SemiLEDs Corp 10-Q

Item 1. Financial Statements SEMILEDS CORPORATION AND SUBSIDIARIES U naudited Condensed Consolidated Balance Sheets (In thousands of U.S. dollars and shares, except par value) May 31, August 31, 2020 2019 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 2,476 $ 1,363 Restricted cash and cash equivalents 85 19 Accounts receivable (including related parties), net of allowance for doubtful accounts of $184 and $195 as of May 31, 2020 and August 31, 2019, respectively 1,452 703 Inventories 2,680 2,083 Prepaid expenses and other current assets 788 460 Total current assets 7,481 4,628 Property, plant and equipment, net 5,733 5,878 Operating lease right of use assets 237 — Intangible assets, net 89 93 Investments in unconsolidated entities 935 894 Other assets 193 169 TOTAL ASSETS $ 14,668 $ 11,662 LIABILITIES AND EQUITY CURRENT LIABILITIES: Current installments of long-term debt $ 3,240 $ 398 Accounts payable 748 680 Advance receipt toward the convertible note 500 500 Accrued expenses and other current liabilities 2,950 2,342 Operating lease liabilities, current 116 — Total current liabilities 7,554 3,920 Long-term debt, excluding current installments 4,361 5,954 Operating lease liabilities, less current portion 121 — Total liabilities 12,036 9,874 Commitments and contingencies (Note 5) EQUITY: SemiLEDs stockholders’ equity Common stock, $0.0000056 par value—7,500 shares authorized; 4,006 shares and 3,594 shares issued and outstanding as of May 31, 2020 and August 31, 2019, respectively — — Additional paid-in capital 177,214 175,804 Accumulated other comprehensive income 3,667 3,753 Accumulated deficit (178,298 ) (177,816 ) Total SemiLEDs stockholders' equity 2,583 1,741 Noncontrolling interests 49 47 Total equity 2,632 1,788 TOTAL LIABILITIES AND EQUITY $ 14,668 $ 11,662 See notes to unaudited condensed consolidated financial statements. 1 Table of Contents SEMILEDS CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidated Statements of Operations (In thousands of U.S. dollars and shares, except per share data) Three Months Ended Nine Months Ended May 31, 2020 May 31, 2019 May 31, 2020 May 31, 2019 Revenues, net $ 1,569 $ 1,745 $ 4,669 $ 4,347 Cost of revenues 1,153 1,405 3,187 4,224 Gross profit 416 340 1,482 123 Operating expenses: Research and development 375 444 1,112 1,076 Selling, general and administrative 782 597 2,141 1,973 Gain on disposals of long-lived assets, net — — (79 ) (288 ) Total operating expenses 1,157 1,041 3,174 2,761 Loss from operations (741 ) (701 ) (1,692 ) (2,638 ) Other income (expenses): Gain on disposal of investment — — 634 — Interest expenses, net (95 ) (74 ) (273 ) (115 ) Other income (losses), net 270 94 594 48 Foreign currency transaction (losses) gain, net 57 (177 ) 256 20 Total other income (expenses), net 232 (157 ) 1,211 (47 ) Loss before income taxes (509 ) (858 ) (481 ) (2,685 ) Income tax expense — — — — Net loss (509 ) (858 ) (481 ) (2,685 ) Less: Net gain (loss) attributable to noncontrolling interests 4 1 1 (1 ) Net loss attributable to SemiLEDs stockholders $ (513 ) $ (859 ) $ (482 ) $ (2,684 ) Net loss per share attributable to SemiLEDs stockholders: Basic and diluted $ (0.14 ) $ (0.24 ) $ (0.13 ) $ (0.75 ) Shares used in computing net loss per share attributable to SemiLEDs stockholders: Basic and diluted 3,738 3,589 3,806 3,576 See notes to unaudited condensed consolidated financial statements. 2 Table of Contents SEMILEDS CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidated Statements of Comprehensive Loss (In thousands of U.S. dollars) Three Months Ended Nine Months Ended May 31, 2020 May 31, 2019 May 31, 2020 May 31, 2019 Net loss $ (509 ) $ (858 ) $ (481 ) $ (2,685 ) Other comprehensive loss, net of tax: Foreign currency translation adjustments, net of tax of $0 for all periods presented $ (9 ) 12 (84 ) (1 ) Comprehensive loss $ (518 ) $ (846 ) $ (565 ) $ (2,686 ) Comprehensive loss attributable to noncontrolling interests $ 4 $ (1 ) $ 3 $ (3 ) Comprehensive loss attributable to SemiLEDs stockholders $ (522 ) $ (845 ) $ (568 ) $ (2,683 ) See notes to unaudited condensed consolidated financial statements. 3 Table of Contents SEMILEDS CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidated Statement of Changes in Equity (In thousands of U.S. dollars and shares) Accumulated Total Additional Other SemiLEDs Non- Common Stock Subscribed Paid-in Comprehensive Accumulated Shareholders' Controlling Total Shares Amount Stock Capital Income Deficit Equity Interests Equity BALANCE—September 1, 2018 3,559 $ — $ — $ 175,527 $ 3,727 $ (174,251 ) $ 5,003 $ — $ 5,003 Issuance of common stock under equity incentive plans 1 — — — — — — — Stock-based compensation — — — 43 — — 43 — 43 Common stock issued by SBDI* — 128 — — 128 48 176 Comprehensive loss: Other comprehensive income (loss) — — — — 5 — 5 (1 ) 4 Net loss — — — — — (978 ) (978 ) (5 ) (983 ) BALANCE—November 30, 2018 3,560 — — 175,698 3,732 (175,229 ) 4,201 42 4,243 Issuance of common stock under equity incentive plans 29 — — — — — — — — Stock-based compensation — — — 47 — — 47 — 47 Comprehensive loss: Other comprehensive income (loss) — — — — (18 ) — (18 ) 1 (17 ) Net loss — — — — — (847 ) (847 ) 3 (844 ) BALANCE—February 28, 2019 3,589 — — 175,745 3,714 (176,076 ) 3,383 46 3,429 Stock-based compensation — — — 27 — 27 — 27 Comprehensive loss: Other comprehensive income (loss) — — — — 14 — 14 (2 ) 12 Net loss — — — — — (859 ) (859 ) 1 (858 ) BALANCE—May 31, 2019 3,589 $ — $ — $ 175,772 $ 3,728 $ (176,935 ) $ 2,565 $ 45 $ 2,610 Accumulated Total Additional Other SemiLEDs Non- Common Stock Subscribed Paid-in Comprehensive Accumulated Shareholders' Controlling Total Shares Amount Stock Capital Income Deficit Equity Interests Equity BALANCE—September 1, 2019 3,594 $ — $ — $ 175,804 $ 3,753 $ (177,816 ) $ 1,741 $ 47 $ 1,788 Issuance of common stock under equity incentive plans 1 — — — — — — — — Stock-based compensation — — — 35 — — 35 — 35 Comprehensive loss: Other comprehensive income (loss) — — — — (24 ) — (24 ) 1 (23 ) Net loss — — — — — (317 ) (317 ) (5 ) (322 ) BALANCE—November 30, 2019 3,595 — — 175,839 3,729 (178,133 ) 1,435 43 1,478 Issuance of common stock under equity incentive plans 28 — — — — — — — — Stock-based compensation — — — 24 — — 24 — 24 Issuance of common stock for private placement — — 600 — — — 600 — 600 Issuance of convertible notes — — — 39 — — 39 — 39 Comprehensive loss: Other comprehensive income (loss) — — — — (53 ) — (53 ) 1 (52 ) Net loss — — — — — 348 348 2 350 BALANCE—February 29, 2020 3,623 — 600 175,902 3,676 (177,785 ) 2,393 46 2,439 Stock-based compensation — — — 21 — — 21 — 21 Issuance of common stock for private placement 183 — (600 ) 700 — — 100 — 100 Conversion of notes into common stocks 200 — — 592 — — 592 — 592 Change ownership in SBDI* (1 ) — — (1 ) (1 ) (2 ) Comprehensive loss: Other comprehensive loss — — — — (9 ) — (9 ) — (9 ) Net loss — — — — — (513 ) (513 ) 4 (509 ) BALANCE—May 31, 2020 4,006 $ — $ - $ 177,214 $ 3,667 $ (178,298 ) $ 2,583 $ 49 $ 2,632 See notes to unaudited condensed consolidated financial statements. *SBDI (Taiwan Bandaoti Zhaoming Co., Ltd.) is one of the Company’s subsidiaries. 4 Table of Contents SEMILEDS CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidated Statements of Cash Flows (In thousands of U.S. dollars) Nine Months Ended May 31, 2020 May 31, 2019 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (481 ) $ (2,685 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 623 827 Stock-based compensation expense 80 117 Provisions for inventory write-downs 571 560 Gain on disposals of long-lived assets, net (79 ) (288 ) Gain on disposals of investments (634 ) — Changes in : Accounts receivable, net (131 ) (292 ) Inventories (1,084 ) (724 ) Prepaid expenses and other 95 (121 ) Accounts payable 60 (183 ) Accrued expenses and other current liabilities 194 (85 ) Net cash used in operating activities (786 ) (2,874 ) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment (226 ) (73 ) Proceeds from sales of property, plant and equipment 79 505 Return the received-in-advance — (3,000 ) Payments for development of intangible assets (14 ) (3 ) Net cash used in investing activities (161 ) (2,571 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt 2,000 3,200 Repayments of long-term debt (279 ) (248 ) Issuance of common stock for private placement 700 — Acquisition of noncontrolling interests (2 ) (1 ) Net cash provided by financing activities 2,419 2,951 Changes in cash balance included in deconsolidated subsidiaries (61 ) — Effect of exchange rate changes on cash and cash equivalents (228 ) 133 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,183 (2,361 ) CASH AND CASH EQUIVALENTS—Beginning of period 1,471 3,421 CASH AND CASH EQUIVALENTS—End of period $ 2,654 $ 1,060 NONCASH INVESTING AND FINANCING ACTIVITIES: Accrual related to property, plant and equipment $ 34 $ 34 See notes to unaudited condensed consolidated financial statements. 5 Table of Contents SEMILEDS CORPORATION AND SUBSIDIARIES Notes to Unaudited Condensed Consolidated Financial Statements 1. Business SemiLEDs Corporation (“SemiLEDs” or the “parent company”) was incorporated in Delaware on January 4, 2005 and is a holding company for various wholly owned subsidiaries. SemiLEDs and its subsidiaries (collectively, the “Company”) develop, manufacture and sell high performance light emitting diodes (“LEDs”). The Company’s core products are LED components, as well as LED chips and lighting products. LED components have become the most important part of its business. A portion of the Company’s business consists of the sale of contract manufactured LED products. The Company’s customers are concentrated in a few select markets, including Taiwan, the United States and China. As of May 31, 2020, SemiLEDs had two wholly owned subsidiaries. SemiLEDs Optoelectronics Co., Ltd., or Taiwan SemiLEDs, is the Company’s wholly owned operating subsidiary, where a substantial portion of the assets is held and located, and where a portion of our research, development, manufacturing and sales activities take place. 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, manufacturing and a substantial portion of marketing and sale of LED components, and where most of the Company’s employees are based. On November 27, 2019, SemiLEDs entered into a stock purchase agreement (the “Agreement”) with XianChang Ma (the “Purchaser”) pursuant to which the Purchaser agreed to purchase all of the outstanding shares of the Company’s 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 costs. The Purchaser paid $140,000 to the Company, and the transaction was completed in January 2020. The Purchaser also subscribed approximately 4% of the Company’s outstanding common shares on January 17, 2020 (see Note 6). SemiLEDs’ common stock began trading on the NASDAQ Global Select Market under the symbol “LEDS”. 2. Summary of Significant Accounting Policies Basis of Presentation —The Company’s unaudited interim condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and applicable provisions of the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted as permitted by the rules and regulations of the SEC. Accordingly, these unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K filed with the SEC on November 20, 2019. The unaudited condensed consolidated balance sheet as of August 31, 2019 included herein was derived from the audited consolidated financial statements as of that date. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the Company’s consolidated balance sheet as of May 31, 2020, the statements of operations and comprehensive loss for the three and nine months ended May 31, 2020 and 2019, the statement of changes in equity for the three and nine months ended May 31, 2020 and 2019, and the statements of cash flows for the nine months ended May 31, 2020 and 2019. The results for the three or nine months ended May 31, 2020 are not necessarily indicative of the results to be expected for the year ending August 31, 2020. Going Concern — The accompanying unaudited interim condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The realization of assets and the satisfaction of liabilities in the normal course of business are dependent on, among other things, the Company’s ability to operate profitably, to generate cash flows from operations, and to pursue financing arrangements to support its working capital requirements. 6 Table of Contents The Company suffered losses from operations of $3 .7 million and $ 3.7 million, and net cash used in operating activities of $ 3.5 million and $ 1.2 million for the years ended August 31, 201 9 and 201 8 , respectively. Gross profit on product sales was $ 4 52 thousand fo r the year ended August 31, 201 9 , and gross loss was $ 435 thousand fo r the year ended August 31, 201 8 . Loss from operations for the three and nine months ended May 31 , 20 20 were $ 741 thousan d and $ 1 . 7 million, respectively. N et cash used in operating activities for the nine months ended May 31 , 20 20 was $ 786 thousand . These facts and conditions raise substantial doubt about the Company’s ability to continue as a going concern. However, on May 31, 2020, the Company’s cash and cash equivalents increased to $2.5 million , mainly due to the issuance of convertible notes. Management believes that it has developed a liquidity plan, as summarized below, that, if executed successfully, should provi de sufficient liquidity to meet the Company’s obligations as they become due for a reasonable period of time, and allow the development of its core business. • Gaining positive cash-inflow from operating activities through continuous cost reductions and the sales of new higher margin products. Steady growth of module products and the continued commercial sales of its UV LED product are expected to improve the Company’s future gross margin, operating results and cash flows. The Company is targeting niche markets and focusing on product enhancement and developing its LED product into many other applications or devices. • Continuing to monitor prices, work with current and potential vendors to decrease costs and, consistent with its existing contractual commitments, may possibly decrease its activity level and capital expenditures further. This plan reflects its strategy of controlling capital costs and maintaining financial flexibility. • Raising additional cash through further equity offerings, sales of assets and/or issuance of debt as considered necessary and looking at other potential business opportunities. While the Company’s management believes that the measures described in the above liquidity plan will be adequate to satisfy its liquidity requirements for the twelve months after the date that the financial statements are issued, there is no assurance that the liquidity plan will be successfully implemented. Failure to successfully implement the liquidity plan may have a material adverse effect on its business, results of operations and financial position, and may adversely affect its ability to continue as a going concern. These unaudited interim condensed consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded assets or the amounts and classification of liabilities or any other adjustments that might be necessary should the Company be unable to continue as a going concern. Restricted Cash Equivalents —Restricted cash primarily consists of cash held in reserved bank accounts in Taiwan. As of May 31, 2020 and August 31, 2019, the Company’s restricted cash equivalents at current portion amounted $85 thousand and $19 thousand, respectively. As of May 31, 2020 and August 31, 2019, the Company’s restricted cash at noncurrent portion, which was recorded as other assets, amounted to $93 thousand and $89 thousand, respectively. Revenue Recognition —Effective September 1 2018, the Company adopted ASC 606 using the modified retrospective transition method. The Company applied the following five steps to achieve the core principles of ASC 606: 1) identified the contract with a customer; 2) identified the performance obligations (promises) in the contract; 3) determined the transaction price; 4) allocated the transaction price to the performance obligations in the contract; and 5) recognized revenue when (or as) the Company satisfies a performance obligation. The Company recognizes the amount of revenue when the Company satisfies a performance obligation to which it expects to be entitled for the transfer of promised goods or services to customers. The Company obtains written purchase authorizations from its customers as evidence of an arrangement and these authorizations generally provide for a specified amount of product at a fixed price. Generally, the Company considers delivery to have occurred at the time of shipment as this is generally when title and risk of loss for the products will pass to the customer. The Company provides its customers with limited rights of return for non‑conforming shipments and product warranty claims. Based on historical return percentages, which have not been material to date, and other relevant factors, the Company estimates its potential future exposure on recorded product sales, which reduces product revenues in the consolidated statements of operations and reduces accounts receivable in the consolidated balance sheets. The Company also provides standard product warranties on its products, which generally range from three months to two years. Management estimates the Company’s warranty obligations as a percentage of revenues, based on historical knowledge of warranty costs and other relevant factors. To date, the related estimated warranty provisions have been insignificant. Principles of Consolidation —The unaudited interim condensed consolidated financial statements include the accounts of SemiLEDs and its consolidated subsidiaries. All intercompany transactions and balances have been eliminated during consolidation. On September 1, 2018, the Company adopted ASC 825-10, “Financial Instruments- Overall: Recognition and Measurement of Financial Assets and Financial Liabilities”. This standard allows equity investments that do not have readily determinable fair values to be re-measured at fair value either upon the occurrence of an observable price change or upon identification of impairment. The standard also simplifies the impairment assessment of equity investments without readily determinable fair values by requiring assessment for impairment qualitatively at each reporting period. 7 Table of Contents Investments in which the Company has the ability to exercise significant influence over the i nvestee but not a controlling financial interest, are accounted for using the equity method of accounting and are not consolidated. These investments are in joint ventures that are not subject to consolidation under the variable interest model, and for whi ch the Company: (i) does not have a majority voting interest that would allow it to control the investee, or (ii) has a majority voting interest but for which other shareholders have significant participating rights, but for which the Company has the abili ty to exercise significant influence over operating and financial policies. Under the equity method, investments are stated at cost after adding or removing the Company’s portion of equity in undistributed earnings or losses, respectively. The Company’s in vestment in these equity ‑ method entities is reported in the consolidated balance sheets in investments in unconsolidated entities, and the Company’s share of the income or loss of these equity ‑ method entities, after the elimination of unrealized intercompany profits, is reported in the consolidated statements of operations in equity in losses from unconsolidated entities. When net losses from an equity ‑ method investee exceed its carrying amount, the carrying amount of the investment is reduced to zero. The Company then suspends using the equity method to provide for additional losses unless the Company has guaranteed obligations or is otherwise committed to provide further financial support to the equity ‑ method investee. The Company resumes account ing for the investment under the equity method if the investee subsequently returns to profitability and the Company’s share of the investee’s income exceeds its share of the cumulative losses that have not been previously recognized during the period the equity method is suspended. Investments in entities that are not consolidated or accounted for under the equity method are recorded as investments without readily determinable fair values. Investments without readily determinable fair values are reported on the consolidated balance sheets in investments in unconsolidated entities, at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. Dividend income, if any, received is reported in the consolidated statements of operations in equity in losses from unconsolidated entities. If the fair value of an equity investment declines below its respective carrying amount and the decline is determined to be other‑than‑temporary, the investment will be written down to its fair value. Use of Estimates —The preparation of unaudited interim condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited interim condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include the preparation of the Company’s consolidated financial statements on the basis that the Company will continue as a going concern, the collectability of accounts receivable, inventory net realizable values, realization of deferred tax assets, valuation of stock-based compensation expense, the useful lives of property, plant and equipment and intangible assets, the recoverability of the carrying amount of property, plant and equipment, intangible assets and investments in unconsolidated entities, the fair value of acquired tangible and intangible assets, income tax uncertainties, provision for potential litigation costs and other contingencies. Management bases its estimates on historical experience and also on assumptions that it believes are reasonable. Management assesses these estimates on a regular basis; however, actual results could differ materially from those estimates. Certain Significant Risks and Uncertainties —The Company is subject to certain risks and uncertainties that could have a material and adverse effect on the Company’s future financial position or results of operations, which risks and uncertainties include, among others: it has incurred significant losses over the past years, any inability of the Company to compete in a rapidly evolving market and to respond quickly and effectively to changing market requirements, any inability of the Company to grow its revenue and/or maintain or increase its margins, it may experience fluctuations in its revenues and operating results, any inability of the Company to protect its intellectual property rights, claims by others that the Company infringes their proprietary technology, and any inability of the Company to raise additional funds in the future. Concentration of Supply Risk —Some of the components and technologies used in the Company’s products are purchased and licensed from a limited number of sources and some of the Company’s products are produced by a limited number of contract manufacturers. The loss of any of these suppliers and contract manufacturers may cause the Company to incur transition costs to another supplier or contract manufacturer, result in delays in the manufacturing and delivery of the Company’s products, or cause it to carry excess or obsolete inventory. The Company relies on a limited number of such suppliers and contract manufacturers for the fulfillment of its customer orders. Any failure of such suppliers and contract manufacturers to perform could have an adverse effect upon the Company’s reputation and its ability to distribute its products or satisfy customers’ orders, which could adversely affect the Company’s business, financial position, results of operations and cash flows. Concentration of Credit Risk —Financial instruments that subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents and accounts receivable. 8 Table of Contents The Company keeps its cash and cash equivalents in demand deposits with pro minent banks of high credit quality and invests only in money market funds. Deposits held with banks may exceed the amount of insurance provided on such deposits. As of May 31 , 20 20 and August 31, 201 9 , cash and cash equivalents of the Company consisted of the following (in thousands): May 31, August 31, Cash and Cash Equivalents by Location 2020 2019 United States; Denominated in U.S. dollars $ 496 $ 52 Taiwan; Denominated in U.S. dollars 1,701 447 Denominated in New Taiwan dollars 137 730 Denominated in other currencies 142 77 China (including Hong Kong); Denominated in U.S. dollars — — Denominated in Renminbi — 49 Denominated in H.K. dollars — 8 Total cash and cash equivalents $ 2,476 $ 1,363 The Company’s revenues are substantially derived from the sales of LED products. A significant portion of the Company’s revenues are derived from a limited number of customers and sales are concentrated in a few select markets. Management performs ongoing credit evaluations of its customers and generally does not require collateral on accounts receivable. Management evaluates the need to establish an allowance for doubtful accounts for estimated potential credit losses at each reporting period. The allowance for doubtful accounts is based on the management’s assessment of the collectability of its customer accounts. Management regularly reviews the allowance by considering certain factors, such as historical experience, industry data, credit quality, ages of accounts receivable balances and current economic conditions that may affect a customer’s ability to pay. Net revenues generated from sales to the top ten customers represented 89% and 83 % of the Company’s total net revenues for the three and nine months ended May 31, 2020, respectively, and 80% and 73% of the Company’s net revenues for the three and nine months ended May 31, 2019, respectively. The Company’s revenues have been concentrated in a few select markets, including the Netherlands, Ireland, Taiwan, Japan, German, the United States, and India. Net revenues generated from sales to customers in these markets, in the aggregate, accounted for 89% and 90% of the Company’s net revenues for the three and nine months ended May 31, 2020, respectively, and 86% and 88 % of the Company’s net revenues for the three and nine months ended May 31, 2019, respectively. Noncontrolling Interests —Noncontrolling interests are classified in the consolidated statements of operations as part of consolidated net income (loss) and the accumulated amount of noncontrolling interests in the consolidated balance sheets as part of equity. Changes in ownership interest in a consolidated subsidiary that do not result in a loss of control are accounted for as an equity transaction. If a change in ownership of a consolidated subsidiary results in loss of control and deconsolidation, any retained ownership interests are remeasured with the gain or loss reported in net earnings. On September 1, 2018, Taiwan Bandaoti Zhaoming Co., Ltd. (“SBDI”), the Company’s wholly owned operating subsidiary, issued 414,000 common shares and amended its certificate of incorporation to increase its issued common stock from 12,087,715 to 12,501,715. As of the issuance date, the increased capital of $176 thousand (NT$5.4 million) has been completely received in cash by Taiwan Bandaoti Zhaoming Co., Ltd. The Company did not subscribe for the newly issued common shares, and, as a result, noncontrolling interest in SBDI was increased from zero to 3.31%. In December 2018 and in March 2020, Taiwan SemiLEDs purchased 3,000 and 5,000 common shares of SBDI from non-controlling interests, respectively. As of May 31, 2020, noncontrolling interest in SBDI was down to 3.25%. Recent Accounting Pronouncements In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-13, Fair Value Measurement (Topic 820) Disclosure Framework – Change to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). ASU 2018-13 removes, modifies and adds certain disclosure requirements in Topic 820, “Fair Value Measurement.” ASU 2018-13 eliminates certain disclosures related to transfers and the valuation process, modifies disclosures for investments that are valued based on net asset value, clarifies the measurement uncertainty disclosure, and requires additional disclosures for Level 3 fair value measurements. ASU 2018-13 is effective for the Company for annual and interim reporting periods beginning September 1, 2020. The Company is currently evaluating the impact ASU 2018-13 will have on the disclosures included in its consolidated financial statements. 9 Table of Contents In December 2019, the FASB issued ASU No. 2019-12, simplifying the Accounting for Income Taxes, as part of its initiative to reduce complexity in accounting standards. The amendments in the ASU are effective for f iscal years beginning after December 15, 2020, including interim periods therein. Early adoption of the standard is permitted, including adoption in interim or annual periods for which financial statements have not yet been issued. The Company is currently evaluating the effect, if any, that the ASU will have on its consolidated financial statements. 3. Balance Sheet Components Inventories Inventories as of May 31, 2020 and August 31, 2019 consisted of the following (in thousands): May 31, August 31, 2020 2019 Raw materials $ 536 $ 479 Work in process 993 728 Finished goods 1,151 876 Total $ 2,680 $ 2,083 Inventory write-downs to estimated net realizable values were $251 thousand and $571 thousand for the three and nine months ended May 31, 2020, respectively, and $248 thousand and $560 thousand for the three and nine months ended May 31, 2019, respectively. Property, Plant and Equipment Property, plant and equipment as of May 31, 2020 and August 31, 2019 consisted of the following (in thousands): May 31, August 31, 2020 2019 Buildings and improvements $ 13,855 $ 13,238 Machinery and equipment 39,798 37,988 Leasehold improvements 163 156 Other equipment 2,342 2,250 Construction in progress 2 61 Total property, plant and equipment 56,160 53,693 Less: Accumulated depreciation and amortization (50,427 ) (47,815 ) Property, plant and equipment, net $ 5,733 $ 5,878 Intangible Assets Intangible assets as of May 31, 2020 and August 31, 2019 consisted of the following (in thousands): May 31, 2020 Weighted Average Gross Net Amortization Carrying Accumulated Carrying Period (Years) Amount Amortization Amount Patents and trademarks 15 $ 541 $ 452 $ 89 Acquired technology 5 339 339 — Total $ 880 $ 791 $ 89 10 Table of Contents August 31, 2019 Weighted Average Gross Net Amortization Carrying Accumulated Carrying Period (Years) Amount Amortization Amount Patents and trademarks 15 $ 542 $ 449 $ 93 Acquired technology 5 484 484 — Total $ 1,026 $ 933 $ 93 4. Investments in Unconsolidated Entities The Company’s ownership interest and carrying amounts of investments in unconsolidated entities as of May 31, 2020 and August 31, 2019 consisted of the following (in thousands, except percentages): May 31, 2020 August 31, 2019 Percentage Percentage Ownership Amount Ownership Amount Equity investment without readily determinable fair value Various $ 935 Various $ 894 Total investments in unconsolidated entities $ 935 $ 894 There were no dividends received from unconsolidated entities through May 31, 2019. Equity Investments without Readily Determinable Fair Value Equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the Company) which do not have readily determinable fair values are recorded as equity investment without readily determinable fair value. All equity investments without readily determinable fair value are assessed for impairment when events or changes in circumstances indicate that the carrying amounts may not be recoverable, and measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. 5. Commitments and Contingencies Operating Lease Agreements —The Company has several operating leases with unrelated parties, primarily for land, plant and office spaces in Taiwan, which include cancelable and noncancelable and which expire at various dates between December 2020 and December 2029. Leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. For lease agreements entered into or reassessed after the adoption of Topic 842, the Company did not combine lease and non-lease components. Most leases do not include options to renew. The exercise of lease renewal options has to be agreed by the lessors. The depreciable life of assets and leasehold improvements are limited by the term of leases, unless there is a transfer of title or purchase option reasonably certain of exercise. Lease expense is recognized on a straight-line basis over the term of the lease. Lease expense related to these noncancelable operating leases were $39 thousand and $115 thousand for three months and nine months ended May 31, 2020. Balance sheet information related to the Company’s leases is presented below: May 31, 2020 Assets Operating lease right of use assets $ 237 Liabilities Operating lease liabilities, current portion $ 116 Operating lease liabilities, less current portion 121 Total $ 237 11 Table of Contents The following provides details of the Company’s lease expenses: Nine Months Ended May 31, 2020 Operating lease expenses, net $ 115 Other information related to leases is presented below: Nine Months Ended May 31, 2020 Cash Paid for amounts Included In Measurement of Liabilities: Operating cash flows from operating leases $ 115 Weighted Average Remaining Lease Term: Operating leases 2.59 years Weighted Average Discount Rate Operating leases 1.76 % As most of the Company’s leases do not provide an implicit rate, the Company uses its average borrowing rate from non-related parties of 1.76% based on the information available at commencement date in determining the present value of lease payments. The aggregate future noncancelable minimum rental payments for the Company’s operating leases as of May 31, 2020 consisted of the following (in thousands): Operating Years Ending August 31, Leases Remainder of 2020 $ 39 2021 98 2022 30 2023 11 2024 11 Thereafter 58 Total future minimum lease payments, undiscounted 247 Less: Imputed interest 10 Present value of future minimum lease payments $ 237 Purchase Obligations —The Company had purchase commitments for inventory, property, plant and equipment in the amount of $83 thousand and $158 thousand as of May 31, 2020 and August 31, 2019, respectively. Litigation —The Company is directly or indirectly involved from time to time in various claims or legal proceedings arising in the ordinary course of business. The Company recognizes a liability when it is probable that a loss has been incurred and the amount is reasonably estimable. There is significant judgment required in assessing both the likelihood of an unfavorable outcome and whether the amount of loss, if any, can be reasonably estimated. However, the Company cannot predict the outcome of any litigation or the potential for future litigation. On June 21, 2017, Well Thrive Ltd. (“Well Thrive”) filed a complaint against SemiLEDs Corporation in the United States District Court for the District of Delaware. The complaint alleges that Well Thrive is entitled to return of $500 thousand paid toward a note purchase pursuant to a purchase agreement (the “Purchase Agreement”) effective July 6, 2016 with Dr. Peter Chiou, which was assigned to Well Thrive on August 4, 2016. Pursuant to the terms of the Purchase Agreement, we have retained the $500 thousand payment as liquidated damages. Well Thrive alleges that the liquidated damages provision is unenforceable as an illegal penalty and does not reflect the amount of purported damages. On March 13, 2018, the Company filed a motion to enforce a settlement agreement between the parties to dismiss the lawsuit with prejudice. On March 27, 2018, Well Thrive filed an answering brief in opposition to the Company’s motion on the basis that Well Thrive never consented to dismiss the case. The judge’s order allowed the Company to conduct depositions of Well Thrive’s former lawyer, Dr. Chiou, and Mr. Chang Sheng-Chun, Well Thrive’s director, and to request documents relating to the issues surrounding the settlement. Based on this order, the Company arranged the depositions to obtain more evidence in support of a motion to enforce the settlement agreement. On October 25, 2019, Well Thrive filed a motion to modify the 12 Table of Contents Court’s scheduling order and to allow it to file a motion for summary j udgment, and the Company filed an opposition to the motion. On November 13, 2019, the Court denied Well Thrive’s motion. The Court held a trial on March 2, 2020. After the trial, judge ordered both sides to prepare post-trial briefs and proposed findings o f fact for the Court to be submitted before end of April 2020. On April 30, 2020, both sides submitted post-trail briefs and proposed findings of fact, and as of today, the judge has not rendered a verdict on this case. On December 28, 2018, the Company received a notification from the Court in Miao-Li County, Taiwan that Epistar Corporation (the successor to Formosa Epitaxy Incorporation, the “Plaintiff”) filed a motion requesting that the Company return the $3 million prepayment plus value-added-tax for the headquarters building sale and pay interest during this period and litigation fee. The Plaintiff also petitioned the Court to do a provisional execution upon the Company, which would permit the Plaintiff to sell the building and/or other assets belonging to the Company to recover the prepayment. On January 4, 2019, the Company filed a statement of defense arguing that the Plaintiff’s action and motion for provisional execution should be dismissed and the litigation fees should be borne by the Plaintiff. On January 25, 2019, the Company and the Plaintiff entered into a settlement, agreeing that the Company would return the $3 million plus value-added-tax of $150 thousand and penalty of $200 thousand, and on February 1, 2019, the Plaintiff withdrew the motion. As of May 31, 2020, the Company has paid the $3.35 million in full. On March 11, 2019, a former employee (the “Plaintiff”) of Taiwan Bandaoti Zhaoming Co., Ltd. (“Taiwan Bandaoti”) filed a civil complaint against Taiwan Bandaoti in the Taiwan Miao-Li District Court. The Plaintiff alleged the following causes of action under the Labor Standards Act of Taiwan: (1) failure to pay the annual bonus; and (2) failure to pay transportation allowance. The Plaintiff is seeking compensation in the aggregate of approximately $9 thousand (NT$293 thousand). On May 24, 2019, Taiwan Miao-Li District Court determined on its own initiative to transfer the case to the Taiwan Hsin-Chu District Court due to a lack of jurisdiction over the action in whole or in part. On February 10, 2020, the Taiwan Hsin-Chu District made a determination in favor of the Company. As of May 31, 2020, the term of appeal expired and the determination is affirmed. Except as described above, as of May 31 2020, there was no pending or threatened litigation that could have a material impact on the Company’s financial position, results of operations or cash flows. 6. Common Stock On January 17, 2020, the Company entered into a definitive common stock purchase agreement with XianChang Ma. Pursuant to the terms of the Agreement, Mr. Ma purchased 150,000 shares of the Company’s common stock at $4.00 per share, representing approximately 4% of the outstanding shares of the Company at the time of purchase. The Company received the $600,000 purchase price in full on January 17, 2020. On May 25, 2020, the Company entered into a definitive common stock purchase agreement (the “Agreement”) with FengShuang Zhu. Pursuant to the terms of the Agreement, Mr. Zhu purchased 33,333 shares of the Company’s common stock at $3.00 per share for an aggregate purchase price of $100,000. The Company received the $100,000 purchase price in full on May 25. 2020. On May 25, 2020, J.R. Simplot Company, the largest shareholder of the Company, and Trung Doan, the Chairman and Chief Executive Officer of the Company, each converted $300,000 of convertible unsecured promissory notes (the “Notes”) into 100,000 shares of the Company’s common stock. 7. Stock-based Compensation The Company currently has one equity incentive plan (the “2010 Plan”), which provides for awards in the form of restricted shares, stock units, stock options or stock appreciation rights to the Company’s employees, officers, directors and consultants. In April 2014, SemiLEDs’ stockholders approved an amendment to the 2010 Plan that increased the number of shares authorized for issuance under the plan by an additional 250 thousand shares. On July 31, 2019, the stockholders approved an increase in the authorized share reserve under the 2010 plan by an additional 500 thousand shares, to extend expiration of the 2010 Plan to November 3, 2023, to remove the IRS Code section 162(m) provisions, and to modify the maximum grant limit to 35 thousand shares to one person in a one year period. Prior to SemiLEDs’ initial public offering, the Company had another stock-based compensation plan (the “2005 Plan”), but awards are made from the 2010 Plan after the initial public offering. Options outstanding under the 2005 Plan continue to be governed by its existing terms. A total of 1,021 thousand and 521 thousand shares was reserved for issuance under the 2010 Plan, respectively, as of May 31, 2020 and 2019. As of May 31, 2020 and 2019, there were 548 thousand and 191 thousand shares of common stock available for future issuance under the equity incentive plans, respectively. 13 Table of Contents In January 2020, SemiLEDs g ranted 136 thousand restricted stock units to its employees , which vest 25% each year on January 10 of 2021, 2022, 2023 and 2024 and will become fully vested upon a change in control. The grant-date fair value of the restricted stock units was $2.39 per un it. In September 2019, SemiLEDs granted 5 thousand restricted stock units to its directors that will vest 100% on the earlier of July 31, 2020 and the date of the 2020 annual meeting. The grant-date fair value of the restricted stock units was $2.45 per unit. In September 2019, SemiLEDs granted 2.5 thousand restricted stock units to a director that will vest 100% on the earlier of September 5, 2020 and the date of the 2020 annual meeting. The grant-date fair value of the restricted stock units was $2.45 per unit. The grant date fair value of stock options is determined using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model requires inputs including the market price of SemiLEDs’ common stock on the date of grant, the term that the stock options are expected to be outstanding, the implied stock volatilities of several of the Company’s publicly-traded peers over the expected term of stock options, risk-free interest rate and expected dividend. Each of these inputs is subjective and generally requires significant judgment to determine. The grant date fair value of stock units is based upon the market price of SemiLEDs’ common stock on the date of the grant. This fair value is amortized to compensation expense over the vesting term. Stock-based compensation expense is recorded net of estimated forfeitures such that expense is recorded 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. A forfeiture rate of zero is estimated for stock-based awards with vesting term that is less than or equal to one year from the date of grant. A summary of the stock-based compensation expense for the three and nine months ended May 31, 2020 and 2019 was as follows (in thousands): Three Months Ended Nine Months Ended May 31, 2020 May 31, 2019 May 31, 2020 May 31, 2019 Cost of revenues $ 5 $ 10 $ 22 $ 34 Research and development 5 6 16 21 Selling, general and administrative 11 11 42 62 $ 21 $ 27 $ 80 $ 117 8. Net Loss Per Share of Common Stock The following stock-based compensation plan awards were excluded from the computation of diluted net loss per share of common stock for the periods presented because including them would have been anti-dilutive (in thousands of shares): Three Months Ended Nine Months Ended May 31, 2020 May 31, 2019 May 31, 2020 May 31, 2019 Stock units and stock options to purchase common stock — 7 157 13 9. Income Taxes The Company’s income (loss) before income taxes for the three and nine months ended May 31, 2020 and 2019 consisted of the following (in thousands): Three Months Ended Nine Months Ended May 31, 2020 May 31, 2019 May 31, 2020 May 31, 2019 U.S. operations $ (324 ) $ (86 ) $ (115 ) $ (377 ) Foreign operations (185 ) (772 ) (366 ) (2,308 ) Loss before income taxes $ (509 ) $ (858 ) $ (481 ) $ (2,685 ) 14 Table of Contents Unrecognized Tax Benefits On December 22, 2017, the U.S. Tax Cuts and Jobs Act was adopted, which among other effects, reduced the U.S. federal corporate income tax rate to 21% from 34% (or 35% in certain cases) beginning in 2018, requires companies to pay a one-time transition tax on certain unrepatriated earnings from non-U.S. subsidiaries that is payable over eight years, makes the receipt of future non-U.S. sourced income of non-U.S. subsidiaries tax-free to U.S. companies and creates a new minimum tax on the earnings of non-U.S. subsidiaries relating to the parent’s deductions for payments to the subsidiaries. Provisional estimate of the Company is that no tax will be due under this provision. As of both May 31 2020 and August 31, 2019, the Company had no unrecognized tax benefits related to tax positions taken in prior periods. The Company files income tax returns in the United States, various U.S. states and certain foreign jurisdictions. The tax years 2014 through 2018 remain open in most jurisdictions. With few exceptions, as of May 31, 2020, the Company is no longer subject to U.S. federal, state, local, or foreign examinations by tax authorities for tax years before 2014. The Company is not currently under examination by income tax authorities in federal, state or foreign jurisdictions. 10. Related Party Transactions On December 6, 2019 and on December 10, 2019, the Company issued convertible unsecured promissory notes (the “Notes”) to each of J.R. Simplot Company, its largest shareholder, and Trung Doan, its Chairman and Chief Executive Officer (together, the “Holders”), with a principal sum of $1.5 million and $500 thousand, respectively, and an annual interest rate of 3.5%. Principal and accrued interest shall be due on demand by the Holders on and at any time after May 30, 2021. The outstanding principal and unpaid accrued interest of the Notes may be converted into the Company’s common stock based on a conversion price of $3.00 per share, at the option of the Holders any time from the date of the Notes. On May 25, 2020, each of the Holders converted $300,000 of the Notes into 100,000 shares of the Company’s common stock. 10. Subsequent Events The Company has analyzed its operations subsequent to May 31, 2020 to the date these unaudited condensed consolidated financial statements were issued, finding that the impact of COVID-19 on the Company is unknown at this time and the financial consequences of this situation cause uncertainty as to the future and its effects on the economy and the Company. Except for the above, the Company has determined that it does not have any material subsequent events to disclose in these unaudited condensed consolidated financial statements. 15 Table of Contents