What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-04-12 compared with 2021-01-14 · 181 added, 92 removed, 235 unchanged (54% of the section changed)

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

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

Forward Looking Statements

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Declining cash position.

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 as a result of our current failure to meet the minimum stockholders’ equity requirement.

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.

The outcome of the pending appeal of the trial verdict ordering us to return the $500,000 partial payment of the uncompleted $1.6 million note financing and potentially pay pre-judgment interest.

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

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

The inability of our suppliers or other contract manufacturers 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 Netherlands, Taiwan, the United States, Germany and India, where our revenues are concentrated, including the impact of the COVID-19 pandemic on customer demand.

Adverse development in those selected markets, including the N etherlands, Ireland, Taiwan, Japan, 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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Ineffectiveness of our disclosure controls and procedures and our internal control over financial reporting.

Our ability to profit from existing and future joint ventures, investments, acquisitions and other strategic alliances.

Our ability to profit from future joint ventures, investments, acquisitions and other strategic alliances.

Impairment of long-lived assets or investments.

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

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.

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

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

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dollar, the New Taiwan, or NT, dollar, the Japanese Yen and other currencies in which our sales, raw materials and component purchases and capital expenditures are denominated.

The effect of the disclosure requirements under the provisions of the Dodd-Frank Act relating to “conflict minerals,” which could increase our costs and limit the supply of certain metals used in our products and affect our reputation with customers and shareholders.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

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Company Overview

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.

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.

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, the Netherlands, Germany and India.

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 Netherlands, Ireland, Taiwan, Japan, the United States, Germany and India.

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

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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.

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 decrease d our sales revenue for the first quarter ended November 30, 2020.

For example, our largest customer, Revlon, Inc., postponed its regular orders, which has decreased our sales revenue for the six months ended February 28, 2021, and we cannot foresee any order from Revlon after the ordered products being shipped.

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

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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.

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

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

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

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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.

For example, we continue to pursue opportunities for profitable growth in areas of our business where we see the best opportunity to develop as an end-to-end LED module solution supplier by providing our 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 pri ces on older inventory.

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

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

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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 Taiwan, the United States and China (including Hong Kong).

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

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

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

For the three 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.

For the three and the six months ended February 28, 2021, sales to our three largest customers, in the aggregate, accounted for 64% and 54% of our revenues, respectively.

Intellectual property issues.

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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.

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.

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Cash position.

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.

Our cash and cash equivalents decreased to $2.1 million as of February 28, 2021 primarily due to the net cash used in operating activities.

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

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

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

Critical Accounting Policies and Estimates

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

Except as described above, there have been no material changes in the matters for which we make critical accounting policies and estimates in the preparation of our unaudited interim condensed consolidated financial statements for the three months ended November 30, 2020 as compared to those disclosed in our 2020 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 and six months ended February 28, 2021 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 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.

On February 28 , 202 1 , the exchange rate was 28.28 NT dollar s to one U.S.

On April 6 , 20 2 1 , the exchange rate was 28.49 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 November 30, 2020 Compared to the Three Months Ended November 30, 2019

Three Months Ended November 30,

Three Months Ended February 28, 2021 Compared to the Three Months Ended February 29, 2020

Three Months Ended

February 28, 2021

February 29, 2020

(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 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.

Our revenues decreased by 22% to $1.2 million for the three months ended February 28, 2021 from $1.5 million for the three months ended February 29, 2020.

The decrease in revenues was driven primarily by a $56 thousand decrease in sales of LED components and a $317 thousand decrease in other revenue, offset in part by a $14 thousand increase in LED chips and a $28 thousand increase in lighting products.

Revenues attributable to the sales of our LED chips were $50 thousand and $36 thousand, representing 4% and 2%, respectively, of our revenues for the three months ended February 28, 2021 and February 29, 2020, the increase was primarily due to varying volumes 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 were $752 thousand and $808 thousand, representing 62% and 53%, respectively, of our revenues for the three months ended February 28, 2021 and February 29, 2020.

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.

Revenues attributable to the sales of lighting products represented 13% and 8% of our revenues for the three months ended February 28, 2021 and February 29, 2020, respectively.

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

Revenues attributable to other revenues represented 21% and 37% of our revenues for the three months ended February 28, 2021 and February 29, 2020, respectively.

The decrease in revenues attributable to other revenues was primarily due to no sale of raw materials in the three months ended February 28, 2021.

Cost of Revenues

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.

Our cost of revenues decreased by 2% from $989 thousand for the three months ended February 29, 2020 to $965 thousand for the three months ended February 28, 2021.

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.

Our gross profit decreased from $548 thousand for the three months ended February 29, 2020 to $241 thousand for the three months ended February 28, 2021.

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

Operating Expenses

Three Months Ended November 30,

Three Months Ended

February 28, 2021

February 29, 2020

(in thousands)

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Selling, general and administrative

Gain on disposals of long-lived assets

Gain on disposals of long-lived assets, net

Total operating expenses

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.

Research and development

Our research and development expenses were $288 thousand and $307 thousand for the three months ended February 28, 2021 and February 29, 2020, respectively.

The decrease was primary due to an $11 thousand decrease in payroll and compensation and a $21 thousand decrease in material and supplies used for our new products, offset partially by an increase in depreciation and amortization.

Selling, general and administrative

Our selling, general and administrative expenses increased from $633 thousand for the three months ended February 29, 2020 to $667 thousand for the three months ended February 28, 2021.

The increase was mainly attributable to increases in stock-based compensation and in various other expenses.

Gain on disposal of long-lived assets, net

We recognized a net gain of $207 thousand on the disposal of long-lived assets for the three months ended February 28, 2021.

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

Other Income (Expenses)

Three Months Ended November 30,

Three Months Ended

February 28, 2021

February 29, 2020

(in thousands)

Gain on disposal of investment

Interest expenses, net

Other income, net

Other income (expenses), net

Foreign currency transaction gain, net

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.

in currency other than the functional currency of such subsidiaries.

Total other income (expenses), net

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

On November 27, 2019, we entered into a stock purchase agreement to sell all of the outstanding shares of our Hong Kong Subsidiary, Semileds International 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 de crease in interest expenses, net was primarily due to the de crease in debt balance, resulting from the conver sion of $ 6 00,000 of convertible notes into 2 00,000 shares of the Company’s common stock in May 2020 .

Other income (expenses), net Other income (expenses), net increase from $167 thousand for the three months ended February 29, 2020, to $307 thousand for the three months ended February 28, 2021, primarily due to subsidies received from the Taiwan government for the COVID-19 pandemic.

Foreign currency transaction gain, net We recognized a net foreign currency transaction gain of $38 thousand and $41 thousand for the three months ended February 28, 2021 and February 29, 2020, respectively, primarily due to the depreciation of the U.S.

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

Income Tax Expense

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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 Non-controlling Interests

Three Months Ended November 30,

Net Income Attributable to Noncontrolling Interests

Three Months Ended

February 28, 2021

February 29, 2020

(in thousands)

Net income attributable to noncontrolling interests

We recognized net income attributable to non-controlling interests of $1 thousand and $2 thousand for the three months ended February 28, 2021 and February 29, 2020, 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 February 28, 2021 and February 29, 2020, respectively.

Six Months Ended February 28, 2021 Compared to the Six Months Ended February 29, 2020

Six Months Ended

February 28, 2021

February 29, 2020

(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 38% from $3.1 million for the six months ended February 29, 2020 to $1.9 million for the six months ended February 28, 2021.

The $1.2 million decrease in revenues reflects a $624 thousand decrease in sales of LED components and a $713 thousand decrease in revenues attributable to other revenue, offset by a $43 thousand increase in sales of LED chips and a $119 thousand increase in revenues attributable to sales of lighting products.

Revenues attributable to the sales of our LED chips represented 4% and 1% of our revenues for the six months ended February 28, 2021 and February 29, 2020, respectively.

The increase in revenues attributable to sales of LED chips was a result of an increase in the volume of LED chips sold.

Revenues attributable to the sales of our LED components were $1.3 million and $1.9 million, representing 65% and 61%, respectively, of our revenues for the six months ended February 28, 2021 and February 29, 2020.

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 17% and 7% of our revenues for the six months ended February 28, 2021 and February 29, 2020, respectively.

Revenues attributable to the sales of lighting products was $119 thousand higher for the six months ended February 28, 2021 primarily due to a seasonal swing in demand on LED luminaries.

Revenues attributable to other revenues represented 14% and 31% of our revenues for the six months ended February 28, 2021 and February 29, 2020, respectively.

The decrease in revenues attributable to other revenues was primarily due to no sale of raw materials in the six months ended February 28, 2021.

Cost of Revenues

Our cost of revenues decreased by 16% from $2.0 million for the six months ended February 29, 2020 to $1.7 million for the six months ended February 28, 2021.

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

Our gross profit decreased from $1.1 million for the six months ended February 29, 2020 to $219 thousand for the six months ended February 28, 2021.

Our gross margin percentage was 11% for the six months ended February 28, 2021, as compared to 34% for the six months ended February 29, 2020 as a consequence of the COVID-19 pandemic impact on customer demand, as more fully described above.

Operating Expenses

Six Months Ended

February 28, 2021

February 29, 2020

(in thousands)

Research and development

Selling, general and administrative

Gain on disposals of long-lived assets, net

Total operating expenses

Research and development

Our research and development expenses were $634 thousand and $737 thousand for the six months ended February 28, 2021 and February 29, 2020, respectively.

The decrease was primary due to a $105 thousand decrease in materials and supplies used for our new products and a $9 decrease in payroll and compensation expense, offset partially by an increase in depreciation and amortization expense.

Selling, general and administrative

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

The slight decrease was mainly attributable to a $33 thousand decrease in professional service fee, offset partially by increases in stock-based compensation and in various other expenses.

Gain on disposal of long-lived assets, net

We recognized a net gain of $284 thousand and $79 thousand on the disposal of long-lived assets for the six months ended February 28, 2021 and February 29, 2020, respectively.

Other Income (Expenses)

Six Months Ended

February 28, 2021

February 29, 2020

(in thousands)

Gain on disposal of investment

Interest expenses, net

Other income (expenses), net

Foreign currency transaction gain, net

Total other income (expenses), net

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

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 issuance of $2 million of convertible notes in December 2019, and our entry into an aggregate amount of $3.2 million of loan agreements in January 8, 2019, with each of our Chairman and Chief Executive Officer and our largest shareholder, offset by the conversion of $600,000 of convertible notes into 200,000 shares of the Company’s common stock in May 2020.

Other income (expenses), net Other income for the six months ended February 28, 2021 primarily consist of rental income from the lease of spare space in our Hsinchu building and subsidies received from the Taiwan government for COVID-19 pandemic.

Other income for the six months ended February 29, 2020 primarily consist of rental income from the lease of spare space in our Hsinchu building.

Foreign currency transaction gain, net We recognized net foreign currency transaction gain of $225 thousand and $199 thousand for the six months ended February 28, 2021 and February 29, 2020, 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.

in currency other than the functional currency of such subsidiaries.

Income Tax Expense

Our effective tax rate is expected to be approximately zero for fiscal 2021 and was zero for fiscal 2020, 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.

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.

Six Months Ended

February 28, 2021

February 29, 2020

(in thousands)

Net loss attributable to noncontrolling interests

We recognized net loss attributable to non-controlling interests of $9 thousand $3 thousand for the six months ended February 28, 2021 and February 29, 2020, 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 February 28, 2021 and February 29, 2020.

Liquidity and Capital Resources

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.

As of February 28, 2021 and August 31, 2020, we had cash and cash equivalents of $2.1 million and $2.8 million, respectively, which were predominately held in U.S.

dollar denominated demand deposits and/or money market funds.

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.

As of April 6, 2021, 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 $7.8 million and $7.7 million as of February 28, 2021 and August 31, 2020, respectively.

Our NT dollar denominated long-term notes totaled $3.2 million and $3.1 million as of February 28, 2021 and August 31, 2020, respectively.

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

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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 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.

Starting from May 2021, the first note payable requires monthly payments of principal in the amount of $23 thousand plus interest over the 74-month term of the note with final payment to occur in July 2027 and, as of February 28, 2021, our outstanding balance on this note payable was approximately $2.0 million.

Starting from May 2021, the second note payable requires monthly payments of principal in the amount of $14 thousand plus interest over the 74-month term of the note with final payment to occur in July 2027 and, as of February 28, 2021, our outstanding balance on this note payable was approximately $1.2 million.

Property, plant and equipment pledged as collateral for our notes payable were both $3.6 million as of February 28, 2021 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%.

All proceeds of the loans were exclusively used to return the deposit to Formosa Epitaxy Incorporation in connection with the proposed sale of our headquarters building pursuant to the agreement dated December 15, 2015.

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

We are required to repay the loans of $1.5 million on January 14, 2021 and $1.7 million on January 22, 2021, respectively.

In February 2021, the loan agreements were extended with the same principal amount and interest rate for one year, which is due on January 15, 2022.

As of February 28, 2021 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 November 30, 2020 and August 31, 2020, the outstanding principal of these notes totaled $1.4 million.

As of February 28, 2021 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.

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

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

In addition, we are planning to issue additional equity to our stockholders.

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 reducing losses and preserving cash.

However, there can be no assurances that our planned activities will be successful in raising additional capital, 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):

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

Six Months Ended

February 28, 2021

February 29, 2020

Net cash used in operating activities

Net cash provided by (used in) investing activities

Net cash provided by (used in) financing activities

Cash Flows Used In Operating Activities

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.

Net cash used in operating activities for the six months ended February 28, 2021 and February 29, 2020 were $625 thousand and $194 thousand, respectively.

The $431 thousand increase in cash flows used in operating activities for the six months ended February 28, 2021 was primary attributable to an increase of $725 thousand in inventories and a decrease of $340 thousand in accrued expenses and other current liabilities, offset partially by $810 thousand in cash collected from customers.

Cash Flows Provided By (Used In) Investing Activities

Net cash provided by investing activities for the six months ended February 28, 2021 was $177 thousand, consisting primarily of $284 thousand of proceeds from the sales of machinery and equipment, offset in part by $97 thousand of purchases of machinery and equipment.

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

Cash Flows Provided By (Used In) Financing Activities

Net cash used in financing activities for the six months ended February 28, 2021 was $12 thousand for acquisition of noncontrolling interest.

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

Capital Expenditures

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

We had capital expenditures of $97 thousand and $159 thousand for the six months ended February 28, 2021 and February 29, 2020, 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 is continuing to monitor prices and, consistent with the existing contractual commitments, may decrease further our activity level and capital expenditures as appropriate.

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.

Off-Balance Sheet Arrangements

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

As of February 28, 2021, 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