AEHR Test Systems — Form 10-Q Summary
Business context and period: This unaudited report covers Aehr Test Systems’ fiscal first quarter ended August 31, 2015, with comparisons to the quarter ended August 31, 2014. Aehr develops and sells semiconductor test and burn-in equipment and related products, including FOX wafer-level systems, ABTS systems and WaferPak contactors. The company reports one operating segment.
Financial performance
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Net sales | $6.633 million | $3.558 million |
| Gross profit / gross margin | $3.383 million / 51.0% | $1.610 million / 45.3% |
| Operating expenses | $2.907 million | $2.583 million |
| Operating income (loss) | $0.476 million | ($0.973 million) |
| Net income (loss) | $0.294 million | ($0.907 million) |
| Diluted earnings (loss) per share | $0.02 | ($0.08) |
| Net cash used in operating activities | $2.096 million | $0.218 million |
Sales rose 86.4% year over year, primarily due to wafer-level products. Management attributed the 5.7 percentage-point gross-margin improvement mainly to sales mix. SG&A increased 13.6%, primarily from employment-related and outside-sales commission costs; R&D increased 10.7%, primarily from project expenses. Interest expense increased to $135,000 from $14,000, mainly due to the convertible financing. The quarter recorded $24,000 of other expense, versus $31,000 of other income a year earlier, primarily reflecting foreign-exchange gains and losses.
Liquidity, balance sheet and debt
- At August 31, 2015, cash and cash equivalents were $3.653 million, down from $5.527 million at May 31, 2015. Total assets were $14.563 million; current liabilities were $5.224 million; and working capital was $8.8 million.
- Operating cash outflow of $2.096 million was driven chiefly by a $2.804 million decrease in customer deposits and deferred revenue and a $1.257 million increase in receivables. Management said deposits declined as orders with down payments shipped. Investing cash outflow was $21,000; financing provided $223,000, mainly from employee stock-option exercises. Ending cash was $3.653 million.
- Long-term debt, net of issuance costs, was $3.828 million; principal outstanding was $4.110 million. The secured notes bear 9% interest and mature April 10, 2017, unless converted or otherwise repurchased. The initial conversion price is $2.65 per share.
- The company also has a secured revolving credit facility of up to $2.0 million, bearing 5% interest; no amount was drawn at quarter-end. The notes and facility are secured by substantially all company assets.
Changes, outlook and risks
- Compared with the prior-year quarter, Aehr moved from an operating and net loss to a profit, alongside higher sales and gross margin. However, operating cash use increased substantially, and cash declined during the quarter.
- Management expected existing cash, operating cash flows and available credit to meet working-capital and capital-equipment needs through fiscal 2016. Beyond fiscal 2016, additional debt or equity financing might be needed depending on growth and profitability; availability and terms are not assured. No specific revenue or earnings guidance was provided.
- Customer and product concentration are significant: the five largest customers generated approximately 96% of quarterly sales, and two customers represented approximately 67% and 11%. Asia accounted for $5.381 million of sales, versus $0.718 million in the United States and $0.534 million in Europe.
- Principal disclosed risks include dependence on a small number of customers and large, deferrable system orders; uncertain adoption and qualification of FOX systems; weakening ABTS sales; semiconductor-industry cyclicality; competition and product-development execution; supplier dependence; and foreign-exchange exposure. Aehr said it did not hedge currency risk.
- The company reported no pending legal proceedings, no off-balance-sheet financing arrangements, and no material change to internal control over financial reporting. Management concluded disclosure controls were effective. The standard product warranty is one year for systems and 90 days for parts and service; accrued warranty liabilities were $219,000.
Important facts for investors to verify
- Whether the strong sales and improved gross margin continue, and how much depends on wafer-level products and customer mix.
- Whether the high customer concentration and order timing expose future revenue, receivables and cash flow to meaningful volatility.
- Whether operating cash use moderates as customer deposits and deferred revenue fluctuate with shipments.
- The terms, interest burden, collateral and potential dilution associated with the $4.110 million convertible notes, and the company’s capacity to fund needs after fiscal 2016.
- FOX qualification and market acceptance, ABTS sales trends, and any resulting product reliability, warranty or development costs.