31, 2011 included the benefit of $209,000 of U.S. federal research credits recognized during the nine months ended March 31, 2011 due to the retroactive reinstatement of a previously expired tax credit. The Company did not recognize deferred income tax assets of $1,316,000 and $1,296,000 related to California state tax credits carried forward at March 31, 2011 and at June 30, 2010, respectively, as the Company could not conclude that it would be probable that sufficient future taxable income would be generated to utilize these tax credits. The U.S. federal tax credits carried forward expire after 20 years, and there is no expiry dates for the California state tax credits carried forward. The credit carry-forwards are subject to change of ownership limitations under U.S. federal and state tax laws.

The Company and its subsidiaries conduct their businesses in several countries and regions and are subject to taxation in those jurisdictions. Dividend distributions received from the Company’s foreign subsidiaries may be subject to local withholding taxes when, and if, distributed. Deferred income tax liabilities have not been recognized for the withholding tax and other taxes that would be payable on the unremitted earnings of certain subsidiaries because the Company’s intent is to indefinitely reinvest any undistributed earnings in those subsidiaries. It is not practical to determine the amount of the liability if dividends from those subsidiaries were to occur. Cumulative undistributed earnings of foreign subsidiaries for which no deferred taxes have been provided were $19,605,000 and $14,301,000 at March 31, 2011 and at June 30, 2010, respectively.

NOTE 17—TRADE AND OTHER PAYABLES:

 

     As of
March 31,
2011
     As of
June 30,
2010
 
     (in thousands)  

Trade payables

   $ 60,427       $ 37,930   

Accrued salaries and wages

     1,704         810   

Accrued vacation

     1,333         880   

Accrued bonuses

     2,436         3,955   

Accrued professional fees

     1,177         895   

ESPP payable

     512         227   

Customer deposits

     986         869   

Other accrued expenses

     4,846         2,018   
                 
   $ 73,421       $ 47,584   
                 

The carrying amounts of trade payables for the Company approximate their fair values due to their short maturity terms. They have contractual maturities ranging from 30 to 90 days.

 

28


ALPHA AND OMEGA SEMICONDUCTOR LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(UNAUDITED)

 

NOTE 18—PROVISIONS:

 

     Warranty     Stock
Rotation
    Total  
     (in thousands)  

At June 30, 2010

   $ 1,275      $ 513      $ 1,788   

Provision

     871        3,494        4,365   

Release of unused amount

     (928     (68 )     (996

Utilization

     (516     (2,061     (2,577
                        

At March 31, 2011

   $ 702      $ 1,878      $ 2,580   
                        

NOTE 19—EXPENSES BY NATURE:

 

     Three Months Ended
March 31,
     Nine Months Ended
March 31,
 
     2011     2010      2011     2010  
     (in thousands)      (in thousands)  

Changes in inventories of finished goods and work in progress

   $ (5,787   $ 124       $ (3,746   $ (2,229

Assembly and testing fee

     1,373        21,362         33,286        63,036   

Raw materials used

     51,213        28,592         125,189        81,090   

Warranty expense (net of released)

     58        110         (57     674   

Shipping costs

     1,201        819         3,179        2,247   

Depreciation and amortization

     4,913        2,266         11,343        6,613   

Provision for write-down of inventories, net

     489        99         2,426        216   

Product prototypes

     2,867        1,743         6,748        5,612   

Employee benefit expense

     14,549        9,207         37,533        24,234   

Professional services fees

     1,413        616         4,043        2,577   

Rent and utilities expenses

     2,528        375         5,558        1,170   

Commission expense

     326        40         1,564        40   

Insurance expense

     836        431         1,935        1,278   

Other expenses

     4,215        2,601         7,591        4,809   
                                 

Total cost of goods sold and operating expenses

   $ 80,194      $ 68,385       $ 236,592      $ 191,367   
                                 

 

29


ALPHA AND OMEGA SEMICONDUCTOR LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(UNAUDITED)

 

NOTE 20—EMPLOYEE BENEFIT EXPENSE:

 

     Three Months Ended
March 31,
     Nine Months Ended
March 31,
 
     2011      2010      2011      2010  
     (in thousands)      (in thousands)  

Wages, salaries and bonuses

   $ 12,172       $ 7,935       $ 31,025       $ 20,805   

Share-based compensation

     1,443         674         4,351         1,898   

Social security costs

     358         307         818         683   

Pension costs-defined contribution plans

     576         291         1,339         848   
                                   
   $ 14,549       $ 9,207       $ 37,533       $ 24,234   
                                   

NOTE 21—INCOME TAX EXPENSE:

 

    

Three Months Ended

March 31,

   

Nine Months Ended

March 31,

 
     2011     2010     2011     2010  
     (in thousands)     (in thousands)  

Overseas

   $ 1,093      $ 1,173      $ 2,632      $ 2,214   

Deferred income tax

     (254     (679     (665     (1,074
                                
   $ 839      $ 494      $ 1,967      $ 1,140   
                                

The income tax on the Company’s profit before income tax differs from the theoretical amount that would arise using the weighted average tax rate applicable to the profit of the consolidated entities as follows:

 

     Three Months Ended
March 31,
    Nine Months Ended
March 31,
 
   2011     2010     2011     2010  
     (in thousands)     (in thousands)  

Profit before income tax

   $ 10,862      $ 10,082      $ 30,817      $ 29,786   
                                

Tax calculated at domestic tax rates applicable to profits in the respective countries which the entities conduct business

     946        454        2,351        1,071   

Income not subject to tax

     (3     (2     (14     (19

Expenses not deductible for tax purposes

     (26     34        35        102   

Overseas tax credits

     (105     (87     (522     (173

Others

     27        95        117        159   
                                

Income tax expense

   $ 839      $ 494      $ 1,967      $ 1,140   
                                

 

30


ALPHA AND OMEGA SEMICONDUCTOR LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(UNAUDITED)

 

The current income tax liabilities are detailed as follows:

 

     Three Months Ended
March 31,
    Nine Months Ended
March 31,
 
     2011     2010     2011     2010  
     (in thousands)     (in thousands)  

Beginning of the period

   $ 6,039      $ 2,602      $ 3,917      $ 2,545   

Current income tax expense

     1,093        1,173        2,632        2,214   

Foreign currency translation

     (1     4        14        4   

Reclassification to tax receivable

     —          11        —          11   

(Payments), net of refunds, during the period

     (609     (168     (1,149     (1,152

Purchase accounting adjustment

     —          —          1,108        —     
                                

End of the period

   $ 6,522      $ 3,622      $ 6,522      $ 3,622   
                                

NOTE 22—EARNINGS PER SHARE

Basic

Basic earnings per share is calculated by dividing the profit attributable to the equity holders of the Company by the weighted average number of common shares issued and outstanding during the reporting periods.

Diluted

Diluted earnings per share is calculated by adjusting the weighted average number of common shares outstanding to assume conversion of all dilutive potential common shares. The Company has three categories of potential dilutive common shares: convertible preferred shares, share options, and restricted stock units. The convertible preferred shares are assumed to have been converted into common shares for the three and nine months ended March 31, 2010. All of the Company’s outstanding preferred shares were automatically converted into common shares and these preferred shares ceased to exist upon the closing of the IPO on May 4, 2010. For share options and restricted stock units, a calculation is made in order to determine the number of shares that could have been acquired at fair value (determined as the average fair value of the Company’s common shares) based on the monetary value of the subscription rights attached to outstanding share options and restricted stock units. The number of shares calculated above is compared with the number of shares that would have been issued assuming the exercise of the share options and issuance of restricted stock units.

 

     Three Months Ended
March 31,
     Nine Months Ended
March 31,
 
     2011      2010      2011      2010  
     (in thousands of shares)  

Shares used in computing basic earnings per share

     24,372         7,970         23,155         7,949   

Adjustment for:

           

Assumed conversion of convertible preferred shares

     —           10,712         —           10,712   

Diluted effect of share options

     1,490         1,919         1,511         1,519   

Diluted effect of unvested restricted stock units

     25         —           7         —     
                                   

Shares used in computing diluted earnings per share

     25,887         20,601         24,673         20,180   
                                   

 

31


ALPHA AND OMEGA SEMICONDUCTOR LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(UNAUDITED)

 

The following potential dilutive securities are not included in the above calculation because their effect was anti-dilutive for the periods indicated:

 

     Three Months Ended
March 31,
     Nine Months Ended
March 31,
 
     2011      2010      2011      2010  
     (in thousands of shares)  

Share options to purchase common share

     1,479         —           1,971         970   

Employee stock purchase plan to purchase common share

     6         —           12         —     
                                   

Total anti-diluted common share equivalents

     1,485         —           1,983         970   
                                   

NOTE 23—CASH GENERATED FROM OPERATIONS:

 

     Nine Months Ended  
     Mar 31,  
     2011     2010  
     (in thousands)  

Profit before income tax

   $ 30,817      $ 29,786   

Adjustments for:

    

Depreciation (Note 6)

     10,114        5,521   

Amortization (Note 7)

     1,229        1,092   

Interest expense

     187        162   

Share of profit from an associate (Note 8)

     (1,984     (4,914

Share-based compensation (Note 12)

     4,351        1,898   

Loss on disposal of property, plant and equipment and intangible assets

     47        2   

Gain on equity investment (Note 25)

     (998     —     
                
     43,763        33,547   

Changes in working capital, net of effect of the APM Acquisition:

    

Inventories

     (14,827     (3,242

Trade receivables

     (2,459     (1,910

Other current and noncurrent assets

     350        (1,032

Deferred rent

     231        —     

Trade and other payables

     9,541        (3,513

Trade and other payables to an associate

     1,277        466   

Provisions

     793        (712
                
     (5,094     (9,943
                

Cash generated from operations

   $ 38,669      $ 23,604   
                

 

32


ALPHA AND OMEGA SEMICONDUCTOR LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(UNAUDITED)

 

NOTE 24—COMMITMENTS:

Capital expenditures that the Company has committed to at the balance sheet date but not yet incurred are as follows:

 

     As of
March 31,
2011
     As of
June 30,
2010
 
     (in thousands)  

Property, plant and equipment contracted but not provided for

   $ 7,462       $ 7,032   

The Company leases office space under non-cancellable operating leases with various expiration dates through 2022. The future aggregate minimum lease payments under non-cancellable operating leases are as follows:

 

     As of
March 31,
2011
     As of
June 30,
2010
 
     (in thousands)  

No later than one year

   $ 2,388       $ 1,664   

Later than one year and no later than five years

     8,528         6,542   

Later than five years

     7,664         8,559   
                 
   $ 18,580       $ 16,765   
                 

As of March 31, 2011 and June 30, 2010, the Company had approximately $60,932,000 and $33,357,000 outstanding purchase commitments for purchases of semiconductor raw materials, wafers and packaging and testing services, respectively.

NOTE 25—BUSINESS COMBINATION

On December 3, 2010, the Company acquired all of the issued and outstanding shares of APM that were not already owned by the Company. Based on the closing price of the Company’s common share at $13.06 per share on December 3, 2010, the acquisition date, the total consideration for the APM Acquisition was $40,045,000, comprising of $16,979,000 in cash and 1,766,159 shares of the Company’s common share. Prior to the APM Acquisition, the Company held a 40.3% equity interest in APM at June 30, 2010. The Company made an additional equity investment of $1,830,000 in APM in October 2010 and held a 43% equity interest in APM. The APM investment was accounted for using the equity method of accounting. Upon closing of the APM Acquisition, APM became a wholly-owned subsidiary of the Company. The acquisition further strengthens the Company’s package development capability and enhances the Company’s delivery performance.

 

33


ALPHA AND OMEGA SEMICONDUCTOR LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(UNAUDITED)

 

The Company uses the acquisition method of accounting to account for the business combination. The consideration transferred for the acquisition of a subsidiary is the fair value of the assets transferred, the liabilities assumed and the equity interests issued by the Company. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The excess of the consideration transferred and the acquisition-date fair value of previous equity interest over the fair value of the identifiable net assets acquired is recorded as goodwill. If this is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the differences is recognized directly in the statement of income. There was no goodwill or gain from bargain purchase arising from the APM Acquisition.

The consideration transferred for the APM Acquisition, the acquisition-date fair value of previous equity interest in APM and the preliminary purchase price allocation are as follows:

 

     At acquisition date  
     (in thousands)  

Purchase Consideration at December 3, 2010

  

Cash

   $ 16,979   

Equity instruments ( 1,766,159 common shares)

     23,066   
        

Total consideration transferred

     40,045   

Fair value of equity interest in APM held before the business combination

     30,505   
        

Total consideration

   $ 70,550   
        

Identifiable assets acquired and liabilities assumed:

  

Cash and cash equivalents

   $ 15,410   

Trade receivables and other receivable

     6,549   

Trade receivables from the Company

     11,377   

Inventories

     10,510   

Prepayments

     275   

Property, plant and equipment

     51,892   

Trade name

     250   

Customer Relationships

     1,150   

Deferred tax assets

     7,748   

Trade and other payables

     (22,157

Borrowings

     (11,346

Income tax payable

     (1,108
        

Total identifiable net assets

   $ 70,550   
        

The acquisition related costs of $360,000, including accounting, tax and audit fees, were recorded in selling, general and administrative expenses in the consolidated income statement for the nine months ended March 31, 2011.

The fair values of the acquired trade name of $250,000 and the customer relationship of $1,150,000 were determined based on the income approach and multi-period excess earnings method. Trade name and customer relationships are amortized over the estimated life of 3 years and 4 years on a straight line basis, respectively.

 

34


ALPHA AND OMEGA SEMICONDUCTOR LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(UNAUDITED)

 

The fair value of the acquired property, plant and equipment of $51,892,000 was based on the cost approach and excess earnings approach and considered:

 

   

Estimation of the current replacement cost of the assets;

 

   

Physical depreciation and certain obsolescence adjustments; and

 

   

Estimation of the net present value of expected future cash flows to be generated by the acquired fixed assets.

The carrying value of the 43% equity interest in APM was $29,507,000 on the acquisition date. The Company recognized a gain of $998,000 as a result of measuring at fair value. The gain was included in the Company’s statement of income for the nine months ended March 31, 2011.

The Company’s revenue for the nine months ended March 31, 2011 included APM’s $7,975,000 revenue generated by providing packaging and testing services to third parties since the APM Acquisition. The Company’s net profit also included APM’s operating results which were integrated with the Company’s operations and consolidated in the Company’s consolidated financial statements.

Pro forma financials

The pro forma financial results for the nine months ended March 31, 2011 combines the historical results of APM with those of the Company as if the acquisition had been completed as of the beginning of the periods presented. The pro forma weighted average number of shares outstanding also assumes that the shares issued as purchase consideration were outstanding as of the beginning of the periods presented.

Pro Forma Combined Statement of Income

 

     Nine Months Ended  
   March 31, 2011  
     (in thousands)  

Revenue

   $ 275,165   

Net profit

   $ 30,205   

Pro forma weighted average shares outstanding

  

- basic

     24,136   

- diluted

     25,654   

These amounts have been calculated after eliminating APM’s inter-company revenue from the Company and associated cost of goods sold, applying the Company’s accounting policies and adjusting the results of APM to reflect the additional cost of goods sold and amortization that would have been charged assuming the fair value adjustments to inventory, fixed assets and intangible assets had been applied from July 1, 2010.

The pro forma financial information is presented for information purposes only and is not indicative of the results of operations that would have been achieved if the acquisitions of APM had taken place at the beginning of period presented, nor is it indicative of the future results of the combined company.

 

35


ALPHA AND OMEGA SEMICONDUCTOR LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(UNAUDITED)

 

NOTE 26—RELATED PARTY TRANSACTIONS:

The following transactions were carried out with related parties:

Purchase of Services and Used Equipment

Prior to the APM Acquisition on December 3, 2010, the Company was a majority customer of APM. The Company purchases semiconductor packaging and testing services from APM during its ordinary course of business. During the nine months ended March 31, 2010, the Company also purchased certain used equipment from APM. The related party transactions and balances are as follows:

 

     Three Months Ended
March 31,
    Nine Months Ended
March 31,
 
         2011          2010     2011     2010  
     (in thousands)     (in thousands)  

Trade and other payables to APM (Beginning of period)

   $ —         $ 6,253      $ 10,100      $ 9,281   

Purchase of semiconductor packaging and testing services from APM

     —           21,684        29,186        58,630   

Purchase of used equipment from APM

     —           —          —          165   

Payments made to APM

     —           (18,190     (27,909     (58,329

Acquisition of subsidiary

     —           —          (11,377     —     
                                 

Trade and other payables to APM (End of period)

   $ —         $ 9,747      $ —        $ 9,747   
                                 

The carrying amounts of payables to APM approximate their fair value due to its short maturity term.

Key Management and Director Compensation

Key management includes the Company’s Chief Executive Officer and his executive members. The following outlines the cash compensation and share-based compensation to key management and directors for the periods presented:

 

     Three Months Ended
March 31,
     Nine Months Ended
March 31,
 
     2011      2010      2011      2010  
     (in thousands)      (in thousands)  

Salaries

   $ 605       $ 588       $ 1,795       $ 1,876   

Bonuses

     385         9         1,356         43   

Share-based compensation

     619         187         1,729         621   

Other compensation

     12         —           63         31   

Non executive directors fees

     40         4         125         20   
                                   
   $ 1,661       $ 788       $ 5,068       $ 2,591   
                                   

 

36


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

You should read the following discussion of the financial condition and results of our operations in conjunction with our consolidated interim financial statements and the notes to those statements included elsewhere in this Form 6-K. Our consolidated interim financial statements contained in this Form 6-K are prepared in accordance with IAS 34, “Interim Financial Reporting”. All references to “we”, “us”, “our” or “the Company” refer to Alpha and Omega Semiconductor Limited and its subsidiaries.

Overview

We are a designer, developer and global supplier of a broad range of power semiconductors. We have a broad portfolio of power semiconductors that we actively market and we seek to continuously add to our product portfolio each year. We seek to differentiate ourselves by integrating our expertise in device physics, process technology, design and advanced packaging to optimize product performance and cost. Our products portfolio is designed to meet the ever increasing power efficiency requirements in high volume applications, including portable computers, smart phones, flat panel TVs, battery packs, portable media players, UPS, motor control and power supplies. In March 2011, we launched our high-voltage MOSFET product line with the introduction of AlphaMos technology platform that enables us to develop a portfolio of products based on this new platform.

Our transnational business model leverages global resources, including leading research and development expertise in the United States, cost-effective semiconductor manufacturing in Asia and localized sales and technical support in several fast-growing electronics hubs globally. Our core research and development team, based in Silicon Valley, is complemented by our design center in Taiwan and process, packaging and testing engineers in China. While we utilize third-party foundries for all of our wafer fabrication, we deploy and implement our proprietary power discrete processes at these third-party foundries to maximize the performance and quality of our products. Following our acquisition of Agape Package Manufacturing Ltd. (“APM”) on December 31, 2010, we primarily rely upon our in-house capacity for packaging and testing. We believe our in-house packaging and testing capabilities provide us with a competitive advantage in proprietary packaging technology, product quality, cost, flexibility and cycle time.

Our IPO became effective on April 28, 2010 and closed on May 4, 2010. On December 3, 2010, we acquired control of APM in a cash and stock transaction with a purchase price of $40.0 million (the “APM Acquisition”). We had a 43% equity interest in APM prior to the acquisition and the equity investment was accounted for under the equity method of accounting. After the acquisition, APM became our wholly owned subsidiary.

Factors affecting our performance

Our performance is affected by several key factors, including the following:

Global economic conditions: Because our products primarily serve consumer applications, global economic conditions could materially affect our revenue.

 

37


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. Typically in the past, we have experienced sales peaks two to three months ahead of major holidays such as Christmas and Lunar New Year. However, this seasonal pattern has been in the past, and may in the future be, changed due to a number of factors, including revenue generated from new products or changes in distributor ordering patterns in response to channel inventory adjustments and end customer demand for our products. For example, this departure from the normal pattern was demonstrated by the strong revenue for the third fiscal quarter ended March 31 of both fiscal years 2010 and 2011, which typically had the lowest quarter revenue in our seasonal pattern.

Product introductions and customers’ specification: Our success depends on our ability to introduce products on a timely basis that meet our customers’ specifications. Both factors – timeliness of product introductions and conformance to customers’ requirements – are equally important in securing design wins with our customers. Our failure to introduce products on a timely basis that meet customers’ specifications could adversely affect our financial performance.

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 products will continue to decline in the future. However, as a normal course of business, we seek to offset the effect of declining average selling prices by reducing manufacturing costs of existing products and introducing new and higher value-added products.

Manufacturing costs: Our gross margin may be affected by our manufacturing costs, including pricing of wafers, packaging and testing services and raw materials, which may fluctuate from time to time, largely due to the market demand and supply. We depend on third party semiconductor foundries to manufacture our products and implement our fabrication processes. Our manufacturing costs may increase significantly if third party foundries increase the pricing of our wafer, or if we cannot offset the pricing increase with other measures, which could negatively impact our gross margin. In addition, capacity utilization may also affect our gross margin because we have certain fixed costs associated with our in-house packaging and testing facility. We acquired APM in December 2010 and we continued to expand our in-house packaging and testing capacity in calendar year 2011. If we are unable to utilize the capacity of our in-house facilities at the desirable level, our gross margin may be adversely affected.

Other factors that may affect comparability

APM acquisition: Prior to the APM Acquisition in December 2010, we held a 40.3% equity interest in APM at June 30, 2010. We made an additional equity investment of $1.8 million in APM in October 2010 and held a 43% equity interest in APM immediately prior to the APM Acquisition, and the investment was accounted for under the equity method of accounting. On December 3, 2010, we acquired APM and APM’s operating results were consolidated in our consolidated financial statements since the acquisition.

Change in an accounting estimate: During the nine months ended March 31, 2011, upon the completion of APM acquisition, we performed a review and assessment of the useful lives of our property, plant and equipment. Based on the results of our review, we revised the estimated useful life of our manufacturing and facility equipment for depreciation purposes from 5 years to 8 years starting from December 1, 2010 on a prospective basis. The effect of this change was to decrease depreciation expense by $2.2 million and $2.9 million, increase net income by $1.7 million and $2.3 million, net of tax effect, and increase basic earnings per share by $0.07 and $0.10 and increase diluted earnings per share by $0.06 and $0.09 for the three and nine months ended March 31, 2011, respectively. The effect of this change is expected to reduce depreciation expense by $2.2 million for the three months ending June 30, 2011 and $5.1 million for the fiscal year ending June 30, 2011.

Foreign private issuer status: Pursuant to SEC requirements, we assessed our ownership structure as of December 31, 2010 and determined that we no longer qualify as a “foreign private issuer” under applicable SEC rules. As a result, we will be required to report our financial statements under accounting principles generally accepted in the United States ( “U.S. GAAP”) and file our annual report for our fiscal year ending June 30, 2011 on a Form 10-K, as well as to comply with additional SEC reporting obligations as a U.S. issuer beginning on July 1, 2011. Accordingly, we incurred $0.4 million general and administrative expenses for the quarter ended March 31, 2011 and we expect to incur additional general and administrative expenses in the upcoming two quarters, including costs associated with converting our existing financial statements under International Financial Reporting Standards (“IFRS”) to the U.S. GAAP financial statements in the upcoming two quarters.

 

38


Public company expenses: On May 4, 2010, we completed the IPO and our common shares are listed on The NASDAQ Global Market. As a result, we are now required to comply with laws, rules and regulations that we did not need to comply with as a private company. These compliances include provisions of the Sarbanes-Oxley Act of 2002, as amended, applicable SEC regulations and the requirements of The NASDAQ Global Market. We expect our selling, general and administrative expenses to increase due to the additional legal, accounting and consulting fees as well as additional headcount that we will incur in order to comply with these requirements, including costs associated with establishing and maintaining internal control over financial reporting and preparing and filing periodic reports required under federal securities laws. In addition, as a public company, it will be more expensive for us to obtain directors’ and officers’ liability insurance. We also established the Employee Share Purchase Plan (the “ESPP”) effective upon the completion of the IPO, and accordingly we incur share-based compensation expenses associated with such purchase rights.

Principal line items of statements of income

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

Revenue

We generate product revenue from the sale of our power semiconductors, consisting of power discretes and power ICs. Historically, a substantial majority of our revenue was derived from power discrete products, and a small but growing amount was derived from power IC products. Because our products typically have three to five-year life cycles, the rate of new product introductions 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, as 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. On December 3, 2010, we acquired APM and our revenue included APM’s revenue generated by providing packaging and testing services to third parties since the APM Acquisition.

The following is a summary of revenue by product type:

 

     Three Months Ended
March 31,
     Nine Months Ended
March 31,
 
     2011      2010      2011      2010  
     (in thousands)      (in thousands)  

Power discrete

   $ 68,767       $ 66,106       $ 207,417       $ 188,327   

Power IC

     16,179         11,566         49,081         28,044   

Packaging and testing services

     6,128         —           7,975         —     
                                   
   $ 91,074       $ 77,672       $ 264,473       $ 216,371   
                                   

We sell our products primarily to distributors in the Asia Pacific region. Because our distributors sell their products to end customers who may have a global presence, revenue by geographic location is not necessarily representative of the geographic distribution of sales to end customers. The revenue by geographic location in the following table is based on the country or region to which the products were shipped:

 

     Three Months Ended
March 31,
     Nine Months Ended
March 31,
 
     2011      2010      2011      2010  
     (in thousands)      (in thousands)  

Hong Kong

   $ 80,391       $ 75,204       $ 244,863       $ 213,403   

Korea

     3,402         2,105         7,387         2,303   

China

     6,000         —           7,847         —     

United States

     272         212         1,496         320   

Other countries

     1,009         151         2,880         345   
                                   
   $ 91,074       $ 77,672       $ 264,473       $ 216,371   
                                   

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 ODMs or 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.

 

39


Cost of goods sold

Our cost of goods sold primarily consists of costs associated with semiconductor wafers, raw materials used in our packaging and testing processes, packaging and testing fees paid to third parties, personnel, including share-based compensation expense, overhead attributable to manufacturing, operations and procurement, warranty and inventory reserves. Our inventory reserves are based on the historical data and forecasted demand for our products. Because lead times at our manufacturing partners can be up to three months, we typically purchase our inventory based on our sales forecasts. As a result, we are subject to potential inventory excess and obsolescence risk. As the volume of sales increases, we expect cost of goods sold will also increase in absolute dollar amount.

Operating expenses

Our operating expenses consist of research and development and selling, general and administrative expenses. We expect that our total operating expenses to increase in absolute dollar amount over time due to our belief that our business will continue to grow. However, our operating expenses as a percentage of revenue may fluctuate from period to period.

Research and development expenses. Our research and development expenses consist primarily of salaries, bonuses, benefits, share-based compensation expenses, expenses associated with new product prototypes, occupancy costs, travel expenses, fees for engineering services provided by outside contractors and consultants, amortization of software and design tools, depreciation of equipment and related overhead costs for research and development personnel. As we continue to invest significant resources in developing new technologies and products, we expect our research and development expenses to increase in absolute dollar amount.

 

40


Selling, general and administrative expenses. Our selling, general and administrative expenses consist primarily of salaries, bonuses, benefits, share-based compensation expenses, 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 increase in absolute dollar amount as we expand our business, and we expect to incur additional expenses associated with being a public company and related to our change of reporting status from a foreign private issuer to a U.S. issuer.

Finance income and cost

Finance income consists of interest earned on our cash and cash equivalents, while finance cost consists of interest expense associated with our bank borrowings.

Share of profit (loss) of an associate

We held a 40.3% economic interest in APM at June 30, 2010. We made an additional investment of $1.8 million in APM in October 2010 and held a 43% economic interest in APM prior to the APM Acquisition on December 3, 2010. The investment was accounted for under the equity method of accounting. Accordingly, we recorded our share of APM’s net profit or loss on our statements of income.

Income tax expense (benefit)

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 our best estimate of certain potential tax exposures. 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 and loss could result in significant changes in our income tax expense.

We record deferred tax assets to the extent it is probable that we will be able to utilize them, based on 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 carryforwards and the effectiveness of our tax planning strategies.

Results of operations

The following tables set forth selected statements of income data derived from our unaudited consolidated financial statements, also expressed as a percentage of revenue, for the three and nine months ended March 31, 2011 and 2010.

 

41


 

     Three Months Ended
March 31,
    Nine Months Ended
March 31,
 
     2011     2010     2011     2010  
     (in thousands)     (in thousands)  

Revenue

   $ 91,074      $ 77,672      $ 264,473      $ 216,371   

Cost of goods sold

     63,029        56,845        188,159        158,730   
                                

Gross profit

     28,045        20,827        76,314        57,641   
                                

Research and development expenses

     7,609        5,447        20,541        15,040   

Selling, general and administrative expenses

     9,556        6,093        27,892        17,597   
                                

Total operating expenses

     17,165        11,540        48,433        32,637   
                                

Operating profit

     10,880        9,287        27,881        25,004   
                                

Finance income

     60        11        141        30   

Finance cost

     (78     (31     (187     (162
                                

Finance income (cost), net

     (18     (20     (46     (132

Gain on equity interest

     —          —          998        —     

Share of profit of an associate

     —          815        1,984        4,914   
                                

Profit before income tax

     10,862        10,082        30,817        29,786   

Income tax expense

     839        494        1,967        1,140   
                                

Net profit for the period

   $ 10,023      $ 9,588      $ 28,850      $ 28,646   
                                

 

42


     Three Months Ended
March 31,
    Nine Months Ended
March 31,
 
     2011     2010     2011     2010  

Revenue

     100.0     100.0     100.0     100.0

Cost of goods sold

     69.2        73.2        71.1        73.4   
                                

Gross profit

     30.8        26.8        28.9        26.6   
                                

Research and development expenses

     8.4        7.0        7.8        7.0   

Selling, general and administrative expenses

     10.5        7.9        10.6        8.1   
                                

Total operating expenses

     18.9        14.9        18.4        15.1   
                                

Operating profit

     11.9        11.9        10.5        11.5   
                                

Finance income

     0.1        0.0        0.1        0.0   

Finance cost

     (0.1     (0.0     (0.1     (0.1
                                

Finance income (cost), net

     (0.0     (0.0     (0.0     (0.1

Gain on equity interest

     0.0        0.0        0.4        0.0   

Share of profit of an associate

     0.0        1.0        0.7        2.3   
                                

Profit before income tax

     11.9        12.9        11.6        13.7   

Income tax expense

     0.9        0.6        0.7        0.5   
                                

Net profit for the period

     11.0     12.3     10.9     13.2
                                

 

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Revenue

Our revenue increased by 17.3%, or $13.4 million, from $77.7 million to $91.1 million for the three months ended March 31, 2010 and 2011, respectively, primarily as a result of a 5.1% increase in unit shipments, a 4.1% increase in average selling prices due to favorable product mix and a $6.1 million increase in packaging and testing services revenue generated by APM for the three months ended March 31, 2011. As we continued to expand our power IC product family, revenue from our power IC products increased by 39.9 %, or $4.6 million, from $11.6 million to $16.2 million for the three months ended March 31, 2010 and 2011, respectively.

Our revenue increased by 22.2%, or $48.1 million, from $216.4 million to $264.5 million for the nine months ended March 31, 2010 and 2011, respectively, primarily as a result of a 9.3 % increase in average selling prices due to favorable product mix, a 8.5% increase in unit shipments and a $8.0 million increase in packaging and testing services revenue generated by APM for the nine months ended March 31, 2011. As we continued to expand our power IC product family, revenue from our power IC products increased by 75.0%, or $21.0 million, from $28.0 million to $49.1 million for the nine months ended March 31, 2010 and 2011, respectively.

Cost of goods sold and gross profit

Cost of goods sold increased by 10.9%, or $6.2 million, from $56.8 million to $63.0 million for the three months ended March 31, 2010 and 2011, respectively. Our gross margin increased 4.0% from 26.8% to 30.8% for the three months ended March 31, 2010 and 2011, respectively. The gross margin improvement was primarily due to lower depreciation expenses as we changed our estimated depreciation life for our manufacturing and facility equipment from 5 years to 8 years, less packaging and testing service fees paid to third parties and higher factory utilization as the majority of packaging and testing manufacturing was made in-house after we acquired APM. These cost reductions were partially offset by increase in wafer prices from our primary foundry and increase in inventory reserves.

Cost of goods sold increased by 18.5%, or $29.4 million, from $158.7 million to $188.2 million for the nine months ended March 31, 2010 and 2011, respectively. Our gross margin increased 2.3% from 26.6% to 28.9% for the nine months ended March 31, 2010 and 2011, respectively. The gross margin improvement was primarily due to lower depreciation expenses as we changed our estimated depreciation life for our manufacturing and facility equipment from 5 years to 8 years starting from December 1, 2010, less packaging and testing service fees paid to third parties and higher factory utilization, partially offset by increase in wafer prices from our primary foundry and increase in inventory reserves.

Research and development expenses

Research and development expenses increased by 39.7%, or $2.2 million, from $5.4 million to $7.6 million for the three months ended March 31, 2010 and 2011, respectively. This increase was primarily attributable to a $1.0 million increase in engineering and new products prototyping expenses as we launched our high-voltage MOSFET product line and continued to add new low-voltage MOSFET and Power IC products. The increase in research and development expenses was also due to $0.5 million expenses incurred by APM, a $0.2 million increase in payroll expenses and a $0.2 million increase in share-based compensation expense due to new options and restricted stock units granted after March 31, 2010 and the establishment of ESPP in May 2010.

Research and development expenses increased by 36.6%, or $5.5 million, from $15.0 million to $20.5 million for the nine months ended March 31, 2010 and 2011, respectively. This increase was primarily attributable to a $1.8 million increase in engineering and new products prototyping expenses as we continued to expand our product lines and develop new products, $0.7 million research and development expenses incurred by APM since the APM Acquisition in December 2010, a $1.7 million increase in personnel expenses due to increase in headcount and bonuses, a $0.6 million increase in share-based compensation expense due to new options and restricted stock units granted after March 31, 2010 and the establishment of ESPP in May 2010.

 

44


Selling, general and administrative expenses

Selling, general and administrative expenses increased by 56.8%, or $3.5 million, from $6.1 million to $9.6 million for the three months ended March 31, 2010 and 2011, respectively. This increase was primarily attributable to a $0.6 million increase in personnel expenses due to an increase in headcount and bonuses, a $0.5 million increase in share-based compensation expenses as a result of new options and restricted stock units granted after March 31, 2010 and establishment of the ESPP in May 2010, a $0.6 million increase in sales commission and samples associated with our revenue growth, a $0.6 million increase in audit and tax professional fees, and a $0.4 million increase in consulting, recruiting, patents application and legal fees to meet our business growth and to increase our patent portfolio. As we became public effective in April 2010, we incurred $0.3 million of expenses related to internal control compliances, preparation and filing of periodic reports required under federal securities laws, and increased premium in directors’ and officers’ liability insurance during the three months ended March 31, 2011. As discussed in prior paragraphs, we incurred $0.4 million of professional fees related to the conversion of our existing financial statements under IFRS to the U.S. GAAP due to change of status from a foreign private issuer to a U.S. issuer. These increases were partially offset by a $0.3 million decrease in audit, tax and legal expenses related to our IPO during the three months ended March 31, 2010.

Selling, general and administrative expenses increased by 58.5%, or $10.3 million, from $17.6 million to $27.9 million for the nine months ended March 31, 2010 and 2011, respectively. This increase was primarily attributable to a $2.7 million increase in personnel expenses due to an increase in headcount and bonuses, a $1.6 million increase in share-based compensation expenses as a result of new options and restricted stock units granted after March 31, 2010 and establishment of the ESPP in May 2010, a $1.9 million increase in sales commissions and samples associated with our revenue growth, and a $1.2 million increase in audit and tax professional fees. As we became public effective in April 2010, we incurred $0.8 million of expenses related to internal control compliances, preparation and filing of periodic reports required under federal securities laws, and increased premium in directors’ and officers’ liability insurance during the nine months ended March 31, 2011. As discussed in prior paragraphs, we incurred $0.4 million of professional fees related to the conversion of our existing financial statements under IFRS to the U.S. GAAP. In addition, we acquired APM in December 2010 and incurred $0.4 million of professional services fees related to the APM acquisition during the nine months ended March 31, 2011. These increases were partially offset by a $1.0 million decrease in audit, tax and legal expenses that related to our IPO during the nine months ended March 31, 2010.

Finance income and cost

Finance income was $60,000 and $11,000 for the three months ended March 31, 2011 and 2010, respectively. The increase in finance income was due to higher average cash balances, partially offset by lower interest rates for the three months ended March 31, 2011. Finance cost was $78,000 and $31,000 for the three months ended March 31, 2011 and 2010, respectively. The increase in finance cost was due to higher average borrowing balances for the three months ended March 31, 2011.

Finance income was $141,000 and $30,000 for the nine months ended March 31, 2011 and 2010, respectively. The increase in finance income was due to higher average cash balances, partially offset by lower interest rates for the nine months ended March 31, 2011. Finance costs were $0.2 million for both the nine months ended March 31, 2011 and 2010 as a combined effect of average borrowing balances and interest rates during the respective periods.

Share of profit of an associate

Our share of APM’s net profit was $0.8 million for the three months ended March 31, 2010. We acquired control of APM in December 2010 and APM was no longer an associate to us and its financial results were consolidated into our financial statements for the three months ended March 31, 2011.

Our share of APM’s net profit decreased by 59.6%, or $2.9 million, from $4.9 million to $2.0 million for the nine months ended March 31, 2010 and 2011, respectively. The decrease was due to consolidation of APM’s financial results into our financial statements during the three months ended March 31, 2011 and a tax benefit recognized related to APM’s deferred tax assets for the nine months ended March 31, 2010.

Income tax expense

Income tax expense increased by 69.8%, or $0.3 million, from $0.5 million to $0.8 million for the three months ended March 31, 2010 and 2011, respectively, due primarily to an increase in revenue and profitability in certain taxable jurisdictions.

Income tax expense increased by 72.5%, or $0.8 million, from $1.1 million to $2.0 million for the nine months ended March 31, 2010 and 2011, respectively, due primarily to an increase in revenue and profitability in certain taxable jurisdictions partially offset by $0.2 million of tax credits resulting from the retroactive reinstatement of previously expired tax credits.

 

45


Liquidity and capital resources

Our principal need for liquidity and capital resources is to maintain working capital sufficient, support our operations and make capital expenditures to finance the growth of our business. To date, we have primarily financed our operations through funds generated from operations, borrowings under our former term loan and revolving lines of credit, proceeds from our IPO, and the issuance of preferred shares.

Our IPO became effective on April 28, 2010 and closed on May 4, 2010. Approximately 5.1 million common shares were sold in our IPO at the price of $18.00 per share, including 3.4 million shares newly issued by us and approximately 1.7 million shares sold by our selling shareholders. Gross proceeds received by us from the 3.4 million shares were $61.2 million, and net proceeds were $53.3 million after deducting $4.3 million for underwriting discounts and commissions and $3.7 million for other offering related costs.

Since the completion of the IPO to March 31, 2011, we have invested approximately $23.7 million of the net proceeds from the IPO in property, plant and equipment for our in-house packaging and testing facilities. On December 3, 2010, we acquired APM in a cash and stock transaction. The consideration was $17.0 million in cash and 1.8 million shares of the Company’s common share. We expect to use the remaining net proceeds from the IPO in capital expenditures, working capital, marketing, research and development and other general corporate purposes. In addition, we may choose to expand our current business through acquisitions of other businesses, products, technologies or other assets.