AEHR TEST SYSTEMS (AEHR) FY 2026 MD&A

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 level, and has installed thousands of systems worldwide. Decarbonization, generative AI and digitalization are 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 package level 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 or more. 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, Sonoma systems, Tahoe systems, Echo 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.

Our operating results and cash flows can vary significantly from period to period due to the timing, volume, and mix of customer orders, particularly because a substantial portion of our revenue is derived from a relatively small number of high-value systems sales. As a result, the number, type, and selling price of systems sold in a given period can materially affect revenue, gross margin, earnings, and operating cash flow.

Demand for our products is influenced by conditions in the semiconductor industry and in the end markets served by our customers, including demand related to generative AI, silicon photonics and power semiconductors including silicon carbide and gallium nitride. During fiscal 2025 and fiscal 2026, our operating performance was negatively affected by continued softness in demand in electric vehicle power semiconductors. Changes in customer investment cycles, order timing, and the pace of adoption of new technologies may continue to affect our results in future periods.

In addition, our results of operations have been affected by changes in revenue mix across systems, contactors, and services, as well as by the integration and contribution of the acquired business. Because these factors can affect revenue levels, gross margins, operating expenses, and working capital differently from period to period, past performance may not necessarily be indicative of future results. Our liquidity and cash flows may also be affected by the timing of large system shipments, investments in inventory and working capital, capital expenditures, acquisition-related cash uses, and investments in product development and market expansion.

Recent changes in U.S. trade and tariff policies, including potential modifications to existing tariffs and the outcome of ongoing regulatory, administrative, or legal developments, may affect the cost of our imported goods, our supply chain, and, accordingly, our gross margins and operating results. The scope, timing, and ultimate impact of these developments remain uncertain, and we continue to evaluate their potential effects on our business, financial condition, and results of operations.

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 ratably over time as the customer simultaneously receives the benefit of the services over the contractual period, which is 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 recognize deferred tax assets (“DTAs”) for deductible temporary differences, net operating loss carryforwards, and tax credit carryforwards to the extent we conclude it is more likely than not that such DTAs will be realized. Our DTAs relate solely to U.S. federal and state income taxes. At each reporting date, we evaluate the realizability of our DTAs and record a valuation allowance when, based on all available evidence, we conclude that it is not more likely than not that some portion or all of our DTAs will be realized.

This assessment requires significant judgment because it involves weighing both positive and negative evidence, with the most objective evidence generally carrying the greatest weight. In making this determination, we consider, among other factors: (i) recent operating results and cumulative pretax income (loss) in the United States; (ii) the duration and severity of any recent losses; (iii) projections of future taxable income based on our operating plans, including expected revenues, margins and cost structure; (iv) the availability and feasibility of tax planning strategies; and (v) the expected utilization periods and limitations applicable to carryforwards.

During fiscal 2024, we released a valuation allowance of $21.9 million after concluding that it was more likely than not that our U.S. DTAs would be realized. Although we incurred pretax losses in fiscal 2025 and fiscal 2026, we concluded as of May 29, 2026 that a valuation allowance against our U.S. DTAs was not required. In reaching this conclusion, we placed significant weight on positive evidence supporting future taxable income, including our expectation of a return to profitability in fiscal 2027, projected improvement in our cumulative pretax income position by fiscal 2027, and revenue projections supported by substantial backlog and visibility into near-term customer demand.

If actual results differ from our current estimates, if assumptions underlying our forecast of future taxable income change, or if negative evidence ultimately outweighs positive evidence, we may be required to record an additional valuation allowance or adjust an existing valuation allowance. Any such change could have a material impact on our income tax provision and our results of operations in the period of the change.

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 years ended May 29, 2026 and May 30, 2025.

Impairment of Long-Lived Assets

We monitor the carrying value of long-lived assets for potential impairment 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 29, 2026, the Company did not record any impairment of long-lived assets. 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.

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 2026 and 2025 ended on May 29, 2026 and May 30, 2025. Our fiscal year in 2024 ended on May 31, 2024.

On April 2, 2026, the Company’s board of directors approved a change in our fiscal year-end from the 52- or 53-week period ending on the Friday nearest May 31 to the 52- or 53-week period ending on the Friday nearest June 30. The change will be effective beginning in fiscal year 2027, which will end on June 25, 2027.

Discussion of Results of Operations

Revenues

Revenue decreased by $9.0 million in fiscal year 2026 compared to fiscal year 2025, primarily due to a $19.9 million decrease in wafer-level contactor revenue driven by significantly lower shipments, reflecting continued softness in demand related to electric vehicles. This decrease was partially offset by a $10.4 million increase in wafer-level burn-in systems revenue, primarily from customers in the silicon photonics market. Package-level burn-in products and service revenue remained relatively flat year over year.

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-level 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.

On a geographic basis, revenues represent products that were shipped to or services that were performed at our customer locations. For fiscal year 2026, revenue decreased in Asia primarily due to the ongoing softness in demand for electric vehicles. This decrease was partially offset by higher revenue in the United States, primarily attributable to increased demand in the silicon photonics market, and higher revenue in Europe and the Middle East, also primarily attributable to increased demand in the silicon photonics market.

For fiscal year 2025, revenue declined in Asia primarily due to 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.

Gross Margin

Gross profit decreased by $6.3 million in fiscal year 2026 compared to fiscal year 2025, primarily due to lower revenue levels. Gross margin decreased by 5.3 percentage points primarily due to higher assembly and warranty costs, increased freight expenses, and higher tariffs on imported parts following the government policy changes.

Gross profit decreased by $8.6 million in fiscal year 2025 compared to fiscal year 2024. Gross margin decreased by 8.5 percentage points 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.

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 $2.2 million in fiscal year 2026 over fiscal year 2025 primarily driven by $1.6 million of higher employment-related costs, including stock-based compensation, resulting from increased headcount, and $1.1 million of higher allocated office expenses. These increases were partially offset by the $0.7 million of one-time severance benefits incurred in the prior year period following the death of an executive officer.

Research and development expenses increased by $1.7 million in fiscal year 2025 over fiscal year 2024 primarily due to $0.7 million in severance benefits incurred following the death of an executive officer, $0.9 million of higher employment related costs, including stock-based compensation expense, resulting from growth in engineering headcount, and $0.3 million of additional research and development expenses from the newly acquired Incal business. The increase was partially offset by $0.4 million of lower non-recurring engineering service charges.

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 remained relatively flat in fiscal year 2026 compared to fiscal year 2025, as $2.0 million of higher employment-related costs, including stock-based compensation, were partially offset by $1.3 million of lower legal and other professional service fees.

Selling, general and administrative expenses increased by $4.5 million in fiscal year 2025 over fiscal year 2024, primarily driven by $1.8 million of additional selling, general and administrative expenses from the newly acquired Incal business, $1.7 million higher legal and other professional service fees, and $1.0 million of higher stock-based compensation expense.

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

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 income, net, remained relatively flat in fiscal year 2026 over fiscal year 2025. Other income (expense), net, increased by $1.1 million, primarily attributable to the Employee Retention Credit (“ERC”) refund of $1.3 million received, net of a $0.3 million third-party service fee incurred in connection with the filing of the ERC claims.

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.

Provision for Income Taxes

N.M.-Not meaningful

Income tax benefit was $4.6 million in fiscal year 2026, primarily driven by operating losses in the United States and excess tax benefits from stock-based compensation.

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. 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 $116.5 million as of May 29, 2026, compared to $26.5 million as of May 30, 2025. 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

Net cash used in operating activities decreased by $4.1 million in fiscal year 2026 compared to fiscal year 2025. The decrease was primarily driven by higher customer deposits related to new bookings, a smaller increase in prepayments to vendors, lower cash outflows for inventory purchases and vendor payments, and higher stock-based compensation expense. These favorable changes were partially offset by a higher loss before income tax benefit.

Net cash 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.

Net Cash Flows Provided by (Used in) Investing Activities

Net cash used in investing activities decreased by $12.2 million in fiscal year 2026 compared to fiscal year 2025. The decrease was primarily due to the $11.1 million payment to acquire Incal during fiscal year 2025, compared to a $1.8 million escrow release related to the acquisition during fiscal year 2026. In addition, capital expenditure decreased by $2.9 million, primarily related to office renovation expenditures incurred during fiscal year 2025.

Net cash used in investing activities was $16.1 million for fiscal year 2025 compared to net cash provided by investing activities of $17.3 million for 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 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 fiscal year 2025.

Net Cash Flows Provided by Financing Activities

Net cash provided by financing activities was $97.2 million in fiscal year 2026, compared to $0.6 million in fiscal year 2025, and $0.1 million in fiscal years 2024, primarily driven by net proceeds of $97.4 million from the issuance of common stock under the Company’s ATM offering program. In fiscal years 2026, 2025, and 2024, proceeds from the issuance of common stock under employee stock plans were $2.2 million, $1.4 million, and $1.8 million, respectively. In fiscal 2026, 2025, and 2024 cash used in shares repurchased for tax withholdings on vesting of restricted stock units was $2.4 million, $0.8 million, and $1.6 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 29, 2026, 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.