FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

þ  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended February 29,August 31, 2012.
 
OR

o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _________ to __________.

Commission file number: 000-22893.
 
AEHR TEST SYSTEMS
(Exact name of Registrant as specified in its charter)
 
CALIFORNIA 94-2424084
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
400 KATO TERRACE
FREMONT, CA
 94539
(Address of principal executive offices) (Zip Code)
 
(510) 623-9400
(510) 623-9400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
 
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT.
 
N/A

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 as the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes  þ No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
 
Yes  þ No  o

 
1
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
 
Large accelerated fileroAccelerated filero
Non-accelerated filer oSmaller reporting companyþ
(Do not check if a smaller reporting company)  
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes  oNo  þ
 
Number of shares of common stock, $0.01 par value, outstanding at March 31,September 30, 2012 was 9,055,172.9,236,351.
 
2
 
2
 
 
FORM 10-Q

FOR THE QUARTER ENDED FEBRUARY 29,AUGUST 31, 2012

INDEX
 
PART I. FINANCIAL INFORMATION   
     
ITEM 1.Condensed Consolidated Financial Statements (Unaudited)   
     
 
Condensed Consolidated Balance Sheets as of
February 29,August 31, 2012 and May 31, 20112012
  4 
      
 
Condensed Consolidated Statements of Operations for the three
            months and nine months ended February 29,August 31, 2012 and
            February 28, 2011
  5 
      
 
Condensed Consolidated Statements of Comprehensive Income for the three months ended August 31, 2012 and 2011
6
Condensed Consolidated Statements of Cash Flows for the
            ninethree months ended February 29,August 31, 2012 and
            February 28, 2011
   67 
      
 Notes to Condensed Consolidated Financial Statements  78 
      
ITEM 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
  1615 
      
ITEM 3.Quantitative and Qualitative Disclosures about Market Risks  2119 
      
ITEM 4.Controls and Procedures  2220 
      
PART II.OTHER INFORMATION    
      
ITEM 1.Legal Proceedings  2321 
      
ITEM 1A.Risk Factors  2321 
      
ITEM 2.Unregistered Sales of Equity Securities and Use of Proceeds  3028 
      
ITEM 3.Defaults Upon Senior Securities  3028 
      
ITEM 4.Mine Safety Disclosures  3028 
      
ITEM 5.Other Information  3028 
      
ITEM 6.Exhibits  3028 
      
SIGNATURE PAGE  3129 
     
Index to Exhibits  3230 

 
3
 
 
PART I.  FINANCIAL INFORMATION

ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Item 1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

AEHR TEST SYSTEMS
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited)
 
 February 29,  May 31,  August 31,  May 31, 
 2012  2011  2012  2012 
    (1)     (1) 
ASSETS       ASSETS
Current assets:              
Cash and cash equivalents $2,975  $4,020  $1,901  $2,073 
Accounts receivable, net of allowances for                
doubtful accounts of $14 and $23 at        
February 29, 2012 and May 31, 2011,        
respectively  825   1,432 
Inventories, net  5,650   4,958 
doubtful accounts of $38 and $39 at        
August 31, 2012 and May 31, 2012, respectively  2,558   2,588 
Inventories  6,710   6,070 
Prepaid expenses and other  247   161   326   197 
                
Total current assets  9,697   10,571   11,495   10,928 
                
Property and equipment, net  587   954   439   510 
Other assets  172   558   174   175 
                
Total assets $10,456  $12,083  $12,108  $11,613 
                
LIABILITIES AND SHAREHOLDERS' EQUITY        LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:                
Line of credit $716  $--  $1,452  $1,408 
Accounts payable  960   885   2,001   1,507 
Accrued expenses  1,221   1,434   1,580   1,385 
Deferred revenue  185   221   393   555 
                
Total current liabilities  3,082   2,540   5,426   4,855 
                
Income tax payable  129   204   112   125 
Deferred lease commitment  195   238   161   179 
                
Total liabilities  3,406   2,982   5,699   5,159 
                
Shareholders' equity:        
Aehr Test Systems shareholders' equity:        
Common stock, $0.01 par value:                
Issued and outstanding: 9,055 shares and        
8,932 shares at February 29, 2012 and        
May 31, 2011, respectively  91   89 
Issued and outstanding: 9,236 shares and        
9,135 shares at August 31, 2012 and        
May 31, 2012, respectively  92   91 
Additional paid-in capital  48,378   47,747   48,857   48,622 
Accumulated other comprehensive income  2,519   2,593   2,473   2,458 
Accumulated deficit  (43,938)  (41,328)  (44,991)  (44,695)
                
Total Aehr Test Systems shareholders' equity  6,431   6,476 
Noncontrolling interest  (22)  (22)
        
Total shareholders' equity  7,050   9,101   6,409   6,454 
                
Total liabilities and shareholders' equity $10,456  $12,083  $12,108  $11,613 
 
 
(1)    The condensed consolidated balance sheet at May 31, 20112012 has been derived from the audited consolidated financial statements at that date.
 
The accompanying notes are an integral part of these
condensed consolidated financial statements.
 
 
4
 

AEHR TEST SYSTEMS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
 
 Three Months Ended  Nine Months Ended  Three Months Ended 
 February 29,  February 28,  February 29,  February 28,  August 31, 
 2012  2011  2012  2011  2012  2011 
                  
Net sales $2,855  $4,242  $10,845  $9,988  $4,832  $4,130 
Cost of sales  1,747   2,637   6,807   6,085   2,376   2,328 
Gross profit  1,108   1,605   4,038   3,903   2,456   1,802 
                        
Operating expenses:                        
Selling, general and administrative  1,525   1,486   4,654   4,499   1,789   1,601 
Research and development  933   1,039   3,054   3,377   930   1,082 
Gain on bankruptcy claim  --   --   --   (155)
Total operating expenses  2,458   2,525   7,708   7,721   2,719   2,683 
                        
Loss from operations  (1,350)  (920)  (3,670)  (3,818)  (263)  (881)
                        
Interest income  --   --   --   3 
Interest expense  (12)  -- 
Gain on sale of long-term investment  --   --   990   --   --   990 
Other income (expense), net  7   (30)  53   593 
Other expense, net  (19)  (12)
                        
Loss before income tax             
expense (benefit)  (1,343)  (950)  (2,627)  (3,222)
(Loss) income before income tax (expense) benefit
  (294)  97 
                        
Income tax expense (benefit)  18   (4)  (17)  7 
Income tax (expense) benefit  (2)  27 
                        
Net loss $(1,361) $(946) $(2,610) $(3,229)
Net (loss) income  (296)  124 
                        
Less: Net income attributable to
the noncontrolling interest
  --   -- 
                        
Net (loss) income attributable to Aehr
Test Systems common shareholders
 $(296) $124 
                        
Net loss per share - Basic $(0.15) $(0.11) $(0.29) $(0.37)
Net loss per share - Diluted $(0.15) $(0.11) $(0.29) $(0.37)
Net (loss) income per share – Basic $(0.03) $0.01 
Net (loss) income per share – Diluted $(0.03) $0.01 
                        
Shares used in per share calculations:Shares used in per share calculations:         Shares used in per share calculations: 
Basic  9,055   8,828   8,989   8,742   9,166   8,932 
Diluted  9,055   8,828   8,989   8,742   9,166   9,100 
 
The accompanying notes are an integral part of these
condensed consolidated financial statements.
 
 
5
 

AEHR TEST SYSTEMS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSCOMPREHENSIVE INCOME
(in thousands)thousands, unaudited)
(unaudited)

  Three Months Ended 
  August 31, 
  2012  2011 
       
Net (loss) income $(296) $124 
         
Other comprehensive income, net of tax:        
    Foreign currency translation gain
  15   34 
         
Total comprehensive (loss) income  (281)  158 
Less:  Comprehensive income attributable to noncontrolling interest  --   -- 
         
Comprehensive (loss) income, attributable to Aehr Test Systems $(281) $158 
  Nine Months Ended 
  February 29,February 28, 
  2012  2011 
Cash flows from operating activities:      
  Net loss $(2,610) $(3,229)
  Adjustments to reconcile net loss to        
    net cash used in operating        
    activities:        
    Stock compensation expense  519   735 
    Provision for doubtful accounts  (9)  24 
    Loss on disposal of asset  --   9 
    Gain on sale of long-term investment  (990)  -- 
    Depreciation and amortization  388   432 
    Changes in operating assets and liabilities:        
     Accounts receivable  535   (1,380)
     Inventories  (694)  (1,027)
     Prepaid expenses and other  (90)  242 
     Accounts payable  106   439 
     Accrued expenses and deferred revenue  (274)  (666)
     Income tax payable  (44)  -- 
     Deferred lease commitment  (43)  (31)
        Net cash used in        
           operating activities  (3,206)  (4,452)
         
Cash flows from investing activities:        
     Proceeds from sale of investments  1,375   -- 
     Purchase of property and equipment  (20)  (6)
       Net cash provided by (used in)        
         investing activities  1,355   (6)
         
Cash flows from financing activities:        
    Line of credit borrowings, net  716   -- 
    Proceeds from issuance of common stock        
     and exercise of stock options  114   246 
       Net cash provided by        
         financing activities  830   246 
         
Effect of exchange rates on cash  (24)  254 
         
       Net decrease in cash and        
         cash equivalents  (1,045)  (3,958)
         
Cash and cash equivalents, beginning of period  4,020   7,766 
         
Cash and cash equivalents, end of period $2,975  $3,808 

The accompanying notes are an integral part of these
condensed consolidated financial statements.
 
 
6
 

AEHR TEST SYSTEMS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
  Three Months Ended 
  August 31, 
  2012  2011 
Cash flows from operating activities:      
Net (loss) income $(296) $124 
Adjustments to reconcile net (loss) income to        
net cash used in operating        
activities:        
Stock based compensation expense  169   165 
(Recovery of) provision for doubtful accounts  (1)  16 
Gain on sale of long-term investment  --   (990)
Depreciation and amortization  86   137 
Changes in operating assets and liabilities:        
Accounts receivable  53   (1,101)
Inventories  (640)  (211)
Prepaid expenses and other  (127)  (83)
Accounts payable  485   376 
Accrued expenses and deferred revenue  16   (1)
Income tax payable  1   (38)
Deferred lease commitment, net of current  (18)  (14)
Net cash used in        
operating activities  (272)  (1,620)
         
Cash flows from investing activities:        
Proceeds from sale of investments  --   1,375 
Purchase of property and equipment  (16)  (7)
Net cash (used in) provided by        
investing activities  (16)  1,368 
         
Cash flows from financing activities:        
Line of credit borrowings, net  44   -- 
Proceeds from issuance of common stock        
and exercise of stock options  67   -- 
Net cash provided by        
financing activities  111   -- 
         
Effect of exchange rates on cash  5   124 
         
Net decrease in cash and        
cash equivalents  (172)  (128)
         
Cash and cash equivalents, beginning of period  2,073   4,020 
         
Cash and cash equivalents, end of period $1,901  $3,892 
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
AEHR TEST SYSTEMS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
1.   BASIS OF PRESENTATION
 
The accompanying condensed consolidated financial information has been prepared by Aehr Test Systems, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC, and therefore does not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in accordance with accounting principles generally accepted in the United States of America.
 
In the opinion of management, the unaudited condensed consolidated financial statements for the interim periods presented reflect all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the condensed consolidated financial position and results of operations as of and for such periods indicated.  These condensed consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2011.2012.  Results for the interim periods presented herein are not necessarily indicative of results which may be reported for any other interim period or for the entire fiscal year.
 
PRINCIPLES OF CONSOLIDATION.  The condensed consolidated financial statements include the accounts of Aehr Test Systems and its subsidiaries (collectively, the "Company," "we," "us," and "our").  All significant intercompany balances have been eliminated in consolidation.  For the majority owned subsidiary, we reflected the noncontrolling interest of the portion we do not own on our Consolidated Balance Sheets in Shareholders’ Equity and in the Consolidated Statements of Operations.
RECLASSIFICATION.  Certain reclassifications have been made to the consolidated financial statements to conform to the current period presentation. These reclassifications did not result in any change in previously reported net income, total assets or shareholders’ equity.
 
ACCOUNTING 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 and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances.  Actual results could differ materially from those estimates.

SIGNIFICANT ACCOUNTING POLICIES.  The Company’s significant accounting policies are disclosed in the Company’s Annual Report on Form 10-K for the year ended May 31, 2012.  During the first quarter of fiscal 2013, the Company entered into an agreement with a customer to develop a next generation system. The project identifies multiple milestones and values assigned to each.  The consideration earned upon achieving the milestone is required to meet the following conditions prior to recognition: the value is commensurate with the vendor’s performance to meet the milestone, it relates solely to past performance, and it is reasonable relative to all of the deliverables and payment terms within the arrangement.
Other than recognition of revenue under the milestone method related to the development contract, the Company has not otherwise materially changed its significant accounting policies.
2.   STOCK-BASED COMPENSATION
 
Stock-based compensation expense consists of expenses for stock options and employee stock purchase plan, or ESPP, shares. Stock-based compensation cost 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.  All of the Company’s stock based compensation is accounted for as an equity instrument.  See Notes 89 and 910 in the Company’s Annual Report on Form 10-K for fiscal 20112012 filed on August 26, 201128, 2012 for further information regarding the stock option plan and the ESPP.
 
The following table summarizes compensation costs related to the Company’s stock-based compensation for the three and nine months ended February 29,August 31, 2012 and February 28, 2011, respectively (in thousands):
 
 
78
 
 
  Three Months Ended  Nine Months Ended 
  February 29, 2012  February 28, 2011  February 29, 2012  February 28, 2011 
             
Stock-based compensation in the            
form of employee stock options            
and ESPP shares, included in:            
                 
Cost of sales $25  $25  $71  $85 
Selling, general and  
    administrative
  111   115   299   380 
Research and development  46   83   149   270 
Total stock-based compensation. $182  $223  $519  $735 
  Three Months Ended 
  August 31, 
  2012  2011 
Stock-based compensation in the form of employee      
stock options and ESPP shares, included in:      
       
Cost of sales $13  $19 
Selling, general and administrative  119   93 
Research and development  37   53 
Total stock-based compensation $169  $165 
 
During the three months ended February 29,August 31, 2012 and February 28, 2011, the Company recorded stock-based compensation related to stock options of $147,000$151,000 and $201,000, respectively.  During the nine months ended February 29, 2012 and February 28, 2011, the Company recorded stock-based compensation related to stock options of $436,000 and $629,000,$155,000, respectively.
 
As of February 29,August 31, 2012, the total unrecognized stock-based compensation cost related to unvested stock-based awards under the Company’s 1996 Stock Option Plan and 2006 Equity Incentive Plan was approximately $939,000,$1,045,000, which is net of estimated forfeitures of $2,000.$3,000.  This cost will be amortized over the remaining service period of the underlying options.  The weighted average service period is approximately 3.33.2 years.
 
During the three months ended February 29,August 31, 2012 and February 28, 2011, the Company recorded stock-based compensation related to the ESPP of $35,000$18,000 and $22,000, respectively.  During the nine months ended February 29, 2012 and February 28, 2011, the Company recorded stock-based compensation related to the ESPP of $83,000 and $106,000,$10,000, respectively.
 
As of February 29,August 31, 2012, the total compensation cost related to options to purchase the Company’s common stock under the ESPP but not yet recognized was approximately $84,000.$36,000.  This cost will be amortized on a straight-line basis over a weighted average service period of approximately 1.0 year.0.8 years.

Valuation Assumptions
 
Valuation and Amortization Method.  The Company estimates the fair value of stock options granted using the Black-Scholes option valuation model and a single option award approach.  The fair value under the single option approach is amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period.
 
Expected Term.  The Company’s expected term represents the period that the Company’s stock-based awards are expected to be outstanding and was determined based on historical experience, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior as evidenced by changes to the terms of its stock-based awards.
 
Expected 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 cost recorded.
 
Dividends.  The Company has never paid any cash dividends on its common stock and does not anticipate paying any cash dividends in the foreseeable future.  Consequently, the Company uses an expected dividend yield of zero in the Black-Scholes option valuation model.
 
8
Risk-Free Interest Rate.  The Company bases the risk-free interest rate used in the Black-Scholes option valuation model on the implied yield in effect at the time of option grant on U.S. Treasury zero-coupon issues with a remaining term equivalent to the expected term of the stock awards including the ESPP.
 
9
Estimated Forfeitures.  When estimating forfeitures, the Company considers voluntary termination behavior as well as analysis of actual option forfeitures.
 
Fair Value.  The fair value of the Company’s stock options granted to employees for the three and nine months ended February 29,August 31, 2012 and February 28, 2011 were estimated using the following weighted average assumptions in the Black-Scholes option valuation model.

 Three Months Ended Nine Months Ended Three Months Ended 
 February 29,  February 28, February 29,February 28,  August 31, 
 2012  2011  2012  2011 2012  2011 
Option Plan Shares                 
Expected Term (in years)  5   5   5   5   5   5 
Volatility  0.85   0.80   0.83   0.80   0.90   0.80 
Expected Dividend $0.00  $0.00  $0.00  $0.00  $0.00  $0.00 
Risk-free Interest Rates  0.84%  1.96%  1.14%  1.72%  0.75%  1.57%
Estimated Forfeiture Rate  0.25%  0.25%  0.25%  0.25%  0.25%  0.25%
Weighted Average Grant Date Fair Value $0.43  $0.85  $0.59  $1.20  $0.88  $0.80 
 
The fair values of the ESPP shares granted for the nine months ended February 29, 2012 and February 28, 2011 were estimated using the following weighted-average assumptions:

  Nine Months Ended 
  February 29,  February 28, 
  2012  2011 
Employee Stock Purchase Plan Shares      
Expected Term (in years)  0.5-2.0   0.5-2.0 
Volatility  0.79-0.98   0.85-0.94 
Expected Dividend $0.00  $0.00 
Risk-free Interest Rates  0.1%-1.1%  0.2%-0.4%
Estimated Forfeiture Rate  0%  0%
Weighted Average Grant Date Fair Value $0.40  $0.74 
There were no ESPP shares granted to employees for the three months ended February 29,August 31, 2012 and February 28, 2011.
9
2011.
 
The following table summarizes the stock option transactions during the three and nine months ended February 29,August 31, 2012 (in thousands, except per share data):
 
     Outstanding Options 
        Weighted    
     Number  Average  Aggregate 
  Available  of  Exercise  Intrinsic 
  Shares  Shares  Price  Value 
Balances, May 31, 2012  839   2,957  $2.40  $587 
                 
Options granted  (439)  439  $1.28     
Options terminated  402   (402) $4.48     
Plan shares expired  (180)            
Options exercised   --   (101) $0.67     
                 
Balances, August 31, 2012  622   2,893  $2.00  $340 
                 
Options fully vested and expected to                
vest at August 31, 2012      2,836  $2.00  $333 
                 
Options exercisable at August 31, 2012      1,541  $2.70  $164 
 
     Outstanding Options 
        Weighted    
     Number  Average  Aggregate 
  Available  of  Exercise  Intrinsic 
  Shares  Shares  Price  Value 
Balances, May 31, 2011  687   2,083  $3.40  $298 
                 
Options granted  (432)  432  $1.27     
Options terminated  140   (140) $3.70     
Plan shares expired  (136)            
                 
Balances, August 31, 2011  259   2,375  $2.99  $123 
                 
Additional shares reserved  1,176   --         
Options granted  (50)  50  $0.89     
Options terminated  69   (69) $3.94     
                 
Balances, November 30, 2011  1,454   2,356  $2.92  $-- 
                 
Options granted  (574)  574  $0.64     
Options terminated  14   (14) $3.31     
Plan shares expired  (2)            
                 
Balances, February 29, 2012  892   2,916  $2.47  $93 
                 
Options fully vested and expected to                
  vest at February 29, 2012      2,857  $2.47  $91 
                 
Options exercisable at February 29, 2012      1,690  $3.38  $3 

The options outstanding and exercisable at February 29,August 31, 2012 were in the following exercise price ranges (in thousands, except per share data):
 
   
Options Outstanding at August 31, 2012
  
Options Excercisable at August 31, 2012
 
Range of
Exercise
Prices
  
Number
Outstanding
Shares
  Weighted Average Remaining Contractual Life (Years)  Weighted Average Exercise Price  
Number
Exercisable
 Shares
  Weighted Average Remaining Contractual Life (Years)  Weighted Average Exercise Price  
Aggregate
Intrinsic
Value
 
 $0.59-$0.89   956   4.32  $0.74   606   3.16  $0.83     
 $1.10-$2.52   1,633   4.55  $1.57   631   2.96  $1.83     
 $3.00-$3.66   38   0.14  $3.51   38   0.14  $3.51     
 $6.00-$9.30   152   0.71  $8.17   152   0.71  $8.17     
 $9.94-$9.94   114   0.81  $9.94   114   0.81  $9.94     
 $0.59-$9.94   2,893   4.07  $2.00   1,541   2.59  $2.70   $164 
   
 Options Outstanding at
February 29, 2012
  
 Options Excercisable
at February 29, 2012
 
Range of
Exercise
Prices
  
Number
Outstanding
Shares
  
Weighted
Average
Remaining
Contractual
Life (Years)
  
Weighted
Average
Exercise
Price
  
Number
Exercisable
Shares
  
Weighted
Average
Remaining
Contractual
Life (Years)
  
Weighted
Average
Exercise
Price
  
Aggregate
Intrinsic
Value
 
$0.59-$0.89   1,071   4.97  $0.74   501   2.81  $0.84     
$1.25-$2.81   1,272   3.65  $1.84   625   2.46  $2.09     
$3.00-$5.96   249   0.37  $5.18   249   0.37  $5.18     
$6.00-$9.30   206   1.02  $7.82   206   1.02  $7.82     
$9.94-$9.94   118   1.32  $9.94   109   1.32  $9.94     
$0.59-$9.94   2,916   3.57  $2.47   1,690   2.01  $3.38  $3 
10
 
The total intrinsic value of options exercised during the three and nine months ended February 29,August 31, 2012 was $0.  The total intrinsic value of$42,000.  There were no stock options exercised duringfor the three and nine months ended February 28, 2011 was $1,000 and $3,000, respectively.August 31, 2011.  The weighted average remaining contractual life of the options exercisable and expected to be exercisable at February 29,August 31, 2012 was 3.64.1 years.
 
Options to purchase 1,690,0001,541,000 and 1,534,0001,547,000 shares were exercisable at February 29,August 31, 2012 and February 28, 2011, respectively.  These exercisable
10

options had weighted average exercise prices of $3.38$2.70 and $3.76$3.59 as of February 29,August 31, 2012 and February 28, 2011, respectively.
 
3.   EARNINGS PER SHARE
 
Earnings per share is computed based on the weighted average number of common and common equivalent shares (common stock options and ESPP shares) outstanding, when dilutive, during each period using the treasury stock method.

  Three Months Ended  Nine Months Ended 
  February 29,
2012
  February 28,
2011
  February 29,
2012
  February 28,
2011
 
  (in thousands, except per share amounts) 
             
Numerator: Net loss $(1,361) $(946) $(2,610) $(3,229)
                 
Denominator for basic net loss                
per share:                
Weighted-average shares outstanding  9,055   8,828   8,989   8,742 
                 
Shares used in basic net loss                
per share calculation  9,055   8,828   8,989   8,742 
                 
Effect of dilutive securities  --   --   --   -- 
                 
Denominator for diluted net loss                
per share  9,055   8,828   8,989   8,742 
                 
Basic net loss per share $(0.15) $(0.11) $(0.29) $(0.37)
                 
Diluted net loss per share $(0.15) $(0.11) $(0.29) $(0.37)
  Three Months Ended 
  August 31, 
  2012  2011 
  (in thousands, except per share amounts) 
Numerator: Net (loss) income $(296) $124 
         
Denominator for basic net (loss) income        
per share:        
Weighted-average shares outstanding  9,166   8,932 
         
Shares used in basic net (loss) income        
per share calculation   9,166   8,932 
Effect of dilutive securities  --   168 
         
Denominator for diluted net (loss) income        
per share  9,166   9,100 
         
Basic net (loss) income per share $(0.03) $0.01 
         
Diluted net (loss) income per share $(0.03) $0.01 
 
For the purpose of computing diluted earnings per share, weighted average potential common shares do not include stock options with an exercise price greater than the average fair value of the Company’s common stock for the period, as the effect would be anti-dilutive.  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 are the same.  Stock options to purchase 2,916,0002,893,000 shares of common stock were outstanding on February 29,August 31, 2012, 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 2,148,0001,792,000 shares of common stock were outstanding on February 28,August 31, 2011, but were not included in the computation of diluted net 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:

11
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.
11

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 and liabilities measured at fair value on a recurring basis as of February 29,August 31, 2012 (in thousands):
 
 Balance as of        Balance as of          
 
February 29,
2012
  Level 1  Level 2  August 31, 2012  Level 1  Level 2  Level 3 
Money market funds $437  $437  $--  $2  $2  $--  $-- 
                            
Assets $437  $437  $--  $2  $2  $--  $-- 
                            
Liabilities $--  $--  $--  $--  $--  $--  $-- 
 
The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis as of May 31, 20112012 (in thousands):

 Balance as of        Balance as of          
 May 31, 2011  Level 1  Level 2  May 31, 2012  Level 1  Level 2  Level 3 
Money market funds $1,236  $1,236  $--  $2  $2  $--  $-- 
                            
Assets $1,236  $1,236  $--  $2  $2  $--  $-- 
                            
Liabilities $--  $--  $--  $--  $--  $--  $-- 

As of February 29,August 31, 2012 and May 31, 2011,2012, the Company did not have any assets or liabilities without observable market values that would require a high level of judgment to determine fair value (Level 3 assets).
 
The Company has at times invested in debt and equity of private companies, and may do so again in the future, as part of its business strategy.  These investments are carried at cost and are included in “Other Assets” in the consolidated balance sheets.  If the Company determines that an other-than-temporary decline exists in the fair value of an investment, the Company writes down the investment to its fair value and records the related write-down as an investment loss in “Other Income (Expense)” in its consolidated statements of operations.  During the first quarter of fiscal 2012, the Company sold its long-term investment in ESA Electronics PTE Ltd for proceeds of approximately $1.4 million, resulting in a gain of $990,000.  At May 31, 2011, the carrying value of the strategic investments was $384,000 and was included in other assets-long term on the accompanying condensed consolidated balance sheet.

5.   ACCOUNTS RECEIVABLE, NET

Accounts receivable represents customer trade receivables and is presented net of allowance for doubtful accounts of $14,000$38,000 at February 29,August 31, 2012 and $23,000$39,000 at May 31, 2011.2012.  Accounts receivable are derived from the sale of products throughout the world to semiconductor manufacturers, semiconductor contract assemblers, electronics manufacturers and burn-in and test service companies.  The Company’s allowance for doubtful accounts is based upon historical experience and review of trade receivables by aging category to identify specific customers with known disputes or collection issues.  Uncollectible receivables are recorded as bad debt expense when all efforts to collect have been exhausted and recoveries are recognized when they are received.
 
 
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6.   INVENTORIES
 
Inventories are comprised of the following (in thousands):
 
 February 29,  May 31,  August 31,  May 31, 
 2012  2011  2012  2012 
Raw materials and sub-assemblies $2,242  $1,992  $3,652  $3,218 
Work in process  2,830   2,699   3,057   2,657 
Finished goods  578   267   1   195 
 $5,650  $4,958  $6,710  $6,070 

7.   SEGMENT INFORMATION
 
The Company operates in one reportable segment: the design, manufacture and marketing of advanced test and burn-in products to the semiconductor manufacturing industry.
 
The following presents information about the Company’s operations in different geographic areas (in thousands):

 United           United          
 States  Asia  Europe  Total  States  Asia  Europe  Total 
Three months ended February 29, 2012:            
Three months ended August 31, 2012:            
Net sales $2,810  $9  $36  $2,855  $4,668  $34  $130  $4,832 
Property and equipment, net  517   66   4   587   369   69   1   439 
                                
Nine months ended February 29, 2012:                
Three months ended August 31, 2011:                
Net sales $9,713  $608  $524  $10,845  $3,906  $26  $198  $4,130 
Property and equipment, net  517   66   4   587   745   74   8   827 
                                
Three months ended February 28, 2011:                
Net sales $4,159  $20  $63  $4,242 
Property and equipment, net  990   76   12   1,078 
                
Nine months ended February 28, 2011:                
Net sales $8,905  $703  $380  $9,988 
Property and equipment, net  990   76   12   1,078 

The Company’s foreign operations are primarily those of its Japanese and German subsidiaries.  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.
 
Sales to the Company’s five largest customers accounted for approximately 98%93% and 86%90% of its net sales in the three and nine months ended February 29,August 31, 2012 and 2011, respectively.  ThreeTwo customers accounted for approximately 59%42%, 17% and 17%38% of the Company’s net sales in the three months ended February 29,August 31, 2012. ThreeTwo customers accounted for approximately 38%, 25%53% and 10% of the Company’s net sales in the nine months ended February 29, 2012.  Sales to the Company’s five largest customers accounted for approximately 95% and 87% of its net sales in the three and nine months ended February 28, 2011, respectively.  One customer accounted for approximately 73%14% of the Company’s net sales in the three months ended February 28, 2011. Two customers accounted for approximately 64% and 12% of the Company’s net sales in the nine months ended February 28,August 31, 2011.  No other customers represented more than 10% of the Company’sCompany's net sales for either fiscalof the three months ended August 31, 2012 or fiscaland 2011.
 
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8.   PRODUCT WARRANTIES
 
The Company provides for the estimated cost of product warranties at the time the products are 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 ninety days for parts and service and one year for systems.
 
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Following is a summary of changes in the Company's liability for product warranties during the three and nine months ended February 29,August 31, 2012 and February 28, 2011 (in thousands):
 
 Three Months Ended  Nine Months Ended  Three Months Ended 
 February 29,  February 28,  February 29,  February 28,  August 31, 
 2012  2011  2012  2011  2012  2011 
                  
Balance at the beginning of the period $129  $97  $103  $174  $91  $103 
                        
Accruals for warranties issued                        
during the period  35   26   176   86   130   55 
Adjustments related to pre-existing                
warranties (including changes in
estimates)
  --   --   --   (88)
Settlement made during the period                        
(in cash or in kind)  (52)  (41)  (167)  (90)  (106)  (58)
                        
Balance at the end of the period $112  $82  $112  $82  $115  $100 
 
The accrued warranty balance is included in accrued expenses on the accompanying condensed consolidated balance sheets.

9.   GAIN ON BANKRUPTCY CLAIM
Spansion Inc., or Spansion, the Company’s largest customer in fiscal 2010 and 2011, filed for bankruptcy in Japan in February 2009 and in the United States in March 2009.  The Company filed claims in the Spansion U.S. and Spansion Japan bankruptcy actions.  In the first quarter of fiscal 2011, the Company's Japanese subsidiary received approximately $155,000 in proceeds from the Spansion Japan bankruptcy claim and recorded the amount as a reduction of operating expenses.

10.  OTHER COMPREHENSIVE LOSS
Other comprehensive loss, net of tax is comprised of the following (in thousands):

  Three Months Ended  Nine Months Ended 
  February 29,  February 28,  February 29,February 28, 
  2012  2011  2012  2011 
             
Net loss $(1,361) $(946) $(2,610) $(3,229)
Foreign currency translation adjustments  (24)  57   (74)  47 
                 
Comprehensive loss $(1,385) $(889) $(2,684) $(3,182)
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11.  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.
 
During fiscal 2009, a full valuation allowance was established against all deferred tax assets as management determined that it is more likely than not that certain deferred tax assets will not be realized.
 
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 - 2011 remain subject to examination by the appropriate governmental agencies due to tax loss carryovers from those years.

12.10.   LINE OF CREDIT
 
On August 25, 2011, the Company entered into a working capital credit facility agreement allowing the Company to borrow up to $1.5 million based upon qualified accounts receivable, and export-related inventory. On May 29, 2012 the credit agreement was amended to increase the borrowing limit to $2.0 million.  Each account receivable financed by the lender will bear an annual interest rate or finance charge equal to the greater of the lender's prime rate less 0.5%, or 3.50%, when the Company meets certain borrowing base requirements. If the Company does not meet the borrowing base requirements, each account receivable financed by the lender will bear an annual interest rate or finance charge equal to the greater of the lender's prime rate plus 0.75%, or 4.75%.  The applicable interest is calculated based on the full amount of the account receivable and export-related inventory provided as collateral for the actual amounts borrowed.  Depending on the composition of the collateral items, whether or not the Company meets certain borrowing base requirements and the relative cash position of the Company, the equivalent annual interest rate applied to the actual loan balances may vary from 3.89% to 8.94%, assuming that the bank’s prime rate is 4.00% or less.  At August 31, 2012 the weighted average interest rate on the outstanding loan balance was 4.33%.  The average loan balance for the first quarter of fiscal 2013 was $705,000.  The term of the agreement is one year and is collateralized by all the Company’s assets except for intellectual property.  At February 29,August 31, 2012 the Company had drawn $716,000$1,452,000 against the credit facility, the totalfacility.  The balance available to borrow under the line at that date.August 31, 2012 was $548,000.  The Company was in compliance with all covenants at February 29,August 31, 2012.
13.  RECENT ACCOUNTING PRONOUNCEMENTS
In October 2009,  The credit limit on the Financial Accounting Standards Board, or FASB, issued authoritative guidance for revenue recognition with multiple deliverables.  This authoritative guidance defines the criteria for identifying individual deliverablesline of credit was increased in a multiple-element arrangement and the manner in which revenues are allocated to individual deliverables. In absence of vendor-specific objective evidence, or VSOE, or other third party evidence, or TPE, of the selling price for the deliverables in a multiple-element arrangement, guidance requires companies to use an estimated selling price, or ESP, for the individual deliverables.  Companies shall apply the relative-selling price model for allocating an arrangement’s total consideration to its individual elements.  Under this model, the ESP is used for both the delivered and undelivered elements that do not have VSOE or TPE of the selling price.  This guidance is effective for fiscal years beginning on or after June 15, 2010, and will be
September 2012.  See Note 12, “SUBSEQUENT EVENT”.
 
 
1514
 

applied prospectively to revenue arrangements entered into or materially modified after the effective date.  The Company adopted these standards in the first quarter of fiscal year 2012.
In October 2009, the FASB issued authoritative guidance for the accounting for certain revenue arrangements that include software elements.  This authoritative guidance amends the scope of pre-existing software revenue guidance by removing from the guidance non-software components of tangible products and certain software components of tangible products.  This guidance is effective for fiscal years beginning on or after June 15, 2010, and will be applied prospectively to revenue arrangements entered into or materially modified after the effective date.  The Company adopted these standards in the first quarter of fiscal year 2012.
These standards did not have a material impact on the Company’s condensed consolidated financial statements.
In May 2011 updated authoritative guidance to amend existing requirements for fair value measurements and disclosures was issued.  The guidance expands the disclosure requirements around fair value measurements categorized in Level 3 of the fair value hierarchy and requires disclosure of the level in the fair value hierarchy of items that are not measured at fair value but whose fair value must be disclosed.  It also clarifies and expands upon existing requirements for fair value measurements of financial assets and liabilities as well as instruments classified in shareholders’ equity.  The guidance will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and are to be applied prospectively.  The Company will adopt this guidance in the first quarter of fiscal 2013.  The implementation of this authoritative guidance is not expected to have a material impact on the Company’s financial position or results of operations.11.  RECENT ACCOUNTING PRONOUNCEMENTS
 
In June 2011, authoritative guidance was issued on the presentation of comprehensive income to require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This authoritative guidance eliminates the option to present the components of other comprehensive income as part of the statement of shareholders’ equity. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  The implementationCompany adopted this guidance the first quarter of fiscal 2013.  Other than requiring additional disclosure, the adoption of this authoritativenew guidance will changedid not have a material impact on the presentation of comprehensive income only.Company’s consolidated financial statements.

12.  SUBSEQUENT EVENT
 
         On September 11, 2012 the Company entered into the Second Amendment to Loan and Security Agreement to increase the borrowing limit under the credit facility from $2.0 million to $2.5 million.
ITEMItem 2.      MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes that appear elsewhere in this report and with our Annual Report on Form 10-K for the fiscal year ended May 31, 20112012 and the condensed consolidated financial statements and notes thereto.
 
In addition to historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  All statements in this report, including those made by the management of Aehr Test Systems, other than statements of historical fact, are forward-looking statements.  These statements typically may be identified by the use of forward-looking words or phrases such as "believe," "expect," "intend," "anticipate," "should," "planned," "estimated," and "potential," among others and include, but are not limited to, statements concerning our expectations regarding our operations, business, strategies, prospects, revenues, expenses, costs and resources.  These forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from those anticipated results or other expectations reflected in the forward-looking
16
statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this report and other factors beyond our control, and in particular, the risks discussed in “Part II, Item 1A. Risk Factors” and those discussed in other documents we file with the SEC. All forward-looking statements included in this document are based on our current expectations, and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements.  Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
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OVERVIEW

The Company was founded in 1977 to develop and manufacture burn-in and test equipment for the semiconductor industry.  Since its inception, the Company has sold more than 2,500 systems to semiconductor manufacturers, semiconductor contract assemblers and burn-in and test service companies worldwide.  The Company’s principal products currently are the Advanced Burn-in and Test System, or ABTS, the FOX full wafer contact parallel test and burn-in system, the MAX burn-in system, WaferPak contactors, the DiePak carrier and test fixtures.

The Company’s net sales consist primarily of sales of systems, test fixtures, die carriers, upgrades and spare parts and revenues from service contracts and cancellation charges.  The Company's selling arrangements may include contractual customer acceptance provisions and installation of the product occurs after shipment and transfer of title.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES
 
The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s 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 the Company 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, the Company evaluates its estimates, including those related to customer programs and incentives, product returns, bad debts, inventories, investments, intangible assets, income taxes, financing operations, warranty obligations, long-term service contracts, and contingencies and litigation.  The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which 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 the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2011.  We2012.
        During the first quarter of fiscal 2013, the Company entered into an agreement with a customer to develop a next generation system. The project identifies multiple milestones and values assigned to each.  The consideration earned upon achieving the milestone is required to meet the following conditions prior to recognition: the value is commensurate with the vendor’s performance to meet the milestone, it relates solely to past performance, and it is reasonable relative to all of the deliverables and payment terms within the arrangement.

Other than recognition of revenue under the milestone method related to the development contract, we believe there have been no material changes to our critical accounting policies and estimates during the ninethree months ended February 29,August 31, 2012 compared to those discussed in our Annual Report on Form 10-K for the fiscal year ended May 31, 2011.2012.
 
 
1716
 
 
RESULTS OF OPERATIONS

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

 Three Months Ended 
 Three Months Ended  Nine Months Ended  August 31 
 
February 29,
2012
  
February 28,
2011
  
February 29,
2012
  
February 28,
2011
  2012  2011 
                  
Net sales  100.0%  100.0%  100.0%  100.0%  100.0%  100.0%
Cost of sales  61.2   62.2   62.8   60.9   49.2   56.4 
Gross profit  38.8   37.8   37.2   39.1   50.8   43.6 
                        
Operating expenses:                        
Selling, general and administrative  53.4   35.0   42.9   45.0   37.0   38.8 
Research and development  32.7   24.5   28.2   33.8   19.2   26.2 
Gain on bankruptcy claim  --   --   --   (1.5)
                        
Total operating expenses  86.1   59.5   71.1   77.3   56.2   65.0 
                        
Loss from operations  (47.3)  (21.7)  (33.9)  (38.2)  (5.4)  (21.4)
                        
Interest income   --   --   --   -- 
Interest expense  (0.3)  - 
Gain on sale of long-term investment  --   --   9.1   --   -   24.0 
Other income (expense), net  0.2   (0.7)  0.5   6.0 
Other expense, net  (0.4)  (0.3)
                        
Loss before income tax                
expense (benefit)  (47.1)  (22.4)  (24.3)  (32.2)
(Loss) income before income tax (expense) benefit
  (6.1)  2.3 
                        
Income tax expense (benefit)  0.6   (0.1)  (0.2)  0.1 
Net loss  (47.7)%  (22.3)%  (24.1)%  (32.3)%
Income tax (expense) benefit  -   0.7 
Net (loss) income  (6.1)%  3.0%

THREE MONTHS ENDED FEBRUARY 29,AUGUST 31, 2012 COMPARED TO THREE MONTHS ENDED FEBRUARY 28,AUGUST 31, 2011

NET SALES.  Net sales decreasedincreased to $2.9$4.8 million for the three months ended February 29,August 31, 2012 from $4.2$4.1 million for the three months ended February 28,August 31, 2011, a decreasean increase of 32.7%17.0%.  The decreaseincrease in net sales for the three months ended February 29,August 31, 2012 was primarily due to a decreasean increase in net sales of the Company’s wafer-levelTest During Burn-in (TDBI) products, partially offset by an increasea decrease of the Company’s monitored burn-inwafer-level products.  Net sales of the TDBI products for the three months ended August 31, 2012 were $2.8 million, and increased approximately $1.2 million from the three months ended August 31, 2011. Net sales of the Company’s wafer-level products for the three months ended February 29,August 31, 2012 were $1.0$2.0 million, and decreased approximately $2.0$0.5 million from the three months ended February 28, 2011.  Net sales of the monitored burn-in products for the three months ended February 29, 2012 were $1.8 million, and increased approximately $0.7 million from the three months ended February 28,August 31, 2011.
 
GROSS PROFIT.  Gross profit consists of net sales less cost of sales.  Cost of sales consists primarily of the cost of materials, assembly and test costs, and overhead from operations.  Gross profit decreasedincreased to $1.1$2.5 million for the three months ended February 29,August 31, 2012 from $1.6$1.8 million for the three months ended February 28,August 31, 2011, a decreasean increase of $0.5$0.7 million.  Gross profit margin, the percentage of gross profit to net sales, increased to 38.8%50.8% for the three months ended February 29,August 31, 2012 from 37.8%43.6% for the three months ended February 28,August 31, 2011.  The gross profit margin improved primarily due to the high margin net sales of an engineering development project for the three months ended August 31, 2012.
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SELLING, GENERAL AND ADMINISTRATIVE.  Selling, general and administrative, or SG&A, expenses consist primarily of salaries and related costs of employees, commission expenses to independent sales representatives, product promotion and other professional services. SG&A expenses remained unchanged at $1.5increased to $1.8 million for the three months ended February 29,August 31, 2012 compared withfrom $1.6 million for the three months ended February 28, 2011.
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August 31, 2011, an increase of 11.7%.  The increase in SG&A expenses was primarily due to an increase of $0.1 million in pre-sales support expenses.
 
RESEARCH AND DEVELOPMENT.  Research and development, or R&D, expenses consist primarily of salaries and related costs of employees engaged in ongoing research, design and development activities, costs of engineering materials and supplies, and outside services. R&D expenses decreased to $0.9 million for the three months ended February 29,August 31, 2012 from $1.0$1.1 million for the three months ended February 28,August 31, 2011, a decrease of $0.1 million.14.0%.  This decrease was primarily attributable to a reduction in project expenses of $42,000, outside services.services of $33,000 and employment related expenses of $28,000.
 
INTEREST INCOME.EXPENSE.  Interest incomeexpense was $12,000 for the three months ended August 31, 2012 compared with nil for the three months ended February 29, 2012 and February 28,August 31, 2011.
OTHER INCOME, NET.  Other income was $7,000 for the three months ended February 29, 2012, compared to other expense of $30,000 for the three months ended February 28, 2011.  The change between other expense and other income was due primarily to gains realized in connection with foreign exchange rate fluctuations.
INCOME TAX (BENEFIT) EXPENSE.  Income tax expense was $18,000 for the three months ended February 29, 2012, compared with an income tax benefit of $4,000 for the three months ended February 28, 2011.
NINE MONTHS ENDED FEBRUARY 29, 2012 COMPARED TO NINE MONTHS ENDED FEBRUARY 28, 2011
NET SALES.  Net sales increased to $10.8 million for the nine months ended February 29, 2012 from $10.0 million for the nine months ended February 28, 2011, an increase of 8.6%.  The increase in net sales for the nine months ended February 29, 2012 was primarily due to an increase in net sales of the Company’s monitored burn-in products, partially offset by a decrease of the Company’s wafer-level products.  Net sales of the monitored burn-in products for the nine months ended February 29, 2012 were $5.6 million, and increased approximately $2.4 million from the nine months ended February 28, 2011.  Net sales of the Company’s wafer-level products for the nine months ended February 29, 2012 were $5.2 million, and decreased approximately $1.6 million from the nine months ended February 28, 2011.
GROSS PROFIT.  Gross profit increased to $4.0 million for the nine months ended February 29, 2012 from $3.9 million for the nine months ended February 28, 2011, an increase of $0.1 million.  Gross profit margin decreased to 37.2% for the nine months ended February 29, 2012 from 39.1% for the nine months ended February 28, 2011.  The decrease in gross profit margin was primarily due to higher initial material costs related to certain early production systems sold in the second quarter of fiscal 2012.
SELLING, GENERAL AND ADMINISTRATIVE.  SG&A expenses increased to $4.7 million for the nine months ended February 29, 2012 from $4.5 million for the nine months ended February 28, 2011, an increase of $0.2 million.  The increase in SG&A expenses was primarily due to an increase in employment related expenses.
RESEARCH AND DEVELOPMENT.  R&D expenses decreased to $3.1 million for the nine months ended February 29, 2012 from $3.4 million for the nine months ended February 28, 2011, a decrease of $0.3 million.  This decrease was primarily attributable to the decrease in employment related expenses.
GAIN ON BANKRUPTCY CLAIM.  Spansion, the Company’s largest customer in fiscal 2011 and 2010, filed for bankruptcy in Japan in February 2009 and in the United States in March 2009.  The Company filed claims in the Spansion U.S. and Spansion Japan bankruptcy actions.  In the first quarter of fiscal 2011, the Company's Japanese subsidiary received $155,000 in proceeds from the Spansion Japan bankruptcy claim and recorded the amount as a reduction of operating expenses.
INTEREST INCOME.  Interest income decreased to nil for the nine months ended February 29, 2012 compared with $3,000 for the nine months ended February 28, 2011.
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GAIN ON SALE OF LONG-TERM INVESTMENT.  During the first quarter of fiscal 2012, the Company sold its long-term investment in ESA Electronics PTE Ltd, resulting in a gain of $990,000.
 
OTHER INCOME,EXPENSE, NET.  Other income decreased to $53,000expense, net were $19,000 and $12,000 for the ninethree months ended February 29,August 31, 2012 from $593,000and 2011, respectively.
INCOME TAX (EXPENSE) BENEFIT.  Income tax expense was $2,000 for the ninethree months ended February 28, 2011.  The otherAugust 31, 2012, compared with an income tax benefit of $27,000 for the nine monththree months ended February 28, 2011August 31, 2011.  Income tax benefit was primarily attributable torecognized in the receipt of a $575,000 dividend payment related to a long-term investment in ESA Electronics PTE Ltd. This long-term investment was soldincome tax provision in the first quarter of fiscal 2012.
INCOME TAX (BENEFIT) EXPENSE.  Income tax benefit was $17,000 for the nine months ended February 29, 2012 compared with income tax expense of $7,000 for the nine months ended February 28, 2011.  Income tax benefit in the nine months ended February 29, 2012 resultedresulting from an adjustment of a tax liability previously reported.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities was $3.2 million and $4.5$0.3 million for the ninethree months ended February 29,August 31, 2012 and February 28, 2011, respectively.$1.6 million for the three months ended August 31, 2011. For the ninethree months ended February 29,August 31, 2012, net cash used in operating activities was primarily driven by a net loss of $2.6$0.3 million as adjusted to exclude the effect of non-cash charges includingcharge of stock-based compensation expense of $0.5$0.2 million, depreciation and amortization of $0.4 million, and a $990,000 gain onas well as the sale of the Company’s long-term investment.  Net cash used in operating activities also included an increase in inventories of $0.7$0.6 million, partially offset by a decreasean increase in accounts receivablepayable of $0.5 million.  The increaseincreases in inventories wasand accounts payable were due primarily to inventory purchases to support future shipments for customer orders.  The decrease in accounts receivable was primarily due to improvements in customer payment terms.shipments.  For the ninethree months ended February 28,August 31, 2011, net cash used in operating activities was primarily driven by the net lossan increase of $3.2$1.1 million and increases in accounts receivable and inventories of $1.4 million anda $1.0 million respectively.gain on the sale of the Company’s long-term investment, partially offset by an increase in accounts payable of $0.4 million.  The increase in accounts receivable was primarily due to an increase in revenues for the nine months ended February 28, 2011 compared to the same periodtiming of revenue generated in the priorfirst quarter of fiscal year.2012.  The increase in inventories isaccounts payable was due primarily to inventory purchases to support future shipments for customer orders.  This was partially offset by stock-based compensation of $0.7 million and depreciation and amortization of $0.4 million.shipments.
 
Net cash used in investing activities was $16,000 for the three months ended August 31, 2012 compared to net cash provided by investing activities wasof $1.4 million for the ninethree months ended February 29, 2012 compared to netAugust 31, 2011.  The cash used inprovided by investing activities of $6,000 for the ninethree months ended February 28, 2011.  The increaseAugust 31, 2011 was due primarily to the $1.4 million in proceeds received from the sale of the Company’s long-term investment in ESA Electronics PTE Ltd.
 
Financing activities provided cash of $830,000$111,000 for the ninethree months ended February 29,August 31, 2012 and $246,000nil for the ninethree months ended February 28,August 31, 2011.  Net cash provided by financing activities during the ninethree months ended February 29,August 31, 2012 was primarily due to a $716,000 draw on our line of credit.  Proceedsthe proceeds from issuance of common stock for the ESPP, the Employee Stock Ownership Plan and from the exercise of stock options also contributed $114,000 and $246,000 in cash for the nine months ended February 29, 2012 and February 28, 2011, respectively.options.
 
The effect of exchange rates onprovided cash used was $24,000of $5,000 and $124,000 for the ninethree months ended February 29,August 31, 2012 compared to cash provided of $254,000 for the nine months ended February 28, 2011.and 2011, respectively.  The change in cash provided or cash used was due to the fluctuation in the value of the dollar compared to foreign currencies.
 
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As of February 29,August 31, 2012, the Company had working capital of $6.6$6.1 million.  Working capital consists of cash and cash equivalents, accounts receivable, inventory and other current assets, less current liabilities.
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The Company leases its manufacturing and office space under operating leases.  The Company entered into a non-cancelable operating lease agreement for its United States manufacturing and office facilities, which commenced in April 2008 and expires in June 2015.  Under the lease agreement, the Company is responsible for payments of utilities, taxes and insurance.
 
From time to time, the Company evaluates potential acquisitions of businesses, products or technologies that complement the Company’s business.  If consummated, any such transactions may use a portion of the Company’s working capital or require the issuance of equity.  The Company has no present understandings, commitments or agreements with respect to any material acquisitions.
 
The Company anticipates that the existing cash balance together with cash flows from operations, as well as funds available through the working capital credit facility will be adequate to meet its working capital and capital equipment requirements through fiscal 2013.  Refer to Note 12,10, “LINE OF CREDIT”, for further discussion of the credit facility agreement.  After fiscal 2013, depending on its rate of growth and profitability, the Company may require additional equity or debt financing to meet its 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 the Company.

OFF-BALANCE SHEET ARRANGEMENTS

The Company has not entered into any off-balance sheet financing arrangements and has not established any variable interest entities.

OVERVIEW OF CONTRACTUAL OBLIGATIONS
 
On August 25, 2011, the Company entered into a working capital credit facility agreement allowing the Company to borrow up to $1.5 million based upon qualified U.S. based and foreign customer receivables, and export-related inventory.  On May 29, 2012 the credit agreement was amended to increase the borrowing limit to $2.0 million.  Refer to Note 10, “LINE OF CREDIT”, for further discussion of the agreement.  On September 11, 2012, the credit agreement was amended to increase the borrowing limit to $2.5 million. Refer to Note 12, “LINE OF CREDIT”,“SUBSEQUENT EVENT” for further discussion of the agreement.
 
There have been no additional material changes in the composition, magnitude or other key characteristics of the Company's contractual obligations or other commitments as disclosed in the Company's Annual Report on Form 10-K for the year ended May 31, 2011.2012.

ITEM 3.  
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
 
The Company had no holdings of derivative financial or commodity instruments at February 29,August 31, 2012 or May 31, 2011.2012.
 
The Company is exposed to financial market risks, including changes in interest rates and foreign currency exchange rates.  The Company only invests its short-term excess cash in government-backed securities with maturities of 18 months or less.  The Company maintained a cost basis equity investment in a privately held company, ESA Electronics PTE Ltd through May 2011.  This investment was sold in the first quarter of fiscal 2012.  The Company does not use any financial instruments for speculative or trading purposes.  Fluctuations in interest rates would not have a material effect on the Company’s financial position, results of operations or cash flows.
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A majority of the Company’s revenue and capital spending is transacted in U.S. Dollars.  The Company, however, enters into transactions in other currencies, primarily Japanese Yen.  Substantially all sales to Japanese customers are denominated in Yen.  Since the price is determined at the time a purchase order is accepted, the Company is exposed to the risks of fluctuations in the Yen-U.S. Dollar exchange rate during the lengthy period from purchase order to ultimate payment.  This exchange rate risk is partially offset to the extent that the Company’s Japanese subsidiary incurs expenses payable in Yen.  To date, the Company has not invested in instruments designed to hedge currency
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risks.  In addition, the Company’s Japanese subsidiary typically carries debt or other obligations due to the Company that may be denominated in either Yen or U.S. Dollars.  Since the Japanese subsidiary’s financial statements are based in Yen and the Company’s condensed consolidated financial statements are based in U.S. Dollars, the Japanese subsidiary and the Company recognize foreign exchange gain or loss in any period in which the value of the Yen rises or falls in relation to the U.S. Dollar.  A 10% decrease in the value of the Yen as compared with the U.S. Dollar would not be expected to result in a significant change to the Company’s 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.

Item 4.  
Item 4.
CONTROLS AND PROCEDURES
 
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.  Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q.  Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities and Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to management as appropriate to allow for timely decisions regarding required disclosure.
 
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING.  There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
 
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PART II - OTHER INFORMATION

ITEM 1.  
Item 1.LEGAL PROCEEDINGS
None.

None.
Item 1A.
RISK FACTORS

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 Quarterly Report on Form 10-Q and in other documents we filed with the U.S. Securities and Exchange Commission, including without limitation our most recently filed Annual Report on Form 10-K or presented elsewhere by management from time to time.

Periodic economic and semiconductor industry downturns could negatively affect our business, results of operations and financial condition.

The recent and historical global economic and semiconductor industry downturns negatively affected and could continue to negatively affect our business, results of operations, and financial condition.  The recent financial turmoil affected the banking system and financial markets resulting in a tightening of the credit markets, disruption in the financial markets and global economy downturn.  These events contributed 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 for the Company.  Customers with liquidity issues may lead to additional bad debt expense for the Company.  For example, Spansion declared bankruptcy in Japan and the U.S. during fiscal 2009; as a result the Company subsequently recorded a $13.7 million provision for bad debts.   A recurrence of these conditions may also similarly affect our key suppliers, which could impact their ability to deliver parts and result in delays in deliveries of our products.

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, DRAM and other memory device prices have historically declined, and will likely do so again in the future.  These developments may affect us in several ways.  We believe that many international semiconductor manufacturers limited their capital spending in calendar 2009 and again in calendar 2011, and that 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 affect on our business, financial condition and results of operations.

The recent 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.

 
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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 the face of the recent sustained downturn in our business and 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.  While we took significant steps in fiscal 2009 to minimize our expense levels and to increase the likelihood that we would have sufficient cash to support operations during the downturn duringfrom fiscal 2009 2010, 2011 andthrough fiscal 2012 we experienced operating losses.  Due primarily to these operating losses, we experienced cash outflows.outflows and, at August 31, 2012, had $1.9 million in cash and cash equivalents.  Should our business downturn be prolonged, and if we are unable to reduce our operating expenses sufficiently, we may require additional debt or equity financing to meet working capital or capital expenditure needs.  While we believe our existing cash balance, together with cash flows from operations, as well as funds available through theour working capital credit facility, will be adequate to meet itsour working capital and capital equipment requirements through fiscal 2013, we cannot determine with certainty that, if needed, we will be able to raise additional funding through either equity or debt financing under these circumstances or on what terms such financing would be available.

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 the Company’s five largest customers accounted for approximately 83% and 85% of its net sales in fiscal 2012 and 2011, and 2010.respectively.  During fiscal 2011,2012, Spansion and Texas Instruments Incorporated accounted for approximately 61%40% and 11%22%, respectively, of the Company’s net sales.  During fiscal 2010,2011, Spansion Micronas Semiconductor Holding AG and Texas Instruments Incorporated accounted for approximately 55%, 12%61% and 11%, respectively, of the Company’s net sales.  No other customers represented more than 10% of the Company's net sales for either fiscal 20112012 or fiscal 2010.2011.

We expect that sales of our 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.  The loss of, or reduction or delay in an order, or orders from a significant customer, or a delay in collecting or failure to collect accounts receivable from a significant customer could adversely affect our business, financial condition and operating results.  For example, during fiscal 2009 Spansion, Inc., our largest customer at the time, declared bankruptcy in Japan and in the U.S. and subsequently placed lower levels of orders with the Company, which caused our net sales to drop dramatically and impacted the Company’s ability to collect on accounts receivable.

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 $200,000 to 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.  All 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
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that we will not be materially adversely affected by future cancellations or rescheduling.  Certain contracts contain provisions that require customer acceptance prior to recognition of revenue.  The delay in customer acceptance 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 below our expectations.
 
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The Company’s business operations could be negatively impacted by earthquakes or other natural disasters.

The March 2011 Japanese earthquake and resulting tsunami seriously affected many companies in Japan, including some of our customers. Besides the direct impact to their employees and facilities, theythe customers were affected by, among other things, the rolling electrical blackouts and industry wide shutdowns as well as the impact of the nuclear power plant disaster.  Some of our customers delayed capital equipment purchases as a result of the disaster. The disaster in Japan also negatively impacted the Japanese economy as a whole, which could further impact the Company's future business prospects in Japan.

Natural disasters may impact our ability to manufacture products in the event our facility is damaged, or if operations are disrupted at a major supplier.  The demand for our products may be negatively affected if a natural disaster impacts one or more of our significant customers. These events may seriously damage our ability to conduct business.

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 capture an increasing share of the test equipment market through sales of our FOX wafer-level test and burn-in system.  The FOX system is designed to simultaneously burn-in and functionally test all of the die on a wafer.  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 Aehr Test Systems.  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 increasing market acceptance for our ABTS system and we may not be ableour ability to achieve sufficient market acceptance to allow our ABTS system to be commercially viable.complete certain enhancements.

Since the introduction of the ABTS product in fiscal 2008, the Company has shipped a limited number of ABTS systems.  Market acceptance of the ABTS systemfamily, first introduced in fiscal 2008, is subject to a number of risks.  We must complete engineering development of certain necessary hardware and software features.   In addition, ita next generation ABTS system in order to grow market share in the higher power logic burn-in market.  It is important that we achieve customer acceptance, satisfaction and increased market acceptance of this new ABTS product.  To date, the Company has received orders for the ABTS products.  Additionalsystem from more than 12 customers must then be found who are willing to place orders for ABTS systems in sufficient quantities to allow it to be produced economically.worldwide.  The failure of the ABTS systemfamily to achieve increased market acceptance would have a material adverse effect on our future operating results long-term prospects and our stock price.
 
 
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We depend upon some continued market acceptanceneed for our MAX system and we may experiencesystem; a limited market for the product.product may result in our having excess inventory.

We have historically derived a substantial portion of our net sales from the sale of dynamicmonitored burn-in systems.  We believe that the market for burn-in systems is mature and is not expected to experience significant long-term growth in the future.  In general, process control improvements in the semiconductor industry have tended to reduce burn-in times.  In addition, as a given IC product generation matures and yields increase, the required burn-in time may be reduced or eliminated.  IC manufacturers, which historically have been our primary customer base, increasingly outsource test and burn-in to independent test labs, which oftenmay build their own systems.  Our ABTS system may cannibalize the business that would previously have been addressed by the MAX system.  We have some level of inventory which supports MAX products.  Our success depends upon some continued acceptance ofneed for our MAX burn-in products within these markets.  There can be no assurance that the market for burn-in systems will grow,not decline, or that sales of our MAX burn-in products will not decline.decline, which would have an adverse effect on our operating results.

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 39%, 29%38% and 72%39% of our net sales for fiscal 2011, 20102012 and 2009,2011, respectively, were attributable to sales to customers for delivery outside of the United States.  We operate sales, service and limited manufacturing organizations in Japan and Germany and a sales and support organization in Taiwan.  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 92%95%, 7%1% and 1%4% of our net sales for fiscal 20112012 were denominated in U.S. Dollars, Japanese Yen and Euros, respectively.  Although athe percentages of net sales denominated in Japanese Yen and Euros were small in fiscal 2012, 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, substantially allbut sales to many Japanese customers are denominated in 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 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.
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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 will depend in part upon our ability to develop new products and to introduce these products at competitive prices and on a timely and cost-
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effectivecost-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 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.

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.  Certain 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.

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 ABTS and MAXABTS systems, WaferPak contactors and DiePak carriers contain several components, including environmental chambers, power supplies, high-density interconnects, wafer contactors, signal distribution substrates 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 becomes unable or unwilling to continue to manufacture subassemblies, components or parts in required volumes, we will 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.
 
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Our suppliers manufacture components, tooling, and provide engineering services which allows access to intellectual property of the Company.  While the
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Company maintains 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.

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 built-in self-test, or BIST, 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, weour business may not be able to grow our business.decline.

Semiconductor business cycles are unreliable and there is always the risk of cancellations and rescheduling which could have a material adverse affect on our operating results.

Our operating results depend primarily upon the capital expenditures of semiconductor manufacturers, semiconductor contract assemblers and burn-in and test service companies worldwide, which in turn depend on the current and anticipated market demand for ICs.  The semiconductor equipment manufacturing industry has historically been subject to a relatively high rate of purchase order cancellation by customers as compared to other high technology industry sectors.  Manufacturing companies that are the customers of semiconductor equipment companies frequently revise, postpone and cancel capital facility expansion plans.  In such cases, semiconductor equipment companies may experience a significant rate of cancellations or rescheduling of purchase orders.  A significant increase in purchase order cancellations was recognized in the third quarter of fiscal 2009 as a result of the Spansion bankruptcy filing.  There can be no assurance that we will not be materially adversely affected by future cancellations or rescheduling of purchase orders.

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, failure to meet securities analysts’ expectations, general conditions in the semiconductor and semiconductor equipment industries and 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.
 
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The Company may not meet the listing requirements of the NASDAQ markets which could cause our stock to be delisted.

Pursuant to the requirements of NASDAQ, if a company’s stock price is below $1 per share for 30 consecutive trading days (the “Bid Price Rule”), NASDAQ will notify the company that it is no longer in compliance with the NASDAQ listing qualifications.  If a company is not in compliance with the Bid Price Rule, the company will have 180 calendar days to regain compliance.  On September 15, 2009, the Company received notice from NASDAQ that it was no longer in compliance with the Bid Price Rule.  The Company regained compliance on
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September 30, 2009.  OnAdditionally, on November 2, 2011, the Company received notice from NASDAQ that it was no longer in compliance with the Bid Price Rule.  The Company will be provided 180 calendar days, or untilsubsequently regained compliance on April 30, 2012, to regain compliance with the Bid Price Rule. There can be no assurance that the Company will remain compliant with the Bid Price Rule.16, 2012.

On January 18, 2011 the Company received notice from NASDAQ that it was no longer in compliance with NASDAQ’s Listing Rule 5450(b)(1)(A), which specifies that an issuer must maintain stockholders’ equity of at least $10 million.  On March 21, 2011 the Company submitted an application to NASDAQ to transfer the listing of its company stock from the NASDAQ Global Market to the NASDAQ Capital Market.  On March 24, 2011 the Company received a letter from NASDAQ informing it that the NASDAQ Listing Qualifications Staff had granted the Company’s request to transfer the listing of its common stock to the NASDAQ Capital Market, effective at the opening of business on March 28, 2011.  The Bid Price Rule is also a listing requirement of the NASDAQ Capital Market.

There can be no assurance that the Company will regainmaintain compliance with the Bid Price Rule maintain compliance withand the other listing requirements of the NASDAQ Capital Market, or that it will not be delisted.

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 Rhea Posedel, our Executive Chairman and 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 the Company.  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 is 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, and our business and operating results could be harmed.  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.

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
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no assurance that we would be able to do so on commercially reasonable terms, or at all.
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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, the failure to comply with current or future regulations could result in substantial fines being imposed on us, 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 by us to control the use, disposal or storage of or adequately restrict the discharge of, hazardous or toxic substances could subject us to significant liabilities.

While we believe we currently have adequate internal control over financial reporting, we are required to assess our internal control over financial reporting on an annual basis and any future adverse results from such assessment could result in a loss of investor confidence in our financial reports and have an adverse effect on our stock.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we must include in our Annual Report on Form 10-K a report of management on the effectiveness of our internal control over financial reporting.  If we fail to maintain effective internal control over financial reporting, or management does not timely assess the adequacy of such internal control, we could be subject to regulatory sanctions and the investing public’s perception of the Company may decline.
 
ITEM 2.  
Item 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.  
Item 3.DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.  
Item 4.MINE SAFETY DISCLOSURES

Not Applicable

ITEM 5.  
Item 5.OTHER INFORMATION

None.

ITEM 6.  
Item 6.EXHIBITS

The Exhibits listed on the accompanying "Index to Exhibits" are filed as part of, or incorporated by reference into, this report.

 
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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
  Aehr Test Systems
(Registrant) 
   
 Aehr Test Systems
(Registrant)
 
Date: April 13,October 12, 2012  /s/ GAYN ERICKSON 
  Gayn Erickson 
  
President and Chief Executive
Officer
 
 
Date: April 13,October 12, 2012
  /s//s/ GARY L. LARSON 
  Gary L. Larson 
  
Vice President of Finance and
Chief Financial Officer
 
 
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AEHR TEST SYSTEMS
INDEX TO EXHIBITS
 
Exhibit NoNo. Description
   
3.1(1) Restated Articles of Incorporation of the Company.
3.2(2) Amended and Restated Bylaws of the Company.
10.23(3)Offer Letter dated January 3, 2012, between the Company and Gayn Erickson.
10.24(4)Offer Letter dated January 3, 2012, between the Company and Rhea Posedel.
10.25(5)Change of Control Severance Agreement dated January 3, 2012, between the Company and Gayn Erickson.
10.26(6)Amended and Restated Change of Control Severance Agreement dated January 3, 2012, between the Company and Rhea J. Posedel.
31.1 Certification of Chief Executive Officer pursuant to Rules13a-14(a)Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.
32 (7) Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
   
101.INS101. INS XBRL Instance Document**
101.SCH101. SCH XBRL Taxonomy Extension Schema Document**
101.CAL101. CAL XBRL Taxonomy Extension Calculation Linkbase Document**
101.DEF101. DEF XBRL Taxonomy Extension Definition Linkbase Document**
101.LAB101. LAB XBRL Taxonomy Extension Label Linkbase Document**
101.PRE101. PRE XBRL Taxonomy Extension Presentation Linkbase Document**
________________

(1)(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)(2) Incorporated by reference to Exhibit No. 3.1 previously filed with the Company’s Current Report on Form 8-K filed January 9, 2012 (File No. 000-22893).

(3)Incorporated by reference to the Exhibit No. 10.1 previously filed with the Company's Current Report on Form 8-K filed January 9, 2012 (File No. 000-22893).
(4)Incorporated by reference to the Exhibit No. 10.2 previously filed with the Company's Current Report on Form 8-K filed January 9, 2012 (File No. 000-22893).
 
*This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section, nor shall it be deemed incorporated by reference in any filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.
 
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(5)Incorporated by reference to the Exhibit No. 10.3 previously filed with the Company's Current Report on Form 8-K filed January 9, 2012 (File No. 000-22893).

(6)Incorporated by reference to the Exhibit No. 10.4 previously filed with the Company's Current Report on Form 8-K filed January 9, 2012 (File No. 000-22893).

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

**In accordance with Rule 406T of Regulation S-T, XBRL (Extensible Business Reporting Language) information deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.
 
 
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