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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

  -   - 

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

    -       -       -       2,212       -       -       2,212  

Other comprehensive loss

    -       -       -       -       (101

)

    -       (101

)

Amortization of deferred compensation related to stock-based awards

    -       -       269       -       -       -       269  

Issuance of unvested shares of restricted stock

    81,468       1       (1

)

    -       -       -       -  

Stock options exercised

    99,740       1       716       -       -       -       717  
                                                         

Balance, March 31, 2021

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

)

    47,849  
                                                         

Net earnings

    -       -       -       2,609       -       -       2,609  

Other comprehensive earnings

    -       -       -       -       24       -       24  

Amortization of deferred compensation related to stock-based awards

    -       -       454       -       -       -       454  

Issuance of unvested shares of restricted stock

    44,741       -       -       -       -       -       -  

Forfeiture of unvested shares of restricted stock

    (18,125

)

    -       -       -       -       -       -  

Stock options exercised

    45,835       -       285       -       -       -       285  
                                                         

Balance, June 30, 2021

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

)

    51,221  
                                                         

Net earnings

    -       -       -       2,175       -       -       2,175  

Other comprehensive loss

    -       -       -       -       (68

)

    -       (68

)

Amortization of deferred compensation related to stock-based awards

    -       -       371       -       -       -       371  

Stock options exercised

    3,435       -       17       -       -       -       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

    -       -       -       (1,143

)

    -       -       (1,143

)

Other comprehensive loss

    -       -       -       -       (38

)

    -       (38

)

Amortization of deferred compensation related to stock-based awards

    -       -       187       -       -       -       187  

Issuance of unvested shares of restricted stock

    58,160       1       (1

)

    -       -       -       -  

Forfeiture of unvested shares of restricted stock

    (8,315

)

    -       -       -       -       -       -  

Repurchase and retirement of common stock

    (13,767

)

    -       (74

)

    -       -       -       (74

)

                                                         

Balance, March 31, 2020

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

)

    43,766  
                                                         

Net earnings

    -       -       -       170       -       -       170  

Other comprehensive earnings

    -       -       -       -       35       -       35  

Amortization of deferred compensation related to stock-based awards

    -       -       208       -       -       -       208  

Issuance of unvested shares of restricted stock

    15,840       -       -       -       -       -       -  

Forfeiture of unvested shares of restricted stock

    (6,750

)

    -       -       -       -       -       -  
                                                         

Balance, June 30, 2020

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

)

    44,179  
                                                         

Net earnings

    -       -       -       458       -       -       458  

Other comprehensive earnings

    -       -       -       -       101       -       101  

Amortization of deferred compensation related to stock-based awards

    -       -       85       -       -       -       85  

Issuance of unvested shares of restricted stock

    155,110       2       (2

)

    -       -       -       -  

Forfeiture of unvested shares of restricted stock

    (52,060

)

    (1

)

    1       -       -       -       -  
                                                         

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       -  

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       -  

Repurchases of common stock

    -       (74

)

Proceeds from Paycheck Protection Program loans

    -       2,829  

Repayments of Paycheck Protection Program loans

    -       (2,829

)

Proceeds from revolving credit facility

    -       2,800  

Repayments of revolving credit facility

    -       (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 two 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   - 

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

  -   120   120 

Accruals for other costs associated with facility consolidation

  183   -   183 

Cash payments

  (416

)

  (140

)

  (556

)

Balance – September 30, 2021

 $-  $87  $87 

 

 

(4)

GOODWILL AND INTANGIBLE ASSETS

 

We have two 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   - 

Trade name

  140   140   - 

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   - 

Trade name

  140   140   - 

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. No 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, no 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