Blueprint
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
☒ QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the
quarterly period ended November 30, 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 incorporation or
organization)
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(I.R.S.
Employer Identification No.)
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400 Kato
Terrace
Fremont,
CA
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94539
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(Address of
principal executive offices)
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(Zip
Code)
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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 ☐
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.
|
Large
accelerated filer ☐
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Accelerated
filer ☐
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Non-accelerated
filer ☒
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Smaller
reporting company ☒
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Emerging
growth company ☐
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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 December 31, 2018 was 22,355,831.
AEHR
TEST SYSTEMS
FORM
10-Q
FOR THE
QUARTER ENDED NOVEMBER 30, 2018
INDEX
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3
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4
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5
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6
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7
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22
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27
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27
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28
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28
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28
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28
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28
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28
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29
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30
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PART I. FINANCIAL INFORMATION
Item 1.
FINANCIAL STATEMENTS (Unaudited)
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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$14,002
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$16,848
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Accounts
receivable, net
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3,868
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2,856
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Inventories
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9,983
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9,049
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Prepaid
expenses and other current assets
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688
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703
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Total
current assets
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28,541
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29,456
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Property
and equipment, net
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1,074
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1,203
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Other
assets
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286
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296
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Total
assets
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$29,901
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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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$1,953
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$1,762
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Accrued
expenses
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1,487
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1,646
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Customer
deposits and deferred revenue, short-term
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2,068
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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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11,618
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11,148
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Deferred
rent
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147
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63
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Deferred
revenue, long-term
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252
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459
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Total
liabilities
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12,017
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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 shares; Issued
and outstanding: 22,356 shares and 22,143
shares at November 30, 2018 and May
31, 2018, respectively
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224
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221
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Additional
paid-in capital
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83,830
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83,041
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Accumulated
other comprehensive income
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2,241
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2,292
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Accumulated deficit
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(68,393)
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(66,249)
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Total
Aehr Test Systems shareholders' equity
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17,902
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19,305
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Noncontrolling
interest
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(18)
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(20)
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Total
shareholders' equity
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17,884
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19,285
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Total
liabilities and shareholders' equity
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$29,901
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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.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in
thousands, except per share data)
(unaudited)
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Net
sales
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$5,911
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$7,923
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$10,651
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$14,893
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Cost
of sales
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3,513
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4,792
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6,700
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8,844
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Gross
profit
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2,398
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3,131
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3,951
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6,049
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Operating
expenses:
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Selling,
general and administrative
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1,977
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1,854
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3,856
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3,645
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Research
and development
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986
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1,090
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2,102
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2,045
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Total
operating expenses
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2,963
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2,944
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5,958
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5,690
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(Loss)
income from operations
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(565)
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187
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(2,007)
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359
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Interest
expense, net
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(74)
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(105)
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(152)
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(212)
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Other
income (expense), net
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29
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(7)
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38
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(67)
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(Loss)
income before income tax expense
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(610)
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75
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(2,121)
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80
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Income
tax expense
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(19)
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(15)
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(23)
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(10)
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Net
(loss) income
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(629)
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60
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(2,144)
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70
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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 (loss) income
attributable to Aehr Test Systems
common shareholders
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$(629)
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$60
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$(2,144)
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$70
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Net
(loss) income per share
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Basic
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$(0.03)
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$0.00
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$(0.10)
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$0.00
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Diluted
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$(0.03)
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$0.00
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$(0.10)
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$0.00
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Shares
used in per share calculations:
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Basic
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22,294
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21,645
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22,242
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21,531
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Diluted
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22,294
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22,883
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22,242
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22,937
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The
accompanying notes are an integral part of these condensed
consolidated financial statements.
CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(in
thousands, unaudited)
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Net (loss)
income
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$(629)
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$60
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$(2,144)
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$70
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Other comprehensive
(loss) income, net of tax:
Net change in
unrealized loss on investments
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--
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(3)
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--
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(3)
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Net
change in cumulative translation adjustments
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(34)
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1
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(49)
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60
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Total comprehensive
(loss) income
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(663)
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58
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(2,193)
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127
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Less: Comprehensive
income attributable to the
noncontrolling interest
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1
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--
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2
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--
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Comprehensive
(loss) income, attributable
to Aehr Test Systems common
shareholders
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$(664)
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$58
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$(2,195)
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$127
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The
accompanying notes are an integral part of these condensed
consolidated financial statements.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in
thousands)
(unaudited)
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Cash
flows from operating activities:
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Net
(loss) income
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$(2,144)
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$70
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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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480
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580
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Recovery of doubtful accounts
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(3)
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(14)
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Depreciation
and amortization
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230
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190
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Changes
in operating assets and liabilities:
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Accounts
receivable
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(1,068)
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592
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Inventories
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(935)
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(1,249)
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Prepaid
expenses and other current assets
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23
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(1,135)
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Accounts
payable
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302
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(1,005)
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Accrued
expenses
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(175)
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5
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Customer
deposits and deferred revenue
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231
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(178)
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Deferred
rent
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84
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--
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Income
taxes payable
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18
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(9)
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Net
cash used in operating activities
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(2,957)
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(2,153)
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Cash
flows from investing activities:
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Purchases
of investments
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--
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(5,972)
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Purchases
of property and equipment
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(103)
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(313)
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Net
cash used in investing activities
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(103)
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(6,285)
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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
|
312
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601
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Net
cash provided by financing activities
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312
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601
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Effect
of exchange rates on cash and cash equivalents
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(98)
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(7)
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Net
decrease in cash and cash
equivalents
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(2,846)
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(7,844)
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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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$14,002
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$9,959
|
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Supplemental
disclosure of non-cash flow information:
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Transfers
of property and equipment to inventories
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$--
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$372
|
The
accompanying notes are an integral part of these condensed
consolidated financial statements.
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 the Company's significant accounting
policies during the three and six months ended November 30, 2018
except for revenue recognition.
2.
RECENT ACCOUNTING PRONOUNCEMENTS
Accounting
Standards Adopted
Revenue Recognition
In May
2014, the FASB issued Accounting Standards Codification
(“ASC”) Update No. 2014-09, Revenue from Contracts with
Customers (Topic 606), which has been subsequently updated
(collectively “ASC 606”). 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.
The
Company adopted ASC 606 on June 1, 2018, the first day of fiscal
2019, using the modified retrospective method. The Company 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 the Company's
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, the Company
does not expect the adoption of the revenue standard to have a
material impact to the
Company's 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,
the
Company has 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 the
Company's 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. 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. The Company has finalized
its calculation of the total post-1986 earnings and profits for its
foreign corporations. Based on the Company’s net operating
loss carryovers and valuation allowance, there is no impact to its
consolidated 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.
3.
REVENUE
Revenue recognition
The
Company recognizes revenue when promised goods or services are
transferred to customers in an amount that reflects the
consideration to which the Company expects to be entitled in
exchange for those goods or services by following a five-step
process, (1) identify the contract with a customer, (2) identify
the performance obligations in the contract, (3) determine the
transaction price, (4) allocate the transaction price, and (5)
recognize revenue when or as the Company satisfies a performance
obligation, as further described below.
Performance
obligations include sales of systems, contactors, spare parts, and
services, as well as, installation and training services included
in customer contracts.
A
contract’s transaction price is allocated to each distinct
performance obligation. In determining the transaction price, the
Company evaluates whether the price is subject to refund or
adjustment to determine the net consideration to which the Company
expects to be entitled. The Company generally does not grant return
privileges, except for defective products during the warranty
period.
For
contracts that contain multiple performance obligations, the
Company allocates the transaction price to the performance
obligations on a relative standalone selling price basis.
Standalone selling prices are based on multiple factors including,
but not limited to historical discounting trends for products and
services and pricing practices in different
geographies.
Revenue
for systems and spares are recognized at a point in time, which is
generally upon shipment or delivery. Revenue from services is
recognized over time as services are completed or ratably over the
contractual period of generally one year or less.
The
Company has elected the practical expedient under ASC 606 to not
assess whether a contract has a significant financing component as
the
Company's standard payment terms are less than one
year.
Disaggregation of revenue
The
following tables show revenues by major product categories. 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.
The
Company’s revenues by product category are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type
of good / service:
|
|
|
|
|
|
Systems
|
$3,712
|
$5,030
|
$5,518
|
$8,506
|
|
Contactors
|
943
|
1,867
|
2,096
|
4,544
|
|
Services
|
1,256
|
1,026
|
3,037
|
1,843
|
|
|
$5,911
|
$7,923
|
$10,651
|
$14,893
|
|
|
|
|
|
|
|
Product
lines:
|
|
|
|
|
|
Wafer-level
|
$4,226
|
$2,812
|
$6,195
|
$6,965
|
|
Test
During Burn-In
|
1,685
|
5,111
|
4,456
|
7,928
|
|
|
$5,911
|
$7,923
|
$10,651
|
$14,893
|
The
following presents information about the Company’s operations
in different geographic areas. Net sales are based upon ship-to
location (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic
region:
|
|
|
|
|
|
United
states
|
$4,509
|
$1,964
|
$7,204
|
$3,254
|
|
Asia
|
1,334
|
5,909
|
3,068
|
11,569
|
|
Europe
|
68
|
50
|
379
|
70
|
|
|
$5,911
|
$7,923
|
$10,651
|
$14,893
|
With
the exception of the amount of service contracts and extended
warranties, the Company’s product category revenues are
recognized at point in time when control transfers to
customers.
|
|
Three Months Ended
November 30,
|
Six Months Ended
November 30,
|
|
|
|
|
|
|
|
Timing
of revenue recognition:
|
|
|
|
|
|
Products
and services transferred at a
point in time
|
$5,272
|
$7,387
|
$9,390
|
$13,887
|
|
Services
transferred over time
|
639
|
536
|
1,261
|
1,006
|
|
|
$5,911
|
$7,923
|
$10,651
|
$14,893
|
Contract balances
A
receivable is recognized in the period the Company delivers goods
or provides services or when the
Company's 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
November 30, 2018 and May 31, 2018 were $2,321,000 and $2,089,000,
respectively. During the three and six months ended November 30,
2018, the Company
recognized $392,000 and $994,000, respectively, of revenues that
were included in contract liabilities as of May 31,
2018.
Remaining performance obligations
On
November 30, 2018, the Company had $695,000 of remaining
performance obligations, which were comprised of deferred service
contracts and extended warranty contracts not yet delivered. The
Company expects to recognize approximately 35% of its remaining
performance obligations as revenue in fiscal 2019, and an
additional 65% 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.
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 the
Company's products and their respective manufacturing
process.
4.
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
|
$(629)
|
$60
|
$(2,144)
|
$70
|
|
|
|
|
|
|
|
Denominator
for basic net (loss) income per
share:
|
|
|
|
|
|
Weighted
average shares outstanding
|
22,294
|
21,645
|
22,242
|
21,531
|
|
|
|
|
|
|
|
Shares
used in basic net (loss) income per
share calculation
|
22,294
|
21,645
|
22,242
|
21,531
|
|
Effect
of dilutive securities
|
--
|
1,238
|
--
|
1,406
|
|
|
|
|
|
|
|
Denominator
for diluted net (loss) income per
share
|
22,294
|
22,883
|
22,242
|
22,937
|
|
|
|
|
|
|
|
Basic
net (loss) income per share
|
$(0.03)
|
$0.00
|
$(0.10)
|
$0.00
|
|
Diluted
net (loss) income per share
|
$(0.03)
|
$0.00
|
$(0.10)
|
$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 and six months ended November
30, 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 these
periods are the same. Stock options to purchase 3,373,000 shares of
common stock, RSUs for 38,000 shares and ESPP rights to purchase
327,000 ESPP shares were outstanding as of November 30, 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 263,000 shares of common stock were outstanding
as of November 30, 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 at November 30, 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.
5.
CASH, CASH EQUIVALENTS AND INVESTMENTS
The
following table summarizes the Company’s cash, cash
equivalents and investments by security type at November 30, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
Cash
|
$1,961
|
$--
|
$1,961
|
|
Cash
equivalents:
|
|
|
|
|
Money
market funds
|
6,050
|
--
|
6,050
|
|
U.S.
Treasury securities
|
5,991
|
--
|
5,991
|
|
Total
Cash equivalents
|
12,041
|
--
|
12,041
|
|
Total
Cash and Cash equivalents
|
$14,002
|
$--
|
$14,002
|
|
Long-term
investments:
|
|
|
|
|
Certificate
of deposit
|
$80
|
$--
|
$80
|
|
Total
Cash, Cash equivalents and Investments
|
$14,082
|
$--
|
$14,082
|
Long-term
investments are included in other assets on the accompanying
condensed consolidated balance sheet at November 30,
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.
6. 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 November 30, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market funds
|
$6,050
|
$6,050
|
$--
|
$--
|
|
U.S.
Treasury securities
|
5,991
|
5,991
|
--
|
--
|
|
Certificate
of deposit
|
80
|
--
|
80
|
--
|
|
Assets
|
$12,121
|
$12,041
|
$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 November
30, 2018 and May 31, 2018.
There
were no transfers between Level 1 and Level 2 fair value
measurements during the three and six months ended November 30,
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.
7. ACCOUNTS
RECEIVABLE, NET
Accounts receivable
represent customer trade receivables and is presented net of
allowance for doubtful accounts of $0 at November 30, 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.
8.
INVENTORIES
Inventories are
comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
Raw
materials and sub-assemblies
|
$6,613
|
$5,747
|
|
Work
in process
|
3,119
|
3,068
|
|
Finished
goods
|
251
|
234
|
|
|
$9,983
|
$9,049
|
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 six months ended November
30, 2018 and 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at the beginning of the period
|
$160
|
$119
|
$135
|
$113
|
|
|
|
|
|
|
|
Accruals
for warranties issued during
the period
|
71
|
152
|
146
|
246
|
|
Consumption
of reserves
|
(68)
|
(138)
|
(118)
|
(226)
|
|
|
|
|
|
|
|
Balance
at the end of the period
|
$163
|
$133
|
$163
|
$133
|
The accrued
warranty balance is included in accrued expenses on the
accompanying condensed consolidated balance
sheets.
10.
CUSTOMER DEPOSITS AND DEFERRED REVENUE, SHORT-TERM
Customer deposits
and deferred revenue, short-term (in thousands):
|
|
|
|
|
|
|
|
|
Customer
deposits
|
$1,625
|
$1,340
|
|
Deferred
revenue
|
443
|
290
|
|
|
$2,068
|
$1,630
|
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.
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. The Company has finalized its calculation of
the total post-1986 earnings and profits for its foreign
corporations. Based on the Company’s net operating loss
carryovers and valuation allowance, there is no impact to its
consolidated financial statements as a result of the 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. Fiscal years 1997 through
2018 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.
12.
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 November 30, 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.
13.
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
|
(51)
|
--
|
(51)
|
|
Amounts
reclassified out of AOCI
|
--
|
--
|
--
|
|
Other
comprehensive (loss) income, net of tax
|
(51)
|
--
|
(51)
|
|
Balance
at November 30, 2018
|
$2,241
|
$--
|
$2,241
|
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 and six months ended November 30, 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
|
$23
|
$57
|
$59
|
$79
|
|
Selling,
general and administrative
|
136
|
218
|
284
|
368
|
|
Research
and development
|
65
|
89
|
137
|
133
|
|
Total
stock-based compensation
|
$224
|
$364
|
$480
|
$580
|
As of
November 30, 2018 and 2017, there were no stock-based compensation
expenses capitalized as part of inventory.
During
the three months ended November 30, 2018 and 2017, the Company
recorded stock-based compensation expense related to stock options
and RSUs of $166,000 and $207,000, respectively. During the six
months ended November 30, 2018 and 2017, the Company recorded
stock-based compensation expense related to stock options and RSUs
of $339,000 and $408,000, respectively.
As of
November 30, 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
$1,582,000, 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 November 30, 2018 and 2017, the Company
recorded stock-based compensation expense related to the ESPP of
$58,000 and $157,000, respectively. During the six months ended
November 30, 2018 and 2017, the Company recorded stock-based
compensation expense related to the ESPP of $141,000 and $172,000,
respectively.
As of
November 30, 2018, the total compensation expense related to
purchase rights under the ESPP but not yet recognized was
approximately $217,000. This expense will be amortized on a
straight-line basis over a weighted average period of approximately
1.3 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 and six months ended November 30, 2018
and 2017 were estimated using the following weighted average
assumptions in the Black-Scholes option valuation
model:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
term (in years)
|
5
|
4
|
5
|
4
|
|
Volatility
|
0.70
|
0.74
|
0.72
|
0.77
|
|
Risk-free
interest rate
|
3.01%
|
1.92%
|
2.84%
|
1.77%
|
|
Weighted
average grant date fair value
|
$1.21
|
$1.93
|
$1.38
|
$2.22
|
The
fair values of the ESPP purchase rights granted for the three and
six months ended November 30, 2018 were estimated using the
following weighted-average assumptions:
|
|
|
Three and Six Months Ended
|
|
|
|
November 30, 2018
|
|
|
|
|
|
Expected term (in years)
|
|
0.5-2.0
|
|
Volatility
|
|
0.48-0.64
|
|
Expected dividend
|
|
$0.00
|
|
Risk-free interest rates
|
|
2.40%-2.82%
|
|
Estimated forfeiture rate
|
|
0%
|
|
Weighted average grant date fair value
|
|
$1.15
|
There
were no ESPP purchase rights granted to employees for the three and
six months ended November 30, 2017. During the three and six months ended
November 30, 2018, ESPP purchase rights of 327,000 were granted.
Total ESPP shares issued during the three and six months ended
November 30, 2018 and 2017 were 64,000 and 116,000 shares,
respectively. As of November 30, 2018, there were 430,000 ESPP
shares available for issuance.
The
following tables summarize the Company’s stock option and
RSU transactions during
three and six months ended November 30, 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
|
|
Options
granted
|
(248)
|
|
RSUs
granted
|
--
|
|
Shares
cancelled
|
45
|
|
Shares
expired
|
(33)
|
|
|
|
|
Balance,
November 30, 2018
|
1,137
|
The
following table summarizes the stock option transactions during the
three and six months ended November 30, 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
granted
|
248
|
$2.03
|
|
|
Options
cancelled
|
(45)
|
$2.70
|
|
|
Options
exercised
|
(19)
|
$1.09
|
|
|
|
|
|
|
|
Balances,
November 30, 2018
|
3,373
|
$2.11
|
$679
|
|
|
|
|
|
|
Options
fully vested and expected to vest
at November 30, 2018
|
3,337
|
$2.11
|
$678
|
The
options outstanding and exercisable at November 30, 2018 were in
the following exercise price ranges (in thousands, except per share
data):
|
|
Options
Outstanding at November 30,
2018
|
Options
Exercisable at November 30,
2018
|
|
|
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
|
249
|
0.27
|
$0.66
|
249
|
0.27
|
$0.66
|
|
|
$1.09-$1.28
|
498
|
1.22
|
$1.28
|
498
|
1.22
|
$1.28
|
|
|
$1.68-$2.06
|
713
|
4.87
|
$1.84
|
344
|
3.53
|
$1.77
|
|
|
$2.10-$2.81
|
1,651
|
4.13
|
$2.43
|
1,143
|
3.13
|
$2.45
|
|
|
|
262
|
5.66
|
$3.86
|
114
|
5.72
|
$3.76
|
|
|
|
3,373
|
3.69
|
$2.11
|
2,348
|
2.61
|
$1.98
|
$653
|
The
total intrinsic value of options exercised during the three and six
months ended November 30, 2018 was $23,000 and $162,000,
respectively. The total intrinsic value of options exercised during
the three and six months ended November 30, 2017 was $269,000 and
$745,000, respectively. The weighted average remaining contractual
life of the options exercisable and expected to be exercisable at
November 30, 2018 was 3.67 years.
There
were no RSUs granted to employees during the three and six months
ended November 30, 2018, and during the three months ended November
30, 2017. During the six months ended November 30, 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. During the
three and six months ended November 30, 2018, 4,000 and 9,000 RSUs
became fully vested, respectively. During the three and six months
ended November 30, 2017, 4,000 and 7,000 RSUs became
fully vested respectively. As of November 30, 2018, 38,000 RSUs
remain unvested which had an intrinsic value of $72,000. 89,000
RSUs were unvested at November 30, 2017 which had an intrinsic
value of $227,000.
14.
SEGMENT INFORMATION
The
Company has only one reportable segment. The information for
revenue category by type, product line, geography and timing of
revenue recognition, is summarized in Note “3.
REVENUE.”
Property and
equipment information is based on the physical location of the
assets. The following table presents property and equipment
information for geographic areas (in thousands):
|
|
|
|
|
|
|
|
|
United
states
|
$1,033
|
$1,156
|
|
Asia
|
38
|
40
|
|
Europe
|
3
|
7
|
|
|
$1,074
|
$1,203
|
There
were no revenues through distributors for the three and six months
ended November 30, 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 94% and 83% of its net sales in the three and six
months ended November 30, 2018, respectively. Three customers
accounted for approximately 55%, 13% and 13% of the Company’s
net sales in the three months ended November 30, 2018. Four
customers accounted for approximately 33%, 16%, 15% and 13% of the
Company’s net sales in the six months ended November 30,
2018. Sales to the Company’s five largest customers accounted
for approximately 94% and 96% of its net sales in the three and six
months ended November 30, 2017, respectively. Two customers
accounted for approximately 43% and 34% of the Company’s net
sales in the three months ended November 30, 2017. Two customers
accounted for approximately 43%, and 39% of the Company’s net
sales in the six months ended November 30, 2017. No other customers
represented more than 10% of the Company’s net sales in the
three and six months ended November 30, 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 six months ended November 30, 2018 compared to those
discussed in our Annual Report on Form 10-K for the fiscal year
ended May 31, 2018.
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
|
59.4
|
60.5
|
62.9
|
59.4
|
|
Gross
profit
|
40.6
|
39.5
|
37.1
|
40.6
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
Selling,
general and administrative
|
33.5
|
23.4
|
36.2
|
24.5
|
|
Research
and development
|
16.7
|
13.7
|
19.7
|
13.7
|
|
|
|
|
|
|
|
Total
operating expenses
|
50.2
|
37.1
|
55.9
|
38.2
|
|
|
|
|
|
|
|
(Loss)
income from operations
|
(9.6)
|
2.4
|
(18.8)
|
2.4
|
|
|
|
|
|
|
|
Interest
expense, net
|
(1.3)
|
(1.3)
|
(1.4)
|
(1.4)
|
|
Other
income (expense), net
|
0.6
|
(0.2)
|
0.3
|
(0.5)
|
|
|
|
|
|
|
|
(Loss)
income before income tax expense
|
(10.3)
|
0.9
|
(19.9)
|
0.5
|
|
|
|
|
|
|
|
Income
tax expense
|
(0.3)
|
(0.1)
|
(0.2)
|
--
|
|
Net
(loss) income
|
(10.6)
|
0.8
|
(20.1)
|
0.5
|
|
Less:
Net income attributable to the
noncontrolling interest
|
--
|
--
|
--
|
--
|
|
|
|
|
|
|
|
Net
(loss) income attributable to Aehr
Test Systems common shareholders
|
(10.6)%
|
0.8%
|
(20.1)%
|
0.5%
|
THREE
MONTHS ENDED NOVEMBER 30, 2018 COMPARED TO THREE MONTHS ENDED
NOVEMBER 30, 2017
NET
SALES. Net sales decreased to $5.9 million for the three months
ended November 30, 2018 from $7.9 million for the three months
ended November 30, 2017, a decrease of 25.4%. The decrease in net
sales for the three months ended November 30, 2018 was primarily
due to the decrease in net sales of our Test During Burn-in (TDBI)
products, partially offset by the increase in net sales of our
wafer-level products. Net sales of the TDBI products for the three
months ended November 30, 2018 were $1.7 million, and decreased
approximately $3.4 million from the three months ended November 30,
2017. Net sales of the wafer-level products for the three months
ended November 30, 2018 were $4.2 million, and increased
approximately $1.4 million from the three months ended November 30,
2017.
GROSS
PROFIT. Gross profit decreased to $2.4 million for the three months
ended November 30, 2018 from $3.1 million for the three months
ended November 30, 2017, a decrease of approximately 23.4%. Gross
profit margin increased to 40.6% for the three months ended
November 30, 2018 from 39.5% for the three months ended November
30, 2017.
SELLING, GENERAL
AND ADMINISTRATIVE. SG&A expenses increased to $2.0 million for
the three months ended November 30, 2018 from $1.9 million for the
three months ended November 30, 2017, an increase of 6.6%. 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 November 30, 2018 from $1.1 million for the
three months ended November 30, 2017, a decrease of 9.5%. The
decrease in R&D expenses was primarily due to a decrease in
project expenses.
INTEREST EXPENSE,
NET. Interest expense, net was $74,000 and $105,000 for the three
months ended November 30, 2018 and 2017, respectively. The lower
interest expense, net in the three months ended November 30, 2018
was primarily a result of higher interest income due to the
increase in the market interest rates on our cash and investment
portfolio during the period compared with the three months ended
November 30, 2017.
OTHER
INCOME (EXPENSE), NET. Other income, net was $29,000 for the three
months ended November 30, 2018 compared with other expense, net of
$7,000 for the three months ended November 30, 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. Income tax expense was $19,000 and $15,000 for the
three months ended November 30, 2018 and 2017,
respectively.
SIX
MONTHS ENDED NOVEMBER 30, 2018 COMPARED TO SIX MONTHS ENDED
NOVEMBER 30, 2017
NET
SALES. Net sales decreased to $10.7 million for the six months
ended November 30, 2018 from $14.9 million for the six months ended
November 30, 2017, a decrease of 28.5%. The decrease in net sales
for the six months ended November 30, 2018 was primarily due to the
decreases in both net sales of our Test During Burn-in (TDBI)
products and wafer-level products. Net sales of the TDBI products
for the six months ended November 30, 2018 were $4.5 million, and
decreased approximately $3.5 million from the six months ended
November 30, 2017. Net sales of the wafer-level products for the
six months ended November 30, 2018 were $6.2 million, and decreased
approximately $0.8 million from the six months ended November 30,
2017.
GROSS
PROFIT. Gross profit decreased to $4.0 million for the six months
ended November 30, 2018 from $6.0 million for the six months ended
November 30, 2017, a decrease of 34.7%. Gross profit margin
decreased to 37.1% for the six months ended November 30, 2018 from
40.6% for the six months ended November 30, 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 $3.9 million for
the six months ended November 30, 2018 from $3.6 million for the
six months ended November 30, 2017, an increase of 5.8%. The
increase in SG&A expenses was primarily due to an increase in
employment related expenses.
RESEARCH AND
DEVELOPMENT. R&D expenses increased to $2.1 million for the six
months ended November 30, 2018 from $2.0 million for the six months
ended November 30, 2017, an increase of 2.8%. The increase in
R&D expenses was primarily due to an increase in employment
related expenses.
INTEREST EXPENSE,
NET. Interest expense, net was $152,000 and $212,000 for the six
months ended November 30, 2018 and 2017, respectively. The lower
interest expense, net in the six months ended November 30, 2018 was
primarily a result of higher interest income due to the increase in
the market interest rates on our cash and investment portfolio
during the period compared with the six months ended November 30,
2017.
OTHER
INCOME (EXPENSE), NET. Other income, net was $38,000 for the six
months ended November 30, 2018 compared with other expense, net of
$67,000 for the six months ended November 30, 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. Income tax expense was $23,000 and $10,000 for the six
months ended November 30, 2018 and 2017, respectively.
LIQUIDITY
AND CAPITAL RESOURCES
Net
cash used in operating activities was $3.0 million and $2.2 million
for the six months ended November 30, 2018 and 2017, respectively.
For the six months ended November 30, 2018, net cash used in
operating activities was primarily the result of net loss of $2.1
million, as adjusted to exclude the effect of non-cash charge of
stock-based compensation expense of $0.5 million. Net cash used in
operations was also impacted by increases in accounts receivable
and inventories of $1.1 million and $0.9 million, respectively,
partially offset by an increase in accounts payable of $0.3 million
and an increase in customer deposits and deferred revenue of $0.2
million. The increase in accounts receivable was primarily due to
large shipments toward the end of the quarter ended November 30,
2018. The increase in inventories and accounts payable were due
primarily to inventory purchases to support future shipments. The
increase in customer deposits and deferred revenue was primarily
due the receipt of additional down payments from certain customers.
For the six months ended November 30, 2017, net cash used in
operating activities was primarily the result of net income of
$70,000, as adjusted to exclude the effect of non-cash charge of
stock-based compensation expense of $0.6 million and depreciation
and amortization expense of $0.2 million. Net cash used in
operations was also impacted by an increase in inventories of $1.2
million, an increase in prepaid expenses and other current assets
of $1.1 million, a decrease in accounts payable of $1.0 million,
and a decrease in customer deposits and deferred revenue of $0.2
million, partially offset by a decrease in accounts receivable of
$0.6 million. The increase in inventories is to support future
shipments for customer orders. The increase in prepaid expenses and
other current assets was primarily due to down payments to certain
vendors. The decrease in accounts payable was primarily due to
timing of vendor payments. The decrease in customer deposits and
deferred revenue was primarily due to the shipments against
customer orders with down payments. The decrease in accounts
receivable was due to improvements in customer payment
terms.
Net
cash used in investing activities was $0.1 million and $6.3 million
for the six months ended November 30, 2018 and 2017, respectively.
During the six months ended November 30, 2018, net cash used in
investing activities was due to the purchases of property and
equipment. During the six months ended November 30, 2017, net cash
used in investing activities was due to the purchase of available
for sale securities, which did not affect our liquidity, and the
purchases of property and equipment.
Financing
activities provided cash of $0.3 million and $0.6 million for the
six months ended November 30, 2018 and 2017, respectively. Net cash
provided by financing activities during the six months ended
November 30, 2018 and 2017 was due to the proceeds from the
issuance of common stock under employee plans.
The
effect of fluctuation in exchange rates decreased cash by $98,000
and $7,000 for the six months ended November 30, 2018 and 2017,
respectively. The changes were due to the fluctuation in the value
of the dollar compared to foreign currencies.
As of
November 30, 2018 and May 31, 2018, we had working capital of $16.9
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
November 30, 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.
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.
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Exhibit No.
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Description
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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.
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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.
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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.*
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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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*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.
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
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(Registrant)
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Date: January 14,
2019
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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: January 14,
2019
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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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