Aehr Test Systems — Form 10-Q Summary
Business context and reporting period
This filing covers the three months ended August 31, 2016, Aehr Test Systems’ fiscal first quarter of fiscal 2017. The company designs, manufactures and markets semiconductor test and burn-in equipment, including ABTS and FOX systems, WaferPak contactors and related products. The interim financial statements are unaudited.
Financial performance and position
| Metric | Quarter ended August 31, 2016 | Prior-year quarter |
|---|---|---|
| Net sales | $5.318 million | $6.633 million |
| Gross profit / margin | $2.206 million / 41.5% | $3.383 million / 51.0% |
| Operating income (loss) | $(570,000) | $476,000 |
| Net income (loss) | $(755,000); $(0.06) per diluted share | $294,000; $0.02 per diluted share |
| Operating cash flow | $1.244 million | $(2.096) million |
- Cash and cash equivalents were $2.342 million at August 31, up from $939,000 at May 31, 2016. Working capital was approximately $4.5 million, versus $4.1 million at May 31; current assets were $10.452 million and current liabilities were $6.002 million.
- Long-term debt was $6.006 million net of issuance costs ($6.110 million principal). The secured notes carry 9% annual interest. There was no remaining balance on the revolving credit facility at August 31.
- Operating cash flow benefited from increased customer deposits and deferred revenue, higher accounts payable and lower inventory; the increase was partly offset by higher receivables and the net loss. Investing cash outflow was $21,000; financing cash inflow was $94,000.
- Shareholders’ deficit totaled $735,000. In August, the company issued 200,000 shares to settle a $323,000 capital-equipment invoice.
Material changes versus the prior-year quarter
- Sales fell 19.8%. Wafer-level product sales declined approximately $2.5 million to $2.7 million, partly offset by a roughly $1.2 million increase in Test During Burn-in sales to $2.6 million.
- Gross margin fell 9.5 percentage points. Management attributed the prior-year quarter’s higher margin in part to sales of systems containing previously written-down material.
- SG&A declined 7% to $1.716 million, primarily due to lower sales commissions; R&D was essentially unchanged at $1.060 million.
- The company moved from operating and net income to losses. Interest expense increased to $178,000 from $135,000, primarily due to convertible-debt financing.
- Operating cash flow improved from use of $2.096 million to provision of $1.244 million, but reflected working-capital movements as well as operating results.
Outlook, risks and unusual items
- Management said cash, operating income, receivable collections, backlog shipments, inventory sales and customer deposits/down payments were expected to cover short-term working-capital and capital-equipment needs. It cautioned that further equity or debt financing may be required depending on growth, profitability and orders; financing availability and terms are not assured.
- An August 22 amendment extended the convertible notes’ maturity to April 10, 2019, reduced the conversion price from $2.65 to $2.30 per share, and reduced the forced-conversion price from $7.50 to $6.51.
- After quarter-end, on September 28, the company sold 2,721,540 shares in a private placement at $2.15 per share, generating $5.851 million gross and $5.389 million net proceeds. On October 3, Nasdaq notified the company it had regained compliance with continued-listing requirements after an earlier stockholders’ equity deficiency notice.
- Key disclosed risks include customer concentration (the five largest customers generated about 93% of quarterly sales, with three customers at 42%, 27% and 17%), dependence on large and potentially reschedulable system orders, semiconductor-industry cyclicality, competition, product qualification and reliability, supplier concentration, and foreign-exchange exposure. The FOX product line’s market remains at an early stage; ABTS sales had weakened in recent quarters.
- The company reported no pending intellectual-property infringement claims against it, no legal proceedings, and no material change in internal control over financial reporting. Disclosure controls were assessed as effective. No formal revenue or earnings guidance was provided.
Important facts for investors to verify
- Whether wafer-level sales weakness and lower gross margin persist, and whether TDBI growth can offset them.
- Customer order timing, concentration, cancellation or rescheduling risk, and the collectability of receivables.
- Cash conversion and liquidity after the reported quarter, including the effect of the $5.389 million net private-placement proceeds.
- Convertible-note terms, 9% interest burden, potential dilution at the $2.30 conversion price, and the secured status of the debt.
- Ongoing Nasdaq listing compliance and the company’s ability to sustain positive operating cash flow and fund operations without additional financing.