What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-08 compared with 2023-02-08 · 117 added, 142 removed, 309 unchanged (46% 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 six months ended December 31, 2022, we introduced an additional 37 new products.

During the nine months ended March 31, 2023, we introduced an additional 56 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 have an extensive patent portfolio that consists of 910 patents and 52 patent applications in the United States as of March 31, 2023.

We also have a total of 971 foreign patents, which were based primarily on our research and development efforts through March 31, 2023.

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

7 unchanged sentences

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.

During the fiscal quarter ended March 31, 2023, 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.

14 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 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.

5 unchanged sentences

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.

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.

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, the infection rate has stabilized or decrease over time and we 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

7 unchanged sentences

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.

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.

3 unchanged sentences

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.

In addition, we enhanced 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.

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.

22 unchanged sentences

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

Principal line items of condensed consolidated statements of income

The following describes the principal line items set forth in our Condensed Consolidated Statements of Income:

9 unchanged sentences

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.

In February 2023, we entered into a license agreement with a customer to license our proprietary SiC technology and to provide 24-month engineering and development services for a total fee of $45 million, consisting of an upfront fee of $18 million paid to us in March 2023, and the remaining amount to be paid upon the achievement of specified engineering services and product milestones.

The license and development fee is determined to be one performance obligation and is recognized over the 24 months when we perform the engineering and development services.

We use the input method to measure progression, representing a faithful depiction of the transfer of services.

In addition, we also entered an accompanying supply agreement to provide limited wafer supply to the customer.

Material right to the customer is presented due to the commitment of limited wafer supply after the development period;

however, deemed to be insignificant to the transaction price.

Cost of goods sold

12 unchanged sentences

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.

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.

52 unchanged sentences

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.

The following tables set forth statements of income, also expressed as a percentage of revenue, for the three and nine months ended March 31, 2023 and 2022.

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,

Three Months Ended March 31, Nine Months Ended March 31,

2023 2022 2023 2022 2023 2022 2023 2022

7 unchanged sentences

Total operating expenses 45,188 41,170 34.1 % 20.2 % 135,038 121,436 25.5 % 20.8 %

Operating income 8,785 27,717 4.6 % 14.4 % 34,319 52,666 8.7 % 13.8 %

Operating income (loss) (14,402) 31,232 (10.9) % 15.4 % 19,917 83,898 3.7 % 14.4 %

Other income (loss), net (513) 263 (0.4) % 0.2 % (1,432) 720 (0.3) % 0.1 %

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

Interest income (expense), net 5 (308) — % (0.2) % (1,000) (3,025) (0.2) % (0.5) %

Gain on deconsolidation of the JV Company — — — % — % — 399,093 — % 68.4 %

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 %

Gain (loss) on changes of equity interest in the JV Company, net — 4,501 — % 2.2 % — (3,140) — % (0.5) %

Net income (loss) before income taxes (14,910) 35,688 (11.3) % 17.6 % 17,485 477,546 3.2 % 81.9 %

Income tax expense 2,517 2,902 1.9 % 1.4 % 5,550 38,318 1.0 % 6.6 %

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 income (loss) before income (loss) from equity method investment (17,427) 32,786 (13.2) % 16.2 % 11,935 439,228 2.2 % 75.3 %

Equity method investment income (loss) from equity investee (1,480) (1,136) (1.1) % (0.6) % 1,533 (1,136) 0.3 % (0.2) %

Net income (loss) (18,907) 31,650 (14.3) % 15.6 % 13,468 438,092 2.5 % 75.1 %

Net loss attributable to noncontrolling interest — — — % — % — 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 %

Net income (loss) attributable to Alpha and Omega Semiconductor Limited $ (18,907) $ 31,650 (14.3) % 15.6 % $ 13,468 $ 438,072 2.5 % 75.1 %

Share-based compensation expense was recorded as follows:

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

Three Months Ended March 31, Nine Months Ended March 31,

2023 2022 2023 2022 2023 2022 2023 2022

4 unchanged sentences

Total $ 10,432 $ 8,273 7.9 % 4.0 % $ 34,119 $ 21,454 6.5 % 3.6 %

Three and Six Months Ended December 31, 2022 and 2021

Three and Nine Months Ended March 31, 2023 and 2022

The following is a summary of revenue by product type:

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

Three Months Ended March 31, Nine Months Ended March 31,

2023 2022 Change 2023 2022 Change

3 unchanged sentences

Packaging and testing services 552 2,308 (1,756) (76.1) % 3,341 9,576 (6,235) (65.1) %

License and development services 3,630 — 3,630 100.0 % 3,630 — 3,630 100.0 %

$ 132,560 $ 203,239 $ (70,679) (34.8) % $ 529,796 $ 583,593 $ (53,797) (9.2) %

The following is a summary of revenue by end market:

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

Three Months Ended March 31, Nine Months Ended March 31,

2023 2022 2023 2022 2023 2022 2023 2022

(% of revenue) (% of revenue)

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

Computing $ 38,062 $ 89,939 28.7 % 44.3 % $ 191,205 $ 256,371 36.1 % 43.9 %

3 unchanged sentences

Packaging and testing services 552 2,308 0.4 % 1.1 % 3,341 9,576 0.6 % 1.6 %

License and development services 3,630 — 2.7 % — % 3,630 — 0.7 % — %

$ 132,560 $ 203,239 100.0 % 100.0 % $ 529,796 $ 583,593 100.0 % 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 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.

Total revenue was $132.6 million for the three months ended March 31, 2023, a decrease of $70.7 million, or 34.8%, as compared to $203.2 million for the same quarter last year.

The decrease was primarily due to a decrease of $59.1 million and $13.5 million in sales of power discrete products and power IC products, respectively.

The decrease in power discrete and power IC product sales was primarily due to a 49.1% decrease in unit shipments, offset by a 25.4% increase in average selling price 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 March 31, 2023, as compared to same quarter last year, was primarily due to decreased demand.

The increase in license and development services for the three months ended March 31, 2023 was related to the license agreement with a customer to license our proprietary SiC technology and to provide 24-month engineering and development services in February 2023.

Total revenue wa s $529.8 million for the nine months ended March 31, 2023 a decrease of $53.8 million, or 9.2%, as compared to $583.6 million for the sam e period last year.

The decrease was primarily due to a decrease of $41.8 million and $9.4 million in sales of power discrete products and sales of power IC products, respectively.

The decrease in power discrete and power IC product sales was primarily due to a 30.2% decrease in unit shipments, offset by a 30.9% increase in average selling price as compared to same period last year due to a shift in product mix.

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

The decrease in revenue of p ackaging and testing services for the nine months ended March 31, 2023, as compared to same period last year, was primarily due to decreased demand.

The increase in license and development services for the nine months ended March 31, 2023 was related to the license agreement with a customer to license our proprietary SiC technology and to provide 24-month engineering and development services in February 2023.

Cost of goods sold and gross profit

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

Three Months Ended March 31, Nine Months Ended March 31,

2023 2022 Change 2023 2022 Change

4 unchanged sentences

Percentage of revenue 23.2 % 35.6 % 29.2 % 35.2 %

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.

Cost of goods sold was $101.8 million for the three months ended March 31, 2023, a decrease of $29.1 million, or 22.2%, as compared to $130.8 million for the same quarter last year.

The decrease was primarily due to 34.8% decrease in revenue.

Gross margin decreased by 12.4 percentage points to 23.2% for the three months ended March 31, 2023, as compared to 35.6% for the same quarter last year.

The decrease in gross margin was primarily due to higher material costs and lower unit shipments during the three months ended March 31, 2023.

Cost of goods sold was $374.8 million for the nine months ended March 31, 2023 , a decrease o f $3.4 million, or 0.9%, as compared to $378.3 million for the same period last year.

The decrease was primarily due to 9.2% decrease i n revenue.

Gross margin decreased by 6.

0 percentage points to 29.2% for the nine months ended March 31, 2023, as compared to 35.2% 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.

1 unchanged sentence

Research and development expenses

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

Three Months Ended March 31, Nine Months Ended March 31,

2023 2022 Change 2023 2022 Change

1 unchanged sentence

Research and development expenses $ 22,578 $ 16,545 $ 6,033 36.5 % $ 65,435 $ 50,873 $ 14,562 28.6 %

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.

Research and development expenses were $22.6 million for the three months ended March 31, 2023, an increase of $6.0 million, or 36.5%, as compared to $16.5 million for the same quarter last year.

The increase was primarily attributable to $1.1 million increase in employee compensation and benefit expense mainly due to increased headcount and higher medical insurance expenses, partially offset by lower vacation accrual and lower bonus accrual, a $1.2 million increase in share-based compensation expense due to the an increase in stock awards granted, a $1.0 million increase in depreciation expenses, and a $1.9 million increase in product prototyping engineering expense as a result of increased engineering activities.

Research and development expenses were $65.4 million for the nine months ended March 31, 2023, an increase of $14.6 million, or 28.6%, as compared to $50.9 million for the same period last year.

The increase was primarily attributable to a $3.1 million increase in employee compensation and benefit expense mainly due to increased headcount and higher medical insurance expenses, partially offset by lower vacation accrual and lower bonus accrual, a $4.0 million increase in share-based compensation expense due to an increase in stock awards granted, a $2.6 million increase in depreciation expense, as well as $3.8 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,

Three Months Ended March 31, Nine Months Ended March 31,

2023 2022 Change 2023 2022 Change

1 unchanged sentence

Selling, general and administrative $ 22,610 $ 24,625 $ (2,015) (8.2) % $ 69,603 $ 70,563 $ (960) (1.4) %

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,

Selling, general and administrative expense s were $22.6 million for the three months ended March 31, 2023, a decrease of $2.0 million, or 8.2%, as compared to $24.6 million for the same quarter last year.

The decrease was primarily due to a $1.7 million decrease in employee compensation and benefits expenses primarily due to lower bonus expenses accrual and lower vacation accrual, partially offset by increased headcount, higher medical and business insurance expenses, as well as a $1.5 million decrease in cyber security incident, offset by a $0.5 million increase in share-based compensation expense due to an increase in stock awards granted, and $0.5 million increase in legal costs.

Selling, general and administrative expenses were $69.6 million for the nine months ended March 31, 2023, a decrease of $1.0 million, or 1.4%, as compared to $70.6 million for the same period last year.

The decrease was primarily attributable to a $7.7 million decrease in employee compensation and benefits expenses mainly due to lower bonus expenses accrual and lower vacation accrual, partially offset by increased headcount, higher medical and business insurance expenses, as well as a $1.5 million decrease in cyber security incident, partially offset by a $6.9 million increase in share-based compensation expense due to an increase in stock award granted and the incremental expenses for one of our former officers' equity shares resulting from the modification, a $0.2 million increase in legal expenses, a $0.4 million increase in recruiting and consulting fees, a $0.3 million increase in marketing demo and trade shows costs, and a $0.5 million increase in employee business expenses.

Other income (loss), net

Three Months Ended March 31, Nine Months Ended March 31,

2023 2022 Change 2023 2022 Change

1 unchanged sentence

Other income (loss), net $ (513) $ 263 $ (776) (295.1) % $ (1,432) $ 720 $ (2,152) (298.9) %

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 December 31, Six Months Ended December 31,

Other income (loss), net was decreased in the three and nine months ended March 31, 2023 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 income (expense), net

Three Months Ended March 31, Nine Months Ended March 31,

2023 2022 Change 2023 2022 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.

Interest income (expense), net $ 5 $ (308) $ 313 (101.6) % $ (1,000) $ (3,025) $ 2,025 (66.9) %

Interest income (expense), net increased by $0.3 million during the three months ended March 31, 2023 as compared to the same quarter last year primarily due to a $1.2 million increase in interest income as a result of higher interest rates, partially offset by a $0.9 million increase in interest expense as a result of an increase in bank borrowings.

Interest expense, net decreased by $2.0 million during the nine months ended March 31, 2023 as compared to the same period last year was primarily due to a $2.5 million increase in interest income as a result of higher interest rates, offset by a $0.5 million increase in interest expense as a result of an increase in bank borrowings during the periods.

The net increase offset by less interest expense in JV Company due to deconsolidation.

Income tax expense

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

Three Months Ended March 31, Nine Months Ended March 31,

2023 2022 Change 2023 2022 Change

1 unchanged sentence

Income tax expense $ 2,517 $ 2,902 $ (385) (13.3) % $ 5,550 $ 38,318 $ (32,768) (85.5) %

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 recognized income tax expense of approximately $2.5 million and $2.9 million for the three months ended March 31, 2023 and 2022, respectively.

The income tax expense of $2.5 million for the three months ended March 31, 2023 included a $0.03 million discrete tax expense.

The income tax expense of $2.9 million for the three months ended March 31, 2022 included a $0.7 million discrete tax expense related to the Company’s $4.5 million of gain related to the revaluation of the Company’s equity interest in a joint venture.

Excluding the discrete income tax items, the income tax expense for the three months ended March 31, 2023 and 2022 was $2.5 million and $2.2 million, respectively, and the effective tax rate for the three months ended March 31, 2023 and 2022 was (15.2)% and 7.4%, respectively.

Excluding the effects of the discrete tax expense recorded in the three months ended March 31, 2023 and 2022, 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 $16.4 million for the three months ended March 31, 2023 as compared to $30.0 million of pretax book income excluding the $4.5 million of gain related to the revaluation of the Company’s equity interest in a joint venture for the three months ended March 31, 2022.

The Company recognized income tax expense of approximately $5.6 million and $38.3 million for the nine months ended March 31, 2023 and 2022, respectively.

The income tax expense of $5.6 million for the nine months ended March 31, 2023 included a $0.1 million discrete tax expense.

The income tax expense of $38.3 million for the nine months ended March 31, 2022 included a $33.5 million discrete tax expense related to the Company’s $396.0 million of income from the sale of equity interest in a joint venture and the related deconsolidation gain as the Company 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 of other discrete income tax items.

Excluding the discrete income tax items, income tax expense for the nine months ended March 31, 2023 and 2022 was $5.4 million and $4.7 million, respectively, and the effective tax rate for the nine months ended March 31, 2023 and 2022 was 28.4% and 6.0%, respectively.

Excluding the effects of the discrete tax expense recorded in the nine months ended March 31, 2023 and 2022, 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 $19.0 million for the nine months ended March 31, 2023 as compared to pretax book income of $80.4 million of pretax book income (excluding the $396.0 million of income from the sale of equity interest in a joint venture and the related deconsolidation gain) for the nine months ended March 31, 2022.

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 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.

As of March 31, 2023, 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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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.

Pursuant to the agreement, we 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 paid to us in March 2023, and 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.

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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.

As of March 31, 2023, there was no outstanding balance for this loan.

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

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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.

The total purchase price of this 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 December 31, 2022.

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

The financing arrangement is secured by this equipment and the hardware which had the carrying amount of $13.1 million as of March 31, 2023.

As of March 31, 2023, the outstanding balance of this debt financing was $12.5 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 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

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.

As of March 31, 2023, Jireh was in compliance with these covenants and the outstanding balance of this loan was $40.5 million.

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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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.

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.

As of March 31, 2023, the Borrower was in compliance with these covenants.

As of March 31, 2023, there was no outstanding balance and the Company had unused credit of approximately $8.0 million.

On May 1, 2018, Jireh entered into a loan agreement with the Bank that provided a term loan in 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.

The loan has a five-year term.

Beginning June 1, 2018, Jireh made consecutive monthly payments of principal and interest to the Bank.

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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 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.

The Company was in compliance with these covenants as of March 31, 2023.

As of March 31, 2023, the outstanding balance of the term loa n was $13.5 million.

The Company paid this loan in full on May 1, 2023.

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 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.

As of March 31, 2023 and June 30, 2022, we h a d $266.2 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.

1 unchanged sentence

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

Six Months Ended December 31,

Nine Months Ended March 31,

(in thousands)

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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.

Net cash provided by operating activities of $48.7 million for the nine months ended March 31, 2023 resulted primarily from net income of $13.5 million and non-cash expenses of $63.2 million, partially offset by net changes in assets and liabilities using cash of $28.0 million, The non-cash expenses of $63.2 million primarily included $34.1 million of share-based compensation expense, $31.2 million of depreciation and amortization expenses, $0.4 million of loss on disposal of property and equipment, $1.5 million of income from equity investment and $1.0 million of deferred income taxes.

The net changes in assets and liabilities of $28.0 million were primarily due to a $10.6 million decrease in net payable from equity investee, a $21.6 million decrease in accounts payable due to timing of payments, a $21.7 million increase in inventories as a result of our inventories built up for preparation of uncertainty of supply chains, $7.8 million increase in other current and long-term assets due to increase in advance payments to vendors, and a $29.4 million decrease in accrued and other liabilities, partially offset by a $46.2 million decrease in accounts receivable as a result of timing of the shipments and payments collected, a $14.4 million increase in deferred revenue, and a $2.5 million increase in income taxes payable.

Net cash provided by operating activities of $193.2 million for the nine months ended March 31, 2022 resulted primarily from net income of $438.1 million and net changes in assets and liabilities using cash of $62.0 million, partially offset by non-cash expenses of $306.9 million.

The non-cash expenses of $306.9 million primarily included $399.1 million of gain on deconsolidation of the JV Company, partially offset by $3.1 million of loss on changes of equity interest in the JV Company, $30.0 million of deferred income tax on deconsolidation and changes of equity interest in the JV Company, $34.3 million of depreciation and amortization expenses, $1.1 million of loss on equity investment, $21.5 million of share-based compensation expense, and $2.2 million of deferred income taxes.

The net changes in assets and liabilities of $62.0 million were primarily due to a $65.1 million increase in accrued and other liabilities, a $3.5 million increase in income taxes payable on deconsolidation and changes of equity interest in the JV Company, a $15.6 million increase in accounts payable due to timing of payments, and a $34.4 million increase in net other payable from equity investee, partially offset by a $3.6 million increase in accounts receivable as a result of timing of the shipments and payments collected, a $42.9 million increase in inventories as a result of our inventories built up for preparation of uncertainty of supply chains, a $10.1 million increase in other current and long-term assets due to increase in advance payments to vendors.

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.

Net cash used in investing activities of $90.6 million for the nine months ended March 31, 2023 was primarily attributable to $91.3 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 $91.1 million fo r the nine months ended March 31, 2022 was primarily attributable to cash of the JV Company of $20.7 million no longer under the control of the Company, purchases of property and equipment of $15.0 million for the JV Company, and purchases of property and equipment of $83.0 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 $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.

Net cash used in financing activities of $6.4 million for the nine months ended March 31, 2023 was primarily attributable to $10.3 million in repayments of borrowings, $0.6 million in payment of finance lease obligations, $6.2 million in common shares acquired to settle withholding tax related to vesting of restricted stock units, and $2.7 million payment for repurchases of common shares, partially offset by $8.6 million proceeds from borrowings and $4.6 million of proceeds from exercise of stock options and ESPP.

Net cash used in financing activities of $16.4 million for the nine months ended March 31, 2022 was primarily attributable to $59.3 million proceeds from borrowings, and $3.3 million of proceeds from exercise of stock options and ESPP, partially offset by $33.7 million in repayments of borrowings, $4.2 million in payment of finance lease obligations, and $8.4 million in common shares acquired to settle withholding tax related to vesting of restricted stock units.

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.

As of March 31, 2023, 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