What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-07 compared with 2023-05-08 · 119 added, 145 removed, 281 unchanged (48% of the section changed)

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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.

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, 2023, filed with the Securities and Exchange Commission on August 29, 2023.

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 nine months ended March 31, 2023, we introduced an additional 56 new products.

Our portfolio of power semiconductors includes approximately 2,600 products, and has grown significantly with the introduction of over 60 new products in the fiscal year ended June 30, 2023, and over 130 and 160 new products in the fiscal years ended June 30, 2022 and 2021, respectively.

During the three months ended September 30, 2023, we introduced an additional 23 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 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 have an extensive patent portfolio that consists of 923 patents and 53 patent applications in the United States as of September 30, 2023.

We also have a total of 986 foreign patents, which were based primarily on our research and development efforts through September 30, 2023.

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

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

During the fiscal quarter ended 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.

During the fiscal quarter ended September 30, 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.

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.

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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 March 31, 2023.

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.

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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

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, 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”

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.

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

Since mid-2022, we have experienced an industry-wide decline of customer demand for semiconductor products, which resulted in inventory corrections and reduction of sales by our major customers that has negatively affected our recent financial performance.

The prolonged and extended downturn in the semiconductor industry have a substantial impact on our operating results and financial conditions.

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 in the PC market could have a material adverse effect on our revenue and results of operations.

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

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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.

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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.

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 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.

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.

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 resulted in the loss of control and reduced influence over the JV Company.

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

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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.

In February 2023, we entered into a license agreement with a customer to license our proprietary SiC technology and to provide 24-months of engineering and development services for a total fee of $45 million, consisting of an upfront fee of $18 million and $6.8 million paid to us in the March and July 2023, with 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 during which we perform the engineering and development services.

We use the input method to measure progression of the transfer of services.

As of September 30, 2023, the Company had recorded $15.6 million of license and development revenue.

We also entered an accompanying supply agreement to provide limited wafer supply to the customer.

Cost of goods sold

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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.

Tax Cuts and Jobs Act", Enacted December 22, 2017

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

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

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

affiliates, where such payments reduce the U.S.

The BEAT tax is imposed at a rate of 10% on Adjusted Taxable Income, excluding certain payments to foreign related entities.

It is an incremental tax over and above the corporate income tax and is recorded as a period cost.

It is possible that this tax could be applicable in future periods, which would cause an increase to the effective tax rate and cash taxes.

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

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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.

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

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

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Results of Operations

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.

The following tables set forth statements of income, also expressed as a percentage of revenue, for the three months ended September 30, 2023 and 2022.

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

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

Three Months Ended September 30,

2023 2022 2023 2022

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

(in thousands) (% of revenue)

Revenue $ 180,633 $ 208,476 100.0 % 100.0 %

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Total operating expenses 41,544 45,594 23.0 % 21.9 %

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

Operating income

9,381 25,534 5.2 % 12.2 %

Other income (loss), net 26 (16) — % — %

Interest income (expense), net 229 (608) 0.1 % (0.3) %

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

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 %

Net income before income taxes 9,636 24,910 5.3 % 11.9 %

Income tax expense 1,138 1,374 0.6 % 0.6 %

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 %

Net income before income (loss) from equity method investment 8,498 23,536 4.7 % 11.3 %

Equity method investment income (loss) from equity investee (2,712) 2,502 (1.5) % 1.2 %

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

Net income $ 5,786 $ 26,038 3.2 % 12.5 %

Share-based compensation expense was recorded as follows:

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

Three Months Ended September 30,

2023 2022 2023 2022

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

(in thousands) (% of revenue)

Cost of goods sold $ 212 $ 1,788 0.1 % 0.9 %

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Total $ 918 $ 10,596 0.5 % 5.1 %

Three and Nine Months Ended March 31, 2023 and 2022

Three Months Ended September 30, 2023 and 2022

The following is a summary of revenue by product type:

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)

Three Months Ended September 30,

2023 2022 Change

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

Power discrete $ 121,500 $ 144,573 $ (23,073) (16.0) %

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The following is a summary of revenue by end market:

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

Three Months Ended September 30,

2023 2022 2023 2022

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

(in thousands) (% of revenue)

Computing $ 70,350 $ 89,265 38.9 % 42.8 %

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$ 180,633 $ 208,476 100.0 % 100.0 %

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.

Total revenue was $180.6 million for the three months ended September 30, 2023, a decrease of $27.8 million, or 13.4%, as compared to $208.5 million for the same quarter last year.

The decrease was primarily due to a decrease of $23.1 million and $9.6 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 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 consumer markets, particularly in gaming products.

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.

The decrease in power discrete and power IC product sales was primarily due to a 21.7% decrease in average selling price as compared to same quarter last year due to a shift in product mix, offset by a 7.5% increase in unit shipments.

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, and decreased in the consumer markets, particularly in gaming products.

The decrease in revenue of packaging and testing services for the three months ended September 30, 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 September 30, 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.

Cost of goods sold and gross profit

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)

Three Months Ended September 30,

2023 2022 Change

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

Cost of goods sold $ 129,708 $ 137,348 $ (7,640) (5.6) %

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Percentage of revenue 28.2 % 34.1 %

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.

Cost of goods sold was $129.7 million for the three months ended September 30, 2023, a decrease of $7.6 million, or 5.6%, as compared to $137.3 million for the same quarter last year.

The decrease was primarily due to 13.4% 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.

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

Gross margin decreased by 5.9 percentage points to 28.2% for the three months ended September 30, 2023, as compared to 34.1% for the same quarter last year.

The decrease in gross margin was primarily due to higher material costs and less favorable product mix during the three months ended September 30, 2023.

Research and development expenses

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)

Three Months Ended September 30,

2023 2022 Change

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

Research and development expenses $ 22,113 $ 21,389 $ 724 3.4 %

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.

Research and development expenses were $22.1 million for the three months ended September 30, 2023, an increase of $0.7 million, or 3.4%, as compared to $21.4 million for the same quarter last year.

The increase was primarily attributable to $1.1 million increase in product prototyping engineering expense as a result of increased engineering activities, a $0.7 million increase in employee compensation and benefit expense mainly due to increased headcount and higher business and medical insurance expenses, partially offset by lower bonus accrual, a $0.2 million increase in depreciation expenses, a $0.2 million increase in consulting fees and a $1.1 million in allocation, partially offset by a $2.5 million decrease in share-based compensation expense as a result of more cancellation of performance-based restricted stock units and a modification of market-based restricted stock units.

Selling, general and administrative expenses

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)

Three Months Ended September 30,

2023 2022 Change

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

Selling, general and administrative $ 19,431 $ 24,205 $ (4,774) (19.7) %

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.

Selling, general and administrative expenses were $19.4 million for the three months ended September 30, 2023, a decrease of $4.8 million, or 19.7%, as compared to $24.2 million for the same quarter last year.

The decrease was primarily due to a $1.2 million decrease in employee compensation and benefits expenses primarily due to lower bonus expenses accrual, partially offset by increased medical and business insurance expenses, as well as a $5.6 million decrease in share-based compensation expense as a result of more cancellation of performance-based restricted stock units and a modification of market-based restricted stock units, partially offset by a $0.5 million increase in legal expenses, a $0.6 million increase in audit fees, a $0.5 million increase in consulting fees, a $0.3 million increase in employee business expenses and a $0.3 million increase in facility expenses as a result of more rent expenses.

Other income (loss), 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)

Three Months Ended September 30,

2023 2022 Change

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

Other income (loss), net $ 26 $ (16) $ 42 (262.5) %

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.

Other income (loss), net in the three months ended September 30, 2023 and 2022 was flat.

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)

Three Months Ended September 30,

2023 2022 Change

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

Interest income (expense), net $ 229 $ (608) $ 837 (137.7) %

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.

Interest income (expense), net increased by $0.8 million during the three months ended September 30, 2023 as compared to the same quarter last year primarily due to a $0.9 million increase in interest income as a result of higher interest rates, partially offset by a $0.1 million increase in interest expense as a result of an increase in bank borrowings.

Income tax expense

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)

Three Months Ended September 30,

2023 2022 Change

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

Income tax expense $ 1,138 $ 1,374 $ (236) (17.2) %

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 recognized income tax expense of approximately $1.1 million and $1.4 million for the three months ended September 30, 2023 and 2022, respectively.

The income tax expense of $1.1 million for the three months ended September 30, 2023 included a $0.05 million discrete tax expense.

The income tax expense of $1.4 million for the three months ended September 30, 2022 included a $0.07 million discrete tax expense.

Excluding the discrete income tax items, the income tax expense for the three months ended September 30, 2023 and 2022 was $1.1 million and $1.3 million, respectively, and the effective tax rate for the three months ended September 30, 2023 and 2022 was 15.7% and 4.8%, respectively.

The changes in the tax expense and effective tax rate between the periods resulted primarily from changes in the mix of earnings in various geographic jurisdictions between the current year and the same period of last year.

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

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These assessments can require considerable estimates and judgments.

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.

As of September 30, 2023, the gross amount of unrecognized tax benefits was approximately $9.4 million, of which $6.3 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 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.

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 and $6.8 million paid to us in the March and July 2023, respectively, 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.

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

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

The Company could borrow up to approximately RMB 50 million or $6.8 million based on currency exchange rate between RMB and U.S.

Dollar on September 30, 2023 with a maturity date of September 8, 2025.

As of September 30, 2023, there was no outstanding balance for this loan.

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 $20.6 million based on currency exchange rage between RMB and U.S.

The Company could borrow up to approximately RMB 140 million or $20.6 million based on currency exchange rate between RMB and U.S.

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

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

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 equipment manufactured by a supplier.

As of September 30, 2023, there was no outstanding balance for this loan.

In September 2022, 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 working capital 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 September 20, 2022, with a maturity date of September 30, 2023.

As of September 30, 2023, there was no outstanding balance and this loan expired.

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 .

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

The total purchase price of this equipment was euro 12.0 million.

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The purchase price of this hardware was $0.2 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.

The financing arrangement is secured by this equipment and other equipment which had the carrying amount of $14.8 million as of September 30, 2023.

As of September 30, 2023, the outstanding balance of this debt financing was $11.0 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 March 31, 2023, Jireh was in compliance with these covenants and the outstanding balance of this loan was $40.5 million.

As of September 30, 2023, Jireh was in compliance with these covenants and the outstanding balance of this loan wa s $36.0 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 reduce the borrowing maximum amount to $8.0 million with certain financial covenants required.

Other terms remain the same.

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.

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 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.

As of September 30, 2023, the Borrower was in compliance with these covenants.

As of September 30, 2023, there was no outstanding balance and the Company had unused credit of approximately $8.0 million.

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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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.

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.

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Cash, cash equivalents and restricted cash

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.

As of September 30, 2023 and June 30, 2023, we h a d $193.8 million and $195.6 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:

Nine Months Ended March 31,

Three Months Ended September 30,

(in thousands)

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Cash flows from operating activities

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.

Net cash provided by operating activities of $13.8 million for the three months ended September 30, 2023 resulted primarily from net income of $5.8 million and non-cash expenses of $15.4 million, partially offset by net changes in assets and liabilities using cash of $7.4 million, The non-cash expenses of $15.4 million primarily included $0.9 million of share-based compensation expense, $13.0 million of depreciation and amortization expenses, $2.7 million of loss from equity investment and $1.2 million of deferred income taxes.

The net changes in assets and liabilities of $7.4 million were primarily due to a $8.2 million increase in net payable from equity investee, a $3.1 million increase in accounts payable due to timing of payments, and $1.1 million increase in deferred revenue, partially offset by a $4.5 million increase in inventories as a result of our inventories built up for preparation of uncertainty of supply chains, $1.3 million increase in other current and long-term assets due to increase in advance payments to vendors, and a $1.1 million decrease in accrued and other liabilities, a $12.0 million increase in accounts receivable as a result of timing of the shipments and payments collected, and a $0.8 million decrease in income taxes payable.

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

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

Cash flows from investing activities

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.

Net cash used in investing activities of $12.5 million for the three months ended September 30, 2023 was primarily due to purchases of property and equipment,

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

Cash flows from financing activities

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.

Net cash used in financing activities of $3.0 million for the three months ended September 30, 2023 was primarily attributable to $2.9 million in repayments of borrowings, $0.2 million in payment of finance lease obligations, and $0.4 million in common shares acquired to settle withholding tax related to vesting of restricted stock units, partially offset by $0.4 million of proceeds from exercise of stock options and ESPP.

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

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 March 31, 2023, we had no off-balance sheet arrangements.

As of September 30, 2023, we had no off-balance sheet arrangements.

Contractual Obligations

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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.

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