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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

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

For the quarterly period ended May 31, 2018

or

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

For the transition period from             to             

Commission File Number: 001-34992

SemiLEDs Corporation

(Exact name of registrant as specified in its charter)

 

Delaware

 

20-2735523

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification Number)

 

3F, No. 11 Ke Jung Rd., Chu-Nan Site,

 

 

Hsinchu Science Park, Chu-Nan 350,

 

 

Miao-Li County, Taiwan, R.O.C.

 

350

(Address of principal executive offices)

 

(Zip Code)

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes    No 

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

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

 

 

 

Emerging growth company

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 3,556,790 shares of common stock, par value $0.0000056 per share, outstanding as of July 6, 2018.

 

 

 


Table of Contents

 

SEMILEDS CORPORATION

FORM 10-Q for the Quarter Ended May 31, 2018

INDEX

 

 

 

Page No.

 

 

 

 

Part I. Financial Information

 

 

 

 

Item 1.

Financial Statements

1

 

 

 

 

Condensed Consolidated Balance Sheets as of May 31, 2018 (unaudited) and August 31, 2017 (audited)

1

 

 

 

 

Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended May 31, 2018 and 2017

2

 

 

 

 

Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended May 31, 2018 and 2017

3

 

 

 

 

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

4

 

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended May 31, 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

27

 

 

 

Item 4.

Controls and Procedures

27

 

 

 

 

Part II. Other Information

 

 

 

 

Item 1.

Legal Proceedings

28

 

 

 

Item 1A.

Risk Factors

28

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

28

 

 

 

Item 3.

Defaults Upon Senior Securities

28

 

 

 

Item 4.

Mine Safety Disclosures

28

 

 

 

Item 5.

Other Information

28

 

 

 

Item 6.

Exhibits

28

 

 

 

Signatures

30

 

 

 

 

 

 

 


Table of Contents

 

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

SEMILEDS CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

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

 

 

 

May 31,

 

 

August 31,

 

 

 

2018

 

 

2017

 

 

 

(Unaudited)

 

 

(Audited)

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

3,739

 

 

$

3,582

 

Accounts receivable (including related parties), net of allowance for doubtful accounts of $501 and $815 as of May 31, 2018 and August 31, 2017, respectively

 

 

310

 

 

 

1,111

 

Inventories

 

 

2,290

 

 

 

2,946

 

Prepaid expenses and other current assets

 

 

286

 

 

 

405

 

Total current assets

 

 

6,625

 

 

 

8,044

 

Property, plant and equipment, net

 

 

7,629

 

 

 

8,275

 

Intangible assets, net

 

 

103

 

 

 

104

 

Investments in unconsolidated entities

 

 

999

 

 

 

992

 

Other assets

 

 

246

 

 

 

255

 

TOTAL ASSETS

 

$

15,602

 

 

$

17,670

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Current installments of long-term debt

 

$

342

 

 

$

335

 

Accounts payable

 

 

807

 

 

 

1,145

 

Advance receipt toward the convertible note

 

 

500

 

 

 

500

 

Accrued expenses and other current liabilities

 

 

5,676

 

 

 

5,482

 

Total current liabilities

 

 

7,325

 

 

 

7,462

 

Long-term debt, excluding current installments

 

 

2,151

 

 

 

2,391

 

Total liabilities

 

 

9,476

 

 

 

9,853

 

Commitments and contingencies (Note 5)

 

 

 

 

 

 

 

 

EQUITY:

 

 

 

 

 

 

 

 

SemiLEDs stockholders’ equity

 

 

 

 

 

 

 

 

Common stock, $0.0000056 par value—7,500 shares authorized; 3,557 shares and 3,544 shares issued and outstanding as of May 31, 2018 and August 31, 2017, respectively

 

 

 

 

 

 

Additional paid-in capital

 

 

175,487

 

 

 

175,386

 

Accumulated other comprehensive income

 

 

3,759

 

 

 

3,701

 

Accumulated deficit

 

 

(173,120

)

 

 

(171,270

)

Total equity

 

 

6,126

 

 

 

7,817

 

TOTAL LIABILITIES AND EQUITY

 

$

15,602

 

 

$

17,670

 

 

See notes to unaudited condensed consolidated financial statements.

 

1


Table of Contents

 

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 May 31,

 

 

Nine Months Ended May 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues, net

 

$

1,999

 

 

$

2,111

 

 

$

5,545

 

 

$

6,643

 

Cost of revenues

 

 

1,837

 

 

 

2,297

 

 

 

5,775

 

 

 

6,706

 

Gross profit (loss)

 

 

162

 

 

 

(186

)

 

 

(230

)

 

 

(63

)

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

296

 

 

 

257

 

 

 

703

 

 

 

651

 

Selling, general and administrative

 

 

799

 

 

 

879

 

 

 

2,313

 

 

 

2,920

 

Gain on disposals of long-lived assets, net

 

 

(581

)

 

 

(33

)

 

 

(790

)

 

 

(113

)

Total operating expenses

 

 

514

 

 

 

1,103

 

 

 

2,226

 

 

 

3,458

 

Loss from operations

 

 

(352

)

 

 

(1,289

)

 

 

(2,456

)

 

 

(3,521

)

Other income (expenses):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impairment loss on investment

 

 

 

 

 

(352

)

 

 

 

 

 

(352

)

Equity in loss from unconsolidated entities, net

 

 

 

 

 

 

 

 

 

 

 

(11

)

Interest expenses, net

 

 

(7

)

 

 

(9

)

 

 

(22

)

 

 

(26

)

Other income, net

 

 

78

 

 

 

29

 

 

 

625

 

 

 

525

 

Foreign currency transaction gain (loss), net

 

 

(45

)

 

 

35

 

 

 

3

 

 

 

(46

)

Total other income (expenses), net

 

 

26

 

 

 

(297

)

 

 

606

 

 

 

90

 

Loss before income taxes

 

 

(326

)

 

 

(1,586

)

 

 

(1,850

)

 

 

(3,431

)

Income tax expense

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

(326

)

 

 

(1,586

)

 

 

(1,850

)

 

 

(3,431

)

Less: Net loss attributable to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

(13

)

Net loss attributable to SemiLEDs stockholders

 

$

(326

)

 

$

(1,586

)

 

$

(1,850

)

 

$

(3,418

)

Net loss per share attributable to SemiLEDs stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.09

)

 

$

(0.45

)

 

$

(0.52

)

 

$

(0.97

)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

3,550

 

 

 

3,544

 

 

 

3,546

 

 

 

3,544

 

 

See notes to unaudited condensed consolidated financial statements.

 

2


Table of Contents

 

SEMILEDS CORPORATION AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Comprehensive Loss

(In thousands of U.S. dollars)

 

 

 

Three Months Ended May 31,

 

 

Nine Months Ended May 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net loss

 

$

 

(326

)

 

$

 

(1,586

)

 

$

(1,850

)

 

$

(3,431

)

Other comprehensive loss, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

(77

)

 

 

 

99

 

 

 

58

 

 

 

332

 

Comprehensive loss

 

$

 

(403

)

 

$

 

(1,487

)

 

$

(1,792

)

 

$

(3,099

)

Comprehensive loss attributable to noncontrolling interests

 

$

 

 

 

$

 

 

 

$

-

 

 

$

(16

)

Comprehensive loss attributable to SemiLEDs stockholders

 

$

 

(403

)

 

$

 

(1,487

)

 

$

(1,792

)

 

$

(3,083

)

 

See notes to unaudited condensed consolidated financial statements.

 

3


Table of Contents

 

SEMILEDS CORPORATION AND SUBSIDIARIES

Unaudited Condensed Consolidated Statement of Changes in Equity

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Comprehensive

 

 

Accumulated

 

 

Total

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income

 

 

Deficit

 

 

Equity

 

BALANCE—September 1, 2017

 

 

3,544

 

 

$

 

 

$

175,386

 

 

$

3,701

 

 

$

(171,270

)

 

$

7,817

 

Issuance of common stock under equity incentive plans

 

 

13

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

101

 

 

 

 

 

 

 

 

 

101

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

58

 

 

 

 

 

 

58

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,850

)

 

 

(1,850

)

BALANCE—May 31, 2018

 

 

3,557

 

 

$

 

 

$

175,487

 

 

$

3,759

 

 

$

(173,120

)

 

$

6,126

 

 

See notes to unaudited condensed consolidated financial statements.

 

4


Table of Contents

 

SEMILEDS CORPORATION AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows

(In thousands of U.S. dollars)

 

 

 

Nine Months Ended May 31,

 

 

 

2018

 

 

2017

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net loss

 

$

(1,850

)

 

$

(3,431

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

766

 

 

 

849

 

Impairment loss on investment

 

 

-

 

 

 

352

 

Stock-based compensation expense

 

 

101

 

 

 

207

 

Bad debt expense

 

 

10

 

 

 

 

 

Provisions for inventory write-downs

 

 

487

 

 

 

1,119

 

Equity in loss from unconsolidated entities, net

 

 

-

 

 

 

11

 

Gain on disposals of long-lived assets, net

 

 

(790

)

 

 

(113

)

Changes in :

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

802

 

 

 

(316

)

Inventories

 

 

201

 

 

 

(238

)

Prepaid expenses and other

 

 

119

 

 

 

141

 

Accounts payable

 

 

(269

)

 

 

(498

)

Accrued expenses and other current liabilities

 

 

150

 

 

 

(700

)

Net cash used in operating activities

 

 

(273

)

 

 

(2,617

)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(247

)

 

 

(149

)

Proceeds from sales of property, plant and equipment

 

 

913

 

 

 

113

 

Payments for development of intangible assets

 

 

(4

)

 

 

(11

)

Proceeds from patents assignment

 

 

1

 

 

 

 

Proceeds from sale of investment

 

 

 

 

 

59

 

Other investing activities

 

 

 

 

 

(1

)

Net cash provided by investing activities

 

 

663

 

 

 

11

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Repayments of long-term debt

 

 

(255

)

 

 

(240

)

Acquisition of noncontrolling interests

 

 

 

 

 

(46

)

Net cash provided used in financing activities

 

 

(255

)

 

 

(286

)

Effect of exchange rate changes on cash and cash equivalents

 

 

22

 

 

 

(1

)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

 

157

 

 

 

(2,893

)

CASH AND CASH EQUIVALENTS—Beginning of period

 

 

3,582

 

 

 

6,030

 

CASH AND CASH EQUIVALENTS—End of period

 

$

3,739

 

 

$

3,137

 

NONCASH INVESTING AND FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Accrual related to property, plant and equipment

 

$

140

 

 

$

225

 

 

See notes to unaudited condensed consolidated financial statements.

 

5


Table of Contents

 

SEMILEDS CORPORATION AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

1. Business

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

As of May 31, 2018, SemiLEDs had five 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 research, development, manufacturing and sales activities take place. Taiwan SemiLEDs owns a 100% 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 29, 2017. The unaudited condensed consolidated balance sheet as of August 31, 2017 included herein was derived from the audited consolidated financial statements as of that date.

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

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

The Company suffered losses from operations of $4.3 million and $20.6 million,  and net cash used in operating activities of $2.1 million and $3.4 million for the years ended August 31, 2017 and 2016, respectively. Gross profit on product sales was $82 thousand for the year ended August 31, 2017 and gross loss was $4.9 million for the year ended August 31, 2016. Loss from operations for the three and nine months ended May 31, 2018 were $352 thousand and $2.5 million, respectively. Net cash used in operating activities for the nine months ended May 31, 2018 was $273 thousand. Although, at May 31, 2018, the Company’s cash and cash equivalents was slightly increased to $3.7 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 is suppressing the gross loss from chip sales by moving toward a fabless business model through an agreement with an ODM partner entered into on December 31, 2015. The Company is continuously restructuring its chips

6


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manufacturing operation. The Company expects to purchase chips from the strategic partner and follow the best process to combine the Company’s technology with the strategic partner’s production process.

 

Continuing to further reduce idle capacity charges. This partnership should help the Company obtain a steady source of LED chips with competitive and favorable price for its packaging business, expand the production capacity for LED components, and strengthen its product portfolio and technology.

 

Increasing sales of automotive products in both China and India by cultivating relationships with automotive lighting developers that are outside the Company’s historical distribution channels. Maintaining a number of display models at automotive lighting facilities in order to provide dealers, communities and consumers with examples of newly designed products.

 

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

 

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 should be adequate to satisfy its liquidity requirements for the twelve months after the date that the financial statement 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.

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.

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 equitymethod 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 equitymethod 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 equitymethod 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 equitymethod 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 accounted for using the cost method. Under the cost method, investments are reported at cost on the consolidated balance sheets in investments in unconsolidated entities, and 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 equitymethod or costmethod investment declines below its respective carrying amount and the decline is determined to be otherthantemporary, the investment will be written down to its fair value.

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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 few years, any inability of the Company to compete in a rapidly evolving market and to respond quickly and effectively to changing market requirements, any inability of the Company to grow its revenue and/or maintain or increase its margins, it may experience fluctuations in its revenues and operating results, any inability of the Company to protect its intellectual property rights, claims by others that the Company infringes their proprietary technology, and any inability of the Company to raise additional funds in the future.

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

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

The Company keeps its cash and cash equivalents in demand deposits with prominent banks of high credit quality and invests only in money market funds. Deposits held with banks may exceed the amount of insurance provided on such deposits. As of May 31, 2018 and August 31, 2017, cash and cash equivalents of the Company consisted of the following (in thousands):

 

 

 

May 31,

 

 

August 31,

 

Cash and Cash Equivalents  by Location

 

2018

 

 

2017

 

United States;

 

 

 

 

 

 

 

 

Denominated in U.S. dollars

 

$

256

 

 

$

109

 

Taiwan;

 

 

 

 

 

 

 

 

Denominated in U.S. dollars

 

 

2,434

 

 

 

2,350

 

Denominated in New Taiwan dollars

 

 

143

 

 

 

81

 

Denominated in other currencies

 

 

870

 

 

 

646

 

China (including Hong Kong);

 

 

 

 

 

 

 

 

Denominated in U.S. dollars

 

 

7

 

 

 

7

 

Denominated in Renminbi

 

 

23

 

 

 

389

 

Denominated in H.K. dollars

 

 

6

 

 

 

 

Total cash and cash equivalents

 

$

3,739

 

 

$

3,582

 

 

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, age of accounts receivable balances and current economic conditions that may affect a customer’s ability to pay.

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Net revenues generated from sales to the top ten customers represented 69% and 62% of the Company’s total net revenues for the three and nine months ended May 31, 2018, respectively, and 81% and 67% of the Company’s net revenues for the three and nine months ended May 31, 2017, respectively.

The Company’s revenues have been concentrated in a few select markets, including Taiwan, the United States, and China (including Hong Kong). Net revenues generated from sales to customers in these markets, in the aggregate, accounted for 54% and 57% of the Company’s net revenues for the three and nine months ended May 31, 2018, respectively, and 76% and 75% of the Company’s net revenues for the three and nine months ended May 31, 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 March 1, 2017, the 93% equity interest subsidiary, Ning Xiang was dissolved. The assets, liability and certain employees of Ning Xiang were merged into its holding company, Taiwan Bandaoti Zhaoming Co., Ltd. An amount of $46 thousand was paid for the acquisition of the Ning Xiang non-controlling interests. As a result of this payment, non-controlling interest in the Company was reduced to zero.

Recent Accounting Pronouncements

In February 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. This standard will be effective for the Company on September 1, 2018. 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 May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting. The guidance provides clarity and reduces diversity in practice and cost and complexity when accounting for a change to the terms or conditions of a share-based payment award. This standard will be effective for the Company on September 1, 2018. 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.

In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments- Overall: Recognition and Measurement of Financial Assets and Financial Liabilities”. The amendments allow equity investments that do not have readily determinable fair values to be remeasured at fair value either upon the occurrence of an observable price change or upon identification of an impairment. The amendments in this Update also simplify the impairment assessment of equity investments without readily determinable fair values by requiring assessment for impairment qualitatively at each reporting period. This standard will be effective for the Company on September 1, 2018. 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 May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers,” which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The FASB has subsequently issued multiple ASUs which amend and clarify the guidance. This standard will be effective for the Company on September 1, 2018. The standard permits the use of either the retrospective or modified retrospective transition method. The Company will adopt the new

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standard using the modified retrospective transition method. Although the Company’s analysis of the impact of the new revenue recognition guidance is not fully complete, the Company does not currently expect that such guidance will have a material impact on its consolidated financial position, results of operations or cash flows.

3. Balance Sheet Components

Inventories

Inventories as of May 31, 2018 and August 31, 2017 consisted of the following (in thousands):

 

 

 

May 31,

 

 

August 31,

 

 

 

2018

 

 

2017

 

Raw materials

 

$

734

 

 

$

885

 

Work in process

 

 

457

 

 

 

758

 

Finished goods

 

 

1,099

 

 

 

1,303

 

Total

 

$

2,290

 

 

$

2,946

 

 

Inventory write-downs to estimated net realizable values were $74 thousand and $487 thousand for the three and nine months ended May 31, 2018, respectively, and $589 thousand and $1,119 thousand for the three and nine months ended May 31, 2017, respectively.

Property, Plant and Equipment

Property, plant and equipment as of May 31, 2018 and August 31, 2017 consisted of the following (in thousands):

 

 

 

May 31,

 

 

August 31,

 

 

 

2018

 

 

2017

 

Buildings and improvements

 

$

14,007

 

 

$

13,891

 

Machinery and equipment

 

 

39,072

 

 

 

42,562

 

Leasehold improvements

 

 

336

 

 

 

238

 

Other equipment

 

 

2,370

 

 

 

2,311

 

Construction in progress

 

 

308

 

 

 

321

 

Total property, plant and equipment

 

 

56,093

 

 

 

59,323

 

Less: Accumulated depreciation and amortization

 

 

(48,464

)

 

 

(51,048

)

Property, plant and equipment, net

 

$

7,629

 

 

$

8,275

 

 

The Company sold property, plant and equipment with net carrying value of $123 thousand and $0 for a total of $913 thousand and $113 thousand for the nine months ended May 31, 2018 and 2017, respectively.

Intangible Assets

Intangible assets as of May 31, 2018 and August 31, 2017 consisted of the following (in thousands):

 

 

 

May 31, 2018

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

Gross

 

 

 

 

 

Net

 

 

 

Amortization

 

 

Carrying

 

 

Accumulated

 

 

Carrying

 

 

 

Period (Years)

 

 

Amount

 

 

Amortization

 

 

Amount

 

Patents and trademarks

 

 

15

 

 

$

557

 

 

$

454

 

 

$

103

 

Acquired technology

 

 

5

 

 

 

507

 

 

 

507

 

 

 

 

Total

 

 

 

 

 

$

1,064

 

 

$

961

 

 

$

103

 

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August 31, 2017

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

Gross

 

 

 

 

 

Net

 

 

 

Amortization

 

 

Carrying

 

 

Accumulated

 

 

Carrying

 

 

 

Period (Years)

 

 

Amount

 

 

Amortization

 

 

Amount

 

Patents and trademarks

 

 

15

 

 

$

574

 

 

$

470

 

 

$

104

 

Acquired technology

 

 

5

 

 

 

503

 

 

 

503

 

 

 

 

Total

 

 

 

 

 

$

1,077

 

 

$

973

 

 

$

104

 

 

The Company sold 4 patents on October 25, 2017 for a total of $500 thousand.

4. Investments in Unconsolidated Entities

The Company’s ownership interest and carrying amounts of investments in unconsolidated entities as of May 31, 2018 and August 31, 2017 consisted of the following (in thousands, except percentages):

 

 

 

May 31, 2018

 

 

August 31, 2017

 

 

 

 

Percentage

 

 

 

 

 

 

Percentage

 

 

 

 

 

 

 

 

Ownership

 

 

Amount

 

 

Ownership

 

 

Amount

 

 

Equity method investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

49

%

 

$

 

 

 

49

%

 

$

 

 

Cost method investments

 

Various

 

 

 

999

 

 

Various

 

 

 

992

 

 

Total investments in unconsolidated entities

 

 

 

 

 

$

999

 

 

 

 

 

 

$

992

 

 

 

There were no dividends received from unconsolidated entities through May 31, 2018.

Equity Method Investments

The Company still 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.

Cost Method Investments

The fair values of the Company’s cost method investments are not readily available. All cost method investments are assessed for impairment when events or changes in circumstances indicate that the carrying amounts may not be recoverable. In February 2017, the Company sold all Nanoteco shares owned to the other investor for a cash consideration of $18 thousand and recognized a loss on sale of investment of $2 thousand. For the period ended May 31, 2017, the Company recognized an other-than-temporary impairment loss of $352 thousand on our cost method investments in Intematix based on the excess of the carrying amount over the estimated recoverable value. The recoverable value of the investment was determined based on the Company’s best estimate of the amount that could be realized from the investment, which considered the latest financial information.

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 are including cancellable and noncancellable and which expire at various dates between October 2018 and December 2020. Lease expense related to these noncancellable operating leases was $101 thousand and $348 thousand for the three and nine months ended May 31, 2018, respectively, and $111 thousand and $334 thousand for the three and nine months ended May 31, 2017, respectively. Lease expense is recognized on a straight-line basis over the term of the lease.

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The aggregate future noncancellable minimum rental payments for the Company’s operating leases as of May 31, 2018 consisted of the following (in thousands):

 

 

 

Operating

 

Years Ending August 31,

 

Leases

 

Remainder of 2018

 

$

40

 

2019

 

 

97

 

2020

 

 

97

 

2021

 

 

32

 

2022

 

 

 

Thereafter

 

 

 

Total

 

$

266

 

 

Purchase Obligations —The Company had purchase commitments for inventory, property, plant and equipment in the amount of $1.8 million and $1.5 million as of May 31, 2018 and August 31, 2017, 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.

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, the Company has 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.  The judge has not ruled on the Company’s motion. If the Company’s motion for specific enforcement is not granted, the Company intends to defend this case vigorously.

Except as described above, as of May 31, 2018, there was no pending 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.

A total of 521 thousand shares was reserved for issuance under the 2010 Plan as of both May 31, 2018 and 2017. There were 196 thousand and 252 thousand shares of common stock available for future issuance under the 2010 Plan as of May 31, 2018 and 2017, respectively.

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 and will become fully vested upon a change in control. The grant-date fair value of the restricted stock units was $4.10 per unit.

In March and November 2017, SemiLEDs granted 5 thousand and 2.5 thousand restricted stock units to its directors, that vested 100% on March 31, 2018 and June 29, 2018, respectively. The grant-date fair value of the restricted stock units was $3.18 and $4.15 per unit, respectively.

 

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

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expected term of stock options, risk-free interest rate and expected dividend. Each of these inputs is subjective and generally requires significant judgment to determine. The grant date fair value of stock units is based upon the market price of SemiLEDs’ common stock on the date of the grant. This fair value is amortized to compensation expense over the vesting term.

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

A summary of the stock-based compensation expense for the three and nine months ended May 31, 2018 and 2017 was as follows (in thousands):

 

 

Three Months Ended May 31,

 

 

Nine Months Ended May 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Cost of revenues

 

$

19

 

 

$

9

 

 

$

33

 

 

$

42

 

Research and development

 

 

10

 

 

 

4

 

 

 

16

 

 

 

9

 

Selling, general and administrative

 

 

23

 

 

 

30

 

 

 

52

 

 

 

156

 

 

 

$

52

 

 

$

43

 

 

$

101

 

 

$

207

 

 

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 May 31,

 

 

Nine Months Ended May 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Stock units and stock options to purchase

   common stock

 

 

11

 

 

 

10

 

 

 

63

 

 

 

10

 

 

8. Income Taxes

The Company’s income (loss) before income taxes for the three and nine months ended May 31, 2018 and 2017 consisted of the following (in thousands):

 

 

Three Months Ended May 31,

 

 

Nine Months Ended May 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

U.S. operations

 

$

(179

)

 

$

(487