ALPHA & OMEGA SEMICONDUCTOR Ltd 10-Q

ITEM 1. Financial Statements ALPHA AND OMEGA SEMICONDUCTOR LIMITED CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited, in thousands except par value per share) September 30, 2022 June 30, 2022 ASSETS Current assets: Cash and cash equivalents $ 316,119 $ 314,352 Restricted cash 278 299 Accounts receivable, net 55,769 65,681 Inventories 164,946 158,040 Other current assets 11,030 11,220 Total current assets 548,142 549,592 Property, plant and equipment, net 339,470 318,666 Operating lease right-of-use assets 24,251 23,674 Intangible assets, net 9,211 10,050 Equity method investment 375,914 378,378 Deferred income tax assets 553 592 Other long-term assets 13,897 17,677 Total assets $ 1,311,438 $ 1,298,629 LIABILITIES AND EQUITY Current liabilities: Accounts payable $ 80,101 $ 87,377 Accrued liabilities 108,350 116,893 Payable related to equity investee, net 19,516 28,989 Income taxes payable 4,687 4,248 Short-term debt 26,738 25,563 Finance lease liabilities 820 802 Operating lease liabilities 4,119 3,850 Total current liabilities 244,331 267,722 Long-term debt 46,953 42,486 Income taxes payable - long-term 2,191 2,158 Deferred income tax liabilities 28,572 28,757 Finance lease liabilities - long-term 3,873 3,932 Operating lease liabilities - long-term 20,748 20,878 Other long-term liabilities 79,301 78,603 Total liabilities 425,969 444,536 Commitments and contingencies (Note 12) Equity: Preferred shares, par value $ 0.002 per share: Authorized: 10,000 shares; issued and outstanding: none at September 30, 2022 and June 30, 2022 — — Common shares, par value $ 0.002 per share: Authorized: 100,000 shares; issued and outstanding: 34,018 shares and 27,401 shares, respectively at September 30, 2022 and 33,988 shares and 27,371 shares, respectively at June 30, 2022 68 68 Treasury shares at cost: 6,617 shares at September 30, 2022 and 6,617 shares at June 30, 2022 ( 65,996 ) ( 66,000 ) Additional paid-in capital 299,196 288,951 Accumulated other comprehensive income (loss) ( 3,827 ) 1,080 Retained earnings 656,028 629,994 Total equity 885,469 854,093 Total liabilities and equity $ 1,311,438 $ 1,298,629 See accompanying notes to these condensed consolidated financial statements. 1 Table of Contents ALPHA AND OMEGA SEMICONDUCTOR LIMITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited, in thousands except per share data) Three Months Ended September 30, 2022 2021 Revenue $ 208,476 $ 187,035 Cost of goods sold 137,348 122,468 Gross profit 71,128 64,567 Operating expenses Research and development 21,389 17,812 Selling, general and administrative 24,205 21,806 Total operating expenses 45,594 39,618 Operating income 25,534 24,949 Other income (loss), net ( 16 ) ( 16 ) Interest expense, net ( 608 ) ( 2,176 ) Net income before income taxes 24,910 22,757 Income tax expense 1,374 1,320 Net income before income from equity method investment 23,536 21,437 Equity method investment income from equity investee 2,502 — Net income 26,038 21,437 Net loss attributable to noncontrolling interest — ( 1,987 ) Net income attributable to Alpha and Omega Semiconductor Limited $ 26,038 $ 23,424 Net income per common share attributable to Alpha and Omega Semiconductor Limited Basic $ 0.95 $ 0.89 Diluted $ 0.88 $ 0.85 Weighted average number of common shares attributable to Alpha and Omega Semiconductor Limited used to compute net income per share Basic 27,391 26,365 Diluted 29,423 27,638 See accompanying notes to these condensed consolidated financial statements. 2 Table of Contents ALPHA AND OMEGA SEMICONDUCTOR LIMITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited, in thousands) Three Months Ended September 30, 2022 2021 Net income including noncontrolling interest $ 26,038 $ 21,437 Other comprehensive income, net of tax Foreign currency translation adjustment ( 4,907 ) ( 100 ) Comprehensive income 21,131 21,337 Less: Noncontrolling interest — ( 2,001 ) Comprehensive income attributable to Alpha and Omega Semiconductor Limited $ 21,131 $ 23,338 See accompanying notes to these condensed consolidated financial statements. 3 ALPHA AND OMEGA SEMICONDUCTOR LIMITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited, in thousands) Common Shares Treasury Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings Total AOS Shareholders' Equity Noncontrolling Interest Total Equity Balance, June 30, 2021 $ 66 $ ( 66,064 ) $ 259,993 $ 2,315 $ 176,895 $ 373,205 $ 143,120 $ 516,325 Reissuance of treasury stock upon exercise of common stock options and release of RSUs — 12 — — ( 12 ) — — — Withholding tax on restricted stock units — — ( 174 ) — — ( 174 ) — ( 174 ) Share-based compensation — — 4,502 — — 4,502 — 4,502 Net income (loss) including noncontrolling interest — — — — 23,424 23,424 ( 1,987 ) 21,437 Foreign currency translation adjustment — — — ( 86 ) — ( 86 ) ( 14 ) ( 100 ) Balance, September 30, 2021 $ 66 $ ( 66,052 ) $ 264,321 $ 2,229 $ 200,307 $ 400,871 $ 141,119 $ 541,990 Common Shares Treasury Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings Total AOS Shareholders' Equity Noncontrolling Interest Total Equity Balance, June 30, 2022 $ 68 $ ( 66,000 ) $ 288,951 $ 1,080 $ 629,994 $ 854,093 $ — $ 854,093 Exercise of common stock options and release of restricted stock units — — 19 — — 19 — 19 Reissuance of treasury stock upon exercise of common stock options and release of RSUs — 4 — — ( 4 ) — — — Withholding tax on restricted stock units — — ( 370 ) — — ( 370 ) — ( 370 ) Share-based compensation — — 10,596 — — 10,596 — 10,596 Net income — — — — 26,038 26,038 — 26,038 Foreign currency translation adjustment, net of tax — — — ( 4,907 ) — ( 4,907 ) — ( 4,907 ) Balance, September 30, 2022 $ 68 $ ( 65,996 ) $ 299,196 $ ( 3,827 ) $ 656,028 $ 885,469 $ — $ 885,469 See accompanying notes to these condensed consolidated financial statements. 4 Table of Contents ALPHA AND OMEGA SEMICONDUCTOR LIMITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited, in thousands) Three Months Ended September 30, 2022 2021 Cash flows from operating activities Net income including noncontrolling interest through December 1, 2021 $ 26,038 $ 21,437 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 9,352 13,722 Share-based compensation expense 10,596 4,635 Income from equity investment ( 2,502 ) — Deferred income taxes, net ( 147 ) 638 Loss on disposal of property and equipment 398 28 Changes in operating assets and liabilities Accounts receivable 9,912 ( 3,528 ) Inventories ( 6,907 ) ( 9,145 ) Other current and long-term assets ( 519 ) ( 2,561 ) Accounts payable ( 6,029 ) 2,081 Net payable equity investee ( 9,472 ) — Income taxes payable 471 414 Accrued and other liabilities 5,484 52,886 Net cash provided by operating activities 36,675 80,607 Cash flows from investing activities Purchases of property and equipment ( 40,260 ) ( 24,993 ) Government grant related to equipment 286 1,082 Net cash used in investing activities ( 39,974 ) ( 23,911 ) Cash flows from financing activities Withholding tax on restricted stock units ( 370 ) ( 174 ) Proceeds from exercise of stock options and release of restricted stock 19 — Proceeds from borrowings 8,632 7,550 Repayments of borrowings ( 2,618 ) ( 9,735 ) Principal payments on finance leases ( 201 ) ( 4,176 ) Net cash provided by (used in) financing activities 5,462 ( 6,535 ) Effect of exchange rate changes on cash, cash equivalents and restricted cash ( 417 ) ( 11 ) Net increase in cash, cash equivalents and restricted cash 1,746 50,150 Cash, cash equivalents and restricted cash at beginning of period 314,651 204,813 Cash, cash equivalents and restricted cash at end of period $ 316,397 $ 254,963 Supplemental disclosures of non-cash investing and financing information: Property and equipment purchased but not yet paid $ 19,360 $ 11,285 September 30, 2022 September 30, 2021 Reconciliation of cash, cash equivalents, and restricted cash: Cash and cash equivalents $ 316,119 $ 252,453 Restricted cash 278 342 Restricted cash - long term — 2,168 Total cash, cash equivalents, and restricted cash $ 316,397 $ 254,963 See accompanying notes to these condensed consolidated financial statements. 5 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. The Company and Significant Accounting Policies The Company Alpha and Omega Semiconductor Limited and its subsidiaries (the “Company”, “AOS”, “we” or “us”) design, develop and supply a broad range of power semiconductors. The Company's portfolio of products targets high-volume applications, including personal and portable computers, graphic cards, flat panel TVs, home appliances, smart phones, battery packs, quick chargers, home appliances, consumer and industrial motor controls and power supplies for TVs, computers, servers and telecommunications equipment. The Company conducts its operations primarily in the United States of America (“USA”), Hong Kong, China, and South Korea. Basis of Preparation The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and with the instructions to Article 10 of Securities and Exchange Commission Regulation S-X, as amended. They do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with U.S. GAAP for complete financial statements. These Condensed Consolidated Financial Statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2022. All significant intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, all adjustments (consisting of normal recurring adjustments and accruals) considered necessary for a fair presentation of the results of operations for the periods presented have been included in the interim periods. Operating results for the three months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2023 or any other interim period. The consolidated balance sheet at June 30, 2022 is derived from the audited financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2022. Joint Venture On March 29, 2016, the Company entered into a joint venture contract (the “JV Agreement”) with two investment funds owned by the Municipality of Chongqing (the “Chongqing Funds”), pursuant to which the Company and the Chongqing Funds formed a joint venture, (the “JV Company”), for the purpose of constructing and operating a power semiconductor packaging, testing and 12-inch wafer fabrication facility in the Liangjiang New Area of Chongqing, China (the “JV Transaction”). As of December 1, 2021, the Company owned 50.9 %, and the Chongqing Funds owned 49.1 %, of the equity interest in the JV Company. The Joint Venture was accounted under the provisions of the consolidation guidance since the Company had controlling financial interest until December 1, 2021. As of December 2, 2021, the Company ceased having control over the JV Company. Therefore, the Company deconsolidated the JV Company as of that date. Subsequently, the Company has accounted for its investment in the JV Company using the equity method of accounting. As of September 30, 2022, the percentage of outstanding JV equity interest beneficially owned by the Company was reduced to 42.2 %. Such reduction reflects (i) the sale by the Company of approximately 2.1 % of the outstanding JV equity interest which resulted in the deconsolidation of the JV Company, (ii) additional sale by the Company of approximately 1.1 % of outstanding JV equity interest in December 2021, (iii) the adoption of an employee equity incentive plan and issued an equity interest equivalent to 3.99 % of the JV Company in exchange for cash in December 2021, and (iv) the New Investors purchased newly issued equity interest of JV in January 2022. Certain Significant Risks and Uncertainties Related to Outbreak of Coronavirus Disease 2019 (“COVID-19”) 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, the Company has experienced shifting market trends, including an increasing demand in markets for notebooks, personal computing ("PC"), gaming devices and other products. While it has 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. 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, 6 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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, the Company 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 addition, the Company’s operations in China have been negatively impacted by the zero-Covid policy imposed by the Chinese government, which has resulted in lockdowns, mass testing and restrictions of travels and movement that limited our ability to conduct our business activities. The full extent of the longer-term impact of the COVID-19 pandemic on the Company’s operational and financial performance is uncertain and will depend on many factors outside of its 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, 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. Use of Estimates The preparation of the consolidated financial statements in conformity with U.S. GAAP requires the Company to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. To the extent there are material differences between these estimates and actual results, the Company's condensed consolidated financial statements will be affected. On an ongoing basis, the Company evaluates the estimates, judgments and assumptions including those related to stock rotation returns, price adjustments, allowance for doubtful accounts, inventory reserves, warranty accrual, income taxes, leases, share-based compensation, recoverability of and useful lives for property, plant and equipment and intangible assets, as well as the economic implications of the COVID-19 pandemic. Leases The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, current operating lease liabilities and long-term operating lease liabilities on the Company's Condensed Consolidated Balance Sheets. Finance leases are included in property, plant and equipment, finance lease liabilities and long-term finance leases liabilities on the Condensed Consolidated Balance Sheets. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. The Company uses an estimate of its incremental borrowing rate based on the information available at the lease commencement date. The operating lease ROU assets also include any lease payments made and exclude lease incentives. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise such options. Operating lease expense is generally recognized on a straight-line basis over the lease term. Variable lease payments are expensed as incurred and are not included within the operating lease ROU asset and lease liability calculation. The Company does not record leases on the Condensed Consolidated Balance Sheet with a term of one year or less. The Company elected to combine its lease and non-lease components as a single lease component for all asset classes. Revenue recognition The Company determines revenue recognition through the following steps: (1) identification of the contract with a customer; (2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recognition of revenue when, or as, a performance obligation is satisfied. The Company recognizes product revenue at a point in time when product is shipped to the customer, net of estimated stock rotation returns and price adjustments that it expects to provide to certain distributors. The Company presents revenue net of sales taxes and any similar assessments. Our standard payment terms range from 30 to 60 days. The Company sells its products primarily to distributors, who in turn sell the products globally to various end customers. The Company allows stock rotation returns from certain distributors. Stock rotation returns are governed by contract and are limited to a specified percentage of the monetary value of products purchased by distributors during a specified period. The Company records an allowance for stock rotation returns based on historical returns and individual distributor agreements. The Company also provides special pricing to certain distributors, primarily based on volume, to encourage resale of the Company’s products. Allowance for price adjustments is recorded against accounts receivable and the provision for stock rotation rights is included in accrued liabilities on the Condensed Consolidated Balance Sheets. 7 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The Company’s performance obligations relate to contracts with a duration of less than one year. The Company elected to apply the practical expedient provided in ASC 606, “Revenue from Contracts with Customers”. Therefore, the Company is not required to disclose the aggregate amount of transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period. The Company recognizes the incremental direct costs of obtaining a contract, which consist of sales commissions, when control over the products they relate to transfers to the customer. Applying the practical expedient, the Company recognizes commissions as expense when incurred, as the amortization period of the commission asset the Company would have otherwise recognized is less than one year. Packaging and testing services revenue is recognized at a point in time upon shipment of serviced products to the customer. Share-based Compensation Expense The Company maintains an equity-settled, share-based compensation plan to grant restricted share units and stock options. The Company recognizes expense related to share-based compensation awards that are ultimately expected to vest based on estimated fair values on the date of grant. The fair value of restricted share units is based on the fair value of the Company's common share on the date of grant. 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. The fair value of stock options is estimated on the date of grant using the Black-Scholes option valuation model. Share-based compensation expense is recognized on the accelerated attribution basis over the requisite service period of the award, which generally equals the vesting period. The Employee Share Purchase Plan (the “ESPP”) is accounted for at fair value on the date of grant using the Black-Scholes option valuation model. Restricted Cash The Company maintains restricted cash in connection with cash balances temporarily restricted for regular business operations, including the possibility of a dispute with a vendor. These balances have been excluded from the Company’s cash and cash equivalents balance and are classified as restricted cash in the Company’s Condensed Consolidated Balance Sheets. As of September 30, 2022 and June 30, 2022, the amount of restricted cash was $ 0.3 million and $ 0.3 million, respectively. Equity method investment The Company uses the equity method of accounting when it has the ability to exercise significant influence, but not control, as determined in accordance with generally accepted accounting principles, over the operating and financial policies of the investee. Effective December 2, 2021, the Company reduced its equity interest in the JV Company and experienced a loss of control of the JV Company. As a result, beginning December 2, 2021, the Company records its investment under equity method of accounting. Since the Company is unable to obtain accurate financial information from the JV Company in a timely manner, the Company records its share of earnings or losses of such affiliate on a one quarter lag. The Company discloses and recognizes intervening events at the JV Company in the lag period that could materially affect our consolidated financial statements, if applicable. The Company records its interest in the net earnings of the equity method investee, 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 the equity method investee 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. The Company reviews 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 The Company carries inventories at the lower of cost (determined on a first-in, first-out basis) or net realizable value. Cost primarily consists of semiconductor wafers and raw materials, labor, depreciation expenses and other manufacturing expenses 8 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) and overhead, and packaging and testing fees paid to third parties if subcontractors are used. Valuation of inventories is based on its periodic review of inventory quantities on hand as compared with its sales forecasts, historical usage, aging of inventories, production yield levels and current product selling prices. If actual market conditions are less favorable than those forecasted by the Company, additional future inventory write-downs may be required that could adversely affect its operating results. Adjustments to inventory, once established are not reversed until the related inventory has been sold or scrapped. If actual market conditions are more favorable than expected and the products that have previously been written down are sold, our gross margin would be favorably impacted. Fair Value of Financial Instruments The fair value of cash equivalents is categorized in Level 1 in the fair value hierarchy. Cash equivalents consist primarily of short-term bank deposits. The carrying values of financial instruments such as cash and cash equivalents, accounts receivable and accounts payable approximate their carrying values due to their short-term maturities. The carrying value of the Company's debt is considered a reasonable estimate of fair value which is estimated by considering the current rates available to the Company for debt of the same remaining maturities, structure, credit risk and terms of the debts. Government Grants The Company occasionally receives government grants that provide financial assistance for certain eligible expenditures in China. These grants include reimbursements on interest expense on bank borrowings, payroll tax credits, credit for property, plant and equipment in a particular geographical location, employment credits, as well as business expansion credits. Government grants are not recognized until there is reasonable assurance that the Company will comply with the conditions attaching to it, and that the grant will be received. The Company records such grants either as a reduction of the related expense, a reduction of the cost of the related asset, or as other income depending upon the nature of the grant. As a result of such grants, during the three months ended September 30, 2022 and 2021, the Company reduced property, plant and equipment by $ 0.3 million and $ 1.1 million, respectively. Accounting for income taxes Income tax expense or benefit is based on income or loss before taxes. Deferred tax assets and liabilities are recognized principally for the expected tax consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts. The Company is subject to income taxes in a number of jurisdictions. Significant judgment is required in determining the worldwide provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Company establishes accruals for certain tax contingencies based on estimates of whether additional taxes may be due. While the final tax outcome of these matters may differ from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made. Significant management judgment is also required in determining whether deferred tax assets will be realized in full or in part. When it is more likely than not that all or some portion of specific deferred tax assets such as net operating losses or research and experimentation tax credit carryforwards will not be realized, a valuation allowance must be established for the amount of the deferred tax assets that cannot be realized. The Company considers all available positive and negative evidence on a jurisdiction-by-jurisdiction basis when assessing whether it is more likely than not that deferred tax assets are recoverable. The Company considers evidence such as our past operating results, the existence of cumulative losses in recent years and our forecast of future taxable income. The Financial Accounting Standards Board (FASB), issued guidance which clarifies the accounting for income taxes by prescribing a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold is defined as a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely to be realized upon ultimate settlement. Although the guidance on the accounting for uncertainty in income taxes prescribes the use of a recognition and measurement model, the determination of whether an uncertain tax position has met those thresholds will continue to require significant judgment by management. If the ultimate resolution of tax uncertainties is different from what is currently estimated, a material impact on income tax expense could result. 9 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The Company's 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. The Company is subject to the continuous examination of our income tax returns by the Internal Revenue Service and other tax authorities. The Company regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. To the extent that the final tax outcome of these matters is different from the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of changes to reserves, as well as the related net interest and penalties. Long-lived Assets The Company reviews all long-lived assets whenever events or changes in circumstance indicate that these assets may not be recoverable. When evaluating long-lived assets, if the Company concludes that the estimated undiscounted cash flows attributable to the assets are less than their carrying value, the Company recognizes an impairment loss based on the excess of the carrying amount of the assets over their respective fair values, which could adversely affect its results of operations. Comprehensive Income Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The Company's accumulated other comprehensive income consists of cumulative foreign currency translation adjustments. Total comprehensive income is presented in the Condensed Consolidated Statements of Comprehensive Income. Recent Accounting Pronouncements Recently Issued Accounting Standards not yet adopted In September 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2022-04, "Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations". This ASU was issued in response to requests from financial statement users for increased transparency surrounding the use of supplier finance programs. The amendments in ASU 2022-04 require that a buyer in a supplier finance program disclose sufficient information about the program to allow a user of financial statements to understand the program’s nature, activity during the period, changes from period to period, and potential magnitude. The amendments in this ASU do not affect the recognition, measurement, or financial statement presentation of obligations covered by supplier finance programs. The amendments in this ASU are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, except for the amendment on rollforward information, which is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. The Company is currently evaluating the impact of adopting this guidance. Recently Adopted Accounting Standards In November 2021, the FASB issued Accounting Standards Update (ASU) No. 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance. This ASU requires business entities to make annual disclosures about transactions with a government they account for by analogizing to a grant or contribution accounting model under ASC 958-605. The adoption of ASU 2021-10 had no impact on the Company's Consolidated Financial Statements. In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which, among other things, provides guidance on how to account for contracts on an entity’s own equity. This ASU simplifies the accounting for certain financial instruments with characteristics of liabilities and equity. Specifically, the ASU eliminated the need for the Company to assess whether a contract on the entity’s own equity (1) permits settlement in unregistered shares, (2) whether counterparty rights rank higher than shareholder’s rights, and (3) whether collateral is required. In addition, the ASU requires incremental disclosure related to contracts on the entity’s own equity and clarifies the treatment of certain financial instruments accounted for under this ASU on earnings per share. The adoption of ASU 2020-06 had no impact on the Company's Consolidated Financial Statements. 10 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 2. Equity Method Investment in Equity Investee On December 1, 2021 (the “Effective Date”), Alpha & Omega Semiconductor (Shanghai) Ltd. (“AOS SH”) and Agape Package Manufacturing (Shanghai) Limited (“APM SH” and, together with AOS SH, the “Sellers”), each a wholly-owned subsidiary of the Company, entered into a share transfer agreement ("STA") with a third-party investor to sell a portion of the Company's equity interest in the JV Company which consists of a power semiconductor packaging, testing and 12-inch wafer fabrication facility in Chongqing, China (the “Transaction”). The Transaction closed on December 2, 2021 (the “Closing Date”), which reduced the Company’s equity interest in the JV Company from 50.9 % to 48.8 %. Also, the Company’s 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 a result of the Transaction and other factors, the Company no longer has a controlling financial interest in the JV Company and has determined that the JV Company was deconsolidated from the Company’s Consolidated Financial Statements effective as of the Closing Date. On December 24, 2021, the Company entered into a share transfer agreement with another third-party investor, pursuant to which the Company sold to this investor 1.1 % of outstanding equity interest held by the Company in the JV Company. In addition, the JV Company adopted an employee equity incentive plan and issued an equity interest equivalent to 3.99 % of the JV Company in exchange to cash. As a result of these two transactions, 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 a corporate investment agreement (the “Investment Agreement”) between the JV Company and certain third-party investors (the “New Investors”). Under the Investment Agreement, the New Investors purchased newly issued equity interest of the JV Company, representing approximately 7.82 % of post-transaction outstanding equity interests of the JV Company, for a total purchase price of RMB 509 million (or approximately USD 80 million based on the currency exchange rate as of January 26, 2022) (the “Investment”). Following the closing of the Investment and as of June 30, 2022, the percentage of outstanding JV equity interest beneficially owned by the Company was reduced to 42.2 %. The Company accounts for its investment in the JV Company as an equity method investment and reports its 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. During the three months ended September 30, 2022, the Company recorded $ 2.5 million of its equity in income of the JV Company, using lag reporting. As of September 30, 2022, the percentage of outstanding JV equity interest beneficially owned by the Company was 42.2 %. 11 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 3. Related Party Transactions As of September 30, 2022, the Company owned 42.2 % equity interest in the JV Company, which, by definition, is a related party to the Company. The JV Company supplies 12-inch wafers and provides assembly and testing services to AOS. AOS also sells 8-inch wafers to the JV Company for further assembly and testing services. Due to the right of offset of receivables and payables with the JV Company, as of September 30, 2022, AOS recorded the net amount of $ 19.5 million presented as payable related to equity investee, net, in the Condensed Consolidated Balance Sheet. Since the December 2, 2021 deconsolidation of the JV Company, the purchases by AOS for the three months ended September 30, 2022 were $ 46.1 million, and the sales by AOS for the three months ended September 30, 2022 were $ 16.6 million. 12 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 4. Net Income Per Common Share Attributable to Alpha and Omega Semiconductor Limited The following table presents the calculation of basic and diluted net income per share attributable to common shareholders: Three Months Ended September 30, 2022 2021 (in thousands, except per share data) Numerator: Net income attributable to Alpha and Omega Semiconductor Limited $ 26,038 $ 23,424 Denominator: Basic: Weighted average number of common shares used to compute basic net income per share 27,391 26,365 Diluted: Weighted average number of common shares used to compute basic net income per share 27,391 26,365 Effect of potentially dilutive securities: Stock options, RSUs and ESPP shares 2,032 1,273 Weighted average number of common shares used to compute diluted net income per share 29,423 27,638 Net income per share attributable to Alpha and Omega Semiconductor Limited: Basic $ 0.95 $ 0.89 Diluted $ 0.88 $ 0.85 The following potential dilutive securities were excluded from the computation of diluted net income per share as their effect would have been anti-dilutive: Three Months Ended September 30, 2022 2021 (in thousands) Employee stock options and RSUs 605 510 ESPP 223 33 Total potential dilutive securities 828 543 13 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 5. Concentration of Credit Risk and Significant Customers The Company manages its credit risk associated with exposure to distributors and direct customers on outstanding accounts receivable through the application and review of credit approvals, credit ratings and other monitoring procedures. In some instances, the Company also obtains letters of credit from certain customers. Credit sales, which are mainly on credit terms of 30 to 60 days, are only made to customers who meet the Company's credit requirements, while sales to new customers or customers with low credit ratings are usually made on an advance payment basis. The Company considers its trade accounts receivable to be of good credit quality because its key distributors and direct customers have long-standing business relationships with the Company and the Company has not experienced any significant bad debt write-offs of accounts receivable in the past. The Company closely monitors the aging of accounts receivable from its distributors and direct customers, and regularly reviews their financial positions, where available. Summarized below are individual customers whose revenue or accounts receivable balances were 10% or higher than the respective total consolidated amounts: Three Months Ended September 30, Percentage of revenue 2022 2021 Customer A 24.0 % 27.4 % Customer B 38.6 % 36.6 % Customer C 11.2 % * September 30, 2022 June 30, 2022 Percentage of accounts receivable Customer A 13.3 % 24.6 % Customer B 30.7 % 36.4 % Customer C 18.7 % 12.0 % * Less than 10% 14 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 6. Balance Sheet Components Accounts receivable, net: September 30, 2022 June 30, 2022 (in thousands) Accounts receivable $ 77,802 $ 84,442 Less: Allowance for price adjustments ( 22,003 ) ( 18,731 ) Less: Allowance for doubtful accounts ( 30 ) ( 30 ) Accounts receivable, net $ 55,769 $ 65,681 Inventories: September 30, 2022 June 30, 2022 (in thousands) Raw materials $ 73,077 $ 67,960 Work in-process 78,615 80,720 Finished goods 13,254 9,360 $ 164,946 $ 158,040 Other current assets: September 30, 2022 June 30, 2022 (in thousands) Value-added tax receivable $ 216 $ 737 Other prepaid expenses 4,488 3,954 Prepaid insurance 2,997 2,590 Prepaid maintenance 1,223 826 Prepayment to supplier 92 257 Prepaid income tax 1,149 2,086 Interest receivable 148 25 Other receivables 717 745 $ 11,030 $ 11,220 15 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Property, plant and equipment, net: September 30, 2022 June 30, 2022 (in thousands) Land $ 4,877 $ 4,877 Building 16,930 16,691 Manufacturing machinery and equipment 298,374 287,574 Equipment and tooling 29,123 28,052 Computer equipment and software 48,053 46,758 Office furniture and equipment 2,928 2,820 Leasehold improvements 36,381 35,254 436,666 422,026 Less: accumulated depreciation ( 241,857 ) ( 233,340 ) 194,809 188,686 Equipment and construction in progress 144,661 129,980 Property, plant and equipment, net $ 339,470 $ 318,666 Intangible assets, net: September 30, 2022 June 30, 2022 (in thousands) Patents and technology rights $ 18,037 $ 18,037 Trade name 268 268 Customer relationships 1,150 1,150 19,455 19,455 Less: accumulated amortization ( 10,513 ) ( 9,674 ) 8,942 9,781 Goodwill 269 269 Intangible assets, net $ 9,211 $ 10,050 Estimated future minimum amortization expense of intangible assets is as follows (in thousands): Year ending June 30, 2023 (Remaining) $ 2,446 2024 3,249 2025 3,247 $ 8,942 16 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Other long-term assets: September 30, 2022 June 30, 2022 (in thousands) Prepayments for property and equipment $ 2,656 $ 6,890 Investment in a privately held company 100 100 Customs deposit 1,767 1,708 Deposit with supplier 6,297 6,396 Other long-term deposits 45 18 Office leases deposits 958 1,012 Other 2,074 1,553 $ 13,897 $ 17,677 Accrued liabilities: September 30, 2022 June 30, 2022 (in thousands) Accrued compensation and benefits $ 39,513 $ 34,681 Warranty accrual 2,828 2,650 Stock rotation accrual 4,710 4,798 Accrued professional fees 3,346 2,659 Accrued inventory 1,568 2,491 Accrued facilities related expenses 3,207 2,421 Accrued property, plant and equipment 8,634 20,485 Other accrued expenses 5,291 5,159 Customer deposit 36,184 40,578 ESPP payable 3,069 971 $ 108,350 $ 116,893 The activities in the warranty accrual, included in accrued liabilities, are as follows: Three Months Ended September 30, 2022 2021 (in thousands) Beginning balance $ 2,650 $ 2,795 Additions 205 139 Utilization ( 27 ) ( 110 ) Ending balance $ 2,828 $ 2,824 17 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The activities in the stock rotation accrual, included in accrued liabilities, are as follows: Three Months Ended September 30, 2022 2021 (in thousands) Beginning balance $ 4,798 $ 3,917 Additions 3,677 701 Utilization ( 3,765 ) ( 836 ) Ending balance $ 4,710 $ 3,782 Other long-term liabilities: September 30, 2022 June 30, 2022 (in thousands) Customer deposits $ 71,701 $ 70,301 Computer software liabilities 7,600 8,302 Other long-term liabilities $ 79,301 $ 78,603 Customer deposits are payments received from customers for securing future product shipments. As of September 30, 2022, $ 29.5 million were from Customer A and $ 20.9 million were from Customer B, and $ 21.3 million were from other customers. As of June 30, 2022, $ 34.5 million were from Customer A and $ 21.9 million were from Customer B, and 13.9 million were from other customers. 18 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 7. Bank Borrowings Short-term borrowings 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 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. The Company could borrow up to approximately RMB 60.0 million or $ 8.5 million based on the currency exchange rate between the RMB and the U.S. Dollar on October 31, 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 credit 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 September 30, 2022, the total outstanding balance o f this loan was $ 1.5 million. On November 16, 2018, one of the Company's subsidiaries 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. The Company could borrow up to approximately RMB 72.0 million or $ 10.3 million based on currency exchange rate between RMB and U.S. Dollar on November 16, 2018. The RMB 72.0 million consists 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 September 30, 2022, there was no outstandin g balance. Accounts Receivable Factoring Agreement 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 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. 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. As of September 30, 2022, the Borrower was in compliance with these covenants. As of September 30, 2022, there was no outstanding balance and the Company had unused credit of approximately $ 8.0 million. Debt financing In September 2021, Jireh Semiconductor Incorporated (“Jireh”), one of the wholly-owned subsidiaries, entered into a financing arrangement agreement with a company (“Lender”) for the lease and purchase of a machinery equipment manufactured by a supplier. This agreement has a 5 years term, after which Jireh has the option to purchase the equipment for $ 1 . The implied interest rate was 4.75 % per annum which was adjustable based on every five basis point increase in 60-month U.S. Treasury Notes, until the final installation and acceptance of the machine . The total purchase price of this machinery equipment was euro 12.0 million. 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. In September 2022, Lender paid the remaining 10 % payment for the total purchase price and reimbursed Jireh for the 50 % down payment, after the installation and configuration of the equipment. The title of the equipment was transferred to Lender following such payment. The agreement was amended with fixed implied interest rate of 7.51 % and monthly payment of principal and interest effective in October 2022. Other terms remain the same. In addition, Jireh purchased hardware for the machine under this financing arrangement. The purchase price of this hardware was $ 0.2 million. The financing arrangement is secured by this machinery equipment and the hardware which had the carrying amount of $ 13.1 million as of September 30, 2022. As of September 30, 2022, the outstanding balance of this debt financing was $ 13.4 million. Long-term bank borrowings 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 the Company’s fabrication facility located in Oregon. The obligation 19 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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 is required to 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 the Company is required to maintain. Jireh drew down $ 45.0 million on February 16, 2022 with the first payment of principal beginning in October 2022. As of September 30, 2022, Jireh was in compliance with these covenants and the outstanding balance of this loan was $ 45.0 million. On May 1, 2018, Jireh entered into a loan agreement with the Bank that provided a term loan in the 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. The loan has a five-year term and matures on June 1, 2023. Beginning June 1, 2018, Jireh made consecutive monthly payments of principal and interest to the Bank. The outstanding principal accrues 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. 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 September 30, 2022. As of September 30, 2022, the outstanding balance of the term loa n was $ 13.9 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 the Company’s fabrication facility located in Oregon. The obligation under the credit agreement is secured by substantially all assets of Jireh and guaranteed by the Company. The credit agreement has a five-year term and matured on August 15, 2022. In January 2018 and July 2018, Jireh drew down the loan in the amount of $ 13.2 million and $ 16.7 million, respectively. 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 LIBOR as defined in the credit agreement, plus a 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. 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 September 30, 2022. As of September 30, 2022, there was no outstanding balance . Maturities of short-term debt and long-term debt were as follows (in thousands): Year ending June 30, 2023 (Remaining) $ 23,954 2024 11,472 2025 11,664 2026 11,871 2027 14,344 Thereafter 536 Total principal 73,841 Less: debt issuance costs ( 150 ) Total principal, less debt issuance costs $ 73,691 Short-term Debt Long-term Debt Total Principal amount $ 26,805 $ 47,036 $ 73,841 Less: debt issuance costs ( 67 ) ( 83 ) ( 150 ) Total debt, less debt issuance costs $ 26,738 $ 46,953 $ 73,691 20 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 8. Leases The Company evaluates contracts for lease accounting at contract inception and assesses lease classification at the lease commencement date. Operating leases are included in operating lease right-of-use (“ROU”) assets, operating lease liabilities and operating lease liabilities - long-term on the Company's Condensed Consolidated Balance Sheets. Finance leases are included in property, plant and equipment, finance lease liabilities and finance lease liabilities-long-term on the Condensed Consolidated Balance Sheets. The Company recognizes a ROU asset and corresponding lease obligation liability at the lease commencement date where the lease obligation liability is measured at the present value of the minimum lease payments. As most of the leases do not provide an implicit rate, the Company uses its incremental borrowing rate at lease commencement. The Company uses an interest rate commensurate with the interest rate to borrow on a collateralized basis over a similar term with an amount equal to the lease payments. Operating leases are primarily related to offices, research and development facilities, sales and marketing facilities, and manufacturing facilities. In addition, long-term supply agreements to lease gas tank equipment and purchase industrial gases are accounted for as operating leases. Lease agreements frequently include renewal provisions and require the Company to pay real estate taxes, insurance and maintenance costs. For operating leases, the amortization of the ROU asset and the accretion of its lease obligation liability result in a single straight-line expense recognized over the lease term. The finance lease is related to the $ 5.1 million of a machinery lease financing with a vendor. In September 2022, the lease was amended to make a monthly payment of principal and interest as a fixed amount effective in October 2022. Other terms remain the same. The amendment was accounted for as a debt modification and no gain or loss was recognized. In addition, the finance lease related to the RMB 400.0 million of lease financing of the JV Company with YinHai Leasing Company and The Export-Import Bank of China was not included in the Company’s unaudited Condensed Consolidated Balance Sheet at September 30, 2022 due to the deconsolidation of the JV Company on December 2, 2021. The Company does not record leases on the Condensed Consolidated Balance Sheets with a term of one year or less. The Company’s unaudited Condensed Consolidated Statements of Income for the three months ended September 30, 2021 include the JV Company's results for the period preceding the deconsolidation on December 2, 2021. The components of the Company’s operating and finance lease expenses are as follows for the periods presented (in thousands): Three Months Ended September 30, 2022 2021 Operating leases: Fixed rent expense $ 1,413 $ 1,801 Variable rent expense 237 298 Finance lease: Amortization of equipment 137 468 Interest 57 410 Short-term leases Short-term lease expenses 80 54 Total lease expenses $ 1,924 $ 3,031 21 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Supplemental balance sheets information related to the Company’s operating and finance leases is as follows (in thousands, except lease term and discount rate): September 30, 2022 June 30, 2022 Operating Leases : ROU assets associated with operating leases $ 24,251 $ 23,674 Finance Lease: Property, plant and equipment, gross $ 5,133 $ 4,831 Accumulated depreciation ( 272 ) ( 136 ) Property, plant and equipment, net $ 4,861 $ 4,695 Weighted average remaining lease term (in years) Operating leases 6.99 7.42 Finance lease 5.00 5.00 Weighted average discount rate Operating leases 4.31 % 4.27 % Finance lease 7.51 % 4.76 % Supplemental cash flow information related to the Company’s operating and finance lease is as follows (in thousands): Three Months Ended September 30, 2022 2021 Cash paid from amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 1,487 $ 1,811 Operating cash flows from finance lease $ 57 $ 410 Financing cash flows from finance lease $ 201 $ 4,176 Non-cash investing and financing information: Operating lease right-of-use assets obtained in exchange for lease obligations $ 1,924 $ 164 Future minimum lease payments are as follows as of September 30, 2022 (in thousands): Year ending June 30, Operating Leases Finance Leases The remainder of fiscal 2023 $ 4,223 $ 859 2024 4,621 1,144 2025 3,794 1,144 2026 3,179 1,144 2027 3,104 1,144 Thereafter 10,139 192 Total minimum lease payments 29,060 5,627 Less amount representing interest ( 4,193 ) ( 934 ) Total lease liabilities $ 24,867 $ 4,693 22 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 9. Shareholders' Equity and Share-based Compensation Share Repurchase In September 2017, the Board of Directors approved a repurchase program (the “Repurchase Program”) that allowed the Company to repurchase its common shares from the open market pursuant to a pre-established Rule 10b5-1 trading plan or through privately negotiated transactions up to an aggregate of $ 30.0 million. The amount and timing of any repurchases under the Repurchase Program depend on a number of factors, including but not limited to, the trading price, volume and availability of the Company’s common shares. Shares repurchased under this program are accounted for as treasury shares and the total cost of shares repurchased is recorded as a reduction of shareholders' equity. From time to time, treasury shares may be reissued as part of the Company’s share-based compensation programs. Gains on re-issuance of treasury stock are credited to additional paid-in capital; losses are charged to additional paid-in capital to offset the net gains, if any, from previous sales or re-issuance of treasury stock. Any remaining balance of the losses is charged to retained earnings. During the three months ended September 30, 2022, the Company did no t repurchase any shares pursuant to the Repurchase Program. Since the inception of the program, the Company 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. No repurchased shares have been retired. Of the 6,784,648 repurchased shares, 167,895 shares with a weighted average repurchase price of $ 10.06 per share, were reissued at an average price of $ 4.98 per share pursuant to option exercises and vested restricted share units (“RSU”). As of September 30, 2022, approximately $ 13.4 million remained available under the Repurchase Program. Time-based Restric ted Stock Units ( “ TRSU ” ) The following table summarizes the Company's TRSU activities for the three months ended September 30, 2022: Number of Restricted Stock Units Weighted Average Grant Date Fair Value Per Share Weighted Average Remaining Contractual Term (Years) Aggregate Intrinsic Value Nonvested at June 30, 2022 1,169,609 $ 34.03 1.73 $ 38,994,764 Granted 90,500 $ 37.14 Vested ( 36,516 ) $ 25.44 Forfeited ( 20,275 ) $ 33.23 Nonvested at September 30, 2022 1,203,318 $ 34.54 1.59 $ 37,014,062 Market-based Restricted Stock Units ( “ MSU ” ) In December 2021, the Company granted 1.0 million market-based restricted stock units ("MSUs") to its certain personnel. The number of shares to be earned at the end of performance period is determined based on the Company’s achievement of specified stock prices and revenue thresholds during the performance period from January 1, 2022 to December 31, 2024 as well as the recipients remaining in continuous service with the Company through such period. The MSU vests in four equal annual installments after the end of performance period. The Company estimated the grant date fair values of its MSU with derived service periods of 4.1 to 7.1 years using a Monte-Carlo simulation model with the following assumptions: Risk-free interest rate of 1.0 %, expected term of 3.1 years, expected volatility of 62.8 % and dividend yield of 0 %. The Company recorded approximately $ 2.0 million and nil of expenses for these MSUs during the three months ended September 30, 2022 and 2021, respectively. During the quarter ended September 30, 2018, the Company granted 1.3 million MSUs to certain personnel. The number of shares to be earned at the end of performance period is determined based on the Company’s achievement of specified stock prices and revenue thresholds during the performance period from January 1, 2019 to December 31, 2021 as well as the recipients remaining in continuous service with the Company through such period. The MSUs vest in four equal annual installments after the end of the performance period. The Company estimated the grant date fair values of its MSUs using a Monte-Carlo simulation model. On August 31, 2020, the Compensation Committee of the Board approved a modification of the terms of MSU to (i) extend the performance period through December 31, 2022 and (ii) change the commencement date for the four-year time-based service period to January 1, 2023. The fair value of these MSUs was recalculated to reflect the change as of August 31, 2020 and the unrecognized compensation amount was adjusted to reflect the increase in fair value. The Company recorded approximatel y $ 0.6 million and $ 0.4 million of expenses for MSUs during the three months ended September 30, 2022 and 2021, respectively. 23 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Performance-based Restricted Stock Units (“PRSUs”) In March each year since year 2017, the Company granted PRSUs to certain personnel. The number of shares to be earned under the PRSUs is determined based on the level of attainment of predetermined financial goals. The PRSUs vest in four equal annual installments from the first anniversary date after the grant date if certain predetermined financial goals were met. The Company recorded approximately $ 1.6 million and $ 1.0 million of expens e for these PRSUs during the three months ended September 30, 2022 and 2021, respectively. The following table summarizes the Company’s PRSUs activities for the three months ended September 30, 2022: Number of Performance-based Restricted Stock Units Weighted Average Grant Date Fair Value Per Share Weighted Average Remaining Contractual Term (Years) Aggregate Intrinsic Value Nonvested at June 30, 2022 389,375 $ 36.56 1.85 $ 12,981,763 Nonvested at September 30, 2022 389,375 $ 36.56 1.59 $ 11,977,175 Stock Options The Company did no t grant any stock options during the three months ended September 30, 2022 and 2021. The following table summarizes the Company's stock option activities for the three months ended September 30, 2022: Weighted Weighted Average Average Remaining Number of Exercise Price Contractual Aggregate Shares Per Share Term (in years) Intrinsic Value Outstanding at June 30, 2022 389,875 $ 7.70 1.53 $ 9,997,364 Exercised ( 2,500 ) $ 7.56 $ 87,500 Outstanding at September 30, 2022 387,375 $ 7.70 1.28 $ 8,933,486 Options vested and expected to vest 387,375 $ 7.70 1.28 $ 8,933,486 Exercisable at September 30, 2022 387,375 $ 7.70 1.28 $ 8,933,486 Employee Share Purchase Plan (“ESPP”) The assumptions used to estimate the fair values of common shares issued under the ESPP were as follows: Three Months Ended September 30, 2022 Volatility rate 69.9 % Risk-free interest rate 2.1 % Expected term 1.3 years Dividend yield 0 % 24 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Share-based Compensation Expense On September 8, 2022, the Compensation Committee of the Board approved modifications to the terms of equity awards granted to a former officer who is currently a board member of the Company. The modifications waived the four-year time based service performance of his MSU and allowed continuing vesting of his TRSU and PRSU according to the original awards' vesting schedule after his termination as a board member. The incremental expenses for these equity shares resulting from the modification were $ 3.9 million. During the three months ended September 30, 2022, the Company recorded $ 0.3 million, net of reversal of prior recorded expenses, of shared-based compensation for these equity shares. The total share-based compensation expense recognized in the Condensed Consolidated Statements of Income for the periods presented was as follows: Three Months Ended September 30, 2022 2021 (in thousands) Cost of goods sold $ 1,788 $ 569 Research and development 2,494 1,043 Selling, general and administrative 6,314 3,023 $ 10,596 $ 4,635 As of September 30, 2022, total unrecognized compensation cost under the Company's equity plans was $ 78.7 million, which is expected to be recognized over a weighted-average period of 2.9 years. 10. Income Taxes The Company recognized income tax expense of approximately $ 1.4 million and $ 1.3 million for the three months ended September 30, 2022 and 2021, respectively. The income tax expense of $ 1.4 million for the three months ended September 30, 2022 included a $ 0.07 million discrete tax expense. The income tax expense of $ 1.3 million for the three months ended September 30, 2021 included $ 0.09 million discrete tax expense. Excluding the discrete income tax items, the effective tax rate for the three months ended September 30, 2022 and 2021 was 4.8 % and 5.4 %, respectively. The changes in the tax expense and effective tax rate between the periods resulted primarily from changes in the mix of earnings in various geographic jurisdictions between the current year and the same period of last year. The Company files its income tax returns in the United States and in various foreign jurisdictions. The tax years 2001 to 2022 remain open to examination by U.S. federal and state tax authorities. The tax years 2014 to 2022 remain open to examination by foreign tax authorities. The Company's income tax returns are subject to examinations by the Internal Revenue Service and other tax authorities in various jurisdictions. In accordance with the guidance on the accounting for uncertainty in income taxes, the Company regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of its provision for income taxes. These assessments can require considerable estimates and judgments. As of September 30, 2022, the gross amount of unrecognized tax benefits was approximately $ 8.6 million, of which $ 5.6 million, if recognized, would reduce the effective income tax rate in future periods. If the Company's estimate of income tax liabilities proves to be less than the ultimate assessment, then a further charge to expense would be required. If events occur and the payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when the Company determines the liabilities are no longer necessary. The Company does not anticipate any material changes to its uncertain tax positions during the next twelve months. “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 a 25% manufacturing investment credits 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. 25 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) “The Inflation Reduction Act”, Enacted August 16, 2022 In August 2022 the United States enacted tax legislation through the Inflation Reduction Act (IRA). The IRA introduces a 15% corporate alternative minimum tax (CAMT) for corporations whose average annual adjusted financial statement income (AFSI) for any consecutive three-tax-year period preceding the applicable tax year exceeds $1 billion. The CAMT is effective for tax years beginning after December 31, 2022. The CAMT is currently not applicable to the Company. Altera Litigation On July 27, 2015, in Altera Corp. v. Commissioner, the U.S. Tax Court issued an opinion related to the treatment of stock-based compensation expense in an intercompany cost-sharing arrangement. In the July 2015 ruling, the Tax Court concluded that the sharing of the cost of employee stock compensation in a company’s cost-sharing arrangement was invalid under the U.S. Administrative Procedures Act. In June 2019, a panel of the Ninth Circuit of the U.S. Court of Appeals reversed this decision. In July 2019, Altera petitioned U.S. Court of Appeals for the Ninth Circuit to hold an en banc rehearing of the case. The petition was subsequently denied by the Ninth Circuit. Altera appealed the case to the U.S. Supreme Court in February 2020, but the U.S. Supreme Court declined to hear the case in June 2020, leaving intact the U.S. Court of Appeals for the Ninth Circuit’s decision. AOS has not recorded any benefit related to the Altera Corporation Tax Court decision in any period through September 2022. The Company will continue to monitor ongoing developments and potential impact to its financial statements. 26 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 11. Segment and Geographic Information The Company is organized as, and operates in, one operating segment: the design, development and supply of power semiconductor products for computing, consumer electronics, communication and industrial applications. The chief operating decision-maker is the Chief Executive Officer. The financial information presented to the Company’s Chief Executive Officer is on a consolidated basis, accompanied by information about revenue by customer and geographic region, for purposes of evaluating financial performance and allocating resources. The Company has one business segment, and there are no segment managers who are held accountable for operations, operating results and plans for products or components below the consolidated unit level. Accordingly, the Company reports as a single operating segment. The Company sells its products primarily to distributors in the Asia Pacific region, who in turn sell these products to end customers. Because the Company’s distributors sell their products to end customers which may have a global presence, revenue by geographical location is not necessarily representative of the geographical distribution of sales to end user markets. The revenue by geographical location in the following tables is based on the country or region in which the products were shipped to: Three Months Ended September 30, 2022 2021 (in thousands) Hong Kong $ 172,296 $ 148,655 China 28,014 32,840 South Korea 2,897 2,854 United States 4,484 2,305 Other countries 785 381 $ 208,476 $ 187,035 The following is a summary of revenue by product type: Three Months Ended September 30, 2022 2021 (in thousands) Power discrete $ 145,139 $ 130,688 Power IC 61,754 52,330 Packaging and testing services 1,583 4,017 $ 208,476 $ 187,035 Long-lived assets, net consisting of property, plant and equipment and operating lease right-of-use assets, net by geographical area are as follows: September 30, 2022 June 30, 2022 (in thousands) China $ 111,151 $ 105,326 United States 248,679 232,731 Other countries 3,891 4,283 $ 363,721 $ 342,340 27 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 12. Commitments and Contingencies Purchase Commitments As of September 30, 2022 and June 30, 2022, the Company had approximately $ 93.6 million and $ 89.9 million, respectively, of outstanding purchase commitments primarily for purchases of semiconductor raw materials, wafers, spare parts, packaging and testing services and others. As of September 30, 2022 and June 30, 2022, the Company had approximately $ 32.5 million and $ 63.4 million, respectively, of capital commitments for the purchase of property and equipment. Other Commitments See Note 7 and Note 8 of the Notes to the Condensed Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q for descriptions of commitments including bank borrowings and leases. Contingencies and Indemnities The Company has in the past, and may from time to time in the future, become involved in legal proceedings arising from the normal course of business activities. The semiconductor industry is characterized by frequent claims and litigation, including claims regarding patent and other intellectual property rights as well as improper hiring practices. Irrespective of the validity of such claims, the Company could incur significant costs in the defense of such claims and suffer adverse effects on its operations. In December 2019, the U.S. Department of Justice (“DOJ”) commenced an investigation into the Company's compliance with export control regulations relating to its business transactions with Huawei and its affiliates (“Huawei”), which were added to the “Entity List” maintained by the Department of Commerce (“DOC”) on May 16, 2019. The Company is cooperating fully with federal authorities in the investigation, including responding to requests for documents, information and interviews from DOJ in connection with the investigation. The Company has maintained an export control compliance program and has been committed to comply fully with all applicable laws and regulations. In connection with this investigation, DOC requested the Company to suspend shipments of its products to Huawei, and the Company complied with such request, and the Company has not shipped any product to Huawei after December 31, 2019. The Company is currently working with DOC to resolve this issue. Given the case is in still ongoing and neither DOJ nor DOC have provided the Company with any clear indication of the timing and schedule for the investigation, the Company cannot estimate the reasonably possible loss or range of loss that may occur. Also, the Company is unable to predict the duration, scope, result or related costs of the investigation, although the Company expects to incur additional professional fees as a result of this matter. In addition, the Company is unable to predict what, if any, further action that may be taken by the government in connection with the investigation, or what, if any, penalties, sanctions or remedial actions may be sought. The Company is a party to a variety of agreements that it has contracted with various third parties. Pursuant to these agreements, the Company may be obligated to indemnify another party to such an agreement with respect to certain matters. Typically, these obligations arise in the context of contracts entered into by the Company, under which the Company customarily agrees to hold the other party harmless against losses arising from a breach of representations and covenants related to such matters as title to assets sold, certain intellectual property rights, specified environmental matters and certain income taxes. In these circumstances, payment by the Company is customarily conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, which procedures typically allow the Company to challenge the other party's claim. Further, the Company's obligations under these agreements may be limited in time and/or amount, and in some instances, the Company may have recourse against third parties for certain payments made by it under these agreements. The Company has not historically paid or recorded any material indemnifications, and no accrual was made at September 30, 2022 and June 30, 2022. The Company has agreed to indemnify its directors and certain employees as permitted by law and pursuant to its Bye-laws, and has entered into indemnification agreements with its directors and executive officers. The Company has not recorded a liability associated with these indemnification arrangements, as it historically has not incurred any material costs associated with such indemnification obligations. Costs associated with such indemnification obligations may be mitigated by insurance coverage that the Company maintains. However, such insurance may not cover any, or may cover only a portion of, the amounts the Company may be required to pay. In addition, the Company may not be able to maintain such insurance coverage at reasonable cost, if at all, in the future. 28