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AEHR TEST SYSTEMS - Quarter Report: 2023 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, 2023

 

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

 

(I.R.S. Employer Identification No.)

incorporation or organization)

 

 

 

 

 

400 Kato Terrace

 

 

Fremont, CA

 

94539

 (Address of principal

 

(Zip Code)

 executive offices)

 

 

 

(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:

 

Title of each class

Trading Symbol (s)

Name of each exchange on which registered

Common Stock par value of $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 March 31, 2023 was 28,338,209.

 

 

 

 

AEHR TEST SYSTEMS

 

FORM 10-Q

 

FOR THE QUARTER ENDED FEBRUARY 28, 2023

 

INDEX

 

PART I.

FINANCIAL INFORMATION

 

 

 

 

 

 

ITEM 1.

Financial Statements (Unaudited)

 

 3

 

 

 

 

 

Condensed Consolidated Balance Sheets at February 28, 2023 and May 31, 2022

 

 3

 

 

 

 

 

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended February 28, 2023 and 2022

 

 4

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended February 28, 2023 and 2022

 

 4

 

 

 

 

 

Condensed Consolidated Statements of Shareholders’ Equity for the Three and Nine Months Ended February 28, 2023 and 2022

 

 6

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended February 28, 2023 and 2022

 

 8

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

 9

 

 

 

 

ITEM 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

 25

 

 

 

 

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risks

 

 30

 

 

 

 

ITEM 4.

Controls and Procedures

 

 30

 

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

 

 

ITEM 1.

Legal Proceedings

 

 31

 

 

 

 

ITEM 1A.

Risk Factors

 

 31

 

 

 

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

 31

 

 

 

 

ITEM 3.

Defaults Upon Senior Securities

 

 31

 

 

 

 

ITEM 4.

Mine Safety Disclosures

 

 31

 

 

 

 

ITEM 5.

Other Information

 

 31

 

 

 

 

ITEM 6.

Exhibits

 

 32

 

 

 

 

SIGNATURES

 

 33

    

 
2

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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,

 

 

 

2023

 

 

2022

 

 

 

 

 

 

 

(1)

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$17,188

 

 

$31,484

 

Short-term investments

 

 

25,577

 

 

 

-

 

Trade and other accounts receivable, net

 

 

11,389

 

 

 

12,859

 

Inventories

 

 

21,619

 

 

 

15,051

 

Prepaid expenses and other current assets

 

 

808

 

 

 

613

 

 

 

 

 

 

 

 

 

 

Total current assets

 

 

76,581

 

 

 

60,007

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

1,281

 

 

 

1,203

 

Operating lease right-of-use assets

 

 

6,293

 

 

 

917

 

Other assets

 

 

241

 

 

 

201

 

 

 

 

 

 

 

 

 

 

Total assets

 

$84,396

 

 

$62,328

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

 

4,988

 

 

 

4,195

 

Accrued expenses

 

 

3,489

 

 

 

3,610

 

Operating lease liabilities, short-term

 

 

68

 

 

 

794

 

Customer deposits and deferred revenue, short-term

 

 

843

 

 

 

2,415

 

 

 

 

 

 

 

 

 

 

Total current liabilities

 

 

9,388

 

 

 

11,014

 

 

 

 

 

 

 

 

 

 

Operating lease liabilities, long-term

 

 

6,324

 

 

 

212

 

Deferred revenue, long-term

 

 

8

 

 

 

69

 

Other long-term liabilities

 

 

42

 

 

 

44

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

15,762

 

 

 

11,339

 

 

 

 

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

 

 

Common stock, $0.01 par value: Authorized: 75,000 shares; Issued and outstanding: 28,320 shares and 27,120 shares as of February 28, 2023 and May 31, 2022, respectively

 

 

283

 

 

 

271

 

Additional paid-in capital

 

 

126,930

 

 

 

117,686

 

Accumulated other comprehensive loss

 

 

(162)

 

 

(105)

Accumulated deficit

 

 

(58,417)

 

 

(66,863)

 

 

 

 

 

 

 

 

 

Total shareholders' equity

 

 

68,634

 

 

 

50,989

 

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders' equity

 

$84,396

 

 

$62,328

 

 

(1)

The condensed consolidated balance sheet as of May 31, 2022 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

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 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,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$17,206

 

 

$15,283

 

 

$42,692

 

 

$30,540

 

Cost of sales

 

 

8,331

 

 

 

8,886

 

 

 

21,425

 

 

 

17,343

 

Gross profit

 

 

8,875

 

 

 

6,397

 

 

 

21,267

 

 

 

13,197

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

3,250

 

 

 

2,612

 

 

 

8,650

 

 

 

7,054

 

Research and development

 

 

1,832

 

 

 

1,529

 

 

 

4,881

 

 

 

4,163

 

Total operating expenses

 

 

5,082

 

 

 

4,141

 

 

 

13,531

 

 

 

11,217

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

 

3,793

 

 

 

2,256

 

 

 

7,736

 

 

 

1,980

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income (expense), net

 

 

374

 

 

 

1

 

 

 

758

 

 

 

(9)

Gain from forgiveness of PPP loan

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,698

 

Other (expense) income, net

 

 

(18)

 

 

10

 

 

 

1

 

 

 

68

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income tax expense

 

 

4,149

 

 

 

2,267

 

 

 

8,495

 

 

 

3,737

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

(17)

 

 

(24)

 

 

(49)

 

 

(81)

Net income

 

$4,132

 

 

$2,243

 

 

$8,446

 

 

$3,656

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$0.15

 

 

$0.08

 

 

$0.31

 

 

$0.14

 

Diluted

 

$0.14

 

 

$0.08

 

 

$0.29

 

 

$0.13

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares used in per share calculations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

27,893

 

 

 

26,871

 

 

 

27,571

 

 

 

25,684

 

Diluted

 

 

29,373

 

 

 

28,854

 

 

 

29,080

 

 

 

27,510

 

 

 The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 
4

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 AEHR TEST SYSTEMS

 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 (in thousands, unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

February 28,

 

 

February 28,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$4,132

 

 

$2,243

 

 

$8,446

 

 

$3,656

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income before reclassification:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in unrealized loss on investments

 

 

(16)

 

 

-

 

 

 

(22)

 

 

-

 

Net change in cumulative translation adjustments

 

 

9

 

 

 

(23)

 

 

(35)

 

 

(103)

Other comprehensive loss, net of tax

 

 

(7)

 

 

(23)

 

 

(57)

 

 

(103)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$4,125

 

 

$2,220

 

 

$8,389

 

 

$3,553

 

 

 The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 
5

Table of Contents

 

 AEHR TEST SYSTEMS

 CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

 (in thousands)

 (unaudited)

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Other

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-in

 

 

Comprehensive

 

 

Accumulated

 

 

Shareholders'

 

Three Months Ended February 28, 2023

 

Shares

 

 

Amount

 

 

Capital

 

 

Income (Loss)

 

 

Deficit

 

 

Equity

 

Balances, November 30, 2022

 

 

27,732

 

 

$277

 

 

$119,094

 

 

$(155)

 

$(62,549)

 

$56,667

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock under employee plans

 

 

395

 

 

 

4

 

 

 

849

 

 

 

-

 

 

 

-

 

 

 

853

 

Shares repurchased for tax withholdings on vesting of restricted stock units

 

 

(16)

 

 

-

 

 

 

(464)

 

 

-

 

 

 

-

 

 

 

(464)

Proceeds from public offerings, net of issuance costs

 

 

209

 

 

 

2

 

 

 

6,851

 

 

 

-

 

 

 

-

 

 

 

6,853

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

600

 

 

 

-

 

 

 

-

 

 

 

600

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4,132

 

 

 

4,132

 

Net unrealized loss on investments

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(16)

 

 

-

 

 

 

(16)

Foreign currency translation adjustment

 

 

-

 

 

 

-

 

 

 

-

 

 

 

9

 

 

 

-

 

 

 

9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, February 28, 2023

 

 

28,320

 

 

$283

 

 

$126,930

 

 

$(162)

 

$(58,417)

 

$68,634

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Other

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-in

 

 

Comprehensive

 

 

Accumulated

 

 

Shareholders'

 

Nine Months Ended February 28, 2023

 

Shares

 

 

Amount

 

 

Capital

 

 

Income (Loss)

 

 

Deficit

 

 

Equity

 

Balances, May 31, 2022

 

 

27,120

 

 

$271

 

 

$117,686

 

 

$(105)

 

$(66,863)

 

$50,989

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock under employee plans

 

 

1,156

 

 

 

11

 

 

 

1,954

 

 

 

-

 

 

 

-

 

 

 

1,965

 

Shares repurchased for tax withholdings on vesting of restricted stock units

 

 

(165)

 

 

(1)

 

 

(1,679)

 

 

-

 

 

 

-

 

 

 

(1,680)

Proceeds from public offerings, net of issuance costs

 

 

209

 

 

 

2

 

 

 

6,851

 

 

 

-

 

 

 

-

 

 

 

6,853

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

2,118

 

 

 

-

 

 

 

-

 

 

 

2,118

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

8,446

 

 

 

8,446

 

Net unrealized loss on investments

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(22)

 

 

-

 

 

 

(22)

Foreign currency translation adjustment

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(35)

 

 

-

 

 

 

(35)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, February 28, 2023

 

 

28,320

 

 

$283

 

 

$126,930

 

 

$(162)

 

$(58,417)

 

$68,634

 

 

 
6

Table of Contents

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Other

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-in

 

 

Comprehensive

 

 

Accumulated

 

 

Shareholders'

 

Three Months Ended February 28, 2022

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Equity

 

Balances, November 30, 2021

 

 

26,835

 

 

$268

 

 

$115,602

 

 

$(108)

 

$(74,900)

 

$40,862

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock under employee plans

 

 

79

 

 

 

1

 

 

 

25

 

 

 

-

 

 

 

-

 

 

 

26

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

880

 

 

 

-

 

 

 

-

 

 

 

880

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,243

 

 

 

2,243

 

Foreign currency translation adjustment

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(23)

 

 

-

 

 

 

(23)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, February 28, 2022

 

 

26,914

 

 

$269

 

 

$116,507

 

 

$(131)

 

$(72,657)

 

$43,988

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

Additional

 

 

Other

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-in

 

 

Comprehensive

 

 

Accumulated

 

 

Shareholders'

 

Nine Months Ended February 28, 2022

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Equity

 

Balances, May 31, 2021

 

 

23,725

 

 

$237

 

 

$87,553

 

 

$(28)

 

$(76,313)

 

$11,449

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock under employee plans

 

 

1,492

 

 

 

15

 

 

 

2,755

 

 

 

-

 

 

 

-

 

 

 

2,770

 

Proceeds from public offerings, net of issuance costs

 

 

1,697

 

 

 

17

 

 

 

24,013

 

 

 

-

 

 

 

-

 

 

 

24,030

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

2,186

 

 

 

-

 

 

 

-

 

 

 

2,186

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,656

 

 

 

3,656

 

Foreign currency translation adjustment

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(103)

 

 

-

 

 

 

(103)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, February 28, 2022

 

 

26,914

 

 

$269

 

 

$116,507

 

 

$(131)

 

$(72,657)

 

$43,988

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 
7

Table of Contents

    

AEHR TEST SYSTEMS

 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 (in thousands)

 (unaudited)

  

 

 

Nine Months Ended

 

 

 

February 28,

 

 

 

2023

 

 

2022

 

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$8,446

 

 

$3,656

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

2,095

 

 

 

2,186

 

Provision for doubtful accounts

 

 

24

 

 

 

-

 

Depreciation and amortization

 

 

337

 

 

 

262

 

Non-cash operating lease expense

 

 

10

 

 

 

(36)

Accretion of investment discount

 

 

(305)

 

 

-

 

Gain from forgiveness of PPP loan

 

 

-

 

 

 

(1,698)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Trade and other accounts receivable

 

 

1,414

 

 

 

(3,454)

Inventories

 

 

(6,783)

 

 

(5,449)

Prepaid expenses and other assets

 

 

(167)

 

 

(28)

Accounts payable

 

 

822

 

 

 

444

 

Accrued expenses

 

 

(126)

 

 

375

 

Customer deposits and deferred revenue

 

 

(1,633)

 

 

5,999

 

Income taxes payable

 

 

9

 

 

 

18

 

Net cash provided by operating activities

 

 

4,143

 

 

 

2,275

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of investments

 

 

(33,294)

 

 

-

 

Proceeds from maturities of investments

 

 

8,000

 

 

 

-

 

Purchases of property and equipment

 

 

(178)

 

 

(218)

Net cash used in investing activities

 

 

(25,472)

 

 

(218)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Line of credit repayments, net

 

 

-

 

 

 

(1,400)

Proceeds from issuance of common stock under employee plans

 

 

1,965

 

 

 

3,139

 

Shares repurchased for tax withholdings on vesting of restricted stock units

 

 

(1,680)

 

 

(369)

Proceeds from issuance of common stock from public offering, net of issuance costs

 

 

6,853

 

 

 

24,030

 

Net cash provided by financing activities

 

 

7,138

 

 

 

25,400

 

 

 

 

 

 

 

 

 

 

Effect of exchange rates on cash, cash equivalents and restricted cash

 

 

(35)

 

 

(19)

 

 

 

 

 

 

 

 

 

Net (decrease) increase in cash, cash equivalents and restricted cash

 

 

(14,226)

 

 

27,438

 

 

 

 

 

 

 

 

 

 

Cash, cash equivalents and restricted cash, beginning of period(1)

 

 

31,564

 

 

 

4,662

 

 

 

 

 

 

 

 

 

 

Cash, cash equivalents and restricted cash, end of period(1)

 

$17,338

 

 

$32,100

 

 

 

(1)

Includes restricted cash in other assets.

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 
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 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 (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, 2022 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, 2022. 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.

 

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 the standalone selling prices related to revenue recognition, 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.

 

RECLASSIFICATIONS. Certain reclassifications have been made to prior year condensed consolidated financial statements to conform to the current period presentation. The reclassifications had no impact on net loss, total assets, total liabilities, or shareholders’ equity.

 

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, 2022. There have been no significant changes in the Company’s significant accounting policies during the three and nine months ended February 28, 2023.

 

2. RECENT ACCOUNTING PRONOUNCEMENTS

 

Accounting Standards Not Yet Adopted

 

In June 2016, the Financial Accounting Standards Board issued Accounting Standard Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326), 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. The Company does not expect a material impact of this accounting standard on its condensed consolidated financial statements.

 

 
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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.

 

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

 

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

 

Disaggregation of revenue

 

The following tables show net sales 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.

 

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

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

February 28,

 

 

February 28,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Type of good / service:

 

 

 

 

 

 

 

 

 

 

 

 

Systems

 

$9,821

 

 

$7,172

 

 

$26,315

 

 

$14,805

 

Contactors

 

 

6,299

 

 

 

7,426

 

 

 

13,400

 

 

 

13,468

 

Services

 

 

1,086

 

 

 

685

 

 

 

2,977

 

 

 

2,267

 

 

 

$17,206

 

 

$15,283

 

 

$42,692

 

 

$30,540

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product lines:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wafer-level

 

$16,810

 

 

$14,879

 

 

$41,532

 

 

$29,130

 

Test During Burn-In

 

 

396

 

 

 

404

 

 

 

1,160

 

 

 

1,410

 

 

 

$17,206

 

 

$15,283

 

 

$42,692

 

 

$30,540

 

    

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

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

February 28,

 

 

February 28,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Geographic region:

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$2,343

 

 

$1,057

 

 

$7,761

 

 

$2,458

 

Asia

 

 

14,849

 

 

 

14,213

 

 

 

34,873

 

 

 

28,066

 

Europe

 

 

14

 

 

 

13

 

 

 

58

 

 

 

16

 

 

 

$17,206

 

 

$15,283

 

 

$42,692

 

 

$30,540

 

  

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

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

February 28,

 

 

February 28,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Timing of revenue recognition:

 

 

 

 

 

 

 

 

 

 

 

 

Products and services transferred at a point in time

 

$16,863

 

 

$14,932

 

 

$41,523

 

 

$29,492

 

Services transferred over time

 

 

343

 

 

 

351

 

 

 

1,169

 

 

 

1,048

 

 

 

$17,206

 

 

$15,283

 

 

$42,692

 

 

$30,540

 

 

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 February 28, 2023 and May 31, 2022 were $851,000 and $2,484,000, respectively. During the three and nine months ended February 28, 2023, the Company recognized $42,000 and $2,157,000, respectively, of revenues that were included in contract liabilities as of May 31, 2022.

 

 
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Remaining performance obligations

 

On February 28, 2023, the Company had $90,000 of remaining performance obligations, which were comprised of deferred service contracts and extended warranty contracts not yet delivered. The Company expects to recognize approximately 24% of its remaining performance obligations as revenue in the remainder of fiscal 2023, and an additional 76% in fiscal 2024 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 shares, restricted stock units (“RSUs”), Performance RSUs (“PRSUs”) 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 earnings per share (in thousands, except per share data):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

February 28,

 

 

February 28,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator: Net income

 

$4,132

 

 

$2,243

 

 

$8,446

 

 

$3,656

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

27,893

 

 

 

26,871

 

 

 

27,571

 

 

 

25,684

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares used in basic earnings per share calculation

 

 

27,893

 

 

 

26,871

 

 

 

27,571

 

 

 

25,684

 

Effect of dilutive securities

 

 

1,480

 

 

 

1,983

 

 

 

1,509

 

 

 

1,826

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for diluted earnings per share

 

 

29,373

 

 

 

28,854

 

 

 

29,080

 

 

 

27,510

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$0.15

 

 

$0.08

 

 

$0.31

 

 

$0.14

 

Diluted earnings per share

 

$0.14

 

 

$0.08

 

 

$0.29

 

 

$0.13

 

 

 For the purpose of computing diluted earnings per share, weighted average potential common shares do 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, 2023, stock options to purchase 15,000 shares of common stock were outstanding, but were not included in the computation of diluted earnings per share, because the inclusion of such shares would be anti-dilutive. In the three and nine months ended February 28, 2022, stock options to purchase 11,000 shares of common stock were outstanding, but were not included in the computation of diluted earnings per share, because the inclusion of such shares would be anti-dilutive.

 

 
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5. CASH, CASH EQUIVALENTS AND INVESTMENTS

 

 The following table summarizes the Company’s cash, cash equivalents and investments by security type as of February 28, 2023 (in thousands):

 

 

 

Cost

 

 

Gross Unrealized Loss

 

 

Estimated Fair Value

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$1,479

 

 

$-

 

 

$1,479

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

 

11,726

 

 

 

-

 

 

 

11,726

 

U.S. treasury securities

 

 

3,983

 

 

 

-

 

 

 

3,983

 

Total cash equivalents

 

 

15,709

 

 

 

-

 

 

 

15,709

 

Total cash and cash equivalents

 

$17,188

 

 

$-

 

 

$17,188

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury securities

 

$25,599

 

 

$(22)

 

$25,577

 

Long-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$150

 

 

 

-

 

 

$150

 

Total cash, cash equivalents and investments

 

$42,937

 

 

$(22)

 

$42,915

 

 

Long-term investments are included in other assets on the accompanying condensed consolidated balance sheets.

 

Unrealized gains and temporary losses on investments classified as available-for-sale are included within accumulated other comprehensive loss, net of any related tax effect. Upon realization, those amounts are reclassified from accumulated other comprehensive loss to results of operations.

 

The unrealized loss of $22,000 as of February 28, 2023 is not considered other-than-temporary, and has been in an unrealized loss position for less than a year.

 

6. 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.

 

 

 
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The following table summarizes the Company’s financial assets measured at fair value on a recurring basis as of February 28, 2023 (in thousands):

 

 

 

Balance as of

 

 

 

 

 

 

 

 

 

 

February 28,

2023

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Money market funds

 

$11,876

 

 

$11,876

 

 

$-

 

 

$-

 

U.S. treasury securities

 

 

29,560

 

 

 

29,560

 

 

 

-

 

 

 

-

 

Total

 

$41,436

 

 

$41,436

 

 

$-

 

 

$-

 

 

The following table summarizes the Company’s financial assets measured at fair value on a recurring basis as of May 31, 2022 (in thousands):

 

 

 

Balance as of

May 31,

2022

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$28,609

 

 

$28,609

 

 

$-

 

 

$-

 

 

Included in money market funds as of February 28, 2023 and May 31, 2022 is $150,000 and $80,000 in restricted cash, respectively, representing a security deposit for the Company’s United States manufacturing and office space lease which is included in other assets in the condensed consolidated balance sheets.

 

There were no financial liabilities measured at fair value as of February 28, 2023 and May 31, 2022.

 

There were no transfers between Level 1 and Level 2 fair value measurements during the three and nine months ended February 28, 2023.

 

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

 

7. TRADE AND OTHER ACCOUNTS RECEIVABLE, NET

 

Trade accounts receivable represent customer trade receivables. As of February 28, 2023 and May 31, 2022, there were no allowances for doubtful accounts. Trade accounts receivable is derived from the sale of products throughout the world to semiconductor manufacturers, semiconductor contract assemblers, electronics manufacturers and burn-in and test service companies. Other accounts receivable represents non-customer trade related receivables that are derived from the sale of raw materials to our subcontractors. 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.

 

 
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8. INVENTORIES

 

Inventories are comprised of the following (in thousands):

 

 

 

February 28,

 

 

 May 31,

 

 

 

2023

 

 

2022

 

Raw materials and sub-assemblies

 

$13,906

 

 

$9,507

 

Work in process

 

 

7,147

 

 

 

5,461

 

Finished goods

 

 

566

 

 

 

83

 

 

 

$21,619

 

 

$15,051

 

 

9. 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, 2023 and 2022 (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

February 28,

 

 

February 28,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at the beginning of the period

 

$311

 

 

$415

 

 

$410

 

 

$494

 

Accruals for warranties issued during the period

 

 

84

 

 

 

37

 

 

 

207

 

 

 

294

 

Adjustments to previously existing warranty accruals

 

 

-

 

 

 

26

 

 

 

61

 

 

 

98

 

Consumption of reserves

 

 

(107)

 

 

(108)

 

 

(390)

 

 

(516)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at the end of the period

 

$288

 

 

$370

 

 

$288

 

 

$370

 

 

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

 

 
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10. CUSTOMER DEPOSITS AND DEFERRED REVENUE, SHORT-TERM

 

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

 

 

 

February 28,

 

 

 May 31,

 

 

 

2023

 

 

2022

 

Customer deposits

 

$760

 

 

$2,263

 

Deferred revenue

 

 

83

 

 

 

152

 

 

 

$843

 

 

$2,415

 

 

11. ACCUMULATED OTHER COMPREHENSIVE LOSS

 

Changes in the components of accumulated other comprehensive loss, net of tax, were as follows (in thousands):

 

 

 

Cumulative Translation Adjustments

 

 

Unrealized Loss on Investments, Net

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

Balance as of May 31, 2022

 

$(105)

 

$-

 

 

$(105)

Other comprehensive loss before reclassifications

 

 

(35)

 

 

(22)

 

 

(57)

Other comprehensive loss, net of tax

 

 

(35)

 

 

(22)

 

 

(57)

Balance as of February 28, 2023

 

$(140)

 

$(22)

 

$(162)

 

12. INCOME TAXES

 

The Company is subject to U.S federal and state and foreign income taxes as a corporation. The Company’s tax provision and the resulting effective tax rate for the interim period is determined based upon its estimated annual effective tax rate adjusted for the effect of discrete items arising in that quarter. The Company recorded a provision for income tax of $17,000 and $49,000 for the three and nine months ended February 28, 2023 which consisted primarily of foreign withholding taxes and foreign income taxes. The Company recorded a provision for income tax of $24,000 and $81,000 for the three and nine months ended February 28, 2022 which consisted primarily of foreign withholding taxes and foreign income taxes. The provision for federal and state income taxes was not significant due to available net operating loss and research and development credit carryforwards.

 

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 will adjust the valuation allowance in the period management determines it is more likely than not that deferred tax assets will or 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.

 

 
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13. 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 sheets, 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 condensed consolidated balance sheets. The Company’s operating leases have remaining lease terms of 1 year to 8 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 assets may be required for items such as initial direct costs paid or incentives received.

 

In December 2022, the Company amended its lease agreement to extend the lease term of an existing office facility located in the United States, which is considered a lease modification not accounted for as a separate contract. The total commitments, net of tenant incentives expected to be received, under the modified lease are $8.6 million. The modified lease expires in fiscal 2031 and contains an option to further extend the lease. The lease modification resulted in an increase in the Company’s operating lease right-of-use assets and operating lease liabilities of $5.9 million each.

 

As of February 28, 2023, the weighted-average remaining lease term for the Company’s operating leases was 7.5 years and the weighted-average discount rate was 7.5%.

 

The Company’s operating lease cost was $256,000 and $634,000 for the three and nine months ended February 28, 2023, respectively. For the three and nine months ended February 28, 2022, operating lease cost was $191,000 and $576,000, respectively.

 

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

  

 

 

Nine Months Ended

 

 

 

February 28,

 

 

 

 2023

 

 

2022

 

Cash paid for amounts included in the measurement of operating lease liabilities:

 

 

 

 

 

 

Operating cash flows from operating leases

 

$624

 

 

$612

 

 

 
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The following table presents the maturities of the Company’s operating lease liabilities as of February 28, 2023 (in thousands):

  

Fiscal year

 

Operating Leases

 

2023 (remaining three months of 2023)

 

$211

 

2024

 

 

608

 

2025

 

 

1,143

 

2026

 

 

1,174

 

2027

 

 

1,195

 

Thereafter

 

 

4,309

 

Total future minimum operating lease payments

 

 

8,640

 

Less: imputed interest

 

 

(2,248)

Present value of operating lease liabilities

 

$6,392

 

    

14. 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 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.

 

On January 14, 2021, the Company entered into the First Amendment to Loan and Security Agreement (the “Amendment”) with SVB. The Amendment, among other things, extended the Revolving Line Maturity Date to July 14, 2021; provided, however, that if the Company achieved specified operating metrics on a consolidated basis on or prior to May 31, 2021 the Amended Revolving Line Maturity Date would be extended to January 13, 2022.

 

On January 11, 2022, the Company entered into the Second Amendment to the Loan and Security Agreement (the “Second Amendment”) with SVB. The Second Amendment, among other things, (A) increased the available amount of the line up to the lesser of (i) $10 million or (ii) the available amount under the borrowing base, under a revolving line of credit, (B) allowed for borrowing up to $3 million of the available balance based upon eligible customer purchase orders, (C) reduced the interest rate for account advances under the line to the greater of (a) prime rate plus an additional percentage up to 1.0%, which additional percentage depends on the Company’s adjusted quick ratio, and (b) 3.25%, reduces the interest rate for purchase order advances under the line to the greater of (a) prime rate plus an additional percentage up to 1.5%, which additional percentage depends on the Company’s adjusted quick ratio, and (b) 3.75%, and (D) extended the maturity date to January 13, 2023.

 

On January 10, 2023, the Company entered into the Third Amendment to the Loan and Security Agreement (the “Third Amendment”) with SVB. The Third Amendment, among other things, extends the Revolving Line Maturity Date to January 13, 2024, provided, however, that (i) if the Company submits a fiscal year 2024 plan of record that is generally acceptable to SVB, and (ii) the minimum net liquidity at the end of November 30, 2023 is at least $20.0 million, the Amended Revolving Line Maturity Date would be extended to January 13, 2025.

 

As of February 28, 2023 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 as of February 28, 2023 was $6,949,000. There are no financial covenants in the agreement.

 

 
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15. LONG-TERM DEBT:

 

On April 23, 2020, the Company obtained the 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 matured on April 23, 2022 and bore interest at a rate of 1% per annum, payable monthly commencing on November 23, 2020. 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. On June 12, 2021, the Company received confirmation from SVB that, on June 4, 2021, the Small Business Administration approved the Company’s PPP Loan forgiveness application for the entire PPP Loan balance of $1,679,000 and interest totaling $19,000, and the Company recognized a gain on loan forgiveness of $1,698,000.

    

16. STOCK-BASED COMPENSATION

 

Stock-based compensation expense consists of expenses for stock options, RSUs, PRSUs, restricted shares, performance restricted shares 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 and restricted shares, 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 2022 filed on August 26, 2022 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 nine months ended February 28, 2023 and 2022 (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

February 28,

 

 

February 28,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Stock-based compensation in the form of stock options, RSUs, restricted shares and ESPP purchase rights, included in:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

$75

 

 

$90

 

 

$252

 

 

$248

 

Selling, general and administrative

 

 

359

 

 

 

487

 

 

 

1,330

 

 

 

1,259

 

Research and development

 

 

158

 

 

 

303

 

 

 

513

 

 

 

679

 

Total stock-based compensation

 

$592

 

 

$880

 

 

$2,095

 

 

$2,186

 

 

As of February 28, 2023, there were $110,000 stock-based compensation expenses capitalized as part of inventory. As of February 28, 2022, there were no stock-based compensation expenses capitalized as part of inventory.

 

During the three months ended February 28, 2023 and 2022, the Company recorded stock-based compensation expense related to stock options, RSUs, PRSUs, performance restricted shares and restricted shares under the 2016 Plan of $424,000 and $516,000, respectively. During the nine months ended February 28, 2023 and 2022, the Company recorded stock-based compensation expense related to stock options, RSUs and restricted shares of $1,536,000 and $1,416,000, respectively. For Performance RSUs and performance restricted shares, the Company evaluates compensation expense quarterly and recognizes expense for performance-based awards only if it determines it is probable that performance criteria for the awards will be met.

 

 
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As of February 28, 2023, the total compensation expense related to unvested stock-based awards under the 2016 Plan, but not yet recognized, was approximately $3,348,000, which is net of estimated forfeitures of $8,000. This expense will be amortized on a straight-line basis over a weighted average period of approximately 2.1 years.

 

During the three months ended February 28, 2023 and 2022, the Company recorded stock-based compensation expense related to the ESPP of $168,000 and $364,000, respectively. During the nine months ended February 28, 2023 and 2022, the Company recorded stock-based compensation expense related to the ESPP of $559,000 and $770,000, respectively.

 

As of February 28, 2023, the total compensation expense related to purchase rights under the ESPP but not yet recognized was approximately $261,000. 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, 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 values of the Company’s stock options granted to employees for the three and nine months ended February 28, 2023 and 2022, was estimated using the following weighted average assumptions in the Black-Scholes option valuation model:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

February 28,

 

 

February 28,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expected term (in years)

 

 

5

 

 

 

5

 

 

 

5

 

 

 

6

 

Volatility

 

 

90%

 

 

117%

 

 

116%

 

 

77%

Risk-free interest rate

 

 

3.58%

 

 

1.56%

 

 

3.11%

 

 

1.03%

Weighted average grant date fair value

 

$24.30

 

 

$9.43

 

 

$7.24

 

 

$2.56

 

 

 
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The fair values of the ESPP purchase rights granted for the nine months ended February 28, 2023 and 2022 were estimated using the following assumptions:

 

 

 

 Nine Months Ended

 

 

 Nine Months Ended

 

 

 

February 28, 2023

 

 

February 28, 2022

 

 

 

 

 

 

 

Expected term (in years)

 

0.5-2.0

 

 

0.5-2.0

 

Volatility

 

 90%-203

 

 101%-143

Risk-free interest rates

 

3.97%-4.12

 

0.05%-0.27

Weighted average grant date fair value

 

$11.17

 

 

$9.57

 

 

There were no ESPP purchase rights granted to employees for the three months ended February 28, 2023 and 2022. During the nine months ended February 28, 2023 and 2022, ESPP purchase rights of 43,000 and 103,000 were granted, respectively. Total ESPP shares issued during the nine months ended February 28, 2023 and 2022 were 109,000 and 75,000 shares, respectively. There were 499,000 ESPP shares available for issuance as of February 28, 2023.

   

The following tables summarize the Company’s stock option and RSU transactions during the three and nine months ended February 28, 2023 and shows the shares available to be issued at the end of each period (in thousands):

 

 

 

Available

 

 

 

Shares

 

Balance, May 31, 2022

 

 

1,826

 

 

 

 

 

 

Options granted

 

 

(103)

RSUs granted

 

 

(323)

Options cancelled and adjusted

 

 

6

 

 

 

 

 

 

Balance, August 31, 2022

 

 

1,406

 

 

 

 

 

 

Options granted

 

 

(5)

RSUs granted

 

 

(14)

 

 

 

 

 

Balance, November 30, 2022

 

 

1,387

 

 

 

 

 

 

Options granted

 

 

(1)

RSUs cancelled

 

 

--

 

Options cancelled

 

 

8

 

 

 

 

 

 

Balance, February 28, 2023

 

 

1,394

 

 

 
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The following table summarizes the stock option transactions during the three and nine months ended February 28, 2023 (in thousands, except per share data):

 

 

 

 Outstanding Options

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

Number

 

 

Average

 

 

Aggregate

 

 

 

of

 

 

Exercise

 

 

Intrinsic

 

 

 

Shares

 

 

Price

 

 

Value

 

Balances, May 31, 2022

 

 

1,597

 

 

$2.70

 

 

$9,290

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options granted

 

 

103

 

 

$8.00

 

 

 

 

 

Options cancelled

 

 

(6)

 

$2.41

 

 

 

 

 

Options exercised

 

 

(102)

 

$2.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, August 31, 2022

 

 

1,592

 

 

$3.08

 

 

$18,287

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options granted

 

 

4

 

 

$21.22

 

 

 

 

 

Options exercised

 

 

(168)

 

$2.31

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, November 30, 2022

 

 

1,428

 

 

$3.23

 

 

$32,614

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options granted

 

 

1

 

 

$34.00

 

 

 

 

 

Options cancelled

 

 

(8)

 

$7.40

 

 

 

 

 

Options exercised

 

 

(360)

 

$2.36

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, February 28, 2023

 

 

1,061

 

 

$3.54

 

 

$31,629

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options fully vested and expected to vest on February 28, 2023

 

 

1,045

 

 

$3.53

 

 

$31,177

 

 

The options outstanding and exercisable on February 28, 2023 were in the following exercise price ranges (in thousands, except per share data):

 

 

 

 

Options Outstanding

 

 

Options Exercisable

 

 

 

 

at February 28, 2023

 

 

at February 28, 2023

 

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

 

$1.34

 

 

 

41

 

 

 

4.64

 

 

$1.34

 

 

 

41

 

 

 

4.64

 

 

$1.34

 

 

 

 

$1.64-$1.86

 

 

 

413

 

 

 

3.57

 

 

$1.72

 

 

 

298

 

 

 

3.43

 

 

$1.70

 

 

 

 

$2.03-$2.40

 

 

 

196

 

 

 

2.85

 

 

$2.15

 

 

 

184

 

 

 

2.71

 

 

$2.15

 

 

 

 

$2.76-$2.93

 

 

 

167

 

 

 

4.98

 

 

$2.92

 

 

 

50

 

 

 

4.07

 

 

$2.89

 

 

 

 

$3.46-$3.93

 

 

 

47

 

 

 

1.42

 

 

$3.83

 

 

 

47

 

 

 

1.42

 

 

$3.83

 

 

 

 

$8.00-$34.00

 

 

 

197

 

 

 

6.22

 

 

$9.63

 

 

 

32

 

 

 

6.14

 

 

$10.17

 

 

 

 

$1.34-$34.00

 

 

 

1,061

 

 

 

4.10

 

 

$3.54

 

 

 

652

 

 

 

3.33

 

 

$2.46

 

 

$20,151

 

 

The total intrinsic value of options exercised during the three and nine months ended February 28,2023 was $10,827,000 and $14,183,000, respectively. The total intrinsic value of options exercised during the three and nine months ended February 28, 2022 was $867,000 and $11,902,000, respectively. The weighted average remaining contractual life of the options exercisable and expected to be exercisable on February 28, 2023 was 4.09 years. The weighted average remaining contractual life of the options exercisable and expected to be exercisable on February 28, 2022 was 4.04 years.

 

 
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The following table summarizes RSUs, PRSUs, restricted shares and performance restricted shares granted to employees and members of the Company’s Board of Directors during the three and nine months ended February 28, 2023 and 2022:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

February 28,

 

 

February 28,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Employees:

 

 

 

 

 

 

 

 

 

 

 

 

Annual RSUs granted

 

 

--

 

 

 

--

 

 

 

151,800

 

 

 

120,000

 

Weighted average market value on the date of the grant of annual RSUs

 

 

-

 

 

 

-

 

 

$8.03

 

 

$3.17

 

Annual restricted shares granted

 

 

--

 

 

 

--

 

 

 

7,500

 

 

 

--

 

Weighted average market value on the date of the grant of annual restricted shares

 

 

-

 

 

 

-

 

 

$8.00

 

 

 

-

 

RSUs granted in lieu of cash payment for salary reductions

 

 

--

 

 

 

--

 

 

 

--

 

 

 

89,000

 

Weighted average market value on the date of the grant of RSU in lieu of cash payment

 

 

-

 

 

 

-

 

 

 

-

 

 

$2.50

 

Maximum PRSUs to be vested if all revenue goals are achieved

 

 

--

 

 

 

--

 

 

 

80,400

 

 

 

270,000

 

Maximum Performance restricted shares to be vested if all revenue goals are achieved

 

 

--

 

 

 

--

 

 

 

23,700

 

 

 

--

 

Weighted average market value on the date of the grant of PRSUs, performance restricted shares

 

 

-

 

 

 

-

 

 

$8.00

 

 

$3.41

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Members of Board of Directors:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RSUs granted

 

 

-

 

 

 

--

 

 

 

44,000

 

 

 

43,000

 

Weighted average market value on the date of the grant of RSUs

 

 

-

 

 

 

-

 

 

$11.35

 

 

$8.02

 

Maximum PRSUs granted to be vested if all revenue goals are achieved

 

 

-

 

 

 

-

 

 

 

30,000

 

 

 

--

 

Weighted average market value on the date of the grant of PRSUs

 

 

 --

 

 

 

 --

 

 

 8.00

 

 

 

 --

 

 

PRSUs were granted to key officers and members of Board of Directors based upon revenue target thresholds for fiscal 2023 and 2022.

 

The following table summarizes the RSUs and PRSUs vested and unvested during the three and nine months ended February 28, 2023 and 2022:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

February 28,

 

 

February 28,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Net RSUs and PRSUs vested

 

 

19,000

 

 

 

21,000

 

 

 

221,000

 

 

 

83,000

 

Shares withheld to settle payroll taxes

 

 

16,000

 

 

 

--

 

 

 

165,000

 

 

 

--

 

RSUs and PRSUs unvested

 

 

406,000

 

 

 

485,000

 

 

 

406,000

 

 

 

485,000

 

Intrinsic value of unvested RSUs and PRSUs (in thousands)

 

$13,540

 

 

$6,596

 

 

$13,540

 

 

$6,596

 

 

 
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17. SEGMENT AND CONCENTRATION 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):

 

 

 

February 28,

 

 

May 31,

 

 

 

2023

 

 

2022

 

United States

 

$1,229

 

 

$1,156

 

Asia

 

 

50

 

 

 

47

 

Europe

 

 

2

 

 

 

-

 

 

 

$1,281

 

 

$1,203

 

 

As of February 28, 2023, the operating lease right-of-use assets of $6,169,000, $76,000 and $48,000 are allocated in the United States, Asia, and Europe, respectively. As of May 31, 2022, the operating lease right-of-use assets of $822,000 and $95,000 were allocated in the United States and Asia, respectively.

 

There were no revenues through distributors for the three and nine months ended February 28, 2023 and 2022.

 

Sales to the Company’s five largest customers accounted for approximately 98% and 97% of its net sales in the three and nine months ended February 28, 2023, respectively. Two customers accounted for approximately 82% and 12% of the Company’s net sales in the three months ended February 28, 2023. Two customers accounted for approximately 77% and 16% of the Company’s net sales in the nine months ended February 28, 2023. Sales to the Company’s five largest customers accounted for approximately 99% and 97% of its net sales in the three and nine months ended February 28, 2022, respectively. One customer accounted for approximately 90% of the Company’s net sales in the three months ended February 28, 2022. One customer accounted for approximately 84% of the Company’s net sales in the nine months ended February 28, 2022. No other customers represented more than 10% of the Company’s net sales in the three and nine months ended February 28, 2023 and 2022.

 

18. EQUITY

 

On August 25, 2021, the Board authorized Management to take actions necessary for the execution of a $75 million shelf registration, which S-3 was filed with the SEC on September 3, 2021. A Prospectus Supplement for an "At the Market" ("ATM") sale of $25 million of common stock was subsequently filed on September 17, 2021. On October 8, 2021, the Company fully executed the ATM offering by selling 1,696,729 shares at an average selling price of $14.73. The gross proceeds to the Company were $25.0 million, before commission fees of $0.7 million and offering expenses of $0.3 million. Another Prospectus Supplement for an ATM sale of $25 million of common stock was subsequently filed on February 8, 2023. The Company partially executed the ATM offering by selling 208,917 shares at an average selling price of $34.78. The gross proceeds to the Company were $7.3 million, before commissions of $0.2 million and offering expenses of $0.2 million.

 

 
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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, 2022 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 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.

 

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-XP, FOX-NP and FOX-CP wafer contact and singulated die/module parallel test and burn-in systems, WaferPak Aligner, WaferPak contactors, DiePak Loader, DiePak carriers and test fixtures.

 

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

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

Our discussion and analysis of our financial condition and results of operations are based upon our 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, assumptions and judgments, including those related to customer programs and incentives, product returns, bad debts, inventories, income taxes, financing obligations, 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, 2022.

 

There have been no material changes to our critical accounting policies and estimates during the three and nine months ended February 28, 2023 compared to those discussed in our Annual Report on Form 10-K for the fiscal year ended May 31, 2022.

 

 
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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,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

 

100.0%

 

 

100.0%

 

 

100.0%

 

 

100.0%

Cost of sales

 

 

48.4

 

 

 

58.1

 

 

 

50.2

 

 

 

56.8

 

Gross profit

 

 

51.6

 

 

 

41.9

 

 

 

49.8

 

 

 

43.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

18.9

 

 

 

17.1

 

 

 

20.3

 

 

 

23.1

 

Research and development

 

 

10.7

 

 

 

10.0

 

 

 

11.4

 

 

 

13.6

 

Total operating expenses

 

 

29.6

 

 

 

27.1

 

 

 

31.7

 

 

 

36.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

 

22.0

 

 

 

14.8

 

 

 

18.1

 

 

 

6.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income (expense), net

 

 

2.2

 

 

 

--

 

 

 

1.8

 

 

 

(0.1)

Gain from forgiveness of PPP loan

 

 

--

 

 

 

--

 

 

 

--

 

 

 

5.6

 

Other (expense) income, net

 

 

(0.1)

 

 

--

 

 

 

--

 

 

 

0.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income tax expense

 

 

24.1

 

 

 

14.8

 

 

 

19.9

 

 

 

12.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

(0.1)

 

 

(0.1)

 

 

(0.1)

 

 

(0.2)

Net income

 

 

24.0%

 

 

14.7%

 

 

19.8%

 

 

12.0%

 

THREE MONTHS ENDED FEBRUARY 28, 2023 COMPARED TO THREE MONTHS ENDED FEBRUARY 28, 2022

 

NET SALES. Net sales increased to $17.2 million for the three months ended February 28, 2023 from $15.3 million for the three months ended February 28, 2022, an increase of 12.6%. The increase in net sales for the three months ended February 28, 2023 was primarily due to the increases in net sales of our wafer-level products. Net sales of our wafer-level products for the three months ended February 28, 2023 were $16.8 million, and increased approximately $1.9 million from the three months ended February 28, 2022 due to stronger demand related to silicon carbide applications.

 

GROSS PROFIT. Gross profit increased to $8.9 million for the three months ended February 28, 2023 from $6.4 million for the three months ended February 28, 2022, an increase of 38.7%. Gross profit margin increased to 51.6% for the three months ended February 28, 2023 from 41.9% for the three months ended February 28, 2022. The increase in gross profit margin of 9.7% was primarily due to decreased direct material costs as a percentage of sales resulting in a 2.9% gross profit margin increase, decreased provision for inventory reserves resulting in a 5.5% gross profit margin increase, and manufacturing efficiencies from the increase in net sales resulting in a 1.3% gross profit margin increase.

 

 
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SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses increased to $3.3 million for the three months ended February 28, 2023 from $2.6 million for the three months ended February 28, 2022, an increase of 24.4%. The increase in SG&A expenses was primarily the result of increases in headcount, bonuses, travel expenses and sales commissions.

 

RESEARCH AND DEVELOPMENT. R&D expenses increased to $1.8 million for the three months ended February 28, 2023 from $1.5 million for the three months ended February 28, 2022, an increase of 19.8%. The increase in R&D expenses was primarily due to increases in employment-related expenses, project expenses and outside services.

 

INTEREST INCOME (EXPENSE), NET. Interest income, net was $374,000 and $1,000 for the three months ended February 28, 2023 and 2022, respectively. The interest income for the three months ended February 28, 2023 was from interest earned on U.S. treasury and government securities while the Company had no such investments during the three months ended February 28,2022.

 

OTHER (EXPENSE) INCOME, NET. Other expense, net for the three months ended February 28, 2023 was $18,000 compared with other income, net for the three months ended February 28, 2022 of $10,000. The changes 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. Income tax expense was $17,000 and $24,000 for the three months ended February 28, 2023 and 2022, respectively. Income tax expense was not significant due to available net operating loss and research and development credit carryforwards.

  

NINE MONTHS ENDED FEBRUARY 28, 2023 COMPARED TO NINE MONTHS ENDED FEBRUARY 28, 2022

 

NET SALES. Net sales increased to $42.7 million for the nine months ended February 28, 2023 from $30.5 million for the nine months ended February 28, 2022, an increase of 39.8%. The increase in net sales for the nine months ended February 28, 2023 was primarily due to the increases in net sales of our wafer-level products. Net sales of our wafer-level products for the nine months ended February 28, 2023 were $41.5 million, and increased approximately $12.4 million from the nine months ended February 28, 2022 due to stronger demand related to silicon carbide applications.

 

GROSS PROFIT. Gross profit increased to $21.3 million for the nine months ended February 28, 2023 from $13.2 million for the nine months ended February 28, 2022, an increase of 61.2%. Gross profit margin increased to 49.8% for the nine months ended February 28, 2023 from 43.2% for the nine months ended February 28, 2022. The increase in gross profit margin of 6.6% was primarily due to decreased provision for inventory reserves as a percentage of sales resulting in a 2.6% gross profit margin increase, manufacturing efficiencies from the increase in net sales resulting in a 2.2% gross profit margin increase, and decreased direct material costs as a percentage of sales resulting in a 1.2% gross profit margin increase.

 

SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses increased to $8.7 million for the nine months ended February 28, 2023 from $7.1 million for the nine months ended February 28, 2022, an increase of 22.6%. The increase in SG&A expenses was primarily the result of increases in headcount, bonuses, and stock-based compensation expenses.

 

RESEARCH AND DEVELOPMENT. R&D expenses increased to $4.9 million for the nine months ended February 28, 2023 from $4.2 million for the nine months ended February 28, 2022, an increase of 17.2%. The increase in R&D expenses was primarily due to increases in employment-related expenses and project expenses.

 

 
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INTEREST INCOME (EXPENSE), NET. Interest income, net for the nine months ended February 28, 2023 was $758,000 compared with interest expense, net for the nine months ended February 28, 2022 of $9,000. The interest income for the nine months ended February 28, 2023 was from interest earned on U.S. treasury and government securities while no such investments were held during the nine months ended February 28, 2022. The interest expense for the nine months ended February 28, 2022 was from the PPP Loan that we obtained on April 23, 2020.

 

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

 

OTHER (EXPENSE) INCOME, NET. Other income, net was $1,000 and $68,000 for the nine months ended February 28, 2023 and 2022, respectively. The changes in other income, net was primarily due to gains realized in connection with the fluctuation in the value of the dollar compared to foreign currencies during the referenced periods.

 

INCOME TAX EXPENSE. Income tax expense was $49,000 and $81,000 for the nine months ended February 28, 2023 and 2022, respectively. Income tax expense was not significant due to available net operating loss and research and development credit carryforwards.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Net cash provided by operating activities was $4.1 million and $2.3 million for the nine months ended February 28, 2023 and 2022, respectively. For the nine months ended February 28, 2023, net cash provided by operating activities was primarily the result of net income of $8.4 million, as adjusted to exclude the effect of a non-cash charge of stock-based compensation expense of $2.1 million, depreciation and amortization of $337,000 and accretion of investment discount of $305,000. Other changes in cash from operations primarily resulted from an increase in inventories of $6.8 million, a decrease in customer deposits and deferred revenue of $1.6 million, a decrease in trade and other accounts receivable of $1.4 million and an increase in accounts payable of $822,000. The increase in inventory was to support expected future shipments for customer orders. The decrease in customer deposits and deferred revenue was primarily due to the decrease in backlog of customer orders with down payments. The decrease in trade and other accounts receivable was primarily due to improvements in customer payment terms. The increase in accounts payable was primarily due to higher expenditures associated with higher revenue. For the nine months ended February 28, 2022, net cash provided by operating activities was primarily the result of net income of $3.7 million, as adjusted to exclude the effect of forgiveness of PPP loan of $1.7 million, and a non-cash charge of stock-based compensation expense of $2.2 million and depreciation and amortization of $226,000. Other changes in cash from operations primarily resulted from an increase in customer deposits and deferred revenue of $6.0 million, and increases in inventories of $5.4 million and accounts receivable of $3.5 million. The increase in customer deposits and deferred revenue was primarily due to the receipt of additional down payments from certain customers. The increase in inventory was to support expected future shipments for customer orders. The increase in accounts receivable was primarily due to the timing of revenue generated toward the end of the fiscal quarter.

 

Net cash used in investing activities was $25.5 million and $218,000 for the nine months ended February 28, 2023 and 2022, respectively. During the nine months ended February 28, 2023 net cash used in investing activities was due to the purchases of U.S. treasury securities of $33.2 million, partially offset by proceeds from maturities of U.S. treasury securities of $8 million, and the purchases of property and equipment of $178,000. During the nine months ended February 28, 2022 net cash used in investing activities was due to purchases of property and equipment.

 

 
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Financing activities provided cash of $7.1 million and $25.4 million for the nine months ended February 28, 2023 and 2022, respectively. Net cash provided by financing activities during the nine months ended February 28, 2023 was primarily due to the net proceeds from issuance of common stock from public offering net of issuance costs of $6.9 million, and the proceeds from the issuance of common stock under employee benefit plans of $2.0 million, partially offset by the shares repurchased for tax withholdings on vesting of RSUs of $1.7 million. Net cash provided by financing activities during the nine months ended February 28, 2022 was primarily due to the net proceeds from issuance of common stock from public offering net of issuance costs of $24.0 million, and the proceeds from the issuance of common stock under employee benefit plans of $3.1 million, partially offset by the shares repurchased for tax withholdings on vesting of RSUs of $369,000, and by the net payment of the line of credit of $1.4 million.

 

The effect of fluctuation in exchange rates decreased cash by $35,000 and $19,000 for the nine months ended February 28, 2023 and 2022, respectively. The changes were due to the fluctuation in the value of the dollar compared to foreign currencies.

 

As of February 28, 2023 and May 31, 2022, we had working capital of $67.2 million and $49.0 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 December 2022 and expires in September 2030. As of February 28, 2023 our operating lease liabilities totaled $6,392,000. 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, require the issuance of equity or entering into debt agreements. We have no present understandings, commitments or agreements with respect to any material acquisitions.

 

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

 

 
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OFF-BALANCE SHEET ARRANGEMENTS

 

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

 

OVERVIEW OF CONTRACTUAL OBLIGATIONS

 

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, 2022.

 

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

 

We had no holdings of derivative financial or commodity instruments as of February 28, 2023 or May 31, 2022.

 

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 12 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 also enter into transactions in other currencies, primarily Euros, New Taiwan Dollar, and Philippine Peso. Since our subsidiaries’ financial statements are based in their local currency and our condensed consolidated financial statements are based in U.S. Dollars, our subsidiaries and we 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.

 

 
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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, 2022 filed with the Securities and Exchange Commission on August 26, 2022 and the following additional risk factor.

 

The collapse of certain U.S. banks and potentially other financial institutions may have adverse impacts on our business.

 

On March 10, 2023, SVB was shut down, followed on March 11, 2023 by Signature Bank and the Federal Deposit Insurance Corporation was appointed as receiver for those banks. Since that time, there have been reports of instability at other U.S. banks. On March 15, 2023, the Company filed a Current Report on Form 8-K with the SEC, disclosing its exposure to SVB and stating that the Company did not expect significant impact to its operations.

 

Despite the limited exposure and steps taken to date by U.S. agencies to protect depositors, the follow-on effects of the events surrounding the SVB and Signature Bank failures and pressure on other banks are unknown, and could include failures of other financial institutions to which we may encounter direct or indirect exposure. The extent of such impacts is uncertain, and there may be additional risks that we have not yet identified. We continue to monitor the situation on U.S. financial institutions and potential impact on our business.

 

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

 

On March 28, 2023, Kenneth B. Spink, the Company’s Chief Financial Officer (“CFO”), notified the Company of his intention to retire after the end of current fiscal year end reporting. The Company has initiated a search to identify a new CFO. To facilitate an orderly transition, Mr. Spink intends to remain at the Company and continue to serve in his current role until a successor is hired.

 

 
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Item 6. EXHIBITS

 

Exhibit No.

 

Description

 

 

 

3.1(1)

 

Restated Articles of Incorporation of Registrant.

 

 

 

3.2(2)

 

Amended and Restated Bylaws of the Registrant.

 

 

 

10.1(3)

 

Fourth Amendment to Multi-Tenant Office Triple Net Lease, dated as of December 5, 2022, by and between Icon Owner Pool 1 SF Non- Business Parks, LLC and Aehr Test Systems.

 

 

 

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 the same-numbered exhibit previously filed with the Company’s Registration Statement on Form S-1 filed June 11, 1997 (File No. 333-28987).

 

 

(2)

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

 

 

(3)

Incorporated by reference to Exhibit 10.1 previously filed with the Company’s Form 8-K filed with the SEC on December 8, 2022 (File No. 000-22893).

  

*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.

 

 
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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 13, 2023

By:

/s/ GAYN ERICKSON

 

 

 

Gayn Erickson

 

 

 

President and Chief Executive Officer

 

 

 

(Principal Executive Officer)

 

 

 

 

 

Date: April 13, 2023

By:

/s/ KENNETH B. SPINK

 

 

 

Kenneth B. Spink

 

 

 

Vice President of Finance and Chief Financial Officer

 

 

 

(Principal Financial and Accounting Officer)

 

 

 
33