The following discussion of the financial condition and results of operations
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, 2019
and the consolidated financial statements and notes thereto.
In addition to historical information, this report contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All
statements in this report, including those made by our management, otherthan
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.
22
OVERVIEW
We were founded in 1977 to develop and manufacture burn-in and test equipment
for the semiconductor industry. Since our inception, we have sold more than
2,500 systems to semiconductor manufacturers, semiconductor contract assemblers
and burn-in and test service companies worldwide. Our principal products
currently are the FOX full wafer contact parallel test and burn-in system,
WaferPak contactors, the DiePak carrier, test fixtures and the Advanced Burn-in
and Test System, or ABTS.
Our net sales consist primarily of sales of systems, WaferPak contactors,
DiePak carriers, test fixtures, upgrades and spare parts, revenues from service
contracts, and engineering development charges. Our selling arrangements may
include contractual customer acceptance provisions, which are mostly deemed
perfunctory or inconsequential, and installation of the product occurs after
shipment and transfer of title.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of
operations are based upon our 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 us 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, we
evaluate our estimates, including those related to customer programs and
incentives, product returns, bad debts, inventories, income taxes, financing
operations, warranty obligations, and long-term service contracts. Our estimates
are derived from historical experience and on various other assumptions that are
believed to be reasonable under the circumstances. Those results 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 our Annual Report on Form 10-K for the fiscal year
ended May 31, 2019.
There have been no material changes to our critical accounting policies and
estimates during the six months ended November 30, 2019 compared to those
discussed in our Annual Report on Form 10-K for the fiscal year ended May 31,
2019, except for the adoption of FASB ASC Topic 842, Leases, as discussed in
Note "2. RECENT ACCOUNTING PRONOUNCEMENTS."
23
RESULTS OF OPERATIONS
The following table sets forth items in our unaudited condensed consolidated
statements of operations as a percentage of net sales for the periods indicated.
Three Months Ended Six Months Ended
November 30, November 30,
2019 2018 2019 2018
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 53.4 59.4 55.9 62.9
Gross profit 46.6 40.6 44.1 37.1
Operating expenses:
Selling, general and administrative 31.4 33.5 31.9 36.2
Research and development 11.6 16.7 13.6 19.7
Total operating expenses 43.0 50.2 45.5 55.9
Income (loss) from operations 3.6 (9.6) (1.4) (18.8)
Interest income (expense), net -- (1.3) 0.1 (1.4)
Other income, net 0.1 0.6 0.1 0.3
Income (loss) before income tax expense 3.7 (10.3) (1.2) (19.9)
Income tax expense -- (0.3) (0.1) (0.2)
Net income (loss) 3.7 (10.6) (1.3) (20.1)
Less: Net income attributable to the
noncontrolling interest -- -- -- --
Net income (loss) attributable to Aehr
Test Systems common shareholders 3.7% (10.6)% (1.3)% (20.1)%
THREE MONTHS ENDED NOVEMBER 30, 2019 COMPARED TO THREE MONTHS ENDED NOVEMBER 30,
2018
NET SALES. Net sales increased to $6.9 million for the three months ended
November 30, 2019 from $5.9 million for the three months ended November 30,
2018, an increase of 16.3%. The increase in net sales for the three months ended
November 30, 2019 was primarily due to the increase in net sales of our
wafer-level products, partially offset by the decrease in net sales of our Test
During Burn-in (TDBI) products. Net sales of the wafer-level products for the
three months ended November 30, 2019 were $6.3 million, and increased
approximately $2.1 million from the three months ended November 30, 2018. Net
sales of the TDBI products for the three months ended November 30, 2019 were
$539,000, and decreased approximately $1.1 million from the three months ended
November 30, 2018.
GROSS PROFIT. Gross profit increased to $3.2 million for the three months
ended November 30, 2019 from $2.4 million for the three months ended November
30, 2018, an increase of approximately 33.5%. Gross profit margin increased to
46.6% for the three months ended November 30, 2019 from 40.6% for the three
months ended November 30, 2018. The increase in gross profit margin was
primarily the result of a change in mix of product sales, and manufacturing
efficiencies due to an increase in net sales.
24
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses increased to $2.2 million
for the three months ended November 30, 2019 from $2.0 million for the three
months ended November 30, 2018, an increase of 9.1%. The increase in SG&A
expenses was primarily due to an increase in commissions and costs associated
with new product introductions.
RESEARCH AND DEVELOPMENT. R&D expenses decreased to $795,000 for the three
months ended November 30, 2019 from $986,000 for the three months ended November
30, 2018, a decrease of 19.4%. The decrease in R&D expenses was primarily due to
a decrease in employment related expenses and a reduction in R&D material
expenses.
INTEREST INCOME (EXPENSE), NET. Interest income, net for the three months
ended November 30, 2019 was $2,000 compared with interest expense, net of
$74,000 for the three months ended November 30, 2018. The decrease in interest
expense for the three months ended November 30, 2019 was primarily due to the
repayment of the Convertible Notes on the maturity date of April 10, 2019.
OTHER INCOME, NET. Other income, net was $5,000 and $29,000 for the three
months ended November 30, 2019 and 2018, respectively. The change in other
income, net was primarily due to gains realized in connection with the
fluctuation in the value of the dollar compared to foreign currencies during the
referenced periods.
INCOME TAX EXPENSE. Income tax expense was $6,000 and $19,000 for the three
months ended November 30, 2019 and 2018, respectively.
SIX MONTHS ENDED NOVEMBER 30, 2019 COMPARED TO SIX MONTHS ENDED NOVEMBER 30,
2018
NET SALES. Net sales increased to $12.4 million for the six months ended
November 30, 2019 from $10.7 million for the six months ended November 30, 2018,
an increase of 16.5%. The increase in net sales for the six months ended
November 30, 2019 was primarily due to the increase in net sales of our
wafer-level products, partially offset by the decrease in net sales of our TDBI
products. Net sales of the wafer-level products for the six months ended
November 30, 2019 were $11.2 million, and increased approximately $5.0 million
from the six months ended November 30, 2018. Net sales of the TDBI products for
the six months ended November 30, 2019 were $1.2 million, and decreased
approximately $3.2 million from the six months ended November 30, 2018.
GROSS PROFIT. Gross profit increased to $5.5 million for the six months ended
November 30, 2019 from $4.0 million for the six months ended November 30, 2018,
an increase of 38.5%. Gross profit margin increased to 44.1% for the six months
ended November 30, 2019 from 37.1% for the six months ended November 30, 2018.
The increase in gross profit margin was primarily the result of a change in mix
of product sales, manufacturing efficiencies due to an increase in net sales,
and a decrease in other cost of goods sold related to inventory scrap, and
tooling and layout charges.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses increased to $4.0 million
for the six months ended November 30, 2019 from $3.9 million for the six months
ended November 30, 2018, an increase of 2.8%. The increase in SG&A expenses was
primarily due to an increase in commissions and costs associated with new
product introductions.
RESEARCH AND DEVELOPMENT. R&D expenses decreased to $1.7 million for the six
months ended November 30, 2019 from $2.1 million for the six months ended
November 30, 2018, a decrease of 19.7%. The decrease in R&D expenses was
primarily due to a decrease in employment related expenses and a reduction in
R&D material expenses.
25
INTEREST INCOME (EXPENSE), NET. Interest income, net for the six months ended
November 30, 2019 was $14,000 compared with interest expense, net of $152,000
for the six months ended November 30, 2018. The decrease in interest expense for
the six months ended November 30, 2019 was primarily due to the repayment of the
Convertible Notes on the maturity date of April 10, 2019.
OTHER INCOME, NET. Other income, net was $15,000 and $38,000 for the six
months ended November 30, 2019 and 2018, respectively. The change in other
income, net was primarily due to gains realized in connection with the
fluctuation in the value of the dollar compared to foreign currencies during the
referenced periods.
INCOME TAX EXPENSE. Income tax expense was $12,000 and $23,000 for the six
months ended November 30, 2019 and 2018, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $276,000 and $3.0 million for the
six months ended November 30, 2019 and 2018, respectively. For the six months
ended November 30, 2019, net cash used in operating activities was primarily the
result of net loss of $162,000, as adjusted to exclude the effect of non-cash
charge of stock-based compensation expense of $404,000 and depreciation and
amortization of $193,000. Net cash used in operations was also impacted by
increases in inventories and accounts receivable of $627,000 and $372,000,
respectively, and a decrease in accrued expenses of $438,000, partially offset
by an increase in accounts payable of $389,000. The increase in accounts
receivable was primarily due to large shipments toward the end of the quarter
ended November 30, 2019. The increase in inventories and accounts payable were
due primarily to inventory purchases to support future shipments. The decrease
in accrued expenses was primarily due to the restructuring payments to
terminated employees impacted by the restructuring plan implemented last fiscal
year 2019. For the six months ended November 30, 2018, net cash used in
operating activities was primarily the result of net loss of $2.1 million, as
adjusted to exclude the effect of non-cash charge of stock-based compensation
expense of $480,000 and depreciation and amortization of $230,000. Net cash used
in operations was also impacted by increases in accounts receivable and
inventories of $1.1 million and $935,000, respectively, partially offset by an
increase in accounts payable of $302,000 million and an increase in customer
deposits and deferred revenue of $231,000. The increase in accounts receivable
was primarily due to large shipments toward the end of the quarter ended
November 30, 2018. The increase in inventories and accounts payable were due
primarily to inventory purchases to support future shipments. The increase in
customer deposits and deferred revenue was primarily due the receipt of
additional down payments from certain customers.
Net cash used in investing activities was $123,000 and $103,000 for the six
months ended November 30, 2019 and 2018, respectively. Net cash used in
investing activities during the six months ended November 30, 2019 and 2018 was
due to purchases of property and equipment.
Financing activities provided cash of $293,000 and $312,000 for the six
months ended November 30, 2019 and 2018, respectively. Net cash provided by
financing activities during the six months ended November 30, 2019 and 2018 was
due to the proceeds from the issuance of common stock under employee plans.
The effect of fluctuation in exchange rates decreased cash by $20,000 and
$98,000 for the six months ended November 30, 2019 and 2018, respectively. The
changes were due to the fluctuation in the value of the dollar compared to
foreign currencies.
26
As of November 30, 2019 and May 31, 2019, we had the same level of working
capital of $14.5 million.
We lease our manufacturing and office space under operating leases. We entered
into a non-cancelable operating lease agreement for our United States
manufacturing and office facilities, which was renewed in February 2018 and
expires in July 2023. Under the lease agreement, we are responsible for payments
of utilities, taxes and insurance.
From time to time, we evaluate potential acquisitions of businesses, products
or technologies that complement our business. If consummated, any such
transactions may use a portion of our working capital or require the issuance of
equity. We have no present understandings, commitments or agreements with
respect to any material acquisitions.
We anticipate that the existing cash balance together with income from
operations, collections of existing accounts receivable, revenue from our
existing backlog of products, the sale of inventory on hand, and deposits and
down payments against significant orders will be adequate to meet our liquidity
requirements for the next 12 months.
OFF-BALANCE SHEET ARRANGEMENTS
We have not entered into any off-balance sheet financing arrangements and have
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 our contractual obligations or other commitments as disclosed
in the Company's Annual Report on Form 10-K for the year ended May 31, 2019.
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