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 August 31, 2009.
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 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
(Section 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 No
--- ---
1
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)
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 September 30, 2009 was 8,495,692.
2
FORM 10-Q
FOR THE QUARTER ENDED AUGUST 31, 2009
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
August 31, 2009 and May 31, 2009 . . . . . . . . . . . . 4
Condensed Consolidated Statements of Income for the
three months ended August 31, 2009 and 2008. . . . . . . 5
Condensed Consolidated Statements of Cash Flows for the
three months ended August 31, 2009 and 2008. . . . . . . 6
Notes to Condensed Consolidated Financial Statements. . . . . 7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . 15
ITEM 3. Quantitative and Qualitative Disclosures about Market Risks. . 19
ITEM 4. Controls and Procedures. . . . . . . . . . . . . . . . . . . . 20
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 21
ITEM 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . 21
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds. . 28
ITEM 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . 28
ITEM 4. Submission of Matters to a Vote of Security Holders . . . . . 28
ITEM 5. Other Information . . . . . . . . . . . . . . . . . . . . . . 29
ITEM 6. Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . 29
SIGNATURE PAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Index to Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
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)
August 31, May 31,
2009 2009
---------- ----------
(1)
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . $ 2,745 $ 4,360
Accounts receivable, net of allowances for
doubtful accounts of $2,794 and $13,741 at
August 31, 2009 and May 31, 2009,
respectively . . . . . . . . . . . . . . . . 718 931
Inventories . . . . . . . . . . . . . . . . . . 4,118 4,472
Prepaid expenses and other. . . . . . . . . . . 3,752 879
---------- -----------
Total current assets . . . . . . . . . . . . 11,333 10,642
Property and equipment, net . . . . . . . . . . . 2,563 2,741
Other assets. . . . . . . . . . . . . . . . . . . 531 528
---------- -----------
Total assets . . . . . . . . . . . . . . . . $14,427 $13,911
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . $ 588 $ 995
Accrued expenses. . . . . . . . . . . . . . . . 1,831 2,107
Deferred revenue. . . . . . . . . . . . . . . . 161 241
---------- -----------
Total current liabilities . . . . . . . . . . 2,580 3,343
Income tax payable. . . . . . . . . . . . . . . . 299 299
Deferred lease commitment . . . . . . . . . . . . 301 306
---------- -----------
Total liabilities . . . . . . . . . . . . . . 3,180 3,948
---------- -----------
Shareholders' equity:
Common stock, $0.01 par value:
Issued and outstanding: 8,496 shares at
August 31, 2009 and May 31, 2009. . . . . . . 85 85
Additional paid-in capital. . . . . . . . . . . 44,857 44,552
Accumulated other comprehensive income. . . . . 2,818 2,800
Accumulated deficit . . . . . . . . . . . . . . (36,513) (37,474)
---------- -----------
Total shareholders' equity . . . . . . . . . 11,247 9,963
---------- -----------
Total liabilities and shareholders' equity. . $14,427 $13,911
========== ===========
(1) The condensed consolidated balance sheet at May 31, 2009 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.
4
AEHR TEST SYSTEMS
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
Three Months Ended
August 31,
----------------------
2009 2008
---------- ----------
Net sales. . . . . . . . . . . . . . . . . . . $1,268 $9,690
Cost of sales. . . . . . . . . . . . . . . . . 1,325 4,772
---------- ----------
Gross (loss) profit. . . . . . . . . . . . . . (57) 4,918
---------- ----------
Operating expenses:
Selling, general and administrative. . . . . 1,313 2,085
Research and development . . . . . . . . . . 942 1,478
Gain on sale of bankruptcy claim . . . . . . (3,289) --
---------- ----------
Total operating expenses . . . . . . . . (1,034) 3,563
---------- ----------
Income from operations . . . . . . . . . 977 1,355
Interest income. . . . . . . . . . . . . . . . 1 63
Other expense, net . . . . . . . . . . . . . . (14) (7)
---------- ----------
Income before income tax expense . . . . 964 1,411
Income tax expense . . . . . . . . . . . . . . 3 546
---------- ----------
Net income . . . . . . . . . . . . . . . . . . $ 961 $ 865
========== ==========
Net income per share - basic . . . . . . . . . $ 0.11 $ 0.10
Net income per share - diluted . . . . . . . . $ 0.11 $ 0.10
Shares used in per share calculations:
Basic . . . . . . . . . . . . . . . . . . . 8,496 8,395
Diluted. . . . . . . . . . . . . . . . . . . 8,512 8,753
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)
Three Months Ended
August 31
---------------------
2009 2008
--------- ---------
Cash flows from operating activities:
Net income.................................... $ 961 $ 865
Adjustments to reconcile net income to
net cash used in operating activities:
Stock compensation expense.................. 305 286
Provision for doubtful accounts............. 6 103
Depreciation and amortization............... 181 139
Deferred income taxes....................... -- 522
Changes in operating assets and liabilities:
Accounts receivable....................... 259 (6,256)
Inventories............................... 355 (547)
Deferred lease commitment................. (5) 45
Accounts payable.......................... (551) (569)
Income tax payable........................ (6) 1
Accrued expenses and deferred revenue..... (356) (490)
Prepaid expenses and other................ (2,865) (158)
--------- ---------
Net cash used in
operating activities.................. (1,716) (6,059)
--------- ---------
Cash flows from investing activities:
Purchase of investments..................... -- (1,999)
Purchase of property and equipment.......... -- (241)
--------- ---------
Net cash used in
investing activities.................. -- (2,240)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock
and exercise of stock options............. -- 190
--------- ---------
Net cash provided by
financing activities.................. -- 190
--------- ---------
Effect of exchange rates on cash................ 101 (87)
--------- ---------
Net decrease in cash and
cash equivalents...................... (1,615) (8,196)
Cash and cash equivalents, beginning of period.. 4,360 15,648
--------- ---------
Cash and cash equivalents, end of period........ $ 2,745 $7,452
========= =========
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, 2009. 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 those estimates. To the extent that there are material differences
between these estimates and our actual results, our future financial statements
will be affected.
2. STOCK-BASED COMPENSATION
The Company accounts for stock options and employee stock purchase plan
("ESPP") shares under the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 123 (revised 2004),"Share-Based Payment" ("SFAS No.
123(R)") which requires companies to estimate the fair value of share-based
payment awards on the date of grant using an option-pricing model. 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. See Notes 8 and 9 in
the Company's Annual Report on Form 10-K for fiscal 2009 filed on September 2,
2009 for further information regarding the stock option plan and the ESPP.
The following table summarizes compensation costs related to the Company's
stock-based compensation for the three months ended August 31, 2009 and 2008,
respectively (in thousands, except per share data):
7
Three Months Ended
August 31,
------------------
2009 2008
-------- --------
Stock-based compensation in the form of employee
stock options and ESPP shares, included in:
Cost of sales . . . . . . . . . . . . . . . . . $ 51 $ 39
Selling, general and administrative . . . . . . 151 155
Research and development . . . . . . . . . . . . 103 92
-------- --------
Total stock-based compensation . . . . . . . . . 305 286
Tax effect on stock-based compensation . . . . . -- (123)
-------- --------
Net effect on net income . . . . . . . . . . . . $305 $163
======== ========
Effect on net income per share:
Basic . . . . . . . . . . . . . . . . . . . . $0.04 $0.02
Diluted . . . . . . . . . . . . . . . . . . . $0.04 $0.02
As of August 31, 2009, none of the stock-based compensation costs were
capitalized as part of inventory. As of August 31, 2008, stock-based
compensation costs of $42,000 were capitalized as part of inventory.
During the three months ended August 31, 2009 and 2008, the Company
recorded stock-based compensation related to stock options of $283,000 and
$251,000, respectively.
As of August 31, 2009, the total unrecognized stock based compensation cost
related to unvested stock-based awards under the Company's 1996 Stock Option
Plan and 2006 Equity Incentive Plan was approximately $2,394,000, which is net
of estimated forfeitures of $6,000. This cost will be amortized over the
remaining service period of the underlying options. The weighted average
period is approximately 3.2 years.
During the three months ended August 31, 2009 and 2008, the Company
recorded stock-based compensation related to the ESPP of $22,000 and $35,000,
respectively.
As of August 31, 2009, the total compensation cost related to options to
purchase the Company's common stock under the ESPP but not yet recognized was
approximately $61,000. This cost will be amortized on a straight-line basis
over a weighted average period of approximately 1.1 years.
Valuation Assumptions
Valuation and Amortization Method. The Company estimates the fair value of
stock options granted using the Black-Scholes option valuation model. The
single option award approach has been used for all 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
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.
8
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 model.
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.
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 months ended August 31, 2009 and 2008
were estimated using the following weighted average assumptions in the Black-
Scholes option valuation model consistent with the provisions of SFAS No.
123(R) and Securities and Exchange Commission Staff Accounting Bulletin No.
107.
Three months ended
August 31,
------------------
2009 2008
------- -------
Option Plan Shares
Expected Term (in years).................... 5 5
Volatility.................................. 0.78 0.72
Expected Dividend........................... $0.00 $0.00
Risk-free Interest Rates.................... 2.54% 3.52%
Estimated Forfeiture Rate................... 0.25% 2%
Weighted Average Grant Date Fair Value...... $0.53 $6.09
There were no ESPP shares granted to employees for the three months ended
August 31, 2009 and 2008.
The following table summarizes the stock option transactions during the
three months ended August 31, 2009 (in thousands, except per share data):
Outstanding Options
---------------------------------------------
Weighted
Number Average Aggregate
Available of Exercise Intrinsic
Shares Shares Price Value
---------- -------- --------- ----------
Balances, May 31, 2009........ 536 1,636 $5.37 $ --
Options granted............. (534) 534 $0.85
Options terminated.......... 102 (102) $4.39
---------- --------
Balances, August 31, 2009... 104 2,068 $4.25 $ --
========== ========
Options exercisable and expected to be
exercisable at August 31, 2009 2,027 $4.25 $ --
========
9
The options outstanding and exercisable at August 31, 2009 were in the
following exercise price ranges (in thousands, except per share data):
Options Outstanding Options Exercisable
at August 31, 2009 at August 31, 2009
-------------------------------- --------------------------------------
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
----------- ----------- ----------- -------- ------- -------- ----------- ---------
$0.85-$3.63 1,174 3.70 $1.89 498 $2.78 2.58
$3.66-$4.08 86 2.16 $3.83 85 $3.83 2.15
$4.35-$4.60 12 1.74 $4.38 12 $4.38 1.74
$5.91-$7.00 385 2.73 $6.12 222 $6.11 2.63
$7.28-$10.93 411 3.76 $9.31 197 $8.90 3.74
----------- -------
$0.85-$10.93 2,068 3.45 $4.25 1,014 $4.80 2.77 $ --
=========== =======
The weighted average remaining contractual life of the options exercisable
and expected to be exercisable at August 31, 2009 was 3.45 years.
Options to purchase 1,014,000 and 800,000 shares were exercisable at August
31, 2009 and 2008, respectively. These exercisable options had weighted
average exercise prices of $4.80 and $4.55 of August 31, 2009 and 2008,
respectively.
3. EARNINGS PER SHARE
Earnings per share is computed based on the weighted average number of
common and common equivalent shares (common stock options and ESPP shares)
outstanding, when dilutive, during each period using the treasury stock method.
Three Months Ended
August 31,
--------------------
2009 2008
--------- ---------
(in thousands, except
per share amounts)
Numerator: Net income...................... $ 961 $ 865
--------- ---------
Denominator for basic net income per share:
Weighted-average shares outstanding ..... 8,496 8,395
--------- ---------
Shares used in basic net income per share
calculation.............................. 8,496 8,395
Effect of dilutive securities.............. 16 358
--------- ---------
Denominator for diluted net income
per share.............................. 8,512 8,753
--------- ---------
Basic net income per share................. $0.11 $0.10
========= =========
Diluted net income per share............... $0.11 $0.10
========= =========
Stock options to purchase 1,589,000 and 410,000 shares of common stock were
outstanding on August 31, 2009 and 2008, respectively, but not included
10
in the computation of diluted net income per share, because the inclusion of
such shares would be anti-dilutive.
4. CASH EQUIVALENTS AND INVESTMENTS
On June 1, 2008, the Company adopted SFAS No. 157, "Fair Value
Measurements" ("SFAS No. 157") which defines fair value, establishes a
framework for using fair value to measure assets and liabilities, and expands
disclosures about fair value measurements. SFAS No. 157 applies whenever other
statements require or permit assets or liabilities to be measured at fair
value. SFAS No. 157 is effective for fiscal years beginning after November 15,
2007, except for non-financial assets and liabilities that are recognized or
disclosed at fair value in the financial statements on a nonrecurring basis,
for which application has been deferred for one year.
In February 2008, the Financial Accounting Standards Board ("FASB") issued
FASB Staff Position No. 157-2, "Effective Date of FASB Statement No. 157" ("FSP
157-2"), which delayed the effective date of SFAS No. 157, for all non-
financial assets and non-financial liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually), to fiscal years, and interim periods
within those fiscal years, beginning after November 15, 2008. In the first
quarter of fiscal 2010, the Company adopted SFAS No. 157 for non-financial
assets and non-financial liabilities. The adoption of SFAS No. 157 for non-
financial assets and non-financial liabilities that are not measured and
recorded at fair value on a recurring basis did not have a material impact on
our consolidated financial statements.
SFAS No. 157 includes a fair value hierarchy that is intended to increase
the consistency and comparability in fair value measurements and related
disclosures. The fair value hierarchy is 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 assets and liabilities
measured at fair value on a recurring basis in accordance with SFAS No. 157 as
of August 31, 2009 (in thousands):
Balance as of
August 31, 2009 Level 1 Level 2
---------------- ---------- ----------
Money market funds................ $1,250 $1,250 $ --
---------------- ---------- ----------
$1,250 $1,250 $ --
================ ========== ==========
Liabilities....................... $ -- $ -- $ --
================ ========== ==========
As of August 31, 2009, the Company did not have any assets or liabilities
without observable market values that would require a high level of judgment to
determine fair value (Level 3 assets).
11
The Company invests in debt and equity of private companies as part of its
business strategy. These investments are carried at cost and are included in
"Other Assets" in the consolidated balance sheets. If the Company determines
that an other-than-temporary decline exists in the fair value of an investment,
the Company writes down the investment to its fair value and records the
related write-down as an investment loss in "Other Income (Expense)" in its
consolidated statements of operations. At August 31, 2009 and 2008, the
carrying value of the strategic investments was $384,000.
5. INVENTORIES
Inventories are comprised of the following (in thousands):
August 31, May 31,
2009 2009
---------- ----------
Raw materials and sub-assemblies........ $1,367 $1,416
Work in process......................... 2,405 2,509
Finished goods.......................... 346 547
---------- ----------
$4,118 $4,472
========== ==========
6. 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
States Asia Europe Total
--------- --------- --------- ---------
Net sales........................... $1,068 $77 $123 $1,268
Property and equipment, net......... 2,466 86 11 2,563
Three months ended August 31, 2008:
Net sales........................... $7,146 $2,515 $29 $9,690
Property and equipment, net......... 2,298 64 16 2,378
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 from outside
the United States include the operating results of Aehr Test Systems Japan K.K.
and Aehr Test Systems GmbH.
Sales to the Company's five largest customers accounted for approximately
81% and 98% of its net sales in the three months ended August 31, 2009 and
2008, respectively. Four customers accounted for approximately 29%, 18%, 15%
and 13% of the Company's net sales in the three months ended August 31, 2009.
One customer, Spansion Inc. ("Spansion"), accounted for approximately 88% of
the Company's net sales in the three months ended August 31, 2008. No other
customers represented more than 10% of the Company's net sales for either
fiscal 2009 or fiscal 2008.
7. 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
12
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 for parts and service is ninety days and one
year for systems.
Following is a summary of changes in the Company's liability for product
warranties during the three months ended August 31, 2009 and 2008 (in
thousands):
Three Months Ended
August 31,
------------------
2009 2008
-------- --------
Balance at the beginning of the period.... $314 $387
Accruals for warranties issued during the period... 28 217
Settlement made during the period
(in cash or in kind)............................. (57) (176)
-------- -------
Balance at the end of the period................... $285 $428
======== =======
The accrued warranty balance is included in accrued expenses on the
accompanying condensed consolidated balance sheets.
8. GAIN ON SALE OF BANKRUPTCY CLAIM
The Company's largest customer, Spansion, filed for bankruptcy in Japan in
February 2009 and in the United States in March 2009. The Company has filed a
claim in the Spansion U.S. bankruptcy action. In the first quarter of fiscal
2010, the Company sold a portion of its bankruptcy claim to a third party for
net proceeds of approximately $3.3 million and recorded the amount in income
from operations. The amount receivable on this sale is included in prepaid
expenses and other on the accompanying condensed consolidated balance sheets.
9. OTHER COMPREHENSIVE INCOME
Other comprehensive income, net of tax is comprised of the following (in
thousands):
Three Months Ended
August 31,
------------------
2009 2008
-------- --------
Net income ...................................... $961 $ 865
Foreign currency translation adjustments......... 18 (220)
Unrealized holding gains arising
during period.................................. -- 1
-------- --------
Comprehensive income............................. $979 $ 646
======== ========
10. INCOME TAXES
The Company accounts for uncertain tax positions in accordance with the
provisions of FASB 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 SFAS No. 109, "Accounting for
Income Taxes" ("SFAS No. 109"). This interpretation 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.
The Company does not expect any material change in
13
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.
For the three months ended August 31, 2009 and 2008, the Company had
recorded tax expenses of $3,000 and $546,000, respectively.
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 - 2008 remain subject to
examination by the appropriate governmental agencies due to tax loss carryovers
from those years.
11. EMPLOYEE BENEFIT PLANS
The Company maintains stock option plans, an employee stock purchase plan
and an equity incentive plan. The employee benefit plans are discussed in
Notes 8 and 9 to the consolidated financial statements in the Company's 2009
Annual Report on Form 10-K.
The purpose of these plans is to attract and retain the services of
qualified and talented persons to serve as employees, directors and/or
consultants of the Company by providing equity ownership and compensation
opportunities in the Company. These 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 (collectively, the "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 August 31, 2009, out of the 2,172,000 shares authorized for grant
under the 1996 Stock Option Plan and 2006 Equity Incentive Plan, approximately
2,068,000 shares are outstanding. As of August 31, 2009, 119,000 shares had
been issued from the 200,000 shares authorized for grant under the 2006
Employee Stock Purchase Plan.
12. RECENT ACCOUNTING PRONOUNCEMENTS
In May 2009, the FASB issued SFAS No. 165, "Subsequent Events" ("SFAS No.
165"), which establishes the accounting for and disclosures of events that
occur after the balance sheet date but before financial statements are issued
or are available to be issued. It requires the disclosure of the date through
which an entity has evaluated subsequent events and the basis for that date;
that is, whether that date represents the date the financial statements were
issued or were available to be issued. SFAS No. 165 was effective with the
beginning of the Company's first quarter of fiscal 2010 and did not have a
material impact on its consolidated financial statements.
In June 2009, the FASB issued SFAS No. 168, "The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles - a
Replacement of FASB Statement No. 162" ("SFAS No. 168"). SFAS No. 168
establishes that the FASB Accounting Standards Codification ("the
Codification") will become the single official source of authoritative
generally accepted accounting principles ("GAAP") in the United States of
America, other than guidance issued by the SEC. Following SFAS No. 168, the
FASB will not issue new standards in the form of Statements, Staff Positions or
Emerging Issues Task Force Abstracts. Instead, the FASB will issue Accounting
Standards Updates. All guidance contained in the Codification carries an equal
level of authority. The GAAP hierarchy will be modified to include only two
levels of GAAP: authoritative and non-authoritative. All non-grandfathered,
non-SEC accounting literature not included in the Codification will become non-
authoritative. The Codification, which changes the referencing
14
of financial standards, becomes effective for interim and annual periods ending
on or after September 15, 2009. The Company does not expect the adoption of
SFAS No. 168 to have a material impact on its consolidated financial
statements.
In September 2009, the FASB ratified Emerging Issues Task Force ("EITF")
Issue No. 08-01, "Revenue Arrangements with Multiple Deliverables" (previously
titled, Revenue Recognition for a Single Unit of Accounting"). In absence of
vendor-specific objective evidence ("VSOE") or other third party evidence
("TPE") of the selling price for the deliverables in a multiple-element
arrangement, this EITF requires companies to use an estimated selling price
("ESP") for the individual deliverables. Companies shall apply the relative-
selling price model for allocating an arrangement's total consideration to its
individual elements. Under this model, the ESP is used for both the delivered
and undelivered elements that do not have VSOE or TPE of the selling price.
The proposed effective date of the draft abstract is for fiscal years beginning
on or after June 15, 2010, and will be applied prospectively to revenue
arrangements entered into or materially modified after the effective date.
Since the Company will apply the requirements of this EITF on a prospective
basis, the Company is currently unable to evaluate its effect on the Company's
consolidated financial statements.
13. SUBSEQUENT EVENTS THROUGH OCTOBER 14, 2009
In preparing these financial statements, the Company has evaluated events
and transactions for potential recognition or disclosure through October 14,
2009, the date the financial statements were issued.
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 report and with our Annual Report on Form 10-K for the fiscal
year ended May 31, 2009 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.
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 uncertainties, readers are cautioned not to
place undue reliance on such forward-looking statements.
OVERVIEW
The Company was founded in 1977 to develop and manufacture burn-in and test
equipment for the semiconductor industry. Since its inception, the Company has
sold more than 2,500 systems to semiconductor manufacturers, semiconductor
contract assemblers and burn-in and test service companies
15
worldwide. The Company's principal products currently are the MAX burn-in
system, the Advanced Burn-in and Test System, the FOX full wafer contact
parallel test and burn-in system and the MTX massively parallel test system,
the DiePak carrier and test fixtures.
The Company's net sales consist primarily of sales of systems, test
fixtures, die carriers, upgrades and spare parts and revenues from service
contracts. The Company's selling arrangements may include contractual customer
acceptance provisions and installation of the product occurs after shipment and
transfer of title.
Approximately 81%, 15% and 4% of our net sales for fiscal 2009 were
denominated in U.S. Dollars, Japanese Yen and Euros, respectively. Although a
large percentage of net sales to European customers is denominated in U.S.
Dollars, substantially all sales to Japanese customers are denominated in Yen.
Because a substantial portion of our net sales is from sales of products for
delivery outside the United States, an increase in the value of the U.S. Dollar
relative to foreign currencies would increase the cost of our products compared
to products sold by local companies in such markets. In addition, since the
price is determined at the time a purchase order is accepted, we are exposed to
the risks of fluctuations in the U.S. Dollar exchange rate during the lengthy
period from the date a purchase order is received until payment is made. This
exchange rate risk is partially offset to the extent our foreign operations
incur expenses in the local currency. To date, we have not invested in
instruments designed to hedge currency risks. Our operating results could be
adversely affected by fluctuations in the value of the U.S. Dollar relative to
other currencies.
Global demand for semiconductor equipment has been severely impacted by the
current negative global economic environment. As a result, in the second half
of fiscal 2009 we experienced a significant decline in sales. In fiscal 2009,
the Company's financial results reflected the impact of the bankruptcy filing
of its largest customer, Spansion. Due to the bankruptcy filing and the
current weak market for the Company's products, we recorded a $13.7 million
provision for bad debts, a $7.2 million provision for excess and obsolete
inventory, a $4.9 million increase in the valuation allowance against the
Company's deferred tax assets, a $0.3 million charge related to cancellation
costs, a $0.3 million goodwill impairment charge and a $0.4 million in
severance charges. During the first quarter of fiscal 2010, the Company sold a
portion of its bankruptcy claim to a third party for net proceeds of
approximately $3.3 million and recorded the amount in income from operations.
The Company has significantly reduced its headcount and initiated other expense
reduction measures. The Company intends to take additional actions as
necessary to maintain sufficient cash to manage through this economic downturn.
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
16
Analysis of Financial Condition and Results of Operations - Critical
Accounting Policies and Estimates" in the Company's Annual Report on Form 10-K
for the fiscal year ended May 31, 2009.
RESULTS OF OPERATIONS
The following table sets forth items in the Company's unaudited condensed
consolidated statements of operation as a percentage of net sales for the
periods indicated.
Three Months Ended
August 31,
---------------------
2009 2008
---------- ----------
Net sales. . . . . . . . . . . . . . . . . 100.0 % 100.0 %
Cost of sales. . . . . . . . . . . . . . . 104.5 49.2
---------- ----------
Gross (loss) profit. . . . . . . . . . . . (4.5) 50.8
---------- ----------
Operating expenses:
Selling, general and administrative. . . 103.5 21.5
Research and development . . . . . . . . 74.3 15.3
Gain on sale of bankruptcy claim . . . . (259.3) --
---------- ----------
Total operating expenses . . . . (81.5) 36.8
---------- ----------
Income from operations . . . . . . . . . . 77.0 14.0
Interest income. . . . . . . . . . . . . . 0.1 0.6
Other expense, net . . . . . . . . . . . . (1.1) (0.1)
---------- ----------
Income before income tax expense . . . . . 76.0 14.5
Income tax expense . . . . . . . . . . . . 0.2 5.6
---------- ----------
Net income. . . . . . . . . . . . . . .. . 75.8 % 8.9 %
========== ==========
THREE MONTHS ENDED AUGUST 31, 2009 COMPARED TO THREE MONTHS ENDED AUGUST 31,
2008
NET SALES. Net sales decreased to $1.3 million for the three months ended
August 31, 2009 from $9.7 million for the three months ended August 31, 2008, a
decrease of 86.9%. The decrease in net sales for the three months ended August
31, 2009 resulted primarily from decreases in net sales of the Company's wafer-
level products. Net sales of the Company's wafer-level products for the three
months ended August 31, 2009 were $35,000, and decreased approximately $8.5
million from the three months ended August 31, 2008.
GROSS (LOSS) PROFIT. Gross (loss) 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 loss was $57,000 for the
three months ended August 31, 2009, compared with gross profit of $4.9 million
for the three months ended August 31, 2008. The difference was primarily the
result of the significant decline in net sales.
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 $1.3 million in the three months
ended August 31, 2009 decreased from $2.1 million in the three months ended
August 31, 2008, a decrease of 37.0%. The decrease in SG&A expense was
primarily due to decreases in employment related expenses.
17
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 decreased to $0.9
million for the three months ended August 31, 2009 from $1.5 million for the
three months ended August 31, 2008, a decrease of 36.3%. This decrease was
primarily attributable to decreases in employment related expenses.
GAIN ON SALE OF BANKRUPTCY CLAIM. The Company's largest customer,
Spansion, filed for bankruptcy in Japan in February 2009 and in the United
States in March 2009. The Company has filed a claim in the Spansion U.S.
bankruptcy action. In the first quarter of fiscal 2010, the Company sold a
portion of its bankruptcy claim to a third party for net proceeds of
approximately $3.3 million and recorded the amount in income from operations.
INTEREST INCOME. Interest income decreased to $1,000 for the three months
ended August 31, 2009 from $63,000 for the three months ended August 31, 2008.
The decrease in net interest income for the three months ended August 31, 2009
was primarily related to lower average investment balances and lower interest
rates.
OTHER EXPENSE, NET. Other expense, net increased to $14,000 for the three
months ended August 31, 2009 from $7,000 for the three months ended August 31,
2008.
INCOME TAX EXPENSE. Income tax expense was $3,000 for the three months
ended August 31, 2009, compared with $546,000 for the three months ended August
31, 2008. A low effective tax rate was recognized for the three months ended
August 31, 2009 as the Company is forecasting a taxable loss for the year for
which no benefit is being recorded due to a full valuation allowance. During
the third quarter of fiscal 2009, the Company reinstated the valuation
allowance for the full amount of its net deferred tax assets for both its U.S.
operations and its Japanese subsidiary. Income tax expense recognized in the
first quarter of fiscal 2009 reflected a significantly higher tax rate as the
Company expected to accrue tax at close to the statutory rates for the
countries in which it generated income.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was approximately $1.7 million for
the three months ended August 31, 2009 and $6.1 million for the three months
ended August 31, 2008. For the three months ended August 31, 2009, net cash
used in operating activities was primarily driven by an increase of $2.9
million in prepaid expenses and other, partially offset by net income of
$961,000. The increase in prepaid expenses and other was primarily due to the
sale of a part of the Company's Spansion U.S. bankruptcy claim for $3.3
million. For the three months ended August 31, 2008, net cash used in
operating activities was primarily driven by an increase in accounts
receivable. The increase in accounts receivable for the three month period was
primarily attributable to a delay in collection of receivables from a large
multinational customer.
Net cash provided by investing activities was $0 for the three months ended
August 31, 2009 and net cash used in investing activities was approximately
$2.2 million for the three months ended August 31, 2008. The net cash used in
investing activities during the three months ended August 31, 2008 was
primarily due to $2.0 million in purchase of investments.
Financing activities provided cash of $0 for the three months ended August
31, 2009 and approximately $190,000 for the three months ended August 31, 2008.
Net cash provided by financing activities during the three months ended August
31, 2008 was primarily due to proceeds from issuance of common stock from the
exercise of stock options.
18
As of August 31, 2009, the Company had working capital of $8.8 million.
Working capital consists of cash and cash equivalents, 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
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. During fiscal 2009, 2008 and 2007, the Company did not repurchase
any of its outstanding common stock.
The Company leases its manufacturing and office space under operating
leases. The Company entered into a non-cancelable operating lease agreement
for its United States manufacturing and office facilities, which commenced in
April 2008 and expires in June 2015. Under the lease agreement, the Company is
responsible for payments of utilities, taxes and insurance.
From time to time, the Company evaluates potential acquisitions of
businesses, products or technologies that complement the Company's business.
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
flows from operations, and any amounts received as a result of the sale of the
Company's bankruptcy claim against Spansion are adequate to meet its working
capital and capital equipment requirements through fiscal year 2010. After
fiscal year 2010, 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, 2009.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
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 August 31, 2009.
The Company is exposed to financial market risks, including changes in
interest rates and foreign currency exchange rates. Through April 2008, the
Company invested excess cash in a managed portfolio of corporate and government
bond instruments with maturities of 18 months or less. Beginning in May 2008,
the Company adopted a revised cash investment policy which only
19
invests in government-backed securities with maturities of 18 months or less.
The Company does not use any financial instruments for speculative or trading
purposes. Fluctuations in interest rates would not have a material effect on
the Company's financial position, results of operations or cash flows.
A majority of the Company's revenue and capital spending is transacted in
U.S. Dollars. The Company, however, enters into transactions in other
currencies, primarily 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 consolidated 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% decrease in the value of the Yen
as compared with the U.S. Dollar would not be expected to result in a
significant change to the Company's net income or loss.
Item 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Our management
evaluated, with the participation of our Chief Executive Officer and our Chief
Financial Officer, the effectiveness of our disclosure controls and procedures,
as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the
end of the period covered by this Quarterly Report on Form 10-Q. Based on this
evaluation, our Chief Executive Officer and our Chief Financial Officer have
concluded that our disclosure controls and procedures are effective to ensure
that information we are required to disclose in reports that we file or submit
under the Securities and Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission 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 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.
20
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None.
Item 1A. RISK FACTORS
You should carefully consider the risks described below. These risks are
not the only risks that we may face. Additional risks and uncertainties that we
are unaware of, or that we currently deem immaterial, also may become important
factors that affect us. If any of the following risks occur, our business,
financial condition or results of operations could be materially and adversely
affected which could cause our actual operating results to differ materially
from those indicated or suggested by forward-looking statements made in this
Quarterly Report on Form 10-Q and in other documents we filed with the U.S.
Securities and Exchange Commission, including without limitation our most
recently filed Annual Report on Form 10-K or presented elsewhere by management
from time to time.
Current economic conditions could materially adversely affect the Company's
operations and performance.
Our operations and performance depend significantly on worldwide economic
conditions. The current financial turmoil affecting the banking system and
financial markets has resulted in a tightening of the credit markets and a
weakening global economy which are contributing to slowdowns in the
semiconductor manufacturing industry in which we operate. Specifically, we
have experienced a lengthening of the sales cycle and we have also received
requests from some of our customers to defer delivery of equipment.
Difficulties in obtaining capital and deteriorating market conditions pose a
risk that some of our customers may not be able to obtain necessary financing
on reasonable terms which could result in lower sales for the Company. For
example, prior to the Spansion bankruptcy, Spansion accounted for approximately
80% of our revenues. Since declaring bankruptcy, Spansion has accounted for
less than 5% of our revenues. Customers with liquidity issues may lead to
additional bad debt expense for the Company. These conditions may also
similarly affect our key suppliers, which could impact their ability to deliver
parts and result in delays on our products.
The current economic conditions and uncertainty about future economic
conditions make it challenging for us to forecast our operating results, make
business decisions, and identify the risks that may affect our business,
financial condition and results of operations. If we are not able to timely
and appropriately adapt to changes resulting from the difficult macroeconomic
environment, our business, financial condition or results of operations may be
materially and adversely affected.
If we are not able to reduce our operating expenses during periods of weak
revenue, or if we utilize significant amounts of cash to support operating
losses, and do not have the ability to raise additional debt or equity
financing, we may erode our cash resources and may not have sufficient cash to
operate our business.
In the face of the current sustained downturn in our industry and decline
in our revenues, we have implemented a variety of cost controls and
restructured our operations with the goal of reducing our operating costs to
position ourselves to more effectively meet the needs of the currently weak
market for test and burn-in equipment. During the third and fourth quarters of
fiscal 2009, we experienced operating losses and cash outflows. Our cash and
cash equivalents as of May 31, 2009 were approximately $4.4 million. We took
significant steps to minimize our expense levels during this period and to
increase the likelihood that we will have sufficient cash to support operations
during the downturn, including reducing our headcount by more than 30%,
reducing compensation for officers and other salaried employees,
21
initiating a Company-wide shutdown for one week each month and lowering the
fees paid to our Board of Directors, among other spending cuts. We will
continue to explore methods to further reduce our costs which may cause us to
incur additional restructuring charges in the future. However, we cannot
predict the amount of such charges at this time. Should the current downturn
be prolonged and if we are unable to reduce our operating expenses
sufficiently, we may require additional debt or equity financing to meet
working capital or capital expenditure needs. While we believe our cash
balances, cash flows from operations, and any amounts received as a result of
the sale of our bankruptcy claim against Spansion will be sufficient to satisfy
our cash requirements thru fiscal year 2010, we cannot determine with certainty
that, if needed, we will be able to raise additional funding through either
equity or debt financing under these circumstances or on what terms such
financing would be available.
We depend on a small number of key customers in the semiconductor manufacturing
industry for a large portion of our revenues.
The semiconductor manufacturing industry is highly concentrated, with a
relatively small number of large semiconductor manufacturers and contract
assemblers accounting for a substantial portion of the purchases of
semiconductor equipment. Sales to the Company's five largest customers
accounted for approximately 81% and 98% of its net sales in the three months
ended August 31, 2009 and 2008, respectively. Four customers accounted for
approximately 29%, 18%, 15% and 13% of the Company's net sales in the three
months ended August 31, 2009, respectively. One customer, Spansion Inc.,
accounted for approximately 88% of the Company's net sales in the three months
ended August 31, 2008. No other customers represented more than 10% of the
Company's net sales for either fiscal 2009 or fiscal 2008.
We expect that sales of our products to a limited number of customers will
continue to account for a high percentage of net sales for the foreseeable
future. In addition, sales to particular customers may fluctuate significantly
from quarter to quarter. The loss of, 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
our business, financial condition and operating results. For example, Spansion
declared bankruptcy in Japan in February 2009 and in the U.S. in March 2009,
and has subsequently placed only small orders with the Company, which has
caused our revenues to drop dramatically and impacted the ability to collect on
accounts receivables.
A substantial portion of our revenues is generated by relatively small volume,
high value transactions.
We derive a substantial portion of our revenues from the sale of a
relatively small number of systems which typically range in purchase price from
approximately $300,000 to over $1 million per system. As a result, the loss or
deferral of a limited number of system sales could have a material adverse
effect on our net sales and operating results in a particular period. All
customer purchase orders are subject to cancellation or rescheduling by the
customer with limited penalties, and, therefore, backlog at any particular date
is not necessarily indicative of actual sales for any succeeding period. From
time to time, cancellations and rescheduling of customer orders have occurred,
and delays by our suppliers in providing components or subassemblies to us have
caused delays in our shipments of our own products. There can be no assurance
that we will not be materially adversely affected by future cancellations or
rescheduling. Certain contracts contain provisions that require customer
acceptance prior to recognition of revenue. The delay in customer acceptance
could have a material adverse effect on our operating results. A substantial
portion of net sales typically are realized near the end of each quarter. A
delay or reduction in shipments near the end of a particular quarter, due, for
example, to unanticipated shipment rescheduling, cancellations or deferrals by
customers, customer credit issues, unexpected manufacturing difficulties
experienced by us, or delays in deliveries by
22
suppliers, could cause net sales in a particular quarter to fall significantly
below our expectations.
We rely on continued market acceptance for our FOX system, and we may not be
successful in attracting new customers or maintaining our existing customers.
A principal element of our business strategy is to capture an increasing
share of the test equipment market through sales of our FOX wafer-level test
and burn-in system. The FOX system is designed to simultaneously burn-in and
functionally test all of the die on a wafer. The market for the FOX systems is
in the very early stages of development. Market acceptance of the FOX system
is subject to a number of risks. Before a customer will incorporate the FOX
system into a production line, lengthy qualification and correlation tests must
be performed. We anticipate that potential customers may be reluctant to
change their procedures in order to transfer burn-in and test functions to the
FOX system. Initial purchases are expected to be limited to systems used for
these qualifications and for engineering studies. Market acceptance of the FOX
system also may be affected by a reluctance of IC manufacturers to rely on
relatively small suppliers such as Aehr Test. As is common with new and
complex products incorporating leading-edge technologies, we may encounter
reliability, design and manufacturing issues as we begin volume production and
initial installations of FOX systems at customer sites. The failure of the FOX
system to achieve market acceptance would have a material adverse effect on our
future operating results, long-term prospects and our stock price.
In future periods, we may rely on market acceptance for our ABTS system and we
may not be able to achieve sufficient market acceptance to allow our ABTS
system to be commercially viable.
In June 2008, we announced shipment of an ABTS beta site system to
Integrated Service Technology ("iST") in Taiwan. We recently booked three
orders for the ABTS products, including two systems from new customers and one
follow-on system order from iST. Market acceptance of the ABTS system is
subject to a number of risks. In order for our ABTS system to become
commercially viable, we must complete engineering development of necessary
hardware and software for various new features and applications. In addition,
it is important that we achieve customer satisfaction and acceptance of the
ABTS products. Additional customers must then be found who are willing to
place orders for ABTS systems in sufficient quantities to allow it to be
produced economically.
We may experience a limited burn-in system market and we depend upon continued
market acceptance for our MAX system.
We have historically derived a substantial portion of our net sales from
the sale of dynamic burn-in systems. We believe that the market for burn-in
systems is mature and is not expected to experience significant long-term
growth in the future. In general, process control improvements in the
semiconductor industry have tended to reduce burn-in times. In addition, as a
given integrated circuit product generation matures and yields increase, the
required burn-in time may be reduced or eliminated. Integrated circuit
manufacturers, which historically have been our primary customer base,
increasingly outsource test and burn-in to independent test labs, which often
build their own systems. Our success depends upon the continued acceptance of
our MAX burn-in products and the acceptance of our ABTS systems within these
markets. There can be no assurance that the market for burn-in systems will
grow, or that sales of our MAX burn-in products may decline or that sales of
our ABTS products may not materialize.
Our sales cycles can be long and unpredictable, which may harm our ability to
forecast demand and our future operating performance.
Sales of our systems depend, in significant part, upon the decision of a
prospective customer to increase manufacturing capacity or to restructure
current manufacturing facilities, either of which typically involves a
23
significant commitment of capital. In addition, the approval process for FOX
systems sales may require lengthy qualification and correlation testing. In
view of the significant investment or strategic issues that may be involved in
a decision to purchase FOX systems, we may experience delays following initial
qualification of our systems as a result of delays in a customer's approval
process. For these reasons, our systems typically have a lengthy sales cycle
during which we may expend substantial funds and management effort in securing
a sale. Lengthy sales cycles subject us to a number of significant risks,
including inventory obsolescence and fluctuations in operating results, over
which we have little or no control. The loss of individual orders due to the
lengthy sales and evaluation cycle, or delays in the sale of even a limited
number of systems impairs our ability to plan future operating levels and could
have a material adverse effect on our business, operating results and financial
condition and, in particular, could contribute to significant fluctuations in
operating results on a quarterly basis.
Our business may suffer due to risks associated with international sales and
operations.
Approximately 72% and 61% of our net sales for fiscal 2009 and 2008,
respectively, were attributable to sales to customers for delivery outside of
the United States. We operate sales, service and limited manufacturing
organizations in Japan and Germany and a sales and support organization in
Taiwan. We expect that sales of products for delivery outside of the United
States will continue to represent a substantial portion of our future revenues.
Our future performance will depend, in significant part, upon our ability to
continue to compete in foreign markets which in turn will depend, in part, upon
a continuation of current trade relations between the United States and foreign
countries in which semiconductor manufacturers or assemblers have operations.
A change toward more protectionist trade legislation in either the United
States or such foreign countries, such as a change in the current tariff
structures, export compliance or other trade policies, could adversely affect
our ability to sell our products in foreign markets. In addition, we are
subject to other risks associated with doing business internationally,
including longer receivable collection periods and greater difficulty in
accounts receivable collection, the burden of complying with a variety of
foreign laws, difficulty in staffing and managing global operations, risks of
civil disturbance or other events which may limit or disrupt markets,
international exchange restrictions, changing political conditions and monetary
policies of foreign governments.
A substantial portion of our net sales has been in Asia. Turmoil in the
Asian financial markets has resulted, and may result in the future, in dramatic
currency devaluations, stock market declines, restriction of available credit
and general financial weakness. In addition, flash, DRAM, and other memory
device prices in Asia have recently declined dramatically, and may do so again
in the future. These developments may affect us in several ways. We believe
that many international semiconductor manufacturers limited their capital
spending in fiscal year 2009, and that the uncertainty of the memory market may
cause some manufacturers in the future to again delay capital spending plans.
The economic conditions in Asia may also affect the ability of our customers to
meet their payment obligations, resulting in cancellations or deferrals of
existing orders and limiting additional orders. In addition, Asian governments
have subsidized some portion of fabrication construction. Financial turmoil
may reduce these governments' willingness to continue such subsidies. Such
developments could have a material adverse affect on our business, financial
condition and results of operations.
Approximately 81%, 15% and 4% of our net sales for fiscal 2009 were
denominated in U.S. Dollars, Japanese Yen and Euros, respectively. Although a
large percentage of net sales to European customers are denominated in U.S.
Dollars, substantially all sales to Japanese customers are denominated in Yen.
Because a substantial portion of our net sales is from sales of products for
delivery outside the United States, an increase in the value of the U.S. Dollar
relative to foreign currencies would increase the cost of our products compared
to products sold by local companies in such markets. In addition,
24
since the price is determined at the time a purchase order is accepted, we are
exposed to the risks of fluctuations in the U.S. Dollar exchange rate during
the lengthy period from the date a purchase order is received until payment is
made. This exchange rate risk is partially offset to the extent our foreign
operations incur expenses in the local currency. To date, we have not invested
in instruments designed to hedge currency risks. Our operating results could
be adversely affected by fluctuations in the value of the U.S. Dollar relative
to other currencies.
Our industry is subject to rapid technological changes and our ability to
remain competitive depends on our ability to introduce new products in a timely
manner.
The semiconductor equipment industry is subject to rapid technological
change and new product introductions and enhancements. Our ability to remain
competitive will depend in part upon our ability to develop new products and to
introduce these products at competitive prices and on a timely and cost-
effective basis. Our success in developing new and enhanced products depends
upon a variety of factors, including product selection, timely and efficient
completion of product design, timely and efficient implementation of
manufacturing and assembly processes, product performance in the field and
effective sales and marketing. Because new product development commitments
must be made well in advance of sales, new product decisions must anticipate
both future demand and the technology that will be available to supply that
demand. Furthermore, introductions of new and complex products typically
involve a period in which design, engineering and reliability issues are
identified and addressed by our suppliers and by us. There can be no assurance
that we will be successful in selecting, developing, manufacturing and
marketing new products that satisfy market demand. Any such failure would
materially and adversely affect our business, financial condition and results
of operations.
Because of the complexity of our products, significant delays can occur
between a product's introduction and the commencement of the volume production
of such product. We have experienced, from time to time, significant delays in
the introduction of, and technical and manufacturing difficulties with, certain
of our products and may experience delays and technical and manufacturing
difficulties in future introductions or volume production of our new products.
Our inability to complete new product development, or to manufacture and ship
products in time to meet customer requirements would materially adversely
affect our business, financial condition and results of operations.
We may experience product delays and increased costs associated with new
product introductions.
As is common with new and complex products incorporating leading-edge
technologies, we have encountered reliability, design and manufacturing issues
as we began volume production and initial installations of certain products at
customer sites. Certain of these issues in the past have been related to
components and subsystems supplied to us by third parties who have in some
cases limited the ability of us to address such issues promptly. This process
in the past required and in the future is likely to require us to incur un-
reimbursed engineering expenses and to experience larger than anticipated
warranty claims which could result in product returns. In the early stages of
product development there can be no assurance that we will discover any
reliability, design and manufacturing issues or, that if such issues arise,
that they can be resolved to the customers' satisfaction or that the resolution
of such problems will not cause us to incur significant development costs or
warranty expenses or to lose significant sales opportunities.
Future changes in semiconductor technologies may make our products obsolete.
Future improvements in semiconductor design and manufacturing technology
may reduce or eliminate the need for our products. For example, improvements
in built-in self-test ("BIST") technology, and improvements in conventional
25
test systems, such as reduced cost or increased throughput, may significantly
reduce or eliminate the market for one or more of our products. If we are not
able to improve our products or develop new products or technologies quickly
enough to maintain a competitive position in our markets, we may not be able to
grow our business.
Semiconductor business cycles are unreliable and there is always the risk of
cancellations and rescheduling which could have a material adverse affect on
our operating results.
Our operating results depend primarily upon the capital expenditures of
semiconductor manufacturers, semiconductor contract assemblers and burn-in and
test service companies worldwide, which in turn depend on the current and
anticipated market demand for integrated circuits. The semiconductor and
semiconductor equipment industries in general, and the market for flash
memories, DRAMs and other memory devices, in particular, have historically been
highly volatile and have experienced periodic downturns and slowdowns, which
have had severe, negative effects on the semiconductor industry's demand for
semiconductor capital equipment, including test and burn-in systems
manufactured and marketed by the Company. These downturns and slowdowns have
adversely affected our operating results in the past. In addition, the
purchasing patterns of our customers are also highly cyclical because most
customers purchase our products for use in new production facilities or for
upgrading existing test lines for the introduction of next generation products.
Construction of new facilities and upgrades of existing facilities have in some
cases been delayed or canceled during the most recent semiconductor industry
downturn. A large portion of our net sales is attributable to a few customers
and therefore a reduction in purchases by one or more customers could
materially adversely affect our financial results. There can be no assurance
that the semiconductor industry will grow in the future at the same rates as it
has grown historically. Any downturn or slowdown in the semiconductor industry
would have a material adverse effect on our business, financial condition and
operating results. In addition, the need to maintain investment in research
and development and to maintain customer service and support will limit our
ability to reduce our expenses in response to any such downturn or slowdown
period.
The semiconductor equipment manufacturing industry has historically been
subject to a relatively high rate of purchase order cancellation by customers
as compared to other high technology industry sectors. Manufacturing companies
that are the customers of semiconductor equipment companies frequently revise,
postpone and cancel capital facility expansion plans. In such cases,
semiconductor equipment companies may experience a significant rate of
cancellations or rescheduling of purchase orders. There can be no assurance
that we will not be materially adversely affected by future cancellations or
rescheduling of purchase orders.
Our stock price may fluctuate.
The price of our common stock has fluctuated in the past and may fluctuate
significantly in the future. We believe that factors such as announcements of
developments related to our business, fluctuations in our operating results,
failure to meet securities analysts' expectations, general conditions in the
semiconductor and semiconductor equipment industries and the worldwide economy,
announcement of technological innovations, new systems or product enhancements
by us or our competitors, fluctuations in the level of cooperative development
funding, acquisitions, changes in governmental regulations, developments in
patents or other intellectual property rights and changes in our relationships
with customers and suppliers could cause the price of our common stock to
fluctuate substantially. In addition, in recent years the stock market in
general, and the market for small capitalization and high technology stocks in
particular, have experienced extreme price fluctuations which have often been
unrelated to the operating performance of the affected companies. Such
fluctuations could adversely affect the market price of our common stock.
26
Our stock price may fall below $1 per share for 30 consecutive days or our
shareholders' equity may fall below $10 million, which could cause our stock to
be delisted from NASDAQ.
Pursuant to the requirements of NASDAQ, if a company's stock price is
below $1 per share for 30 consecutive trading days (the "Bid Price Rule") or if
its shareholders' equity falls below $10 million, NASDAQ will notify the
company that it is no longer in compliance with the NASDAQ listing
qualifications. The company will then have 180 calendar days to become
compliant. Thereafter, companies listed on the NASDAQ Global Market can
receive an additional 180-day compliance period by transferring to the NASDAQ
Capital Market if they meet all initial listing requirements of the NASDAQ
Capital Market, except for the Bid Price Rule. On September 18, 2009, we
received notice from NASDAQ that the Company was no longer in compliance with
the Bid Price Rule. The Company regained compliance on September 30, 2009.
However, if our stock price again falls below the threshold required or our
shareholders equity falls below $10 million, it is possible that our stock
could be delisted from the NASDAQ Global Market.
Any future growth may strain our operations and may require us to incur
additional expenses to support these expanded operations.
If we are to be successful, we must expand our operations. Such expansion
will place a significant strain on our administrative, operational and
financial resources. Further, such expansion will result in a continuing
increase in the responsibility placed upon management personnel and will
require development or enhancement of operational, managerial and financial
systems and controls. If we are unable to manage the expansion of our
operations effectively, our business, financial condition and operating results
will be materially and adversely affected.
We depend on our key personnel and our success depends on our ability to
attract and retain talented employees.
Our success depends to a significant extent upon the continued service of
Rhea Posedel, our Chief Executive Officer, as well as other executive officers
and key employees. We do not maintain key person life insurance for our
benefit on any of our personnel, and none of our employees are subject to a
non-competition agreement with the Company. The loss of the services of any of
our executive officers or a group of key employees could have a material
adverse effect on our business, financial condition and operating results. Our
future success will depend in significant part upon our ability to attract and
retain highly skilled technical, management, sales and marketing personnel.
There is a limited number of personnel with the requisite skills to serve in
these positions, and it has become increasingly difficult for us to hire such
personnel. Competition for such personnel in the semiconductor equipment
industry is intense, and there can be no assurance that we will be successful
in attracting or retaining such personnel. Changes in management could disrupt
our operations and adversely affect our operating results.
We may be subject to litigation relating to intellectual property infringement
which would be time-consuming, expensive and a distraction from our business.
If we do not adequately protect our intellectual property, competitors may
be able to use our proprietary information to erode our competitive advantage,
and our business and operating results could be harmed. Litigation may be
necessary to enforce or determine the validity and scope of our proprietary
rights, and there can be no assurance that our intellectual property rights, if
challenged, will be upheld as valid. Such litigation could result in
substantial costs and diversion of resources and could have a material adverse
effect on our operating results, regardless of the outcome of the litigation.
In addition, there can be no assurance that any of the patents issued to us
will not be challenged, invalidated or circumvented or that the rights granted
thereunder will provide competitive advantages to us.
27
There are no pending claims against us regarding infringement of any
patents or other intellectual property rights of others. However, in the
future we may receive communications from third parties asserting intellectual
property claims against us. Such claims could include assertions that our
products infringe, or may infringe, the proprietary rights of third parties,
requests for indemnification against such infringement or suggestions that we
may be interested in acquiring a license from such third parties. There can be
no assurance that any such claim will not result in litigation, which could
involve significant expense to us, and, if we are required or deem it
appropriate to obtain a license relating to one or more products or
technologies, there can be no assurance that we would be able to do so on
commercially reasonable terms, or at all.
While we believe we have complied with all applicable environmental laws, our
failure to do so could materially adversely affect our business as a result of
having to pay substantial amounts in damages or fees.
Federal, state and local regulations impose various controls on the use,
storage, discharge, handling, emission, generation, manufacture and disposal of
toxic and other hazardous substances used in our operations. We believe that
our activities conform in all material respects to current environmental and
land use regulations applicable to our operations and our current facilities,
and that we have obtained environmental permits necessary to conduct our
business. Nevertheless, the failure to comply with current or future
regulations could result in substantial fines being imposed on us, suspension
of production, alteration of our manufacturing processes or cessation of
operations. Such regulations could require us to acquire expensive remediation
equipment or to incur substantial expenses to comply with environmental
regulations. Any failure by us to control the use, disposal or storage of, or
adequately restrict the discharge of, hazardous or toxic substances could
subject us to significant liabilities.
While we believe we currently have adequate internal control over financial
reporting, we are required to assess our internal control over financial
reporting on an annual basis and any future adverse results from such
assessment could result in a loss of investor confidence in our financial
reports and have an adverse effect on our stock.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we must include
in our Annual Report on Form 10-K a report of management on the effectiveness
of our internal control over financial reporting. If we fail to maintain
effective internal control over financial reporting, or management does not
timely assess the adequacy of such internal control, or our independent
registered public accounting firm does not timely deliver an unqualified
opinion as to the effectiveness of our internal controls, we could be subject
to regulatory sanctions and the public's perception may decline. Our
independent registered public accounting firm will be required to attest to the
effectiveness of our internal control over financial reporting at the end of
fiscal 2011.
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.
28
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.
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Aehr Test Systems
(Registrant)
Date: October 14, 2009 /s/ RHEA J. POSEDEL
----------------------------------
Rhea J. Posedel
Chief Executive Officer and
Chairman of the Board of Directors
Date: October 14, 2009 /s/ GARY L. LARSON
--------------------------------
Gary L. Larson
Vice President of Finance and
Chief Financial Officer
30
AEHR TEST SYSTEMS
INDEX TO EXHIBITS
Exhibit No. Description
---------- -----------------------------------------------------------
3.1(1) Restated Articles of Incorporation of the Company.
3.2(2) Amended and Restated Bylaws of the Company.
10.1 Purchase and Sale Agreement between the Company and
Fulcrum Credit Partners LLC dated August 31, 2009.
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.
----------------
(1) Incorporated by reference to the same-numbered exhibit previously filed
with the Company's Registration Statement on Form S-1 filed June 11, 1997 (File
No. 333-28987).
(2) Incorporated by reference to the same-numbered exhibit previously filed
with the Company's Quarterly Report on Form 10-Q filed April 13, 2009 (File No.
000-22893).
31