Quarterly Report for Quarter Ending September 25, 2026 (Form 10-Q)

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, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. 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 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 and uncertainties discussed in Item 1A, "Risk Factors" 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 29, 2026, filed with the Securities and Exchange Commission on July 27, 2026. 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 level, and have installed thousands of systems worldwide. The rapid advancement of generative artificial intelligence ("AI") and High Performance Computing ("HPC") data centers, together with 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 AI and HPC data centers, 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 gallium nitride power semiconductors, memory semiconductors, processors, microcontrollers, systems-on-a-chip, and photonics and integrated optical devices used in artificial intelligence. 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 Carriers on the FOX-NP and FOX-XP systems, with up to nine DiePak Carriersat a time.

The introduction of the High Power FOX-XP in connection with the Sonoma Ultra high-power package level reliability/burn-in test solutions provides us the unique ability to deliver wafer level test and burn-in and package level burn-in for AI accelerators, GPUs, and HPC processors. The combination positions us well within the rapidly growing AI market as a turn-key provider of reliability and testing that spans from engineering to high volume production. In combination with Sonoma, Tahoe and Echo package level burn-in systems, we provide a full range of burn-in solutions for semiconductor devices.

Our net 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 contract 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 system 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.

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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 such as silicon carbide and gallium nitride. During 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.

Change in Fiscal Year

On April 2, 2026, our board of directors approved a change in the Company's fiscal year-end from the 52- or 53-week period ending on the Friday in May nearest May 31 to the 52- or 53-week period ending on the Friday in June nearest June 30. The change became effective beginning in fiscal year 2027, which began on June 27, 2026 and will end on June 25, 2027. As a result of the change in fiscal year, there was a one-month transition period beginning on May 30, 2026, and ending on June 26, 2026 (the "Transition Period"). See "Results of Operations" for further information regarding the Transition Period.

Financial information for the three months ended September 26, 2025 has not been included in this Form 10-Q because: (i) the three months ended August 29, 2025 provide a meaningful comparison to the three months ended September 25, 2026; (ii) there are no significant seasonal or other factors that would materially impact comparability of information if the results for the three months ended September 26, 2025 were presented in lieu of results for the three months ended August 29, 2025; and (iii) it was not practicable or cost justified to prepare such information.

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 based on 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 29, 2026.

There have been no material changes to our critical accounting policies and estimates during the three months ended September 25, 2026, or the one-month transition period ended June 26, 2026, compared to those discussed in our Annual Report on Form 10-K for the fiscal year ended May 29, 2026.

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.

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

During fiscal 2024, we released a valuation allowance of $21.9 million after concluding that it was more likely than not that our U.S. DTAs would be realized. We incurred pretax losses in fiscal 2025 and 2026 and reported pretax income in the first quarter of fiscal 2027. Management continues to reassess at each reporting date whether sufficient positive evidence exists to support realization of our U.S. DTAs. This reassessment places increased emphasis on the evaluation of recent operating performance and our forecast of future taxable income, including the extent to which recent losses are expected to be temporary versus indicative of a sustained trend.

If actual results differ from our current estimates, if assumptions underlying our forecast of future taxable income change, or if negative evidence (including sustained losses) outweighs positive evidence, we may be required to record or adjust a valuation allowance. Any such change could have a material impact on our income tax provision and our results of operations in the period of the change.

Results of Operations

Discussion of Results of Operations for the Three Months Ended September 25, 2026 Compared to the Three Months Ended August 29, 2025

Revenues

		Three Months Ended
		September 25,				August 29,				Percent
(Dollars in thousands)		2026				2025				Change
Revenues		$	33,007			$	10,969				201	%

For the three months ended September 25, 2026 revenue increased by $22.0 million, compared to the three months ended August 29, 2025, primarily driven by significantly higher shipments of systems and contactors due to strong demand in the AI market. Revenue from package level burn-in systems increased by $10.9 million, while revenue from wafer-level burn-in contactors and package level burn-in boards and modules increased by a combined $10.9 million.

Revenue by Geography		Three Months Ended
		September 25,				August 29,				Percent
(Dollars in thousands)		2026				2025				Change
Asia		$	22,174			$	2,476				796	%
United States			8,802				4,812				83	%
Europe and Middle East			2,031				3,681				(45	)%
Total revenues		$	33,007			$	10,969				201	%
Asia as a percentage of total revenues			67.2	%			22.6	%
United States as a percentage of total revenues			26.7	%			43.9	%
Europe and Middle East as a percentage of total revenues			6.1	%			33.5	%

On a geographic basis, revenues represent products that were shipped to or services that were performed at our customer locations. For the three months ended September 25, 2026, compared to the three months ended August 29, 2025, revenue increased in Asia and the United States due to strong demand in the AI market, which was partially offset by decreases in FOX-P systems sold in Europe and Middle East.

Gross Margin

		Three Months Ended
		September 25,				August 29,				Percent
(Dollars in thousands)		2026				2025				Change
Gross profit		$	15,663			$	3,719				321	%
Gross margin			47.5	%			33.9	%

Gross profit increased by $11.9 million for the three months ended September 25, 2026, compared to the three months ended August 29, 2025, primarily due to significantly higher revenue levels. Gross margin increased by 13.6 percentage points primarily due to higher sales volume and a more favorable product mix. The higher sales volume resulted in improved absorption of labor and manufacturing overhead, reducing fixed manufacturing costs as a percentage of revenue. In addition, the prior-year quarter included a higher proportion of lower-margin products sold as part of our complete solutions.

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Research and Development

		Three Months Ended
		September 25,				August 29,				Percent
(Dollars in thousands)		2026				2025				Change
Research and development		$	4,143			$	2,849				45	%
As a percentage of total revenues			12.6	%			26.0	%

Research and development expenses consist primarily of compensation and benefits for product development personnel, outside development service costs, travel expenses, facilities cost allocations, and stock-based compensation charges. Research and development expenses increased by $1.3 million for the three months ended September 25, 2026, compared to the three months ended August 29, 2025. The increase was primarily driven by $0.8 million in higher employment-related costs, and $0.3 million in higher allocated costs, both of which resulted from increased headcount.

Selling, General and Administrative

		Three Months Ended
		September 25,				August 29,				Percent
(Dollars in thousands)		2026				2025				Change
Selling, general and administrative		$	5,473			$	4,717				16	%
As a percentage of total revenues			16.6	%			43.0	%

Selling, general and administrative expenses consist primarily of compensation and benefits for sales, marketing and general and administrative personnel, legal and accounting service costs, marketing communications costs, travel expenses, facilities cost allocations, and stock-based compensation charges. Selling, general and administrative expenses increased by $0.8 million for the three months ended September 25, 2026, compared to the three months ended August 29, 2025. The increase was primarily driven by higher employment-related costs, including increased accruals for bonuses and commissions.

Restructuring Charges

		Three Months Ended
		September 25,				August 29,				Percent
(Dollars in thousands)		2026				2025				Change
Restructuring charges		$	-			$	219				(100	)%
As a percentage of total revenues			0.0	%			2.0	%

There were no restructuring charges for the three months ended September 25, 2026. Restructuring charges incurred for the three months ended August 29, 2025 primarily related to a workforce reduction implemented to better align our resources with our business needs.

Interest and Other Income, Net

		Three Months Ended
		September 25,				August 29,				Percent
(Dollars in thousands)		2026				2025				Change
Interest income, net		$	899			$	179				402	%
Other Income (expense), net			(19	)			1,051			N.M.
Interest and other income, net		$	880			$	1,230				(28	)%

N.M.-Not meaningful

Interest and other income, net, consists primarily of interest income, foreign currency transaction exchange gains and losses and other non-operating income and expense. Interest income, net, increased by $0.7 million for the three months ended September 25, 2026, compared to the three months ended August 29, 2025, primarily driven by higher interest income earned on a significantly higher average cash balances from our investments in money market funds. Other income, net, decreased by $1.1 million for the three months ended September 25, 2026, compared to the three months ended August 29, 2025, primarily attributable to the Employee Retention Credit ("ERC") refund of $1.3 million received, net of a $0.3 million third-party service fee incurred in connection with the filing of the ERC claims during the three months ended August 29, 2025.

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Income Tax Benefit

		Three Months Ended
		September 25,				August 29,				Percent
(Dollars in thousands)		2026				2025				Change
Income tax benefit		$	(254	)		$	(752	)			(66	)%

For the three months ended September 25, 2026, the Company recognized a $0.3 million income tax benefit despite pretax income primarily due to tax deductions associated with disqualified dispositions and excess tax benefits from the vesting of restricted stock units. For the three months ended August 29, 2025, the Company recognized a $0.8 million income tax benefit primarily driven by year-to-date losses in the United States.

Discussion of Results of Operations for the One Month Ended June 26, 2026

Because the transition period covers only one month, the results of operations for the period are not necessarily indicative of results for a full fiscal quarter or fiscal year.

Revenues

		One Month Ended
		June 26,
(Dollars in thousands)		2026
Revenues		$	638

Revenue by Geography		One Month Ended
		June 26,
(Dollars in thousands)		2026
United States		$	143
Europe and Middle East			11
Asia			484
Total revenues		$	638
United States as a percentage of total revenues			22.4	%
Europe and Middle East as a percentage of total revenues			1.7	%
Asia as a percentage of total revenues			75.9	%

For the one-month transition period ended June 26, 2026, revenue consisted primarily of $0.4 million in services revenue and $0.2 million in revenue from package level burn-in boards and modules.

Gross Margin

		One Month Ended
		June 26,
(Dollars in thousands)		2026
Gross loss		$	(1,012	)
Gross margin			(159	)%

Gross margin was negative for the one-month transition period ended June 26, 2026, primarily because shipments are historically low in the month after year-end and the low level of revenue was insufficient to absorb fixed manufacturing costs.

Research and Development

		One Month Ended
		June 26,
(Dollars in thousands)		2026
Research and development		$	1,164
As a percentage of total revenues			182.4	%

Research and development expenses were $1.2 million for the one-month transition period ended June 26, 2026. Research and development expenses consisted primarily of compensation and benefits for product development personnel, outside development service costs, travel expenses, facilities cost allocations, and stock-based compensation charges.

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Selling, General and Administrative

		One Month Ended
		June 26,
(Dollars in thousands)		2026
Selling, general and administrative		$	1,819
As a percentage of total revenues			285.1	%

Selling, general and administrative expenses were $1.8 million for the one-month transition period ended June 26, 2026. Selling, general and administrative expenses consisted primarily of compensation and benefits for sales, marketing and general and administrative personnel, legal and accounting service costs, marketing communications costs, travel expenses, facilities cost allocations, and stock-based compensation charges.

Interest and Other Income, Net

		One Month Ended
		June 26,
(Dollars in thousands)		2026
Interest income, net		$	301
Other Income, net			21
Interest and other income, net		$	322

Interest and other income, net, consisted primarily of interest income, foreign currency transaction exchange gains and losses and other non-operating income and expense.

Income Tax Benefit

		One Month Ended
		June 26,
(Dollars in thousands)		2026
Income tax benefit		$	(930	)

For the one-month transition period ended June 26, 2026, the Company recognized a $0.9 million income tax benefit primarily due to a pretax loss in the United States.

Liquidity and Capital Resources

Cash, cash equivalents, and restricted cash were $105.1 million as of September 25, 2026, compared to $24.7 million as of August 29, 2025. Cash, cash equivalents, and restricted cash were $112.5 million as of June 26, 2026. We believe that our existing cash resources and anticipated funds from operations will satisfy our cash requirements to fund our operating activities, capital expenditures and other obligations for the next twelve months.

		Three Months Ended
		September 25,				August 29,
(In thousands)		2026				2025				Change
Operating activities		$	(3,054	)		$	(282	)		$	(2,772	)
Investing activities			(49	)			(1,391	)			1,342
Financing activities			(4,298	)			(158	)			(4,140	)
Effect of exchange rate changes on cash, cash equivalents and restricted cash			(6	)			9				(15	)
Net decrease in cash, cash equivalents and restricted cash		$	(7,407	)		$	(1,822	)		$	(5,585	)

		One Month Ended
		June 26,
(In thousands)		2026
Operating activities		$	(3,812	)
Investing activities			(4	)
Financing activities			(234	)
Effect of exchange rate changes on cash, cash equivalents and restricted cash			-
Net decrease in cash, cash equivalents and restricted cash		$	(4,050	)

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Net Cash Flows Used in Operating Activities

Net cash used in operating activities increased by $2.8 million for the three months ended September 25, 2026, compared to the three months ended August 29, 2025. This increase in cash usage was primarily driven by an increase in accounts receivable associated with significantly higher revenue and increased cash used for prepaid expenses. The Company also increased inventory purchases in anticipation of higher customer demand; however, the cash impact was largely offset by a corresponding increase in accounts payable due to the timing of vendor payments. These uses of cash were partially offset by improved net income and an increase in cash provided by deferred revenue due to the timing of customer deposits and revenue recognition.

Net cash used in operating activities during the one month ended June 26, 2026, was driven primarily by a net loss and cash used for inventory purchases in anticipation of higher customer demand, partially offset by cash provided by deferred revenue and collection of accounts receivable.

Net Cash Flows Used in Investing Activities

Net cash used in investing activities decreased by $1.3 million for the three months ended September 25, 2026 compared to the three months ended August 29, 2025. The decrease was primarily due to higher cash expenditures on property and equipment in the prior-year period, mainly related to office renovations.

Net cash used in investing activities during the one month ended June 26, 2026 was immaterial.

Net Cash Flows Used in Financing Activities

Net cash used in financing activities increased by $4.1 million for the three months ended September 25, 2026 compared to the three months ended August 29, 2025. The increase was primarily due to higher cash payments for shares withheld for taxes upon the vesting of restricted stock units, driven by a higher stock price.

Net cash used in financing activities during the one month ended June 26, 2026 was immaterial.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, investments in special purpose entities or undisclosed borrowings or debt. There have been no material changes in the composition, magnitude or other key characteristics of our contractual obligations or other commitments as disclosed in the Company's Annual Report on Form 10-K for the year ended May 29, 2026.

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