AEHR TEST SYSTEMS (AEHR)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact may be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “could,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential”, “target” or “continue,” the negative effect of terms like these or other similar expressions. Any statement concerning future financial performance (including future revenues, earnings or growth rates), ongoing business strategies or prospects, and possible actions taken by us or our subsidiaries, which may be provided by us are also forward-looking statements. These forward-looking statements are only predictions. Forward-looking statements are based on current expectations and projections about future events and are inherently subject to a variety of risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from those anticipated or projected. All forward-looking statements included in this document are based on information available to us on the date of filing and we further caution investors that our business and financial performance are subject to substantial risks and uncertainties. We assume no obligation to update any such forward-looking statements. In evaluating these statements, you should specifically consider various factors, including the risk factors set forth in Item 1. “Business” and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended May 30, 2025, filed with the Securities and Exchange Commission on July 28, 2025. All references to “we”, “us”, “our”, “Aehr Test”, “Aehr Test Systems” or the “Company” refer to Aehr Test Systems.

Overview

We are a leading provider of test solutions for testing, burning-in, and stabilizing semiconductor devices in wafer level, singulated die, and package part form, and have installed thousands of systems worldwide.  The rapid advancement of generative artificial intelligence (AI) and the accelerating electrification of transportation and global infrastructure represent two of the most significant macro-trends impacting the semiconductor industry today. These transformative forces are driving enormous growth in semiconductor demand while fundamentally increasing the performance, reliability, safety, and security requirements of the devices used across computing and data infrastructure, telecommunications networks, hard disk drive and solid-state storage solutions, electric vehicles, charging systems, and renewable energy generation. As these applications operate at ever-higher power levels and in increasingly mission-critical environments, the need for comprehensive test and burn-in has become more essential than ever. Semiconductor manufacturers are turning to advanced wafer-level and package-level burn-in systems to screen for early-life failures, validate long-term reliability, and ensure consistent performance under extreme electrical and thermal stress. This growing emphasis on reliability testing reflects a fundamental shift in the industry—from simply achieving functionality to guaranteeing dependable operation throughout a product’s lifetime, a requirement that continues to expand alongside the scale and complexity of next-generation semiconductor devices.

We have developed and introduced several innovative products including the FOX-P family of test and burn-in systems and FOX WaferPak Aligner, FOX WaferPak Contactor, FOX DiePak Carrier and FOX DiePak Loader. The FOX-XP and FOX-NP systems are full wafer contact and singulated die/module test and burn-in systems that can test, burn-in, and stabilize a wide range of devices such as leading-edge silicon carbide-based and other power semiconductors, 2D and 3D sensors used in mobile phones, tablets, and other computing devices, memory semiconductors, processors, microcontrollers, systems-on-a-chip, and photonics and integrated optical devices used in AI. The FOX-CP system is a low-cost single-wafer compact test solution for logic, memory and photonic devices and the newest addition to the FOX-P product family. The FOX WaferPak Contactor contains a unique full wafer contactor capable of testing wafers up to 300mm that enables Integrated Circuit manufacturers to perform test, burn-in, and stabilization of full wafers on the FOX-P systems. The FOX DiePak Carrier allows testing, burning in, and stabilization of singulated bare die and modules up to 1,024 devices in parallel per DiePak on the FOX-NP and FOX-XP systems up to nine DiePaks at a time.

In connection with the acquisition of Incal Technology, Inc. (“Incal”), our product portfolio further expanded to include packaged parts burn-in solutions for the full range of power and complexity of integrated circuits. Incal’s product lines feature the Sonoma series for ultra-high-power burn-in testing, the Tahoe series for medium-power reliability burn-in, and the Echo series for low-power and high parallelism testing. The Sonoma line, with its ultra-high-power capabilities, is specifically designed to address the reliability and burn-in needs of the burgeoning demand for AI accelerators, graphics processing units (“GPUs”), high-performance computing (“HPC”) processors, and devices that can reach over a thousand watts of power per device. The Tahoe and Echo lines for medium-power and low-power burn-in solutions, respectively, target logic, system on a chip (“SoC”), and mixed-signal devices employed in mobile communications, mobility, medical, military, aerospace, and data center applications. These systems are frequently used by independent test and burn-in labs, as well as semiconductor manufacturers.

Our net revenue consists primarily of sales of FOX-P systems, WaferPak Aligners, WaferPak contactors, Sonoma systems, Tahoe systems, Echo systems, test fixtures, upgrades and spare parts, service contracts revenues, and non-recurring engineering charges. Our selling arrangements may include contractual customer acceptance provisions, which are mostly deemed perfunctory or inconsequential, and installation of the product occurs after shipment, transfer of title and risk of loss.

Our operating results and cash flows can vary significantly from period to period due to the timing, volume, and mix of customer orders, particularly because a substantial portion of our revenue is derived from a relatively small number of high-value systems sales. As a result, the number, type, and selling price of systems sold in a given period can materially affect revenue, gross margin, earnings, and operating cash flow.

Demand for our products is influenced by conditions in the semiconductor industry and in the end markets served by our customers, including demand related to generative AI, silicon photonics and power semiconductors including silicon carbide and gallium nitride. During fiscal 2025 and the first nine months of fiscal 2026, our operating performance was negatively affected by continued softness in demand in electric vehicle power semiconductors. Changes in customer investment cycles, order timing, and the pace of adoption of new technologies may continue to affect our results in future periods.

In addition, our results of operations have been affected by changes in revenue mix across systems, contactors, and services, as well as by the integration and contribution of the acquired business. Because these factors can affect revenue levels, gross margins, operating expenses, and working capital differently from period to period, past performance may not necessarily be indicative of future results. Our liquidity and cash flows may also be affected by the timing of large system shipments, investments in inventory and working capital, capital expenditures, acquisition-related cash uses, and investments in product development and market expansion.

Recent changes in U.S. tariff policy, including possible replacement tariffs and the availability, timing and amount of any potential refunds of previously paid tariffs, may affect the cost of our imported goods, our supply chain, and, accordingly, our gross margins and operating results. We have not yet determined the impact of such changes and are continuing to evaluate the potential impact of these developments.

Critical Accounting Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these Condensed Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, assumptions and judgments, including those related to customer programs and incentives, inventories, and income taxes. Our estimates are derived from historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Those results form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. For a discussion of the critical accounting policies, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the fiscal year ended May 30, 2025.

There have been no material changes to our critical accounting policies and estimates during the nine months ended February 27, 2026 compared to those discussed in our Annual Report on Form 10-K for the fiscal year ended May 30, 2025. However, we have expanded the discussion below regarding income taxes to provide additional information about the significant judgments and estimates involved in assessing the realizability of deferred tax assets.

Income Taxes

We recognize deferred tax assets (“DTAs”) for deductible temporary differences, net operating loss carryforwards, and tax credit carryforwards to the extent we conclude it is more likely than not that such DTAs will be realized. Our DTAs relate solely to U.S. federal and state income taxes. At each reporting date, we evaluate the realizability of our DTAs and record a valuation allowance when, based on all available evidence, we conclude that it is not more likely than not that some portion or all of our DTAs will be realized.

This assessment is a critical accounting estimate because it requires significant judgment in weighing both positive and negative evidence, with the most objective evidence generally carrying the greatest weight. In making this determination, we consider, among other factors: (i) recent operating results and cumulative pretax income (loss) in the United States; (ii) the duration and severity of any recent losses; (iii) projections of future taxable income based on our operating plans (including expected revenues, margins, and cost structure); (iv) the availability and feasibility of tax planning strategies; and (v) the expected utilization periods and limitations applicable to carryforwards.

During fiscal 2024, we released a valuation allowance of $21.9 million after concluding that it was more likely than not that our U.S. DTAs

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the financial condition and results of operations should be read in conjunction with our “Selected Consolidated Financial Data” and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

Overview

Aehr Test Systems (“Aehr Test”, “Aehr”, the “Company” or “We”) is a leading provider of test solutions for testing, burning-in, and stabilizing semiconductor devices in wafer level, singulated die, and package level, and has installed thousands of systems worldwide. Decarbonization, generative AI and digitalization are driving increased quality, reliability, safety, and security needs of semiconductors used across multiple applications, including electric vehicles, electric vehicle charging infrastructure, solar and wind power, computing, data and telecommunications infrastructure, and solid-state memory and storage. This trend is driving additional test requirements, incremental capacity needs, and new opportunities for Aehr Test products and solutions.

We have developed and introduced several innovative products including the FOX-P family of test and burn-in systems and FOX WaferPak Aligner, FOX WaferPak Contactor, FOX DiePak Carrier and FOX DiePak Loader. The FOX-XP and FOX-NP systems are full wafer contact and singulated die/module test and burn-in systems that can test, burn-in, and stabilize a wide range of devices such as leading-edge silicon carbide-based and other power semiconductors, 2D and 3D sensors used in mobile phones, tablets, and other computing devices, memory semiconductors, processors, microcontrollers, systems-on-a-chip, and photonics and integrated optical devices. The FOX-CP system is a low-cost single-wafer compact test solution for logic, memory and photonic devices and the newest addition to the FOX-P product family. The FOX WaferPak Contactor contains a unique full wafer contactor capable of testing wafers up to 300mm that enables Integrated Circuit manufacturers to perform test, burn-in, and stabilization of full wafers on the FOX-P systems. The FOX DiePak Carrier allows testing, burning in, and stabilization of singulated bare die and modules up to 1,024 devices in parallel per DiePak on the FOX-NP and FOX-XP systems up to nine DiePaks at a time.

Following the acquisition of Incal, our product portfolio further expanded to include package level burn-in solutions for the full range of power and complexity of integrated circuits. Incal’s product lines feature the Sonoma series for ultra-high-power burn-in testing, the Tahoe series for medium-power reliability burn-in, and the Echo series for low-power and high parallelism testing. The Sonoma line, with its ultra-high-power capabilities, is specifically designed to address the reliability and burn-in needs of the burgeoning demand for AI accelerators, GPUs, HPC processors, and devices that can reach levels of power as high as 1600W or more. The Sonoma is available in its standard configuration, which hosts up to 22 slots per chamber. The Tahoe and Echo lines for medium-power and low-power burn-in solutions, respectively, target logic, SoC, and mixed-signal devices employed in mobile communications, mobility, medical, military, aerospace, and data center applications. These systems are frequently used by independent test and burn-in labs, as well as semiconductor manufacturers.

Our revenue consists primarily of sales of FOX-P systems, WaferPak Aligners and DiePak Loaders, WaferPak Contactors, DiePak Carriers, Sonoma systems, Tahoe systems, Echo systems, test fixtures, upgrades and spare parts, service contracts revenues, and non-recurring engineering charges. Our selling arrangements may include contractual customer acceptance provisions, which are mostly deemed perfunctory or inconsequential, and installation of the product occurs after shipment, transfer of title and risk of loss.

Our operating results and cash flows can vary significantly from period to period due to the timing, volume, and mix of customer orders, particularly because a substantial portion of our revenue is derived from a relatively small number of high-value systems sales. As a result, the number, type, and selling price of systems sold in a given period can materially affect revenue, gross margin, earnings, and operating cash flow.

Demand for our products is influenced by conditions in the semiconductor industry and in the end markets served by our customers, including demand related to generative AI, silicon photonics and power semiconductors including silicon carbide and gallium nitride. During fiscal 2025 and fiscal 2026, our operating performance was negatively affected by continued softness in demand in electric vehicle power semiconductors. Changes in customer investment cycles, order timing, and the pace of adoption of new technologies may continue to affect our results in future periods.

In addition, our results of operations have been affected by changes in revenue mix across systems, contactors, and services, as well as by the integration and contribution of the acquired business. Because these factors can affect revenue levels, gross margins, operating expenses, and working capital differently from period to period, past performance may not necessarily be indicative of future results. Our liquidity and cash flows may also be affected by the timing of large system shipments, investments in inventory and working capital, capital expenditures, acquisition-related cash uses, and investments in product development and market expansion.

Recent changes in U.S. trade and tariff policies, including potential modifications to existing tariffs and the outcome of ongoing regulatory, administrative, or legal developments, may affect the cost of our imported goods, our supply chain, and, accordingly, our gross margins and operating results. The scope, timing, and ultimate impact of these developments remain uncertain, and we continue to evaluate their potential effects on our business, financial condition, and results of operations.

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 (“US GAAP”). 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 revenues, inventories, income taxes, the business combination with Incal, and the impairment of goodwill and long-lived assets, 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

We recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which we expect 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 we satisfy 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, we evaluate whether the price is subject to refund or adjustment to determine the net consideration to which we expect to be entitled. We generally do not grant return privileges, except for defective products during the warranty period.

For contracts that contain multiple performance obligations, we allocate the transaction price to the performance obligations on a relative standalone selling price basis. Standalone selling prices are based on multiple factors including, but not limited to, historical discounting trends for products and services and pricing practices in different geographies. Revenue for systems and spares is recognized at a point in time, which is generally upon shipment or delivery and evidenced by transfer of title and risk of loss to the customer. Revenue from services is recognized ratably over time as the customer simultaneously receives the benefit of the services over the contractual period, which is generally one year or less.

We have elected the practical expedient to not assess whether a contract has a significant financing component as our standard payment terms are less than one year.

We sell our products primarily through a direct sales force. In certain international markets, we sell our products through independent distributors.

Inventory Valuation

We write down the carrying value of our inventory to net realizable value for estimated obsolescence or unmarketable inventory in an amount equal to the difference between the cost of inventory and its estimated realizable value based upon assumptions about future demand and market conditions. We assess the valuation of all inventories, including raw materials, work-in-process, finished goods and spare parts on a periodic basis.

Obsolete inventory or inventory in excess of our estimated usage is written down to its estimated market value less costs to sell, if less than its cost. The inventory write-downs are established on the basis of obsolete inventory or specifically identified inventory in excess of established usage. Inherent in our estimates of demand and market value in determining inventory valuation are estimates related to economic trends, market conditions, and future demand for our products. If actual demand and market conditions are less favorable than our projections, additional inventory write-downs may be required. If the inventory value is written down to its net realizable value, and subsequently there is an increased demand for the inventory at a higher value, the increased value of the inventory is not realized until the inventory is sold either as a component of a system or as separate inventory.

Income Taxes

The determination of our tax provision is highly dependent upon the geographic composition of worldwide earnings and tax regulations governing each region and is subject to judgments and estimates. Management carefully monitors the changes in many factors and adjusts the effective tax rate as required.

We recognize deferred tax assets (“DTAs”) for deductible temporary differences, net operating loss carryforwards, and tax credit carryforwards to the extent we conclude it is more likely than not that such DTAs will be realized. Our DTAs relate solely to U.S. federal and state income taxes. At each reporting date, we evaluate the realizability of our DTAs and record a valuation allowance when, based on all available evidence, we conclude that it is not more likely than not that some portion or all of our DTAs will be realized.

This assessme

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