UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
 
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended May 31, 2020
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from ________________ to ________________
 
Commission file number: 000-22893.
 
AEHR TEST SYSTEMS
(Exact name of registrant as specified in its charter)
 
  CALIFORNIA
 
  94-2424084
  (State or other jurisdiction of incorporation or organization)
 
  (IRS Employer Identification Number)
 
  400 KATO TERRACE, FREMONT, CA
 
  94539
   (Address of principal executive offices)
 
  (Zip Code)
 
Registrant’s telephone number, including area code: (510) 623-9400
 
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 $0.01 per share
AEHR
The NASDAQ Capital Market
 
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes [ ] No [X]
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Act. Yes [ ] No [X]
 
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 [X] 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 [X] No [ ]

 
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     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 [X]
Smaller reporting company [X]
 
 
     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 [X]
 
     The aggregate market value of the registrant’s common stock, par value $0.01 per share, held by non-affiliates of the registrant, based upon the closing price of $1.89 on November 29, 2019, as reported on the NASDAQ Capital Market, was $38,433,844. For purposes of this disclosure, shares of common stock held by persons who hold more than 5% of the outstanding shares of common stock (other than such persons of whom the Registrant became aware only through the filing of a Schedule 13G filed with the Securities and Exchange Commission) and shares held by officers and directors of the Registrant have been excluded because such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily conclusive for other purposes.
 
     The number of shares of registrant’s common stock, par value $0.01 per share, outstanding at July 31, 2020 was 23,291,146.
 
DOCUMENTS INCORPORATED BY REFERENCE:
 
     Portions of registrant’s Definitive Proxy Statement relating to the Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated. Such Definitive Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of the registrant’s fiscal year ended May 31, 2020.
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AEHR TEST SYSTEMS
 
FORM 10-K
FISCAL YEAR ENDED MAY 31, 2020
 
TABLE OF CONTENTS
 
PART I
 
 
 
 
PART II  
 
 
 
 
 
 
PART III 
 
 
 
 
 
 
PART IV 
 
 
 
 
 
 
 
 
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     This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). All statements contained in this Annual Report on Form 10-K other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “plan,” “intend,” “expect,” “could,” “target,” “project,” “should,” “predict,” “potential,” “would,” “seek” and similar expressions and the negative of those expressions are intended to identify forward-looking statements. These forward-looking statements are subject to a number of risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. These risks include but are not limited to those factors identified in “Risk Factors” beginning on page 10 of this Annual Report on Form 10-K, those factors that we may from time to time identify in our periodic filings with the Securities and Exchange Commission, as well as other factors beyond our control. We undertake no obligation to revise or update publicly any forward-looking statements for any reason. Unless the context requires otherwise, references in this Form 10-K to “Aehr Test,” the “Company,” “we,” “us” and “our” refer to Aehr Test Systems.
 
     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.
 
PART I
 
Item 1. Business
 
THE COMPANY
 
    Aehr Test was incorporated in the state of California on May 25, 1977. We develop, manufacture and sell systems that are designed to reduce the cost of testing and to perform reliability screening and stress testing, burn-in or cycling, of homogeneous and heterogenous logic and memory integrated circuits (ICs), sensors and optical devices. These systems can be used to simultaneously perform parallel testing and burn-in of packaged ICs, singulated bare die or ICs still in wafer form. The expanding automotive, mobility, networking, and telecommunications markets require ICs that meet increased quality and reliability specifications. To meet these needs, IC manufacturers are increasing capacity and performing additional testing and burn-in of their products, creating opportunities for Aehr Test products in package and wafer-level testing. Leveraging its expertise as a long-time leading provider of burn-in equipment, and having installed over 2,500 systems worldwide, the Company has developed and introduced several innovative product families, including the ABTSTM and FOXTM systems, the WaferPakTM contactor and the DiePak® carrier. The latest ABTS family of packaged part burn-in and test systems can perform test during burn-in of complex devices, such as digital signal processors, microprocessors, microcontrollers, memory and systems-on-a-chip, and offers individual temperature control for high-power advanced logic devices. The FOX systems are full wafer contact parallel test and burn-in systems designed to make contact with all pads of a wafer simultaneously, thus enabling full wafer parallel test and burn-in. They are also used for parallel test and burn-in of singulated die or very small multi-IC modules. The WaferPak contactor includes a full-wafer probe card for use in testing wafers in FOX systems. The DiePak carrier is a reusable, temporary package that enables IC manufacturers to perform cost-effective test and burn-in of singulated bare die or very small multi-IC modules.
 
INDUSTRY BACKGROUND
 
    Semiconductor manufacturing is a complex, multi-step process, and defects or weaknesses that may result in the failure of an IC may be introduced at any process step. Failures may occur immediately or at any time during the operating life of an IC, sometimes after several months of normal use. Semiconductor manufacturers rely on testing and reliability screening to identify and eliminate defects that occur during the manufacturing process.
 
    Testing and reliability screening involve multiple steps. The first set of tests is typically performed by IC manufacturers before the processed semiconductor wafer is cut into individual die, in order to avoid the cost of packaging defective die into their packages. This “wafer probe” testing can be performed on one or many die at a time, including testing the entire wafer at once. Most leading-edge microprocessors, microcontrollers, digital signal processors, memory ICs, sensors and optical devices (such as vertical-cavity surface-emitting lasers, or VCSELs) then undergo an extensive reliability screening and stress testing procedure known as burn-in or cycling, depending on the application. This can either be done at the wafer level, before the die are packaged, or at the package level, after the die are packaged. The burn-in process screens for early failures by operating the IC at elevated voltages and temperatures, at
 
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up to 150 degrees Celsius (302 degrees Fahrenheit) or higher. Depending upon the application, the burn-in times can range anywhere from minutes and hours to days. A typical burn-in system can process thousands of ICs simultaneously. After burn-in, the ICs undergo a final test process using automatic test equipment, or testers. For example, this cycling process screens flash memory devices for failure to meet write/erase cycling endurance requirements.
 
PRODUCTS
 
    The Company manufactures and markets full wafer contact test systems, test during burn-in systems, test fixtures and related accessories.
 
    All of the Company’s systems are platform-based systems with a portfolio of current, voltage, digital and thermal capabilities, allowing them to be configured with optional features to meet customer requirements. Systems can be configured for use in production applications, where capacity, throughput and price are most important, or for reliability engineering and quality assurance applications, where performance and flexibility, such as extended temperature ranges, are essential.
 
    FULL WAFER CONTACT SYSTEMS
 
    The FOX-XP test and burn-in system, introduced in July 2016, is designed for devices in wafer, singulated die, and module form that require test and burn-in times typically measured in hours to days. The FOX-XP system can test and burn-in up to 18 wafers at a time. For high reliability applications, such as automotive, mobile devices, networking, telecommunications, sensors, and solid-state devices, the FOX-XP system is a cost-effective solution for producing tested and burned-in die for use in multi-chip packages. Using Known-Good Die, or KGD, which are fully burned-in and tested die, in multi-chip packages helps assure the reliability of the final product and lowers costs by increasing the yield of high-cost multi-chip packages. Wafer-level burn-in and test enables lower cost production of KGD for multi-chip modules, 3-D stacked packages and systems-in-a-package. The FOX-P platform has been extended for burn-in and test of small multi-die modules by using DiePak carriers. The DiePak carrier with its multi-module sockets and high wattage dissipation capabilities has a capacity of hundreds of die or modules, much higher than the capacity of a traditional burn-in system with traditional single-device sockets and heat sinks. This capability was introduced in March 2017.
 
    The FOX-NP was introduced in January 2019 and is a low-cost entry-level system to provide a configuration and price point for companies to do initial production qualification and new product introduction, enabling an easier transition to the FOX-XP system for high volume production test. The FOX-NP system is 100% compatible with the FOX-XP system and is configurable with up to two slot assemblies per system compared to up to 18 slot assemblies in the FOX-XP system.
 
    The FOX-CP was introduced in February 2019 and is a new low-cost single-wafer compact test and reliability verification solution for logic, memory and photonic devices. The FOX-CP reduces test cost by functionally testing wafers during reliability screening to identify failing logic, memory or photonic die before the die are integrated into their final package, and is optimal for test times ranging from minutes to a few hours or where multiple touchdowns are required to test the entire wafer. The FOX-CP includes an integrated prober which is equipped with optics for automatic pattern recognition so that the wafer is aligned properly for the testing process. It complements the capabilities of the FOX-XP and FOX-NP systems, which are optimal when the test time is measured in hours or days and the full wafer can be tested in a single touchdown.
 
    The FOX-1P full wafer parallel test system, introduced in October 2014, is designed for massively parallel test of devices at wafer level. The FOX-1P system is designed to make electrical contact to and test all of the die on a wafer in a single touchdown. The FOX-1P test head and WaferPak contactor are compatible with industry-standard 300 mm wafer probers, which provide the wafer handling and alignment automation for the FOX-1P system. The FOX-1P pattern generator is designed to functionally test industry-standard memory devices such as flash and DRAMs, plus it is optimized to test memory or logic ICs that incorporate design for testability, or DFT, and built-in self-test, or BIST. The FOX-1P universal per-pin architecture is designed to provide per-pin electronics and per-device power supplies and is tailored to full-wafer functional test. The Company believes that the FOX-1P system can significantly reduce the cost of testing IC wafers. The Company’s FOX-1P system was partially funded through a development agreement with a leading semiconductor manufacturer. The Company received the first production order of this new system and shipped the first system in July 2016.
 
    The FOX-15 full wafer parallel test system, the predecessor to the FOX-XP system, was introduced in October 2007 and was designed for full-wafer test and burn-in. The FOX-15 system is nearing the end of its lifecycle and limited shipments are expected in the future.
 
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    One of the key components of the FOX systems is the patented WaferPak contactor system. The WaferPak contactor contains a full-wafer single-touchdown probe card which is easily removable from the system. Traditional probe cards contact only a portion of the wafer, requiring multiple touchdowns to test the entire wafer. The unique design is intended to accommodate a wide range of contactor technologies so that the contactor technology can evolve along with the changing requirements of the customer’s wafers. The WaferPak contactors are custom designed for each device type, each of which has a typical lifetime of 2 to 7 years, depending on the device life cycle. Therefore, multiple sets of WaferPak contactors could be purchased over the life of a FOX system.
 
    A key new component of the FOX-XP and FOX-NP systems is the patented DiePak carrier system. The DiePak carrier contains many multi-module or die sockets with very fine-pitch probes which are easily removable from the system. Traditional sockets contact only a single device, requiring multiple large numbers of sockets and burn-in boards to test a production lot of devices. The unique design accommodates a wide range of socket sizes and densities so that the DiePak carrier technology can evolve along with the changing requirements of the customer’s devices. The DiePak carriers are custom designed for each device type, each of which has a typical lifetime of 2 to 7 years, depending on the device life cycle. Therefore, multiple sets of DiePak carriers could be purchased over the life of a FOX-XP or FOX-NP system.
 
    Another key component of our FOX-XP, FOX-NP and FOX-15 test cell is the WaferPak Aligner. The WaferPak Aligner performs alignment of the customer’s wafer to the WaferPak contactor so that the wafer can be tested and burned-in by the FOX-XP, FOX-NP and FOX-15 systems. The Company offers an automated aligner for high volume production applications, which can support several FOX-XP, FOX-NP or FOX-15 systems, and a manual aligner for low volume production or engineering applications.
 
    Similar to the WaferPak Aligner for WaferPak contactors, the Company offers the DiePak Loader for DiePak carriers. The DiePak Loader performs automatic loading of the customer’s modules to the DiePak carrier so that the modules can be tested and burned-in by the FOX-XP and FOX-NP system. Typically, one DiePak Loader can support several FOX-XP or FOX-NP systems.
 
    Net sales of full wafer contact product lines, systems, WaferPak contactors, DiePaks and services for fiscal 2020, 2019 and 2018 were $19.8 million, $14.6 million, and $13.1 million, respectively, and accounted for approximately 89%, 69% and 44% of the Company’s net sales in fiscal 2020, 2019 and 2018, respectively.
 
    SYSTEMS FOR PACKAGED PARTS
 
    Test during burn-in, or TDBI, systems consist of several subsystems: pattern generation and test electronics, control software, network interface and environmental chamber. The test pattern generator allows duplication of most of the functional tests performed by a traditional tester. Pin electronics at each burn-in board, or BIB, position are designed to provide accurate signals to the ICs being tested and detect whether a device is failing the test.
 
    Devices being tested are placed on BIBs and loaded into environmental chambers which typically operate at temperatures from 25 degrees Celsius (77 degrees Fahrenheit) up to 150 degrees Celsius (302 degrees Fahrenheit). Using our optional chambers, our systems can produce temperatures as low as -55 degrees Celsius (-67 degrees Fahrenheit). A single BIB can hold up to several hundred ICs, and a production chamber holds up to 72 BIBs, resulting in thousands of memory or logic devices being tested in a single system.
 
    The Advanced Burn-in and Test System, or ABTS, was introduced in fiscal 2008. Several updates to the ABTS system have been made since its introduction, including the ABTS-P system released in 2012. The ABTS family of products is based on a hardware and software architecture that is intended to address not only today’s devices, but also future devices for many years to come. The ABTS system can test and burn-in both high-power logic and low-power ICs. It can be configured to provide individual device temperature control for devices up to 70W or more and with up to 320 I/O channels.
 
    Net sales of packaged part product lines, systems and services for fiscal 2020, 2019 and 2018 were $2.5 million, $6.4 million, and $16.5 million, respectively, and accounted for approximately 11%, 31% and 56% of the Company’s net sales in fiscal 2020, 2019 and 2018, respectively.
 
    TEST FIXTURES
 
    The Company sells, and licenses others to manufacture and sell, custom-designed test fixtures for its systems. The test fixtures include BIBs for its packaged part burn-in systems. These test fixtures hold the devices undergoing test or burn-in and electrically connect the devices under test to the system electronics. The capacity of each test fixture depends on the type of device being tested or burned-in, ranging from several hundred in memory production to as few as eight for high pin-count complex Application Specific Integrated Circuits, or ASICs, or microprocessor devices. Test
 
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fixtures are sold both with new Aehr Test systems and for use with the Company’s installed base of systems. Test fixtures are also available from third-party suppliers.
 
    The Company has received patents or applied for patents on certain features of the FOX and ABTS test fixtures. The Company has licensed or authorized several other companies to provide BIBs from which the Company receives royalties. Royalties and revenue for the test fixtures product category accounted for less than 1% of net sales in fiscal 2020, 2019 and 2018.
 
CUSTOMERS
 
    The Company markets and sells its products throughout the world to semiconductor manufacturers, semiconductor contract assemblers, electronics manufacturers and burn-in and test service companies.
 
    Sales to the Company’s five largest customers accounted for approximately 87%, 80%, and 86% of its net sales in fiscal 2020, 2019 and 2018, respectively. During fiscal 2020, Intel Corporation, or Intel, ON Semiconductor Korea, Ltd., or ON Semiconductor and STMicroelectronics, Inc., or STMicroelectronics, accounted for approximately 43%, 16% and 15%, respectively, of the Company’s net sales. During fiscal 2019, Intel, Texas Instruments Incorporated, or Texas Instruments, Cypress Semiconductor Corporation, or Cypress Semiconductor, and STMicroelectronics, Inc. accounted for approximately 36%, 14%, 12% and 10%, respectively, of the Company’s net sales. During fiscal 2018, Texas Instruments, STMicroelectronics, and Astronics Test Systems, Inc., or Astronics Test Systems, accounted for approximately 34%, 26% and 13%, respectively, of the Company’s net sales. No other customers accounted for more than 10% of the Company’s net sales for any of these periods. The Company expects that sales of its products to a limited number of customers will continue to account for a high percentage of net sales for the foreseeable future. In addition, sales to particular customers may fluctuate significantly from quarter to quarter. Such fluctuations may result in changes in utilization of the Company’s facilities and resources. The loss of or reduction or delay in orders from a significant customer or a delay in collecting or failure to collect accounts receivable from a significant customer could materially and adversely affect the Company’s business, financial condition and operating results.
 
MARKETING, SALES AND CUSTOMER SUPPORT
 
    The Company has sales and service operations in the United States and Taiwan, dedicated service resources in Germany, China, South Korea, and the Philippines, and has established a network of distributors and sales representatives in certain key parts of the world. In fiscal 2020, the Company moved to a sales representative distributorship model for sales in Japan and Germany, substantially closing its subsidiary in Japan, see Note 16, “Restructuring,” of the Notes to Consolidated Financial Statements, and eliminating the direct sales staff at its Germany subsidiary. See “REVENUE RECOGNITION” in Item 7 under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a further discussion of the Company’s relationship with distributors, and its effects on revenue recognition.
 
    The Company’s customer service and support program includes system installation, system repair, applications engineering support, spare parts inventories, customer training and documentation. The Company has applications engineering and field service personnel located near and sometimes co-located at our customers and includes resources at the corporate headquarters in Fremont, California, at customer locations in Texas, at the Company’s subsidiary in Germany, at its branch office in Taiwan, and also through 3rd party agreements in China, South Korea, and the Philippines. The Company’s distributors provide applications and field service support in other parts of the world. The Company customarily provides a warranty on its products. The Company offers service contracts on its systems directly and through its subsidiaries, distributors and representatives. The Company believes that maintaining a close relationship with customers and providing them with ongoing engineering support improves customer satisfaction and will provide the Company with a competitive advantage in selling its products to the Company’s customers.
 
BACKLOG
 
    At May 31, 2020, the Company’s backlog was $2.5 million compared with $7.5 million at May 31, 2019. The Company’s backlog consists of product orders for which confirmed purchase orders have been received and which are scheduled for shipment within 12 months. Due to the possibility of customer changes in delivery schedules or cancellations and potential delays in product shipments or development projects, the Company’s backlog as of a particular date may not be indicative of net sales for any succeeding period.
 
RESEARCH AND PRODUCT DEVELOPMENT
 
    The Company historically has devoted a significant portion of its financial resources to research and development programs and expects to continue to allocate significant resources to these efforts. Certain research and development expenditures related to non-recurring engineering milestones have been transferred to cost of goods sold, reducing
 
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research and development expenses. The Company’s research and development expenses during fiscal 2020, 2019 and 2018 were $3.4 million, $4.2 million and $4.2 million, respectively.
 
    The Company conducts ongoing research and development to design new products and to support and enhance existing product lines. Building upon the expertise gained in the development of its existing products, the Company has developed the FOX family of systems for performing test and burn-in of entire processed wafers, and burn-in of devices in singulated die and module form, including the FOX-NP and FOX-CP systems released during fiscal 2019. The Company is developing enhancements to the ABTS and FOX families of products, intended to improve the capability and performance for testing and burn-in of future generation devices and provide the flexibility in a wide variety of applications.
 
MANUFACTURING
 
    The Company assembles its products from components and parts manufactured by others, including environmental chambers, power supplies, metal fabrications, printed circuit assemblies, ICs, burn-in sockets, high-density interconnects, wafer contactors and interconnect substrates. The Company’s strategy is to use in-house manufacturing only when necessary to protect a proprietary process or when a significant improvement in quality, cost or lead time can be achieved and relies on subcontractors to manufacture many of the components and subassemblies used in its products. Final assembly and testing are performed at the Company’s principal manufacturing facility located in Fremont, California.
 
COMPETITION
 
    The semiconductor equipment industry is intensely competitive. Significant competitive factors in the semiconductor equipment market include price, technical capabilities, quality, flexibility, automation, cost of ownership, reliability, throughput, product availability and customer service. In each of the markets it serves, the Company faces competition from established competitors and potential new entrants, many of which have greater financial, engineering, manufacturing and marketing resources than the Company.
 
    The Company’s FOX full wafer contact systems face competition from larger systems manufacturers that have significant technological know-how and manufacturing capability. Competing suppliers of full wafer contact systems include Advantest Corporation, Chroma ATE Inc., Teradyne Inc., Micronics Japan Co., Ltd., and Tokyo Electron Limited.
 
    The Company’s ABTS TDBI systems face increasingly severe competition, especially from several regional, low-cost manufacturers and from systems manufacturers that offer higher power dissipation per device under test. Some users of such systems, such as independent test labs, build their own burn-in systems, while others, particularly large IC manufacturers in Asia, acquire burn-in systems from captive or affiliated suppliers. The market for burn-in systems is highly fragmented, with many domestic and international suppliers. Competing suppliers of burn-in and functional test systems that compete with ABTS systems include Dong-Il Corporation, Micro Control Company, Incal Technology and Advantest Corporation.
 
    The Company’s WaferPak products are facing and are expected to face increasing competition. Several companies have developed or are developing full-wafer and single-touchdown probe cards. As the full-wafer test market develops, the Company expects that other competitors will emerge. The primary competitive factors in this market are cost, performance, reliability and assured supply. Competing suppliers of full-wafer probe cards include FormFactor, Inc., Japan Electronic Materials Corporation and Micronics Japan Co., Ltd.
 
    The Company’s test fixture products face numerous regional competitors. There are limited barriers to entry into the BIB market, and as a result, many companies design and manufacture BIBs, including BIBs for use with the Company’s packaged part systems. The Company has granted royalty-bearing licenses to several companies to make BIBs for use with the Company’s packaged part systems and the Company may grant additional licenses as well. Sales of BIBs by licensees result in royalties to the Company.
 
    The Company expects that its DiePak products for burning-in and testing multiple singulated die and small modules face significant competition. The Company believes that several companies have developed or are developing products which are intended to enable test and burn-in of multiple bare die, and small modules. The Company expects that other competitors will emerge. The Company expects that the primary competitive factors in this market will be cost, performance, reliability and assured supply. Suppliers with products that compete with our single die DiePak products include Chroma ATE Inc.
 
    The Company expects its competitors to continue to improve the performance of their current products and to introduce new products with improved price and performance characteristics. New product introductions by the
 
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Company’s competitors or by new market entrants could cause a decline in sales or loss of market acceptance of the Company’s products. The Company has observed price competition in the systems market, particularly with respect to its less advanced products. Increased competitive pressure could also lead to intensified price-based competition, resulting in lower prices which could adversely affect the Company’s operating margins and results. The Company believes that to remain competitive it must invest significant financial resources in new product development and expand its customer service and support worldwide. There can be no assurance that the Company will be able to compete successfully in the future.
 
PROPRIETARY RIGHTS
 
    The Company relies primarily on the technical and creative ability of its personnel, its proprietary software, and trade secrets and copyright protection, rather than on patents, to maintain its competitive position. The Company’s proprietary software is copyrighted and licensed to the Company’s customers. At May 31, 2020, the Company held 54 issued United States patents with expiration date ranges from 2022 to 2038 and had several additional United States patent applications and foreign patent applications pending.
 
    The Company’s ability to compete successfully is dependent in part upon its ability to protect its proprietary technology and information. Although the Company attempts to protect its proprietary technology through patents, copyrights, trade secrets and other measures, there can be no assurance that these measures will be adequate or that competitors will not be able to develop similar technology independently. Further, there can be no assurance that claims allowed on any patent issued to the Company will be sufficiently broad to protect the Company’s technology, that any patent will be issued to the Company from any pending application or that foreign intellectual property laws will protect the Company’s intellectual property. Litigation may be necessary to enforce or determine the validity and scope of the Company’s proprietary rights, and there can be no assurance that the Company’s intellectual property rights, if challenged, will be upheld as valid. Any such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on the Company’s business, financial condition and operating results, regardless of the outcome of the litigation. In addition, there can be no assurance that any of the patents issued to the Company will not be challenged, invalidated or circumvented or that the rights granted thereunder will provide competitive advantages to the Company. Also, there can be no assurance that the Company will have the financial resources to defend its patents from infringement or claims of invalidity.
 
    There are currently no pending claims against the Company regarding infringement of any patents or other intellectual property rights of others. However, the Company may, from time to time, receive communications from third parties asserting intellectual property claims against the Company. Such claims could include assertions that the Company’s products infringe, or may infringe, the proprietary rights of third parties, requests for indemnification against such infringement or suggest the Company may be interested in acquiring a license from such third parties. There can be no assurance that any such claim made in the future will not result in litigation, which could involve significant expense to the Company, and, if the Company is required or deems it appropriate to obtain a license relating to one or more products or technologies, there can be no assurance that the Company would be able to do so on commercially reasonable terms, or at all.
 
EMPLOYEES
 
    As of May 31, 2020, the Company, including its foreign subsidiaries and one branch office, employed 71 persons collectively, on a full-time basis, of whom 17 were engaged in research, development and related engineering, 25 were engaged in manufacturing, 21 were engaged in marketing, sales and customer support and 8 were engaged in general administration and finance functions. In addition, the Company from time to time employs a number of contractors and part-time employees, particularly to perform customer support and manufacturing. The Company’s success is in part dependent on its ability to attract and retain highly skilled workers, who are in high demand. None of the Company’s employees are represented by a union and the Company has never experienced a work stoppage. The Company’s management considers its relations with its employees to be good.
 
BUSINESS SEGMENT DATA AND GEOGRAPHIC AREAS
 
    The Company operates in a single business segment, the designing, manufacturing and marketing of advanced test and burn-in products to the semiconductor manufacturing industry in several geographic areas. Selected financial information, including net sales and property and equipment, net for each of the last three fiscal years, by geographic area is included in Part II, Item 8, Note 2 “REVENUE” and Note 15 “SEGMENT INFORMATION” and certain risks related to such operations are discussed in Part I, Item 1A, Risk Factors, under the heading “We sell our products and services worldwide, and our business is subject to risks inherent in conducting business activities in geographic regions outside of the United States.”
 
 
 
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AVAILABLE INFORMATION
 
    The Company’s common stock trades on the NASDAQ Capital Market under the symbol “AEHR.” The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports that are filed with the United States Securities and Exchange Commission, or SEC, pursuant to Section 13(a) or 15(d) of the Exchange Act, are available free of charge through the Company’s website at www.aehr.com as soon as reasonably practicable after we electronically file them with, or furnish them to the SEC.
 
    The public may read and copy any materials filed by the Company with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operations of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site, www.sec.gov, that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.
 
    In addition, information regarding the Company’s code of conduct and ethics and the charters of its Audit, Compensation and Nominating and Governance Committees, are available free of charge on the Company’s website listed above.
 
Item 1A. Risk Factors
 
    You should carefully consider the risks described below. These risks are not the only risks that we may face. Additional risks and uncertainties that we are unaware of, or that we currently deem immaterial, also may become important factors that affect us. If any of the following risks occur, our business, financial condition or results of operations could be materially and adversely affected which could cause our actual operating results to differ materially from those indicated or suggested by forward-looking statements made in this Annual Report on Form 10-K or presented elsewhere by management from time to time.
 
The effects of the COVID-19 pandemic have disrupted, and may continue to significantly disrupt, our operations, including our ability to manufacture and supply products and perform research and development activities, and our customers’ usage of our products, all of which have had and are expected to continue to have a material and adverse effect on our business, future revenues and financial condition. We are unable to predict the extent to which the pandemic and related impacts will continue to adversely impact our business operations, financial performance, results of operations and the achievement of our strategic objectives.
 
    Our business, results of operation and financial performance have been negatively impacted by the COVID-19 pandemic and related public health responses, such as shelter-in-place orders, social distancing protocols, and travel restrictions in many of the countries and regions in which we have operations or manufacturing partners. Due to these impacts and measures, we have experienced and may continue to experience significant and unpredictable reductions in the demand for our products. In addition, our customers may delay, cancel or redirect planned capital expenditures in order to focus resources differently during or as a result of the COVID-19 pandemic. The effects of this outbreak on our business has included and could continue to include disruptions or restrictions on our employees’ ability to travel in affected regions, as well as temporary closures of the facilities of our suppliers, customers, or other vendors in our supply chain, which could impact our business, interactions and relationships with our customers, third-party suppliers and contractors, and results of operations.
 
    As a result of the COVID-19 outbreak around the world, we implemented certain travel restrictions, temporarily limited the number of employees permitted onsite in our offices and implemented work-from-home rules. This has caused disruption and delays in our ability to operate and manufacture, test and assemble products in our internal facilities, and has limited our ability to continue certain research and development activities which could materially and adversely affect our ability to develop or deliver products on the timelines we previously anticipated.
 
    The COVID-19 pandemic has created economic uncertainty and volatility in the financial markets around the world, resulting in an economic downturn that has affected and will likely continue to affect demand for our products and impact our results of operations. As a result, this may lead to a period of regional, national, and global economic slowdown or regional, national, or global recessions that would curtail or delay spending by semiconductor manufacturers and contract assemblers and affect demand for our products as well as increase the risk of customer defaults or delays in payments. Our customers may delay or cancel orders for our products due to bankruptcy, lack of liquidity, lack of funding, operational failures, or other reasons. The ultimate impact of the COVID-19 pandemic on our operations and financial performance depends on many factors that are not within our control, including, but not limited, to: government’s, business’ and individuals’ actions that have been and continue to be taken in response to the pandemic (including restrictions on travel and transport and workforce pressures); the impact of the pandemic and actions taken in response to global and regional economies, travel, and economic activity; the availability of federal, state, local or non-U.S. funding programs; general economic uncertainty in key global markets and financial market volatility;
 
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global economic conditions and levels of economic growth; and the pace of recovery when the COVID-19 pandemic subsides. Although the magnitude of the impact of COVID-19 on our business operations remains uncertain and difficult to predict, and this remains a highly dynamic situation, we have experienced and will continue to experience in subsequent periods, disruptions to our business that will likely continue to impact our business, financial condition and results of operations.
 
We have incurred indebtedness under the CARES Act which may be subject to audit, may not be forgivable and may eventually have to be repaid. Any repayment of such indebtedness may limit the funds available to us and may restrict our flexibility in operating our business or otherwise adversely affect our results of operations.
 
     On April 23, 2020, we received proceeds of $1,679,000 from a loan (the PPP Loan) pursuant to the Paycheck Protection Program (PPP), established under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The proceeds were used to retain employees, maintain payroll and make lease and utility payments. All or a portion of the PPP Loan may be forgiven by the Small Business Administration (the SBA). We may submit a loan forgiveness application any time on or before the maturity date of the loan if we have used all of the loan proceeds for which we are requesting forgiveness. Under the CARES Act and pursuant to the note agreement, loan forgiveness is available for the sum of documented payroll costs, covered rent payments, covered mortgage interest and covered utilities during the eight week or twenty-four week periods beginning on the date of loan approval. Not more than 25% of the forgiven amount may be for non-payroll costs. The amount of the PPP Loan eligible to be forgiven is reduced if our full-time headcount declines or if salaries and wages for employees with salaries of $100,000 or less annually are reduced by more than 25%. Under the CARES Act, we will be required to repay any portion of the outstanding principal that is not forgiven, along with accrued interest, and we cannot provide any assurance that we will be eligible for loan forgiveness or that any amount of the PPP Loan will ultimately be forgiven by the SBA. Any such repayment of the PPP Loan will reduce the funds available to us for working capital, capital expenditures, and other corporate purposes and may limit our ability to obtain additional financing for working capital, capital expenditures, expansion plans, and other investments or divert funds that are otherwise necessary to run our business. The SBA has the right to audit our eligibility for and compliance with the requirements of the PPP and we cannot predict the outcome of any such audit despite our belief that we were eligible for the PPP Loan and entitled to forgiveness. On April 23, 2020, the SBA issued guidance stating that it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith. The lack of clarity regarding loan eligibility under the CARES Act PPP has resulted in significant media coverage and controversy with respect to public companies applying for and receiving loans. If, despite our good-faith belief that we satisfied all eligible requirements for the PPP Loan, we are later determined to have violated any of the laws or governmental regulations that apply to us in connection with the PPP Loan, such as the False Claims Act, or it is otherwise determined that we were ineligible to receive the PPP Loan, we may be subject to penalties, including significant civil, criminal and administrative penalties, and could be required to repay the PPP Loan in its entirety. In addition, our receipt of the PPP Loan may result in adverse publicity and damage to our reputation, and a review or audit by the SBA or other government entity or claims under the False Claims Act could consume significant financial and management resources.
 
We generate a large portion of our sales from a small number of customers. If we were to lose one or more of our large customers, operating results could suffer dramatically.
 
    The semiconductor manufacturing industry is highly concentrated, with a relatively small number of large semiconductor manufacturers and contract assemblers accounting for a substantial portion of the purchases of semiconductor equipment. Sales to our five largest customers accounted for approximately 87%, 80%, and 86% of our net sales in fiscal 2020, 2019 and 2018, respectively. During fiscal 2020, Intel, ON Semiconductor and STMicroelectronics, accounted for approximately 43%, 16% and 15%, respectively, of the Company’s net sales. During fiscal 2019, Intel, Texas Instruments, Cypress Semiconductor and STMicroelectronics, accounted for approximately 36%, 14%, 12% and 10%, respectively, of the Company’s net sales. During fiscal 2018, Texas Instruments, STMicroelectronics, and Astronics Test Systems, accounted for approximately 34%, 26% and 13%, respectively, of the Company’s net sales. No other customers accounted for more than 10% of our net sales for any of these periods.
 
    We expect that sales of our products to a limited number of customers will continue to account for a high percentage of our net sales for the foreseeable future. In addition, sales to particular customers may fluctuate significantly from quarter to quarter. The loss of, or reduction or delay of, an order or orders from a significant customer or customers, or a delay in collecting or failure to collect accounts receivable from a significant customer or customers, could adversely affect our business, financial condition and operating results.
 
 
 
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The semiconductor equipment industry is intensely competitive. In each of the markets we serve, we face competition from established competitors and potential new entrants, many of which have greater financial, engineering, manufacturing and marketing resources than us.
 
    Our FOX wafer-level and singulated die/module test and burn in systems face competition from larger systems manufacturers that have significant technological know-how and manufacturing capability. Our ABTS TDBI systems have faced and are expected to continue to face increasingly severe competition, especially from several regional, low-cost manufacturers and from systems manufacturers that offer higher power dissipation per device under test. Some users of such systems, such as independent test labs, build their own burn-in systems, while others, particularly large IC manufacturers in Asia, acquire burn-in systems from captive or affiliated suppliers. Our WaferPak products are facing and are expected to face increasing competition. Several companies have developed or are developing full-wafer and single-touchdown probe cards.
 
    We expect our competitors to continue to improve the performance of their current products and to introduce new products with improved price and performance characteristics. New product introductions by our competitors or by new market entrants could cause a decline in sales or loss of market acceptance of our products. We have observed price competition in the systems market, particularly with respect to its less advanced products. Increased competitive pressure could also lead to intensified price-based competition, resulting in lower prices which could adversely affect our operating margins and results. We believe that to remain competitive we must invest significant financial resources in new product development and expand our customer service and support worldwide. There can be no assurance that we will be able to compete successfully in the future.
 
We rely on increasing market acceptance for our FOX system, and we may not be successful in attracting new customers or maintaining our existing customers.
 
    A principal element of our business strategy is to increase our presence in the test equipment market through system sales in our FOX wafer-level and singulated die/module test and burn-in product family. The market for the FOX systems is in the early stages of development. Market acceptance of the FOX system is subject to a number of risks. Before a customer will incorporate the FOX system into a production line, lengthy qualification and correlation tests must be performed. We anticipate that potential customers may be reluctant to change their procedures in order to transfer burn-in and test functions to the FOX system. Initial purchases are expected to be limited to systems used for these qualifications and for engineering studies. Market acceptance of the FOX system also may be affected by a reluctance of IC manufacturers to rely on relatively small suppliers such as us. As is common with new complex products incorporating leading-edge technologies, we may encounter reliability, design and manufacturing issues as we begin volume production and initial installations of FOX systems at customer sites. The failure of the FOX system to achieve increased market acceptance would have a material adverse effect on our future operating results, long-term prospects and our stock price.
 
We rely on continued market acceptance of our ABTS system and our ability to complete certain enhancements.
 
    Continued market acceptance of the ABTS family is subject to a number of risks. It is important that we achieve customer acceptance, customer satisfaction and increased market acceptance as we add new features and enhancements to the ABTS product. To date, we have shipped ABTS systems to customers worldwide for use in both reliability and production applications. We have had a strengthening of ABTS product sales in fiscal 2018 and 2017. In fiscal 2019 and 2020, our ABTS product sales decreased significantly from fiscal 2018, which adversely affected our operating results. The failure to grow revenues of the ABTS family above current levels could have a material adverse effect on our future operating results.
 
A substantial portion of our net sales is generated by relatively small volume, high value transactions.
 
    We derive a substantial portion of our net sales from the sale of a relatively small number of systems which typically range in purchase price from approximately $300,000 to well over $1 million per system. As a result, the loss or deferral of a limited number of system sales could have a material adverse effect on our net sales and operating results in a particular period. Most customer purchase orders are subject to cancellation or rescheduling by the customer with limited penalties, and, therefore, backlog at any particular date is not necessarily indicative of actual sales for any succeeding period. From time to time, cancellations and rescheduling of customer orders have occurred, and delays by our suppliers in providing components or subassemblies to us have caused delays in our shipments of our own products. There can be no assurance that we will not be materially adversely affected by future cancellations or rescheduling by our customers or other delays in our shipments. For non-standard products where we have not effectively demonstrated the ability to meet specifications in the customer environment, we defer revenue until we have met such customer specifications. Any delay in meeting customer specifications could have a material adverse effect on our operating results. A substantial portion of net sales typically are realized near the end of each quarter. A delay or reduction in
 
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shipments near the end of a particular quarter, due, for example, to unanticipated shipment rescheduling, cancellations or deferrals by customers, customer credit issues, unexpected manufacturing difficulties experienced by us or delays in deliveries by suppliers, could cause net sales in a particular quarter to fall significantly.
 
We may experience increased costs associated with new product introductions.
 
    As is common with new complex products incorporating leading-edge technologies, we have encountered reliability, design and manufacturing issues as we began volume production and initial installations of certain products at customer sites. Some of these issues in the past have been related to components and subsystems supplied to us by third parties who have in some cases limited the ability of us to address such issues promptly. This process in the past required and in the future is likely to require us to incur un-reimbursed engineering expenses and to experience larger than anticipated warranty claims which could result in product returns. In the early stages of product development there can be no assurance that we will discover any reliability, design and manufacturing issues or, that if such issues arise, that they can be resolved to the customers’ satisfaction or that the resolution of such problems will not cause us to incur significant development costs or warranty expenses or to lose significant sales opportunities.
 
We sell our products and services worldwide, and our business is subject to risks inherent in conducting business activities in geographic regions outside of the United States.
 
    Approximately 39%, 36%, and 71% of our net sales for fiscal 2020, 2019 and 2018, respectively, were attributable to sales to customers for delivery outside of the United States. We operate sales and service in Taiwan, a service organization in Germany, as well as direct support through 3rd party agreements in China, South Korea, and the Philippines. We expect that sales of products for delivery outside of the United States will continue to represent a substantial portion of our future net sales. Our future performance will depend, in significant part, upon our ability to continue to compete in foreign markets which in turn will depend, in part, upon a continuation of current trade relations between the United States and foreign countries in which semiconductor manufacturers or assemblers have operations. A change toward more protectionist trade legislation in either the United States or such foreign countries, such as a change in the current tariff structures, export compliance or other trade policies, could adversely affect our ability to sell our products in foreign markets. In addition, we are subject to other risks associated with doing business internationally, including longer receivable collection periods and greater difficulty in accounts receivable collection, the burden of complying with a variety of foreign laws, difficulty in staffing and managing global operations, the impact of the COVID-19 pandemic on the global economy and financial markets, risks of civil disturbance or other events which may limit or disrupt markets, international exchange restrictions, changing political conditions and monetary policies of foreign governments.
 
    Approximately 100%, 0% and 0% of our net sales for fiscal 2020 were denominated in U.S. Dollars, Euros and Japanese Yen, respectively. Although the percentages of net sales denominated in Euros and Japanese Yen were immaterial in fiscal 2020, they have been larger in the past and could become significant again in the future. A large percentage of net sales to European customers are denominated in U.S. Dollars, but sales to many Japanese customers are denominated in Japanese Yen. Because a substantial portion of our net sales is from sales of products for delivery outside the United States, an increase in the value of the U.S. Dollar relative to foreign currencies would increase the cost of our products compared to products sold by local companies in such markets. In addition, since the price is determined at the time a purchase order is accepted, we are exposed to the risks of fluctuations in the U.S. Dollar exchange rate during the lengthy period from the date a purchase order is received until payment is made. This exchange rate risk is partially offset to the extent our foreign operations incur expenses in the local currency. To date, we have not invested in any instruments designed to hedge currency risks. Our operating results could be adversely affected by fluctuations in the value of the U.S. Dollar relative to other currencies.
 
We purchase materials from suppliers worldwide, which subjects the Company to increased risk.
 
    We purchase components, sub-assemblies, and chambers from suppliers outside the United States. Increases in tariffs, additional taxes, disruptions due to the COVID-19 pandemic or trade barriers may result in an increase in our manufacturing costs. A decrease in the value of the U.S. Dollar relative to foreign currencies would increase the cost of our materials. Should the Company increase its sales prices to recover the increase in costs, this could result in a decrease in the competitiveness of our products. In addition, we are subject to other risks associated with purchasing materials from suppliers worldwide. Government authorities may also implement protectionist policies or impose limitations on the transfer of intellectual property. This may limit our ability to obtain products from certain geographic regions and require us to identify and qualify new suppliers. The process of qualifying suppliers could be lengthy, and no assurance can be given that any additional sources would be available to us on a timely basis. Changes in trade relations, currency fluctuations, or protectionist policies could have a material adverse effect on our business, financial condition or results of operations.
 
 
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The Company is exposed to cybersecurity threats or incidents.
 
    We collect, maintain, and transmit data on information systems. These systems include those owned and maintained by the Company or by third parties. In addition, we use cloud-based enterprise resource planning, ERP, software to manage the business integrating all facets of operations, including manufacturing, finance, and sales and marketing. The data maintained on these systems includes confidential and proprietary information belonging to us, our customers, suppliers, and others. While the Company devotes significant resources to protect its systems and data from unauthorized access or misuse, we are exposed to cybersecurity risks. Our systems are subject to computer viruses, data breach, phishing schemes, and other malicious software programs or attacks. We have experienced cyber threats and incidents in the past. Although past threats and incidents have not resulted in a material adverse effect, cybersecurity incidents may result in business disruption, loss of data, or unauthorized access to intellectual property which could adversely affect our business.
 
Our industry is subject to rapid technological change and our ability to remain competitive depends on our ability to introduce new products in a timely manner.
 
    The semiconductor equipment industry is subject to rapid technological change and new product introductions and enhancements. Our ability to remain competitive depends in part upon our ability to develop new products and to introduce them at competitive prices and on a timely and cost-effective basis. Our success in developing new and enhanced products depends upon a variety of factors, including product selection, timely and efficient completion of product design, timely and efficient implementation of manufacturing and assembly processes, product performance in the field and effective sales and marketing. Because new product development commitments must be made well in advance of sales, new product decisions must anticipate both future demand and the technology that will be available to supply that demand. Furthermore, introductions of new and complex products typically involve a period in which design, engineering and reliability issues are identified and addressed by our suppliers and by us. There can be no assurance that we will be successful in selecting, developing, manufacturing and marketing new products that satisfy market demand. Any such failure would materially and adversely affect our business, financial condition and results of operations.
 
    Because of the complexity of our products, significant delays can occur between a product’s introduction and the commencement of the volume production of such product. We have experienced, from time to time, significant delays in the introduction of, and technical and manufacturing difficulties with, certain of our products and may experience delays and technical and manufacturing difficulties in future introductions or volume production of our new products. Our inability to complete new product development, or to manufacture and ship products in time to meet customer requirements would materially adversely affect our business, financial condition and results of operations.
 
Our dependence on subcontractors and sole source suppliers may prevent us from delivering our products on a timely basis and expose us to intellectual property infringement.
 
    We rely on subcontractors to manufacture many of the components or subassemblies used in our products. Our FOX and ABTS systems, WaferPak contactors and DiePak carriers contain several components, including environmental chambers, power supplies, high-density interconnects, wafer contactors, module contactors, signal distribution substrates, WaferPak Aligners, DiePak Loaders and certain ICs that are currently supplied by only one or a limited number of suppliers. Our reliance on subcontractors and single source suppliers involves a number of significant risks, including the loss of control over the manufacturing process, the potential absence of adequate capacity and reduced control over delivery schedules, manufacturing yields, quality and costs. In the event that any significant subcontractor or single source supplier is unable or unwilling to continue to manufacture subassemblies, components or parts in required volumes, we would have to identify and qualify acceptable replacements. The process of qualifying subcontractors and suppliers could be lengthy, and no assurance can be given that any additional sources would be available to us on a timely basis. Any delay, interruption or termination of a supplier relationship could adversely affect our ability to deliver products, which would harm our operating results.
 
    Our suppliers manufacture components, tooling, and provide engineering services. During this process, our suppliers are allowed access to our intellectual property. While we maintain patents to protect from intellectual property infringement, there can be no assurance that technological information gained in the manufacture of our products will not be used to develop a new product, improve processes or techniques which compete against our products. Litigation may be necessary to enforce or determine the validity and scope of our proprietary rights, and there can be no assurance that our intellectual property rights, if challenged, will be upheld as valid.
 
 
14
 
 
Periodic economic and semiconductor industry downturns could negatively affect our business, results of operations and financial condition.
 
    Periodic global economic and semiconductor industry downturns have negatively affected and could continue to negatively affect our business, results of operations, and financial condition. Financial turmoil in the banking system and financial markets has resulted, and may result in the future, in a tightening of the credit markets, disruption in the financial markets and global economy downturn. These events may contribute to significant slowdowns in the industry in which we operate. Difficulties in obtaining capital and deteriorating market conditions can pose the risk that some of our customers may not be able to obtain necessary financing on reasonable terms, which could result in lower sales. Customers with liquidity issues may lead to additional bad debt expense.
 
    Turmoil in the international financial markets has resulted, and may result in the future, in dramatic currency devaluations, stock market declines, restriction of available credit and general financial weakness. In addition, flash memory and other similar device prices have historically declined and will likely do so again in the future. These developments may affect us in several ways. The market for semiconductors and semiconductor capital equipment has historically been cyclical, and we expect this to continue in the future. The uncertainty of the semiconductor market may cause some manufacturers in the future to further delay capital spending plans. Economic conditions may also affect the ability of our customers to meet their payment obligations, resulting in cancellations or deferrals of existing orders and limiting additional orders. In addition, some governments have subsidized portions of fabrication facility construction, and financial turmoil may reduce these governments’ willingness to continue such subsidies. Such developments could have a material adverse effect on our business, financial condition and results of operations.
 
    The current economic conditions and uncertainty about future economic conditions make it challenging for us to forecast our operating results, make business decisions, and identify the risks that may affect our business, financial condition and results of operations. If such conditions recur, and we are not able to timely and appropriately adapt to changes resulting from the difficult macroeconomic environment, our business, financial condition or results of operations may be materially and adversely affected.
 
Future changes in semiconductor technologies may make our products obsolete.
 
    Future improvements in semiconductor design and manufacturing technology may reduce or eliminate the need for our products. For example, improvements in semiconductor process technology and improvements in conventional test systems, such as reduced cost or increased throughput, may significantly reduce or eliminate the market for one or more of our products. If we are not able to improve our products or develop new products or technologies quickly enough to maintain a competitive position in our markets, our business may decline.
 
If we are not able to reduce our operating expenses sufficiently during periods of weak revenue, or if we utilize significant amounts of cash to support operating losses, we may erode our cash resources and may not have sufficient cash to operate our business.
 
    In recent years, in the face of a downturn in our business and a decline in our net sales, we implemented a variety of cost controls and restructured our operations with the goal of reducing our operating costs to position ourselves to more effectively meet the needs of the then weak market for test and burn-in equipment. In February 2019, we adopted a restructuring plan in order to streamline our operations and better align our structure with our objectives going forward. While we took significant steps to minimize our expense levels and to increase the likelihood that we would have sufficient cash to support operations during the downturn, from fiscal 2009 through fiscal 2020, with the exception of fiscal 2014 and 2018, we experienced operating losses. We anticipate that our existing cash balance together with income from operations, collections of existing accounts receivable, revenue from our existing backlog of products, the sale of inventory on hand, and deposits and down payments against significant orders will be adequate to meet our working capital and capital equipment requirements. Depending on our rate of growth and profitability, and our ability to obtain significant orders with down payments, we may require additional equity or debt financing to meet our working capital requirements or capital equipment needs. There can be no assurance that additional financing will be available when required, or if available, that such financing can be obtained on terms satisfactory to us.
 
Our stock price may fluctuate.
 
    The price of our common stock has fluctuated in the past and may fluctuate significantly in the future. We believe that factors such as announcements of developments related to our business, fluctuations in our operating results, general conditions in the semiconductor and semiconductor equipment industries as well as the worldwide economy, announcement of technological innovations, new systems or product enhancements by us or our competitors, fluctuations in the level of cooperative development funding, acquisitions, changes in governmental regulations, developments in patents or other intellectual property rights and changes in our relationships with customers and suppliers could cause the price of our common stock to fluctuate substantially. In addition, in recent years the stock
 
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market in general, and the market for small capitalization and high technology stocks in particular, have experienced extreme price fluctuations which have often been unrelated to the operating performance of the affected companies. Such fluctuations could adversely affect the market price of our common stock.
 
We depend on our key personnel and our success depends on our ability to attract and retain talented employees.
 
    Our success depends to a significant extent upon the continued service of Gayn Erickson, our President and Chief Executive Officer, as well as other executive officers and key employees. We do not maintain key person life insurance for our benefit on any of our personnel, and none of our employees are subject to a non-competition agreement with us. The loss of the services of any of our executive officers or a group of key employees could have a material adverse effect on our business, financial condition and operating results. Our future success will depend in significant part upon our ability to attract and retain highly skilled technical, management, sales and marketing personnel. There are a limited number of personnel with the requisite skills to serve in these positions, and it has become increasingly difficult for us to hire such personnel. Competition for such personnel in the semiconductor equipment industry is intense, and there can be no assurance that we will be successful in attracting or retaining such personnel. Changes in management could disrupt our operations and adversely affect our operating results.
 
We may be subject to litigation relating to intellectual property infringement which would be time-consuming, expensive and a distraction from our business.
 
    If we do not adequately protect our intellectual property, competitors may be able to use our proprietary information to erode our competitive advantage, which could harm our business and operating results. Litigation may be necessary to enforce or determine the validity and scope of our proprietary rights, and there can be no assurance that our intellectual property rights, if challenged, will be upheld as valid. Such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on our operating results, regardless of the outcome of the litigation. In addition, there can be no assurance that any of the patents issued to us will not be challenged, invalidated or circumvented or that the rights granted thereunder will provide competitive advantages to us.
 
    There are no pending claims against us regarding infringement of any patents or other intellectual property rights of others. However, in the future we may receive communications from third parties asserting intellectual property claims against us. Such claims could include assertions that our products infringe, or may infringe, the proprietary rights of third parties, requests for indemnification against such infringement or suggestions that we may be interested in acquiring a license from such third parties. There can be no assurance that any such claim will not result in litigation, which could involve significant expense to us, and, if we are required or deem it appropriate to obtain a license relating to one or more products or technologies, there can be no assurance that we would be able to do so on commercially reasonable terms, or at all.
 
While we believe we have complied with all applicable environmental laws, our failure to do so could adversely affect our business as a result of having to pay substantial amounts in damages or fees.
 
    Federal, state and local regulations impose various controls on the use, storage, discharge, handling, emission, generation, manufacture and disposal of toxic and other hazardous substances used in our operations. We believe that our activities conform in all material respects to current environmental and land use regulations applicable to our operations and our current facilities, and that we have obtained environmental permits necessary to conduct our business. Nevertheless, failure to comply with current or future regulations could result in substantial fines, suspension of production, alteration of our manufacturing processes or cessation of operations. Such regulations could require us to acquire expensive remediation equipment or to incur substantial expenses to comply with environmental regulations. Any failure to control the use, disposal or storage of or adequately restrict the discharge of, hazardous or toxic substances could subject us to significant liabilities.
 
If we fail to maintain effective internal control over financial reporting in the future, the accuracy and timing of our financial reporting may be adversely affected.
 
    We are required to comply with Section 404 of the Sarbanes-Oxley Act of 2002. The provisions of the act require, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. Preparing our financial statements involves a number of complex processes, many of which are done manually and are dependent upon individual data input or review. These processes include, but are not limited to, calculating revenue, deferred revenue and inventory costs. While we continue to automate our processes and enhance our review and put in place controls to reduce the likelihood for errors, we expect that for the foreseeable future, many of our processes will remain manually intensive and thus subject to human error.
 
 
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Our common stock may be delisted from The NASDAQ Capital Market if we cannot maintain compliance with NASDAQ’s continued listing requirements.
 
    In order to maintain our listing on The NASDAQ Capital Market, we are required to maintain compliance with NASDAQ’s continued listing requirements. The continued listing requirements include, among others, a minimum bid price of $1.00 per share and any of: (i) a minimum stockholders’ equity of $2.5 million; (ii) a market value of listed securities of at least $35 million; or (iii) net income from continuing operations of $500,000 in the most recently completed fiscal year or in two of the last three fiscal years. There are no assurances that we will be able to sustain long-term compliance with NASDAQ’s continued listing requirements. If we fail to maintain compliance with the applicable NASDAQ continued listing requirements, our stock may be delisted.
 
    If we are delisted, we would expect our common stock to be traded in the over-the-counter market, which could make trading our common stock more difficult for investors, potentially leading to declines in our share price and liquidity. In addition, delisting could result in negative publicity and make it more difficult for us to raise additional capital.
 
Item 1B. Unresolved Staff Comments
 
    None.
 
Item 2. Properties
 
    The Company’s principal administrative and production facilities are located in Fremont, California, in a 51,289 square foot building. The Company’s lease was renewed in February 2018 and expires in July 2023. The Company maintained a facility in Japan located in a 418 square foot office in Tokyo under a lease which expired in June 2020. The Company also maintained a 1,585 square foot warehouse in Yamanashi under a lease which expired in June 2020. The Company substantially closed its subsidiary Aehr Test Systems Japan K.K. in March 2020, completing the liquidation of the legal entity in July 2020, see Note 16, “Restructuring,” of the Notes to Consolidated Financial Statements. The Company leases a 492 square foot sales and support office in Utting, Germany. The lease, which began February 1, 1992 and expires on January 31, 2022, contains an automatic twelve months renewal, at rates to be determined, if no notice is given prior to six months from expiry. The Company periodically evaluates its global operations and facilities to bring its capacity in line with demand and to provide cost efficient services for its customers. In prior years, through this process, the Company has moved from certain facilities that exceeded the capacity required to satisfy its needs. The Company believes that its existing facilities are adequate to meet its current and reasonably foreseeable requirements. The Company regularly evaluates its expected future facilities requirements and believes that alternate facilities would be available if needed.
 
Item 3. Legal Proceedings
 
    None.
 
Item 4. Mine Safety Disclosures
 
    Not Applicable
 
 
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PART II
 
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
    The Company’s common stock is publicly traded on the NASDAQ Capital Market under the symbol “AEHR”. The following table sets forth, for the periods indicated, the high and low sale prices for the common stock on such market. These quotations represent prices between dealers and do not include retail markups, markdowns or commissions and may not necessarily represent actual transactions.
 
 
 
High
 
 
Low
 
Fiscal 2020:
 
 
 
 
 
 
 First quarter ended August 31, 2019
 $1.87 
 $1.27 
 Second quarter ended November 30, 2019
  2.33 
  1.28 
 Third quarter ended February 29, 2020
  2.78 
  1.75 
 Fourth quarter ended May 31, 2020
  2.24 
  1.10 
 
    
    
Fiscal 2019:
    
    
 First quarter ended August 31, 2018
 $2.94 
 $2.21 
 Second quarter ended November 30, 2018
  2.57 
  1.80 
 Third quarter ended February 28, 2019
  1.97 
  1.03 
 Fourth quarter ended May 31, 2019
  2.19 
  1.27 
 
    At August 3, 2020, the Company had 135 holders of record of its common stock. A substantially greater number of holders of the Company’s common stock are “street name” or beneficial holders whose shares are held by banks, brokers and other financial institutions.
 
    The Company has not paid cash dividends on its common stock or other securities. The Company currently anticipates that it will retain its future earnings, if any, for use in the expansion and operation of its business and does not anticipate paying any cash dividends on its common stock in the foreseeable future.
 
    The Company did not repurchase any of its common stock during the fiscal year ended May 31, 2020.
 
PERFORMANCE MEASUREMENT COMPARISON
 
    The following graph shows a comparison of total shareholder return for holders of the Company's common stock for the last five fiscal years ended May 31, 2020, compared with the NASDAQ Composite Index and the Philadelphia Semiconductor Index. The graph assumes that $100 was invested in the Company's common stock, in the NASDAQ Composite Index and the Philadelphia Semiconductor Index on May 31, 2015, and that all dividends were reinvested. The Company believes that while total shareholder return can be an important indicator of corporate performance, the stock prices of semiconductor equipment companies like us are subject to a number of market-related factors other than company performance, such as competitive announcements, mergers and acquisitions in the industry, the general state of the economy and the performance of other semiconductor equipment company stocks. Stock prices and shareholder returns over the indicated period should not be considered indicative of future stock prices or shareholder returns.
 
 
18
 
 
 
Item 6. Selected Consolidated Financial Data
 
    The selected consolidated financial data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. The selected consolidated financial data in this section are not intended to replace the consolidated financial statements and are qualified in their entirety by the consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K.
 
    We derived the statements of operations data for the fiscal years ended May 31, 2020, 2019 and 2018 and the balance sheet data as of May 31, 2020 and 2019 from our audited consolidated financial statements and related notes, which are included elsewhere in this Annual Report on Form 10-K. We derived the statements of operations data for the fiscal years ended May 31, 2017 and 2016 and the balance sheet data as of May 31, 2018, 2017 and 2016 from our audited consolidated financial statements and related notes which are not included in this Annual Report on Form 10-K. We have not declared or distributed any cash dividends.
 
 
19
 
 
 
 
 
Fiscal Year Ended May 31,
 
 
 
2020
 
 
2019
 
 
2018
 
 
2017
 
 
2016
 
 
 
(In thousands, except per share data)
 
CONSOLIDATED STATEMENTS OF OPERATIONS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
 $22,291 
 $21,056 
 $29,555 
 $18,898 
 $14,501 
 
    
    
    
    
    
Cost of sales
  13,920 
  13,454 
  17,169 
  12,118 
  9,356 
Gross profit
  8,371 
  7,602 
  12,386 
  6,780 
  5,145 
 
    
    
    
    
    
Operating expenses:
    
    
    
    
    
  Selling, general and administrative
  7,530 
  7,724 
  7,290 
  7,052 
  6,975 
  Research and development
  3,386 
  4,153 
  4,181 
  4,657 
  4,324 
  Restructuring
  220 
  725 
  -- 
  -- 
  -- 
 
    
    
    
    
    
     Total operating expenses
  11,136 
  12,602 
  11,471 
  11,709 
  11,299 
 
    
    
    
    
    
(Loss) income from operations
  (2,765)
  (5,000)
  915 
  (4,929)
  (6,154)
 
    
    
    
    
    
Interest income (expense), net
  10 
  (252)
  (399)
  (678)
  (605)
Other (expense) income, net
  (11)
  44 
  (61)
  (21)
  (16)
 
    
    
    
    
    
(Loss) income before income tax (expense) benefit
  (2,766)
  (5,208)
  455 
  (5,628)
  (6,775)
 
    
    
    
    
    
Income tax (expense) benefit
  (36)
  (27)
  73 
  (25)
  (10)
Net (loss) income
  (2,802)
  (5,235)
  528 
  (5,653)
  (6,785)
     Less: Net income attributable to the noncontrolling interest
  -- 
  -- 
  -- 
  -- 
  -- 
 
    
    
    
    
    
Net (loss) income attributable to Aehr Test Systems common shareholders
 $(2,802)
 $(5,235)
 $528 
 $(5,653)
 $(6,785)
Net (loss) income per share:
    
    
    
    
    
     Basic 
 $(0.12)
 $(0.23)
 $0.02 
 $(0.35)
 $(0.52)
     Diluted
 $(0.12)
 $(0.23)
 $0.02 
 $(0.35)
 $(0.52)
 
    
    
    
    
    
Shares used in per share calculations:
    
    
    
    
    
     Basic
  22,882 
  22,387 
  21,732 
  16,267 
  13,091 
     Diluted
  22,882 
  22,387 
  22,782 
  16,267 
  13,091 
 
 
 
May 31,
 
 
 
2020
 
 
2019
 
 
2018
 
 
2017
 
 
2016
 
CONSOLIDATED BALANCE SHEETS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 $5,433 
 $5,428 
 $16,848 
 $17,803 
 $939 
Working capital
  13,786 
  14,522 
  18,308 
  21,494 
  4,068 
Total assets
  20,574 
  21,307 
  30,955 
  30,892 
  10,046 
 
    
    
    
    
    
Long-term obligations, less current portion
  2,653 
  342 
  522 
  6,214 
  6,089 
Total shareholders' equity (deficit)
  14,056 
  15,453 
  19,285 
  16,794 
  (723)
 
 
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
    The following discussion and analysis of the financial condition and results of operations should be read in conjunction with our “Selected Consolidated Financial Data” and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.
 
COVID-19 PANDEMIC RESPONSE
 
    The Company has been impacted by the recent outbreak of the novel coronavirus, known as COVID-19, which has spread to many countries throughout the world. We experienced a significant drop in customer orders and revenues in the last quarter of fiscal year ended May 31, 2020. In response to the ongoing COVID-19 pandemic, we have implemented cost reduction initiatives including mandatory vacation days and shutdown days to mitigate operating losses. On April 23, 2020, we received proceeds of $1,679,000 from a PPP loan, under the CARES Act, a portion of which may be forgiven, which we intend to use to retain employees, maintain payroll and make lease and utility payments.
 
    Our business’ top priority during the COVID-19 pandemic is protecting the health and safety of its employees and their families, customers and community. We introduced workplace flexibility such as working remotely where possible to reduce the number of people who are on campus each day. As a global supplier of Critical Infrastructure Sectors we are continuing to support customers during the pandemic. In the interest of public health, all onsite operations are utilizing the minimum number of people to safely execute tasks and following enhanced safety and health protocols including screenings, social distancing, and use of personal protective equipment.
 
    We will continue to monitor the situation. As of the date of this report, we cannot predict with certainty the potential effects the COVID-19 may have on our business and our operating results. While the overall environment remains uncertain, we continue to aggressively invest in priority areas with the objective of driving profitable growth over the long term.
 
OVERVIEW
 
    We were founded in 1977 to develop and manufacture burn-in and test equipment for the semiconductor industry. Since our inception, we have installed over 2,500 systems at semiconductor manufacturers, semiconductor contract assemblers and burn-in and test service companies worldwide. Our principal products currently are the Advanced Burn-in and Test System, or ABTS, the FOX full wafer contact and singulated die/module parallel test and burn-in system, WaferPak Aligner, WaferPak contactors, DiePak Loader, DiePak carriers and test fixtures.
 
    Our net sales consist primarily of sales of systems, WaferPak Aligners and DiePak Loaders, WaferPak contactors, DiePak carriers, test fixtures, upgrades and spare parts, revenues from service contracts, and engineering development charges. Our selling arrangements may include contractual customer acceptance provisions, which are mostly deemed perfunctory or inconsequential, and installation of the product occurs after shipment and transfer of title.
 
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
 
    Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to customer programs and incentives, product returns, bad debts, inventories, investments, income taxes, financing operations, warranty obligations, and long-term service contracts, among others. Our estimates are derived from historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Those results form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
 
    We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
 
    REVENUE RECOGNITION
 
    In May 2014, the Financial Accounting Standards Boards (FASB) issued ASC Topic 606, Revenue from Contracts with Customers (Topic 606), which was subsequently updated (collectively “ASC 606”). We adopted the standard as of June 1, 2018, using the modified retrospective method. Under this method, we applied ASC 606 to contracts that were not complete as of June 1, 2018 and recognized the cumulative effect of initially applying the standard as an adjustment to
 
21
 
 
the opening balance of retained earnings. Results for reporting periods beginning after June 1, 2018 are presented in accordance with ASC 606. Under the modified retrospective adoption method, prior period amounts are not adjusted and are reported in accordance with the accounting standards in effect for those periods per FASB ASC Topic 605, Revenue Recognition, which is also referred to herein as “legacy GAAP.”
 
    The adoption of ASC 606 did not have a material impact on our consolidated financial statements as of June 1, 2018. No adjustment was recorded to accumulated deficit as of the adoption date and reported revenue would not have been different under legacy GAAP. Additionally, we do not expect the adoption of the revenue standard to have a material impact to our net income on an ongoing basis.
 
    We sell our products primarily through a direct sales force. In certain international markets, we sell our products through independent distributors. We consider revenue to be earned when all of the following criteria are met:
 
● We have a contract with a customer that creates enforceable rights and obligations,
 
● Promised performance obligations are identified,
 
● The transaction price, or the amount we expect to receive, is determinable and
 
● We have satisfied the performance obligations to the customer.
 
    Transfer of control is evidenced upon passage of title and risk of loss to the customer unless we are required to provide additional services.
 
     ALLOWANCE FOR DOUBTFUL ACCOUNTS
 
    We maintain an allowance for doubtful accounts to reserve for potentially uncollectible trade receivables. We also review our trade receivables by aging category to identify specific customers with known disputes or collection issues. We exercise judgment when determining the adequacy of these reserves as we evaluate historical bad debt trends, general economic conditions in the United States and internationally and changes in customer financial conditions. Uncollectible receivables are recorded as bad debt expense when all efforts to collect have been exhausted and recoveries are recognized when they are received.
 
    WARRANTY OBLIGATIONS
 
    We provide and record the estimated cost of product warranties at the time revenues are recognized on products shipped. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, our warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Our estimate of warranty reserve is based on management’s assessment of future warranty obligations and on historical warranty obligations. Should actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required.
 
    INVENTORY OBSOLESCENCE
 
    In each of the last three fiscal years, we have written down our inventory for estimated obsolescence or unmarketable inventory by an amount equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If future market conditions are less favorable than those projected by management, additional inventory write-downs may be required.
 
    INCOME TAXES
 
    Income taxes have been provided using the liability method whereby deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and net operating loss and tax credit carryforwards measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse or the carryforwards are utilized. Valuation allowances are established when it is determined that it is more likely than not that such assets will not be realized.
 
    A full valuation allowance was established against all deferred tax assets, as management determined that it is more likely than not that deferred tax assets will not be realized, as of May 31, 2020 and 2019.
 
    We account 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
 
22
 
 
a tax position taken or expected to be taken in a tax return. We do not expect any material change in its unrecognized tax benefits over the next twelve months. We recognize interest and penalties related to unrecognized tax benefits as a component of income taxes.
 
    Although we file U.S. federal, various state and foreign tax returns, our only major tax jurisdictions are the United States, California, Germany and Japan. Tax years 1996 – 2019 remain subject to examination by the appropriate governmental agencies due to tax loss carryovers, research and development tax credits, or other tax attributes from those years.
 
    On March 27, 2020, the CARES Act was passed into law. The CARES Act includes several significant business tax provisions including modification to the taxable income limitation for utilization of net operating losses (NOLs) incurred in 2018, 2019 and 2020 and the ability to carry back NOLs from those years for a period of up to five years, an increase to the limitation on deductibility of certain business interest expense, bonus depreciation for purchases of qualified improvement property and special deductions on certain corporate charitable contributions. We are currently analyzing the impact of these changes and therefore an estimate of the impact to income taxes is not yet available.
 
    On June 29, 2020, California Governor Gavin Newsom signed Assembly Bill 85 (AB 85) into law as part of the California 2020 Budget Act, which temporarily suspends the use of California net operating losses and imposes a cap on the amount of business incentive tax credits that companies can utilize against their net income for tax years 2020, 2021, and 2022. We analyzed the provisions of AB 85 and determined there was no impact on our provision for income taxes for the current period and will continue to evaluate the impact, if any, AB 85 may have on our condensed consolidated financial statements and disclosures.
 
    STOCK-BASED COMPENSATION EXPENSE
 
    Stock-based compensation expense consists of expenses for stock options, restricted stock units, or RSUs, and employee stock purchase plan, or ESPP, purchase rights. Stock-based compensation cost for stock options and ESPP purchase rights is measured at each grant date, based on the fair value of the award using the Black-Scholes option valuation model, and is recognized as expense over the employee’s requisite service period. This model was developed for use in estimating the value of publicly traded options that have no vesting restrictions and are fully transferable. Our employee stock options have characteristics significantly different from those of publicly traded options. For RSUs, stock-based compensation cost is based on the fair value of our common stock at the grant date. All of our stock-based compensation is accounted for as an equity instrument.
 
    The fair value of each option grant and the right to purchase shares under our ESPP are estimated on the date of grant using the Black-Scholes option valuation model with assumptions concerning expected term, stock price volatility, expected dividend yield, risk-free interest rate and the expected life of the award. See Note 11 to our consolidated financial statements for detailed information relating to stock-based compensation and the stock option plan and the ESPP.
 
     RESTRUCTURING
 
     We record a charge for restructuring when management commits to a restructuring plan, the restructuring plan identifies all significant actions, the period of time to complete the restructuring plan indicates that significant changes to the plan are not likely, and individuals who are impacted have been notified of the pending involuntary termination.  Restructuring charges include severance payments, legal fees, and write-off of assets.  For employees that are not required to render services beyond a minimum retention period, the severance expense is recognized at the communication date based upon its fair value.  For employees who are required to render service until they are terminated in order to receive the severance, the severance costs are measured initially at the communication date based upon its fair value, and recognized ratably over the future service period.
 
     In the fiscal year ended May 31, 2020, we recognized $220,000 in restructuring charges related to the dissolution of Aehr Test Systems Japan K.K (“ATS-Japan”), a majority owned subsidiary.  The restructuring charges included severance payments for individuals impacted in this reduction, legal fees associated with the dissolution process, and write-off of assets.  Restructuring charges for the fiscal year ended May 31, 2019 were related to a restructuring plan implemented in order to streamline our operations and better align our structure with our objectives going forward. We recognized $725,000 of employee termination expenses for the fiscal year ended May 31, 2019.   
  
 
 
23
 
 
RESULTS OF OPERATIONS
 
    The following table sets forth statements of operations data as a percentage of net sales for the periods indicated.
 
 
 
Year Ended May 31,
 
 
 
2020
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
 
 
 
Net sales
  100.0%
  100.0%
  100.0%
Cost of sales
  62.4 
  63.9 
  58.1 
Gross profit
  37.6 
  36.1 
  41.9 
 
    
    
    
Operating expenses:
    
    
    
  Selling, general and administrative
  33.8 
  36.7 
  24.7 
  Research and development
  15.2 
  19.7 
  14.1 
  Restructuring
  1.0 
  3.4 
  -- 
 
    
    
    
     Total operating expenses
  50.0 
  59.8 
  38.8 
 
    
    
    
  (Loss) income from operations
  (12.4)
  (23.7)
  3.1 
 
    
    
    
Interest income (expense), net
  -- 
  (1.2)
  (1.4)
Other (expense) income, net
  -- 
  0.2 
  (0.2)
 
    
    
    
  (Loss) income before income tax (expense) benefit
  (12.4)
  (24.7)
  1.5 
 
    
    
    
Income tax (expense) benefit
  (0.2)
  (0.2)
  0.3 
 
    
    
    
Net (loss) income
  (12.6)
  (24.9)
  1.8 
  Less: Net income attributable to the noncontrolling interest
  -- 
  -- 
  -- 
Net (loss) income attributable to Aehr Test Systems common shareholders
  (12.6)%
  (24.9)%
  1.8%
 
FISCAL YEAR ENDED MAY 31, 2020 COMPARED TO FISCAL YEAR ENDED MAY 31, 2019
 
    NET SALES. Net sales increased to $22.3 million for the fiscal year ended May 31, 2020 from $21.1 million for the fiscal year ended May 31, 2019, an increase of 5.9%. The increase in net sales in fiscal 2020 resulted primarily from the increase in net sales of our wafer-level products, partially offset by the decrease in net sales of our Test During Burn-in (TDBI) products. Net sales of our wafer-level products for fiscal 2020 were $19.8 million, and increased approximately $5.2 million from fiscal 2019. Net sales of our TDBI products for fiscal 2020 were $2.5 million, and decreased approximately $3.9 million from fiscal 2019.
 
    GROSS PROFIT. Gross profit increased to $8.4 million for the fiscal year ended May 31, 2020 from $7.6 million for the fiscal year ended May 31, 2019, an increase of 10.1%. Gross profit margin increased to 37.6% for the fiscal year ended May 31, 2020 from 36.1% for the fiscal year ended May 31, 2019. The increase in gross profit margin was primarily the result of change in product mix in net sales which wafer-level products revenues, contributing higher margins, accounted for 89% of revenues in fiscal year ended May 31, 2020 compared to 69% of revenues in fiscal year ended May 31, 2019. The increase was partially offset by the impact of excess and obsolete charges mainly related to ABTS products reaching the end of product life.
 
    SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses were $7.5 million for the fiscal year ended May 31, 2020, compared with $7.7 million for the fiscal year ended May 31, 2019, a decrease of 2.5%. The decrease in SG&A expenses was primarily due to decreases in employment related expenses as a result of cost reduction initiatives implemented in fiscal 2019.
 
    RESEARCH AND DEVELOPMENT. R&D expenses were $3.4 million for the fiscal year ended May 31, 2020, compared with $4.2 million for the fiscal year ended May 31, 2019, a decrease of 18.5%. The decrease in R&D expenses was primarily due to decreases in employment related expenses of $500,000 and project expenses of $267,000.
 
    RESTRUCTURING. Restructuring charges for the fiscal year ended May 31, 2020 were related to the dissolution of Aehr Test Systems Japan K.K (ATS-Japan), a majority owned subsidiary. In connection with the dissolution plan, the
 
24
 
 
Company recognized approximately $220,000 related to severance payments for individuals impacted in this reduction and legal fees associated with the dissolution process in the fourth quarter of fiscal 2020. Restructuring charges for the fiscal year ended May 31, 2019 were related to a restructuring plan implemented in February 2019 in order to streamline our operations and better align our structure with our objectives going forward. We recognized $725,000 of employee termination expenses for the fiscal year ended May 31, 2019.
 
    INTEREST INCOME (EXPENSE), NET. Interest income, net was $10,000 for the fiscal year ended May 31, 2020 compared with interest expense, net was $252,000 for the fiscal year ended May 31, 2019. The decrease in interest expense, net was primarily due to the repayment of the Convertible Notes on the maturity date of April 10, 2019, partially offset by a decrease in interest income due to a decrease in our investment portfolio.
 
    OTHER (EXPENSE) INCOME, NET. Other expense, net was $11,000 for the fiscal year ended May 31, 2020 compared with other income, net of $44,000 for the fiscal year ended May 31, 2019. The change in other (expense) income, net was due primarily to losses or gains realized in connection with the fluctuation in the value of the dollar compared to foreign currencies during the referenced periods.
 
    INCOME TAX (EXPENSE) BENEFIT. Income tax expense was $36,000 and $27,000 for the fiscal year ended May 31, 2020 and 2019, respectively.
 
FISCAL YEAR ENDED MAY 31, 2019 COMPARED TO FISCAL YEAR ENDED MAY 31, 2018
 
    NET SALES. Net sales decreased to $21.1 million for the fiscal year ended May 31, 2019 from $29.6 million for the fiscal year ended May 31, 2018, a decrease of 28.8%. The decrease in net sales in fiscal 2019 resulted primarily from the decrease in net sales of our Test During Burn-in (TDBI) products, partially offset by the increase in net sales of our wafer-level products. Net sales of our TDBI products for fiscal 2019 were $6.4 million, and decreased approximately $10.0 million from fiscal 2018. The decrease was primarily due to our customers utilizing the significant capacity that they added in the prior year and lower sales to OEM manufacturers. Net sales of our wafer-level products for fiscal 2019 were $14.6 million, and increased approximately $1.5 million from fiscal 2018.
 
    GROSS PROFIT. Gross profit decreased to $7.6 million for the fiscal year ended May 31, 2019 from $12.4 million for the fiscal year ended May 31, 2018, a decrease of 38.6%. Gross profit margin decreased to 36.1% for the fiscal year ended May 31, 2019 from 41.9% for the fiscal year ended May 31, 2018. The decrease in gross profit margin was primarily the result of manufacturing inefficiencies due to a decrease in net sales, product mix, and the impact of reserves taken on excess and obsolete inventory.
 
    SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses were $7.7 million for the fiscal year ended May 31, 2019, compared with $7.3 million for the fiscal year ended May 31, 2018, an increase of 6.0%. The increase in SG&A expenses was primarily due to increases in employment related expenses.
 
    RESEARCH AND DEVELOPMENT. R&D expenses were flat at $4.2 million for the fiscal year ended May 31, 2019 compared with the fiscal year ended May 31, 2018.
 
    RESTRUCTURING. Restructuring charges for the fiscal year ended May 31, 2019 were related to a restructuring plan implemented in February 2019 in order to streamline our operations and better align our structure with our objectives going forward. We recognized $725,000 of employee termination expenses for the fiscal year ended May 31, 2019. There were no restructuring charges incurred for the fiscal year ended May 31, 2018.
 
    INTEREST EXPENSE. Interest expense decreased to $252,000 for the fiscal year ended May 31, 2019 from $399,000 for the fiscal year ended May 31, 2018. The decrease in interest expense for the fiscal year ended May 31, 2019 was primarily due to the repayment of the 9.0% Convertible Secured Notes (the “Convertible Notes”) on the maturity date of April 10, 2019, and the impact of an increase in interest income due to an increase in interest rates on our investment portfolio.
 
    OTHER INCOME (EXPENSE), NET. Other income, net was $44,000 for the fiscal year ended May 31, 2019 compared with other expense, net of $61,000 for the fiscal year ended May 31, 2018. The change in other income (expense), net was due primarily to gains or losses realized in connection with the fluctuation in the value of the dollar compared to foreign currencies during the referenced periods.
 
    INCOME TAX (EXPENSE) BENEFIT. Income tax expense was $27,000 for the fiscal year ended May 31, 2019 compared with income tax benefit of $73,000 for the fiscal year ended May 31, 2018. The income tax benefit in the fiscal year ended May 31, 2018 was primarily due to the impact of the “Tax Cuts and Jobs Act” enacted on December 22, 2017, specifically, the provision which made our alternative minimum tax credit refundable by 2022.
 
25
 
 
LIQUIDITY AND CAPITAL RESOURCES
 
    We consider cash and cash equivalents as liquid and available for use. As of May 31, 2020 and 2019, respectively, we had $5.4 million in cash and cash equivalents.
 
    Net cash used in operating activities was $2.0 million and $5.6 million for the fiscal years ended May 31, 2020 and 2019, respectively. For the fiscal year ended May 31, 2020, net cash used in operating activities was primarily the result of the net loss of $2.8 million, as adjusted to exclude the effect of non-cash charges of stock-based compensation expense of $910,000 and depreciation and amortization of $384,000. Net cash used in operations was also impacted by decreases in customer deposits and deferred revenue of $1.5 million and in accounts payable of $1.0 million, partially offset by decreases in inventories and accounts receivable of $1.2 million each. The decrease in customer deposits and deferred revenue was primarily due to the decrease in backlog of customer orders with down payments. The decrease in accounts payable was primarily due to a reduction in inventory purchases. The decrease in inventories was primarily due to the increase in inventory reserves related to older products. The decrease in accounts receivable was primarily due to lower shipment activities toward the end of fiscal year ended May 31, 2020. For the fiscal year ended May 31, 2019, net cash used in operating activities was primarily the result of the net loss of $5.2 million, as adjusted to exclude the effect of non-cash charges of stock-based compensation expense of $905,000 and depreciation and amortization of $431,000, an increase in accounts receivable of $2.0 million, and a decrease in customer deposits and deferred revenue of $355,000, partially offset by an increase in accrued expenses of $402,000. The increase in accounts receivable was primarily due to large shipments toward the end of fiscal 2019. The decrease in customer deposits and deferred revenue was primarily due to the decrease in backlog of customer orders with down payments. The increase in accrued expenses was primarily due to severance expenses accrued as a result of our restructuring plan implemented in February 2019.
 
    Net cash used in investing activities was $163,000 and $173,000 for the fiscal years ended May 31, 2020 and 2019, respectively. Net cash used in investing activities for the fiscal years ended May 31, 2020 and 2019 was due to the purchases of property and equipment.
 
    Net cash provided by financing activities was $2.2 million for the fiscal year ended May 31, 2020 as compared to net cash used in financing activities of $5.6 million for the fiscal year ended May 31, 2019. Net cash provided by financing activities during the fiscal year ended May 31, 2020 was primarily due to the proceeds of approximately $1.7 million from the PPP Loan, and the net proceeds from issuance of common stock under employee plans of $493,000. Net cash used in financing activities during the fiscal year ended May 31, 2019 was primarily due to the repayment of the Convertible Notes of $6.1 million on the maturity date of April 10, 2019, partially offset by proceeds from issuance of common stock under employee plans of $559,000.
 
    The effect of fluctuation in exchange rates increased cash by $20,000 for the fiscal year ended May 31, 2020 and decreased cash by $59,000 for the fiscal year ended May 31, 2019. The changes were due to the fluctuation in the value of the dollar compared to foreign currencies.
 
    As of May 31, 2020 and 2019, we had working capital of $13.8 million and $14.5 million, respectively.
 
    For the fiscal year ended May 31, 2018, net cash used in operating activities was primarily the result of the net income of $528,000, as adjusted to exclude the effect of non-cash charges of stock-based compensation expense of $996,000 and depreciation and amortization of $417,000, and a decrease in accounts receivable of $1.3 million. Other changes in cash from operations primarily resulted from an increase in inventories of $2.1 million, a decrease in customer deposits and deferred revenue of $1.5 million, as well as the decrease in accounts payable of $1.1 million. The decrease in accounts receivable was primarily due to improvements in customer payment terms. The increase in inventories is to support 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 accounts payable was primarily due to the down payments applied toward vendor invoices.
 
    Net cash used in investing activities was $572,000 for the fiscal year ended May 31, 2018 was due to the purchase of property and equipment.
 
    Net cash provided by financing activities of $925,000 for the fiscal year ended May 31, 2018 was primarily due to the proceeds from issuance of common stock under employee plans.
 
    The effect of fluctuation in exchange rates increased cash by $43,000 for the fiscal year ended May 31, 2018 due to the fluctuation in the value of the dollar compared to foreign currencies.
 
    As of May 31, 2018, we had working capital of $18.3 million.
 
26
 
 
    We lease our manufacturing and office space under operating leases. We entered into a non-cancelable operating lease agreement for our United States manufacturing and office facilities, which was renewed in February 2018 and expires in July 2023. Under that lease agreement, we are responsible for payments of utilities, taxes and insurance.
 
    From time to time, we evaluate potential acquisitions of businesses, products or technologies that complement our business. If consummated, any such transactions may use a portion of our working capital or require the issuance of equity. We have no present understandings, commitments or agreements with respect to any material acquisitions.
 
    We anticipate that the existing cash balance together with income from operations, collections of existing accounts receivable, revenue from our existing backlog of products, the sale of inventory on hand, deposits and down payments against significant orders, and anticipated loan forgiveness of the PPP Loan will be adequate to meet our liquidity requirements for the next 12 months.
 
OFF-BALANCE SHEET FINANCING
 
    We have not entered into any off-balance sheet financing arrangements and have not established any special purpose or variable interest entities.
 
OVERVIEW OF CONTRACTUAL OBLIGATIONS
 
    The following table provides a summary of such arrangements, or contractual obligations.
 
 
 
Payments Due by Period (in thousands)
 
 
 
 
 
 
Less than
 
 
1-3
 
 
3-5
 
 
More than
 
 
 
 Total
 
 
 1 year
 
 
 years
 
 
 years
 
 
 5 years
 
Lease obligations
 $2,473 
 $765 
 $1,574 
 $134 
 $-- 
Long-term debt
  1,679 
  653 
  1,026 
  -- 
  -- 
Interest on long-term debt (1) 
  21 
  16 
  5 
  -- 
  -- 
Purchases (2) 
  2,196 
  2,196 
  -- 
  -- 
  -- 
Total
 $6,369 
 $3,630 
 $2,605 
 $134 
 $-- 
 
(1) Based on 1% interest rate of PPP Loan. See Note 10, “LONG-TERM DEBT.”
(2) Shown above are our binding purchase obligations. The large majority of our purchase orders are cancelable by either party, which if canceled may result in a negotiation with the vendor to determine if there shall be any restocking or cancellation fees payable to the vendor.
 
    In the normal course of business to facilitate sales of our products, we indemnify other parties, including customers, with respect to certain matters. We have agreed to hold the other party harmless against losses arising from a breach of representations or covenants, or from intellectual property infringement or other claims. These agreements may limit the time period within which an indemnification claim can be made and the amount of the claim. In addition, we have entered into indemnification agreements with our officers and directors, and our bylaws contain similar indemnification obligations to our agents.
 
    It is not possible to determine the maximum potential amount under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. To date, our payments under these agreements have not had a material impact on our operating results, financial position or cash flows.
 
RECENT ACCOUNTING PRONOUNCEMENTS
 
    For a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements, see Note 1, “Organization and Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements.
 
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
 
    We had no holdings of derivative financial or commodity instruments at May 31, 2020.
 
    We are exposed to financial market risks, including changes in interest rates and foreign currency exchange rates. We only invest our short-term excess cash in government-backed securities with maturities of 18 months or less. We do not use any financial instruments for speculative or trading purposes. Fluctuations in interest rates would not have a material effect on our financial position, results of operations or cash flows.
 
 
27
 
 
    A majority of our revenue and capital spending is transacted in U.S. Dollars. We, however, enter into transactions in other currencies, primarily Euros and Japanese Yen. Since the price is determined at the time a purchase order is accepted, we are exposed to the risks of fluctuations in the foreign currency-U.S. Dollar exchange rates during the lengthy period from purchase order to ultimate payment. This exchange rate risk is partially offset to the extent that our subsidiaries incur expenses payable in their local currency. To date, we have not invested in instruments designed to hedge currency risks. In addition, our subsidiaries typically carry debt or other obligations due to us that may be denominated in either their local currency or U.S. Dollars. Since our subsidiaries’ financial statements are based in their local currency and our condensed consolidated financial statements are based in U.S. Dollars, 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.
 
28
 
 
Item 8. Financial Statements and Supplementary Data
 
INDEX
 
Consolidated Financial Statements of Aehr Test Systems
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Report of Independent Registered Public Accounting Firm
30
 
 
 
 
 
 
 
 
 
 
 
 
  Consolidated Balance Sheets at May 31, 2020 and 2019
31
 
 
 
 
 
 
 
 
 
 
 
 
  Consolidated Statements of Operations for the years ended May 31, 2020, 2019 and 2018
32
 
 
 
 
 
 
 
 
 
 
 
 
  Consolidated Statements of Comprehensive (Loss) Income for the years ended May 31, 2020, 2019 and 2018
33
 
 
 
 
 
 
 
 
 
 
 
 
  Consolidated Statements of Shareholders' Equity for the years ended May 31, 2020, 2019 and 2018
34
 
 
 
 
 
 
 
 
 
 
 
 
  Consolidated Statements of Cash Flows for the years ended May 31, 2020, 2019 and 2018
35
 
 
 
 
 
 
 
 
 
 
 
 
  Notes to Consolidated Financial Statements
36
 
Financial statement schedules not listed above are either omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or in the Notes thereto.
 
 
29
 
 
 
Report Of Independent Registered Public Accounting Firm
 
To the Stockholders and Board of Directors of
Aehr Test Systems
 
Opinion on the Consolidated Financial Statements
 
We have audited the accompanying consolidated balance sheets of Aehr Test Systems and its subsidiaries (the “Company”) as of May 31, 2020 and 2019, the related consolidated statements of operations, comprehensive (loss) income, shareholders’ equity, and cash flows for each of the three years in the period ended May 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of May 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended May 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
 
Change in Accounting Principle
 
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for leases in 2020 due to the adoption of the new lease standard.
 
Basis for Opinion
 
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
 
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
 
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
 
/s/ BPM LLP
 
We have served as the Company’s auditor since 2005.
 
San Jose, California
August 28, 2020
 
 
 
 
30
 
AEHR TEST SYSTEMS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
 
 
 
May 31,
 
 
 
2020
 
 
2019
 
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
  Cash and cash equivalents
 $5,433 
 $5,428 
  Accounts receivable, net
  3,717 
  4,859 
  Inventories
  7,989 
  9,061 
  Prepaid expenses and other
  512 
  686 
 
    
    
     Total current assets 
  17,651 
  20,034 
 
    
    
Property and equipment, net
  663 
  1,045 
Operating lease right-of-use assets 
  2,107 
  -- 
Other assets
  153 
  228 
 
    
    
     Total assets
 $20,574 
 $21,307 
 
    
    
LIABILITIES AND SHAREHOLDERS' EQUITY
    
    
 
    
    
Current liabilities:
    
    
  Accounts payable
 $945 
 $1,933 
  Accrued expenses
  1,439 
  2,034 
  Operating lease liabilities, short-term
  658 
  -- 
  Customer deposits and deferred revenue, short-term
  170 
  1,545 
  Current portion of long-term debt
  653 
  -- 
 
    
    
     Total current liabilities
  3,865 
  5,512 
 
    
    
Operating lease liabilities, long-term 
  1,605 
  -- 
Long-term debt, net of current portion 
  1,026 
  -- 
Deferred rent 
  -- 
  153 
Deferred revenue, long-term 
  22 
  189 
 
    
    
     Total liabilities
  6,518 
  5,854 
 
    
    
Commitments and contingencies (Note 18)
    
    
 
    
    
Aehr Test Systems shareholders' equity: Preferred stock, $0.01 par value: Authorized: 10,000 shares; Issued and outstanding: none 
  -- 
  -- 
Common stock, $0.01 par value: Authorized: 75,000 shares; Issued and outstanding: 23,107 shares and 22,669 shares at May 31, 2020 and 2019 respectively
  231 
  227 
Additional paid-in capital
  85,898 
  84,499 
Accumulated other comprehensive income
  2,234 
  2,230 
Accumulated deficit
  (74,286)
  (71,484)
    Total Aehr Test Systems shareholders' equity 
  14,077 
  15,472 
Noncontrolling interest
  (21)
  (19)
     Total shareholders' equity
  14,056 
  15,453 
 
    
    
     Total liabilities and shareholders' equity
 $20,574 
 $21,307 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
31
 
AEHR TEST SYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
 
 
 
Year Ended May 31,
 
 
 
2020
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
 
 
 
Net sales
 $22,291 
 $21,056 
 $29,555 
Cost of sales 
  13,920 
  13,454 
  17,169 
Gross profit
  8,371 
  7,602 
  12,386 
 
    
    
    
Operating expenses:
    
    
    
  Selling, general and administrative
  7,530 
  7,724 
  7,290 
  Research and development
  3,386 
  4,153 
  4,181 
  Restructuring
  220 
  725 
  -- 
 
    
    
    
    Total operating expenses
  11,136 
  12,602 
  11,471 
 
    
    
    
(Loss) income from operations 
  (2,765)
  (5,000)
  915 
 
    
    
    
Interest income (expense), net
  10 
  (252)
  (399)
Other (expense) income, net
  (11)
  44 
  (61)
 
    
    
    
(Loss) income before income tax (expense) benefit
  (2,766)
  (5,208)
  455 
 
    
    
    
Income tax (expense) benefit
  (36)
  (27)
  73 
Net (loss) income
  (2,802)
  (5,235)
  528 
Less: Net income attributable to the noncontrolling interest
  -- 
  -- 
  -- 
 
    
    
    
Net (loss) income attributable to Aehr Test Systems common shareholders
 $(2,802)
 $(5,235)
 $528 
 
    
    
    
 
    
    
    
 
    
    
    
Net (loss) income per share – basic and diluted
 $(0.12)
 $(0.23)
 $0.02 
Shares used in per share calculation – basic
  22,882 
  22,387 
  21,732 
Shares used in per share calculation – diluted
  22,882 
  22,387 
  22,782 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
32
 
 
AEHR TEST SYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(IN THOUSANDS) 

 
 
Year Ended May 31,
 
 
 
2020
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net (loss) income
 $(2,802)
 $(5,235)
 $528 
 
    
    
    
Other comprehensive income (loss), net of tax:
    Foreign currency translation income (loss)
  2 
  (61)
  42 
 
    
    
    
Total comprehensive (loss) income
  (2,800)
  (5,296)
  570 
Less: Comprehensive (loss) income attributable to noncontrolling interest
  (2)
  1 
  (1)
 
    
    
    
Comprehensive (loss) income, attributable to Aehr Test Systems
 $(2,798)
 $(5,297)
 $571 
 
                            The accompanying notes are an integral part of these consolidated financial statements.
 
 
33
 
 
AEHR TEST SYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Aehr
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Accumulated
 
 
 
 
 
  Test
 
 
 
 
 
 
 
 
 
 
 
 
 Additional
 
 
 Other
 
 
 
 
 
Systems
 
 
 
 
 
 Total
 
 
 
Common Stock
 
 
Paid-in
 
 
 Comprehensive
 
 
Accumulated
 
 
 Shareholders’
 
 
Noncontrolling
 
 
Shareholders'
 
 
 
Shares
 
 
Amount
 
 
 Capital
 
 
  Income
 
 
Deficit
 
 
Equity
 
 
Interest
 
 
Equity
 
Balances, May 31, 2017
  21,340 
 $213 
 $81,128 
 $2,249 
 $(66,777)
 $16,813 
 $(19)
 $16,794 
 
    
    
    
    
    
    
    
    
Issuance of common stock under employee plans
  803 
  8 
  917 
  -- 
  -- 
  925 
  -- 
  925 
Stock-based compensation
  -- 
  -- 
  996 
  -- 
  -- 
  996 
  -- 
  996 
Net income
  -- 
  -- 
  -- 
  -- 
  528 
  528 
  -- 
  528 
Foreign currency translation adjustment
  -- 
  -- 
  -- 
  43 
  -- 
  43 
  (1)
  42 
 
    
    
    
    
    
    
    
    
Balances, May 31, 2018
  22,143 
  221 
  83,041 
  2,292 
  (66,249)
  19,305 
  (20)
  19,285 
 
    
    
    
    
    
    
    
    
Issuance of common stock under employee plans
  526 
  6 
  553 
  -- 
  -- 
  559 
  -- 
  559 
Stock-based compensation
  -- 
  -- 
  905 
  -- 
  -- 
  905 
  -- 
  905 
Net loss
  -- 
  -- 
  -- 
  -- 
  (5,235)
  (5,235)
  -- 
  (5,235)
Foreign currency translation adjustment
  -- 
  -- 
  -- 
  (62)
  -- 
  (62)
  1 
  (61)
 
    
    
    
    
    
    
    
    
Balances, May 31, 2019
  22,669 
  227 
  84,499 
  2,230 
  (71,484)
  15,472 
  (19)
  15,453 
 
    
    
    
    
    
    
    
    
Issuance of common stock under employee plans
  444 
  4 
  499 
  -- 
  -- 
  503 
  -- 
  503 
Shares repurchased for tax withholdings on vesting of RSUs
  (6) 
  -- 
  (10)
  -- 
  -- 
  (10)
  -- 
  (10)
Stock-based compensation
  -- 
  -- 
  910 
  -- 
  -- 
  910 
  -- 
  910 
Net loss
  -- 
  -- 
  -- 
  -- 
  (2,802)
  (2,802)
  -- 
  (2,802)
Foreign currency translation adjustment
  -- 
  -- 
  -- 
  4 
  -- 
  4 
  (2)
  2 
 
    
    
    
    
    
    
    
    
Balances, May 31, 2020
  23,107 
 $231 
 $85,898 
 $2,234 
 $(74,286)
 $14,077 
 $(21)
 $14,056 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
34
 
AEHR TEST SYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
 
 
 
Year Ended May 31,
 
 
 
2020
 
 
2019
 
 
2018
 
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
  Net (loss) income
 $(2,802)
 $(5,235)
 $528 
  Adjustments to reconcile net (loss) income to net cash used in operating activities:
    
    
    
    Stock-based compensation expense
  910 
  905 
  996 
    Recovery of doubtful accounts
  -- 
  (3)
  (58)
    Depreciation and amortization
  384 
  431 
  417 
    Loss on disposal of assets
  45 
  -- 
  -- 
    Changes in operating assets and liabilities:
    
    
    
      Accounts receivable
  1,161 
  (2,043)
  1,260 
      Inventories
  1,164 
  (112)
  (2,073)
      Prepaid expenses and other
  271 
  84 
  59 
      Accounts payable
  (1,024)
  210 
  (1,095)
      Accrued expenses
  (589)
  402 
  62 
      Customer deposits and deferred revenue
  (1,542)
  (355)
  (1,482)
      Deferred rent
  -- 
  90 
  63 
      Income taxes payable
  (2)
  (11)
  (28)
        Net cash used in operating activities
  (2,024)
  (5,637)
  (1,351)
 
    
    
    
Cash flows from investing activities:
    
    
    
    Purchases of property and equipment
  (163)
  (173)
  (572)
        Net cash used in investing activities
  (163)
  (173)
  (572)
 
    
    
    
Cash flows from financing activities:
    
    
    
    Repayment of convertible notes
  -- 
  (6,110)
  -- 
    Proceeds from long-term debt
  1,679 
  -- 
  -- 
    Proceeds from issuance of common stock under employee plans
  503 
  559 
  925 
    Shares repurchased for tax withholdings on vesting of restricted stock units
  (10)
  -- 
  -- 
        Net cash provided by (used in) financing activities
  2,172 
  (5,551)
  925 
 
    
    
    
Effect of exchange rates on cash, cash equivalents and restricted cash
  20 
  (59)
  43 
 
    
    
    
        Net increase (decrease) in cash, cash equivalents and restricted cash
  5 
  (11,420)
  (955)
 
    
    
    
Cash, cash equivalents and restricted cash, beginning of year
  5,508 
  16,928 
  17,883 
Cash, cash equivalents and restricted cash, end of year
 $5,513 
 $5,508 
 $16,928 
 
    
    
    
Supplemental cash flow information:
    
    
    
    Cash paid during the year for:
    
    
    
        Income taxes
 $42 
 $37 
 $37 
        Interest
 $-- 
 $610 
 $550 
 
    
    
    
Supplemental disclosure of non-cash flow information:
    
    
    
    Net transfer of equipment between inventory and property and equipment
 $112 
 $119 
 $-- 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
35
 
AEHR TEST SYSTEMS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
 
BUSINESS:
 
    Aehr Test Systems (the “Company”) was incorporated in California in May 1977 and primarily designs, engineers and manufactures test and burn-in equipment used in the semiconductor industry. The Company’s principal products are the Advanced Burn-In and Test System, or ABTS, the FOX full wafer contact parallel test and burn-in systems, the MAX burn-in system, the WaferPak full wafer contactor, the DiePak carrier and test fixtures.
 
LIQUIDITY:
 
    Since inception, the Company has incurred substantial cumulative losses and negative cash flows from operations. In response, the Company took steps to minimize expense levels, entered into credit arrangements, and raised capital through public and private equity offerings, to increase the likelihood that it will have sufficient cash to support operations.
 
    At May 31, 2020, the Company had $5.4 million in cash and cash equivalents. The Company anticipates that the existing cash balance together with income from operations, collections of existing accounts receivable, revenue from its existing backlog of products, the sale of inventory on hand, deposits and down payments against significant orders will be adequate to meet its working capital and capital equipment requirements. The Company believes its existing cash and cash equivalents will be sufficient to meet its anticipated cash needs over the next 12 months. The Company’s future capital requirements will depend on many factors, including the Company’s growth rate, the timing and extent of its spending to support research and development activities, the timing and cost of establishing additional sales and marketing capabilities, the timing and cost to introduce new and enhanced products and the timing and cost to implement new manufacturing technologies. In the event that additional financing is required from outside sources, the Company may not be able to raise it on terms acceptable to the Company or at all. Any additional debt financing obtained by the Company in the future could also involve restrictive covenants relating to the Company’s capital-raising activities and other financial and operational matters, which may make it more difficult for the Company to obtain additional capital and to pursue business opportunities, including potential acquisitions. Additionally, if the Company raises additional funds through further issuances of equity, convertible debt securities or other securities convertible into equity, its existing stockholders could suffer significant dilution in their percentage ownership of the Company, and any new equity securities the Company issue could have rights, preferences and privileges senior to those of holders of the Company’s common stock. If the Company is unable to obtain adequate financing or financing on terms satisfactory to the Company when the Company requires it, the Company’s ability to continue to grow or support its business and to respond to business challenges could be significantly limited.
 
CONSOLIDATION:
 
    The consolidated financial statements include the accounts of the Company and both its wholly-owned and majority-owned foreign subsidiaries. Intercompany accounts and transactions have been eliminated.
 
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS:
 
    Assets and liabilities of the Company’s foreign subsidiaries and a branch office are translated into U.S. Dollars from their functional currencies of Japanese Yen, Euros and New Taiwan Dollars using the exchange rate in effect at the balance sheet date. Additionally, their net sales and expenses are translated using exchange rates approximating average rates prevailing during the fiscal year. Translation adjustments that arise from translating their financial statements from their local currencies to U.S. Dollars are accumulated and reflected as a separate component of shareholders’ equity.
 
    Transaction gains and losses that arise from exchange rate changes denominated in currencies other than the local currency are included in the Consolidated Statements of Operations as incurred. See Note 13, Other (Expense) Income, Net for the detail of foreign exchange transaction gains and losses for all periods presented.
 
USE OF ESTIMATES:
 
    The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, 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. Actual results could differ from those estimates.
 
36
 
 
Significant estimates in the Company’s consolidated financial statements include allowance for doubtful accounts, valuation of inventory at the lower of cost or net realizable value, and warranty reserves.
 
CASH EQUIVALENTS:
 
    Cash equivalents consist of money market instruments purchased with an original maturity of three months or less. These investments are reported at fair value.
 
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS:
 
    Accounts receivable are derived from the sale of products throughout the world to semiconductor manufacturers, semiconductor contract assemblers, electronics manufacturers and burn-in and test service companies. Accounts receivable are recorded at the invoiced amount and are not interest bearing. The Company maintains an allowance for doubtful accounts to reserve for potentially uncollectible trade receivables. The Company also reviews its trade receivables by aging category to identify specific customers with known disputes or collection issues. The Company exercises judgment when determining the adequacy of these reserves as the Company evaluates historical bad debt trends, general economic conditions in the United States and internationally, and changes in customer financial conditions. Uncollectible receivables are recorded as bad debt expense when all efforts to collect have been exhausted and recoveries are recognized when they are received. No significant adjustments to the allowance for doubtful accounts were recorded during the fiscal year ended May 31, 2020, 2019 or 2018.
 
CONCENTRATION OF CREDIT RISK:
 
    The Company sells its products primarily to semiconductor manufacturers in North America, Asia, and Europe. As of May 31, 2020, approximately 13%, 62% and 25% of gross accounts receivable were from customers located in North America, Asia and Europe, respectively. As of May 31, 2019, approximately 49%, 25% and 26% of gross accounts receivable were from customers located in North America, Asia and Europe, respectively. Two customers accounted for 45% and 18% of gross accounts receivable as of May 31, 2020. Three customers accounted for 44%, 25% and 21% of gross accounts receivable as of May 31, 2019. Three customers accounted for 43%, 16% and 15% of net sales in fiscal 2020. Four customers accounted for 36%, 14%, 12% and 10% of net sales in fiscal 2019. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company uses letter of credit terms for some of its international customers.
 
    The Company’s cash and cash equivalents are generally deposited with major financial institutions in the United States, Japan, Germany and Taiwan. The Company invests its excess cash in money market funds and U.S. Treasury securities. The money market funds bear the risk associated with each fund. The money market funds have variable interest rates. The Company has not experienced any material losses on its money market funds or short-term cash deposits.
 
CONCENTRATION OF SUPPLY RISK:
 
    The Company relies on subcontractors to manufacture many of the components and subassemblies used in its products. Quality or performance failures of the Company’s products or changes in its manufacturers’ financial or business condition could disrupt the Company’s ability to supply quality products to its customers and thereby have a material and adverse effect on its business and operating results. Some of the components and technologies used in the Company’s products are purchased and licensed from a single source or a limited number of sources. The loss of any of these suppliers may cause the Company to incur additional transition costs, result in delays in the manufacturing and delivery of its products, or cause it to carry excess or obsolete inventory and could cause it to redesign its products.
 
INVENTORIES:
 
    Inventories include material, labor and overhead, and are stated at the lower of cost (first-in, first-out method) or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less costs of completion, disposal and transportation. Provisions for excess, obsolete and unusable inventories are made after management’s evaluation of future demand and market conditions. The Company adjusts inventory balances to approximate the lower of its manufacturing costs or net realizable value. If actual future demand or market conditions become less favorable than those projected by management, additional inventory write-downs may be required, and would be reflected in cost of sales in the period the revision is made.
 
PROPERTY AND EQUIPMENT:
 
    Property and equipment are stated at cost less accumulated depreciation and amortization. Major improvements are capitalized, while repairs and maintenance are expensed as incurred. Leasehold improvements are amortized over the
 
 
 
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lesser of their estimated useful lives or the term of the related lease. Furniture and fixtures, machinery and equipment, and test equipment are depreciated on a straight-line basis over their estimated useful lives. The ranges of estimated useful lives are generally as follows:
 
Furniture and fixtures . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . 2 to 6 years
Machinery and equipment. . . . .. . . . . . . . . . . . . . . . . . . . . . . . . 3 to 6 years
Test equipment . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 to 6 years
 
REVENUE RECOGNITION:
 
    In May 2014, the Financial Accounting Standards Board (“FASB”) issued FASB Accounting Standards Code (“ASC”) Topic 606, Revenue from Contracts with Customers (Topic 606), which was subsequently updated (collectively “ASC 606”). We adopted the standard as of June 1, 2018, using the modified retrospective method. Under this method, we applied ASC 606 to contracts that were not complete as of June 1, 2018 and recognized the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings. Results for reporting periods beginning after June 1, 2018 are presented in accordance with ASC 606. Under the modified retrospective adoption method, prior period amounts are not adjusted and are reported in accordance with the accounting standards in effect for those periods per FASB ASC Topic 605, Revenue Recognition, which is also referred to herein as “legacy GAAP.”
 
    The adoption of ASC 606 did not have a material impact on our consolidated financial statements as of June 1, 2018. No adjustment was recorded to accumulated deficit as of the adoption date and reported revenue would not have been different under legacy GAAP. Additionally, we do not expect the adoption of the revenue standard to have a material impact to our net income on an ongoing basis.
 
    We sell our products primarily through a direct sales force. In certain international markets, we sell our products through independent distributors. We consider revenue to be earned when all of the following criteria are met:
 
● We have a contract with a customer that creates enforceable rights and obligations,
 
● Promised performance obligations are identified,
 
● The transaction price, or the amount we expect to receive, is determinable and
 
● We have satisfied the performance obligations to the customer.
 
    Transfer of control is evidenced upon passage of title and risk of loss to the customer unless we are required to provide additional services.
 
PRODUCT DEVELOPMENT COSTS AND CAPITALIZED SOFTWARE:
 
    Costs incurred in the research and development of new products or systems are charged to operations as incurred. Costs incurred in the development of software programs for the Company’s products are charged to operations as incurred until technological feasibility of the software has been established. Generally, technological feasibility is established when the software module performs its primary functions described in its original specifications, contains features required for it to be usable in a production environment, is completely documented and the related hardware portion of the product is complete. After technological feasibility is established, any additional costs are capitalized. Capitalization of software costs ceases when the software is substantially complete and is ready for its intended use. Capitalized costs are amortized over the estimated life of the related software product using the greater of the units of sales or straight-line methods over ten years. No system software development costs were capitalized or amortized in fiscal 2020, 2019 and 2018.
 
IMPAIRMENT OF LONG-LIVED ASSETS:
 
    In the event that facts and circumstances indicate that the carrying value of assets may be impaired, an evaluation of recoverability would be performed. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset would be compared to the asset’s carrying value to determine if a write-down is required.
 
ADVERTISING COSTS:
 
    The Company expenses all advertising costs as incurred and the amounts were not material for all periods presented.
 
 
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SHIPPING AND HANDLING OF PRODUCTS:
 
    Amounts billed to customers for shipping and handling of products are included in net sales. Costs incurred related to shipping and handling of products are included in cost of sales.