SemiLEDs Corp: Form 10-Q for the period ended May 31, 2023

Forward Looking Statements

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

• Declining cash position.
• Our ability to improve our liquidity, access alternative sources of funding and obtain additional equity capital or credit when necessary for our operations, the difficulty of which may increase if our common stock is delisted from the NASDAQ Stock Market.
• Our ability to maintain compliance with the continued listing requirements to avoid our stock being delisted from the Nasdaq Capital Market.
• The uncertainty and continuing impact of the COVID-19 and other health epidemics and outbreaks on our business and the business of our customers.
• The inability of our suppliers or other contract manufacturers to produce products that satisfy our requirements.
• Our ability to implement our cost reduction programs and to execute our restructuring plan effectively.
• Our ability to improve our gross margins, reduce our net losses and restore our operations to profitability.
• Our ability to successfully introduce new products that we can produce and that customers will purchase in such amounts as to be sufficiently profitable to cover the costs of developing and producing these products, as well as providing us additional net income from operations.
• Our ability to effectively develop, maintain and expand our sales and distribution channels, especially in the niche LED markets, including the UV LED and architectural lighting that we focus on.
• Our ability to successfully manage our operations in the face of the cyclicality, rapid technological change, rapid product obsolescence, declining average selling prices and wide fluctuations in supply and demand typically found in the LED market.
• Competitive pressures from existing and new companies.
• Our ability to grow our revenues generated from the sales of our products and to control our expenses.
• Loss of any of our key personnel, or our failure to attract, assimilate and retain other highly qualified personnel.
• Intellectual property infringement or misappropriation claims by third parties against us or our customers, including our distributor customers.
• The failure of LEDs to achieve widespread adoption in the general lighting market, or if alternative technologies gain market acceptance.
• The loss of key suppliers or contract manufacturers.
• Our ability to effectively expand or upgrade our production facilities or do so in a timely or cost-effective manner.
• Difficulty in managing our future growth or in responding to a need to contract operations, and the associated changes to our operations.
• Adverse development in those selected markets, including the United States, Japan, Netherlands and Taiwan where our revenues are concentrated, including the uncertain impact of inflation on customer demand.
• Our ability to develop and execute upon a new strategy to exploit the China and India market.
• 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.
• Loss of customers.
• Failure of our strategy of marketing and selling our products in jurisdictions with limited intellectual property enforcement regimes.
• Lack of marketing and distribution success by our third-party distributors.
• Our customers’ ability to produce and sell products incorporating our LED products.
• Our failure to adequately prevent disclosure of trade secrets and other proprietary information.
• Ineffectiveness of our disclosure controls and procedures and our internal control over financial reporting.
• Our ability to profit from future joint ventures, investments, acquisitions and other strategic alliances.
• Impairment of long-lived assets or investments.
• Undetected defects in our products that harm our sales and reputation and adversely affect our manufacturing yields.
• The availability of adequate and timely supply of electricity and water for our manufacturing facilities.
• Our ability to comply with existing and future environmental laws and the cost of such compliance.
• The ability of SemiLEDs Optoelectronics Co., Ltd., or Taiwan SemiLEDs, to make dividends and other payments to SemiLEDs Corporation.
• Our ability to obtain necessary regulatory approvals to make further investments in Taiwan SemiLEDs.
• Catastrophic events such as fires, earthquakes, floods, tornados, tsunamis, typhoons, pandemics, including the COVID-19 pandemic, wars, terrorist activities and other similar events, particularly if these events occur at or near our operations, or the operations of our suppliers, contract manufacturers and customers.
• The effect of the legal system in the People’s Republic of China, or the PRC.
• Labor shortages, strikes and other disturbances that affect our operations.
• Deterioration in the relations between the PRC and Taiwan governments.
• Fluctuations in the exchange rate among the U.S. dollar, the New Taiwan, or NT, dollar, the Japanese Yen and other currencies in which our sales, raw materials and component purchases and capital expenditures are denominated.

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, 2022, or the 2022 Annual Report, and those contained in Part II, Item 1A of this Quarterly Report, and other information provided from time to time in our filings with the Securities and Exchange Commission, or the SEC.

The following discussion and analysis of our financial condition and results of operations is based upon and should be read in conjunction with the unaudited interim condensed consolidated financial statements and the notes and other information included elsewhere in this Quarterly Report, in our 2022 Annual Report, and in other filings with the SEC.

Company Overview

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

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

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

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

• reusing sapphire substrate in subsequent production runs;
• optimizing our epitaxial growth processes to create layers that efficiently convert electrical current into light;
• employing a copper alloy base manufacturing technology to improve our chip’s thermal and electrical performance;
• utilizing nanoscale surface engineering to improve usable light extraction;
• 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 two wholly and majority owned subsidiaries. SemiLEDs Optoelectronics Co., Ltd., or Taiwan SemiLEDs, is our wholly owned operating subsidiary, where a substantial portion of our assets are held and located, where a portion of our research, development, manufacturing and sales activities take place. Taiwan SemiLEDs owns an approximately 97.37% 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.

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

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

• Our ability to raise additional debt, sell additional equity securities and improve our liquidity. We need to improve our liquidity, access alternative sources of funding and obtain additional equity capital or credit when necessary for our operations. In July 2021, we established an at-the-market equity program ("ATM") that allows us from time to time to sell up to the greater of $20 million of shares of our common stock, or the aggregate market value of common stock sold by us in the prior 12 months which is no more than one-third of the aggregate market value of our common stock held by non-affiliates. During fiscal 2022, we sold 286,328 shares of our common stock pursuant to the ATM program for net proceeds of $964,473. However, we may not be able to obtain new debt funding or sell additional equity securities on terms that are favorable to us, or at all. The raising of additional debt 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 should have a strong impact on the demand of LED chips generally and, as a result, for our LED chips, LED components and LED lighting products.
• Average selling price of our products. The average selling price of our products may decline for a variety of factors, including prices charged by our competitors, the efficacy of our products, our cost basis, changes in our product mix, the size of the order and our relationship with the relevant customer, as well as general market and economic conditions. Competition in the markets for LED products is intense, and we expect that competition will continue to increase, thereby creating a highly aggressive pricing environment. For example, some of our competitors have in the past reduced their average selling prices, and the resulting competitive pricing pressures have caused us to similarly reduce our prices, accelerating the decline in our revenues and the gross margin of our products. When prices decline, we must also write down the value of our inventory. Furthermore, the average selling prices for our LED products have typically decreased over product life cycles. Therefore, our ability to continue to innovate and offer competitive products that meet our customers’ specifications and pricing requirements, such as higher efficacy LED products at lower costs, will have a material influence on our ability to improve our revenues and product margins, although in the near term the introduction of such higher performance LED products may further reduce the selling prices of our existing products or render them obsolete.
• Changes in our product mix. We anticipate that our gross margins will continue to fluctuate from period to period as a result of the mix of products that we sell and the utilization of our manufacturing capacity in any given period, among other things. For example, we continue to pursue opportunities for profitable growth in areas of our business where we see the best opportunity to develop as an end-to-end LED module solution supplier by providing our customers with high quality, flexible and more complete LED system solution, customer technical support and LED module/system design, as opposed to just providing customers with individual components. As a strategic plan, we have placed greater emphasis on the sales of LED components rather than the sales of LED chips where we have been forced to cut prices on older inventory. Steady growth of the module product and the continued commercial sales of our UV LED product are expected to improve our gross margin, operating results and cash flows. In addition, we have adjusted the lower-priced LED components strategy as appropriate. We have adopted a strategy to adjust our product mix by exiting certain high volume but low unit selling price product lines in response to the general trend of lower average selling prices for products that have been available in the market for some time. However, as we expand and diversify our product offerings and with varying average selling prices, or execute new business initiatives, a change in the mix of products that we sell in any given period may increase volatility in our revenues and gross margin from period to period.
• Our ability to reduce cost to offset lower average selling prices. Competitors may reduce average selling prices faster than our ability to reduce costs, and competitive pricing pressures may accelerate the rate of decline of our average selling prices. To address increased pricing pressure, we have improved and increased our production yields to reduce the per-unit cost of production of our products. However, such cost savings currently have limited impact on our gross profit, as we currently suffer from the underutilization of manufacturing capacity and must absorb a high level of fixed costs, such as depreciation. While we intend to focus on managing our costs and expenses, over the long term we expect to be required to invest substantially in LED component products development and production equipment if we are to grow.
• Our ability to continue to innovate. As part of our growth strategy, we plan to continue to be innovative in product design, to deliver new products and to improve our manufacturing efficiencies. Our continued success depends on our ability to develop and introduce new, technologically advanced and lower cost products, such as more efficient, better performance LED component products. If we are unable to introduce new products that are commercially viable and meet rapidly evolving customer requirements or keep pace with evolving technological standards and market developments or 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.

• General economic conditions and geographic concentration. Many countries including the United States and the European Union (the “E.U.”) members have instituted, or have announced plans to institute, government regulations and programs designed to encourage or mandate increased energy efficiency in lighting. These actions include in certain cases banning the sale after specified dates of certain forms of incandescent lighting, which are advancing the adoption of more energy efficient lighting solutions such as LEDs. When the global economy slows or a financial crisis occurs, consumer and government confidence declines, with levels of government grants and subsidies for LED adoption and consumer spending likely to be adversely impacted. Our revenues have been concentrated in a few select markets, including the United States, Japan, Netherlands and Taiwan. Given that we are operating in a rapidly changing industry, our sales in specific markets may fluctuate from quarter to quarter. Therefore, our financial results will be impacted by general economic and political conditions in such markets. For example, the aggressive support by the Chinese government for the LED industry through significant government incentives and subsidies to encourage the use of LED lighting and to establish the LED ‑ sector companies has resulted in production overcapacity in the market and intense competition. Furthermore, due to Chinese package manufacturers increasing usage of domestic LED chips, prices are increasingly competitive, leading to Chinese manufacturers growing market share in the global LED industry. In addition, we have historically derived a significant portion of our revenues from a limited number of customers. Some of our largest customers and what we produce/have produced for them have changed from quarter to quarter primarily as a result of the timing of discrete, large project‑based purchases and broadening customer base, among other things. For the three and the nine months ended May 31, 2023, sales to our three largest customers, in the aggregate, accounted for 60% and 56% of our revenues, respectively. Revlon, our largest customer in fiscal 2022, filed for Chapter 11 bankruptcy in June 2022, which resulted in a write off receivable of $126 thousand for the year ended August 31, 2022. If Revlon is not able to reorganize its business successfully, our revenue and financial results could be adversely impacted.
• Intellectual property issues. Competitors of ours and other third parties have in the past and will likely from time to time in the future allege that our products infringe on their intellectual property rights. Defending against any intellectual property infringement claims would likely result in costly litigation and ultimately may lead to our not being able to manufacture, use or sell products found to be infringing. However, other third parties may also assert infringement claims against our customers with respect to our products, or our customers’ products that incorporate our technologies or products. Any such legal action or the threat of legal action against us, or our customers, could impair such customers’ continued demand for our products. This could prevent us from growing or even maintaining our revenues, or cause us to incur additional costs and expenses, and adversely affect our financial condition and results of operations.
• Cash position. Our cash and cash equivalents were $3.0 million for both May 31, 2023 and 2022. 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. In December 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 with conversion price of $3.00 per share of common stock in May 2020. On May 26, 2021 the Notes were extended with the same terms and interest rate for one year and matured on May 30, 2022. On May 26, 2022, the Notes were second extended with the same terms and interest rate for one year and matured on May 30, 2023. On June 6, 2023, the Notes were third extended to the maturity date from May 30, 2023 to May 30, 2024 with the conversion price changed from $3.00 to $2.046 per share. All other terms and conditions of the Notes remain the same. As of May 31, 2023 and August 31, 2022, the outstanding principal of these notes totaled $1.4 million. Based on our current financial projections, we believe that we will have sufficient sources of liquidity to fund our operations and capital expenditure plans for the next 12 months.

Critical Accounting Policies and Estimates

We believe that the application of the following accounting policies, which are important to our financial position and results of operations, require significant judgments and estimates on the part of management. For a summary of our significant accounting policies, including the accounting policies discussed below, see Item 1 to the Unaudited Consolidated Financial Statements.

Revenue Recognition

The Company recognizes the amount of revenue when the Company satisfies a performance obligation to which it expects to be entitled for the transfer of promised goods or services to customers. The Company obtains written purchase authorizations from its customers as evidence of an arrangement and these authorizations generally provide for a specified amount of product at a fixed price. Generally, the Company considers delivery to have occurred at the time of shipment as this is generally when title and risk of loss for the products will pass to the customer. The Company provides its customers with limited rights of return for non-conforming shipments and product warranty claims. Based on historical return percentages, which have not been material to date, and other relevant factors, the Company estimates its potential future exposure on recorded product sales, which reduces product revenues in the consolidated statements of operations and reduces accounts receivable in the consolidated balance sheets. The Company also provides standard product warranties on its products, which generally range from three months to two years. Management estimates the Company’s warranty obligations as a percentage of revenues, based on historical knowledge of warranty costs and other relevant factors. To date, the related estimated warranty provisions have been insignificant. Refer to Note 2 to the Unaudited Condensed Consolidated Financial Statements for our revenue recognition policies.

Accounts Receivable

The allowance for doubtful accounts is based on management’s assessment of the collectability of customer accounts. Management regularly reviews the allowance by considering certain factors such as historical experience, industry data, credit quality, age of accounts receivable balances and current economic conditions that may affect a customer’s ability to pay. No bad debt expenses were recognized during the three and nine months ended May 31, 2023 and 2022.

Write-down of Inventories

The Company writes down excess and obsolete inventory to its estimated net realizable value. The net realized value of inventories is the estimated selling price in the ordinary course of business less the estimated costs of completion and disposal. The estimation of net realized value is based on current market conditions and historical experience with product sales of similar nature. Changes in market conditions may have a material impact on the estimation of the net realizable value. For finished goods and work in process, if the estimated net realizable value for an inventory item, which is the estimated selling price in the ordinary course of business, less reasonably predicable costs to completion and disposal, is lower than its cost, the specific inventory item is written down to its estimated net realizable value. Net realizable value for raw materials is based on replacement cost. Provisions for inventory write downs are included in cost of revenues in the consolidated statements of operations. Once written down, inventories are carried at this lower cost basis until sold or scrapped. Inventory write‑downs to estimated net realizable values were $97 thousand and $176 thousand for the three months ended May 31, 2023 and 2022, respectively. Inventory write‑downs to estimated net realizable values were $471 thousand and $592 thousand for the nine months ended May 31, 2023 and 2022, respectively.

Exchange Rate Information

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

The translations from NT dollars to U.S. dollars were made at the exchange rates as set forth in the statistical release of the Bank of Taiwan. On May 31, 2023, the exchange rate was 30.75 NT dollars to one U.S. dollar. On June 30, 2023, the exchange rate was 30.82 NT dollars to one U.S. dollar.

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

Results of Operations

Three Months Ended May 31, 2023 Compared to the Three Months Ended May 31, 2022

(in thousands)

(1) Other includes primarily revenues attributable to the sale of epitaxial wafers, scraps and raw materials, the provision of services and a joint development project with CrayoNano AS.

Revenues, net

Our revenues decreased by 6% to $1.7 million for the three months ended May 31, 2023 from $1.8 million for the three months ended May 31, 2022. The decrease in revenues was driven primarily by a $125 thousand decrease in sales of LED components, a $22 thousand decrease in sales of LED chips and a $62 thousand decrease in lighting products, offset in part by a $104 thousand increase in other revenues.

Revenues attributable to the sales of our LED chips were $35 thousand and $57 thousand, representing 2% and 3%, respectively, of our revenues for the three months ended May 31, 2023 and 2022. The decrease was primarily due to less 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 $1,080 thousand and $1,205 thousand, representing 64% and 68%, respectively, of our revenues for the three months ended May 31, 2023 and 2022. Revenues attributable to sales of LED components were lower for the three months ended May 31, 2023 primarily due to less volumes sold.

Revenues attributable to the sales of lighting products represented 6% and 9% of our revenues for the three months ended May 31, 2023 and 2022, respectively. Revenues attributable to the sales of lighting products were lower for the three months ended May 31, 2023 primarily due to lower in demand for LED lighting products.

Revenues attributable to other revenues represented 28% and 20% of our revenues for the three months ended May 31, 2023 and 2022, respectively. The increase in revenues attributable to other revenues was primarily due to a service charge to CrayoNano AS in the three months ended May 31, 2023.

Cost of Revenues

Our cost of revenues was $1.4 million for both the three months ended May 31, 2023 and 2022. The slight decrease in cost of revenues was due to the decrease in the volume of products sold.

Gross Profit

Our gross profit decreased from $336 thousand for the three months ended May 31, 2022 to $241 thousand for the three months ended May 31, 2023. Our gross margin percentage decreased from 19% for the three months ended May 31, 2022 to 14% for the three months ended May 31, 2023 as a consequence of a decrease in the sales of products with higher margins.

Operating Expenses

(in thousands)

Research and development Our research and development expenses were $372 thousand and $357 thousand for the three months ended May 31, 2023 and 2022, respectively. The increase was primary due to a $55 thousand increase in materials and supplies, partially offset by a $32 thousand decrease in payroll and compensation and a $4 thousand decrease in professional service fees.

Selling, general and administrative Our selling, general and administrative expenses increased from $810 thousand for the three months ended May 31, 2022 to $850 thousand for the three months ended May 31, 2023. The increase was mainly attributable to an increase in stock-based compensation and professional service fees offset by various other expenses.

Gain on disposal of long-lived assets, net We recognized a net gain of $0 thousand and $57 thousand on the disposal of long-lived assets for the three months ended May 31, 2023 and 2022. 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 items of our idle equipment during the three months ended May 31, 2022.

Other Income (Expenses)

(in thousands)

24

Interest expenses, net Interest expenses, net primarily consisted of accrued interest payment on convertible notes, NT dollar denominated long-term notes and $3.2 million of loans with our Chairman and Chief Executive Officer and our largest shareholder. The decrease in interest expenses, net was primarily due to higher interest income for the three months ended May 31, 2023.

Other income, net Other income, net which primarily consisted of the rental income, was $295 thousand and $264 thousand for the three months ended May 31, 2023 and May 31, 2022, respectively.

Foreign currency transaction loss, net We recognized a net foreign currency transaction loss of $3 thousand and $307 thousand for the three months ended May 31, 2023 and 2022, respectively, primarily due to the appreciation of the U.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 2023 and was zero for fiscal 2022, since Taiwan SemiLEDs incurred losses, and because we provided a full valuation allowance on all deferred tax assets, which consisted primarily of net operating loss carryforwards and foreign investment loss.

Net Income Attributable to Noncontrolling Interests

(in thousands)

We recognized net income attributable to non-controlling interests of $0 and $5 thousand for the three months ended May 31, 2023 and 2022, 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% equity interest in Taiwan Bandaoti Zhaoming Co., Ltd., for both May 31, 2023 and 2022.

Nine months Ended May 31, 2023 Compared to the Nine months Ended May 31, 2022

(in thousands)

(1) Other includes primarily revenues attributable to the sale of epitaxial wafers, scraps and raw materials, the provision of services and a joint development project with CrayoNano AS.

Revenues, net

Our revenues decreased by 16% from $5.4 million for the nine months ended May 31, 2022 to $4.5 million for the nine months ended May 31, 2023. The $899 thousand decrease in revenues reflects a $1.6 million decrease in sales of LED components, a $78 thousand decrease in revenues attributable to sales of lighting products and a $47 thousand decrease in sales of LED chips, offset by a $827 thousand increase in revenues attributable to other revenues.

Revenues attributable to the sales of our LED chips were $106 thousand and $153 thousand, representing 2% of our revenues for both nine months ended May 31, 2023 and 2022. The slight decrease in revenues attributable to sales of LED chips was a result of a decrease in the volume of LED chips sold.

Revenues attributable to the sales of our LED components were $2.3 million and $3.9 million, representing 51% and 72% of our revenues for the nine months ended May 31, 2023 and 2022, respectively. The decrease in revenues attributable to sales of LED components was primarily due to less volumes sold.

Revenues attributable to the sales of lighting products were $307 thousand and $385 thousand, representing 7% of our revenues for both nine months ended May 31, 2023 and 2022. Revenues attributable to the sales of lighting products were $78 thousand lower for the nine months ended May 31, 2023 primarily due to less demand for the lighting products sold.

Revenues attributable to other revenues represented 40% and 18% of our revenues for the nine months ended May 31, 2023 and 2022, respectively. The increase in revenues attributable to other revenues was primarily due to the non-recurring sale of raw materials and a joint development project with CrayoNano AS beginning in January 2022.

Cost of Revenues

Our cost of revenues decreased by 18% from $4.4 million for the nine months ended May 31, 2022 to $3.6 million for the nine months ended May 31, 2023. The decrease in cost of revenues was primarily due to the decrease in the volume of products sold.

Gross Profit

Our gross profit decreased from $1.1 million for the nine months ended May 31, 2022 to $966 thousand for the nine months ended May 31, 2023. Our gross margin percentage was 21% for the nine months ended May 31, 2023, as compared to 20% for the nine months ended May 31, 2022 as a consequence of an increase in the sales of products with higher margins.

Operating Expenses

(in thousands)

Research and development Our research and development expenses were $1.0 million and $1.1 million for the nine months ended May 31, 2023 and 2022, respectively. The decrease was primary due to a $35 thousand decrease in payroll and compensation, an $18 thousand decrease in professional service fees and a $22 thousand decrease in depreciation and amortization offset by a $58 thousand increase in material and supplies.

Selling, general and administrative Our selling, general and administrative expenses were $2.3 million for both nine months ended May 31, 2023 and May 31, 2022. The slight decrease was mainly attributable to a $175 thousand decrease in other expenses offset partially by a $69 thousand increase in payroll and compensation and $30 thousand increase in professional service fees.

Gain on disposal of long-lived assets, net

We recognized a net gain of $0 and $196 thousand on the disposal of long-lived assets for the nine months ended May 31, 2023 and 2022, respectively. Due to the excess capacity charges that we have experienced for the last few years, considering the risk of technological obsolescence and according to the production plan built based on our sales forecast, we disposed of certain items of our idle equipment in the nine months ended May 31, 2022.

Other Income (Expenses)

(in thousands)

Interest expenses, net Interest expenses, net primarily consisted of accrued interest payment of convertible notes, NT dollar denominated long-term notes and $3.2 million of loans with our Chairman and Chief Executive Officer and our largest shareholders. The decrease in interest expense, net was primarily due to higher interest income for the nine months ended May 31, 2023.

Other income, net Other income, net decreased from $1.2 million for the nine months ended May 31, 2022, to $766 thousand for the nine months ended May 31, 2023, primarily due to rental income and payments received under the new Patent Cross-License Agreement with CrayoNano AS for the nine months ended May 31, 2022.

Foreign currency transaction loss, net We recognized a net foreign currency transaction loss of $20 thousand and $395 thousand for the nine months ended May 31, 2023 and 2022, respectively, primarily due to the appreciation on the U.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 2023 and was zero for fiscal 2022, since Taiwan SemiLEDs incurred losses, and because we provided a full valuation allowance on all deferred tax assets, which consisted primarily of net operating loss carryforwards and foreign investment loss.

Net (Loss) Income Attributable to Noncontrolling Interests

(in thousands)

We recognized net loss attributable to non-controlling interests of $1 thousand and net gain of $18 thousand for the nine months ended May 31, 2023 and 2022, respectively, which was attributable to the share of the net (loss) gain of Taiwan Bandaoti Zhaoming Co., Ltd. held by the remaining non-controlling holders. Non-controlling interests represented 2.63% equity interest in Taiwan Bandaoti Zhaoming Co., Ltd., for both May 31, 2023 and 2022.

Liquidity and Capital Resources

This section includes a discussion and analysis of our cash requirements, contingencies, sources and uses of cash, operations, working capital and long-term assets and liabilities.

Contingencies

We have several operating leases with third parties, primarily for land, plant and office spaces in Taiwan, including cancellable and noncancelable leases that expire at various dates between December 2024 and December 2040. See Note 5, "Commitments and Contingencies" in the notes to our Unaudited Condensed Consolidated Financial Statements in this Form 10-Q.

Sources and Uses of Cash

As of May 31, 2023 and August 31, 2022, we had cash and cash equivalents of $3.0 million and $4.3 million, respectively, which were predominately held in U.S. dollar denominated demand deposits and/or money market funds.

As of June 30, 2023, we had no available credit facility.

Long-term assets and liabilities

Our long-term assets consist primarily of property, plant and equipment, intangible assets, operating lease assets and investments in unconsolidated entities. Our manufacturing rationalization plans have included efforts to utilize our existing manufacturing assets and supply arrangements more efficiently. We believe that near-term access to additional manufacturing capacity, should it be required, could be readily obtained on reasonable terms through manufacturing agreements with third parties. We will continue to look for opportunities to make strategic manufacturing in the future for additional capacity.

Our long-term liabilities consist primarily of long-term debt and operating lease liabilities.

Our long-term debt, which consisted of NT dollar denominated long-term notes, convertible unsecured promissory notes, and loans from our Chairman and our largest shareholder, totaled $6.6 million and $6.9 million as of May 31, 2023 and August 31, 2022, respectively.

Our NT dollar denominated long-term notes, totaled $3.2 million of both May 31, 2023 and August 31, 2022. These long-term notes consisted of two loans which we entered into on July 5, 2019, with aggregate amounts of $3.2 million (NT$100 million). The first loan originally for $2.0 million (NT$62 million) has an annual floating interest rate equal to the NTD base lending rate plus 1.565% (or 2.29% 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 1.945% (or 2.67% currently) and was used for operating capital. These loans are secured by an $81 thousand (NT$2.5 million) security deposit and a first priority security interest on the Company’s headquarters building.

• Starting from May 2021, the first note payable requires monthly payments of principal in the amount of $24 thousand plus interest over the 74-month term of the note with final payment to occur in July 2027 and, as of May 31, 2023, our outstanding balance on this note payable was approximately $1.2 million.
• Starting from May 2021, the second note payable requires monthly payments of principal in the amount of $15 thousand plus interest over the 74-month term of the note with final payment to occur in July 2027 and, as of May 31, 2023, our outstanding balance on this note payable was approximately $747 thousand.

Property, plant and equipment pledged as collateral for our notes payable were $2.5 million and $2.8 million as of May 31, 2023 and August 31, 2022, respectively.

On January 8, 2019, the Company entered into loan agreements with each of the Chairman and Chief Executive Officer and the largest shareholder of the Company, with aggregate amounts of $1.7 million and $1.5 million, respectively, and an annual interest rate of both 8%. All proceeds of the loans were exclusively used to return the deposit to Formosa Epitaxy Incorporation in connection with the cancelled proposed sale of the Company’s headquarters building pursuant to the agreement dated December 15, 2015. The Company was required to repay the loans of $1.5 million on January 14, 2021 and $1.7 million on January 22, 2021, respectively. On January 16, 2021, the maturity date of these loans was extended with same terms and interest rate for one year to January 15, 2022, and on January 14, 2022, the maturity date of these loans was extended again with same terms and interest rate for one more year to January 15, 2023. On January 13, 2023, the maturity date of these loans was further extended with same terms and interest rate for one year to January 15, 2024. As of May 31, 2023 and August 31, 2022, the outstanding principal of these loans totaled $3.2 million. The loans are secured by a second priority security interest on the headquarters building of the Company.

On November 25, 2019 and on December 10, 2019, the Company issued convertible unsecured promissory notes (the “Notes”) to J.R. Simplot Company, its largest shareholder, and Trung Doan, its Chairman and Chief Executive Officer, (together, the “Holders”) with a principal sum of $1.5 million and $500 thousand, respectively, and an annual interest rate of 3.5%. Principal and accrued interest shall be due on demand by the Holders on and at any time after May 30, 2021. On February 7, 2020, J.R. Simplot Company assigned all of its right, title and interest in the Notes to Simplot Taiwan Inc. The outstanding principal and unpaid accrued interest of the Notes may be converted into the Company’s common stock based on a conversion price of $3.00 per share, at the option of the Holders any time from the date of the Notes. On May 25, 2020, each of the Holders converted $300,000 of the Notes into 100,000 shares of the Company’s common stock. On May 26, 2021, the Notes were extended with the same terms and interest rate for one year and a maturity date of May 30, 2022. On May 26, 2022, the Notes were second extended with the same terms and interest rate for one year and a maturity date of May 30, 2023. On June 6, 2023, the Company entered into the Third Amendment to Convertible Unsecured Promissory Notes ("Third Amendments") to amend the Notes to (i) extend the maturity date from May 30, 2023 to May 30, 2024, and (ii) change the conversion price from $3.00 to $2.046 per share. All other terms and conditions of the Notes remain the same. As of May 31, 2023 and August 31, 2022, the outstanding principal of these notes totaled $1.4 million.

Working Capital

We have incurred significant losses since inception, including net losses attributable to SemiLEDs stockholders of $756 thousand and $916 thousand during the three months ended May 31, 2023 and 2022, respectively. Net cash used in operating activities for the nine months ended May 31, 2023 was $645 thousand. As of May 31, 2023, 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.

On July 6, 2021, we entered into a Sales Agreement (the “Sales Agreement”) with Roth 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 the greater of $20,000,000 or the aggregate market value of common stock sold by us in the prior 12 months which is no more than one-third of the aggregate market value of our common stock held by non-affiliates (the “Placement Shares”). Sales of the Placement Shares will be made on Nasdaq at market prices by any method permitted by law deemed to be an “at the market offering” as defined in Rule 415 of the Securities Act of 1933, as amended, or the Securities Act. We agreed to pay a commission to the Agent of 3.0% of the gross proceeds of the sale of the Placement Shares sold under the Agreement and reimburse the Agent for certain expenses. During the year ended August 31, 2022, we sold 286,328 shares of common stocks for gross proceeds of $995 thousand with $31 thousand paid as placement agent fees under our ATM program. As of May 31, 2023, we had not sold any shares under the ATM program in fiscal 2023. We may resume sales of Placement Shares after the issuance of the third quarter Form 10-Q.

We estimate that our cash requirements to service debt and contractual obligations in fiscal 2023 is approximately $5.1 million, which we expect to fund through the issuance of additional equity under the ATM program and through loan extensions. Based on our current financial projections and assuming the successful implementation of our liquidity plans, we believe that we will have sufficient sources of liquidity to fund our operations and capital expenditure plans for the next 12 months and beyond. The loans with each of our Chairman and Chief Executive Officer and our largest shareholder are expected to be extended upon maturity. However, there can be no assurances that our planned activities will be successful in raising additional capital, reducing losses and preserving cash. If we are not able to generate positive cash flows from operations, we may need to consider alternative financing sources and seek additional funds through public or private equity financings or from other sources, or refinance our indebtedness, to support our working capital requirements or for other purposes. There can be no assurance that additional debt or equity financing will be available to us or that, if available, such financing will be available on terms favorable to us.

Cash Flows

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

29

Cash Flows Used In Operating Activities

Net cash used in operating activities for the nine months ended May 31, 2023 and May 31, 2022 was $645 thousand and $1.9 million, respectively. The decrease in cash flows used in operating activities for the nine months ended May 31, 2023 was primary attributable to a $649 thousand increase of accounts receivable offset by $396 thousand decrease of accounts payable and $126 thousand decrease of accrued expenses and other current liabilities.

Cash Flows (Used In) Provided by Investing Activities

Net cash used in investing activities for the nine months ended May 31, 2023 was $228 thousand, consisting primarily of $212 thousand related to the purchase of property, plant and equipment and $16 thousand in payments for development of intangible assets.

Net cash provided by investing activities for the nine months ended May 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 property, plant and equipment and $11 thousand of payments for development of intangible assets.

Cash Flows Used In Financing Activities

Net cash used in financing activities for the nine months ended May 31, 2023 was $354 thousand, consisting primarily of $354 thousand of repayments on long-term debt.

Net cash used in financing activities for the nine months ended May 31, 2022 was $390 thousand, consisting primarily of $368 thousand of repayments on long-term debt and $23 thousand for acquisition of noncontrolling interest.

Capital Expenditures

We had capital expenditures of $212 thousand and $69 thousand for the nine months ended May 31, 2023 and 2022, respectively. Our capital expenditures consisted primarily of the purchases of machinery and equipment, construction in progress, prepayments for our manufacturing facilities and prepayments for equipment purchases. We expect to continue investing in capital expenditures in the future as we expand our business operations and invest in such expansion of our production capacity as we deem appropriate under market conditions and customer demand. However, in response to controlling capital costs and maintaining financial flexibility, our management continues to monitor prices and, consistent with its existing contractual commitments, may decrease further its activity level and capital expenditures as appropriate.

Evaluation of disclosure controls and procedures

Our management, with the participation of our chief executive officer, or CEO, and our chief financial officer, or CFO, has evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of May 31, 2023. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Based upon the aforementioned evaluation, our CEO and CFO have concluded that, as of May 31, 2023, our disclosure controls and procedures were designed at a reasonable assurance level and were effective to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended May 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Except as set forth below, there are no material changes related to risk factors from the risk factors described in Item 1A “Risk Factors” in Part I of our 2022 Annual Report.

The market prices and trading volume of common stock have recently experienced, and may continue to experience, extreme volatility, which could cause purchasers of our securities to incur substantial losses.

The market prices and trading volume of our shares of common stock have recently experienced, and may continue to experience, extreme volatility, which could cause purchasers of our common stock to incur substantial losses. For example, during 2023 to date, the market price of our common stock has fluctuated from a low of $1.54 on December 28, 2022 to a high of $2.93 per share on May 25, 2023. During 2023 to date, daily trading volume ranged from approximately 800 to 8,272,400 shares.

We believe that the recent volatility and our current market prices reflect market and trading dynamics unrelated to our underlying business, or macro or industry fundamentals, and we do not know how long these dynamics will last. Under the circumstances, we caution you against investing in our common stock, unless you are prepared to incur the risk of losing all or a substantial portion of your investment.

Extreme fluctuations in the market price of our common stock may be the result of strong and substantially increased retail investor interest, including on social media and online forums. The market volatility and trading patterns we have experienced create several risks for investors, including the following:

• the market price of our common stock has experienced and may continue to experience rapid and substantial increases or decreases unrelated to our operating performance or prospects, or macro or industry fundamentals, and substantial increases may be significantly inconsistent with the risks and uncertainties that we continue to face;
• factors in the public trading market for our common stock include the sentiment of retail investors (including as may be expressed on financial trading and other social media sites and online forums), the direct access by retail investors to broadly available trading platforms, the amount and status of short interest in our securities, access to margin debt, trading in options and other derivatives on our common stock and any related hedging and other trading factors;
• our market capitalization, as implied by various trading prices, currently reflects valuations that diverge significantly from those seen prior to recent volatility, and to the extent these valuations reflect trading dynamics unrelated to our financial performance or prospects, purchasers of our common stock could incur substantial losses if there are declines in market prices driven by a return to earlier valuations;
• to the extent volatility in our common stock is caused, as has widely been reported, by a “short squeeze” in which coordinated trading activity causes a spike in the market price of our common stock as traders with a short position make market purchases to avoid or to mitigate potential losses, investors purchase at inflated prices unrelated to our financial performance or prospects, and may thereafter suffer substantial losses as prices decline once the level of short-covering purchases has abated; and
• if the market price of our common stock declines, you may be unable to resell your shares at or above the price at which you acquired them. We cannot assure you that the equity issuance of our common stock will not fluctuate or decline significantly in the future, in which case you could incur substantial losses.

We may continue to incur rapid and substantial increases or decreases in our stock price in the foreseeable future that may not coincide in timing with the disclosure of news or developments by or affecting us. Accordingly, the market price of our shares of common stock may fluctuate dramatically, and may decline rapidly, regardless of any developments in our business. Overall, there are various factors, many of which are beyond our control, that could negatively affect the market price of our common stock or result in fluctuations in the price or trading volume of our common stock, including:

• overall performance of the equity markets and the economy as a whole;
• changes in the financial projections we may provide to the public or our failure to meet these projections;
• in our growth rate relative to that of our competitors;
• changes in the anticipated future size or growth rate of our addressable markets;
• announcements of new products and services, technological updates or enhancements, or of acquisitions, strategic partnerships, joint ventures or capital-raising activities or commitments, by us or by our competitors;
• additions or departures of board members, management or key personnel;
• failure of securities analysts to initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our company or our failure to meet these estimates or the expectations of investors;
• rumors and market speculation involving us or other companies in our industry;
• research or reports that securities analysts or others publish about us or our business;
• new laws or regulations or new interpretations of existing laws or regulations applicable to our business;
• lawsuits threatened or filed against us or investigations by governmental authorities;
• other events or factors, including those resulting from war, incidents of terrorism, or responses to these events;
• health epidemics, such as the COVID-19 pandemic, influenza, and other highly communicable diseases; and
• sales of shares of our common stock by us or our stockholders.