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AEHR TEST SYSTEMS - Quarter Report: 2019 February (Form 10-Q)

 

  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 February 28, 2019
 
OR
 
☐ 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 as 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 ☒
 
Number of shares of the registrant’s common stock, $0.01 par value, outstanding as of March 31, 2019 was 22,562,044.
 

 
1
 
AEHR TEST SYSTEMS
 
FORM 10-Q
 
FOR THE QUARTER ENDED FEBRUARY 28, 2019
 
INDEX
 
 
 
 
 
 
 
 
 
 
 
 
 
4
 
 
 
 
5
 
 
 
 
6
 
 
 
 
7
 
 
 
 
8
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2
 
PART I. FINANCIAL INFORMATION
 
Item 1. FINANCIAL STATEMENTS (Unaudited)
 
AEHR TEST SYSTEMS
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited)
 
 
 
February 28,
 
 
May 31,
 
 
 
2019
 
 
2018
 
 
  (1)
ASSETS
 
 
 
    
Current assets:
 
 
 
    
  Cash and cash equivalents
 $12,300 
 $16,848 
  Accounts receivable, net
  1,944 
  2,856 
  Inventories
  9,189 
  9,049 
  Prepaid expenses and other current assets
  787 
  703 
 
    
    
    Total current assets
  24,220 
  29,456 
 
    
    
Property and equipment, net
  975 
  1,203 
Other assets
  256 
  296 
 
    
    
    Total assets
 $25,451 
 $30,955 
 
    
    
LIABILITIES AND SHAREHOLDERS' EQUITY
    
    
Current liabilities:
    
    
  Accounts payable
 $557 
 $1,762 
  Accrued expenses
  2,085 
  1,646 
  Customer deposits and deferred revenue, short-term
  1,267 
  1,630 
  Current portion of long-term debt
  6,110 
  6,110 
 
    
    
    Total current liabilities
  10,019 
  11,148 
 
    
    
Deferred rent
  151 
  63 
Deferred revenue, long-term
  240 
  459 
 
    
    
    Total liabilities
  10,410 
  11,670 
 
    
    
Aehr Test Systems shareholders' equity:
    
    
  Common stock, $0.01 par value: Authorized: 75,000 shares; Issued and outstanding: 22,562 shares and 22,143 shares at February 28, 2019 and May 31, 2018, respectively
  226 
  221 
  Additional paid-in capital
  84,176 
  83,041 
  Accumulated other comprehensive income
  2,252 
  2,292 
  Accumulated deficit
  (71,594)
  (66,249)
 
    
    
    Total Aehr Test Systems shareholders' equity
  15,060 
  19,305 
Noncontrolling interest
  (19)
  (20)
 
    
    
    Total shareholders' equity
  15,041 
  19,285 
 
    
    
    Total liabilities and shareholders' equity
 $25,451 
 $30,955 
 
(1) The condensed consolidated balance sheet at May 31, 2018 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.
 
 
3
 
 
AEHR TEST SYSTEMS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
 
 
 
Three Months Ended
 
 
Nine Months Ended
 
 
 
February 28,
 
 
February 28,
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
 $3,163 
 $7,393 
 $13,814 
 $22,286 
Cost of sales
  2,891 
  4,217 
  9,591 
  13,061 
Gross profit
  272 
  3,176 
  4,223 
  9,225 
 
    
    
    
    
Operating expenses:
    
    
    
    
 Selling, general and administrative
  1,850 
  1,829 
  5,706 
  5,474 
 Research and development
  931 
  1,040 
  3,033 
  3,085 
 Restructuring
  607 
  -- 
  607 
  -- 
   Total operating expenses
  3,388 
  2,869 
  9,346 
  8,559 
 
    
    
    
    
(Loss) income from operations
  (3,116)
  307 
  (5,123)
  666 
 
    
    
    
    
Interest expense, net
  (76)
  (98)
  (228)
  (310)
Other (expense) income, net
  (11)
  (33)
  27 
  (100)
 
    
    
    
    
(Loss) income before income tax benefit (expense)
  (3,203)
  176 
  (5,324)
  256 
 
    
    
    
    
Income tax benefit (expense)
  2 
  91 
  (21)
  81 
  Net (loss) income
  (3,201)
  267 
  (5,345)
  337 
  Less: Net income attributable to the noncontrolling interest
  -- 
  -- 
  -- 
  -- 
 
    
    
    
    
  Net (loss) income attributable to Aehr Test Systems common shareholders
 $(3,201)
 $267 
 $(5,345)
 $337 
 
    
    
    
    
Net (loss) income per share
    
    
    
    
  Basic
 $(0.14)
 $0.01 
 $(0.24)
 $0.02 
  Diluted
 $(0.14)
 $0.01 
 $(0.24)
 $0.01 
 
    
    
    
    
Shares used in per share calculations:
    
    
    
    
  Basic
  22,459 
  21,832 
  22,314 
  21,631 
  Diluted
  22,459 
  22,641 
  22,314 
  22,838 
 
The accompanying notes are an integral part of these
condensed consolidated financial statements.
 
 
4
 
 
AEHR TEST SYSTEMS
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(in thousands, unaudited)
 
 
 
Three Months Ended
 
 
Nine Months Ended
 
 
 
February 28,
 
 
February 28,
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net (loss) income
 $(3,201)
 $267 
 $(5,345)
 $337 
 
    
    
    
    
Other comprehensive (loss) income, net of tax:
    Net change in unrealized loss on investments
  -- 
  -- 
  -- 
  (3)
    Net change in cumulative translation adjustments
  10 
  37 
  (39)
  97 
 
    
    
    
    
Total comprehensive (loss) income
  (3,191)
  304 
  (5,384)
  431 
Less: Comprehensive (loss) income attributable to the noncontrolling interest
  (1)
  (1)
  1 
  (1)
 
    
    
    
    
Comprehensive (loss) income, attributable to Aehr Test Systems common shareholders
 $(3,190)
 $305 
 $(5,385)
 $432 
 
The accompanying notes are an integral part of these
condensed consolidated financial statements.

 
5
 
 
AEHR TEST SYSTEMS
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)
(unaudited)
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
Total Aehr
 
 
 
 
 
 
 
 
 
 
 
 
Additional
 
 
Other
 
 
 
 
 
Test
 
 
 
 
 
Total
 
 
 
Common Stock
 
 
Paid-in
 
 
Comprehensive
 
 
Accumulated
 
 
Shareholders’
 
 
Noncontrolling
 
 
Shareholders'
 
Three Months Ended February 28, 2019
 
Shares
 
 
Amount
 
 
Capital
 
 
Income
 
 
Deficit
 
 
Equity
 
 
Interest
 
 
Equity
 
Balances, November 30, 2018
  22,356 
 $224 
 $83,830 
 $2,241 
 $(68,393)
 $17,902 
 $(18)
 $17,884 
 
    
    
    
    
    
    
    
    
  Issuance of common stock under employee plans
  206 
  2 
  121 
  -- 
  -- 
  123 
  -- 
  123 
  Stock-based compensation
  -- 
  -- 
  225 
  -- 
  -- 
  225 
  -- 
  225 
  Net loss
  -- 
  -- 
  -- 
  -- 
  (3,201)
  (3,201)
  -- 
  (3,201)
  Foreign currency translation adjustment
  -- 
  -- 
  -- 
  11 
  -- 
  11 
  (1)
  10 
 
    
    
    
    
    
    
    
    
Balances, February 28, 2019
  22,562 
 $226 
 $84,176 
 $2,252 
 $(71,594)
 $15,060 
 $(19)
 $15,041 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Aehr
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
Test
 
 
 
 
 
 
 
 
 
 
 
 
Additional
 
 
Other
 
 
 
 
 
Systems
 
 
 
 
 
Total
 
 
 
Common Stock
 
 
Paid-in
 
 
Comprehensive
 
 
Accumulated
 
 
Shareholders’
 
 
Noncontrolling
 
 
Shareholders'
 
Nine Months Ended February 28, 2019
 
Shares
 
 
Amount
 
 
Capital
 
 
Income
 
 
Deficit
 
 
Equity
 
 
Interest
 
 
Equity
 
Balances, May 31, 2018
  22,143 
 $221 
 $83,041 
 $2,292 
 $(66,249)
 $19,305 
 $(20)
 $19,285 
 
    
    
    
    
    
    
    
    
  Issuance of common stock under employee plans
  419 
  5 
  430 
  -- 
  -- 
  435 
  -- 
  435 
  Stock-based compensation
  -- 
  -- 
  705 
  -- 
  -- 
  705 
  -- 
  705 
  Net loss
  -- 
  -- 
  -- 
  -- 
  (5,345)
  (5,345)
  -- 
  (5,345)
  Foreign currency translation adjustment
  -- 
  -- 
  -- 
  (40)
  -- 
  (40)
  1 
  (39)
 
    
    
    
    
    
    
    
    
Balances, February 28, 2019
  22,562 
 $226 
 $84,176 
 $2,252 
 $(71,594)
 $15,060 
 $(19)
 $15,041 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Aehr
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
Test
 
 
 
 
 
 
 
 
 
 
 
 
Additional
 
 
Other
 
 
 
 
 
Systems
 
 
 
 
 
Total
 
 
 
Common Stock
 
 
Paid-in
 
 
Comprehensive
 
 
Accumulated
 
 
Shareholders’
 
 
Noncontrolling
 
 
Shareholders'
 
Three Months Ended February 28, 2018
 
Shares
 
 
Amount
 
 
Capital
 
 
Income
 
 
Deficit
 
 
Equity
 
 
Interest
 
 
Equity
 
Balances, November 30, 2017
  21,797 
 $218 
 $82,304 
 $2,306 
 $(66,707)
 $18,121 
 $(19)
 $18,102 
 
    
    
    
    
    
    
    
    
  Issuance of common stock under employee plans
  146 
  1 
  125 
  -- 
  -- 
  126 
  -- 
  126 
  Stock-based compensation
  -- 
  -- 
  242 
  -- 
  -- 
  242 
  -- 
  242 
  Net income
  -- 
  -- 
  -- 
  -- 
  267 
  267 
  -- 
  267 
  Foreign currency translation adjustment
  -- 
  -- 
  -- 
  38 
  -- 
  38 
  (1)
  37 
 
    
    
    
    
    
    
    
    
Balances, February 28, 2018
  21,943 
 $219 
 $82,671 
 $2,344 
 $(66,440)
 $18,794 
 $(20)
 $18,774 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Aehr
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
Test
 
 
 
 
 
 
 
 
 
 
 
 
Additional
 
 
Other
 
 
 
 
 
Systems
 
 
 
 
 
Total
 
 
 
Common Stock
 
 
Paid-in
 
 
Comprehensive
 
 
Accumulated
 
 
Shareholders’
 
 
Noncontrolling
 
 
Shareholders'
 
Nine Months Ended February 28, 2018
 
Shares
 
 
Amount
 
 
Capital
 
 
Income
 
 
Deficit
 
 
Equity
 
 
Interest
 
 
Equity
 
Balances, May 31, 2017
  21,340 
 $213 
 $81,128 
 $2,249 
 $(66,777)
 $16,813 
 $(19)
 $16,794 
 
    
    
    
    
    
    
    
    
  Issuance of common stock under employee plans
  603 
  6 
  721 
  -- 
  -- 
  727 
  -- 
  727 
  Stock-based compensation
  -- 
  -- 
  822 
  -- 
  -- 
  822 
  -- 
  822 
  Net income
  -- 
  -- 
  -- 
  -- 
  337 
  337 
  -- 
  337 
  Net unrealized loss on investments
  -- 
  -- 
  -- 
  (3)
  -- 
  (3)
  -- 
  (3)
  Foreign currency translation adjustment
  -- 
  -- 
  -- 
  98 
  -- 
  98 
  (1)
  97 
 
    
    
    
    
    
    
    
    
Balances, February 28, 2018
  21,943 
 $219 
 $82,671 
 $2,344 
 $(66,440)
 $18,794 
 $(20)
 $18,774 
 

 
6
 
 
AEHR TEST SYSTEMS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
 
 
Nine Months Ended
 
 
 
February 28,
 
 
 
2019
 
 
2018
 
Cash flows from operating activities:
 
 
 
 
 
 
  Net (loss) income
 $(5,345)
 $337 
  Adjustments to reconcile net (loss) income to net cash used in operating activities:
    
    
   Stock-based compensation expense
  705 
  822 
   Recovery of doubtful accounts
  (3)
  (3)
   Depreciation and amortization
  333 
  300 
   Accretion of investment discount
  -- 
  (24)
   Changes in operating assets and liabilities:
    
    
     Accounts receivable
  871 
  (527)
     Inventories
  (121)
  (2,392)
     Prepaid expenses and other current assets
  (47)
  (603)
     Accounts payable
  (1,132)
  (268)
     Accrued expenses
  431 
  31 
     Customer deposits and deferred revenue
  (582)
  (764)
     Deferred rent
  88 
  -- 
     Income taxes payable
  9 
  (5)
       Net cash used in operating activities
  (4,793)
  (3,096)
 
    
    
Cash flows from investing activities:
    
    
     Purchases of investments
  -- 
  (5,965)
     Purchases of property and equipment
  (124)
  (458)
       Net cash used in investing activities
  (124)
  (6,423)
 
    
    
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
  435 
  727 
       Net cash provided by financing activities
  435 
  727 
 
    
    
Effect of exchange rates on cash and cash equivalents
  (66)
  66 
 
    
    
       Net decrease in cash and cash equivalents
  (4,548)
  (8,726)
 
    
    
Cash and cash equivalents, beginning of period
  16,848 
  17,803 
 
    
    
Cash and cash equivalents, end of period
 $12,300 
 $9,077 
 
    
    
Supplemental disclosure of non-cash flow information:
    
    
  Transfers of property and equipment to inventories
 $20 
 $372 
 
The accompanying notes are an integral part of these
condensed consolidated financial statements.
 
 
7
 
 
AEHR TEST SYSTEMS
NOTES 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, or 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, 2018 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, 2018. 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.
 
    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., 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.
 
    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, 2018. There have been no significant changes in the Company’s significant accounting policies during the three and nine months ended February 28, 2019 except for revenue recognition.
 
 
8
 
2. RECENT ACCOUNTING PRONOUNCEMENTS
 
Accounting Standards Adopted
 
    Revenue Recognition
    In May 2014, the FASB issued Accounting Standards Codification (“ASC”) Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), which has been subsequently updated (collectively “ASC 606”). The core principle of the standard is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The new standard defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price, and allocating the transaction price to each distinct performance obligation. The standard permits the use of either the retrospective or modified retrospective transition methods. It also requires expanded disclosures including the nature, amount, timing, and uncertainty of revenues and cash flows related to contracts with customers. Additionally, qualitative and quantitative disclosures are required about customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract.
 
    The Company adopted ASC 606 on June 1, 2018, the first day of fiscal 2019, using the modified retrospective method. The Company applied ASC 606 to all contracts not completed as of the date of adoption in order to determine any adjustment to the opening balance of retained earnings. Under the modified retrospective adoption method, the comparative financial information has not been restated and continues to be reported under the accounting standards in effect for those periods, ASC 605, "Revenue Recognition", which is also referred to herein as "legacy GAAP."
 
    The adoption of ASC 606 did not have a material impact on the Company’s consolidated financial statements as of June 1, 2018. No adjustment was recorded to accumulated deficit as of the adoption date and reported revenue would not have been different under legacy GAAP. Additionally, the Company does not expect the adoption of the revenue standard to have a material impact to the Company’s net income on an ongoing basis.
 
    Classification of Certain Cash Receipts and Cash Payments
    In August 2016, the FASB issued authoritative guidance related to the classification of certain cash receipts and cash payments on the statement of cash flows. The Company adopted this new standard in fiscal year 2019. The adoption of this guidance did not have a significant impact on the Company’s consolidated financial statements.
 
    Intra-Entity Asset Transfers
    In October 2016, the FASB issued an accounting standard update that requires recognition of the income tax consequences of intra-entity transfers of assets (other than inventory) at the transaction date. The Company adopted this new standard in fiscal year 2019. The adoption of this guidance did not have a significant impact on the Company’s consolidated financial statements.
 
    Restricted Cash
    In November 2016, the FASB issued authoritative guidance related to statements of cash flows. This guidance clarifies that amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of period total amounts shown on the statement of cash flows. The Company adopted this new standard in fiscal year 2019. The adoption of this guidance did not have a significant impact on the Company’s consolidated financial statements.
 
    Income Taxes
    On December 22, 2017, the US government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the US tax code including but not limited to (1) reducing the US federal corporate tax rate from 34% to 21%; (2) requiring companies to pay a one-time transition tax on certain repatriated earnings of foreign subsidiaries; (3) generally eliminating US federal income taxes on dividends from foreign subsidiaries; (4) requiring a current inclusion in US federal income of certain earnings of controlled foreign corporations; (5) creating a new limitation on deductible interest expense; (6) changing rules related to the uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017, and (7) repeals the corporate alternative minimum tax regime, or AMT, effective December 31, 2017 and permits existing minimum tax credits to offset the regular tax liability for any tax year. Consequently, the Company has accounted for the reduction of $6.4 million of deferred tax assets with an offsetting adjustment to the valuation allowance for the fiscal year ended 2018, and recorded a benefit of $90,000 for the Company’s Federal refundable AMT credit.
 
 
9
 
    On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) which provides guidance on accounting for the tax effects of the Tax act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740, Income taxes. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. There are also certain transitional impacts of the Tax Act. As part of the transition to the new territorial tax system, the Tax Act imposes a one-time repatriation tax on deemed repatriation of historical earnings of foreign subsidiaries. The Company is not subject to the transition tax. The one-time transition tax is based on post-1986 earnings and profits that were previously deferred from U.S. income tax. The Company has finalized its calculation of the total post-1986 earnings and profits for its foreign corporations. Based on the Company’s net operating loss carryovers and valuation allowance, there is no impact to its consolidated financial statements as a result of the completion of the analysis.
 
Accounting Standards Not Yet Adopted
 
    Financial Instruments
    In January 2016, the FASB issued an accounting standard update related to recognition and measurement of financial assets and financial liabilities. This standard changes accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. In addition, it clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. This standard is effective for us in fiscal year 2020. Early adoption is permitted. The Company does not expect a material impact of this new guidance on its consolidated financial statements.
 
    In June 2016, the FASB issued an accounting standard update 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 collectibility of the reported amount. The accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2021 on a modified retrospective basis, and early adoption in fiscal 2020 is permitted. The Company does not expect a material impact of this accounting standard update on its consolidated financial statements.
 
    Leases
    In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which modifies lease accounting for lessees to increase transparency and comparability by recording lease assets and liabilities for operating leases and disclosing key information about leasing arrangements. The Company will adopt ASU 2016-02 utilizing the modified retrospective transition method through a cumulative-effect adjustment at the beginning of its first quarter of 2020. We are currently assessing the impact on our Consolidated Financial Statements and expect that the primary impact upon adoption will be the recognition of right-of-use assets and lease liabilities on the Company's Condensed Consolidated Balance Sheets for those leases currently classified as operating leases.
 
 
10
 
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 under ASC 606 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.
 
 
11
 
    
The Company’s revenues by product category are as follows (in thousands):
 
 
 
Three Months Ended
 
 
Nine Months Ended
 
 
 
February 28,
 
 
February 28,
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
Type of good / service:
 
 
 
 
 
 
 
 
 
 
 
 
Systems
 $404 
 $4,345 
 $5,922 
 $12,851 
Contactors
  1,445 
  747 
  3,541 
  5,291 
Services
  1,314 
  2,301 
  4,351 
  4,144 
 
 $3,163 
 $7,393 
 $13,814 
 $22,286 
 
    
    
    
    
Product lines:
    
    
    
    
Wafer-level
 $2,046 
 $2,934 
 $8,240 
 $9,898 
Test During Burn-In
  1,117 
  4,459 
  5,574 
  12,388 
 
 $3,163 
 $7,393 
 $13,814 
 $22,286 
 
    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
 
 
Nine Months Ended
 
 
 
February 28,
 
 
February 28,
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
Geographic region:
 
 
 
 
 
 
 
 
 
 
 
 
United States
 $2,203 
 $1,493 
 $9,407 
 $4,747 
Asia
  746 
  4,974 
  3,814 
  16,543 
Europe
  214 
  926 
  593 
  996 
 
 $3,163 
 $7,393 
 $13,814 
 $22,286 
 
    
    
    
    
  
  With the exception of the amount of service contracts and extended warranties, the Company’s product category revenues are recognized at point in time when control transfers to customers.
 
 
 
Three Months Ended
 
 
Nine Months Ended
 
 
 
February 28,
 
 
February 28,
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Timing of revenue recognition:
 
 
 
 
 
 
 
 
 
 
 
 
Products and services transferred at a point in time
 $2,507 
 $6,805 
 $11,897 
 $20,692 
Services transferred over time
  656 
  588 
  1,917 
  1,594 
 
 $3,163 
 $7,393 
 $13,814 
 $22,286 
 
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.
 
 
 
12
 
    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 February 28, 2019 and May 31, 2018 were $1,507,000 and $2,089,000, respectively. During the three and nine months ended February 28, 2019, the Company recognized $185,000 and $1,179,000, respectively, of revenues that were included in contract liabilities as of May 31, 2018.
 
Remaining performance obligations
 
    On February 28, 2019, the Company had $833,000 of remaining performance obligations, which were comprised of deferred service contracts and extended warranty contracts not yet delivered. The Company expects to recognize approximately 18% of its remaining performance obligations as revenue in fiscal 2019, and an additional 82% in fiscal 2020 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, RSUs and 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):
 
 
13
 
 
 
 
Three Months Ended
 
 
Nine Months Ended
 
 
 
February 28,
 
 
February 28,
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Numerator: Net (loss) income
 $(3,201)
 $267 
 $(5,345)
 $337 
 
    
    
    
    
Denominator for basic net (loss) income per share:
    
    
    
    
Weighted average shares outstanding
  22,459 
  21,832 
  22,314 
  21,631 
 
    
    
    
    
Shares used in basic net (loss) income per share calculation
  22,459 
  21,832 
  22,314 
  21,631 
Effect of dilutive securities
  -- 
  809 
  -- 
  1,207 
 
    
    
    
    
Denominator for diluted net (loss) income per share
  22,459 
  22,641 
  22,314 
  22,838 
 
    
    
    
    
Basic net (loss) income per share
 $(0.14)
 $0.01 
 $(0.24)
 $0.02 
Diluted net (loss) income per share
 $(0.14)
 $0.01 
 $(0.24)
 $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 nine months ended February 28, 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 3,220,000 shares of common stock, RSUs for 34,000 shares and ESPP rights to purchase 327,000 ESPP shares were outstanding as of February 28, 2019, 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 983,000 shares of common stock were outstanding as of February 28, 2018 but were not included in the computation of diluted net income per share, because the inclusion of such shares would be anti-dilutive. The 2,657,000 shares convertible under the convertible notes outstanding at February 28, 2019 and 2018 were not included in the computation of diluted net income (loss) per share, because the inclusion of such shares would be anti-dilutive.
 
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.
 
 
14
 
    The following table summarizes the Company’s financial assets measured at fair value on a recurring basis as of February 28, 2019 (in thousands):
 
 
 
Balance as of
 
 
 
 
 
 
 
 
 
 
 
 
February 28, 2019
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
Money market funds
 $10,581 
 $10,581 
 $-- 
 $-- 
Assets
 $10,581 
 $10,581 
 $-- 
 $-- 
 
    The following table summarizes the Company’s financial assets measured at fair value on a recurring basis as of May 31, 2018 (in thousands):
 
 
 
Balance as of
May 31, 2018
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
Money market funds
 $7,813 
 $7,813 
 $-- 
 $-- 
U.S. Treasury securities
  5,983 
  5,983 
  -- 
  -- 
Assets
 $13,796 
 $13,796 
 $-- 
 $-- 
 
    The U.S. Treasury securities as of May 31, 2018 have maturities of three months and have no unrealized gain or loss.
 
    Included in Money market funds as of February 28, 2019 and May 31, 2018 is $80,000 restricted cash for Letter of Credit.
 
    There were no financial liabilities measured at fair value as of February 28, 2019 and May 31, 2018.
 
    There were no transfers between Level 1 and Level 2 fair value measurements during the three and nine months ended February 28, 2019.
 
    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. Based on the borrowing rates currently available to the Company for loans with similar terms, the carrying value of the debt approximates the fair value.
 
    The Company has, at times, invested in debt and equity of private companies, and may do so again in the future, as part of its business strategy.
 
6. ACCOUNTS RECEIVABLE, NET
 
Accounts receivable represent customer trade receivables and is presented net of allowance for doubtful accounts of $0 at February 28, 2019 and $4,000 at May 31, 2018. 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.
 
 
15
 
7. INVENTORIES
 
    Inventories are comprised of the following (in thousands):
 
 
 
February 28,
 
 
May 31,
 
 
 
2019
 
 
2018
 
Raw materials and sub-assemblies
 $5,276 
 $5,747 
Work in process
  3,678 
  3,068 
Finished goods
  235 
  234 
 
 $9,189 
 $9,049 
 
    During the three and nine months ended February 28, 2019, the Company wrote down $795,000 and $802,000 of inventory, respectively. During the three and nine months ended February 28, 2018, the Company wrote down $7,000 and $91,000 of inventory, respectively.
 
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 nine months ended February 28, 2019 and 2018 (in thousands):
 
 
 
Three Months Ended
 
 
Nine Months Ended
 
 
 
February 28,
 
 
February 28,
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at the beginning of the period
 $163 
 $133 
 $135 
 $113 
 
    
    
    
    
Accruals for warranties issued during the period
  30 
  5 
  176 
  251 
Consumption of reserves
  (30)
  (22)
  (148)
  (248)
 
    
    
    
    
Balance at the end of the period
 $163 
 $116 
 $163 
 $116 
 
    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):
 
 
 
February 28,
 
 
 May 31,
 
 
 
2019
 
 
2018
 
Customer deposits
 $674 
 $1,340 
Deferred revenue
  593 
  290 
 
 $1,267 
 $1,630 
 
 
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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 December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740, Income taxes. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements.
 
    As part of the transition to the new territorial tax system, the Tax Act imposes a one-time repatriation tax on deemed repatriation of historical earnings of foreign subsidiaries. The company is not subject to the transition tax. The one-time transition tax is based on post-1986 earnings and profits that were previously deferred from U.S. income tax. The Company has finalized its calculation of the total post-1986 earnings and profits for its foreign corporations. Based on the Company’s net operating loss carryovers and valuation allowance, there is no impact to its consolidated financial statements as a result of the completion of the analysis.
 
    The new law effective December 31, 2017 repeals the corporate alternative minimum tax, or AMT, regime and permits existing minimum tax credits to offset the regular tax liability for any tax year. Further, the credit is refundable for any tax year beginning after December 31, 2017 and before December 31, 2020 in an amount equal to 50% of the excess of the minimum tax credit over the allowable credit for the year against the regular tax liability. Any unused minimum tax credit carryforward is refundable in the following year. As result, the company recorded a benefit of $90,000 in the third quarter of fiscal 2018 for its Federal refundable AMT credit.
 
    In addition, the reduction of the U.S. federal corporate tax rate reduces the corporate tax rate to 21%, effective January 1, 2018. Consequently, the Company has accounted for the reduction of $6.4 million of deferred tax assets with an offsetting adjustment to the valuation allowance.
 
    Although the Company files U.S. federal, various state, and foreign tax returns, the Company’s only major tax jurisdictions are the United States, California, Germany and Japan. Fiscal years 1997 through 2018 remain subject to examination by the appropriate governmental agencies due to tax loss carryovers, research and development tax credits, or other tax attributes from those years.
 
 
17
 
11. LONG-TERM DEBT
 
    On April 10, 2015, the Company entered into a Convertible Note Purchase and Credit Facility Agreement (the “Purchase Agreement”) with QVT Fund LP and Quintessence Fund L.P. (the “Purchasers”) providing for (a) the Company’s sale to the Purchasers of $4,110,000 in aggregate principal amount of 9.0% Convertible Secured Notes due 2017 (the “Convertible Notes”) and (b) a secured revolving loan facility (the “Credit Facility”) in an aggregate principal amount of up to $2,000,000. On August 22, 2016 the Purchase Agreement was amended to extend the maturity date of the Convertible Notes to April 10, 2019, decrease the conversion price from $2.65 per share to $2.30 per share, decrease the forced conversion price from $7.50 per share to $6.51 per share, and allow for additional equity awards.
 
    The Convertible Notes bear interest at an annual rate of 9.0% and will mature on April 10, 2019 unless repurchased or converted prior to that date. Interest is payable quarterly on March 1, June 1, September 1 and December 1 of each year. Debt issuance costs of $356,000, which were accreted over the term of the original loan using the effective interest rate method, were offset against the loan balance.
 
    The conversion price for the Convertible Notes is $2.30 per share and is subject to adjustment upon the occurrence of certain specified events. Holders may convert all or any part of the principal amount of their Convertible Notes in integrals of $10,000 at any time prior to the maturity date. Upon conversion, the Company will deliver shares of its common stock to the holder of Convertible Notes electing such conversion. The Company may not redeem the Convertible Notes prior to maturity.
 
    The maximum amount of $2,000,000 drawn against the Credit Facility has been converted to Convertible Notes, and at February 28, 2019 there was no remaining balance available to be drawn on the Credit Facility.
 
    The Company’s obligations under the Purchase Agreement are secured by substantially all of the assets of the Company.
 
    At the maturity date of April 10, 2019, the Company repaid the debt in an aggregate principal amount of $6,110,000 under the Purchase Agreement with QVT Fund LP and Quintessence Fund L.P.
 
12. STOCKHOLDERS’ EQUITY, COMPREHENSIVE INCOME AND STOCK-BASED COMPENSATION
 
ACCUMULATED OTHER COMPREHENSIVE INCOME
 
    Changes in the components of AOCI, net of tax, were as follows (in thousands):
 
 
 
Cumulative Translation Adjustments
 
 
Unrealized Loss on Investments, Net
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
Balance at May 31, 2018
 $2,292 
 $-- 
 $2,292 
Other comprehensive (loss) income before reclassifications
  (40)
  -- 
  (40)
Amounts reclassified out of AOCI
  -- 
  -- 
  -- 
Other comprehensive (loss) income, net of tax
  (40)
  -- 
  (40)
Balance at February 28, 2019
 $2,252 
 $-- 
 $2,252 
 
 
18
 
    STOCK-BASED COMPENSATION
 
    Stock-based compensation expense consists of expenses for stock options, restricted stock units, or RSUs, and employee stock purchase plan, or ESPP, purchase rights. Stock-based compensation 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 10 in the Company’s Annual Report on Form 10-K for fiscal 2018 filed on August 28, 2018 for further information regarding the 2016 Equity Incentive Plan and the Amended and Restated 2006 ESPP.
 
    The following table summarizes the stock-based compensation expense for the three and nine months ended February 28, 2019 and 2018 (in thousands):
 
 
 
Three Months Ended
 
 
Nine Months Ended
 
 
 
February 28,
 
 
 February 28,
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
Stock-based compensation in the form of employee stock options, RSUs and ESPP purchase rights, included in:
 
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
 $24 
 $28 
 $83 
 $107 
Selling, general and administrative
  137 
  162 
  421 
  530 
Research and development
  64 
  52 
  201 
  185 
Total stock-based compensation
 $225 
 $242 
 $705 
 $822 
 
    As of February 28, 2019 and 2018, there were no stock-based compensation expenses capitalized as part of inventory.
 
    During the three months ended February 28, 2019 and 2018, the Company recorded stock-based compensation expense related to stock options and RSUs of $166,000 and $206,000, respectively. During the nine months ended February 28, 2019 and 2018, the Company recorded stock-based compensation expense related to stock options and RSUs of $505,000 and $614,000, respectively.
 
    As of February 28, 2019, the total compensation expense related to unvested stock-based awards under the Company’s 2016 Equity Incentive Plan, but not yet recognized, was approximately $1,466,000, which is net of estimated forfeitures of $4,000. This expense will be amortized on a straight-line basis over a weighted average period of approximately 3.1 years.
 
    During the three months ended February 28, 2019 and 2018, the Company recorded stock-based compensation expense related to the ESPP of $59,000 and $36,000, respectively. During the nine months ended February 28, 2019 and 2018, the Company recorded stock-based compensation expense related to the ESPP of $200,000 and $208,000, respectively.
 
    As of February 28, 2019, the total compensation expense related to purchase rights under the ESPP but not yet recognized was approximately $174,000. This expense will be amortized on a straight-line basis over a weighted average period of approximately 1.2 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.
 
19
 
   
    Fair Value. The fair value of the Company’s stock options granted to employees for the three and nine months ended February 28, 2019 and 2018 were estimated using the following weighted average assumptions in the Black-Scholes option valuation model:
 
 
 
Three Months Ended
 
 
Nine Months Ended
 
 
 
February 28,
 
 
February 28,
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Expected term (in years)
  5 
  4 
  5 
  4 
Volatility
  0.69 
  0.73 
  0.72 
  0.77 
Risk-free interest rate
  2.77%
  2.31%
  2.83%
  1.81%
Weighted average grant date fair value
 $1.01 
 $1.53 
 $1.34 
 $2.17 
 
    The fair values of the ESPP purchase rights granted for the nine months ended February 28, 2019 were estimated using the following weighted-average assumptions:
 
 
 
Nine Months Ended
 
 
 
February 28, 2019
 
 
 
 
 
Expected term (in years)
  0.5-2.0 
Volatility
  0.48-0.64 
Expected dividend
 $0.00 
Risk-free interest rates
      2.40% -2.82%
Estimated forfeiture rate
  0%
Weighted average grant date fair value
 $1.15 
 
    There were no ESPP purchase rights granted to employees for the three months ended February 28, 2019 and 2018, and nine months ended February 28, 2018. During the nine months ended February 28, 2019, ESPP purchase rights of 327,000 were granted. Total ESPP shares issued during the nine months ended February 28, 2019 and 2018 were 64,000 and 116,000 shares, respectively. As of February 28, 2019, there were 430,000 ESPP shares available for issuance.
 
    The following tables summarize the Company’s stock option and RSU transactions during three and nine months ended February 28, 2019 (in thousands):
 
 
 
Available
 
 
 
Shares
 
Balance, May 31, 2018
  1,812 
 
    
  Options granted
  (441)
  Shares cancelled
  13 
  Shares expired
  (11)
 
    
Balance, August 31, 2018
  1,373 
 
    
  Options granted
  (248)
  Shares cancelled
  45 
  Shares expired
  (33)
 
    
Balance, November 30, 2018
  1,137 
 
    
  Options granted
  (100)
  Shares cancelled
  51 
  Shares expired
  (1)
 
    
Balance, February 28, 2019
  1,087 
 

 
20
 
 
   The following table summarizes the stock option transactions during the three and nine months ended February 28, 2019 (in thousands, except per share data):
 
 
 
Outstanding Options
 
 
 
 
 
 
Weighted
 
 
 
 
 
 
Number
 
 
Average
 
 
Aggregate
 
 
 
of
 
 
Exercise
 
 
Intrinsic
 
 
 
Shares
 
 
Price
 
 
Value
 
Balances, May 31, 2018
  2,859 
 $2.04 
 $1,987 
 
    
    
    
Options granted
  441 
 $2.40 
    
Options cancelled
  (13)
 $1.64 
    
Options exercised
  (98)
 $1.12 
    
 
    
    
    
Balances, August 31, 2018
  3,189 
 $2.12 
 $1,757 
 
    
    
    
Options granted
  248 
 $2.03 
    
Options cancelled
  (45)
 $2.70 
    
Options exercised
  (19)
 $1.09 
    
 
    
    
    
Balances, November 30, 2018
  3,373 
 $2.11 
 $679 
 
    
    
    
Options granted
  100 
 $1.71 
    
Options cancelled
  (51)
 $1.72 
    
Options exercised
  (202)
 $0.61 
    
 
    
    
    
Balances, February 28, 2019
  3,220 
 $2.20 
 $120 
 
    
    
    
Options fully vested and expected to vest at February 28, 2019
  3,184 
 $2.20 
 $120 
 
 The options outstanding and exercisable at February 28, 2019 were in the following exercise price ranges (in thousands, except per share data):
 
 
 
 
 
Options Outstanding
 
 
Options Exercisable
 
 
 
 
 
at February 28, 2019
 
 
at February 28, 2019
 
 
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
 
 $0.80-$0.97 
  47 
  0.77 
 $0.85 
  47 
  0.77 
 $0.85 
 
 $1.09-$1.28 
  498 
  0.97 
 $1.28 
  498 
  0.97 
 $1.28 
 
 $1.68-$2.06 
  763 
  4.76 
 $1.83 
  386 
  3.54 
 $1.79 
 
 $2.10-$2.81 
  1,651 
  3.88 
 $2.43 
  1,199 
  2.98 
 $2.44 
 
 $3.46-$3.93 
  261 
  5.41 
 $3.86 
  128 
  5.45 
 $3.78 
 
 $0.80-$3.93 
  3,220 
  3.72 
 $2.20 
  2,258 
  2.73 
 $2.11 
  $120
 
    The total intrinsic value of options exercised during the three and nine months ended February 28, 2019 was $160,000 and $322,000, respectively. The total intrinsic value of options exercised during the three and nine months ended February 28, 2018 was $214,000 and $959,000, respectively. The weighted average remaining contractual life of the options exercisable and expected to be exercisable at February 28, 2019 was 3.70 years.
 
    There were no RSUs granted to employees during the three and nine months ended February 28, 2019, and during the three months ended February 28, 2018. During the nine months ended February 28, 2018, RSUs for 64,000 shares were granted to employees. The market value on the date of the grant of these RSUs was $3.93 per share. During the three and nine months ended February 28, 2019, 4,000 and 13,000 RSUs became fully vested, respectively. During the three and nine months ended February 28, 2018, 4,000 and 11,000 RSUs became fully vested respectively. As of February 28, 2019, 34,000 RSUs remain unvested which had an intrinsic value of $50,000. 85,000 RSUs were unvested at February 28, 2018 which had an intrinsic value of $194,000.
 
13. 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.”

 
21
 
 
  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):
 
 
 
February 28,
 
 
May 31,
 
 
 
2019
 
 
2018
 
United States
 $934 
 $1,156 
Asia
  39 
  40 
Europe
  2 
  7 
 
 $975 
 $1,203 
 
    There were no revenues through distributors for the three and nine months ended February 28, 2019 and 2018.
 
    The Company’s Japanese and German subsidiaries primarily comprise the foreign operations. Substantially all of the sales of the subsidiaries are made to unaffiliated Japanese or European customers. Net sales from outside the United States include those of Aehr Test Systems Japan K.K. and Aehr Test Systems GmbH.
 
    Sales to the Company’s five largest customers accounted for approximately 90% and 81% of its net sales in the three and nine months ended February 28, 2019, respectively. Four customers accounted for approximately 27%, 25%, 22% and 13% of the Company’s net sales in the three months ended February 28, 2019. Four customers accounted for approximately 31%, 18%, 16% and 12% of the Company’s net sales in the nine months ended February 28, 2019. Sales to the Company’s five largest customers accounted for approximately 93% and 93% of its net sales in the three and nine months ended February 28, 2018, respectively. Four customers accounted for approximately 31%, 25%, 16% and 12% of the Company’s net sales in the three months ended February 28, 2018. Three customers accounted for approximately 35%, 34% and 13% of the Company’s net sales in the nine months ended February 28, 2018. No other customers represented more than 10% of the Company’s net sales in the three and nine months ended February 28, 2019 and 2018.
 
14. RESTRUCTURING
 
    During the three months ended February 28, 2019, the Company implemented a restructuring plan in order to streamline its operations and better align its structure with its objectives going forward. In connection with the restructuring plan, the Company expects to incur restructuring charges of $0.7 million related to employee termination expenses. Of this amount, the Company recognized $0.6 million of restructuring charges during the three months ended February 28, 2019, and the balance of $0.1 million is expected to be recognized in the next quarter with the completion of future required services. The restructuring charges of $0.6 million during the three months ended February 28, 2019 were recorded in accrued expenses on the accompanying condensed consolidated balance sheets. There were no payments made during the three months ended February 28, 2019. There were no restructuring charges incurred for the three and nine months ended February 28, 2018.
 
15. SUBSEQUENT EVENT
 
    At the maturity date of April 10, 2019, the Company repaid the debt in an aggregate principal amount of $6.1 million under the Purchase Agreement with QVT Fund LP and Quintessence Fund L.P.
 
Item 2. MANAGEMENT’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, 2018 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 our expectations regarding our operations, business, strategies, prospects, revenues, expenses, costs and resources. These forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from those anticipated results or other expectations reflected in the 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.
 
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 Advanced Burn-in and Test System, or ABTS, the FOX full wafer contact parallel test and burn-in system, WaferPak contactors, the DiePak carrier and test fixtures.
 
22
 
    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, 2018.
 
    There have been no material changes to our critical accounting policies and estimates during the nine months ended February 28, 2019 compared to those discussed in our Annual Report on Form 10-K for the fiscal year ended May 31, 2018.
 
23
 
 
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
 
 
Nine Months Ended
 
 
 
February 28,
 
 
February 28,
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
  100.0%
  100.0%
  100.0%
  100.0%
Cost of sales
  91.4 
  57.0 
  69.4 
  58.6 
Gross profit
  8.6 
  43.0 
  30.6 
  41.4 
 
    
    
    
    
Operating expenses:
    
    
    
    
 Selling, general and administrative
  58.5 
  24.7 
  41.3 
  24.6 
 Research and development
  29.4 
  14.1 
  22.0 
  13.8 
 Restructuring
  19.2 
  -- 
  4.4 
  -- 
   Total operating expenses
  107.1 
  38.8 
  67.7 
  38.4 
 
    
    
    
    
   (Loss) income from operations
  (98.5)
  4.2 
  (37.1)
  3.0 
 
    
    
    
    
Interest expense, net
  (2.4)
  (1.3)
  (1.7)
  (1.4)
Other (expense) income, net
  (0.4)
  (0.5)
  0.3 
  (0.5)
 
    
    
    
    
   (Loss) income before income tax benefit (expense)
  (101.3)
  2.4 
  (38.5)
  1.1 
 
    
    
    
    
Income tax benefit (expense)
  0.1 
  1.2 
  (0.2)
  0.4 
Net (loss) income
  (101.2)
  3.6 
  (38.7)
  1.5 
  Less: Net income attributable to the noncontrolling interest
  -- 
  -- 
  -- 
  -- 
 
    
    
    
    
Net (loss) income attributable to Aehr Test Systems common shareholders
  (101.2)%
  3.6%
  (38.7)%
  1.5%
 
THREE MONTHS ENDED FEBRUARY 28, 2019 COMPARED TO THREE MONTHS ENDED FEBRUARY 28, 2018
 
    NET SALES. Net sales decreased to $3.2 million for the three months ended February 28, 2019 from $7.4 million for the three months ended February 28, 2018, a decrease of 57.2%. The decrease in net sales for the three months ended February 28, 2019 was primarily due to the decrease in net sales of both our wafer-level products and our Test During Burn-in (TDBI) products. Net sales of the wafer-level products for the three months ended February 28, 2019 were $2.0 million, and decreased approximately $0.9 million from the three months ended February 28, 2018. Net sales of the TDBI products for the three months ended February 28, 2019 were $1.1 million, and decreased approximately $3.3 million from the three months ended February 28, 2018.
 
    GROSS PROFIT. Gross profit decreased to $0.3 million for the three months ended February 28, 2019 from $3.2 million for the three months ended February 28, 2018, a decrease of approximately 91.4%. Gross profit margin decreased to 8.6% for the three months ended February 28, 2019 from 43.0% for the three months ended February 28, 2018. The lower gross profit margin for the three months ended February 28, 2019 was primarily due to a higher level of inventory write-downs recorded and was also impacted by higher unabsorbed overhead charged to cost of goods sold due to lower manufacturing and revenue levels in the quarter.
 
    SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses increased to $1.9 million for the three months ended February 28, 2019 from $1.8 million for the three months ended February 28, 2018, an increase of 1.1%. The increase in SG&A expenses was primarily due to an increase in employment related expenses.
 
 
24
 
    RESEARCH AND DEVELOPMENT. R&D expenses decreased to $0.9 million for the three months ended February 28, 2019 from $1.0 million for the three months ended February 28, 2018, a decrease of 10.5%. The decrease in R&D expenses was primarily due to a decrease in project expenses.
 
    RESTRUCTURING. Restructuring charges for the three months ended February 28, 2019 were related to a restructuring plan implemented in February 2019 in order to streamline our operations and better align our structure with our objectives going forward. We recognized $0.6 million of employee termination expenses for the three months ended February 28, 2019. There were no restructuring charges incurred for the three months ended February 28, 2018.
 
    INTEREST EXPENSE, NET. Interest expense, net was $76,000 and $98,000 for the three months ended February 28, 2019 and 2018, respectively. The lower interest expense, net in the three months ended February 28, 2019 was primarily a result of higher interest income due to the increase in the market interest rates on our cash and investment portfolio during the period compared with the three months ended February 28, 2018.
 
    OTHER (EXPENSE) INCOME, NET. Other expense, net was $11,000 and $33,000 for the three months ended February 28, 2019 and 2018, respectively. The change in other expense, net was primarily due to losses realized in connection with the fluctuation in the value of the dollar compared to foreign currencies during the referenced periods.
 
    INCOME TAX BENEFIT (EXPENSE). Income tax benefit was $2,000 for the three months ended February 28, 2019 compared with income tax benefit of $91,000 for the three months ended February 28, 2018. The income tax benefit in the three months ended February 28, 2018 was primarily due to the impact of the “Tax Cuts and Jobs Act” enacted on December 22, 2017, specifically, the provision which made our alternative minimum tax credit refundable by 2022.
 
NINE MONTHS ENDED FEBRUARY 28, 2019 COMPARED TO NINE MONTHS ENDED FEBRUARY 28, 2018
 
    NET SALES. Net sales decreased to $13.8 million for the nine months ended February 28, 2019 from $22.3 million for the nine months ended February 28, 2018, a decrease of 38.0%. The decrease in net sales for the nine months ended February 28, 2019 was primarily due to the decrease in net sales of both our wafer-level products and our TDBI products. Net sales of the wafer-level products for the nine months ended February 28, 2019 were $8.2 million, and decreased approximately $1.7 million from the nine months ended February 28, 2018. Net sales of the TDBI products for the nine months ended February 28, 2019 were $5.6 million, and decreased approximately $6.8 million from the nine months ended February 28, 2018.
 
    GROSS PROFIT. Gross profit decreased to $4.2 million for the nine months ended February 28, 2019 from $9.2 million for the nine months ended February 28, 2018, a decrease of 54.2%. Gross profit margin decreased to 30.6% for the nine months ended February 28, 2019 from 41.4% for the nine months ended February 28, 2018. The decrease in gross profit margin was primarily a result of the higher level of inventory write-downs recorded in the nine months ended February 28, 2019 and manufacturing inefficiencies due to a lower level of net sales.
 
    SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses increased to $5.7 million for the nine months ended February 28, 2019 from $5.5 million for the nine months ended February 28, 2018, an increase of 4.2%. The increase in SG&A expenses was primarily due to an increase in employment related expenses.
 
    RESEARCH AND DEVELOPMENT. R&D expenses decreased to $3.0 million for the nine months ended February 28, 2019 from $3.1 million for the nine months ended February 28, 2018, a decrease of 1.7%. The decrease in R&D expenses was primarily due to a decrease in project expenses.
 
 
25
 
    RESTRUCTURING. Restructuring charges for the nine months ended February 28, 2019 were related to a restructuring plan implemented in February 2019 in order to streamline our operations and better align our structure with our objectives going forward. We recognized $0.6 million of employee termination expenses for the nine months ended February 28, 2019. There were no restructuring charges incurred for the nine months ended February 28, 2018.
 
    INTEREST EXPENSE, NET. Interest expense, net was $228,000 and $310,000 for the nine months ended February 28, 2019 and 2018, respectively. The lower interest expense, net in the nine months ended February 28, 2019 was primarily a result of higher interest income due to the increase in the market interest rates on our cash and investment portfolio during the period compared with the nine months ended February 28, 2018.
 
    OTHER INCOME (EXPENSE), NET. Other income, net was $27,000 for the nine months ended February 28, 2019 compared with other expense, net of $100,000 for the nine months ended February 28, 2018. The change in other income (expense), net was primarily due to gains or losses realized in connection with the fluctuation in the value of the dollar compared to foreign currencies during the referenced periods.
 
    INCOME TAX BENEFIT (EXPENSE). Income tax expense was $21,000 for the nine months ended February 28, 2019 compared with income tax benefit of $81,000 for the nine months ended February 28, 2018. The income tax benefit in the nine months ended February 28, 2018 was primarily due to the impact of the “Tax Cuts and Jobs Act” enacted on December 22, 2017, specifically, the provision which made our alternative minimum tax credit refundable by 2022.
 
LIQUIDITY AND CAPITAL RESOURCES
 
    Net cash used in operating activities was $4.8 million and $3.1 million for the nine months ended February 28, 2019 and 2018, respectively. For the nine months ended February 28, 2019, net cash used in operating activities was primarily the result of net loss of $5.3 million, as adjusted to exclude the effect of non-cash charges of stock-based compensation expense of $0.7 million and depreciation and amortization expenses of $0.3 million. Net cash used in operations was also impacted by a decrease in accounts payable of $1.1 million, partially offset by a decrease in accounts receivable of $0.9 million. The decrease in accounts payable was primarily due to lower expenditures associated with lower revenue. The decrease in accounts receivable was primarily due to a decrease in sales. For the nine months ended February 28, 2018, net cash used in operating activities was primarily the result of the changes in operating assets and liabilities including the increases in inventories, prepaid expenses and other current assets, and accounts receivable of $2.4 million, $0.6 million and $0.5 million, respectively, and a decrease of customer deposits and deferred revenue of $0.8 million. Net cash used in operating activities was also impacted by net income of $0.3 million, as adjusted to exclude the effect of non-cash charges of stock-based compensation expense of $0.8 million and depreciation and amortization of $0.3 million. The increase in inventories was to support expected future shipments for customer orders. The increase in prepaid expenses and other current assets was primarily due to down payments to certain vendors. The increase in accounts receivable was primarily due to large shipments toward the end of the quarter. The decrease in customer deposits and deferred revenue was primarily due to the shipments against customer orders with down payments.
 
    Net cash used in investing activities was $0.1 million and $6.4 million for the nine months ended February 28, 2019 and 2018, respectively. During the nine months ended February 28, 2019, net cash used in investing activities was due to the purchases of property and equipment. During the nine months ended February 28, 2018, net cash used in investing activities was due to the purchase of available for sale securities of $6.0 million, which did not affect our liquidity, and the purchases of property and equipment of $0.5 million.
 
 
 
26
 
Financing activities provided cash of $0.4 million and $0.7 million for the nine months ended February 28, 2019 and 2018, respectively. Net cash provided by financing activities during the nine months ended February 28, 2019 and 2018 was due to the proceeds from the issuance of common stock under employee plans.
 
    The effect of fluctuation in exchange rates decreased cash by $66,000 for the nine months ended February 28, 2019 and increased cash by $66,000 for the nine months ended February 28, 2018. The changes were due to the fluctuation in the value of the dollar compared to foreign currencies.
 
    As of February 28, 2019 and May 31, 2018, we had working capital of $14.2 million and $18.3 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.
 
    We anticipate that the existing cash balance together with income from operations, collections of existing accounts receivable, revenue from our existing backlog of products, the sale of inventory on hand, and deposits and down payments against significant orders will be adequate to meet our liquidity requirements for the next 12 months.
 
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, 2018.
 
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
 
    We had no holdings of derivative financial or commodity instruments as of February 28, 2019 or May 31, 2018.
 
    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.
 
 
27
 
    A majority of our revenue and capital spending is transacted in U.S. Dollars. We, however, enter into transactions in other currencies, primarily Euros and Japanese Yen. 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. CONTROLS 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 - OTHER INFORMATION
 
Item 1. LEGAL PROCEEDINGS
 
    None.
 
Item 1A. RISK 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, 2018 filed with the Securities and Exchange Commission on August 28, 2018.
 
 
28
 
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
    None.
 
Item 3. DEFAULTS UPON SENIOR SECURITIES
 
    None.
 
Item 4. MINE SAFETY DISCLOSURES
 
    Not Applicable
 
Item 5. OTHER INFORMATION
 
    None.
 
Item 6. EXHIBITS
 
 
Exhibit No.
 
Description
 
 
 
 
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.
 
 
 
 
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.
 
 
 
 
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


*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.
 
 
29
 
 
SIGNATURES
 
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: April 12, 2019
By:  
/s/ GAYN ERICKSON
 
 
 
Gayn Erickson
 
 
 
President and Chief Executive Officer
 
 
 
 
 
 
 
Date: April 12, 2019
By:  
/s/ KENNETH B. SPINK
 
 
 
Kenneth B. Spink
 
 
 
Vice President of Finance and Chief Financial Officer
 
 
 
 
 
 
30