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.
The Company was founded in 1977 to develop and manufacture burn-in and test equipment for the semiconductor industry. Since its inception, the Company has sold more than 2,500 systems to semiconductor manufacturers, semiconductor contract assemblers and burn-in and test service companies worldwide. The Company’s principal products currently are the Advanced Burn-in and Test System, or ABTS, the FOX full wafer contact parallel test and burn-in system, the MAX burn-in system, WaferPak contactors, the DiePak carrier and test fixtures.
The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s 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 the Company 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, the Company evaluates its 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. The Company’s 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 the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2013.
The following table sets forth items in the Company’s unaudited condensed consolidated statements of operations as a percentage of net sales for the periods indicated.
sales representatives, $0.2 million$26,000 in pre-sales supportoutside services expenses, and $0.1 million$13,000 in employment related expenses.
RESEARCH AND DEVELOPMENT. Research and development, or R&D, expenses consist primarily of salaries and related costs of employees engaged in ongoing research, design and development activities, costs of engineering materials and supplies, and professional consulting expenses. R&D expenses decreasedincreased to $0.8$0.9 million for the three months ended November 30, 2013February 28, 2014 from $1.0$0.7 million for the three months ended November 30, 2012, a decrease of 17.0%. The decrease in R&D expenses was primarily due to the transfer of $0.3 million R&D expenditures, related to non-recurring engineering milestones, into cost of goods sold and prepaid expenses. This was partially offset byFebruary 28, 2013, an increase of 32.4%. This increase was primarily attributable to increases in employment related expenses and project expenses of $0.1 million in project expense.each.
INTEREST EXPENSE. Interest expense decreased to $10,000$7,000 for the three months ended November 30, 2013February 28, 2014 from $13,000$18,000 for the three months ended November 30, 2012February 28, 2013 primarily as a result of lower average borrowings on the line of credit.
OTHER EXPENSE, NET. Other expenses,expense, net were $30,000was $21,000 and $15,000$9,000 for the three months ended November 30,February 28, 2014 and 2013, and 2012, respectively. The change in other expense was due primarily to losses realized in connection with foreign exchange rate fluctuations during the referenced periods.
INCOME TAX (EXPENSE) BENEFIT. Income tax expenses were $2,000$22,000 and $16,000nil for the three months ended November 30,February 28, 2014 and 2013, and 2012, respectively.
SIXNINE MONTHS ENDED NOVEMBER 30, 2013FEBRUARY 28, 2014 COMPARED TO SIXNINE MONTHS ENDED NOVEMBER 30, 2012FEBRUARY 28, 2013
NET SALES. Net sales decreasedincreased to $8.7$14.3 million for the sixnine months ended November 30, 2013February 28, 2014 from $9.9$13.2 million for the sixnine months ended November 30, 2012, a decreaseFebruary 28, 2013, an increase of 12.0%8.2%. The decreaseincrease in net sales for the sixnine months ended November 30, 2013February 28, 2014 resulted primarily from a decreasean increase in net sales of the Company’s TDBIwafer-level products, partially offset by an increasea decrease of the Company’s wafer-levelTDBI products. Net sales of the TDBI products for the six months ended November 30, 2013 were $4.9 million, and decreased approximately $2.3 million from the six months ended November 30, 2012. Net sales of the Company’s wafer-level products for the sixnine months ended November 30, 2013February 28, 2014 were $3.7$6.0 million, and increased approximately $1.2$1.8 million from the sixnine months ended November 30, 2012.February 28, 2013. Net sales of the TDBI products for the nine months ended February 28, 2014 were $8.2 million, and decreased approximately $0.6 million from the nine months ended February 28, 2013.
GROSS PROFIT. Gross profit decreasedincreased to $4.4$7.3 million for the sixnine months ended November 30, 2013February 28, 2014 from $4.7$5.5 million for the sixnine months ended November 30, 2012, a decreaseFebruary 28, 2013, an increase of 6.0%33.3%. Gross profit margin increased to 51.0%51.1% for the sixnine months ended November 30, 2013February 28, 2014 from 47.7%41.5% for the sixnine months ended November 30, 2012.February 28, 2013. The increase in gross profit margin was primarily due to decreased direct material costs resulting from the resultsales of the sale ofmultiple systems containingincluding previously reserved inventory.written down material.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses decreased to $2.9$4.6 million for the sixnine months ended November 30, 2013February 28, 2014 from $3.9$5.4 million for the sixnine months ended November 30, 2012,February 28, 2013, a decrease of 23.9%13.6%. The decrease in SG&A expenses was primarily due to decreases of $0.4$0.3 million in employment related expenses, $0.3 million in pre-sales support expenses and $0.3 million in sales commissioncommissions to outside sales representatives.representatives and $0.2 million in pre-sales support expenses.
RESEARCH AND DEVELOPMENT. R&D expenses decreased to $1.5$2.4 million for the sixnine months ended November 30, 2013February 28, 2014 from $1.9$2.6 million for the sixnine months ended November 30, 2012,February 28, 2013, a decrease of 21.8%7.4%. The decrease in R&D expenses was primarily due to the transfer of $0.4$0.5 million R&D expenditures, related to non-recurring engineering milestones, into cost of goods sold and prepaid expenses, and a decrease of $0.1 million in employment related expenses. These were partially offset by increases in project materials and outside services of $0.2 million each.
INTEREST EXPENSE. Interest expense decreased to $14,000$21,000 for the sixnine months ended November 30, 2013February 28, 2014 from $25,000$43,000 for the sixnine months ended November 30, 2012 primarilyFebruary 28, 2013 as a result of lower average borrowings on the line of credit.
OTHER EXPENSE, NET. Other expenses,expense, net were $64,000was $85,000 and $34,000$43,000 for the sixnine months ended November 30,February 28, 2014 and 2013, and 2012, respectively. The change in other expense was due primarily to losses realized in connection with foreign exchange rate fluctuations during the referenced periods.
INCOME TAX (EXPENSE) BENEFIT. Income tax benefit was $27,000$5,000 for the sixnine months ended November 30, 2013,February 28, 2014, compared with income tax expense of $18,000 for the sixnine months ended November 30, 2012.February 28, 2013. The income tax benefit for the sixnine months ended November 30, 2013February 28, 2014 was due to the reversal of tax liabilities previously established under Financial Accounting Standards Board Interpretation No. 48, which were no longer required.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $0.4 million for the six months ended November 30, 2013 and cash used in operating activities was $1.2$0.2 million for the sixnine months ended November 30, 2012.February 28, 2014 and $0.3 million for the nine months ended February 28, 2013. For the sixnine months ended November 30, 2013,February 28, 2014, net cash provided by operating activities was primarily due to the increase in accounts payable of $0.7$1.1 million and the exclusion of the effect of non-cash charges of stock-based compensation expense of $0.4$0.6 million, partially offset by an increase in accounts receivable of $0.7 million, inventories of $0.3$0.5 million and a decrease in accrued expensescustomer deposits and deferred revenue of $0.2$0.7 million. The increases in accounts payable and inventories were due primarily to inventory purchases to support future shipments. The increase in accounts receivable was primarily due to an increase in sales. The decrease in accrued expensescustomer deposits and deferred revenue was primarily fromdue to the decrease in sales commission accrual.shipments of customer orders with down payments. For the sixnine months ended November 30, 2012,February 28, 2013, net cash used in operating activities was primarily the result of the net loss of $1.1$2.6 million as adjusted to exclude the effect of non-cash charges including stock-based compensation expense of $0.2$0.4 million and depreciation and amortization of $0.2 million, as well as increasesdecreases in accounts receivable of $0.3$1.0 million and inventories of $0.3$0.4 million. The increasedecrease in accounts receivable was primarily due to an increaseimprovements in revenues for the six months ended November 30, 2012 compared to the same period in the prior fiscal year.customer payment terms. The increasedecrease in inventories was primarily due to support future shipments for customer orders.the increase in inventory reserves related to older products as new products move into volume production.
Net cash used in investing activities was $52,000$104,000 and $21,000$126,000 for the sixnine months ended November 30,February 28, 2014 and 2013, and 2012, respectively. Net cash used in investing activities was primarily due to the purchasepurchases of property and equipment, offset by proceeds from the sales of property and equipment.
Financing activities used cash of $202,000$193,000 and $13,000 for the sixnine months ended November 30,February 28, 2014 and 2013, and provided cash of $457,000 for the six months ended November 30, 2012.respectively. Net cash used inby financing activities during the sixnine months ended November 30, 2013February 28, 2014 was due primarily to the net repayments forunder the line of credit of $625,000,$695,000, offset by cash provided of $423,000$502,000 in proceeds from the proceeds of issuance of common stock and exercise of stock options. Net cash providedused by financing activities during the sixnine months ended November 30, 2012February 28, 2013 was due primarily to net borrowingsrepayments under the line of credit of $277,000 and$193,000, offset by $180,000 due toin proceeds from issuance of common stock and exercise of stock options.
The effect of exchange rates used cash of $11,000$12,000 and $250,000 for the sixnine months ended November 30,February 28, 2014 and 2013, and $88,000 for the six months ended November 30, 2012. The change in cash used wasrespectively, due to the fluctuation in the value of the dollar compared to foreign currencies.
As of November 30, 2013,February 28, 2014, the Company had working capital of $5.6$6.1 million. Working capital consists of cash and cash equivalents, accounts receivable, inventory and other current assets, less current liabilities.
The Company leases its manufacturing and office space under operating leases. The Company entered into a non-cancelable operating lease agreement for its United States manufacturing and office facilities, which commenced in April 2008 and expires in June 2015. Under the lease agreement, the Company is responsible for payments of utilities, taxes and insurance.
From time to time, the Company evaluates potential acquisitions of businesses, products or technologies that complement the Company’s business. If
consummated, any such transactions may use a portion of the Company’s working capital or require the issuance of equity. The Company has no present understandings, commitments or agreements with respect to any material acquisitions.
The Company anticipates that the existing cash balance together with cash flows from operations, as well as funds available through the working capital credit facility will be adequate to meet its working capital and capital equipment requirements through calendar 2014.fiscal 2015. Refer to Note 11, “LINE OF CREDIT”, for further discussion of the credit facility agreement. After calendar 2014,fiscal 2015, depending on its rate of growth and profitability, the Company may require additional equity or debt financing to meet its working capital requirements or capital equipment needs. There can be no assurance that additional financing will be available when required, or if available, that such financing can be obtained on terms satisfactory to the Company.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has not entered into any off-balance sheet financing arrangements and has not established any variable interest entities.
OVERVIEW OF CONTRACTUAL OBLIGATIONS
On August 25, 2011, the Company entered into a working capital credit facility agreement allowing the Company to borrow up to $1.5 million based upon qualified U.S. based and foreign customer receivables, and export-related inventory. On May 29, 2012 the credit agreement was amended to increase the borrowing limit to $2.0 million. On September 11, 2012, the credit agreement was amended to increase the borrowing limit to $2.5 million. On August 21, 2013 the credit agreement was further amended to extend the term of the agreement to August 22, 2014. Refer to Note 11, “LINE OF CREDIT,” for further discussion of the credit agreement.
There have been no additional material changes in the composition, magnitude or other key characteristics of the Company's contractual obligations or other commitments as disclosed in the Company's Annual Report on Form 10-K for the year ended May 31, 2013.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company had no holdings of derivative financial or commodity instruments at November 30, 2013February 28, 2014 or May 31, 2013.
The Company is exposed to financial market risks, including changes in interest rates and foreign currency exchange rates. The Company only invests its short-term excess cash in government-backed securities with maturities of 18 months or less. The Company does not use any financial instruments for speculative or trading purposes. Fluctuations in interest rates would not have a material effect on the Company’s financial position, results of operations or cash flows.
A majority of the Company’s revenue and capital spending is transacted in U.S. Dollars. The Company, however, enters into transactions in other currencies, primarily Euros and Japanese Yen. Since the price is determined at the time a purchase order is accepted, the Company is 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 the Company’s subsidiaries incur expenses payable in their local currency. To date, the Company has not invested in instruments designed to hedge currency risks. In addition, the Company’s subsidiaries typically carry debt or other obligations due to the Company that may be denominated in either their local currency or U.S. Dollars. Since the Company’s subsidiaries’ financial statements are based in their local currency and the Company’s condensed consolidated financial statements are based in U.S. Dollars, the Company’s subsidiaries and the Company 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 the Company’s net income or loss. There have been no material changes in our risk exposure since the end of the last fiscal year, nor are any material changes to our risk exposure anticipated.
Item 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to management as appropriate to allow for timely decisions regarding required disclosure.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING. There was no change in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
INHERENT LIMITATIONS OF INTERNAL CONTROLS. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within us have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving our stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None.
Item 1A. RISK FACTORS
You should carefully consider the risks described below. These risks are not the only risks that we may face. Additional risks and uncertainties that we are unaware of, or that we currently deem immaterial, also may become important factors that affect us. If any of the following risks occur, our business, financial condition or results of operations could be materially and adversely affected which could cause our actual operating results to differ materially from those indicated or suggested by forward-looking statements made in this Quarterly Report on Form 10-Q and in other documents we filed with the U.S. Securities and Exchange Commission, including without limitation our most recently filed Annual Report on Form 10-K or presented elsewhere by management from time to time.
Periodic economic and semiconductor industry downturns could negatively affect our business, results of operations and financial condition.
Periodic global economic and semiconductor industry downturns have negatively affected and could continue to negatively affect our business, results of operations, and financial condition. Financial turmoil in the banking system and financial markets has resulted, and may result in the future, in a tightening of the credit markets, disruption in the financial markets and global economy downturn. These events may contribute to significant slowdowns in the industry in which we operate. Difficulties in obtaining capital and deteriorating market conditions can pose the risk that some of our customers may not be able to obtain necessary financing on reasonable terms, which could result in lower sales for the Company. Customers with liquidity issues may lead to additional bad debt expense for the Company. For example, as a result of Spansion declaring bankruptcy in Japan and the U.S. during fiscal 2009, the Company subsequently recorded a $13.7 million provision for bad debts. A recurrence of these or similar conditions may also affect our key suppliers,
which could impact their ability to deliver parts and result in delays in deliveries of our products.
Turmoil in the international financial markets has resulted, and may result in the future, in dramatic currency devaluations, stock market declines, restriction of available credit and general financial weakness. In addition, flash, DRAM and other memory device prices have historically declined, and will likely do so again in the future. These developments may affect us in several ways. We believe that many international semiconductor manufacturers limited their capital spending in calendar 2009 and again in calendar 2012 and 2013, and that the uncertainty of the semiconductor market may cause some manufacturers in the future to further delay capital spending plans. Economic conditions may also affect the ability of our customers to meet their payment obligations, resulting in cancellations or deferrals of existing orders and limiting additional orders. In addition, some governments have subsidized portions of fabrication facility construction, and financial turmoil may reduce these governments’ willingness to continue such subsidies. Such developments could have a material adverse effect on our business, financial condition and results of operations.
The recent economic conditions and uncertainty about future economic conditions make it challenging for us to forecast our operating results, make business decisions, and identify the risks that may affect our business, financial condition and results of operations. If such conditions recur, and we are not able to timely and appropriately adapt to changes resulting from the difficult macroeconomic environment, our business, financial condition or results of operations may be materially and adversely affected.
If we are not able to reduce our operating expenses sufficiently during periods of weak revenue, or if we utilize significant amounts of cash to support operating losses, we may erode our cash resources and may not have sufficient cash to operate our business.
In the face of the recent sustained downturn in our business and decline in our net sales, we implemented a variety of cost controls and restructured our operations with the goal of reducing our operating costs to position ourselves to more effectively meet the needs of the then weak market for test and burn-in equipment. While we took significant steps in fiscal 2009 to minimize our expense levels and to increase the likelihood that we would have sufficient cash to support operations during the downturn, from fiscal 2009 through fiscal 2013 we experienced operating losses. Due primarily to these operating losses, we experienced cash outflows and, at November 30, 2013,February 28, 2014, had $2.5$1.8 million in cash and cash equivalents. Should our business downturn be prolonged,recur, and if we are unable to reduce our operating expenses sufficiently, we may require additional debt or equity financing to meet working capital or capital expenditure needs. While we believe our existing cash balance, together with cash flows from operations, as well as funds available through our working capital credit facility, will be adequate to meet our working capital and capital equipment requirements through fiscal 2014,2015, we cannot determine with certainty that, if needed, we will be able to raise additional funding through either equity or debt financing under these circumstances or on what terms such financing would be available.
We generate a large portion of our sales from a small number of customers. If we were to lose one or more of our large customers, operating results could suffer dramatically.
The semiconductor manufacturing industry is highly concentrated, with a relatively small number of large semiconductor manufacturers and contract assemblers accounting for a substantial portion of the purchases of semiconductor equipment. Sales to the Company’s five largest customers accounted for approximately 81%, 83%, and 85% of its net sales in fiscal 2013, 2012 and 2011, respectively. During fiscal 2013, Texas Instruments and Spansion accounted for approximately 32% and 26%, respectively, of the Company’s net sales. During fiscal 2012, Spansion and Texas Instruments accounted for approximately 40% and 22%, respectively, of the Company’s net sales. During
fiscal 2011, Spansion and Texas Instruments accounted for approximately 61% and 11%, respectively, of the Company’s net sales. No other customers accounted for more than 10% of the Company’s net sales for any of these periods.
We expect that sales of our products to a limited number of customers will continue to account for a high percentage of net sales for the foreseeable future. In addition, sales to particular customers may fluctuate significantly from quarter to quarter. The loss of, reduction or delay in an order, or orders from a significant customer, or a delay in collecting or failure to collect accounts receivable from a significant customer could adversely affect our business, financial condition and operating results. For example, during fiscal 2009 Spansion, our largest customer at the time, declared bankruptcy in Japan and in the U.S. and subsequently placed lower levels of orders with the Company, which caused our net sales to drop dramatically and impacted the Company’s ability to collect on accounts receivable.
A substantial portion of our net sales is generated by relatively small volume, high value transactions.
We derive a substantial portion of our net sales from the sale of a relatively small number of systems which typically range in purchase price from approximately $200,000 to over $1 million per system. As a result, the loss or deferral of a limited number of system sales could have a material adverse effect on our net sales and operating results in a particular period. All customer purchase orders are subject to cancellation or rescheduling by the customer with limited penalties, and, therefore, backlog at any particular date is not necessarily indicative of actual sales for any succeeding period. From time to time, cancellations and rescheduling of customer orders have occurred, and delays by our suppliers in providing components or subassemblies to us have caused delays in our shipments of our own products. There can be no assurance that we will not be materially adversely affected by future cancellations or rescheduling. For non-standard products where we have not effectively demonstrated the ability to meet specifications in the customer environment, we defer revenue until this event occurs. Any delay in meeting customer specifications could have a material adverse effect on our operating results. A substantial portion of net sales typically are realized near the end of each quarter. A delay or reduction in shipments near the end of a particular quarter, due, for example, to unanticipated shipment rescheduling, cancellations or deferrals by customers, customer credit issues, unexpected manufacturing difficulties experienced by us or delays in deliveries by suppliers, could cause net sales in a particular quarter to fall significantly below our expectations.
We rely on increasing market acceptance for our FOX system, and we may not be successful in attracting new customers or maintaining our existing customers.
A principal element of our business strategy is to increase our presence in the test equipment market through system sales ofin our FOX wafer-level test and burn-in system.product family. The FOX system is designed to simultaneously burn-infunctionally test and functionally testburn-in all of the die on a wafer on a single touchdown. The market for the FOX systems is in the early stages of development. Market acceptance of the FOX system is subject to a number of risks. Before a customer will incorporate the FOX system into a production line, lengthy qualification and correlation tests must be performed. We anticipate that potential customers may be reluctant to change their procedures in order to transfer burn-in and test functions to the FOX system. Initial purchases are expected to be limited to systems used for these qualifications and for engineering studies. Market acceptance of the FOX system also may be affected by a reluctance of IC manufacturers to rely on relatively small suppliers such as us. As is common with new complex products incorporating leading-edge technologies, we may encounter reliability, design and manufacturing issues as we begin volume production and initial installations of FOX systems at customer sites. The failure of the FOX system to achieve increased market acceptance would have a material adverse effect on our future operating results, long-term prospects and our stock price.
We rely on continued market acceptance of our ABTS system and our ability to complete certain enhancements.
Increased market acceptance of the ABTS family, first introduced in fiscal 2008, is subject to a number of risks. It is important that we achieve customer acceptance, customer satisfaction and increased market acceptance as we add new features and enhancements to the ABTS product. To date, the Company has shipped ABTS systems to customers worldwide for use in both reliability and production applications. The failure of the ABTS family to maintain revenues at or above current levels would have a material adverse effect on our future operating results.
We depend upon continued market demand for test systems used for traditional package level burn-in during production of integrated circuits.
We have historically derived a substantial portion of our net sales from the sale of monitored and test during burn-in systems of packaged integrated circuits. We believe that the market for package level burn-in systems is mature and is not expected to experience significant growth in the future. In general, process control improvements in the semiconductor industry have tended to reduce burn-in times. In addition, as a given IC product generation matures and yields increase, the required burn-in time may be reduced or eliminated. There can be no assurance that the market for burn-in systems will not decline, which would have a negative effect on our operating results.
We may experience increased costs associated with new product introductions.
As is common with new complex products incorporating leading-edge technologies, we have encountered reliability, design and manufacturing issues as we began volume production and initial installations of certain products at customer sites. Some of these issues in the past have been related to components and subsystems supplied to us by third parties who have in some cases limited the ability of us to address such issues promptly. This process in the past required and in the future is likely to require us to incur un-reimbursed engineering expenses and to experience larger than anticipated warranty claims which could result in product returns. In the early stages of product development there can be no assurance that we will discover any reliability, design and manufacturing issues or, that if such issues arise, that they can be resolved to the customers’ satisfaction or that the resolution of such problems will not cause us to incur significant development costs or warranty expenses or to lose significant sales opportunities.
The Company may not meet the listing requirements of the NASDAQ markets which could cause our stock to be delisted.
Pursuant to the listing requirements of NASDAQ, if a company’s stock price is below $1.00 per share for 30 consecutive trading days , NASDAQ will notify the company that it is no longer in compliance with the NASDAQ Bid Price Rule listing qualification. If a company is not in compliance with the Bid Price Rule, the company will have 180 calendar days to regain compliance. The company may regain compliance with the Bid Price Rule if the bid price of the common stock closes at $1.00 per share or more for a minimum of 10 consecutive business days at any time during the 180 day cure period. On November 2, 2011, the Company received notice from NASDAQ that it was no longer in compliance with the Bid Price Rule. The Company regained compliance on April 16, 2012. On December 26, 2012, the Company received notice from NASDAQ that it was no longer in compliance with the Bid Price Rule. The Company subsequently regained compliance on April 3, 2013.
On January 18, 2011 the Company received notice from NASDAQ that it was no longer in compliance with NASDAQ’s Listing Rule 5450(b)(1)(A), which specifies that an issuer must maintain stockholders’ equity of at least $10 million. On March 21, 2011 the Company submitted an application to NASDAQ to transfer the listing of its company stock from the NASDAQ Global Market to the NASDAQ Capital Market. On March 24, 2011 the Company received a letter from NASDAQ informing it that the NASDAQ Listing Qualifications Staff had granted the Company’s request to transfer the listing of its common stock to the NASDAQ Capital
Market, effective at the opening of business on March 28, 2011. The Bid Price Rule is also a listing requirement of the NASDAQ Capital Market.
There can be no assurance that the Company will remain in compliance with the Bid Price Rule, and that it will maintain compliance with the other listing requirements of the NASDAQ Capital Market, or that it will not be delisted.
We sell our products and services worldwide, and our business is subject to risks inherent in conducting business activities in geographic regions outside of the United States.
Approximately 55%, 38%, and 39% of our net sales for fiscal 2013, 2012 and 2011, respectively, were attributable to sales to customers for delivery outside of the United States. We operate a sales, service and limited manufacturing organization in Germany and a sales and service organization in Japan and Taiwan. We expect that sales of products for delivery outside of the United States will continue to represent a substantial portion of our future net sales. Our future performance will depend, in significant part, upon our ability to continue to compete in foreign markets which in turn will depend, in part, upon a continuation of current trade relations between the United States and foreign countries in which semiconductor manufacturers or assemblers have operations. A change toward more protectionist trade legislation in either the United States or such foreign countries, such as a change in the current tariff structures, export compliance or other trade policies, could adversely affect our ability to sell our products in foreign markets. In addition, we are subject to other risks associated with doing business internationally, including longer receivable collection periods and greater difficulty in accounts receivable collection, the burden of complying with a variety of foreign laws, difficulty in staffing and managing global operations, risks of civil disturbance or other events which may limit or disrupt markets, international exchange restrictions, changing political conditions and monetary policies of foreign governments.
Approximately 95%, 1% and 4% of our net sales for fiscal 2013 were denominated in U.S. Dollars, Japanese Yen and Euros, respectively. Although the percentages of net sales denominated in Japanese Yen and Euros were small in fiscal 2013, they have been larger in the past and could become significant again in the future. A large percentage of net sales to European customers are denominated in U.S. Dollars, but sales to many Japanese customers are denominated in Japanese Yen. Because a substantial portion of our net sales is from sales of products for delivery outside the United States, an increase in the value of the U.S. Dollar relative to foreign currencies would increase the cost of our products compared to products sold by local companies in such markets. In addition, since the price is determined at the time a purchase order is accepted, we are exposed to the risks of fluctuations in the U.S. Dollar exchange rate during the lengthy period from the date a purchase order is received until payment is made. This exchange rate risk is partially offset to the extent our foreign operations incur expenses in the local currency. To date, we have not invested in instruments designed to hedge currency risks. Our operating results could be adversely affected by fluctuations in the value of the U.S. Dollar relative to other currencies.
The Company’s business operations could be negatively impacted by earthquakes or other natural disasters.
The March 2011 Japanese earthquake and resulting tsunami seriously affected many companies in Japan, including some of our customers. Some of our customers delayed capital equipment purchases as a result of the disaster. The disaster also negatively impacted the Japanese economy as a whole, which could further impact the Company's future business prospects in Japan.
Natural disasters may impact our ability to manufacture products in the event our facility is damaged, or if operations are disrupted at a major supplier. The demand for our products may be negatively affected if a natural disaster impacts one or more of our significant customers. These events may seriously damage our ability to conduct business.
Our industry is subject to rapid technological change and our ability to remain competitive depends on our ability to introduce new products in a timely manner.
The semiconductor equipment industry is subject to rapid technological change and new product introductions and enhancements. Our ability to remain competitive depends in part upon our ability to develop new products and to introduce them at competitive prices and on a timely and cost-effective basis. Our success in developing new and enhanced products depends upon a variety of factors, including product selection, timely and efficient completion of product design, timely and efficient implementation of manufacturing and assembly processes, product performance in the field and effective sales and marketing. Because new product development commitments must be made well in advance of sales, new product decisions must anticipate both future demand and the technology that will be available to supply that demand. Furthermore, introductions of new and complex products typically involve a period in which design, engineering and reliability issues are identified and addressed by our suppliers and by us. There can be no assurance that we will be successful in selecting, developing, manufacturing and marketing new products that satisfy market demand. Any such failure would materially and adversely affect our business, financial condition and results of operations.
Because of the complexity of our products, significant delays can occur between a product’s introduction and the commencement of the volume production of such product. We have experienced, from time to time, significant delays in the introduction of, and technical and manufacturing difficulties with, certain of our products and may experience delays and technical and manufacturing difficulties in future introductions or volume production of our new products. Our inability to complete new product development, or to manufacture and ship products in time to meet customer requirements would materially adversely affect our business, financial condition and results of operations.
Our dependence on subcontractors and sole source suppliers may prevent us from delivering our products on a timely basis and expose us to intellectual property infringement.
We rely on subcontractors to manufacture many of the components or subassemblies used in our products. Our FOX and ABTS systems, WaferPak contactors and DiePak carriers contain several components, including environmental chambers, power supplies, high-density interconnects, wafer contactors, signal distribution substrates and certain ICs that are currently supplied by only one or a limited number of suppliers. Our reliance on subcontractors and single source suppliers involves a number of significant risks, including the loss of control over the manufacturing process, the potential absence of adequate capacity and reduced control over delivery schedules, manufacturing yields, quality and costs. In the event that any significant subcontractor or single source supplier is unable or unwilling to continue to manufacture subassemblies, components or parts in required volumes, we would have to identify and qualify acceptable replacements. The process of qualifying subcontractors and suppliers could be lengthy, and no assurance can be given that any additional sources would be available to us on a timely basis. Any delay, interruption or termination of a supplier relationship could adversely affect our ability to deliver products, which would harm our operating results.
Our suppliers manufacture components, tooling, and provide engineering services. During this process, our suppliers are allowed access to intellectual property of the Company. While the Company maintains patents to protect from intellectual property infringement, there can be no assurance that technological information gained in the manufacture of our products will not be used to develop a new product, improve processes or techniques which compete against our products. Litigation may be necessary to enforce or determine the validity and scope of our proprietary rights, and there can be no assurance that our intellectual property rights, if challenged, will be upheld as valid.
Future changes in semiconductor technologies may make our products obsolete.
Future improvements in semiconductor design and manufacturing technology may reduce or eliminate the need for our products. For example, improvements in semiconductor process technology and improvements in conventional test systems, such as reduced cost or increased throughput, may significantly reduce or eliminate the market for one or more of our products. If we are not able to improve our products or develop new products or technologies quickly enough to maintain a competitive position in our markets, our business may decline.
Semiconductor business cycles are unreliable and there is always the risk of cancellations and rescheduling which could have a material adverse effect on our operating results.
Our operating results depend primarily upon the capital expenditures of semiconductor manufacturers, semiconductor contract assemblers and burn-in and test service companies worldwide, which in turn depend on the current and anticipated market demand for ICs. The semiconductor equipment manufacturing industry has historically been subject to a relatively high rate of purchase order cancellation by customers as compared to other high technology industry sectors. Manufacturing companies who are the customers of semiconductor equipment companies frequently revise, postpone and cancel capital facility expansion plans. In such cases, semiconductor equipment companies may experience a significant rate of cancellations or rescheduling of purchase orders. There can be no assurance that we will not be materially adversely affected by future cancellations or rescheduling of purchase orders.
Our stock price may fluctuate.
The price of our common stock has fluctuated in the past and may fluctuate significantly in the future. We believe that factors such as announcements of developments related to our business, fluctuations in our operating results, failure to meet securities analysts’ expectations, general conditions in the semiconductor and semiconductor equipment industries as well as the worldwide economy, announcement of technological innovations, new systems or product enhancements by us or our competitors, fluctuations in the level of cooperative development funding, acquisitions, changes in governmental regulations, developments in patents or other intellectual property rights and changes in our relationships with customers and suppliers could cause the price of our common stock to fluctuate substantially. In addition, in recent years the stock market in general, and the market for small capitalization and high technology stocks in particular, have experienced extreme price fluctuations which have often been unrelated to the operating performance of the affected companies. Such fluctuations could adversely affect the market price of our common stock.
We depend on our key personnel and our success depends on our ability to attract and retain talented employees.
Our success depends to a significant extent upon the continued service of Gayn Erickson, our President and Chief Executive Officer, and Rhea Posedel, our Chairman, as well as other executive officers and key employees. We do not maintain key person life insurance for our benefit on any of our personnel, and none of our employees are subject to a non-competition agreement with us. The loss of the services of any of our executive officers or a group of key employees could have a material adverse effect on our business, financial condition and operating results. Our future success will depend in significant part upon our ability to attract and retain highly skilled technical, management, sales and marketing personnel. There is a limited number of personnel with the requisite skills to serve in these positions, and it has become increasingly difficult for us to hire such personnel. Competition for such personnel in the semiconductor equipment industry is intense, and there can be no assurance that we will be successful in attracting or retaining such personnel. Changes in management could disrupt our operations and adversely affect our operating results.
We may be subject to litigation relating to intellectual property infringement which would be time-consuming, expensive and a distraction from our business.
If we do not adequately protect our intellectual property, competitors may be able to use our proprietary information to erode our competitive advantage, which could harm our business and operating results. Litigation may be necessary to enforce or determine the validity and scope of our proprietary rights, and there can be no assurance that our intellectual property rights, if challenged, will be upheld as valid. Such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on our operating results, regardless of the outcome of the litigation. In addition, there can be no assurance that any of the patents issued to us will not be challenged, invalidated or circumvented or that the rights granted thereunder will provide competitive advantages to us.
There are no pending claims against us regarding infringement of any patents or other intellectual property rights of others. However, in the future we may receive communications from third parties asserting intellectual property claims against us. Such claims could include assertions that our products infringe, or may infringe, the proprietary rights of third parties, requests for indemnification against such infringement or suggestions that we may be interested in acquiring a license from such third parties. There can be no assurance that any such claim will not result in litigation, which could involve significant expense to us, and, if we are required or deem it appropriate to obtain a license relating to one or more products or technologies, there can be no assurance that we would be able to do so on commercially reasonable terms, or at all.
While we believe we have complied with all applicable environmental laws, our failure to do so could adversely affect our business as a result of having to pay substantial amounts in damages or fees.
Federal, state and local regulations impose various controls on the use, storage, discharge, handling, emission, generation, manufacture and disposal of toxic and other hazardous substances used in our operations. We believe that our activities conform in all material respects to current environmental and land use regulations applicable to our operations and our current facilities, and that we have obtained environmental permits necessary to conduct our business. Nevertheless, failure to comply with current or future regulations could result in substantial fines, suspension of production, alteration of our manufacturing processes or cessation of operations. Such regulations could require us to acquire expensive remediation equipment or to incur substantial expenses to comply with environmental regulations. Any failure to control the use, disposal or storage of or adequately restrict the discharge of, hazardous or toxic substances could subject us to significant liabilities.
While we believe we currently have adequate internal control over financial reporting, we are required to assess our internal control over financial reporting on an annual basis and any future adverse results from such assessment could result in a loss of investor confidence in our financial reports and have an adverse effect on our stock.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we must include in our Annual Report on Form 10-K a report of management on the effectiveness of our internal control over financial reporting. If we fail to maintain effective internal control over financial reporting, or management does not timely assess the adequacy of such internal control, we could be subject to regulatory sanctions and the investing public’s perception of the Company may decline.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. MINE SAFETY DISCLOSURES
Not Applicable
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS
The Exhibits listed on the accompanying "Index to Exhibits" are filed as part of, or incorporated by reference into, this report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | Aehr Test Systems | |
| | (Registrant) | |
| | | | |
Date: January 13,April 11, 2014 | By: | /s/ GAYN ERICKSON | |
| | | Gayn Erickson | |
| | | President and Chief Executive Officer | |
| | | | |
Date: January 13,April 11, 2014 | By: | /s/ GARY L. LARSON | |
| | | Gary L. Larson | |
| | | Vice President of Finance and Chief Financial Officer | |
| | | | |
AEHR TEST SYSTEMS
INDEX TO EXHIBITS
| Exhibit No. | | Description |
| | | |
| 3.1(1) | | Restated Articles of Incorporation of the Company. |
| | | |
| 3.2(2) | | Amended and Restated Bylaws of the Company. |
| | | |
| | Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002. |
| | | |
| | Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities ExchangeSecuritiesExchange Act of 1934, as amended, as adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002. |
| | | |
| 32.1 | | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
| | | |
| 101.INS | | XBRL Instance Document |
| | | |
| 101.SCH | | XBRL Taxonomy Extension Schema Document |
| | | |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
| | | |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
| | | |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
| | | |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
(1) Incorporated by reference to the same-numbered exhibit previously filed with the Company's Registration Statement on Form S-1 filed June 11, 1997 (File No. 333-28987).
(2) Incorporated by reference to Exhibit No. 3.1 previously filed with the Company’s Current Report on Form 8-K filed January 9, 2012 (File No. 000-22893).
*This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section, nor shall it be deemed incorporated by reference in any filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.