What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-09-20 compared with 2021-08-30 · 219 added, 214 removed, 374 unchanged (54% of the section changed)

3 unchanged sentences

We are a designer, developer and global supplier of a broad portfolio of power semiconductors.

Our portfolio of power semiconductors includes approximately 2,400 products, and has grown significantly with the introduction of over 160 new products in the fiscal year ended June 30, 2021 and 2020, respectively, and 200 new products in the fiscal year ended June 30, 2019, respectively.

Our portfolio of power semiconductors includes approximately 2,500 products, and has grown significantly with the introduction of over 130 new products in the fiscal year ended June 30, 2022, and over 160 new products in each of the fiscal year ended June 30, 2020 and 2019, respectively.

Our teams of scientists and engineers have developed extensive intellectual properties and technical knowledge that encompass major aspects of power semiconductors, which we believe enables us to introduce and develop innovative products to address the increasingly complex power requirements of advanced electronics.

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We differentiate ourselves by integrating our expertise in technology, design and advanced manufacturing and packaging to optimize product performance and cost.

Our portfolio of products targets high-volume applications, including personal computers, graphic cards, game consoles, flat panel TVs, home appliances, smart phones, battery packs, consumer and industrial motor controls and power supplies for TVs, computers, servers and telecommunications equipment.

Our portfolio of products targets high-volume applications, including personal computers, graphic cards, game consoles, flat panel TVs, home appliances, power tools, smart phones, battery packs, consumer and industrial motor controls and power supplies for TVs, computers, servers and telecommunications equipment.

Our business model leverages global resources, including research and development and manufacturing in the United States and Asia.

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We believe our in-house packaging and testing capability provides us with a competitive advantage in proprietary packaging technology, product quality, cost and sales cycle time.

We operate a power semiconductor packaging, testing and wafer fabrication facility in the Liangjiang New Area of Chongqing, China through our joint venture (the “JV Company”) with two investment funds owned by the Municipality of Chongqing (the “Chongqing Funds”).

We currently own 51%, and the Chongqing Funds own 49%, of the equity interest in the JV Company.

The Company’s consolidated financial statements for the fiscal years ended June 30, 2021, 2020 and 2019 reflect net losses attributable to the non-controlling interest in the JV Company of $1.8 million, $11.7 million and $16.5 million, respectively.

While the JV Company is our consolidated subsidiary for purpose of financial reporting, it operates as an independent and separate legal entity.

As a result, the JV Company’s assets and liabilities are segregated from our company's assets and liabilities.

For example, the JV Company incurs debt through its own financing and bank loan agreements, and our parent company and other subsidiaries are not parties to these agreements and do not provide any guarantee or security for the JV Company’s debt, nor do we have direct access to any cash proceeds borrowed from such loan agreements.

As part of our strategic plan, we formed the JV Company to fulfill growing customer demand.

During the fiscal year 2021, the additional capacity at the JV Company contributed significantly to meeting the increasing demand for our products.

The JV Company has reached its targeted production of assembly and testing, and is expected to ramp up its Phase I target run rate of the 12-inch wafer fabrication in the quarter ending September 30, 2021.

But our goal may be affected by various factors, including the impact of the global COVID-19 pandemic and related economic downturn, intensified geopolitical tensions between China and U.S., logistical difficulties, the JV Company’s ability to obtain financing and other risk factors beyond our control.

We will continue to monitor and evaluate market conditions closely during this period and react quickly to the changing environment as necessary to achieve an optimal production level at the JV Company.

In addition, the JV Company is currently pursuing various financing options to fund its future expansion and repay its debt obligations, and there is no guarantee that the JV Company will be able obtain such financing with favorable terms, or at all.

We expect the joint venture to provide important capacity to support our future growth, enhance our market positions in China, and drive improvements in capital expenditures.

On March 29, 2016, we formed the JV Company with the Chongqing Funds, for the purpose of constructing and operating the Chongqing Fab in the LiangJiang New Area of Chongqing, China.

The Chongqing Fab is being built in phases.

As of December 1, 2021, we owned 50.9%, and the Chongqing Funds owned 49.1% of the equity interest in the JV Company.

The JV Company was accounted under the provisions of the consolidation guidance since we had controlling financial interest until December 1, 2021.

Effective December 1, 2021, we entered into a share transfer agreement ("STA") with a third-party investor (the "Investor"), pursuant to which we sold to the Investor approximately 2.1% of outstanding equity interest held by us in the JV Company for an aggregate purchase price of RMB 108 million or approximately $16.9 million.

The STA contained customary representations, warranties and covenants.

The Transaction was closed on December 2, 2021.

As a result of the Transaction, as of the Closing Date, our equity interest in the JV Company decreased from 50.9% to 48.8%.

Also, our right to designate directors on the board of JV Company was reduced to three (3) out of seven (7) directors, from four (4) directors prior to the Transaction.

As of December 2, 2021, we no longer have a controlling financial interest in the JV Company under generally accepted accounting principles.

Loss of control is deemed to have occurred when, among other things, a parent company owns less than a majority of the outstanding common stock in the subsidiary, lacks a controlling financial interest in the subsidiary and, is unable to unilaterally control the subsidiary through other means such as having, or the ability to obtain or represent, a majority of the subsidiary’s board of directors.

All of these loss of control factors were present for us as of December 2, 2021.

Accordingly, since December 2, 2021, we have deconsolidated the JV Company in our Consolidated Financial Statements and accounted for our investment in the JV Company using the equity method of accounting.

On December 24, 2021, we entered into a share transfer agreement with another third-party investor, pursuant to which we sold to this investor 1.1% of outstanding equity interest held by us in the JV Company for an aggregate purchase price of RMB 60 million or approximately $9.4 million based on the currency exchange rate as of December 24, 2021.

In addition, on December 30, 2021, the JV Company adopted an employee equity incentive plan and issued an equity interest equivalent to 3.99% of the JV Company to exchange in cash.

As a result, we owned 45.8% of the equity interest in the JV Company as of December 31, 2021.

On January 26, 2022, the JV Company completed a financing transaction pursuant to the Financing Agreement between the JV Company and certain New Investors.

Under the Financing Agreement, the New Investors purchased newly issued equity interest of the JV Company for a total purchase price of RMB 509 million (or approximately $80 million based on the currency

exchange rate as of January 26, 2022) (the "Investment").

Following the closing of the Investment, the percentage of outstanding JV Company equity interest beneficially owned by the Company was reduced to 42.2%.

We reduced our ownership of the JV Company to below 50% to increase the flexibility of the JV Company to raise capital to fund its future expansion.

Following the Transaction and the successful ramp up to its Phase I target run rate in the September quarter of 2021, as planned, the JV Company commenced an effort to raise up to $200 million of additional capital, including an $80 million round that was completed on January 26, 2022 through private funding for its Phase II expansion.

In addition to immediate private funding rounds, the JV Company is also contemplating an eventual listing on the Science and Technology Innovation Board, or STAR Market, of the Shanghai Stock Exchange.

The Transaction assists the JV Company in meeting certain regulatory listing requirements.

A potential STAR Market listing may take several years to consummate and there is no guarantee that such listing by the JV Company will be successful or will be completed in a timely manner, or at all.

In addition, the JV Company will continue to provide us with significant level of foundry capacity to enable us to develop and manufacture our products.

On July 12, 2022, the current shareholders of the JV Company entered into a shareholders contract, pursuant to which the JV Company provided us a monthly wafer production capacity guarantee, subject to future increase when the JV Company’s production capacity reaches certain goal.

During the fiscal year ended June 30, 2022, we continued our diversification program by developing new silicon and packaging platforms to expand our serviceable available market, or SAM and offer higher performance products.

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Numerous governmental jurisdictions, including the States of California, Oregon and Texas in the U.S.

and countries throughout the Asia Pacific region have imposed “stay-at-home” orders, quarantines, travel bans and similar governmental orders and restrictions to control the spread of COVID-19.

Such orders and restrictions have resulted in business closures, work stoppages, slowdowns and delays in commercial activities, unprecedented and widespread unemployment, disruptions to ports and other shipping infrastructure, border closures, and other travel or health-related restrictions, thereby negatively impacting our customers, suppliers, distributors, employees, offices, and the entire semiconductor ecosystem.

As a result of the COVID-19 pandemic and changing consumer behaviors due to various government restrictions, including "stay-at-home" orders, we have experienced shifting market trends, including an increasing demand in markets for notebooks, PCs, gaming devices and other products.

While we have recently benefited from the increasing demand for PC related products, there is no guarantee that this trend will continue, and such increasing demand may discontinue or decline if government authorities relax or terminate COVID-19 related restrictions and consumer behaviors change in response to the reopening of certain economic activities.

In an effort to protect the health and safety of our employees and to comply with various government and regulatory guidelines, we took proactive actions to adopt policies and protocols at our locations around the world, including social distancing guidelines, working from home, limiting the number of employees attending meetings, reducing the number of people in our sites at any one time, and suspending employee travel, and these measures may result in difficulties and logistical challenges in our business operations.

Since the start of the second quarter of 2021, there have been increasing availability and administration of vaccines against COVID-19, as well as an easing of restrictions on social, business, travel, and government activities and functions, and a gradual resumption of economic activities and consumer spending in our industries.

On the other hand, infection rates continue to fluctuate in various regions and new strains of the virus remain a risk.

In addition, there are ongoing global impacts resulting from the pandemic, including disruption of the product supply chains, shortages of semiconductor components, and delays in shipments, product development, and product launches.

The full extent of the future impact of the COVID-19 pandemic on our operational and financial performance is uncertain and will depend on many factors outside the Company’s control, including, without limitation, the timing, extent, trajectory and duration of the pandemic;

and countries throughout the Asia Pacific region have imposed various restrictions on commercial activities, resulting in business closures, work stoppages, labor shortage, disruptions to ports, vaccine mandates and other shipping infrastructure, border closures, thereby negatively impacting our customers, suppliers, distributors, employees, offices, and the entire semiconductor ecosystem.

As a result of the COVID-19 pandemic and changing consumer behaviors due to various government restrictions and the growing trend to provide remote-working options by employers, we have experienced shifting market trends, including an increasing demand in markets for notebooks, personal computing ("PC"), gaming devices and other products.

While we have benefited from the increasing demand for PC related products, there is no guarantee that this trend will continue, and such increasing demand may discontinue or decline if government authorities relax or terminate COVID-19 related restrictions and consumer behaviors change in response to the reopening of certain economic activities.

In an effort to protect the health and safety of our employees and to comply with various government and regulatory guidelines, we also took proactive actions to adopt policies and protocols at our locations around the world, including social distancing guidelines, vaccine and testing protocols.

Since the start of the second quarter of calendar year 2021, there have been increasing availability and administration of vaccines against COVID-19, as well as an easing of restrictions on social, business, travel, and government activities and functions, and a gradual resumption of economic activities and consumer spending in our industries.

However, infection rates continued to fluctuate in various regions and new strains of the virus remain a risk, including a surge of COVID-19 cases and hospitalization due to the spread of Omicron variants in late 2021 and early 2022.

During the first half of calendar year 2022, COVID-19 cases and hospitalization rate continued to decline and governments in various jurisdictions, including the U.S.

and Europe, have lifted various restrictions and limitations on economic activities.

At the same time, however, new variants of COVID-19 continued to emerge and contributed to recent rise of infection rates in various jurisdictions in which we operate, including China and U.S.

Furthermore, we may be subject to the ongoing global impacts resulting from the pandemic, including disruption of the product supply chains, shortages of semiconductor components, and delays in shipments, product development, and product launches and rising inflation rates.

In April 2022, the operations of our two packaging and testing facilities in Shanghai, China were suspended due to a strict lockdown of the city imposed by the local government in response to surging COVID cases.

Our facilities in Shanghai were required to shut down and production was halted beginning in early April.

Transportation suspension in and out of Shanghai also interrupted the shipping of raw materials and finished parts to and from our facilities.

We received permission to reopen our facilities partially in early May.

We gradually ramped up production at these facilities in May and returned to normal operation in June 2022.

The suspension of our Shanghai facilities, and the subsequent partial resumption of production,

reduced our ability to complete orders from our customers in a timely manner, which adversely affected our revenue and results of operation for the three months ended June 30, 2022.

We cannot guarantee that the Shanghai government will not impose similar restrictions and lockdown in the future, and any such restrictions and lockdown will adversely affect our operations and financial performance.

The full extent of the longer-term impact of the COVID-19 pandemic on our operational and financial performance is uncertain and will depend on many factors outside our control, including, without limitation, the timing, extent, trajectory and duration of the pandemic;

the availability, distribution and effectiveness of vaccines;

the spread of new variants of COVID-19;

the continued and renewed imposition of protective public safety measures;

the continued and renewed imposition of protective public safety measures, including local and regional lockdown and quarantines;

the disruption of global supply chain;

and the impact of the pandemic on the global economy and demand for consumer products.

4 unchanged sentences

Because our products primarily serve consumer electronic applications, any significant change in global and regional economic conditions could materially affect our revenue and results of operations.

For example, because a significant amount of our revenue is derived from sales of products in the personal computing ("PC") markets, such as notebooks, motherboards and notebook battery packs, a substantial decline or downturn in the PC market could have a material adverse effect on our revenue and results of operations.

A significant amount of our revenue is derived from sales of products in the PC markets, such as notebooks, motherboards and notebook battery packs, therefore a substantial decline or downturn in the PC market could have a material adverse effect on our revenue and results of operations.

The PC markets have experienced a modest global decline in recent years due to continued growth of demand in tablets and smart phones, worldwide economic conditions and the industry inventory correction which had and may continue to have a material impact on the demand for our products.

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While making efforts to reduce our reliance on the computing market, we continue to support our computing business and capitalize on the opportunities in this market with a more focused and competitive PC product strategy to gain market share.

Manufacturing costs:

Manufacturing costs and capacity availability :

Our gross margin is affected by a number of factors including our manufacturing costs, utilization of our manufacturing facilities, the product mixes of our sales, pricing of wafers from third party foundries and pricing of semiconductor raw materials.

Capacity utilization affects our gross margin because we have certain fixed costs associated with our packaging and testing facilities at our Oregon fab and our Chongqing fabrication facility operated by the JV Company.

We expect that in the long term our JV Company will reduce our cost of manufacturing.

Capacity utilization affects our gross margin because we have certain fixed costs at our Shanghai facilities and our Oregon Fab.

If we are unable to utilize our manufacturing facilities at a desired level, our gross margin may be adversely affected.

In addition, from time to time, we may experience wafer capacity constraints, particularly at third party foundries, that may prevent us from meeting fully the demand

of our customers.

For example, in April 2022, the operations of our packaging and testing facilities in Shanghai, China were suspended due to a strict lockdown of the city imposed by the local government in response to surging COVID cases.

The facilities were required to be shut down and production was halted since early April.

Transportation suspension in and out of Shanghai also interrupted the shipping of raw materials and finished parts to and from our facilities.

We received permission to reopen our facilities partially in early May.

We gradually ramped up production at these facilities in May and returned to normal operation in June 2022.

However, there is no guarantee that additional restrictions and lockdown will not be reimposed by the government, which is outside of our control, and any extension of the lockdown will continue to have a negative impact on our results of operation and financial condition.

In addition, from time to time, we may experience wafer capacity constraints, particularly at third party foundries, that may prevent us from meeting fully the demand of our customers.

For example, the recent global shortage of semiconductor manufacturing capacity has provided us with both challenges and opportunities in the market, and highlighted the importance of maintaining sufficient and independent in-house manufacturing capabilities to meet increasing customer demands.

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In addition, we recently commenced a plan to enhance the manufacturing capability and capacity of our Oregon Fab by investing in new equipment and expanding our factory facilities, which we expect will have a positive impact on our future new product development and revenue, particularly during the period of global shortage of capacity.

The expansion is expected to be completed in the fiscal quarter ending March 31, 2023.

We also rely substantially on the JV Company to provide foundry capacity to manufacture our products, therefore it is critical that we maintain continuous access to such capacity, which may not be available at sufficient level or at a pricing terms favorable to us because of lack of control over the JV Company’s operation.

As a result of sales of our JV Company equity interests and issuance of additional equity interests by the JV Company to third-party investors in financing transactions, our

equity interest in the JV Company was reduced to 42.2%, which reduced our control and influence over the JV Company.

While we continue to maintain a business relationship with the JV Company to ensure uninterrupted supply of manufacturing capacity, and we are currently negotiating a foundry agreement for the JV Company to provide guarantee level of capacity, the JV Company may take actions or make decisions that adversely impact our ability to access required capacity, and our lack of control and influence may prevent us from eliminating or mitigating such risk.

Erosion and fluctuation of average selling price :

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If we were to fail to introduce new products on a timely basis that meet customers’ specifications and performance requirements, particularly those products with major OEM customers, and continue to expand our serviceable markets, then we would lose market share and our financial performance would be adversely affected.

We believe that the JV Transaction will increase and diversify our customer base, particularly in China, in the long term.

However, the ramp-activities and production schedule of our JV Company have been impacted by the COVID-19 pandemic and related events, as discussed above.

Even if we are able to ramp up the operation of the JV Company timely, we may not be successful in acquiring or maintaining a sufficient number of new customers to offset additional costs due to various factors, including but are not limited to, competition from other semiconductor companies in the region, our lack of history and prior relationships with customers as a new entrant, difficulties in executing our joint venture strategies and the general economic conditions in Chongqing and China.

Distributor ordering patterns, customer demand and seasonality :

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If these major customers experience significant decline in the demand of their products, encounter difficulties or defects in their products, or otherwise fail to execute their sales and marketing strategies successfully, it may adversely affect our revenue and results of operations.

Regulatory Matters:

As previously disclosed, the U.S.

Department of Justice (“DOJ”) commenced an investigation into our compliance with export control regulations relating to business transactions with Huawei and its affiliates (“Huawei”), which were added to the “Entity List” by the Department of Commerce (“DOC”) in May 2019.

We continue to cooperate fully with federal authorities in the investigation.

The Company has continued to respond to inquiries and requests from DOJ for documents and information relating to the investigation, and the matter is currently pending at DOJ.

However, DOJ and DOC have not provided us any clear or definitive response regarding the timeline of the investigation and potential resolutions or outcome.

In the meantime, we continue incur significant costs and expenses, including legal and professional fees, in connection with the government investigation, which may reduce our profitability and operating margin.

Principal line items of statements of operations

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As the volume of sales increases, we expect cost of goods sold to increase.

We continued to ramp up the 12-inch fab at the JV Company to meet the increasing demand on our products.

While our utilization rates cannot be immune to the market conditions, our goal is to make them less vulnerable to market fluctuations.

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Operating expenses

Our operating expenses consist of research and development, selling, general and administrative expenses and impairment of long-lived assets.

Our operating expenses consist of research and development, and selling, general and administrative expenses.

We expect our operating expenses as a percentage of revenue to fluctuate from period to period as we continue to exercise cost control measures in response to the declining PC market as well as align our operating expenses to the revenue level.

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If the recognition threshold is met, the applicable accounting guidance permits us to recognize a tax benefit measured at the largest amount of tax benefit that is more likely than not to be realized upon settlement with a taxing authority.

If the actual tax outcome of such exposures is different from the amounts that were initially recorded, the differences will impact the income tax and deferred tax

provisions in the period in which such determination is made.

If the actual tax outcome of such exposures is different from the amounts that were initially recorded, the differences will impact the income tax and deferred tax provisions in the period in which such determination is made.

Changes in the location of taxable income (loss) could result in significant changes in our income tax expense.

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On December 22, 2017, the United States enacted tax reform legislation through the Tax Cuts and Jobs Act (“the Tax Act”), which significantly changes the existing U.S.

tax laws, including, but not limited to, (1) a reduction in the corporate tax rate from 35% to 21%, (2) a shift from a worldwide tax system to a territorial system, (3) eliminating the corporate alternative minimum tax (AMT) and changing how existing AMT credits can be realized, (4) bonus depreciation that will allow for full expensing of qualified property, (5) creating a new limitation on deductible interest expense and (6) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.

expensing of qualified property, (5) creating a new limitation on deductible interest expense and (6) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.

The Company is not currently subject to the Base Erosion and Anti-Abuse (BEAT) tax, which is a tax imposed on certain entities who make payments to their non U.S.

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There was no material impact of the tax law changes included in the American Rescue Plan Act of 2021 to the Company.

“The Chip and Science Act of 2022”, Enacted August 2, 2022

In August 2022 the U.S.

enacted the Chip and Science Act of 2022 (the Chips Act).

The Chips Act provides incentives to semiconductor chip manufacturers in the United States, including providing manufacturing investment credits of 25% for investments in semiconductor manufacturing property placed in service after December 31, 2022, for which construction begins before January 1, 2027.

Property investments qualify for the 25% credit if, among other requirements, the property is integral to the operation of an advanced manufacturing facility, defined as having a primary purpose of manufacturing semiconductors or semiconductor manufacturing equipment.

Currently, we are evaluating the impact of the Chips Act to us.

Operating results

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Operating income (loss) 102,038 64,076 (13,937) 13.0 % 9.7 % (2.9) %

Interest expense and other income (loss), net (3,852) (3,972) (6,362) (0.6) % (0.9) % (1.4) %

Other income (loss), net 999 2,456 (1,229) 0.1 % 0.4 % (0.3) %

Interest expenses, net (3,920) (6,308) (2,743) (0.5) % (1.0) % (0.6) %

Gain on deconsolidation of the JV Company 399,093 — — 51.3 % — % — %

Loss on changes of equity interest in the JV Company, net (3,140) — — (0.4) % — % — %

Net income (loss) before income taxes 495,070 60,224 (17,909) 63.5 % 9.1 % (3.8) %

Income tax expense 39,258 3,935 348 5.0 % 0.6 % 0.1 %

Net income (loss) including noncontrolling interest 56,289 (18,257) (14,638) 8.5 % (3.9) % (3.2) %

Net loss attributable to noncontrolling interest (1,827) (11,661) (16,499) (0.3) % (2.5) % (3.7) %

Net income (loss) before loss from equity method investment 455,812 56,289 (18,257) 58.5 % 8.5 % (3.9) %

Equity method investment loss from equity investee 2,629 — — 0.3 % — % — %

Net income (loss) 453,183 56,289 (18,257) 58.2 % 8.5 % (3.9) %

Net income (loss) attributable to noncontrolling interest 20 (1,827) (11,661) 0.0 % (0.3) % (2.5) %

Net income (loss) attributable to Alpha and Omega Semiconductor Limited $ 453,163 $ 58,116 $ (6,596) 58.2 % 8.8 % (1.4) %

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The increase was primarily due to an increase of $62.4 million in sales of power discrete products and an increase of $59.2 million in sales of power IC products.

The increase in power discrete and power IC product sales was primarily due to a 23.0% increase in unit shipments and a 14.5% increase in average selling price due to a shift in product mix as compared to last fiscal year.

The increase in revenue of packaging and testing services for the fiscal year 2021 as compared to last fiscal year was primarily due to increased demand .

During fiscal year 2021, we accelerated the development of new technology platforms which allowed us to introduce 41 medium and high voltage MOSFET products, targeting primarily the power supply and communication marketing, and 11 module products primarily for the consumer markets, as well as 22 low voltage MOSFET products primarily for the computing and communication markets.

In addition, we introduced 84 Power IC new products for computing applications, power supply, communication and consumer markets.

The increase in power discrete and power IC product sales was primarily due to a 21.0% increase in average selling price as compared to last fiscal year due to a shift in product mix, partially offset by a 2.1% decrease in unit shipments.

The decrease in revenue of packaging and testing services for the fiscal year 2022 as compared to last fiscal year was primarily due to decreased demand.

During fiscal year 2022, we accelerated the development of new technology platforms which allowed us to introduce 49 medium and high voltage MOSFET products, targeting primarily the industrial markets and communication marketing, and 7 module products primarily for the consumer markets, as well as 14 low voltage MOSFET products primarily for the computing and communication markets.

In addition, we introduced 69 Power IC new products for computing applications, communication and consumer markets.

Fiscal 2021 vs 2020

Total revenue was $656.9 million for fiscal year 2021, an increase of $192.0 million, or 41.3%, as compared to $464.9 million for fiscal year 2020.

The increase was primarily due to an increase of $20.1 million in sales of power discrete products, partially offset by a decrease of $3.9 million in sales of power IC products.

The net increase in product sales was primarily due to a 6.0% increase in average selling price as compared to last fiscal year due to a shift in product mix, partially offset by a 2.3% decrease in unit shipments.

The decrease in revenue of packaging and testing services for fiscal year 2020 as compared to last fiscal year was primarily due to the fluctuation of demand on these services externally.

The increase was primarily due to an increase of $90.8 million in sales of power discrete products and an increase of $95.4 million in sales of power IC products.

The increase in revenue of packaging and testing services for the fiscal year 2021 as compared to last fiscal year was primarily due to increased demand.

Cost of goods sold and gross profit

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Gross margin increased by 3.4 percentage points to 34.5% for the fiscal year 2022, as compared to 31.1% for the fiscal year 2021.

Our JV Company continued its ramp during the fiscal year 2021, which resulted in an increase in the capacity utilization and contributed to the increase in gross margin.

We expect our gross margin to continue to fluctuate in the future as a result of variations in our product mix, ramp up costs related to the JV Company, factory utilization, semiconductor wafer and raw material pricing, manufacturing labor cost and general economic and PC market conditions.

The increase in gross margin was primarily due to better product mix during the fiscal year ended June 30, 2022.

We expect our gross margin to continue to fluctuate in the future as a result of variations in our product mix, semiconductor wafer and raw material pricing, manufacturing labor cost and general economic and PC market conditions.

Fiscal 2021 vs 2020

Cost of goods sold was $452.4 million for fiscal year 2021, an increase of $90.2 million, or 24.9%, as compared to $362.2 million for fiscal year 2020.

The increase was primarily due to limited mass production in our JV Company and the 3.1% increase of revenue.

Gross margin decreased by 3.5 percentage points to 22.1% for fiscal year 2020, as compared to 25.6% for fiscal year 2019.

The decrease in gross margin was primarily the result of low capacity utilization due to the limited mass production in our Chongqing joint venture during the fiscal year 2020.

The increase was primarily due to 41.3% increase in revenue.

Gross margin increased by 9.0 percentage points to 31.1% for the fiscal year 2021, as compared to 22.1% for the fiscal year 2020.

Our JV Company continued its ramp during the fiscal year 2021, which resulted in an increase in the capacity utilization and contributed to the increase in gross margin.

Research and development expenses

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Research and development expenses were $71.3 million for fiscal year 2022, an increase of $8.3 million, or 13.2%, as compared to $63.0 million for fiscal year 2021.

The increase was primarily attributable to a $4.0 million increase in employee compensation and benefit expense mainly due to higher bonus accrual, a $4.2 million increase in product prototyping engineering expense as a result of increased engineering activities, a $2.5 million increase in share-based compensation expense due to higher stock awards price, and a $0.5 million increase in facility expenses as a result of higher office rental expenses and higher utility costs.

The increase was primarily attributable to a $6.8 million increase in employee compensation and benefit expense mainly due to higher bonus accrual, increased headcount and annual merit increase, a $1.7 million increase in share-based compensation expense due to an increase in stock awards granted, a $0.2 million increase in depreciation expenses, and a $0.2 million increase in professional fees, partially offset by a $0.8 million decrease in product prototyping engineering expense as a result of decreased engineering activities.

We continue to evaluate and invest resources in developing new technologies and products utilizing our own fabrication and packaging facilities.

2 unchanged sentences

Research and development expenses were $63.0 million for fiscal year 2021, an increase of $11.7 million, or 22.8%, as compared to $51.3 million for fiscal year 2020.

The increase was primarily attributable to a $1.4 million increase in employee compensation and benefit expense mainly due to annual merit increase, partially offset by lower bonus accrual, a $2.1 million increase in professional fees, a $0.9 million increase in depreciation expenses, and a $0.4 million increase in share-based compensation expense due to more grants in stock awards.

Selling, general and administrative expenses

5 unchanged sentences

Selling, general and administrative expenses were $95.3 million for fiscal year 2022, an increase of $17.7 million, or 22.9%, as compared to $77.5 million for fiscal year 2021.

The increase was primarily attributable to a $13.2 million increase in employee compensation and benefits expenses, mainly due to increased headcount, higher bonus expenses and increased employee insurance expenses, as well as $2.2 million increase in share-based compensation expense due to higher stock rewards price.

The increase was partially offset by a $1.9 million decrease in legal expense related to the government investigation, and a $0.9 million decrease in business travel expenses as a result of the COVID-19 pandemic.

The increase was primarily attributable to a $8.6 million increase in employee compensation and benefits expenses mainly due to increased headcount, annual merit increase, higher bonus expenses and increased employee and business insurance expenses, as well as $10.9 million increase in share-based compensation expense due to increase in stock award granted, partially offset by a $2.2 million decrease in legal expense related to the government investigation.

Fiscal 2021 vs 2020

Selling, general and administrative expenses were $64.8 million for fiscal year 2020, a decrease of $11.2 million, or 14.7%, as compared to $76.0 million for fiscal year 2019.

The decrease was primarily due to a $14.9 million reduction in pre-production costs as a result of the commencement of limited mass production at the 12-inch fab facility at the JV Company, and a $2.7 million decrease in share-based compensation expense.

The net decrease was partially offset by a $1.0 million increase in depreciation expenses and a $5.4 million increase in legal expenses primarily due to the government investigation.

Selling, general and administrative expenses were $77.5 million for fiscal year 2021, an increase of $12.7 million, or 19.6%, as compared to $64.8 million for fiscal year 2020.

The increase was primarily attributable to a $13.2 million increase in

employee compensation and benefits expenses, mainly due to increased headcount, higher bonus expenses and increased employee insurance expenses, as well as $2.2 million increase in share-based compensation expense due to higher stock rewards price.

Impairment of privately-held investment

4 unchanged sentences

During the fiscal year 2020, we recorded an other-than-temporary impairment charge for our investment of $0.6 million in a privately-held start-up company.

As of June 30, 2021 and 2020, we have a remaining $0.1 million of privately-held investment.

Interest expense and other income (loss), net

As of June 30, 2022 and 2021, we have remaining a privately-held investment of $0.1 million.

Other income (loss), net

Year Ended June 30, Change

1 unchanged sentence

(in thousands) (in thousands) (in percentage) (in thousands) (in percentage)

Interest expense and other income (loss), net $ (3,852) $ (3,972) $ (6,362) $ 120 (3.0) % $ 2,390 (37.6) %

Other income (loss), net $ 999 $ 2,456 $ (1,229) $ (1,457) (59.3) % $ 3,685 (299.8) %

Other income (loss), net decreased by $1.5 million in fiscal year 2022 as compared to the last fiscal year primarily due to increase in foreign currency exchange loss as a result of the depreciation of RMB against USD.

Other income (loss), net increased by $3.7 million in the fiscal year 2021 as compared to the fiscal year 2020 was primarily due to a decrease in foreign currency exchange loss as a result of the appreciation of RMB against USD.

Interest expense, net

Year Ended June 30, Change

2022 2021 2020 2022 2021

(in thousands) (in thousands) (in percentage) (in thousands) (in percentage)

Interest expense, net $ (3,920) $ (6,308) $ (2,743) $ 2,388 (37.9) % $ (3,565) 130.0 %

Interest expense was primarily related to bank borrowings.

Interest expense increased by $3.6 million in fiscal year 2021 as compared to the last fiscal year was primarily due to an increase in bank borrowings as well as less interest refund from the Chinese government in the JV Company.

Interest expense decreased by $4.0 million in fiscal year 2020 as compa red to the fiscal year 2019 w as primarily due to $6.1 million of interest refund from the Chinese government in the JV Company, partially offset by higher interest expense as a result of an increase in bank borrowings.

Interest income and others were primarily related to interest earned from cash and cash equivalents, as well as foreign exchange gains (losses).

Interest income and others, net increased by $3.7 million in fiscal year 2021 as compared to the last fiscal year was primarily due to higher foreign currency exchange gains as a result of the appreciation of RMB against USD.

Interest income and others, net decreased by $1.6 million in fiscal year 2020 as compared to the fiscal year 2019 was primarily due to higher foreign currency exchange losses as a result of the depreciation of USD against RMB.

Interest expense decreased by $2.4 million in fiscal year 2022 as compared to the prior fiscal year primarily because of deconsolidation of the JV Company in December 2021.

Interest expense increased by $3.6 million in fiscal year 2021 as compared to the fiscal year 2020 primarily due to an increase in bank borrowings as well as to a reduction in the interest refund from the Chinese government to the JV Company.

Gain on deconsolidation of the JV Company and Gain/loss on changes of equity interest in the JV Company

Effective December 1, 2021, we entered into the STA with the Investor, pursuant to which we sold to the Investor approximately 2.1% of outstanding equity interest held by us in the JV Company for an aggregate purchase price of RMB 108 million or approximately $16.9 million.

The STA contained customary representations, warranties and covenants.

The Transaction was closed on December 2, 2021.

As a result of the Transaction, as of the Closing Date, our equity interest in the JV Company decreased from 50.9% to 48.8%.

Also, our right to designate directors on the board of JV Company was reduced to three (3) out of seven (7) directors, from four (4) directors prior to the Transaction.

We no longer have a controlling financial interest in the JV Company under generally accepted accounting principles.

other means such as having, or the ability to obtain, a majority of the subsidiary’s board of directors.

All of these loss of control factors were present for us as of December 2, 2021.

Accordingly, since December 2, 2021, AOS has accounted for its investment in the JV Company using the equity method of accounting.

In addition, the JV Company adopted an employee equity incentive plan and issued an equity interest equivalent to 3.99% of the JV Company to exchange in cash.

As a result, the Company owned 45.8% of the equity interest in the JV Company as of December 31, 2021.

On January 26, 2022, the JV Company completed a financing transaction pursuant to the Financing Agreement between the JV Company and certain New Investors.

Following the closing of the Investment, the percentage of outstanding JV Company equity interest beneficially owned by us was reduced to 42.2%.

During the fiscal year ended June 30, 2022, we recorded a gain of $399.1 million on deconsolidation of the JV Company, and a $3.1 million of loss on changes of equity interest in the JV Company.

We account for our investment in the JV Company as an equity method investment and report our equity in earnings or loss of the JV Company on a three-month lag due to an inability to timely obtain financial information of the JV Company.

For the fiscal year ended June 30, 2022 using lag reporting, we recorded $2.6 million of its equity in loss of the JV Company.

Income tax expense

5 unchanged sentences

Income tax expense for fiscal years 2022 and 2021 was $39.3 million and $3.9 million, respectively.

Income tax expense increased by $3.6 million, or 1,030.7% in fiscal year 2021 as compared to fiscal year 2020, primarily due to an approximate $80 million increase in pretax book income in fiscal 2021 (in which we reported a pretax book income of $60.2 million) vs.

Income tax expense increased by $35.3 million, or 897.7% in fiscal year 2022 as compared to fiscal year 2021.

The income tax expense of $39.3 million for the year ended June 30, 2022 included a $33.5 million discrete tax expense related to the Company’s $396.0 million of income from the sale of equity interest in a joint venture and the related deconsolidation gain as the Company changed from the consolidation method of accounting to the equity method of accounting.

In addition, we recorded a tax benefit of $0.4 million from other discrete income tax items.

The income tax expense of $3.9 million for the year ended June 30, 2021 included a $0.3 million discrete tax benefit.

Excluding the discrete income tax items ($396.0 million of income from the sale of equity interest in a joint venture and the related deconsolidation gain as well as other discrete items), the effective tax rate for the years ended June 30, 2022 and 2021 was 6.3% and 7.1%, respectively.

The changes in the tax expense and effective tax rate between the periods resulted primarily from the Company reporting pretax book income of $495.0 million ($99.0 million of pretax book income plus the $396.0 million of income from the sale of equity interest in a joint venture and the related deconsolidation gain) for the year ended June 30, 2022 as compared to a pretax book income of $60.2 million for the year ended June 30, 2021 as well as changes in the mix of earnings in various geographic jurisdictions between the current year and the same period of last year.

Fiscal 2021 vs 2020

Income tax expense for fiscal years 2021 and 2020 was $3.9 million and $0.3 million, respectively.

Income tax expense increased by $3.6 million in fiscal year 2021 as compared to fiscal year 2020, primarily due to an approximate $80 million increase in pretax book income in fiscal 2021 (in which we reported a pretax book income of $60.2 million) vs.

fiscal 2020 (in which we reported pretax book loss of $17.9 million).

1 unchanged sentence

The changes in the effective tax rate and tax expense between the fiscal years resulted primarily from changes in the mix of earnings in various geographic jurisdictions between the current fiscal year and prior fiscal year.

Fiscal 2020 vs 2019

Income tax expense for fiscal years 2020 and 2019 was $0.3 million and $1.3 million, respectively.

Income tax expense decreased by $0.9 million, or 72.3% in fiscal year 2020 as compared to fiscal year 2019 primarily due to a $1.1 million tax

benefit in fiscal year 2020 from re-measuring the tax benefit of our U.S.

net operating losses that could be carried back to the fiscal 2015, 2016 and 2017 years following the enactment of the CARES Act in March 2020, partially offset by decreased research credits generated in fiscal year 2020 vs.

fiscal year 2019 and changes in the mix of earnings in various geographic jurisdictions between the respective periods in fiscal year 2020 compared to fiscal year 2019.

Excluding the discrete income tax items, the effective tax rate for the current fiscal year was (9.6%), compared to (14.6%) for the last fiscal year.

Liquidity and Capital Resources

1 unchanged sentence

To date, we finance our operations and capital expenditures primarily through funds generated from operations and borrowings under our term loans, financing lease and other debt agreements.

On August 18, 2021, Jireh entered into a term loan agreement with a financial institution (the "Bank") in an amount up to $45.0 million for the purpose of expanding and upgrading our fabrication facility located in Oregon.

On August 18, 2021, Jireh Semiconductor Incorporated (“Jireh”) entered into a term loan agreement with a financial institution (the “Bank”) in an amount up to $45.0 million for the purpose of expanding and upgrading the Company’s fabrication facility located in Oregon.

The obligation under the loan agreement is secured by substantially all assets of Jireh and guaranteed by the Company.

The agreement has a 5.5 year term and matures on February 16, 2027.

Jireh will make consecutive quarterly payments of principal and interest.

The loan accrues interest based on adjusted LIBOR plus the applicable margin based on the outstanding balance of the loan.

This agreement contains customary restrictive covenants and includes certain financial covenants that require the Company to maintain.

In October 2019, the Company's subsidiary in China entered into a line of credit facility with Bank of Communications Limited in China.

This line of credit was scheduled to mature on February 14, 2021 and is based on the China Base Rate multiplied by 1.05, or 4.99% on October 31, 2019.

Jireh is required to make consecutive quarterly payments of principal and interest.

The loan accrues interest based on adjusted London Interbank Offered Rate (“LIBOR”) plus the applicable margin based on the outstanding balance of the loan.

This agreement contains customary restrictive covenants and includes certain financial covenants that the Company is required to maintain.

Jireh drew down $45.0 million on February 16, 2022.

As of June 30, 2022, Jireh was in compliance with these covenants and the outstanding balance of this loan was $45.0 million.

In October 2019, the Company’ subsidiary in China entered into a line of credit facility with Bank of Communications Limited in China.

This line of credit matured on February 14, 2021 and was based on the China Base Rate multiplied by 1.05, or 4.99% on October 31, 2019.

The purpose of the credit facility is to provide short-term borrowings.

1 unchanged sentence

Dollar on October 31, 2019.

In October 2020, this line of credit was renewed with the same terms and a maturity date of April 21, 2022.

As of June 30, 2021, there was no outstanding balance under the loan.

On November 16, 2018, the Company's subsidiary in China entered into a line of credit facility with Industrial and Commercial Bank of China, which expired on September 30, 2019.

In September 2021, this line of credit was renewed with maximum borrowings up to RMB 140.0 million with the same terms and a maturity date of September 18, 2022.

During the three months ended December 31, 2021, the Company borrowed RMB 11.0 million, or $1.6 million, at an interest rate of 3.85% per annum, with principal due on November 18, 2022.

As of June 30, 2022, there was $1.6 million outstanding balance under the loan.

On November 16, 2018, the Company’ subsidiary in China entered into a line of credit facility with Industrial and Commercial Bank of China.

The purpose of the credit facility was to provide short-term borrowings.

1 unchanged sentence

Dollar on November 16, 2018.

In December 2020, this line of credit was renewed with the same terms and a maturity date of December 31, 2021.

As of June 30, 2021, there was no outstanding balance under the line of credit.

On August 9, 2019, one of the Company's wholly-owned subsidiaries (the "Borrower") entered into a factoring agreement with the Hongkong and Shanghai Banking Corporation Limited (“HSBC”), whereby the Borrower assigns certain of its accounts receivable with recourse.

This factoring agreement allows the Borrower to borrow up to 70% of the net amount of its eligible accounts receivable of the Borrower with a maximum amount of $30.0 million.

The interest rate is based on one month London Interbank Offered Rate ("LIBOR") plus 1.75% per annum.

The Company is the guarantor for this agreement.

The RMB 72.0 million consisted of RMB 27.0 million for trade borrowings with a maturity date of December 31, 2021, and RMB 45.0 million for working capital borrowings or trade borrowings with a maturity date of September 13, 2022.

During the three months ended December 31, 2021, the Company borrowed RMB 5.0 million, or $0.8 million, at an interest rate of 3.7% per annum, with principal due on September 12, 2022.

As of June 30, 2022, the total outstanding balance of this loan was $0.5 million.

In September 2021, Jireh Semiconductor Incorporated (“Jireh”) entered into a financing arrangement agreement with a company (“Lender”) for the lease and purchase of a machinery equipment manufactured by a supplier.

The total purchase price of this machinery equipment was euro 12.0 million, or $12.8 million based on the currency exchange rate between the euro and U.S.

Dollar on June 30, 2022.

In April 2021, Jireh made a down payment of euro 6.0 million, representing 50% of the total purchase price of the equipment, to the supplier.

In June 2022, the equipment was delivered to Jireh after Lender paid 40% of the total purchase price, for euro 4.8 million, to the supplier on behalf of Jireh.

Based on the terms of the agreement between Jireh and Lender, after the installation and configuration of the equipment for its intended use, Lender will make the remaining 10% payment for the total purchase price and reimburse Jireh for the down payment made to the supplier.

By that time, the title of the equipment will be transferred to Lender.

This agreement has a 5 years term, after which Jireh has the option to purchase the equipment for $1.

Jireh is required to make a monthly payment of interest at an implied interest rate of 4.75% per annum to Lessor.

Principal payment is required to be paid monthly after the completion of the title transfer.

The financing arrangement is secured by this machinery equipment which had the carrying amount of $12.8 million as of June 30, 2022.

As of June 30, 2022, the outstanding balance of this debt financing was $5.0 million.

On August 9, 2019, one of the Company’ wholly-owned subsidiaries (the “Borrower”) entered into a factoring agreement with the Hongkong and Shanghai Banking Corporation Limited (“HSBC”), whereby the Borrower assigns certain of its accounts receivable with recourse.

This factoring agreement allowed the Borrower to borrow up to 70% of the net amount of its eligible accounts receivable of the Borrower with a maximum amount of $30.0 million.

The interest rate was based on one month London Interbank Offered Rate (“LIBOR”) plus 1.75% per annum.

The Company was the guarantor for this agreement.

The Company is accounting for this transaction as a secured borrowing under the Transfers and Servicing of Financial Assets guidance.

In addition, any cash held in the restricted bank account controlled by HSBC has a legal right of offset against the borrowing.

This agreement, with certain financial covenants required, has no expiration date.

The Borrower was in compliance with these covenants as of June 30, 2021.

During the fiscal year ended June 30, 2021, the Company borrowed $56.7 million and repaid it in full.

As of June 30, 2021, there was no outstanding balance and the Company had unused credit of approximately $30.0 million.

In addition, any cash held in the restricted bank account controlled by HSBC had a legal right of offset against the borrowing.

This agreement, with certain financial covenants required, had no expiration date.

On August 11, 2021, the Borrower signed an agreement with HSBC to decrease the borrowing maximum amount to $8.0 million with certain financial covenants required.

Other terms remain the same.

On May 1, 2018, Jireh Semiconductor Incorporated (“Jireh”), a wholly-owned subsidiary of the Company, entered into a loan agreement with a financial institution (the "Bank") that provided a term loan in an amount of $17.8 million.

The Borrower was in compliance with these covenants as of June 30, 2022.

As of June 30, 2022, there was no outstanding balance and the Company had unused credit of approximately $8.0 million.

On May 1, 2018, Jireh entered into a loan agreement with the Bank that provided a term loan in an amount of $17.8 million.

The obligation under the loan agreement is secured by certain real estate assets of Jireh and guaranteed by the Company.

2 unchanged sentences

The outstanding principal shall accrue interest at a fixed rate of 5.04% per annum on the basis of a 360-day year.

The loan agreement contains customary restrictive covenants and includes certain financial covenants that require the

Company to maintain, on a consolidated basis, specified financial ratios.

The loan agreement contains customary restrictive covenants and includes certain financial covenants that require the Company to maintain, on a consolidated basis, specified financial ratios.

In August 2021, Jireh signed an amendment of this loan with the Bank to modify the financial covenants requirement to align with the new term loan agreement entered into on August 18, 2021 discussed above.

The amendment was accounted for as a debt modification and no gain or loss was recognized.

The Company was in compliance with these covenants as of June 30, 2022.

As of June 30, 2022, the outstanding balance of the term loan was $14.2 million.

On August 15, 2017, Jireh entered into a credit agreement with the Bank that provided a term loan in an amount up to $30.0 million for the purpose of purchasing certain equipment for our fabrication facility located in Oregon.

The obligation under the credit agreement is secured by substantially all assets of Jireh and guaranteed by the Company.

2 unchanged sentences

Beginning in October 2018, Jireh is required to pay to the Bank on each payment date, the outstanding principal amount of the loan in monthly installments.

The loan accrues interest based on an adjusted London Interbank Offered Rate ("LIBOR") as defined in the credit agreement, plus specified applicable margin in the range of 1.75% to 2.25%, based on the outstanding balance of the loan.

The loan accrues interest based on an adjusted LIBOR as defined in the credit agreement, plus specified applicable margin in the range of 1.75% to 2.25%, based on the outstanding balance of the loan.

The credit agreement contains customary restrictive covenants and includes certain financial covenants that require the Company to maintain, on a consolidated basis, specified financial ratios and fixed charge coverage ratio.

The amendment was accounted for as a debt modification and no gain or loss was recognized.

The Company was in compliance with these covenants as of June 30, 2022.

4 unchanged sentences

During fiscal year 2022, 2021 and 2020, we did not repurchase any shares pursuant to the repurchase program.

During fiscal years 2019, we repurchased an aggregate of 111,509 shares, from the open market for a total cost of approximately $1.5 million, excluding fees and related expenses, at an average price of $13.43 per share.

As of June 30, 2022, the Company had repurchased an aggregate of 6,784,648 shares for a total cost of $67.3 million, at an average price of $9.92 per share, excluding fees and related expenses, since inception of the program.

13 unchanged sentences

As a result of this and other restrictions under PRC laws and regulations, our China subsidiaries are restricted in their ability to transfer a portion of their net assets to us, and such restriction may adversely affect our ability to generate sufficient liquidity to fund our operations or other expenditures.

As of June 30, 2021 and 2020, such restricted portion amounted to approximately $209.9 million and $209.8 million, or 50.4% and 61.4%, of our total consolidated net assets attributable to the Company, respectively.

The increase of restricted net assets was primarily from the JV Company in China.

As of June 30, 2022 and 2021, such restricted portion amounted to approximately

$92.4 million and $209.9 million, or 10.8% and 50.4%, of our total consolidated net assets attributable to the Company, respectively.

The decrease of restricted net assets was primarily from deconsolidation of the JV Company in China.

We believe that our current cash and cash equivalents and cash flows from operations will be sufficient to meet our anticipated cash needs, including working capital and capital expenditures, for at least the next twelve months.

In addition, we recently commenced an investment plan to expand the manufacturing capacity and upgrade the operational capabilities of our

In addition, we recently commenced an investment plan to expand the manufacturing capacity and upgrade the operational capabilities of our Oregon Fab.

We intend to fund the costs by a combination of cash reserve, bank loans and equipment leases.

4 unchanged sentences

We cannot be certain that any financing will be available in the amounts we need or on terms acceptable to us, if at all.

JV Company Financing Transactions

From time to time the JV Company has entered into financing and loan agreements with banks and other third parties to fund capital expenditures and other operational expenses in connection with the constructions and ramp-up of the manufacturing facility in Chongqing.

The JV Company incurs debt through its own financing agreements, and our parent company and other subsidiaries are not parties to these agreements and do not provide any guarantee or security for JV Company’s debt, nor do we have direct access to any cash proceeds borrowed from such loan agreements.

The JV Company is currently pursuing additional financing transactions to fund its operations and ramp-up activities, and to refinance its existing debt.

There is no guarantee that the JV Company will be able to secure financing on favorable terms, or at all.

In addition, any equity financing by the JV Company may dilute our equity ownership in the JV Company, which may adversely affect our ability to maintain control over the JV Company.

On May 9, 2018 (the “Effective Date”), the JV Company entered into a lease finance agreement and a security agreement (the “Agreements”) with YinHai Leasing Company and China Import/Export Bank (the “Lenders”).

Pursuant to the Agreements, the Lenders agree to provide an aggregate of RMB 400.0 million, or $62.8 million based on the currency exchange rate between RMB and U.S.

Dollar on the Effective Date, of financing to the JV Company (the “Lease Financing”).

In exchange for the Lease Financing, the JV Company agrees to transfer title of its assembly and testing equipment to the Lenders, and the Lenders lease such equipment to the JV Company under a five-year lease arrangement, pursuant to which the JV Company makes quarterly lease payments to the Lenders consisting of principal and interest based on a repayment schedule mutually agreed by the parties.

The interest under the Lease Financing is accrued based on the China Base Rate multiplied by 1.15, or 5.4625% on the Effective Date.

Under the Agreements, at the end of the five-year lease term, the Lenders agree to sell such equipment back to the JV Company for a nominal amount (RMB 1).

The JV Company’s obligations under the Lease Financing are secured by the land and building owned by the JV Company (the “Collateral”).

The proceeds from the Lease Financing will be used primarily for the acquisition and installation of the 12-inch fabrication equipment and other expenses of the JV Company relating to the completion of the fabrication facility located in Chongqing.

The Agreements contain customary representation, warranties and covenants, including restrictions on the transfer of the Collateral.

The Agreements also contain customary events of default, including but are not limited to, failure to make payments and breach of material terms under the Agreements.

On June 28, 2020, the parties entered into a modification to this agreement as a result of a change in the bank reference rate, pursuant to which the interest rate was changed to be the five-year loan prime rate in China plus 0.8125%, or 5.4625%.

Other terms of this agreement remain the same.

As of June 30, 2021, the outstanding balance of the Lease Financing of 190.0 million RMB (equivalent of $29.4 million based on the currency exchange rate as of June 30, 2021) was recorded under short-term and long-term finance lease liabilities.

On November 29 and December 4, 2018, the JV Company entered into two, one-year loan agreements with China Merchant Bank and Chongqing LiangJiang New District China Merchants Group Limited Company in China to provide loans for RMB 80 million and RMB 20 million, respectively, or $14.5 million in total based on the currency exchange rate between RMB and U.S.

Dollar on December 31, 2018, at varying interest rates.

On January 20, 2020, the JV Company renewed the loan agreements with the same terms.

Interest payments are due monthly and quarterly with the entire principal due not later than January 21, 2021.

As of June 30, 2021, these two loans were expired and there was no outstanding balance under the loans.

On March 12, 2019, the JV Company entered into a loan agreement with The Export-Import Bank of China in the aggregate principal amount of RMB 200 million (approximately $29.8 million based on currency exchange rate between RMB and U.S.

Dollar on March 31, 2019).

The loan will mature on February 20, 2025.

The JV Company drew down RMB 190 million and RMB 10 million in March 2019 and December 2019, respectively.

The loan withdraw window expired on February 28, 2020.

The interest is accrued based on the China Base Rate multiplied by 1.1, or 5.39%.

The loan requires quarterly interest payments.

The principal payments are required to be paid every 6 months over the term of loan commencing in October 2019.

This loan is secured by the buildings and certain equipment owned by the JV Company.

As a condition of the loan arrangements, 14 million RMB (approximately $2.0 million) of cash is held as restricted cash by the JV Company as a compensating balance at the JV Company's bank until the principal is paid.

On June 24, 2020, a modification of this loan was signed as a result of a change in the bank reference rate, pursuant to which the interest rate was changed to be based on the five-year loan prime rate in China plus 0.74%, or 5.39%.

Other terms of this loan remain the same.

As of June 30, 2021, the

outstanding balance of the loan was 184 million RMB (equivalent of $28.5 million based on the currency exchange rate as of June 30, 2021).

In December 2019, the JV Company entered into a loan agreement with China Development Bank in the amount of $24.0 million.

The obligation under the loan agreement is secured by certain assets of the JV Company.

Beginning December 18, 2020, the JV Company will make consecutive semi-annual payments of principal until December 8, 2024.

The interest is accrued based on the LIBOR rate plus 2.8%.

The interest is required to be paid on March 21 and September 21 each year.

As of June 30, 2021, the outstanding balance of the loan was $19.2 million.

On April 15, 2020, the JV Company entered into a one-year loan agreement with China Everbright Bank in China to borrow a maximum of RMB 100 million (approximately $14.3 million based on the currency exchange rate between RMB and U.S.

Dollar on April 15, 2020), in the amount in RMB or USD.

Interest payments were due on the 20th of each month, and the entire principal was due on April 16, 2021.

The loan consisted of RMB 20 million for working capital borrowing in Chinese yuan and RMB 80 million for borrowing in US dollars that was collateralized by eligible accounts receivable.

As of June 30, 2021, this loan was expired and there was no outstanding balance under the loan.

On April 26, 2020, the JV Company entered into a loan agreement with China Development Bank, Agricultural Bank of China, China Merchants Bank and Chongqing Rural Commercial Bank (collectively, "the Banks") in the aggregate principal amount of RMB 250 million (approximately $35.7 million based on the currency exchange rate between RMB and U.S.

Dollar on April 26, 2020).

The obligation under the loan agreement is secured by certain assets of the JV Company.

Beginning December 18, 2020, the JV Company is required to make consecutive semi-annual payments of principal until December 8, 2024.

Interest payment is due on March 20, June 20, September 20 and December 20 of each year based on China one-year loan prime rate ("LPR") plus 1.3%.

The JV Company drew down RMB 250 million (approximately $35.3 million based on the currency exchange rate between RMB and U.S.

Dollar on June 30, 2020) in April 2020.

As of June 30, 2021, the outstanding balance of the loan was $34.1 million.

On November 13, 2020, the JV Company entered into a one-year loan agreement with China Merchant Bank in China.

The JV Company can borrow up to Chinese Renminbi ("RMB") 50.0 million, or $7.6 million, based on the currency exchange rate between RMB and U.S.

Dollar on November 13, 2020.

The loan's interest rates are based on the China one-year loan prime rate ("LPR") plus 1.4% per annum.

Interest payments are due quarterly with the entire principal due not later than November 19, 2021.

During the three months ended December 31, 2020, the JV Company borrowed RMB 50.0 million at a n interest rate of 5.25% per annum.

As of June 30, 2021, the outstanding balance of this loan was $ 7.7 million.

On June 29, 2021, the JV Company entered into a one-year loan agreement with China Citic Bank in China to borrow a maximum of $7.7 million.

Interest payments are due on the 20th of each quarter starting September 20, 2021, and the entire principal is due on June 29, 2022.

As of June 30, 2021, the outstanding balance of this loan was $7.7 million at an interest rate of 3.49% per annum.

On April 19, 2021, the JV Company entered into a loan agreement with China Everbright Bank in China to borrow a maximum of Chinese Renminbi ("RMB") 100 million.

The borrowing can be in RMB or U.S.

Dollar ("USD").

The loan consists of RMB 50 million for working capital borrowings in Chinese yuan and RMB 50 million for borrowing in USD.

The loan is collateralized by eligible accounts receivable.

On April 19, 2021, the JV Company borrowed RMB 50.0 million, or $7.7 million based on the currency exchange rate between RMB and USD on April 19, 2021, at an interest rate of 5.1% annum.

The interest payments are due quarterly with the entire principal due no later than May 19, 2022.

On June 16, 2021 and June 24, 2021, the JV Company also borrowed $4.2 million and $3.5 million at interest rate of 2.7% per annum, with principal due on August 18, 2021 and September 9, 2021, respectively.

As of June 30, 2021, the total outstanding balance of these loans was $15.4 million.

Cash, cash equivalents and restricted cash

10 unchanged sentences

Effect of exchange rate changes on cash, cash equivalents and restricted cash (59) 4,895 (708)

Net increase (decrease) in cash, cash equivalents and restricted cash $ 42,109 $ 38,409 $ (7,429)

Net increase in cash, cash equivalents and restricted cash $ 109,838 $ 42,109 $ 38,409

Cash flows from operating activities

Net cash provided by operating activities of $218.9 million for fiscal year 2022 resulted primarily from net income of $453.2 million, non-cash charges of $287.6 million and net change in assets and liabilities providing net cash of $53.3 million.

The non-cash charges of $287.6 million included depreciation and amortization expenses of $42.9 million, share-based compensation expense of $31.3 million, gain on deconsoidation of the JV Company of $399.1 million, loss on changes of equity interest in the JV Company, net of $3.1 million, deferred income tax on deconsolidation and changes of equity interest in the JV Company of $30.0 million, loss on equity investment of $2.6 million, and net deferred income taxes of $1.6 million.

The net change in assets and liabilities providing net cash of $53.3 million was primarily due to $76.4 million increase in accrued and other liabilities, income taxes payable on deconsolidation and changes of equity interest in the JV company of $3.5 million, other payable on equity investee of $48.2 million, and $23.8 million increase in accounts payable primarily due to timing of payment, partially offset by $30.1 million increase in accounts receivable due to timing of billings and collection of payments, $57.4 million increase in inventories, $9.4 million increase in other current and long-term assets primarily due to decrease in advance payments to suppliers, and $1.7 million decrease in income taxes payable.

Net cash provided by operating activities of $128.7 million for fiscal year 2021 resulted primarily from net income of $56.3 million, non-cash charges of $70.0 million and net change in assets and liabilities providing net cash of $2.5 million.

The non-cash charges of $70.0 million included depreciation and amortization expenses of $52.7 million, share-based compensation expense of $15.3 million, loss on disposal of property and equipment of $0.4 million, and net deferred income taxes of $1.6 million.

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The net change in assets and liabilities providing net cash of $24.4 million was primarily due to $27.3 million decrease in other current and long-term assets primarily due to increase in advance payments to suppliers, $11.0 million decrease in accounts receivable due to timing of billings and collection of payments, and $11.0 million increase in accrued and other liabilities, partially offset by $22.8 million increase in inventories, $1.8 million decrease in accounts payable primarily due to timing of payments, and $0.3 million decrease in income taxes payable.

Net cash provided by operating activities of $31.4 million for fiscal year 2019 resulted primarily from net loss of $14.6 million, non-cash charges of $44.8 million and net change in assets and liabilities providing net cash of $1.3 million.

The non-cash charges of $44.8 million included depreciation and amortization expenses of $32.0 million, share-based compensation expense of $13.2 million, and net deferred income taxes of $0.5 million.

The net change in assets and liabilities providing net cash of $1.3 million was primarily due to $9.6 million increase in accrued and other liabilities, $9.2 million decrease in accounts receivable due to timing of billings and collection of payments, $6.4 million increase in accounts payable primarily due to timing of payments, partially offset by $21.5 million increase in inventories, $1.9 million increase in other current and long-term assets primarily due to increase in advance payments to suppliers, and $0.6 million decrease in income taxes payable.

Cash flows from investing activities

Net cash used in investing activities of $72.5 million for the fiscal year 2021 was primarily attributable to $72.7 million purchases of property and equipment, including $50.0 million purchases in JV Company, which was partially offset by $0.1 million government grant related to equipment in the JV Company.

Net cash used in investing activities of $60.8 million for the fiscal year 2020 was primarily attributable to $62.4 million purchases of property and equipment, including $20.0 million purchases in JV Company, which was partially offset by $1.3 million government grant related to equipment in the JV Company and $0.3 million of proceeds from sale of property and equipment.

Net cash used in investing activities of $112.4 million for the fiscal year 2019 was primarily attributable to $112.1 million purchases of property and equipment, including $76.0 million purchases in JV Company, and $0.4 million purchases of intangible assets.

Net cash used in investing activities of $130.8 million for the fiscal year 2022 was primarily attributable to $138.0 million purchases of property and equipment, and $20.7 million deconsolidation of cash and cash equivalents of the JV Company, partially offset by $1.4 million government grant related to equipment in the JV Company, $26.3 million proceeds from sale of equity interest in the JV Company and $0.1 million proceeds from sale of property and equipment.

Net cash used in investing activities of $72.5 million for the fiscal year 2021 was primarily attributable to $72.7 million purchases of property and equipment, which was partially offset by $0.1 million government grant related to equipment in the JV Company.

Net cash used in investing activities of $60.8 million for the fiscal year 2020 was primarily attributable to $62.4 million purchases of property and equipment, which was partially offset by $1.3 million government grant related to equipment in the JV Company and $0.3 million of proceeds from sale of property and equipment.

Cash flows from financing activities

Net cash used in financing activities of $21.9 million for the fiscal year 2022 was primarily attributable to $64.3 million of proceeds from borrowings and $6.1 million of proceeds from exercises of share options and issuance of shares under the ESPP, partially offset by $8.6 million in common shares acquired to settle withholding tax related to vesting of restricted stock units, $4.2 million in payments of capital lease obligations, and $35.7 million in repayments of borrowings.

Net cash used in financing activities of $19.0 million for the fiscal year 2021 was primarily attributable to $6.9 million in common shares acquired to settle withholding tax related to vesting of restricted stock units, $16.5 million in payments of capital lease obligations, and $66.6 million in repayments of borrowings, partially offset by $65.9 million of proceeds from borrowings and $5.1 million of proceeds from exercises of share options and issuance of shares under the ESPP.

Net cash provided by financing activities of $37.7 million for the fiscal year 2020 was primarily attributable to $96.2 million of proceeds from borrowings, and $3.4 million of proceeds from exercises of share options and issuance of shares under the ESPP, partially offset by $1.5 million in common shares acquired to settle withholding tax related to vesting of restricted stock units, $11.0 million in payments of capital lease obligations, and $49.4 million in repayments of borrowings.

Net cash provided by financing activities of $75.1 million for the fiscal year 2019 was primarily attributable to $24.0 million proceeds from investment by Chongqing Funds, $77.9 million of proceeds from borrowings, and $3.0 million of proceeds from exercises of share options and issuance of shares under the ESPP, partially offset by $2.0 million in common shares acquired to settle withholding tax related to vesting of restricted stock units, $1.5 million for repurchase of our common shares under the repurchase program, $4.4 million in payments of capital lease obligations, and $21.9 million in repayments of borrowings.

Contractual Obligations

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To the extent there are material differences between these estimates and actual results, our consolidated financial statements will be affected.

On an ongoing basis, we evaluate the estimates, judgments and assumptions including those related to stock rotation returns, price adjustments, allowance for doubtful accounts, valuation of inventories, warranty accrual, income taxes, leases, share-based compensation, recoverability of and useful lives for property, plant and equipment and intangible assets, as well as economic implications of the COVID-19 pandemic.

On an ongoing basis, we evaluate the estimates, judgments and assumptions including those related to stock rotation returns, price adjustments, allowance for doubtful accounts, valuation of inventories, warranty accrual, income taxes, leases, equity method investment, share-based compensation, recoverability of and useful lives for property, plant and equipment and intangible assets, as well as economic implications of the COVID-19 pandemic.

Revenue recognition

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Packaging and testing services revenue is recognized at a point in time upon shipment of serviced products to the customer.

Equity method investment

We use the equity method of accounting when we have the ability to exercise significant influence, but not control, as determined in accordance with general accepted accounting principles, over the operating and financial policies of the investee.

Effective December 2, 2021, we reduced our equity interest in the JV Company, which resulted in deconsolidation of our investment in the JV Company.

As a result, beginning December 2, 2021, we record our investment under equity method of accounting.

Due to difficulties in obtaining accurate financial information from the JV Company in a timely manner, we record our share of earnings or losses of such affiliate on a one quarter lag.

Therefore, our share of losses of the JV Company for the period from December 2, 2021 to March 31, 2022 was recorded in our Consolidated Statement of Operations for the fiscal year ended June 30, 2022.

We recognize and disclose intervening events at the JV Company in the lag period that could materially affect our consolidated financial statements.

We record our interest in the net earnings of our equity method investees, along with adjustments for unrealized profits or losses on intra-entity transactions and amortization of basis differences, within earnings or loss from equity interests in the Consolidated Statements of Income.

Profits or losses related to intra-entity sales with its equity method investees are eliminated until realized by the investor and investee.

Basis differences represent differences between the cost of the investment and the underlying equity in net assets of the investment and are generally amortized over the lives of the related assets that gave rise to them.

Equity method goodwill is not amortized or tested for impairment;

instead the equity method investment is tested for impairment.

We review for impairment whenever factors indicate that the carrying amount of the

investment might not be recoverable.

In such a case, the decrease in value is recognized in the period the impairment occurs in the Condensed Consolidated Statements of Income.

Valuation of inventories

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Cost primarily consists of semiconductor wafers and raw materials, labor, depreciation expenses and other manufacturing expenses and overhead, and packaging and testing fees paid to third parties if subcontractors are used.

Valuation of inventories are based on our periodic review of inventory quantities on hand as compared with our sales forecasts, historical usage, aging of inventories, production yield levels and current product selling prices.

Valuation of inventories is based on our periodic review of inventory quantities on hand as compared with our sales forecasts, historical usage, aging of inventories, production yield levels and current product selling prices.

If actual market conditions are less favorable than those forecasted by us, additional future inventory write-downs may be required that could adversely affect our operating results.

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If actual market conditions are more favorable than expected and the products that have previously been written down are sold, our gross margin would be favorably impacted.

Product warranty

We provide a standard one-year warranty for the products from the date of purchase by the end customers.

We accrue for estimated warranty costs at the time revenue is recognized.

Our warranty obligation is affected by product failure rates, labor and material costs for replacing defective parts, related freight costs for failed parts and other quality assurance costs.

We monitor our product returns for warranty claims and maintain warranty reserve based on our historical experiences and

anticipated warranty claims known at the time of estimation.

If actual warranty costs differ significantly from our estimates, revisions to the estimated warranty accrual would be required and any such adjustments could be material.

Accounting for income taxes

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We have not provided for withholding taxes on the undistributed earnings of our foreign subsidiaries because we intend to reinvest such earnings indefinitely.

However, we have recorded a deferred tax liability of $29.6 million at June 30, 2022 related to our investment in the JV Company.

As of June 30, 2022, the cumulative amount of undistributed earnings of our foreign subsidiaries considered permanently reinvested was $314.7 million.

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Our provision for income taxes is subject to volatility and could be adversely impacted by changes in earnings or tax laws and regulations in various jurisdictions.

We are subject to the continuous examination of our income tax returns by the Internal Revenue Service and other tax authorities.

We are subject to the continuous examination of our income tax returns by the

Internal Revenue Service and other tax authorities.

We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes.

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For restricted stock awards subject to market conditions, the fair value of each restricted stock award is estimated at the date of grant using the Monte-Carlo pricing model.

Share-based compensation expense is significant to the consolidated financial

statements and is calculated using our best estimates, which involve inherent uncertainties and the application of management's judgment.

Share-based compensation expense is significant to the consolidated financial statements and is calculated using our best estimates, which involve inherent uncertainties and the application of management's judgment.

The Black-Scholes option valuation model requires the input of subjective assumptions, including the expected term and stock price volatility.

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Changes in estimated forfeitures are recognized in the period of change and impact the amount of stock compensation expenses to be recognized in future periods, which could be material if actual results differ significantly from estimates.

Estimated Useful Lives for Property, Plant and Equipment and Intangible Assets

Property, plant and equipment are recorded at cost and are depreciated using the straight-line method over estimated useful lives of the assets.

Patents and exclusive technology rights purchased from third parties are amortized on a straight-line basis over their estimated useful lives of three to seven years.

Trade name and customer relationships acquired in a business combination are recognized at fair values at the acquisition date and amortized on a straight-line basis over their estimated economic lives of three years and four years, respectively.

Recently Issued Accounting Pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis