SemiLEDs Corp - Quarter Report: 2019 May (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended May 31, 2019

☐	TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-34992

SemiLEDs Corporation

(Exact name of registrant as specified in its charter)

Delaware		20-2735523
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)

3F, No. 11 Ke Jung Rd., Chu-Nan Site,
Hsinchu Science Park, Chu-Nan 350,
Miao-Li County, Taiwan, R.O.C.		350
(Address of principal executive offices)		(Zip Code)

+886-37-586788
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.0000056	LEDs	The Nasdaq Stock Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 3,589,015 shares of common stock, par value $0.0000056 per share, outstanding as of July 9, 2019.

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SEMILEDS CORPORATION

FORM 10-Q for the Quarter Ended May 31, 2019

INDEX

		Page No.

	Part I. Financial Information

Item 1.	Financial Statements	1

	Unaudited Condensed Consolidated Balance Sheets as of May 31, 2019 and August 31, 2018	1

	Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended May 31, 2019 and 2018	2

	Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended May 31, 2019 and 2018	3

	Unaudited Condensed Consolidated Statement of Changes in Equity for the three and nine months ended May 31, 2019 and 2018	4

	Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended May 31, 2019 and 2018	5

	Notes to Unaudited Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27

Item 4.	Controls and Procedures	27

	Part II. Other Information

Item 1.	Legal Proceedings	28

Item 1A.	Risk Factors	28

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29

Item 3.	Defaults Upon Senior Securities	29

Item 4.	Mine Safety Disclosures	29

Item 5.	Other Information	29

Item 6.	Exhibits	29

Signatures		30

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

SEMILEDS CORPORATION AND SUBSIDIARIES

Unaudited Condensed Consolidated Balance Sheets

(In thousands of U.S. dollars and shares, except par value)

	May 31,			August 31,
	2019			2018
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	1,060		$	3,421
Accounts receivable (including related parties), net of allowance for doubtful accounts of $469 and $477 as of May 31, 2019 and August 31, 2018, respectively		562			282
Inventories		1,945			1,818
Prepaid expenses and other current assets		441			340
Total current assets		4,008			5,861
Property, plant and equipment, net		6,029			7,213
Intangible assets, net		96			98
Investments in unconsolidated entities		888			914
Other assets		163			164
TOTAL ASSETS	$	11,184		$	14,250
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Current installments of long-term debt	$	329		$	335
Accounts payable		658			894
Advance receipt toward the convertible note		500			500
Accrued expenses and other current liabilities		2,179			5,505
Total current liabilities		3,666			7,234
Long-term debt, excluding current installments		4,908			2,013
Total liabilities		8,574			9,247
Commitments and contingencies (Note 5)
EQUITY:
SemiLEDs stockholders’ equity
Common stock, $0.0000056 par value—7,500 shares authorized; 3,589 shares and 3,559 shares issued and outstanding as of May 31, 2019 and August 31, 2018, respectively		—			—
Additional paid-in capital		175,772			175,527
Accumulated other comprehensive income		3,728			3,727
Accumulated deficit		(176,935	)		(174,251	)
Total SemiLEDs stockholders' equity		2,565			5,003
Noncontrolling interests		45			—
Total equity		2,610			5,003
TOTAL LIABILITIES AND EQUITY	$	11,184		$	14,250

See notes to unaudited condensed consolidated financial statements.

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SEMILEDS CORPORATION AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Operations

(In thousands of U.S. dollars and shares, except per share data)

	Three Months Ended						Nine Months Ended
	May 31, 2019			May 31, 2018			May 31, 2019			May 31, 2018
Revenues, net	$	1,745		$	1,999		$	4,347		$	5,545
Cost of revenues		1,405			1,837			4,224			5,775
Gross profit (loss)		340			162			123			(230	)
Operating expenses:
Research and development		444			296			1,076			703
Selling, general and administrative		597			799			1,973			2,313
Gain on disposals of long-lived assets, net		—			(581	)		(288	)		(790	)
Total operating expenses		1,041			514			2,761			2,226
Loss from operations		(701	)		(352	)		(2,638	)		(2,456	)
Other income (expenses):
Interest expenses, net		(74	)		(7	)		(115	)		(22	)
Other income (losses), net		94			78			48			625
Foreign currency transaction (losses) gain, net		(177	)		(45	)		20			3
Total other income (expenses), net		(157	)		26			(47	)		606
Loss before income taxes		(858	)		(326	)		(2,685	)		(1,850	)
Income tax expense		—			—			—			—
Net loss		(858	)		(326	)		(2,685	)		(1,850	)
Less: Net gain (loss) attributable to noncontrolling interests		1			—			(1	)		—
Net loss attributable to SemiLEDs stockholders	$	(859	)	$	(326	)	$	(2,684	)	$	(1,850	)
Net loss per share attributable to SemiLEDs stockholders:
Basic and diluted	$	(0.24	)	$	(0.09	)	$	(0.75	)	$	(0.52	)
Shares used in computing net loss per share attributable to SemiLEDs stockholders:
Basic and diluted		3,589			3,550			3,576			3,546

See notes to unaudited condensed consolidated financial statements.

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SEMILEDS CORPORATION AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Comprehensive Loss

(In thousands of U.S. dollars)

	Three Months Ended						Nine Months Ended
	May 31, 2019			May 31, 2018			May 31, 2019			May 31, 2018
Net loss	$	(858	)	$	(326	)	$	(2,685	)	$	(1,850	)
Other comprehensive loss, net of tax:
Foreign currency translation adjustments, net of tax of $0 for all periods presented	$	12			(77	)		(1	)		58
Comprehensive loss	$	(846	)	$	(403	)	$	(2,686	)	$	(1,792	)
Comprehensive loss attributable to noncontrolling interests	$	(1	)	$	—		$	(3	)	$	—
Comprehensive loss attributable to SemiLEDs stockholders	$	(845	)	$	(403	)	$	(2,683	)	$	(1,792	)

See notes to unaudited condensed consolidated financial statements.

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SEMILEDS CORPORATION AND SUBSIDIARIES

Unaudited Condensed Consolidated Statement of Changes in Equity

(In thousands of U.S. dollars and shares)

							Accumulated						Total
					Additional		Other						SemiLEDs			Non-
	Common Stock				Paid-in		Comprehensive			Accumulated			Shareholders'			Controlling			Total
	Shares		Amount		Capital		Income			Deficit			Equity			Interests			Equity
BALANCE—September 1, 2017		3,544	$	—	$	175,386	$	3,701		$	(171,270	)	$	7,817		$	—		$	7,817
Stock-based compensation		—		—		24		—			—			24			—			24
Comprehensive loss:
Other comprehensive income (loss)		—				—	26							26			—			26
Net loss		—		—		—		—			(392	)		(392	)		—			(392	)
BALANCE—November 30, 2017		3,544	$	—	$	175,410	$	3,727		$	(171,662	)	$	7,475		$	—		$	7,475
Issuance of common stock under equity incentive plans		1		—		—		—			—			—			—			—
Stock-based compensation		—		—		24		—			—			24			—			24
Comprehensive loss:
Other comprehensive income (loss)		—		—		—		109			—			109			—			109
Net loss		—		—		—		—			(1,132	)		(1,132	)		—			(1,132	)
BALANCE—February 28, 2018		3,545	$	—	$	175,434	$	3,836		$	(172,794	)	$	6,476		$	—		$	6,476
Issuance of common stock under equity incentive plans		12
Stock-based compensation		—		—		53					—			53			—			53
Comprehensive loss:
Other comprehensive income (loss)		—		—		—		(77	)		—			(77	)		—			(77	)
Net loss		—		—		—		—			(326	)		(326	)		—			(326	)
BALANCE—May 31, 2018		3,557	$	—	$	175,487	$	3,759		$	(173,120	)	$	6,126		$	—		$	6,126
							Accumulated						Total
					Additional		Other						SemiLEDs			Non-
	Common Stock				Paid-in		Comprehensive			Accumulated			Shareholders'			Controlling			Total
	Shares		Amount		Capital		Income			Deficit			Equity			Interests			Equity
BALANCE—September 1, 2018		3,559	$	—	$	175,527	$	3,727		$	(174,251	)	$	5,003		$	—		$	5,003
Issuance of common stock under equity incentive plans		1		—		—		—			—			—			—			—
Stock-based compensation				—		43		—			—			43			—			43
Common stock issued by SBDI*		—		—		128		—			—			128			48			176
Comprehensive loss:
Other comprehensive income (loss)		—		—		—	5				—			5			(1	)		4
Net loss		—		—		—		—			(978	)		(978	)		(5	)		(983	)
BALANCE—November 30, 2018		3,560	$	—	$	175,698	$	3,732		$	(175,229	)	$	4,201		$	42		$	4,243
Issuance of common stock under equity incentive plans		29		—		—		—			—			—			—			—
Stock-based compensation				—		47		—			—			47			—			47
Comprehensive loss:
Other comprehensive income (loss)		—		—		—		(18	)		—			(18	)		1			(17	)
Net loss		—		—		—		—			(847	)		(847	)		3			(844	)
BALANCE—February 28, 2019		3,589	$	—	$	175,745	$	3,714		$	(176,076	)	$	3,383		$	46		$	3,429
Stock-based compensation		—		—		27		—			—			27			—			27
Comprehensive loss:
Other comprehensive income (loss)		—		—		—		14			—			14			(2	)		12
Net loss		—		—		—		—			(859	)		(859	)		1			(858	)
BALANCE—May 31, 2019		3,589	$	—	$	175,772	$	3,728		$	(176,935	)	$	2,565		$	45		$	2,610

See notes to unaudited condensed consolidated financial statements.

*SBDI (Taiwan Bandaoti Zhaoming Co., Ltd.) is one of the Company’s subsidiaries.

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SEMILEDS CORPORATION AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows

(In thousands of U.S. dollars)

	Nine Months Ended
	May 31, 2019			May 31, 2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(2,685	)	$	(1,850	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		827			766
Stock-based compensation expense		117			101
Bad debt expense		—			10
Provisions for inventory write-downs		560			487
Gain on disposals of long-lived assets, net		(288	)		(790	)
Changes in :
Accounts receivable, net		(292	)		802
Inventories		(724	)		201
Prepaid expenses and other		(121	)		119
Accounts payable		(183	)		(269	)
Accrued expenses and other current liabilities		(85	)		150
Net cash used in operating activities		(2,874	)		(273	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment		(73	)		(247	)
Proceeds from sales of property, plant and equipment		505			913
Return the received-in-advance		(3,000	)		—
Payments for development of intangible assets		(3	)		(4	)
Proceeds from patents assignment		—			1
Net cash provided by (used in) investing activities		(2,571	)		663
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt		3,200			—
Repayments of long-term debt		(248	)		(255	)
Acquisition of noncontrolling interests		(1	)		—
Net cash provided by (used in) financing activities		2,951			(255	)
Effect of exchange rate changes on cash and cash equivalents		133			22
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(2,361	)		157
CASH AND CASH EQUIVALENTS—Beginning of period		3,421			3,582
CASH AND CASH EQUIVALENTS—End of period	$	1,060		$	3,739
NONCASH INVESTING AND FINANCING ACTIVITIES:
Accrual related to property, plant and equipment	$	34		$	140

See notes to unaudited condensed consolidated financial statements.

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SEMILEDS CORPORATION AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

1. Business

SemiLEDs Corporation (“SemiLEDs” or the “parent company”) was incorporated in Delaware on January 4, 2005 and is a holding company for various wholly owned subsidiaries. SemiLEDs and its subsidiaries (collectively, the “Company”) develop, manufacture and sell high performance light emitting diodes (“LEDs”). The Company’s core products are LED components, as well as LED chips and lighting products. LED components have become the most important part of its business. A portion of the Company’s business consists of the sale of contract manufactured LED products. The Company’s customers are concentrated in a few select markets, including Taiwan, the United States and China.

As of May 31, 2019, SemiLEDs had four wholly owned subsidiaries. SemiLEDs Optoelectronics Co., Ltd., or Taiwan SemiLEDs, is the Company’s wholly owned operating subsidiary, where a substantial portion of the assets is held and located, and where a portion of our research, development, manufacturing and sales activities take place. Taiwan SemiLEDs owns a 97% equity interest in Taiwan Bandaoti Zhaoming Co., Ltd., formerly known as Silicon Base Development, Inc., which is engaged in the research, development, manufacturing and a substantial portion of marketing and sale of LED components, and where most of the Company’s employees are based.

SemiLEDs’ common stock began trading on the NASDAQ Global Select Market under the symbol “LEDS” on December 8, 2010 and was transferred to the NASDAQ Capital Market effective November 5, 2015 where it continues to trade under the same symbol.

2. Summary of Significant Accounting Policies

Basis of Presentation —The Company’s unaudited interim condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and applicable provisions of the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted as permitted by the rules and regulations of the SEC. Accordingly, these unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K filed with the SEC on November 26, 2018. The unaudited condensed consolidated balance sheet as of August 31, 2018 included herein was derived from the audited consolidated financial statements as of that date.

The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the Company’s consolidated balance sheet as of May 31, 2019, the statements of operations and comprehensive loss for the three and nine months ended May 31, 2019 and 2018, the statement of changes in equity for the nine months ended May 31, 2019 and 2018, and the statements of cash flows for the nine months ended May 31, 2019 and 2018. The results for the three or nine months ended May 31, 2019 are not necessarily indicative of the results to be expected for the year ending August 31, 2019.

The accompanying unaudited interim condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The realization of assets and the satisfaction of liabilities in the normal course of business are dependent on, among other things, the Company’s ability to operate profitably, to generate cash flows from operations, and to pursue financing arrangements to support its working capital requirements.

The Company suffered losses from operations of $3.7 million and $4.3 million, and net cash used in operating activities of $1.2 million and $2.1 million for the years ended August 31, 2018 and 2017, respectively. Gross loss on product sales was $435 thousand for the year ended August 31, 2018, and gross profit was $82 thousand for the year ended August 31, 2017. Loss from operations for the three and nine months ended May 31, 2019 were $701 thousand and $2.6 million, respectively. Net cash used in operating activities for the nine months ended May 31, 2019 was $2.9 million. Further, at May 31, 2019, the Company’s cash and cash equivalents was down to $1.1 million. These facts and conditions raise substantial doubt about the Company’s ability to continue as a going concern. However, management has recently entered into two new loan agreements to refinance its existing real estate loan and provide for operating capital. Management believes that it has developed a liquidity plan, as summarized below, that, if executed successfully, should provide sufficient liquidity to meet the Company’s obligations as they become due for a reasonable period of time, and allow the development of its core business.

•

Gaining positive cash-inflow from operating activities through continuous cost reductions and the sales of new higher margin products. Steady growth of module products and the continued commercial sales of its UV LED product are expected to improve the Company’s future gross margin, operating results and cash flows. The Company is targeting niche markets and focusing on product enhancement and developing its LED product into many other applications or devices.

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•

Continuing to monitor prices, work with current and potential vendors to decrease costs and, consistent with its existing contractual commitments, may possibly decrease its activity level and capital expenditures further. This plan reflects its strategy of controlling capital costs and maintaining financial flexibility.

•

Raising additional cash through further equity offerings, sales of assets and/or issuance of debt as considered necessary and looking at other potential business opportunities.

While the Company’s management believes that the measures described in the above liquidity plan will be adequate to satisfy its liquidity requirements for the twelve months after the date that the financial statements are issued, there is no assurance that the liquidity plan will be successfully implemented. Failure to successfully implement the liquidity plan may have a material adverse effect on its business, results of operations and financial position, and may adversely affect its ability to continue as a going concern. These unaudited interim condensed consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded assets or the amounts and classification of liabilities or any other adjustments that might be necessary should the Company be unable to continue as a going concern.

Revenue Recognition —Effective September 1 2018, the Company adopted ASC 606 using the modified retrospective transition method. The Company applied the following five steps to achieve the core principles of ASC 606: 1) identified the contract with a customer; 2) identified the performance obligations (promises) in the contract; 3) determined the transaction price; 4) allocated the transaction price to the performance obligations in the contract; and 5) recognized revenue when (or as) the Company satisfies a performance obligation. 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 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.

Principles of Consolidation —The unaudited interim condensed consolidated financial statements include the accounts of SemiLEDs and its consolidated subsidiaries. All intercompany transactions and balances have been eliminated during consolidation.

On September 1, 2018, the Company adopted ASC 825-10, “Financial Instruments- Overall: Recognition and Measurement of Financial Assets and Financial Liabilities”. This standard allows equity investments that do not have readily determinable fair values to be re-measured at fair value either upon the occurrence of an observable price change or upon identification of impairment. The standard also simplifies the impairment assessment of equity investments without readily determinable fair values by requiring assessment for impairment qualitatively at each reporting period.

Investments in which the Company has the ability to exercise significant influence over the investee but not a controlling financial interest, are accounted for using the equity method of accounting and are not consolidated. These investments are in joint ventures that are not subject to consolidation under the variable interest model, and for which the Company: (i) does not have a majority voting interest that would allow it to control the investee, or (ii) has a majority voting interest but for which other shareholders have significant participating rights, but for which the Company has the ability to exercise significant influence over operating and financial policies. Under the equity method, investments are stated at cost after adding or removing the Company’s portion of equity in undistributed earnings or losses, respectively. The Company’s investment in these equity‑method entities is reported in the consolidated balance sheets in investments in unconsolidated entities, and the Company’s share of the income or loss of these equity‑method entities, after the elimination of unrealized intercompany profits, is reported in the consolidated statements of operations in equity in losses from unconsolidated entities. When net losses from an equity‑method investee exceed its carrying amount, the carrying amount of the investment is reduced to zero. The Company then suspends using the equity method to provide for additional losses unless the Company has guaranteed obligations or is otherwise committed to provide further financial support to the equity‑method investee. The Company resumes accounting for the investment under the equity method if the investee subsequently returns to profitability and the Company’s share of the investee’s income exceeds its share of the cumulative losses that have not been previously recognized during the period the equity method is suspended.

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Investments in entities that are not consolidated or accounted for under the equity method are recorded as investments without readily determinable fair values. Investments without readily determinable fair values are reported on the consolidated balance sheets in investments in unconsolidated entities, at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. Dividend income, if any, received is reported in the consolidated statements of operations in equity in losses from unconsolidated entities.

If the fair value of an equity investment declines below its respective carrying amount and the decline is determined to be other‑than‑temporary, the investment will be written down to its fair value.

Use of Estimates —The preparation of unaudited interim condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited interim condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include the preparation of the Company’s consolidated financial statements on the basis that the Company will continue as a going concern, the collectibility of accounts receivable, inventory net realizable values, realization of deferred tax assets, valuation of stock-based compensation expense, the useful lives of property, plant and equipment and intangible assets, the recoverability of the carrying amount of property, plant and equipment, intangible assets and investments in unconsolidated entities, the fair value of acquired tangible and intangible assets, income tax uncertainties, provision for potential litigation costs and other contingencies. Management bases its estimates on historical experience and also on assumptions that it believes are reasonable. Management assesses these estimates on a regular basis; however, actual results could differ materially from those estimates.

Certain Significant Risks and Uncertainties —The Company is subject to certain risks and uncertainties that could have a material and adverse effect on the Company’s future financial position or results of operations, which risks and uncertainties include, among others: it has incurred significant losses over the past years, any inability of the Company to compete in a rapidly evolving market and to respond quickly and effectively to changing market requirements, any inability of the Company to grow its revenue and/or maintain or increase its margins, it may experience fluctuations in its revenues and operating results, any inability of the Company to protect its intellectual property rights, claims by others that the Company infringes their proprietary technology, and any inability of the Company to raise additional funds in the future.

Concentration of Supply Risk —Some of the components and technologies used in the Company’s products are purchased and licensed from a limited number of sources and some of the Company’s products are produced by a limited number of contract manufacturers. The loss of any of these suppliers and contract manufacturers may cause the Company to incur transition costs to another supplier or contract manufacturer, result in delays in the manufacturing and delivery of the Company’s products, or cause it to carry excess or obsolete inventory. The Company relies on a limited number of such suppliers and contract manufacturers for the fulfillment of its customer orders. Any failure of such suppliers and contract manufacturers to perform could have an adverse effect upon the Company’s reputation and its ability to distribute its products or satisfy customers’ orders, which could adversely affect the Company’s business, financial position, results of operations and cash flows.

Concentration of Credit Risk —Financial instruments that subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents and accounts receivable.

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The Company keeps its cash and cash equivalents in demand deposits with prominent banks of high credit quality and invests only in money market funds. Deposits held with banks may exceed the amount of insurance provided on such deposits. As of May 31, 2019 and August 31, 2018, cash and cash equivalents of the Company consisted of the following (in thousands):

	May 31,		August 31,
Cash and Cash Equivalents by Location	2019		2018
United States;
Denominated in U.S. dollars	$	16	$	194
Taiwan;
Denominated in U.S. dollars		234		2,220
Denominated in New Taiwan dollars		696		55
Denominated in other currencies		78		910
China (including Hong Kong);
Denominated in U.S. dollars		—		7
Denominated in Renminbi		28		29
Denominated in H.K. dollars		8		6
Total cash and cash equivalents	$	1,060	$	3,421

The Company’s revenues are substantially derived from the sales of LED products. A significant portion of the Company’s revenues are derived from a limited number of customers and sales are concentrated in a few select markets. Management performs ongoing credit evaluations of its customers and generally does not require collateral on accounts receivable. Management evaluates the need to establish an allowance for doubtful accounts for estimated potential credit losses at each reporting period. The allowance for doubtful accounts is based on the management’s assessment of the collectability of its customer accounts. Management regularly reviews the allowance by considering certain factors, such as historical experience, industry data, credit quality, ages of accounts receivable balances and current economic conditions that may affect a customer’s ability to pay.

Net revenues generated from sales to the top ten customers represented 80% and 73 % of the Company’s total net revenues for the three and nine months ended May 31, 2019, respectively, and 69% and 62% of the Company’s net revenues for the three and nine months ended May 31, 2018, respectively.

The Company’s revenues have been concentrated in a few select markets, including the Netherlands, Taiwan, the United States, and China (including Hong Kong). Net revenues generated from sales to customers in these markets, in the aggregate, accounted for 74 % and 71% of the Company’s net revenues for the three and nine months ended May 31, 2019, respectively, and 85% and 78 % of the Company’s net revenues for the three and nine months ended May 31, 2018, respectively.

Noncontrolling Interests —Noncontrolling interests are classified in the consolidated statements of operations as part of consolidated net income (loss) and the accumulated amount of noncontrolling interests in the consolidated balance sheets as part of equity. Changes in ownership interest in a consolidated subsidiary that do not result in a loss of control are accounted for as an equity transaction. If a change in ownership of a consolidated subsidiary results in loss of control and deconsolidation, any retained ownership interests are remeasured with the gain or loss reported in net earnings. On September 1, 2018, Taiwan Bandaoti Zhaoming Co., Ltd. (“SBDI”), the Company’s wholly owned operating subsidiary, issued 414,000 common shares and amended its certificate of incorporation to increase its issued common stock from 12,087,715 to 12,501,715. As of the issuance date, the increased capital of $176 thousand (NT$5.4 million) has been completely received in cash by Taiwan Bandaoti Zhaoming Co., Ltd. The Company did not subscribe for the newly issued common shares, and, as a result, noncontrolling interest in SBDI was increased from zero to 3.31%. In December 2018, Taiwan SemiLEDs purchased 3,000 common shares of SBDI from non-controlling interests. As of May 31, 2019, noncontrolling interest in SBDI was down to 3.29%.

Recent Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-13, Fair Value Measurement (Topic 820) Disclosure Framework – Change to the Disclosure Requirements for Fair Value Measurement. The amendments in this Update modify the disclosure requirements of fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in the Concepts Statement, including the consideration of costs and benefits. This standard will be effective for the Company on September 1, 2020. The Company is currently evaluating the impact the adoption of this ASU will have on its consolidated financial statements.

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In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers. This standard will be effective for the Company on September 1, 2019. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial position, results of operations or cash flows.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. 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. This standard will be effective for the Company on September 1, 2020. The Company is currently evaluating the impact the adoption of this ASU will have on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases, which is intended to improve financial reporting on leasing transactions. This standard requires a lessee to record on the balance sheet the assets and liabilities for the rights and obligations created by lease terms of more than 12 months. This standard will be effective for the Company on September 1, 2019. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial position, results of operations or cash flows.

3. Balance Sheet Components

Inventories

Inventories as of May 31, 2019 and August 31, 2018 consisted of the following (in thousands):

	May 31,		August 31,
	2019		2018
Raw materials	$	519	$	577
Work in process		529		505
Finished goods		897		736
Total	$	1,945	$	1,818

Inventory write-downs to estimated net realizable values were $248 thousand and $560 thousand for the three and nine months ended May 31, 2019, respectively, and $74 thousand and $487 thousand for the three and nine months ended May 31, 2018, respectively.

Property, Plant and Equipment

Property, plant and equipment as of May 31, 2019 and August 31, 2018 consisted of the following (in thousands):

	May 31,			August 31,
	2019			2018
Buildings and improvements	$	13,143		$	13,558
Machinery and equipment		37,729			39,391
Leasehold improvements		155			150
Other equipment		2,235			2,312
Total property, plant and equipment		53,262			55,411
Less: Accumulated depreciation and amortization		(47,233	)		(48,487	)
Construction in progress		—			289
Property, plant and equipment, net	$	6,029		$	7,213

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Intangible Assets

Intangible assets as of May 31, 2019 and August 31, 2018 consisted of the following (in thousands):

	May 31, 2019
	Weighted
	Average		Gross				Net
	Amortization		Carrying		Accumulated		Carrying
	Period (Years)		Amount		Amortization		Amount
Patents and trademarks		15	$	538	$	442	$	96
Acquired technology		5		480		480		—
Total			$	1,018	$	922	$	96

	August 31, 2018
	Weighted
	Average		Gross				Net
	Amortization		Carrying		Accumulated		Carrying
	Period (Years)		Amount		Amortization		Amount
Patents and trademarks		15	$	544	$	446	$	98
Acquired technology		5		494		494		—
Total			$	1,038	$	940	$	98

4. Investments in Unconsolidated Entities

The Company’s ownership interest and carrying amounts of investments in unconsolidated entities as of May 31, 2019 and August 31, 2018 consisted of the following (in thousands, except percentages):

	May 31, 2019					August 31, 2018
	Percentage					Percentage
	Ownership			Amount		Ownership			Amount
Equity method investments:
Xurui Guangdian Co., Ltd. (“China SemiLEDs”)		49	%	$	—		49	%	$	—
Equity investment wihout readily determinable fair value	Various				888	Various				914
Total investments in unconsolidated entities				$	888				$	914

There were no dividends received from unconsolidated entities through May 31, 2019.

Equity Method Investments

The Company owns a 49% equity interest in China SemiLEDs. This investment has a carrying amount of zero as a result of a previously recognized impairment. In May 2019, the Foshan (China) Court declared China SemiLEDs was bankrupt after confirming that China SemiLEDs was incapable to pay outstanding debts.

Equity Investments without Readily Determinable Fair Value

Equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the Company) which do not have readily determinable fair values are recorded as equity investment without readily determinable fair value. All equity investments without readily determinable fair value are assessed for impairment when events or changes in circumstances indicate that the carrying amounts may not be recoverable, and measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer.

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5. Commitments and Contingencies

Operating Lease Agreements —The Company has several operating leases with unrelated parties, primarily for land, plant and office spaces in Taiwan, which include cancellable and noncancellable and which expire at various dates between December 2020 and December 2021. Lease expense related to these noncancellable operating leases was $39 thousand and $114 thousand for the three and nine months ended May 31, 2019, respectively, and $101 thousand and $348 thousand for the three and nine months ended May 31, 2018, respectively. Lease expense is recognized on a straight-line basis over the term of the lease.

The aggregate future noncancellable minimum rental payments for the Company’s operating leases as of May 31, 2019 consisted of the following (in thousands):

	Operating
Years Ending August 31,	Leases
Remainder of 2019	$	37
2020		147
2021		49
2022		—
2023		—
Thereafter		—
Total	$	233

Purchase Obligations —The Company had purchase commitments for inventory, property, plant and equipment in the amount of $220 thousand and $1.6 million as of May 31, 2019 and August 31, 2018, respectively.

Litigation —The Company is directly or indirectly involved from time to time in various claims or legal proceedings arising in the ordinary course of business. The Company recognizes a liability when it is probable that a loss has been incurred and the amount is reasonably estimable. There is significant judgment required in assessing both the likelihood of an unfavorable outcome and whether the amount of loss, if any, can be reasonably estimated. However, the Company cannot predict the outcome of any litigation or the potential for future litigation.

On June 21, 2017, Well Thrive Ltd. (“Well Thrive”) filed a complaint against SemiLEDs Corporation in the United States District Court for the District of Delaware. The complaint alleges that Well Thrive is entitled to return of $500 thousand paid toward a note purchase pursuant to a purchase agreement (the “Purchase Agreement”) effective July 6, 2016 with Dr. Peter Chiou, which was assigned to Well Thrive on August 4, 2016. Pursuant to the terms of the Purchase Agreement, we have retained the $500 thousand payment as liquidated damages. Well Thrive alleges that the liquidated damages provision is unenforceable as an illegal penalty and does not reflect the amount of purported damages. On March 13, 2018, the Company filed a motion to enforce a settlement agreement between the parties to dismiss the lawsuit with prejudice. On March 27, 2018, Well Thrive filed an answering brief in opposition to the Company’s motion on the basis that Well Thrive never consented to dismiss the case. On January 2, 2019, the judge denied without prejudice the motion filed by us, because there remains some question as to whether Well Thrive’s former lawyers and Dr. Chiou had authority from Well Thrive to settle this case. The judge’s order allows us to conduct depositions of Well Thrive’s former lawyer, Dr. Chiou, and Mr. Chang Sheng-Chun, Well Thrive’s director, and to request documents relating to the issues surrounding the settlement. Based on this order, we intend to arrange the depositions to obtain more evidence in support of a motion to enforce the settlement agreement. The Court set a trial date of March 2, 2020, if needed.

On December 28, 2018, the Company received a notification from the Court in Miao-Li County, Taiwan that Epistar Corporation (the successor to Formosa Epitaxy Incorporation, the “Plaintiff”) filed a motion requesting that the Company return the $3 million prepayment plus value-added-tax for the headquarters building sale and pay interest during this period and litigation fee. The Plaintiff also petitioned the Court to do a provisional execution upon the Company, which would permit the Plaintiff to sell the building and/or other assets belonging to the Company to recover the prepayment. On January 4, 2019, the Company filed a statement of defense arguing that the Plaintiff’s action and motion for provisional execution should be dismissed and the litigation fees should be borne by the Plaintiff. On January 25, 2019, the Company and the Plaintiff entered into a settlement, agreeing that the Company would return the $3 million plus value-added-tax of $150 thousand and penalty of $200 thousand, and on February 1, 2019, the Plaintiff withdrew the motion. As of May 31, 2019, the Company has paid the $3.2 million, and accrued a payable of $150 thousand.

Except as described above, as of May 31 2019, there was no pending or threatened litigation that could have a material impact on the Company’s financial position, results of operations or cash flows.

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6. Stock-based Compensation

The Company currently has one equity incentive plan (the “2010 Plan”), which provides for awards in the form of restricted shares, stock units, stock options or stock appreciation rights to the Company’s employees, officers, directors and consultants. In April 2014, SemiLEDs’ stockholders approved an amendment to the 2010 Plan that increased the number of shares authorized for issuance under the plan by an additional 250 thousand shares. Prior to SemiLEDs’ initial public offering, the Company had another stock-based compensation plan (the “2005 Plan”), but awards are made from the 2010 Plan after the initial public offering. Options outstanding under the 2005 Plan continue to be governed by its existing terms.

On June 14, 2019, the Company amended the 2010 Plan, subject to shareholder approval at the annual meeting on July 31, 2019, to increase the number of shares authorized for issuance under the plan by an additional 500 thousand shares, to extend expiration of the plan to November 3, 2023, to remove the IRS Code section 162(m) provisions from the plan, and to modify the maximum grant limit to 35 thousand shares to one person in a one year period.

A total of 521 thousand shares was reserved for issuance under the 2010 Plan, respectively, as of both May 31, 2019 and 2018. As of May 31, 2019 and 2018, there were 191 thousand and 196 thousand shares of common stock available for future issuance under the equity incentive plans, respectively.

In July 2018, SemiLEDs granted 7.5 thousand restricted stock units to its directors that vested 100% on June 29, 2019. The grant-date fair value of the restricted stock units was $4.75 per unit.

In January 2018, SemiLEDs granted 56.7 thousand restricted stock units to its employees among which 50% will vest each year on January 1 of 2019 and 2020 and will become fully vested upon a change in control. The grant-date fair value of the restricted stock units was $4.10 per unit.

In November 2017, SemiLEDs granted 2.5 thousand restricted stock units to its directors that vested 100% on June 28, 2018. The grant-date fair value of the restricted stock units was $4.15 per unit.

The grant date fair value of stock options is determined using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model requires inputs including the market price of SemiLEDs’ common stock on the date of grant, the term that the stock options are expected to be outstanding, the implied stock volatilities of several of the Company’s publicly-traded peers over the expected term of stock options, risk-free interest rate and expected dividend. Each of these inputs is subjective and generally requires significant judgment to determine. The grant date fair value of stock units is based upon the market price of SemiLEDs’ common stock on the date of the grant. This fair value is amortized to compensation expense over the vesting term.

Stock-based compensation expense is recorded net of estimated forfeitures such that expense is recorded only for those stock-based awards that are expected to vest. A forfeiture rate is estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from initial estimates. A forfeiture rate of zero is estimated for stock-based awards with vesting term that is less than or equal to one year from the date of grant.

A summary of the stock-based compensation expense for the three and nine months ended May 31, 2019 and 2018 was as follows (in thousands):

	Three Months Ended				Nine Months Ended
	May 31, 2019		May 31, 2018		May 31, 2019		May 31, 2018
Cost of revenues	$	10	$	19	$	34	$	33
Research and development		6		10		21		16
Selling, general and administrative		11		23		62		52
	$	27	$	52	$	117	$	101

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7. Net Loss Per Share of Common Stock

The following stock-based compensation plan awards were excluded from the computation of diluted net loss per share of common stock for the periods presented because including them would have been anti-dilutive (in thousands of shares):

Three Months Ended

Nine Months Ended

May 31, 2019

May 31, 2018

May 31, 2019

May 31, 2018

Stock units and stock options to purchase common stock

8. Income Taxes

The Company’s income (loss) before income taxes for the three and nine months ended May 31, 2019 and 2018 consisted of the following (in thousands):

	Three Months Ended						Nine Months Ended
	May 31, 2019			May 31, 2018			May 31, 2019			May 31, 2018
U.S. operations	$	(86	)	$	(179	)	$	(377	)	$	(86	)
Foreign operations		(772	)		(147	)		(2,308	)		(1,764	)
Loss before income taxes	$	(858	)	$	(326	)	$	(2,685	)	$	(1,850	)

Unrecognized Tax Benefits

On December 22, 2017, the U.S. Tax Cuts and Jobs Act was adopted, which among other effects, reduced the U.S. federal corporate income tax rate to 21% from 34% (or 35% in certain cases) beginning in 2018, requires companies to pay a one-time transition tax on certain unrepatriated earnings from non-U.S. subsidiaries that is payable over eight years, makes the receipt of future non-U.S. sourced income of non-U.S. subsidiaries tax-free to U.S. companies and creates a new minimum tax on the earnings of non-U.S. subsidiaries relating to the parent’s deductions for payments to the subsidiaries. Provisional estimate of the Company is that no tax will be due under this provision.

As of both May 31 2019 and August 31, 2018, the Company had no unrecognized tax benefits related to tax positions taken in prior periods. The Company files income tax returns in the United States, various U.S. states and certain foreign jurisdictions. The tax years 2005 through 2018 remain open in most jurisdictions. The Company is not currently under examination by income tax authorities in federal, state or foreign jurisdictions.

9. Related Party Transactions

On January 8, 2019, the Company entered into loan agreements with each of its Chairman and Chief Executive Officer and its largest shareholder, with aggregate amounts of $3.2 million, and an annual interest rate of 8%. All proceeds of the loans were exclusively used to return the deposit to Formosa Epitaxy Incorporation in connection with the canceled sale of the Company’s headquarters building pursuant to the agreement dated December 15, 2015. The Company is required to repay the loans of $1.5 million on January 14, 2021 and $1.7 million on January 22, 2021, respectively, unless the loans are sooner accelerated pursuant to the loan agreements. As of May 31, 2019, these loans totaled $3.2 million. The loans are secured by a second priority security interest on the Company’s headquarters building.

10. Subsequent Events

The Company entered two New Taiwan dollar (“NTD”) denominated loan agreements with Mega International Commercial Bank on July 5, 2019 with aggregate amounts of $3.2 million (NT$100 million). The first loan for $2.0 million (NT$62 million) has an annual floating interest rate equal to the NTD base lending rate plus 0.64% (or 1.62% currently), and was exclusively used to repay the existing loan to E. Sun Commercial Bank. The second loan for $1.2 million (NT$38 million) has an annual floating interest rate equal to the NTD base lending rate plus 1.02% (or 2% currently) and is available for operating capital. The loans are secured by a $79 thousand (NT$2.5 million) security deposit and a first priority security interest on the Company’s headquarters building. Principal and interests on the loans are payable monthly, and will mature in 8 years after the first withdrawal of the loaned funds.

The Company has analyzed its operations subsequent to May 31, 2019 to the date these unaudited condensed consolidated financial statements were issued, and has determined that it does not have any material subsequent events to disclose in these unaudited condensed consolidated financial statements, except the above.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

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

•

Declining cash position.

•

The ability to retain the $500,000 partial payment of the uncompleted $1.6 million note financing as liquidated damages.

•

Our ability to improve our liquidity, access alternative sources of funding and obtain additional equity capital or credit when necessary for our operations, the difficulty of which may increase if our common stock is delisted from the NASDAQ Stock Market.

•

The inability of our suppliers or other contract manufacturers to produce products that satisfy our requirements.

•

Our ability to implement our cost reduction programs and to execute our restructuring plan effectively.

•

Our ability to improve our gross margins, reduce our net losses and restore our operations to profitability.

•

Our ability to successfully introduce new products that we can produce and that customers will purchase in such amounts as to be sufficiently profitable to cover the costs of developing and producing these products, as well as providing us additional net income from operations.

•

Our ability to effectively develop, maintain and expand our sales and distribution channels, especially in the niche LED markets, including the UV LED and architectural lighting that we focus on.

•

Our ability to successfully manage our operations in the face of the cyclicality, rapid technological change, rapid product obsolescence, declining average selling prices and wide fluctuations in supply and demand typically found in the LED market.

•

Competitive pressures from existing and new companies.

•

Our ability to grow our revenues generated from the sales of our products and to control our expenses.

•

Loss of any of our key personnel, or our failure to attract, assimilate and retain other highly qualified personnel.

•

Intellectual property infringement or misappropriation claims by third parties against us or our customers, including our distributor customers.

•

The failure of LEDs to achieve widespread adoption in the general lighting market, or if alternative technologies gain market acceptance.

•

The loss of key suppliers or contract manufacturers.

•

Our ability to effectively expand or upgrade our production facilities or do so in a timely or cost-effective manner.

•

Difficulty in managing our future growth or in responding to a need to contract operations, and the associated changes to our operations.

•

Adverse development in those selected markets, including the Netherlands, Taiwan, the United States and China, where our revenues are concentrated.

•

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

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•

The reduction or elimination of government investment in LED lighting or the elimination of, or changes in, policies in certain countries that encourage the use of LEDs over some traditional lighting technologies.

•

Our ability to implement our product innovation strategy effectively, particularly in view of the prohibition against our (and/or our assisting others in) making, using, importing, selling and/or offering to sell in the United States our accused products and/or any device that includes an accused product after October 1, 2012 as a result of the injunction agreed to in connection with the Cree Inc., or Cree, litigation.

•

Loss of customers.

•

Failure of our strategy of marketing and selling our products in jurisdictions with limited intellectual property enforcement regimes.

•

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

•

Our customers’ ability to produce and sell products incorporating our LED products.

•

Our failure to adequately prevent disclosure of trade secrets and other proprietary information.

•

Ineffectiveness of our disclosure controls and procedures and our internal control over financial reporting.

•

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

•

Impairment of long-lived assets or investments.

•

Undetected defects in our products that harm our sales and reputation and adversely affect our manufacturing yields.

•

The availability of adequate and timely supply of electricity and water for our manufacturing facilities.

•

Our ability to comply with existing and future environmental laws and the cost of such compliance.

•

The ability of SemiLEDs Optoelectronics Co., Ltd., or Taiwan SemiLEDs, to make dividends and other payments to SemiLEDs Corporation.

•

Our ability to obtain necessary regulatory approvals to make further investments in Taiwan SemiLEDs.

•

Our ability to appoint a new independent director to regain compliance with the Nasdaq continued listing requirements necessary to avert delisting of our common stock.

•

Catastrophic events such as fires, earthquakes, floods, tornados, tsunamis, typhoons, pandemics, wars, terrorist activities and other similar events, particularly if these events occur at or near our operations, or the operations of our suppliers, contract manufacturers and customers.

•

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

•

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

•

Deterioration in the relations between the PRC and Taiwan governments.

•

Fluctuations in the exchange rate among the U.S. dollar, the New Taiwan, or NT, dollar, the Japanese Yen and other currencies in which our sales, raw materials and component purchases and capital expenditures are denominated.

•

The effect of the disclosure requirements under the provisions of the Dodd-Frank Act relating to “conflict minerals,” which could increase our costs and limit the supply of certain metals used in our products and affect our reputation with customers and shareholders.

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

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

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

Company Overview

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

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

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

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

•

reusing sapphire substrate in subsequent production runs;

•

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

•

employing a copper alloy base manufacturing technology to improve our chip’s thermal and electrical performance;

•

utilizing nanoscale surface engineering to improve usable light extraction;

•

developing a LED structure that generally consists of multiple epitaxial layers which are vertically-stacked on top of a copper alloy base; and

•

developing low cost Chip Scaled Packaging (CSP) technology.

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

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

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

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

•

Our ability to raise additional debt, sell additional equity securities and improve our liquidity. We need to improve our liquidity, access alternative sources of funding and obtain additional equity capital or credit when necessary for our operations. However, we may not be able to obtain such debt funding or sell equity securities on terms that are favorable to us, or at all. The raising of additional debt funding by us, if required and available, would result in increased debt service obligations and could result in additional operating and financing covenants, or liens on our assets, that would restrict our operations. The sale of additional equity securities, if required and available, could result in dilution to our stockholders.

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•

Our ability to get chips from other chip suppliers. Our reliance on our chip suppliers exposes us to a number of significant risks, including reduced control over delivery schedules, quality assurance and production costs, lack of guaranteed production capacity or product supply. If our chip suppliers are unable or unwilling to continue to supply our chips at requested quality, quantity, performance and costs, or in a timely manner, our business and reputation could be seriously harmed. Our inability to procure chips from other chip suppliers at the desired quality, quantity, performance and cost might result in unforeseen manufacturing and operations problems. In such events, our customer relationships, business, financial condition and results of operations would be adversely affected.

•

Industry growth and demand for products and applications using LEDs. The overall adoption of LED lighting devices to replace traditional lighting sources is expected to influence the growth and demand for LED chips and component products and impact our financial performance. We believe the potential market for LED lighting will continue to expand. LEDs for efficient generation of UV light are also starting to gain attention for various medical, germicidal and industrial applications. Since a substantial portion of our LED chips, LED components and our lighting products are used by end- users in general lighting applications and specialty industrial applications such as UV curing, medical/cosmetic, counterfeit detection, horticulture, architectural lighting and entertainment lighting the adoption of LEDs into these applications should have a strong impact on the demand of LED chips generally and, as a result, for our LED chips, LED components and LED lighting products.

•

Average selling price of our products. The average selling price of our products may decline for a variety of factors, including prices charged by our competitors, the efficacy of our products, our cost basis, changes in our product mix, the size of the order and our relationship with the relevant customer, as well as general market and economic conditions. Competition in the markets for LED products is intense, and we expect that competition will continue to increase, thereby creating a highly aggressive pricing environment. For example, some of our competitors have in the past reduced their average selling prices, and the resulting competitive pricing pressures have caused us to similarly reduce our prices, accelerating the decline in our revenues and the gross margin of our products. When prices decline, we must also write down the value of our inventory. Furthermore, the average selling prices for our LED products have typically decreased over product life cycles. Therefore, our ability to continue to innovate and offer competitive products that meet our customers’ specifications and pricing requirements, such as higher efficacy LED products at lower costs, will have a material influence on our ability to improve our revenues and product margins, although in the near term the introduction of such higher performance LED products may further reduce the selling prices of our existing products or render them obsolete.

•

Changes in our product mix. We anticipate that our gross margins will continue to fluctuate from period to period as a result of the mix of products that we sell and the utilization of our manufacturing capacity in any given period, among other things. For example, we continue to pursue opportunities for profitable growth in areas of our business where we see the best opportunity to develop as an end-to-end LED module solution supplier by providing our customers with high quality, flexible and more complete LED system solution, customer technical support and LED module/system design, as opposed to just providing customers with individual components. As a strategic plan, we have placed greater emphasis on the sales of LED components rather than the sales of LED chips where we have been forced to cut prices on older inventory. Steady growth of the module product and the continued commercial sales of our UV LED product are expected to improve our gross margin, operating results and cash flows. In addition, we have adjusted the lower-priced LED components strategy as appropriate. We have adopted a strategy to adjust our product mix by exiting certain high volume but low unit selling price product lines in response to the general trend of lower average selling prices for products that have been available in the market for some time. However, as we expand and diversify our product offerings and with varying average selling prices, or execute new business initiatives, a change in the mix of products that we sell in any given period may increase volatility in our revenues and gross margin from period to period.

•

Our ability to reduce cost to offset lower average selling prices. Competitors may reduce average selling prices faster than our ability to reduce costs, and competitive pricing pressures may accelerate the rate of decline of our average selling prices. To address increased pricing pressure, we have improved and increased our production yields to reduce the per-unit cost of production of our products. However, such cost savings currently have limited impact on our gross profit, as we currently suffer from the underutilization of manufacturing capacity and must absorb a high level of fixed costs, such as depreciation. While we intend to focus on managing our costs and expenses, over the long term we expect to be required to invest substantially in LED component products development and production equipment if we are to grow.

•

Our ability to continue to innovate. As part of our growth strategy, we plan to continue to be innovative in product design, to deliver new products and to improve our manufacturing efficiencies. Our continued success depends on our ability to develop and introduce new, technologically advanced and lower cost products, such as more efficient, better performance LED component products. If we are unable to introduce new products that are commercially viable and meet rapidly evolving customer requirements or keep pace with evolving technological standards and market developments or

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are otherwise unable to execute our product innovation strategy effectively, we may not be able to take advantage of market opportunities as they arise, execute our business plan or be able to compete effectively. To differentiate ourselves from other LED package manufacturers, we are putting more resources towards module and system design. Along with our technical know-how in the chip and package sectors, we are able to further integrate electrical, thermal and mechanical manufacturing resources to provide customers with one-stop system services. Services include design, prototyping, OEM and ODM. Key markets that we intend to target at the system end include different types of UV LED industrial printers, aquarium lighting, medical applications, niche imaging light engines, horticultural lighting and high standard commercial lighting. The modules are designed for various printing, curing, and PCB exposure industrial equipments, providing uncompromised reliability and optical output. Our LED components include different sizes and wattage to accommodate different demands in the LED market.

•

General economic conditions and geographic concentration. Many countries including the United States and the European Union (the “E.U.”) members have instituted, or have announced plans to institute, government regulations and programs designed to encourage or mandate increased energy efficiency in lighting. These actions include in certain cases banning the sale after specified dates of certain forms of incandescent lighting, which are advancing the adoption of more energy efficient lighting solutions such as LEDs. When the global economy slows or a financial crisis occurs, consumer and government confidence declines, with levels of government grants and subsidies for LED adoption and consumer spending likely to be adversely impacted. Our revenues have been concentrated in a few select markets, including the Netherlands, Taiwan, the United States and China (including Hong Kong). Given that we are operating in a rapidly changing industry, our sales in specific markets may fluctuate from quarter to quarter. Therefore, our financial results will be impacted by general economic and political conditions in such markets. For example, the aggressive support by the Chinese government for the LED industry through significant government incentives and subsidies to encourage the use of LED lighting and to establish the LED ‑ sector companies has resulted in production overcapacity in the market and intense competition. Furthermore, due to Chinese package manufacturers increasing usage of domestic LED chips, prices are increasingly competitive, leading to Chinese manufacturers growing market share in the global LED industry. In addition, we have historically derived a significant portion of our revenues from a limited number of customers. Some of our largest customers and what we produce/have produced for them have changed from quarter to quarter primarily as a result of the timing of discrete, large project‑based purchases and broadening customer base, among other things. For the three and the nine months ended May 31, 2019, sales to our three largest customers, in the aggregate, accounted for 49% and 44% of our revenues, respectively.

•

Intellectual property issues. Competitors of ours and other third parties have in the past and will likely from time to time in the future allege that our products infringe on their intellectual property rights. Defending against any intellectual property infringement claims would likely result in costly litigation and ultimately may lead to our not being able to manufacture, use or sell products found to be infringing. In June 2012, we settled an intellectual property dispute involving Cree. We agreed to dismiss amended complaints filed against each other without prejudice. We agreed to the entry of a permanent injunction that was effective October 1, 2012 that precludes us from (and/or from assisting others in) making, using, importing, selling and/or offering to sell in the United States certain accused products and/or any device that includes such an accused product after that date and to payment of a settlement fee for past damages. All remaining claims between Cree and us were withdrawn without prejudice, with each retaining the right to assert them in the future. However, other third parties may also assert infringement claims against our customers with respect to our products, or our customers’ products that incorporate our technologies or products. Any such legal action or the threat of legal action against us, or our customers, could impair such customers’ continued demand for our products. This could prevent us from growing or even maintaining our revenues, or cause us to incur additional costs and expenses, and adversely affect our financial condition and results of operations.

•

Cash position. Our cash and cash equivalents decreased to $1.1 million as of May 31, 2019 primarily due to the combination of our net cash used in operating activities offset by proceeds from long-term debt. We have implemented actions to accelerate operating cost reductions and improve operational efficiencies. The plan is further enhanced through the fabless business model in which we implemented certain workforce reductions and are exploring the opportunities to sell certain equipment related to the manufacturing of vertical LED chips, in order to reduce the idle capacity charges and minimize our research and development activities associated with chips manufacturing operation. We recently entered into two new loan agreements to refinance an existing real estate loan and provide for operating capital. In addition, the shipment of our new module product and the continued commercial sales of our UV LED product are expected to grow steadily. Based on our current financial projections, we believe that we will have sufficient sources of liquidity to fund our operations and capital expenditure plans for the next 12 months.

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Critical Accounting Policies and Estimates

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

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

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

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

Exchange Rate Information

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

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

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

Results of Operations

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

		Three Months Ended
		May 31, 2019					May 31, 2018
				% of					% of			Change			Change
		$		Revenues			$		Revenues			$			%
	(in thousands)
LED chips		$	7		—	%	$	43		2	%	$	(36	)		(84	)	%
LED components			1,275		73	%		1,289		64	%		(14	)		(1	)	%
Lighting products			152		9	%		269		13	%		(117	)		(43	)	%
Other revenues⁽¹⁾			311		18	%		398		21	%		(87	)		(22	)	%
Total revenues, net			1,745		100	%		1,999		100	%		(254	)		(13	)	%
Cost of revenues			1,405		81	%		1,837		92	%		(432	)		(24	)	%
Gross profit		$	340		19	%	$	162		8	%	$	178			110		%

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

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Revenues, net

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

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

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

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

Cost of Revenues

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

Gross Profit (Loss)

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

Operating Expenses

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

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

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

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Gain on disposal of long-lived assets, net Due to the excess capacity charges that we have suffered for a few years, considering the risk of technological obsolescence and according to the production plan built based on our sales forecast, we disposed of certain of our idle equipment and a gain of $581 thousand was recognized as a result for the three months ended May 31, 2018.

Other Income (Expenses)

	Three Months Ended
	May 31, 2019							May 31, 2018
				% of							% of
	$			Revenues				$			Revenues
	(in thousands)
Interest expenses, net	$	(74	)		(4	)	%	$	(7	)		—		%
Other income, net		94			5		%		78			4		%
Foreign currency transaction loss, net		(177	)		(10	)	%		(45	)		(2	)	%
Total other income (expenses), net	$	(157	)		(9	)	%	$	26			2		%

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

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

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

Income Tax Expense

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

Net Gain Attributable to Noncontrolling Interests

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

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

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

		Nine Months Ended
		May 31, 2019					May 31, 2018
				% of						% of				Change			Change
		$		Revenues			$			Revenues				$			%
	(in thousands)
LED chips		$	91		2	%	$	193			3		%	$	(102	)		(53	)	%
LED components			3,392		78	%		3,641			66		%		(249	)		(7	)	%
Lighting products			466		11	%		825			15		%		(359	)		(44	)	%
Other revenues⁽¹⁾			398		9	%		886			16		%		(488	)		(55	)	%
Total revenues, net			4,347		100	%		5,545			100		%		(1,198	)		(22	)	%
Cost of revenues			4,224		97	%		5,775			104		%		(1,551	)		(27	)	%
Gross profit (loss)		$	123		3	%	$	(230	)		(4	)	%	$	353			(153	)	%

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

Revenues, net

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

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

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

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

Cost of Revenues

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

Gross Profit (Loss)

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

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Operating Expenses

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

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

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

Gain on disposal of long-lived assets, net

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

Other Income (Expenses)

	Nine Months Ended
	May 31, 2019							May 31, 2018
				% of							% of
	$			Revenues				$			Revenues
	(in thousands)
Interest expenses, net	$	(115	)		(2	)	%	$	(22	)		—	%
Other income, net		48			1		%		625			11	%
Foreign currency transaction gain, net		20			—		%		3			—	%
Total other income (expenses), net	$	(47	)		(1	)	%	$	606			11	%

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

Foreign currency transaction gain, net We recognized net foreign currency transaction gain of $20 thousand and $3 thousand for the nine months ended May 31, 2019 and 2018, respectively, primarily due to the depreciation of the U.S. dollar against the NT dollar from bank deposits and accounts receivables held by Taiwan SemiLEDs and Taiwan Bandaoti Zhaoming Co., Ltd. in currency other than the functional currency of such subsidiaries.

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Income Tax Expense

Net Loss Attributable to Noncontrolling Interests

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

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

Liquidity and Capital Resources

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

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

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

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

•

The first note payable requires monthly payments of principal and interest in the amount of $13 thousand over the 15-year term of the note with final payment to occur in May 2024 and, as of May 31, 2019, our outstanding balance on this note payable was approximately $731 thousand.

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The second note payable requires monthly payments of principal and interest in the amount of $17 thousand over the 15-year term of the note with final payment to occur in December 2025 and, as of May 31, 2019, our outstanding balance on this note payable was approximately $1.3 million.

Property, plant and equipment pledged as collateral for our notes payable were $3.8 million and $4.2 million as of May 31, 2019 and August 31, 2018, respectively.

On January 8, 2019, we entered into loan agreements with each of our Chairman and Chief Executive Officer and our largest shareholder, with aggregate amounts of $3.2 million, and an annual interest rate of 8%. All proceeds of the loans were exclusively used to return the deposit to Formosa Epitaxy Incorporation in connection with the proposed sale of our headquarters building pursuant to the agreement dated December 15, 2015. We are required to repay the loans of $1.5 million on January 14, 2021 and $1.7 million on January 22, 2021, respectively, unless the loans are sooner accelerated pursuant to the loan agreements. As of May 31, 2019, these loans totaled $3.2 million. The loans are secured by a second priority security interest on our headquarters building.

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

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

Cash Flows

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

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

Cash Flows Used In Operating Activities

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

Cash Flows Provided by (Used In) Investing Activities

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

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

Cash Flows Provided by (Used In) Financing Activities

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

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

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Capital Expenditures

We had capital expenditures of $73 thousand and $247 thousand for the nine months ended May 31, 2019 and 2018, respectively. Our capital expenditures consisted primarily of the purchases of machinery and equipment, construction in progress, prepayments for our manufacturing facilities and prepayments for equipment purchases. We expect to continue investing in capital expenditures in the future as we expand our business operations and invest in such expansion of our production capacity as we deem appropriate under market conditions and customer demand. However, in response to controlling capital costs and maintaining financial flexibility, our management continues to monitor prices and, consistent with its existing contractual commitments, may decrease further its activity level and capital expenditures as appropriate.

Off-Balance Sheet Arrangements

As of May 31, 2019, we did not engage in any off-balance sheet arrangements. We do not have any interests in variable interest entities.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures

Our management, with the participation of our chief executive officer, or CEO, and our chief financial officer, or CFO, has evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of May 31, 2019. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Based upon the aforementioned evaluation, our CEO and CFO have concluded that, as of May 31, 2019, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended May 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

Due to the complex technology required to compete successfully in the LED industry, participants in our industry are often engaged in significant intellectual property licensing arrangements, negotiations, disputes and litigation. We are directly or indirectly involved from time to time and may be named in various other claims or legal proceedings arising in the ordinary course of our business or otherwise.

On June 21, 2017, Well Thrive Ltd. (“Well Thrive”) filed a complaint against SemiLEDs Corporation in the United States District Court for the District of Delaware. The complaint alleges that Well Thrive was entitled to return of $500 thousand paid toward a note purchase pursuant to a purchase agreement (the “Purchase Agreement”) effective July 6, 2016 with Dr. Peter Chiou, which was assigned to Well Thrive on August 4, 2016. Pursuant to the terms of the Purchase Agreement, we retained the $500 thousand payment as liquidated damages. Well Thrive alleged that the liquidated damages provision was unenforceable as an illegal penalty and did not reflect the amount of purported damages. On March 13, 2018, we filed a motion to enforce a settlement agreement between the parties to dismiss the lawsuit with prejudice. On March 27, 2018, Well Thrive filed an answering brief in opposition to our motion on the basis that Well Thrive never consented to dismiss the case. On January 2, 2019, the judge denied without prejudice the motion filed by us, because there remains some question as to whether Well Thrive’s former lawyers and Dr. Chiou had authority from Well Thrive to settle this case. The judge’s order allows us to conduct depositions of Well Thrive’s former lawyer, Dr. Chiou, and Mr. Chang Sheng-Chun, Well Thrive’s director, and to request documents relating to the issues surrounding the settlement. Based on this order, we intend to arrange the depositions to obtain more evidence in support of a motion to enforce the settlement agreement. The Court set a trial date of March 2, 2020, if needed.

On December 28, 2018, the Company received a notification from the Court in Miao-Li County, Taiwan that Epistar Corporation (the successor to Formosa Epitaxy Incorporation, the “Plaintiff”) filed a motion requesting that the Company return the $3 million prepayment plus value-added-tax for the headquarters building sale and pay interest during this period and litigation fees. The Plaintiff also petitioned the Court to do a provisional execution upon the Company, which would permit the Plaintiff to sell the building and/or other assets belonged to the Company to recover the prepayment. On January 4, 2019, the Company filed a statement of defense arguing that the Plaintiff’s action and motion for provisional execution should be dismissed and the litigation fees should be borne by the Plaintiff. On January 25, 2019, the Company and the Plaintiff entered into a settlement, agreeing that the Company would return the $3 million plus value-added-tax of $150 thousand and penalty of $200 thousand, and on February 1, 2019, the Plaintiff withdrew the motion. As of May 31, 2019, the Company has paid $3.2 million, and accrued a payable of $150 thousand.

Except as described above, there was no material pending legal proceedings or claims as of May 31, 2019.

Item 1A. Risk Factors

Except as set forth below, there are no material changes related to risk factors from the risk factors described in Item 1A “Risk Factors” in Part I of our 2018 Annual Report.

We may fail to qualify for continued listing on NASDAQ which could make it more difficult for investors to sell their shares.

In December 2010, our common stock was initially approved for listing on the NASDAQ Global Select Market but was transferred to the NASDAQ Capital Market effective November 5, 2015. To maintain that listing, we must satisfy the continued listing requirements of NASDAQ for inclusion in the NASDAQ Capital Market, including among other things, that our audit committee consist of three independent directors who satisfy additional requirements under the Exchange Act. On March 17, 2019, Roger Lee resigned from the Board of Directors of the Company effective immediately, which resulted in one vacancy on the audit committee. In accordance with NASDAQ Listing Rule 5605(c)(4)(B), we have been provided a cure period until September 13, 2019 to regain compliance with the audit committee requirements. If we do not regain compliance with the audit committee requirements by the period provided, NASDAQ will notify us that our common stock will be delisted.

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We intend to appoint a replacement director for the vacancy on the Audit Committee. There can be no assurance that we will be able to implement our plan, regain and maintain compliance with the continued listing requirements or that our common stock will not be delisted from NASDAQ in the future. If our common stock is delisted by NASDAQ, we expect prices for our common stock to be quoted on one of the OTC Markets or the OTC Bulletin Board. Under such circumstances, stockholders may find it more difficult to sell, or to obtain accurate quotations, for our common stock, and our common stock would become substantially less attractive to certain purchasers such as financial institutions, hedge funds and other similar investors. There is no assurance, however, that prices for our common stock would be quoted on one of these other trading systems or that an active trading market for our common stock would thereafter exist, which would materially and adversely impact the market value of our common stock.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Repurchases

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit No.		Description

31.1		Certification of Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		SEMILEDS CORPORATION
		(Registrant)

Dated:	July 12, 2019	By:	/s/ Christopher Lee
		Name:	Christopher Lee
		Title:	Chief Financial Officer
			(Principal Financial Officer and Principal Accounting Officer)