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MarketScreener Homepage  >  Equities  >  Nasdaq  >  SemiLEDs Corporation    LEDS

SEMILEDS CORPORATION

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SEMILEDS : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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07/12/2019 | 06:08am EDT

Forward Looking Statements


This Quarterly Report on Form 10-Q, or this Quarterly Report, contains
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended, or the Exchange Act. All statements other than
statements of historical facts contained in this Quarterly Report, including
statements regarding the future results of operations of SemiLEDs Corporation,
or "we," "our" or the "Company," and financial position, strategy and plans, and
our expectations for future operations, including the execution of our
restructuring plan and any resulting cost savings, are forward-looking
statements. Any statements contained herein that are not statements of
historical facts may be deemed to be forward-looking statements. The words
"believe," "may," "should," "plan," "potential," "project," "will," "estimate,"
"continue," "anticipate," "design," "intend," "expect" and similar expressions
are intended to identify forward-looking statements. We have based these
forward-looking statements largely on our current expectations and projections
about future events and trends that we believe may affect our financial
condition, results of operations, strategy, short-term and long-term business
operations and objectives, and financial needs. These forward-looking statements
are subject to a number of risks, uncertainties and assumptions, and actual
results and the timing of certain events could differ materially and adversely
from those anticipated or implied in the forward-looking statements as a result
of many factors. These factors include, among other things,

• Declining cash position.

• The ability to retain the $500,000 partial payment of the uncompleted $1.6

        million note financing as liquidated damages.


    •   Our ability to improve our liquidity, access alternative sources of

funding and obtain additional equity capital or credit when necessary for

        our operations, the difficulty of which may increase if our common stock
        is delisted from the NASDAQ Stock Market.

• The inability of our suppliers or other contract manufacturers to produce

products that satisfy our requirements.

• Our ability to implement our cost reduction programs and to execute our

restructuring plan effectively.

• Our ability to improve our gross margins, reduce our net losses and

restore our operations to profitability.

• Our ability to successfully introduce new products that we can produce and

that customers will purchase in such amounts as to be sufficiently

profitable to cover the costs of developing and producing these products,

as well as providing us additional net income from operations.

• Our ability to effectively develop, maintain and expand our sales and

distribution channels, especially in the niche LED markets, including the

UV LED and architectural lighting that we focus on.

• Our ability to successfully manage our operations in the face of the

cyclicality, rapid technological change, rapid product obsolescence,

        declining average selling prices and wide fluctuations in supply and
        demand typically found in the LED market.


  • Competitive pressures from existing and new companies.


• Our ability to grow our revenues generated from the sales of our products

and to control our expenses.

• Loss of any of our key personnel, or our failure to attract, assimilate

and retain other highly qualified personnel.

• Intellectual property infringement or misappropriation claims by third

parties against us or our customers, including our distributor customers.

• The failure of LEDs to achieve widespread adoption in the general lighting

        market, or if alternative technologies gain market acceptance.


  • The loss of key suppliers or contract manufacturers.

• Our ability to effectively expand or upgrade our production facilities or

do so in a timely or cost-effective manner.

• Difficulty in managing our future growth or in responding to a need to

contract operations, and the associated changes to our operations.

• Adverse development in those selected markets, including the Netherlands,

Taiwan, the United States and China, where our revenues are concentrated.



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




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• The reduction or elimination of government investment in LED lighting or

the elimination of, or changes in, policies in certain countries that

encourage the use of LEDs over some traditional lighting technologies.

• Our ability to implement our product innovation strategy effectively,

particularly in view of the prohibition against our (and/or our assisting

others in) making, using, importing, selling and/or offering to sell in

the United States our accused products and/or any device that includes an

        accused product after October 1, 2012 as a result of the injunction agreed
        to in connection with the Cree Inc., or Cree, litigation.


  • Loss of customers.


    •   Failure of our strategy of marketing and selling our products in

jurisdictions with limited intellectual property enforcement regimes.

• Lack of marketing and distribution success by our third-party distributors.

• Our customers' ability to produce and sell products incorporating our LED

products.

• Our failure to adequately prevent disclosure of trade secrets and other

proprietary information.

• Ineffectiveness of our disclosure controls and procedures and our internal

        control over financial reporting.


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


  • Impairment of long-lived assets or investments.

• Undetected defects in our products that harm our sales and reputation and

adversely affect our manufacturing yields.

• The availability of adequate and timely supply of electricity and water

for our manufacturing facilities.

• Our ability to comply with existing and future environmental laws and the

cost of such compliance.

• The ability of SemiLEDs Optoelectronics Co., Ltd., or Taiwan SemiLEDs, to

make dividends and other payments to SemiLEDs Corporation.

• Our ability to obtain necessary regulatory approvals to make further

investments in Taiwan SemiLEDs.

• Our ability to appoint a new independent director to regain compliance

        with the Nasdaq continued listing requirements necessary to avert
        delisting of our common stock.


    •   Catastrophic events such as fires, earthquakes, floods, tornados,
        tsunamis, typhoons, pandemics, wars, terrorist activities and other
        similar events, particularly if these events occur at or near our

operations, or the operations of our suppliers, contract manufacturers and

customers.

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

• Labor shortages, strikes and other disturbances that affect our operations.

• Deterioration in the relations between the PRC and Taiwan governments.

• Fluctuations in the exchange rate among the U.S. dollar, the New Taiwan,

or NT, dollar, the Japanese Yen and other currencies in which our sales,

        raw materials and component purchases and capital expenditures are
        denominated.

• The effect of the disclosure requirements under the provisions of the

Dodd-Frank Act relating to "conflict minerals," which could increase our

        costs and limit the supply of certain metals used in our products and
        affect our reputation with customers and shareholders.


Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We have not assumed any obligation to,
and you should not expect us to, update or revise these statements because of
new information, future events or otherwise.

For more information on the significant risks that could affect the outcome of
these forward-looking statements, see Item 1A "Risk Factors" in Part I of our
Annual Report on Form 10-K for the fiscal year ended August 31, 2018, or the
2018 Annual Report, and those contained in Part II, Item 1A of this Quarterly
Report, and other information provided from time to time in our filings with the
Securities and Exchange Commission, or the SEC.



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The following discussion and analysis of our financial condition and results of
operations is based upon and should be read in conjunction with the unaudited
interim condensed consolidated financial statements and the notes and other
information included elsewhere in this Quarterly Report, in our 2018 Annual
Report, and in other filings with the SEC.

Company Overview


We develop, manufacture and sell light emitting diode (LED) chips and LED
components. Our products are used for general lighting applications, including
street lights and commercial, industrial, system and residential lighting. Our
LED chips may also be used in specialty industrial applications, such as
ultraviolet, or UV, curing of polymers, LED light therapy in medical/cosmetic
applications, counterfeit detection, LED lighting for horticulture applications,
architectural lighting and entertainment lighting.

Utilizing our patented and proprietary technology, our manufacturing process
begins by growing upon the surface of a sapphire wafer, or substrate, several
very thin separate semiconductive crystalline layers of gallium nitride, or GaN,
a process known as epitaxial growth, on top of which a mirror-like reflective
silver layer is then deposited. After the subsequent addition of a copper alloy
layer and finally the removal of the sapphire substrate, we further process this
multiple-layered material to create individual vertical LED chips.

We package our LED chips into LED components, which we sell to distributors and
a customer base that is heavily concentrated in a few select markets, including
Taiwan, the United States and China (including Hong Kong). We also sell our
"Enhanced Vertical," or EV, LED product series in blue, white, green and UV in
selected markets. We sell our LED chips to packagers or to distributors, who in
turn sell to packagers. Our lighting products customers are primarily original
design manufacturers, or ODMs, of lighting products and the end­users of
lighting devices. We also contract other manufacturers to produce for our sale
certain LED products, and for certain aspects of our product fabrication,
assembly and packaging processes, based on our design and technology
requirements and under our quality control specifications and final inspection
process.

We have developed advanced capabilities and proprietary know-how in:

  • reusing sapphire substrate in subsequent production runs;


    •   optimizing our epitaxial growth processes to create layers that
        efficiently convert electrical current into light;

• employing a copper alloy base manufacturing technology to improve our

chip's thermal and electrical performance;

• utilizing nanoscale surface engineering to improve usable light extraction;

• developing a LED structure that generally consists of multiple epitaxial

layers which are vertically-stacked on top of a copper alloy base; and

• developing low cost Chip Scaled Packaging (CSP) technology.



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

We were incorporated in the State of Delaware on January 4, 2005 and sold our
first LED chips in November 2005. We are a holding company for various wholly
and majority owned subsidiaries. SemiLEDs Optoelectronics Co., Ltd., or TaiwanSemiLEDs, is our wholly owned operating subsidiary, where a substantial portion
of our assets are held and located, where a portion of our research,
development, manufacturing and sales activities take place. Taiwan SemiLEDs owns
a 97% equity interest in Taiwan Bandaoti Zhaoming Co., Ltd., formerly known as
Silicon Base Development, Inc., which is engaged in the research, development,
manufacture, and substantial portion of marketing and sale of LED products, and
where most of our employees are based.

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

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

• Our ability to raise additional debt, 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. 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. The

        sale of additional equity securities, if required and available, could
        result in dilution to our stockholders.




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• Our ability to get chips from other chip suppliers. Our reliance on our

chip suppliers exposes us to a number of significant risks, including

reduced control over delivery schedules, quality assurance and production

costs, lack of guaranteed production capacity or product supply. If our

chip suppliers are unable or unwilling to continue to supply our chips at

requested quality, quantity, performance and costs, or in a timely manner,

our business and reputation could be seriously harmed. Our inability to

procure chips from other chip suppliers at the desired quality, quantity,

performance and cost might result in unforeseen manufacturing and

operations problems. In such events, our customer relationships, business,

financial condition and results of operations would be adversely affected.

• Industry growth and demand for products and applications using LEDs. The

overall adoption of LED lighting devices to replace traditional lighting

sources is expected to influence the growth and demand for LED chips and

component products and impact our financial performance. We believe the

potential market for LED lighting will continue to expand. LEDs for

efficient generation of UV light are also starting to gain attention for

various medical, germicidal and industrial applications. Since a

substantial portion of our LED chips, LED components and our lighting

products are used by end- users in general lighting applications and

specialty industrial applications such as UV curing, medical/cosmetic,

        counterfeit detection, horticulture, architectural lighting and
        entertainment lighting the adoption of LEDs into these applications 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.

• Average selling price of our products. The average selling price of our

products may decline for a variety of factors, including prices charged by

our competitors, the efficacy of our products, our cost basis, changes in

our product mix, the size of the order and our relationship with the

relevant customer, as well as general market and economic conditions.

Competition in the markets for LED products is intense, and we expect that

competition will continue to increase, thereby creating a highly

aggressive pricing environment. For example, some of our competitors have

in the past reduced their average selling prices, and the resulting

competitive pricing pressures have caused us to similarly reduce our

prices, accelerating the decline in our revenues and the gross margin of

our products. When prices decline, we must also write down the value of

our inventory. Furthermore, the average selling prices for our LED

products have typically decreased over product life cycles. Therefore, our

        ability to continue to innovate and offer competitive products that meet
        our customers' specifications and pricing requirements, such as higher

efficacy LED products at lower costs, will have a material influence on

our ability to improve our revenues and product margins, although in the

near term the introduction of such higher performance LED products may

further reduce the selling prices of our existing products or render them

obsolete.

• Changes in our product mix. We anticipate that our gross margins will

continue to fluctuate from period to period as a result of the mix of

products that we sell and the 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 prices on older inventory. Steady growth
        of the module product and the continued commercial sales of our UV LED
        product are expected to improve our gross margin, operating results and

cash flows. In addition, we have adjusted the lower-priced LED components

strategy as appropriate. We have adopted a strategy to adjust our product

mix by exiting certain high volume but low unit selling price product

lines in response to the general trend of lower average selling prices for

products that have been available in the market for some time. However, as

we expand and diversify our product offerings and with varying average

selling prices, or execute new business initiatives, a change in the mix

of products that we sell in any given period may increase volatility in

our revenues and gross margin from period to period.

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

Competitors may reduce average selling prices faster than our ability to

reduce costs, and competitive pricing pressures may accelerate the rate of

decline of our average selling prices. To address increased pricing

pressure, we have improved and increased our production yields to reduce

the per-unit cost of production of our products. However, such cost

savings currently have limited impact on our gross profit, as we currently

suffer from the underutilization of manufacturing capacity and must absorb

a high level of fixed costs, such as depreciation. While we intend to

focus on managing our costs and expenses, over the long term we expect to

be required to invest substantially in LED component products development

and production equipment if we are to grow.

• Our ability to continue to innovate. As part of our growth strategy, we

plan to continue to be innovative in product design, to deliver new

products and to improve our manufacturing efficiencies. Our continued

success depends on our ability to develop and introduce new,

technologically advanced and lower cost products, such as more efficient,

better performance LED component products. If we are unable to introduce

new products that are commercially viable and meet rapidly evolving

customer requirements or keep pace with evolving technological standards

        and market developments or


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        are otherwise unable to execute our product innovation strategy

effectively, we may not be able to take advantage of market opportunities

        as they arise, execute our business plan or be able to compete
        effectively. To differentiate ourselves from other LED package
        manufacturers, we are putting more resources towards module and system

design. Along with our technical know-how in the chip and package sectors,

we are able to further integrate electrical, thermal and mechanical

manufacturing resources to provide customers with one-stop system

services. Services include design, prototyping, OEM and ODM. 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. Our LED components include different sizes and wattage to

accommodate different demands in the LED market.

• General economic conditions and geographic concentration. Many countries

including the United States and the European Union (the "E.U.") members

have instituted, or have announced plans to institute, government

regulations and programs designed to encourage or mandate increased energy

efficiency in lighting. These actions include in certain cases banning the

sale after specified dates of certain forms of incandescent lighting,

which are advancing the adoption of more energy efficient lighting

solutions such as LEDs. When the global economy slows or a financial

crisis occurs, consumer and government confidence declines, with levels of

government grants and subsidies for LED adoption and consumer spending

likely to be adversely impacted. Our revenues have been concentrated in a

few select markets, including the Netherlands, Taiwan, the United States

and China (including Hong Kong). Given that we are operating in a rapidly

changing industry, our sales in specific markets may fluctuate from

quarter to quarter. Therefore, our financial results will be impacted by

general economic and political conditions in such markets. For example,

the aggressive support by the Chinese government for the LED industry

through significant government incentives and subsidies to encourage the

use of LED lighting and to establish the LED ­ sector companies has

resulted in production overcapacity in the market and intense competition.

Furthermore, due to Chinese package manufacturers increasing usage of

domestic LED chips, prices are increasingly competitive, leading to

Chinese manufacturers growing market share in the global LED industry. In

addition, we have historically derived a significant portion of our

revenues from a limited number of customers. Some of our largest customers

and what we produce/have produced for them have changed from quarter to

quarter primarily as a result of the timing of discrete, large

project­based purchases and broadening customer base, among other things.

        For the three and the nine months ended May 31, 2019, sales to our three
        largest customers, in the aggregate, accounted for 49% and 44% of our
        revenues, respectively.

• Intellectual property issues. Competitors of ours and other third parties

have in the past and will likely from time to time in the future allege

that our products infringe on their intellectual property rights.

Defending against any intellectual property infringement claims would

likely result in costly litigation and ultimately may lead to our not

being able to manufacture, use or sell products found to be infringing. In

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

agreed to dismiss amended complaints filed against each other without

prejudice. We agreed to the entry of a permanent injunction that was

effective October 1, 2012 that precludes us from (and/or from assisting

others in) making, using, importing, selling and/or offering to sell in

the United States certain accused products and/or any device that includes

such an accused product after that date and to payment of a settlement fee

for past damages. All remaining claims between Cree and us were withdrawn

        without prejudice, with each retaining the right to assert them in the
        future. However, other third parties may also assert infringement claims

against our customers with respect to our products, or our customers'

        products that incorporate our technologies or products. Any such legal
        action or the threat of legal action against us, or our customers, could
        impair such customers' continued demand for our 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 $1.1 million as

of May 31, 2019 primarily due to the combination of our net cash used in

operating activities offset by proceeds from long-term debt. We have

implemented actions to accelerate operating cost reductions and improve

operational efficiencies. The plan is further enhanced through the fabless

business model in which we implemented certain workforce reductions and

are exploring the opportunities to sell certain equipment related to the

manufacturing of vertical LED chips, in order to reduce the idle capacity

charges and minimize our research and development activities associated

with chips manufacturing operation. We recently entered into two new loan

agreements to refinance an existing real estate loan and provide for

operating capital. In addition, the shipment of our new module product and

the continued commercial sales of our UV LED product are expected to grow

steadily. Based on our current financial projections, we believe that we

        will have sufficient sources of liquidity to fund our operations and
        capital expenditure plans for the next 12 months.






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Critical Accounting Policies and Estimates


Effective September 1, 2018, we adopted ACS 606 using the modified retrospective
transition method. Under this approach, we apply the new standards to all new
contracts initiated on and after September 1 2018, and, for contracts which have
remaining obligations as of September 1 2018, we recognized no adjustment to the
opening balance of our retained earnings account.

On September 1, 2018, we adopted ASC 825-10, "Financial Instruments- Overall:
Recognition and Measurement of Financial Assets and Financial Liabilities". This
standard allows equity investments that do not have readily determinable fair
values to be re-measured at fair value either upon the occurrence of an
observable price change or upon identification of impairment. The standard also
simplifies the impairment assessment of equity investments without readily
determinable fair values by requiring assessment for impairment qualitatively at
each reporting period. There was no material impact on our consolidated
financial position, results of operations or cash flows due to the adoption.

Effective September 1, 2018, we adopted ASU No. 2017-09, "Compensation- Stock
Compensation: Scope of Modification Accounting". The guidance provides clarity
and reduces diversity in practice and cost and complexity when accounting for a
change to the terms or conditions of a share-based payment award. Adoption of
this standard did not have a material impact on our consolidated financial
position, results of operations or cash flows.

Except as described above, there have been no material changes in the matters
for which we make critical accounting policies and estimates in the preparation
of our unaudited interim condensed consolidated financial statements for the
nine months ended May 31, 2019 as compared to those disclosed in our 2018 Annual
Report.

Exchange Rate Information

We are a Delaware corporation and, under SEC requirements, must report our
financial position, results of operations and cash flows in accordance with
accounting principles generally accepted in the United States of America, or
U.S. GAAP. At the same time, our subsidiaries use the local currency as their
functional currency. For example, the functional currency for Taiwan SemiLEDs is
the NT dollar. The assets and liabilities of the subsidiaries are, therefore,
translated into U.S. dollars at exchange rates in effect at each balance sheet
date, and income and expense accounts are translated at average exchange rates
during the period. The resulting translation adjustments are recorded to a
separate component of accumulated other comprehensive income (loss) within
equity. Any gains and losses from transactions denominated in currencies other
than their functional currencies are recognized in the consolidated statements
of operations as a separate component of other income (expense). Due to exchange
rate fluctuations, such translated amounts may vary from quarter to quarter even
in circumstances where such amounts have not materially changed when denominated
in their functional currencies.

The translations from NT dollars to U.S. dollars were made at the exchange rates
as set forth in the statistical release of the Bank of Taiwan. On May 31, 2019,
the exchange rate was 31.60 NT dollars to one U.S. dollar. On July 8, 2019, the
exchange rate was 31.18 NT dollars to one U.S. dollar.

No representation is made that the NT dollar or U.S. dollar amounts referred to
herein could have been or could be converted into U.S. dollars or NT dollars, as
the case may be, at any particular rate or at all.

Results of Operations


Three Months Ended May 31, 2019 Compared to the Three Months Ended May 31, 2018



                                       Three Months Ended
                            May 31, 2019                May 31, 2018
                                      % of                        % of          Change       Change
                           $        Revenues           $        Revenues           $           %
                                                      (in thousands)
  LED chips             $     7             -   %   $    43             2   %   $   (36 )        (84 ) %
  LED components          1,275            73   %     1,289            64   

% (14 ) (1 ) %

  Lighting products         152             9   %       269            13   

% (117 ) (43 ) %

  Other revenues(1)         311            18   %       398            21   

% (87 ) (22 ) %

  Total revenues, net     1,745           100   %     1,999           100   %      (254 )        (13 ) %
  Cost of revenues        1,405            81   %     1,837            92   %      (432 )        (24 ) %
  Gross profit          $   340            19   %   $   162             8   %   $   178          110   %



(1) Other includes primarily revenues attributable to the sale of epitaxial

    wafers, scraps and raw materials and the provision of services.






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Revenues, net

Our revenues decreased by 13% to $1.7 million for the three months ended May 31, 2019 from $2.0 million for the three months ended May 31, 2018. The $254 thousand decrease in revenues reflects a $36 thousand decrease in revenues attributable to sales of LED chips, a $14 thousand decrease in sales of LED components, a $117 thousand decrease in revenues attributable to sales of lighting products, and an $87 thousand decrease in revenues attributable to other revenues.


Revenues attributable to the sales of our LED chips were $7 thousand and $43
thousand, respectively, of our revenues for the three months ended May 31, 2019
and 2018, primarily due to lower volume sold for the LED chips. We have adopted
a strategy to adjust our product mix by exiting certain high volume but low unit
selling price product lines in response to the general trend of lower average
selling prices for products that have been available in the market for some time
and to focus on profitable products.

Revenues attributable to the sales of our LED components represented 73% and 64%
of our revenues for the three months ended May 31, 2019 and 2018, respectively.
The slight decrease in revenues attributable to sales of LED components was
primarily due to a lower volume sold, offset in part by a higher average selling
price for the UV LED product, which we particularly focus on within the niche
LED markets.

Revenues attributable to the sales of lighting products represented 9% and 13%
of our revenues for the three months ended May 31, 2019 and 2018, respectively.
Revenues attributable to the sales of lighting products were slightly lower for
the three months ended May 31, 2019 primarily due to lower volumes sold.

Cost of Revenues


Our cost of revenues decreased by 24% from $1.8 million for the three months
ended May 31, 2018 to $1.4 million for the three months ended May 31, 2019. The
decrease in cost of revenues was primarily due to the effect of our ongoing cost
reduction efforts, a decrease in volume sold and decreases in depreciation
expenses and idle capacity charges associated with property, plant and
equipment.

Gross Profit (Loss)


Our gross profit increased from $162 thousand for the three months ended May 31,
2018 to $340 thousand for the three months ended May 31, 2019. Our gross margin
percentage increased from 8% to 19% for the three months ended May 31, 2019 as a
consequence of the reduction in cost of revenues as more fully described above.

Operating Expenses



                                                  Three Months Ended
                                       May 31, 2019                  May 31, 2018
                                                 % of                          % of           Change       Change
                                    $          Revenues            $         Revenues           $            %
                                                                  (in thousands)
Research and development         $    444              26   %   $    296            15   %   $    148           50   %
Selling, general and
administrative                        597              34   %        799            40   %       (202 )        (25 ) %
Gain on disposals of
long-lived assets, net                  -               -   %       (581 )         (29 ) %        581         (100 ) %
Total operating expenses         $  1,041              60   %   $    514            26   %   $    527          103   %


Research and development Our research and development expenses were $444
thousand and $296 thousand for the three months ended May 31, 2019 and 2018,
respectively. The increase was primary due to a $10 thousand increase in payroll
and compensation and a $151 thousand increase in materials and supplies used for
our new products, offset partially by decreases in various other expenses.

Selling, general and administrative Our selling, general and administrative
expenses decreased from $799 thousand for the three months ended May 31, 2018 to
$597 thousand for the three months ended May 31, 2019. The decrease was mainly
attributable to a $16 thousand decrease in payroll and stock based compensation
and a $175 thousand decrease in professional service fees and insurance fees.



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Gain on disposal of long-lived assets, net 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 and a gain of $581
thousand was recognized as a result for the three months ended May 31, 2018.

Other Income (Expenses)



                                                          Three Months Ended
                                              May 31, 2019                 May 31, 2018
                                                        % of                         % of
                                             $        Revenues           $         Revenues
                                                            (in thousands)
 Interest expenses, net                   $   (74 )          (4 ) %   $    (7 )            -   %
 Other income, net                             94             5   %        78              4   %

Foreign currency transaction loss, net (177 ) (10 ) % (45 )

           (2 ) %

Total other income (expenses), net $ (157 ) (9 ) % $ 26

              2   %




Interest expenses, net The increase in interest expenses, net was primarily due
to the increase in debt balance, resulting from our entry into loan agreements
on January 8, 2019 with each of our Chairman and Chief Executive Officer and our
largest shareholder, with aggregate amounts of $3.2 million, and an annual
interest rate of 8%.

Other income, net Our other income consists primarily of rental income from the lease of spare space in our Hsinchu building, net of related depreciation charge. The increase was mainly attributable to a new lease agreement of B1 floor of our Hsinchu building starting from May 2019.


Foreign currency transaction loss, net We recognized a net foreign currency
transaction loss of $177 thousand and $45 thousand for the three months ended
May 31, 2019 and 2018, respectively, primarily due to the depreciation of the
U.S. dollar against the NT dollar from bank deposits and accounts receivables.

Income Tax Expense


Our effective tax rate is expected to be approximately zero for fiscal 2019 and
was zero for fiscal 2018, since Taiwan SemiLEDs incurred losses, and because we
provided a full valuation allowance on all deferred tax assets, which consisted
primarily of net operating loss carryforwards and foreign investment loss.

On December 22, 2017, the U.S. Tax Cuts and Jobs Act was adopted, which among
other effects, reduced the U.S. federal corporate income tax rate to 21% from
34% (or 35% in certain cases) beginning in 2018, requires companies to pay a
one-time transition tax on certain unrepatriated earnings from non-U.S.
subsidiaries that is payable over eight years, makes the receipt of future
non-U.S. sourced income of non-U.S. subsidiaries tax-free to U.S. companies and
creates a new minimum tax on the earnings of non-U.S. subsidiaries relating to
the parent's deductions for payments to the subsidiaries.

Net Gain Attributable to Noncontrolling Interests



                                                                 Three Months Ended
                                                   May 31, 2019                      May 31, 2018
                                                                % of                              % of
                                               $              Revenues           $              Revenues
                                                                   (in thousands)
Net gain attributable to noncontrolling
interests                                 $         1                  -   % $        -                  -   %




We recognized net gain attributable to non-controlling interests of $1 thousand
for the three months ended May 31, 2019, which was attributable to the share of
the net losses of Taiwan Bandaoti Zhaoming Co., Ltd held by the remaining
non-controlling holders. As of May 31, 2019, non-controlling interests
represented 3.29% equity interest in Taiwan Bandaoti Zhaoming CO., Ltd.





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Nine months Ended May 31, 2019 Compared to the Nine months Ended May 31, 2018



                                        Nine Months Ended
                            May 31, 2019                May 31, 2018
                                      % of                        % of           Change      Change
                           $        Revenues           $        Revenues           $            %
                                                      (in thousands)
  LED chips             $    91             2   %   $   193             3   %   $   (102 )       (53 ) %
  LED components          3,392            78   %     3,641            66   

% (249 ) (7 ) %

  Lighting products         466            11   %       825            15   

% (359 ) (44 ) %

  Other revenues(1)         398             9   %       886            16   

% (488 ) (55 ) %

  Total revenues, net     4,347           100   %     5,545           100   

% (1,198 ) (22 ) %

  Cost of revenues        4,224            97   %     5,775           104   

% (1,551 ) (27 ) %

  Gross profit (loss)   $   123             3   %   $  (230 )          (4 ) %   $    353        (153 ) %



(1) 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 22% from $5.5 million for the nine months ended May
31, 2018 to $4.3 million for the nine months ended May 31, 2019. The $1.2
million decrease in revenues reflects a $102 thousand decrease in revenues
attributable to sales of LED chips, a $249 thousand decrease in sales of LED
components, a $359 thousand decrease in revenues attributable to sales of
lighting products, and a $488 thousand decrease in revenues attributable to
other revenues.

Revenues attributable to the sales of our LED chips represented 2% and 3% of our
revenues for the nine months ended May 31, 2019 and 2018, respectively. The
decrease of 53% in revenues attributable to sales of LED chips was a result of a
decrease in the volume of LED chips sold, offset slightly by a higher average
selling price, primarily due to our strategic plan to place greater emphasis on
the sales of LED components rather than the sales of LED chips.

Revenues attributable to the sales of our LED components represented 78% and 66%
of our revenues for the nine months ended May 31, 2019 and 2018, respectively.
The decrease in revenues attributable to sales of LED components was primarily
due to lower volumes sold for the UV LED product, which we particularly focus on
within the niche LED markets.

Revenues attributable to the sales of lighting products represented 11% and 15%
of our revenues for the nine months ended May 31, 2019 and 2018, respectively.
Revenues attributable to the sales of lighting products was $359 thousand lower
for the nine months ended May 31, 2019 primarily due to a slowdown in demand on
LED luminaries and retrofits and fewer non-recurring project-based orders for
LED lighting products compared to the nine months ended May 31, 2018.

Cost of Revenues


Our cost of revenues decreased by 27% from $5.8 million for the nine months
ended May 31, 2018 to $4.2 million for the nine months ended May 31, 2019. The
decrease in cost of revenues was primarily due to the effect of our ongoing cost
reduction efforts, a decrease in volume sold and decreases in depreciation
expenses and idle capacity charges associated with property, plant and
equipment.

Gross Profit (Loss)


Our gross profit increased from a loss of $230 thousand for the nine months
ended May 31, 2018 to a profit of $123 thousand for the nine months ended May
31, 2019. Our gross margin percentage was 3% for the nine months ended May 31,
2019, as compared to negative 4% for the nine months ended May 31, 2018 as a
consequence of the reduction in cost of revenues as more fully described above.





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Operating Expenses



                                                  Nine Months Ended
                                       May 31, 2019                 May 31, 2018
                                                 % of                         % of           Change       Change
                                    $          Revenues            $        Revenues           $            %
                                                                  (in thousands)
Research and development         $  1,076              25   %   $   703            13   %   $    373           53   %
Selling, general and
administrative                      1,973              45   %     2,313            42   %       (340 )        (15 ) %
Gain on disposals of
long-lived assets, net               (288 )            (7 ) %      (790 )         (14 ) %        502          (64 ) %
Total operating expenses         $  2,761              63   %   $ 2,226            41   %   $    535            -   %




Research and development Our research and development expenses were $1.1 million
and $703 thousand for the nine months ended May 31, 2019 and 2018, respectively.
The increase was primary due to a $149 thousand increase in payroll and
compensation and a $224 increase in materials and supplies used for our new
products, offset by a decrease in depreciation and amortization expense.

Selling, general and administrative Our selling, general and administrative
expenses decreased from $2.3 million for the nine months ended May 31, 2018 to
$2.0 million for the nine months ended May 31, 2019. The decrease was mainly
attributable to a $50 thousand decrease in payroll and stock based compensation,
a $230 thousand decrease in professional service fees and insurance fees due to
a reversal of an accrual, and decrease in various expenses.

Gain on disposal of long-lived assets, net


We recognized a net gain of $288 thousand and $790 thousand on the disposal of
long-lived assets for the nine months ended May 31, 2019 and 2018, respectively.
Due to the excess capacity charges that we have experienced for the last few
years, considering the risk of technological obsolescence and according to the
production plan built based on our sales forecast, we disposed of certain of our
idle equipment.

Other Income (Expenses)



                                                           Nine Months Ended
                                               May 31, 2019                 May 31, 2018
                                                         % of                         % of
                                             $         Revenues           $         Revenues
                                                            (in thousands)
 Interest expenses, net                   $   (115 )          (2 ) %   $   (22 )            -   %
 Other income, net                              48             1   %       625             11   %
 Foreign currency transaction gain, net         20             -   %         3              -   %

Total other income (expenses), net $ (47 ) (1 ) % $ 606

             11   %




Interest expenses, net The increase in interest expenses, net was primarily due
to the increase in debt balance, resulting from our entry into loan agreements
on January 8, 2019 with each of our Chairman and Chief Executive Officer and our
largest shareholder, with aggregate amounts of $3.2 million, and an annual
interest rate of 8%.

Other income, net Other income for the nine months ended May 31, 2018 primarily
consists of sales of patents offset by their commission expense and cost. Other
expenses for the nine months ended May 31, 2019 consists primarily of rental
income from the lease of spare space in our Hsinchu building, net of related
depreciation charge, and offset by the settlement of a lawsuit with Epistar.

Foreign currency transaction gain, net We recognized net foreign currency
transaction gain of $20 thousand and $3 thousand for the nine months ended May
31, 2019 and 2018, 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.





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Income Tax Expense



Our effective tax rate is expected to be approximately zero for fiscal 2019 and
was zero for fiscal 2018, since Taiwan SemiLEDs incurred losses, and because we
provided a full valuation allowance on all deferred tax assets, which consisted
primarily of net operating loss carryforwards and foreign investment loss.

On December 22, 2017, the U.S. Tax Cuts and Jobs Act was adopted, which among
other effects, reduced the U.S. federal corporate income tax rate to 21% from
34% (or 35% in certain cases) beginning in 2018, requires companies to pay a
one-time transition tax on certain unrepatriated earnings from non-U.S.
subsidiaries that is payable over eight years, makes the receipt of future
non-U.S. sourced income of non-U.S. subsidiaries tax-free to U.S. companies and
creates a new minimum tax on the earnings of non-U.S. subsidiaries relating to
the parent's deductions for payments to the subsidiaries.

Net Loss Attributable to Noncontrolling Interests



                                                                  Nine Months Ended
                                                   May 31, 2019                      May 31, 2018
                                                                % of                              % of
                                                $             Revenues           $              Revenues
                                                                   (in thousands)
Net loss attributable to noncontrolling
interests                                  $        (1 )               -   % $        -                  -




We recognized net loss attributable to non-controlling interests of $1 thousand
for the nine months ended May 31, 2019, which was attributable to the share of
the net losses of Taiwan Bandaoti Zhaoming Co., Ltd held by the remaining
non-controlling holders. As of May 31, 2019, non-controlling interests
represented 3.29% equity interest in Taiwan Bandaoti Zhaoming CO., Ltd.

Liquidity and Capital Resources


As of May 31, 2019 and August 31, 2018, we had cash and cash equivalents of $1.1
million and $3.4 million, respectively, which were predominately held in U.S.
dollar denominated demand deposits and/or money market funds.

As of July 8, 2019, we had no available credit facility.


Our long-term debt, which consisted of NT dollar denominated long-term notes and
loans from our Chairman and our largest shareholder, totaled $5.2 million and
$2.3 million as of May 31, 2019 and August 31, 2018, respectively.

Our NT dollar denominated long-term notes, totaled $2.0 million and $2.3 million
as of May 31, 2019 and August 31, 2018, respectively. These long-term notes
carry an interest rate of 1.62%, based on the annual time deposit rate plus a
specific spread, as of both May 31, 2019 and August 31, 2018, are payable in
monthly installments, and are secured by our property, plant and equipment.
These long-term notes do not have prepayment penalties or balloon payments upon
maturity.

• The first note payable requires monthly payments of principal and interest

in the amount of $13 thousand over the 15-year term of the note with final

payment to occur in May 2024 and, as of May 31, 2019, our outstanding

balance on this note payable was approximately $731 thousand.

• The second note payable requires monthly payments of principal and

interest in the amount of $17 thousand over the 15-year term of the note

with final payment to occur in December 2025 and, as of May 31, 2019, our

outstanding balance on this note payable was approximately $1.3 million.

Property, plant and equipment pledged as collateral for our notes payable were $3.8 million and $4.2 million as of May 31, 2019 and August 31, 2018, 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,
unless the loans are sooner accelerated pursuant to the loan agreements. As of
May 31, 2019, these loans totaled $3.2 million. The loans are secured by a
second priority security interest on our headquarters building.



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We have incurred significant losses since inception, including net losses
attributable to SemiLEDs stockholders of $3.0 million and $4.1 million during
the years ended August 31, 2018 and 2017, respectively. Net cash used in
operating activities for the year ended August 31, 2018 was $1.2 million. As of
August 31, 2018, we had cash and cash equivalents of $3.4 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. On
July 5, 2019, we entered into two new loan agreements totaling an aggregate
amount of $3.2 million (NT$100 million) to refinance an existing real estate
loan of $2.0 million (NT$62 million) and provide for operating capital of $1.2
million (NT$38 million).

Based on our current financial projections and assuming the successful
implementation of our liquidity plans, we believe that we will have sufficient
sources of liquidity to fund our operations and capital expenditure plans for
the next 12 months. However, there can be no assurances that our planned
activities will be successful in reducing losses and preserving cash. If we are
not able to generate positive cash flows from operations, we may need to
consider alternative financing sources and seek additional funds through public
or private equity financings or from other sources, or refinance our
indebtedness, to support our working capital requirements or for other purposes.
There can be no assurance that additional debt or equity financing will be
available to us or that, if available, such financing will be available on terms
favorable to us.

Cash Flows

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
                                                         May 31, 2019       May 31, 2018
Net cash used in operating activities                   $       (2,874 )   $         (273 )
Net cash provided by (used in) investing activities     $       (2,571 )   $          663
Net cash provided by (used in) financing activities     $        2,951     $         (255 )



Cash Flows Used In Operating Activities


Net cash used in operating activities for the nine months ended May 31, 2019 was
$2.9 million while net cash used in operating activities for the nine months
ended May 31, 2018 was $273 thousand. Cash flows used in operating activities
for the nine months ended May 31, 2019 was $2.6 million more, primary
attributable to and a decrease of $1.3 million in cash collected from customers
and an increase of $925 thousand in inventory.

Cash Flows Provided by (Used In) Investing Activities


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

Net cash provided by investing activities for the nine months ended May 31, 2018
was $663 thousand, consisting primarily of $913 thousand of proceeds from sales
of machinery and equipment, offset in part by the purchases of machinery and
equipment.

Cash Flows Provided by (Used In) Financing Activities


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

Net cash used in financing activities for the nine months ended May 31, 2018 was $255 thousand, primarily attributable to the repayments on long-term debt.





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Capital Expenditures

We had capital expenditures of $73 thousand and $247 thousand for the nine
months ended May 31, 2019 and 2018, 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, 2019, we did not engage in any off-balance sheet arrangements. We do not have any interests in variable interest entities.

© Edgar Online, source Glimpses

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