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,
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Declining cash position.
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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 theNASDAQ Stock Market .
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Our ability to maintain compliance with the continued listing requirements to avoid our stock being delisted from the Nasdaq Capital Market.
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The uncertainty and continuing impact of COVID-19 and other health epidemics and outbreaks on our business and the business of our customers.
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The inability of our suppliers or other contract manufacturers to produce products that satisfy our requirements.
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Our ability to implement our cost reduction programs and to execute our restructuring plan effectively.
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Our ability to improve our gross margins, reduce our net losses and restore our operations to profitability.
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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.
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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.
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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.
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Competitive pressures from existing and new companies.
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Our ability to grow our revenues generated from the sales of our products and to control our expenses.
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Loss of any of our key personnel, or our failure to attract, assimilate and retain other highly qualified personnel.
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Intellectual property infringement or misappropriation claims by third parties against us or our customers, including our distributor customers.
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The failure of LEDs to achieve widespread adoption in the general lighting market, or if alternative technologies gain market acceptance.
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The loss of key suppliers or contract manufacturers.
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Our ability to effectively expand or upgrade our production facilities or do so in a timely or cost-effective manner.
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Difficulty in managing our future growth or in responding to a need to contract operations, and the associated changes to our operations.
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Adverse development in those selected markets, including
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Our ability to develop and execute upon a new strategy to exploit the
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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.
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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 inthe United States our accused products and/or any device that includes an accused product afterOctober 1, 2012 as a result of the injunction agreed to in connection with the Cree Inc., or Cree, litigation.
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Loss of customers.
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Failure of our strategy of marketing and selling our products in jurisdictions with limited intellectual property enforcement regimes.
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Lack of marketing and distribution success by our third-party distributors.
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Our customers' ability to produce and sell products incorporating our LED products.
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Our failure to adequately prevent disclosure of trade secrets and other proprietary information.
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Ineffectiveness of our disclosure controls and procedures and our internal control over financial reporting.
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Our ability to profit from future joint ventures, investments, acquisitions and other strategic alliances.
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Impairment of long-lived assets or investments.
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Undetected defects in our products that harm our sales and reputation and adversely affect our manufacturing yields.
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The availability of adequate and timely supply of electricity and water for our manufacturing facilities.
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Our ability to comply with existing and future environmental laws and the cost of such compliance.
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The ability of
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Our ability to obtain necessary regulatory approvals to make further investments
in
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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.
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The effect of the legal system in
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Labor shortages, strikes and other disturbances that affect our operations.
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Deterioration in the relations between the PRC and
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Fluctuations in the exchange rate among theU.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. 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, 2022 , or the 2022 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 2022 Annual Report, and in other filings with theSEC .
Company Overview
We develop, manufacture and sell light emitting diode (LED) chips and LED
components, LED modules and systems. Our products are used for general lighting
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
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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 ,Netherlands andTaiwan . 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:
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reusing sapphire substrate in subsequent production runs;
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optimizing our epitaxial growth processes to create layers that efficiently convert electrical current into light;
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employing a copper alloy base manufacturing technology to improve our chip's thermal and electrical performance;
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utilizing nanoscale surface engineering to improve usable light extraction;
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manufacturing extremely small footprint LEDs with optimized yield, ideal for Mini LED applications;
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developing a LED structure that generally consists of multiple epitaxial layers which are vertically-stacked on top of a copper alloy base;
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developing low cost
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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 theState of Delaware onJanuary 4, 2005 . We are a holding company for two 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. TaiwanSemiLEDs owns an approximately 97.37% equity interest inTaiwan Bandaoti Zhaoming Co., Ltd. , formerly known asSilicon 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.
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:
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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. InJuly 2021 , we established an at-the-market equity program ("ATM") that allows us to sell up to$20 million of shares of our common stock from time to time. During fiscal 2022, we sold 286,328 shares of our common stock pursuant to the ATM program for net proceeds of$964,473 . However, we may not be able to obtain new debt funding or sell additional equity securities on terms that are favorable to us, or at all. The raising of additional debt 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.
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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 a result, for our LED chips, LED components and LED lighting products.
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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.
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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 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.
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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.
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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, niche imaging 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.
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General economic conditions and geographic concentration. Many countries includingthe United States and theEuropean 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, includingthe United States ,Japan ,Taiwan andNetherlands . 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 six months endedFebruary 28, 2023 , sales to our three largest customers, in the aggregate, accounted for 72% and 68% of our revenues, respectively. Revlon, our largest customer in fiscal 2022, filed for Chapter 11 bankruptcy inJune 2022 , which resulted in a write off receivables of$126 thousand for the year endedAugust 31, 2022 . If Revlon is not able to reorganize its business successfully, our revenue and financial results could be adversely impacted.
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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. 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.
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Cash position. Our cash and cash equivalents increased to$3.9 million as ofFebruary 28, 2023 from$3.7 million as ofFebruary 28, 2022 , primarily due to the collection of accounts receivable and advances from customers. 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. InDecember 2019 , we issued convertible unsecured promissory notes with a principal sum of$2 million , of which,$600 thousand convertible notes were converted into 200 thousand shares of common stock inMay 2020 . OnMay 26, 2022 , the Notes were extended with the same terms and interest rate for one year and now mature onMay 30, 2023 . As ofFebruary 28, 2023 and 2022, the outstanding principal of these notes totaled$1.4 million . 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.
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 recognizes the amount of revenue when the Company satisfies a
performance obligation to which it expects to be entitled for the transfer of
promised goods or services to customers. The Company obtains written purchase
authorizations from its customers as evidence of an arrangement and these
authorizations generally provide for a specified amount of product at a fixed
price. Generally, the Company considers delivery to have occurred at the time of
shipment as this is generally when title and risk of loss for the products will
pass to the customer. The Company provides its customers with limited rights of
return for non-conforming shipments and product warranty claims. Based on
historical return percentages, which have not been material to date, and other
relevant factors, the Company estimates its potential future exposure on
recorded product sales, which reduces product revenues in the consolidated
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statements of operations and reduces accounts receivable in the consolidated balance sheets. The Company also provides standard product warranties on its products, which generally range from three months to two years. Management estimates the Company's warranty obligations as a percentage of revenues, based on historical knowledge of warranty costs and other relevant factors. To date, the related estimated warranty provisions have been insignificant. Refer to Note 2 to the Unaudited Condensed Consolidated Financial Statements for our revenue recognition policies. Accounts Receivable The allowance for doubtful accounts is based on management's assessment of the collectability of customer accounts. Management regularly reviews the allowance by considering certain factors such as historical experience, industry data, credit quality, age of accounts receivable balances and current economic conditions that may affect a customer's ability to pay. No bad debt expenses were recognized during the three months endedFebruary 28, 2023 and 2022.
Write-down of Inventories
The Company writes down excess and obsolete inventory to its estimated net realizable value. 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. For finished goods and work in process, if the estimated net realizable value for an inventory item, which is the estimated selling price in the ordinary course of business, less reasonably predicable costs to completion and disposal, is lower than its cost, the specific inventory item is written down to its estimated net realizable value. Net realizable value for raw materials is based on replacement cost. Provisions for inventory write downs are included in cost of revenues in the consolidated statements of operations. Once written down, inventories are carried at this lower cost basis until sold or scrapped. Inventory writedowns to estimated net realizable values were$196 thousand and$185 thousand for the three months endedFebruary 28, 2023 and 2022, respectively.
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. 21
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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, 2023 , the exchange rate was 30.48 NT dollars toone U.S. dollar . OnApril 6, 2023 , the exchange rate was 30.52 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, 2023 Compared to the Three Months EndedFebruary 28, 2022 Three Months Ended February 28, 2023 February 28, 2022 % of % of Change Change $ Revenues $ Revenues $ % (in
thousands)
LED chips$ 22 2 %$ 78 4 %$ (56 ) (72 ) % LED components 380 33 % 1,569 72 % (1,189 ) (76 ) % Lighting products 56 5 % 142 6 % (86 ) (61 ) % Other revenues (1) 694 60 % 387 18 % 307 79 % Total revenues, net 1,152 100 % 2,176 100 % (1,024 ) (47 ) % Cost of revenues 890 77 % 1,653 76 % (763 ) (46 ) % Gross profit$ 262 23 %$ 523 24 %$ (261 ) (50 ) %
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(1) Other includes primarily revenues attributable to the sale of epitaxial wafers, scraps and raw materials, the provision of services and a joint development project with CrayoNano AS.
Revenues, net
Our revenues decreased by 47% to$1.2 million for the three months endedFebruary 28, 2023 from$2.2 million for the three months endedFebruary 28, 2022 . The decrease in revenues was driven primarily by a$1.2 million decrease in sales of LED components and a$56 thousand decrease in sales of LED chips and a$86 thousand decrease in lighting products, offset in part by a$307 thousand increase in other revenues. Revenues attributable to the sales of our LED chips were$22 thousand and$78 thousand , representing 2% and 4% of our revenues for each of the three months endedFebruary 28, 2023 andFebruary 28, 2022 . The decrease 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$380 thousand and$1.6 million , representing 33% and 72%, respectively, of our revenues for the three months endedFebruary 28, 2023 andFebruary 28, 2022 , respectively. The decrease in revenues attributable to sales of LED components was primarily due to less volumes sold. Revenues attributable to the sales of lighting products were$56 thousand and$142 thousand , representing 5% and 6% of our revenues for the three months endedFebruary 28, 2023 andFebruary 28, 2022 , respectively. Revenues attributable to the sales of lighting products were lower for the three months endedFebruary 28, 2023 primarily due to lower in demand for LED lighting products. Revenues attributable to other revenues were$694 thousand and$387 thousand , representing 60% and 18% of our revenues for the three months endedFebruary 28, 2023 andFebruary 28, 2022 , respectively. The increase in revenues attributable to other revenues was primarily due to the non-recurring sale of raw materials and a joint development project with CrayoNano AS beginning inJanuary 2022 .
Cost of Revenues
Our cost of revenues decreased by 46% from$1.7 million for the three months endedFebruary 28, 2022 to$890 thousand for the three months endedFebruary 28, 2023 . The decrease in cost of revenues was primarily due to the decrease in the volume of products sold. 22
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Table of Contents Gross Profit Our gross profit decreased by 50% from$523 thousand for the three months endedFebruary 28, 2022 to$262 thousand for the three months endedFebruary 28, 2023 . The decrease of gross margin was primarily a consequence of a proportionate decrease in the sales of products. Operating Expenses Three Months Ended February 28, 2023 February 28, 2022 % of % of Change Change $ Revenues $ Revenues $ % (in thousands) Research and development$ 295 26 %$ 295 14 % $ - - % Selling, general and administrative 669 58 % 746 34 % (77 ) (10 ) % Gain on disposals of long-lived assets, net - - % (139 ) (6 ) % 139 (100 ) % Total operating expenses$ 964 84 %$ 902 41 %$ 62 7 % Research and development
Our research and development expenses were
Selling, general and administrative
Our selling, general and administrative expenses decreased from
Gain on disposal of long-lived assets, net
We recognized a net gain of$0 thousand and$139 thousand on the disposal of long-lived assets for the three months endedFebruary 28, 2023 and 2022, 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) Three Months Ended February 28, 2023 February 28, 2022 % of % of $ Revenues $ Revenues (in thousands) Interest expenses, net (65 ) (6 ) (92 ) (4 ) % Other income, net 229 20 % 385 18 % Foreign currency transaction loss, net (7 ) (1 ) % (66 ) (3 ) % Total other income (expenses), net$ 157 14 %$ 227 11 % 23
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Interest expenses, net Interest expenses, net which primarily consisted of accrued interest payment on convertible notes, NT dollar denominated long-term notes and$3.2 million of loans with our Chairman and Chief Executive Officer and our largest shareholder. The decrease in interest expense, net was primarily due to higher interest income for the three months endedFebruary 28, 2023 . Other income, net Other income, net decrease from$385 thousand for the three months endedFebruary 28, 2022 , to$229 thousand for the three months endedFebruary 28, 2023 , primarily due to higher rental income and payments received under the new Patent Cross-License Agreement with CrayoNano AS for the three months endedFebruary 28, 2022 .
Foreign currency transaction loss, net We recognized a net foreign currency
transaction loss of
Income Tax Expense Our effective tax rate is expected to be approximately zero for fiscal 2023 and was zero for fiscal 2022, 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 (Loss) Income Attributable to Noncontrolling Interests
Three Months Ended
February 28, 2023 February 28, 2022
% of % of
$ Revenues $ Revenues
(inthousands)
Net (loss) income attributable to noncontrolling interests$ (4 ) 1 %$ 20 1 % We recognized net loss attributable to non-controlling interests of$4 thousand and a net income of$20 thousand for the three months endedFebruary 28, 2023 and 2022, respectively, which was attributable to the share of the net (loss) gain ofTaiwan Bandaoti Zhaoming Co., Ltd held by the remaining non-controlling holders. Non-controlling interests represented 2.63% and 3.05% equity interest inTaiwan Bandaoti Zhaoming Co., Ltd. , as ofFebruary 28, 2023 and 2022, respectively. Six Months EndedFebruary 28, 2023 Compared to the Six Months EndedFebruary 28, 2022 Six Months Ended February 28, 2023 February 28, 2022 % of % of Change Change $ Revenues $ Revenues $ % (in thousands) LED chips$ 71 3 %$ 96 3 %$ (25 ) (26 ) % LED components 1,215 43 % 2,690 74 % (1,475 ) (55 ) % Lighting products 211 7 % 227 6 % (16 ) (7 ) % Other revenues (1) 1,350 47 % 628 17 % 722 115 % Total revenues, net 2,847 100 % 3,641 100 % (794 ) (22 ) % Cost of revenues 2,122 75 % 2,915 80 % (793 ) (27 ) % Gross profit$ 725 25 %$ 726 20 %$ (1 ) (0 ) %
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(1) Other includes primarily revenues attributable to the sale of epitaxial wafers, scraps and raw materials and the provision of services and a joint development project with CrayoNano AS.
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Table of Contents Revenues, net Our revenues decreased by 22% from$3.6 million for the six months endedFebruary 28, 2022 to$2.8 million for the six months endedFebruary 28, 2023 . The$794 thousand decrease in revenues reflects a$1.5 million decrease in sales of LED components, a$25 thousand decrease in sales of LED chips and a$16 thousand decrease in revenues attributable to lighting products, offset by a$722 thousand increase in other revenues. Revenues attributable to the sales of our LED chips were$71 thousand and$96 thousand , representing 3% of our revenues for both six months endedFebruary 28, 2023 and 2022. The slight decrease in revenues attributable to sales of LED chips was a result of a decrease in the volume of LED chips sold. Revenues attributable to the sales of our LED components were$1.2 million and$2.7 million , representing 43% and 74% of our revenues for the six months endedFebruary 28, 2023 andFebruary 28, 2022 , respectively. The decrease in revenues attributable to sales of LED components was primarily due to less volumes sold. Revenues attributable to the sales of lighting products were$211 thousand and$227 thousand , representing 7% and 6% of our revenues for the six months endedFebruary 28, 2023 andFebruary 28, 2022 , respectively. Revenues attributable to the sales of lighting products were$16 thousand lower for the six months endedFebruary 28, 2023 primarily due to less demand for the lighting products sold. Revenues attributable to other revenues represented 47% and 17% of our revenues for the six months endedFebruary 28, 2023 andFebruary 28, 2022 , respectively. The increase in revenues attributable to other revenues was primarily due to the non-recurring sale of raw materials and a joint development project with CrayoNano AS beginning inJanuary 2022 .
Cost of Revenues
Our cost of revenues decreased by 27% from$2.9 million for the six months endedFebruary 28, 2022 to$2.1 million for the six months endedFebruary 28, 2023 . The decrease in cost of revenues was primarily due to the decrease in the volume of products sold. Gross Profit Our gross profit decreased from$726 thousand for the six months endedFebruary 28, 2022 to$725 thousand for the six months endedFebruary 28, 2023 . Our gross margin percentage was 25% for the six months endedFebruary 28, 2023 , as compared to 20% for the six months endedFebruary 28, 2022 as a consequence of an increase in the sales of products with higher margin. Operating Expenses Six Months Ended February 28, 2023 February 28, 2022 % of % of Change Change $ Revenues $ Revenues $ % (in thousands) Research and development$ 660 23 %$ 699 19 %$ (39 ) (6 ) % Selling, general and administrative 1,421 50 % 1,523 42 % (102 ) (7 ) % Gain on disposals of long-lived assets, net - - % (139 ) (4 ) % 139 (100 ) % Total operating expenses$ 2,081 73 %$ 2,083 57 %$ (2 ) (0 ) %
Research and development
Our research and development expenses were$660 thousand and$699 thousand for the six months endedFebruary 28, 2023 andFebruary 28, 2022 , respectively. The decrease was primary due to a$18 thousand decrease in engineering experiment fee and$14 thousand decrease in professional service fees. 25
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Selling, general and administrative
Our selling, general and administrative expenses were$1.4 million and$1.5 million for the six months endedFebruary 28, 2023 andFebruary 28, 2022 . The decrease was mainly attributable to a decrease of$83 thousand in insurance expense and$22 thousand decrease in patent membership fee and other various expenses.
Gain on disposal of long-lived assets, net
We recognized a net gain of$0 thousand and$139 thousand on the disposal of long-lived assets for the six months endedFebruary 28, 2023 andFebruary 28, 2022 , 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 in the six months endedFebruary 28, 2022 . Other Income (Expenses) Six Months Ended February 28, 2023 February 28, 2022 % of % of $ Revenues $ Revenues (in thousands) Interest expenses, net (152 ) (5 ) % (183 ) (6 ) % Other income, net 471 17 % 951 26 % Foreign currency transaction loss, net (17 ) (1 ) % (88 ) (2 ) % Total other income (expenses), net$ 302 11 %$ 680 19 % Interest expenses, net Interest expenses, net which primarily consisted of accrued interest payment on convertible notes, NT dollar denominated long-term notes and$3.2 million of loans with our Chairman and Chief Executive Officer and our largest shareholder. The decrease in interest expense, net was primarily due to higher interest income for the six months endedFebruary 28, 2023 Other income, net Other income, net decreased from$951 thousand for the six months endedFebruary 28, 2022 , to$471 thousand for the six months endedFebruary 28, 2023 , primarily due to higher rental income and payments received under the new Patent Cross-License Agreement with CrayoNano AS for the six months endedFebruary 28, 2022 .
Foreign currency transaction loss, net We recognized a net foreign currency
transaction loss of
Income Tax Expense Our effective tax rate is expected to be approximately zero for fiscal 2023 and was zero for fiscal 2022, since Taiwan SemiLEDs incurred losses, and because we provided a full valuation allowance on all deferred tax assets, which consisted primarily of net operating loss carryforwards and foreign investment loss.
Net (Loss) Income Attributable to Noncontrolling Interests
Six Months Ended
February 28, 2023 February 28, 2022
% of % of
$ Revenues $ Revenues
(in thousands)
Net (loss) income attributable to
noncontrolling interests $ (1 ) - % $ 13 -
We recognized net loss of attributable to non-controlling interests of $1
thousand net gain of $13 thousand for the six months ended February 28, 2023 and
February 28, 2022 , respectively, which was attributable to the share of the net
(loss) gain of Taiwan Bandaoti Zhaoming Co., Ltd. , held by the remaining
non-controlling holders. Non-controlling interests represented 2.63% and 3.05%
equity interest in Taiwan Bandaoti Zhaoming Co., Ltd. , as of February 28, 2023
and 2022, respectively.
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Liquidity and Capital Resources
This section includes a discussion and analysis of our cash requirements, contingencies, sources and uses of cash, operations, working capital and long-term assets and liabilities.
Contingencies
We have several operating leases with third parties, primarily for land, plant and office spaces inTaiwan , including cancellable and noncancelable leases that expire at various dates betweenDecember 2024 andDecember 2040 . See Note 5, "Commitments and Contingencies" in the notes to our unaudited condensed consolidated financial statements in this Form 10-Q.
Sources and Uses of Cash
As ofFebruary 28, 2023 andAugust 31, 2022 , we had cash and cash equivalents of$3.9 million and$4.3 million , respectively, which were predominately held inU.S. dollar denominated demand deposits and/or money market funds.
As of
Long-term assets and liabilities
Our long-term assets consist primarily of property, plant and equipment, intangible assets, operating lease assets and investments in unconsolidated entities. Our manufacturing rationalization plans have included efforts to utilize our existing manufacturing assets and supply arrangements more efficiently. We believe that near-term access to additional manufacturing capacity, should it be required, could be readily obtained on reasonable terms through manufacturing agreements with third parties. We will continue to look for opportunities to make strategic manufacturing in the future for additional capacity.
Our long-term liabilities consist primarily long-term debt and operating lease liabilities.
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$6.7 million and$6.9 million as ofFebruary 28, 2023 andAugust 31, 2022 , respectively. Our NT dollar denominated long-term notes, totaled$3.2 million of bothFebruary 28, 2023 andAugust 31, 2022 . 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 1.44% (or 2.165% 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 1.82% (or 2.545% currently) and is available for operating capital. These loans are secured by an$81 thousand (NT$2.5 million ) security deposit and a first priority security interest on the Company's headquarters building.
•
Starting fromMay 2021 , the first note payable requires monthly payments of principal in the amount of$25 thousand plus interest over the 74-month term of the note with final payment to occur inJuly 2027 and, as ofFebruary 28, 2023 , our outstanding balance on this note payable was approximately$1.3 million .
•
Starting fromMay 2021 , the second note payable requires monthly payments of principal in the amount of$15 thousand plus interest over the 74-month term of the note with final payment to occur inJuly 2027 and, as ofFebruary 28, 2023 , our outstanding balance on this note payable was approximately$798 thousand .
Property, plant and equipment pledged as collateral for our notes payable were
OnJanuary 8, 2019 , the Company entered into loan agreements with each of the Chairman and Chief Executive Officer and the largest shareholder of the Company, with aggregate amounts of$1.7 million and$1.5 million , respectively, and an annual interest rate of both 8%. All proceeds of the loans were exclusively used to return the deposit toFormosa Epitaxy Incorporation in connection with the cancelled proposed sale of the Company's headquarters building pursuant to the agreement datedDecember 15, 2015 . The Company was required to repay the loans of$1.5 million onJanuary 14, 2021 and$1.7 million onJanuary 22, 2021 , respectively, unless the loans were sooner accelerated pursuant to the loan agreements. 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 second extended with same terms and interest rate for one more year toJanuary 15, 2023 . OnJanuary 13, 2023 , the maturity date of these loans was further extended with same terms and interest rate for one year toJanuary 15, 2024 . As ofFebruary 28, 2023 andAugust 31, 2022 , the outstanding principal of these loans totaled$3.2 million . The loans are secured by a second priority security interest on the headquarters building of the Company. 27
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OnNovember 25, 2019 and onDecember 10, 2019 , the Company issued convertible unsecured promissory notes (the "Notes") toJ.R. Simplot Company , its largest shareholder, andTrung Doan , its Chairman and Chief Executive Officer, (together, the "Holders") with a principal sum of$1.5 million and$500 thousand , respectively, and an annual interest rate of 3.5%. Principal and accrued interest shall be due on demand by the Holders on and at any time afterMay 30, 2021 . OnFebruary 7, 2020 ,J.R. Simplot Company assigned all of its right, title and interest in the Notes toSimplot Taiwan Inc. The outstanding principal and unpaid accrued interest of the Notes may be converted into the Company's common stock based on a conversion price of$3.00 per share, at the option of the Holders any time from the date of the Notes. OnMay 25, 2020 , each of the Holders converted$300,000 of the Notes into 100,000 shares of the Company's common stock. OnMay 26, 2021 , the Notes were extended with the same terms and interest rate for one year and were scheduled to mature onMay 30, 2022 , and onMay 26, 2022 , the Notes were further extended with the same terms and interest rate for one year and now mature onMay 30, 2023 . As ofFebruary 28, 2023 andAugust 31, 2022 , the outstanding principal of these notes totaled$1.4 million . Working Capital We have incurred significant losses since inception, including net losses attributable toSemiLEDs stockholders of$541 thousand and$172 thousand during the three months endedFebruary 28, 2023 and 2022, respectively. Net cash used in operating activities for the six months endedFebruary 28, 2023 was$85 thousand . As ofFebruary 28, 2023 , we had cash and cash equivalents of$3.9 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 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, or the Securities Act. We agreed to 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. During the year endedAugust 31, 2022 , we sold 286,328 shares of common stocks for gross proceeds of$995 thousand with$31 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 2023. We may 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 2023 is approximately$5.1 million , which we expect to fund through the issuance of additional equity under the ATM program and through loan extensions. 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. The loans with each of our Chairman and Chief Executive Officer and our largest shareholder are expected to be extended upon maturity. 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,
February 28, 2023 2022
Net cash used in operating activities $ (85 ) $ (1,031 )
Net cash (used in) provided by investing activities $ (92 ) $ 84
Net cash used in financing activities $
(240 )
Cash Flows Used In Operating Activities
Net cash used in operating activities for the six months endedFebruary 28, 2023 andFebruary 28, 2022 was$85 thousand and$1.0 million , respectively. The decrease in cash flows used in operating activities for the six months endedFebruary 28, 2023 was primary attributable to a decrease of$651 thousand of accounts receivable and$494 thousand increase in accrued expenses and other 28
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current liabilities and a decrease of
Cash Flows (Used In) Provided By Investing Activities
Net cash used in investing activities for the six months endedFebruary 28, 2023 was$92 thousand , consisting primarily of$83 thousand of purchases of property, plant and equipment and$9 thousand of payments for development of intangible assets. 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 machinery and equipment and$6 thousand of payments for development of intangible assets.
Cash Flows Used In Financing Activities
Net cash used in financing activities for the six months endedFebruary 28, 2023 andFebruary 28, 2022 was$240 thousand and$260 thousand , respectively. The decrease was primary attributable to the repayments of long-term debt.
Capital Expenditures
We had capital expenditures of$83 thousand and$49 thousand for the six months endedFebruary 28, 2023 and 2022, 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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