ALPHA & OMEGA SEMICONDUCTOR Ltd 10-Q

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Except for the historical information contained herein, the matters addressed in this Item 2 constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward looking statements include, but are not limited to, statements regarding future financial performance of the Company; the expected ramp up timeline of the 12-inch fab at the JV Company; the impact of government investigation and coronavirus on our financial performance; and other statements and information set forth under the heading “Factors Affecting Our Performance”. Such forward-looking statements are subject to a variety of risks and uncertainties, including those discussed below under the heading “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, that could cause actual results to differ materially from those anticipated by the Company’s management. The Private Securities Litigation Reform Act of 1995 (the “Act”) provides certain “safe harbor” provisions for forward-looking statements. All forward-looking statements made in this Quarterly Report on Form 10-Q are made pursuant to the Act. The Company undertakes no obligation to publicly release the results of any revisions to its forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unexpected events. Unless the context otherwise requires, the words “AOS,” the “Company,” “we,” “us” and “our” refer to Alpha and Omega Semiconductor Limited and its subsidiaries. This management’s discussion should be read in conjunction with the management’s discussion included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2022, filed with the Securities and Exchange Commission on September 19, 2022. Overview We are a designer, developer and global supplier of a broad portfolio of power semiconductors. 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 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 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. Our portfolio of products targets high-volume applications, including personal computers, graphic cards, game consoles, flat panel TVs, home appliances, power tools, smart phones, battery packs, consumer and industrial motor controls and power supplies for TVs, computers, servers and telecommunications equipment. Our business model leverages global resources, including research and development and manufacturing in the United States and Asia. Our sales and technical support teams are localized in several growing markets. We operate an 8-inch wafer fabrication facility located in Hillsboro, Oregon, or the Oregon Fab, which is critical for us to accelerate proprietary technology development, new product introduction and improve our financial performance. To meet the market demand for the more mature high volume products, we also utilize the wafer manufacturing capacity of selected third party foundries. For assembly and test, we primarily rely upon our in-house facilities in China. In addition, we utilize subcontracting partners for industry standard packages. 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 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. The Fab is being built in phases. As of December 1, 2021, we owned 50.9%, and the Chongqing Funds owned 49.1% of the equity interest in the JV Company. The Joint Venture was accounted under the provisions of the consolidation guidance since we had controlling financial interest until December 1, 2021. 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 33 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 for 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 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 December 31, 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. The JV Company is also contemplating an eventual listing on the Science and Technology Innovation Board, or STAR Market, of the Shanghai Stock Exchange. The reduction of our ownership assists the JV Company in meeting certain regulatory listing requirements. A potential STAR Market listing may take several years to consummate and there is no guarantee that such listing by the JV Company will be successful or will be completed in a timely manner, or at all. In addition, the JV Company will continue to provide us with significant level of foundry capacity to enable us to develop and manufacture our products. On July 12, 2022, the current shareholders of the JV Company entered into a shareholders contract, pursuant to which the JV Company provided us with a monthly wafer production capacity guarantee, subject to future increase when the JV Company’s production capacity reaches certain specified level. Impact of COVID-19 Pandemic to our Business Our business operations have been impacted by the global COVID-19 pandemic and the resulting economic downturn. Numerous governmental jurisdictions, including the States of California, Oregon and Texas in the U.S. 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. 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. During the first half of calendar year 2022, COVID-19 cases and hospitalization rate continued to decline and governments in various jurisdictions, including the U.S. and Europe, have lifted various restrictions and limitations on economic activities. At the same time, however, new variants of COVID-19 continued to emerge and contributed to recent rise of infection rates in various jurisdictions in which we operate, including China and U.S. 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- 34 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” 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 The global, regional economic and PC market conditions : Because our products primarily serve consumer electronic applications, any significant change in global and regional economic conditions could materially affect our revenue and results of operations. A significant amount of our revenue is derived from sales of products in the PC markets, such as notebooks, motherboards and notebook battery packs, therefore a substantial decline or downturn in the PC market could have a material adverse effect on our revenue and results of operations. The PC markets have experienced a modest global decline in recent years due to continued growth of demand in tablets and smart phones, worldwide economic conditions and the industry inventory correction which had and may continue to have a material impact on the demand for our products. 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. We have executed and continue to execute strategies to diversify our product portfolio, penetrate other market segments, including the consumer, communications and industrial markets, and improve gross margins and profit by implementing cost control measures. While making efforts to reduce our reliance on the computing market, we continue to support our computing business and capitalize on the opportunities in this market with a more focused and competitive PC product strategy to gain market share. Manufacturing costs and capacity availability: Our gross margin is affected by a number of factors including our manufacturing costs, utilization of our manufacturing facilities, the product mixes of our sales, pricing of wafers from third party foundries and pricing of semiconductor raw materials. Capacity utilization affects our gross margin because we have certain fixed costs at our Shanghai facilities and our Oregon Fab. If we are unable to utilize our manufacturing facilities at a desired level, our gross margin may be adversely affected. In addition, from time to time, we may experience wafer capacity constraints, particularly at third party foundries, that may prevent us from meeting fully the demand of our customers. For example, the recent global shortage of semiconductor manufacturing capacity has provided us with both challenges and opportunities in the market, and highlighted the importance of maintaining sufficient and independent in-house manufacturing capabilities to meet increasing customer demands. While we can mitigate these constraints by increasing and re-allocating capacity at our own fab, we may not be able to do so quickly or at sufficient level, which could adversely affect our financial conditions and results of operations. In addition, we recently commenced a plan to enhance the manufacturing capability and capacity of our Oregon Fab by investing in new equipment and expanding our factory facilities, which we expect will have a positive impact on our future new product development and revenue, particularly during the period of global shortage of capacity. The expansion is expected to be completed in the fiscal quarter ending March 31, 2023. We also rely substantially on the JV Company to provide foundry capacity to manufacture our products, therefore it is critical that we maintain continuous access to such capacity, which may not be available at sufficient level or at a pricing terms favorable to us because of lack of control over the JV Company’s operation. As a result of sales of our JV Company equity interests and issuance of additional equity interests by the JV Company to third-party investors in financing transactions, our equity interest in the JV Company was reduced to 42.2%, which reduced our control and influence over the JV Company. 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. Erosion and fluctuation of average selling price: Erosion of average selling prices of established products is typical in our industry. Consistent with this historical trend, we expect our average selling prices of existing products to decline in the future. However, in the normal course of business, we seek to offset the effect of declining average selling price by introducing new and higher value products, expanding existing products for new applications and new customers and reducing the manufacturing cost of existing products. These strategies may cause the average selling price of our products to fluctuate significantly from time to time, thereby affecting our financial performance and profitability. 35 Product introductions and customers’ product requirements: 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. 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. If we were to fail to introduce new products on a timely basis that meet customers’ specifications and performance requirements, particularly those products with major OEM customers, and continue to expand our serviceable markets, then we would lose market share and our financial performance would be adversely affected. Distributor ordering patterns, customer demand and seasonality: Our distributors place purchase orders with us based on their forecasts of end customer demand, and this demand may vary significantly depending on the sales outlook and market and economic conditions of end customers. Because these forecasts may not be accurate, channel inventory held at our distributors may fluctuate significantly, which in turn may prompt distributors to make significant adjustments to their purchase orders placed with us. As a result, our revenue and operating results may fluctuate significantly from quarter to quarter. In addition, because our products are used in consumer electronics products, our revenue is subject to seasonality. Our sales seasonality is affected by numerous factors, including global and regional economic conditions as well as the PC market conditions, revenue generated from new products, changes in distributor ordering patterns in response to channel inventory adjustments and end customer demand for our products and fluctuations in consumer purchase patterns prior to major holiday seasons. In recent periods, broad fluctuations in the semiconductor markets and the global and regional economic conditions, in particular the decline of the PC market conditions, have had a more significant impact on our results of operations than seasonality. Furthermore, our revenue may be impacted by the level of demand from our major customers due to factors outside of our control. If these major customers experience significant decline in the demand of their products, encounter difficulties or defects in their products, or otherwise fail to execute their sales and marketing strategies successfully, it may adversely affect our revenue and results of operations. Principal line items of statements of income The following describes the principal line items set forth in our Condensed Consolidated Statements of Income: Revenue We generate revenue primarily from the sale of power semiconductors, consisting of power discretes and power ICs. Historically, a majority of our revenue has been derived from power discrete products. Because our products typically have three-year to five-year life cycles, the rate of new product introduction is an important driver of revenue growth over time. We believe that expanding the breadth of our product portfolio is important to our business prospects, because it provides us with an opportunity to increase our total bill-of-materials within an electronic system and to address the power requirements of additional electronic systems. In addition, a small percentage of our total revenue is generated by providing packaging and testing services to third parties through one of our subsidiaries. Our product revenue is reported net of the effect of the estimated stock rotation returns and price adjustments that we expect to provide to our distributors. Stock rotation returns are governed by contract and are limited to a specified percentage of the monetary value of products purchased by the distributor during a specified period. At our discretion or upon our direct negotiations with the original design manufacturers (“ODMs”) or original equipment manufacturers (“OEMs”), we may elect to grant special pricing that is below the prices at which we sold our products to the distributors. In these situations, we will grant price adjustments to the distributors reflecting such special pricing. We estimate the price adjustments for inventory at the distributors based on factors such as distributor inventory levels, pre-approved future distributor selling prices, distributor margins and demand for our products. Cost of goods sold Our cost of goods sold primarily consists of costs associated with semiconductor wafers, packaging and testing, personnel, including share-based compensation expense, overhead attributable to manufacturing, operations and procurement, and costs associated with yield improvements, capacity utilization, warranty and valuation of inventories. As the volume of sales increases, we expect cost of goods sold to increase. While our utilization rates cannot be immune to the market conditions, our goal is to make them less vulnerable to market fluctuations. We believe our market diversification strategy and product growth will drive higher volume of manufacturing which will improve our factory utilization rates and gross margin in the long run. Operating expenses 36 Our operating expenses consist of research and development, and selling, general and administrative expenses. We expect our operating expenses as a percentage of revenue to fluctuate from period to period as we continue to exercise cost control measures in response to the declining PC market as well as align our operating expenses to the revenue level. Research and development expenses . Our research and development expenses consist primarily of salaries, bonuses, benefits, share-based compensation expense, expenses associated with new product prototypes, travel expenses, fees for engineering services provided by outside contractors and consultants, amortization of software and design tools, depreciation of equipment and overhead costs. We continue to invest in developing new technologies and products utilizing our own fabrication and packaging facilities as it is critical to our long-term success. We also evaluate appropriate investment levels and stay focused on new product introductions to improve our competitiveness. We expect that our research and development expenses will fluctuate from time to time. Selling, general and administrative expenses. Our selling, general and administrative expenses consist primarily of salaries, bonuses, benefits, share-based compensation expense, product promotion costs, occupancy costs, travel expenses, expenses related to sales and marketing activities, amortization of software, depreciation of equipment, maintenance costs and other expenses for general and administrative functions as well as costs for outside professional services, including legal, audit and accounting services. We expect our selling, general and administrative expenses to fluctuate in the near future as we continue to exercise cost control measures. Income tax expense We are subject to income taxes in various jurisdictions. Significant judgment and estimates are required in determining our worldwide income tax expense. The calculation of tax liabilities involves dealing with uncertainties in the application of complex tax regulations of different jurisdictions globally. We establish accruals for potential liabilities and contingencies based on a more likely than not threshold to the recognition and de-recognition of uncertain tax positions. If the recognition threshold is met, the applicable accounting guidance permits us to recognize a tax benefit measured at the largest amount of tax benefit that is more likely than not to be realized upon settlement with a taxing authority. If the actual tax outcome of such exposures is different from the amounts that were initially recorded, the differences will impact the income tax and deferred tax provisions in the period in which such determination is made. Changes in the location of taxable income (loss) could result in significant changes in our income tax expense. We record a valuation allowance against deferred tax assets if it is more likely than not that a portion of the deferred tax assets will not be realized, based on historical profitability and our estimate of future taxable income in a particular jurisdiction. Our judgments regarding future taxable income may change due to changes in market conditions, changes in tax laws, tax planning strategies or other factors. If our assumptions and consequently our estimates change in the future, the deferred tax assets may increase or decrease, resulting in corresponding changes in income tax expense. Our effective tax rate is highly dependent upon the geographic distribution of our worldwide profits or losses, the tax laws and regulations in each geographical region where we have operations, the availability of tax credits and carry-forwards and the effectiveness of our tax planning strategies. “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. “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. 37 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 December 2022. The Company will continue to monitor ongoing developments and potential impact to its financial statements. 38 Equity method investment income/loss from equity investee We use the equity method of accounting when we have the ability to exercise significant influence, but we do not have control, as determined in accordance with generally accepted accounting principles, over the operating and financial policies of the company. Effective December 2, 2021, we reduced our equity interest in the JV Company below 50% of outstanding equity ownership and experienced a loss of control of the JV Company. As a result, we record our investment under equity method of accounting. Since we are unable to obtain accurate financial information from the JV Company in a timely manner, we record our share of earnings or losses of such affiliate on a one quarter lag. We record our 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 or 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 total equity method investment balance, including equity method goodwill, is tested for impairment. We review for impairment whenever factors indicate that the carrying amount of the investment might not be recoverable. In such a case, the decrease in value is recognized in the period the impairment occurs in the Consolidated Statement of Income. Results of Operations 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 December 31, Six Months Ended December 31, 2022 2021 2022 2021 2022 2021 2022 2021 (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 % Cost of goods sold 135,719 124,954 71.9 % 64.6 % 273,067 247,422 68.7 % 65.1 % Gross profit 53,041 68,365 28.1 % 35.4 % 124,169 132,932 31.3 % 34.9 % Operating expenses Research and development 21,468 16,516 11.4 % 8.5 % 42,857 34,328 10.8 % 9.0 % Selling, general and administrative 22,788 24,132 12.1 % 12.5 % 46,993 45,938 11.8 % 12.1 % Total operating expenses 44,256 40,648 23.5 % 21.0 % 89,850 80,266 22.6 % 21.1 % Operating income 8,785 27,717 4.6 % 14.4 % 34,319 52,666 8.7 % 13.8 % Other income (loss), net (903) 473 (0.5) % 0.2 % (919) 457 (0.2) % 0.1 % 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 % Income tax expense 1,659 34,096 0.8 % 17.6 % 3,033 35,416 0.8 % 9.3 % Net income before income from equity method investment 5,826 385,005 3.1 % 199.2 % 29,362 406,442 7.4 % 106.9 % Equity method investment income from equity investee 511 — 0.3 % — % 3,013 — 0.8 % — % Net income 6,337 385,005 3.4 % 199.2 % 32,375 406,442 8.2 % 106.9 % Net loss attributable to noncontrolling interest — 2,007 — % 1.0 % — 20 — % — % Net income attributable to Alpha and Omega Semiconductor Limited $ 6,337 $ 382,998 3.4 % 198.2 % $ 32,375 $ 406,422 8.2 % 106.9 % 39 Share-based compensation expense was recorded as follows: 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) Cost of goods sold $ 1,748 $ 1,709 0.9 % 0.9 % $ 3,536 $ 2,278 0.9 % 0.6 % Research and development 3,327 1,912 1.8 % 1.0 % 5,821 2,955 1.5 % 0.8 % Selling, general and administrative 8,016 4,926 4.2 % 2.5 % 14,330 7,949 3.6 % 2.1 % Total $ 13,091 $ 8,547 6.9 % 4.4 % $ 23,687 $ 13,182 6.0 % 3.5 % Three and Six Months Ended December 31, 2022 and 2021 Revenue The following is a summary of revenue by product type: 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 % Power IC 49,972 55,557 (5,585) (10.1) % 112,292 108,211 4,081 3.8 % Packaging and testing services 1,206 3,251 (2,045) (62.9) % 2,789 7,268 (4,479) (61.6) % $ 188,760 $ 193,319 $ (4,559) (2.4) % $ 397,236 $ 380,354 $ 16,882 4.4 % 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. 40 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 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 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 % Percentage of revenue 71.9 % 64.6 % 68.7 % 65.1 % Gross profit $ 53,041 $ 68,365 $ (15,324) (22.4) % $ 124,169 $ 132,932 $ (8,763) (6.6) % Percentage of revenue 28.1 % 35.4 % 31.3 % 34.9 % 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. 41 Research and development 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) 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 $21.5 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 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 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 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. 42 Interest expense, net 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 $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 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 $1.7 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. 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. 43 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 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. If 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. Liquidity and Capital Resources Our principal need for liquidity and capital resources is to maintain sufficient working capital to support our operations and to invest adequate capital expenditures to grow our business. 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. 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 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. The obligation under the loan agreement is secured by substantially all assets of Jireh and guaranteed by the Company. The agreement has a 5.5 year term and matures on February 16, 2027. Jireh 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 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. 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 44 140.0 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 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. 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 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. 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 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. 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 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. 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 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. In addition, we commenced an investment plan to expand the manufacturing capacity and upgrade the operational capabilities of our Oregon Fab. We intend to fund the costs by a combination of cash reserve, bank loans and equipment leases. In the long-term, we may require additional capital due to changing business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If our cash is insufficient to meet our needs, we may seek to raise capital through equity or debt financing. The sale of additional equity securities could result in dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and may include operating and financial covenants that would restrict our operations. We cannot be certain that any financing will be available in the amounts we need or on terms acceptable to us, if at all. 45 Cash, cash equivalents and restricted cash 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. Of the $288.1 million and $314.7 million cash, cash equivalents and restricted cash, $194.9 million and $212.6 million, respectively, are deposited with financial institutions outside the United States. The following table shows our cash flows from operating, investing and financing activities for the periods indicated: Six Months Ended December 31, 2022 2021 (in thousands) Net cash provided by operating activities $ 37,015 $ 131,374 Net cash used in investing activities (67,935) (47,709) Net cash provided by (used in) financing activities 4,526 (19,165) Effect of exchange rate changes on cash, cash equivalents and restricted cash (164) 307 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 $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 $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. 46 Cash flows from financing activities 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. Commitments 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 December 31, 2022, we had no off-balance sheet arrangements. Contractual Obligations There were no material changes outside of our ordinary course of business in our contractual obligations from those disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022. Recent Accounting Pronouncements See Note 1 of the Notes to the Condensed Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q for a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on results of operations and financial condition, which is incorporated herein by reference. 47 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in the market risks previously disclosed in Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," of our Annual Report on Form 10-K for the year ended June 30, 2022, filed with the SEC on September 19, 2022.