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AEHR > SEC Filings for AEHR > Form 10-Q on 12-Apr-2013All Recent SEC Filings

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Form 10-Q for AEHR TEST SYSTEMS


12-Apr-2013

Quarterly Report


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, 2012 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 Aehr Test Systems, 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, the DiePak carrier and test fixtures.

The Company's net sales consist primarily of sales of systems, test fixtures, die carriers, upgrades and spare parts and revenues from service contracts and engineering development charges. The Company's 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

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 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, 2012.

During the first quarter of fiscal 2013, the Company entered into an agreement with a customer to develop a next generation system. The project identifies multiple milestones with values assigned to each. The consideration earned upon achieving the milestone is required to meet the following conditions prior to recognition: (i) the value is commensurate with the vendor's performance to meet the milestone, (ii) it relates solely to past performance, (iii) and it is reasonable relative to all of the deliverables and payment terms within the arrangement.

During the third quarter of fiscal 2013, the Company revised its revenue recognition policy. Under the updated policy and consistent with our contractual obligations, we will not defer amounts related to acceptance activities which are deemed perfunctory or inconsequential. There was no material impact from adopting this policy.

Other than recognition of revenue under the milestone method related to the development contract and the revision to the revenue recognition policy affecting acceptance activities as described above, we believe there have been no material changes to our critical accounting policies and estimates during the nine months ended February 28, 2013 compared to those discussed in our Annual Report on Form 10-K for the fiscal year ended May 31, 2012.


RESULTS OF OPERATIONS

The following table sets forth items in the Company's unaudited condensed
consolidated statements of operations as a percentage of net sales for the
periods indicated.

                                                  Three Months Ended                     Nine Months Ended
                                           February 28,        February 29,       February 28,       February 29,
                                               2013                2012               2013               2012

Net sales                                          100.0 %             100.0 %            100.0 %            100.0 %
Cost of sales                                       77.1                61.2               58.5               62.8
Gross profit                                        22.9                38.8               41.5               37.2

Operating expenses:
Selling, general and administrative                 45.2                53.4               40.6               42.9
Research and development                            20.5                32.7               19.5               28.2
Total operating expenses                            65.7                86.1               60.1               71.1

Loss from operations                               (42.8 )             (47.3 )            (18.6 )            (33.9 )

Interest expense                                    (0.6 )                --               (0.4 )               --
Gain on sale of long-term investment                  --                  --                 --                9.1
Other (expense) income, net                         (0.3 )               0.2               (0.3 )              0.5

Loss before income tax (expense) benefit           (43.7 )             (47.1 )            (19.3 )            (24.3 )

Income tax (expense) benefit                          --                (0.6 )             (0.1 )              0.2
Net loss                                           (43.7 )%            (47.7 )%           (19.4 )%           (24.1 )%

THREE MONTHS ENDED FEBRUARY 28, 2013 COMPARED TO THREE MONTHS ENDED FEBRUARY 29,
2012

NET SALES. Net sales increased to $3.3 million for the three months ended February 28, 2013 from $2.9 million for the three months ended February 29, 2012, an increase of 17.0%. The increase in net sales for the three months ended February 28, 2013 was primarily due to an increase in net sales of the Company's wafer-level products, partially offset by a decrease of Company's Test During Burn-in (TDBI) products. Net sales of the Company's wafer-level products for the three months ended February 28, 2013 were $1.6 million, and increased approximately $0.6 million from the three months ended February 29, 2012. Net sales of the TDBI products for the three months ended February 28, 2013 were $1.6 million, and decreased approximately $0.2 million from the three months ended February 29, 2012.

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 $0.8 million for the three months ended February 28, 2013 from $1.1 million for the three months ended February 29, 2012, a decrease of 31%. Gross profit margin decreased to 22.9% for the three months ended February 28, 2013 from 38.8% for the three months ended February 29, 2012. The decrease in gross profit margin of 15.9% was primarily due to increased direct material costs as a percentage of sales resulting in a 6.2% gross profit margin reduction, increased provision for inventory reserves resulting in a 5.4% gross profit margin reduction, and an increased warranty provision resulting in a 3.4% gross profit margin reduction.


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 remained unchanged at $1.5 million for the three months ended February 28, 2013 compared with the three months ended February 29, 2012.

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 $0.7 million for the three months ended February 28, 2013 from $0.9 million for the three months ended February 29, 2012, a decrease of 26.6%. This decrease was primarily attributable to a reduction in employment related expenses of $112,000 and project expenses of $37,000.

INTEREST EXPENSE. Interest expense increased to $18,000 for the three months ended February 28, 2013 from nil for the three months ended February 29, 2012 primarily as a result of higher average borrowings on the line of credit.

OTHER (EXPENSE) INCOME, NET. Other expense, net was $9,000 for the three months ended February 28, 2013, compared with other income, net of $7,000 for the three months ended February 29, 2012. The change between other expense and other income was due primarily to gains and losses realized in connection with foreign exchange rate fluctuations during the referenced periods.

INCOME TAX (EXPENSE) BENEFIT. Income tax expense was nil for the three months ended February 28, 2013, compared with an income tax expense of $18,000 for the three months ended February 29, 2012.

NINE MONTHS ENDED FEBRUARY 28, 2013 COMPARED TO NINE MONTHS ENDED FEBRUARY 29,
2012

NET SALES. Net sales increased to $13.2 million for the nine months ended February 28, 2013 from $10.8 million for the nine months ended February 29, 2012, an increase of 22.0%. The increase in net sales for the nine months ended February 28, 2013 resulted primarily from an increase in net sales of the Company's TDBI products, partially offset by a decrease of the Company's wafer-level products. Net sales of the TDBI products for the nine months ended February 28, 2013 were $8.8 million, and increased approximately $3.7 million from the nine months ended February 29, 2012. Net sales of the Company's wafer-level products for the nine months ended February 28, 2013 were $4.2 million, and decreased approximately $1.1 million from the nine months ended February 29, 2012.

GROSS PROFIT. Gross profit increased to $5.5 million for the nine months ended February 28, 2013 from $4.0 million for the nine months ended February 29, 2012, an increase of 35.8%. Gross profit margin increased to 41.5% for the nine months ended February 28, 2013 from 37.2% for the nine months ended February 29, 2012. The increase in gross profit margin was primarily the result of manufacturing efficiencies due to an increase in net sales.

SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses increased to $5.4 million for the nine months ended February 28, 2013 from $4.7 million for the nine months ended February 29, 2012, an increase of 15.3%. The increase in SG&A expenses was primarily due to an increase of $0.4 million in pre-sales support expenses and $0.2 million in sales commissions to outside sales representatives.

RESEARCH AND DEVELOPMENT. R&D expenses decreased to $2.6 million for the nine months ended February 28, 2013 from $3.1 million for the nine months ended February 29, 2012, a decrease of 15.6%. This decrease was primarily attributable to a reduction in employment related expenses of $0.2 million and project expenses of $0.1 million.

INTEREST EXPENSE. Interest expense increased to $43,000 for the nine months ended February 28, 2013 from nil for the nine months ended February 29, 2012 as a result of higher average borrowings on the line of credit.


GAIN ON SALE OF LONG-TERM INVESTMENT. During the first quarter of fiscal 2012, the Company sold its long-term investment in ESA Electronics PTE Ltd, resulting in a gain of $990,000.

OTHER (EXPENSE) INCOME, NET. Other expense, net was $43,000 for the nine months ended February 28, 2013, compared with other income, net of $53,000 for the nine months ended February 29, 2012. The change between other expense and other income was due primarily to gains and losses realized in connection with foreign exchange rate fluctuations during the referenced periods.

INCOME TAX (EXPENSE) BENEFIT. Income tax expense was $18,000 for the nine months ended February 28, 2013, compared with income tax benefit of $17,000 for the nine months ended February 29, 2012. An income tax benefit was recognized in the nine months ended February 29, 2012 resulting from an adjustment of a tax liability previously reported.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities was $0.3 million for the nine months ended February 28, 2013 and $3.2 million for the nine months ended February 29, 2012. For the nine months ended February 28, 2013, net cash used in operating activities was primarily the result of the net loss of $2.6 million as adjusted to exclude the effect of non-cash charges including stock-based compensation expense of $0.4 million and depreciation and amortization of $0.2 million, as well as decreases in accounts receivable of $1.0 million and inventories of $0.4 million. The decrease in accounts receivable was primarily due to improvements in customer payment terms. The decrease in inventories was primarily due to the increase in inventory reserves related to older products as new products move into volume production. For the nine months ended February 29, 2012, net cash used in operating activities was primarily driven by a net loss of $2.6 million as adjusted to exclude the effect of non-cash charges including stock-based compensation expense of $0.5 million, depreciation and amortization of $0.4 million, and a $990,000 gain on the sale of the Company's long-term investment. Net cash used in operating activities also included an increase in inventories of $0.7 million, partially offset by a decrease in accounts receivable of $0.5 million. The increase in inventories was to support future shipments for customer orders. The decrease in accounts receivable was primarily due to improvements in customer payment terms.

Net cash used in investing activities was $126,000 for the nine months ended February 28, 2013 compared to $1.4 million of net cash provided for the nine months ended February 29, 2012. The cash provided by investing activities for the nine months ended February 29, 2012 was due primarily to the $1.4 million in proceeds received from the sale of the Company's long-term investment in ESA Electronics PTE Ltd.

Financing activities used cash of $13,000 for the nine months ended February 28, 2013 compared to cash provided of $830,000 for the nine months ended February 29, 2012. Net cash used by financing activities during the nine months ended February 28, 2013 was primarily due to net repayments under the line of credit of $193,000, offset by $180,000 in proceeds from issuance of common stock for the ESPP, the Employee Stock Ownership Plan and from the exercise of stock options. Net cash provided by financing activities during the nine months ended February 29, 2012 was due primarily to net borrowings under the line of credit of $716,000 and $114,000 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 used was $250,000 and $24,000 for the nine months ended February 28, 2013 and February 29, 2012, respectively, due to the fluctuation in the value of the dollar compared to foreign currencies.

As of February 28, 2013, the Company had working capital of $4.4 million. Working capital consists of cash and cash equivalents, accounts receivable, inventory and other current assets, less current liabilities.


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, funds from the private placement completed in March 2013 (refer to Note 12, "SUBSEQUENT EVENTS"), as well as funds available through the working capital credit facility will be adequate to meet its working capital and capital equipment requirements through calendar 2013. Refer to Note 10, "LINE OF CREDIT", for further discussion of the credit facility agreement. After calendar 2013, depending on its rate of growth and profitability, the Company may require additional equity or debt financing to meet its working capital requirements or capital equipment needs. There can be no assurance that additional financing will be available when required, or if available, that such financing can be obtained on terms satisfactory to the Company.

OFF-BALANCE SHEET ARRANGEMENTS

The Company has not entered into any off-balance sheet financing arrangements and has not established any variable interest entities.

OVERVIEW OF CONTRACTUAL OBLIGATIONS

On August 25, 2011, the Company entered into a working capital credit facility agreement allowing the Company to borrow up to $1.5 million based upon qualified U.S. based and foreign customer receivables, and export-related inventory. On May 29, 2012, the credit agreement was amended to increase the borrowing limit to $2.0 million. On September 11, 2012, the credit agreement was amended to increase the borrowing limit to $2.5 million. The maturity date of the loan is August 23, 2013. Refer to Note 10, "LINE OF CREDIT", for further discussion of the agreement.

There have been no additional 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, 2012.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

The Company had no holdings of derivative financial or commodity instruments at February 28, 2013 or May 31, 2012.

The Company is exposed to financial market risks, including changes in interest rates and foreign currency exchange rates. The Company only invests its short-term excess cash in government-backed securities with maturities of 18 months or less. The Company maintained a cost basis equity investment in a privately held company, ESA Electronics PTE Ltd through May 2011. This investment was sold in the first quarter of fiscal 2012. The Company does not use any financial instruments for speculative or trading purposes. Fluctuations in interest rates would not have a material effect on the Company's financial position, results of operations or cash flows.


A majority of the Company's revenue and capital spending is transacted in U.S. Dollars. The Company, however, enters into transactions in other currencies, primarily Japanese Yen. Substantially all sales to Japanese customers are denominated in Yen. Since the price is determined at the time a purchase order is accepted, the Company is exposed to the risks of fluctuations in the Yen-U.S. Dollar exchange rate during the lengthy period from purchase order to ultimate payment. This exchange rate risk is partially offset to the extent that the Company's Japanese subsidiary incurs expenses payable in Yen. To date, the Company has not invested in instruments designed to hedge currency risks. In addition, the Company's Japanese subsidiary typically carries debt or other obligations due to the Company that may be denominated in either Yen or U.S. Dollars. Since the Japanese subsidiary's financial statements are based in Yen and the Company's condensed consolidated financial statements are based in U.S. Dollars, the Japanese subsidiary and the Company recognize foreign exchange gains or losses in any period in which the value of the Yen rises or falls in relation to the U.S. Dollar. A 10% decrease in the value of the Yen as compared with the U.S. Dollar would not be expected to result in a significant change to the Company's net income or loss. There have been no material changes in our risk exposure since the end of the last fiscal year, nor are any material changes to our risk exposure anticipated.

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.

PART II - OTHER INFORMATION

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