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, 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 September 30, 2008 was 8,402,720.
2
FORM 10-Q
FOR THE QUARTER ENDED AUGUST 31, 2008
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
August 31, 2008 and May 31, 2008 . . . . . . . . . . . . 4
Condensed Consolidated Statements of Income for the
three months ended August 31, 2008 and 2007 . . . . . . 5
Condensed Consolidated Statements of Cash Flows for the
three months ended August 31, 2008 and 2007 . . . . . . 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. . 18
ITEM 4. Controls and Procedures. . . . . . . . . . . . . . . . . . . . 19
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 19
ITEM 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . 19
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 STATEMENTS
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,
2008 2008
----------- -----------
(1)
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . $ 7,452 $15,648
Short-term investments. . . . . . . . . . . . . 2,000 --
Accounts receivable, net of allowances for
doubtful accounts of $286 and $183 at
August 31, 2008 and May 31, 2008,
respectively . . . . . . . . . . . . . . . . 16,948 10,927
Inventories . . . . . . . . . . . . . . . . . . 10,767 10,209
Deferred income taxes . . . . . . . . . . . . . 2,521 3,043
Prepaid expenses and other. . . . . . . . . . . 556 396
----------- -----------
Total current assets . . . . . . . . . . . . 40,244 40,223
Property and equipment, net . . . . . . . . . . . 2,378 2,278
Goodwill. . . . . . . . . . . . . . . . . . . . . 274 274
Deferred income taxes . . . . . . . . . . . . . . 1,900 1,900
Other assets. . . . . . . . . . . . . . . . . . . 518 524
----------- -----------
Total assets . . . . . . . . . . . . . . . . $45,314 $45,199
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . $ 2,414 $ 2,981
Accrued expenses. . . . . . . . . . . . . . . . 3,179 3,694
Deferred revenue. . . . . . . . . . . . . . . . 204 186
----------- -----------
Total current liabilities . . . . . . . . . . 5,797 6,861
Income tax payable. . . . . . . . . . . . . . . . 298 297
Deferred lease commitment . . . . . . . . . . . . 314 269
----------- -----------
Total liabilities . . . . . . . . . . . . . . 6,409 7,427
----------- -----------
Shareholders' equity:
Common stock, $0.01 par value:
Issued and outstanding: 8,403 shares and
8,359 shares at August 31, 2008 and
May 31, 2008, respectively. . . . . . . . . . 84 84
Additional paid-in capital. . . . . . . . . . . 43,283 42,796
Accumulated other comprehensive income. . . . . 2,176 2,395
Accumulated deficit . . . . . . . . . . . . . . (6,638) (7,503)
----------- -----------
Total shareholders' equity . . . . . . . . . 38,905 37,772
----------- -----------
Total liabilities and shareholders' equity. . $45,314 $45,199
=========== ===========
(1) The condensed consolidated balance sheet at May 31, 2008 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,
----------------------
2008 2007
---------- ----------
Net sales. . . . . . . . . . . . . . . . . . . $9,690 $7,660
Cost of sales. . . . . . . . . . . . . . . . . 4,772 3,479
---------- ----------
Gross profit . . . . . . . . . . . . . . . . . 4,918 4,181
---------- ----------
Operating expenses:
Selling, general and administrative. . . . . 2,085 1,816
Research and development . . . . . . . . . . 1,478 1,648
---------- ----------
Total operating expenses . . . . . . . . 3,563 3,464
---------- ----------
Income from operations . . . . . . . . . 1,355 717
Interest income. . . . . . . . . . . . . . . . 63 75
Other income (expense), net . . . . . . . . . (7) 2
---------- ----------
Income before income tax expense . . . . 1,411 794
Income tax expense . . . . . . . . . . . . . . 546 15
---------- ----------
Net income . . . . . . . . . . . . . . . . . . $ 865 $ 779
========== ==========
Net income per share - basic . . . . . . . . . $ 0.10 $ 0.10
Net income per share - diluted . . . . . . . . $ 0.10 $ 0.09
Shares used in per share calculations:
Basic . . . . . . . . . . . . . . . . . . . 8,395 7,827
Diluted. . . . . . . . . . . . . . . . . . . 8,753 8,301
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,
----------------------
2008 2007
---------- ----------
Cash flows from operating activities:
Net income.................................... $ 865 $ 779
Adjustments to reconcile net income to
net cash used in operating activities:
Stock compensation expense.................. 286 193
Provision for doubtful accounts............. 103 (19)
Depreciation and amortization............... 139 118
Deferred income taxes....................... 522 --
Changes in operating assets and liabilities:
Accounts receivable....................... (6,256) (74)
Inventories............................... (547) (919)
Deferred lease commitment................. 45 (22)
Accounts payable.......................... (569) (584)
Income tax payable........................ 1 --
Accrued expenses and deferred revenue..... (490) (414)
Prepaid expenses and other................ (158) 2
---------- ----------
Net cash used in
operating activities.................. (6,059) (940)
---------- ----------
Cash flows from investing activities:
Purchase of investments..................... (1,999) (200)
Proceeds from sales and maturity
of investments............................ -- 2,141
Purchase of property and equipment ......... (241) (41)
Increase in other assets.................... -- (1)
---------- ----------
Net cash (used in) provided by
investing activities.................. (2,240) 1,899
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock
and exercise of stock options............. 190 55
---------- ----------
Net cash provided by
financing activities.................. 190 55
---------- ----------
Effect of exchange rates on cash................ (87) 96
---------- ----------
Net increase (decrease) in cash and
cash equivalents...................... (8,196) 1,110
Cash and cash equivalents, beginning of period.. 15,648 6,564
---------- ----------
Cash and cash equivalents, end of period........ $ 7,452 $7,674
========== ==========
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, 2008. 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
On June 1, 2006, the Company began accounting 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)"), using the modified prospective transition
method, 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. The Company's
condensed consolidated financial statements for the three months ended August
31, 2008 and 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 2008 filed on August 29,
2008 for further information regarding the stock option plan and the employee
stock purchase plan.
The following table summarizes compensation costs related to the Company's
stock-based compensation for the three months ended August 31, 2008 and 2007,
respectively (in thousands, except per share data):
7
Three Months Ended Three Months Ended
August 31, 2008 August 31, 2007
------------------ ------------------
Stock-based compensation in the form of
employee stock options and ESPP shares,
included in:
Cost of sales . . . . . . . . . . . . . . . $ 39 $ 11
Selling, general and administrative . . . . 155 113
Research and development . . . . . . . . . . 92 69
------------------ -----------------
Total stock-based compensation . . . . . . . 286 193
Tax effect on stock-based compensation . . . (123) 4
------------------ -----------------
Net effect on net income . . . . . . . . . . $163 $189
================== =================
Effect on net income per share:
Basic . . . . . . . . . . . . . . . . . . $0.02 $0.02
Diluted . . . . . . . . . . . . . . . . . $0.02 $0.02
Stock-based compensation expense of $11,000 and $21,000 for the three
months ended August 31, 2008 and 2007, respectively, is included in ending
inventory and is not reflected in the above table. As of August 31, 2008,
stock-based compensation costs of $42,000 are capitalized as part of
inventory.
During the three months ended August 31, 2008 and 2007, the Company
recorded stock-based compensation related to stock options of $251,000 and
$158,000, respectively.
As of August 31, 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 $3,087,000, which is
net of estimated forfeitures of $63,000. This cost will be amortized on a
straight-line basis over a weighted average period of approximately 3.0 years.
During the three months ended August 31, 2008 and 2007, the Company
recorded stock-based compensation related to its ESPP of $35,000 and $35,000,
respectively.
As of August 31, 2008, the total compensation cost related to options to
purchase the Company's common shares under the ESPP but not yet recognized was
approximately $106,000. 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
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
8
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 months ended August 31, 2008 and 2007
were estimated using the following weighted average assumptions in the Black-
Scholes valuation model consistent with the provisions of SFAS No. 123(R) and
Securities and Exchange Commission Staff Accounting Bulletin No. 107.
The fair value of our stock options granted to employees for the three
months ended August 31, 2008 and 2007 was estimated using the following
weighted-average assumptions:
Three months ended
August 31,
---------------------
2008 2007
-------- --------
Option Plan Shares
Expected Term (in years).................... 5 5
Volatility.................................. 0.72 0.74
Expected Dividend........................... $0.00 $0.00
Risk-free Interest Rates.................... 3.52% 4.78%
Estimated Forfeiture Rate................... 2% 4%
Weighted Average Grant Date Fair Value...... $6.09 $3.84
The fair value of our ESPP shares for the three months ended August 31,
2008 and 2007, respectively, was estimated using the following weighted-
average assumptions:
Three months ended
August 31,
-------------------------
2008 2007
----------- -----------
Employee Stock Purchase Plan Shares
Expected Term (in years).................... 0.5 - 2.0 0.5 - 2.0
Volatility.................................. 0.62 - 0.80 0.50 - 0.69
Expected Dividend........................... $0.00 $0.00
Risk-free Interest Rates.................... 2.0% - 2.6% 4.7% - 4.9%
Estimated Forfeiture Rate................... 0% 4%
Weighted Average Grant Date Fair Value...... $2.28 $2.24
9
The following table summarizes the stock option transactions during the
three months ended August 31, 2008 (in thousands, except per share data):
Outstanding Options
---------------------------------------------
Weighted
Number Average Aggregate
Available of Exercise Intrinsic
Shares Shares Price Value
---------- -------- --------- ----------
Balances, May 31, 2008........ 350 1,266 $5.05 $4,632
Options granted............. (268) 268 $10.03
Options terminated.......... 2 (2) $5.17
Options exercised........... -- (44) $4.35
---------- --------
Balances, August 31, 2008..... 84 1,488 $5.97 $604
========== ========
Options exercisable and expected to be
exercisable at August 31, 2008 1,458 $5.78 $592
========
The options outstanding and exercisable at August 31, 2008 were in the
following exercise price ranges:
Options Outstanding Options Exercisable
at August 31, 2008 at August 31, 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
----------- ----------- ----------- -------- ------- -------- ----------- ---------
$2.49-$3.63 421 3.11 $3.08 366 $3.12 3.00
$3.66-$4.08 139 2.25 $3.92 138 $3.92 2.23
$4.35-$4.60 53 1.29 $4.45 53 $4.45 1.29
$5.91-$7.00 420 3.74 $6.11 142 $6.11 3.50
$7.28-$10.93 455 4.74 $9.30 101 $8.43 4.67
----------- -------
$2.49-$10.93 1,488 3.64 $5.97 800 $4.55 3.06 $521
=========== =======
The total intrinsic value of options exercised for the three months ended
August 31, 2008 was $219,000. The weighted average remaining contractual life
of the options exercisable and expected to be exercisable at August 31, 2008
was 3.6 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.
10
Three Months Ended
August 31,
---------- ----------
2008 2007
---------- ----------
(in thousands, except
per share amounts)
Net income available to common shareholders:
Numerator: Net income ............................. $ 865 $ 779
---------- ----------
Denominator for basic income per share:
Weighted-average shares outstanding ............. 8,395 7,827
---------- ----------
Shares used in basic income per share
calculation...................................... 8,395 7,827
Effect of dilutive securities...................... 358 474
---------- ----------
Denominator for diluted net income
per share...................................... 8,753 8,301
---------- ----------
Basic net income per share......................... $ 0.10 $ 0.10
========== ==========
Diluted net income per share....................... $ 0.10 $ 0.09
========== ==========
Stock options to purchase 410,000 and 439,000 shares of common stock were
outstanding on August 31, 2008 and 2007, respectively, but not included in the
computation of diluted 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 nonfinancial 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.
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.
11
The following table summarizes the Company's financial assets and
liabilities measured at fair value on a recurring basis in accordance with
SFAS No. 157 as of August 31, 2008 (in thousands):
Balance as of
August 31, 2008 Level 1 Level 2
--------------- ---------- ----------
Money market funds................ $5,734 $5,734 $ --
United States government agency... 2,000 -- 2,000
--------------- ---------- ----------
$7,734 $5,734 $2,000
=============== ========== ==========
--------------- ---------- ----------
Liabilities....................... $ -- $ -- $ --
=============== ========== ==========
As of August 31, 2008, 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).
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) which is effective for fiscal years
beginning after November 15, 2007. SFAS No. 159 permits entities to choose to
measure many financial instruments and certain other items at fair value. SFAS
No. 159 also establishes presentation and disclosure requirements designed to
facilitate comparisons between entities that choose different measurement
attributes for similar types of assets and liabilities. Unrealized gains and
losses on items for which the fair value option is elected would be reported
in earnings. On June 1, 2008, the Company adopted SFAS No. 159 and has elected
not to measure any additional financial instruments and other items at fair
value.
5. INVENTORIES
Inventories are comprised of the following (in thousands):
August 31, May 31,
2008 2008
----------- -----------
Raw materials and sub-assemblies........ $ 5,829 $ 5,482
Work in process......................... 4,919 4,462
Finished goods.......................... 19 265
----------- -----------
$10,767 $10,209
=========== ===========
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):
12
United Adjust-
States Asia Europe ments Total
--------- --------- --------- --------- ---------
Three months ended August 31, 2008:
Net sales........................... $ 9,127 $2,858 $ 245 $(2,540) $ 9,690
Portion of U.S. net sales
from export sales, including sales
to subsidiaries................... 4,624 -- -- -- 4,624
Income (loss) from operations....... 1,152 93 (2) 112 1,355
Identifiable assets................. 53,299 7,194 1,135 (16,314) 45,314
Property and equipment, net......... 2,298 64 16 -- 2,378
Three months ended August 31, 2007:
Net sales........................... $ 7,429 $1,716 $ 68 $(1,553) $ 7,660
Portion of U.S. net sales
from export sales, including sales
to subsidiaries................... 2,904 -- -- -- 2,904
Income (loss) from operations....... 808 116 (119) (88) 717
Identifiable assets................. 37,383 4,093 906 (13,492) 28,890
Property and equipment, net......... 1,536 72 9 -- 1,617
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.
Sales to the Company's five largest customers accounted for approximately
98.3% and 98.5% of its net sales in the three months ended August 31, 2008 and
2007, respectively. One customer, Spansion Inc., accounted for approximately
88.4% and 73.9% of the Company's net sales in the three months ended August
31, 2008 and 2007, respectively.
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
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 months ended August 31, 2008 and 2007 (in
thousands):
Three months ended
August 31,
-----------------------
2008 2007
---------- ----------
Balance at the beginning of the period ........... $387 $153
Accruals for warranties issued during the period.. 217 74
Reversal of warranties issued during the period... -- --
Settlements made during the period
(in cash or in kind)............................. (176) (50)
---------- ----------
Balance at the end of the period.................. $428 $177
========== ==========
The accrued warranty balance is included in accrued expenses on the
accompanying condensed consolidated balance sheets.
13
8. OTHER COMPREHENSIVE INCOME
Other comprehensive income, net of tax is comprised of the following (in
thousands):
Three months ended
August 31,
------------------------
2008 2007
----------- -----------
Net income................................ $865 $779
Foreign currency translation adjustments.. (220) 104
Unrealized holding gains arising
during period .......................... 1 --
----------- -----------
Comprehensive income...................... $646 $883
=========== ===========
9. INCOME TAXES
On June 1, 2007, the Company adopted the provisions 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 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. 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 ended August 31, 2008
and 2007, the Company had recorded tax expenses of $546,000 and $15,000,
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.
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.
10. EMPLOYEE BENEFIT PLANS
In addition to the Company's stock options and employee stock purchase
plan discussed in Notes 9 and 10 in the Company's 2008 Annual Report on Form
10-K, the Company maintains an 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.
14
As of August 31, 2008, out of the 1,572,335 shares authorized for grant
under the 1996 Stock Option Plan and 2006 Equity Incentive Plan, approximately
1,487,998 shares had been granted. As of August 31, 2008, 46,648 shares had
been issued from the 200,000 shares authorized for grant under the 2006
Employee Stock Purchase Plan.
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, 2008 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.
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, 2008.
15
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
August 31,
---------------------
2008 2007
---------- ----------
Net sales. . . . . . . . . . . . . . . . . 100.0 % 100.0 %
Cost of sales. . . . . . . . . . . . . . . 49.2 45.4
---------- ----------
Gross profit . . . . . . . . . . . . . . . 50.8 54.6
---------- ----------
Operating expenses:
Selling, general and administrative. . . 21.5 23.7
Research and development . . . . . . . . 15.3 21.5
---------- ----------
Total operating expenses . . . . 36.8 45.2
---------- ----------
Income from operations . . . . . . . . . . 14.0 9.4
Interest income. . . . . . . . . . . . . . 0.6 1.0
Other income (expense), net. . . . . . . . (0.1) 0.0
---------- ----------
Income before income tax expense . . . . . 14.5 10.4
Income tax expense . . . . . . . . . . . . 5.6 0.2
---------- ----------
Net income. . . . . . . . . . . . . . .. . 8.9 % 10.2 %
========== ==========
THREE MONTHS ENDED AUGUST 31, 2008 COMPARED TO THREE MONTHS ENDED AUGUST 31,
2007
NET SALES. Net sales increased to $9.7 million for the three months ended
August 31, 2008 from $7.7 million for the three months ended August 31, 2007,
an increase of 26.5%. The increase in net sales for the three months ended
August 31, 2008 resulted primarily from increases in net sales of the
Company's wafer level products, partially offset by decreases in sales of the
Company's MAX monitored burn-in products. Net sales of the Company's wafer
level products for the three months ended August 31, 2008 were $8.5 million,
and increased approximately $2.9 million from the three months ended August
31, 2007. Net sales of the Company's MAX monitored burn-in products for the
three months ended August 31, 2008 were $1.0 million, and decreased
approximately $771,000 from the three months ended August 31, 2007. The
Company expects that net sales in the second quarter of fiscal 2009 will be
higher on both a sequential quarter and a year-over-year basis.
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 $4.9 million
for the three months ended August 31, 2008 from $4.2 million for the three
months ended August 31, 2007, an increase of 17.6%. As a percentage of net
sales, gross profit margin decreased to 50.8% for the three months ended
August 31, 2008 from 54.6% for the three months ended August 31, 2007. The
decrease in gross profit margin was primarily the result of the increased
costs associated with ramping up production of WaferPak contactors. Given the
current mix of products, the Company continues to believe that its typical
gross profit margin will be about 50%.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
("SG&A") expenses consist primarily of salaries and related costs of
16
employees, commission expenses to independent sales representatives, product
promotion and other professional services. SG&A expenses of $2.1 million for
the three months ended August 31, 2008 increased from $1.8 million for the
three months ended August 31, 2007, an increase of 14.8%. The increase in
SG&A expenses was primarily attributable to increases in employment related
expenses, as the Company added support resources to address the expected
growth in our business. As a percentage of net sales, SG&A expenses decreased
to 21.5% for the three months ended August 31, 2008 from 23.7% for the three
months ended August 31, 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
decreased to $1.5 million for the three months ended August 31, 2008 from $1.6
million for the three months ended August 31, 2007, a decrease of 10.3%. This
decrease was primarily due to a decrease in project material expenses. As a
percentage of net sales, R&D expenses decreased to 15.3% for the three months
ended August 31, 2008 from 21.5% for the three months ended August 31, 2007.
INTEREST INCOME. Interest income decreased to $63,000 for the three
months ended August 31, 2008 from $75,000 for the three months ended August
31, 2007.
OTHER INCOME (EXPENSE), NET. Other income (expense), net decreased to
($7,000) for the three months ended August 31, 2008 from $2,000 for the three
months ended August 31, 2007.
INCOME TAX EXPENSE. Income tax expense was $546,000 for the three months
ended August 31, 2008 and $15,000 for the three months ended August 31, 2007.
A low effective tax rate was recognized for the three months ended August 31,
2007 as the company maintained a valuation allowance and recorded tax expense
at the alternative minimum tax rate. During the fiscal year ended May 31,
2008 a partial release of the valuation allowance was made based upon the
Company's current level of profitability and the level of forecasted future
earnings. The first quarter of fiscal 2009 reflects a significantly higher
tax rate than the same period of the prior year as the Company now expects to
accrue tax at close to the statutory rates for the countries in which it
generates income.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was approximately $6.1 million for
the three months ended August 31, 2008 and $940,000 for the three months ended
August 31, 2007. 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. For the three months ended August 31, 2007, net
cash used in operating activities of $940,000 was driven primarily by an
increase in inventories $919,000 primarily to support the wafer product line
and a decrease in accounts payable $584,000, partially offset by net income of
$779,000. The decrease in accounts payable was primarily a matter of timing,
as the Company received a proportionately higher amount of goods earlier in
this fiscal quarter than in the quarter ended May 31, 2007.
Net cash used in investing activities was approximately $2.2 million for
the three months ended August 31, 2008 and net cash provided by investing
activities was approximately $1.9 million for the three months ended August
31, 2007. The net cash used in investing activities during the three months
ended August 31, 2008 was primarily due to a $2.0 million purchase of
investments. The net cash provided by investing activities during the three
months ended August 31, 2007 was primarily due to proceeds from sales and
maturities of investments.
17
Financing activities provided cash of approximately $190,000 for the three
months ended August 31, 2008 and approximately $55,000 for the three months
ended August 31, 2007, respectively. Net cash provided by financing
activities during the three months ended August 31, 2008 and 2007 was
primarily due to proceeds from issuance of common stock from the exercise of
stock options.
As of August 31, 2008, the Company had working capital of $34.4 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
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 term of the Company's current lease ends on June 30,
2015 for its United States manufacturing and office facilities. 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 balances together with cash
provided by operations, if any, are adequate to meet its working capital and
capital equipment requirements through fiscal year 2009. After fiscal year
2009, 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, 2008.
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
18
Instruments." The Company had no holdings of derivative financial or
commodity instruments at August 31, 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
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.
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 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 in 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 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. 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.
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 occurs, 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 file with
19
the 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.
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 98.3% and 98.5% of our net sales in the three
months ended August 31, 2008 and 2007, respectively. One customer, Spansion
Inc., accounted for approximately 88.4% and 73.9% of our net sales in the
three months ended August 31, 2008 and 2007, respectively. No other customers
represented more than 10% of the Company's net sales for either fiscal 2008 or
fiscal 2007. 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.
Our operating results could be adversely affected by substantial quarterly and
annual fluctuations.
We have experienced and expect to continue to experience significant
fluctuations in our quarterly and annual operating results. During fiscal
years 2008, 2007 and 2006, quarterly net sales have been as low as $4.6
million and as high as $10.9 million, and gross margins for quarterly net
sales have fluctuated between 40.2% and 58.3%. Our future operating results
will depend upon a variety of factors, including sales volume, the timing of
significant orders, the mix of products sold, changes in pricing by us, our
competitors, customers or suppliers, the length of sales cycles for our
products, timing of new product announcements and releases by us and our
competitors, market acceptance of new products and enhanced versions of our
products, capital spending patterns by customers, manufacturing inefficiencies
associated with our new product introductions, our ability to produce systems
and products in volume and meet customer requirements, product returns and
customer acceptance of product shipments, volatility in our targeted markets,
political and economic instability, natural disasters, regulatory changes,
possible disruptions caused by expanding existing facilities or moving into
new facilities, expenses associated with acquisitions and alliances, and
various competitive factors, including price-based competition, competition
from vendors employing other technologies, and the amount of products sold
under volume purchase arrangements, which tend to have lower selling prices.
Accordingly, past performance may not be indicative of future performance.
We depend on shipment and order size and timing.
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 and rescheduling. 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
20
shipment rescheduling, cancellations or deferrals by customers, customer
credit issues, unexpected manufacturing difficulties experienced by us, or
delays in deliveries by suppliers, could cause net sales in a particular
quarter to fall significantly below our expectations.
We rely on continued market acceptance for our FOX system, and may not be
successful in attracting new 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 newly designed to simultaneously burn-
in and functionally test all of the die on a wafer. The WaferPak contactor is
an interface device which enables contact between the FOX wafer-level system
and all of the die on a wafer, with a single touchdown. 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 or to WaferPak contactors 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, 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 in Taiwan. Market acceptance of the ABTS
system is subject to a number of risks. In order for our ABTS system to
become commercially accepted, we must complete engineering development of
necessary hardware and software. In addition, the first system, ordered by
Integrated Service Technology, must successfully complete customer acceptance.
Other customers must then be found who are willing to place orders for ABTS
systems in sufficient quantities to allow it to be produced economically.
To date, a limited number of customers have ordered MTX systems and it may not
achieve broad market acceptance.
Through the end of fiscal 2008, several companies purchased evaluation
units of the MTX system, but only four customers have purchased production
quantities. There are no long-term volume purchase commitments with any of
these customers. There can be no assurance that these customers will again
purchase MTX systems for their production facilities. Since most potential
customers have successfully relied on memory testers for many years and their
personnel understand the use and maintenance of such systems, we anticipate
that they may be reluctant to change their procedures to transfer test
functions to the MTX system. Before a customer will transfer test functions
to the MTX, the test programs must be translated for use with the MTX system
and lengthy correlation tests must be performed. Correlation testing may take
up to six months or more. Furthermore, MTX system sales are expected to be
primarily limited to new facilities and to existing facilities being upgraded
to accommodate new product generations, such as the transition to new memory
technologies, including newer generation flash memories, the Double Data Rate
DRAMs, and DDR II DRAMs. Construction of new facilities and upgrades of
existing facilities have in some cases been delayed or canceled during
periodic semiconductor industry downturns. Other companies have purchased MTX
systems which are being used only in quality assurance and engineering
applications. If we are unable to achieve broad market acceptance for our MTX
21
system, our future prospects and future results of operations will be
significantly harmed.
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
significant commitment of capital. In addition, the approval process for FOX,
ABTS and MTX systems and DiePak carrier 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, ABTS
and MTX systems or DiePak carriers, 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 61.3% and 42.4% of our net sales for fiscal 2008 and 2007,
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 will likely do so again in the future. These developments may affect us
in several ways. We believes that many international semiconductor
manufacturers limited their capital spending in fiscal year 2008, 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 the limitation
of 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
22
have a material adverse affect on our business, financial condition and
results of operations.
Approximately 49.3%, 49.1% and 1.6% of our net sales for fiscal 2008 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.
Our industry is subject to rapid technological changes. It is important to
introduce the new product 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 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 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 its products and may experience delays and technical and
manufacturing difficulties in future introductions or volume production of 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 complex and software-intensive products, 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 from time to time to experience larger than
anticipated warranty claims and could result in product returns. In the early
stages of product development, there can be no assurance that reliability,
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design and manufacturing issues will not be discovered or, that if such issues
arise, 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 BIST technology, and improvements in conventional test systems, such as
reduced cost or increased throughput, may significantly reduce or eliminate
the market for one or more of our products. If we are not able to improve our
products or develop new products or technologies quickly enough to maintain a
competitive position in its 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.
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, historically have 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 and rescheduling of purchase orders. There can be no
assurance that we will not be materially adversely affected by future
cancellations and rescheduling.
Our stock price may vary.
The price for 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
24
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, has experienced extreme price
fluctuations which have often been unrelated to the operating performance of
affected companies. Such fluctuations could adversely affect the market price
of our common stock.
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. We must 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 is 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 to our business.
If we do not adequately protect our intellectual property, competitors may
be able to practice our technologies and 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.
There are no pending claims against us regarding infringement of any
patents or other intellectual property rights of others. However, we may
receive, in the future, 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 made in the future 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.
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We are subject to environment regulations.
Federal, state and local regulations impose various controls on the use,
storage, discharge, handling, emission, generation, manufacture and disposal
of toxic or 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 it has obtained environmental permits necessary to
conduct its 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.
We are subject to internal control evaluation requirements of Section 404 of
the Sarbanes-Oxley Act.
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 beginning
in fiscal 2010.
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.
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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, 2008 /s/ RHEA J. POSEDEL
---------------------------
Rhea J. Posedel
Chief Executive Officer and
Chairman of the Board of Directors
Date: October 14, 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