AOS(AOSL) - 2020 Q3 - Quarterly Report

Part I. FINANCIAL INFORMATION Financial Statements The unaudited condensed consolidated financial statements for the period ended March 31, 2020, show a decrease in cash and cash equivalents to $110.2 million and an increase in total assets to $767.3 million, with a net loss attributable to AOS of $6.5 million for the third quarter and for the nine months ended March 31, 2020 Condensed Consolidated Balance Sheets As of March 31, 2020, the company's total assets increased to $767.3 million from $739.4 million, driven by property, plant, and equipment, while total liabilities rose to $337.6 million and total equity slightly decreased to $429.7 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2020 | June 30, 2019 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $110,223 | $121,893 | | Inventories | $127,395 | $111,643 | | Total current assets | $291,931 | $295,298 | | Property, plant and equipment, net | $412,318 | $409,737 | | Total assets | $767,295 | $739,394 | | Liabilities & Equity | | | | Total current liabilities | $190,834 | $177,964 | | Total liabilities | $337,566 | $296,105 | | Total equity | $429,729 | $443,289 | | Total liabilities and equity | $767,295 | $739,394 | Condensed Consolidated Statements of Operations For the three months ended March 31, 2020, revenue decreased 2.0% year-over-year to $106.9 million, resulting in a gross profit of $22.5 million and an increased net loss attributable to AOS of $6.5 million, or ($0.26) per share, due to lower gross profit and higher operating expenses Key Operating Results (in thousands, except per share data) | Metric | Three Months Ended Mar 31, 2020 | Three Months Ended Mar 31, 2019 | Nine Months Ended Mar 31, 2020 | Nine Months Ended Mar 31, 2019 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $106,852 | $109,067 | $342,514 | $339,064 | | Gross Profit | $22,459 | $25,629 | $73,797 | $87,742 | | Operating Loss | $(8,619) | $(3,735) | $(12,610) | $(6,062) | | Net Loss attributable to AOS | $(6,495) | $(1,555) | $(6,491) | $(684) | | Diluted EPS | $(0.26) | $(0.06) | $(0.26) | $(0.03) | Condensed Consolidated Statements of Cash Flows For the nine months ended March 31, 2020, net cash provided by operating activities slightly decreased to $22.0 million, while net cash used in investing activities significantly decreased to $47.7 million, and net cash provided by financing activities was $16.5 million Cash Flow Summary (Nine Months Ended Mar 31, in thousands) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $22,023 | $23,156 | | Net cash used in investing activities | $(47,655) | $(90,295) | | Net cash provided by financing activities | $16,494 | $77,477 | | Net (decrease) increase in cash | $(9,774) | $9,765 | Notes to Condensed Consolidated Financial Statements This section provides detailed disclosures on the financial statements, covering the impact of COVID-19, lease accounting, the Chongqing JV, debt, share-based compensation, CARES Act tax benefits, and contingencies like the DOJ investigation regarding Huawei - The company identified the COVID-19 pandemic as a significant risk, noting a decline in demand for some products (smartphones, industrial) offset by increases in others (notebooks, PCs, gaming)[22] - The company is under investigation by the U.S. Department of Justice ("DOJ") regarding compliance with export control regulations related to Huawei, leading to suspended shipments to Huawei after December 31, 2019[122] - A shareholder class-action lawsuit was filed against the company and its management in March 2020, alleging material misstatements regarding export control practices related to Huawei[123] - The company recognized a $1.1 million discrete tax benefit related to the U.S. CARES Act, which allows for the carryback of net operating losses[107][108] - The Chongqing JV, 51% owned by the company, commenced limited mass production at its 12-inch wafer fab in July 2019[29] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's performance, significantly affected by the COVID-19 pandemic, Chongqing JV ramp-up costs, and a government investigation into export controls, resulting in a 2.0% YoY revenue decrease to $106.9 million and a gross margin decline to 21.0% for Q3 FY20, while maintaining sufficient liquidity Results of Operations For Q3 FY20, revenue decreased 2.0% YoY to $106.9 million, primarily due to an 11.0% decline in Power IC sales, leading to a gross margin contraction to 21.0% and an operating loss of $8.6 million, partially offset by a $1.0 million tax benefit Revenue by Product Type (Q3 FY20 vs Q3 FY19, in thousands) | Product Type | Q3 2020 | Q3 2019 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Power discrete | $89,932 | $89,936 | $(4) | 0.0% | | Power IC | $15,699 | $17,631 | $(1,932) | (11.0)% | | Packaging and testing services | $1,221 | $1,500 | $(279) | (18.6)% | | Total Revenue | $106,852 | $109,067 | $(2,215) | (2.0)% | - Gross margin for Q3 FY20 decreased to 21.0% from 23.5% in Q3 FY19, primarily due to low capacity utilization from the commencement of limited mass production in the Chongqing joint venture[173] - Selling, general and administrative (SG&A) expenses for Q3 FY20 decreased by $1.0 million YoY, mainly due to lower pre-production costs at the JV, offset by a $2.4 million increase in legal expenses related to the government investigation[177] Liquidity and Capital Resources As of March 31, 2020, the company had $114.5 million in cash, cash equivalents, and restricted cash, believing its current liquidity and cash flows from operations are sufficient for the next twelve months, supported by various debt facilities for operations and capital expenditures - As of March 31, 2020, the company had cash, cash equivalents, and restricted cash of $114.5 million, of which $99.5 million was held outside the United States[204] - The company did not repurchase any shares during the nine months ended March 31, 2020, with approximately $13.4 million remaining available under the share repurchase program[201][241] - Subsequent to the quarter end, in April 2020, the JV Company entered into new loan agreements totaling RMB 350 million (approximately $50 million)[185][186] Quantitative and Qualitative Disclosures About Market Risk The company reports no material changes in its market risks since the disclosures in its Annual Report on Form 10-K for the fiscal year ended June 30, 2019 - There have been no material changes in market risks since the last annual report filed on August 23, 2019[217] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of March 31, 2020, with no material changes to internal control over financial reporting identified during the quarter - Management concluded that disclosure controls and procedures were effective as of March 31, 2020[218] - No material changes to internal control over financial reporting were identified during the quarter[219] Part II. OTHER INFORMATION Legal Proceedings The company is involved in an ongoing U.S. Department of Justice investigation into export control compliance related to Huawei, leading to suspended shipments, and faces a shareholder class-action lawsuit alleging misstatements regarding these practices, which the company intends to vigorously defend - The U.S. Department of Justice (DOJ) is investigating the company's compliance with export control regulations related to business with Huawei[222] - As requested by the Department of Commerce (DOC), the company suspended all product shipments to Huawei after December 31, 2019[222] - A shareholder class-action lawsuit (Gray Action) was filed on March 19, 2020, alleging misstatements regarding the company's export control practices[223] Risk Factors This section highlights material changes to risk factors, including the adverse effects of the COVID-19 pandemic, the ongoing government investigation into export controls, potential U.S.-China tariffs, and disruptions to information technology systems, all posing significant operational and financial challenges - COVID-19 Pandemic: The company is experiencing a significant decline in product demand, work stoppages, and logistical challenges due to the pandemic, with the long-term impact remaining highly uncertain[227][228] - Government Investigation & Export Controls: The ongoing DOJ investigation and suspension of shipments to Huawei negatively impact revenue and incur significant legal costs, with evolving U.S. export regulations potentially further restricting business with customers in China[234][235] - Tariffs: The potential for new or additional U.S. tariffs on goods from China could reduce demand for the company's products or lower gross margins[238] - IT System Disruption: The company's operations are dependent on its IT systems, which are vulnerable to cyber-attacks like ransomware, potentially causing business disruptions and increased costs[239] Unregistered Sales of Equity Securities and Use of Proceeds The company did not repurchase any shares under its $30.0 million share repurchase program during the three months ended March 31, 2020, leaving approximately $13.4 million available for future repurchases - The company did not repurchase any of its common shares during the three months ended March 31, 2020[241] - As of March 31, 2020, approximately $13.4 million remained available under the company's share repurchase program[241]