AEHR TEST SYSTEMS quarterly report, Q3 FY2016

Aehr Test Systems — Form 10-Q Summary

Business context and reporting period. The company designs, manufactures, and markets semiconductor test and burn-in equipment, including ABTS, FOX wafer-level systems, and WaferPak products. This unaudited Form 10-Q covers the fiscal third quarter and nine months ended February 29, 2016; comparisons are with the periods ended February 28, 2015. Unless otherwise noted, amounts are in U.S. dollars.

Financial results and liquidity

MetricThree months ended Feb. 29, 2016Three months ended Feb. 28, 2015Nine months ended Feb. 29, 2016Nine months ended Feb. 28, 2015
Net sales$1.677 million$2.027 million$12.930 million$8.200 million
Gross profit / margin$0.169 million / 10.1%$0.852 million / 42.0%$5.243 million / 40.5%$3.156 million / 38.5%
Operating loss$2.819 million$1.763 million$3.288 million$4.883 million
Net loss$2.975 million$1.726 million$3.729 million$4.747 million
Net loss per share, basic and diluted$0.23$0.14$0.29$0.40
  • Quarterly sales fell 17.3%. TDBI sales declined about $0.8 million to $0.8 million, partly offset by wafer-level sales rising about $0.5 million to $0.9 million.
  • Nine-month sales rose 57.7%, principally from wafer-level products, which generated $8.2 million, up about $5.4 million. TDBI sales were $4.7 million, down about $0.3 million.
  • Quarterly gross margin contracted sharply. Management attributed this primarily to higher inventory reserves and increased unabsorbed manufacturing overhead amid lower production and revenue. Nine-month gross margin improved year over year.
  • For the nine months, SG&A was $5.253 million and R&D was $3.278 million. Quarterly operating expenses increased to $2.988 million, including SG&A of $1.695 million and R&D of $1.293 million.
  • Operating cash flow was negative $4.707 million for the nine months, versus negative $1.640 million a year earlier. Investing cash use was $0.890 million, mainly for capital and infrastructure improvements. Financing provided $2.460 million, including $2.0 million of credit-facility borrowing.
  • Cash and cash equivalents were $2.472 million at February 29, 2016, down from $5.527 million at May 31, 2015. Working capital was $4.7 million.
  • Debt included $4.110 million principal on 9.0% secured convertible notes due April 2017, reported net of issuance costs at $3.917 million, and $2.0 million drawn under a secured revolving facility. No facility availability remained. The notes’ initial conversion price is $2.65 per share.
  • Total liabilities were $11.411 million and shareholders’ equity was $2.028 million at period end. The company reported 13.164 million shares issued and outstanding at February 29, 2016; 13,164,396 common shares were outstanding on March 31, 2016.

Material changes versus prior periods

  • Quarterly revenue and gross profit declined, and quarterly net loss widened. In contrast, nine-month revenue and gross profit increased and the nine-month net loss narrowed.
  • Interest expense rose to $0.165 million for the quarter and $0.437 million for the nine months, primarily reflecting the convertible debt and line of credit.
  • Customer deposits and deferred revenue, short-term, declined to $2.026 million from $4.750 million at May 31, 2015; management linked the operating cash outflow partly to shipment of orders for which deposits had been received.
  • Accounts receivable increased to $1.947 million from $1.383 million, and property and equipment, net, increased to $1.251 million from $0.478 million.

Outlook, commentary, and risks

  • Management said existing cash and anticipated operating cash flows should cover short-term working-capital and capital-equipment needs. It expects to rely on receivable collections, backlog shipments, inventory sales, and customer deposits/down payments. Additional financing may be needed depending on growth, profitability, and significant orders; availability and acceptable terms are not assured.
  • Capital spending was described as supporting infrastructure, product demonstrations, and manufacturing capability in preparation for increased demand. The filing provides no quantified revenue or earnings guidance.
  • Management cited weaker ABTS/TDBI sales and identified increased FOX market acceptance as important but uncertain; qualification cycles, reliability or manufacturing issues, and competition may impede adoption.
  • Customer concentration is substantial: the five largest customers accounted for approximately 93% of quarterly and 94% of nine-month sales. Two customers represented approximately 45% and 37% of quarterly sales.
  • The company disclosed that, as of February 29, 2016, it did not meet Nasdaq’s $2.5 million minimum stockholders’ equity continued-listing criterion. It planned steps to regain compliance but provided no assurance of success. Delisting could impair trading and trigger a default under its credit and convertible debt agreements.
  • Other stated risks include dependence on a small number of large, high-value orders; order cancellation or rescheduling; semiconductor industry cyclicality; competition and product obsolescence; supplier concentration; foreign-exchange exposure without hedging; and possible need for additional financing.
  • No legal proceedings were reported. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting. The company reported no off-balance-sheet financing arrangements.

Important facts for investors to verify

  • Progress toward Nasdaq stockholders’ equity compliance and any consequences for the listing or debt agreements.
  • Cash burn, liquidity needs, and access to financing given $2.472 million in cash and no remaining availability under the revolving facility.
  • Whether customer deposits, backlog conversion, and order timing support revenue and cash flow, particularly given customer concentration and cancellation risk.
  • Whether the quarter’s very low gross margin reflects temporary inventory and overhead effects or persists in subsequent results.
  • FOX product qualification and adoption, and the trajectory of wafer-level sales relative to TDBI/ABTS demand.
  • Debt service and conversion terms, including the 9.0% notes due in April 2017 and the security interests over substantially all company assets.