What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-02-08 compared with 2022-11-07 · 157 added, 106 removed, 294 unchanged (47% of the section changed)

13 unchanged sentences

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 years ended June 30, 2021 and 2020, respectively.

During the three months ended September 30, 2022, we introduced an additional 16 new products.

During the six months ended December 31, 2022, we introduced an additional 37 new products.

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

We have an extensive patent portfolio that consists of 894 patents and 59 patent applications in the United States as of September 30, 2022.

We also have a total of 954 foreign patents, which were based primarily on our research and development efforts through September 30, 2022.

We have an extensive patent portfolio that consists of 906 patents and 55 patent applications in the United States as of December 31, 2022.

We also have a total of 961 foreign patents, which were based primarily on our research and development efforts through December 31, 2022.

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

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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.

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

Our metal-oxide-semiconductor field-effect transistors, or MOSFET, and power IC product portfolio expanded significantly.

Our high performance products and deepened customer relationships with our OEM and ODM customers have contributed to the achievement of our record high quarterly revenue of $208.5 million for the three months ended September 30, 2022, a 11.5% growth compared to the same quarter last year.

During the fiscal quarter ended December 31, 2022, we continued our product diversification program by developing new silicon and packaging platforms to expand our serviceable available market, or SAM and offer higher performance products.

Our metal-oxide-semiconductor field-effect transistors, or MOSFET, and power IC product portfolio also expanded.

On March 29, 2016, we formed a joint venture (the “JV Company”) with two investment funds owned by the Municipality of Chongqing (the “Chongqing Funds”), for the purpose of constructing and operating a power semiconductor packaging, testing and 12-inch wafer fabrication facility (“Fab”) in the LiangJiang New Area of Chongqing, China.

3 unchanged sentences

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”).

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%.

6 unchanged sentences

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 January 26, 2022 Investment, the percentage of outstanding JV equity interest beneficially owned by the Company was reduced to 42.2% at both June 30, 2022 and September 30, 2022.

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.

8 unchanged sentences

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.

During the first two years of the COVID-19 pandemic from 2019 to 2021, consumer behaviors changed due to various government restrictions that accelerated the growth of remote-working options by employers.

As a result, we experienced an increasing demand in markets for notebooks, personal computing ("PC"), gaming devices and other products, and we benefited from the increased demand for PC related products.

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.

2 unchanged sentences

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.

Furthermore, our 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.

Also, 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 addition, during the first half of calendar year 2022, our operations were negatively impacted by China’s zero-Covid policy that resulted in factory shutdowns and supply chain shortages, including the temporary suspension of our factory operations in Shanghai from April to June 2022.

In December 2022, the Chinese government issued new guidelines easing some of its strict zero-COVID policies, including the relaxation of testing requirements and travel restrictions.

However, the change of COVID-

policy and reopening of commercial activities resulted in a significant increase of COVID infections in China.

While the rising infection rates affected some of our workers in our facilities in China, we are expecting the infection rate to stabilize or decrease over time and do not expect COVID pandemic in China or elsewhere will have a material impact on our business operations and financial results.

See “Other Factors affecting our performance—Manufacturing costs and capacity availability”

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, 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.

Although we are unable to predict the full impact and duration of the COVID-19 pandemic on our business, we are actively managing our business operations and financial expenditures in response to continued uncertainty.

As COVID-19 pandemic subsides, its impact on macroeconomic conditions continues, including supply chain disruptions and rising inflation rates.

Recently we have experienced inflationary pressures on our business in most jurisdictions where we operate, including higher wages and labor costs, increased pricing on raw materials and third party vendors, and rising costs of other goods and services that we need to purchase to develop our products and operate our facilities.

While we do not believe inflation has a material impact on our financial performance, we are taking measures to mitigate its impact, including but are not limited to, implementation of cost-saving programs and active search for competitive and alternative sources of goods and services.

There is no guarantee that these measures will be effective, particularly if rising inflation continues for an extended period of time.

Other Factors affecting our performance

In addition to the COVID-19 pandemic and related events as described above, our performance is affected by several key factors, including the following:

The global, regional economic and PC market conditions :

2 unchanged sentences

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.

However, we have experienced a significant increase of demand in PC market due to the impact of the COVID-19 pandemic and resulting shift in market trend and consumer behaviors.

We cannot predict whether and how long this trend will continue due to the uncertainty and unpredictability of COVID-19 pandemic.

A decline of the PC market may have a negative impact on our revenue, factory utilization, gross margin, our ability to resell excess inventory, and other performance measures.

5 unchanged sentences

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

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.

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.

5 unchanged sentences

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.

We continue to maintain a business relationship with the JV Company to ensure uninterrupted supply of manufacturing capacity, and on July 12, 2022, we entered into an agreement with the JV Company, pursuant to which the JV Company agrees to provide us with a monthly wafer production capacity guarantee, subject to future increase when the JV Company’s production capacity reaches certain specified level.

We continue to maintain a business relationship with the JV Company to ensure uninterrupted supply of manufacturing capacity.

On July 12, 2022, we entered into an agreement with the JV Company, pursuant to which the JV Company agrees to provide us with a monthly wafer production capacity guarantee, subject to future increase when the JV Company’s production capacity reaches certain specified level.

Because we continue to rely on the JV Company to provide us with manufacturing capacity, if the JV Company take actions or make decisions that prevents us from accessing required capacity, our operations may be adversely affected.

6 unchanged sentences

Our success depends on our ability to introduce products on a timely basis that meet or are compatible with our customers' specifications and performance requirements.

Both factors, timeliness of product introductions and conformance to customers' requirements, are equally important in securing design wins

with our customers.

Both factors, timeliness of product introductions and conformance to customers' requirements, are equally important in securing design wins with our customers.

As we accelerate the development of new technology platforms, we expect to increase the pace at which we introduce new products and seek and acquire design wins.

60 unchanged sentences

The CAMT is currently not applicable to the Company.

Altera Litigation

On July 27, 2015, in Altera Corp.

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 December 2022.

The Company will continue to monitor ongoing developments and potential impact to its financial statements.

Equity method investment income/loss from equity investee

11 unchanged sentences

Results of Operations

The following tables set forth statements of income, also expressed as a percentage of revenue, for the three months ended September 30, 2022 and 2021.

The following tables set forth statements of income, also expressed as a percentage of revenue, for the three and six months ended December 31, 2022 and 2021.

Our historical results of operations are not necessarily indicative of the results for any future period.

Three Months Ended September 30,

Three Months Ended December 31, Six Months Ended December 31,

2022 2021 2022 2021 2022 2021 2022 2021

(in thousands) (% of revenue)

(in thousands) (% of revenue) (in thousands) (% of revenue)

Revenue $ 188,760 $ 193,319 100.0 % 100.0 % $ 397,236 $ 380,354 100.0 % 100.0 %

8 unchanged sentences

Interest expense, net (397) (541) (0.2) % (0.2) % (1,005) (2,717) (0.3) % (0.7) %

Gain on deconsolidation of the JV Company — 399,093 — % 206.4 % — 399,093 — % 104.9 %

Loss on changes of equity interest in the JV Company, net — (7,641) — % (4.0) % — (7,641) — % (2.0) %

Net income before income taxes 7,485 419,101 3.9 % 216.8 % 32,395 441,858 8.2 % 116.2 %

6 unchanged sentences

Share-based compensation expense was recorded as follows:

Three Months Ended September 30,

Three Months Ended December 31, Six Months Ended December 31,

2022 2021 2022 2021 2022 2021 2022 2021

(in thousands) (% of revenue)

(in thousands) (% of revenue) (in thousands) (% of revenue)

Cost of goods sold $ 1,748 $ 1,709 0.9 % 0.9 % $ 3,536 $ 2,278 0.9 % 0.6 %

2 unchanged sentences

Total $ 13,091 $ 8,547 6.9 % 4.4 % $ 23,687 $ 13,182 6.0 % 3.5 %

Three Months Ended September 30, 2022 and 2021

Three and Six Months Ended December 31, 2022 and 2021

The following is a summary of revenue by product type:

Three Months Ended September 30,

2022 2021 Change

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

Three Months Ended December 31, Six Months Ended December 31,

2022 2021 Change 2022 2021 Change

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

Power discrete $ 137,582 $ 134,511 $ 3,071 2.3 % $ 282,155 $ 264,875 $ 17,280 6.5 %

2 unchanged sentences

$ 188,760 $ 193,319 $ (4,559) (2.4) % $ 397,236 $ 380,354 $ 16,882 4.4 %

Total revenue was $208.5 million for the three months ended September 30, 2022, an increase of $21.4 million, or 11.5%, as compared to $187.0 million for the same quarter last year.

The following is a summary of revenue by end market:

Three Months Ended December 31, Six Months Ended December 31,

2022 2021 2022 2021

(% of revenue) (% of revenue)

Computing 33.8 % 45.5 % 38.6 % 43.8 %

Consumer 25.0 % 20.1 % 23.3 % 21.0 %

Communication 18.7 % 13.2 % 16.8 % 13.5 %

Power Supply and Industrial 21.9 % 19.5 % 20.6 % 19.8 %

Packaging and testing services 0.6 % 1.7 % 0.7 % 1.9 %

100.0 % 100.0 % 100.0 % 100.0 %

Total revenue was $188.8 million for the three months ended December 31, 2022, a decrease of $4.6 million, or 2.4%, as compared to $193.3 million for the same quarter last year.

The decrease was primarily due to a decrease of $5.6 million in sales of power IC products, offset by an increase of $3.1 million in sales of power discrete products.

The net decrease in power discrete and power IC product sales was primarily due to a 20.7% decrease in unit shipments, offset by a 24.4% increase in average selling price as compared to same quarter last year due to a shift in product mix.

The decrease in revenues was primarily driven by the significant decrease in the computing market, reflecting weaker demand for computers and inventory correction by our customers, partially offset by increased sales in the communications and consumer markets, particularly in smartphone and gaming products.

The decrease in revenue of packaging and testing services for the three months ended December 31, 2022, as compared to same quarter last year, was primarily due to decreased demand.

Total revenue wa s $397.2 million for the six months ended December 31, 2022 an increase of $16.9 million, or 4.4%, as compared to $380.4 million for the sam e period last year.

The increase was primarily due to an increase of $17.3 million and $4.1 million in sales of power discrete products and sales of power IC products, respectively.

The increase in power discrete and power IC product sales was primarily due to a 44.1% increase in average selling price, offset by a 21.5% decrease in unit shipments as compared to same quarter last year due to a shift in product mix.

The decrease in revenue of packaging and testing services for the three months ended September 30, 2022, as compared to same quarter last year, was primarily due to decreased demand.

The increase in power discrete and power IC product sales was primarily due to an 34.0% increase in average selling price, partially offset by a 21.1% decrease in unit shipments as compared to same period last year due to a shift in p roduct mix.

The increase in revenues was primarily driven by an increase in communications and consumer markets, particularly in gaming products, partially offset by a decrease in computing market, reflecting weaker demand for computers.

The decrease in r evenue of packaging and testing services for the six months ended December 31, 2022, as compared to same period last year, was primarily due to decreased demand.

Cost of goods sold and gross profit

Three Months Ended September 30,

2022 2021 Change

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

Three Months Ended December 31, Six Months Ended December 31,

2022 2021 Change 2022 2021 Change

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

Cost of goods sold $ 135,719 $ 124,954 $ 10,765 8.6 % $ 273,067 $ 247,422 $ 25,645 10.4 %

2 unchanged sentences

Percentage of revenue 28.1 % 35.4 % 31.3 % 34.9 %

Cost of goods sold was $137.3 million for the three months ended September 30, 2022, an increase of $14.9 million, or 12.2%, as compared to $122.5 million for the same quarter last year.

The increase was primarily due to 11.5% increase in revenue.

Gross margin decreased by 0.4 percentage points to 34.1% for the three months ended September 30, 2022, as compared to 34.5% for the same quarter last year.

The decrease in gross margin was primarily due to higher material costs and less unit shipment during the three months ended September 30, 2022.

Cost of goods sold was $135.7 million for the three months ended December 31, 2022, an increase of $10.8 million, or 8.6%, as compared to $125.0 million for the same quarter last year.

The increase was primarily due to higher standard costs from more favorable product mix.

Gross margin decreased by 7.3 percentage points to 28.1% for the three months ended December 31, 2022, as compared to 35.4% for the same quarter last year.

The decrease in gross margin was primarily due to higher material costs and less unit shipment during the three months ended December 31, 2022.

In addition, the JV Company was deconsolidated from our Condensed Consolidated Statements of Operations effective as of December 2, 2021.

Cost of goods sold was $273.1 million for the six months ended December 31, 2022 , an increase o f $25.6 million, or 10.4%, as compared to $247.4 million for the same period last year.

The increase was primarily due to 4.4% increase i n revenue.

Gross margin decreased by 3.6 percentage points to 31.3% for the six months ended December 31, 2022, as compared to 34.9% for the same period last year.

The decrease in gross margin was primarily due to higher material costs and less unit shipment during the periods.

In addition, the JV Company was deconsolidated from our Condensed Consolidated Statements of Operations effective as of December 2, 2021.

Research and development expenses

Three Months Ended September 30,

2022 2021 Change

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

Three Months Ended December 31, Six Months Ended December 31,

2022 2021 Change 2022 2021 Change

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

Research and development expenses $ 21,468 $ 16,516 $ 4,952 30.0 % $ 42,857 $ 34,328 $ 8,529 24.8 %

Research and development expenses were $21.4 million for the three months ended September 30, 2022, an increase of $3.6 million, or 20.1%, as compared to $17.8 million for the same quarter last year.

The increase was primarily attributable to $0.6 million increase in employee compensation and benefit expense mainly due to increased headcount and annual merit increase, partially offset by lower bonus accrual, a $1.5 million increase in share-based compensation expense due to an increase in stock awards granted, a $0.7 million increase in depreciation expenses, and a $1.0 million increase in product prototyping engineering expense as a result of increased engineering activities, offset by a $0.2 million decrease in consulting fees.

Research and development expenses were $21.5 million for the three months ended December 31, 2022, an increase of $5.0 million, or 30.0%, as compared to $16.5 million for the same quarter last year.

The increase was primarily attributable to $1.4 million increase in employee compensation and benefit expense mainly due to increased headcount, higher medical insurance expenses and annual merit increase, partially offset by lower vacation accrual and lower bonus accrual, a $1.4 million increase in share-based compensation expense due to the an increase in stock awards granted, a $0.9 million increase in depreciation expenses, and a $1.0 million increase in product prototyping engineering expense as a result of increased engineering activities.

Research and development expenses were $42.9 million for the six months ended December 31, 2022, an increase of $8.5 million, or 24.8%, as compared to $34.3 million for the same period last year.

The increase was primarily attributable to a $2.0 million increase in employee compensation and benefit expense mainly due to increased headcount, higher medical insurance expenses and annual merit increase, partially offset by lower vacation accrual and lower bonus accrual, a $2.9 million increase in share-based compensation expense due to an increase in stock awards granted, a $1.6 million increase in depreciation expense, as well as $2.0 million increase in product prototyping engineering expense as a result of increased engineering activities.

Selling, general and administrative expenses

Three Months Ended September 30,

2022 2021 Change

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

Three Months Ended December 31, Six Months Ended December 31,

2022 2021 Change 2022 2021 Change

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

Selling, general and administrative $ 22,788 $ 24,132 $ (1,344) (5.6) % $ 46,993 $ 45,938 $ 1,055 2.3 %

Selling, general and administrative expenses wer e $24.2 million for the three months ended September 30, 2022, an increase of $2.4 million, or 11.0%, as compared to $21.8 million for the same quarter last year.

The increase was primarily due to a $3.3 million increase in share-based compensation expense due to an increase in stock award granted, a $0.3 million in audit fees and a $0.3 million in design wins costs, partially offset by a $1.6 million decrease in employee compensation and benefits expenses primarily due to lower bonus expenses accrual, partially offset by increased headcount, annual merit increase and higher medical insurance expenses.

Other income (loss), net

Three Months Ended September 30,

2022 2021 Change

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

Selling, general and administrative expense s were $22.8 million for the three months ended December 31, 2022, a decrease of $1.3 million, or 5.6%, as compared to $24.1 million for the same quarter last year.

The decrease was primarily due to a $4.4 million decrease in employee compensation and benefits expenses primarily due to lower bonus expenses accrual, partially offset by increased headcount, annual merit increase and higher medical insurance expenses, offset by a $3.1 million increase in share-based compensation expense due to the incremental expenses for one of our former officers' equity shares resulting from the modification.

Selling, general and administrative expenses were $47.0 million for the six months ended December 31, 2022, an increase of $1.1 million, or 2.3%, as compared to $45.9 million for the same period last year.

The increase was primarily attributable to a $6.4 million increase in share-based compensation expense due to an increase in stock award granted and the the incremental expenses for one of our former officers' equity shares resulting from the modification, and a $0.4 million increase in marketing demo and trade shows costs, as well as a $0.4 million increase in recruiting and consulting fees, partially offset by a $6.1 million decrease in employee compensation and benefits expenses mainly due to lower bonus expenses accrual, partially offset by increased headcount, annual merit increase and higher medical insurance expenses.

Three Months Ended December 31, Six Months Ended December 31,

2022 2021 Change 2022 2021 Change

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

Other income (loss), net $ (903) $ 473 $ (1,376) (290.9) % $ (919) $ 457 $ (1,376) (301.1) %

Other income (loss), net for the three months ended September 30, 2022 and 2021 did not change.

Other income (loss), net was decreased in the three and six months ended December 31, 2022 as compared to the same periods last year primarily due to increase in foreign currency exchange loss as a result of the depreciation of RMB against USD.

Interest expense, net

Three Months Ended September 30,

2022 2021 Change

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

Three Months Ended December 31, Six Months Ended December 31,

2022 2021 Change 2022 2021 Change

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

Interest expense, net $ (397) $ (541) $ 144 (26.6) % $ (1,005) $ (2,717) $ 1,712 (63.0) %

Interest expense, net decreased by $1.6 million during the three months ended September 30, 2022 as compared to the same quarter last year was primarily due to deconsolidation of the JV Company in December 2021.

Interest expense, net decreased by $0.1 million during the three months ended December 31, 2022 as compared to the same quarter last year was primarily due to a $0.8 million increase in interest income as a result of higher cash balance with higher interest rate, partially offset by a $0.7 million increase in interest expense as a result of an increase in bank borrowings, offset by less interest expense in JV Company due to deconsolidation.

Interest expense, net decreased by $1.7 million during the six months ended December 31, 2022 as compared to the same period last year was primarily due to a $1.2 million increase in interest income as a result of higher cash balance with higher interest rate and a $0.5 million decrease in interest expense as a result of less interest expense in JV Company due to deconsolidation, offset by increase in interest expense as a result of an increase in bank borrowings during the periods.

Income tax expense

Three Months Ended September 30,

2022 2021 Change

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

Three Months Ended December 31, Six Months Ended December 31,

2022 2021 Change 2022 2021 Change

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

Income tax expense $ 1,659 $ 34,096 $ (32,437) (95.1) % $ 3,033 $ 35,416 $ (32,383) (91.4) %

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 recognized income tax expense of approximately $1.7 million and $34.1 million for the three months ended December 31, 2022 and 2021, respectively.

The income tax expense of $1.7 million for the three months ended December 31, 2022 included a $0.1 million discrete tax expense.

The income tax expense of $34.1 million for the three months ended December 31, 2021 included a $32.8 million discrete tax expense related to the Company’s $391.5 million of income from the sale of equity interest in a joint venture and the related deconsolidation gain as the Company switches from the consolidation method of accounting to the equity method of accounting related to this investment and no longer asserts permanent reinvestment related to the Company’s investment in the joint venture.

Excluding the discrete income tax items, the income tax expense for the three months ended December 31, 2022 and 2021 was $1.6 million and $1.3 million, respectively, and the effective tax rate for the three months ended December 31, 2022 and 2021 was 20.2% and 4.7%, respectively.

Excluding the effects of the discrete tax expense recorded in the three months ended December 31, 2022 and 2021, 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 as well as from reporting pretax book income of $8.0 million for the three months ended December 31, 2022 as compared to $27.6 million of pretax book income (excluding the $391.5 million of income from the sale of equity interest in a joint venture and the related deconsolidation gain) for the three months ended December 31, 2021.

The Company recognized income tax expense of approximately $3.0 million and $35.4 million for the six months ended December 31, 2022 and 2021, respectively.

The income tax expense of $3.0 million for the six months ended December 31, 2022 included a $0.1 million discrete tax expense.

The income tax expense of $35.4 million for the six months ended December 31, 2021 included a $32.8 million discrete tax expense related to the Company’s $391.5 million of income from the sale of equity interest in a joint venture and the related deconsolidation gain as the Company switches from the consolidation method of accounting to the equity method of accounting related to this investment and no longer asserts permanent reinvestment related to the Company’s investment in the joint venture as well as $0.1 million for other discrete income tax items.

Excluding the discrete income tax items, income tax expense for the six months ended December 31, 2022 and 2021 was $2.9 million and $2.5 million, respectively, and the effective tax rate for the six months ended December 31, 2022 and 2021 was 8.2% and 5.0%, respectively.

Excluding the effects of the discrete tax expense recorded in the six months ended December 31, 2022 and 2021, 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 as well as from the Company reporting a pretax book income of $35.4 million for the six months ended December 31, 2022 as compared to pretax book income of $50.4 million of pretax book income (excluding the $391.5 million of income from the sale of equity interest in a joint venture and the related deconsolidation gain) for the six months ended December 31, 2021.

The Company files its income tax returns in the United States and in various foreign jurisdictions.

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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.

As of December 31, 2022, the gross amount of unrecognized tax benefits was approximately $8.7 million, of which $5.7 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.

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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 February 6, 2023, we entered into a license and engineering service agreement with a leading power semiconductor automotive supplier related to our Silicon Carbide (SiC) MOSFET and diode technology.

Pursuant to the agreement, we will license and provide 24-month engineering support for our proprietary SiC technology to the supplier for a total fee of $45 million, consisted of an upfront fees of $18 million payable within 45 days of the execution of the agreement, with the remaining amount to be paid upon our achievements of specified business and product milestones.

In addition, we entered an accompanying supply agreement with the supplier to provide it with limited wafer supply.

In January 2023, one of the Company's subsidiaries in China entered into a line of credit facility with Bank of Communications Limited in China.

The purpose of the credit facility is to provide working capital borrowings.

The Company could borrow up to approximately RMB 140 million or $20.1 million based on currency exchange rage between RMB and U.S.

Dollar on January 31, 2023 with a maturity date of December 1, 2023.

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.

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Treasury Notes, until the final installation and acceptance of the machine .

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.

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.

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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.

The financing arrangement is secured by this machinery equipment and the hardware which had the carrying amount of $13.1 million as of December 31, 2022.

As of December 31, 2022, the outstanding balance of this debt financing was $13.1 million.

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.

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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

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.

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

As of December 31, 2022, Jireh was in compliance with these covenants and the outstanding balance of this loan was $42.8 million.

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.

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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.

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 of this loan was $1.5 million.

As of December 31, 2022, there was no outstanding balance and this loan was expired.

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.

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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.

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

As of December 31, 2022, the Borrower was in compliance with these covenants.

As of December 31, 2022, there was no outstanding balance and the Company had unused credit of approximately $8.0 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.

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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 outstanding balance.

As of December 31, 2022, there was no out standin g balance and this loan was expired.

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.

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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 loan was $13.9 million.

The Company was in compliance with these covenants as of December 31, 2022.

As of December 31, 2022, the outstanding balance of the term loa n was $13.7 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.

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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.

The loan was paid in full in September 2022.

As of December 31, 2022, there was 0 outstanding balance.

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.

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Cash, cash equivalents and restricted cash

As of September 30, 2022 and June 30, 2022, we h ad $316.4 million and $314.7 million of cash, cash equivalents and restricted cash, respectively.

As of December 31, 2022 and June 30, 2022, we h a d $288.1 million and $314.7 million of cash, cash equivalents and restricted cash, respectively.

Our cash, cash equivalents and restricted cash primarily consist of cash on hand, restricted cash, and short-term bank deposits with original maturities of three months or less.

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The following table shows our cash flows from operating, investing and financing activities for the periods indicated:

Three Months Ended September 30,

Six Months Ended December 31,

(in thousands)

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Effect of exchange rate changes on cash, cash equivalents and restricted cash (164) 307

Net increase in cash, cash equivalents and restricted cash $ 1,746 $ 50,150

Net increase (decrease) in cash, cash equivalents and restricted cash $ (26,558) $ 64,807

Cash flows from operating activities

Net cash provided by operating activities of $36.7 million for the three months ended September 30, 2022 resulted primarily from net income of $26.0 million and non-cash expenses of $17.7 million, partially offset by net changes in assets and liabilities using cash of $7.1 million, The non-cash expenses of $17.7 million primarily included $10.6 million of share-based compensation expense, $9.4 million of depreciation and amortization expenses, $0.4 million of loss on disposal of property and equipment, and $2.5 million of income on equity investment.

The net changes in assets and liabilities of $7.1 million were primarily due to a $9.5 million decrease in other payable from equity investee, a $6.0 million decrease in accounts payable due to timing of payments, a $6.9 million increase in inventories as a result of our inventories built up for preparation of uncertainty of supply chains, and a $0.5 million increase in other current and long-term assets due to increase in advance payments to vendors, partially offset by a $9.9 million decrease in accounts receivable as a result of timing of the shipments and payments collected, a $0.5 million increase in income taxes payable, and a $5.5 million increase in accrued and other liabilities.

Net cash provided by operating activities of $80.6 million for the three months ended September 30, 2021 resulted primarily from net income of $21.4 million and non-cash expenses of $19.0 million, partially offset by net changes in assets and liabilities using cash of $40.1 million.

The non-cash expenses of $19.0 million primarily included $13.7 million of depreciation and amortization expenses, $4.6 million of share-based compensation expense, and $0.7 million of deferred income taxes.

The net changes in assets and liabilities of $40.1 million were primarily due to a $52.9 million increase in accrued and other liabilities, a $2.1 million increase in accounts payable due to timing of payments, and a $0.4 million increase in income taxes payable, partially offset by a $3.5 million increase in accounts receivable as a result of higher revenue, a $9.1 million increase in inventories due to a continued ramp of the JV Company, and a $2.6 million increase in other current and long-term assets due to increase in advance payments to suppliers.

Net cash provided by operating activities of $37.0 million for the six months ended December 31, 2022 resulted primarily from net income of $32.4 million and non-cash expenses of $39.6 million, partially offset by net changes in assets and liabilities using cash of $35.0 million, The non-cash expenses of $39.6 million primarily included $23.7 million of share-based compensation expense, $20.2 million of depreciation and amortization expenses, $0.4 million of loss on disposal of property and equipment, and $3.0 million of income from equity investment.

The net changes in assets and liabilities of $35.0 million were primarily due to a $7.4 million decrease in net payable from equity investee, a $14.1 million decrease in accounts payable due to timing of payments, a $5.8 million increase in inventories as a result of our inventories built up for preparation of uncertainty of supply chains, $8.4 million increase in other current and long-term assets due to increase in advance payments to vendors, and a $13.2 million decrease in accrued and other liabilities, partially offset by a $12.5 million decrease in accounts receivable as a result of timing of the shipments and payments collected, and a $1.4 million increase in income taxes payable.

Net cash provided by operating activities of $131.4 million for the six months ended December 31, 2021 resulted primarily from net income of $406.4 million and net changes in assets and liabilities using cash of $47.5 million, partially offset by non-cash expenses of $322.5 million.

The non-cash expenses of $322.5 million primarily included $399.1 million of gain on deconsolidation of the JV Company, partially offset by $7.6 million of loss on changes of equity interest in the JV Company, $29.3 million of deferred income tax on deconsolidation and changes of equity interest in the JV Company, $25.7 million of depreciation and amortization expenses, $13.2 million of share-based compensation expense, and $0.7 million of deferred income taxes.

The net changes in assets and liabilities of $47.5 million were primarily due to a $70.3 million increase in accrued and other liabilities, a $3.5 million of income taxes payable on deconsolidation and changes of equity interest in the JV Company, a $11.6 million increase in accounts payable due to timing of payments, a $1.3 million increase in income taxes payable, and a $3.9 million decrease in accounts receivable as a result of timing of the shipments and payments collected, partially offset by a $28.5 million increase in inventories as a result of preparation of uncertainty of supply chains, a $8.9 million increase in other current and long-term assets due to increase in advance payments to vendors, and a $5.8 million decrease in net payable from equity investee.

Cash flows from investing activities

Net cash used in investing activities of $40.0 million for the three months ended September 30, 2022 was primarily attributable to $40.3 million purchases of property and equipment, partially offset by $0.3 million government grants related to fixed assets.

Net cash used in investing activities of $23.9 million fo r the three months ended September 30, 2021 was primarily attributable to purchases of property and equipment of $8.4 million for the JV Company and purchases of property and equipment of $16.6 million for other than the JV Company, net of government grants of $1.1 million.

Net cash used in investing activities of $67.9 million for the six months ended December 31, 2022 was primarily attributable to $68.6 million purchases of property and equipment, partially offset by $0.6 million government grants related to fixed assets.

Net cash used in investing activities of $47.7 million fo r the six months ended December 31, 2021 was primarily attributable to cash disposed upon deconsolidation of the JV Company of $20.7 million, purchases of property and equipment of $15.0 million for the JV Company, and purchases of property and equipment of $39.5 million for other than the JV Company, partially offset by proceeds from the sale of equity interest in the JV Company of $26.3 million and government grants related to fixed assets of $1.2 million.

Cash flows from financing activities

Net cash used in financing activities of $5.5 million for the three months ended September 30, 2022 was primarily attributable to $8.6 million proceeds from borrowings, partially offset by $2.6 million in repayments of borrowings, $0.2 million in payment of finance lease obligations, and $0.4 million in common shares acquired to settle withholding tax related to vesting of restricted stock units.

Net cash used in financing activities of $6.5 million for the three months ended September 30, 2021 was primarily attributable to $9.7 million in repayments of borrowings, $4.2 million in payment of finance lease obligations, and $0.2 million in common shares acquired to settle withholding tax related to vesting of restricted stock units, partially offset by $7.6 million proceeds from borrowings.

Net cash used in financing activities of $4.5 million for the six months ended December 31, 2022 was primarily attributable to $8.6 million proceeds from borrowings and $4.1 million of proceeds from exercise of stock options and ESPP, partially offset by $7.2 million in repayments of borrowings, $0.4 million in payment of finance lease obligations, and $0.6 million in common shares acquired to settle withholding tax related to vesting of restricted stock units.

Net cash used in financing activities of $19.2 million for the six months ended December 31, 2021 was primarily attributable to $31.4 million in repayments of borrowings, $4.2 million in payment of finance lease obligations, and $0.6 million in common shares acquired to settle withholding tax related to vesting of restricted stock units, partially offset by $2.7 million of proceeds from exercise of stock options and ESPP and $14.3 million proceeds from borrowings.

See Note 12 of the Notes to the Condensed Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q for a description of commitments.

Off-Balance Sheet Arrangements

As of September 30, 2022, we had no off-balance sheet arrangements.

As of December 31, 2022, we had no off-balance sheet arrangements.

Contractual Obligations

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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-Q

Item 2. Management’s Discussion and Analysis