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.
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 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, goodwill 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.
On December 10, 2015, the Company entered into a Building Purchase Agreement to sell its headquarter building at a sales price of $5.2 million. The sale is scheduled to close on December 31, 2017. As a result, the Company changed its estimates of the useful live and the salvage value of the building to better reflect the estimated periods during which the building will remain in service and the sales price. The effect of this change in estimate was
to increase depreciation expense and to net loss by $77 thousand, and increase negative basic and diluted earnings per share by $0.03
for the period ended May 31, 2016.
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
Common stock purchase agreement
—The Company entered into a definitive common stock purchase agreement effective December 18, 2014 (the “Agreement”) with Mr. Xiaoqing Han, the Chairman and CEO of Beijing Xiaoqing Environmental Protection Group. The transaction has not closed due to Mr. Han’s difficulty in transferring funds from China. To date, the Company has only received approximately $261 thousand of the $5 million purchase price. Pursuant to the terms of the Agreement, if Mr. Han did not purchase the shares before February 25, 2015, then he is required, upon written request by the Company, to pay the Company $3 million in liquidated damages plus the legal fees incurred by the Company relating to the sale. On June 29, 2015, the Company provided written notice to Mr. Han informing him that he is in breach of the Agreement for failure to provide full payment before February 25, 2015 and demanding that he remit the balance of the purchase price by July 16, 2015 or, alternatively, the $3 million in liquidated damages. On July 6, 2015, Mr. Han replied in a letter that he acknowledged recei
pt
of the payment demand notice and the balance he owed under the Agreement. He also expressed his intent to continue with the terms and conditions in the Agreement. However, he was unable to transfer personal investment funds out of China. He requested an extension of time to complete the purchase. The Company’s Board rejected his request of granting him more time to execute the Agreement and filed a complaint for breach of contract in the Delaware Court of Chancery
in April 2016
.
Mr. Han filed an answer and counterclaim seeking rescission of the Agreement and a return of his $261 thousand payment.
If the Company receives a judgment, t
here can be no assurance when the Company can collect any judgment for liquidated damages. This gain contingency has not be
en
recognized in these consolidated financial statements
,
and the amount liquidation damages collected, if any, will be recognized when received.
6
.
Common
Stock
R
everse
S
tock
S
plit
—
On April 15, 2016, the Company amended its
certificate
of incorporation to effect a one-for-ten (1:10)
r
everse
s
tock
s
plit. This reverse stock split became effective as of the close of business on April 15, 2016. The
r
everse
s
tock
s
plit
had
no effect on the par value of its common stock and
did
not reduce the number of authorized shares of common stock but reduc
ed
the number of outstanding shares of common stock by the ratio. Accordingly, the outstanding
shares
, stock options disclosures, net loss per share, and other per share disclosures for all periods presented have been retrospectively adjusted to reflect the impact of this reverse stock split.
7
. 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 2,500 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 6,349 thousand shares was reserved for issuance
under the 2005 Plan and 2010 Plan as of both May 31, 2016 and 2015. As of May 31, 2016 and 2015, there were
3,836
thousand and 3,886 thous
and shares of common stock available for future issuance
under the equity incentive plans.
In April 201
6
, SemiLEDs granted
8
thousand restricted stock units to its directors that vest 100% on the earlier of April
12
, 201
7
and the date of the next annual meeting. The grant-date fair value of the restricted stock units was $
3.4
per unit.
During fiscal 2015, SemiLEDs granted
10
thousand restricted stock units to the Company’s executives and employees. These stock units vest over four years at a rate of 25% on each anniversary of the vesting start date. The grant-date fair value of stock units was equal to the closing price of the common stock on the date of grant. In addition, in
May 2015
, SemiLEDs granted
5
thousand restricted stock units to its directors that vest
ed
100% on
April 12, 2016
. The grant-date fair value of the restricted stock units was $
8
.
20
per unit. Each restricted stock unit represents the contingent right to one share of SemiLEDs’ common stock.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
This Quarterly Report on Form 10-Q, or this Quarterly Report, contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements other than statements of historical facts contained in this Quarterly Report, including statements regarding the future results of operations of SemiLEDs Corporation, or “we,” “our” or the “Company,” and financial position, strategy and plans, and our expectations for future operations, including the execution of restructuring plan and any resulting cost savings, are forward-looking statements. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. The words “believe,” “may,” “should,” “plan,” “potential,” “project,” “will,” “estimate,” “continue,” “anticipate,” “design,” “intend,” “expect” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, and actual results and the timing of certain events could differ materially and adversely from those anticipated or implied in the forward-looking statements as a result of many factors. These factors include, among other things,
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Declining cash position.
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The successful
completion
of the pending $4.5 million equity and note financing.
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Our ability to improve our liquidity, access alternative sources of funding and obtain additional equity capital or credit when necessary for our operations, the difficulty of which may increase if our common stock is delisted from
t
he NASDAQ Stock Market.
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The inability of our ODM partner or other contract manufacturers to produce products that satisfy our requirements.
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Our ability to implement our cost reduction programs and to execute our restructuring plan effectively.
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Our ability to improve our gross margins, reduce our net losses and restore our operations to profitability.
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Our ability to collect the $3 million liquidated damages owed to us by the investor who failed to complete
a
private placement
in 2015
.
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Our ability to successfully introduce new products that we can produce and that customers will purchase in such amounts as to be sufficiently profitable to cover the costs of developing and producing these products, as well as providing us additional net income from operations.
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Our ability to effectively develop, maintain and expand our sales and distribution channels, especially in the niche LED markets, including the UV LED and architectural lighting that we focus on.
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Our ability to successfully manage our operations in the face of the cyclicality, rapid technological change, rapid product obsolescence, declining average selling prices and wide fluctuations in supply and demand typically found in the LED market.
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Competitive pressures from existing and new companies.
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Our ability to grow our revenues generated from the sales of our products and to control our expenses.
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Loss of any of our key personnel, or our failure to attract, assimilate and retain other highly qualified personnel.
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Intellectual property infringement or misappropriation claims by third parties against us or our customers, including our distributor customers.
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The failure of LEDs to achieve widespread adoption in the general lighting market, or if alternative technologies gain market acceptance.
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The loss of key suppliers or contract manufacturers.
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Our ability to effectively expand or upgrade our production facilities or do so in a timely or cost-effective manner.
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Difficulty in managing our future growth or in responding to a need to contract operations, and the associated changes to our operations.
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Adverse development in those selected markets, including Taiwan, the United States and China, where our revenues are concentrated.
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Our ability to develop and execute upon a new strategy to exploit the China and India market.
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The reduction or elimination of government investment in LED lighting or the elimination of, or changes in, policies in certain countries that encourage the use of LEDs over some traditional lighting technologies.
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Our ability to implement our product innovation strategy effectively, particularly in view of the prohibition against our (and/or our assisting others in) making, using, importing, selling and/or offering to sell in the United States our accused products and/or any device that includes an accused product after October 1, 2012 as a result of the injunction agreed to in connection with the Cree Inc., or Cree, litigation.
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Failure of our strategy of marketing and selling our products in jurisdictions with limited intellectual property enforcement regimes.
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Lack of marketing and distribution success by our third-party distributors.
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Our customers’ ability to produce and sell products incorporating our LED products.
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Our failure to adequately prevent disclosure of trade secrets and other proprietary information.
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Ineffectiveness of our disclosure controls and procedures and our internal control over financial reporting.
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Our ability to profit from existing and future joint ventures, investments, acquisitions and other strategic alliances.
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Impairment of goodwill, long-lived assets or investments.
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Undetected defects in our products that harm our sales and reputation and adversely affect our manufacturing yields.
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The availability of adequate and timely supply of electricity and water for our manufacturing facilities.
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Our ability to comply with existing and future environmental laws and the cost of such compliance.
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The ability of SemiLEDs Optoelectronics Co., Ltd., or Taiwan SemiLEDs, to make dividends and other payments to SemiLEDs
Corporation
.
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Our ability to obtain necessary regulatory approvals to make further investments in Taiwan SemiLEDs.
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Catastrophic events such as fires, earthquakes, floods, tornados, tsunamis, typhoons, pandemics, wars, terrorist activities and other similar events, particularly if these events occur at or near our operations, or the operations of our suppliers, contract manufacturers and customers.
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The effect of the legal system in the People’s Republic of China, or the PRC.
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Labor shortages, strikes and other disturbances that affect our operations.
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Deterioration in the relations between the PRC and Taiwan governments.
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Fluctuations in the exchange rate among the U.S. dollar, the New Taiwan, or NT, dollar, the Japanese Yen and other currencies in which our sales, raw materials and component purchases and capital expenditures are denominated.
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The effect of the disclosure requirements under the provisions of the Dodd-Frank Act relating to “conflict minerals,” which could increase our costs and limit the supply of certain metals used in our products and affect our reputation with customers and shareholders.
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Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We have not assumed any obligation to, and you should not expect us to, update or revise these statements because of new information, future events or otherwise.
For more information on the significant risks that could affect the outcome of these forward-looking statements, see Item 1A “Risk Factors” in Part I of our Annual Report on Form 10-K for the fiscal year ended August 31, 2015, or the 2015 Annual Report, and those contained in Part II, Item 1A of this Quarterly Report, and other information provided from time to time in our filings with the Securities and Exchange Commission, or the SEC.
The following discussion and analysis of our financial condition and results of operations is based upon and should be read in conjunction with the unaudited interim condensed consolidated financial statements and the notes and other information included elsewhere in this Quarterly Report, in our 2015 Annual Report, and in other filings with the SEC.
Company Overview
We develop, manufacture and sell light emitting diode (LED) chips and LED components. Our products are used primarily for general lighting applications, including street lights and commercial, industrial and residential lighting. Our LED chips may also be used in specialty industrial applications, such as ultraviolet, or UV, curing of polymers, LED light therapy in medical/cosmetic applications, counterfeit detection, LED lighting for horticulture applications, architectural lighting and entertainment lighting.
Utilizing our patented and proprietary technology, our manufacturing process begins by growing upon the surface of a sapphire wafer, or substrate, several very thin separate semiconductive crystalline layers of gallium nitride, or GaN, a process known as epitaxial growth, on top of which a mirror-like reflective silver layer is then deposited. After the subsequent addition of a copper alloy layer and finally the removal of the sapphire substrate, we further process this multiple-layered material to create individual vertical LED chips.
We package our LED chips into LED components, which we sell to a customer base that is heavily concentrated in a few select markets, including Taiwan, the United States and China (including Hong Kong). We also sell our “Enhanced Vertical,” or EV, LED product series in blue, white, green and UV in selected markets. We sell our LED chips to packagers or to distributors, who in turn sell to packagers. Our lighting products customers are primarily original design manufacturers, or ODMs, of lighting products and the end-users of lighting devices. We also contract other manufacturers to produce for our sale certain LED products, and for certain aspects of our product fabrication, assembly and packaging processes, based on our design and technology requirements and under our quality control specifications and final inspection process.
We have developed advanced capabilities and proprietary know-how in:
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reusing sapphire substrate in subsequent production runs;
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optimizing our epitaxial growth processes to create layers that efficiently convert electrical current into light;
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employing a copper alloy base manufacturing technology to improve our chip’s thermal and electrical performance;
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utilizing nanoscale surface engineering to improve usable light extraction;
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developing a LED structure that generally consists of multiple epitaxial layers which are vertically-stacked on top of a copper alloy base; and
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developing low cost Chip Scaled Packaging (CSP) technology.
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These technical capabilities enable us to produce LED chips and LED component products. We entered into a Foundry Services and Licensing Agreement with an ODM partner in December 2015 to assist us with the restructuring of our chips manufacturing operations. The ODM partner
is
work
ing
with us to ODM vertical chips for us using our vertical technology. We granted our ODM partner a royalty-free, non-transferable, nonexclusive license to use our technology and intellectual property for internal use by the ODM partner’s employees at its facilities for the purpose of manufacturing, testing and supplying us its products. We believe these capabilities, know-how and partnership should also allow us to reduce our manufacturing costs and our dependence on sapphire, a costly raw material used in the production of sapphire-based LED devices.
We were incorporated in the State of Delaware on January 4, 2005 and sold our first LED chips in November 2005. We are a holding company for various wholly and majority owned subsidiaries. Our most significant subsidiary is our wholly owned operating subsidiary, SemiLEDs Optoelectronics Co., Ltd., or Taiwan SemiLEDs, where a substantial portion of our assets are held and located, where a substantial portion of our research, development, manufacturing, marketing and sales activities take place, and where most of our employees are based. 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, manufacture, marketing and sale of LED components. As of
May 31, 2016
, we also owned a
93
% equity interest in Ning Xiang Technology Co., Ltd., or Ning Xiang, a company engaged in the design, manufacture and sale of lighting fixtures and systems.
We also have interests in unconsolidated joint ventures that we have accounted for as equity method investments and as such have not consolidated for financial reporting purposes. As of
May 31, 2016
, we owned a
33
% interest in SILQ (Malaysia) Sdn. Bhd. or SILQ, a joint venture established in Malaysia
that is currently
in the process of being dissolved
.
Key Factors Affecting Our Financial Condition, Results of Operations and Business
The following are key factors that we believe affect our financial condition, results of operations and business:
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Our ability to raise additional debt funding
,
sell additional equity securities
and improve our liquidity
.
We
may need to
improve our liquidity, access alternative sources of funding and obtain additional equity capital or credit when necessary for our operations
.
However,
we
may not be able to obtain such debt funding or sell equity securities on terms that are favorable to
us
, or at all. The raising of additional debt funding by
us
, if required and available, would result in increased debt service obligations and could result in additional operating and financing covenants, or liens on
our
assets, that would restrict
our
operations. The sale of additional equity securities, if required and available, could result in dilution to
our
stockholders.
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Our ability to outsource manufacturing and our ability to get chips from other chip suppliers.
Our reliance on our new ODM partner exposes us to a number of significant risks, including reduced control over delivery schedules, quality assurance and production costs, lack of guaranteed production capacity or product supply, and the possible breach of the manufacturing agreement by the contract manufacturer because of factors beyond our control. If our ODM partner fails to deliver products on time and at a satisfactory level of quality, we could have difficulties fulfilling our customer orders and our net revenue could decline. If our ODM partner were to become unable or unwilling to continue to manufacture our products at requested quality, quantity, performance and costs, or in a timely manner, our business and reputation could be seriously harmed. As a result, we would have to attempt to identify and qualify substitute manufacturers, which could be time consuming and difficult, and might result in unforeseen manufacturing and operations problems. Our inability to procure chips from other chip suppliers at the desired quality, quantity, performance and cost might result in unforeseen manufacturing and operations problems. In such events, our customer relationships, business, financial condition and results of operations would be adversely affected.
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Industry growth and demand for products and applications using LEDs.
The overall adoption of LED lighting devices to replace traditional lighting sources is expected to influence the growth and demand for LED chips and component products and impact our financial performance. We believe the potential market for LED lighting will continue to expand. LEDs for efficient generation of UV light are also starting to gain attention for various medical, germicidal and industrial applications. Since a substantial portion of our LED chips, LED components and our lighting products are used by end-users in general lighting applications and specialty industrial applications such as UV curing, medical/cosmetic, counterfeit detection, horticulture, architectural lighting and entertainment lighting, the adoption of LEDs into these applications will have a strong impact on the demand of LED chips generally and, as a result, for our LED chips, LED components and LED lighting products. Fluctuations in demand for LED lighting products will also affect the results of Ning Xiang.
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Average selling price of our products.
The average selling price of our products may decline for a variety of factors, including prices charged by our competitors, the efficacy of our products, our cost basis, changes in our product mix, the size of the order and our relationship with the relevant customer, as well as general market and economic conditions. Competition in the markets for LED products is intense, and we expect that competition will continue to increase, thereby creating a highly aggressive pricing environment. For example, some of our competitors have in the past reduced their average selling prices, and the resulting competitive pricing pressures have caused us to similarly reduce our prices, accelerating the decline in our revenues and the gross margin of our products. When prices decline, we must also write down the value of our inventory. Furthermore, the average selling prices for our LED products have typically decreased over product life cycles. Therefore, our ability to continue to innovate and offer competitive products that meet our customers’ specifications and pricing requirements, such as higher efficacy LED products at lower costs, will have a material influence on our ability to improve our revenues and product margins, although in the near term the introduction of such higher performance LED products may further reduce the selling prices of our existing products or render them obsolete. Reduction in the average selling price of LED lights products will also affect the results of Ning Xiang.
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Changes in our product mix.
We anticipate that our gross margins will continue to fluctuate from period to period as a result of the mix of products that we sell and the utilization of our manufacturing capacity in any given period, among other things. For example, we continue to pursue opportunities for profitable growth in areas of business where we see the best opportunity to develop as an end-to-end LED module solution supplier by providing our customers with high quality, flexible and more complete LED system solution, customer technical support and LED module/system design, as opposed to just providing customers with individual components. As a strategic plan, we have placed greater emphasis on the sales of LED components rather than the sales of LED chips where we have been forced to cut prices on older inventory. Steadily growth of the module product and the continued commercial sales of our UV LED product are expected to improve our gross margin, operating results and cash flows. In addition, we have adjusted the lower-priced LED components strategy as appropriate. We have adopted a strategy to adjust our product mix by exit
ing
certain high volume but low unit selling price product lines in response to the general trend of lower average selling prices for products that have been available in the market for some time.
However, as we expand and diversify our product offerings and with varying average selling prices, or execute new business initiatives, a change in the mix of products that we sell in any given period may increase volatility in our revenues and gross margin from period to period.
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Our ability to reduce cost to offset lower average prices.
Competitors may reduce average selling prices faster than our ability to reduce costs, and competitive pricing pressures may accelerate the rate of decline of our average selling prices. To address increased pricing pressure, we have improved and increased our production yields to reduce the per-unit cost of production of our products. However, such cost savings currently have limited impact on our gross profit, as we currently suffer from the underutilization of manufacturing capacity and must absorb a high level of fixed costs, such as depreciation. We anticipate moving toward a fabless business model in which we would utilize foundry fabs to ODM our chips using our developed technology. As part of the restructuring, we are exploring the opportunities to consign or sell our chip manufacturing equipment to our ODM partner or others, which will help us to reduce the idle capacity costs. While we intend to focus on managing our costs and expenses, over the long term we expect to be required to invest substantially in LED component products development and production equipment if we are to grow.
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Our ability to continue to innovate.
As part of our growth strategy, we plan to continue to be innovative in product design, to deliver new products and to improve our manufacturing efficiencies. Our continued success depends on our ability to develop and introduce new, technologically advanced and lower cost products, such as more efficient, better performance LED component products. If we are unable to introduce new products that are commercially viable and meet rapidly evolving customer requirements or keep pace with evolving technological standards and market developments or are otherwise unable to execute our product innovation strategy effectively, we may not be able to take advantage of market opportunities as they arise, execute our business plan or be able to compete effectively. In March 2015, we announced our Phosphor Converted or PC LED chip series, including PC Red, PC Green, and PC Amber, in a 40mil (1mm x 1mm) chip that combines with our ReadyWhite™ phosphor technology to minimize blue pass through in our product and therefore allow more options for our customers in these color ranges. In August 2015, we launched two UV COB module products: D4525 and D4825. These high density UV modules are suggested to be driven at 120W and 200W respectively with efficient thermal management. The modules are designed for various printing, curing, and PCB exposure industrial equipments, providing uncompromised reliability and optical output.
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General economic conditions and geographic concentration.
Many countries including the United States and the European Union
(
the
“
E.U.
”
) members have instituted, or have announced plans to institute, government regulations and programs designed to encourage or mandate increased energy efficiency in lighting. These actions include in certain cases banning the sale after specified dates of certain forms of incandescent lighting, which are advancing the adoption of more energy efficient lighting solutions such as LEDs. The global financial crisis that began in late 2007 caused extreme disruption in the financial markets. Although the disruption in the financial markets moderated thereafter, the global financial markets continue to reflect uncertainty about a sustained economic recovery. The
exit of the United Kingdom from the
E.U.
(the
“
Brexit
”
)
may also
cause disruptions
and
lead to a lot of global economic uncertainty
.
When the global economy slows or a financial crisis occurs, consumer and government confidence declines, with levels of government grants and subsidies for LED adoption and consumer spending likely to be adversely impacted. Our revenues have been concentrated in a few select markets, including Taiwan, the United States and China (including Hong Kong). Given that we are operating in a rapidly changing industry, our sales in specific markets may fluctuate from quarter to quarter. Therefore, our financial results will be impacted by general economic and political conditions in such markets. For example, the aggressive support by the Chinese government for the LED industry through significant government incentives and subsidies to encourage the use of LED lighting and to establish the LED-sector companies has resulted in production overcapacity in the market and intense competition. Furthermore, due to Chinese package manufacturers increasing usage of domestic LED chips, prices are increasingly competitive, leading to Chinese manufacturers growing market share in the global LED industry. In addition, we have historically derived a significant portion of our revenues from a limited number of customers. Some of our largest customers and what we produce/have produced for them have changed from quarter to quarter primarily as a result of the timing of discrete, large project-based purchases and broadening customer base, among other things. For the three and nine months ended
May 31, 2016
, sales to our three largest customers, in the aggregate, accounted for
32
% and
36
% of our revenues, respectively.
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Intellectual property issues.
Competitors of ours and other third parties have in the past and will likely from time to time in the future allege that our products infringe on their intellectual property rights. Defending against any intellectual property infringement claims would likely result in costly litigation and ultimately may lead to our not being able to manufacture, use or sell products found to be infringing. In June 2012, we settled an intellectual property dispute involving Cree. We agreed to dismiss amended complaints filed against each other without prejudice. We agreed to the entry of a permanent injunction that was effective October 1, 2012 that precludes us from (and/or from assisting others in) making, using, importing, selling and/or offering to sell in the United States certain accused products and/or any device that includes such an accused product after that date and to payment of a settlement fee for past damages. All accused products sold before the date of settlement are released under this agreement and our customers and distributors are specifically released. All remaining claims between Cree and us were withdrawn without prejudice, with each retaining the right to assert them in the future. However, other third parties may also assert infringement claims against our customers with respect to our products, or our customers’ products that incorporate our technologies or products. Any such legal action or the threat of legal action against us, or our customers, could impair such customers’ continued demand for our products. This could prevent us from growing or even maintaining our revenues, or cause us to incur additional costs and expenses, and adversely affect our financial condition and results of operations.
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Declining cash position.
Our cash and cash equivalents decreased to $3.5 million as of
May 31, 2016
due to the combination of our net cash used in operating activities, payments related to long-term debt, and cash outlays for fixed assets to expand our Chu-Nan Facility for the consolidation of our manufacturing operations.
We have implemented actions to accelerate operating cost reductions and improve operational efficiencies. The plan is further enhanced through the fabless business model in which we implemented certain workforce reductions and are exploring the opportunities to consign or sell certain equipment related to the manufacturing of vertical LED chips to our ODM partner or others, in order to reduce the idle capacity charges, minimize our research and development activities associated with chips manufacturing operation. We believe we will be able to generate positive cash inflows through the restructuring of our chip operation and the significant ongoing cost savings in the form of reduced payroll and research and development activities. The shipment of our new module product and the continued commercial sales of our UV LED product are expected to grow steadily
beginning in 2017
. Based on our current financial projections, we believe that we will have sufficient sources of liquidity to fund our operations and capital expenditure plans for the next 12 months. Please see “Critical Accounting Policies and Estimates — Basis of Presentation — Going Concern” for more information about our liquidity plans.
|
Recent Developments
On Ju
ly
6
, 2016, we
entered into a purchase agreement with
Dr.
Peter
Chiou to purchase 577,000
newly issued
shares of the Company’s common stock at $5.00 per share. This represents approximately 19.6% of the outstanding shares of the Company.
D
r. Chiou has also
agreed
to
purchase
a $1,615,000 SemiLEDs Corporation’s 0% interest convertible note (the “Note”) with a
September 29
, 2017 maturity date. Subject to shareholder approval at the Company’s next shareholders meeting, the Note will be convertible into a number of shares of the Company’s common stock equal to the quotient obtained by dividing (x) $1,615,000 by (y) the conversion price, which is equal to the lesser of $3.40
or
the 5-trading day volume weighted average price of the common stock on the NASDAQ Stock Market ending on the
m
aturity
d
ate.
These investments are expected to be funded to SemiLEDs Corporation in three installments as follows:
1.
1st installment of $1,
0
00,000 has been
wired to the Company’s bank account.
2.
2nd installment of $1,
8
85,000 will be wired to the Company on or before
August
15, 2016. Upon completion of the share purchase, Dr. Chiou will be appointed a member of SemiLEDs Corporations’ Board of Directors; Dr. Chiou has agreed to waive any compensation for his services on the Board.
3.
3rd installment of $1,615,000 will be wired to the Company on or before
September 29
, 2016
.
There is no assurance that we can successfully close the financing
or if Dr. Chiou is able to meet the funding requirements of the purchase agreement.
On
April 22
, 2016, we
filed
a complaint in the Delaware Court of Chancery
against
Mr. Xiaoqing Han, the Chairman and CEO of Beijing Xiaoqing Environmental Protection Group for breach of
the
definitive common stock purchase agreement effective December 18, 2014 (the “Agreement”)
for
his failure to transfer
the
full purchase price from China. Pursuant to the terms of the Agreement, if Mr. Han did not purchase the shares before February 25, 2015, then he is required, upon written request by us, to pay us $3 million in liquidated damages plus the legal fees incurred by us relating to the sale. To date, we have only received approximately $261 thousand of the $5 million purchase price. Mr. Han filed an answer and counterclaim seeking rescission of the Agreement and a return of his $261 thousand payment.
We
filed
an answer and defenses
to Mr.
H
an’s counterclaim on July 11, 2016
requesting a
judgment
in the Company
’
s favor and an order declaring that liquidated damages are due and payable to SemiLEDs and awarding
SemiLEDs fees and expenses
incurred in connection with
the Agreement.
There can be no assurance
that we will obtain a judgment for the $3 million in liquidated damages, or, if we do, that we will be able to collect any judgment in China or elsewhere.
Critical Accounting Policies and Estimates
There have been no material changes in the matters for which we make critical accounting policies and estimates in the preparation of our unaudited interim condensed consolidated financial statements for the nine months ended
May 31, 2016
as compared to those disclosed in our 2015 Annual Report.
Exchange Rate Information
We are a Delaware corporation and, under SEC requirements, must report our financial position, results of operations and cash flows in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. At the same time, our subsidiaries use the local currency as their functional currency. For example, the functional currency for Taiwan SemiLEDs is the NT dollar. The assets and liabilities of the subsidiaries are, therefore, translated into U.S. dollars at exchange rates in effect at each balance sheet date, and income and expense accounts are translated at average exchange rates during the period. The resulting translation adjustments are recorded to a separate component of accumulated other comprehensive income (loss) within equity. Any gains and losses from transactions denominated in currencies other than their functional currencies are recognized in the consolidated statements of operations as a separate component of other income (expense). Due to exchange rate fluctuations, such translated amounts may vary from quarter to quarter even in circumstances where such amounts have not materially changed when denominated in their functional currencies.
The translations from NT dollars to U.S. dollars were made at the exchange rates as set forth in the statistical release of the Bank of Taiwan. On May 31, 2016, the exchange rate was
32.62
NT dollars to one U.S. dollar. On
July
7, 2016, the exchange rate was
32.3
0 NT dollars to one U.S. dollar.
The following table sets forth, for the periods indicated, information concerning the number of NT dollars for which one U.S. dollar could be exchanged.
|
|
|
|
|
|
|
|
|
|
|
|
NT dollars per U.S. dollar
|
|
|
|
Average
(1)
|
|
High
|
|
Low
|
|
Period-End
|
|
Fiscal 2014
|
|
29.94
|
|
30.60
|
|
29.36
|
|
29.90
|
|
Fiscal 2015
|
|
31.08
|
|
32.86
|
|
29.86
|
|
32.50
|
|
September 2015
|
|
32.61
|
|
33.00
|
|
32.35
|
|
32.87
|
|
October 2015
|
|
32.49
|
|
32.90
|
|
32.24
|
|
32.44
|
|
November 2015
|
|
32.60
|
|
32.80
|
|
32.34
|
|
32.59
|
|
December 2015
|
|
32.79
|
|
32.89
|
|
32.68
|
|
32.83
|
|
January 2016
|
|
33.46
|
|
33.77
|
|
33.01
|
|
33.45
|
|
February 2016
|
|
33.28
|
|
33.56
|
|
33.02
|
|
33.24
|
|
March 2016
|
|
32.69
|
|
33.16
|
|
32.19
|
|
32.19
|
|
April 2016
|
|
32.33
|
|
32.43
|
|
32.24
|
|
32.26
|
|
May 2016
|
|
32.56
|
|
32.77
|
|
32.18
|
|
32.62
|
|
June 2016
|
|
32.38
|
|
32.61
|
|
32.18
|
|
32.28
|
|
July 2016 (through July
7, 2016)
|
|
32.27
|
|
32.38
|
|
32.20
|
|
32.30
|
|
|
(1)
|
|
Annual averages calculated from month-end rates and monthly averages calculated from daily closing rates.
|
No
representation
is made that the NT dollar or U.S. dollar amounts referred to herein could have been or could be converted into U.S. dollars or NT dollars, as the case may be, at any particular rate or at all.
Results of Operations
Three Months Ended May 31, 2016 Compared to the Three Months Ended May 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
May 31,
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
% of
|
|
Change
|
|
Change
|
|
|
|
|
$
|
|
Revenues
|
|
$
|
|
Revenues
|
|
$
|
|
%
|
|
|
|
|
(in thousands)
|
|
|
LED chips
|
|
$
|
176
|
|
7
|
%
|
$
|
778
|
|
22
|
%
|
$
|
(602)
|
|
(77)
|
%
|
|
LED components
|
|
|
1,803
|
|
76
|
%
|
|
2,011
|
|
58
|
%
|
|
(208)
|
|
(10)
|
%
|
|
Lighting products
|
|
|
363
|
|
15
|
%
|
|
529
|
|
15
|
%
|
|
(166)
|
|
(31)
|
%
|
|
Other revenues
(1)
|
|
|
36
|
|
2
|
%
|
|
190
|
|
5
|
%
|
|
(154)
|
|
*
|
|
|
Total revenues, net
|
|
|
2,378
|
|
100
|
%
|
|
3,508
|
|
100
|
%
|
|
(1,130)
|
|
(32)
|
%
|
|
Cost of revenues
|
|
|
3,828
|
|
161
|
%
|
|
4,367
|
|
124
|
%
|
|
(539)
|
|
(12)
|
%
|
|
Gross loss
|
|
$
|
(1,450)
|
|
(61)
|
%
|
$
|
(859)
|
|
(24)
|
%
|
$
|
(591)
|
|
69
|
%
|
|
* Not meaningful
|
(1)
|
|
Other includes primarily revenues attributable to the sale of epitaxial wafers, scraps and raw materials and the provision of services.
|
Revenues, net
Our revenues
de
creased by
32
% to $
2.4
million for the three months ended May 31, 2016 from $
3.5
million for the three months ended May 31, 2015. The
decrease
in revenues was driven primarily by a $
0
.6
million decrease in revenues attributable to sales of LED chips
,
a
$
0.2
million
decrease in
revenues attributable to sales of lighting products
,
a $
0.2
million
de
crease in revenues attributable to sales of LED components
and a $0.
1
million decrease in revenues attributable to other revenues
.
Revenues attributable to the sales of our LED chips represented
7
% and
22
% of our revenues for the three months ended May 31, 2016 and 2015
, respectively
.
The decrease in revenues attributable to sales of LED chips was the result of a
77
% decrease in the volume of LED chips sold, primarily due to our strategic
decision
to place greater emphasis on the sales of LED components rather than the sales of LED chips and a business interruption as a result of the restructuring plan
which has and continues to
impact our ability to serve the needs of our customers on a timely basis.
Revenues attributable to the sales of our LED components represented
76%
and
58
% of our revenues for the three months ended May 31, 2016 and 2015, respectively.
The decrease in revenues attributable to sales of LED components was due t
o
seasonal swings in demand
for the UV LED components product, which more than offset the increase in new module product sales and which resulted in an overall decrease in the sales of our LED components for the three months ended
May 31
, 2016
and our decision
to exit certain high volume but low unit selling price product lines
in response to
the general trend of lower average selling prices for products that have been available in the market for some time
.
Revenues attributable to the sales of lighting products represented 1
5
% of our revenues for
both
the three months ended May 31, 2016 and 2015.
Revenues attributable to the sales of lighting products w
ere
lower for the three months ended
May 31, 2016
primarily due to a slowdown in demand on LED luminaries and retrofits
, offset in part by an increase in
non-recurring project-based orders for LED lighting products compared to the three months ended
May 31, 2015
.
The decrease in other revenues, consisting primarily of revenues attributable to the sales of scrap and raw materials, and the provision of services was
the result of
fewer raw materials
and scraps
sold
and a decrease in service revenues
for the three months ended May 31, 201
6
.
Cost of Revenues
Our cost of revenues decreased by
12
% from $
4.4
million for the three months ended May 31, 2015 to $
3.8
million for the three months ended May 31, 2016.
The decrease in cost of revenues was primarily due to the effect of our ongoing cost reduction and the result of lower sales volume for our LED chips and components for the three months ended
May 31, 2016
.
Gross Loss
Our gross loss increased from a loss of $
0.9
million
for
the three months ended
May 31, 2015
to a loss of $
1.5
million
for
the three months ended
May 31, 2016
. Our gross margin percentage was negative
61
% for the three months ended
May 31, 2016
, as compared to negative
24
% for the three months ended
May 31, 2015
. The gross margin percentage decline was a consequence of the significant reduction in revenues, primarily due to reduced sales of LED components and LED chips, as more fully described above.
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
% of
|
|
Change
|
|
Change
|
|
|
|
|
$
|
|
Revenues
|
|
$
|
|
Revenues
|
|
$
|
|
%
|
|
|
|
|
(in thousands)
|
|
|
Research and development
|
|
$
|
394
|
|
17
|
%
|
$
|
594
|
|
17
|
%
|
$
|
(200)
|
|
(34)
|
%
|
|
Selling, general and administrative
|
|
|
1,267
|
|
53
|
%
|
|
1,621
|
|
46
|
%
|
|
(354)
|
|
(22)
|
%
|
|
Employee termination benefits
|
|
|
59
|
|
2
|
%
|
|
—
|
|
—
|
%
|
|
59
|
|
—
|
%
|
|
Gain on disposal of long-lived assets
|
|
|
(29)
|
|
(1)
|
%
|
|
—
|
|
—
|
%
|
|
(29)
|
|
—
|
%
|
|
Total operating expenses
|
|
$
|
1,691
|
|
71
|
%
|
$
|
2,215
|
|
63
|
%
|
$
|
(524)
|
|
(24)
|
%
|
|
Research and development.
Our research and development expenses decreased from $
0.6
million for the three months ended May 31, 201
5
to $0.
4
million for the three months ended May 31, 201
6
. The decrease was primarily due to a
$0.2 million decrease in materials and supplies spending on research and development activities.
Selling, general and administrative.
Our selling, general and administrative expenses decreased from $
1
.6 million for the three months ended
May 31, 2015
to $
1.3
million for the three months ended
May 31, 2016
. The decrease was mainly attributable to a $0
.3
million decrease in payroll and stock based compensation due to workforce reductions and normal attrition
, offset in part by an increase in
professional service expenses, mainly legal and advisory services
for implementing the reverse stock split
.
Employee termination benefits.
Employee termination benefits of $
59
thousand
were recognized for severance-related expenses for workforce reductions with respect to our restructuring plan on chips manufacturing operation for the three months ended
May 31, 2016
.
G
ai
n
on disposal of long-lived assets.
We recognized a gain of $
29
thousand
on the disposal of long-lived assets for
the
three months ended May 31, 2016
. Due to the excess capacity charges that we have suffered for a few years, considering the risk of
technological obsolescence and according to the production plan built based on our sales forecast, we disposed of a certain level of our idle
equipment.
Other Income (Expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
May 31,
|
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
% of
|
|
|
|
|
% of
|
|
|
|
$
|
|
Revenues
|
|
$
|
|
Revenues
|
|
|
|
(in thousands)
|
|
Equity in gain (loss) from unconsolidated entities
|
|
$
|
(79)
|
|
(3)
|
%
|
$
|
40
|
|
1
|
%
|
Interest expenses, net
|
|
|
(13)
|
|
(1)
|
%
|
|
(26)
|
|
(1)
|
%
|
Other income, net
|
|
|
48
|
|
2
|
%
|
|
29
|
|
1
|
%
|
Foreign currency transaction loss, net
|
|
|
(78)
|
|
(3)
|
%
|
|
(15)
|
|
0
|
%
|
Total other income (expenses), net
|
|
$
|
(122)
|
|
(5)
|
%
|
$
|
28
|
|
1
|
%
|
Equity in gain (loss) from unconsolidated entities.
We recognized
loss
and
gain
from our portion of the net
loss
and net
income
from SILQ, an unconsolidated entity, for the three months ended May 31, 2016 and 2015, respectively. SILQ is currently in the process of being dissolved. We also recognized additional loss to reduce the carrying amount of our investment in SILQ to our proportionate share of the net realizable value reported by SILQ
for the three months ended May 31, 2016
.
Interest expenses, net.
The decrease in interest expenses, net was primarily due to the decrease in debt balance because of the repayment of debt.
Other income, net.
Our other income consists primarily of rental income from the lease back of the second floor of our Hsinchu building to the original owner, net of related depreciation charge
, and g
overnment subsidy income
to our research and development plan
.
Foreign currency transaction
loss, net
.
We recognized net foreign currency transaction loss of $
78
thousand and $15 thousand for the three months ended May 31, 201
6
and 201
5
, respectively, primarily due to the depreciation of the U.S. dollar against the NT dollar from bank deposits and accounts receivables held by Taiwan SemiLEDs and Taiwan Bandaoti Zhaoming Co., Ltd. in currency other than the functional currency of such subsidiaries.
Income Tax Expense
Our effective tax rate is expected to be approximately zero for fiscal 2016
and was zero for fiscal 2015
, since Taiwan SemiLEDs incurred losses, and because we provided a full valuation allowance on all deferred tax assets, which consisted primarily of net operating loss carryforwards and foreign investment loss.
Net Loss Attributable to Noncontrolling Interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
May 31,
|
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
% of
|
|
|
|
|
% of
|
|
|
|
$
|
|
Revenues
|
|
$
|
|
Revenues
|
|
|
|
(in thousands)
|
|
Net loss attributable to noncontrolling interests
|
|
$
|
(10)
|
|
(0)
|
%
|
$
|
(5)
|
|
(0)
|
%
|
We recognized net losses attributable to noncontrolling interests of $
10
thousand and $
5
thousand
for
the three months ended
May 31, 2016
and
2015
, respectively, which was attributable to the share of the net losses of Ning Xiang held by the remaining noncontrolling holders. Noncontrolling interests represented a
7
% equity interest in Ning Xiang.
Nine
M
onths
Ended May 31, 2016 Compared to the
Nine
M
onths
Ended May 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended May 31,
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
% of
|
|
Change
|
|
Change
|
|
|
|
$
|
|
Revenues
|
|
$
|
|
Revenues
|
|
$
|
|
%
|
|
|
|
(in thousands)
|
|
LED chips
|
|
$
|
588
|
|
7
|
%
|
$
|
2,022
|
|
18
|
%
|
$
|
(1,434)
|
|
(71)
|
%
|
LED components
|
|
|
6,310
|
|
76
|
%
|
|
6,771
|
|
62
|
%
|
|
(461)
|
|
(7)
|
%
|
Lighting products
|
|
|
1,218
|
|
15
|
%
|
|
1,765
|
|
16
|
%
|
|
(547)
|
|
(31)
|
%
|
Other revenues
(1)
|
|
|
141
|
|
2
|
%
|
|
444
|
|
4
|
%
|
|
(303)
|
|
*
|
|
Total revenues, net
|
|
|
8,257
|
|
100
|
%
|
|
11,002
|
|
100
|
%
|
|
(2,745)
|
|
(25)
|
%
|
Cost of revenues
|
|
|
11,946
|
|
145
|
%
|
|
14,055
|
|
128
|
%
|
|
(2,109)
|
|
(15)
|
%
|
Gross loss
|
|
$
|
(3,689)
|
|
(45)
|
%
|
$
|
(3,053)
|
|
(28)
|
%
|
$
|
(636)
|
|
21
|
%
|
* Not meaningful
|
(1)
|
|
Other includes primarily revenues attributable to the sale of epitaxial wafers, scraps and raw materials and the provision of services.
|
Revenues, net
Our revenues decreased by approximately
25
% from $
11.0
million for the
nine months
ended May 31, 2015 to $
8.3
million for the
nine months
ended May 31, 2016. The $
2.7
million decrease in revenues reflects a $
1.4
million decrease in revenues attributable to sales of LED chips
,
a $
0.5
million
de
crease in revenues attributable to
sales of LED components
,
a
$
0.5
million decrease in revenues attributable to sales of lighting products
,
and a $
0
.3
million
de
crease in revenues attributable to other revenues.
Revenues attributable to the sales of our LED chips represented
7
% and
18
% of our revenues for the
nine months
ended May 31, 2016 and 2015
, respectively
.
The decrease in revenues attributable to sales of LED chips was the result of a
63
% decrease in the volume of LED chips sold, primarily due to a slowdown in demand, our strategic
decision
to place greater emphasis on the sales of LED components rather than the sales of LED chips and a business interruption as a result of the restructuring plan
which has and continues to
impact our ability to serve the needs of our customers on a timely basis.
Revenues attributable to the sales of our LED components represented
76
% and
62
% of our revenues for the
nine months
ended May 31, 2016 and
2015, respectively.
The decrease in revenues attributable to sales of LED components was
primarily
due to lower volume sold for the UV LED components product
,
and average selling price erosion
,
offset
in part by
the increase in new module product sales.
We have adopted a
strategy to
adjust our product mix by
exit
ing
certain high volume but low unit selling price product lines in response to the general trend of lower average selling prices for products that have been available in the market for some time.
Revenues attributable to the sales of lighting products represented
15
% and
16
% of our revenues for the
nine months
ended May 31, 2016 and 2015, respectively.
Revenues attributable to the sales of lighting products
were
lower for the nine months ended
May 31, 2016
primarily due to a slowdown in demand on LED luminaries and retrofits and fewer non-recurring project-based orders for LED lighting products compared to the nine months ended
May 31, 2015
.
The decrease in other revenues was primarily due to fewer raw materials and scraps sold and
a
decrease in service revenues
for the nine months ended May 31, 2016
.
Cost of Revenues
Our cost of revenues decreased by
15
% from $
14.1
million for the
nine months
ended May 31, 2015 to $
11.9
million for the
nine months
ended May 31, 2016.
The decrease in cost of revenues was primarily due to the effect of our
ongoing cost reduction and the result of lower sales volume for our LED chips
and components
for
the
nine months
ended
May 31, 2016
.
Gross Loss
Our gross loss was $
3.7
million
and $3.1 million
for the nine months ended May 31, 2016 and 2015
, respectively
. Our gross margin percentage was negative
45
% for the nine months ended May 31, 2016, as compared to negative
28
% for the nine months ended May 31, 2015, as a consequence of the reduction in revenues, primarily due to decreases in
the sales of
UV LED components
and
the average selling prices, which is more fully described above, and excess capacity charges for our LED chips because of lower factory utilization.
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended May 31,
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
% of
|
|
Change
|
|
Change
|
|
|
|
$
|
|
Revenues
|
|
$
|
|
Revenues
|
|
$
|
|
%
|
|
|
|
(in thousands)
|
|
Research and development
|
|
$
|
1,617
|
|
20
|
%
|
$
|
1,954
|
|
18
|
%
|
$
|
(337)
|
|
(17)
|
%
|
Selling, general and administrative
|
|
|
3,557
|
|
43
|
%
|
|
5,648
|
|
51
|
%
|
|
(2,091)
|
|
(37)
|
%
|
Employee termination benefits
|
|
|
207
|
|
2
|
%
|
|
—
|
|
—
|
%
|
|
207
|
|
—
|
%
|
Gain on disposals of long-lived assets, net
|
|
|
(27)
|
|
(0)
|
%
|
|
(287)
|
|
(3)
|
%
|
|
260
|
|
(91)
|
%
|
Total operating expenses
|
|
$
|
5,354
|
|
65
|
%
|
$
|
7,315
|
|
66
|
%
|
$
|
(1,961)
|
|
(27)
|
%
|
Research and development.
Our research and development expenses decreased from $2.0 million for the
nine months
ended
May 31, 2015
to $
1.6
million for the
nine months
ended
May 31, 2016
. The decrease was primarily due to a $
0.2
million decrease in payroll expense and other operating expenses as a result of lower headcount, a $0
.1
million
decrease
in materials and supplies used in research and development
, and a
$0
.1
million
decrease in depreciation and amortization expense
.
Selling, general and administrative.
Our selling, general and administrative expenses decreased from $5.6 million for the
nine months
ended
May 31, 2015
to $
3.6
million for the
nine months
ended
May 31, 2016
. The decrease was mainly attributable to a $
1.1
million decrease in payroll and stock based compensation expense
,
a $0
.5
million decrease in professional service expenses
,
mainly legal and advisory services and decreases in various other expenses including depreciation and amortization, travel related expenses, rent and advertisement of $0.
4
million.
We have started to realize the benefits of operating cost reductions, such as savings on lease and lower payroll expenses due to workforce reductions and normal attrition, and improvement in operational efficiencies through the consolidation of facilities.
Employee termination benefits.
Employee termination benefits of $
0.2
million were recognized for severance-related expenses for workforce reductions with respect to our restructuring plan on chips manufacturing operation for the nine months ended
May 31, 2016
.
G
ai
n
on disposal of long-lived assets, net.
We recognized a gain of $
27 thousand and $287 thousand
, net on the disposal of long-lived assets for the nine months ended May 31, 201
6 and 2015, respectively
.
P
rimarily
d
ue to the excess capacity charges that we have suffered for a few years, considering the risk of technological obsolescence and according to the production plan built based on our sales forecast, we disposed of a certain level of our idle equipment.
Other Income (Expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended May 31,
|
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
% of
|
|
|
|
|
% of
|
|
|
|
$
|
|
Revenues
|
|
$
|
|
Revenues
|
|
|
|
(in thousands)
|
|
Equity in losses from unconsolidated entities
|
|
$
|
(79)
|
|
(1)
|
%
|
$
|
(16)
|
|
0
|
%
|
Interest expenses, net
|
|
|
(42)
|
|
(0)
|
%
|
|
(74)
|
|
(1)
|
%
|
Other income, net
|
|
|
101
|
|
1
|
%
|
|
88
|
|
1
|
%
|
Foreign currency transaction gain (loss), net
|
|
|
(60)
|
|
(1)
|
%
|
|
49
|
|
0
|
%
|
Total other income (expenses), net
|
|
$
|
(80)
|
|
(1)
|
%
|
$
|
47
|
|
0
|
%
|
Equity in loss
es
from unconsolidated entities.
We recognized loss from our portion of the net loss from SILQ, an unconsolidated entity. SILQ is currently in the process of being dissolved.
We also recognized additional loss to reduce the
carrying amount of
our
investment in SILQ to
our
proportionate share of the net realizable value reported by SILQ
for the
nin
e months ended May 31, 2016.
Interest expenses, net.
The decrease in interest expenses, net was primarily due to the decrease in debt balance because of the repayment of debt.
Other income, net.
Our other income consists primarily of rental income from the lease back of the
second
floor of our Hsinchu building to the original owner, net of related depreciation charge
, and g
overnment subsidy income
to our research and development plan
.
Foreign currency transaction gai
n (loss)
, net.
We recognized a net foreign currency transaction loss of $
60
thousand for the
nine
months ended
May 31, 2016
, primarily due to the depreciation of the U.S. dollar against the NT dollar from bank deposits and accounts receivables held by Taiwan
SemiLEDs and Taiwan Bandaoti Zhaoming Co., Ltd. in currency other than the functional currency of such subsidiaries, as compared to a net foreign currency
transaction gain of $
49
thousand for the
nine
months ended
May 31, 201
5
due to the appreciation of the U.S. dollar against the NT dollar from bank
deposits held by Taiwan SemiLEDs in currency other than the functional currency of such subsidiary.
Income Tax Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended May 31,
|
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
% of
|
|
|
|
|
% of
|
|
|
|
$
|
|
Revenues
|
|
$
|
|
Revenues
|
|
|
|
(in thousands)
|
|
Income tax expense
|
|
$
|
—
|
|
—
|
%
|
$
|
1
|
|
0%
|
|
Although we incurred a loss before income taxes for the nine months ended May 31, 2016, we did not recognize any related income tax benefits. Our effective tax rate is estimated to be approximately zero for fiscal 2016, since Taiwan SemiLEDs incurred losses, and because we provided a full valuation allowance on all deferred tax assets, which consisted primarily of net operating loss carryforwards and foreign investment loss.
Despite a loss before income taxes, we recognized income tax expense of $1 thousand for the nine months ended May 31, 2015 for a subsidiary in Taiwan, which is subject to an additional 10% tax on distributable retained earnings (after statutory legal reserves) to the extent that such earnings are not distributed prior to the end of the subsequent year. This undistributed earnings surtax is determined in the subsequent year when the distribution plan relating to earnings attributable to the prior year is approved by a company’s stockholders and is payable in the subsequent year. Our effective tax rate was zero for fiscal 2015, since Taiwan SemiLEDs incurred losses, and because we provided a full valuation allowance on all deferred tax assets, which consisted primarily of net operating loss carryforwards and foreign investment loss. Subsidiaries in Taiwan file their income tax returns separately.
Net Loss Attributable to Noncontrolling Interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended May 31,
|
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
% of
|
|
|
|
|
% of
|
|
|
|
$
|
|
Revenues
|
|
$
|
|
Revenues
|
|
|
|
(in thousands)
|
|
Net loss attributable to noncontrolling interests
|
|
$
|
(19)
|
|
(0)
|
%
|
$
|
(48)
|
|
(0)
|
%
|
We recognized net losses attributable to noncontrolling interests of $
19
thousand and $48 thousand
for
the
nine months
ended
May 31, 2016
and
2015
, respectively, which were attributable to the share of the net losses of Ning Xiang held by the remaining noncontrolling holders. Noncontrolling interests represented a
13
% equity interest in Ning Xiang beginning in November 2013, and reduced to 7% beginning in December 2014.
Liquidity and Capital Resources
As of May 31, 2016 and August 31, 2015, we had cash and cash equivalents of $
3.5
million and $
4.8
million, respectively, which were predominately held in U.S. dollar denominated demand deposits and/or money market funds. We received the cash down payment of $3 million on December 14, 2015 for the potential sale of our headquarters building, at a sales price of $5.2 million. The sale is scheduled to close on December 31, 2017. At any time before December 31, 2017, we have the right to cancel the agreement or sell the building to any other third party, concurrently with the repayment of all the cash balance received along with interest payable to the buyer.
Our long-term debt, which consisted of NT dollar denominated long-term notes, totaled $
2.9
million and $
3.9
million as of May 31, 2016 and August 31, 2015, respectively. These long-term notes carry variable interest rates, based on the annual time deposit rate plus a specific spread, which ranged from
1.7
% to 2.0% per annum as of both May 31, 2016 and August 31, 2015, are payable in monthly installments, and are secured by our property, plant and equipment. These long-term notes do not have prepayment penalties or balloon payments upon maturity.
|
·
|
|
The first note payable requires monthly payments of principal and interest in the amount of $
12
thousand over the 15-year term of the note with final payment to occur in May 2024 and, as of May 31, 2016, our outstanding balance on this note payable was approximately $
1.1
million.
|
|
·
|
|
The second note payable requires monthly payments of principal and interest in the amount of $
17
thousand over the 15-year term of the note with final payment to occur in December 2025 and, as of May 31, 2016, our outstanding balance on this note payable was approximately $
1.8
million.
|
|
·
|
|
The third note payable, which we entered in January 2013 and had been fully drawn down, requires monthly payments of principal and interest in the amount of $
29
thousand over the three-year term of the note with final payment to occur in July 2016 and, as of May 31, 2016, our outstanding balance on this note payable was approximately $
38
thousand
.
|
Property, plant and equipment pledged as collateral for our notes payable were $
6.2
million and $7.1 million as of May 31, 2016 and August 31, 2015, respectively.
We have incurred significant losses since inception. We have suffered losses from operations of $13.3 million and $24.8 million, gross losses on product sales of $4.1 million and $11.3 million, and net cash used in operating activities of $4.5 million and $15.7 million for the years ended August 31, 2015 and 2014, respectively. Loss from operations for the three and nine months ended May 31, 2016 were $
3.1
million and $
9.0
million, respectively. Gross loss on product sales for the three and nine months ended May 31, 2016 were $
1.5
million and $
3.7
million, respectively.
Further, a
t May 31, 2016, the Company’s cash and cash equivalents was down to $3.5 million.
These facts and conditions raise substantial doubt about our ability to continue as a going concern. However, our management has developed a liquidity plan as
summarized below, that if executed successfully, should provide sufficient liquidity to meet our obligations as they become due for a reasonable period of time, and allow the development of its core business.
|
·
|
|
Rais
ing
approximately $4.5 million
of
cash through the private placement of additional common shares and debt of the Company to an investor
.
|
|
·
|
|
Enter
ing
into an agreement in December 2015 with a strategic partner for the potential sale of the headquarters building located at Miao-Li, Taiwan. The total cash consideration for the potential sale is $5.2 million to be paid in three installments, of which the initial installment of $3 million was received on December 14, 2015. The sale is expected to close on December 31, 2017.
|
|
·
|
|
Suppressing 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. We are restructuring the chips manufacturing operation. We are exploring the opportunities to consign or sell certain equipment to our ODM partner. Part of our employees related to our chips manufacturing has transferred to our ODM partner. We also implemented certain workforce reductions with respect to our chips manufacturing operation. Following the restructuring, we expect to reduce payroll, minimize research and development activities associated with chips manufacturing operation and reduce idle capacity charges. This partnership should help us obtain a steady source of LED chips with competitive and favorable price for our packaging business, expand the production capacity for LED components, and strengthen our product portfolio and technology.
|
|
·
|
|
Increasing sales of Automotive Projects in both China and India by cultivating relationships with automotive lighting developers that are outside the Company’s historical distribution channels. Maintaining the number of display models at automotive lighting facilities in order to provide dealers, communities and consumers with examples of newly designed product.
|
|
·
|
|
Gaining positive cash-inflow from operating activities through continuous cost reductions and the sales of new higher margin products. In the
second
quarter of fiscal 2016, our new module product has moved from sampling stage to mass production and begun shipment to our customers. Steadily growth of the module product and the continued commercial sales of its UV LED product are expected to improve our future gross margin, operating results and cash flows. We are targeting niche markets and focused on product enhancement and developing its LED product into many other applications or devices.
|
|
·
|
|
C
ontinu
ing
to monitor prices, work with current and potential vendors to decrease costs and, consistent with our existing contractual commitments, may decrease our activity level and capital expenditures further. This plan reflects our strategy of controlling capital costs and maintaining financial flexibility.
|
|
·
|
|
Rais
ing
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 we believe that these liquidity plan measures
should
be adequate to satisfy our liquidity requirements for the twelve months ending
May
31
, 2017, 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 our business, results of operations and financial position, and may adversely affect our ability to continue as a going concern. Our 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.
Cash Flows
The following summary of our cash flows for the periods indicated has been derived from our unaudited interim condensed consolidated financial statements, which are included elsewhere in this Quarterly Report (in thousands):
|
|
|
|
|
|
|
|
|
|
Nine Months Ended May 31,
|
|
|
|
2016
|
|
2015
|
|
Net cash used in operating activities
|
|
$
|
(2,909)
|
|
$
|
(3,928)
|
|
Net cash used in investing activities
|
|
$
|
(375)
|
|
$
|
(957)
|
|
Net cash provided by (used in) financing activities
|
|
$
|
2,055
|
|
$
|
(1,453)
|
|
Cash Flows Used In Operating Activities
Net cash used in operating activities for the nine months ended May 31, 2016 and 2015 was $
2.9
million and $3.9 million, respectively. The cash flows used in operating activities for the nine months ended May 31, 2016 was $
1
million lower, primary attributable to the decrease in cash used to pay for salary-related expenses due to the reduction of employees engaged in manufacturing activities as we
restructured
our manufacturing operations and the termination of employ
ees
. In addition, a decrease in cash used to pay for materials and supplies used in production and research and development reflecting the effect of cost reduction.
Cash Flows Used In Investing Activities
Net cash used in investing activities for the nine months ended May 31, 2016 was $
0.4
million, primarily
relating to $0.7 million in
purchases of machinery and equipment and payments for the build out of our manufacturing facility and leasehold improvements
, partially offset by a $0.3 million in proceeds from the sale of machinery and equipment.
Net cash used in investing activities for the nine months ended May 31, 2015 was $1.0 million, consisting primarily of purchases of $1.3 million in property, plant and equipment representing primarily the purchases of machinery and equipment and payments for leasehold improvements, offset by
decrease in restricted cash.
Cash Flows
Provided By (
Used In
)
Financing Activities
Net cash provided by financing activities for the nine months ended May 31, 2016 was $
2.1
million, consisting of the receipt of the $
3.0
million initial installment of cash consideration for the potential sale of our headquarters building, offset in part by the payments on long-term debt of $
0.9
million.
Net cash used in financing activities for the nine months ended May 31, 2015 was the payment
s
on long-term debt.
Capital Expenditures
We had capital expenditures of $
0.7
million and $1.
3
million for the nine months ended May 31, 2016 and 2015, respectively. Our capital expenditures consisted primarily of the purchases of machinery and equipment, construction in progress, prepayments for our manufacturing facilities and prepayments for equipment purchases. We expect to continue investing in capital expenditures in the future as we expand our business operations and invest in such expansion of our production capacity as we deem appropriate under market conditions and customer demand. However, in response to controlling capital costs and maintaining financial flexibility, our management continues to monitor prices and, consistent with its existing contractual commitments, may decrease its activity level and capital expenditures as appropriate.
Off-Balance Sheet Arrangements
As of May 31, 2016, we did not engage in any off-balance sheet arrangements. We do not have any interests in variable interest entities.