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AEHR TEST SYSTEMS - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes that appear elsewhere in this report and with our Annual Report on Form 10-K for the fiscal year ended May 31, 2014 and the consolidated financial statements and notes thereto. In addition to historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements in this report, including those made by the management of Aehr Test Systems, other than statements of historical fact, are forward-looking statements. These statements typically may be identified by the use of forward-looking words or phrases such as "believe," "expect," "intend," "anticipate," "should," "planned," "estimated," and "potential," among others and include, but are not limited to, statements concerning our expectations regarding our operations, business, strategies, prospects, revenues, expenses, costs and resources. These forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from those anticipated results or other expectations reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this report and other factors beyond our control, and in particular, the risks discussed in "Part II, Item 1A. Risk Factors" and those discussed in other documents we file with the SEC. All forward-looking statements included in this document are based on our current expectations, and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. OVERVIEW The Company was founded in 1977 to develop and manufacture burn-in and test equipment for the semiconductor industry. Since its inception, the Company has sold more than 2,500 systems to semiconductor manufacturers, semiconductor contract assemblers and burn-in and test service companies worldwide. The Company's principal products currently are the Advanced Burn-in and Test System, or ABTS, the FOX full wafer contact parallel test and burn-in system, the MAX burn-in system, WaferPak contactors, the DiePak carrier and test fixtures. The Company's net sales consist primarily of sales of systems, WaferPak contactors, test fixtures, die carriers, upgrades and spare parts, revenues from service contracts, and engineering development charges. The Company's selling arrangements may include contractual customer acceptance provisions, which are mostly deemed perfunctory or inconsequential, and installation of the product occurs after shipment and transfer of title. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to customer programs and incentives, product returns, bad debts, inventories, income taxes, financing operations, warranty obligations, and long-term service contracts. The Company's estimates are derived from historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Those results form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. For a discussion of the critical accounting policies, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates" in the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2014. There have been no material changes to our critical accounting policies and estimates during the three months ended August 31, 2014 compared to those discussed in our Annual Report on Form 10-K for the fiscal year ended May 31, 2014. 15 -------------------------------------------------------------------------------- RESULTS OF OPERATIONS The following table sets forth items in the Company's unaudited condensed consolidated statements of operations as a percentage of net sales for the periods indicated. Three Months Ended August 31, 2014 2013 Net sales 100.0 % 100.0 % Cost of sales 54.7 48.2 Gross profit 45.3 51.8 Operating expenses: Selling, general and administrative 45.6 37.8 Research and development 27.0 18.2 Total operating expenses 72.6 56.0 Loss from operations (27.3 ) (4.2 ) Interest expense (0.4 ) (0.1 ) Other income (expense), net 0.9 (0.9 ) Loss before income tax benefit (26.8 ) (5.2 ) Income tax benefit 1.3 0.8 Net loss (25.5 ) (4.4 ) Less: Net income attributable to the noncontrolling interest -- -- Net loss attributable to Aehr Test Systems common shareholders (25.5 )% (4.4 )% 16 -------------------------------------------------------------------------------- THREE MONTHS ENDED AUGUST 31, 2014 COMPARED TO THREE MONTHS ENDED AUGUST 31, 2013 NET SALES. Net sales decreased to $3.6 million for the three months ended August 31, 2014 from $3.8 million for the three months ended August 31, 2013, a decrease of 5.2%. The decrease in net sales for the three months ended August 31, 2014 was primarily due to the decrease in net sales of the Company's Test During Burn-in (TDBI) products, partially offset by an increase of the Company's wafer-level products. Net sales of the Company's TDBI products for the three months ended August 31, 2014 were $1.4 million, and decreased approximately $1.2 million from the three months ended August 31, 2013. Net sales of the Company's wafer-level products for the three months ended August 31, 2014 were $2.0 million, and increased approximately $0.9 million from the three months ended August 31, 2013. GROSS PROFIT. Gross profit consists of net sales less cost of sales. Cost of sales consists primarily of the cost of materials, assembly and test costs, and overhead from operations. Gross profit decreased to $1.6 million for the three months ended August 31, 2014 from $1.9 million for the three months ended August 31, 2013, a decrease of approximately $0.3 million. Gross profit margin, the percentage of gross profit to net sales, decreased to 45.3% for the three months ended August 31, 2014 from 51.8% for the three months ended August 31, 2013. The higher gross profit margin for the three months ended August 31, 2013 was primarily the result of the sale of systems containing previously written down material. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative, or SG&A, expenses consist primarily of salaries and related costs of employees, commission expenses to independent sales representatives, product promotion and other professional services. SG&A expenses increased to $1.6 million for the three months ended August 31, 2014 from $1.4 million for the three months ended August 31, 2013, an increase of 14.4%. The increase in SG&A expenses was primarily due to the increase in employment related expenses. RESEARCH AND DEVELOPMENT. Research and development, or R&D, expenses consist primarily of salaries and related costs of employees engaged in ongoing research, design and development activities, costs of engineering materials and supplies, and professional consulting expenses. R&D expenses increased to $1.0 million for the three months ended August 31, 2014 from $0.7 million for the three months ended August 31, 2013, an increase of 40.8%. This increase was primarily attributable to increases in employment related expenses and project expenses of $0.1 million each. INTEREST EXPENSE. Interest expense was $14,000 for the three months ended August 31, 2014 compared with $4,000 for the three months ended August 31, 2013 primarily as a result of higher average borrowings on the line of credit. OTHER INCOME (EXPENSE), NET. Other income, net was $31,000 for the three months ended August 31, 2014, compared with other expense, net of $34,000 for the three months ended August 31, 2013. The change between other income and other expense was due primarily to gains and losses realized in connection with the fluctuation in the value of the dollar compared to foreign currencies during the referenced periods. INCOME TAX BENEFIT. Income tax benefit was $49,000 and $29,000 for the three months ended August 31, 2014 and 2013, respectively. The income tax benefit for the three months ended August 31, 2014 and 2013 was due to the reversal of tax liabilities previously established under Financial Accounting Standards Board Interpretation No. 48, which were no longer required. LIQUIDITY AND CAPITAL RESOURCES Net cash used in operating activities was $0.2 million for the three months ended August 31, 2014, and net cash provided by operating activities was $0.2 million for the three months ended August 31, 2013. For the three months ended August 31, 2014, net cash used in operating activities was primarily the result of the net loss of $0.9 million, as well as decreases in accounts payable and customer deposits and deferred revenue of $0.3 million each, partially offset by a decrease in accounts receivable of $1.3 million. The decrease in customer deposits and deferred revenue was primarily due to the shipments of customer orders with down payments. The decrease in accounts payable was primarily due to lower expenditures associated with lower revenue. The decrease in accounts receivable was primarily due to a decrease in revenues in the quarter ended August 31, 2014 compared to the three months ended May 31, 2014. For the three months ended August 31, 2013, net cash provided by operating activities was primarily driven by the increase in customer deposits and deferred revenue of $0.4 million, partially offset by an increase in accounts receivable of $0.2 million. The increase in customer deposits and deferred revenue was primarily due to the receipt of additional 30% down payments from certain customers. The increase in accounts receivable was primarily due to an increase in revenues in the quarter ended August 31, 2013 compared to the three months ended May 31, 2013. 17 -------------------------------------------------------------------------------- Net cash used in investing activities was $21,000 and $6,000 for the three months ended August 31, 2014 and 2013, respectively. Net cash used in investing activities was due to purchases of property and equipment Net cash provided by financing activities was $538,000 for the three months ended August 31, 2014 compared to net cash used in financing activities of $95,000 for the three months ended August 31, 2013. Net cash provided by financing activities during the three months ended August 31, 2014 was primarily due to proceeds from the exercise of stock options of $315,000 and net borrowings under the line of credit of $223,000. Net cash used by financing activities during the three months ended August 31, 2013 was primarily due to net repayments under the line of credit of $154,000, offset by $59,000 in proceeds from the exercise of stock options. The effect of fluctuation in exchange rates used cash of $33,000 for the three months ended August 31, 2014 and provided cash of $40,000 for the three months ended August 31, 2013. The change in cash used or provided was due to the fluctuation in the value of the dollar compared to foreign currencies. As of August 31, 2014, the Company had working capital of $6.0 million. Working capital consists of cash and cash equivalents, accounts receivable, inventory and other current assets, less current liabilities. The Company leases its manufacturing and office space under operating leases. The Company entered into a non-cancelable operating lease agreement for its United States manufacturing and office facilities, which commenced in April 2008 and expires in June 2015. Under the lease agreement, the Company is responsible for payments of utilities, taxes and insurance. From time to time, the Company evaluates potential acquisitions of businesses, products or technologies that complement the Company's business. If consummated, any such transactions may use a portion of the Company's working capital or require the issuance of equity. The Company has no present understandings, commitments or agreements with respect to any material acquisitions. Based on the Company's existing cash balance together with cash flows from operations, as well as funds available through the working capital credit facility, the Company anticipates that it may require additional equity or debt financing to meet its working capital requirements to support its new product initiatives for fiscal 2015 and beyond and is taking steps to obtain such additional financing. However, there can be no assurance that additional financing will be available when required, or if available, that such financing can be obtained on terms satisfactory to the Company. OFF-BALANCE SHEET ARRANGEMENTS The Company has not entered into any off-balance sheet financing arrangements and has not established any variable interest entities. OVERVIEW OF CONTRACTUAL OBLIGATIONS On August 25, 2011, the Company entered into a working capital credit facility agreement allowing the Company to borrow up to $1.5 million based upon qualified U.S. based and foreign customer receivables, and export-related inventory. On May 29, 2012 the credit agreement was amended to increase the borrowing limit to $2.0 million. On September 11, 2012, the credit agreement was amended to increase the borrowing limit to $2.5 million. On August 21, 2013 the credit agreement was further amended to extend the term of the agreement to August 22, 2014. On August 22, 2014 the credit agreement was further amended to extend the term of the agreement to August 21, 2015. As of August 31, 2014, the Company had drawn $1.0 million against the credit facility. Refer to Note 11, "LINE OF CREDIT," for further discussion of the credit agreement. There have been no additional material changes in the composition, magnitude or other key characteristics of the Company's contractual obligations or other commitments as disclosed in the Company's Annual Report on Form 10-K for the year ended May 31, 2014. 18 -------------------------------------------------------------------------------- |