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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 26, 2021
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number 0-21154
__________________________________________ 
WOLFSPEED, INC.
(Exact name of registrant as specified in its charter)
North Carolina   56-1572719
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
4600 Silicon Drive  
Durham North Carolina 27703
(Address of principal executive offices)   (Zip Code)
(919) 407-5300
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, $0.00125 par value WOLF New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Securities Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes No
The number of shares outstanding of the registrant’s common stock, par value $0.00125 per share, as of October 22, 2021, was 116,217,170.


WOLFSPEED, INC.
FORM 10-Q
For the Quarterly Period Ended September 26, 2021

2

PART I - FINANCIAL INFORMATION

3

WOLFSPEED, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
in millions of U.S. Dollars, except share data in thousands September 26, 2021 June 27, 2021
Assets
Current assets:
Cash and cash equivalents $261.5  $379.0 
Short-term investments 596.3  775.6 
Total cash, cash equivalents and short-term investments 857.8  1,154.6 
Accounts receivable, net 106.4  95.9 
Inventories 183.0  166.6 
Income taxes receivable 6.5  6.4 
Prepaid expenses 33.3  25.7 
Other current assets 43.2  27.9 
Current assets held for sale 1.7  1.6 
Total current assets 1,231.9  1,478.7 
Property and equipment, net 1,343.3  1,292.3 
Goodwill 359.2  359.2 
Intangible assets, net 136.5  140.5 
Long-term receivables 140.0  138.4 
Deferred tax assets 1.0  1.0 
Other assets 36.9  35.5 
Long-term assets of discontinued operations —  1.2 
Total assets $3,248.8  $3,446.8 
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expenses $247.7  $381.1 
Accrued contract liabilities 25.6  22.9 
Income taxes payable 0.4  0.4 
Finance lease liabilities 8.7  5.2 
Other current liabilities 36.6  38.6 
Current liabilities of discontinued operations —  0.6 
Total current liabilities 319.0  448.8 
Long-term liabilities:
Convertible notes, net 834.4  823.9 
Deferred tax liabilities 2.7  2.5 
Finance lease liabilities - long-term 9.9  10.0 
Other long-term liabilities 43.4  44.5 
Long-term liabilities of discontinued operations —  0.6 
Total long-term liabilities 890.4  881.5 
Commitments and contingencies
Shareholders’ equity:
Preferred stock, par value $0.01; 3,000 shares authorized at September 26, 2021 and June 27, 2021; none issued and outstanding
—  — 
Common stock, par value $0.00125; 200,000 shares authorized at September 26, 2021 and June 27, 2021; 116,186 and 115,691 shares issued and outstanding at September 26, 2021 and June 27, 2021, respectively
0.1  0.1 
Additional paid-in-capital 3,670.6  3,676.8 
Accumulated other comprehensive income 1.9  2.7 
Accumulated deficit (1,633.2) (1,563.1)
Total shareholders’ equity 2,039.4  2,116.5 
Total liabilities and shareholders’ equity $3,248.8  $3,446.8 
The accompanying notes are an integral part of the consolidated financial statements
4

WOLFSPEED, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
 
  Three months ended
  September 26, 2021 September 27, 2020
in millions of U.S. Dollars, except share data
Revenue, net $156.6  $115.5 
Cost of revenue, net 107.2  80.0 
Gross profit 49.4  35.5 
Operating expenses:
Research and development 49.9  41.2 
Sales, general and administrative 49.0  44.0 
Amortization or impairment of acquisition-related intangibles 3.6  3.6 
(Gain) loss on disposal or impairment of other assets (0.2) 0.3 
Other operating expense 12.8  8.6 
Operating loss (65.7) (62.2)
Non-operating expense, net 4.1  13.9 
Loss before income taxes (69.8) (76.1)
Income tax expense (benefit) 0.3  (0.8)
Net loss from continuing operations (70.1) (75.3)
Net loss from discontinued operations —  (108.8)
Net loss (70.1) (184.1)
Net income from discontinued operations attributable to noncontrolling interest —  0.3 
Net loss attributable to controlling interest ($70.1) ($184.4)
Basic and diluted loss per share
Continuing operations ($0.60) ($0.69)
Net loss attributable to controlling interest ($0.60) ($1.68)
Weighted average shares - basic and diluted (in thousands) 115,919  109,705 
The accompanying notes are an integral part of the consolidated financial statements
5

WOLFSPEED, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
  Three months ended
(in millions of U.S. Dollars) September 26, 2021 September 27, 2020
Net loss ($70.1) ($184.1)
Other comprehensive loss:
Net unrealized loss on available-for-sale securities (0.8) — 
Comprehensive loss (70.9) (184.1)
Net income from discontinued operations attributable to noncontrolling interest —  0.3 
Comprehensive loss attributable to controlling interest ($70.9) ($184.4)
The accompanying notes are an integral part of the consolidated financial statements
6

WOLFSPEED, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income Total Shareholders' Equity
(in millions of U.S Dollars, except share data) Number of Shares Par Value
Balance at June 27, 2021 115,691  $0.1  $3,676.8  ($1,563.1) $2.7  $2,116.5 
Net loss —  —  —  (70.1) —  (70.1)
Unrealized loss on available-for-sale securities —  —  —  —  (0.8) (0.8)
Comprehensive loss (70.9)
Tax withholding on vested equity awards —  —  (22.5) —  —  (22.5)
Stock-based compensation —  —  15.6  —  —  15.6 
Exercise of stock options and issuance of shares 495  —  0.7  —  —  0.7 
Balance at September 26, 2021 116,186  $0.1  $3,670.6  ($1,633.2) $1.9  $2,039.4 
The accompanying notes are an integral part of the consolidated financial statements
7

WOLFSPEED, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income Total Equity - Controlled Interest Non-controlling Interest from Discontinued Operations Total Shareholders' Equity
(in millions of U.S. Dollars, except share data) Number of Shares Par Value
Balance at June 28, 2020 109,230  $0.1  $3,106.2  ($1,039.2) $16.0  $2,083.1  $6.1  $2,089.2 
Net (loss) income —  —  —  (184.4) —  (184.4) 0.3  (184.1)
Unrealized gain on available-for-sale securities —  —  —  —  —  —  —  — 
Comprehensive (loss) income (184.4) 0.3  (184.1)
Tax withholding on vested equity awards —  —  (22.7) —  —  (22.7) —  (22.7)
Stock-based compensation —  —  16.2  —  —  16.2  —  16.2 
Exercise of stock options and issuance of shares 1,066  —  16.5  —  —  16.5  —  16.5 
Balance at September 27, 2020 110,296  $0.1  $3,116.2  ($1,223.6) $16.0  $1,908.7  $6.4  $1,915.1 
The accompanying notes are an integral part of the consolidated financial statements
8

WOLFSPEED, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
  Three months ended
(in millions of U.S. Dollars) September 26, 2021 September 27, 2020
Operating activities:
Net loss ($70.1) ($184.1)
Net loss from discontinued operations —  (108.8)
Net loss from continuing operations (70.1) (75.3)
Adjustments to reconcile net loss from continuing operations to cash (used in) provided by operating activities:
Depreciation and amortization 34.6  27.4 
Amortization of debt issuance costs and discount, net of non-cash capitalized interest 5.1  9.4 
Stock-based compensation 14.6  13.7 
Loss on disposal or impairment of long-lived assets 0.8  0.2 
Amortization of premium/discount on investments 1.7  1.5 
Realized gain on sale of investments (0.2) — 
Loss on equity investment —  3.4 
Foreign exchange gain on equity investment —  (0.5)
Deferred income taxes 0.2  0.3 
Changes in operating assets and liabilities:
Accounts receivable, net (10.5) 11.4 
Inventories (22.5) (11.0)
Prepaid expenses and other assets 1.2  5.3 
Accounts payable, trade (5.2) (2.7)
Accrued salaries and wages and other liabilities (14.9) 17.4 
Accrued contract liabilities 2.7  0.2 
Net cash (used in) provided by operating activities of continuing operations (62.5) 0.7 
Net cash used in operating activities of discontinued operations —  (0.3)
Cash (used in) provided by operating activities (62.5) 0.4 
Investing activities:
Purchases of property and equipment (259.3) (113.5)
Purchases of patent and licensing rights (1.0) (1.2)
Proceeds from sale of property and equipment 0.5  0.6 
Purchases of short-term investments (8.7) (61.7)
Proceeds from maturities of short-term investments 77.2  157.8 
Proceeds from sale of short-term investments 108.5  3.2 
Reimbursement of property and equipment purchases from long-term incentive agreement 50.8  — 
Net cash used in investing activities of continuing operations (32.0) (14.8)
Net cash used in investing activities of discontinued operations —  (1.2)
Cash used in investing activities (32.0) (16.0)
Financing activities:
Proceeds from long-term debt borrowings 20.0  — 
Payments on long-term debt borrowings, including finance lease obligations (20.1) (0.1)
Proceeds from issuance of common stock 0.7  16.5 
Tax withholding on vested equity awards (22.5) (12.8)
Commitment fee on long-term incentive agreement (1.0) (0.5)
Cash (used in) provided by financing activities (22.9) 3.1 
Effects of foreign exchange changes on cash and cash equivalents (0.1) 0.1 
Net change in cash and cash equivalents (117.5) (12.4)
Cash and cash equivalents, beginning of period 379.0  448.8 
Cash and cash equivalents, end of period $261.5  $436.4 
The accompanying notes are an integral part of the consolidated financial statements
9

WOLFSPEED, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


10

Note 1 – Basis of Presentation and New Accounting Standards
Overview
Wolfspeed, Inc. (the Company), formally known as Cree, Inc., is an innovator of wide bandgap semiconductors, focused on Silicon Carbide and gallium nitride (GaN) materials and devices for power and radio-frequency (RF) applications. The Company's Silicon Carbide and GaN materials and devices are targeted for applications such as transportation, power supplies, inverters and wireless systems.
Previously, the Company designed, manufactured and sold specialty lighting-class light emitting diode (LED) products targeted for use in indoor and outdoor lighting, electronic signs and signals and video displays. As discussed more fully below in Note 2, “Discontinued Operations,” on March 1, 2021, the Company completed the sale of certain assets and subsidiaries comprising its former LED Products segment (the LED Business Divestiture) to SMART Global Holdings, Inc. (SGH) and its wholly owned newly-created acquisition subsidiary CreeLED, Inc. (CreeLED and collectively with SGH, SMART).
Unless otherwise noted, discussion within these notes to the consolidated financial statements relates to the Company's continuing operations.
The Company’s materials products and power devices are used in electric vehicles, motor drives, power supplies, solar and transportation applications. The Company’s materials products and RF devices are used in military communications, radar, satellite and telecommunication applications.
In January 2021, the Company announced plans to change its corporate name from Cree, Inc. to Wolfspeed, Inc., which was completed on October 4, 2021. In addition, the Company transferred the listing of its common stock to the New York Stock Exchange (NYSE) from The Nasdaq Global Select Market (Nasdaq). The Company ceased trading as a Nasdaq-listed company at the end of the day on October 1, 2021 and commenced trading as a NYSE-listed company at market open on October 4, 2021 under the new ticker symbol ‘WOLF’.
The majority of the Company's products are manufactured at its production facilities located in North Carolina, California and Arkansas. The Company also uses contract manufacturers for certain products and aspects of product fabrication, assembly and packaging. Additionally, the Company is in the process of building a Silicon Carbide device fabrication facility in New York. The Company operates research and development facilities in North Carolina, California, Arkansas, Arizona and New York.
Wolfspeed, Inc. is a North Carolina corporation established in 1987, and its headquarters are in Durham, North Carolina.
Basis of Presentation
The consolidated financial statements presented herein have been prepared by the Company and have not been audited. In the opinion of management, all normal and recurring adjustments necessary to fairly state the consolidated financial position, results of operations, comprehensive loss, shareholders' equity and cash flows at September 26, 2021, and for all periods presented, have been made. All material intercompany accounts and transactions have been eliminated. The consolidated balance sheet at June 27, 2021 has been derived from the audited financial statements as of that date.
These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for annual financial statements. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 27, 2021 (fiscal 2021) (the 2021 Form 10-K). The results of operations for the three months ended September 26, 2021 are not necessarily indicative of the operating results that may be attained for the entire fiscal year ending June 26, 2022 (fiscal 2022). Additionally, the impact of the COVID-19 pandemic to the results of operations remains uncertain.
Certain accounting matters that generally require consideration of forecasted financial information were assessed regarding impacts from the COVID-19 pandemic as of September 26, 2021 and through the date of this Quarterly Report using reasonably available information as of those dates. The accounting matters assessed included, but were not limited to, allowance for doubtful accounts, the carrying value of goodwill and other long-lived tangible and intangible assets, the potential impact to earnings of unrealized losses on investments, valuation allowances for tax assets and the ability to estimate an annual effective tax rate. While the assessments resulted in no material impacts to the consolidated financial statements as of and for the quarter ended September 26, 2021, the Company believes the full impact of the COVID-19 pandemic remains uncertain and will continue to assess if ongoing developments related to the COVID-19 pandemic may cause future material impacts to its consolidated financial statements.
11

Change in Estimate
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and the disclosure of contingent assets and liabilities. Actual amounts could differ materially from those estimates.
As a result of the LED Business Divestiture and the Company's continued investment in 200mm technology, the Company evaluated the useful lives applied to certain machinery and equipment assets by considering industry standards and reviewing the assets' historical and estimated future use. In the first quarter of fiscal 2022, the Company increased the expected useful lives of these assets by two to five years to more closely reflect the estimated economic lives of those assets. This change in estimate was applied prospectively effective for the first quarter of fiscal 2022 and resulted in a decrease in depreciation expense of $8.4 million for the first quarter of fiscal 2022. Approximately $7.1 million of the decrease in depreciation expense resulted in a reduction of inventory as of September 26, 2021 and will impact cost of revenue, net in future periods as the inventory is relieved. The remaining $1.3 million of reduced depreciation expense resulted in the following: (1) an improvement in gross profit of $0.5 million; (2) an improvement in both loss before income taxes and net loss of $1.3 million; and (3) an improvement in basic and diluted loss per share of $0.01 per share.
Recently Adopted Accounting Pronouncements
None.
Accounting Pronouncements Pending Adoption
Convertible Debt Instruments
In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40). This standard simplifies the accounting for convertible instruments by eliminating the cash conversion and the beneficial conversion accounting models. This update also amends the guidance for the derivatives scope exception for contracts in an entity’s own equity. The update requires an entity to use the if-converted method for all convertible instruments in the diluted earnings per share calculation. An entity may use either a modified or full retrospective approach for adoption. The Company will adopt this standard on June 27, 2022, as required, and is currently evaluating the impact on its consolidated financial statements.

Note 2 – Discontinued Operations
On March 1, 2021, the Company completed the LED Business Divestiture pursuant to the terms of the Asset Purchase Agreement (the LED Purchase Agreement), dated October 18, 2020, as amended. Pursuant to the LED Purchase Agreement, (i) the Company completed the sale to SMART of (a) certain equipment, inventory, intellectual property rights, contracts, and real estate comprising the Company’s former LED Products segment, (b) all of the issued and outstanding equity interests of Cree Huizhou Solid State Lighting Company Limited (Cree Huizhou), a limited liability company organized under the laws of the People’s Republic of China and an indirect wholly owned subsidiary of the Company, and (c) the Company’s ownership interest in Cree Venture LED Company Limited., the Company’s joint venture with San’an Optoelectronics Co., Ltd. (collectively, the LED Business); and (ii) SMART assumed certain liabilities related to the LED Business. The Company retained certain assets used in and pre-closing liabilities associated with the former LED Products segment.
The purchase price for the LED Business consisted of (i) a payment of $50 million in cash, subject to customary adjustments, (ii) an unsecured promissory note issued to the Company by SGH in the amount of $125 million (the Purchase Price Note), (iii) the potential to receive an earn-out payment between $2.5 million and $125 million based on the revenue and gross profit performance of the LED Business in the first four full fiscal quarters following the closing (the Earnout Period), also payable in the form of a unsecured promissory note of SGH (the Earnout Note), and (iv) the assumption of certain liabilities. The Purchase Price Note and the Earnout Note will accrue interest at a rate of three-month LIBOR plus 3.0% with interest paid every three months and one bullet payment of principal and all accrued and unpaid interest will be payable on the maturity date of the Purchase Price Note and Earnout Note. The Purchase Price Note will mature on August 15, 2023, and the Earnout Note will mature on March 27, 2025. In fiscal 2021, the Company recognized a loss on sale of the LED Business of $29.1 million. The cost of selling the LED Business was $27.4 million, which was recognized throughout fiscal 2020 and 2021.
12

In connection with the closing of the LED Business Divestiture, the Company and CreeLED also entered into certain ancillary and related agreements, including (i) an Intellectual Property Assignment and License Agreement, which assigned to CreeLED certain intellectual property owned by the Company and its affiliates and licensed to CreeLED certain additional intellectual property owned by the Company, (ii) a Transition Services Agreement (LED TSA), (iii) a Wafer Supply and Fabrication Services Agreement (the Wafer Supply Agreement), pursuant to which the Company will supply CreeLED with certain Silicon Carbide materials and fabrication services for up to four years, and (iv) a Real Estate License Agreement (LED RELA), which will allow CreeLED to use certain premises owned by the Company to conduct the LED Business for a period of up to 24 months after closing.
The following table presents the financial results of the LED Business as loss from discontinued operations, net of income taxes in the Company's consolidated statements of operations:
Three months ended
(in millions of U.S. Dollars) September 27, 2020
Revenue, net $101.1 
Cost of revenue, net 82.6 
Gross profit 18.5 
Operating expenses:
Research and development 8.4 
Sales, general and administrative 7.9 
Goodwill impairment 105.7 
Gain on disposal or impairment of long-lived assets (0.5)
Other operating expense 4.8 
Operating loss (107.8)
Non-operating expense, net 0.1 
Loss before income taxes (107.9)
Income tax expense 0.9 
Net loss (108.8)
Net income attributable to noncontrolling interest 0.3 
Net loss attributable to controlling interest ($109.1)
As of September 27, 2020, the Company determined it would more likely than not sell all or a portion of the assets comprising its former LED Products segment below carrying value. As a result, the Company recorded an impairment to goodwill of $105.7 million.
For the three months ended September 26, 2021, the Company recognized $0.9 million and $2.9 million in administrative fees related to the LED RELA and the LED TSA, respectively, of which $0.3 million and $0.9 million are included in accounts receivable, net in the consolidated balance sheets as of September 26, 2021. Fees related to the LED RELA were recorded as lease income, see Note 4, "Leases." Fees related to the LED TSA were recorded as a reduction in expense within the line item in the consolidated statements of operations in which costs were incurred.
At the inception of the Wafer Supply Agreement, the Company recorded a supply agreement liability of $31.0 million, of which $17.5 million was outstanding as of September 26, 2021. The Wafer Supply Agreement liability is recognized in other current liabilities and other long-term liabilities on the consolidated balance sheets.
The Company recognized a net loss of $0.8 million in non-operating expense, net for the three months ended September 26, 2021 related to the Wafer Supply Agreement. A receivable of $3.1 million was included in other assets in the consolidated balance sheets as of September 26, 2021.

13

Note 3 – Revenue Recognition
In accordance with ASC 606, the Company follows a five-step approach for recognizing revenue, consisting of the following: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation.
Contract liabilities primarily include various rights of return and customer deposits, as well as a reserve on the Company's "ship and debit" program. Contract liabilities were $47.8 million as of September 26, 2021 and $45.2 million as of June 27, 2021. The increase was primarily due to increased reserves on the Company's "ship and debit" program. Contract liabilities are recorded within accrued contract liabilities and other long-term liabilities on the consolidated balance sheets.
For the three months ended September 26, 2021, the Company did not recognize any revenue that was included in contract liabilities as of June 27, 2021.
Revenue recognized related to performance obligations that were satisfied or partially satisfied in previous periods was not material for the three months ended September 26, 2021.
The Company conducts business in several geographic areas. Revenue is attributed to a particular geographic region based on the shipping address for the products. Disaggregated revenue from external customers by geographic area is as follows:
  Three months ended
  September 26, 2021 September 27, 2020
(in millions of U.S. Dollars) Revenue % of Revenue Revenue % of Revenue
Europe $58.1  37.1  % $35.8  31.0  %
United States 26.0  16.6  % 28.9  25.0  %
China 42.9  27.4  % 22.4  19.4  %
Japan 10.3  6.6  % 11.3  9.8  %
South Korea 7.5  4.8  % 7.4  6.4  %
Other 11.8  7.5  % 9.7  8.4  %
Total $156.6  $115.5 

Note 4 – Leases
The Company primarily leases manufacturing and office space. The Company also has a number of bulk gas leases. Lease agreements frequently include renewal provisions and require the Company to pay real estate taxes, insurance and maintenance costs. Variable costs include lease payments that were volume or usage-driven in accordance with the use of the underlying asset, as well as non-lease components incurred with respect to actual terms rather than contractually fixed amounts.
The Company's finance lease obligations include manufacturing equipment, manufacturing space in Malaysia, and a 49-year ground lease on a future Silicon Carbide device fabrication facility in New York.
14

Balance Sheet
Lease assets and liabilities and the corresponding balance sheet classifications are as follows (in millions of U.S. Dollars):
Operating Leases: September 26, 2021 June 27, 2021
Right-of-use asset (1)
$13.3  $12.1 
Current lease liability (2)
6.6  4.5 
Non-current lease liability (3)
6.4  7.5 
Total operating lease liabilities 13.0  12.0 
Finance Leases:
Finance lease assets (4)
$18.6  $15.5 
Current portion of finance lease liabilities 8.7  5.2 
Finance lease liabilities, less current portion 9.9  10.0 
Total finance lease liabilities 18.6  15.2 
(1) Within other assets on the consolidated balance sheets.
(2) Within other current liabilities on the consolidated balance sheets.
(3) Within other long-term liabilities on the consolidated balance sheets.
(4) Within property and equipment, net on the consolidated balance sheets.

Statement of Operations
Operating lease expense was $1.5 million for the three months ended September 26, 2021 and $1.4 million for the three months ended September 27, 2020.
Short-term lease expense, variable lease expense and sublease income were immaterial for the three months ended September 26, 2021 and September 27, 2020.
Finance lease amortization was $0.4 million and interest expense was $0.1 million for the three months ended September 26, 2021. Finance lease amortization was $0.2 million and interest expense was $0.1 million for the three months ended September 27, 2020.
Cash Flows
Cash flow information consisted of the following:
Three months ended
(in millions of U.S. Dollars) September 26, 2021 September 27, 2020
Cash used in operating activities:
Cash paid for operating leases $1.6  $1.3 
Cash paid for interest portion of financing leases 0.1  0.1 
Cash used in financing activities:
Cash paid for principal portion of finance leases 0.1  0.1 
Non-cash activities:
Operating lease additions and modifications, net 2.6  1.2 
Finance lease additions 3.5  — 
Transfer of finance lease liability to accounts payable and accrued expenses (1)
—  4.2 
(1) In the first quarter of fiscal 2021, the Company executed the available bargain purchase option for certain finance leases relating to property and equipment, net, in order to purchase the assets.
Lease Liability Maturities
Maturities of operating and finance lease liabilities as of September 26, 2021 were as follows (in millions of U.S. Dollars):
15

Fiscal Year Ending Operating Leases Finance Leases Total
June 26, 2022 (remainder of fiscal 2022) $5.7  $8.8  $14.5 
June 25, 2023 3.6  0.7  4.3 
June 30, 2024 2.2  0.7  2.9 
June 29, 2025 1.2  0.7  1.9 
June 28, 2026 0.7  0.7  1.4 
Thereafter 0.1  14.5  14.6 
Total lease payments 13.5  26.1  39.6 
Imputed lease interest (0.5) (7.5) (8.0)
Total lease liabilities $13.0  $18.6  $31.6 
Supplemental Disclosures
Operating Leases Finance Leases
Weighted average remaining lease term (in months) (1)
27 353
Weighted average discount rate (2)
2.54  % 2.26  %
(1) Weighted average remaining lease term of finance leases without the 49-year ground lease is 24 months.
(2) Weighted average discount rate of finance leases without the 49-year ground lease is 1.78%.
Lease Income
As mentioned in Note 2, "Discontinued Operations", on March 1, 2021 and in connection with the sale of its LED Business, the Company entered into the LED RELA pursuant to which the Company leases to CreeLED approximately 58,000 square feet of the Company’s property and certain facilities in Durham, North Carolina for a total of $3.6 million per year. The lease term is 24 months and expires on February 28, 2023. Subject to certain provisions in the LED RELA, CreeLED may terminate its rights or a portion of its rights under the agreement at any time with sixty days written notice. A notice of thirty days is permitted under certain circumstances as defined in the agreement. The agreement does not contain any renewal provisions.
The Company recognized lease income of $0.9 million for the three months ended September 26, 2021. The Company did not recognize lease income for the three months ended September 27, 2020.
The Company did not recognize any variable lease income for the three months ended September 26, 2021 and September 27, 2020.
Future minimum rental income relating to the LED RELA is as follows (in millions of U.S. Dollars):
June 26, 2022 (remainder of fiscal 2022) 2.7 
June 25, 2023 2.4 
Total future minimum rental income 5.1 

16

Note 5 – Financial Statement Details
Accounts Receivable, net
Accounts receivable, net consisted of the following:
(in millions of U.S. Dollars) September 26, 2021 June 27, 2021
Billed trade receivables $106.0  $95.6 
Unbilled contract receivables 0.9  0.6 
Royalties 0.4  0.5 
107.3  96.7 
Allowance for bad debts (0.9) (0.8)
Accounts receivable, net $106.4  $95.9 
    
Changes in the Company’s allowance for bad debts were as follows:
(in millions of U.S. Dollars) September 26, 2021
Balance at beginning of period $0.8 
Current period provision change 0.1 
Write-offs, net of recoveries — 
Balance at end of period $0.9 
Inventories
Inventories consisted of the following:
(in millions of U.S. Dollars) September 26, 2021 June 27, 2021
Raw material $46.8  $43.3 
Work-in-progress 121.6  109.5 
Finished goods 14.6  13.8 
Inventories $183.0  $166.6 
In addition, the Company holds inventory related to the Wafer Supply Agreement entered into in connection with the LED Business Divestiture, which is recorded within other current assets on the consolidated balance sheets.
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following:
(in millions of U.S. Dollars) September 26, 2021 June 27, 2021
Accounts payable, trade $38.2  $44.2 
Accrued salaries and wages 60.2  69.5 
Accrued property and equipment 128.9  248.3 
Accrued expenses 19.5  17.4 
Other 0.9  1.7 
Accounts payable and accrued expenses $247.7  $381.1 

17

Other Operating Expense
Other operating expense consisted of the following:
Three months ended
(in millions of U.S. Dollars) September 26, 2021 September 27, 2020
Factory optimization restructuring $2.6  $1.6 
Severance and other restructuring —  2.8 
Total restructuring costs 2.6  4.4 
Project, transformation and transaction costs 1.6  1.2 
Factory optimization start-up costs 8.6  3.0 
Other operating expense $12.8  $8.6 
Accumulated Other Comprehensive Income, net of taxes
Accumulated other comprehensive income, net of taxes, consisted of $1.9 million and $2.7 million of net unrealized gains on available-for-sale securities as of September 26, 2021 and June 27, 2021, respectively. Amounts for both periods include a $2.4 million loss related to tax on unrealized gain (loss) on available-for-sale securities.
Reclassifications Out of Accumulated Other Comprehensive Income
Reclassifications out of accumulated other comprehensive income were $0.2 million for the three months ended September 26, 2021 and less than $0.1 million for the three months ended September 27, 2020. Amounts were reclassified to non-operating expense, net on the consolidated statements of operations.
Non-Operating Expense, net
The following table summarizes the components of non-operating expense, net:
Three months ended
(in millions of U.S. Dollars) September 26, 2021 September 27, 2020
Foreign currency gain, net ($0.1) ($0.2)
Gain on sale of investments, net (0.2) — 
Loss on equity investment, net —  3.4 
Interest income (2.6) (2.7)
Interest expense, net of capitalized interest 6.7  13.1 
Loss on Wafer Supply Agreement 0.8  — 
Other, net (0.5) 0.3 
Non-operating expense, net $4.1  $13.9 
Statements of Cash Flows - non-cash activities
Three months ended
September 26, 2021 September 27, 2020
Lease asset and liability additions $3.5  $1.1 
Lease asset and liability modifications, net 2.6  0.1 
Transfer of finance lease liability to accounts payable and accrued expenses (1)
—  4.2 
Decrease in property, plant and equipment from long-term incentive related receivables 23.2  — 
(1) In the first quarter of fiscal 2021, the Company executed the available bargain purchase option for certain finance leases relating to property and equipment, net, in order to purchase the assets.
18

Accrued property and equipment as of September 26, 2021 and September 27, 2020 was $128.9 million and $108.2 million, respectively.
Note 6 – Investments
Investments consist of municipal bonds, corporate bonds, U.S. agency securities, U.S. treasury securities, certificates of deposit, commercial paper and variable rate demand notes. All short-term investments are classified as available-for-sale.
Short-term investments as of September 26, 2021 and June 27, 2021 consisted of the following:
  September 26, 2021
  Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Credit Loss Allowance Estimated Fair Value
Municipal bonds $135.7  $1.7  $—  $—  $137.4 
Corporate bonds 366.9  2.6  (0.2) —  369.3 
U.S. agency securities 13.8  —  —  —  13.8 
U.S. treasury securities 46.1  0.2  —  —  46.3 
Certificates of deposit 9.5  —  —  —  9.5 
Variable rate demand notes 20.0  —  —  —  20.0 
Total short-term investments $592.0  $4.5  ($0.2) $—  $596.3 
  June 27, 2021
  Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Credit Loss Allowance Estimated Fair Value
Municipal bonds $139.4  $1.9  $—  $—  $141.3 
Corporate bonds 456.5  3.3  (0.3) —  459.5 
U.S. agency securities 15.8  —  —  —  15.8 
U.S. treasury securities 72.3  0.3  (0.1) —  72.5 
Certificates of deposit 16.5  —  —  —  16.5 
Commercial paper 50.0  —  —  —  50.0 
Variable rate demand notes 20.0  —  —  —  20.0 
Total short-term investments $770.5  $5.5  ($0.4) $—  $775.6 
The Company does not include accrued interest in estimated fair values of short-term investments and does not record an allowance for credit losses on receivables related to accrued interest. Accrued interest receivable was $4.1 million and $5.5 million as of September 26, 2021 and June 27, 2021, respectively, and is recorded in other current assets on the consolidated balance sheets. When necessary, write offs of noncollectable interest income are recorded as a reversal to interest income. There were no write offs of noncollectable interest income during the three months ended September 26, 2021 and September 27, 2020.
The following tables present the gross unrealized losses and estimated fair value of the Company’s short-term investments, aggregated by investment type and the length of time that individual securities have been in a continuous unrealized loss position:
19

September 26, 2021
Less than 12 Months Greater than 12 Months Total
Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss
Municipal bonds $14.0  $—  $—  $—  $14.0  $— 
Corporate bonds 94.1  (0.2) —  —  94.1  (0.2)
U.S. agency securities 7.7  —  —  —  7.7  — 
U.S. treasury securities 20.8  —  —  —  20.8  — 
Total $136.6  ($0.2) $—  $—  $136.6  ($0.2)
Number of securities with an unrealized loss 75  —  75 
June 27, 2021
Less than 12 Months Greater than 12 Months Total
Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss
Municipal bonds $28.8  $—  $—  $—  $28.8  $— 
Corporate bonds 133.8  (0.3) —  —  133.8  (0.3)
U.S. agency securities 16.7  —  —  —  16.7  — 
U.S. treasury securities 47.9  (0.1) —  —  47.9  (0.1)
Certificates of deposit 0.7  —  —  —  0.7  — 
Total $227.9  ($0.4) $—  $—  $227.9  ($0.4)
Number of securities with an unrealized loss 134  —  134 
The Company utilizes specific identification in computing realized gains and losses on the sale of investments. Realized gains of $0.2 million and less than $0.1 million for the three months ended September 26, 2021 and September 27, 2020, respectively, are included in non-operating expense, net in the consolidated statements of operations. Unrealized gains and losses are included as a separate component of equity, net of tax, unless the Company determines there is an expected credit loss.
The Company evaluates its investments for expected credit losses. The Company believes it is able to and intends to hold each of the investments held with an unrealized loss as of September 26, 2021 until the investments fully recover in market value. No allowance for credit losses was recorded as of September 26, 2021.
The contractual maturities of short-term investments as of September 26, 2021 were as follows:

 
  Within One Year After One, Within Five Years After Five, Within Ten Years After Ten Years Total
Municipal bonds $27.5  $109.9  $—  $—  $137.4 
Corporate bonds 65.5  303.8  —  —  369.3 
U.S. agency securities 5.5  8.3  —  —  13.8 
U.S. treasury securities 16.6  29.7  —  —  46.3 
Certificates of deposit 9.5  —  —  —  9.5 
Variable rate demand notes —  —  —  20.0  20.0 
Total short-term investments $124.6  $451.7  $—  $20.0  $596.3 

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Note 7 – Fair Value of Financial Instruments
Under U.S. GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the exit price) in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various valuation approaches, including quoted market prices and discounted cash flows. U.S. GAAP also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are obtained from independent sources and can be validated by a third party, whereas unobservable inputs reflect assumptions regarding what a third party would use in pricing an asset or liability. The fair value hierarchy is categorized into three levels based on the reliability of inputs as follows:
Level 1 - Valuations based on quoted prices in active markets for identical instruments that the Company is able to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.
Level 2 - Valuations based on quoted prices in active markets for instruments that are similar, or quoted prices in markets that are not active for identical or similar instruments, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
The financial assets for which the Company performs recurring fair value remeasurements are cash equivalents and short-term investments. As of September 26, 2021 and June 27, 2021, financial assets utilizing Level 1 inputs included money market funds and U.S. treasury securities. Financial assets utilizing Level 2 inputs included municipal bonds, corporate bonds, certificates of deposit, commercial paper, U.S. agency securities, and variable rate demand notes. Level 2 assets are valued based on quoted prices in active markets for instruments that are similar or using a third-party pricing service’s consensus price, which is a weighted average price based on multiple sources. These sources determine prices utilizing market income models which factor in, where applicable, transactions of similar assets in active markets, transactions of identical assets in infrequent markets, interest rates, bond or credit default swap spreads and volatility. The Company did not have any financial assets requiring the use of Level 3 inputs as of September 26, 2021 and June 27, 2021.
The following table sets forth financial instruments carried at fair value within the U.S. GAAP hierarchy:
  September 26, 2021 June 27, 2021
(in millions of U.S. Dollars) Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
Cash equivalents:
Money market funds $108.5  $—  $—  $108.5  $96.9  $—  $—  $96.9 
Municipal bonds —  —  —  —  —  16.0  —  16.0 
U.S. agency securities —  —  —  —  —  6.0  —  6.0 
Commercial paper —  32.0  —  32.0  —  62.4  —  62.4 
Variable rate demand notes —  —  —  —  —  22.9  —  22.9 
Total cash equivalents 108.5  32.0  —  140.5  96.9  107.3  —  204.2 
Short-term investments:
Municipal bonds —  137.4  —  137.4  —  141.3  —  141.3 
Corporate bonds —  369.3  —  369.3  —  459.5  —  459.5 
U.S. agency securities —  13.8  —  13.8  —  15.8  —  15.8 
U.S. treasury securities 46.3  —  —  46.3  72.5  —  —  72.5 
Certificates of deposit —  9.5  —  9.5  —  16.5  —  16.5 
Commercial paper —  —  —  —  —  50.0  —  50.0 
Variable rate demand notes —  20.0  —  20.0  —  20.0  —  20.0 
Total short-term investments 46.3  550.0  —  596.3  72.5  703.1  —  775.6 
Total cash equivalents and short-term investments $154.8  $582.0  $—  $736.8  $169.4  $810.4  $—  $979.8 

21

Note 8 – Goodwill and Intangible Assets
Goodwill
There were no changes to goodwill during the three months ended September 26, 2021.

Intangible Assets, net
The following table presents the components of intangible assets, net:
September 26, 2021 June 27, 2021
(in millions of U.S. Dollars) Gross Accumulated Amortization Net Gross Accumulated Amortization Net
Customer relationships $96.8  ($26.6) $70.2  $96.8  ($25.1) $71.7 
Developed technology 68.0  (29.5) 38.5  68.0  (28.2) 39.8 
Non-compete agreements 12.2  (10.9) 1.3  12.2  (10.1) 2.1 
Acquisition related intangible assets 177.0  (67.0) 110.0  177.0  (63.4) 113.6 
Patent and licensing rights 66.9  (40.4) 26.5  67.1  (40.2) 26.9 
Total intangible assets $243.9  ($107.4) $136.5  $244.1  ($103.6) $140.5 
Total amortization of acquisition-related intangibles assets was $3.6 million and $3.6 million for the three months ended September 26, 2021 and September 27, 2020, respectively.
Total amortization of patents and licensing rights was $1.3 million and $1.2 million for the three months ended September 26, 2021 and September 27, 2020, respectively.
Total future amortization expense of intangible assets is estimated to be as follows:
(in millions of U.S. Dollars)

Fiscal Year Ending
Acquisition Related Intangibles Patents Total
June 26, 2022 (remainder of fiscal 2022) $9.9  $3.8  $13.7 
June 25, 2023 11.0  4.1  15.1 
June 30, 2024 10.4  3.5  13.9 
June 29, 2025 10.4  2.7  13.1 
June 28, 2026 9.3  2.0  11.3 
Thereafter 59.0  10.4  69.4 
Total future amortization expense $110.0  $26.5  $136.5 

Note 9 – Long-term Debt
Revolving Line of Credit
As of September 26, 2021, the Company had a $125.0 million secured revolving line of credit (the Credit Agreement) under which the Company can borrow, repay and reborrow loans from time to time prior to its scheduled maturity date of January 9, 2023. The Credit Agreement requires the Company to maintain a ratio of certain cash equivalents and marketable securities to outstanding loans and letter of credit obligations greater than 1.25:1, with no other financial covenants.
The Company classifies balances outstanding under the Credit Agreement as long-term debt in the consolidated balance sheets. As of September 26, 2021, the Company had no outstanding borrowings under the Credit Agreement, $125.0 million in available commitments under the Credit Agreement and $125.0 million available for borrowing. For the three months ended September 26, 2021, the average interest rate was 0.15%, related to a ten day draw of $20.0 million on the line of credit in the first quarter of fiscal 2022. As of September 26, 2021, the unused line fee on available borrowings is 25 basis points.
22

2023 Convertible Notes
On August 24, 2018, the Company sold $500.0 million aggregate principal amount of 0.875% convertible senior notes due September 1, 2023 to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the Securities Act), and an additional $75.0 million aggregate principal amount of such notes pursuant to the exercise in full of the over-allotment options of the underwriters (the 2023 Notes). The total net proceeds from the debt offering was approximately $562.1 million.
The conversion rate will initially be 16.6745 shares of common stock per one thousand dollars in principal amount of 2023 Notes (equivalent to an initial conversion price of approximately $59.97 per share of common stock). The conversion rate will be subject to adjustment for some events, but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date, or following the Company's issuance of a notice of redemption, the Company will increase the conversion rate for a holder who elects to convert its 2023 Notes in connection with such a corporate event, or who elects to convert any 2023 Notes called for redemption during the related redemption period in certain circumstances. The Company may not redeem the 2023 Notes prior to September 1, 2021. The Company may redeem for cash all or any portion of the 2023 Notes, at its option, on a redemption date occurring on or after September 1, 2021 and on or before the 40th scheduled trading day immediately before the maturity date, if the last reported sales price of its common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which the Company provides a notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption. The redemption price will be 100% of the principal amount of the 2023 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. If the Company undergoes certain fundamental changes related to the Company's common stock, holders may require the Company to repurchase for cash all or any portion of their 2023 Notes at a fundamental change repurchase price equal to 100% of the principal amount of the 2023 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
Holders may convert their 2023 Notes at their option at any time prior to the close of business on the business day immediately preceding March 1, 2023 only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending December 31, 2018 (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any ten consecutive trading day period in which the trading price per one thousand dollars in principal amount of 2023 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of its common stock and the conversion rate on each such trading day; (3) if the Company calls such 2023 Notes for redemption, at any time prior to the close of business on the second business day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events. On or after March 1, 2023 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their 2023 Notes at any time, regardless of the foregoing circumstances. Upon conversion, the Company will pay or deliver cash, shares of its common stock, or a combination of cash and shares of its common stock, at the Company's election.
2026 Convertible Notes
On April 21, 2020, the Company sold $500.0 million aggregate principal amount of 1.75% convertible senior notes due May 1, 2026 to qualified institutional buyers pursuant to Rule 144A under the Securities Act and an additional $75.0 million aggregate principal amount of such notes pursuant to the exercise in full of the over-allotment options of the underwriters (the 2026 Notes). The total net proceeds from the debt offerings was approximately $561.4 million.
23

The conversion rate will initially be 21.1346 shares of common stock per one thousand dollars in principal amount of 2026 Notes (equivalent to an initial conversion price of approximately $47.32 per share of common stock). The conversion rate will be subject to adjustment for some events, but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date, or following the Company's issuance of a notice of redemption, the Company will increase the conversion rate for a holder who elects to convert its 2026 Notes in connection with such a corporate event, or who elects to convert any 2026 Notes called for redemption during the related redemption period in certain circumstances. The Company may not redeem the 2026 Notes prior to May 1, 2023. The Company may redeem for cash all or any portion of the 2026 Notes, at its option, on a redemption date occurring on or after May 1, 2023 and on or before the 40th scheduled trading day immediately before the maturity date, if the last reported sales price of its common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which the Company provides a notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption. The redemption price will be 100% of the principal amount of the 2026 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. If the Company undergoes certain fundamental changes related to the Company's common stock, holders may require the Company to repurchase for cash all or any portions of their 2026 Notes at a fundamental repurchase price equal to 100% of the principal amount of the 2026 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
Holders may convert their 2026 Notes at their option at any time prior to the close of business on the business day immediately preceding November 3, 2025 only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending June 30, 2020 (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any ten consecutive trading day period in which the trading price per $1.0 thousand principal amount of 2026 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of its common stock and the conversion rate on each such trading day; (3) if the Company calls such 2026 Notes for redemption, at any time prior to the close of business on the second business day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events. On or after November 3, 2025 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their 2026 Notes at any time, regardless of the foregoing circumstances. Upon conversion, the Company will pay or deliver cash, shares of its common stock, or a combination of cash and shares of its common stock, at the Company's election.
The Company used approximately $144.3 million of the net proceeds from the sale of the 2026 Notes to repurchase approximately $150.2 million aggregate principal amount of the 2023 Notes, including approximately $0.2 million of accrued interest on such notes, in privately negotiated transactions.
Accounting for 2023 Notes and 2026 Notes (collectively, the Notes)
In accounting for the issuance of the 2023 Notes and 2026 Notes, the Company separated the Notes into liability and equity components. The carrying amount of the liability of the equity component representing the conversion option was $110.6 million and $145.4 million for the 2023 and 2026 Notes, respectively. The amounts were determined by deducting the fair value of the liability component from the par value of each of the Notes. Due to the partial extinguishment of the 2023 Notes, the equity component of the 2023 Notes was reduced by $27.7 million.
The equity component is not remeasured as long as it continues to meet the conditions for equity classification. The excess of the principal amount of the liability component over its carrying amount (the debt discount), along with related issuance fees, are amortized to interest expense over the term of the Notes at an effective annual interest rate of 5.87% and 7.45% for the 2023 and 2026 Notes, respectively.
The Notes are equal in right of payment to any of the Company’s unsecured indebtedness; senior in right of payment to the Company’s existing and future indebtedness that is expressly subordinated in right of payment to the Notes; effectively subordinated in right of payment of any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally subordinated to all indebtedness and other liabilities (including trade payables) of the Company’s subsidiaries.
The net carrying amount of the liability component of the Notes is as follows:
24

(in millions of U.S. Dollars) September 26, 2021 June 27, 2021
Principal $999.8  $999.8 
Unamortized discount and issuance costs (165.4) (175.9)
Net carrying amount $834.4  $823.9 
The net carrying amount of the equity component of the Notes is as follows:
(in millions of U.S. Dollars) September 26, 2021 June 27, 2021
Discount related to value of conversion option $262.3  $262.3 
Partial extinguishment of 2023 Notes (27.7) (27.7)
Debt issuance costs (6.3) (6.3)
Net carrying amount $228.3  $228.3 
The interest expense, net recognized related to the Notes is as follows:
Three months ended
(in millions of U.S. Dollars) September 26, 2021 September 27, 2020
Interest expense, net of capitalized interest $1.1  $3.2 
Amortization of discount and issuance costs, net of capitalized interest 5.1  9.4 
Total interest expense, net $6.2  $12.6 
The Company capitalizes interest related to the Notes in connection with the building of a new Silicon Carbide device fabrication facility in New York. For the three months ended September 26, 2021 and September 27, 2020, the Company capitalized $2.3 million and $0.2 million of interest expense, respectively, and $5.4 million and $0.4 million of amortization of discount and issuance costs, respectively.
The last reported sale price of the Company's common stock was greater than or equal to 130% of the applicable conversion price for both the 2023 and 2026 Notes for at least 20 trading days in the 30 consecutive trading days ended on September 30, 2021. As a result, the Notes are convertible at the option of the holders through December 31, 2021.
As of September 26, 2021, the if-converted values of the 2023 and 2026 Notes exceeded their respective principal amounts by $175.6 million and $455.0 million, respectively.
The estimated fair value of the Notes is $1.7 billion as of September 26, 2021, as determined by a Level 2 valuation.

25

Note 10 – Loss Per Share
The details of the computation of basic and diluted loss per share are as follows:
  Three months ended
(in millions of U.S. Dollars, except share data) September 26, 2021 September 27, 2020
Net loss from continuing operations ($70.1) ($75.3)
Net loss from discontinued operations —  (108.8)
Net income from discontinued operations attributable to noncontrolling interest —  0.3 
Net loss from discontinued operations attributable to controlling interest —  (109.1)
Weighted average shares - basic and diluted (in thousands) 115,919  109,705 
Loss per share - basic and diluted:
Continuing operations ($0.60) ($0.69)
Discontinued operations attributable to controlling interest $—  ($0.99)
Diluted net loss per share is the same as basic net loss per share for the periods presented due to potentially dilutive items being anti-dilutive given the Company's net loss from continuing operations.
For the three months ended September 26, 2021 and September 27, 2020, 2.7 million and 4.5 million, respectively, of weighted average shares were excluded from the calculation of diluted loss per share because their effect would be anti-dilutive.
In addition, future earnings per share of the Company are also subject to dilution from conversion of its Notes under certain conditions as described in Note 9, “Long-term Debt.”

Note 11 – Stock-Based Compensation
Overview of Employee Stock-Based Compensation Plans
The Company currently has one equity-based compensation plan, the 2013 Long-Term Incentive Compensation Plan (2013 LTIP), from which stock-based compensation awards can be granted to employees and directors. The 2013 LTIP provides for awards in the form of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units and other awards. The Company has other equity-based compensation plans that have been terminated so that no future grants can be made under those plans, but under which stock options, restricted stock and restricted stock units are currently outstanding.
The Company’s stock-based awards can be either service-based or performance-based. Performance-based conditions are generally tied to future financial and/or operating performance of the Company and/or external based market metrics. The compensation expense with respect to performance-based grants is recognized if the Company believes it is probable that the performance condition will be achieved. The Company reassesses the probability of the achievement of the performance condition at each reporting period, and adjusts the compensation expense for subsequent changes in the estimate or actual outcome. As with non-performance based awards, compensation expense is recognized over the vesting period. For performance awards with market conditions, the Company estimates the grant date fair value using the Monte Carlo valuation model and expenses the awards over the vesting period regardless of whether the market condition is ultimately satisfied.
The Company also has an Employee Stock Purchase Plan (ESPP) that provides employees with the opportunity to purchase common stock at a discount. The ESPP limits employee contributions to 15% of each employee’s compensation (as defined in the plan) and allows employees to purchase shares at a 15% discount to the fair market value of common stock on the purchase date two times per year. The ESPP provides for a twelve-month participation period, divided into two equal six-month purchase periods, and also provides for a look-back feature. At the end of each six-month period in April and October, participants purchase the Company’s common stock through the ESPP at a 15% discount to the fair market value of the common stock on the first day of the twelve-month participation period or the purchase date, whichever is lower. The plan also provides for an automatic reset feature to start participants on a new twelve-month participation period if the fair market value of common stock declines during the first six-month purchase period.
26

Stock Option Awards
A summary of stock option awards outstanding as of September 26, 2021 and changes during the three months then ended is as follows:
(shares in thousands) Number of Shares Weighted Average Exercise Price
Outstanding at June 27, 2021 142  $27.37 
Granted —  $— 
Exercised (17) $39.59 
Forfeited or expired —  $— 
Outstanding at September 26, 2021 125  $25.62 
Restricted Stock Units
A summary of nonvested restricted stock unit awards (RSUs) outstanding as of September 26, 2021 and changes during the three months then ended is as follows:
(awards and units in thousands) Number of RSUs   Weighted Average 
Grant-Date Fair Value
Nonvested at June 27, 2021 2,168  $57.38 
Granted 629  $92.52 
Vested (733) $51.59 
Forfeited (20) $67.05 
Nonvested at September 26, 2021 2,044  $70.18 
Stock-Based Compensation Valuation and Expense
The Company accounts for its employee stock-based compensation plans using the fair value method. The fair value method requires the Company to estimate the grant-date fair value of its stock-based awards and amortize this fair value to compensation expense over the requisite service period or vesting term.
The Company uses the Black-Scholes option-pricing model to estimate the fair value of the Company’s ESPP awards. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables. These variables include the expected stock price volatility over the term of the awards, the risk-free interest rate and expected dividends. Due to the inherent limitations of option-valuation models, future events that are unpredictable and the estimation process utilized in determining the valuation of the stock-based awards, the ultimate value realized by award holders may vary significantly from the amounts expensed in the Company’s financial statements.
For RSUs, the grant-date fair value is based upon the market price of the Company’s common stock on the date of the grant. This fair value is then amortized to compensation expense over the requisite service period or vesting term.
Stock-based compensation expense is recognized net of estimated forfeitures such that expense is recognized only for those stock-based awards that are expected to vest. A forfeiture rate is estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from initial estimates.
The Black-Scholes and Monte Carlo option pricing models require the input of highly subjective assumptions. The assumptions listed below represent management's best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if other assumptions had been used, recorded share-based compensation expense could have been materially different from that depicted below.
27

Total stock-based compensation expense was classified in the consolidated statements of operations as follows:
  Three months ended
(in millions of U.S. Dollars) September 26, 2021 September 27, 2020
Cost of revenue, net $3.1  $3.4 
Research and development 2.4  2.4 
Sales, general and administrative 9.1  7.9 
Total stock-based compensation expense $14.6  $13.7 
Stock-based compensation expense may differ from the impact of stock-based compensation to additional paid in capital due to manufacturing related stock-based compensation capitalized within inventory.

Note 12 – Income Taxes
In general, the variation between the Company's effective income tax rate and the U.S. statutory rate of 21% is primarily due to: (i) changes in the Company’s valuation allowances against deferred tax assets in the U.S. and Luxembourg, (ii) projected income for the full year derived from international locations with differing tax rates than the U.S. and (iii) projected tax credits generated.
The Company assesses all available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets by jurisdiction. As of September 26, 2021, the Company has concluded that it is necessary to recognize a full valuation allowance against its U.S. and Luxembourg deferred tax assets.
As a result of the LED Business Divestiture and the liquidation of the Company’s common stock ownership interest in ENNOSTAR, Inc., the Company began reviewing its legal entity structure, including its Luxembourg holding company, during the fourth quarter of fiscal 2021. As of September 26, 2021, the Company is still performing the due diligence necessary to understand its ability and desire to restructure its Luxembourg holding company. If the Company determines it is willing and able to execute a restructuring of its Luxembourg holding company, it is reasonably possible the action could generate taxable income of the right character to utilize all or a portion of the Company’s existing $121.8 million of deferred tax assets in Luxembourg. As a result, the Company believes it is reasonably possible within the next twelve months, and potentially as early as the second quarter of fiscal 2022, that objective positive evidence may become available to allow the Company to conclude that all or a portion of the $121.8 million of Luxembourg deferred tax assets are realizable. This determination would result in the release of all or a portion of the Luxembourg valuation allowance. The release of the Luxembourg valuation allowance could result in the recognition of $121.8 million of net operating loss deferred tax assets and a decrease to income tax expense in the period the release is recorded.
U.S. GAAP requires a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is cumulatively more than 50% likely to be realized upon ultimate settlement.
As of June 27, 2021, the Company's liability for unrecognized tax benefits was $7.4 million. During the three months ended September 26, 2021, the Company did not record any material movement in its unrecognized tax benefits. As a result, the total liability for unrecognized tax benefits as of September 26, 2021 was $7.4 million. If any portion of this $7.4 million is recognized, the Company will then include that portion in the computation of its effective tax rate. Although the ultimate timing of the resolution and/or closure of audits is highly uncertain, the Company believes it is reasonably possible that $0.6 million of gross unrecognized tax benefits will change in the next 12 months as a result of statute requirements or settlement with tax authorities.
The Company files U.S. federal, U.S. state and foreign tax returns. For U.S. federal purposes, the Company is generally no longer subject to tax examinations for fiscal years prior to 2017. For U.S. state tax returns, the Company is generally no longer subject to tax examinations for fiscal years prior to 2017. For foreign purposes, the Company is generally no longer subject to examination for tax periods prior to 2011. Certain carryforward tax attributes generated in prior years remain subject to examination, adjustment and recapture.

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Note 13 – Commitments and Contingencies
Litigation
The Company is currently a party to various legal proceedings. While management presently believes that the ultimate outcome of such proceedings, individually and in the aggregate, will not materially harm the Company’s financial position, cash flows, or overall trends in results of operations, legal proceedings are subject to inherent uncertainties, and unfavorable rulings could occur.  An unfavorable ruling could include monetary damages or, in matters for which injunctive relief or other conduct remedies may be sought, an injunction prohibiting the Company from selling one or more products at all or in particular ways. Were unfavorable final outcomes to occur, there exists the possibility of a material adverse impact on the Company’s business, results of operations, financial position and overall trends. The outcomes in these matters are not reasonably estimable.
Grant Disbursement Agreement (GDA) with the State of New York
The Company currently has a GDA with the State of New York Urban Development Corporation (doing business as Empire State Development). The GDA provides a potential total grant amount of $500.0 million to partially and fully reimburse the Company for certain property, plant and equipment costs related to the Company's construction of a new Silicon Carbide device fabrication facility in Marcy, New York.
The GDA was signed in the fourth quarter of fiscal 2020 and requires the Company to satisfy a number of objectives for the Company to receive reimbursements through the span of the 13-year agreement. These objectives include maintaining a certain level of local employment, investing a certain amount in locally administered research and development activities and the payment of an annual commitment fee for the first six years. Additionally, the Company has agreed, under a separate agreement (the SUNY Agreement), to sponsor the creation of two endowed faculty chairs and fund a scholarship program at SUNY Polytechnic Institute.
The annual cost of satisfying the objectives of the GDA and the SUNY Agreement, excluding the direct and indirect costs associated with employment, varies from $2.5 million to $5.2 million per year through fiscal 2031.
As of September 26, 2021, the Company has reduced property and equipment, net by $101.1 million as a result of GDA reimbursements, of which $61.5 million has been received in cash and an additional $26.4 million and $13.2 million are recorded as receivables in other current assets and other assets, respectively, in the consolidated balance sheets.
Note 14 - Restructuring
The Company has approved various operational plans that include restructuring costs. All restructuring costs are recorded in other operating expense on the consolidated statement of operations.
Factory Optimization Restructuring
In May 2019, the Company started a significant, multi-year factory optimization plan anchored by a state-of-the-art, automated 200mm capable Silicon Carbide and GaN fabrication facility and a large materials factory at its U.S. campus headquarters in Durham, North Carolina. As part of the plan, the Company will incur restructuring charges associated with the movement of equipment as well as disposals on certain long-lived assets.
In September 2019, the Company announced its intent to build a new Silicon Carbide device fabrication facility in Marcy, New York to complement the factory expansion underway at its U.S. campus headquarters in Durham, North Carolina. The Company has commenced the building of the New York facility and is currently evaluating the impact of this decision on future restructuring charges.
The Company expects approximately $90.0 million in restructuring charges related to the factory optimization plan to be incurred through 2024. For the three months ended September 26, 2021, the Company expensed $1.6 million of restructuring charges associated with the movement of equipment related to the factory optimization plan, of which $0.3 million is accrued for as of September 26, 2021. Additionally, the Company expensed $1.0 million of restructuring charges associated with disposals of certain long-lived assets for the three months ended September 26, 2021.
For the three months ended September 27, 2020, the Company expensed and paid $2.6 million of restructuring charges associated with the movement of equipment related to the factory optimization plan.
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Corporate Restructuring
In September 2020, the Company realigned certain resources to further focus on areas vital to our growth while driving efficiencies. As a result, the Company recorded $2.8 million in severance-related costs during the three months ended September 27, 2020. The plan has concluded and all expenses were paid as of June 27, 2021.

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Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations
Information set forth in this Quarterly Report on Form 10-Q contains various “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). All information contained in this report relative to future markets for our products and trends in and anticipated levels of revenue, gross margins and expenses, as well as other statements containing words such as “believe,” “project,” “may,” “will,” “anticipate,” “target,” “plan,” “estimate,” “expect” and “intend” and other similar expressions constitute forward-looking statements. These forward-looking statements are subject to business, economic and other risks and uncertainties, both known and unknown, and actual results may differ materially from those contained in the forward-looking statements. Any forward-looking statements we make are as of the date made, and except as required under the U.S. federal securities laws and the rules and regulations of the Securities and Exchange Commission (the SEC), we have no duty to update them if our views later change. These forward-looking statements should not be relied upon as representing our views as of any date subsequent to the date of this Quarterly Report. Examples of risks and uncertainties that could cause actual results to differ materially from historical performance and any forward-looking statements include, but are not limited to, those described in “Risk Factors” in Part II, Item 1A of this Quarterly Report.
Executive Summary
The following discussion is designed to provide a better understanding of our unaudited consolidated financial statements, including a brief discussion of our business and products, key factors that impacted our performance and a summary of our operating results. The following discussion should be read in conjunction with the unaudited consolidated financial statements and the notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q, and the consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended June 27, 2021 (the 2021 Form 10-K). Historical results and percentage relationships among any amounts in the financial statements are not necessarily indicative of trends in operating results for any future periods.

Overview
Wolfspeed, Inc., formerly known as Cree, Inc. (Wolfspeed, we, our, or us) is an innovator of wide bandgap semiconductors, focused on Silicon Carbide and gallium nitride (GaN) materials and devices for power and radio-frequency (RF) applications. Our Silicon Carbide and GaN materials and devices are targeted for applications such as transportation, power supplies, inverters and wireless systems.
During and prior to fiscal 2021, we designed, manufactured and sold specialty lighting-class light emitting diode (LED) products targeted for use in indoor and outdoor lighting, electronic signs and signals and video displays. On March 1, 2021, we completed the sale of certain assets and subsidiaries comprising our former LED Products segment (the LED Business) to SMART Global Holdings, Inc. (SGH) and its wholly owned newly-created acquisition subsidiary CreeLED, Inc. (CreeLED and collectively with SGH, SMART) (the LED Business Divestiture). We retained certain assets used in and pre-closing liabilities associated with our former LED Products segment.
Unless otherwise noted, discussions within this Quarterly Report relate to our continuing operations.
Our continuing operations consist entirely of our Wolfspeed business, which includes Silicon Carbide and GaN materials, power devices and RF devices based on wide bandgap semiconductor materials and silicon. Our materials products and power devices are used in electric vehicles, motor drives, power supplies, solar and transportation applications. Our materials products and RF devices are used in military communications, radar, satellite and telecommunication applications.
In January 2021, we announced plans to change our corporate name from Cree, Inc. to Wolfspeed, Inc., which was completed on October 4, 2021. In addition, we transferred the listing of our common stock to the New York Stock Exchange (NYSE) from The Nasdaq Global Select Market. We ceased trading as a Nasdaq-listed company at the end of the day on October 1, 2021 and commenced trading as a NYSE-listed company at market open on October 4, 2021 under the new ticker symbol ‘WOLF’.
The majority of our products are manufactured at our production facilities located in North Carolina, California and Arkansas. We also use contract manufacturers for certain products and aspects of product fabrication, assembly and packaging. We maintain captive lines at some of our contract manufacturers. Additionally, we are in the process of building a Silicon Carbide device fabrication facility in New York. We operate research and development facilities in North Carolina, California, Arkansas, Arizona, New York and China.
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Wolfspeed, Inc. is a North Carolina corporation established in 1987, and our headquarters are in Durham, North Carolina. For further information about our consolidated revenue and earnings, please see our consolidated financial statements included in Item 1 of this Quarterly Report.
Industry Dynamics and Trends
There are a number of industry factors that affect our business which include, among others:
COVID-19 Pandemic. Although vaccines for COVID-19 have been made available to the general public in the United States and in many places around the world, vaccination rates vary and vaccines may lose effectiveness over time. We are unable to predict how widely utilized the vaccines and boosters will be, whether and for how long they will be effective in preventing the spread of COVID-19 (including its variant strains), and when or if normal economic activity and business operations will resume. In light of the increasing percentage of vaccinated individuals, many previously implemented restrictions have gradually been lifted. While the number of new cases is significantly below the levels witnessed at the height of the COVID-19 pandemic, there was a significant uptick in the number of new cases, including so called ‘breakthrough’ cases involving individuals who were previously vaccinated, during the first quarter of fiscal 2022. Despite the availability of vaccines, COVID-19 and its variants continue to spread globally and to impact the locations where we do business. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and labor force participation and created significant volatility and disruption of financial markets. In order to combat the COVID-19 pandemic, significant business and travel restrictions and changes to behavior intended to reduce its spread were implemented. The COVID-19 pandemic has continued to affect us in a number of ways including, but not limited to, the impact on employees becoming ill, quarantined, or otherwise unable to work or travel due to illness or governmental restriction, the impact on customers and their related demand and/or purchases, the impact on our suppliers' and contract manufacturers' ability to fulfill our orders, and the overall impact of the aforementioned items that could cause output challenges and increased costs. The potential continued spread of COVID-19 and any of its variants could result in a number of additional adverse effects, including additional laws and regulations affecting our business, restoration and/or expansion of restrictions, fluctuations in foreign currency markets and the credit risks of our customers. We continue to pay close attention to the evolving development of, and the disruption to business and economic activities caused by, the COVID-19 pandemic. However, given the dynamic nature of the COVID-19 pandemic, it is not practicable to provide a reasonable estimate of its impact on our financial position, cash flows and operating results at the present.
Overall Demand for Products and Applications Using Our Wolfspeed Materials and Devices. Our potential for growth depends significantly on the adoption of Silicon Carbide and GaN materials and device products in the power and RF markets, the continued use of silicon devices in the RF telecommunications market and our ability to win new designs for these applications. Demand also fluctuates based on various market cycles, continuously evolving industry supply chains, trade and tariff terms, inflationary impacts, as well as evolving competitive dynamics in each of the respective markets. These uncertainties make demand difficult to forecast for us and our customers.
Supply Constraints. The semiconductor industry has experienced supply constraints for certain items. While we have successfully managed through challenges relating to obtaining certain necessary raw materials and production and processing equipment thus far, we expect the supply situation for these items to remain tight for at least the next few quarters. In addition, the current high demand for our products has led to supply constraints for our customers. We continue to work closely with our customer base to best match our supply to their demand. We have taken steps to provide continuity to our customers, to the extent possible, although we expect that constraints may continue to limit our shipments in the near term.
Governmental Trade and Regulatory Conditions. Our potential for growth, as with most multi-national companies, depends on a balanced and stable trade, political, economic and regulatory environment among the countries where we do business. Changes in trade policy such as the imposition or extension of tariffs or export bans to specific customers or countries could reduce or limit demand for our products in certain markets.
Intense and Constantly Evolving Competitive Environment. Competition in the industries we serve is intense. Many companies have made significant investments in product development, production equipment and production facilities. To remain competitive, market participants must continuously increase product performance, reduce costs and develop improved ways to serve their customers. To address these competitive pressures, we have invested in research and development activities to support new product development, lower product costs and deliver higher levels of performance to differentiate our products in the market. In addition, we invest in systems, people and new processes to improve our ability to deliver a better overall experience for our customers. Market participants often undertake pricing strategies to gain or protect market share, increase the utilization of their production capacity and open new applications in the power and RF markets we serve.
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Technological Innovation and Advancement. Innovations and advancements in materials, power, and RF technologies continue to expand the potential commercial application for our products. However, new technologies or standards could emerge or improvements could be made in existing technologies that could reduce or limit the demand for our products in certain markets.
Intellectual Property Issues. Market participants rely on patented and non-patented proprietary information relating to product development, manufacturing capabilities and other core competencies of their business. Protection of intellectual property is critical. Therefore, steps such as additional patent applications, confidentiality and non-disclosure agreements, as well as other security measures are generally taken. To enforce or protect intellectual property rights, litigation or threatened litigation is common.
Overview of the three months ended September 26, 2021
The following is a summary of our financial results for the three months ended September 26, 2021:
Revenue increased to $156.6 million for the three months ended September 26, 2021 from $115.5 million for the three months ended September 27, 2020.
Gross profit increased to $49.4 million for the three months ended September 26, 2021 from $35.5 million for the three months ended September 27, 2020. Gross margin was 31.5% for the three months ended September 26, 2021 and 30.7% for the three months ended September 27, 2020.
Operating loss was $65.7 million for the three months ended September 26, 2021 compared to $62.2 million for the three months ended September 27, 2020.
Diluted loss per share from continuing operations was $0.60 for the three months ended September 26, 2021 compared to $0.69 for the three months ended September 27, 2020.
Combined cash, cash equivalents and short-term investments was $857.8 million at September 26, 2021 and $1,154.6 million at June 27, 2021.
Cash used in operating activities from continuing operations was $62.5 million for the three months ended September 26, 2021 compared to cash provided by operating activities from continuing operations of $0.7 million for the three months ended September 27, 2020.
Purchases of property and equipment, net were $208.5 million (net of $50.8 million in reimbursements) for the three months ended September 26, 2021 compared to $113.5 million for the three months ended September 27, 2020.
Business Outlook
We believe we are uniquely positioned as an innovator in the global semiconductor industry. The strength of our balance sheet provides us the ability to invest in our business, as indicated by our ongoing construction of a state-of-the-art, automated 200mm Silicon Carbide device fabrication facility and an expansion of our materials factory to grow our Silicon Carbide production capacity, each of which was announced in May 2019. In September 2019, we announced our intention to build a new Silicon Carbide device fabrication facility in Marcy, New York to complement the factory expansion already underway at our U.S. campus headquarters in Durham, North Carolina. Construction on the new device fabrication facility commenced in the fourth quarter of fiscal 2020 and the facility is expected to start production in fiscal 2022. In fiscal 2022, we expect to incur an estimated $80.0 million of start-up and pre-production costs as we ramp production at this facility.
The completion of the LED Business Divestiture on March 1, 2021 represented a key milestone in our transformation to be a global semiconductor powerhouse focused on disruptive technology solutions for high-growth applications. This transaction positioned us with a sharpened strategic focus to lead the semiconductor industry transition from silicon to Silicon Carbide and further strengthened our financial position, which we plan to utilize in order to support continued investments to capitalize on multi-decade growth opportunities across electrical vehicles (EVs), 5G and industrial applications.
We are focused on investing in our business to expand the scale, further develop the technologies, and accelerate the growth opportunities of Silicon Carbide materials, Silicon Carbide power devices and modules, and GaN and silicon RF devices. We believe these efforts will support our goals of delivering higher revenue and shareholder returns over time.
In addition, we are focused on improving the number of usable items in a production cycle (yield) as our manufacturing technologies become more complex. Despite increased complexities in our manufacturing process, we believe we are in a position to improve yield levels to support our future growth, particularly as we transition to our new Silicon Carbide device fabrication facility in Marcy, New York.
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In regards to COVID-19, we have instituted strict measures designed to balance employee safety with meeting the needs of business operations. These measures include increased employee sick days, robust health screening, social distancing policies and cleaning protocols to ensure the safety of our employees and the protection of our customers, suppliers, and partners.
We believe we have the ability to navigate the current environment while maintaining our capital expenditure plans to support future growth, including the construction of new facilities in New York and additional production capacity in North Carolina. Even so, our short-term impacts from COVID-19 to our financial position, results of operations and cash flows remain uncertain.
Change in Estimate
As a result of the LED Business Divestiture and our continued investment in 200mm technology, we evaluated the useful lives applied to certain machinery and equipment assets by considering industry standards and reviewing the assets' historical and estimated future use. In the first quarter of fiscal 2022, we increased the expected useful lives of these assets by two to five years to more closely reflect the estimated economic lives of those assets. This change in estimate was applied prospectively effective for the first quarter of fiscal 2022 and resulted in a decrease in depreciation expense of $8.4 million for the first quarter of fiscal 2022. Approximately $7.1 million of the decrease in depreciation expense resulted in a reduction of inventory as of September 26, 2021 and will impact cost of revenue, net in future periods as the inventory is relieved. The remaining $1.3 million of reduced depreciation expense resulted in the following: (1) an improvement in gross profit of $0.5 million; (2) an improvement in both loss before income taxes and net loss of $1.3 million; and (3) an improvement in basic and diluted loss per share of $0.01 per share. We expect the impact to gross profit to be approximately $8.0 million per quarter by the end of the year as inventory is relieved.
Results of Operations
Selected consolidated statements of operations data for the three months ended September 26, 2021 and September 27, 2020 is as follows:
 
Three months ended
September 26, 2021 September 27, 2020
(in millions of U.S. Dollars, except share data) Amount % of Revenue Amount % of Revenue
Revenue, net $156.6  100.0  % $115.5  100.0  %
Cost of revenue, net 107.2  68.5  80.0  69.3 
Gross profit 49.4  31.5  35.5  30.7 
Research and development 49.9  31.9  41.2  35.7 
Sales, general and administrative 49.0  31.3  44.0  38.1 
Amortization or impairment of acquisition-related intangibles 3.6  2.3  3.6  3.1 
(Gain) loss on disposal or impairment of other assets (0.2) (0.1) 0.3  0.3 
Other operating expense 12.8  8.2  8.6  7.4 
Operating loss (65.7) (42.0) (62.2) (53.9)
Non-operating expense, net 4.1  2.6  13.9  12.0 
Loss before income taxes (69.8) (44.6) (76.1) (65.9)
Income tax expense (benefit) 0.3  0.2  (0.8) (0.7)
Net loss from continuing operations ($70.1) (44.8) ($75.3) (65.2)
Net loss from discontinued operations —  —  (108.8) (94.2)
Net loss (70.1) (44.8) (184.1) (159.4)
Net income from discontinued operations attributable to noncontrolling interest —  —  0.3  0.3 
Net loss attributable to controlling interest ($70.1) (44.8) ($184.4) (159.7)
Basic and diluted loss per share
Continuing operations ($0.60) ($0.69)
Net loss attributable to controlling interest ($0.60) ($1.68)

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Revenue

Revenue was comprised of the following:
  Three months ended
(in millions of U.S. Dollars) September 26, 2021 September 27, 2020 Change
Revenue $156.6  $115.5  $41.1  36  %
Revenue
Revenue for the three months ended September 26, 2021 increased when compared to the three months ended September 27, 2020 due to increased demand across all of our product lines, as well as increased production capacity to meet the increased demand.
Gross Profit and Gross Margin
Gross profit and gross margin were as follows:
Three months ended
(in millions of U.S. Dollars) September 26, 2021 September 27, 2020 Change
Gross profit $49.4  $35.5  $13.9  39  %
Gross margin 31.5  % 30.7  %

Gross Profit and Gross Margin
The increase in gross profit and gross margin for the three months ended September 26, 2021 compared to the three months ended September 27, 2020 is primarily due to increased revenues in the current period and cost improvements.

Research and Development
Research and development expenses include costs associated with the development of new products, enhancements of existing products and general technology research. These costs consisted primarily of employee salaries and related compensation costs, occupancy costs, consulting costs and the cost of development equipment and supplies. Research and development costs also include developing supporting technologies for our expansion to a new Silicon Carbide device fabrication facility in Marcy, New York.
Research and development expenses were as follows:
  Three months ended
(in millions of U.S. Dollars) September 26, 2021 September 27, 2020 Change
Research and development $49.9  $41.2  $8.7  21  %
Percent of revenue 32  % 36  %
The increase in research and development expenses is primarily due to our continued investment in our Silicon Carbide and GaN technologies, including the development of existing Silicon Carbide materials and fabrication technology for next generation platforms and expansion of our power and RF product portfolio.
Our research and development expenses vary significantly from year to year based on a number of factors, including the timing of new product introductions and the number and nature of our ongoing research and development activities.
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Sales, General and Administrative
Sales, general and administrative expenses are comprised primarily of costs associated with our sales and marketing personnel and our executive and administrative personnel (for example, finance, human resources, information technology and legal) and consists of salaries and related compensation costs; consulting and other professional services (such as litigation and other outside legal counsel fees, audit and other compliance costs); marketing and advertising expenses; facilities and insurance costs; and travel and other costs.
Sales, general and administrative expenses were as follows:
  Three months ended
(in millions of U.S. Dollars) September 26, 2021 September 27, 2020 Change
Sales, general and administrative $49.0  $44.0  $5.0  11  %
Percent of revenue 31  % 38  %
The increase in sales, general and administrative expenses for the three months ended September 26, 2021 compared to September 27, 2020 was primarily due to increased salaries and benefits, including incentive based stock-based compensation, partially offset by a decrease in professional service fees primarily related to transition services incurred in the first quarter of fiscal 2021 in connection with the sale of our former Lighting Products business unit.

Amortization or Impairment of Acquisition-Related Intangibles
As a result of our acquisitions, we have recognized various amortizable intangible assets, including customer relationships, developed technology, non-compete agreements and trade names.
Amortization of intangible assets related to our acquisitions was as follows:
  Three months ended
(in millions of U.S. Dollars) September 26, 2021 September 27, 2020 Change
Customer relationships $1.5  $1.5  $—  —  %
Developed technology 1.4  1.4  —  —  %
Non-compete agreements 0.7  0.7  —  —  %