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 August 31, 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
every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the
registrant was required to submit such files).
Yes
☒ No
☐
1
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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☒
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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 September 28, 2018 was 22,253,698.
AEHR
TEST SYSTEMS
FORM
10-Q
FOR THE
QUARTER ENDED AUGUST 31, 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
August 31, 2018 and May 31, 2018
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4
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Condensed
Consolidated Statements of Operations for the Three Months Ended
August 31, 2018 and 2017
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5
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Condensed Consolidated Statements of Comprehensive
(Loss) Income for the Three Months Ended August 31, 2018 and
2017
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6
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Condensed Consolidated Statements of Cash Flows
for the Three Months Ended August 31, 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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21
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ITEM 3. Quantitative and Qualitative Disclosures About Market
Risks
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25
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ITEM 4. Controls and Procedures
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26
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PART II. OTHER INFORMATION
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ITEM 1. Legal Proceedings
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26
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ITEM 1A. Risk Factors
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26
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ITEM 2. Unregistered Sales of Equity Securities and Use of
Proceeds
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27
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ITEM 3. Defaults Upon Senior Securities
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27
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ITEM 4. Mine Safety Disclosures
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27
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ITEM 5. Other Information
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27
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ITEM 6. Exhibits
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27
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SIGNATURES
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28
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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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(1)
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ASSETS
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Current
assets:
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Cash
and cash equivalents
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$15,864
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$16,848
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Accounts
receivable, net
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2,272
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2,856
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Inventories
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9,585
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9,049
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Prepaid
expenses and other current assets
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727
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703
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Total
current assets
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28,448
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29,456
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Property
and equipment, net
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1,174
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1,203
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Other
assets
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266
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296
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Total
assets
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$29,888
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$30,955
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LIABILITIES
AND SHAREHOLDERS' EQUITY
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Current
liabilities:
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Accounts
payable
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$1,317
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$1,762
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Accrued
expenses
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1,498
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1,646
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Customer
deposits and deferred revenue, short-term
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2,339
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1,630
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Current
portion of long-term debt
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6,110
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6,110
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Total
current liabilities
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11,264
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11,148
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Deferred
rent
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145
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63
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Deferred
revenue, long-term
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359
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459
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Total
liabilities
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11,768
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11,670
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Aehr
Test Systems shareholders' equity:
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Common
stock, $0.01 par value: Authorized:
75,000;
Issued and outstanding: 22,245 shares and 22,143
shares at August 31, 2018 and May 31, 2018,
respectively
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222
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221
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Additional
paid-in capital
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83,405
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83,041
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Accumulated
other comprehensive income
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2,276
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2,292
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Accumulated
deficit
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(67,764)
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(66,249)
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Total
Aehr Test Systems shareholders' equity
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18,139
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19,305
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Noncontrolling
interest
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(19)
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(20)
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Total
shareholders' equity
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18,120
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19,285
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Total
liabilities and shareholders' equity
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$29,888
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$30,955
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(1)
The condensed
consolidated balance sheet at May 31, 2018 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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$4,740
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$6,970
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Cost of
sales
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3,187
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4,052
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Gross
profit
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1,553
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2,918
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Operating
expenses:
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Selling,
general and administrative
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1,879
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1,791
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Research and
development
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1,116
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955
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Total
operating expenses
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2,995
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2,746
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(Loss)
income from operations
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(1,442)
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172
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Interest expense,
net
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(78)
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(107)
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Other income
(expense), net
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9
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(60)
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(Loss)
income before income tax (expense)
benefit
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(1,511)
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5
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Income tax
(expense) benefit
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(4)
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5
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Net (loss)
income
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(1,515)
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10
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Less:
Net income attributable to the noncontrolling
interest
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--
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--
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Net (loss) income
attributable to Aehr
Test Systems
common shareholders
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$(1,515)
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$10
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Net (loss) income
per share
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Basic
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$(0.07)
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$0.00
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Diluted
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$(0.07)
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$0.00
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Shares
used in per share calculations:
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Basic
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22,190
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21,417
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Diluted
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22,190
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22,991
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The
accompanying notes are an integral part of these
condensed
consolidated financial statements.
AEHR
TEST SYSTEMS
CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(in
thousands, unaudited)
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Net (loss)
income
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$(1,515)
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$10
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Other comprehensive
(loss) income, net of tax:
Net
change in cumulative translation adjustments
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(15)
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59
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Total comprehensive
(loss) income
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(1,530)
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69
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Less: Comprehensive
income attributable to the
noncontrolling interest
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1
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--
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Comprehensive
(loss) income, attributable
to Aehr Test Systems common
shareholders
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$(1,531)
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$69
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The
accompanying notes are an integral part of these
condensed
consolidated financial statements.
AEHR
TEST SYSTEMS
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in
thousands)
(unaudited)
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Cash
flows from operating activities:
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Net
(loss) income
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$(1,515)
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$10
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Adjustments
to reconcile net (loss) income to net cash used in operating
activities:
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Stock-based
compensation expense
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256
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216
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Provision
for doubtful accounts
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--
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31
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Depreciation
and amortization
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111
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89
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Changes
in operating assets and liabilities:
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Accounts
receivable
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563
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(1,260)
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Inventories
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(536)
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(2,044)
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Prepaid
expenses and other current assets
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4
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(1,089)
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Accounts
payable
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(398)
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651
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Accrued
expenses
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(151)
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(21)
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Customer
deposits and deferred revenue
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609
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(440)
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Deferred
rent
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82
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--
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Income
taxes payable
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4
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(20)
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Net
cash used in operating activities
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(971)
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(3,877)
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Cash
flows from investing activities:
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Purchases
of property and equipment
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(84)
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(184)
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Net
cash used in investing activities
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(84)
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(184)
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Cash
flows from financing activities:
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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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109
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234
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Net
cash provided by financing activities
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109
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234
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Effect
of exchange rates on cash and cash equivalents
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(38)
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17
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Net
decrease in cash and cash
equivalents
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(984)
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(3,810)
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Cash
and cash equivalents, beginning of period
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16,848
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17,803
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Cash
and cash equivalents, end of period
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$15,864
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$13,993
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Supplemental
disclosure of non-cash flow information:
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Transfers
of property and equipment to inventories
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$--
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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, 2018 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, 2018.
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.
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, 2018. There have
been no significant changes in our significant accounting policies
during the three months ended August 31, 2018 except for revenue
recognition.
REVENUE
RECOGNITION. Revenue consists primarily of the sale of the
following products and services: systems, WaferPaks, DiePaks,
upgrade services, spare parts, application support, service
contracts and extended warranty contracts. Revenue is recognized
upon transferring control of products and performing services, and
the amounts recognized reflect the consideration we expect to be
entitled to receive in exchange for these products and
services. We sell our
products and services directly to customers and through
distributors.
A
performance obligation is a promise in a contract to transfer a
distinct good or service to the customer. In contracts with
multiple performance obligations, we identify each performance
obligation and evaluate whether the performance obligation is
distinct within the context of the contract at contract inception.
A good or service that is not distinct is combined with
other
promised goods or services until the Company identifies a bundle of
goods or services that is distinct.
Our
products may be customized to our customers’ specifications,
however, control of our product is typically transferred to the
customer at the point in time the product is either shipped or
delivered, depending on the terms of the arrangement, as the
criteria for over time recognition is not met. In limited
circumstances, substantive acceptance by the customer exists which
results in the deferral of revenue until acceptance is formally
received from the customer. Judgment may be required in determining
if the acceptance clause is substantive.
Upgrade
services are a distinct performance obligation apart from the
systems and recognized in the period they are performed. Service
contracts, which include repair and maintenance service contracts
and extended warranty contracts, are also distinct performance
obligations and recognized as our performance obligations are
satisfied. This is typically the contractual service period, which
ranges from one to three years. For these service contracts
recognized over time, we use an input measure, days elapsed, to
measure progress.
A
contract’s transaction price is allocated to each distinct
performance obligation and recognized as revenue when, or as, the
performance obligation is satisfied. In determining the transaction
price, we evaluate whether the price is subject to refund or
adjustment to determine the net consideration to which we expect to
be entitled. We generally do not grant return privileges, except
for defective products during the warranty period. Sales discounts
that we may make available to these customers are considered to be
a form of variable consideration, which is estimated in determining
the contract’s transaction price to be allocated to the
performance obligations. We have elected the practical expedient
under Accounting Standards Codification (“ASC”)
606-10-32-18 to not assess whether a contract has a significant
financing component as our standard payment terms are less than one
year.
For
contracts with multiple performance obligations, we allocate the
contract’s transaction price to each performance obligation
based on its relative standalone selling price. The stand-alone
selling prices are determined based on the prices at which we
separately sell these products. For items that are not sold
separately, we estimate the stand-alone selling prices using our
best estimate of selling price.
Transaction
price allocated to the remaining performance obligations. On
August 31, 2018, we had $685,000 of remaining performance
obligations, which were comprised of deferred service contracts and
extended warranty contracts not yet delivered. We expect to
recognize approximately 34% of our remaining performance
obligations as revenue in fiscal 2019, and an additional 66% in
fiscal 2020 and thereafter. The foregoing excludes the value of
other remaining performance obligations as they have original
durations of one year or less, and also excludes information about
variable consideration allocated entirely to a wholly unsatisfied
performance obligation.
Contract
Assets and Liabilities. The timing of revenue recognition
may differ from the timing of invoicing to customers. Accounts
receivable is recorded at the invoiced amount, net of an allowance
for doubtful accounts. A receivable is recognized in the period we
deliver goods or provide services or when our right to
consideration is unconditional. The Company usually does not record
contract assets because the Company has an unconditional right to
payment upon satisfaction of the performance obligation, and
therefore, a receivable is more commonly recorded than a contract
asset.
Contract
liabilities include payments received in advance of performance
under a contract and are satisfied as the associated revenue is
recognized. Contract liabilities are reported on the Condensed
Consolidated Balance Sheets at the end of each reporting period as
a component of deferred revenue. Contract liabilities as of August
31, 2018 and May 31, 2018 were $2,698,000 and $2,089,000,
respectively. During the three months ended
August 31, 2018, we recognized $602,000 of revenues that was
included in contract liabilities as of May 31, 2018.
Costs
to obtain or fulfill a contract. The Company generally
expenses sales commissions when incurred as a component of Selling,
general and administrative expense as the amortization period is
typically less than one year. Additionally, the majority of the
Company’s cost of fulfillment as a manufacturer of products
is classified as inventory and fixed assets, which are accounted
for under the respective guidance for those asset types. Other
costs of contract fulfillment are immaterial due to the nature of
our products and their respective manufacturing
process.
Amount collected from customers.
Sales tax collected from customers is not included in net sales but
rather recorded as a liability due to the respective taxing
authorities.
RECENT
ACCOUNTING PRONOUNCEMENTS
Accounting
Standards Adopted
Revenue
Recognition
In
May 2014, the FASB issued ASC Update No. 2014-09, Revenue from
Contracts with Customers (Topic 606), which has been subsequently
updated. The core principle of the standard is to recognize
revenues when promised goods or services are transferred to
customers in an amount that reflects the consideration that is
expected to be received for those goods or services. The new
standard defines a five-step process to achieve this core principle
and, in doing so, it is possible more judgment and estimates may be
required within the revenue recognition process than required under
existing GAAP, including identifying performance obligations in the
contract, estimating the amount of variable consideration to
include in the transaction price, and allocating the transaction
price to each distinct performance obligation. The standard permits
the use of either the retrospective or modified retrospective
transition methods. It also requires expanded disclosures including
the nature, amount, timing, and uncertainty of revenues and cash
flows related to contracts with customers. Additionally,
qualitative and quantitative disclosures are required about
customer contracts, significant judgments and changes in judgments,
and assets recognized from the costs to obtain or fulfill a
contract.
We
adopted Accounting Standards Codification (“ASC”) 606,
Revenue from Contracts with Customers and all related amendments
(collectively “ASC 606”), on June 1, 2018, the first
day of fiscal 2019, using the modified retrospective method. We
applied ASC 606 to all contracts not completed as of the date of
adoption in order to determine any adjustment to the opening
balance of retained earnings. Under the modified retrospective
adoption method, the comparative financial information has not been
restated and continues to be reported under the accounting
standards in effect for those periods, ASC 605, "Revenue
Recognition", which is also referred to herein as "legacy
GAAP."
The
adoption of ASC 606 did not have a material impact on our
consolidated financial statements as of June 1, 2018. No adjustment
was recorded to accumulated deficit as of the adoption date and
reported revenue would not have been different under legacy GAAP.
Additionally, we do not expect the adoption of the revenue standard
to have a material impact to our net income on an ongoing
basis.
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 Company adopted this new standard in
fiscal year 2019. The adoption of this guidance did not have a
significant impact on the Company’s consolidated financial
statements.
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 Company adopted this new
standard in fiscal year 2019. The adoption of this guidance did not
have a significant impact on the Company’s 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 Company adopted this new
standard in fiscal year 2019. The adoption of this guidance did not
have a significant impact on the Company’s consolidated
financial statements.
Income
Taxes
On
December 22, 2017, the US government enacted comprehensive tax
legislation commonly referred to as the Tax Cuts and Jobs Act (the
“Tax Act”). The Tax Act makes broad and complex changes
to the US tax code including but not limited to (1) reducing the US
federal corporate tax rate from 34% to 21%; (2) requiring companies
to pay a one-time transition tax on certain repatriated earnings of
foreign subsidiaries; (3) generally eliminating US federal income
taxes on dividends from foreign subsidiaries; (4) requiring a
current inclusion in US federal income of certain earnings of
controlled foreign corporations; (5) creating a new limitation on
deductible interest expense; (6) changing rules related to the uses
and limitations of net operating loss carryforwards created in tax
years beginning after December 31, 2017, and (7) repeals the
corporate alternative minimum tax regime, or AMT, effective
December 31, 2017 and permits existing minimum tax credits to
offset the regular tax liability for any tax year. Consequently, we
have accounted for the reduction of $6.4 million of deferred tax
assets with an offsetting adjustment to the valuation allowance for
the fiscal year ended 2018, and recorded a benefit of $90,000 for
our Federal refundable AMT credit.
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. There are also certain transitional impacts of the Tax
Act. 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. These
transitional impacts have no impact to the company for the year
fiscal year ended 2018. The one-time transition tax is based on
post-1986 earnings and profits that were previously deferred from
US income tax. While we have not yet finalized our calculation of
the total post-1986 earnings and profits, for our foreign
corporations or the impact of foreign tax credits, we have prepared
a reasonable estimate and calculated the provision amount. The
Company is evaluating the calculation of the transition tax. The
accounting for this item is incomplete and may change as our
interpretation of the provisions of the 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 the current
year and carryover losses and the valuation allowance the Company
would not expect an impact to the financial statements as a result
of the completion of the analysis.
Accounting
Standards Not Yet Adopted
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.
2.
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
(loss) income per share attributable to Aehr Test Systems common
shareholders (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
Net (loss) income
|
$(1,515)
|
$10
|
|
|
|
|
|
Denominator
for basic net (loss) income per share:
|
|
|
|
Weighted
average shares outstanding
|
22,190
|
21,417
|
|
|
|
|
|
Shares used in basic net (loss) income per share
calculation
|
22,190
|
21,417
|
|
Effect
of dilutive securities
|
--
|
1,574
|
|
|
|
|
|
Denominator
for diluted net (loss) income per share
|
22,190
|
22,991
|
|
|
|
|
|
Basic
net (loss) income per share
|
$(0.07)
|
$0.00
|
|
Diluted
net (loss) income per share
|
$(0.07)
|
$0.00
|
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. In the three months ended August 31, 2018,
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 3,189,000 shares of common stock, RSUs for 43,000 shares
and ESPP rights to purchase 359,000 ESPP shares were outstanding as
of August 31, 2018 but were not included in the computation of
diluted net loss per share, because the inclusion of such shares
would be anti-dilutive. Stock options to purchase 140,000 shares of
common stock were outstanding as of August 31, 2017, but were not
included in the computation of diluted net income per share,
because the inclusion of such shares would be anti-dilutive. The
2,657,000 shares convertible under the convertible notes
outstanding on August 31, 2018 and 2017 were not included in the
computation of diluted net (loss) income per share, because the
inclusion of such shares would be anti-dilutive.
3.
CASH, CASH EQUIVALENTS AND INVESTMENTS
The
following table summarizes the Company’s cash, cash
equivalents and investments by security type at August 31, 2018 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Cash
|
$2,587
|
$--
|
$2,587
|
|
Cash
equivalents:
|
|
|
|
|
Money
market funds
|
13,277
|
--
|
13,277
|
|
U.S.
Treasury securities
|
--
|
--
|
--
|
|
Total
Cash equivalents
|
13,277
|
--
|
13,277
|
|
Total
Cash and Cash equivalents
|
$15,864
|
$--
|
$15,864
|
|
Long-term
investments:
|
|
|
|
|
Certificate
of deposit
|
$80
|
$--
|
$80
|
|
Total
Cash, Cash equivalents and Investments
|
$15,944
|
$--
|
$15,944
|
Long-term
investments are included in other assets on the accompanying
condensed consolidated balance sheet at August 31,
2018.
The
following table summarizes the Company’s cash, cash
equivalents and investments by security type at May 31, 2018 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Cash
|
$3,132
|
$--
|
$3,132
|
|
Cash
equivalents:
|
|
|
|
|
Money
market funds
|
7,733
|
--
|
7,733
|
|
U.S.
Treasury securities
|
5,983
|
--
|
5,983
|
|
Total
Cash equivalents
|
13,716
|
--
|
13,716
|
|
Total
Cash and Cash equivalents
|
$16,848
|
$--
|
$16,848
|
|
Long-term
investments:
|
|
|
|
|
Certificate
of deposit
|
$80
|
$--
|
$80
|
|
Total
Cash, Cash equivalents and Investments
|
$16,928
|
$--
|
$16,928
|
Long-term investments are included in other assets on the
accompanying consolidated balance sheet at May 31.
2018.
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.
4. 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 August 31, 2018
(in thousands):
|
|
Balance as of August 31, 2018
|
|
|
|
|
Money
market funds
|
$13,277
|
$13,277
|
$--
|
$--
|
|
Certificate
of deposit
|
80
|
--
|
80
|
--
|
|
Assets
|
$13,357
|
$13,277
|
$80
|
$--
|
The
following table summarizes the Company’s financial assets
measured at fair value on a recurring basis as of May 31, 2018 (in
thousands):
|
|
Balance as of May 31, 2018
|
|
|
|
|
Money
market funds
|
$7,733
|
$7,733
|
$--
|
$--
|
|
U.S.
Treasury securities
|
5,983
|
5,983
|
--
|
--
|
|
Certificate
of deposit
|
80
|
--
|
80
|
--
|
|
Assets
|
$13,796
|
$13,716
|
$80
|
$--
|
The
U.S. Treasury Securities have maturities of three
months.
There
were no financial liabilities measured at fair value as of August
31, 2018 and May 31, 2018.
There
were no transfers between Level 1 and Level 2 fair value
measurements during the three months ended August 31,
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.
5.
ACCOUNTS RECEIVABLE, NET
Accounts receivable
represent customer trade receivables and is presented net of
allowance for doubtful accounts of $0 at August 31, 2018 and $4,000
at May 31, 2018. 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.
6.
INVENTORIES
Inventories
are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
Raw
materials and sub-assemblies
|
$6,103
|
$5,747
|
|
Work
in process
|
3,248
|
3,068
|
|
Finished
goods
|
234
|
234
|
|
|
$9,585
|
$9,049
|
7.
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 months ended August 31, 2018
and 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at the beginning of the period
|
$135
|
$113
|
|
|
|
|
|
Accruals for warranties issued during the
period
|
75
|
94
|
|
Consumption
of reserves
|
(50)
|
(88)
|
|
|
|
|
|
Balance
at the end of the period
|
$160
|
$119
|
The
accrued warranty balance is included in accrued expenses on the
accompanying condensed consolidated balance sheets.
8.
CUSTOMER DEPOSITS AND DEFERRED REVENUE, SHORT-TERM
Customer
deposits and deferred revenue, short-term (in
thousands):
|
|
|
|
|
|
|
|
|
Customer
deposits
|
$2,014
|
$1,340
|
|
Deferred
revenue
|
325
|
290
|
|
|
$2,339
|
$1,630
|
9.
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.
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 effective December 31, 2017 repeals the corporate
alternative minimum tax, or AMT, 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 in the third quarter of fiscal 2018 for its Federal
refundable AMT credit.
In
addition, the reduction of the 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 $6.4
million of deferred tax assets with an offsetting adjustment to the
valuation allowance.
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 1996
– 2017 remain subject to examination by the appropriate
governmental agencies due to tax loss carryovers, research and
development tax credits, or other tax attributes from those
years.
10.
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 August 31, 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.
11.
STOCKHOLDERS’ EQUITY, COMPREHENSIVE INCOME AND STOCK-BASED
COMPENSATION
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, 2018
|
$2,292
|
$--
|
$2,292
|
|
Other
comprehensive (loss) income before reclassifications
|
(16)
|
--
|
(16)
|
|
Amounts
reclassified out of AOCI
|
--
|
--
|
--
|
|
Other
comprehensive (loss) income, net of tax
|
(16)
|
--
|
(16)
|
|
Balance
at August 31, 2018
|
$2,276
|
$--
|
$2,276
|
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 expense for
stock options and ESPP purchase rights is 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 an
equity instrument. See Note 10 in the Company’s Annual Report
on Form 10-K for fiscal 2018 filed on August 28, 2018 for further
information regarding the 2016 Equity Incentive Plan and the
Amended and Restated 2006 ESPP.
The
following table summarizes the stock-based compensation expense for
the three months ended August 31, 2018 and 2017 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation in the form of employee stock options, RSUs and ESPP
purchase rights, included in:
|
|
|
|
Cost
of sales
|
$36
|
$22
|
|
Selling,
general and administrative
|
148
|
150
|
|
Research
and development
|
72
|
44
|
|
Net
effect on net (loss) income
|
$256
|
$216
|
As
of August 31, 2018 and 2017, there were no stock-based compensation
expenses capitalized as part of inventory.
During
the three months ended August 31, 2018 and 2017, the Company
recorded stock-based compensation expenses related to stock options
and RSUs of $173,000 and $201,000, respectively.
As
of August 31, 2018, the total compensation expense related to
unvested stock-based awards under the Company’s 2016 Equity
Incentive Plan, but not yet recognized, was approximately
$1,449,000, which is net of estimated forfeitures of $4,000. This
expense will be amortized on a straight-line basis over a weighted
average period of approximately 3.2 years.
During
the three months ended August 31, 2018 and 2017, the Company
recorded stock-based compensation expense related to the ESPP of
$83,000 and $15,000, respectively.
As
of August 31, 2018, the total compensation expense related to
purchase rights under the ESPP but not yet recognized was
approximately $223,000. This expense will be amortized on a
straight-line basis over a weighted average period of approximately
1.1 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 expense
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 August 31, 2018 and 2017
were estimated using the following weighted average assumptions in
the Black-Scholes option valuation model:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
term (in years)
|
5
|
4
|
|
Volatility
|
0.74
|
0.78
|
|
Risk-free
interest rate
|
2.75%
|
1.75%
|
|
Weighted
average grant date fair value
|
$1.48
|
$2.27
|
There
were no ESPP purchase rights granted to employees for the three
months ended August 31, 2018 and 2017. There were no ESPP shares
issued during the three months ended August 31, 2018 and 2017. As
of August 31, 2018, there were 145,000 ESPP shares available for
issuance.
The
following tables summarize the Company’s stock option and
RSU transactions during
three months ended August 31, 2018 (in thousands):
|
|
|
|
|
|
|
Balance,
May 31, 2018
|
1,812
|
|
|
|
|
Options
granted
|
(441)
|
|
RSUs
granted
|
--
|
|
Shares
cancelled
|
13
|
|
Shares
expired
|
(11)
|
|
|
|
|
Balance,
August 31, 2018
|
1,373
|
The
following table summarizes the stock option transactions during the
three months ended August 31, 2018 (in thousands, except per share
data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
May 31, 2018
|
2,859
|
$2.04
|
$1,987
|
|
|
|
|
|
|
Options
granted
|
441
|
$2.40
|
|
|
Options
cancelled
|
(13)
|
$1.64
|
|
|
Options
exercised
|
(98)
|
$1.12
|
|
|
|
|
|
|
|
Balances,
August 31, 2018
|
3,189
|
$2.12
|
$1,757
|
|
|
|
|
|
|
Options fully vested and expected to vest at August 31,
2018
|
3,156
|
$2.12
|
$1,746
|
The
options outstanding and exercisable at August 31, 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
|
259
|
0.51
|
$0.67
|
259
|
0.51
|
$0.67
|
|
|
$1.09-$1.36
|
507
|
1.46
|
$1.28
|
506
|
1.46
|
$1.28
|
|
|
$1.68-$2.06
|
466
|
4.04
|
$1.74
|
318
|
3.64
|
$1.77
|
|
|
$2.10-$2.81
|
1,695
|
4.34
|
$2.44
|
1,130
|
3.26
|
$2.47
|
|
|
$3.46-$3.93
|
262
|
5.91
|
$3.86
|
94
|
5.96
|
$3.76
|
|
|
$0.59-$3.93
|
3,189
|
3.66
|
$2.12
|
2,307
|
2.72
|
$1.96
|
$1,541
|
The
total intrinsic value of options exercised during the three months
ended August 31, 2018 and 2017 was $139,000 and $476,000,
respectively. The weighted average remaining contractual life of
the options exercisable and expected to be exercisable at August
31, 2018 was 3.64 years.
During
the three months ended August 31, 2018, there were no RSUs granted
to employees. During the three months ended August 31, 2017, RSUs
for 64,000 shares were granted to employees. The market value on
the date of the grant of these RSUs was $3.93 per share. 2,000 RSUs
became fully vested during the three months ended August 31, 2017,
and 93,000 RSUs were unvested at August 31, 2017. During the three
months ended August 31, 2018, 4,000 RSUs became fully vested. As of
August 31, 2018, 43,000 RSUs remain unvested which have an
intrinsic value of $108,000.
12.
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 August 31, 2018:
|
|
|
|
|
|
Net
sales
|
$2,695
|
$1,734
|
$311
|
$4,740
|
|
Property
and equipment, net
|
1,130
|
39
|
5
|
1,174
|
|
|
|
|
|
|
|
Three
months ended August 31, 2017:
|
|
|
|
|
|
Net
sales
|
$1,290
|
$5,660
|
$20
|
$6,970
|
|
Property
and equipment, net
|
1,089
|
39
|
12
|
1,140
|
The
following table shows revenues by major product categories, similar
to our reportable segment disclosure. Within each product category,
contract terms, conditions and economic factors affecting the
nature, amount, timing and uncertainty around revenue recognition
and cash flow are substantially similar. With the exception of the
amount of service revenues, our product category revenues are
recognized at point in time when control transfers to
customers. Our revenues by
product category are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Type
of good / service:
|
|
|
|
Systems
|
$1,806
|
$3,476
|
|
Contactors
|
1,153
|
2,677
|
|
Services
|
1,781
|
817
|
|
|
$4,740
|
$6,970
|
|
|
|
|
|
Timing
of revenue recognition:
|
|
|
|
Products
and services transferred at a point
in time
|
$4,118
|
$6,500
|
|
Services
transferred over time
|
622
|
470
|
|
|
$4,740
|
$6,970
|
There were no revenues through distributors for the three
months ended August 31, 2018 and 2017.
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 78% and 99% of its net sales for the three months
ended August 31, 2018 and 2017, respectively. Four customers
accounted for approximately 21%, 18%, 17% and 14% of the
Company’s net sales in the three months ended August 31,
2018. Two customers accounted for approximately 54% and 35% of the
Company’s net sales in the three months ended August 31,
2017. No other customers represented more than 10% of the Company's
net sales for either of the three months ended August 31, 2018 and
2017.
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, 2018 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 our management, 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 ABTS, the FOX full wafer
contact parallel test and burn-in system, WaferPak contactors, the
DiePak carrier and test fixtures.
Our
net sales consist primarily of sales of systems, 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, 2018.
There
have been no material changes to our critical accounting policies
and estimates during the three months ended August 31, 2018
compared to those discussed in our Annual Report on Form 10-K for
the fiscal year ended May 31, 2018.
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%
|
|
Cost
of sales
|
67.2
|
58.1
|
|
Gross
profit
|
32.8
|
41.9
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
Selling,
general and administrative
|
39.6
|
25.7
|
|
Research
and development
|
23.6
|
13.7
|
|
|
|
|
|
Total
operating expenses
|
63.2
|
39.4
|
|
|
|
|
|
(Loss)
income from operations
|
(30.4)
|
2.5
|
|
|
|
|
|
Interest
expense, net
|
(1.7)
|
(1.5)
|
|
Other
income (expense), net
|
0.2
|
(0.9)
|
|
|
|
|
|
(Loss)
income before income tax (expense)
benefit
|
(31.9)
|
0.1
|
|
|
|
|
|
Income
tax (expense) benefit
|
(0.1)
|
--
|
|
|
|
|
|
Net
(loss) income
|
(32.0)
|
0.1
|
|
Less:
Net income attributable to
the noncontrolling interest
|
--
|
--
|
|
Net
(loss) income attributable to Aehr Test
Systems common shareholders
|
(32.0)%
|
0.1%
|
THREE
MONTHS ENDED AUGUST 31, 2018 COMPARED TO THREE MONTHS ENDED AUGUST
31, 2017
NET
SALES. Net sales decreased to $4.7 million for the three months
ended August 31, 2018 from $7.0 million for the three months ended
August 31, 2017, a decrease of 32.0%. The decrease in net sales for
the three months ended August 31, 2018 was primarily due to the
decrease in net sales of our wafer-level products. Net sales of the
wafer-level products for the three months ended August 31, 2018
were $2.0 million, and decreased approximately $2.2 million from
the three months ended August 31, 2017.
GROSS
PROFIT. Gross profit decreased to $1.6 million for the three months
ended August 31, 2018 from $2.9 million for the three months ended
August 31, 2017, a decrease of approximately 46.8%. Gross profit
margin decreased to 32.8% for the three months ended August 31,
2018 from 41.9% for the three months ended August 31, 2017. The
decrease in gross profit margin was primarily a result of
manufacturing inefficiencies due to a lower level of net
sales.
SELLING,
GENERAL AND ADMINISTRATIVE. SG&A expenses increased to $1.9
million for the three months ended August 31, 2018 from $1.8
million for the three months ended August 31, 2017, an increase of
4.9%. The increase in SG&A expenses was primarily due to an
increase in employment related expenses.
RESEARCH
AND DEVELOPMENT. R&D expenses increased to $1.1 million for the
three months ended August 31, 2018 from $1.0 million for the three
months ended August 31, 2017, an increase of 16.9%. The increase in
R&D expenses was primarily due to an increase in employment
related expenses.
INTEREST
EXPENSE, NET. Interest expense, net was $78,000 and $107,000 for
the three months ended August 31, 2018 and 2017, respectively. The
lower interest expense, net in the three months ended August 31,
2018 was primarily a result of higher interest income due to the
increase in the interest rate as well as a higher average cash
balance during the period compared with the three months ended
August 31, 2017.
OTHER
INCOME (EXPENSE), NET. Other income, net was $9,000 for the three
months ended August 31, 2018 compared with other expense, net of
$60,000 for the three months ended August 31, 2017. The change in
other income (expense), net was primarily due to gains or losses
realized in connection with the fluctuation in the value of the
dollar compared to foreign currencies during the referenced
periods.
INCOME
TAX (EXPENSE) BENEFIT. Income tax expense was $4,000 for the three
months ended August 31, 2018 compared with income tax benefit of
$5,000 for the three months ended August 31, 2017.
LIQUIDITY
AND CAPITAL RESOURCES
Net
cash used in operating activities was $1.0 million and $3.9 million
for the three months ended August 31, 2018 and 2017, respectively.
For the three months ended August 31, 2018, net cash used in
operating activities was primarily the result of the net loss of
$1.5 million, as adjusted to exclude the effect of a non-cash
charge of stock-based compensation expense of $0.3 million and
depreciation and amortization of $0.1 million. Other changes in
cash from operations primarily resulted from an increase in
customer deposits and deferred revenue of $0.6 million and a
decrease in accounts receivable of $0.6 million, partially offset
by an increase in inventories of $0.5 million, and decreases in
accounts payable of $0.4 million and accrued expenses of $0.2
million. The increase in customer deposits and deferred revenue was
primarily due to the receipt of additional down payments from
certain customers. The decrease in accounts receivable was
primarily due to improvements in customer payment terms. The
increase in inventories is to support future shipments for customer
orders. The decrease in accounts payable was primarily due to lower
expenditures associated with lower revenue. The decrease in accrued
expenses was primarily due to the interest payment before the end
of the quarter. For the three months ended August 31, 2017, net
cash used in operating activities was primarily due to the
increases in inventories of $2.0 million, accounts receivable of
$1.3 million, and prepaid expenses and other current assets of $1.1
million, partially offset by an increase in accounts payable of
$0.7 million. The increase in inventories is to support future
shipments for customer orders. The increase in accounts receivable
was primarily due to an increase in sales. The increase in prepaid
expenses and other current assets was primarily due to down
payments to certain vendors. The increase in accounts payable was
primarily due to higher expenditures associated with higher
revenue.
Net
cash used in investing activities was $84,000 and $184,000 for the
three months ended August 31, 2018 and 2017, respectively. Net cash
used in investing activities during the three months ended August
31, 2018 and 2017 was due to purchases of property and
equipment.
Net cash provided
by financing activities was $109,000 and $234,000 for the three
months ended August 31, 2018 and 2017, respectively. Net cash
provided by financing activities during the three months ended
August 31, 2018 and 2017 was due to proceeds from the issuance of
common stock under employee plans.
The
effect of fluctuation in exchange rates decreased cash by $38,000
for the three months ended August 31, 2018 and increased cash by
$17,000 for the three months ended August 31, 2017. The changes
were due to the fluctuation in the value of the dollar compared to
foreign currencies.
As
of August 31, 2018 and May 31, 2018, we had working capital of
$17.2 million and $18.3 million, respectively.
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
There
have been no material changes in the composition, magnitude or
other key characteristics of our contractual obligations or other
commitments as disclosed in the Company's Annual Report on Form
10-K for the year ended May 31, 2018.
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISKS
We
had no holdings of derivative financial or commodity instruments as
of August 31, 2018 or May 31, 2018.
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 to 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, 2018 filed with the Securities and Exchange
Commission on August 28, 2018.
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
|
Exhibit No.
|
|
Description
|
|
|
|
|
|
|
|
Certification
of Chief Executive Officer pursuant to Rules 13a-14(a) and
15d-14(a) promulgated under the Securities Exchange Act of 1934, as
amended, as adopted pursuant to Section 302(a) of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
|
Certification
of Chief Financial Officer pursuant to Rules 13a-14(a) and
15d-14(a) promulgated under the Securities Exchange Act of 1934, as
amended, as adopted pursuant to Section 302(a) of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
|
|
|
|
|
|
101.INS
|
|
XBRL
Instance Document
|
|
|
|
|
|
101.SCH
|
|
XBRL
Taxonomy Extension Schema Document
|
|
|
|
|
|
101.CAL
|
|
XBRL
Taxonomy Extension Calculation Linkbase Document
|
|
|
|
|
|
101.DEF
|
|
XBRL
Taxonomy Extension Definition Linkbase Document
|
|
|
|
|
|
101.LAB
|
|
XBRL
Taxonomy Extension Label Linkbase Document
|
|
|
|
|
|
101.PRE
|
|
XBRL
Taxonomy Extension Presentation Linkbase Document
|
*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.
|
|
|
Aehr
Test Systems
|
|
|
|
|
Registrant)
|
|
|
|
|
|
|
|
Date:
October 12, 2018
|
By:
|
/s/ GAYN ERICKSON
|
|
|
|
|
Gayn
Erickson
|
|
|
|
|
President
and Chief Executive Officer
|
|
|
Date:
October 12, 2018
|
By:
|
/s/
KENNETH B. SPINK
|
|
|
|
|
Kenneth
B. Spink
|
|
|
|
|
Vice
President of Finance and Chief Financial
Officer
|
|