What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-07-13 compared with 2020-04-10 · 124 added, 146 removed, 274 unchanged (50% of the section changed)

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Declining cash position.

The outcome of the pending trial verdict on our ability to retain the $500,000 partial payment of the uncompleted $1.6 million note financing as liquidated damages.

The ability to retain the $500,000 partial payment of the uncompleted $1.6 million note financing as liquidated damages and the ability to pay a judgment should the court determine that we must repay some or all of the prepayment.

Our ability to improve our liquidity, access alternative sources of funding and obtain additional equity capital or credit when necessary for our operations, the difficulty of which may increase if our common stock is delisted from the NASDAQ Stock Market.

Our ability to regain compliance with the minimum stockholders’ equity requirement by May 25, 2020 to avoid our stock being delisted from the Nasdaq Capital Market.

The impact of the COVID-19 pandemic on our business and the business of our customers.

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Difficulty in managing our future growth or in responding to a need to contract operations, and the associated changes to our operations.

Adverse development in those selected markets, including the N etherlands, Taiwan, the United States and China, where our revenues are concentrated , including the impact of the COVID-19 pandemic on customer demand .

Adverse development in those selected markets, including the Netherlands, Taiwan, the United States and China, where our revenues are concentrated, including the impact of the COVID-19 pandemic on customer demand.

Our ability to develop and execute upon a new strategy to exploit the China and India market.

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Our ability to obtain necessary regulatory approvals to make further investments in Taiwan SemiLEDs.

Our ability to appoint a new independent director to regain compliance with the Nasdaq continued listing requirements necessary to avert delisting of our common stock.

Catastrophic events such as fires, earthquakes, floods, tornados, tsunamis, typhoons, pandemics, including the COVID-19 pandemic, wars, terrorist activities and other similar events, particularly if these events occur at or near our operations, or the operations of our suppliers, contract manufacturers and customers.

Our ability to maintain the minimum stockholders’ equity required to remain in compliance with the Nasdaq continued listing requirements necessary to avert delisting of our common stock.

Catastrophic events such as fires, earthquakes, floods, tornados, tsunamis, typhoons, pandemics, wars, terrorist activities and other similar events, particularly if these events occur at or near our operations, or the operations of our suppliers, contract manufacturers and customers.

The effect of the legal system in the People’s Republic of China, or the PRC.

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We have not assumed any obligation to, and you should not expect us to, update or revise these statements because of new information, future events or otherwise.

For more information on the significant risks that could affect the outcome of the se forward-looking statements, see Item 1A “Risk Factors” in Part I of our Annual Repo rt on Form 10-K for the fiscal year ended August 31, 201 9 , or the 201 9 Annual Report, and those contained in Part II, Item 1A of this Quarterly Report, and other information provided from time to time in our filings with the Securities and Exchange Commiss ion, or the SEC.

The following discussion and analysis of our financial condition and results of operations is based upon and should be read in conjunction with the unaudited interim condensed consolidated financial statements and the notes and other information included elsewhere in this Quarterly Report, in our 2019 Annual Report, and in other filings with the SEC.

For more information on the significant risks that could affect the outcome of these forward-looking statements, see Item 1A “Risk Factors” in Part I of our Annual Report on Form 10-K for the fiscal year ended August 31, 2019, or the 2019 Annual Report, and those contained in Part II, Item 1A of this Quarterly Report, and other information provided from time to time in our filings with the Securities and Exchange Commission, or the SEC.

The following discussion and analysis of our financial condition and results of operations is ba sed upon and should be read in conjunction with the unaudited interim condensed consolidated financial statements and the notes and other information included elsewhere in this Quarterly Report, in our 201 9 Annual Report, and in other filings with the SEC.

Company Overview

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utilizing nanoscale surface engineering to improve usable light extraction;

manufacturing extremely small footprint LEDs with optimized yield, ideal for Mini LED applications;

developing a LED structure that generally consists of multiple epitaxial layers which are vertically-stacked on top of a copper alloy base;

developing low cost Chip Scaled Packaging (CSP) technology.

developing multi-pixel Mini LED packages for commercial displays.

These technical capabilities enable us to produce LED chips, LED component, LED modules and System products.

We believe these capabilities and know-how should also allow us to reduce our manufacturing costs and our dependence on sapphire, a costly raw material used in the production of sapphire-based LED devices.

We were incorporated in the State of Delaware on January 4, 2005.

These technical capabilities enable us to produce LED chips and LED component products.

We believe these capabilities, know-how and partnership should also allow us to reduce our manufacturing costs and our dependence on sapphire, a costly raw material used in the production of sapphire-based LED devices.

We were incorporated in the State of Delaware on January 4, 2005 and sold our first LED chips in November 2005.

We are a holding company for various wholly and majority owned subsidiaries.

SemiLEDs Optoelectronics Co., Ltd., or Taiwan SemiLEDs, is our wholly owned operating subsidiary, where a substantial portion of our assets are held and located, where a portion of our research, development, manufacturing and sales activities take place.

Taiwan SemiLEDs owns an approximately 97% equity interest in Taiwan Bandaoti Zhaoming Co., Ltd., formerly known as Silicon Base Development, Inc., which is engaged in the research, development, manufacture, and substantial portion of marketing and sale of LED products, including lighting fixtures and systems, and where most of our employees are based.

Taiwan SemiLEDs owns a 97% equity interest in Taiwan Bandaoti Zhaoming Co., Ltd., formerly known as Silicon Base Development, Inc., which is engaged in the research, development, manufacture, and substantial portion of marketing and sale of LED products, and where most of our employees are based.

Key Factors Affecting Our Financial Condition, Results of Operations and Business

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COVID-19 Pandemic.

In December 2019, a novel coronavirus disease (“COVID-19”) was reported and in January 2020, the World Health Organization (“WHO”) declared it a Public Health Emergency of International Concern.

On February 28, 2020, the WHO raised its assessment of the COVID-19 threat from high to very high at a global level due to the continued increase in the number of cases and affected countries, and on March 11, 2020, the WHO characterized COVID-19 as a pandemic.

The potential effects of COVID-19 could impact us in a number of other ways including, but not limited to, individuals could become ill, quarantined, or otherwise unable to work and/or travel due to health reasons or governmental restrictions.

Also, governments may impose other laws, regulations or taxes which could adversely impact our business, financial condition or results of operations.

Further, if our customers’ businesses are similarly affected, they might delay or reduce purchases from us.

To the extent that COVID-19 continues or worsens, governments may impose additional restrictions.

The result of COVID-19 and those restrictions could result in a number of adverse impacts including, but not limited to, reductions to our profitability, laws and regulations affecting our business, fluctuations in foreign currency markets, the availability of future borrowings, the cost of borrowings, credit risks of our customers, and supply chains being interrupted, slowed, or rendered inoperable.

As a result, it may be challenging to return to the profitability.

In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic, which continues to spread throughout the world.

As a result, and in consideration of the health and well-being of our employees, customers and communities, and in support of efforts to contain the spread of the virus, we have taken several precautionary measures and adjusted our operational needs.

Our work places are operating under enhanced measures to ensure the health and safety of our employees, including limiting the visitors coming into our work place and using videoconferencing for meetings when possible.

Our business, financial condition, liquidity and operating results have been, and will continue to be, adversely affected by COVID-19 and related restrictions.

The conditions caused by the COVID-19 pandemic have adversely affected our customers’ ability or willingness to purchase our products or services,

delay ed prospective customers’ purchasing decisions, adversely impact ed our ability to provide or deliver products and on-site services to our customers, delay ed the provisi oning of our offerings, or lengthen ed payment terms, all of which could adversely affect our future sales, operating results and overall financial performance.

Our operations have also begun to be negatively affected by a range of external factors related to the COVID-19 pandemic that are not within our control.

For example, many cities, counties, states, and even countries have imposed or may impose a wide range of restrictions on our employees, partners and customers physical movement to limit the spread of COVID-19 .

Also, some of our suppliers located in China are unable to produce as before, as a result, we have to find substitutes of some raw-materials or new suppliers in Taiwan or other place with higher price, and in the worst case we have had to post pone promised deliver dates.

Several customers postponed or cancelled their order because of the delay.

To avoid cash shortage due to the pandemic, we applied and received subsidies from the Taiwan government with a promise to not lay off employees or take any actions which could influence employees’ welfare, such as reducing employees’ compensation and salaries or forcing employees to take working days off without pay, until the end of a month when the last installment of subsidy is wired.

Our bank also granted us a deferment period for twelve months starting from May 2020.

During this period, we do n o t need to pay the monthly payments of the principal but only the interest.

However, g iven the ongoing and evolving economic and business impact of the COVID -19 pandemic, we may be required to further revise certain acco unting estimates and judgments which could have a material adverse effect on our financial position and results of operations .

Our ability to raise additional debt, sell additional equity securities and improve our liquidity.

We may need to improve our liquidity, access alternative sources of funding and obtain additional equity capital or credit when necessary for our operations.

We need to improve our liquidity, access alternative sources of funding and obtain additional equity capital or credit when necessary for our operations.

However, we may not be able to obtain such debt funding or sell equity securities on terms that are favorable to us, or at all.

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LEDs for efficient generation of UV light are also starting to gain attention for various medical, germicidal and industrial applications.

Since a substantial portion of our LED chips, LED components and our lighting products are used by end- users in general lighting applications and specialty industrial applications such as UV curing, medical/cosmetic, counterfeit detection, horticulture, architectural lighting and entertainment lighting the adoption of LEDs into these applications will have a strong impact on the demand of LED chips generally and, as a result, for our LED chips, LED components and LED lighting products.

Since a substantial portion of our LED chips, LED components and our lighting products are used by end- users in general lighting applications and specialty industrial applications such as UV curing, medical/cosmetic, counterfeit detection, horticulture, architectural lighting and entertainment lighting the adoption of LEDs into these applications should have a strong impact on the demand of LED chips generally and, as a result, for our LED chips, LED components and LED lighting products.

Average selling price of our products.

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Changes in our product mix.

We anticipate that our gross margins will continue to fluctuate from period to period as a result of the mix of products that we sell and the utilization of our manufacturing capacity in any given period, among other things.

For example, we continue to pursue opportunities for profitable growth in areas of our business where we see the best opportunity to develop as an end-to-end LED module solution supplier by providing our c ustomers with high quality, flexible and more complete LED system solution, customer technical support and LED module/system design, as opposed to just providing customers with individual components.

As a strategic plan, we have placed greater emphasis on the sales of LED components rather than the sales of LED chips where we have been forced to cut pri ces on older inventory.

We anticipate that our gross margins will continue to fluctuate from period to period as a result of the mix of products that we sell and the utilizat ion of our manufacturing capacity in any given period, among other things.

For example, we continue to pursue opportunities for profitable growth in areas of our business where we see the best opportunity to develop as an end-to-end LED module solution sup plier by providing our customers with high quality, flexible and more complete LED system solution, customer technical support and LED module/system design, as opposed to just providing customers with individual components.

As a strategic plan, we have pla ced greater emphasis on the sales of LED components rather than the sales of LED chips where we have been forced to cut pri ces on older inventory.

Steady growth of the module product and the continued commercial sales of our UV LED product are expected to improve our gross margin, operating results and cash flows.

In addition, we have adjusted the lower-priced LED components strategy as appropriate.

We have adopted a strategy to adjust our product mix by exiting certain high volume but low unit selling price product lines in respo nse to the general trend of lower average selling prices for products that have been available in the market for some time.

However, as we expand and diversify our product offerings and with varying average selling prices, or execute new business initiativ es, a change in the mix of products that we sell in any given period may increase volatility in our revenues and gross margin from period to period.

We hav e adopted a strategy to adjust our product mix by exiting certain high volume but low unit selling price product lines in response to the general trend of lower average selling prices for products that have been available in the market for some time.

Howev er, as we expand and diversify our product offerings and with varying average selling prices, or execute new business initiatives, a change in the mix of products that we sell in any given period may increase volatility in our revenues and gross margin fro m period to period.

Our ability to reduce cost to offset lower average selling prices.

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When the global economy slows or a financial crisis occurs, consumer and government confidence declines, with levels of government grants and subsidies for LED adoption and consumer spending likely to be adversely impacted.

Our revenues have been concentrated in a few select markets, including the Netherlands, Taiwan, the United States and China (including Hong Kong).

Our revenues have been concentrated in a few select markets, including the Netherlands, Taiwan, the United States, Germany, Japan and India.

Given that we are operating in a rapidly changing industry, our sales in specific markets may fluctuate from quarter to quarter.

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Some of our largest customers and what we produce/have produced for them have changed from quarter to quarter primarily as a result of the timing of discrete, large project‑based purchases and broadening customer base, among other things.

For the three and the six months ended February 29, 2020, sales to our three largest customers, in the aggregate, accounted for 64% and 52% of our revenues, respectively.

For the three and the nine months ended May 31, 2020, sales to our three largest customers, in the aggregate, accounted for 61% and 59% of our revenues, respectively.

Intellectual property issues.

Competitors of ours and other third parties have in the past and will likely from time to time in the future allege that our products infringe on their intellectual property rights.

Defending against any intellectual property infringement claims would likely result in costly litigation and ultimately may lead to our not being able to manufacture, use or sell products found to be infringing.

Competitors of ours and other third parties have in the past and will likely from time to time in the future a llege that our products infringe on their intellectual property rights.

In June 2012, we settled an intellectual property dispute involving Cree.

We agreed to dismiss amend ed complaints filed against each other without prejudice.

We agreed to the entry of a permanent injunction that was effective October 1, 2012 that precludes us from (and/or from assisting others in) making, using, importing, selling and/or offering to sell in the United States certain accused products and/or any device that includes such an accused product after that date and to payment of a settlement fee for past damages.

We agreed to dismiss amended complaints filed against each other without prejudice.

We agreed to the entry of a permanent injunction that was effective Oc tober 1, 2012 that precludes us from (and/or from assisting others in) making, using, importing, selling and/or offering to sell in the United States certain accused products and/or any device that includes such an accused product after that date and to pa yment of a settlement fee for past damages.

All remaining claims between Cree and us were withdrawn without prejudice, with each retaining the right to assert them in the future.

However, other third parties may also assert infringement claims against our customers with respect to our products, or our customers’ products that incorporate our technologies or products.

Any such legal action or the threat of legal action against us, or our customers, could impair such customers’ continued demand for our products.

Any such legal action or the threat of legal action against us, or our customers, could impair such customers’ continued demand for our produc ts.

This could prevent us from growing or even maintaining our revenues, or cause us to incur additional costs and expenses, and adversely affect our financial condition and results of operations.

Cash position.

Our cash and cash equivalents increased to $3.2 million as of February 29, 2020 primarily due to the combination of our proceeds from borrowing of long-term debt and the issuance of common stocks in a private placement, offset by net cash used in operating activities.

Our cash and cash equivalents increased to $2.5 million as of May 31, 2020 primarily due to the combination of our proceeds from borrowing of long-term debt and the issuance of common stock in a private placement, offset by net cash used in operating activities.

We have implemented actions to accelerate operating cost reductions and improve operational efficiencies.

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Based on our current financial projections, we believe that we will have sufficient sources of liquidity to fund our operations and capital expenditure plans for the next 12 months.

Please see “Critical Accounting Policies and Estimates” for more information about our liquidity plans.

Critical Accounting Policies and Estimates

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and there was no material impact on our consolidated financial results of operations or cash flows due to the adoption.

Except as described above, there have been no material changes in the matters for which we make critical accounting policies and estimates in the preparation of our unaudited interim condensed consolidated financial statements for the three months ended November 30, 2019 as compared to those disclosed in our 2019 Annual Report.

Except as described above, there have been no material changes in the matters for which we make critical accounting policies and estimates in the preparation of our unaudited interim condensed consolidated financial statements for the nine months ended May 31, 2020 as compared to those disclosed in our 2019 Annual Report.

Exchange Rate Information

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dollars were made at the exchange rates as set forth in the statistical release of the Bank of Taiwan.

On February 29, 2020, the exchange rate was 30.25 NT dollars to one U.S.

On April 6, 2020, the exchange rate was 30.18 NT dollars to one U.S.

On May 31, 2020, the exchange rate was 30.02 NT dollars to one U.S.

On July 7, 2020, the exchange rate was 29.55 NT dollars to one U.S.

No representation is made that the NT dollar or U.S.

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Results of Operations

Three Months Ended February 29, 2020 Compared to the Three Months Ended February 28, 2019

Three Months Ended May 31, 2020 Compared to the Three Months Ended May 31, 2019

Three Months Ended

February 29, 2020

February 28, 2019

(in thousands)

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Revenues, net

Our revenues decreased by 6% to $1.5 million for the three months ended February 29, 2020 from $1.6 million for the three months ended February 28, 2019.

The decrease in revenues was driven primarily by a $630 thousand decrease in sales of LED components and a $17 thousand decrease in lighting products offset in part by a $533 thousand increase in other revenue and a $21 thousand increase in LED chips.

Revenues attributable to the sales of our LED chips were $36 thousand and $15 thousand, representing 2% and 1%, respectively, of our revenues for the three months ended February 29, 2020 and February 28, 2019, primarily due to varying volumes sold for the LED chips.

Our revenues decreased by 10% to $1.6 million for the three months ended May 31, 2020 from $1.7 million for the three months ended May 31, 2019.

The $176 thousand decrease in revenues reflects a $346 thousand decrease in revenues attributable to sales of LED components, offset partially by a $165 thousand increase in other revenues.

Revenues attributable to the sales of our LED chips were $11 thousand and $7 thousand, respectively, of our revenues for the three months ended May 31, 2020 and 2019, primarily due to lower volume sold for the LED chips.

We have adopted a strategy to adjust our product mix by exiting certain high volume but low unit selling price product lines in response to the general trend of lower average selling prices for products that have been available in the market for some time and to focus on profitable products.

Revenues attributable to the sales of our LED components represented 53% and 88% of our revenues for the three months ended February 29, 2020 and February 28, 2019, respectively.

The decrease in revenues attributable to sales of LED components was primarily due to lower volumes sold for the UV LED product, which we particularly focus on within the niche LED markets.

Revenues attributable to the sales of lighting products represented 8% and 9% of our revenues for the three months ended February 29, 2020 and February 28, 2019, respectively.

Revenues attributable to the sales of lighting products were slightly lower for the three months ended February 29, 2020 primarily due to lower volumes sold.

Revenues attributable to other revenues represented 37% and 2% of our revenues for the three months ended February 29, 2020 and February 28, 2019, respectively.

The increase in revenues attributable to other revenues was primarily due to the provision of service s and the sale of raw materials.

Revenues attributable to the sales of our LED components represented 59% and 73% of our revenues for the three months ended May 31, 2020 and 2019, respectively.

The decrease in revenues attributable to sales of LED components was primarily due to the declining demand, offset in part by a higher average selling price for the UV LED product, which we particularly focus on within the niche LED markets.

Revenues attributable to the sales of lighting products represented 10% and 9% of our revenues for the three months ended May 31, 2020 and 2019, respectively.

Revenues attributable to the sales of lighting products were slightly higher for the three months ended May 31, 2020 primarily due to higher volumes sold.

Revenues attributable to other revenues represented 30% and 18% of our revenues for t he three months ended May 31, 2020 and 2019, respectively.

The $1 65 thousand in crease in other revenues reflects a n $ 88 thousand in crease in the sale of raw material s , and a $77 thousand increase in the provision of services .

Cost of Revenues

Our cost of revenues decreased by 39% from $1.6 million for the three months ended February 28, 2019 to $989 thousand for the three months ended February 29, 2020.

Our cost of revenues decreased by 18% from $1.4 million for the three months ended May 31, 2019 to $1.2 million for the three months ended May 31, 2020.

The decrease in cost of revenues was primarily due to the effort of focusing on profitable products and services.

Our gross profit increased from $2 thousand for the three months ended February 28, 2019 to $548 thousand for the three months ended February 29, 2020.

Our gross margin percentage increased from breakeven for the three months ended February 28, 2019 to 36% for the three months ended February 29, 2020 as a consequence of the focusing on profitable products as more fully described above.

Our gross profit increased from $340 thousand for the three months ended May 31, 2019 to $416 thousand for the three months ended May 31, 2020.

Our gross margin percentage increased from 19% to 27% for the three months ended May 31, 2020 as a consequence of the focusing on profitable products as more fully described above.

Operating Expenses

Three Months Ended

February 29, 2020

February 28, 2019

(in thousands)

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Total operating expenses

Research and development

Our research and development expenses were $307 thousand and $298 thousand for the three months ended February 29, 2020 and February 28, 2019, respectively.

The increase was primary due to a $7 thousand increase in payroll and compensation.

Selling, general and administrative

Our selling, general and administrative expenses increased from $619 thousand for the three months ended February 28, 2019 to $633 thousand for the three months ended February 29, 2020.

The increase was mainly attributable to a $33 thousand increase in Delaware Franchise tax due to a reversal of an accrual in the three months ended February 28, 2020, offset partially by decreases in insurance expenses and in payroll and stock-based compensation.

Research and development Our research and development expenses were $375 thousand and $444 thousand for the three months ended May 31, 2020 and 2019, respectively.

The decrease was primary due to a $79 thousand decrease in materials and supplies used for our new products, offset partially by increases in depreciation and amortization expense and various other expenses.

Selling, general and administrative Our selling, general and administrative expenses increased from $597 thousand for the three months ended May 31, 2019 to $782 thousand for the three months ended May 31, 2020.

The increase was mainly attributable to a $210 thousand increase in professional services fee and a $50 thousand increase in insurance fees, offset partially by a decrease in payroll and stock based compensation.

Other Income (Expenses)

Three Months Ended

February 29, 2020

February 28, 2019

(in thousands)

Gain on disposal of investment

Interest expenses, net

Other income (expenses), net

Foreign currency transaction gain, net

Other income, net

Foreign currency transaction gain (loss), net

Total other income (expenses), net

Gain on disposal of investment We recognized a gain of $ 634 thousand for the three months ended February 29, 2020.

On November 27, 2019, we entered into a stock purchase agreement to sell all of the outstanding shares of our Hong Kong Subsidiary, Semileds International Corpor ation Limited, and its wholly owned subsidiary Xuhe Guangdian Co Ltd for $100,000 and an additional $40,000 for the transaction cost.

The $140,000 was fully received in November 2019, and the transaction was approved by the authority and closed in January 2020.

Interest expenses, net The increase in interest expenses, net was primarily due to the increase in debt balance, resulting from issuance of $2 million of convertible notes in December 2019, and our entry into an aggregate amount of $3.2 million loan of agreements in January 8, 2019, with each of our Chairman and Chief Executive Officer and our largest shareholder.

Other income (expenses), net Other income (expenses), net increase from an expense of $126 thousand for the three months ended February 28, 2019, to an income of $167 thousand for the three months ended February 29, 2020, primarily due to the settlement of the lawsuit with Epistar in the three months ended February 28, 2019.

Foreign currency transaction gain, net We recognized a net foreign currency transaction gain of $41 thousand and $233 thousand for the three months ended February 29, 2020 and February 28, 2019, respectively, primarily due to the depreciation of the U.S.

Interest expenses, net The increase in interest expenses, net was primarily due to the increase in debt balance, resulting from issuance of $2 million of convertible notes in December 2019.

Other income, net Other income, net increase from $94 thousand for the three months ended May 31, 2019 to $270 thousand for the three months ended May 31, 2020, primarily due to a financial subsidy from the Taiwan government for the economic impact resulting from the COVID-19 pandemic.

Foreign currency transaction loss , net We recognized a net foreign currency transaction gain of $ 57 thousand and a loss of $ 177 thousand for the thre e months ended May 31 , 20 20 and 201 9 , respectively , primarily due to the depreciation of the U.S.

dollar against the NT dollar from bank deposits and accounts receivables.

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subsidiaries relating to the parent’s deductions for payments to the subsidiaries.

Net Income Attributable to Noncontrolling Interests

Net Gain Attributable to Noncontrolling Interests

Three Months Ended

February 29, 2020

February 28, 2019

(in thousands)

Net income attributable to noncontrolling interests

We recognized net income attributable to non-controlling interests of $2 thousand and $3 thousand for the three months ended February 29, 2020 and February 28, 2019, respectively, which was attributable to the share of the net losses of Taiwan Bandaoti Zhaoming Co., Ltd held by the remaining non-controlling holders.

Non-controlling interests represented both 3.29% equity interest in Taiwan Bandaoti Zhaoming CO., Ltd, as of February 29, 2020 and February 28, 2019.

Six Months Ended February 29, 2020 Compared to the Six Months Ended February 28, 2019

Six Months Ended

February 29, 2020

February 28, 2019

Net gain attributable to noncontrolling interests

We recognized net gain attributable to non-controlling interests of $4 thousand and $1 thousand for the three months ended May 31, 2020 and 2019, respectively, which was attributable to the share of the net losses of Taiwan Bandaoti Zhaoming Co., Ltd held by the remaining non-controlling holders.

As of May 31, 2020 and 2019, non-controlling interests represented 3.25% and 3.29% equity interest, respectively, in Taiwan Bandaoti Zhaoming CO., Ltd.

Nine months Ended May 31, 2020 Compared to the Nine months Ended May 31, 2019

Nine Months Ended

(in thousands)

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Cost of revenues

Gross profit (loss)

Other includes primarily revenues attributable to the sale of epitaxial wafers, scraps and raw materials and the provision of services.

Revenues, net

Our revenues increased by 19% from $2.6 million for the six months ended February 28, 2019 to $3.1 million for the six months ended February 29, 2020.

The $498 thousand increase in revenues reflects an $886 thousand increase in revenues attributable to other revenue, offset by a $40 thousand decrease in sales of LED chips, a $236 thousand decrease in sales of LED components, and a $112 thousand decrease in revenues attributable to sales of lighting products.

Revenues attributable to the sales of our LED chips represented 1% and 3% of our revenues for the six months ended February 29, 2020 and February 28, 2019, respectively.

The decrease of 48% in revenues attributable to sales of LED chips was a result of a decrease in the volume of LED chips sold, primarily due to our strategic plan to place greater emphasis on the sales of LED components rather than the sales of LED chips.

Revenues attributable to the sales of our LED components represented 61% and 82% of our revenues for the six months ended February 29, 2020 and February 28, 2019, respectively.

Our revenues increased by 7% from $4.3 million for the nine months ended May 31, 2019 to $4.7 million for the nine months ended May 31, 2020.

The $322 thousand increase in revenues reflects a $1.1 million increase in revenues attributable to other revenues, offset partially by a $36 thousand decrease in revenues attributable to sales of LED chips, a $582 thousand decrease in sales of LED components, and a $111 thousand decrease in revenues attributable to sales of lighting products.

Revenues attributable to the sales of our LED chips represented 1 % and 2 % of our revenues for the nine months ended May 31 , 20 20 and 20 19 , r espectively.

The dec rease of 40 % in revenues attributable to sales of L ED chips was a result of a decrease in the volume of LED chips sold, offset slightly by a higher average selling price, primarily due to our strategic plan to place greater emphasis on the sales of LED com ponents rather than the sales of LED chips.

Revenues attributable to the sales of our LED components represented 60% and 78% of our revenues for the nine months ended May 31, 2020 and 2019, respectively.

The decrease in revenues attributable to sales of LED components was primarily due to lower volumes sold for the UV LED product, which we particularly focus on within the niche LED markets.

Revenues attributable to the sales of lighting products represented 7% and 12% of our revenues for the six months ended February 29, 2020 and February 28, 2019, respectively.

Revenues attributable to the sales of lighting products was $122 thousand lower for the six months ended February 29, 2020 primarily due to a slowdown in demand on LED luminaries compared to the six months ended February 28, 2019.

Revenues attributable to other revenues represented 31% and 3% of our revenues for the six months ended February 29, 2020 and February 28, 2019, respectively.

Revenues attributable to the sales of lighting products represented 8% and 11% of our revenues for the nine months ended May 31, 2020 and 2019, respectively.

Revenues attributable to the sales of lighting products was $111 thousand lower for the nine months ended May 31, 2020 primarily due to a slowdown in demand on LED luminaries and retrofits and fewer non-recurring project-based orders for LED lighting products compared to the nine months ended May 31, 2019.

Revenues attributable to other revenues represented 31% and 9% of our revenues for the nine months ended May 31, 2020 and 2019, respectively.

The increase in revenues attributable to other revenues was primarily due to the provision of services and the sale of raw materials.

Cost of Revenues

Our cost of revenues decreased by 28% from $2.8 million for the six months ended February 28, 2019 to $2.0 million for the six months ended February 29, 2020.

Our cost of revenues decreased by 25% from $4.2 million for the nine months ended May 31, 2019 to $3.2 million for the nine months ended May 31, 2020.

The decrease in cost of revenues was primarily due to the effort of focusing on profitable products and services.

Gross Profit (Loss)

Our gross profit increased from a loss of $217 thousand for the six months ended February 28, 2019 to a gain of $1.1 million for the six months ended February 29, 2020.

Our gross margin percentage was 34% for the six months ended February 29, 2020, as compared to negative 8% for the six months ended February 28, 2019 as a consequence of the effort of focusing on profitable products as more fully described above.

Our gross profit increased from $123 thousand for the nine months ended May 31, 2019 to a gross profit of $1.5 million for the nine months ended May 31, 2020.

Our gross margin percentage was 32% for the nine months ended May 31, 2020, as compared to 3% for the nine months ended May 31, 2019 as a consequence of the effort of focusing on profitable products as more fully described above

Operating Expenses

Six Months Ended

February 29, 2020

February 28, 2019

Nine Months Ended

(in thousands)

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Total operating expenses

Research and development

Our research and development expenses were $737 thousand and $632 thousand for the six months ended February 29, 2020 and February 28, 2019, respectively.

The increase was primary due to a $107 thousand increase in materials and supplies used for our new products, offset by a decrease in payroll and compensation expense.

Selling, general and administrative

Our selling, general and administrative expenses were $1.4 million for both the six months ended February 29, 2020 and February 28, 2019.

The slight decrease was mainly attributable to a decrease in payroll and in various other expenses, offset by an increase in depreciation expenses and in professional service expenses.

Gain on disposal of long-lived assets, net

We recognized a net gain of $79 thousand and $288 thousand on the disposal of long-lived assets for the six months ended February 29, 2020 and February 28, 2019, respectively.

Research and development Our research and development expenses were $1.1 million and $1.1 million for the nine months ended May 31, 2020 and 2019, respectively.

The increase was primary due to a $37 thousand increase in materials and supplies used for our new products and a $9 thousand in depreciation and amortization expense, offset partially by decreases in payroll and compensation.

Selling, general and administrative Our selling, general and administrative expenses increased from $2.0 million for the nine months ended May 31, 2019 to $2.1 million for the nine months ended May 31, 2020.

The increase was mainly attributable to a $244 thousand increase in professional service fees, offset partially by decreases in payroll and stock based compensation and in various expenses.

G ain on dis pos al of long-lived assets, net

We recognized a net gain of $79 thousand and $288 thousand on the disposal of long-lived assets for the nine months ended May 31, 2020 and 2019, respectively.

Due to the excess capacity charges that we have experienced for the last few years, considering the risk of technological obsolescence and according to the production plan built based on our sales forecast, we disposed of certain of our idle equipment.

Other Income (Expenses)

Six Months Ended

February 29, 2020

February 28, 2019

Nine Months Ended

(in thousands)

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Interest expenses, net

Other income (expenses), net

Other income, net

Foreign currency transaction gain, net

Total other income (expenses), net

Gain on disposal of investment We recognized a gain of $634 thousand for the six months ended February 29, 2020.

Gain on disposal of investment We recognized a gain of $634 thousand for the nine months ended May 31, 2020.

On November 27, 2019, we entered into a stock purchase agreement to sell all of the outstanding shares of our Hong Kong Subsidiary, Semileds International Corporation Limited, and its wholly owned subsidiary Xuhe Guangdian Co Ltd for $100,000 and an additional $40,000 for the transaction cost.

The $140,000 was fully received in November 2019, and the transaction was approved by the authority and closed in January 2020.

Interest expenses, net The increase in interest expenses, net was primarily due to the increase in debt balance, resulting from issuance of $2 million of convertible notes in December 2019, and our entry into an aggregate amount of $3.2 million of loan agreements in January 8, 2019, with each of our Chairman and Chief Executive Officer and our largest shareholder.

Other income (expenses) , net Other income for the six months ended February 2 9 , 20 20 primarily consist of rental income from the lease o f spare space in our Hsinchu building.

Other expenses for the six months ended February 28 , 20 19 primarily due to the settlement of a lawsuit with Epistar .

Foreign currency transaction gain, net We recognized net foreign currency transaction gain of $199 thousand and $197 thousand for the six months ended February 29, 2020 and February 28, 2019, respectively, primarily due to the depreciation of the U.S.

Other income, net Other income for the nine months ended May 31, 2020 primarily consists of government subsidy for the COVID-19 pandemic impact and rental income from the lease of spare space in our Hsinchu building.

Other expenses for the nine months ended May 31, 2019 consists primarily of rental income from the lease of spare space in our Hsinchu building, net of related depreciation charge, and offset by the settlement of a lawsuit with Epistar.

Foreign currency transaction gain, net We recognized net foreign currency transaction gain of $256 thousand and $20 thousand for the nine months ended May 31, 2020 and 2019, respectively, primarily due to the depreciation of the U.S.

dollar against the NT dollar from bank deposits and accounts receivables held by Taiwan SemiLEDs and Taiwan Bandaoti Zhaoming Co., Ltd.

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Net Loss Attributable to Noncontrolling Interests

Six Months Ended

February 29, 2020

February 28, 2019

Nine Months Ended

(in thousands)

Net loss attributable to noncontrolling interests

We recognized net loss attributable to non-controlling interests of $ 3 thousand $2 thousand for the six months ended February 29, 2020 and February 28, 2019, respectively, which was attributable to the share of the net losses of Taiwan Bandaoti Zhaoming Co., Ltd held by the remaining non-controlling holders.

Non-controlling interests represented both 3.29% equity interest in Taiwan Bandaoti Zhaoming CO., Ltd., as of February 29, 2020 and February 28, 2019.

Net gain (loss) attributable to noncontrolling interests

We recognized net gain attributable to non-controlling interests of $1 thousand and net loss of $1 thousand for the nine months ended May 31, 2020 and 2019, respectively, which was attributable to the share of the net losses of Taiwan Bandaoti Zhaoming Co., Ltd held by the remaining non-controlling holders.

As of May 31, 2020 and 2019, non-controlling interests represented 3.25% and 3.29% equity interest, respectively, in Taiwan Bandaoti Zhaoming CO., Ltd.

Liquidity and Capital Resources

As of February 29, 2020 and August 31, 2019, we had cash and cash equivalents of $3.2 million and $1.4 million, respectively, which were predominately held in U.S.

As of May 31, 2020 and August 31, 2019, we had cash and cash equivalents of $2.5 million and $1.4 million, respectively, which were predominately held in U.S.

dollar denominated demand deposits and/or money market funds.

As of April 6, 2020, we had no available credit facility.

Our long-term debt, which consisted of NT dollar denominated long-term notes, convertible unsecured promissory notes, and loans from our Chairman and our largest shareholder, totaled $8.2 million and $6.4 million as of February 29, 2020 and August 31, 2019, respectively.

Our NT dollar denominated long-term notes, totaled $3.1 million and $3.2 million as of February 29, 2020 and August 31, 2019, respectively.

As of July 7, 2020, we had no available credit facility.

Our long-term debt, which consisted of NT dollar denominated long-term notes convertible unsecured promissory notes, and loans from our Chairman and our largest shareholder, totaled $7.6 million and $6.4 million as of May 31, 2020 and August 31, 2019, respectively.

Our NT dollar denominated long-term notes, totaled $3.0 million and $3.2 million as of May 31, 2020 and August 31, 2019, respectively.

These long-term notes consisted of two loans which we entered into on July 5, 2019, with aggregate amounts of $3.2 million (NT$100 million).

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The second loan originally for $1.2 million (NT$38 million) has an annual floating interest rate equal to the NTD base lending rate plus 1.02% (or 1.845% currently) and is available for operating capital.

These loans are secured by a $79 thousand (NT$2.5 million) security deposit and a first priority security interest on the Company’s headquarters building.

The first note payable requires monthly payments of principal in the amount of $21 thousand plus interest over the 8-year term of the note with final payment to occur in July 2027 and, as of February 29, 2020, our outstanding balance on this note payable was approximately $1.9 million.

The second note payable requires monthly payments of principal in the amount of $13 thousand plus interest over the 8-year term of the note with final payment to occur in July 2027 and, as of February, 2020, our outstanding balance on this note payable was approximately $1.2 mill ion.

Property, plant and equipment pledged as collateral for our notes payable were both $3.7 million as of February 29, 2020 and August 31, 2019.

These loans are secured by an $83 thousand (NT$2.5 million) security deposit and a first priority security interest on the Company’s headquarters building.

Due to the impact of the COVID-19 pandemic, the bank agreed to give us a deferment period for twelve months starting from May 2020.

During this period, we don’t need to pay the monthly payments of the principal but only the interest.

Starting from May 2021, the first note payable requires monthly payments of principal in the amount of $25 thousand plus interest over the 74-month term of the note with final payment to occur in July 2027 and, as of May 31, 2020, our outstanding balance on this note payable was approximately $1.9 million.

Starting from May 2021, the second note payable requires monthly payments of principal in the amount of $15 thousand plus interest over the 74-month term of the note with final payment to occur in July 2027 and, as of May 31, 2020, our outstanding balance on this note payable was approximately $1.1 million.

Property, plant and equipment pledged as collateral for our notes payable were $3.6 million and $3.7 million as of May 31, 2020 and August 31, 2019, respectively.

On January 8, 2019, we entered into loan agreements with each of our Chairman and Chief Executive Officer and our largest shareholder, with aggregate amounts of $3.2 million, and an annual interest rate of 8%.

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We are required to repay the loans of $1.5 million on January 14, 2021 and $1.7 million on January 22, 2021, respectively, unless the loans are sooner accelerated pursuant to the loan agreements.

As of February 29, 2020 and August 31, 2019, these loans totaled both $3.2 million.

As of May 31, 2020 and August 31, 2019, these loans totaled $3.2 million.

The loans are secured by a second priority security interest on our headquarters building.

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The outstanding principal and unpaid accrued interest of the Notes may be converted into our Common Stock based on a conversion price of $3 dollars per share, at the option of the Holders any time from the date of the Notes.

As of February 29, 2020, these notes totaled $2 million, were recorded as a $39 thousand additional paid-in capital and a $1.9 million long-term liabilities.

We have incurred significant losses since inception, including net losses attributable to SemiLEDs stockholders of $3.6 million and $3.0 million during the years ended August 31, 2019 and 2018, respectively.

On May 25, 2020, the Holders each converted $300 thousand of notes into 100,000 shares of our Common stock.

As of May 31, 2020, the principal of these notes totaled $1.4 million.

We have incurred significant losses since inception, including net losses attributable to SemiLEDs sto ckholders of $ 3.

6 million and $ 3.0 million during the years ended August 31, 2019 and 201 8, respectively.

Net cash used in operating activities for the year ended August 31, 2019 was $3.5 million.

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We have undertaken actions to decrease losses incurred and implemented cost reduction programs in an effort to transform the Company into a profitable operation.

In addition we are planning to issue convertible notes to our major stockholders and may issue additional equity.

In addition we are planning to issue con vertible notes to our major stockholders and may issue additional equity.

Based on our current financial projections and assuming the successful implementation of our liquidity plans, we believe that we will have sufficient sources of liquidity to fund our operations and capital expenditure plans for the next 12 months.

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The following summary of our cash flows for the periods indicated has been derived from our unaudited interim condensed consolidated financial statements, which are included elsewhere in this Quarterly Report (in thousands):

Six Months Ended

February 29, 2020

February 28, 2019

Nine Months Ended

Net cash used in operating activities

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Cash Flows Used In Operating Activities

Net cash used in operating activities for the six months ended February 29, 2020 and February 28, 2019 were $194 thousand and 2.0 million respectively.

Cash flows used in operating activities for the six months ended February 29, 2020 was $1.8 million less, primary attributable to an increase of $757 thousand in cash collected from customers and a decrease in net loss after adjustment of non-cash operating activities.

Net cash used in operating activities for the nine months ended May 31, 2020 was $786 thousand while net cash used in operating activities for the nine months ended May 31, 2019 was $2.9 million.

Cash flows used in operating activities for the nine months ended May 31, 2020 was $2.1 million less, primary attributable to a decrease in net loss.

Cash Flows Used In Investing Activities

Net cash used in investing activities for the six months ended February 29, 2020 was $88 thousand, consisting primarily of $159 thousand of purchases of machinery and equipment, offset in part by the proceeds from the sales of machinery and equipment.

Net cash used in investing activities for the six months ended February 28, 2019 was $2.6 million, consisting primarily of the return of $3 million to Epistar and $64 thousand of purchases of machinery and equipment, offset in part by $512 thousand of proceeds from the sales of machinery and equipment.

Net cash used in investing activities for the nine months ended May 31, 2020 was $161 thousand, consisting primarily of $226 thousand of the purchases of machinery and equipment and $14 thousand of payments for development of intangible assets, offset in part by proceeds from sales of machinery and equipment.

Net cash used in investing activities for the nine months ended May 31, 2019 was $2.6 million, consisting primarily of the return of $3 million to Epistar and $73 thousand of purchases of machinery and equipment, offset in part by $505 thousand of proceeds from sales of machinery and equipment.

Cash Flows Provided by Financing Activities

Net cash provided by financing activities for the six months ended February 29, 2020 was $2.4 million, consisting primarily of $2 million of proceeds from convertible notes, and $600 thousand of issuance of common stocks, offset in part by the repayments on long-term debt.

Net cash provided by financing activities for the six months ended February 28, 2019 was $3 million, consisting primarily of $3.2 million of proceeds from Chairman and shareholder loans, offset in part by the repayments on long-term notes.

Net cash provided by financing activities for the nine months ended May 31, 2020 was $2.4 million, consisting primarily of $2 million of proceeds from convertible notes, and $700 thousand of issuance of common stocks, offset in part by the repayments on long-term debt.

Net cash provided by financing activities for the nine months ended May 31, 2019 was $3.0 million, consisting primarily of $3.2 million of proceeds from Chairman and shareholder loans, offset in part by the repayments on long-term notes.

Capital Expenditures

We had capital expenditures of $159 thousand and $64 thousand for the six months ended February 29, 2020 and February 28, 2019, respectively.

We had capital expenditures of $226 thousand and $73 thousand for the nine months ended May 31, 2020 and 2019, respectively.

Our capital expenditures consisted primarily of the purchases of machinery and equipment, construction in progress, prepayments for our manufacturing facilities and prepayments for equipment purchases.

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Off-Balance Sheet Arrangements

As of February 29, 2020, we did not engage in any off-balance sheet arrangements.

As of May 31, 2020, we did not engage in any off-balance sheet arrangements.

We do not have any interests in variable interest entities.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis