Aehr Test Systems — FY2017 Form 10-K
Business context and reporting period. Aehr Test Systems designs and sells semiconductor test and burn-in equipment, including FOX wafer-level systems, ABTS packaged-device systems, WaferPak contactors and DiePak carriers. This 10-K covers the fiscal year ended May 31, 2017; it also reports unaudited fourth-quarter results. The company operates as one business segment.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $18.898 million | $14.501 million |
| Gross profit / margin | $6.780 million / 35.9% | $5.145 million / 35.5% |
| Operating loss | $4.929 million | $6.154 million |
| Net loss | $5.653 million | $6.785 million |
| Loss per share, basic and diluted | $0.35 | $0.52 |
| Cash used in operating activities | $4.495 million | $6.281 million |
- Sales rose 30.3%; management attributed the increase to wafer-level products and test-during-burn-in (TDBI) products. FY2017 wafer-level sales were $9.6 million and TDBI sales were $9.2 million.
- SG&A was $7.052 million and R&D was $4.657 million. Interest expense was $678,000, primarily reflecting higher average borrowings.
- At May 31, 2017, cash and cash equivalents were $17.803 million, versus $939,000 a year earlier; working capital was $21.494 million, versus $4.068 million. The cash increase mainly reflects equity financing, not positive operating cash flow.
- Financing activities provided $21.835 million, including net proceeds of $15.832 million from an April public offering and $5.299 million from a September private placement. Investing activities used $477,000.
- Convertible notes, net, were $6.110 million at year-end. The notes bear 9% interest, are secured by substantially all company assets, and mature April 10, 2019; holders may convert at $2.30 per share. There was no remaining credit-facility availability.
- Backlog was $12.7 million at May 31, 2017, compared with $5.3 million a year earlier; orders may be rescheduled or canceled.
Material changes and fourth-quarter performance
- FY2017 sales increased from FY2016, and the net loss narrowed by $1.132 million. Gross margin improved slightly, from 35.5% to 35.9%, while operating expenses increased to $11.709 million from $11.299 million.
- TDBI sales increased approximately $3.4 million year over year; wafer-level sales increased approximately $0.9 million. Product mix shifted: full-wafer-contact products were approximately 51% of sales (60% in FY2016), and packaged-part systems approximately 49% (40% in FY2016).
- Fourth-quarter FY2017 sales were $6.683 million, gross profit $2.608 million and net loss $795,000. In fourth-quarter FY2016, sales were $1.571 million, gross profit was negative $98,000 and net loss was $3.056 million.
- Year-end common shares outstanding increased to 21.340 million from 13.216 million. The company also issued 200,000 shares to settle a vendor invoice. The substantial equity issuance strengthened liquidity but diluted existing holders.
Outlook, commentary and risks
- Management expected available cash, operating receipts, collections, backlog shipments, inventory sales and customer deposits to cover working-capital and capital-equipment needs for the next 12 months. No specific revenue or earnings guidance was provided.
- The FOX product family is an important growth opportunity, but management described its market as early-stage, with lengthy customer qualification and adoption processes. The first FOX-1P production system shipped in July 2016; FOX-XP capabilities were expanded for multi-die modules in March 2017.
- The business remains loss-making and has historically used operating cash. Management noted that additional financing could be required depending on growth, profitability and access to significant orders with down payments; future financing availability and terms are not assured.
- Customer concentration is high: the five largest customers represented approximately 93% of FY2017 sales. Texas Instruments, STMicroelectronics, Intel and Cypress represented approximately 45%, 19%, 17% and 10%, respectively. Three customers accounted for 47%, 40% and 11% of year-end receivables.
- Other material risks include semiconductor-industry cyclicality, competition and price pressure, reliance on a limited number of suppliers, product qualification/reliability and warranty risks, international operations and currency exposure, and dependence on key personnel. Approximately 59% of FY2017 sales were for delivery outside the United States; the company did not hedge currency risk.
- The company reported no legal proceedings in Item 3 and said management did not believe pending ordinary-course matters would materially affect financial position, results or cash flows. It had $5.684 million of supplier purchase obligations due within 12 months and disclosed customer and officer/director indemnifications whose maximum potential exposure could not be determined.
- Management reported effective disclosure controls and internal control over financial reporting at May 31, 2017. The independent auditor gave an unqualified opinion on the financial statements, but did not attest to internal-control effectiveness.
Important facts for investors to verify
- Whether backlog converts to recognized revenue on schedule, given customer cancellation/rescheduling rights and the company’s concentrated customer base.
- Cash burn, receivable collection and customer deposits, alongside the 9% secured convertible debt and its 2019 maturity/conversion terms.
- Whether FOX products achieve broader production adoption and whether growth can improve operating profitability and cash generation.
- Potential dilution from equity issuance and outstanding convertible notes, options and other share-based awards.
- Supplier capacity, product reliability and warranty costs, and any changes in customer concentration or significant receivable balances.