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INTT Intest

Filed: 12 Nov 21, 4:16pm
 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 


 

FORM 10-Q

 


(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021 or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                     

 

Commission File Number 1-36117

inTEST Corporation
(Exact Name of Registrant as Specified in its Charter)

 

Delaware
(State or other jurisdiction of incorporation or organization)

22-2370659
(I.R.S. Employer Identification Number)

 

804 East Gate Drive, Suite 200
Mt. Laurel, New Jersey 08054
(Address of principal executive offices, including zip code)

(856) 505-8800
(Registrant's Telephone Number, including Area Code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class
Common Stock, par value $0.01 per share

Trading Symbol

INTT

Name of Each Exchange on Which Registered
NYSE American

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒      No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒      No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer" "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ☐

Accelerated filer  ☐ 

Non-accelerated filer   ☒ 

Smaller reporting company ☒ 

Emerging growth company  ☐ 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐      No ☒

 

Number of shares of Common Stock, $0.01 par value, outstanding as of the close of business on November 3, 2021:   10,873,392

 

 

 

 

 

inTEST CORPORATION


INDEX

 

 

Page

PART I.

FINANCIAL INFORMATION

 
   

Item 1.

Financial Statements

 
   
 

Consolidated Balance Sheets as of September 30, 2021 (Unaudited) and December 31, 2020

1

 

Unaudited Consolidated Statements of Operations for the three months and nine months ended September 30, 2021 and 2020

2

 

Unaudited Consolidated Statements of Comprehensive Earnings (Loss) for the three months and nine months ended September 30, 2021 and 2020

3

 

Unaudited Consolidated Statements of Stockholders' Equity for the three months and nine months ended September 30, 2021 and 2020

4

 

Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020

5

 

Notes to Consolidated Financial Statements

6

   

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

21
   

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

30
   

Item 4.

Controls and Procedures

30
   

PART II.

OTHER INFORMATION

31
   

Item 1.

Legal Proceedings

31
   

Item 1A.

Risk Factors

31
   

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

31
   

Item 3.

Defaults Upon Senior Securities

31
   

Item 4.

Mine Safety Disclosures

31
   

Item 5.

Other Information

31
   

Item 6.

Exhibits

32
  

SIGNATURES

33

 

 

 

 

 

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

inTEST CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)

 

  

September 30,

  

December 31,

 
  

2021

  

2020

 
  

(Unaudited)

     

ASSETS

        

Current assets:

        

Cash and cash equivalents

 $18,743  $10,277 

Trade accounts receivable, net of allowance for doubtful accounts of $211 and $212, respectively

  12,232   8,435 

Inventories

  9,359   7,476 

Prepaid expenses and other current assets

  798   776 

Total current assets

  41,132   26,964 

Property and equipment:

        

Machinery and equipment

  5,414   5,356 

Leasehold improvements

  2,908   2,636 

Gross property and equipment

  8,322   7,992 

Less: accumulated depreciation

  (5,925

)

  (5,642

)

Net property and equipment

  2,397   2,350 

Right-of-use assets, net

  5,819   6,387 

Goodwill

  13,738   13,738 

Intangible assets, net

  11,503   12,421 

Restricted certificates of deposit

  100   140 

Other assets

  40   30 

Total assets

 $74,729  $62,030 
         

LIABILITIES AND STOCKHOLDERS' EQUITY

        

Current liabilities:

        

Accounts payable

 $3,849  $2,424 

Accrued wages and benefits

  2,881   1,944 

Accrued professional fees

  827   776 

Customer deposits and deferred revenue

  2,082   396 

Accrued sales commissions

  836   472 

Current portion of operating lease liabilities

  1,207   1,215 

Domestic and foreign income taxes payable

  1,121   825 

Other current liabilities

  741   804 

Total current liabilities

  13,544   8,856 

Operating lease liabilities, net of current portion

  5,332   6,050 

Deferred tax liabilities

  1,701   1,922 

Other liabilities

  436   450 

Total liabilities

  21,013   17,278 
         

Commitments and Contingencies

          

Stockholders' equity:

        

Preferred stock, $0.01 par value; 5,000,000 shares authorized; no shares issued or outstanding

  0   0 

Common stock, $0.01 par value; 20,000,000 shares authorized; 10,819,294 and 10,562,200 shares issued, respectively

  108   106 

Additional paid-in capital

  28,962   26,851 

Retained earnings

  24,106   17,110 

Accumulated other comprehensive earnings

  744   889 

Treasury stock, at cost; 33,077 shares

  (204

)

  (204

)

Total stockholders' equity

  53,716   44,752 

Total liabilities and stockholders' equity

 $74,729  $62,030 

 

See accompanying Notes to Consolidated Financial Statements.

 

 

- 1 -

 

 

 

inTEST CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)

 

  

Three Months Ended
September 30,

  

Nine Months Ended
September 30,

 
  

2021

  

2020

  

2021

  

2020

 
                 

Net revenues

 $21,144  $14,443  $62,520  $38,948 

Cost of revenues

  10,749   7,993   31,642   21,564 

Gross margin

  10,395   6,450   30,878   17,384 

Operating expenses:

                

Selling expense

  2,841   1,747   7,849   5,560 

Engineering and product development expense

  1,334   1,316   4,012   3,825 

General and administrative expense

  3,620   2,799   10,550   8,525 

Restructuring and other charges

  51   161   303   207 
                 

Total operating expenses

  7,846   6,023   22,714   18,117 
                 

Operating income (loss)

  2,549   427   8,164   (733

)

Other income (loss)

  (17

)

  6   2   (44

)

Earnings (loss) before income tax expense (benefit)

  2,532   433   8,166   (777

)

Income tax expense (benefit)

  357   (25

)

  1,170   (262

)

                 

Net earnings (loss)

 $2,175  $458  $6,996  $(515

)

                 

Net earnings (loss) per common share - basic

 $0.21  $0.04  $0.67  $(0.05

)

                 
                 

Weighted average common shares outstanding - basic

  10,496,188   10,269,995   10,422,851   10,247,779 
                 

Net earnings (loss) per common share - diluted

 $0.20  $0.04  $0.65  $(0.05

)

                 

Weighted average common shares and common share equivalents outstanding - diluted

  10,792,290   10,287,562   10,694,351   10,247,779 

 

See accompanying Notes to Consolidated Financial Statements.

 

- 2 -

 

 

 

inTEST CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (LOSS)
(In thousands)
(Unaudited)

 

  

Three Months Ended
September 30,

  

Nine Months Ended
September 30,

 
  

2021

  

2020

  

2021

  

2020

 
                 

Net earnings (loss)

 $2,175  $458  $6,996  $(515

)

                 

Foreign currency translation adjustments

  (68

)

  101   (145

)

  98 
                 

Comprehensive earnings (loss)

 $2,107  $559  $6,851  $(417

)

 

See accompanying Notes to Consolidated Financial Statements.

 

- 3 -

 

 

 

inTEST CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
(Unaudited)

 

  

Nine Months Ended September 30, 2021

 
                  

Accumulated

         
          

Additional

      

Other

      

Total

 
  

Common Stock

  

Paid-in

  

Retained

  

Comprehensive

  

Treasury

  

Stockholders'

 
  

Shares

  

Amount

  

Capital

  

Earnings

  

Earnings

  

Stock

  

Equity

 

Balance, January 1, 2021

  10,562,200  $106  $26,851  $17,110  $889  $(204

)

 $44,752 
                             

Net earnings

  -   0   0   2,212   0   0   2,212 

Other comprehensive loss

  -   0   0   0   (101

)

  0   (101

)

Amortization of deferred compensation related to stock-based awards

  -   0   269   0   0   0   269 

Issuance of unvested shares of restricted stock

  81,468   1   (1

)

  0   0   0   0 

Stock options exercised

  99,740   1   716   0   0   0   717 
                             

Balance, March 31, 2021

  10,743,408   108   27,835   19,322   788   (204

)

  47,849 
                             

Net earnings

  -   0   0   2,609   0   0   2,609 

Other comprehensive earnings

  -   0   0   0   24   0   24 

Amortization of deferred compensation related to stock-based awards

  -   0   454   0   0   0   454 

Issuance of unvested shares of restricted stock

  44,741   0   0   0   0   0   0 

Forfeiture of unvested shares of restricted stock

  (18,125

)

  0   0   0   0   0   0 

Stock options exercised

  45,835   0   285   0   0   0   285 
                             

Balance, June 30, 2021

  10,815,859   108   28,574   21,931   812   (204

)

  51,221 
                             

Net earnings

  -   0   0   2,175   0   0   2,175 

Other comprehensive loss

  -   0   0   0   (68

)

  0   (68

)

Amortization of deferred compensation related to stock-based awards

  -   0   371   0   0   0   371 

Stock options exercised

  3,435   0   17   0   0   0   17 
                             

Balance, September 30, 2021

  10,819,294  $108  $28,962  $24,106  $744  $(204

)

 $53,716 

 

  

Nine Months Ended September 30, 2020

 
                  

Accumulated

         
          

Additional

      

Other

      

Total

 
  

Common Stock

  

Paid-in

  

Retained

  

Comprehensive

  

Treasury

  

Stockholders'

 
  

Shares

  

Amount

  

Capital

  

Earnings

  

Earnings

  

Stock

  

Equity

 

Balance, January 1, 2020

  10,413,982  $104  $26,256  $18,005  $673  $(204

)

 $44,834 
                             

Net loss

  -   0   0   (1,143

)

  0   0   (1,143

)

Other comprehensive loss

  -   0   0   0   (38

)

  0   (38

)

Amortization of deferred compensation related to stock-based awards

  -   0   187   0   0   0   187 

Issuance of unvested shares of restricted stock

  58,160   1   (1

)

  0   0   0   0 

Forfeiture of unvested shares of restricted stock

  (8,315

)

  0   0   0   0   0   0 

Repurchase and retirement of common stock

  (13,767

)

  0   (74

)

  0   0   0   (74

)

                             

Balance, March 31, 2020

  10,450,060   105   26,368   16,862   635   (204

)

  43,766 
                             

Net earnings

  -   0   0   170   0   0   170 

Other comprehensive earnings

  -   0   0   0   35   0   35 

Amortization of deferred compensation related to stock-based awards

  -   0   208   0   0   0   208 

Issuance of unvested shares of restricted stock

  15,840   0   0   0   0   0   0 

Forfeiture of unvested shares of restricted stock

  (6,750

)

  0   0   0   0   0   0 
                             

Balance, June 30, 2020

  10,459,150   105   26,576   17,032   670   (204

)

  44,179 
                             

Net earnings

  -   0   0   458   0   0   458 

Other comprehensive earnings

  -   0   0   0   101   0   101 

Amortization of deferred compensation related to stock-based awards

  -   0   85   0   0   0   85 

Issuance of unvested shares of restricted stock

  155,110   2   (2

)

  0   0   0   0 

Forfeiture of unvested shares of restricted stock

  (52,060

)

  (1

)

  1   0   0   0   0 
                             

Balance, September 30, 2020

  10,562,200  $106  $26,660  $17,490  $771  $(204

)

 $44,823 

 

See accompanying Notes to Consolidated Financial Statements.

- 4 -

 

 

 

inTEST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

 

  

Nine Months Ended
September 30,

 
  

2021

  

2020

 

CASH FLOWS FROM OPERATING ACTIVITIES

        

Net earnings (loss)

 $6,996  $(515

)

Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:

        

Depreciation and amortization

  2,166   2,378 

Provision for excess and obsolete inventory

  154   410 

Foreign exchange loss

  36   33 

Amortization of deferred compensation related to stock-based awards

  1,094   480 

Loss on disposal of property and equipment

  20   56 

Deferred income tax benefit

  (221

)

  (81

)

Changes in assets and liabilities:

        

Trade accounts receivable

  (3,874

)

  (237

)

Inventories

  (2,051

)

  (146

)

Prepaid expenses and other current assets

  (26

)

  95 

Restricted certificates of deposit

  40   0 

Other assets

  (10

)

  (5

)

Accounts payable

  1,425   215 

Accrued wages and benefits

  942   18 

Accrued professional fees

  52   47 

Customer deposits and deferred revenue

  1,697   936 

Accrued sales commissions

  366   (2

)

Operating lease liabilities

  (918

)

  (977

)

Domestic and foreign income taxes payable

  302   (240

)

Other current liabilities

  (60

)

  (60

)

Other liabilities

  (7

)

  (5

)

Net cash provided by operating activities

  8,123   2,400 
         

CASH FLOWS FROM INVESTING ACTIVITIES

        

Purchase of property and equipment

  (577

)

  (520

)

Net cash used in investing activities

  (577

)

  (520

)

         

CASH FLOWS FROM FINANCING ACTIVITIES

        

Proceeds from stock options exercised

  1,019   0 

Repurchases of common stock

  0   (74

)

Proceeds from Paycheck Protection Program loans

  0   2,829 

Repayments of Paycheck Protection Program loans

  0   (2,829

)

Proceeds from revolving credit facility

  0   2,800 

Repayments of revolving credit facility

  0   (2,800

)

Net cash provided by (used in) financing activities

  1,019   (74

)

         

Effects of exchange rates on cash

  (99

)

  55 
         

Net cash provided by all activities

  8,466   1,861 

Cash and cash equivalents at beginning of period

  10,277   7,612 

Cash and cash equivalents at end of period

 $18,743  $9,473 
         

Cash payments for:

        

Domestic and foreign income taxes

 $1,053  $58 

 

See accompanying Notes to Consolidated Financial Statements.

 

- 5 -

 

 

inTEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except share and per share data)

 

 

(1)

NATURE OF OPERATIONS

 

We are a global supplier of innovative test and process solutions for use in manufacturing and testing across a wide range of markets including automotive, defense/aerospace, industrial, life sciences, semiconductor and telecommunications. We manage our business as 2 operating segments which are also our reportable segments and reporting units: Thermal Products ("Thermal") and Electromechanical Solutions ("EMS"). Our Thermal segment designs, manufactures and sells our thermal test and thermal process products while our EMS segment designs, manufactures and sells our semiconductor test products. We manufacture our products in the U.S. Marketing and support activities are conducted worldwide from our facilities in the U.S., Germany, Singapore, the Netherlands and the U.K. The consolidated entity is comprised of inTEST Corporation and our wholly-owned subsidiaries.

 

Our EMS segment sells its products to semiconductor manufacturers and third-party test and assembly houses (end user sales) and to automated test equipment (“ATE”) manufacturers (original equipment manufacturer (“OEM”) sales), who ultimately resell our equipment with theirs to both semiconductor manufacturers and third-party test and assembly houses. These sales all fall within the ATE sector of the broader semiconductor market. Our Thermal segment sells its products to many of these same types of customers; however, it also sells to customers in the wafer processing sector within the broader semiconductor market and to customers in a variety of other markets outside the semiconductor market, including the automotive, defense/aerospace, industrial (including consumer products packaging, fiber optics and other sectors within the broader industrial market), medical and telecommunications markets.

 

Both of our operating segments have multiple products that we design, manufacture and market to our customers. Due to a number of factors, our products have varying levels of gross margin. The mix of products we sell in any period is ultimately determined by our customers' needs. Therefore, the mix of products sold in any given period can change significantly from the prior period. As a result, our consolidated gross margin can be significantly impacted in any given period by a change in the mix of products sold in that period.

 

We refer to the broader semiconductor market, including the more specialized ATE and wafer processing sectors within that market, as the “Semi Market.” All other markets are designated as “Multimarket.” The Semi Market, which is the principal market in which we operate, is characterized by rapid technological change, competitive pricing pressures and cyclical market patterns. This market is subject to significant economic downturns at various times.

 

Our financial results are affected by a wide variety of factors, including, but not limited to, general economic conditions worldwide and in the markets in which we operate, economic conditions specific to the Semi Market and the other markets we serve, our ability to safeguard patented technology and intellectual property in a rapidly evolving market, downward pricing pressures from customers, and our reliance on a relatively few number of customers for a significant portion of our sales. In addition, we are exposed to the risk of obsolescence of our inventory depending on the mix of future business and technological changes within the markets that we serve. Part of our strategy for growth includes potential acquisitions that may cause us to incur substantial expense in the review and evaluation of potential transactions. We may or may not be successful in locating suitable businesses to acquire or in closing acquisitions of businesses we pursue. In addition, we may not be able to successfully integrate any business we do acquire with our existing business and we may not be able to operate the acquired business profitably. As a result of these or other factors, we may experience significant period-to-period fluctuations in our future operating results.

 

COVID-19 Pandemic

 

As of the date of this Quarterly Report on Form 10-Q (this “Report”), our U.S. offices remain open. We are following the guidance of the Centers for Disease Control and Prevention (“CDC”) and, accordingly, we are requiring all employees working in our offices to wear masks and maintain appropriate social distancing. We are also continuing to allow employees to work remotely either part-time or full-time in circumstances when possible. As of the date of this Report, our offices in Europe have also reopened to varying degrees, while our employees in Asia remain under more significant restrictions. Our employees outside of the U.S. continue to follow the guidance of their local regulatory authorities, which in most cases includes wearing masks, observing social distancing, limiting travel and quarantining after travel, as required.  

 

While the negative impact of COVID-19 on our business was reduced significantly in the second half of 2020 and the first nine months of 2021, the spread of the virus or variants of the virus could continue to worsen and one or more of our significant customers or suppliers could be impacted, or significant additional governmental regulations and restrictions could be imposed, thus negatively impacting our business in the future. We continue to monitor the situation closely in the regions in which we operate in the U.S. and abroad and will adjust our operations as necessary to protect the health and well-being of our employees. To the extent that further governmental mandates or restrictions are implemented in the future, we currently expect to be able to continue to operate our business in a manner similar to how we have operated over the past year. 

 

- 6 -

 

 

(2)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation and Use of Estimates

The accompanying consolidated financial statements include our accounts and those of our wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated upon consolidation. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires us 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. Actual results could differ from those estimates. Certain of our accounts, including inventories, long-lived assets, goodwill, identifiable intangibles, deferred tax assets and liabilities, including related valuation allowances, and performance-based stock compensation are particularly impacted by estimates.
 

In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position, results of operations, and changes in cash flows for the interim periods presented. Certain footnote information has been condensed or omitted from these consolidated financial statements. Therefore, these consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying footnotes included in our Form 10-K for the year ended December 31, 2020 (“2020 Form 10-K”) filed on March 23, 2021 with the Securities and Exchange Commission (the “SEC”).

 

Reclassification

Certain prior period amounts have been reclassified to be comparable with the current period's presentation.

 

Subsequent Events

We have made an assessment of our operations and determined that there were no material subsequent events requiring adjustment to, or disclosure in, our consolidated financial statements for the nine months ended September 30, 2021 other than those described in Note 15.

 

Business Combinations

Acquired businesses are accounted for using the purchase method of accounting, which requires that the purchase price be allocated to the net assets acquired at their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Fair values of intangible assets are estimated by valuation models prepared by our management and third-party advisors. The assets purchased and liabilities assumed have been reflected in our consolidated balance sheets, and the results are included in the consolidated statements of operations and consolidated statements of cash flows from the date of acquisition. Any change in the fair value of acquisition-related contingent consideration subsequent to the acquisition date, including changes from events after the acquisition date, will be recognized in the consolidated statement of operations in the period of the estimated fair value change. Acquisition-related transaction costs, including legal and accounting fees and other external costs directly related to the acquisition, are recognized separately from the acquisition and expensed as incurred in general and administrative expense in the consolidated statements of operations.

 

Restructuring and Other Charges

 

In accordance with the guidance in Accounting Standards Codification (“ASC”) Topic 420 (Exit or Disposal Cost Obligations), we recognize a liability for restructuring costs at fair value only when the liability is incurred. Workforce-related charges are accrued when it is determined that a liability has been incurred, which is generally after individuals have been notified of their termination dates and expected severance benefits. Depending on the timing of the termination dates, these charges may be recognized upon notification or ratably over the remaining required service period of the employees. Plans to consolidate excess facilities may result in lease termination fees and impairment charges related to our right-of-use (“ROU”) assets that are associated with the leases for these facilities. Other long-lived assets that may be impaired as a result of restructuring consist of property and equipment, goodwill and intangible assets. Asset impairment charges included in restructuring and other charges are based on an estimate of the amounts and timing of future cash flows related to the expected future remaining use and ultimate sale or disposal of the asset, and, in the case of our ROU assets, would include expected future sublease rental income, if applicable. These estimates are derived using the guidance in ASC Topic 842 (Leases), ASC Topic 360 (Property, Plant and Equipment) and ASC Topic 350 (Intangibles - Goodwill and Other).
 

- 7 -


Goodwill, Intangible and Long-Lived Assets

We account for goodwill and intangible assets in accordance with ASC Topic 350 (Intangibles - Goodwill and Other). Finite-lived intangible assets are amortized over their estimated useful economic life and are carried at cost less accumulated amortization. Goodwill is assessed for impairment annually in the fourth quarter on a reporting unit basis, or more frequently when events and circumstances occur indicating that the recorded goodwill may be impaired. Goodwill is considered to be impaired if the fair value of a reporting unit is less than its carrying amount. As a part of the goodwill impairment assessment, we have the option to perform a qualitative assessment to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. If, as a result of our qualitative assessment, we determine that it is more-likely-than-not that the fair value of the reporting unit is greater than its carrying amount, a quantitative goodwill impairment test is not required. However, if, as a result of our qualitative assessment, we determine it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, or, if we choose not to perform a qualitative assessment, we are required to perform a quantitative goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized.

 

The quantitative goodwill impairment test compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. The goodwill impairment assessment is based upon the income approach, which estimates the fair value of our reporting units based upon a discounted cash flow approach. This fair value is then reconciled to our market capitalization at year end with an appropriate control premium. The determination of the fair value of our reporting units requires management to make significant estimates and assumptions, including the selection of control premiums, discount rates, terminal growth rates, forecasts of revenue and expense growth rates, income tax rates, changes in working capital, depreciation, amortization and capital expenditures. Changes in assumptions concerning future financial results or other underlying assumptions could have a significant impact on either the fair value of the reporting unit or the amount of the goodwill impairment charge.

 

Indefinite-lived intangible assets are assessed for impairment annually in the fourth quarter, or more frequently if events or changes in circumstances indicate that the asset might be impaired. As a part of the impairment assessment, we have the option to perform a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. If, as a result of our qualitative assessment, we determine that it is more-likely-than-not that the fair value of the indefinite-lived intangible asset is less than its carrying amount, the quantitative impairment test is required; otherwise, no further testing is required. The quantitative impairment test consists of a comparison of the fair value of the intangible asset with its carrying amount. If the carrying amount of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.

 

Long-lived assets, which consist of finite-lived intangible assets, property and equipment and ROU assets, are assessed for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. Each impairment test is based on a comparison of the estimated undiscounted cash flows to the recorded value of the asset. If impairment is indicated, the asset is written down to its estimated fair value. The cash flow estimates used to determine the impairment, if any, contain management's best estimates using appropriate assumptions and projections at that time.

 

Revenue Recognition

We recognize revenue in accordance with the guidance in ASC Topic 606 (Revenue from Contracts with Customers). We recognize revenue for the sale of products or services when our performance obligations under the terms of a contract with a customer are satisfied and control of the product or service has been transferred to the customer. Generally, this occurs when we ship a product or perform a service. In certain cases, recognition of revenue is deferred until the product is received by the customer or at some other point in the future when we have determined that we have satisfied our performance obligations under the contract. Our contracts with customers may include a combination of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. In addition to the sale of products and services, we also lease certain of our equipment to customers under short-term lease agreements. We recognize revenue from equipment leases on a straight-line basis over the lease term. 

 

Revenue is recorded in an amount that reflects the consideration we expect to receive in exchange for those products or services. We do not have any material variable consideration arrangements, or any material payment terms with our customers other than standard payment terms which generally range from net 30 to net 90 days. We generally do not provide a right of return to our customers. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities.

 

- 8 -

 

Nature of Products and Services

We are a global supplier of innovative test and process solutions for use in manufacturing and testing across a wide range of markets including automotive, defense/aerospace, industrial, medical, semiconductor and telecommunications. We sell thermal management products including ThermoStreams, ThermoChambers and process chillers, which we sell under our Temptronic, Sigma and Thermonics product lines, and Ambrell Corporation’s (“Ambrell”) precision induction heating systems, including EKOHEAT and EASYHEAT products. We sell semiconductor ATE interface solutions which include manipulators, docking hardware and electrical interface products. We provide post-warranty service for the equipment we sell. We sell semiconductor ATE interface solutions and certain thermal management products to the Semi Market. We also sell our thermal management products to various other markets including the automotive, defense/aerospace, industrial, medical and telecommunications markets.

 

We lease certain of our equipment under short-term leasing agreements with original lease terms of six months or less. Our lease agreements do not contain purchase options.

 

Types of Contracts with Customers  

Our contracts with customers are generally structured as individual purchase orders which specify the exact products or services being sold or equipment being leased along with the selling price, service fee or monthly lease amount for each individual item on the purchase order. Payment terms and any other customer-specific acceptance criteria are also specified on the purchase order. We generally do not have any customer-specific acceptance criteria, other than that the product performs within the agreed upon specifications. We test substantially all products manufactured as part of our quality assurance process to determine that they comply with specifications prior to shipment to a customer.

 

Contract Balances  

We record accounts receivable at the time of invoicing. Accounts receivable, net of the allowance for doubtful accounts, is included in current assets on our balance sheet. To the extent that we do not recognize revenue at the same time as we invoice, we record a liability for deferred revenue. In certain instances, we also receive customer deposits in advance of invoicing and recording of accounts receivable. Deferred revenue and customer deposits are included in current liabilities on our consolidated balance sheets.

 

The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable balance. We determine the allowance based on known troubled accounts, if any, historical experience, and other currently available evidence.

 

Costs to Obtain a Contract with a Customer 

The only costs we incur associated with obtaining contracts with customers are sales commissions that we pay to our internal sales personnel or third-party sales representatives. These costs are calculated based on set percentages of the selling price of each product or service sold. Commissions are considered earned by our internal sales personnel at the time we recognize revenue for a particular transaction. Commissions are considered earned by third-party sales representatives at the time that revenue is recognized for a particular transaction. We record commission expense in our consolidated statements of operations at the time the commission is earned. Commissions earned but not yet paid are included in current liabilities on our balance sheets.

 

Product Warranties

In connection with the sale of our products, we generally provide standard one- or two-year product warranties which are detailed in our terms and conditions and communicated to our customers. Our standard warranties are not offered for sale separately from our products; therefore, there is not a separate performance obligation related to our standard warranties. We record estimated warranty expense for our standard warranties at the time of sale based upon historical claims experience. We offer customers an option to separately purchase an extended warranty on certain products. In the case of extended warranties, we recognize revenue in the amount of the sale price for the extended warranty on a straight-line basis over the extended warranty period. We record costs incurred to provide service under an extended warranty at the time the service is provided. Warranty expense is included in selling expense in our consolidated statements of operations. 

 

See Notes 5 and 14 for further information about our revenue from contracts with customers.

 

Inventories

Inventories are valued at cost on a first-in, first-out basis, not in excess of market value. Cash flows from the sale of inventories are recorded in operating cash flows. On a quarterly basis, we review our inventories and record excess and obsolete inventory charges based upon our established objective excess and obsolete inventory criteria. Our criteria identify excess material as the quantity of material on hand that is greater than the average annual usage of that material over the prior three years. Effective January 1, 2021, our criteria identify obsolete material as material that has not been used in a work order during the prior twenty-four months. Prior to January 1, 2021, these criteria identified obsolete material as material that had not been used in a work order during the prior twelve months. In certain cases, additional excess and obsolete inventory charges are recorded based upon current market conditions, anticipated product life cycles, new product introductions and expected future use of the inventory. The excess and obsolete inventory charges we record establish a new cost basis for the related inventories.

 

- 9 -

 

Leases

 

We account for leases in accordance with ASC Topic 842 (Leases) which was effective for us as of January 1, 2019. Upon adoption of ASC Topic 842, we elected the package of practical expedients which included the grandfathering of the lease classification that had been made under prior guidance and, accordingly, we did not re-evaluate any of our leases for classification purposes in connection with the implementation of ASC Topic 842. All our lease contracts are still being treated as operating leases. We do not currently have any lease contracts that meet the criteria to be categorized as finance leases. We did not elect the hindsight practical expedient and therefore did not reevaluate the lease terms that we used under prior guidance. The implementation of ASC Topic 842 had a significant impact on our consolidated balance sheet as a result of recording ROU assets and lease liabilities for all our multi-year leases. Under prior guidance, none of these leases had any related asset recorded on our balance sheets. The only related liability recorded on our balance sheets was the amount which represented the difference between the lease payments we had made and the straight-line rent expense we had recorded in our statements of operations. The implementation of ASC Topic 842 did not have a significant impact on our pattern of expense recognition for any of our multi-year leases.

 

We determine if an arrangement is a lease at inception. A lease contract is within scope if the contract has an identified asset (property, plant or equipment) and grants the lessee the right to control the use of the asset during the lease term. The identified asset may be either explicitly or implicitly specified in the contract. In addition, the supplier must not have any practical ability to substitute a different asset and would not economically benefit from doing so for the lease contract to be in scope. The lessee’s right to control the use of the asset during the term of the lease must include the ability to obtain substantially all the economic benefits from the use of the asset as well as decision-making authority over how the asset will be used. Leases are classified as either operating leases or finance leases based on the guidance in ASC Topic 842. Operating leases are included in operating lease ROU assets and operating lease liabilities in our consolidated balance sheets. Finance leases are included in property and equipment and finance lease liabilities. We do not currently have any finance leases. We do not have embedded leases nor do we have any initial direct costs related to our lease contracts.

 

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. None of our leases provide an implicit rate; therefore, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease. We include these options in the determination of the amount of the ROU asset and lease liability when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Certain of our operating leases contain predetermined fixed escalations of minimum rentals and rent holidays during the original lease terms. Rent holidays are periods during which we have control of the leased facility but are not obligated to pay rent. For these leases, our ROU asset and lease liability are calculated including any rent holiday in the determination of the life of the lease.

 

We have lease agreements which contain both lease and non-lease components, which are generally accounted for separately. In addition to the monthly rental payments due, most of our leases for our offices and warehouse facilities include non-lease components representing our portion of the common area maintenance, property taxes and insurance charges incurred by the landlord for the facilities which we occupy. These amounts are not included in the calculation of the ROU assets and lease liabilities as they are based on actual charges incurred in the periods to which they apply.

 

Operating lease payments are included in cash outflows from operating activities on our consolidated statements of cash flows. Amortization of ROU assets is presented separately from the change in operating lease liabilities and is included in depreciation and amortization in our consolidated statements of cash flows.

 

We have made an accounting policy election not to apply the recognition requirements of ASC Topic 842 to short-term leases (leases with a term of one year or less at the commencement date of the lease). Lease expense for short-term lease payments is recognized on a straight-line basis over the lease term.

 

See Note 8 for further disclosures regarding our leases. 

 

- 10 -

 

Contingent Liability for Repayment of State and Local Grant Proceeds

 

In connection with leasing a new facility in Rochester, New York, which our subsidiary, Ambrell, occupied in May 2018, we entered into agreements with the city of Rochester and the state of New York under which we received grants totaling $463 to help offset a portion of the cost of the leasehold improvements we have made to this facility. In exchange for the funds we received under these agreements, we are required to create and maintain specified levels of employment in this location through various dates ending in 2023. If we fail to meet these employment targets, we may be required to repay a proportionate share of the proceeds. As of September 30, 2021, $370 of the total proceeds received could still be required to be repaid if we do not meet the targets. We have recorded this amount as a contingent liability which is included in other liabilities on our balance sheet. Those portions of the proceeds which are no longer subject to repayment are reclassified to deferred grant proceeds and amortized to income on a straight-line basis over the remaining lease term for the Rochester facility. Deferred grant proceeds are included in other current liabilities and other liabilities on our balance sheet and totaled $77 at September 30, 2021.

 

As of December 31, 2020, we were not in compliance with the employment targets as specified in the grant agreement with the city of Rochester. We applied for and received a waiver of this requirement for the year ended December 31, 2020. The waiver provided us until December 31, 2021 to come into compliance with the targets as outlined in the waiver. As of September 30, 2021, we were in compliance with those targets.


Stock-Based Compensation

We account for stock-based compensation in accordance with ASC Topic 718 (Compensation - Stock Compensation), which requires that employee share-based equity awards be accounted for under the fair value method and requires the use of an option pricing model for estimating fair value of stock options granted, which is then amortized to expense over the service periods. See further disclosures related to our stock-based compensation plan in Note 10.

 

Income Taxes

The asset and liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for operating loss and tax credit carryforwards and for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets if it is more likely than not that such assets will not be realized.

 

Net Earnings (Loss) Per Common Share

Net earnings (loss) per common share - basic is computed by dividing net earnings (loss) by the weighted average number of common shares outstanding during each period. Net earnings (loss) per common share - diluted is computed by dividing net earnings (loss) by the weighted average number of common shares and common share equivalents outstanding during each period. Common share equivalents represent unvested shares of restricted stock and stock options and are calculated using the treasury stock method. Common share equivalents are excluded from the calculation if their effect is anti-dilutive.

The table below sets forth, for the periods indicated, a reconciliation of weighted average common shares outstanding - basic to weighted average common shares and common share equivalents outstanding - diluted and the average number of potentially dilutive securities that were excluded from the calculation of diluted earnings per share because their effect was anti-dilutive:

 

  

Three Months Ended
September 30,

  

Nine Months Ended
September 30,

 
  

2021

  

2020

  

2021

  

2020

 

Weighted average common shares outstanding - basic

  10,496,188   10,269,995   10,422,851   10,247,779 

Potentially dilutive securities:

                

Unvested shares of restricted stock and employee stock options

  296,102   17,567   271,500   0 

Weighted average common shares and common share equivalents outstanding - diluted

  10,792,290   10,287,562   10,694,351   10,247,779 

Average number of potentially dilutive securities excluded from calculation

  237,545   631,392   283,894   722,538 

 

Effect of Recently Issued Amendments to Authoritative Accounting Guidance

 

In June 2016, the Financial Accounting Standards Board (“FASB”) issued amendments to the guidance for accounting for credit losses. In November 2019, the FASB deferred the effective date of these amendments for certain companies, including smaller reporting companies. As a result of the deferral, the amendments are effective for us for reporting periods beginning after December 15, 2022. The amendments replace the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires the use of a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. The amendments require a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. We plan to adopt the amendments when they become effective for us on January 1, 2023. We do not currently expect that the adoption of these amendments will have a material impact on our consolidated financial statements. 

 

- 11 -

 

 

(3)

RESTRUCTURING AND OTHER CHARGES

 

EMS Segment Restructuring and Facility Consolidation

 

As discussed in Note 3 to our consolidated financial statements in our 2020 Form 10-K, on September 21, 2020, we notified employees in our Fremont, California facility of a plan to consolidate all manufacturing for our EMS segment into our manufacturing operations located in Mt. Laurel, New Jersey. The consolidation of manufacturing operations resulted in the closure of the Fremont facility and the termination of certain employees at that location. As a result of the consolidation, we incurred charges for severance and other one-time termination benefits, other associated costs, including moving and production start-up costs, and charges related to exiting the facility, including an impairment charge related to the ROU asset for the lease of the Fremont facility. These charges are more fully discussed in Note 3 to our consolidated financial statements in our 2020 Form 10-K.

 

At the time of the consolidation of manufacturing operations, we intended to try to sublease the facility in Fremont, but we did not expect to sublet the facility for the full remaining term of the lease. On July 19, 2021, we executed a sublease for our facility in Fremont. The sublease commenced in August 2021 and ends November 30, 2025, which is the termination date of our lease for this facility. We entered into this sublease approximately 14 months earlier than we had estimated in December 2020. As a result, we will record approximately $350 of incremental sublease income above the level that we had estimated at the time that we recorded the impairment charge in December 2020. This income will be recorded ratably over the term of the sublease and will be included in other income in our consolidated statements of operations.

 

During the nine months ended September 30, 2021, we incurred $183 of additional charges associated with finalizing the integration of the manufacturing operations. All of these charges were cash charges and are included in restructuring and other charges in our consolidated statement of operations. The integration of our EMS manufacturing operations took longer than originally anticipated, primarily as a result of the significant increase in our business activity in the first nine months of 2021 as we delayed some final integration activities and instead allocated our resources to meet customer demand for shipments of our products during this time. We completed the integration of the EMS manufacturing operations in the third quarter of 2021.

 

Executive Management Changes

 

On June 10, 2021, our Board of Directors (the “Board”) accepted the retirement of Hugh T. Regan, Jr. from the positions of Chief Financial Officer, Treasurer, and Secretary (the “Retirement”). In connection with the Retirement, we entered into a Separation and Consulting Agreement (the “Separation and Consulting Agreement”) with Mr. Regan effective June 11, 2021 pursuant to which Mr. Regan agreed to provide consulting services for three months, subject to an extension of up to an additional three months at our option. We did not extend the consulting services beyond the original three months. The Separation and Consulting Agreement also provides that Mr. Regan was entitled to a severance benefit of $120. In connection with the Retirement, we also agreed that certain options issued to Mr. Regan in March 2020 to purchase shares of our common stock that remained unvested on the date of the Retirement would continue to vest after the Retirement and expire one year from their respective vesting dates.

 

On June 10, 2021, the Board approved, effective as of June 14, 2021 (the “Start Date”), the appointment of Duncan Gilmour to the position of Chief Financial Officer, Treasurer, and Secretary. Mr. Gilmour entered into a letter agreement (the “Letter Agreement”), dated June 10, 2021, subject to his appointment as our Chief Financial Officer, Treasurer, and Secretary, which appointments were approved on June 10, 2021 and are effective as of the Start Date.

 

Total costs incurred during the nine months ended September 30, 2021 related to these executive management changes were $370, which consisted of $159 for consulting and legal fees related to the transition, $120 for severance paid to our former Chief Financial Officer (“CFO”) and $91 of stock-based compensation expense, primarily as a result of the modification of the March 2020 option awards issued to our former CFO, as discussed above. The $120 of severance is included in restructuring and other charges in our consolidated statement of operations. The balance of the costs is included in general and administrative expense in our consolidated statement of operations.

 

2020 Restructuring Actions

 

During the nine months ended September 30, 2020, we recorded cash charges totaling $207 for severance and other one-time termination benefits and other costs associated with restructuring activities. This amount consisted of $133 related to the resignation of our former Chief Executive Officer, $46 related to headcount reductions in our corporate office and at Ambrell, $14 related to the EMS facility consolidation and $14 of other associated costs.

 

- 12 -

 

Accrued Restructuring

 

The liability for accrued restructuring charges is included in other current liabilities on our consolidated balance sheet. Changes in the amount of the liability for accrued restructuring for the nine months ended September 30, 2021 is as follows:

 

  

EMS Facility

Consolidation

  

Executive Management

Changes

  

Total

 

Balance – January 1, 2021

 $233  $107  $340 

Accruals for severance

  0   120   120 

Accruals for other costs associated with facility consolidation

  183   0   183 

Cash payments

  (416

)

  (140

)

  (556

)

Balance – September 30, 2021

 $0  $87  $87 

 

 

(4)

GOODWILL AND INTANGIBLE ASSETS

 

We have 2 operating segments which are also our reporting units: Thermal and EMS. Goodwill and intangible assets on our balance sheets are the result of our acquisitions of Sigma Systems Corp. ("Sigma") in October 2008, Thermonics, Inc. ("Thermonics") in January 2012 and Ambrell in May 2017. All our goodwill and intangible assets are allocated to our Thermal segment.

 

Goodwill

 

Goodwill totaled $13,738 at both September 30, 2021 and December 31, 2020 and was comprised of the following:

 

Sigma

 $1,656 

Thermonics

  50 

Ambrell

  12,032 

Total

 $13,738 

 

Intangible Assets

Changes in the amount of the carrying value of finite-lived intangible assets for the nine months ended September 30, 2021 are as follows:

 

Balance - January 1, 2021

 $5,711 

Amortization

  (918

)

Balance September 30, 2021

 $4,793 

 

The following tables provide further detail about our intangible assets as of September 30, 2021 and December 31, 2020:

 

  

September 30, 2021

 
  

Gross
Carrying
Amount

  

Accumulated

Amortization

  

Net
Carrying
Amount

 

Finite-lived intangible assets:

            

Customer relationships

 $10,480  $5,767  $4,713 

Technology

  600   528   72 

Patents

  590   582   8 

Software

  270   270   0 

Trade name

  140   140   0 

Total finite-lived intangible assets

  12,080   7,287   4,793 

Indefinite-lived intangible assets:

            

Trademarks

  6,710   -   6,710 

Total intangible assets

 $18,790  $7,287  $11,503 

 

- 13 -

 
  

December 31, 2020

 
  

Gross

Carrying

Amount

  

Accumulated

Amortization

  

Net
Carrying

Amount

 

Finite-lived intangible assets:

            

Customer relationships

 $10,480  $4,912  $5,568 

Technology

  600   477   123 

Patents

  590   570   20 

Software

  270   270   0 

Trade name

  140   140   0 

Total finite-lived intangible assets

  12,080   6,369   5,711 

Indefinite-lived intangible assets:

            

Trademarks

  6,710   -   6,710 

Total intangible assets

 $18,790  $6,369  $12,421 

 

We generally amortize our finite-lived intangible assets over their estimated useful lives on a straight-line basis, unless an alternate amortization method can be reliably determined. Any such alternate amortization method would be based on the pattern in which the economic benefits of the intangible asset are expected to be consumed. None of our intangible assets have any residual value.

 

Total amortization expense for our finite-lived intangible assets was $309 and $918 for the three months and nine months ended September 30, 2021, respectively, and $307 and $927 for the three months and nine months ended September 30, 2020, respectively. The following table sets forth the estimated annual amortization expense for each of the next five years:

 

2021 (remainder)

 $309 

2022

 $1,167 

2023

 $1,067 

2024

 $980 

2025

 $905 

 

 

(5)

REVENUE FROM CONTRACTS WITH CUSTOMERS

 

The following tables provide additional information about our revenue from contracts with customers, including revenue by customer and product type and revenue by market. See also Note 14 for information about revenue by operating segment and geographic region.

 

  

Three Months Ended
September 30,

  

Nine Months Ended
September 30,

 
  

2021

  

2020

  

2021

  

2020

 

Net revenues by customer type:

                

End user

 $17,366  $12,651  $54,291  $34,518 

OEM/Integrator

  3,778   1,792   8,229   4,430 
  $21,144  $14,443  $62,520  $38,948 
                 

Net revenues by product type:

                

Thermal test

 $5,284  $3,632  $14,126  $11,482 

Thermal process

  6,412   5,574   18,785   13,885 

Semiconductor test

  7,951   3,604   25,224   9,093 

Service/other

  1,497   1,633   4,385   4,488 
  $21,144  $14,443  $62,520  $38,948 
                 

Net revenues by market:

                

Semi Market

 $13,656  $7,387  $42,653  $19,256 

Multimarket:

                

Industrial

  5,463   4,220   13,535   12,346 

Defense/aerospace

  778   2,015   3,175   4,919 

Telecommunications

  315   419   870   1,427 

Other Multimarkets

  932   402   2,287   1,000 
  $21,144  $14,443  $62,520  $38,948 

 

There was not a significant change in the amount of the allowance for doubtful accounts for the nine months ended September 30, 2021.

 

- 14 -

 

 

(6)

MAJOR CUSTOMERS

 

During the nine months ended September 30, 2021, Texas Instruments Incorporated accounted for 14% of our consolidated net revenues. While both of our segments sold to this customer, these revenues were primarily generated by our EMS segment. NaN other customers accounted for 10% or more of our consolidated net revenues during the nine months ended September 30, 2021. During the nine months ended September 30, 2020, 0 customer accounted for 10% or more of our consolidated net revenues.

 

 

(7) 

INVENTORIES 

 

Inventories held at September 30, 2021 and December 31, 2020 were comprised of the following:

 

  

September 30,
2021

  

December 31,
2020

 

Raw materials

 $6,768  $5,371 

Work in process

  1,148   1,085 

Inventory consigned to others

  44   45 

Finished goods

  1,399   975 

Total inventories

 $9,359  $7,476 

 

Total charges incurred for excess and obsolete inventory for the three months and nine months ended September 30, 2021 and 2020, respectively, were as follows:

 

  

Three Months Ended
September 30,

  

Nine Months Ended
September 30,

 
  

2021

  

2020

  

2021

  

2020

 
                 

Excess and obsolete inventory charges

 $61  $105  $154  $410 

 

 

(8)

LEASES

 

We lease our offices, warehouse facilities and certain equipment under non-cancellable operating leases which expire at various dates through 2031. Total operating lease and short-term lease costs for the three months and nine months ended September 30, 2021 and 2020 were as follows:

 

  

Three Months Ended
September 30,

  

Nine Months Ended
September 30,

 
  

2021

  

2020

  

2021

  

2020

 
                 

Operating lease cost

 $247  $393  $865  $1,174 

Short-term lease cost

 $20  $13  $60  $35 

 

The following is additional information about our leases as of September 30, 2021:

 

Range of remaining lease terms (in years)

 0.5  to  9.6 

Weighted average remaining lease term (in years)

       6.0 

Weighted average discount rate

       4.2%

 

Maturities of lease liabilities as of September 30, 2021 were as follows:

 

2021 (remainder)

 $358 

2022

  1,469 

2023

  1,482 

2024

  1,474 

2025

  722 

Thereafter

  1,845 

Total lease payments

 $7,350 

Less imputed interest

  (811

)

Total

 $6,539 

 

- 15 -

 

Supplemental Cash Flow Information

 

Total amortization of ROU assets was $231 and $760 for the three months and nine months ended September 30, 2021, respectively, and $324 and $977 for the three months and nine months ended September 30, 2020, respectively.

 

Nine Months ended September 30, 2021

Non-cash increases in operating lease liabilities and ROU assets as a result of a lease modification for the nine months ended September 30, 2021 were as follows:

 

Execution of lease for facility in Fremont, California $202 

 

On August 16, 2021, we executed a lease for approximately 3,888 square feet of office space for the engineering and sales staff located in Fremont, California. This lease has a 38.5 month term. At the effective date of this lease, we recorded an increase in our ROU assets and operating lease liabilities of approximately $202.

 

Nine Months ended September 30, 2020

Non-cash increases in operating lease liabilities and ROU assets as a result of lease modifications for the nine months ended September 30, 2020 were as follows:

 

Modification to lease for facility in Fremont, California $1,176 
Modification to lease for facility in Mt. Laurel, New Jersey $2,051 

 

On January 23, 2020, we executed an amendment to the lease for our EMS facility in Fremont, California, which extended the term for a period of 61 months commencing on November 1, 2020 and expiring on November 30, 2025. At the effective date of this modification, we recorded an increase in our ROU assets and operating lease liabilities of approximately $1,176. As discussed in Note 3 to our consolidated financial statements in our 2020 Form 10-K, as of December 31, 2020, we recorded an impairment charge of $522 related to the ROU asset associated with this lease. On July 19, 2021, we executed a sublease for this facility which commenced on August 1, 2021 and ends November 30, 2025, which is the termination date of our lease for this facility. We entered into this sublease approximately 14 months earlier than we had estimated in December 2020. As a result, we will record approximately $350 of incremental sublease income above the level that we had estimated at the time that we recorded the impairment charge in December 2020. This income will be recorded ratably over the term of the sublease and will be included in other income in our consolidated statements of operations.

 

On September 22, 2020, we executed an amendment to the lease for our EMS facility in Mt. Laurel, New Jersey, which extended the term of the existing lease for a period of 120 months commencing on May 1, 2021. At the effective date of this modification, we recorded an increase in our ROU assets and operating lease liabilities of approximately $2,051.

 

 

(9)

DEBT

 

Letters of Credit

We have issued letters of credit as security deposits for certain of our domestic leases. These letters of credit are secured by pledged certificates of deposit which are classified as Restricted Certificates of Deposit on our consolidated balance sheets. The terms of our leases require us to renew these letters of credit at least 30 days prior to their expiration dates for successive terms of not less than one year until lease expiration.

 

Our outstanding letters of credit at September 30, 2021 and December 31, 2020 consisted of the following:

 

       

Letters of Credit
Amount Outstanding

 
 

Original L/C
Issue Date

 

L/C
Expiration
Date

 

Lease
Expiration
Date

 

September 30,
2021

  

December 31,
2020

 

Mt. Laurel, NJ

3/29/2010

 

4/30/2022

 

4/30/2031

 $50  $90 

Mansfield, MA

10/27/2010

 

12/31/2024

 

12/31/2024

  50   50 
       $100  $140 

 

- 16 -

 

Line of Credit

 

As of September 30, 2021, we had a revolving credit facility with M&T Bank (“M&T”) which is discussed more fully in Note 10 to our consolidated financial statements included in our 2020 Form 10-K and Note 9 to our consolidated financial statements included in our Form 10-Q for the quarterly period ended June 30, 2021, filed on August 12, 2021 with the SEC. On October 15, 2021 we entered into an Amended and Restated Loan and Security Agreement (the “October 2021 Agreement”) with M&T which replaced this facility. The October 2021 Agreement is discussed further under “Credit Facility” in Note 15.

 

 

(10)

STOCK-BASED COMPENSATION

 

As of September 30, 2021, we had unvested restricted stock awards and stock options granted under stock-based compensation plans that are described more fully in Note 13 to the consolidated financial statements in our 2020 Form 10-K.

Our unvested restricted stock awards and stock options are accounted for based on their grant date fair value. As of September 30, 2021, total compensation expense to be recognized in future periods is $2,928. The weighted average period over which this expense is expected to be recognized is 2.6 years. The following table shows the allocation of the compensation expense we recorded during the three months and nine months ended September 30, 2021 and 2020, respectively, related to stock-based compensation:

 

  

Three Months Ended
September 30,

  

Nine Months Ended
September 30,

 
  

2021

  

2020

  

2021

  

2020

 

Cost of revenues

 $10  $0  $17  $0 

Selling expense

  8   3   17   9 

Engineering and product development expense

  17   10   43   31 

General and administrative expense

  336   72   1,017   440 
  $371  $85  $1,094  $480 

 

There was 0 stock-based compensation expense capitalized in the three months or nine months ended September 30, 2021 or 2020.

 

Restricted Stock Awards

We record compensation expense for restricted stock awards based on the quoted market price of our stock at the grant date and amortize the expense over the vesting period. Restricted stock awards generally vest over four years for employees and over one year for our independent directors (25% at each of March 31, June 30, September 30, and December 31 of the year in which they were granted).

 

On August 24, 2020, our new President and CEO received two restricted stock awards totaling 141,610 shares valued at $650 as of the date of grant, which was also his hire date. Of the total shares awarded, 66,448 shares vest over 4 years (25% at each anniversary) and 75,162 shares vest on the third anniversary of the grant date at a vesting percentage that could range from 0% to 150% of the number of shares awarded on August 24, 2020. The final vesting percentage will be based on the achievement of certain performance metrics, including net revenue compound annual growth rate and diluted earnings per share excluding amortization of intangibles, for specified time periods as determined by the Compensation Committee of our Board of Directors. As of September 30, 2021, we have estimated that these shares will vest at 100% of the original amount awarded and are recording expense based on this estimate on a straight-line basis over the three-year vesting period. Our estimate of the final expected vesting percentage is reassessed and adjusted, as needed, at the end of each reporting period.

 

On March 10, 2021, we issued restricted stock awards totaling 18,000 shares to members of the senior management within our operating segments. These shares will vest on the third anniversary of the grant date at a vesting percentage that could range from 0% to 150% of the number of shares awarded on March 10, 2021. The final vesting percentage will be based on the achievement of certain performance metrics related to the operating results of the business units for which these members of management are responsible. As of September 30, 2021, we have estimated that these shares will vest at 100% of the original amount awarded and are recording expense based on this estimate on a straight-line basis over the three-year vesting period. Our estimate of the final expected vesting percentage is reassessed and adjusted, as needed, at the end of each reporting period.

 

On June 14, 2021, our new CFO received two restricted stock awards totaling 7,941 shares valued at $133 as of the date of grant, which was also his hire date. Of the total shares awarded, 1,988 shares vest over 4 years (25% at each anniversary) and 5,953 shares vest on August 24, 2023 at a vesting percentage that could range from 0% to 150% of the number of shares awarded on June 14, 2021. The final vesting percentage will be based on the achievement of certain performance metrics, including net revenue compound annual growth rate and diluted earnings per share excluding amortization of intangibles, for specified time periods as determined by the Compensation Committee of our Board of Directors. As of September 30, 2021, we have estimated that these shares will vest at 100% of the original amount awarded and are recording expense based on this estimate on a straight-line basis over the vesting period. Our estimate of the final expected vesting percentage is reassessed and adjusted, as needed, at the end of each reporting period.

 

- 17 -

 

The following table summarizes the activity related to unvested shares of restricted stock for the nine months ended September 30, 2021:

 

  

Number
of Shares

  

Weighted
Average
Grant Date
Fair Value

 

Unvested shares outstanding, January 1, 2021

  237,155  $4.93 

Granted

  126,209   11.74 

Vested

  (78,206

)

  7.24 

Forfeited

  (18,125

)

  9.02 

Unvested shares outstanding, September 30, 2021

  267,033   7.19 

 

The total fair value of the shares that vested during the nine months ended September 30, 2021 and 2020 was $981 and $296, respectively, as of the vesting dates of these shares.

 

Stock Options

We record compensation expense for stock options based on the fair value of the options as of the grant date. No option may be granted with an exercise period in excess of ten years from the date of grant. Generally, stock options will be granted with an exercise price equal to the fair market value of our stock on the date of grant and will vest over four years.

 

The fair value for stock options granted during the nine months ended September 30, 2021 and 2020 was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

 

  

2021

  

2020

 

Risk-free interest rate

  1.03

%

  0.46

%

Dividend yield

  0.00

%

  0.00

%

Expected common stock market price volatility factor

  .50   .44 

Weighted average expected life of stock options (years)

  6.25   6.25 

 

The per share weighted average fair value of stock options issued during the nine months ended September 30, 2021 and 2020 was $5.70 and $1.48, respectively.

The following table summarizes the activity related to stock options for the nine months ended September 30, 2021:

 

  

Number
of Shares

  

Weighted
Average
Grant Date
Fair Value

 

Options outstanding, January 1, 2021 (204,630 exercisable)

  438,200  $6.25 

Granted

  282,404   11.77 

Exercised

  (149,010

)

  6.84 

Forfeited

  (80,550

)

  9.55 

Options outstanding, September 30, 2021 (141,370 exercisable)

  491,044   8.70 

 

 

(11) 

STOCK REPURCHASE PLAN

 

On July 31, 2019, our Board of Directors authorized the repurchase of up to $3,000 of our common stock from time to time on the open market, in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or in privately negotiated transactions pursuant to a newly authorized stock repurchase plan (the “2019 Repurchase Plan”). Repurchases are to be made under a Rule 10b5-1 plan entered into with RW Baird & Co., which permits shares to be repurchased when we might otherwise be precluded from doing so under insider trading laws and our internal trading windows. The 2019 Repurchase Plan does not obligate us to purchase any particular amount of common stock and can be suspended or discontinued at any time without prior notice. The 2019 Repurchase Plan is funded using our operating cash flow or available cash. Purchases began on September 18, 2019 under this plan. On March 2, 2020, we suspended repurchases under the 2019 Repurchase Plan. From the adoption of the 2019 Repurchase Plan through the suspension of the plan, we repurchased a total of 243,075 shares at a cost of $1,216, which includes fees paid to our broker of $6. All of the repurchased shares were retired.

 

- 18 -

 

 

(12) 

EMPLOYEE STOCK PURCHASE PLAN

 

The inTEST Corporation Employee Stock Purchase Plan (the “ESPP”) was adopted by the Board in April 2021 subject to approval by our stockholders, which occurred on June 23, 2021 at our Annual Meeting of Stockholders. The ESPP provides our eligible employees with an opportunity to purchase common stock through accumulated payroll deductions at a discounted purchase price. The ESPP became effective on October 1, 2021.

 

The ESPP provides that an aggregate of up to 250,000 shares of our common stock will be available for issuance under the ESPP. The shares of our common stock purchasable under the ESPP will be shares of authorized but unissued or reacquired shares, including shares repurchased by us on the open market.

 

 

(13) 

EMPLOYEE BENEFIT PLANS

 

We have defined contribution 401(k) plans for our employees who work in the U.S. All permanent employees of inTEST Corporation, inTEST EMS LLC (“inTEST EMS”), Temptronic Corporation (“Temptronic”) and inTEST Silicon Valley Corporation (“inTEST SV”) who are at least 18 years of age are eligible to participate in the inTEST Corporation Incentive Savings Plan. We match employee contributions dollar for dollar up to 10% of the employee's annual compensation, with a maximum limit of $5. Employer contributions vest ratably over four years. Matching contributions are discretionary. For the three months and nine months ended September 30, 2021, we recorded $51 and $322 of expense for matching contributions, respectively. For the three months and nine months ended September 30, 2020, we recorded $56 and $313 of expense for matching contributions, respectively.

 

All permanent employees of Ambrell are immediately eligible to participate in the Ambrell Corporation Savings & Profit Sharing Plan (the "Ambrell Plan") upon employment and are eligible for employer matching contributions after completing six months of service, as defined in the Ambrell Plan. The Ambrell Plan allows eligible employees to make voluntary contributions up to 100% of compensation, up to the federal government contribution limits. We will make a matching contribution of 50% of each employee's contributions up to a maximum of 10% of the employee's deferral with a maximum limit of $5. For the three months and nine months ended September 30, 2021, we recorded $44 and $131 of expense for matching contributions, respectively. For the three months and nine months ended September 30, 2020, we recorded $17 and $49 of expense for matching contributions, respectively.

 

 

(14)

SEGMENT INFORMATION

 

We have 2 reportable segments, Thermal and EMS, which are also our reporting units. Thermal includes the operations of Temptronic, Thermonics, Sigma, inTEST Thermal Solutions GmbH (Germany), inTEST Pte, Limited (Singapore) and Ambrell. Sales of this segment consist primarily of temperature management systems which we design, manufacture and market under our Temptronic, Thermonics and Sigma product lines, and precision induction heating systems which are designed, manufactured and marketed by Ambrell. In addition, this segment provides post-warranty service and support. EMS includes the operations of our manufacturing facilities in Mt. Laurel, New Jersey and, prior to the consolidation of manufacturing operations late in the fourth quarter of 2020, Fremont, California. Sales of this segment consist primarily of manipulator, docking hardware and tester interface products, which we design, manufacture and market.

 

We operate our business worldwide and sell our products both domestically and internationally. Both of our segments sell to semiconductor manufacturers, third-party test and assembly houses and ATE manufacturers. Thermal also sells into a variety of markets outside of the Semi Market, including the automotive, defense/aerospace, medical, industrial, telecommunications and other markets.

 

  

Three Months Ended
September 30,

  

Nine Months Ended
September 30,

 
  

2021

  

2020

  

2021

  

2020

 

Net Revenues:

                

Thermal

 $13,042  $10,724  $36,863  $29,534 

EMS

  8,102   3,719   25,657   9,414 
  $21,144  $14,443  $62,520  $38,948 

Earnings (loss) before income tax expense (benefit):

                

Thermal

 $865  $478  $1,991  $39 

EMS

  2,278   169   7,767   (574

)

Corporate

  (611

)

  (214

)

  (1,592

)

  (242

)

  $2,532  $433  $8,166  $(777

)

Net earnings (loss):

                

Thermal

 $743  $379  $1,706  $26 

EMS

  1,957   218   6,654   (380

)

Corporate

  (525

)

  (139

)

  (1,364

)

  (161

)

  $2,175  $458  $6,996  $(515

)

 

- 19 -

 
  

September 30,
2021

  

December 31,
2020

 

Identifiable assets:

        

Thermal

 $51,368  $50,782 

EMS

  16,309   9,667 

Corporate

  7,052   1,581 
  $74,729  $62,030 

 

The following tables provide information about our geographic areas of operation. Net revenues from unaffiliated customers are based on the location to which the goods are shipped.

 

  

Three Months Ended
September 30,

  

Nine Months Ended
September 30,

 
  

2021

  

2020

  

2021

  

2020

 

Net revenues:

                

U.S.

 $6,271  $5,562  $18,650  $16,235 

Foreign

  14,873   8,881   43,870   22,713 
  $21,144  $14,443  $62,520  $38,948 

 

 

  

September 30,
2021

  

December 31,
2020

 

Net property and equipment:

        

U.S.

 $2,200  $2,053 

Foreign

  197   297 
  $2,397  $2,350 

 

 

(15)

SUBSEQUENT EVENTS

 

Acquisition of Z-Sciences

 

On October 6, 2021, we acquired substantially all of the assets of Z-Sciences Corp. (“Z-Sciences”) pursuant to the Asset Purchase Agreement dated as of that same date. Z-Sciences is a developer of ultra-cold storage solutions for the life sciences cold chain market. The acquisition of the Z-Sciences business will broaden the product line of our Thermal segment. The purchase price for the assets, net of assumed liabilities, was approximately $500 in cash. We placed $200 of the purchase price in escrow to provide security for certain indemnification obligations set forth in the acquisition agreement. In connection with this acquisition, we also entered into a separate management services agreement with Z-Sciences and certain of its employees to provide management, transitional, and administrative services to us. We also expect that the founder of Z-Sciences, Jean Fallacara, will become an employee of inTEST in 2022. In connection with his prospective employment, Mr. Fallacara would receive a multi-year restricted stock award with vesting provisions which would be contingent upon achieving future performance milestones related to sales growth and profitability of products related to the Z-Sciences business.

 

The Z-Sciences acquisition will be accounted for as a purchase business combination and, accordingly, the results will be included in our consolidated results of operations from the date of acquisition. We have not completed our purchase accounting for this transaction and are still in the process of valuing the assets acquired. We expect to complete this process by December 31, 2021. The results of Z-Sciences will be included in our Thermal segment.

 

Acquisition of Videology

 

On October 28, 2021, we acquired substantially all of the assets of Videology Imaging Solutions, Inc. and Videology Imaging Solutions Europe B.V. (collectively, “Videology”), pursuant to two separate asset purchase agreements, both of which were dated as of that same date. Videology is a global designer, developer and manufacturer of OEM digital streaming and image capturing solutions. The acquisition of Videology will broaden the product line of our Thermal segment. The purchase price for the assets, net of assumed liabilities, was approximately $12,000 in cash. We placed $1,200 of the purchase price in escrow to provide security for certain indemnification obligations set forth in the asset purchase agreements.

 

- 20 -


The Videology acquisition will be accounted for as a purchase business combination and, accordingly, the results will be included in our consolidated results of operations from the date of acquisition. We have not completed our purchase accounting for this transaction and are still in the process of valuing the assets acquired. We expect to complete this process by December 31, 2021. The results of Videology will be included in our Thermal segment.

 

Credit Facility

 

As discussed in Note 9, on October 15, 2021 (the “Closing Date”), we entered into the October 2021 Agreement with M&T Bank. The October 2021 Agreement includes a $25,000 non-revolving delayed draw term note (the “Term Note”) and a $10,000 revolving credit facility (the “Revolver Note”) and replaces the Loan and Security Agreement, dated April 10, 2020, as amended by the First Amendment to Loan and Security Agreement, dated December 16, 2020, and the Second Amendment to Loan and Security Agreement, dated April 10, 2021. Our domestic subsidiaries, Ambrell, inTEST EMS, inTEST SV and Temptronic, are guarantors under the October 2021 Agreement (collectively, the “Guarantors”). The October 2021 Agreement has a five year contract period that began on the Closing Date and expires on October 15, 2026 (the “Contract Period”), and draws under the delayed draw term note will be permissible for two years.

 

The principal balance of the revolving credit facility and the principal balance of any amount drawn under the Term Note will accrue interest based on the secured overnight financing rate for U.S. government securities (“SOFR”) or a bank-defined base rate plus an applicable margin, depending on leverage. Currently, this equates to a rate of approximately 2.2%. Each draw under the delayed draw term note will have an option for us of either (i) up to a five year amortizing term loan with a balloon due at maturity, or (ii) up to a five year term with up to seven years amortization with a balloon due at maturity. Any amortization greater than five years will be subject to an excess cash flow recapture. The October 2021 Agreement also allows us to enter into hedging contracts with M&T, including interest rate swap agreements, interest rate cap agreements, interest rate collar agreements, or any other agreements or that are designed to protect us against fluctuations in interest rates or currency exchange rates.

 

The October 2021 Agreement contains customary default provisions, including but not limited to the failure by us to repay obligations when due, violation of provisions or representations provided in the October 2021 Agreement, bankruptcy by us, suspension of our business or any of our subsidiaries and certain material judgments. After expiration of the Contract Period or if a continued event of default occurs, interest will accrue on the principal balance at a rate of 2% in excess of the then applicable non-default interest rate. The October 2021 Agreement includes customary affirmative, negative and financial covenants, including a maximum ratio of consolidated funded debt to consolidated EBITDA and a fixed charge coverage ratio. Our obligations under the October 2021 Agreement are secured by liens on substantially all of our tangible and intangible assets that are owned as of the Closing Date or acquired thereafter.

 

On October 28, 2021, we drew $12,000 under the Term Note to finance the acquisition of Videology discussed above. We also entered into an interest rate swap agreement with M&T as of this date which is designed to protect us against fluctuations in interest rates during the five year repayment and amortization period. As a result, the annual interest rate we expect to pay for this draw under the Term Note is fixed at approximately 3.2% based on current leverage. On October 28, 2021, the October 2021 Agreement was amended to include our subsidiary, Videology Imaging Corporation, as a subsidiary guarantor thereunder.

 

 

 

Item 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Risk Factors and Forward-Looking Statements

 

In addition to historical information, this Quarterly Report on Form 10-Q for the period ended September 30, 2021 (this “Report”), including this management’s discussion and analysis (“MD&A”), contains statements that are considered "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. These statements do not convey historical information but relate to predicted or potential future events and financial results, such as statements of our plans, strategies and intentions, or our future performance or goals that are based upon management's current expectations. Our forward-looking statements can often be identified by the use of forward-looking terminology such as "believes," "expects," "intends," "may," “could,” "will," "should," "plans," “projects,” “forecasts,” “seeks,” “anticipates,” “goal,” “objective,” “target,” “future,” “outlook,” “vision,” or variations of such words or similar terminology. Investors and prospective investors are cautioned that such forward-looking statements are only projections based on current estimations. These statements involve risks and uncertainties and are based upon various assumptions. Such risks and uncertainties include, but are not limited to:

 

 

the possibility of future acquisitions and our ability to realize the potential benefits of acquisitions or dispositions and the successful integration of any acquired operations, for example with respect to our acquisitions of Videology and Z-Sciences;

 

the success of our strategy to diversify our business by entering markets outside the Semi Market, including the automotive, defense/aerospace, industrial, life sciences, telecommunications and other markets and changes in demand in these markets;

 

the impact of COVID-19 and its variant strains on our business, liquidity, financial condition and results of operations;

 

- 21 -

 

 

indications of a change in the market cycles in the Semi Market or other markets we serve;

 

developments and trends in the Semi Market, including changes in the demand for semiconductors;

 

the loss of any one or more of our largest customers, or a reduction in orders by a major customer;

 

changes in the rate of, and timing of, capital expenditures by our customers;

 

the availability of materials used to manufacture our products;

 

the impact of interruptions in our supply chain caused by external factors;

 

the sufficiency of cash balances, lines of credit and net cash from operations;

 

stock price fluctuations;

 

the possibility of future acquisitions or dispositions and the successful integration of any acquired operations;

 

our ability to borrow funds or raise capital to finance major potential acquisitions;

 

competitive pricing pressures;

 

the development of new products and technologies by us or our competitors;

 

effects of exchange rate fluctuations;

 

progress of product development programs;

 

the anticipated market for our products;

 

the availability of and retention of key personnel or our ability to hire personnel at anticipated costs;

 

general economic conditions both domestically and globally;

 

other projections of net revenues, taxable earnings (loss), net earnings (loss), net earnings (loss) per share, capital expenditures and other financial items; and

 

other risk factors included in Part I, Item 1A - "Risk Factors" in our 2020 Form 10-K.

 

These risks and uncertainties, among others, could cause our actual future results to differ materially from those described in our forward-looking statements or from our prior results. Any forward-looking statement made by us in this Report is based only on information currently available to us and speaks to circumstances only as of the date on which it is made. We are not obligated to update these forward-looking statements, even though our situation may change in the future.

 

Overview
 

This MD&A should be read in conjunction with the accompanying consolidated financial statements.

 

We are a global supplier of innovative test and process solutions for use in manufacturing and testing across a wide range of markets including automotive, defense/aerospace, industrial, life sciences, semiconductor and telecommunications. We manage our business as two operating segments: Thermal and EMS. Our Thermal segment designs, manufactures and sells our thermal test and thermal process products while our EMS segment designs, manufactures and sells our semiconductor test products.

 

Our EMS segment sells its products to semiconductor manufacturers and third-party test and assembly houses (end user sales) and to ATE manufacturers (“OEM sales”), who ultimately resell our equipment with theirs to both semiconductor manufacturers and third-party test and assembly houses. These sales all fall within the ATE sector of the broader semiconductor market. Our Thermal segment sells its products to many of these same types of customers; however, it also sells to customers in the wafer processing sector within the broader semiconductor market and to customers in a variety of other markets outside the semiconductor market, including the automotive, defense/aerospace, industrial (including consumer products packaging, fiber optics and other sectors within the broader industrial market), life sciences and telecommunications markets.

 

Both of our operating segments have multiple products that we design, manufacture and market to our customers. Due to a number of factors, our products have varying levels of gross margin. These factors include, for example, the amount of engineering time required to develop the product, the market or customer to which we sell the product and the level of competing products available from other suppliers. The needs of our customers ultimately determine the products that we sell in a given time period. Therefore, the mix of products sold in a given period can change significantly when compared against the prior period. As a result, our consolidated gross margin may be significantly impacted by a change in the mix of products sold in a particular period.

 

- 22 -

 

Markets

 

We refer to the semiconductor market, including the more specialized semiconductor ATE and wafer processing sectors within the broader semiconductor market, as the “Semi Market.” All other markets are designated as “Multimarket.” Business within our Thermal segment can fall into either the Semi Market or Multimarket, depending upon how our customers utilize our products or upon their respective applications.

 

While the Semi Market represents the historical roots of inTEST and remains a very important component of our business, Multimarket is where we have focused our strategic growth efforts in the last several years. Our goal was to grow our business, both organically and through acquisition, in these markets as we believe these markets have historically been less cyclical than the Semi Market. Moving forward, with the launch of our new strategic plan which is discussed in Part 1, Item 1 under “Our Strategies” in our 2020 Form 10-K, we intend to broaden our strategic growth efforts to target both organic and inorganic growth in all of our currently served markets, which includes the Semi Market. Our goal is to further expand our existing product lines, strengthen our positions in served markets and drive expansion into new markets.

 

Prior to our acquisition of Ambrell in May 2017, we offered only highly specialized engineering solutions used for testing applications in Multimarket, the demand for which is limited and which varies significantly from period to period. Our acquisition of Ambrell not only provided expansion into new markets but also broadened our product offerings to include products sold into process or manufacturing applications. Historically, Ambrell sold its precision induction heating systems almost exclusively to customers in the industrial market but since 2018, has also had significant sales into the Semi Market. Overall, however, the acquisition of Ambrell has helped to diversify our customer base.

 

The portion of our business that is derived from the Semi Market is substantially dependent upon the demand for ATE by semiconductor manufacturers and companies that specialize in the testing of integrated circuits or, for Ambrell, the demand for wafer processing equipment. Demand for ATE or wafer processing equipment is driven by semiconductor manufacturers that are opening new, or expanding existing, semiconductor fabrication facilities or upgrading equipment, which in turn is dependent upon the current and anticipated market demand for semiconductors and products incorporating semiconductors. Such market demand can be the result of market expansion, development of new technologies or redesigned products to incorporate new features, or the replacement of aging equipment. In addition, we continue to focus on design improvements and new approaches for our own products that contribute to our net revenues as our customers adopt these new products.

 

In the past, the Semi Market has been highly cyclical with recurring periods of oversupply, which often severely impact the Semi Market's demand for the products we manufacture and sell into the market. This cyclicality can cause wide fluctuations in both our orders and net revenues and, depending on our ability to react quickly to these shifts in demand, can significantly impact our results of operations. Market cycles are difficult to predict and, because they are generally characterized by sequential periods of growth or declines in orders and net revenues during each cycle, year over year comparisons of operating results may not always be as meaningful as comparisons of periods at similar points in either up or down cycles. These periods of heightened or reduced demand can shift depending on various factors impacting both our customers and the markets that they serve. In addition, during both downward and upward cycles in the Semi Market, in any given quarter, the trend in both our orders and net revenues can be erratic. This can occur, for example, when orders are canceled or currently scheduled delivery dates are accelerated or postponed by a significant customer or when customer forecasts and general business conditions fluctuate during a quarter.

 

Third party market share statistics are not available for the products we manufacture and sell into the Semi Market; therefore, comparisons of period over period changes in our market share are not easily determined. As a result, it is difficult to ascertain if Semi Market volatility in any period is the result of macro-economic or customer-specific factors impacting Semi Market demand, or if we have gained or lost market share to a competitor during the period.

 

While approximately half of our orders and net revenues are generally derived from the Semi Market, and our operating results generally follow the overall trend in the Semi Market, in any given period we may experience anomalies that cause the trend in our net revenues to deviate from the overall trend in the Semi Market. We believe that these anomalies may be driven by a variety of factors within the Semi Market, including, for example, changing product requirements, longer periods between new product offerings by OEMs and changes in customer buying patterns. In addition, in recent periods, we have seen instances when demand within the Semi Market is not consistent for each of our operating segments or for any given product within a particular operating segment. This lack of consistency in demand can be driven by a number of factors but, in most cases, we have found that the primary reason is unique customer-specific changes in demand for certain products driven by the needs of their customers or markets served. Recently this has become more pronounced for our sales into the wafer processing sector within the broader semiconductor market due to the limited market penetration we have into this sector and the variability of orders we have experienced from the few customers we support. These shifts in market practices and customer-specific needs have had, and may continue to have, varying levels of impact on our operating results and are difficult to quantify or predict from period to period. Management has taken, and will continue to take, such actions it deems appropriate to adjust our strategies, products and operations to counter such shifts in market practices as they become evident.

 

- 23 -

 

As previously mentioned, as part of our ongoing strategy to grow our business, we continue to diversify our served markets to address the thermal test and thermal process requirements of several markets outside the Semi Market. These include the automotive, defense/aerospace, industrial, life sciences, telecommunications and other markets, which we refer to as Multimarket. We believe that these markets are usually less cyclical than the Semi Market. While market share statistics exist for some of these markets, due to the nature of our highly specialized product offerings in these markets, we do not expect broad market penetration in many of these markets and therefore do not anticipate developing meaningful market shares in most of these markets.

 

In addition, because of our limited market share, our Multimarket orders and net revenues in any given period do not necessarily reflect the overall trends in the markets within Multimarket. Consequently, we are continuing to evaluate buying patterns and opportunities for growth in Multimarket that may affect our performance. The level of our Multimarket orders and net revenues has varied in the past, and we expect will vary significantly in the future, as we work to build our presence in Multimarket and establish new markets for our products.

 

Acquisitions

 

On October 6, 2021, we acquired substantially all of the assets of Z-Sciences, as discussed further in Note 15 to our consolidated financial statements in this Report. Z-Sciences is a developer of ultra-cold storage solutions for the life sciences cold chain market. The acquisition of the Z-Sciences business will broaden the product line of our Thermal segment. The purchase price for the assets, net of liabilities assumed, was approximately $500,000 in cash. The Z-Sciences acquisition will be accounted for as a purchase business combination and, accordingly, the results will be included in our consolidated results of operations from the date of acquisition. We have not completed our purchase accounting for this transaction and are still in the process of valuing the assets acquired. We expect to complete this process by December 31, 2021.

 

On October 28, 2021, we acquired substantially all of the assets of Videology, as discussed further in Note 15 to our consolidated financial statements in this Report. Videology is a global designer, developer and manufacturer of OEM digital streaming and image capturing solutions. The purchase price for the assets, net of liabilities assumed, was approximately $12 million in cash. The Videology acquisition will be accounted for as a purchase business combination and, accordingly, the results will be included in our consolidated results of operations from the date of acquisition. We have not completed our purchase accounting for this transaction and are still in the process of valuing the assets acquired. We expect to complete this process by December 31, 2021.

 

Both acquired businesses will be integrated into our Thermal segment.

 

Credit Facility

 

As discussed further in Notes 9 and 15 to our consolidated financial statements in this Report, on October 15, 2021, we entered into the October 2021 Agreement with M&T Bank. The October 2021 Agreement includes a $25 million non-revolving delayed draw term note and a $10 million revolving credit facility and replaces our prior credit facility with M&T Bank. The October 2021 Agreement has a five-year contract period that expires on October 15, 2026, and draws under the delayed draw term note will be permissible for two years. The principal balance of the revolving credit facility and the principal balance of any amount drawn under the non-revolving delayed draw term note will accrue interest based on SOFR or a bank-defined base rate plus an applicable margin, depending on leverage. The October 2021 Agreement includes customary affirmative, negative and financial covenants, including a maximum ratio of consolidated funded debt to consolidated EBITDA and a fixed charge coverage ratio. Our obligations under the October 2021 Agreement are secured by liens on substantially all of our tangible and intangible assets. On October 28, 2021, we drew $12 million under the Term Note to finance the acquisition of Videology discussed above. We also entered into an interest rate swap agreement with M&T as of this date which is designed to protect us against fluctuations in interest rates during the five year repayment and amortization period. As a result, the annual interest rate we expect to pay for this draw under the Term Note is fixed at approximately 3.2% based on current leverage. On October 28, 2021, the October 2021 Agreement was amended to include our subsidiary, Videology Imaging Corporation, as a subsidiary guarantor thereunder.

 

Restructuring and Other Charges

 

On September 21, 2020, we notified employees in our Fremont, California facility of a plan to consolidate all manufacturing for our EMS segment into our manufacturing operations located in Mt. Laurel, New Jersey. Prior to the consolidation, our interface products were manufactured in the Fremont facility, and our manipulator and docking hardware products were manufactured in the Mt. Laurel facility. The consolidation was undertaken to better serve customers through streamlined operations and reduce the fixed annual operating costs for the EMS segment. A small engineering and sales office is being maintained in northern California. The integration of our EMS manufacturing operations took longer than originally anticipated primarily as a result of the significant increase in our business activity in the first nine months of 2021. We completed the integration during the third quarter of 2021. The costs related to these actions are included in restructuring and other charges on our consolidated statement of operations and are discussed in more detail in Note 3 to our consolidated financial statements in this Report and in our 2020 Form 10-K.
 

- 24 -

 

Orders and Backlog

The following table sets forth, for the periods indicated, a breakdown of the orders received by operating segment and market (in thousands).

 

  

Three

Months Ended

September 30,

  

Change

  

Three

Months

Ended

June 30,

  

Change

 
  

2021

  

2020

     

%

   2021     $   %

 

Orders:

                            

Thermal

 $13,713  $11,004  $2,709   25

%

 $14,826  $(1,113

)

  (8

)%

EMS

  7,435   3,423   4,012   117

%

  10,279   (2,844

)

  (28

)%

  $21,148  $14,427  $6,721   47

%

 $25,105  $(3,957

)

  (16

)%

                             

Semi Market

 $13,365  $7,263  $6,102   84

%

 $16,532  $(3,167

)

  (19

)%

Multimarket

  7,783   7,164   619   9

%

  8,573   (790

)

  (9

)%

  $21,148  $14,427  $6,721   47

%

 $25,105  $(3,957

)

  (16

)%

 

  

Nine
Months Ended
September 30,

  

Change

 
  

2021

  

2020

      

%

 

Orders:

                

Thermal

 $43,285  $31,949  $11,336   35

%

EMS

  28,198   10,172   18,026   177

%

  $71,483  $42,121  $29,362   70

%

                 

Semi Market

 $47,071  $21,254  $25,817   121

%

Multimarket

  24,412   20,867   3,545   17

%

  $71,483  $42,121  $29,362   70

%

 

Total consolidated orders for the three months ended September 30, 2021 were $21.1 million compared to $14.4 million for the same period in 2020 and $25.1 million for the three months ended June 30, 2021. Orders from customers in Multimarket for the three months ended September 30, 2021 were 37% of total consolidated orders compared to 50% of total consolidated orders for the same period in 2020 and 34% of total consolidated orders for the three months ended June 30, 2021.

We believe that the significant level of increase in orders from the Semi Market during the three months ended September 30, 2021 as compared to the same period in 2020 reflects the impact of increased demand for semiconductors (also referred to as “integrated circuits” or “ICs”), generally, which has led to the current shortage in the global supply. We believe this increase in the demand for semiconductors is being driven both by changing technology as well as increased use of technology across all aspects of daily life, such as in devices that facilitate remote work and education, smart technology used in homes and businesses, the increase in the number of ICs used in the automotive industry and changes occurring in the telecommunications and mobility markets. We also experienced an increase in orders from Multimarket for the three months ended September 30, 2021 as compared to the same period in 2020. This increase was primarily from the automotive market, which includes the electric vehicle (“EV”) market. During the third quarter of 2021, we received a significant order from one of our EV customers which we expect to ship over the next several quarters. Our orders from customers in Multimarket declined as compared to the three months ended June 30, 2021. During the second quarter of 2021, we experienced higher demand from customers in both the defense/aerospace and automotive (both traditional and EV) markets as compared to the third quarter of 2021. It is important to note that we have seen an increasing tendency by certain of our customers, particularly those in Multimarket, to place large orders with us that will ship over several quarters. We expect this may, at times, result in period over period fluctuations in order levels that are not necessarily indicative of changing demand but rather reflect the timing of when these large orders were placed.

 

At September 30, 2021, our backlog of unfilled orders for all products was approximately $20.4 million compared with approximately $8.7 million at September 30, 2020 and $20.4 million at June 30, 2021. Our backlog includes customer orders which we have accepted, approximately 75% of which we expect to deliver in 2021. While backlog is calculated on the basis of firm purchase orders, a customer may cancel an order or accelerate or postpone currently scheduled delivery dates. Our backlog may be affected by the tendency of customers to rely on short lead times available from suppliers, including us, in periods of depressed demand. In periods of increased demand, there is a tendency towards longer lead times that has the effect of increasing backlog. As a result, our backlog at a particular date is not necessarily indicative of sales for any future period.
 

- 25 -


Net Revenues

The following table sets forth, for the periods indicated, a breakdown of the net revenues by operating segment and market (in thousands).

 

  

Three
Months Ended
September 30,

  

Change

  

Three
Months

Ended
June 30,

  

Change

 
  

2021

  

2020

  

$

  

%

  

2021

  $  % 

Net revenues:

                            

Thermal

 $13,041  $10,724  $2,317   22

%

 $12,766  $275   2

%

EMS

  8,103   3,719   4,384   118

%

  9,054   (951

)

  (11

)%

  $21,144  $14,443  $6,701   46

%

 $21,820  $(676

)

  (3

)%

                             

Semi Market

 $13,656  $7,387  $6,269   85

%

 $15,677  $(2,021

)

  (13

)%

Multimarket

  7,488   7,056   432   6

%

  6,143   1,345   22

%

  $21,144  $14,443  $6,701   46

%

 $21,820  $(676

)

  (3

)%

 

  

Nine
Months Ended
September 30,

  

Change

 
  

2021

  

2020

     

%

 

Net revenues:

                

Thermal

 $36,862  $29,534  $7,328   25

%

EMS

  25,658   9,414   16,244   173

%

  $62,520  $38,948  $23,572   61

%

                 

Semi Market

 $42,653  $19,256  $23,397   122

%

Multimarket

  19,867   19,692   175   1

%

  $62,520  $38,948  $23,572   61

%

 

Total consolidated net revenues for the three months ended September 30, 2021 were $21.1 million compared to $14.4 million for the same period in 2020 and $21.8 million for the three months ended June 30, 2021. We believe the increase in our consolidated net revenues as compared to the same period in 2020 reflects the aforementioned increase in demand from the Semi Market. We saw this demand decrease in the third quarter of 2021 which resulted in a 13% decline in our net revenues from the Semi Market for the third quarter of 2021 as compared to the second quarter of 2021. This decline was partially offset by an increase in shipments to Multimarket customers, primarily those in the industrial market which we believe reflects the ongoing, broad-based recovery within industrial sectors that we serve. We also attribute the increase to new product introductions and the reopening of trade shows, which have resulted in new customer opportunities and wins. We believe the EV market continues to gain traction with a variety of applications for induction heating technology.

 

Net revenues from customers in Multimarket for the three months ended September 30, 2021 were 35% of total consolidated net revenues compared to 49% of total consolidated net revenues for the same period in 2020 and 28% of total consolidated orders for the three months ended June 30, 2021.

 

COVID-19 Pandemic

 

As of the date of this Report, our U.S. offices remain open. We are following the guidance of the CDC and, accordingly, we are requiring all employees working in our offices to wear masks and maintain appropriate social distancing. We are also continuing to allow employees to work remotely either part-time or full-time in circumstances where possible. As of the date of this Report, our offices in Europe have also reopened to varying degrees, while our employees in Asia remain under more significant restrictions. Our employees outside of the U.S. continue to follow the guidance of their local regulatory authorities, which in most cases includes wearing masks, observing social distancing, limiting travel and quarantining after travel, as required.

 

- 26 -

 

While the negative impact of COVID-19 on our business was reduced significantly in the second half of 2020 and the first nine months of 2021, the spread of the virus or variants of the virus could continue to worsen and one or more of our significant customers or suppliers could be impacted, or significant additional governmental regulations and restrictions could be imposed, thus negatively impacting our business in the future. We continue to monitor the situation closely in the regions in which we operate in the U.S. and abroad and will adjust our operations as necessary to protect the health and well-being of our employees. To the extent that further governmental mandates or restrictions are implemented in the future, we currently expect to be able to continue to operate our business in a manner similar to how we have operated over the past year. 

 

Results of Operations

 

The results of operations for our two operating segments are generally affected by the same factors described in the Overview section above. Separate discussions and analyses for each segment would be repetitive. The discussion and analysis that follows, therefore, is presented on a consolidated basis and includes discussion of factors unique to each segment where significant to an understanding of that segment.

Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020

Net Revenues. Net revenues were $21.1 million for the three months ended September 30, 2021 compared to $14.4 million for the same period in 2020, an increase of $6.7 million, or 46%. We believe the increase in our net revenues during the third quarter of 2021 primarily reflects the factors previously discussed in the Overview section.

Gross Margin. Our consolidated gross margin was 49% of net revenues for the three months ended September 30, 2021 as compared to 45% of net revenues for the same period in 2020. The increase in our gross margin primarily reflects that our fixed operating costs were more fully absorbed by the higher net revenue levels in 2021. Although our fixed operating costs were relatively unchanged in absolute dollar terms, as a percentage of net revenues these costs decreased from 17% of net revenues for the three months ended September 30, 2020 to 12% of net revenues for the same period in 2021. During the three months ended September 30, 2021 as compared to the same period in 2020, decreases in facility-related costs in our EMS segment and reduced premiums for medical insurance in both our segments were offset by increased salaries and benefits expense due to additional headcount in our Thermal segment. The decrease in our fixed operating costs as a percentage of net revenues during the three months ended September 30, 2021 as compared to the same period in 2020 was partially offset by an increase in our component material costs, reflecting changes in product mix.

Selling Expense. Selling expense was $2.8 million for the three months ended September 30, 2021 compared to $1.7 million for the same period in 2020 an increase of $1.1 million, or 63%. Commissions increased by $560,000 which primarily reflects the higher net revenue levels. We also had an increase in salaries and benefits expense due to additional headcount and higher levels of travel and trade show expense as COVID-19 restrictions were reduced or eliminated. We expect this increase in travel costs to continue throughout the balance of 2021 as we return to a more normal business model with regard to customer support and on-site visits.

Engineering and Product Development Expense. Engineering and product development expense was essentially unchanged at $1.3 million for both the three months ended September 30, 2021 and 2020. Increases in our EMS segment as a result of headcount additions and higher spending on third-party consultants used in product development were offset by reductions in our Thermal segment for legal fees related to our intellectual property and supplies used in product development.

 

General and Administrative Expense. General and administrative expense was $3.6 million for the three months ended September 30, 2021 compared to $2.8 million for the same period in 2020, an increase of $821,000, or 29%. During the three months ended September 30, 2021, we spent $336,000 on costs related to potential acquisitions which is a part of our corporate growth strategy, as previously discussed. There were no similar expenses in the three months ended September 30, 2020. In addition, we recorded higher levels of stock-based compensation expense, reflecting an increase in the price of our common stock, and an increase in profit-based bonuses, reflecting our increased earnings in the three months ended September 30, 2021 as compared to the same period in 2020. These increases were partially offset by a reduction in non-acquisition related legal fees during the three months ended September 30, 2021 as compared to the same period in 2020. The higher legal fees in the third quarter of 2020 were primarily related to the resignation of our former CEO and the hiring of our new CEO which occurred in August 2020.

 

Restructuring and Other Charges. For the three months ended September 30, 2021, we recorded $51,000 in restructuring and other charges related to the consolidation of our EMS manufacturing operations. During the same period in 2020, we recorded $161,000 in restructuring and other charges related primarily to severance and other one-time termination benefits for our former CEO.

 

- 27 -

 

Income Tax Expense (Benefit). For the three months ended September 30, 2021, we recorded income tax expense of $357,000 compared to an income tax benefit of $25,000 for the same period in 2020. Our effective tax rate was 14% for the three months ended September 30, 2021 compared to (6)% for the same period in 2020. On a quarterly basis, we record income tax expense or benefit based on the expected annualized effective tax rate for the various taxing jurisdictions in which we operate our businesses. The lower effective tax rate in the three months ended September 30, 2020 reflects adjustments that were made to bring the effective tax rate for the nine-month period ended September 30, 2020 to the expected annualized effective tax rate as of that date.

 

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

Net Revenues. Net revenues were $62.5 million for the nine months ended September 30, 2021 compared to $38.9 million for the same period in 2020, an increase of $23.6 million, or 61%. We believe the increase in our net revenues during the first nine months of 2021 primarily reflects the increase in demand from the Semi Market as discussed in the Overview.

Gross Margin. Our consolidated gross margin was 49% of net revenues for the nine months ended September 30, 2021 as compared to 45% of net revenues for the same period in 2020. The increase in our gross margin primarily reflects that our fixed operating costs were more fully absorbed by the higher net revenue levels in 2021. Although our fixed operating costs were relatively unchanged in absolute dollar terms, as a percentage of net revenues these costs decreased from 19% of net revenues for the nine months ended September 30, 2020 to 12% of net revenues for the same period in 2021. During the nine months ended September 30, 2021 as compared to the same period in 2020, decreases in facility related costs, primarily in our EMS segment, and a reduction in premiums for medical insurance in both our segments were offset by increased salaries and benefits expense due to additional headcount in our Thermal segment and, to a lesser extent, increases in supplies used in our manufacturing facilities. The decrease in our fixed operating costs as a percentage of net revenues during the nine months ended September 30, 2021 as compared to the same period in 2020 was partially offset by an increase in our component material costs, reflecting changes in product mix.

Selling Expense. Selling expense was $7.8 million for the nine months ended September 30, 2021 compared to $5.6 million for the same period in 2020 an increase of $2.3 million, or 41%. Commissions increased $1.5 million and standard warranty accruals increased $168,000, both of which primarily reflect the higher net revenue levels. We also had an increase in salaries and benefits expense due to additional headcount in our EMS segment and higher levels of travel and trade show expense in both of our segments as COVID-19 restrictions were reduced or eliminated. We expect this increase in travel costs to continue throughout the balance of 2021 as we return to a more normal business model with regard to customer support and on-site visits.

Engineering and Product Development Expense. Engineering and product development expense was $4.0 million for the nine months ended September 30, 2021 compared to $3.8 million for the same period in 2020 an increase of $187,000, or 5%. The increase primarily reflects higher salaries and benefits expense as a result of headcount additions in both our segments.
 

General and Administrative Expense. General and administrative expense was $10.6 million for the nine months ended September 30, 2021 compared to $8.5 million for the same period in 2020, an increase of $2.0 million, or 24%. During the nine months ended September 30, 2021, as compared to the same period in 2020, we recorded higher levels of stock-based compensation expense, reflecting an increase in the price of our common stock, and an increase in profit-based bonuses, reflecting our increased earnings in the first nine months of 2021. In addition, during the nine months ended September 30, 2021, we incurred $359,000 of costs related to potential acquisitions and $250,000 of legal and consulting fees and stock-based compensation costs related to the retirement of our former CFO and the appointment of our new CFO. There were no similar costs in the nine months ended September 30, 2020.

 

Restructuring and Other Charges. For the nine months ended September 30, 2021, we recorded $303,000 in restructuring and other charges related to retirement of our former CFO and the consolidation of our EMS manufacturing operations. During the same period in 2020, we recorded $207,000 in restructuring and other charges related to the resignation of our former CEO in August 2020 and headcount reductions in our Corporate staff and our Thermal segment.

 

Income Tax Expense (Benefit). For the nine months ended September 30, 2021, we recorded income tax expense of $1.2 million compared to an income tax benefit of $262,000 for the same period in 2020. Our effective tax rate was 14% for the nine months ended September 30, 2021 compared to 34% for the same period in 2020. On a quarterly basis, we record income tax expense or benefit based on the expected annualized effective tax rate for the various taxing jurisdictions in which we operate our businesses. The lower effective tax rate in the nine months ended September 30, 2021 primarily reflects both an increase in the deduction for foreign-derived intangible income and an increase in the level of our tax deductions related to stock-based compensation. To a lesser extent, we also recorded increased levels of expected tax credits driven by both research and development activities and foreign operations.

 

- 28 -

 

Liquidity and Capital Resources

As discussed more fully in the Overview, our business and results of operations are substantially dependent upon the demand for ATE by semiconductor manufacturers and companies that specialize in the testing of ICs. The cyclical and volatile nature of demand for ATE makes estimates of future revenues, results of operations and net cash flows difficult.

 

Our primary historical source of liquidity and capital resources has been cash flow generated by our operations, and we manage our businesses to maximize operating cash flows as our primary source of liquidity. We use cash to fund growth in our operating assets, for new product research and development and for acquisitions.

 

Liquidity

Our cash and cash equivalents and working capital were as follows (in thousands):

 

  

September 30,
2021

  

December 31,
2020

 

Cash and cash equivalents

 $18,743  $10,277 

Working capital

 $27,588  $18,108 

 

As of September 30, 2021, $2.5 million, or 13%, of our cash and cash equivalents was held by our foreign subsidiaries. We currently expect our cash and cash equivalents, in combination with the borrowing availability under our revolving credit facility to be sufficient to support our short-term working capital requirements and other corporate requirements. Our revolving credit facility is discussed in Notes 9 and 15 to our consolidated financial statements in this Report.

 

Our material short-term cash requirements include payments due under our various lease agreements, recurring payroll and benefits obligations to our employees and purchase commitments for materials that we use in the products we sell. We estimate that our minimum short-term working capital requirements currently range between $5.0 million and $7.0 million. We also anticipate making investments in our business in the next twelve months including hiring of additional staff, updates to our website and other systems and investments related to our geographic and market expansion efforts. We expect our current cash and cash equivalents, in combination with the borrowing capacity available under our revolving credit facility and the anticipated net cash to be provided by our operations to be sufficient to support these additional investments as well as our current short-term cash requirements.

 

Our current growth strategy includes pursuing acquisition opportunities for complementary businesses, technologies or products. As discussed further in the Overview, on October 28, 2021, we acquired substantially all of the assets of Videology. We utilized our new credit facility which is also discussed further in the Overview to finance the purchase price of $12 million. We currently anticipate that any additional long-term cash requirements related to our acquisition strategy would be funded through a combination of our cash and cash equivalents, our new credit facility or by issuing equity.

 

Cash Flows


Operating Activities. For the nine months ended September 30, 2021, we recorded net earnings of $7.0 million. Net cash provided by operations during this period was $8.1 million. During the nine months ended September 30, 2021, we had non-cash charges of $2.2 million for depreciation and amortization which included $760,000 of amortization related to our ROU assets. Our operating lease liabilities declined $918,000 during this same period. During the nine months ended September 30, 2021, we also recorded $1.1 million for amortization of deferred compensation expense related to stock-based awards. Accounts receivable increased $3.9 million during the nine months ended September 30, 2021, reflecting the significant increase in net revenues in the first nine months of 2021, while inventories, accounts payable and accrued sales commissions increased $2.1 million, $1.4 million and $366,000, respectively, also reflecting the increase in business levels. Accrued wages and benefits increased $942,000 during the first nine months of 2021 reflecting higher levels of profit-based bonuses accruals as a result of our level of profit in the first nine months of 2021. Customer deposits increased $1.7 million during the nine months ended June 30, 2021, primarily in our Thermal segment.

 

Investing Activities. During the nine months ended September 30, 2021, purchases of property and equipment were $577,000, primarily reflecting leasehold improvements to our facility in Mt. Laurel, New Jersey which were funded using our working capital. We have no significant commitments for capital expenditures for the balance of 2021; however, depending upon changes in market demand or manufacturing and sales strategies, we may make such purchases or investments as we deem necessary and appropriate. These additional cash requirements would be funded by our cash and cash equivalents, anticipated net cash to be provided by operations and our revolving credit facility.

 

Financing Activities. During the nine months ended September 30, 2021, we received $1.0 million as a result of the exercise of options to acquire 149,010 shares of our stock. These options were issued to certain current and former employees under our stock-based compensation plans which are discussed in Note 10 to our consolidated financial statements in this Report.

 

- 29 -

 

New or Recently Adopted Accounting Standards

 

See the Notes to our consolidated financial statements in this Report for information concerning the implementation and impact of new or recently adopted accounting standards.

 

Critical Accounting Estimates

The preparation of consolidated financial statements in conformity with GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to inventories, long-lived assets, goodwill, identifiable intangibles, contingent consideration liabilities and deferred income tax valuation allowances. We base our estimates on historical experience and on appropriate and customary assumptions that we believe 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. Some of these accounting estimates and assumptions are particularly sensitive because of their significance to our consolidated financial statements and because of the possibility that future events affecting them may differ markedly from what had been assumed when the financial statements were prepared. As of September 30, 2021, there have been no significant changes to the accounting estimates that we have deemed critical other than the change in accounting estimate that is discussed in Note 15 to our consolidated financial statements in our Form 10-Q for the quarter ended June 30, 2021. Our critical accounting estimates are more fully described in our 2020 Form 10-K.

 

Off -Balance Sheet Arrangements

 

There were no off-balance sheet arrangements during the nine months ended September 30, 2021 that have or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our interests.

 

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

This disclosure is not required for a smaller reporting company.

 

Item 4.

CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the Exchange Act. Because there are inherent limitations in all control systems, a control system, no matter how well conceived and operated, can provide only reasonable, as opposed to absolute, assurance that the objectives of the control system are met. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Our management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all error and all fraud. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Accordingly, our management has designed the disclosure controls and procedures to provide reasonable assurance that the objectives of the control system were met.

 

CEO/CFO Conclusions about the Effectiveness of the Disclosure Controls and Procedures. As required by Rule 13a-15(b) of the Exchange Act, inTEST management, including our CEO and CFO, conducted an evaluation as of the end of the period covered by this Report, of the effectiveness of our disclosure controls and procedures, including the impact of COVID-19. Based on that evaluation, our CEO and CFO concluded that, as of the end of the period covered by this Report, our disclosure controls and procedures were effective at the reasonable assurance level.

 

Changes in Internal Control Over Financial Reporting

 

During the period covered by this Report, there has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this Report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We will continue monitoring and assessing any impacts from COVID-19 on our internal controls.

 

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PART II.  OTHER INFORMATION

 

Item 1.

Legal Proceedings

 

From time to time we may be a party to legal proceedings occurring in the ordinary course of business. We are not currently involved in any material legal proceedings.

 

 

Item 1A.

Risk Factors

 

Information regarding the primary risks and uncertainties that could materially and adversely affect our future performance or could cause actual results to differ materially from those expressed or implied in our forward-looking statements, appears in Part I, Item 1A - "Risk Factors" of our 2020 Form 10-K filed with the Securities and Exchange Commission on March 23, 2021. There have been no material changes from the risk factors set forth in our 2020 Form 10-K.

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

 

Item 3.

Defaults Upon Senior Securities

 

None.

 

 

Item 4.

Mine Safety Disclosures

 

Not applicable.

 

 

Item 5.

Other Information

 

None.

 

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Item 6.

Exhibits

 

2.1*

Asset Purchase Agreement among inTEST Corporation, Videology Imaging Corporation, Videology Imaging Solutions, Inc. and Carol Ethier dated October 28, 2021. (1)

2.2*

Asset Purchase Agreement among Ambrell B.V., Videology Imaging Solutions Europe B.V. and Carol Ethier dated October 28, 2021. (1)

10.1

Amended and Restated Loan and Security Agreement, dated October 15, 2021, among inTEST Corporation, Ambrell Corporation, inTEST Silicon Valley Corporation, inTEST EMS, LLC, Temptronic Corporation and M&T Bank. (2)

10.2

Delayed Draw Term Note dated October 15, 2021. (2)

10.3

Second Amended and Restated Revolver Note dated October 15, 2021. (2)

10.4

Joinder and Amendment to Amended and Restated Loan and Security Agreement, dated October 28, 2021, among inTEST Corporation, Ambrell Corporation, inTEST Silicon Valley Corporation, inTEST EMS, LLC, Temptronic Corporation, Videology Imaging Corporation and M&T Bank. (1)

10.5

Amended and Restated Surety Agreement, dated October 28, 2021, among Ambrell Corporation, inTEST Silicon Valley Corporation, inTEST EMS, LLC, Temptronic Corporation, Videology Imaging Corporation and M&T Bank. (1)

10.6

Amended and Restated Patents, Trademarks, Copyrights and Licenses Security Agreement, dated October 28, 2021, among inTEST Corporation, Ambrell Corporation, inTEST Silicon Valley Corporation, inTEST EMS, LLC, Temptronic Corporation, Videology Imaging Corporation and M&T Bank. (1)

10.7

Amended and Restated Delayed Draw Term Note 1, dated October 28, 2021. (1)

10.8

Amended and Restated Delayed Draw Term Note 1A, dated October 28, 2021. (1)

31.1

Certification of Chief Executive Officer pursuant to Rule 13a-14(a).

31.2

Certification of Chief Financial Officer pursuant to Rule 13a-14(a).

32.1

Certification of Chief Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Certification of Chief Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS

Inline XBRL Taxonomy Instance Document

101.SCH

Inline XBRL Taxonomy Extension Schema Document

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

 

(1)

Previously filed by the Company as an exhibit to the Company’s Current Report on Form 8-K dated October 28, 2021, File No. 001-36117, filed November 2, 2021, and incorporated herein by reference.

(2)

Previously filed by the Company as an exhibit to the Company’s Current Report on Form 8-K dated October 15, 2021, File No. 001-36117, filed October 20, 2021, and incorporated herein by reference.

*

This filing omits exhibits and schedules pursuant to Item 601(a)(5) of Regulation S-K, which the registrant agrees to furnish supplementary to the Securities and Exchange Commission upon request.

 

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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.

 

  

inTEST Corporation

   
   
   

Date:

November 12, 2021

/s/ Richard N. Grant, Jr.                           

  

Richard N. Grant, Jr.
President and Chief Executive Officer

   
   
   

Date:

November 12, 2021

/s/ Duncan Gilmour                           

  

Duncan Gilmour
Chief Financial Officer, Treasurer and Secretary

 

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