Aehr Test : Quarterly Report for Quarter Ending February 27, 2026 (Form 10-Q)

About this update from Aehr Test Systems

Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion of our financial condition and results of operations contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact may be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "may," "could," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential", "target" or "continue," the negative effect of terms like these or other similar expressions. Any statement concerning future financial performance (including future revenues, earnings or growth rates), ongoing business strategies or prospects, and possible actions taken by us or our subsidiaries, which may be provided by us are also forward-looking statements. These forward-looking statements are only predictions. Forward-looking statements are based on current expectations and projections about future events and are inherently subject to a variety of risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from those anticipated or projected. All forward-looking statements included in this document are based on information available to us on the date of filing and we further caution investors that our business and financial performance are subject to substantial risks and uncertainties. We assume no obligation to update any such forward-looking statements. In evaluating these statements, you should specifically consider various factors, including the risk factors set forth in Item 1. "Business" and Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended May 30, 2025, filed with the Securities and Exchange Commission on July 28, 2025. All references to "we", "us", "our", "Aehr Test", "Aehr Test Systems" or the "Company" refer to Aehr Test Systems. Overview We are a leading provider of test solutions for testing, burning-in, and stabilizing semiconductor devices in wafer level, singulated die, and package part form, and have installed thousands of systems worldwide. The rapid advancement of generative artificial intelligence (AI) and the accelerating electrification of transportation and global infrastructure represent two of the most significant macro-trends impacting the semiconductor industry today. These transformative forces are driving enormous growth in semiconductor demand while fundamentally increasing the performance, reliability, safety, and security requirements of the devices used across computing and data infrastructure, telecommunications networks, hard disk drive and solid-state storage solutions, electric vehicles, charging systems, and renewable energy generation. As these applications operate at ever-higher power levels and in increasingly mission-critical environments, the need for comprehensive test and burn-in has become more essential than ever. Semiconductor manufacturers are turning to advanced wafer-level and package-level burn-in systems to screen for early-life failures, validate long-term reliability, and ensure consistent performance under extreme electrical and thermal stress. This growing emphasis on reliability testing reflects a fundamental shift in the industry-from simply achieving functionality to guaranteeing dependable operation throughout a product's lifetime, a requirement that continues to expand alongside the scale and complexity of next-generation semiconductor devices. We have developed and introduced several innovative products including the FOX-P family of test and burn-in systems and FOX WaferPak Aligner, FOX WaferPak Contactor, FOX DiePak Carrier and FOX DiePak Loader. The FOX-XP and FOX-NP systems are full wafer contact and singulated die/module test and burn-in systems that can test, burn-in, and stabilize a wide range of devices such as leading-edge silicon carbide-based and other power semiconductors, 2D and 3D sensors used in mobile phones, tablets, and other computing devices, memory semiconductors, processors, microcontrollers, systems-on-a-chip, and photonics and integrated optical devices used in AI. The FOX-CP system is a low-cost single-wafer compact test solution for logic, memory and photonic devices and the newest addition to the FOX-P product family. The FOX WaferPak Contactor contains a unique full wafer contactor capable of testing wafers up to 300mm that enables Integrated Circuit manufacturers to perform test, burn-in, and stabilization of full wafers on the FOX-P systems. The FOX DiePak Carrier allows testing, burning in, and stabilization of singulated bare die and modules up to 1,024 devices in parallel per DiePak on the FOX-NP and FOX-XP systems up to nine DiePaks at a time. In connection with the acquisition of Incal Technology, Inc. ("Incal"), our product portfolio further expanded to include packaged parts burn-in solutions for the full range of power and complexity of integrated circuits. Incal's product lines feature the Sonoma series for ultra-high-power burn-in testing, the Tahoe series for medium-power reliability burn-in, and the Echo series for low-power and high parallelism testing. The Sonoma line, with its ultra-high-power capabilities, is specifically designed to address the reliability and burn-in needs of the burgeoning demand for AI accelerators, graphics processing units ("GPUs"), high-performance computing ("HPC") processors, and devices that can reach over a thousand watts of power per device. The Tahoe and Echo lines for medium-power and low-power burn-in solutions, respectively, target logic, system on a chip ("SoC"), and mixed-signal devices employed in mobile communications, mobility, medical, military, aerospace, and data center applications. These systems are frequently used by independent test and burn-in labs, as well as semiconductor manufacturers. Our net revenue consists primarily of sales of FOX-P systems, WaferPak Aligners, WaferPak contactors, Sonoma systems, Tahoe systems, Echo systems, test fixtures, upgrades and spare parts, service contracts revenues, and non-recurring engineering 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, transfer of title and risk of loss. 19 Our operating results and cash flows can vary significantly from period to period due to the timing, volume, and mix of customer orders, particularly because a substantial portion of our revenue is derived from a relatively small number of high-value systems sales. As a result, the number, type, and selling price of systems sold in a given period can materially affect revenue, gross margin, earnings, and operating cash flow. Demand for our products is influenced by conditions in the semiconductor industry and in the end markets served by our customers, including demand related to generative AI, silicon photonics and power semiconductors including silicon carbide and gallium nitride. During fiscal 2025 and the first nine months of fiscal 2026, our operating performance was negatively affected by continued softness in demand in electric vehicle power semiconductors. Changes in customer investment cycles, order timing, and the pace of adoption of new technologies may continue to affect our results in future periods. In addition, our results of operations have been affected by changes in revenue mix across systems, contactors, and services, as well as by the integration and contribution of the acquired business. Because these factors can affect revenue levels, gross margins, operating expenses, and working capital differently from period to period, past performance may not necessarily be indicative of future results. Our liquidity and cash flows may also be affected by the timing of large system shipments, investments in inventory and working capital, capital expenditures, acquisition-related cash uses, and investments in product development and market expansion. Recent changes in U.S. tariff policy, including possible replacement tariffs and the availability, timing and amount of any potential refunds of previously paid tariffs, may affect the cost of our imported goods, our supply chain, and, accordingly, our gross margins and operating results. We have not yet determined the impact of such changes and are continuing to evaluate the potential impact of these developments. Critical Accounting 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, inventories, and income taxes. 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 30, 2025. There have been no material changes to our critical accounting policies and estimates during the nine months ended February 27, 2026 compared to those discussed in our Annual Report on Form 10-K for the fiscal year ended May 30, 2025. However, we have expanded the discussion below regarding income taxes to provide additional information about the significant judgments and estimates involved in assessing the realizability of deferred tax assets. Income Taxes We recognize deferred tax assets ("DTAs") for deductible temporary differences, net operating loss carryforwards, and tax credit carryforwards to the extent we conclude it is more likely than not that such DTAs will be realized. Our DTAs relate solely to U.S. federal and state income taxes. At each reporting date, we evaluate the realizability of our DTAs and record a valuation allowance when, based on all available evidence, we conclude that it is not more likely than not that some portion or all of our DTAs will be realized. This assessment is a critical accounting estimate because it requires significant judgment in weighing both positive and negative evidence, with the most objective evidence generally carrying the greatest weight. In making this determination, we consider, among other factors: (i) recent operating results and cumulative pretax income (loss) in the United States; (ii) the duration and severity of any recent losses; (iii) projections of future taxable income based on our operating plans (including expected revenues, margins, and cost structure); (iv) the availability and feasibility of tax planning strategies; and (v) the expected utilization periods and limitations applicable to carryforwards. During fiscal 2024, we released a valuation allowance of $21.9 million after concluding that it was more likely than not that our U.S. DTAs would be realized. However, because we incurred pretax losses in fiscal 2025, and losses continued through the nine months ended February 27, 2026, management continues to reassess at each reporting date whether sufficient positive evidence exists to support realization of our U.S. DTAs. This reassessment places increased emphasis on the evaluation of recent operating performance and our forecast of future taxable income, including the extent to which recent losses are expected to be temporary versus indicative of a sustained trend. 20 If actual results differ from our current estimates, if assumptions underlying our forecast of future taxable income change, or if negative evidence (including sustained losses) outweighs positive evidence, we may be required to record or adjust a valuation allowance. Any such change could have a material impact on our income tax provision and our results of operations in the period of the change. Results of Operations Discussion of Results of Operations for the Three and Nine Months Ended February 27, 2026 compared to the Three and Nine Months Ended February 28, 2025 Revenues Three Months Ended Nine Months Ended February 27, February 28, Percent February 27, February 28, Percent (Dollars in thousands) 2026 2025 Change 2026 2025 Change Revenues $ 10,313 $ 18,307 (44 )% $ 31,166 $ 44,879 (31 )% For the three months ended February 27, 2026, revenue decreased by $8.0 million, compared to the same period in the prior year. This decrease was primarily driven by a $5.9 million decline in wafer-level burn-in systems revenue and a $4.3 million decline in wafer-level contactors revenue, mainly due to lower shipments of wafer-level burn-in products sold. In the prior year period, wafer-level burn-in products were sold to a new semiconductor customer serving AI applications and to a gallium nitride power semiconductor supplier. These decreases were partially offset by a $1.4 million increase in package-level burn-in boards and burn-in modules revenue and $0.9 million increase in package-level burn-in systems revenue, driven by a higher number of package-level burn-in products sold to customers in AI-related applications. For the nine months ended February 27, 2026, revenue decreased by $13.7 million, compared to the same period in the prior year, primarily driven by a $21.2 million decrease in wafer-level contactors revenue due to significantly lower shipments, reflecting continued softness in demand related to electric vehicles. This decrease was partially offset by a $3.6 million increase in package-level burn-in boards and burn-in modules revenue and a $2.5 million increase in package-level burn-in systems revenue, primarily reflecting increased demand for package-level burn-in products from customers in AI-related applications and other markets, a $0.8 million increase in wafer-level burn-in systems revenue, and a $0.5 million increase in service revenue. Revenue by Geography Three Months Ended Nine Months Ended February 27, February 28, Percent February 27, February 28, Percent (Dollars in thousands) 2026 2025 Change 2026 2025 Change Asia $ 5,552 $ 5,472 1 % $ 15,645 $ 27,875 (44 )% United States 2,733 10,560 (74 )% 9,487 14,544 (35 )% Europe and Middle East 2,028 2,275 (11 )% 6,034 2,460 145 % Total revenues $ 10,313 $ 18,307 (44 )% $ 31,166 $ 44,879 (31 )% Asia as a percentage of total revenues 53.8 % 29.9 % 50.2 % 62.1 % United States as a percentage of total revenues 26.5 % 57.7 % 30.4 % 32.4 % Europe and Middle East as a percentage of total revenues 19.7 % 12.4 % 19.4 % 5.5 % On a geographic basis, revenues represent products that were shipped to or services that were performed at our customer locations. For the three months ended February 27, 2026, compared to the same period in the prior year, revenue decreased in the United States primarily due to lower sales of wafer-level burn-in systems and contactors to customers in the United States. For the nine months ended February 27, 2026, compared to the same period in the prior year, revenue decreased in Asia primarily due to the ongoing softness in demand for electric vehicles and revenue decreased in the United States primarily due to lower sales of wafer-level burn-in systems and contactors to a customer providing AI applications. These decreases were partially offset by higher revenue in Europe and the Middle East, primarily attributable to the memory market. 21 Gross Margin Three Months Ended Nine Months Ended February 27, February 28, Percent February 27, February 28, Percent (Dollars in thousands) 2026 2025 Change 2026 2025 Change Gross profit $ 3,368 $ 7,183 (53 )% $ 9,632 $ 19,661 (51 )% Gross margin 32.7 % 39.2 % 30.9 % 43.8 % Gross profit decreased by $3.8 million for the three months ended February 27, 2026, compared to the same period in the prior year, primarily due to lower revenue levels. Gross margin decreased by 6.5 percentage points primarily due to a change in product mix toward package-level burn-in products, which have lower gross margins than wafer-level products, as well as higher assembly and warranty costs, and increased freight and tariff costs. Gross profit decreased by $10.0 million for the nine months ended February 27, 2026, compared to the same period in the prior year, primarily due to lower revenue levels. Gross margin decreased by 12.9 percentage points primarily due to lower overhead absorption as a result of lower manufacturing production, a change in product mix toward package-level burn-in products, which have lower gross margins than wafer-level products, higher assembly and warranty costs, increased freight expenses, and higher tariffs on imported parts following the government policy changes. Research and Development Three Months Ended Nine Months Ended February 27, February 28, Percent February 27, February 28, Percent (Dollars in thousands) 2026 2025 Change 2026 2025 Change Research and development $ 3,167 $ 3,140 1 % $ 8,988 $ 7,777 16 % As a percentage of total revenues 30.7 % 17.2 % 28.8 % 17.3 % Research and development expenses consist primarily of compensation and benefits for product development personnel, outside development service costs, travel expenses, facilities cost allocations, and stock-based compensation charges. Research and development expenses remained consistent for the three months ended February 27, 2026, compared to the same period in the prior year, as higher employment-related costs of $0.3 million resulting from increased headcount and higher allocated office expenses of $0.3 million were partially offset by one-time severance benefits of $0.7 million incurred in the prior year period following the passing of an executive officer. Research and development expenses increased by $1.2 million for the nine months ended February 27, 2026, compared to the same period in the prior year. The increase was primarily driven by $1.1 million of higher employment-related costs, including stock-based compensation, resulting from increased headcount, higher allocated office expenses of $0.5 million and higher project-related expenses of $0.3 million, which were partially offset by the one-time severance benefits of $0.7 million incurred in the prior year period following the passing of an executive officer. Selling, General and Administrative Three Months Ended Nine Months Ended February 27, February 28, Percent February 27, February 28, Percent (Dollars in thousands) 2026 2025 Change 2026 2025 Change Selling, general and administrative $ 4,430 $ 5,162 (14 )% $ 13,581 $ 14,357 (5 )% As a percentage of total revenues 43.0 % 28.2 % 43.6 % 32.0 % Selling, general and administrative expenses consist primarily of compensation and benefits for sales, marketing and general and administrative personnel, legal and accounting service costs, marketing communications costs, travel expenses, facilities cost allocations, and stock-based compensation charges. Selling, general and administrative expenses decreased by $0.7 million for the three months ended February 27, 2026, compared to the same period in the prior year, primarily due to lower professional service fees of $0.5 million. Selling, general and administrative expenses decreased by $0.8 million for the nine months ended February 27, 2026, compared to the same period in the prior year, primarily due to lower professional service fees of $1.3 million and a lower bonus expense of $0.4 million partially offset by higher stock-based compensation of $1.1 million. 22 Interest and Other Income, Net Three Months Ended Nine Months Ended February 27, February 28, Percent February 27, February 28, Percent (Dollars in thousands) 2026 2025 Change 2026 2025 Change Interest income, net $ 240 $ 270 (11 )% $ 613 $ 1,179 (48 )% Other income (expense), net (12 ) (25 ) (52 )% 1,049 (11 ) N.M. Interest and other income, net $ 228 $ 245 (7 )% $ 1,662 $ 1,168 42 % N.M.-Not meaningful Interest and other income, net, primarily consists of interest income, foreign currency transaction exchange gains and losses and other non-operating income and expense. Interest income, net, and other income (expense), net, remained consistent for the three months ended February 27, 2026, compared to the same period in the prior year. Interest income, net, decreased by $0.6 million for the nine months ended February 27, 2026, compared to the same periods in the prior year, primarily driven by lower interest income earned on lower average cash balances and lower yields from our investments in money market funds. For the nine months ended February 27, 2026, other income (expense), net, increased by $1.1 million, compared to the same period in the prior year, primarily attributable to the Employee Retention Credit ("ERC") refund of $1.3 million received, net of a $0.3 million third-party service fee incurred in connection with the filing of the ERC claims. For further explanation of the ERC, see Note 11, Employee Retention Credit, in Notes to Condensed Consolidated Financial Statements. Income Tax Benefit Three Months Ended Nine Months Ended February 27, February 28, Percent February 27, February 28, Percent (Dollars in thousands) 2026 2025 Change 2026 2025 Change Income tax benefit $ (798 ) $ (231 ) 245 % $ (2,764 ) $ (294 ) N.M. N.M.-Not meaningful For the three and nine months ended February 27, 2026, the Company recognized income tax benefit of $0.8 million and $2.8 million, respectively, primarily driven by quarter-to-date and year-to-date losses in the United States. For the three and nine months ended February 28, 2025, the income tax benefit was also primarily related to quarter-to-date and year-to-date losses in the United States. Liquidity and Capital Resources Cash, cash equivalents, and restricted cash were $37.1 million as of February 27, 2026, compared to $31.4 million as of February 28, 2025. We believe that our existing cash resources and anticipated funds from operations will satisfy our cash requirements to fund our operating activities, capital expenditures and other obligations for the next twelve months. Nine Months Ended February 27, February 28, (In thousands) 2026 2025 Change Operating activities $ (5,142 ) $ (5,098 ) $ (44 ) Investing activities (3,733 ) (13,249 ) 9,516 Financing activities 19,447 374 19,073 Effect of exchange rate changes on cash, cash equivalents and restricted cash 9 25 (16 ) Net increase (decrease) in cash, cash equivalents and restricted cash $ 10,581 $ (17,948 ) $ 28,529 Net Cash Flows Used in Operating Activities Net cash flows used in operating activities for the nine months ended February 27, 2026 remained relatively consistent, compared to the same period in the prior year. The change was driven primarily by decreases in prepayments to vendor and in unbilled receivables, an increase in cash provided by collection of accounts receivable, lower cash outflows for inventory purchases, and higher non-cash charges including stock-based compensation expense, offset by a higher loss before income tax benefit and an increase in payment to vendors. 23 Net Cash Flows Used in Investing Activities Net cash used in investing activities decreased by $9.5 million for the nine months ended February 27, 2026, compared to the same period in the prior year. The decrease was primarily due to the $11.1 million payment to acquire Incal during the nine months ended February 28, 2025, compared to a $1.8 million escrow release related to the acquisition during the nine months ended February 27, 2026. Net Cash Flows Provided by Financing Activities Net cash provided by financing activities increased by $19.1 million for the nine months ended February 27, 2026, compared to the same period in the prior year, primarily driven by net proceeds of $19.6 million from the issuance of common stock under the Company's ATM offering program, partially offset by a $0.8 million increase in shares repurchased for tax withholdings on vesting of restricted stock units. Off-Balance Sheet Agreements We do not have any off-balance sheet arrangements, investments in special purpose entities or undisclosed borrowings or debt. 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 30, 2025. 24

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