What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-01-12 compared with 2021-07-13 · 125 added, 181 removed, 213 unchanged (59% of the section changed)

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Our ability to maintain compliance with the continued listing requirements 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 continuing 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.

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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 mark ets, including the Netherlands, 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.

Adverse development in those selected markets, including the Netherlands, 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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Company Overview

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

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

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

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

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

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

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

We package our LED chips into LED components, which we sell to distributors and a customer base that is heavily concentrated in a few select markets, including Netherlands, Ireland, Taiwan, Japan, the United States, 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 Taiwan, the United States, the Netherlands, 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.

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 has decreased our sales revenue for the nine months ended May 31, 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.

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

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

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

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

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

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 been negatively affected by a range of external factors related to the COVID-19 pandemic that are not within our control.

For example, while operations continue d in our locations, some of our non-manufacturing employees work remotely and travel remains limited;

which hinders our ability to connect with customers and participate in trade shows.

G iven 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.

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.

In July 2021, we established an at-the-market equity program (“ATM”) that allows us to sell up to $20 million of common stock from time to time.

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

The raising of additional debt funding by us, if required and available, would result in increased debt service obligations and could result in additional operating and financing covenants, or liens on our assets, that would restrict our operations.

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

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

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

Average selling price of our products.

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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 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.

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

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

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

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

We have adopted a strategy to 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.

the market for some time.

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

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

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

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

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

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

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

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

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

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

For the three and the nine months ended May 31, 2021, sales to our three largest customers, in the aggregate, accounted for 51% and 52% of our revenues, respectively.

For the three months ended November 30, 2021 and 2020, sales to our three largest customers, in the aggregate, accounted for 68% and 61% of our revenues, respectively.

Intellectual property issues.

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

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

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

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

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

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

demand for our products.

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

Cash position.

Our cash and cash equivalents decreased to $1.7 million as of May 31, 2021 primarily due to the net cash used in operating activities.

Our cash and cash equivalents increased to $4.1 million as of November 30, 2021 from $2.7 million as of November 30, 2020, primarily due to the sale of 344,391 shares of common stock for net proceeds of $4.0 million under our ATM program.

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

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

We believe we will be able to generate positive cash inflows through the restructuring of our chip operation and the significant ongoing cost savings in the form of reduced payroll and research and development activities.

The shipment of our new module product and the continued commercial sales of our UV LED product are expected to grow steadily.

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

In December 2019, we issued convertible unsecured promissory notes with a principal sum of $2 million, of which, $600 thousand convertible notes were converted into 200 thousand shares of common stock in May 2020.

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

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

On May 26, 2021 the Notes were extended with the same terms and interest rate for one year and mature on May 30, 2022.

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

Critical Accounting Policies and Estimates

Effective September 1, 2020, we adopted ASU No.

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

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

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

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

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

Effective September 1, 2020, we adopted ASU No.

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

ASU 2018-13 removes, modifies and adds certain disclosure requirements in Topic 820, “Fair Value Measurement.” ASU 2018-13 eliminates certain disclosures related to transfers and the valuation process, modifies disclosures for investments that are valued based on net asset value, clarifies the measurement uncertainty disclosure, and requires additional disclosures for Level 3 fair value measurements.

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

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 nine months ended May 31, 2021 as compared to those disclosed in our 2020 Annual Report.

We believe that the application of the following accounting policies, which are important to our financial position and results of operations, require significant judgments and estimates on the part of management.

For a summary of our significant accounting policies, including the accounting policies discussed below, see Item 1 to the Unaudited Consolidated Financial Statements.

Revenue Recognition

The Company has revenue recognition policies for its operating projects that are appropriate to the circumstances of each business.

Refer to Note 2 to the Consolidated Financial Statements for our revenue recognition policies.

Write-down of Inventories

The net realized value of inventories is the estimated selling price in the ordinary course of business less the estimated costs of completion and disposal.

The estimation of net realized value is based on current market conditions and historical experience with product sales of similar nature.

Changes in market conditions may have a material impact on the estimation of the net realizable value.

The reliability of the deferred tax asset mainly depends on whether sufficient future profits or taxable temporary differences will be available.

In cases where the actual future profits generated are less than expected, a material reversal of deferred tax assets may arise, which would be recognized in profit or loss for the period in which such a reversal takes place.

Exchange Rate Information

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

On May 31 , 20 2 1 , the exchange rate was 27 .

64 NT dollar s to one U.S.

On July 6 , 20 2 1 , the exchange rate was 27.91 NT dollars to one U.S.

On November 30, 2021, the exchange rate was 27.80 NT dollars to one U.S.

On January 7, 2022, the exchange rate was 27.69 NT dollars to one U.S.

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

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Results of Operations

Three Months Ended May 31, 2021 Compared to the Three Months Ended May 31, 2020

Three Months Ended

Three Months Ended November 30, 2021 Compared to the Three Months Ended November 30, 2020

Three Months Ended November 30,

(in thousands)

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Cost of revenues

Gross profit (loss)

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

Revenues, net

Our revenues decreased by 8% to $1.4 million for the three months ended May 31, 2021 from $1.6 million for the three months ended May 31, 2020.

The decrease in revenues was driven primarily by a $330 thousand decrease in other revenues, offset in part by a $21 thousand increase in LED chips, a $128 thousand increase in sales of LED components and a $51 thousand increase in lighting products.

Revenues attributable to the sales of our LED chips were $32 thousand and $11 thousand, representing 2% and 1%, respectively, of our revenues for the three months ended May 31, 2021 and 2020, the increase was primarily due to varying volumes sold for the LED chips.

Revenues attributable to the sales of our LED components were $1,057 thousand and $929 thousand, representing 74% and 59%, respectively, of our revenues for the three months ended May 31, 2021 and 2020.

Revenues attributable to sales of LED components were higher for the three months ended May 31, 2021 primarily due to more volumes sold.

Revenues attributable to the sales of lighting products represented 14% and 10% of our revenues for the three months ended May 31, 2021 and 2020, respectively.

Revenues attributable to the sales of lighting products were slightly higher for the three months ended May 31, 2021 primarily due to higher volumes sold.

Revenues attributable to other revenues represented 10% and 30% of our revenues for the three months ended May 31, 2021 and 2020, respectively.

The decrease in revenues attributable to other revenues was primarily due to decreases in the provision of services and sales of raw materials in the three months ended May 31, 2021.

Our revenues increased by 104% to $1.5 million for the three months ended November 30, 2021 from $719 thousand for the three months ended November 30, 2020.

The increase in revenues was caused primarily by a $618 thousand increase in sales of LED components and 231 thousand increase in other revenue offset by a $19 thousand decrease in LED chips and $84 thousand decrease in lighting products.

Revenues attributable to the sales of our LED chips represented 1% and 5% of our revenues for the three months ended November 30, 2021 and 2020, respectively.

The decrease in revenues attributable to sales of LED chips was the result of a decrease in the volume of LED chips sold, reflecting our strategic plan 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 77% and 70% of our revenues for the three months ended November 30, 2021 and 2020, respectively.

The increase in revenues attributable to sales of LED components was primarily due to more volumes sold.

Revenues attributable to the sales of lighting products represented 6% and 24% of our revenues for the three months ended November 30, 2021 and 2020, respectively.

Revenues attributable to the sales of lighting products were lower for the three months ended November 30, 2021 primarily due to less demand of the lighting products sold.

Revenues attributable to other revenues represented 16% and 1% of our revenues for the three months ended November 30, 2021 and 2020, respectively.

The increase in revenues attributable to other revenues was primarily due to the non-recurring sale of raw materials in the three months ended November 30, 2021.

Cost of Revenues

Our cost of revenues decreased by 33% from $1.2 million for the three months ended May 31, 2020 to $775 thousand for the three months ended May 31, 2021.

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

Our gross profit increased from $416 thousand for the three months ended May 31, 2020 to $664 thousand for the three months ended May 31, 2021.

Our gross margin percentage increased from 27% to 46% for the three months ended May 31, 2021 as a consequence of focusing on profitable products.

Our cost of revenues increased by 70% from $741 thousand for the three months ended November 30, 2020 to $1.3 million for the three months ended November 30, 2021.

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

Gross Profit (loss)

Our gross profit (loss) increased from a loss of $22 thousand for the three months ended November 30, 2020 to a profit of $203 thousand for the three months ended November 30, 2021.

The increase was a consequence of focusing on profitable products described above.

Operating Expenses

Three Months Ended

Three Months Ended November 30,

(in thousands)

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Selling, general and administrative

Gain on disposals of long-lived assets, net

Gain on disposals of long-lived assets

Total operating expenses

Research and development Our research and development expenses were $528 thousand and $375 thousand for the three months ended May 31, 2021 and 2020, respectively.

The increase was primary due to a $132 thousand increase in out-source manufacturing, an $8 thousand increase in materials and supplies used for our new products, and a $5 thousand increase in payroll and compensation plus increases in depreciation and amortization expense and various other expenses.

Selling, general and administrative Our selling, general and administrative expenses decreased from $782 thousand for the three months ended May 31, 2020 to $730 thousand for the three months ended May 31, 2021.

The decrease was mainly attributable to a $111 thousand decrease in professional services fees offset partially by a $63 thousand increase in payroll and in various expenses.

Gain on disposal of long-lived assets, net We recognized a net gain of $2 thousand on the disposal of long-lived assets for the three months ended May 31, 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.

Research and development.

Our research and development expenses were $404 thousand and $346 thousand for the three months ended November 30, 2021 and 2020, respectively.

The increase was mainly attributable to a $58 thousand increase in the payroll and engineering experiment materials.

Selling, general and administrative.

Our selling, general and administrative expenses increased from $681 thousand for the three months ended November 30, 2020 to $777 thousand for the three months ended November 30, 2021.

The increase was mainly attributable to increase in other expenses and professional service expenses.

Gain on disposal of long-lived assets.

We recognized $0 and $77 thousand gain on the disposal of long-lived assets for the three months ended November 30, 2021 and 2020, 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 in the three months ended November 30, 2020.

Other Income (Expenses)

Three Months Ended

Three Months Ended November 30,

(in thousands)

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Other income, net

Foreign currency transaction gain, net

Foreign currency transaction (loss) gain, net

Total other income, net

Interest expenses, net The decrease in interest expenses, net was primarily due to a decrease in debt balance, resulting from the conversion of $600,000 of convertible notes into 200,000 shares of the Company’s common stock in May 2020.

Other income, net Other income, net increased from $270 thousand for the three months ended May 31, 2020 to $474 thousand for the three months ended May 31, 2021, primarily due to subsidies received from the Taiwan government for the COVID-19 pandemic.

Foreign currency transaction loss, net We recognized a net foreign currency transaction gain of $155 thousand and $57 thousand for the three months ended May 31, 2021 and 2020, respectively, primarily due to the depreciation of the U.S.

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

Interest expenses, net.

The decrease in interest expenses, net, was primarily due to the impact of a lower exchange rate of NT dollars to U.S.

Other income, net.

Other income, net increased from $170 thousand for the three months ended November 30, 2020 to $566 thousand for the three months ended November 30, 2021 was primarily due to the subsidies from a government jointly developed research project.

Foreign currency transaction gain, net.

We recognized a net foreign currency transaction loss of $22 thousand and a gain of $187 thousand for the three months ended November 30, 2021 and 2020, respectively, primarily due to the impact of a higher exchange rate of the U.S.

dollar against the NT dollar from bank deposits.

Income Tax Expense.

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

Net Income Attributable to Noncontrolling Interests

Three Months Ended

(in thousands)

Net income attributable to noncontrolling interests

We recognized net income attributable to non-controlling interests of $7 thousand and $4 thousand for the three months ended May 31, 2021 and 2020, respectively , which was attributable to the share of the net losses of Taiwan Bandaoti Zhaoming Co., Ltd held by the non-controlling holders.

Non-controlling interests represented 3.05% and 3.25% equity interest in Taiwan Bandaoti Zhaoming CO., Ltd as of May 31, 2021 and 2020, respectively.

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

Nine Months Ended

(in thousands)

LED components

Lighting products

Other revenues ( 1)

Total revenues, net

Cost of revenues

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

Revenues, net

Our revenues decreased by 28% from $4.7 million for the nine months ended May 31, 2020 to $3.4 million for the nine months ended May 31, 2021.

The $1.3 million decrease in revenues reflects a $496 thousand decrease in sales of LED components and a $1.0 million decrease in revenues attributable to other revenue, offset by a $64 thousand increase in sales of LED chips and a $170 thousand increase in revenues attributable to sales of lighting products.

Revenues attributable to the sales of our LED chips represented 3% and 1% of our revenues for the nine months ended May 31, 2021 and 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 ou r LED components were $2.3 million and $2.8 million, representing 6 9 % and 60 % , respectively, of our revenues for the nine months ended May 31 , 20 2 1 and May 31, 20 20 .

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 16% and 8% of our revenues for the nine months ended May 31, 2021 and 2020, respectively.

Revenues attributable to the sales of lighting products was $170 thousand higher for the nine months ended May 31, 2021 primarily due to a seasonal swing in demand on LED luminaries.

Revenues attributable to other revenues represented 12% and 31% of our revenues for the nine months ended May 31, 2021 and 2020, respectively.

The decrease in revenues attributable to other revenues was primarily due to decreases in the provision of services and sales of raw materials in the nine months ended May 31, 2021.

Cost of Revenues

Our cost of revenues decreased by 22% from $3.2 million for the nine months ended May 31, 2020 to $2.5 million for the nine months ended May 31, 2021.

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

Our gross profit decreased from $1.5 million for the nine months ended May 31, 2020 to a gross profit of $883 thousand for the nine months ended May 31, 2021.

Our gross margin percentage was 26% for the nine months ended May 31, 2021, as compared to 32% for the nine months ended May 31, 2020 as a consequence of the COVID-19 pandemic impact on customer demand, as more fully described above.

Operating Expenses

Nine Months Ended

(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 $1.2 million and $1.1 million for the nine months ended May 31, 2021 and 2020, respectively.

The increase was primary due to a $140 thousand increase in out-source manufacturing, a $26 thousand increase in materials and supplies used for our new products and a $9 thousand increase in depreciation and amortization expense, offset partially by decreases in payroll and compensation.

Selling, general and administrative Our selling, general and administrative expenses were $2.1 million for both the nine months ended May 31, 2021 and May 31, 2020.

The slight decrease was mainly attributable to a $144 thousand decrease in professional service fee, offset partially by a $83 thousand increase in payroll and in various expenses.

Gain on disposal of long-lived assets, net

We recognized a net gain of $286 thousand and $79 thousand on the disposal of long-lived assets for the nine months ended May 31, 2021 and 2020, respectively.

Other Income (Expenses)

Nine Months Ended

(in thousands)

Gain on disposal of investment

Interest expenses, net

Other income, net

Foreign currency transaction gain, net

Total other income, net

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

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

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

Interest expenses, net The increase in interest expenses, net was primarily due to the 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, net The increase in other income for the nine months ended May 31, 2021 primarily consists of additional subsidies received from the Taiwan government for COVID-19 pandemic and rental income from the lease of spare space in our Hsinchu building, compared to the nine months ended May 31, 2020.

Foreign currency transaction gain, net We recognized net foreign currency transaction gain of $380 thousand and $256 thousand for the nine months ended May 31, 2021 and 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) Income Attributable to Noncontrolling Interests

Nine Months Ended

Net Loss Attributable to Non-controlling Interests

Three Months Ended November 30,

(in thousands)

Net income (loss) attributable to noncontrolling interests

We recognized net loss attributable to non-controlling interests of $2 thousand and net gain of $1 thousand for the nine months ended May 31, 2021 and 2020, respectively, which was attributable to the share of the net losses of Taiwan Bandaoti Zhaoming Co., Ltd held by the non-controlling holders.

Non-controlling interests represented 3.05% and 3.25% equity interest in Taiwan Bandaoti Zhaoming CO., Ltd, as of May 31, 2021 and May 31, 2020, respectively.

Net loss attributable to noncontrolling interests

We recognized net loss attributable to non-controlling interests of $7 thousand and $10 thousand for the three months ended November 30, 2021 and 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% equity interest in Taiwan Bandaoti Zhaoming Co., Ltd., for both of November 30, 2021 and 2020, respectively.

Liquidity and Capital Resources

As of May 31, 2021 and August 31, 2020, we had cash and cash equivalents of $1.7 million and $2.8 million, respectively, which were predominately held in U.S.

As of November 30, 2021 and August 31, 2021, we had cash and cash equivalents of $4.1 million and $4.8 million, respectively, which were predominately held in U.S.

dollar denominated demand deposits and/or money market funds.

As of July 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 May 31, 2021 and August 31, 2020, respectively.

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

As of January 7 , 2022, 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 $7.5 million and $7.7 million as of November 30, 2021 and August 31, 2021, respectively.

Our NT dollar denominated long-term notes, totaled $3.2 million of both November 30, 2021 and August 31, 2021.

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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The second loan originally for $1.2 million (NT$38 million) has an annual floating interest rate equal to the NTD base lending rate plus 1.02% (or 1.845% currently) and is available for operating capital.

These loans are secured by a $90 thousand (NT$2.5 million) security deposit and a first priority security interest on the Company’s headquarters building.

These loans are secured by an $85 thousand (NT$2.5 million) security deposit and a first priority security interest on the Company’s headquarters building.

Due to the impact of the COVID-19 pandemic, the bank agreed to give us a deferment period for twelve months starting from May 2020.

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

Starting from May 2021, the first note payable requires monthly payments of principal in the amount of $23 thousand plus interest over the 74-month term of the note with final payment to occur in July 2027 and, as of May 31, 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 May 31, 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 May 31, 2021 and August 31, 2020, respectively.

During this period, we did not 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 $27 thousand plus interest over the 74-month term of the note with final payment to occur in July 2027 and, as of November 30, 2021, our outstanding balance on this note payable was approximately $1.8 million.

Starting from May 2021, the second note payable requires monthly payments of principal in the amount of $17 thousand plus interest over the 74-month term of the note with final payment to occur in July 2027 and, as of November 30, 2021, our outstanding balance on this note payable was approximately $1.1 million.

Property, plant and equipment pledged as collateral for our notes payable were $3.4 million and $3.5 million as of November 30, 2021 and August 31, 2021, respectively.

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.

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 May 31, 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.

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

On January 16, 2021, the maturity date of these loans were extended with same terms and interest rate for one year to January 15, 2022.

As of November 30, 2021 and August 31, 2020, these loans totaled $3.2 million, respectively.

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

On December 6, 2019 and on December 10, 2019, we issued convertible unsecured promissory notes to each of our Chairman and Chief Executive Officer and our largest shareholder (the “Holders”), with a principal sum of $2 million and an annual interest rate of 3.5%.

Principal and accrued interest shall be due on demand by the Holders on and at any time after May 30, 2021 (the “Maturity Date”).

Principal and accrued interest was due on demand by the Holders on and at any time after May 30, 2021 (the “Maturity Date”).

The outstanding principal and unpaid accrued interest of the Notes may be converted into our Common Stock based on a conversion price of $3 dollars per share, at the option of the Holders any time from the date of the Notes.

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

On May 26, 2021, the Notes were extended with the same terms and interest rate for one year, which is mature on May 30, 2021.

As of May 31, 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.

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

As of August 31, 2020, we had cash and cash equivalents of $2.8 million.

On May 26, 2021, the Notes were extended with the same terms and interest rate for one year and now mature on May 30, 2022.

As of November 30, 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 $518 thousand and $697 thousand during the three months ended November 30, 2021 and 2020, respectively.

Net cash used in operating activities for the three months ended November 30, 2021 was $607 thousand.

As of November 30, 2021, we had cash and cash equivalents of $4.1 million.

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 additional equity to our stockholders.

In addition, we are planning to issue additional equity.

On July 6, 2021, we entered into a Sales Agreement (the “Sales Agreement”) with Roth Capital Partners, LLC (the “Agent”).

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The Company will pay a commission to the Agent of 3.0% of the gross proceeds of the sale of the Placement Shares sold under the Agreement and reimburse the Agent for certain expenses.

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.

In the fourth quarter of fiscal 2021, we sold 344,391 shares of common stock for gross proceeds of $4.2 million with $125 thousand paid as placement agent fees under our ATM program.

We did not sell any shares under the ATM program in the first quarter of fiscal 2022.

We expect to resume sales of Placement Shares after the issuance of the first quarter Form 10-Q.

We estimate that our cash requirements to service debt and contractual obligations in fiscal 2022 is approximately $5.1 million, which we expect to fund through the issuance of additional equity under the ATM program.

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

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

Nine Months Ended

Net cash used in operating activities

Net cash provided by (used in) investing activities

Net cash (used in) provided by financing activities

Three Months Ended November 30,

Net cash (used in) provided by operating activities

Net cash (used in) provided by investing activities

Net cash used in financing activities

Cash Flows Used In Operating Activities

Net cash used in operating activities for the nine months ended May 31, 2021 and May 31, 2020 was $826 thousand and $786 thousand, respectively.

The $40 thousand increase in cash flows used in operating activities for the nine months ended May 31, 2021 was primary attributable to an increase in net loss

Cash Flows Provided by (Used In) Investing Activities

Net cash provided by investing activities for the nine months ended May 31, 2021 was $168 thousand, consisting primarily of $291 thousand of proceeds from the sales of machinery and equipment, offset in part by $111 thousand of purchases of machinery and equipment.

Net cash used in investing activities for the nine months ended May 31, 2020 was $161 thousand, consisting primarily of $226 thousand of the purchases of machinery and equipment and $14 thousand of payments for development of intangible assets, offset in part by $79 thousand of proceeds from sales of machinery and equipment.

Cash Flows Provided by (Used In) Financing Activities

Net cash used in financing activities for the nine months ended May 31, 2021 was $55 thousand, consisting primarily of $$43 thousand of repayments on long-term debt and $12 thousand for acquisition of noncontrolling interest.

Net cash provided by financing activities for the nine months ended May 31, 2020 was $2.4 million, consisting primarily of $2 million of proceeds from convertible notes, and $700 thousand of issuance of common stocks, offset in part by $279 thousand of repayments on long-term debt.

Net cash used in operating activities for the three months ended November 30, 2021 was $607 thousand and net cash provided by operating activities for the three months ended November 30, 2020 was $88 thousand.

The cash flows used in operating activities for the three months ended November 30, 2021 was $695 thousand more, primarily due to a decrease in accounts receivable and inventory and an increase in accrued expenses and other current liabilities.

Cash Flows Used In Investing Activities

Net cash used in investing activities for the three months ended November 30, 2021 was $31 thousand primarily for the purchase of machinery and equipment.

Net cash provided by investing activities for the three months ended November 30, 20 20 was $ 30 thousand, consisting of $ 7 7 thousand in proceeds from sale of machinery and equipment, offset by a $ 41 thousand in purchases of machinery and equipment and $6 thousand in payments for development of intangible assets .

Cash Flows Used In Financing Activities

Net cash used in financing activities for the three months ended November 30, 2021 was primarily for the repayment of long-term debt, while the three months ended November 30, 2020 was for the acquisition of noncontrolling interests.

Capital Expenditures

We had capital expenditures of $111 thousand and $226 thousand for the nine months ended May 31, 2021 and 2020, respectively.

We had capital expenditures of $31 thousand and $41 thousand for the three months ended November 30, 2021 and 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 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 May 31, 2021, we did not engage in any off-balance sheet arrangements.

We do not have any interests in variable interest entities.

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.

Quantitative and Qualitative Disclosures About Market Risk

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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