Aehr Test Systems — Form 10-Q Summary
Business context and reporting period. This filing covers Aehr Test Systems’ first quarter of fiscal 2019, the three months ended August 31, 2018. The company designs, manufactures, and sells semiconductor test and burn-in systems, contactors, carriers, and related services. The interim financial statements are unaudited.
Financial performance and liquidity
| Metric | Three months ended Aug. 31, 2018 | Prior-year quarter |
|---|---|---|
| Net sales | $4.740 million | $6.970 million |
| Gross profit / margin | $1.553 million / 32.8% | $2.918 million / 41.9% |
| Operating expenses | $2.995 million | $2.746 million |
| Operating income (loss) | $(1.442) million | $0.172 million |
| Net income (loss) | $(1.515) million; $(0.07) per share | $0.010 million; $0.00 per share |
| Cash used in operating activities | $0.971 million | $3.877 million |
- Cash and cash equivalents were $15.864 million at quarter-end, down from $16.848 million at May 31, 2018. Working capital was $17.2 million, versus $18.3 million at fiscal year-end.
- Investing activities used $0.084 million; financing activities provided $0.109 million, primarily from employee stock plans. Net cash decreased $0.984 million.
- Current assets were $28.448 million and current liabilities $11.264 million. Inventory was $9.585 million, up from $9.049 million at May 31.
- Long-term debt was classified as current: $6.110 million. The secured convertible notes bear 9% interest and mature April 10, 2019; substantially all company assets secure the obligations. The credit facility had no remaining availability.
Material changes versus the prior-year quarter
- Sales declined 32.0%, primarily because wafer-level product sales fell by approximately $2.2 million to $2.0 million.
- Gross profit declined approximately 46.8%, and gross margin fell 9.1 percentage points. Management attributed the margin decline primarily to manufacturing inefficiencies associated with lower sales.
- SG&A increased 4.9% to $1.879 million and R&D increased 16.9% to $1.116 million, mainly due to higher employment-related expenses.
- Revenue mix shifted: systems revenue was $1.806 million versus $3.476 million; contactors were $1.153 million versus $2.677 million; services increased to $1.781 million from $0.817 million.
- U.S. sales rose to $2.695 million from $1.290 million, while Asia sales declined to $1.734 million from $5.660 million. Five largest customers accounted for 78% of quarterly sales, down from 99%; four customers individually represented approximately 21%, 18%, 17%, and 14%.
- Operating cash use improved year over year, although the company continued to report a net loss and cash outflow from operations.
Outlook, risks, and notable items
- No numerical revenue or earnings guidance is provided. Management expects existing cash, operating income, receivable collections, backlog revenue, inventory sales, and customer deposits to meet liquidity needs for the next 12 months.
- Management said lower sales drove manufacturing inefficiencies. The filing also cites customer concentration and foreign-exchange exposure; the company does not hedge currency risk. It reported no material change in market-risk exposure.
- Customer deposits and deferred revenue increased to $2.698 million from $2.089 million; management attributed the increase primarily to additional customer down payments. Inventory increased to support future customer shipments.
- The company adopted ASC 606 on June 1, 2018 using the modified retrospective method, with no material impact reported. Remaining performance obligations for service and extended-warranty contracts were $0.685 million; about 34% was expected to be recognized in fiscal 2019 and 66% in fiscal 2020 and thereafter.
- The company reported no legal proceedings, defaults upon senior securities, or off-balance-sheet financing arrangements. Management assessed disclosure controls as effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether sales and wafer-level product demand recover, and whether the reported backlog converts into shipments and cash receipts.
- The company’s ability to improve gross margin as volume changes, given management’s stated manufacturing inefficiencies at lower sales levels.
- Repayment, conversion, or refinancing plans for the $6.110 million of 9% secured convertible notes due April 2019, including the impact of the asset security and conversion terms.
- Whether customer concentration and customer deposits remain at levels that support predictable revenue and cash flow.
- Actual cash burn and liquidity compared with management’s 12-month sufficiency expectation.