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.
• The outcome of the pending appeal of the trial verdict ordering us to
return the $500,000 partial payment of the uncompleted $1.6 million note
financing and potentially pay pre-judgment interest.
• 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 regain compliance with the minimum stockholders' equity
requirement to avoid our stock being delisted from the
Market.
• The 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 be sufficiently
profitable to cover the costs of developing and producing these products,
as well as providing us additional net income from operations.
• Our ability to effectively develop, maintain and expand our sales and
distribution channels, especially in the niche LED markets, including the
UV LED and architectural lighting that we focus on.
• Our ability to successfully manage our operations in the face of the
cyclicality, rapid technological change, rapid product obsolescence,
declining average selling prices and wide fluctuations in supply and
demand typically found in the LED market.
• Competitive pressures from existing and new companies.
• Our ability to grow our revenues generated from the sales of our products
and to control our expenses.
• Loss of any of our key personnel, or our failure to attract, assimilate
and retain other highly qualified personnel.
• Intellectual property infringement or misappropriation claims by third
parties against us or our customers, including our distributor customers.
• The failure of LEDs to achieve widespread adoption in the general lighting
market, or if alternative technologies gain market acceptance.
• The loss of key suppliers or contract manufacturers.
• Our ability to effectively expand or upgrade our production facilities or
do so in a timely or cost-effective manner.
• Difficulty in managing our future growth or in responding to a need to
contract operations, and the associated changes to our operations.
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• Adverse development in those selected markets, including
revenues are concentrated, including the impact of the COVID-19 pandemic
on customer demand.
• Our ability to develop and execute upon a new strategy to exploit the
China andIndia market. • Our ability to resolve pending litigation on favorable terms.
• 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
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 injurisdictions 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
make dividends and other payments to
• 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 and
• Fluctuations in the exchange rate among the
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, 2020 , or the 2020 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 . 17
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The following discussion and analysis of our financial condition and results of operations is based upon and should be read in conjunction with the unaudited interim condensed consolidated financial statements and the notes and other information included elsewhere in this Quarterly Report, in our 2020 Annual Report, and in other filings with theSEC .
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, includingNetherlands ,Ireland ,Taiwan ,Japan ,the United States ,Germany andIndia . 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 factors
related to the COVID-19 pandemic that are not within our control. Forexample, our largest customer, Revlon, Inc., postponed its regular orders,
which has decreased our sales revenue for the six months ended February
28, 2021, and we cannot foresee any order from Revlon after the ordered
products being shipped. To avoid cash shortage due to the pandemic, we
applied and received subsidies from the Taiwan government. Our bank
granted us a deferment period for twelve months starting from May 2020 .
During this period, we do not need to pay the monthly payments of the
principal but only the interest. We have also devoted ourselves to new
product development and expect these new products could bring in newrevenue, 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 may 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
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 ended
three largest customers, in the aggregate, accounted for 64% and 54% 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 decreased to
of
activities. We have implemented actions to accelerate operating cost
reductions and improve operational efficiencies. The plan is further
enhanced through the fabless business model in which we implemented
certain workforce reductions and are exploring the opportunities to sell
certain equipment related to the manufacturing of vertical LED chips, in
order to reduce the idle capacity charges, minimize our research and
development activities associated with chips manufacturing operation. We
believe we will be able to generate positive cash inflows through the
restructuring of our chip operation and the significant ongoing cost
savings in the form of reduced payroll and research and developmentactivities. The shipment of our new module product and the continued
commercial sales of our UV LED product are expected to grow steadily.
Based on our current financial projections, we believe that we will have
sufficient sources of liquidity to fund our operations and capital
expenditure plans for the next 12 months. Please see "Critical Accounting
Policies and Estimates" for more information about our liquidity plans.
Critical Accounting Policies and Estimates
EffectiveSeptember 1, 2020 , we adopted ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). This standard requires a financial asset (or group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The amendments in ASU 2016-13 require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. There was no material impact on our consolidated financial position, results of operations or cash flows due to the adoption. EffectiveSeptember 1, 2020 , we adopted ASU No. 2018-13, Fair Value Measurement (Topic 820) Disclosure Framework - Change to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13"). ASU 2018-13 removes, modifies and adds certain disclosure requirements in Topic 820, "Fair Value Measurement." ASU 2018-13 eliminates certain disclosures related to transfers and the valuation process, modifies disclosures for investments that are valued based on net asset value, clarifies the measurement uncertainty disclosure, and requires additional disclosures for Level 3 fair value measurements. There was no material impact on our consolidated financial position, results of operations or cash flows due to the adoption. Except as described above, there have been no material changes in the matters for which we make critical accounting policies and estimates in the preparation of our unaudited interim condensed consolidated financial statements for the three months and six months endedFebruary 28, 2021 as compared to those disclosed in our 2020 Annual Report.
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, 2021 , the exchange rate was 28.28 NT dollars toone U.S. dollar . OnApril 6, 2021 , the exchange rate was 28.49 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, 2021 Compared to the Three Months EndedFebruary 29, 2020 Three Months Ended February 28, 2021 February 29, 2020 % of % of Change Change $ Revenues $ Revenues $ % (in
thousands)
LED chips$ 50 4 %$ 36 2 %$ 14 39 % LED components 752 62 % 808 53 % (56 ) (7 ) % Lighting products 152 13 % 124 8 % 28 23 % Other revenues(1) 252 21 % 569 37 % (317 ) (56 ) % Total revenues, net 1,206 100 % 1,537 100 % (331 ) (22 ) % Cost of revenues 965 80 % 989 64 % (24 ) (2 ) % Gross profit$ 241 20 %$ 548 36 %$ (307 ) (56 ) %
(1) Other includes primarily revenues attributable to the sale of epitaxial
wafers, scraps and raw materials and the provision of services.
Revenues, net
Our revenues decreased by 22% to$1.2 million for the three months endedFebruary 28, 2021 from$1.5 million for the three months endedFebruary 29, 2020 . The decrease in revenues was driven primarily by a$56 thousand decrease in sales of LED components and a$317 thousand decrease in other revenue, offset in part by a$14 thousand increase in LED chips and a$28 thousand increase in lighting products. Revenues attributable to the sales of our LED chips were$50 thousand and$36 thousand , representing 4% and 2%, respectively, of our revenues for the three months endedFebruary 28, 2021 andFebruary 29, 2020 , 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$752 thousand and$808 thousand , representing 62% and 53%, respectively, of our revenues for the three months endedFebruary 28, 2021 andFebruary 29, 2020 . The decrease in revenues attributable to sales of LED components was primarily due to the impact of COVID-19 pandemic on customer demand for UV LED components products. Revenues attributable to the sales of lighting products represented 13% and 8% of our revenues for the three months endedFebruary 28, 2021 andFebruary 29, 2020 , respectively. Revenues attributable to the sales of lighting products were slightly higher for the three months endedFebruary 29, 2020 primarily due to more volumes sold. Revenues attributable to other revenues represented 21% and 37% of our revenues for the three months endedFebruary 28, 2021 andFebruary 29, 2020 , respectively. The decrease in revenues attributable to other revenues was primarily due to no sale of raw materials in the three months endedFebruary 28, 2021 . Cost of Revenues Our cost of revenues decreased by 2% from$989 thousand for the three months endedFebruary 29, 2020 to$965 thousand for the three months endedFebruary 28, 2021 . 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 from
Operating Expenses
Three Months Ended
February 28, 2021 February 29, 2020
% of % of Change Change
$ Revenues $ Revenues $ %
(in thousands)
Research and development $ 288 24 % $ 307 20 % $ (19 ) (6 ) %
Selling, general and
administrative 667 55 % 633 41 % 34 5 %
Gain on disposals of
long-lived assets, net (207 ) (17 ) % - - % (207 ) (100 ) %
Total operating expenses $ 748 62 % $ 940 61 % $ (192 ) (20 ) %
Research and development
Our research and development expenses were $288 thousand and $307 thousand for
the three months ended February 28, 2021 and February 29, 2020 , respectively.
The decrease was primary due to an $11 thousand decrease in payroll and
compensation and a $21 thousand decrease in material and supplies used for our
new products, offset partially by an increase in depreciation and amortization.
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$207 thousand on the disposal of long-lived assets for the three months endedFebruary 28, 2021 . Due to the excess capacity charges that we have experienced for the last few years, considering the risk of technological obsolescence and according to the production plan built based on our sales forecast, we disposed of certain of our idle equipment. Other Income (Expenses) Three Months Ended February 28, 2021 February 29, 2020 % of % of $ Revenues $ Revenues (in thousands) Gain on disposal of investment $ - - %$ 634 41 % Interest expenses, net (92 ) (8 ) (100 ) (7 ) % Other income (expenses), net 307 25 % 167 11 % Foreign currency transaction gain, net 38 3 % 41 3 % Total other income (expenses), net$ 253 21 %$ 742 48 % Gain on disposal of investment We recognized a gain of$634 thousand for the three months endedFebruary 29, 2020 . OnNovember 27, 2019 , we entered into a stock purchase agreement to sell all of the outstanding shares of ourHong Kong Subsidiary,Semileds International Corporation Limited , and its wholly owned subsidiaryXuhe Guangdian Co Ltd for$100,000 and an additional$40,000 for the transaction cost. The$140,000 was fully received inNovember 2019 , and the transaction was approved by the authority and closed inJanuary 2020 . 23
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Interest expenses, net The decrease in interest expenses, net was primarily due to the decrease in debt balance, resulting from the conversion of$600,000 of convertible notes into 200,000 shares of the Company's common stock inMay 2020 . Other income (expenses), net Other income (expenses), net increase from$167 thousand for the three months endedFebruary 29, 2020 , to$307 thousand for the three months endedFebruary 28, 2021 , primarily due to subsidies received from theTaiwan government for the COVID-19 pandemic. Foreign currency transaction gain, net We recognized a net foreign currency transaction gain of$38 thousand and$41 thousand for the three months endedFebruary 28, 2021 andFebruary 29, 2020 , respectively, primarily due to the depreciation 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 2021 and was zero for fiscal 2020, since Taiwan SemiLEDs incurred losses, and because we provided a full valuation allowance on all deferred tax assets, which consisted primarily of net operating loss carryforwards and foreign investment loss. 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, 2021 February 29, 2020
% of % of
$ Revenues $ Revenues
(in thousands)
Net income attributable to
noncontrolling interests $ 1 - % $ 2 - %
We recognized net income attributable to non-controlling interests of $1
thousand and $2 thousand for the three months ended February 28, 2021 and
February 29, 2020 , respectively, which was attributable to the share of the net
losses of Taiwan Bandaoti Zhaoming Co., Ltd held by the remaining
non-controlling holders. Non-controlling interests represented 3.05% and 3.29%
equity interest in Taiwan Bandaoti Zhaoming CO., Ltd, as of February 28, 2021
and February 29, 2020 , respectively.
Six Months Ended February 28, 2021 Compared to the Six Months Ended February 29,
2020
Six Months Ended
February 28, 2021 February 29, 2020
% of % of Change Change
$ Revenues $ Revenues $ %
(in thousands)
LED chips $ 87 4 % $ 44 1 % $ 43 98 %
LED components 1,257 65 % 1,881 61 % (624 ) (33 ) %
Lighting products 321 17 % 202 7 % 119 59 %
Other revenues(1) 260 14 % 973 31 % (713 ) (73 ) %
Total revenues, net 1,925 100 % 3,100 100 % (1,175 ) (38 ) %
Cost of revenues 1,706 89 % 2,034 66 % (328 ) (16 ) %
Gross profit $ 219 11 % $ 1,066 34 % $ (847 ) (79 ) %
(1) Other includes primarily revenues attributable to the sale of epitaxial
wafers, scraps and raw materials and the provision of services.
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Table of Contents Revenues, net Our revenues decreased by 38% from$3.1 million for the six months endedFebruary 29, 2020 to$1.9 million for the six months endedFebruary 28, 2021 . The$1.2 million decrease in revenues reflects a$624 thousand decrease in sales of LED components and a$713 thousand decrease in revenues attributable to other revenue, offset by a$43 thousand increase in sales of LED chips and a$119 thousand increase in revenues attributable to sales of lighting products. Revenues attributable to the sales of our LED chips represented 4% and 1% of our revenues for the six months endedFebruary 28, 2021 andFebruary 29, 2020 , respectively. The increase in revenues attributable to sales of LED chips was a result of an increase in the volume of LED chips sold. Revenues attributable to the sales of our LED components were$1.3 million and$1.9 million , representing 65% and 61%, respectively, of our revenues for the six months endedFebruary 28, 2021 andFebruary 29, 2020 . The decrease in revenues attributable to sales of LED components was primarily due to the impact of COVID-19 pandemic on customer demand for UV LED components products. Revenues attributable to the sales of lighting products represented 17% and 7% of our revenues for the six months endedFebruary 28, 2021 andFebruary 29, 2020 , respectively. Revenues attributable to the sales of lighting products was$119 thousand higher for the six months endedFebruary 28, 2021 primarily due to a seasonal swing in demand on LED luminaries. Revenues attributable to other revenues represented 14% and 31% of our revenues for the six months endedFebruary 28, 2021 andFebruary 29, 2020 , respectively. The decrease in revenues attributable to other revenues was primarily due to no sale of raw materials in the six months endedFebruary 28, 2021 .
Cost of Revenues
Our cost of revenues decreased by 16% from$2.0 million for the six months endedFebruary 29, 2020 to$1.7 million for the six months endedFebruary 28, 2021 . 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$1.1 million for the six months endedFebruary 29, 2020 to$219 thousand for the six months endedFebruary 28, 2021 . Our gross margin percentage was 11% for the six months endedFebruary 28, 2021 , as compared to 34% for the six months endedFebruary 29, 2020 as a consequence of the COVID-19 pandemic impact on customer demand, as more fully described above. Operating Expenses Six Months Ended February 28, 2021 February 29, 2020 % of % of Change Change $ Revenues $ Revenues $ % (in thousands) Research and development$ 634 33 %$ 737 24 %$ (103 ) (14 ) % Selling, general and administrative 1,348 70 % 1,359 44 % (11 ) (1 ) % Gain on disposals of long-lived assets, net (284 ) (15 ) % (79 ) (3 ) % (205 ) 259 % Total operating expenses$ 1,698 88 %$ 2,017 65 %$ (319 ) - %
Research and development
Our research and development expenses were$634 thousand and$737 thousand for the six months endedFebruary 28, 2021 andFebruary 29, 2020 , respectively. The decrease was primary due to a$105 thousand decrease in materials and supplies used for our new products and a$9 decrease in payroll and compensation expense, offset partially by an increase in depreciation and amortization expense. 25
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Selling, general and administrative
Our selling, general and administrative expenses were$1.4 million for both the six months endedFebruary 29, 2020 andFebruary 28, 2019 . The slight decrease was mainly attributable to a$33 thousand decrease in professional service fee, offset partially by increases in stock-based compensation and in various other expenses.
Gain on disposal of long-lived assets, net
We recognized a net gain of$284 thousand and$79 thousand on the disposal of long-lived assets for the six months endedFebruary 28, 2021 andFebruary 29, 2020 , 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, 2021 February 29, 2020 % of % of $ Revenues $ Revenues (in thousands) Gain on disposal of investment $ - - %$ 634 21 % Interest expenses, net (184 ) (9 ) % (178 ) (5 ) % Other income (expenses), net 477 25 % 324 10 % Foreign currency transaction gain, net 225 12 % 199 6 % Total other income (expenses), net$ 518 27 %$ 979 32 % Gain on disposal of investment We recognized a gain of$634 thousand for the six months endedFebruary 29, 2020 . OnNovember 27, 2019 , we entered into a stock purchase agreement to sell all of the outstanding shares of ourHong Kong Subsidiary,Semileds International Corporation Limited , and its wholly owned subsidiaryXuhe Guangdian Co Ltd for$100,000 and an additional$40,000 for the transaction cost. The$140,000 was fully received inNovember 2019 , and the transaction was approved by the authority and closed inJanuary 2020 . Interest expenses, net The increase 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 (expenses), net 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. Other income for the six months endedFebruary 29, 2020 primarily consist of rental income from the lease of spare space in our Hsinchu building. Foreign currency transaction gain, net We recognized net foreign currency transaction gain of$225 thousand and$199 thousand for the six months endedFebruary 28, 2021 andFebruary 29, 2020 , respectively, primarily due to the depreciation 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 2021 and
was zero for fiscal 2020, since Taiwan SemiLEDs incurred losses, and because we
provided a full valuation allowance on all deferred tax assets, which consisted
primarily of net operating loss carryforwards and foreign investment loss.
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Net Loss Attributable to Noncontrolling Interests
Six Months Ended
February 28, 2021 February 29, 2020
% of % of
$ Revenues $ Revenues
(in thousands)
Net loss attributable to noncontrolling
interests $ (9 ) - % $ (3 ) -
We recognized net loss attributable to non-controlling interests of $9 thousand
$3 thousand for the six months ended February 28, 2021 and February 29, 2020 ,
respectively, which was attributable to the share of the net losses of Taiwan
Bandaoti Zhaoming Co., Ltd held by the remaining non-controlling holders.
Non-controlling interests represented 3.05% and 3.29% equity interest in Taiwan
Bandaoti Zhaoming CO., Ltd., as of February 28, 2021 and February 29, 2020 .
Liquidity and Capital Resources
As ofFebruary 28, 2021 andAugust 31, 2020 , we had cash and cash equivalents of$2.1 million and$2.8 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$7.8 million and$7.7 million as ofFebruary 28, 2021 andAugust 31, 2020 , respectively. Our NT dollar denominated long-term notes totaled$3.2 million and$3.1 million as ofFebruary 28, 2021 andAugust 31, 2020 , respectively. 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$88 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 . During this period, we don't 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, 2021 , our outstanding balance on this note payable was
approximately $2.0 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, 2021 , our outstanding balance on this note payable was
approximately $1.2 million .
Property, plant and equipment pledged as collateral for our notes payable were
both
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 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 are required to repay the loans of$1.5 million onJanuary 14, 2021 and$1.7 million onJanuary 22, 2021 , respectively. InFebruary 2021 , the loan agreements were extended with the same principal amount and interest rate for one year, which is due onJanuary 15, 2022 . As ofFebruary 28, 2021 andAugust 31, 2020 , these loans totaled$3.2 million . The Loans are secured by a second priority security interest on our headquarters building. 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 shall be 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. As ofFebruary 28, 2021 andAugust 31, 2020 , the outstanding principal of these notes totaled$1.4 million . 27
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We have incurred significant losses since inception, including net losses attributable toSemiLEDs stockholders of$544 thousand and$3.6 million during the years endedAugust 31, 2020 and 2019, respectively. Net cash used in operating activities for the year endedAugust 31, 2020 was$1.0 million . As ofAugust 31, 2020 , we had cash and cash equivalents of$2.8 million . We have undertaken actions to decrease losses incurred and implemented cost reduction programs in an effort to transform the Company into a profitable operation. In addition, we are planning to issue additional equity to our stockholders. Based on our current financial projections and assuming the successful implementation of our liquidity plans, we believe that we will have sufficient sources of liquidity to fund our operations and capital expenditure plans for the next 12 months. However, there can be no assurances that our planned activities will be successful in 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, 2021 February 29, 2020
Net cash used in operating activities $ (625 ) $ (194 )
Net cash provided by (used in) investing activities $ 177 $ (88 )
Net cash provided by (used in) financing activities $ (12 ) $ 2,393
Cash Flows Used In Operating Activities
Net cash used in operating activities for the six months endedFebruary 28, 2021 andFebruary 29, 2020 were$625 thousand and$194 thousand , respectively. The$431 thousand increase in cash flows used in operating activities for the six months endedFebruary 28, 2021 was primary attributable to an increase of$725 thousand in inventories and a decrease of$340 thousand in accrued expenses and other current liabilities, offset partially by$810 thousand in cash collected from customers.
Cash Flows Provided By (Used In) Investing Activities
Net cash provided by investing activities for the six months endedFebruary 28, 2021 was$177 thousand , consisting primarily of$284 thousand of proceeds from the sales of machinery and equipment, offset in part by$97 thousand of purchases of machinery and equipment.
Net cash used in investing activities for the six months ended
Cash Flows Provided By (Used In) Financing Activities
Net cash used in financing activities for the six months ended
Net cash provided by financing activities for the six months endedFebruary 29, 2020 was$2.4 million , consisting primarily of$2 million of proceeds from convertible notes, and$600 thousand of issuance of common stocks, offset in part by the repayments on long-term debt.
Capital Expenditures
We had capital expenditures of$97 thousand and$159 thousand for the six months endedFebruary 28, 2021 andFebruary 29, 2020 , respectively. Our capital expenditures consisted primarily of the purchases of machinery and equipment, construction in progress, prepayments for our manufacturing facilities and prepayments for equipment purchases. We expect to continue investing in capital expenditures in the future as we expand our business operations and invest in such expansion of our production capacity as we deem appropriate under market conditions and customer demand. However, in response to controlling capital costs and maintaining financial flexibility, our management continues to monitor prices and, consistent with its existing contractual commitments, may decrease further its activity level and capital expenditures as appropriate. 28
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Off-Balance Sheet Arrangements
As of
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