AMTECH SYSTEMS INC

Results of Operations

The following table sets forth certain operational data as a percentage of net revenue for the periods indicated:

Net Revenue

Net revenue consists of revenue recognized upon shipment or delivery of equipment. Spare parts sales are recognized upon shipment and service revenue is recognized upon completion of the service activity, which is generally ratable over the term of the service contract. Since the majority of our revenue is generated from large system sales, revenue, gross profit and operating income can be significantly impacted by the timing of system shipments.

Our net revenue by reportable segment was as follows, dollars in thousands:

Total net revenue for the three months ended December 31, 2023 and 2022 was $24.9 million and $21.6 million, respectively, an increase of approximately $3.4 million or 16%. Our Semiconductor results for the first quarter of fiscal 2024 reflect increases in our belt furnace shipments partially offset by decreases in shipments of our horizontal diffusion furnaces, surface-mount technology (“SMT”), and packaging equipment. We continue to experience softness in shipments of our advanced packaging and SMT equipment, primarily related to a slowdown in global demand in the consumer markets. Material and Substrate revenue increased due to the addition of Entrepix, effective January 17, 2023, partially offset by a decrease in revenue due to lower sales of our consumable products. Entrepix accounted for approximately $3.8 million of revenue in the Material and Substrate segment during the quarter ended December 31, 2023.

Orders and Backlog

New orders booked by reportable segment were as follows, dollars in thousands:

Our backlog by reportable segment was as follows, dollars in thousands:

As of December 31, 2023, one customer of our Semiconductor segment customers individually accounted for 31% of our backlog. Additionally, one customer of both our Semiconductor and Material and Substrate segments accounted for 21% of our backlog. No other customer accounted for more than 10% of our backlog as of December 31, 2023. The orders included in our backlog are generally credit approved customer purchase orders believed to be firm and are generally expected to ship within the next twelve months. Our backlog at any particular point in time is not necessarily representative of actual sales for succeeding periods, nor is backlog any assurance that we will realize profit from completing these orders.

Gross Profit and Gross Margin

Gross profit is the difference between net revenue and cost of goods sold. Cost of goods sold consists of purchased material, labor and overhead to manufacture equipment and spare parts and the cost of service and support to customers for installation, warranty and paid service calls. Gross margin is gross profit as a percent of net revenue. Our gross profit and gross margin by business segment were as follows, dollars in thousands:

Our gross margins can be affected by capacity utilization and the type and volume of machines and consumables sold each quarter. Gross profit for the three months ended December 31, 2023 and 2022 was $8.2 million (33% of net revenue) and $8.3 million (39% of net revenue), respectively, a decrease of $0.1 million. Gross margin on products from our Semiconductor segment decreased slightly due to changes in our product mix and lower utilization at our Shanghai facility. Gross margin on products from our Material and Substrate segment decreased compared to the three months ended December 31, 2022, primarily due to an impairment charge of $0.8 million for intangible assets. Additionally, we had higher equipment sales, primarily at Entrepix, which have lower margins than our consumables, and charges for slow-moving inventory. We are experiencing increased material costs across all our segments. In response to such increased costs, we continually review our pricing plans and supplier agreements, with the objective of passing these increased costs to our customers where possible; however, we continue to experience pricing pressure from our customers. We are also exploring partnerships with contract manufacturers, who can leverage their buying power on a larger scale. In the first quarter of fiscal 2024, we began making targeted labor reductions as a result of the shift to contract manufacturing and the continuing slowdown in the broader semiconductor industry.

Selling, General and Administrative

Selling, general and administrative expenses (“SG&A”) consists of the cost of employees, consultants and contractors, facility costs, sales commissions, shipping costs, promotional marketing expenses, legal and accounting expenses and bad debt expense.

SG&A expenses for the three months ended December 31, 2023 and 2022 were $8.6 million and $9.2 million, respectively. SG&A for the three months ended December 31, 2023 included $1.2 million of additional expense from Entrepix. SG&A for the three months ended December 31, 2022 included $1.4 million of transaction expenses related to the acquisition of Entrepix, Inc.

Research, Development and Engineering

Research, development and engineering (“RD&E”) expenses consist of the cost of employees, consultants and contractors who design, engineer and develop new products and processes as well as materials and supplies used in producing prototypes. RD&E expenses may vary from period to period depending on the engineering projects in process. Expenses related to engineers working on strategic projects or sustaining engineering projects are recorded in RD&E. However, from time to time we add functionality to our products or develop new products during engineering and manufacturing to fulfill specifications in a customer’s order, in which case the cost of development, along with other costs of the order, are charged to cost of goods sold. Occasionally, we receive reimbursements through governmental research and development grants which are netted against these expenses when certain conditions have been met.

RD&E expense, net of grants earned, for the three months ended December 31, 2023 and 2022 were $1.6 million and $1.4 million, respectively. The increase in RD&E in the three month period is due to the timing of purchases related to specific strategic-development projects at our Semiconductor segment. Grants earned are immaterial in all periods presented.

Goodwill Impairment

During the quarter ended December 31, 2023, we recognized impairment of our goodwill of $6.4 million at our Material and Substrate segment as a result of a triggering event identified at the end of the quarter.

Intangible Asset Impairment

During the quarter ended December 31, 2023, we recognized impairment of our definite lived intangible assets of $1.3 million at our Material and Substrate segment. As stated above, $0.8 million of this impairment was recorded in cost of goods sold, and the remainder was recorded within operating expenses in the Condensed Consolidated Statement of Operations.

Severance Expense

We recorded severance expense of $0.2 million and $0.4 million in the three months ended December 31, 2023 and 2022, respectively. For the three months ended December 31, 2023, the amount relates to staff reductions in our Semiconductor and Material and Substrate segments. For the three months ended December 31, 2022, the amount relates to the retirement of our founder.

Income Taxes

Our effective tax rate was (0.6%) and 0.1% for the three months ended December 31, 2023 and 2022, respectively. The effective tax rate for the three months ended December 31, 2023 differs from the U.S. statutory tax rate of 21% primarily due to losses for which no tax benefit can be recognized. For the three months ended December 31, 2023 and 2022, we recorded income tax expense of $58,000 and an income tax benefit of $4,000, respectively. The quarterly income tax provision is calculated using an estimated annual effective tax rate, based upon expected annual income, permanent items, statutory rates and planned tax strategies in the various jurisdictions in which we operate. However, losses in certain jurisdictions and discrete items are excluded from the determination of the estimated annual effective tax rate.

Generally accepted accounting principles of the United States (“GAAP”) require that a valuation allowance be established when it is “more likely than not” that all or a portion of deferred tax assets will not be realized. A review of all available positive and negative evidence needs to be considered, including a company’s performance, the market environment in which the company operates and the length of carryback and carryforward periods. According to those principles, it is difficult to conclude that a valuation allowance is not needed when the negative evidence includes cumulative losses in recent years. Based on the consideration of all available evidence, we have concluded that we will maintain a full valuation allowance for all net deferred tax assets related to the carryforwards of U.S. net operating losses and tax credits. We will continue to monitor our cumulative income and loss positions in the U.S. and foreign jurisdictions to determine whether full valuation allowances on U.S. net deferred tax assets are appropriate.

We expect to pay minimal U.S federal cash taxes for the foreseeable future as a result of our U.S. net operating losses and tax credits that are carried forward.

Our future effective income tax rate depends on various factors, such as the amount of income (loss) in each tax jurisdiction, tax regulations governing each region, non-tax deductible expenses incurred as a percent of pre-tax income and the effectiveness of our tax planning strategies.