SEMILEDS CORPORATION Forward Looking Statements
This Quarterly Report on Form 10-Q, or this Quarterly Report, contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements other than statements of historical facts contained in this Quarterly Report, including statements regarding the future results of operations ofSemiLEDs Corporation , or "we," "our" or the "Company," and financial position, strategy and plans, and our expectations for future operations, including the execution of our restructuring plan and any resulting cost savings, are forward-looking statements. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. The words "believe," "may," "should," "plan," "potential," "project," "will," "estimate," "continue," "anticipate," "design," "intend," "expect" and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, and actual results and the timing of certain events could differ materially and adversely from those anticipated or implied in the forward-looking statements as a result of many factors. These factors include, among other things,
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Declining cash position.
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Our ability to improve our liquidity, access alternative sources of funding and obtain additional equity capital or credit when necessary for our operations, the difficulty of which may increase if our common stock is delisted from theNASDAQ Stock Market .
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Our ability to maintain compliance with the continued listing requirements to avoid our stock being delisted from the Nasdaq Capital Market.
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The continuing impact of the COVID-19 pandemic on our business and the business of our customers.
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The inability of our suppliers or other contract manufacturers to produce products that satisfy our requirements.
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Our ability to implement our cost reduction programs and to execute our restructuring plan effectively.
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Our ability to improve our gross margins, reduce our net losses and restore our operations to profitability.
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Our ability to successfully introduce new products that we can produce and that customers will purchase in such amounts as to be sufficiently profitable to cover the costs of developing and producing these products, as well as providing us additional net income from operations.
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Our ability to effectively develop, maintain and expand our sales and distribution channels, especially in the niche LED markets, including the UV LED and architectural lighting that we focus on.
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Our ability to successfully manage our operations in the face of the cyclicality, rapid technological change, rapid product obsolescence, declining average selling prices and wide fluctuations in supply and demand typically found in the LED market.
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Competitive pressures from existing and new companies.
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Our ability to grow our revenues generated from the sales of our products and to control our expenses.
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Loss of any of our key personnel, or our failure to attract, assimilate and retain other highly qualified personnel.
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Intellectual property infringement or misappropriation claims by third parties against us or our customers, including our distributor customers.
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The failure of LEDs to achieve widespread adoption in the general lighting market, or if alternative technologies gain market acceptance.
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The loss of key suppliers or contract manufacturers.
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Our ability to effectively expand or upgrade our production facilities or do so in a timely or cost-effective manner.
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Difficulty in managing our future growth or in responding to a need to contract operations, and the associated changes to our operations.
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Adverse development in those selected markets, including
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Our ability to develop and execute upon a new strategy to exploit the
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The reduction or elimination of government investment in LED lighting or the elimination of, or changes in, policies in certain countries that encourage the use of LEDs over some traditional lighting technologies.
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Our ability to implement our product innovation strategy effectively, particularly in view of the prohibition against our (and/or our assisting others in) making, using, importing, selling and/or offering to sell inthe United States our accused products and/or any device that includes an accused product afterOctober 1, 2012 as a result of the injunction agreed to in connection with the Cree Inc., or Cree, litigation.
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Loss of customers.
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Failure of our strategy of marketing and selling our products in jurisdictions with limited intellectual property enforcement regimes.
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Lack of marketing and distribution success by our third-party distributors.
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Our customers' ability to produce and sell products incorporating our LED products.
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Our failure to adequately prevent disclosure of trade secrets and other proprietary information.
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Ineffectiveness of our disclosure controls and procedures and our internal control over financial reporting.
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Our ability to profit from future joint ventures, investments, acquisitions and other strategic alliances.
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Impairment of long-lived assets or investments.
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Undetected defects in our products that harm our sales and reputation and adversely affect our manufacturing yields.
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The availability of adequate and timely supply of electricity and water for our manufacturing facilities.
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Our ability to comply with existing and future environmental laws and the cost of such compliance.
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The ability of
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Our ability to obtain necessary regulatory approvals to make further investments
in
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Catastrophic events such as fires, earthquakes, floods, tornados, tsunamis, typhoons, pandemics, including the COVID-19 pandemic, wars, terrorist activities and other similar events, particularly if these events occur at or near our operations, or the operations of our suppliers, contract manufacturers and customers.
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The effect of the legal system in
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Labor shortages, strikes and other disturbances that affect our operations.
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Deterioration in the relations between the PRC and
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Fluctuations in the exchange rate among theU.S. dollar, the New Taiwan, or NT, dollar, the Japanese Yen and other currencies in which our sales, raw materials and component purchases and capital expenditures are denominated. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We have not assumed any obligation to, and you should not expect us to, update or revise these statements because of new information, future events or otherwise. For more information on the significant risks that could affect the outcome of these forward-looking statements, see Item 1A "Risk Factors" in Part I of our Annual Report on Form 10-K for the fiscal year endedAugust 31, 2021 , or the 2021 Annual Report, and those contained in Part II, Item 1A of this Quarterly Report, and other information provided from time to time in our filings with theSecurities and Exchange Commission , or theSEC . The following discussion and analysis of our financial condition and results of operations is based upon and should be read in conjunction with the unaudited interim condensed consolidated financial statements and the notes and other information included elsewhere in this Quarterly Report, in our 2021 Annual Report, and in other filings with theSEC . 18
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Table of Contents Company Overview We develop, manufacture and sell light emitting diode (LED) chips and LED components. Our products are used for general lighting applications, including street lights and commercial, industrial, system and residential lighting. Our LED chips may also be used in specialty industrial applications, such as ultraviolet, or UV, curing of polymers, LED light therapy in medical/cosmetic applications, counterfeit detection, LED lighting for horticulture applications, architectural lighting and entertainment lighting. Utilizing our patented and proprietary technology, our manufacturing process begins by growing upon the surface of a sapphire wafer, or substrate, several very thin separate semiconductive crystalline layers of gallium nitride, orGaN , a process known as epitaxial growth, on top of which a mirror-like reflective silver layer is then deposited. After the subsequent addition of a copper alloy layer and finally the removal of the sapphire substrate, we further process this multiple-layered material to create individual vertical LED chips. We package our LED chips into LED components, which we sell to distributors and a customer base that is heavily concentrated in a few select markets, includingthe United States ,Japan ,Germany andNetherlands . We also sell our "Enhanced Vertical," or EV, LED product series in blue, white, green and UV in selected markets. We sell our LED chips to packagers or to distributors,who in turn sell to packagers. Our lighting products customers are primarily original design manufacturers, or ODMs, of lighting products and the endusers of lighting devices. We also contract other manufacturers to produce for our sale certain LED products, and for certain aspects of our product fabrication, assembly and packaging processes, based on our design and technology requirements and under our quality control specifications and final inspection process.
We have developed advanced capabilities and proprietary know-how in:
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reusing sapphire substrate in subsequent production runs;
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optimizing our epitaxial growth processes to create layers that efficiently convert electrical current into light;
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employing a copper alloy base manufacturing technology to improve our chip's thermal and electrical performance;
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utilizing nanoscale surface engineering to improve usable light extraction;
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manufacturing extremely small footprint LEDs with optimized yield, ideal for Mini LED applications;
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developing a LED structure that generally consists of multiple epitaxial layers which are vertically-stacked on top of a copper alloy base;
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developing low cost
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developing multi-pixel Mini LED packages for commercial displays.
These technical capabilities enable us to produce LED chips, LED component, LED modules and System products. We believe these capabilities and know-how should also allow us to reduce our manufacturing costs and our dependence on sapphire, a costly raw material used in the production of sapphire-based LED devices. We were incorporated in theState of Delaware onJanuary 4, 2005 . We are a holding company for 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. TaiwanSemiLEDs owns an approximately 97% equity interest inTaiwan Bandaoti Zhaoming Co., Ltd. , formerly known asSilicon Base Development, Inc. , which is engaged in the research, development, manufacture, and substantial portion of marketing and sale of LED products, including lighting fixtures and systems, and where most of our employees are based.
Key Factors Affecting Our Financial Condition, Results of Operations and Business
The following are key factors that we believe affect our financial condition, results of operations and business:
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COVID-19 Pandemic. InMarch 2020 , theWorld Health Organization declared the outbreak of COVID-19 as a pandemic, which continues to spread throughout the world. As a result, and in consideration of the health and well-being of our employees, customers and communities, and in support of efforts to contain the spread of the virus, we have taken several precautionary measures and adjusted our operational needs. Our workplaces are operating under enhanced measures to ensure the health and safety of our employees, including limiting the visitors coming into our workplace and using videoconferencing for meetings when possible. Our business, financial condition, liquidity and operating results have been, and will continue to be, adversely affected by COVID-19 and related restrictions. The conditions caused by the COVID-19 pandemic have adversely affected our customers' ability or willingness to purchase our products or services, delayed prospective customers' purchasing decisions, adversely impacted our ability to provide or deliver products and on-site services to our customers, delayed the provisioning of our offerings, or lengthened payment terms, all of which could adversely affect our future sales, operating results and overall financial performance. Our operations have also begun to be negatively affected by a range of external factors related to the COVID-19 pandemic that are not within our control. To 19
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avoid cash shortage due to the pandemic, we applied and received subsidies from theTaiwan government. Our bank granted us a deferment period for twelve months starting fromMay 2020 . During this period, we did not need to pay the monthly payments of the principal but only the interest. We have also devoted ourselves to new product development and expect these new products could bring in new revenue, offsetting the losses resulted from existing customers' delayed purchasing. However, given the ongoing and evolving economic and business impact of the COVID-19 pandemic, we may be required to further revise certain accounting estimates and judgments, which could have a material adverse effect on our financial position and results of operations.
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Our ability to raise additional debt, sell additional equity securities and improve our liquidity. We need to improve our liquidity, access alternative sources of funding and obtain additional equity capital or credit when necessary for our operations. 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.
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Industry growth and demand for products and applications using LEDs. The overall adoption of LED lighting devices to replace traditional lighting sources is expected to influence the growth and demand for LED chips and component products and impact our financial performance. We believe the potential market for LED lighting will continue to expand. LEDs for efficient generation of UV light are also starting to gain attention for various medical, germicidal and industrial applications. Since a substantial portion of our LED chips, LED components and our lighting products are used by end- users in general lighting applications and specialty industrial applications such as UV curing, medical/cosmetic, counterfeit detection, horticulture, architectural lighting and entertainment lighting the adoption of LEDs into these applications 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.
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Average selling price of our products. The average selling price of our products
may decline for a variety of factors, including prices charged by our
competitors, the efficacy of our products, our cost basis, changes in our
product mix, the size of the order and our relationship with the relevant
customer, as well as general market and economic conditions. Competition in the
markets for LED products is intense, and we expect that competition will
continue to increase, thereby creating a highly aggressive pricing environment.
For example, some of our competitors have in the past reduced their average
selling prices, and the resulting competitive pricing pressures have caused us
to similarly reduce our prices, accelerating the decline in our revenues and the
gross margin of our products. When prices decline, we must also write down the
value of our inventory. Furthermore, the average selling prices for our LED
products have typically decreased over product life cycles. Therefore, our
ability to continue to innovate and offer competitive products that meet our
customers' specifications and pricing requirements, such as higher efficacy LED
products at lower costs, will have a material influence on our ability to
improve our revenues and product margins, although in the near term the
introduction of such higher performance LED products may further reduce the
selling prices of our existing products or render them obsolete.
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Changes in our product mix. We anticipate that our gross margins will continue to fluctuate from period to period as a result of the mix of products that we sell and the utilization of our manufacturing capacity in any given period, among other things. For example, we continue to pursue opportunities for profitable growth in areas of our business where we see the best opportunity to develop as an end-to-end LED module solution supplier by providing our customers with high quality, flexible and more complete LED system solution, customer technical support and LED module/system design, as opposed to just providing customers with individual components. As a strategic plan, we have placed greater emphasis on the sales of LED components rather than the sales of LED chips where we have been forced to cut prices on older inventory. Steady growth of the module product and the continued commercial sales of our UV LED product are expected to improve our gross margin, operating results and cash flows. In addition, we have adjusted the lower-priced LED components strategy as appropriate. We have adopted a strategy to adjust our product mix by exiting certain high volume but low unit selling price product lines in response to the general trend of lower average selling prices for products that have been available in the market for some time. However, as we expand and diversify our product offerings and with varying average selling prices, or execute new business initiatives, a change in the mix of products that we sell in any given period may increase volatility in our revenues and gross margin from period to period.
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Our ability to reduce cost to offset lower average selling prices. Competitors may reduce average selling prices faster than our ability to reduce costs, and competitive pricing pressures may accelerate the rate of decline of our average selling prices. To address increased pricing pressure, we have improved and increased our production yields to reduce the per-unit cost of production of our products. However, such cost savings currently have limited impact on our gross profit, as we currently suffer from the underutilization of manufacturing capacity and must absorb a high level of fixed costs, such as depreciation. While we intend to focus on managing our costs and expenses, over the long term we expect to be required to invest substantially in LED component products development and production equipment if we are to grow.
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Our ability to continue to innovate. As part of our growth strategy, we plan to continue to be innovative in product design, to deliver new products and to improve our manufacturing efficiencies. Our continued success depends on our ability to develop and introduce new, technologically advanced and lower cost products, such as more efficient, better performance LED component products. If we are unable to introduce new products that are commercially viable and meet rapidly evolving customer requirements or keep pace with evolving technological standards and market developments or are otherwise unable to execute our product innovation strategy effectively, we may not be able to take advantage of market opportunities as they arise, execute our business plan or be able to compete effectively. To differentiate ourselves from other LED package manufacturers, we are putting more resources towards module and system design. Along with our technical know-how in the chip and package sectors, we are able to further integrate electrical, thermal and mechanical manufacturing resources to provide customers with one-stop system services. Services include design, prototyping, OEM and ODM. Key markets that we intend to target at the system end include different types of UV LED industrial printers, aquarium lighting, medical applications, niche imaging light engines, horticultural lighting and high standard commercial lighting. The modules are designed for various printing, curing, and PCB exposure industrial equipment, providing uncompromised reliability and optical output. Our LED components include different sizes and wattage to accommodate different demands in the LED market.
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General economic conditions and geographic concentration. Many countries includingthe United States and theEuropean Union (the "E.U.") members have instituted, or have announced plans to institute, government regulations and programs designed to encourage or mandate increased energy efficiency in lighting. These actions include in certain cases banning the sale after specified dates of certain forms of incandescent lighting, which are advancing the adoption of more energy efficient lighting solutions such as LEDs. When the global economy slows or a financial crisis occurs, consumer and government confidence declines, with levels of government grants and subsidies for LED adoption and consumer spending likely to be adversely impacted. Our revenues have been concentrated in a few select markets, includingthe Netherlands ,Ireland ,Taiwan ,Japan ,the United States ,Germany andIndia . Given that we are operating in a rapidly changing industry, our sales in specific markets may fluctuate from quarter to quarter. Therefore, our financial results will be impacted by general economic and political conditions in such markets. For example, the aggressive support by the Chinese government for the LED industry through significant government incentives and subsidies to encourage the use of LED lighting and to establish the LED sector companies has resulted in production overcapacity in the market and intense competition. Furthermore, due to Chinese package manufacturers increasing usage of domestic LED chips, prices are increasingly competitive, leading to Chinese manufacturers growing market share in the global LED industry. In addition, we have historically derived a significant portion of our revenues from a limited number of customers. Some of our largest customers and what we produce/have produced for them have changed from quarter to quarter primarily as a result of the timing of discrete, large projectbased purchases and broadening customer base, among other things. For the three and the nine months endedMay 31, 2022 , sales to our three largest customers, in the aggregate, accounted for 64% and 63% of our revenues, respectively. 21
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Intellectual property issues. Competitors of ours and other third parties have in the past and will likely from time to time in the future allege that our products infringe on their intellectual property rights. Defending against any intellectual property infringement claims would likely result in costly litigation and ultimately may lead to our not being able to manufacture, use or sell products found to be infringing. InJune 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 effectiveOctober 1, 2012 that precludes us from (and/or from assisting others in) making, using, importing, selling and/or offering to sell inthe 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.
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Cash position. Our cash and cash equivalents increased to$3.0 million as ofMay 31, 2022 from$1.7 million as ofMay 31, 2021 , primarily due to the sale of 344,391 shares of common stock in the fourth quarter of fiscal 2021 for net proceeds of$4.0 million under our ATM program. We have implemented actions to accelerate operating cost reductions and improve operational efficiencies. The plan is further enhanced through the fabless business model in which we implemented certain workforce reductions and are exploring the opportunities to sell certain equipment related to the manufacturing of vertical LED chips, in order to reduce the idle capacity charges and minimize our research and development activities associated with chips manufacturing operation. InDecember 2019 , we issued convertible unsecured promissory notes with a principal sum of$2 million , of which$600 thousand of convertible notes were converted into 200 thousand shares of common stock inMay 2020 . OnMay 26, 2021 the Notes were extended with the same terms and interest rate for one year and were scheduled to mature onMay 30, 2022 , and onMay 26, 2022 , the Notes were further extended with the same terms and interest rate for one year and now mature onMay 30, 2023 . As ofMay 31, 2022 andAugust 31, 2021 , the outstanding principal of these notes totaled$1.4 million . Based on our current financial projections, we believe that we will have sufficient sources of liquidity to fund our operations and capital expenditure plans for the next 12 months.
Critical Accounting Policies and Estimates
We believe that the application of the following accounting policies, which are important to our financial position and results of operations, require significant judgments and estimates on the part of management. For a summary of our significant accounting policies, including the accounting policies discussed below, see Item 1 to the Unaudited Consolidated Financial Statements.
Revenue Recognition
The Company has revenue recognition policies for its operating projects that are appropriate to the circumstances of each business. Refer to Note 2 to the Consolidated Financial Statements for our revenue recognition policies.
Write-down of Inventories
The net realized value of inventories is the estimated selling price in the ordinary course of business less the estimated costs of completion and disposal. The estimation of net realized value is based on current market conditions and historical experience with product sales of similar nature. Changes in market conditions may have a material impact on the estimation of the net realizable value. Income taxes The reliability of the deferred tax asset mainly depends on whether sufficient future profits or taxable temporary differences will be available. In cases where the actual future profits generated are less than expected, a material reversal of deferred tax assets may arise, which would be recognized in profit or loss for the period in which such a reversal takes place.
Exchange Rate Information
We are aDelaware corporation and, underSEC requirements, must report our financial position, results of operations and cash flows in accordance with accounting principles generally accepted inthe United States of America , orU.S. GAAP. At the same time, our subsidiaries use the local currency as their functional currency. For example, the functional currency for Taiwan SemiLEDs is the NT dollar. The assets and liabilities of the subsidiaries are, therefore, translated intoU.S. dollars at exchange rates in effect at each 22
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balance sheet date, and income and expense accounts are translated at average exchange rates during the period. The resulting translation adjustments are recorded to a separate component of accumulated other comprehensive income (loss) within equity. Any gains and losses from transactions denominated in currencies other than their functional currencies are recognized in the consolidated statements of operations as a separate component of other income (expense). Due to exchange rate fluctuations, such translated amounts may vary from quarter to quarter even in circumstances where such amounts have not materially changed when denominated in their functional currencies. The translations from NT dollars toU.S. dollars were made at the exchange rates as set forth in the statistical release of theBank of Taiwan . OnMay 31, 2022 , the exchange rate was 29.05 NT dollars toone U.S. dollar . OnJuly 5, 2022 , the exchange rate was 29.76 NT dollars toone U.S. dollar . No representation is made that the NT dollar orU.S. dollar amounts referred to herein could have been or could be converted intoU.S. dollars or NT dollars, as the case may be, at any particular rate or at all.
Results of Operations
Three Months EndedMay 31, 2022 Compared to the Three Months EndedMay 31, 2021 Three Months Ended May 31, 2022 May 31, 2021 % of % of Change Change $ Revenues $ Revenues $ % (in thousands) LED chips$ 57 3 %$ 32 2 %$ 25 78 % LED components 1,205 68 % 1,057 74 % 148 14 % Lighting products 158 9 % 204 14 % (46 ) (23 ) % Other revenues(1) 364 20 % 146 10 % 218 149 % Total revenues, net 1,784 100 % 1,439 100 % 345 24 % Cost of revenues 1,448 81 % 775 54 % 673 87 % Gross profit$ 336 19 %$ 664 46 %$ (328 ) (49 ) %
(1) Other includes primarily revenues attributable to the sale of epitaxial wafers, scraps and raw materials and the provision of services.
Revenues, net
Our revenues increased by 24% to$1.8 million for the three months endedMay 31, 2022 from$1.4 million for the three months endedMay 31, 2021 . The increase in revenues was driven primarily by a$148 thousand increase in sales of LED components and a$25 thousand increase in sales of LED chips and a$218 thousand increase in other revenue, offset in part by a$46 thousand decrease in lighting products. Revenues attributable to the sales of our LED chips were$57 thousand and$32 thousand , representing 3% and 2%, respectively, of our revenues for the three months endedMay 31, 2022 and 2021, the increase was primarily due to varying volumes sold for the LED chips. We have adopted a strategy to adjust our product mix by exiting certain high volume but low unit selling price product lines in response to the general trend of lower average selling prices for products that have been available in the market for some time and to focus on profitable products. Revenues attributable to the sales of our LED components were$1,205 thousand and$1,057 thousand , representing 69% and 74%, respectively, of our revenues for the three months endedMay 31, 2022 and 2021. Revenues attributable to sales of LED components were higher for the three months endedMay 31, 2022 primarily due to more volumes sold. Revenues attributable to the sales of lighting products represented 9% and 14% of our revenues for the three months endedMay 31, 2022 and 2021, respectively. Revenues attributable to the sales of lighting products were lower for the three months endedMay 31, 2021 primarily due to the less volumes sold. Revenues attributable to other revenues represented 20% and 10% of our revenues for the three months endedMay 31, 2022 and 2021, respectively. The increase in revenues attributable to other revenues was primarily due to the non-recurring sales of raw material and a joint development project with CrayoNano AS in the three months endedMay 31, 2022 .
Cost of Revenues
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Our cost of revenues increased by 87% from$775 thousand for the three months endedMay 31, 2021 to$1.4 million for the three months endedMay 31, 2022 . The increase in cost of revenues was primarily due to the increase in the volume of products sold. Gross Profit Our gross profit decreased from$664 thousand for the three months endedMay 31, 2021 to$336 thousand for the three months endedMay 31, 2022 . Our gross margin percentage decreased from 46% for the three months endedMay 31, 2021 to 19% for the three months endedMay 31, 2022 as a consequence of an increase in the sales of products with lower margins. Operating Expenses Three Months Ended May 31, 2022 May 31, 2021 % of % of Change Change $ Revenues $ Revenues $ % (in thousands) Research and development$ 357 20 %$ 528 37 %$ (171 ) (32 ) % Selling, general and administrative 810 45 % 730 51 % 80 11 % Gain on disposals of long-lived assets, net (57 ) (3 ) % (2 ) - % (55 ) 2,750 % Total operating expenses$ 1,110 62 %$ 1,256 88 %$ (146 ) (12 ) % Research and development Our research and development expenses were$357 thousand and$528 thousand for the three months endedMay 31, 2022 and 2021, respectively. The decrease was primary due to the$134 thousand decrease in government project R&D expenses and$79 thousand decrease in materials and supplies capacity, partially offset by the$38 thousand increase in payroll and compensation. Selling, general and administrative Our selling, general and administrative expenses increased from$730 thousand for the three months endedMay 31, 2021 to$810 thousand for the three months endedMay 31, 2022 . The increase was mainly attributable to increase in stock-based compensation and in various other expenses. Gain on disposal of long-lived assets, net We recognized a net gain of$57 thousand and$2 thousand on the disposal of long-lived assets for the three months endedMay 31, 2022 and 2021. Due to the excess capacity charges that we have experienced for the last few years, considering the risk of technological obsolescence and according to the production plan built based on our sales forecast, we disposed of certain of our idle equipment. Other Income (Expenses) Three Months Ended May 31, 2022 May 31, 2021 % of % of $ Revenues $ Revenues (in thousands) Interest expenses, net (94 ) (5 ) % (94 ) (7 ) % Other income, net 264 15 % 474 33 % Foreign currency transaction (loss) gain, net (307 ) (17 ) % 155 11 %
Total other (expenses) income, net
37 %
Interest expenses, net Interest expenses, net was $94 thousand for both three
months ended May 31, 2022 and 2021, which primarily consisted of the interest
payment of the convertible notes and loans.
Other income, net Other income, net decreased from $474 thousand for the three
months ended May 31, 2021 to $264 thousand for the three months ended May 31,
2022 , primarily due to subsidies received from the Taiwan government for the
COVID-19 pandemic in 2021.
Foreign currency transaction loss, net We recognized a net foreign currency
transaction loss of $307 thousand and gain of $155 thousand for the three months
ended May 31, 2022 and 2021, respectively, primarily due to the depreciation of
the U.S. dollar against the NT dollar from bank deposits and accounts payables.
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Table of Contents Income Tax Expense Our effective tax rate is expected to be approximately zero for fiscal 2022 and was zero for fiscal 2021, since Taiwan SemiLEDs incurred losses, and because we provided a full valuation allowance on all deferred tax assets, which consisted primarily of net operating loss carryforwards and foreign investment loss. OnDecember 22, 2017 , theU.S. Tax Cuts and Jobs Act was adopted, which among other effects, reduced theU.S. federal corporate income tax rate to 21% from 34% (or 35% in certain cases) beginning in 2018, requires companies to pay a one-time transition tax on certain unrepatriated earnings from non-U.S. subsidiaries that is payable over eight years, makes the receipt of future non-U.S. sourced income of non-U.S. subsidiaries tax-free toU.S. companies and creates a new minimum tax on the earnings of non-U.S. subsidiaries relating to the parent's deductions for payments to the subsidiaries.
Net Income Attributable to Noncontrolling Interests
Three Months Ended
May 31, 2022 May 31, 2021
% of % of
$ Revenues $ Revenues
(in thousands)
Net income attributable to
noncontrolling interests $ 5 1 % $ 7 - %
We recognized net income attributable to non-controlling interests of $5
thousand and $7 thousand for the three months ended May 31, 2022 and 2021,
respectively, which was attributable to the share of the net losses of Taiwan
Bandaoti Zhaoming Co., Ltd. held by the non-controlling holders. Non-controlling
interests represented 2.63% and 3.05% equity interest in Taiwan Bandaoti
Zhaoming Co., Ltd. , as of May 31, 2022 and 2021, respectively.
Nine months Ended May 31, 2022 Compared to the Nine months Ended May 31, 2021
Nine Months Ended
May 31, 2022 May 31, 2021
% of % of Change Change
$ Revenues $ Revenues $ %
(in thousands)
LED chips $ 153 3 % $ 119 3 % $ 34 29 %
LED components 3,896 72 % 2,314 69 % 1,582 68 %
Lighting products 385 7 % 525 16 % (140 ) (27 ) %
Other revenues(1) 991 18 % 406 12 % 585 144 %
Total revenues, net 5,425 100 % 3,364 100 % 2,061 61 %
Cost of revenues 4,363 80 % 2,481 74 % 1,882 76 %
Gross profit $ 1,062 20 % $ 883 26 % $ 179 20 %
(1) Other includes primarily revenues attributable to the sale of epitaxial wafers, scraps and raw materials and the provision of services.
Revenues, net
Our revenues increased by 61% from$3.4 million for the nine months endedMay 31, 2021 to$5.4 million for the nine months endedMay 31, 2022 . The$2.1 million increase in revenues reflects a$1.6 million increase in sales of LED components and a$585 thousand increase in revenues attributable to other revenue, offset by a$140 thousand decrease in revenues attributable to sales of lighting products. Revenues attributable to the sales of our LED chips were$153 thousand and$119 thousand , representing 3% and 3% for the nine months endedMay 31, 2022 and 2021, respectively. The slight increase of revenues attributable to sales of LED chips was a result of an increase in the volume of LED chips sold. 25
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Revenues attributable to the sales of our LED components were$3.9 million and$2.3 million , representing 72% and 69%, respectively, of our revenues for the nine months endedMay 31, 2022 andMay 31, 2021 . The increase in revenues attributable to sales of LED components was primarily due to more volumes sold. Revenues attributable to the sales of lighting products represented 7% and 16% of our revenues for the nine months endedMay 31, 2022 and 2021, respectively. Revenues attributable to the sales of lighting products was$140 thousand lower for the nine months endedMay 31, 2022 primarily due to less demand for the lighting products sold. Revenues attributable to other revenues represented 18% and 12% of our revenues for the nine months endedMay 31, 2022 and 2021, respectively. The increase in revenues attributable to other revenues was primarily due to the non-recurring sale of raw materials and a joint development project with CrayoNano AS in the nine months endedMay 31, 2022 .
Cost of Revenues
Our cost of revenues increased by 76% from$2.5 million for the nine months endedMay 31, 2021 to$4.4 million for the nine months endedMay 31, 2022 . The increase in cost of revenues was primarily due to the increase in the volume of products sold. Gross Profit Our gross profit increased from$883 thousand for the nine months endedMay 31, 2021 to a gross profit of$1.1 million for the nine months endedMay 31, 2022 . Our gross margin percentage was 20% for the nine months endedMay 31, 2022 , as compared to 26% for the nine months endedMay 31, 2021 as a result of increase in the sales of products with lower margins. Operating Expenses Nine Months Ended May 31, 2022 May 31, 2021 % of % of Change Change $ Revenues $ Revenues $ % (in thousands) Research and development$ 1,056 19 %$ 1,162 35 %$ (106 ) (9 ) % Selling, general and administrative 2,333 43 % 2,078 62 % 255 12 % Gain on disposals of long-lived assets, net (196 ) (4 ) % (286 ) (9 ) % 90 (31 ) % Total operating expenses$ 3,193 58 %$ 2,954 88 %$ 239 8 % Research and development Our research and development expenses were$1.1 million and$1.2 million for the nine months endedMay 31, 2022 and 2021, respectively. The decrease was primary due to the$146 thousand decrease in government project R&D expenses and$104 thousand decrease materials and supplies capacity offset by the$120 thousand increase in payroll and compensation. Selling, general and administrative Our selling, general and administrative expenses were$2.3 million and$2.1 million for the nine months endedMay 31, 2022 andMay 31, 2021 . The slight increase was mainly attributable to a$129 thousand increase in insurance and$32 thousand increase in patent fees, offset partially by a$40 thousand decrease in professional service fees.
Gain on disposal of long-lived assets, net
We recognized a net gain of$196 thousand and$286 thousand on the disposal of long-lived assets for the nine months endedMay 31, 2022 and 2021, respectively. Due to the excess capacity charges that we have experienced for the last few years, considering the risk of technological obsolescence and according to the production plan built based on our sales forecast, we disposed of certain of our idle equipment. 26
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Other Income (Expenses)
Nine Months Ended
May 31, 2022 May 31, 2021
% of % of
$ Revenues $ Revenues
(in thousands)
Interest expenses, net (277 ) (5 ) % (278 ) (8 ) %
Other income, net 1,215 22 % 951 28 %
Foreign currency transaction (loss)
gain, net (395 ) (7 ) % 380 11 %
Total other income, net $ 543 10 % $ 1,053 31 %
Interest expenses, net Interest expenses, net was
Other income, net Other income, net increase from$951 thousand for the nine months endedMay 31, 2021 , to$1.2 million for the nine months endedMay 31, 2022 , primarily due to higher rental income and payments received under the new Patent Cross-License Agreement with CrayoNano AS. Foreign currency transaction gain, net We recognized a net foreign currency transaction loss of$395 thousand and gain of$380 thousand for the nine months endedMay 31, 2022 and 2021, respectively, primarily due to the depreciation of theU.S. dollar against the NT dollar from bank deposits and accounts payables.
Income Tax Expense
Our effective tax rate is expected to be approximately zero for fiscal 2022 and was zero for fiscal 2021, since Taiwan SemiLEDs incurred losses, and because we provided a full valuation allowance on all deferred tax assets, which consisted primarily of net operating loss carryforwards and foreign investment loss.
Net Income (Loss) Attributable to Noncontrolling Interests
Nine Months Ended
May 31, 2022 May 31, 2021
% of % of
$ Revenues $ Revenues
(in thousands)
Net income (loss) attributable to
noncontrolling interests $ 18 - % $ (2 ) -
We recognized net income attributable to non-controlling interests of $18
thousand and net loss of $2 thousand for the nine months ended May 31, 2022 and
2021, respectively, which was attributable to the share of the net losses of
Taiwan Bandaoti Zhaoming Co., Ltd. held by the non-controlling holders.
Non-controlling interests represented 2.63% and 3.05% equity interest in Taiwan
Bandaoti Zhaoming Co., Ltd. , as of May 31, 2022 and May 31, 2021 , respectively.
Liquidity and Capital Resources
As ofMay 31, 2022 andAugust 31, 2021 , we had cash and cash equivalents of$3.0 million and$4.8 million , respectively, which were predominately held inU.S. dollar denominated demand deposits and/or money market funds.
As of
Our long-term debt, which consisted of NT dollar denominated long-term notes, convertible unsecured promissory notes, and loans from our Chairman and our largest shareholder, totaled$7.2 million and$7.7 million as ofMay 31, 2022 andAugust 31, 2021 , respectively. Our NT dollar denominated long-term notes, totaled$3.2 million of bothMay 31, 2022 andAugust 31, 2021 . These long-term notes consisted of two loans which we entered into onJuly 5, 2019 , with aggregate amounts of$3.2 million (NT$100 million ). The first loan originally for$2.0 million (NT$62 million ) has an annual floating interest rate equal to the NTD base lending rate plus 0.64% (or 1.69% currently), and was exclusively used to repay the existing loans. The second loan originally for$1.2 million (NT$38 million ) has an annual floating interest rate equal to the NTD base lending rate plus 1.02% (or 2.07% currently) and is available for operating capital. 27
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These loans are secured by an$86 thousand (NT$2.5 million ) security deposit and a first priority security interest on the Company's headquarters building. Due to the impact of the COVID-19 pandemic, the bank agreed to give us a deferment period for twelve months starting fromMay 2020 untilApril 2021 . During this period, we did not need to pay the monthly payments of the principal but only the interest.
•
Starting fromMay 2021 , the first note payable requires monthly payments of principal in the amount of$25 thousand plus interest over the 74-month term of the note with final payment to occur inJuly 2027 and, as ofMay 31, 2022 , our outstanding balance on this note payable was approximately$1.6 million .
•
Starting fromMay 2021 , the second note payable requires monthly payments of principal in the amount of$16 thousand plus interest over the 74-month term of the note with final payment to occur inJuly 2027 and, as ofMay 31, 2022 , our outstanding balance on this note payable was approximately$1.0 million .
Property, plant and equipment pledged as collateral for our notes payable were
OnJanuary 8, 2019 , we entered into loan agreements with each of our Chairman and Chief Executive Officer and our largest shareholder, with aggregate amounts of$3.2 million , and an annual interest rate of 8%. All proceeds of the loans were exclusively used to return the deposit toFormosa Epitaxy Incorporation in connection with the proposed sale of our headquarters building pursuant to the agreement datedDecember 15, 2015 . We were initially required to repay the loans of$1.5 million onJanuary 14, 2021 and$1.7 million onJanuary 22, 2021 , respectively. OnJanuary 16, 2021 , the maturity date of these loans was extended with same terms and interest rate for one year toJanuary 15, 2022 , and onJanuary 14, 2022 , the maturity date of these loans was further extended with same terms and interest rate for one more year toJanuary 15, 2023 . As ofMay 31, 2022 andAugust 31, 2021 , these loans totaled$3.2 million , respectively. The loans are secured by a second priority security interest on our headquarters. OnDecember 6, 2019 and onDecember 10, 2019 , we issued convertible unsecured promissory notes to each of our Chairman and Chief Executive Officer and our largest shareholder (the "Holders"), with a principal sum of$2 million and an annual interest rate of 3.5%. Principal and accrued interest was due on demand by the Holders on and at any time afterMay 30, 2021 (the "Maturity Date"). The outstanding principal and unpaid accrued interest of the Notes may be converted into our Common Stock based on a conversion price of$3 dollars per share, at the option of the Holders any time from the date of the Notes. OnMay 25, 2020 , the Holders each converted$300 thousand of notes into 100,000 shares of our common stock. OnMay 26, 2021 , the Notes were extended with the same terms and interest rate for one year and were scheduled to mature onMay 30, 2022 , and onMay 26, 2022 , the Notes were further extended with the same terms and interest rate for one year and now mature onMay 30, 2023 . As ofMay 31, 2022 andAugust 31, 2021 , the outstanding principal of these notes totaled$1.4 million . We have incurred significant losses since inception, including net losses attributable toSemiLEDs stockholders of$916 thousand and$64 thousand during the three months endedMay 31, 2022 and 2021, respectively. Net cash used in operating activities for the nine months endedMay 31, 2022 was$1.9 million . As ofMay 31, 2022 , we had cash and cash equivalents of$3.0 million . We have undertaken actions to decrease losses incurred and implemented cost reduction programs in an effort to transform the Company into a profitable operation. In addition, we are planning to issue additional equity to our stockholders. OnJuly 6, 2021 , we entered into a Sales Agreement (the "Sales Agreement") withRoth Capital Partners, LLC (the "Agent"). In accordance with the terms of the Sales Agreement, we may offer and sell from time to time through the Agent our common stock having an aggregate offering price of up to$20,000,000 (the "Placement Shares"). Sales of the Placement Shares, if any, will be made on Nasdaq at market prices by any method permitted by law deemed to be an "at the market offering" as defined in Rule 415 of the Securities Act of 1933, as amended. The Company will pay a commission to the Agent of 3.0% of the gross proceeds of the sale of the Placement Shares sold under the Agreement and reimburse the Agent for certain expenses. In the fourth quarter of fiscal 2021, we sold 344,391 shares of common stock for gross proceeds of$4.2 million with$125 thousand paid as placement agent fees under our ATM program. InApril 2022 , we sold 200 shares of the Company's common stock for gross proceeds of$690 , before placement agent fees and bank fees of$146 . We estimate that our cash requirements to service debt and contractual obligations in fiscal 2022 is approximately$5.1 million , which we expect to fund through the issuance of additional equity under the ATM program or through an extension or conversion of the convertible notes dueMay 2023 . Based on our current financial projections and assuming the successful implementation of our liquidity plans, we believe that we will have sufficient sources of liquidity to fund our operations and capital expenditure plans for the next 12 months and beyond. However, there can be no assurances that our planned activities will be successful in raising additional capital, reducing losses and preserving cash. If we are not able to generate positive cash flows from operations, we may need to consider alternative financing sources and seek additional funds through public or private equity financings or from other sources, or refinance our indebtedness, to support our working capital requirements or for other purposes. There can be no assurance that additional debt or equity financing will be available to us or that, if available, such financing will be available on terms favorable to us. 28
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The following summary of our cash flows for the periods indicated has been derived from our unaudited interim condensed consolidated financial statements, which are included elsewhere in this Quarterly Report (in thousands):
Nine Months Ended
May 31, 2022 May 31 , 2021
Net cash used in operating activities$ (1,863 ) $ (826 ) Net cash provided by investing activities $ 107 $ 168 Net cash used in financing activities $ (390 ) $ (55 )
Cash Flows Used In Operating Activities
Net cash used in operating activities for the nine months endedMay 31, 2022 andMay 31, 2021 was$1.9 million and$826 thousand , respectively. The$1.0 million increase in cash flows used in operating activities for the nine months endedMay 31, 2022 was primary attributable to an increase of$570 thousand in net loss and$1.2 million increase in accounts receivable offset by the$654 thousand decrease in inventories.
Cash Flows Provided by Investing Activities
Net cash provided by investing activities for the nine months endedMay 31, 2022 was$107 thousand , consisting primarily of$187 thousand of proceeds from the sales of machinery and equipment, offset in part by$69 thousand of purchases of machinery and equipment. Net cash provided by investing activities for the nine months endedMay 31, 2021 was$168 thousand , consisting primarily of$291 thousand of proceeds from the sales of machinery and equipment, offset in part by$111 thousand of purchases of machinery and equipment.
Cash Flows Used In Financing Activities
Net cash used in financing activities for the nine months endedMay 31, 2022 was$390 thousand , consisting primarily of$368 thousand of repayments on long-term debt and$23 thousand for acquisition of noncontrolling interest. Net cash used in financing activities for the nine months endedMay 31, 2021 was$55 thousand , consisting primarily of$43 thousand of repayments on long-term debt and$12 thousand for acquisition of noncontrolling interest.
Capital Expenditures
We had capital expenditures of$69 thousand and$111 thousand for the nine months endedMay 31, 2022 and 2021, respectively. Our capital expenditures consisted primarily of the purchases of machinery and equipment, construction in progress, prepayments for our manufacturing facilities and prepayments for equipment purchases. We expect to continue investing in capital expenditures in the future as we expand our business operations and invest in such expansion of our production capacity as we deem appropriate under market conditions and customer demand. However, in response to controlling capital costs and maintaining financial flexibility, our management continues to monitor prices and, consistent with its existing contractual commitments, may decrease further its activity level and capital expenditures as appropriate. 29
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