SEMILEDS CORPORATION Forward Looking Statements
This Quarterly Report on Form 10-Q, or this Quarterly Report, contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements other than statements of historical facts contained in this Quarterly Report, including statements regarding the future results of operations ofSemiLEDs Corporation , or "we," "our" or the "Company," and financial position, strategy and plans, and our expectations for future operations, including the execution of our restructuring plan and any resulting cost savings, are forward-looking statements. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. The words "believe," "may," "should," "plan," "potential," "project," "will," "estimate," "continue," "anticipate," "design," "intend," "expect" and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, and actual results and the timing of certain events could differ materially and adversely from those anticipated or implied in the forward-looking statements as a result of many factors. These factors include, among other things,
• Declining cash position.
• The ability to retain the
million note financing as liquidated damages.
• Our ability to close the pending sale of our Hong Kong subsidiary.
• 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 as a result of our current
failure to meet the minimum stockholders' equity requirement.
• 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
Taiwan ,the United States ,Germany andIndia , where our revenues are concentrated. 16
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• Our ability to develop and execute upon a new strategy to exploit the
China andIndia market. • Our ability to resolve pending litigation on favorable terms.
• The reduction or elimination of government investment in LED lighting or
the elimination of, or changes in, policies in certain countries that
encourage the use of LEDs over some traditional lighting technologies.
• Our ability to implement our product innovation strategy effectively,
particularly in view of the prohibition against our (and/or our assisting
others in) making, using, importing, selling and/or offering to sell in
accused product after October 1, 2012 as a result of the injunction agreed
to in connection with the Cree Inc., or Cree, litigation.
• Loss of customers.
• Failure of our strategy of marketing and selling our products injurisdictions with limited intellectual property enforcement regimes.
• Lack of marketing and distribution success by our third-party distributors.
• Our customers' ability to produce and sell products incorporating our LED
products.
• Our failure to adequately prevent disclosure of trade secrets and other
proprietary information.
• Ineffectiveness of our disclosure controls and procedures and our internal
control over financial reporting.
• Our ability to profit from 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
make dividends and other payments to
• Our ability to obtain necessary regulatory approvals to make further
investments in Taiwan SemiLEDs.
• Catastrophic events such as fires, earthquakes, floods, tornados,
tsunamis, typhoons, pandemics, wars, terrorist activities and other
similar events, particularly if these events occur at or near ouroperations, or the operations of our suppliers, contract manufacturers and
customers.
• The effect of the legal system in
• Labor shortages, strikes and other disturbances that affect our operations.
• Deterioration in the relations between the PRC and
• Fluctuations in the exchange rate among the
or NT, dollar, the Japanese Yen and other currencies in which our sales,
raw materials and component purchases and capital expenditures are
denominated.
• 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, 2019 , or the
2019 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 2019 Annual
Report, and in other filings with the SEC .
Company Overview
We develop, manufacture and sell light emitting diode (LED) chips and LED components, LED modules and systems. Our products are used for general lighting and specialty industrial applications, including 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 mirrorlike 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 multiplelayered 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, includingTaiwan ,the United States ,the Netherlands ,Germany andIndia . We also sell our "Enhanced Vertical," or EV, LED product series in blue, white, green and UV in selected markets. We sell our LED chips to packagers or to distributors, who in turn sell to packagers. Our lighting products customers are primarily original design manufacturers, or ODMs, of lighting products and the endusers of lighting devices. We also contract other manufacturers to produce for our sale certain LED products, and for certain aspects of our product fabrication, assembly and packaging processes, based on our design and technology requirements and under our quality control specifications and final inspection process.
We have developed advanced capabilities and proprietary know-how in:
• reusing sapphire substrate in subsequent production runs;
• optimizing our epitaxial growth processes to create layers that
efficiently convert electrical current into light;
• employing a copper alloy base manufacturing technology to improve our
chip's thermal and electrical performance;
• utilizing nanoscale surface engineering to improve usable light extraction;
• manufacturing extremely small footprint LEDs with optimized yield, ideal
for Mini LED applications;
• developing a LED structure that generally consists of multiple epitaxial
layers which are vertically-stacked on top of a copper alloy base;
• developing low cost Chip Scaled Packaging (CSP) technology; and
• developing multi-pixel Mini LED packages for commercial displays.
These technical capabilities enable us to produce LED chips, LED component, LED
modules and System products. We believe these capabilities and know-how should
also allow us to reduce our manufacturing costs and our dependence on sapphire,
a costly raw material used in the production of sapphire-based LED devices.
We were incorporated in the State of Delaware on January 4, 2005 . We are a
holding company for various wholly and majority owned subsidiaries. SemiLEDs
Optoelectronics Co., Ltd. , or Taiwan SemiLEDs, is our wholly owned operating
subsidiary, where a substantial portion of our assets are held and located,
where a portion of our research, development, manufacturing and sales activities
take place. Taiwan SemiLEDs owns an approximately 97% equity interest in Taiwan
Bandaoti Zhaoming Co., Ltd. , formerly known as Silicon Base Development, Inc. ,
which is engaged in the research, development, manufacture, and substantial
portion of marketing and sale of LED products, including lighting fixtures and
systems, and where most of our employees are based.
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--------------------------------------------------------------------------------Key Factors Affecting Our Financial Condition, Results of Operations and Business
The following are key factors that we believe affect our financial condition, results of operations and business:
• Our ability to raise additional debt funding, 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 arefavorable to us, or at all. The raising of additional debt funding by us,
if required and available, would result in increased debt service
obligations and could result in additional operating and financing
covenants, or liens on our assets, that would restrict our operations. The
sale of additional equity securities, if required and available, could
result in dilution to our stockholders.
• Our ability to get chips from other chip suppliers. Our reliance on our
chip suppliers exposes us to a number of significant risks, including
reduced control over delivery schedules, quality assurance and production
costs, lack of guaranteed production capacity or product supply. If our
chip suppliers are unable or unwilling to continue to supply our chips at
requested quality, quantity, performance and costs, or in a timely manner,
our business and reputation could be seriously harmed. Our inability to
procure chips from other chip suppliers at the desired quality, quantity,
performance and cost might result in unforeseen manufacturing and
operations problems. In such events, our customer relationships, business,
financial condition and results of operations would be adversely affected.
• Industry growth and demand for products and applications using LEDs. The
overall adoption of LED lighting devices to replace traditional lighting
sources is expected to influence the growth and demand for LED chips and
component products and impact our financial performance. We believe the
potential market for LED lighting will continue to expand. LEDs for
efficient generation of UV light are also starting to gain attention for
various medical, germicidal and industrial applications. Since a
substantial portion of our LED chips, LED components and our lighting
products are used by end users in general lighting applications and
specialty industrial applications such as UV curing, medical/cosmetic,
counterfeit detection, horticulture, architectural lighting and
entertainment lighting the adoption of LEDs into these applications will
have a strong impact on the demand of LED chips generally and, as aresult, for our LED chips, LED components and LED lighting products.
• Average selling price of our products. The average selling price of our
products may decline for a variety of factors, including prices charged by
our competitors, the efficacy of our products, our cost basis, changes in
our product mix, the size of the order and our relationship with the
relevant customer, as well as general market and economic conditions.
Competition in the markets for LED products is intense, and we expect that
competition will continue to increase, thereby creating a highly
aggressive pricing environment. For example, some of our competitors have
in the past reduced their average selling prices, and the resulting
competitive pricing pressures have caused us to similarly reduce our
prices, accelerating the decline in our revenues and the gross margin of
our products. When prices decline, we must also write down the value of
our inventory. Furthermore, the average selling prices for our LED
products have typically decreased over product life cycles. Therefore, our
ability to continue to innovate and offer competitive products that meet
our customers' specifications and pricing requirements, such as higherefficacy LED products at lower costs, will have a material influence on
our ability to improve our revenues and product margins, although in the
near term the introduction of such higher performance LED products may
further reduce the selling prices of our existing products or render them
obsolete.
• 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 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. Steadily 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.
• Our ability to continue to innovate. As part of our growth strategy, we
plan to continue to be innovative in product design, to deliver new
products and to improve our manufacturing efficiencies. Our continued
success depends on our ability to develop and introduce new,
technologically advanced and lower cost products, such as more efficient,
better performance LED component products. If we are unable to introduce
new products that are commercially viable and meet rapidly evolving
customer requirements or keep pace with evolving technological standards
and market developments or are otherwise unable to execute our product
innovation strategy effectively, we may not be able to take advantage of
market opportunities as they arise, execute our business plan or be able
to compete effectively. To differentiate ourselves from other LED package
manufacturers, we are putting more resources towards module and system
design. Along with our technical know-how in the chip and package sectors,
we are able to further integrate electrical, thermal and mechanical
manufacturing resources to provide customers with one-stop system
services. Services include design, prototyping, OEM and ODM. Key markets
that we intend to target at the system end include different types of UV
LED industrial printers, aquarium lighting, medical applications, nicheimaging light engines, horticultural lighting and high standard commercial
lighting. The modules are designed for various printing, curing, and PCB
exposure industrial equipment, providing uncompromised reliability and
optical output. Our LED components include different sizes and wattage to
accommodate different demands in the LED market.
• General economic conditions and geographic concentration. Many countries
including
have instituted, or have announced plans to institute, government
regulations and programs designed to encourage or mandate increased energy
efficiency in lighting. These actions include in certain cases banning the
sale after specified dates of certain forms of incandescent lighting,
which are advancing the adoption of more energy efficient lighting
solutions such as LEDs. When the global economy slows or a financial
crisis occurs, consumer and government confidence declines, with levels of
government grants and subsidies for LED adoption and consumer spending
likely to be adversely impacted. Our revenues have been concentrated in a
few select markets, including
(including
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 toChinese 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 months ended November 30, 2019 , sales to our three largest
customers, in the aggregate, accounted for 66% of our revenues.
• 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 notbeing able to manufacture, use or sell products found to be infringing. In
agreed to dismiss amended complaints filed against each other without
prejudice. We agreed to the entry of a permanent injunction that was
effective
others in) making, using, importing, selling and/or offering to sell in
such an accused product after that date and to payment of a settlement fee
for past damages. All remaining claims between Cree and us were withdrawn
without prejudice, with each retaining the right to assert them in the
future. However, other third parties may also assert infringement claimsagainst our customers with respect to our products, or our customers'
products that incorporate our technologies or products. Any such legal
action or the threat of legal action against us, or our customers, could
impair such customers' continued demand for our products. This could
prevent us from growing or even maintaining our revenues, or cause us toincur additional costs and expenses, and adversely affect our financial
condition and results of operations.
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• Declining cash position. Our cash and cash equivalents decreased to
$688 thousand as ofNovember 30, 2019 due to the combination of our net cash used in operating activities and payments related to 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, minimize our research and development activities
associated with chips manufacturing operation. We believe we will be able
to generate positive cash inflows through the restructuring of our chip
operation and the significant ongoing cost savings in the form of reduced
payroll and research and development activities. 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.Critical Accounting Policies and Estimates
OnSeptember 1, 2019 , we adopted 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. There was no material impact on our consolidated financial position, results of operations or cash flows due to the adoption. OnSeptember 1, 2019 , we adopted 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. There was no material impact on our consolidated financial position, results of operations or cash flows due to the adoption. EffectiveSeptember 1, 2019 , we adopted, without restating comparatives, ASC 842, 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. As ofSeptember 1 2019 , we recognized$307 thousand of lease right of use Asset and of lease liability; and there was no material impact on our consolidated financial results of operations or cash flows due to the adoption. Except as described above, there have been no material changes in the matters for which we make critical accounting policies and estimates in the preparation of our unaudited interim condensed consolidated financial statements for the three months endedNovember 30, 2019 as compared to those disclosed in our 2019 Annual Report. Exchange Rate Information We are aDelaware corporation and, underSEC requirements, must report our financial position, results of operations and cash flows in accordance with accounting principles generally accepted inthe United States of America , orU.S. GAAP. At the same time, our subsidiaries use the local currency as their functional currency. For example, the functional currency for Taiwan SemiLEDs is the NT dollar. The assets and liabilities of the subsidiaries are, therefore, translated intoU.S. dollars at exchange rates in effect at each balance sheet date, and income and expense accounts are translated at average exchange rates during the period. The resulting translation adjustments are recorded to a separate component of accumulated other comprehensive income (loss) within equity. Any gains and losses from transactions denominated in currencies other than their functional currencies are recognized in the consolidated statements of operations as a separate component of other income (expense). Due to exchange rate fluctuations, such translated amounts may vary from quarter to quarter even in circumstances where such amounts have not materially changed when denominated in their functional currencies. 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 . OnNovember 30, 2019 , the exchange rate was 30.5 NT dollars toone U.S. dollar . OnJanuary 7, 2020 , the exchange rate was 30.05 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. 21 --------------------------------------------------------------------------------
Results of Operations
Three Months EndedNovember 30, 2019 Compared to the Three Months EndedNovember 30, 2018 Three Months Ended November 30, 2019 2018 % of % of Change Change $ Revenues $ Revenues $ % (in thousands) LED chips$ 8 1 %$ 69 7 %$ (61 ) (88 ) % LED components 1,073 69 % 679 70 % 394 58 % Lighting products 78 5 % 173 18 % (95 ) (55 ) % Other revenues(1) 404 25 % 51
5 % 353 692 %
Total revenues, net 1,563 100 % 972
100 % 591 61 %
Cost of revenues 1,045 67 % 1,191
123 % (146 ) (12 ) %
Gross profit (loss)$ 518 33 %$ (219 ) (23 ) %$ 737 (337 ) %
(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% to$1.6 million for the three months endedNovember 30, 2019 from$972 thousand for the three months endedNovember 30, 2018 . The increase in revenues was driven primarily by a$394 thousand increase in sales of LED components and a$353 thousand increase in other revenues. Revenues attributable to the sales of our LED chips represented 1% and 7% of our revenues for the three months endedNovember 30, 2019 and 2018, respectively. The decrease of 88% in revenues attributable to sales of LED chips was the result of a decrease in the volume of LED chips sold, 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 69% and 70% of our revenues for the three months endedNovember 30, 2019 and 2018, respectively. The increase in revenues attributable to sales of LED components was primarily due to seasonal swings in demand for UV LED components products. Revenues attributable to the sales of lighting products represented 5% and 18% of our revenues for the three months endedNovember 30, 2019 and 2018, respectively. Revenues attributable to the sales of lighting products were lower for the three months endedNovember 30, 2019 primarily due to a slowdown in demand on LED luminaries and LED retrofits, and fewer non-recurring project-based orders for LED lighting products. Revenues attributable to other revenues represented 25% and 5% of our revenues for the three months endedNovember 30, 2019 and 2018, respectively. The increase in revenues attributable to other revenues was primarily due to the sale of raw materials. Cost of Revenues Our cost of revenues decreased by 12% from$1.2 million for the three months endedNovember 30, 2018 to$1.0 million for the three months endedNovember 30, 2019 . The decrease in cost of revenues was primarily due to the effort of focusing on profitable products.
Gross Profit
Our gross margin increased from a loss of$219 thousand for the three months endedNovember 30, 2018 to a profit of$518 thousand for the three months endedNovember 30, 2019 . The increase was a consequence of the focusing on profitable products, as more fully described above. 22 --------------------------------------------------------------------------------
Operating Expenses
Three Months Ended November 30,
2019 2018
% of % of Change Change
$ Revenues $ Revenues $ %
(in thousands)
Research and development $ 430 28 % $ 334
34 % $ 96 29 %
Selling, general and
administrative 726 46 % 757 78 % (31 ) (4 ) %
Gain on disposals of
long-lived assets (79 ) (5 ) % (288 ) (30 ) % 209 - %
Total operating expenses $ 1,077 68 % $ 803 46 % $ 274 34 %
Research and development Our research and development expenses were
Selling, general and administrative Our selling, general and administrative expenses decreased from$757 thousand for the three months endedNovember 30, 2018 to$726 thousand for the three months endedNovember 30, 2019 . The decrease was mainly attributable to decreases in various other expenses including professional service expenses. Gain on disposal of long-lived assets We recognized a gain of$79 thousand and$288 thousand on the disposal of long-lived assets for the three months endedNovember 30, 2019 and 2018, respectively. 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. Other Income (Expenses) Three Months Ended November 30, 2019 2018 % of % of $ Revenues $ Revenues (in thousands) Interest expenses, net$ (78 ) - %$ (5 ) - % Other income, net 157 10 % 80 8 % Foreign currency transaction gain (loss), net 158 10 % (36 ) (4 ) % Total other income, net$ 237 15 %$ 39 4 % 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 onJanuary 8, 2019 with each of our Chairman and our largest stockholder, with aggregate amounts of$3.2 million , and an annual interest rate of 8%. The proceeds of the loans were used to return the deposit received in 2015 in connection with the proposed sale of our headquarters building, which sale agreement was terminated. Other income, net Other income primarily consist of rental income from the lease of spare space in our Hsinchu building. The increase in other income for the three months endedNovember 30, 2019 , compared to the three months endedNovember 30, 2018 , was primarily due to more spare space being leased to other parties. Foreign currency transaction loss, net We recognized net foreign currency transaction gain of$158 thousand and a loss of$36 thousand for the three months endedNovember 30, 2019 and 2018, respectively, primarily due to the depreciation of theU.S. dollar against the NT dollar from bank deposits and accounts receivables held byTaiwan SemiLEDs and Taiwan Bandaoti Zhaoming Co., Ltd. in currency other than the functional currency of such subsidiaries.
Income Tax Expense
Our effective tax rate is expected to be approximately zero for fiscal 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.
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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.
Net Loss Attributable to Non-controlling Interests
Three Months Ended November 30,
2019 2018
% of % of
$ Revenues $ Revenues
(in thousands)
Net loss attributable to
noncontrolling interests $ (5 ) - % $ (5 ) - %
We recognized net loss attributable to non-controlling interests of $5 thousand
for both the three months ended November 30, 2019 and 2018, which was
attributable to the share of the net losses of Taiwan Bandaoti Zhaoming Co., Ltd
held by the remaining non-controlling holders. Non-controlling interests
represented 3.29% and 3.31% equity interest in Taiwan Bandaoti Zhaoming CO., Ltd
as of November 30, 2019 and 2018, respectively.
Liquidity and Capital Resources
As ofNovember 30, 2019 andAugust 31, 2019 , we had cash and cash equivalents of$688 thousand and$1.4 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 and loans from our Chairman and our largest shareholder, totaled$6.3 million and$6.4 million as ofNovember 30 andAugust 31, 2019 , respectively. Our NT dollar denominated long-term notes, totaled$3.1 million and$3.2 million as ofNovember 30, 2019 andAugust 31, 2019 , respectively. These long-term notes consisted of two loans which we entered into onJuly 5, 2019 , with aggregate amounts of$3.2 million (NT$100 million ). The first loan originally for$2.0 million (NT$62 million ) has an annual floating interest rate equal to the NTD base lending rate plus 0.64% (or 1.62% 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% currently) and is available for operating capital. These 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.
• The first note payable requires monthly payments of principal in the
amount of
final payment to occur in
outstanding balance on this note payable was approximately $1.9 million .
• The second note payable requires monthly payments of principal in the
amount of
final payment to occur in
outstanding balance on this note payable was approximately
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 cancelled sale of our headquarters building pursuant to the agreement datedDecember 15, 2015 . We are required to repay the loans of$1.5 million onJanuary 14, 2021 and$1.7 million onJanuary 22, 2021 , respectively, unless the loans are sooner accelerated pursuant to the loan agreements. As ofNovember 30, 2019 andAugust 31, 2019 , these loans totaled both$3.2 million . The loans are secured by a second priority security interest on our headquarters building. 24
-------------------------------------------------------------------------------- We have incurred significant losses since inception, including net losses attributable toSemiLEDs stockholders of$3.6 million and$3.0 million during the years endedAugust 31, 2019 and 2018, respectively. Net cash used in operating activities for the year endedAugust 31, 2019 was$3.5 million . As ofAugust 31, 2019 , we had cash and cash equivalents of$1.4 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. In addition we are planning to issue convertible notes to our major stockholders and may issue additional equity. Based on our current financial projections and assuming the successful implementation of our liquidity plans, we believe that we will have sufficient sources of liquidity to fund our operations and capital expenditure plans for the next 12 months. However, there can be no assurances that our planned activities will be successful in raising additional capital, reducing losses and preserving cash. If we are not able to generate positive cash flows from operations, we may need to consider alternative financing sources and seek additional funds through public or private equity financings or from other sources, or refinance our indebtedness, to support our working capital requirements or for other purposes. There can be no assurance that additional debt or equity financing will be available to us or that, if available, such financing will be available on terms favorable to us.
Cash Flows
The following summary of our cash flows for the periods indicated has been derived from our unaudited interim condensed consolidated financial statements, which are included elsewhere in this Quarterly Report (in thousands):
Three Months Ended November 30,
2019 2018
Net cash used in operating activities
(1,266 )
Net cash provided by investing activities $ 21 $
485
Net cash used in financing activities
(83 )
Cash Flows Used In Operating Activities
Net cash used in operating activities for the three month endedNovember 30, 2019 and 2018 was$324 thousand and$1.3 million , respectively. The cash flows used in operating activities for the three months endedNovember 30, 2019 was$942 thousand less, primarily due to a decrease in net loss, offset partially by an increase in inventory.
Cash Flows Used In Investing Activities
Net cash used in investing activities for the three months ended
Net cash provided by investing activities for the three months endedNovember 30, 2018 was$485 thousand , consisting of$511 thousand in proceeds from sale of machinery and equipment, offset by a$24 thousand in purchases of machinery and equipment.
Cash Flows Used In Financing Activities
Net cash used in financing activities for the three months ended
Capital Expenditures
We had capital expenditures of$50 thousand and$24 thousand for the three months endedNovember 30, 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 is continuing to monitor prices and, consistent with the existing contractual commitments, may decrease further our activity level and capital expenditures as appropriate. 25 --------------------------------------------------------------------------------
Off-Balance Sheet Arrangements
As of
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