AEHR TEST SYSTEMS (AEHR)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the financial condition and results of operations should be read in conjunction with our “Selected Consolidated Financial Data” and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

Overview

Aehr Test Systems (“Aehr Test”, “Aehr”, the “Company” or “We”) is a leading provider of test solutions for testing, burning-in, and stabilizing semiconductor devices in wafer level, singulated die, and package part form, and has installed thousands of systems worldwide. Decarbonization, generative AI and digitalization is driving increased quality, reliability, safety, and security needs of semiconductors used across multiple applications, including electric vehicles, electric vehicle charging infrastructure, solar and wind power, computing, data and telecommunications infrastructure, and solid-state memory and storage. This trend is driving additional test requirements, incremental capacity needs, and new opportunities for Aehr Test products and solutions.

We have developed and introduced several innovative products including the FOX-P family of test and burn-in systems and FOX WaferPak Aligner, FOX WaferPak Contactor, FOX DiePak Carrier and FOX DiePak Loader. The FOX-XP and FOX-NP systems are full wafer contact and singulated die/module test and burn-in systems that can test, burn-in, and stabilize a wide range of devices such as leading-edge silicon carbide-based and other power semiconductors, 2D and 3D sensors used in mobile phones, tablets, and other computing devices, memory semiconductors, processors, microcontrollers, systems-on-a-chip, and photonics and integrated optical devices. The FOX-CP system is a low-cost single-wafer compact test solution for logic, memory and photonic devices and the newest addition to the FOX-P product family. The FOX WaferPak Contactor contains a unique full wafer contactor capable of testing wafers up to 300mm that enables Integrated Circuit manufacturers to perform test, burn-in, and stabilization of full wafers on the FOX-P systems. The FOX DiePak Carrier allows testing, burning in, and stabilization of singulated bare die and modules up to 1,024 devices in parallel per DiePak on the FOX-NP and FOX-XP systems up to nine DiePaks at a time.

Following the acquisition of Incal, our product portfolio further expanded to include packaged parts burn-in solutions for the full range of power and complexity of integrated circuits. Incal’s product lines feature the Sonoma series for ultra-high-power burn-in testing, the Tahoe series for medium-power reliability burn-in, and the Echo series for low-power and high parallelism testing. The Sonoma line, with its ultra-high-power capabilities, is specifically designed to address the reliability and burn-in needs of the burgeoning demand for AI accelerators, GPUs, HPC processors, and devices that can reach levels of power as high as 1600W. The Sonoma is available in its standard configuration, which hosts up to 22 slots per chamber. The Tahoe and Echo lines for medium-power and low-power burn-in solutions, respectively, target logic, SoC, and mixed-signal devices employed in mobile communications, mobility, medical, military, aerospace, and data center applications. These systems are frequently used by independent test and burn-in labs, as well as semiconductor manufacturers.

Our revenue consists primarily of sales of FOX-P systems, WaferPak Aligners and DiePak Loaders, WaferPak Contactors, DiePak Carriers, packaged parts burn-in systems, test fixtures, upgrades and spare parts, service contracts revenues, and non-recurring engineering charges. Our selling arrangements may include contractual customer acceptance provisions, which are mostly deemed perfunctory or inconsequential, and installation of the product occurs after shipment, transfer of title and risk of loss.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenues, inventories, income taxes, the business combination with Incal, and the impairment of goodwill and long-lived assets, among others. Our estimates are derived from historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Those results form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

We recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which we expect 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 we satisfy 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, we evaluate whether the price is subject to refund or adjustment to determine the net consideration to which we expect to be entitled. We generally do not grant return privileges, except for defective products during the warranty period.

For contracts that contain multiple performance obligations, we allocate 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 is recognized at a point in time, which is generally upon shipment or delivery and evidenced by transfer of title and risk of loss to the customer. Revenue from services is recognized over time as the customer receives the benefit over the contractual period of generally one year or less.

We have elected the practical expedient to not assess whether a contract has a significant financing component as our standard payment terms are less than one year.

We sell our products primarily through a direct sales force. In certain international markets, we sell our products through independent distributors.

Inventory Valuation

We write down the carrying value of our inventory to net realizable value for estimated obsolescence or unmarketable inventory in an amount equal to the difference between the cost of inventory and its estimated realizable value based upon assumptions about future demand and market conditions. We assess the valuation of all inventories, including raw materials, work-in-process, finished goods and spare parts on a periodic basis.

Obsolete inventory or inventory in excess of our estimated usage is written down to its estimated market value less costs to sell, if less than its cost. The inventory write-downs are established on the basis of obsolete inventory or specifically identified inventory in excess of established usage. Inherent in our estimates of demand and market value in determining inventory valuation are estimates related to economic trends, market conditions, and future demand for our products. If actual demand and market conditions are less favorable than our projections, additional inventory write-downs may be required. If the inventory value is written down to its net realizable value, and subsequently there is an increased demand for the inventory at a higher value, the increased value of the inventory is not realized until the inventory is sold either as a component of a system or as separate inventory.

Income Taxes

The determination of our tax provision is highly dependent upon the geographic composition of worldwide earnings and tax regulations governing each region and is subject to judgments and estimates. Management carefully monitors the changes in many factors and adjusts the effective tax rate as required.

We assess the likelihood that we are able to recover our deferred tax assets. If recovery is not more likely than not, we increase our provision for taxes by recording a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be recoverable. In determining whether the realization of these deferred tax assets is impaired, we make judgments with respect to whether we are likely to generate sufficient future taxable income to realize these assets. In order to reverse the valuation allowance, management considers both positive and negative evidence and determines that there is sufficient positive evidence to conclude that it is more likely than not that the deferred tax assets will be realized. In fiscal 2024, we released the entire valuation allowance which contributed to the tax benefit of approximately $20.7 million for the year ended May 31, 2024.

Business Combination

Accounting for business combinations requires management to make significant estimates and assumptions to determine the fair values of assets acquired and liabilities assumed at the acquisition date. The assumptions and estimates are based, in part, on historical experience and information obtained from management of the acquired company and are inherently uncertain. Critical estimates in valuing certain acquired intangible assets include, but are not limited to, future expected cash flows including revenue growth rate assumptions from product sales, customer orders and acquired technologies, estimated royalty rates used in valuing technology-related intangible assets, and discount rates. The discount rates used to discount expected future cash flows to present value are typically derived from a weighted-average cost of capital analysis and adjusted to reflect inherent risks. Unanticipated events and circumstances may occur that could affect either the accuracy or validity of such assumptions, estimates or actual results.

Impairment of Goodwill

We assess goodwill for impairment annually during our fourth fiscal quarter or whenever events or changes in circumstances indicate the carrying value may not be fully recoverable. The process of evaluating the potential impairment of goodwill requires significant judgment. We may first evaluate qualitative factors to assess if it is more likely than not that the fair value of a reporting unit is less than its carrying amount and to determine if an impairment test is necessary. We may choose to proceed directly to the quantitative impairment test, bypassing the initial qualitative assessment. The quantitative test compares the fair value of the reporting unit to its carrying value, including goodwill allocated to that reporting unit. A goodwill impairment loss would be the amount by which a reporting unit’s carrying value exceeds its fair value, however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. There were no impairments to goodwill during the fiscal year ended May 30, 2025.

Impairment of Long-Lived Assets

We monitor the carrying value of long-lived assets for potential impairment each quarter based on whether certain triggering events have occurred. These events include current period losses combined with a history of losses, or a projection of continuing losses, or a significant decrease in the market value of an asset. When a triggering event occurs, we perform an impairment calculation, comparing projected undiscounted cash flows, utilizing current cash flow information and expected growth rates, to the carrying value of the assets. If we identify impairment for long-lived assets to be held and used, we compare the assets’ current carrying value to the assets’ fair value. Fair value is determined based on market values or discounted future cash flows. We record impairment when the carrying value exceeds fair market value.

During the year ended May 30, 2025, the Company recognized an impairment charge of $0.5 million related to the right-of-use asset and $0.1 million related to leasehold improvements in connection with the closure of the Incal office and the consolidation of facilities. The impairment charge is included in restructuring changes in the consolidated statement of operations. During the years ended May 31, 2024 and May 31, 2023, the Company did not record any impairment of long-lived assets.

Results of Operations

Fiscal Year

Beginning on June 1, 2024, we have changed our fiscal year to the 52- or 53-week period ending on the Friday nearest May 31. Our fiscal year 2025 ended on May 30, 2025. Each of our fiscal years in 2024 and 2023 ended on May 31.

Discussion of Results of Operations

Revenues

Revenue decreased by $7.3 million in fiscal year 2025 over fiscal year 2024 driven by a decrease in shipments of our systems and contactors primarily due to the continued softness in the power semiconductor demand for electric vehicles. Our product revenue decreased by $8.9 million due to the decrease in our contactors revenue and FOX-P systems revenue, which was partially offset by the increase in package parts burn-in product revenue in connection with the Incal acquisition. The decline in product revenue was partially offset by an increase in services revenue of $1.7 million.

Revenue increased by $1.3 million in fiscal year 2024 over fiscal year 2023, primarily driven by higher sales in our contactors. Our contactors revenue increased by $15.7 million, and our services revenue increased by $0.3 million. The increase was partially offset by a decrease in systems revenue of $14.7 million.

25

N.M.-Not meaningful

On a geographic basis, revenues represent products that were shipped to or services that were performed at our customer locations. For fiscal year 2025, revenue declined in Asia primarily due to continued softness in the power semiconductor demand for electric vehicles. This decline was partially offset by revenue growth in the United States, driven by much higher systems and contactors sales to customers that focus on the artificial intelligence market.

For fiscal year 2024, total revenues increased compared to the same period in the prior year due to an increase in international revenues as a result of more shipments to our customers in Europe and Asia, partially offset by the decline in revenue from a customer in the United States.

Gross Margin

Gross profit decreased to $23.9 million for fiscal year 2025 from $32.5 million for fiscal year 2024. Gross margin decreased by 8.5 percentage point primarily due to the amortization of certain acquired intangible assets, the acquisition related fair value adjustment to inventory, an inventory variance charge, lower system shipments leading to reduced manufacturing efficiencies, and a change in product mix.

Gross profit decreased slightly for fiscal year 2024, compared to fiscal year 2023. Gross margin decreased by 1.3% primarily due to an increase in inventory reserves, as well as an increase in costs from design changes.

Research and Development

Research and development expenses consist primarily of compensation and benefits for product development personnel, outside development service costs, travel expenses, facilities cost allocations, and stock-based compensation charges. Research and development expenses increased by $1.7 million in fiscal year 2025 over fiscal year 2024 primarily due to the severance benefits incurred following the death of an executive officer, higher employee costs and stock-based compensation expense resulting from growth in engineering headcount, and additional research and development expenses from the newly acquired Incal business. The increase was partially offset by lower non-recurring engineering service charges.

Research and development expenses increased by $1.6 million in fiscal year 2024 over fiscal year 2023 primarily due to higher employment-related costs because of an increase in headcount, higher non-recurring engineering services charges, an increase in allocated facility cost and an increase in recruiting expenses.

Selling, General and Administrative

Selling, general and administrative expenses consist primarily of compensation and benefits for sales, marketing and general and administrative personnel, legal and accounting service costs, marketing communications costs, travel expenses, facilities cost allocations, and stock-based compensation charges. Selling, general and administrative expenses increased by $4.5 million in fiscal year 2025 over fiscal year 2024, primarily driven by additional selling, general and administrative expenses from the newly acquired Incal business, higher legal and other professional service fees, and higher stock-based compensation expense.

Selling, general and administrative expenses increased by $1.5 million in fiscal year 2024 over fiscal year 2023, primarily due to higher employment-related cost because of an increase in headcount, and an increase in audit and legal service fees.

Restructuring Charges

N.M.-Not meaningful

Restructuring charges incurred during fiscal 2025 primarily relate to the closure of the Incal office. For further explanation of our restructuring charges, see Note 13, Restructuring Charges, in Notes to Consolidated Financial Statements.

Interest and Other Income, Net

Interest and other income, net, primarily consists of interest income, foreign currency transaction exchange gains and losses and other income (expense). Interest and other income, net, decreased by $1.0 million in fiscal year 2025 over fiscal year 2024, primarily driven by lower interest income earned on a lower average cash balances as a result of $11.1 million spent on the acquisition of Incal and lower yields from our investments in money market funds.

Interest and other income, net, increased by $1.1 million in fiscal year 2024 over fiscal year 2023, primarily driven by higher interest income earned due to higher average cash and investment balances and higher yields from our investments in money market funds.

Provision for Income Taxes

N.M.-Not meaningful

Income tax benefit was $0.4 million in fiscal year 2025, compared to income tax benefit of $20.7 million in fiscal year 2024. In fiscal 2025, the Company recognized an income tax benefit due to year-to-date operating losses in the United States. Income tax benefit was $20.7 million in fiscal year 2024, compared to income tax expense of $60 thousand in fiscal year 2023. A significant income tax benefit in fiscal year 2024 was recognized primarily due to the release of a valuation allowance of $21.9 million, as management determined that there was sufficient positive evidence to conclude that it is more likely than not that the deferred tax assets will be realized, which was partially offset by income tax expense of $1.2 million in fiscal year 2024.

Liquidity and Capital Resources

Cash, cash equivalents, and restricted cash were $26.5 million as of May 30, 2025, compared to $49.3 million as of May 31, 2024. We believe that our existing cash resources and anticipated funds generated from operations will satisfy our cash requirements to fund our operating activities, capital expenditures and other obligations for the next twelve months.

Net Cash Flows Provided by (Used in) Operating Activities

Cash flow used in operating activities during fiscal year 2025 mostly consisted of net loss, adjusted for certain non-cash items which primarily consisted of depreciation and amortization, stock-based compensation expense and amortization of operating lease right-of-use assets. The $9.2 million decrease in cash flows from operating activities in fiscal year 2025, compared to fiscal year 2024, was driven primarily by lower adjusted net income, excluding non-cash items, in the current period compared to the prior period, a decrease in cash provided by the collection of accounts receivable due to lower revenue and slower collection, and an increase in unbilled receivables and prepayments, which were partially offset by the decrease in cash used in procuring inventory and payments to vendors, and an increase in deferred revenue due to timing of customer deposits and revenue recognition.

The $8.3 million decrease in cash flows from operating activities for fiscal year 2024, compared to fiscal year 2023, was driven primarily by an increase in cash used in inventory production and vendor payments due to anticipated customer demand, lower net income after non-cash adjustments and a decrease in cash provided by deferred revenue due to timing of customer deposits and revenue recognition, partially offset by an increase in cash provided by collection of accounts receivable.

Net Cash Flows Provided by (Used in) Investing Activities

Net cash used in investing activities was $16.1 million for the fiscal year 2025 compared to net cash provided by investing activities of $17.3 million for the fiscal year 2024. The increase in net cash used was primarily due to the maturity of our short-term investments of $18.0 million during the fiscal year 2024, while there was no such maturity of investment during the fiscal year 2025. Additionally, the Company paid $11.1 million to acquire Incal, and increased its spending on property and equipment by $4.2 million, primarily related to office renovation during the fiscal year 2025.

Net cash provided by investing activities was $17.3 million for fiscal year 2024, compared to net cash used in investing activities of $18.7 million for fiscal year 2023. The increase was primarily due to the maturity of our short-term investments of $18.0 million during fiscal year 2024, while there was a net purchase of short-term investments of $17.3 million during fiscal year 2023. Capital expenditure in fiscal 2024, and 2023 was $0.7 million and $1.4 million, respectively. Capital expenditure was primarily for acquisition of testing equipment and manufacturing equipment.

Net Cash Flows Provided by Financing Activities

Net cash provided by financing activities was $0.6 million for fiscal year 2025, compared to $0.1 million and $7.3 million for fiscal years 2024 and 2023, respectively. For the fiscal years 2023, net proceeds from the sale of our common stock under our “At-the-Market” offering program were $6.8 million, compared to no such sales during fiscal years 2025 and 2024. In fiscal years 2025, 2024, and 2023, the proceeds from the issuance of common stock under employee stock plans were $1.4 million, $1.8 million, and $2.6 million, respectively. In fiscal 2025, 2024 and 2023, cash used in shares repurchased for tax withholdings on vesting of restricted stock units was $0.8 million, $1.6 million and $2.0 million, respectively.

Off-Balance Sheet Financing

We have not entered into any off-balance sheet financing arrangements and have not established any special purpose or variable interest entities.

Contractual Obligations

As of May 30, 2025, the Company’s unconditional purchase obligations, which have a remaining term in excess of 12 months, are not material.

Recent Accounting Pronouncements

For a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements, see Note 1, “Organization and Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the financial condition and results of operations should be read in conjunction with our “Selected Consolidated Financial Data” and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

Overview

Aehr Test Systems (“Aehr Test”, “Aehr”, the “Company” or “We”) is a leading provider of test solutions for testing, burning-in, and stabilizing semiconductor devices in wafer level, singulated die, and package part form, and has installed thousands of systems worldwide. Increasing quality, reliability, safety, and security needs of semiconductors used across multiple applications, including electric vehicles, electric vehicle charging infrastructure, solar and wind power, computing, data and telecommunications infrastructure, and solid-state memory and storage, are driving additional test requirements, incremental capacity needs, and new opportunities for Aehr Test products and solutions.

We have developed and introduced several innovative products including the FOX-P family of test and burn-in systems and FOX WaferPak Aligner, FOX WaferPak Contactor, FOX DiePak Carrier and FOX DiePak Loader. The FOX-XP and FOX-NP systems are full wafer contact and singulated die/module test and burn-in systems that can test, burn-in, and stabilize a wide range of devices such as leading-edge silicon carbide-based and other power semiconductors, 2D and 3D sensors used in mobile phones, tablets, and other computing devices, memory semiconductors, processors, microcontrollers, systems-on-a-chip, and photonics and integrated optical devices. The FOX-CP system is a low-cost single-wafer compact test solution for logic, memory and photonic devices and the newest addition to the FOX-P product family. The FOX WaferPak Contactor contains a unique full wafer contactor capable of testing wafers up to 300mm that enables Integrated Circuit manufacturers to perform test, burn-in, and stabilization of full wafers on the FOX-P systems. The FOX DiePak Carrier allows testing, burning in, and stabilization of singulated bare die and modules up to 1,024 devices in parallel per DiePak on the FOX-NP and FOX-XP systems up to nine DiePaks at a time.

Our revenue consists primarily of sales of FOX-P systems, WaferPak Aligners and DiePak Loaders, WaferPak Contactors, DiePak Carriers, test fixtures, upgrades and spare parts, service contracts revenues, and non-recurring engineering charges. Our selling arrangements may include contractual customer acceptance provisions, which are mostly deemed perfunctory or inconsequential, and installation of the product occurs after shipment, transfer of title and risk of loss.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenues, inventories,

and income taxes, among others. Our estimates are derived from historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Those results form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

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 is recognized at a point in time, which is generally upon shipment or delivery and evidenced by transfer of title and risk of loss to the customer. Revenue from services is recognized over time as the customer receives the benefit 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.

The Company sells its products primarily through a direct sales force. In certain international markets, the Company sells its products through independent distributors.

Inventory Valuation

We write down the carrying value of our inventory to net realizable value for estimated obsolescence or unmarketable inventory in an amount equal to the difference between the cost of inventory and its estimated realizable value based upon assumptions about future demand and market conditions. We assess the valuation of all inventories, including raw materials, work-in-process, finished goods and spare parts on a periodic basis.

Obsolete inventory or inventory in excess of our estimated usage is written down to its estimated market value less costs to sell, if less than its cost. The inventory write-downs are established on the basis of obsolete inventory or specifically identified inventory in excess of established usage. Inherent in our estimates of demand and market value in determining inventory valuation are estimates related to economic trends, market conditions, and future demand for our products. If actual demand and market conditions are less favorable than our projections, additional inventory write-downs may be required. If the inventory value is written down to its net realizable value, and subsequently there is an increased demand for the inventory at a higher value, the increased value of the inventory is not realized until the inventory is sold either as a component of a system or as separate inventory.

Income Taxes

The determination of our tax provision is highly dependent upon the geographic composition of worldwide earnings and tax regulations governing each region and is subject to judgments and estimates. Management carefully monitors the changes in many factors and adjusts the effective tax rate as required.

In the past, we assessed the likelihood that we would be able to recover our deferred tax assets. If recovery was not more likely than not, we increased our provision for taxes by recording a valuation allowance to reduce our deferred tax assets to the amount that was more likely than not to be recoverable. In determining whether the realization of these deferred tax assets would be impaired, we made judgments with respect to whether we were likely to generate sufficient future taxable income to realize these assets. In order to reverse the valuation allowance, management considered both positive and negative evidence and determined that there was sufficient positive evidence to conclude that it is more likely than not that the deferred tax assets will be realized. As a result, we released the entire valuation allowance in fiscal 2024 which contributed to the tax benefit of approximately $20.7 million for the year ended May 31, 2024.

Results of Operations

Fiscal Year

Our fiscal year ended on May 31 for each of our fiscal years in 2024, 2023 and 2022. Beginning on June 1, 2024, we have changed our fiscal year to the 52- or 53-week period ending on the Friday nearest May 31. Our first fiscal quarter in fiscal 2025 will end on August 30 and our fiscal year 2025 will end on May 30, 2025.

Discussion of Results of Operations

Revenues

Revenue increased by $1.3 million in fiscal year 2024 over fiscal year 2023, primarily driven by higher sales in our contactors.  Our contactors revenue increased by $15.7 million, and our services revenue increased by $0.3 million. The increase was partially offset by a decrease in systems revenue of $14.7 million.

Revenue increased by $14.1 million in fiscal year 2023 over fiscal year 2022, primarily due to the increases in revenue of our wafer-level test products. Revenue of our wafer-level test products and services for fiscal 2023 were $63.5 million and increased by $14.6 million from fiscal year 2022 due to strong demand for our FOX-P systems.

N.M.-Not meaningful

On a geographic basis, revenues represent products that were shipped to or services that were performed at our customer locations. For fiscal year 2024, total revenues increased compared to the same period in the prior year due to an increase in international revenues as a result of more shipments to our customers in Asia and Europe, partially offset by the decline in revenue from a customer in the United states.

For fiscal year 2023, both international revenue and domestic revenue increased, compared to the same period in the prior year.

Gross Margin

Gross profit decreased slightly for fiscal year 2024, compared to fiscal year 2023. Gross margin decreased to 49.1% in fiscal year 2024 from 50.4% in fiscal year 2023. The decrease in gross margin of 1.3% was primarily due to an increase in inventory reserves, as well as an increase in costs from design changes.

Gross profit increased to $32.7 million for fiscal year 2023 from $23.7 million for fiscal year 2022. Gross margin increased to 50.4% in fiscal year 2023 from 46.6% in fiscal year 2022. The increase in gross margin of 3.8% was primarily the result of a decrease in inventory reserve provisions, an increase in manufacturing efficiencies as a result of higher sales volume, and a decrease in direct material costs.

Research and Development

Research and development expenses consist primarily of compensation and benefits for product development personnel, outside development service costs, travel expenses, facilities cost allocations, and stock-based compensation charges. Research and development expenses increased by $1.6 million in fiscal year 2024 over fiscal year 2023 primarily due to higher employment-related costs of $0.5 million because of an increase in headcount, higher non-recurring engineering services charges of $0.3 million, an increase in allocated facility cost of $0.3 million and an increase in recruiting expenses of $0.2 million.

Research and development expenses increased by $1.3 million in fiscal year 2023 over fiscal year 2022, primarily due to increases in project expenses of $0.6 million and employment-related costs of $0.5 million related to research and development initiatives during fiscal 2023.

Selling, General and Administrative

Selling, general and administrative expenses consist primarily of compensation and benefits for sales, marketing and general and administrative personnel, legal and accounting service costs, marketing communications costs, travel expenses, facilities cost allocations, and stock-based compensation charges. Selling, general and administrative expenses increased by $1.5 million in fiscal year 2024 over fiscal year 2023, primarily due to higher employment-related cost of $1.3 million because of an increase in headcount, and an increase in audit and legal service fees of $0.3 million.

Selling, general and administrative expenses increased by $2.2 million in fiscal year 2023 over fiscal year 2022, primarily due to increased shareholder related costs of $0.5 million, recruiting and relocation expenses of $0.3 million, employment-related costs of $0.6 million because of an increase in headcount to support our growing business, audit and legal service fees of $0.3 million, and travel expenses of $0.2 million.

Interest and Other Income, Net

N.M.-Not meaningful

Interest and other income, net, primarily consists of interest income, foreign currency transaction exchange gains and losses and other income (expense). Interest and other income, net, increased by $1.1 million in fiscal year 2024 over fiscal year 2023, primarily driven by higher interest income earned due to higher average cash and investment balances and higher yields from our investments in money market funds.

Interest and other income, net, decreased by $0.5 million in fiscal year 2023 over fiscal year 2022, primarily due to the one-time gain from forgiveness of Payroll Protection Program loan (“PPP Loan”) of $1.7 million in fiscal 2022. The decrease was partially offset by higher interest income for the fiscal year 2023, driven by higher cash deposits and higher interest rates.

Provision for Income Taxes

N.M.-Not meaningful

Income tax benefit was $20.7 million in  fiscal year 2024, compared to income tax expense of $60 thousand in fiscal year 2023 and $91 thousand in fiscal year 2022. A significant income tax benefit in fiscal year 2024 was recognized primarily due to release of a valuation allowance of $21.9 million, as management determined that there was sufficient positive evidence to conclude that it is more likely than not that the deferred tax assets will be realized, which was partially offset by income tax expense of $1.2 million in fiscal year 2024.

Liquidity and Capital Resources

Cash, cash equivalents, and restricted cash were $49.3 million as of May 31, 2024, compared to $30.2 million as of May 31, 2023. Short term investments were $0 as of May 31, 2024, compared to $17.9 million as of May 31, 2023. We believe that our existing cash resources and anticipated funds generated from operations will satisfy our cash requirements to fund our operating activities, capital expenditures and other obligations for the next twelve months.

Net Cash Flows Provided by Operating Activities

Cash flow from operating activities during fiscal year 2024 mostly consisted of net income, adjusted for certain non-cash items which primarily consisted of depreciation and amortization, share-based compensation expense and amortization of operating lease right-of-use assets. The $8.3 million decrease in cash flows from operating activities for fiscal year 2024, compared to fiscal year 2023, was driven primarily by an increase in cash used in inventory production and vendor payments due to anticipated customer demand, lower net income after non-cash adjustments and a decrease in cash provided by deferred revenue due to timing of customer deposits and revenue recognition, partially offset by an increase in cash provided by collection of accounts receivable. The $8.5 million increase in cash flows from operating activities for fiscal year 2023, compared to fiscal year 2022, was driven primarily by higher net income after non-cash adjustments, improved cash flow from collection of accounts receivable and increase in accounts payable due to higher inventory purchases, partially offset by an increase in cash used in inventory production and a decrease in cash provided by deferred revenue due to timing of customer deposits and revenue recognition.

Net Cash Flows Provided by (Used in) Investing Activities

Net cash provided by investing activities was $17.3 million for fiscal year 2024, compared to net cash used in investing activities of $18.7 million for fiscal year 2023. The increase was primarily due to the maturity of our short-term investments of $18.0 million during fiscal year 2024, while there was a net purchase of short-term investments of $17.3 million during fiscal year 2023, compared to no purchase or sale of short-term investments during fiscal year 2022. Capital expenditure in fiscal 2024, 2023 and 2022 was $0.7 million, $1.4 million and $0.4 million, respectively. Capital expenditure was primarily for acquisition of testing equipment and manufacturing equipment.

Net Cash Flows Provided by Financing Activities

Net cash provided by financing activities decreased to $0.1 million for fiscal year 2024, compared to $7.3 million and $25.8 million for fiscal years 2023 and 2022, respectively. For the fiscal years 2023 and 2022, net proceeds from the sale of our common stock under our “At-the-Market” offering program were $6.8 million and $24.0 million, respectively, compared to no such sales during fiscal year 2024. The proceeds from the issuance of common stock under employee stock plans in fiscal 2024, 2023 and 2022 were $1.8 million, $2.6 million and $3.6 million, respectively. Cash used in shares repurchased for tax withholdings on vesting of restricted stock units in fiscal 2024, 2023 and 2022 were $1.6 million, $2.0 million and $0.4 million, respectively. In fiscal 2022, the Company also repaid the line of credit of $1.4 million.

Off-Balance Sheet Financing

We have not entered into any off-balance sheet financing arrangements and have not established any special purpose or variable interest entities.

Contractual Obligations

As of May 31, 2024, the Company’s unconditional purchase obligations, which have a remaining term in excess of 12 months, are not material.

Recent Accounting Pronouncements

For a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements, see Note 1, “Organization and Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the financial condition and results of operations should be read in conjunction with our “Selected Consolidated Financial Data” and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

OVERVIEW

Aehr Test Systems (“Aehr Test”, “Aehr” or “We”) is a leading provider of test solutions for testing, burning-in, and stabilizing semiconductor devices in wafer level, singulated die, and package part form, and has installed thousands of systems worldwide. Increasing quality, reliability, safety, and security needs of semiconductors used across multiple applications, including electric vehicles, electric vehicle charging infrastructure, solar and wind power, computing, data and telecommunications infrastructure, and solid-state memory and storage, are driving additional test requirements, incremental capacity needs, and new opportunities for Aehr Test products and solutions.

We have developed and introduced several innovative products including the FOX-P family of test and burn-in systems and FOX WaferPak Aligner, FOX WaferPak Contactor, FOX DiePak Carrier and FOX DiePak Loader. The FOX-XP and FOX-NP systems are full wafer contact and singulated die/module test and burn-in systems that can test, burn-in, and stabilize a wide range of devices such as leading-edge silicon carbide-based and other power semiconductors, 2D and 3D sensors used in mobile phones, tablets, and other computing devices, memory semiconductors, processors, microcontrollers, systems-on-a-chip, and photonics and integrated optical devices. The FOX-CP system is a low-cost single-wafer compact test solution for logic, memory and photonic devices and the newest addition to the FOX-P product family. The FOX WaferPak Contactor contains a unique full wafer contactor capable of testing wafers up to 300mm that enables Integrated Circuit manufacturers to perform test, burn-in, and stabilization of full wafers on the FOX-P systems. The FOX DiePak Carrier allows testing, burning in, and stabilization of singulated bare die and modules up to 1,024 devices in parallel per DiePak on the FOX-NP and FOX-XP systems up to nine DiePaks at a time.

Our net sales consist primarily of sales of FOX-P systems, WaferPak Aligners and DiePak Loaders, WaferPak contactors, DiePak carriers, test fixtures, upgrades and spare parts, service contracts revenues, and non-recurring engineering charges. Our selling arrangements may include contractual customer acceptance provisions, which are mostly deemed perfunctory or inconsequential, and installation of the product occurs after shipment, transfer of title and risk of loss.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to customer programs and incentives, product returns, bad debts, inventories, investments, income taxes, financing operations, warranty obligations, and long-term service contracts, among others. Our estimates are derived from historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Those results form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

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.

We sell our products primarily through a direct sales force. In certain international markets, we sell our products through independent distributors.

Transfer of control is evidenced upon passage of title and risk of loss to the customer unless we are required to provide additional services.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

We maintain an allowance for doubtful accounts to reserve for potentially uncollectible trade receivables. We also review our trade receivables by aging category to identify specific customers with known disputes or collection issues. We exercise judgment when determining the adequacy of these reserves as we evaluate 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.

WARRANTY OBLIGATIONS

We provide and record the estimated cost of product warranties at the time revenues are recognized on products shipped. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, our warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Our estimate of warranty reserve is based on management’s assessment of future warranty obligations and on historical warranty obligations. Should actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required.

INVENTORY OBSOLESCENCE

In each of the last three fiscal years, we wrote down our inventory for estimated obsolescence or unmarketable inventory by an amount equal to the difference between the cost of inventory and the net realizable value based upon assumptions about future demand and market conditions, see Note 7, “Balance Sheet Detail.” If future market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

INCOME TAXES

Income taxes are accounted for under the asset-and-liability method as required by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 740, Income Taxes (“ASC 740”). Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period corresponding to the enactment date. Under ASC 740, a valuation allowance is required when it is more likely than not all or some portion of the deferred tax assets will not be realized through generating sufficient future taxable income.

As of May 31, 2023 the Company maintained a full valuation allowance against its deferred tax assets. We will continue to assess whether sufficient future taxable income will be generated to permit the use of deferred tax assets, and will reverse all or a portion of the allowance when there is sufficient evidence to support the reversal. Based upon our prior two fiscal years of profitability, the outlook for the next fiscal year, and absent any additional objective negative evidence, the Company anticipates adjusting the current valuation allowance position in fiscal 2024.

FASB ASC Subtopic 740-10, Accounting for Uncertainty of Income Taxes, (“ASC 740-10”) defines the criterion an individual tax position must meet for any part of the benefit of the tax position to be recognized in financial statements

prepared in conformity with GAAP. The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not such tax position will be sustained on examination by the taxing authorities, based solely on the technical merits of the respective tax position. The tax benefits recognized in the financial statements from such a tax position should be measured based on the largest benefit having a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority. In accordance with the disclosure requirements of ASC 740-10, the Company’s policy on income statement classification of interest and penalties related to income tax obligations is to include such items as part of income taxes.

STOCK-BASED COMPENSATION EXPENSE

Stock-based compensation expense consists of expenses for stock options, restricted stock units, or RSUs, and employee stock purchase plan, or ESPP, purchase rights. Stock-based compensation cost 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. Our employee stock options have characteristics significantly different from those of publicly traded options. For RSUs, stock-based compensation expense is based on the fair value of our common stock at the grant date, and is recognized as expense over the employee’s requisite service period. All of our stock-based compensation is accounted for as an equity instrument.

The fair value of each option grant and the right to purchase shares under our ESPP are estimated on the date of grant using the Black-Scholes option valuation model with assumptions concerning expected term, stock price volatility, expected dividend yield, risk-free interest rate and the expected life of the award. See Note 13 to our consolidated financial statements for detailed information relating to stock-based compensation and the stock option plan and the ESPP.

RESULTS OF OPERATIONS

The following table sets forth statements of operations data as a percentage of net sales for the periods indicated.

FISCAL YEAR ENDED MAY 31, 2023 COMPARED TO FISCAL YEAR ENDED MAY 31, 2022

NET SALES.  Net sales increased to $65.0 million for the fiscal year ended May 31, 2023 from $50.8 million for the fiscal year ended May 31, 2022, an increase of 27.8%.  The increase in net sales for the fiscal year ended May 31, 2023 was primarily due to the increases in net sales of our wafer-level test products.  Net sales of our wafer-level test products

for fiscal 2023 were $63.5 million and increased approximately $14.6 million from fiscal 2022 due to strong demand for our FOX-P systems.

GROSS PROFIT. Gross profit increased to $32.7 million for the fiscal year ended May 31, 2023 from $23.7 million for the fiscal year ended May 31, 2022, an increase of 38.4%. Gross margin increased to 50.4% for the fiscal year ended May 31, 2023 from 46.6% for the fiscal year ended May 31, 2022. The increase in gross margin was primarily the result of a decrease in other cost of sales of 1.6 percentage points primarily due to lower costs of provision for inventory reserves, a decrease in labor and overhead of 1.2 percentage points due to manufacturing efficiencies due to higher sales volume, and a benefit of 1.0 percentage points due to lower direct material costs.

SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses were $12.2 million for the fiscal year ended May 31, 2023, compared with $10.0 million for the fiscal year ended May 31, 2022, an increase of 21.8%. The increase in SG&A expenses was primarily the result of increased shareholder relation costs of $0.5 million, recruiting and relocation of $0.3 million, and employment-related expenses of $0.3 million to support our growing business.

RESEARCH AND DEVELOPMENT. R&D expenses were $7.1 million for the fiscal year ended May 31, 2023, compared with $5.8 million for the fiscal year ended May 31, 2022, an increase of 22.6%. The increase in R&D expenses was primarily due to increases in project expenses of $0.6 million and employment-related expenses of $0.5 million related to R&D initiatives during fiscal 2023.

INTEREST INCOME (EXPENSE), NET. Interest income, net was $1.2 million and $13,000 for the fiscal years ended May 31, 2023 and 2022, respectively. Higher interest income for the fiscal year ended May 31, 2023 was driven by higher cash deposits and higher interest rates in fiscal year ended May 31, 2023.

GAIN FROM FORGIVENESS OF PPP LOAN. On June 12, 2021, we received confirmation from SVB that on June 4, 2021, the Small Business Administration approved our Payroll Protection Program loan (“PPP Loan”) forgiveness application for the entire PPP Loan balance of $1,679,000 and interest totaling $19,000, and we recognized a gain of $1,698,000.

OTHER (EXPENSE) INCOME, NET. Other expense, net was $3,000 for the fiscal year ended May 31, 2023, compared with other income, net of $30,000 for the fiscal year ended May 31, 2022. The change in other (expense) income, net was primarily due to losses or gains realized in connection with the fluctuation in the value of the dollar compared to foreign currencies during the referenced periods.

INCOME TAX (EXPENSE) BENEFIT. Income tax expense was $60,000 and $91,000 for the fiscal years ended May 31, 2023 and 2022, respectively. Income tax expense for both fiscal years were related to income taxes incurred in foreign tax jurisdictions. Income tax expense was not significant due to available net operating loss and research and development credit carryforwards.

FISCAL YEAR ENDED MAY 31, 2022 COMPARED TO FISCAL YEAR ENDED MAY 31, 2021

NET SALES.  Net sales increased to $50.8 million for the fiscal year ended May 31, 2022 from $16.6 million for the fiscal year ended May 31, 2021, an increase of 206.2%.  The increase in net sales for the fiscal year ended May 31, 2022 was primarily due to the increases in net sales of our wafer-level products.  Net sales of our wafer-level products for fiscal 2022 were $48.9 million, and increased approximately $33.9 million from fiscal 2021 due to stronger demand related to silicon carbide applications.

GROSS PROFIT. Gross profit increased to $23.7 million for the fiscal year ended May 31, 2022 from $6.0 million for the fiscal year ended May 31, 2021, an increase of 292.3%. Gross profit margin increased to 46.6% for the fiscal year ended May 31, 2022 from 36.3% for the fiscal year ended May 31, 2021. The increase in gross profit margin was primarily the result of manufacturing efficiencies due to an increase in net sales.

SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses were $10.0 million for the fiscal year ended May 31, 2022, compared with $6.6 million for the fiscal year ended May 31, 2021, an increase of 53.1%. The increase in SG&A expenses was primarily the result of increased bonuses, stock-based compensation, and commission expense due to an increase in net sales and profitability, and an increase in headcount.

RESEARCH AND DEVELOPMENT. R&D expenses were $5.8 million for the fiscal year ended May 31, 2022, compared with $3.7 million for the fiscal year ended May 31, 2021, an increase of 59.3%. The increase in R&D expenses was primarily due to increases in employment-related expenses of $1.7 million, outside services of $316,000, and project expenses of $155,000. The increase in employment-related expenses was primarily the result of increased bonuses and stock-based compensation due to an increase in net sales and profitability, and an increase in headcount.

INTEREST INCOME (EXPENSE), NET. Interest income, net was $13,000 for the fiscal year ended May 31, 2022, compared with interest expense of $46,000 for the fiscal year ended May 31, 2021. The interest expense for the fiscal year ended May 31, 2021 was from the PPP Loan that we obtained on April 23, 2020.

NET GAIN FROM DISSOLUTION OF AEHR TEST SYSTEMS JAPAN. Net gain from dissolution of Aehr Test Systems Japan was $2.2 million for the fiscal year ended May 31, 2021, due to the release of the cumulative translation adjustment in connection with the complete liquidation of Aehr Test Systems Japan subsidiary in July 2020.

GAIN FROM FORGIVENESS OF PPP LOAN. On June 12, 2021, we received confirmation from SVB that on June 4, 2021, the Small Business Administration approved our PPP Loan forgiveness application for the entire PPP Loan balance of $1,679,000 and interest totaling $19,000, and we recognized a gain of $1,698,000.

OTHER (EXPENSE) INCOME, NET. Other income, net was $30,000 for the fiscal year ended May 31, 2022, compared with other expense, net of $162,000 for the fiscal year ended May 31, 2021. The change in other (expense) income, net was primarily due to gains or losses realized in connection with the fluctuation in the value of the dollar compared to foreign currencies during the referenced periods.

INCOME TAX (EXPENSE) BENEFIT. Income tax expense for the fiscal year ended May 31, 2022 was $91,000 compared with income tax benefit of $177,000 for the fiscal year ended May 31, 2021. During the fiscal year ended May 31, 2021, the currency translation adjustment balance was released and the residual income tax effect of $215,000 was recorded pursuant to the inter-period allocation rules in connection with the complete liquidation of Aehr Test Systems Japan subsidiary in July 2020.

LIQUIDITY AND CAPITAL RESOURCES

We consider cash, cash equivalents and short-term investments as liquid and available for use. As of May 31, 2023 and 2022, respectively, we had $30.2 million and $31.6 million in cash, cash equivalents and restricted cash. We also had $17.9 million in short-term investments as of May 31, 2023.

Net cash provided by operating activities was $10.0 million and $1.5 million for the fiscal year ended May 31, 2023 and 2022, respectively. For the fiscal year ended May 31, 2023, net cash provided by operating activities was primarily the result of net income of $14.6 million, net of a non-cash charge of stock-based compensation expense of $2.7 million, depreciation and amortization of $0.5 million, and accretion of investment discount of $0.6 million. Other changes in cash from operations primarily resulted from increases in inventories and trade and other accounts receivable of $9.5 million and $3.8 million, respectively, partially offset by increases in accounts payable, accrued expenses and customer deposits and deferred revenue of $5.0 million, $0.5 million and $0.4 million, respectively. The increase in inventory was to support expected future shipments for customer orders. The increase in trade and other accounts receivable was primarily due to higher revenues and lower customer deposits on shipments. The increase in accounts payable was primarily due to inventory purchases to support future shipments. For the fiscal year ended May 31, 2022, net cash provided by operating activities was primarily the result of net income of $9.5 million, as adjusted to exclude the effect of forgiveness of PPP loan of $1.7 million, and a non-cash charge of stock-based compensation expense of $3.0 million and depreciation and amortization of $356,000. Other changes in cash from operations primarily resulted from increases in accounts receivable and inventories of $7.8 million and $6.7 million, respectively, partially offset by increases in customer deposits and deferred revenue, accrued expenses, and accounts payable of $2.2 million, $1.5 million and $1.4 million, respectively. The increase in accounts receivable was primarily due to the increase in and timing of revenue generated toward the end of the fiscal year ended May 31, 2022. The increase in inventory was to support expected future shipments for customer orders. The increase in customer deposits and deferred revenue was primarily due to the receipt of additional down payments from certain customers. The increase in accrued expenses was primarily due to an increase in accrued employment related expenses including profit sharing, commissions, bonuses, and vacations. The increase in accounts payable was primarily due to inventory purchases to support future shipments.

Net cash used in investing activities was $18.7 million and $0.4 million for the fiscal years ended May 31, 2023 and 2022, respectively. During the fiscal year ended May 31, 2023, net cash used in investing activities was due to the purchases of U.S. treasury securities of $33.3 million, partially offset by proceeds from maturities of U.S. treasury securities of $16 million, and the purchases of property and equipment of $1.4 million. During the fiscal year ended May 31, 2022, net cash used in investing activities was due to purchases of property and equipment.

Financing activities provided cash of $7.3 million and $25.8 million for the fiscal years ended May 31, 2023 and 2022, respectively. Net cash provided by financing activities during the fiscal year ended May 31, 2023 was primarily due to the net proceeds from issuance of common stock from public offering of $6.8 million, and the proceeds from the issuance of common stock under employee benefit plans of $2.6 million, partially offset by the shares repurchased for tax withholdings on vesting of RSUs and PRSUs of $2.1 million. Net cash provided by financing activities during the fiscal year ended May 31, 2022 was primarily due to the net proceeds from issuance of common stock from public

offering of $24.0 million, and the proceeds from the issuance of common stock under employee benefit plans of $3.6 million, partially offset by the shares repurchased for tax withholdings on vesting of RSUs of $0.4 million, and by the net payment of the line of credit of $1.4 million.

The effect of fluctuation in exchange rates decreased cash by $37,000 for the fiscal years ended May 31, 2023 and increased cash by $49,000 for the fiscal years ended May 31, 2022. The changes were due to the fluctuation in the value of the dollar compared to foreign currencies.

As of May 31, 2023 and 2022, we had working capital of $72.7 million and $49.0 million, respectively.

For the fiscal year ended May 31, 2021, net cash used in operating activities was primarily the result of the net loss of $2.0 million, as adjusted to exclude the effect of net gain from dissolution of Aehr Test Systems Japan of $2.4 million, including an income tax benefit of $215,000, a non-cash charge for stock-based compensation expense of $1.1 million and depreciation and amortization of $328,000. Net cash used in operations was also impacted by increases in accounts receivable and inventories of $1.4 million and $972,000, respectively, partially offset by increases in accounts payable and accrued expenses of $1.9 million and $732,000, respectively. The increase in accounts receivable was primarily due to higher shipment activities toward the end of fiscal year ended May 31, 2021. The increase in inventory was to support expected future shipments for customer orders. The increase in accounts payable was primarily due to inventory purchases to support future shipments. The increase in accrued expenses was primarily due to increases in warranty provision and accrued employment related expenses.

Net cash used in investing activities was $227,000 for the fiscal year ended May 31, 2021 was due to the purchase of property and equipment.

Net cash provided by financing activities was $2.0 million for the fiscal year ended May 31, 2021 was due to $1.4 million borrowing from our line of credit and $560,000 in proceeds from the issuance of common stock under employee plans.

The effect of fluctuation in exchange rates increased cash by $117,000 for the fiscal year ended May 31, 2021 due to the fluctuation in the value of the dollar compared to foreign currencies.

We lease our manufacturing and office space under operating leases. We entered into a non-cancelable operating lease agreement for our United States manufacturing and office facilities, which was renewed in December 2022 and expires in September 2030. As of May 31, 2023 our operating lease liabilities totaled $6,300,000. Under that lease agreement, we are responsible for payments of utilities, taxes and insurance.

From time to time, we evaluate potential acquisitions of businesses, products or technologies that complement our business. If consummated, any such transactions may use a portion of our working capital or require the issuance of equity. We have no present understandings, commitments or agreements with respect to any material acquisitions.

We anticipate that the existing cash balance and the available line of credit together with future income from operations, collections of existing accounts receivable, revenue from our existing backlog of products as of this filing date, the sale of inventory on hand, deposits and down payments against significant orders will be adequate to meet our working capital and capital equipment requirement needs over the next 12 months. Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of our spending to support research and development activities, the timing and cost of establishing additional sales and marketing capabilities, the timing and cost to introduce new and enhanced products and the timing and cost to implement new manufacturing technologies. We successfully raised $25 million in an at-the-market (“ATM”) offering in October 2021 and $7.3 million in a follow on ATM offering in February 2023; however, in the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. Any additional debt financing obtained by us in the future could also involve restrictive covenants relating to our capital-raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. Additionally, if we raise additional funds through further issuances of equity, convertible debt securities or other securities convertible into equity, our existing stockholders could suffer significant dilution in their percentage ownership of the Company, and any new equity securities we issue could have rights, preferences and privileges senior to those of holders of our common stock. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to grow or support our business and to respond to business challenges could be significantly limited.

OFF-BALANCE SHEET FINANCING

We have not entered into any off-balance sheet financing arrangements and have not established any special purpose or variable interest entities.

OVERVIEW OF CONTRACTUAL OBLIGATIONS

The following table provides a summary of such arrangements, or contractual obligations.

(1) Shown above are our binding purchase obligations. The large majority of our purchase orders are cancelable by either party, which if canceled may result in a negotiation with the vendor to determine if there shall be any restocking or cancellation fees payable to the vendor.

In the normal course of business to facilitate sales of our products, we indemnify other parties, including customers, with respect to certain matters. We have agreed to hold the other party harmless against losses arising from a breach of representations or covenants, or from intellectual property infringement or other claims. These agreements may limit the time period within which an indemnification claim can be made and the amount of the claim. In addition, we have entered into indemnification agreements with our officers and directors, and our bylaws contain similar indemnification obligations to our agents.

It is not possible to determine the maximum potential amount under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. To date, our payments under these agreements have not had a material impact on our operating results, financial position or cash flows.

RECENT ACCOUNTING PRONOUNCEMENTS

For a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements, see Note 1, “Organization and Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the financial condition and results of operations should be read in conjunction with our “Selected Consolidated Financial Data” and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

COVID-19 PANDEMIC RESPONSE

The Company has been impacted by the outbreak of the novel coronavirus, known as COVID-19, which has spread throughout the world. Our top priority during the COVID-19 pandemic is protecting the health and safety of our employees and their families, along with our customers and community. We introduced policies and procedures to increase workplace flexibility, such as working remotely where possible to reduce the number of people who are on campus each day. As a global supplier of Critical Infrastructure Sectors, as defined by the Cybersecurity and Infrastructure Security Agency, we have supported and continue to support customers during the pandemic. In the interest of public health, all onsite operations generally use the minimum number of people to safely execute tasks and follow enhanced safety and health protocols including screenings, social distancing and use of personal protective equipment.

Due to the impact of the COVID-19 pandemic on customers and customers’ customers, the Company experienced a drop in customer orders and revenues during the fiscal year ended May 31, 2021 and in the last quarter of fiscal year ended May 31, 2020. In response, the Company implemented cost reduction initiatives to mitigate operating losses, including mandatory vacation days, shutdown days and executive staff pay reductions. The Company eliminated all cost reduction initiatives in the last quarter of the fiscal year ended May 31, 2021.

The Company will continue 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.

OVERVIEW

We were founded in 1977 to develop and manufacture burn-in and test equipment for the semiconductor industry. Since our inception, we have installed over 2,500 systems at semiconductor manufacturers, semiconductor contract assemblers and burn-in and test service companies worldwide. Our principal products currently are the FOX-XP, FOX-NP, and FOX-CP wafer contact and singulated die/module parallel test and burn-in systems, WaferPak Aligner, WaferPak contactors, DiePak Loader, DiePak carriers and test fixtures.

Our net sales consist primarily of sales of systems, WaferPak Aligners and DiePak Loaders, WaferPak contactors, DiePak carriers, test fixtures, upgrades and spare parts, revenues from service contracts, and engineering development charges. Our selling arrangements may include contractual customer acceptance provisions, which are mostly deemed perfunctory or inconsequential, and installation of the product occurs after shipment and transfer of title.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to customer programs and incentives, product returns, bad debts, inventories, investments, income taxes, financing operations, warranty obligations, and long-term service contracts, among others. Our estimates are derived from historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Those results form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

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.

We sell our products primarily through a direct sales force. In certain international markets, we sell our products through independent distributors.

Transfer of control is evidenced upon passage of title and risk of loss to the customer unless we are required to provide additional services.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

We maintain an allowance for doubtful accounts to reserve for potentially uncollectible trade receivables. We also review our trade receivables by aging category to identify specific customers with known disputes or collection issues. We exercise judgment when determining the adequacy of these reserves as we evaluate 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.

WARRANTY OBLIGATIONS

We provide and record the estimated cost of product warranties at the time revenues are recognized on products shipped. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, our warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Our estimate of warranty reserve is based on management’s assessment of future warranty obligations and on historical warranty obligations. Should actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required.

INVENTORY OBSOLESCENCE

In each of the last three fiscal years, we wrote down our inventory for estimated obsolescence or unmarketable inventory by an amount equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions, see Note 6, “Balance Sheet Detail.” If future market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

INCOME TAXES

Income taxes are accounted for under the asset-and-liability method as required by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 740, Income Taxes (“ASC 740”). Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period corresponding to the enactment date. Under ASC 740, a valuation allowance is required when it is more likely than not all or some portion of the deferred tax assets will not be realized through generating sufficient future taxable income.

FASB ASC Subtopic 740-10, Accounting for Uncertainty of Income Taxes, (“ASC 740-10”) defines the criterion an individual tax position must meet for any part of the benefit of the tax position to be recognized in financial statements prepared in conformity with GAAP. The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not such tax position will be sustained on examination by the taxing authorities, based solely on the technical merits of the respective tax position. The tax benefits recognized in the financial statements from such a tax position should be measured based on the largest benefit having a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority. In accordance with the disclosure requirements of ASC 740-10, the Company’s policy on income statement classification of interest and penalties related to income tax obligations is to include such items as part of income taxes.

STOCK-BASED COMPENSATION EXPENSE

Stock-based compensation expense consists of expenses for stock options, restricted stock units, or RSUs, and employee stock purchase plan, or ESPP, purchase rights. Stock-based compensation cost 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. Our 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 our common stock at the grant date, and is recognized as expense over the employee’s requisite service period. All of our stock-based compensation is accounted for as an equity instrument.

The fair value of each option grant and the right to purchase shares under our ESPP are estimated on the date of grant using the Black-Scholes option valuation model with assumptions concerning expected term, stock price volatility, expected dividend yield, risk-free interest rate and the expected life of the award. See Note 11 to our consolidated financial statements for detailed information relating to stock-based compensation and the stock option plan and the ESPP.

RESTRUCTURING

We record a charge for restructuring when management commits to a restructuring plan, the restructuring plan identifies all significant actions, the period of time to complete the restructuring plan indicates that significant changes to the plan are not likely, and individuals who are impacted have been notified of the pending involuntary termination.

Restructuring charges include severance payments, legal fees, and write-off of assets. For employees that are not required to render services beyond a minimum retention period, the severance expense is recognized at the communication date based upon its fair value. For employees who are required to render service until they are terminated in order to receive the severance, the severance costs are measured initially at the communication date based upon its fair value, and recognized ratably over the future service period.

There were no restructuring charges during fiscal year ended May 31, 2022 and 2021. In the fiscal year ended May 31, 2020, we recognized $220,000 in restructuring charges related to the dissolution of Aehr Test Systems Japan K.K (“ATS-Japan”), a majority owned subsidiary. The restructuring charges included severance payments for individuals impacted in this reduction, legal fees associated with the dissolution process, and write-off of assets.

RESULTS OF OPERATIONS

The following table sets forth statements of operations data as a percentage of net sales for the periods indicated.

FISCAL YEAR ENDED MAY 31, 2022 COMPARED TO FISCAL YEAR ENDED MAY 31, 2021

NET SALES.  Net sales increased to $50.8 million for the fiscal year ended May 31, 2022 from $16.6 million for the fiscal year ended May 31, 2021, an increase of 206.2%.  The increase in net sales for the fiscal year ended May 31, 2022 was primarily due to the increases in net sales of our wafer-level products.  Net sales of our wafer-level products for fiscal 2022 were $48.9 million, and increased approximately $33.9 million from fiscal 2021 due to stronger demand related to silicon carbide applications.

GROSS PROFIT. Gross profit increased to $23.7 million for the fiscal year ended May 31, 2022 from $6.0 million for the fiscal year ended May 31, 2021, an increase of 292.3%. Gross profit margin increased to 46.6% for the fiscal year ended May 31, 2022 from 36.3% for the fiscal year ended May 31, 2021. The increase in gross profit margin was primarily the result of manufacturing efficiencies due to an increase in net sales.

SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses were $10.0 million for the fiscal year ended May 31, 2022, compared with $6.6 million for the fiscal year ended May 31, 2021, an increase of 53.1%. The increase in SG&A expenses was primarily the result of increased bonuses, stock compensation, and commission expense due to an increase in net sales and profitability, and an increase in headcount.

RESEARCH AND DEVELOPMENT. R&D expenses were $5.8 million for the fiscal year ended May 31, 2022, compared with $3.7 million for the fiscal year ended May 31, 2021, an increase of 59.3%. The increase in R&D expenses was primarily due to increases in employment-related expenses of $1.7 million, outside services of $316,000, and project expenses of $155,000. The increase in employment-related expenses was primarily the result of increased bonuses and stock compensation due to an increase in net sales and profitability, and an increase in headcount.

INTEREST INCOME (EXPENSE), NET. Interest income, net was $13,000 for the fiscal year ended May 31, 2022, compared with interest expense of $46,000 for the fiscal year ended May 31, 2021. The interest expense for the fiscal year ended May 31, 2021 was from the Paycheck Protection Program Loan (the “PPP Loan”) that we obtained on April 23, 2020.

NET GAIN FROM DISSOLUTION OF AEHR TEST SYSTEMS JAPAN. Net gain from dissolution of Aehr Test Systems Japan was $2.2 million for the fiscal year ended May 31, 2021, due to the release of the cumulative translation adjustment in connection with the complete liquidation of Aehr Test Systems Japan subsidiary in July 2020.

GAIN FROM FORGIVENESS OF PPP LOAN. On June 12, 2021, we received confirmation from the SVB that on June 4, 2021, the Small Business Administration approved our PPP Loan forgiveness application for the entire PPP Loan balance of $1,679,000 and interest totaling $19,000, and we recognized a gain of $1,698,000.

OTHER INCOME (EXPENSE), NET. Other income, net was $30,000 for the fiscal year ended May 31, 2022, compared with other expense, net of $162,000 for the fiscal year ended May 31, 2021. The change in other income (expense), net was primarily due to gains or losses realized in connection with the fluctuation in the value of the dollar compared to foreign currencies during the referenced periods.

INCOME TAX (EXPENSE) BENEFIT. Income tax expense for the fiscal year ended May 31, 2022 was $91,000 compared with income tax benefit of $177,000 for the fiscal year ended May 31, 2021. During the fiscal year ended May 31, 2021, the currency translation adjustment balance was released and the residual income tax effect of $215,000 was recorded pursuant to the inter-period allocation rules in connection with the complete liquidation of Aehr Test Systems Japan subsidiary in July 2020.

FISCAL YEAR ENDED MAY 31, 2021 COMPARED TO FISCAL YEAR ENDED MAY 31, 2020

NET SALES. Net sales decreased to $16.6 million for the fiscal year ended May 31, 2021 from $22.3 million for the fiscal year ended May 31, 2020, a decrease of 25.5%. The decrease in net sales for the fiscal year ended May 31, 2021 was impacted by the continued challenging global business environment created by the COVID-19 pandemic which resulted in the decrease in net sales of both our wafer-level products and Test During Burn-in (TDBI) products. Net sales of our wafer-level products for fiscal 2021 were $15.0 million, and decreased approximately $4.8 million from fiscal 2020. Net sales of our TDBI products for fiscal 2021 were $1.6 million, and decreased approximately $928,000 from fiscal 2020.

GROSS PROFIT. Gross profit decreased to $6.0 million for the fiscal year ended May 31, 2021 from $8.4 million for the fiscal year ended May 31, 2020, a decrease of 27.9%. Gross profit margin decreased to 36.3% for the fiscal year ended May 31, 2021 from 37.6% for the fiscal year ended May 31, 2020. The decrease in gross profit margin was primarily due to manufacturing inefficiencies due to a lower level of net sales and increased warranty provision related to a voluntary replacement of a component to improve long term reliability of our systems, partially offset by a lower level of inventory reserves recorded.

SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses were $6.6 million for the fiscal year ended May 31, 2021, compared with $7.5 million for the fiscal year ended May 31, 2020, a decrease of 12.9%. The decrease in SG&A expenses was primarily due to decreases in employment related expenses as a result of cost reduction initiatives implemented in fiscal 2021.

RESEARCH AND DEVELOPMENT. R&D expenses were $3.7 million for the fiscal year ended May 31, 2021, compared with $3.4 million for the fiscal year ended May 31, 2020, an increase of 7.9%. The increase in R&D expenses was primarily due to increases in project expenses of $169,000 and employment related expenses of $104,000.

RESTRUCTURING. There were no restructuring charges for the fiscal year ended May 31, 2021. Restructuring charges for the fiscal year ended May 31, 2020 were related to the dissolution of Aehr Test Systems Japan K.K (ATS-Japan), a majority owned subsidiary. In connection with the dissolution plan, the Company recognized approximately $220,000 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.

INTEREST INCOME (EXPENSE), NET. Interest expense, net was $46,000 for the fiscal year ended May 31, 2021 compared with interest income, net which was $10,000 for the fiscal year ended May 31, 2020. The interest expense for the fiscal year ended May 31, 2021 was from the PPP Loan that we obtained on April 23, 2020.

NET GAIN FROM DISSOLUTION OF AEHR TEST SYSTEMS JAPAN. Net gain from dissolution of Aehr Test Systems Japan was $2.2 million for the fiscal year ended May 31, 2021, due to the release of the cumulative translation adjustment in connection with the complete liquidation of Aehr Test Systems Japan subsidiary in July 2020.

OTHER INCOME (EXPENSE), NET. Other expense, net was $162,000 and $11,000 for the fiscal years ended May 31, 2021 and 2020, respectively. The change in other expense, net was primarily due to losses realized in connection with the fluctuation in the value of the dollar compared to foreign currencies during the referenced periods.

INCOME TAX (EXPENSE) BENEFIT. Income tax benefit for the fiscal year ended May 31, 2021 was $177,000 compared with income tax expense of $36,000 for the fiscal year ended May 31, 2020. During the fiscal year ended May 31, 2021, the currency translation adjustment balance was released and the residual income tax effect of $215,000 was recorded pursuant to the inter-period allocation rules in connection with the complete liquidation of Aehr Test Systems Japan subsidiary in July 2020.

LIQUIDITY AND CAPITAL RESOURCES

We consider cash and cash equivalents as liquid and available for use. As of May 31, 2022 and 2021, respectively, we had $31.5 million and $4.6 million in cash and cash equivalents.

Net cash provided by operating activities was $1.5 million for the fiscal year ended May 31, 2022, compared with net cash used by operating activities of $2.7 million for the fiscal year ended May 31, 2021. For the fiscal year ended May 31, 2022, net cash provided by operating activities was primarily the result of net income of $9.5 million, as adjusted to exclude the effect of forgiveness of PPP loan of $1.7 million, and a non-cash charge of stock-based compensation expense of $3.0 million and depreciation and amortization of $307,000. Other changes in cash from operations primarily resulted from increases in accounts receivable and inventories of $7.8 million and $6.7 million, respectively, partially offset by increases in customer deposits and deferred revenue, accrued expenses, and accounts payable of $2.2 million, $1.5 million and $1.4 million, respectively. The increase in accounts receivable was primarily due to the increase in and timing of revenue generated toward the end of the fiscal year ended May 31, 2022. The increase in inventory was to support expected future shipments for customer orders. The increase in customer deposits and deferred revenue was primarily due to the receipt of additional down payments from certain customers. The increase in accrued expenses was primarily due to an increase in accrued employment related expenses including profit sharing, commissions, bonuses, and vacations. The increase in accounts payable was primarily due to inventory purchases to support future shipments. For the fiscal year ended May 31, 2021, net cash used in operating activities was primarily the result of the net loss of $2.0 million, as adjusted to exclude the effect of net gain from dissolution of Aehr Test Systems Japan of $2.4 million, including an income tax benefit of $215,000, a non-cash charge for stock-based compensation expense of $1.1 million and depreciation and amortization of $310,000. Net cash used in operations was also impacted by increases in accounts receivable and inventories of $1.4 million and $972,000, respectively, partially offset by increases in accounts payable and accrued expenses of $1.9 million and $732,000, respectively. The increase in accounts receivable was primarily due to higher shipment activities toward the end of fiscal year ended May 31, 2021. The increase in inventory was to support expected future shipments for customer orders. The increase in accounts payable was primarily due to inventory purchases to support future shipments. The increase in accrued expenses was primarily due to increases in warranty provision and accrued employment related expenses.

Net cash used in investing activities was $416,000 and $227,000 for the fiscal years ended May 31, 2022 and 2021, respectively, was due to the purchases of property and equipment.

Financing activities provided cash of $25.8 million and $2.0 million for the fiscal years ended May 31, 2022 and 2021, respectively. Net cash provided by financing activities during the fiscal year ended May 31, 2022 was primarily due to the net proceeds from issuance of common stock from public offering of $24.0 million, and the proceeds from the issuance of common stock under employee benefit plans of $3.1 million, partially offset by the net payment of the line of credit of $1.4 million. Net cash provided by financing activities during the fiscal year ended May 31, 2021 was due to $1.4 million borrowing from our line of credit and $560,000 in proceeds from the issuance of common stock under employee plans.

The effect of fluctuation in exchange rates increased cash by $49,000 and $117,000 for the fiscal years ended May 31, 2022 and 2021, respectively. The changes were due to the fluctuation in the value of the dollar compared to foreign currencies.

As of May 31, 2022 and 2021, we had working capital of $49.0 million and $10.1 million, respectively.

For the fiscal year ended May 31, 2020, net cash used in operating activities was primarily the result of the net loss of $2.8 million, as adjusted to exclude the effect of non-cash charges of stock-based compensation expense of $910,000 and depreciation and amortization of $384,000. Net cash used in operations was also impacted by decreases in customer deposits and deferred revenue of $1.5 million and in accounts payable of $1.0 million, partially offset by decreases in inventories and accounts receivable of $1.2 million each. The decrease in customer deposits and deferred revenue was primarily due to the decrease in backlog of customer orders with down payments. The decrease in accounts payable was primarily due to a reduction in inventory purchases. The decrease in inventories was primarily due to the increase in inventory reserves related to older products. The decrease in accounts receivable was primarily due to lower shipment activities toward the end of the fiscal year ended May 31, 2020.

Net cash used in investing activities was $163,000 for the fiscal year ended May 31, 2020 was due to the purchase of property and equipment.

Net cash provided by financing activities during the fiscal year ended May 31, 2020 was due to the proceeds of $1.7 million from the PPP Loan, and the net proceeds from issuance of common stock under employee plans of $493,000.

The effect of fluctuation in exchange rates increased cash by $20,000 for the fiscal year ended May 31, 2020 due to the fluctuation in the value of the dollar compared to foreign currencies.

We lease our manufacturing and office space under operating leases. We entered into a non-cancelable operating lease agreement for our United States manufacturing and office facilities, which was renewed in February 2018 and expires in July 2023. Under that lease agreement, we are responsible for payments of utilities, taxes and insurance.

From time to time, we evaluate potential acquisitions of businesses, products or technologies that complement our business. If consummated, any such transactions may use a portion of our working capital or require the issuance of equity. We have no present understandings, commitments or agreements with respect to any material acquisitions.

We anticipate that the existing cash balance together with future income from operations, collections of existing accounts receivable, revenue from our existing backlog of products as of this filing date, the sale of inventory on hand, deposits and down payments against significant orders will be adequate to meet our working capital and capital equipment requirement needs over the next 12 months. Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of our spending to support research and development activities, the timing and cost of establishing additional sales and marketing capabilities, the timing and cost to introduce new and enhanced products and the timing and cost to implement new manufacturing technologies. While we successfully raised $25 million in the ATM public offering in October 2021 as a portion of a $75 million shelf registration, in the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. Any additional debt financing obtained by us in the future could also involve restrictive covenants relating to our capital-raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. Additionally, if we raise additional funds through further issuances of equity, convertible debt securities or other securities convertible into equity, our existing stockholders could suffer significant dilution in their percentage ownership of the Company, and any new equity securities we issue could have rights, preferences and privileges senior to those of holders of our common stock. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to grow or support our business and to respond to business challenges could be significantly limited.

OFF-BALANCE SHEET FINANCING

We have not entered into any off-balance sheet financing arrangements and have not established any special purpose or variable interest entities.

OVERVIEW OF CONTRACTUAL OBLIGATIONS

The following table provides a summary of such arrangements, or contractual obligations.

(1) Shown above are our binding purchase obligations. The large majority of our purchase orders are cancelable by either party, which if canceled may result in a negotiation with the vendor to determine if there shall be any restocking or cancellation fees payable to the vendor.

In the normal course of business to facilitate sales of our products, we indemnify other parties, including customers, with respect to certain matters. We have agreed to hold the other party harmless against losses arising from a breach of representations or covenants, or from intellectual property infringement or other claims. These agreements may limit the time period within which an indemnification claim can be made and the amount of the claim. In addition, we have entered into indemnification agreements with our officers and directors, and our bylaws contain similar indemnification obligations to our agents.

It is not possible to determine the maximum potential amount under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. To date, our payments under these agreements have not had a material impact on our operating results, financial position or cash flows.

RECENT ACCOUNTING PRONOUNCEMENTS

For a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements, see Note 1, “Organization and Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements.