ALPHA & OMEGA SEMICONDUCTOR Ltd 10-Q

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Except for the historical information contained herein, the matters addressed in this Item 2 constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward looking statements include, but are not limited to, statements regarding future financial performance of the Company; the expected ramp up timeline of the 12-inch fab at the JV Company; and other statements and information set forth under the heading “Factors Affecting Our Performance”. Such forward-looking statements are subject to a variety of risks and uncertainties, including those discussed below under the heading “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, that could cause actual results to differ materially from those anticipated by the Company’s management. The Private Securities Litigation Reform Act of 1995 (the “Act”) provides certain “safe harbor” provisions for forward-looking statements. All forward-looking statements made in this Quarterly Report on Form 10-Q are made pursuant to the Act. The Company undertakes no obligation to publicly release the results of any revisions to its forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unexpected events. Unless the context otherwise requires, the words “AOS,” the “Company,” “we,” “us” and “our” refer to Alpha and Omega Semiconductor Limited and its subsidiaries. Management’s discussion should be read in conjunction with management’s discussion included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2024, filed with the Securities and Exchange Commission on August 23, 2024. Overview We are a designer, developer and global supplier of a broad portfolio of power semiconductors. Our portfolio of power semiconductors includes approximately 2,700 products, and has grown significantly with the introduction of over 100 new products in the fiscal year ended June 30, 2024, and over 60 and 130 new products in the fiscal years ended June 30, 2023 and 2022, respectively. During the three months ended September 30, 2024, we introduced an 29 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 935 patents and 53 patent applications in the United States as of September 30, 2024. We also have a total of 1,039 foreign patents, which were based primarily on our research and development efforts through September 30, 2024. We differentiate ourselves by integrating our expertise in technology, design and advanced manufacturing and packaging to optimize product performance and cost. Our portfolio of products targets high-volume applications, including personal computers, graphic cards, game consoles, flat panel TVs, home appliances, power tools, smart phones, battery packs, consumer and industrial motor controls and power supplies for TVs, computers, servers and telecommunications equipment. Our business model leverages global resources, including research and development and manufacturing in the United States and Asia. Our sales and technical support teams are localized in several growing markets. We operate an 8-inch wafer fabrication facility located in Hillsboro, Oregon, or the Oregon Fab, which is critical for us to accelerate proprietary technology development, new product introduction and improve our financial performance. To meet the market demand for the more mature high volume products, we also utilize the wafer manufacturing capacity of selected third party foundries. For assembly and test, we primarily rely upon our in-house facilities in China. In addition, we utilize subcontracting partners for industry standard packages. We believe our in-house packaging and testing capability provides us with a competitive advantage in proprietary packaging technology, product quality, cost and sales cycle time. During the fiscal quarter ended September 30, 2024, 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. As of December 1, 2021, we owned 50.9%, and the Chongqing Funds owned 49.1% of the equity interest in the JV Company. The Joint Venture was accounted under the provisions of the consolidation guidance since we had controlling financial interests until December 1, 2021. On December 1, 2021 (the “Effective Date”), Alpha & Omega Semiconductor (Shanghai) Ltd. (“AOS SH”) and Agape Package Manufacturing (Shanghai) Limited (“APM SH” and, together with AOS SH, the “Sellers”), each a wholly-owned subsidiary of the Company, entered into a share transfer agreement (“STA”) with a third-party investor to sell a portion of the Company's equity interest in the JV Company which consists of a power semiconductor packaging, testing and 12-inch wafer 31 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 had a controlling financial interest in the JV Company. The JV Company was deconsolidated from the Company’s Consolidated Financial Statements effective as of the Closing Date. On December 24, 2021, the Company entered into a share transfer agreement with another third-party investor, pursuant to which the Company sold to this investor 1.1% of outstanding equity interest held by the Company in the JV Company. In addition, the JV Company adopted an employee equity incentive plan and issued an equity interest equivalent to 3.99% of the JV Company in exchange for cash. As a result of these two transactions, the Company owned 45.8% of the equity interest in the JV Company as of December 31, 2021. On January 26, 2022, the JV Company completed a financing transaction pursuant to a corporate investment agreement (the “Investment Agreement”) between the JV Company and certain third-party investors (the “New Investors”). Under the Investment Agreement, the New Investors purchased newly issued equity interest of the JV Company, representing approximately 7.82% of post-transaction outstanding equity interests of the JV Company, for a total purchase price of RMB 509 million (or approximately USD 80 million based on the currency exchange rate as of January 26, 2022) (the “Investment”). Following the closing of the January 26, 2022 Investment, the percentage of outstanding JV equity interest beneficially owned by the Company was reduced to 42.2% at June 30, 2022. In February 2024, the JV Company repurchased certain shares that were previously issued to employees under the employee equity incentive plan, which increased the Company’s percentage of equity ownership in the JV Company by 0.54%. As of September 30, 2024, the percentage of outstanding JV equity interest beneficially owned by the Company was 42.8%. We reduced our ownership of the JV Company to below 50% to increase the flexibility of the JV Company to raise capital to fund its future expansion. The JV Company is also contemplating an eventual listing on the Science and Technology Innovation Board, or STAR Market, of the Shanghai Stock Exchange. The reduction of our ownership assists the JV Company in meeting certain regulatory listing requirements. A potential STAR Market listing may take several years to consummate and there is no guarantee that such listing by the JV Company will be successful or will be completed in a timely manner, or at all. In addition, the JV Company will continue to provide us with significant level of foundry capacity to enable us to develop and manufacture our products. On July 12, 2022, the current shareholders of the JV Company entered into a shareholders contract, pursuant to which the JV Company committed to provide us with a monthly wafer production capacity until December 2023, and additional commitment to provide wafer capacity after December 2023 if the JV Company’s production capacity reaches certain specified level. Other Factors affecting our Performance The global, regional economic and PC market conditions : 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. 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. A decline of the PC market may have a negative impact on our revenue, factory utilization, gross margin, our ability to resell excess inventory, and other performance measures. We have executed and continue to execute strategies to diversify our product portfolio, penetrate other market segments, including the consumer, communications and industrial markets, and improve gross margins and profit by implementing cost control measures. While making efforts to reduce our reliance on the computing market, we continue to support our computing business and capitalize on the opportunities in this market with a more focused and competitive PC product strategy to gain market share. Manufacturing costs and capacity availability: Our gross margin is affected by a number of factors including our manufacturing costs, utilization of our manufacturing facilities, the product mixes of our sales, pricing of wafers from third party foundries and pricing of semiconductor raw materials. Capacity utilization affects our gross margin because we have certain fixed costs at our Shanghai facilities and our Oregon Fab. If we are unable to utilize our manufacturing facilities at a desired level, our gross margin may be adversely affected. In addition, from time to time, we may experience wafer capacity constraints, particularly at third party foundries, that may prevent us from meeting fully the demand of our customers. 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. We also rely on the JV 32 Company to provide foundry capacity to manufacture our products, therefore it is important that we maintain continuous access to such capacity, which may not be available at sufficient level or at pricing terms favorable to us because of lack of control over the JV Company’s operation. We continue to maintain a business relationship with the JV Company to ensure uninterrupted supply of manufacturing capacity. Because we continue to rely on the JV Company to provide us with manufacturing capacity, if the JV Company take actions or make decisions that prevents us from accessing required capacity, our operations may be adversely affected. Erosion and fluctuation of average selling price: Erosion of average selling prices of established products is typical in our industry. Consistent with this historical trend, we expect our average selling prices of our existing products to decline in the future. However, in the normal course of business, we seek to offset the effect of declining average selling price by introducing new and higher value products, expanding existing products for new applications and new customers and reducing the manufacturing cost of existing products. These strategies may cause the average selling price of our products to fluctuate significantly from time to time, thereby affecting our financial performance and profitability. Product introductions and customers’ product requirements: Our success depends on our ability to introduce products on a timely basis that meet or are compatible with our customers' specifications and performance requirements. Both factors, timeliness of product introductions and conformance to customers' requirements, are equally important in securing design wins with our customers. As we accelerate the development of new technology platforms, we expect to increase the pace at which we introduce new products and seek and acquire design wins. If we were to fail to introduce new products on a timely basis that meet customers’ specifications and performance requirements, particularly those products with major OEM customers, and continue to expand our serviceable markets, then we would lose market share and our financial performance would be adversely affected. Distributor ordering patterns, customer demand and seasonality: Our distributors place purchase orders with us based on their forecasts of end customer demand, and this demand may vary significantly depending on the sales outlook and market and economic conditions of end customers. Because these forecasts may not be accurate, channel inventory held at our distributors may fluctuate significantly, which in turn may prompt distributors to make significant adjustments to their purchase orders placed with us. As a result, our revenue and operating results may fluctuate significantly from quarter to quarter. In addition, because our products are used in consumer electronics products, our revenue is subject to seasonality. Our sales seasonality is affected by numerous factors, including global and regional economic conditions as well as the PC market conditions, revenue generated from new products, changes in distributor ordering patterns in response to channel inventory adjustments and end customer demand for our products and fluctuations in consumer purchase patterns prior to major holiday seasons. In recent periods, broad fluctuations in the semiconductor markets and the global and regional economic conditions, in particular the changing PC market conditions, have had a more significant impact on our results of operations than seasonality. Furthermore, our revenue may be impacted by the level of demand from our major customers due to factors outside of our control. If these major customers experience significant decline in the demand of their products, encounter difficulties or defects in their products, or otherwise fail to execute their sales and marketing strategies successfully, it may adversely affect our revenue and results of operations. 33 Principal line items of condensed consolidated statements of income (loss) The following describes the principal line items set forth in our Condensed Consolidated Statements of Income (loss). Revenue We generate revenue primarily from the sale of power semiconductors, consisting of power discretes and power ICs. Historically, a majority of our revenue has been derived from power discrete products. Because our products typically have three-year to five-year life cycles, the rate of new product introduction is an important driver of revenue growth over time. We believe that expanding the breadth of our product portfolio is important to our business prospects, because it provides us with an opportunity to increase our total bill-of-materials within an electronic system and to address the power requirements of additional electronic systems. In addition, a small percentage of our total revenue is generated by providing packaging and testing services to third parties through one of our in-house facilities. Our product revenue is reported net of the effect of the estimated stock rotation returns and price adjustments that we expect to provide to our distributors. Stock rotation returns are governed by contract and are limited to a specified percentage of the monetary value of products purchased by the distributor during a specified period. At our discretion or upon our direct negotiations with the original design manufacturers (“ODMs”) or original equipment manufacturers (“OEMs”), we may elect to grant special pricing that is below the prices at which we sold our products to the distributors. In certain situations, we will grant price adjustments to the distributors reflecting such special pricing. We estimate the price adjustments for inventory at the distributors based on factors such as distributor inventory levels, forecasted 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-months of engineering and development services for a total fee of $45.0 million, consisting of an upfront fee and milestone payments of $18.0 million, $6.8 million and $9.0 million paid to us in the March 2023, July 2023 and February 2024, 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 we perform the engineering and development services. We use the input method to measure progression of the transfer of services. During three months ended September 30, 2024 and 2023, we recorded $5.6 million and $5.6 million of license and development revenue, respectively. As of September 30, 2024, we had recorded a total of $36.8 million of license and development revenue. When our performance under the contract precedes our receipt of consideration from the customer, and the receipt of consideration is conditional upon factors other than the passage of time, a contract asset is recorded. We also entered an accompanying supply agreement to provide limited wafer supply to the customer. Cost of goods sold Our cost of goods sold primarily consists of costs associated with semiconductor wafers, packaging and testing, personnel, including share-based compensation expense, overhead attributable to manufacturing, operations and procurement, and costs associated with yield improvements, capacity utilization, warranty and valuation of inventories. As the volume of sales increases, we expect cost of goods sold to increase. While our utilization rates cannot be immune to the market conditions, our goal is to make them less vulnerable to market fluctuations. We believe our market diversification strategy and product growth will drive higher volume of manufacturing which will improve our factory utilization rates and gross margin in the long run. Operating expenses Our operating expenses consist of research and development, and selling, general and administrative expenses. We expect our operating expenses as a percentage of revenue to fluctuate from period to period as we continue to exercise cost control measures in response to the declining PC market as well as align our operating expenses to the revenue level. Research and development expenses . Our research and development expenses consist primarily of salaries, bonuses, benefits, share-based compensation expense, expenses associated with new product prototypes, travel expenses, fees for engineering services provided by outside contractors and consultants, amortization of software and design tools, depreciation of equipment and overhead costs. We continue to invest in developing new technologies and products utilizing our own fabrication and packaging facilities as it is critical to our long-term success. We also evaluate appropriate investment levels and stay focused on new product introductions to improve our competitiveness. We expect that our research and development expenses will fluctuate from time to time. 34 Selling, general and administrative expenses. Our selling, general and administrative expenses consist primarily of salaries, bonuses, benefits, share-based compensation expense, product promotion costs, occupancy costs, travel expenses, expenses related to sales and marketing activities, amortization of software, depreciation of equipment, maintenance costs and other expenses for general and administrative functions as well as costs for outside professional services, including legal, audit and accounting services. We expect our selling, general and administrative expenses to fluctuate in the near future as we continue to exercise cost control measures. Income tax expense We are subject to income taxes in various jurisdictions. The Company’s interim period tax provision for (benefit from) income taxes is determined using an estimate of its annual effective tax rate, adjusted for discrete items, if any, that arise during the period. Each quarter, the Company updates its estimate of the annual effective tax rate, and if the estimated annual effective tax rate changes, the Company makes a cumulative adjustment in such period. The Company’s quarterly tax provision and estimate of its annual effective tax rate are subject to variation due to several factors, including variability in accurately predicting its pre-tax income or loss and the mix of jurisdictions to which they relate, and changes in how the Company does business. Significant judgment and estimates are required in determining our worldwide income tax expense. The calculation of tax liabilities involves dealing with uncertainties in the application of complex tax regulations of different jurisdictions globally. We establish accruals for potential liabilities and contingencies based on a more likely than not threshold to the recognition and de-recognition of uncertain tax positions. If the recognition threshold is met, the applicable accounting guidance permits us to recognize a tax benefit measured at the largest amount of tax benefit that is more likely than not to be realized upon settlement with a taxing authority. If the actual tax outcome of such exposures is different from the amounts that were initially recorded, the differences will impact the income tax and deferred tax provisions in the period in which such determination is made. Changes in the location of taxable income (loss) could result in significant changes in our income tax expense. We record a valuation allowance against deferred tax assets if it is more likely than not that a portion of the deferred tax assets will not be realized, based on historical profitability and our estimate of future taxable income in a particular jurisdiction. Our judgments regarding future taxable income may change due to changes in market conditions, changes in tax laws, tax planning strategies or other factors. If our assumptions and consequently our estimates change in the future, the deferred tax assets may increase or decrease, resulting in corresponding changes in income tax expense. Our effective tax rate is highly dependent upon the geographic distribution of our worldwide profits or losses, the tax laws and regulations in each geographical region where we have operations, the availability of tax credits and carry-forwards and the effectiveness of our tax planning strategies. “The Chip and Science Act of 2022”, Enacted August 2, 2022 In August 2022 the U.S. enacted the Chip and Science Act of 2022 (the Chips Act). The Chips Act provides incentives to semiconductor chip manufacturers in the United States, including providing 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. 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 31 December 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 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. As we have previously disclosed, the Government of Bermuda announced in December 2023 that it enacted the Corporate Income Tax Act 2023, potentially imposing a 15% corporate income tax (CIT) on Bermuda companies that are within the scope of the CIT, that will be effective for tax years beginning on or after 35 January 1, 2025. In particular, the CIT applies to multinational companies with annual revenue of 750 million euros or more in the consolidated financial statements of the ultimate parent entity for at least two of the four fiscal years immediately preceding the fiscal year when the CIT may apply. The Company is not in a position to determine whether the annual revenues may meet and/or cross the 750 million Euro threshold for at least two of the four fiscal years immediately preceding the fiscal year when CIT may apply. The Company continues to monitor and assess if and when it may be within the scope of the CIT. If we become subject to the Bermuda CIT, we may be subject to additional income taxes, which may adversely affect our financial position, results of operations and our overall business. Equity method investment income/loss from equity investee We use the equity method of accounting when we have the ability to exercise significant influence, but we do not have control, as determined in accordance with generally accepted accounting principles, over the operating and financial policies of the company. Effective December 2, 2021, we reduced our equity interest in the JV Company below 50% of outstanding equity ownership and experienced a loss of control of the JV Company. As a result, we record our investment under equity method of accounting. Since we are unable to obtain accurate financial information from the JV Company in a timely manner, we record our share of earnings or losses of such affiliate on a one quarter lag. We record our interest in the net earnings of the equity method investee, along with adjustments for unrealized profits or losses on intra-entity transactions and amortization of basis differences, within earnings or loss from equity interests in the Consolidated Statements of Operations. Profits or losses related to intra-entity sales with the equity method investee are eliminated until realized by the investor or investee. Basis differences represent differences between the cost of the investment and the underlying equity in net assets of the investment and are generally amortized over the lives of the related assets that gave rise to them. Equity method goodwill is not amortized or tested for impairment. Instead the total equity method investment balance, including equity method goodwill, is tested for impairment. We review for impairment whenever factors indicate that the carrying amount of the investment might not be recoverable. In such a case, the decrease in value is recognized in the period the impairment occurs in the Consolidated Statement of Operations. Results of Operations The following tables set forth statements of income (loss), also expressed as a percentage of revenue, for three months ended September 30, 2024 and 2023. Our historical results of operations are not necessarily indicative of the results for any future period. Three Months Ended September 30, 2024 2023 2024 2023 (in thousands) (% of revenue) Revenue $ 181,887 $ 180,633 100.0 % 100.0 % Cost of goods sold 137,361 129,708 75.5 % 71.8 % Gross profit 44,526 50,925 24.5 % 28.2 % Operating expenses Research and development 22,478 22,113 12.4 % 12.2 % Selling, general and administrative 22,300 19,431 12.3 % 10.8 % Total operating expenses 44,778 41,544 24.7 % 23.0 % Operating income (loss) (252) 9,381 (0.2) % 5.2 % Other income (loss), net (650) 26 (0.4) % — % Interest income, net 453 229 0.2 % 0.1 % Net income (loss) before income taxes (449) 9,636 (0.4) % 5.3 % Income tax expense 1,040 1,138 0.6 % 0.6 % Net income (loss) before loss from equity method investment (1,489) 8,498 (1.0) % 4.7 % Equity method investment loss from equity investee (1,007) (2,712) (0.6) % (1.5) % Net income (loss) $ (2,496) $ 5,786 (1.6) % 3.2 % 36 Share-based compensation expense was recorded as follows: Three Months Ended September 30, 2024 2023 2024 2023 (in thousands) (% of revenue) Cost of goods sold $ 1,015 $ 212 0.6 % 0.1 % Research and development 1,935 6 1.1 % — % Selling, general and administrative 3,952 700 2.2 % 0.4 % Total $ 6,902 $ 918 3.9 % 0.5 % Three Months Ended September 30, 2024 and 2023 Revenue The following is a summary of revenue by product type: Three Months Ended September 30, 2024 2023 Change (in thousands) (in thousands) (in percentage) Power discrete $ 122,454 $ 121,500 $ 954 0.8 % Power IC 52,940 52,747 193 0.4 % Packaging and testing services and other 852 745 107 14.4 % License and development services 5,641 5,641 — — % $ 181,887 $ 180,633 $ 1,254 0.7 % The following is a summary of revenue by end market: Three Months Ended September 30, 2024 2023 2024 2023 (in thousands) (% of revenue) Computing $ 76,411 $ 70,350 42.0 % 38.9 % Consumer 31,696 31,090 17.4 % 17.2 % Communication 35,426 31,027 19.5 % 17.2 % Power Supply and Industrial 31,861 41,780 17.5 % 23.2 % Packaging and testing services and other 852 745 0.5 % 0.4 % License and development services 5,641 5,641 3.1 % 3.1 % $ 181,887 $ 180,633 100.0 % 100.0 % Total revenue was $181.9 million for the three months ended September 30, 2024, an increase of $1.3 million, or 0.7%, as compared to $180.6 million for the same quarter last year. The increase was primarily due to an increase of $1.0 million and $0.2 million in sales of power discrete products and sales of power IC products, respectively. The increase in power discrete and power IC product sales was primarily due to a 15.8% increase in unit shipments, partially offset by a 13.1% decrease in average selling prices compared to same quarter last year due to a shift in product mix. The increase in revenues was primarily driven by a significant increase in the computing markets, particularly in artificial intelligence and tablet products, as well as an increase in the communication markets, particular in battery, partially offset by a decrease in power supply and industrial markets, particularly in quick chargers. The revenue of packaging and testing services and other for the three months ended September 30, 2024, as compared to same quarter last year, remained flat. The license and development services for the three months ended September 30, 2024 and 2023 was related to the license agreement signed in February 2023 with a customer to license our proprietary SiC technology and to provide 24-month engineering and development services. 37 Cost of goods sold and gross profit Three Months Ended September 30, 2024 2023 Change (in thousands) (in thousands) (in percentage) Cost of goods sold $ 137,361 $ 129,708 $ 7,653 5.9 % Percentage of revenue 75.5 % 71.8 % Gross profit $ 44,526 $ 50,925 $ (6,399) (12.6) % Percentage of revenue 24.5 % 28.2 % Cost of goods sold was $137.4 million for the three months ended September 30, 2024, an increase of $7.7 million or 5.9%, as compared to $129.7 million for the same quarter last year. The increase was primarily due to 0.7% increase in revenue. Gross margin decreased by 3.7 percentage points to 24.5% for the three months ended September 30, 2024, as compared to 28.2% 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, 2024. Research and development expenses Three Months Ended September 30, 2024 2023 Change (in thousands) (in thousands) (in percentage) Research and development expenses $ 22,478 $ 22,113 $ 365 1.7 % Research and development expenses were $22.5 million for the three months ended September 30, 2024, an increase of $0.4 million, or 1.7%, as compared to $22.1 million for the same quarter last year. The increase was primarily attributable to a $1.9 million increase in share-based compensation expense as a result of a modification of market-based restricted stock units in August 2024, partially offset by a $0.9 million decrease in product prototyping engineering expense as a result of decreased engineering activities, as well as a $0.6 million decrease in employee compensation and benefit expense mainly due to decreased headcount and lower bonus expense. Selling, general and administrative expenses Three Months Ended September 30, 2024 2023 Change (in thousands) (in thousands) (in percentage) Selling, general and administrative $ 22,300 $ 19,431 $ 2,869 14.8 % Selling, general and administrative expenses were $22.3 million for the three months ended September 30, 2024, an increase of $2.9 million, or 14.8%, as compared to $19.4 million for the same quarter last year. The increase was primarily due to a $3.3 million increase in share-based compensation expense as a result of a modification of market-based restricted stock units in August 2024, and $0.2 million increase in employee compensation and benefits expenses primarily due to increased headcount, partially offset by a $0.4 million decrease in audit fees, a $0.2 million decrease in legal fees and $0.1 million decrease in consulting fees. Other income (loss), net Three Months Ended September 30, 2024 2023 Change (in thousands) (in thousands) (in percentage) Other income (loss), net $ (650) $ 26 $ (676) (2,600.0) % 38 Other income (loss), net decreased by $0.7 million in the three months ended September 30, 2024 as compared to the same period last year primarily due to $0.1 million of an impairment of a privately-held investment, as well as an increase in foreign currency exchange loss as a result of the depreciation of RMB against USD. Interest income, net Three Months Ended September 30, 2024 2023 Change (in thousands) (in thousands) (in percentage) Interest income, net $ 453 $ 229 $ 224 97.8 % Interest income (expense), net increased by $0.2 million during the three months ended September 30, 2024 as compared to the same quarter last year primarily due to lower interest expense as a result of less outstanding loan balance in current quarter. Income tax expense Three Months Ended September 30, 2024 2023 Change (in thousands) (in thousands) (in percentage) Income tax expense $ 1,040 $ 1,138 $ (98) (8.6) % The Company recognized income tax expense of approximately $1.0 million and $1.1 million for the three months ended September 30, 2024 and 2023, respectively. The income tax expense of $1.0 million for the three months ended September 30, 2024 included a $0.08 million discrete tax expense. The income tax expense of $1.1 million for the three months ended September 30, 2023 included a $0.05 million discrete tax expense. Excluding the discrete income tax items, the income tax expense for the three months ended September 30, 2024 and 2023 was $1.0 million and $1.1 million, respectively, and the effective tax rate for the three months ended September 30, 2024 and 2023 was (65.8)% and 15.7%, 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 $1.5 million for the three months ended September 30, 2024 as compared to $6.9 million of pretax book income for the three months ended September 30, 2023. The Company files its income tax returns in the United States and in various foreign jurisdictions. The tax years 2004 to 2024 remain open to examination by U.S. federal and state tax authorities. The tax years 2018 to 2024 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 September 30, 2024, the gross amount of unrecognized tax benefits was approximately $10.1 million, of which $6.9 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. Liquidity and Capital Resources Our principal need for liquidity and capital resources is to maintain sufficient working capital to support our operations and to invest adequate capital expenditures to grow our business. To date, we finance our operations and capital expenditures primarily through funds generated from operations and borrowings under our term loans, financing lease and other debt agreements. 39 In March 2024, Bank of Communications Limited in China provided a line of credit facility to one of the Company's subsidiaries 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 $20.0 million based on currency exchange rate between RMB and U.S. Dollar on September 30, 2024 with a maturity date of March 15, 2025 . As of September 30, 2024, there was no outstanding balance for this loan. In December 2023, Industrial and Commercial Bank of China provided a line of credit facility to one of the Company's subsidiaries in 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 30, 2024, with a maturity date of December 31, 2024. As of September 30, 2024, there was no outstanding balance for this loan . In September 2023, China Construction Bank provided a line of credit facility to one of the Company's subsidiaries in China. The purpose of the credit facility is to provide working capital borrowings. The Company could borrow up to approximately RMB 50 million or $7.1 million based on currency exchange rate between RMB and U.S. Dollar on September 30, 2024 with a maturity date of September 8, 2025. As of September 30, 2024, there was no outstanding balance for this loan. 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 $45.0 million, consisted of an upfront fee and milestone payments of $18.0 million, $6.8 million and $9.0 million paid to us in the March, July 2023 and February 2024, 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 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 net book value of $13.2 million as of September 30, 2024. As of September 30, 2024, the outstanding balance of this debt financing was $8.5 million. On August 18, 2021, Jireh entered into a term loan agreement with a financial institution (the “Bank”) in an amount up to $45.0 million for the purpose of expanding and upgrading the Company’s fabrication facility located in Oregon. The obligation under the loan agreement is secured by substantially all assets of Jireh and guaranteed by the Company. The agreement has a 5.5 year term and matures on February 16, 2027. Jireh is required to make consecutive quarterly payments of principal and interest. The loan accrues interest based on adjusted SOFR plus the applicable margin based on the outstanding balance of the loan. This agreement contains customary restrictive covenants and includes certain financial covenants that the Company is required to maintain. Jireh drew down $45.0 million on February 16, 2022 with the first payment of principal beginning in October 2022. As of September 30, 2024, Jireh was in compliance with these covenants and the outstanding balance of this loan wa s $27.0 million. On August 9, 2019, one of the Company's wholly-owned subsidiaries (the “Borrower”) entered into a factoring agreement with 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 the Secured Overnight Financing Rate (“SOFR”), plus 2.01% per annum. The Company is the guarantor for this agreement. The Company is accounting for this transaction as a secured borrowing. 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 September 30, 2024, the 40 Borrower was in compliance with these covenants. As of September 30, 2024, 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. 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 debt financing. The incurrence of indebtedness would result in increased debt service obligations and may include operating and financial covenants that would restrict our operations. If we decide to raise capital through equity financing, the issuance of additional equity may result in dilution to our shareholders. We cannot be certain that any financing will be available in the amounts we need or on terms acceptable to us, if at all. Cash, cash equivalents and restricted cash As of September 30, 2024 and June 30, 2024, we h a d $176.2 million and $175.5 million of cash, cash equivalents and restricted cash, respectively. Our cash, cash equivalents and restricted cash primarily consist of cash on hand, restricted cash, and short-term bank deposits with original maturities of three months or less. Of the $176.2 million and $175.5 million cash, cash equivalents and restricted cash, $92.7 million and $55.0 million, respectively, are deposited with financial institutions outside the United States. The following table shows our cash flows from operating, investing and financing activities for the periods indicated: Three Months Ended September 30, 2024 2023 (in thousands) Net cash provided by operating activities $ 11,021 $ 13,823 Net cash used in investing activities (6,738) (12,510) Net cash used in financing activities (3,706) (2,999) Effect of exchange rate changes on cash, cash equivalents and restricted cash 105 (135) Net increase (decrease) in cash, cash equivalents and restricted cash $ 682 $ (1,821) Cash flows from operating activities Net cash provided by operating activities of $11.0 million for the three months ended September 30, 2024 resulted primarily from net loss of $2.5 million and non-cash expenses of $22.4 million, partially offset by net changes in assets and liabilities using cash of $8.8 million. The non-cash expenses of $22.4 million primarily included $6.9 million of share-based compensation expense, $14.6 million of depreciation and amortization expenses, $1.0 million of loss from equity investment, $0.1 million of impairment of a privately-held investment and $0.2 million of deferred income taxes. The net changes in assets and liabilities of $8.8 million were primarily due to a $12.0 million increase in accounts receivable as a result of timing of the shipments and payments collected, a $3.1 million increase in contract assets, a $0.1 million increase in other current and long-term assets due to increase in advance payments to vendors, a $2.6 million decrease in deferred revenue, a $4.7 million decrease in accrued and other liabilities, and a $1.5 million decrease in accounts payable due to timing of payments, partially offset by $10.8 million decrease in inventories, a $3.5 million increase in net payable to equity investee, and $0.6 million increase in income taxes payable. Cash flows from investing activities Net cash used in investing activities of $6.7 million for the three months ended September 30, 2024 was primarily attributable to $6.9 million in purchases of property and equipment, partially offset by $0.2 million government grants related to equipment. Cash flows from financing activities Net cash used in financing activities of $3.7 million for the three months ended September 30, 2024 was primarily attributable to $2.9 million in repayments of borrowings, $0.2 million in payment of finance lease obligations, and $0.7 million in common shares acquired to settle withholding tax related to vesting of restricted stock units, partially offset by $0.1 million of proceeds from exercise of stock options. 41 Commitments See Note 12 of the Notes to the Condensed Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q for a description of commitments. Off-Balance Sheet Arrangements As of September 30, 2024, we had no off-balance sheet arrangements. Contractual Obligations There were no material changes outside of our ordinary course of business in our contractual obligations from those disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2024. Recent Accounting Pronouncements See Note 1 of the Notes to the Condensed Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q for a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on results of operations and financial condition, which is incorporated herein by reference. 42 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in the market risks previously disclosed in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of our Annual Report on Form 10-K for the year ended June 30, 2024, filed with the SEC on August 23, 2024.