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, 2020 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, 2020.
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.
The
Company has been impacted by the outbreak of the novel coronavirus,
known as COVID-19, which has spread throughout the world. Due to
the impact of the COVID-19 pandemic on customers and customers'
customers, the Company experienced a drop in customer orders and
revenues in the three and six months ended November 30, 2020. In
response, the Company has implemented cost reduction initiatives to
mitigate operating losses, including mandatory vacation days,
shutdown days, and executive staff pay reductions.
The
Company continues to monitor the situation. As of the date of this
report, the Company cannot predict with certainty the potential
effects the COVID-19 pandemic may have on the Company’s
business and its operating results. While the overall environment
remains uncertain, the Company continues to invest in priority
areas with the objective of driving profitable growth over the long
term.
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.(“ATS-Japan”), 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. As discussed
in Note 16, the liquidation of ATS-Japan was completed on July 31,
2020.
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, 2020. There have been no
significant changes in the Company’s significant accounting
policies during the three and six months ended November 30,
2020.
2.
RECENT ACCOUNTING PRONOUNCEMENTS
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 2021 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
|
$171
|
$3,027
|
$972
|
$5,961
|
Contactors
|
773
|
3,046
|
1,400
|
4,696
|
Services
|
739
|
801
|
1,323
|
1,750
|
|
$1,683
|
$6,874
|
$3,695
|
$12,407
|
|
|
|
|
|
Product
lines:
|
|
|
|
|
Wafer-level
|
$1,251
|
$6,335
|
$2,810
|
$11,161
|
Test
During Burn-In
|
432
|
539
|
885
|
1,246
|
|
$1,683
|
$6,874
|
$3,695
|
$12,407
|
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
|
$970
|
$2,627
|
$2,011
|
$7,684
|
Asia
|
632
|
3,529
|
1,601
|
3,867
|
Europe
|
81
|
718
|
83
|
856
|
|
$1,683
|
$6,874
|
$3,695
|
$12,407
|
With
the exception of the amount of service contracts and extended
warranties, the Company’s product category revenues are
recognized at the 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
|
$1,214
|
$6,322
|
$2,784
|
$11,181
|
Services
transferred over time
|
469
|
552
|
911
|
1,226
|
|
$1,683
|
$6,874
|
$3,695
|
$12,407
|
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
November 30, 2020 and May 31, 2020 were $75,000 and $192,000,
respectively. During the three and six months ended November 30,
2020, the Company recognized $47,000 and $126,000, respectively, of
revenues that were included in contract liabilities as of May 31,
2020.
Remaining performance obligations
On
November 30, 2020, the Company had $75,000 of remaining performance
obligations, which were comprised of deferred service contracts and
extended warranty contracts not yet delivered. The Company expects
to recognize approximately 62% of its remaining performance
obligations as revenue in fiscal 2021, and an additional 38% in
fiscal 2022 and thereafter. The foregoing excludes the value of
other remaining performance obligations as they have original
durations of one year or less, and also excludes information about
variable consideration allocated entirely to a wholly unsatisfied
performance obligation.
Costs to obtain or fulfill a contract
The
Company generally expenses sales commissions when incurred as a
component of selling, general and administrative expense as the
amortization period is typically less than one year. Additionally,
the majority of the Company’s cost of fulfillment as a
manufacturer of products is classified as inventory and fixed
assets, which are accounted for under the respective guidance for
those asset types. Other costs of contract fulfillment are
immaterial due to the nature of the Company’s products and
their respective manufacturing process.
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, restricted stock units
(“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
(loss) income per share attributable to Aehr Test Systems common
shareholders (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
Net (loss) income
|
$(1,966)
|
$251
|
$(1,859)
|
$(162)
|
|
|
|
|
|
Denominator for basic net (loss) income per
share:
|
|
|
|
|
Weighted
average shares outstanding
|
23,396
|
22,823
|
23,322
|
22,765
|
|
|
|
|
|
Shares used in basic net (loss) income per
share calculation
|
23,396
|
22,823
|
23,322
|
22,765
|
Effect
of dilutive securities
|
--
|
89
|
--
|
--
|
|
|
|
|
|
Denominator
for diluted net (loss) income per
share
|
23,396
|
22,912
|
23,322
|
22,765
|
|
|
|
|
|
Basic
net (loss) income per share
|
$(0.08)
|
$0.01
|
$(0.08)
|
$(0.01)
|
Diluted
net (loss) income per share
|
$(0.08)
|
$0.01
|
$(0.08)
|
$(0.01)
|
For
the purpose of computing diluted earnings per share, the weighted
average number of potential common shares does not include stock
options with an exercise price greater than the average fair value
of the Company’s common stock for the period, as the effect
would be anti-dilutive. In the three and six months ended November
30, 2020 and in the six months ended November 30, 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 2,886,000 shares of common stock, RSUs for
155,000 shares and ESPP rights to purchase 72,000 ESPP shares were
outstanding as of November 30, 2020, but were not included in the
computation of diluted net loss per share, because the inclusion of
such shares would be anti-dilutive. Stock options to purchase
2,919,000 shares of common stock were outstanding as of November
30, 2019, but were not included in the computation of diluted net
income per share, because the inclusion of such shares would be
antidilutive.
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 November 30, 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, 2020 (in
thousands):
|
Balance as of May 31, 2020
|
|
|
|
Money
market funds
|
$80
|
$80
|
$--
|
$--
|
Assets
|
$80
|
$80
|
$--
|
$--
|
Included
in money market funds as of November 30, 2020 and May 31, 2020 is
$80,000 restricted cash representing a security deposit for the
Company’s United States manufacturing and office space lease
which is included in other assets in the consolidated balance
sheets.
There
were no financial liabilities measured at fair value as of November
30, 2020 and May 31, 2020.
There
were no transfers between Level 1 and Level 2 fair value
measurements during the three and six months ended November 30,
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 November 30, 2020 and
May 31, 2020, 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
|
$6,170
|
$5,055
|
Work
in process
|
2,884
|
2,917
|
Finished
goods
|
3
|
17
|
|
$9,057
|
$7,989
|
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 six months ended November
30, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at the beginning of the period
|
$330
|
$192
|
$246
|
$154
|
|
|
|
|
|
Accruals
for warranties issued during
the period
|
113
|
79
|
192
|
141
|
Adjustments
to previously existing warranty accruals
|
11
|
--
|
87
|
--
|
Consumption
of reserves
|
(210)
|
(81)
|
(281)
|
(105)
|
|
|
|
|
|
Balance
at the end of the period
|
$244
|
$190
|
$244
|
$190
|
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
|
$--
|
$--
|
Deferred
revenue
|
66
|
170
|
|
$66
|
$170
|
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
Act (the “CARES Act”) was passed into law. The CARES
Act includes several significant business tax provisions including
modification to the taxable income limitation for utilization of
net operating losses (“NOLs”) incurred in 2018, 2019
and 2020 and the ability to carry back NOLs from those years for a
period of up to five years, an increase to the limitation on
deductibility of certain business interest expense, bonus
depreciation for purchases of qualified improvement property and
special deductions on certain corporate charitable contributions.
The Company is currently analyzing the impact of these changes and
therefore an estimate of the impact to income taxes is not yet
available.
On
June 29, 2020, Assembly Bill 85 (AB 85) was signed into law as part
of the California 2020 Budget Act, which temporarily suspends the
use of California net operating losses and imposes a cap on the
amount of business incentive tax credits that companies can utilize
against their net income for tax years 2020, 2021, and 2022. The
Company analyzed the provisions of AB 85 and determined there was
no impact on its provision for income taxes for the current period
and will continue to evaluate the impact, if any, AB 85 may have on
the Company’s condensed consolidated financial statements and
disclosures.
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 4
months to 5 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 2.8 years at November 30, 2020 and the
weighted-average discount rate was 5.35%.
The
Company’s operating lease cost was $190,000 and $375,000 for
the three and six months ended November 30, 2020, respectively. The
Company’s operating lease cost was $183,000 and $366,000 for
the three and six months ended November 30, 2019,
respectively.
The
following table presents supplemental cash flow information related
to the Company’s operating leases (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for amounts included in the measurement of operating lease
liabilities
|
|
|
|
|
Operating
cash flows from operating leases
|
$192
|
$184
|
$382
|
$366
|
The
following table presents the maturities of the Company’s
operating lease liabilities as of November 30, 2020 (in
thousands):
Fiscal year
|
|
2021
(excluding the first six months of 2021)
|
$394
|
2022
|
806
|
2023
|
822
|
2024
|
161
|
2025
|
29
|
Thereafter
|
17
|
Total
future minimum operating lease payments
|
$2,229
|
Less:
imputed interest
|
(163)
|
Present
value of operating lease liabilities
|
$2,066
|
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 (“SVB”). Pursuant to the Loan Agreement, the
Company may borrow up to (a) the lesser of (i) the revolving line
of $4.0 million or (ii) the amount available under the borrowing
base minus (b) the outstanding principal balance of any advances,
under a revolving line of credit which is collateralized by all the
Company’s assets except intellectual property. The borrowing
base is 80% of eligible accounts, as determined by SVB from the
Company’s most recent borrowing base statement; provided,
however, SVB has the right to decrease the foregoing percentage in
its good faith business judgment to mitigate the impact of certain
events or conditions, which may adversely affect the collateral or
its value. Subject to an event of default, the principal amount
outstanding under the revolving line of credit will accrue interest
at a floating per annum rate equal to the greater of (a) the prime
rate plus an additional percentage of up to 1%, which additional
percentage depends on the Company’s adjusted quick ratio, and
(b) 4.75%. Interest is payable monthly on the last calendar day of
each month and the outstanding principal amount, the unpaid
interest and all other obligations are due on the maturity date,
which is 364 days from the effective date of January 13, 2020. At
November 30, 2020, the Company had not drawn against the credit
facility and was in compliance with all covenants related to
obligations to meet reporting requirements. The balance available
to borrow under the line at November 30, 2020 was $76,000. There
are no financial covenants in the agreement.
13.
LONG-TERM DEBT:
On
April 23, 2020, the Company obtained a Paycheck Protection
Program Loan
(the “PPP Loan”) in the aggregate amount of $1,679,000
from SVB. The PPP Loan was evidenced by a promissory note dated
April 23, 2020 (the “Note”) that matures on April 23,
2022 and bears interest at a rate of 1% per annum. The PPP Loan
proceeds were used for payroll, health care benefits, rent and
utilities.
Under
the terms of the CARES Act, PPP loan recipients can apply for and
be granted forgiveness for all or a portion of loans granted under
the PPP. Such forgiveness will be determined, subject to
limitations, based on the use of loan proceeds for payment of
payroll costs, covered rent and mortgage obligations, and covered
utility payments incurred by the Company. The Company applied on
November 6, 2020 for loan forgiveness for the full amount of the
borrowing and accrued interest. The Small Business Administration
has 90 days from the date submitted to review and approve the
application. No assurance can be given that the Company will obtain
forgiveness of the amount due under the loan in whole or in
part.
14.
STOCK-BASED COMPENSATION
Stock-based
compensation expense consists of expenses for stock options, 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 11 in the Company’s Annual Report
on Form 10-K for fiscal 2020 filed on August 28, 2020 for further
information regarding the 2016 Equity Incentive Plan (the
“2016 Plan”) and the ESPP.
The
following table summarizes the stock-based compensation expense for
the three and six months ended November 30, 2020 and 2019 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation in the form of employee stock options, RSUs and ESPP
purchase rights, included in:
|
|
|
|
|
Cost
of sales
|
$15
|
$19
|
$31
|
$39
|
Selling,
general and administrative
|
194
|
135
|
399
|
264
|
Research
and development
|
48
|
51
|
97
|
101
|
Total
stock-based compensation
|
$257
|
$205
|
$527
|
$404
|
As
of November 30, 2020, and November 30, 2019, there were no
stock-based compensation expenses capitalized as part of
inventory.
During
the three months ended November 30, 2020 and 2019, the Company
recorded stock-based compensation expense related to stock options
and RSUs of $238,000 and $163,000, respectively. During the six
months ended November 30, 2020 and 2019, the Company recorded
stock-based compensation expense related to stock options and RSUs
of $483,000 and $313,000, respectively.
As
of November 30, 2020, the total compensation expense related to
unvested stock-based awards under the 2016 Plan, but not yet
recognized, was approximately $1,331,000, 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
2.8 years.
During
the three months ended November 30, 2020 and 2019, the Company
recorded stock-based compensation expense related to the ESPP of
$19,000 and $42,000, respectively. During the six months ended
November 30, 2020 and 2019, the Company recorded stock-based
compensation expense related to the ESPP of $44,000 and $91,000,
respectively.
As
of November 30, 2020, the total compensation expense related to
purchase rights under the ESPP but not yet recognized was
approximately $41,000. This expense will be amortized on a
straight-line basis over a weighted average period of approximately
1.0 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, 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 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 six months ended November 30, 2020
and 2019 were estimated using the following weighted average
assumptions in the Black-Scholes option valuation
model:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
term (in years)
|
6
|
5
|
6
|
5
|
Volatility
|
0.73
|
0.72
|
0.72
|
0.71
|
Risk-free
interest rate
|
0.43%
|
1.60%
|
0.39%
|
1.85%
|
Weighted
average grant date fair value
|
$0.91
|
$1.05
|
$1.09
|
$0.98
|
The
fair values of the ESPP purchase rights granted for the three and
six months ended November 30, 2020 and 2019 were estimated using
the following assumptions:
|
Three
and Six Months Ended
|
Three
and Six Months Ended
|
|
|
|
|
|
|
Expected
term (in years)
|
0.5-2.0
|
0.5-2.0
|
Volatility
|
0.74-0.82
|
0.62-0.71
|
Expected
dividend
|
$0.00
|
$0.00
|
Risk-free
interest rates
|
0.10%-0.14%
|
1.56%-1.81%
|
Estimated
forfeiture rate
|
0%
|
0%
|
Weighted
average grant date fair value
|
$0.42
|
$0.80
|
During
the three and six months ended November 30, 2020, ESPP purchase
rights of 72,000 were granted. During the three and six months
ended November 30, 2019, ESPP purchase rights of 38,000 were
granted. Total ESPP shares issued during the three and six months
ended November 30, 2020 and 2019 were 72,000 and 71,000 shares,
respectively. As of November 30, 2020, there were 161,000 ESPP
shares available for issuance. As of November 30, 2019, 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 six months ended November 30,
2020 (in thousands):
|
|
|
|
Balance,
May 31, 2020
|
1,650
|
|
|
Options
granted
|
(200)
|
RSUs
granted
|
(196)
|
Options
cancelled
|
188
|
RSUs
cancelled
|
2
|
Options expired
|
(125)
|
|
|
Balance,
August 31, 2020
|
1,319
|
Options
granted
|
(73)
|
RSUs
granted
|
(57)
|
Options
cancelled
|
185
|
Options
expired
|
(162)
|
|
|
Balance,
November 30, 2020
|
1,212
|
The
following table summarizes the stock option transactions during the
three and six months ended November 30, 2020 (in thousands, except
per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
May 31, 2020
|
3,153
|
$2.17
|
$102
|
|
|
|
|
Options
granted
|
200
|
$1.86
|
|
Options
cancelled
|
(188)
|
$2.18
|
|
Options
exercised
|
(148)
|
$1.30
|
|
|
|
|
|
Balances,
August 31, 2020
|
3,017
|
$2.19
|
$148
|
|
|
|
|
Options
granted
|
73
|
$1.44
|
|
Options
cancelled
|
(185)
|
$2.42
|
|
Options
exercised
|
(19)
|
$1.67
|
|
|
|
|
|
Balances,
November 30, 2020
|
2,886
|
$2.16
|
$56
|
|
|
|
|
Options fully vested and expected to vest
at November 30, 2020
|
2,850
|
$2.16
|
$54
|
The
options outstanding and exercisable at November 30, 2020 were in
the following exercise price ranges (in thousands, except per share
data):
|
|
|
|
|
|
|
Number
Outstanding Shares
|
Weighted Average
Remaining Contractual Life (Years)
|
Weighted Average
Exercise Price
|
Number
Exercisable Shares
|
Weighted Average
Remaining Contractual Life (Years)
|
Weighted Average
Exercise Price
|
Aggregate
Intrinsic Value
|
$1.22-$1.34
|
133
|
6.55
|
$1.27
|
17
|
6.46
|
$1.25
|
|
$1.64-$1.86
|
1,092
|
5.28
|
$1.70
|
574
|
4.64
|
$1.69
|
|
$2.03-$2.46
|
1,048
|
3.48
|
$2.21
|
771
|
3.02
|
$2.19
|
|
$2.63-$2.81
|
411
|
0.90
|
$2.71
|
410
|
0.88
|
$2.71
|
|
$3.46-$3.93
|
202
|
3.66
|
$3.86
|
174
|
3.66
|
$3.85
|
|
$1.22-$3.93
|
2,886
|
3.95
|
$2.16
|
1,946
|
3.14
|
$2.29
|
$9
|
The
total intrinsic value of options exercised during the three and six
months ended November 30, 2020 was $3,000 and $95,000,
respectively. The total intrinsic value of options exercised during
the three and six months ended November 30, 2019 was $50,000 and
$67,000, respectively. The weighted average remaining contractual
life of the options exercisable and expected to be exercisable at
November 30, 2020 was 3.93 years. The weighted average remaining
contractual life of the options exercisable and expected to be
exercisable at November 30, 2019 was 3.93 years.
There
were no RSUs granted to employees during the three months ended
November 30, 2020. During the six months ended November 30, 2020,
RSUs for 161,000 shares were granted to employees. The market value
on the date of the grant of these RSUs was $1.86 per share. During
the three and six months ended November 30, 2020, 11,000 and 14,000
RSUs became fully vested, respectively. During the three and six
months ended November 30, 2019, 3,000 and 7,000 RSUs became fully
vested, respectively. As of November 30, 2020, 155,000 RSUs were
unvested which had an intrinsic value of $256,000. As of November
30, 2019, 16,000 RSUs were unvested which had an intrinsic value of
$31,000. There were no RSUs granted to employees during the three
and six months ended November 30, 2019.
During
the three months ended November 30, 2020, RSUs for 57,000 shares
were granted to members of the Company’s Board of Directors
for Board fees. The market value on the date of the grant of these
RSUs was $1.34 per share. During the six months ended November 30,
2020, RSUs for 92,000 shares were granted to members of the
Company’s Board of Directors for Board fees. The weighted
average market value on the date of the grant of these RSUs was
$1.54 per share. All of these RSUs were immediately fully vested.
There were no RSUs granted to members of the Company’s Board
of Directors during the three and six months ended November 30,
2019.
15.
SEGMENT INFORMATION
The
Company has only one reportable segment. The information for
revenue category by type, product line, geography and timing of
revenue recognition, is summarized in Note “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
|
$682
|
$662
|
Asia
|
1
|
1
|
Europe
|
--
|
--
|
|
$683
|
$663
|
As
of November 30, 2020, the operating lease right-of-use assets of
$1,918,000 are allocated in the United States.
There
were no revenues through distributors for the three and six months
ended November 30, 2020 and 2019.
Sales
to the Company’s five largest customers accounted for
approximately 90% and 74% of its net sales in the three and six
months ended November 30, 2020, respectively. Five customers
accounted for approximately 22%,18%, 18%, 16% and 15% of the
Company’s net sales in the three months ended November 30,
2020. Five customers accounted for approximately 20%, 18%, 15%, 11%
and 10% of the Company’s net sales in the six months ended
November 30, 2020. Sales to the Company’s five largest
customers accounted for approximately 95% and 88% of its net sales
in the three and six months ended November 30, 2019, respectively.
Two customers accounted for approximately 44% and 32% of the
Company’s net sales in the three months ended November 30,
2019. Three customers accounted for approximately 42%, 24% and 10%
of the Company’s net sales in the six months ended November
30, 2019. No other customers represented more than 10% of the
Company’s net sales in the three and six months ended
November 30, 2020 and 2019.
16.
DISSOLUTION OF AEHR TEST SYSTEMS JAPAN
On
July 31, 2020, the Company completed the liquidation of ATS-Japan,
a majority owned subsidiary. Accordingly, the Company
deconsolidated ATS-Japan and recognized an aggregate net gain of
$2,401,000 for the period ended August 31, 2020. The net gain was
mainly due to cumulative translation adjustment reclassified into
earnings of $2,186,000 and the residual income tax effect in
connection with the cumulative translation adjustment released into
income tax benefits of $215,000.