Blueprint
UNITED
STATES
SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C.
20549
FORM
10-Q
/X/ QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF
1934
For the quarterly
period ended February 28, 2018
OR
/ / 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: 000-22893
AEHR TEST
SYSTEMS
(Exact name of
Registrant as specified in its charter)
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California
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94-2424084
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(State or other
jurisdiction of
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(I.R.S. Employer
Identification No.)
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incorporation or
organization)
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400 Kato
Terrace
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Fremont,
CA
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94539
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(Address of
principal
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(Zip
Code)
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executive
offices)
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(510)
623-9400
(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 as 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
and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted 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 and post such files).
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange
Act.
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Large accelerated filer
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☐
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Accelerated filer
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☐
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Non-accelerated
filer
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☐ (Do not check if a smaller reporting
company)
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Smaller reporting company
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☒
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Emerging
growth company
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☐
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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
☒
Number
of shares of the registrant’s common stock, $0.01 par value,
outstanding as of March 30, 2018 was 21,953,730.
AEHR
TEST SYSTEMS
FORM
10-Q
FOR THE
QUARTER ENDED FEBRUARY 28, 2018
INDEX
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PART
I. FINANCIAL INFORMATION
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ITEM
1. Financial Statements (Unaudited)
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Condensed
Consolidated Balance Sheets at February 28, 2018 and May 31,
2017
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4
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Condensed
Consolidated Statements of Operations for the Three and Nine Months
Ended February 28, 2018 and
2017
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5
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Condensed
Consolidated Statements of Comprehensive Income (Loss) for the
Three and Nine Months Ended February
28, 2018 and 2017
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6
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Condensed
Consolidated Statements of Cash Flows for the Nine Months
Ended February
28, 2018 and 2017
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7
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Notes
to Condensed Consolidated Financial Statements
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8
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ITEM
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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23
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ITEM
3. Quantitative and Qualitative Disclosures About Market
Risks
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28
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ITEM
4. Controls and Procedures
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29
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PART
II. OTHER INFORMATION
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ITEM
1. Legal Proceedings
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30
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ITEM
1A. Risk Factors
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30
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ITEM
2. Unregistered Sales of Equity Securities and Use of
Proceeds
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30
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ITEM
3. Defaults Upon Senior Securities
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30
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ITEM
4. Mine Safety Disclosures
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30
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ITEM
5. Other Information
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30
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ITEM
6. Exhibits
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31
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SIGNATURES
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32
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PART I.
FINANCIAL INFORMATION
Item
1. FINANCIAL STATEMENTS
(Unaudited)
AEHR
TEST SYSTEMS
CONDENSED
CONSOLIDATED BALANCE SHEETS
(in
thousands, except per share data)
(unaudited)
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ASSETS
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(1)
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Current
assets:
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Cash
and cash equivalents
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$9,077
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$17,803
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Short-term
investments
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5,986
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--
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Accounts
receivable, net
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4,673
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4,010
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Inventories
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9,368
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6,604
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Prepaid
expenses and other current assets
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1,339
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961
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Total
current assets
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30,443
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29,378
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Property
and equipment, net
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1,205
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1,419
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Other
assets
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324
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95
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Total
assets
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$31,972
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$30,892
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LIABILITIES
AND SHAREHOLDERS' EQUITY
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Current
liabilities:
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Accounts
payable
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$2,638
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$2,808
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Accrued
expenses
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1,643
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1,609
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Customer
deposits and deferred revenue, short-term
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2,310
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3,467
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Total
current liabilities
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6,591
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7,884
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Long-term
debt
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6,110
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6,110
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Deferred
revenue, long-term
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497
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104
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Total
liabilities
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13,198
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14,098
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Aehr
Test Systems shareholders' equity:
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Common
stock, $0.01 par value:
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Authorized:
75,000 shares; Issued
and outstanding: 21,943 shares and 21,340 shares at February
28, 2018 and May 31, 2017, respectively
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219
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213
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Additional
paid-in capital
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82,671
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81,128
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Accumulated
other comprehensive income
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2,344
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2,249
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Accumulated
deficit
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(66,440)
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(66,777)
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Total
Aehr Test Systems shareholders' equity
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18,794
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16,813
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Noncontrolling
interest
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(20)
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(19)
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Total
shareholders' equity
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18,774
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16,794
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Total
liabilities and shareholders' equity
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$31,972
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$30,892
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(1)
The condensed
consolidated balance sheet at May 31, 2017 has been derived
from
the audited consolidated financial statements at that
date.
The
accompanying notes are an integral part of these
condensed
consolidated financial statements.
AEHR
TEST SYSTEMS
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in
thousands, except per share data)
(unaudited)
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Net
sales
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$7,393
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$2,681
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$22,286
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$12,215
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Cost
of sales
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4,217
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2,178
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13,061
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8,043
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Gross
profit
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3,176
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503
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9,225
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4,172
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Operating
expenses:
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Selling,
general and administrative
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1,829
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1,724
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5,474
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5,147
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Research
and development
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1,040
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1,248
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3,085
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3,348
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Total
operating expenses
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2,869
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2,972
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8,559
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8,495
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Income
(loss) from operations
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307
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(2,469)
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666
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(4,323)
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Interest
expense, net
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(98)
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(178)
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(310)
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(537)
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Other
(expense) income, net
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(33)
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(2)
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(100)
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38
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Income
(loss) before income tax benefit
(expense)
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176
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(2,649)
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256
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(4,822)
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Income
tax benefit (expense)
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91
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(2)
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81
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(36)
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Net
income (loss)
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267
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(2,651)
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337
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(4,858)
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Less:
Net income attributable to the noncontrolling
interest
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--
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--
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--
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--
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Net income (loss)
attributable to Aehr Test Systems
common shareholders
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$267
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$(2,651)
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$337
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$(4,858)
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Net
income (loss) per share
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Basic
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$0.01
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$(0.16)
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$0.02
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$(0.32)
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Diluted
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$0.01
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$(0.16)
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$0.01
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$(0.32)
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Shares
used in per share calculations:
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Basic
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21,832
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16,672
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21,631
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15,411
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Diluted
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22,641
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16,672
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22,838
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15,411
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The
accompanying notes are an integral part of these
condensed
consolidated financial statements.
AEHR
TEST SYSTEMS
CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in
thousands, unaudited)
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Net income
(loss)
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$267
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$(2,651)
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$337
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$(4,858)
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Other comprehensive
income (loss), net of tax:
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Net
change in unrealized loss on investments
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--
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--
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(3)
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--
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Net
change in cumulative translation adjustments
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37
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2
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97
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(46)
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Total comprehensive
income (loss)
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304
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(2,649)
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431
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(4,904)
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Less: Comprehensive
(loss) income attributable to the
noncontrolling interest
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(1)
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--
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(1)
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1
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Comprehensive
income (loss), attributable
to Aehr
Test Systems common shareholders
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$305
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$(2,649)
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$432
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$(4,905)
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The
accompanying notes are an integral part of these
condensed
consolidated financial statements.
AEHR
TEST SYSTEMS
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in
thousands)
(unaudited)
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Cash
flows from operating activities:
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Net
income (loss)
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$337
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$(4,858)
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Adjustments to reconcile net income (loss) to net cash used
in operating activities:
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Stock-based
compensation expense
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822
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791
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(Recovery
of) provision for doubtful accounts
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(3)
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16
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Amortization
of debt issuance costs
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--
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133
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Depreciation
and amortization
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300
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195
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Accretion
of investment discount
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(24)
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--
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Changes
in operating assets and liabilities:
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Accounts
receivable
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(527)
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(1,119)
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Inventories
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(2,392)
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197
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Prepaid
expenses and other current assets
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(603)
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(100)
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Accounts
payable
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(268)
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726
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Accrued
expenses
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31
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325
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Customer
deposits and deferred revenue
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(764)
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(797)
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Income
taxes payable
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(5)
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23
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Net
cash used in operating activities
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(3,096)
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(4,468)
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Cash
flows from investing activities:
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Purchases
of investments
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(5,965)
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--
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Purchases
of property and equipment
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(458)
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(219)
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Net
cash used in investing activities
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(6,423)
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(219)
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Cash
flows from financing activities:
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Proceeds from issuance of common stock under private
placement, net of issuance costs
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--
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5,299
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Proceeds
from issuance of common stock under employee plans, net of
taxes paid related to share settlement of equity
awards
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727
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510
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Net
cash provided by financing activities
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727
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5,809
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Effect
of exchange rates on cash and cash equivalents
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66
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(22)
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Net (decrease) increase in cash and
cash
equivalents
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(8,726)
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1,100
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Cash
and cash equivalents, beginning of period
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17,803
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939
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Cash
and cash equivalents, end of period
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$9,077
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$2,039
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Supplemental
disclosure of non-cash flow information:
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Fair
value of common stock issued to settle accounts payable
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$--
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$323
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Transfer
of property and equipment to inventories
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$372
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$372
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The
accompanying notes are an integral part of these
condensed
consolidated financial statements.
AEHR
TEST SYSTEMS
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1.
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCCOUNTING
POLICIES
The
accompanying financial information has been prepared by Aehr Test
Systems, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission, or SEC. Certain information
and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting
principles in the United States (GAAP) have been condensed or
omitted pursuant to such rules and regulations.
In
the opinion of management, the unaudited condensed consolidated
financial statements for the interim periods presented have been
prepared on a basis consistent with the May 31, 2017 audited
consolidated financial statements and reflect all adjustments,
consisting of normal recurring adjustments, necessary for a fair
presentation of the condensed consolidated financial position and
results of operations as of and for such periods indicated. These
unaudited condensed consolidated financial statements and notes
thereto should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the fiscal year ended May 31, 2017.
Results for the interim periods presented herein are not
necessarily indicative of results which may be reported for any
other interim period or for the entire fiscal year.
PRINCIPLES
OF CONSOLIDATION. The condensed consolidated financial statements
include the accounts of Aehr Test Systems and its subsidiaries
(collectively, the "Company"). All significant intercompany
balances have been eliminated in consolidation. For the
Company’s majority owned subsidiary, Aehr Test Systems Japan
K.K., the noncontrolling interest of the portion the Company does
not own was reflected on the Condensed Consolidated Balance Sheets
in Shareholders’ Equity and in the Condensed Consolidated
Statements of Operations.
ACCOUNTING
ESTIMATES. The preparation of financial statements in conformity
with 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
financial statements and the reported amounts of revenues and
expenses during the reporting period. Estimates are used to account
for sales and revenue allowances, the allowance for doubtful
accounts, inventory valuations, income taxes, stock-based
compensation expenses, and product warranties, among others. The
Company bases its estimates on historical experience and on various
other assumptions that it believes to be reasonable under the
circumstances. Actual results could differ materially from those
estimates.
REVENUE
RECOGNITION. The Company recognizes revenue upon the shipment of
products or the performance of services when: (1) persuasive
evidence of the arrangement exists; (2) goods or services have been
delivered; (3) the price is fixed or determinable; and (4)
collectibility is reasonably assured. When a sales agreement
involves multiple deliverables, such as extended support
provisions, training to be supplied after delivery of the systems,
and test programs specific to customers’ routine
applications, the multiple deliverables are evaluated to determine
the unit of accounting. Judgment is required to properly identify
the accounting units of multiple element transactions and the
manner in which revenue is allocated among the accounting units.
Judgments made, or changes to judgments made, may significantly
affect the timing or amount of revenue recognition.
Revenue
related to the multiple elements is allocated to each unit of
accounting using the relative selling price hierarchy. Consistent
with accounting guidance, the selling price is based upon vendor
specific objective evidence (VSOE). If VSOE is not available, third
party evidence (TPE) is used to establish the selling price. In the
absence of VSOE or TPE, estimated selling price is
used.
During
the first quarter of fiscal 2013, the Company entered into an
agreement with a customer to develop a next generation system, and
the Company shipped the first system in July 2016. The project
identifies multiple milestones with values assigned to each. The
consideration earned upon achieving the milestone is required to
meet the following conditions prior to recognition: (i) the value
is commensurate with the vendor’s performance to meet the
milestone, (ii) it relates solely to past performance, (iii) and it
is reasonable relative to all of the deliverables and payment terms
within the arrangement. Revenue is recognized for the milestone
upon acceptance by the customer.
The
Company recognizes revenue in certain circumstances before physical
delivery has occurred. In these arrangements, among other things,
risk of ownership has passed to the customer, the customer has made
a written fixed commitment to purchase the products, the customer
has requested the products be held for future delivery as scheduled
and designated by them, and no additional performance obligations
exist by the Company. For these transactions, the products are
segregated from inventory and normal billing and credit terms
granted.
Sales
tax collected from customers is not included in net sales but
rather recorded as a liability due to the respective taxing
authorities. Provisions for the estimated future cost of warranty
and installation are recorded at the time the products are
shipped.
Royalty-based
revenue related to licensing income from performance test boards
and burn-in boards is recognized upon the earlier of the receipt by
the Company of the licensee’s report related to its usage of
the licensed intellectual property or upon payment by the
licensee.
The
Company’s terms of sales with distributors are generally FOB
shipping point with payment due within 60 days. All products go
through in-house testing and verification of specifications before
shipment. Apart from warranty reserves, credits issued have not
been material as a percentage of net sales. The Company’s
distributors do not generally carry inventories of the
Company’s products. Instead, the distributors place orders
with the Company at or about the time they receive orders from
their customers. The Company’s shipment terms to our
distributors do not provide for credits or rights of return.
Because the Company’s distributors do not generally carry
inventories of our products, they do not have rights to price
protection or to return products. At the time the Company ships
products to the distributors, the price is fixed. Subsequent to the
issuance of the invoice, there are no discounts or special terms.
The Company does not give the buyer the right to return the product
or to receive future price concessions. The Company’s
arrangements do not include vendor consideration.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES. The Company’s significant
accounting policies are disclosed in the Company’s Annual
Report on Form 10-K for the year ended May 31, 2017. There have been no
significant changes in our significant accounting policies during
the nine months ended February 28, 2018.
2.
STOCK-BASED COMPENSATION
Stock-based
compensation expense consists of expenses for stock options,
restricted stock units, or RSUs, and employee stock purchase plan,
or ESPP, purchase rights. Stock-based compensation cost for stock
options and ESPP purchase rights are measured at each grant date,
based on the fair value of the award using the Black-Scholes option
valuation model, and is recognized as expense over the
employee’s requisite service period. This model was developed
for use in estimating the value of publicly traded options that
have no vesting restrictions and are fully transferable. The
Company’s employee stock options have characteristics
significantly different from those of publicly traded options. For
RSUs, stock-based compensation cost is based on the fair value of
the Company’s common stock at the grant date. All of the
Company’s stock-based compensation is accounted for as equity
instruments. See Notes 11 and 12 in the Company’s Annual
Report on Form 10-K for fiscal 2017 filed on August 29, 2017 for
further information regarding the 2016 Equity Incentive Plan and
the Amended and Restated 2006 Employee Stock Purchase
Plan.
The
following table summarizes the stock-based compensation expense for
the three and nine months ended February 28, 2018 and 2017 (in
thousands):
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Stock-based
compensation in the form of employee stock options, RSUs and ESPP
purchase rights, included in:
|
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|
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Cost
of sales
|
$28
|
$22
|
$107
|
$69
|
|
Selling,
general and administrative
|
162
|
187
|
530
|
575
|
|
Research
and development
|
52
|
48
|
185
|
147
|
|
Total
stock-based compensation
|
$242
|
$257
|
$822
|
$791
|
As
of February 28, 2018 and 2017, there were no stock-based
compensation costs capitalized as part of inventory.
During
the three months ended February 28, 2018 and 2017, the Company
recorded stock-based compensation related to stock options and RSUs
of $206,000 and $232,000, respectively. During the nine months
ended February 28, 2018 and 2017, the Company recorded stock-based
compensation related to stock options and RSUs of $614,000 and
$695,000, respectively.
As
of February 28, 2018, the total compensation cost related to
unvested stock-based awards under the Company’s 2016 Equity
Incentive Plan, but not yet recognized, was approximately
$1,120,000, which is net of estimated forfeitures of $3,000. This
cost will be amortized on a straight-line basis over a weighted
average period of approximately 2.4 years.
During
the three months ended February 28, 2018 and 2017, the Company
recorded stock-based compensation related to the ESPP of $36,000
and $25,000, respectively. During the nine months ended February
28, 2018 and 2017, the Company recorded stock-based compensation
related to the ESPP of $208,000 and $96,000, respectively. The
increase in the three and nine months ended February 28, 2018 is
primarily due to employees increasing their ESPP elections during
the current fiscal year.
As
of February 28, 2018, the total compensation cost related to
purchase rights under the ESPP but not yet recognized was
approximately $13,000. This cost will be amortized on a
straight-line basis over a weighted average period of approximately
0.1 years.
Valuation Assumptions
Valuation
and Amortization Method. The Company estimates the fair value of
stock options granted using the Black-Scholes option valuation
model and a single option award approach. The fair value under the
single option approach is amortized on a straight-line basis over
the requisite service periods of the awards, which is generally the
vesting period.
Expected
Term. The Company’s expected term represents the period that
the Company’s stock-based awards are expected to be
outstanding and was determined based on historical experience,
giving consideration to the contractual terms of the stock-based
awards, vesting schedules and expectations of future employee
behavior as evidenced by changes to the terms of its stock-based
awards.
Volatility.
Volatility is a measure of the amounts by which a financial
variable such as stock price has fluctuated (historical volatility)
or is expected to fluctuate (expected volatility) during a period.
The Company uses the historical volatility for the past four or
five years, which matches the expected term of most of the option
grants, to estimate expected volatility. Volatility for each of the
ESPP’s four time periods of six months, twelve months,
eighteen months, and twenty-four months is calculated separately
and included in the overall stock-based compensation cost
recorded.
Risk-Free
Interest Rate. The Company bases the risk-free interest rate used
in the Black-Scholes option valuation model on the implied yield in
effect at the time of option grant on U.S. Treasury zero-coupon
issues with a remaining term equivalent to the expected term of the
stock awards including the ESPP.
Fair
Value. The fair value of the Company’s stock options granted
to employees for the three months ended February 28, 2018 and nine
months ended February 28, 2018 and 2017 were estimated using the
following weighted average assumptions in the Black-Scholes option
valuation model:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
term (in years)
|
4
|
4
|
4
|
|
Volatility
|
0.73
|
0.77
|
0.81
|
|
Risk-free
interest rates
|
2.31%
|
1.81%
|
1.02%
|
|
Weighted
average grant date fair value
|
$1.53
|
$2.17
|
$1.09
|
There
were no stock options granted to employees for the three months
ended February 28, 2017.
There
were no ESPP purchase rights granted during the three and nine
months ended February 28, 2018 and 2017. Total ESPP shares issued
during the nine months ended February 28, 2018 and 2017 were
116,000 and 65,000 shares, respectively. As of February 28, 2018,
there were 265,000 ESPP shares available for issuance.
The
following table summarizes the Company’s stock option and
RSU transactions during
the three and nine months ended February 28, 2018 (in
thousands):
|
|
|
|
|
|
|
Balance,
May 31, 2017
|
2,169
|
|
|
|
|
Options
granted
|
(224)
|
|
RSUs
granted
|
(64)
|
|
|
|
|
Balance,
August 31, 2017
|
1,881
|
|
|
|
|
Options
granted
|
(41)
|
|
|
|
|
Balance,
November 30, 2017
|
1,840
|
|
|
|
|
Options
granted
|
(19)
|
|
RSUs
granted
|
--
|
|
Shares
cancelled
|
13
|
|
Plan
shares expired
|
(2)
|
|
|
|
|
Balance,
February 28, 2018
|
1,832
|
The
following table summarizes the stock option transactions during the
three and nine months ended February 28, 2018 (in thousands, except
per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
May 31, 2017
|
3,074
|
$1.73
|
$8,763
|
|
|
|
|
|
|
Options
granted
|
224
|
$3.93
|
|
|
Options
exercised
|
(189)
|
$1.23
|
|
|
|
|
|
|
|
Balances,
August 31, 2017
|
3,109
|
$1.92
|
$4,612
|
|
|
|
|
|
|
Options
granted
|
41
|
$3.46
|
|
|
Options
exercised
|
(132)
|
$1.46
|
|
|
|
|
|
|
|
Balances,
November 30, 2017
|
3,018
|
$1.96
|
$2,230
|
|
|
|
|
|
|
Options
granted
|
19
|
$2.76
|
|
|
Options
cancelled
|
(13)
|
$2.71
|
|
|
Options
exercised
|
(141)
|
$0.89
|
|
|
|
|
|
|
|
Balances,
February 28, 2018
|
2,883
|
$2.01
|
$1,486
|
|
|
|
|
|
|
Options fully vested and expected to vest at February 28,
2018
|
2,849
|
$2.01
|
$1,480
|
The
options outstanding and exercisable at February 28, 2018 were in
the following exercise price ranges (in thousands, except per share
data):
|
|
|
|
|
|
|
|
|
|
Number
Outstanding Shares
|
Weighted
Average Remaining Contractual Life (Years)
|
Weighted
Average Exercise Price
|
Number
Exercisable Shares
|
Weighted
Average Remaining Contractual Life (Years)
|
Weighted
Average Exercise Price
|
Aggregate
Intrinsic Value
|
|
$0.59-$0.97
|
324
|
1.02
|
$0.66
|
324
|
1.02
|
$0.66
|
|
|
$1.09-$1.36
|
605
|
1.88
|
$1.28
|
605
|
1.88
|
$1.28
|
|
|
$1.68-$2.06
|
486
|
4.48
|
$1.74
|
295
|
3.89
|
$1.79
|
|
|
$2.10-$2.81
|
1,204
|
3.79
|
$2.45
|
1,012
|
3.74
|
$2.47
|
|
|
$3.46-$3.93
|
264
|
6.41
|
$3.86
|
46
|
6.45
|
$3.79
|
|
|
$0.59-$3.93
|
2,883
|
3.43
|
$2.01
|
2,282
|
2.93
|
$1.83
|
$1,351
|
The
total intrinsic value of options exercised during the three and
nine months ended February 28, 2018 was $214,000 and $959,000,
respectively. The total intrinsic value of options exercised during
the three and nine months ended February 28, 2017 was $154,000 and
$564,000, respectively. The weighted average remaining contractual
life of the options exercisable and expected to be exercisable at
February 28, 2018 was 3.42 years.
There
were no RSUs granted to employees for the three months ended
February 28, 2018 or 2017. During the nine months ended February
28, 2018, RSUs for 64,000 shares were granted. The market value on
the date of the grant of these RSUs was $3.93 per share. During the
nine months ended February 28, 2017, RSUs for 157,000 shares were
granted. The market value on the date of the grant of these RSUs
was $1.78 per share. 4,000 and 11,000 RSUs became
fully vested during the three and nine months ended February 28,
2018, respectively. 85,000 RSUs were unvested at February 28, 2018.
The intrinsic value of the unvested RSUs at February 28, 2018 was
$194,000.
3.
EARNINGS PER SHARE
Basic
earnings per share is determined using the weighted average number
of common shares outstanding during the period. Diluted earnings
per share is determined using the weighted average number of common
shares and potential common shares (representing the dilutive
effect of stock options, RSUs and ESPP shares) outstanding during
the period using the treasury stock method.
The
following table presents the computation of basic and diluted net
income (loss) per share attributable to the Company’s common
shareholders (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
Net income (loss)
|
$267
|
$(2,651)
|
$337
|
$(4,858)
|
|
|
|
|
|
|
|
Denominator
for basic net income (loss)
per share:
|
|
|
|
|
|
Weighted-average
shares outstanding
|
21,832
|
16,672
|
21,631
|
15,411
|
|
|
|
|
|
|
Shares
used in basic net income (loss) per
share calculation
|
21,832
|
16,672
|
21,631
|
15,411
|
|
Effect
of dilutive securities
|
809
|
--
|
1,207
|
--
|
|
|
|
|
|
|
|
Denominator for diluted net income (loss) per
share
|
22,641
|
16,672
|
22,838
|
15,411
|
|
|
|
|
|
|
|
Basic
net income (loss) per share
|
$0.01
|
$(0.16)
|
$0.02
|
$(0.32)
|
|
Diluted
net income (loss) per share
|
$0.01
|
$(0.16)
|
$0.01
|
$(0.32)
|
For
the purpose of computing diluted earnings per share, the weighted
average number of potential common shares does not include stock
options with an exercise price greater than the average fair value
of the Company’s common stock for the period, as the effect
would be anti-dilutive. Stock options to purchase 983,000 shares of
common stock were outstanding as of February 28, 2018 but were not
included in the computation of diluted net income per share,
because the inclusion of such shares would be anti-dilutive. In the
three and nine months ended February 28, 2017, potential common
shares have not been included in the calculation of diluted net
loss per share as the effect would be anti-dilutive. As such, the
numerator and the denominator used in computing both basic and
diluted net loss per share for this period are the same. Stock
options to purchase 3,157,000 shares of common stock, RSUs for
34,000 shares and ESPP rights to purchase 253,000 ESPP shares were
outstanding as of February 28, 2017 but were not included in the
computation of diluted net loss per share, because the inclusion of
such shares would be anti-dilutive. The 2,657,000 shares
convertible under the convertible notes outstanding at February 28,
2018 and 2017 were not included in the computation of diluted net
income (loss) per share, because the inclusion of such shares would
be anti-dilutive.
4.
CASH, CASH EQUIVALENTS AND INVESTMENTS
The
following table summarizes the Company’s cash, cash
equivalents and investments by security type at February 28, 2018
(in thousands):
|
|
|
|
|
|
Cash
|
$1,899
|
$--
|
$1,899
|
|
Cash
equivalents:
|
|
|
|
|
Money
market funds
|
7,178
|
--
|
7,178
|
|
U.S.
Treasury securities
|
--
|
--
|
--
|
|
Total
Cash equivalents
|
7,178
|
--
|
7,178
|
|
Total
Cash and Cash equivalents
|
$9,077
|
$--
|
$9,077
|
|
Short-term
investments:
|
|
|
|
|
U.S.
Treasury securities
|
$5,989
|
$3
|
$5,986
|
|
Long-term
investments:
|
|
|
|
|
Certificate
of deposit
|
$80
|
--
|
$80
|
|
Total
Cash, Cash equivalents and Investments
|
$15,146
|
$3
|
$15,143
|
Long-term
investments are included in other assets on the accompanying
condensed consolidated balance sheets.
Unrealized
gains and temporary losses on investments classified as
available-for-sale are included within accumulated other
comprehensive income (“AOCI”), net of any related tax
effect. Upon realization, those amounts are reclassified from AOCI
to results of operations.
The
unrealized loss as of February 28, 2018 is not considered
other-than-temporary, and has been in an unrealized loss position
for less than a year.
5. FAIR
VALUE OF FINANCIAL INSTRUMENTS
The
Company’s financial instruments are measured at fair value
consistent with authoritative guidance. This authoritative guidance
defines fair value, establishes a framework for using fair value to
measure assets and liabilities, and disclosures required related to
fair value measurements.
The
guidance establishes a fair value hierarchy based on inputs to
valuation techniques that are used to measure fair value that are
either observable or unobservable. Observable inputs reflect
assumptions market participants would use in pricing an asset or
liability based on market data obtained from independent sources
while unobservable inputs reflect a reporting entity’s
pricing based upon their own market assumptions. The fair value
hierarchy consists of the following three levels:
Level 1
- instrument valuations are obtained from real-time quotes for
transactions in active exchange markets involving identical
assets.
Level 2
- instrument valuations are obtained from readily-available pricing
sources for comparable instruments.
Level 3
- instrument valuations are obtained without observable market
values and require a high level of judgment to determine the fair
value.
The
following table summarizes the Company’s financial assets
measured at fair value on a recurring basis as of February 28, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market funds
|
$7,178
|
$7,178
|
$--
|
$--
|
|
U.S.
Treasury securities
|
5,986
|
5,986
|
--
|
--
|
|
Certificate
of deposit
|
80
|
--
|
80
|
--
|
|
Assets
|
$13,244
|
$13,164
|
$80
|
$--
|
The
U.S. Treasury Securities have maturities of six
months.
The
following table summarizes the Company’s financial assets
measured at fair value on a recurring basis as of May 31, 2017 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market funds
|
$15,516
|
$15,516
|
$--
|
$--
|
|
Certificate
of deposit
|
50
|
--
|
50
|
--
|
|
Assets
|
$15,566
|
$15,516
|
$50
|
$--
|
There
were no financial liabilities measured at fair value as of February
28, 2018 and May 31, 2017.
There
were no transfers between Level 1 and Level 2 fair value
measurements during the three and nine months ended February 28,
2018.
The
carrying amounts of financial instruments including cash, cash
equivalents, receivables, accounts payable and certain other
accrued liabilities, approximate fair value due to their short
maturities. Based on the borrowing rates currently available to the
Company for loans with similar terms, the carrying value
of the debt approximates the fair value.
The
Company has, at times, invested in debt and equity of private
companies, and may do so again in the future, as part of its
business strategy.
6.
ACCOUNTS RECEIVABLE, NET
Accounts receivable
represent customer trade receivables and is presented net of
allowances for doubtful accounts of $58,000 at February 28, 2018
and $61,000 at May 31, 2017. Accounts receivable are derived
from the sale of products throughout the world to semiconductor
manufacturers, semiconductor contract assemblers, electronics
manufacturers and burn-in and test service companies. The
Company’s allowance for doubtful accounts is based upon
historical experience and review of trade receivables by aging
category to identify specific customers with known disputes or
collection issues. Uncollectible receivables are recorded as bad
debt expense when all efforts to collect have been exhausted and
recoveries are recognized when they are received.
7.
INVENTORIES
Inventories
are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
Raw
materials and sub-assemblies
|
$5,616
|
$4,268
|
|
Work
in process
|
3,518
|
2,059
|
|
Finished
goods
|
234
|
277
|
|
|
$9,368
|
$6,604
|
8.
SEGMENT INFORMATION
The
Company operates in one reportable segment: the design, manufacture
and marketing of advanced test and burn-in products to the
semiconductor manufacturing industry.
The
following presents information about the Company’s operations
in different geographic areas. Net sales are based upon ship-to
location (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended February 28, 2018:
|
|
|
|
|
|
Net
sales
|
$1,493
|
$4,974
|
$926
|
$7,393
|
|
Property
and equipment, net
|
1,155
|
41
|
9
|
1,205
|
|
|
|
|
|
|
|
Nine
months ended February 28, 2018:
|
|
|
|
|
|
Net
sales
|
$4,747
|
$16,543
|
$996
|
$22,286
|
|
Property
and equipment, net
|
1,155
|
41
|
9
|
1,205
|
|
|
|
|
|
|
|
Three
months ended February 28, 2017:
|
|
|
|
|
|
Net
sales
|
$546
|
$2,017
|
$118
|
$2,681
|
|
Property
and equipment, net
|
808
|
39
|
14
|
861
|
|
|
|
|
|
|
|
Nine
months ended February 28, 2017:
|
|
|
|
|
|
Net
sales
|
$5,419
|
$6,183
|
$613
|
$12,215
|
|
Property
and equipment, net
|
808
|
39
|
14
|
861
|
The
Company’s Japanese and German subsidiaries primarily comprise
the foreign operations. Substantially all of the sales of the
subsidiaries are made to unaffiliated Japanese or European
customers. Net sales from outside the United States include those
of Aehr Test Systems Japan K.K. and Aehr Test Systems
GmbH.
Sales
to the Company’s five largest customers accounted for
approximately 93% and 93% of its net sales in the three and nine
months ended February 28, 2018, respectively. Four customers
accounted for approximately 31%, 25%, 16% and 12% of the
Company’s net sales in the three months ended February 28,
2018. Three customers accounted for approximately 35%, 34% and 13%
of the Company’s net sales in the nine months ended February
28, 2018. Sales to the Company’s five largest customers
accounted for approximately 98% and 95% of its net sales in the
three and nine months ended February 28, 2017, respectively. One
customer accounted for approximately 91% of the Company’s net
sales in the three months ended February 28, 2017. Three customers
accounted for approximately 59%, 15% and 13% of the Company’s
net sales in the nine months ended February 28, 2017. No other
customers represented more than 10% of the Company’s net
sales in the three and nine months ended February 28, 2018 and
2017.
9.
PRODUCT WARRANTIES
The
Company provides for the estimated cost of product warranties at
the time revenues are recognized on the products shipped. While the
Company engages in extensive product quality programs and
processes, including actively monitoring and evaluating the quality
of its component suppliers, the Company’s warranty obligation
is affected by product failure rates, material usage and service
delivery costs incurred in correcting a product failure. Should
actual product failure rates, material usage or service delivery
costs differ from the Company’s estimates, revisions to the
estimated warranty liability would be required.
The
standard warranty period is one year for systems and ninety days
for parts and service.
The
following is a summary of changes in the Company's liability for
product warranties during the three and nine months ended February
28, 2018 and February 28, 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at the beginning of the period
|
$133
|
$72
|
$113
|
$155
|
|
|
|
|
|
|
|
Accruals for warranties issued during the
period
|
5
|
37
|
251
|
48
|
|
Accruals
and adjustments (change in estimates) related to
pre-existing warranties during the period
|
--
|
--
|
--
|
(54)
|
|
Consumption
of reserves
|
(22)
|
(23)
|
(248)
|
(63)
|
|
|
|
|
|
|
|
Balance
at the end of the period
|
$116
|
$86
|
$116
|
$86
|
The
accrued warranty balance is included in accrued expenses on the
accompanying condensed consolidated balance sheets.
10.
ACCUMULATED OTHER COMPREHENSIVE INCOME
Changes
in the components of AOCI, net of tax, were as follows (in
thousands):
|
|
Cumulative Translation Adjustments
|
Unrealized Loss on Investments, Net
|
|
|
|
|
|
|
|
Balance
at May 31, 2017
|
$2,249
|
$--
|
$2,249
|
|
Other
comprehensive income (loss) before reclassifications
|
98
|
(3)
|
95
|
|
Amounts
reclassified out of AOCI
|
--
|
--
|
--
|
|
Other
comprehensive income (loss), net of tax
|
98
|
(3)
|
95
|
|
Balance
at February 28, 2018
|
$2,347
|
$(3)
|
$2,344
|
11.
INCOME TAXES
Income
taxes have been provided using the liability method whereby
deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities and net operating loss and tax credit carryforwards
measured using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse or the
carryforwards are utilized. Valuation allowances are established
when it is determined that it is more likely than not that such
assets will not be realized.
Since
fiscal 2009, a full valuation allowance was established against all
deferred tax assets as management determined that it is more likely
than not that certain deferred tax assets will not be
realized.
The
Company accounts for uncertain tax positions consistent with
authoritative guidance. The guidance prescribes a “more
likely than not” recognition threshold and measurement
attribute for the financial statement recognition and measurement
of a tax position taken or expected to be taken in a tax return.
The Company does not expect any material change in its unrecognized
tax benefits over the next twelve months. The Company recognizes
interest and penalties related to unrecognized tax benefits as a
component of income taxes.
Although
the Company files U.S. federal, various state, and foreign tax
returns, the Company’s only major tax jurisdictions are the
United States, California, Germany and Japan. Tax years 1997 - 2017
remain subject to examination by the appropriate governmental
agencies due to tax loss carryovers from those years.
On
December 22, 2017, the U.S. government enacted comprehensive tax
legislation commonly referred to as the Tax Cuts and Jobs Act (the
“Tax Act”). On December 22, 2017, the SEC staff issued
Staff Accounting Bulletin No. 118 (“SAB 118”), which
provides guidance on accounting for the tax effects of the Tax Act.
SAB 118 provides a measurement period that should not extend beyond
one year from the Tax Act enactment date for companies to complete
the accounting under ASC 740, Income taxes. In accordance with SAB
118, a company must reflect the income tax effects of those aspects
of the Tax Act for which the accounting under ASC 740 is complete.
To the extent that a company’s accounting for certain income
tax effects of the Tax Act is incomplete but it is able to
determine a reasonable estimate, it must record a provisional
estimate in the financial statements.
As
part of the transition to the new territorial tax system, the Tax
Act imposes a one-time repatriation tax on deemed repatriation of
historical earnings of foreign subsidiaries. The company is not
subject to the transition tax. The one-time transition tax is based
on post-1986 earnings and profits that were previously deferred
from U.S. income tax. While the Company has not yet finalized its
calculation of the total post-1986 earnings and profits for its
foreign corporations or the impact of foreign tax credits, it has
prepared a reasonable estimate and calculation of nil transition
tax. The Company is continuing to evaluate the calculation and
accounting of the transition tax, which may change as the Company's
interpretation of the provisions of the Tax Act evolve, additional
information becomes available or interpretive guidance is issued by
the U.S. Treasury. The final determination will be completed no
later than one year from the enactment date. Based on current year
and carryover losses and valuation allowance, the Company does not
expect an impact to its consolidated financial statements upon
completion of the analysis.
The
new law also repeals the corporate alternative minimum tax, or AMT,
effective December 31, 2017. The law repeals the corporate
alternative minimum tax regime and permits existing minimum tax
credits to offset the regular tax liability for any tax year.
Further, the credit is refundable for any tax year beginning after
December 31, 2017 and before December 31, 2020 in an amount equal
to 50% of the excess of the minimum tax credit over the allowable
credit for the year against the regular tax liability. Any unused
minimum tax credit carryforward is refundable in the following
year. As result, the company recorded a benefit of $90,000 for its
Federal refundable AMT credit.
In
addition, the reduction of U.S. federal corporate tax rate reduces
the corporate tax rate to 21%, effective January 1, 2018.
Consequently, the Company has accounted for the reduction of $6.2
million of deferred tax assets with an offsetting adjustment to the
valuation allowance.
12.
CUSTOMER DEPOSITS AND DEFERRED REVENUE, SHORT-TERM
Customer
deposits and deferred revenue, short-term (in
thousands):
|
|
|
|
|
|
|
|
|
Customer
deposits
|
$2,049
|
$3,264
|
|
Deferred
revenue
|
261
|
203
|
|
|
$2,310
|
$3,467
|
13.
LONG-TERM DEBT
On
April 10, 2015, the Company entered into a Convertible Note
Purchase and Credit Facility Agreement (the “Purchase
Agreement”) with QVT Fund LP and Quintessence Fund L.P. (the
“Purchasers”) providing for (a) the Company’s
sale to the Purchasers of $4,110,000 in aggregate principal amount
of 9.0% Convertible Secured Notes due 2017 (the “Convertible
Notes”) and (b) a secured revolving loan facility (the
“Credit Facility”) in an aggregate principal amount of
up to $2,000,000. On August 22, 2016 the Purchase Agreement was
amended to extend the maturity date of the Convertible Notes to
April 10, 2019, decrease the conversion price from $2.65 per share
to $2.30 per share, decrease the forced conversion price from $7.50
per share to $6.51 per share, and allow for additional equity
awards.
The
Convertible Notes bear interest at an annual rate of 9.0% and will
mature on April 10, 2019 unless repurchased or converted prior to
that date. Interest is payable quarterly on March 1, June 1,
September 1 and December 1 of each year. Debt issuance costs of
$356,000, which were accreted over the term of the original loan
using the effective interest rate method, were offset against the
loan balance.
The
conversion price for the Convertible Notes is $2.30 per share and
is subject to adjustment upon the occurrence of certain specified
events. Holders may convert all or any part of the principal amount
of their Convertible Notes in integrals of $10,000 at any time
prior to the maturity date. Upon conversion, the Company will
deliver shares of its common stock to the holder of Convertible
Notes electing such conversion. The Company may not redeem the
Convertible Notes prior to maturity.
The
maximum amount of $2,000,000 drawn against the Credit Facility has
been converted to Convertible Notes, and at February 28, 2018 there
was no remaining balance available to be drawn on the Credit
Facility.
The
Company’s obligations under the Purchase Agreement are
secured by substantially all of the assets of the
Company.
14.
RECENT ACCOUNTING PRONOUNCEMENTS
Accounting
Standards Adopted
Inventory Measurement
In
July 2015, the Financial Accounting Standards Board
(“FASB”) issued an accounting standard update that
requires management to measure inventory at the lower of cost or
net realizable value. Net realizable value is the estimated selling
prices in the ordinary course of business, less reasonably
predictable costs of completion, disposal, and transportation. The
Company adopted this new standard in fiscal year 2018. The adoption
of this guidance did not have a significant impact on the
Company’s consolidated financial statements.
Balance Sheet Classification of Deferred
Taxes
In
November 2015, the FASB issued an accounting standard update
related to deferred tax assets and liabilities. This standard
simplifies the presentation of deferred income taxes to be
classified as noncurrent in the consolidated balance sheet. The
Company adopted this new standard in fiscal year 2018. The adoption
of this guidance did not have a significant impact on the
Company’s consolidated financial statements.
Share-Based Compensation
In March 2016, the FASB released an accounting standard update that
simplifies several aspects of the accounting for share-based
payment transactions, including the income tax consequences,
forfeitures, classification of awards as either equity or
liabilities, and classification on the statement of cash flows. The
Company adopted this new standard in fiscal year 2018. The adoption
of this guidance did not have a significant impact on the
Company’s consolidated financial statements.
Accounting
Standards Not Yet Adopted
Revenue Recognition
In
May 2014, the FASB issued an accounting standard update related to
revenue from contracts with customers. This standard sets forth a
new five-step revenue recognition model which replaces the prior
revenue recognition guidance in its entirety and is intended to
eliminate numerous industry-specific pieces of revenue recognition
guidance that have historically existed in GAAP. The underlying
principle of the new standard is that a business or other
organization will recognize revenue to depict the transfer of
promised goods or services to customers in an amount that reflects
what it expects in exchange for the goods or services. The standard
also requires more detailed disclosures and provides additional
guidance for transactions that were not addressed completely in the
prior accounting guidance. The standard provides alternative
methods of initial adoption and will become effective for the
Company beginning in the first quarter of fiscal 2019. The FASB has
issued several updates to the standard which i) defer the original
effective date from January 1, 2017 to January 1, 2018, while
allowing for early adoption as of January 1, 2017. ii) clarify the
application of the principal versus agent guidance. and iii)
clarify the guidance on inconsequential and perfunctory promises
and licensing. In May 2016, the FASB issued an update to address
certain narrow aspects of the guidance including collectibility
criterion, collection of sales taxes from customers, noncash
consideration, contract modifications and completed contracts. This
issuance does not change the core principle of the guidance in the
initial topic issued in May 2014. In December 2016, the FASB issued
updated guidance regarding revenue from contracts with customers.
Some topics that could impact the Company include corrections and
improvements around the following: contract costs impairment
testing, disclosure of remaining performance obligations and prior
period obligations, contract modifications, and contract asset
versus receivable. The Company is currently evaluating the impact
of adopting this new guidance on its consolidated financial
statements.
Financial
Instruments
In
January 2016, the FASB issued an accounting standard update related
to recognition and measurement of financial assets and financial
liabilities. This standard changes accounting for equity
investments, financial liabilities under the fair value option and
the presentation and disclosure requirements for financial
instruments. In addition, it clarifies guidance related to the
valuation allowance assessment when recognizing deferred tax assets
resulting from unrealized losses on available-for-sale debt
securities. This standard is effective for us in fiscal year 2020.
Early adoption is permitted. The Company is currently evaluating
the impact of this new guidance on its consolidated financial
statements.
In June 2016, the FASB issued an
accounting standard update that requires measurement and
recognition of expected credit losses for financial assets held
based on historical experience, current conditions, and reasonable
and supportable forecasts that affect the collectibility of the
reported amount. The accounting standard update will be effective
for the Company beginning in the first quarter of fiscal 2021 on a
modified retrospective basis, and early adoption in fiscal 2020 is
permitted. The Company is currently evaluating the impact of this
accounting standard update on its consolidated financial
statements.
Leases
In
February 2016, the FASB issued authoritative guidance related to
leases. This guidance requires management to present all leases
greater than one year on the balance sheet as a liability to make
payments and an asset as the right to use the underlying asset for
the lease term. This new standard will be effective for us in
fiscal year 2020, with early adoption permitted. The Company is
currently evaluating the impact of adopting this new guidance on
its consolidated financial statements.
Classification of Certain Cash Receipts and Cash
Payments
In August 2016, the FASB issued
authoritative guidance related to the classification of certain
cash receipts and cash payments on the statement of cash flows. The
accounting standard update will be effective for the Company
beginning in the first quarter of fiscal 2019 on a retrospective
basis, and early adoption is permitted. The Company is currently
evaluating the impact of this accounting standard update on its
consolidated statements of cash flows.
Intra-Entity Asset Transfers
In
October 2016, the FASB issued an accounting standard update that
requires recognition of the income tax consequences of intra-entity
transfers of assets (other than inventory) at the transaction date.
The accounting standard update will be effective for the Company
beginning in the first quarter of fiscal 2019 on a modified
retrospective basis, and early adoption is permitted. The Company
is currently evaluating the impact of this accounting standard
update on its consolidated financial statements.
Restricted Cash
In
November 2016, the FASB issued authoritative guidance related to
statements of cash flows. This guidance clarifies that amounts
generally described as restricted cash and restricted cash
equivalents should be included with cash and cash equivalents when
reconciling the beginning-of-period and end-of period total amounts
shown on the statement of cash flows. The accounting standard
update will be effective for the Company beginning in the first
quarter of fiscal 2019 on a retrospective basis, and early adoption
is permitted. The Company is currently evaluating the impact of
this accounting standard update on its consolidated financial
statements.
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The
following discussion of the financial condition and results of
operations should be read in conjunction with the unaudited
condensed consolidated financial statements and the related notes
that appear elsewhere in this report and with our Annual Report on
Form 10-K for the fiscal year ended May 31, 2017 and the
consolidated financial statements and notes thereto.
In
addition to historical information, this report contains
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements in this
report, including those made by the management of Aehr Test
Systems, other than statements of historical fact, are
forward-looking statements. These statements typically may be
identified by the use of forward-looking words or phrases such as
"believe," "expect," "intend," "anticipate," "should," "planned,"
"estimated," and "potential," among others and include, but are not
limited to, statements concerning our expectations regarding our
operations, business, strategies, prospects, revenues, expenses,
costs and resources. These forward-looking statements are subject
to certain risks and uncertainties that could cause our actual
results to differ materially from those anticipated results or
other expectations reflected in the forward-looking statements.
Factors that could cause or contribute to such differences include,
but are not limited to, those discussed in this report and other
factors beyond our control, and in particular, the risks discussed
in “Part II, Item 1A. Risk Factors” and those discussed
in other documents we file with the SEC. All forward-looking
statements included in this document are based on our current
expectations, and we undertake no obligation to revise or publicly
release the results of any revision to these forward-looking
statements. Given these risks and uncertainties, readers are
cautioned not to place undue reliance on such forward-looking
statements.
OVERVIEW
We were founded in 1977 to develop and manufacture burn-in and test
equipment for the semiconductor industry. Since our inception, we
have sold more than 2,500 systems to semiconductor manufacturers,
semiconductor contract assemblers and burn-in and test service
companies worldwide. Our principal products currently are the
Advanced Burn-in and Test System, or ABTSTM, the
FOXTM full
wafer contact and singulated die/module parallel test and burn-in
system, WaferPakTM Aligner, WaferPak
contactors, DiePak® Loader, the
DiePak carrier and test fixtures.
Our
net sales consist primarily of sales of systems, WaferPak Aligners
and DiePak Loaders, WaferPak contactors, DiePak Carriers, test
fixtures, upgrades and spare parts, revenues from service
contracts, and engineering development charges. Our selling
arrangements may include contractual customer acceptance
provisions, which are mostly deemed perfunctory or inconsequential,
and installation of the product occurs after shipment and transfer
of title.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
Our
discussion and analysis of our financial condition and results of
operations are based upon our condensed consolidated financial
statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The
preparation of these condensed consolidated financial statements
requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. On an
ongoing basis, we evaluate our estimates, including those related
to customer programs and incentives, product returns, bad debts,
inventories, income taxes, financing operations, warranty
obligations, and long-term service contracts. Our estimates are
derived from historical experience and on various other assumptions
that are believed to be reasonable under the circumstances. Those
results form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under
different assumptions or conditions. For a discussion of the
critical accounting policies, see “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations – Critical Accounting Policies and
Estimates” in our Annual Report on Form 10-K for the fiscal
year ended May 31, 2017.
There
have been no material changes to our critical accounting policies
and estimates during the nine months ended February 28, 2018
compared to those discussed in our Annual Report on Form 10-K for
the fiscal year ended May 31, 2017.
RESULTS
OF OPERATIONS
The
following table sets forth items in our unaudited condensed
consolidated statements of operations as a percentage of net sales
for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
100.0%
|
100.0%
|
100.0%
|
100.0%
|
|
Cost
of sales
|
57.0
|
81.2
|
58.6
|
65.8
|
|
Gross
profit
|
43.0
|
18.8
|
41.4
|
34.2
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
Selling,
general and administrative
|
24.7
|
64.3
|
24.6
|
42.1
|
|
Research
and development
|
14.1
|
46.6
|
13.8
|
27.5
|
|
Total
operating expenses
|
38.8
|
110.9
|
38.4
|
69.6
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
4.2
|
(92.1)
|
3.0
|
(35.4)
|
|
|
|
|
|
|
|
Interest
expense, net
|
(1.3)
|
(6.6)
|
(1.4)
|
(4.4)
|
|
Other
(expense) income, net
|
(0.5)
|
(0.1)
|
(0.5)
|
0.3
|
|
|
|
|
|
|
|
Income
(loss) before income tax benefit
(expense)
|
2.4
|
(98.8)
|
1.1
|
(39.5)
|
|
|
|
|
|
|
|
Income
tax benefit (expense)
|
1.2
|
(0.1)
|
0.4
|
(0.3)
|
|
Net
income (loss)
|
3.6
|
(98.9)
|
1.5
|
(39.8)
|
|
Less:
Net income attributable to the
noncontrolling interest
|
--
|
--
|
--
|
--
|
|
|
|
|
|
|
|
Net
income (loss) attributable to Aehr
Test Systems common shareholders
|
3.6%
|
(98.9)%
|
1.5%
|
(39.8)%
|
THREE
MONTHS ENDED FEBRUARY 28, 2018 COMPARED TO THREE MONTHS ENDED
FEBRUARY 28, 2017
NET
SALES. Net sales increased to $7.4 million for the three months
ended February 28, 2018 from $2.7 million for the three months
ended February 28, 2017, an increase of 175.8%. The increase in net
sales for the three months ended February 28, 2018 was primarily
due to the increases in both net sales of our Test During Burn-in
(TDBI) products and wafer-level products. Net sales of the TDBI
products for the three months ended February 28, 2018 were $4.5
million, and increased approximately $1.9 million from the three
months ended February 28, 2017. Net sales of the wafer-level
products for the three months ended February 28, 2018 were $2.9
million, and increased approximately $2.8 million from the three
months ended February 28, 2017.
GROSS
PROFIT. Gross profit increased to $3.2 million for the three months
ended February 28, 2018 from $0.5 million for the three months
ended February 28, 2017. Gross profit margin increased to 43.0% for
the three months ended February 28, 2018 from 18.8% for the three
months ended February 28, 2017. The increase in gross profit margin
of 24.2% was primarily due to manufacturing efficiencies due to an
increase in net sales resulting in a 14.0% gross profit margin
increase, and a decreased warranty provision resulting in a 10.0%
gross profit margin increase.
SELLING,
GENERAL AND ADMINISTRATIVE. SG&A expenses increased to $1.8
million for the three months ended February 28, 2018 from $1.7
million for the three months ended February 28, 2017, an increase
of 6.1%. The increase in SG&A expenses was primarily due to an
increase in employment related expenses.
RESEARCH
AND DEVELOPMENT. R&D expenses decreased to $1.0 million for the
three months ended February 28, 2018 from $1.2 million for the
three months ended February 28, 2017, a decrease of 16.7%. The
decrease in R&D expenses was primarily due to a decrease in
project expenses.
INTEREST
EXPENSE. Interest expenses were $98,000 and $178,000 for the three
months ended February 28, 2018 and 2017, respectively. The decrease
in interest expense in the three months ended February 28, 2018 was
primarily due to the debt issuance costs related to the convertible
notes becoming fully amortized at the end of fiscal
2017.
OTHER
(EXPENSE) INCOME, NET. Other expense, net was $33,000 and $2,000
for the three months ended February 28, 2018 and 2017,
respectively. The change in other expense was primarily
due to losses realized in connection with the fluctuation in the
value of the dollar compared to foreign currencies during the
referenced periods.
INCOME
TAX BENEFIT (EXPENSE). Income tax benefit was $91,000 for the three
months ended February 28, 2018 compared with income tax expense of
$2,000 for the three months ended February 28, 2017. The income tax
benefit in the three months ended February 28, 2018 was primarily
due to the impact of the “Tax Cuts and Jobs Act”
enacted on December 22, 2017, specifically, the provision which
made our alternative minimum tax credit refundable by
2022.
NINE
MONTHS ENDED FEBRUARY 28, 2018 COMPARED TO NINE MONTHS ENDED
FEBRUARY 28, 2017
NET
SALES. Net sales increased to $22.3 million for the nine months
ended February 28, 2018 from $12.2 million for the nine months
ended February 28, 2017, an increase of 82.4%. The increase in net
sales for the nine months ended February 28, 2018 was primarily due
to the increases in both net sales of our TDBI products and
wafer-level products. Net sales of the TDBI products for the nine
months ended February 28, 2018 were $12.4 million, and increased
approximately $4.6 million from the nine months ended February 28,
2017. Net sales of the wafer-level products for the nine months
ended February 28, 2018 were $9.9 million, and increased
approximately $5.6 million from the nine months ended February 28,
2017.
GROSS
PROFIT. Gross profit increased to $9.2 million for the nine months
ended February 28, 2018 from $4.2 million for the nine months ended
February 28, 2017, an increase of 121.1%. Gross profit margin
increased to 41.4% for the nine months ended February 28, 2018 from
34.2% for the nine months ended February 28, 2017. The increase in
gross profit margin was primarily due to manufacturing efficiencies
due to an increase in net sales.
SELLING,
GENERAL AND ADMINISTRATIVE. SG&A expenses increased to $5.5
million for the nine months ended February 28, 2018 from $5.1
million for the nine months ended February 28, 2017, an increase of
6.4%. The increase in SG&A expenses was primarily due to an
increase in employment related expenses.
RESEARCH
AND DEVELOPMENT. R&D expenses decreased to $3.1 million for the
nine months ended February 28, 2018 from $3.3 million for the nine
months ended February 28, 2017, a decrease of 7.9%. The decrease in
R&D expenses was primarily due to a decrease of $0.4 million in
project expenses, partially offset by an increase of $0.1 million
in employment related expenses.
INTEREST
EXPENSE. Interest expense was $310,000 for the nine months ended
February 28, 2018 compared with $537,000 for the nine months ended
February 28, 2017. The decrease in interest expense in the nine
months ended February 28, 2018 was primarily due to the debt
issuance costs related to the convertible notes becoming fully
amortized at the end of fiscal 2017.
OTHER
(EXPENSE) INCOME, NET. Other expense, net was $100,000 for the nine
months ended February 28, 2018 compared with other income, net of
$38,000 for the nine months ended February 28, 2017. The change
between other expense and other income was primarily due to losses
or gains realized in connection with the fluctuation in the value
of the dollar compared to foreign currencies during the referenced
periods.
INCOME
TAX BENEFIT (EXPENSE). Income tax benefit was $81,000 for the nine
months ended February 28, 2018 compared with income tax expense of
$36,000 for the nine months ended February 28, 2017. The income tax
benefit in the nine months ended February 28, 2018 was primarily
due to the impact of the “Tax Cuts and Jobs Act”
enacted on December 22, 2017, specifically, the provision which
made our alternative minimum tax credit refundable by
2022.
LIQUIDITY
AND CAPITAL RESOURCES
Net
cash used in operating activities was $3.1 million and $4.5 million
for the nine months ended February 28, 2018 and 2017, respectively.
For the nine months ended February 28, 2018, net cash used in
operating activities was primarily the result of the changes in
operating assets and liabilities including the increases in
inventories, prepaid expenses and other current assets, and
accounts receivable of $2.4 million, $0.6 million and $0.5 million,
respectively, and a decrease of customer deposits and deferred
revenue of $0.8 million. Net cash used in operating activities was
also impacted by net income of $0.3 million, as adjusted to exclude
the effect of non-cash charges of stock-based compensation expense
of $0.8 million and depreciation and amortization of $0.3 million.
The increase in inventories is to support expected future shipments
for customer orders. The increase in prepaid expenses and other
current assets was primarily due to down payments to certain
vendors. The increase in accounts receivable was primarily due to
large shipments toward the end of the quarter. The decrease in
customer deposits and deferred revenue was primarily due to the
shipments against customer orders with down payments. For the nine
months ended February 28, 2017, net cash used in operating
activities was primarily the result of net loss of $4.9 million, as
adjusted to exclude the effect of non-cash charge of stock-based
compensation expense of $0.8 million. Net cash used in operations
was also impacted by an increase in accounts receivable of $1.1
million, partially offset by an increase in accounts payable of
$0.7 million. The increase in accounts receivable was primarily due
to large shipments toward the end of February 28, 2017. The
increase in accounts payable was primarily due to inventory
purchases to support future shipments.
Net
cash used in investing activities was $6.4 million and $219,000 for
the nine months ended February 28, 2018 and 2017, respectively.
During the nine months ended February 28, 2018, net cash used in
investing activities was due to the purchase of available for sale
securities of $6.0 million, which did not affect our liquidity, and
the purchases of property and equipment of $0.5 million. During the
nine months ended February 28, 2017, net cash used in investing
activities was due to the purchases of property and
equipment.
Financing activities provided cash of
$0.7 million and $5.8 million for the nine months ended February
28, 2018 and 2017, respectively. Net cash provided by financing
activities during the nine months ended February 28, 2018 was due
to $0.7 million in proceeds from the issuance of common stock under
employee plans. Net cash provided by financing activities during
the nine months ended February 28, 2017 was due to the net proceeds
of $5.3 million from the sale of our common stock in a private
placement transaction to certain institutional and accredited
investors that closed on September 28, 2016 and $0.5 million in
proceeds from the issuance of common stock under employee
plans.
The
effect of fluctuation in exchange rates increased cash by $66,000
for the nine months ended February 28, 2018 and decreased cash by
$22,000 for the nine months ended February 28, 2017. The changes
were due to the fluctuation in the value of the dollar compared to
foreign currencies.
As
of February 28, 2018 and May 31, 2017, we had working capital of
$23.9 million and $21.5 million, respectively. Working capital
consists of cash and cash equivalents, short-term investments,
accounts receivable, inventories and prepaid expenses and other
current assets, less current liabilities.
We
lease our manufacturing and office space under operating leases. We
entered into a non-cancelable operating lease agreement for our
United States manufacturing and office facilities, which was
renewed in February 2018 and expires in July 2023. Under the lease
agreement, we are responsible for payments of utilities, taxes and
insurance.
From
time to time, we evaluate potential acquisitions of businesses,
products or technologies that complement our business. If
consummated, any such transactions may use a portion of our working
capital or require the issuance of equity. We have no present
understandings, commitments or agreements with respect to any
material acquisitions.
We
anticipate that the existing cash balance together with income from
operations, collections of existing accounts receivable, revenue
from our existing backlog of products, the sale of inventory on
hand, and deposits and down payments against significant orders
will be adequate to meet our liquidity requirements for the next 12
months.
OFF-BALANCE
SHEET ARRANGEMENTS
We
have not entered into any off-balance sheet financing arrangements
and have not established any variable interest
entities.
OVERVIEW
OF CONTRACTUAL OBLIGATIONS
The
only material changes in the composition, magnitude or other key
characteristics of our contractual obligations or other commitments
as disclosed in our Annual Report on Form 10-K for the year ended
May 31, 2017 was the extension of the lease of our principal
executive office entered into on February 27, 2018 and as disclosed
on our Current Report on Form 8-K filed with the SEC on March 2,
2018.
Minimum
annual rentals payments under non-cancellable operating leases in
each of the next five fiscal years and thereafter are as follows
(in thousands):
|
Years
Ending May 31,
|
|
|
2018
|
$502
|
|
2019
|
713
|
|
2020
|
728
|
|
2021
|
749
|
|
2022
|
772
|
|
Thereafter
|
861
|
|
Total
|
$4,325
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Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISKS
We
had no holdings of derivative financial or commodity instruments as
of February 28, 2018 or May 31, 2017.
We
are exposed to financial market risks, including changes in
interest rates and foreign currency exchange rates. We only invest
our short-term excess cash in government-backed securities with
maturities of 18 months or less. We do not use any financial
instruments for speculative or trading purposes. Fluctuations in
interest rates would not have a material effect on our financial
position, results of operations or cash flows.
A
majority of our revenue and capital spending is transacted in U.S.
Dollars. We, however, enter into transactions in other currencies,
primarily Euros and Japanese Yen. Since the price is determined at
the time a purchase order is accepted, we are exposed to the risks
of fluctuations in the foreign currency-U.S. Dollar exchange rates
during the lengthy period from purchase order to ultimate payment.
This exchange rate risk is partially offset to the extent that our
subsidiaries incur expenses payable in their local currency. To
date, we have not invested in instruments designed to hedge
currency risks. In addition, our subsidiaries typically carry debt
or other obligations due us that may be denominated in either their
local currency or U.S. Dollars. Since our subsidiaries’
financial statements are based in their local currency and our
condensed consolidated financial statements are based in U.S.
Dollars, we and our subsidiaries recognize foreign exchange gains
or losses in any period in which the value of the local currency
rises or falls in relation to the U.S. Dollar. A 10% decrease in
the value of the subsidiaries’ local currency as compared
with the U.S. Dollar would not be expected to result in a
significant change to our net income or loss. There have been no
material changes in our risk exposure since the end of the last
fiscal year, nor are any material changes to our risk exposure
anticipated.
Item 4.
CONTROLS AND PROCEDURES
EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES. Our management evaluated,
with the participation of our Chief Executive Officer and our Chief
Financial Officer, 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 the end of the period covered by this Quarterly
Report on Form 10-Q. Based on this evaluation, our Chief Executive
Officer and our Chief Financial Officer have concluded that our
disclosure controls and procedures are effective to ensure that
information we are required to disclose in reports that we file or
submit under the Securities and Exchange Act of 1934, as amended,
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 management as
appropriate to allow for timely decisions regarding required
disclosure.
CHANGES
IN INTERNAL CONTROLS OVER FINANCIAL REPORTING. There was no change
in our internal control over financial reporting, as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act, that occurred
during the period covered by this Quarterly Report on Form 10-Q
that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
INHERENT
LIMITATIONS OF INTERNAL CONTROLS. Our management, including our
Chief Executive Officer and Chief Financial Officer, does not
expect that our disclosure controls and procedures or our internal
controls will prevent all error and all fraud. A control system, no
matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the
control system are met. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any,
within us have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and
that breakdowns can occur because of a simple error or mistake.
Additionally, controls can be circumvented by the individual acts
of some persons, by collusion of two or more people, or by
management override of the control. The design of any system of
controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any
design will succeed in achieving our stated goals under all
potential future conditions. Over time, controls may become
inadequate because of changes in conditions, or the degree of
compliance with the policies or procedures may deteriorate. Because
of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be
detected.
PART II
- OTHER INFORMATION
Item 1.
LEGAL PROCEEDINGS
None.
Item
1A. RISK FACTORS
Please
refer to the description of the risk factors associated with our
business previously disclosed in Part I, Item 1A - "Risk Factors"
of our Annual Report on Form 10-K for the year ended May 31, 2017
filed with the Securities and Exchange Commission on August 29,
2017. There have been no material changes from the risk factors
previously described under Item 1A of our Annual Report on Form
10-K for the fiscal year ended May 31, 2017.
Item 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
None.
Item 3.
DEFAULTS UPON SENIOR SECURITIES
None.
Item 4.
MINE SAFETY DISCLOSURES
Not
Applicable
Item 5.
OTHER INFORMATION
None.
Item 6.
EXHIBITS
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Exhibit No.
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Description
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101.INS
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XBRL Instance
Document
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101.SCH
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XBRL Taxonomy
Extension Schema Document
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101.CAL
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XBRL Taxonomy
Extension Calculation Linkbase Document
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101.DEF
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XBRL Taxonomy
Extension Definition Linkbase Document
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101.LAB
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XBRL Taxonomy
Extension Label Linkbase Document
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101.PRE
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XBRL
Taxonomy Extension Presentation Linkbase Document
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(1) Incorporated by
reference to Exhibit No. 3.1 previously filed with the
Company’s Current Report on Form 8-K filed March 2, 2018
(File No. 000-22893).
*This
exhibit shall not be deemed “filed” for purposes of
Section 18 of the Securities Exchange Act of 1934 or otherwise
subject to the liabilities of that Section, nor shall it be deemed
incorporated by reference in any filings under the Securities Act
of 1933 or the Securities Exchange Act of 1934, whether made before
or after the date hereof and irrespective of any general
incorporation language in any filings.
SIGNATURES
Pursuant
to the requirements 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.
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Aehr Test
Systems
(Registrant)
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Date:
April
12, 2018
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By:
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/s/
GAYN
ERICKSON
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Gayn
Erickson
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President and Chief
Executive Officer
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Date:
April
12, 2018
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By:
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/s/
KENNETH
B. SPINK
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Kenneth B.
Spink
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Vice President of
Finance and Chief Financial
Officer
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