aehr_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended August 31, 2022

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

For the transition period from _________ to __________

Commission file number: 000-22893

AEHR TEST SYSTEMS

(Exact name of Registrant as specified in its charter)

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

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

(510) 623-9400

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒ No ☐

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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

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

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

Number of shares of the registrant’s common stock, $0.01 par value, outstanding as of September 30, 2022 was 27,495,356.

AEHR TEST SYSTEMS

FORM 10-Q

FOR THE QUARTER ENDED AUGUST 31, 2022

INDEX

PART I. FINANCIAL INFORMATION

ITEM 1.	Financial Statements (Unaudited)	3

	Condensed Consolidated Balance Sheets at August 31, 2022 and May 31, 2022	3

	Condensed Consolidated Statements of Operations for the Three Months Ended August 31, 2022 and 2021	4

	Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended August 31, 2022 and 2021	5

	Condensed Consolidated Statements of Shareholders’ Equity for the Three Months Ended August 31, 2022 and 2021	6

	Condensed Consolidated Statements of Cash Flows for the Three Months Ended August 31, 2022 and 2021	7

	Notes to Condensed Consolidated Financial Statements	8

ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	22

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risks	27

ITEM 4.	Controls and Procedures	28

PART II. OTHER INFORMATION

ITEM 1.	Legal Proceedings	29

ITEM 1A.	Risk Factors	29

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29

ITEM 3.	Defaults Upon Senior Securities	29

ITEM 4.	Mine Safety Disclosures	29

ITEM 5.	Other Information	29

ITEM 6.	Exhibits	30

SIGNATURES		31

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PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS (Unaudited)

AEHR TEST SYSTEMS

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

(unaudited)

	August 31,			May 31,
	2022			2022
					(1)
ASSETS
Current assets:
Cash and cash equivalents	$	36,147		$	31,484
Accounts receivable, net		5,116			12,859
Inventories		17,233			15,051
Prepaid expenses and other current assets		833			613

Total current assets		59,329			60,007

Property and equipment, net		1,322			1,203
Operating lease right-of-use assets		740			917
Other assets		187			201

Total assets	$	61,578		$	62,328

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	3,387		$	4,195
Accrued expenses		2,479			3,610
Operating lease liabilities, short-term		741			794
Customer deposits and deferred revenue, short-term		3,292			2,415

Total current liabilities		9,899			11,014

Operating lease liabilities, long-term		73			212
Deferred revenue, long-term		47			69
Other long-term liabilities		41			44

Total liabilities		10,060			11,339

Aehr Test Systems shareholders' equity:
Common stock, $0.01 par value: Authorized: 75,000; Issued and outstanding: 27,395 shares and 27,120 shares at August 31, 2022 and May 31, 2022, respectively		274			271
Additional paid-in capital		117,668			117,686
Accumulated other comprehensive loss		(150	)		(105	)
Accumulated deficit		(66,274	)		(66,863	)

Total shareholders' equity		51,518			50,989

Total liabilities and shareholders' equity	$	61,578		$	62,328

(1) The condensed consolidated balance sheet at May 31, 2022 has been derived from the audited consolidated financial statements at that date.

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

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AEHR TEST SYSTEMS

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

	Three Months Ended
	August 31,
	2022			2021

Net sales	$	10,671		$	5,646
Cost of sales		6,190			3,365
Gross profit		4,481			2,281

Operating expenses:
Selling, general and administrative		2,525			1,953
Research and development		1,498			1,321
Total operating expenses		4,023			3,274

Income (loss) from operations		458			(993	)

Interest income (expense), net		121			(9	)
Gain from forgiveness of PPP loan		-			1,698
Other income, net		24			23

Income before income tax expense		603			719

Income tax expense		(14	)		(23	)

Net income	$	589		$	696

Net income per share:
Basic	$	0.02		$	0.03
Diluted	$	0.02		$	0.03

Shares used in per share calculations:
Basic		27,242			23,999
Diluted		28,788			25,356

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

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AEHR TEST SYSTEMS

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands, unaudited)

	Three Months Ended
	August 31,
	2022			2021

Net income	$	589		$	696
Other comprehensive income, net of tax:
Net change in cumulative translation adjustment		(45	)		(36	)
Comprehensive income	$	544		$	660

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

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AEHR TEST SYSTEMS

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in thousands)

(unaudited)

							Additional			Accumulated Other						Total
	Common Stock						Paid-in			Comprehensive			Accumulated			Shareholders'
Three Months Ended August 31, 2022	Shares			Amount			Capital			Income (loss)			Deficit			Equity
Balances, May 31, 2022		27,120		$	271		$	117,686		$	(105	)	$	(66,863	)	$	50,989

Issuance of common stock under employee plans		422			4			451			-			-			455
Shares repurchased for tax withholdings on vesting of restricted stock units		(147	)		(1	)		(1,178	)		-			-			(1,179	)
Stock-based compensation		-			-			709			-			-			709
Net income		-			-			-			-			589			589
Foreign currency translation adjustment		-			-			-			(45	)		-			(45	)

Balances, August 31, 2022		27,395		$	274		$	117,668		$	(150	)	$	(66,274	)	$	51,518

					Additional		Accumulated Other						Total
	Common Stock				Paid-in		Comprehensive			Accumulated			Shareholders’
Three Months Ended August 31, 2021	Shares		Amount		Capital		Income (loss)			Deficit			Equity
Balances, May 31, 2021		23,725	$	237	$	87,553	$	(28	)	$	(76,313	)	$	11,449

Issuance of common stock under employee plans		758		8		1,527		-			-			1,535
Stock-based compensation		-		-		588		-			-			588
Net income		-		-		-		-			696			696
Foreign currency translation adjustment		-		-		-		(36	)		-			(36	)

Balances, August 31, 2021		24,483	$	245	$	89,668	$	(64	)	$	(75,617	)	$	14,232

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

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AEHR TEST SYSTEMS

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Three Months Ended
	August 31,
	2022			2021
Cash flows from operating activities:
Net income	$	589		$	696
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation expense		710			588
Depreciation and amortization		89			73
Gain from forgiveness of PPP loan		-			(1,698	)
Changes in operating assets and liabilities:
Accounts receivable		7,648			895
Inventories		(2,323	)		(1,324	)
Prepaid expenses and other current assets		(210	)		(201	)
Accounts payable		(769	)		(130	)
Accrued expenses		(1,130	)		(169	)
Customer deposits and deferred revenue		855			3,141
Income taxes payable		2			3
Net cash provided by operating activities		5,461			1,874

Cash flows from investing activities:
Purchases of property and equipment		(84	)		(59	)
Net cash used in investing activities		(84	)		(59	)

Cash flows from financing activities:
Line of credit repayments, net		-			(1,400	)
Proceeds from issuance of common stock under employee plans		455			1,535
Shares repurchased for tax withholdings on vesting of restricted stock units		(1,179	)		-
Net cash (used in) provided by financing activities		(724	)		135

Effect of exchange rates on cash, cash equivalents and restricted cash		10			(2	)

Net increase in cash, cash equivalents and restricted cash		4,663			1,948

Cash, cash equivalents and restricted cash, beginning of period⁽¹⁾		31,564			4,662

Cash, cash equivalents and restricted cash, end of period⁽¹⁾	$	36,227		$	6,610

(1) Includes restricted cash in other assets.

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

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AEHR TEST SYSTEMS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCCOUNTING POLICIES

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

In the opinion of management, the unaudited condensed consolidated financial statements for the interim periods presented have been prepared on a basis consistent with the May 31, 2022 audited consolidated financial statements and reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the condensed consolidated financial position and results of operations as of and for such periods indicated. These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2022. Results for the interim periods presented herein are not necessarily indicative of results which may be reported for any other interim period or for the entire fiscal year.

PRINCIPLES OF CONSOLIDATION. The condensed consolidated financial statements include the accounts of Aehr Test Systems and its subsidiaries (collectively, the "Company"). All significant intercompany balances have been eliminated in consolidation.

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

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. The Company’s significant accounting policies are disclosed in the Company’s Annual Report on Form 10-K for the year ended May 31, 2022. There have been no significant changes in the Company’s significant accounting policies during the three months ended August 31, 2022.

2. RECENT ACCOUNTING PRONOUNCEMENTS

Accounting Standards Adopted

Income Taxes

On December 18, 2019, the FASB issued Accounting Standards Update ASU 2019-12 on Simplifying the Accounting for Income Taxes. The board decided to remove the exception to the incremental approach for intra-period tax allocation when there is a loss from continuing operations and income or gain from other items (for example discontinued operations or other comprehensive income). There are also provisions related to state taxes and calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2020. The Company adopted ASU 2019-12 in the quarter ended August 31, 2021 with no material impact.

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Accounting Standards Not Yet Adopted

Financial Instruments

In June 2016, the FASB issued an accounting standard update (“ASU”) that requires measurement and recognition of expected credit losses for financial assets held based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. Due to a subsequent ASU in November 2019, the accounting standard will be effective for the Company beginning in the first quarter of fiscal 2024 on a modified retrospective basis, and early adoption in fiscal 2022 is permitted. The Company does not expect a material impact of this accounting standard on its consolidated financial statements.

3. REVENUE

Revenue recognition

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

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

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

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

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

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

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

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

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Disaggregation of revenue

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

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

	Three Months Ended
	August 31,
	2022		2021
Type of good / service:
Systems	$	9,094	$	3,879
Contactors		494		952
Services		1,083		815
	$	10,671	$	5,646

Product lines:
Wafer-level	$	10,321	$	5,143
Test During Burn-In		350		503
	$	10,671	$	5,646

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

	Three Months Ended
	August 31,
	2022		2021
Geographic region:
United States	$	2,863	$	506
Asia		7,808		5,137
Europe		-		3
	$	10,671	$	5,646

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

	Three Months Ended
	August 31,
	2022		2021
Timing of revenue recognition:
Products and services transferred at a point in time	$	10,254	$	5,590
Services transferred over time		417		356
	$	10,671	$	5,646

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Contract balances

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

Contract liabilities include payments received in advance of performance under a contract and are satisfied as the associated revenue is recognized. Contract liabilities are reported on the Condensed Consolidated Balance Sheets at the end of each reporting period as a component of deferred revenue. Contract liabilities as of August 31, 2022 and May 31, 2022 were $3,339,000 and $2,484,000, respectively. During the three months ended August 31, 2022, the Company recognized $2,071,000 of revenues that were included in contract liabilities as of May 31, 2022.

Remaining performance obligations

On August 31, 2022, the Company had $192,000 of remaining performance obligations, which were comprised of deferred service contracts and extended warranty contracts not yet delivered. The Company expects to recognize approximately 64% of its remaining performance obligations as revenue in the remainder of fiscal 2023, and an additional 36% in fiscal 2024 and thereafter. The foregoing excludes the value of other remaining performance obligations as they have original durations of one year or less, and also excludes information about variable consideration allocated entirely to a wholly unsatisfied performance obligation.

Costs to obtain or fulfill a contract

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

4. EARNINGS PER SHARE

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

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

	Three Months Ended
	August 31,
	2022		2021

Numerator: Net income	$	589	$	696

Denominator for basic net income per share:
Weighted average shares outstanding		27,242		23,999

Shares used in basic net income per share calculation		27,242		23,999
Effect of dilutive securities		1,546		1,357

Denominator for diluted net income per share		28,788		25,356
Basic net income per share	$	0.02	$	0.03

Diluted net income per share	$	0.02	$	0.03

For the purpose of computing diluted earnings per share, weighted average potential common shares do not include stock options with an exercise price greater than the average fair value of the Company’s common stock for the period, as the effect would be anti-dilutive. Stock options to purchase 152,000 shares of common stock were outstanding for the three months ending August 31, 2022, but were not included in the computation of diluted net income per share, because the inclusion of such shares would be anti-dilutive. Stock options to purchase 112,000 shares of common stock were outstanding for the three months ending August 31, 2021, but were not included in the computation of diluted net income per share, because the inclusion of such shares would be anti-dilutive.

5. FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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

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

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

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

	Balance as of
	August 31, 2022		Level 1		Level 2		Level 3
Money market funds	$	34,733	$	34,733	$	-	$	-
Assets	$	34,733	$	34,733	$	-	$	-

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

	Balance as of
	May 31, 2022		Level 1		Level 2		Level 3
Money market funds	$	28,609	$	28,609	$	-	$	-
Assets	$	28,609	$	28,609	$	-	$	-

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

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

There were no transfers between Level 1 and Level 2 fair value measurements during the three months ended August 31, 2022.

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

6. ACCOUNTS RECEIVABLE, NET

Accounts receivable represent customer trade receivables. As of August 31, 2022 and May 31, 2021, there was no 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. The Company’s allowance for doubtful accounts is based upon historical experience and review of trade receivables by aging category to identify specific customers with known disputes or collection issues. Uncollectible receivables are recorded as bad debt expense when all efforts to collect have been exhausted and recoveries are recognized when they are received.

7. INVENTORIES

Inventories are comprised of the following (in thousands):

	August 31,		May 31,
	2022		2022
Raw materials and sub-assemblies	$	12,292	$	9,507
Work in process		4,941		5,461
Finished goods		-		83
	$	17,233	$	15,051

8. PRODUCT WARRANTIES

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

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

The following is a summary of changes in the Company's liability for product warranties during the three months ended August 31, 2022 and 2021 (in thousands):

	Three Months Ended
	August 31,
	2022			2021

Balance at the beginning of the period	$	410		$	494

Accruals for warranties issued during the period		118			162
Adjustments to previously existing warranty accruals		61			-
Consumption of reserves		(165	)		(151	)

Balance at the end of the period	$	424		$	505

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

9. CUSTOMER DEPOSITS AND DEFERRED REVENUE, SHORT-TERM

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

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	August 31,		May 31,
	2022		2022
Customer deposits	$	3,138	$	2,263
Deferred revenue		154		152
	$	3,292	$	2,415

10. INCOME TAXES

The Company is subject to U.S federal and state and foreign income taxes as a corporation. The Company’s tax provision and the resulting effective tax rate for the interim period is determined based upon its estimated annual effective tax rate adjusted for the effect of discrete items arising in that quarter. The Company recorded a provision for income tax of $14,000 for the three months ended August 31, 2022 which consisted primarily of foreign withholding taxes and foreign income taxes. The Company recorded a provision for income tax of $23,000 for the three months ended August 31, 2021 which consisted primarily of foreign withholding taxes and foreign income taxes.

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

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

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

11. LEASES

The Company has only operating leases for real estate including corporate offices, warehouse space and certain equipment. A lease with an initial term of 12 months or less is generally not recorded on the condensed consolidated balance sheet, unless the arrangement includes an option to purchase the underlying asset, or renew the arrangement that the Company is reasonably certain to exercise (short-term leases). The Company recognizes lease expense on a straight-line basis over the lease term for short-term leases that the Company does not record on its balance sheet. The Company’s operating leases have remaining lease terms of 11 months to 3 years.

The Company determines whether an arrangement is or contains a lease based on the unique facts and circumstances present at the inception of the arrangement. Operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected lease term. The interest rate implicit in lease contracts is typically not readily determinable. As such, the Company utilizes the appropriate incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term at an amount equal to the lease payments in a similar economic environment. Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received.

The weighted-average remaining lease term for the Company’s operating leases was 1.2 years at August 31, 2022 and the weighted-average discount rate was 5.40%.

The Company’s operating lease cost was $189,000 and $192,000 for the three months ended August 31, 2022 and 2021, respectively.

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

	Three Months Ended
	August 31,
	2022		2021
Cash paid for amounts included in the measurement of operating lease liabilities:
Operating cash flows for operating leases	$	206	$	203

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The following table presents the maturities of the Company’s operating lease liabilities as of August 31, 2022 (in thousands):

Fiscal year	Operating Leases
2023 (excluding the first three months of 2023)	$	623
2024		168
2025		32
2026		19
Thereafter		-
Total future minimum operating lease payments		842
Less: imputed interest		(28	)
Present value of operating lease liabilities	$	814

12. BORROWING AND FINANCING ARRANGEMENTS:

On January 16, 2020, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with Silicon Valley Bank (“SVB”). Pursuant to the Loan Agreement, the Company may borrow up to (a) the lesser of (i) the revolving line of $4.0 million or (ii) the amount available under the borrowing base minus (b) the outstanding principal balance of any advances, under a revolving line of credit which is collateralized by all the Company’s assets except intellectual property. The borrowing base is 80% of eligible accounts, as determined by SVB from the Company’s most recent borrowing base statement; provided, however, SVB has the right to decrease the foregoing percentage in its good faith business judgment to mitigate the impact of certain events or conditions, which may adversely affect the collateral or its value. Subject to an event of default, the principal amount outstanding under the revolving line of credit will accrue interest at a floating per annum rate equal to the greater of (a) the prime rate plus an additional percentage of up to 1%, which additional percentage depends on the Company’s adjusted quick ratio, and (b) 4.75%. Interest is payable monthly on the last calendar day of each month and the outstanding principal amount, the unpaid interest and all other obligations are due on the maturity date, which is 364 days from the effective date of January 13, 2020.

On January 14, 2021, the Company entered into the First Amendment to Loan and Security Agreement (the “First Amendment”) with Silicon Valley Bank. The First Amendment, among other things, extends the Revolving Line Maturity Date to July 14, 2021; provided, however, that if the Company achieves specified operating metrics on a consolidated basis on or prior to May 31, 2021 the Amended Revolving Line Maturity Date is extended to January 13, 2022. On July 8, 2021 the Company received confirmation from SVB that the Revolving Line Maturity Date has been extended to January 13, 2022.

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

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At August 31, 2022, the Company had not drawn amounts against the credit facility and was in compliance with all covenants related to obligations to meet reporting requirements. The balance available to borrow under the line at August 31, 2022 was $5,699,000. There are no financial covenants in the agreement.

13. LONG-TERM DEBT:

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

Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of loans granted under the PPP. On June 12, 2021, the Company received confirmation from SVB that on June 4, 2021, the Small Business Administration approved the Company’s PPP Loan forgiveness application for the entire PPP Loan balance of $1,679,000 and interest totaling $19,000, and the Company recognized a gain on loan forgiveness of $1,698,000.

14. STOCK-BASED COMPENSATION

Stock-based compensation expense consists of expenses for stock options, RSUs and ESPP purchase rights. Stock-based compensation expense for stock options and ESPP purchase rights is measured at each grant date, based on the fair value of the award using the Black-Scholes option valuation model, and is recognized as expense over the employee’s requisite service period. This model was developed for use in estimating the value of publicly traded options that have no vesting restrictions and are fully transferable. The Company’s employee stock options have characteristics significantly different from those of publicly traded options. For RSUs, stock-based compensation cost is based on the fair value of the Company’s common stock at the grant date and is recognized as expense over the employee’s requisite service period. All of the Company’s stock-based compensation is accounted for as an equity instrument. See Note 11 in the Company’s Annual Report on Form 10-K for fiscal 2022 filed on August 26, 2022 for further information regarding the 2016 Equity Incentive Plan (the “2016 Plan”) and the ESPP.

The following table summarizes the stock-based compensation expense for the three months ended August 31, 2022 and 2021 (in thousands):

	Three Months Ended
	August 31,
	2022		2021
Stock-based compensation in the form of stock options, RSUs and ESPP purchase rights, included in:
Cost of sales	$	91	$	82
Selling, general and administrative		465		395
Research and development		154		111
Total stock-based compensation	$	710	$	588

As of August 31, 2022, there were $85,000 stock-based compensation expenses capitalized as part of inventory. As of August 31, 2021, there were no stock-based compensation expenses capitalized as part of inventory.

During the three months ended August 31, 2022 and 2021, the Company recorded stock-based compensation expenses related to stock options and RSUs under the 2016 Plan of $535,000 and $484,000, respectively.

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As of August 31, 2022, the total compensation expense related to unvested stock-based awards under the 2016 Plan, but not yet recognized, was approximately $4,249,000, which is net of estimated forfeitures of $11,000. This expense will be amortized on a straight-line basis over a weighted average period of approximately 2.3 years.

During the three months ended August 31, 2022 and 2021, the Company recorded stock-based compensation expense related to the ESPP of $175,000 and $104,000, respectively.

As of August 31, 2022, the total compensation expense related to purchase rights under the ESPP but not yet recognized was approximately $241,000. This expense will be amortized on a straight-line basis over a weighted average period of approximately 0.6 years.

Valuation Assumptions

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

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

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

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

Fair Value. The fair value of the Company’s stock options granted to employees for the three months ended August 31, 2022 and 2021 were estimated using the following weighted average assumptions in the Black-Scholes option valuation model:

	Three Months Ended
	August 31,
	2022			2021

Expected term (in years)		5			6
Volatility		117	%		76	%
Risk-free interest rate		3.06	%		1.01	%
Weighted average grant date fair value	$	6.57		$	1.93

There were no ESPP purchase rights granted to employees for the three months ended August 31, 2022 and 2021. There were no ESPP shares issued during the three months ended August 31, 2022 and 2021. As of August 31, 2022, there were 258,000 ESPP shares available for issuance.

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The following tables summarize the Company’s stock option and RSU transactions during the three months ended August 31, 2022 (in thousands):

	Available
	Shares
Balance, May 31, 2022		1,826

Options granted		(103	)
RSUs granted		(276	)
Options cancelled and adjusted		6

Balance, August 31, 2022		1,453

The following table summarizes the stock option transactions during the three months ended August 31, 2022 (in thousands, except per share data):

	Outstanding Options
				Weighted
	Number			Average		Aggregate
	of			Exercise		Intrinsic
	Shares			Price		Value
Balances, May 31, 2022		1,597		$	2.70	$	9,290

Options granted		103		$	8.00
Options cancelled		(6	)	$	2.41
Options exercised		(102	)	$	2.00

Balances, August 31, 2022		1,592		$	3.08	$	18,287

Options fully vested and expected to vest at August 31, 2022		1,569		$	3.08	$	18,030

The options outstanding and exercisable at August 31, 2022 were in the following exercise price ranges (in thousands, except per share data):

		Options Outstanding						Options Exercisable
		at August 31, 2022						at August 31, 2022
Range of Exercise Prices		Number Outstanding Shares		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Number Exercisable Shares		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Aggregate Intrinsic Value
$	1.34		51		5.14	$	1.34		51		5.14	$	1.34
$1.64-$1.86			586		3.89	$	1.71		387		3.67	$	1.70
$2.03-$2.42			451		3.06	$	2.25		428		2.97	$	2.25
$2.76-$2.93			204		5.32	$	2.91		60		4.00	$	2.88
$3.46-$3.93			100		1.92	$	3.84		100		1.92	$	3.84
$8.00-$19.85			200		6.71	$	9.24		11		6.56	$	11.13
$1.34-$19.85			1,592		4.11	$	3.08		1,037		3.33	$	2.29	$	12,715

The total intrinsic value of options exercised during the three months ended August 31, 2022 and 2021 was $764,000 and $1,902,000, respectively. The weighted average remaining contractual life of the options exercisable and expected to be exercisable at August 31, 2022 was 4.10 years.

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During the three months ended August 31, 2022, RSUs for 159,000 shares were granted to employees. The weighted average market value on the date of the grant of these RSUs was $8.03 per share. During the three months ended August 31, 2022, performance RSUs were granted to key officers based upon revenue target thresholds for the year ending May 31, 2023. The total maximum number of RSUs to be vested if all revenue goals are achieved will be approximately 114,000. The weighted average market value on the date of the grant of these performance RSUs was $8.00 per share. As of August 31, 2022 none of the revenue goals have been achieved and thus none of the RSUs are vested. During the three months ended August 31, 2022 the Company recognized approximately $22,000 in stock-based compensation expense for these performance RSUs. The Company will adjust its expense when expected revenue changes.

During the three months ended August 31, 2021, RSUs for 119,000 shares were granted to employees. The market value on the date of the grant of these RSUs was $2.93 per share. During the three months ended August 31, 2021, performance RSUs were granted to key officers based upon revenue target thresholds for the year ended May 31, 2022. The total maximum number of RSUs to be vested if all revenue goals were achieved would be approximately 316,000. The weighted average market value on the date of the grant of these performance RSUs was $2.93 per share. As of August 31, 2021 none of the revenue goals had been achieved and thus none of the RSUs were vested. As of August 31, 2021 the Company did not expect that by year end the target revenue goals would be achieved and did not recognize stock-based compensation expense for these performance RSUs. During the three months ended August 31, 2021, RSUs for 240,000 shares, net of 40,000 shares withheld to settle payroll taxes, were granted to officers in lieu of cash payment for salary reductions taken as part of prior cost reduction initiatives. These RSUs were fully vested and the market value on the date of the grant of these RSUs was $2.50 per share.

During the three months ended August 31, 2022, RSUs for 30,000 shares were granted to members of the Company’s Board of Directors. The market value on the date of the grant of these RSUs was $8.00 per share. During the three months ended August 31, 2022, performance RSUs were granted to the Company’s Board of Directors based upon revenue target thresholds for the year ended May 31, 2023. The total maximum amount of RSUs to be vested if all revenue goals are achieved will be approximately 30,000. The weighted average market value on the date of the grant of these performance RSUs was $8.00 per share. As of August 31, 2022 none of the revenue goals have been achieved and thus none of the RSUs are vested. The Company expects that by year end the target revenue goal will be achieved. During the three months ended August 31, 2022 the Company recognized approximately $60,000 in stock-based compensation expense for these performance RSUs. During the three months ended August 31, 2021, RSUs for 30,000 shares were granted to members of the Company’s Board of Directors in lieu of cash payment of board fees and were fully vested. The market value on the date of the grant of these RSUs was $2.93 per share.

During the three months ended August 31, 2022, RSUs for 142,000 shares, net of 147,000 shares withheld to settle payroll taxes, became fully vested. As of August 31, 2022, 442,000 RSUs and performance were unvested which had an intrinsic value of $6,423,000. During the three months ended August 31, 2021, RSUs for 90,000 shares, net of 40,000 shares withheld to settle payroll taxes, became fully vested. As of August 31, 2021, 240,000 RSUs were unvested which had an intrinsic value of $1,790,000.

15. SEGMENT AND CONCENTRATION INFORMATION

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

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

	August 31,		May 31,
	2022		2022
United States	$	1,272	$	1,156
Asia		50		47
Europe		-		-
	$	1,322	$	1,203

As of August 31, 2022, the operating lease right-of-use assets of $652,000 and $88,000 are allocated in the United States and Asia, respectively.

There were no revenues through distributors for the three months ended August 31, 2022 and 2021.

Sales to the Company’s five largest customers accounted for approximately 98% and 95% of its net sales for the three months ended August 31, 2022 and 2021, respectively. Two customers accounted for approximately 67% and 69% of the Company’s net sales in the three months ended August 31, 2022. Two customers accounted for approximately 23% and 16% of the Company’s net sales in the three months ended August 31, 2021. No other customers represented more than 10% of the Company's net sales for either of the three months ended August 31, 2022 and 2021.

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

The following discussion of the financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes that appear elsewhere in this Report and with our Annual Report on Form 10-K for the fiscal year ended May 31, 2022 and the consolidated financial statements and notes thereto.

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

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

COVID-19 PANDEMIC RESPONSE

The Company has been impacted by the outbreak of the novel coronavirus, known as COVID-19, which has spread throughout the world. Our top priority during the COVID-19 pandemic is protecting the health and safety of our employees and their families, along with our customers and community. We introduced policies and procedures to increase workplace flexibility, such as working remotely where possible to reduce the number of people who are on campus each day. As a global supplier of Critical Infrastructure Sectors, as defined by the Cybersecurity and Infrastructure Security Agency, we have supported and continue to support customers during the pandemic. In the interest of public health, all onsite operations generally use the minimum number of people to safely execute tasks and follow enhanced safety and health protocols including screenings, social distancing and use of personal protective equipment.

Due to the impact of the COVID-19 pandemic on customers and customers’ customers, the Company experienced a drop in customer orders and revenues during the fiscal year ended May 31, 2021 and in the last quarter of fiscal year ended May 31, 2020. In response, the Company implemented cost reduction initiatives to mitigate operating losses, including mandatory vacation days, shutdown days and executive staff pay reductions. The Company eliminated all cost reduction initiatives in the last quarter of the fiscal year ended May 31, 2021.

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

OVERVIEW

We were founded in 1977 to develop and manufacture burn-in and test equipment for the semiconductor industry. Since our inception, we have sold more than 2,500 systems to semiconductor manufacturers, semiconductor contract assemblers and burn-in and test service companies worldwide. Our principal products currently are the FOX-XP, FOX-NP and FOX-CP wafer contact and singulated die/module parallel test and burn-in systems, WaferPak Aligner, WaferPak contactors, DiePak Loader, DiePak carriers and test fixtures.

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

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, assumptions and judgments, including those related to customer programs and incentives, product returns, bad debts, inventories, income taxes, financing operations, warranty obligations, and long-term service contracts. Our estimates are derived from historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Those results form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. For a discussion of the critical accounting policies, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the fiscal year ended May 31, 2022.

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

RESULTS OF OPERATIONS

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

	Three Months Ended
	August 31,
	2022			2021

Net sales		100.0	%		100.0	%
Cost of sales		58.0			59.6
Gross profit		42.0			40.4

Operating expenses:
Selling, general and administrative		23.7			34.6
Research and development		14.0			23.4

Total operating expenses		37.7			58.0

Income (loss) from operations		4.3			(17.6	)

Interest income (expense), net		1.1			(0.2	)
Gain from forgiveness of PPP loan		--			30.1
Other income, net		0.3			0.4

Income before income tax expense		5.7			12.7

Income tax expense		(0.2	)		(0.4	)

Net income		5.5	%		12.3	%

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THREE MONTHS ENDED AUGUST 31, 2022 COMPARED TO THREE MONTHS ENDED AUGUST 31, 2021

NET SALES. Net sales increased to $10.7 million for the three months ended August 31, 2022 from $5.6 million for the three months ended August 31, 2021, an increase of 89.0%. The increase in net sales for the three months ended August 31, 2022 was primarily due to the increases in net sales of our wafer-level products. Net sales of our wafer-level products for the three months ended August 31, 2022 were $10.3 million, and increased approximately $5.2 million from the three months ended August 31, 2021 due to stronger demand related to silicon carbide applications.

GROSS PROFIT. Gross profit increased to $4.5 million for the three months ended August 31, 2022 from $2.3 million for the three months ended August 31, 2021, an increase of approximately 96.4%. Gross profit margin increased to 42% for the three months ended August 31, 2022 from 40.4% for the three months ended August 31, 2021. The increase in gross profit margin was primarily the result of manufacturing efficiencies due to an increase in net sales.

SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses increased to $2.5 million for the three months ended August 31, 2022 from $2.0 million for the three months ended August 31, 2021, an increase of 29.3%. The increase in SG&A expenses was primarily the result of increases in headcount, bonuses and stock compensation.

RESEARCH AND DEVELOPMENT. R&D expenses increased to $1.5 million for the three months ended August 31, 2022 from $1.3 million for the three months ended August 31, 2021, an increase of 13.4%. The increase in R&D expenses was primarily due to an increase in employment-related expenses of $344,000, partially offset by a decrease in outside services of $130,000. The increase in employment-related expenses was primarily the result of increased bonuses and stock compensation due to an increase in net sales and profitability, and an increase in headcount.

INTEREST INCOME (EXPENSE), NET. Interest income, net was $121,000 for the three months ended August 31, 2022, compared with interest expense, net of $9,000 for the three months ended August 31, 2021. The interest income for the three months ended August 31, 2022 was related to interest earned on the Company’s $24.0 million net proceeds from the sale of common stock in October 2021. The interest expense for the three months ended August 31, 2021 was from the PPP Loan that we obtained on April 23, 2020.

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

OTHER INCOME, NET. Other income, net was $24,000 and $23,000 for the three months ended August 31, 2022 and 2021, respectively. The change in other income, net was primarily due to gains realized in connection with the fluctuation in the value of the dollar compared to foreign currencies during the referenced periods.

INCOME TAX EXPENSE. Income tax expense was $14,000 and $23,000 for the three months ended August 31, 2022 and 2021, respectively.

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LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities was $5.5 million and $1.9 million for the three months ended August 31, 2022 and 2021, respectively. For the three months ended August 31, 2022, net cash provided by operating activities was primarily the result of net income of $589,000, as adjusted to exclude the effect of a non-cash charge of stock-based compensation expense of $710,000 and depreciation and amortization of $89,000. Other changes in cash from operations primarily resulted from a decrease in accounts receivable of $7.6 million, partially offset by an increase in inventories of $2.3 million, and a decrease in accrued expenses of $1.1 million. The decrease in accounts receivable was primarily due to collection of accounts receivable related to higher revenue levels in the prior fiscal quarter. The increase in inventory was to support expected future shipments for customer orders. The decrease in accrued expenses was primarily due to the payments of bonus and sales commission accrual. For the three months ended August 31, 2021, net cash provided by operating activities was primarily the result of net income of $696,000, as adjusted to exclude the effect of forgiveness of PPP loan of $1.7 million, and a non-cash charge of stock-based compensation expense of $588,000 and depreciation and amortization of $73,000. Other changes in cash from operations primarily resulted from an increase in customer deposits and deferred revenue of $3.1 million, partially offset by an increase in inventories of $1.3 million. The increase in customer deposits and deferred revenue was primarily due to the receipt of additional down payments from certain customers. The increase in inventory was to support expected future shipments for customer orders.

Net cash used in investing activities was $84,000 and $59,000 for the three months ended August 31, 2022 and 2021, respectively, was due to purchases of property and equipment.

Net cash used in financing activities was $724,000 for the three months ended August 31, 2022, compared with net cash provided by financing activities of $135,000 for the three months ended August 31, 2021. Net cash used in financing activities during the three months ended August 31, 2022 was primarily due to the proceeds from issuance of common stock under employee plans of $455,000, offset by the shares repurchased for tax withholdings on vesting of RSUs of $1.2 million. Net cash provided by financing activities during the three months ended August 31, 2021 was primarily due to the net proceeds from issuance of common stock under employee plans of $1.5 million, partially offset by the net payment on the line of credit of $1.4 million.

The effect of fluctuation in exchange rates increased cash by $10,000 for the three months ended August 31, 2022, and decreased cash by $2,000 for the three months ended August 31, 2021. The changes were due to the fluctuation in the value of the dollar compared to foreign currencies.

As of August 31, 2022 and May 31, 2022, we had working capital of $49.4 million and $49.0 million, respectively.

We lease our manufacturing and office space under operating leases. We entered into a non-cancelable operating lease agreement for our United States manufacturing and office facilities, which was renewed in February 2018 and expires in July 2023. Under the lease agreement, we are responsible for payments of utilities, taxes and insurance.

From time to time, we evaluate potential acquisitions of businesses, products or technologies that complement our business. If consummated, any such transactions may use a portion of our working capital or require the issuance of equity. We have no present understandings, commitments or agreements with respect to any material acquisitions.

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We anticipate that the existing cash balance together with future income from operations, collections of existing accounts receivable, revenue from our existing backlog of products as of this filing date, the sale of inventory on hand, deposits and down payments against significant orders will be adequate to meet our working capital and capital equipment requirement needs over the next 12 months. Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of our spending to support research and development activities, the timing and cost of establishing additional sales and marketing capabilities, the timing and cost to introduce new and enhanced products and the timing and cost to implement new manufacturing technologies. While we successfully raised $25 million in the ATM public offering in October 2021 as a portion of a $75 million shelf registration, in the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. Any additional debt financing obtained by us in the future could also involve restrictive covenants relating to our capital-raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. Additionally, if we raise additional funds through further issuances of equity, convertible debt securities or other securities convertible into equity, our existing stockholders could suffer significant dilution in their percentage ownership of the Company, and any new equity securities we issue could have rights, preferences and privileges senior to those of holders of our common stock. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to grow or support our business and to respond to business challenges could be significantly limited.

OFF-BALANCE SHEET ARRANGEMENTS

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

OVERVIEW OF CONTRACTUAL OBLIGATIONS

There have been no material changes in the composition, magnitude or other key characteristics of our contractual obligations or other commitments as disclosed in the Company's Annual Report on Form 10-K for the year ended May 31, 2022.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

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

We are exposed to financial market risks, including changes in interest rates and foreign currency exchange rates. We do not use any financial instruments for speculative or trading purposes. Fluctuations in interest rates would not have a material effect on our financial position, results of operations or cash flows.

A majority of our revenue and capital spending is transacted in U.S. Dollars. We also enter into transactions in other currencies, primarily Euros, New Taiwan Dollar, and Philippine Peso. Since our subsidiaries’ financial statements are based in their local currency and our condensed consolidated financial statements are based in U.S. Dollars, our subsidiaries and we recognize foreign exchange gains or losses in any period in which the value of the local currency rises or falls in relation to the U.S. Dollar. A 10% decrease in the value of the subsidiaries’ local currency as compared with the U.S. Dollar would not be expected to result in a significant change to our net income or loss. There have been no material changes in our risk exposure since the end of the last fiscal year, nor are any material changes to our risk exposure anticipated.

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Item 4. CONTROLS AND PROCEDURES

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

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

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

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PART II - OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

None.

Item 1A. RISK FACTORS

Please refer to the description of the risk factors associated with our business previously disclosed in Part I, Item 1A - "Risk Factors" of our Annual Report on Form 10-K for the year ended May 31, 2022 filed with the Securities and Exchange Commission on August 26, 2022.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

Item 3. DEFAULTS UPON SENIOR SECURITIES

None.

Item 4. MINE SAFETY DISCLOSURES

Not Applicable.

Item 5. OTHER INFORMATION

None.

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Item 6. EXHIBITS

Exhibit No.		Description

3.1(1)		Restated Articles of Incorporation of Registrant.

3.2(2)		Amended and Restated Bylaws of the Registrant.

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

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

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

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

_____________________

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

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

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

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SIGNATURES

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

	Aehr Test Systems
	(Registrant)

Date: October 14, 2022	By:	/s/ GAYN ERICKSON
		Gayn Erickson
		President and Chief Executive Officer
		(Principal Executive Officer)



Date: October 14, 2022	By:	/s/ KENNETH B. SPINK
		Kenneth B. Spink
		Vice President of Finance and Chief Financial Officer
		(Principal Financial and Accounting Officer)

SEC Form 10-Q filed by Aehr Test Systems