SEMILEDS CORP Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

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 our
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,

Declining cash position.

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 the
NASDAQ Stock Market.

Our ability to maintain compliance with ongoing listing requirements to avoid having our shares delisted from the Nasdaq capital market.

The ongoing impact of the COVID-19 pandemic on our business and that of our customers.

The inability of our suppliers or other contract manufacturers to produce products that meet our requirements.

Our ability to execute our cost reduction programs and effectively implement our restructuring plan.

Our ability to improve our gross margins, reduce our net losses and return our operations to profitability.

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.

Our ability to effectively develop, maintain and expand our sales and distribution channels, particularly in the niche LED markets, including UV LED and Architectural Lighting, which we focus on.

Our ability to run our business successfully in the face of the cyclicality, rapid technological change, rapid product obsolescence, declining average selling prices, and wide swings in supply and demand typically encountered in the LED market.

Competitive pressure from existing and new companies.

Our ability to increase our income from the sale of our products and to control our expenses.

Loss of one of our key employees or our failure to attract, assimilate and retain other highly qualified personnel.

Claims by third parties of intellectual property infringement or misappropriation against us or our customers, including our distributor customers.

The failure of LEDs to achieve widespread acceptance in the general lighting market, or if alternative technologies gain market acceptance.

The loss of key suppliers or contract manufacturers.

Our ability to expand or modernize our manufacturing facilities effectively, or to do so in a timely or cost-effective manner.

Difficulty managing our future growth or responding to the need for contract operations and the associated changes to our operations.

Unfavorable developments in these selected markets, including The United States,
Japan, Germany, Taiwan and Netherlandswhere our revenue is concentrated, including the impact of the COVID-19 pandemic and inflation on customer demand.

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Our ability to develop and implement a new strategy to China and
India Market.

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.

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.

loss of customers.

Failure of our strategy to market and sell our products in jurisdictions with limited intellectual property enforcement regimes.

Lack of marketing and sales success by our third party providers.

Our customers’ ability to manufacture and sell products that contain our LED products.

Our failure to adequately prevent disclosure of trade secrets and other proprietary information.

Ineffectiveness of our disclosure controls and procedures and our internal control over financial reporting.

Our ability to benefit from future joint ventures, investments, acquisitions and other strategic alliances.

Impairment of long-lived assets or investments.

Undetected defects in our products that damage our sales and reputation and affect our production yield.

The availability of adequate and timely supplies of electricity and water to our production facilities.

Our ability to comply with existing and future environmental laws and the cost of such compliance.

The ability of SemiLEDs Optoelectronics Co.,Ltd.or Taiwan SemiLEDs to make dividends and other payments SemiLEDs Corporation.

Our ability to obtain the necessary regulatory approvals to make further investments Taiwan SemiLEDs.

Catastrophic events such as fires, earthquakes, floods, tornadoes, tsunamis, typhoons, pandemics including the COVID-19 pandemic, wars, terrorist activities and other similar events, particularly when such events occur at or near our facilities or the facilities of our suppliers, subcontractors and customers.

The effect of the legal system in People’s Republic of Chinaor the PRC.

Labor shortages, strikes and other disruptions affecting our operations.

Deteriorating relations between the PRC and Taiwan governments.

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.

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, 2021, or the
2021 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 2021 Annual
Report, and in other filings with the SEC.

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Company Overview

We develop, manufacture and sell light emitting diode (LED) chips and LED
components. Our products are used for general lighting applications, including
street lights and commercial, industrial, system 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 distributors and
a customer base that is heavily concentrated in a few select markets, including
the United States, Japan, Germany and Netherlands. 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 end­users 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:

Reuse of sapphire substrate in subsequent production runs;

Optimizing our epitaxial growth processes to create layers that efficiently convert electricity into light;

Employing copper alloy based manufacturing technology to improve the thermal and electrical performance of our chip;

Leveraging nanoscale surface engineering to improve usable light extraction;

Manufacture of LEDs with an extremely small footprint and optimized output, ideal for mini-LED applications;

Development of an LED structure generally composed of multiple epitaxial layers stacked vertically on a copper alloy base;

develop cheaply Chip-scale packaging (CSP) technology; and

Development of multi-pixel mini-LED packages for commercial displays.

These technical capabilities enable us to produce LED chips, LED component, LED
modules and System products. We believe these capabilities and know-how 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. We are a
holding company for various wholly and majority owned subsidiaries. SemiLEDs
Optoelectronics Co., Ltd., or Taiwan SemiLEDs, is our wholly owned operating
subsidiary, where a substantial portion of our assets are held and located,
where a portion of our research, development, manufacturing and sales activities
take place. Taiwan SemiLEDs owns an approximately 97% equity interest in Taiwan
Bandaoti Zhaoming Co., Ltd., formerly known as Silicon Base Development, Inc.,
which is engaged in the research, development, manufacture, and substantial
portion of marketing and sale of LED products, including lighting fixtures and
systems, and where most of our employees are based.

Key factors affecting our financial condition, results of operations and our business

In our opinion, the following are key factors affecting our financial condition, results of operations and business:

COVID-19 Pandemic. In March 2020, the World Health Organization declared the
outbreak of COVID-19 as a pandemic, which continues to spread throughout the
world. As a result, and in consideration of the health and well-being of our
employees, customers and communities, and in support of efforts to contain the
spread of the virus, we have taken several precautionary measures and adjusted
our operational needs. Our workplaces are operating under enhanced measures to
ensure the health and safety of our employees, including limiting the visitors
coming into our workplace and using videoconferencing for meetings when
possible. Our business, financial condition, liquidity and operating results
have been, and will continue to be, adversely affected by COVID-19 and related
restrictions. The conditions caused by the COVID-19 pandemic have adversely
affected our customers' ability or willingness to purchase our products or
services, delayed prospective customers' purchasing decisions, adversely
impacted our ability to provide or deliver products and on-site services to our
customers, delayed the provisioning of our offerings, or lengthened payment
terms, all of which could adversely affect our future sales, operating results
and overall financial performance. Our operations have also begun to be
negatively affected by a range of external factors related to the COVID-19
pandemic that are not within our control. To

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avoid cash shortage due to the pandemic, we applied and received subsidies from
the Taiwan government. Our bank granted us a deferment period for twelve months
starting from May 2020. During this period, we did not need to pay the monthly
payments of the principal but only the interest. We have also devoted ourselves
to new product development and expect these new products could bring in new
revenue, offsetting the losses resulted from existing customers' delayed
purchasing. However, given the ongoing and evolving economic and business impact
of the COVID-19 pandemic, we may be required to further revise certain
accounting estimates and judgments, which could have a material adverse effect
on our financial position and results of operations.

Our ability to raise additional debt, sell additional equity securities and
improve our liquidity. We 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.

Our ability to get chips from other chip suppliers. Our reliance on our chip
suppliers 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. If our chip suppliers are
unable or unwilling to continue to supply our chips at requested quality,
quantity, performance and costs, or in a timely manner, our business and
reputation could be seriously harmed. 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.

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 should 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.

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.

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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 our 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. Steady 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 exiting
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.

Our ability to reduce cost to offset lower average selling 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.
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.

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. To differentiate ourselves from other LED package manufacturers, we
are putting more resources towards module and system design. Along with our
technical know-how in the chip and package sectors, we are able to further
integrate electrical, thermal and mechanical manufacturing resources to provide
customers with one-stop system services. Services include design, prototyping,
OEM and ODM. Key markets that we intend to target at the system end include
different types of UV LED industrial printers, aquarium lighting, medical
applications, niche imaging light engines, horticultural lighting and high
standard commercial lighting. The modules are designed for various printing,
curing, and PCB exposure industrial equipment, providing uncompromised
reliability and optical output. Our LED components include different sizes and
wattage to accommodate different demands in the LED market.

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. 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 the Netherlands,
Ireland, Taiwan, Japan, the United States, Germany and India. 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
project­based purchases and broadening customer base, among other things. For
the three and the nine months ended May 31, 2022, sales to our three largest
customers, in the aggregate, accounted for 64% and 63% 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 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.

Cash position. Our cash and cash equivalents increased to $3.0 million as of May
31, 2022 from $1.7 million as of May 31, 2021, primarily due to the sale of
344,391 shares of common stock in the fourth quarter of fiscal 2021 for net
proceeds of $4.0 million under our ATM program. 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
sell certain equipment related to the manufacturing of vertical LED chips, in
order to reduce the idle capacity charges and minimize our research and
development activities associated with chips manufacturing operation. In
December 2019, we issued convertible unsecured promissory notes with a principal
sum of $2 million, of which $600 thousand of convertible notes were converted
into 200 thousand shares of common stock in May 2020. On May 26, 2021 the Notes
were extended with the same terms and interest rate for one year and were
scheduled to mature on May 30, 2022, and on May 26, 2022, the Notes were further
extended with the same terms and interest rate for one year and now mature on
May 30, 2023. As of May 31, 2022 and August 31, 2021, the outstanding principal
of these notes totaled $1.4 million. 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.

Critical Accounting Policies and Estimates

We believe that the application of the following accounting policies, which are
important to our financial position and results of operations, require
significant judgments and estimates on the part of management. For a summary of
our significant accounting policies, including the accounting policies discussed
below, see Item 1 to the Unaudited Consolidated Financial Statements.

Revenue Recognition

The Company has revenue recognition policies for its operational projects that are appropriate to each Company’s circumstances. See Note 2 to the Consolidated Financial Statements for our revenue recognition policy.

Depreciation of inventories

The net realized value of inventories is the estimated selling price in the
ordinary course of business less the estimated costs of completion and disposal.
The estimation of net realized value is based on current market conditions and
historical experience with product sales of similar nature. Changes in market
conditions may have a material impact on the estimation of the net realizable
value.

Income taxes

The reliability of the deferred tax asset mainly depends on whether sufficient
future profits or taxable temporary differences will be available. In cases
where the actual future profits generated are less than expected, a material
reversal of deferred tax assets may arise, which would be recognized in profit
or loss for the period in which such a reversal takes place.

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

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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, 2022,
the exchange rate was 29.05 NT dollars to one U.S. dollar. On July 5, 2022, the
exchange rate was 29.76 NT dollars to one U.S. dollar.

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.

operating results

Three Months Ended May 31, 2022 Compared to the Three Months Ended May 31, 2021

                                   Three Months Ended
                          May 31, 2022             May 31, 2021
                                   % of                     % of        Change     Change
                         $       Revenues         $       Revenues         $         %
                                                (in thousands)
LED chips             $     57           3   % $     32           2   % $    25         78   %
LED components           1,205          68   %    1,057          74   %     148         14   %
Lighting products          158           9   %      204          14   %     (46 )      (23 ) %
Other revenues(1)          364          20   %      146          10   %     218        149   %
Total revenues, net      1,784         100   %    1,439         100   %     345         24   %
Cost of revenues         1,448          81   %      775          54   %     673         87   %
Gross profit          $    336          19   % $    664          46   % $  (328 )      (49 ) %


(1) “Other” mainly includes revenues attributable to the sale of epitaxial wafers, scrap and raw materials and the provision of services.

revenue, net

Our revenues increased by 24% to $1.8 million for the three months ended May 31,
2022 from $1.4 million for the three months ended May 31, 2021. The increase in
revenues was driven primarily by a $148 thousand increase in sales of LED
components and a $25 thousand increase in sales of LED chips and a $218 thousand
increase in other revenue, offset in part by a $46 thousand decrease in lighting
products.

Revenues attributable to the sales of our LED chips were $57 thousand and $32
thousand, representing 3% and 2%, respectively, of our revenues for the three
months ended May 31, 2022 and 2021, the increase was primarily due to varying
volumes sold for the LED chips. We have adopted a strategy to adjust our product
mix by exiting 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 and to focus on profitable
products.

Revenues attributable to the sales of our LED components were $1,205 thousand
and $1,057 thousand, representing 69% and 74%, respectively, of our revenues for
the three months ended May 31, 2022 and 2021. Revenues attributable to sales of
LED components were higher for the three months ended May 31, 2022 primarily due
to more volumes sold.

Revenues attributable to the sales of lighting products represented 9% and 14%
of our revenues for the three months ended May 31, 2022 and 2021, respectively.
Revenues attributable to the sales of lighting products were lower for the three
months ended May 31, 2021 primarily due to the less volumes sold.

Revenues attributable to other revenues represented 20% and 10% of our revenues
for the three months ended May 31, 2022 and 2021, respectively. The increase in
revenues attributable to other revenues was primarily due to the non-recurring
sales of raw material and a joint development project with CrayoNano AS in the
three months ended May 31, 2022.

cost of revenue

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Our cost of revenues increased by 87% from $775 thousand for the three months
ended May 31, 2021 to $1.4 million for the three months ended May 31, 2022. The
increase in cost of revenues was primarily due to the increase in the volume of
products sold.

Gross Profit

Our gross profit decreased from $664 thousand for the three months ended May 31,
2021 to $336 thousand for the three months ended May 31, 2022. Our gross margin
percentage decreased from 46% for the three months ended May 31, 2021 to 19% for
the three months ended May 31, 2022 as a consequence of an increase in the sales
of products with lower margins.

Operating Expenses

                                                 Three Months Ended
                                      May 31, 2022                May 31, 2021
                                                % of                        % of          Change     Change
                                     $        Revenues           $        Revenues           $          %
                                                               (in thousands)
Research and development         $     357            20   % $     528            37   % $    (171 )     (32 ) %
Selling, general and
administrative                         810            45   %       730            51   %        80        11   %
Gain on disposals of
long-lived assets, net                 (57 )          (3 ) %        (2 )           -   %       (55 )   2,750   %
Total operating expenses         $   1,110            62   % $   1,256            88   % $    (146 )     (12 ) %


Research and development Our research and development expenses were $357
thousand and $528 thousand for the three months ended May 31, 2022 and 2021,
respectively. The decrease was primary due to the $134 thousand decrease in
government project R&D expenses and $79 thousand decrease in materials and
supplies capacity, partially offset by the $38 thousand increase in payroll and
compensation.

Selling, general and administrative Our selling, general and administrative
expenses increased from $730 thousand for the three months ended May 31, 2021 to
$810 thousand for the three months ended May 31, 2022. The increase was mainly
attributable to increase in stock-based compensation and in various other
expenses.

Gain on disposal of long-lived assets, net We recognized a net gain of $57
thousand and $2 thousand on the disposal of long-lived assets for the three
months ended May 31, 2022 and 2021. Due to the excess capacity charges that we
have experienced for the last few years, considering the risk of technological
obsolescence and according to the production plan built based on our sales
forecast, we disposed of certain of our idle equipment.

Other Income (Expenses)
                                                           Three Months Ended
                                              May 31, 2022                  May 31, 2021
                                                         % of                          % of
                                             $         Revenues          $           Revenues
                                                             (in thousands)
Interest expenses, net                          (94 )         (5 ) %        (94 )             (7 ) %
Other income, net                               264           15   %        474               33   %
Foreign currency transaction (loss)
gain, net                                      (307 )        (17 ) %        155               11   %

Total Other (Expense) Income, Net € (137 ) (7 )% $535

               37   %


Interest expenses, net Interest expenses, net was $94 thousand for both three
months ended May 31, 2022 and 2021, which primarily consisted of the interest
payment of the convertible notes and loans.

Other income, net Other income, net decreased from $474 thousand for the three
months ended May 31, 2021 to $264 thousand for the three months ended May 31,
2022, primarily due to subsidies received from the Taiwan government for the
COVID-19 pandemic in 2021.

Foreign currency transaction loss, net We recognized a net foreign currency
transaction loss of $307 thousand and gain of $155 thousand for the three months
ended May 31, 2022 and 2021, respectively, primarily due to the depreciation of
the U.S. dollar against the NT dollar from bank deposits and accounts payables.

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Income Tax Expense

Our effective tax rate is expected to be approximately zero for fiscal 2022 and
was zero for fiscal 2021, 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.

On December 22, 2017, the U.S. Tax Cuts and Jobs Act was adopted, which among
other effects, reduced the U.S. federal corporate income tax rate to 21% from
34% (or 35% in certain cases) beginning in 2018, requires companies to pay a
one-time transition tax on certain unrepatriated earnings from non-U.S.
subsidiaries that is payable over eight years, makes the receipt of future
non-U.S. sourced income of non-U.S. subsidiaries tax-free to U.S. companies and
creates a new minimum tax on the earnings of non-U.S. subsidiaries relating to
the parent's deductions for payments to the subsidiaries.

Net income attributable to non-controlling interests

                                                                 Three Months Ended
                                                 May 31, 2022                       May 31, 2021
                                                            % of                                % of
                                              $           Revenues              $             Revenues
                                                                   (in thousands)
Net income attributable to
noncontrolling interests                  $        5                1    % $         7                   -   %


We recognized net income attributable to non-controlling interests of $5
thousand and $7 thousand for the three months ended May 31, 2022 and 2021,
respectively, which was attributable to the share of the net losses of Taiwan
Bandaoti Zhaoming Co., Ltd. held by the non-controlling holders. Non-controlling
interests represented 2.63% and 3.05% equity interest in Taiwan Bandaoti
Zhaoming Co., Ltd., as of May 31, 2022 and 2021, respectively.

Nine months Ended May 31, 2022 Compared to the Nine months Ended May 31, 2021

                                    Nine Months Ended
                          May 31, 2022             May 31, 2021
                                   % of                     % of        Change     Change
                         $       Revenues         $       Revenues         $         %
                                                (in thousands)
LED chips             $    153           3   % $    119           3   % $    34         29   %
LED components           3,896          72   %    2,314          69   %   1,582         68   %
Lighting products          385           7   %      525          16   %    (140 )      (27 ) %
Other revenues(1)          991          18   %      406          12   %     585        144   %
Total revenues, net      5,425         100   %    3,364         100   %   2,061         61   %
Cost of revenues         4,363          80   %    2,481          74   %   1,882         76   %
Gross profit          $  1,062          20   % $    883          26   % $   179         20   %


(1) “Other” mainly includes revenues attributable to the sale of epitaxial wafers, scrap and raw materials and the provision of services.

revenue, net

Our revenues increased by 61% from $3.4 million for the nine months ended May
31, 2021 to $5.4 million for the nine months ended May 31, 2022. The $2.1
million increase in revenues reflects a $1.6 million increase in sales of LED
components and a $585 thousand increase in revenues attributable to other
revenue, offset by a $140 thousand decrease in revenues attributable to sales of
lighting products.

Revenues attributable to the sales of our LED chips were $153 thousand and $119
thousand, representing 3% and 3% for the nine months ended May 31, 2022 and
2021, respectively. The slight increase of revenues attributable to sales of LED
chips was a result of an increase in the volume of LED chips sold.

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Revenues attributable to the sales of our LED components were $3.9 million and
$2.3 million, representing 72% and 69%, respectively, of our revenues for the
nine months ended May 31, 2022 and May 31, 2021. The increase in revenues
attributable to sales of LED components was primarily due to more volumes sold.

Revenues attributable to the sales of lighting products represented 7% and 16%
of our revenues for the nine months ended May 31, 2022 and 2021, respectively.
Revenues attributable to the sales of lighting products was $140 thousand lower
for the nine months ended May 31, 2022 primarily due to less demand for the
lighting products sold.

Revenues attributable to other revenues represented 18% and 12% of our revenues
for the nine months ended May 31, 2022 and 2021, respectively. The increase in
revenues attributable to other revenues was primarily due to the non-recurring
sale of raw materials and a joint development project with CrayoNano AS in the
nine months ended May 31, 2022.

cost of revenue

Our cost of revenues increased by 76% from $2.5 million for the nine months
ended May 31, 2021 to $4.4 million for the nine months ended May 31, 2022. The
increase in cost of revenues was primarily due to the increase in the volume of
products sold.

Gross Profit

Our gross profit increased from $883 thousand for the nine months ended May 31,
2021 to a gross profit of $1.1 million for the nine months ended May 31, 2022.
Our gross margin percentage was 20% for the nine months ended May 31, 2022, as
compared to 26% for the nine months ended May 31, 2021 as a result of increase
in the sales of products with lower margins.

Operating Expenses

                                                  Nine Months Ended
                                      May 31, 2022                May 31, 2021
                                                % of                        % of          Change      Change
                                     $        Revenues           $        Revenues           $          %
                                                                (in thousands)
Research and development         $   1,056            19   % $   1,162            35   % $    (106 )       (9 ) %
Selling, general and
administrative                       2,333            43   %     2,078            62   %       255         12   %
Gain on disposals of
long-lived assets, net                (196 )          (4 ) %      (286 )          (9 ) %        90        (31 ) %
Total operating expenses         $   3,193            58   % $   2,954            88   % $     239          8   %


Research and development Our research and development expenses were $1.1 million
and $1.2 million for the nine months ended May 31, 2022 and 2021, respectively.
The decrease was primary due to the $146 thousand decrease in government project
R&D expenses and $104 thousand decrease materials and supplies capacity offset
by the $120 thousand increase in payroll and compensation.

Selling, general and administrative Our selling, general and administrative
expenses were $2.3 million and $2.1 million for the nine months ended May 31,
2022 and May 31, 2021. The slight increase was mainly attributable to a $129
thousand increase in insurance and $32 thousand increase in patent fees, offset
partially by a $40 thousand decrease in professional service fees.

Gain on disposal of long-lived assets, net

We recognized a net gain of $196 thousand and $286 thousand on the disposal of
long-lived assets for the nine months ended May 31, 2022 and 2021, respectively.
Due to the excess capacity charges that we have experienced for the last few
years, considering the risk of technological obsolescence and according to the
production plan built based on our sales forecast, we disposed of certain of our
idle equipment.

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Other Income (Expenses)

                                                             Nine Months Ended
                                                May 31, 2022                   May 31, 2021
                                                          % of                           % of
                                             $          Revenues            $          Revenues
                                                              (in thousands)
Interest expenses, net                         (277 )            (5 ) %       (278 )            (8 ) %
Other income, net                             1,215              22   %        951              28   %
Foreign currency transaction (loss)
gain, net                                      (395 )            (7 ) %        380              11   %
Total other income, net                  $      543              10   % $    1,053              31   %

Interest Expense, Net Interest Expense, Net Was $277,000 and $278,000 for the past nine months May 31, 2022 and 2021, which consisted primarily of the interest payment on the convertible bonds and the loans.

Other income, net Other income, net increase from $951 thousand for the nine
months ended May 31, 2021, to $1.2 million for the nine months ended May 31,
2022, primarily due to higher rental income and payments received under the new
Patent Cross-License Agreement with CrayoNano AS.

Foreign currency transaction gain, net We recognized a net foreign currency
transaction loss of $395 thousand and gain of $380 thousand for the nine months
ended May 31, 2022 and 2021, respectively, primarily due to the depreciation of
the U.S. dollar against the NT dollar from bank deposits and accounts payables.

income tax expense

Our effective tax rate is expected to be approximately zero for fiscal 2022 and
was zero for fiscal 2021, 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 income (loss) attributable to non-controlling interests.

                                                                 Nine Months Ended
                                                   May 31, 2022                     May 31, 2021
                                                               % of                            % of
                                                $            Revenues            $           Revenues
                                                                  (in thousands)
Net income (loss) attributable to
noncontrolling interests                   $        18                 -   % $       (2 )              -


We recognized net income attributable to non-controlling interests of $18
thousand and net loss of $2 thousand for the nine months ended May 31, 2022 and
2021, respectively, which was attributable to the share of the net losses of
Taiwan Bandaoti Zhaoming Co., Ltd. held by the non-controlling holders.
Non-controlling interests represented 2.63% and 3.05% equity interest in Taiwan
Bandaoti Zhaoming Co., Ltd., as of May 31, 2022 and May 31, 2021, respectively.

liquidity and capital resources

As of May 31, 2022 and August 31, 2021, we had cash and cash equivalents of $3.0
million and $4.8 million, respectively, which were predominately held in U.S.
dollar denominated demand deposits and/or money market funds.

away July 6, 2022we had no available credit facility.

Our long-term debt, which consisted of NT dollar denominated long-term notes,
convertible unsecured promissory notes, and loans from our Chairman and our
largest shareholder, totaled $7.2 million and $7.7 million as of May 31, 2022
and August 31, 2021, respectively.

Our NT dollar denominated long-term notes, totaled $3.2 million of both May 31,
2022 and August 31, 2021. These long-term notes consisted of two loans which we
entered into on July 5, 2019, with aggregate amounts of $3.2 million (NT$100
million). The first loan originally for $2.0 million (NT$62 million) has an
annual floating interest rate equal to the NTD base lending rate plus 0.64% (or
1.69% currently), and was exclusively used to repay the existing loans. The
second loan originally for $1.2 million (NT$38 million) has an annual floating
interest rate equal to the NTD base lending rate plus 1.02% (or 2.07% currently)
and is available for operating capital.

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These loans are secured by an $86 thousand (NT$2.5 million) security deposit and
a first priority security interest on the Company's headquarters building. Due
to the impact of the COVID-19 pandemic, the bank agreed to give us a deferment
period for twelve months starting from May 2020 until April 2021. During this
period, we did not need to pay the monthly payments of the principal but only
the interest.

Starting from May 2021, the first note payable requires monthly payments of
principal in the amount of $25 thousand plus interest over the 74-month term of
the note with final payment to occur in July 2027 and, as of May 31, 2022, our
outstanding balance on this note payable was approximately $1.6 million.

Starting from May 2021, the second note payable requires monthly payments of
principal in the amount of $16 thousand plus interest over the 74-month term of
the note with final payment to occur in July 2027 and, as of May 31, 2022, our
outstanding balance on this note payable was approximately $1.0 million.

Property, plant and equipment pledged as collateral for our bills payable
$3.0 million and $3.5 million away May 31, 2022 and August 31, 2021respectively.

On January 8, 2019, we entered into loan agreements with each of our Chairman
and Chief Executive Officer and our largest shareholder, with aggregate amounts
of $3.2 million, and an annual interest rate of 8%. All proceeds of the loans
were exclusively used to return the deposit to Formosa Epitaxy Incorporation in
connection with the proposed sale of our headquarters building pursuant to the
agreement dated December 15, 2015. We were initially required to repay the loans
of $1.5 million on January 14, 2021 and $1.7 million on January 22, 2021,
respectively. On January 16, 2021, the maturity date of these loans was extended
with same terms and interest rate for one year to January 15, 2022, and on
January 14, 2022, the maturity date of these loans was further extended with
same terms and interest rate for one more year to January 15, 2023. As of May
31, 2022 and August 31, 2021, these loans totaled $3.2 million, respectively.
The loans are secured by a second priority security interest on our
headquarters.

On December 6, 2019 and on December 10, 2019, we issued convertible unsecured
promissory notes to each of our Chairman and Chief Executive Officer and our
largest shareholder (the "Holders"), with a principal sum of $2 million and an
annual interest rate of 3.5%. Principal and accrued interest was due on demand
by the Holders on and at any time after May 30, 2021 (the "Maturity Date"). The
outstanding principal and unpaid accrued interest of the Notes may be converted
into our Common Stock based on a conversion price of $3 dollars per share, at
the option of the Holders any time from the date of the Notes. On May 25, 2020,
the Holders each converted $300 thousand of notes into 100,000 shares of our
common stock. On May 26, 2021, the Notes were extended with the same terms and
interest rate for one year and were scheduled to mature on May 30, 2022, and on
May 26, 2022, the Notes were further extended with the same terms and interest
rate for one year and now mature on May 30, 2023. As of May 31, 2022 and August
31, 2021, the outstanding principal of these notes totaled $1.4 million.

We have incurred significant losses since inception, including net losses
attributable to SemiLEDs stockholders of $916 thousand and $64 thousand during
the three months ended May 31, 2022 and 2021, respectively. Net cash used in
operating activities for the nine months ended May 31, 2022 was $1.9 million. As
of May 31, 2022, we had cash and cash equivalents of $3.0 million. We have
undertaken actions to decrease losses incurred and implemented cost reduction
programs in an effort to transform the Company into a profitable operation. In
addition, we are planning to issue additional equity to our stockholders.

On July 6, 2021, we entered into a Sales Agreement (the "Sales Agreement") with
Roth Capital Partners, LLC (the "Agent"). In accordance with the terms of the
Sales Agreement, we may offer and sell from time to time through the Agent our
common stock having an aggregate offering price of up to $20,000,000 (the
"Placement Shares"). Sales of the Placement Shares, if any, will be made on
Nasdaq at market prices by any method permitted by law deemed to be an "at the
market offering" as defined in Rule 415 of the Securities Act of 1933, as
amended. The Company will pay a commission to the Agent of 3.0% of the gross
proceeds of the sale of the Placement Shares sold under the Agreement and
reimburse the Agent for certain expenses. In the fourth quarter of fiscal 2021,
we sold 344,391 shares of common stock for gross proceeds of $4.2 million with
$125 thousand paid as placement agent fees under our ATM program. In April 2022,
we sold 200 shares of the Company's common stock for gross proceeds of $690,
before placement agent fees and bank fees of $146.

We estimate that our cash requirements to service debt and contractual
obligations in fiscal 2022 is approximately $5.1 million, which we expect to
fund through the issuance of additional equity under the ATM program or through
an extension or conversion of the convertible notes due May 2023. Based on our
current financial projections and assuming the successful implementation of our
liquidity plans, we believe that we will have sufficient sources of liquidity to
fund our operations and capital expenditure plans for the next 12 months and
beyond. However, there can be no assurances that our planned activities will be
successful in raising additional capital, reducing losses and preserving cash.
If we are not able to generate positive cash flows from operations, we may need
to consider alternative financing sources and seek additional funds through
public or private equity financings or from other sources, or refinance our
indebtedness, to support our working capital requirements or for other purposes.
There can be no assurance that additional debt or equity financing will be
available to us or that, if available, such financing will be available on terms
favorable to us.

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Cash Flows

The following summary of our cash flows for the periods shown is derived from our unaudited condensed interim consolidated financial statements included elsewhere in this quarterly report (in thousands):

                                                    Nine Months Ended
                                             May 31, 2022       May 31, 

2021

Net cash used in operating activities       $       (1,863 )   $         (826 )
Net cash provided by investing activities   $          107     $          168
Net cash used in financing activities       $         (390 )   $          (55 )



Cash flows used in operational activities

Net cash used in operating activities for the nine months ended May 31, 2022 and
May 31, 2021 was $1.9 million and $826 thousand, respectively. The $1.0 million
increase in cash flows used in operating activities for the nine months ended
May 31, 2022 was primary attributable to an increase of $570 thousand in net
loss and $1.2 million increase in accounts receivable offset by the $654
thousand decrease in inventories.

Cash flows from investing activities

Net cash provided by investing activities for the nine months ended May 31, 2022
was $107 thousand, consisting primarily of $187 thousand of proceeds from the
sales of machinery and equipment, offset in part by $69 thousand of purchases of
machinery and equipment.

Net cash provided by investing activities for the nine months ended May 31, 2021
was $168 thousand, consisting primarily of $291 thousand of proceeds from the
sales of machinery and equipment, offset in part by $111 thousand of purchases
of machinery and equipment.

Cash flows used in financing activities

Net cash used in financing activities for the nine months ended May 31, 2022 was
$390 thousand, consisting primarily of $368 thousand of repayments on long-term
debt and $23 thousand for acquisition of noncontrolling interest.

Net cash used in financing activities for the nine months ended May 31, 2021 was
$55 thousand, consisting primarily of $43 thousand of repayments on long-term
debt and $12 thousand for acquisition of noncontrolling interest.

investments

We had capital expenditures of $69 thousand and $111 thousand for the nine
months ended May 31, 2022 and 2021, 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 further
its activity level and capital expenditures as appropriate.

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