SemiLEDs Corp 10-Q

Item 1. Financial Statements SEMILEDS CORPORATION AND SUBSIDIARIES Condensed Consolidated Balance Sheets (In thousands of U.S. dollars and shares, except par value) February 28, August 31, 2021 2020 (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 2,086 $ 2,832 Restricted cash and cash equivalents 88 85 Accounts receivable (including related parties), net of allowance for doubtful accounts of $195 and $187 as of February 28, 2021 and August 31, 2020, respectively 800 1,331 Inventories 2,905 2,476 Prepaid expenses and other current assets 743 781 Total current assets 6,622 7,505 Property, plant and equipment, net 5,549 5,645 Operating lease right of use assets 1,672 203 Intangible assets, net 120 89 Investments in unconsolidated entities 992 952 Other assets 172 186 TOTAL ASSETS $ 15,127 $ 14,580 LIABILITIES AND EQUITY CURRENT LIABILITIES: Current installments of long-term debt $ 5,023 $ 4,750 Accounts payable 439 536 Advance receipt toward the convertible note 500 500 Accrued expenses and other current liabilities 2,483 2,654 Other payable to related parties 611 460 Operating lease liabilities, current 126 97 Total current liabilities 9,182 8,997 Long-term debt, excluding current installments 2,777 2,909 Operating lease liabilities, less current portion 1,546 106 Total liabilities 13,505 12,012 Commitments and contingencies (Note 5) EQUITY: SemiLEDs stockholders’ equity Common stock, $0.0000056 par value—7,500 shares authorized; 4,057 shares and 4,011 shares issued and outstanding as of February 28, 2021 and August 31, 2020, respectively — — Additional paid-in capital 177,313 177,235 Accumulated other comprehensive income 3,585 3,647 Accumulated deficit (179,312 ) (178,360 ) Total SemiLEDs stockholders' equity 1,586 2,522 Noncontrolling interests 36 46 Total equity 1,622 2,568 TOTAL LIABILITIES AND EQUITY $ 15,127 $ 14,580 See notes to unaudited condensed consolidated financial statements. 1 Table of Contents SEMILEDS CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidated Statements of Operations (In thousands of U.S. dollars and shares, except per share data) Three Months Ended Six Months Ended February 28, 2021 February 29, 2020 February 28, 2021 February 29, 2020 Revenues, net $ 1,206 $ 1,537 $ 1,925 $ 3,100 Cost of revenues 965 989 1,706 2,034 Gross profit 241 548 219 1,066 Operating expenses: Research and development 288 307 634 737 Selling, general and administrative 667 633 1,348 1,359 Gain on disposals of long-lived assets, net (207 ) — (284 ) (79 ) Total operating expenses 748 940 1,698 2,017 Loss from operations (507 ) (392 ) (1,479 ) (951 ) Other income (expenses): Gain on disposal of investment — 634 — 634 Interest expenses, net (92 ) (100 ) (184 ) (178 ) Other income (losses), net 307 167 477 324 Foreign currency transaction gain, net 38 41 225 199 Total other income, net 253 742 518 979 Income (loss) before income taxes (254 ) 350 (961 ) 28 Income tax expense — — — — Net income (loss) (254 ) 350 (961 ) 28 Less: Net income (loss) attributable to noncontrolling interests 1 2 (9 ) (3 ) Net income (loss) attributable to SemiLEDs stockholders $ (255 ) $ 348 $ (952 ) $ 31 Net income (loss) per share attributable to SemiLEDs stockholders: Basic $ (0.06 ) $ 0.10 $ (0.24 ) $ 0.01 Diluted $ (0.06 ) $ 0.08 $ (0.24 ) $ 0.01 Shares used in computing net income (loss) per share attributable to SemiLEDs stockholders: Basic 4,033 3,613 4,023 3,604 Diluted 4,033 4,486 4,023 3,732 See notes to unaudited condensed consolidated financial statements. 2 Table of Contents SEMILEDS CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) (In thousands of U.S. dollars) Three Months Ended Six Months Ended February 28, 2021 February 29, 2020 February 28, 2021 February 29, 2020 Net income (loss) $ (254 ) $ 350 $ (961 ) $ 28 Other comprehensive loss, net of tax: Foreign currency translation adjustments, net of tax of $0 for all periods presented $ (32 ) (52 ) (60 ) (75 ) Comprehensive income (loss) $ (286 ) $ 298 $ (1,021 ) $ (47 ) Comprehensive income (loss) attributable to noncontrolling interests $ 2 $ 3 $ (7 ) $ (1 ) Comprehensive income (loss) attributable to SemiLEDs stockholders $ (288 ) $ 295 $ (1,014 ) $ (46 ) See notes to unaudited condensed consolidated financial statements. 3 Table of Contents SEMILEDS CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidated Statement of Changes in Equity (In thousands of U.S. dollars and shares) Accumulated Total Additional Other SemiLEDs Non- Common Stock Subscribed Paid-in Comprehensive Accumulated Shareholders' Controlling Total Shares Amount stock Capital Income Deficit Equity Interests Equity BALANCE—September 1, 2020 4,011 $ — $ — $ 177,235 $ 3,647 $ (178,360 ) $ 2,522 $ 46 $ 2,568 Stock-based compensation — — — 21 — — 21 — 21 Change ownership in SBDI* — — — (9 ) — — (9 ) (3 ) (12 ) Comprehensive income (loss): Other comprehensive income — — — — (29 ) — (29 ) 1 (28 ) Net loss — — — — — (697 ) (697 ) (10 ) (707 ) BALANCE—November 30, 2020 4,011 — — 177,247 3,618 (179,057 ) 1,808 34 1,842 Issuance of common stock under equity incentive plans 47 — — — — — — — — Stock-based compensation — — — 66 — — 66 — 66 Comprehensive loss: — Other comprehensive income (loss) — — — — (33 ) — (33 ) 1 (32 ) Net loss — — — — — (255 ) (255 ) 1 (254 ) BALANCE—February 28, 2021 4,058 $ — $ - $ 177,313 $ 3,585 $ (179,312 ) $ 1,586 $ 36 $ 1,622 Accumulated Total Additional Other SemiLEDs Non- Common Stock Subscribed Paid-in Comprehensive Accumulated Shareholders' Controlling Total Shares Amount stock Capital Income Deficit Equity Interests Equity BALANCE—September 1, 2019 3,594 $ — $ — $ 175,804 $ 3,753 $ (177,816 ) $ 1,741 $ 47 $ 1,788 Issuance of common stock under equity incentive plans 1 — — — — — — — — Stock-based compensation — — 35 — — 35 — 35 Comprehensive income (loss): Other comprehensive income — — — — (24 ) — (24 ) 1 (23 ) Net loss — — — — — (317 ) (317 ) (5 ) (322 ) BALANCE—November 30, 2019 3,595 — — 175,839 3,729 (178,133 ) 1,435 43 1,478 Issuance of common stock under equity incentive plans 28 — — — — — — — — Stock-based compensation — — — 24 — — 24 — 24 Issuance of common stock for private placement 150 — 600 — — — 600 — 600 Issuance of convertible notes — — — 39 — — 39 — 39 Comprehensive loss: — Other comprehensive income (loss) — — — — (53 ) — (53 ) 1 (52 ) Net loss — — — — — 348 348 2 350 BALANCE—February 28, 2020 3,773 $ — $ 600 $ 175,902 $ 3,676 $ (177,785 ) $ 2,393 $ 46 $ 2,439 See notes to unaudited condensed consolidated financial statements. * SBDI (Taiwan Bandaoti Zhaoming Co., Ltd.) is one of the Company’s subsidiaries. 4 Table of Contents SEMILEDS CORPORATION AND SUBSIDIARIES Unaudited Condensed Consolidated Statements of Cash Flows (In thousands of U.S. dollars) Six Months Ended February 28, 2021 February 29, 2020 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (961 ) $ 28 Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 443 412 Stock-based compensation expense 87 59 Provisions for inventory write-downs 396 320 Gain on disposals of long-lived assets, net (284 ) (79 ) Gain on disposals of investment — (634 ) Changes in : Accounts receivable 810 302 Inventories (725 ) (680 ) Prepaid expenses and other 68 69 Accounts payable (119 ) (79 ) Accrued expenses and other current liabilities (340 ) 88 Net cash used in operating activities (625 ) (194 ) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment (97 ) (159 ) Proceeds from sales of property, plant and equipment 284 79 Payments for development of intangible assets (10 ) (8 ) Net cash provided by (used in) investing activities 177 (88 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt — 2,000 Repayments of long-term debt — (207 ) Issuance of common stock for private placement — 600 Acquisition of noncontrolling interests (12 ) — Net cash provided by (used in) financing activities (12 ) 2,393 Changes in cash balances included in deconsolidated subsidiaries — (61 ) Effect of exchange rate changes on cash and cash equivalents and restricted cash (275 ) (188 ) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH (735 ) 1,862 CASH AND CASH EQUIVALENTS AND RESTRICTED CASH—Beginning of period 3,012 1,471 CASH AND CASH EQUIVALENTS AND RESTRICTED CASH—End of period $ 2,277 $ 3,333 NONCASH INVESTING AND FINANCING ACTIVITIES: Accrual related to property, plant and equipment $ 8 $ 47 See notes to unaudited condensed consolidated financial statements. 5 Table of Contents SEMILEDS CORPORATION AND SUBSIDIARIES Notes to Unaudited Condensed Consolidated Financial Statements 1. Business SemiLEDs Corporation (“SemiLEDs” or the “parent company”) was incorporated in Delaware on January 4, 2005 and is a holding company for various wholly owned subsidiaries. SemiLEDs and its subsidiaries (collectively, the “Company”) develop, manufacture and sell high performance light emitting diodes (“LEDs”). The Company’s core products are LED components, as well as LED chips and lighting products. LED components have become the most important part of its business. A portion of the Company’s business consists of the sale of contract manufactured LED products. The Company’s customers are concentrated in a few select markets, including Taiwan, the United States and China. As of February 28, 2021, SemiLEDs had two wholly owned subsidiaries. SemiLEDs Optoelectronics Co., Ltd., or Taiwan SemiLEDs, is the Company’s wholly owned operating subsidiary, where a substantial portion of the assets is held and located, and where a portion of our research, development, manufacturing and sales activities take place. Taiwan SemiLEDs owns a 97% equity interest in Taiwan Bandaoti Zhaoming Co., Ltd., formerly known as Silicon Base Development, Inc., which is engaged in the research, development, manufacturing and a substantial portion of marketing and sale of LED components, and where most of the Company’s employees are based. On November 27, 2019, SemiLEDs entered into a stock purchase agreement (the “Agreement”) with XianChang Ma (the “Purchaser”) pursuant to which the Purchaser agreed to purchase all of the outstanding shares of the Company’s Hong Kong subsidiary, Semileds International Corporation Limited, and its wholly owned subsidiary Xuhe Guangdian Co Ltd. for $100,000 and an additional $40,000 for the transaction costs. The Purchaser paid $140,000 to the Company, and the transaction was completed in January 2020. The Purchaser also subscribed approximately 4% of the Company’s outstanding common shares on January 17, 2020 (see Note 6). SemiLEDs’ common stock trades on the NASDAQ Capital Market under the symbol “LEDS”. 2. Summary of Significant Accounting Policies Basis of Presentation —The Company’s unaudited interim condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and applicable provisions of the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted as permitted by the rules and regulations of the SEC. Accordingly, these unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K filed with the SEC on November 17, 2020. The unaudited condensed consolidated balance sheet as of August 31, 2020 included herein was derived from the audited consolidated financial statements as of that date. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the Company’s consolidated balance sheet as of February 28, 2021, the statements of operations and comprehensive loss for the three and six months ended February 28, 2021 and February 29, 2020, the statement of changes in equity for the three and six months ended February 28, 2021 and February 29, 2020, and the statements of cash flows for the six months ended February 28, 2021 and February 29, 2020. The results for the three or six months ended February 28, 2021 are not necessarily indicative of the results to be expected for the year ending August 31, 2021. Going Concern — The accompanying unaudited interim condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The realization of assets and the satisfaction of liabilities in the normal course of business are dependent on, among other things, the Company’s ability to operate profitably, to generate cash flows from operations, and to pursue financing arrangements to support its working capital requirements. 6 Table of Contents The Company suffered losses from operations of $ 2 .1 million and $ 3.7 million, and net cash used in operating activities of $ 1.0 million and $ 3.5 million for the years ended August 31, 20 20 and 20 19 , respectively. These facts and conditions raise substantial doubt about the Company’s ability to continue as a going concern, even though g ross profit on product sales was $ 1.6 million fo r the year ended August 31, 20 20 compared to $ 452 thousand fo r the year ended August 31, 201 9 . Loss from operations for the three and six months ended February 2 8 , 20 2 1 were $ 507 thousand and $ 1.5 million , respectively. N et cash used in operating activities for the six months ended February 2 8 , 20 2 1 was $ 625 thousand. Moreover , a t February 2 8 , 20 2 1 , the Company’ s cash and cash equivalents had de creased to $ 2.1 million . However, m anagement believes that it has developed a liquidity plan, as summarized below, that, if executed successfully, should provide sufficient liquidity to meet the Company’s obligations as they become due for a reasonable period of time, and allow the development of its core business. • Gaining positive cash-inflow from operating activities through continuous cost reductions and the sales of new higher margin products. Steady growth of module products and the continued commercial sales of its UV LED product are expected to improve the Company’s future gross margin, operating results and cash flows. The Company is targeting niche markets and focusing on product enhancement and developing its LED products into many other applications or devices. • Continuing to monitor prices, work with current and potential vendors to decrease costs and, consistent with its existing contractual commitments, may possibly decrease its activity level and capital expenditures further. This plan reflects its strategy of controlling capital costs and maintaining financial flexibility. • Raising additional cash through potential equity offerings, sales of assets, and/or issuance of debt as considered necessary and looking at other potential business opportunities. While the Company’s management believes that the measures described in the above liquidity plan will be adequate to satisfy its liquidity requirements for the twelve months after the date that the financial statements are issued, there is no assurance that the liquidity plan will be successfully implemented. Failure to successfully implement the liquidity plan may have a material adverse effect on its business, results of operations and financial position, and may adversely affect its ability to continue as a going concern. These unaudited interim condensed consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded assets or the amounts and classification of liabilities or any other adjustments that might be necessary should the Company be unable to continue as a going concern. Restricted Cash Equivalents —Restricted cash primarily consists of cash held in reserved bank accounts in Taiwan. As of February 28, 2021 and August 31, 2020, the Company’s restricted cash equivalents at current portion amounted $88 thousand and $85 thousand, respectively. As of February 28, 2021 and August 31, 2020, the Company’s restricted cash at noncurrent portion, which was recorded as other assets, amounted to $103 thousand and $95 thousand, respectively. Revenue Recognition —Effective September 1, 2018, the Company adopted ASC 606 using the modified retrospective transition method. The Company applied the following five steps to achieve the core principles of ASC 606: 1) identified the contract with a customer; 2) identified the performance obligations (promises) in the contract; 3) determined the transaction price; 4) allocated the transaction price to the performance obligations in the contract; and 5) recognized revenue when (or as) the Company satisfies a performance obligation. The Company recognizes the amount of revenue when the Company satisfies a performance obligation to which it expects to be entitled for the transfer of promised goods or services to customers. The Company obtains written purchase authorizations from its customers as evidence of an arrangement and these authorizations generally provide for a specified amount of product at a fixed price. Generally, the Company considers delivery to have occurred at the time of shipment as this is generally when title and risk of loss for the products will pass to the customer. The Company provides its customers with limited rights of return for non‑conforming shipments and product warranty claims. Based on historical return percentages, which have not been material to date, and other relevant factors, the Company estimates its potential future exposure on recorded product sales, which reduces product revenues in the consolidated statements of operations and reduces accounts receivable in the consolidated balance sheets. The Company also provides standard product warranties on its products, which generally range from three months to two years. Management estimates the Company’s warranty obligations as a percentage of revenues, based on historical knowledge of warranty costs and other relevant factors. To date, the related estimated warranty provisions have been insignificant. Principles of Consolidation —The unaudited interim condensed consolidated financial statements include the accounts of SemiLEDs and its consolidated subsidiaries. All intercompany transactions and balances have been eliminated during consolidation. 7 Table of Contents On September 1, 2018, the Company adopted ASC 825-10, “Financial Instruments- Overall: Recognition and Measurement of Financial Assets and Financial Liabilities”. This standard allows equity investments that do not have readily determinable fair values to be re-measured at fair value either upon the occurrence of an observable price change or upon identification of impairment. The standard also simplifies the impairment assessment of equity investments without readily determinable fair values by requiring assessment for impairment qualitatively at each reporting period. Investments in which the Company has the ability to exercise significant influence over the investee but not a controlling financial interest, are accounted for using the equity method of accounting and are not consolidated. These investments are in joint ventures that are not subject to consolidation under the variable interest model, and for which the Company: (i) does not have a majority voting interest that would allow it to control the investee, or (ii) has a majority voting interest but for which other shareholders have significant participating rights, but for which the Company has the ability to exercise significant influence over operating and financial policies. Under the equity method, investments are stated at cost after adding or removing the Company’s portion of equity in undistributed earnings or losses, respectively. The Company’s investment in these equity‑method entities is reported in the consolidated balance sheets in investments in unconsolidated entities, and the Company’s share of the income or loss of these equity‑method entities, after the elimination of unrealized intercompany profits, is reported in the consolidated statements of operations in equity in losses from unconsolidated entities. When net losses from an equity‑method investee exceed its carrying amount, the carrying amount of the investment is reduced to zero. The Company then suspends using the equity method to provide for additional losses unless the Company has guaranteed obligations or is otherwise committed to provide further financial support to the equity‑method investee. The Company resumes accounting for the investment under the equity method if the investee subsequently returns to profitability and the Company’s share of the investee’s income exceeds its share of the cumulative losses that have not been previously recognized during the period the equity method is suspended. Investments in entities that are not consolidated or accounted for under the equity method are recorded as investments without readily determinable fair values. Investments without readily determinable fair values are reported on the consolidated balance sheets in investments in unconsolidated entities, at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. Dividend income, if any, received is reported in the consolidated statements of operations in equity in losses from unconsolidated entities. If the fair value of an equity investment declines below its respective carrying amount and the decline is determined to be other‑than‑temporary, the investment will be written down to its fair value. Use of Estimates —The preparation of unaudited interim condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited interim condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include the preparation of the Company’s consolidated financial statements on the basis that the Company will continue as a going concern, the collectability of accounts receivable, inventory net realizable values, realization of deferred tax assets, valuation of stock-based compensation expense, the useful lives of property, plant and equipment and intangible assets, the recoverability of the carrying amount of property, plant and equipment, intangible assets and investments in unconsolidated entities, the fair value of acquired tangible and intangible assets, income tax uncertainties, provision for potential litigation costs and other contingencies. Management bases its estimates on historical experience and also on assumptions that it believes are reasonable. Management assesses these estimates on a regular basis; however, actual results could differ materially from those estimates. Certain Significant Risks and Uncertainties —The Company is subject to certain risks and uncertainties that could have a material and adverse effect on the Company’s future financial position or results of operations, which risks and uncertainties include, among others: it has incurred significant losses over the past few years, any inability of the Company to compete in a rapidly evolving market and to respond quickly and effectively to changing market requirements, any inability of the Company to grow its revenue and/or maintain or increase its margins, it may experience fluctuations in its revenues and operating results, any inability of the Company to protect its intellectual property rights, claims by others that the Company infringes their proprietary technology, and any inability of the Company to raise additional funds in the future. 8 Table of Contents Concentration of Supply Risk —Some of the components and technologies used in the Company’s products are purchased and licensed from a limited number of sources and some of the Company’s products are produced by a limited number of contract manufacturers. The loss of any of these suppliers and contract manufacturers may cause the Company to incur transition costs to another supplier or contract manufacturer, result in delays in the manufacturing and delivery of the Company’s products, or cause it to carry excess or obsolete inventory. The Company relies on a limited number of such suppliers and contract manufacturers for the fulfillment of its customer orders. Any failure of such suppliers and contract manufacturers to perform could have an adverse effect upon the Company’s reputation and its ability to distribute its products or satisfy customers’ orders, which could adversely affect the Company’s business, financial position, results of operations and cash flows. Concentration of Credit Risk —Financial instruments that subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents and accounts receivable. The Company keeps its cash and cash equivalents in demand deposits with prominent banks of high credit quality and invests only in money market funds. Deposits held with banks may exceed the amount of insurance provided on such deposits. As of February 28, 2021 and August 31, 2020, cash and cash equivalents of the Company consisted of the following (in thousands): February 28, August 31, Cash and Cash Equivalents by Location 2021 2020 United States; Denominated in U.S. dollars $ 35 $ 251 Taiwan; Denominated in U.S. dollars 1,936 2,514 Denominated in New Taiwan dollars 58 52 Denominated in other currencies 57 15 Total cash and cash equivalents $ 2,086 $ 2,832 The Company’s revenues are substantially derived from the sales of LED products. A significant portion of the Company’s revenues are derived from a limited number of customers and sales are concentrated in a few select markets. Management performs ongoing credit evaluations of its customers and generally does not require collateral on accounts receivable. Management evaluates the need to establish an allowance for doubtful accounts for estimated potential credit losses at each reporting period. The allowance for doubtful accounts is based on the management’s assessment of the collectability of its customer accounts. Management regularly reviews the allowance by considering certain factors, such as historical experience, industry data, credit quality, age of accounts receivable balances and current economic conditions that may affect a customer’s ability to pay. Net revenues generated from sales to the top ten customers represented 85% and 82% of the Company’s total net revenues for the three and six months ended February 28, 2021 respectively, and 88% and 84% of the Company’s net revenues for the three and six months ended February 29, 2020, respectively. The Company’s revenues have been concentrated in a few select markets, including the Netherlands, Ireland, Taiwan, Japan, the United States, Germany and India. Net revenues generated from sales to customers in these markets, in the aggregate, accounted for 87 % and 83% of the Company’s net revenues for the three and six months ended February 28, 2021, respectively, and 91% and 90% of the Company’s net revenues for the three and six months ended February 29, 2020, respectively. Noncontrolling Interests —Noncontrolling interests are classified in the consolidated statements of operations as part of consolidated net income (loss) and the accumulated amount of noncontrolling interests in the consolidated balance sheets as part of equity. Changes in ownership interest in a consolidated subsidiary that do not result in a loss of control are accounted for as an equity transaction. If a change in ownership of a consolidated subsidiary results in loss of control and deconsolidation, any retained ownership interests are remeasured with the gain or loss reported in net earnings. On September 1, 2018, Taiwan Bandaoti Zhaoming Co., Ltd. (“SBDI”), the Company’s then wholly owned operating subsidiary, issued 414,000 common shares and amended its certificate of incorporation to increase its common stock issued from 12,087,715 to 12,501,715 shares. As of the issuance date, the increased capital of $176 thousand (NT$5.4 million) has been received in full amount by Taiwan Bandaoti Zhaoming Co., Ltd. The Company did not subscribe for any newly issued common shares at the issuance date; as a result, noncontrolling interest in SBDI increased from zero to 3.31%. From January 2019 to February 2021, the Company purchased additional 33,000 common shares of SBDI from non-controlling shareholders. Therefore, noncontrolling interest in SBDI was down to 3.05% as of February 28, 2021. 9 Table of Contents Recent Accounting Pronouncements In December 2019, the FASB issued ASU No. 2019-12, simplifying the Accounting for Income Taxes, as part of its initiative to reduce complexity in accounting standards. The amendments in the ASU are effective for fiscal years beginning after December 15, 2020, including interim periods therein. Early adoption of the standard is permitted, including adoption in interim or annual periods for which financial statements have not yet been issued. The Company is currently evaluating the impact ASU 2019-12 will have on the disclosures included in its consolidated financial statements. In August 2020, the FASB issued ASU 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging- Contracts in Entity’s Own Equity (Subtopic 815-40), to reduce the complexity associated with applying U.S. GAAP principles for certain financial instruments with characteristics of liabilities and equity. The amendments in this ASU reduce the number of accounting models for convertible instruments and expand the existing disclosure requirements over earnings per share as it relates to convertible instruments. This ASU will be effective for the fiscal year beginning January 1, 2022 and interim periods therein. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. The amendments may be adopted through either a modified retrospective method, or a fully retrospective method. The Company is currently evaluating the impact of adopting ASU 2020-06. 3. Balance Sheet Components Inventories Inventories as of February 28, 2021 and August 31, 2020 consisted of the following (in thousands): February 28, August 31, 2021 2020 Raw materials $ 445 $ 433 Work in process 962 792 Finished goods 1,498 1,251 Total $ 2,905 $ 2,476 Inventory write-downs to estimated net realizable values were $200 thousand and $396 thousand for the three and six months ended February 28, 2021, respectively, and $201 thousand and $320 thousand for the three and six months ended February 29, 2020, respectively. Property, Plant and Equipment Property, plant and equipment as of February 28, 2021 and August 31, 2020 consisted of the following (in thousands): February 28, August 31, 2021 2020 Buildings and improvements $ 14,712 $ 14,104 Machinery and equipment 33,765 33,977 Leasehold improvements 173 166 Other equipment 2,522 2,384 Construction in progress — 7 Total property, plant and equipment 51,172 50,638 Less: Accumulated depreciation and amortization (45,623 ) (44,993 ) Property, plant and equipment, net $ 5,549 $ 5,645 10 Table of Contents Intangible Assets Intangible assets as of February 28, 2021 and August 31, 2020 consisted of the following (in thousands): February 28, 2021 Weighted Average Gross Net Amortization Carrying Accumulated Carrying Period (Years) Amount Amortization Amount Patents and trademarks 15 $ 605 $ 485 $ 120 Acquired technology 5 360 360 — Total $ 965 $ 845 $ 120 August 31, 2020 Weighted Average Gross Net Amortization Carrying Accumulated Carrying Period (Years) Amount Amortization Amount Patents and trademarks 15 $ 550 $ 461 $ 89 Acquired technology 5 345 345 — Total $ 895 $ 806 $ 89 4. Investments in Unconsolidated Entities The Company’s ownership interest and carrying amounts of investments in unconsolidated entities as of February 28, 2021 and August 31, 2020 consisted of the following (in thousands, except percentages): February 28, 2021 August 31, 2020 Percentage Percentage Ownership Amount Ownership Amount Equity method investments: Equity investment without readily determinable fair value Various $ 992 Various $ 952 Total investments in unconsolidated entities $ 992 $ 952 There were no dividends received from unconsolidated entities through February 28, 2021. Equity Investments without Readily Determinable Fair Value Equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the Company) which do not have readily determinable fair values are recorded as equity investment without readily determinable fair value. All equity investments without readily determinable fair value are assessed for impairment when events or changes in circumstances indicate that the carrying amounts may not be recoverable, and measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. 5. Commitments and Contingencies Operating Lease Agreements —The Company has several operating leases with unrelated parties, primarily for land, plant and office spaces in Taiwan, which include cancellable and noncancelable and which expire at various dates between December 2021 and December 2040. Leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. For lease agreements entered into or reassessed after the adoption of Topic 842, the Company did not combine lease and non-lease components. Most leases do not include options to renew. The exercise of lease renewal options has to be agreed by the lessors. The depreciable life of assets and leasehold improvements are limited by the term of leases, unless there is a transfer of title or purchase option reasonably certain of exercise. Lease expense is recognized on a straight-line basis over the term of the lease. Lease expense related to these noncancelable operating leases was $40 thousand and $81 thousand for three months and six months ended February 28, 2021. Lease expense related to these noncancelable operating leases was $38 thousand and $76 thousand for three months and six months ended February 29, 2020. 11 Table of Contents Balance sheet information related to the Company’s leases is presented below: February 28, 2021 Assets Operating lease right of use assets $ 1,672 Liabilities Operating lease liabilities, current portion $ 126 Operating lease liabilities, less current portion 1,546 Total $ 1,672 The following provides details of the Company’s lease expenses: Six Months Ended February 28, 2021 Operating lease expenses, net $ 81 Other information related to leases is presented below: Six Months Ended February 28, 2021 Cash Paid for amounts Included In Measurement of Liabilities: Operating cash flows from operating leases $ 81 Weighted Average Remaining Lease Term: Operating leases 12.35 years Weighted Average Discount Rate Operating leases 1.76 % As most of the Company’s leases do not provide an implicit rate, the Company uses its average borrowing rate from non-related parties of 1.76% based on the information available at commencement date in determining the present value of lease payments. The aggregate future noncancelable minimum rental payments for the Company’s operating leases as of February 28, 2021 consisted of the following (in thousands): Operating Years Ending August 31, Leases Remainder of 2021 $ 81 2022 121 2023 100 2024 100 2025 100 Thereafter 1,403 Total future minimum lease payments, undiscounted 1,905 Less: Imputed interest 233 Present value of future minimum lease payments $ 1,672 Purchase Obligations —The Company had purchase commitments for inventory, property, plant and equipment in the amount of $108 thousand and $33 thousand as of February 28, 2021 and August 31, 2020, respectively. Litigation —The Company is directly or indirectly involved from time to time in various claims or legal proceedings arising in the ordinary course of business. The Company recognizes a liability when it is probable that a loss has been incurred and the amount is reasonably estimable. There is significant judgment required in assessing both the likelihood of an unfavorable outcome and whether the amount of loss, if any, can be reasonably estimated. However, the Company cannot predict the outcome of any litigation or the potential for future litigation. 12 Table of Contents On June 21, 2017, Well Thrive Ltd. (“Well Thrive”) filed a complaint against SemiLEDs Corporation in the United States District Court for the District of Delaware. The complaint alleges that Well Thrive is entitled to return of $ 500 thousand paid toward a note purchase pursuant to a purchase agreement (the “Purchase Agreement”) effective July 6, 2016 with Dr. Peter Chiou, which was assigned to Well Thrive on August 4, 2016. Pursuant to the terms of the Purchase Agreement, the Company retained the $500 thousand payment as liquidated damages. Well Thrive alleged that the liquidated damages provision was unenforceable as an illegal penalty and did not reflect the amount of purported damages. The Court held a trial on March 2, 2020. After the trial, judge ordered both sides to prepare post-trial briefs and proposed findings of fact for the Court to be submitted before the end of April 2020. Both sides submitted post-trial briefs and proposed findings of fact on April 30, 2020. On December 21, 2020, the judge, following a hearing, issued her judgment, which order ed SemiLEDs to return the $ 500,000 to Well Thrive, and required both parties, on or before January 6, 2021, to submit information on the appropriate amount of interest to be added. On January 6, 2021, the Company filed a brief arguing that there should not be an award of prejudgment interest , and Well Thrive is arguing for the amount of $ 135,774 in pre-judgment interest. As of the date of filing this report, the judge has not yet decided on the interest issue. O n January 20, 2021, the Company filed a notice of appeal from the judgment in the U.S. Third Circuit Court of Appeals . T he Court of Appeals has not yet set a briefing schedule and has not yet scheduled any argument. T he Company recorded the $ 500,000 in advance receipt toward the convertible note under current liabilities as of February 28, 2021. Except as described above, as of February 28 2021, there was no pending or threatened litigation that could have a material impact on the Company’s financial position, results of operations or cash flows. 6. Common Stock On January 17, 2020, the Company entered into a definitive common stock purchase agreement with XianChang Ma. Pursuant to the terms of the Agreement, Mr. Ma purchased 150,000 shares of the Company’s common stock at $4.00 per share, representing approximately 4% of the outstanding shares of the Company at the time of purchase. The Company received the $600,000 purchase price in full on January 17, 2020. On May 25, 2020, the Company entered into a definitive common stock purchase agreement (the “Agreement”) with FengShuang Zhu. Pursuant to the terms of the Agreement, Mr. Zhu purchased 33,333 shares of the Company’s common stock at $3.00 per share for an aggregate purchase price of $100,000. The Company received the $100,000 purchase price in full on May 25. 2020. On May 25, 2020, J.R. Simplot Company, the largest shareholder of the Company, and Trung Doan, the Chairman and Chief Executive Officer of the Company, each converted $300,000 of convertible unsecured promissory notes into 100,000 shares of the Company’s common stock (see Note 10). 7. Stock-based Compensation The Company currently has one equity incentive plan (the “2010 Plan”), which provides for awards in the form of restricted shares, stock units, stock options or stock appreciation rights to the Company’s employees, officers, directors and consultants. In April 2014, SemiLEDs’ stockholders approved an amendment to the 2010 Plan that increased the number of shares authorized for issuance under the plan by an additional 250 thousand shares. On July 31, 2019, the stockholders approved an increase in the authorized share reserve under the 2010 plan by an additional 500 thousand shares, to extend expiration of the 2010 Plan to November 3, 2023, to remove the IRS Code section 162(m) provisions, and to modify the maximum grant limit to 35 thousand shares to one person in a one year period. On September 25, 2020, stockholders approved the amended 2010 Equity Incentive Plan to increase the authorized shares reserve by an additional 400 thousand shares. Prior to SemiLEDs’ initial public offering, the Company had another stock‑based compensation plan (the “2005 Plan”), but awards are made from the 2010 Plan after the initial public offering. Options outstanding under the 2005 Plan continue to be governed by its existing terms. A total of 1,421 thousand and 1,021 thousand shares was reserved for issuance under the 2010 Plan, respectively, as of February 28, 2021 and February 29, 2020. As of February 28, 2021 and February 29, 2020, there were 1,048 thousand and 548 thousand shares of common stock available for future issuance under the equity incentive plans, respectively. In November 2020, SemiLEDs granted 15 thousand restricted stock units to its directors, which vested 25% on February 12, 2021 and will vest 25% every three months on May 12, 2021, August 12, 2021 and November 12, 2021. In the event that the 2021 annual meeting falls before November 12, 2021, 100% of the stock units shall immediately vest on the date of the 2021 annual meeting. The grant-date fair value of the restricted stock units was $3.00 per unit. 13 Table of Contents In November 2020, SemiLEDs granted 33 thousand restricted stock units to its employees, which vested 25 % on February 12, 2021 and will vest 25% every three months on May 12, 2021, August 12, 2021 and November 12, 2021 and will become fully vested upon a change in control. The grant-date fair value of the restricted stock units was $ 3.00 per unit. In January 2020, SemiLEDs granted 136 thousand restricted stock units to its employees, which vested 25% on January 10, 2021 and will vest 25% each year on January 10 of 2022, 2023 and 2024 and will become fully vested upon a change in control. The grant-date fair value of the restricted stock units was $2.39 per unit. In September 2019, SemiLEDs granted 5 thousand restricted stock units to its directors, which vested 100% on July 31, 2020. The grant-date fair value of the restricted stock units was $2.45 per unit. In September 2019, SemiLEDs granted 2.5 thousand restricted stock units to a director, which vested 100% on September 5, 2020. The grant-date fair value of the restricted stock units was $2.45 per unit. The grant date fair value of stock options is determined using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model requires inputs including the market price of SemiLEDs’ common stock on the date of grant, the term that the stock options are expected to be outstanding, the implied stock volatilities of several of the Company’s publicly-traded peers over the expected term of stock options, risk-free interest rate and expected dividend. Each of these inputs is subjective and generally requires significant judgment to determine. The grant date fair value of stock units is based upon the market price of SemiLEDs’ common stock on the date of the grant. This fair value is amortized to compensation expense over the vesting term. Stock-based compensation expense is recorded net of estimated forfeitures such that expense is recorded only for those stock-based awards that are expected to vest. A forfeiture rate is estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from initial estimates. A forfeiture rate of zero is estimated for stock-based awards with vesting term that is less than or equal to one year from the date of grant. A summary of the stock-based compensation expense for the three and six months ended February 28, 2021 and February 29, 2020 was as follows (in thousands): Three Months Ended Six Months Ended February 28, 2021 February 29, 2020 February 28, 2021 February 29, 2020 Cost of revenues $ 18 $ 6 $ 23 $ 17 Research and development 15 5 19 11 Selling, general and administrative 33 13 45 31 $ 66 $ 24 $ 87 $ 59 8. Net Loss Per Share of Common Stock The following stock-based compensation plan awards were excluded from the computation of diluted net loss per share of common stock for the periods presented because including them would have been anti-dilutive (in thousands of shares): Three Months Ended Six Months Ended February 28, 2021 February 29, 2020 February 28, 2021 February 29, 2020 Stock units and stock options to purchase common stock 72 — 69 — 9. Income Taxes The Company’s income (loss) before income taxes for the three and six months ended February 28, 2021 and February 29, 2020 consisted of the following (in thousands): Three Months Ended Six Months Ended February 28, 2021 February 29, 2020 February 28, 2021 February 29, 2020 U.S. operations $ (201 ) $ 410 $ (338 ) $ 209 Foreign operations (53 ) (60 ) (623 ) (181 ) Income (loss) before income taxes $ (254 ) $ 350 $ (961 ) $ 28 14 Table of Contents Unrecognized Tax Benefits On December 22, 2017, the U.S. Tax Cuts and Jobs Act was adopted, which among other effects, reduced the U.S. federal corporate income tax rate to 21% from 34% (or 35% in certain cases) beginning in 2018, requires companies to pay a one-time transition tax on certain unrepatriated earnings from non-U.S. subsidiaries that is payable over eight years, makes the receipt of future non-U.S. sourced income of non-U.S. subsidiaries tax-free to U.S. companies and creates a new minimum tax on the earnings of non-U.S. subsidiaries relating to the parent’s deductions for payments to the subsidiaries. Provisional estimate of the Company is that no tax will be due under this provision. As of both February 28, 2021 and August 31, 2020, the Company had no unrecognized tax benefits related to tax positions taken in prior periods. The Company files income tax returns in the United States, various U.S. states and certain foreign jurisdictions. The tax years 2016 through 2019 remain open in most jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state, local, or foreign examinations by tax authorities for tax years before 2015. 10. Related Party Transactions On December 6, 2019 and on December 10, 2019, the Company issued convertible unsecured promissory notes (the “Notes”) to each of J.R. Simplot Company, its largest shareholder, and Trung Doan, its Chairman and Chief Executive Officer (together, the “Holders”), with a principal sum of $1.5 million and $500 thousand, respectively, and an annual interest rate of 3.5%. Principal and accrued interest shall be due on demand by the Holders on and at any time after May 30, 2021. The outstanding principal and unpaid accrued interest of the Notes may be converted into the Company’s common stock based on a conversion price of $3.00 per share, at the option of the Holders any time from the date of the Notes. On May 25, 2020, each of the Holders converted $300,000 of the Notes into 100,000 shares of the Company’s common stock. On January 8, 2019, the Company entered into loan agreements with each of the Chairman and Chief Executive Officer and the largest shareholder of the Company, with aggregate amounts of $1.7 million and $1.5 million, respectively, and an annual interest rate of both 8%. All proceeds of the loans were exclusively used to return the deposit to Formosa Epitaxy Incorporation in connection with the cancelled proposed sale of the Company’s headquarters building pursuant to the agreement dated December 15, 2015. The Company is 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 the headquarters building of the Company. 11. Subsequent Events The Company has analyzed its operations subsequent to February 28, 2021 to the date these unaudited condensed consolidated financial statements were issued, finding that the impact of COVID-19 on the Company is unknown at this time and the financial consequences of this situation cause uncertainty as to the future and its effects on the economy and the Company. Except for the above, the Company has determined that it does not have any material subsequent events to disclose in these unaudited condensed consolidated financial statements. 15 Table of Contents