What changed in this filing

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Item 7. Management’s Discussion and Analysis

2020-11-17 compared with 2019-11-20 · 116 added, 108 removed, 334 unchanged (40% of the section changed)

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The following are key factors that we believe affect our financial condition, results of operations and business:

COVID-19 Pandemic.

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 workplaces are operating under enhanced measures to ensure the health and safety of our employees, including limiting the visitors coming into our workplace 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, delayed prospective customers’ purchasing decisions, adversely impacted our ability to provide or deliver products and on-site services to our customers, delayed the provisioning of our offerings, or lengthened 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, our largest customer, Revlon, Inc., postponed its regular orders, which is expected to decrease our sales revenue for the first quarter ended November 30, 2020, and even for the quarters after that if the COVID-19 pandemic continues.

To avoid cash shortage due to the pandemic, we applied and received subsidies from the Taiwan government.

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

During this period, we do not need to pay the monthly payments of the principal but only the interest.

We have also devoted ourselves to new product development and expect these new products could bring in new revenue, offsetting the losses resulted from existing customers’ delayed purchasing.

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

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

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Industry growth and demand for products and applications using LEDs.

The overall adoption of LED lighting devices to replace traditional lighting sources is expected to influence the growth and demand for LED chips and component products and impact our financial performance.

The overall adoption of LED lighting devices to replace traditional lighting sources is expected to influence the growth and demand for LED chips and component products and impact our

financial performance.

We believe the potential market for LED lighting will continue to expand.

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 will have a stro ng 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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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 pu rsue opportunities for profitable growth in areas of business where we see the best opportunity to develop as an end-to-end LED module solution supplier 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 placed greater emphasis on the sales of LED components rather than the sales of LED chips where we have been for ced to cut prices on older inventory.

T he g rowth of our module product s and the continued commercial sales of our UV LED product are expected to improve our gross margin, operating results and cash flows.

For example, we continue to pursue opportunities for profitable growth in areas of business where we see the best opportunity to develop as an end-to-end LED module solution supplier 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 placed greater emphasis on the sales of LED components rather than the sales of LED chips where we have been forced to cut prices on older inventory.

The growth of our module products 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 adjus t 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.

However, as we expand and diversif y 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 from period to period.

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.

However, 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 from period to period.

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

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Our LED components include different sizes and wattage to accommodate different demands in the LED market.

General economic conditions and geographic concentration.

General economic conditions and geographic concentrat ion.

Many countries including the United States and the European Union (the “E.U.”) members have instituted, or have announced plans to institute, government regulations and programs designed to encourage or mandate increased energy efficiency in lighting.

These actions include in certain cases banning the sale after specified dates of certain forms of incandescent lighting, which are advancing the adoption of more energy efficient lighting solutions such as LEDs.

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, Germany, Japan and India.

When the global economy slows or a financia l 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 Netherland s , 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.

Therefore, our financial results will be impacted by general economic and political conditions in such markets.

For example, the aggressive support by the Chinese government for the LED industry through significant government incentives and subsidies to encourage the use of LED lighting and to establish the LED‑sector companies has resulted in production overcapacity in the market and intense competition.

Furthermore, due to Chinese package manufacturers increasing usage of domestic LED chips, prices are increasingly competitive, leading to Chinese manufacturers growing market share in the global LED industry.

For example, the aggressive support by the Chinese government for the LED industry through significant government incentives and subsidies to encourage the use of LED lighting and to establish the LED ‑ sect or companies has resulted in production overcapacity in the market and intense competition.

In addition, we have historically derived a significant portion of our revenues from a limited number of customers.

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.

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

For the years ended August 31, 20 20 and 201 9 , sales to our three largest customers, in the aggregate, accounted for 61 % and 45 % 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 right s.

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.

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All accused products sold before the date of settlement are released under this agreement and our customers and distributors are specifically released.

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

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.

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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.

Declining cash position.

Our cash and cash equivalents decreased to $1.4 million as of August 31, 2019 primarily due to the combination of our net cash used in operating activities offset by proceeds from long-term debt.

Cash position.

Our cash and cash equivalents increased to $2.8 million as of August 31, 2020 primarily due to the combination of our net cash provided by financing activities offset by net cash used in operating activities.

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

The plan is further enhanced through the fabless business model in which we implemented certain workforce reductions and are exploring the opportunities to sell certain equipment related to the manufacturing of vertical LED chips, in order to reduce the idle capacity charges and minimize our research and development activities associated with chips manufacturing operation.

In July 2019, we entered into two new loan agreements to refinance an existing real estate loan and provide for operating capital.

In December 2019, we issued convertible unsecured promissory notes with a principal sum of $2 million.

Among which, $600 thousand convertible notes were converted into 200 thousand shares of common stock in May 2020.

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.

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Our larger customers typically provide us with non ‑ binding rolling forecasts of their requirements for the coming one to three months;

however, recent global economic uncertainty and weakness has led to reduced spending in our target markets and made it difficult for our customers and us to accurately forecast and plan future business activities.

however, recent global economic uncertainty and weakness has led to reduced spending in our t arget markets and made it difficult for our customers and us to accurately forecast and plan future business activities.

Our customers may increase, decrease, cancel or delay purchase orders already in place, with no material consequences to the customer.

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We price our products in accordance with prevailing market conditions, taking into account the technical specifications of the product being sold, the order volume, the strength and history of our relationship with the customer, our inventory levels and our capacity utilization.

When average selling prices drop, as they did in recent years, inventory write‑downs to net realizable values may also result.

When average selling prices drop, as they did in recent yea rs, inventory write ‑ downs to net realizable values may also result.

Our customers consist primarily of packagers, ODMs and end‑customers.

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Other Income (Expense)

Equity in loss from unconsolidated entities.

We recognized net loss of $8 thousand from our equity investments without readily determinable fair value in Intematix for the year ended August 31, 2018, based on the excess of the carry amount over the receivables.

No gain nor loss was recognized from our equity investments without readily determinable far value for the year ended August 31, 2019.

We report our investment in the entity as investments in unconsolidated entities on our consolidated balance sheets and such investment amounts are initially stated at cost, and subsequently adjusted for our portion of equity in undistributed earnings or losses.

Gain on disposal of investment.

We recognized a gain of $634 thousand for the year ended August 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.

Interest expenses, net consists of interest income and interest expense.

Interest expenses, net consist of interest income and interest expense.

Interest income represents interest earned from our cash and cash equivalents deposited with commercial banks in the United States and Taiwan.

As of August 31, 2020 and 2019, we had cash and cash equivalents of $2.8 million and $1.4 million, respectively, which consisted of time deposits with initial maturity of greater than three months but less than one year.

Interest expense consists primarily of interest on our long‑term borrowings and/or short‑term lines of credit with certain banks in Taiwan as well as with our Chairman and largest stockholder.

Interest expense consists primarily of interest on our convertible notes and long‑term borrowings and/or short‑term lines of credit with certain banks in Taiwan as well as with our Chairman and largest stockholder.

We had long‑term debt totaling $7.7 million and $6.4 million as of August 31, 2020 and 2019, respectively.

Other income, net.

Other income for the year ended August 31, 2018 primarily consists of sales of patents and rental income from the lease of the second floor of our Hsinchu building, offset by the commission expense and related depreciation charge.

Other income for the year ended August 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 income for the year ended August 31, 2019 consists primarily of rental income from the lease of spare space in our Hsinchu building, offset by the settlement of a lawsuit with Epistar.

Foreign currency transaction gain (loss), net.

We recognized a net foreign currency transaction gain of $40 thousand and a net loss of $52 thousand for the years ended August 31, 2019 and 2018, respectively, primarily due to the depreciation of the U.S.

We recognized a net foreign currency transaction gain of $352 thousand and $40 thousand for the years ended August 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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Taiwan tax treatment.

The corporate income tax rate in Taiwan is 20% and 17% for the year ended August 31, 2019 and 2018, respectively.

The corporate income tax rate in Taiwan is 20% for the year ended August 31, 20 20 and 201 9 .

Corporate income taxes payable, however, are subject to an alternative minimum tax.

The Taiwan government enacted the Taiwan Alternative Minimum Tax Act, or the AMT Act, on January 1, 2006.

The Taiwan government enac ted the Taiwan Alternative Minimum Tax Act, or the AMT Act, on January 1, 2006.

Under the AMT Act, a taxpayer must pay the higher of its taxable income multiplied by the corporate income tax rate or the alternative minimum tax, or AMT.

In calculating the AMT amount, the taxpayer must include income that would otherwise be exempt from taxation pursuant to various tax holidays or investment tax credits, other than certain exemptions or tax credits that have been grandfathered for the purposes of calculating AMT.

In calculating the A MT amount, the taxpayer must include income that would otherwise be exempt from taxation pursuant to various tax holidays or investment tax credits, other than certain exemptions or tax credits that have been grandfathered for the purposes of calculating A MT.

The AMT rate for business entities is 12%.

In addition to the statutory corporate taxes payable, or the AMT, corporate taxpayers in Taiwan are subject to an additional tax on distributable retained earnings (after statutory legal reserves) to the extent that such earnings are not distributed prior to the end of the subsequent year.

This undistributed earnings surtax is determined in the subsequent year when the distribution plan relating to earnings attributable to the prior year is approved by a company’s stockholders and is payable in the subsequent year.

In addition to the statutory corporate taxes payable, or the AMT, corporate taxpayers in Taiwan are subject to an additional tax on distributable retained earnings (after statutory legal reserves) to the exten t that such earnings are not distributed prior to the end of the subsequent year.

This undistributed earnings surtax is determined in the subsequent year when the distribution plan relating to earnings attributable to the prior year is approved by a compan y’s stockholders and is payable in the subsequent year.

The surtax rate has been reduced from 10% to 5%, starting applicable to the undistributed retained earnings of the year ended August 31, 2019.

Because most of our subsidiaries in Taiwan incurred losses before income tax for both our fiscal year 2019 and 2018, we do not expect to pay such taxes on undistributed earnings.

As of August 31, 2019, we had total foreign net operating loss carryforwards of $120.3 million, arising primarily from certain of our consolidated and majority owned subsidiaries in Taiwan, which will expire in various amounts in future years.

Pursuant to the Taiwan Income Tax Act, as amended in January 2009, net operating loss carryforwards can be carried forward for a period of ten years.

As a result of amendments to the “Taiwan Income Tax Act” enacted by the Office of the President of Taiwan on February 7, 2018, the statutory income tax rate increased from 17% to 20% and the unappropriated earning tax decreased from 10% to 5% effective from January 1, 2018.

The effect of the change in tax rate on deferred tax income had been recognized in profit which had been offset by the reverse of deferred tax allowance.

The new tax rates are applicable to the Company starting from September 1, 2018.

Because most of our subsidiaries in Taiwan incurred losse s before income tax for both our fiscal year 20 20 and 201 9 , we do not expect to pay such taxes on undistributed earnings.

In addition, in accordance with the Taiwan Income Tax Act, dividends distributed by companies incorporated in accordance with the Taiwan Company Act shall be deemed as income derived from sources in Taiwan and income taxes shall be levied on the shareholders receiving such dividends.

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Therefore, dividends received from our subsidiaries in Taiwan, if any, will be subjected to withholding tax under Taiwan law.

As of August 31, 2020, we had total foreign net operating loss carryforwards of $115.1 million, arising primarily from certain of our consolidated and majority owned subsidiaries in Taiwan, which will expire in various amounts in future years.

Pursuant to the Taiwan Income Tax Act, as amended in January 2009, net operating loss carryforwards can be carried forward for a period of ten years.

We are subject to income taxes in both the United States and foreign jurisdictions.

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We determined that we have two asset groups for impairment testing purposes, one of which is associated with the manufacture and sale of LED chips and LED components, and the other is associated with our Ning Xiang subsidiary, which is engaged in the manufacture and sale of lighting fixtures and systems.

The estimates of future cash flows involve subjective judgments and represent our best estimate at each date of assessment about futur e developments, determined based on reasonable and supportable assumptions and projections taking into account past experience, as well as market data obtained from independent external sources.

The use of different assumptions could increase or decrease t he estimates of expected future cash flows and consequently, increase or decrease the related impairment charges.

For example, if the average selling prices continue to decline beyond the assumptions used in our forecast of future cash flows expected to be generated by the asset groups, or if demand for our LED products does not grow as we anticipate, or if utilization rates are lower than anticipated, it is reasonably possible that the estimate of expected future cash flows may change in the near term resu lting in the need to adjust our determination of fair value.

The estimates of future cash flows involve subjective judgments and represent our best estimate at each date of assessment about future developments, determined based on reasonable and supportable assumptions and projections taking into account past experience, as well as market data obtained from independent external sources.

The use of different assumptions could increase or decrease the estimates of expected future cash flows and consequently, increase or decrease the related impairment charges.

For example, if the average selling prices continue to decline beyond the assumptions used in our forecast of future cash flows expected to be generated by the asset groups, or if demand for our LED products does not grow as we anticipate, or if utilization rates are lower than anticipated, it is reasonably possible that the estimate of expected future cash flows may change in the near term resulting in the need to adjust our determination of fair value.

For the year ended August 31, 2020, lower than projected sales of our LED products and lower market capitalization compared to our consolidated net book values again indicated potential impairment of our long‑lived assets.

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Critical Accounting Policies and Estimates

Effective September 1, 2018, we adopted ASU No.

2016-18, Statement of Cash Flows (Topic 230), Restricted Cash, using the retrospective transition approach.

The standard requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statements of cash flows.

The reclassified restricted cash balances from investing activities to changes in cash, cash equivalents and restricted cash on the consolidated statements of cash flows were not material for all periods presented.

Effective September 1, 2018, we adopted ACS 606 using the modified retrospective transition method.

Under this approach, we apply the new standards to all new contracts initiated on and after September 1 2018, and, for contracts which have remaining obligations as of September 1 2018, we recognized no adjustment to the opening balance of our retained earnings account.

On September 1, 2018, we 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.

On September 1, 2019, we adopted ASU No.

2018-07, Compensation – Stock Compensation (Topic 718):

Improvements to Nonemployee Share-Based Payment Accounting.

The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards.

The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers.

There was no material impact on our consolidated financial position, results of operations or cash flows due to the adoption.

Effective September 1, 2018, we adopted ASU No.

2017-09, “Compensation- Stock Compensation:

Scope of Modification Accounting”.

The guidance provides clarity and reduces diversity in practice and cost and complexity when accounting for a change to the terms or conditions of a share-based payment award.

Adoption of this standard did not have a material impact on our consolidated financial position, results of operations or cash flows.

Effective September 1, 2019, we adopted, without restating comparatives, ASC 842, Leases, which is intended to improve financial reporting on leasing transactions.

This standard requires a lessee to record on the balance sheet the assets and liabilities for the rights and obligations created by lease terms of more than 12 months.

As of September 1, 2019, we recognized $307 thousand of lease right of use Asset and of lease liability;

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 condensed consolidated financial statements for the year ended August 31, 2020 as compared to those disclosed in our 2019 Annual Report.

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Cost of revenues

Gross profit (loss)

Operating expenses:

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Other income (expenses):

Equity in loss from unconsolidated entities

Gain on disposals of investment

Interest expenses, net

Other income, net

Foreign currency transaction gain (loss), net

Foreign currency transaction gain, net

Total other income (expenses), net

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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, the provision of services and the lease of manufacturing as well as research and development facilities.

Revenues, net

Our revenues decreased by 21% from $7.5 million for the year ended August 31, 2018 to $5.9 million for the year ended August 31, 2019.

The $1.6 million decrease in revenues reflects a $151 thousand decrease in revenues attributable to sales of LED chips, a $751 thousand decrease in revenues attributable to sales of LED components, a $336 thousand decrease in revenues attributable to the sales of lighting products, and a $355 thousand decrease in other revenues.

Total revenues increased by 3% from $5.9 million for the year ended August 31, 2019 to $6.1 million for the year ended August 31, 2020.

The $166 thousand increase in revenues reflects a $727 thousand increase in other revenues, offset by a $24 thousand decrease in revenues attributable to sales of LED chips, a $453 thousand decrease in revenues attributable to sales of LED components, and an $84 thousand decrease in revenues attributable to the sales of lighting products.

Revenues attributable to the sales of our LED chips represented 1% and 2% of our revenues for the years ended August 31, 2020 and 2019, respectively.

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Revenues attributable to the sales of our LED components represented 66% and 75% of our revenues for the years ended August 31, 2020 and 2019, respectively.

The decrease in revenues attributable to sales of LED components was primarily due to the lower average selling price for our UV LED product.

The decrease was also a result of lower volume sold for another LED components products, which has a higher average selling price.

The decrease in revenues attributable to sales of LED components was primarily due to a result of lower volume sold of LED components products with a lower average selling price.

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 the profitable products.

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The decrease in revenues attributable to the sales of lighting products was mainly due to a slowdown in demand on LED luminaries and retrofits and fewer non-recurring project-based orders for LED lighting products.

The decrease in other revenues was primarily due to a decrease in service revenues for the year ended August 31, 2019.

Revenues attributable to other revenues represented 24% and 12% of our revenues for the year ended August 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

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A majority of our inventory write-downs during the years ended August 31, 2020 and 2019 was related to finished goods and work in process, primarily as a result of obsolescence.

Gross Profit (Loss)

Our gross profit increased from a loss of $435 thousand for the year ended August 31, 2018 to a profit of $452 thousand for the year ended August 31, 2019.

Our gross margin percentage was 8% for the year ended August 31, 2019, as compared to negative 6% for the year ended August 31, 2018 as a consequence of the increase in the sales of products with higher margin.

Our gross profit increased from $452 thousand for the year ended August 31, 2019 to $1.6 million for the year ended August 31, 2020.

Our gross margin percentage was 26% for the year ended August 31, 2020, as compared to 8% for the year ended August 31, 2019 as a consequence of an increase in the sales of products with higher margin.

Operating Expenses

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Research and development.

Our research and development expenses increased from $957 thousand for the year ended August 31, 2018 to $1.6 million for the year ended August 31, 2019.

The increase was primarily due to a $150 thousand increase in payroll expense and other operating expenses as a result of headcount reallocation and a $508 thousand increase in materials and supplies used in research and development, offset by a $4 thousand decrease in depreciation and amortization expense.

Our research and development expenses decreased from $1.6 million for the year ended August 31, 2019 to $1.5 million for the year ended August 31, 2020.

The slight decrease was primarily due to an $87 thousand decrease in materials and supplies used in research and development, offset partially by an increase in payroll expense and other operating expenses.

Selling, general and administrative.

Our selling, general and administrative expenses decreased from $3.2 million for the year ended August 31, 2018 to $2.8 million for the year ended August 31, 2019.

The decrease was mainly attributable to a $57 thousand decrease in payroll and stock-based compensation expenses, a $306 thousand decrease in professional service fees and insurance fees due to a reversal of an accrual, and decrease in various expenses.

Gain on disposal of long ‑ lived asset s , net.

We recognized a gain of $ 288 thousand and $ 902 thousand, net on the disposal o f long-lived assets for the years ended August 31, 201 9 and 20 18 , respectively.

Primarily due to the excess capacity charges that we have suffered for a few years, considering the risk of technological obsolescence and according to the production plan buil t based on our sales forecast, we disposed of a certain level of our idle equipment.

Our selling, general and administrative expenses increased slightly from $2.8 million for the year ended August 31, 2019 to $2.8 million for the year ended August 31, 2020.

The increase was mainly attributable to a $278 thousand increase in professional fees, offset partially by a decrease in payroll expense, shipping and freight fee, and other various expenses.

Gain on disposal of long ‑ lived assets, net.

We recognized a gain of $669 thousand and $288 thousand, net on the disposal of long-lived assets for the years ended August 31, 2020 and 2019, respectively.

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

Other Income (Expenses)

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(in thousands)

Equity in loss from unconsolidated entities

Gain on disposals of investment

Interest expenses, net

Other income, net

Foreign currency transaction gain (loss), net

Foreign currency transaction gain, net

Total other income (expenses), net

Equity in loss from unconsolidated entities.

We recognized net loss of $8 thousand from our cost method investment in InteMatix for the year ended August 31, 2018, based on the excess of the carry amount over the receivables.

Gain on disposal of investment.

We recognized a gain of $634 thousand for the year ended August 31, 2020.

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 our entry into loan agreements on January 8, 2019 with each of our Chairman and our largest stockholder, with aggregate amounts of $3.2 million, and an annual interest rate of 8%.

The proceeds of the loans were used to return the deposit received in 2015 in connection with the proposed sale of our headquarters building, which sale agreement was terminated.

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, net.

Other income for the year ended August 31, 2018 primarily consisted of sales of patents and rental income from the lease of the second floor of our Hsinchu building, offset by the commission expense and related depreciation charge.

Other income for the year ended August 31, 2019 consisted primarily of rental income from the lease of spare space in our Hsinchu building, offset by the settlement of a lawsuit with Epistar.

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

Foreign currency transaction gain (loss), net.

We recognized a net foreign currency transaction gain of $352 thousand and $40 thousand for the years ended August 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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Utilization of these net operating losses carryforwards may be subject to an annual limitation due to applicable provisions of the Internal Revenue Code of 1986, as amended, and local tax laws if we have experienced an “ownership change” in the past, or if an ownership change occurs in the future.

As of August 31, 201 9 , we had total foreign net operating loss carryforwards of $1 20.

1 million, arising primarily from certain of our consolidated and majority owned subsidiaries in Taiwan.

As of August 31, 2020, we had total foreign net operating loss carryforwards of $115 million, arising primarily from certain of our consolidated and majority owned subsidiaries in Taiwan.

Pursuant to the Taiwan Income Tax Act, as amended in January 2009, net operating losses carryforwards can be carried forward for a period of ten years.

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Net loss attributable to noncontrolling interests

We recognized net loss attributable to non-controlling interests of approximately $0 for the year ended August 31, 2019, 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 August 31, 2019, non-controlling interests represented 3.29% equity interest in Taiwan Bandaoti Zhaoming CO., Ltd.

We recognized net loss attributable to non-controlling interests of $3 thousand and a net gain of approximately $0 thousand for the year ended August 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 August 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

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As of November 13, 2020, we had no available credit facility.

Our long-term debt, which consisted of NT dollar denominated long-term notes and loans from our Chairman and our largest shareholder, totaled $6.4 million and $2.3 million as of August 31, 2019 and 2018, respectively.

Our NT dollar denominated long-term notes, totaled $3.2 million and $2.3 million as of August 31, 2019 and 2018, respectively.

As of August 31, 2018, these long-term notes carried an interest rate of 1.62%, based on the annual time deposit rate plus a specific spread, were payable in monthly installments, and were secured by our property, plant and equipment.

These long-term notes did not have prepayment penalties or balloon payments upon maturity.

On July 5, 2019, we entered into two New Taiwan dollar (“NTD”) denominated loan agreements with aggregate amounts of $3.2 million (NT$100 million).

The first loan for $2.0 million (NT$62 million) has an annual floating interest rate equal to the NTD base lending rate plus 0.64% (or 1.62% currently), and was exclusively used to repay the existing loans.

The second loan for $1.2 million (NT$38 million) has an annual floating interest rate equal to the NTD base lending rate plus 1.02% (or 2% currently) and is available for operating capital.

The new 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 August 31, 2019, our outstanding balance on this note payable was approximately $2.0 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 August 31, 2019, our outstanding balance on this note payable was approximately $1.2 million.

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 $7.7 million and $6.4 million as of August 31, 2020 and 2019, respectively.

Our NT dollar denominated long-term notes, totaled $3.1 million and $3.2 million as of August 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).

The first loan originally for $2.0 million (NT$62 million) has an annual floating interest rate equal to the NTD base lending rate plus 0.64% (or 1.465% currently), and was exclusively used to repay the existing loans.

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 an $85 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 August 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 $1 6 thousand plus interest over the 74-month term of the note with final payment to occur in July 2027 and, as of Augus t 31, 2020, our outstanding balance on this note payable was approximately $1.

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

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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 August 31, 2019, these loans totaled $3.2 million.

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

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

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 December 6, 2019 and on December 10, 2019, we issued convertible unsecured promissory notes to each of our Chairman and Chief Executive Officer and our largest shareholder (the “Holders”), with a principal sum of $2 million 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 “Maturity Date”).

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.

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

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

We have incurred significant losses since inception, including net losses attributable to SemiLEDs stockholders of $544 thousand and $3.6 million during the years ended August 31, 2020 and 2019, respectively.

Net cash used in operating activities for the year ended August 31, 2020 was $1.0 million.

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However, there can be no assurances that our planned activities will be successful in reducing losses and preserving cash.

If we are not able to generate positive cash flows from operations, we may need to consider alternative financing sources an d seek additional funds through public or private equity financings or from other sources, or refinance our indebtedness, to support our working capital requirements or for other purposes.

If we are not able to generate positive cash flows from operations, we may need to consider alternative financing sources and seek additional funds through public or private equity financings or from other sources, or refinance our indebtedness, to support our working capital requirements or for other purposes.

There can be no assurance that additional debt or equity financing will be available to us or that, if available, such financing will be available on terms favorable to us.

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Net cash provided by (used in) investing activities

Net cash provided by (used in) financing activities

Net cash provided by financing activities

Cash Flows Used in Operating Activities

Net cash used in operating activities was $1.0 million and $3.5 million for the years ended August 31, 2020 and 2019, respectively.

Cash used in operating activities for the year ended August 31, 2019 was $2.4 million higher, primary attributable to a decrease of $1.2 million in cash collected from customers, and an increase of $1.4 million in cash paid out for inventory during the year ended August 31, 2019 compared to the year ended August 31, 2018.

Cash used in operating activities for the year ended August 31, 2020 was $2.5 million lower, primary attributable to a decrease of $3.0 million in net loss, an increase of $442 thousand in cash collected from customers, and a decrease of $111 thousand in cash paid out for accrued expenses and other current liabilities, partially offset by various non-cash adjustments during the year ended August 31, 2020 compared to the year ended August 31, 2019.

Cash Flows Provided By (Used in) Investing Activities

Net cash provided by investing activities was $518 thousand for the year ended August 31, 2020, consisting primarily of the proceeds from the sales of property, plant and equipment of $669 thousand as a result of the disposal of idle machinery, and the proceeds of $140 thousand from the sales of our Hong Kong subsidiary, Semileds International Corporation Limited, and its wholly owned subsidiary Xuhe Guangdian Co Ltd., partially offset by a $271 thousand in cash used in the purchase of machinery and equipment and a $20 thousand for development of intangible assets.

Net cash used in investing activities was $2.6 million for the year ended August 31, 2019, consisting primarily of the return of $3 million to Epistar and $ 127 thousand of purchases of machinery and equipment, partially offset by $50 2 thousand of proceeds from sales of machinery and equipment.

Net cash provided by investing activities was $1.2 million for the year ended August 31, 2018, consisting primarily of the proceeds from the sales of property, plant and equipment of $1 million as a result of the disposal of idle machinery, proceeds from sales of investment and from patents assignment contributed $54 thousand and $500 thousand, respectively, partially offset by a $341 thousand in cash used in the purchase of machinery and equipment.

Cash Flows Provided by (Used in) Financing Activities

Cash Flows Provided by Financing Activities

Net cash provided by financing activities for the year ended August 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 was $4.1 million for the year ended August 31, 2019, consisting primarily of $3.2 million of proceeds from Chairman and shareholder loans, and $3.2 million of proceeds from the new bank loans, partially offset by $2.3 million of repayments on long-term notes.

Net cash used in financing activities was $331 thousand for the year ended August 31, 2018, primarily attributable to the repayments on long-term debt.

Capital Expenditures

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However, in response to controlling capital costs and maintaining financial flexibility, our management continues to monitor prices and, consistent with its existing contractual commitments, may decrease its activity level and capital expenditures as appropriate.

Off ‑ Balanc e Sheet Arrangements

Off ‑ Balance Sheet Arrangements

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

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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-K

Item 7. Management’s Discussion and Analysis