What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-01-14 compared with 2020-07-13 · 117 added, 188 removed, 210 unchanged (59% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis o f Financial Condition and Results of Operations

Forward Looking Statements

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Declining cash position.

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

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

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

The inability of our suppliers or other contract manufacturers to produce products that satisfy our requirements.

The inability of our suppliers or other contract manufacturThe impact of the COVID-19 pandemic on our business and the business of our customersers to produce products that satisfy our requirements.

Our ability to implement our cost reduction programs and to execute our restructuring plan effectively.

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

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

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

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

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

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

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

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For more information on the significant risks that could affect the outcome of these forward-looking statements, see Item 1A “Risk Factors” in Part I of our Annual Report on Form 10-K for the fiscal year ended August 31, 2020, or the 2020 Annual Report, and those contained in Part II, Item 1A of this Quarterly Report, and other information provided from time to time in our filings with the Securities and Exchange Commission, or the SEC.

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

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

Company Overview

We develop, manufacture and sell light emitting diode (LED) chips and LED components.

Our products are used for general lighting applications, including street lights and commercial, industrial, system and residential lighting.

Our LED chips may also be used in specialty industrial applications, such as ultraviolet, or UV, curing of polymers, LED light therapy in medical/cosmetic applications, counterfeit detection, LED lighting for horticulture applications, architectural lighting and entertainment lighting.

We develop, manufacture and sell light emitting diode (LED) chips and LED components, LED modules and systems.

Our products are used for general lighting and specialty industrial applications, including ultraviolet, or UV, curing of polymers, LED light therapy in medical/cosmetic applications, counterfeit detection, germicidal and viricidal devices LED lighting for horticulture applications, architectural lighting and entertainment lighting.

Utilizing our patented and proprietary technology, our manufacturing process begins by growing upon the surface of a sapphire wafer, or substrate, several very thin separate semiconductive crystalline layers of gallium nitride, or GaN, a process known as epitaxial growth, on top of which a mirror‑like reflective silver layer is then deposited.

After the subsequent addition of a copper alloy layer and finally the removal of the sapphire substrate, we further process this multiple‑layered material to create individual vertical LED chips.

We package our LED chips into LED components, which we sell to distributors and a customer base that is heavily concentrated in a few select markets, including Taiwan, the United States and China (including Hong Kong).

We also sell our “Enhanced Vertical,” or EV, LED product series in blue, white, green and UV in selected markets.

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utilizing nanoscale surface engineering to improve usable light extraction;

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

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

developing low cost Chip Scaled Packaging (CSP) technology;

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

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

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

developing multi-pixel Mini LED packages for commercial displays.

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

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

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

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

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

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

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

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

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

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

Our 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,

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

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

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

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

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

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

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

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

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

For example, our largest customer, Revlon, Inc., postponed its regular orders, which decrease d our sales revenue for the first quarter ended November 30, 2020.

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.

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

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

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

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.

Average selling price of our products.

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Changes in our product mix.

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

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

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

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

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

For example, we continue to pursue opportunities for profitable growth in areas of 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.

Steadily growth of the module product and the continued commercial sales of our UV LED product are expected to

improve our gross margin, operating results and cash flows.

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

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

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

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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Key markets that we intend to target at the system end include different types of UV LED industrial printers, aquarium lighting, medical applications, niche imaging light engines, horticultural lighting and high standard commercial lighting.

The modules are designed for various printing, curing, and PCB exposure industrial equipments, providing uncompromised reliability and optical output.

The modules are designed for various printing, curing, and PCB exposure industrial equipment, providing uncompromised reliability and optical output.

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

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

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

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

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

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

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

For the three months ended November 30, 2020 and 2019, sales to our three largest customers, in the aggregate, accounted for 61% and 66%, respectively, of our revenues.

Intellectual property issues.

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

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 produ cts found to be infringing.

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

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

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

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

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

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

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

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

However, other third parties may also assert infringement claims against our customers with respect to our products, or

our customers’ products that incorporate our technologies or products.

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

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

Cash position.

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

Our cash and cash equivalents had increased to $2.7 million as of November 30, 2020 compared to $688 thousand on November 30, 2019, mainly due to the issuance of convertible notes and common stock for private placement.

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

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Critical Accounting Policies and Estimates

On September 1, 2019, we adopted ASU No.

2018-13, Fair Value Measurement (Topic 820) Disclosure Framework – Change to the Disclosure Requirements for Fair Value Measurement.

The amendments in this Update modify the disclosure requirements of fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in the Concepts Statement, including the consideration of costs and benefits.

Effective September 1, 2020, we adopted ASU No.

2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”).

This standard requires a financial asset (or group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected.

The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset.

The amendments in ASU 2016-13 require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected.

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

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.

Effective September 1, 2020, we adopted 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.

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

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 unaudited interim condensed consolidated financial statements for the nine months ended May 31, 2020 as compared to those disclosed in our 2019 Annual Report.

Except as described above, there have been no material changes in the matters for which we make critical accounting policies and estimates in the preparation of our unaudited interim condensed consolidated financial statements for the three months ended November 30, 2020 as compared to those disclosed in our 2020 Annual Report.

Exchange Rate Information

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

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

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

On November 30, 2020, the exchange rate was 28.81 NT dollars to one U.S.

On January 7, 2021, the exchange rate was 27.98 NT dollars to one U.S.

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

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Results of Operations

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

Three Months Ended

(in thousands)

LED components

Lighting products

Other revenues (1)

Total revenues, net

Cost of revenues

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

Revenues, net

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

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

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

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

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

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

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

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

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

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

Cost of Revenues

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

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

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

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

Operating Expenses

Three Months Ended

(in thousands)

Research and development

Selling, general and administrative

Total operating expenses

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

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

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

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

Other Income (Expenses)

Three Months Ended

(in thousands)

Interest expenses, net

Other income, net

Foreign currency transaction gain (loss), net

Total other income (expenses), net

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

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

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

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

Income Tax Expense

Our effective tax rate is expected to be approximately zero for fiscal 2020 and was zero for fiscal 2019, since Taiwan SemiLEDs incurred losses, and because we provided a full valuation allowance on all deferred tax assets, which consisted primarily of net operating loss carryforwards and foreign investment loss.

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.

Net Gain Attributable to Noncontrolling Interests

Three Months Ended

(in thousands)

Net gain attributable to noncontrolling interests

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

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

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

Nine Months Ended

Three Months Ended November 30, 2020 Compared to the Three Months Ended November 30, 2019

Three Months Ended November 30,

(in thousands)

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Cost of revenues

Gross profit (loss)

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

Revenues, net

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

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

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

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

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

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

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

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

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

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

Our revenues decreased by 54% to $719 thousand for the three months ended November 30, 2020 from $1.6 million for the three months ended November 30, 2019.

The decrease in revenues was caused primarily by a $568 thousand decrease in sales of LED components and a $396 thousand decrease in other revenues.

Revenues attributable to the sales of our LED chips represented 5% and 1% of our revenues for the three months ended November 30, 2020 and 2019, respectively.

The increase in revenues attributable to sales of LED chips was the result of an increase in the volume of LED chips sold, even though our strategic plan is to place greater emphasis on the sales of LED components rather than the sales of LED chips.

Revenues attributable to the sales of our LED components represented 70% and 69% of our revenues for the three months ended November 30, 2020 and 2019, respectively.

The decrease in revenues attributable to sales of LED components was primarily due to the impact of COVID-19 pandemic on customer demand for UV LED components products.

Revenues attributable to the sales of lighting products represented 24% and 5% of our revenues for the three months ended November 30, 2020 and 2019, respectively.

Revenues attributable to the sales of lighting products were higher for the three months ended November 30, 2020 primarily due to a seasonal swings in demand on LED luminaries.

Revenues attributable to other revenues represented 1% and 25% of our revenues for the three months ended November 30, 2020 and 2019, respectively.

The decrease in revenues attributable to other revenues was primarily due to the non-recurring sale of raw materials in the three months ended November 30, 2020.

Cost of Revenues

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

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

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

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

Our cost of revenues decreased by 29% from $1.0 million for the three months ended November 30, 2019 to $741 thousand for the three months ended November 30, 2020.

The decrease in cost of revenues was primarily due to the decrease in the volume of products sold.

Gross Profit (loss)

Our gross margin decreased from a profit of $518 thousand for the three months ended November 30, 2019 to a loss of $22 thousand for the three months ended November 30, 2020.

The decrease was a consequence of the COVID-19 pandemic impact on customer demand, as more fully described above.

Operating Expenses

Nine Months Ended

Three Months Ended November 30,

(in thousands)

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Selling, general and administrative

Gain on disposals of long-lived assets, net

Gain on disposals of long-lived assets

Total operating expenses

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

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

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

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

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

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

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

Research and development Our research and development expenses were $346 thousand and $430 thousand for the three months ended November 30, 2020 and 2019, respectively.

The decrease was mainly attributable to a $85 thousand decrease in engineering experiment materials, offset by an increase in depreciation and amortization.

Selling, general and administrative Our selling, general and administrative expenses decreased from $726 thousand for the three months ended November 30, 2019 to $681 thousand for the three months ended November 30, 2020.

The decrease was mainly attributable to decreases in various other expenses including professional service expenses.

Gain on disposal of long-lived assets We recognized a gain of $77 thousand and $79 thousand on the disposal of long-lived assets for the three months ended November 30, 2020 and 2019, respectively.

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 certain of our idle equipment.

Other Income (Expenses)

Nine Months Ended

Three Months Ended November 30,

(in thousands)

Gain on disposal of investment

Interest expenses, net

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Foreign currency transaction gain, net

Total other income (expenses), net

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

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

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

Interest expenses, net The increase in interest expenses, net was primarily due to the increase in debt balance, resulting from issuance of $2 million of convertible notes in December 2019, and our entry into an aggregate amount of $3.2 million 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 nine months ended May 31, 2020 primarily consists of government subsidy for the COVID-19 pandemic impact and rental income from the lease of spare space in our Hsinchu building.

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

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

Total other income, net

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

Other income, net Other income primarily consists of rental income from the lease of spare space in our Hsinchu building.

The increase in other income for the three months ended November 30, 2020, compared to the three months ended November 30, 2019, was primarily due to the slight increase of rental fee.

Foreign currency transaction gain, net We recognized net foreign currency transaction gain of $187 thousand and $158thousand for the three months ended November 30, 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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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.

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.

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

Net Loss Attributable to Noncontrolling Interests

Nine Months Ended

Net Loss Attributable to Non-controlling Interests

Three Months Ended November 30,

(in thousands)

Net gain (loss) attributable to noncontrolling interests

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

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

Net loss attributable to noncontrolling interests

We recognized net loss attributable to non-controlling interests of $10 thousand and $5 thousand for the three months ended November 30, 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.

Non-controlling interests represented 3.05% and 3.29% equity interest in Taiwan Bandaoti Zhaoming CO., Ltd as of November 30, 2020 and 2019, respectively.

Liquidity and Capital Resources

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

As of November 30, 2020 and August 31, 2020, we had cash and cash equivalents of $2.7 million and $2.8 million, respectively, which were predominately held in U.S.

dollar denominated demand deposits and/or money market funds.

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

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

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

As of January 8, 2021, we had no available credit facility.

Our long-term debt, which consisted of New Taiwan dollar (“NTD”) denominated long-term notes, convertible unsecured promissory notes and loans from the Chairman and the largest shareholder of the Company, totaled both $7.7 million as of November 30, 2020 and August 31, 2020.

Our NT dollar denominated long-term notes totaled $3.1 million as of both November 30, 2020 and August 31, 2020.

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

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

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

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

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

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 November 30, 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 $16 thousand plus interest over the 74-month term of the note with final payment to occur in July 2027 and, as of November 30, 2020, our outstanding balance on this note payable was approximately $1.2 million.

Property, plant and equipment pledged as collateral for our notes payable were $3.6 million as of both November 30, 2020 and August 31, 2020.

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

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

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

As of November 30, 2020 and August 31, 2020, these loans totaled $3.2 million.

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

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

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

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

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

As of November 30, 2020 and 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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We have undertaken actions to decrease losses incurred and implemented cost reduction programs in an effort to transform the Company into a profitable operation.

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

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

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

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

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 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.

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

Nine Months Ended

Net cash used in operating activities

Net cash used in investing activities

Net cash provided by financing activities

Three Months Ended November 30,

Net cash provided by (used in) operating activities

Net cash provided by investing activities

Net cash used in financing activities

Cash Flows Used In Operating Activities

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

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

Cash Flows Used In Investing Activities

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

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

Cash Flows Provided by Financing Activities

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

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

Net cash provided by operating activities for the three month ended November 30, 2020 was $88 thousand and net cash used in operating activities for the three month ended November 30, 2019 was $324 thousand, respectively.

The cash flows provided by operating activities for the three months ended November 30, 2020 was $412 thousand more, primarily due to a decrease in accounts receivable, offset partially by an increase in inventory.

Cash Flows provided by In Investing Activities

Net cash used in investing activities for the three months ended November 30, 2020 was $30 thousand, consisting of $77 thousand in proceeds from sale of machinery and equipment, offset partially by a $41 thousand in purchases of machinery and equipment.

Net cash provided by investing activities for the three months ended November 30, 2019 was $21 thousand, consisting of $79 thousand in proceeds from sale of machinery and equipment, offset by a $50 thousand in purchases of machinery and equipment.

Cash Flows Used In Financing Activities

Net cash used in financing activities for the three months ended November 30, 2020 was for acquisition of noncontrolling interest, while the three months ended November 30, 2019 was for repayments on long-term debt.

Capital Expenditures

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

We had capital expenditures of $41 thousand and $50 thousand for the three months ended November 30, 2020 and 2019, respectively.

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

We expect to continue investing in capital expenditures in the future as we expand our business operations and invest in such expansion of our production capacity as we deem appropriate under market conditions and customer demand.

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 further its activity level and capital expenditures as appropriate.

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

Off-Balance Sheet Arrangements

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

As of November 30, 2020, we did not engage in any off-balance sheet arrangements.

We do not have any interests in variable interest entities.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis