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1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 12 Months Ended
May. 31, 2015
Organization And Summary Of Significant Accounting Policies  
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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 recent years, the Company has recognized significantly lower sales levels compared to the net sales of the years immediately preceding fiscal 2009, as a result of a major customer filing bankruptcy and a slowdown in the semiconductor manufacturing industry.  In response to the low levels of net sales, the Company took significant steps to minimize expense levels and to increase the likelihood that it will have sufficient cash to support operations during the slow business periods.  Those steps included reductions in headcount, reduced compensation for officers and other salaried employees, Company-wide shutdowns and lower fees paid to the Board of Directors, among other spending cuts.  The Company will continue to explore methods to reduce its costs as necessary. 

 

    In March 2013, the Company sold 1,158,000 shares of its common stock in a private placement transaction with certain Directors and Officers of the Company and other accredited investors.  The purchase price per share of the common stock sold in the private placement was $1.00, resulting in gross proceeds to the Company of $1,158,000, before offering expenses.  The net proceeds after offering expenses were $1,138,000.

 

    In November 2014, the Company sold 1,065,000 shares of its common stock in a private placement transaction with certain Directors and Officers of the Company and other accredited investors.  The purchase price per share of the common stock sold in the private placement was $2.431, resulting in gross proceeds to the Company of $2,589,000, before offering expenses.  The net proceeds after offering expenses were $2,574,000.

 

    In August 2011, the Company entered into a working capital credit facility agreement allowing the Company to borrow up to $1.5 million based upon qualified U.S. based and foreign customer receivables, and export-related inventory.  In May 2012, the credit agreement was amended to increase the borrowing limit to $2.0 million.  In September 2012, the credit agreement was amended to increase the borrowing limit to $2.5 million.   On April 10, 2015, the Company terminated the working capital credit facility and entered into a Convertible Notes Purchase (the “Convertible Notes”) and Credit Facility (the “Credit Facility”) Agreement with QVT Fund LP and Quintessence Fund L.P.  The Company received $3.8 million in net proceeds from the issuance of the convertible notes.  Refer to Note 9, “LINE OF CREDIT” and Note 11, “LONG-TERM DEBT”, for further discussion of the Credit Facility and Convertible Notes agreement.

 

    During fiscal 2015, 2014 and 2013, the Company experienced negative cash flow from operating activities.  The Company anticipates that the existing cash balance together with cash flows from operations, as well as funds available through the  Credit Facility will be adequate to meet its working capital and capital equipment requirements through fiscal 2016.  After fiscal 2016, depending on its rate of growth and profitability, the Company may require additional equity or debt financing to meet its working capital requirements or capital equipment needs.  There can be no assurance that additional financing will be available when required, or if available, that such financing can be obtained on terms satisfactory to the Company.

 

CONSOLIDATION AND EQUITY INVESTMENTS:

 

    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.  Equity investments in which the Company holds an equity interest less than 20 percent and over which the Company does not have significant influence are accounted for using the cost method.  Dividends received from investees accounted for using the cost method are included in other income on the Consolidated Statements of Operations.

 

FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS:

 

    Assets and liabilities of the Company’s foreign subsidiaries and a branch office are translated into U.S. Dollars from their functional currencies of Japanese Yen, Euros and New Taiwan Dollars using the exchange rate in effect at the balance sheet date.  Additionally, their net sales and expenses are translated using exchange rates approximating average rates prevailing during the fiscal year.  Translation adjustments that arise from translating their financial statements from their local currencies to U.S. Dollars are accumulated and reflected as a separate component of shareholders’ equity.

 

    Transaction gains and losses that arise from exchange rate changes denominated in currencies other than the local currency are included in the Consolidated Statements of Operations as incurred.  See Note 14 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 AND INVESTMENTS:

 

    Cash equivalents consist of money market instruments purchased with an original maturity of three months or less.   These investments are reported at fair value.

 

FAIR VALUE OF FINANCIAL INSTRUMENTS AND 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 and liabilities measured at fair value on a recurring basis as of May 31, 2015 (in thousands):

 

    Balance as of                    
    May 31, 2015     Level 1     Level 2     Level 3  
Money market funds   $ 4,650     $ 4,650     $ --     $ --  
Certificate of deposit     50       --       50       --  
Assets   $ 4,700     $ 4,650     $ 50     $ --  
                                 
Liabilities   $ --     $ --     $ --     $ --  

 

 

    The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis as of May 31, 2014 (in thousands):

 

    Balance as of                    
    May 31, 2014     Level 1     Level 2     Level 3  
Money market funds   $ 477     $ 477     $ --     $ --  
Certificate of deposit     50       --       50       --  
Assets   $ 527     $ 477     $ 50     $ --  
                                 
Liabilities   $ --     $ --     $ --     $ --  

 

    There were no transfers between Level 1 and Level 2 fair value measurements during the fiscal year ended May 31, 2015 and 2014.

 

    Financial instruments include cash, cash equivalents, receivables, accounts payable and certain other accrued liabilities. The fair value of cash, cash equivalents, receivables, accounts payable and certain other accrued liabilities are valued at their carrying value, which approximates fair value due to their short maturities.  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.

 

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, 2015, 2014 or 2013.

 

CONCENTRATION OF CREDIT RISK:

 

    The Company sells its products primarily to semiconductor manufacturers in North America, Asia, and Europe.  As of May 31, 2015, approximately 70%, 3% and 27% of gross accounts receivable were from customers located in Asia, Europe and North America, respectively.  As of May 31, 2014, approximately 36%, 35% and 29% of gross accounts receivable were from customers located in Asia, Europe and North America, respectively.  Two customers accounted for 41% and 32% of gross accounts receivable at May 31, 2015.  Four customers accounted for 35%, 24%, 18% and 17% of gross accounts receivable at May 31, 2014.  Two customers accounted for 45% and 11% of net sales in fiscal 2015.  Three customers accounted for 40%, 30% and 12% of net sales in fiscal 2014.  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.  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 market.  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 market 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) services have been rendered; (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 are 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.  The Company has adopted this guidance effective with the first quarter of fiscal 2012.  Prior to fiscal 2012, revenue for arrangements containing multiple deliverables was allocated based upon estimated fair values.  The adoption of the new revenue recognition accounting standards did not have a material impact on our consolidated financial statements.

 

    During the first quarter of fiscal 2013, the Company entered into an agreement with a customer to develop a next generation system. 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.

 
 

    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 2015, 2014 and 2013.

 

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, 2015 and 2014.

 

    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 – 2014 remain subject to examination by the appropriate governmental agencies due to tax loss carryovers from those years.

 

STOCK-BASED COMPENSATION:

 

    Stock-based compensation expense consists of expenses for stock options and employee stock purchase plan, or ESPP, purchase rights.  Stock-based compensation cost is measured at each grant date, based on the fair value of the award using the Black-Scholes option valuation model, and is recognized as expense over the employee’s requisite service period.  This model was developed for use in estimating the value of publicly traded options that have no vesting restrictions and are fully transferable.  The Company’s employee stock options have characteristics significantly different from those of publicly traded options.  All of the Company’s stock-based compensation is accounted for as an equity instrument.

 

    The following table summarizes compensation costs related to the Company’s stock-based compensation for the years ended May 31, 2015, 2014 and 2013 (in thousands, except per share data):

 

    Year Ended May 31,  
    2015     2014     2013  
Stock-based compensation in the form of employee                  
  stock options and ESPP purchase rights, included in:                  
                   
Cost of sales   $ 70     $ 43     $ 36  
Selling, general and administrative     726       643       446  
Research and development     201       167       119  
                         
Net effect on net (loss) income   $ 997     $ 853     $ 601  
                         
Effect on net (loss) income per share:                        
  Basic   $ 0.08     $ 0.08     $ 0.06  
  Diluted   $ 0.08     $ 0.07     $ 0.06  

 

    During fiscal 2015, 2014 and fiscal 2013, the Company recorded stock-based compensation related to stock options of $857,000, $723,000 and $551,000, respectively.

 

    As of May 31, 2015, the total compensation cost related to unvested stock-based awards under the Company’s 1996 Stock Option Plan and 2006 Equity Incentive Plan, but not yet recognized, was $1,873,000 which is net of estimated forfeitures of $5,000.  This cost will be amortized on a straight-line basis over a weighted average period of approximately 2.9 years.

 

    During fiscal 2015, 2014 and fiscal 2013, the Company recorded stock-based compensation related to its ESPP of $140,000, $130,000 and $50,000, respectively.

 

    As of May 31, 2015 and 2014, stock-based compensation costs of $20,000 and $24,000, respectively, were capitalized as part of inventory.  There were no stock-based compensation costs capitalized as part of inventory as of May 31, 2013.

 

    As of May 31, 2015, the total compensation cost related to purchase rights under the ESPP but not yet recognized was $135,000.  This cost 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.

 

    Expected Volatility.  Volatility is a measure of the amounts by which a financial variable such as stock price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period.  The Company uses the historical volatility for the past five years, which matches the expected term of most of the option grants, to estimate expected volatility.  Volatility for each of the ESPP’s four time periods of six months, twelve months, eighteen months, and twenty-four months is calculated separately and included in the overall stock-based compensation cost recorded.

 

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

 

    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.

 

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

 

    Fair Value.  The fair values of the Company’s stock options granted to employees shares in fiscal 2015, 2014 and 2013 were estimated using the following weighted average assumptions in the Black-Scholes option valuation method:

 

    Year Ended May 31,  
    2015     2014     2013  
Option plan shares                  
Expected term (in years)     4       4       5  
Volatility     0.90       0.95       0.91  
Expected dividend   $ 0.00     $ 0.00     $ 0.00  
Risk-free interest rates     1.20 %     1.39 %     0.72 %
Weighted-average grant date fair value   $ 1.52     $ 1.09     $ 0.78  

 

    The fair value of our ESPP purchase rights for the fiscal 2015, 2014 and 2013 was estimated using the following weighted-average assumptions:

 

    Year End May 31,  
    2015     2014     2013  
Employee stock purchase plan shares                  
Expected term (in years)     0.5 – 2.0       0.5 – 2.0       0.5 – 2.0  
Volatility     0.55 – 0.83       0.86 – 1.00       0.45 – 1.05  
Expected dividend   $ 0.00     $ 0.00     $ 0.00  
Risk-free interest rates     0.04%–0.55 %     0.04%–0.44 %     0.11%–0.23 %
Weighted-average grant date fair value   $ 1.43     $ 1.34     $ 0.52  

 

    During the fiscal years ended May 31, 2015, 2014 and 2013, ESPP purchase rights of 222,000, 172,000, and 27,000 shares, respectively, were granted.  Total ESPP shares issued during the fiscal years ended May 31, 2015, 2014, and 2013 were 87,000, 120,000, and 156,000 shares, respectively.  As of May 31, 2015 there were 268,000 ESPP shares available for issuance.

 

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, and employee stock purchase plan 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):

 

    Year Ended May 31,  
    2015     2014     2013  
Numerator: Net (loss) income   $ (6,647 )   $ 422     $ (3,419 )
                         
Denominator for basic net (loss) income per share:                        
  Weighted-average shares outstanding     12,047       10,877       9,549  
                         
Shares used in basic net (loss) income per share calculation     12,047       10,877       9,549  
                         
Effect of dilutive securities     --       1,012       --  
                         
                         
Denominator for diluted net (loss) income per share     12,047       11,889       9,549  
                         
Basic net (loss) income per share   $ (0.55 )   $ 0.04     $ (0.36 )
                         
Diluted net (loss) income per share   $ (0.55 )   $ 0.04     $ (0.36 )

 

    For the purpose of computing diluted earnings per share, weighted average potential common shares do not include stock options with an exercise price greater than the average fair value of the Company’s common stock for the period, as the effect would be anti-dilutive. In the fiscal year’s ended May 31, 2015 and 2013, 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 3,686,000, 301,000 and 2,956,000 shares of common stock were outstanding on May 31, 2015, 2014 and 2013, respectively, but were not included in the computation of diluted net (loss) income per share, because the inclusion of such shares would be anti-dilutive.  ESPP rights to purchase 175,000, 131,000 and 178,000 ESPP shares were outstanding on May 31, 2015, 2014 and 2013, respectively, but were not included in the computation of diluted net (loss) income per share, because the inclusion of such shares would be anti-dilutive.

 

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 statement of shareholders’ equity and comprehensive loss.

 

RECLASSIFICATION 

 

    Certain reclassifications have been made to the consolidated financial statements to conform to the current period presentation. These reclassifications did not result in any change in previously reported net loss, total assets or shareholders’ equity.

 

RECENT ACCOUNTING PRONOUNCEMENTS:

 

    In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU")  No. 2014-09, Revenue from Contracts with Customers, a new standard on revenue recognition.  The new standard will supersede existing revenue recognition guidance and apply to all entities that enter into contracts to provide goods or services to customers.  The guidance also addresses the measurement and recognition of gains and losses on the sale of certain non-financial assets, such as real estate, and property and equipment.  The new standard will become effective for us beginning with the first quarter of fiscal 2019 and can be adopted either retrospectively to each reporting period presented or as a cumulative effect adjustment as of the date of adoption.  The Company is currently evaluating the impact of adopting this new guidance on our consolidated financial statements.

 

    In August 2014, the FASB issued ASU No. 2014-15, Presentation of Going Concern.  This standard requires management to evaluate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern and whether or not it is probable that the entity will be unable to meet its obligations as they become due within one year after the date the financial statements are issued.  The new standard will apply to all entities and will be effective for us in the fiscal year 2017, with early adoption permitted. The adoption of this update is not expected to have a material effect on the Company’s consolidated financial statements or disclosures.

 

    In April 2015, the FASB issued ASU No. 2015-03, Interest – Imputation of Interest. This standard requires management to simplify the presentation of debt issuance costs by presenting the costs related to obtaining a debt liability as a direct deduction from that debt liability. The debt issuance costs, or discount, is amortized over the life of the debt liability. The new standard is effective for us in fiscal 2017, with early adoption permitted. The Company has adopted this update for the fiscal year ended May 31, 2015. Refer to Note 11 of Notes to Consolidated Financial Statements, “LONG-TERM DEBT” for further discussion of the new credit facility with QVT Fund LP and Quintessence Fund L.P.

 

    In July 2015, the FASB issued ASU No. 2015-11, Inventory. This standard 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. This new standard will be effective for us in the fiscal year 2018, with early adoption permitted. The Company is currently evaluating the impact of adopting this new guidance on our consolidated financial statements.