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 November 30, 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 Smaller reporting company X
--- ---
(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 December 31, 2009 was 8,601,943.
2
FORM 10-Q
FOR THE QUARTER ENDED NOVEMBER 30, 2009
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
November 30, 2009 and May 31, 2009 . . . . . . . . . . . 4
Condensed Consolidated Statements of Operations for the three
months and six months ended November 30, 2009 and 2008 . 5
Condensed Consolidated Statements of Cash Flows for the
six months ended November 30, 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. . . . . . . . . . . . . . . . 16
ITEM 3. Quantitative and Qualitative Disclosures about Market Risks. . 22
ITEM 4. Controls and Procedures. . . . . . . . . . . . . . . . . . . . 22
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 23
ITEM 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . 23
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds. . 30
ITEM 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . 30
ITEM 4. Submission of Matters to a Vote of Security Holders . . . . . 31
ITEM 5. Other Information . . . . . . . . . . . . . . . . . . . . . . 31
ITEM 6. Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . 32
SIGNATURE PAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Index to Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
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)
November 30, May 31,
2009 2009
----------- -----------
(1)
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . $ 5,052 $ 4,360
Accounts receivable, net of allowances for
doubtful accounts of $2,718 and $13,741 at
November 30, 2009 and May 31, 2009,
respectively . . . . . . . . . . . . . . . . 971 931
Inventories . . . . . . . . . . . . . . . . . . 3,950 4,472
Prepaid expenses and other. . . . . . . . . . . 628 879
----------- -----------
Total current assets . . . . . . . . . . . . 10,601 10,642
Property and equipment, net . . . . . . . . . . . 2,446 2,741
Other assets. . . . . . . . . . . . . . . . . . . 534 528
----------- -----------
Total assets . . . . . . . . . . . . . . . . $13,581 $13,911
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . $ 366 $ 995
Accrued expenses. . . . . . . . . . . . . . . . 1,728 2,107
Deferred revenue. . . . . . . . . . . . . . . . 872 241
----------- -----------
Total current liabilities . . . . . . . . . . 2,966 3,343
Income tax payable. . . . . . . . . . . . . . . . 299 299
Deferred lease commitment . . . . . . . . . . . . 294 306
----------- -----------
Total liabilities . . . . . . . . . . . . . . 3,559 3,948
----------- -----------
Shareholders' equity:
Common stock, $0.01 par value:
Issued and outstanding: 8,598 shares and
8,496 shares at November 30, 2009 and
May 31, 2009, respectively. . . . . . . . . . 86 85
Additional paid-in capital. . . . . . . . . . . 45,734 44,552
Accumulated other comprehensive income. . . . . 2,873 2,800
Accumulated deficit . . . . . . . . . . . . . . (38,671) (37,474)
----------- -----------
Total shareholders' equity . . . . . . . . . 10,022 9,963
----------- -----------
Total liabilities and shareholders' equity. . $13,581 $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 OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended Six Months Ended
November 30, November 30,
------------------ ------------------
2009 2008 2009 2008
------- ------- ------- -------
Net sales. . . . . . . . . . . . . . . $1,646 $9,242 $ 2,914 $18,932
Cost of sales. . . . . . . . . . . . . 1,297 4,650 2,622 9,422
------- ------- ------- -------
Gross profit . . . . . . . . . . . . . 349 4,592 292 9,510
------- ------- ------- -------
Operating expenses:
Selling, general and administrative. 1,623 1,830 2,936 3,915
Research and development . . . . . . 1,077 1,577 2,019 3,055
Gain on sale of bankruptcy claim . . -- -- (3,289) --
------- ------- ------- -------
Total operating expenses . . . . 2,700 3,407 1,666 6,970
------- ------- ------- -------
(Loss) income from operations. . . . . (2,351) 1,185 (1,374) 2,540
Interest income . . . . . . . . . . . 2 47 3 110
Other income, net. . . . . . . . . . . 26 384 12 377
------- ------- ------- -------
(Loss) income before income tax
(benefit) expense. . . . . . . . . . (2,323) 1,616 (1,359) 3,027
Income tax (benefit) expense . . . . . (165) 744 (162) 1,290
------- ------- ------- -------
Net (loss) income. . . . . . . . . . . $(2,158) $ 872 $(1,197) $ 1,737
======= ======= ======= =======
Net (loss) income per share - basic. . $ (0.25) $ 0.10 $ (0.14) $ 0.21
Net (loss) income per share - diluted. $ (0.25) $ 0.10 $ (0.14) $ 0.20
Shares used in per share calculations:
Basic. . . . . . . . . . . . . . . . 8,526 8,426 8,504 8,411
Diluted. . . . . . . . . . . . . . . 8,526 8,447 8,504 8,600
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)
Six Months Ended
November 30,
---------------------
2009 2008
--------- ---------
Cash flows from operating activities:
Net (loss) income............................. $(1,197) $ 1,737
Adjustments to reconcile net (loss) income to
net cash provided by (used in) operating
activities:
Stock compensation expense.................. 1,085 616
Provision for doubtful accounts............. -- 55
Depreciation and amortization............... 358 233
Deferred income taxes....................... -- 997
Changes in operating assets and liabilities:
Accounts receivable....................... 181 (3,875)
Inventories............................... 523 (283)
Deferred lease commitment................. (12) 46
Accounts payable.......................... (1,156) (757)
Income tax payable........................ 44 4
Accrued expenses and deferred revenue..... 238 (850)
Prepaid expenses and other................ 287 (168)
--------- ---------
Net cash provided by (used in)
operating activities.................. 351 (2,245)
--------- ---------
Cash flows from investing activities:
Purchase of investments..................... -- (2,000)
Purchase of property and equipment.......... (54) (246)
--------- ---------
Net cash used in
investing activities.................. (54) (2,246)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock
and exercise of stock options............. 98 450
--------- ---------
Net cash provided by
financing activities.................. 98 450
--------- ---------
Effect of exchange rates on cash................ 297 120
--------- ---------
Net increase (decrease) in cash and
cash equivalents...................... 692 (3,921)
Cash and cash equivalents, beginning of period.. 4,360 15,648
--------- ---------
Cash and cash equivalents, end of period........ $ 5,052 $11,727
========= =========
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
Stock-based compensation expense consists of expenses for stock options
and employee stock purchase plan ("ESPP") shares. Stock-based compensation
cost is measured at each grant date, based on the fair value of the award
using an option-pricing model, and is recognized as expense over the
employee's requisite service period. This model was developed for use in
estimating the value of publicly traded options that have no vesting
restrictions and are fully transferable. The Company's employee stock options
have characteristics significantly different from those of publicly traded
options. 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 and six months ended November 30, 2009
and 2008, respectively (in thousands, except per share data):
7
Three Months Ended Six Months Ended
November 30, November 30,
------------------ ------------------
2009 2008 2009 2008
-------- -------- -------- --------
Stock-based compensation in the form of employee
stock options and ESPP shares, included in:
Cost of sales . . . . . . . . . . . . . . . $118 $ 42 $169 $ 81
Selling, general and administrative . . . . 437 178 588 333
Research and development . . . . . . . . . . 225 110 328 202
-------- -------- -------- --------
Total stock-based compensation . . . . . . . 780 330 1,085 616
Tax effect on stock-based compensation . . . -- (132) -- (255)
-------- -------- -------- --------
Total stock-based compensation, net of tax . $780 $198 $1,085 $361
======== ======== ======== ========
As of November 30, 2009, none of the stock-based compensation costs were
capitalized as part of inventory. As of November 30, 2008, stock-based
compensation costs of $56,000 were capitalized as part of inventory.
During the three months ended November 30, 2009 and 2008, the Company
recorded stock-based compensation related to stock options of $737,000 and
$284,000, respectively. During the six months ended November 30, 2009 and
2008, the Company recorded stock-based compensation related to stock options
of $1,020,000 and $535,000, respectively.
In the second quarter of fiscal 2010, the seven officers of the Company
elected to forfeit certain stock options previously granted. The forfeiture
of these options resulted in the immediate recognition of the unamortized
portion of stock compensation expense of $465,000.
As of November 30, 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 $1,685,000, which
is net of estimated forfeitures of $4,000. This cost will be amortized over
the remaining service period of the underlying options. The weighted average
period is approximately 2.9 years.
During the three months ended November 30, 2009 and 2008, the Company
recorded stock-based compensation related to the ESPP of $43,000 and $46,000,
respectively. During the six months ended November 30, 2009 and 2008, the
Company recorded stock-based compensation related to the ESPP of $65,000 and
$81,000, respectively.
As of November 30, 2009, the total compensation cost related to options to
purchase the Company's common stock under the ESPP but not yet recognized was
approximately $71,000. This cost will be amortized on a straight-line basis
over a weighted average period of approximately 1.2 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
8
of the stock-based awards, vesting schedules and expectations of future
employee behavior as evidenced by changes to the terms of the Company's stock-
based awards.
Expected Volatility. Volatility is a measure of the amounts by which a
financial variable such as stock price has fluctuated (historical volatility)
or is expected to fluctuate (expected volatility) during a period. The
Company uses the historical volatility for the past five years, which matches
the term of most of the option grants, to estimate expected volatility.
Volatility for each of the ESPP's four time periods of six months, twelve
months, eighteen months, and twenty-four months is calculated separately and
included in the overall stock-based compensation cost recorded.
Dividends. The Company has never paid any cash dividends on its common
stock and we do not anticipate paying any cash dividends in the foreseeable
future. Consequently, we use an expected dividend yield of zero in the Black-
Scholes option valuation 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 for the three and six months ended November 30, 2009 and 2008 were
estimated using the following weighted average assumptions in the Black-
Scholes option valuation model.
Three months ended Six Months Ended
November 30, November 30,
------------------ -----------------
2009 2008 2009 2008
------- ------- ------- -------
Option Plan Shares
Expected Term (in years).................... 5 5 5 5
Volatility.................................. 0.79 0.76 0.78 0.74
Expected Dividend........................... $0.00 $0.00 $0.00 $0.00
Risk-free Interest Rates.................... 2.41% 2.51% 2.53% 3.00%
Estimated Forfeiture Rate................... 0.25% 2.00% 0.25% 2.00%
Weighted Average Grant Date Fair Value...... $0.92 $1.43 $0.56 $3.71
The fair values of the ESPP shares for the three and six months ended
November 30, 2009 and 2008, respectively, were estimated using the following
weighted-average assumptions:
Three months ended Six Months Ended
November 30, November 30,
------------------- ------------------
2009 2008 2009 2008
--------- --------- -------- ---------
Employee Stock Purchase Plan Shares
Expected Term (in years).................. 0.5-2.0 0.5-2.0 0.5-2.0 0.5-2.0
Volatility................................ 0.90-1.01 0.64-0.88 0.79-1.08 0.62-0.88
Expected Dividend......................... $0.00 $0.00 $0.00 $0.00
Risk-free Interest Rates.................. 0.2%-0.9% 1.2%-1.6% 0.2%-0.9% 1.2%-2.6%
Estimated Forfeiture Rate................. 0% 0% 0% 0%
Weighted Average Grant Date Fair Value.... $0.62 $1.47 $0.63 $1.72
9
The following table summarizes the stock option transactions during the
three and six months ended November 30, 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 $ --
Additional shares reserved.. 800 --
Options granted............. (25) 25 $1.42
Options terminated.......... 125 (125) $9.54
Options exercised........... -- (3) $0.85
---------- --------
Balances, November 30, 2009... 1,004 1,965 $3.88 $348
========== ========
Options exercisable and expected to be
exercisable at November 30, 2009 1,926 $3.88 $341
========
The options outstanding and exercisable at November 30, 2009 were in the
following exercise price ranges (in thousands, except per share data):
Options Outstanding Options Exercisable
at November 30, 2009 at November 30, 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 1,187 3.59 $1.88 575 $2.53 2.71
$3.66-$3.99 86 1.91 $3.83 85 $3.83 1.90
$4.35-$4.51 12 1.49 $4.38 12 $4.38 1.49
$5.91-$7.00 384 2.48 $6.12 243 $6.11 2.40
$7.28-$9.94 296 3.49 $8.98 181 $8.68 3.48
----------- -------
$0.85-$9.94 1,965 3.27 $3.88 1,096 $4.46 2.69 $75
=========== =======
The weighted average remaining contractual life of the options exercisable
and expected to be exercisable at November 30, 2009 was 3.3 years.
Options to purchase 1,096,000 and 874,000 shares were exercisable at
November 30, 2009 and 2008, respectively. These exercisable options had
weighted average exercise prices of $4.46 and $4.72 as of November 30, 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.
10
Three Months Ended Six Months Ended
November 30, November 30,
--------- ------- -------- --------
2009 2008 2009 2008
-------- ------- -------- --------
(in thousands, except per share amounts)
Numerator: Net (loss) income .............. $(2,158) $ 872 $(1,197) $1,737
-------- ------- -------- --------
Denominator for basic net (loss) income
per share:
Weighted-average shares outstanding ..... 8,526 8,426 8,504 8,411
-------- ------- -------- --------
Shares used in basic net (loss) income per
share calculation........................ 8,526 8,426 8,504 8,411
Effect of dilutive securities.............. -- 21 -- 189
-------- ------- -------- --------
Denominator for diluted net (loss) income
per share.............................. 8,526 8,447 8,504 8,600
-------- ------- -------- --------
Basic net (loss) income per share.......... $(0.25) $ 0.10 $(0.14) $ 0.21
======== ======= ======== ========
Diluted net (loss) income per share........ $(0.25) $ 0.10 $(0.14) $ 0.20
======== ======= ======== ========
Stock options to purchase 1,965,000 shares of common stock were
outstanding on November 30, 2009, but were not included in the computation of
diluted net loss per share, because the inclusion of such shares would be
anti-dilutive. Stock options to purchase 1,272,000 shares of common stock
were outstanding on November 30, 2008, but not included 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 authoritative guidance for fair value
measurements and the fair value option for financial assets and liabilities.
This authoritative guidance defines fair value, establishes a framework for
using fair value to measure assets and liabilities, and expands disclosures
about fair value measurements.
In the first quarter of fiscal 2010, the Company adopted revised
accounting guidance for the fair value measurement and disclosure for 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).
The guidance establishes 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 assets and liabilities
measured at fair value on a recurring basis as of November 30, 2009 (in
thousands):
Balance as of
November 30, 2009 Level 1 Level 2
----------------- ---------- ----------
Money market funds.............. $3,151 $3,151 $ --
----------------- ---------- ----------
Assets.......................... $3,151 $3,151 $ --
================= ========== ==========
Liabilities..................... $ -- $ -- $ --
================= ========== ==========
As of November 30, 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).
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 November 30, 2009
and May 31, 2009, the carrying value of the strategic investments was
$384,000.
5. INVENTORIES
Inventories are comprised of the following (in thousands):
November 30, May 31,
2009 2009
----------- ----------
Raw materials and sub-assemblies........ $1,060 $1,416
Work in process......................... 2,168 2,509
Finished goods.......................... 722 547
---------- ----------
$3,950 $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):
12
United
States Asia Europe Total
--------- --------- --------- ---------
Three months ended November 30, 2009:
Net sales........................... $1,493 $31 $122 $1,646
Property and equipment, net......... 2,329 88 29 2,446
Six months ended November 30, 2009:
Net sales........................... $2,561 $108 $245 $2,914
Property and equipment, net......... 2,329 88 29 2,446
Three months ended November 30, 2008:
Net sales........................... $8,527 $601 $114 $9,242
Property and equipment, net......... 2,205 75 12 2,292
Six months ended November 30, 2008:
Net sales........................... $15,673 $3,116 $143 $18,932
Property and equipment, net......... 2,205 75 12 2,292
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
87% and 73% of its net sales in the three and six months ended November 30,
2009, respectively. Four customers accounted for approximately 31%, 18%, 16%
and 14% of the Company's net sales in the three months ended November 30,
2009. Four customers accounted for approximately 20%, 18%, 16% and 10% of the
Company's net sales in the six months ended November 30, 2009. Sales to the
Company's five largest customers accounted for approximately 99% and 97% of
its net sales in the three and six months ended November 30, 2008,
respectively. One customer, Spansion Inc. ("Spansion"), accounted for
approximately 93% and 91% of the Company's net sales in the three and six
months ended November 30, 2008. No other customers represented more than 10%
of the Company's net sales for either fiscal 2010 or fiscal 2009.
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.
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 and six months ended November 30, 2009 and 2008
(in thousands):
13
Three Months Ended Six Months Ended
November 30, November 30,
------------------ ----------------
2009 2008 2009 2008
-------- -------- ------- -------
Balance at the beginning of the period.... $285 $428 $314 $387
Accruals for warranties issued
during the period....................... 12 81 40 298
Reversals of warranties issued
during the period....................... (28) -- (28) --
Settlement made during the period
(in cash or in kind).................... (39) (248) (96) (424)
-------- ------- ------- -------
Balance at the end of the period.......... $230 $261 $230 $261
======== ======= ======= =======
The accrued warranty balance is included in accrued expenses on the
accompanying condensed consolidated balance sheets.
8. GAIN ON SALE OF BANKRUPTCY CLAIM
Spansion, the Company's largest customer in fiscal 2009, 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 $11.4 million 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 a remaining
balance of its Spansion U.S. bankruptcy claim which consists of accounts
receivable previously reserved and cancellation charges for goods and services
ordered.
9. OTHER COMPREHENSIVE (LOSS) INCOME
Other comprehensive (loss) income, net of tax is comprised of the
following (in thousands):
Three Months Ended Six Months Ended
November 30, November 30,
------------------ ------------------
2009 2008 2009 2008
------- ------- -------- -------
Net (loss) income....................... $(2,158) $ 872 $(1,197) $1,737
Foreign currency translation adjustments 55 409 73 189
Unrealized holding gains arising
during period......................... -- 2 -- 3
------- ------- -------- -------
Comprehensive (loss) income............. $(2,103) $1,283 $(1,124) $1,929
======= ======= ======== =======
10. INCOME TAXES
The Company accounts for uncertain tax positions consistent with
authoritative guidance. The guidance prescribes a "more likely than not"
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in
a tax return. The Company does not expect any material change in its
unrecognized tax benefits over the next twelve months. The Company recognizes
interest and penalties related to unrecognized tax benefits as a component of
income taxes.
For the three and six months ended November 30, 2009, the Company had
recorded tax benefits of $165,000 and $162,000, respectively. For the three
and six months ended November 30, 2008, the Company had recorded tax expenses
of $744,000 and $1,290,000, 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,
14
California, Germany and Japan. Tax years 1993 - 2009 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 November 30, 2009, out of the 2,970,000 shares authorized for grant
under the 1996 Stock Option Plan and 2006 Equity Incentive Plan, approximately
1,965,000 shares are outstanding. As of November 30, 2009, 157,000 shares had
been issued from the 450,000 shares authorized for grant under the 2006
Employee Stock Purchase Plan.
12. RECENT ACCOUNTING PRONOUNCEMENTS
In May 2009, the Financial Accounting Standards Board ("FASB") issued
guidance 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. The guidance 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 October 2009, the FASB issued authoritative guidance for revenue
recognition with multiple deliverables. This authoritative guidance defines
the criteria for identifying individual deliverables in a multiple-element
arrangement and the manner in which revenues are allocated to individual
deliverables. 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, guidance 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. This guidance is effective 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.
In October 2009, the FASB issued authoritative guidance for the accounting
for certain revenue arrangements that include software elements. This
authoritative guidance amends the scope of pre-existing software revenue
guidance by removing from the guidance non-software components of tangible
products and certain software components of tangible products. Since the
15
Company will apply the requirements of this authoritative guidance on a
prospective basis, the Company is currently unable to evaluate its effect on
the Company's consolidated financial statements.
13. SUBSEQUENT EVENTS THROUGH JANUARY 13, 2010
In preparing these financial statements, the Company has evaluated events
and transactions for potential recognition or disclosure through January 13,
2010, 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. All statements in this report, including those made by the
management of Aehr, other than statements of historical fact, are forward-
looking statements. These statements typically may be identified by the use
of forward-looking words or phrases such as "believe," "expect," "intend,"
"anticipate," "should," "planned," "estimated," and "potential," among others
and include, but are not limited to, statements concerning 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
worldwide. The Company's principal products currently are the Advanced Burn-
in and Test System ("ABTS"), the FOX full wafer contact parallel test and
burn-in system, the MAX burn-in system, 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.
16
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 negatively impacted by
the current global economic environment. As a result, in the second half of
fiscal 2009 we experienced a significant decline in sales. In fiscal 2009,
our financial results reflected the impact of the bankruptcy filing of our
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 $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
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. We believe there have been no
material changes to our critical accounting policies and estimates during the
six months ended November 30, 2009 compared to those discussed in our 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.
17
Three Months Ended Six Months Ended
November 30, November 30,
------------------- -------------------
2009 2008 2009 2008
-------- -------- -------- --------
Net sales. . . . . . . . . . . . . . . . 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales. . . . . . . . . . . . . . 78.8 50.3 90.0 49.8
-------- -------- -------- --------
Gross profit . . . . . . . . . . . . . . 21.2 49.7 10.0 50.2
-------- -------- -------- --------
Operating expenses:
Selling, general and administrative. . 98.6 19.8 100.8 20.7
Research and development . . . . . . . 65.4 17.1 69.3 16.1
Gain on sale of bankruptcy claim . . . -- -- (112.9) --
-------- -------- -------- --------
Total operating expenses . . . . . 164.0 36.9 57.2 36.8
-------- -------- -------- --------
(Loss) income from operations. . . . . . (142.8) 12.8 (47.2) 13.4
Interest income. . . . . . . . . . . . . 0.1 0.5 0.1 0.6
Other income, net. . . . . . . . . . . . 1.6 4.2 0.4 2.0
-------- -------- -------- --------
(Loss) income before income tax
(benefit) expense. . . . . . . . . . . (141.1) 17.5 (46.7) 16.0
Income tax (benefit) expense . . . . . . (10.0) 8.1 (5.6) 6.8
-------- -------- -------- --------
Net (loss) income. . . . . . . . . . . . (131.1)% 9.4 % (41.1)% 9.2 %
======== ======== ======== ========
THREE MONTHS ENDED NOVEMBER 30, 2009 COMPARED TO THREE MONTHS ENDED NOVEMBER
30, 2008
NET SALES. Net sales decreased to $1.6 million for the three months ended
November 30, 2009 from $9.2 million for the three months ended November 30,
2008, a decrease of 82.2%. The decrease in net sales for the three months
ended November 30, 2009 resulted primarily from a decrease in net sales of the
Company's wafer-level products. Net sales of the Company's wafer-level
products for the three months ended November 30, 2009 were $509,000, and
decreased approximately $8.5 million from the three months ended November 30,
2008 due primarily to a reduction of sales to Spansion, who declared
bankruptcy in the third quarter of fiscal 2009.
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 decreased to $349,000 for
the three months ended November 30, 2009 from $4.6 million for the three
months ended November 30, 2008, a decrease of 92.4%. As a percentage of net
sales, gross profit margin decreased to 21.2% for the three month ended
November 30, 2009 from 49.7% for the three months ended November 30, 2008.
The decrease in gross profit 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 $1.6 million in
the three months ended November 30, 2009 decreased from $1.8 million in the
three months ended November 30, 2008, a decrease of 11.3%. The decrease in
SG&A expenses was primarily due to expense reduction initiatives the Company
has taken of $446,000 and a reduction of bad debt expense of $25,000. This
reduction was partially offset by an increase in stock-based compensation
expense of approximately $264,000 due primarily to the impact of forfeited
options by the Company's officers.
18
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 $1.1 million for the three months ended November 30, 2009 from
$1.6 million for the three months ended November 30, 2008, a decrease of
31.7%. The decrease in R&D expenses was primarily due to expense reduction
initiatives the Company has taken of $537,000 and a reduction of project
materials expense of $85,000. This reduction was partially offset by an
increase in stock-based compensation expense of approximately $115,000 due
primarily to the impact of forfeited options by the Company's officers.
INTEREST INCOME. Interest income decreased to $2,000 for the three months
ended November 30, 2009 from $47,000 for the three months ended November 30,
2008. The decrease in net interest income for the three months ended November
30, 2009 was primarily related to lower interest rates and lower investment
balances.
OTHER INCOME, NET. Other income, net decreased to $26,000 for the three
months ended November 30, 2009 from $384,000 for the three months ended
November 30, 2008. Other income in the second quarter of fiscal 2009 was
primarily related to foreign exchange gains on settlement of transactions in
the Company's Japan subsidiary. There were no foreign exchange gains of
similar magnitude in the second quarter of fiscal 2010.
INCOME TAX (BENEFIT) EXPENSE. Income tax benefit was $165,000 for the
three months ended November 30, 2009, compared with income tax expense of
$744,000 for the three months ended November 30, 2008. The income tax benefit
for the three months ended November 30, 2009 was primarily attributable to the
increase in the NOL carryback period from two to five years and the inclusion
of alternative minimum taxes paid in the carry-back calculation. Income tax
expense recognized in the second 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.
SIX MONTHS ENDED NOVEMBER 30, 2009 COMPARED TO SIX MONTHS ENDED NOVEMBER 30,
2008
NET SALES. Net sales decreased to $2.9 million for the six months ended
November 30, 2009 from $18.9 million for the six months ended November 30,
2008, a decrease of 84.6%. The decrease in net sales for the six months ended
November 30, 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 six months ended November 30, 2009 were $542,000, and
decreased approximately $16.4 million from the six months ended November 30,
2008 due primarily to a reduction of sales to Spansion, who declared
bankruptcy in the third quarter of fiscal 2009.
GROSS PROFIT. Gross profit decreased to $292,000 for the six months ended
November 30, 2009 from $9.5 million for the six months ended November 30,
2008, a decrease of 96.9%. Gross profit margin decreased to 10.0% for the six
months ended November 30, 2009 from 50.2% for the six months ended November
30, 2008. The decrease in gross profit margin was primarily the result of the
significant decline in net sales.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses decreased to $2.9
million for the six months ended November 30, 2009 from $3.9 million for the
six months ended November 30, 2008, a decrease of 25.0%. The decrease in SG&A
expenses was primarily due to expense reduction initiatives the Company has
taken of $999,000 and a reduction of bad debt expense of $97,000. This
reduction was partially offset by an increase in stock-based compensation
expense of approximately $274,000 due primarily to the impact of forfeited
options by the Company's officers. As a percentage of net sales, SG&A
expenses increased to 100.8% for the six months ended November 30, 2009 from
20.7% for the six months ended November 30, 2008, reflecting lower net sales.
19
RESEARCH AND DEVELOPMENT. R&D expenses decreased to $2.0 million for the
six months ended November 30, 2009 from $3.1 million for the six months ended
November 30, 2008, a decrease of 33.9%. The decrease in R&D expenses was
primarily due to expense reduction initiatives the Company has taken of
$1,038,000 and a reduction of project materials expense of $136,000. This
reduction was partially offset by an increase in stock-based compensation
expense of approximately $125,000 due primarily to the impact of forfeited
options by the Company's officers. As a percentage of net sales, R&D expenses
increased to 69.3% for the six months ended November 30, 2009 from 16.1% for
the six months ended November 30, 2008, reflecting lower net sales.
GAIN ON SALE OF BANKRUPTCY CLAIM. Spansion, the Company's largest
customer in fiscal 2009, 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 $3,000 for the six months
ended November 30, 2009 from $110,000 for the six months ended November 30,
2008, a decrease of 97.3%. The decrease in net interest income for the six
months ended November 30, 2009 was primarily related to lower interest rates
and lower investment balances.
OTHER INCOME, NET. Other income, net decreased to $12,000 for the six
months ended November 30, 2009 from $377,000 for the six months ended November
30, 2008. Other income for the six months ended November 30, 2008 was
primarily related to foreign exchange gains on settlement of transactions in
the Company's Japan subsidiary. There were no foreign exchange gains of
similar magnitude for the six months ended November 30, 2009.
INCOME TAX (BENEFIT) EXPENSE. Income tax benefit was $162,000 for the six
months ended November 30, 2009, compared with income tax expense of $1.3
million for the six months ended November 30, 2008. The income tax benefit
for the six months ended November 30, 2009 was related to the increase in the
NOL carry-back period from two to five years and the inclusion of alternative
minimum taxes paid in the carry-back calculation. Income tax expense
recognized for the six months ended November 30, 2008 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 provided by operating activities was $351,000 for the six months
ended November 30, 2009 and net cash used in operating activities was
approximately $2.2 million for the six months ended November 30, 2008. For
the six months ended November 30, 2009, net cash provided by operating
activities was primarily driven by stock compensation expenses of $1.1
million, a decrease in inventories of $0.5 million, depreciation and
amortization of $0.4 million, a decreases in prepaid expenses and other of
$0.3 million, an increase in accrued expenses and deferred revenue of $0.2
million and a decrease in accounts receivable of $0.2 million, partially
offset by net loss of $1.2 million and a decrease in accounts payable of $1.2
million. Included in net loss for the six months ended November 30, 2009 is
cash received of approximately $3.3 million related to the sale of a portion
of the Spansion bankruptcy claim. The decrease in inventories was primarily
due to inventory charged to cost of good sold. The decrease in accounts
payable was primarily due to a reduction in inventory purchases. For the six
months ended November 30, 2008, net cash used in operating activities was
primarily driven by an increase in accounts receivable of $3.9 million,
partially offset by net income of $1.7 million. The increase in accounts
receivable for the six-month period was primarily due to a delay in collection
of receivables from a large multinational customer.
20
Net cash used in investing activities was $54,000 for the six months ended
November 30, 2009 and approximately $2.2 million for the six months ended
November 30, 2008. The net cash used in investing activities during the six
months ended November 30, 2009 was primarily due to purchase of property and
equipment. The net cash used in investing activities during the six months
ended November 30, 2008 was primarily due to $2.0 million in purchase of
investments.
Financing activities provided cash of $98,000 for the six months ended
November 30, 2009 and approximately $450,000 for the six months ended November
30, 2008. Net cash provided by financing activities during the six months
ended November 30, 2009 and 2008 was primarily due to proceeds from issuance
of common stock from the exercise of stock options and ESPP.
As of November 30, 2009, the Company had working capital of $7.6 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 calendar year 2010. After
calendar 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.
21
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
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
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.
The Company had no holdings of derivative financial or commodity
instruments at November 30, 2009.
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.
22
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 and the second quarter of fiscal 2010, we experienced operating
losses. During the third and fourth quarters of fiscal 2009 and the first
quarter of fiscal 2010, we experienced cash outflows. Our cash and cash
equivalents as of November 30, 2009 were approximately $5.1 million. We took
significant steps to minimize our expense levels during these periods and to
increase the likelihood that we will have sufficient cash to support
23
operations during the downturn, including reducing our headcount by more than
30%, reducing compensation for officers and other salaried employees,
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 calendar 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 87% and 73% of its net sales in the three and six
months ended November 30, 2009, respectively. Four customers accounted for
approximately 31%, 18%, 16% and 14% of the Company's net sales in the three
months ended November 30, 2009, respectively. Four customers accounted for
approximately 20%, 18%, 16% and 10% of the Company's net sales in the six
months ended November 30, 2009. Sales to the Company's five largest customers
accounted for approximately 99% and 97% of its net sales in the three and six
months ended November 30, 2008, respectively. One customer, Spansion Inc.,
accounted for approximately 93% and 91% of the Company's net sales in the
three and six months ended November 30, 2008, respectively. No other
customers represented more than 10% of the Company's net sales for either
fiscal 2010 or fiscal 2009.
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 lower levels of 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
24
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
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. In fiscal 2009 and 2010, we
shipped four ABTS products, including two systems to new customers and two
follow-on system shipments to 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 depend upon continued market acceptance for our MAX system and we may
experience a limited burn-in system market.
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.
25
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
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
26
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,
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.
27
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
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
28
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.
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. If a company is not in compliance with the Bid Price Rule, the
company will have 180 calendar days to regain compliance. 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, the Company received notice from
NASDAQ that it 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
29
substantial costs and diversion of resources and could have a material adverse
effect on our operating results, regardless of the outcome of the litigation.
In addition, there can be no assurance that any of the patents issued to us
will not be challenged, invalidated or circumvented or that the rights granted
thereunder will provide competitive advantages to us.
There are no pending claims against us regarding infringement of any
patents or other intellectual property rights of others. However, in the
future we may receive communications from third parties asserting intellectual
property claims against us. Such claims could include assertions that our
products infringe, or may infringe, the proprietary rights of third parties,
requests for indemnification against such infringement or suggestions that we
may be interested in acquiring a license from such third parties. There can
be no assurance that any such claim will not result in litigation, which could
involve significant expense to us, and, if we are required or deem it
appropriate to obtain a license relating to one or more products or
technologies, there can be no assurance that we would be able to do so on
commercially reasonable terms, or at all.
While we believe we have complied with all applicable environmental laws, our
failure to do so could adversely affect our business as a result of having to
pay substantial amounts in damages or fees.
Federal, state and local regulations impose various controls on the use,
storage, discharge, handling, emission, generation, manufacture and disposal
of toxic and other hazardous substances used in our operations. We believe
that our activities conform in all material respects to current environmental
and land use regulations applicable to our operations and our current
facilities, and that we have obtained environmental permits necessary to
conduct our business. Nevertheless, 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.
30
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held an Annual Meeting of Shareholders on October 27, 2009
(the "Annual Meeting"). There were issued and outstanding on September 8,
2009, the record date, 8,495,692 shares of common stock. There were present
at the Annual Meeting in person and by proxy Shareholders of the Company who
were holders of 7,498,928 shares of common stock entitled to vote thereat,
constituting a quorum. At the Annual Meeting, the following votes were cast
for the proposals indicated:
Proposal One: Election of Directors of the Company.
NOMINEE VOTES FOR VOTES WITHHELD
------------------ --------- --------------
Rhea J. Posedel 6,710,185 788,743
Robert R. Anderson 6,681,009 817,919
William W.R. Elder 6,680,509 818,419
Mukesh Patel 7,351,478 147,450
Mario M. Rosati 7,322,302 176,626
Howard T. Slayen 7,322,802 176,126
Proposal Two: Approve an amendment of the Company's 2006 Equity Incentive
Plan to increase the number of shares reserved for issuance thereunder by an
additional 800,000 shares.
TOTAL VOTES TOTAL VOTES TOTAL VOTES TOTAL BROKER
PROPOSAL FOR AGAINST ABSTAIN NON-VOTES
----------- ----------- ----------- ----------- ------------
TWO 2,652,975 911,467 13,827 3,920,659
Proposal Three: Approve an amendment of the Company's 2006 Employee Stock
Purchase Plan to increase the number of shares reserved for issuance
thereunder by an additional 250,000 shares.
TOTAL VOTES TOTAL VOTES TOTAL VOTES TOTAL BROKER
PROPOSAL FOR AGAINST ABSTAIN NON-VOTES
----------- ----------- ----------- ----------- ------------
THREE 3,327,022 236,620 14,627 3,920,659
Proposal Four: Ratify the selection of Burr, Pilger & Mayer LLP as the
Company's independent registered public accounting firm for the fiscal year
ending May 31, 2010.
TOTAL VOTES TOTAL VOTES TOTAL VOTES TOTAL BROKER
PROPOSAL FOR AGAINST ABSTAIN NON-VOTES
----------- ----------- ----------- ----------- ------------
Four 7,321,765 127,868 49,295 --
Proposal Five: Approve an amendment of the Company's Restated Articles of
Incorporation authorizing the Board of Directors, in its discretion, to effect
a reverse stock split of the Company Common Stock pursuant to which any whole
number of outstanding shares between and including two (2) and five (5) would
be combined into one share of Common Stock and to concurrently decrease the
authorized number of shares of Common Stock on a proportional basis.
TOTAL VOTES TOTAL VOTES TOTAL VOTES TOTAL BROKER
PROPOSAL FOR AGAINST ABSTAIN NON-VOTES
----------- ----------- ----------- ----------- ------------
FIVE 6,132,660 1,291,020 75,248 --
Item 5. OTHER INFORMATION
None.
31
Item 6. EXHIBITS
The Exhibits listed on the accompanying "Index to Exhibits" are filed as
part of, or incorporated by reference into, this report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Aehr Test Systems
(Registrant)
Date: January 13, 2010 /s/ RHEA J. POSEDEL
----------------------------------
Rhea J. Posedel
Chief Executive Officer and
Chairman of the Board of Directors
Date: January 13, 2010 /s/ GARY L. LARSON
--------------------------------
Gary L. Larson
Vice President of Finance and
Chief Financial Officer
32
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.
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).
33