NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES:
BUSINESS:
Aehr
Test Systems (the “Company”) was incorporated in
California in May 1977 and primarily designs, engineers and
manufactures test and burn-in equipment used in the semiconductor
industry. The Company’s principal products are the Advanced
Burn-In and Test System, or ABTS, the FOX full wafer contact
parallel test and burn-in systems, the MAX burn-in system, the
WaferPak full wafer contactor, the DiePak carrier and test
fixtures.
LIQUIDITY:
Since
inception, the Company has incurred substantial cumulative losses
and negative cash flows from operations. In response, the Company
took steps to minimize expense levels, entered into credit
arrangements, and raised capital through public and private equity
offerings, to increase the likelihood that it will have sufficient
cash to support operations.
At
May 31, 2020, the Company had $5.4 million in cash and cash
equivalents. The Company anticipates that the existing cash balance
together with income from operations, collections of existing
accounts receivable, revenue from its existing backlog of products,
the sale of inventory on hand, deposits and down payments against
significant orders will be adequate to meet its working capital and
capital equipment requirements. The Company believes its existing
cash and cash equivalents will be sufficient to meet its
anticipated cash needs over the next 12 months. The Company’s
future capital requirements will depend on many factors, including
the Company’s growth rate, the timing and extent of its
spending to support research and development activities, the timing
and cost of establishing additional sales and marketing
capabilities, the timing and cost to introduce new and enhanced
products and the timing and cost to implement new manufacturing
technologies. In the event that additional financing is required
from outside sources, the Company may not be able to raise it on
terms acceptable to the Company or at all. Any additional debt
financing obtained by the Company in the future could also involve
restrictive covenants relating to the Company’s
capital-raising activities and other financial and operational
matters, which may make it more difficult for the Company to obtain
additional capital and to pursue business opportunities, including
potential acquisitions. Additionally, if the Company raises
additional funds through further issuances of equity, convertible
debt securities or other securities convertible into equity, its
existing stockholders could suffer significant dilution in their
percentage ownership of the Company, and any new equity securities
the Company issue could have rights, preferences and privileges
senior to those of holders of the Company’s common stock. If
the Company is unable to obtain adequate financing or financing on
terms satisfactory to the Company when the Company requires it, the
Company’s ability to continue to grow or support its business
and to respond to business challenges could be significantly
limited.
CONSOLIDATION:
The
consolidated financial statements include the accounts of the
Company and both its wholly-owned and majority-owned foreign
subsidiaries. Intercompany accounts and transactions have been
eliminated.
FOREIGN
CURRENCY TRANSLATION AND TRANSACTIONS:
Assets
and liabilities of the Company’s foreign subsidiaries and a
branch office are translated into U.S. Dollars from their
functional currencies of Japanese Yen, Euros and New Taiwan Dollars
using the exchange rate in effect at the balance sheet date.
Additionally, their net sales and expenses are translated using
exchange rates approximating average rates prevailing during the
fiscal year. Translation adjustments that arise from translating
their financial statements from their local currencies to U.S.
Dollars are accumulated and reflected as a separate component of
shareholders’ equity.
Transaction
gains and losses that arise from exchange rate changes denominated
in currencies other than the local currency are included in the
Consolidated Statements of Operations as incurred. See Note 13,
Other (Expense)
Income,
Net for the detail of foreign exchange transaction gains and losses
for all periods presented.
USE OF
ESTIMATES:
The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
Significant
estimates in the Company’s consolidated financial statements
include allowance for doubtful accounts, valuation of inventory at
the lower of cost or net realizable value, and warranty
reserves.
CASH
EQUIVALENTS:
Cash
equivalents consist of money market instruments purchased with an
original maturity of three months or less. These investments are
reported at fair value.
ACCOUNTS
RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Accounts
receivable are derived from the sale of products throughout the
world to semiconductor manufacturers, semiconductor contract
assemblers, electronics manufacturers and burn-in and test service
companies. Accounts receivable are recorded at the invoiced amount
and are not interest bearing. The Company maintains an allowance
for doubtful accounts to reserve for potentially uncollectible
trade receivables. The Company also reviews its trade receivables
by aging category to identify specific customers with known
disputes or collection issues. The Company exercises judgment when
determining the adequacy of these reserves as the Company evaluates
historical bad debt trends, general economic conditions in the
United States and internationally, and changes in customer
financial conditions. Uncollectible receivables are recorded as bad
debt expense when all efforts to collect have been exhausted and
recoveries are recognized when they are received. No significant
adjustments to the allowance for doubtful accounts were recorded
during the fiscal year ended May 31, 2020, 2019 or
2018.
CONCENTRATION
OF CREDIT RISK:
The
Company sells its products primarily to semiconductor manufacturers
in North America, Asia, and Europe. As of May 31, 2020,
approximately 13%, 62% and 25% of gross accounts receivable were
from customers located in North America, Asia and Europe,
respectively. As of May 31, 2019, approximately 49%, 25% and 26% of
gross accounts receivable were from customers located in North
America, Asia and Europe, respectively. Two customers accounted for
45% and 18% of gross accounts receivable as of May 31, 2020. Three
customers accounted for 44%, 25% and 21% of gross accounts
receivable as of May 31, 2019. Three customers accounted for 43%,
16% and 15% of net sales in fiscal 2020. Four customers accounted
for 36%, 14%, 12% and 10% of net sales in fiscal 2019. The Company
performs ongoing credit evaluations of its customers and generally
does not require collateral. The Company uses letter of credit
terms for some of its international customers.
The
Company’s cash and cash equivalents are generally deposited
with major financial institutions in the United States, Japan,
Germany and Taiwan. The Company invests its excess cash in money
market funds and U.S. Treasury securities. The money market funds
bear the risk associated with each fund. The money market funds
have variable interest rates. The Company has not experienced any
material losses on its money market funds or short-term cash
deposits.
CONCENTRATION
OF SUPPLY RISK:
The
Company relies on subcontractors to manufacture many of the
components and subassemblies used in its products. Quality or
performance failures of the Company’s products or changes in
its manufacturers’ financial or business condition could
disrupt the Company’s ability to supply quality products to
its customers and thereby have a material and adverse effect on its
business and operating results. Some of the components and
technologies used in the Company’s products are purchased and
licensed from a single source or a limited number of sources. The
loss of any of these suppliers may cause the Company to incur
additional transition costs, result in delays in the manufacturing
and delivery of its products, or cause it to carry excess or
obsolete inventory and could cause it to redesign its
products.
INVENTORIES:
Inventories
include material, labor and overhead, and are stated at the lower
of cost (first-in, first-out method) or net realizable value. Net
realizable value is the estimated selling prices in the ordinary
course of business, less costs of completion, disposal and
transportation. Provisions for excess, obsolete and unusable
inventories are made after management’s evaluation of future
demand and market conditions. The Company adjusts inventory
balances to approximate the lower of its manufacturing costs or net
realizable value. If actual future demand or market conditions
become less favorable than those projected by management,
additional inventory write-downs may be required, and would be
reflected in cost of sales in the period the revision is
made.
PROPERTY
AND EQUIPMENT:
Property
and equipment are stated at cost less accumulated depreciation and
amortization. Major improvements are capitalized, while repairs and
maintenance are expensed as incurred. Leasehold improvements are
amortized over the
lesser
of their estimated useful lives or the term of the related lease.
Furniture and fixtures, machinery and equipment, and test equipment
are depreciated on a straight-line basis over their estimated
useful lives. The ranges of estimated useful lives are generally as
follows:
Furniture
and fixtures . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . 2 to 6 years
Machinery
and equipment. . . .
. . . . . . . . . . . . . . . . . . . . . . . . . 3 to 6
years
Test
equipment . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . .
. . . .
. 4 to 6
years
REVENUE
RECOGNITION:
In
May 2014, the Financial Accounting Standards Board
(“FASB”) issued FASB Accounting Standards Code
(“ASC”) Topic 606, Revenue from Contracts with Customers
(Topic 606), which was subsequently updated (collectively
“ASC 606”). We adopted the standard as of June 1, 2018,
using the modified retrospective method. Under this method, we
applied ASC 606 to contracts that were not complete as of June 1,
2018 and recognized the cumulative effect of initially applying the
standard as an adjustment to the opening balance of retained
earnings. Results for reporting periods beginning after June 1,
2018 are presented in accordance with ASC 606. Under the modified
retrospective adoption method, prior period amounts are not
adjusted and are reported in accordance with the accounting
standards in effect for those periods per FASB ASC Topic 605,
Revenue Recognition, which
is also referred to herein as “legacy
GAAP.”
The
adoption of ASC 606 did not have a material impact on our
consolidated financial statements as of June 1, 2018. No adjustment
was recorded to accumulated deficit as of the adoption date and
reported revenue would not have been different under legacy GAAP.
Additionally, we do not expect the adoption of the revenue standard
to have a material impact to our net income on an ongoing
basis.
We
sell our products primarily through a direct sales force. In
certain international markets, we sell our products through
independent distributors. We consider revenue to be earned when all
of the following criteria are met:
●
We have a contract with a customer that creates enforceable rights
and obligations,
●
Promised performance obligations are identified,
●
The transaction price, or the amount we expect to receive, is
determinable and
●
We have satisfied the performance obligations to the
customer.
Transfer
of control is evidenced upon passage of title and risk of loss to
the customer unless we are required to provide additional
services.
PRODUCT
DEVELOPMENT COSTS AND CAPITALIZED SOFTWARE:
Costs
incurred in the research and development of new products or systems
are charged to operations as incurred. Costs incurred in the
development of software programs for the Company’s products
are charged to operations as incurred until technological
feasibility of the software has been established. Generally,
technological feasibility is established when the software module
performs its primary functions described in its original
specifications, contains features required for it to be usable in a
production environment, is completely documented and the related
hardware portion of the product is complete. After technological
feasibility is established, any additional costs are capitalized.
Capitalization of software costs ceases when the software is
substantially complete and is ready for its intended use.
Capitalized costs are amortized over the estimated life of the
related software product using the greater of the units of sales or
straight-line methods over ten years. No system software
development costs were capitalized or amortized in fiscal 2020,
2019 and 2018.
IMPAIRMENT
OF LONG-LIVED ASSETS:
In
the event that facts and circumstances indicate that the carrying
value of assets may be impaired, an evaluation of recoverability
would be performed. If an evaluation is required, the estimated
future undiscounted cash flows associated with the asset would be
compared to the asset’s carrying value to determine if a
write-down is required.
ADVERTISING
COSTS:
The
Company expenses all advertising costs as incurred and the amounts
were not material for all periods presented.
SHIPPING
AND HANDLING OF PRODUCTS:
Amounts
billed to customers for shipping and handling of products are
included in net sales. Costs incurred related to shipping and
handling of products are included in cost of sales.
INCOME
TAXES:
Income
taxes have been provided using the liability method whereby
deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities and net operating loss and tax credit carryforwards
measured using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse or the
carryforwards are utilized. Valuation allowances are established
when it is determined that it is more likely than not that such
assets will not be realized.
A
full valuation allowance was established against all deferred tax
assets, as management determined that it is more likely than not
that deferred tax assets will not be realized, as of May 31, 2020
and 2019.
The
Company accounts for uncertain tax positions consistent with
authoritative guidance. The guidance prescribes a “more
likely than not” recognition threshold and measurement
attribute for the financial statement recognition and measurement
of a tax position taken or expected to be taken in a tax return.
The Company does not expect any material change in its unrecognized
tax benefits over the next twelve months. The Company recognizes
interest and penalties related to unrecognized tax benefits as a
component of income taxes.
Although
the Company files U.S. federal, various state, and foreign tax
returns, the Company’s only major tax jurisdictions are the
United States, California, Germany and Japan. Tax years 1996
– 2019 remain subject to examination by the appropriate
governmental agencies due to tax loss carryovers, research and
development tax credits, or other tax attributes from those
years.
On March 27, 2020,
the Coronavirus Aid, Relief, and Economic Security Act (CARES Act)
was passed into law. The CARES Act includes several significant
business tax provisions including modification to the taxable
income limitation for utilization of net operating losses (NOLs)
incurred in 2018, 2019 and 2020 and the ability to carry back NOLs
from those years for a period of up to five years, an increase to
the limitation on deductibility of certain business interest
expense, bonus depreciation for purchases of qualified improvement
property and special deductions on certain corporate charitable
contributions. The Company is currently analyzing the impact of
these changes and therefore an estimate of the impact to income
taxes is not yet available.
On
June 29, 2020, California Governor Gavin Newsom signed Assembly
Bill 85 (AB 85) into law as part of the California 2020 Budget Act,
which temporarily suspends the use of California net operating
losses and imposes a cap on the amount of business incentive tax
credits that companies can utilize against their net income for tax
years 2020, 2021, and 2022. The Company analyzed the provisions of
AB 85 and determined there was no impact on its provision for
income taxes for the current period and will continue to evaluate
the impact, if any, AB 85 may have on its condensed consolidated
financial statements and disclosures.
COMPREHENSIVE
(LOSS) INCOME:
Comprehensive
(loss) income generally represents all changes in
shareholders’ equity except those resulting from investments
or contributions by shareholders. Unrealized gains and losses on
foreign currency translation adjustments are included in the
Company’s components of comprehensive (loss) income, which
are excluded from net (loss) income. Comprehensive (loss) income is
included in the statements of comprehensive (loss)
income.
RECENT
ACCOUNTING PRONOUNCEMENTS:
Accounting
Standards Adopted
Financial Instruments
In
January 2016, the FASB issued an accounting standard update related
to the recognition and measurement of financial assets and
financial liabilities. This standard changes accounting for equity
investments and financial liabilities under the fair value option
and the presentation and disclosure requirements for financial
instruments. In addition, this standard clarifies guidance related
to the valuation allowance assessment when recognizing deferred tax
assets resulting from unrealized losses on available-for-sale debt
securities. The Company adopted this new standard in fiscal year
2020. The adoption of this standard did not have a significant
impact on the Company’s consolidated financial
statements.
Leases
In
February 2016, the FASB issued ASC Update No. 2016-02, Leases (FASB
ASC Topic 842, Leases). The Company adopted the standard as of June
1, 2019, using the modified retrospective approach and the
transition method provided by ASC Update No. 2018-11, Leases (Topic
842): Targeted Improvements. Under this method, the Company applied
the new leasing rules on the date of adoption and recognized the
cumulative effect of initially applying the standard as an
adjustment to its opening balance sheet, rather than at the
earliest comparative period presented in the financial statements.
Prior periods presented are in accordance with the previous lease
guidance under FASB ASC Topic 840, Leases.
In
addition, the Company applied the package of practical expedients
permitted under FASB ASC Topic 842 transition guidance to its
entire lease portfolio at June 1, 2019. As a result, the Company
was not required to reassess (i) whether any expired or existing
contracts are or contain leases, (ii) the classification of any
expired or existing leases or (iii) the treatment of initial direct
costs for any existing leases. Furthermore, the Company elected not
to separate lease and non-lease components for the majority of its
leases. Instead, for all applicable classes of underlying assets,
the Company accounted for each separate lease component and the
non-lease components associated with that lease component as a
single lease component.
As
a result of adopting FASB ASC Topic 842, Leases, on June 1, 2019,
the Company recognized right-of-use assets of $2.7 million and
corresponding liabilities of $2.8 million for its existing
operating lease portfolio on its consolidated balance sheet.
Operating lease right-of-use assets are presented as long-term
assets and corresponding liabilities are presented within Operating
lease liabilities, short-term and Operating lease liabilities,
long-term on the Company’s consolidated balance sheet. There
was no material impact to the Company’s consolidated
statements of operations or consolidated statements of cash flows
as a result of FASB ASC Topic 842, Leases. Please refer to Note
“8. LEASES” for information regarding the
Company’s lease portfolio as of May 31, 2020 as accounted for
under FASB ASC Topic 842, Leases.
Accounting
Standards Not Yet Adopted
Financial
Instruments
In
June 2016, the FASB issued an accounting standard update
(“ASU”) that requires measurement and recognition of
expected credit losses for financial assets held based on
historical experience, current conditions, and reasonable and
supportable forecasts that affect the collectability of the
reported amount. Due to a subsequent ASU in November 2019, the
accounting standard will be effective for the Company beginning in
the first quarter of fiscal 2024 on a modified retrospective basis,
and early adoption in fiscal 2020 is permitted. The Company does
not expect a material impact of this accounting standard on its
consolidated financial statements.
2. REVENUE:
Revenue recognition
The
Company recognizes revenue when promised goods or services are
transferred to customers in an amount that reflects the
consideration to which the Company expects to be entitled in
exchange for those goods or services by following a five-step
process: (1) identify the contract with a customer, (2) identify
the performance obligations in the contract, (3) determine the
transaction price, (4) allocate the transaction price, and (5)
recognize revenue when or as the Company satisfies a performance
obligation, as further described below.
Performance
obligations include sales of systems, contactors, spare parts, and
services, as well as installation and training services included in
customer contracts.
A
contract’s transaction price is allocated to each distinct
performance obligation. In determining the transaction price, the
Company evaluates whether the price is subject to refund or
adjustment to determine the net consideration to which the Company
expects to be entitled. The Company generally does not grant return
privileges, except for defective products during the warranty
period.
For
contracts that contain multiple performance obligations, the
Company allocates the transaction price to the performance
obligations on a relative standalone selling price basis.
Standalone selling prices are based on multiple factors including,
but not limited to, historical discounting trends for products and
services and pricing practices in different
geographies.
Revenue
for systems and spares are recognized at a point in time, which is
generally upon shipment or delivery. Revenue from services is
recognized over time as services are completed or ratably over the
contractual period of generally one year or less.
The
Company has elected the practical expedient to not assess whether a
contract has a significant financing component as the
Company’s standard payment terms are less than one
year.
Disaggregation of revenue
The
following tables show revenues by major product categories. Within
each product category, contract terms, conditions and economic
factors affecting the nature, amount, timing and uncertainty around
revenue recognition and cash flow are substantially
similar.
The
Company’s revenues by product category are as follows (in
thousands):
|
|
|
|
|
|
Type
of good / service:
|
|
|
|
Systems
|
$8,099
|
$9,566
|
$18,174
|
Contactors
|
10,784
|
6,154
|
6,500
|
Services
|
3,408
|
5,336
|
4,881
|
|
$22,291
|
$21,056
|
$29,555
|
Product
lines:
|
|
|
|
Wafer-level
|
$19,768
|
$14,618
|
$13,080
|
Test During Burn-In
|
2,523
|
6,438
|
16,475
|
|
$22,291
|
$21,056
|
$29,555
|
The
following presents information about the Company’s operations
in different geographic areas. Net sales are based upon ship-to
location (in thousands):
|
|
|
|
|
|
Geographic
region:
|
|
|
|
United States
|
$13,544
|
$13,468
|
$8,446
|
Asia
|
7,556
|
5,648
|
19,973
|
Europe
|
1,191
|
1,940
|
1,136
|
|
$22,291
|
$21,056
|
$29,555
|
|
|
|
|
With
the exception of the amount of service contracts and extended
warranties, the Company’s product category revenues are
recognized at point in time when control transfers to customers.
The following presents revenue based on timing of recognition (in
thousands):
|
|
|
|
|
|
Timing
of revenue recognition (in thousands):
|
|
|
|
Products
and services transferred at a point in time
|
$19,948
|
$18,473
|
$27,337
|
Services transferred over time
|
2,343
|
2,583
|
2,218
|
|
$22,291
|
$21,056
|
$29,555
|
Contract balances
A
receivable is recognized in the period the Company delivers goods
or provides services or when the Company’s right to
consideration is unconditional. The Company usually does not record
contract assets because the Company has an unconditional right to
payment upon satisfaction of the performance obligation, and
therefore, a receivable is more commonly recorded than a contract
asset.
Contract
liabilities include payments received in advance of performance
under a contract and are satisfied as the associated revenue is
recognized. Contract liabilities are reported on the Condensed
Consolidated Balance Sheets at the
end of
each reporting period as a component of deferred revenue. Contract
liabilities as of May 31, 2020 and 2019 were $192,000 and
$1,734,000, respectively. During the fiscal years ended May 31,
2020 and 2019, the Company recognized $1,545,000 and $1,273,000 of
revenues that were included in contract liabilities as of May 31,
2019 and 2018, respectively.
Remaining performance obligations
On
May 31, 2020, the Company had $192,000 of remaining performance
obligations, which were comprised of deferred service contracts and
extended warranty contracts not yet delivered. The Company expects
to recognize approximately 88% of its remaining performance
obligations as revenue in fiscal 2021, and an additional 12% in
fiscal 2022 and thereafter. The foregoing excludes the value of
other remaining performance obligations as they have original
durations of one year or less, and also excludes information about
variable consideration allocated entirely to a wholly unsatisfied
performance obligation.
Costs to obtain or fulfill a contract
The
Company generally expenses sales commissions when incurred as a
component of selling, general and administrative expense as the
amortization period is typically less than one year. Additionally,
the majority of the Company’s cost of fulfillment as a
manufacturer of products is classified as inventory and fixed
assets, which are accounted for under the respective guidance for
those asset types. Other costs of contract fulfillment are
immaterial due to the nature of the Company’s products and
their respective manufacturing process.
3. EARNINGS PER SHARE (“EPS”):
Basic
EPS is determined using the weighted average number of common
shares outstanding during the period. Diluted EPS is determined
using the weighted average number of common shares and potential
common shares (representing the dilutive effect of stock options,
RSUs and ESPP shares) outstanding during the period using the
treasury stock method.
The
following table presents the computation of basic and diluted net
(loss) income per share attributable to Aehr Test Systems common
shareholders (in thousands, except per share data):
|
|
|
|
|
|
Numerator: Net (loss) income
|
$(2,802)
|
$(5,235)
|
$528
|
|
|
|
|
Denominator
for basic net (loss) income per share:
|
|
|
|
Weighted-average shares
outstanding
|
22,882
|
22,387
|
21,732
|
|
|
|
|
Shares used in basic net (loss) income per share
calculation
|
22,882
|
22,387
|
21,732
|
|
|
|
|
Effect of dilutive securities.
|
--
|
--
|
1,050
|
|
|
|
|
Denominator for diluted net (loss) income per
share
|
22,882
|
22,387
|
22,782
|
|
|
|
|
Basic net (loss) income per
share
|
$(0.12)
|
$(0.23)
|
$0.02
|
|
|
|
|
Diluted net (loss) income per
share
|
$(0.12)
|
$(0.23)
|
$0.02
|
For
the purpose of computing diluted earnings per share, the weighted
average number of potential common shares does not include stock
options with an exercise price greater than the average fair value
of the Company’s common stock for the period, as the effect
would be anti-dilutive. In the fiscal years ended May 31, 2020 and
2019, potential common shares have not been included in the
calculation of diluted net loss per share as the effect would be
anti-dilutive. As such, the numerator and the denominator used in
computing both basic and diluted net loss per share for these
periods are the same. Stock options to purchase 3,153,000 and
3,107,000 shares of common stock were outstanding on May 31, 2020
and 2019, respectively, but were not included in the computation of
diluted net loss per share, because the inclusion of such shares
would be anti-dilutive. Stock options to purchase 1,313,000 shares
of common stock were outstanding as of May 31, 2018 but were not
included in the computation of diluted net income per share,
because the inclusion of such shares would be anti-dilutive. ESPP
rights to purchase 192,000 and 297,000 ESPP shares were outstanding
on May 31, 2020 and 2019, respectively, but were not included in
the computation of diluted net loss per share, because the
inclusion of such shares would be anti-dilutive. RSUs for 10,000
shares and 23,000 shares were outstanding on
May 31, 2020 and 2019, respectively, but were not included in the
computation of diluted net loss
per
share, because the inclusion of such shares would be anti-dilutive.
The 2,657,000 shares convertible under the Convertible Notes
outstanding on May 31, 2018 were not included in the computation of
diluted net income (loss) per share, because the inclusion of such
shares would be anti-dilutive.
4. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The
Company’s financial instruments are measured at fair value
consistent with authoritative guidance. This authoritative guidance
defines fair value, establishes a framework for using fair value to
measure assets and liabilities, and disclosures required related to
fair value measurements.
The
guidance establishes a fair value hierarchy based on inputs to
valuation techniques that are used to measure fair value that are
either observable or unobservable. Observable inputs reflect
assumptions market participants would use in pricing an asset or
liability based on market data obtained from independent sources
while unobservable inputs reflect a reporting entity’s
pricing based upon their own market assumptions. The fair value
hierarchy consists of the following three levels:
Level 1
- instrument valuations are obtained from real-time quotes for
transactions in active exchange markets involving identical
assets.
Level 2
- instrument valuations are obtained from readily-available pricing
sources for comparable instruments.
Level 3
- instrument valuations are obtained without observable market
values and require a high level of judgment to determine the fair
value.
The
following table summarizes the Company’s financial assets
measured at fair value on a recurring basis as of May 31, 2020 (in
thousands):
|
|
|
|
|
|
|
|
|
|
Money market funds
|
$80
|
$80
|
$--
|
$--
|
Assets
|
$80
|
$80
|
$--
|
$--
|
|
|
|
|
|
The following table
summarizes the Company’s financial assets measured at fair
value on a recurring basis as of May 31, 2019 (in
thousands):
|
|
|
|
|
|
|
|
|
|
Money market funds
|
$3,017
|
$3,017
|
$--
|
$--
|
Assets
|
$3,017
|
$3,017
|
$--
|
$--
|
|
|
|
|
|
Included
in Money market funds as of May 31, 2020 and 2019 is $80,000
restricted cash representing a security deposit for the
Company’s United States manufacturing and office space
lease.
There
were no financial liabilities measured at fair value as of May 31,
2020 and 2019.
There
were no transfers between Level 1 and Level 2 fair value
measurements during the fiscal years ended May 31, 2020 and
2019.
The
carrying amounts of financial instruments including cash, cash
equivalents, receivables, accounts payable and certain other
accrued liabilities, approximate fair value due to their short
maturities. Based on the borrowing rates currently available to the
Company for loans with similar terms, the carrying value of the
debt approximates the fair value.
5. ACCOUNTS RECEIVABLE:
Accounts
receivable comprise (in thousands):
|
|
|
|
|
Accounts receivable
|
$3,717
|
$4,859
|
Less: Allowance for doubtful
accounts
|
--
|
--
|
|
$3,717
|
$4,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
receivable:
|
|
|
|
|
May 31, 2020
|
$0
|
$--
|
$(0)
|
$--
|
|
|
|
|
|
May 31,
2019
|
$4
|
$--
|
$(4)
|
$--
|
|
|
|
|
|
*
Deductions include write-offs of uncollectible accounts,
collections of amounts previously reserved, and releases of
allowance for doubtful accounts credited to expense.
6. BALANCE SHEET DETAIL:
INVENTORIES:
|
|
(In
Thousands)
|
|
|
Raw materials and
sub-assemblies
|
$5,055
|
$5,471
|
Work in process
|
2,917
|
3,580
|
Finished goods
|
17
|
10
|
|
$7,989
|
$9,061
|
During the year ended May 31, 2020
and 2019, the Company wrote down $1,669,000 and $1,168,000 of
inventory, respectively.
PROPERTY AND EQUIPMENT, NET:
|
|
(In
Thousands)
|
|
|
Leasehold improvements
|
$1,201
|
$1,154
|
Furniture and fixtures
|
612
|
983
|
Machinery and equipment
|
3,038
|
3,097
|
Test equipment
|
2,516
|
2,604
|
|
7,367
|
7,838
|
Less:
Accumulated depreciation and amortization
|
(6,704)
|
(6,793)
|
|
$663
|
$1,045
|
Depreciation expense was $384,000,
$431,000 and $417,000 for fiscal 2020, 2019, and 2018,
respectively.
ACCRUED EXPENSES:
|
|
(In
Thousands)
|
|
|
Payroll related
|
$791
|
$990
|
Warranty
|
246
|
154
|
Professional services
|
173
|
162
|
Commissions and bonuses
|
139
|
168
|
Taxes payable
|
30
|
29
|
Investor relations
|
19
|
19
|
Restructuring
|
8
|
408
|
Material purchases
|
--
|
65
|
Other
|
33
|
39
|
|
$1,439
|
$2,034
|
CUSTOMER
DEPOSITS AND DEFERRED REVENUE, SHORT-TERM:
|
|
(In
Thousands)
|
|
|
Customer deposits
|
$--
|
$1,003
|
Deferred revenue
|
170
|
542
|
|
$170
|
$1,545
|
7. INCOME TAXES:
Domestic
and foreign components of (loss) income before income tax (expense)
benefit are as follows (in thousands):
|
|
|
|
|
|
Domestic
|
$(2,751)
|
$(5,273)
|
$433
|
Foreign
|
(15)
|
65
|
22
|
|
$(2,766)
|
$(5,208)
|
$455
|
The
income tax (expense) benefit consists of the following (in
thousands):
|
|
|
|
|
|
Federal
income taxes:
|
|
|
|
Current
|
$--
|
$--
|
$99
|
Deferred
|
--
|
--
|
--
|
State
income taxes:
|
|
|
|
Current
|
(30)
|
(6)
|
(22)
|
Deferred
|
--
|
--
|
--
|
Foreign
income taxes:
|
|
|
|
Current
|
(6)
|
(21)
|
(4)
|
Deferred
|
--
|
--
|
--
|
|
$(36)
|
$(27)
|
$73
|
The
Company’s effective tax rate differs from the U.S. federal
statutory tax rate, as follows:
|
|
|
|
|
|
U.S. federal statutory tax rate
|
21.0%
|
21.0%
|
28.6%
|
State taxes, net of federal tax
effect
|
1.4
|
(1.0)
|
(16.7)
|
Foreign rate differential.
|
(21.5)
|
(0.7)
|
39.4
|
Stock-based compensation
|
(4.0)
|
(2.8)
|
39.9
|
Research and development credit
|
--
|
1.5
|
5.9
|
Change in valuation allowance
|
4.3
|
(15.6)
|
(1,349.2)
|
Federal rate change impact
|
--
|
--
|
1,419.7
|
Federal AMT refund
|
--
|
--
|
(20.0)
|
ASU 2016-09 adoption
|
--
|
--
|
(169.1)
|
Other
|
(2.5)
|
(2.9)
|
5.4
|
Effective tax rate
|
(1.3)%
|
(0.5)%
|
(16.1)%
|
The
components of the net deferred tax assets and liabilities are as
follows (in thousands):
|
|
|
|
|
|
|
|
Deferred
tax assets:
|
|
|
Net operating losses
|
$13,634
|
$13,475
|
Lease Liability
|
483
|
--
|
Credit carryforwards
|
5,089
|
4,995
|
Inventory reserves
|
1,005
|
790
|
Reserves and accruals
|
739
|
1,379
|
Other
|
319
|
298
|
|
21,269
|
20,937
|
|
|
|
Deferred
tax liabilities:
|
|
|
Operating lease right-of-use
assets
|
(449)
|
--
|
Less: Valuation allowance
|
(20,820)
|
(20,937)
|
Net deferred tax assets (liabilities)
|
$--
|
$--
|
The
valuation allowance decreased by $118,000 during fiscal 2020,
increased by $813,000 during fiscal 2019, and decreased by
$6,139,000 during fiscal 2018. As of May 31, 2020 and 2019, the
Company concluded that it is more likely than not that the deferred
tax assets will not be realized and therefore provided a full
valuation allowance against the deferred tax assets. The Company
will continue to evaluate the need for a valuation allowance
against its deferred tax assets on a quarterly basis.
At
May 31, 2020, the Company had federal and state net operating loss
carryforwards of $54,601,000 and $29,386,000, respectively. The
federal and state net operating loss carryforwards will begin to
expire in 2024. Federal net operating losses of $3.7 million will
carryforward indefinitely. At May 31, 2020, the Company also had
federal and state research and development tax credit carryforwards
of $2,026,000 and $5,825,000, respectively. The federal credit
carryforward will begin to expire in 2022, and the California
credit will carryforward indefinitely. These carryforwards may be
subject to certain limitations on annual utilization in case of a
change in ownership, as defined by tax law. The Company also has
alternative minimum tax credit carryforwards of $34,000 for state
purposes. The credits may be used to offset regular tax and do not
expire.
The
Company has made no provision for U.S. income taxes on
undistributed earnings of certain foreign subsidiaries because it
is the Company’s intention to permanently reinvest such
earnings in its foreign subsidiaries. If such earnings were
distributed, the Company would be subject to additional U.S. income
tax expense. Determination of the amount of unrecognized deferred
income tax liability related to these earnings is not
practicable.
Foreign
net operating loss carryforwards of $378,000 are available to
reduce future foreign taxable income. The foreign net operating
losses will expire starting fiscal year 2021.
The
Company maintains liabilities for uncertain tax positions. These
liabilities involve considerable judgment and estimation and are
continuously monitored by management based on the best information
available. The aggregate changes in the balance of gross
unrecognized tax benefits are as follows (in
thousands):
Beginning balance as of May 31,
2017
|
$789
|
|
|
Increases related to prior year tax
positions
|
889
|
Increases related to current year tax
positions
|
107
|
|
|
Balance at May 31, 2018
|
$1,785
|
|
|
Decreases related to prior year tax
positions
|
(41)
|
Increases related to current year tax
positions
|
65
|
|
|
Balance at May 31, 2019
|
$1,809
|
|
|
Decreases related to prior year tax
positions
|
(11)
|
Increases related to current year tax
positions
|
54
|
|
|
Balance at May 31, 2020
|
$1,852
|
The
ending balance of $1,852,000 of unrecognized tax benefits as of May
31, 2020, if recognized, would not impact the effective tax
rate.
On
December 22, 2017, the U.S. government enacted comprehensive tax
legislation commonly referred to as the Tax Cuts and Jobs Act (the
“Tax Act”). On December 22, 2017, the SEC staff issued
Staff Accounting Bulletin No. 118 (“SAB 118”), which
provides guidance on accounting for the tax effects of the Tax Act.
SAB 118 provides a measurement period that should not extend beyond
one year from the Tax Act enactment date for companies to complete
the accounting under ASC 740, Income taxes. In accordance with SAB
118, a company must reflect the income tax effects of those aspects
of the Tax Act for which the accounting under ASC 740 is complete.
To the extent that a company’s accounting for certain income
tax effects of the Tax Act is incomplete but it is able to
determine a reasonable estimate, it must record a provisional
estimate in the financial statements.
As
part of the transition to the new territorial tax system, the Tax
Act imposes a one-time repatriation tax on deemed repatriation of
historical earnings of foreign subsidiaries. The company is not
subject to the transition tax. The one-time transition tax is based
on post-1986 earnings and profits that were previously deferred
from U.S. income tax. During fiscal 2020 the Company finalized its
calculation of the transition tax and due to carryover losses and
the valuation allowance the Company determined there was no impact
to the financial statements as a result of the completion of the
analysis. The Company also finalized its adjustment to the deferred
tax assets and offset to the valuation allowance for the reduction
in the U.S. corporate tax rate to 21% with no financial statement
impact.
The
tax reform repealed the corporate alternative minimum tax, or AMT,
effective December 31, 2017. The minimum tax credit is refundable
for any tax year beginning after December 31, 2017 and before
December 31, 2020 in an amount equal to 50% of the excess of the
minimum tax credit over the allowable credit for the year against
the regular tax liability. Any unused minimum tax credit
carryforward is refundable in the following year. The company
recorded a $91,000 benefit for its federal refundable AMT credit in
Q3 fiscal 2018. 50% of the refundable credit was claimed through
the fiscal year 2019 federal income tax return and received by the
end of fiscal year 2020. The remaining 50% of the refundable credit
will be claimed through the fiscal year 2020 federal income tax
return.
On
December 18, 2019, the FASB issued Accounting Standards Update ASU
2019-12 on Simplifying the Accounting for Income Taxes. The board
decided to remove the exception to the incremental approach for
intra-period tax allocation when there is a loss from continuing
operations and income or gain from other items (for example
discontinued operations or other comprehensive income). There are
also provisions related to state taxes and calculating income taxes
in an interim period when a year-to-date loss exceeds the
anticipated loss for the year. The Company has not yet adopted ASU
2019-12 and believes upon adoption there would be no material
impact.
On
March 27, 2020, the CARES Act was signed into law. The CARES Act
includes provisions relating to refundable payroll tax credits,
deferment of the employer portion of certain payroll taxes, net
operating loss carryback periods, alternative minimum tax credit
refunds, modifications to the net interest deduction limitations
and technical corrections to tax depreciation methods for qualified
improvement property. The Company is currently analyzing the impact
of these changes and therefore an estimate of the impact to income
taxes is not yet available.
Although
the Company files U.S. federal, various state, and foreign tax
returns, the Company’s only major tax jurisdictions are the
United States, California, Germany and Japan. Tax years 1996
– 2019 remain subject to examination by the appropriate
governmental agencies due to tax loss carryovers, research and
development tax credits, or other tax attributes from those
years.
8. LEASES
The
Company leases most of its manufacturing and office space under
operating leases. The Company entered into non-cancelable operating
lease agreements for its United States manufacturing and office
facilities and maintains equipment under non-cancelable operating
leases in Germany. The Company’s principal administrative and
production facilities are located in Fremont, California, in a
51,289 square foot building. The Company’s lease was renewed
in February 2018 and expires in July 2023. The Company maintained a
facility in Japan located in a 418 square foot office in Tokyo
under a lease which expired in June 2020. The Company also
maintained a 1,585 square foot warehouse in Yamanashi under a lease
which expired in June 2020. The Company substantially closed its
subsidiary Aehr Test Systems Japan K.K. in March 2020, completing
the liquidation of the legal entity in July 2020, see Note 16,
“Restructuring,” of the Notes to Consolidated Financial
Statements. The Company leases a 492 square foot sales and support
office in Utting, Germany. The lease, which began February 1, 1992
and expires on January 31, 2022, contains an automatic twelve
months renewal, at rates to be determined, if no notice is given
prior to six months from expiry. Under the lease agreements, the
Company is responsible for payments of utilities, taxes and
insurance.
The
Company has only operating leases for real estate including
corporate offices, warehouse space and certain equipment. A lease
with an initial term of 12 months or less is generally not recorded
on the condensed consolidated balance sheet, unless the arrangement
includes an option to purchase the underlying asset, or renew the
arrangement that the Company is reasonably certain to exercise
(short-term leases). The Company recognizes lease expense on a
straight-line basis over the lease term for short-term leases that
the Company does not record on its balance sheet. The
Company’s operating leases have remaining lease terms of 4
months to 3 years.
The
Company determines whether an arrangement is or contains a lease
based on the unique facts and circumstances present at the
inception of the arrangement. Operating lease liabilities and their
corresponding right-of-use assets are recorded based on the present
value of lease payments over the expected lease term. The interest
rate implicit in lease contracts is typically not readily
determinable. As such, the Company utilizes the appropriate
incremental borrowing rate, which is the rate incurred to borrow on
a collateralized basis over a similar term at an amount equal to
the lease payments in a similar economic environment. Certain
adjustments to the right-of-use asset may be required for items
such as initial direct costs paid or incentives
received.
The
weighted-average remaining lease term for the Company’s
operating leases was 3.2 years at May 31, 2020 and the
weighted-average discount rate was 5.5%.
The
Company’s operating lease cost under FASB ASC Topic
842 was $734,000 for the year ended May 31, 2020. Rent
expense under FASB ASC Topic 840 was $787,000 for the year
ended May 31, 2019.
The
following table presents supplemental cash flow information related
to the Company’s operating leases (in
thousands):
|
|
Cash
paid for amounts included in the measurement of operating lease
liabilities
|
|
Operating
cash flows from operating leases
|
$737
|
The
following table presents the maturities of the Company’s
operating lease liabilities as of May 31, 2020 (in
thousands):
Fiscal year
|
|
2021
|
$765
|
2022
|
779
|
2023
|
795
|
2024
|
134
|
2025
|
--
|
Thereafter
|
--
|
Total
future minimum operating lease payments
|
$2,473
|
Less:
imputed interest
|
210
|
Present
value of operating lease liabilities
|
$2,263
|
9. BORROWING AND FINANCING ARRANGEMENTS:
On
January 16, 2020, the Company entered into a Loan and Security
Agreement (the “Loan Agreement”) with Silicon Valley
Bank (“SVB”). Pursuant to the Loan Agreement, the
Company may borrow up to (a) the lesser of (i) the revolving line
of $4.0 million or (ii) the amount available under the borrowing
base minus (b) the outstanding principal balance of any advances,
under a revolving line of credit which is collateralized by all the
Company's assets except intellectual property. The borrowing base
is 80% of eligible accounts, as determined by SVB from the
Company’s most recent borrowing base statement; provided,
however, SVB has the right to decrease the foregoing percentage in
its good faith business judgment to mitigate the impact of certain
events or conditions, which may adversely affect the collateral or
its value. Subject to an event of default, the principal amount
outstanding under the revolving line of credit will accrue interest
at a floating per annum rate equal to the greater of (a) the prime
rate plus an additional percentage of up to 1%, which additional
percentage depends on the Company’s adjusted quick ratio, and
(b) 4.75%. Interest is payable monthly on the last calendar day of
each month and the outstanding principal amount, the unpaid
interest and all other obligations are due on the maturity date,
which is 364 days from the effective date of January 13, 2020. At
May 31, 2020, the Company had not drawn against the credit facility
and was in compliance with all covenants related to obligations to
meet reporting requirements. The balance available to borrow under
the line at May 31, 2020 was $263,000. There are no financial
covenants in the agreement.
10. LONG-TERM DEBT:
On
April 23, 2020, the Company obtained the PPP Loan in the aggregate
amount of $1,678,789 from SVB. The PPP Loan was evidenced by a
promissory note dated April 23, 2020 (the “Note”) that
matures on April 23, 2022 and bears interest at a rate of 1% per
annum, payable monthly commencing on November 23, 2020. The PPP
Loan proceeds were used for payroll, health care benefits, rent and
utilities.
Under
the terms of the CARES Act, PPP loan recipients can apply for and
be granted forgiveness for all or a portion of loans granted under
the PPP. Such forgiveness will be determined, subject to
limitations, based on the use of loan proceeds for payment of
payroll costs, covered rent and mortgage obligations, and covered
utility payments incurred by the Company. The Company intends to
apply for forgiveness of the PPP Loan with respect to these covered
expenses. No assurance can be given that the Company will obtain
forgiveness of the amount due under the loan in whole or in
part.
11. STOCKHOLDERS’ EQUITY, COMPREHENSIVE INCOME AND
STOCK-BASED COMPENSATION:
STOCK-BASED
COMPENSATION:
Stock-based
compensation expense consists of expenses for stock options,
restricted stock units, or RSUs, and employee stock purchase plan,
or ESPP, purchase rights. Stock-based compensation expense for
stock options and ESPP purchase rights is measured at each grant
date, based on the fair value of the award using the Black-Scholes
option valuation model, and is recognized as expense over the
employee’s requisite service period. This model was developed
for use in estimating the value of publicly traded options that
have no vesting restrictions and are fully transferable. The
Company’s employee stock options have characteristics
significantly different from those of publicly traded
options.
For
RSUs, stock-based compensation expense is based on the fair value
of the Company’s common stock at the grant date. All of the
Company’s stock-based compensation is accounted for as equity
instruments.
The
following table summarizes the stock-based compensation expense for
the fiscal years ended May 31, 2020, 2019 and 2018 (in thousands,
except per share data):
|
|
|
|
|
|
Stock-based
compensation in the form of stock options, RSUs,
and ESPP purchase rights, included in:
|
|
|
|
|
|
|
|
Cost of sales
|
$80
|
$104
|
$148
|
Selling, general and
administrative
|
631
|
545
|
592
|
Research and development
|
199
|
256
|
256
|
|
|
|
|
Net effect on net (loss)
income
|
$910
|
$905
|
$996
|
|
|
|
|
Effect
on net (loss) income per share:
|
|
|
|
Basic
|
$0.04
|
$0.04
|
$0.05
|
Diluted
|
$0.04
|
$0.04
|
$0.04
|
As
of May 31, 2020, 2019 and 2018, there were no stock-based
compensation expenses capitalized as part of
inventory.
During
fiscal 2020, 2019 and fiscal 2018, the Company recorded stock-based
compensation related to stock options and restricted stock units of
$751,000, $650,000 and $706,000, respectively.
As
of May 31, 2020, the total compensation expense related to unvested
stock-based awards under the Company’s 2016 Equity Incentive
Plan, but not yet recognized, was $1,131,000 which is net of
estimated forfeitures of $3,000. This expense will be amortized on
a straight-line basis over a weighted average period of
approximately 2.6 years.
During
fiscal 2020, 2019 and fiscal 2018, the Company recorded stock-based
compensation related to its ESPP of $159,000, $255,000 and
$290,000, respectively. The increase in fiscal 2018 is primarily
due to employees increasing their ESPP elections during the fiscal
year.
As
of May 31, 2020, the total compensation expense related to purchase
rights under the ESPP but not yet recognized was $59,000. This
expense will be amortized on a straight-line basis over a weighted
average period of approximately 0.8 years.
Valuation
Assumptions
Valuation
and Amortization Method. The Company estimates the fair value of
stock options granted using the Black-Scholes option valuation
method and a single option award approach. The fair value under the
single option approach is amortized on a straight-line basis over
the requisite service periods of the awards, which is generally the
vesting period.
Expected
Term. The Company’s expected term represents the period that
the Company’s stock-based awards are expected to be
outstanding and was determined based on historical experience,
giving consideration to the contractual terms of the stock-based
awards, vesting schedules and expectations of future employee
behavior as evidenced by changes to the terms of its stock-based
awards.
Volatility.
Volatility is a measure of the amounts by which a financial
variable such as stock price has fluctuated (historical volatility)
or is expected to fluctuate (expected volatility) during a period.
The Company uses the historical volatility for the past five years,
which matches the expected term of most of the option grants, to
estimate expected volatility. Volatility for each of the
ESPP’s four time periods of six months, twelve months,
eighteen months, and twenty-four months is calculated separately
and included in the overall stock-based compensation expense
recorded.
Risk-Free
Interest Rate. The Company bases the risk-free interest rate used
in the Black-Scholes option valuation method on the implied yield
in effect at the time of option grant on U.S. Treasury zero-coupon
issues with a remaining term equivalent to the expected term of the
stock awards including the ESPP.
Fair
Value. The fair values of the Company’s stock options granted
to employees in fiscal 2020, 2019 and 2018 were estimated using the
following weighted average assumptions in the Black-Scholes option
valuation method:
|
|
|
|
|
|
|
|
|
|
Expected term (in years)
|
5
|
5
|
4
|
Volatility
|
0.72
|
0.72
|
0.77
|
Risk-free interest rates
|
1.56%
|
2.83%
|
1.95%
|
Weighted-average grant date fair
value
|
$0.95
|
$1.33
|
$2.07
|
The
fair value of our ESPP purchase rights for the fiscal 2020, 2019
and 2018 was estimated using the following weighted-average
assumptions:
|
Year End May 31,
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
Expected term (in years)
|
0.5 – 2.0
|
|
0.5 – 2.0
|
|
0.5 – 2.0
|
Volatility
|
0.62 – 0.77
|
|
0.48 – 0.78
|
|
0.56 – 0.81
|
Risk-free interest rates
|
0.14%–1.81%
|
|
2.33%–2.82%
|
|
1.92%–2.25%
|
Weighted-average grant date fair value
|
$0.79
|
|
$1.14
|
|
$1.01
|
EQUITY
INCENTIVE PLAN:
In
October 2006, the Company’s 2006 Equity Incentive Plan was
approved by the shareholders, which provides for granting of
incentive stock options, non-statutory stock options, restricted
stock, restricted stock units, stock appreciation rights,
performance units, performance shares and other stock or cash
awards as the Company’s Board of Directors may
determine.
In
October 2016, the Company’s 2016 Equity Incentive Plan was
approved by the Company’s shareholders. The 2016 Equity
Incentive Plan replaced our 2006 Equity Incentive Plan, which was
scheduled to expire in October 2016, and will continue in effect
until 2026. A total of 3,435,000 shares of common stock have been
reserved for issuance under the Company’s 2016 Equity
Incentive Plan, which includes 1,835,000 shares that remained
available for issuance under the 2006 Equity Incentive Plan. See
the Company’s Registration Statement on Form S-8 filed with
the Securities and Exchange Commission on November 22, 2019 for
further information regarding the 2016 Equity Incentive
Plan.
As
of May 31, 2020, out of the 4,813,000 shares authorized for grant
under the 2016 Equity Incentive Plan, 3,163,000 stock options and
RSUs were outstanding. As of May 31, 2019, out of the 4,277,000
shares authorized for grant under the 2016 Equity Incentive Plan,
3,129,000 stock options and RSUs were outstanding.
The
following tables summarize the Company’s stock option and RSU
transactions during fiscal 2020, 2019 and 2018 (in
thousands):
|
|
|
|
Balance, May 31, 2017
|
2,169
|
|
|
Options granted
|
(338)
|
RSUs granted
|
(64)
|
RSUs cancelled
|
33
|
Options terminated
|
16
|
Options expired
|
(4)
|
|
|
Balance, May 31, 2018
|
1,812
|
|
|
Options granted
|
(804)
|
RSUs cancelled
|
8
|
Options terminated
|
195
|
Options expired
|
(64)
|
|
|
Balance, May 31, 2019
|
1,147
|
|
|
Additional shares reserved
|
1,196
|
Options granted
|
(738)
|
RSUs granted
|
(25)
|
Shares
withheld for taxes and not issued
|
6
|
Options terminated
|
457
|
Options expired
|
(393)
|
|
|
Balance, May 31, 2020
|
1,650
|
The
following table summarized the stock option transactions during
fiscal 2020, 2019 and 2018 (in thousands, except per share
data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, May 31, 2017
|
3,074
|
$1.73
|
$8,763
|
|
|
|
|
Options granted
|
338
|
$3.56
|
|
Options terminated
|
(16)
|
$2.72
|
|
Options exercised
|
(537)
|
$1.17
|
|
|
|
|
|
Balances, May 31, 2018
|
2,859
|
$2.04
|
$1,987
|
|
|
|
|
Options granted
|
804
|
$2.19
|
|
Options terminated
|
(195)
|
$2.32
|
|
Options exercised
|
(361)
|
$0.85
|
|
|
|
|
|
Balances, May 31, 2019
|
3,107
|
$2.20
|
$283
|
|
|
|
|
Options granted
|
738
|
$1.61
|
|
Options terminated
|
(457)
|
$1.98
|
|
Options exercised
|
(235)
|
$1.22
|
|
|
|
|
|
Balances, May 31, 2020
|
3,153
|
$2.17
|
$102
|
|
|
|
|
Options
fully vested and expected to vest at
May 31, 2020
|
3,115
|
$2.17
|
$101
|
The
options outstanding and exercisable at May 31, 2020 were in the
following exercise price ranges (in thousands, except per share
data):
|
|
|
|
|
|
|
Number
Outstanding Shares
|
Weighted Average
Remaining Contractual Life (Years)
|
Weighted Average
Exercise Price
|
Number
Exercisable Shares
|
Weighted Average
Remaining Contractual Life (Years)
|
Weighted Average
Exercise Price
|
Aggregate
Intrinsic Value
|
$1.22-$1.28
|
248
|
2.10
|
$1.26
|
176
|
0.19
|
$1.28
|
|
$1.64-$1.77
|
945
|
5.35
|
$1.66
|
487
|
4.66
|
$1.68
|
|
$2.03-$2.46
|
1,223
|
3.70
|
$2.21
|
858
|
3.03
|
$2.19
|
|
$2.63-$2.81
|
511
|
1.29
|
$2.70
|
510
|
1.28
|
$2.70
|
|
$3.46-$3.93
|
226
|
4.16
|
$3.84
|
172
|
4.18
|
$3.82
|
|
|
|
|
|
|
|
|
|
$1.22-$3.93
|
3,153
|
3.71
|
$2.17
|
2,203
|
2.85
|
$2.25
|
$67
|
The
total intrinsic values of options exercised were $160,000, $338,000
and $1,058,000 during fiscal 2020, 2019 and 2018, respectively. The
weighted average contractual life of the options exercisable and
expected to be exercisable at May 31, 2020 was 3.69
years.
Options
to purchase 2,203,000, 2,314,000 and 2,312,000 shares were
exercisable at May 31, 2020, 2019 and 2018, respectively. These
exercisable options had weighted average exercise prices of $2.25,
$2.14 and $1.89 as of May 31, 2020, 2019 and 2018,
respectively.
During the fiscal year ended May 31, 2020, RSUs for 10,000 shares,
net of 6,000 shares withheld to settle payroll taxes, were granted
and fully vested to employees. The market value on the date
of the grant of these RSUs was $1.64 per share. During the
fiscal year ended May 31, 2020, 13,000 RSUs became fully vested and
there was no cancellation. 10,000 RSUs were outstanding and
unvested at May 31, 2020. The intrinsic value of the outstanding
and unvested RSUs at May 31, 2020 was $16,000. During the fiscal
year ended May 31, 2019, there were no RSUs granted to
employees. During the fiscal year ended May 31, 2019, 16,000
RSUs became fully vested and 8,000 RSUs were cancelled. 23,000 RSUs
were outstanding and unvested at May 31, 2019. The intrinsic
value of the outstanding and unvested RSUs at May 31, 2019 was
$40,000. During the fiscal year ended May 31, 2018, RSUs for
64,000 shares were granted to employees. The market value on
the date of the grant of these RSUs was $3.93 per share.
During the fiscal year ended May 31, 2018, 16,000 RSUs became fully
vested and 33,000 RSUs were cancelled. 47,000 RSUs were
outstanding and unvested at May 31, 2018. The intrinsic value
of the outstanding and unvested RSUs at May 31, 2018 was
$122,000.
During
the fiscal year ended May 31, 2020, RSUs for 9,000 shares were
granted and fully vested to members of the Company’s Board of
Directors. The weighted average market value on the date of the
grant of these RSUs was $1.64 per share. There were no RSUs granted
to members of the Board of Directors during fiscal 2019 and
2018.
EMPLOYEE
STOCK PURCHASE PLAN:
In
October 2006, the Company’s shareholders approved the 2006
Employee Stock Purchase Plan. In October 2016, the Company’s
shareholders approved the Company’s Amended and Restated 2006
Employee Stock Purchase Plan (the “Purchase Plan”),
which amended and restated the 2006 Employee Stock Purchase Plan.
The Purchase Plan extended the term of the 2006 Employee Stock
Purchase Plan indefinitely. See the Company’s Registration
Statements on Form S-8 filed with the Securities and Exchange
Commission on November 14, 2016 and November 21, 2018 for further
information regarding the Purchase Plan. The Purchase Plan has
consecutive, overlapping, twenty-four month offering periods. Each
twenty-four-month offering period includes four six-month purchase
periods. The offering periods generally begin on the first trading
day on or after April 1 and October 1 each year. All employees who
work a minimum of 20 hours per week and are customarily employed by
the Company (or an affiliate thereof) for at least five months per
calendar year are eligible to participate. Under the Purchase Plan,
shares are purchased through employee payroll deductions at
exercise prices equal to 85% of the lesser of the fair market value
of the Company’s common stock at either the first day of an
offering period or the last day of the purchase period. If a
participant’s rights to purchase stock under all employee
stock purchase plans of the Company accrue at a rate which exceeds
$25,000 worth of stock for a calendar year, such participant may
not be granted an option to purchase stock under the Purchase Plan.
The maximum number of shares a participant may purchase during a
single purchase period is 3,000 shares. In October 2018, the
Company’s shareholders approved an amendment to the Purchase
Plan to increase the number of shares authorized for
issuance thereunder by an additional 350,000 shares of the
Company’s common stock. After such amendment, a total of
1,850,000 shares of the Company’s common stock have been
authorized for issuance under the Purchase Plan. During the fiscal
years ended May 31, 2020, 2019 and 2018, ESPP purchase rights of
55,000, 379,000, and 359,000 shares, respectively, were granted.
For the fiscal years ended May 31, 2020, 2019 and 2018,
approximately
136,000,
125,000 and 237,000 shares of common stock, respectively, were
issued under the Purchase Plan. As of May 31, 2020, a total of
1,617,000 shares have been issued under the Purchase Plan, and
233,000 ESPP shares remain available for issuance.
12. EMPLOYEE BENEFIT PLANS:
EMPLOYEE
STOCK OWNERSHIP PLAN:
The
Company has a non-contributory, trusteed employee stock ownership
plan for full-time employees who have completed three consecutive
months of service and for part-time employees who have completed
one year of service and have attained an age of 21. The Company can
contribute either shares of the Company’s stock or cash to
the plan. The contribution is determined annually by the Company
and cannot exceed 15% of the annual aggregate salaries of those
employees eligible for participation in the plan. On May 31, 2007,
the Company converted the Aehr Test Systems Employee Stock Bonus
Plan into the Aehr Test Systems Employee Stock Ownership Plan (the
“Plan”). The stock bonus plan was converted to an
employee stock ownership plan (“ESOP”) to enable the
Plan to better comply with changes in the law regarding Company
stock. Individuals’ account balances vest at a rate of 20%
per year commencing upon completion of two years of service.
Non-vested balances, which are forfeited following termination of
employment, are allocated to the remaining employees in the Plan.
Under the Plan provisions, each employee who reaches age fifty-five
(55) and has been a participant in the Plan for ten years will be
offered an election each year to direct the transfer of up to 25%
of his/her ESOP account to the employee self-directed account in
the Savings and Retirement Plan. For anyone who met the above
prerequisites, the first election to diversify holdings was offered
after May 31, 2008. In the sixth year, employees will be able to
diversify up to 50% of their ESOP accounts. Contributions of
$60,000 per year were authorized for the plan during fiscal 2020,
2019 and 2018. The contribution amounts are recorded as
compensation expense, in the period authorized and included in
accrued expenses, in the period authorized. Contributions of 34,000
shares were made to the ESOP during fiscal 2020 for fiscal 2019.
Contributions of 23,000 shares were made to the ESOP during fiscal
2019 for fiscal 2018. Contributions of 13,000 shares were made to
the ESOP during fiscal 2018 for fiscal 2017. The contribution for
fiscal 2020 will be made in fiscal 2021. Shares held in the ESOP
are included in the EPS calculation.
401(K)
PLAN:
The
Company maintains a defined contribution savings plan (the
“401(k) Plan”) to provide retirement income to all
qualified employees of the Company. The 401(k) Plan is intended to
be qualified under Section 401(k) of the Internal Revenue Code of
1986, as amended. The 401(k) Plan is funded by voluntary pre-tax
contributions from employees. Contributions are invested, as
directed by the participant, in investment funds available under
the 401(k) Plan. The Company is not required to make, and did not
make, any contributions to the 401(k) Plan during fiscal 2020, 2019
and 2018.
13. OTHER (EXPENSE)
INCOME,
NET:
Other
(expense)
income,
net comprises the following (in thousands):
|
|
|
|
|
|
Foreign exchange (loss) gain
|
$(12)
|
$43
|
$(63)
|
Other income, net
|
1
|
1
|
2
|
|
$(11)
|
$44
|
$(61)
|
14. PRODUCT WARRANTIES:
The
Company provides for the estimated cost of product warranties at
the time revenues are recognized on the products shipped. While the
Company engages in extensive product quality programs and
processes, including actively monitoring and evaluating the quality
of its component suppliers, the Company’s warranty obligation
is affected by product failure rates, material usage and service
delivery costs incurred in correcting a product failure. Should
actual product failure rates, material usage or service delivery
costs differ from the Company’s estimates, revisions to the
estimated warranty liability would be required.
The
standard warranty period is one year for systems and ninety days
for parts and service.
Following
is a summary of changes in the Company’s liability for
product warranties during the fiscal years ended May 31, 2020 and
2019 (in thousands):
|
|
|
|
|
|
|
|
Balance at the beginning of the
year
|
$154
|
$135
|
Accruals for warranties issued during the
year
|
299
|
214
|
Consumption of reserves
|
(207)
|
(195)
|
|
|
|
Balance at the end of the year
|
$246
|
$154
|
The
accrued warranty balance is included in accrued expenses on the
consolidated balance sheets.
15. SEGMENT INFORMATION:
The
Company has only one reportable segment. The information for
revenue category by type, product line, geography and timing of
revenue recognition, is summarized in Note “2.
REVENUE.”
Property
and equipment information is based on the physical location of the
assets. The following table presents property and equipment
information for geographic areas (in thousands):
|
|
|
|
|
United
States
|
$662
|
$1,005
|
Asia
|
1
|
40
|
Europe
|
--
|
--
|
|
$663
|
$1,045
|
There
were no revenues through distributors for the fiscal years ended
May 31, 2020 and 2019.
The
Company’s Japanese and German subsidiaries primarily comprise
the foreign operations. Substantially all of the sales of the
subsidiaries are made to unaffiliated Japanese or European
customers. Net sales from outside the United States include those
of Aehr Test Systems Japan K.K. and Aehr Test Systems
GmbH.
16. RESTRUCTURING:
During the fiscal year ended May 31,
2020, the Company
approved the dissolution of Aehr Test Systems Japan K.K
(“ATS-Japan”), a majority owned subsidiary. In
connection with the dissolution plan, the Company recognized
approximately $220,000 in the fourth quarter of fiscal 2020 related
to severance payments for individuals impacted in this reduction,
legal fees associated with the dissolution process, and write-off
of assets. The ATS-J subsidiary was dissolved in March 2020. The
liquidation process occurred from March 2020 through the final
liquidation in July 2020, allowing creditors time to submit claims
and time for ATS-J to wind down and disposition any assets. The
Company expects the dissolution of ATS-Japan will result in a cost
saving of approximately $90,000 each quarter beginning in fiscal
2021.
During
the fiscal year ended May 31, 2019, the Company implemented a
restructuring plan in order to streamline its operations and better
align its structure with its objectives going forward. In
connection with the restructuring plan, the Company recognized
$725,000 of restructuring charges related to employee termination
expenses during the fiscal year ended May 31, 2019. The Company
paid $317,000 of the restructuring charge during fiscal year ended
May 31, 2019. At May 31, 2019, the balance of $408,000 of the
restructuring charge was included in accrued expenses on the
accompanying condensed consolidated balance sheets and is expected
to be paid in fiscal year 2020. The Company does not expect to
incur any further expenses in connection with this restructuring
plan. There were no restructuring charges incurred for the fiscal
years ended May 31, 2018.
17. RELATED PARTY TRANSACTIONS:
Mario
M. Rosati, one of the Company’s directors, was also a member
of Wilson Sonsini Goodrich & Rosati, Professional Corporation,
which has served as the Company’s outside corporate counsel
and has received compensation at normal
commercial rates for these services. Mario M. Rosati retired from
Wilson Sonsini Goodrich & Rosati on January 31, 2020. The
amounts of transactions during fiscal years ended May 31, 2020,
2019 and 2018 were $78,000, $90,000, and $64,000, respectively. At
May 31, 2020 the Company had a prepayment to Wilson Sonsini
Goodrich & Rosati of $14,000 and at May 31, 2019 had a payable
to Wilson Sonsini Goodrich & Rosati of $13,000.
18. COMMITMENTS AND CONTINGENCIES:
COMMITMENTS
At
both May 31, 2020 and 2019, the Company had restricted cash of
$80,000 held by a financial institution, representing a security
deposit for its United States manufacturing and office space lease.
This amount is included in other assets on the consolidated balance
sheets.
PURCHASE
OBLIGATIONS
The
Company has purchase obligations to certain suppliers. In some
cases the products the Company purchases are unique and have
provisions against cancellation of the order. At May 31, 2020, the
Company had $2,196,000 of purchase obligations which are due within
the following 12 months. This amount does not include contractual
obligations recorded on the consolidated balance sheets as
liabilities.
CONTINGENCIES
The
Company may, from time to time, be involved in legal proceedings
arising in the ordinary course of business. While there can be no
assurances as to the ultimate outcome of any litigation involving
the Company, management does not believe any pending legal
proceedings will result in judgment or settlement that will have a
material adverse effect on the Company’s consolidated
financial position, results of operations or cash
flows.
In
the normal course of business to facilitate sales of its products,
the Company indemnifies other parties, including customers, with
respect to certain matters, for example, including against losses
arising from a breach of representations or covenants, or from
intellectual property infringement or other claims. These
agreements may limit the time within which an indemnification claim
can be made and the amount of the claim. In addition, the Company
has entered into indemnification agreements with its officers and
directors, and the Company’s bylaws contain similar
indemnification obligations to the Company’s
agents.
It
is not possible to determine the maximum potential amount under
these indemnification agreements due to the limited history of
prior indemnification claims and the unique facts and circumstances
involved in each particular agreement. To date, payments made by
the Company under these agreements have not had a material impact
on the Company’s operating results, financial position or
cash flows.
19. SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA
(UNAUDITED):
The
following tables (presented in thousands, except per share data)
sets forth selected unaudited condensed consolidated statements of
operations data for each of the four quarters of the fiscal years
ended May 31, 2020 and 2019. The unaudited quarterly information
has been prepared on the same basis as the annual information
presented elsewhere herein and, in the Company’s opinion,
includes all adjustments (consisting only of normal recurring
entries) necessary for a fair statement of the information for the
quarters presented. The operating results for any quarter are not
necessarily indicative of results for any future period and should
be read in conjunction with the audited consolidated financial
statements of the Company’s and the notes thereto included
elsewhere herein.
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$5,533
|
$6,874
|
$6,111
|
$3,773
|
Gross profit (loss)
|
$2,271
|
$3,202
|
$2,991
|
$(93)
|
Net (loss) income
|
$(413)
|
$251
|
$245
|
$(2,885)
|
Net (loss) income per share basic and
diluted
|
$(0.02)
|
$0.01
|
$0.01
|
$(0.13)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$4,740
|
$5,911
|
$3,163
|
$7,242
|
Gross profit
|
$1,553
|
$2,398
|
$272
|
$3,379
|
Net (loss) income
|
$(1,515)
|
$(629)
|
$(3,201)
|
$110
|
Net (loss) income per share basic and
diluted
|
$(0.07)
|
$(0.03)
|
$(0.14)
|
$0.00
|