1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCCOUNTING POLICIES

    The accompanying 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.(the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (GAAP)(“GAAP”) have been condensed or omitted pursuant to such rules and regulations.

    In the opinion of management, the unaudited condensed consolidated financial statements for the interim periods presented have been prepared on a basis consistent with the May 31, 20172019 audited consolidated financial statements and reflect all adjustments, consisting of 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 unaudited 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, 2017.2019. 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"). All significant intercompany balances have been eliminated in consolidation. For the Company’s majority owned subsidiary, Aehr Test Systems Japan K.K., the noncontrolling interest of the portion the Company does not own was reflected on the Condensed Consolidated Balance Sheets in Shareholders’ Equity and in the Condensed Consolidated Statements of Operations.

    ACCOUNTING ESTIMATES. The preparation of financial statements in conformity with GAAP 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. Estimates are used to account for sales and revenue allowances, the allowance for doubtful accounts, inventory valuations, income taxes, stock-based compensation expenses, and product warranties, among others. The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances. Actual results could differ materially from those estimates.

2. STOCK-BASED COMPENSATIONRECENT ACCOUNTING PRONOUNCEMENTS

    In January 2016, the FASB issued an accounting standard update related to the recognition and measurement of expensesfinancial assets and financial liabilities. This standard changes accounting for stock options, restricted stock units, or RSUs,equity investments and employee stock purchase plan, or ESPP, purchase rights. Stock-based compensation cost for stock options and ESPP purchase rights are measured at each grant date, based onfinancial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. In addition, this standard clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The Company adopted this new standard in fiscal year 2020. The adoption of this standard did not have a significant impact on the awardCompany’s consolidated financial statements.

    In February 2016, the FASB issued ASC Update No. 2016-02, Leases (FASB ASC Topic 842, Leases). The Company adopted the standard as of June 1, 2019, using the Black-Scholes option valuation model,modified retrospective approach and is recognized as expense over the employee’s requisite service period. This model was developed for use in estimatingtransition method provided by ASC Update No. 2018-11, Leases (Topic 842): Targeted Improvements. Under this method, the value of publicly traded options that have no vesting restrictions and are fully transferable. The Company’s employee stock options have characteristics significantly different from those of publicly traded options. For RSUs, stock-based compensation cost is basedCompany applied the new leasing rules on the fair valuedate of adoption and recognized the cumulative effect of initially applying the standard as an adjustment to its opening balance sheet, rather than at the earliest comparative period presented in the financial statements. Prior periods presented are in accordance with the previous lease guidance under FASB ASC Topic 840, Leases.

    As a result of adopting FASB ASC Topic 842, Leases, on June 1, 2019, the Company recognized right-of-use assets of $2.7 million and corresponding liabilities of $2.8 million for its existing operating lease portfolio on its unaudited condensed consolidated balance sheet. Operating lease right-of-use assets are presented within Operating lease right-of-use assets and corresponding liabilities are presented within Operating lease liabilities, short-term and Operating lease liabilities, long-term on the Company’s common stock at the grant date. All ofunaudited condensed consolidated balance sheet. There was no material impact to the Company’s stock-based compensation is accountedunaudited condensed consolidated statements of operations or unaudited condensed consolidated statements of cash flows as a result of FASB ASC Topic 842, Leases. Please refer to Note “11. LEASES” for as an equity instrument. See Notes 11 and 12 in the Company’s Annual Report on Form 10-K for fiscal 2017 filed on August 29, 2017 for further information regarding the Company’s lease portfolio as of February 29, 2020 as accounted for under FASB ASC Topic 842, Leases.

    In June 2016, Equity Incentive Planthe FASB issued an accounting standard update (“ASU”) that requires measurement and recognition of expected credit losses for financial assets held based on historical experience, current conditions, and reasonable and supportable forecasts that affect the Amendedcollectability of the reported amount. Due to a subsequent ASU in November 2019, the accounting standard will be effective for the Company beginning in the first quarter of fiscal 2024 on a modified retrospective basis, and Restated 2006 ESPP.early adoption in fiscal 2020 is permitted. The Company does not expect a material impact of this accounting standard on its consolidated financial statements.

    The following table summarizes the stock-based compensation expense related to the Company’s stock-based incentive plans for the three and six months ended November 30, 2017 and 2016revenues by product category are as follows (in thousands):

    As of November 30, 2017 and 2016, there were no stock-based compensation costs capitalized as part of inventory.The following presents information about the Company’s operations in different geographic areas. Net sales are based upon ship-to location (in thousands):

    

     DuringWith the three months ended November 30, 2017exception of the amount of service contracts and 2016,extended warranties, the Company recorded stock-based compensation relatedCompany’s product category revenues are recognized at a point in time when control transfers to stock options and RSUscustomers. The following presents revenue based on timing of $207,000 and $185,000, respectively. During the six months ended November 30, 2017 and 2016, the Company recorded stock-based compensation related to stock options and RSUs of $408,000 and $464,000, respectively.recognition (in thousands):

    A receivable is recognized in the period the Company delivers goods or provides services or when the Company’s right to consideration is unconditional. The Company basesusually does not record contract assets because 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 equivalentCompany has an unconditional right to the expected termpayment upon satisfaction of the stock awards including the ESPP.performance obligation, and therefore, a receivable is more commonly recorded than a contract asset.

    Fair Value. The fair valueContract liabilities include payments received in advance of performance under a contract and are satisfied as the Company’s stock options granted to employees forassociated revenue is recognized. Contract liabilities are reported on the Condensed Consolidated Balance Sheets at the end of each reporting period as a component of deferred revenue. Contract liabilities as of February 29, 2020 and May 31, 2019 were $419,000 and $1,734,000, respectively. During the three and sixnine months ended November 30, 2017February 29, 2020, the Company recognized $135,000 and 2016$1,316,000 respectively, of revenues that were estimated using the following weighted average assumptionsincluded in the Black-Scholes option valuation model:contract liabilities as of May 31, 2019.

    ThereOn February 29, 2020, the Company had $284,000 of remaining performance obligations, which were no ESPP purchase rights granted forcomprised of deferred service contracts and extended warranty contracts not yet delivered. The Company expects to recognize approximately 33% of its remaining performance obligations as revenue in fiscal 2020, and an additional 67% in fiscal 2021 and thereafter. The foregoing excludes the threevalue of other remaining performance obligations as they have original durations of one year or less, and six months ended November 30, 2017 and 2016.also excludes information about variable consideration allocated entirely to a wholly unsatisfied performance obligation.

    The following tables summarizeCompany generally expenses sales commissions when incurred as a component of selling, general and administrative expense as the amortization period is typically less than one year. Additionally, the majority of the Company’s stock optioncost of fulfillment as a manufacturer of products is classified as inventory and RSU transactions duringfixed assets, which are accounted for under the threerespective guidance for those asset types. Other costs of contract fulfillment are immaterial due to the nature of the Company’s products and six months ended November 30, 2017 (in thousands):their respective manufacturing process.

    Basic earnings per share is determined using the weighted average number of common shares outstanding during the period. Diluted earnings per share is determined using the weighted average number of common shares and potential common shares (representing the dilutive effect of stock options, RSUs and ESPPAmended and Restated 2006 Employee Stock Purchase Plan (“ESPP”) shares) outstanding during the period using the treasury stock method.

    The following table presents the computation of basic and diluted net income (loss) per share attributable to the Company’sAehr Test Systems common shareholders (in thousands, except per share data):

    For the purpose of computing diluted earnings per share, the weighted average number of potential common shares does not include stock options with an exercise price greater than the average fair value of the Company’s common stock for the period,periods presented, as the effect would be anti-dilutive. Stock options to purchase 263,0002,505,000 shares of common stock were outstanding as of November 30, 2017February 29, 2020 but were not included in the computation of diluted net income per share for the periods, because the inclusion of such shares would be anti-dilutive. In the three and sixnine months ended November 30, 2016,February 28, 2019, potential common shares have not been included in the calculation of diluted net loss per share as the effect would be anti-dilutive. As such, the numerator and the denominator used in computing both basic and diluted net loss per share for this periodthese periods are the same. Stock options to purchase 3,229,0003,220,000 shares of common stock, and 34,000 RSUs for 72,000 sharesunder the Company’s 2016 Equity Incentive Plan (“2016 Plan”) and ESPP rights to purchase 246,000327,000 ESPP shares were outstanding as of November 30, 2016,February 28, 2019 but were not included in the computation of diluted net loss per share for the periods, because the inclusion of such shares would be anti-dilutive. The 2,657,000 shares convertible under the convertible notes outstanding at November 30, 2017 and 2016February 28, 2019 were not included in the computation of diluted net income (loss) per share for the periods presented, because the inclusion of such shares would be anti-dilutive.

5. FAIR VALUE OF FINANCIAL INSTRUMENTS

    The Company’s financial instruments are measured at fair value consistent with authoritative guidance. This authoritative guidance defines fair value, establishes a framework for using fair value to measure assets and liabilities, and disclosures required related to fair value measurements.

    The guidance establishes a fair value hierarchy based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions. The fair value hierarchy consists of the following three levels:

Level 1 - instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets.

Level 2 - instrument valuations are obtained from readily-available pricing sources for comparable instruments.

Level 3 - instrument valuations are obtained without observable market values and require a high level of judgment to determine the fair value.

    The following table summarizes the Company’s financial assets measured at fair value on a recurring basis as of November 30, 2017February 29, 2020 (in thousands):

    The following table summarizes the Company’s financial assets measured at fair value on a recurring basis as of May 31, 20172019 (in thousands):

    There were no financial liabilities measured at fair value as of November 30, 2017February 29, 2020 and May 31, 2017.2019.

    There were no transfers between Level 1 and Level 2 fair value measurements during the three and sixnine months ended November 30, 2017.February 29, 2020.

    The carrying amounts of financial instruments including cash, cash equivalents, receivables, accounts payable and certain other accrued liabilities, approximate fair value due to their short maturities. Based on the borrowing rates currently available to the Company for loans with similar terms, the carrying value of the debt approximates the fair value.

6. ACCOUNTS RECEIVABLE, NET

    Accounts receivable represent customer trade receivablesreceivables. As of February 29, 2020 and is presented net ofMay 31, 2019, there were no allowances for doubtful accounts of $47,000 at November 30, 2017 and $61,000 at May 31, 2017.accounts. Accounts receivable are derived from the sale of products throughout the world to semiconductor manufacturers, semiconductor contract assemblers, electronics manufacturers and burn-in and test service companies. 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.

7. INVENTORIES

    Inventories are comprised of the following (in thousands):

 

8. SEGMENT INFORMATION

    The Company provides for the estimated cost of product warranties at the time revenues are recognized on the products shipped. While the Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its component suppliers, the Company’s warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from the Company’s estimates, revisions to the estimated warranty liability would be required.

    The standard warranty period is one year for systems and ninety days for parts and service.

    The following is a summary of changes in the Company's liability for product warranties during the three and sixnine months ended November 30, 2017February 29, 2020 and 2016February 28, 2019 (in thousands):

    The accrued warranty balance is included in accrued expenses on the accompanying condensed consolidated balance sheets.

    Changes in the components of AOCI, net of tax, were as followsCustomer deposits and deferred revenue, short-term (in thousands):

10. 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.

    Since 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.

    On December 22, 2017,March 27, 2020, the "Tax Cuts“Coronavirus Aid, Relief and Jobs Act"Economic Security (CARES) Act” was signed into law, significantly impacting several sectionslaw. The Act includes provisions relating to refundable payroll tax credits, deferment of the Internal Revenue Code.employer portion of certain payroll taxes, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The Company is currently analyzing the impact of these changes and therefore an estimate of the impact to income taxes is not yet available.

    

    Customer deposits and deferred revenue, short-termThe following table presents supplemental cash flow information related to the Company’s operating leases (in thousands):