SemiLEDs Corp (Form: 10-Q, Received: 01/11/2019 17:09:11)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended November 30, 201 8

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

For the transition period from to

Commission File Number: 001-34992

SemiLEDs Corporation

(Exact name of registrant as specified in its charter)

Delaware		20-2735523
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)

3F, No. 11 Ke Jung Rd., Chu-Nan Site,
Hsinchu Science Park, Chu-Nan 350,
Miao-Li County, Taiwan, R.O.C.		350
(Address of principal executive offices)		(Zip Code)

+886-37-586788

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

Large accelerated filer	☐	Accelerated filer	☐

Non-accelerated filer	☐	Smaller reporting company	☒

		Emerging growth company	☐

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 3,559,915 shares of common stock, par value $0.0000056 per share, outstanding as of January 7, 2019.

SEMILEDS CORPORATION

FORM 10-Q for the Quarter Ended November 30, 2018

INDEX

		Page No

Part I. Financial Information

Item 1.	Financial Statements	1
	Unaudited C ondensed Consolidated Balance Sheets as of November 30, 2018 and August 31, 2018	1
	Unaudited Condensed Consolidated Statements of Operations for the three months ended November 30, 2018 and 2017	2
	Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three months ended November 30, 2018 and 2017	3
	Unaudited Condensed Consolidated Statement of Changes in Equity for the three months ended November 30, 2018	4
	Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended November 30, 2018 and 2017	5
	Notes to Unaudited Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25

Item 4.	Controls and Procedures	25

Part II. Other Information

Item 1.	Legal Proceedings	26

Item 1A.	Risk Factors	26

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26

Item 3.	Defaults Upon Senior Securities	26

Item 4.	Mine Safety Disclosures	26

Item 5.	Other Information	27

Item 6.	Exhibits	27

Signatures		28

PART I — FINANC IAL INFORMATION

Item 1. Financial Statements

SEMILEDS CORPORATION AND SUBSIDIARIES

Unaudited Condensed Consolidated Balance Sheets

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

	November 30,			August 31,
	2018			2018
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	2,574		$	3,421
Accounts receivable (including related parties), net of allowance for doubtful accounts of $471 and $477 as of November 30, 2018 and August 31, 2018, respectively		183			282
Inventories		2,220			1,818
Prepaid expenses and other current assets		378			340
Total current assets		5,355			5,861
Property, plant and equipment, net		6,678			7,213
Intangible assets, net		95			98
Investments in unconsolidated entities		910			914
Other assets		175			164
TOTAL ASSETS	$	13,213		$	14,250
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Current installments of long-term debt	$	335		$	335
Accounts payable		634			894
Advance receipt toward the convertible note		500			500
Accrued expenses and other current liabilities		5,580			5,505
Total current liabilities		7,049			7,234
Long-term debt, excluding current installments		1,921			2,013
Total liabilities		8,970			9,247
Commitments and contingencies (Note 5)
EQUITY:
SemiLEDs stockholders’ equity
Common stock, $0.0000056 par value—7,500 shares authorized; 3,560 shares and 3,559 shares issued and outstanding as of November 30, 2018 and August 31, 2018, respectively		—			—
Additional paid-in capital		175,698			175,527
Accumulated other comprehensive income		3,732			3,727
Accumulated deficit		(175,229	)		(174,251	)
Total SemiLEDs stockholders' equity		4,201			5,003
Noncontrolling interests		42			—
Total equity		4,243			5,003
TOTAL LIABILITIES AND EQUITY	$	13,213		$	14,250

See notes to unaudited condensed consolidated financial statements.

SEMILEDS CORPORATION AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Operations

(In thousands of U.S. dollars and shares, except per share data)

	Three Months Ended November 30,
	2018			2017
Revenues, net	$	972		$	2,003
Cost of revenues		1,191			1,951
Gross profit		(219	)		52
Operating expenses:
Research and development		334			184
Selling, general and administrative		757			733
Gain on disposals of long-lived assets		(288	)		—
Total operating expenses		803			917
Loss from operations		(1,022	)		(865	)
Other income (expenses):
Interest expenses, net		(5	)		(8	)
Other income, net		80			498
Foreign currency transaction loss, net		(36	)		(17	)
Total other income (expenses), net		39			473
Loss before income taxes		(983	)		(392	)
Income tax expense		—			—
Net loss		(983	)		(392	)
Less: Net loss attributable to noncontrolling interests		(5	)		—
Net loss attributable to SemiLEDs stockholders	$	(978	)	$	(392	)
Net loss per share attributable to SemiLEDs stockholders:
Basic and diluted	$	(0.27	)	$	(0.11	)
Shares used in computing net loss per share attributable to SemiLEDs stockholders:
Basic and diluted		3,560			3,544

See notes to unaudited condensed consolidated financial statements.

SEMILEDS CORPORATION AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Comprehensive Loss

(In thousands of U.S. dollars)

	Three Months Ended November 30,
	2018			2017
Net loss	$	(983	)	$	(392	)
Other comprehensive gain (loss), net of tax:
Foreign currency translation adjustments, net of tax of $0 for both periods		4			26
Comprehensive loss	$	(979	)	$	(366	)
Comprehensive loss attributable to noncontrolling interests	$	(6	)	$	—
Comprehensive loss attributable to SemiLEDs stockholders	$	(973	)	$	(366	)

See notes to unaudited condensed consolidated financial statements.

SEMILEDS CORPORATION AND SUBSIDIARIES

Unaudited Condensed Consolidated Statement of Changes in Equity

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

							Accumulated					Total
					Additional		Other					SemiLEDs			Non-
	Common Stock				Paid-in		Comprehensive		Accumulated			Shareholders'			Controlling			Total
	Shares		Amount		Capital		Income		Deficit			Equity			Interests			Equity
BALANCE—September 1, 2018		3,559	$	—	$	175,527	$	3,727	$	(174,251	)	$	5,003		$	—		$	5,003
Issuance of common stock under equity incentive plans		1		—		—		—		—			—			—			—
Stock-based compensation		—		—		43		—		—			43			—			43
Common stock issued by SBDI*		—		—		128		—		—			128			48			176
Comprehensive loss:
Other comprehensive income (loss)		—		—		—		5		—			5			(1	)		4
Net loss		—		—		—		—		(978	)		(978	)		(5	)		(983	)
BALANCE—November 30, 2018		3,560	$	—	$	175,698	$	3,732	$	(175,229	)	$	4,201		$	42		$	4,243

See notes to unaudited condensed consolidated financial statements.

*SBDI (Taiwan Bandaoti Zhaoming Co., Ltd.) is one of the Company’s subsidiaries.

SEMILEDS CORPORATION AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows

(In thousands of U.S. dollars)

	Three Months Ended November 30,
	2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(983	)	$	(392	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		264			238
Stock-based compensation expense		43			24
Provisions for inventory write-downs		172			206
Gain on disposals of long-lived assets		(288	)		—
Changes in :
Accounts receivable, net		97			(188	)
Inventories		(583	)		105
Prepaid expenses and other		(50	)		186
Accounts payable		(209	)		(338	)
Accrued expenses and other current liabilities		271			99
Net cash used in operating activities		(1,266	)		(60	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment		(24	)		(94	)
Proceeds from sales of property, plant and equipment		511			—
Payments for development of intangible assets		(2	)		—
Proceeds from sale of investment		—			1
Net cash provided by (used in) investing activities		485			(93	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt		(83	)		(84	)
Net cash used in financing activities		(83	)		(84	)
Effect of exchange rate changes on cash and cash equivalents		17			55
NET DECREASE IN CASH AND CASH EQUIVALENTS		(847	)		(182	)
CASH AND CASH EQUIVALENTS—Beginning of period		3,421			3,582
CASH AND CASH EQUIVALENTS—End of period	$	2,574		$	3,400
NONCASH INVESTING AND FINANCING ACTIVITIES:
Accrual related to property, plant and equipment	$	18		$	130
Issuance of common shares in a subsidiary to noncontrolling interests	$	176		$	—

See notes to unaudited condensed consolidated financial statements.

SEMILEDS CORPORATION AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

1. Business

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

As of November 30, 2018, SemiLEDs had four wholly owned subsidiaries. SemiLEDs Optoelectronics Co., Ltd., or Taiwan SemiLEDs, is the Company’s wholly owned operating subsidiary, where a substantial portion of the assets is held and located, and where a portion of our research, development, manufacturing and sales activities take place. Taiwan SemiLEDs owns a 97% equity interest in Taiwan Bandaoti Zhaoming Co., Ltd., formerly known as Silicon Base Development, Inc., which is engaged in the research, development, manufacturing and a substantial portion of marketing and sale of LED components, and where most of the Company’s employees are based. 　

SemiLEDs’ common stock began trading on the NASDAQ Global Select Market under the symbol “LEDS” on December 8, 2010 and was transferred to the NASDAQ Capital Market effective November 5, 2015 where it continues to trade under the same symbol.

2. Summary of Significant Accounting Policies

Basis of Presentation —The Company’s unaudited interim condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and applicable provisions of the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted as permitted by the rules and regulations of the SEC. Accordingly, these unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K filed with the SEC on November 26, 2018. The unaudited condensed consolidated balance sheet as of August 31, 2018 included herein was derived from the audited consolidated financial statements as of that date.

The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the Company’s unaudited condensed consolidated balance sheet as of November 30, 2018, the unaudited condensed statements of operations and comprehensive loss for the three months ended November 30, 2018 and 2017, changes in equity for the three months ended November 30, 2018, and cash flows for the three months ended November 30, 2018 and 2017. The results for the three months ended November 30, 2018 are not necessarily indicative of the results to be expected for the year ending August 31, 2019.

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

The Company has suffered losses from operations of $3 .7 million and $ 4.3 million, and used net cash in operating activities of $ 1.2 million and $ 2.1 million for the years ended August 31, 201 8 and 201 7 , respectively. G ross loss on product sales was $ 435 thousand fo r the year ended August 31, 2018 and gross profit was $ 82 thous and fo r the year ended August 31, 2017 . Loss from operations and net cash used in operating activities for the thre e months ended November 30, 2018 were $ 1.0 million and $ 1.3 million , respectivel y. Further, at November 30, 2018 , the Company’s cash and cash equivalents was down to $ 2.6 million. These facts and conditions raise substantial doubt about the Company’s ability to continue as a going concern. However, management believes that it has developed a liquidity plan, as summarized below, that, if execute d successfully, should provide sufficient liquidity to meet the Company’s obligations as they become due for a reasonable period of time, and allow the development of its core business.

•

The Company entered into an agreement in December 2015 with a strategic partner, Formosa Epitaxy Incorporation, for the potential sale of the headquarters building located at Miao-Li, Taiwan. The total cash consideration for the sale is $5.2 million, of which the initial installment of $3 million was received on December 14, 2015, $1 million was due on December 31, 2016 and the balance of $1.2 million is due on December 31, 2017. As of date of this quarterly report, the Company hasn’t received the $1 million due on December 31, 2016 or the $1.2 million due on December 31, 2017. The Company intends to terminate the agreement for the sale of the headquarters, and on January 8, 2019, the Company entered loan agreements with each of the Company’s Chairman and CEO and its largest shareholder to fund the repayment of $3 million received in 2015 and booked under other current liabilities as of November 30 and August 31, 2018. However, in December 2018, Epistar Corporation (the successor to Formosa Epitaxy Incorporation, the “Plaintiff”) filed a motion to the Court in Miao-Li County, Taiwan requesting the Company return the $3 million plus value-added-tax and pay interest during this period and litigation fees. The Plaintiff also petitioned the Court to do a provisional execution upon the Company, which would permit the Plaintiff to sell the Company’s building and/or other assets belonged to the Company to a third party to collect the $3 million. The Company has filed a statement of defense arguing that the Plaintiff’s action and motion for provisional execution should be dismissed and the litigation fees should be borne by the Plaintiff. The Company has not accrued an expense related to the outcome of this litigation, because it is not yet possible to determine if a potential loss is probable nor reasonably estimable.

•

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

•

Continuing to monitor prices, work with current and potential vendors to decrease costs and, consistent with its existing contractual commitments, may possibly decrease its activity level and capital expenditures further. This plan reflects its strategy of controlling capital costs and maintaining financial flexibility.

•

Raising additional cash through further equity offerings, sales of assets and/or issuance of debt as considered necessary and looking at other potential business opportunities.

While the Company's management believes that the measures described in the above liquidity plan will be adequate to satisfy its liquidity requirements for the twelve months after the date that the financial statements are issued, there is no assurance that the liquidity plan will be successfully implemented. Failure to successfully implement the liquidity plan may have a material adverse effect on its business, results of operations and financial position, and may adversely affect its ability to continue as a going concern. These unaudited interim condensed consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded assets or the amounts and classification of liabilities or any other adjustments that might be necessary should the Company be unable to continue as a going concern.

Revenue Recognition —Effective September 1 2018, the Company adopted ASC 606 using the modified retrospective transition method. The company applied the following five steps to achieve the core principles of ASC 606: 1) identified the contract with a customer; 2) identified the performance obligations (promises) in the contract; 3) determined the transaction price; 4) allocated the transaction price to the performance obligations in the contract; and 5) recognized revenue when (or as) the Company satisfies a performance obligation. The Company recognizes the amount of revenue, when the Company satisfies a performance obligation, to which it expects to be entitled for the transfer of promised goods or services to customers. The Company obtains written purchase authorizations from its customers as evidence of an arrangement and these authorizations generally provide for a specified amount of product at a fixed price. Generally, the Company considers delivery to have occurred at the time of shipment as this is generally when title and risk of loss for the products will pass to the customer. The Company provides its customers with limited rights of return for non‑conforming shipments and product warranty claims. Based on historical return percentages, which have not been material to date, and other relevant factors, the Company estimates its potential future exposure on recorded product sales, which reduces product revenues in the consolidated statements of operations and reduces accounts receivable in the consolidated balance sheets. The Company also provides standard product warranties on its products, which generally range from three months to two years. Management estimates the Company’s warranty obligations as a percentage of revenues, based on historical knowledge of warranty costs and other relevant factors. To date, the related estimated warranty provisions have been insignificant.

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.

On September 1, 2018, the Company adopted ASC 825-10, “Financial Instruments- Overall: Recognition and Measurement of Financial Assets and Financial Liabilities”. This standard allows equity investments that do not have readily determinable fair values to be re-measured at fair value either upon the occurrence of an observable price change or upon identification of impairment. The standard also simplifies the impairment assessment of equity investments without readily determinable fair values by requiring assessment for impairment qualitatively at each reporting period.

Investments in which the Company has the ability to exercise significant influence over the investee but not a controlling financial interest, are accounted for using the equity method of accounting and are not consolidated. These investments are in joint ventures that are not subject to consolidation under the variable interest model, and for which the Company: (i) does not have a majority voting interest that would allow it to control the investee, or (ii) has a majority voting interest but for which other shareholders have significant participating rights, but for which the Company has the ability to exercise significant influence over operating and financial policies. Under the equity method, investments are stated at cost after adding or removing the Company’s portion of equity in undistributed earnings or losses, respectively. The Company’s investment in these equity‑method entities is reported in the consolidated balance sheets in investments in unconsolidated entities, and the Company’s share of the income or loss of these equity‑method entities, after the elimination of unrealized intercompany profits, is reported in the consolidated statements of operations in equity in losses from unconsolidated entities. When net losses from an equity‑method investee exceed its carrying amount, the carrying amount of the investment is reduced to zero. The Company then suspends using the equity method to provide for additional losses unless the Company has guaranteed obligations or is otherwise committed to provide further financial support to the equity‑method investee. The Company resumes accounting for the investment under the equity method if the investee subsequently returns to profitability and the Company’s share of the investee’s income exceeds its share of the cumulative losses that have not been previously recognized during the period the equity method is suspended.

Investments in entities that are not consolidated or accounted for under the equity method are recorded as investments without readily determinable fair values. Investments without readily determinable fair values are reported on the consolidated balance sheets in investments in unconsolidated entities, at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. Dividend income, if any, received is reported in the consolidated statements of operations in equity in losses from unconsolidated entities.

If the fair value of an equity investment declines below its respective carrying amount and the decline is determined to be other‑than‑temporary, the investment will be written down to its fair value.

Use of Estimates —The preparation of unaudited interim condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited interim condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include the preparation of the Company’s consolidated financial statements on the basis that the Company will continue as a going concern, the collectibility of accounts receivable, inventory net realizable values, realization of deferred tax assets, valuation of stock-based compensation expense, the useful lives of property, plant and equipment and intangible assets, the recoverability of the carrying amount of property, plant and equipment, intangible assets and investments in unconsolidated entities, the fair value of acquired tangible and intangible assets, income tax uncertainties, provision for potential litigation costs and other contingencies. Management bases its estimates on historical experience and also on assumptions that it believes are reasonable. Management assesses these estimates on a regular basis; however, actual results could differ materially from those estimates.

Certain Significant Risks and Uncertainties —The Company is subject to certain risks and uncertainties that could have a material and adverse effect on the Company’s future financial position or results of operations, which risks and uncertainties include, among others: it has incurred significant losses over the past several years, any inability of the Company to compete in a rapidly evolving market and to respond quickly and effectively to changing market requirements, any inability of the Company to grow its revenue and/or maintain or increase its margins, it may experience fluctuations in its revenues and operating results, any inability of the Company to protect its intellectual property rights, claims by others that the Company infringes their proprietary technology, and any inability of the Company to raise additional funds in the future.

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

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

The Company keeps its cash and cash equivalents in demand deposits with prominent banks of high credit quality and invests only in money market funds. Deposits held with banks may exceed the amount of insurance provided on such deposits. As of November 30, 2018 and August 31, 2018, cash and cash equivalents of the Company consisted of the following (in thousands):

	November 30,		August 31,
Cash and Cash Equivalents by Location	2018		2018
United States;
Denominated in U.S. dollars	$	129	$	194
Taiwan;
Denominated in U.S. dollars		1,323		2,220
Denominated in New Taiwan dollars (NT$)		27		55
Denominated in other currencies		1,044		910
China (including Hong Kong);
Denominated in U.S. dollars		7		7
Denominated in Renminbi		38		29
Denominated in H.K. dollars		6		6
Total cash and cash equivalents	$	2,574	$	3,421

The Company’s revenues are substantially derived from the sales of LED products. A significant portion of the Company’s revenues are derived from a limited number of customers and sales are concentrated in a few select markets. Management performs ongoing credit evaluations of its customers and generally does not require collateral on accounts receivable. Management evaluates the need to establish an allowance for doubtful accounts for estimated potential credit losses at each reporting period. The allowance for doubtful accounts is based on the management’s assessment of the collectibility of its customer accounts. Management regularly reviews the allowance by considering certain factors, such as historical experience, industry data, credit quality, ages of accounts receivable balances and current economic conditions that may affect a customer’s ability to pay.

Net revenues generated from sales to the top ten customers represented 79% and 66% of the Company’s total net revenues for the three months ended November 30, 2018 and 2017, respectively.

The Company’s revenues have been concentrated in a few select markets, including Netherlands, Taiwan, the United States, and China (including Hong Kong). Net revenues generated from sales to customers in these markets, in the aggregate, accounted for 65% and 79% of the Company’s net revenues for the three months ended November 30, 2018 and 2017, respectively.

Noncontrolling Interests —Noncontrolling interests are classified in the consolidated statements of operations as part of consolidated net income (loss) and the accumulated amount of noncontrolling interests in the consolidated balance sheets as part of equity. Changes in ownership interest in a consolidated subsidiary that do not result in a loss of control are accounted for as an equity transaction. If a change in ownership of a consolidated subsidiary results in loss of control and deconsolidation, any retained ownership interests are remeasured with the gain or loss reported in net earnings. On September 1, 2018, Taiwan Bandaoti Zhaoming Co., Ltd., the Company’s wholly owned operating subsidiary, issued 414,000 common shares and amended its certificate of incorporation to increase its issued common stock from 12,087,715 to 12,501,715. As of the issuance date, the increased capital of $176 thousand (NT$5.4 million) has been completely received in cash by Taiwan Bandaoti Zhaoming Co., Ltd. The Company did not subscribe for the newly issued common shares, and, as a result, noncontrolling interest in the Company was increased from zero to 3.31%.

Recent Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-13, Fair Value Measurement (Topic 820) Disclosure Framework – Change to the Disclosure Requirements for Fair Value Measurement. The amendments in this Update modify the disclosure requirements of fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in the Concepts Statement, including the consideration of costs and benefits. This standard will be effective for the Company on September 1, 2020. The Company is currently evaluating the impact the adoption of this ASU will have on its consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Account ing. The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue fro m Contracts with Customers. This standard will be effective for the Company on September 1, 2019. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial position, results of operations or cash flow s.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. This standard requires a financial asset (or group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. This standard will be effective for the Company on September 1, 2020. The Company is currently evaluating the impact the adoption of this ASU will have on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases, which is intended to improve financial reporting on leasing transactions. This standard requires a lessee to record on the balance sheet the assets and liabilities for the rights and obligations created by lease terms of more than 12 months. This standard will be effective for the Company on September 1, 2019. The Company is currently evaluating the impact the adoption of this ASU will have on its consolidated financial statements.

3. Balance Sheet Components

Inventories

Inventories as of November 30, 2018 and August 31, 2018 consisted of the following (in thousands):

	November 30,		August 31,
	2018		2018
Raw materials	$	537	$	577
Work in process		708		505
Finished goods		975		736
Total	$	2,220	$	1,818

Inventory write-downs to estimated net realizable values were $172 thousand and $206 thousand for the three months ended November 30, 2018 and 2017, respectively.

Property, Plant and Equipment

Property, plant and equipment as of November 30, 2018 and August 31, 2018 consisted of the following (in thousands):

	November 30,			August 31,
	2018			2018
Buildings and improvements	$	13,471		$	13,558
Machinery and equipment		38,627			39,391
Leasehold improvements		149			150
Other equipment		2,309			2,312
Construction in progress		—			289
Total property, plant and equipment		54,556			55,700
Less: Accumulated depreciation and amortization		(47,878	)		(48,487	)
Property, plant and equipment, net	$	6,678		$	7,213

Intangible Assets

Intangible assets as of November 30, 2018 and August 31, 2018 consisted of the following (in thousands):

	November 30, 2018
	Weighted
	Average		Gross				Net
	Amortization		Carrying		Accumulated		Carrying
	Period (Years)		Amount		Amortization		Amount
Patents and trademarks		15	$	542	$	447	$	95
Acquired technology		5		492		492		—
Total			$	1,034	$	939	$	95

	August 31, 2018
	Weighted
	Average		Gross				Net
	Amortization		Carrying		Accumulated		Carrying
	Period (Years)		Amount		Amortization		Amount
Patents and trademarks		15	$	544	$	446	$	98
Acquired technology		5		494		494		—
Total			$	1,038	$	940	$	98

4. Investments in Unconsolidated Entities

The Company’s ownership interest and carrying amounts of investments in unconsolidated entities as of November 30, 2018 and August 31, 2018 consisted of the following (in thousands, except percentages):

	November 30, 2018					August 31, 2018
	Percentage					Percentage
	Ownership			Amount		Ownership			Amount
Equity method investments:
Xurui Guangdian Co., Ltd. (“China SemiLEDs”)		49	%		—		49	%		—
Equity investment without readily determinable fair value	Various				910	Various				914
Total investments in unconsolidated entities				$	910				$	914

There were no dividends received from unconsolidated entities through November 30, 2018.

Equity Method Investments

The Company owns a 49% equity interest in China SemiLEDs. However, this investment has a carrying amount of zero as a result of a previously recognized impairment.

Equity Investments without readily determinable fair value

Equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the Company) which do not have readily determinable fair values are recorded as equity investment without readily determinable fair value. All equity investments without readily determinable fair value are assessed for impairment when events or changes in circumstances indicate that the carrying amounts may not be recoverable, and measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer.

5. Commitments and Contingencies

Operating Lease Agreements —The Company has several operating leases with unrelated parties, primarily for land, plant and office spaces in Taiwan, which include cancellable and noncancellable leases and which expire at various dates between December 2018 and December 2020. Lease expense related to these noncancellable operating leases were $38 thousand and $112 thousand for three months ended November 30, 2018 and 2017, respectively. Lease expense is recognized on a straight-line basis over the term of the lease.

The aggregate future noncancellable minimum rental payments for the Company’s operating leases as of November 30, 201 8 consisted of the following (in tho usands):

	Operating
Years Ending August 31,	Leases
Remainder of 2019	$	77
2020		94
2021		31
2022		—
2023		—
Thereafter		—
Total	$	202

Purchase Obligations —The Company had purchase commitments for inventory, property, plant and equipment in the amount of $1.1 million and $1.6 million as of November 30, 2018 and August 31, 2018, respectively.

Litigation —The Company is directly or indirectly involved from time to time in various claims or legal proceedings arising in the ordinary course of business. The Company recognizes a liability when it is probable that a loss has been incurred and the amount is reasonably estimable. There is significant judgment required in assessing both the likelihood of an unfavorable outcome and whether the amount of loss, if any, can be reasonably estimated. However, the Company cannot predict the outcome of any litigation or the potential for future litigation.

On June 21, 2017, Well Thrive Ltd. (“Well Thrive”) filed a complaint against SemiLEDs Corporation in the United States District Court for the District of Delaware. The complaint alleges that Well Thrive is entitled to return of $500 thousand paid toward a note purchase pursuant to a purchase agreement (the “Purchase Agreement”) effective July 6, 2016 with Dr. Peter Chiou, which was assigned to Well Thrive on August 4, 2016. Pursuant to the terms of the Purchase Agreement, we have retained the $500 thousand payment as liquidated damages. Well Thrive alleges that the liquidated damages provision is unenforceable as an illegal penalty and does not reflect the amount of purported damages. On March 13, 2018, the Company filed a motion to enforce a settlement agreement between the parties to dismiss the lawsuit with prejudice. On March 27, 2018, Well Thrive filed an answering brief in opposition to the Company’s motion on the basis that Well Thrive never consented to dismiss the case. On January 2, 2019, the judge denied without prejudice the motion filed by us, because there remains some question as to whether Well Thrive’s former lawyers and Dr. Chiou had authority from Well Thrive to settle this case. The judge’s order allows us to conduct depositions of Well Thrive’s former lawyer, Dr. Chiou, and Mr. Chang Sheng-Chun, Well Thrive’s director, and to request documents relating to the issues surrounding the settlement. Based on this order, we intend to arrange the depositions to obtain more evidence in support of a motion to enforce the settlement agreement. The Court set a trial date of March 2, 2020, if needed.

On December 28, 2018, the Company received a notification from the Court in Miao-Li County, Taiwan that Epistar Corporation (the successor to Formosa Epitaxy Incorporation, the “Plaintiff”) filed a motion requesting that the Company return the $3 million prepayment plus value-added-tax for the headquarters building sale and pay interest during this period and litigation fee. The Plaintiff also petitioned the Court to do a provisional execution upon the Company, which would permit the Plaintiff to sell the building and/or other assets belonged to the Company to recover the prepayment. On January 4, 2019, the Company filed a statement of defense arguing that the Plaintiff’s action and motion for provisional execution should be dismissed and the litigation fees should be borne by the Plaintiff. If the Company’s defense is not agreed and accepted, the Company intends to defend this case vigorously. The Company has not accrued an expense related to the outcome of this litigation, because it is not yet possible to determine if a potential loss is probable nor reasonably estimable.

Except as described above, as of November 30, 2018, there was no pending or threatened litigation that could have a material impact on the Company’s financial position, results of operations or cash flows.

6. Stock-based Compensation

The Company currently has one equity incentive plan (the “2010 Plan”), which provides for awards in the form of restricted shares, stock units, stock options or stock appreciation rights to the Company’s employees, officers, directors and consultants. In April 2014, SemiLEDs’ stockholders approved an amendment to the 2010 Plan that increased the number of shares authorized for issuance under the plan by an additional 250 thousand shares. Prior to SemiLEDs’ initial public offering, the Company had another stock-based compensation plan (the “2005 Plan”), but awards are made from the 2010 Plan after the initial public offering. Options outstanding under the 2005 Plan continue to be governed by its existing terms.

A total of 521 thousand shares was reserved for issuance under and 2010 Plan as of both November 30, 2018 and 2017 . As of November 30, 201 8 and 201 7 , there were 189 thousand and 255 thousand shares of common stock available for future issuance under the equity incentive plans.

In July 2018, SemiLEDs granted 7.5 thousand restricted stock units to its directors that will be vested 100% on the earlier of June 29, 2019 or the date of the next annual meeting. The grant-date fair value of the restricted stock units was $4.75 per unit.

In January 2018, SemiLEDs granted 56.7 thousand restricted stock units to its employees among which 50% will be vested each year on January 1 of 2019 and 2020 or will become fully vested upon a change in control. The grant-date fair value of the restricted stock units was $4.10 per unit.

In November 2017, SemiLEDs granted 2.5 thousand restricted stock units to its directors that vested 100% on June 28 2018. The grant-date fair value of the restricted stock units was $4.15 per unit.

The grant date fair value of stock options is determined using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model requires inputs including the market price of SemiLEDs’ common stock on the date of grant, the term that the stock options are expected to be outstanding, the implied stock volatilities of several of the Company’s publicly-traded peers over the expected term of stock options, risk-free interest rate and expected dividend. Each of these inputs is subjective and generally requires significant judgment to determine. The grant date fair value of stock units is based upon the market price of SemiLEDs’ common stock on the date of the grant. This fair value is amortized to compensation expense over the vesting term.

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

A summary of the stock-based compensation expense for the three months ended November 30, 2018 and 2017 was as follows (in thousands):

	Three Months Ended November 30,
	2018		2017
Cost of revenues	$	11	$	7
Research and development		7		3
Selling, general and administrative		25		14
	$	43	$	24

7. Net Loss Per Share of Common Stock

The following stock-based compensation plan awards were excluded from the computation of diluted net loss per share of common stock for the periods presented because including them would have been anti-dilutive (in thousands of shares):

	Three Months Ended November 30,
	2018		2017
Stock units and stock options to purchase common stock		21		10

8. Income Taxes

The Company’s income (loss) before income taxes for the three months ended November 30, 2018 and 2017 consisted of the following (in thousands):

	Three Months Ended November 30,
	2018			2017
U.S. operations	$	(150	)	$	233
Foreign operations		(833	)		(625	)
Loss before income taxes	$	(983	)	$	(392	)

Unrecognized Tax Benefits

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. Provisional estimate of the Company is that no tax will be due under this provision.

As of both November 30, 2018 and August 31, 2018, the Company had no unrecognized tax benefits related to tax positions taken in prior periods. The Company files income tax returns in the United States, various U.S. states and certain foreign jurisdictions. The tax years 2005 through 2018 remain open in most jurisdictions. The Company is not currently under examination by income tax authorities in federal, state or foreign jurisdictions.

9. Subsequent Events

On December 28, 2018, the Company received a notification from the Court in Miao-Li Country, Taiwan that Plaintiff filed a motion requesting that the Company return the $3 million of prepayment plus value-added-tax for the headquarters building sale and pay interest during this period and the litigation fees. The Plaintiff also petitioned the Court to do a provisional execution upon the Company. On January 4, 2019, the Company filed a statement of defense arguing that the Plaintiff’s action and motion for provisional execution should be dismissed and the court fees should be borne by the Plaintiff. The Company has not accrued an expense related to the outcome of this litigation, because it is not yet possible to determine if a potential loss is probable nor reasonably estimable.

On January 8, 2019, the Company entered into loan agreements (“the loans”) with each of its Chairman and Chief Executive Officer and its largest shareholder, with aggregate amounts of $3 million, and an annual interest rate of 8%. All proceeds of the loans shall be exclusively used to return the deposit to Formosa Epitaxy Incorporation in connection with the proposed sale of the Company’s headquarters building agreement dated December 15, 2015. The Company shall repay the loans in full on the second anniversary of the Drawdown Date, unless the loans are sooner accelerated pursuant to the loan agreements. The Loans are secured by a second priority interest on the headquarters building.

The Company has analyzed its operations subsequent to November 30, 2018 to the date these unaudited condensed consolidated financial statements were issued, and has determined that it does not have any material subsequent events to disclose in these unaudited condensed consolidated financial statements, except for the above.

Item 2. Management’s Discussion and Analysis o f 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 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.

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The ability to retain any partial payments of the uncompleted $1.6 million note financing as liquidated damages.

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The ability to return of the $3 million prepayment on the terminated agreement for the sale of the headquarters and to successfully resolve any pending litigation.

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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 the NASDAQ Stock Market.

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The inability of our suppliers 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 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 Netherlands, 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 marke t.

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Our ability to resolve pending litigation on favorable terms.

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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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Loss of customers.

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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 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.

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, 2018, or the 2018 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 201 8 Annual Report, and in other filings with the SE C.

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 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:

•

reusing sapphire substrate in subsequent production runs;

•

optimizing our epitaxial growth processes to create layers that efficiently convert electrical current into light;

•

employing a copper alloy base manufacturing technology to improve our chip’s thermal and electrical performance;

•

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

•

developing low cost Chip Scaled Packaging (CSP) technology.

These technical capabilities enable us to produce LED chips and LED component 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. 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, and where most of our employees are based.

Key Factors Affecting Our Financial Condition, Results of Operations and B usiness

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 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.

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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.

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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.

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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 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.

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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 pe r-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 depreci ation. 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. 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.

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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. 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 months ended November 30, 2018, sales to our three largest customers, in the aggregate, accounted for 47% of our revenues.

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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.

•

Declining cash position. Our cash and cash equivalents decreased to $ 2.6 million as of November 30, 201 8 due to the combination of our net cash used in oper ating activities and payments related to long-term debt. 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 certa in 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, minimize our research and development activities associated with chips m anufacturing 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 shipme nt of our new module product and the continued commercial sales of our UV LED product are expected to grow steadily. 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 ” for more information about our liquidity plans.

Critical Accounting Policies and Estimates

Effective September 1, 2018, we adopted ACS 606 using the modified retrospective transition method. Under this approach, we apply the new standards to all new contracts initiated on and after September 1 2018, and, for contracts which have remaining obligations as of September 1 2018, we recognized no adjustment to the opening balance of our retained earnings account.

On September 1, 2018, we adopted ASC 825-10, “Financial Instruments- Overall: Recognition and Measurement of Financial Assets and Financial Liabilities”. This standard allows equity investments that do not have readily determinable fair values to be re-measured at fair value either upon the occurrence of an observable price change or upon identification of impairment. The standard also simplifies the impairment assessment of equity investments without readily determinable fair values by requiring assessment for impairment qualitatively at each reporting period. There was no material impact on our consolidated financial position, results of operations or cash flows due to the adoption.

Effective September 1, 2018, we adopted ASU No. 2017-09, “Compensation- Stock Compensation: Scope of Modification Accounting”. The guidance provides clarity and reduces diversity in practice and cost and complexity when accounting for a change to the terms or conditions of a share-based payment award. Adoption of this standard did not have a material impact on our consolidated financial position, results of operations or cash flows.

Except as described above, 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 three months ended November 30, 2018 as compared to those disclosed in our 2018 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 November 30, 2018, the exchange rate was 30.83 NT dollars to one U.S. dollar. On January 7, 2019, the exchange rate was 30.81 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.

Results of Operations

Three Months Ended November 30, 2018 Compared to the Three Months Ended November 30, 2017

	Three Months Ended November 30,
	2018							2017
				% of						% of			Change				Change
	$			Revenues				$		Revenues				$			%
	(in thousands)
LED chips	$	69			7		%	$	76		4	%		$	(7	)		(9	)	%
LED components		679			70		%		1,411		70	%			(732	)		(52	)	%
Lighting products		173			18		%		266		13	%			(93	)		(35	)	%
Other revenues ⁽¹⁾		51			5		%		250		13	%			(199	)		(80	)	%
Total revenues, net		972			100		%		2,003		100	%			(1,031	)		(51	)	%
Cost of revenues		1,191			123		%		1,951		97	%			(760	)		(39	)	%
Gross profit (loss)	$	(219	)		(23	)	%	$	52		3	%		$	(271	)		(521	)	%

⁽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 51% to $972 thousand for the three months ended November 30, 2018 from $2.0 million for the three months ended November 30, 2017. The decrease in revenues was driven primarily by a $732 thousand decrease in sales of LED components and a $93 thousand decrease in sales of lighting products.

Revenues attributable to the sales of our LED chips represented 7% and 4% of our revenues for the three months ended November 30, 2018 and 2017, respectively. The decrease of 9% in revenues attributable to sales of LED chips was the result of a decrease in the volume of LED chips sold, primarily due to our strategic plan to place greater emphasis on the sales of LED components rather than the sales of LED chips.

Revenues attributable to the sales of our LED components represented 70% of our revenues for both the three months ended November 30, 2018 and 2017. The decrease in revenues attributable to sales of LED components was primarily due to a slowdown in demand for UV LED components products.

Revenues attributable to the sales of lighting products represented 18% and 13% of our revenues for the three months ended November 30, 2018 and 2017, respectively. Revenues attributable to the sales of lighting products were lower for the three months ended November 30, 2018 primarily due to a slowdown in demand on LED luminaries and LED retrofits, and fewer non-recurring project-based orders for LED lighting products.

Cost of Revenues

Our cost of revenues decreased by 39% from $2.0 million for the three months ended November 30, 2017 to $1.2 million for the three months ended November 30, 2018. The decrease in cost of revenues was primarily due to the effect of our ongoing cost reduction efforts, a decrease in volume sold and decreases in depreciation expenses.

Gross Profit

Our gross margin decreased from a profit of $52 thousand for the three months ended November 30, 2017 to a loss of $219 thousand for the three months ended November 30, 2018. The decrease was a consequence of the reduction in cost of revenues, as more fully described above.

Operating Expenses

	Three Months Ended November 30,
	2018							2017
				% of						% of			Change				Change
	$			Revenues				$		Revenues				$			%
	(in thousands)
Research and development	$	334			34		%	$	184		9	%		$	150			82		%
Selling, general and administrative		757			78		%		733		37	%			24			3		%
Gain on disposals of long-lived assets		(288	)		(30	)	%		—		—	%			(288	)		—		%
Total operating expenses	$	803			82		%	$	917		46	%		$	(114	)		(12	)	%

Research and development Our research and development expenses were $334 thousand and $184 thousand for the three months ended November 30, 2018 and 2017, respectively. The increase was mainly attributable to a $95 thousand increase in payroll and stock based compensation, and a $51 thousand increase in engineering experiment materials, offset by a decrease in depreciation and amortization expense.

Selling, general and administrative Our selling, general and administrative expenses increased from $733 thousand for the three months ended November 30, 2017 to $757 thousand for the three months ended November 30, 2018. The increase was mainly attributable to increases in payroll and stock based compensation, and DE franchise tax, offset by decreases in various other expenses including professional service expenses. The $57 thousand increase in payroll and stock based compensation was mainly due to a reverse of bonus accrual in the three months ended November 30 2017.

Gain on disposal of long-lived assets We recognized a gain of $288 thousand on the disposal of long-lived assets for the three months ended November 30, 2018. 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 certain level of our idle equipment.

Other Income (Expenses)

		Three Months Ended November 30,
		2018							2017
					% of							% of
		$			Revenues				$			Revenues
	(in thousands)
Interest expenses, net		$	(5	)		—		%	$	(8	)		—		%
Other income, net			80			8		%		498			25		%
Foreign currency transaction loss, net			(36	)		(4	)	%		(17	)		(1	)	%
Total other income (expenses), net		$	39			4		%	$	473			24		%

Interest expenses, net The decrease in net interest expenses was primarily due to the continuous repayment of debt.

Other income, net Other income for the three months ended November 30, 2018 primarily consist of rental income from the lease of the second floor of our Hsinchu building, net of related depreciation charges. Other income for the three months ended November 30, 2017 primarily consists of sales of patents offset by their commission expense and cost.

Foreign currency transaction loss, net We recognized net foreign currency transaction loss of $36 thousand and $17 thousand for the three months ended November 30, 2018 and 2017, 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 2019 and was zero for fiscal 2018, 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 Non-controlling Interests

		Three Months Ended November 30,
		2018						2017
					% of					% of
		$			Revenues			$		Revenues
	(in thousands)
Net loss attributable to noncontrolling interests		$	(5	)		—	%	$	—		—	%

We recognized net loss attributable to non-controlling interests of $5 thousand for the three months ended November 30, 2018, which was attributable to the share of the net losses of Taiwan Bandaoti Zhaoming Co., Ltd held by the remaining non- controlling holders. Non-controlling interests represented 3.31% equity interest in Taiwan Bandaoti Zhaoming CO., Ltd.

Liquidity and Capital Resources

As of November 30, 2018 and August 31, 2018, we had cash and cash equivalents of $2.6 million and $3.4 million, respectively, which were predominately held in U.S. dollar denominated demand deposits and/or money market funds.

As of January 7, 2019, we had no available credit facility.

Our long-term debt, which consisted of NT dollar denominated long-term notes, totaled $2.3 million as of both November 30, 2018 and August 31, 2018. These long-term notes carry interest rate of 1.62%, based on the annual time deposit rate plus a specific spread, as of both November 30, 2018 and August 31, 2018 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 $13 thousand over the 15-year term of the note with final payment to occur in May 2024 and, as of November 30, 2018, our outstanding balance on this note payable was approximately $821thousand.

•

The second note payable requires monthly payments of principal and interest in the amount of $18 thousand over the 15-year term of the note with final payment to occur in December 2025 and, as of November 30, 2018, our outstanding balance on this note payable was approximately $1.4 million.

Property, plant and equipment pledged as collateral for our notes payable were $4.1 million and $4.2 million as of November 30, 2018 and August 31, 2018, respectively.

We have incurred significant losses since inception, including net losses attributable to SemiLEDs stockholders of $3.0 million and $4.1 million during the years ended August 31, 2018 and 2017, respectively. Net cash used in operating activities for the year ended August 31, 2018 was $1.2 million. As of August 31, 2018, we had cash and cash equivalents of $3.4 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.

Based on our current financial projections and assuming the successful implementatio n 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. However, there can be no assurances that our planned activities will be successful in reduci ng 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 refinan ce 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. Please see “Critical Accounting Policies and Estimates ” for more information on our liquidity plans.

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):

	Three Months Ended November 30,
	2018			2017
Net cash used in operating activities	$	(1,266	)	$	(60	)
Net cash provided by (used in) investing activities	$	485		$	(93	)
Net cash used in financing activities	$	(83	)	$	(84	)

Cash Flows Used In Operating Activities

Net cash used in operating activities for the three month ended November 30, 2018 and 2017 was $1.3 million and $60 thousand, respectively. The cash flows used in operating activities for the three months ended November 30, 2018 was $1.2 million higher, primarily due to an increase in cash used to pay for salary-related expenses due to the reduction of employees and for engineering experiment materials.

Cash Flows Used In Investing Activities

Net cash provided by investing activities for the three months ended November 30, 2018 was $485 thousand, consisting of $511 thousand in proceeds of machinery and equipment, offset by a $24 thousand in purchases of machinery and equipment.

Net cash used in investing activities for the three months ended November 30, 2017 was $93 thousand, consisting of $94 thousand in purchases of machinery and equipment, offset by a $1 thousand in proceeds from the sale of assets.

Cash Flows Used In Financing Activities

Net cash used in financing activities for the three months ended November 30, 2018 and 2017 was for repayments on long-term debt.

Capital Expenditures

We had capital expenditures of $24 thousand and $94 thousand for the three months ended November 30, 2018 and 2017, 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 is continuing to monitor prices and, consistent with the existing contractual commitments, may decrease further our activity level and capital expenditures as appropriate.

Off-Balance Sheet Arrangements

As of November 30, 2018, we did not engage in any off-balance sheet arrangements. We do not have any interests in variable interest entities.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures

Our management, with the participation of our chief executive officer, or CEO, and our chief financial officer, or CFO, has evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of November 30, 2018. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Based upon the aforementioned evaluation, our CEO and CFO have concluded that, as of November 30, 2018, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended November 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHE R INFORMATION

Item 1. Legal Proceedings

Due to the complex technology required to compete successfully in the LED industry, participants in our industry are often engaged in significant intellectual property licensing arrangements, negotiations, disputes and litigation. We are directly or indirectly involved from time to time and may be named in various other claims or legal proceedings arising in the ordinary course of our business or otherwise.

On June 21, 2017, Well Thrive Ltd. (“Well Thrive”) filed a complaint against SemiLEDs Corporation in the United States District Court for the District of Delaware. The complaint alleges that Well Thrive was entitled to return of $500 thousand paid toward a note purchase pursuant to a purchase agreement (the “Purchase Agreement”) effective July 6, 2016 with Dr. Peter Chiou, which was assigned to Well Thrive on August 4, 2016. Pursuant to the terms of the Purchase Agreement, we retained the $500 thousand payment as liquidated damages. Well Thrive alleged that the liquidated damages provision was unenforceable as an illegal penalty and did not reflect the amount of purported damages. On March 13, 2018, the Company filed a motion to enforce a settlement agreement between the parties to dismiss the lawsuit with prejudice. On March 27, 2018, Well Thrive filed an answering brief in opposition to the Company’s motion on the basis that Well Thrive never consented to dismiss the case. On January 2, 2019, the judge denied without prejudice the motion filed by us, because there remains some question as to whether Well Thrive’s former lawyers and Dr. Chiou had authority from Well Thrive to settle this case. The judge’s order allows us to conduct depositions of Well Thrive’s former lawyer, Dr. Chiou, and Mr. Chang Sheng-Chun, Well Thrive’s director, and to request documents relating to the issues surrounding the settlement. Based on this order, we intend to arrange the depositions to obtain more evidence in support of a motion to enforce the settlement agreement. The Court set a trial date of March 2, 2020, if needed.

On December 28, 2018, the Company received a notification from the Court in Miao-Li County, Taiwan that Epistar Corporation (the successor to Formosa Epitaxy Incorporation, the “Plaintiff”) filed a motion requesting that the Company return the $3 million prepayment plus value-added-tax for the headquarters building sale and pay interest during this period and litigation fees. The Plaintiff also petitioned the Court to do a provisional execution upon the Company, which would permit the Plaintiff to sell the building and/or other assets belonged to the Company to recover the prepayment. On January 4, 2019, the Company filed a statement of defense arguing that the Plaintiff’s action and motion for provisional execution should be dismissed and the litigation fees should be borne by the Plaintiff. The Company has not accrued an expense related to the outcome of this litigation, because it is not yet possible to determine if a potential loss is probable nor reasonably estimable.

Except as described above, there was no material pending legal proceedings or claims as of November 30, 2018.

Item 1A. Risk Factors

There are no material changes related to risk factors from the risk factors described in Item 1A “Risk Factors” in Part I of our 2018 Annual Report.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Repurchases

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Othe r Information

On January 8, 2019, the Company entered into loan agreements for $1.5 million with each of Trung Doan, its Chairman and Chief Executive Officer, and J.R. Simplot Company, its largest shareholder, for aggregate proceeds of $3 million. The loans bear an annual interest rate of 8%. All proceeds of the loans shall be exclusively used to return the deposit to Formosa Epitaxy Incorporation in connection with the proposed sale of the Company’s headquarters building agreement dated December 15, 2015. The Company shall repay the loans in full on the second anniversary of the drawdown date, unless the loans are sooner accelerated pursuant to the loan agreements. The loans are secured by a second priority interest on the Company’s headquarters building.Copies of the two loan agreements have been filed as exhibits 10.1 and 10.2 to this Form 10-Q.

Item 6. Exhibits

Exhibit No.		Description

10.1		Loan Agreement dated January 8, 2019 between SemiLEDs Corporation and Trung Doan.

10.2		Loan Agreement dated January 8, 2019 between SemiLEDs Corporation and J. R. Simplot Company.

31.1		Certification of Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

SIGNA TURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		SEMILEDS CORPORATION
		(Registrant)

Dated:	January 11, 2019	By:	/s/ Christopher Lee
		Name:	Christopher Lee
		Title:	Chief Financial Officer
			(Principal Financial Officer and Principal Accounting Officer)

Exhibit 10.1

LOAN AGREEMENT

This Loan Agreement (as amended, restated, modified or otherwise supplemented from time to time, this “ Agreement ”) is entered into as of January 8, 2019 (the “ Agreement Date ”), by and between SemiLEDs Corporation , a corporation organized under the laws of the state of Delaware (the “ Borrower ”), and Trung Doan , an US citizen (the “ Lender ”).

RECITALS

A. WHEREAS , the Borrower desires to borrow and incur debt from the Lender in the amount of One Million Five Hundred Thousand Dollars ($1,500,000.00) (USD)

B. WHEREAS , the Borrower also desires to concurrently borrow and incur debt from J. R. Simplot Company , a corporation organized under the laws of the state of Nevada Trung Doan, an individual, in the amount of One Million Five Hundred Thousand Dollars ($1,500,000.00) (USD) (“ J. R. Simplot Company Loan ”) under the terms of a separate loan agreement, note, and mortgage and related documents and instruments (“ J. R. Simplot Company Loan Documents ”).

C . WHEREAS , the purpose of the loan from Lender and the J. R. Simplot Company Loan, which in the aggregate are for Three Million Dollars ($3,000,000.00) (USD), is to allow Borrower to return certain deposit to Formosa Epitaxy Incorporation relating to certain agreement dated as of December 2015 by and between Borrower and Formosa Epitaxy Incorporation.

D. WHEREAS , the Lender hereby agrees to extend the loan facility agreed to herein to the Borrower and the Borrower hereby agrees to borrow the same from the Lender on the terms set forth herein.

NOW, THEREFORE , for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows:

1. DEFINITION .

1.1 Defined Terms .

“ Affiliate ” means, with respect to any specified Person, any other Person that, directly or indirectly, including through one or more intermediaries, controls, is controlled by, or is under common control with such specified Person.

“ Agreement ” shall have the meaning set forth in the preamble of this Agreement.

“ Agreement Date ” shall have the meaning set forth in the preamble of this Agreement.

“ Applicable Law ” means any applicable laws, statutes, rules, regulations, ordinances, orders, codes, arbitration awards, judgments, decrees or other legal requirements of any Governmental Entity.

“ Borrower ” shall have the meaning set forth in the preamble of this Agreement.

“ Business Day ” means a day that is not a Saturday, Sunday or other day on which commercial banking institutions in the US or ROC are authorized or required by Applicable Law to be closed.

“ Confidential Information ” shall have the meaning set forth in Section 9.15(a) of this Agreement.

“ Control ” (whether or not capitalized) means the power or authority, whether exercised or not, to direct the business, management and policies of a Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise, which power or authority shall conclusively be presumed to exist upon possession of beneficial ownership or power to direct the vote of more than fifty percent (50%) of the votes entitled to be cast at a meeting of the members, shareholders or other equity holders of such Person or power to control the composition of a majority of the board of directors or like governing body of such Person; and the terms “ controlling ” and “ controlled ” have meanings correlative to the foregoing.

“ J. R. Simplot Company Loan ” has the meaning set forth in recital B to this Agreement.

“ J. R. Simplot Company Loan Documents ” has the meaning set forth in recital B to this Agreement.

“ Drawdown Date ” means the date on which the Lender makes available and releases the Loan to the Borrower.

“ Event of Default ” means any of the events described in Section 8 .1 of this Agreement.

“ GAAP ” means generally accepted accounting principles, consistently applied for all periods at issue.

“ Governmental Entity ” means any governmental authority or entity, including any agency, board, bureau, commission, court, municipality, department, subdivision or instrumentality thereof, or any arbitrator or arbitration panel.

“ Interest Period ” means three (3) M onths.

“ Lender ” shall have the meaning set forth in the preamble of this Agreement.

“ Loan ” shall have the meaning set forth in Section 2.1(a) of this Agreement.

“ Loan Documents ” means this Agreement, the Note , the Mortgage Agreement and any ancillary documents entered into in connection therewith, each as amended, extended or modified from time to time .

“ Material Adverse Effect ” means a material adverse effect on (a) the business, operations, property, or condition (financial or otherwise) of the Borrower ; (b) the ability of the Borrower to perform its obligations under the Loan Document s to which it is a party; or (c) the legality, validity or enforceability of the Loan Document s or the rights or remedies of the Lender under any of the Loan Document s .

“ Maturity Date ” has the meaning set forth in Section 2.2 of this Agreement .

“ Month ” means a period starting on one day in a calendar month and ending on the numerically corresponding day in the next calendar month, except that:

(a) subject to paragraph (c) below, if the numerically corresponding day is not a Business Day, that period shall end on the next Business Day in that calendar month in which that period is to end if there is one, or if there is not, on the immediately preceding Business Day;

(b) if there is no numerically corresponding day in the calendar month in which that period is to end, that period shall end on the last Business Day in that calendar month; and

(c) if an Interest Period begins on the last Business Day of a calendar month, that Interest Period shall end on the last Business Day in the calendar month in which that Interest Period is to end.

The above rules will apply only to the last Month of any period.

“ Mortgage ” shall have the meaning set forth in Section 4.1 of this Agreement.

“ Mortgage Agreement ” shall have the meaning set forth in Section 4.1 of this Agreement.

“ Mortgagor ” shall have the meaning set forth in Section 4.1 of this Agreement.

“ Note ” shall mean a promissory note or notes of Borrower substantially in the form attached as Exhibit A hereto.

“ Person ” means any natural person, corporation, joint stock company, limited liability company, association, partnership, firm, joint venture, organization, business, trust, estate or any other entity or organization of any kind or character.

“ Potential Event of Default ” means any event or circumstance that with the giving of notice or the passage of time (or both) would constitute an Event of Default.

“ Real Property ” shall mean all right, title and interests in and to a parcel of real property including land, together with all buildings, structures, improvements and fixtures located thereon, and all easements and other rights and interests appurtenant thereto, owned by SemiLEDs Optoelectronics Co., Ltd. at 1F to 4F, No. 11, Ke Jung Rd., Chunan Science Park, Chunan, Miaoli County, Taiwan, ROC, over which a first-priority mortgage is created in favor of E.Sun Bank to secure a line of credit in amount of NT$202,000,000.

ROC ” means the Republic of China.

“ Subsidiary ” means with respect to any specified Person, any other Person that, directly or indirectly, including through one or more intermediaries , is controlled by such specified Person.

“ Taxes ” includes any tax, levy, duty, charge, impost, fee, deduction or withholding of any nature now or hereafter imposed, levied, collected, withheld or assessed by any taxing or other authority and includes any interest, penalty or other charge payable or claimed in respect thereof.

“ Term ” shall have the meaning set forth in Section 9.4 of this Agreement.

“U.S.” means the United States of America.

1.2 Certain Interpretive Matters .

(a) Unless the context requires otherwise, (i) all references to Sections, Articles or Exhibits are to Sections, Articles or Exhibits of or to this Agreement, (ii) words in the singular include the plural and vice versa, (iii) the term “ including ” means “including without limitation,” and (iv) the terms “ herein ,” “ hereof ,” “ hereunder ” and words of similar import shall mean references to this Agreement as a whole and not to any individual section or portion hereof. Unless otherwise denoted, all references to “ $ ,” “ USD ,” “ Dollar ” or dollar amounts will be to lawful currency of the United States of America. All references to “ day ” or “ days ” mean calendar days.

(b) No provision of this Agreement will be interpreted in favor of, or against, any party hereto by reason of the extent to which (i) such party or its counsel participated in the drafting thereof, or (ii) such provision is inconsistent with any prior draft of this Agreement or such provision.

2. TERMS OF LOAN AND REPAYMENT .

2.1 Provision of Loan .

(a) Subject to the terms and conditions of this Agreement, the Lender shall make available a loan facility to the Borrower in the principal amount of One Million Five Hundred Thousand Dollars ($1,500,000) (USD) (the “ Loan ”) and the Borrower agrees to borrow the Loan.

(b) Subject to the Borrower's satisfaction or the Lender’s waiver of the conditions set forth in Article 6 of this Agreement, the Lender shall make available and release the entire principal amount of the Loan to the Borrower on the Drawdown Date (which shall be a Business Day) by wire transfer to the account designated by the Borrower, the details of which are set forth in a writing delivered by the Borrower to the Lender. Provided, the Drawdown Date shall not be later than January 15, 2019 and this Agreement, at the election of Lender, shall be null and void without liability on either party if the Drawdown Date does not occur by January 15, 2019.

2.2 Maturity of the Loan . The Borrower shall repay the Loan in full on the second anniversary of the Drawdown Date (the “ Maturity Date ”), unless the Loan is sooner accelerated pursuant to this Agreement or any other of the Loan Document .

2.3 Use of Proceeds . All proceeds of the Loan shall be exclusively used to return the deposit provided under that certain agreement dated as of December 2015 by and between Borrower and Formosa Epitaxy Incorporation in connection with the sale of its Subsidiary's headquarters building located at Miao-Li, Taiwan.

2.4 The Loans and the Note . The obligation of Borrower to repay the aggregate unpaid principal amount of and interest on the Loan shall be evidenced by the Note setting forth the principal amount of the Loan and the payments due. Any failure by a Lender to obtain or retain the Note shall not limit or otherwise affect the obligations of Borrower to pay amounts due hereunder with respect to the Loan.

2.5 Repayment Mechanics . All repayments hereunder shall be made by wire transfer of such amounts in immediately available funds denominated in U.S. Dollars (USD) to the Lender, at such place and to such account as the Lender shall designate in a written notice to the Borrower. Payments shall be credited first to costs and expenses due and payable hereunder (including the costs incurred under Sections 8.3), then to the accrued interest then due and payable and the remainder applied to principal. The Loan may be prepaid, without penalty or premium, in whole or in part from time to time , provided that :

(a) Notice: the Borrower shall have given the Lender not less than three (3) Business Days’ (or such shorter period as may be agreed between the Borrower and the Lender) prior written notice specifying the amount to be prepaid and the date of prepayment; and

(b) Interest: the Borrower shall concurrently pay accrued and unpaid interest on the full amount of the Loan to be prepaid on the date of such prepayment.

2.6 Taxes .

(a) All payments to be made by the Borrower to the Lender under the Loan Documents shall be made free and clear of any deduction or withholding on account of any Taxes. If the Borrower or any other P erson is required by any law or regulation to make any such deduction or withholding, the Borrower shall (i ) pay such deducted or withheld amount to the applicable tax authorities and, promptly upon the Lender’s request, deliver to the Lender the certificate or receipt evidencing such payment and ( ii) pay such additional amount as will ensure that the Lender receives and is entitled to retain, free and clear of any such deduction or withholding, the full amount which it would have received if no such deduction or withholding had been required. Without limiting the foregoing, if the Lender or any other P erson on the Lender's behalf is required by any law or regulation to make a payment on account of any such withholding Tax or incurs any liability in respect thereof, the Borrower shall, within ten (10) Business Days after demand by the Lender (which demand shall provide a calculation in reasonable detail of such payment) , indemnify the Lender against such payment or liability and any interest, penalty or expense payable or incurred in connection therewith. The obligations of the Borrower under this Section 2.6(a) are subject to (i) the Lender executing any applicable tax withholding forms as reasonably requested by the Borrower or the United States Internal Revenue Service for United States taxation purposes, together with such supplementary documentation necessary to allow the Borrower to determine whether the withholding or deduction is required to be made, and (ii) the representations made and covenants agreed to in Sections 6 and 7 being true and correct and complied with in all respects. The Lender agrees to use its commercially reasonable efforts, at the cost and expense of the Borrower, to otherwise assist the Borrower to obtain the exemption status for any such deduction or withholding. Nothing in this Section 2.6 shall require the Borrower to make any payment on or indemnify the Lender for any Taxes imposed on or measured by the Lender’s overall net income (however denominated) and franchise Taxes imposed on the Lender under applicable ROC laws.

(b) If the Lender determines that it has received a refund of, or reduction in its liability for, any Taxes as a result of amounts paid or withheld by the Borrower pursuant to this Section 2. 6 , the Lender shall pay over such refund or reduction to the Borrower (but only to the extent of the amounts paid or withheld by the Borrower under this Section 2. 6 with respect to the Taxes giving rise to such refund or reduction), net of all out-of-pocket expenses of the Lender and without interest (other than any interest paid by the relevant governmental authority with respect to such refund or reduction), provided that the Borrower, upon the request of the Lender, agrees to repay the amount paid over to the Borrower to the Lender in the event the Lender is required to repay such refund or reduction to such Governmental Entity. This Section 2. 6 shall not be construed to require the Lender to make available its tax returns (or any other information relating to its Taxes that it deems confidential) to the Borrower or any other P erson .

3. INTEREST.

3.1 Calculation of Interest . The rate of interest on the Loan for each Interest Period shall be at a rate per annum equal to the eight percent (8%) .

3.2 Interest Period . The initial Interest Period shall commence on the Drawdown Date, with each successive Interest Period commencing on the last day of the prior Interest Period .

3.3 Payment of Interest . The Borrower shall pay accrued interest in arrears on the Loan on the last day of each Interest Period, and the amount of interest shall be computed on the basis of the actual number of days elapsed (including the first day but excluding the last day of such Interest Period) and a year of three hundred and sixty (360) days.

3.4 Past Due Rate . If the Borrower fails to pay any amount payable by it under the Loan on its due date, past due interest shall accrue on such unpaid amount at the rate of 12% per annum from the due date up to the date of actual payment of the unpaid amount (both before and after judgment). The Borrower shall pay p ast due interest (if unpaid) accruing on an unpaid sum at the end of each Interest Period applicable to that unpaid sum or on demand of the Lender.

4. MORTGAGE.

4.1 Mortgage . As security for the performance in full of the obligations of the Borrower under this Agreement, the Subsidiary of the Borrower, SemiLEDs Optoelectronics Co., Ltd., (the “ Mortgagor ”) and the Lender shall enter into a Mortgage Agreement in the form and substance attached hereto as Exhibit B (the “ Mortgage Agreement ”), creating a second priority security interest in and to the Real Property in favor of the Lender (the “ Mortgage ”).

5. CONDITIONS PRECEDENT.

The Lender shall only be obligated to provide the Loan when each of the following conditions has been satisfied:

(a) The Lender shall have received this Agreement and the Note duly executed and delivered by the Borrower.

(b) Th e Mortgagor shall have become the legal record and beneficial owner of and shall have good title to the Real Property free and clear of all liens and encumbrances except for the first- priority mortgage which is created in favor of E.Sun Bank to secure a line of credit in amount of NT$ 202 , 0 00 , 000 .

(c) The Lender shall have received the Mortgage Agreement, duly executed and delivered by the Mortgagor, granting to the Lender, for its benefit, a security interest in the Real Property described therein together with such financing and assignment documents as may be provided in the Mortgage Agreement and evidence reasonably satisfactory to the Lender with respect to the Lender’s second priority security interest in the Real Property .

(d) The Lender shall have received certified copies of all action taken by the Borrower authorizing the execution, delivery and performance of the Loan Documents.

(e) The creation and perfection of the Mortgage in a timely manner as set forth in Section 4.1 of this Agreement shall have been completed, which might be evidenced by any notices and acknowledgements required to perfect or give effect to the security created under the Loan Documents, including, but not limited to, a securities passbook/statement produced by the securities agent of the Lender evidencing the creation of the Mortgage.

(f) No Event of Default or Potential Event of Default shall have occurred and be continuing.

(g) Borrower and Trung Doan shall be prepared to concurrently close the Doan Loan pursuant to the Doan Loan Documents.

6. REPRESENTATIONS AND WARRANTIES .

The Borrower represents and warrants to the Lender that each of the representations, warranties and statements contained in the following Sections of this Article 6 are true and correct as of the Agreement Date and shall be true and correct at all times during the Term.

6.1 Organization; Good Standing and Qualification . The Borrower is a corporation duly incorporated and validly existing under the laws of the state of Delaware. The Borrower has all requisite corporate power and authority to own, lease and operate its properties and assets that it currently owns, leases or operates and to carry on its business as now conducted and as presently proposed to be conducted.

6.2 Authorization . All corporate action on the part of the Borrower, its respective officers, directors and stockholders necessary for the authorization, execution and delivery of the Loan Documents to which it is a party and the performance of all obligations of the Borrower under the Loan Documents has been taken. Each of the Loan Documents to which it is a party constitutes a valid and legally binding obligation of the Borrower, as the case may be, enforceable against the Borrower in accordance with its terms, except to the extent that the enforceability thereof may be limited by applicable bankruptcy, insolvency, moratorium, and other laws affecting creditor’s rights generally and by equitable principles (regardless of whether enforcement is sought in equity or at law) .

6.3 Governmental Consents . N o consent, approval, order or authorization of, or registration , qualification, designation, declaration or filing with, any Governmental Entity on the part of the Borrower is required in connection with the consummation of the transactions contemplated by the Loan Document s except as have been made or obtained (it being understood that no representation or warranty is being made as to any such consents, approvals, orders, authorizations, registrations, qualifications, designations or filings which may be required in connection with the exercise by Lender of any of its rights and remedies against the Mortgage ).

6.4 No Proceedings Pending or Threatened . N o litigation, arbitration or administrative proceedings of or before any court, arbitral body or agency, is pending or, to the Borrower’s knowledge, threatened in writing against the Borrower which could reasonably be expected to have a Material Adverse Effect.

6.5 Non-conflict With Other Obligations . The entry into and performance by the Borrower of the Loan Documents to which it is a party, and the consummation by it of the transactions contemplated thereby, do not and will not conflict with or result in a breach of, as the case may be:

(a) any law or regulation applicable to it;

(b) its constitutional documents;

(d) any of its borrowing limits or powers or any power exercisable by its directors in connection therewith;

except, in each case where such conflict or breach would not reasonably be expected to have a Material Adverse Effect.

6.6 No Default . No Event of Default is continuing or would reasonably be expected to result from the making of the Loan.

6.7 No Unpaid Taxes . The Borrower has, to the extent required by Applicable Law, timely filed all material tax returns that are required to have been filed by it and has paid all material taxes, fees and other charges properly imposed on it by any relevant governmental authority, except such taxes, fees or other changes that are being contested in good faith by appropriate proceedings and for which adequate reserves are maintained on the Borrower’s books to the extent required by U.S. GAAP.

6.8 No Winding-up . T he Bor rower has not taken any corporate action, nor have any other steps been taken or legal proceedings been started or threatened in writing against it , for its winding-up, dissolution or administration or for the appointment of a receiver, administrator, administrative receiver, trustee or similar offices of it or of any or all of its assets or revenues.

6.9 Effective Mortgage . The provisions of the Mortgage Agreement will be effective to create in favor of the Lender a valid, binding and enforceable security interest in all of Mortgagor’s right, title and interest of the Real Property, and constitute a fully perfected second priority Mortgage in all right, title and interest of such Mortgagor in such Real Property, superior in right to any liens which any third Person may have against such Real Property or interests therein other than the first priority Mortgage .

7. COVENANTS.

So long as any amount under the Loan Documents is outstanding, the Borrower agrees to:

7.1 Authorizations . Obtain when required, make and keep in full force and effect all authorizations from and registrations with any Governmental Entity and other Persons that may be required to enable the Borrower to own its assets and carry on its business from time to time being conducted, except where the failure to so obtain or keep in effect would not materially impair Borrower’s ability to perform Borrower’s obligations under any of the Loan Documents to which Borrower is a party, and to ensure the legality, validity, and enforceability of such Loan Documents.

7.2 Necessary Acts . Upon request by the Lender, do or procure the doing of all such acts and execute or procure the execution of all such documents as the Lender may reasonably consider necessary for giving full effect to the Loan Documents or securing to the Lender the full benefits of all rights, powers and remedies conferred upon the Lender in the Loan Documents.

7.3 Notification of Defaults . Promptly notify the Lender upon the Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, the Treasurer or General Counsel of the Borrower obtaining knowledge of the occurrence of any default or Event of Default hereunder or of any default under the Mortgage Agreement, the Note, any other of the Loan Documents or the Doan Loan Documents.

7.4 Inspection . Grant the Lender, its representatives, agents and/or advisors, the right to reasonable access to inspect the facilities and books of the Borrower. Notwithstanding anyt hing to the contrary in this Agreement, the Borrower will not be required to disclose or permit the inspection or examination of, any document, information or other matter that (i) constitutes non-financial trade secrets or non-financial proprietary information, (ii) in respect of which disclosure to the Lender (or its designated representative) is then prohibited by Applicable Law or any agreement binding on the Borrower or any of its Subsidiaries or (iii) is subject to attorney-client or similar privilege or constitutes attorney work product.

7.5 Compliance with Laws . C omply in all material respects with all laws to which such party may be subject, if failure so to comply would materially impair such party’s ability to perform such party’s obligations under any of the Loan Documents to which such party is a party.

7.6 Environmental Com pliance . Comply in all material respects with all applicable environmental laws, obtain and maintain any environmental permits necessary to the Borrower’s business and take all reasonable steps in anticipation of known or expected future changes to or obligations under environmental law or any environmental permits, in each case where the failure to do so could reasonably be expected to have a Material Adverse Effect.

7.7 Taxes . Pay and discharge all material taxes, assessments and governmental charges or levies whatsoever imposed on the Borrower or on its income or profits or on any of the property of the Borrower prior to the date on which penalties attach thereto, and timely file all returns relating thereto, except to the extent that any such tax, assessment, governmental charge, levy or claim is being contested in good faith and by appropriate proceedings and for which adequate segregated reserves have been established therefore to the extent required by U.S. GAAP or where the failure to so pay, discharge or file would not materially impair such party’s ability to perform such party’s obligations under any of the Loan Documents to which such party is a party.

7.8 Maintenance of Insurance . Maintain or procure to be maintained with reputable insurers insurances on and in relation to its business and assets:

(a) against those risks customarily insured against by prudent companies carrying on a similar business; and

(b) against those risks required by Applicable Law.

7.9 Maintenance of Property . Maintain and preserve in good working order (ordinary wear and tear excepted) all of the assets necessary to the conduct of its business from time to time, except where the failure to do so would not materially impair such party’s ability to perform such party’s obligations under any of the Loan Documents to which such party is a party.

8. EVENTS OF DEFAULT .

8.1 Events of Default . The occurrence and continuance of any of the following shall constitute an “ Event of Default ” under this Agreement:

(a) the Borrower’s failure to make any payment of principal, interest or any other amount payable hereunder when due under the Loan Documents and such failure continues unremedied for three (3) Business Days in the case of payments of principal or five (5) Business Days in the case of interest or any such other amount;

(b) the Borrower’s failure to duly and punctually perform its material obligations or covenants under the Loan Documents and such failure continues for thirty (30) days after the Lender provides written notice thereof to the Borrower;

(c) any representation, warranty or statement made or deemed to be made by the Borrower in the Loan Documents is or proves to have been incorrect or misleading in any material respect when made;

(d) the filing of a petition by or against the Borrower under any provision of any law relating to bankruptcy, insolvency or other relief for debtors ; and in the case of any such petition filed against the Borrower, such petition remains unstayed or undismissed for a period of sixty ( 60 ) days; or appointment of a receiver, trustee, custodian or liquidator of or for all or any part of the assets or property of the Borrower; or the insolvency of the Borrower; or the making of a general assignment for the benefit of creditors by the Borrower ;

(e) any of the Loan Documents, once executed and delivered, ceases to be in full force and effect or ceases to be effective to create the security interest;

(f) any actual or asserted invalidity or unenforceability by the Borrower or Mortgagor of the Mortgage;

(g) any default by Borrower under the Doan Loan Documents; and

(h) the filing of a petition by or against the Mortgagor under any provision of any law relating to bankruptcy, insolvency or other relief for debtors; and in the case of any such petition filed against the Mortgagor, such petition remains unstayed or undismissed for a period of sixty (60) days; or appointment of a receiver, trustee, custodian or liquidator of or for all or any part of the assets or property of the Mortgagor; or the insolvency of the Mortgagor; or the making of a general assignment for the benefit of creditors by the Mortgagor.

8.2 Remedies . Upon the occurrence and during the continuance of any Event of Default, the Lender, at its option, may: (i) by notice to the Borrower, declare the unpaid principal amount of the Loan, all interest accrued and unpaid thereon and all other amounts payable hereunder to be immediately due and payable, whereupon the unpaid principal amount of the Loan, all such interest and all such other amounts shall become immediately due and payable, without presentment, demand, protest or further notice of any kind, provided that if an event described in Section 8.1(d ) above shall occur without the giving of any such notice and (ii) upon the acceleration of the Loan, exercise its rights and remedies under the Mortgage Agreement. All rights, powers and remedies of Lender may be exercised at any time by Lender and from time to time upon the occurrence of an Event of Default, are cumulative and not exclusive, and shall be in addition to any other rights, powers or remedies provided by law or equity.

8.3 Costs . The Borrower agrees to pay on demand all of the losses, costs and expenses (including reasonable attorneys' fees and disbursements) that the Lender incurs in connection with enforcement of the Loan Documents, the protection or preservation of the Lender's rights under the Loan Documents or collection of amounts due under the Loan Documents , whether by judicial proceeding or otherwise. Such costs and expenses include those incurred in connection with any refinancing, or any bankruptcy, insolvency, liquidation or similar proceedings.

8.4 Waivers . Except as otherwise set forth herein or in the Loan Documents, the Borrower hereby waives diligence, demand, presentment, protest or notice of any kind in connection with the exercise by the Lender of its rights under the Loan Documents. The Borrower agrees to make all payments under the Loan Documents without setoff (except as may be requested by the Lender) or deduction and regardless of any counterclaim or defense.

9 . GENERAL PROVISIONS .

9.1 Notices . All notices and other communications hereunder shall be in writing and shall be deemed duly given upon (a) transmitter’s confirmation of a receipt of a facsimile transmission, (b) confirmed delivery by a standard overnight or recognized international carrier or when delivered by hand, or (c) delivery in person, addressed at the following addresses (or at such other address for a party as shall be specified by like notice):

(a) if to Borrower, to:

SemiLEDs Corporation

1F, 3F, 4F, No. 11, Ke Jung Rd., Chunan Science Park, Chunan, Miaoli County, Taiwan, ROC

Fax: +886-37-582688

Attention: Christopher Lee

(b) if to Lender, to:

Trung Doan
3F No. 11, Ke Jung Rd., Chunan Science Park, Chunan, Miaoli County, Taiwan, ROC

Fax: +886-37-582688

Attention: Trung Doan

9.2 Waiver . The failure at any time of a party hereto to require performance by the other party or parties of any responsibility or obligation required by this Agreement shall in no way affect the first party’s right to require such performance at any time thereafter, nor shall the waiver by a party hereto of a breach of any provision of this Agreement by the other party or parties constitute a waiver of any other breach of the same or any other provision nor constitute a waiver of the responsibility or obligation itself.

9.3 Assignment . This Agreement or any right or obligation hereunder, is not assignable, delegable or otherwise transferable by any party, either voluntarily, by operation of law, or otherwise, without the prior written consent of the other parties (which consent may be withheld in its sole discretion) .

9.4 Term. The term of this Agreement shall commence from the date hereof and end on the date upon which all the Borrower's obligations and liabilities under the Loan Documents, including, without limitation, the repayments of the Loan and the interest, have been duly performed (the “ Term ”).

9.5 Amendment . This Agreement may not be amended or modified without the written consent of all parties hereto.

9 .6 Third Party Rights . Nothing in this Agreement, whether express or implied, is intended or shall be construed to confer, directly or indirectly, upon or give to any Person, other than the parties hereto, any legal or equitable right, remedy or claim under or in respect of this Agreement or any covenant, condition or other provision contained herein.

9.7 Governing Law . This Agreement shall be governed by and construed in accordance with the laws of the Republic of China, , without giving effect to its conflict of laws principles.

9.8 Jurisdiction; Venue . Any suit, action or proceeding seeking to enforce any provision of, or based on any matter arising out of or in connection with, this Agreement shall be brought in the Miao-li District Court, located in Miao-li, Taiwan , and each of the parties hereto hereby consents and submits to the exclusive jurisdiction of such court (and of the appropriate appellate courts therefrom) in any such suit, action or proceeding and irrevocably waives, to the fullest extent permitted by Applicable Law, any objection which it may now or hereafter have to the laying of the venue of any such suit, action or proceeding in any such court or that any such suit, action or proceeding which is brought in any such court has been brought in an inconvenient forum.

9.9 Headings . The headings of the Articles and Sections in this Agreement are provided for convenience of reference only and shall not be deemed to constitute a part hereof.

9.10 Entire Agreement . This Agreement, together with the Exhibits hereto and the agreements and instruments referred to herein, constitute the entire agreement of the parties hereto with respect to the subject matter hereof and supersede all prior agreements and understandings, oral and written, among the parties hereto with respect to the subject matter hereof.

9.11 Taxes. Except as otherwise set forth in this Agreement, all Taxes incurred or imposed in connection with this Agreement and the transactions contemplated hereby shall be paid by the party subject to such Tax.

9.12 Cost and Expenses . Except as otherwise set forth herein or in the Loan Documents, the Borrower and the Lender shall be responsible for their own out of pocket expenses incurred by them in the preparation, negotiation and performance of the Loan Documents (including, but not limited to, legal fees and service fees to professional advisors).

9.13 Severability . Should any provision of this Agreement be deemed in contradiction with the laws of any jurisdiction in which it is to be performed or unenforceable for any reason, such provision shall be deemed null and void, but this Agreement shall remain in full force and effect in all other respects. Should any provision of this Agreement be or become ineffective because of changes in Applicable Law or interpretations thereof, or should this Agreement fail to include a provision that is required as a matter of law, the validity of the other provisions of this Agreement shall not be affected thereby. If such circumstances arise, the parties hereto shall negotiate in good faith appropriate modifications to this Agreement to reflect those changes that are required by Applicable Law.

9 .14 Counterparts . This Agreement may be executed in several counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

9.15 Confidential Information .

(a) The parties hereby acknowledge that the terms and conditions of the Loan Documents and the information requested to be disclosed herein which is not available to the public shall be considered confidential information (collectively, the “ Confidential Information ”), and the parties agree that the term Confidential Information includes (i) on the part of the Borrower, any information received from the Lender under, pursuant to or in connection with the Loan Documents or the transactions contemplated thereby, and (ii) on the part of the Lender, any information received from the Borrower under, pursuant to or in connection with the Loan Documents or the transactions contemplated thereby. The parties shall not disclose any Confidential Information to any third party except in accordance with the provisions of this Section 9.15. Notwithstanding the foregoing, the term "Confidential Information" shall not include information that (i) is or becomes published or otherwise generally available to the public through no fault or omission of the applicable party or any of its Affiliates, employees, lenders, accountants or attorneys, (ii) was available to the applicable party on a non-confidential basis prior to its disclosure to such party pursuant to the Loan Documents or (iii) becomes available to the applicable party on a non-confidential basis from a source other than the other parties.

(b) Notwithstanding the foregoing, any of the parties may disclose any of the Confidential Information to its Affiliates, employees, lenders, accountants and attorneys, in each case only where such Persons have the need to know and so long as such Persons agree to keep the information confidential in accordance with this Section 9.15.

(c) In the event that any of the parties is requested or becomes legally compelled (including without limitation, by the U.S. Securities Exchange Commission) to disclose the Confidential Information, such party, shall provide the other parties with prompt written notice of that fact before such disclosure is made and furnish for disclosure only that portion of the information which is legally required.

(d) Each of the Lender and the Borrower agrees that it will provide the other parties with drafts of any documents, press releases or other filings in which it is required to disclose the Confidential Information at least five (5) Business Days or such other period as required by law, whichever is shorter, prior to the filing or disclosure thereof, and that it will make any changes to such materials reasonably requested by the other parties to the extent permitted by Applicable Law. If confidential treatment is requested by any of the other parties, the party seeking disclosure of the Confidential Information agrees to file a request on behalf of such other party and shall use its commercially reasonable efforts in responding to any comments by any such stock exchange or securities regulatory body or authority to cause such confidential treatment to be granted.

(e) Notwithstanding Section 9.4, the obligations of this Section 9.15 with respect to any Confidential Information or with respect to any discussions or agreements between the parties shall survive and continue for five (5) years from the Agreement Date.

[SIGNATURE PAGE FOLLOWS]

The parties hereto have caused this Agreement to be executed and delivered as of the date first written above.

SemiLEDs Corporation

By:		/s/Christopher Lee

Name:		Christopher Lee

Title:		CHIEF FINANCIAL OFFICER

Trung Doan

By:		/s/ Trung Doan

Name:		Trung Doan

Title:		Self

EXHIBIT A

Form of Promissory Note


US$1,500,000.00	Dated: As of January 8, 2019

FOR VALUE RECEIVED, the undersigned, SemiLEDs Corporation , a corporation organized under the laws of the state of Delaware (the " Company "), hereby unconditionally promises to pay to the order of Trung Doan , an US citizen , or his permitted assigns (the " Holder ") the principal sum of One Million Five Hundred Thousand Dollars ($1,500,000.00) (USD) (the " Principal Amount "), or such lesser amount as shall then be equal to the outstanding principal amount hereunder, together with interest,at the interest rate set forth below, from the date of this Promissory Note (this " Note ") on the unpaid principal balance until the Principal Amount is paid. The Company and the Holder have entered into a Loan Agreement dated January 8, 2019 (the " Loan Agreement ") whereby the Holder agrees to extend a loan facility in the Principal Amountto the Company and the Company agrees to borrow the same from the Holder.

The Company shall make interest payments as provided for in the Loan Agreement (including Section 3.3) and the unpaid principal amount of this Note together with any accrued and unpaid interest and any other amounts due shall become immediately due and payable on January 15, 2021 (“the Maturity Date ”). Provided, however, this Note may be accelerated, and the unpaid principal amount of this Note together with any accrued and unpaid interest and any other amounts due, shall become immediately due and payable prior to the Maturity Date as provided for under Section 5 of this Note and/or the Loan Agreement (including Section 8). All payment hereunder shall be made by wire transfer of such amounts in United States Dollars(USD) in immediately available funds, without any deduction, setoff or counterclaim, at such place and to such account as the Holder shall designate in a written notice to the Company.

This Note shall bear interest on the unpaid principal amount hereof at the rate of eight percent (8%) per annum computed on the basis of the actual number of days elapsed and a year of 360 days; provided, however, that upon the occurrence and during the continuance of an Event of Default (defined below), interest shall accrue on the unpaid principal amount of this Note, from the due date up to the date of actual payment of the unpaid amount (both before and after judgment), at the rate of twelve percent(12%) per annum.

The principal amount of this Note may be prepaid without penalty, at the sole discretion of the Company, in whole or in part at any time, provided that: (i) the Company shall have given the Holder not less than three (3) business days’ (or such shorter period as may be agreed between the Company and the Holder) prior written notice specifying the amount to be prepaid and the date of prepayment; and (ii) the Company shall concurrently pay accrued and unpaid interest on the full amount of the principal to be repaid on the date of such prepayment.

4.	This Note, the Loan Agreement, the Mortgage Agreement (as defined in the Loan Agreement) and any ancillary documents entered into in connection therewith, each as amended, extended or modified from time to time, are referred to collectively herein as the " Loan Documents ".

The unpaid principal amount of this Note, the accrued interest thereon and all other obligations of the Company hereunder (collectively, the " Obligations "), at the sole discretion of the Holder, shall become immediately due and payable upon the occurrence of any of the following events of default ( the " Events of Default "):

(a)

The Company shall fail to pay any principal, accrued interest or any other amount payable hereunder when due under this Note and such failure continues unremedied for three (3) Business Days in the case of payment of principal or five (5) business days in the case of accrued interest or any such other amount;

(b)

The Company shall default in the observance or performance of any material agreements, covenants or conditions contained in this Note, any of the Loan Documents and fail to cure such default within thirty (30) days of the date the Holder provides written notice thereof to the Company;

(c)

Any present or future representation or warranty made by or on behalf of the Company whether contained herein or in any of the other Loan Documents shall be incorrect or misleading in any material respect when such representation or warranty is made;

(d)

the filing of a petition by or against the Company under any provision of any law relating to bankruptcy, insolvency or other relief for debtors; and in the case of any such petition filed against the Company, such petition remains unstayed or undismissed for a period of sixty (60) days; or appointment of a receiver, trustee, custodian or liquidator of or for all or any part of the assets or property of the Company; or the insolvency of the Company; or the making of a general assignment for the benefit of creditors by the Company;

(e)

any of the Loan Documents, once executed and delivered, ceases to be in full force and effect or ceases to be effective to create the security interest;

(f)

any actual or asserted invalidity or unenforceability by the Company or Mortgagor (as defined in the Loan Agreement) of the Mortgage (as defined in the Loan Agreement);

(f)

any default by Company under the Doan Loan Documents (as defined in the Loan Agreement); and

(h)

the filing of a petition by or against the Mortgagor under any provision of any law relating to bankruptcy, insolvency or other relief for debtors; and in the case of any such petition filed against the Mortgagor, such petition remains unstayed or undismissed for a period of sixty (60) days; or appointment of a receiver, trustee, custodian or liquidator of or for all or any part of the assets or property of the Mortgagor; or the insolvency of the Mortgagor; or the making of a general assignment for the benefit of creditors by the Mortgagor.

The Company shall reimburse the Holder for all costs and expenses incurred by the Holder and shall pay the reasonable fees, disbursements and out of pocket expenses of counsel to the Holder in connection with the enforcement of the Holder's rights hereunder. The Company shall also pay any and all taxes (other than taxes on or measured by net income of the Holder of this Note) recording fees, filing charges, search fees or similar items incurred or payable in connection with the execution and delivery of this Note.

7.	The Company waives demand, presentment, protest and notice of any kind and consents to the release, surrender or substitution of any and all security or guarantees for the obligations evidenced hereby or other indulgence with respect to this Note, all without notice.

The Company shall indemnify, defend and save the Holder harmless from and against any and all claims, liabilities, losses, costs and expenses (including, without limitation, reasonable attorneys' fees, disbursements and out of pocket expenses) of any nature whatsoever which may be asserted against or incurred by the Holder arising out of or in any manner occasioned by or any failure by the Company to perform any of its obligations hereunder or pursuant to the Loan Documents.

The Company agrees to do such further acts and to execute and deliver to the Holder such additional agreements, instruments and documents as the Holder may reasonably require or deem advisable to effectuate the purposes of this Note, or to confirm to the Holder its rights, powers and remedies under this Note.

10.

All notices and other communications hereunder shall be in writing and shall be deemed duly given upon (a) transmitter’s confirmation of a receipt of a facsimile transmission, (b) confirmed delivery by a standard overnight or recognized international carrier or when delivered by hand, or (c) delivery in person, addressed at the following addresses (or at such other address for a party as shall be specified by like notice):


	(i)	If to the Company, to:

		SemiLEDs Corporation 1F, 3F, 4F, No. 11, Ke Jung Rd., Chunan Science Park, Chunan, Miaoli County, Taiwan, ROC Fax:+886-37-582688 Attention: Christopher Lee


	(ii)	If to the Holder, to:
		Trung Doan 3F No. 11, Ke Jung Rd., Chunan Science Park, Chunan, Miaoli County, Taiwan, ROC Fax: +886-37-582688

11.	This Note and the Loan Documents contain the entire agreement between the parties with respect to the subject matter hereof and supersede all prior agreements, written or oral, with respect thereto.

12.

This Note may be amended, superseded, cancelled, renewed or extended only by a written instrument signed by the Holder and the Company. Any provisions hereof may be waived by a party but any such waiver must be in writing signed by such party and any such waiver shall be effective only in the specific instance and for the specific purpose for which given. No delay on the part of any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of any party of any such right, power or privilege, nor any single or partial exercise of any such right, power or privilege, preclude any further exercise thereof or the exercise of any other such right, power or privilege. The rights and remedies herein provided are cumulative and are not exclusive of any rights or remedies that any party may otherwise have at law or in equity.

13.	This Note shall be governed by and construed in accordance with the laws of the Republic of China, without regard to the conflict of laws rules thereof.

14.

Any suit, action or proceeding seeking to enforce any provision of, or based on any matter arising out of or in connection with, this Note shall be brought in the Miao-li District Court, located in Miao-li, Taiwan, and each of the parties hereto hereby consents and submits to the exclusive jurisdiction of such court (and of the appropriate appellate courts therefrom) in any such suit, action or proceeding and irrevocably waives, to the fullest extent permitted by applicable laws, any objection which it may now or hereafter have to the laying of the venue of any such suit, action or proceeding in any such court or that any such suit, action or proceeding which is brought in any such court has been brought in an inconvenient forum.

15.

This Note and all of its provisions, rights and obligations shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors, assigns and legal representatives. Nothing herein express or implied is intended or shall be construed to confer upon or to give anyone other than the parties hereto and their respective heirs, legal representatives and successors any rights or benefits under or by reason of this Note and no other party shall have any right to enforce any of the provisions of this Note.

16.	If any provision of this Note for any reason shall be held to be illegal, invalid or unenforceable, such illegality shall not affect any other provision of this Note, but this Note shall be construed as if such illegal, invalid or unenforceable provision had never been included herein.

17.	Except as otherwise set forth herein, the Company and the Holder shall be responsible for their own out-of-pocket expenses incurred by them in the preparation, negotiation and performance of this Note.

18.

If this Note is mutilated, defaced, destroyed, stolen or lost, it may be replaced at the registered office of the Company for the time being upon payment by the claimant of such costs as may be incurred in connection therewith and on such terms as to evidence and indemnity as the Company may reasonably require and on payment of such reasonable fee as the Company may determine. Mutilated or defaced Note must be surrendered before replacements will be issued.

19.

Except as otherwise provided herein, the terms and conditions of this Note shall inure to the benefit of and be binding upon the respective successors and assigns of the parties whose rights or obligations hereunder are affected by such terms and conditions, except that the Company may not assign or transfer any of its rights or obligations under this Note without the prior written consent of the Holder.

[SIGNATURE PAGE FOLLOWS]

IN WITNESS WHEREOF, the undersigned has executed this Note as of the date first written above.

TheCompany:
SemiLEDs Corporation


By:		/s/ Christopher Lee
Name:		CHRISTOPHER LEE
Title:		CHIEF FINANCIAL OFFICER

EXHIBIT B

Form of Mortgage Agreement

1. 其他約定（附於土　　　地建築改良物抵押權契約書）

2. Terms and Conditions to be Appended

3. to Mortgage Setting Agreement for Land and Construction Improvements

下述約定（下稱「本約定」）茲此補充簽名欄所載之義務人旭明光電股份有限公司（下稱「抵押人」）與補充簽名欄所載之權利人Trung Doan（下稱「抵押權人」）於民國（下同）108年1月[ ]日簽訂之土地建築改良物抵押權契約書（下稱「抵押權契約書」），而構成其一部份，抵押權契約書係就座落於新竹科學工業園區苗栗縣竹南鎮科中路11號1樓至4樓之建築改良物（下稱「抵押物」），設定第二順位之抵押權予抵押權人，擔保依抵押權人與簽名欄所載之債務人SemiLEDs Corporation（下稱「債務人」）間借貸文件（定義如后），債務人對抵押權人所應負之本金、利息、遲延利息、費用、損害賠償、墊款、抵押物鑑價費用或任何款項支付或交付義務及其他費用等各項直接或或有債務，及本約定第十三條所定之其他受擔保之債務（以上合稱「擔保債務」）。

The following terms and conditions (the " Terms and Conditions ") shall form a part of and are hereby incorporated by reference into the Mortgage Agreement entered into on January 8, 2019, by and between the mortgagor as referred to in the signature column, SemiLEDs Optoelectronics Co., Ltd. (the “ Mortgagor ”) and the mortgagee as referred to in the signature column, Trung Doan, an US Citizen (the “ Mortgagee ”), granting a second-rank mortgage to the Mortgagee as security for any and all indebtedness, obligations and liabilities, direct or contingent, of any kind of the debtor as referred to in the signature column, SemiLEDs Corporation (the “ Debtor ”) to the Mortgagee, whether for principal, interest, fees, default interest, penalties, costs, expenses, reimbursements, damages, appraisal fee for the value of the Mortgaged Property (as defined below) or any other obligation to pay or delivery monies howsoever characterized, arising out of the Loan Documents (as defined below) and the enforcement thereof, and the secured indebtedness under Articles 13 hereof (collectively, the “ Indebtedness ”). Said mortgage is given with respect to buildings situated at 1F to 4F, No. 11, Ke Jung Rd., Chunan Science Park, Chunan, Miaoli County, Taiwan, R.O.C. (the “ Mortgaged Property ”).

本約定之當事人茲願遵守履行下列條款：

The parties hereof agree to observe and perform the terms and conditions set out below:

一、付款：抵押人同意，擔保債務之清償期限及方法及提前到期等均應依借貸文件（定義如后）之規定處理。

1. Payments . The Mortgagor agrees that the dates and manner of repayment of the Indebtedness and the acceleration of the Indebtedness or portions thereof shall be governed by and determined in accordance with the Loan Documents (defined below).

二、借貸文件：抵押人同意，關於擔保債務之利息、報酬、遲延利息及違約金應分別按抵押權人及債務人於108年1月[ ]日所簽署本金為美金$1,500,000元（新台幣46,650,000元）之借款契約，以及債務人於108年1月[ ]簽發予抵押權人本金美金$1,500,000元（新台幣46,650,000元）之本票（下合稱「借貸文件」）所訂之利率或標準計算，並依借貸文件訂定給付方法及時間，借貸文件亦構成本約定之一部分。

2. Loan Documents . The Mortgagor agrees that interest, fees, default interest and/or penalties with respect to the Indebtedness shall be calculated at the rates or terms specified in the loan agreement entered into by and between the Mortgagee and the Debtor dated January 8, 2019 pursuant in the principal amount of US$1,500,000 (NT$46,650,000), and the promissory note with the principal sum of US$1,500,000 (NT$46,650,000) issued by the Debtor to the Mortgagee dated January 8, 2019 (together referred to as the " Loan Documents "), and the manner and dates of repayment shall be determined in accordance with the Loan Documents, which Loan Documents are incorporated herein by reference and made a part hereof.

三、滅失：抵押權人對於抵押人就抵押物之滅失所得行使之賠償或其他請求權有權利質權，其次序與原抵押權同。

3. Destruction. With respect to the claims for the damages or other rights owned by the Mortgagor resulting from the destruction of the Mortgaged Property, a pledge over such rights in favor of the Mortgagee will be created and the priority thereof will be the same as the original mortgage.

四、登記：抵押人及抵押權人應即會同向主管機關，申請抵押物上第二順位不動產抵押權之設定登記，無論何時，抵押權人為保護其在本約定下之權益，認為有必要變更前述登記或抵押物所有權登記，而請求抵押人變更時，抵押人應即辦理。

4. Registration . The Mortgagor and the Mortgagee shall forthwith jointly file an application with the competent authority for registration of real property mortgage(s) over the Mortgaged Property with the second-rank priority. The Mortgagor shall, on demand by the Mortgagee, make such amendments to the foregoing registrations and/or to any registration of its ownership of the Mortgaged Property as the Mortgagee may from time to time deem necessary or appropriate to protect the Mortgagee‘s interests hereunder.

五、所有權：抵押人茲聲明下列為本約定及抵押權契約書簽訂日存在於抵押物上之所有（包含但不限於抵押權設定契約）之一切負擔，除所下列所列者外，抵押人聲明並擔保，抵押物為其完全且合法所有，並無他人之權利、請求、租賃權或擔保權益，如日後因抵押物或抵押人之所有權而發生糾葛時，抵押人應使抵押權人不受損害，並補償其所受損失。

5. Ownership . The Mortgagor hereby declares that the following is a full and complete listing of all encumbrances including but not limited to mortgage setting agreement, in the Mortgaged Property as of the date of execution of the Terms and Conditions and the Mortgage Agreement. Except the declared encumbrances, the Mortgagor represents and warrants to the Mortgagee that the Mortgaged Property is wholly and legally owned by the Mortgagor free and clear of any rights, claims, leases or security interests. The Mortgagor shall hold harmless and indemnify the Mortgagee from and against any dispute regarding the Mortgaged Property and/or the Mortgagor‘s ownership thereof.

建號

Building Number

類別

Types

義務人／權利人

Obligor/Obligee

擔保金額

Secured Amount

竹南鎮南科段00006-000

00079-000

Chunan Township Nan-ke Section

Nos 00006-000 and 00079-000

第一順位之抵押權

first-rank mortgage

旭明光電股份有限公司／玉山銀行

SemiLEDs Optoelectronics Co., Ltd./E.Sun Bank

新台幣77,000,000元正

NTD 77,000,000

竹南鎮南科段00077-000

00078-000

Chunan Township Nan-ke Section

Nos 00077-000 and

00078-000

第一順位之抵押權

first-rank mortgage

旭明光電股份有限公司／玉山銀行

SemiLEDs Optoelectronics Co., Ltd./E.Sun Bank

新台幣125,000,000元正

NTD 125,000,000

六、抵押物：抵押人應始終使抵押物保持完好，抵押物如有重大損壞或其價值減少時，抵押人應即以書面通知抵押權人，抵押人非先經抵押權人書面同意，不得將抵押物出賣、出租、出借、轉讓、移轉、信託，或再設定抵押等其他負擔或擔保權利或允許其他權利之存在。抵押人不得自行或允許他人對抵押物加以變更、改造，包含但不限於在空地上設置、建造任何建築物或結構體。抵押人同意，抵押權人為保護或保全其抵押權或抵押物，在法律許可最大範圍內，得（但無義務）隨時為抵押權人認為必要之行為，包括（但不限於）加派警衛及/或暫時占有抵押物等，其費用由抵押人負擔。抵押人茲聲明下列為本約定及抵押權契約書簽訂日存在於抵押物上之所有（包含但不限於租賃契約）之一切權益：

6. Mortgaged Property . The Mortgagor shall at all times maintain the Mortgaged Property in good condition. The Mortgagor shall immediately, notify the Mortgagee in writing of any substantial damage to any of the Mortgaged Property or if the value of the Mortgaged Property declines. The Mortgagor shall not, without the prior written consent of the Mortgagee, sell, lease, lend, transfer, assign, or create any trust or subordinated mortgage over or create or permit superficies or any other encumbrance or lien over any of the Mortgaged Property. The Mortgagor shall not, and shall not permit others to make any modification or alteration of any kind to the Mortgaged Property including without limitation the placing or building of any structures on bare land, without the prior written consent of the Mortgagee. The Mortgagor agrees that the Mortgagee may (but shall not be obligated to), to the greatest extent permitted by law, at any time and from time to time and at the Mortgagor's cost and expense take such actions as the Mortgagee deems necessary or appropriate to protect or preserve the Mortgaged Property and/or the Mortgagee's mortgage rights therein, including without limitation the posting of guards, and/or sequestering of the Mortgaged Property. The Mortgagor hereby declares that the following is a full and complete listing of all rights including but not limited to lease rights, in the Mortgaged Property as of the date of execution of the Terms and Conditions and the Mortgage Agreement:

類別

Types

承租人

Lessee

租賃之不動產

Leased Property

生效日

Effective Date

租賃期間

Lease Period

月租金

Monthly Rental

租賃

Lease

PRIME OPTICAL FIBER CORPORATION

The second floor and the partial space at the basement of the building

2017/10/1

10年

10 Years

自2017/10/1起

新台幣10萬元

From 2017/10/1 to 2017/7/31:

NTD 100,000

自2018/8/1起

新台幣2萬元

From 2018/8/1:

NTD 20,000

租賃

Lease

SUCCESS PRIME CORPORATION

The second floor and the partial space at the basement of the building

2018/8/1

9年2個月

Nine years and two months

新台幣98萬元

NTD 980,000

租賃

Lease

台灣半導體照明股份有限公司

TSLC Corporation

1樓部分區域

the partial space at the first floor of the building

2018/1/1

5年

5 Years

新台幣10萬元

NTD 100,000

七、稅捐：凡關於抵押物之所有權、保管、使用、維修之稅捐及費用，僅由抵押人負責，並隨時到期繳付。

7. Taxes . The Mortgagor shall be solely responsible for, and shall at all times pay when due, all taxes and all expenses incurred with respect to the custody, use and/or maintenance of the Mortgaged Property.

八、違約：下列任一情事（下稱「違約情事」），如其發生並繼續時，於有關法律最大許可範圍內，抵押權人得不論擔保債務是否到期，立即依照有關法令實行抵押權，及/或以拍賣或變賣之方式處分抵押物之全部或一部：(1)抵押人未履行其在本約定下對於抵押權人之約定或其他義務，且抵押人未能於抵押權人給予書面通知補正後十五日內（下稱「補正期限」）補正者；(2)任何抵押物被出賣、抵押、移轉、出租、出借，或以其他方法被處分，而未先徵得抵押權人之書面同意且抵押人未能於補正期限內補正者；(3)抵押物之全部或一部毀損、沒收或公用徵收，或其價值顯著減少，且抵押人未能於補正期限補正者；(4)有借貸文件所述之違約情事，或抵押權人依照其與抵押人及／或債務人間之合約或借貸文件之規定有權行使抵押權時。

抵押物拍賣或變賣時，抵押權人得投標或承買該出賣之抵押物之全部或一部，日後抵押權人就抵押物所得之孳息或為處分，概與抵押人無涉。抵押人茲明示同意，違約情事發生後，抵押權人得於有關法律最大許可範圍內，按其善意認定之當時市價，以變賣方式處分抵押物。抵押人茲承諾： (1) 與抵押權人及抵押物拍賣或變賣之買受人（下稱「買受人」）合作，簽署一切必要之文件，為一切必要之申請，以便買受人辦理抵押物所有權之登記； (2) 關於抵押物移轉予買受人，履行其一切義務。抵押物所售得之價款，應先扣付抵押權人出售抵押物所發生之ㄧ切費用及成本，再清償擔保債務及其他於本約定、抵押權契約書、借貸文件或其他合約下所積欠抵押權人之一切成本、費用及債務，不問其是否到期。抵押權人為抵押人或債務人所負擔之或有負債（下稱「或有負債」）屆期之前，抵押權人得留置上述價款之全部或一部。如其價款不足支付上述已到期或將到期之款項及抵押權人之或有負債時，抵押人及／或債務人應即補足差額，支付抵押權人。

8. Default. Upon the occurrence and during the continuation of any of the following events (“ Event of Default ”): (a) the Mortgagor shall fail to perform or observe any agreement or other obligation to the Mortgagee hereunder and such failure is not cured within fifteen (15) days after the Mortgagee sends written notice to the Mortgagor (“ Cure Period ”) ; (b) any of the Mortgaged Property shall be sold, mortgaged, transferred, leased or otherwise disposed of without the Mortgagee’s prior written consent and such circumstances are not cured within the Cure Period; (c) the Mortgaged Property or any portion thereof shall be damaged, confiscated or appropriated for public use or its value shall be substantially diminished and such circumstances are not cured within the Cure Period; (d) there shall occur an Event of Default under and as defined in the Loan Documents or the Mortgagge shall otherwise become entitled to realize upon the Mortgagged Property under the Loan Documents or any other agreement between the Mortagee and the Mortgagor or the Debtor and the Mortgagee; the Mortgagee may, without regard to whether the Indebtedness is then due, immediately foreclose the mortgage created hereunder in accordance with applicable laws and regulations and/or, to the greatest extent permitted by applicable laws, dispose of the whole or any part of the Mortgaged Property either at public auction or by private sale. At any such sale the Mortgagee may bid for or purchase the whole or part of the Mortgaged Property so sold without liability to account to the Mortgagor or the Debtor with respect to any subsequent income earned therefrom or the disposal thereof.

The Mortgagor hereby expressly agrees and consents that, to the greatest extent permitted by applicable laws, after the occurrence of any Event of Default, the Mortgagee may dispose of the Mortgaged Property by private sale at the then current market value thereof, as determined in good faith by the Mortgagee. The Mortgagor hereby undertakes that it shall (i) cooperate with the Mortgagee and the party or parties which purchase the Mortgaged Property through public auction or by private sale (“ the Purchaser ”) by executing all documents and filing all applications necessary for the registration of such Purchaser as owner of the Mortgaged Property and (ii) fulfill any and all obligations arising from or in connection with the transfer of the Mortgaged Property to the Purchaser. The proceeds from any sale of the Mortgaged Property shall, after deduction of all costs and expenses incurred by the Mortgagee in making such sale, be applied to the repayment of the Indebtedness and all other obligations, costs and expenses owing to the Mortgagee hereunder, under the Loan Documents or otherwise, whether or not then due, and/or may be held in whole or in part by the Mortgagee pending the expiry of any contingent liability undertaken by the Mortgagee for the Mortgagor ' s or the Debtor ' s account (“ Contingent Obligations ”). In the event that such sales proceeds are insufficient to cover all sums due or to become due to the Mortgagee, plus the Mortgagee ' s potential liability under the Contingent Obligations, the Mortgagor or the Debtor shall immediately pay to the Mortgagee the balance thereof.

九、如擔保債務已屆清償期而未為清償時，抵押物之所有權應依民法第八百七十三條之ㄧ規定移屬於抵押權人，抵押權人毋須申請法院拍賣或以拍賣或變賣之方式處分抵押物之全部或一部，抵押人並同意配合抵押權人辦理前述所有權移屬之相關登記事宜，並負擔全部相關費用。

9. If the Indebtedness is due and unpaid, the ownership of the Mortgaged Property shall be transferred to and belonged to the Mortgagee in accordance with Article 873-1 of the Republic of China Civil Code. In this circumstance, the Mortgagee needs not to petition to the court for auction or dispose of the whole or any part of the Mortgaged Property either at public auction or by private sale. The Mortgagor agrees to cooperate with the Mortgagee to complete all matters relating to the registration of the above arrangement at the Mortgagor's own expenses.

十、抵押權人請求抵押人依前項約定為抵押物所有權之移轉時，抵押人同意由抵押權人指定之第三人就抵押物之價值進行鑑價，並願受該鑑價結果之約束，且抵押人同意配合抵押權人辦理所有權移轉之所有登記及其他相關事宜及程序，並負擔全部相關費用，絕不藉故遲延，並願就抵押人遲延或未能移轉抵押物所有權致生抵押權人之損害負損害賠償責任。

10. If the Mortgagee requests the Mortgagor to transfer the ownership of the Mortgaged Property in accordance with the preceding paragraph, the Mortgagor agrees that the valuation of the Mortgaged Property shall be done by the appraiser appointed by the Mortgagee and the appraisal report prepared by such appraiser is conclusive and binding upon the Mortgagor. The Mortgagor also agrees to cooperate with the Mortgagee to complete all matters relating to the registration of the transfer of the ownership of the Mortgaged Property to the Mortgagee at the Mortgagor's own expenses without any delay of such transfer. The Mortgagor shall be reliable for the damages suffered by the Mortgagee resulting from any delay or failure of the transfer of the ownership of the Mortgaged Property by the Mortgagor.

十一、抵押權範圍：本抵押權效力及於抵押物上之一切權益。

11. Coverage . This mortgage shall cover all rights and interests in the Mortgaged Property.

十二、其他債權人之主張：抵押人聲明此項抵押權之設定行為不致損害其他債權人之債權，亦即此項設定予抵押權人之抵押權絕不會發生被抵押人之其他債權人聲請法院撤銷之危險。

12. Claims of Other Creditors . The Mortgagor declares the registration of this Mortgaged Property will in no way harm the interests of the Mortgagor ' s other creditors and that the Mortgaged Property will not be the subject of an action by any of the Mortgagor ' s creditors to have the courts revoke this Mortgage.

十三、費用：抵押權人所墊付抵押人依本約定應支付之費用、或抵押人依本約定應償還之費用或抵押物鑑價費用，均屬本約定之擔保債務，由本約定之抵押予以擔保。

13. Expenses . Any expenses and fees payable by the Mortgagor hereunder which are advanced by the Mortgagee, all fees reimbursable by the Mortgagor hereunder and the fees for evaluation of the value of the Mortgaged Property, shall be deemed Indebtedness for all purposes hereof and shall be secured by the mortgages created hereunder.

十四、轉讓：本約定之效力及於抵押人之繼承人及受讓人、法定代理人、受託人、破產管理人、重整人及清算人，但抵押人非先經抵押權人書面同意，不得轉讓其於本約定及抵押權契約書下之權利義務。抵押權人得將抵押權人於本約定及抵押權契約書下之權利讓與擔保債務之受讓人，毋須通知抵押人或經其同意。

14. Assignment . The Terms and Conditions shall be binding upon the respective successor(s), assigns, legal representatives, the trustees, the bankruptcy administrators, the reorganizers and the liquidators of the Mortgagor; provided that the Mortgagor may not assign its rights or obligations under the Terms and Conditions and the Mortgage Agreement without the prior written consent of the Mortgagee. The Mortgagee may, without notice to, or the consent of, the Mortgagor, assign its rights under the Terms and Conditions and the Mortgage Agreement to any assignee of the Indebtedness.

十五、準據法：本約定、抵押權契約書及依其設定之抵押權，應依照中華民國之法律解釋，但不包括選法衝突時之適用原則。關於本約定及抵押權契約書之爭議，立約雙方同意由台灣苗栗地方法院管轄。抵押權人為保障其於本約定及抵押權契約書下之權利及行使抵押權所生之律師費、訴訟費及其他費用，抵押權人請求抵押人償還時，抵押人應立即償還。

15. Governing Law . The Terms and Conditions, the Mortgage Agreement and the mortgages created hereunder shall be construed in accordance with the laws of the Republic of China, without regard to principles of conflicts. The parties hereto agree that the Miao-li District Court shall be the court having jurisdiction over the Terms and Conditions and the Mortgage Agreement. The Mortgagor shall reimburse the Mortgagee, on demand, for all lawyers fees, court fees and other costs incurred by the Mortgagee in protection its rights under the Terms and Conditions and the Mortgage Agreement and in realizing on the Mortgaged Property.

十六、其他事項：本約定及抵押權契約書未盡事宜，悉依中華民國有關法令處理，但不包括選法衝突時之適用原則。

16. Other Matters . All matters not specifically covered by the Terms and Conditions and the Mortgage Agreement shall be governed by relevant laws and regulations in the Republic of China, without regard to principles of conflicts of law thereunder.

十七、其他文件：為實行本約定及抵押權契約書之意旨，抵押人願更為其他行為，簽署其他文件，並以其他方式與抵押權人充分合作。

17. Other Documents . The Mortgagor agrees to do all such further acts, to execute all such further documents and to otherwise fully cooperate with the Mortgagee in carrying out the intent of the Terms and Conditions and the Mortgage Agreement.

十八、非放棄：抵押權人若遲延或怠於行使本約定或抵押權契約書下之任何權利，不得視為抵押權人放棄該權利。抵押權人對本約定或抵押權契約書下之任何權利所為之放棄，需以書面為之，且僅限於放棄其明示之部分，並不影響其他部份或其他權利之行使。

18. Non Waiver . Any failure on the part of the Mortgagee to insist on performance of any provision of the Terms and Conditions or the Mortgage Agreement shall not constitute a waiver thereof or of any other provision contained in the Terms and Conditions or the Mortgage Agreement. Any waiver of the provision of the Terms and Conditions or the Mortgage Agreement by the Mortgagee shall be valid only if in writing and shall be strictly limited to the waiver stated therein and shall not constitute a waiver of any other provision of the Terms and Conditions or the Mortgage Agreement.

十九、效力：於有關法律最大許可範圍內，本約定及抵押權契約書下抵押人之義務，完全有效，不因下列情事而受影響，亦不得因此而予終止或解除：(1)借貸文件或債務人與抵押權人簽訂之其他文件契據有修改、變更、或轉讓時：(2)抵押權人行使或未行使其在本約定或其與債務人簽訂之文件契據下之權利、職權或救濟時；(3)關於本約定或債務人與抵押權人簽訂之文件契據，有放棄主張（或行使）、同意、期限延展、縱容或其他行為或不行為時；或(4)債務人破產，重整或和解時。

19. Validity , To the greatest extent permitted by applicable law, the obligations of the Mortgagor under the Terms and Conditions and the Mortgage Agreement shall remain in full force and effect without regard to and shall not be terminated, discharged, impaired or affected by (i) any amendment, modification or assignment of the Loan Documents or any other document or instrument executed by and between the Debtor and the Mortgagee, (ii) any exercise or enforcement or non-exercise or non-enforcement by the Mortgagee of any right, power or remedy under the Terms and Conditions or any document or instrument executed by and between the Debtor and the Mortgagee, (iii) any waiver, consent, extension of time, indulgence or other action or inaction in respect of the Terms and Conditions or any document or instrument executed by and between the Debtor and the Mortgagee or (iv) the bankruptcy, reorganization or composition of the Debtor.

二十、通知：有關本約定及抵押權契約書之連絡通訊、請求或通知，應送交抵押人或債務人者，如由抵押權人以電話通知、以傳真發送或以書面而派人送遞或以普通郵件寄發至抵押人或債務人簽名欄所列之電話號碼、傳真號碼或地址，或抵押人或債務人另行以書面提供予抵押權人之電話號碼、傳真號碼或地址，即視為已依法送達。任何對抵押權人之連絡通訊、請求或通知，應以書面或傳真為之（以傳真方式發送者應另以書面確認之），並送達後列之抵押權人地址或傳真號碼（或其他抵押權人隨時以書面通知指定之地址或傳真號碼），且於抵押權人確實收到後，始生效力。

20. Notices . Any communication, demand or notice to the Mortgagor or the Debtor with respect to the Terms and Conditions and the Mortgage Agreement shall be, deemed duly and properly made or given if made or given by telephone, fax or in writing delivered by hand or mailed by ordinary mail to the Mortgagor or the Debtor at the telephone number, address or fax number indicated after the Mortgagor’s or the Debtor's signature hereon, or at such other telephone number, address or fax number as the Mortgagor or the Debtor may designate by notice to the Mortgagee in writing. Any communication, demand or notice to the Mortgagee shall be made in writing or by fax (to be confirmed in writing) and delivered to the address or dispatched to the fax number of the Mortgagee as set out below (or to such other address or fax number as the Mortgagee may designate from time to time by notice in writing) and said notice to the Mortgagee shall be effective only upon the Mortgagee’s actual receipt thereof.

二十一、塗銷登記：於借貸文件下之所有交易皆已完全終止且擔保債務皆已完全清償後，抵押權人應即發給清償證明並協助抵押人辦理抵押權塗銷登記，屆時，本約定及土地建築改良物抵押權契約書並即終止。

the Mortgagor to de-register the mortgage created under the Terms and Conditions and the Mortgage Agreement whereupon the Terms and Conditions and the Mortgage Agreement shall terminate.

二十二、登記費用：債務人及抵押人茲同意由其共同連帶負擔各項登記規費及辦理抵押設定之代辦費用。

22. Registration Fee . The Debtor and the Mortgagor hereby agree that all registration fees and other expenses incurred with respect to the registration of the Mortgaged Property shall be jointly and severally borne by the Debtor and the Mortgagor.

二十三、語言：本約定書得以中文及英文做成。但中文版與英文版之內容不一致時，以英文版為準。

23. Language , The Terms and Conditions may be executed in both Chinese and English. In the event of any discrepancy between the Chinese and English texts hereof and thereof, the English version shall govern.

二十四、存續期間：本約定書至擔保債務完全清償之日止失其效力。

24. Validity Period . This Agreement shall remain in force until the Indebtedness has been repaid.

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為茲證明，雙方當事人於首揭日期簽署本合約。

In WITNESS WHEREOF, the parties hereof have executed this Terms and Conditions as of the date first written above.

抵押權人Mortgagee :
Trung Doan

By:		/s/ Trung Doan
Name:		TRUNG DOAN
Title:		Self

債務人Debtor：
SemiLEDs Corporation

By:	/s/ Christopher Lee
姓名 Name:		CHRISTOPHER LEE
職稱 Title:		CHIEF FINANCIAL OFFICER

抵押人Mortgagor：
旭明光電股份有限公司(SemiLEDs Optoelectronics Co., Ltd.)

By:	/s/ Chris Wang
姓名 Name:		Chris Wang
職稱 Title:		Vice President

Exhibit 10.2

LOAN AGREEMENT

RECITALS

A. WHEREAS , the Borrower desires to borrow and incur debt from the Lender in the amount of One Million Five Hundred Thousand Dollars ($1,500,000.00) (USD)

B. WHEREAS , the Borrower also desires to concurrently borrow and incur debt from Trung Doan, an individual, in the amount of One Million Five Hundred Thousand Dollars ($1,500,000.00) (USD) (“ Doan Loan ”) under the terms of a separate loan agreement, note, and mortgage and related documents and instruments (“ Doan Loan Documents ”).

C. WHEREAS , the purpose of the loan from Lender and the Doan Loan, which in the aggregate are for Three Million Dollars ($3,000,000.00) (USD), is to allow Borrower to return certain deposit to Formosa Epitaxy Incorporation relating to certain agreement dated as of December 2015 by and between Borrower and Formosa Epitaxy Incorporation.

D. WHEREAS , the Lender hereby agrees to extend the loan facility agreed to herein to the Borrower and the Borrower hereby agrees to borrow the same from the Lender on the terms set forth herein.

NOW, THEREFORE , for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows:

DEFINITION .

1.1 Defined Terms .

“ Agreement ” shall have the meaning set forth in the preamble of this Agreement.

“ Agreement Date ” shall have the meaning set forth in the preamble of this Agreement.

“ Borrower ” shall have the meaning set forth in the preamble of this Agreement.

“ Business Day ” means a day that is not a Saturday, Sunday or other day on which commercial banking institutions in the US or ROC are authorized or required by Applicable Law to be closed.

“ Confidential Information ” shall have the meaning set forth in Section 9.15(a) of this Agreement.

“ Doan Loan ” has the meaning set forth in recital B to this Agreement.

“ Doan Loan Documents ” has the meaning set forth in recital B to this Agreement.