NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES:
BUSINESS:
Aehr
Test Systems (the “Company”) was incorporated in
California in May 1977 and primarily designs, engineers and
manufactures test and burn-in equipment used in the semiconductor
industry. The Company’s principal products are the Advanced
Burn-In and Test System, or ABTS, the FOX full wafer contact
parallel test and burn-in systems, the MAX burn-in system, WaferPak
full wafer contactor, the DiePak carrier and test
fixtures.
LIQUIDITY:
Since
inception, the Company has incurred substantial cumulative losses
and negative cash flows from operations. In response, the Company
took steps to minimize expense levels, entered into credit
arrangements, and raised capital through public and private equity
offerings, to increase the likelihood that it will have sufficient
cash to support operations.
In
April 2017, the Company completed a public offering of its common
stock raising net proceeds to the Company of $15.8 million. At May
31, 2018 the Company had $16.8 million in cash and cash
equivalents. The Company anticipates that the existing cash balance
together with income from operations, collections of existing
accounts receivable, revenue from our existing backlog of products,
the sale of inventory on hand, and deposits and down payments
against significant orders will be adequate to meet its working
capital and capital equipment requirements.
CONSOLIDATION:
The
consolidated financial statements include the accounts of the
Company and both its wholly-owned and majority-owned foreign
subsidiaries. Intercompany accounts and transactions have been
eliminated.
FOREIGN
CURRENCY TRANSLATION AND TRANSACTIONS:
Assets
and liabilities of the Company’s foreign subsidiaries and a
branch office are translated into U.S. Dollars from their
functional currencies of Japanese Yen, Euros and New Taiwan Dollars
using the exchange rate in effect at the balance sheet date.
Additionally, their net sales and expenses are translated using
exchange rates approximating average rates prevailing during the
fiscal year. Translation adjustments that arise from translating
their financial statements from their local currencies to U.S.
Dollars are accumulated and reflected as a separate component of
shareholders’ equity (deficit).
Transaction
gains and losses that arise from exchange rate changes denominated
in currencies other than the local currency are included in the
Consolidated Statements of Operations as incurred. See Note 12 for
the detail of foreign exchange transaction gains and losses for all
periods presented.
USE OF
ESTIMATES:
The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates. Significant estimates in the Company’s
consolidated financial statements include allowance for doubtful
accounts, valuation of inventory at the lower of cost or market,
and warranty reserves.
CASH
EQUIVALENTS:
Cash
equivalents consist of money market instruments purchased with an
original maturity of three months or less. These investments are
reported at fair value.
ACCOUNTS
RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Accounts
receivable are derived from the sale of products throughout the
world to semiconductor manufacturers, semiconductor contract
assemblers, electronics manufacturers and burn-in and test service
companies. Accounts receivable are recorded at the invoiced amount
and are not interest bearing. The Company maintains an allowance
for doubtful accounts to reserve for potentially uncollectible
trade receivables. The Company also reviews its trade
receivables
by aging category to identify specific customers with known
disputes or collection issues. The Company exercises judgment when
determining the adequacy of these reserves as the Company evaluates
historical bad debt trends, general economic conditions in the
United States and internationally, and changes in customer
financial conditions. Uncollectible receivables are recorded as bad
debt expense when all efforts to collect have been exhausted and
recoveries are recognized when they are received. No significant
adjustments to the allowance for doubtful accounts were recorded
during the years ended May 31, 2018, 2017 or 2016.
CONCENTRATION
OF CREDIT RISK:
The
Company sells its products primarily to semiconductor manufacturers
in North America, Asia, and Europe. As of May 31, 2018,
approximately 45%, 0% and 55% of gross accounts receivable were
from customers located in Asia, Europe and North America,
respectively. As of May 31, 2017, approximately 55%, 0% and 45% of
gross accounts receivable were from customers located in Asia,
Europe and North America, respectively. Three customers accounted
for 38%, 32% and 11% of gross accounts receivable as of May 31,
2018. Three customers accounted for 47%, 40% and 11% of gross
accounts receivable as of May 31, 2017. Three customers accounted
for 34%, 26% and 13% of net sales in fiscal 2018. Four customers
accounted for 45%, 19%, 17% and 10% of net sales in fiscal 2017.
The Company performs ongoing credit evaluations of its customers
and generally does not require collateral. The Company uses letter
of credit terms for some of its international
customers.
The
Company’s cash and cash equivalents are generally deposited
with major financial institutions in the United States, Japan,
Germany and Taiwan. The Company invests its excess cash in money
market funds and U.S. Treasury Securities. The money market funds
bear the risk associated with each fund. The money market funds
have variable interest rates. The Company has not experienced any
material losses on its money market funds or short-term cash
deposits.
CONCENTRATION
OF SUPPLY RISK:
The
Company relies on subcontractors to manufacture many of the
components and subassemblies used in its products. Quality or
performance failures of the Company’s products or changes in
its manufacturers’ financial or business condition could
disrupt the Company’s ability to supply quality products to
its customers and thereby have a material and adverse effect on its
business and operating results. Some of the components and
technologies used in the Company’s products are purchased and
licensed from a single source or a limited number of sources. The
loss of any of these suppliers may cause the Company to incur
additional transition costs, result in delays in the manufacturing
and delivery of its products, or cause it to carry excess or
obsolete inventory and could cause it to redesign its
products.
INVENTORIES:
Inventories
include material, labor and overhead, and are stated at the lower
of cost (first-in, first-out method) or net realizable value. Net
realizable value is the estimated selling prices in the ordinary
course of business, less costs of completion, disposal and
transportation. Provisions for excess, obsolete and unusable
inventories are made after management’s evaluation of future
demand and market conditions. The Company adjusts inventory
balances to approximate the lower of its manufacturing costs or net
realizable value. If actual future demand or market conditions
become less favorable than those projected by management,
additional inventory write-downs may be required, and would be
reflected in cost of product revenue in the period the revision is
made.
PROPERTY
AND EQUIPMENT:
Property
and equipment are stated at cost less accumulated depreciation and
amortization. Major improvements are capitalized, while repairs and
maintenance are expensed as incurred. Leasehold improvements are
amortized over the lesser of their estimated useful lives or the
term of the related lease. Furniture and fixtures, machinery and
equipment, and test equipment are depreciated on a straight-line
basis over their estimated useful lives. The ranges of estimated
useful lives are generally as follows:
Furniture
and fixtures
|
2 to 6
years
|
Machinery
and equipment
|
3 to 6
years
|
Test
equipment
|
4 to 6
years
|
REVENUE
RECOGNITION:
The
Company recognizes revenue upon the shipment of products or the
performance of services when: (1) persuasive evidence of the
arrangement exists; (2) goods or services have been delivered; (3)
the price is fixed or determinable; and (4) collectibility is
reasonably assured. When a sales agreement involves multiple
deliverables, such as extended support provisions, training to be
supplied after delivery of the systems, and test programs specific
to customers’ routine
applications, the multiple deliverables are evaluated to determine
the unit of accounting. Judgment is required to properly identify
the accounting units of multiple element transactions and the
manner in which revenue is allocated among the accounting units.
Judgments made, or changes to judgments made, may significantly
affect the timing or amount of revenue
recognition.
Revenue
related to the multiple elements is allocated to each unit of
accounting using the relative selling price hierarchy. Consistent
with accounting guidance, the selling price is based upon vendor
specific objective evidence (VSOE). If VSOE is not available, third
party evidence (TPE) is used to establish the selling price. In the
absence of VSOE or TPE, estimated selling price is
used.
During
the first quarter of fiscal 2013, the Company entered into an
agreement with a customer to develop a next generation system, and
the Company shipped the first system in July 2016. The project
identifies multiple milestones with values assigned to each. The
consideration earned upon achieving the milestone is required to
meet the following conditions prior to recognition: (i) the value
is commensurate with the vendor’s performance to meet the
milestone, (ii) it relates solely to past performance, (iii) and it
is reasonable relative to all of the deliverables and payment terms
within the arrangement. Revenue is recognized for the milestone
upon acceptance by the customer.
The
Company recognizes revenue in certain circumstances before physical
delivery has occurred. In these arrangements, among other things,
risk of ownership has passed to the customer, the customer has made
a written fixed commitment to purchase the products, the customer
has requested the products be held for future delivery as scheduled
and designated by them, and no additional performance obligations
exist by the Company. For these transactions, the products are
segregated from inventory and normal billing and credit terms
granted.
Sales
tax collected from customers is not included in net sales but
rather recorded as a liability due to the respective taxing
authorities. Provisions for the estimated future cost of warranty
and installation are recorded at the time the products are
shipped.
Royalty-based
revenue related to licensing income from performance test boards
and burn-in boards is recognized upon the earlier of the receipt by
the Company of the licensee’s report related to its usage of
the licensed intellectual property or upon payment by the
licensee.
The
Company’s terms of sales with distributors are generally FOB
shipping point with payment due within 60 days. All products go
through in-house testing and verification of specifications before
shipment. Apart from warranty reserves, credits issued have not
been material as a percentage of net sales. The Company’s
distributors do not generally carry inventories of the
Company’s products. Instead, the distributors place orders
with the Company at or about the time they receive orders from
their customers. The Company’s shipment terms to our
distributors do not provide for credits or rights of return.
Because the Company’s distributors do not generally carry
inventories of our products, they do not have rights to price
protection or to return products. At the time the Company ships
products to the distributors, the price is fixed. Subsequent to the
issuance of the invoice, there are no discounts or special terms.
The Company does not give the buyer the right to return the product
or to receive future price concessions. The Company’s
arrangements do not include vendor consideration.
PRODUCT
DEVELOPMENT COSTS AND CAPITALIZED SOFTWARE:
Costs
incurred in the research and development of new products or systems
are charged to operations as incurred. Costs incurred in the
development of software programs for the Company’s products
are charged to operations as incurred until technological
feasibility of the software has been established. Generally,
technological feasibility is established when the software module
performs its primary functions described in its original
specifications, contains features required for it to be usable in a
production environment, is completely documented and the related
hardware portion of the product is complete. After technological
feasibility is established, any additional costs are capitalized.
Capitalization of software costs ceases when the software is
substantially complete and is ready for its intended use.
Capitalized costs are amortized over the estimated life of the
related software product using the greater of the units of sales or
straight-line methods over ten years. No system software
development costs were capitalized or amortized in fiscal 2018,
2017 and 2016.
IMPAIRMENT
OF LONG-LIVED ASSETS:
In
the event that facts and circumstances indicate that the carrying
value of assets may be impaired, an evaluation of recoverability
would be performed. If an evaluation is required, the estimated
future undiscounted cash flows associated with the asset would be
compared to the asset’s carrying value to determine if a
write-down is required.
ADVERTISING
COSTS:
The
Company expenses all advertising costs as incurred and the amounts
were not material for all periods presented.
SHIPPING
AND HANDLING OF PRODUCTS:
Amounts
billed to customers for shipping and handling of products are
included in net sales. Costs incurred related to shipping and
handling of products are included in cost of sales.
INCOME
TAXES:
Income
taxes have been provided using the liability method whereby
deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities and net operating loss and tax credit carryforwards
measured using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse or the
carryforwards are utilized. Valuation allowances are established
when it is determined that it is more likely than not that such
assets will not be realized.
A
full valuation allowance was established against all deferred tax
assets, as management determined that it is more likely than not
that deferred tax assets will not be realized, as of May 31, 2018
and 2017.
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
– 2017 remain subject to examination by the appropriate
governmental agencies due to tax loss carryovers, research and
development tax credits, or other tax attributes from those
years.
COMPREHENSIVE
INCOME (LOSS):
Comprehensive
income (loss) generally represents all changes in
shareholders’ equity except those resulting from investments
or contributions by shareholders. Unrealized gains and losses on
foreign currency translation adjustments are included in the
Company’s components of comprehensive income (loss), which
are excluded from net income (loss). Comprehensive income (loss) is
included in the statements of comprehensive income
(loss).
RECENT
ACCOUNTING PRONOUNCEMENTS:
Accounting
Standards Adopted
Inventory
Measurement
In
July 2015, the Financial Accounting Standards Board
(“FASB”) issued an accounting standard update that
requires management to measure inventory at the lower of cost or
net realizable value. Net realizable value is the estimated selling
prices in the ordinary course of business, less reasonably
predictable costs of completion, disposal, and transportation. The
Company adopted this new standard in fiscal year 2018. The adoption
of this guidance did not have a significant impact on the
Company’s consolidated financial statements.
Balance
Sheet Classification of Deferred Taxes
In
November 2015, the FASB issued an accounting standard update
related to deferred tax assets and liabilities. This standard
simplifies the presentation of deferred income taxes to be
classified as noncurrent in the consolidated balance sheet. The
Company adopted this new standard in fiscal year 2018. The adoption
of this guidance did not have a significant impact on the
Company’s consolidated financial statements.
Share-Based Compensation
In
March 2016, the FASB released an accounting standard update that
simplifies several aspects of the accounting for share-based
payment transactions, including the income tax consequences,
forfeitures, classification of awards as either equity or
liabilities, and classification on the statement of cash flows. The
Company adopted this new standard in fiscal year 2018. The adoption
of this guidance did not have a significant impact on the
Company’s consolidated financial statements.
Income Taxes
On December 22, 2017, the US government enacted comprehensive tax
legislation commonly referred to as the Tax Cuts and Jobs Act (the
“Tax Act”). The Tax Act makes broad and complex changes
to the US tax code including but not limited to (1) reducing the US
federal corporate tax rate from 34% to 21%; (2) requiring
companies to pay a one-time transition tax on certain repatriated
earnings of foreign subsidiaries; (3) generally eliminating US
federal income taxes on dividends from foreign subsidiaries; (4)
requiring a current inclusion in US federal income of certain
earnings of controlled foreign corporations; (5) creating a new
limitation on deductible interest expense; (6) changing rules
related to the uses and limitations of net operating loss
carryforwards created in tax years beginning after December 31,
2017; and (7) repeals the corporate alternative minimum tax, or
AMT, effective December 31, 2017 and repeals the corporate
alternative minimum tax regime and permits existing minimum tax
credits to offset the regular tax liability for any tax year.
Consequently, we have accounted for the reduction of $6.4 million
of deferred tax assets with an offsetting adjustment to the
valuation allowance for the fiscal year ended 2018,.and recorded a
benefit of $90,000 for our Federal refundable AMT
credit.
On
December 22, 2017, the SEC staff issued Staff Accounting Bulletin
No. 118 (“SAB 118”) which provides guidance on
accounting for the tax effects of the Tax act. SAB 118 provides a
measurement period that should not extend beyond one year from the
Tax Act enactment date for companies to complete the accounting
under ASC 740, Income taxes. In accordance with SAB 118, a company
must reflect the income tax effects of those aspects of the Tax Act
for which the accounting under ASC 740 is complete. To the extent
that a company’s accounting for certain income tax effects of
the Tax Act is incomplete but it is able to determine a reasonable
estimate, it must record and provisional estimate in the financial
statements. There are also certain transitional impacts of the Tax
Act. As part of the transition to the new territorial tax system,
the Tax Act imposes a one-time repatriation tax on deemed
repatriation of historical earnings of foreign subsidiaries. These
transitional impacts has no impact to the company for the year
fiscal year ended 2018. The one-time transition tax is based on
post-1986 earnings and profits that were previously deferred from
US income tax. While we have not yet finalized our calculation of
the total post-1986 Earnings and profits, for our foreign
corporations or the impact of foreign tax credits, we have prepared
a reasonable estimate and calculated the provision amount. The
Company is evaluating the calculation of the transition tax. The
accounting for this item is incomplete and may change as our
interpretation of the provisions of the Act evolve, additional
information becomes available or interpretive guidance is issued by
the U.S. Treasury. The final determination will be completed no
later than one year from the enactment date. Based on the current
year and carryover losses and the valuation allowance the Company
would not expect an impact to the financial statements as a result
of the completion of the analysis.
Accounting
Standards Not Yet Adopted
Revenue
Recognition
In
May 2014, the FASB issued ASC Update No. 2014-09, Revenue from
Contracts with Customers (Topic 606), which has been subsequently
updated. The new standard will supersede nearly all U.S. GAAP on
revenue recognition and eliminate industry-specific guidance. The
core principle of the standard is to recognize revenues when
promised goods or services are transferred to customers in an
amount that reflects the consideration that is expected to be
received for those goods or services. The new standard defines a
five-step process to achieve this core principle and, in doing so,
it is possible more judgment and estimates may be required within
the revenue recognition process than required under existing GAAP,
including identifying performance obligations in the contract,
estimating the amount of variable consideration to include in the
transaction price, and allocating the transaction price to each
distinct performance obligation. It also requires increased
disclosures including the nature, amount, timing, and uncertainty
of revenues and cash flows related to contracts with customers. The
new guidance will become effective for the Company in the first
quarter of fiscal 2019, which is the Company’s planned
adoption date.
The
standard allows two methods of adoption: i) retrospectively to each
prior period presented (“full retrospective method”),
or ii) retrospectively with the cumulative effect recognized in
retained earnings as of the date of adoption ("modified
retrospective method").
The
Company plans to adopt Topic 606 using the modified retrospective
method through a cumulative effect adjustment being recognized in
accumulated deficit as of the adoption date. Under that method, the
Company will not restate the prior financial statements but apply
the rules to contracts that are complete or incomplete as of June
1, 2018 and recognize the cumulative effect of initially applying
the new standard as an adjustment to the opening balance of
accumulative deficit.
The
Company has reached conclusions on its accounting assessments
related to the standard and does not expect to record an adjustment
to the opening cumulative deficits as the impact deems
insignificant.
The
adoption of the new standard will not significantly impact the
Company’s process, procedure and control. The Company is
currently in the process of developing, implementing and testing
its internal systems, processes and controls
necessary
to adopt Topic 606, and is in process of making the necessary
changes to its accounting policies. In addition, the Company is
currently evaluating the impact of the expanded disclosures to its
consolidated financial statements.
Financial
Instruments
In
January 2016, the FASB issued an accounting standard update related
to recognition and measurement of financial assets and financial
liabilities. This standard changes accounting for equity
investments, financial liabilities under the fair value option and
the presentation and disclosure requirements for financial
instruments. In addition, it clarifies guidance related to the
valuation allowance assessment when recognizing deferred tax assets
resulting from unrealized losses on available-for-sale debt
securities. This standard is effective for us in fiscal year 2020.
Early adoption is permitted. The Company is currently evaluating
the impact of this new guidance on its consolidated financial
statements.
In
June 2016, the FASB issued an accounting standard update that
requires measurement and recognition of expected credit losses for
financial assets held based on historical experience, current
conditions, and reasonable and supportable forecasts that affect
the collectibility of the reported amount. The accounting standard
update will be effective for the Company beginning in the first
quarter of fiscal 2021 on a modified retrospective basis, and early
adoption in fiscal 2020 is permitted. The Company is currently
evaluating the impact of this accounting standard update on its
consolidated financial statements.
Leases
In
February 2016, the FASB issued authoritative guidance related to
leases. This guidance requires management to present all leases
greater than one year on the balance sheet as a liability to make
payments and an asset as the right to use the underlying asset for
the lease term. This new standard will be effective for us in
fiscal year 2020, with early adoption permitted. The Company is
currently evaluating the impact of adopting this new guidance on
its consolidated financial statements.
Classification
of Certain Cash Receipts and Cash Payments
In
August 2016, the FASB issued authoritative guidance related to the
classification of certain cash receipts and cash payments on the
statement of cash flows. The accounting standard update will be
effective for the Company beginning in the first quarter of fiscal
2019 on a retrospective basis, and early adoption is permitted. The
Company is currently evaluating the impact of this accounting
standard update on its consolidated statements of cash
flows.
Intra-Entity
Asset Transfers
In
October 2016, the FASB issued an accounting standard update that
requires recognition of the income tax consequences of intra-entity
transfers of assets (other than inventory) at the transaction date.
The accounting standard update will be effective for the Company
beginning in the first quarter of fiscal 2019 on a modified
retrospective basis, and early adoption is permitted. The Company
is currently evaluating the impact of this accounting standard
update on its consolidated financial statements.
Restricted
Cash
In
November 2016, the FASB issued authoritative guidance related to
statements of cash flows. This guidance clarifies that amounts
generally described as restricted cash and restricted cash
equivalents should be included with cash and cash equivalents when
reconciling the beginning-of-period and end-of period total amounts
shown on the statement of cash flows. The accounting standard
update will be effective for the Company beginning in the first
quarter of fiscal 2019 on a retrospective basis, and early adoption
is permitted. The Company is currently evaluating the impact of
this accounting standard update on its consolidated financial
statements.
2. EARNINGS PER SHARE (“EPS”):
Basic
EPS is determined using the weighted average number of common
shares outstanding during the period. Diluted EPS is determined
using the weighted average number of common shares and potential
common shares (representing the dilutive effect of stock options,
RSUs and ESPP shares) outstanding during the period using the
treasury stock method.
The
following table presents the computation of basic and diluted net
income (loss) per share attributable to Aehr Test Systems common
shareholders (in thousands, except per share data):
|
|
|
|
|
|
Numerator: Net income (loss)
|
$
528
|
$
(5,653
)
|
$
(6,785
)
|
|
|
|
|
Denominator
for basic net income (loss) per share:
|
|
|
|
Weighted-average shares
outstanding
|
21,732
|
16,267
|
13,091
|
|
|
|
|
Shares used in basic net income (loss) per share
calculation
|
21,732
|
16,267
|
13,091
|
|
|
|
|
Effect of dilutive securities
|
1,050
|
--
|
--
|
|
|
|
|
|
|
|
|
Denominator for diluted net income (loss) per
share
|
22,782
|
16,267
|
13,091
|
|
|
|
|
Basic net income (loss) per
share
|
$
0.02
|
$
(0.35
)
|
$
(0.52
)
|
|
|
|
|
Diluted net income (loss) per
share
|
$
0.02
|
$
(0.35
)
|
$
(0.52
)
|
For
the purpose of computing diluted earnings per share, the weighted
average number of potential common shares does not include stock
options with an exercise price greater than the average fair value
of the Company’s common stock for the period, as the effect
would be anti-dilutive. Stock options to purchase 1,313,000 shares
of common stock were outstanding as of May 31, 2018 but were not
included in the computation of diluted net income per share,
because the inclusion of such shares would be anti-dilutive. In the
fiscal year ended May 31, 2017 and 2016, potential common shares
have not been included in the calculation of diluted net loss per
share as the effect would be anti-dilutive. As such, the numerator
and the denominator used in computing both basic and diluted net
loss per share for these periods are the same. Stock options to
purchase 3,074,000 and 3,201,000 shares of common stock were
outstanding on May 31, 2017 and 2016, respectively, but were not
included in the computation of diluted net loss per share, because
the inclusion of such shares would be anti-dilutive. ESPP rights to
purchase 169,000 and 304,000 ESPP shares were outstanding on May
31, 2017 and 2016, respectively, but were not included in the
computation of diluted net loss per share, because the inclusion of
such shares would be anti-dilutive. RSUs for 32,000 shares and 0
shares were outstanding on May 31, 2017 and 2016, respectively, but
were not included in the computation of diluted net loss per share,
because the inclusion of such shares would be anti-dilutive. The
2,657,000 shares convertible under the convertible notes
outstanding on May 31, 2018, 2017 and 2016 were not included in the
computation of diluted net income (loss) per share, because the
inclusion of such shares would be anti-dilutive.
3. CASH, CASH EQUIVALENTS AND INVESTMENTS:
The
following table summarizes the Company’s cash, cash
equivalents and investments by security type at May 31, 2018 (in
thousands):
|
|
|
|
|
|
|
|
Cash
|
$
3,132
|
$
--
|
$
3,132
|
Cash
equivalents:
|
|
|
|
Money
market funds
|
7,733
|
--
|
7,733
|
U.S.
Treasury securities
|
5,983
|
--
|
5,983
|
Total
Cash equivalents
|
13,716
|
--
|
13,716
|
Total
Cash and Cash equivalents
|
$
16,848
|
$
--
|
$
16,848
|
Long-term
investments:
|
|
|
|
Certificate
of deposit
|
$
80
|
$
--
|
$
80
|
Total
Cash, Cash equivalents and Investments
|
$
16,928
|
$
--
|
$
16,928
|
Long-term
investments are included in other assets on the accompanying
consolidated balance sheet at May 31. 2018.
Unrealized
gains and temporary losses on investments classified as
available-for-sale are included within accumulated other
comprehensive income (“AOCI”), net of any related tax
effect. Upon realization, those amounts are reclassified from AOCI
to results of operations.
The
following table summarizes the Company’s cash, cash
equivalents and investments by security type at May 31, 2017 (in
thousands):
|
|
|
|
|
|
|
|
Cash
|
$
2,287
|
$
--
|
$
2,287
|
Cash
equivalents:
|
|
|
|
Money
market funds
|
15,516
|
--
|
15,516
|
Total
Cash equivalents
|
15,516
|
--
|
15,516
|
Total
Cash and Cash equivalents
|
$
17,803
|
$
--
|
$
17,803
|
Long-term
investments:
|
|
|
|
Certificate
of deposit
|
$
50
|
$
--
|
$
50
|
Total
Cash, Cash equivalents and Investments
|
$
17,853
|
$
--
|
$
17,853
|
4. FAIR VALUE MEASUREMENT:
The
Company’s financial instruments are measured at fair value
consistent with authoritative guidance. This authoritative guidance
defines fair value, establishes a framework for using fair value to
measure assets and liabilities, and disclosures required related to
fair value measurements.
The
guidance establishes a fair value hierarchy based on inputs to
valuation techniques that are used to measure fair value that are
either observable or unobservable. Observable inputs reflect
assumptions market participants would use in pricing an asset or
liability based on market data obtained from independent sources
while unobservable inputs reflect a reporting entity’s
pricing based upon their own market assumptions. The fair value
hierarchy consists of the following three levels:
Level 1
- instrument valuations are obtained from real-time quotes for
transactions in active exchange markets involving identical
assets.
Level 2
- instrument valuations are obtained from readily-available pricing
sources for comparable instruments.
Level 3
- instrument valuations are obtained without observable market
values and require a high level of judgment to determine the fair
value.
The
following table summarizes the Company’s financial assets
measured at fair value on a recurring basis as of May 31, 2018 (in
thousands):
|
|
|
|
|
|
|
|
|
|
Money market funds
|
$
7,733
|
$
7,733
|
$
--
|
$
--
|
U.S. Treasury securities
|
5,983
|
5,983
|
--
|
--
|
Certificate of deposit
|
80
|
--
|
80
|
--
|
Assets
|
$
13,796
|
$
13,716
|
$
80
|
$
--
|
The
U.S. Treasury Securities have maturities of three
months.
The
following table summarizes the Company’s financial assets
measured at fair value on a recurring basis as of May 31, 2017 (in
thousands):
|
|
|
|
|
|
|
|
|
|
Money market funds
|
$
15,516
|
$
15,516
|
$
--
|
$
--
|
Certificate of deposit
|
50
|
--
|
50
|
--
|
Assets
|
$
15,566
|
$
15,516
|
$
50
|
$
--
|
There were no financial liabilities
measured at fair value as of May 31, 2018 and
2017.
There
were no transfers between Level 1 and Level 2 fair value
measurements during the fiscal year ended May 31, 2018 and
2017.
The
carrying amounts of financial instruments including cash, cash
equivalents, receivables, accounts payable and certain other
accrued liabilities, approximate fair value due to their short
maturities. Based on the borrowing rates currently available to the
Company for loans with similar terms, the carrying value of the
debt approximates the fair value.
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.
5. ACCOUNTS RECEIVABLE:
Accounts
receivable comprise (in thousands):
|
|
|
|
|
Accounts receivable
|
$
2,860
|
$
4,071
|
Less: Allowance for doubtful accounts
|
(4
)
|
(61
)
|
|
$
2,856
|
$
4,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts receivable:
|
|
|
|
|
May
31, 2018
|
$
61
|
$
4
|
$
(61
)
|
$
4
|
|
|
|
|
|
May
31, 2017
|
$
8
|
$
53
|
$
--
|
$
61
|
*
Deductions include write-offs of uncollectible accounts,
collections of amounts previously reserved, and releases of
allowance for
doubtful accounts credited to expense.
6. BALANCE SHEET DETAIL
INVENTORIES:
|
|
(In
Thousands)
|
|
|
Raw materials and
sub-assemblies
|
$
5,747
|
$
4,268
|
Work in process
|
3,068
|
2,059
|
Finished goods
|
234
|
277
|
|
$
9,049
|
$
6,604
|
PROPERTY AND EQUIPMENT,
NET:
|
|
(In
Thousands)
|
|
|
Leasehold improvements
|
$
1,154
|
$
1,145
|
Furniture and fixtures
|
984
|
974
|
Machinery and equipment
|
2,865
|
3,035
|
Test equipment
|
2,595
|
2,268
|
|
|
|
|
7,598
|
7,422
|
Less:
Accumulated depreciation
and amortization
|
(6,395
)
|
(6,003
)
|
|
$
1,203
|
$
1,419
|
Depreciation expense was $417,000,
$271,000 and $203,000 for fiscal 2018, 2017, and 2016,
respectively.
ACCRUED EXPENSES:
|
|
(In
Thousands)
|
|
|
Payroll related
|
$
1,014
|
$
934
|
Professional services
|
163
|
161
|
Accrued interest
|
139
|
139
|
Warranty
|
135
|
113
|
Commissions and bonuses
|
101
|
125
|
Taxes payable
|
34
|
69
|
Investor relations
|
19
|
25
|
Other
|
41
|
43
|
|
$
1,646
|
$
1,609
|
CUSTOMER
DEPOSITS AND DEFERRED REVENUE, SHORT-TERM:
|
|
(In
Thousands)
|
|
|
Customer deposits
|
$
1,340
|
$
3,264
|
Deferred revenue
|
290
|
203
|
|
$
1,630
|
$
3,467
|
7. INCOME TAXES:
Domestic
and foreign components of income (loss) before income tax benefit
(expense) are as follows (in thousands):
|
|
|
|
|
|
Domestic
|
$
433
|
$
(5,663
)
|
$
(6,794
)
|
Foreign
|
22
|
35
|
19
|
|
$
455
|
$
(5,628
)
|
$
(6,775
)
|
The
income tax benefit (expense) consists of the following (in
thousands):
|
|
|
|
|
|
Federal
income taxes:
|
|
|
|
Current
|
$
99
|
$
--
|
$
--
|
Deferred
|
--
|
--
|
--
|
State
income taxes:
|
|
|
|
Current
|
(22
)
|
(8
)
|
3
|
Deferred
|
--
|
--
|
--
|
Foreign
income taxes:
|
|
|
|
Current
|
(4
)
|
(17
)
|
(13
)
|
Deferre
|
--
|
--
|
--
|
|
$
73
|
$
(25
)
|
$
(10
)
|
The
Company’s effective tax rate differs from the U.S. federal
statutory tax rate, as follows:
|
|
|
|
|
|
U.S. federal statutory tax rate
|
28.6
%
|
34.0
%
|
34.0
%
|
State taxes, net of federal tax
effect
|
(16.7
)
|
(0.1
)
|
--
|
Foreign rate differential
|
39.4
|
0.1
|
0.2
|
Stock-based compensation
|
39.9
|
(2.8
)
|
(3.8
)
|
Research and development credit
|
5.9
|
3.1
|
2.1
|
Change in valuation allowance
|
(1,349.2
)
|
(33.8
)
|
(32.5
)
|
Federal rate change impact
|
1,419.7
|
--
|
--
|
Federal AMT refund
|
(20.0
)
|
--
|
--
|
ASU 2016-09 adoption
|
(169.1
)
|
--
|
--
|
Other
|
5.4
|
(0.9
)
|
(0.2
)
|
Effective tax rate
|
(16.1
)%
|
(0.4
)%
|
(0.2
)%
|
The
components of the net deferred tax assets are as follows (in
thousands):
|
|
|
|
|
|
|
|
Net operating losses
|
$
12,918
|
$
18,719
|
Credit carryforwards
|
4,952
|
4,715
|
Inventory reserves
|
588
|
870
|
Reserves and accruals
|
1,419
|
1,566
|
Other
|
247
|
393
|
|
|
|
|
20,124
|
26,263
|
|
|
|
Less: Valuation allowance
|
(20,124
)
|
(26,263
)
|
Net deferred tax assets
.
|
$
--
|
$
--
|
The
valuation allowance decreased by $6,139,000 during fiscal 2018,
increased by $1,635,000 during fiscal 2017, and increased by
$421,000 during fiscal 2016. As of May 31, 2018 and 2017, the
Company concluded that it is more likely than not that the deferred
tax assets will not be realized and therefore provided a full
valuation allowance against the deferred tax assets. The Company
will continue to evaluate the need for a valuation allowance
against its deferred tax assets on a quarterly basis.
At
May 31, 2018, the Company had federal and state net operating loss
carryforwards of $50,356,000 and $31,340,000 respectively. The
federal and state net operating loss carryforwards will begin to
expire in 2024. At May 31, 2018, the Company also had federal and
state research and development tax credit carryforwards of
$2,157,000 and $5,428,000, respectively. The federal credit
carryforward will begin to expire in 2019, and the California
credit will carryforward indefinitely. These carryforwards may be
subject to certain limitations on annual utilization in case of a
change in ownership, as defined by tax law. The Company also has
alternative minimum tax credit carryforwards of $34,000 for state
purposes. The credits may be used to offset regular tax and do not
expire.
The
Company has made no provision for U.S. income taxes on
undistributed earnings of certain foreign subsidiaries because it
is the Company’s intention to permanently reinvest such
earnings in its foreign subsidiaries. If such earnings were
distributed, the Company would be subject to additional U.S. income
tax expense. Determination of the amount of unrecognized deferred
income tax liability related to these earnings is not
practicable.
Foreign
net operating loss carryforwards of $457,000 are available to
reduce future foreign taxable income. The foreign net operating
losses will expire starting fiscal year 2019.
The
Company maintains liabilities for uncertain tax positions. These
liabilities involve considerable judgment and estimation and are
continuously monitored by management based on the best information
available. The aggregate changes in the balance of gross
unrecognized tax benefits are as follows (in
thousands):
Beginning balance as of May 31,
2015
|
$
919
|
Decreases related to prior year tax
positions
|
(124
)
|
Decreases related to lapse of statute of
limitations
|
(6
)
|
|
|
Balance at May 31, 2016
|
$
789
|
|
|
Decreases related to prior year tax
positions
|
--
|
Decreases related to lapse of statute of
limitations
|
--
|
|
|
Balance at May 31, 2017
|
$
789
|
|
|
Increases related to prior year tax
positions
|
889
|
Increases related to current year tax
positions
|
107
|
|
|
Balance at May 31, 2018
|
$
1,785
|
The
ending balance of $1,785,000 of unrecognized tax benefits as of May
31, 2018, if recognized, would not impact the effective tax
rate.
On
December 22, 2017, the U.S. government enacted comprehensive tax
legislation commonly referred to as the Tax Cuts and Jobs Act (the
“Tax Act”). On December 22, 2017, the SEC staff issued
Staff Accounting Bulletin No. 118 (“SAB 118”), which
provides guidance on accounting for the tax effects of the Tax Act.
SAB 118 provides a measurement period that should not extend beyond
one year from the Tax Act enactment date for companies to complete
the accounting under ASC 740, Income taxes. In accordance with SAB
118, a company must reflect the income tax effects of those aspects
of the Tax Act for which the accounting under ASC 740 is complete.
To the extent that a company’s accounting for certain income
tax effects of the Tax Act is incomplete but it is able to
determine a reasonable estimate, it must record a provisional
estimate in the financial statements.
As
part of the transition to the new territorial tax system, the Tax
Act imposes a one-time repatriation tax on deemed repatriation of
historical earnings of foreign subsidiaries. The company is not
subject to the transition tax. The one-time transition tax is based
on post-1986 earnings and profits that were previously deferred
from U.S. income tax. While the Company has not yet finalized its
calculation of the total post-1986 earnings and profits for its
foreign corporations or the impact of foreign tax credits, it has
prepared a reasonable estimate and calculation of nil transition
tax. The Company is continuing to evaluate the calculation and
accounting of the transition tax, which may change as the Company's
interpretation of the provisions of the Tax Act evolve, additional
information becomes available or interpretive guidance is issued by
the U.S. Treasury. The final determination will be completed no
later than one year from the enactment date. Based on current year
and carryover losses and valuation allowance, the Company does not
expect an impact to its consolidated financial statements upon
completion of the analysis.
The
new law also repeals the corporate alternative minimum tax, or AMT,
effective December 31, 2017. The law repeals the corporate
alternative minimum tax regime and permits existing minimum tax
credits to offset the regular tax liability for any tax year.
Further, the credit is refundable for any tax year beginning after
December 31, 2017 and before December 31, 2020 in an amount equal
to 50% of the excess of the minimum tax credit over the allowable
credit for the year against the regular tax liability. Any unused
minimum tax credit carryforward is refundable in the following
year. As result, the company recorded a benefit of $90,000 for its
Federal refundable AMT credit.
In
addition, the reduction of U.S. federal corporate tax rate reduces
the corporate tax rate to 21%, effective January 1, 2018.
Consequently, the Company has accounted for the reduction of $6.4
million of deferred tax assets with an offsetting adjustment to the
valuation allowance.
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
– 2017 remain subject to examination by the appropriate
governmental agencies due to tax loss carryovers, research and
development tax credits, or other tax attributes from those
years.
8. LONG-TERM DEBT:
On
April 10, 2015, the Company entered into a Convertible Note
Purchase and Credit Facility Agreement (the “Purchase
Agreement”) with QVT Fund LP and Quintessence Fund L.P. (the
“Purchasers”) providing for (a) the Company’s
sale to the Purchasers of $4,110,000 in aggregate principal amount
of 9.0% Convertible Secured Notes due
2017 (the
“Convertible Notes”) and (b) a secured revolving loan
facility (the “Credit Facility”) in an aggregate
principal
amount of up to
$2,000,000. On August 22, 2016 the Purchase Agreement was amended
to extend the maturity date of
the
Convertible Notes to April 10, 2019, decrease the conversion price
from $2.65 per share to $2.30 per share, decrease the forced
conversion price from $7.50 per share to $6.51 per share, and allow
for additional equity awards.
The
Convertible Notes bear interest at an annual rate of 9.0% and will
mature on April 10, 2019 unless repurchased or converted prior to
that date. Interest is payable quarterly on March 1, June 1,
September 1 and December 1 of each year. Debt issuance costs of
$356,000, which were accreted over the term of the original loan
using the effective interest rate method, were offset against the
loan balance.
The
conversion price for the Convertible Notes is $2.30 per share and
is subject to adjustment upon the occurrence of certain specified
events. Holders may convert all or any part of the principal amount
of their Convertible Notes in integrals of $10,000 at any time
prior to the maturity date. Upon conversion, the Company will
deliver shares of its common stock to the holder of Convertible
Notes electing such conversion. The Company may not redeem the
Convertible Notes prior to maturity.
The
maximum amount of $2,000,000 drawn against the Credit Facility has
been converted to Convertible Notes, and at May 31, 2018 there was
no remaining balance available to be drawn on the Credit
Facility.
The
Company’s obligations under the Purchase Agreement are
secured by substantially all of the assets of the
Company.
9. EQUITY:
On August 8, 2016 the Company issued
200,000 shares of its common stock to Semics Inc., a semiconductor
test equipment provider that produces fully automatic wafer probe
systems, in consideration for cancellation of an outstanding
invoice of $323,000 for capital equipment.
On
September 28, 2016, the Company sold 2,722,000 shares of its common
stock in a private placement transaction to certain institutional
and accredited investors. The purchase price per share of the
common stock sold in the private placement was $2.15, resulting in
gross proceeds to the Company of $5,851,000, before offering
expenses. The net proceeds after offering expenses were
$5,299,000.
On
April 19 2017, the Company completed a public offering of 4,423,000
shares of its common stock at a price to the public of $3.90 per
share, including the underwriter’s exercise of its option to
purchase 577,000 additional shares to cover over-allotments. The
gross proceeds to the Company were $17,250,000, before underwriting
discounts and offering expenses. The net proceeds after
underwriting discounts and offering expenses were
$15,832,000.
10. STOCKHOLDERS’ EQUITY, COMPREHENSIVE INCOME AND
STOCK-BASED COMPENSATION
ACCUMULATED
OTHER COMPREHENSIVE INCOME:
Changes
in the components of AOCI, net of tax, were as follows (in
thousands):
|
Cumulative Translation Adjustments
|
Unrealized Loss on Investments, Net
|
|
|
|
|
|
Balance
at May 31, 2016
|
$
2,237
|
$
--
|
$
2,237
|
Other comprehensive income (loss) before
reclassification
|
12
|
--
|
12
|
Amounts reclassified out of AOCI
|
--
|
--
|
--
|
Other comprehensive income (loss), net of tax
|
12
|
--
|
12
|
Balance
at May 31, 2017
|
$
2,249
|
$
--
|
$
2,249
|
Other comprehensive income (loss) before
reclassifications
|
43
|
--
|
43
|
Amounts reclassified out of AOCI
|
--
|
--
|
--
|
Other comprehensive income (loss), net of tax
|
43
|
--
|
43
|
Balance
at May 31, 2018
|
$
2,292
|
$
--
|
$
2,292
|
STOCK-BASED
COMPENSATION:
Stock-based
compensation expense consists of expenses for stock options,
restricted stock units, or RSUs, and employee stock purchase plan,
or ESPP, purchase rights. Stock-based compensation expense for
stock options and ESPP purchase rights is measured at each grant
date, based on the fair value of the award using the Black-Scholes
option valuation model, and is recognized as expense over the
employee’s requisite service period. This model was developed
for use in estimating the value of publicly traded options that
have no vesting restrictions and are fully transferable. The
Company’s employee stock options have characteristics
significantly different from those of publicly traded options. For
RSUs, stock-based compensation expense is based on the fair value
of the Company’s common stock at the grant date. All of the
Company’s stock-based compensation is accounted for as equity
instruments.
The
following table summarizes the stock-based compensation expense for
the years ended May 31, 2018, 2017 and 2016 (in thousands, except
per share data):
|
|
|
|
|
|
Stock-based compensation in the form of stock options,
RSUs,
and ESPP purchase rights, included in:
|
|
|
|
|
|
|
|
Cost of sales
|
$
148
|
$
91
|
$
87
|
Selling, general and
administrative
|
592
|
714
|
723
|
Research and development
|
256
|
194
|
206
|
|
|
|
|
Net effect on net income
(loss)
|
$
996
|
$
999
|
$
1,016
|
|
|
|
|
Effect
on net income (loss) per share:
|
|
|
|
Basic
|
$
0.05
|
$
0.06
|
$
0.08
|
Diluted
|
$
0.04
|
$
0.06
|
$
0.08
|
As
of May 31, 2018, 2017 and 2016, there were no stock-based
compensation expenses capitalized as part of
inventory.
During
fiscal 2018, 2017 and fiscal 2016, the Company recorded stock-based
compensation related to stock options and restricted stock units of
$706,000, $884,000 and $894,000, respectively.
As
of May 31, 2018, the total compensation expense related to unvested
stock-based awards under the Company’s 2016 Equity Incentive
Plan, but not yet recognized, was $976,000 which is net of
estimated forfeitures of $2,000. This expense will be amortized on
a straight-line basis over a weighted average period of
approximately 2.5 years.
During
fiscal 2018, 2017 and fiscal 2016, the Company recorded stock-based
compensation related to its ESPP of $290,000, $115,000 and
$122,000, respectively. The increase in fiscal 2018 is primarily
due to employees increasing their ESPP elections during the fiscal
year.
As
of May 31, 2018, the total compensation expense related to purchase
rights under the ESPP but not yet recognized was $306,000. This
expense will be amortized on a straight-line basis over a weighted
average period of approximately 1.3 years.
Valuation
Assumptions
Valuation
and Amortization Method. The Company estimates the fair value of
stock options granted using the Black-Scholes option valuation
method and a single option award approach. The fair value under the
single option approach is amortized on a straight-line basis over
the requisite service periods of the awards, which is generally the
vesting period.
Expected
Term. The Company’s expected term represents the period that
the Company’s stock-based awards are expected to be
outstanding and was determined based on historical experience,
giving consideration to the contractual terms of the stock-based
awards, vesting schedules and expectations of future employee
behavior as evidenced by changes to the terms of its stock-based
awards.
Volatility.
Volatility is a measure of the amounts by which a financial
variable such as stock price has fluctuated (historical volatility)
or is expected to fluctuate (expected volatility) during a period.
The Company uses the historical volatility for the past five years,
which matches the expected term of most of the option grants, to
estimate expected volatility. Volatility for each of the
ESPP’s four time periods of six months, twelve months,
eighteen months, and twenty-four months is calculated separately
and included in the overall stock-based compensation expense
recorded.
Risk-Free
Interest Rate. The Company bases the risk-free interest rate used
in the Black-Scholes option valuation method on the implied yield
in effect at the time of option grant on U.S. Treasury zero-coupon
issues with a remaining term equivalent to the expected term of the
stock awards including the ESPP.
Fair
Value. The fair values of the Company’s stock options granted
to employees in fiscal 2018, 2017 and 2016 were estimated using the
following weighted average assumptions in the Black-Scholes option
valuation method:
|
|
|
|
|
|
Option
plan shares
|
|
|
|
Expected term (in years)
|
4
|
4
|
4
|
Volatility
|
0.77
|
0.81
|
0.86
|
Risk-free interest rates
|
1.95
%
|
1.02
%
|
1.21
%
|
Weighted-average grant date fair
value
|
$
2.07
|
$
1.09
|
$
1.31
|
The
fair value of our ESPP purchase rights for the fiscal 2018, 2017
and 2016 was estimated using the following weighted-average
assumptions:
|
Year End May 31,
|
|
2018
|
|
2017
|
|
2016
|
Employee stock purchase plan shares
|
|
|
|
|
|
Expected term (in years)
|
0.5 – 2.0
|
|
0.5 – 2.0
|
|
0.5 – 2.0
|
Volatility
|
0.56 – 0.81
|
|
0.79 – 1.08
|
|
0.64 – 0.74
|
Risk-free interest rates
|
1.92%–2.25%
|
|
0.48%–0.80%
|
|
0.40%–0.76%
|
Weighted-average grant date fair value
|
$1.01
|
|
$1.65
|
|
$0.80
|
EQUITY
INCENTIVE PLAN:
In
October 2006, the Company’s 2006 Equity Incentive Plan was
approved by the shareholders, which provides for granting of
incentive stock options, nonstatutory stock options, restricted
stock, restricted stock units, stock appreciation rights,
performance units, performance shares and other stock or cash
awards as the Company’s Board of Directors may
determine.
In
October 2016, the Company’s 2016 Equity Incentive Plan was
approved by the Company’s shareholders. The 2016 Equity
Incentive Plan replaced our 2006 Equity Incentive Plan, which was
scheduled to expire in October 2016, and will continue in effect
until 2026. A total of 2,238,000 shares of common stock have been
reserved for issuance under the Company’s 2016 Equity
Incentive Plan, which includes 1,438,000 shares that remained
available for issuance under the 2006 Equity Incentive Plan. See
the Company’s Registration Statement on Form S-8 filed with
the Securities and Exchange Commission on November 14, 2016 for
further information regarding the 2016 Equity Incentive
Plan.
As of May 31, 2018,
out of the 4,718,000 shares authorized for grant under the 2016
Equity Incentive Plan, 2,906,000 stock options and RSUs were
outstanding. As of May 31, 2017, out of the 5,275,000 shares
authorized for grant under the 2006 Equity Incentive Plan and 2016
Equity Incentive Plan, 3,105,000 stock options and RSUs were
outstanding.
The
following tables summarize the Company’s stock option and RSU
transactions during fiscal 2018, 2017 and 2016 (in
thousands):
|
|
|
|
Balances, May 31, 201
5
|
845
|
|
|
Additional shares reserved
|
800
|
Options granted
|
(92
)
|
RSUs granted
|
(35
)
|
Options terminated
|
329
|
|
|
Balances, May 31, 2016
|
1,847
|
|
|
Additional shares reserved
|
2,238
|
Options granted
|
(368
)
|
RSUs granted
|
(157
)
|
Options terminated
|
55
|
Plan shares expired
|
(1,446
)
|
|
|
Balances, May 31, 2017
|
2,169
|
|
|
Options granted
|
(338
)
|
RSUs granted
|
(64
)
|
RSUs cancelled
|
33
|
Options terminated
|
16
|
Plan shares expired
|
(4
)
|
|
|
Balances, May 31, 2018
|
1,812
|
The
following table summarized the stock option transactions during
fiscal 2018, 2017 and 2016 (in thousands, except per share
data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, May 31, 2015
|
3,686
|
$
1.66
|
$
2,946
|
|
|
|
|
Options granted
|
92
|
$
2.12
|
|
Options terminated
|
(329
)
|
$
1.93
|
|
Options exercised
|
(248
)
|
$
1.34
|
|
|
|
|
|
Balances, May 31, 2016
|
3,201
|
$
1.66
|
$
189
|
|
|
|
|
Options granted
|
368
|
$
1.83
|
|
Options terminated
|
(55
)
|
$
1.42
|
|
Options exercised
|
(440
)
|
$
1.35
|
|
|
|
|
|
Balances, May 31, 2017
|
3,074
|
$
1.73
|
$
8,763
|
|
|
|
|
Options granted
|
338
|
$
3.56
|
|
Options terminated
|
(16
)
|
$
2.72
|
|
Options exercised
|
(537
)
|
$
1.17
|
|
|
|
|
|
Balances, May 31, 2018
|
2,859
|
$
2.04
|
$
1,987
|
|
|
|
|
Options fully vested and expected to vest
at May 31,
2018
|
2,825
|
$
2.04
|
$
1,976
|
The
options outstanding and exercisable at May 31, 2018 were in the
following exercise price ranges (in thousands, except per share
data):
|
|
|
|
|
|
|
Number
Outstanding Shares
|
Weighted Average
Remaining Contractual Life (Years)
|
Weighted Average
Exercise Price
|
Number
Exercisable Shares
|
Weighted Average
Remaining Contractual Life (Years)
|
Weighted Average
Exercise Price
|
Aggregate
Intrinsic Value
|
$
0.59-$0.97
|
299
|
0.77
|
$
0.67
|
299
|
0.77
|
$
0.67
|
|
$
1.09-$1.36
|
557
|
1.64
|
$
1.28
|
556
|
1.64
|
$
1.28
|
|
$
1.68-$2.06
|
483
|
4.23
|
$
1.74
|
314
|
3.73
|
$
1.78
|
|
$
2.10-$2.81
|
1,257
|
3.68
|
$
2.45
|
1,073
|
3.49
|
$
2.47
|
|
$
3.46-$3.93
|
263
|
6.16
|
$
3.86
|
70
|
6.21
|
$
3.77
|
|
|
|
|
|
|
|
|
|
$
0.59-$3.93
|
2,859
|
3.30
|
$
2.04
|
2,312
|
2.81
|
$
1.89
|
$
1,778
|
The
total intrinsic values of options exercised were $1,058,000,
$810,000 and $185,000 during fiscal 2018, 2017 and 2016,
respectively. The weighted average contractual life of the options
exercisable and expected to be exercisable at May 31, 2018 was 3.29
years.
Options
to purchase 2,312,000, 2,422,000 and 2,390,000 shares were
exercisable at May 31, 2018, 2017 and 2016, respectively. These
exercisable options had weighted average exercise prices of $1.89,
$1.63 and $1.49 as of May 31, 2018, 2017 and 2016,
respectively.
During
the fiscal year ended May 31, 2018, RSUs for 64,000 shares were
granted to employees. The market value on the date of the grant of
these RSUs was $3.93 per share. During the year ended May 31, 2018,
16,000 RSUs became fully vested and 33,000 RSUs were cancelled.
47,000 RSUs were unvested at May 31, 2018. The intrinsic value of
the unvested RSUs at May 31, 2018 was $122,000. During the fiscal
year ended May 31, 2017, RSUs for 74,000 shares were granted to
employees. The market value on the date of the grant of these RSUs
was $1.68 per share. 42,000 RSUs became fully vested during the
year ended May 31, 2017, and 32,000 RSUs were unvested at May 31,
2017. The intrinsic value of the unvested RSUs at May 31, 2017 was
$145,000. During the fiscal year ended May 31, 2016, RSUs were
granted to an employee for 35,000 shares. The market value on the
date of the grant of these RSUs was $2.16 per share. The RSUs were
performance-based, immediately vested upon attainment of goals
established, and had a term of one year. The 35,000 RSUs were
outstanding and fully vested at May 31, 2016. The intrinsic value
of the outstanding RSUs at May 31, 2016 was $35,000.
There
were no RSUs granted to members of the Board of Directors during
fiscal 2018. During the fiscal year ended May 31, 2017, RSUs for
83,000 shares were granted to members of the Company’s Board
of Directors. The weighted average market value on the date of the
grant of these RSUs was $1.86 per share. All of these RSUs were
fully vested at May 31, 2017. There were no RSUs granted to members
of the Board of Directors during fiscal 2016.
EMPLOYEE
STOCK PURCHASE PLAN:
In
October 2006, the Company’s shareholders approved the 2006
Employee Stock Purchase Plan. In October 2016, the Company’s
Amended and Restated 2006 Employee Stock Purchase Plan, or Purchase
Plan, was approved by the Company’s shareholders. The
Purchase Plan extended the term of the 2006 Employee Stock Purchase
Plan indefinitely. A total of 532,000 shares of the Company’s
common stock were reserved for issuance under the Purchase Plan.
See the Company’s Registration Statement on Form S-8 filed
with the Securities and Exchange Commission on November 14, 2016
for further information regarding the Purchase Plan. The Purchase
Plan has consecutive, overlapping, twenty-four month offering
periods. Each twenty-four month offering period includes four six
month purchase periods. The offering periods generally begin on the
first trading day on or after April 1 and October 1 each year. All
employees who work a minimum of 20 hours per week and are
customarily employed by the Company (or an affiliate thereof) for
at least five months per calendar year are eligible to participate.
Under the Purchase Plan, shares are purchased through employee
payroll deductions at exercise prices equal to 85% of the lesser of
the fair market value of the Company’s common stock at either
the first day of an offering period or the last day of the purchase
period. If a participant’s rights to purchase stock under all
employee stock purchase plans of the Company accrue at a rate which
exceeds $25,000 worth of stock for a calendar year, such
participant may not be granted an option to purchase stock under
the Purchase Plan. The maximum number of shares a participant may
purchase during a single purchase period is 3,000 shares. During
the fiscal years ended May 31, 2018, 2017 and 2016, ESPP purchase
rights of 359,000, 1,000, and 304,000 shares, respectively, were
granted. For the years ended May 31, 2018, 2017 and 2016,
approximately 237,000, 151,000 and
86,000
shares of common stock, respectively, were issued under the plans.
As of May 31, 2018, 1,355,000 shares have been issued under the
ESPP, and there were 145,000 ESPP shares available for
issuance.
11. EMPLOYEE BENEFIT PLANS:
EMPLOYEE
STOCK OWNERSHIP PLAN:
The
Company has a non-contributory, trusteed employee stock ownership
plan for full-time employees who have completed three consecutive
months of service and for part-time employees who have completed
one year of service and have attained an age of 21. The Company can
contribute either shares of the Company’s stock or cash to
the plan. The contribution is determined annually by the Company
and cannot exceed 15% of the annual aggregate salaries of those
employees eligible for participation in the plan. On May 31, 2007,
the Company converted the Aehr Test Systems Employee Stock Bonus
Plan into the Aehr Test Systems Employee Stock Ownership Plan (the
“Plan”). The stock bonus plan was converted to an
employee stock ownership plan (“ESOP”) to enable the
Plan to better comply with changes in the law regarding Company
stock. Individuals’ account balances vest at a rate of 20%
per year commencing upon completion of two years of service.
Non-vested balances, which are forfeited following termination of
employment, are allocated to the remaining employees in the Plan.
Under the Plan provisions, each employee who reaches age fifty-five
(55) and has been a participant in the Plan for ten years will be
offered an election each year to direct the transfer of up to 25%
of his/her ESOP account to the employee self-directed account in
the Savings and Retirement Plan. For anyone who met the above
prerequisites, the first election to diversify holdings was offered
after May 31, 2008. In the sixth year, employees will be able to
diversify up to 50% of their ESOP accounts. Contributions of
$60,000 per year were authorized for the plan during fiscal 2018,
2017 and 2016. The contribution amounts are recorded as
compensation expense, in the period authorized and included in
accrued expenses, in the period authorized. Contributions of 13,000
shares were made to the ESOP during fiscal 2018 for fiscal 2017.
Contributions of 59,000 shares were made to the ESOP during fiscal
2017 for fiscal 2016. Contributions of 25,000 shares were made to
the ESOP during fiscal 2016 for fiscal 2015. The contribution for
fiscal 2018 will be made in fiscal 2019. Shares held in the ESOP
are included in the EPS calculation.
401(K)
PLAN:
The
Company maintains a defined contribution savings plan (the
“401(k) Plan”) to provide retirement income to all
qualified employees of the Company. The 401(k) Plan is intended to
be qualified under Section 401(k) of the Internal Revenue Code of
1986, as amended. The 401(k) Plan is funded by voluntary pre-tax
contributions from employees. Contributions are invested, as
directed by the participant, in investment funds available under
the 401(k) Plan. The Company is not required to make, and did not
make, any contributions to the 401(k) Plan during fiscal 2018, 2017
and 2016.
12. OTHER EXPENSE, NET:
Other
expense, net comprises the following (in thousands):
|
|
|
|
|
|
Foreign exchange (loss) gain
|
$
(63
)
|
$
(21
)
|
$
(19
)
|
Other income, net
|
2
|
--
|
3
|
|
$
(61
)
|
$
(21
)
|
$
(16
)
|
13. PRODUCT WARRANTIES:
The
Company provides for the estimated cost of product warranties at
the time revenues are recognized on the products shipped. While the
Company engages in extensive product quality programs and
processes, including actively monitoring and evaluating the quality
of its component suppliers, the Company’s warranty obligation
is affected by product failure rates, material usage and service
delivery costs incurred in correcting a product failure. Should
actual product failure rates, material usage or service delivery
costs differ from the Company’s estimates, revisions to the
estimated warranty liability would be required.
The
standard warranty period is one year for systems and ninety days
for parts and service.
Following
is a summary of changes in the Company’s liability for
product warranties during the fiscal years ended May 31, 2018 and
2017 (in thousands):
|
|
|
|
|
|
|
|
Balance at the beginning of the
year
|
$
113
|
$
155
|
Accruals for warranties issued during the
year
|
329
|
123
|
Accruals
and adjustments (change in estimates) related
to
pre-existing warranties during the year
|
--
|
(54
)
|
Consumption of reserves
|
(307
)
|
(111
)
|
|
|
|
Balance at the end of the year
|
$
135
|
$
113
|
The
accrued warranty balance is included in accrued expenses on the
consolidated balance sheets.
14. 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. Net sales are based upon ship-to
location (in thousands):
|
|
|
|
|
|
|
|
|
|
2018:
|
|
|
|
|
Net sales
|
$
8,446
|
$
19,973
|
$
1,136
|
$
29,555
|
Property and equipment,
net
|
1,156
|
40
|
7
|
1,203
|
|
|
|
|
|
2017:
|
|
|
|
|
Net sales
|
$
7,762
|
$
10,439
|
$
697
|
$
18,898
|
Property and equipment,
net
|
1,364
|
40
|
15
|
1,419
|
|
|
|
|
|
2016:
|
|
|
|
|
Net sales
|
$
2,957
|
$
10,228
|
$
1,316
|
$
14,501
|
Property and equipment, net
|
1,151
|
39
|
14
|
1,204
|
The
Company’s Japanese and German subsidiaries primarily comprise
the foreign operations. Substantially all of the sales of the
subsidiaries are made to unaffiliated Japanese or European
customers. Net sales from outside the United States include those
of Aehr Test Systems Japan K.K. and Aehr Test Systems
GmbH.
15. RELATED PARTY TRANSACTIONS:
Mario
M. Rosati, one of the Company’s directors, is also a member
of Wilson Sonsini Goodrich & Rosati, Professional Corporation,
which has served as the Company’s outside corporate counsel
and has received compensation at normal commercial rates for these
services. The amounts of transactions during fiscal years ended May
31, 2018, 2017 and 2016 were $64,000, $440,000, and $90,000,
respectively. At May 31, 2018 and 2017, the Company had $5,000 and
$188,000, respectively, payable to Wilson Sonsini Goodrich &
Rosati.
16. COMMITMENTS AND CONTINGENCIES:
COMMITMENTS
The
Company leases most of its manufacturing and office space under
operating leases. The Company entered into non-cancelable operating
lease agreements for its United States manufacturing and office
facilities and maintains equipment under non-cancelable operating
leases in Germany. The Company’s principal administrative and
production facilities are located in Fremont, California, in a
51,289 square foot building. The Company’s lease was renewed
in February 2018 and expires in July 2023. The Company’s
facility in Japan is located in a 418 square foot office in Tokyo
under a cancellable lease which expires in June 2019. The Company
also maintains a 1,585 square foot warehouse in Yamanashi under a
lease which expires in November 2019. The Company leases a 492
square foot sales and support office in Utting, Germany. The lease,
which began February 1, 1992 and expires on January 31, 2020,
contains an
automatic
twelve months renewal, at rates to be determined, if no notice is
given prior to six months from expiry. Under the lease agreements,
the Company is responsible for payments of utilities, taxes and
insurance.
Minimum
annual rentals payments under non-cancellable operating leases in
each of the next five fiscal years and thereafter are as follows
(in thousands):
Years
Ending May 31,
|
|
2019
|
$
664
|
2020
|
754
|
2021
|
750
|
2022
|
772
|
2023
|
795
|
Thereafter
|
133
|
Total
|
$
3,868
|
Rental
expense for the years ended May 31, 2018, 2017 and 2016 was
$587,000, $509,000 and $499,000, respectively.
At
May 31, 2018 and 2017, the Company had a $80,000 and $50,000,
respectively, certificate of deposit held by a financial
institution representing a security deposit for its United States
manufacturing and office space lease. This amount is included in
other assets on the consolidated balance sheets.
PURCHASE
OBLIGATIONS
The
Company has purchase obligations to certain suppliers. In some
cases the products the Company purchases are unique and have
provisions against cancellation of the order. At May 31, 2018, the
Company had $2,488,000 of purchase obligations which are due within
the following 12 months. This amount does not include contractual
obligations recorded on the consolidated balance sheets as
liabilities.
CONTINGENCIES
The
Company may, from time to time, be involved in legal proceedings
arising in the ordinary course of business. While there can be no
assurances as to the ultimate outcome of any litigation involving
the Company, management does not believe any pending legal
proceedings will result in judgment or settlement that will have a
material adverse effect on the Company’s consolidated
financial position, results of operations or cash
flows.
In
the normal course of business to facilitate sales of its products,
the Company indemnifies other parties, including customers, with
respect to certain matters, for example, including against losses
arising from a breach of representations or covenants, or from
intellectual property infringement or other claims. These
agreements may limit the time within which an indemnification claim
can be made and the amount of the claim. In addition, the Company
has entered into indemnification agreements with its officers and
directors, and the Company’s bylaws contain similar
indemnification obligations to the Company’s
agents.
It
is not possible to determine the maximum potential amount under
these indemnification agreements due to the limited history of
prior indemnification claims and the unique facts and circumstances
involved in each particular agreement. To date, payments made by
the Company under these agreements have not had a material impact
on the Company’s operating results, financial position or
cash flows.
17. SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA
(UNAUDITED)
The
following tables (presented in thousands, except per share data)
sets forth selected unaudited condensed consolidated statements of
operations data for each of the four quarters of the fiscal years
ended May 31, 2018 and 2017. The unaudited quarterly information
has been prepared on the same basis as the annual information
presented elsewhere herein and, in the Company’s opinion,
includes all adjustments (consisting only of normal recurring
entries) necessary for a fair statement of the information for the
quarters presented. The operating results for any quarter are not
necessarily indicative of results for any future period and should
be read in conjunction with the audited consolidated financial
statements of the Company’s and the notes thereto included
elsewhere herein.
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
6,970
|
$
7,923
|
$
7,393
|
$
7,269
|
Gross profit
|
$
2,918
|
$
3,131
|
$
3,176
|
$
3,161
|
Net income
|
$
10
|
$
60
|
$
267
|
$
191
|
Net income per share basic and diluted
|
$
0.00
|
$
0.00
|
$
0.01
|
$
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
5,318
|
$
4,216
|
$
2,681
|
$
6,683
|
Gross profit
|
$
2,206
|
$
1,463
|
$
503
|
$
2,608
|
Net loss
|
$
(755
)
|
$
(1,452
)
|
$
(2,651
)
|
$
(795
)
|
Net loss per share basic and diluted
|
$
(0.06
)
|
$
(0.09
)
|
$
(0.16
)
|
$
(0.04
)
|