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 small-footprint LEDs, chip-scaled packaging, and multi-pixel Mini LED packages. 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, under which the company will purchase machinery and equipment and then resell the goods to a customer. The company has received $7.0 million in deposits, with the balance due upon completion of installation and testing. The revenue from these orders is expected to be recognized in the second quarter of fiscal 2025, with an estimated cost of revenue of $12.7 million. However, delays in shipment could push the revenue recognition to the third quarter.

Key Factors Affecting Financial Performance

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

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

Chip Supply: Reliance on chip suppliers exposes the company to risks such as reduced control over delivery, quality, and costs. Inability to procure chips from other suppliers could harm the business.

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

Average Selling Prices: Competition in the LED market has led to declining average selling prices, which the company must offset through cost reductions and product innovations.

Product Mix Changes: Shifts in the company’s product mix, with a focus on more profitable LED components and modules, are expected to improve gross margins and operating results.

Cost Reduction and Innovation: The ability to reduce costs and introduce new, more efficient, and lower-cost products is crucial to offsetting pricing pressures and maintaining competitiveness.

Geographic Concentration and Economic Conditions: SemiLEDs’ revenues are concentrated in a few select markets, making it vulnerable to economic and political conditions in those regions. The company also faces competition from Chinese manufacturers benefiting from government support.

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

Cash Position and Liquidity

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

Based on current financial projections and assuming the successful implementation of liquidity plans, the company believes it will have sufficient sources of liquidity to fund operations and capital expenditures for the next 12 months. This includes servicing approximately $3.4 million in debt and contractual obligations in fiscal 2025, which the company expects to fund through equity issuances and loan extensions.

However, there are no assurances that the planned activities will be successful in raising additional capital, reducing losses, and preserving cash. If the company is unable to generate positive cash flows from operations, it may need to consider alternative financing sources, such as public or private equity, to support working capital requirements.

Results of Operations

For the three months ended November 30, 2024, SemiLEDs reported the following:

Revenues, net: $1.3 million, down 24% from $1.6 million in the prior-year period. The decrease was primarily due to a $514 thousand decline in LED component sales, partially offset by increases in other operating revenues, lighting product sales, and LED chip sales.

Cost of Revenues: $1.0 million, down 29% from $1.4 million in the prior-year period, primarily due to lower LED component sales volumes.

Gross Profit: $260 thousand, up from $245 thousand in the prior-year period. Gross margin improved to 21% from 15% due to the increase in higher-margin other operating revenues.

Operating Expenses: $917 thousand, down 14% from $1.1 million in the prior-year period. The decrease was driven by lower research and development expenses, partially offset by a lack of gains on disposals of long-lived assets compared to the prior year.

Other Income (Expenses): $110 thousand, down from $223 thousand in the prior-year period. The decrease was primarily due to a foreign currency transaction loss of $102 thousand, compared to a gain of $44 thousand in the prior-year period.

Net Income Attributable to SemiLEDs: A loss of $547 thousand, compared to a loss of $598 thousand in the prior-year period.

Liquidity and Capital Resources

SemiLEDs has several long-term debt obligations, including:

• $1.2 million in NT dollar-denominated long-term notes, with monthly principal and interest payments through July 2027.
• $2.4 million in loans from the company’s Chairman and largest shareholder, with maturity dates extended to January 2025.
• Convertible unsecured promissory notes totaling $1.6 million, which were converted to common stock in January 2024.

The company’s long-term assets consist primarily of property, plant, and equipment, intangible assets, operating lease assets, and investments in unconsolidated entities. SemiLEDs believes it can readily obtain additional manufacturing capacity through third-party agreements if required.

Outlook and Analysis

SemiLEDs faces several challenges that have impacted its financial performance in recent periods:

1. Declining Revenues and Profitability: The 24% year-over-year decline in revenues, driven by lower LED component sales, reflects the competitive pressures in the LED market. While the company has been able to improve gross margins through changes in product mix, it continues to report net losses.

2. Liquidity Concerns: SemiLEDs’ cash position has declined, and it remains reliant on debt financing from its Chairman and largest shareholder. The company’s ability to fund operations and service its debt obligations is a significant concern, despite its plans to raise additional equity capital.

3. Competitive Landscape: The LED market is highly competitive, with aggressive pricing from Chinese manufacturers that have benefited from government support. SemiLEDs must continue to innovate and reduce costs to maintain its competitiveness.

4. Concentration Risks: The company’s revenues are heavily concentrated in a few select markets, making it vulnerable to economic and political conditions in those regions. Diversifying its customer base and geographic reach could help mitigate these risks.

5. Intellectual Property Challenges: Defending against potential intellectual property infringement claims could result in costly litigation and disrupt the company’s operations.

To address these challenges, SemiLEDs has implemented several strategic initiatives:

• Focusing on more profitable LED components and modules, rather than lower-margin LED chips
• Pursuing cost reduction measures, including workforce reductions and the sale of manufacturing equipment
• Exploring opportunities to raise additional equity capital and extend debt maturities
• Continuing to invest in product innovation and development to maintain a competitive edge

However, the success of these initiatives is not guaranteed, and the company’s long-term viability remains uncertain. SemiLEDs must execute its plans effectively, navigate the competitive landscape, and secure sufficient funding to return to profitability and sustainable growth. Investors should closely monitor the company’s progress in addressing its liquidity concerns and improving its financial performance in the coming quarters.