FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended February 29, 2008.
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________.
Commission file number: 000-22893.
AEHR TEST SYSTEMS
(Exact name of Registrant as specified in its charter)
CALIFORNIA 94-2424084
-------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
400 KATO TERRACE
FREMONT, CA 94539
-------------------------------------- ------------------------------------
(Address of principal (Zip Code)
executive offices)
(510) 623-9400
------------------------------------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE
LAST REPORT.
N/A
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period as the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
(Item 1) YES X NO
--- ---
(Item 2) YES X NO
--- ---
Indicate by check mark whether the Registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated
filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act
(Check one):
Large accelerated filer Accelerated filer
--- ---
Non-accelerated filer X Smaller reporting company
--- ---
(Do not check if a smaller reporting company)
1
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
YES NO X
--- ---
Number of shares of common stock, $0.01 par value, outstanding
at March 31, 2008 was 8,146,995.
2
FORM 10-Q
FOR THE QUARTER ENDED FEBRUARY 29, 2008
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
February 29, 2008 and May 31, 2007 . . . . . . . . . . . 4
Condensed Consolidated Statements of Income for the three
months and nine months ended February 29, 2008 and
February 28, 2007. . . . . . . . . . . . . . . . . . . . 5
Condensed Consolidated Statements of Cash Flows for the
nine months ended February 29, 2008
and February 28, 2007. . . . . . . . . . . . . . . . . . 6
Notes to Condensed Consolidated Financial Statements. . . . . 7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . 16
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk . . 22
ITEM 4. Controls and Procedures. . . . . . . . . . . . . . . . . . . . 23
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 23
ITEM 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . 23
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds. . 26
ITEM 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . 26
ITEM 4. Submission of Matters to a Vote of Security Holders . . . . . 26
ITEM 5. Other Information . . . . . . . . . . . . . . . . . . . . . . 26
ITEM 6. Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SIGNATURE PAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Index to Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
3
PART I. FINANCIAL INFORMATION
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
AEHR TEST SYSTEMS
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(Unaudited)
February 29, May 31,
2008 2007
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . $ 5,774 $ 6,564
Short-term investments. . . . . . . . . . . . . 300 2,987
Accounts receivable, net of allowances for
doubtful accounts of $100 and $87 at
February 29, 2008 and May 31, 2007,
respectively. . . . . . . . . . . . . . . . . 17,977 6,614
Inventories . . . . . . . . . . . . . . . . . . 9,431 9,701
Prepaid expenses and other. . . . . . . . . . . 346 326
----------- -----------
Total current assets . . . . . . . . . . . . 33,828 26,192
Property and equipment, net . . . . . . . . . . . 1,779 1,689
Goodwill. . . . . . . . . . . . . . . . . . . . . 274 274
Other assets. . . . . . . . . . . . . . . . . . . 531 520
----------- -----------
Total assets . . . . . . . . . . . . . . . . $36,412 $28,675
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . $ 2,522 $ 2,517
Accrued expenses. . . . . . . . . . . . . . . . 4,129 2,927
Deferred revenue. . . . . . . . . . . . . . . . 167 378
----------- -----------
Total current liabilities . . . . . . . . . . 6,818 5,822
Deferred lease commitment . . . . . . . . . . . . 110 185
----------- -----------
Total liabilities . . . . . . . . . . . . . . 6,928 6,007
----------- -----------
Shareholders' equity:
Common stock, $0.01 par value:
Issued and outstanding: 8,054 shares and
7,820 shares at February 29, 2008 and
May 31, 2007, respectively. . . . . . . . . . 81 78
Additional paid-in capital. . . . . . . . . . . 41,268 39,552
Accumulated other comprehensive income. . . . . 2,140 1,241
Accumulated deficit . . . . . . . . . . . . . . (14,005) (18,203)
----------- -----------
Total shareholders' equity . . . . . . . . . 29,484 22,668
----------- -----------
Total liabilities and shareholders' equity. . $36,412 $28,675
=========== ===========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
AEHR TEST SYSTEMS
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
------------------------ ------------------------
February 29, February 28, February 29, February 28,
2008 2007 2008 2007
----------- ----------- ----------- -----------
Net sales. . . . . . . . . . . . . . $10,792 $5,687 $28,127 $19,072
Cost of sales. . . . . . . . . . . . 5,262 2,369 13,532 9,542
----------- ----------- ----------- -----------
Gross profit . . . . . . . . . . . . 5,530 3,318 14,595 9,530
----------- ----------- ----------- -----------
Operating expenses:
Selling, general and administrative 2,001 1,619 5,664 4,773
Research and development . . . . . 1,826 1,634 4,919 4,543
----------- ----------- ----------- -----------
Total operating expenses . . . 3,827 3,253 10,583 9,316
----------- ----------- ----------- -----------
Income from operations . . . . . . . 1,703 65 4,012 214
Interest income . . . . . . . . . . 55 134 213 390
Other income (expense), net. . . . . 38 70 (70) 937
----------- ----------- ----------- -----------
Income before income tax expense
(benefit). . . . . . . . . . . . . 1,796 269 4,155 1,541
Income tax expense (benefit) . . . . (130) 4 84 32
----------- ----------- ----------- -----------
Net income . . . . . . . . . . . . . $1,926 $ 265 $ 4,071 $ 1,509
=========== =========== =========== ===========
Net income per share - basic . . . . $ 0.24 $ 0.03 $ 0.51 $ 0.20
Net income per share - diluted . . . $ 0.23 $ 0.03 $ 0.48 $ 0.18
Shares used in per share calculations:
Basic. . . . . . . . . . . . . . . 8,025 7,765 7,919 7,732
Diluted. . . . . . . . . . . . . . 8,476 8,115 8,398 8,228
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
AEHR TEST SYSTEMS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Nine Months Ended
------------------------
February 29, February 28,
2008 2007
----------- -----------
Cash flows from operating activities:
Net income.................................... $4,071 $1,509
Adjustments to reconcile net income to
net cash used in operating activities:
Stock compensation expense.................. 612 521
Provision for doubtful accounts............. 13 8
Loss on disposal of property and equipment.. 6 41
Depreciation and amortization............... 332 233
Changes in operating assets and liabilities:
Accounts receivable....................... (11,376) (1,542)
Inventories............................... 270 163
Deferred lease commitment non-current..... (75) (31)
Accounts payable.......................... 5 268
Accrued expenses and deferred revenue..... 1,052 (2,077)
Prepaid expenses and other................ 12 (72)
----------- -----------
Net cash used in operating activities... (5,078) (979)
----------- -----------
Cash flows from investing activities:
Purchases of investments.................... (500) (12,408)
Proceeds from sales and maturity
of investments............................ 3,188 10,697
Purchase of property and equipment ......... (417) (584)
----------- -----------
Net cash provided by (used in)
investing activities.................. 2,271 (2,295)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock
and exercise of stock options............. 1,053 666
----------- -----------
Net cash provided by
financing activities.................. 1,053 666
----------- -----------
Effect of exchange rates on cash................ 964 2
----------- -----------
Net decrease in cash and
cash equivalents...................... (790) (2,606)
Cash and cash equivalents, beginning of period.. 6,564 9,405
----------- -----------
Cash and cash equivalents, end of period........ $5,774 $6,799
=========== ===========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
6
AEHR TEST SYSTEMS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial information has been
prepared by Aehr Test Systems, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC") and therefore
does not include all information and footnotes necessary for a fair
presentation of financial position, results of operations and cash flows in
accordance with accounting principles generally accepted in the United States
of America.
In the opinion of management, the unaudited condensed consolidated
financial statements for the interim periods presented reflect all
adjustments, consisting of only 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 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, 2007. 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 consolidated financial statements
include the accounts of Aehr Test Systems and its subsidiaries (collectively,
the "Company," "we," "us," and "our"). All significant intercompany balances
have been eliminated in consolidation.
ACCOUNTING ESTIMATES. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
of America 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. We
base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances. Actual results may
differ from these estimates. To the extent that there are material
differences between these estimates and our actual results, our future
financial statements will be affected.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS. In June 2006, the
Financial Accounting Standards Board ("FASB") issued Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes - an interpretation of FASB
Statement No. 109" ("FIN No. 48"). FIN No. 48 clarifies the accounting for
uncertainty in income taxes recognized in the Company's financial statements
in accordance with FASB Statement No. 109, "Accounting for Income Taxes." FIN
No. 48 prescribes a 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. FIN No. 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. The evaluation of a tax position in
accordance with FIN No. 48 is a two-step process. The first step is
recognition: the Company determines whether it is "more-likely-than-not" that
a tax position will be sustained upon examination, including resolution of any
related appeals or litigation processes, based on the technical merits of the
position. In evaluating whether a tax position has met the "more-likely-than-
not" recognition threshold, the Company presumes that the position will be
examined by the appropriate taxing authority that would have full knowledge of
all relevant information. The second step is measurement: a tax position
that meets the "more-likely-than-not" recognition threshold is measured to
determine the amount of benefit to recognize in the financial statements. The
tax position is measured at the largest amount of benefit that is greater than
7
50 percent likely to be realized upon ultimate settlement. FIN No. 48 is
effective for fiscal years beginning after December 15, 2006.
Upon adoption of FIN No. 48 on June 1, 2007, the Company recognized a
cumulative effect adjustment of $127,000, decreasing its income tax liability
for unrecognized tax benefits, and decreasing the May 31, 2007 accumulated
deficit balance. For the three months and nine months ended February 29,
2008, the Company had recorded tax expenses (credits) of ($130,000) and
$84,000, respectively. The Company does not expect any material change in its
unrecognized tax benefits over the next twelve months. In accordance with FIN
No. 48, the Company recognizes interest and penalties related to unrecognized
tax benefits as a component of income taxes. The following table shows the
changes in the accumulated deficit for the three and nine months ended
February 29, 2008 (in thousands):
Three Months Ended Nine Months Ended
February 29, 2008 February 29, 2008
------------------ -----------------
Balance at beginning of period $(15,931) $(18,203)
FIN 48 adjustments to beginning balance -- 127
Net income during the period 1,926 4,071
------------------ -----------------
Balance at end of period $(14,005) $(14,005)
================== =================
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 1993 - 2007 remain subject to
examination by the appropriate governmental agencies due to tax loss
carryovers from those years.
2. STOCK-BASED COMPENSATION
Prior to June 1, 2006, the Company's stock-based employee compensation
plans were accounted for under the recognition and measurement provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"), and related interpretations, as permitted by
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"). The Company generally did not
recognize stock-based compensation cost in its condensed consolidated
statements of operations for periods prior to June 1, 2006 as most options
granted had an exercise price equal to or higher than the market value of the
underlying common stock on the date of the grant.
The Company adopted the provisions of SFAS No. 123 (revised 2004),"Share-
Based Payment" ("SFAS No. 123(R)"), using the modified prospective transition
method, which requires the application of the accounting standard as of June
1, 2006, the first day of the Company's fiscal year 2007. SFAS No. 123(R)
establishes accounting for stock-based awards exchanged for employee services.
Accordingly, stock-based compensation cost is measured at each grant date,
based on the fair value of the award, and is recognized as expense over the
employee's requisite service period. All of the Company's stock compensation
is accounted for as an equity instrument. The Company's condensed
consolidated financial statements for the three and nine months ended February
29, 2008 and February 28, 2007 reflect the impact of SFAS No. 123(R). See
Notes 9 and 10 in the Company's Annual Report on Form 10-K for fiscal 2007
filed on August 29, 2007 for further information regarding the stock option
plan and the employee stock purchase plan ("ESPP").
Under the modified prospective transition method, stock compensation cost
has been recognized in the three and nine months ended February 29, 2008 and
February 28, 2007 in the condensed consolidated statements of income for stock
awards granted or modified after May 31, 2006 and for stock awards granted
prior to, but unvested as of, June 1, 2006. As required by SFAS No. 123(R),
the Company has made an estimate of expected forfeitures and is recognizing
8
compensation costs only for those stock-based compensation awards expected to
vest.
The following table summarizes compensation costs related to the Company's
stock-based compensation for the three and nine months ended February 29, 2008
and February 28, 2007, respectively (in thousands, except per share data):
Three Months Ended Nine Months Ended
------------------ ------------------
Feb. 29, Feb. 28, Feb. 29, Feb. 28,
2008 2007 2008 2007
-------- -------- -------- --------
Stock-based compensation in the
form of employee stock options
and ESPP shares, included in:
Cost of sales. . . . . . . . . . . . . . $ 25 $ 10 $ 56 $ 27
Selling, general and administrative. . . 120 97 349 285
Research and development . . . . . . . . 71 64 207 194
-------- -------- --------- --------
Total stock-based compensation . . . . . 216 171 612 506
Tax effect on stock-based compensation 4 3 12 9
-------- -------- --------- --------
Net effect on net income . . . . . . . . $212 $168 $600 $497
======== ======== ========= ========
Effect on net income per share:
Basic. . . . . . . . . . . . . . . . . $0.03 $0.02 $0.08 $0.06
Diluted. . . . . . . . . . . . . . . . $0.03 $0.02 $0.07 $0.06
During the three months ended February 29, 2008 and February 28, 2007, the
Company recorded stock-based compensation related to stock options of $181,000
and $136,000, respectively. During the nine months ended February 29, 2008
and February 28, 2007, the Company recorded stock-based compensation related
to stock options of $507,000 and $396,000, respectively.
As of February 29, 2008, the total compensation cost related to unvested
stock-based awards under the Company's 1996 Stock Option Plan and 2006 Equity
Incentive Plan, but not yet recognized, was approximately $1,899,000, which is
net of estimated forfeitures of $79,000. This cost will be amortized on a
straight-line basis over a weighted average period of approximately 2.8 years.
During the three months ended February 29, 2008 and February 28, 2007, the
Company recorded stock-based compensation related to our ESPP of $35,000 and
$35,000, respectively. During the nine months ended February 29, 2008 and
February 28, 2007, the Company recorded stock-based compensation related to
our ESPP of $105,000 and $110,000, respectively.
As of February 29, 2008, the total compensation cost related to options to
purchase the Company's common shares under the 2006 Employee Stock Purchase
Plan but not yet recognized was approximately $119,000. This cost will be
amortized on a straight-line basis over a weighted average period of
approximately 1.3 years.
Valuation Assumptions
Valuation and Amortization Method. The Company estimates the fair value
of stock options granted using the Black-Scholes option valuation method and a
single option award approach for options granted after June 1, 2006. The
multiple option approach has been used for all options granted prior to June
1, 2006. The fair value under the single option approach is amortized on a
straight-line basis over the requisite service period of the awards, which is
generally the vesting period. The fair value under the multiple option
approach is amortized on a weighted basis over the requisite service period 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
9
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 the Company's stock-
based awards.
Expected 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 five years, which matches
the term of most of the option grants, to estimate expected volatility.
Volatility for each of the ESPP's four time periods of six months, twelve
months, eighteen months, and twenty-four months is calculated separately and
included in the overall stock-based compensation cost recorded.
Dividends. The Company has never paid any cash dividends on its common
stock and we do not anticipate paying any cash dividends in the foreseeable
future. Consequently, we use an expected dividend yield of zero in the Black-
Scholes option valuation method.
Risk-Free Interest Rate. The Company bases the risk-free interest rate
used in the Black-Scholes option valuation method 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.
Estimated Forfeitures. When estimating forfeitures, the Company considers
voluntary termination behavior as well as analysis of actual option
forfeitures.
Fair Value. The fair values of the Company's stock options granted to
employees and ESPP shares for the three and nine months ended February 29,
2008 and February 28, 2007 were estimated using the following weighted average
assumptions in the Black-Scholes valuation method consistent with the
provisions of SFAS No. 123(R) and SEC Staff Accounting Bulletin No. 107.
The fair value of our stock options granted to employees for the three and
nine months ended February 29, 2008 and February 28, 2007, respectively, was
estimated using the following weighted-average assumptions:
Three months ended Nine Months Ended
------------------- -----------------
Feb. 29, Feb. 28, Feb. 29, Feb. 28,
2008 2007 2008 2007
-------- -------- -------- --------
Option Plan Shares
Expected Term (in years).................... 5 -- 5 5
Volatility.................................. 0.71 -- 0.74 0.75
Expected Dividend........................... $0.00 -- $0.00 $0.00
Risk-free Interest Rates.................... 2.87% -- 4.60% 4.76%
Estimated Forfeiture Rate................... 4% -- 4% 4%
Weighted Average Grant Date Fair Value...... $4.24 -- $3.93 $5.19
No options were granted during the three months ended February 28, 2007.
The fair value of our ESPP shares for the three and nine months ended
February 29, 2008 and February 28, 2007, respectively, was estimated using the
following weighted-average assumptions:
10
Three months ended Nine Months Ended
------------------ -----------------
Feb. 29, Feb. 28, Feb. 29, Feb. 28,
2008 2007 2008 2007
-------- -------- -------- --------
Employee Stock Purchase Plan Shares
Expected Term (in years).................. 0.5-2.0 0.5-2.0 0.5-2.0 0.5-2.0
Volatility................................ 0.51-0.63 0.61-0.74 0.43-0.69 0.61-0.74
Expected Dividend......................... $0.00 $0.00 $0.00 $0.00
Risk-free Interest Rates.................. 2.8%-4.4% 4.5%-5.1% 2.8%-4.9% 4.5%-5.1%
Estimated Forfeiture Rate................. 4% 4% 4% 4%
Weighted Average Grant Date Fair Value.... $2.12 $1.22 $2.15 $1.26
The following table summarizes the stock option transactions during the
nine months ended February 29, 2008 (in thousands, except per share data):
Outstanding Options
--------------------------------------------
Weighted
Number Average Aggregate
Available of Exercise Intrinsic
Shares Shares Price Value
---------- -------- --------- ----------
Balances, May 31, 2007........ 745 1,350 $4.38 $2,633
Options granted............. (355) 355 $6.05
Options exercised........... -- (14) $3.73
---------- --------
Balances, August 31, 2007..... 390 1,691 $4.74 $3,898
Options granted............. (43) 43 $7.28
Options cancelled........... 23 (23) $6.11
Options exercised........... -- (127) $4.17
---------- --------
Balances, November 30, 2007... 370 1,584 $4.83 $2,355
Options granted............. (22) 22 $7.00
Options cancelled........... 3 (3) $6.02
Options exercised........... -- (53) $4.52
---------- --------
Balances, February 29, 2008... 351 1,550 $4.87 $3,948
========== ========
Options exercisable and expected to be
exercisable at February 29, 2008 1,488 $4.87 $3,790
========
11
The options outstanding and exercisable at February 29, 2008 were in the
following exercise price ranges:
Options Outstanding Options Exercisable
at February 29, 2008 at February 29, 2008
--------------------------------- ----------------------------------------------
Weighted Weighted
Average Weighted Number Weighted Average
Range of Number Remaining Average Exer- Average Remaining Aggregate
Exercise Outstanding Contractual Exercise cisable Exercise Contractual Intrinsic
Prices Shares Life (Years) Price Shares Price Life (Years) Value
(in thousands) (in thousands) (in thousands)
----------- ------------ ----------- -------- ------------ -------- ----------- -------------
$2.49-$3.63 514 3.56 $3.11 410 $3.14 3.40
$3.66-$4.08 227 1.97 $3.94 222 $3.94 1.93
$4.35-$4.95 186 1.43 $4.51 180 $4.52 1.37
$5.91-$7.00 430 4.24 $6.11 100 $6.09 3.87
$7.28-$9.30 193 5.16 $8.24 68 $8.36 5.22
------------ -----------
$2.49-$9.30 1,550 3.46 $4.87 980 $4.24 2.87 $3,074
============ ===========
The total intrinsic value of options exercised for the three and nine
months ended February 29, 2008 was $122,000 and $317,000, respectively. The
weighted average remaining contractual life of the options exercisable and
expected to be exercisable was 3.5 years.
3. EARNINGS PER SHARE
Earnings per share is computed based on the weighted average number of
common and common equivalent shares (common stock options) outstanding, when
dilutive, during each period using the treasury stock method.
Three Months Ended Nine Months Ended
------------------ ------------------
Feb. 29, Feb. 28, Feb. 29, Feb. 28,
2008 2007 2008 2007
-------- -------- -------- --------
(in thousands, except per share amounts)
Numerator: Net income ..................... $1,926 $ 265 $4,071 $1,509
======== ======== ======== ========
Denominator for basic net income per share:
Weighted-average shares outstanding ..... 8,025 7,765 7,919 7,732
-------- -------- -------- --------
Shares used in basic per share calculation. 8,025 7,765 7,919 7,732
Effect of dilutive securities.............. 451 350 479 496
-------- -------- -------- --------
Denominator for diluted net income
per share.............................. 8,476 8,115 8,398 8,228
-------- -------- -------- --------
Basic net income per share................. $ 0.24 $ 0.03 $ 0.51 $ 0.20
======== ======== ======== ========
Diluted net income per share............... $ 0.23 $ 0.03 $ 0.48 $ 0.18
======== ======== ======== ========
Stock options to purchase 252,635 and 248,938 shares of common stock were
outstanding on February 29, 2008 and February 28, 2007, respectively, but not
included in the computation of diluted net income per share, because the
inclusion of such shares would be anti-dilutive.
12
4. INVENTORIES
Inventories are comprised of the following (in thousands):
February 29, May 31,
2008 2007
----------- -----------
Raw materials and sub-assemblies........ $4,660 $4,908
Work in process......................... 3,424 4,587
Finished goods.......................... 1,347 206
----------- -----------
$9,431 $9,701
=========== ===========
5. SEGMENT INFORMATION
The Company operates in one reportable segment; the design, manufacture
and marketing of advanced test and burn-in products to the semiconductor
manufacturing industry.
The following presents information about the Company's operations in
different geographic areas (in thousands):
United Adjust-
States Asia Europe ments Total
--------- --------- --------- --------- ---------
Three months ended February 29, 2008:
Net sales........................... $11,290 $10,251 $ 56 $(10,805) $10,792
Portion of U.S. net sales
from export sales, including sales
to subsidiaries................... 10,766 -- -- -- 10,766
Income (loss) from operations....... 2,736 (813) (152) (68) 1,703
Identifiable assets................. 42,679 18,741 1,139 (26,147) 36,412
Property and equipment, net......... 1,700 71 8 -- 1,779
Nine months ended February 29, 2008:
Net sales........................... $26,479 $17,769 $ 155 ($16,276) $28,127
Portion of U.S. net sales
from export sales, including sales
to subsidiaries................... 17,723 -- -- -- 17,723
Income (loss) from operations....... 3,896 612 (442) (54) 4,012
Identifiable assets................. 42,679 18,741 1,139 (26,147) 36,412
Property and equipment, net......... 1,700 71 8 -- 1,779
Three months ended February 28, 2007:
Net sales........................... $ 4,773 $ 541 $746 $ (373) $ 5,687
Portion of U.S. net sales
from export sales, including sales
to subsidiaries................... 1,172 -- -- -- 1,172
Income (loss) from operations....... (226) (4) 199 96 65
Identifiable assets................. 34,464 1,388 997 (11,096) 25,753
Property and equipment, net......... 1,170 78 13 -- 1,261
Nine months ended February 28, 2007:
Net sales........................... $17,276 $2,503 $891 $(1,598) $19,072
Portion of U.S. net sales
from export sales, including sales
to subsidiaries................... 6,045 -- -- -- 6,045
Income (loss) from operations....... 47 174 (5) (2) 214
Identifiable assets................. 34,464 1,388 997 (11,096) 25,753
Property and equipment, net......... 1,170 78 13 -- 1,261
The Company's foreign operations are primarily those of its Japanese and
German subsidiaries. Substantially all of the sales of the subsidiaries are
made to unaffiliated Japanese or European customers. Net sales and income
(loss) from operations from outside the United States include the operating
results of Aehr Test Systems Japan K.K. and Aehr Test Systems GmbH.
Adjustments consist of intercompany eliminations. Identifiable assets are all
assets identified with operations in each geographic area.
13
Sales to the Company's five largest customers accounted for approximately
99.6% and 98.4% of its net sales in the three and nine months ended February
29, 2008, respectively. One customer, Spansion Inc., accounted for
approximately 94.3% and 87.7% of the Company's net sales in the three and
nine months ended February 29, 2008, respectively. Sales to the Company's
five largest customers accounted for approximately 81.8% and 70.7% of its net
sales in the three and nine months ended February 28, 2007, respectively.
Two customers accounted for approximately 47.3% and 13.0% of the Company's
net sales in the three months ended February 28, 2007, respectively. Two
customers accounted for approximately 30.5% and 21.0% of the Company's net
sales in the nine months ended February 28, 2007, respectively.
6. PRODUCT WARRANTIES
The Company provides for the estimated cost of product warranties at the
time the products are 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.
Following is a summary of changes in the Company's liability for product
warranties during the three and nine months ended February 29, 2008 and
February 28, 2007 (in thousands):
Three Months Ended Nine Months Ended
------------------ ------------------
Feb. 29, Feb. 28, Feb. 29, Feb. 28,
2008 2007 2008 2007
-------- -------- -------- --------
Balance at the beginning of the period.... $271 $137 $153 $169
Accruals for warranties issued
during the period....................... 198 26 559 201
Reversals of warranties issued
during the period....................... -- (21) -- (70)
Settlement made during the period
(in cash or in kind).................... (149) (26) (392) (184)
-------- -------- -------- --------
Balance at the end of the period.......... $320 $116 $320 $116
======== ======== ======== ========
The accrued warranty balance is included in accrued expenses on the
accompanying condensed consolidated balance sheets.
7. OTHER COMPREHENSIVE INCOME
Other comprehensive income, net of tax is comprised of the following (in
thousands):
Three Months Ended Nine Months Ended
------------------ ------------------
Feb. 29, Feb. 28, Feb. 29, Feb. 28,
2008 2007 2008 2007
-------- -------- -------- --------
Net income ............................. $1,926 $265 $4,071 $1,509
Foreign currency translation
adjustments income (expense).......... 460 9 898 (18)
Unrealized holding gains (losses) arising
during period......................... (1) (1) 1 --
-------- -------- -------- --------
Comprehensive income.................... $2,385 $273 $4,970 $1,491
======== ======== ======== ========
14
8. EMPLOYEE BENEFIT PLANS
In addition to the Company's 1996 Stock Option Plan and the 1997 Employee
Stock Purchase Plan discussed in Notes 9 and 10 in the Company's 2007 Annual
Report on Form 10-K, the Company maintains the equity incentive plan and
employee benefit plans under which its equity securities are authorized for
issuance to the Company's employees, directors and consultants.
The purpose of these plans is to provide equity ownership and compensation
opportunities in the Company by attracting and retaining the services of
qualified and talented persons to serve as employees, directors and/or
consultants of the Company. Those plans were approved by the Company's
shareholders.
In October 2006, the Company's 2006 Equity Incentive Plan and the 2006
Employee Stock Purchase Plan ("2006 Plans") were approved by the Company's
shareholders. The 2006 Plans replace the Company's Amended and Restated 1996
Stock Option Plan, which would otherwise have expired in 2006, and the
Company's 1997 Employee Stock Purchase Plan, which would otherwise have
expired in 2007. The Amended and Restated 1996 Stock Option Plan will
continue to govern awards previously granted under that plan.
As of February 29, 2008, out of the 1,901,684 shares authorized for grant
under the 1996 Stock Option Plan and 2006 Equity Incentive Plan, approximately
1,550,169 shares had been granted. As of February 29, 2008, 29,000 shares had
been issued from the 200,000 shares authorized for grant under the 2006
Employee Stock Purchase Plan.
9. RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS No. 157"), which defines fair value, establishes a framework for
measuring fair value in accordance with generally accepted accounting
principles, and expands disclosures about fair value measurements. SFAS No.
157 does not require any new fair value measurements; rather, it applies under
other accounting pronouncements that require or permit fair value
measurements. The provisions of SFAS No. 157 are to be applied prospectively
as of the beginning of the fiscal year in which it is initially applied, with
any transition adjustment recognized as a cumulative-effect adjustment to the
opening balance of retained earnings. The provisions of SFAS No. 157 are
effective for fiscal years beginning after November 15, 2007; therefore, the
Company anticipates adopting SFAS No. 157 as of June 1, 2008. The Company is
currently evaluating the impact, if any, that the adoption of SFAS No. 157
will have on its consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115" ("SFAS No. 159"). SFAS No. 159 provides companies with an
option to report selected financial assets and liabilities at fair value. The
objective of SFAS No. 159 is to reduce both complexity in accounting for
financial instruments and the volatility in earnings caused by measuring
related assets and liabilities differently. SFAS No. 159 is effective as of
the beginning of an entity's first fiscal year beginning after November 15,
2007. The Company is currently evaluating the potential impact, if any, that
the adoption of SFAS No. 159 will have on its consolidated financial
statements.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests
in Consolidated Financial Statements - an amendment of ARB No. 51" ("SFAS
No. 160"). The objective of SFAS No. 160 is to improve the relevance,
comparability, and transparency of the financial information that a company
provides in its consolidated financial statements. SFAS No. 160 requires
companies to clearly identify and present ownership interests in subsidiaries
held by parties other than the company in the consolidated financial
statements within the equity section but separate from the company's equity.
It also requires the amount of consolidated net income attributable to the
15
parent and to the noncontrolling interest be clearly identified and presented
on the face of the consolidated statement of income; changes in ownership
interest be accounted for similarly, as equity transactions; and when a
subsidiary is deconsolidated, any retained noncontrolling equity investment in
the former subsidiary and the gain or loss on the deconsolidation of the
subsidiary be measured at fair value. SFAS No. 160 is effective as of the
beginning of an entity's first fiscal year beginning after December 15, 2008.
The Company is currently evaluating the impact, if any, that the adoption of
SFAS No. 160 will have on its consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" ("SFAS No. 141(R)"). The objective of SFAS No. 141(R) is to
improve the relevance, representational faithfulness, and comparability of the
information that a company provides in its financial reports about a business
combination and its effects. Under SFAS No. 141(R), a company is required to
recognize the assets acquired, liabilities assumed, contractual contingencies,
and contingent consideration measured at their fair value at the acquisition
date. It further requires that research and development assets acquired in a
business combination that have no alternative future use be measured at their
acquisition-date fair value and then immediately charged to expense, and that
acquisition-related costs are to be recognized separately from the acquisition
and expensed as incurred. Among other changes, SFAS No. 141(R) also requires
that "negative goodwill" be recognized in earnings as a gain attributable to
the acquisition, and any deferred tax benefits resulted in a business
combination are recognized in income from continuing operations in the period
of the business combination. SFAS No. 141(R) is effective for fiscal years
beginning after December 15, 2008. Early adoption is prohibited. SFAS No.
141 (R) will only impact us if the Company is involved in a business
combination.
In December 2007, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 110, extending the use, under certain
circumstances, of the simplified method for developing an estimate of the
expected term of share options. The Company is currently evaluating the
potential impact of this issuance.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the unaudited
condensed consolidated financial statements and the related notes that appear
elsewhere in this document and with our Annual Report on Form 10-K for the
fiscal year ended May 31, 2007 and the consolidated financial statements and
notes thereto.
In addition to historical information, this quarterly 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. These statements typically may be identified by the use of
forward-looking words or phrases such as "believe," "expect," "intend,"
"anticipate," "should," "planned," "estimated," and "potential," among others
and include, but are not limited to, statements concerning our expectations
regarding our operations, business, strategies, prospects, revenues, expenses,
costs and resources. These forward-looking statements are subject to certain
risks and uncertainties that could cause our actual results to differ
materially from those anticipated results or other expectations reflected in
the forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in this report
and other factors beyond our control, and in particular, the risks discussed
in "Part II, Item 1A. Risk Factors" and those discussed in other documents we
file with the Securities and Exchange Commission. 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
16
uncertainties, readers are cautioned not to place undue reliance on such
forward-looking statements.
CRITICAL ACCOUNTING POLICIES
The Company's discussion and analysis of its financial condition and
results of operations are based upon the Company's unaudited 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 financial statements requires the Company to make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an ongoing basis, the Company evaluates its
estimates, including those related to customer programs and incentives,
product returns, bad debts, inventories, investments, intangible assets,
income taxes, financing operations, warranty obligations, long-term service
contracts, and contingencies and litigation. The Company bases its estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which 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" in the Company's Annual Report on Form 10-K for the
fiscal year ended May 31, 2007.
Except for the adoption of the Financial Accounting Standards Board
("FASB") issued Interpretation No. 48, "Accounting for Uncertainty in Income
Taxes - an interpretation of FASB Statement No. 109" ("FIN 48") as described
in Note 1 of the notes to condensed consolidated financial statements in "Item
1. Condensed Consolidated Financial Statements (unaudited)," the Company's
critical accounting policies have not changed materially from the Company's
Annual Report on Form 10-K for the fiscal year ended May 31, 2007.
RESULTS OF OPERATIONS
The following table sets forth items in the Company's unaudited condensed
consolidated statements of operations as a percentage of net sales for the
periods indicated.
Three Months Ended Nine Months Ended
------------------ ------------------
Feb. 29, Feb. 28, Feb. 29, Feb. 28,
2008 2007 2008 2007
-------- -------- -------- --------
Net sales. . . . . . . . . . . . . . . . 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales. . . . . . . . . . . . . . 48.8 41.7 48.1 50.0
-------- -------- -------- --------
Gross profit . . . . . . . . . . . . . . 51.2 58.3 51.9 50.0
-------- -------- -------- --------
Operating expenses:
Selling, general and administrative. . 18.5 28.5 20.1 25.0
Research and development . . . . . . . 16.9 28.7 17.5 23.8
-------- -------- -------- --------
Total operating expenses . . . . . 35.4 57.2 37.6 48.8
-------- -------- -------- --------
Income from operations . . . . . . . . . 15.8 1.1 14.3 1.2
Interest income. . . . . . . . . . . . . 0.5 2.4 0.8 2.0
Other income (expense), net. . . . . . . 0.3 1.3 (0.3) 4.9
-------- -------- -------- --------
Income before income tax expense (benefit) 16.6 4.8 14.8 8.1
Income tax expense (benefit) . . . . . . (1.2) 0.1 0.3 0.2
-------- -------- -------- --------
Net income . . . . . . . . . . . . . . . 17.8 % 4.7 % 14.5 % 7.9 %
======== ======== ======== ========
17
THREE MONTHS ENDED FEBRUARY 29, 2008 COMPARED TO THREE MONTHS ENDED FEBRUARY
28, 2007
NET SALES. Net sales increased to $10.8 million in the three months ended
February 29, 2008 from $5.7 million in the three months ended February 28,
2007, an increase of 89.8%. The increase in net sales in the three months
ended February 29, 2008 resulted primarily from increases in net sales of the
Company's wafer/die level products, partially offset by decreases in sales of
the Company's MAX monitored burn-in products. Net sales of the Company's
wafer/die level products for the three months ended February 29, 2008 were
$10.1 million, and increased approximately $7.3 million from the three months
ended February 28, 2007. Net sales of the Company's MAX monitored burn-in
products for the three months ended February 29, 2008 were $462,000, and
decreased approximately $2.1 million from the three months ended February 28,
2007. The Company expects that net sales in the fourth quarter of fiscal 2008
will be somewhat higher than those in the third quarter of fiscal 2008.
GROSS PROFIT. Gross profit consists of net sales less cost of sales.
Cost of sales consists primarily of the cost of materials, assembly and test
costs, and overhead from operations. Gross profit increased to $5.5 million
in the three months ended February 29, 2008 from $3.3 million in the three
months ended February 28, 2007, an increase of 66.7%. As a percentage of net
sales, gross profit margin decreased to 51.2% in the three months ended
February 29, 2008 from 58.3% in the three months ended February 28, 2007. The
decrease in gross profit margin was primarily related to the fact that the
Company's gross margin last year was positively impacted by a one-time non-
recurring engineering fee, as well as higher than normal performance test
board royalties, which contribute essentially 100% margin. On an ongoing
basis, the Company continues to believe that typical gross profit margin will
be approximately 50%.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
("SG&A") expenses consist primarily of salaries and related costs of
employees, commission expenses to independent sales representatives, product
promotion and other professional services. SG&A expenses of $2.0 million in
the three months ended February 29, 2008 increased from $1.6 million in the
three months ended February 28, 2007, an increase of 23.6%. The increase in
SG&A expense was primarily attributable to an increase in employment related
expenses, as we added sales and support resources to address the anticipated
growth in the Company's business. As a percentage of net sales, SG&A expenses
decreased to 18.5% in the three months ended February 29, 2008 from 28.5% in
the three months ended February 28, 2007, resulting from higher net sales.
RESEARCH AND DEVELOPMENT. Research and development ("R&D") expenses
consist primarily of salaries and related costs of employees engaged in
ongoing research, design and development activities, costs of engineering
materials and supplies, and professional consulting expenses. R&D expenses
increased to $1.8 million in the three months ended February 29, 2008 from
$1.6 million in the three months ended February 28, 2007, an increase of
11.8%. This increase was primarily due to increases in employment related
expenses, as we added headcount to address the anticipated growth in the
Company's business. As a percentage of net sales, R&D expenses decreased to
16.9% in the three months ended February 29, 2008 from 28.7% in the three
months ended February 28, 2007, resulting from higher net sales.
INTEREST INCOME. Interest income decreased to $55,000 in the three months
ended February 29, 2008 from $134,000 in the three months ended February 28,
2007. The decrease in net interest income for the three months ended February
29, 2008 was primarily related to lower average balances invested during the
period.
OTHER INCOME (EXPENSE), NET. Other income (expense), net decreased to
$38,000 in the three months ended February 29, 2008 from $70,000 in the three
months ended February 28, 2007. The decrease in other income (expense), net
18
was primarily due to a decrease in the dividends received from ESA Electronics
Pte Ltd., a Singapore company.
INCOME TAX EXPENSE (BENEFIT). Income tax benefit was $130,000 in the
three months ended February 29, 2008, compared with income tax expense of
$4,000 in the three months ended February 28, 2007. The income tax benefit in
the three months ended February 29, 2008 is related to a shift in the mix of
projected earnings between the US parent and its Japanese subsidiary for the
fiscal year 2008. This shift in projections is due to appropriate application
and adjustment of intercompany pricing between related subsidiaries. The
Company's U.S. operations and its Japanese subsidiary have experienced
significant cumulative losses and thus generated certain net operating losses
available to offset future taxes payable in the United States and Japan.
Primarily, as a result of the cumulative operating losses in the Company's
U.S. operations and its Japanese subsidiary, a valuation allowance was
established for the full amount of its net deferred tax assets for both its
U.S. operations and its Japanese subsidiary.
NINE MONTHS ENDED FEBRUARY 29, 2008 COMPARED TO NINE MONTHS ENDED FEBRUARY 28,
2007
NET SALES. Net sales increased to $28.1 million in the nine months ended
February 29, 2008 from $19.1 million in the nine months ended February 28,
2007, an increase of 47.5%. The increase in net sales in the nine months
ended February 29, 2008 resulted primarily from increases in net sales of the
Company's wafer/die level products, partially offset by decreases in sales of
the Company's MAX monitored burn-in products and MTX products. Net sales of
the Company's wafer/die level products for the nine months ended February 29,
2008 were $24.5 million, and increased approximately $17.4 million from the
nine months ended February 28, 2007. Net sales of the Company's MAX monitored
burn-in products for the nine months ended February 29, 2008 were $3.1
million, and decreased approximately $6.4 million from the nine months ended
February 28, 2007. Net sales of the Company's MTX products for the nine
months ended February 29, 2008 were $559,000, and decreased approximately $2.0
million from the nine months ended February 28, 2007.
GROSS PROFIT. Gross profit increased to $14.6 million in the nine months
ended February 29, 2008 from $9.5 million in the nine months ended February
28, 2007, an increase of 53.1%. Gross profit margin increased to 51.9% in the
nine months ended February 29, 2008 from 50.0% in the nine months ended
February 28, 2007. The increase in gross profit margin was primarily related
to the fact that wafer/die level products, with somewhat higher margins,
represented a higher proportion of net sales.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses increased to $5.7
million in the nine months ended February 29, 2008 from $4.8 million in the
nine months ended February 28, 2007, an increase of 18.7%. The increase in
SG&A expenses was primarily due to an increase in employment related expenses.
Employment related expenses increased primarily due to an increase in sales
and support resources to address the anticipated growth in the Company's
business. As a percentage of net sales, SG&A expenses decreased to 20.1% in
the nine months ended February 29, 2008 from 25.0% in the nine months ended
February 28, 2007, resulting from higher net sales.
RESEARCH AND DEVELOPMENT. R&D expenses increased to $4.9 million in the
nine months ended February 29, 2008 from $4.5 million in the nine months ended
February 28, 2007, an increase of 8.3%. The increase in R&D expenses was
primarily due to an increase in employment related expense of $698,000,
partially offset by a decrease in project related professional service expense
of approximately $281,000. As a percentage of net sales, R&D expenses
decreased to 17.5% in the nine months ended February 29, 2008 from 23.8% in
the nine months ended February 28, 2007, resulting from higher net sales.
INTEREST INCOME. Interest income decreased to $213,000 in the nine months
ended February 29, 2008 from $390,000 in the nine months ended February 28,
2007, a decrease of 45.4%. The decrease in net interest income for the nine
19
months ended February 29, 2008 was primarily related to lower average balances
invested during the period.
OTHER INCOME (EXPENSE), NET. Other income (expense), net decreased to
($70,000) in the nine months ended February 29, 2008 from $937,000 in the nine
months ended February 28, 2007. The decrease in other income (expense), net
was primarily due to the receipt of an earn-out payment paid for a portion of
the Company's investment in ESA Electronics Pte Ltd., a Singapore company, in
the nine months ended February 28, 2007. No such earn-out payment was
received in the nine months ended February 29, 2008.
INCOME TAX EXPENSE. Income tax expense increased to $84,000 in the nine
months ended February 29, 2008, from $32,000 in the nine months ended February
28, 2007. The income tax expenses in the nine months ended February 29, 2008
and February 28, 2007 were primarily attributable to alternative minimum tax
requirements on the Company's U.S. operations. The Company's U.S. operations
and its Japanese subsidiary have experienced significant cumulative losses and
thus generated certain net operating losses available to offset future taxes
payable in the United States and Japan. Primarily, as a result of the
cumulative operating losses in the Company's U.S. operations and its Japanese
subsidiary, a valuation allowance was established for the full amount of its
net deferred tax assets for both its U.S. operations and its Japanese
subsidiary.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was approximately $5.1 million for
the nine months ended February 29, 2008 and approximately $979,000 for the
nine months ended February 28, 2007, respectively. For the nine months ended
February 29, 2008, net cash used in operating activities was primarily related
to an increase in accounts receivable of $11.4 million, partially offset by
net income of $4.1 million. The increase in accounts receivable in the nine
month period was primarily attributable to the higher level of sales, as well
as an increase in the proportion of receivables in Japan, which typically have
longer payment terms. For the nine months ended February 28, 2007, net cash
used in operating activities was primarily due to a decrease in accrued
expenses and deferred revenue of $2.1 million, and an increase in accounts
receivable of $1.5 million, partially offset by net income of $1.5 million and
stock compensation expense of $521,000.
Net cash provided by investing activities was approximately $2.3 million
for the nine months ended February 29, 2008 and net cash used in investing
activities was approximately $2.3 million for the nine months ended February
28, 2007. The net cash provided by investing activities during the nine
months ended February 29, 2008 was primarily due to $3.2 million in net
proceeds from sales and maturity of investments, partially offset by $500,000
in purchases of investments. The net cash used in investing activities during
the nine months ended February 28, 2007 was primarily attributable to $12.4
million in purchases of investments, partially offset by $10.7 million in net
proceeds from sales and maturities of investments.
Financing activities provided cash of approximately $1.1 million in the
nine months ended February 29, 2008 and approximately $666,000 in the nine
months ended February 28, 2007, respectively. Net cash provided by financing
activities during the nine months ended February 29, 2008 and February 28,
2007 were primarily due to proceeds from issuance of common stock from the
exercise of stock options.
As of February 29, 2008, the Company had working capital of $27.0 million.
Working capital consists of cash and cash equivalents, short-term investments,
accounts receivable, inventory and other current assets, less current
liabilities.
The Company announced in August 1998 that its board of directors had
authorized the repurchase of up to 1,000,000 shares of its outstanding common
shares. The Company may repurchase the shares in the open market or in
20
privately negotiated transactions, from time to time, subject to market
conditions. The number of shares of common stock actually acquired by the
Company will depend on subsequent developments and corporate needs, and the
repurchase program may be interrupted or discontinued at any time. Any such
repurchase of shares, if consummated, may use a portion of the Company's
working capital. As of May 31, 2006, the Company had repurchased 523,700
shares at an average price of $3.95. Shares repurchased by the Company are
cancelled. The Company has not repurchased any of its outstanding common
shares since May 31, 2006.
The Company leases most of its manufacturing and office space under
operating leases. The Company entered into a non-cancelable operating lease
agreement for its United States manufacturing and office facilities, which
commenced in December 1999 and expires in December 2009. Under the lease
agreement, the Company is responsible for payments of utilities, taxes and
insurance.
From time to time, the Company evaluates potential acquisitions of
businesses, products or technologies that complement the Company's business.
Any such transactions, if consummated, may use a portion of the Company's
working capital or require the issuance of equity. The Company has no present
understandings, commitments or agreements with respect to any material
acquisitions.
The Company anticipates that the existing cash balance together with cash
provided by operations, if any, are adequate to meet its working capital and
capital equipment requirements through calendar year 2008. After calendar
year 2008, depending on its rate of growth and profitability, the Company may
require additional equity or debt financing to meet its working capital
requirements or capital equipment needs. There can be no assurance that
additional financing will be available when required, or, if available, that
such financing can be obtained on terms satisfactory to the Company.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has not entered into any off-balance sheet financing
arrangements and has not established any variable interest entities.
OVERVIEW OF CONTRACTUAL OBLIGATIONS
There have been no material changes in the composition, magnitude or other
key characteristics of the Company's contractual obligations or other
commitments as disclosed in the Company's Annual Report on Form 10-K for the
year ended May 31, 2007.
RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS No. 157"), which defines fair value, establishes a framework for
measuring fair value in accordance with generally accepted accounting
principles, and expands disclosures about fair value measurements. SFAS No.
157 does not require any new fair value measurements; rather, it applies under
other accounting pronouncements that require or permit fair value
measurements. The provisions of SFAS No. 157 are to be applied prospectively
as of the beginning of the fiscal year in which it is initially applied, with
any transition adjustment recognized as a cumulative-effect adjustment to the
opening balance of retained earnings. The provisions of SFAS No. 157 are
effective for fiscal years beginning after November 15, 2007; therefore, the
Company anticipates adopting SFAS No. 157 as of June 1, 2008. The Company is
currently evaluating the impact, if any, that the adoption of SFAS No. 157
will have on its consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115" ("SFAS No. 159"). SFAS No. 159 provides companies with an
option to report selected financial assets and liabilities at fair value. The
21
objective of SFAS No. 159 is to reduce both complexity in accounting for
financial instruments and the volatility in earnings caused by measuring
related assets and liabilities differently. SFAS No. 159 is effective as of
the beginning of an entity's first fiscal year beginning after November 15,
2007. The Company is currently evaluating the potential impact, if any, that
the adoption of SFAS No. 159 will have on its consolidated financial
statements.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests
in Consolidated Financial Statements - an amendment of ARB No. 51" ("SFAS
No. 160"). The objective of SFAS No. 160 is to improve the relevance,
comparability, and transparency of the financial information that a company
provides in its consolidated financial statements. SFAS No. 160 requires
companies to clearly identify and present ownership interests in subsidiaries
held by parties other than the company in the consolidated financials
statements within the equity section but separate from the company's equity.
It also requires the amount of consolidated net income attributable to the
parent and to the noncontrolling interest be clearly identified and presented
on the face of the consolidated statement of income; changes in ownership
interest be accounted for similarly, as equity transactions; and when a
subsidiary is deconsolidated, any retained noncontrolling equity investment in
the former subsidiary and the gain or loss on the deconsolidation of the
subsidiary be measured at fair value. SFAS No. 160 is effective as of the
beginning of an entity's first fiscal year beginning after December 15, 2008.
The Company is currently evaluating the impact, if any, that the adoption of
SFAS No. 160 will have on its consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" ("SFAS No. 141(R)"). The objective of SFAS No. 141(R) is to
improve the relevance, representational faithfulness, and comparability of the
information that a company provides in its financial reports about a business
combination and its effects. Under SFAS No. 141(R), a company is required to
recognize the assets acquired, liabilities assumed, contractual contingencies,
and contingent consideration measured at their fair value at the acquisition
date. It further requires that research and development assets acquired in a
business combination that have no alternative future use be measured at their
acquisition-date fair value and then immediately charged to expense, and that
acquisition-related costs are to be recognized separately from the acquisition
and expensed as incurred. Among other changes, SFAS No. 141(R) also requires
that "negative goodwill" be recognized in earnings as a gain attributable to
the acquisition, and any deferred tax benefits resulted in a business
combination are recognized in income from continuing operations in the period
of the business combination. SFAS No. 141(R) is effective for fiscal years
beginning after December 15, 2008. Early adoption is prohibited. SFAS No.
141 (R) will only impact us if the Company is involved in a business
combination.
In December 2007, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 110, extending the use, under certain
circumstances, of the simplified method for developing an estimate of the
expected term of share options. The Company is currently evaluating the
potential impact of this issuance.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company considered the provisions of Financial Reporting Release No.
48, "Disclosures of Accounting Policies for Derivative Financial Instruments
and Derivative Commodity Instruments, and Disclosures of Quantitative and
Qualitative Information about Market Risk Inherent in Derivative Commodity
Instruments." The Company had no holdings of derivative financial or
commodity instruments at February 29, 2008.
The Company is exposed to financial market risks, including changes in
interest rates and foreign currency exchange rates. The Company invests
excess cash in a managed portfolio of corporate and government bond
22
instruments with maturities of 18 months or less. The Company does not use
any financial instruments for speculative or trading purposes. Fluctuations
in interest rates would not have a material effect on the Company's financial
position, results of operations or cash flows.
Historically, a majority of the Company's revenue and capital spending has
been transacted in U.S. dollars. The Company, however, enters into
transactions in other currencies, primarily Japanese Yen. Substantially all
sales to Japanese customers are denominated in Yen. Since the price is
determined at the time a purchase order is accepted, the Company is exposed to
the risks of fluctuations in the Yen-U.S. dollar exchange rate during the
lengthy period from purchase order to ultimate payment. This exchange rate
risk is partially offset to the extent that the Company's Japanese subsidiary
incurs expenses payable in Yen. To date, the Company has not invested in
instruments designed to hedge currency risks. In addition, the Company's
Japanese subsidiary typically carries debt or other obligations due to the
Company that may be denominated in either Yen or U.S. dollars. Since the
Japanese subsidiary's financial statements are based in Yen and the Company's
financial statements are based in U.S. dollars, the Japanese subsidiary and
the Company recognize foreign exchange gain or loss in any period in which the
value of the Yen rises or falls in relation to the U.S. dollar. A 10% change
in the value of the Yen as compared with the U.S. dollar would not be expected
to result in a significant change to our financial position or results of
operations.
Item 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Our management
evaluated, with the participation of our Chief Executive Officer and our Chief
Financial Officer, the effectiveness of our disclosure controls and procedures
as 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 is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission rules and forms.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING. No change in our
internal control over financial reporting 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.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None.
Item 1A. RISK FACTORS
Set forth below and elsewhere in this Quarterly Report on Form 10-Q and in
other documents we file with the Securities and Exchange Commission, including
without limitation our most recently filed Annual Report on Form 10-K, are
risks and uncertainties that could cause actual results to differ materially
from the results contemplated by the forward-looking statements in this
Quarterly Report on Form 10-Q. We believe that these risks and uncertainties
are the principal material risks facing the Company as of the date of this
Quarterly Report on Form 10-Q. In the future, we may become subject to
additional risks that are not currently known to us. If any of these risks
actually occur, our business, financial condition and operating results could
be seriously harmed. As a result, the trading price of our common stock could
decline, and you could lose all or part of the value of your investment.
23
CUSTOMER CONCENTRATION. The semiconductor manufacturing industry is
highly concentrated, with a relatively small number of large semiconductor
manufacturers and contract assemblers accounting for a substantial portion of
the purchases of semiconductor equipment. Sales to the Company's five largest
customers accounted for approximately 75.8% and 82.9% of its net sales in
fiscal 2007 and 2006, respectively. Sales to the Company's five largest
customers accounted for approximately 99.6% and 98.4% of its net sales in the
three and nine months ended February 29, 2008, respectively. One customer,
Spansion Inc., accounted for approximately 94.3% and 87.7% of the Company's
net sales in the three and nine months ended February 29, 2008, respectively.
Sales to the Company's five largest customers accounted for approximately
81.8% and 70.7% of its net sales in the three and nine months ended
February 28, 2007, respectively. Two customers accounted for approximately
47.3% and 13.0% of the Company's net sales in the three months ended
February 28, 2007, respectively. Two customers accounted for approximately
30.5% and 21.0% of the Company's net sales in the nine months ended February
28, 2007, respectively. During fiscal 2007, Spansion Inc. and Texas
Instruments Incorporated accounted for 39.2% and 22.9% of the Company's net
sales, respectively. During fiscal 2006, Texas Instruments Incorporated and
Spansion Inc. accounted for 47.9% and 24.9% of the Company's net sales,
respectively. No other customers represented more than 10% of the Company's
net sales for either fiscal 2007 or fiscal 2006. The Company expects that
sales of its products to a limited number of customers will continue to
account for a high percentage of net sales for the foreseeable future.
In addition, sales to particular customers may fluctuate significantly from
quarter to quarter. The loss of or reduction or delay in an order or orders
from a significant customer, or a delay in collecting or failure to collect
accounts receivable from a significant customer could adversely affect the
Company's business, financial condition and operating results.
DEPENDENCE ON MARKET ACCEPTANCE OF FOX SYSTEM. A principal element of the
Company's business strategy is to capture an increasing share of the test
equipment market through sales of its FOX wafer-level test and burn-in system.
The FOX systems are newly designed to simultaneously burn-in and/or
functionally test all of the die on a wafer in a single touchdown. The market
for the FOX systems is in the very early stages of development. The FOX-14
full wafer contact burn-in and parallel test system was introduced in July
2001, the FOX-1 full wafer parallel test system was introduced in June 2005
and the FOX-15 full wafer contact test and burn-in system was introduced in
October 2007. The Company's strategy depends, in part, upon its ability to
persuade potential customers that the FOX system can successfully contact and
functionally test all of the die on a wafer simultaneously, and that this
method of testing is cost-effective for the customer. There can be no
assurance that the Company's strategy will be successful. The failure of the
FOX system to achieve market acceptance would have a material adverse effect
on the Company's future operating results and long-term prospects. The
Company's stock price may also decline.
Market acceptance of the FOX system is subject to a number of risks.
Typically the Company must complete development of the FOX WaferPak contactor
and validate its performance on the customer's wafer. Before a customer will
incorporate the FOX system into a production line, lengthy qualification and
correlation tests must be performed. The Company anticipates that potential
customers may be reluctant to change their procedures in order to transfer
burn-in and/or test functions to the FOX system. Initial purchases are
expected to be limited to systems used for these qualifications and for
engineering studies. Market acceptance of the FOX system also may be affected
by a reluctance of IC manufacturers to rely on relatively small suppliers such
as the Company. As is common with new complex products incorporating leading-
edge technologies, the Company may encounter reliability, design and
manufacturing issues as it begins volume production and initial installations
of FOX systems at customer sites. While the Company places a high priority on
addressing these issues as they arise, there can be no assurance that they can
be resolved to the customer's satisfaction or that the resolution of such
problems will not cause the Company to incur significant development costs or
warranty expenses or to lose significant sales opportunities.
24
INTENSE COMPETITION. In each of the markets it serves, the Company faces
competition from established competitors and potential new entrants, many of
which have greater financial, engineering, manufacturing and marketing
resources than the Company. The Company expects its competitors will continue
to improve the performance of their current products and to introduce new
products with improved price and performance characteristics. In addition,
continuing consolidation in the semiconductor equipment industry, and
potential future consolidation, could adversely affect the ability of smaller
companies, such as the Company, to compete with larger, integrated
competitors. New product introductions by the Company's competitors or by new
market entrants could cause a decline in sales or loss of market acceptance of
the Company's existing products. Increased competitive pressure could also
lead to intensified price-based competition, resulting in lower prices which
could adversely affect the Company's business, financial condition and
operating results. The Company believes that to remain competitive it must
invest significant financial resources in new product development and expand
its customer service and support worldwide. There can be no assurance that
the Company will be able to compete successfully in the future.
The semiconductor equipment industry is intensely competitive.
Significant competitive factors in the semiconductor equipment market include
price, technical capabilities, quality, delivery lead-time, flexibility,
automation, cost of ownership, reliability, throughput, product availability
and customer service. In each of the markets it serves, the Company faces
competition from established competitors and potential new entrants, many of
which have greater financial, engineering, manufacturing and marketing
resources than the Company.
Because the Company's MTX system performs burn-in and many of the
functional tests performed by traditional memory testers, the MTX system faces
intense competition from burn-in system suppliers and traditional memory
tester suppliers. The market for burn-in systems is highly fragmented, with
many domestic and international suppliers. Some users of such systems, such
as independent test labs, build their own burn-in systems, while others,
particularly large IC manufacturers in Asia, acquire burn-in systems from
captive or affiliated suppliers. Competing suppliers of burn-in and
functional test systems include Advantest Corporation and Dong-Il Corporation.
The Company's MAX monitored burn-in systems have faced and are expected to
continue to face increasingly severe competition, especially from several
regional, low-cost manufacturers and from systems manufacturers that offer
higher power dissipation per device under test.
The Company's FOX full wafer contact system is expected to face
competition from larger systems manufacturers that have sufficient
technological know-how and manufacturing capability. Competing suppliers of
full wafer contact systems include Matsushita Electric Industrial Co., Ltd.
and Delta V Instruments, Incorporated.
The Company expects that its DiePak products will face significant
competition. The Company believes that several companies have developed or
are developing products which are intended to enable test and burn-in of bare
die. As the bare die market develops, the Company expects that other
competitors will emerge. The DiePak products also face severe competition
from other alternative test solutions. The Company expects that the primary
competitive factors in this market will be cost, performance, reliability and
assured supply. Competing suppliers of DiePak products include Yamaichi
Electronics Co., Ltd.
The Company's test fixture products face numerous regional competitors.
There are limited barriers to entry into the burn-in board ("BIB") market, and
as a result, many companies design and manufacture BIBs, including BIBs for
use with the Company's MAX system. The Company's strategy is to provide only
certain high performance BIBs, and the Company generally does not compete to
supply low cost, low performance BIBs. The Company has granted royalty-
25
bearing licenses to several companies to make performance test boards for use
with the Company's MTX systems and BIBs for use with the Company's MAX4
systems, in order to assure customers of a second source of supply, and the
Company may grant additional licenses as well. Sales of MTX performance test
boards and MAX4 BIBs by licensees result in royalties to the Company.
The Company expects its competitors to continue to improve the performance
of their current products and to introduce new products with improved price
and performance characteristics. New product introductions by the Company's
competitors or by new market entrants could cause a decline in sales or loss
of market acceptance of the Company's products. The Company has observed
price competition in the systems market, particularly with respect to its less
advanced products. Increased competitive pressure could also lead to
intensified price-based competition, resulting in lower prices which could
adversely affect the Company's operating margins and results. The Company
believes that to remain competitive it must invest significant financial
resources in new product development and expand its customer service and
support worldwide. There can be no assurance that the Company will be able to
compete successfully in the future.
DEPENDENCE ON SUBCONTRACTORS; SOLE OR LIMITED SOURCES OF SUPPLY. The
Company relies on subcontractors to manufacture many of the components or
subassemblies used in its products. The Company's MTX, MAX, FOX systems,
WaferPak contactors and DiePak carriers contain several components, including
environmental chambers, power supplies, wafer and die contactors, signal
distribution substrates and certain ICs, which are currently supplied by only
one or a limited number of suppliers. The Company's reliance on
subcontractors and single source suppliers involves a number of significant
risks, including the loss of control over the manufacturing process, the
potential absence of adequate capacity and reduced control over delivery
schedules, manufacturing yields, quality and costs. In the event that any
significant subcontractor or single source supplier was to become unable or
unwilling to continue to manufacture subassemblies, components or parts in
required volumes, the Company would have to identify and qualify acceptable
replacements. The process of qualifying subcontractors and suppliers could be
lengthy, and no assurance can be given that any additional sources would be
available to the Company on a timely basis. Any delay, interruption or
termination of a supplier relationship could have a material and adverse
effect on the Company's business, financial condition and operating results.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS
The Exhibits listed on the accompanying "Index to Exhibits" are filed as
part of, or incorporated by reference into, this report.
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Aehr Test Systems
(Registrant)
Date: April 11, 2008 /s/ RHEA J. POSEDEL
------------------------------
Rhea J. Posedel
Chief Executive Officer and
Chairman of the Board of Directors
Date: April 11, 2008 /s/ GARY L. LARSON
-----------------------------
Gary L. Larson
Vice President of Finance and
Chief Financial Officer
27
AEHR TEST SYSTEMS
INDEX TO EXHIBITS
Exhibit No. Description
---------- ------------
31.1 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.
31.2 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.
32 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.
28