AEHR 10-Q Quarterly Report Nov. 30, 2020

AEHR TEST SYSTEMS

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10-Q 1 aehr_10q.htm QUARTERLY REPORT aehr_10q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended November 30, 2020

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to __________

Commission file number: 000-22893

AEHR TEST SYSTEMS

(Exact name of Registrant as specified in its charter)

California		94-2424084
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

400 Kato Terrace Fremont, CA		94539
(Address of principal executive offices)		(Zip Code)

(510) 623-9400

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☒	Smaller reporting company ☒
	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Securities registered pursuant to Section 12(b) of the Act:

	Trading
Title of each class	Symbol(s)	Name of each exchange on which registered
Common Stock Par value $0.01 per share	AEHR	The NASDAQ Capital Market

Number of shares of the registrant’s common stock, $0.01 par value, outstanding as of December 31, 2020 was 23,491,528.

AEHR TEST SYSTEMS

FORM 10-Q

FOR THE QUARTER ENDED NOVEMBER 30, 2020

INDEX

PART I.	FINANCIAL INFORMATION

ITEM 1.	Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets at November 30, 2020 and May 31, 2020	4

	Condensed Consolidated Statements of Operations for the Three and Six Months Ended November 30, 2020 and 2019	5

	Condensed Consolidated Statements of Comprehensive (Loss) Income for the Three and Six Months Ended November 30, 2020 and 2019	6

	Condensed Consolidated Statements of Shareholders’ Equity for the Three and Six Months Ended November 30, 2020 and 2019	7

	Condensed Consolidated Statements of Cash Flows for the Six Months Ended November 30, 2020 and 2019	8

	Notes to Condensed Consolidated Financial Statements	9

ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	23

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risks	28

ITEM 4.	Controls and Procedures	29

PART II.	OTHER INFORMATION

ITEM 1.	Legal Proceedings	30

ITEM 1A.	Risk Factors	30

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30

ITEM 3.	Defaults Upon Senior Securities	30

ITEM 4.	Mine Safety Disclosures	30

ITEM 5.	Other Information	30

ITEM 6.	Exhibits	31

	SIGNATURES	32

PART I. FINANCIAL INFORMATION

Item 1 . F INANCIAL STATEMENTS (Unaudited)

AEHR TEST SYSTEMS

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

(unaudited)

	November 30,	May 31,
	2020	2020
		(1)
ASSETS
Current assets:
Cash and cash equivalents	$ 3,449	$ 5,433
Accounts receivable, net	1,429	3,717
Inventories	9,057	7,989
Prepaid expenses and other current assets	433	512

Total current assets	14,368	17,651

Property and equipment, net	683	663
Operating lease right-of-use assets	1,918	2,107
Other assets	142	153

Total assets	$ 17,111	$ 20,574

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$ 1,155	$ 945
Accrued expenses	1,344	1,439
Operating lease liabilities, short-term	705	658
Customer deposits and deferred revenue, short-term	66	170
Current portion of long-term debt	1,213	653

Total current liabilities	4,483	3,865

Operating lease liabilities, long-term	1,361	1,605
Long-term debt, net of current portion	466	1,026
Deferred revenue, long-term	9	22

Total liabilities	6,319	6,518

Aehr Test Systems shareholders' equity:
Common stock, $0.01 par value: Authorized: 75,000 shares; Issued and outstanding: 23,487 shares and 23,107 shares at November 30, 2020 and May 31, 2020, respectively	235	231
Additional paid-in capital	86,786	85,898
Accumulated other comprehensive (loss) income	(62 )	2,234
Accumulated deficit	(76,167 )	(74,286 )

Total Aehr Test Systems shareholders' equity	10,792	14,077
Noncontrolling interest	--	(21 )

Total shareholders' equity	10,792	14,056

Total liabilities and shareholders' equity	$ 17,111	$ 20,574

(1) The condensed consolidated balance sheet at May 31, 2020 has been derived from the audited consolidated financial statements at that date.

The accompanying notes are an integral part of these

condensed consolidated financial statements.

AEHR TEST SYSTEMS

CONDENSED CONSOLIDATED STATEMENTS OF O PERATIONS

(in thousands, except per share data)

(unaudited)

	Three Months Ended		Six Months Ended
	November 30,		November 30,
	2020	2019	2020	2019


Net sales	$ 1,683	$ 6,874	$ 3,695	$ 12,407
Cost of sales	1,306	3,672	3,091	6,934
Gross profit	377	3,202	604	5,473

Operating expenses:
Selling, general and administrative	1,501	2,157	3,015	3,965
Research and development	820	795	1,720	1,687
Total operating expenses	2,321	2,952	4,735	5,652

(Loss) income from operations	(1,944 )	250	(4,131 )	(179 )

Interest (expense) income, net	(12 )	2	(25 )	14
Net gain from dissolution of Aehr Test Systems Japan	--	--	2,186	--
Other (expense) income, net	(6 )	5	(100 )	15

(Loss) income before income tax (expense) benefit	(1,962 )	257	(2,070 )	(150 )

Income tax (expense) benefit	(4 )	(6 )	211	(12 )
Net (loss) income	$ (1,966 )	$ 251	$ (1,859 )	$ (162 )

Net (loss) income per share
Basic	$ (0.08 )	$ 0.01	$ (0.08 )	$ (0.01 )
Diluted	$ (0.08 )	$ 0.01	$ (0.08 )	$ (0.01 )

Shares used in per share calculations:
Basic	23,396	22,823	23,322	22,765
Diluted	23,396	22,912	23,322	22,765

The accompanying notes are an integral part of these

condensed consolidated financial statements.

AEHR TEST SYSTEMS

CONDENSED CONSOLIDATED STATEMENTS OF C OMPREHENSIVE (LOSS) INCOME

(in thousands, unaudited)

	Three Months Ended		Six Months Ended
	November 30,		November 30,
	2020	2019	2020	2019

Net (loss) income	$ (1,966 )	$ 251	$ (1,859 )	$ (162 )

Other comprehensive income (loss), net of tax:
Net change in cumulative translation adjustments	5	(5 )	104	(20 )
Reclassification of cumulative translation adjustment as a result of dissolution of Aehr Test Systems Japan	--	--	(2,401 )	--

Total comprehensive (loss) income	(1,961 )	246	(4,156 )	(182 )
Less: Comprehensive income attributable to the noncontrolling interest	--	--	21	(1 )

Comprehensive (loss) income , attributable to Aehr Test Systems common shareholders	$ (1,961 )	$ 246	$ (4,177 )	$ (181 )

The accompanying notes are an integral part of these

condensed consolidated financial statements.

AEHR TEST SYSTEMS

CONDENSED CONSOLIDATED STATEMENTS OF S HAREHOLDERS’ EQUITY

(in thousands)

(unaudited)

						Total Aehr
				Accumulated		Test
			Additional	Other		Systems		Total
	Common Stock		Paid-in	Comprehensive	Accumulated	Shareholders’	Noncontrolling	Shareholders'
Three Months Ended November 30, 2020	Shares	Amount	Capital	Income	Deficit	Equity	Interest	Equity
Balances, August 31, 2020	23,291	$ 233	$ 86,356	$ (67 )	$ (74,201 )	$ 12,321	$ --	$ 12,321

Issuance of common stock under employee plans	196	2	173	--	--	175	--	175
Stock-based compensation	--	--	257	--	--	257	--	257
Net loss	--	--	--	--	(1,966 )	(1,966 )	--	(1,966 )
Foreign currency translation adjustment	--	--	--	5	--	5	--	5

Balances, November 30, 2020	23,487	$ 235	$ 86,786	$ (62 )	$ (76,167 )	$ 10,792	$ --	$ 10,792

						Total Aehr
				Accumulated		Test
			Additional	Other		Systems		Total
	Common Stock		Paid-in	Comprehensive	Accumulated	Shareholders’	Noncontrolling	Shareholders'
Six Months Ended November 30, 2020	Shares	Amount	Capital	Income	Deficit	Equity	Interest	Equity
Balances, May 31, 2020	23,107	$ 231	$ 85,898	$ 2,234	$ (74,286 )	$ 14,077	$ (21 )	$ 14,056

Issuance of common stock under employee plans	380	4	361	--	--	365	--	365
Stock-based compensation	--	--	527	--	--	527	--	527
Net loss	--	--	--	--	(1,859 )	(1,859 )	--	(1,859 )
Foreign currency translation adjustment	--	--	--	105	--	105	(1 )	104
Reclassification of cumulative translation Adjustment as a result of dissolution of Aehr Test Systems Japan	--	--	--	(2,401 )	(22 )	(2,423 )	22	(2,401 )

Balances, November 30, 2020	23,487	$ 235	$ 86,786	$ (62 )	$ (76,167 )	$ 10,792	$ --	$ 10,792

						Total Aehr
				Accumulated		Test
			Additional	Other		Systems		Total
	Common Stock		Paid-in	Comprehensive	Accumulated	Shareholders’	Noncontrolling	Shareholders'
Three Months Ended November 30, 2019	Shares	Amount	Capital	Income	Deficit	Equity	Interest	Equity
Balances, August 31, 2019	22,721	$ 227	$ 84,760	$ 2,216	$ (71,897 )	$ 15,306	$ (20 )	$ 15,286

Issuance of common stock under employee plans	193	2	229	--	--	231	--	231
Stock-based compensation	--	--	205	--	--	205	--	205
Net income	--	--	--	--	251	251	--	251
Foreign currency translation adjustment	--	--	--	(5 )	--	(5 )	--	(5 )

Balances, November 30, 2019	22,914	$ 229	$ 85,194	$ 2,211	$ (71,646 )	$ 15,988	$ (20 )	$ 15,968

						Total Aehr
				Accumulated		Test
			Additional	Other		Systems		Total
	Common Stock		Paid-in	Comprehensive	Accumulated	Shareholders’	Noncontrolling	Shareholders'
Six Months Ended November 30, 2019	Shares	Amount	Capital	Income	Deficit	Equity	Interest	Equity
Balances, May 31, 2019	22,669	$ 227	$ 84,499	$ 2,230	$ (71,484 )	$ 15,472	$ (19 )	$ 15,453

Issuance of common stock under employee plans	245	2	291	--	--	293	--	293
Stock-based compensation	--	--	404	--	--	404	--	404
Net loss	--	--	--	--	(162 )	(162 )	--	(162 )
Foreign currency translation adjustment	--	--	--	(19 )	--	(19 )	(1 )	(20 )

Balances, November 30, 2019	22,914	$ 229	$ 85,194	$ 2,211	$ (71,646 )	$ 15,988	$ (20 )	$ 15,968

The accompanying notes are an integral part of these

condensed consolidated financial statements.

AEHR TEST SYSTEMS

CONDENSED CONSOLIDATED STATEMENTS OF C ASH FLOWS

(in thousands)

(unaudited)

	Six Months Ended
	November 30,
	2020	2019
Cash flows from operating activities:
Net loss	$ (1,859 )	$ (162 )
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense	527	404
Depreciation and amortization	165	193
Net gain from dissolution of Aehr Test Systems Japan	(2,186 )	--
Income tax benefit related to dissolution of Aehr Test Systems Japan	(215 )	--
Changes in operating assets and liabilities:
Accounts receivable	2,341	(372 )
Inventories	(1,067 )	(627 )
Prepaid expenses and other assets	92	194
Accounts payable	160	389
Accrued expenses	(97 )	(438 )
Customer deposits and deferred revenue	(117 )	139
Income taxes payable	1	4
Net cash used in operating activities	(2,255 )	(276 )

Cash flows from investing activities:
Purchases of property and equipment	(194 )	(123 )
Net cash used in investing activities	(194 )	(123 )

Cash flows from financing activities:
Proceeds from issuance of common stock under employee plans, net of taxes paid related to share settlement of equity awards	365	293
Net cash provided by financing activities	365	293

Effect of exchange rates on cash, cash equivalents and restricted cash	100	(20 )

Net decrease in cash, cash equivalents and restricted cash	(1,984 )	(126 )

Cash, cash equivalents and restricted cash, beginning of period	5,513	5,508

Cash, cash equivalents and restricted cash, end of period	$ 3,529	$ 5,382

Supplemental disclosure of non-cash flow information:
Transfers of property and equipment to inventories	$ --	$ 112

The accompanying notes are an integral part of these

condensed consolidated financial statements.

AEHR TEST SYSTEMS

N OTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCCOUNTING POLICIES

The accompanying financial information has been prepared by Aehr Test Systems, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted pursuant to such rules and regulations.

In the opinion of management, the unaudited condensed consolidated financial statements for the interim periods presented have been prepared on a basis consistent with the May 31, 2020 audited consolidated financial statements and reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the condensed consolidated financial position and results of operations as of and for such periods indicated. These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2020. Results for the interim periods presented herein are not necessarily indicative of results which may be reported for any other interim period or for the entire fiscal year.

The Company has been impacted by the outbreak of the novel coronavirus, known as COVID-19, which has spread throughout the world. Due to the impact of the COVID-19 pandemic on customers and customers' customers, the Company experienced a drop in customer orders and revenues in the three and six months ended November 30, 2020. In response, the Company has implemented cost reduction initiatives to mitigate operating losses, including mandatory vacation days, shutdown days, and executive staff pay reductions.

The Company continues to monitor the situation. As of the date of this report, the Company cannot predict with certainty the potential effects the COVID-19 pandemic may have on the Company’s business and its operating results. While the overall environment remains uncertain, the Company continues to invest in priority areas with the objective of driving profitable growth over the long term.

PRINCIPLES OF CONSOLIDATION. The condensed consolidated financial statements include the accounts of Aehr Test Systems and its subsidiaries (collectively, the "Company"). All significant intercompany balances have been eliminated in consolidation. For the Company’s majority owned subsidiary, Aehr Test Systems Japan K.K.(“ATS-Japan”), the noncontrolling interest of the portion the Company does not own was reflected on the Condensed Consolidated Balance Sheets in Shareholders’ Equity and in the Condensed Consolidated Statements of Operations. As discussed in Note 16, the liquidation of ATS-Japan was completed on July 31, 2020.

ACCOUNTING ESTIMATES. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are used to account for sales and revenue allowances, the allowance for doubtful accounts, inventory valuations, income taxes, stock-based compensation expenses, and product warranties, among others. The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances. Actual results could differ materially from those estimates.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. The Company’s significant accounting policies are disclosed in the Company’s Annual Report on Form 10-K for the year ended May 31, 2020. There have been no significant changes in the Company’s significant accounting policies during the three and six months ended November 30, 2020.

2. RECENT ACCOUNTING PRONOUNCEMENTS

Accounting Standards Not Yet Adopted

Financial Instruments

In June 2016, the FASB issued an accounting standard update (“ASU”) that requires measurement and recognition of expected credit losses for financial assets held based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. Due to a subsequent ASU in November 2019, the accounting standard will be effective for the Company beginning in the first quarter of fiscal 2024 on a modified retrospective basis, and early adoption in fiscal 2021 is permitted. The Company does not expect a material impact of this accounting standard on its consolidated financial statements.

3. REVENUE

Revenue recognition

The Company recognizes revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services by following a five-step process: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price, and (5) recognize revenue when or as the Company satisfies a performance obligation, as further described below.

Performance obligations include sales of systems, contactors, spare parts, and services, as well as installation and training services included in customer contracts.

A contract’s transaction price is allocated to each distinct performance obligation. In determining the transaction price, the Company evaluates whether the price is subject to refund or adjustment to determine the net consideration to which the Company expects to be entitled. The Company generally does not grant return privileges, except for defective products during the warranty period.

For contracts that contain multiple performance obligations, the Company allocates the transaction price to the performance obligations on a relative standalone selling price basis. Standalone selling prices are based on multiple factors including, but not limited to historical discounting trends for products and services and pricing practices in different geographies.

Revenue for systems and spares are recognized at a point in time, which is generally upon shipment or delivery. Revenue from services is recognized over time as services are completed or ratably over the contractual period of generally one year or less.

The Company has elected the practical expedient to not assess whether a contract has a significant financing component as the Company’s standard payment terms are less than one year.

Disaggregation of revenue

The following tables show revenues by major product categories. Within each product category, contract terms, conditions and economic factors affecting the nature, amount, timing and uncertainty around revenue recognition and cash flow are substantially similar.

The Company’s revenues by product category are as follows (in thousands):

	Three Months Ended		Six Months Ended
	November 30,		November 30,
	2020	2019	2020	2019
Type of good / service:
Systems	$ 171	$ 3,027	$ 972	$ 5,961
Contactors	773	3,046	1,400	4,696
Services	739	801	1,323	1,750
	$ 1,683	$ 6,874	$ 3,695	$ 12,407

Product lines:
Wafer-level	$ 1,251	$ 6,335	$ 2,810	$ 11,161
Test During Burn-In	432	539	885	1,246
	$ 1,683	$ 6,874	$ 3,695	$ 12,407

The following presents information about the Company’s operations in different geographic areas. Net sales are based upon ship-to location (in thousands):

	Three Months Ended		Six Months Ended
	November 30,		November 30,
	2020	2019	2020	2019
Geographic region:
United States	$ 970	$ 2,627	$ 2,011	$ 7,684
Asia	632	3,529	1,601	3,867
Europe	81	718	83	856
	$ 1,683	$ 6,874	$ 3,695	$ 12,407

With the exception of the amount of service contracts and extended warranties, the Company’s product category revenues are recognized at the point in time when control transfers to customers. The following presents revenue based on timing of recognition (in thousands):

	Three Months Ended		Six Months Ended
	November 30,		November 30,
	2020	2019	2020	2019
Timing of revenue recognition:
Products and services transferred at a point in time	$ 1,214	$ 6,322	$ 2,784	$ 11,181
Services transferred over time	469	552	911	1,226
	$ 1,683	$ 6,874	$ 3,695	$ 12,407

Contract balances

A receivable is recognized in the period the Company delivers goods or provides services or when the Company’s right to consideration is unconditional. The Company usually does not record contract assets because the Company has an unconditional right to payment upon satisfaction of the performance obligation, and therefore, a receivable is more commonly recorded than a contract asset.

Contract liabilities include payments received in advance of performance under a contract and are satisfied as the associated revenue is recognized. Contract liabilities are reported on the Condensed Consolidated Balance Sheets at the end of each reporting period as a component of deferred revenue. Contract liabilities as of November 30, 2020 and May 31, 2020 were $75,000 and $192,000, respectively. During the three and six months ended November 30, 2020, the Company recognized $47,000 and $126,000, respectively, of revenues that were included in contract liabilities as of May 31, 2020.

Remaining performance obligations

On November 30, 2020, the Company had $75,000 of remaining performance obligations, which were comprised of deferred service contracts and extended warranty contracts not yet delivered. The Company expects to recognize approximately 62% of its remaining performance obligations as revenue in fiscal 2021, and an additional 38% in fiscal 2022 and thereafter. The foregoing excludes the value of other remaining performance obligations as they have original durations of one year or less, and also excludes information about variable consideration allocated entirely to a wholly unsatisfied performance obligation.

Costs to obtain or fulfill a contract

The Company generally expenses sales commissions when incurred as a component of selling, general and administrative expense as the amortization period is typically less than one year. Additionally, the majority of the Company’s cost of fulfillment as a manufacturer of products is classified as inventory and fixed assets, which are accounted for under the respective guidance for those asset types. Other costs of contract fulfillment are immaterial due to the nature of the Company’s products and their respective manufacturing process.

4. EARNINGS PER SHARE

Basic earnings per share is determined using the weighted average number of common shares outstanding during the period. Diluted earnings per share is determined using the weighted average number of common shares and potential common shares (representing the dilutive effect of stock options, restricted stock units (“RSUs”), and Amended and Restated 2006 Employee Stock Purchase Plan (“ESPP”) shares) outstanding during the period using the treasury stock method.

The following table presents the computation of basic and diluted net (loss) income per share attributable to Aehr Test Systems common shareholders (in thousands, except per share data):

	Three Months Ended		Six Months Ended
	November 30,		November 30,
	2020	2019	2020	2019

Numerator: Net (loss) income	$ (1,966 )	$ 251	$ (1,859 )	$ (162 )

Denominator for basic net (loss) income per share:
Weighted average shares outstanding	23,396	22,823	23,322	22,765

Shares used in basic net (loss) income per share calculation	23,396	22,823	23,322	22,765
Effect of dilutive securities	--	89	--	--

Denominator for diluted net (loss) income per share	23,396	22,912	23,322	22,765

Basic net (loss) income per share	$ (0.08 )	$ 0.01	$ (0.08 )	$ (0.01 )
Diluted net (loss) income per share	$ (0.08 )	$ 0.01	$ (0.08 )	$ (0.01 )

For the purpose of computing diluted earnings per share, the weighted average number of potential common shares does not include stock options with an exercise price greater than the average fair value of the Company’s common stock for the period, as the effect would be anti-dilutive. In the three and six months ended November 30, 2020 and in the six months ended November 30, 2019, potential common shares have not been included in the calculation of diluted net loss per share as the effect would be anti-dilutive. As such, the numerator and the denominator used in computing both basic and diluted net loss per share for these periods are the same. Stock options to purchase 2,886,000 shares of common stock, RSUs for 155,000 shares and ESPP rights to purchase 72,000 ESPP shares were outstanding as of November 30, 2020, but were not included in the computation of diluted net loss per share, because the inclusion of such shares would be anti-dilutive. Stock options to purchase 2,919,000 shares of common stock were outstanding as of November 30, 2019, but were not included in the computation of diluted net income per share, because the inclusion of such shares would be antidilutive.

5. FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company’s financial instruments are measured at fair value consistent with authoritative guidance. This authoritative guidance defines fair value, establishes a framework for using fair value to measure assets and liabilities, and disclosures required related to fair value measurements.

The guidance establishes a fair value hierarchy based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions. The fair value hierarchy consists of the following three levels:

Level 1 - instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets.

Level 2 - instrument valuations are obtained from readily-available pricing sources for comparable instruments.

Level 3 - instrument valuations are obtained without observable market values and require a high level of judgment to determine the fair value.

The following table summarizes the Company’s financial assets measured at fair value on a recurring basis as of November 30, 2020 (in thousands):

	Balance as of
	November 30, 2020	Level 1	Level 2	Level 3
Money market funds	$ 80	$ 80	$ --	$ --
Assets	$ 80	$ 80	$ --	$ --

The following table summarizes the Company’s financial assets measured at fair value on a recurring basis as of May 31, 2020 (in thousands):

	Balance as of May 31, 2020	Level 1	Level 2	Level 3
Money market funds	$ 80	$ 80	$ --	$ --
Assets	$ 80	$ 80	$ --	$ --

Included in money market funds as of November 30, 2020 and May 31, 2020 is $80,000 restricted cash representing a security deposit for the Company’s United States manufacturing and office space lease which is included in other assets in the consolidated balance sheets.

There were no financial liabilities measured at fair value as of November 30, 2020 and May 31, 2020.

There were no transfers between Level 1 and Level 2 fair value measurements during the three and six months ended November 30, 2020.

The carrying amounts of financial instruments including cash, cash equivalents, receivables, accounts payable and certain other accrued liabilities, approximate fair value due to their short maturities.

6. ACCOUNTS RECEIVABLE, NET

Accounts receivable represent customer trade receivables. As of November 30, 2020 and May 31, 2020, there were no allowances for doubtful accounts. Accounts receivable are derived from the sale of products throughout the world to semiconductor manufacturers, semiconductor contract assemblers, electronics manufacturers and burn-in and test service companies. The Company’s allowance for doubtful accounts is based upon historical experience and review of trade receivables by aging category to identify specific customers with known disputes or collection issues. Uncollectible receivables are recorded as bad debt expense when all efforts to collect have been exhausted and recoveries are recognized when they are received.

7. INVENTORIES

Inventories are comprised of the following (in thousands):

	November 30,	May 31,
	2020	2020
Raw materials and sub-assemblies	$ 6,170	$ 5,055
Work in process	2,884	2,917
Finished goods	3	17
	$ 9,057	$ 7,989

8. PRODUCT WARRANTIES

The Company provides for the estimated cost of product warranties at the time revenues are recognized on the products shipped. While the Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its component suppliers, the Company’s warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from the Company’s estimates, revisions to the estimated warranty liability would be required.

The standard warranty period is one year for systems and ninety days for parts and service.

The following is a summary of changes in the Company's liability for product warranties during the three and six months ended November 30, 2020 and 2019 (in thousands):

	Three Months Ended		Six Months Ended
	November 30,		November 30,
	2020	2019	2020	2019

Balance at the beginning of the period	$ 330	$ 192	$ 246	$ 154

Accruals for warranties issued during the period	113	79	192	141
Adjustments to previously existing warranty accruals	11	--	87	--
Consumption of reserves	(210 )	(81 )	(281 )	(105 )

Balance at the end of the period	$ 244	$ 190	$ 244	$ 190

The accrued warranty balance is included in accrued expenses on the accompanying condensed consolidated balance sheets.

9. CUSTOMER DEPOSITS AND DEFERRED REVENUE, SHORT-TERM

Customer deposits and deferred revenue, short-term (in thousands):

	November 30,	May 31,
	2020	2020
Customer deposits	$ --	$ --
Deferred revenue	66	170
	$ 66	$ 170

10. INCOME TAXES

Income taxes have been provided using the liability method whereby deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and net operating loss and tax credit carryforwards measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse or the carryforwards are utilized. Valuation allowances are established when it is determined that it is more likely than not that such assets will not be realized.

Since fiscal 2009, a full valuation allowance was established against all deferred tax assets, as management determined that it is more likely than not that certain deferred tax assets will not be realized.

The Company accounts for uncertain tax positions consistent with authoritative guidance. The guidance prescribes a “more likely than not” recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company does not expect any material change in its unrecognized tax benefits over the next twelve months. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income taxes.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was passed into law. The CARES Act includes several significant business tax provisions including modification to the taxable income limitation for utilization of net operating losses (“NOLs”) incurred in 2018, 2019 and 2020 and the ability to carry back NOLs from those years for a period of up to five years, an increase to the limitation on deductibility of certain business interest expense, bonus depreciation for purchases of qualified improvement property and special deductions on certain corporate charitable contributions. The Company is currently analyzing the impact of these changes and therefore an estimate of the impact to income taxes is not yet available.

On June 29, 2020, Assembly Bill 85 (AB 85) was signed into law as part of the California 2020 Budget Act, which temporarily suspends the use of California net operating losses and imposes a cap on the amount of business incentive tax credits that companies can utilize against their net income for tax years 2020, 2021, and 2022. The Company analyzed the provisions of AB 85 and determined there was no impact on its provision for income taxes for the current period and will continue to evaluate the impact, if any, AB 85 may have on the Company’s condensed consolidated financial statements and disclosures.

11. LEASES

The Company has only operating leases for real estate including corporate offices, warehouse space and certain equipment. A lease with an initial term of 12 months or less is generally not recorded on the condensed consolidated balance sheet, unless the arrangement includes an option to purchase the underlying asset, or renew the arrangement that the Company is reasonably certain to exercise (short-term leases). The Company recognizes lease expense on a straight-line basis over the lease term for short-term leases that the Company does not record on its balance sheet. The Company’s operating leases have remaining lease terms of 4 months to 5 years.

The Company determines whether an arrangement is or contains a lease based on the unique facts and circumstances present at the inception of the arrangement. Operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected lease term. The interest rate implicit in lease contracts is typically not readily determinable.

As such, the Company utilizes the appropriate incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term at an amount equal to the lease payments in a similar economic environment. Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received.

The weighted-average remaining lease term for the Company’s operating leases was 2.8 years at November 30, 2020 and the weighted-average discount rate was 5.35%.

The Company’s operating lease cost was $190,000 and $375,000 for the three and six months ended November 30, 2020, respectively. The Company’s operating lease cost was $183,000 and $366,000 for the three and six months ended November 30, 2019, respectively.

The following table presents supplemental cash flow information related to the Company’s operating leases (in thousands):

	Three Months Ended		Six Months Ended
	November 30,		November 30,
	2020	2019	2020	2019
Cash paid for amounts included in the measurement of operating lease liabilities
Operating cash flows from operating leases	$ 192	$ 184	$ 382	$ 366

The following table presents the maturities of the Company’s operating lease liabilities as of November 30, 2020 (in thousands):

Fiscal year	Operating Leases
2021 (excluding the first six months of 2021)	$ 394
2022	806
2023	822
2024	161
2025	29
Thereafter	17
Total future minimum operating lease payments	$ 2,229
Less: imputed interest	(163 )
Present value of operating lease liabilities	$ 2,066

12. BORROWING AND FINANCING ARRANGEMENTS:

On January 16, 2020, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with Silicon Valley Bank (“SVB”). Pursuant to the Loan Agreement, the Company may borrow up to (a) the lesser of (i) the revolving line of $4.0 million or (ii) the amount available under the borrowing base minus (b) the outstanding principal balance of any advances, under a revolving line of credit which is collateralized by all the Company’s assets except intellectual property. The borrowing base is 80% of eligible accounts, as determined by SVB from the Company’s most recent borrowing base statement; provided, however, SVB has the right to decrease the foregoing percentage in its good faith business judgment to mitigate the impact of certain events or conditions, which may adversely affect the collateral or its value. Subject to an event of default, the principal amount outstanding under the revolving line of credit will accrue interest at a floating per annum rate equal to the greater of (a) the prime rate plus an additional percentage of up to 1%, which additional percentage depends on the Company’s adjusted quick ratio, and (b) 4.75%. Interest is payable monthly on the last calendar day of each month and the outstanding principal amount, the unpaid interest and all other obligations are due on the maturity date, which is 364 days from the effective date of January 13, 2020. At November 30, 2020, the Company had not drawn against the credit facility and was in compliance with all covenants related to obligations to meet reporting requirements. The balance available to borrow under the line at November 30, 2020 was $76,000. There are no financial covenants in the agreement.

13. LONG-TERM DEBT:

On April 23, 2020, the Company obtained a Paycheck Protection Program Loan (the “PPP Loan”) in the aggregate amount of $1,679,000 from SVB. The PPP Loan was evidenced by a promissory note dated April 23, 2020 (the “Note”) that matures on April 23, 2022 and bears interest at a rate of 1% per annum. The PPP Loan proceeds were used for payroll, health care benefits, rent and utilities.

Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of loans granted under the PPP. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for payment of payroll costs, covered rent and mortgage obligations, and covered utility payments incurred by the Company. The Company applied on November 6, 2020 for loan forgiveness for the full amount of the borrowing and accrued interest. The Small Business Administration has 90 days from the date submitted to review and approve the application. No assurance can be given that the Company will obtain forgiveness of the amount due under the loan in whole or in part.

14. STOCK-BASED COMPENSATION

Stock-based compensation expense consists of expenses for stock options, RSUs, and ESPP purchase rights. Stock-based compensation expense for stock options and ESPP purchase rights is measured at each grant date, based on the fair value of the award using the Black-Scholes option valuation model, and is recognized as expense over the employee’s requisite service period. This model was developed for use in estimating the value of publicly traded options that have no vesting restrictions and are fully transferable. The Company’s employee stock options have characteristics significantly different from those of publicly traded options. For RSUs, stock-based compensation cost is based on the fair value of the Company’s common stock at the grant date. All of the Company’s stock-based compensation is accounted for as an equity instrument. See Note 11 in the Company’s Annual Report on Form 10-K for fiscal 2020 filed on August 28, 2020 for further information regarding the 2016 Equity Incentive Plan (the “2016 Plan”) and the ESPP.

The following table summarizes the stock-based compensation expense for the three and six months ended November 30, 2020 and 2019 (in thousands):

	Three Months Ended		Six Months Ended
	November 30,		November 30,
	2020	2019	2020	2019
Stock-based compensation in the form of employee stock options, RSUs and ESPP purchase rights, included in:
Cost of sales	$ 15	$ 19	$ 31	$ 39
Selling, general and administrative	194	135	399	264
Research and development	48	51	97	101
Total stock-based compensation	$ 257	$ 205	$ 527	$ 404

As of November 30, 2020, and November 30, 2019, there were no stock-based compensation expenses capitalized as part of inventory.

During the three months ended November 30, 2020 and 2019, the Company recorded stock-based compensation expense related to stock options and RSUs of $238,000 and $163,000, respectively. During the six months ended November 30, 2020 and 2019, the Company recorded stock-based compensation expense related to stock options and RSUs of $483,000 and $313,000, respectively.

As of November 30, 2020, the total compensation expense related to unvested stock-based awards under the 2016 Plan, but not yet recognized, was approximately $1,331,000, which is net of estimated forfeitures of $3,000. This expense will be amortized on a straight-line basis over a weighted average period of approximately 2.8 years.

During the three months ended November 30, 2020 and 2019, the Company recorded stock-based compensation expense related to the ESPP of $19,000 and $42,000, respectively. During the six months ended November 30, 2020 and 2019, the Company recorded stock-based compensation expense related to the ESPP of $44,000 and $91,000, respectively.

As of November 30, 2020, the total compensation expense related to purchase rights under the ESPP but not yet recognized was approximately $41,000. This expense will be amortized on a straight-line basis over a weighted average period of approximately 1.0 years.

Valuation Assumptions

Valuation and Amortization Method. The Company estimates the fair value of stock options granted using the Black-Scholes option valuation model and a single option award approach. The fair value under the single option approach is amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period.

Expected Term. The Company’s expected term represents the period that the Company’s stock-based awards are expected to be outstanding and was determined based on historical experience, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior as evidenced by changes to the terms of its stock-based awards.

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

Risk-Free Interest Rate. The Company bases the risk-free interest rate used in the Black-Scholes option valuation model on the implied yield in effect at the time of option grant on U.S. Treasury zero-coupon issues with a remaining term equivalent to the expected term of the stock awards including the ESPP.

Fair Value. The fair value of the Company’s stock options granted to employees for the three and six months ended November 30, 2020 and 2019 were estimated using the following weighted average assumptions in the Black-Scholes option valuation model:

	Three Months Ended		Six Months Ended
	November 30,		November 30,
	2020	2019	2020	2019

Expected term (in years)	6	5	6	5
Volatility	0.73	0.72	0.72	0.71
Risk-free interest rate	0.43 %	1.60 %	0.39 %	1.85 %
Weighted average grant date fair value	$ 0.91	$ 1.05	$ 1.09	$ 0.98

The fair values of the ESPP purchase rights granted for the three and six months ended November 30, 2020 and 2019 were estimated using the following assumptions:

	Three and Six Months Ended	Three and Six Months Ended
	November 30, 2020	November 30, 2019

Expected term (in years)	0.5-2.0	0.5-2.0
Volatility	0.74-0.82	0.62-0.71
Expected dividend	$ 0.00	$ 0.00
Risk-free interest rates	0.10%-0.14 %	1.56%-1.81 %
Estimated forfeiture rate	0 %	0 %
Weighted average grant date fair value	$ 0.42	$ 0.80

During the three and six months ended November 30, 2020, ESPP purchase rights of 72,000 were granted. During the three and six months ended November 30, 2019, ESPP purchase rights of 38,000 were granted. Total ESPP shares issued during the three and six months ended November 30, 2020 and 2019 were 72,000 and 71,000 shares, respectively. As of November 30, 2020, there were 161,000 ESPP shares available for issuance. As of November 30, 2019, there were 299,000 ESPP shares available for issuance.

The following tables summarize the Company’s stock option and RSU transactions during the three and six months ended November 30, 2020 (in thousands):

	Available
	Shares
Balance, May 31, 2020	1,650

Options granted	(200 )
RSUs granted	(196 )
Options cancelled	188
RSUs cancelled	2
Options expired	(125 )

Balance, August 31, 2020	1,319
Options granted	(73 )
RSUs granted	(57 )
Options cancelled	185
Options expired	(162 )

Balance, November 30, 2020	1,212

The following table summarizes the stock option transactions during the three and six months ended November 30, 2020 (in thousands, except per share data):

	Outstanding Options
		Weighted
	Number	Average	Aggregate
	of	Exercise	Intrinsic
	Shares	Price	Value
Balances, May 31, 2020	3,153	$ 2.17	$ 102

Options granted	200	$ 1.86
Options cancelled	(188 )	$ 2.18
Options exercised	(148 )	$ 1.30

Balances, August 31, 2020	3,017	$ 2.19	$ 148

Options granted	73	$ 1.44
Options cancelled	(185 )	$ 2.42
Options exercised	(19 )	$ 1.67

Balances, November 30, 2020	2,886	$ 2.16	$ 56

Options fully vested and expected to vest at November 30, 2020	2,850	$ 2.16	$ 54

The options outstanding and exercisable at November 30, 2020 were in the following exercise price ranges (in thousands, except per share data):

	Options Outstanding			Options Exercisable
	at November 30, 2020			at November 30, 2020
Range of Exercise Prices	Number Outstanding Shares	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price	Number Exercisable Shares	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price	Aggregate Intrinsic Value
$ 1.22-$1.34	133	6.55	$ 1.27	17	6.46	$ 1.25
$ 1.64-$1.86	1,092	5.28	$ 1.70	574	4.64	$ 1.69
$ 2.03-$2.46	1,048	3.48	$ 2.21	771	3.02	$ 2.19
$ 2.63-$2.81	411	0.90	$ 2.71	410	0.88	$ 2.71
$ 3.46-$3.93	202	3.66	$ 3.86	174	3.66	$ 3.85
$ 1.22-$3.93	2,886	3.95	$ 2.16	1,946	3.14	$ 2.29	$ 9

The total intrinsic value of options exercised during the three and six months ended November 30, 2020 was $3,000 and $95,000, respectively. The total intrinsic value of options exercised during the three and six months ended November 30, 2019 was $50,000 and $67,000, respectively. The weighted average remaining contractual life of the options exercisable and expected to be exercisable at November 30, 2020 was 3.93 years. The weighted average remaining contractual life of the options exercisable and expected to be exercisable at November 30, 2019 was 3.93 years.

There were no RSUs granted to employees during the three months ended November 30, 2020. During the six months ended November 30, 2020, RSUs for 161,000 shares were granted to employees. The market value on the date of the grant of these RSUs was $1.86 per share. During the three and six months ended November 30, 2020, 11,000 and 14,000 RSUs became fully vested, respectively. During the three and six months ended November 30, 2019, 3,000 and 7,000 RSUs became fully vested, respectively. As of November 30, 2020, 155,000 RSUs were unvested which had an intrinsic value of $256,000. As of November 30, 2019, 16,000 RSUs were unvested which had an intrinsic value of $31,000. There were no RSUs granted to employees during the three and six months ended November 30, 2019.

During the three months ended November 30, 2020, RSUs for 57,000 shares were granted to members of the Company’s Board of Directors for Board fees. The market value on the date of the grant of these RSUs was $1.34 per share. During the six months ended November 30, 2020, RSUs for 92,000 shares were granted to members of the Company’s Board of Directors for Board fees. The weighted average market value on the date of the grant of these RSUs was $1.54 per share. All of these RSUs were immediately fully vested. There were no RSUs granted to members of the Company’s Board of Directors during the three and six months ended November 30, 2019.

15. SEGMENT INFORMATION

The Company has only one reportable segment. The information for revenue category by type, product line, geography and timing of revenue recognition, is summarized in Note “3. REVENUE.”

Property and equipment information is based on the physical location of the assets. The following table presents property and equipment information for geographic areas (in thousands):

	November 30,	May 31,
	2020	2020
United States	$ 682	$ 662
Asia	1	1
Europe	--	--
	$ 683	$ 663

As of November 30, 2020, the operating lease right-of-use assets of $1,918,000 are allocated in the United States.

There were no revenues through distributors for the three and six months ended November 30, 2020 and 2019.

Sales to the Company’s five largest customers accounted for approximately 90% and 74% of its net sales in the three and six months ended November 30, 2020, respectively. Five customers accounted for approximately 22%,18%, 18%, 16% and 15% of the Company’s net sales in the three months ended November 30, 2020. Five customers accounted for approximately 20%, 18%, 15%, 11% and 10% of the Company’s net sales in the six months ended November 30, 2020. Sales to the Company’s five largest customers accounted for approximately 95% and 88% of its net sales in the three and six months ended November 30, 2019, respectively. Two customers accounted for approximately 44% and 32% of the Company’s net sales in the three months ended November 30, 2019. Three customers accounted for approximately 42%, 24% and 10% of the Company’s net sales in the six months ended November 30, 2019. No other customers represented more than 10% of the Company’s net sales in the three and six months ended November 30, 2020 and 2019.

16. DISSOLUTION OF AEHR TEST SYSTEMS JAPAN

On July 31, 2020, the Company completed the liquidation of ATS-Japan, a majority owned subsidiary. Accordingly, the Company deconsolidated ATS-Japan and recognized an aggregate net gain of $2,401,000 for the period ended August 31, 2020. The net gain was mainly due to cumulative translation adjustment reclassified into earnings of $2,186,000 and the residual income tax effect in connection with the cumulative translation adjustment released into income tax benefits of $215,000.

Item 2. M ANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of the financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes that appear elsewhere in this report and with our Annual Report on Form 10-K for the fiscal year ended May 31, 2020 and the consolidated financial statements and notes thereto.

In addition to historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements in this report, including those made by our management, other than statements of historical fact, are forward-looking statements. These statements typically may be identified by the use of forward-looking words or phrases such as "believe," "expect," "intend," "anticipate," "should," "planned," "estimated," and "potential," among others and include, but are not limited to, statements concerning when we expect to recognize remaining performance obligations and statements concerning our expectations regarding our operations, business, strategies, prospects, revenues, expenses, costs and resources. These forward-looking statements include management’s judgments, estimates and assumptions and are subject to certain risks and uncertainties that could cause our actual results to differ materially from anticipated results or other expectations reflected in forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this report and other factors beyond our control, and in particular, the risks discussed in “Part II, Item 1A. Risk Factors” and those discussed in other documents we file with the SEC. All forward-looking statements included in this document are based on our current expectations, and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

Investors and others should note that we announce material financial information to our investors using our investor relations website (https://www.aehr.com/investor-relations/), SEC filings, press releases, public conference calls and webcasts. We use these channels to communicate with our investors and the public about our company, our products and services and other issues. It is possible that the information we post on our investor relations website could be deemed to be material information. Therefore, we encourage investors, the media, and others interested in our company to review the information we post on our investor relations website.

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. Due to the impact of the COVID-19 pandemic on customers and customers' customers, the Company experienced a significant drop in customer orders and revenues in the three and six months ended November 30, 2020. In response, we have implemented cost reduction initiatives to mitigate operating losses, including mandatory vacation days, shutdown days, and executive staff pay reductions.

The Company's top priority during the COVID-19 pandemic is protecting the health and safety of its employees and their families, 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 and continue to support customers during the pandemic. In the interest of public health, all onsite operations 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.

We continue to monitor the situation. As of the date of this report, we cannot predict with certainty the potential effects the COVID-19 pandemic may have on our business and our operating results. While the overall environment remains uncertain, we continue 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 sold more than 2,500 systems to semiconductor manufacturers, semiconductor contract assemblers and burn-in and test service companies worldwide. Our principal products currently are the FOX full wafer contact parallel test and burn-in system, WaferPak contactors, the DiePak carrier, test fixtures and the Advanced Burn-in and Test System, or ABTS.

Our net sales consist primarily of sales of systems, 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 condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed 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, income taxes, financing operations, warranty obligations, and long-term service contracts. 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. For a discussion of the critical accounting policies, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the fiscal year ended May 31, 2020.

There have been no material changes to our critical accounting policies and estimates during the three and six months ended November 30, 2020 compared to those discussed in our Annual Report on Form 10-K for the fiscal year ended May 31, 2020.

RESULTS OF OPERATIONS

The following table sets forth items in our unaudited condensed consolidated statements of operations as a percentage of net sales for the periods indicated.

	Three Months Ended		Six Months Ended
	November 30,		November 30,
	2020	2019	2020	2019


Net sales	100.0 %	100.0 %	100.0 %	100.0 %
Cost of sales	77.6	53.4	83.7	55.9
Gross profit	22.4	46.6	16.3	44.1

Operating expenses:
Selling, general and administrative	89.2	31.4	81.6	31.9
Research and development	48.7	11.6	46.5	13.6
Total operating expenses	137.9	43.0	128.1	45.5

(Loss) income from operations	(115.5 )	3.6	(111.8 )	(1.4 )

Interest (expense) income, net	(0.7 )	--	(0.7 )	0.1
Net gain from dissolution of Aehr Test Systems Japan	--	--	59.2	--
Other (expense) income, net	(0.4 )	0.1	(2.7 )	0.1

(Loss) income before income tax (expense) benefit	(116.6 )	3.7	(56.0 )	(1.2 )

Income tax (expense) benefit	(0.2 )	--	5.7	(0.1 )

Net (loss) income	(116.8 )%	3.7 %	(50.3 )%	(1.3 )%

THREE MONTHS ENDED NOVEMBER 30, 2020 COMPARED TO THREE MONTHS ENDED NOVEMBER 30, 2019

NET SALES. Net sales decreased to $1.7 million for the three months ended November 30, 2020 from $6.9 million for the three months ended November 30, 2019, a decrease of 75.5%. The decrease in net sales for the three months ended November 30, 2020 was impacted by the continued challenging global business environment created by the COVID-19 pandemic which resulted in the decreases in net sales of both our wafer-level products and Test During Burn-in (TDBI) products. Net sales of the wafer-level products for the three months ended November 30, 2020 were $1.3 million, and decreased approximately $5.1 million from the three months ended November 30, 2019. Net sales of the TDBI products for the three months ended November 30, 2020 were $432,000, and decreased approximately $107,000 from the three months ended November 30, 2019.

GROSS PROFIT. Gross profit decreased to $377,000 for the three months ended November 30, 2020 from $3.2 million for the three months ended November 30, 2019, a decrease of 88.2%. Gross profit margin decreased to 22.4% for the three months ended November 30, 2020 from 46.6% for the three months ended November 30, 2019. The decrease in gross profit margin was primarily due to manufacturing inefficiencies due to a lower level of net sales resulting in a 15.8% gross profit margin reduction, and increased warranty provision resulting in a 6.2% gross profit margin reduction.

SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses decreased to $1.5 million for the three months ended November 30, 2020 from $2.2 million for the three months ended November 30, 2019, a decrease of 30.4%. The decrease in SG&A expenses was primarily due to a decrease in employment related expenses due to cost reduction initiatives.

RESEARCH AND DEVELOPMENT. R&D expenses increased to $820,000 for the three months ended November 30, 2020 from $795,000 for the three months ended November 30, 2019, an increase of 3.1%. The increase in R&D expenses was primarily due to an increase in R&D material expenses.

INTEREST (EXPENSE) INCOME, NET. Interest expense, net for the three months ended November 30, 2020 was $12,000 compared with interest income, net of $2,000 for the three months ended November 30, 2019. The interest expense for the three months ended November 30, 2020 was from the PPP Loan that we obtained on April 23, 2020.

OTHER (EXPENSE) INCOME, NET. Other expense, net for the three months ended November 30, 2020 was $6,000 compared with other income, net of $5,000 for the three months ended November 30, 2019. 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 $4,000 and $6,000 for the three months ended November 30, 2020 and 2019, respectively.

SIX MONTHS ENDED NOVEMBER 30, 2020 COMPARED TO SIX MONTHS ENDED NOVEMBER 30, 2019

NET SALES. Net sales decreased to $3.7 million for the six months ended November 30, 2020 from $12.4 million for the six months ended November 30, 2019, a decrease of 70.2%. The decrease in net sales for the six months ended November 30, 2020 was impacted by the continued challenging global business environment created by the COVID-19 pandemic which resulted in thedecreases in net sales of both our wafer-level products and TDBI products. Net sales of the wafer-level products for the six months ended November 30, 2020 were $2.8 million, and decreased approximately $8.4 million from the six months ended November 30, 2019. Net sales of the TDBI products for the six months ended November 30, 2020 were $885,000, and decreased approximately $361,000 from the six months ended November 30, 2019.

GROSS PROFIT. Gross profit decreased to $604,000 for the six months ended November 30, 2020 from $5.5 million for the six months ended November 30, 2019, a decrease of 89.0%. Gross profit margin decreased to 16.3% for the six months ended November 30, 2020 from 44.1% for the six months ended November 30, 2019. The decrease in gross profit margin was primarily due to manufacturing inefficiencies due to a lower level of net sales resulting in a 17.1% gross profit margin reduction, increased warranty provision, mainly due to adjustments related to preexisting warranties , resulting in a 6.4% gross profit margin reduction, and increased direct material costs as a percentage of sales resulting in a 3.2% gross profit margin reduction.

SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses decreased to $3.0 million for the six months ended November 30, 2020 from $4.0 million for the six months ended November 30, 2019, a decrease of 24.0%. The decrease in SG&A expenses was primarily due to a decrease in employment related expenses due to cost reduction initiatives.

RESEARCH AND DEVELOPMENT. R&D expenses were flat at $1.7 million for the six months ended November 30, 2020 compared with the six months ended November 30, 2019.

INTEREST (EXPENSE) INCOME, NET. Interest expense, net for the six months ended November 30, 2020 was $25,000 compared with interest income, net of $14,000 for the six months ended November 30, 2019. The interest expense for the six months ended November 30, 2020 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 six months ended November 30, 2020, 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 (EXPENSE) INCOME, NET. Other expense, net for the six months ended November 30, 2020 was $100,000 compared with other income, net of $15,000 for the six months ended November 30, 2019. 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 benefit for the six months ended November 30, 2020 was $211,000 compared with income tax expense of $12,000 for the six months ended November 30, 2019. During the six months ended November 30, 2020, 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

Net cash used in operating activities was $2.3 million and $276,000 for the six months ended November 30, 2020 and 2019, respectively. For the six months ended November 30, 2020, net cash used in operating activities was primarily the result of net loss of $1.9 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 of stock-based compensation expense of $527,000 and depreciation and amortization of $165,000. Net cash used in operations was also impacted by a decrease in accounts receivable of $2.3 million, partially offset by an increase in inventories of $1.1 million. The decrease in accounts receivable was primarily due to a decrease in sales for the six months ended November 30, 2020 compared with the six months ended May 31, 2020. The increase in inventories was due primarily to inventory purchases to support future shipments. For the six months ended November 30, 2019, net cash used in operating activities was primarily the result of net loss of $162,000, as adjusted to exclude the effect of non-cash charge of stock-based compensation expense of $404,000 and depreciation and amortization of $193,000. Net cash used in operations was also impacted by increases in inventories and accounts receivable of $627,000 and $372,000, respectively, and a decrease in accrued expenses of $438,000, partially offset by an increase in accounts payable of $389,000. The increase in accounts receivable was primarily due to large shipments toward the end of the quarter ended November 30, 2019. The increase in inventories and accounts payable were due primarily to inventory purchases to support future shipments. The decrease in accrued expenses was primarily due to the restructuring payments to terminated employees impacted by the restructuring plan implemented in fiscal year 2019.

Net cash used in investing activities was $194,000 and $123,000 for the six months ended November 30, 2020 and 2019, respectively. Net cash used in investing activities during the six months ended November 30, 2020 and 2019 was due to purchases of property and equipment.

Financing activities provided cash of $365,000 and $293,000 for the six months ended November 30, 2020 and 2019, respectively. Net cash provided by financing activities during the six months ended November 30, 2020 and 2019 was due to the proceeds from the issuance of common stock under employee plans.

The effect of fluctuation in exchange rates increased cash by $100,000 for the six months ended November 30, 2020, and decreased cash by $20,000 for the six months ended November 30, 2019. The changes were due to the fluctuation in the value of the dollar compared to foreign currencies.

As of November 30, 2020 and May 31, 2020, we had working capital of $9.9 million and $13.8 million, respectively.

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 the 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.

Since inception, we have incurred substantial cumulative losses and negative cash flows from operations. In response, we took steps to minimize expense levels, entered into credit arrangements, and raised capital through public and private equity offerings, to increase the likelihood that we will have sufficient cash to support operations. 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 of $6.3 million 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 requirements. We believe our existing cash and cash equivalents will be sufficient to meet our anticipated cash 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. 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 ARRANGEMENTS

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

OVERVIEW OF CONTRACTUAL OBLIGATIONS

There have been no material changes in the composition, magnitude or other key characteristics of our contractual obligations or other commitments as disclosed in the Company's Annual Report on Form 10-K for the year ended May 31, 2020.

Item 3. Q UANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

We had no holdings of derivative financial or commodity instruments as of November 30, 2020 or May 31, 2020.

We are exposed to financial market risks, including changes in interest rates and foreign currency exchange rates. We only invest our short-term excess cash in government-backed securities with maturities of 18 months or less. We do not use any financial instruments for speculative or trading purposes. Fluctuations in interest rates would not have a material effect on our financial position, results of operations or cash flows.

A majority of our revenue and capital spending is transacted in U.S. Dollars. We, however, enter into transactions in other currencies, primarily Euros. Since the price is determined at the time a purchase order is accepted, we are exposed to the risks of fluctuations in the foreign currency-U.S. Dollar exchange rates during the lengthy period from purchase order to ultimate payment. This exchange rate risk is partially offset to the extent that our subsidiaries incur expenses payable in their local currency. To date, we have not invested in instruments designed to hedge currency risks. In addition, our subsidiaries typically carry debt or other obligations due to us that may be denominated in either their local currency or U.S. Dollars. Since our subsidiaries’ financial statements are based in their local currency and our condensed consolidated financial statements are based in U.S. Dollars, we and our subsidiaries recognize foreign exchange gains or losses in any period in which the value of the local currency rises or falls in relation to the U.S. Dollar. A 10% decrease in the value of the subsidiaries’ local currency as compared with the U.S. Dollar would not be expected to result in a significant change to our net income or loss. There have been no material changes in our risk exposure since the end of the last fiscal year, nor are any material changes to our risk exposure anticipated.

Item 4. C ONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to management as appropriate to allow for timely decisions regarding required disclosure.

CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING. There was no change in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

INHERENT LIMITATIONS OF INTERNAL CONTROLS. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within us have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving our stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART II - O THER INFORMATION

Item 1. L EGAL PROCEEDINGS

None.

Item 1A. R ISK FACTORS

Please refer to the description of the risk factors associated with our business previously disclosed in Part I, Item 1A - "Risk Factors" of our Annual Report on Form 10-K for the year ended May 31, 2020 filed with the Securities and Exchange Commission on August 28, 2020.

Item 2. U NREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

Item 3. D EFAULTS UPON SENIOR SECURITIES

None.

Item 4. M INE SAFETY DISCLOSURES

Not Applicable.

Item 5. O THER INFORMATION

None.

Item 6. E XHIBITS

Exhibit No.		Description

3.1 (1)		Amended and Restated Bylaws of the Registrant.

10.1 (2)		Amended and Restated 2006 Employee Stock Purchase Plan.

31.1		Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

(1) Incorporated by reference to Exhibit 3.1 previously filed with the Company’s Current Report on Form 8-K filed with the SEC on September 9, 2020 (File No. 000-22893 ).

(2) Incorporated by reference to Exhibit 4.2 previously filed with the Company’s Form S-8 filed November 14, 2016 (File No. 333-214589), as deemed to be amended by the share increase approved at the 2020 Annual Meeting of Shareholders.

*This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section, nor shall it be deemed incorporated by reference in any filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.

S IGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	Aehr Test Systems
	(Registrant)

Date: January 14, 2021	By:	/s/ GAYN ERICKSON
		Gayn Erickson
		President and Chief Executive Officer (Principal Executive Officer)


Date: January 14, 2021	By:	/s/ KENNETH B. SPINK
		Kenneth B. Spink
		Vice President of Finance and Chief Financial Officer (Principal Financial and Accounting Officer)

TABLE OF CONTENTS

Part I. Financial Information Item 1. Financial Statements (unaudited)Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risks Item 4. Controls and Procedures Part II - Other Information Item 1. Legal Proceedings Item 1A. Risk Factors Item 2. Unregistered Sales Of Equity Securities and Use Of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Mine Safety Disclosures Item 5. Other Information Item 6. Exhibits

Exhibits

3.1(1) Amended and Restated Bylaws of the Registrant. 10.1(2) Amended and Restated 2006 Employee Stock Purchase Plan. 31.1 Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

AEHR 10-Q Quarter ended Nov. 30, 2020

Exhibits