FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 2011.
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.
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 March 31, 2011 was 8,831,689.
2
FORM 10-Q
FOR THE QUARTER ENDED FEBRUARY 28, 2011
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
February 28, 2011 and May 31, 2010 . . . . . . . . . . . 4
Condensed Consolidated Statements of Operations for the three
months and nine months ended February 28, 2011 and 2010. 5
Condensed Consolidated Statements of Cash Flows for the
nine months ended February 28, 2011 and 2010 . . . . . . 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. . 21
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. (Removed and Reserved) . . . . . . . . . . . . . . . . . . . . 30
ITEM 5. Other Information . . . . . . . . . . . . . . . . . . . . . . 30
ITEM 6. Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . 30
SIGNATURE PAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Index to Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
3
PART I. FINANCIAL INFORMATION
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
AEHR TEST SYSTEMS
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited)
February 28, May 31,
2011 2010
----------- -----------
(1)
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . $ 3,808 $ 7,766
Accounts receivable, net of allowances for
doubtful accounts of $33 and $1,411 at
February 28, 2011 and May 31, 2010,
respectively . . . . . . . . . . . . . . . . 2,229 596
Inventories, net. . . . . . . . . . . . . . . . 4,687 3,635
Prepaid expenses and other. . . . . . . . . . . 220 445
----------- -----------
Total current assets . . . . . . . . . . . . 10,944 12,442
Property and equipment, net . . . . . . . . . . . 1,078 1,504
Other assets. . . . . . . . . . . . . . . . . . . 540 528
----------- -----------
Total assets . . . . . . . . . . . . . . . . $12,562 $14,474
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . $ 1,672 $ 703
Accrued expenses. . . . . . . . . . . . . . . . 1,213 1,626
Deferred revenue. . . . . . . . . . . . . . . . 50 286
----------- -----------
Total current liabilities . . . . . . . . . . 2,935 2,615
Income tax payable. . . . . . . . . . . . . . . . 298 298
Deferred lease commitment . . . . . . . . . . . . 249 280
----------- -----------
Total liabilities . . . . . . . . . . . . . . 3,482 3,193
----------- -----------
Shareholders' equity:
Common stock, $0.01 par value:
Issued and outstanding: 8,829 shares and
8,664 shares at February 28, 2011 and
May 31, 2010, respectively. . . . . . . . . . 88 87
Additional paid-in capital. . . . . . . . . . . 47,439 46,459
Accumulated other comprehensive income. . . . . 2,737 2,690
Accumulated deficit . . . . . . . . . . . . . . (41,184) (37,955)
----------- -----------
Total shareholders' equity . . . . . . . . . 9,080 11,281
----------- -----------
Total liabilities and shareholders' equity. . $12,562 $14,474
=========== ===========
(1) The condensed consolidated balance sheet at May 31, 2010 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 Nine Months Ended
February 28, February 28,
------------------ ------------------
2011 2010 2011 2010
------- -------- ------- --------
Net sales:
Product sales. . . . . . . . . . . . $4,242 $2,453 $ 9,988 $5,367
Cancellation charges . . . . . . . . -- 2,740 -- 2,740
------- -------- ------- --------
Total net sales. . . . . . . . . 4,242 5,193 9,988 8,107
Cost of sales. . . . . . . . . . . . . 2,637 1,178 6,085 3,800
------- -------- ------- --------
Gross profit . . . . . . . . . . . . . 1,605 4,015 3,903 4,307
------- -------- ------- --------
Operating expenses:
Selling, general and administrative. 1,486 1,664 4,499 4,600
Research and development . . . . . . 1,039 1,451 3,377 3,470
Gain on bankruptcy claim . . . . . . -- (584) (155) (3,873)
------- -------- ------- --------
Total operating expenses . . . . 2,525 2,531 7,721 4,197
------- -------- ------- --------
(Loss) income from operations. . . . . (920) 1,484 (3,818) 110
Interest income . . . . . . . . . . . -- 1 3 4
Other (expense) income, net. . . . . . (30) 55 593 67
------- -------- ------- --------
(Loss) income before income tax
(benefit) expense. . . . . . . . . . (950) 1,540 (3,222) 181
Income tax (benefit) expense . . . . . (4) 5 7 (157)
------- -------- ------- --------
Net (loss) income. . . . . . . . . . . $ (946) $1,535 $(3,229) $ 338
======= ======== ======= ========
Net (loss) income per share - basic. . $(0.11) $ 0.18 $(0.37) $ 0.04
Net (loss) income per share - diluted. $(0.11) $ 0.18 $(0.37) $ 0.04
Shares used in per share calculations:
Basic. . . . . . . . . . . . . . . . 8,828 8,601 8,742 8,541
Diluted. . . . . . . . . . . . . . . 8,828 8,759 8,742 8,594
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
AEHR TEST SYSTEMS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
February 28,
---------------------
2011 2010
--------- ---------
Cash flows from operating activities:
Net (loss) income............................. $(3,229) $ 338
Adjustments to reconcile net (loss) income to
net cash (used in) provided by operating
activities:
Stock-based compensation expense............ 735 1,408
Provision for doubtful accounts............. 24 (4)
Loss on disposal of assets.................. 9 151
Depreciation and amortization............... 432 537
Changes in operating assets and liabilities:
Accounts receivable....................... (1,380) (287)
Inventories............................... (1,027) 439
Prepaid expenses and other................ 242 292
Accounts payable.......................... 439 (798)
Income tax payable........................ -- 39
Accrued expenses and deferred revenue..... (666) 1,992
Deferred lease commitment................. (31) (19)
--------- ---------
Net cash (used in) provided by
operating activities.................. (4,452) 4,088
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment......... (6) (65)
--------- ---------
Net cash used in
investing activities.................. (6) (65)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock
and exercise of stock options............. 246 100
--------- ---------
Net cash provided by
financing activities.................. 246 100
--------- ---------
Effect of exchange rates on cash................ 254 190
--------- ---------
Net (decrease) increase in cash and
cash equivalents...................... (3,958) 4,313
Cash and cash equivalents, beginning of period.. 7,766 4,360
--------- ---------
Cash and cash equivalents, end of period........ $3,808 $ 8,673
========= =========
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, or 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, 2010. 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
could differ materially from those estimates.
2. STOCK-BASED COMPENSATION
Stock-based compensation expense consists of expenses for stock options
and employee stock purchase plan, or ESPP, shares. Stock-based compensation
cost is measured at each grant date, based on the fair value of the award
using the Black-Scholes option valuation model, and is recognized as expense
over the employee's requisite service period. All of the Company's stock-
based 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 2010 filed on August
27, 2010 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 nine months ended February 28, 2011
and 2010, respectively (in thousands):
7
Three Months Ended Nine Months Ended
February 28, February 28,
------------------ -----------------
2011 2010 2011 2010
-------- -------- -------- -------
Stock-based compensation in the form of employee
stock options and ESPP shares, included in:
Cost of sales . . . . . . . . . . . . . . . $ 25 $ 63 $ 85 $ 231
Selling, general and administrative . . . . 115 155 380 743
Research and development . . . . . . . . . . 83 106 270 434
-------- -------- -------- -------
Total stock-based compensation . . . . . . . $223 $324 $735 $1,408
======== ======== ======== =======
During the three months ended February 28, 2011 and 2010, the Company
recorded stock-based compensation related to stock options of $201,000 and
$244,000, respectively. During the nine months ended February 28, 2011 and
2010, the Company recorded stock-based compensation related to stock options
of $629,000 and $1,263,000, 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-based compensation expense of $465,000.
As of February 28, 2011, 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 $971,000, which
is net of estimated forfeitures of $2,000. This cost will be amortized over
the remaining service period of the underlying options. The weighted average
period is approximately 2.8 years.
During the three months ended February 28, 2011 and 2010, the Company
recorded stock-based compensation related to the ESPP of $22,000 and $80,000,
respectively. During the nine months ended February 28, 2011 and 2010, the
Company recorded stock-based compensation related to the ESPP of $106,000 and
$145,000, respectively.
As of February 28, 2011, the total compensation cost related to options to
purchase the Company's common stock under the ESPP but not yet recognized was
approximately $32,000. This cost will be amortized on a straight-line basis
over a weighted average period of approximately 0.7 years.
Valuation Assumptions
Valuation and Amortization Method. The Company estimates the fair value
of stock options granted using the Black-Scholes option valuation model. The
single option award approach has been used for all options granted after June
1, 2006. The multiple option approach has been used for all options granted
prior to June 1, 2006. The fair value under the single option approach is
amortized on a straight-line basis over the requisite service period of the
awards, which is generally the vesting period. The fair value under the
multiple option approach is amortized on a weighted basis over the requisite
service period of the awards, which is generally the vesting period.
Expected Term. The Company's expected term represents the period that the
Company's stock-based awards are expected to be outstanding and was determined
based on historical experience, giving consideration to the contractual terms
of the stock-based awards, vesting schedules and expectations of future
employee behavior as evidenced by changes to the terms of the Company's stock-
based awards.
Expected Volatility. Volatility is a measure of the amounts by which a
financial variable such as stock price has fluctuated (historical volatility)
or is expected to fluctuate (expected volatility) during a period. The
8
Company uses the historical volatility for the past five years, which matches
the term of most of the option grants, to estimate expected volatility.
Volatility for each of the ESPP's four time periods of six months, twelve
months, eighteen months, and twenty-four months is calculated separately and
included in the overall stock-based compensation cost recorded.
Dividends. The Company has never paid any cash dividends on its common
stock and we do not anticipate paying any cash dividends in the foreseeable
future. Consequently, we use an expected dividend yield of zero in the Black-
Scholes option valuation 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 nine months ended February 28, 2011 and 2010 were
estimated using the following weighted average assumptions in the Black-
Scholes option valuation model. There were no option grants during the three
months ended February 28, 2010.
Three months ended Nine Months Ended
February 28, February 28,
------------------ -----------------
2011 2010 2011 2010
------- ------- ------- -------
Option Plan Shares
Expected Term (in years).................... 5 N/A 5 5
Volatility.................................. 0.80 N/A 0.80 0.78
Expected Dividend........................... $0.00 N/A $0.00 $0.00
Risk-free Interest Rates.................... 1.96% N/A 1.72% 2.53%
Estimated Forfeiture Rate................... 0.25% N/A 0.25% 0.25%
Weighted Average Grant Date Fair Value...... $0.85 N/A $1.20 $0.56
The fair values of the ESPP shares for the nine months ended February 28,
2011 and 2010, respectively, were estimated using the following weighted-
average assumptions:
Nine Months Ended
February 28,
---------------------
2011 2010
--------- ---------
Employee Stock Purchase Plan Shares
Expected Term (in years).................. 0.5-2.0 0.5-2.0
Volatility................................ 0.85-0.94 0.79-1.08
Expected Dividend......................... $0.00 $0.00
Risk-free Interest Rates.................. 0.2%-0.4% 0.2%-0.9%
Estimated Forfeiture Rate................. 0% 0%
Weighted Average Grant Date Fair Value.... $0.74 $0.62
There were no ESPP shares granted to employee for the three months ended
February 28, 2011 and 2010.
The following table summarizes the stock option transactions during the
three and nine months ended February 28, 2011 (in thousands, except per share
data):
9
Outstanding Options
--------------------------------------------
Weighted
Number Average Aggregate
Available of Exercise Intrinsic
Shares Shares Price Value
---------- -------- --------- ----------
Balances, May 31, 2010........ 998 1,949 $3.88 $833
Options granted............. (434) 434 $1.97
Options terminated.......... 115 (115) $3.41
Options exercised........... -- (14) $0.86
Plan shares expired......... (63) --
---------- --------
Balances, August 31, 2010..... 616 2,254 $3.56 $173
Options granted............. (65) 65 $1.32
Options terminated.......... 126 (126) $5.34
Options exercised........... -- (3) $0.85
Plan shares expired......... (43) --
---------- --------
Balances, November 30, 2010... 634 2,190 $3.40 $ 39
Options granted............. (2) 2 $1.31
Options terminated.......... 40 (40) $2.57
Options exercised........... -- (4) $0.85
---------- --------
Balances, February 28, 2011... 672 2,148 $3.41 $493
========== ========
Options exercisable and expected to be
exercisable at February 28, 2011 2,105 $3.41 $483
========
The options outstanding and exercisable at February 28, 2011 were in the
following exercise price ranges (in thousands, except per share data):
Options Outstanding Options Exercisable
at February 28, 2011 at February 28, 2011
-------------------------------- --------------------------------------
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-$0.85 480 3.33 $0.85 407 $0.85 3.33
$1.29-$2.81 871 3.41 $2.12 396 $2.31 2.63
$2.84-$5.96 434 0.98 $4.62 418 $4.58 0.96
$6.00-$9.30 241 1.91 $7.69 231 $7.72 1.92
$9.94-$9.94 122 2.32 $9.94 82 $9.94 2.32
----------- -------
$0.85-$9.94 2,148 2.67 $3.41 1,534 $3.76 2.24 $403
=========== =======
The total intrinsic value of options exercised during the three and nine
months ended February 28, 2011 was $1,000 and $3,000, respectively. The total
intrinsic value of options exercised during the three and nine months ended
February 28, 2010 was $1,000 and $1,000, respectively. The weighted average
remaining contractual life of the options exercisable and expected to be
exercisable at February 28, 2011 was 2.7 years.
Options to purchase 1,534,000 and 1,225,000 shares were exercisable at
February 28, 2011 and 2010, respectively. These exercisable options had
weighted average exercise prices of $3.76 and $4.31 as of February 28, 2011
and 2010, respectively.
10
3. EARNINGS PER SHARE
Earnings per share is computed based on the weighted average number of
common and common equivalent shares (common stock options and ESPP shares)
outstanding, when dilutive, during each period using the treasury stock
method.
Three Months Ended Nine Months Ended
February 28, February 28,
-------- -------- -------- --------
2011 2010 2011 2010
-------- -------- -------- --------
(in thousands, except per share amounts)
Numerator: Net (loss) income.............. $ (946) $1,535 $(3,229) $ 338
-------- -------- -------- --------
Denominator for basic net (loss) income
per share:
Weighted-average shares outstanding ..... 8,828 8,601 8,742 8,541
-------- -------- -------- --------
Shares used in basic net (loss) income per
share calculation........................ 8,828 8,601 8,742 8,541
Effect of dilutive securities.............. -- 158 -- 53
-------- -------- -------- --------
Denominator for diluted net (loss) income
per share.............................. 8,828 8,759 8,742 8,594
-------- -------- -------- --------
Basic net (loss) income per share.......... $(0.11) $ 0.18 $ (0.37) $0.04
======== ======== ======== ========
Diluted net (loss) income per share........ $(0.11) $ 0.18 $ (0.37) $0.04
======== ======== ======== ========
For the purpose of computing diluted earnings per share, weighted average
potential common shares do not include stock options with an exercise price
greater than the average fair value of the Company's common stock for the
period, as the effect would be anti-dilutive. Potential common shares have
not been included in the calculation of diluted net loss per share as the
effect would be anti-dilutive. As such, the numerator and the denominator
used in computing both basic and diluted net loss per share are the same.
Stock options to purchase 2,148,000 shares of common stock were outstanding on
February 28, 2011, 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 1,430,000 shares of common stock were outstanding on
February 28, 2010, but not included in the computation of diluted net income
per share, because the inclusion of such shares would be anti-dilutive.
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
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
11
independent sources while unobservable inputs reflect a reporting entity's
pricing based upon their own market assumptions. The fair value hierarchy
consists of the following three levels:
Level 1 - instrument valuations are obtained from real-time quotes for
transactions in active exchange markets involving identical assets.
Level 2 - instrument valuations are obtained from readily-available pricing
sources for comparable instruments.
Level 3 - instrument valuations are obtained without observable market values
and require a high level of judgment to determine the fair value.
The following table summarizes the Company's assets and liabilities
measured at fair value on a recurring basis as of February 28, 2011 and May
31, 2010 (in thousands):
Balance as of
February 28, 2011 Level 1 Level 2
----------------- ---------- ----------
Money market funds.............. $1,886 $1,886 $ --
----------------- ---------- ----------
Assets.......................... $1,886 $1,886 $ --
================= ========== ==========
Liabilities..................... $ -- $ -- $ --
================= ========== ==========
Balance as of
May 31, 2010 Level 1 Level 2
----------------- ---------- ----------
Money market funds.............. $6,428 $6,428 $ --
----------------- ---------- ----------
Assets.......................... $6,428 $6,428 $ --
================= ========== ==========
Liabilities..................... $ -- $ -- $ --
================= ========== ==========
As of February 28, 2011, 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 equity securities 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 February 28, 2011
and May 31, 2010, the carrying value of the strategic investments was
$384,000.
5. ACCOUNTS RECEIVABLE, NET
Accounts receivable represents customer trade receivables and is
presented net of allowance for doubtful accounts of $33,000 at February 28,
2011 and $1,411,000 at May 31, 2010. Accounts receivable is derived from the
sale of products throughout the world to semiconductor manufacturers,
semiconductor contract assemblers, electronics manufacturers and burn-in and
test service companies. The Company's allowance for doubtful accounts is
based upon historical experience and review of trade receivables by aging
category to identify specific customers with known disputes or collection
issues. Uncollectible receivables are recorded as bad debt expense when all
efforts to collect have been exhausted and recoveries are recognized when they
are received.
12
6. INVENTORIES
Inventories are comprised of the following (in thousands):
February 28, May 31,
2011 2010
----------- -----------
Raw materials and sub-assemblies........ $1,471 $ 754
Work in process......................... 3,044 2,633
Finished goods.......................... 172 248
----------- -----------
$4,687 $3,635
=========== ===========
7. SEGMENT INFORMATION
The Company operates in one reportable segment: the design, manufacture
and marketing of advanced test and burn-in products to the semiconductor
manufacturing industry.
The following presents information about the Company's operations in
different geographic areas (in thousands):
United
States Asia Europe Total
--------- --------- --------- ---------
Three months ended February 28, 2011:
Net sales........................... $4,159 $20 $63 $4,242
Property and equipment, net......... 990 76 12 1,078
Nine months ended February 28, 2011:
Net sales........................... $8,905 $703 $380 $9,988
Property and equipment, net......... 990 76 12 1,078
Three months ended February 28, 2010:
Net sales........................... $5,085 $81 $27 $5,193
Property and equipment, net......... 1,554 82 18 1,654
Nine months ended February 28, 2010:
Net sales........................... $7,646 $189 $272 $8,107
Property and equipment, net......... 1,554 82 18 1,654
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
95% and 87% of its net sales in the three and nine months ended February 28,
2011, respectively. One customer, Spansion Inc. ("Spansion"), accounted for
approximately 73% and 64% of the Company's net sales in the three and nine
months ended February 28, 2011. One customer, Texas Instruments Inc.,
accounted for approximately 12% of the Company's net sales in the nine months
ended February 28, 2011. Sales to the Company's five largest customers
accounted for approximately 96% and 84% of its net sales in the three and nine
months ended February 28, 2010, respectively. One customer, Spansion,
accounted for approximately 81% and 59% of the Company's net sales in the
three and nine months ended February 28, 2010, respectively. No other
customers represented more than 10% of the Company's net sales for either
fiscal 2011 or fiscal 2010.
8. PRODUCT WARRANTIES
The Company provides for the estimated cost of product warranties at the
time products are shipped. While the Company engages in extensive product
13
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 nine months ended February 28, 2011 and 2010
(in thousands):
Three Months Ended Nine Months Ended
February 28, February 28,
------------------ -----------------
2011 2010 2011 2010
-------- -------- -------- -------
Balance at the beginning of the period.... $97 $230 $174 $314
Accruals for warranties issued
during the period....................... 26 26 86 66
Reversals of warranties issued
during the period....................... -- -- (88) (28)
Settlement made during the period
(in cash or in kind).................... (41) (52) (90) (148)
-------- ------- -------- -------
Balance at the end of the period.......... $82 $204 $ 82 $204
======== ======= ======== =======
The accrued warranty balance is included in accrued expenses on the
accompanying condensed consolidated balance sheets.
9. GAIN ON BANKRUPTCY CLAIM
Spansion, the Company's largest customer in fiscal 2009 and 2010, filed
for bankruptcy in Japan in February 2009 and in the United States in March
2009. The Company filed claims in the Spansion U.S. and Spansion Japan
bankruptcy actions. In the first quarter of fiscal 2010, the Company sold a
portion of its Spansion U.S. bankruptcy claim to a third party for net
proceeds of approximately $3.3 million and recorded the amount as a reduction
of operating expenses. In the third quarter of fiscal 2010, the Company sold
the remaining balance of $7.1 million of its Spansion U.S. bankruptcy claim to
a third party for net proceeds of approximately $4.6 million and recorded $2.7
million as revenue related to cancellation charges, $1.3 million as deferred
revenue and $0.6 million as a reduction of operating expenses. In the first
quarter of fiscal 2011, the Company's Japanese subsidiary received
approximately $155,000 in proceeds from the Spansion Japan bankruptcy claim
and recorded the amount as a reduction of operating expenses.
10. OTHER COMPREHENSIVE LOSS
Other comprehensive loss, net of tax is comprised of the following (in
thousands):
Three Months Ended Nine Months Ended
February 28, February 28,
------------------ ------------------
2011 2010 2011 2010
-------- -------- -------- --------
Net (loss) income....................... $(946) $1,535 $(3,229) $338
Foreign currency translation adjustments 57 (95) 47 (22)
-------- -------- -------- -------
Comprehensive (loss) income............. $(889) $1,440 $(3,182) $316
======== ======== ======== ========
14
11. INCOME TAXES
Income taxes have been provided using the liability method whereby
deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and net
operating loss and tax credit carry-forwards measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse or the carry-forwards are utilized. Valuation allowances are
established when it is determined that it is more likely than not that such
assets will not be realized.
During fiscal 2009, a full valuation allowance was established against all
deferred tax assets as management determined that it is more likely than not
that the Company's deferred tax assets will not be realized.
The Company accounts for uncertain tax positions consistent with
authoritative guidance. The guidance prescribes a "more likely than not"
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in
a tax return. The Company does not expect any material change in its
unrecognized tax benefits over the next twelve months. The Company recognizes
interest and penalties related to unrecognized tax benefits as a component of
income taxes.
Although the Company files U.S. federal, various state, and foreign tax
returns, the Company's only major tax jurisdictions are the United States,
California, Germany and Japan. Tax years 1996 - 2009 remain subject to
examination by the appropriate governmental agencies due to tax loss
carryovers from those years.
12. RECENT ACCOUNTING PRONOUNCEMENTS
In October 2009, the Financial Accounting Standards Board, or 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, or VSOE, or other third party evidence, or TPE,
of the selling price for the deliverables in a multiple-element arrangement,
guidance requires companies to use an estimated selling price, or 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. The Company will adopt this
guidance in the first quarter of fiscal year 2012. The implementation of this
authoritative guidance is not expected to have a material impact on the
Company's financial position or results of operations.
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. 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. The Company will adopt this guidance in
the first quarter of fiscal year 2012. The implementation of this
authoritative guidance is not expected to have a material impact on the
Company's financial position or results of operations.
In January 2010, the FASB issued amended standards that require additional
fair value disclosures. These amended standards require disclosures for
significant transfers in and out of Level 1 and Level 2 fair value
15
measurements and the reasons for the transfers and activity. For Level 3 fair
value measurements, purchases, sales, issuances and settlements must be
reported on a gross basis. Further, additional disclosures are required by
class of assets or liabilities, as well as inputs used to measure fair value
and valuation techniques. The Company adopted these standards in the first
quarter of 2010. These standards did not have a material impact on the
Company's condensed consolidated financial statements.
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, 2010 and the condensed 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 the Company, 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 SEC. All forward-looking
statements included in this document are based on our current expectations,
and we undertake no obligation to revise or publicly release the results of
any revision to these forward-looking statements. Given these risks and
uncertainties, readers are cautioned not to place undue reliance on such
forward-looking statements.
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, or ABTS, the FOX full wafer contact parallel test and
burn-in system, the MAX burn-in system, WaferPak contactors and the DiePak
carrier.
The Company's net sales consist primarily of sales of systems, test
fixtures, die carriers, upgrades and spare parts and revenues from service
contracts and cancellation charges. The Company's selling arrangements may
include contractual customer acceptance provisions and installation of the
product occurs after shipment and transfer of title.
CRITICAL ACCOUNTING POLICIES
The Company's discussion and analysis of its financial condition and
results of operations are based upon the Company's condensed consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The
preparation of these condensed consolidated financial statements requires the
16
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, 2010. We believe there have been no
material changes to our critical accounting policies and estimates during the
nine months ended February 28, 2011 compared to those discussed in our Annual
Report on Form 10-K for the fiscal year ended May 31, 2010.
RESULTS OF OPERATIONS
The following table sets forth items in the Company's unaudited condensed
consolidated statements of operation as a percentage of net sales for the
periods indicated.
Three Months Ended Nine Months Ended
February 28, February 28,
------------------ ------------------
2011 2010 2011 2010
-------- -------- -------- --------
Net sales:
Product sales. . . . . . . . . . . . . 100.0 % 47.2 % 100.0 % 66.2 %
Cancellation charges . . . . . . . . . -- 52.8 -- 33.8
-------- -------- -------- --------
Total net sales. . . . . . . . . . 100.0 100.0 100.0 100.0
Cost of sales. . . . . . . . . . . . . . 62.2 22.7 60.9 46.9
-------- -------- -------- --------
Gross profit . . . . . . . . . . . . . . 37.8 77.3 39.1 53.1
-------- -------- -------- --------
Operating expenses:
Selling, general and administrative. . 35.0 32.0 45.0 56.7
Research and development . . . . . . . 24.5 27.9 33.8 42.8
Gain on bankruptcy claim . . . . . . . -- (11.2) (1.5) (47.8)
-------- -------- -------- --------
Total operating expenses . . . . . 59.5 48.7 77.3 51.7
-------- -------- -------- --------
(Loss) income from operations. . . . . . (21.7) 28.6 (38.2) 1.4
Interest income. . . . . . . . . . . . . -- -- -- 0.1
Other (expense) income, net. . . . . . . (0.7) 1.1 6.0 0.8
-------- -------- -------- --------
(Loss) income before income tax
expense (benefit). . . . . . . . . . . (22.4) 29.7 (32.2) 2.3
Income tax expense (benefit) . . . . . . (0.1) 0.1 0.1 (1.9)
-------- -------- -------- --------
Net (loss) income. . . . . . . . . . . . (22.3)% 29.6 % (32.3)% 4.2 %
======== ======== ======== ========
THREE MONTHS ENDED FEBRUARY 28, 2011 COMPARED TO THREE MONTHS ENDED FEBRUARY
28, 2010
NET SALES. Net sales decreased to $4.2 million for the three months ended
February 28, 2011 from $5.2 million for the three months ended February 28,
2010, a decrease of 18.3%. Net sales for the three months ended February 28,
2010 included $2.7 million of cancellation charges. No cancellation charges
were recorded for the three months ended February 28, 2011. In the third
quarter of fiscal 2010, the Company sold the remainder of its Spansion U.S.
17
bankruptcy claim for net proceeds of approximately $4.6 million, and recorded
$2.7 million as revenue related to cancellation charges.
Product sales were $4.2 for the three months ended February 28, 2011
compared to $2.5 million for the three months ended February 28, 2010. The
increase in product sales for the three months ended February 28, 2011
resulted primarily from an increase in net sales of the Company's wafer-level
products to $3.1 million, an increase of $1.6 million from the $1.5 million
for three months ended February 28, 2010.
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 $1.6 million
for the three months ended February 28, 2011 from a gross profit of $4.0
million for the three months ended February 28, 2010, a decrease of $2.4
million. Included in the third quarter of fiscal 2010 gross profit was $2.7
million of gross profit related to cancellation charges in the Spansion
bankruptcy claim. Gross profit margin decreased to 37.8% for the three
months ended February 28, 2011 from 77.3% for the three months ended February
28, 2010. The decrease in gross profit margin was primarily the result of the
cancellation charges in net sales for the three months ended February 28,
2010.
Excluding the impact of cancellation charges, gross profit margin related
to product sales decreased to 37.8% for the three months ended February 28,
2011 from 52.0% for the three months ended February 28, 2010. Gross profit
margin on product sales decreased because in the three months ended February
28, 2010, a higher than normal proportion of shipments had low costs, as some
of the shipments included inventory items that had previously been fully
reserved.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative,
or 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 $1.5 million in
the three months ended February 28, 2011 decreased from $1.7 million in the
three months ended February 28, 2010, a decrease of $0.2 million. The
decrease in SG&A expenses was primarily due to a decrease in employment
related expenses resulting from lower bonus accruals.
RESEARCH AND DEVELOPMENT. Research and development, or 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 $1.0 million for the three months ended February 28, 2011 from
$1.5 million for the three months ended February 28, 2010, a decrease of $0.5
million. This decrease was primarily attributable to the inclusion of a $0.2
million write-down of capital equipment in fiscal 2010. In addition, R&D
employment related expenses decreased by $0.1 million resulting from lower
bonus accruals, and outside services decreased by $0.1 million due to a
decrease in patent filings on new products.
GAIN ON BANKRUPTCY CLAIM. In the third quarter of fiscal 2010, the
Company sold the remaining balance of its Spansion U.S. bankruptcy claim for
net proceeds of approximately $4.6 million, of which $0.6 million was recorded
as a reduction of operating expenses.
INTEREST INCOME. Interest income was nil for the three months ended
February 28, 2011, down from $1,000 for the three months ended February 28,
2010. The decrease in net interest income for the three months ended February
28, 2011 was primarily related to lower average cash and cash equivalent
balances.
OTHER (EXPENSE) INCOME, NET. Other expense was $30,000 for the three
months ended February 28, 2011 compared to other income of $55,000 for the
three months ended February 28, 2010. The change in other (expense) income
18
was primarily related to foreign exchange gains and losses on settlement of
transactions in the Company's German subsidiary.
INCOME TAX (BENEFIT) EXPENSE. An income tax benefit of $4,000 was
recognized for the three months ended February 28, 2011, compared with an
income tax expense of $5,000 for the three months ended February 28, 2010.
NINE MONTHS ENDED FEBRUARY 28, 2011 COMPARED TO NINE MONTHS ENDED FEBRUARY 28,
2010
NET SALES. Net sales increased to $10.0 million for the nine months ended
February 28, 2011 from $8.1 million for the nine months ended February 28,
2010, an increase of 23.2%. Net sales for the nine months ended February 28,
2010 included $2.7 million of cancellation charges. No cancellation charges
were recorded for the nine months ended February 28, 2011. In the third
quarter of fiscal 2010, the Company sold the remainder of its Spansion U.S.
bankruptcy claim for net proceeds of approximately $4.6 million, and recorded
$2.7 million as revenue related to cancellation charges.
Product sales were $10.0 million for the nine months ended February 28,
2011 compared to $5.4 million for the nine months ended February 28, 2010.
The increase in product sales resulted primarily from increases in net sales
of the Company's wafer-level products to $6.8 million, an increase of
approximately $4.8 million from the $2.0 million for the nine months ended
February 28, 2010.
GROSS PROFIT. Gross profit decreased to $3.9 million for the nine months
ended February 28, 2011 from $4.3 million for the nine months ended February
28, 2010, a decrease of 9.4%. Gross profit margin decreased to 39.1% for the
nine months ended February 28, 2011 from 53.1% for the nine months ended
February 28, 2010. The decrease in gross profit margin was primarily the
result of the cancellation charges in net sales in the nine months ended
February 28, 2010.
Excluding the impact of cancellation charges, gross profit margin related
to product sales increased to 39.1% for the nine months ended February 28,
2011 from 29.2% for the nine months ended February 28, 2010. The increase in
gross profit margin on product sales was due primarily to manufacturing
efficiencies resulting from an increase in product sales in the nine months
ended February 28, 2011.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses decreased to $4.5
million for the nine months ended February 28, 2011 from $4.6 million for the
nine months ended February 28, 2010, a decrease of $0.1 million. The decrease
in SG&A expenses was primarily due to a decrease in employment related
expenses. The decrease in employment related expenses was primarily due to a
decrease of $0.4 million in option compensation expense from the impact of
forfeited options in fiscal 2010, offset by an increase in salaries and labor
costs of $0.3 million from the elimination of certain cost reduction
initiatives previously implemented.
RESEARCH AND DEVELOPMENT. R&D expenses decreased to $3.4 million for the
nine months ended February 28, 2011 from $3.5 million for the nine months
ended February 28, 2010, a decrease of $0.1 million. This decrease was
primarily attributable to the inclusion of a $0.2 million write-down of
capital equipment in fiscal 2010. This was partially offset by an increase in
R&D employment related expenses of $0.1. The increase in employment related
expenses was primarily due to an increase in salaries and labor costs of $0.3
million from the elimination of certain cost reduction initiatives previously
implemented, offset by a decrease of $0.2 million in option compensation
expense from the impact of forfeited options in fiscal 2010.
GAIN ON BANKRUPTCY CLAIM. In the first quarter of fiscal 2010, the
Company sold a portion of its Spansion U.S. bankruptcy claim to a third party
for net proceeds of approximately $3.3 million and recorded the amount as a
reduction of operating expenses. In the third quarter of fiscal 2010, the
19
Company sold the remaining balance of its Spansion U.S. bankruptcy claim for
net proceeds of approximately $4.6 million, of which $0.6 million was recorded
as a reduction of operating expenses. In the first quarter of fiscal 2011,
the Company's Japanese subsidiary received approximately $155,000 in proceeds
from the Spansion Japan bankruptcy claim and recorded the amount as a
reduction of operating expenses.
INTEREST INCOME. Interest income decreased to $3,000 for the nine months
ended February 28, 2011 from $4,000 for the nine months ended February 28,
2010. The decrease in net interest income for the nine months ended February
28, 2011 was related to lower average cash and cash equivalent balances.
OTHER INCOME, NET. Other income increased to $593,000 for the nine months
ended February 28, 2011 from $67,000 for the nine months ended February 28,
2010. The increase in other income was primarily attributable to the receipt
of a $575,000 dividend payment in the second quarter of fiscal 2011 related to
a long-term investment.
INCOME TAX EXPENSE (BENEFIT). Income tax expense was $7,000 for the nine
months ended February 28, 2011, compared with an income tax benefit of
$157,000 for the nine months ended February 28, 2010. The income tax benefit
for the nine months ended February 28, 2010 was related to the increase in the
Net Operating Loss carry-back period from two to five years and the inclusion
of alternative minimum taxes paid in the carry-back calculation.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $4.5 million for the nine months
ended February 28, 2011 and net cash provided by operating activities was $4.1
million for the nine months ended February 28, 2010. For the nine months
ended February 28, 2011, net cash used in operating activities was primarily
driven by the net loss of $3.2 million, and increases in accounts receivable
and inventories of $1.4 million and $1.0 million, respectively. The increase
in accounts receivable was primarily due to an increase in revenues for the
nine months ended February 28, 2011 compared to the same period in the prior
fiscal year. The increase in inventories is to support future shipments for
customer orders. This was partially offset by stock-based compensation of
$0.7 million and depreciation and amortization of $0.4 million. For the nine
months ended February 28, 2010, net cash provided by operating activities was
primarily the result of an increase in accrued expenses and deferred revenue
of $2.0 million and stock based compensation of $1.4 million. Included in the
accrued expenses and deferred revenue for the nine months ended February 28,
2010 was $1.3 million related to the sale of the remainder of the Spansion
bankruptcy claim.
Net cash used in investing activities was $6,000 for the nine months ended
February 28, 2011 and $65,000 for the nine months ended February 28, 2010.
The net cash used in investing activities during the nine months ended
February 28, 2011 and 2010 was primarily due to purchases of property and
equipment.
Financing activities provided cash of $246,000 for the nine months ended
February 28, 2011 and $100,000 for the nine months ended February 28, 2010.
Net cash provided by financing activities during the nine months ended
February 28, 2011 and 2010 was primarily due to proceeds from issuance of
common stock for the ESPP, the Employee Stock Ownership Plan and from the
exercise of stock options.
The effect of exchange rates on cash provided $254,000 for the nine months
ended February 28, 2011, compared to $190,000 for the nine months ended
February 28, 2010. The increase in cash provided is due to the change in the
value of the dollar compared to foreign currencies.
As of February 28, 2011, the Company had working capital of $8.0 million.
Working capital consists of cash and cash equivalents, accounts receivable,
inventory and other current assets, less current liabilities.
20
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.
If consummated, any such transactions 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, will be adequate to meet its working capital and
capital equipment requirements through the next twelve months. Depending on
its ability to grow revenues and achieve 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 the
Company will grow revenues or achieve or maintain profitability or that the
Company's cash flows from operations will meet its future needs. If the
Company is required to raise additional capital, it may not be successful in
doing so. Even if it is able to raise additional capital, the terms of such a
financing may be onerous and could result in significant dilution to the
Company's shareholders or a loss in value of the Company's stock.
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, 2010.
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. The Company 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 the 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 condensed 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
21
loss. There have not been any significant changes in risk exposures since the
end of the last fiscal year, and management does not expect any material
changes in market risks.
The Company had no holdings of derivative financial or commodity
instruments at February 28, 2011.
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 SEC rules and forms, and that such information is accumulated
and communicated to management as appropriate to allow for timely decisions
regarding required disclosure.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING. There was no
change in our internal control over financial reporting 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.
Periodic economic and semiconductor industry downturns could continue to
negatively affect our business, results of operations, and financial
condition.
The recent and historical global economic and semiconductor industry
downturns negatively affected and could continue to negatively affect our
business, results of operations, and financial condition. The recent
financial turmoil affected the banking system and financial markets resulting
in a tightening of the credit markets, disruption in the financial markets and
global economy downturn. These events contributed to significant slowdowns in
the industries in which we operate. Difficulties in obtaining capital and
deteriorating market conditions can pose the 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. Customers with liquidity issues may
lead to additional bad debt expense for the Company. For example, Spansion
declared bankruptcy in Japan and the U.S. during fiscal 2009; as a result the
Company subsequently recorded a $13.7 million provision for bad debts. A
recurrence of these conditions may also similarly affect our key suppliers,
which could impact their ability to deliver parts and result in delays in
deliveries of our products.
Turmoil in the international 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 have historically
declined, and will likely 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 calendar 2009, and that the
uncertainty of the memory market may cause some manufacturers in the future to
again delay capital spending plans. Economic conditions 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, some governments have subsidized portions of fabrication facility
construction, and 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.
The recent economic conditions and uncertainty about future economic
conditions made 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 such conditions recur, and
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.
23
If we are not able to reduce our operating expenses sufficiently during
periods of weak revenue, or if we utilize significant amounts of cash to
support operating losses, we may erode our cash resources and may not have
sufficient cash to operate our business.
In the face of the recent sustained downturn in our business and decline
in our net sales, we 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 then weak market for test
and burn-in equipment. While we took significant steps in fiscal 2009 to
minimize our expense levels and to increase the likelihood that we would have
sufficient cash to support operations during the downturn, during fiscal 2009
and fiscal 2010 we experienced operating losses. Due primarily to these
operating losses in fiscal 2009 and fiscal 2010, we experienced net cash
outflows. Should our business 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 together with cash flows from operations will be
sufficient to satisfy our cash requirements through the next twelve months, 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 generate a large portion of our sales from a small number of customers. If
we were to lose one or more of our large customers, operating results could
suffer dramatically.
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 95% and 87% of its net sales in the three and nine
months ended February 28, 2011, respectively. One customer, Spansion Inc.
("Spansion"), accounted for approximately 73% and 64% of the Company's net
sales in the three and nine months ended February 28, 2011. One customer,
Texas Instruments Inc., accounted for approximately 12% of the Company's net
sales in the nine months ended February 28, 2011. Sales to the Company's five
largest customers accounted for approximately 96% and 84% of its net sales in
the three and nine months ended February 28, 2010, respectively. One
customer, Spansion, accounted for approximately 81% and 59% of the Company's
net sales in the three and nine months ended February 28, 2010, respectively.
No other customers represented more than 10% of the Company's net sales for
either fiscal 2011 or fiscal 2010.
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, during fiscal 2009 Spansion, our largest customer at the time,
declared bankruptcy in Japan and in the U.S., and subsequently placed lower
levels of orders with the Company, which caused our net sales to drop
dramatically and impacted the Company's ability to collect on accounts
receivable.
A substantial portion of our net sales is generated by relatively small
volume, high value transactions.
We derive a substantial portion of our net sales from the sale of a
relatively small number of systems which typically range in purchase price
from approximately $200,000 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
24
the customer with limited penalties, and, therefore, backlog at any particular
date is not necessarily indicative of actual sales for any succeeding period.
From time to time, cancellations and rescheduling of customer orders have
occurred, and delays by our suppliers in providing components or subassemblies
to us have caused delays in our shipments of our own products. There can be
no assurance that we will not be materially adversely affected by future
cancellations or rescheduling. Certain contracts contain provisions that
require customer acceptance prior to recognition of revenue. The delay in
customer acceptance could have a material adverse effect on our operating
results. A substantial portion of net sales typically are realized near the
end of each quarter. A delay or reduction in shipments near the end of a
particular quarter, due, for example, to unanticipated shipment rescheduling,
cancellations or deferrals by customers, customer credit issues, unexpected
manufacturing difficulties experienced by us or delays in deliveries by
suppliers, could cause net sales in a particular quarter to fall significantly
below our expectations.
The Company's business operations could be negatively impacted by earthquakes
or other natural disasters.
The recent Japanese earthquake and resulting tsunami may affect the
Company's business operations. Our Japanese subsidiary is located in Tokyo
and as of the date of this filing all of our Japanese employees are reported
safe and our office was not damaged. However, there can be no assurances that
future operations and revenue may not be seriously affected by, among other
things, the rolling electrical blackouts and industry wide shutdowns now
occurring in Japan as well as the potential of a nuclear disaster occurring at
a power plant installation within two hundred miles of our Tokyo office. The
disaster in Japan may also result in a downturn in the Japanese economy as a
whole. These occurring or potential events may seriously damage our ability
to conduct business in Japan or, in the worst case, cause operations in Japan
to completely cease with our business suffering a material downturn.
Natural disasters may impact our ability to manufacture product in the
event our facility is damaged, or if operations are disrupted at a major
supplier. The demand for our product may be negatively affected if a natural
disaster impacts one of our significant customers.
We rely on increasing 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 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 Systems. As is common with new
complex products incorporating leading-edge technologies, we may encounter
reliability, design and manufacturing issues as we begin volume production and
initial installations of FOX systems at customer sites. The failure of the
FOX system to achieve increased market acceptance would have a material
adverse effect on our future operating results, long-term prospects and our
stock price.
We rely on increasing 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.
25
Since the introduction of the ABTS product in fiscal 2008, the Company has
shipped a limited number of ABTS systems. Market acceptance of the ABTS
system is subject to a number of risks. We must complete engineering
development of certain necessary hardware and software features. 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 IC product generation matures and yields increase, the required burn-in
time may be reduced or eliminated. IC 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 ABTS system
may cannibalize the business that would previously have been addressed by the
MAX system. Our success depends upon some continued acceptance of our MAX
burn-in products 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 not decline.
We sell our products and services worldwide, and our business is subject to
risks inherent in conducting business activities in geographic regions outside
of the United States.
Approximately 29%, 72% and 61% of our net sales for fiscal 2010, 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 net sales. 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.
Approximately 95%, 2% and 3% of our net sales for fiscal 2010 were
denominated in U.S. Dollars, Japanese Yen and Euros, respectively. Although a
large percentage of net sales to European customers are denominated in U.S.
Dollars, substantially all sales to Japanese customers are denominated in Yen.
Because a substantial portion of our net sales is from sales of products for
delivery outside the United States, an increase in the value of the U.S.
Dollar relative to foreign currencies would increase the cost of our products
compared to products sold by local companies in such markets. In addition,
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
26
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 change 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 increased costs associated with new product introductions.
As is common with new 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.
Our dependence on subcontractors and sole source suppliers may prevent us from
delivering our products on a timely basis and expose us to intellectual
property infringement.
We rely on subcontractors to manufacture many of the components or
subassemblies used in its products. Our ABTS, FOX and MAX systems, WaferPak
contactors, and DiePak carriers contain several components, including
environmental chambers, power supplies, high-density interconnects, wafer
contactors, signal distribution substrates and certain ICs that are currently
supplied by only one or a limited number of suppliers. Our reliance on
subcontractors and single source suppliers involves a number of significant
27
risks, including the loss of control over the manufacturing process, the
potential absence of adequate capacity and reduced control over delivery
schedules, manufacturing yields, quality and costs. In the event that any
significant subcontractor or single source supplier becomes unable or
unwilling to continue to manufacture subassemblies, components or parts in
required volumes, we will have to identify and qualify acceptable
replacements. The process of qualifying subcontractors and suppliers could be
lengthy, and no assurance can be given that any additional sources would be
available to us on a timely basis. Any delay, interruption or termination of
a supplier relationship could adversely affect our ability to deliver
products, which would harm our operating results.
Our suppliers manufacture components, tooling, and provide engineering
services which allows access to intellectual property of the Company. While
the Company maintains patents to protect from intellectual property
infringement, there can be no assurance that technological information gained
in the manufacture of our products will not be used to develop a new product,
improve processes or techniques which compete against our products.
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.
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, or 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 ICs. 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. A significant increase in purchase order cancellations was recognized
in the third quarter of fiscal 2009 as a result of the Spansion bankruptcy
filing. There can be no assurance that we will not be materially adversely
affected by future cancellations or rescheduling of purchase orders.
Our stock price may fluctuate.
The price of our common stock has fluctuated in the past and may fluctuate
significantly in the future. We believe that factors such as announcements of
developments related to our business, fluctuations in our operating results,
failure to meet securities analysts' expectations, general conditions in the
semiconductor and semiconductor equipment industries and the worldwide
economy, announcement of technological innovations, new systems or product
enhancements by us or our competitors, fluctuations in the level of
cooperative development funding, acquisitions, changes in governmental
regulations, developments in patents or other intellectual property rights and
changes in our relationships with customers and suppliers could cause the
price of our common stock to fluctuate substantially. In addition, in recent
years the stock market in general, and the market for small capitalization and
28
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.
The Company may not meet the listing requirements of the NASDAQ markets which
could cause our stock to be delisted.
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"),
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. 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.
On January 18, 2011 the Company received notice from NASDAQ that it
was no longer in compliance with NASDAQ's Listing Rule 5450(b)(1)(A), which
specifies that an issuer must maintain stockholders' equity of at least $10
million. On March 21, 2011 the Company submitted an application to NASDAQ
to transfer the listing of its company stock from the NASDAQ Global Market
to the NASDAQ Capital Market. On March 24, 2011 the Company received a
letter from NASDAQ informing it that the NASDAQ Listing Qualifications
Staff had granted the Company's request to transfer the listing of its
common stock to the NASDAQ Capital Market, effective at the opening of
business on March 28, 2011.
There can be no assurance that the Company will continue to meet the
listing requirements of the NASDAQ Capital Market, or that it will not be
delisted.
We depend on our key personnel and our success depends on our ability to
attract and retain talented employees.
Our success depends to a significant extent upon the continued service of
Rhea Posedel, our Chief Executive Officer, as well as other executive officers
and key employees. We do not maintain key person life insurance for our
benefit on any of our personnel, and none of our employees are subject to a
non-competition agreement with the Company. The loss of the services of any
of our executive officers or a group of key employees could have a material
adverse effect on our business, financial condition and operating results.
Our future success will depend in significant part upon our ability to attract
and retain highly skilled technical, management, sales and marketing
personnel. There is a limited number of personnel with the requisite skills
to serve in these positions, and it has become increasingly difficult for us
to hire such personnel. Competition for such personnel in the semiconductor
equipment industry is intense, and there can be no assurance that we will be
successful in attracting or retaining such personnel. Changes in management
could disrupt our operations and adversely affect our operating results.
We may be subject to litigation relating to intellectual property infringement
which would be time-consuming, expensive and a distraction from our business.
If we do not adequately protect our intellectual property, competitors may
be able to use our proprietary information to erode our competitive advantage,
and our business and operating results could be harmed. Litigation may be
necessary to enforce or determine the validity and scope of our proprietary
rights, and there can be no assurance that our intellectual property rights,
if challenged, will be upheld as valid. Such litigation could result in
substantial costs and diversion of resources and could have a material adverse
effect on our operating results, regardless of the outcome of the litigation.
In addition, there can be no assurance that any of the patents issued to us
will not be challenged, invalidated or circumvented or that the rights granted
thereunder will provide competitive advantages to us.
29
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, we could be subject to
regulatory sanctions and the public's perception of the Company may decline.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. (REMOVED AND RESERVED)
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS
The Exhibits listed on the accompanying "Index to Exhibits" are filed as
part of, or incorporated by reference into, this report.
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Aehr Test Systems
(Registrant)
Date: April 13, 2011 /s/ RHEA J. POSEDEL
----------------------------------
Rhea J. Posedel
Chief Executive Officer and
Chairman of the Board of Directors
Date: April 13, 2011 /s/ GARY L. LARSON
--------------------------------
Gary L. Larson
Vice President of Finance and
Chief Financial Officer
31
AEHR TEST SYSTEMS
INDEX TO EXHIBITS
Exhibit No. Description
---------- -----------------------------------------------------------
3.1(1) Restated Articles of Incorporation of the Company.
3.2(2) Amended and Restated Bylaws of the Company.
10.18(3) Separation Agreement and Release between the Company and
Gregory M. Perkins, dated February 1, 2011.
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).
(3) Incorporated by reference to the same-numbered exhibit previously filed
with the Company's Current Report on Form 8-K filed February 3, 2011 (File No.
000-22893).
32