Aehr Test Systems — Form 10-Q Summary
Business context and period. This unaudited quarterly report covers the three and six months ended November 30, 2015 (fiscal 2016 Q2), compared with the corresponding 2014 periods. Aehr designs, manufactures and markets semiconductor test and burn-in equipment, including FOX wafer-level systems, ABTS/TDBI systems and WaferPak products. All dollar amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 FY2016 | Q2 FY2015 | Six months FY2016 | Six months FY2015 |
|---|---|---|---|---|
| Net sales | $4.620 million | $2.615 million | $11.253 million | $6.173 million |
| Gross profit / margin | $1.691 million / 36.6% | $0.694 million / 26.5% | $5.074 million / 45.1% | $2.304 million / 37.3% |
| Operating loss | $0.945 million | $2.147 million | $0.469 million | $3.120 million |
| Net loss | $1.048 million | $2.114 million | $0.754 million | $3.021 million |
| Loss per share, basic and diluted | $0.08 | $0.18 | $0.06 | $0.26 |
- Quarterly sales grew 76.7%; six-month sales grew 82.3%. Management attributed growth to wafer-level and TDBI products. Six-month wafer-level sales were $7.3 million, up approximately $4.9 million; TDBI sales were $3.9 million, up approximately $0.4 million.
- Gross margin improved in both comparisons. Management attributed the six-month improvement primarily to systems sold with inventory that had previously been reserved; the prior-year quarter’s lower margin reflected higher inventory reserves.
- Q2 operating expenses were $2.636 million, versus $2.841 million; six-month operating expenses were $5.543 million, versus $5.424 million. Six-month interest expense rose to $272,000 from $22,000, primarily due to convertible debt financing.
- Six-month operating cash flow was negative $3.853 million, compared with negative $843,000 a year earlier. The current-period use included a $3.328 million decrease in customer deposits and deferred revenue and a $1.196 million increase in receivables, partly offset by higher payables.
- Cash and cash equivalents fell to $1.955 million at November 30 from $5.527 million at May 31, 2015. Investing activities used $169,000; financing activities provided $460,000, mainly from employee stock plans. Management reported working capital of $8.1 million.
- At November 30, current assets were $12.279 million and current liabilities were $4.181 million. Inventory was $7.419 million, including $3.848 million of work in process.
Balance sheet, debt and liquidity
- Convertible secured notes had $4.110 million principal outstanding, with a 9% annual interest rate and an April 10, 2017 maturity. The reported carrying amount, net of unamortized issuance costs, was $3.873 million. Notes are convertible at an initial $2.65 per share, subject to adjustment, and are secured along with the facility by substantially all company assets.
- The secured revolving credit facility was undrawn; $2.0 million was available at November 30. Borrowings, if any, carry 5% interest, must be supported by qualifying purchase orders and generally repaid within 90 days.
- Management expected cash, operating cash flows and the available facility to meet working-capital and capital-equipment needs through fiscal 2016. It said additional equity or debt financing might be needed after fiscal 2016 depending on growth and profitability, and availability or terms were not assured.
Material changes, outlook and risks
- Revenue growth and improved gross margins narrowed losses, but operating cash use increased substantially and the cash balance declined. Customer deposits and short-term deferred revenue decreased from $4.750 million to $1.295 million, primarily as orders with down payments shipped.
- Customer concentration was very high: the five largest customers generated approximately 97% of Q2 sales and 96% of six-month sales. Asia accounted for $3.768 million of Q2 sales and $9.149 million for the six-month period.
- No quantified revenue or earnings guidance was provided. Management’s liquidity outlook was limited to its expectation of funding needs through fiscal 2016, subject to risks and assumptions.
- Key disclosed risks include dependence on a small number of customers and high-value system orders; customer order cancellations or delays; qualification and market-acceptance risks for FOX; weakening ABTS sales; competition and pricing pressure; supplier concentration and delivery risks; product reliability and warranty costs; and foreign-exchange exposure. The filing states that the legal proceedings item was “None.”
- Warranty liability rose to $305,000 from $137,000 at May 31, 2015. Management reported disclosure controls and procedures were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether cash burn and the sharp reduction in customer deposits are consistent with subsequent shipment, collection and order trends.
- Whether the improved gross margin is sustainable, given management’s explanation that prior-reserved inventory contributed to the six-month result.
- Customer concentration, especially the effect of any order delays, cancellations or reduced purchases by major customers.
- FOX qualification and adoption progress, and the trajectory of ABTS/TDBI sales.
- Liquidity beyond fiscal 2016, including the secured debt’s 9% cost, 2017 maturity, conversion terms and potential dilution.