Company Overview

SemiLEDs Corporation develops, manufactures, and sells light-emitting diode (LED) chips, components, modules, and systems. The company’s products are used for general lighting and specialty industrial applications, including ultraviolet (UV) curing, LED light therapy, counterfeit detection, germicidal and viricidal devices, horticulture, architectural lighting, and entertainment lighting.

SemiLEDs has advanced technical capabilities and proprietary know-how in areas such as reusing sapphire substrates, optimizing epitaxial growth processes, employing copper alloy base manufacturing, utilizing nanoscale surface engineering, and developing low-cost chip-scaled packaging and mini-LED technologies. These capabilities allow the company to produce a range of LED products and reduce manufacturing costs.

The company operates through two principal subsidiaries - SemiLEDs Optoelectronics Co., Ltd. in Taiwan, which handles a substantial portion of the company’s assets, research, development, manufacturing, and sales activities, and Taiwan Bandaoti Zhaoming Co., Ltd., which focuses on LED component research, development, manufacturing, and marketing.

Recent Developments

In the second quarter of fiscal 2025, SemiLEDs received approximately $13.3 million in buy-sell purchase orders, with $7 million in deposits received so far. The revenue from these orders is expected to be recognized in the second quarter, with an estimated cost of revenue of $12.7 million. However, delays in shipment could push the revenue recognition to the third quarter or later.

Key Factors Affecting Financial Performance

Several key factors influence SemiLEDs’ financial condition, results of operations, and business:

1. Ability to Raise Funding and Improve Liquidity: The company needs to improve its liquidity, access alternative funding sources, and obtain additional equity or debt capital as necessary for operations. Failure to do so could adversely impact the business.

2. Reliance on Chip Suppliers: The company’s reliance on chip suppliers exposes it to risks such as reduced control over delivery schedules, quality, and costs. Inability to procure chips from other suppliers could harm the business.

3. Industry Growth and LED Adoption: The overall adoption of LED lighting to replace traditional sources will influence the growth and demand for SemiLEDs’ products, impacting financial performance.

4. Average Selling Prices: Declining average selling prices due to competition can accelerate revenue and margin declines, requiring the company to innovate and offer competitive products.

5. Product Mix Changes: Shifts in the company’s product mix, with greater emphasis on LED components and modules versus chips, can impact gross margins and operating results.

6. Cost Reduction Efforts: The ability to reduce manufacturing costs to offset lower average selling prices is crucial, as competitors may reduce prices faster than SemiLEDs can cut costs.

7. Innovation Capabilities: Continued innovation in product design and manufacturing efficiency is essential to deliver new, technologically advanced, and lower-cost products.

8. Economic Conditions and Geographic Concentration: General economic conditions and the company’s revenue concentration in a few select markets can significantly impact financial results.

9. Intellectual Property Issues: Defending against potential intellectual property infringement claims can result in costly litigation and impact the company’s ability to manufacture and sell products.

10. Cash Position: SemiLEDs’ declining cash position and the need to service debt and contractual obligations require the company to implement cost reduction programs and explore additional financing options.

Critical Accounting Policies and Estimates

The company’s critical accounting policies and estimates include:

1. Revenue Recognition: SemiLEDs recognizes revenue when it satisfies performance obligations and expects to be entitled to the transfer of promised goods or services to customers. The company provides customers with limited rights of return and product warranties, which are estimated and recorded as reductions to revenue and cost of revenue, respectively.

2. Accounts Receivable: The allowance for doubtful accounts is based on management’s assessment of the collectability of customer accounts, considering historical experience, industry data, credit quality, and current economic conditions.

3. Inventory Write-downs: The company writes down excess and obsolete inventory to its estimated net realizable value, which is the estimated selling price less reasonably predictable costs of completion and disposal.

4. Exchange Rate Information: SemiLEDs’ subsidiaries use local currencies as their functional currencies, and the company translates their financial statements into U.S. dollars for reporting purposes, which can result in translation adjustments.

Results of Operations

Comparing the three months ended November 30, 2024, to the same period in 2023:

Revenues, net:

• Total revenues decreased by 24% to $1.3 million, driven by a $514 thousand decrease in LED components sales, partially offset by increases in other operating revenues ($108 thousand), lighting products ($10 thousand), and LED chips ($7 thousand).
• The decrease in LED components sales was due to lower sales volumes, while the increase in other revenues was primarily from the provision of services and sale of raw materials.

Cost of Revenues:

• Cost of revenues decreased by 29% to $1.0 million, primarily due to the lower sales volumes for LED components.

Gross Profit:

• Gross profit increased from $245 thousand to $260 thousand, and gross margin improved from 15% to 21%, mainly due to the increase in higher-margin other revenues.

Operating Expenses:

• Research and development expenses decreased by 41% to $221 thousand, primarily due to lower materials, supplies, and payroll costs.
• Selling, general, and administrative expenses decreased by 6% to $696 thousand, mainly from lower payroll, entertainment, and travel expenses.
• The company recognized no gain on disposals of long-lived assets in the current period, compared to a $50 thousand gain in the prior-year period.

Other Income (Expenses):

• Investment loss from unconsolidated entities was $3 thousand, compared to $8 thousand in income in the prior-year period.
• Interest expenses, net, decreased from $88 thousand to $67 thousand, primarily due to the repayment of loan principal.
• Other income, net, increased from $259 thousand to $282 thousand, mainly from higher rental income.
• The company recognized a $102 thousand net foreign currency transaction loss, compared to a $44 thousand net gain in the prior-year period, due to exchange rate fluctuations.

Liquidity and Capital Resources

As of November 30, 2024, SemiLEDs had $1.2 million in cash and cash equivalents, down from $1.7 million as of August 31, 2024. The company has implemented cost reduction programs and is exploring opportunities to sell certain manufacturing equipment to improve its cash position and operational efficiency.

SemiLEDs’ long-term debt consists of NT dollar-denominated notes, convertible unsecured promissory notes, and loans from the company’s Chairman and largest shareholder, totaling $3.6 million as of November 30, 2024. The company has been extending the maturity dates of these loans and exploring options to repay them with equity.

Based on the company’s current financial projections and assuming successful implementation of its liquidity plans, including the issuance of additional equity, SemiLEDs believes it will have sufficient sources of liquidity to fund its operations and capital expenditures for the next 12 months. However, there are no assurances that the planned activities will be successful in raising additional capital, reducing losses, and preserving cash.

Outlook

SemiLEDs faces several challenges, including its declining cash position, the need to improve liquidity and access alternative funding sources, and the reliance on chip suppliers that exposes the company to risks. The company’s financial performance is also heavily influenced by the overall adoption of LED lighting, the ability to manage declining average selling prices and product mix changes, and the need for continuous innovation to remain competitive.

To address these challenges, SemiLEDs has implemented cost reduction programs, is exploring opportunities to sell manufacturing equipment, and is planning to issue additional equity to strengthen its financial position. The company’s success in executing these plans and adapting to the dynamic LED market will be crucial in determining its future financial performance and long-term viability.