UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 2017August 31, 2020
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(Exact name of Registrant as specified in its charter)
| California | | 94-2424084 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
incorporation or organization) | | |
| | |
400 Kato Terrace | | |
Fremont, CA | | 94539 |
(Address(Address of principal executive offices)
| | (Zip Code) |
executive offices) | |
|
(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 asthat the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Yes X No ___
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes X☒ 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“large accelerated filer," "accelerated” “accelerated filer," "smaller” “smaller reporting company,"” and "emerging“emerging growth company"company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ___ Accelerated filer ___
Non-accelerated filer ___ Smaller reporting company X
(Do not check if a smaller reporting company)
Emerging growth company ___| Large accelerated filer ☐ | Accelerated filer ☐ |
| Non-accelerated filer ☒ | Smaller reporting company ☒ |
| Emerging growth company ☐
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ___☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ___ ☐ No X☒
Securities registered pursuant to Section 12(b) of the Act:
| Trading |
|
| Symbol(s) | Name of each exchange on which registered |
Common Stock Par value $0.01 per share | AEHR | The NASDAQ Capital Market |
Number of shares of the registrant’s common stock, $0.01 par value, outstanding as of December 29, 2017September 30, 2020 was 21,802,037.23,310,312.
AEHR TEST SYSTEMS
FORM 10-Q
FOR THE QUARTER ENDED NOVEMBER 30, 2017AUGUST 31, 2020
INDEX
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PART II. OTHER INFORMATION | | |
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ITEM 1. Legal Proceedings | 27 |
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SIGNATURES | 28 |
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Index to Exhibits
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PART I. FINANCIAL INFORMATION
Item 1. FINANCIALFINANCIAL STATEMENTS (Unaudited)
AEHR TEST SYSTEMS
CONDENSED CONSOLIDATED BALANCEBALANCE SHEETS (in thousands, except per share data)
(unaudited)
| | | | | |
| | | |
| | | (1) | | (1) |
| ASSETS | | | | |
| Current assets: | | | | |
| Cash and cash equivalents | $9,959 | $17,803 | $6,313 | $5,433 |
| Short-term investments | 5,969 | -- | |
| Accounts receivable, net | 3,490 | 4,010 | 1,116 | 3,717 |
| Inventories | 8,225 | 6,604 | 8,102 | 7,989 |
| Prepaid expenses and other current assets | 2,098 | 961 | 439 | 512 |
| | | |
| Total current assets | 29,741 | 29,378 | 15,970 | 17,651 |
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| Property and equipment, net | 1,166 | 1,419 | 622 | 663 |
| Operating lease right-of-use assets | | 1,952 | 2,107 |
| Other assets | 94 | 95 | 147 | 153 |
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| Total assets | $31,001 | $30,892 | $18,691 | $20,574 |
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| LIABILITIES AND SHAREHOLDERS' EQUITY | | |
| Current liabilities: | | |
| Accounts payable | $1,789 | 2,808 | $809 | $945 |
| Accrued expenses | 1,607 | 1,609 | 1,373 | 1,439 |
| Operating lease liabilities, short-term | | 671 | 658 |
| Customer deposits and deferred revenue, short-term | 3,142 | 3,467 | 387 | 170 |
| Current portion of long-term debt | | 933 | 653 |
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| Total current liabilities | 6,538 | 7,884 | 4,173 | 3,865 |
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| Long-term debt | 6,110 | |
| Operating lease liabilities, long-term | | 1,432 | 1,605 |
| Long-term debt, net of current portion | | 746 | 1,026 |
| Deferred revenue, long-term | 251 | 104 | 19 | 22 |
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| Total liabilities | 12,899 | 14,098 | 6,370 | 6,518 |
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| Aehr Test Systems shareholders' equity: | | |
| Common stock, $0.01 par value: | | |
| Authorized: 75,000 shares; Issued and outstanding: 21,797 shares and 21,340 shares at November 30, 2017 and May 31, 2017, respectively | 218 | 213 | |
Common stock, $0.01 par value: Authorized: 75,000; Issued and outstanding: 23,291 shares and 23,107 shares at August 31, 2020 and May 31, 2020, respectively | | 233 | 231 |
| Additional paid-in capital | 82,304 | 81,128 | 86,356 | 85,898 |
| Accumulated other comprehensive income | 2,306 | 2,249 | |
| Accumulated other comprehensive (loss) income | | (67) | 2,234 |
| Accumulated deficit | (66,707) | (66,777) | (74,201) | (74,286) |
| | | |
| Total Aehr Test Systems shareholders' equity | 18,121 | 16,813 | 12,321 | 14,077 |
| Noncontrolling interest | (19) | - | (21) |
| | | |
| Total shareholders' equity | 18,102 | 16,794 | 12,321 | 14,056 |
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| Total liabilities and shareholders' equity | $31,001 | $30,892 | $18,691 | $20,574 |
(1)
The condensed consolidated balance sheet at May 31, 20172020 has been derived from the audited consolidated financial statements at that date.
The accompanying notes are an integral part of these
condensed consolidated financial statements.
AEHR TEST SYSTEMS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
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| Net sales | $7,923 | $4,216 | $14,893 | $9,534 |
| Cost of sales | 4,792 | 2,753 | 8,844 | 5,865 |
| Gross profit | 3,131 | 1,463 | 6,049 | 3,669 |
| | | | | |
| Operating expenses: | | | | |
| Selling, general and administrative | 1,854 | 1,707 | 3,645 | 3,423 |
| Research and development | 1,090 | 1,040 | 2,045 | 2,100 |
| Total operating expenses | 2,944 | 2,747 | 5,690 | 5,523 |
| | | | | |
| Income (loss) from operations | 187 | (1,284) | 359 | (1,854) |
| | | | | |
| Interest expense, net | (105) | (181) | (212) | (359) |
| Other (expense) income, net | (7) | 43 | (67) | 40 |
| | | | | |
| Income (loss) before income tax expense | 75 | (1,422) | 80 | (2,173) |
| | | | | |
| Income tax expense | (15) | (30) | (10) | (34) |
| Net income (loss) | 60 | (1,452) | 70 | ( 2,207) |
| Less: Net income attributable to the noncontrolling interest | -- | -- | -- | -- |
| | | | | |
| Net income (loss) attributable to Aehr Test Systems common shareholders | $60 | $(1,452) | $70 | $(2,207) |
| | | | | |
| Net income (loss) per share | | | | |
| Basic | $0.00 | $(0.09) | $0.00 | $(0.15) |
| Diluted | $0.00 | $(0.09) | $0.00 | $(0.15) |
| | | | | |
| Shares used in per share calculations: | | | | |
| Basic | 21,645 | 16,029 | 21,531 | 14,673 |
| Diluted | 22,883 | 16,029 | 22,937 | 14,673 |
The accompanying notes are an integral part of these
condensed consolidated financial statements.
AEHR TEST SYSTEMS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
(unaudited)
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| Net sales | $2,012 | $5,533 |
| Cost of sales | 1,785 | 3,262 |
| Gross profit | 227 | 2,271 |
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| Operating expenses: | | |
| Selling, general and administrative | 1,514 | 1,808 |
| Research and development | 900 | 892 |
| Total operating expenses | 2,414 | 2,700 |
| | | |
| Loss from operations | (2,187) | (429) |
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| Interest (expense) income, net | (13) | 12 |
| Net gain from dissolution of Aehr Test Systems Japan | 2,186 | -- |
| Other (expense) income, net | (94) | 10 |
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| Loss before income tax benefit (expense) | (108) | (407) |
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| Income tax benefit (expense) | 215 | (6) |
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| Net income (loss) | 107 | (413) |
| Less: Net income attributable to the noncontrolling interest | -- | -- |
| | | |
Net income (loss) attributable to Aehr Test Systems common shareholders | $107 | $(413) |
| | | |
| Net income (loss) per share: | | |
| Basic and Diluted | $0.00 | $(0.02) |
| | | |
| Shares used in per share calculations: |
| Basic | 23,248 | 22,708 |
| Diluted | 23,455 | 22,708 |
The accompanying notes are an integral part of these
condensed consolidated financial statements.
AEHR TEST SYSTEMS
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)LOSS (in thousands, unaudited)
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| Net income (loss) | $60 | $(1,452) | $70 | $(2,207) |
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Other comprehensive income (loss), net of tax: Net change in unrealized loss on investments | (3) | -- | (3) | -- |
| Net change in cumulative translation adjustments | 1 | (55) | 60 | (48) |
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| Total comprehensive income (loss) | 58 | (1,507) | 127 | (2,255) |
| Less: Comprehensive income attributable to the noncontrolling interest | -- | 2 | -- | 1 |
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Comprehensive income (loss), attributable to Aehr Test Systems common shareholders | $58 | $(1,509) | $127 | $(2,256) |
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| Net income (loss) | $107 | $(413) |
| Other comprehensive loss, net of tax: | | |
| Net change in cumulative translation adjustment | 99 | (15) |
| Reclassification of cumulative translation adjustment as a result of dissolution of Aehr Test Systems Japan | (2,401) | -- |
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| Total comprehensive loss | (2,195) | (428) |
| Less: Comprehensive income (loss) attributable to the noncontrolling interest | 21 | (1) |
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Comprehensive loss, attributable to Aehr Test Systems common shareholders | $(2,216) | $(427) |
The accompanying notes are an integral part of these
condensed consolidated financial statements.
AEHR TEST SYSTEMS
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (in thousands)
(unaudited)
| | | | Accumulated Other Comprehensive | | Total Aehr Test Systems Shareholders’ | | |
| Three Months Ended August 31, 2020 | | | | | | | | |
| Balances, May 31, 2020 | 23,107 | $231 | $85,898 | $2,234 | $(74,286) | $14,077 | $(21) | $14,056 |
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| Issuance of common stock under employee plans | 184 | 2 | 188 | -- | -- | 190 | -- | 190 |
Stock-based compensation | -- | -- | 270 | -- | -- | 270 | -- | 270 |
| Net income | -- | -- | -- | -- | 107 | 107 | -- | 107 |
| Foreign currency translation adjustment | -- | -- | -- | 100 | -- | 100 | (1) | 99 |
| Reclassification of cumulative translation adjustment as a result of dissolution of Aehr Test Systems Japan | -- | -- | -- | (2,401) | (22) | (2,423) | 22 | (2,401) |
| Balances, August 31, 2020 | 23,291 | $233 | $86,356 | $(67) | $(74,201) | $12,321 | -- | $12,321 |
| | | | Accumulated Other Comprehensive | | Total Aehr Test Systems Shareholders’ | | |
| Three Months Ended August 31, 2019 | | | | | | | | |
| Balances, May 31, 2019 | 22,669 | $227 | $84,499 | $2,230 | $(71,484) | $15,472 | $(19) | $15,453 |
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| Issuance of common stock under employee plans | 52 | -- | 62 | -- | -- | 62 | -- | 62 |
Stock-based compensation | -- | -- | 199 | -- | -- | 199 | -- | 199 |
| Net loss | -- | -- | -- | -- | (413) | (413) | -- | (413) |
| Foreign currency translation adjustment | -- | -- | -- | (14) | -- | (14) | (1) | (15) |
| | | | | | | | | |
| Balances, August 31, 2019 | 22,721 | $227 | $84,760 | $2,216 | $(71,897) | $15,306 | $(20) | $15,286 |
The accompanying notes are an integral part of these
condensed consolidated financial statements.
AEHR TEST SYSTEMS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
(unaudited)
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| Cash flows from operating activities: | | |
| Net income (loss) | $107 | $(413) |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | 270 | 199 |
| Depreciation and amortization | 82 | 95 |
| Net gain from dissolution of Aehr Test Systems Japan | (2,186) | -- |
| Income tax benefit related to dissolution of Aehr Test Systems Japan | (215) | -- |
| Changes in operating assets and liabilities: | | |
| Accounts receivable | 2,642 | 1,584 |
| Inventories | (112) | (156) |
| Prepaid expenses and other current assets | 80 | 194 |
| Accounts payable | (173) | (235) |
| Accrued expenses | (67) | (455) |
| Customer deposits and deferred revenue | 214 | (1,006) |
| Income taxes payable | 1 | 3 |
| Net cash provided by (used in) operating activities | 643 | (190) |
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| Cash flows from investing activities: | | |
| Purchases of property and equipment | (47) | (50) |
| Net cash used in investing activities | (47) | (50) |
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| Cash flows from financing activities: | | |
Proceeds from issuance of common stock under employee plans, net of taxes paid related to share settlement of equity awards | 190 | 62 |
| Net cash provided by financing activities | 190 | 62 |
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| Effect of exchange rates on cash, cash equivalents and restricted cash | 94 | 16 |
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Net increase (decrease) in cash, cash equivalents and restricted cash | 880 | (162) |
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| Cash, cash equivalents and restricted cash, beginning of period | 5,513 | 5,508 |
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| Cash, cash equivalents and restricted cash, end of period | $6,393 | $5,346 |
The accompanying notes are an integral part of these
condensed consolidated financial statements.
AEHR TEST SYSTEMS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
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| Cash flows from operating activities: | | |
| Net income (loss) | $70 | $(2,207) |
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | | |
| Stock-based compensation expense | 580 | 534 |
| (Recovery of) provision for doubtful accounts | (14) | 12 |
| Amortization of debt issuance costs | -- | 89 |
| Depreciation and amortization | 190 | 129 |
| Changes in operating assets and liabilities: | | |
| Accounts receivable | 592 | (972) |
| Inventories | (1,249) | 1,335 |
| Prepaid expenses and other current assets | (1,135) | (138) |
| Accounts payable | (1,005) | 721 |
| Accrued expenses | 5 | (201) |
| Customer deposits and deferred revenue | (178) | (739) |
| Income taxes payable | (9) | 21 |
| Net cash used in operating activities | (2,153) | (1,416) |
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| Cash flows from investing activities: | | |
| Purchases of investments | (5,972)
| -- |
| Purchases of property and equipment | (313) | (88) |
| Net cash used in investing activities | (6,285) | (88) |
| | | |
| Cash flows from financing activities: | | |
| Proceeds from issuance of common stock under private placement, net of issuance costs | -- | 5,299 |
| Proceeds from issuance of common stock under employee plans, net of taxes paid related to share settlement of equity awards | 601 | 463 |
| Net cash provided by financing activities | 601 | 5,762 |
| | | |
| Effect of exchange rates on cash and cash equivalents | (7) | (43) |
| | | |
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| Net (decrease) increase in cash and cash equivalents | (7,844) | 4,215 |
| | | |
| Cash and cash equivalents, beginning of period | 17,803 | 939 |
| Cash and cash equivalents, end of period | $9,959 | $5,154 |
| | | |
| Supplemental disclosure of non-cash flow information: | | |
| Fair value of common stock issued to settle accounts payable | $-- | $323 |
| Transfers of property and equipment to inventories | $372 | $372 |
The accompanying notes are an integral part of these
condensed consolidated financial statements.
AEHR TEST SYSTEMS
NOTESNOTES 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.(the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (GAAP)(“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, 20172020 audited consolidated financial statements and reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the condensed consolidated financial position and results of operations as of and for such periods indicated. These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2017.2020. 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’sCompany'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’Sharholders' Equity and in the Condensed Consolidated Statements of Operations.
ACCOUNTING ESTIMATES. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are used to account for sales and revenue allowances, the allowance for doubtful accounts, inventory valuations, income taxes, stock-based compensation expenses, and product warranties, among others. The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances. Actual results could differ materially from those estimates.
REVENUE RECOGNITION. The Company recognizes revenue upon the shipment of products or the performance of services when: (1) persuasive evidence of the arrangement exists; (2) goods or services have been delivered; (3) the price is fixed or determinable; and (4) collectibility is reasonably assured. When a sales agreement involves multiple deliverables, such as extended support provisions, training to be supplied after delivery of the systems, and test programs specific to customers’ routine applications, the multiple deliverables are evaluated to determine the unit of accounting. Judgment is required to properly identify the accounting units of multiple element transactions and the manner in which revenue is allocated among the accounting units. Judgments made, or changes to judgments made, may significantly affect the timing or amount of revenue recognition.
Revenue related to the multiple elements is allocated to each unit of accounting using the relative selling price hierarchy. Consistent with accounting guidance, the selling price is based upon vendor specific objective evidence (VSOE). If VSOE is not available, third party evidence (TPE) is used to establish the selling price. In the absence of VSOE or TPE, estimated selling price is used.
During the first quarter of fiscal 2013, the Company entered into an agreement with a customer to develop a next generation system, and the Company shipped the first system in July 2016. The project identifies multiple milestones with values assigned to each. The consideration earned upon achieving the milestone is required to meet the following conditions prior to recognition: (i) the value is commensurate with the vendor’s performance to meet the milestone, (ii) it relates solely to past performance, (iii) and it is reasonable relative to all of the deliverables and payment terms within the arrangement. Revenue is recognized for the milestone upon acceptance by the customer.
The Company recognizes revenue in certain circumstances before physical delivery has occurred. In these arrangements, among other things, risk of ownership has passed to the customer, the customer has made a written fixed commitment to purchase the products, the customer has requested the products be held for future delivery as scheduled and designated by them, and no additional performance obligations exist by the Company. For these transactions, the products are segregated from inventory and normal billing and credit terms granted.
Sales tax collected from customers is not included in net sales but rather recorded as a liability due to the respective taxing authorities. Provisions for the estimated future cost of warranty and installation are recorded at the time the products are shipped.
Royalty-based revenue related to licensing income from performance test boards and burn-in boards is recognized upon the earlier of the receipt by the Company of the licensee’s report related to its usage of the licensed intellectual property or upon payment by the licensee.
The Company’s terms of sales with distributors are generally FOB shipping point with payment due within 60 days. All products go through in-house testing and verification of specifications before shipment. Apart from warranty reserves, credits issued have not been material as a percentage of net sales. The Company’s distributors do not generally carry inventories of the Company’s products. Instead, the distributors place orders with the Company at or about the time they receive orders from their customers. The Company’s shipment terms to our distributors do not provide for credits or rights of return. Because the Company’s distributors do not generally carry inventories of our products, they do not have rights to price protection or to return products. At the time the Company ships products to the distributors, the price is fixed. Subsequent to the issuance of the invoice, there are no discounts or special terms. The Company does not give the buyer the right to return the product or to receive future price concessions. The Company’s arrangements do not include vendor consideration.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. The Company’s significant accounting policies are disclosed in the Company’s Annual Report on Form 10-K for the year ended May 31, 2017.2020. There have been no significant changes in ourthe Company’s significant accounting policies during the sixthree months ended August 31, 2020.
2. RECENT ACCOUNTING PRONOUNCEMENTS
Accounting Standards Not Yet Adopted
Financial Instruments
In June 2016, the FASB issued an accounting standard update (“ASU”) 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 collectability of the reported amount. Due to a subsequent ASU in November 30, 2017.2019, the accounting standard will be effective for the Company beginning in the first quarter of fiscal 2024 on a modified retrospective basis, and early adoption in fiscal 2021 is permitted.The Company does not expect a material impact of this accounting standard 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 is 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 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):
2.| | |
| | |
| | | |
| Type of good / service: | | |
| Systems | $801 | $2,934 |
| Contactors | 627 | 1,650 |
| Services | 584 | 949 |
| | $2,012 | $5,533 |
| | | |
| Product lines: | | |
| Wafer-level | $1,559 | $4,826 |
| Test During Burn-In | 453 | 707 |
| | $2,012 | $5,533 |
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 | $1,041 | $5,057 |
| Asia | 969 | 338 |
| Europe | 2 | 138 |
| | $2,012 | $5,533 |
With the exception of the amount of service contracts and extended warranties, the Company’s product category revenues are recognized at a point in time when control transfers to the customers. The following presents revenue based on timing of recognition (in thousands):
| | |
| | |
| | | |
| Timing of revenue recognition: | | |
Products and services transferred at a point in time | $1,570 | $4,859 |
| Services transferred over time | 442 | 674 |
| | $2,012 | $5,533 |
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 August 31, 2020 and May 31, 2020 were $406,000 and $192,000, respectively. During the three months ended August 31, 2020, the Company recognized $79,000 of revenues that were included in contract liabilities as of May 31, 2020.
Remaining performance obligations
On August 31, 2020, the Company had $128,000 of remaining performance obligations, which were comprised of deferred service contracts and extended warranty contracts not yet delivered. The Company expects to recognize approximately 66% of its remaining performance obligations as revenue in fiscal 2021, and an additional 34% in fiscal 2022 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, restricted stock units (“RSUs”), and Amended and Restated 2006 Employee Stock Purchase Plan (“ESPP”) shares) outstanding during the period using the treasury stock method.
The following table presents the computation of basic and diluted net income (loss) per share attributable to Aehr Test Systems common shareholders (in thousands, except per share data):
| | |
| | |
| | | |
| | | |
| Numerator: Net income (loss) | $107 | $(413) |
| | | |
| Denominator for basic net income (loss) per share: | | |
| Weighted average shares outstanding | 23,248 | 22,708 |
| | | |
| Shares used in basic net income (loss) per share calculation | 23,248 | 22,708 |
| Effect of dilutive securities | 207 | -- |
| | | |
| Denominator for diluted net income (loss) per share | 23,455 | 22,708 |
| Basic net income (loss) per share | $0.00 | $(0.02) |
| | | |
| Diluted net income (loss) per share | $0.00 | $(0.02) |
For the purpose of computing diluted earnings per share, the weighted average number of potential common shares does not include stock options with an exercise price greater than the average fair value of the Company’s common stock for the period, as the effect would be anti-dilutive. Stock options to purchase 2,594,000 shares of common stock were outstanding as of August 31, 2020, but were not included in the computation of diluted net income per share, because the inclusion of such shares would be anti-dilutive. In the three months ended August 31, 2019, potential common shares were not 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 3,434,000 shares of common stock, RSUs for 20,000 shares and ESPP rights to purchase 297,000 ESPP shares were outstanding as of August 31, 2019, but were not included in the computation of diluted net loss per share because the inclusion of such shares would be anti-dilutive.
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company’s financial instruments are measured at fair value consistent with authoritative guidance. This authoritative guidance defines fair value, establishes a framework for using fair value to measure assets and liabilities, and disclosures required related to fair value measurements.
The guidance establishes a fair value hierarchy based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions. The fair value hierarchy consists of the following three levels:
Level 1 - instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets.
Level 2 - instrument valuations are obtained from readily-available pricing sources for comparable instruments.
Level 3 - instrument valuations are obtained without observable market values and require a high level of judgment to determine the fair value.
The following table summarizes the Company’s financial assets measured at fair value on a recurring basis as of August 31, 2020 (in thousands):
| | | | | |
| | | | | |
| Money market funds | $80 | $80 | $-- | $-- |
| Assets | $80 | $80 | $-- | $-- |
The following table summarizes the Company’s financial assets measured at fair value on a recurring basis as of May 31, 2020 (in thousands):
| | Balance as of May 31, 2020 | | | |
| Money market funds | $80 | $80 | $-- | $-- |
| Assets | $80 | $80 | $-- | $-- |
Included in money market funds as of August 31, 2020 and May 31, 2020 is $80,000 restricted cash representing a security deposit for the Company’s United States manufacturing and office space lease which is included in other assets in the consolidated balance sheet.
There were no financial liabilities measured at fair value as of August 31, 2020 and May 31, 2020.
There were no transfers between Level 1 and Level 2 fair value measurements during the three months ended August 31, 2020.
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.
6. ACCOUNTS RECEIVABLE, NET
Accounts receivable represent customer trade receivables. As of August 31, 2020 and May 31, 2020, there was no allowance for doubtful accounts. Accounts receivable are derived from the sale of products throughout the world to semiconductor manufacturers, semiconductor contract assemblers, electronics manufacturers and burn-in and test service companies. The Company’s allowance for doubtful accounts is based upon historical experience and review of trade receivables by aging category to identify specific customers with known disputes or collection issues. Uncollectible receivables are recorded as bad debt expense when all efforts to collect have been exhausted and recoveries are recognized when they are received.
7. INVENTORIES
Inventories are comprised of the following (in thousands):
| | | |
| | | |
| Raw materials and sub-assemblies | $5,571 | $5,055 |
| Work in process | 2,529 | 2,917 |
| Finished goods | 2 | 17 |
| | $8,102 | $7,989 |
8. PRODUCT WARRANTIES
The Company provides for the estimated cost of product warranties at the time revenues are recognized on the products shipped. While the Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its component suppliers, the Company’s warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from the Company’s estimates, revisions to the estimated warranty liability would be required.
The standard warranty period is one year for systems and ninety days for parts and service.
The following is a summary of changes in the Company's liability for product warranties during the three months ended August 31, 2020 and 2019 (in thousands):
| | |
| | |
| | | |
| | | |
| Balance at the beginning of the period | $246 | $154 |
| | | |
Accruals for warranties issued during the period | 79 | 62 |
| Adjustments to previously existing warranty accruals | 76 | - |
| Consumption of reserves | (71) | (24) |
| | | |
| Balance at the end of the period | $330 | $192 |
The accrued warranty balance is included in accrued expenses on the accompanying condensed consolidated balance sheets.
9. CUSTOMER DEPOSITS AND DEFERRED REVENUE, SHORT-TERM
Customer deposits and deferred revenue, short-term (in thousands):
| | | |
| | | |
| Customer deposits | $278 | $-- |
| Deferred revenue | 109 | 170 |
| | $387 | $170 |
10. 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 March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was passed into law. The CARES Act includes several significant business tax provisions including modification to the taxable income limitation for utilization of net operating losses (“NOLs”) incurred in 2018, 2019 and 2020 and the ability to carry back NOLs from those years for a period of up to five years, an increase to the limitation on deductibility of certain business interest expense, bonus depreciation for purchases of qualified improvement property and special deductions on certain corporate charitable contributions. The Company is currently analyzing the impact of these changes and therefore an estimate of the impact to income taxes is not yet available.
On June 29, 2020, the Assembly Bill 85 (AB 85) was signed into law as part of the California 2020 Budget Act, which temporarily suspends the use of California net operating losses and imposes a cap on the amount of business incentive tax credits that companies can utilize against their net income for tax years 2020, 2021, and 2022. The Company analyzed the provisions of AB 85 and determined there was no impact on its provision for income taxes for the current period and will continue to evaluate the impact, if any, AB 85 may have on the Company’s condensed consolidated financial statements and disclosures.
11. LEASES
The Company has only operating leases for real estate including corporate offices, warehouse space and certain equipment. A lease with an initial term of 12 months or less is generally not recorded on the condensed consolidated balance sheet, unless the arrangement includes an option to purchase the underlying asset, or renew the arrangement that the Company is reasonably certain to exercise (short-term leases). The Company recognizes lease expense on a straight-line basis over the lease term for short-term leases that the Company does not record on its balance sheet. The Company’s operating leases have remaining lease terms of 1 month to 3 years.
The Company determines whether an arrangement is or contains a lease based on the unique facts and circumstances present at the inception of the arrangement. Operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected lease term. The interest rate implicit in lease contracts is typically not readily determinable.
As such, the Company utilizes the appropriate incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term at an amount equal to the lease payments in a similar economic environment. Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received.
The weighted-average remaining lease term for the Company’s operating leases was 2.9 years at August 31, 2020 and the weighted-average discount rate was 5.49%.
The Company’s operating lease cost was $186,000 and $183,000 for the three months ended August 31, 2020 and 2019, respectively.
The following table presents supplemental cash flow information related to the Company’s operating leases (in thousands):
| | Three Months Ended August 31, |
| | | |
| Cash paid for amounts included in the measurement of operating lease liabilities: | | |
| Operating cash flows from operating leases | $190 | $182 |
The following table presents the maturities of the Company’s operating lease liabilities as of August 31, 2020 (in thousands):
| Fiscal year | |
| 2021 (excluding the first three months of 2021) | $575 |
| 2022 | 779 |
| 2023 | 795 |
| 2024 | 133 |
| 2025 | -- |
| Thereafter | -- |
| Total future minimum operating lease payments | 2,282 |
| Less: imputed interest | 179 |
| Present value of operating lease liabilities | $2,103 |
12. BORROWING AND FINANCING ARRANGEMENTS:
On January 16, 2020, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with Silicon Valley Bank (“SVB”). Pursuant to the Loan Agreement, the Company may borrow up to (a) the lesser of (i) the revolving line of $4.0 million or (ii) the amount available under the borrowing base minus (b) the outstanding principal balance of any advances, under a revolving line of credit which is collateralized by all the Company’s assets except intellectual property. The borrowing base is 80% of eligible accounts, as determined by SVB from the Company’s most recent borrowing base statement; provided, however, SVB has the right to decrease the foregoing percentage in its good faith business judgment to mitigate the impact of certain events or conditions, which may adversely affect the collateral or its value. Subject to an event of default, the principal amount outstanding under the revolving line of credit will accrue interest at a floating per annum rate equal to the greater of (a) the prime rate plus an additional percentage of up to 1%, which additional percentage depends on the Company’s adjusted quick ratio, and (b) 4.75%. Interest is payable monthly on the last calendar day of each month and the outstanding principal amount, the unpaid interest and all other obligations are due on the maturity date, which is 364 days from the effective date of January 13, 2020. At August 31, 2020, the Company had not drawn against the credit facility and was in compliance with all covenants related to obligations to meet reporting requirements. The balance available to borrow under the line at August 31, 2020 was $159,000. There are no financial covenants in the agreement.
13. LONG-TERM DEBT:
On April 23, 2020, the Company obtained the Paycheck Protection Program Loan (the “PPP Loan”) in the aggregate amount of $1,679,000 from SVB. The PPP Loan was evidenced by a promissory note dated April 23, 2020 (the “Note”) that matures on April 23, 2022 and bears interest at a rate of 1% per annum, payable monthly commencing on November 23, 2020. The PPP Loan proceeds were used for payroll, health care benefits, rent and utilities.
Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of loans granted under the PPP. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for payment of payroll costs, covered rent and mortgage obligations, and covered utility payments incurred by the Company. The Company intends to apply for forgiveness of the PPP Loan with respect to these covered expenses. No assurance can be given that the Company will obtain forgiveness of the amount due under the loan in whole or in part.
14. 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 costexpense for stock options and ESPP purchase rights areis 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 NotesNote 11 and 12 in the Company’s Annual Report on Form 10-K for fiscal 20172020 filed on August 29, 201728, 2020 for further information regarding the 2016 Equity Incentive Plan (the “2016 Plan”) and the Amended and Restated 2006 ESPP.
The following table summarizes the stock-based compensation expense related to the Company’s stock-based incentive plans for the three and six months ended November 30, 2017August 31, 2020 and 20162019 (in thousands):
| | | | |
| | | |
| | | | | | 2020 | 2019 |
| Stock-based compensation in the form of employee stock options, RSUs and ESPP purchase rights, included in: | | |
| Cost of sales | $57 | $23 | $79 | $47 | $16 | $19 |
| Selling, general and administrative | 218 | 141 | 368 | 388 | 205 | 130 |
| Research and development | 89 | 51 | 133 | 99 | 49 | 50 |
| Total stock-based compensation | $364 | $215 | $580 | $534 | |
| Net effect on net income (loss) | | $270 | $199 |
As of November 30, 2017August 31, 2020, and 2016,August 31, 2019, there were no stock-based compensation costsexpenses capitalized as part of inventory.
During the three months ended November 30, 2017August 31, 2020 and 2016,2019, the Company recorded stock-based compensation expenses related to stock options and RSUs of $207,000$245,000 and $185,000,$150,000, respectively. During the six months ended November 30, 2017 and 2016, the Company recorded stock-based compensation related to stock options and RSUs of $408,000 and $464,000, respectively.
As of November 30, 2017,August 31, 2020, the total compensation costexpense related to unvested stock-based awards under the Company’s 2016 Equity Incentive Plans,Plan, but not yet recognized, was approximately $1,316,000,$1,434,000, which is net of estimated forfeitures of $3,000.$4,000. This costexpense will be amortized on a straight-line basis over a weighted average period of approximately 2.52.9 years.
During the three months ended November 30, 2017August 31, 2020 and 2016,2019, the Company recorded stock-based compensation expense related to the ESPP of $157,000$25,000 and $30,000,$49,000, respectively. During the six months ended November 30, 2017 and 2016, the Company recorded stock-based compensation related to the ESPP of $172,000 and $70,000, respectively. The increase in the three and six months ended November 30, 2017 is primarily due to employees increasing their ESPP elections during the current ESPP purchase period.
As of November 30, 2017,August 31, 2020, the total compensation costexpense related to purchase rights under the ESPP but not yet recognized was approximately $49,000.$34,000. This costexpense will be amortized on a straight-line basis over a weighted average period of approximately 0.30.7 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 costexpense 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, 2017August 31, 2020 and 20162019 were estimated using the following weighted average assumptions in the Black-Scholes option valuation model:
| | | | |
| | | |
| | | | | | | |
| | | |
| Expected term (in years) | 4 | 6 | 5 |
| Volatility | 0.74 | 0.81 | 0.77 | 0.81 | 0.71 |
| Risk-free interest rate | 1.92% | 1.10% | 1.77% | 1.02% | 0.38% | 1.88% |
| Weighted average grant date fair value | $1.93 | $1.66 | $2.22 | $1.09 | $1.16 | $0.97 |
There were no ESPP purchase rights granted to employees for the three and six months ended November 30, 2017August 31, 2020 and 2016.2019. There were no ESPP shares issued during the three months ended August 31, 2020 and 2019. As of August 31, 2020, there were 233,000 ESPP shares available for issuance.
The following tables summarize the Company’s stock option and RSU transactions during the three and six months ended November 30, 2017August 31, 2020 (in thousands):
| | |
| | |
Balance, May 31, 20172020 | 2,1691,650 |
| | |
| Options granted | (224200) |
| RSUs granted | (64196) |
SharesOptions cancelled | --188 |
| RSUs cancelled | 2 |
| Options expired | (125) |
| | |
Balance, August 31, 20172020 | 1,881 |
| |
Options granted | (41)
|
RSUs granted | --
|
Shares cancelled | --
|
| |
Balance, November 30, 2017 | 1,8401,319
|
The following table summarizes the stock option transactions during the three and six months ended November 30, 2017August 31, 2020 (in thousands, except per share data):
| | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Balances, May 31, 2017 | 3,074 | $1.73 | $8,763 | |
| Balances, May 31, 2020 | | 3,153 | $2.17 | $102 |
| | | |
| Options granted | 224 | $3.93 | | 200 | $1.86 | |
| Options cancelled | -- | $-- | | (188) | $2.18 | |
| Options exercised | (189) | $1.23 | | (148) | $1.30 | |
| | | |
| Balances, August 31, 2017 | 3,109 | $1.92 | $4,612 | |
| Balances, August 31, 2020 | | 3,017 | $2.19 | $148 |
| | | |
| Options granted | 41 | $3.46 | | |
| Options cancelled | -- | $-- | | |
| Options exercised | (132) | $1.46 | | |
| | | |
| Balances, November 30, 2017 | 3,018 | $1.96 | $2,230 | |
| | | |
| Options fully vested and expected to vest at November 30, 2017 | 2,984 | $1.95 | $2,220 | |
| | | |
Options fully vested and expected to vest at August 31, 2020 | | 2,981 | $2.19 | $145 |
The options outstanding and exercisable at November 30, 2017August 31, 2020 were in the following exercise price ranges (in thousands, except per share data):
| | |
| | |
| Number Outstanding Shares | Weighted Average Remaining Contractual Life (Years) | Weighted Average Exercise Price | Number Exercisable Shares | Weighted Average Remaining Contractual Life (Years) | Weighted Average Exercise Price | Aggregate Intrinsic Value |
$0.59-$0.97 | 424 | 1.31 | $0.68 | 424 | 1.31 | $0.68 | |
$1.09-$1.36 | 645 | 2.11 | $1.27 | 645 | 2.10 | $1.27 | |
$1.68-$2.06 | 487 | 4.73 | $1.74 | 276 | 4.03 | $1.79 | |
$2.10-$2.81 | 1,197 | 4.01 | $2.45 | 953 | 3.99 | $2.47 | |
| 265 | 6.66 | $3.88 | 22 | 6.66 | $3.88 | |
| 3,018 | 3.57 | $1.96 | 2,320 | 3.00 | $1.74 | $1,985 |
| | |
| | |
| 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 |
$1.22 | 75 | 6.54 | $1.22 | 8 | 6.54 | $1.22 | |
$1.64-$1.86 | 1,105 | 5.47 | $1.70 | 546 | 4.72 | $1.68 | |
$2.03-$2.46 | 1,162 | 3.49 | $2.21 | 846 | 2.92 | $2.19 | |
$2.63-$2.81 | 464 | 1.04 | $2.70 | 462 | 1.03 | $2.70 | |
$3.46-$3.93 | 211 | 3.90 | $3.86 | 171 | 3.91 | $3.85 | |
$1.22-$3.93 | 3,017 | 3.94 | $2.19 | 2,033 | 3.07 | $2.31 | $59 |
The total intrinsic value of options exercised during the three and six months ended November 30, 2017August 31, 2020 and 2019 was $269,000$92,000 and $745,000,$17,000, respectively. The total intrinsic value of options exercised during the three and six months ended November 30, 2016 was $359,000 and $411,000, respectively. The weighted average remaining contractual life of the options exercisable and expected to be exercisable at November 30, 2017August 31, 2020 was 3.563.93 years.
There were no RSUs granted to employees for
During the three months ended November 30, 2017 or 2016. During the six months ended November 30, 2017,August 31, 2020, RSUs for 64,000161,000 shares were granted.granted to employees, and RSUs for 35,000 shares were granted to non-employee directors, which were immediately fully vested. The market value on the date of the grant of these RSUs was $3.93$1.86 per share. During the sixthree months ended November 30, 2016,August 31, 2020, 3,000 RSUs for 138,000 shares were granted. The market value on the date of the grant of these RSUs was $1.68 per share. 4,000 and 7,000 RSUsgranted to employees became fully vested during the three and six months ended November 30, 2017, respectively. 89,000vested. As of August 31, 2020, 166,000 RSUs were unvested at November 30, 2017. Thewhich had an intrinsic value of $296,000. During the three months ended August 31, 2019, there were no RSUs granted to employees or non-employee directors. During the three months ended August 31, 2019, 3,000 RSUs granted to employees became fully vested. As of August 31, 2019, 20,000 RSUs were unvested RSUs at November 30, 2017 was $227,000.which had an intrinsic value of $26,000.
3. EARNINGS PER SHARE
Basic earnings per share is determined using the weighted average number of common shares outstanding during the period. Diluted earnings per share is determined using the weighted average number of common shares and potential common shares (representing the dilutive effect of stock options, RSUs and ESPP shares) outstanding during the period using the treasury stock method.
The following table presents the computation of basic and diluted net income (loss) per share attributable to the Company’s common shareholders (in thousands, except per share data):
| | | |
| | | |
| | | | | |
| | | | | |
| Numerator: Net income (loss) | $60 | $(1,452) | $70 | $(2,207) |
| | | | | |
| Denominator for basic net income (loss) per share: | | | | |
| Weighted average shares outstanding | 21,645 | 16,029 | 21,531 | 14,673 |
| | | | | |
| Shares used in basic net income (loss) per share calculation | 21,645 | 16,029 | 21,531 | 14,673 |
| Effect of dilutive securities | 1,238 | -- | 1,406 | -- |
| | | | | |
| Denominator for diluted net income (loss) per share | 22,883 | 16,029 | 22,937 | 14,673 |
| | | | | |
| Basic net income (loss) per share | $0.00 | $(0.09) | $0.00 | $(0.15) |
| Diluted net income (loss) per share | $0.00 | $(0.09) | $0.00 | $(0.15) |
For the purpose of computing diluted earnings per share, the weighted average number of potential common shares does not include stock options with an exercise price greater than the average fair value of the Company’s common stock for the period, as the effect would be anti-dilutive. Stock options to purchase 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. In the three and six months ended November 30, 2016, potential common shares have not been included in the calculation of diluted net loss per share as the effect would be anti-dilutive. As such, the numerator and the denominator used in computing both basic and diluted net loss per share for this period are the same. Stock options to purchase 3,229,000 shares of common stock, RSUs for 72,000 shares and ESPP rights to purchase 246,000 ESPP shares were outstanding as of November 30, 2016, but were not included in the computation of diluted net loss per share, because the inclusion of such shares would be anti-dilutive. The 2,657,000 shares convertible under the convertible notes outstanding at November 30, 2017 and 2016 were not included in the computation of diluted net income (loss) per share, because the inclusion of such shares would be anti-dilutive.
4. CASH, CASH EQUIVALENTS AND INVESTMENTS
The following table summarizes the Company’s cash, cash equivalents and investments by security type at November 30, 2017 (in thousands):
| | | | |
| | | | |
| Cash | $1,802 | $-- | $1,802 |
| Cash equivalents: | | | |
| Money market funds | 4,164 | -- | 4,164 |
| U.S. Treasury securities | 3,993 | -- | 3,993 |
| Total Cash equivalents | 8,157 | -- | 8,157 |
| Total Cash and Cash equivalents | $9,959 | $-- | $9,959 |
| Short-term investments: | | | |
| U.S. Treasury securities | $5,972 | $3 | $5,969 |
| Total Cash, Cash equivalents and Investments | $15,931 | $3 | $15,928 |
Unrealized gains and temporary losses on investments classified as available-for-sale are included within accumulated other comprehensive income ("AOCI"), net of any related tax effect. Upon realization, those amounts are reclassified from AOCI to results of operations.
The unrealized loss as of November 30, 2017 is not considered other-than-temporary.
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company’s financial instruments are measured at fair value consistent with authoritative guidance. This authoritative guidance defines fair value, establishes a framework for using fair value to measure assets and liabilities, and disclosures required related to fair value measurements.
The guidance establishes a fair value hierarchy based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions. The fair value hierarchy consists of the following three levels:
Level 1 - instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets.
Level 2 - instrument valuations are obtained from readily-available pricing sources for comparable instruments.
Level 3 - instrument valuations are obtained without observable market values and require a high level of judgment to determine the fair value.
The following table summarizes the Company’s financial assets measured at fair value on a recurring basis as of November 30, 2017 (in thousands):
| | | | | |
| | | | | |
| Money market funds | $4,164 | $4,164 | $-- | $-- |
| U.S. Treasury securities | 9,962 | 9,962 | -- | -- |
| Certificate of deposit | 50 | -- | 50 | -- |
| Assets | $14,176 | $14,126 | $50 | $-- |
The U.S. Treasury securities have maturities of three and six months.
The following table summarizes the Company’s financial assets measured at fair value on a recurring basis as of May 31, 2017 (in thousands):
| | | | | |
| | | | | |
| Money market funds | $15,516 | $15,516 | $-- | $-- |
| Certificate of deposit | 50 | -- | 50 | -- |
| Assets | $15,566 | $15,516 | $50 | $-- |
| | | | | |
There were no financial liabilities measured at fair value as of November 30, 2017 and May 31, 2017.
There were no transfers between Level 1 and Level 2 fair value measurements during the three and six months ended November 30, 2017.
The carrying amounts of financial instruments including cash, cash equivalents, receivables, accounts payable and certain other accrued liabilities, approximate fair value due to their short maturities. Based on the borrowing rates currently available to the Company for loans with similar terms, the carrying value of the debt approximates the fair value.
The Company has, at times, invested in debt and equity of private companies, and may do so again in the future, as part of its business strategy.
6. ACCOUNTS RECEIVABLE, NET
Accounts receivable represent customer trade receivables and is presented net of allowances for doubtful accounts of $47,000 at November 30, 2017 and $61,000 at May 31, 2017. Accounts receivable are derived from the sale of products throughout the world to semiconductor manufacturers, semiconductor contract assemblers, electronics manufacturers and burn-in and test service companies. The Company’s allowance for doubtful accounts is based upon historical experience and review of trade receivables by aging category to identify specific customers with known disputes or collection issues. Uncollectible receivables are recorded as bad debt expense when all efforts to collect have been exhausted and recoveries are recognized when they are received.
7. INVENTORIES
Inventories are comprised of the following (in thousands):
| | | |
| | | |
| Raw materials and sub-assemblies | $5,020 | $4,268 |
| Work in process | 2,970 | 2,059 |
| Finished goods | 235 | 277 |
| | $8,225 | $6,604 |
8.15. SEGMENT INFORMATION
The Company operates inhas only one reportable segment: the design, manufacturesegment. The information for revenue category by type, product line, geography and marketingtiming of advanced test and burn-in products to the semiconductor manufacturing industry.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 about the Company’s operations in differentfor geographic areas. Net sales are based upon ship-to locationareas (in thousands).:
| | | |
| | | |
| United States | $621 | $662 |
| Asia | 1 | 1 |
| Europe | -- | -- |
| | $622 | $663 |
| | | | | |
| | | | | |
| Three months ended November 30, 2017: | | | | |
| Net sales | $1,964 | $5,909 | $50 | $7,923 |
| Property and equipment, net | 1,116 | 39 | 11 | 1,166 |
| | | | | |
| Six months ended November 30, 2017: | | | | |
| Net sales | $3,254 | $11,569 | $70 | $14,893 |
| Property and equipment, net | 1,116 | 39 | 11 | 1,166 |
| | | | | |
| Three months ended November 30, 2016: | | | | |
| Net sales | $1,709 | $2,256 | $251 | $4,216 |
| Property and equipment, net | 740 | 39 | 14 | 793 |
| | | | | |
| Six months ended November 30, 2016: | | | | |
| Net sales | $4,873 | $4,166 | $495 | $9,534 |
| Property and equipment, net | 740 | 39 | 14 | 793 |
The Company’s JapaneseThere were no revenues through distributors for the three months ended August 31, 2020 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.2019.
Sales to the Company’s five largest customers accounted for approximately 94%81% and 96%93% of its net sales infor the three and six months ended November 30, 2017,August 31, 2020 and 2019, respectively. TwoFour customers accounted for approximately 43%21%,19%, 17%, and 34%15% of the Company’s net sales in the three months ended November 30, 2017.August 31, 2020. Two customers accounted for approximately 43%, and 39% of the Company’s net sales in the six months ended November 30, 2017. Sales to the Company’s five largest customers accounted for approximately 96% and 95% of its net sales in the three and six months ended November 30, 2016, respectively. Two customers accounted for approximately 60%54% and 22% of the Company’s net sales in the three months ended November 30, 2016. Three customers accounted for approximately 50%, 19% and 16% of the Company’s net sales in the six months ended November 30, 2016.August 31, 2019. No other customers represented more than 10% of the Company’sCompany's net sales infor either of the sixthree months ended November 30, 2017August 31, 2020 and 2016.2019.
16. DISSOLUTION OF AEHR TEST SYSTEMS JAPAN
9. PRODUCT WARRANTIESOn July 31, 2020, the Company completed the liquidation of Aehr Test Systems Japan K.K. (“ATS-Japan”), a majority owned subsidiary. Accordingly, the Company deconsolidated ATS-Japan and recognized an aggregate net gain of $2,401,000 for the period ended August 31, 2020. The net gain was mainly due to cumulative translation adjustment reclassified into earnings of $2,186,000 and the residual income tax effect in connection with the cumulative translation adjustment released into income tax benefits of $215,000.
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, 2017 and 2016 (in thousands):
| | | |
| | | |
| | | | | |
| | | | | |
| Balance at the beginning of the period | $119 | $90 | $113 | $155 |
| | | | | |
| Accruals for warranties issued during the period | 152 | 11 | 246 | 11 |
| Accruals and adjustments (change in estimates) related to pre-existing warranties during the period | -- | -- | -- | (54) |
| | | | |
| Settlement made during the period (in cash or in kind) | (138) | (29) | (226) | (40) |
| | | | | |
| Balance at the end of the period | $133 | $72 | $133 | $72 |
The accrued warranty balance is included in accrued expenses on the accompanying condensed consolidated balance sheets.
10. ACCUMULATED OTHER COMPREHENSIVE INCOME
Changes in the components of AOCI, net of tax, were as follows (in thousands):
| | Cumulative Translation Adjustments | Unrealized Loss on Investments, Net | |
| | | | |
| Balance at May 31, 2017 | $2,249
| $-- | $2,249
|
| Other comprehensive income (loss) before reclassifications | 60
| (3) | 57 |
| Amounts reclassified out of AOCI | -- | -- | -- |
| Other comprehensive income (loss), net of tax | 60
| (3) | 57 |
| Balance at November 30, 2017 | $2,309 | $(3) | $2,306 |
11. INCOME TAXES
Income taxes have been provided using the liability method whereby deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and net operating loss and tax credit carryforwards measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse or the carryforwards are utilized. Valuation allowances are established when it is determined that it is more likely than not that such assets will not be realized.
Since fiscal 2009, a full valuation allowance was established against all deferred tax assets as management determined that it is more likely than not that certain deferred tax assets will not be realized.
The Company accounts for uncertain tax positions consistent with authoritative guidance. The guidance prescribes a “more likely than not” recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company does not expect any material change in its unrecognized tax benefits over the next twelve months. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income taxes.
Although the Company files U.S. federal, various state, and foreign tax returns, the Company’s only major tax jurisdictions are the United States, California, Germany and Japan. Tax years 1997 - 2016 remain subject to examination by the appropriate governmental agencies due to tax loss carryovers from those years.
On December 22, 2017, the "Tax Cuts and Jobs Act" was signed into law, significantly impacting several sections of the Internal Revenue Code. The Company is currently analyzing the impact of these changes and therefore an estimate of the impact to income taxes is not yet available.
12. CUSTOMER DEPOSITS AND DEFERRED REVENUE, SHORT-TERM
Customer deposits and deferred revenue, short-term (in thousands):
| | | |
| | | |
| Customer deposits | $2,755 | $3,264 |
| Deferred revenue | 387 | 203 |
| | $3,142 | $3,467 |
13. LONG-TERM DEBT
On April 10, 2015, the Company entered into a Convertible Note Purchase and Credit Facility Agreement (the “Purchase Agreement”) with QVT Fund LP and Quintessence Fund L.P. (the “Purchasers”) providing for (a) the Company’s sale to the Purchasers of $4,110,000 in aggregate principal amount of 9.0% Convertible Secured Notes due 2017 (the “Convertible Notes”) and (b) a secured revolving loan facility (the “Credit Facility”) in an aggregate principal amount of up to $2,000,000. On August 22, 2016 the Purchase Agreement was amended to extend the maturity date of the Convertible Notes to April 10, 2019, decrease the conversion price from $2.65 per share to $2.30 per share, decrease the forced conversion price from $7.50 per share to $6.51 per share, and allow for additional equity awards.
The Convertible Notes bear interest at an annual rate of 9.0% and will mature on April 10, 2019 unless repurchased or converted prior to that date. Interest is payable quarterly on March 1, June 1, September 1 and December 1 of each year. Debt issuance costs of $356,000, which were accreted over the term of the original loan using the effective interest rate method, were offset against the loan balance.
The conversion price for the Convertible Notes is $2.30 per share and is subject to adjustment upon the occurrence of certain specified events. Holders may convert all or any part of the principal amount of their Convertible Notes in integrals of $10,000 at any time prior to the maturity date. Upon conversion, the Company will deliver shares of its common stock to the holder of Convertible Notes electing such conversion. The Company may not redeem the Convertible Notes prior to maturity.
The maximum amount of $2,000,000 drawn against the Credit Facility has been converted to Convertible Notes, and at November 30, 2017 there was no remaining balance available to be drawn on the Credit Facility.
The Company’s obligations under the Purchase Agreement are secured by substantially all of the assets of the Company.
14. RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, as part of its ongoing efforts to assist in the convergence of GAAP and International Financial Reporting Standards (“IFRS”), the Financial Accounting Standards Board (“FASB”) issued an accounting standard update related to revenue from contracts with customers. This standard sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in GAAP. The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not addressed completely in the prior accounting guidance. The standard provides alternative methods of initial adoption and will become effective for the Company beginning in the first quarter of fiscal 2019. The FASB has issued several updates to the standard which i) defer the original effective date from January 1, 2017 to January 1, 2018, while allowing for early adoption as of January 1, 2017. ii) clarify the application of the principal versus agent guidance. and iii) clarify the guidance on inconsequential and perfunctory promises and licensing. In May 2016, the FASB issued an update to address certain narrow aspects of the guidance including collectibility criterion, collection of sales taxes from customers, noncash consideration, contract modifications and completed contracts. This issuance does not change the core principle of the guidance in the initial topic issued in May 2014. In December 2016, the FASB issued updated guidance regarding revenue from contracts with customers. Some topics that could impact the Company include corrections and improvements around the following: contract costs impairment testing, disclosure of remaining performance obligations and prior period obligations, contract modifications, and contract asset versus receivable. The Company is currently evaluating the impact of adopting this new guidance on its consolidated financial statements.
In July 2015, the FASB issued an accounting standard update that requires management to measure inventory at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The Company adopted this new standard in fiscal year 2018. The adoption of this guidance does not have a significant impact on the Company’s consolidated financial statements.
In November 2015, the FASB issued an accounting standard update related to deferred tax assets and liabilities. This standard simplifies the presentation of deferred income taxes to be classified as noncurrent in the consolidated balance sheet. The Company adopted this new standard in fiscal year 2018. The adoption of this guidance does not have a significant impact on the Company’s consolidated financial statements.
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 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.
In March 2016, the FASB released an accounting standard update that simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, forfeitures, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The Company adopted this new standard in fiscal year 2018. The adoption of this guidance does not have a significant impact on the Company’s 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.
In August 2016, the FASB issued authoritative guidance related to the classification of certain cash receipts and cash payments on the statement of cash flows. The accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2019 on a retrospective basis, and early adoption is permitted. The Company is currently evaluating the impact of this accounting standard update on its consolidated statements of cash flows.
In October 2016, the FASB issued an accounting standard update that requires recognition of the income tax consequences of intra-entity transfers of assets (other than inventory) at the transaction date. The accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2019 on a modified retrospective basis, and early adoption is permitted. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements.
In November 2016, the FASB issued authoritative guidance related to statements of cash flows. This guidance clarifies that amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of period total amounts shown on the statement of cash flows. The accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2019 on a retrospective basis, and early adoption is permitted. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements.
Item 2. MANAGEMENT’SMANAGEMENT’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, 20172020 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 when we expect to recognize remaining performance obligations and statements concerning our expectations regarding our operations, business, strategies, prospects, revenues, expenses, costs and resources. These forward-looking statements include management’s judgments, estimates and assumptions and 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.
Investors and others should note that we announce material financial information to our investors using our investor relations website (https://www.aehr.com/investor-relations/), SEC filings, press releases, public conference calls and webcasts. We use these channels to communicate with our investors and the public about our company, our products and services and other issues. It is possible that the information we post on our investor relations website could be deemed to be material information. Therefore, we encourage investors, the media, and others interested in our company to review the information we post on our investor relations website.
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, test fixtures and test fixtures.the Advanced Burn-in and Test System, or ABTS.
Our net sales consist primarily of sales of systems, WaferPak contactors, DiePak Carriers,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, assumptions and judgements, including those related to customer programs and incentives, product returns, bad debts, inventories, income taxes, financing operations, warranty obligations, and long-term service contracts. Our estimates are derived from historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Those results form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. For a discussion of the critical accounting policies, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the fiscal year ended May 31, 2017.2020.
There have been no material changes to our critical accounting policies and estimates during the sixthree months ended November 30, 2017August 31, 2020 compared to those discussed in our Annual Report on Form 10-K for the fiscal year ended May 31, 2017.
2020.
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% |
| Cost of sales | 60.5 | 65.3 | 59.4 | 61.5 | 88.7 | 59.0 |
| Gross profit | 39.5 | 34.7 | 40.6 | 38.5 | 11.3 | 41.0 |
| | | |
| Operating expenses: | | |
| Selling, general and administrative | 23.4 | 40.5 | 24.5 | 35.9 | 75.3 | 32.7 |
| Research and development | 13.7 | 24.7 | 13.7 | 22.0 | 44.7 | 16.1 |
| | | |
| Total operating expenses | 37.1 | 65.2 | 38.2 | 57.9 | 120.0 | 48.8 |
| | | |
| Income (loss) from operations | 2.4 | (30.5) | 2.4 | (19.4) | |
| Loss from operations | | (108.7) | (7.8) |
| | | |
| Interest expense, net | (1.3) | (4.3) | (1.4) | (3.8) | |
| Interest (expense) income, net | | (0.6) | 0.2 |
| Net gain from dissolution of Aehr Test Systems Japan | | 108.6 | -- |
| Other (expense) income, net | (0.2) | 1.1 | (0.5) | 0.4 | (4.7) | 0.2 |
| | | |
| Income (loss) before income tax expense | 0.9 | (33.7) | 0.5 | (22.8) | |
| Loss before income tax benefit (expense) | | (5.4) | (7.4) |
| | | |
| Income tax expense | (0.1) | (0.7) | -- | (0.3) | |
| Income tax benefit (expense) | | 10.7 | (0.1) |
| | | |
| Net income (loss) | 0.8 | (34.4) | 0.5 | (23.1) | 5.3 | (7.5) |
| Less: Net income attributable to the noncontrolling interest | -- | -- |
| | | |
| Net income (loss) attributable to Aehr Test Systems common shareholders | 0.8% | (34.4)% | 0.5% | (23.1)% | 5.3% | (7.5)% |
THREE MONTHS ENDED NOVEMBER 30, 2017AUGUST 31, 2020 COMPARED TO THREE MONTHS ENDED NOVEMBER 30, 2016AUGUST 31, 2019
NET SALES. Net sales increaseddecreased to $7.9$2.0 million for the three months ended November 30, 2017August 31, 2020 from $4.2$5.5 million for the three months ended November 30, 2016, an increaseAugust 31, 2019, a decrease of 87.9%63.6%. The increasedecrease in net sales for the three months ended November 30, 2017August 31, 2020 was primarily due to the increasesdecreases in both net sales of both our wafer-level products and Test During Burn-in (TDBI) products and wafer-level products. Net sales of our wafer-level products for the three months ended August 31, 2020 were $1.6 million, and decreased approximately $3.3 million from the three months ended August 31, 2019. Net sales of our TDBI products for the three months ended November 30, 2017August 31, 2020 were $5.1 million,$453,000, and increased approximately $2.4 milliondecreased $254,000 from the three months ended November 30, 2016. Net sales of the wafer-level productsAugust 31, 2019.
GROSS PROFIT. Gross profit decreased to $227,000 for the three months ended November 30, 2017 were $2.8 million, and increased approximately $1.4 millionAugust 31, 2020 from the three months ended November 30, 2016.
GROSS PROFIT. Gross profit increased to $3.1$2.3 million for the three months ended November 30, 2017 from $1.5 millionAugust 31, 2019, a decrease of approximately 90.0%. Gross profit margin decreased to 11.3% for the three months ended November 30, 2016, an increase of 114.0%. Gross profit margin increased to 39.5%August 31, 2020 from 41.0% for the three months ended November 30, 2017 from 34.7% for the three months ended November 30, 2016.August 31, 2019. The increasedecrease in gross profit margin was primarily due to manufacturing efficienciesincreased direct material costs as a percentage of sales resulting in a 5.0% gross profit margin reduction, increased warranty provision, mainly due to an increaseadjustments related to preexisting warranties, resulting in a 6.5% gross profit margin reduction, and manufacturing inefficiencies due to a lower level of net sales resulting in a 6.7%17.4% gross profit margin increase, partially offset by an increase in warranty provision resulting in a 1.7% decrease in gross profit margin.reduction.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses increaseddecreased to $1.9$1.5 million for the three months ended November 30, 2017August 31, 2020 from $1.7$1.8 million for the three months ended November 30, 2016, an increaseAugust 31, 2019, a decrease of 8.6%16.3%. The increasedecrease in SG&A expenses was primarily due to an increasea decrease in employment related expenses.
RESEARCH AND DEVELOPMENT. R&D expenses increased to $1.1$900,000 for the three months ended August 31, 2020 from $892,000 for the three months ended August 31, 2019, an increase of 0.9%.
INTEREST (EXPENSE) INCOME, NET. Interest expense, net for the three months ended August 31, 2020 was $13,000 compared with interest income, net of $12,000 for the three months ended August 31, 2019. The interest expense for the three months ended August 31, 2020 was from the PPP Loan that we obtained on April 23, 2020.
NET GAIN FROM DISSOLUTION OF AEHR TEST SYSTEMS JAPAN. Net gain from dissolution of Aehr Test Systems Japan was $2.2 million for the three months ended November 30, 2017 from $1.0 million for the three months ended November 30, 2016, an increase of 4.8%. The increase in R&D expenses was primarily due to an increase in employment related expenses.
INTEREST EXPENSE. Interest expense was $105,000 for the three months ended November 30, 2017 compared with $181,000 for the three months ended November 30, 2016. The decrease in interest expense in the three months ended November 30, 2017 was primarilyAugust 31, 2020, due to the debt issuance costs related torelease of the convertible notes becoming fully amortized atcumulative translation adjustment in connection with the endcomplete liquidation of fiscal 2017.Aehr Test Systems Japan subsidiary in July 2020.
OTHER (EXPENSE) INCOME, NET. Other expense, net was $7,000$94,000 for the three months ended November 30, 2017August 31, 2020, compared with other income, net of $43,000$10,000 for the three months ended November 30, 2016.August 31, 2019. The change betweenin other expense and other(expense) income, net was primarily due to losses or gains realized in connection with the fluctuation in the value of the dollar compared to foreign currencies during the referenced periods.
INCOME TAX EXPENSE.BENEFIT (EXPENSE). Income tax expenses were $15,000 and $30,000benefit was $215,000 for the three months ended November 30, 2017 and 2016, respectively.
SIX MONTHS ENDED NOVEMBER 30, 2017 COMPARED TO SIX MONTHS ENDED NOVEMBER 30, 2016
NET SALES. Net sales increased to $14.9 millionAugust 31, 2020, compared with income tax expense of $6,000 for the sixthree months ended November 30, 2017 from $9.5 million forAugust 31, 2019. During the sixthree months ended November 30, 2016, an increaseAugust 31, 2020, the currency translation adjustment balance was released and the residual income tax effect of 56.2%. The increase in net sales for the six months ended November 30, 2017$215,000 was primarily duerecorded pursuant to the increases in both net sales of our Test During Burn-in (TDBI) products and wafer-level products. Net sales of the TDBI products for the six months ended November 30, 2017 were $7.9 million, and increased approximately $2.6 million from the six months ended November 30, 2016. Net sales of the wafer-level products for the six months ended November 30, 2017 were $7.0 million, and increased approximately $2.8 million from the six months ended November 30, 2016.
GROSS PROFIT. Gross profit increased to $6.0 million for the six months ended November 30, 2017 from $3.7 million for the six months ended November 30, 2016, an increase of 64.9%. Gross profit margin increased to 40.6% for the six months ended November 30, 2017 from 38.5% for the six months ended November 30, 2016. The increase in gross profit margin was primarily due to manufacturing efficiencies due to an increase in net sales resulting in a 6.6% gross profit margin increase, partially offset by an increase in warranty provision resulting in a 2.1% decrease in gross profit margin, an increase in shipping cost resulting in a 0.9% decrease in gross profit margin, and an increase in direct material costs resulting in a 1.1% decrease in gross profit margin.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses increased to $3.6 million for the six months ended November 30, 2017 from $3.4 million for the six months ended November 30, 2016, an increase of 6.5%. The increase in SG&A expenses was primarily due to an increase in employment related expenses.
RESEARCH AND DEVELOPMENT. R&D expenses decreased to $2.0 million for the six months ended November 30, 2017 from $2.1 million for the six months ended November 30, 2016, a decrease of 2.6%. The decrease in R&D expenses was primarily due to a decrease in project expenses.
INTEREST EXPENSE. Interest expense was $212,000 for the six months ended November 30, 2017 compared with $359,000 for the six months ended November 30, 2016. The decrease in interest expense in the six months ended November 30, 2017 was primarily due to the debt issuance costs related to the convertible notes becoming fully amortized at the end of fiscal 2017.
OTHER (EXPENSE) INCOME, NET. Other expense, net was $67,000 for the six months ended November 30, 2017 compared with other income, net of $40,000 for the six months ended November 30, 2016. The change between other expense and other income was primarily due to losses or gains realizedinter-period allocation rules in connection with the fluctuationcomplete liquidation of Aehr Test Systems Japan subsidiary in the value of the dollar compared to foreign currencies during the referenced periods.July 2020.
INCOME TAX EXPENSE. Income tax expenses were $10,000 and $34,000 for the six months ended November 30, 2017 and 2016, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $643,000 for the three months ended August 31, 2020 and net cash used in operating activities was $2.2 million and $1.4 million$190,000 for the sixthree months ended November 30, 2017 and 2016, respectively.August 31, 2019. For the sixthree months ended November 30, 2017,August 31, 2020, net cash provided by operating activities was primarily the result of net income of $107,000, as adjusted to exclude the effect of net gain from dissolution of Aehr Test Systems Japan of $2.4 million including income tax benefit, and a non-cash charge of stock-based compensation expense of $270,000 and depreciation and amortization of $82,000. Other change in cash from operations primarily resulted from a decrease in accounts receivable of $2.6 million. The decrease in accounts receivable was primarily due to a decrease in sales for the three months ended August 31, 2020 compared with the three months ended May 31, 2020. For the three months ended August 31, 2019, net cash used in operating activities was primarily the result of the net incomeloss of $70,000,$413,000, as adjusted to exclude the effect of a non-cash charge of stock-based compensation expense of $0.6 million$199,000 and depreciation and amortization expense of $0.2 million. Net$95,000. Other changes in cash used infrom 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,primarily resulted from a decrease in accounts payablereceivable of $1.0$1.6 million, and a decreasepartially offset by decreases in customer deposits and deferred revenue, accrued expenses and accounts payable of $0.2$1.0 million, partially offset by a$455,000 and $235,000, respectively. The 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. Thea decrease in accounts payable was primarily due to timing of vendor payments.sales for the three months ended August 31, 2019 compared with the three months ended May 31, 2019. The decrease in customer deposits and deferred revenue was primarily due to the shipments againstdecrease in backlog of customer orders with down payments. The decrease in accounts receivable was due to improvements in customer payment terms. For the six months ended November 30, 2016, net cash used in operating activities was primarily the result of net loss of $2.2 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 an increase in accounts receivable of $1.0 million and a decrease in customer deposits and deferred revenue of $0.7 million, partially offset by a decrease in inventories of $1.3 million and an increase in accounts payable of $0.7 million. The increase in accounts receivableaccrued expenses was primarily due to large shipments toward the end ofseverance payments to terminated employees impacted by the quarter ended November 30, 2016.restructuring plan implemented during fiscal year 2019. The decrease in customer deposits and deferred revenue was primarily due to shipments to customers with down payments. The decrease in inventories is primarily due to the sales of systems on-hand at the beginning of the period. The increase in accounts payable was primarily due to the decrease in inventory and capital equipment purchases.purchases for the three months ended August 31, 2019 compared with the three months ended May 31, 2019.
Net cash used in investing activities was $6.3 million$47,000 and $88,000$50,000 for the sixthree months ended November 30, 2017August 31, 2020 and 2016,2019, respectively. During the six months ended November 30, 2017, netNet cash used in investing activities during the three months ended August 31, 2020 and 2019 was due to the purchase of available for sale securities, which did not affect our liquidity, and the purchases of property and equipment. During the six months ended November 30, 2016, net cash used ininvesting activities was primarily due to the purchases of property and equipment.
FinancingNet cash provided by financing activities provided cash of $0.6 millionwas $190,000 and $5.8 million$62,000 for the sixthree months ended November 30, 2017August 31, 2020 and 2016,2019, respectively. Net cash provided by financing activities during the sixthree months ended November 30, 2017August 31, 2020 and 2019 was due to $0.6 million in proceeds from the issuance of common stock under employee plans. Net cash provided by financing activities during the six months ended November 30, 2016 was due to the net proceeds of $5.3 million from the sale of our common stock in a private placement transaction with certain institutional and accredited investors that closed on September 28, 2016 and $0.5 million in proceeds from the issuance of common stock under employee plans.
The effect of fluctuation in exchange rates usedincreased cash of $7,000by $94,000 and $16,000 for the sixthree months ended November 30, 2017August 31, 2020 and $43,000 for the six months ended November 30, 2016.2019, respectively. The change in cash used waschanges were due to the fluctuation in the value of the dollar compared to foreign currencies.
As of November 30, 2017August 31, 2020 and May 31, 2017, the Company2020, we had working capital of $23.2$11.8 million and $21.5$13.8 million, respectively. Working capital consists of cash and cash equivalents, short-term investments, accounts receivable, inventory and other current assets, less current liabilities.
We lease our manufacturing and office space under operating leases. We entered into a non-cancelable operating lease agreement for our United States manufacturing and office facilities, which was renewed in November 2014February 2018 and expires in June 2018.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 special purpose or 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 ourthe Company's Annual Report on Form 10-K for the year ended May 31, 2017.2020.
Item 3. QUANTITATIVEQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We had no holdings of derivative financial or commodity instruments as of November 30, 2017August 31, 2020 or May 31, 2017.2020.
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.currencies. 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. CONTROLSCONTROLS 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.
PARTPART II - OTHER INFORMATION
Item 1. LEGALLEGAL PROCEEDINGS
None.
Item 1A. RISKRISK FACTORS
Please refer to the description of the risk factors associated with our business previously disclosed in Part I, Item 1A - "Risk Factors" of our Annual Report on Form 10-K for the year ended May 31, 20172020 filed with the Securities and Exchange Commission on August 29, 2017. There have been no material changes from the risk factors previously described under Item 1A of our Annual Report on Form 10-K for the fiscal year ended May 31, 2017.28, 2020.
Item 2. UNREGISTEREDUNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
Item 3. DEFAULTSDEFAULTS UPON SENIOR SECURITIES
None.
Item 4. MINEMINE SAFETY DISCLOSURES
Not ApplicableApplicable.
Item 5. OTHEROTHER 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)Exhibit No. | | Description |
| | | | |
Date: January 12, 2018 | By: | /s/GAYN ERICKSON
| |
| | Gayn Erickson | |
| | President and Chief Executive Officer
| |
Date: January 12, 2018 | By: | /s/KENNETH B. SPINK
| |
| | Kenneth B. Spink | |
| | Vice President of Finance and Chief Financial Officer
| |
AEHR TEST SYSTEMS
INDEX TO EXHIBITS
Exhibit No.
| | Description
|
| | Amended and Restated Bylaws of the Registrant.
|
| | | |
| | Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002. |
| | |
|
| | Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002. |
| | | |
| | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
| | |
|
101.INS
| | XBRL Instance Document |
| | |
|
101.SCH
| | XBRL Taxonomy Extension Schema Document |
| | |
|
101.CAL
| | XBRL Taxonomy Extension Calculation Linkbase Document |
| | |
|
101.DEF
| | XBRL Taxonomy Extension Definition Linkbase Document |
| | |
|
101.LAB
| | XBRL Taxonomy Extension Label Linkbase Document |
| | |
|
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
(1)Incorporated by reference to Exhibit No. 3.1 previously filed with the Company’s Current Report on Form 8-K filed October 31, 2017September 9, 2020 (File No. 000-22893)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.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Aehr Test Systems | |
| (Registrant) | |
| | | |
| Date: October 14, 2020 | By: | /s/ GAYN ERICKSON | |
| | Gayn Erickson | |
| | President and Chief Executive Officer (Principal Executive Officer)
| |
| | | |
| Date: October 14, 2020 | By: | /s/ KENNETH B. SPINK | |
| | Kenneth B. Spink | |
| | Vice President of Finance and Chief Financial Officer (Principal Financial and Accounting Officer)
| |