LEDS [SemiLEDs] 10-Q: SEMILEDS CORPORATION FORM 10-Q for the Quarter Ended

Ticker: LEDS, Company: SemiLEDs Corp, Type: 10-Q, Date: 2019-01-11, XBRL Interactive Financials
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SEMILEDS CORPORATION FORM 10-Q for the Quarter Ended November 30, 2018 INDEX Page No Part I. Financial Information Item 1. Financial Statements 1 Unaudited C ondensed Consolidated Balance Sheets as of November 30, 2018 and August 31, 2018 1 Unaudited Condensed Consolidated Statements of Operations for the three months ended November 30, 2018 and 2017 2 Unaudited Condensed Consolidated Statements



s:1369391:"

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 3,559,915 shares of common stock, par value $0.0000056 per share, outstanding as of January 7, 2019.

 

 

 


 

SEMILEDS CORPORATION

FORM 10-Q for the Quarter Ended November 30, 2018

INDEX

 

 

 

 

 

Page No

 

 

 

 

 

Part I. Financial Information

 

 

 

 

 

Item 1.

 

Financial Statements

 

1

 

 

Unaudited Condensed Consolidated Balance Sheets as of November 30, 2018 and August 31, 2018

 

1

 

 

Unaudited Condensed Consolidated Statements of Operations for the three months ended November 30, 2018 and 2017

 

2

 

 

Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three months ended November 30, 2018 and 2017

 

3

 

 

Unaudited Condensed Consolidated Statement of Changes in Equity for the three months ended November 30, 2018

 

4

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended November 30, 2018 and 2017

 

5

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

6

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

15

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

25

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

25

 

 

 

 

 

Part II. Other Information

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

26

 

 

 

 

 

Item 1A.

 

Risk Factors

 

26

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

26

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

26

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

26

 

 

 

 

 

Item 5.

 

Other Information

 

27

 

 

 

 

 

Item 6.

 

Exhibits

 

27

 

 

 

 

 

Signatures

 

28

 

 

 

 


PART I — FINANCIAL INFORMATION

Item 1.  Financial Statements

SEMILEDS CORPORATION AND SUBSIDIARIES

Unaudited Condensed Consolidated Balance Sheets

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

 

 

 

November 30,

 

 

August 31,

 

 

 

2018

 

 

2018

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

2,574

 

 

$

3,421

 

Accounts receivable (including related parties), net of allowance for doubtful accounts of $471 and $477 as of November 30, 2018 and August 31, 2018, respectively

 

 

183

 

 

 

282

 

Inventories

 

 

2,220

 

 

 

1,818

 

Prepaid expenses and other current assets

 

 

378

 

 

 

340

 

Total current assets

 

 

5,355

 

 

 

5,861

 

Property, plant and equipment, net

 

 

6,678

 

 

 

7,213

 

Intangible assets, net

 

 

95

 

 

 

98

 

Investments in unconsolidated entities

 

 

910

 

 

 

914

 

Other assets

 

 

175

 

 

 

164

 

TOTAL ASSETS

 

$

13,213

 

 

$

14,250

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Current installments of long-term debt

 

$

335

 

 

$

335

 

Accounts payable

 

 

634

 

 

 

894

 

Advance receipt toward the convertible note

 

 

500

 

 

 

500

 

Accrued expenses and other current liabilities

 

 

5,580

 

 

 

5,505

 

Total current liabilities

 

 

7,049

 

 

 

7,234

 

Long-term debt, excluding current installments

 

 

1,921

 

 

 

2,013

 

Total liabilities

 

 

8,970

 

 

 

9,247

 

Commitments and contingencies (Note 5)

 

 

 

 

 

 

 

 

EQUITY:

 

 

 

 

 

 

 

 

SemiLEDs stockholders’ equity

 

 

 

 

 

 

 

 

Common stock, $0.0000056 par value—7,500 shares authorized; 3,560 shares and 3,559 shares issued and outstanding as of November 30, 2018 and August 31, 2018, respectively

 

 

 

 

 

 

Additional paid-in capital

 

 

175,698

 

 

 

175,527

 

Accumulated other comprehensive income

 

 

3,732

 

 

 

3,727

 

Accumulated deficit

 

 

(175,229

)

 

 

(174,251

)

Total SemiLEDs stockholders' equity

 

 

4,201

 

 

 

5,003

 

Noncontrolling interests

 

 

42

 

 

 

 

Total equity

 

 

4,243

 

 

 

5,003

 

TOTAL LIABILITIES AND EQUITY

 

$

13,213

 

 

$

14,250

 

 

See notes to unaudited condensed consolidated financial statements.

1


 

SEMILEDS CORPORATION AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Operations

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

 

 

 

Three Months Ended November 30,

 

 

 

2018

 

 

2017

 

Revenues, net

 

$

972

 

 

$

2,003

 

Cost of revenues

 

 

1,191

 

 

 

1,951

 

Gross profit

 

 

(219

)

 

 

52

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

334

 

 

 

184

 

Selling, general and administrative

 

 

757

 

 

 

733

 

Gain on disposals of long-lived assets

 

 

(288

)

 

 

 

Total operating expenses

 

 

803

 

 

 

917

 

Loss from operations

 

 

(1,022

)

 

 

(865

)

Other income (expenses):

 

 

 

 

 

 

 

 

Interest expenses, net

 

 

(5

)

 

 

(8

)

Other income, net

 

 

80

 

 

 

498

 

Foreign currency transaction loss, net

 

 

(36

)

 

 

(17

)

Total other income (expenses), net

 

 

39

 

 

 

473

 

Loss before income taxes

 

 

(983

)

 

 

(392

)

Income tax expense

 

 

 

 

 

 

Net loss

 

 

(983

)

 

 

(392

)

Less: Net loss attributable to noncontrolling interests

 

 

(5

)

 

 

 

Net loss attributable to SemiLEDs stockholders

 

$

(978

)

 

$

(392

)

Net loss per share attributable to SemiLEDs stockholders:

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.27

)

 

$

(0.11

)

Shares used in computing net loss per share attributable to SemiLEDs stockholders:

 

 

 

 

 

 

 

 

Basic and diluted

 

 

3,560

 

 

 

3,544

 

 

See notes to unaudited condensed consolidated financial statements.

2


 

SEMILEDS CORPORATION AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Comprehensive Loss

(In thousands of U.S. dollars)

 

 

 

Three Months Ended November 30,

 

 

 

2018

 

 

2017

 

Net loss

 

$

(983

)

 

$

(392

)

Other comprehensive gain (loss), net of tax:

 

 

 

 

 

 

 

 

Foreign currency translation adjustments, net of tax of $0 for both periods

 

 

4

 

 

 

26

 

Comprehensive loss

 

$

(979

)

 

$

(366

)

Comprehensive loss attributable to noncontrolling interests

 

$

(6

)

 

$

 

Comprehensive loss attributable to SemiLEDs stockholders

 

$

(973

)

 

$

(366

)

 

See notes to unaudited condensed consolidated financial statements.

3


 

SEMILEDS CORPORATION AND SUBSIDIARIES

Unaudited Condensed Consolidated Statement of Changes in Equity

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Other

 

 

 

 

 

 

SemiLEDs

 

 

Non-

 

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Comprehensive

 

 

Accumulated

 

 

Shareholders'

 

 

Controlling

 

 

Total

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income

 

 

Deficit

 

 

Equity

 

 

Interests

 

 

Equity

 

BALANCE—September 1, 2018

 

 

3,559

 

 

$

 

 

$

175,527

 

 

$

3,727

 

 

$

(174,251

)

 

$

5,003

 

 

$

 

 

$

5,003

 

Issuance of common stock under equity incentive plans

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

43

 

 

 

 

 

 

 

 

 

43

 

 

 

 

 

 

43

 

Common stock issued by SBDI*

 

 

 

 

 

 

 

 

128

 

 

 

 

 

 

 

 

 

128

 

 

 

48

 

 

 

176

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

5

 

 

 

 

 

 

5

 

 

 

(1

)

 

 

4

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(978

)

 

 

(978

)

 

 

(5

)

 

 

(983

)

BALANCE—November 30, 2018

 

 

3,560

 

 

$

 

 

$

175,698

 

 

$

3,732

 

 

$

(175,229

)

 

$

4,201

 

 

$

42

 

 

$

4,243

 

 

See notes to unaudited condensed consolidated financial statements.

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

 

4


 

SEMILEDS CORPORATION AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows

(In thousands of U.S. dollars)

 

 

 

Three Months Ended November 30,

 

 

 

2018

 

 

2017

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net loss

 

$

(983

)

 

$

(392

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

264

 

 

 

238

 

Stock-based compensation expense

 

 

43

 

 

 

24

 

Provisions for inventory write-downs

 

 

172

 

 

 

206

 

Gain on disposals of long-lived assets

 

 

(288

)

 

 

 

Changes in :

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

97

 

 

 

(188

)

Inventories

 

 

(583

)

 

 

105

 

Prepaid expenses and other

 

 

(50

)

 

 

186

 

Accounts payable

 

 

(209

)

 

 

(338

)

Accrued expenses and other current liabilities

 

 

271

 

 

 

99

 

Net cash used in operating activities

 

 

(1,266

)

 

 

(60

)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(24

)

 

 

(94

)

Proceeds from sales of property, plant and equipment

 

 

511

 

 

 

 

Payments for development of intangible assets

 

 

(2

)

 

 

 

Proceeds from sale of investment

 

 

 

 

 

1

 

Net cash provided by (used in) investing activities

 

 

485

 

 

 

(93

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Repayments of long-term debt

 

 

(83

)

 

 

(84

)

Net cash used in financing activities

 

 

(83

)

 

 

(84

)

Effect of exchange rate changes on cash and cash equivalents

 

 

17

 

 

 

55

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

 

 

(847

)

 

 

(182

)

CASH AND CASH EQUIVALENTS—Beginning of period

 

 

3,421

 

 

 

3,582

 

CASH AND CASH EQUIVALENTS—End of period

 

$

2,574

 

 

$

3,400

 

NONCASH INVESTING AND FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Accrual related to property, plant and equipment

 

$

18

 

 

$

130

 

Issuance of common shares in a subsidiary to noncontrolling interests

 

$

176

 

 

$

 

 

See notes to unaudited condensed consolidated financial statements.

5


 

SEMILEDS CORPORATION AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

1. Business

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

As of November 30, 2018, SemiLEDs had four wholly owned subsidiaries. SemiLEDs Optoelectronics Co., Ltd., or Taiwan SemiLEDs, is the Company’s wholly owned operating subsidiary, where a substantial portion of the assets is held and located, and where a portion of our research, development, manufacturing and sales activities take place. Taiwan SemiLEDs owns a 97% equity interest in Taiwan Bandaoti Zhaoming Co., Ltd., formerly known as Silicon Base Development, Inc., which is engaged in the research, development, manufacturing and a substantial portion of marketing and sale of LED components, and where most of the Company’s employees are based. 

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

2. Summary of Significant Accounting Policies

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

The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the Company’s unaudited condensed consolidated balance sheet as of November 30, 2018, the unaudited condensed statements of operations and comprehensive loss for the three months ended November 30, 2018 and 2017, changes in equity for the three months ended November 30, 2018, and cash flows for the three months ended November 30, 2018 and 2017. The results for the three months ended November 30, 2018 are not necessarily indicative of the results to be expected for the year ending August 31, 2019.

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

6


 

The Company has suffered losses from operations of $3.7 million and $4.3 million, and used net cash in operating activities of $1.2 million and $2.1 million for the years ended August 31, 2018 and 2017, respectively. Gross loss on product sales was $435 thousand for the year ended August 31, 2018 and gross profit was $82 thousand for the year ended August 31, 2017. Loss from operations and net cash used in operating activities for the three months ended November 30, 2018 were $1.0 million and $1.3 million, respectively. Further, at November 30, 2018, the Company’s cash and cash equivalents was down to $2.6 million. These facts and conditions raise substantial doubt about the Company’s ability to continue as a going concern. However, management believes that it has developed a liquidity plan, as summarized below, that, if executed successfully, should provide sufficient liquidity to meet the Company’s obligations as they become due for a reasonable period of time, and allow the development of its core business.

 

The Company entered into an agreement in December 2015 with a strategic partner, Formosa Epitaxy Incorporation, for the potential sale of the headquarters building located at Miao-Li, Taiwan. The total cash consideration for the sale is $5.2 million, of which the initial installment of $3 million was received on December 14, 2015, $1 million was due on December 31, 2016 and the balance of $1.2 million is due on December 31, 2017. As of date of this quarterly report, the Company hasn’t received the $1 million due on December 31, 2016 or the $1.2 million due on December 31, 2017. The Company intends to terminate the agreement for the sale of the headquarters, and on January 8, 2019, the Company entered loan agreements with each of the Company’s Chairman and CEO and its largest shareholder to fund the repayment of $3 million received in 2015 and booked under other current liabilities as of November 30 and August 31, 2018. However, in December 2018, Epistar Corporation (the successor to Formosa Epitaxy Incorporation, the “Plaintiff”) filed a motion to the Court in Miao-Li County, Taiwan requesting the Company return the $3 million plus value-added-tax and pay interest during this period and litigation fees. The Plaintiff also petitioned the Court to do a provisional execution upon the Company, which would permit the Plaintiff to sell the Company’s building and/or other assets belonged to the Company to a third party to collect the $3 million. The Company has filed a statement of defense arguing that the Plaintiff’s action and motion for provisional execution should be dismissed and the litigation fees should be borne by the Plaintiff. The Company has not accrued an expense related to the outcome of this litigation, because it is not yet possible to determine if a potential loss is probable nor reasonably estimable.

 

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

 

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

 

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

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

Revenue Recognition —Effective September 1 2018, the Company adopted ASC 606 using the modified retrospective transition method. The company applied the following five steps to achieve the core principles of ASC 606: 1) identified the contract with a customer; 2) identified the performance obligations (promises) in the contract; 3) determined the transaction price; 4) allocated the transaction price to the performance obligations in the contract; and 5) recognized revenue when (or as) the Company satisfies a performance obligation. The Company recognizes the amount of revenue, when the Company satisfies a performance obligation, to which it expects to be entitled for the transfer of promised goods or services to customers. The Company obtains written purchase authorizations from its customers as evidence of an arrangement and these authorizations generally provide for a specified amount of product at a fixed price. Generally, the Company considers delivery to have occurred at the time of shipment as this is generally when title and risk of loss for the products will pass to the customer. The Company provides its customers with limited rights of return for non‑conforming shipments and product warranty claims. Based on historical return percentages, which have not been material to date, and other relevant factors, the Company estimates its potential future exposure on recorded product sales, which reduces product revenues in the consolidated statements of operations and reduces accounts receivable in the consolidated balance sheets. The Company also provides standard product warranties on its products, which generally range from three months to two years. Management estimates the Company’s warranty obligations as a percentage of revenues, based on historical knowledge of warranty costs and other relevant factors. To date, the related estimated warranty provisions have been insignificant.

7


 

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

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

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

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

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

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

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

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

8


 

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

The Company keeps its cash and cash equivalents in demand deposits with prominent banks of high credit quality and invests only in money market funds. Deposits held with banks may exceed the amount of insurance provided on such deposits. As of November 30, 2018 and August 31, 2018, cash and cash equivalents of the Company consisted of the following (in thousands):

 

 

 

November 30,

 

 

August 31,

 

Cash and Cash Equivalents  by Location

 

2018

 

 

2018

 

United States;

 

 

 

 

 

 

 

 

Denominated in U.S. dollars

 

$

129

 

 

$

194

 

Taiwan;

 

 

 

 

 

 

 

 

Denominated in U.S. dollars

 

 

1,323

 

 

 

2,220

 

Denominated in New Taiwan dollars (NT$)

 

 

27

 

 

 

55

 

Denominated in other currencies

 

 

1,044

 

 

 

910

 

China (including Hong Kong);

 

 

 

 

 

 

 

 

Denominated in U.S. dollars

 

 

7

 

 

 

7

 

Denominated in Renminbi

 

 

38

 

 

 

29

 

Denominated in H.K. dollars

 

 

6

 

 

 

6

 

Total cash and cash equivalents

 

$

2,574

 

 

$

3,421

 

 

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

Net revenues generated from sales to the top ten customers represented 79% and 66% of the Company’s total net revenues for the three months ended November 30, 2018 and 2017, respectively.

The Company’s revenues have been concentrated in a few select markets, including Netherlands, Taiwan, the United States, and China (including Hong Kong). Net revenues generated from sales to customers in these markets, in the aggregate, accounted for 65% and 79% of the Company’s net revenues for the three months ended November 30, 2018 and 2017, respectively.

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

   

Recent Accounting Pronouncements

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

9


 

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

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. This standard requires a financial asset (or group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. This standard will be effective for the Company on September 1, 2020. The Company is currently evaluating the impact the adoption of this ASU will have on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases, which is intended to improve financial reporting on leasing transactions. This standard requires a lessee to record on the balance sheet the assets and liabilities for the rights and obligations created by lease terms of more than 12 months. This standard will be effective for the Company on September 1, 2019. The Company is currently evaluating the impact the adoption of this ASU will have on its consolidated financial statements.

3. Balance Sheet Components

Inventories

Inventories as of November 30, 2018 and August 31, 2018 consisted of the following (in thousands):

 

 

 

November 30,

 

 

August 31,

 

 

 

2018

 

 

2018

 

Raw materials

 

$

537

 

 

$

577

 

Work in process

 

 

708

 

 

 

505

 

Finished goods

 

 

975

 

 

 

736

 

Total

 

$

2,220

 

 

$

1,818

 

 

Inventory write-downs to estimated net realizable values were $172 thousand and $206 thousand for the three months ended November 30, 2018 and 2017, respectively.

Property, Plant and Equipment

Property, plant and equipment as of November 30, 2018 and August 31, 2018 consisted of the following (in thousands):

 

 

 

November 30,

 

 

August 31,

 

 

 

2018

 

 

2018

 

Buildings and improvements

 

$

13,471

 

 

$

13,558

 

Machinery and equipment

 

 

38,627

 

 

 

39,391

 

Leasehold improvements

 

 

149

 

 

 

150

 

Other equipment

 

 

2,309

 

 

 

2,312

 

Construction in progress

 

 

 

 

 

289

 

Total property, plant and equipment

 

 

54,556

 

 

 

55,700

 

Less: Accumulated depreciation and amortization

 

 

(47,878

)

 

 

(48,487

)

Property, plant and equipment, net

 

$

6,678

 

 

$

7,213

 

 

10


 

Intangible Assets

Intangible assets as of November 30, 2018 and August 31, 2018 consisted of the following (in thousands):

 

 

 

November 30, 2018

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

Gross

 

 

 

 

 

 

Net

 

 

 

Amortization

 

 

Carrying

 

 

Accumulated

 

 

Carrying

 

 

 

Period (Years)

 

 

Amount

 

 

Amortization

 

 

Amount

 

Patents and trademarks

 

 

15

 

 

$

542

 

 

$

447

 

 

$

95

 

Acquired technology

 

 

5

 

 

 

492

 

 

 

492

 

 

 

 

Total

 

 

 

 

 

$

1,034

 

 

$

939

 

 

$

95

 

 

 

 

August 31, 2018

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

Gross

 

 

 

 

 

 

Net

 

 

 

Amortization

 

 

Carrying

 

 

Accumulated

 

 

Carrying

 

 

 

Period (Years)

 

 

Amount

 

 

Amortization

 

 

Amount

 

Patents and trademarks

 

 

15

 

 

$

544

 

 

$

446

 

 

$

98

 

Acquired technology

 

 

5

 

 

 

494

 

 

 

494

 

 

 

 

Total

 

 

 

 

 

$

1,038

 

 

$

940

 

 

$

98

 

   

4. Investments in Unconsolidated Entities

The Company’s ownership interest and carrying amounts of investments in unconsolidated entities as of November 30, 2018 and August 31, 2018 consisted of the following (in thousands, except percentages):

 

 

 

November 30, 2018

 

 

August 31, 2018

 

 

 

Percentage

 

 

 

 

 

 

Percentage

 

 

 

 

 

 

 

Ownership

 

 

Amount

 

 

Ownership

 

 

Amount

 

Equity method investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Xurui Guangdian Co., Ltd. (“China SemiLEDs”)

 

 

49

%

 

 

 

 

 

49

%

 

 

 

Equity investment without readily determinable fair value

 

Various

 

 

 

910

 

 

Various

 

 

 

914

 

Total investments in unconsolidated entities

 

 

 

 

 

$

910

 

 

 

 

 

 

$

914

 

 

There were no dividends received from unconsolidated entities through November 30, 2018.

Equity Method Investments

The Company owns a 49% equity interest in China SemiLEDs. However, this investment has a carrying amount of zero as a result of a previously recognized impairment.

Equity Investments without readily determinable fair value

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

5. Commitments and Contingencies

Operating Lease Agreements —The Company has several operating leases with unrelated parties, primarily for land, plant and office spaces in Taiwan, which include cancellable and noncancellable leases and which expire at various dates between December 2018 and December 2020. Lease expense related to these noncancellable operating leases were $38 thousand and $112 thousand for three months ended November 30, 2018 and 2017, respectively. Lease expense is recognized on a straight-line basis over the term of the lease.

11


 

The aggregate future noncancellable minimum rental payments for the Company’s operating leases as of November 30, 2018 consisted of the following (in thousands):

 

 

 

Operating

 

Years Ending August 31,

 

Leases

 

Remainder of 2019

 

$

77

 

2020

 

 

94

 

2021

 

 

31

 

2022

 

 

 

2023

 

 

 

Thereafter

 

 

 

Total

 

$

202

 

 

Purchase Obligations —The Company had purchase commitments for inventory, property, plant and equipment in the amount of $1.1 million and $1.6 million as of November 30, 2018 and August 31, 2018, respectively.

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

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

On December 28, 2018, the Company received a notification from the Court in Miao-Li County, Taiwan that Epistar Corporation (the successor to Formosa Epitaxy Incorporation, the “Plaintiff”) filed a motion requesting that the Company return the $3 million prepayment plus value-added-tax for the headquarters building sale and pay interest during this period and litigation fee. The Plaintiff also petitioned the Court to do a provisional execution upon the Company, which would permit the Plaintiff to sell the building and/or other assets belonged to the Company to recover the prepayment. On January 4, 2019, the Company filed a statement of defense arguing that the Plaintiff’s action and motion for provisional execution should be dismissed and the litigation fees should be borne by the Plaintiff. If the Company’s defense is not agreed and accepted, the Company intends to defend this case vigorously. The Company has not accrued an expense related to the outcome of this litigation, because it is not yet possible to determine if a potential loss is probable nor reasonably estimable.

Except as described above, as of November 30, 2018, there was no pending or threatened litigation that could have a material impact on the Company’s financial position, results of operations or cash flows.

6. Stock-based Compensation

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

12


 

A total of 521 thousand shares was reserved for issuance under and 2010 Plan as of both November 30, 2018 and 2017. As of November 30, 2018 and 2017, there were 189 thousand and 255 thousand shares of common stock available for future issuance under the equity incentive plans.

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

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

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

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

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

A summary of the stock-based compensation expense for the three months ended November 30, 2018 and 2017 was as follows (in thousands):

 

 

 

Three Months Ended November 30,

 

 

 

2018

 

 

2017

 

Cost of revenues

 

$

11

 

 

$

7

 

Research and development

 

 

7

 

 

 

3

 

Selling, general and administrative

 

 

25

 

 

 

14

 

 

 

$

43

 

 

$

24

 

 

7. Net Loss Per Share of Common Stock

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

 

 

 

Three Months Ended November 30,

 

 

 

2018

 

 

2017

 

Stock units and stock options to purchase common stock

 

 

21

 

 

 

10

 

 

8. Income Taxes

The Company’s income (loss) before income taxes for the three months ended November 30, 2018 and 2017 consisted of the following (in thousands):

 

 

 

Three Months Ended November 30,

 

 

 

2018

 

 

2017

 

U.S. operations

 

$

(150

)