SEMILEDS CORPORATION 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 ofSemiLEDs 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.
• 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 .
• Our ability to maintain compliance with the continued listing
requirements to avoid our stock being delisted from the Nasdaq Capital
Market.
• 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.
• 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 besufficiently
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 productobsolescence,
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.
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• Adverse development in those selected markets, including the United
States , Japan , Germany and Netherlands , where our revenues are
concentrated, including the impact of the COVID-19 pandemic and
inflation on customer demand.
• Our ability to develop and execute upon a new strategy to exploit the
China andIndia market. • 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 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
to make dividends and other payments to SemiLEDs Corporation .
• Our ability to obtain necessary regulatory approvals to make further
investments in Taiwan SemiLEDs.
• Catastrophic events such as fires, earthquakes, floods, tornados,
tsunamis, typhoons, pandemics, including the COVID-19 pandemic, wars,
terrorist activities and other similar events, particularly if these
events occur at or near our operations, or the operations of our
suppliers, contract manufacturers and customers.
• The effect of the legal system in
• Labor shortages, strikes and other disturbances that affect our operations.
• Deterioration in the relations between the PRC andTaiwan governments. • Fluctuations in the exchange rate among theU.S. dollar, the NewTaiwan , or NT, dollar, the Japanese Yen and other currencies in which our sales, raw materials and component purchases and capital expenditures are denominated. 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 endedAugust 31, 2021 , or the 2021 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 theSecurities and Exchange Commission , or theSEC . 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 2021 Annual Report, and in other filings with theSEC . 17
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Table of Contents 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, includingthe United States ,Japan ,Germany andNetherlands . 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;
• manufacturing extremely small footprint LEDs with optimized yield, ideal
for Mini LED applications;
• developing a LED structure that generally consists of multiple epitaxial
layers which are vertically-stacked on top of a copper alloy base;
• developing low cost Chip Scaled Packaging (CSP) technology; and
• developing multi-pixel Mini LED packages for commercial displays.
These technical capabilities enable us to produce LED chips, LED component, LED
modules and System products. We believe these capabilities and know-how should
also allow us to reduce our manufacturing costs and our dependence on sapphire,
a costly raw material used in the production of sapphire-based LED devices.
We were incorporated in the State of Delaware on January 4, 2005 . We are a
holding company for various wholly and majority owned subsidiaries. SemiLEDs
Optoelectronics Co., Ltd. , or Taiwan SemiLEDs, is our wholly owned operating
subsidiary, where a substantial portion of our assets are held and located,
where a portion of our research, development, manufacturing and sales activities
take place. Taiwan SemiLEDs owns an approximately 97% equity interest in Taiwan
Bandaoti Zhaoming Co., Ltd. , formerly known as Silicon Base Development, Inc. ,
which is engaged in the research, development, manufacture, and substantial
portion of marketing and sale of LED products, including lighting fixtures and
systems, and where most of our employees are based.
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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:
• COVID-19 Pandemic. In
the outbreak of COVID-19 as a pandemic, which continues to spread
throughout the world. As a result, and in consideration of the health and
well-being of our employees, customers and communities, and in support of
efforts to contain the spread of the virus, we have taken several
precautionary measures and adjusted our operational needs. Our workplaces
are operating under enhanced measures to ensure the health and safety of
our employees, including limiting the visitors coming into our workplace
and using videoconferencing for meetings when possible. Our business,
financial condition, liquidity and operating results have been, and will
continue to be, adversely affected by COVID-19 and related restrictions.
The conditions caused by the COVID-19 pandemic have adversely affected our
customers' ability or willingness to purchase our products or services,
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 factorsrelated to the COVID-19 pandemic that are not within our control. 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 did not need to paythe 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. 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.
• 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 will
have a strong impact on the demand of LED chips generally and, as aresult, 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 higherefficacy 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.
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• Changes in our product mix. We anticipate that our gross margins will
continue to fluctuate from period to period as a result of the mix of
products that we sell and the 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 seethe 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 greateremphasis 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 andcash 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 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, nicheimaging light engines, horticultural lighting and high standard commercial
lighting. 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.
• General economic conditions and geographic concentration. Many countries
including
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
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 six months ended
customers, in the aggregate, accounted for 58% and 62% of our revenues,
respectively.
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• 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
agreed to dismiss amended complaints filed against each other without
prejudice. We agreed to the entry of a permanent injunction that was
effective
others in) making, using, importing, selling and/or offering to sell in
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 claimsagainst 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 toincur additional costs and expenses, and adversely affect our financial
condition and results of operations.
• Cash position. Our cash and cash equivalents increased to
of
due to the sale of 344,391 shares of common stock in the fourth quarter of
fiscal 2021 for net proceeds of $4.0 million under our ATM program. We
have implemented actions to accelerate operating cost reductions andimprove 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. In
convertible unsecured promissory notes with a principal sum of
of which $600 thousand of convertible notes were converted into 200
thousand shares of common stock in May 2020 . On May 26, 2021 the Notes
were extended with the same terms and interest rate for one year and
mature on
principal of these notes totaled
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.
Critical Accounting Policies and Estimates
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.
Income taxes
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.
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Table of Contents Exchange Rate Information We are aDelaware corporation and, underSEC requirements, must report our financial position, results of operations and cash flows in accordance with accounting principles generally accepted inthe United States of America , orU.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 intoU.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 toU.S. dollars were made at the exchange rates as set forth in the statistical release of theBank of Taiwan . OnFebruary 28, 2022 , the exchange rate was 28.03 NT dollars toone U.S. dollar . OnApril 5, 2022 , the exchange rate was 28.70 NT dollars toone U.S. dollar . No representation is made that the NT dollar orU.S. dollar amounts referred to herein could have been or could be converted intoU.S. dollars or NT dollars, as the case may be, at any particular rate or at all.
Results of Operations
Three Months EndedFebruary 28, 2022 Compared to the Three Months EndedFebruary 28, 2021 Three Months Ended February 28, 2022 February 28, 2021 % of % of Change Change $ Revenues $ Revenues $ % (in
thousands)
LED chips$ 78 4 %$ 50 4 %$ 28 56 % LED components 1,569 72 % 752 62 % 817 109 % Lighting products 142 6 % 152 13 % (10 ) (7 ) % Other revenues(1) 387 18 % 252 21 % 135 54 % Total revenues, net 2,176 100 % 1,206 100 % 970 80 % Cost of revenues 1,653 76 % 965 80 % 688 71 % Gross profit$ 523 24 %$ 241 20 %$ 282 117 %
(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 increased by 80% to$2.2 million for the three months endedFebruary 28, 2022 from$1.2 million for the three months endedFebruary 28, 2021 . The increase in revenues was driven primarily by a$817 thousand increase in sales of LED components and a$28 thousand increase in sales of LED chips and a$135 thousand increase in other revenue, offset in part by a$10 thousand decrease in lighting products. Revenues attributable to the sales of our LED chips were$78 thousand and$50 thousand , representing 4% of our revenues for each of the three months endedFebruary 28, 2022 andFebruary 28, 2021 , the increase was primarily due to varying volumes sold for the LED chips. We have adopted a strategy to adjust our product mix by exiting certain high volume but low unit selling price product lines in response to the general trend of lower average selling prices for products that have been available in the market for some time and to focus on profitable products. Revenues attributable to the sales of our LED components were$1.6 million and$752 thousand , representing 72% and 62%, respectively, of our revenues for the three months endedFebruary 28, 2022 andFebruary 28, 2021 , 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 13% of our revenues for the three months endedFebruary 28, 2022 andFebruary 28, 2021 , respectively. Revenues attributable to the sales of lighting products were slightly higher for the three months endedFebruary 28, 2022 primarily due to higher in demand for LED lighting products. 22
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Revenues attributable to other revenues were$387 thousand and$ 252 thousand , representing 18% and 21% of our revenues for the three months endedFebruary 28, 2022 andFebruary 28, 2021 , respectively. The increase in revenues attributable to other revenues was primarily due to the non-recurring sale of raw materials in the three months endedFebruary 28, 2022 .
Cost of Revenues
Our cost of revenues increased by 71% from$965 thousand for the three months endedFebruary 28, 2021 to$1.7 million for the three months endedFebruary 28, 2022 . The increase in cost of revenues was primarily due to the increase in the volume of products sold. Gross Profit Our gross profit increased from$241 thousand for the three months endedFebruary 28, 2021 to$523 thousand for the three months endedFebruary 28, 2022 . The increase was primarily a consequence of focusing on profitable products described above. Operating Expenses Three Months Ended February 28, 2022 February 28, 2021 % of % of Change Change $ Revenues $ Revenues $ % (in thousands) Research and development$ 295 14 %$ 288 24 %$ 7 2 % Selling, general and administrative 746 34 % 667 55 % 79 12 % Gain on disposals of long-lived assets, net (139 ) (6 ) % (207 ) (17 ) % 68 (33 ) % Total operating expenses$ 902 41 %$ 748 62 %$ 154 21 % Research and development Our research and development expenses were$295 thousand and$288 thousand for the three months endedFebruary 28, 2022 andFebruary 28, 2021 , respectively. The increase was primary due to a$39 thousand increase in payroll and compensation and an$11 thousand increase in development project service fee and a$10 thousand in patent write-off and$7 thousand increase in depreciation and amortization, offset partially by a decrease in$59 thousand in material and supplies capacity.
Selling, general and administrative
Our selling, general and administrative expenses increased from
Gain on disposal of long-lived assets, net
We recognized a net gain of$139 thousand and$207 thousand on the disposal of long-lived assets for the three months endedFebruary 28, 2022 and 2021, 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. 23
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Other Income (Expenses)
Three Months Ended
February 28, 2022 February 28, 2021
% of % of
$ Revenues $ Revenues
(in thousands)
Interest expenses, net (92 ) (4 ) (92 ) (7 ) %
Other income, net 385 18 % 307 25 %
Foreign currency transaction gain
(loss), net (66 ) (3 ) % 38 3 %
Total other income (expenses), net $ 227 11 % $ 253 21 %
Interest expenses, net Interest expenses, net was
Other income, net Other income, net increase from$307 thousand for the three months endedFebruary 28, 2021 , to$385 thousand for the three months endedFebruary 28, 2022 , primarily due to higher rental income and payments received under the new Patent Cross-License Agreement with CrayoNano AS. Foreign currency transaction gain (loss), net We recognized a net foreign currency transaction loss of$66 thousand and gain of$38 thousand for the three months endedFebruary 28, 2022 andFebruary 28, 2021 , respectively, primarily due to the appreciation of theU.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 2022 and was zero for fiscal 2021, 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. OnDecember 22, 2017 , theU.S. Tax Cuts and Jobs Act was adopted, which among other effects, reduced theU.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 toU.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 Income Attributable to Noncontrolling Interests
Three Months Ended
February 28, 2022 February 28, 2021
% of % of
$ Revenues $ Revenues
(in thousands)
Net income attributable to
noncontrolling interests $ 20 1 % $ 1 - %
We recognized net income attributable to non-controlling interests of $20
thousand and $1 thousand for the three months ended February 28, 2022 and
February 28, 2021 , respectively, which was attributable to the share of the net
gain of Taiwan Bandaoti Zhaoming Co., Ltd held by the remaining non-controlling
holders. Non-controlling interests represented 3.05% and 3.05% equity interest
in Taiwan Bandaoti Zhaoming Co., Ltd. , as of February 28, 2022 and February 28,
2021 , respectively.
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Six Months EndedFebruary 28, 2022 Compared to the Six Months EndedFebruary 28, 2021 Six Months Ended February 28, 2022 February 28, 2021 % of % of Change Change $ Revenues $ Revenues $ % (in thousands) LED chips$ 96 3 %$ 87 4 %$ 9 10 % LED components 2,690 74 % 1,257 65 % 1,433 114 % Lighting products 227 6 % 321 17 % (94 ) (29 ) % Other revenues(1) 628 17 % 260 14 % 368 142 % Total revenues, net 3,641 100 % 1,925 100 % 1,716 89 % Cost of revenues 2,915 80 % 1,706 89 % 1,209 71 % Gross profit$ 726 20 %$ 219 11 %$ 507 232 %
(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 increased by 89% from$1.9 million for the six months endedFebruary 28, 2021 to$3.6 million for the six months endedFebruary 28, 2022 . The$1.7 million increase in revenues reflects a$1.4 million increase in sales of LED components and a$9 thousand increase in sales of LED chips and$368 thousand increase in revenues attributable to other revenue, offset by a$94 thousand decrease in sales of lighting products. Revenues attributable to the sales of our LED chips were$96 thousand and$87 thousand , representing 3% and 4% of our revenues for the six months endedFebruary 28, 2022 andFebruary 28, 2021 , respectively. The slight increase in revenues attributable to sales of LED chips was a result of an increase in the volume of LED chips sold. Revenues attributable to the sales of our LED components were$2.7 million and$1.3 million , representing 74% and 65%, respectively, of our revenues for the six months endedFebruary 28, 2022 andFebruary 28, 2021 . 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 17% of our revenues for the six months endedFebruary 28, 2022 andFebruary 28, 2021 , respectively. Revenues attributable to the sales of lighting products was$94 thousand lower for the six months endedFebruary 28, 2022 primarily due to less demand for the lighting products sold. Revenues attributable to other revenues represented 17% and 14% of our revenues for the six months endedFebruary 28, 2022 andFebruary 28, 2021 , respectively. The increase in revenues attributable to other revenues was primarily due to the non-recurring sale of raw materials in the six months endedFebruary 28, 2022 .
Cost of Revenues
Our cost of revenues increased by 71% from$1.7 million for the six months endedFebruary 28, 2021 to$2.9 million for the six months endedFebruary 28, 2022 . The increase in cost of revenues was primarily due to the increase in the volume of products sold. Gross Profit Our gross profit increased from$219 thousand for the six months endedFebruary 28, 2021 to$726 thousand for the six months endedFebruary 28, 2022 . Our gross margin percentage was 20% for the six months endedFebruary 28, 2022 , as compared to 11% for the six months endedFebruary 28, 2021 as a consequence of focusing on profitable products described above. 25
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Operating Expenses
Six Months Ended
February 28, 2022 February 28, 2021
% of % of Change Change
$ Revenues $ Revenues $ %
(in thousands)
Research and development $ 699 19 % $ 634 33 % $ 65 10 %
Selling, general and
administrative 1,523 42 % 1,348 70 % 175 13 %
Gain on disposals of
long-lived assets, net (139 ) (4 ) % (284 ) (15 ) % 145 (51 ) %
Total operating expenses $ 2,083 57 % $ 1,698 88 % $ 385 23 %
Research and development
Our research and development expenses were $699 thousand and $634 thousand for
the six months ended February 28, 2022 and February 28, 2021 , respectively. The
increase was primary due to a $81 thousand increase in payroll and compensation
expense due to higher headcount offset partially by a decrease in material and
supplies capacity and less engineering expenses.
Selling, general and administrative
Our selling, general and administrative expenses were$1.5 million and$1.3 million for the six months endedFebruary 28, 2022 andFebruary 28, 2021 . The increase was mainly attributable to a increase of$44 thousand in stock-based compensation and$125 thousand increase in insurance and patent expenses and other various expenses, offset partially by a decrease in professional service fee.
Gain on disposal of long-lived assets, net
We recognized a net gain of$139 thousand and$284 thousand on the disposal of long-lived assets for the six months endedFebruary 28, 2022 andFebruary 28, 2021 , 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) Six Months Ended February 28, 2022 February 28, 2021 % of % of $ Revenues $ Revenues (in thousands) Interest expenses, net (183 ) (6 ) % (184 ) (9 ) % Other income, net 951 26 % 477 24 % Foreign currency transaction gain (loss), net (88 ) (2 ) % 225 12 % Total other income (expenses), net$ 680 19 %$ 518 27 % Interest expenses, net The slight decrease in interest expenses, net was primarily due to the issuance of$2 million of convertible notes inDecember 2019 , and our entry into an aggregate amount of$3.2 million of loan agreements inJanuary 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 inMay 2020 . Other income, net Other income, net for the six months endedFebruary 28, 2022 primarily consist of rental income from the lease of spare space in our Hsinchu building and the cross patent license-fee income. Other income for the six months endedFebruary 28, 2021 primarily consist of rental income from the lease of spare space in our Hsinchu building and subsidies received from theTaiwan government for COVID-19 pandemic. 26
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Foreign currency transaction gain (loss), net We recognized a net foreign currency transaction loss of$88 thousand and gain of$225 thousand for the six months endedFebruary 28, 2022 andFebruary 28, 2021 , respectively, primarily due to the appreciation of theU.S. dollar against the NT dollar from bank deposits and accounts receivables held byTaiwan 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 2022 and was zero for fiscal 2021, since Taiwan SemiLEDs incurred losses, and because we provided a full valuation allowance on all deferred tax assets, which consisted primarily of net operating loss carryforwards and foreign investment loss.
Net Loss Attributable to Noncontrolling Interests
Six Months Ended
February 28, 2022 February 28, 2021
% of % of
$ Revenues $ Revenues
(in thousands)
Net loss attributable to noncontrolling
interests $ 13 - % $ (9 ) -
We recognized net gain of attributable to non-controlling interests of $13
thousand net loss of $9 thousand for the six months ended February 28, 2022 and
February 28, 2021 , respectively, which was attributable to the share of the net
gain (loss) 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. , as of both February 28, 2022 and
2021.
Liquidity and Capital Resources
As ofFebruary 28, 2022 andAugust 31, 2021 , we had cash and cash equivalents of$3.7 million and$4.8 million , respectively, which were predominately held inU.S. dollar denominated demand deposits and/or money market funds.
As of
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$7.4 million and$7.7 million as ofFebruary 28, 2022 andAugust 31, 2021 , respectively. Our NT dollar denominated long-term notes, totaled$3.2 million of bothFebruary 28, 2022 andAugust 31, 2021 . These long-term notes consisted of two loans which we entered into onJuly 5, 2019 , with aggregate amounts of$3.2 million (NT$100 million ). The first loan originally for$2.0 million (NT$62 million ) has an annual floating interest rate equal to the NTD base lending rate plus 0.64% (or 1.465% currently), and was exclusively used to repay the existing loans. 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 an$89 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 fromMay 2020 untilApril 2021 . During this period, we did not need to pay the monthly payments of the principal but only the interest.
• Starting from
of principal in the amount of
term of the note with final payment to occur in July 2027 and, as of
February 28, 2022 , our outstanding balance on this note payable was
approximately $1.7 million .
• Starting from
of principal in the amount of
term of the note with final payment to occur in July 2027 and, as of
February 28, 2022 , our outstanding balance on this note payable was
approximately $1.1 million .
Property, plant and equipment pledged as collateral for our notes payable were
OnJanuary 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 27
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used to return the deposit toFormosa Epitaxy Incorporation in connection with the proposed sale of our headquarters building pursuant to the agreement datedDecember 15, 2015 . We were initially required to repay the loans of$1.5 million onJanuary 14, 2021 and$1.7 million onJanuary 22, 2021 , respectively. OnJanuary 16, 2021 , the maturity date of these loans was extended with same terms and interest rate for one year toJanuary 15, 2022 , and onJanuary 14, 2022 , the maturity date of these loans was further extended with same terms and interest rate for one more year toJanuary 15, 2023 . As ofFebruary 28, 2022 andAugust 31, 2021 , these loans totaled$3.2 million , respectively. The loans are secured by a second priority security interest on our headquarters. OnDecember 6, 2019 and onDecember 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 was due on demand by the Holders on and at any time afterMay 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. OnMay 25, 2020 , the Holders each converted$300 thousand of notes into 100,000 shares of our common stock. OnMay 26, 2021 , the Notes were extended with the same terms and interest rate for one year and now mature onMay 30, 2022 . As ofFebruary 28, 2022 andAugust 31, 2021 , the outstanding principal of these notes totaled$1.4 million . We have incurred significant losses since inception, including net losses attributable toSemiLEDs stockholders of$172 thousand and$255 thousand during the three months endedFebruary 28, 2022 and 2021, respectively. Net cash used in operating activities for the three months endedFebruary 28, 2022 was$424 thousand . As ofFebruary 28, 2022 , we had cash and cash equivalents of$3.7 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. OnJuly 6, 2021 , we entered into a Sales Agreement (the "Sales Agreement") withRoth Capital Partners, LLC (the "Agent"). In accordance with the terms of the Sales Agreement, we may offer and sell from time to time through the Agent our common stock having an aggregate offering price of up to$20,000,000 (the "Placement Shares"). Sales of the Placement Shares, if any, will be made on Nasdaq at market prices by any method permitted by law deemed to be an "at the market offering" as defined in Rule 415 of the Securities Act of 1933, as amended. 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. 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 and second quarter of fiscal 2022. We expect to resume sales of Placement Shares after the issuance of the second 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 or through an extension or conversion of the convertible notes dueMay 2022 . 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 and beyond. However, there can be no assurances that our planned activities will be successful in raising additional capital, reducing losses and preserving cash. If we are not able to generate positive cash flows from operations, we may need to consider alternative financing sources and seek additional funds through public or private equity financings or from other sources, or refinance our indebtedness, to support our working capital requirements or for other purposes. 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):
Six Months Ended
February 28, 2022 February 28, 2021
Net cash used in operating activities $ (1,031 ) $ (625 )
Net cash provided by investing activities $ 84 $ 177
Net cash used in financing activities $ (260 ) $ (12 )
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Cash Flows Used In Operating Activities
Net cash used in operating activities for the six months endedFebruary 28, 2022 andFebruary 28, 2021 were$1.0 million and$625 thousand , respectively. The increase in cash flows used in operating activities for the six months endedFebruary 28, 2022 was primary attributable to a decrease of 284 thousand of net loss and$123 thousand decrease in inventories and$107 thousand decrease in accrued expenses and other current liabilities, offset partially by$110 thousand increase in stock-based compensation expense.
Cash Flows Provided By Investing Activities
Net cash provided by investing activities for the six months endedFebruary 28, 2022 was$84 thousand , consisting primarily of$139 thousand of proceeds from sales of property, plant and equipment, offset in part by$49 thousand of purchases of property, plant and equipment and$6 thousand of payments for development of intangible assets. Net cash provided by investing activities for the six months endedFebruary 28, 2021 was$177 thousand , consisting primarily of$284 thousand of proceeds from sales of property, plant and equipment, offset in part by$97 thousand of purchases of machinery and equipment and$10 thousand of payments for development of intangible assets
Cash Flows Used In Financing Activities
Net cash used in financing activities for the six months ended
Capital Expenditures
We had capital expenditures of$49 thousand and$97 thousand for the six months endedFebruary 28, 2022 andFebruary 28, 2021 , 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.
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