ALPHA & OMEGA SEMICONDUCTOR Ltd 10-Q

ITEM 1. Financial Statements ALPHA AND OMEGA SEMICONDUCTOR LIMITED CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited, in thousands except par value per share) December 31, 2023 June 30, 2023 ASSETS Current assets: Cash and cash equivalents $ 162,266 $ 195,188 Restricted cash 212 415 Accounts receivable, net 31,923 22,420 Inventories 191,709 183,247 Other current assets 20,509 22,666 Total current assets 406,619 423,936 Property, plant and equipment, net 349,046 357,831 Operating lease right-of-use assets 25,416 24,349 Intangible assets, net 5,141 6,765 Equity method investment 356,144 366,617 Deferred income tax assets 518 536 Other long-term assets 33,462 19,703 Total assets $ 1,176,346 $ 1,199,737 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 45,156 $ 50,775 Accrued liabilities 77,683 79,533 Payable related to equity investee, net 12,966 11,950 Income taxes payable 4,680 5,546 Short-term debt 11,533 11,434 Deferred revenue 3,715 8,073 Finance lease liabilities 900 867 Operating lease liabilities 4,963 4,383 Total current liabilities 161,596 172,561 Long-term debt 32,568 38,360 Income taxes payable - long-term 2,924 2,817 Deferred income tax liabilities 26,385 27,283 Finance lease liabilities - long-term 2,758 3,216 Operating lease liabilities - long-term 21,214 20,544 Other long-term liabilities 34,343 51,037 Total liabilities 281,788 315,818 Commitments and contingencies (Note 12) Shareholders' Equity: Preferred shares, par value $ 0.002 per share: Authorized: 10,000 shares; issued and outstanding: none at December 31, 2023 and June 30, 2023 — — Common shares, par value $ 0.002 per share: Authorized: 100,000 shares; issued and outstanding: 35,205 shares and 28,051 shares, respectively at December 31, 2023 and 34,811 shares and 27,654 shares, respectively at June 30, 2023 70 70 Treasury shares at cost: 7,154 shares at December 31, 2023 and 7,157 shares at June 30, 2023 ( 79,343 ) ( 79,365 ) Additional paid-in capital 342,636 329,034 Accumulated other comprehensive loss ( 13,937 ) ( 8,111 ) Retained earnings 645,132 642,291 Total shareholders' equity 894,558 883,919 Total liabilities and shareholders' equity $ 1,176,346 $ 1,199,737 See accompanying notes to these condensed consolidated financial statements. 1 Table of Contents ALPHA AND OMEGA SEMICONDUCTOR LIMITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (Unaudited, in thousands except per share data) Three Months Ended December 31, Six Months Ended December 31, 2023 2022 2023 2022 Revenue $ 165,285 $ 188,760 $ 345,918 $ 397,236 Cost of goods sold 121,284 135,719 250,992 273,067 Gross profit 44,001 53,041 94,926 124,169 Operating expenses Research and development 22,919 21,468 45,032 42,857 Selling, general and administrative 22,216 22,788 41,647 46,993 Total operating expenses 45,135 44,256 86,679 89,850 Operating income (loss) ( 1,134 ) 8,785 8,247 34,319 Other income (loss), net ( 472 ) ( 903 ) ( 446 ) ( 919 ) Interest income (expense), net 274 ( 397 ) 503 ( 1,005 ) Net income (loss) before income taxes ( 1,332 ) 7,485 8,304 32,395 Income tax expense 894 1,659 2,032 3,033 Net income (loss) before income (loss) from equity method investment ( 2,226 ) 5,826 6,272 29,362 Equity method investment income (loss) from equity investee ( 697 ) 511 ( 3,409 ) 3,013 Net income (loss) $ ( 2,923 ) $ 6,337 $ 2,863 $ 32,375 Net income (loss) per common share Basic $ ( 0.10 ) $ 0.23 $ 0.10 $ 1.18 Diluted $ ( 0.10 ) $ 0.21 $ 0.10 $ 1.10 Weighted average number of common shares used to compute net income (loss) per share Basic 27,939 27,511 27,816 27,451 Diluted 27,939 29,576 29,830 29,499 See accompanying notes to these condensed consolidated financial statements. 2 Table of Contents ALPHA AND OMEGA SEMICONDUCTOR LIMITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited, in thousands) Three Months Ended December 31, Six Months Ended December 31, 2023 2022 2023 2022 Net income (loss) $ ( 2,923 ) $ 6,337 $ 2,863 $ 32,375 Other comprehensive income (loss), net of tax Foreign currency translation adjustment ( 419 ) ( 9,077 ) ( 5,826 ) ( 13,984 ) Comprehensive income (loss) $ ( 3,342 ) $ ( 2,740 ) $ ( 2,963 ) $ 18,391 See accompanying notes to these condensed consolidated financial statements. 3 ALPHA AND OMEGA SEMICONDUCTOR LIMITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited, in thousands) Common Shares Treasury Shares Additional Paid-In Capital Accumulated Other Comprehensive Loss Retained Earnings Total Shareholders' Equity Shares Amount Shares Amount Balance, September 30, 2022 34,018 $ 68 ( 6,617 ) $ ( 65,996 ) $ 299,196 $ ( 3,827 ) $ 656,028 $ 885,469 Exercise of common stock options and release of restricted stock units 33 — — — — — — — Reissuance of treasury stock upon exercise of common stock options and release of RSUs — — 1 6 — — ( 6 ) — Withholding tax on restricted stock units ( 7 ) — — — ( 226 ) — — ( 226 ) Issuance of shares under ESPP 137 — — — 4,080 — — 4,080 Share-based compensation — — — — 13,091 — — 13,091 Net income — — — — — — 6,337 6,337 Foreign currency translation adjustment, net of tax — — — — — ( 9,077 ) — ( 9,077 ) Balance, December 31, 2022 34,181 $ 68 ( 6,616 ) $ ( 65,990 ) $ 316,141 $ ( 12,904 ) $ 662,359 $ 899,674 Common Shares Treasury Shares Additional Paid-In Capital Accumulated Other Comprehensive Loss Retained Earnings Total Shareholders' Equity Shares Amount Shares Amount Balance, June 30, 2022 33,988 $ 68 ( 6,617 ) $ ( 66,000 ) $ 288,951 $ 1,080 $ 629,994 $ 854,093 Exercise of common stock options and release of restricted stock units 72 — — — 19 — — 19 Reissuance of treasury stock upon exercise of common stock options and release of RSUs — — 1 10 — — ( 10 ) — Withholding tax on restricted stock units ( 16 ) — — — ( 596 ) — — ( 596 ) Issuance of shares under ESPP 137 — — — 4,080 — — 4,080 Share-based compensation — — — — 23,687 — — 23,687 Net income — — — — — — 32,375 32,375 Foreign currency translation adjustment, net of tax — — — — — ( 13,984 ) — ( 13,984 ) Balance, December 31, 2022 34,181 $ 68 ( 6,616 ) $ ( 65,990 ) $ 316,141 $ ( 12,904 ) $ 662,359 $ 899,674 4 ALPHA AND OMEGA SEMICONDUCTOR LIMITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited, in thousands) Common Shares Treasury Shares Additional Paid-In Capital Accumulated Other Comprehensive Loss Retained Earnings Total Shareholders' Equity Shares Amount Shares Amount Balance, September 30, 2023 34,903 $ 70 ( 7,157 ) $ ( 79,365 ) $ 330,015 $ ( 13,518 ) $ 648,077 $ 885,279 Exercise of common stock options and release of restricted stock units 134 — — — 726 — — 726 Reissuance of treasury stock upon exercise of common stock options and release of RSUs — — 3 22 — — ( 22 ) — Withholding tax on restricted stock units ( 9 ) — — — ( 219 ) — — ( 219 ) Issuance of shares under ESPP 177 — — — 3,423 — — 3,423 Share-based compensation — — — — 8,691 — — 8,691 Net loss — — — — — — ( 2,923 ) ( 2,923 ) Foreign currency translation adjustment, net of tax — — — — — ( 419 ) — ( 419 ) Balance, December 31, 2023 35,205 $ 70 ( 7,154 ) $ ( 79,343 ) $ 342,636 $ ( 13,937 ) $ 645,132 $ 894,558 Common Shares Treasury Shares Additional Paid-In Capital Accumulated Other Comprehensive Loss Retained Earnings Total Shareholders' Equity Shares Amount Shares Amount Balance, June 30, 2023 $ 34,811 $ 70 $ ( 7,157 ) $ ( 79,365 ) $ 329,034 $ ( 8,111 ) $ 642,291 $ 883,919 Exercise of common stock options and release of restricted stock units 238 — — — 1,172 — — 1,172 Reissuance of treasury stock upon exercise of common stock options and release of RSUs — — 3 22 — — ( 22 ) — Withholding tax on restricted stock units ( 21 ) — — — ( 602 ) — — ( 602 ) Issuance of shares under ESPP 177 — — — 3,423 — — 3,423 Share-based compensation — — — — 9,609 — — 9,609 Net income — — — — — — 2,863 2,863 Foreign currency translation adjustment, net of tax — — — — — ( 5,826 ) — ( 5,826 ) Balance, December 31, 2023 $ 35,205 $ 70 $ ( 7,154 ) $ ( 79,343 ) $ 342,636 $ ( 13,937 ) $ 645,132 $ 894,558 See accompanying notes to these condensed consolidated financial statements. 5 Table of Contents ALPHA AND OMEGA SEMICONDUCTOR LIMITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited, in thousands) Six Months Ended December 31, 2023 2022 Cash flows from operating activities Net income $ 2,863 $ 32,375 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 26,524 20,156 Loss (income) from equity investment 3,409 ( 3,013 ) Share-based compensation expense 9,609 23,687 Deferred income taxes, net ( 880 ) ( 1,595 ) Loss on disposal of property and equipment 42 383 Changes in operating assets and liabilities Accounts receivable ( 9,504 ) 12,458 Inventories ( 8,462 ) ( 5,783 ) Other current and long-term assets ( 10,688 ) ( 8,437 ) Accounts payable ( 3,206 ) ( 14,073 ) Net payable, equity investee 1,015 ( 7,418 ) Income taxes payable ( 759 ) 1,440 Increase in deferred revenue ( 4,358 ) — Accrued and other liabilities ( 15,233 ) ( 13,165 ) Net cash provided by (used in) operating activities ( 9,628 ) 37,015 Cash flows from investing activities Purchases of property and equipment ( 22,030 ) ( 68,593 ) Proceeds from sale of property and equipment 150 27 Government grant related to equipment 449 631 Net cash used in investing activities ( 21,431 ) ( 67,935 ) Cash flows from financing activities Withholding tax on restricted stock units ( 602 ) ( 596 ) Proceeds from exercise of stock options and ESPP 4,595 4,099 Proceeds from borrowings — 8,632 Repayments of borrowings ( 5,713 ) ( 7,209 ) Principal payments on finance leases ( 426 ) ( 400 ) Net cash provided by (used in) financing activities ( 2,146 ) 4,526 Effect of exchange rate changes on cash, cash equivalents and restricted cash 80 ( 164 ) Net decrease in cash, cash equivalents and restricted cash ( 33,125 ) ( 26,558 ) Cash, cash equivalents and restricted cash at beginning of period 195,603 314,651 Cash, cash equivalents and restricted cash at end of period $ 162,478 $ 288,093 Supplemental disclosures of non-cash investing and financing information: Property and equipment purchased but not yet paid $ 4,127 $ 17,391 Reconciliation of cash, cash equivalents, and restricted cash: Cash and cash equivalents $ 162,266 $ 287,805 Restricted cash 212 288 Total cash, cash equivalents, and restricted cash $ 162,478 $ 288,093 See accompanying notes to these condensed consolidated financial statements. 6 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. The Company and Significant Accounting Policies The Company Alpha and Omega Semiconductor Limited and its subsidiaries (the “Company”, “AOS”, “we” or “us”) design, develop and supply a broad range of power semiconductors. The Company's portfolio of products targets high-volume applications, including personal and portable computers, graphic cards, flat panel TVs, home appliances, smart phones, battery packs, quick chargers, home appliances, consumer and industrial motor controls and power supplies for TVs, computers, servers and telecommunications equipment. The Company conducts its operations primarily in the United States of America (“USA”), Hong Kong, China, and South Korea. Basis of Preparation The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and with the instructions to Article 10 of Securities and Exchange Commission Regulation S-X, as amended. They do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with U.S. GAAP for complete financial statements. These Condensed Consolidated Financial Statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2023. All significant intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, all adjustments (consisting of normal recurring adjustments and accruals) considered necessary for a fair presentation of the results of operations for the periods presented have been included in the interim periods. Operating results for the six months ended December 31, 2023 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2024 or any other interim period. The consolidated balance sheet at June 30, 2023 is derived from the audited financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2023. Joint Venture On March 29, 2016, the Company entered into a joint venture contract (the “JV Agreement”) with two investment funds owned by the Municipality of Chongqing (the “Chongqing Funds”), pursuant to which the Company and the Chongqing Funds formed a joint venture, (the “JV Company”), for the purpose of constructing and operating a power semiconductor packaging, testing and 12-inch wafer fabrication facility in the Liangjiang New Area of Chongqing, China (the “JV Transaction”). Prior to December 1, 2021, the JV Company was accounted for under the provisions of the consolidation guidance since the Company had controlling financial interest. As of December 2, 2021, the Company ceased having control over the JV Company. Therefore, the Company deconsolidated the JV Company as of that date. Subsequently, the Company has accounted for its investment in the JV Company using the equity method of accounting. As of December 31, 2023, the percentage of outstanding JV equity interest beneficially owned by the Company was reduced to 42.2 %. Such reduction reflects (i) the sale by the Company of approximately 2.1 % of the outstanding JV equity interest which resulted in the deconsolidation of the JV Company, (ii) additional sale by the Company of approximately 1.1 % of outstanding JV equity interest in December 2021, (iii) the adoption of an employee equity incentive plan and the issuance of additional equity interest equivalent to 3.99 % of the JV Company to investors in exchange for cash in December 2021, and (iv) issuance of additional equity interest of JV to investors in January 2022. Use of Estimates The preparation of the consolidated financial statements in conformity with U.S. GAAP requires the Company to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. To the extent there are material differences between these estimates and actual results, the Company's consolidated financial statements will be affected. On an ongoing basis, the Company evaluates the estimates, judgments and assumptions including those related to stock rotation returns, price adjustments, allowance for doubtful accounts, inventory reserves, warranty accrual, income taxes, leases, share-based compensation, recoverability of and useful lives for property, plant and equipment and intangible assets. 7 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Leases The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, current operating lease liabilities and long-term operating lease liabilities on the Company's consolidated balance sheets. Finance leases are included in property, plant and equipment, finance lease liabilities and long-term finance leases liabilities on the consolidated balance sheets. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. The Company determined its incremental borrowing rate based on the information available at the lease commencement date. The operating lease ROU assets also include any lease payments made and exclude lease incentives. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise such options. Operating lease expense is generally recognized on a straight-line basis over the lease term. Variable lease payments are expensed as incurred and are not included within the operating lease ROU asset and lease liability calculation. The Company does not record leases on the consolidated balance sheet with a term of one year or less. The Company elected to combine its lease and non-lease components as a single lease component for all asset classes. Revenue recognition The Company determines revenue recognition through the following steps: (1) identification of the contract with a customer; (2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recognition of revenue when, or as, a performance obligation is satisfied. The Company recognizes product revenue at a point in time when product is shipped to the customer, as determined by the agreed upon shipping terms, net of estimated stock rotation returns and price adjustments that it expects to provide to certain distributors. The Company presents revenue net of sales taxes and any similar assessments. Our standard payment terms range from 30 to 60 days. The Company sells its products primarily to distributors, who in turn sell the products globally to various end customers. The Company allows stock rotation returns from certain distributors. Stock rotation returns are governed by contract and are limited to a specified percentage of the monetary value of products purchased by distributors during a specified period. The Company records an allowance for stock rotation returns based on historical returns, current expectations, and individual distributor agreements. The Company also provides special pricing to certain distributors, primarily based on volume, to encourage resale of the Company's products. Allowance for price adjustments is recorded against accounts receivable and the provision for stock rotation rights is included in accrued liabilities on the consolidated balance sheets. The Company's performance obligations relate to contracts with a duration of less than one year. The Company elected to apply the practical expedient provided in ASC 606, “ Revenue from Contracts with Customers ”. Therefore, the Company is not required to disclose the aggregate amount of transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period. The Company recognizes the incremental direct costs of obtaining a contract, which consist of sales commissions, when control over the products they relate to transfers to the customer. Applying the practical expedient, the Company recognizes commissions as expense when incurred, as the amortization period of the commission asset the Company would have otherwise recognized is less than one year. Packaging and testing services revenue is recognized at a point in time upon shipment of serviced products to the customer. License and Development Revenue Recognition In February 2023, the Company entered into a license agreement with a customer, pursuant to which the Company agreed to license its proprietary Silicon Carbide (SiC) technology to the customer and engineering and development services for 24 months for a total fee of $ 45 million, consisting of an upfront fee of $ 18 million and $ 6.8 million paid to the Company in March 2023 and July 2023, respectively, 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 the Company performs the engineering and development services. The Company uses the input method to measure progress, which method represents a faithful depiction of the transfer of services. During the three and six months ended December 31, 2023, the Company recorded license and development revenue of $ 5.5 million and $ 11.1 million, respectively. The amount of contract liability is recorded as deferred revenue on the consolidated balance sheets. 8 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) As of December 31, 2023, the Company had recorded $ 21.1 million of license and development revenue. In addition, the Company also entered an accompanying supply agreement to provide limited wafer supply to the customer. Share-based Compensation Expense The Company maintains an equity-settled, share-based compensation plan to grant restricted share units and stock options. The Company recognizes expense related to share-based compensation awards that are ultimately expected to vest based on estimated fair values on the date of grant. The fair value of restricted share units is based on the fair value of the Company's common share on the date of grant. For restricted stock awards subject to market conditions, the fair value of each restricted stock award is estimated at the date of grant using the Monte-Carlo pricing model. The fair value of stock options is estimated on the date of grant using the Black-Scholes option valuation model. Share-based compensation expense is recognized on the accelerated attribution basis over the requisite service period of the award, which generally equals the vesting period. The Employee Share Purchase Plan (the “ESPP”) is accounted for at fair value on the date of grant using the Black-Scholes option valuation model. Restricted Cash The Company maintains restricted cash in connection with cash balances temporarily restricted for regular business operations. These balances have been excluded from the Company’s cash and cash equivalents balance and are classified as restricted cash in the Company’s Condensed Consolidated Balance Sheets. As of December 31, 2023 and June 30, 2023, the amount of restricted cash was $ 0.2 million and $ 0.4 million, respectively. Equity method investment The Company uses the equity method of accounting when it has the ability to exercise significant influence, but not control, as determined in accordance with generally accepted accounting principles, over the operating and financial policies of the investee. Effective December 1, 2021, the Company reduced its equity interest in the JV Company and no longer controls of the JV Company. As a result, beginning December 2, 2021, the Company records its investment under the equity method of accounting. Since the Company is unable to obtain accurate financial information from the JV Company in a timely manner, the Company records its share of earnings or losses of such affiliate on a one quarter lag. The Company discloses and recognizes intervening events at the JV Company in the lag period that could materially affect its consolidated financial statements, if applicable. The Company records its interest in the net earnings of the equity method investee, along with adjustments for unrealized profits or losses on intra-entity transactions and amortization of basis differences, within earnings or loss from equity interests in the Consolidated Statements of Income. Profits or losses related to intra-entity sales with the equity method investee are eliminated until realized by the investor and investee. Basis differences represent differences between the cost of the investment and the underlying equity in net assets of the investment and are generally amortized over the lives of the related assets that gave rise to them. Equity method goodwill is not amortized or tested for impairment; instead the equity method investment is tested for impairment. The Company reviews for impairment whenever factors indicate that the carrying amount of the investment might not be recoverable. In such a case, the decrease in value is recognized in the period the impairment occurs in the Condensed Consolidated Statements of Income. Valuation of inventories The Company carries inventories at the lower of cost (determined on a first-in, first-out basis) or net realizable value. Cost primarily consists of semiconductor wafers and raw materials, labor, depreciation expenses and other manufacturing expenses and overhead, and packaging and testing fees paid to third parties if subcontractors are used. Valuation of inventories is based on its periodic review of inventory quantities on hand as compared with its sales forecasts, historical usage, aging of inventories, production yield levels and current product selling prices. If actual market conditions are less favorable than those forecasted by the Company, additional future inventory write-downs may be required that could adversely affect its operating results. Adjustments to inventory, once established are not reversed until the related inventory has been sold or scrapped. If actual market conditions are more favorable than expected and the products that have previously been written down are sold, our gross margin would be favorably impacted. 9 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Fair Value of Financial Instruments The fair value of cash equivalents is categorized in Level 1 in the fair value hierarchy. Cash equivalents consist primarily of short-term bank deposits. The carrying values of financial instruments such as cash and cash equivalents, accounts receivable and accounts payable approximate their carrying values due to their short-term maturities. The carrying value of the Company's debt is considered a reasonable estimate of fair value which is estimated by considering the current rates available to the Company for debt of the same remaining maturities, structure, credit risk and terms of the debts. Government Grants The Company occasionally receives government grants that provide financial assistance for certain eligible expenditures in China. These grants include reimbursements on interest expense on bank borrowings, payroll tax credits, credit for property, plant and equipment in a particular geographical location, employment credits, as well as business expansion credits. Government grants are not recognized until there is reasonable assurance that the Company will comply with the conditions attaching to it, and that the grant will be received. The Company records such grants either as a reduction of the related expense, a reduction of the cost of the related asset, or as other income depending upon the nature of the grant. As a result of such grants, during the three and six months ended December 31, 2023, the Company reduced property, plant and equipment by $ 0.4 million and $ 0.4 million, respectively. During the three and six months ended December 31, 2022, the Company reduced property, plant and equipment by $ 0.3 million and $ 0.6 million, and operating expenses by $ 0.1 million and $ 0.1 million, respectively. Accounting for income taxes Income tax expense or benefit is based on income or loss before income taxes. Deferred tax assets and liabilities are recognized principally for the expected tax consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts. The Company is subject to income taxes in a number of jurisdictions. Significant judgment is required in determining the worldwide provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Company establishes accruals for certain tax contingencies based on estimates of whether additional taxes may be due. While the final tax outcome of these matters may differ from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made. The Company is subject to income tax expense or benefit based upon pre-tax income or loss reported in the consolidated statements of income (loss) and the provisions of currently enacted tax laws. The parent company is incorporated under the laws of Bermuda and is subject to Bermuda law with respect to taxation. Under current Bermuda law, the Company is not subject to any income or capital gains taxes in Bermuda. In recent months, the Government of Bermuda announced that it has enacted the Corporate Income Tax Act 2023, potentially imposing a 15% corporate income tax (CIT) that would be taken into account in calculating the effective tax rate of Bermuda businesses under the Organization for Economic Cooperation and Development’s global minimum tax rules, that will be effective for tax years beginning on or after January 1, 2025. The Company is closely analyzing the recently enacted Corporate Income Tax Act 2023 and the related potential tax and financial statement consequences. The new Bermudian CIT may subject us to additional income taxes, which may adversely affect our results of operations. Significant management judgment is also required in determining whether deferred tax assets will be realized in full or in part. When it is more likely than not that all or some portion of specific deferred tax assets such as net operating losses or research and development tax credit carryforwards will not be realized, a valuation allowance must be established for the amount of the deferred tax assets that cannot be realized. The Company considers all available positive and negative evidence on a jurisdiction-by-jurisdiction basis when assessing whether it is more likely than not that deferred tax assets are recoverable. The Company considers evidence such as our past operating results, the existence of cumulative losses in recent years and our forecast of future taxable income. The Financial Accounting Standards Board (FASB), issued guidance which clarifies the accounting for income taxes by prescribing a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. 10 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The minimum threshold is defined as a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely to be realized upon ultimate settlement. Although the guidance on the accounting for uncertainty in income taxes prescribes the use of a recognition and measurement model, the determination of whether an uncertain tax position has met those thresholds will continue to require significant judgment by management. If the ultimate resolution of tax uncertainties is different from what is currently estimated, a material impact on income tax expense could result. The Company's provision for income taxes is subject to volatility and could be adversely impacted by changes in earnings or tax laws and regulations in various jurisdictions. The Company is subject to the continuous examination of our income tax returns by the Internal Revenue Service and other tax authorities. The Company regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. To the extent that the final tax outcome of these matters is different from the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of changes to reserves, as well as the related net interest and penalties. Long-lived Assets The Company reviews all long-lived assets whenever events or changes in circumstance indicate that these assets may not be recoverable. When evaluating long-lived assets, if the Company concludes that the estimated undiscounted cash flows attributable to the assets are less than their carrying value, the Company recognizes an impairment loss based on the excess of the carrying amount of the assets over their respective fair values, which could adversely affect its results of operations. Comprehensive Income Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The Company's accumulated other comprehensive income consists of cumulative foreign currency translation adjustments. Total comprehensive income is presented in the Condensed Consolidated Statements of Comprehensive Income. Recent Accounting Pronouncements Recently Adopted Accounting Standards None Recently Issued Accounting Standards not yet adopted In November 2023, the FASB issued ASU No. 2023-07, “ Segment Reporting (Topic 280) – Improvements to Reportable Segment Disclosures ”, which improves reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. This ASU also expands disclosure requirements to enable users of financial statements to better understand the entity’s measurement and assessment of segment performance and resource allocation. This guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact of the ASU on its disclosures within the Consolidated Financial Statements. In December 2023, the FASB issued ASU No. 2023-09, “ Income Taxes (Topic 740) – Improvements to Income Tax Disclosures ”, which enhances the transparency, effectiveness and comparability of income tax disclosures by requiring consistent categories and greater disaggregation of information related to income tax rate reconciliations and the jurisdictions in which income taxes are paid. This guidance is effective for annual periods beginning after December 15, 2024 with early adoption permitted. The Company is currently evaluating the impact of the ASU on its income tax disclosures within the Consolidated Financial Statements. 11 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 2. Equity Method Investment in Equity Investee On December 1, 2021 (the “Effective Date”), Alpha & Omega Semiconductor (Shanghai) Ltd. (“AOS SH”) and Agape Package Manufacturing (Shanghai) Limited (“APM SH” and, together with AOS SH, the “Sellers”), each a wholly-owned subsidiary of the Company, entered into a share transfer agreement ("STA") with a third-party investor to sell a portion of the Company's equity interest in the JV Company which consists of a power semiconductor packaging, testing and 12-inch wafer fabrication facility in Chongqing, China (the “Transaction”). The Transaction closed on December 2, 2021 (the “Closing Date”), which reduced the Company’s equity interest in the JV Company from 50.9 % to 48.8 %. Also, the Company’s right to designate directors on the board of JV Company was reduced to three (3) out of seven (7) directors, from four (4) directors prior to the Transaction. As a result of the Transaction and other factors, the Company no longer has a controlling financial interest in the JV Company and has determined that the JV Company was deconsolidated from the Company’s Consolidated Financial Statements effective as of the Closing Date. On December 24, 2021, the Company entered into a share transfer agreement with another third-party investor, pursuant to which the Company sold to this investor 1.1 % of outstanding equity interest held by the Company in the JV Company. In addition, the JV Company adopted an employee equity incentive plan and issued an equity interest equivalent to 3.99 % of the JV Company in exchange to cash. As a result of these two transactions, the Company owned 45.8 % of the equity interest in the JV Company as of December 31, 2021. On January 26, 2022, the JV Company completed a financing transaction pursuant to a corporate investment agreement (the “Investment Agreement”) between the JV Company and certain third-party investors (the “New Investors”). Under the Investment Agreement, the New Investors purchased newly issued equity interest of the JV Company, representing approximately 7.82 % of post-transaction outstanding equity interests of the JV Company, for a total purchase price of RMB 509 million (or approximately USD 80 million based on the currency exchange rate as of January 26, 2022) (the “Investment”). Following the closing of the Investment and as of June 30, 2022, the percentage of outstanding JV equity interest beneficially owned by the Company was reduced to 42.2 %. The Company accounts for its investment in the JV Company as an equity method investment and reports its equity in earnings or loss of the JV Company on a three-month lag due to an inability to timely obtain financial information of the JV Company. During the three and six months ended December 31, 2023, the Company recorded a $ 0.7 million loss and $ 3.4 million loss of its equity share of the JV Company, respectively, using lag reporting. During the three and six months ended December 31, 2022, the Company recorded $ 0.5 million and $ 3.0 million of its equity in income of the JV Company, respectively, using lag reporting. As of December 31, 2023, the percentage of outstanding JV equity interest beneficially owned by the Company was 42.2 %. 12 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 3. Related Party Transactions As of December 31, 2023, the Company owned 42.2 % equity interest in the JV Company, which, by definition, is a related party to the Company. The JV Company supplies 12-inch wafers and provides assembly and testing services to AOS. AOS previously sold 8-inch wafers to the JV Company for further assembly and testing services until January 1, 2023, when it changed to consign the 8-inch wafers to the JV Company. Due to the right of offset of receivables and payables with the JV Company, as of December 31, 2023, AOS recorded the net amount of $ 13.0 million as payable related to equity investee, net, in the Condensed Consolidated Balance Sheet. The purchases by AOS for the three and six months ended December 31, 2023 were $ 28.6 million and $ 58.4 million, respectively, and the sales by AOS for the three and six months ended December 31, 2023 were $ 3.0 million and $ 3.7 million, respectively. The purchases by AOS for the three and six months ended December 31, 2022 were $ 39.8 million and $ 85.9 million, respectively, and the sales by AOS for the three and six months ended December 31, 2022 were $ 13.8 million and $ 30.4 million, respectively. 13 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 4. Net Income (Loss) Per Common Share The following table presents the calculation of basic and diluted net income (loss) per share attributable to common shareholders: Three Months Ended December 31, Six Months Ended December 31, 2023 2022 2023 2022 (in thousands, except per share data) Numerator: Net income (loss) $ ( 2,923 ) $ 6,337 $ 2,863 $ 32,375 Denominator: Basic: Weighted average number of common shares used to compute basic net income (loss) per share 27,939 27,511 27,816 27,451 Diluted: Weighted average number of common shares used to compute basic net income (loss) per share 27,939 27,511 27,816 27,451 Effect of potentially dilutive securities: Stock options, RSUs and ESPP shares — 2,065 2,014 2,048 Weighted average number of common shares used to compute diluted net income (loss) per share 27,939 29,576 29,830 29,499 Net income (loss) per share: Basic $ ( 0.10 ) $ 0.23 $ 0.10 $ 1.18 Diluted $ ( 0.10 ) $ 0.21 $ 0.10 $ 1.10 The following potential dilutive securities were excluded from the computation of diluted net income (loss) per share as their effect would have been anti-dilutive: Three Months Ended December 31, Six Months Ended December 31, 2023 2022 2023 2022 (in thousands) (in thousands) Employee stock options and RSUs 1,984 118 90 361 ESPP 1,229 218 324 220 Total potential dilutive securities 3,213 336 414 581 14 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 5. Concentration of Credit Risk and Significant Customers The Company manages its credit risk associated with exposure to distributors and direct customers on outstanding accounts receivable through the application and review of credit approvals, credit ratings and other monitoring procedures. In some instances, the Company also obtains letters of credit from certain customers. Credit sales, which are mainly on credit terms of 30 to 60 days, are only made to customers who meet the Company's credit requirements, while sales to new customers or customers with low credit ratings are usually made on an advance payment basis. The Company considers its trade accounts receivable to be of good credit quality because its key distributors and direct customers have long-standing business relationships with the Company and the Company has not experienced any significant bad debt write-offs of accounts receivable in the past. The Company closely monitors the aging of accounts receivable from its distributors and direct customers, and regularly reviews their financial positions, where available. Summarized below are individual customers whose revenue or accounts receivable balances were 10% or higher than the respective total consolidated amounts: Three Months Ended December 31, Six Months Ended December 31, Percentage of revenue 2023 2022 2023 2022 Customer A 29.3 % 19.8 % 26.5 % 22.0 % Customer B 41.3 % 36.7 % 44.1 % 37.7 % Customer D * 14.6 % * 12.8 % December 31, 2023 June 30, 2023 Percentage of accounts receivable Customer A 29.0 % 15.3 % Customer B * 17.6 % Customer C * 13.3 % Customer D 16.9 % 30.9 % * Less than 10% 15 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 6. Balance Sheet Components Accounts receivable, net: December 31, 2023 June 30, 2023 (in thousands) Accounts receivable $ 77,461 $ 62,426 Less: Allowance for price adjustments ( 45,508 ) ( 39,976 ) Less: Allowance for doubtful accounts ( 30 ) ( 30 ) Accounts receivable, net $ 31,923 $ 22,420 Inventories: December 31, 2023 June 30, 2023 (in thousands) Raw materials $ 86,160 $ 86,620 Work-in-process 80,125 69,426 Finished goods 25,424 27,201 $ 191,709 $ 183,247 Other current assets: December 31, 2023 June 30, 2023 (in thousands) Value-added tax receivable $ 340 $ 275 Other prepaid expenses 3,482 3,863 Prepaid insurance 2,144 4,162 Prepaid maintenance 1,472 1,697 Prepayment to supplier 10,967 10,689 Prepaid income tax 1,010 707 Interest receivable 399 135 Other receivables 695 1,138 $ 20,509 $ 22,666 16 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Property, plant and equipment, net: December 31, 2023 June 30, 2023 (in thousands) Land $ 4,877 $ 4,877 Building and building improvements 26,888 26,478 Manufacturing machinery and equipment 410,788 398,757 Equipment and tooling 35,228 32,737 Computer equipment and software 51,298 49,890 Office furniture and equipment 3,119 3,087 Leasehold improvements 41,218 38,787 573,416 554,613 Less: accumulated depreciation and amortization ( 296,504 ) ( 272,503 ) 276,912 282,110 Equipment and construction in progress 72,134 75,721 Property, plant and equipment, net $ 349,046 $ 357,831 Intangible assets, net: December 31, 2023 June 30, 2023 (in thousands) Patents and technology rights $ 18,037 $ 18,037 Trade name 268 268 Customer relationships 1,150 1,150 19,455 19,455 Less: accumulated amortization ( 14,583 ) ( 12,959 ) 4,872 6,496 Goodwill 269 269 Intangible assets, net $ 5,141 $ 6,765 Estimated future minimum amortization expense of intangible assets is as follows (in thousands): Year ending June 30, 2024 (Remaining) $ 1,625 2025 3,247 $ 4,872 17 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Other long-term assets: December 31, 2023 June 30, 2023 (in thousands) Prepayments for property and equipment $ 2,728 $ 1,717 Investment in a privately held company 100 100 Customs deposit 1,645 931 Deposit with supplier 23,441 12,290 Other long-term deposits 37 37 Office leases deposits 1,405 1,274 Other 4,106 3,354 $ 33,462 $ 19,703 Accrued liabilities: December 31, 2023 June 30, 2023 (in thousands) Accrued compensation and benefits $ 20,176 $ 15,627 Warranty accrual 2,152 1,674 Stock rotation accrual 5,458 5,588 Accrued professional fees 2,009 2,458 Accrued inventory 1,110 1,597 Accrued facilities related expenses 2,620 2,327 Accrued property, plant and equipment 6,355 6,402 Other accrued expenses 4,568 4,401 Customer deposits 31,861 38,082 ESPP payable 1,374 1,377 $ 77,683 $ 79,533 Short-term customer deposits are payments received from customers for securing future product shipments. As of December 31, 2023, $ 10.0 million were from Customer A, $ 9.2 million were from Customer B, and $ 12.7 million were from other customers. As of June 30, 2023, $ 13.5 million were from Customer A, $ 9.2 million were from Customer B, and $ 15.4 million were from other customers. The activities in the warranty accrual, included in accrued liabilities, are as follows: Six Months Ended December 31, 2023 2022 (in thousands) Beginning balance $ 1,674 $ 2,650 Additions 643 628 Utilization ( 165 ) ( 795 ) Ending balance $ 2,152 $ 2,483 18 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The activities in the stock rotation accrual, included in accrued liabilities, are as follows: Six Months Ended December 31, 2023 2022 (in thousands) Beginning balance $ 5,588 $ 4,798 Additions 5,504 6,359 Utilization ( 5,634 ) ( 7,074 ) Ending balance $ 5,458 $ 4,083 Other long-term liabilities: December 31, 2023 June 30, 2023 (in thousands) Customer deposits $ 31,858 $ 46,393 Computer software liabilities 2,485 4,644 Other long-term liabilities $ 34,343 $ 51,037 Customer deposits are payments received from customers for securing future product shipments. As of December 31, 2023, $ 14.0 million were from Customer A, $ 6.0 million were from Customer B, and $ 11.9 million were from other customers. As of June 30, 2023, $ 21.0 million were from Customer A, $ 11.7 million were from Customer B, and $ 13.7 million were from other customers. 19 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 7. Bank Borrowings Short-term borrowings 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 December 31, 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 rate between RMB and U.S. Dollar on January 31, 2023 with a maturity date of December 1, 2023. As of December 31, 2023, there was no outstanding balance and this loan expired. 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 December 31, 2023, there was no outstanding balance and this loan expired. Accounts Receivable Factoring Agreement On August 9, 2019, one of the Company's wholly-owned subsidiaries (the “Borrower”) entered into a factoring agreement with the Hongkong and Shanghai Banking Corporation Limited (“HSBC”), whereby the Borrower assigns certain of its accounts receivable with recourse. This factoring agreement allows the Borrower to borrow up to 70 % of the net amount of its eligible accounts receivable of the Borrower with a maximum amount of $ 30.0 million. The interest rate is based on one month London Interbank Offered Rate (“LIBOR”) plus 1.75 % per annum. The Company is the guarantor for this agreement. The Company is accounting for this transaction as a secured borrowing under the Transfers and Servicing of Financial Assets guidance. In addition, any cash held in the restricted bank account controlled by HSBC has a legal right of offset against the borrowing. This agreement, with certain financial covenants required, has no expiration date. On August 11, 2021, the Borrower signed an agreement with HSBC to reduce the borrowing maximum amount to $ 8.0 million with certain financial covenants required. Other terms remain the same. As of December 31, 2023, the Borrower was in compliance with these covenants. As of December 31, 2023, there was no outstanding balance and the Company had unused credit of approximately $ 8.0 million. Debt financing In September 2021, Jireh Semiconductor Incorporated (“Jireh”), one of the wholly-owned subsidiaries, entered into a financing arrangement agreement with a company (“Lender”) for the lease and purchase of a machinery equipment manufactured by a supplier. This agreement has a 5 years term, after which Jireh has the option to purchase the equipment for $ 1 . The implied interest rate was 4.75 % per annum which was adjustable based on every five basis point increase in 60-month U.S. Treasury Notes, until the final installation and acceptance of the equipment . 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. In June 2022, the equipment was delivered to Jireh after Lender paid 40 % of the total purchase price, for euro 4.8 million, to the supplier on behalf of Jireh. In September 2022, Lender paid the remaining 10 % payment for the total purchase price and reimbursed Jireh for the 50 % down payment, after the installation and configuration of the equipment. The title of the equipment was transferred to Lender following such payment. The agreement was amended with fixed implied interest rate of 7.51 % and monthly payment of principal and interest effective in October 2022. Other terms remain the same. In addition, Jireh purchased hardware for the machine under this financing arrangement. The purchase price of this hardware was $ 0.2 million. The financing arrangement is secured by this equipment and other equipment which had the carrying amount of $ 14.4 million as of December 31, 2023. As of December 31, 2023, the outstanding balance of this debt financing was $ 10.4 million. Long-term bank borrowings On August 18, 2021, Jireh entered into a term loan agreement with a financial institution (the "Bank") in an amount up to $ 45.0 million for the purpose of expanding and upgrading the Company’s fabrication facility located in Oregon. The obligation 20 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) under the loan agreement is secured by substantially all assets of Jireh and guaranteed by the Company. The agreement has a 5.5 year term and matures on February 16, 2027. Jireh is required to make consecutive quarterly payments of principal and interest. The loan accrues interest based on adjusted LIBOR plus the applicable margin based on the outstanding balance of the loan. This agreement contains customary restrictive covenants and includes certain financial covenants that the Company is required to maintain. Jireh drew down $ 45.0 million on February 16, 2022 with the first payment of principal beginning in October 2022. As of December 31, 2023, Jireh was in compliance with these covenants and the outstanding balance of this loan wa s $ 33.8 million. Maturities of short-term debt and long-term debt were as follows (in thousands): Year ending June 30, 2024 (Remaining) $ 5,759 2025 11,664 2026 11,871 2027 14,344 2028 536 Total principal 44,174 Less: debt issuance costs ( 73 ) Total principal, less debt issuance costs $ 44,101 Short-term Debt Long-term Debt Total Principal amount $ 11,566 $ 32,608 $ 44,174 Less: debt issuance costs ( 33 ) ( 40 ) ( 73 ) Total debt, less debt issuance costs $ 11,533 $ 32,568 $ 44,101 8. Leases The Company evaluates contracts for lease accounting at contract inception and assesses lease classification at the lease commencement date. Operating leases are included in operating lease right-of-use (“ROU”) assets, operating lease liabilities and operating lease liabilities - long-term on the Company's Condensed Consolidated Balance Sheets. Finance leases are included in property, plant and equipment, finance lease liabilities and finance lease liabilities-long-term on the Condensed Consolidated Balance Sheets. The Company recognizes a ROU asset and corresponding lease obligation liability at the lease commencement date where the lease obligation liability is measured at the present value of the minimum lease payments. As most of the leases do not provide an implicit rate, the Company uses its incremental borrowing rate at lease commencement. The Company uses an interest rate commensurate with the interest rate to borrow on a collateralized basis over a similar term with an amount equal to the lease payments. Operating leases are primarily related to offices, research and development facilities, sales and marketing facilities, and manufacturing facilities. In addition, long-term supply agreements to lease gas tank equipment and purchase industrial gases are accounted for as operating leases. Lease agreements frequently include renewal provisions and require the Company to pay real estate taxes, insurance and maintenance costs. For operating leases, the amortization of the ROU asset and the accretion of its lease obligation liability result in a single straight-line expense recognized over the lease term. The finance lease is related to the $ 5.1 million of a machinery lease financing with a vendor. In September 2022, the lease was amended to make a monthly payment of principal and interest as a fixed amount effective in October 2022. Other terms remain the same. The amendment was accounted for as a debt modification and no gain or loss was recognized. The Company does not record leases on the Condensed Consolidated Balance Sheets with a term of one year or less. The components of the Company’s operating and finance lease expenses are as follows for the periods presented (in thousands): 21 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Three Months Ended December 31, Six Months Ended December 31, 2023 2022 2023 2022 Operating leases: Fixed rent expense $ 1,485 $ 1,500 $ 3,042 $ 2,913 Variable rent expense 260 241 511 478 Finance lease: Amortization of equipment 129 128 257 265 Interest 72 87 147 144 Short-term leases Short-term lease expenses 47 87 87 167 Total lease expenses $ 1,993 $ 2,043 $ 4,044 $ 3,967 Supplemental balance sheets information related to the Company’s operating and finance leases is as follows (in thousands, except lease term and discount rate): December 31, 2023 June 30, 2023 Operating Leases : ROU assets associated with operating leases $ 25,416 $ 24,349 Finance Lease: Property, plant and equipment, gross $ 5,133 $ 5,133 Accumulated depreciation ( 914 ) ( 657 ) Property, plant and equipment, net $ 4,219 $ 4,476 Weighted average remaining lease term (in years) Operating leases 5.86 6.57 Finance lease 3.75 4.25 Weighted average discount rate Operating leases 4.90 % 4.67 % Finance lease 7.51 % 7.51 % Supplemental cash flow information related to the Company’s operating and finance lease is as follows (in thousands): Six Months Ended December 31, 2023 2022 Cash paid from amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 3,190 $ 2,934 Operating cash flows from finance lease $ 147 $ 144 Financing cash flows from finance lease $ 426 $ 400 Non-cash investing and financing information: Operating lease right-of-use assets obtained in exchange for lease obligations $ 3,588 $ 2,210 Future minimum lease payments are as follows as of December 31, 2023 (in thousands): 22 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Year ending June 30, Operating Leases Finance Leases The remainder of fiscal 2024 $ 3,167 $ 572 2025 5,898 1,144 2026 5,031 1,144 2027 4,111 1,145 2028 3,705 191 Thereafter 8,371 — Total minimum lease payments 30,283 4,196 Less amount representing interest ( 4,106 ) ( 538 ) Total lease liabilities $ 26,177 $ 3,658 23 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 9. Shareholders' Equity and Share-based Compensation Share Repurchase In September 2017, the Board of Directors approved a repurchase program (the “Repurchase Program”) that allowed the Company to repurchase its common shares from the open market pursuant to a pre-established Rule 10b5-1 trading plan or through privately negotiated transactions up to an aggregate of $ 30.0 million. The amount and timing of any repurchases under the Repurchase Program depend on a number of factors, including but not limited to, the trading price, volume and availability of the Company’s common shares. Shares repurchased under this program are accounted for as treasury shares and the total cost of shares repurchased is recorded as a reduction of shareholders' equity. From time to time, treasury shares may be reissued as part of the Company’s share-based compensation programs. Gains on re-issuance of treasury stock are credited to additional paid-in capital; losses are charged to additional paid-in capital to offset the net gains, if any, from previous sales or re-issuance of treasury stock. Any remaining balance of the losses is charged to retained earnings. As of December 31, 2023, the Company had repurchased an aggregate of 7,332,780 shares for a total cost of $ 81.1 million, at an average price of $ 11.01 per share, excluding fees and related expenses. No repurchased shares have been retired. Of the 7,332,780 repurchased shares, 178,349 shares with a weighted average repurchase price of $ 9.94 per share, were reissued at an average price of $ 4.69 per share pursuant to option exercises and vested restricted share units (“RSU”). As of December 31, 2023, no remaining amount was available under the share repurchase program, which has been terminated. Time-based Restric ted Stock Units ( “ TRSU ” ) The following table summarizes the Company's TRSU activities for the six months ended December 31, 2023: Number of Restricted Stock Units Weighted Average Grant Date Fair Value Per Share Weighted Average Remaining Contractual Term (Years) Aggregate Intrinsic Value Nonvested at June 30, 2023 1,385,065 $ 32.48 1.73 $ 45,430,132 Granted 121,951 $ 28.46 Vested ( 82,517 ) $ 30.26 Forfeited ( 24,601 ) $ 34.88 Nonvested at December 31, 2023 1,399,898 $ 32.22 1.34 $ 36,481,342 Market-based Restricted Stock Units ( “ MSU ” ) In December 2021, the Company granted 1.0 million market-based restricted stock units ("MSUs") to certain personnel. The number of shares to be earned at the end of performance period was determined based on the Company’s achievement of specified stock prices and revenue thresholds during the performance period from January 1, 2022 to December 31, 2024 as well as the recipients remaining in continuous service with the Company through such period. The MSU vests in four equal annual installments after the end of performance period. The Company estimated the grant date fair values of its MSUs using a Monte-Carlo simulation model. On September 19, 2023, the Compensation Committee of the Board approved a modification of the terms of MSUs to extend the performance period through December 31, 2025, changed the commencement date for the four-year time-based service period January 1, 2025, and reduced the achievement of specified stock prices and revenue thresholds. The fair value of these MSUs was revalued to reflect the change using a Monte-Carlo simulation model with the following assumptions: risk-free interest rate of 4.94 %, expected term of 2.28 years, expected volatility of 61.38 % and dividend yield of 0 %. The Company recognizes the total compensation cost of the modified MSUs beginning on the modification date over the remaining requisite service periods. The Company recorded $ 1.2 million of expenses for the three months ended December 31, 2023, and a negative $ 5.1 million of expenses for the six months ended December 31, 2023 due to a $ 6.4 million of reversal of the prior recognized expenses. The Company recorded $ 2.1 million and $ 4.1 million of expenses for the three and six months ended December 31, 2022, respectively. During the quarter ended September 30, 2018, the Company granted 1.3 million MSUs to certain personnel. The number of shares to be earned at the end of performance period is determined based on the Company’s achievement of specified stock prices and revenue thresholds during the performance period from January 1, 2019 to December 31, 2021 as well as the recipients remaining in continuous service with the Company through such period. The MSUs vest in four equal annual installments after the end of the performance period. The Company estimated the grant date fair values of its MSUs using a Monte-Carlo simulation model. On August 31, 2020, the Compensation Committee of the Board approved a modification of the terms of MSU to (i) extend the 24 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) performance period through December 31, 2022 and (ii) change the commencement date for the four-year time-based service period to January 1, 2023. The fair value of these MSUs was recalculated to reflect the change as of August 31, 2020 and the unrecognized compensation amount was adjusted to reflect the increase in fair value. The Company recorded $ 0.3 million and $ 0.6 million of expenses for MSUs during the three and six months ended December 31, 2023, respectively, and $ 2.8 million and $ 3.3 million of expenses for MSUs during the three and six months ended December 31, 2022. The following table summarizes the Company's MSUs activities for the six months ended December 31, 2023: Number of Performance-based Restricted Stock Units Weighted Average Grant Date Fair Value Per Share Weighted Average Remaining Contractual Term (Years) Aggregate Intrinsic Value Nonvested at June 30, 2023 2,108,000 $ 25.86 2.96 $ 69,142,400 Granted — $ — Vested ( 275,000 ) $ 5.17 Forfeited — $ — Nonvested at December 31, 2023 1,833,000 $ 28.96 3.37 $ 47,767,980 Performance-based Restricted Stock Units (“PRSUs”) In March each year since year 2017, the Company granted PRSUs to certain personnel. The number of shares to be earned under the PRSUs is determined based on the level of attainment of predetermined financial goals. The PRSUs vest in four equal annual installments from the first anniversary date after the grant date if certain predetermined financial goals were met. The Company recorded approximately $ 0.8 million and $ 1.2 million of e xpens e for these PRSUs during the three and six months ended December 31, 2023, respectively, and $ 1.1 million and $ 2.7 million and for the three and six months ended December 31, 2022, respectively. The following table summarizes the Company’s PRSUs activities for the six months ended December 31, 2023: Number of Performance-based Restricted Stock Units Weighted Average Grant Date Fair Value Per Share Weighted Average Remaining Contractual Term (Years) Aggregate Intrinsic Value Nonvested at June 30, 2023 526,714 $ 32.19 1.78 $ 17,276,219 Granted — $ — Vested — $ — Forfeited — $ — Nonvested at December 31, 2023 526,714 $ 32.19 1.29 $ 13,726,167 Stock Options The Company did no t grant any stock options during the six months ended December 31, 2023 and 2022. The following table summarizes the Company's stock option activities for the six months ended December 31, 2023: 25 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Weighted Weighted Average Average Remaining Number of Exercise Price Contractual Aggregate Shares Per Share Term (in years) Intrinsic Value Outstanding at June 30, 2023 319,375 $ 7.53 0.72 $ 8,071,631 Exercised ( 157,500 ) $ 7.45 $ 1,732,188 Outstanding at December 31, 2023 161,875 $ 7.61 0.25 $ 2,987,294 Options vested and expected to vest 161,875 $ 7.61 0.25 $ 2,987,294 Exercisable at December 31, 2023 161,875 $ 7.61 0.25 $ 2,987,294 Employee Share Purchase Plan (“ESPP”) The assumptions used to estimate the fair values of common shares issued under the ESPP were as follows: Six Months Ended December 31, 2023 Volatility rate 64.0 % Risk-free interest rate 5.2 % Expected term 1.3 years Dividend yield 0 % Share-based Compensation Expense The total share-based compensation expense recognized in the Condensed Consolidated Statements of Income for the periods presented was as follows: Three Months Ended December 31, Six Months Ended December 31, 2023 2022 2023 2022 (in thousands) (in thousands) Cost of goods sold $ 1,504 $ 1,748 $ 1,716 $ 3,536 Research and development 2,417 3,327 2,423 5,821 Selling, general and administrative 4,770 8,016 5,470 14,330 $ 8,691 $ 13,091 $ 9,609 $ 23,687 As of December 31, 2023, total unrecognized compensation cost under the Company's equity plans was $ 48.7 million, which is expected to be recognized over a weighted-average period of 2.5 years. 10. Income Taxes The Company recognized income tax expense of approximately $ 0.9 million and $ 1.7 million for the three months ended December 31, 2023 and 2022, respectively. The income tax expense of $ 0.9 million for the three months ended December 31, 2023 included a $ 0.1 million discrete tax expense. The income tax expense of $ 1.7 million for the three months ended December 31, 2022 included a $ 0.1 million discrete tax expense. Excluding the discrete income tax items, the income tax expense for the three months ended December 31, 2023 and 2022 was $ 0.8 million and $ 1.6 million, respectively, and the effective tax rate for the three months ended December 31, 2023 and 2022 was ( 41.2 )% and 20.2 %, 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 as well as from reporting pretax book loss of $ 2.0 million for the three months ended December 31, 2023 as compared to $ 8.0 million of pretax book income for the three months ended December 31, 2022. The Company recognized income tax expense of approximately $ 2.0 million and $ 3.0 million for the six months ended December 31, 2023 and 2022, respectively. The income tax expense of $ 2.0 million for the six months ended December 31, 2023 included a $ 0.1 million discrete tax expense. The income tax expense of $ 3.0 million for the six months ended December 31, 2022 26 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) included a $ 0.1 million discrete tax expense. Excluding the discrete income tax items, income tax expense for the six months ended December 31, 2023 and 2022 was $ 1.9 million and $ 2.9 million, respectively, and the effective tax rate for the six months ended December 31, 2023 and 2022 was 39.2 % and 8.2 %, 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 as well as from reporting pretax book income of $ 4.9 million for the six months ended December 31, 2023 as compared to $ 35.4 million of pretax book income for the six months ended December 31, 2022. The Company files its income tax returns in the United States and in various foreign jurisdictions. The tax years 2001 to 2023 remain open to examination by U.S. federal and state tax authorities. The tax years 2017 to 2023 remain open to examination by foreign tax authorities. The Company's income tax returns are subject to examinations by the Internal Revenue Service and other tax authorities in various jurisdictions. In accordance with the guidance on the accounting for uncertainty in income taxes, the Company regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of its provision for income taxes. These assessments can require considerable estimates and judgments. As of December 31, 2023, the gross amount of unrecognized tax benefits was approximately $ 9.5 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. If events occur and the payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when the Company determines the liabilities are no longer necessary. The Company does not anticipate any material changes to its uncertain tax positions during the next twelve months. "U.S. 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. tax base. 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 In August 2022 the U.S. enacted the Chip and Science Act of 2022 (the Chips Act). The Chips Act provides incentives to semiconductor chip manufacturers in the United States, including providing a 25% manufacturing investment credits for investments in semiconductor manufacturing property placed in service after December 31, 2022, for which construction begins before January 1, 2027. Property investments qualify for the 25% credit if, among other requirements, the property is integral to the operation of an advanced manufacturing facility, defined as having a primary purpose of manufacturing semiconductors or semiconductor manufacturing equipment. Currently, we are evaluating the impact of the Chips Act to us. “The Inflation Reduction Act”, Enacted August 16, 2022 In August 2022 the United States enacted tax legislation through the Inflation Reduction Act (IRA). The IRA introduces a 15% corporate alternative minimum tax (CAMT) for corporations whose average annual adjusted financial statement income (AFSI) for any consecutive three-tax-year period preceding the applicable tax year exceeds $1 billion. The CAMT is effective for tax years beginning after December 31, 2022. The CAMT is currently not applicable to the Company. Bermuda Corporate Income Tax for Tax Years Beginning in 2025 The Company is subject to income tax expense or benefit based upon pre-tax income or loss reported in the consolidated statements of income (loss) and the provisions of currently enacted tax laws. The parent company is incorporated under the laws of 27 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Bermuda and is subject to Bermuda law with respect to taxation. Under current Bermuda law, the Company is not subject to any income or capital gains taxes in Bermuda. In recent months, the Government of Bermuda announced that it has enacted the Corporate Income Tax Act 2023, potentially imposing a 15% corporate income tax (CIT) that would be taken into account in calculating the effective tax rate of Bermuda businesses under the Organization for Economic Cooperation and Development’s global minimum tax rules, that will be effective for tax years beginning on or after January 1, 2025. The Company is closely analyzing the recently enacted Corporate Income Tax Act 2023 and the related potential tax and financial statement consequences. The new Bermudian CIT may subject us to additional income taxes, which may adversely affect our results of operations. 28 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 11. Segment and Geographic Information The Company is organized as, and operates in, one operating segment: the design, development and supply of power semiconductor products for computing, consumer electronics, communication and industrial applications. The chief operating decision-makers are the Executive Chairman and the Chief Executive Officer. The financial information presented to the Company’s Executive Chairman and Chief Executive Officer is on a consolidated basis, accompanied by information about revenue by customer and geographic region, for purposes of evaluating financial performance and allocating resources. The Company has one business segment, and there are no segment managers who are held accountable for operations, operating results and plans for products or components below the consolidated unit level. Accordingly, the Company reports as a single operating segment. The Company sells its products primarily to distributors in the Asia Pacific region, who in turn sell these products to end customers. Because the Company’s distributors sell their products to end customers which may have a global presence, revenue by geographical location is not necessarily representative of the geographical distribution of sales to end user markets. In February 2023, the Company entered into a license agreement with a customer to license the Company’s proprietary SiC technology and to provide 24-month engineering and development services for a total fee of $ 45 million. The revenue by geographical location in the following tables is based on the country or region in which the products were shipped to: Three Months Ended December 31, Six Months Ended December 31, 2023 2022 2023 2022 (in thousands) (in thousands) Hong Kong $ 124,081 $ 159,301 $ 265,287 $ 331,597 China 30,543 15,730 57,162 43,744 South Korea 4,033 3,642 9,344 6,539 United States 1,005 7,972 2,400 12,456 Other countries 5,623 2,115 11,725 2,900 $ 165,285 $ 188,760 $ 345,918 $ 397,236 The following is a summary of revenue by product type: Three Months Ended December 31, Six Months Ended December 31, 2023 2022 2023 2022 (in thousands) (in thousands) Power discrete $ 108,780 $ 137,582 $ 230,280 $ 282,155 Power IC 50,295 49,972 103,042 112,292 Packaging and testing services 744 1,206 1,489 2,789 License and development services 5,466 — 11,107 — $ 165,285 $ 188,760 $ 345,918 $ 397,236 29 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Long-lived assets, net consisting of property, plant and equipment and operating lease right-of-use assets, net by geographical area are as follows: December 31, 2023 June 30, 2023 (in thousands) China $ 113,151 $ 114,822 United States 257,126 263,083 Other countries 4,185 4,275 $ 374,462 $ 382,180 30 ALPHA AND OMEGA SEMICONDUCTOR LIMITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 12. Commitments and Contingencies Purchase Commitments As of December 31, 2023 and June 30, 2023, the Company had approximately $ 99.5 million and $ 127.5 million, respectively, of outstanding purchase commitments primarily for purchases of semiconductor raw materials, wafers, spare parts, packaging and testing services and others. As of December 31, 2023 and June 30, 2023, the Company had approximately $ 11.4 million and $ 9.7 million, respectively, of capital commitments for the purchase of property and equipment. Other Commitments See Note 7 and Note 8 of the Notes to the Condensed Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q for descriptions of commitments including bank borrowings and leases. Contingencies and Indemnities The Company has in the past, and may from time to time in the future, become involved in legal proceedings arising from the normal course of business activities. The semiconductor industry is characterized by frequent claims and litigation, including claims regarding patent and other intellectual property rights as well as improper hiring practices. Irrespective of the validity of such claims, the Company could incur significant costs in the defense of such claims and suffer adverse effects on its operations. In December 2019, the U.S. Department of Justice (“DOJ”) commenced an investigation into the Company's compliance with export control regulations relating to its business transactions with Huawei and its affiliates (“Huawei”), which were added to the “Entity List” maintained by the Department of Commerce (“DOC”) on May 16, 2019. The Company has been cooperating fully with federal authorities in the investigation, including responding to requests for documents, information and interviews from DOJ in connection with the investigation. In connection with this investigation, DOC requested the Company to suspend shipments of its products to Huawei, and the Company complied with such request, and the Company has not shipped any product to Huawei after December 31, 2019. On January 19, 2024, DOJ informed the Company that it has closed such investigation without any charges. The Company intends to continue cooperating with the DOC in the ongoing civil investigation. DOC has not informed the Company of any specific timeline or schedule under which DOC will complete its review. The Company is a party to a variety of agreements that it has contracted with various third parties. Pursuant to these agreements, the Company may be obligated to indemnify another party to such an agreement with respect to certain matters. Typically, these obligations arise in the context of contracts entered into by the Company, under which the Company customarily agrees to hold the other party harmless against losses arising from a breach of representations and covenants related to such matters as title to assets sold, certain intellectual property rights, specified environmental matters and certain income taxes. In these circumstances, payment by the Company is customarily conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, which procedures typically allow the Company to challenge the other party's claim. Further, the Company's obligations under these agreements may be limited in time and/or amount, and in some instances, the Company may have recourse against third parties for certain payments made by it under these agreements. The Company has not historically paid or recorded any material indemnifications, and no accrual was made at December 31, 2023 and June 30, 2023. The Company has agreed to indemnify its directors and certain employees as permitted by law and pursuant to its Bye-laws, and has entered into indemnification agreements with its directors and executive officers. The Company has not recorded a liability associated with these indemnification arrangements, as it historically has not incurred any material costs associated with such indemnification obligations. Costs associated with such indemnification obligations may be mitigated by insurance coverage that the Company maintains. However, such insurance may not cover any, or may cover only a portion of, the amounts the Company may be required to pay. In addition, the Company may not be able to maintain such insurance coverage at reasonable cost, if at all, in the future. 31