NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
1.
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCCOUNTING
POLICIES
The
accompanying financial information has been prepared by Aehr Test
Systems, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission (the “SEC”).
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles in the United States (“GAAP”)
have been condensed or omitted pursuant to such rules and
regulations.
In
the opinion of management, the unaudited condensed consolidated
financial statements for the interim periods presented have been
prepared on a basis consistent with the May 31, 2019 audited
consolidated financial statements and reflect all adjustments,
consisting of 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
unaudited 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, 2019.
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"). All significant intercompany
balances have been eliminated in consolidation. For the
Company’s majority owned subsidiary, Aehr Test Systems Japan
K.K., the noncontrolling interest of the portion the Company does
not own was reflected on the Condensed Consolidated Balance Sheets
in Shareholders’ Equity and in the Condensed Consolidated
Statements of Operations.
ACCOUNTING
ESTIMATES. The preparation of financial statements in conformity
with GAAP 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. Estimates are used to account
for sales and revenue allowances, the allowance for doubtful
accounts, inventory valuations, income taxes, stock-based
compensation expenses, and product warranties, among others. The
Company bases its estimates on historical experience and on various
other assumptions that it believes to be reasonable under the
circumstances. Actual results could differ materially from those
estimates.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES. The Company’s significant
accounting policies are disclosed in the Company’s Annual
Report on Form 10-K for the year ended May 31, 2019. There have been no
significant changes in the Company’s significant accounting
policies during the three and nine months ended February 29, 2020,
except for the adoption of Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification
(“ASC”) Update No. 2016-02, Leases, as discussed in
Note “2. RECENT ACCOUNTING
PRONOUNCEMENTS.”
2.
RECENT ACCOUNTING PRONOUNCEMENTS
Accounting
Standards Adopted
Financial
Instruments
In
January 2016, the FASB issued an accounting standard update related
to the recognition and measurement of financial assets and
financial liabilities. This standard changes accounting for equity
investments and financial liabilities under the fair value option
and the presentation and disclosure requirements for financial
instruments. In addition, this standard clarifies guidance related
to the valuation allowance assessment when recognizing deferred tax
assets resulting from unrealized losses on available-for-sale debt
securities. The Company adopted this new standard in fiscal year
2020. The adoption of this standard did not have a significant
impact on the Company’s consolidated financial
statements.
Leases
In
February 2016, the FASB issued ASC Update No. 2016-02, Leases (FASB
ASC Topic 842, Leases). The Company adopted the standard as of June
1, 2019, using the modified retrospective approach and the
transition method provided by ASC Update No. 2018-11, Leases (Topic
842): Targeted Improvements. Under this method, the Company applied
the new leasing rules on the date of adoption and recognized the
cumulative effect of initially applying the standard as an
adjustment to its opening balance sheet, rather than at the
earliest comparative period presented in the financial statements.
Prior periods presented are in accordance with the previous lease
guidance under FASB ASC Topic 840, Leases.
In
addition, the Company applied the package of practical expedients
permitted under FASB ASC Topic 842 transition guidance to its
entire lease portfolio at June 1, 2019. As a result, the Company
was not required to reassess (i) whether any expired or existing
contracts are or contain leases, (ii) the classification of any
expired or existing leases or (iii) the treatment of initial direct
costs for any existing leases. Furthermore, the Company elected not
to separate lease and non-lease components for the majority of its
leases. Instead, for all applicable classes of underlying assets,
the Company accounted for each separate lease component and the
non-lease components associated with that lease component as a
single lease component.
As
a result of adopting FASB ASC Topic 842, Leases, on June 1, 2019,
the Company recognized right-of-use assets of $2.7 million and
corresponding liabilities of $2.8 million for its existing
operating lease portfolio on its unaudited condensed consolidated
balance sheet. Operating lease right-of-use assets are presented
within Operating lease right-of-use assets and corresponding
liabilities are presented within Operating lease liabilities,
short-term and Operating lease liabilities, long-term on the
Company’s unaudited condensed consolidated balance sheet.
There was no material impact to the Company’s unaudited
condensed consolidated statements of operations or unaudited
condensed consolidated statements of cash flows as a result of FASB
ASC Topic 842, Leases. Please refer to Note “11.
LEASES” for information regarding the Company’s lease
portfolio as of February 29, 2020 as accounted for under FASB ASC
Topic 842, Leases.
Accounting
Standards Not Yet Adopted
Financial
Instruments
In
June 2016, the FASB issued an accounting standard update
(“ASU”) that requires measurement and recognition of
expected credit losses for financial assets held based on
historical experience, current conditions, and reasonable and
supportable forecasts that affect the collectability of the
reported amount. Due to a subsequent ASU in November 2019, the
accounting standard will be effective for the Company beginning in
the first quarter of fiscal 2024 on a modified retrospective basis,
and early adoption in fiscal 2020 is permitted. The Company does
not expect a material impact of this accounting standard on its
consolidated financial statements.
3.
REVENUE
Revenue recognition
The
Company recognizes revenue when promised goods or services are
transferred to customers in an amount that reflects the
consideration to which the Company expects to be entitled in
exchange for those goods or services by following a five-step
process: (1) identify the contract with a customer, (2) identify
the performance obligations in the contract, (3) determine the
transaction price, (4) allocate the transaction price, and (5)
recognize revenue when or as the Company satisfies a performance
obligation, as further described below.
Performance
obligations include sales of systems, contactors, spare parts, and
services, as well as installation and training services included in
customer contracts.
A
contract’s transaction price is allocated to each distinct
performance obligation. In determining the transaction price, the
Company evaluates whether the price is subject to refund or
adjustment to determine the net consideration to which the Company
expects to be entitled. The Company generally does not grant return
privileges, except for defective products during the warranty
period.
For
contracts that contain multiple performance obligations, the
Company allocates the transaction price to the performance
obligations on a relative standalone selling price basis.
Standalone selling prices are based on multiple factors including,
but not limited to, historical discounting trends for products and
services and pricing practices in different
geographies.
Revenue
for systems and spares are recognized at a point in time, which is
generally upon shipment or delivery. Revenue from services is
recognized over time as services are completed or ratably over the
contractual period of generally one year or less.
The
Company has elected the practical expedient to not assess whether a
contract has a significant financing component as the
Company’s standard payment terms are less than one
year.
Disaggregation of revenue
The
following tables show revenues by major product categories. Within
each product category, contract terms, conditions and economic
factors affecting the nature, amount, timing and uncertainty around
revenue recognition and cash flow are substantially
similar.
The
Company’s revenues by product category are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Type
of good / service:
|
|
|
|
|
Systems
|
$2,138
|
$404
|
$8,099
|
$5,922
|
Contactors
|
3,094
|
1,445
|
7,790
|
3,541
|
Services
|
879
|
1,314
|
2,629
|
4,351
|
|
$6,111
|
$3,163
|
$18,518
|
$13,814
|
|
|
|
|
|
Product
lines:
|
|
|
|
|
Wafer-level
|
$5,408
|
$2,046
|
$16,570
|
$8,240
|
Test
During Burn-In
|
703
|
1,117
|
1,948
|
5,574
|
|
$6,111
|
$3,163
|
$18,518
|
$13,814
|
The
following presents information about the Company’s operations
in different geographic areas. Net sales are based upon ship-to
location (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic
region:
|
|
|
|
|
United
States
|
$5,014
|
$2,203
|
$12,698
|
$9,407
|
Asia
|
891
|
746
|
4,758
|
3,814
|
Europe
|
206
|
214
|
1,062
|
593
|
|
$6,111
|
$3,163
|
$18,518
|
$13,814
|
With the exception
of the amount of service contracts and extended warranties, the
Company’s product category revenues are recognized at a point
in time when control transfers to customers. The following presents
revenue based on timing of recognition (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Timing
of revenue recognition:
|
|
|
|
|
Products
and services transferred at
a point in time
|
$5,485
|
$2,507
|
$16,666
|
$11,897
|
Services
transferred over time
|
626
|
656
|
1,852
|
1,917
|
|
$6,111
|
$3,163
|
$18,518
|
$13,814
|
Contract
balances
A
receivable is recognized in the period the Company delivers goods
or provides services or when the Company’s right to
consideration is unconditional. The Company usually does not record
contract assets because the Company has an unconditional right to
payment upon satisfaction of the performance obligation, and
therefore, a receivable is more commonly recorded than a contract
asset.
Contract
liabilities include payments received in advance of performance
under a contract and are satisfied as the associated revenue is
recognized. Contract liabilities are reported on the Condensed
Consolidated Balance Sheets at the end of each reporting period as
a component of deferred revenue. Contract liabilities as of
February 29, 2020 and May 31, 2019 were $419,000 and $1,734,000,
respectively. During the three and nine months ended February 29,
2020, the Company recognized $135,000 and $1,316,000 respectively,
of revenues that were included in contract liabilities as of May
31, 2019.
Remaining performance obligations
On
February 29, 2020, the Company had $284,000 of remaining
performance obligations, which were comprised of deferred service
contracts and extended warranty contracts not yet delivered. The
Company expects to recognize approximately 33% of its remaining
performance obligations as revenue in fiscal 2020, and an
additional 67% in fiscal 2021 and thereafter. The foregoing
excludes the value of other remaining performance obligations as
they have original durations of one year or less, and also excludes
information about variable consideration allocated entirely to a
wholly unsatisfied performance obligation.
Costs to obtain or fulfill a contract
The
Company generally expenses sales commissions when incurred as a
component of selling, general and administrative expense as the
amortization period is typically less than one year. Additionally,
the majority of the Company’s cost of fulfillment as a
manufacturer of products is classified as inventory and fixed
assets, which are accounted for under the respective guidance for
those asset types. Other costs of contract fulfillment are
immaterial due to the nature of the Company’s products and
their respective manufacturing process.
4.
EARNINGS PER SHARE
Basic
earnings per share is determined using the weighted average number
of common shares outstanding during the period. Diluted earnings
per share is determined using the weighted average number of common
shares and potential common shares (representing the dilutive
effect of stock options, RSUs and Amended and Restated 2006
Employee Stock Purchase Plan (“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)
|
$245
|
$(3,201)
|
$83
|
$(5,345)
|
|
|
|
|
|
Denominator
for basic net income (loss) per share:
|
|
|
|
|
Weighted
average shares outstanding
|
22,937
|
22,459
|
22,823
|
22,314
|
|
|
|
|
|
Shares
used in basic net income (loss)
per share calculation
|
22,937
|
22,459
|
22,823
|
22,314
|
Effect
of dilutive securities
|
193
|
--
|
117
|
--
|
|
|
|
|
|
Denominator
for diluted net income (loss)
per share
|
23,130
|
22,459
|
22,940
|
22,314
|
|
|
|
|
|
Basic
net income (loss) per share
|
$0.01
|
$(0.14)
|
$0.00
|
$(0.24)
|
Diluted
net income (loss) per share
|
$0.01
|
$(0.14)
|
$0.00
|
$(0.24)
|
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 periods presented, as
the effect would be anti-dilutive. Stock options to purchase
2,505,000 shares of common stock were outstanding as of February
29, 2020 but were not included in the computation of diluted net
income per share for the periods, because the inclusion of such
shares would be anti-dilutive. In the three and nine months ended
February 28, 2019, potential common shares have not been included
in the calculation of diluted net loss per share as the effect
would be anti-dilutive. As such, the numerator and the denominator
used in computing both basic and diluted net loss per share for
these periods are the same. Stock options to purchase 3,220,000
shares of common stock, and 34,000 RSUs under the Company’s
2016 Equity Incentive Plan (“2016 Plan”) and rights to
purchase 327,000 ESPP shares were outstanding as of February 28,
2019 but were not included in the computation of diluted net loss
per share for the periods, because the inclusion of such shares
would be anti-dilutive. The 2,657,000 shares convertible under the
convertible notes outstanding at February 28, 2019 were not
included in the computation of diluted net income (loss) per share
for the periods presented, because the inclusion of such shares
would be anti-dilutive.
5. FAIR
VALUE OF FINANCIAL INSTRUMENTS
The
Company’s financial instruments are measured at fair value
consistent with authoritative guidance. This authoritative guidance
defines fair value, establishes a framework for using fair value to
measure assets and liabilities, and disclosures required related to
fair value measurements.
The
guidance establishes a fair value hierarchy based on inputs to
valuation techniques that are used to measure fair value that are
either observable or unobservable. Observable inputs reflect
assumptions market participants would use in pricing an asset or
liability based on market data obtained from independent sources
while unobservable inputs reflect a reporting entity’s
pricing based upon their own market assumptions. The fair value
hierarchy consists of the following three levels:
Level 1
- instrument valuations are obtained from real-time quotes for
transactions in active exchange markets involving identical
assets.
Level 2
- instrument valuations are obtained from readily-available pricing
sources for comparable instruments.
Level 3
- instrument valuations are obtained without observable market
values and require a high level of judgment to determine the fair
value.
The
following table summarizes the Company’s financial assets
measured at fair value on a recurring basis as of February 29, 2020
(in thousands):
|
|
|
|
|
|
|
|
|
|
Money
market funds
|
$80
|
$80
|
$--
|
$--
|
Assets
|
$80
|
$80
|
$--
|
$--
|
The
following table summarizes the Company’s financial assets
measured at fair value on a recurring basis as of May 31, 2019 (in
thousands):
|
Balance as of
May 31, 2019
|
|
|
|
Money
market funds
|
$3,017
|
$3,017
|
$--
|
$--
|
Assets
|
$3,017
|
$3,017
|
$--
|
$--
|
Included in Money market funds as of February 29, 2020 and
May 31, 2019 is $80,000 restricted cash representing a security
deposit for the Company’s United States manufacturing and
office space lease.
There
were no financial liabilities measured at fair value as of February
29, 2020 and May 31, 2019.
There
were no transfers between Level 1 and Level 2 fair value
measurements during the three and nine months ended February 29,
2020.
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.
6.
ACCOUNTS RECEIVABLE, NET
Accounts receivable
represent customer trade receivables. As of February 29, 2020 and
May 31, 2019, there were no allowances 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. 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.
7.
INVENTORIES
Inventories
are comprised of the following (in thousands):
|
|
|
|
|
|
Raw
materials and sub-assemblies
|
$6,449
|
$5,471
|
Work
in process
|
2,875
|
3,580
|
Finished
goods
|
6
|
10
|
|
$9,330
|
$9,061
|
8.
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.
The
following is a summary of changes in the Company's liability for
product warranties during the three and nine months ended February
29, 2020 and February 28, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at the beginning of the period
|
$190
|
$163
|
$154
|
$135
|
|
|
|
|
|
Accruals
for warranties issued during
the period
|
26
|
30
|
167
|
176
|
Consumption
of reserves
|
(30)
|
(30)
|
(135)
|
(148)
|
|
|
|
|
|
Balance
at the end of the period
|
$186
|
$163
|
$186
|
$163
|
The
accrued warranty balance is included in accrued expenses on the
accompanying condensed consolidated balance sheets.
9.
CUSTOMER DEPOSITS AND DEFERRED REVENUE, SHORT-TERM
Customer
deposits and deferred revenue, short-term (in
thousands):
|
|
|
|
|
|
Customer
deposits
|
$135
|
$1,003
|
Deferred
revenue
|
250
|
542
|
|
$385
|
$1,545
|
10.
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.
Since
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.
On
March 27, 2020, the “Coronavirus Aid, Relief and Economic
Security (CARES) Act” was signed into law. The Act includes
provisions relating to refundable payroll tax credits, deferment of
the employer portion of certain payroll taxes, net operating loss
carryback periods, alternative minimum tax credit refunds,
modifications to the net interest deduction limitations and
technical corrections to tax depreciation methods for qualified
improvement property. The Company is currently analyzing the impact
of these changes and therefore an estimate of the impact to income
taxes is not yet available.
11.
LEASES
The
Company has only operating leases for real estate including
corporate offices, warehouse space and certain equipment. A lease
with an initial term of 12 months or less is generally not recorded
on the condensed consolidated balance sheet, unless the arrangement
includes an option to purchase the underlying asset, or renew the
arrangement that the Company is reasonably certain to exercise
(short-term leases). The Company recognizes lease expense on a
straight-line basis over the lease term for short-term leases that
the Company does not record on its balance sheet. The
Company’s operating leases have remaining lease terms of 1 to
3 years.
The
Company determines whether an arrangement is or contains a lease
based on the unique facts and circumstances present at the
inception of the arrangement. Operating lease liabilities and their
corresponding right-of-use assets are recorded based on the present
value of lease payments over the expected lease term. The interest
rate implicit in lease contracts is typically not readily
determinable.
As
such, the Company utilizes the appropriate incremental borrowing
rate, which is the rate incurred to borrow on a collateralized
basis over a similar term at an amount equal to the lease payments
in a similar economic environment. Certain adjustments to the
right-of-use asset may be required for items such as initial direct
costs paid or incentives received.
The
weighted-average remaining lease term for the Company’s
operating leases was 3.4 years at February 29, 2020 and the
weighted-average discount rate was 5.5%.
The
Company’s operating lease cost was $183,000 and $548,000 for
the three and nine months ended February 29, 2020,
respectively.
The
following table presents supplemental cash flow information related
to the Company’s operating leases (in
thousands):
|
Three Months Ended
February 29, 2020
|
Nine Months Ended
February 29, 2020
|
Cash
paid for amounts included in the measurement of operating lease
liabilities
|
|
|
Operating
cash flows from operating leases
|
$184
|
$550
|
The
following table presents the maturities of the Company’s
operating lease liabilities as of February 29, 2020 (in
thousands):
Fiscal year
|
|
2020
(excluding the first nine months of 2020)
|
$187
|
2021
|
765
|
2022
|
779
|
2023
|
795
|
2024
|
132
|
Thereafter
|
--
|
Total
future minimum operating lease payments
|
$2,658
|
Less:
imputed interest
|
242
|
Present
value of operating lease liabilities
|
$2,416
|
12.
BORROWING AND FINANCING ARRANGEMENTS
On
January 16, 2020, the Company entered into a Loan and Security
Agreement (the “Loan Agreement”) with Silicon Valley
Bank (the “Bank”). Pursuant to the Loan Agreement, the
Company may borrow up to (a) the lesser of (i) the revolving line
of $4.0 million or (ii) the amount available under the borrowing
base minus (b) the outstanding principal balance of any advances,
under a revolving line of credit. The borrowing base is 80% of
eligible accounts, as determined by the Bank from the
Company’s most recent borrowing base statement; provided,
however, the Bank has the right to decrease the foregoing
percentage in its good faith business judgment to mitigate the
impact of certain events or conditions, which may adversely affect
the collateral or its value. Subject to an event of default, the
principal amount outstanding under the revolving line of credit
will accrue interest at a floating per annum rate equal to the
greater of (a) the prime rate plus an additional percentage of up
to 1%, which additional percentage depends on the Company’s
adjusted quick ratio, and (b) 4.75%. Interest is payable monthly on
the last calendar day of each month and the outstanding principal
amount, the unpaid interest and all other obligations are due on
the maturity date, which is 364 days from the effective date of
January 13, 2020. At February 29, 2020, the Company had not drawn
against the credit facility and was in compliance with all
covenants related to obligations to meet reporting requirements.
There are no financial covenants in the agreement.
13.
STOCK-BASED COMPENSATION
Stock-based
compensation expense consists of expenses for stock options,
restricted stock units (“RSUs”), and 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 cost 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 an equity instrument. See Note 10 in the
Company’s Annual Report on Form 10-K for fiscal 2019 filed on
August 28, 2019 for further information regarding the 2016 Plan and
the ESPP.
The
following table summarizes the stock-based compensation expense for
the three and nine months ended February 29, 2020 and February 28,
2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation in the form of employee stock options, RSUs and ESPP
purchase rights, included in:
|
|
|
|
|
Cost
of sales
|
$19
|
$24
|
$58
|
$83
|
Selling,
general and administrative
|
137
|
137
|
401
|
421
|
Research
and development
|
51
|
64
|
152
|
201
|
Total
stock-based compensation
|
$207
|
$225
|
$611
|
$705
|
As
of February 29,2020 and February 28, 2019, there were no
stock-based compensation expenses capitalized as part of
inventory.
During
the three months ended February 29, 2020 and February 28, 2019, the
Company recorded stock-based compensation expense related to stock
options and RSUs under 2016 Plan of $166,000 and $166,000,
respectively. During the nine months ended February 29, 2020 and
February 28, 2019, the Company recorded stock-based compensation
expense related to stock options and RSUs of $480,000 and $505,000,
respectively.
As
of February 29, 2020, the total compensation expense related to
unvested stock-based awards under the 2016 Plan, but not yet
recognized, was approximately $1,244,000, which is net of estimated
forfeitures of $3,000. This expense will be amortized on a
straight-line basis over a weighted average period of approximately
2.7 years.
During
the three months ended February 29, 2020 and February 28, 2019, the
Company recorded stock-based compensation expense related to the
ESPP of $41,000 and $59,000, respectively. During the nine months
ended February 29, 2020 and February 28, 2019, the Company recorded
stock-based compensation expense related to the ESPP of $131,000
and $200,000, respectively.
As
of February 29, 2020, the total compensation expense related to
purchase rights under the ESPP but not yet recognized was
approximately $77,000. This expense will be amortized on a
straight-line basis over a weighted average period of approximately
0.8 years.
Valuation Assumptions
Valuation
and Amortization Method. The Company estimates the fair value of
stock options granted using the Black-Scholes option valuation
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.
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 four or
five years based on weighted average of the expected term of 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 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.
Fair
Value. The fair value of the Company’s stock options granted
to employees for the three and nine months ended February 29, 2020
and February 28, 2019, were estimated using the following weighted
average assumptions in the Black-Scholes option valuation
model:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
term (in years)
|
5
|
5
|
5
|
5
|
Volatility
|
0.72
|
0.69
|
0.71
|
0.72
|
Risk-free
interest rate
|
1.57%
|
2.77%
|
1.85%
|
2.83%
|
Weighted
average grant date fair value
|
$1.37
|
$1.01
|
$0.98
|
$1.34
|
The
fair values of the ESPP purchase rights granted for the nine months
ended February 29, 2020 were estimated using the following
weighted-average assumptions:
|
|
|
|
|
|
Expected
term (in years)
|
0.5-2.0
|
Volatility
|
0.62-0.71
|
Expected
dividend
|
$0.00
|
Risk-free
interest rates
|
1.56%-1.81%
|
Estimated
forfeiture rate
|
0%
|
Weighted
average grant date fair value
|
$0.80
|
There
were no ESPP purchase rights granted to employees for the three
months ended February 29, 2020 and February 28, 2019. During the
nine months ended February 29, 2020 and February 28, 2019, ESPP
purchase rights of 38,000 and 327,000 were granted, respectively.
Total ESPP shares issued during the nine months ended February 29,
2020 and February 28, 2019 were 71,000 and 64,000 shares,
respectively. As of February 29, 2020, there were 299,000 ESPP
shares available for issuance.
The
following tables summarize the Company’s stock option and RSU
transactions during the three and nine months ended February 29,
2020 (in thousands):
|
|
|
|
Balance,
May 31, 2019
|
1,147
|
|
|
Options
granted
|
(527)
|
Options
cancelled
|
151
|
Options
expired
|
(119)
|
|
|
Balance,
August 31, 2019
|
652
|
|
|
Options
reserved
|
1,196
|
Options
granted
|
(58)
|
Options
cancelled
|
280
|
Options
expired
|
(256)
|
|
|
Balance,
November 30, 2019
|
1,814
|
|
|
Options
granted
|
(6)
|
Options cancelled
|
11
|
Options expired
|
(8)
|
|
|
Balance,
February 29, 2020
|
1,811
|
The
following table summarizes the stock option transactions during the
three and nine months ended February 29, 2020 (in thousands, except
per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
May 31, 2019
|
3,107
|
$2.20
|
$282
|
|
|
|
|
Options
granted
|
527
|
$1.64
|
|
Options
cancelled
|
(151)
|
$1.50
|
|
Options
exercised
|
(49)
|
$1.27
|
|
|
|
|
|
Balances,
August 31, 2019
|
3,434
|
$2.16
|
$41
|
|
|
|
|
Options
granted
|
58
|
$1.77
|
|
Options
cancelled
|
(280)
|
$2.19
|
|
Options
exercised
|
(85)
|
$1.06
|
|
|
|
|
|
Balances,
November 30, 2019
|
3,127
|
$2.18
|
$358
|
|
|
|
|
Options
granted
|
6
|
$2.30
|
|
Options
cancelled
|
(11)
|
$2.42
|
|
Options
exercised
|
(98)
|
$1.34
|
|
|
|
|
|
Balances,
February 29, 2020
|
3,024
|
$2.21
|
$544
|
|
|
|
|
Options
fully vested and expected to vest
at February 29, 2020
|
2,989
|
$2.21
|
$536
|
The
options outstanding and exercisable at February 29, 2020 were in
the following exercise price ranges (in thousands, except per share
data):
|
|
|
|
|
|
|
Number
Outstanding Shares
|
Weighted Average
Remaining Contractual Life (Years)
|
Weighted Average
Exercise Price
|
Number
Exercisable Shares
|
Weighted Average
Remaining Contractual Life (Years)
|
Weighted Average
Exercise Price
|
Aggregate
Intrinsic Value
|
$1.09-$1.28
|
177
|
0.32
|
$1.28
|
177
|
0.32
|
$1.28
|
|
$1.64-$2.06
|
1,183
|
5.30
|
$1.76
|
520
|
4.28
|
$1.80
|
|
$2.10-$2.81
|
1,436
|
2.90
|
$2.43
|
1,166
|
2.31
|
$2.43
|
|
$3.46-$3.93
|
228
|
4.41
|
$3.85
|
162
|
4.44
|
$3.81
|
|
$1.09-$3.93
|
3,024
|
3.80
|
$2.21
|
2,025
|
2.81
|
$2.28
|
$301
|
The
total intrinsic value of options exercised during the three and
nine months ended February 29, 2020 was $92,000 and $159,000,
respectively. The total intrinsic value of options exercised during
the three and nine months ended February 28, 2019 was $160,000 and
$322,000, respectively. The weighted average remaining contractual
life of the options exercisable and expected to be exercisable at
February 29, 2020 was 3.78 years.
There
were no RSUs granted to employees during the three and nine months
ended February 29, 2020 and February 28, 2019. During the three and
nine months ended February 29, 2020, 3,000 and 10,000 RSUs became
fully vested, respectively. During the three and nine months ended
February 28, 2019, 4,000 and 13,000 RSUs became fully vested,
respectively. As of February 29, 2020, 13,000 RSUs remain unvested
which had an intrinsic value of $27,000. As of February 28, 2019,
34,000 RSUs remain unvested which had an intrinsic value of
$50,000.
14.
SEGMENT INFORMATION
The
Company has only one reportable segment. The information for
revenue category by type, product line, geography and timing of
revenue recognition, is summarized in Note “3.
REVENUE.”
Property
and equipment information is based on the physical location of the
assets. The following table presents property and equipment
information for geographic areas (in thousands):
|
|
|
|
|
|
United
States
|
$744
|
$1,005
|
Asia
|
39
|
40
|
Europe
|
--
|
--
|
|
$783
|
$1,045
|
As
of February 29, 2020, the operating lease right-of-use assets of
$2,260,000 were allocated in the United States.
There
were no revenues through distributors for the three and nine months
ended February 29, 2020 and February 28, 2019.
The
Company’s Japanese and German subsidiaries primarily comprise
the foreign operations. Substantially all of the sales by the
Company’s 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 94% and 89% of its net sales in the three and nine
months ended February 29, 2020, respectively. One customer
accounted for approximately 71% of the Company’s net sales in
the three months ended February 29, 2020. Two customers accounted
for approximately 51% and 18% of the Company’s net sales in
the nine months ended February 29, 2020. Sales to the
Company’s five largest customers accounted for approximately
90% and 81% of its net sales in the three and nine months ended
February 28, 2019, respectively. Four customers accounted for
approximately 27%, 25%, 22% and 13%, respectively, of the
Company’s net sales in the three months ended February 28,
2019. Four customers accounted for approximately 31%, 18%, 16% and
12%, respectively, of the Company’s net sales in the nine
months ended February 28, 2019. No other customers represented more
than 10% of the Company’s net sales in the three and nine
months ended February 29, 2020 and February 28, 2019.
15.
SUBSEQUENT EVENT
On
March 19, 2020, the Company approved the dissolution of Aehr Test
Systems Japan K.K (“ATS-Japan”), a majority owned
subsidiary. In connection with the dissolution plan, the Company
expects to incur charges of approximately $150,000 related to
severance payments for individuals impacted in this reduction and
legal fees associated with the dissolution process in the fourth
quarter of fiscal 2020. The Company expects the dissolution of
ATS-Japan will result in a cost saving of approximately $90,000
each quarter beginning in fiscal 2021.