2019 Annual Report
Aehr Test Systems
FOX-P Wafer Level Test & Burn-in Systems
& WaferPak Full Wafer Contactor
FINANCIAL HIGHLIGHTS
PRODUCTS
The FOX-P platform can be used in a wide range of test and reliability screening (burn-in)
applications for high reliability applications, such as automotive, mobile devices, networking,
telecommunications, sensors, photonics and laser devices. The FOXTM-XP Burn-in and Test
System, introduced in July 2016, is designed for single-touchdown testing of up to 18 wafers
at a time and for testing singulated die or small modules. The FOX-NP was introduced in
January 2019 and is a low-cost entry-level system to provide a configuration and price point
for companies to do initial production qualification and new product introduction, enabling
an easier transition to the FOX-XP system for high volume production test. The FOX-CP
was introduced in February 2019 and is a new low-cost single-wafer compact test and
reliability verification solution for logic, memory and photonic devices where test times
ranging from minutes to a few hours or where multiple touchdowns are required to test the
entire wafer. It complements the capabilities of the FOX-XP and FOX-NP systems, which
are optimal when the test time is measured in hours or days and the full wafer can be tested
in a single touchdown.
The FOX-1P Full Wafer Parallel Test System, introduced in our fiscal year 2015, is designed
for massively parallel testing in wafer sort. By utilizing Design for Testability (DFT) or
Built-In Self-Test (BIST) all devices on a wafer are tested at one time, test costs can be
decreased significantly due to the high throughput of the system, enabling the user to
significantly reduce the capital investment required for high-volume production test.
Aehr Test’s patented WaferPak Contactor and DiePak® Carriers connect electrical test
resources from Aehr’s FOX systems to the customer’s wafer or singulated die/modules to be
tested or burned-in. Both products contain micro-miniature probes to contact all the
die/modules in a single insertion.
The ABTSTM Advanced Burn-In and Test System is Aehr
systems for packaged parts. It is being used for many applications in the mobility and automotive
markets. It can be configured with up to 320 I/O channels and up to 72 Burn-in boards for
testing and burning-in advanced logic devices. It offers an individual device temperature control
option for higher-power applications such as applications processors.
-In
This Annual Report contains certain “forward-looking” statements based on current expectations, forecasts and assumptions that involve risks and
uncertainties. Forward-looking statements include statements relating to future market opportunities and conditions, industry growth and customer
demand for Aehr Test's products. Actual results may differ materially from those stated or implied due to risks and uncertainties. See Aehr Test's recent
10-K report that is part of this Annual Report for a more detailed description of the risks facing our business. Aehr Test disclaims any obligation to
update information contained in any forward-looking statement to reflect events or circumstances occurring after the date of this Annual Report.
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Dear Shareholders, Customers, Partners, and Employees,
Fiscal 2019 was a good year for our FOX-
systems that expand our capabilities and addressable market and we already received orders from four
customers for these new systems since their launch. We grew our customer base for our FOX-P solutions, and
we expect to see significant growth in our consumables business as we increase our installed base of FOX-P
systems. We finished the fiscal year with strong revenue and a return to profitability in the fourth quarter, and
fully paid off our convertible note leaving us with a solid balance sheet with no long-term debt. We also made
significant structural and staffing changes during the year to enhance our sales, R&D and manufacturing
capabilities, and believe that we are well positioned to meet the expanding market opportunities for Aehr Test s
products as we head into fiscal 2020.
We successfully introduced two new test
We introduced new test and reliability solutions. During the fiscal year we expanded our test capabilities
with the successful introduction the FOX-
family of semiconductor wafer and module test and burn-in systems. We believe these new test solutions will
significantly expand the market and number of customers for our FOX-P products.
-
-P
Our FOX-NP is a low-cost, small footprint, entry-level system providing a configuration and price point for
initial product development, product qualification and production, enabling an easier transition to our FOX-
high-volume production test. The FOX-NP system is affordable and low risk for smaller
companies or new applications where the initial volumes are low. It also opens up new opportunities where
customers use multiple FOX-NP systems to run multiple wafers, panels, modules or die in parallel at different
temperature and burn-in conditions as part of their development and qualification process.
Our new FOX-CP is a low-cost single-wafer compact solution for wafer-level testing and reliability cycling for
logic, memory and photonic devices. The FOX-CP is optimal for test times ranging from minutes to a few
hours, or where multiple touchdowns are required to test the entire wafer. It complements the capabilities of
our FOX-XP and FOX-NP systems, which are optimal when the test time is measured in hours or days and
the full wafer can be tested in a single touchdown.
We grew our customer base. Following the introduction of the FOX-NP and FOX CP solutions, we
received orders from four customers for these systems to perform 100% test and burn-in production on their
devices. The first order for the FOX-NP was from a new customer that selected the FOX-NP and our
tment to utilize our FOX-P platform for
qualification and production burn-in of their new family of integrated silicon photonics chips. This new
customer will utilize the FOX-NP for initial product development, qualification and production, and then plans
to transition to high volume production test and burn-in of 100% of their silicon photonics chips using our
FOX-XP multi-wafer and singulated die/module test solution.
The second FOX-NP order was from an existing customer that ordered several systems to complement their
existing fleet of FOX-XP systems to provide additional test and qualification capacity for a variety of silicon
photonics devices. For this lead customer, having multiple FOX-NP systems enables them to run many wafers
at many different process variations and burn-in conditions as part of their qualification process.
We received an initial order for our new FOX-CP from a major new customer who will utilize this system to
perform 100% test and burn-in of devices in a very high-volume application for the enterprise and data center
market, with a build out of this production ramp over the next several years. We began shipments of both the
FOX-NP and FOX-CP to these three customers during the fourth quarter, and expect each of them to add
additional FOX system capacity from Aehr during the coming fiscal year.
We also received another new customer order for our FOX-P platform from Skorpios Technologies, a
vertically integrated silicon photonics company. Skorpios will use our high-power test and reliability verification
solutions to perform 100% wafer level test and burn-in for infant mortality and aging of silicon photonics
devices as part of a significant production ramp to meet demand for high speed optical transceivers.
We see significant new market growth opportunities. The rapid growth of integrated optical devices in
mobile devices, telecommunications, high-performance servers and data centers, and automotive applications is
driving substantially higher requirements for initial quality and long-term reliability, and they are increasing with
every new product generation. We believe these new applications are driving an entirely new level of quality
and reliability expectation for these systems and provide a significant long-term growth opportunity for Aehr.
Our unique products enable our customers to test and burn-in their devices with 100% confidence in
traceability, which is needed to address the reliability, safety, security and confidence for mission-critical
applications. We believe that we are well positioned to capitalize on those long-term market trends.
We believe that the data storage market, as well as multiple devices related to the worldwide 5G build-out, are
substantial new opportunities for our test and burn-in systems, where these end markets and customers require
devices to have extremely high levels of quality and long-term reliability. We see significant new growth
opportunities in test and reliability qualification for automotive modules, heterogeneous semiconductor
packaged devices, and the emerging Silicon Carbide device markets. We also remain very optimistic about the
silicon photonics and photonics sensors markets that generated significant revenue for Aehr in fiscal 2019, and
we believe they will be significant growth drivers for Aehr for multiple years ahead.
Our consumables business is expected to grow significantly. We expect to increase our installed base of
FOX systems substantially over the next few years
contactors and DiePak carriers will not only add to our overall revenue, but will also further grow our
consumables business as new customers continue to order contactors and carriers with each new device they
design. The consumable business continues long after a system is installed, and our FOX-NP, FOX-CP and
FOX-XP, along with our legacy FOX-
-
and/or DiePak carriers that provide this consumable revenue stream for the long-term. We expect our
consumables business to grow with current and new customers both in absolute terms and as a percentage of
revenue, and we believe we can reach a point in the next few years where our WaferPak contactors and DiePak
carriers comprise over half of our annual revenue.
contactors
We enhanced our sales, R&D and manufacturing capabilities to address new opportunities. We have
seen our business shift considerably toward wafer level, singulated die, and module test and burn-in,
particularly in silicon photonics, 2D and 3D sensors, automotive applications and data centers that consider
wafer level and singulated die reliability test to be critical to their production. With this shift in our business and
customer opportunities for our FOX-P platform, we have focused more of our selling resources and processes
and made substantial structural changes in key areas of our company this past year to address these
opportunities and improve our efficiencies. These included substantial changes in our customer-facing sales
and marketing teams and in our R&D and manufacturing infrastructure to better align these operations for
future growth.
As we head into fiscal 2020, we remain very optimistic about the opportunity for significant growth in our
systems and consumables business within our installed base of customers, as well as expanding into new
customers with our full family of FOX-P solutions. We see large expanding market opportunities ahead and
believe we are well positioned to capitalize on these opportunities and generate significant revenue growth in
fiscal 2020 and for many years to come.
I continue to be grateful to our employees, customers, partners and shareholders for their support.
Gayn Erickson, President and CEO
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[X]
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended May 31, 2019
or
[ ]
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ________________ to ________________
Commission file number: 000-22893.
AEHR TEST SYSTEMS
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-2424084
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
400 KATO TERRACE, FREMONT, CA 94539
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (510) 623-9400
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock
Trading
Symbol(s)
AEHR
Name of each exchange on which registered
The NASDAQ Capital Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Securities Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be
submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit such files).
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this
chapter) is not contained herein, and will not be contained to the best of the registrant’s knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-
K. [ ]
1
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”
“accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [X] Smaller reporting company [X]
Emerging growth company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended
transition period for complying with any new or revised financial accounting standards provided pursuant to Section
13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
The aggregate market value of the registrant’s common stock, par value $0.01 per share, held by non-affiliates of the
registrant, based upon the closing price of $1.88 on November 30, 2018, as reported on the NASDAQ Capital Market,
was $36,887,600. For purposes of this disclosure, shares of common stock held by persons who hold more than 5% of
the outstanding shares of common stock (other than such persons of whom the Registrant became aware only through
the filing of a Schedule 13G filed with the Securities and Exchange Commission) and shares held by officers and
directors of the Registrant have been excluded because such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily conclusive for other purposes.
The number of shares of registrant’s common stock, par value $0.01 per share, outstanding at July 31, 2019 was
22,720,686.
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AEHR TEST SYSTEMS
FORM 10-K
FISCAL YEAR ENDED MAY 31, 2019
TABLE OF CONTENTS
PART I
Item 1. Business ................................................................................................................................................................ 4
Item 1A. Risk Factors .......................................................................................................................................................... 10
Item 1B. Unresolved Staff Comments ............................................................................................................................. 15
Item 2. Properties .............................................................................................................................................................. 15
Item 3. Legal Proceedings ............................................................................................................................................... 16
Item 4. Mine Safety Disclosures ..................................................................................................................................... 16
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities ..................................................................................................................... 16
Item 6. Selected Consolidated Financial Data ............................................................................................................. 17
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ................ 19
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ..................................................................... 24
Item 8. Financial Statements and Supplementary Data ............................................................................................. 26
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ............... 54
Item 9A. Controls and Procedures .................................................................................................................................... 54
Item 9B. Other Information ............................................................................................................................................. 54
PART III
Item 10. Directors, Executive Officers and Corporate Governance .......................................................................... 55
Item 11. Executive Compensation .................................................................................................................................... 55
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters ................................................................................................................................................................ 55
Item 13. Certain Relationships and Related Transactions, and Director Independence ......................................... 55
Item 14. Principal Accountant Fees and Services ........................................................................................................... 55
Item 15. Exhibits, Financial Statement Schedules .......................................................................................................... 56
PART IV
Signatures ............................................................................................................................................................... 59
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This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Section 27A of
the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as
amended (the Exchange Act). All statements contained in this Annual Report on Form 10-K other than statements of
historical fact, including statements regarding our future results of operations and financial position, our business
strategy and plans, and our objectives for future operations, are forward-looking statements. The words “believe,”
“may,” “will,” “estimate,” “continue,” “anticipate,” “plan,” “intend,” “expect,” “could,” “target,” “project,” “should,”
“predict,” “potential,” “would,” “seek” and similar expressions and the negative of those expressions are intended to
identify forward-looking statements. These forward-looking statements are subject to a number of risks, uncertainties
and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those
expressed in any forward-looking statements. These risks include but are not limited to those factors identified in “Risk
Factors” beginning on page 10 of this Annual Report on Form 10-K, those factors that we may from time to time
identify in our periodic filings with the Securities and Exchange Commission, as well as other factors beyond our
control. We undertake no obligation to revise or update publicly any forward-looking statements for any reason. Unless
the context requires otherwise, references in this Form 10-K to “Aehr Test,” the “Company,” “we,” “us” and “our”
refer to Aehr Test Systems.
PART I
Item 1. Business
THE COMPANY
Aehr Test was incorporated in the state of California on May 25, 1977. We develop, manufacture and sell systems
that are designed to reduce the cost of testing and to perform reliability screening and stress testing, burn-in or cycling,
of homogeneous and heterogenous logic and memory integrated circuits (ICs), sensors and optical devices. These
systems can be used to simultaneously perform parallel testing and burn-in of packaged ICs, singulated bare die or ICs
still in wafer form. The expanding automotive, mobility, networking, and telecommunications markets require ICs that
meet increased quality and reliability specifications. To meet these needs, IC manufacturers are increasing capacity and
performing additional testing and burn-in of their products, creating opportunities for Aehr Test products in package
and wafer-level testing. Leveraging its expertise as a long-time leading provider of burn-in equipment, and having
installed over 2,500 systems worldwide, the Company has developed and introduced several innovative product families,
including the ABTSTM and FOXTM systems, the WaferPakTM contactor and the DiePak® carrier. The latest ABTS family
of packaged part burn-in and test systems can perform test during burn-in of complex devices, such as digital signal
processors, microprocessors, microcontrollers, memory and systems-on-a-chip, and offers individual temperature
control for high-power advanced logic devices. The FOX systems are full wafer contact parallel test and burn-in
systems designed to make contact with all pads of a wafer simultaneously, thus enabling full wafer parallel test and burn-
in. They are also used for parallel test and burn-in of singulated die or very small multi-IC modules. The WaferPak
contactor includes a full-wafer probe card for use in testing wafers in FOX systems. The DiePak carrier is a reusable,
temporary package that enables IC manufacturers to perform cost-effective test and burn-in of singulated bare die or
very small multi-IC modules.
INDUSTRY BACKGROUND
Semiconductor manufacturing is a complex, multi-step process, and defects or weaknesses that may result in the
failure of an IC may be introduced at any process step. Failures may occur immediately or at any time during the
operating life of an IC, sometimes after several months of normal use. Semiconductor manufacturers rely on testing and
reliability screening to identify and eliminate defects that occur during the manufacturing process.
Testing and reliability screening involve multiple steps. The first set of tests is typically performed by IC
manufacturers before the processed semiconductor wafer is cut into individual die, in order to avoid the cost of
packaging defective die into their packages. This “wafer probe” testing can be performed on one or many die at a time,
including testing the entire wafer at once. Most leading-edge microprocessors, microcontrollers, digital signal
processors, memory ICs, sensors and optical devices (such as vertical-cavity surface-emitting lasers, or VCSELs) then
undergo an extensive reliability screening and stress testing procedure known as burn-in or cycling, depending on the
application. This can either be done at the wafer level, before the die are packaged, or at the package level, after the die
are packaged. The burn-in process screens for early failures by operating the IC at elevated voltages and temperatures, at
up to 150 degrees Celsius (302 degrees Fahrenheit) or higher. Depending upon the application, the burn-in times can
range anywhere from minutes and hours to days. A typical burn-in system can process thousands of ICs simultaneously.
After burn-in, the ICs undergo a final test process using automatic test equipment, or testers. For example, this cycling
process screens flash memory devices for failure to meet write/erase cycling endurance requirements.
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PRODUCTS
The Company manufactures and markets full wafer contact test systems, test during burn-in systems, test fixtures and
related accessories.
All of the Company’s systems are platform-based systems with a portfolio of current, voltage, digital and thermal
capabilities, allowing them to be configured with optional features to meet customer requirements. Systems can be
configured for use in production applications, where capacity, throughput and price are most important, or for reliability
engineering and quality assurance applications, where performance and flexibility, such as extended temperature ranges,
are essential.
FULL WAFER CONTACT SYSTEMS
The FOX-XP test and burn-in system, introduced in July 2016, is designed for devices in wafer, singulated die, and
module form that require test and burn-in times typically measured in hours to days. The FOX-XP system can test and
burn-in up to 18 wafers at a time. For high reliability applications, such as automotive, mobile devices, networking,
telecommunications, sensors, and solid-state devices, the FOX-XP system is a cost-effective solution for producing
tested and burned-in die for use in multi-chip packages. Using Known-Good Die, or KGD, which are fully burned-in
and tested die, in multi-chip packages helps assure the reliability of the final product and lowers costs by increasing the
yield of high-cost multi-chip packages. Wafer-level burn-in and test enables lower cost production of KGD for multi-
chip modules, 3-D stacked packages and systems-in-a-package. The FOX-P platform has been extended for burn-in and
test of small multi-die modules by using DiePak carriers. The DiePak carrier with its multi-module sockets and high
wattage dissipation capabilities has a capacity of hundreds of die or modules, much higher than the capacity of a
traditional burn-in system with traditional single-device sockets and heat sinks. This capability was introduced in March
2017.
The FOX-NP was introduced in January 2019 and is a low-cost entry-level system to provide a configuration and
price point for companies to do initial production qualification and new product introduction, enabling an easier
transition to the FOX-XP system for high volume production test. The FOX-NP system is 100% compatible with the
FOX-XP system and is configurable with up to two slot assemblies per system compared to up to 18 slot assemblies in
the FOX-XP system.
The FOX-CP was introduced in February 2019 and is a new low-cost single-wafer compact test and reliability
verification solution for logic, memory and photonic devices. The FOX-CP reduces test cost by functionally testing
wafers during reliability screening to identify failing logic, memory or photonic die before the die are integrated into their
final package, and is optimal for test times ranging from minutes to a few hours or where multiple touchdowns are
required to test the entire wafer. The FOX-CP includes an integrated prober which is equipped with optics for automatic
pattern recognition so that the wafer is aligned properly for the testing process. It complements the capabilities of the
FOX-XP and FOX-NP systems, which are optimal when the test time is measured in hours or days and the full wafer
can be tested in a single touchdown.
The FOX-1P full wafer parallel test system, introduced in October 2014, is designed for massively parallel test of
devices at wafer level. The FOX-1P system is designed to make electrical contact to and test all of the die on a wafer in
a single touchdown. The FOX-1P test head and WaferPak contactor are compatible with industry-standard 300 mm
wafer probers, which provide the wafer handling and alignment automation for the FOX-1P system. The FOX-1P
pattern generator is designed to functionally test industry-standard memory devices such as flash and DRAMs, plus it is
optimized to test memory or logic ICs that incorporate design for testability, or DFT, and built-in self-test, or BIST.
The FOX-1P universal per-pin architecture is designed to provide per-pin electronics and per-device power supplies and
is tailored to full-wafer functional test. The Company believes that the FOX-1P system can significantly reduce the cost
of testing IC wafers. The Company’s FOX-1P system was partially funded through a development agreement with a
leading semiconductor manufacturer. The Company received the first production order of this new system and shipped
the first system in July 2016.
The FOX-15 full wafer parallel test system, the predecessor to the FOX-XP system, was introduced in October 2007
and was designed for full-wafer test and burn-in. The FOX-15 system is nearing the end of its lifecycle and limited
shipments are expected in the future.
One of the key components of the FOX systems is the patented WaferPak contactor system. The WaferPak
contactor contains a full-wafer single-touchdown probe card which is easily removable from the system. Traditional
probe cards contact only a portion of the wafer, requiring multiple touchdowns to test the entire wafer. The unique
design is intended to accommodate a wide range of contactor technologies so that the contactor technology can evolve
along with the changing requirements of the customer’s wafers. The WaferPak contactors are custom designed for each
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device type, each of which has a typical lifetime of 2 to 7 years, depending on the device life cycle. Therefore, multiple
sets of WaferPak contactors could be purchased over the life of a FOX system.
A key new component of the FOX-XP and FOX-NP systems is the patented DiePak carrier system. The DiePak
carrier contains many multi-module or die sockets with very fine-pitch probes which are easily removable from the
system. Traditional sockets contact only a single device, requiring multiple large numbers of sockets and burn-in boards
to test a production lot of devices. The unique design accommodates a wide range of socket sizes and densities so that
the DiePak carrier technology can evolve along with the changing requirements of the customer’s devices. The DiePak
carriers are custom designed for each device type, each of which has a typical lifetime of 2 to 7 years, depending on the
device life cycle. Therefore, multiple sets of DiePak carriers could be purchased over the life of a FOX-XP or FOX-NP
system.
Another key component of our FOX-XP, FOX-NP and FOX-15 test cell is the WaferPak Aligner. The WaferPak
Aligner performs alignment of the customer’s wafer to the WaferPak contactor so that the wafer can be tested and
burned-in by the FOX-XP, FOX-NP and FOX-15 systems. The Company offers an automated aligner for high volume
production applications, which can support several FOX-XP, FOX-NP or FOX-15 systems, and a manual aligner for
low volume production or engineering applications.
Similar to the WaferPak Aligner for WaferPak contactors, the Company offers the DiePak Loader for DiePak carriers.
The DiePak Loader performs automatic loading of the customer’s modules to the DiePak carrier so that the modules
can be tested and burned-in by the FOX-XP and FOX-NP system. Typically, one DiePak Loader can support several
FOX-XP or FOX-NP systems.
Net sales of full wafer contact systems for fiscal 2019, 2018 and 2017 were $14.6 million, $13.1 million, and $9.6
million, respectively, and accounted for approximately 69%, 44% and 51% of the Company’s net sales in fiscal 2019,
2018 and 2017, respectively.
SYSTEMS FOR PACKAGED PARTS
Test during burn-in, or TDBI, systems consist of several subsystems: pattern generation and test electronics, control
software, network interface and environmental chamber. The test pattern generator allows duplication of most of the
functional tests performed by a traditional tester. Pin electronics at each burn-in board, or BIB, position are designed to
provide accurate signals to the ICs being tested and detect whether a device is failing the test.
Devices being tested are placed on BIBs and loaded into environmental chambers which typically operate at
temperatures from 25 degrees Celsius (77 degrees Fahrenheit) up to 150 degrees Celsius (302 degrees Fahrenheit). Using
our optional chambers, our systems can produce temperatures as low as -55 degrees Celsius (-67 degrees Fahrenheit). A
single BIB can hold up to several hundred ICs, and a production chamber holds up to 72 BIBs, resulting in thousands of
memory or logic devices being tested in a single system.
The Advanced Burn-in and Test System, or ABTS, was introduced in fiscal 2008. Several updates to the ABTS
system have been made since its introduction, including the ABTS-P system released in 2012. The ABTS family of
products is based on a hardware and software architecture that is intended to address not only today’s devices, but also
future devices for many years to come. The ABTS system can test and burn-in both high-power logic and low-power
ICs. It can be configured to provide individual device temperature control for devices up to 70W or more and with up
to 320 I/O channels.
Net sales of packaged part systems for fiscal 2019, 2018 and 2017 were $6.4 million, $16.5 million, and $9.2 million,
respectively, and accounted for approximately 31%, 56% and 49% of the Company’s net sales in fiscal 2019, 2018 and
2017, respectively.
TEST FIXTURES
The Company sells, and licenses others to manufacture and sell, custom-designed test fixtures for its systems. The
test fixtures include BIBs for its packaged part burn-in systems. These test fixtures hold the devices undergoing test or
burn-in and electrically connect the devices under test to the system electronics. The capacity of each test fixture
depends on the type of device being tested or burned-in, ranging from several hundred in memory production to as few
as eight for high pin-count complex Application Specific Integrated Circuits, or ASICs, or microprocessor devices. Test
fixtures are sold both with new Aehr Test systems and for use with the Company’s installed base of systems. Test
fixtures are also available from third-party suppliers.
The Company has received patents or applied for patents on certain features of the FOX and ABTS test fixtures. The
Company has licensed or authorized several other companies to provide BIBs from which the Company receives
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royalties. Royalties and revenue for the test fixtures product category accounted for less than 1% of net sales in fiscal
2019, 2018 and 2017.
CUSTOMERS
The Company markets and sells its products throughout the world to semiconductor manufacturers, semiconductor
contract assemblers, electronics manufacturers and burn-in and test service companies.
Sales to the Company’s five largest customers accounted for approximately 80%, 86%, and 93% of its net sales in
fiscal 2019, 2018 and 2017, respectively. During fiscal 2019, Intel Corporation, or Intel, Texas Instruments
Incorporated, or Texas Instruments, Cypress Semiconductor Corporation, or Cypress Semiconductor, and
STMicroelectronics, Inc., or STMicroelectronics, accounted for approximately 36%, 14%, 12% and 10%, respectively, of
the Company’s net sales. During fiscal 2018, Texas Instruments, STMicroelectronics, and Astronics Test Systems, Inc.,
or Astronics Test Systems, accounted for approximately 34%, 26% and 13%, respectively, of the Company’s net sales.
During fiscal 2017, Texas Instruments, STMicroelectronics, Intel and Cypress Semiconductor accounted for
approximately 45%, 19%, 17% and 10%, respectively, of the Company’s net sales. No other customers accounted for
more than 10% of the Company’s net sales for any of these periods. The Company expects that sales of its products to
a limited number of customers will continue to account for a high percentage of net sales for the foreseeable future. In
addition, sales to particular customers may fluctuate significantly from quarter to quarter. Such fluctuations may result in
changes in utilization of the Company’s facilities and resources. The loss of or reduction or delay in orders from a
significant customer or a delay in collecting or failure to collect accounts receivable from a significant customer could
materially and adversely affect the Company’s business, financial condition and operating results.
MARKETING, SALES AND CUSTOMER SUPPORT
The Company has sales and service operations in the United States, Japan, Germany and Taiwan, dedicated service
resources in China, South Korea, and the Philippines, and has established a network of distributors and sales
representatives in certain key parts of the world. See “REVENUE RECOGNITION” in Item 7 under “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” for a further discussion of the Company’s
relationship with distributors, and its effects on revenue recognition.
The Company’s customer service and support program includes system installation, system repair, applications
engineering support, spare parts inventories, customer training and documentation. The Company has applications
engineering and field service personnel located near and sometimes co-located at our customers and includes resources
at the corporate headquarters in Fremont, California, at customer locations in Texas, at the Company’s subsidiaries in
Japan and Germany, at its branch office in Taiwan, and also through 3rd party agreements in China, South Korea, and
the Philippines. The Company’s distributors provide applications and field service support in other parts of the world.
The Company customarily provides a warranty on its products. The Company offers service contracts on its systems
directly and through its subsidiaries, distributors and representatives. The Company believes that maintaining a close
relationship with customers and providing them with ongoing engineering support improves customer satisfaction and
will provide the Company with a competitive advantage in selling its products to the Company’s customers.
BACKLOG
At May 31, 2019, the Company’s backlog was $7.5 million compared with $8.4 million at May 31, 2018. The
Company’s backlog consists of product orders for which confirmed purchase orders have been received and which are
scheduled for shipment within 12 months. Due to the possibility of customer changes in delivery schedules or
cancellations and potential delays in product shipments or development projects, the Company’s backlog as of a
particular date may not be indicative of net sales for any succeeding period.
RESEARCH AND PRODUCT DEVELOPMENT
The Company historically has devoted a significant portion of its financial resources to research and development
programs and expects to continue to allocate significant resources to these efforts. Certain research and development
expenditures related to non-recurring engineering milestones have been transferred to cost of goods sold, reducing
research and development expenses. The Company’s research and development expenses during fiscal 2019, 2018 and
2017 were $4.2 million, $4.2 million and $4.7 million, respectively.
The Company conducts ongoing research and development to design new products and to support and enhance
existing product lines. Building upon the expertise gained in the development of its existing products, the Company has
developed the FOX family of systems for performing test and burn-in of entire processed wafers, and burn-in of devices
in singulated die and module form, including the FOX-NP and FOX-CP systems released during fiscal 2019. The
Company is developing enhancements to the ABTS and FOX families of products, intended to improve the capability
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and performance for testing and burn-in of future generation devices and provide the flexibility in a wide variety of
applications.
MANUFACTURING
The Company assembles its products from components and parts manufactured by others, including environmental
chambers, power supplies, metal fabrications, printed circuit assemblies, ICs, burn-in sockets, high-density interconnects,
wafer contactors and interconnect substrates. Final assembly and testing are performed within the Company’s facilities.
The Company’s strategy is to use in-house manufacturing only when necessary to protect a proprietary process or when
a significant improvement in quality, cost or lead time can be achieved and relies on subcontractors to manufacture
many of the components and subassemblies used in its products. The Company’s principal manufacturing facility is
located in Fremont, California. The Company’s facility in Utting, Germany provides limited manufacturing and product
customization.
COMPETITION
The semiconductor equipment industry is intensely competitive. Significant competitive factors in the semiconductor
equipment market include price, technical capabilities, quality, flexibility, automation, cost of ownership, reliability,
throughput, product availability and customer service. In each of the markets it serves, the Company faces competition
from established competitors and potential new entrants, many of which have greater financial, engineering,
manufacturing and marketing resources than the Company.
The Company’s FOX full wafer contact systems face competition from larger systems manufacturers that have
significant technological know-how and manufacturing capability. Competing suppliers of full wafer contact systems
include Advantest Corporation, Chroma ATE Inc., Teradyne Inc., Micronics Japan Co., Ltd., and Tokyo Electron
Limited.
The Company’s ABTS TDBI systems face increasingly severe competition, especially from several regional, low-cost
manufacturers and from systems manufacturers that offer higher power dissipation per device under test. Some users of
such systems, such as independent test labs, build their own burn-in systems, while others, particularly large IC
manufacturers in Asia, acquire burn-in systems from captive or affiliated suppliers. The market for burn-in systems is
highly fragmented, with many domestic and international suppliers. Competing suppliers of burn-in and functional test
systems that compete with ABTS systems include Dong-Il Corporation, Micro Control Company, Incal Technology and
Advantest Corporation.
The Company’s WaferPak products are facing and are expected to face increasing competition. Several companies
have developed or are developing full-wafer and single-touchdown probe cards. As the full-wafer test market develops,
the Company expects that other competitors will emerge. The primary competitive factors in this market are cost,
performance, reliability and assured supply. Competing suppliers of full-wafer probe cards include FormFactor, Inc.,
Japan Electronic Materials Corporation and Micronics Japan Co., Ltd.
The Company’s test fixture products face numerous regional competitors. There are limited barriers to entry into the
BIB market, and as a result, many companies design and manufacture BIBs, including BIBs for use with the Company’s
packaged part systems. The Company has granted royalty-bearing licenses to several companies to make BIBs for use
with the Company’s packaged part systems and the Company may grant additional licenses as well. Sales of BIBs by
licensees result in royalties to the Company.
The Company expects that its DiePak products for burning-in and testing multiple singulated die and small modules
face significant competition. The Company believes that several companies have developed or are developing products
which are intended to enable test and burn-in of multiple bare die, and small modules. The Company expects that other
competitors will emerge. The Company expects that the primary competitive factors in this market will be cost,
performance, reliability and assured supply. Suppliers with products that compete with our single die DiePak products
include Chroma ATE Inc.
The Company expects its competitors to continue to improve the performance of their current products and to
introduce new products with improved price and performance characteristics. New product introductions by the
Company’s competitors or by new market entrants could cause a decline in sales or loss of market acceptance of the
Company’s products. The Company has observed price competition in the systems market, particularly with respect to
its less advanced products. Increased competitive pressure could also lead to intensified price-based competition,
resulting in lower prices which could adversely affect the Company’s operating margins and results. The Company
believes that to remain competitive it must invest significant financial resources in new product development and
expand its customer service and support worldwide. There can be no assurance that the Company will be able to
compete successfully in the future.
8
PROPRIETARY RIGHTS
The Company relies primarily on the technical and creative ability of its personnel, its proprietary software, and trade
secrets and copyright protection, rather than on patents, to maintain its competitive position. The Company’s
proprietary software is copyrighted and licensed to the Company’s customers. At May 31, 2019, the Company held 53
issued United States patents with expiration date ranges from 2019 to 2038 and had several additional United States
patent applications and foreign patent applications pending.
The Company’s ability to compete successfully is dependent in part upon its ability to protect its proprietary
technology and information. Although the Company attempts to protect its proprietary technology through patents,
copyrights, trade secrets and other measures, there can be no assurance that these measures will be adequate or that
competitors will not be able to develop similar technology independently. Further, there can be no assurance that claims
allowed on any patent issued to the Company will be sufficiently broad to protect the Company’s technology, that any
patent will be issued to the Company from any pending application or that foreign intellectual property laws will protect
the Company’s intellectual property. Litigation may be necessary to enforce or determine the validity and scope of the
Company’s proprietary rights, and there can be no assurance that the Company’s intellectual property rights, if
challenged, will be upheld as valid. Any such litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on the Company’s business, financial condition and operating results, regardless of
the outcome of the litigation. In addition, there can be no assurance that any of the patents issued to the Company will
not be challenged, invalidated or circumvented or that the rights granted thereunder will provide competitive advantages
to the Company. Also, there can be no assurance that the Company will have the financial resources to defend its
patents from infringement or claims of invalidity.
There are currently no pending claims against the Company regarding infringement of any patents or other intellectual
property rights of others. However, the Company may, from time to time, receive communications from third parties
asserting intellectual property claims against the Company. Such claims could include assertions that the Company’s
products infringe, or may infringe, the proprietary rights of third parties, requests for indemnification against such
infringement or suggest the Company may be interested in acquiring a license from such third parties. There can be no
assurance that any such claim made in the future will not result in litigation, which could involve significant expense to
the Company, and, if the Company is required or deems it appropriate to obtain a license relating to one or more
products or technologies, there can be no assurance that the Company would be able to do so on commercially
reasonable terms, or at all.
EMPLOYEES
As of May 31, 2019, the Company, including its two foreign subsidiaries and one branch office, employed 79 persons
collectively, on a full-time basis, of whom 17 were engaged in research, development and related engineering, 26 were
engaged in manufacturing, 23 were engaged in marketing, sales and customer support and 13 were engaged in general
administration and finance functions. In addition, the Company from time to time employs a number of contractors
and part-time employees, particularly to perform customer support and manufacturing. The Company’s success is in
part dependent on its ability to attract and retain highly skilled workers, who are in high demand. None of the
Company’s employees are represented by a union and the Company has never experienced a work stoppage. The
Company’s management considers its relations with its employees to be good.
BUSINESS SEGMENT DATA AND GEOGRAPHIC AREAS
The Company operates in a single business segment, the designing, manufacturing and marketing of advanced test
and burn-in products to the semiconductor manufacturing industry in several geographic areas. Selected financial
information, including net sales and property and equipment, net for each of the last three fiscal years, by geographic
area is included in Part II, Item 8, Note 2 “REVENUE” and Note 14 “SEGMENT INFORMATION” and certain risks
related to such operations are discussed in Part I, Item 1A, under the heading “We sell our products and services
worldwide, and our business is subject to risks inherent in conducting business activities in geographic regions outside of
the United States.”
AVAILABLE INFORMATION
The Company’s common stock trades on the NASDAQ Capital Market under the symbol “AEHR.” The Company’s
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these
reports that are filed with the United States Securities and Exchange Commission, or SEC, pursuant to Section 13(a) or
15(d) of the Exchange Act, are available free of charge through the Company’s website at www.aehr.com as soon as
reasonably practicable after we electronically file them with, or furnish them to the SEC.
9
The public may read and copy any materials filed by the Company with the SEC at the SEC’s Public Reference Room
at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operations of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site, www.sec.gov, that
contains reports, proxy and information statements and other information regarding issuers that file electronically with
the SEC.
In addition, information regarding the Company’s code of conduct and ethics and the charters of its Audit,
Compensation and Nominating and Governance Committees, are available free of charge on the Company’s website
listed above.
Item 1A. Risk Factors
You should carefully consider the risks described below. These risks are not the only risks that we may face.
Additional risks and uncertainties that we are unaware of, or that we currently deem immaterial, also may become
important factors that affect us. If any of the following risks occur, our business, financial condition or results of
operations could be materially and adversely affected which could cause our actual operating results to differ materially
from those indicated or suggested by forward-looking statements made in this Annual Report on Form 10-K or
presented elsewhere by management from time to time.
We generate a large portion of our sales from a small number of customers. If we were to lose one or more of
our large customers, operating results could suffer dramatically.
The semiconductor manufacturing industry is highly concentrated, with a relatively small number of large
semiconductor manufacturers and contract assemblers accounting for a substantial portion of the purchases of
semiconductor equipment. Sales to our five largest customers accounted for approximately 80%, 86%, and 93% of our
net sales in fiscal 2019, 2018 and 2017, respectively. During fiscal 2019, Intel, Texas Instruments, Cypress
Semiconductor and STMicroelectronics, accounted for approximately 36%, 14%, 12% and 10%, respectively, of the
Company’s net sales. During fiscal 2018, Texas Instruments, STMicroelectronics, and Astronics Test Systems,
accounted for approximately 34%, 26% and 13%, respectively, of the Company’s net sales. During fiscal 2017, Texas
Instruments, STMicroelectronics, Intel, and Cypress Semiconductor, accounted for approximately 45%, 19%, 17% and
10%, respectively, of the Company’s net sales. No other customers accounted for more than 10% of our net sales for
any of these periods.
We expect that sales of our products to a limited number of customers will continue to account for a high percentage
of our net sales for the foreseeable future. In addition, sales to particular customers may fluctuate significantly from
quarter to quarter. The loss of, or reduction or delay of, an order or orders from a significant customer or customers, or
a delay in collecting or failure to collect accounts receivable from a significant customer or customers, could adversely
affect our business, financial condition and operating results.
The semiconductor equipment industry is intensely competitive. In each of the markets we serve, we face
competition from established competitors and potential new entrants, many of which have greater financial,
engineering, manufacturing and marketing resources than us.
Our FOX wafer-level and singulated die/module test and burn in systems face competition from larger systems
manufacturers that have significant technological know-how and manufacturing capability. Our ABTS TDBI systems
have faced and are expected to continue to face increasingly severe competition, especially from several regional, low-
cost manufacturers and from systems manufacturers that offer higher power dissipation per device under test. Some
users of such systems, such as independent test labs, build their own burn-in systems, while others, particularly large IC
manufacturers in Asia, acquire burn-in systems from captive or affiliated suppliers. Our WaferPak products are facing
and are expected to face increasing competition. Several companies have developed or are developing full-wafer and
single-touchdown probe cards.
We expect our competitors to continue to improve the performance of their current products and to introduce new
products with improved price and performance characteristics. New product introductions by our competitors or by
new market entrants could cause a decline in sales or loss of market acceptance of our products. We have observed
price competition in the systems market, particularly with respect to its less advanced products. Increased competitive
pressure could also lead to intensified price-based competition, resulting in lower prices which could adversely affect our
operating margins and results. We believe that to remain competitive we must invest significant financial resources in
new product development and expand our customer service and support worldwide. There can be no assurance that we
will be able to compete successfully in the future.
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We rely on increasing market acceptance for our FOX system, and we may not be successful in attracting new
customers or maintaining our existing customers.
A principal element of our business strategy is to increase our presence in the test equipment market through system
sales in our FOX wafer-level and singulated die/module test and burn-in product family. The market for the FOX
systems is in the early stages of development. Market acceptance of the FOX system is subject to a number of risks.
Before a customer will incorporate the FOX system into a production line, lengthy qualification and correlation tests
must be performed. We anticipate that potential customers may be reluctant to change their procedures in order to
transfer burn-in and test functions to the FOX system. Initial purchases are expected to be limited to systems used for
these qualifications and for engineering studies. Market acceptance of the FOX system also may be affected by a
reluctance of IC manufacturers to rely on relatively small suppliers such as us. As is common with new complex
products incorporating leading-edge technologies, we may encounter reliability, design and manufacturing issues as we
begin volume production and initial installations of FOX systems at customer sites. The failure of the FOX system to
achieve increased market acceptance would have a material adverse effect on our future operating results, long-term
prospects and our stock price.
We rely on continued market acceptance of our ABTS system and our ability to complete certain
enhancements.
Continued market acceptance of the ABTS family is subject to a number of risks. It is important that we achieve
customer acceptance, customer satisfaction and increased market acceptance as we add new features and enhancements
to the ABTS product. To date, we have shipped ABTS systems to customers worldwide for use in both reliability and
production applications. We have had a strengthening of ABTS product sales in fiscal 2018 and 2017. In fiscal 2019,
our ABTS product sales decreased significantly from fiscal 2018, which adversely affected our operating results. The
failure to grow revenues of the ABTS family above current levels could have a material adverse effect on our future
operating results.
A substantial portion of our net sales is generated by relatively small volume, high value transactions.
We derive a substantial portion of our net sales from the sale of a relatively small number of systems which typically
range in purchase price from approximately $300,000 to well over $1 million per system. As a result, the loss or deferral
of a limited number of system sales could have a material adverse effect on our net sales and operating results in a
particular period. Most customer purchase orders are subject to cancellation or rescheduling by the customer with
limited penalties, and, therefore, backlog at any particular date is not necessarily indicative of actual sales for any
succeeding period. From time to time, cancellations and rescheduling of customer orders have occurred, and delays by
our suppliers in providing components or subassemblies to us have caused delays in our shipments of our own products.
There can be no assurance that we will not be materially adversely affected by future cancellations or rescheduling by our
customers or other delays in our shipments. For non-standard products where we have not effectively demonstrated the
ability to meet specifications in the customer environment, we defer revenue until we have met such customer
specifications. Any delay in meeting customer specifications could have a material adverse effect on our operating
results. A substantial portion of net sales typically are realized near the end of each quarter. A delay or reduction in
shipments near the end of a particular quarter, due, for example, to unanticipated shipment rescheduling, cancellations
or deferrals by customers, customer credit issues, unexpected manufacturing difficulties experienced by us or delays in
deliveries by suppliers, could cause net sales in a particular quarter to fall significantly.
We may experience increased costs associated with new product introductions.
As is common with new complex products incorporating leading-edge technologies, we have encountered reliability,
design and manufacturing issues as we began volume production and initial installations of certain products at customer
sites. Some of these issues in the past have been related to components and subsystems supplied to us by third parties
who have in some cases limited the ability of us to address such issues promptly. This process in the past required and
in the future is likely to require us to incur un-reimbursed engineering expenses and to experience larger than anticipated
warranty claims which could result in product returns. In the early stages of product development there can be no
assurance that we will discover any reliability, design and manufacturing issues or, that if such issues arise, that they can
be resolved to the customers’ satisfaction or that the resolution of such problems will not cause us to incur significant
development costs or warranty expenses or to lose significant sales opportunities.
We sell our products and services worldwide, and our business is subject to risks inherent in conducting
business activities in geographic regions outside of the United States.
Approximately 36%, 71%, and 59% of our net sales for fiscal 2019, 2018 and 2017, respectively, were attributable to
sales to customers for delivery outside of the United States. We operate a direct sales, service and limited manufacturing
organization in Germany and sales and service organizations in Japan and Taiwan as well as direct support through 3rd
11
party agreements in China, South Korea, and the Philippines. We expect that sales of products for delivery outside of
the United States will continue to represent a substantial portion of our future net sales. Our future performance will
depend, in significant part, upon our ability to continue to compete in foreign markets which in turn will depend, in part,
upon a continuation of current trade relations between the United States and foreign countries in which semiconductor
manufacturers or assemblers have operations. A change toward more protectionist trade legislation in either the United
States or such foreign countries, such as a change in the current tariff structures, export compliance or other trade
policies, could adversely affect our ability to sell our products in foreign markets. In addition, we are subject to other
risks associated with doing business internationally, including longer receivable collection periods and greater difficulty in
accounts receivable collection, the burden of complying with a variety of foreign laws, difficulty in staffing and managing
global operations, risks of civil disturbance or other events which may limit or disrupt markets, international exchange
restrictions, changing political conditions and monetary policies of foreign governments.
Approximately 100%, 0% and 0% of our net sales for fiscal 2019 were denominated in U.S. Dollars, Euros and
Japanese Yen, respectively. Although the percentages of net sales denominated in Euros and Japanese Yen were
immaterial in fiscal 2019, they have been larger in the past and could become significant again in the future. A large
percentage of net sales to European customers are denominated in U.S. Dollars, but sales to many Japanese customers
are denominated in Japanese Yen. Because a substantial portion of our net sales is from sales of products for delivery
outside the United States, an increase in the value of the U.S. Dollar relative to foreign currencies would increase the
cost of our products compared to products sold by local companies in such markets. In addition, since the price is
determined at the time a purchase order is accepted, we are exposed to the risks of fluctuations in the U.S. Dollar
exchange rate during the lengthy period from the date a purchase order is received until payment is made. This
exchange rate risk is partially offset to the extent our foreign operations incur expenses in the local currency. To date,
we have not invested in any instruments designed to hedge currency risks. Our operating results could be adversely
affected by fluctuations in the value of the U.S. Dollar relative to other currencies.
We purchase materials from suppliers worldwide, which subjects the Company to increased risk.
We purchase components, sub-assemblies, and chambers from suppliers outside the United States. Increases in
tariffs, additional taxes, or trade barriers may result in an increase in our manufacturing costs. A decrease in the value of
the U.S. Dollar relative to foreign currencies would increase the cost of our materials. Should the Company increase its
sales prices to recover the increase in costs, this could result in a decrease in the competitiveness of our products. In
addition, we are subject to other risks associated with purchasing materials from suppliers worldwide. Government
authorities may also implement protectionist policies or impose limitations on the transfer of intellectual property. This
may limit our ability to obtain products from certain geographic regions and require us to identify and qualify new
suppliers. The process of qualifying suppliers could be lengthy, and no assurance can be given that any additional
sources would be available to us on a timely basis. Changes in trade relations, currency fluctuations, or protectionist
policies could have a material adverse effect on our business, financial condition or results of operations.
The Company is exposed to cybersecurity threats or incidents.
We collect, maintain, and transmit data on information systems. These systems include those owned and maintained
by the Company or by third parties. In addition, we use cloud-based enterprise resource planning, ERP, software to
manage the business integrating all facets of operations, including manufacturing, finance, and sales and marketing. The
data maintained on these systems includes confidential and proprietary information belonging to us, our customers,
suppliers, and others. While the Company devotes significant resources to protect its systems and data from
unauthorized access or misuse, we are exposed to cybersecurity risks. Our systems are subject to computer viruses, data
breach, phishing schemes, and other malicious software programs or attacks. We have experienced cyber threats and
incidents in the past. Although past threats and incidents have not resulted in a material adverse effect, cybersecurity
incidents may result in business disruption, loss of data, or unauthorized access to intellectual property which could
adversely affect our business.
Our industry is subject to rapid technological change and our ability to remain competitive depends on our
ability to introduce new products in a timely manner.
The semiconductor equipment industry is subject to rapid technological change and new product introductions and
enhancements. Our ability to remain competitive depends in part upon our ability to develop new products and to
introduce them at competitive prices and on a timely and cost-effective basis. Our success in developing new and
enhanced products depends upon a variety of factors, including product selection, timely and efficient completion of
product design, timely and efficient implementation of manufacturing and assembly processes, product performance in
the field and effective sales and marketing. Because new product development commitments must be made well in
advance of sales, new product decisions must anticipate both future demand and the technology that will be available to
supply that demand. Furthermore, introductions of new and complex products typically involve a period in which
design, engineering and reliability issues are identified and addressed by our suppliers and by us. There can be no
12
assurance that we will be successful in selecting, developing, manufacturing and marketing new products that satisfy
market demand. Any such failure would materially and adversely affect our business, financial condition and results of
operations.
Because of the complexity of our products, significant delays can occur between a product’s introduction and the
commencement of the volume production of such product. We have experienced, from time to time, significant delays
in the introduction of, and technical and manufacturing difficulties with, certain of our products and may experience
delays and technical and manufacturing difficulties in future introductions or volume production of our new products.
Our inability to complete new product development, or to manufacture and ship products in time to meet customer
requirements would materially adversely affect our business, financial condition and results of operations.
Our dependence on subcontractors and sole source suppliers may prevent us from delivering our products on
a timely basis and expose us to intellectual property infringement.
We rely on subcontractors to manufacture many of the components or subassemblies used in our products. Our
FOX and ABTS systems, WaferPak contactors and DiePak carriers contain several components, including
environmental chambers, power supplies, high-density interconnects, wafer contactors, module contactors, signal
distribution substrates, WaferPak Aligners, DiePak Loaders and certain ICs that are currently supplied by only one or a
limited number of suppliers. Our reliance on subcontractors and single source suppliers involves a number of
significant risks, including the loss of control over the manufacturing process, the potential absence of adequate capacity
and reduced control over delivery schedules, manufacturing yields, quality and costs. In the event that any significant
subcontractor or single source supplier is unable or unwilling to continue to manufacture subassemblies, components or
parts in required volumes, we would have to identify and qualify acceptable replacements. The process of qualifying
subcontractors and suppliers could be lengthy, and no assurance can be given that any additional sources would be
available to us on a timely basis. Any delay, interruption or termination of a supplier relationship could adversely affect
our ability to deliver products, which would harm our operating results.
Our suppliers manufacture components, tooling, and provide engineering services. During this process, our suppliers
are allowed access to our intellectual property. While we maintain patents to protect from intellectual property
infringement, there can be no assurance that technological information gained in the manufacture of our products will
not be used to develop a new product, improve processes or techniques which compete against our products. Litigation
may be necessary to enforce or determine the validity and scope of our proprietary rights, and there can be no assurance
that our intellectual property rights, if challenged, will be upheld as valid.
Periodic economic and semiconductor industry downturns could negatively affect our business, results of
operations and financial condition.
Periodic global economic and semiconductor industry downturns have negatively affected and could continue to
negatively affect our business, results of operations, and financial condition. Financial turmoil in the banking system and
financial markets has resulted, and may result in the future, in a tightening of the credit markets, disruption in the
financial markets and global economy downturn. These events may contribute to significant slowdowns in the industry
in which we operate. Difficulties in obtaining capital and deteriorating market conditions can pose the risk that some of
our customers may not be able to obtain necessary financing on reasonable terms, which could result in lower sales.
Customers with liquidity issues may lead to additional bad debt expense.
Turmoil in the international financial markets has resulted, and may result in the future, in dramatic currency
devaluations, stock market declines, restriction of available credit and general financial weakness. In addition, flash
memory and other similar device prices have historically declined and will likely do so again in the future. These
developments may affect us in several ways. The market for semiconductors and semiconductor capital equipment has
historically been cyclical, and we expect this to continue in the future. The uncertainty of the semiconductor market
may cause some manufacturers in the future to further delay capital spending plans. Economic conditions may also
affect the ability of our customers to meet their payment obligations, resulting in cancellations or deferrals of existing
orders and limiting additional orders. In addition, some governments have subsidized portions of fabrication facility
construction, and financial turmoil may reduce these governments’ willingness to continue such subsidies. Such
developments could have a material adverse effect on our business, financial condition and results of operations.
The current economic conditions and uncertainty about future economic conditions make it challenging for us to
forecast our operating results, make business decisions, and identify the risks that may affect our business, financial
condition and results of operations. If such conditions recur, and we are not able to timely and appropriately adapt to
changes resulting from the difficult macroeconomic environment, our business, financial condition or results of
operations may be materially and adversely affected.
13
Future changes in semiconductor technologies may make our products obsolete.
Future improvements in semiconductor design and manufacturing technology may reduce or eliminate the need for
our products. For example, improvements in semiconductor process technology and improvements in conventional test
systems, such as reduced cost or increased throughput, may significantly reduce or eliminate the market for one or more
of our products. If we are not able to improve our products or develop new products or technologies quickly enough to
maintain a competitive position in our markets, our business may decline.
If we are not able to reduce our operating expenses sufficiently during periods of weak revenue, or if we utilize
significant amounts of cash to support operating losses, we may erode our cash resources and may not have
sufficient cash to operate our business.
In recent years, in the face of a downturn in our business and a decline in our net sales, we implemented a variety of
cost controls and restructured our operations with the goal of reducing our operating costs to position ourselves to more
effectively meet the needs of the then weak market for test and burn-in equipment. In February 2019, we adopted a
restructuring plan in order to streamline our operations and better align our structure with our objectives going forward.
While we took significant steps to minimize our expense levels and to increase the likelihood that we would have
sufficient cash to support operations during the downturn, from fiscal 2009 through fiscal 2019, with the exception of
fiscal 2014 and 2018, we experienced operating losses. We anticipate that our existing cash balance together with
income from operations, collections of existing accounts receivable, revenue from our existing backlog of products, the
sale of inventory on hand, and deposits and down payments against significant orders will be adequate to meet our
working capital and capital equipment requirements. Depending on our rate of growth and profitability, and our ability
to obtain significant orders with down payments, we may require additional equity or debt financing to meet our
working capital requirements or capital equipment needs. There can be no assurance that additional financing will be
available when required, or if available, that such financing can be obtained on terms satisfactory to us.
Our stock price may fluctuate.
The price of our common stock has fluctuated in the past and may fluctuate significantly in the future. We believe
that factors such as announcements of developments related to our business, fluctuations in our operating results,
general conditions in the semiconductor and semiconductor equipment industries as well as the worldwide economy,
announcement of technological innovations, new systems or product enhancements by us or our competitors,
fluctuations in the level of cooperative development funding, acquisitions, changes in governmental regulations,
developments in patents or other intellectual property rights and changes in our relationships with customers and
suppliers could cause the price of our common stock to fluctuate substantially. In addition, in recent years the stock
market in general, and the market for small capitalization and high technology stocks in particular, have experienced
extreme price fluctuations which have often been unrelated to the operating performance of the affected companies.
Such fluctuations could adversely affect the market price of our common stock.
We depend on our key personnel and our success depends on our ability to attract and retain talented
employees.
Our success depends to a significant extent upon the continued service of Gayn Erickson, our President and Chief
Executive Officer, as well as other executive officers and key employees. We do not maintain key person life insurance
for our benefit on any of our personnel, and none of our employees are subject to a non-competition agreement with us.
The loss of the services of any of our executive officers or a group of key employees could have a material adverse effect
on our business, financial condition and operating results. Our future success will depend in significant part upon our
ability to attract and retain highly skilled technical, management, sales and marketing personnel. There are a limited
number of personnel with the requisite skills to serve in these positions, and it has become increasingly difficult for us to
hire such personnel. Competition for such personnel in the semiconductor equipment industry is intense, and there can
be no assurance that we will be successful in attracting or retaining such personnel. Changes in management could
disrupt our operations and adversely affect our operating results.
We may be subject to litigation relating to intellectual property infringement which would be time-consuming,
expensive and a distraction from our business.
If we do not adequately protect our intellectual property, competitors may be able to use our proprietary information
to erode our competitive advantage, which could harm our business and operating results. Litigation may be necessary
to enforce or determine the validity and scope of our proprietary rights, and there can be no assurance that our
intellectual property rights, if challenged, will be upheld as valid. Such litigation could result in substantial costs and
diversion of resources and could have a material adverse effect on our operating results, regardless of the outcome of the
litigation. In addition, there can be no assurance that any of the patents issued to us will not be challenged, invalidated
or circumvented or that the rights granted thereunder will provide competitive advantages to us.
14
There are no pending claims against us regarding infringement of any patents or other intellectual property rights of
others. However, in the future we may receive communications from third parties asserting intellectual property claims
against us. Such claims could include assertions that our products infringe, or may infringe, the proprietary rights of
third parties, requests for indemnification against such infringement or suggestions that we may be interested in
acquiring a license from such third parties. There can be no assurance that any such claim will not result in litigation,
which could involve significant expense to us, and, if we are required or deem it appropriate to obtain a license relating
to one or more products or technologies, there can be no assurance that we would be able to do so on commercially
reasonable terms, or at all.
While we believe we have complied with all applicable environmental laws, our failure to do so could adversely
affect our business as a result of having to pay substantial amounts in damages or fees.
Federal, state and local regulations impose various controls on the use, storage, discharge, handling, emission,
generation, manufacture and disposal of toxic and other hazardous substances used in our operations. We believe that
our activities conform in all material respects to current environmental and land use regulations applicable to our
operations and our current facilities, and that we have obtained environmental permits necessary to conduct our
business. Nevertheless, failure to comply with current or future regulations could result in substantial fines, suspension
of production, alteration of our manufacturing processes or cessation of operations. Such regulations could require us
to acquire expensive remediation equipment or to incur substantial expenses to comply with environmental regulations.
Any failure to control the use, disposal or storage of or adequately restrict the discharge of, hazardous or toxic
substances could subject us to significant liabilities.
If we fail to maintain effective internal control over financial reporting in the future, the accuracy and timing of
our financial reporting may be adversely affected.
We are required to comply with Section 404 of the Sarbanes-Oxley Act of 2002. The provisions of the act require,
among other things, that we maintain effective internal control over financial reporting and disclosure controls and
procedures. Preparing our financial statements involves a number of complex processes, many of which are done
manually and are dependent upon individual data input or review. These processes include, but are not limited to,
calculating revenue, deferred revenue and inventory costs. While we continue to automate our processes and enhance
our review and put in place controls to reduce the likelihood for errors, we expect that for the foreseeable future, many
of our processes will remain manually intensive and thus subject to human error.
Our common stock may be delisted from The NASDAQ Capital Market if we cannot maintain compliance
with NASDAQ’s continued listing requirements.
In order to maintain our listing on The NASDAQ Capital Market, we are required to maintain compliance with
NASDAQ’s continued listing requirements. The continued listing requirements include, among others, a minimum bid
price of $1.00 per share and any of: (i) a minimum stockholders’ equity of $2.5 million; (ii) a market value of listed
securities of at least $35 million; or (iii) net income from continuing operations of $500,000 in the most recently
completed fiscal year or in two of the last three fiscal years. There are no assurances that we will be able to sustain long-
term compliance with NASDAQ’s continued listing requirements. On April 19, 2016, we were notified by NASDAQ
that we were no longer in compliance with NASDAQ’s continued listing requirements as we did not have a minimum
stockholders’ equity of $2.5 million. On October 3, 2016, we were notified by NASDAQ that we had regained
compliance with NASDAQ’s continued listing requirements. If we fail to maintain compliance with the applicable
NASDAQ continued listing requirements, our stock may be delisted.
If we are delisted, we would expect our common stock to be traded in the over-the-counter market, which could
make trading our common stock more difficult for investors, potentially leading to declines in our share price and
liquidity. In addition, delisting could result in negative publicity and make it more difficult for us to raise additional
capital.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The Company’s principal administrative and production facilities are located in Fremont, California, in a 51,289
square foot building. The Company’s lease was renewed in February 2018 and expires in July 2023. The Company’s
facility in Japan is located in a 418 square foot office in Tokyo under a lease which expires in June 2022. The Company
also maintains a 1,585 square foot warehouse in Yamanashi under a lease which expires in May 2020. The Company
leases a 492 square foot sales and support office in Utting, Germany. The lease, which began February 1, 1992 and
15
expires on January 31, 2021, contains an automatic twelve months renewal, at rates to be determined, if no notice is
given prior to six months from expiry. The Company periodically evaluates its global operations and facilities to bring
its capacity in line with demand and to provide cost efficient services for its customers. In prior years, through this
process, the Company has moved from certain facilities that exceeded the capacity required to satisfy its needs. The
Company believes that its existing facilities are adequate to meet its current and reasonably foreseeable requirements.
The Company regularly evaluates its expected future facilities requirements and believes that alternate facilities would be
available if needed.
Item 3. Legal Proceedings
None.
Item 4. Mine Safety Disclosures
Not Applicable
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
The Company’s common stock is publicly traded on the NASDAQ Capital Market under the symbol “AEHR”. The
following table sets forth, for the periods indicated, the high and low sale prices for the common stock on such market.
These quotations represent prices between dealers and do not include retail markups, markdowns or commissions and
may not necessarily represent actual transactions.
Fiscal 2019:
First quarter ended August 31, 2018. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second quarter ended November 30, 2018. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third quarter ended February 28, 2019. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth quarter ended May 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal 2018:
First quarter ended August 31, 2017. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second quarter ended November 30, 2017. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third quarter ended February 28, 2018. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth quarter ended May 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
High
Low
$2.94
2.57
1.97
2.19
$4.60
4.10
3.37
2.80
$2.21
1.80
1.03
1.27
$2.62
2.50
2.16
2.12
At August 2, 2019, the Company had 134 holders of record of its common stock. A substantially greater number of
holders of the Company’s common stock are “street name” or beneficial holders whose shares are held by banks,
brokers and other financial institutions.
The Company has not paid cash dividends on its common stock or other securities. The Company currently
anticipates that it will retain its future earnings, if any, for use in the expansion and operation of its business and does
not anticipate paying any cash dividends on its common stock in the foreseeable future.
The Company did not repurchase any of its common stock during the fiscal year ended May 31, 2019.
PERFORMANCE MEASUREMENT COMPARISON
The following graph shows a comparison of total shareholder return for holders of the Company's common stock for
the last five fiscal years ended May 31, 2019, compared with the NASDAQ Composite Index and the Philadelphia
Semiconductor Index. The graph assumes that $100 was invested in the Company's common stock, in the NASDAQ
Composite Index and the Philadelphia Semiconductor Index on May 31, 2014, and that all dividends were reinvested.
The Company believes that while total shareholder return can be an important indicator of corporate performance, the
stock prices of semiconductor equipment companies like us are subject to a number of market-related factors other than
company performance, such as competitive announcements, mergers and acquisitions in the industry, the general state
of the economy and the performance of other semiconductor equipment company stocks. Stock prices and shareholder
returns over the indicated period should not be considered indicative of future stock prices or shareholder returns.
16
Item 6. Selected Consolidated Financial Data
The selected consolidated financial data set forth below should be read in conjunction with “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements
and related notes included elsewhere in this Annual Report on Form 10-K. The selected consolidated financial data in
this section are not intended to replace the consolidated financial statements and are qualified in their entirety by the
consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K.
We derived the statements of operations data for the fiscal years ended May 31, 2019, 2018 and 2017 and the balance
sheet data as of May 31, 2019 and 2018 from our audited consolidated financial statements and related notes, which are
included elsewhere in this Annual Report on Form 10-K. We derived the statements of operations data for the fiscal
years ended May 31, 2016 and 2015 and the balance sheet data as of May 31, 2017, 2016 and 2015 from our audited
consolidated financial statements and related notes which are not included in this Annual Report on Form 10-K. We
have not declared or distributed any cash dividends.
17
CONSOLIDATED STATEMENTS OF
OPERATIONS:
2019
Fiscal Year Ended May 31,
2018
2016
2017
(In thousands, except per share data)
2015
Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . .
$21,056
$29,555
$18,898
$14,501
$10,018
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . .
13,454
17,169
12,118
9,356
6,180
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . .
7,602
12,386
6,780
5,145
3,838
Operating expenses:
Selling, general and administrative. . . . . . .
Research and development. . . . . . . . . . . . .
Restructuring. . . . . . . . . . . . . . . . . . . . . . .
7,724
4,153
725
7,290
4,181
--
7,052
4,657
--
6,975
4,324
--
6,470
4,062
--
Total operating expenses . . . . . . . . . . . .
12,602
11,471
11,709
11,299
10,532
(Loss) income from operations. . . . . . . . . . .
(5,000)
915
(4,929)
(6,154)
(6,694)
Interest expense. . . . . . . . . . . . . . . . . . . . . .
Other income (expense), net . . . . . . . . . . . .
(252)
44
(399)
(61)
(678)
(21)
(605)
(16)
(130)
211
(Loss) income before income tax (expense)
benefit . . . . . . . . . . . . . . . . . . . . . . . . . .
(5,208)
455
(5,628)
(6,775)
(6,613)
Income tax (expense) benefit. . . . . . . . . . . .
Net (loss) income. . . . . . . . . . . . . . . . . . . . .
Less: Net income attributable to the
noncontrolling interest . . . . . . . . . . . .
(27)
(5,235)
--
73
528
--
(25)
(5,653)
(10)
(6,785)
(34)
(6,647)
--
--
--
Net (loss) income attributable to Aehr
Test Systems common shareholders. . . .
Net (loss) income per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares used in per share calculations:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted. . . . . . . . . . . . . . . . . . . . . . . . . .
CONSOLIDATED BALANCE SHEETS:
$(5,235)
$528
$ (5,653)
$ (6,785)
$(6,647)
$ (0.23)
$ (0.23)
$0.02
$0.02
$(0.35)
$(0.35)
$(0.52)
$(0.52)
$(0.55)
$(0.55)
22,387
22,387
21,732
22,782
16,267
16,267
13,091
13,091
12,047
12,047
2019
2018
May 31,
2017
2016
2015
Cash and cash equivalents. . . . . . . . . . . . . . .
Working capital. . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . .
$5,428
14,522
21,307
$16,848
18,308
30,955
$ 17,803
21,494
30,892
$ 939
4,068
10,046
$5,527
7,776
14,868
Long-term obligations, less current portion .
Total shareholders' equity (deficit) . . . . . . . .
342
15,453
522
19,285
6,214
16,794
6,089
(723)
3,799
4,550
18
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the financial condition and results of operations should be read in
conjunction with our “Selected Consolidated Financial Data” and our consolidated financial statements and related
notes included elsewhere in this Annual Report on Form 10-K.
OVERVIEW
We were founded in 1977 to develop and manufacture burn-in and test equipment for the semiconductor industry.
Since our inception, we have installed over 2,500 systems at semiconductor manufacturers, semiconductor contract
assemblers and burn-in and test service companies worldwide. Our principal products currently are the Advanced Burn-
in and Test System, or ABTS, the FOX full wafer contact and singulated die/module parallel test and burn-in system,
WaferPak Aligner, WaferPak contactors, DiePak Loader, the DiePak carriers and test fixtures.
Our net sales consist primarily of sales of systems, WaferPak Aligners and DiePak Loaders, WaferPak contactors,
DiePak carriers, test fixtures, upgrades and spare parts, revenues from service contracts, and engineering development
charges. Our selling arrangements may include contractual customer acceptance provisions, which are mostly deemed
perfunctory or inconsequential, and installation of the product occurs after shipment and transfer of title.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated
financial statements, which have been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these consolidated financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to customer
programs and incentives, product returns, bad debts, inventories, investments, income taxes, financing operations,
warranty obligations, and long-term service contracts, among others. Our estimates are derived from historical
experience and on various other assumptions that are believed to be reasonable under the circumstances. Those results
form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the
preparation of our consolidated financial statements.
REVENUE RECOGNITION
In May 2014, the Financial Accounting Standards Boards (FASB) issued ASC Topic 606, Revenue from Contracts with
Customers (Topic 606), which was subsequently updated (collectively “ASC 606”). We adopted the standard as of June 1,
2018, using the modified retrospective method. Under this method, we applied ASC 606 to contracts that were not
complete as of June 1, 2018 and recognized the cumulative effect of initially applying the standard as an adjustment to
the opening balance of retained earnings. Results for reporting periods beginning after June 1, 2018 are presented in
accordance with ASC 606. Under the modified retrospective adoption method, prior period amounts are not adjusted
and are reported in accordance with the accounting standards in effect for those periods per FASB ASC Topic 605,
Revenue Recognition, which is also referred to herein as “legacy GAAP.”
The adoption of ASC 606 did not have a material impact on our consolidated financial statements as of June 1, 2018.
No adjustment was recorded to accumulated deficit as of the adoption date and reported revenue would not have been
different under legacy GAAP. Additionally, we do not expect the adoption of the revenue standard to have a material
impact to our net income on an ongoing basis.
We sell our products primarily through a direct sales force. In certain international markets, we sell our products
through independent distributors. We consider revenue to be earned when all of the following criteria are met:
• We have a contract with a customer that creates enforceable rights and obligations,
• Promised performance obligations are identified,
• The transaction price, or the amount we expect to receive, is determinable and
• We have satisfied the performance obligations to the customer.
19
Transfer of control is evidenced upon passage of title and risk of loss to the customer unless we are required to
provide additional services.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
We maintain an allowance for doubtful accounts to reserve for potentially uncollectible trade receivables. We also
review our trade receivables by aging category to identify specific customers with known disputes or collection issues.
We exercise judgment when determining the adequacy of these reserves as we evaluate historical bad debt trends, general
economic conditions in the United States and internationally and changes in customer financial conditions.
Uncollectible receivables are recorded as bad debt expense when all efforts to collect have been exhausted and
recoveries are recognized when they are received.
WARRANTY OBLIGATIONS
We provide and record the estimated cost of product warranties at the time revenues are recognized on products
shipped. While we engage in extensive product quality programs and processes, including actively monitoring and
evaluating the quality of our component suppliers, our warranty obligation is affected by product failure rates, material
usage and service delivery costs incurred in correcting a product failure. Our estimate of warranty reserve is based on
management’s assessment of future warranty obligations and on historical warranty obligations. Should actual product
failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty
liability would be required, which could affect how we account for expenses.
INVENTORY OBSOLESCENCE
In each of the last three fiscal years, we have written down our inventory for estimated obsolescence or unmarketable
inventory by an amount equal to the difference between the cost of inventory and the estimated market value based
upon assumptions about future demand and market conditions. If future market conditions are less favorable than
those projected by management, additional inventory write-downs may be required.
INCOME TAXES
Income taxes have been provided using the liability method whereby deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and liabilities and net operating loss and tax
credit carryforwards measured using the enacted tax rates and laws that will be in effect when the differences are
expected to reverse or the carryforwards are utilized. Valuation allowances are established when it is determined that it
is more likely than not that such assets will not be realized.
A full valuation allowance was established against all deferred tax assets, as management determined that it is more
likely than not that deferred tax assets will not be realized, as of May 31, 2019 and 2018.
We account for uncertain tax positions consistent with authoritative guidance. The guidance prescribes a “more likely
than not” recognition threshold and measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. We do not expect any material change in its unrecognized
tax benefits over the next twelve months. We recognize interest and penalties related to unrecognized tax benefits as a
component of income taxes.
Although we file U.S. federal, various state and foreign tax returns, our only major tax jurisdictions are the United
States, California, Germany and Japan. Tax years 1996 – 2018 remain subject to examination by the appropriate
governmental agencies due to tax loss carryovers, research and development tax credits, or other tax attributes from
those years.
STOCK-BASED COMPENSATION EXPENSE
Stock-based compensation expense consists of expenses for stock options, restricted stock units, or RSUs, and
employee stock purchase plan, or ESPP, purchase rights. Stock-based compensation cost for stock options and ESPP
purchase rights is measured at each grant date, based on the fair value of the award using the Black-Scholes option
valuation model, and is recognized as expense over the employee’s requisite service period. This model was developed
for use in estimating the value of publicly traded options that have no vesting restrictions and are fully transferable. Our
employee stock options have characteristics significantly different from those of publicly traded options. For RSUs,
stock-based compensation cost is based on the fair value of our common stock at the grant date. All of our stock-based
compensation is accounted for as an equity instrument.
20
The fair value of each option grant and the right to purchase shares under our ESPP are estimated on the date of
grant using the Black-Scholes option valuation model with assumptions concerning expected term, stock price volatility,
expected dividend yield, risk-free interest rate and the expected life of the award. See Note 10 to our consolidated
financial statements for detailed information relating to stock-based compensation and the stock option plan and the
ESPP.
RESULTS OF OPERATIONS
The following table sets forth statements of operations data as a percentage of net sales for the periods indicated.
2019
Year Ended May 31,
2018
2017
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100.0%
63.9
36.1
100.0%
58.1
41.9
100.0%
64.1
35.9
Operating expenses:
Selling, general and administrative . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . .
Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
36.7
19.7
3.4
24.7
14.1
--
37.3
24.7
--
Total operating expenses. . . . . . . . . . . . . . . . . . . . . .
59.8
38.8
62.0
(Loss) income from operations. . . . . . . . . . . . . . . . . . .
(23.7)
3.1
(26.1)
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense), net. . . . . . . . . . . . . . . . . . . . . .
(1.2)
0.2
(1.4)
(0.2)
(3.6)
(0.1)
(Loss) income before income tax (expense) benefit . . .
(24.7)
1.5
(29.8)
Income tax (expense) benefit. . . . . . . . . . . . . . . . . . . . . .
(0.2)
0.3
(0.1)
Net (loss) income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(24.9)
1.8
(29.9)
Less: Net income attributable
to the noncontrolling interest. . . . . . . . . . . . . . . . . . .
Net (loss) income attributable to Aehr Test Systems
common shareholders. . . . . . . . . . . . . . . . . . . . . . . . . . .
--
--
--
(24.9)%
1.8%
(29.9)%
FISCAL YEAR ENDED MAY 31, 2019 COMPARED TO FISCAL YEAR ENDED MAY 31, 2018
NET SALES. Net sales decreased to $21.1 million for the fiscal year ended May 31, 2019 from $29.6 million for the
fiscal year ended May 31, 2018, a decrease of 28.8%. The decrease in net sales in fiscal 2019 resulted primarily from the
decrease in net sales of our Test During Burn-in (TDBI) products, partially offset by the increase in net sales of our
wafer-level products. Net sales of our TDBI products for fiscal 2019 were $6.4 million, and decreased approximately
$10.0 million from fiscal 2018. The decrease was primarily due to our customers utilizing the significant capacity that
they added in the prior year and lower sales to OEM manufacturers. Net sales of our wafer-level products for fiscal
2019 were $14.6 million, and increased approximately $1.5 million from fiscal 2018.
GROSS PROFIT. Gross profit decreased to $7.6 million for the fiscal year ended May 31, 2019 from $12.4 million
for the fiscal year ended May 31, 2018, a decrease of 38.6%. Gross profit margin decreased to 36.1% for the fiscal year
ended May 31, 2019 from 41.9% for the fiscal year ended May 31, 2018. The decrease in gross profit margin was
primarily the result of manufacturing inefficiencies due to a decrease in net sales, product mix, and the impact of
reserves taken on excess and obsolete inventory.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses were $7.7 million for the fiscal year ended
May 31, 2019, compared with $7.3 million for the fiscal year ended May 31, 2018, an increase of 6.0%. The increase in
SG&A expenses was primarily due to increases in employment related expenses.
RESEARCH AND DEVELOPMENT. R&D expenses were flat at $4.2 million for the fiscal year ended May 31,
2019 compared with the fiscal year ended May 31, 2018.
21
RESTRUCTURING. Restructuring charges for the fiscal year ended May 31, 2019 were related to a restructuring
plan implemented in February 2019 in order to streamline our operations and better align our structure with our
objectives going forward. We recognized $725,000 of employee termination expenses for the fiscal year ended May 31,
2019. There were no restructuring charges incurred for the fiscal year ended May 31, 2018.
INTEREST EXPENSE. Interest expense decreased to $252,000 for the fiscal year ended May 31, 2019 from
$399,000 for the fiscal year ended May 31, 2018. The decrease in interest expense for the fiscal year ended May 31, 2019
was primarily due to the repayment of the 9.0% Convertible Secured Notes (the “Convertible Notes”) on the maturity
date of April 10, 2019, and the impact of an increase in interest income due to an increase in interest rates on our
investment portfolio.
OTHER INCOME (EXPENSE), NET. Other income, net was $44,000 for the fiscal year ended May 31, 2019
compared with other expense, net of $61,000 for the fiscal year ended May 31, 2018. The change in other income
(expense), net was due primarily to gains or losses realized in connection with the fluctuation in the value of the dollar
compared to foreign currencies during the referenced periods.
INCOME TAX (EXPENSE) BENEFIT. Income tax expense was $27,000 for the fiscal year ended May 31, 2019
compared with income tax benefit of $73,000 for the fiscal year ended May 31, 2018. The income tax benefit in the fiscal
year ended May 31, 2018 was primarily due to the impact of the “Tax Cuts and Jobs Act” enacted on December 22,
2017, specifically, the provision which made our alternative minimum tax credit refundable by 2022.
FISCAL YEAR ENDED MAY 31, 2018 COMPARED TO FISCAL YEAR ENDED MAY 31, 2017
NET SALES. Net sales increased to $29.6 million for the fiscal year ended May 31, 2018 from $18.9 million for the
fiscal year ended May 31, 2017, an increase of 56.4%. The increase in net sales in fiscal 2018 resulted primarily from
increases in net sales of both our TDBI products and wafer-level products. Net sales of our TDBI products for fiscal
2018 were $16.5 million, and increased approximately $7.3 million from fiscal 2017. Net sales of our wafer-level products
for fiscal 2018 were $13.1 million, and increased approximately $3.5 million from fiscal 2017.
GROSS PROFIT. Gross profit increased to $12.4 million for the fiscal year ended May 31, 2018 from $6.8 million
for the fiscal year ended May 31, 2017, an increase of 82.7%. Gross profit margin increased to 41.9% for the fiscal year
ended May 31, 2018 from 35.9% for the fiscal year ended May 31, 2017. 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 were $7.3 million for the fiscal year ended
May 31, 2018, compared with $7.1 million for the fiscal year ended May 31, 2017, an increase of 3.4%. The increase in
SG&A expenses was primarily due to increases in employment related expenses.
RESEARCH AND DEVELOPMENT. R&D expenses decreased to $4.2 million for the fiscal year ended May 31,
2018 from $4.7 million for the fiscal year ended May 31, 2017, a decrease of 10.2%. The decrease in R&D expenses was
primarily due to decreases in project expenses.
INTEREST EXPENSE. Interest expense decreased to $399,000 for the fiscal year ended May 31, 2018 from
$678,000 for the fiscal year ended May 31, 2017. The decrease in interest expense for the fiscal year ended May 31, 2018
was primarily due to the debt issuance costs related to the Convertible Notes becoming fully amortized at the end of
fiscal 2017, and the impact of an increase in interest income due to an increase in interest rates on our investment
portfolio.
OTHER EXPENSE, NET. Other expense, net was $61,000 and $21,000 for the fiscal year ended May 31, 2018 and
2017, respectively. The change in other expense was due primarily to losses realized in connection with the fluctuation
in the value of the dollar compared to foreign currencies during the referenced periods.
INCOME TAX BENEFIT (EXPENSE). Income tax benefit was $73,000 for the fiscal year ended May 31, 2018
compared with income tax expense of $25,000 for the fiscal year ended May 31, 2017. The income tax benefit in the
fiscal year ended May 31, 2018 was primarily due to the impact of the “Tax Cuts and Jobs Act” enacted on December
22, 2017, specifically, the provision which made our alternative minimum tax credit refundable by 2022.
LIQUIDITY AND CAPITAL RESOURCES
We consider cash and cash equivalents as liquid and available for use. As of May 31, 2019 and 2018, we had $5.4
million and $16.8 million, respectively, in cash and cash equivalents.
22
Net cash used in operating activities was $5.6 million and $1.4 million for the fiscal years ended May 31, 2019 and
2018, respectively. For the fiscal year ended May 31, 2019, net cash used in operating activities was primarily the result
of the net loss of $5.2 million, as adjusted to exclude the effect of non-cash charges of stock-based compensation
expense of $905,000 and depreciation and amortization of $431,000, an increase in accounts receivable of $2.0 million,
and a decrease in customer deposits and deferred revenue of $355,000, partially offset by an increase in accrued expenses
of $402,000. The increase in accounts receivable was primarily due to large shipments toward the end of fiscal 2019.
The decrease in customer deposits and deferred revenue was primarily due to the decrease in backlog of customer orders
with down payments. The increase in accrued expenses was primarily due to severance expenses accrued as a result of
our restructuring plan implemented in February 2019. For the fiscal year ended May 31, 2018, net cash used in
operating activities was primarily the result of the net income of $528,000, as adjusted to exclude the effect of non-cash
charges of stock-based compensation expense of $996,000 and depreciation and amortization of $417,000, and a
decrease in accounts receivable of $1.3 million. Other changes in cash from operations primarily resulted from an
increase in inventories of $2.1 million, a decrease in customer deposits and deferred revenue of $1.5 million, as well as
the decrease in accounts payable of $1.1 million. The decrease in accounts receivable was primarily due to
improvements in customer payment terms. The increase in inventories is to support future shipments for customer
orders. The decrease in customer deposits and deferred revenue was primarily due to the decrease in backlog of
customer orders with down payments. The decrease in accounts payable was primarily due to the down payments
applied toward vendor invoices.
Net cash used in investing activities was $173,000 and $572,000 for the fiscal years ended May 31, 2019 and 2018,
respectively. Net cash used in investing activities for the fiscal years ended May 31, 2019 and 2018 was due to the
purchases of property and equipment.
Net cash used in financing activities was $5.6 million for the fiscal year ended May 31, 2019 as compared to net cash
provided by financing activities of $925,000 for the fiscal year ended May 31, 2018. Net cash used in financing activities
during the fiscal year ended May 31, 2019 was primarily due to the repayment of the Convertible Notes of $6.1 million
on the maturity date of April 10, 2019, partially offset by proceeds from issuance of common stock under employee
plans of $559,000. Net cash provided by financing activities during the fiscal year ended May 31, 2018 was primarily due
to the proceeds from issuance of common stock under employee plans.
The effect of fluctuation in exchange rates decreased cash by $59,000 for the fiscal year ended May 31, 2019 and
increased cash by $43,000 for the fiscal year ended May 31, 2018. The changes were due to the fluctuation in the value
of the dollar compared to foreign currencies.
As of May 31, 2019 and 2018, we had working capital of $14.5 million and $18.3 million, respectively.
For the fiscal year ended May 31, 2017, net cash used in operating activities was primarily the result of the net loss of
$5.7 million, as adjusted to exclude the effect of a non-cash charge of stock-based compensation expense of $1.0 million,
and an increase in accounts receivable of $3.5 million, partially offset by a decrease in inventories of $430,000. Other
changes in cash from operations resulted from an increase in accounts payable as well as an increase in customer
deposits and deferred revenue of $1.7 million each. The increase in accounts receivable was primarily due to an increase
in sales. The decrease in inventories is primarily due to the sales of systems on-hand at the beginning of the period. The
increase in accounts payable was primarily due to higher expenditures associated with higher revenue. The increase in
customer deposits and deferred revenue was primarily due to the receipt of additional down payments from certain
customers.
Net cash used in investing activities was $477,000 for the fiscal year ended May 31, 2017 was due to the purchase of
property and equipment.
Net cash provided by financing activities of $21.8 million during the fiscal year ended May 31, 2017 was primarily due
to the net proceeds of $15.8 million from the sale of our common stock in a public offering that closed on April 19,
2017, the net proceeds of $5.3 million from the sale of our common stock in a private placement transaction with certain
institutional and accredited investors that closed on September 28, 2016, and $704,000 in proceeds from issuance of
common stock under employee plans.
The effect of fluctuation in exchange rates increased cash by $1,000 for the fiscal year ended May 31, 2017 due to the
fluctuation in the value of the dollar compared to foreign currencies.
As of May 31, 2017, we had working capital of $21.5 million.
We lease our manufacturing and office space under operating leases. We entered into a non-cancelable operating
lease agreement for our United States manufacturing and office facilities, which was renewed in February 2018 and
expires in July 2023. Under that lease agreement, we are responsible for payments of utilities, taxes and insurance.
23
From time to time, we evaluate potential acquisitions of businesses, products or technologies that complement our
business. If consummated, any such transactions may use a portion of our working capital or require the issuance of
equity. We have no present understandings, commitments or agreements with respect to any material acquisitions.
We anticipate that the existing cash balance together with income from operations, collections of existing accounts
receivable, revenue from our existing backlog of products, the sale of inventory on hand, and deposits and down
payments against significant orders will be adequate to meet our liquidity requirements for the next 12 months.
OFF-BALANCE SHEET FINANCING
We have not entered into any off-balance sheet financing arrangements and have not established any special purpose
or variable interest entities.
OVERVIEW OF CONTRACTUAL OBLIGATIONS
The following table provides a summary of such arrangements, or contractual obligations.
Operating Leases . . . . . . . . . . . . . . . . .
Purchases (1) . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
$3,228
2,525
$5,753
Less than
1 year
Payments Due by Period (in thousands)
3-5
years
$ 928
--
$ 928
1-3
years
$1,538
--
$1,538
$ 762
2,525
$3,287
More than
5 years
$ --
--
$ --
(1) Shown above are our binding purchase obligations. The large majority of our purchase orders are cancelable by either
party, which if canceled may result in a negotiation with the vendor to determine if there shall be any restocking or
cancellation fees payable to the vendor.
In the normal course of business to facilitate sales of our products, we indemnify other parties, including customers,
with respect to certain matters. We have agreed to hold the other party harmless against losses arising from a breach of
representations or covenants, or from intellectual property infringement or other claims. These agreements may limit
the time period within which an indemnification claim can be made and the amount of the claim. In addition, we have
entered into indemnification agreements with our officers and directors, and our bylaws contain similar indemnification
obligations to our agents.
It is not possible to determine the maximum potential amount under these indemnification agreements due to the
limited history of prior indemnification claims and the unique facts and circumstances involved in each particular
agreement. To date, our payments under these agreements have not had a material impact on our operating results,
financial position or cash flows.
RECENT ACCOUNTING PRONOUNCEMENTS
For a description of recent accounting pronouncements, including the expected dates of adoption and estimated
effects, if any, on our consolidated financial statements, see Note 1, “Organization and Summary of Significant
Accounting Policies,” of the Notes to Consolidated Financial Statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We had no holdings of derivative financial or commodity instruments at May 31, 2019.
We are exposed to financial market risks, including changes in interest rates and foreign currency exchange rates. We
only invest our short-term excess cash in government-backed securities with maturities of 18 months or less. We do not
use any financial instruments for speculative or trading purposes. Fluctuations in interest rates would not have a
material effect on our financial position, results of operations or cash flows.
A majority of our revenue and capital spending is transacted in U.S. Dollars. We, however, enter into transactions in
other currencies, primarily Euros and Japanese Yen. Since the price is determined at the time a purchase order is
accepted, we are exposed to the risks of fluctuations in the foreign currency-U.S. Dollar exchange rates during the
lengthy period from purchase order to ultimate payment. This exchange rate risk is partially offset to the extent that our
subsidiaries incur expenses payable in their local currency. To date, we have not invested in instruments designed to
hedge currency risks. In addition, our subsidiaries typically carry debt or other obligations due to us that may be
24
denominated in either their local currency or U.S. Dollars. Since our subsidiaries’ financial statements are based in their
local currency and our condensed consolidated financial statements are based in U.S. Dollars, our subsidiaries and we
recognize foreign exchange gains or losses in any period in which the value of the local currency rises or falls in relation
to the U.S. Dollar. A 10% decrease in the value of the subsidiaries’ local currency as compared with the U.S. Dollar
would not be expected to result in a significant change to our net income or loss. There have been no material changes
in our risk exposure since the end of the last fiscal year, nor are any material changes to our risk exposure anticipated.
25
Item 8. Financial Statements and Supplementary Data
INDEX
Consolidated Financial Statements of Aehr Test Systems
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Consolidated Balance Sheets at May 31, 2019 and 2018. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Consolidated Statements of Operations for the years ended May 31, 2019, 2018 and 2017. . . . . . . . . . . . . . . . . . 29
Consolidated Statements of Comprehensive (Loss) Income for the years ended May 31, 2019, 2018 and 2017 . . 30
Consolidated Statements of Shareholders' Equity (Deficit) for the years ended May 31, 2019, 2018 and 2017 . . . 31
Consolidated Statements of Cash Flows for the years ended May 31, 2019, 2018 and 2017. . . . . . . . . . . . . . . . . . 32
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Financial statement schedules not listed above are either omitted because they are not applicable or the required
information is shown in the Consolidated Financial Statements or in the Notes thereto.
26
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of
Aehr Test Systems
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Aehr Test Systems and its subsidiaries (the
“Company”) as of May 31, 2019 and 2018, the related consolidated statements of operations, comprehensive (loss)
income, shareholders’ equity (deficit), and cash flows for each of the three years in the period ended May 31, 2019, and
the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated
financial statements present fairly, in all material respects, the financial position of the Company as of May 31, 2019 and
2018, and the results of its operations and its cash flows for each of the three years in the period ended May 31, 2019, in
conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting
firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to
be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of
material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an
understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our
audits provide a reasonable basis for our opinion.
/s/ BPM LLP
We have served as the Company’s auditor since 2005.
San Jose, California
August 28, 2019
27
AEHR TEST SYSTEMS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other. . . . . . . . . . . . . . . . . . . . . . .
May 31,
2019
2018
$5,428
4,859
9,061
686
$16,848
2,856
9,049
703
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
20,034
29,456
Property and equipment, net. . . . . . . . . . . . . . . . . . . . . . .
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,045
228
1,203
296
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$21,307
$30,955
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer deposits and deferred revenue, short-term . . .
Current portion of long-term debt. . . . . . . . . . . . . . . . . .
$1,933
2,034
1,545
--
$1,762
1,646
1,630
6,110
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . .
5,512
11,148
Deferred rent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue, long-term . . . . . . . . . . . . . . . . . . . . . . .
153
189
63
459
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,854
11,670
Commitments and contingencies (Note 17)
Aehr Test Systems shareholders' equity:
Preferred stock, $0.01 par value:
Authorized: 10,000 shares;
Issued and outstanding: none . . . . . . . . . . . . . . . . . . . .
Common stock, $0.01 par value:
Authorized: 75,000 shares;
Issued and outstanding: 22,669 shares and 22,143
shares at May 31, 2019 and 2018 respectively . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . .
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Aehr Test Systems shareholders' equity . . . . . . . .
Noncontrolling interest. . . . . . . . . . . . . . . . . . . . . . . . . . .
--
--
227
84,499
2,230
(71,484)
15,472
(19)
221
83,041
2,292
(66,249)
19,305
(20)
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . .
15,453
19,285
Total liabilities and shareholders' equity . . . . . . . . . . .
$21,307
$30,955
The accompanying notes are an integral part of these consolidated financial statements.
28
AEHR TEST SYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2019
Year Ended May 31,
2018
2017
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$21,056
13,454
7,602
$29,555
17,169
12,386
$18,898
12,118
6,780
Operating expenses:
Selling, general and administrative . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . .
Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . .
7,724
4,153
725
12,602
7,290
4,181
--
7,052
4,657
--
11,471
11,709
(Loss) income from operations . . . . . . . . . . . . . . . . . . . . .
(5,000)
915
(4,929)
Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense), net . . . . . . . . . . . . . . . . . . . . . . .
(252)
44
(399)
(61)
(678)
(21)
(Loss) income before income tax (expense) benefit. . . . . .
(5,208)
455
(5,628)
Income tax (expense) benefit . . . . . . . . . . . . . . . . . . . . . . .
(27)
73
Net (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(5,235)
528
(25)
(5,653)
Less: Net income attributable
to the noncontrolling interest. . . . . . . . . . . . . . . . . . . . .
Net (loss) income attributable to Aehr Test Systems
common shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . .
--
--
--
$(5,235)
$ 528
$ (5,653)
Net (loss) income per share – basic and diluted . . . . . . . .
Shares used in per share calculation – basic. . . . . . . . . . . .
Shares used in per share calculation – diluted . . . . . . . . . .
$ (0.23)
22,387
22,387
$ 0.02
21,732
22,782
$ (0.35)
16,267
16,267
The accompanying notes are an integral part of these consolidated financial statements.
29
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
AEHR TEST SYSTEMS AND SUBSIDIARIES
(IN THOUSANDS)
2019
Year Ended May 31,
2018
2017
Net (loss) income. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(5,235)
$ 528
$ (5,653)
Other comprehensive (loss) income, net of tax:
Foreign currency translation (loss) income . . . . . . . .
(61)
42
13
Total comprehensive (loss) income. . . . . . . . . . . . . . . .
(5,296)
570
(5,640)
Less: Comprehensive income (loss) attributable to
noncontrolling interest . . . . . . . . . . . . . . . . . . . . .
Comprehensive (loss) income, attributable to
Aehr Test Systems. . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
(1)
1
$(5,297)
$ 571
$ (5,641)
The accompanying notes are an integral part of these consolidated financial statements.
30
AEHR TEST SYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
Accumulated
Additional
Other
Total Aehr
Test
Systems
Total
Common Stock
Paid-in
Comprehensive
Accumulated
Shareholders’
Noncontrolling
Shareholders'
Shares
13,216
Amount
$132
Capital
Income
$58,052
$2,237
Deficit
$(61,124)
Equity (Deficit)
$ (703)
Interest
Equity (Deficit)
$ (723)
$(20)
Balances, May 31, 2016
Issuance of common stock
under employee plans . . . . . . .
779
8
696
--
--
704
--
704
Issuance of common stock
under public offering . . . . . . . . 4,423
Issuance of common stock
under private offering . . . . . . . 2,722
Issuance of common stock in
44
15,788
--
--
15,832
27
5,272
--
--
5,299
consideration for cancellation
of outstanding vendor invoice . 200
2
Stock-based compensation. . . . . . -- --
--
Net loss . . . . . . . . . . . . . . . . . . . . .
--
321
999
--
--
--
--
--
--
(5,653)
323
999
(5,653)
--
--
--
--
--
15,832
5,299
323
999
(5,653)
Foreign currency
translation adjustment . . . . . . .
--
--
--
12
--
12
1
13
Balances, May 31, 2017
21,340
213
81,128
2,249
(66,777)
16,813
(19)
16,794
Issuance of common stock
under employee plans. . . . . . .
Stock-based compensation. . . . .
Net income . . . . . . . . . . . . . . . . .
Foreign currency
803
--
--
translation adjustment. . . . . .
--
8
--
--
--
917
996
--
--
--
--
--
--
--
528
925
996
528
--
--
--
925
996
528
43
--
43
(1)
42
Balances, May 31, 2018 22,143
221
83,041
2,292
(66,249)
19,305
(20)
19,285
Issuance of common stock
under employee plans. . . . . . . .
Stock-based compensation. . . . .
Net loss . . . . . . . . . . . . . . . . . . . .
Foreign currency
translation adjustment. . . . . . .
526
--
--
--
6
--
--
--
553
905
--
--
--
--
--
--
(5,235)
559
905
(5,235)
--
--
--
559
905
(5,235)
--
(62)
--
(62)
1
(61)
Balances, May 31, 2019
22,669
$227
$84,499
$2,230
$(71,484)
$15,472
$(19)
$ 15,453
The accompanying notes are an integral part of these consolidated financial statements.
31
AEHR TEST SYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Cash flows from operating activities:
Net (loss) income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net (loss) income to net cash used in
operating activities:
Stock-based compensation expense . . . . . . . . . . . . . . . . . . . .
(Recovery of) provision for doubtful accounts. . . . . . . . . . . .
Amortization of debt issuance costs . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other. . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer deposits and deferred revenue. . . . . . . . . . . . . . . .
Deferred rent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in operating activities. . . . . . . . . . . . . . . . . . .
Cash flows from investing activities:
Purchases of property and equipment. . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . .
Cash flows from financing activities:
Repayment of Convertible Notes . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of common stock
under public offering, net of issuance costs . . . . . . . . . . . . . .
Proceeds from issuance of common stock
under private placement, net of issuance costs . . . . . . . . . . . .
Proceeds from issuance of common stock
under employee plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash (used in) provided by financing activities. . . . . . . . .
2019
Year Ended May 31,
2018
2017
$(5,235)
$ 528
$ (5,653)
905
(3)
--
431
(2,043)
(112)
84
210
402
(355)
90
(11)
(5,637)
(173)
(173)
996
(58)
--
417
1,260
(2,073)
59
(1,095)
62
(1,482)
63
(28)
(1,351)
999
53
148
271
(3,507)
430
(707)
1,686
53
1,730
--
2
(4,495)
(572)
(572)
(477)
(477)
(6,110)
--
--
--
--
15,832
--
--
5,299
559
(5,551)
925
925
43
(955)
17,803
$16,848
704
21,835
1
16,864
939
$ 17,803
Effect of exchange rates on cash and cash equivalents. . . . . . . . . .
(59)
Net (decrease) increase in cash and cash equivalents . . . . . . .
Cash and cash equivalents, beginning of year. . . . . . . . . . . . . . . . .
(11,420)
16,848
Cash and cash equivalents, end of year. . . . . . . . . . . . . . . . . . . . . .
$ 5,428
Supplemental cash flow information:
Cash paid during the year for:
Income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 37
$610
$ 37
$ 550
$ 18
$ 516
Supplemental disclosure of non-cash flow information:
Fair value of common stock issued to settle accounts payable. .
Net transfer of equipment between inventory
and property and equipment. . . . . . . . . . . . . . . . . . . . . . . . .
$ --
$ --
$ 323
$119
$ --
$ --
The accompanying notes are an integral part of these consolidated financial statements.
32
AEHR TEST SYSTEMS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS:
Aehr Test Systems (the “Company”) was incorporated in California in May 1977 and primarily designs, engineers and
manufactures test and burn-in equipment used in the semiconductor industry. The Company’s principal products are
the Advanced Burn-In and Test System, or ABTS, the FOX full wafer contact parallel test and burn-in systems, the
MAX burn-in system, WaferPak full wafer contactor, the DiePak carrier and test fixtures.
LIQUIDITY:
Since inception, the Company has incurred substantial cumulative losses and negative cash flows from operations. In
response, the Company took steps to minimize expense levels, entered into credit arrangements, and raised capital
through public and private equity offerings, to increase the likelihood that it will have sufficient cash to support
operations.
At May 31, 2019, the Company had $5.4 million in cash and cash equivalents. The Company anticipates that the
existing cash balance together with income from operations, collections of existing accounts receivable, revenue from
our existing backlog of products, the sale of inventory on hand, and deposits and down payments against significant
orders will be adequate to meet its working capital and capital equipment requirements. We believe our existing cash
and cash equivalents will be sufficient to meet our anticipated cash 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. 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 our 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.
CONSOLIDATION:
The consolidated financial statements include the accounts of the Company and both its wholly-owned and majority-
owned foreign subsidiaries. Intercompany accounts and transactions have been eliminated.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS:
Assets and liabilities of the Company’s foreign subsidiaries and a branch office are translated into U.S. Dollars from
their functional currencies of Japanese Yen, Euros and New Taiwan Dollars using the exchange rate in effect at the
balance sheet date. Additionally, their net sales and expenses are translated using exchange rates approximating average
rates prevailing during the fiscal year. Translation adjustments that arise from translating their financial statements from
their local currencies to U.S. Dollars are accumulated and reflected as a separate component of shareholders’ equity
(deficit).
Transaction gains and losses that arise from exchange rate changes denominated in currencies other than the local
currency are included in the Consolidated Statements of Operations as incurred. See Note 12 for the detail of foreign
exchange transaction gains and losses for all periods presented.
USE OF ESTIMATES:
The preparation of financial statements in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
33
Significant estimates in the Company’s consolidated financial statements include allowance for doubtful accounts,
valuation of inventory at the lower of cost or market, and warranty reserves.
CASH EQUIVALENTS:
Cash equivalents consist of money market instruments purchased with an original maturity of three months or less.
These investments are reported at fair value.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Accounts receivable are derived from the sale of products throughout the world to semiconductor manufacturers,
semiconductor contract assemblers, electronics manufacturers and burn-in and test service companies. Accounts
receivable are recorded at the invoiced amount and are not interest bearing. The Company maintains an allowance for
doubtful accounts to reserve for potentially uncollectible trade receivables. The Company also reviews its trade
receivables by aging category to identify specific customers with known disputes or collection issues. The Company
exercises judgment when determining the adequacy of these reserves as the Company evaluates historical bad debt
trends, general economic conditions in the United States and internationally, and changes in customer financial
conditions. Uncollectible receivables are recorded as bad debt expense when all efforts to collect have been exhausted
and recoveries are recognized when they are received. No significant adjustments to the allowance for doubtful
accounts were recorded during the fiscal year ended May 31, 2019, 2018 or 2017.
CONCENTRATION OF CREDIT RISK:
The Company sells its products primarily to semiconductor manufacturers in North America, Asia, and Europe. As
of May 31, 2019, approximately 49%, 25% and 26% of gross accounts receivable were from customers located in North
America, Asia and Europe, respectively. As of May 31, 2018, approximately 55%, 45% and 0% of gross accounts
receivable were from customers located in North America, Asia, and Europe, respectively. Three customers accounted
for 44%, 25% and 21% of gross accounts receivable as of May 31, 2019. Three customers accounted for 38%, 32% and
11% of gross accounts receivable as of May 31, 2018. Four customers accounted for 36%, 14%, 12% and 10% of net
sales in fiscal 2019. Three customers accounted for 34%, 26% and 13% of net sales in fiscal 2018. The Company
performs ongoing credit evaluations of its customers and generally does not require collateral. The Company uses letter
of credit terms for some of its international customers.
The Company’s cash and cash equivalents are generally deposited with major financial institutions in the United
States, Japan, Germany and Taiwan. The Company invests its excess cash in money market funds and U.S. Treasury
securities. The money market funds bear the risk associated with each fund. The money market funds have variable
interest rates. The Company has not experienced any material losses on its money market funds or short-term cash
deposits.
CONCENTRATION OF SUPPLY RISK:
The Company relies on subcontractors to manufacture many of the components and subassemblies used in its
products. Quality or performance failures of the Company’s products or changes in its manufacturers’ financial or
business condition could disrupt the Company’s ability to supply quality products to its customers and thereby have a
material and adverse effect on its business and operating results. Some of the components and technologies used in the
Company’s products are purchased and licensed from a single source or a limited number of sources. The loss of any of
these suppliers may cause the Company to incur additional transition costs, result in delays in the manufacturing and
delivery of its products, or cause it to carry excess or obsolete inventory and could cause it to redesign its products.
INVENTORIES:
Inventories include material, labor and overhead, and are stated at the lower of cost (first-in, first-out method) or net
realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less costs of
completion, disposal and transportation. Provisions for excess, obsolete and unusable inventories are made after
management’s evaluation of future demand and market conditions. The Company adjusts inventory balances to
approximate the lower of its manufacturing costs or net realizable value. If actual future demand or market conditions
become less favorable than those projected by management, additional inventory write-downs may be required, and
would be reflected in cost of sales in the period the revision is made.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost less accumulated depreciation and amortization. Major improvements are
capitalized, while repairs and maintenance are expensed as incurred. Leasehold improvements are amortized over the
34
lesser of their estimated useful lives or the term of the related lease. Furniture and fixtures, machinery and equipment,
and test equipment are depreciated on a straight-line basis over their estimated useful lives. The ranges of estimated
useful lives are generally as follows:
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 to 6 years
Machinery and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 to 6 years
Test equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 to 6 years
REVENUE RECOGNITION:
In May 2014, the FASB issued FASB ASC Topic 606, Revenue from Contracts with Customers (Topic 606), which was
subsequently updated (collectively “ASC 606”). We adopted the standard as of June 1, 2018, using the modified
retrospective method. Under this method, we applied ASC 606 to contracts that were not complete as of June 1, 2018
and recognized the cumulative effect of initially applying the standard as an adjustment to the opening balance of
retained earnings. Results for reporting periods beginning after June 1, 2018 are presented in accordance with ASC 606.
Under the modified retrospective adoption method, prior period amounts are not adjusted and are reported in
accordance with the accounting standards in effect for those periods per FASB ASC Topic 605, Revenue Recognition, which
is also referred to herein as “legacy GAAP.”
The adoption of ASC 606 did not have a material impact on our consolidated financial statements as of June 1, 2018.
No adjustment was recorded to accumulated deficit as of the adoption date and reported revenue would not have been
different under legacy GAAP. Additionally, we do not expect the adoption of the revenue standard to have a material
impact to our net income on an ongoing basis.
We sell our products primarily through a direct sales force. In certain international markets, we sell our products
through independent distributors. We consider revenue to be earned when all of the following criteria are met:
• We have a contract with a customer that creates enforceable rights and obligations,
• Promised performance obligations are identified,
• The transaction price, or the amount we expect to receive, is determinable and
• We have satisfied the performance obligations to the customer.
Transfer of control is evidenced upon passage of title and risk of loss to the customer unless we are required to
provide additional services.
PRODUCT DEVELOPMENT COSTS AND CAPITALIZED SOFTWARE:
Costs incurred in the research and development of new products or systems are charged to operations as incurred.
Costs incurred in the development of software programs for the Company’s products are charged to operations as
incurred until technological feasibility of the software has been established. Generally, technological feasibility is
established when the software module performs its primary functions described in its original specifications, contains
features required for it to be usable in a production environment, is completely documented and the related hardware
portion of the product is complete. After technological feasibility is established, any additional costs are capitalized.
Capitalization of software costs ceases when the software is substantially complete and is ready for its intended use.
Capitalized costs are amortized over the estimated life of the related software product using the greater of the units of
sales or straight-line methods over ten years. No system software development costs were capitalized or amortized in
fiscal 2019, 2018 and 2017.
IMPAIRMENT OF LONG-LIVED ASSETS:
In the event that facts and circumstances indicate that the carrying value of assets may be impaired, an evaluation of
recoverability would be performed. If an evaluation is required, the estimated future undiscounted cash flows associated
with the asset would be compared to the asset’s carrying value to determine if a write-down is required.
ADVERTISING COSTS:
The Company expenses all advertising costs as incurred and the amounts were not material for all periods presented.
35
SHIPPING AND HANDLING OF PRODUCTS:
Amounts billed to customers for shipping and handling of products are included in net sales. Costs incurred related
to shipping and handling of products are included in cost of sales.
INCOME TAXES:
Income taxes have been provided using the liability method whereby deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and liabilities and net operating loss and tax
credit carryforwards measured using the enacted tax rates and laws that will be in effect when the differences are
expected to reverse or the carryforwards are utilized. Valuation allowances are established when it is determined that it
is more likely than not that such assets will not be realized.
A full valuation allowance was established against all deferred tax assets, as management determined that it is more
likely than not that deferred tax assets will not be realized, as of May 31, 2019 and 2018.
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.
Although the Company files U.S. federal, various state, and foreign tax returns, the Company’s only major tax
jurisdictions are the United States, California, Germany and Japan. Tax years 1996 – 2018 remain subject to examination
by the appropriate governmental agencies due to tax loss carryovers, research and development tax credits, or other tax
attributes from those years.
COMPREHENSIVE (LOSS) INCOME:
Comprehensive (loss) income generally represents all changes in shareholders’ equity except those resulting from
investments or contributions by shareholders. Unrealized gains and losses on foreign currency translation adjustments
are included in the Company’s components of comprehensive (loss) income, which are excluded from net (loss) income.
Comprehensive (loss) income is included in the statements of comprehensive (loss) income.
RECENT ACCOUNTING PRONOUNCEMENTS:
Accounting Standards Adopted
Revenue Recognition
In May 2014, the FASB issued Accounting Standards Codification (“ASC”) Update No. 2014-09, Revenue from Contracts
with Customers (Topic 606), which has been subsequently updated (collectively “ASC 606”). The core principle of the
standard is to recognize revenues when promised goods or services are transferred to customers in an amount that
reflects the consideration that is expected to be received for those goods or services. The new standard defines a five-
step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required
within the revenue recognition process than required under legacy GAAP, including identifying performance obligations
in the contract, estimating the amount of variable consideration to include in the transaction price, and allocating the
transaction price to each distinct performance obligation. The standard permits the use of either the retrospective or
modified retrospective transition methods. It also requires expanded disclosures including the nature, amount, timing,
and uncertainty of revenues and cash flows related to contracts with customers. Additionally, qualitative and quantitative
disclosures are required about customer contracts, significant judgments and changes in judgments, and assets
recognized from the costs to obtain or fulfill a contract.
The Company adopted ASC 606 on June 1, 2018, the first day of fiscal 2019, using the modified retrospective
method. The Company applied ASC 606 to all contracts not completed as of the date of adoption in order to determine
any adjustment to the opening balance of retained earnings. Under the modified retrospective adoption method, the
comparative financial information has not been restated and continues to be reported under the accounting standards in
effect for those periods, ASC 605, "Revenue Recognition", which is also referred to herein as "legacy GAAP."
The adoption of ASC 606 did not have a material impact on the Company’s consolidated financial statements as of
June 1, 2018. No adjustment was recorded to accumulated deficit as of the adoption date and reported revenue would
not have been different under legacy GAAP. Additionally, the Company does not expect the adoption of the revenue
standard to have a material impact to the Company’s net income on an ongoing basis.
36
Classification of Certain Cash Receipts and Cash Payments
In August 2016, the FASB issued authoritative guidance related to the classification of certain cash receipts and cash
payments on the statement of cash flows. The Company adopted this new standard in fiscal year 2019. The adoption of
this guidance did not have a significant impact on the Company’s consolidated financial statements.
Intra-Entity Asset Transfers
In October 2016, the FASB issued an accounting standard update that requires recognition of the income tax
consequences of intra-entity transfers of assets (other than inventory) at the transaction date. The Company adopted this
new standard in fiscal year 2019. The adoption of this guidance did not have a significant impact on the Company’s
consolidated financial statements.
Restricted Cash.
In November 2016, the FASB issued authoritative guidance related to statements of cash flows. This guidance
clarifies that amounts generally described as restricted cash and restricted cash equivalents should be included with cash
and cash equivalents when reconciling the beginning-of-period and end-of period total amounts shown on the statement
of cash flows. The Company adopted this new standard in fiscal year 2019. The adoption of this guidance did not have
a significant impact on the Company’s consolidated financial statements.
Income Taxes
On December 22, 2017, the US government enacted comprehensive tax legislation commonly referred to as the Tax
Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the US tax code including but
not limited to (1) reducing the US federal corporate tax rate from 34% to 21%; (2) requiring companies to pay a one-
time transition tax on certain repatriated earnings of foreign subsidiaries; (3) generally eliminating US federal income
taxes on dividends from foreign subsidiaries; (4) requiring a current inclusion in US federal income of certain earnings of
controlled foreign corporations; (5) creating a new limitation on deductible interest expense; (6) changing rules related to
the uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017, and
(7) repealing the corporate alternative minimum tax regime, or AMT, effective December 31, 2017 and permitting
existing minimum tax credits to offset the regular tax liability for any tax year. Consequently, the Company has
accounted for the reduction of $6.4 million of deferred tax assets with an offsetting adjustment to the valuation
allowance for the fiscal year ended 2018, and recorded a benefit of $90,000 for the Company’s Federal refundable AMT
credit.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) which provides
guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not
extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740,
Income taxes. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax
Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income
tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional
estimate in the financial statements. There are also certain transitional impacts of the Tax Act. As part of the transition
to the new territorial tax system, the Tax Act imposes a one-time repatriation tax on deemed repatriation of historical
earnings of foreign subsidiaries. The Company is not subject to the transition tax. The one-time transition tax is based
on post-1986 earnings and profits that were previously deferred from U.S. income tax. The Company has finalized its
calculation of the total post-1986 earnings and profits for its foreign corporations. Based on the Company’s net
operating loss carryovers and valuation allowance, there is no impact to its consolidated financial statements as a result
of the completion of the analysis.
Accounting Standards Not Yet Adopted
Financial Instruments
In January 2016, the FASB issued an accounting standard update related to recognition and measurement of financial
assets and financial liabilities. This standard changes accounting for equity investments, financial liabilities under the fair
value option and the presentation and disclosure requirements for financial instruments. In addition, it clarifies guidance
related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on
available-for-sale debt securities. This standard is effective for us in fiscal year 2020. Early adoption is permitted. The
Company does not expect a material impact of this new guidance on its consolidated financial statements.
In June 2016, the FASB issued an accounting standard update that requires measurement and recognition of expected
credit losses for financial assets held based on historical experience, current conditions, and reasonable and supportable
forecasts that affect the collectibility of the reported amount. The accounting standard update will be effective for the
Company beginning in the first quarter of fiscal 2021 on a modified retrospective basis, and early adoption in fiscal 2020
is permitted. The Company does not expect a material impact of this accounting standard update on its consolidated
financial statements.
37
Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which modifies lease
accounting for lessees to increase transparency and comparability by recording lease assets and liabilities for operating
leases and disclosing key information about leasing arrangements. The Company will adopt ASU 2016-02 utilizing the
modified retrospective transition method through a cumulative-effect adjustment at the beginning of its first quarter of
2020. The Company has reached conclusions on its accounting assessments to the new standard and anticipates
recording right of use assets and lease liabilities, including deferred rent, of approximately $2.7 million on the Company's
Condensed Consolidated Balance Sheets for those leases currently classified as operating leases. However, the ultimate
impact of adopting ASU 2016-02 will depend on the Company’s lease portfolio as of the adoption date.
2. REVENUE:
Revenue recognition
The Company recognizes revenue when promised goods or services are transferred to customers in an amount that
reflects the consideration to which the Company expects to be entitled in exchange for those goods or services by
following a five-step process, (1) identify the contract with a customer, (2) identify the performance obligations in the
contract, (3) determine the transaction price, (4) allocate the transaction price, and (5) recognize revenue when or as the
Company satisfies a performance obligation, as further described below.
Performance obligations include sales of systems, contactors, spare parts, and services, as well as, installation and
training services included in customer contracts.
A contract’s transaction price is allocated to each distinct performance obligation. In determining the transaction
price, the Company evaluates whether the price is subject to refund or adjustment to determine the net consideration to
which the Company expects to be entitled. The Company generally does not grant return privileges, except for defective
products during the warranty period.
For contracts that contain multiple performance obligations, the Company allocates the transaction price to the
performance obligations on a relative standalone selling price basis. Standalone selling prices are based on multiple
factors including, but not limited to historical discounting trends for products and services and pricing practices in
different geographies.
Revenue for systems and spares are recognized at a point in time, which is generally upon shipment or delivery.
Revenue from services is recognized over time as services are completed or ratably over the contractual period of
generally one year or less.
The Company has elected the practical expedient under ASC 606 to not assess whether a contract has a significant
financing component as the Company’s standard payment terms are less than one year.
Disaggregation of revenue
The following tables show revenues by major product categories. Within each product category, contract terms,
conditions and economic factors affecting the nature, amount, timing and uncertainty around revenue recognition and
cash flow are substantially similar.
The Company’s revenues by product category are as follows (in thousands):
Type of good / service:
Systems. . . . . . . . . . . . . . . . . . . .
Contactors . . . . . . . . . . . . . . . . .
Services . . . . . . . . . . . . . . . . . . .
Product lines:
Wafer-level. . . . . . . . . . . . . . . . .
Test During Burn-In. . . . . . . . .
Year Ended May 31,
2019
2018
2017
$18,174
6,500
4,881
$29,555
$13,080
16,475
$29,555
$12,115
1,991
4,792
$18,898
$9,582
9,316
$18,898
$ 9,566
6,154
5,336
$21,056
$14,618
6,438
$21,056
38
The following presents information about the Company’s operations in different geographic areas. Net sales are
based upon ship-to location (in thousands):
Geographic region:
United States . . . . . . . . . . . . . . .
Asia. . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . .
Year Ended May 31,
2019
2018
2017
$13,468
5,648
1,940
$21,056
$ 8,446
19,973
1,136
$29,555
$ 7,762
10,439
697
$18,898
With the exception of the amount of service contracts and extended warranties, the Company’s product category
revenues are recognized at point in time when control transfers to customers.
Timing of revenue recognition (in thousands):
Products and services transferred at
a point in time. . . . . . . . . . . . . . . . .
Services transferred over time . . . . . .
Contract balances
2019
Year Ended May 31,
2018
2017
$18,473
2,583
$21,056
$27,337
2,218
$29,555
$17,193
1,705
$18,898
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 May 31, 2019 and 2018 were
$1,734,000 and $2,089,000, respectively. During the fiscal year ended May 31, 2019, the Company recognized $1,273,000
of revenues that were included in contract liabilities as of May 31, 2018.
Remaining performance obligations
On May 31, 2019, the Company had $731,000 of remaining performance obligations, which were comprised of
deferred service contracts and extended warranty contracts not yet delivered. The Company expects to recognize
approximately 74% of its remaining performance obligations as revenue in fiscal 2020, and an additional 26% in fiscal
2021 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.
3. EARNINGS PER SHARE (“EPS”):
Basic EPS is determined using the weighted average number of common shares outstanding during the period.
Diluted EPS is determined using the weighted average number of common shares and potential common shares
(representing the dilutive effect of stock options, RSUs and ESPP shares) outstanding during the period using the
treasury stock method.
39
The following table presents the computation of basic and diluted net (loss) income per share attributable to Aehr
Test Systems common shareholders (in thousands, except per share data):
Numerator: Net (loss) income. . . . . . . . . . . . . . . . . . . . . . . . .
2019
$ (5,235)
Year Ended May 31,
2018
$ 528
2017
$ (5,653)
Denominator for basic net (loss) income per share:
Weighted-average shares outstanding . . . . . . . . . . . . . . . . . .
22,387
21,732
16,267
Shares used in basic net (loss) income per share calculation . .
22,387
21,732
16,267
Effect of dilutive securities. . . . . . . . . . . . . . . . . . . . . . . . . . . .
--
1,050
--
Denominator for diluted net (loss) income per share . . . . . . . .
22,387
22,782
16,267
Basic net (loss) income per share . . . . . . . . . . . . . . . . . . . . . . .
$ (0.23)
$ 0.02
$(0.35)
Diluted net (loss) income per share . . . . . . . . . . . . . . . . . . . . . .
$ (0.23)
$ 0.02
$(0.35)
For the purpose of computing diluted earnings per share, the weighted average number of potential common shares
does not include stock options with an exercise price greater than the average fair value of the Company’s common
stock for the period, as the effect would be anti-dilutive. In the fiscal years ended May 31, 2019 and 2017, potential
common shares have not been included in the calculation of diluted net loss per share as the effect would be anti-
dilutive. As such, the numerator and the denominator used in computing both basic and diluted net loss per share for
these periods are the same. Stock options to purchase 3,107,000 and 3,074,000 shares of common stock were
outstanding on May 31, 2019 and 2017, respectively, but were not included in the computation of diluted net loss per
share, because the inclusion of such shares would be anti-dilutive. Stock options to purchase 1,313,000 shares of
common stock were outstanding as of May 31, 2018 but were not included in the computation of diluted net income per
share, because the inclusion of such shares would be anti-dilutive. ESPP rights to purchase 297,000 and 169,000 ESPP
shares were outstanding on May 31, 2019 and 2017, respectively, but were not included in the computation of diluted
net loss per share, because the inclusion of such shares would be anti-dilutive. RSUs for 23,000 shares and 32,000 shares
were outstanding on May 31, 2019 and 2017, respectively, but were not included in the computation of diluted net loss
per share, because the inclusion of such shares would be anti-dilutive. The 2,657,000 shares convertible under the
Convertible Notes outstanding on May 31, 2018 and 2017 were not included in the computation of diluted net income
(loss) per share, because the inclusion of such shares would be anti-dilutive.
4. 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.
The following table summarizes the Company’s financial assets measured at fair value on a recurring basis as of May
31, 2019 (in thousands):
40
Money market funds. . . . .
Assets. . . . . . . . . . . . . . . .
Balance as of
May 31, 2019
$ 3,017
$ 3,017
Level 1
$ 3,017
$ 3,017
Level 2
$ --
$ --
Level 3
$ --
$ --
The following table summarizes the Company’s financial assets measured at fair value on a recurring basis as of
May 31, 2018 (in thousands):
Money market funds. . . . .
U.S. Treasury securities. . .
Assets. . . . . . . . . . . . . . . .
Balance as of
May 31, 2018
$ 7,813
5,983
$13,796
Level 1
$ 7,813
5,983
$13,796
Level 2
Level 3
$ --
--
$ --
$ --
--
$ --
The U.S. Treasury securities as of May 31, 2018 have maturities of three months and have no unrealized gain or loss.
Included in Money market funds as of May 31, 2019 and 2018 is $80,000 restricted cash representing a security
deposit for the Company’s United States manufacturing and office space lease.
There were no financial liabilities measured at fair value as of May 31, 2019 and 2018.
There were no transfers between Level 1 and Level 2 fair value measurements during the fiscal years ended May 31,
2019 and 2018.
The carrying amounts of financial instruments including cash, cash equivalents, receivables, accounts payable and
certain other accrued liabilities, approximate fair value due to their short maturities. Based on the borrowing rates
currently available to the Company for loans with similar terms, the carrying value of the debt approximates the fair
value.
5. ACCOUNTS RECEIVABLE:
Accounts receivable comprise (in thousands):
Accounts receivable. . . . . . . . . . . . . . . . . . . .
Less: Allowance for doubtful accounts . . . . .
May 31,
2019
$4,859
--
$4,859
2018
$2,860
(4)
$2,856
Balance at
beginning
of year
Additions
charged to
costs and
expenses
Deductions*
Balance
at end
of year
Allowance for doubtful
accounts receivable:
May 31, 2019 . . . . . . . . . . . . . . .
$ 4
$ --
$ (4)
$ --
May 31, 2018 . . . . . . . . . . . . . . .
$ 61
$ 4
$ (61)
$ 4
* Deductions include write-offs of uncollectible accounts, collections of amounts previously reserved, and releases of
allowance for doubtful accounts credited to expense.
6. BALANCE SHEET DETAIL:
INVENTORIES:
(In Thousands)
Raw materials and sub-assemblies. . . . . .
Work in process. . . . . . . . . . . . . . . . . . . .
Finished goods. . . . . . . . . . . . . . . . . . . . .
May 31,
2019
$5,471
3,580
10
$9,061
2018
$5,747
3,068
234
$9,049
41
PROPERTY AND EQUIPMENT, NET:
(In Thousands)
Leasehold improvements. . . . . . . . . . . . .
Furniture and fixtures . . . . . . . . . . . . . . .
Machinery and equipment. . . . . . . . . . . .
Test equipment. . . . . . . . . . . . . . . . . . . .
Less: Accumulated depreciation
and amortization. . . . . . . . . . . . . . . . . .
May 31,
2019
$1,154
983
3,097
2,604
7,838
2018
$1,154
984
2,865
2,595
7,598
(6,793)
$1,045
(6,395)
$ 1,203
Depreciation expense was $431,000, $417,000 and $271,000 for fiscal 2019, 2018, and 2017, respectively.
ACCRUED EXPENSES:
(In Thousands)
Payroll related. . . . . . . . . . . . . . . . . . . . . . .
Restructuring . . . . . . . . . . . . . . . . . . . . . . .
Commissions and bonuses. . . . . . . . . . . . .
Professional services. . . . . . . . . . . . . . . . . .
Warranty. . . . . . . . . . . . . . . . . . . . . . . . . . .
Material purchases. . . . . . . . . . . . . . . . . . .
Taxes payable. . . . . . . . . . . . . . . . . . . . . . .
Investor relations . . . . . . . . . . . . . . . . . . . .
Accrued interest . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019
$ 990
408
168
162
154
65
29
19
--
39
$2,034
May 31,
2018
$ 1,014
--
101
163
135
--
34
19
139
41
$1,646
CUSTOMER DEPOSITS AND DEFERRED REVENUE, SHORT-TERM:
(In Thousands)
Customer deposits. . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . .
May 31,
2019
$1,003
542
$1,545
2018
$ 1,340
290
$1,630
7. INCOME TAXES:
Domestic and foreign components of (loss) income before income tax (expense) benefit are as follows (in thousands):
Domestic. . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended May 31,
2019
$ (5,273)
65
$ (5,208)
2018
$ 433
22
$ 455
2017
$(5,663)
35
$(5,628)
42
The income tax (expense) benefit consists of the following (in thousands):
Federal income taxes:
Current . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . .
State income taxes:
Current . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign income taxes:
Current . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . .
2019
$ --
--
(6)
--
(21)
--
$ (27)
Year Ended May 31,
2018
2017
$ 99
--
(22)
--
(4)
--
$ 73
$ --
--
(8)
--
(17)
--
$ (25)
The Company’s effective tax rate differs from the U.S. federal statutory tax rate, as follows:
U.S. federal statutory tax rate. . . . . . . . . . .
State taxes, net of federal tax effect. . . . . .
Foreign rate differential. . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . .
Research and development credit . . . . . . .
Change in valuation allowance. . . . . . . . . .
Federal rate change impact . . . . . . . . . . .
Federal AMT refund . . . . . . . . . . . . . . . .
ASU 2016-09 adoption . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effective tax rate. . . . . . . . . . . . . . . . . . . .
2019
21.0 %
(1.0)
(0.7)
(2.8)
1.5
(15.6)
--
--
--
(2.9)
(0.5)%
Year Ended May 31,
2018
28.6 %
(16.7)
39.4
39.9
5.9
(1,349.2)
1,419.7
(20.0)
(169.1)
5.4
(16.1)%
2017
34.0 %
(0.1)
0.1
(2.8)
3.1
(33.8)
--
--
--
(0.9)
(0.4)%
The components of the net deferred tax assets are as follows (in thousands):
Net operating losses. . . . . . . . . . . . . . . . .
Credit carryforwards. . . . . . . . . . . . . . . . .
Inventory reserves . . . . . . . . . . . . . . . . . .
Reserves and accruals. . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Valuation allowance . . . . . . . . . . . .
Net deferred tax assets. . . . . . . . . . . . . . .
Year Ended May 31,
2019
2018
$13,475
4,995
790
1,379
298
$12,918
4,952
588
1,419
247
20,937
20,124
(20,937)
$ --
(20,124)
$ --
The valuation allowance increased by $813,000 during fiscal 2019, decreased by $6,139,000 during fiscal 2018, and
increased by $1,635,000 during fiscal 2017. As of May 31, 2019 and 2018, the Company concluded that it is more likely
than not that the deferred tax assets will not be realized and therefore provided a full valuation allowance against the
deferred tax assets. The Company will continue to evaluate the need for a valuation allowance against its deferred tax
assets on a quarterly basis.
At May 31, 2019, the Company had federal and state net operating loss carryforwards of $53,803,000 and $29,504,000
respectively. The federal and state net operating loss carryforwards will begin to expire in 2024. At May 31, 2019, the
Company also had federal and state research and development tax credit carryforwards of $2,071,000 and $5,609,000,
respectively. The federal credit carryforward will begin to expire in 2022, and the California credit will carryforward
indefinitely. These carryforwards may be subject to certain limitations on annual utilization in case of a change in
ownership, as defined by tax law. The Company also has alternative minimum tax credit carryforwards of $34,000 for
state purposes. The credits may be used to offset regular tax and do not expire.
43
The Company has made no provision for U.S. income taxes on undistributed earnings of certain foreign subsidiaries
because it is the Company’s intention to permanently reinvest such earnings in its foreign subsidiaries. If such earnings
were distributed, the Company would be subject to additional U.S. income tax expense. Determination of the amount
of unrecognized deferred income tax liability related to these earnings is not practicable.
Foreign net operating loss carryforwards of $345,000 are available to reduce future foreign taxable income. The
foreign net operating losses will expire starting in fiscal year 2021.
The Company maintains liabilities for uncertain tax positions. These liabilities involve considerable judgment and
estimation and are continuously monitored by management based on the best information available. The aggregate
changes in the balance of gross unrecognized tax benefits are as follows (in thousands):
Beginning balance as of May 31, 2016. . . . . . . . . . . . .
Decreases related to prior year tax positions. . . . . . . .
Decreases related to lapse of statute of limitations . . .
Balance at May 31, 2017 . . . . . . . . . . . . . . . . . . . . . . .
Increases related to prior year tax positions. . . . . . . .
Increases related to current year tax positions. . . . . .
Balance at May 31, 2018 . . . . . . . . . . . . . . . . . . . . . . .
Decreases related to prior year tax positions. . . . . . . .
Increases related to current year tax positions. . . . . .
Balance at May 31, 2019 . . . . . . . . . . . . . . . . . . . . . . .
$ 789
--
--
$ 789
889
107
$1,785
(41)
65
$1,809
The ending balance of $1,809,000 of unrecognized tax benefits as of May 31, 2019, if recognized, would not impact
the effective tax rate.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax
Cuts and Jobs Act (the “Tax Act”). On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118
(“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a
measurement period that should not extend beyond one year from the Tax Act enactment date for companies to
complete the accounting under ASC 740, Income taxes. In accordance with SAB 118, a company must reflect the
income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent
that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a
reasonable estimate, it must record a provisional estimate in the financial statements.
As part of the transition to the new territorial tax system, the Tax Act imposes a one-time repatriation tax on deemed
repatriation of historical earnings of foreign subsidiaries. The company is not subject to the transition tax. The one-
time transition tax is based on post-1986 earnings and profits that were previously deferred from U.S. income tax.
During fiscal 2019 the Company finalized its calculation of the transition tax and due to carryover losses and the
valuation allowance the Company determined there was no impact to the financial statements as a result of the
completion of the analysis.
The Tax Act also repealed the corporate alternative minimum tax, or AMT, effective December 31, 2017. The Tax
Act repealed the corporate alternative minimum tax regime and permits existing minimum tax credits to offset the
regular tax liability for any tax year. Further, the credit is refundable for any tax year beginning after December 31, 2017
and before December 31, 2020 in an amount equal to 50% of the excess of the minimum tax credit over the allowable
credit for the year against the regular tax liability. Any unused minimum tax credit carryforward is refundable in the
following year. As result, the Company recorded a benefit of $90,000 for its federal refundable AMT credit in its fiscal
2018 tax provision.
In addition, the reduction of U.S. federal corporate tax rate reduces the corporate tax rate to 21%, effective January 1,
2018. Consequently, the Company has accounted for the reduction of $6.4 million of deferred tax assets with an
offsetting adjustment to the valuation allowance.
44
Although the Company files U.S. federal, various state, and foreign tax returns, the Company’s only major tax
jurisdictions are the United States, California, Germany and Japan. Tax years 1996 – 2018 remain subject to examination
by the appropriate governmental agencies due to tax loss carryovers, research and development tax credits, or other tax
attributes from those years.
8. LONG-TERM DEBT:
On April 10, 2015, the Company entered into a Convertible Note Purchase and Credit Facility Agreement (the
“Purchase Agreement”) with QVT Fund LP and Quintessence Fund L.P. (the “Purchasers”) providing for (a) the
Company’s sale to the Purchasers of $4,110,000 in aggregate principal amount of 9.0% Convertible Secured Notes due
2017 (the “Convertible Notes”) and (b) a secured revolving loan facility (the “Credit Facility”) in an aggregate principal
amount of up to $2,000,000. On August 22, 2016 the Purchase Agreement was amended to extend the maturity date of
the Convertible Notes to April 10, 2019, decrease the conversion price from $2.65 per share to $2.30 per share, decrease
the forced conversion price from $7.50 per share to $6.51 per share, and allow for additional equity awards.
The maximum amount of $2,000,000 drawn against the Credit Facility was converted to Convertible Notes, and at
May 31, 2018 there was no remaining balance available to be drawn on the Credit Facility.
The Convertible Notes bore interest at an annual rate of 9.0%. Interest was payable quarterly on March 1, June 1,
September 1 and December 1 of each year. Debt issuance costs of $356,000, which were accreted over the term of the
original loan using the effective interest rate method, were offset against the loan balance.
The conversion price for the Convertible Notes was $2.30 per share and was subject to adjustment upon the
occurrence of certain specified events. Holders could convert all or any part of the principal amount of their
Convertible Notes in integrals of $10,000 at any time prior to the maturity date. Upon conversion, the Company would
deliver shares of its common stock to the holder of Convertible Notes electing such conversion. The Company could
not redeem the Convertible Notes prior to maturity.
The Company’s obligations under the Purchase Agreement were secured by substantially all of the assets of the
Company.
On the maturity date of April 10, 2019, the Company paid off the Convertible Notes in an aggregate principal amount
of $6.1 million.
9. EQUITY:
On August 8, 2016 the Company issued 200,000 shares of its common stock to Semics Inc., a semiconductor test
equipment provider that produces fully automatic wafer probe systems, in consideration for cancellation of an
outstanding invoice of $323,000 for capital equipment.
On September 28, 2016, the Company sold 2,722,000 shares of its common stock in a private placement transaction
to certain institutional and accredited investors. The purchase price per share of the common stock sold in the private
placement was $2.15, resulting in gross proceeds to the Company of $5,851,000, before offering expenses. The net
proceeds after offering expenses were $5,299,000.
On April 19, 2017, the Company completed a public offering of 4,423,000 shares of its common stock at a price to
the public of $3.90 per share, including the underwriter’s exercise of its option to purchase 577,000 additional shares to
cover over-allotments. The gross proceeds to the Company were $17,250,000, before underwriting discounts and
offering expenses. The net proceeds after underwriting discounts and offering expenses were $15,832,000.
45
10. STOCKHOLDERS’ EQUITY, COMPREHENSIVE INCOME AND STOCK-BASED
COMPENSATION:
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Changes in the components of AOCI, net of tax, were as follows (in thousands):
Cumulative
Translation
Adjustments
Unrealized Loss
on Investments,
Net
Total
Balance at May 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss) before reclassifications.
Amounts reclassified out of AOCI . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss), net of tax. . . . . . . . . . .
Balance at May 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,249
43
--
43
$2,292
Other comprehensive income (loss) before reclassifications.
(62)
Amounts reclassified out of AOCI. . . . . . . . . . . . . . . . . . . .
--
Other comprehensive income (loss), net of tax. . . . . . . . . . .
(62)
Balance at May 31, 2019. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,230
STOCK-BASED COMPENSATION:
$--
--
--
--
$--
--
--
--
$--
$2,249
43
--
43
$2,292
(62)
--
(62)
$2,230
Stock-based compensation expense consists of expenses for stock options, restricted stock units, or RSUs, and
employee stock purchase plan, or ESPP, purchase rights. Stock-based compensation expense for stock options and
ESPP purchase rights is measured at each grant date, based on the fair value of the award using the Black-Scholes option
valuation model, and is recognized as expense over the employee’s requisite service period. This model was developed
for use in estimating the value of publicly traded options that have no vesting restrictions and are fully transferable. The
Company’s employee stock options have characteristics significantly different from those of publicly traded options.
For RSUs, stock-based compensation expense is based on the fair value of the Company’s common stock at the grant
date. All of the Company’s stock-based compensation is accounted for as equity instruments.
The following table summarizes the stock-based compensation expense for the fiscal years ended May 31, 2019, 2018
and 2017 (in thousands, except per share data):
Stock-based compensation in the form of stock options,
RSUs, and ESPP purchase rights, included in:
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative. . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . .
Net effect on net income (loss). . . . . . . . . . . . . . . . .
Effect on net income (loss) per share:
Basic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019
Year Ended May 31,
2018
2017
$104
545
256
$905
$0.04
$0.04
$148
592
256
$ 91
714
194
$996
$999
$0.05
$0.04
$0.06
$0.06
As of May 31, 2019, 2018 and 2017, there were no stock-based compensation expenses capitalized as part of
inventory.
During fiscal 2019, 2018 and fiscal 2017, the Company recorded stock-based compensation related to stock options
and restricted stock units of $650,000, $706,000 and $884,000, respectively.
46
As of May 31, 2019, the total compensation expense related to unvested stock-based awards under the Company’s
2016 Equity Incentive Plan, but not yet recognized, was $1,182,000 which is net of estimated forfeitures of $3,000. This
expense will be amortized on a straight-line basis over a weighted average period of approximately 3.0 years.
During fiscal 2019, 2018 and fiscal 2017, the Company recorded stock-based compensation related to its ESPP of
$255,000, $290,000 and $115,000, respectively. The increase in fiscal 2018 is primarily due to employees increasing their
ESPP elections during the fiscal year.
As of May 31, 2019, the total compensation expense related to purchase rights under the ESPP but not yet recognized
was $179,000. This expense will be amortized on a straight-line basis over a weighted average period of approximately
1.2 years.
Valuation Assumptions
Valuation and Amortization Method. The Company estimates the fair value of stock options granted using the Black-
Scholes option valuation method and a single option award approach. The fair value under the single option approach is
amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period.
Expected Term. The Company’s expected term represents the period that the Company’s stock-based awards are
expected to be outstanding and was determined based on historical experience, giving consideration to the contractual
terms of the stock-based awards, vesting schedules and expectations of future employee behavior as evidenced by
changes to the terms of its stock-based awards.
Volatility. Volatility is a measure of the amounts by which a financial variable such as stock price has fluctuated
(historical volatility) or is expected to fluctuate (expected volatility) during a period. The Company uses the historical
volatility for the past five years, which matches the expected term of most of the option grants, to estimate expected
volatility. Volatility for each of the ESPP’s four time periods of six months, twelve months, eighteen months, and
twenty-four months is calculated separately and included in the overall stock-based compensation expense recorded.
Risk-Free Interest Rate. The Company bases the risk-free interest rate used in the Black-Scholes option valuation
method on the implied yield in effect at the time of option grant on U.S. Treasury zero-coupon issues with a remaining
term equivalent to the expected term of the stock awards including the ESPP.
Fair Value. The fair values of the Company’s stock options granted to employees in fiscal 2019, 2018 and 2017 were
estimated using the following weighted average assumptions in the Black-Scholes option valuation method:
Year Ended May 31,
2019
2018
2017
Expected term (in years) . . . . . . . . . . . . . . . . . . . . . . .
Volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rates. . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average grant date fair value. . . . . . . . . . . . .
5
0.72
2.83%
$1.33
4
0.77
1.95%
$2.07
4
0.81
1.02%
$1.09
The fair value of our ESPP purchase rights for the fiscal 2019, 2018 and 2017 was estimated using the following
weighted-average assumptions:
Year End May 31,
2019
2018
2017
Expected term (in years) . . . . . . . . . . . . . . . . . . . . . . .
Volatility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rates. . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average grant date fair value. . . . . . . . . . . . .
0.5 – 2.0
0.48 – 0.78
2.33%–2.82%
$1.14
0.5 – 2.0
0.56 – 0.81
1.92%–2.25%
$1.01
0.5 – 2.0
0.79 – 1.08
0.48%–0.80%
$1.65
47
EQUITY INCENTIVE PLAN:
In October 2006, the Company’s 2006 Equity Incentive Plan was approved by the shareholders, which provides for
granting of incentive stock options, non-statutory stock options, restricted stock, restricted stock units, stock
appreciation rights, performance units, performance shares and other stock or cash awards as the Company’s Board of
Directors may determine.
In October 2016, the Company’s 2016 Equity Incentive Plan was approved by the Company’s shareholders. The
2016 Equity Incentive Plan replaced our 2006 Equity Incentive Plan, which was scheduled to expire in October 2016,
and will continue in effect until 2026. A total of 2,238,000 shares of common stock have been reserved for issuance
under the Company’s 2016 Equity Incentive Plan, which includes 1,438,000 shares that remained available for issuance
under the 2006 Equity Incentive Plan. See the Company’s Registration Statement on Form S-8 filed with the Securities
and Exchange Commission on November 14, 2016 for further information regarding the 2016 Equity Incentive Plan.
As of May 31, 2019, out of the 4,277,000 shares authorized for grant under the 2016 Equity Incentive Plan, 3,129,000
stock options and RSUs were outstanding. As of May 31, 2018, out of the 4,718,000 shares authorized for grant under
the 2016 Equity Incentive Plan, 2,906,000 stock options and RSUs were outstanding.
The following tables summarize the Company’s stock option and RSU transactions during fiscal 2019, 2018 and 2017
(in thousands):
Balance, May 31, 2016. . . . . . . . . . . . . . . .
Additional shares reserved. . . . . . . . . . .
Options granted. . . . . . . . . . . . . . . . . . .
RSUs granted. . . . . . . . . . . . . . . . . . . . .
Options terminated . . . . . . . . . . . . . . . .
Plan shares expired. . . . . . . . . . . . . . . . .
Balance, May 31, 2017 . . . . . . . . . . . . . . . .
Options granted. . . . . . . . . . . . . . . . . . .
RSUs granted. . . . . . . . . . . . . . . . . . . . .
RSUs cancelled . . . . . . . . . . . . . . . . . . .
Options terminated . . . . . . . . . . . . . . . .
Plan shares expired. . . . . . . . . . . . . . . . .
Balance, May 31, 2018 . . . . . . . . . . . . . . . .
Options granted. . . . . . . . . . . . . . . . . . .
RSUs cancelled . . . . . . . . . . . . . . . . . . .
Options terminated . . . . . . . . . . . . . . . .
Plan shares expired. . . . . . . . . . . . . . . . .
Balance, May 31, 2019 . . . . . . . . . . . . . . . .
Available
Shares
1,847
2,238
(368)
(157)
55
(1,446)
2,169
(338)
(64)
33
16
(4)
1,812
(804)
8
195
(64)
1,147
48
The following table summarized the stock option transactions during fiscal 2019, 2018 and 2017 (in thousands, except
per share data):
Balances, May 31, 2016. . . . . . . . . . . . . . .
Options granted. . . . . . . . . . . . . . . . . . .
Options terminated . . . . . . . . . . . . . . . .
Options exercised. . . . . . . . . . . . . . . . . .
Balances, May 31, 2017. . . . . . . . . . . . . . . .
Options granted. . . . . . . . . . . . . . . . . . .
Options terminated . . . . . . . . . . . . . . . .
Options exercised. . . . . . . . . . . . . . . . . .
Outstanding Options
Weighted
Average
Exercise
Price
Aggregate
Intrinsic
Value
$1.66
$ 189
Number
of
Shares
3,201
368
(55)
(440)
3,074
338
(16)
(537)
$1.83
$1.42
$1.35
$1.73
$8,763
$3.56
$2.72
$1.17
Balances, May 31, 2018. . . . . . . . . . . . . . . .
2,859
$2.04
$1,987
Options granted. . . . . . . . . . . . . . . . . . .
Options terminated . . . . . . . . . . . . . . . .
Options exercised. . . . . . . . . . . . . . . . . .
804
(195)
(361)
$2.19
$2.32
$0.85
Balances, May 31, 2019. . . . . . . . . . . . . . . .
3,107
$2.20
$283
Options fully vested and expected to vest
at May 31, 2019
3,079
$2.20
$282
The options outstanding and exercisable at May 31, 2019 were in the following exercise price ranges (in thousands,
except per share data):
Options Outstanding
at May 31, 2019
Options Exercisable
at May 31, 2019
Weighted
Average
Remaining
Contractual
Life (Years)
0.52
0.78
4.57
3.55
5.16
Weighted
Average
Exercise
Price
$0.85
$1.28
$1.83
$2.43
$3.85
Number
Outstanding
Shares
47
456
761
1,600
243
Weighted
Average
Remaining
Contractual
Life (Years)
0.52
0.78
3.50
2.81
5.20
Weighted
Average
Exercise
Price
$0.85
$1.28
$1.79
$2.44
$3.79
Number
Exercisable
Shares
47
456
427
1,244
140
Range of
Exercise
Prices
$0.80-$0.97
$1.09-$1.28
$1.65-$2.06
$2.10-$2.81
$3.46-$3.93
Aggregate
Intrinsic
Value
$0.80-$3.93
3,107
3.47
$2.20
2,314
2.64
$2.14
$274
The total intrinsic values of options exercised were $338,000, $1,058,000 and $810,000 during fiscal 2019, 2018 and
2017, respectively. The weighted average contractual life of the options exercisable and expected to be exercisable at
May 31, 2019 was 3.46 years.
Options to purchase 2,314,000, 2,312,000 and 2,422,000 shares were exercisable at May 31, 2019, 2018 and 2017,
respectively. These exercisable options had weighted average exercise prices of $2.14, $1.89 and $1.63 as of May 31,
2019, 2018 and 2017, respectively.
During the fiscal year ended May 31, 2019, there were no RSUs granted to employees. During the fiscal year ended
May 31, 2019, 16,000 RSUs became fully vested and 8,000 RSUs were cancelled. 23,000 RSUs were outstanding and
unvested at May 31, 2019. The intrinsic value of the outstanding and unvested RSUs at May 31, 2019 was $40,000.
During the fiscal year ended May 31, 2018, RSUs for 64,000 shares were granted to employees. The market value on the
date of the grant of these RSUs was $3.93 per share. During the fiscal year ended May 31, 2018, 16,000 RSUs became
49
fully vested and 33,000 RSUs were cancelled. 47,000 RSUs were outstanding and unvested at May 31, 2018. The
intrinsic value of the outstanding and unvested RSUs at May 31, 2018 was $122,000. During the fiscal year ended May
31, 2017, RSUs for 74,000 shares were granted to employees. The market value on the date of the grant of these RSUs
was $1.68 per share. 42,000 RSUs became fully vested during the fiscal year ended May 31, 2017, and 32,000 RSUs were
outstanding and unvested at May 31, 2017. The intrinsic value of the outstanding and unvested RSUs at May 31, 2017
was $145,000.
There were no RSUs granted to members of the Board of Directors during fiscal 2019 and 2018. During the fiscal
year ended May 31, 2017, RSUs for 83,000 shares were granted to members of the Company’s Board of Directors. The
weighted average market value on the date of the grant of these RSUs was $1.86 per share. All of these RSUs were fully
vested at May 31, 2017.
EMPLOYEE STOCK PURCHASE PLAN:
In October 2006, the Company’s shareholders approved the 2006 Employee Stock Purchase Plan. In October 2016,
the Company’s shareholders approved the Company’s Amended and Restated 2006 Employee Stock Purchase Plan (the
“Purchase Plan”), which amended and restated the 2006 Employee Stock Purchase Plan. The Purchase Plan extended
the term of the 2006 Employee Stock Purchase Plan indefinitely. See the Company’s Registration Statements on Form
S-8 filed with the Securities and Exchange Commission on November 14, 2016 and November 21, 2018 for further
information regarding the Purchase Plan. The Purchase Plan has consecutive, overlapping, twenty-four month offering
periods. Each twenty-four-month offering period includes four six-month purchase periods. The offering periods
generally begin on the first trading day on or after April 1 and October 1 each year. All employees who work a
minimum of 20 hours per week and are customarily employed by the Company (or an affiliate thereof) for at least five
months per calendar year are eligible to participate. Under the Purchase Plan, shares are purchased through employee
payroll deductions at exercise prices equal to 85% of the lesser of the fair market value of the Company’s common stock
at either the first day of an offering period or the last day of the purchase period. If a participant’s rights to purchase
stock under all employee stock purchase plans of the Company accrue at a rate which exceeds $25,000 worth of stock
for a calendar year, such participant may not be granted an option to purchase stock under the Purchase Plan. The
maximum number of shares a participant may purchase during a single purchase period is 3,000 shares. In October
2018, the Company’s shareholders approved an amendment to the Purchase Plan to increase the number of shares
authorized for issuance thereunder by an additional 350,000 shares of the Company’s common stock. After such
amendment, a total of 1,850,000 shares of the Company’s common stock have been authorized for issuance under the
Purchase Plan. During the fiscal years ended May 31, 2019, 2018 and 2017, ESPP purchase rights of 379,000, 359,000,
and 1,000 shares, respectively, were granted. For the fiscal years ended May 31, 2019, 2018 and 2017, approximately
125,000, 237,000 and 151,000 shares of common stock, respectively, were issued under the Purchase Plan. As of May
31, 2019, a total of 1,481,000 shares have been issued under the Purchase Plan, and 369,000 ESPP shares remain
available for issuance.
11. EMPLOYEE BENEFIT PLANS:
EMPLOYEE STOCK OWNERSHIP PLAN:
The Company has a non-contributory, trusteed employee stock ownership plan for full-time employees who have
completed three consecutive months of service and for part-time employees who have completed one year of service
and have attained an age of 21. The Company can contribute either shares of the Company’s stock or cash to the plan.
The contribution is determined annually by the Company and cannot exceed 15% of the annual aggregate salaries of
those employees eligible for participation in the plan. On May 31, 2007, the Company converted the Aehr Test Systems
Employee Stock Bonus Plan into the Aehr Test Systems Employee Stock Ownership Plan (the “Plan”). The stock
bonus plan was converted to an employee stock ownership plan (“ESOP”) to enable the Plan to better comply with
changes in the law regarding Company stock. Individuals’ account balances vest at a rate of 20% per year commencing
upon completion of two years of service. Non-vested balances, which are forfeited following termination of
employment, are allocated to the remaining employees in the Plan. Under the Plan provisions, each employee who
reaches age fifty-five (55) and has been a participant in the Plan for ten years will be offered an election each year to
direct the transfer of up to 25% of his/her ESOP account to the employee self-directed account in the Savings and
Retirement Plan. For anyone who met the above prerequisites, the first election to diversify holdings was offered after
May 31, 2008. In the sixth year, employees will be able to diversify up to 50% of their ESOP accounts. Contributions
of $60,000 per year were authorized for the plan during fiscal 2019, 2018 and 2017. The contribution amounts are
recorded as compensation expense, in the period authorized and included in accrued expenses, in the period authorized.
Contributions of 23,000 shares were made to the ESOP during fiscal 2019 for fiscal 2018. Contributions of 13,000
shares were made to the ESOP during fiscal 2018 for fiscal 2017. Contributions of 59,000 shares were made to the
ESOP during fiscal 2017 for fiscal 2016. The contribution for fiscal 2019 will be made in fiscal 2020. Shares held in the
ESOP are included in the EPS calculation.
50
401(K) PLAN:
The Company maintains a defined contribution savings plan (the “401(k) Plan”) to provide retirement income to all
qualified employees of the Company. The 401(k) Plan is intended to be qualified under Section 401(k) of the Internal
Revenue Code of 1986, as amended. The 401(k) Plan is funded by voluntary pre-tax contributions from employees.
Contributions are invested, as directed by the participant, in investment funds available under the 401(k) Plan. The
Company is not required to make, and did not make, any contributions to the 401(k) Plan during fiscal 2019, 2018 and
2017.
12. OTHER INCOME (EXPENSE), NET:
Other income (expense), net comprises the following (in thousands):
Foreign exchange gain (loss). . . . . . . . . . . . . . . . . .
Other income, net. . . . . . . . . . . . . . . . . . . . . . . . . .
13. PRODUCT WARRANTIES:
2019
$43
1
$44
Year Ended May 31,
2018
$(63)
2
$(61)
2017
$(21)
--
$(21)
The Company provides for the estimated cost of product warranties at the time revenues are recognized on the
products shipped. While the Company engages in extensive product quality programs and processes, including actively
monitoring and evaluating the quality of its component suppliers, the Company’s warranty obligation is affected by
product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual
product failure rates, material usage or service delivery costs differ from the Company’s estimates, revisions to the
estimated warranty liability would be required.
The standard warranty period is one year for systems and ninety days for parts and service.
Following is a summary of changes in the Company’s liability for product warranties during the fiscal years ended May
31, 2019 and 2018 (in thousands):
Balance at the beginning of the year. . . . . . . . . . . . . . .
Accruals for warranties issued during the year . . . . . . .
Consumption of reserves . . . . . . . . . . . . . . . . . . . . . . .
Balance at the end of the year. . . . . . . . . . . . . . . . . . . .
May 31,
2019
2018
$ 135
214
(195)
$ 154
$ 113
329
(307)
$ 135
The accrued warranty balance is included in accrued expenses on the consolidated balance sheets.
14. SEGMENT INFORMATION:
The Company has only one reportable segment. The information for revenue category by type, product line,
geography and timing of revenue recognition, is summarized in Note “2. 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):
United States. . . . . . . . . . . . . . . . . . . . . . .
Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe. . . . . . . . . . . . . . . . . . . . . . . . . . . .
May 31,
2019
2018
$1,005
40
--
$1,045
$1,156
40
7
$1,203
51
There were no revenues through distributors for the fiscal years ended May 31, 2019 and 2018.
The Company’s Japanese and German subsidiaries primarily comprise the foreign operations. Substantially all of the
sales of the subsidiaries are made to unaffiliated Japanese or European customers. Net sales from outside the United
States include those of Aehr Test Systems Japan K.K. and Aehr Test Systems GmbH.
15. RESTRUCTURING:
During the fiscal year ended May 31, 2019, the Company implemented a restructuring plan in order to streamline its
operations and better align its structure with its objectives going forward. In connection with the restructuring plan, the
Company recognized $725,000 of restructuring charges related to employee termination expenses during the fiscal year
ended May 31, 2019. The Company paid $317,000 of the restructuring charge during fiscal year ended May 31, 2019. At
May 31, 2019, the balance of $408,000 of the restructuring charge was included in accrued expenses on the
accompanying condensed consolidated balance sheets, and is expected to be paid in fiscal year 2020. The Company
does not expect to incur any further expenses in connection with this restructuring plan. There were no restructuring
charges incurred for the fiscal years ended May 31, 2018 and 2017.
16. RELATED PARTY TRANSACTIONS:
Mario M. Rosati, one of the Company’s directors, is also a member of Wilson Sonsini Goodrich & Rosati,
Professional Corporation, which has served as the Company’s outside corporate counsel and has received compensation
at normal commercial rates for these services. The amounts of transactions during fiscal years ended May 31, 2019,
2018 and 2017 were $90,000, $64,000, and $440,000, respectively. At May 31, 2019 and 2018, the Company had $13,000
and $5,000, respectively, payable to Wilson Sonsini Goodrich & Rosati.
17. COMMITMENTS AND CONTINGENCIES:
COMMITMENTS
The Company leases most of its manufacturing and office space under operating leases. The Company entered into
non-cancelable operating lease agreements for its United States manufacturing and office facilities and maintains
equipment under non-cancelable operating leases in Germany. The Company’s principal administrative and production
facilities are located in Fremont, California, in a 51,289 square foot building. The Company’s lease was renewed in
February 2018 and expires in July 2023. The Company’s facility in Japan is located in a 418 square foot office in Tokyo
under a cancellable lease which expires in June 2022. The Company also maintains a 1,585 square foot warehouse in
Yamanashi under a lease which expires in May 2020. The Company leases a 492 square foot sales and support office in
Utting, Germany. The lease, which began February 1, 1992 and expires on January 31, 2021, contains an automatic
twelve months renewal, at rates to be determined, if no notice is given prior to six months from expiry. Under the lease
agreements, the Company is responsible for payments of utilities, taxes and insurance.
Minimum annual rentals payments under non-cancellable operating leases in each of the next five fiscal years and
thereafter are as follows (in thousands):
Years Ending May 31,
2020. . . . . . . . . . . . . . . . . . . . . . .
2021. . . . . . . . . . . . . . . . . . . . . . .
2022. . . . . . . . . . . . . . . . . . . . . . .
2023. . . . . . . . . . . . . . . . . . . . . . .
2024. . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . .
Total
$762
766
772
795
133
--
$3,228
Rental expense for the fiscal years ended May 31, 2019, 2018 and 2017 was $787,000, $587,000 and $509,000,
respectively.
At both May 31, 2019 and 2018, the Company had restricted cash of $80,000 held by a financial institution,
representing a security deposit for its United States manufacturing and office space lease. This amount is included in
other assets on the consolidated balance sheets.
52
PURCHASE OBLIGATIONS
The Company has purchase obligations to certain suppliers. In some cases the products the Company purchases are
unique and have provisions against cancellation of the order. At May 31, 2019, the Company had $2,525,000 of
purchase obligations which are due within the following 12 months. This amount does not include contractual
obligations recorded on the consolidated balance sheets as liabilities.
CONTINGENCIES
The Company may, from time to time, be involved in legal proceedings arising in the ordinary course of business.
While there can be no assurances as to the ultimate outcome of any litigation involving the Company, management does
not believe any pending legal proceedings will result in judgment or settlement that will have a material adverse effect on
the Company’s consolidated financial position, results of operations or cash flows.
In the normal course of business to facilitate sales of its products, the Company indemnifies other parties, including
customers, with respect to certain matters, for example, including against losses arising from a breach of representations
or covenants, or from intellectual property infringement or other claims. These agreements may limit the time within
which an indemnification claim can be made and the amount of the claim. In addition, the Company has entered into
indemnification agreements with its officers and directors, and the Company’s bylaws contain similar indemnification
obligations to the Company’s agents.
It is not possible to determine the maximum potential amount under these indemnification agreements due to the
limited history of prior indemnification claims and the unique facts and circumstances involved in each particular
agreement. To date, payments made by the Company under these agreements have not had a material impact on the
Company’s operating results, financial position or cash flows.
18. SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED):
The following tables (presented in thousands, except per share data) sets forth selected unaudited condensed
consolidated statements of operations data for each of the four quarters of the fiscal years ended May 31, 2019 and 2018.
The unaudited quarterly information has been prepared on the same basis as the annual information presented elsewhere
herein and, in the Company’s opinion, includes all adjustments (consisting only of normal recurring entries) necessary
for a fair statement of the information for the quarters presented. The operating results for any quarter are not
necessarily indicative of results for any future period and should be read in conjunction with the audited consolidated
financial statements of the Company’s and the notes thereto included elsewhere herein.
Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (loss) income . . . . . . . . . . . . . . . . . . . . . . . .
Net (loss) income per share basic and diluted. . .
Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income per share basic and diluted . . . . . . .
Three Months Ended
Aug. 31,
2018
$ 4,740
$ 1,553
$(1,515)
$ (0.07)
Nov. 30,
2018
$ 5,911
$ 2,398
$ (629)
$ (0.03)
Feb. 28,
2019
$ 3,163
$ 272
$(3,201)
$ (0.14)
May 31,
2019
$ 7,242
$ 3,379
$ 110
$ 0.00
Three Months Ended
Aug. 31,
2017
$6,970
$2,918
$ 10
$ 0.00
Nov. 30,
2017
$ 7,923
$ 3,131
$ 60
$ 0.00
Feb. 28,
2018
$ 7,393
$ 3,176
$ 267
$ 0.01
May 31,
2018
$ 7,269
$ 3,161
$ 191
$ 0.01
53
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Our management evaluated, with the participation of our Chief Executive Officer and 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 Annual Report on Form 10-K. 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
Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities
and Exchange Commission rules and forms, and that such information is accumulated and communicated to
management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow for timely
decisions regarding required disclosure.
(b) Management’s report on internal control over financial reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting as defined in Rule 13a-15(f) of the Exchange Act. Under the supervision and with the participation of our
Chief Executive Officer and Chief Financial Officer, our management conducted an evaluation of the effectiveness of
our internal control over financial reporting based upon the framework in “Internal Control – Integrated Framework” (2013
Framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that
evaluation, management has concluded that the Company’s internal control over financial reporting was effective as of
May 31, 2019. This annual report does not include an attestation report of the Company’s registered public accounting
firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit
the Company to provide only management’s report in this Annual Report.
(c) Changes in internal controls over financial reporting.
There were no changes in our internal controls over financial reporting that occurred during the period covered
by this Annual Report on Form 10-K that have materially affected, or are reasonably likely to materially affect, our
internal controls over financial reporting.
Item 9B. Other Information
None.
54
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information required by this item is incorporated by reference to our Proxy Statement to be filed with the
Securities and Exchange Commission in connection with our 2019 Annual Meeting of Shareholders.
Item 11. Executive Compensation
The information required by this item is incorporated by reference to our Proxy Statement to be filed with the
Securities and Exchange Commission in connection with our 2019 Annual Meeting of Shareholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated by reference to our Proxy Statement to be filed with the
Securities and Exchange Commission in connection with our 2019 Annual Meeting of Shareholders.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated by reference to our Proxy Statement to be filed with the
Securities and Exchange Commission in connection with our 2019 Annual Meeting of Shareholders.
Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated by reference to our Proxy Statement to be filed with the
Securities and Exchange Commission in connection with our 2019 Annual Meeting of Shareholders.
55
Item 15. Exhibits, Financial Statement Schedules
(a) The following documents are filed as part of this Report:
PART IV
1. Financial Statements
See Index under Item 8.
2. Financial Statement Schedule
See Index under Item 8.
3. Exhibits
See Item 15(b) below.
(b) Exhibits
The following exhibits are filed as part of or incorporated by reference into this Report:
56
Exhibit No.
-----------
3.1(1)
3.2
4.1(2)
4.7(3)
10.1(4)
10.2(5)
10.3(6)
10.4(7)
10.5(8)
10.6(9)
10.6.1(10)
10.6.2(11)
10.6.3(12)
Description
------------------------------------------------------------------------------------------------------------
Restated Articles of Incorporation of Registrant.
Amended and Restated Bylaws of Registrant.
Form of Common Stock certificate.
Registration Rights Agreement by and among the Company and the
Investors (as defined therein), dated as of September 22, 2016.
2006 Equity Incentive Plan.*
Amended and Restated 2006 Employee Stock Purchase Plan.*
2016 Equity Incentive Plan.*
Form of Indemnification Agreement entered into between Registrant
and its directors and executive officers.*
Form of Change of Control Agreement.*
Lease dated August 3, 1999 for facilities located at Building C,
400 Kato Terrace, Fremont, California.
First Amendment dated May 06, 2008 for facilities located at
400 Kato Terrace, Fremont, California.
Second Amendment dated November 7, 2014 for facilities located at
400 Kato Terrace, Fremont, California.
Third Amendment dated February 27, 2018 for facilities located at
400 Kato Terrace, Fremont, California.
Offer Letter dated January 3, 2012, between the Company and Gayn Erickson.*
Offer Letter dated March 5, 2013, between the Company and Rhea Posedel.*
Change of Control Severance Agreement dated January 3, 2012, between the Company and Gayn
10.10(13)
10.11(14)
10.12(15)
Erickson.*
10.13(16)
10.15(17)
10.16(18)
10.17(19)
10.18(20)
10.19(21)
10.21(22)
21.1
23.1
24.1
31.1
31.2
32.1
Amended and Restated Change of Control Severance Agreement dated March 5, 2013, between the
Company and Rhea J. Posedel.*
Form of 2006 Equity Incentive Plan Stock Option Award Agreement.*
Form of 2006 Equity Incentive Plan Restricted Stock Unit Award.*
Form of 2016 Equity Incentive Plan Stock Option Award Agreement.*
Form of 2016 Equity Incentive Plan Restricted Stock Unit Award.*
Purchase Agreement by and among the Company and the Investors (as
defined therein), dated as of September 22, 2016.
Underwriting Agreement dated April 13, 2017, between the Company and Craig-Hallum Capital
Group LLLC
Subsidiaries of the Company.
Consent of BPM LLP - Independent Registered Public Accounting Firm (filed herewith).
Power of Attorney (incorporated by reference to the signature page of this
Annual Report on Form 10-K).
Certification Statement of Chief Executive Officer pursuant to
Section 302(a) of the Sarbanes-Oxley Act of 2002 (filed herewith).
Certification Statement of Chief Financial Officer pursuant to
Section 302(a) of the Sarbanes-Oxley Act of 2002 (filed herewith).
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 (furnished
herewith).
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase Document
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
------------------------
(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 the same-numbered exhibit previously filed with Amendment No.1 to the Company’s
Registration Statement on Form S-1 filed July 17, 1997 (File No. 333-28987).
(3) Incorporated by reference to Exhibit 10.2 previously filed with the Company’s Current Report on Form 8-K filed
September 28, 2016 (File No. 000-22893).
(4) Incorporated by reference to Exhibit 4.1 previously filed with the Company’s Registration Statement on Form S-8
filed October 27, 2006 (File No. 333-138249).
57
(5) Incorporated by reference to Exhibit 4.2 previously filed with the Company’s Registration Statement on Form S-8
filed November 14, 2016 (File No. 333-214589).
(6) Incorporated by reference to Exhibit 4.1 previously filed with the Company’s Registration Statement on Form S-8
filed November 14, 2016 (File No. 333-214589).
(7) Incorporated by reference to Exhibit 10.4 previously filed with Amendment No.1 to the Company’s Registration
Statement on Form S-1 filed July 17, 1997 (File No. 333-28987).
(8) Incorporated by reference to Exhibit 10.14 previously filed with the Company’s Form 10-K for the year ended May
31, 2001 filed August 29, 2001 (File No. 000-22893).
(9) Incorporated by reference to Exhibit 10.12 exhibit previously filed with the Company’s Form 10-K for the year
ended May 31, 1999 filed August 30, 1999 (File No. 000-22893).
(10) Incorporated by reference to Exhibit 10.15 previously filed with the Company’s Current Report on Form 8-K filed
May 9, 2008 (File No. 000-22893).
(11) Incorporated by reference to Exhibit 10.1 previously filed with the Company’s Current Report on Form 8-K filed
November 12, 2014 (File No. 000-22893).
(12) Incorporated by reference to Exhibit 10.1 previously filed with the Company’s Current Report on Form 8-K filed
March 2, 2018 (File No. 000-22893).
(13) Incorporated by reference to Exhibit No. 10.1 previously filed with the Company's Current Report on Form 8-K
filed January 9, 2012 (File No. 000-22893).
(14) Incorporated by reference to Exhibit No. 10.1 previously filed with the Company's Current Report on Form 8-K
filed March 8, 2013 (File No. 000-22893).
(15) Incorporated by reference to Exhibit No. 10.3 previously filed with the Company's Current Report on Form 8-K
filed January 9, 2012 (File No. 000-22893).
(16) Incorporated by reference to Exhibit No. 10.2 previously filed with the Company's Current Report on Form 8-K
filed March 8, 2013 (File No. 000-22893).
(17) Incorporated by reference to Exhibit 10.17 previously filed with the Company’s Annual Report on Form 10-K filed
August 29, 2016 (File No. 000-22893).
(18) Incorporated by reference to Exhibit 10.18 previously filed with the Company’s Annual Report on Form 10-K filed
August 29, 2016 (File No. 000-22893).
(19) Incorporated by reference to Exhibit 10.19 previously filed with the Company’s Annual Report on Form 10-K filed
August 29, 2017 (File No. 000-22893).
(20) Incorporated by reference to Exhibit 10.20 previously filed with the Company’s Annual Report on Form 10-K filed
August 29, 2017 (File No. 000-22893).
(21) Incorporated by reference to Exhibit 10.1 previously filed with the Company’s Current Report on Form 8-K filed
September 28, 2016 (File No. 000-22893).
(22) Incorporated by reference to Exhibit 1.1 previously filed with the Company’s Current Report on Form 8-K filed
April 19, 2017 (File No. 000-22893).
* Management contracts or compensation plans or arrangements in which directors or executive officers are eligible to
participate.
58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly
caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: August 28, 2019
AEHR TEST SYSTEMS
By: /s/ GAYN ERICKSON
---------------------------------------
Gayn Erickson
PRESIDENT AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints Gayn Erickson and Kenneth B. Spink, jointly and severally, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and
to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, this Annual Report on Form 10-K has been signed below
by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date
-------------------------- ----------------------------------- -----------------
President, Chief Executive
Officer, and Director
/s/ GAYN ERICKSON (Principal Executive Officer) August 28, 2019
-------------------------- -----------------
Gayn Erickson Vice President of Finance
and Chief Financial Officer
/s/ KENNETH B. SPINK (Principal Financial and August 28, 2019
-------------------------- Accounting Officer) -----------------
Kenneth B. Spink
/s/ LAURA OLIPHANT Director August 28, 2019
-------------------------- -----------------
Laura Oliphant
/s/ RHEA J. POSEDEL Chairman August 28, 2019
-------------------------- -----------------
Rhea J. Posedel
/s/ MARIO M. ROSATI Director August 28, 2019
-------------------------- -----------------
Mario M. Rosati
/s/ JOHN M. SCHNEIDER Director August 28, 2019
-------------------------- -----------------
John M. Schneider
/s/ HOWARD T. SLAYEN Director August 28, 2019
-------------------------- -----------------
Howard T. Slayen
59
Exhibit 3.2
BY-LAWS
OF
AEHR TEST SYSTEMS
(As Amended as of July 17, 2019)
ARTICLE I
CORPORATE OFFICES
1.1
PRINCIPAL OFFICE.
The board of directors shall fix the location of the principal executive office of the corporation at any place
within or outside the State of California. If the principal executive office is located outside such state, and the
corporation has one or more business offices in such state, the board of directors shall fix and designate a principal
business office in the State of California.
1.2
OTHER OFFICES.
The board of directors may at any time establish branch or subordinate offices at any place or places where the
corporation is qualified to do business.
ARTICLE II
MEETINGS OF SHAREHOLDERS
2.1
PLACE OF MEETINGS.
Meetings of shareholders shall be held at any place within or outside the State of California designated by the
board of directors. In the absence of any such designation, shareholders' meetings shall be held at the principal
executive office of the corporation.
2.2
ANNUAL MEETING.
The annual meeting of shareholders shall be held each year on a date and at a time designated by the board of
directors. In the absence of such designation, the annual meeting of shareholders shall be held on the first Wednesday
of October in each year at 4:00 p.m. However, if such day falls on a legal holiday, then the meeting shall be held at the
same time and place on the next succeeding full business day. At the meeting, directors shall be elected, and any other
proper business may be transacted.
2.3
SPECIAL MEETING.
A special meeting of the shareholders may be called at any time by the board of directors, or by the chairman
of the board, or by the president, or by one or more shareholders holding shares in the aggregate entitled to cast not less
than ten percent (10%) of the votes at that meeting.
If a special meeting is called by any person or persons other than the board of directors, the request shall be in
writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall
be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the chairman of the
board, the president, any vice president or the secretary of the corporation. The officer receiving the request shall cause
notice to be promptly given to the shareholders entitled to vote, in accordance with the provisions of Sections 2.4 and
2.5 of these by-laws, that a meeting will be held at the time requested by the person or persons calling the meeting, not
less than thirty-five (35) nor more than sixty (60) days after the receipt of the request. If the notice is not given within
twenty (20) days after receipt of the request, the person or persons requesting the meeting may give the notice. Nothing
contained in this paragraph of this Section 2.3 shall be construed as limiting, fixing or affecting the time when a meeting
of shareholders called by action of the board of directors may be held.
60
2.4
NOTICE OF SHAREHOLDERS' MEETINGS.
All notices of meetings of shareholders shall be sent or otherwise given in accordance with Section 2.5 of these
by-laws not less than ten (10) nor more than sixty (60) days before the date of the meeting. The notice shall specify the
place, date and hour of the meeting and (i) in the case of a special meeting, the general nature of the business to be
transacted (no business other than that specified in the notice may be transacted) or (ii) in the case of the annual
meeting, those matters which the board of directors, at the time of giving the notice, intends to present for action by the
shareholders. The notice of any meeting at which directors are to be elected shall include the name of any nominee or
nominees whom, at the time of the notice, management intends to present for election.
If action is proposed to be taken at any meeting for approval of (i) a contract or transaction in which a director
has a direct or indirect financial interest, pursuant to Section 310 of the Corporations Code of California (the "Code"),
(ii) an amendment of the articles of incorporation, pursuant to Section 902 of the Code, (iii) a reorganization of the
corporation, pursuant to Section 1201 of the Code, (iv) a voluntary dissolution of the corporation, pursuant to
Section 1900 of the Code, or (v) a distribution in dissolution other than in accordance with the rights of outstanding
preferred shares, pursuant to Section 2007 of the Code, the notice shall also state the general nature of that proposal.
2.5
MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE.
Notice of any meeting of shareholders shall be given either personally or by first-class mail or telegraphic or
other written communication, charges prepaid, addressed to the shareholder at the address of that shareholder appearing
on the books of the corporation or given by the shareholder to the corporation for the purpose of notice. If no such
address appears on the corporation's books or is given, notice shall be deemed to have been given if sent to that
shareholder by first-class mail or telegraphic or other written communication to the corporation's principal executive
office, or if published at least once in a newspaper of general circulation in the county where that office is located.
Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by
telegram or other means of written communication.
If any notice addressed to a shareholder at the address of that shareholder appearing on the books of the
corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States
Postal Service is unable to deliver the notice to the shareholder at that address, all future notices or reports shall be
deemed to have been duly given without further mailing if the same shall be available to the shareholder on written
demand of the shareholder at the principal executive office of the corporation for a period of one (1) year from the date
of the giving of the notice.
An affidavit of the mailing or other means of giving any notice of any shareholders' meeting, executed by the
secretary, assistant secretary or any transfer agent of the corporation giving the notice, shall be prima facie evidence of
the giving of such notice.
2.6
QUORUM.
The presence in person or by proxy of the holders of a majority of the shares entitled to vote thereat
constitutes a quorum for the transaction of business at all meetings of shareholders. The shareholders present at a duly
called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the
withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is
approved by at least a majority of the shares required to constitute a quorum.
2.7
ADJOURNED MEETING; NOTICE.
Any shareholders' meeting, annual or special, whether or not a quorum is present, may be adjourned from time
to time by the vote of the majority of the shares represented at that meeting, either in person or by proxy, but in the
absence of a quorum, no other business may be transacted at that meeting, except as provided in Section 2.6 of these by-
laws.
When any meeting of shareholders, either annual or special, is adjourned to another time or place, notice need
not be given of the adjourned meeting if the time and place are announced at the meeting at which the adjournment is
taken, unless a new record date for the adjourned meeting is fixed, or unless the adjournment is for more than forty-five
(45) days from the date set for the original meeting, in which case notice of the adjourned meeting shall be given.
Notice of any such adjourned meeting shall be given to each shareholder of record entitled to vote at the adjourned
meeting in accordance with the provisions of Sections 2.4 and 2.5 of these by-laws. At any adjourned meeting the
corporation may transact any business which might have been transacted at the original meeting.
61
2.8
VOTING.
The shareholders entitled to vote at any meeting of shareholders shall be determined in accordance with the
provisions of Section 2.11 of these by-laws, subject to the provisions of Sections 702 to 704, inclusive, of the Code
(relating to voting shares held by a fiduciary, in the name of a corporation or in joint ownership).
The shareholders' vote may be by voice vote or by ballot; provided, however, that any election for directors
must be by ballot if demanded by any shareholder before the voting has begun.
On any matter other than the election of directors, any shareholder may vote part of the shares in favor of the
proposal and refrain from voting the remaining shares or vote them against the proposal, but, if the shareholder fails to
specify the number of shares which the shareholder is voting affirmatively, it will be conclusively presumed that the
shareholder's approving vote is with respect to all shares which the shareholder is entitled to vote.
If a quorum is present, the affirmative vote of the majority of the shares represented at the meeting and entitled
to vote on any matter (other than the election of directors) shall be the act of the shareholders, unless the vote of a
greater number, or voting by classes, is required by the Code or by the articles of incorporation.
At a shareholders' meeting at which directors are to be elected, no shareholder shall be entitled to cumulate
votes (i.e. cast for any one or more candidates a number of votes greater than the number of the shareholder's shares)
unless the candidates' names have been placed in nomination prior to commencement of the voting and a shareholder
has given notice prior to commencement of the voting of the shareholder's intention to cumulate votes. If any
shareholder has given such a notice, then every shareholder entitled to vote may cumulate votes for candidates placed in
nomination and give one candidate a number of votes equal to the number of directors to be elected multiplied by the
number of votes to which that shareholder's shares are entitled, or distribute the shareholder's votes on the same
principle among any or all of the candidates, as the shareholder thinks fit. The candidates receiving the highest number
of votes, up to the number of directors to be elected, shall be elected.
2.9
VALIDATION OF MEETINGS: WAIVER OF NOTICE; CONSENT.
The transactions of any meeting of shareholders, either annual or special, however called and noticed, and
wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present
either in person or by proxy, and if, either before or after the meeting, each person entitled to vote, who was not present
in person or by proxy, signs a written waiver of notice or a consent to the holding of the meeting or an approval of the
minutes thereof. The waiver of notice or consent need not specify either the business to be transacted or the purpose of
any annual or special meeting of shareholders, except that if action is taken or proposed to be taken for approval of any
of those matters specified in the second paragraph of Section 2.4 of these by-laws, the waiver of notice or consent shall
state the general nature of the proposal. All such waivers, consents and approvals shall be filed with the corporate
records or made a part of the minutes of the meeting.
Attendance by a person at a meeting shall also constitute a waiver of notice of that meeting, except when the
person objects, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully
called or convened, and except that attendance at a meeting is not a waiver of any right to object to the consideration of
a matter not included in the notice of the meeting, if that objection is expressly made at the meeting.
2.10
SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING.
Any action which may be taken at any annual or special meeting of shareholders may be taken without a
meeting and without prior notice, if a consent in writing, setting forth the action so taken, is signed by the holders of
outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take that
action at a meeting at which all shares entitled to vote on that action were present and voted.
In the case of election of directors, such a consent shall be effective only if signed by the holders of all
outstanding shares entitled to vote for the election of directors; provided, however, that a director may be elected at any
time to fill a vacancy on the board of directors that has not been filled by the directors, by the written consent of the
holders of a majority of the outstanding shares entitled to vote for the election of directors.
All such consents shall be maintained in the corporate records. Any shareholder giving a written consent, or
the shareholder's proxy holders, or a transferee of the shares, or a personal representative of the shareholder, or their
respective proxy holders, may revoke the consent by a writing received by the secretary of the corporation before written
consents of the number of shares required to authorize the proposed action have been filed with the secretary.
62
If the consents of all shareholders entitled to vote have not been solicited in writing, and if the unanimous
written consent of all such shareholders shall not have been received, the secretary shall give prompt notice of the
corporate action approved by the shareholders without a meeting. Such notice shall be given in the manner specified in
Section 2.5 of these by-laws. In the case of approval of (i) a contract or transaction in which a director has a direct or
indirect financial interest, pursuant to Section 310 of the Code, (ii) indemnification of a corporate "agent", pursuant to
Section 317 of the Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of the Code, and (iv) a
distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to
Section 2007 of the Code, the notice shall be given at least ten (10) days before the consummation of any action
authorized by that approval.
2.11
RECORD DATE FOR SHAREHOLDER NOTICE, VOTING AND GIVING CONSENTS.
For purposes of determining the shareholders entitled to notice of any meeting or to vote thereat or entitled to
give consent to corporate action without a meeting, the board of directors may fix, in advance, a record date, which shall
not be more than sixty (60) days nor less than ten (10) days before the date of any such meeting nor more than sixty (60)
days before any such action without a meeting, and in such event only shareholders of record on the date so fixed are
entitled to notice and to vote or to give consents, as the case may be, notwithstanding any transfer of any shares on the
books of the corporation after the record date, except as otherwise provided in the Code.
If the board of directors does not so fix a record date:
the record date for determining shareholders entitled to notice of or to vote at a meeting of
shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if
notice is waived, at the close of business on the business day next preceding the day on which the meeting is held; and
(a)
(b)
the record date for determining shareholders entitled to give consent to corporate action in
writing without a meeting, (i) when no prior action by the board has been taken, shall be the day on which the first
written consent is given or (ii) when prior action by the board has been taken, shall be the day on which the board
adopts the resolution relating to that action, or the sixtieth (60th) day before the date of such other action, whichever is
later.
The record date for any other purpose shall be as provided in Article VIII of these by-laws.
2.12
PROXIES.
Every person entitled to vote for directors, or on any other matter, shall have the right to do so either in person
or by one or more agents authorized by a written proxy signed by the person and filed with the secretary of the
corporation. A proxy shall be deemed signed if the shareholder's name is placed on the proxy (whether by manual
signature, typewriting, telegraphic transmission or otherwise) by the shareholder or the shareholder's attorney-in-fact. A
validly executed proxy which does not state that it is irrevocable shall continue in full force and effect unless (i) revoked
by the person executing it, before the vote pursuant to that proxy, by a writing delivered to the corporation stating that
the proxy is revoked, or by a subsequent proxy executed by, or attendance at the meeting and voting in person by, the
person executing the proxy or (ii) written notice of the death or incapacity of the maker of that proxy is received by the
corporation before the vote pursuant to that proxy is counted; provided, however, that no proxy shall be valid after the
expiration of eleven (11) months from the date of the proxy, unless otherwise provided in the proxy. The revocability of
a proxy that states on its face that it is irrevocable shall be governed by the provisions of Sections 705(e) and 705(f) of
the Code.
2.13
INSPECTORS OF ELECTION.
Before any meeting of shareholders, the board of directors may appoint an inspector or inspectors of election
to act at the meeting or its adjournment. If no inspector of election is so appointed, the chairman of the meeting may,
and on the request of any shareholder or a shareholder's proxy shall, appoint an inspector or inspectors of election to act
at the meeting. The number of inspectors shall be either one (1) or three (3). If inspectors are appointed at a meeting
pursuant to the request of one (1) or more shareholders or proxies, the holders of a majority of shares or their proxies
present at the meeting shall determine whether one (1) or three (3) inspectors are to be appointed. If any person
appointed as inspector fails to appear or fails or refuses to act, the chairman of the meeting may, and upon the request
of any shareholder or a shareholder's proxy shall, appoint a person to fill that vacancy.
63
Such inspectors shall:
shares represented at the meeting, the existence of a quorum, and the authenticity, validity and effect of proxies;
(a)
Determine the number of shares outstanding and the voting power of each, the number of
(b)
(c)
(d)
(e)
(f)
(g)
right to vote;
shareholders.
Receive votes, ballots or consents;
Hear and determine all challenges and questions in any way arising in connection with the
Count and tabulate all votes or consents;
Determine when the polls shall close;
Determine the result; and
Do any other acts that may be proper to conduct the election or vote with fairness to all
ARTICLE III
DIRECTORS
3.1
POWERS.
Subject to the provisions of the Code and any limitations in the articles of incorporation and these by-laws
relating to action required to be approved by the shareholders or by the outstanding shares, the business and affairs of
the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of
directors.
3.2
NUMBER AND QUALIFICATION OF DIRECTORS.
The number of directors of the corporation shall be not less than four (4) nor more than seven (7). The exact
number of directors shall be seven (7) until changed, within the limits specified above, by a by-law amending this
Section 3.2, duly adopted by the board of directors or by the shareholders. The indefinite number of directors may be
changed, or a definite number fixed without provision for an indefinite number, by a duly adopted amendment to this
by-law duly adopted by the vote or written consent of holders of a majority of the outstanding shares entitled to vote;
provided, however, that an amendment reducing the number of the minimum number of directors to a number less than
five (5) cannot be adopted if the votes cast against its adoption at a meeting of the shareholders, or the shares not
consenting in the case of action by written consent, are equal to more than sixteen and two-thirds percent (16 2/3%) of
the outstanding shares entitled to vote thereon. No amendment may change the stated maximum number of authorized
directors to a number greater than two (2) times the stated minimum number of directors minus one (1).
3.3
ELECTION AND TERM OF OFFICE OF DIRECTORS.
Directors shall be elected at each annual meeting of shareholders to hold office until the next such annual
meeting. Each director, including a director elected to fill a vacancy, shall hold office until the expiration of the term for
which elected and until a successor has been elected and qualified.
3.4
VACANCIES.
Vacancies in the board of directors may be filled by a majority of the remaining directors, though less than a
quorum, or by a sole remaining director, except that a vacancy created by the removal of a director by the vote or
written consent of the shareholders or by court order may be filled only by the vote of a majority of the shares entitled
to vote thereon represented at a duly held meeting at which a quorum is present, or by the written consent of holders of
a majority of the outstanding shares entitled to vote thereon. Each director so elected shall hold office until the next
annual meeting of the shareholders and until a successor has been elected and qualified.
A vacancy or vacancies in the board of directors shall be deemed to exist in the event of the death, resignation
or removal of any director, or if the board of directors by resolution declares vacant the office of a director who has
been declared of unsound mind by an order of court or convicted of a felony, or if the authorized number of directors is
64
increased, or if the shareholders fail, at any meeting of shareholders at which any director or directors are elected, to
elect the number of directors to be elected at that meeting.
The shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the
directors, but any such election, if by written consent, shall require the consent of the holders of a majority of the
outstanding shares entitled to vote thereon.
Any director may resign effective on giving written notice to the chairman of the board, the president, the
secretary or the board of directors, unless the notice specifies a later time for that resignation to become effective. If the
resignation of a director is effective at a future time, the board of directors may elect a successor to take office when the
resignation becomes effective.
No reduction of the authorized number of directors shall have the effect of removing any director before that
director's term of office expires.
3.5
PLACE OF MEETINGS; MEETINGS BY TELEPHONE.
Regular meetings of the board of directors may be held at any place within or outside the State of California
that has been designated from time to time by resolution of the board. In the absence of such a designation, regular
meetings shall be held at the principal executive office of the corporation. Special meetings of the board may be held at
any place within or outside the State of California that has been designated in the notice of the meeting or, if not stated
in the notice or if there is no notice, at the principal executive office of the corporation.
Any meeting, regular or special, may be held by conference telephone or similar communication equipment, so
long as all directors participating in the meeting can hear one another; and all such directors shall be deemed to be
present in person at the meeting.
3.6
REGULAR MEETINGS.
Regular meetings of the board of directors may be held without notice if the times of such meetings are fixed
by the board of directors.
3.7
SPECIAL MEETINGS.
Special meetings of the board of directors for any purpose or purposes may be called at any time by the
chairman of the board, the president, any vice president, the secretary or any two directors.
Notice of the time and place of special meetings shall be delivered personally or by telephone to each director
or sent by first-class mail or telegram, charges prepaid, addressed to each director at that director's address as it is shown
on the records of the corporation. If the notice is mailed, it shall be deposited in the United States mail at least four (4)
days before the time of the holding of the meeting. If the notice is delivered personally, or by telephone or telegram, it
shall be delivered personally or by telephone or to the telegraph company at least forty-eight (48) hours before the time
of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the
director or to a person at the office of the director who the person giving the notice has reason to believe will promptly
communicate it to the director. The notice need not specify the purpose or the place of the meeting, if the meeting is to
be held at the principal executive office of the corporation.
3.8
QUORUM.
A majority of the authorized number of directors shall constitute a quorum for the transaction of business,
except to adjourn as provided in Section 3.10 of these by-laws. Every act or decision done or made by a majority of the
directors present at a duly held meeting at which a quorum is present shall be regarded as the act of the board of
directors, subject to the provisions of Section 310 of the Code (as to approval of contracts or transactions in which a
director has a direct or indirect material financial interest), Section 311 of the Code (as to appointment of committees)
and Section 317(e) of the Code (as to indemnification of directors).
A meeting at which a quorum is initially present may continue to transact business notwithstanding the
withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting.
65
3.9
WAIVER OF NOTICE.
The transactions of any meeting of the board of directors, however called and noticed or wherever held, shall
be as valid as though had at a meeting duly held after regular call and notice if a quorum is present and if, either before
or after the meeting, each of the directors not present signs a written waiver of notice, a consent to holding the meeting
or an approval of the minutes thereof. The waiver of notice or consent need not specify the purpose of the meeting.
All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the
meeting. Notice of a meeting shall also be deemed given to any director who attends the meeting without protesting,
before or at its commencement, the lack of notice to that director.
3.10
ADJOURNMENT.
A majority of the directors present, whether or not constituting a quorum, may adjourn any meeting to another
time and place.
3.11
NOTICE OF ADJOURNMENT.
Notice of the time and place of holding an adjourned meeting need not be given, unless the meeting is
adjourned for more than twenty-four (24) hours, in which case notice of the time and place shall be given before the
time of the adjourned meeting, in the manner specified in Section 3.7 of these by-laws, to the directors who were not
present at the time of the adjournment.
3.12
ACTION WITHOUT MEETING.
Any action required or permitted to be taken by the board of directors may be taken without a meeting, if all
members of the board shall individually or collectively consent in writing to that action. Such action by written consent
shall have the same force and effect as a unanimous vote of the board of directors. Such written consent and any
counterparts thereof shall be filed with the minutes of the proceedings of the board.
3.13
FEES AND COMPENSATION OF DIRECTORS.
Directors and members of committees may receive such compensation, if any, for their services, and such
reimbursement of expenses, as may be fixed or determined by resolution of the board of directors. This Section 3.13
shall not be construed to preclude any director from serving the corporation in any other capacity as an officer, agent,
employee or otherwise, and receiving compensation for those services.
ARTICLE IV
COMMITTEES
4.1
COMMITTEES OF DIRECTORS.
The board of directors may, by resolution adopted by a majority of the authorized number of directors,
designate one (1) or more committees, each consisting of two or more directors, to serve at the pleasure of the board.
The board may designate one (1) or more directors as alternate members of any committee, who may replace any absent
member at any meeting of the committee. Any committee, to the extent provided in the resolution of the board, shall
have all the authority of the board, except with respect to:
approval of the outstanding shares;
(a)
the approval of any action which, under the Code, also requires shareholders' approval or
(b)
(c)
(d)
the filling of vacancies in the board of directors or in any committee;
the fixing of compensation of the directors for serving on the board or any committee;
the amendment or repeal of these by-laws or the adoption of new by-laws;
(e)
terms is not so amendable or repealable;
the amendment or repeal of any resolution of the board of directors which by its express
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or within a price range determined by the board of directors; or
(f)
a distribution to the shareholders of the corporation, except at a rate or in a periodic amount
committees.
(g)
the appointment of any other committees of the board of directors or the members of such
4.2
MEETINGS AND ACTION OF COMMITTEES.
Meetings and actions of committees shall be governed by, and held and taken in accordance with, the
provisions of Article III of these by-laws, Section 3.5 (place of meetings), Section 3.6 (regular meetings), Section 3.7
(special meetings and notice), Section 3.8 (quorum.), Section 3.9 (waiver of notice), Section 3.10 (adjournment),
Section 3.11 (notice of adjournment) and Section 3.12 (action without meeting), with such changes in the context of
those by-laws as are necessary to substitute the committee and its members for the board of directors and its members,
except that the time of regular meetings of committees may be determined either by resolution of the board of directors
or by resolution of the committee; special meetings of committees may also be called by resolution of the board of
directors; and notice of special meetings of committees shall also be given to all alternate members, who shall have the
right to attend all meetings of the committee. The board of directors may adopt rules for the government of any
committee not inconsistent with the provisions of these by-laws.
ARTICLE V
OFFICERS
5.1
OFFICERS.
The officers of the corporation shall be a president, a secretary, and a chief financial officer. The corporation
may also have, at the discretion of the board of directors, a chairman of the board, one or more vice presidents, one or
more assistant secretaries, one or more assistant treasurers, and such other officers as may be appointed in accordance
with the provisions of Section 5.3 of these by-laws. Any number of offices may be held by the same person.
5.2
ELECTION OF OFFICERS.
The officers of the corporation, except such officers as may be appointed in accordance with the provisions of
Section 5.3 or Section 5.5 of these by-laws, shall be chosen by the board, subject to the rights, if any, of an officer under
any contract of employment.
5.3
SUBORDINATE OFFICERS.
The board of directors may appoint, or may empower the president to appoint, such other officers as the
business of the corporation may require, each of whom shall hold office for such period, have such authority and
perform such duties as are provided in these by-laws or as the board of directors may from time to time determine.
5.4
REMOVAL AND RESIGNATION OF OFFICERS.
Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed,
either with or without cause, by the board of directors at any regular or special meeting of the board or, except in case of
an officer chosen by the board of directors, by any officer upon whom such power of removal may be conferred by the
board of directors.
Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect
at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that
notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice
to the rights, if any, of the corporation under any contract to which the officer is a party.
5.5
VACANCIES IN OFFICES.
A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled
in the manner prescribed in these by-laws for regular appointments to that office.
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5.6
CHAIRMAN OF THE BOARD.
The chairman of the board, if such an officer be elected, shall, if present, preside at meetings of the board of
directors and exercise and perform such other powers and duties as may be from time to time assigned to him by the
board of directors or prescribed by these by-laws. If there is no president, the chairman of the board shall also be the
chief executive officer of the corporation and shall have the powers and duties prescribed in Section 5.7 of these by-
laws.
5.7
PRESIDENT.
Subject to such supervisory powers, if any, as may be given by the board of directors to the chairman of the
board, if there be such an officer, the president shall be the chief executive officer of the corporation and shall, subject
to the control of the board of directors, have general supervision, direction and control of the business and the officers
of the corporation. He shall preside at all meetings of the shareholders and, in the absence of the chairman of the board,
or if there be none, at all meetings of the board of directors. He shall have the general powers and duties of
management usually vested in the office of president of a corporation, and shall have such other powers and duties as
may be prescribed by the board of directors or these bylaws.
5.8
VICE PRESIDENTS.
In the absence or disability of the president, the vice presidents, if any, in order of their rank as fixed by the
board of directors or, if not ranked, a vice president designated by the board of directors, shall perform all the duties of
the president and when so acting shall have all the powers of, and be subject to all the restrictions upon, the president.
The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed
for them respectively by the board of directors, these by-laws, the president or the chairman of the board.
5.9
SECRETARY.
The secretary shall keep or cause to be kept, at the principal executive office of the corporation, or such other
place as the board of directors may direct, a book of minutes of all meetings and actions of directors, committees of
directors, and shareholders, with the time and place of holding, whether regular or special (and, if special, how
authorized and the notice given), the names of those present at directors' meetings or committee meetings, the number
of shares present or represented at shareholders' meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal executive office of the corporation or at the office
of the corporation's transfer agent or registrar, as determined by resolution of the board of directors, a share register, or
a duplicate share register, showing the names of all shareholders and their addresses, the number and classes of shares
held by each, the number and date of certificates evidencing such shares, and the number and date of cancellation of
every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings of the shareholders and of the board of
directors required by these by-laws or by law to be given, and he shall keep the seal of the corporation, if one be
adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the
board of directors or by these by-laws.
5.10
CHIEF FINANCIAL OFFICER.
The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct
books and records of accounts of the properties and business transactions of the corporation, including accounts of its
assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings, and shares. The books of account shall
at all reasonable times be open to inspection by any director.
The chief financial officer shall deposit all money and other valuables in the name and to the credit of the
corporation with such depositaries as may be designated by the board of directors. He shall disburse the funds of the
corporation as may be ordered by the board of directors, shall render to the president and directors, whenever they
request it, an account of all of his transactions as chief financial officer and of the financial condition of the corporation,
and shall have such other powers and perform such other duties as may be prescribed by the board of directors or these
by-laws.
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ARTICLE VI
INDEMNIFICATION OF DIRECTORS, AND OFFICERS, EMPLOYEES
AND OTHER AGENTS
6.1
INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The corporation shall, to the maximum extent and in the manner permitted by the Code, indemnify each of its
directors and officers against expenses (as defined in Section 317(a) of the Code), judgments, fines, settlements, and
other amounts actually and reasonably incurred in connection with any proceeding (as defined in Section 317(a) of the
Code), arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this
Article VI, a "director" or "officer" of the corporation includes any person (i) who is or was a director or officer of the
corporation, (ii) who is or was serving at the request of the corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, or (iii) who was a director or officer of a corporation which was a
predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation.
6.2
INDEMNIFICATION OF OTHERS.
The corporation shall have the power, to the extent and in the manner permitted by the Code, to indemnify
each of its employees and agents (other than directors and officers) against expenses (as defined in Section 317(a) of the
Code), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any
proceeding (as defined in Section 317(a) of the Code), arising by reason of the fact that such person is or was an agent of
the corporation. For purposes of this Article VI, an "employee" or "agent" of the corporation (other than a director or
officer) includes any person (i) who is or was an employee or agent of the corporation, (ii) who is or was serving at the
request of the corporation as an employee or agent of another corporation, partnership, joint venture, trust or other
enterprise, or (iii) who was an employee or agent of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor corporation.
6.3
PAYMENT OF EXPENSES IN ADVANCE.
Expenses incurred in defending any civil or criminal action or proceeding for which indemnification is required
pursuant to Section 6.1 or for which indemnification is permitted pursuant to Section 6.2 following authorization
thereof by the Board of Directors shall be paid by the corporation in advance of the final disposition of such action or
proceeding upon receipt of an undertaking by or on behalf of the indemnified party to repay such amount if it shall
ultimately be determined that the indemnified party is not entitled to be indemnified as authorized in this Article VI.
6.4
INDEMNITY NOT EXCLUSIVE.
The indemnification provided by this Article VI shall not be deemed exclusive of any other rights to which
those seeking indemnification may be entitled under any bylaw, agreement, vote of shareholders or disinterested
directors or otherwise, both as to action in an official capacity and as to action in another capacity while holding such
office, to the extent that such additional rights to indemnification are authorized in the Articles of Incorporation.
6.5
INSURANCE INDEMNIFICATION.
The corporation shall have the power to purchase and maintain insurance on behalf of any person who is or
was a director, officer, employee or agent of the corporation against any liability asserted against or incurred by such
person in such capacity or arising out of such person's status as such, whether or not the corporation would have the
power to indemnify him against such liability under the provisions of this Article VI.
6.6
CONFLICTS.
No indemnification or advance shall be made under this Article VI, except where such indemnification or
advance is mandated by law or the order, judgment or decree of any court of competent jurisdiction, in any circumstance
where it appears:
(a)
That it would be inconsistent with a provision of the Articles of Incorporation, these bylaws,
a resolution of the shareholders or an agreement in effect at the time of the accrual of the alleged cause of the action
asserted in the proceeding in which the expenses were incurred or other amounts were paid, which prohibits or
otherwise limits indemnification; or
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a settlement.
(b)
That it would be inconsistent with any condition expressly imposed by a court in approving
ARTICLE VII
RECORDS AND REPORTS
7.1
MAINTENANCE AND INSPECTION OF SHARE REGISTER.
The corporation shall keep at its principal executive office, or at the office of its transfer agent or registrar, if
either be appointed and as determined by resolution of the board of directors, a record of its shareholders, giving the
names and addresses of all shareholders and the number and class of shares held by each shareholder.
A shareholder or shareholders of the corporation holding at least five percent (5%) in the aggregate of the
outstanding voting shares of the corporation or who holds at least one percent (1%) of such voting shares and has filed
a Schedule 14B with the Securities and Exchange Commission relating to the election of directors, may (i) inspect and
copy the records of shareholders' names and addresses and shareholdings during usual business hours on five (5) days'
prior written demand on the corporation, (ii) obtain from the transfer agent of the corporation, on written demand and
on the tender of such transfer agent's usual charges for such list, a list of the names and addresses of the shareholders
who are entitled to vote for the election of directors, and their shareholdings, as of the most recent record date for
which that list has been compiled or as of a date specified by the shareholder after the date of demand. Such list shall be
made available to any such shareholder by the transfer agent on or before the later of five (5) days after the demand is
received or five (5) days after the date specified in the demand as the date as of which the list is to be compiled.
The record of shareholders shall also be open to inspection on the written demand of any shareholder or
holder of a voting trust certificate, at any time during usual business hours, for a purpose reasonably related to the
holder's interests as a shareholder or as the holder of a voting trust certificate.
Any inspection and copying under this Section 7.1 may be made in person or by an agent or attorney of the
shareholder or holder of a voting trust certificate making the demand.
7.2
MAINTENANCE AND INSPECTION OF BY-LAWS.
The corporation shall keep at its principal executive office, or if its principal executive office is not in the State
of California, at its principal business office in such state, the original or a copy of these by-laws as amended to date,
which bylaws shall be open to inspection by the shareholders at all reasonable times during office hours. If the principal
executive office of the corporation is outside the State of California and the corporation has no principal business office
in such state, the secretary shall, upon the written request of any shareholder, furnish to that shareholder a copy of these
by-laws as amended to date.
7.3
MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS.
The accounting books and records, and the minutes of proceedings of the shareholders and the board of
directors and any committee or committees of the board of directors, shall be kept at such place or places designated by
the board of directors or, in absence of such designation, at the principal executive office of the corporation. The
minutes shall be kept in written form and the accounting books and records shall be kept either in written form or in any
other form capable of being converted into written form.
The minutes and accounting books and records shall be open to inspection upon the written demand of any
shareholder or holder of a voting trust certificate, at any reasonable time during usual business hours, for a purpose
reasonably related to the holder's interests as a shareholder or as the holder of a voting trust certificate. The inspection
may be made in person or by an agent or attorney, and shall include the right to copy and make extracts. Such rights of
inspection shall extend to the records of each subsidiary corporation of the corporation.
7.4
INSPECTION BY DIRECTORS.
Every director shall have the absolute right at any reasonable time to inspect all books, records and documents
of every kind and the physical properties of the corporation and each of its subsidiary corporations. Such inspection by
a director may be made in person or by an agent or attorney, and the right of inspection includes the right to copy and
make extracts of documents.
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7.5
ANNUAL REPORT TO SHAREHOLDERS; WAIVER.
The board of directors shall cause an annual report to be sent to the shareholders not later than one hundred
twenty (120) days after the close of the fiscal year adopted by the corporation. Such report shall be sent at least fifteen
(15) days before the annual meeting of shareholders to be held during the next fiscal year and in the manner specified in
Section 2.5 of these by-laws for giving notice to shareholders of the corporation.
The annual report shall contain a balance sheet as of the end of the fiscal year and an income statement and
statement of changes in financial position for the fiscal year, accompanied by any report of independent accountants or,
if there is no such report, the certificate of an authorized officer of the corporation that the statements were prepared
without audit from the books and records of the corporation.
The foregoing requirement of an annual report may be waived by the board so long as the shares of the
corporation are held by less than one hundred (100) holders of record.
7.6
FINANCIAL STATEMENTS.
A copy of any annual financial statement and any income statement of the corporation for each quarterly
period of each fiscal year, and any accompanying balance sheet of the corporation as of the end of each such period, that
has been prepared by the corporation shall be kept on file in the principal executive office of the corporation for twelve
(12) months; and each such statement shall be exhibited at all reasonable times to any shareholder demanding an
examination of any such statement or a copy shall be mailed to any such shareholder.
If a shareholder or shareholders holding at least five percent (5%) of the outstanding shares of any class of
stock of the corporation makes a written request to the corporation for an income statement of the corporation for the
three-month, six-month or nine-month period of the then current fiscal year ended more than thirty (30) days before the
date of the request, and for a balance sheet of the corporation as of the end of that period, the chief financial officer
shall cause that statement to be prepared, if not already prepared, and shall deliver personally or mail that statement or
statements to the person making the request within thirty (30) days after the receipt of the request. If the corporation
has not sent to the shareholders its annual report for the last fiscal year, such report shall likewise be delivered or mailed
to the shareholder or shareholders within thirty (30) days after the request.
The corporation shall also, on the written request of any shareholder, mail to the shareholder a copy of the last
annual, semi-annual or quarterly income statement which it has prepared, and a balance sheet as of the end of that
period.
The quarterly income statements and balance sheets referred to in this section shall be accompanied by the
report, if any, of any independent accountants engaged by the corporation or the certificate of an authorized officer of
the corporation that the financial statements were prepared without audit from the books and records of the
corporation.
ARTICLE VIII
GENERAL MATTERS
8.1
RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING.
For purposes of determining the shareholders entitled to receive payment of any dividend or other distribution
or allotment of any rights or entitled to exercise any rights in respect of any other lawful action (other than action by
shareholders by written consent without a meeting), the board of directors may fix, in advance, a record date, which shall
not be more than sixty (60) days before any such action, and in that case only shareholders of record on the date so fixed
are entitled to receive the dividend, distribution or allotment of rights, or to exercise such rights, as the case may be,
notwithstanding any transfer of any shares on the books of the corporation after the record date so fixed, except as
otherwise provided in the Code.
If the board of directors does not so fix a record date, the record date for determining shareholders for any
such purpose shall be at the close of business on the day on which the board adopts the applicable resolution or the
sixtieth (60th) day before the date of that action, whichever is later.
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8.2
CHECKS, DRAFTS, EVIDENCES OF INDEBTEDNESS.
All checks, drafts, or other orders for payment of money, notes, or other evidences of indebtedness, issued in
the name of or payable to the corporation, shall be signed or endorsed by such person or persons and in such manner
as, from time to time, shall be determined by resolution of the board of directors.
8.3
CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED.
The board of directors, except as otherwise provided in these by-laws, may authorize any officer or officers, or
agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation,
and such authority may be general or confined to specific instances; and, unless so authorized or ratified by the board of
directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to
bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for
any amount.
8.4
CERTIFICATES FOR SHARES.
A certificate or certificates for shares of the corporation shall be issued to each shareholder when any of such
shares are fully paid, and the board of directors may authorize the issuance of certificates or shares as partly paid
provided that these certificates shall state the amount of the consideration to be paid for them and the amount paid. All
certificates shall be signed in the name of the corporation by the chairman or vice chairman of the board or the
president or a vice president and by the chief financial officer or an assistant treasurer or the secretary or any assistant
secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any or all of the
signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose
facsimile signature has been placed on a certificate has ceased to be that such officer, transfer agent or registrar before
such certificate is issued, it may be issued by the corporation with the same effect as if such person were an officer,
transfer agent or registrar at the date of issue.
Notwithstanding the foregoing paragraph, the corporation may adopt a system of issuance, recordation and
transfer of its shares by electronic or other means not involving any issuance of certificates, including provisions for
notice to purchasers in substitution for the required statements on certificates under Sections 417, 418 and 1302 of the
Code, and as may be required by the commissioner in administering the California Corporate Securities Law of 1968,
which system (1) has been approved by the United States Securities and Exchange Commission, (2) is authorized in any
statute of the United States, or (3) is in accordance with Division 8 of the California Commercial Code. Any system so
adopted shall not become effective as to issued and outstanding certificated securities until the certificates therefor have
been surrendered to the corporation.
8.5
LOST CERTIFICATES.
Except as provided in this Section 8.5, no new certificates for shares shall be issued to replace a previously
issued certificate unless the latter is surrendered to the corporation and cancelled at the same time. The board of
directors may, in case any share certificate or certificate for any other security is lost, stolen or destroyed, authorize the
issuance of replacement certificates on such terms and conditions as the board may require, including provision for
indemnification of the corporation secured by a bond or other adequate security sufficient to protect the corporation
against any claim that may be made against it, including any expense or liability, on account of the alleged loss, theft or
destruction of the certificate or the issuance of the replacement certificate.
8.6
CONSTRUCTION AND DEFINITIONS.
Unless the context requires otherwise, the general provisions, rules of construction and definitions in the Code
shall govern the construction of these by-laws. Without limiting the generality of this provision, the singular number
includes the plural, the Plural number includes the singular, and the term "person" includes both a corporation and a
natural person.
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ARTICLE IX
AMENDMENTS
9.1
AMENDMENT BY SHAREHOLDERS.
New by-laws may be adopted or these by-laws may be amended or repealed by the vote or written consent of
holders of a majority of the outstanding shares entitled to vote; provided, however, that if the articles of incorporation of
the corporation set forth the number of authorized directors of the corporation, the authorized number of directors may
be changed only by an amendment of the articles of incorporation.
9.2
AMENDMENT BY DIRECTORS.
Subject to the rights of the shareholders as provided in Section 9.1 of these by-laws, by-laws, other than a by-
law or an amendment of a by-law changing the authorized number of directors (except to fix the authorized number of
directors pursuant to a by-law providing for a variable number of directors), may be adopted, amended, or repealed by
the board of directors.
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SUBSIDIARIES OF AEHR TEST SYSTEMS
1. Aehr Test Systems Japan K.K., incorporated in Japan
2. Aehr Test Systems GmbH, incorporated in Germany
Exhibit 21.1
74
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-
204008, 333-214218 and 333-216792) and Registration Statements on Form S-8 (No. 333-208130, 333-200442, 333-
184865, 333-177954, 333-163100, 333-155389, 333-138249, 333-119636, 333-52592, 333-40577, 333-214589, and 333-
228509) of Aehr Test Systems of our report dated August 28, 2019 relating to the consolidated financial statements,
which appears in this Form 10-K.
Exhibit 23.1
/s/ BPM LLP
San Jose, California
August 28, 2019
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Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302(a) OF THE SARBANES-OXLEY ACT
I, Gayn Erickson, certify that:
1. I have reviewed this annual report on Form 10-K of Aehr Test Systems;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors
(or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report
financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant’s internal control over financial reporting.
Date: August 28, 2019
/s/ GAYN ERICKSON
-----------------------------------------------
Gayn Erickson
President and Chief Executive Officer
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Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302(a) OF THE SARBANES-OXLEY ACT
I, Kenneth B. Spink, certify that:
1. I have reviewed this annual report on Form 10-K of Aehr Test Systems;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors
(or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report
financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant’s internal control over financial reporting.
Date: August 28, 2019
/s/ KENNETH B. SPINK
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Kenneth B. Spink
Vice President of Finance and Chief Financial Officer
77
Exhibit 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
I, Gayn Erickson, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that the Annual Report of Aehr Test Systems on Form 10-K for the period ending May 31,
2019 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that
information contained in such Annual Report on Form 10-K fairly presents in all material respects the financial
condition and results of operations of Aehr Test Systems.
Date: August 28, 2019
By:
/s/ GAYN ERICKSON
----------------------------------------------------------------
Gayn Erickson
President and Chief Executive Officer
I, Kenneth B. Spink, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that the Annual Report of Aehr Test Systems on Form 10-K for the period ending May 31,
2019 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that
information contained in such Annual Report on Form 10-K fairly presents in all material respects the financial
condition and results of operations of Aehr Test Systems.
Date: August 28, 2019
By:
/s/ KENNETH B. SPINK
-----------------------------------------------------------------
Kenneth B. Spink
Vice President of Finance and Chief Financial Officer
78
Rhea J. Posedel
Chairman
Gayn Erickson
President
Chief Executive Officer
Laura Oliphant (1) (2)
Independent consultant and investor
Mario M. Rosati
Member
Wilson Sonsini Goodrich & Rosati,
Professional Corporation
John M. Schneider (1) (3)
Private investor
Howard T. Slayen (1) (2) (3)
Retired Partner
PricewaterhouseCoopers
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
(3) Member of the Corporate Governance and
Nominating Committee
Gayn Erickson
President
Chief Executive Officer
Kenneth B. Spink
Vice President of Finance
Chief Financial Officer
David Fucci
Vice President of Operations
David S. Hendrickson
Chief Technology Officer
Donald P. Richmond II
Vice President of Engineering
Vernon Rogers
Executive V.P. of Sales and Marketing
Kunio Sano
President
Aehr Test Systems Japan
CORPORATE INFORMATION
400 Kato Terrace
Fremont, CA 94539
Telephone: 510.623.9400
Fax: 510.623.9450
Website: www.aehr.com
Aehr Test Systems Japan
Hashikan Bldg., 1-14
Azuma-Cho
Hachioji
Tokyo, Japan 192-0082
Telephone: 81.42.642.3530
Fax: 81.42.642.3531
Email: atsj@aehr.com
Aehr Test Systems GmbH
Industriestrasse 9
D-86919 Utting
Germany
Telephone: 49.8806.2021
Fax: 49.8806.2024
Email: atsg@aehr.com
Legal Counsel
Wilson Sonsini Goodrich & Rosati,
Professional Corporation
Palo Alto, CA
Independent Registered
Public Accounting Firm
BPM LLP
San Jose, CA
Transfer Agent and Registrar
Computershare Trust Company, N.A.
P. O. Box 505000
Louisville, KY 40233
Toll free: 800.962.4284
Telephone: 303.262.0600
Fax: 303.262.0700
Investor Relations
MKR Group, Inc.
Telephone: 323.468.2300
Email: aehr@mkr-group.com
Annual Meeting
The annual meeting of shareholders
will be held at 4:00 p.m. on
October 22, 2019
Corporate Headquarters.
headquarters has been certified to the
International Standards Organization
(ISO) 9001 standard since 1997.
CORPORATE HEADQUARTERS
400 KATO TERRACE
FREMONT, CA 94539
TELEPHONE: 510.623.9400
FAX: 510.623.9450
WEB: WWW.AEHR.COM