0001354488-11-003818.txt : 20111018 0001354488-11-003818.hdr.sgml : 20111018 20111014155958 ACCESSION NUMBER: 0001354488-11-003818 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20110831 FILED AS OF DATE: 20111014 DATE AS OF CHANGE: 20111014 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AEHR TEST SYSTEMS CENTRAL INDEX KEY: 0001040470 STANDARD INDUSTRIAL CLASSIFICATION: INSTRUMENTS FOR MEAS & TESTING OF ELECTRICITY & ELEC SIGNALS [3825] IRS NUMBER: 942424084 STATE OF INCORPORATION: CA FISCAL YEAR END: 0127 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22893 FILM NUMBER: 111141917 BUSINESS ADDRESS: STREET 1: 400 KATO TERRACE CITY: FREMONT STATE: CA ZIP: 94539 BUSINESS PHONE: 5106239400 MAIL ADDRESS: STREET 1: 400 KATO TERRACE CITY: FREMONT STATE: CA ZIP: 94539 10-Q 1 b77201_10-q.txt QUARTERLY REPORT FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended August 31, 2011. OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to __________. Commission file number: 000-22893. AEHR TEST SYSTEMS (Exact name of Registrant as specified in its charter) CALIFORNIA 94-2424084 -------------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 400 KATO TERRACE FREMONT, CA 94539 -------------------------------------- ------------------------------------ (Address of principal (Zip Code) executive offices) (510) 623-9400 ------------------------------------------------------------------------------ (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT. N/A Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period as the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes X No --- --- 1 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act (Check one): Large accelerated filer Accelerated filer --- --- Non-accelerated filer Smaller reporting company X --- --- (Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X --- --- Number of shares of common stock, $0.01 par value, outstanding at September 30, 2011 was 8,931,928. 2 FORM 10-Q FOR THE QUARTER ENDED AUGUST 31, 2011 INDEX PART I. FINANCIAL INFORMATION ITEM 1. Condensed Consolidated Financial Statements (Unaudited) Condensed Consolidated Balance Sheets as of August 31, 2011 and May 31, 2011 ....................... 4 Condensed Consolidated Statements of Operations for the three months ended August 31, 2011 and 2010............. 5 Condensed Consolidated Statements of Cash Flows for the three months ended August 31, 2011 and 2010............. 6 Notes to Condensed Consolidated Financial Statements......... 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................... 15 ITEM 3. Quantitative and Qualitative Disclosures about Market Risks... 19 ITEM 4. Controls and Procedures....................................... 20 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings ........................................... 21 ITEM 1A. Risk Factors ............................................... 21 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds... 28 ITEM 3. Defaults Upon Senior Securities ............................. 28 ITEM 4. (Removed and Reserved) ....................................... 28 ITEM 5. Other Information ........................................... 28 ITEM 6. Exhibits ................................................... 28 SIGNATURE PAGE ....................................................... 29 Index to Exhibits ..................................................... 30
3 PART I. FINANCIAL INFORMATION Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) AEHR TEST SYSTEMS CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share data) (unaudited)
August 31, May 31, 2011 2011 ----------- ----------- (1) ASSETS Current assets: Cash and cash equivalents ..................... $ 3,892 $ 4,020 Accounts receivable, net of allowances for doubtful accounts of $39 and $23 at August 31, 2011 and May 31, 2011, respectively ............................... 2,633 1,432 Inventories, net............................... 5,169 4,958 Prepaid expenses and other..................... 247 161 ----------- ----------- Total current assets ....................... 11,941 10,571 Property and equipment, net ..................... 827 954 Other assets..................................... 178 558 ----------- ----------- Total assets ............................... $ 12,946 $ 12,083 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable............................... $ 1,473 $ 885 Accrued expenses............................... 1,451 1,434 Deferred revenue............................... 209 221 ----------- ----------- Total current liabilities ................... 3,133 2,540 Income tax payable............................... 165 204 Deferred lease commitment ....................... 224 238 ----------- ----------- Total liabilities ........................... 3,522 2,982 ----------- ----------- Shareholders' equity: Common stock, $0.01 par value: Issued and outstanding: 8,932 shares at August 31, 2011 and May 31, 2011............. 89 89 Additional paid-in capital..................... 47,912 47,747 Accumulated other comprehensive income......... 2,627 2,593 Accumulated deficit ........................... (41,204) (41,328) ----------- ----------- Total shareholders' equity ................. 9,424 9,101 ----------- ----------- Total liabilities and shareholders' equity... $ 12,946 $ 12,083 =========== ===========
(1) The condensed consolidated balance sheet at May 31, 2011 has been derived from the audited consolidated financial statements at that date. The accompanying notes are an integral part of these condensed consolidated financial statements. 4 AEHR TEST SYSTEMS CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (unaudited)
Three Months Ended August 31, ---------------------- 2011 2010 ---------- ---------- Net sales..................................... $ 4,130 $ 2,169 Cost of sales................................. 2,328 1,225 ---------- ---------- Gross profit ................................. 1,802 944 ---------- ---------- Operating expenses: Selling, general and administrative......... 1,601 1,518 Research and development ................... 1,082 1,142 Gain on bankruptcy claim ................... -- (155) ---------- ---------- Total operating expenses ............... 2,683 2,505 ---------- ---------- Loss from operations ................... (881) (1,561) Interest income............................... -- 2 Gain on sale of long-term investment ......... 990 -- Other (expense) income, net................... (12) 44 ---------- ---------- Income (loss) before income tax (benefit) expense................... 97 (1,515) Income tax (benefit) expense ................. (27) 1 ---------- ---------- Net income (loss)............................. $ 124 $ (1,516) ========== ========== Net income (loss) per share - basic........... $ 0.01 $ (0.17) Net income (loss) per share - diluted......... $ 0.01 $ (0.17) Shares used in per share calculations: Basic ..................................... 8,932 8,667 Diluted..................................... 9,100 8,667
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 AEHR TEST SYSTEMS CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
Three Months Ended August 31, ------------------- 2011 2010 -------- -------- Cash flows from operating activities: Net income (loss)............................. $ 124 $ (1,516) Adjustments to reconcile net income (loss) to net cash used in operating activities: Stock compensation expense.................. 165 274 Provision for doubtful accounts............. 16 11 Loss on disposal of assets.................. -- 2 Gain on sale of long-term investment........ (990) -- Depreciation and amortization............... 137 147 Changes in operating assets and liabilities: Accounts receivable....................... (1,101) (653) Inventories............................... (211) (307) Deferred lease commitment................. (14) (9) Accounts payable.......................... 376 (292) Income tax payable........................ (38) (20) Accrued expenses and deferred revenue..... (1) (464) Prepaid expenses and other................ (83) 260 -------- -------- Net cash used in operating activities.................. (1,620) (2,567) -------- -------- Cash flows from investing activities: Proceeds from sale of investments........... 1,375 -- Purchases of property and equipment......... (7) -- -------- -------- Net cash provided by investing activities.................. 1,368 -- -------- -------- Cash flows from financing activities: Proceeds from issuance of common stock and exercise of stock options............. -- 12 -------- -------- Net cash provided by financing activities.................. -- 12 -------- -------- Effect of exchange rates on cash................ 124 194 -------- -------- Net decrease in cash and cash equivalents...................... (128) (2,361) Cash and cash equivalents, beginning of period.. 4,020 7,766 -------- -------- Cash and cash equivalents, end of period........ $ 3,892 $ 5,405 ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. 6 AEHR TEST SYSTEMS NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying condensed consolidated financial information has been prepared by Aehr Test Systems, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC, and therefore does not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in accordance with accounting principles generally accepted in the United States of America. In the opinion of management, the unaudited condensed consolidated financial statements for the interim periods presented reflect all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the condensed consolidated financial position and results of operations as of and for such periods indicated. These condensed consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2011. Results for the interim periods presented herein are not necessarily indicative of results which may be reported for any other interim period or for the entire fiscal year. PRINCIPLES OF CONSOLIDATION. The condensed consolidated financial statements include the accounts of Aehr Test Systems and its subsidiaries (collectively, the "Company," "we," "us," and "our"). All significant intercompany balances have been eliminated in consolidation. ACCOUNTING 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 and 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. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from those estimates. 2. STOCK-BASED COMPENSATION Stock-based compensation expense consists of expenses for stock options and employee stock purchase plan, or ESPP, shares. Stock-based compensation cost 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. All of the Company's stock based compensation is accounted for as an equity instrument. See Notes 8 and 9 in the Company's Annual Report on Form 10-K for fiscal 2011 filed on August 26, 2011 for further information regarding the stock option plan and the ESPP. The following table summarizes compensation costs related to the Company's stock-based compensation for the three months ended August 31, 2011 and 2010, respectively (in thousands): 7
Three Months Ended August 31, ------------------ 2011 2010 -------- -------- Stock-based compensation in the form of employee stock options and ESPP shares, included in: Cost of sales ................................. $ 19 $ 32 Selling, general and administrative ........... 93 143 Research and development ....................... 53 99 -------- -------- Total stock-based compensation ................. $ 165 $ 274 ======== ========
During the three months ended August 31, 2011 and 2010, the Company recorded stock-based compensation related to stock options of $155,000 and $223,000, respectively. As of August 31, 2011, the total unrecognized stock-based compensation cost related to unvested stock-based awards under the Company's 1996 Stock Option Plan and 2006 Equity Incentive Plan was approximately $963,000, which is net of estimated forfeitures of $2,000. This cost will be amortized over the remaining service period of the underlying options. The weighted average period is approximately 3.2 years. During the three months ended August 31, 2011 and 2010, the Company recorded stock-based compensation related to the ESPP of $10,000 and $51,000, respectively. As of August 31, 2011, the total compensation cost related to options to purchase the Company's common stock under the ESPP but not yet recognized was approximately $8,000. This cost will be amortized on a straight-line basis over a weighted average period of approximately 0.5 years. VALUATION ASSUMPTIONS Valuation and Amortization Method. The Company estimates the fair value of stock options granted using the Black-Scholes option valuation model 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. Expected 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 cost recorded. Dividends. The Company has never paid any cash dividends on its common stock and does not anticipate paying any cash dividends in the foreseeable future. Consequently, the Company uses an expected dividend yield of zero in the Black-Scholes option valuation model. Risk-Free Interest Rate. The Company bases the risk-free interest rate used in the Black-Scholes option valuation model on the implied yield in 8 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. Estimated Forfeitures. When estimating forfeitures, the Company considers voluntary termination behavior as well as analysis of actual option forfeitures. Fair Value. The fair values of the Company's stock options granted to employees for the three months ended August 31, 2011 and 2010 were estimated using the following weighted average assumptions in the Black-Scholes option valuation model.
Three months ended August 31, ------------------ 2011 2010 ------- ------- Option Plan Shares Expected Term (in years).................... 5 5 Volatility.................................. 0.80 0.80 Expected Dividend........................... $ 0.00 $ 0.00 Risk-free Interest Rates.................... 1.57% 1.78% Estimated Forfeiture Rate................... 0.25% 0.25% Weighted Average Grant Date Fair Value...... $ 0.80 $ 1.25
There were no ESPP shares granted to employees for the three months ended August 31, 2011 and 2010. The following table summarizes the stock option transactions during the three months ended August 31, 2011 (in thousands, except per share data):
Outstanding Options -------------------------------------------- Weighted Number Average Aggregate Available of Exercise Intrinsic Shares Shares Price Value ---------- -------- --------- ---------- Balances, May 31, 2011........ 687 2,083 $ 3.40 $ 298 Options granted............. (432) 432 $ 1.27 Options terminated.......... 140 (140) $ 3.70 Plan shares expired......... (136) ---------- -------- Balances, August 31, 2011... 259 2,375 $ 2.99 $ 123 ========== ======== Options fully vested and expected to vest at August 31, 2011 2,328 $ 2.99 $ 120 ======== Options exercisable at August 31, 2011 1,547 $ 3.59 $ 123 ========
9 The options outstanding and exercisable at August 31, 2011 were in the following exercise price ranges (in thousands, except per share data):
Options Outstanding Options Exercisable at August 31, 2011 at August 31, 2011 -------------------------------- -------------------------------------- Weighted Weighted Average Weighted Number Weighted Average Range of Number Remaining Average Exer- Average Remaining Aggregate Exercise Outstanding Contractual Exercise cisable Exercise Contractual Intrinsic Prices Shares Life(Years) Price Shares Price Life (Years) Value ----------- ----------- ----------- -------- ------- -------- ----------- --------- $0.85-$0.85 454 2.83 $ 0.85 454 $ 0.85 2.83 $1.25-$2.81 1,296 4.15 $ 1.83 496 $ 2.20 2.49 $2.84-$5.96 272 0.81 $ 5.02 272 $ 5.02 0.81 $6.00-$9.30 231 1.38 $ 7.66 228 $ 7.67 1.38 $9.94-$9.94 122 1.81 $ 9.94 97 $ 9.94 1.81 ----------- ------- $0.85-$9.94 2,375 3.12 $ 2.99 1,547 $ 3.59 2.09 $ 123 =========== =======
There were no stock options exercised for the three months ended August 31, 2011. The total intrinsic value of options exercised was $1,000 during the three months ended August 31, 2010. The weighted average contractual life of the options exercisable and expected to be exercisable at August 31, 2011 was 3.12 years. Options to purchase 1,547,000 and 1,393,000 shares were exercisable at August 31, 2011 and 2010, respectively. These exercisable options had weighted average exercise prices of $3.59 and $4.16 as of August 31, 2011 and 2010, respectively. 3. EARNINGS PER SHARE Earnings per share is computed based on the weighted average number of common and common equivalent shares (common stock options and ESPP shares) outstanding, when dilutive, during each period using the treasury stock method.
Three Months Ended August 31, --------- --------- 2011 2010 --------- --------- (in thousands, except per share amounts) Numerator: Net income (loss)............... $ 124 $ (1,516) --------- --------- Denominator for basic net income (loss) per share: Weighted-average shares outstanding ..... 8,932 8,667 --------- --------- Shares used in basic net income (loss) per share calculation........................ 8,932 8,667 Effect of dilutive securities.............. 168 -- --------- --------- Denominator for diluted net income (loss) per share.............................. 9,100 8,667 --------- --------- Basic net income (loss) per share.......... $ 0.01 $ (0.17) ========= ========= Diluted net income (loss) per share........ $ 0.01 $ (0.17) ========= =========
10 For the purpose of computing diluted earnings per share, weighted average potential common shares do 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. Stock options to purchase 1,792,000 shares of common stock were outstanding on August 31, 2011, but were not included in the computation of diluted net income per share, because the inclusion of such shares would be anti-dilutive. Potential common shares have not been included in the calculation of diluted net loss per share for the quarter ended August 31, 2010 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 the quarter ended August 31, 2010 are the same. Stock options to purchase 2,254,000 shares of common stock were outstanding on August 31, 2010, but not included in the computation of diluted net income per share, because the inclusion of such shares would be anti-dilutive. 4. FAIR VALUE OF FINANCIAL INSTRUMENTS On June 1, 2008, the Company adopted authoritative guidance for fair value measurements and the fair value option for financial assets and liabilities. This authoritative guidance defines fair value, establishes a framework for using fair value to measure assets and liabilities, and expands disclosures about fair value measurements. In the first quarter of fiscal 2010, the Company adopted revised accounting guidance for the fair value measurement and disclosure for non- financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The guidance establishes a fair value hierarchy that is intended to increase the consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is 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 and liabilities measured at fair value on a recurring basis as of August 31, 2011 (in thousands):
Balance as of August 31, 2011 Level 1 Level 2 --------------- --------- --------- Money market funds.............. $ 2,796 $ 2,796 $ -- --------------- --------- --------- Assets.......................... $ 2,796 $ 2,796 $ -- =============== ========= ========= Liabilities..................... $ -- $ -- $ -- =============== ========= =========
11 The following table summarizes the Company's financial assets and liabilities measured at fair value on a recurring basis as of May 31, 2011 (in thousands):
Balance as of May 31, 2011 Level 1 Level 2 --------------- --------- --------- Money market funds.............. $ 1,236 $ 1,236 $ -- --------------- --------- --------- Assets.......................... $ 1,236 $ 1,236 $ -- =============== ========= ========= Liabilities..................... $ -- $ -- $ -- =============== ========= =========
As of August 31, 2011 and May 31, 2011, the Company did not have any assets or liabilities without observable market values that would require a high level of judgment to determine fair value (Level 3 assets). The Company has at times invested in debt and equity of private companies, and may do so again in the future, as part of its business strategy. These investments are carried at cost and are included in "Other Assets" in the consolidated balance sheets. If the Company determines that an other-than- temporary decline exists in the fair value of an investment, the Company writes down the investment to its fair value and records the related write- down as an investment loss in "Other Income (Expense)" in its consolidated statements of operations. During the first quarter of fiscal 2012, the Company sold its long-term investment in ESA Electronics PTE Ltd for proceeds of approximately $1.4 million, resulting in a gain of $990,000. At May 31, 2011, the carrying value of the strategic investments was $384,000. 5. ACCOUNTS RECEIVABLE, NET Accounts receivable represents customer trade receivables and is presented net of allowance for doubtful accounts of $39,000 at August 31, 2011 and $23,000 at May 31, 2011. 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. The Company's allowance for doubtful accounts is based upon historical experience and review of trade receivables by aging category to identify specific customers with known disputes or collection issues. Uncollectible receivables are recorded as bad debt expense when all efforts to collect have been exhausted and recoveries are recognized when they are received. 6. INVENTORIES Inventories are comprised of the following (in thousands):
August 31, May 31, 2011 2011 ---------- ---------- Raw materials and sub-assemblies........ $ 2,016 $ 1,992 Work in process......................... 3,144 2,699 Finished goods.......................... 9 267 ---------- ---------- $ 5,169 $ 4,958 ========== ==========
7. SEGMENT INFORMATION The Company operates in one reportable segment: the design, manufacture and marketing of advanced test and burn-in products to the semiconductor manufacturing industry. 12 The following presents information about the Company's operations in different geographic areas (in thousands):
United States Asia Europe Total --------- --------- --------- --------- Three months ended August 31, 2011: Net sales........................... $ 3,906 $ 26 $ 198 $ 4,130 Property and equipment, net......... 745 74 8 827 Three months ended August 31, 2010: Net sales........................... $ 1,609 $ 499 $ 61 $ 2,169 Property and equipment, net......... 1,268 79 13 1,360
The Company's foreign operations are primarily those of its Japanese and German subsidiaries. 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. Sales to the Company's five largest customers accounted for approximately 90% and 93% of its net sales in the three months ended August 31, 2011 and 2010, respectively. Two customers accounted for approximately 53% and 14% of the Company's net sales in the three months ended August 31, 2011. Four customers accounted for approximately 39%, 22%, 17% and 13% of the Company's net sales in the three months ended August 31, 2010. No other customers represented more than 10% of the Company's net sales for either of the three months ended August 31, 2011 and 2010. 8. PRODUCT WARRANTIES The Company provides for the estimated cost of product warranties at the time products are 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 ninety days for parts and service and one year for systems. Following is a summary of changes in the Company's liability for product warranties during the three months ended August 31, 2011 and 2010 (in thousands):
Three Months Ended August 31, ------------------ 2011 2010 -------- -------- Balance at the beginning of the period..... $ 103 $ 174 Accruals for warranties issued during the period........................ 55 21 Adjustments related to pre-existing warranties (including changes in estimates)......... -- (88) Settlement made during the period (in cash or in kind) .................... (58) (13) -------- ------- Balance at the end of the period........... $ 100 $ 94 ======== =======
The accrued warranty balance is included in accrued expenses on the accompanying condensed consolidated balance sheets. 13 9. GAIN ON BANKRUPTCY CLAIM Spansion, the Company's largest customer in fiscal 2010 and 2011, filed for bankruptcy in Japan in February 2009 and in the United States in March 2009. The Company filed claims in the Spansion U.S. and Spansion Japan bankruptcy actions. In the first quarter of fiscal 2011, the Company's Japanese subsidiary received approximately $155,000 in proceeds from the Spansion Japan bankruptcy claim and recorded the amount as a reduction of operating expenses. 10. OTHER COMPREHENSIVE INCOME (LOSS) Other comprehensive income (loss), net of tax is comprised of the following (in thousands):
Three Months Ended August 31, ------------------- 2011 2010 -------- -------- Net income (loss).............................. $ 124 $ (1,516) Foreign currency translation adjustments 34 (5) -------- -------- Comprehensive income (loss).................... $ 158 $ (1,521) ======== ========
11. 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. During fiscal 2009, a full valuation allowance was established against all deferred tax assets as management determined that it is more likely than not that certain deferred tax assets will not be realized. 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 - 2010 remain subject to examination by the appropriate governmental agencies due to tax loss carryovers from those years. 12. BORROWING AND FINANCING ARRANGEMENTS 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. Each account receivable financed by Lender will bear an annual interest rate or finance charge equal to the greater of Lender's prime rate less 0.5%, or 3.50%, when the Company meets certain borrowing base requirements. If the Company does not meet the borrowing base requirements, each account receivable financed by Lender will bear an annual interest rate or finance charge equal to the greater of Lender's prime rate plus 0.75%, or 14 4.75%. The applicable interest is calculated based on the full amount of the account receivable and export-related inventory provided as collateral for the actual amounts borrowed. Depending on the composition of the collateral items, whether or not the Company meets certain borrowing base requirements and the relative cash position of the Company, the equivalent annual interest rate applied to the actual loan balances may vary from 3.89% to 8.94%, assuming that the bank's prime rate is 4.00% or less. The term of the agreement is one year and is collateralized by all the Company's assets except for intellectual property. At August 31, 2011 the Company had not drawn against the credit facility and was in compliance with all covenants. 13. RECENT ACCOUNTING PRONOUNCEMENTS In October 2009, the Financial Accounting Standards Board, or FASB, issued authoritative guidance for revenue recognition with multiple deliverables. This authoritative guidance defines the criteria for identifying individual deliverables in a multiple-element arrangement and the manner in which revenues are allocated to individual deliverables. In absence of vendor- specific objective evidence, or VSOE, or other third party evidence, or TPE, of the selling price for the deliverables in a multiple-element arrangement, guidance requires companies to use an estimated selling price, or ESP, for the individual deliverables. Companies shall apply the relative-selling price model for allocating an arrangement's total consideration to its individual elements. Under this model, the ESP is used for both the delivered and undelivered elements that do not have VSOE or TPE of the selling price. This guidance is effective for fiscal years beginning on or after June 15, 2010, and will be applied prospectively to revenue arrangements entered into or materially modified after the effective date. The Company adopted these standards in the first quarter of 2012. In October 2009, the FASB issued authoritative guidance for the accounting for certain revenue arrangements that include software elements. This authoritative guidance amends the scope of pre-existing software revenue guidance by removing from the guidance non-software components of tangible products and certain software components of tangible products. This guidance is effective for fiscal years beginning on or after June 15, 2010, and will be applied prospectively to revenue arrangements entered into or materially modified after the effective date. The Company adopted these standards in the first quarter of 2012. These standards did not have a material impact on the Company's condensed consolidated financial statements. In May 2011 updated authoritative guidance to amend existing requirements for fair value measurements and disclosures was issued. The guidance expands the disclosure requirements around fair value measurements categorized in Level 3 of the fair value hierarchy and requires disclosure of the level in the fair value hierarchy of items that are not measured at fair value but whose fair value must be disclosed. It also clarifies and expands upon existing requirements for fair value measurements of financial assets and liabilities as well as instruments classified in shareholders' equity. The guidance will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and are to be applied prospectively. The Company will adopt this guidance in the first quarter of fiscal 2013. The implementation of this authoritative guidance is not expected to have a material impact on the Company's financial position or results of operations. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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, 2011 and the condensed consolidated financial statements and notes thereto. 15 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, test fixtures, die carriers, upgrades and spare parts and revenues from service contracts and cancellation charges. The Company's selling arrangements may include contractual customer acceptance provisions 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, investments, intangible assets, income taxes, financing operations, warranty obligations, long-term service contracts, and contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which 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, 2011. We believe there have been no material changes to our critical accounting policies and estimates during the three months ended August 31, 2011 compared to those discussed in our Annual Report on Form 10-K for the fiscal year ended May 31, 2011. 16 RESULTS OF OPERATIONS The following table sets forth items in the Company's unaudited condensed consolidated statements of operation as a percentage of net sales for the periods indicated.
Three Months Ended August 31, -------------------- 2011 2010 -------- -------- Net sales..................................... 100.0% 100.0% Cost of sales................................. 56.4 56.5 -------- -------- Gross profit ................................. 43.6 43.5 -------- -------- Operating expenses: Selling, general and administrative......... 38.8 70.0 Research and development ................... 26.2 52.7 Gain on bankruptcy claim ................... -- (7.2) -------- -------- Total operating expenses ............... 65.0 115.5 -------- -------- Loss from operations ......................... (21.4) (72.0) Interest income............................... -- 0.1 Gain on sale of long-term investment ......... 24.0 -- Other (expense) income, net................... (0.3) 2.0 -------- -------- Income (loss) before income tax (benefit) expense........................... 2.3 (69.9) Income tax (benefit) expense ................. (0.7) -- -------- -------- Net income (loss)............................. 3.0% (69.9)% ======== ========
THREE MONTHS ENDED AUGUST 31, 2011 COMPARED TO THREE MONTHS ENDED AUGUST 31, 2010 NET SALES. Net sales increased to $4.1 million for the three months ended August 31, 2011 from $2.2 million for the three months ended August 31, 2010, an increase of 90.4%. The increase in net sales for the three months ended August 31, 2011 resulted primarily from an increase in net sales of the Company's wafer-level and monitored burn-in products. Net sales of the Company's wafer-level products for the three months ended August 31, 2011 were $2.3 million, and increased approximately $1.2 million from the three months ended August 31, 2010. Net sales of the monitored burn-in products for the three months ended August 31, 2011 were $1.2 million, and increased approximately $0.6 million from the three months ended August 31, 2010. 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 increased to $1.8 million for the three months ended August 31, 2011 from gross profit of $0.9 million for the three months ended August 31, 2010, an increase of $0.9 million. Gross profit margin for the three months ended August 31, 2011 and the three months ended August 31,2010 were 43.6% and 43.5%, respectively. 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 of $1.6 million for the three months ended August 31, 2011 increased from $1.5 million for the three months ended August 31, 2010, an increase of 5.5%. This increase was primarily attributable to an increase in employment related expenses due to the elimination of certain cost cutting initiatives previously implemented. 17 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 remained unchanged at $1.1 million for the three months ended August 31, 2011 and 2010. GAIN ON BANKRUPTCY CLAIM. Spansion, the Company's largest customer in fiscal 2011 and 2010, filed for bankruptcy in Japan in February 2009 and in the United States in March 2009. The Company filed claims in the Spansion U.S. and Spansion Japan bankruptcy actions. In the first quarter of fiscal 2011, the Company's Japanese subsidiary received $155,000 in proceeds from the Spansion Japan bankruptcy claim and recorded the amount as a reduction of operating expenses. INTEREST INCOME. Interest income decreased to nil for the three months ended August 31, 2011 compared with $2,000 for the three months ended August 31, 2010. GAIN ON SALE OF LONG-TERM INVESTMENT. During the first quarter of fiscal 2012, the Company sold its long-term investment in ESA Electronics PTE Ltd, resulting in a gain of $990,000. OTHER (EXPENSE) INCOME, NET. Other expense was $12,000 for the three months ended August 31, 2011, compared with $44,000 of other income for the three months ended August 31, 2010. The change in other (expense) income, net was primarily attributable to foreign exchange losses recognized in the first quarter of fiscal 2012 compared to foreign exchange gains recognized in the first quarter of fiscal 2011. INCOME TAX (BENEFIT) EXPENSE. Income tax benefit was recognized in the income tax provision in the first quarter of fiscal 2012 resulting from an adjustment of a tax liability previously reported. LIQUIDITY AND CAPITAL RESOURCES Net cash used in operating activities was $1.6 million for the three months ended August 31, 2011 and $2.6 million for the three months ended August 31, 2010. For the three months ended August 31, 2011, net cash used in operating activities was primarily driven by an increase of $1.1 million in accounts receivable and a $990,000 gain on the sale of the Company's long-term investment, partially offset by an increase in accounts payable of $376,000. The increase in accounts receivable was due to the timing of revenue generated in the first quarter of fiscal 2012. The increase in accounts payable was due primarily to inventory purchases to support future shipments. For the three months ended August 31, 2010, net cash used in operating activities was primarily driven by net loss of $1.5 million, partially offset by an increase of $0.7 million in accounts receivable. The increase is accounts receivable is due to higher revenues in the first quarter of fiscal 2011. Net cash provided by investing activities was $1.4 million for the three months ended August 31, 2011 compared to nil for the three months ended August 31, 2010. The increase was due primarily to the $1.4 million in proceeds received from the sale of the Company's long-term investment. Financing activities provided cash of nil for the three months ended August 31, 2011 and $12,000 for the three months ended August 31, 2010. Net cash provided by financing activities for the three months ended August 31, 2010 was primarily due to proceeds from the exercise of stock options. As of August 31, 2011, the Company had working capital of $8.8 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 18 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. The Company anticipates that the existing cash balance together with cash flows from operations, as well as funds available through the working capital credit facility entered into in August 2011, will be adequate to meet its working capital and capital equipment requirements through fiscal 2012. Refer to Note 12, BORROWING AND FINANCING ARRANGEMENTS, for further discussion of the credit facility agreement. After fiscal 2012, depending on its rate of growth and profitability, the Company may require additional equity or debt financing to meet its working capital requirements or capital equipment needs. 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. Refer to Note 12, BORROWING AND FINANCING ARRANGEMENTS, for further discussion of the 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, 2011. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS The Company had no holdings of derivative financial or commodity instruments at August 31, 2011 or May 31, 2011. The Company is exposed to financial market risks, including changes in interest rates and foreign currency exchange rates. The Company only invests its short-term excess cash in government-backed securities with maturities of 18 months or less. The Company maintained a cost basis equity investment in a privately held company, ESA Electronics PTE Ltd through May 2011. This investment was sold in the first quarter of fiscal 2012. The Company does not use any financial instruments for speculative or trading purposes. Fluctuations in interest rates would not have a material effect on the Company's financial position, results of operations or cash flows. A majority of the Company's revenue and capital spending is transacted in U.S. Dollars. The Company, however, enters into transactions in other currencies, primarily Japanese Yen. Substantially all sales to Japanese customers are denominated in Yen. Since the price is determined at the time a purchase order is accepted, the Company is exposed to the risks of fluctuations in the Yen-U.S. Dollar exchange rate during the lengthy period from purchase order to ultimate payment. This exchange rate risk is partially offset to the extent that the Company's Japanese subsidiary incurs expenses payable in Yen. To date, the Company has not invested in instruments designed to hedge currency risks. In addition, the Company's Japanese subsidiary typically carries debt or other obligations due to the Company that may be 19 denominated in either Yen or U.S. Dollars. Since the Japanese subsidiary's financial statements are based in Yen and the Company's condensed consolidated financial statements are based in U.S. Dollars, the Japanese subsidiary and the Company recognize foreign exchange gain or loss in any period in which the value of the Yen rises or falls in relation to the U.S. Dollar. A 10% decrease in the value of the Yen as compared with the U.S. Dollar would not be expected to result in a significant change to the Company's net income or loss. There have been no material changes in our risk exposure since the end of the last fiscal year, nor are any material changes to our risk exposure anticipated. Item 4. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10- Q. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities and Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to management as appropriate to allow for timely decisions regarding required disclosure. CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING. There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 20 PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS None. Item 1A. RISK FACTORS You should carefully consider the risks described below. These risks are not the only risks that we may face. Additional risks and uncertainties that we are unaware of, or that we currently deem immaterial, also may become important factors that affect us. If any of the following risks occur, our business, financial condition or results of operations could be materially and adversely affected which could cause our actual operating results to differ materially from those indicated or suggested by forward-looking statements made in this Quarterly Report on Form 10-Q and in other documents we filed with the U.S. Securities and Exchange Commission, including without limitation our most recently filed Annual Report on Form 10-K or presented elsewhere by management from time to time. Periodic economic and semiconductor industry downturns could negatively affect our business, results of operations and financial condition. The recent and historical global economic and semiconductor industry downturns negatively affected and could continue to negatively affect our business, results of operations, and financial condition. The recent financial turmoil affected the banking system and financial markets resulting in a tightening of the credit markets, disruption in the financial markets and global economy downturn. These events contributed to significant slowdowns in the industries in which we operate. Difficulties in obtaining capital and deteriorating market conditions can pose the risk that some of our customers may not be able to obtain necessary financing on reasonable terms, which could result in lower sales for the Company. Customers with liquidity issues may lead to additional bad debt expense for the Company. For example, Spansion declared bankruptcy in Japan and the U.S. during fiscal 2009; as a result the Company subsequently recorded a $13.7 million provision for bad debts. A recurrence of these conditions may also similarly affect our key suppliers, which could impact their ability to deliver parts and result in delays in deliveries of our products. Turmoil in the international financial markets has resulted, and may result in the future, in dramatic currency devaluations, stock market declines, restriction of available credit and general financial weakness. In addition, flash, DRAM and other memory device prices have historically declined, and will likely do so again in the future. These developments may affect us in several ways. We believe that many international semiconductor manufacturers limited their capital spending in calendar 2009 and again in calendar 2011, and that the uncertainty of the memory market may cause some manufacturers in the future to further delay capital spending plans. Economic conditions may also affect the ability of our customers to meet their payment obligations, resulting in cancellations or deferrals of existing orders and limiting additional orders. In addition, some governments have subsidized portions of fabrication facility construction, and financial turmoil may reduce these governments' willingness to continue such subsidies. Such developments could have a material adverse affect on our business, financial condition and results of operations. The recent economic conditions and uncertainty about future economic conditions made it challenging for us to forecast our operating results, make business decisions, and identify the risks that may affect our business, financial condition and results of operations. If such conditions recur, and we are not able to timely and appropriately adapt to changes resulting from the difficult macroeconomic environment, our business, financial condition or results of operations may be materially and adversely affected. 21 If we are not able to reduce our operating expenses sufficiently during periods of weak revenue, or if we utilize significant amounts of cash to support operating losses, we may erode our cash resources and may not have sufficient cash to operate our business. In the face of the recent sustained downturn in our business and decline in our net sales, we implemented a variety of cost controls and restructured our operations with the goal of reducing our operating costs to position ourselves to more effectively meet the needs of the then weak market for test and burn-in equipment. While we took significant steps in fiscal 2009 to minimize our expense levels and to increase the likelihood that we would have sufficient cash to support operations during the downturn, during fiscal 2009, 2010 and fiscal 2011 we experienced operating losses. Due primarily to these operating losses in fiscal 2009, 2010 and 2011, we experienced cash outflows. Should our business downturn be prolonged, and if we are unable to reduce our operating expenses sufficiently, we may require additional debt or equity financing to meet working capital or capital expenditure needs. While we believe our existing cash balance together with cash flows from operations, as well as funds available through the working capital credit facility entered into in August 2011, will be adequate to meet its working capital and capital equipment requirements through fiscal 2012, we cannot determine with certainty that, if needed, we will be able to raise additional funding through either equity or debt financing under these circumstances or on what terms such financing would be available. We generate a large portion of our sales from a small number of customers. If we were to lose one or more of our large customers, operating results could suffer dramatically. The semiconductor manufacturing industry is highly concentrated, with a relatively small number of large semiconductor manufacturers and contract assemblers accounting for a substantial portion of the purchases of semiconductor equipment. Sales to the Company's five largest customers accounted for approximately 85% of its net sales in fiscal 2011 and 2010. During fiscal 2011, Spansion and Texas Instruments Incorporated accounted for approximately 61% and 11%, respectively, of the Company's net sales. During fiscal 2010, Spansion, Micronas Semiconductor Holding AG and Texas Instruments Incorporated accounted for approximately 55%, 12% and 11%, respectively, of the Company's net sales. No other customers represented more than 10% of the Company's net sales for either fiscal 2011 or fiscal 2010. We expect that sales of our products to a limited number of customers will continue to account for a high percentage of net sales for the foreseeable future. In addition, sales to particular customers may fluctuate significantly from quarter to quarter. The loss of, or reduction or delay in an order, or orders from a significant customer, or a delay in collecting or failure to collect accounts receivable from a significant customer could adversely affect our business, financial condition and operating results. For example, during fiscal 2009 Spansion Inc., our largest customer at the time, declared bankruptcy in Japan and in the U.S. and subsequently placed lower levels of orders with the Company, which caused our net sales to drop dramatically and impacted the Company's ability to collect on accounts receivable. A substantial portion of our net sales is generated by relatively small volume, high value transactions. We derive a substantial portion of our net sales from the sale of a relatively small number of systems which typically range in purchase price from approximately $200,000 to over $1 million per system. As a result, the loss or deferral of a limited number of system sales could have a material adverse effect on our net sales and operating results in a particular period. All customer purchase orders are subject to cancellation or rescheduling by the customer with limited penalties, and, therefore, backlog at any particular date is not necessarily indicative of actual sales for any succeeding period. From time to time, cancellations and rescheduling of customer orders have occurred, and delays by our suppliers in providing components or subassemblies 22 to us have caused delays in our shipments of our own products. There can be no assurance that we will not be materially adversely affected by future cancellations or rescheduling. Certain contracts contain provisions that require customer acceptance prior to recognition of revenue. The delay in customer acceptance could have a material adverse effect on our operating results. A substantial portion of net sales typically are realized near the end of each quarter. A delay or reduction in shipments near the end of a particular quarter, due, for example, to unanticipated shipment rescheduling, cancellations or deferrals by customers, customer credit issues, unexpected manufacturing difficulties experienced by us or delays in deliveries by suppliers, could cause net sales in a particular quarter to fall significantly below our expectations. The Company's business operations could be negatively impacted by earthquakes or other natural disasters. The March 2011 Japanese earthquake and resulting tsunami seriously affected many companies in Japan, including some of our customers. Besides direct impact to their employees and facilities, they were affected by, among other things, the rolling electrical blackouts and industry wide shutdowns as well as the impact of the nuclear power plant disaster. Some of our customers have delayed capital equipment purchases as a result of the disaster. The disaster in Japan may also result in a downturn in the Japanese economy as a whole, which could further impact the Company's business prospects in Japan. Natural disasters may impact our ability to manufacture products in the event our facility is damaged, or if operations are disrupted at a major supplier. The demand for our products may be negatively affected if a natural disaster impacts one of our significant customers. These events may seriously damage our ability to conduct business. We rely on increasing market acceptance for our FOX system, and we may not be successful in attracting new customers or maintaining our existing customers. A principal element of our business strategy is to capture an increasing share of the test equipment market through sales of our FOX wafer-level test and burn-in system. The FOX system is designed to simultaneously burn-in and functionally test all of the die on a wafer. The market for the FOX systems is in the early stages of development. Market acceptance of the FOX system is subject to a number of risks. Before a customer will incorporate the FOX system into a production line, lengthy qualification and correlation tests must be performed. We anticipate that potential customers may be reluctant to change their procedures in order to transfer burn-in and test functions to the FOX system. Initial purchases are expected to be limited to systems used for these qualifications and for engineering studies. Market acceptance of the FOX system also may be affected by a reluctance of IC manufacturers to rely on relatively small suppliers such as Aehr Test Systems. As is common with new complex products incorporating leading-edge technologies, we may encounter reliability, design and manufacturing issues as we begin volume production and initial installations of FOX systems at customer sites. The failure of the FOX system to achieve increased market acceptance would have a material adverse effect on our future operating results, long-term prospects and our stock price. We rely on increasing market acceptance for our ABTS system and we may not be able to achieve sufficient market acceptance to allow our ABTS system to be commercially viable. Since the introduction of the ABTS product in fiscal 2008, the Company has shipped a limited number of ABTS systems. Market acceptance of the ABTS system is subject to a number of risks. We must complete engineering development of certain necessary hardware and software features. In addition, it is important that we achieve customer satisfaction and acceptance of the ABTS products. Additional customers must then be found who are willing to place orders for ABTS systems in sufficient quantities to allow it to be produced economically. The failure of the ABTS system to achieve increased 23 market acceptance would have a material adverse effect on our future operating results, long-term prospects and our stock price. We depend upon continued market acceptance for our MAX system and we may experience a limited burn-in system market. We have historically derived a substantial portion of our net sales from the sale of dynamic burn-in systems. We believe that the market for burn-in systems is mature and is not expected to experience significant long-term growth in the future. In general, process control improvements in the semiconductor industry have tended to reduce burn-in times. In addition, as a given IC product generation matures and yields increase, the required burn-in time may be reduced or eliminated. IC manufacturers, which historically have been our primary customer base, increasingly outsource test and burn-in to independent test labs, which often build their own systems. Our ABTS system may cannibalize the business that would previously have been addressed by the MAX system. Our success depends upon some continued acceptance of our MAX burn-in products within these markets. There can be no assurance that the market for burn-in systems will grow, or that sales of our MAX burn-in products will not decline. We sell our products and services worldwide, and our business is subject to risks inherent in conducting business activities in geographic regions outside of the United States. Approximately 39%, 29% and 72% of our net sales for fiscal 2011, 2010 and 2009, respectively, were attributable to sales to customers for delivery outside of the United States. We operate sales, service and limited manufacturing organizations in Japan and Germany and a sales and support organization in Taiwan. We expect that sales of products for delivery outside of the United States will continue to represent a substantial portion of our future net sales. Our future performance will depend, in significant part, upon our ability to continue to compete in foreign markets which in turn will depend, in part, upon a continuation of current trade relations between the United States and foreign countries in which semiconductor manufacturers or assemblers have operations. A change toward more protectionist trade legislation in either the United States or such foreign countries, such as a change in the current tariff structures, export compliance or other trade policies, could adversely affect our ability to sell our products in foreign markets. In addition, we are subject to other risks associated with doing business internationally, including longer receivable collection periods and greater difficulty in accounts receivable collection, the burden of complying with a variety of foreign laws, difficulty in staffing and managing global operations, risks of civil disturbance or other events which may limit or disrupt markets, international exchange restrictions, changing political conditions and monetary policies of foreign governments. Approximately 92%, 7% and 1% of our net sales for fiscal 2011 were denominated in U.S. Dollars, Japanese Yen and Euros, respectively. Although a large percentage of net sales to European customers are denominated in U.S. Dollars, substantially all sales to Japanese customers are denominated in Yen. Because a substantial portion of our net sales is from sales of products for delivery outside the United States, an increase in the value of the U.S. Dollar relative to foreign currencies would increase the cost of our products compared to products sold by local companies in such markets. In addition, since the price is determined at the time a purchase order is accepted, we are exposed to the risks of fluctuations in the U.S. Dollar exchange rate during the lengthy period from the date a purchase order is received until payment is made. This exchange rate risk is partially offset to the extent our foreign operations incur expenses in the local currency. To date, we have not invested in instruments designed to hedge currency risks. Our operating results could be adversely affected by fluctuations in the value of the U.S. Dollar relative to other currencies. Our industry is subject to rapid technological change and our ability to remain competitive depends on our ability to introduce new products in a timely manner. 24 The semiconductor equipment industry is subject to rapid technological change and new product introductions and enhancements. Our ability to remain competitive will depend in part upon our ability to develop new products and to introduce these products at competitive prices and on a timely and cost- effective basis. Our success in developing new and enhanced products depends upon a variety of factors, including product selection, timely and efficient completion of product design, timely and efficient implementation of manufacturing and assembly processes, product performance in the field and effective sales and marketing. Because new product development commitments must be made well in advance of sales, new product decisions must anticipate both future demand and the technology that will be available to supply that demand. Furthermore, introductions of new and complex products typically involve a period in which design, engineering and reliability issues are identified and addressed by our suppliers and by us. There can be no assurance that we will be successful in selecting, developing, manufacturing and marketing new products that satisfy market demand. Any such failure would materially and adversely affect our business, financial condition and results of operations. Because of the complexity of our products, significant delays can occur between a product's introduction and the commencement of the volume production of such product. We have experienced, from time to time, significant delays in the introduction of, and technical and manufacturing difficulties with, certain of our products and may experience delays and technical and manufacturing difficulties in future introductions or volume production of our new products. Our inability to complete new product development, or to manufacture and ship products in time to meet customer requirements would materially adversely affect our business, financial condition and results of operations. We may experience increased costs associated with new product introductions. As is common with new complex products incorporating leading-edge technologies, we have encountered reliability, design and manufacturing issues as we began volume production and initial installations of certain products at customer sites. Certain of these issues in the past have been related to components and subsystems supplied to us by third parties who have in some cases limited the ability of us to address such issues promptly. This process in the past required and in the future is likely to require us to incur un- reimbursed engineering expenses and to experience larger than anticipated warranty claims which could result in product returns. In the early stages of product development there can be no assurance that we will discover any reliability, design and manufacturing issues or, that if such issues arise, that they can be resolved to the customers' satisfaction or that the resolution of such problems will not cause us to incur significant development costs or warranty expenses or to lose significant sales opportunities. Our dependence on subcontractors and sole source suppliers may prevent us from delivering our products on a timely basis and expose us to intellectual property infringement. We rely on subcontractors to manufacture many of the components or subassemblies used in our products. Our FOX, ABTS and MAX systems, WaferPak contactors and DiePak carriers contain several components, including environmental chambers, power supplies, high-density interconnects, wafer contactors, signal distribution substrates and certain ICs that are currently supplied by only one or a limited number of suppliers. Our reliance on subcontractors and single source suppliers involves a number of significant risks, including the loss of control over the manufacturing process, the potential absence of adequate capacity and reduced control over delivery schedules, manufacturing yields, quality and costs. In the event that any significant subcontractor or single source supplier becomes unable or unwilling to continue to manufacture subassemblies, components or parts in required volumes, we will have to identify and qualify acceptable replacements. The process of qualifying subcontractors and suppliers could be lengthy, and no assurance can be given that any additional sources would be 25 available to us on a timely basis. Any delay, interruption or termination of a supplier relationship could adversely affect our ability to deliver products, which would harm our operating results. Our suppliers manufacture components, tooling, and provide engineering services which allows access to intellectual property of the Company. While the Company maintains patents to protect from intellectual property infringement, there can be no assurance that technological information gained in the manufacture of our products will not be used to develop a new product, improve processes or techniques which compete against our products. Litigation may be necessary to enforce or determine the validity and scope of our proprietary rights, and there can be no assurance that our intellectual property rights, if challenged, will be upheld as valid. Future changes in semiconductor technologies may make our products obsolete. Future improvements in semiconductor design and manufacturing technology may reduce or eliminate the need for our products. For example, improvements in built-in self-test, or BIST, technology and improvements in conventional test systems, such as reduced cost or increased throughput, may significantly reduce or eliminate the market for one or more of our products. If we are not able to improve our products or develop new products or technologies quickly enough to maintain a competitive position in our markets, we may not be able to grow our business. Semiconductor business cycles are unreliable and there is always the risk of cancellations and rescheduling which could have a material adverse affect on our operating results. Our operating results depend primarily upon the capital expenditures of semiconductor manufacturers, semiconductor contract assemblers and burn-in and test service companies worldwide, which in turn depend on the current and anticipated market demand for ICs. The semiconductor equipment manufacturing industry has historically been subject to a relatively high rate of purchase order cancellation by customers as compared to other high technology industry sectors. Manufacturing companies that are the customers of semiconductor equipment companies frequently revise, postpone and cancel capital facility expansion plans. In such cases, semiconductor equipment companies may experience a significant rate of cancellations or rescheduling of purchase orders. A significant increase in purchase order cancellations was recognized in the third quarter of fiscal 2009 as a result of the Spansion bankruptcy filing. There can be no assurance that we will not be materially adversely affected by future cancellations or rescheduling of purchase orders. Our stock price may fluctuate. The price of our common stock has fluctuated in the past and may fluctuate significantly in the future. We believe that factors such as announcements of developments related to our business, fluctuations in our operating results, failure to meet securities analysts' expectations, general conditions in the semiconductor and semiconductor equipment industries and the worldwide economy, announcement of technological innovations, new systems or product enhancements by us or our competitors, fluctuations in the level of cooperative development funding, acquisitions, changes in governmental regulations, developments in patents or other intellectual property rights and changes in our relationships with customers and suppliers could cause the price of our common stock to fluctuate substantially. In addition, in recent years the stock market in general, and the market for small capitalization and high technology stocks in particular, have experienced extreme price fluctuations which have often been unrelated to the operating performance of the affected companies. Such fluctuations could adversely affect the market price of our common stock. The Company may not meet the listing requirements of the NASDAQ markets which could cause our stock to be delisted. 26 Pursuant to the requirements of NASDAQ, if a company's stock price is below $1 per share for 30 consecutive trading days (the "Bid Price Rule"), NASDAQ will notify the company that it is no longer in compliance with the NASDAQ listing qualifications. If a company is not in compliance with the Bid Price Rule, the company will have 180 calendar days to regain compliance. On September 18, 2009, the Company received notice from NASDAQ that it was no longer in compliance with the Bid Price Rule. The Company regained compliance on September 30, 2009. Currently, the Company's stock price is below $1 per share and there can be no assurance that the Company will remain compliant with the Bid Price Rule. On January 18, 2011 the Company received notice from NASDAQ that it was no longer in compliance with NASDAQ's Listing Rule 5450(b)(1)(A), which specifies that an issuer must maintain stockholders' equity of at least $10 million. On March 21, 2011 the Company submitted an application to NASDAQ to transfer the listing of its company stock from the NASDAQ Global Market to the NASDAQ Capital Market. On March 24, 2011 the Company received a letter from NASDAQ informing it that the NASDAQ Listing Qualifications Staff had granted the Company's request to transfer the listing of its common stock to the NASDAQ Capital Market, effective at the opening of business on March 28, 2011. The Bid Price Rule is also a listing requirement of the NASDAQ Capital Market. There can be no assurance that the Company will continue to meet the listing requirements of the NASDAQ Capital Market or that it will not be delisted. We depend on our key personnel and our success depends on our ability to attract and retain talented employees. Our success depends to a significant extent upon the continued service of Rhea Posedel, our Chief Executive Officer, as well as other executive officers and key employees. We do not maintain key person life insurance for our benefit on any of our personnel, and none of our employees are subject to a non-competition agreement with the Company. The loss of the services of any of our executive officers or a group of key employees could have a material adverse effect on our business, financial condition and operating results. Our future success will depend in significant part upon our ability to attract and retain highly skilled technical, management, sales and marketing personnel. There is a limited number of personnel with the requisite skills to serve in these positions, and it has become increasingly difficult for us to hire such personnel. Competition for such personnel in the semiconductor equipment industry is intense, and there can be no assurance that we will be successful in attracting or retaining such personnel. Changes in management could disrupt our operations and adversely affect our operating results. We may be subject to litigation relating to intellectual property infringement which would be time-consuming, expensive and a distraction from our business. If we do not adequately protect our intellectual property, competitors may be able to use our proprietary information to erode our competitive advantage, and our business and operating results could be harmed. Litigation may be necessary to enforce or determine the validity and scope of our proprietary rights, and there can be no assurance that our intellectual property rights, if challenged, will be upheld as valid. Such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on our operating results, regardless of the outcome of the litigation. In addition, there can be no assurance that any of the patents issued to us will not be challenged, invalidated or circumvented or that the rights granted thereunder will provide competitive advantages to us. There are no pending claims against us regarding infringement of any patents or other intellectual property rights of others. However, in the future we may receive communications from third parties asserting intellectual property claims against us. Such claims could include assertions that our products infringe, ormay infringe, the proprietary rights of third parties, requests for indemnification against such infringement or suggestions that we may be interested in acquiring a license from such third parties. There can 27 be no assurance that any such claim will not result in litigation, which could involve significant expense to us, and, if we are required or deem it appropriate to obtain a license relating to one or more products or technologies, there can be no assurance that we would be able to do so on commercially reasonable terms, or at all. While we believe we have complied with all applicable environmental laws, our failure to do so could adversely affect our business as a result of having to pay substantial amounts in damages or fees. Federal, state and local regulations impose various controls on the use, storage, discharge, handling, emission, generation, manufacture and disposal of toxic and other hazardous substances used in our operations. We believe that our activities conform in all material respects to current environmental and land use regulations applicable to our operations and our current facilities, and that we have obtained environmental permits necessary to conduct our business. Nevertheless, the failure to comply with current or future regulations could result in substantial fines being imposed on us, suspension of production, alteration of our manufacturing processes or cessation of operations. Such regulations could require us to acquire expensive remediation equipment or to incur substantial expenses to comply with environmental regulations. Any failure by us to control the use, disposal or storage of or adequately restrict the discharge of, hazardous or toxic substances could subject us to significant liabilities. While we believe we currently have adequate internal control over financial reporting, we are required to assess our internal control over financial reporting on an annual basis and any future adverse results from such assessment could result in a loss of investor confidence in our financial reports and have an adverse effect on our stock. Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we must include in our Annual Report on Form 10-K a report of management on the effectiveness of our internal control over financial reporting. If we fail to maintain effective internal control over financial reporting, or management does not timely assess the adequacy of such internal control, we could be subject to regulatory sanctions and the investing public's perception of the Company may decline. Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS None. Item 3. DEFAULTS UPON SENIOR SECURITIES None. Item 4. (REMOVED AND RESERVED) Item 5. OTHER INFORMATION None. Item 6. EXHIBITS The Exhibits listed on the accompanying "Index to Exhibits" are filed as part of, or incorporated by reference into, this report. 28 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Aehr Test Systems (Registrant) Date: October 14, 2011 /s/ RHEA J. POSEDEL ---------------------------------- Rhea J. Posedel Chief Executive Officer and Chairman of the Board of Directors Date: October 14, 2011 /s/ GARY L. LARSON -------------------------------- Gary L. Larson Vice President of Finance and Chief Financial Officer 29 AEHR TEST SYSTEMS INDEX TO EXHIBITS
Exhibit No. Description ---------- ----------------------------------------------------------- 3.1(1) Restated Articles of Incorporation of the Company. 3.2(2) Amended and Restated Bylaws of the Company. 10.20(3) Loan and Security Agreement dated August 25, 2011 by and between the Company and Silicon Valley Bank. 10.21(3) Export-Import Bank Loan and Security Agreement dated August 25, 2011 by between the Company and Silicon Valley Bank. 10.22(3) Export-Import Bank of the United States Working Capital Guarantee Program Borrower Agreement dated August 25, 2011 made by the Company in favor of the Export Import Bank of the United States and Silicon Valley Bank. 31.1 Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002. 32 (4) Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.INS XBRL Instance Document* 101.SCH XBRL Taxonomy Extension Schema Document* 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document* 101.DEF XBRL Taxonomy Extension Definition Linkbase Document* 101.LAB XBRL Taxonomy Extension Label Linkbase Document* 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document*
-------------------------------------------------------------------------------- (1) Incorporated by reference to the same-numbered exhibit previously filed with the Company's Registration Statement on Form S-1 filed June 11, 1997 (File No. 333-28987). (2) Incorporated by reference to the same-numbered exhibit previously filed with the Company's Quarterly Report on Form 10-Q filed April 13, 2009 (File No. 000-22893). (3) Incorporated by reference to the same-numbered exhibit previously filed with the Company's Current Report on Form 8-K filed August 30, 2011 (File No. 000-22893). (4) This exhibit shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section, nor shall it be deemed incorporated by reference in any filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings. 30 *In accordance with Rule 406T of Regulation S-T, XBRL (Extensible Business Reporting Language) information deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections 31 EX-31.1 2 b77201_ex31-1.txt CERTIFICATION Exhibit 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302(a) OF THE SARBANES-OXLEY ACT I, Rhea J. Posedel, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Aehr Test Systems; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: October 14, 2011 /s/ RHEA J. POSEDEL ----------------------- Rhea J. Posedel Chief Executive Officer EX-31.2 3 b77201_ex31-2.txt CERTIFICATION Exhibit 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302(a) OF THE SARBANES-OXLEY ACT I, Gary L. Larson, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Aehr Test Systems; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: October 14, 2011 /s/ GARY L. LARSON --------------------------- Gary L. Larson Chief Financial Officer EX-32 4 b77201_ex32.txt CERTIFICATION Exhibit 32 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Rhea J. Posedel, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Aehr Test Systems on Form 10-Q for the period ended August 31, 2011 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of Aehr Test Systems. Date: October 14, 2011 By: /s/ RHEA J. POSEDEL ---------------------------------- Rhea J. Posedel Chief Executive Officer I, Gary L. Larson, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Aehr Test Systems on Form 10-Q for the period ended August 31, 2011 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of Aehr Test Systems. Date: October 14, 2011 By: /s/ GARY L. LARSON ---------------------------------- Gary L. 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In Thousands, except Share data
Aug. 31, 2011
May 31, 2011
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Allowance for doubtful accounts$ 39$ 23
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Condensed Consolidated Statements of Operations (Unaudited) (USD $)
In Thousands, except Share data
3 Months Ended
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Aug. 31, 2010
Condensed Consolidated Statements Of Operations  
Net sales$ 4,130$ 2,169
Cost of sales2,3281,225
Gross profit1,802944
Operating expenses:  
Selling, general and administrative1,6011,518
Research and development1,0821,142
Gain on bankruptcy claim0(155)
Total operating expenses2,6832,505
Loss from operations(881)(1,561)
Interest income02
Gain on sale of long-term investment9900
Other (expense) income, net(12)44
Income (loss) before income tax (benefit) expense97(1,515)
Income tax (benefit) expense(27)1
Net income (loss)$ 124$ (1,516)
Net income (loss) per share - basic$ 0.01$ (0.17)
Net income (loss) per share - diluted$ 0.01$ (0.17)
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Document And Entity Information  
Entity Registrant NameAEHR TEST SYSTEMS 
Entity Central Index Key0001040470 
Document Type10-Q 
Document Period End DateAug. 31, 2011
Amendment Flagfalse 
Current Fiscal Year End Date--05-31 
Is Entity a Well-known Seasoned Issuer?No 
Is Entity a Voluntary Filer?No 
Is Entity's Reporting Status Current?Yes 
Entity Filer CategorySmaller Reporting Company 
Entity Common Stock, Shares Outstanding 8,931,928
Document Fiscal Period FocusQ1 
Document Fiscal Year Focus2012 
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Note 7 - SEGMENT INFORMATION
3 Months Ended
Aug. 31, 2011
Notes to Financial Statements 
SEGMENT INFORMATION

Note 7 - Segment information

 

The Company operates in one reportable segment: the design, manufacture and marketing of advanced test and burn-in products to the semiconductor manufacturing industry.

 

The following presents information about the Company’s operations in different geographic areas (in thousands):

 

    United            
    States   Asia   Europe   Total
Three months ended August 31, 2011:                
  Net sales $3,906   $26   $198   $4,130
  Property and equipment, net 745   74   8   827
                 
Three months ended August 31, 2010:                
  Net sales $1,609   $499   $61   $2,169
  Property and equipment, net 1,268   79   13   1,360

 

.

The Company’s foreign operations are primarily those of its Japanese and German subsidiaries. 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.

 

Sales to the Company’s five largest customers accounted for approximately 90% and 93% of its net sales in the three months ended August 31, 2011 and 2010, respectively. Two customers accounted for approximately 53% and 14% of the Company’s net sales in the three months ended August 31, 2011. Four customers accounted for approximately 39%, 22%, 17% and 13% of the Company’s net sales in the three months ended August 31, 2010. No other customers represented more than 10% of the Company's net sales for either of the three months ended August 31, 2011 and 2010.

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Note 12 - BORROWING AND FINANCING ARRANGEMENTS
3 Months Ended
Aug. 31, 2011
Notes to Financial Statements 
BORROWING AND FINANCING ARRANGEMENTS

Note 12 - Borrowing and financing arrangements

 

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. Each account receivable financed by Lender will bear an annual interest rate or finance charge equal to the greater of Lender's prime rate less 0.5%, or 3.50%, when the Company meets certain borrowing base requirements. If the Company does not meet the borrowing base requirements, each account receivable financed by Lender will bear an annual interest rate or finance charge equal to the greater of Lender's prime rate plus 0.75%, or 4.75%. The applicable interest is calculated based on the full amount of the account receivable and export-related inventory provided as collateral for the actual amounts borrowed. Depending on the composition of the collateral items, whether or not the Company meets certain borrowing base requirements and the relative cash position of the Company, the equivalent annual interest rate applied to the actual loan balances may vary from 3.89% to 8.94%, assuming that the bank’s prime rate is 4.00% or less. The term of the agreement is one year and is collateralized by all the Company’s assets except for intellectual property. At August 31, 2011 the Company had not drawn against the credit facility and was in compliance with all covenants.

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Note 3 - EARNINGS PER SHARE
3 Months Ended
Aug. 31, 2011
Notes to Financial Statements 
EARNINGS PER SHARE

Note 3 - Earnings Per Share

 

Earnings per share is computed based on the weighted average number of common and common equivalent shares (common stock options and ESPP shares) outstanding, when dilutive, during each period using the treasury stock method.

 

    Three Months Ended
    August 31,  
    2011   2010
    (in thousands, except per share amounts) 
         
Numerator: Net income (loss) $124   $(1,516)
         
Denominator for basic net income (loss) per share:       
  Weighted-average shares outstanding  8,932   8,667
         
Shares used in basic net income (loss) per share calculation 8,932   8,667
         
Effect of dilutive securities 168   0
         
Denominator for diluted net income (loss) per share 9,100   8,667
         
Basic net income (loss) per share $0.01   $(0.17)
         
Diluted net income (loss) per share $0.01   $(0.17)

 

 For the purpose of computing diluted earnings per share, weighted average potential common shares do 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. Stock options to purchase 1,792,000 shares of common stock were outstanding on August 31, 2011, but were not included in the computation of diluted net income per share, because the inclusion of such shares would be anti-dilutive. Potential common shares have not been included in the calculation of diluted net loss per share for the quarter ended August 31, 2010 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 the quarter ended August 31, 2010 are the same. Stock options to purchase 2,254,000 shares of common stock were outstanding on August 31, 2010, but not included in the computation of diluted net income per share, because the inclusion of such shares would be anti-dilutive.

 XML 19 R14.htm IDEA: XBRL DOCUMENT v2.3.0.15
Note 9 - GAIN ON BANKRUPTCY CLAIM
3 Months Ended
Aug. 31, 2011
Notes to Financial Statements 
GAIN ON BANKRUPTCY CLAIM

Note 9 - Gain on bankruptcy claim

 

 Spansion, the Company’s largest customer in fiscal 2010 and 2011, filed for bankruptcy in Japan in February 2009 and in the United States in March 2009. The Company filed claims in the Spansion U.S. and Spansion Japan bankruptcy actions. In the first quarter of fiscal 2011, the Company's Japanese subsidiary received approximately $155,000 in proceeds from the Spansion Japan bankruptcy claim and recorded the amount as a reduction of operating expenses.

 XML 20 R15.htm IDEA: XBRL DOCUMENT v2.3.0.15
Note 10 - OTHER COMPREHENSIVE INCOME (LOSS)
3 Months Ended
Aug. 31, 2011
Notes to Financial Statements 
OTHER COMPREHENSIVE INCOME (LOSS)

Note 10 - Other comprehensive income (loss)

 

Other comprehensive income (loss), net of tax is comprised of the following (in thousands):

 

    Three Months Ended
    August 31,  
    2011   2010
         
Net income (loss) $124   $(1,516)
Foreign currency translation adjustments 34   (5)
Comprehensive income (loss) $158   $(1,521)

 XML 21 R13.htm IDEA: XBRL DOCUMENT v2.3.0.15
Note 8 - PRODUCT WARRANTIES
3 Months Ended
Aug. 31, 2011
Notes to Financial Statements 
PRODUCT WARRANTIES

Note 8 - Product warranties

 

The Company provides for the estimated cost of product warranties at the time products are 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 ninety days for parts and service and one year for systems.

 

Following is a summary of changes in the Company's liability for product warranties during the three months ended August 31, 2011 and 2010 (in thousands):

 

    Three Months Ended
    August 31,  
    2011   2010
         
Balance at the beginning of the period $103   $174
         
Accruals for warranties issued during the period 55   21
Adjustments related to pre-existing warranties      
  (including changes in estimates) --   (88)
Settlement made during the period      
  (in cash or in kind)  (58)   (13)
         
Balance at the end of the period $100   $94

 

The accrued warranty balance is included in accrued expenses on the accompanying condensed consolidated balance sheets.

 XML 22 R6.htm IDEA: XBRL DOCUMENT v2.3.0.15
Note 1 - BASIS OF PRESENTATION
3 Months Ended
Aug. 31, 2011
Notes to Financial Statements 
BASIS OF PRESENTATION

Note 1 - Basis of Presentation

 

 The accompanying condensed consolidated financial information has been prepared by Aehr Test Systems, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC, and therefore does not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in accordance with accounting principles generally accepted in the United States of America.

 

In the opinion of management, the unaudited condensed consolidated financial statements for the interim periods presented reflect all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the condensed consolidated financial position and results of operations as of and for such periods indicated. These condensed consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2011. Results for the interim periods presented herein are not necessarily indicative of results which may be reported for any other interim period or for the entire fiscal year. 

 

PRINCIPLES OF CONSOLIDATION. The condensed consolidated financial statements include the accounts of Aehr Test Systems and its subsidiaries (collectively, the "Company," "we," "us," and "our"). All significant intercompany balances have been eliminated in consolidation.

 

ACCOUNTING 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 and 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. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from those estimates.

 XML 23 R9.htm IDEA: XBRL DOCUMENT v2.3.0.15
Note 4 - FAIR VALUE OF FINANCIAL INSTRUMENTS
3 Months Ended
Aug. 31, 2011
Notes to Financial Statements 
FAIR VALUE OF FINANCIAL INSTRUMENTS

Note 4 - Fair value of financial instruments

 

On June 1, 2008, the Company adopted authoritative guidance for fair value measurements and the fair value option for financial assets and liabilities. This authoritative guidance defines fair value, establishes a framework for using fair value to measure assets and liabilities, and expands disclosures about fair value measurements.

 

In the first quarter of fiscal 2010, the Company adopted revised accounting guidance for the fair value measurement and disclosure for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).

 

The guidance establishes a fair value hierarchy that is intended to increase the consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is 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 and liabilities measured at fair value on a recurring basis as of August 31, 2011 (in thousands):

 

   Balance as of      
   August 31, 2011  Level 1  Level 2
Money market funds  $2,796   $2,796   $—   
                
Assets  $2,796   $2,796   $—   
                
Liabilities  $—     $—     $—   

  

The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis as of May 31, 2011 (in thousands):

 

   Balance as of      
   May 31, 2011  Level 1  Level 2
Money market funds  $1,236   $1,236   $—   
                
Assets  $1,236   $1,236   $—   
                
Liabilities  $—     $—     $—   

 

As of August 31, 2011 and May 31, 2011, the Company did not have any assets or liabilities without observable market values that would require a high level of judgment to determine fair value (Level 3 assets).

 

The Company has at times invested in debt and equity of private companies, and may do so again in the future, as part of its business strategy. These investments are carried at cost and are included in “Other Assets” in the consolidated balance sheets. If the Company determines that an other-than-temporary decline exists in the fair value of an investment, the Company writes down the investment to its fair value and records the related write-down as an investment loss in “Other Income (Expense)” in its consolidated statements of operations. During the first quarter of fiscal 2012, the Company sold its long-term investment in ESA Electronics PTE Ltd for proceeds of approximately $1.4 million, resulting in a gain of $990,000. At May 31, 2011, the carrying value of the strategic investments was $384,000.

 

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Note 5 - ACCOUNTS RECEIVABLE, NET
3 Months Ended
Aug. 31, 2011
Notes to Financial Statements 
ACCOUNTS RECEIVABLE, NET

Note 5 - Accounts receivable, net

 

Accounts receivable represents customer trade receivables and is presented net of allowance for doubtful accounts of $39,000 at August 31, 2011 and $23,000 at May 31, 2011. 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. The Company’s allowance for doubtful accounts is based upon historical experience and review of trade receivables by aging category to identify specific customers with known disputes or collection issues. Uncollectible receivables are recorded as bad debt expense when all efforts to collect have been exhausted and recoveries are recognized when they are received.

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Note 13 - RECENT ACCOUNTING PRONOUNCEMENTS
3 Months Ended
Aug. 31, 2011
Notes to Financial Statements 
RECENT ACCOUNTING PRONOUNCEMENTS

Note 13 - Recent accounting pronouncements

 

In October 2009, the Financial Accounting Standards Board, or FASB, issued authoritative guidance for revenue recognition with multiple deliverables. This authoritative guidance defines the criteria for identifying individual deliverables in a multiple-element arrangement and the manner in which revenues are allocated to individual deliverables. In absence of vendor-specific objective evidence, or VSOE, or other third party evidence, or TPE, of the selling price for the deliverables in a multiple-element arrangement, guidance requires companies to use an estimated selling price, or ESP, for the individual deliverables. Companies shall apply the relative-selling price model for allocating an arrangement’s total consideration to its individual elements. Under this model, the ESP is used for both the delivered and undelivered elements that do not have VSOE or TPE of the selling price. This guidance is effective for fiscal years beginning on or after June 15, 2010, and will be applied prospectively to revenue arrangements entered into or materially modified after the effective date. The Company adopted these standards in the first quarter of 2012.

 . 

In October 2009, the FASB issued authoritative guidance for the accounting for certain revenue arrangements that include software elements. This authoritative guidance amends the scope of pre-existing software revenue guidance by removing from the guidance non-software components of tangible products and certain software components of tangible products. This guidance is effective for fiscal years beginning on or after June 15, 2010, and will be applied prospectively to revenue arrangements entered into or materially modified after the effective date. The Company adopted these standards in the first quarter of 2012.

These standards did not have a material impact on the Company’s condensed consolidated financial statements. 

In May 2011 updated authoritative guidance to amend existing requirements for fair value measurements and disclosures was issued. The guidance expands the disclosure requirements around fair value measurements categorized in Level 3 of the fair value hierarchy and requires disclosure of the level in the fair value hierarchy of items that are not measured at fair value but whose fair value must be disclosed. It also clarifies and expands upon existing requirements for fair value measurements of financial assets and liabilities as well as instruments classified in shareholders’ equity. The guidance will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and are to be applied prospectively. The Company will adopt this guidance in the first quarter of fiscal 2013. The implementation of this authoritative guidance is not expected to have a material impact on the Company’s financial position or results of operations.

 

 

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Note 6 - INVENTORIES
3 Months Ended
Aug. 31, 2011
Notes to Financial Statements 
INVENTORIES

Note 6 - Inventories

 

Inventories are comprised of the following (in thousands): 

 

   August 31,  May 31,
   2011  2011
Raw materials and sub-assemblies  $2,016   $1,992 
Work in process   3,144    2,699 
Finished goods   9    267 
   $5,169   $4,958 

 XML 28 R5.htm IDEA: XBRL DOCUMENT v2.3.0.15
Condensed Consolidated Statements of Cash Flows (Unaudited) (USD $)
In Thousands
3 Months Ended
Aug. 31, 2011
Aug. 31, 2010
Cash flows from operating activities:  
Net income (loss)$ 124$ (1,516)
Adjustments to reconcile net income (loss) to net cash used in operating activities:  
Stock compensation expense165274
Provision for doubtful accounts1611
Loss on disposal of assets02
Gain on sale of long-term investment(990)0
Depreciation and amortization137147
Changes in operating assets and liabilities:  
Accounts receivable(1,101)(653)
Inventories(211)(307)
Deferred lease commitment(14)(9)
Accounts payable376(292)
Income tax payable(38)(20)
Accrued expenses and deferred revenue(1)(464)
Prepaid expenses and other(83)260
Net cash used in operating activities(1,620)(2,567)
Cash flows from investing activities:  
Proceeds from sale of investments1,3750
Purchases of property and equipment(7)0
Net cash provided by investing activities1,3680
Cash flows from financing activities:  
Proceeds from issuance of common stock and excercise of stock options012
Net cash provided by financing activities012
Effect of exchange rates on cash124194
Net decrease in cash and cash equivalents(128)(2,361)
Cash and cash equivalents, beginning of period4,020[1]7,766
Cash and cash equivalents, end of period$ 3,892$ 5,405
[1]The condensed consolidated balance sheet at May 31, 2011 has been derived from the audited consolidated financial statements at that date.
 XML 29 R7.htm IDEA: XBRL DOCUMENT v2.3.0.15
Note 2 - STOCK-BASED COMPENSATION
3 Months Ended
Aug. 31, 2011
Notes to Financial Statements 
STOCK-BASED COMPENSATION

Note 2 - Stock-based compensation

 

Stock-based compensation expense consists of expenses for stock options and employee stock purchase plan, or ESPP, shares. Stock-based compensation cost 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. All of the Company’s stock based compensation is accounted for as an equity instrument. See Notes 8 and 9 in the Company’s Annual Report on Form 10-K for fiscal 2011 filed on August 26, 2011 for further information regarding the stock option plan and the ESPP.

 

The following table summarizes compensation costs related to the Company’s stock-based compensation for the three months ended August 31, 2011 and 2010, respectively (in thousands):

 

   Three Months Ended
   August 31,
   2011  2010
Stock-based compensation in the form of employee      
stock options and ESPP shares, included in:      
       
Cost of sales  $19   $32 
Selling, general and administrative   93    143 
Research and development   53    99 
Total stock-based compensation  $165   $274 

 

 

During the three months ended August 31, 2011 and 2010, the Company recorded stock-based compensation related to stock options of $155,000 and $223,000, respectively.

 

As of August 31, 2011, the total unrecognized stock-based compensation cost related to unvested stock-based awards under the Company’s 1996 Stock Option Plan and 2006 Equity Incentive Plan was approximately $963,000, which is net of estimated forfeitures of $2,000. This cost will be amortized over the remaining service period of the underlying options. The weighted average period is approximately 3.2 years.

 

During the three months ended August 31, 2011 and 2010, the Company recorded stock-based compensation related to the ESPP of $10,000 and $51,000, respectively.

 

As of August 31, 2011, the total compensation cost related to options to purchase the Company’s common stock under the ESPP but not yet recognized was approximately $8,000. This cost will be amortized on a straight-line basis over a weighted average period of approximately 0.5 years.

 

Valuation Assumptions

 

Valuation and Amortization Method. The Company estimates the fair value of stock options granted using the Black-Scholes option valuation model 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.

 

Expected 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 cost recorded.

 

Dividends. The Company has never paid any cash dividends on its common stock and does not anticipate paying any cash dividends in the foreseeable future. Consequently, the Company uses an expected dividend yield of zero in the Black-Scholes option valuation model.

 

Risk-Free Interest Rate. The Company bases the risk-free interest rate used in the Black-Scholes option valuation model 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.

 

Estimated Forfeitures. When estimating forfeitures, the Company considers voluntary termination behavior as well as analysis of actual option forfeitures.

 

Fair Value. The fair values of the Company’s stock options granted to employees for the three months ended August 31, 2011 and 2010 were estimated using the following weighted average assumptions in the Black-Scholes option valuation model.

 

   Three Months Ended
   August 31,
   2011  2010
Option Plan Shares      
Expected Term (in years)   5    5 
Volatility   0.80    0.80 
Expected Dividend  $0.00   $0.00 
Risk-free Interest Rates   1.57%   1.78%
Estimated Forfeiture Rate   0.25%   0.25%
Weighted Average Grant Date Fair Value  $0.80   $1.25 

 

There were no ESPP shares granted to employees for the three months ended August 31, 2011 and 2010.

 

The following table summarizes the stock option transactions during the three months ended August 31, 2011 (in thousands, except per share data):

 

  Outstanding Options
          Weighted    
      Number   Average   Aggregate
  Available   of   Exercise   Intrinsic
  Shares   Shares   Price   Value
Balances, May 31, 2011 687   2,083   $3.40   $298
               
Options granted (432)   432   $1.27    
Options terminated 140   (140)   $3.70    
Plan shares expired (136)            
               
Balances, August 31, 2011 259   2,375   $2.99   $123
               
Options fully vested and expected to              
  vest at August 31, 2011     2,328   $2.99   $120
               
Options exercisable at August 31, 2011     1,547   $3.59   $123

 

 

The options outstanding and exercisable at August 31, 2011 were in the following exercise price ranges (in thousands, except per share data):

 

   Options Outstanding  Options Exercisable
   at August 31, 2011  at August 31, 2011
      Weighted           Weighted   
      Average  Weighted     Weighted  Average   
Range of  Number  Remaining  Average   Number  Average  Remaining  Aggregate
Exercise  Outstanding  Contractual  Exercise   Exercisable  Exercise  Contractual  Intrinsic
Prices  Shares  Life(Years)  Price   Shares  Price  Life(Years)  Value
 $0.85-$0.85   454    2.83   $0.85    454   $0.85    2.83      
 $1.25-$2.81   1,296    4.15   $1.83    496   $2.20    2.49      
 $2.84-$5.96   272    0.81   $5.02    272   $5.02    0.81      
 $6.00-$9.30   231    1.38   $7.66    228   $7.67    1.38      
 $9.94-$9.94   122    1.81   $9.94    97   $9.94    1.81      
                                    
 $0.85-$9.94   2,375    3.12   $2.99    1,547   $3.59    2.09   $123 

 

 

There were no stock options exercised for the three months ended August 31, 2011. The total intrinsic value of options exercised was $1,000 during the three months ended August 31, 2010. The weighted average contractual life of the options exercisable and expected to be exercisable at August 31, 2011 was 3.12 years.

 

Options to purchase 1,547,000 and 1,393,000 shares were exercisable at August 31, 2011 and 2010, respectively. These exercisable options had weighted average exercise prices of $3.59 and $4.16 as of August 31, 2011 and 2010, respectively.

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Note 11 - INCOME TAXES
3 Months Ended
Aug. 31, 2011
Notes to Financial Statements 
INCOME TAXES

Note 11 - 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.

 

During fiscal 2009, a full valuation allowance was established against all deferred tax assets as management determined that it is more likely than not that certain deferred tax assets will not be realized.

 

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 - 2010 remain subject to examination by the appropriate governmental agencies due to tax loss carryovers from those years.

 XML 31 R2.htm IDEA: XBRL DOCUMENT v2.3.0.15
Condensed Consolidated Balance Sheets (Unaudited) (USD $)
In Thousands
Aug. 31, 2011
May 31, 2011
ASSETS  
Cash and cash equivalents$ 3,892$ 4,020[1]
Accounts receivable, net of allowances for doubtful accounts of $39 and $23 at August 31 2011 and May 31, 2011, respectively2,6331,432[1]
Inventories, net5,1694,958[1]
Prepaid expenses and other247161[1]
Total current assets11,94110,571[1]
Property and equipment, net827954[1]
Other assets178558[1]
Total assets12,94612,083[1]
LIABILITIES AND SHAREHOLDERS' EQUITY  
Accounts payable1,473885[1]
Accrued expenses1,4511,434[1]
Deferred revenue209221[1]
Total current liabilities3,1332,540[1]
Income tax payable165204[1]
Deferred lease commitment224238[1]
Total liabilities3,5222,982[1]
Shareholders' equity:  
Common stock, $0.01 par value: Issued and outstanding: 8,932 shares at August 31, 2011 and May 31, 20118989[1]
Additional paid-in capital47,91247,747[1]
Accumulated other comprehensive income2,6272,593[1]
Accumulated deficit(41,204)(41,328)[1]
Total shareholders' equity9,4249,101[1]
Total liabilities and shareholders' equity$ 12,946$ 12,083[1]
[1]The condensed consolidated balance sheet at May 31, 2011 has been derived from the audited consolidated financial statements at that date.