inTEST (INTT) - 2022 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited consolidated financial statements for the three months ended March 31, 2022 Consolidated Balance Sheets Consolidated Balance Sheet Highlights (in thousands) | Metric | March 31, 2022 | December 31, 2021 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $17,211 | $21,195 | $(3,984) | -18.8% | | Inventories | $14,913 | $12,863 | $2,050 | 15.9% | | Total current assets | $51,269 | $52,077 | $(808) | -1.6% | | Total assets | $102,934 | $103,905 | $(971) | -0.9% | | Total current liabilities | $24,147 | $25,072 | $(925) | -3.7% | | Total liabilities | $46,933 | $49,082 | $(2,149) | -4.4% | | Total stockholders' equity | $56,001 | $54,823 | $1,178 | 2.1% | Consolidated Statements of Operations Consolidated Statements of Operations Highlights (Three Months Ended March 31, in thousands, except per share data) | Metric | 2022 | 2021 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Revenue | $24,081 | $19,556 | $4,525 | 23.1% | | Cost of revenue | $13,068 | $10,035 | $3,033 | 30.2% | | Gross profit | $11,013 | $9,521 | $1,492 | 15.7% | | Operating expenses | $10,211 | $6,941 | $3,270 | 47.1% | | Operating income | $802 | $2,580 | $(1,778) | -68.9% | | Net earnings | $577 | $2,212 | $(1,635) | -73.9% | | Earnings per common share – basic | $0.05 | $0.21 | $(0.16) | -76.2% | | Earnings per common share – diluted | $0.05 | $0.21 | $(0.16) | -76.2% | Consolidated Statements of Comprehensive Earnings Consolidated Statements of Comprehensive Earnings (Three Months Ended March 31, in thousands) | Metric | 2022 | 2021 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net earnings | $577 | $2,212 | $(1,635) | -73.9% | | Unrealized gain on interest rate swap agreement | $289 | $- | $289 | N/A | | Foreign currency translation adjustments | $(116) | $(101) | $(15) | 14.9% | | Comprehensive earnings | $750 | $2,111 | $(1,361) | -64.5% | Consolidated Statements of Stockholders' Equity Consolidated Stockholders' Equity (Three Months Ended March 31, in thousands) | Metric | Balance, Jan 1, 2022 | Net Earnings | Other Comprehensive Earnings | Amortization of Deferred Compensation | Issuance of Unvested Shares | Shares Issued under ESPP | Balance, Mar 31, 2022 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Common Stock (Amount) | $109 | $- | $- | $- | $1 | $- | $110 | | Additional Paid-in Capital | $29,931 | $- | $- | $372 | $(1) | $56 | $30,358 | | Retained Earnings | $24,393 | $577 | $- | $- | $- | $- | $24,970 | | Accumulated Other Comprehensive Earnings | $594 | $- | $173 | $- | $- | $- | $767 | | Treasury Stock | $(204) | $- | $- | $- | $- | $- | $(204) | | Total Stockholders' Equity | $54,823 | $577 | $173 | $372 | $- | $56 | $56,001 | Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows (Three Months Ended March 31, in thousands) | Cash Flow Activity | 2022 | 2021 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net cash used in operating activities | $(2,795) | $(337) | $(2,458) | 729.4% | | Net cash used in investing activities | $(335) | $(388) | $53 | -13.7% | | Net cash provided by (used in) financing activities | $(827) | $717 | $(1,544) | -215.3% | | Effects of exchange rates on cash | $(27) | $(74) | $47 | -63.5% | | Net cash used in all activities | $(3,984) | $(82) | $(3,902) | 4758.5% | | Cash and cash equivalents at end of period | $17,211 | $10,195 | $7,016 | 68.8% | Notes to Consolidated Financial Statements These notes detail the company's accounting policies, acquisitions, and segment information (1) NATURE OF OPERATIONS - inTEST Corporation is a global supplier of innovative test and process solutions for manufacturing and testing across diverse markets including automotive, defense/aerospace, industrial, life sciences, security, and semiconductor[20] - Effective January 1, 2022, the company reorganized its operating segments into three reportable segments: Electronic Test, Environmental Technologies, and Process Technologies, reclassifying prior period information for comparability[20] - The company aims to diversify its markets, product offerings, and customer base to reduce dependence on the volatile semiconductor market[23] (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This section outlines key accounting policies for financial statement preparation and revenue recognition Basis of Presentation and Use of Estimates - The consolidated financial statements include inTEST Corporation and its wholly-owned subsidiaries, with all significant intercompany accounts and transactions eliminated[27] - Preparation of financial statements requires management to make estimates and assumptions, particularly impacting contingent consideration, inventories, long-lived assets, goodwill, identifiable intangibles, and deferred tax assets/liabilities[27] Business Combinations - Acquired businesses are accounted for using the purchase method, allocating the purchase price to net assets at fair value, with any excess recorded as goodwill[31] - Changes in the fair value of acquisition-related contingent consideration after the acquisition date are recognized in the consolidated statement of operations[31] Fair Value of Financial Instruments - Financial instruments like cash, accounts receivable, accounts payable, and accrued expenses are carried at cost, approximating fair value due to short maturities[33] - Contingent consideration liabilities are measured at fair value on a recurring basis using Level 3 inputs (unobservable and significant assumptions)[33] Goodwill, Intangible and Long-Lived Assets - Goodwill is assessed for impairment annually or more frequently if circumstances indicate impairment, using a qualitative or quantitative assessment comparing fair value to carrying amount[35] - Finite-lived intangible assets are amortized over their estimated useful lives, while indefinite-lived intangible assets are assessed for impairment annually[35][37] Revenue Recognition - Revenue is recognized when performance obligations are satisfied and control of products or services is transferred to the customer, typically upon shipment or service completion[39] - The company also leases equipment under short-term agreements, recognizing revenue on a straight-line basis over the lease term[39] Inventories - Inventories are valued at cost (first-in, first-out basis) not exceeding market value[49] - Excess and obsolete inventory charges are recorded quarterly based on established criteria (average annual usage over three years for excess, no use in 24 months for obsolete) and market conditions[49] Excess and Obsolete Inventory Charges (Three Months Ended March 31, in thousands) | Period | Charge Amount | | :--- | :--- | | 2022 | $123 | | 2021 | $39 | Leases - Leases are accounted for under ASC Topic 842, classifying them as operating or finance leases; the company currently has only operating leases[50] - Operating lease Right-of-Use (ROU) assets and liabilities are recognized at commencement based on the present value of lease payments, using the incremental borrowing rate[51] - The company has elected not to apply recognition requirements to short-term leases (one year or less)[55] Interest Rate Swap Agreement - The company uses an interest rate swap agreement to convert floating-rate debt to a fixed-rate basis, applying hedge accounting rules (ASC Topic 815) and qualifying for the shortcut method[57] - Changes in the fair value of the swap are recorded in accumulated other comprehensive income (loss) and amortized to interest expense[57] Contingent Liability for Repayment of State and Local Grant Funds Received - The company received $550k in grants for a Rochester, NY facility, with the final $87k received in Q1 2022[58] - A contingent liability of $285k remains at March 31, 2022, subject to meeting employment targets through 2024; the company was in compliance as of March 31, 2022[58] Stock-Based Compensation - Stock-based compensation is accounted for under the fair value method (ASC Topic 718), using an option pricing model for stock options and amortizing expense over service periods[59] Income Taxes - Income taxes are accounted for using the asset and liability method, recognizing deferred tax assets and liabilities for temporary differences and carryforwards[60] - A valuation allowance is recorded if it's more likely than not that deferred tax assets will not be realized[60] Earnings (Loss) Per Common Share - Basic EPS is calculated by dividing net earnings by weighted average common shares outstanding[61] - Diluted EPS includes common share equivalents (unvested restricted stock and stock options) using the treasury stock method, excluding anti-dilutive effects[61] Weighted Average Common Shares Outstanding (Three Months Ended March 31) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Weighted average common shares outstanding–basic | 10,617,271 | 10,329,449 | | Potentially dilutive securities | 225,321 | 196,377 | | Weighted average common shares and common share equivalents outstanding– diluted | 10,842,592 | 10,525,826 | | Average number of potentially dilutive securities excluded from calculation | 318,574 | 347,068 | Effect of Recently Issued Amendments to Authoritative Accounting Guidance - The FASB's amendments for credit losses, replacing the incurred loss methodology with an expected credit loss model, are effective for the company for reporting periods beginning after December 15, 2022 (January 1, 2023)[64] - The company plans to adopt these amendments on January 1, 2023, and is currently evaluating their impact on consolidated financial statements[64] (3) ACQUISITIONS This section details the strategic rationale and purchase price allocation for three acquisitions completed in Q4 2021 Z-Sciences - Acquired Z-Sciences (re-branded as North Sciences) on October 6, 2021, for $500k cash (plus $200k contingent on employment terms), enhancing medical offerings and life sciences market presence[65] - The acquisition included a multi-year restricted stock award for Z-Sciences' founder, valued up to $1,800k, contingent on sales growth and profitability milestones[65] Videology - Acquired Videology on October 28, 2021, for $12,000k cash, expanding process technology solutions, diversifying target markets, and broadening the customer base[68] Unaudited Pro Forma Financial Information for Videology Acquisition (Three Months Ended March 31, 2021, in thousands, except per share data) | Metric | Pro Forma 2021 | | :--- | :--- | | Revenue | $21,855 | | Net earnings | $2,832 | | Diluted earnings per share | $0.27 | Acculogic - Acquired Acculogic on December 21, 2021, for approximately $9,000k cash, plus potential additional payments up to CAD $5,000k contingent on sales to EV or battery customers[71] - The preliminary purchase price allocation for Acculogic was finalized in Q1 2022, increasing the estimated fair value of contingent consideration by approximately $500k[73] Acculogic Purchase Price Allocation (in thousands) | Item | Amount | | :--- | :--- | | Goodwill | $3,363 | | Identifiable intangible assets | $5,123 | | Tangible assets acquired and liabilities assumed | $1,311 | | Total purchase price | $9,797 | Unaudited Pro Forma Financial Information for Acculogic Acquisition (Three Months Ended March 31, 2021, in thousands, except per share data) | Metric | Pro Forma 2021 | | :--- | :--- | | Revenue | $22,286 | | Net earnings | $2,185 | | Diluted earnings per share | $0.21 | (4) FAIR VALUE MEASUREMENTS - The company categorizes fair value measurements into a three-tier hierarchy: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs)[77][78][79] - The interest rate swap agreement is measured at fair value using Level 2 inputs, while contingent consideration liabilities from Z-Sciences and Acculogic acquisitions are measured using Level 3 inputs[81] - The Acculogic contingent consideration liability increased by $500k during Q1 2022 due to a revised estimate of sales to EV or battery customers[81][82] Fair Value Measurement Using (As of March 31, 2022, in thousands) | Liability | Fair Value | Level 1 | Level 2 | Level 3 | | :--- | :--- | :--- | :--- | :--- | | Contingent consideration liability – Z-Sciences | $179 | $- | $- | $179 | | Contingent consideration liability – Acculogic | $1,478 | $- | $- | $1,478 | | Interest rate swap | $289 | $- | $289 | $- | (5) RESTRUCTURING AND OTHER CHARGES - No restructuring and other charges were incurred in the three months ended March 31, 2022; in contrast, $55k of charges were incurred in Q1 2021 related to manufacturing operations integration[83] - The accrued restructuring liability at March 31, 2022, was $63k, related to the corporate office move, with the remaining amount expected to be paid in Q2 2022[84] (6) GOODWILL AND INTANGIBLE ASSETS - Goodwill increased by $451k during Q1 2022, primarily due to adjustments related to the Acculogic acquisition[86] Goodwill by Segment (in thousands) | Segment | March 31, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Electronic Test | $3,566 | $3,055 | | Environmental Technologies | $1,817 | $1,817 | | Process Technologies | $16,480 | $16,576 | | Total goodwill | $21,863 | $21,448 | - Finite-lived intangible assets decreased by $751k in Q1 2022, primarily due to amortization of $782k[88] Intangible Assets by Segment (in thousands) | Segment | March 31, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Electronic Test | $4,973 | $5,074 | | Environmental Technologies | $878 | $893 | | Process Technologies | $15,054 | $15,667 | | Total intangible assets | $20,905 | $21,634 | Estimated Annual Amortization Expense for Finite-Lived Intangible Assets (in thousands) | Year | Amount | | :--- | :--- | | 2022 (remainder) | $1,937 | | 2023 | $2,137 | | 2024 | $2,013 | | 2025 | $1,799 | | 2026 | $1,188 | (7) REVENUE FROM CONTRACTS WITH CUSTOMERS Revenue by Customer Type (Three Months Ended March 31, in thousands) | Customer Type | 2022 | 2021 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | End user | $19,579 | $17,660 | $1,919 | 10.9% | | OEM/Integrator | $4,502 | $1,896 | $2,606 | 137.4% | | Total Revenue | $24,081 | $19,556 | $4,525 | 23.1% | Revenue by Product Type (Three Months Ended March 31, in thousands) | Product Type | 2022 | 2021 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Thermal test | $5,057 | $4,305 | $752 | 17.5% | | Thermal process | $7,465 | $5,566 | $1,899 | 34.1% | | Semiconductor test | $6,348 | $8,320 | $(1,972) | -23.7% | | Video imaging | $1,851 | $- | $1,851 | N/A | | Flying probe and in-circuit testers | $1,688 | $- | $1,688 | N/A | | Service/other | $1,672 | $1,365 | $307 | 22.5% | | Total Revenue | $24,081 | $19,556 | $4,525 | 23.1% | Revenue by Market (Three Months Ended March 31, in thousands) | Market | 2022 | 2021 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Semiconductor | $13,390 | $13,320 | $70 | 0.5% | | Industrial | $2,799 | $1,427 | $1,372 | 96.1% | | Automotive (including Electric Vehicles) | $2,756 | $1,327 | $1,429 | 107.7% | | Defense/aerospace | $1,493 | $1,252 | $241 | 19.2% | | Life Sciences | $699 | $643 | $56 | 8.7% | | Security | $574 | $- | $574 | N/A | | Other | $2,370 | $1,587 | $783 | 49.3% | | Total Revenue | $24,081 | $19,556 | $4,525 | 23.1% | (8) MAJOR CUSTOMERS - No single customer accounted for 10% or more of consolidated revenue for the three months ended March 31, 2022[94] - In the three months ended March 31, 2021, Texas Instruments Incorporated accounted for 16% of consolidated revenue, primarily from the Electronic Test segment[94] (9) INVENTORIES Inventories (in thousands) | Inventory Type | March 31, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Raw materials | $11,179 | $10,403 | | Work in process | $1,562 | $1,250 | | Inventory consigned to others | $44 | $44 | | Finished goods | $2,128 | $1,166 | | Total inventories | $14,913 | $12,863 | - Total inventories increased by $2,050k (15.9%) from December 31, 2021, to March 31, 2022, driven by increases in raw materials, work in process, and finished goods[95] (10) LEASES Lease Costs (Three Months Ended March 31, in thousands) | Lease Type | 2022 | 2021 | | :--- | :--- | :--- | | Operating lease cost | $326 | $324 | | Short-term lease cost | $30 | $8 | - Weighted average remaining lease term is 5.5 years, with a weighted average discount rate of 4.2% as of March 31, 2022[96] - Total amortization of ROU assets was $309k for Q1 2022, up from $280k in Q1 2021[97] - An amendment to the Singapore facility lease extended its term by 24 months, resulting in a non-cash increase of approximately $51k in ROU assets and operating lease liabilities[97] (11) DEBT - The company has a $25,000k non-revolving delayed draw term note and a $10,000k revolving credit facility under an October 2021 agreement with M&T Bank[99] - As of March 31, 2022, $20,500k was drawn under the Term Note (including $12,000k for Videology at a fixed rate of ~3.2% and $8,500k for Acculogic at a variable rate of ~2.2%), with $4,500k remaining available[102][103][167] Maturities of Long-Term Debt (in thousands) | Year | Amount | | :--- | :--- | | 2022 (remainder) | $3,217 | | 2023 | $4,100 | | 2024 | $4,100 | | 2025 | $4,100 | | 2026 | $3,700 | | Total | $19,217 | (12) STOCK-BASED COMPENSATION PLAN - Total unrecognized stock-based compensation expense as of March 31, 2022, is $3,232k, to be recognized over a weighted average period of 2.4 years[107] Stock-Based Compensation Expense (Three Months Ended March 31, in thousands) | Expense Category | 2022 | 2021 | | :--- | :--- | :--- | | Cost of revenue | $11 | $- | | Selling expense | $7 | $3 | | Engineering and product development expense | $19 | $10 | | General and administrative expense | $335 | $256 | | Total | $372 | $269 | - Performance-based restricted stock awards, granted since August 2020, have vesting percentages ranging from 0% to 150% based on performance metrics; awards granted to CEO and CFO in March 2022 totaling 20,493 shares are expected to vest at 100%[112][113] (13) EMPLOYEE STOCK PURCHASE PLAN - The Employee Stock Purchase Plan (ESPP), effective October 1, 2021, allows eligible employees to purchase common stock at a discounted price[115] - In Q1 2022, employees purchased 5,245 shares at a 15% discount, resulting in $8k of compensation expense[117] (14) EMPLOYEE BENEFIT PLANS - The company offers 401(k) plans for U.S. employees, with matching contributions[118] Matching Contributions Expense (Three Months Ended March 31, in thousands) | Plan | 2022 | 2021 | | :--- | :--- | :--- | | inTEST Corporation Incentive Savings Plan | $216 | $171 | | Ambrell Corporation Savings & Profit Sharing Plan | $101 | $43 | | Total | $317 | $214 | (15) SEGMENT INFORMATION - Effective January 1, 2022, the company reorganized into three reportable segments: Electronic Test, Environmental Technologies, and Process Technologies, reflecting business evolution and recent acquisitions[121] Revenue by Segment (Three Months Ended March 31, in thousands) | Segment | 2022 | 2021 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Electronic Test | $8,778 | $8,501 | $277 | 3.3% | | Environmental Technologies | $6,993 | $6,198 | $795 | 12.8% | | Process Technologies | $8,310 | $4,857 | $3,453 | 71.1% | | Total revenue | $24,081 | $19,556 | $4,525 | 23.1% | Income from Divisional Operations by Segment (Three Months Ended March 31, in thousands) | Segment | 2022 | 2021 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Electronic Test | $1,887 | $2,987 | $(1,100) | -36.8% | | Environmental Technologies | $802 | $923 | $(121) | -13.1% | | Process Technologies | $730 | $456 | $274 | 60.1% | | Total income from divisional operations | $3,419 | $4,366 | $(947) | -21.7% | Revenue by Geographic Area (Three Months Ended March 31, in thousands) | Geographic Area | 2022 | 2021 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | U.S. | $9,234 | $5,747 | $3,487 | 60.7% | | Foreign | $14,847 | $13,809 | $1,038 | 7.5% | | Total Revenue | $24,081 | $19,556 | $4,525 | 23.1% | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, market trends, acquisition impacts, and operational challenges Risk Factors and Forward-Looking Statements - The report contains forward-looking statements based on management's current expectations, which involve risks and uncertainties that could cause actual results to differ materially[126] - Key risks include the ability to execute on strategy, grow in target markets, integrate acquisitions, manage semiconductor market volatility, convert backlog, retain major customers, and mitigate supply chain constraints and inflation[126] - No material changes to the risk factors were reported from the 2021 Form 10-K[184] Overview - inTEST Corporation is a global supplier of innovative test and process solutions, with a recent reorganization of operating segments (Electronic Test, Environmental Technologies, Process Technologies) effective January 1, 2022, following Q4 2021 acquisitions[130] - Product mix significantly impacts consolidated gross margin due to varying gross margin levels across different products, markets, and customer types[131] Markets - The company targets diverse markets including automotive, defense/aerospace, industrial, life sciences, security, and the semiconductor manufacturing industry, aiming to reduce dependence on the volatile semi market[132] - The semi market is characterized by rapid technological change, competitive pricing, and cyclical demand, which can cause significant fluctuations in orders and revenue[132][134] - Demand within the semi market can be inconsistent across operating segments or products due to customer-specific needs and market shifts, making trends difficult to predict[135] Acquisitions - Acquisitions are a key growth strategy, with three completed in 2021: Z-Sciences (life sciences cold chain), Videology (OEM digital streaming/imaging), and Acculogic (robotics-based electronic production test equipment)[136][137][138][139] - These acquisitions expanded technology offerings, diversified markets and customers, and broadened the company's international reach[136][138][139] Orders and Backlog Orders by Segment and Market (Three Months Ended March 31, in thousands) | Category | 2022 | 2021 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Orders by Segment: | | | | | | Electronic Test | $9,297 | $10,484 | $(1,187) | -11% | | Environmental Technologies | $6,914 | $5,644 | $1,270 | 23% | | Process Technologies | $8,852 | $9,102 | $(250) | -3% | | Total Orders | $25,063 | $25,230 | $(167) | -1% | | Orders by Market: | | | | | | Semi | $12,382 | $17,185 | $(4,803) | -28% | | Industrial | $3,222 | $2,526 | $696 | 28% | | Auto/EV | $2,619 | $1,168 | $1,451 | 124% | | Life Sciences | $1,216 | $952 | $264 | 28% | | Defense/Aerospace | $1,851 | $1,110 | $741 | 67% | | Security | $153 | $- | $153 | N/A | | Other | $3,620 | $2,289 | $1,331 | 58% | | Total Orders | $25,063 | $25,230 | $(167) | -1% | - Total consolidated orders for Q1 2022 were $25.1 million, a slight decrease of 1% compared to Q1 2021, primarily due to a 28% decline in semi market orders[143] - Orders showed strong demand from the automotive (especially EV applications), life sciences, and defense/aerospace markets in Q1 2022[144] - Backlog of unfilled orders increased significantly to $35.0 million at March 31, 2022, from $17.1 million at March 31, 2021, largely due to a $10.0 million front-end semi order in Q4 2021 and acquired businesses[145] Revenue Revenue by Segment and Market (Three Months Ended March 31, in thousands) | Category | 2022 | 2021 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Revenue by Segment: | | | | | | Electronic Test | $8,778 | $8,501 | $277 | 3% | | Environmental Technologies | $6,993 | $6,198 | $795 | 13% | | Process Technologies | $8,310 | $4,857 | $3,453 | 71% | | Total Revenue | $24,081 | $19,556 | $4,525 | 23% | | Revenue by Market: | | | | | | Semi | $13,390 | $13,320 | $70 | 1% | | Industrial | $2,799 | $1,427 | $1,372 | 96% | | Auto/EV | $2,756 | $1,327 | $1,429 | 108% | | Life Sciences | $699 | $643 | $56 | 9% | | Defense/Aerospace | $1,493 | $1,252 | $241 | 19% | | Security | $574 | $- | $574 | N/A | | Other | $2,370 | $1,587 | $783 | 49% | | Total Revenue | $24,081 | $19,556 | $4,525 | 23% | - Total consolidated revenue increased by 23% to $24.1 million in Q1 2022 compared to Q1 2021, with $4.0 million contributed by acquired businesses[147] - Organic revenue growth was 3%, driven by demand from the automotive (EVs) and industrial markets; revenue from the semi market remained relatively flat[148] - Revenue was negatively impacted by approximately $1.0 million of products that could not be shipped in Q1 2022 due to logistics and supply chain constraints, expected to ship in Q2 2022[150] War in Ukraine and Global Supply Chain Constraints - The war in Ukraine exacerbates global supply chain challenges, contributing to inflationary pressures and raw material availability issues[149] - The company faces a risk with a sole-source supplier in Belarus for Acculogic, with a 6-9 month supply on hand and efforts underway to qualify an alternate supplier by end of Q2 2022[149] - Mitigation strategies include qualifying new vendors, increasing raw material inventory, ordering further in advance, and increasing product prices[150] COVID-19 Pandemic - The company continues to follow health guidance, with re-instituted mask requirements in some facilities due to increased cases, and ongoing remote work options[152] - Assessing the impact of recent case increases and China shutdowns, which could lead to lost production time or shipping interruptions[152] Results of Operations This section analyzes consolidated financial performance for Q1 2022 compared to Q1 2021 Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021 Key Financial Performance Indicators (Three Months Ended March 31, in thousands) | Metric | 2022 | 2021 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Revenue | $24,081 | $19,556 | $4,525 | 23% | | Gross Margin | 46% | 49% | -3% pts | -6.1% | | Selling Expense | $3,456 | $2,403 | $1,053 | 44% | | Engineering and Product Development Expense | $1,924 | $1,322 | $602 | 46% | | General and Administrative Expense | $4,831 | $3,161 | $1,670 | 53% | | Restructuring and Other Charges | $- | $55 | $(55) | -100% | | Income Tax Expense | $78 | $366 | $(288) | -78.7% | - Gross margin decreased from 49% to 46% due to increased component material costs, higher direct labor as a percentage of revenue (reflecting acquisitions and increased rates), and higher fixed operating costs[156] - Operating expenses (selling, engineering, G&A) significantly increased, primarily driven by the impact of recent acquisitions and headcount investments[157][158][159] Liquidity and Capital Resources This section discusses the company's financial flexibility, cash balances, and credit facilities Credit Facility - The company has a $25 million Term Note and a $10 million revolving credit facility with M&T Bank, established in October 2021[164] - $20.5 million was drawn from the Term Note to finance the Videology and Acculogic acquisitions, with $4.5 million remaining available[165][166][167] - The Term Note draw for Videology has a fixed interest rate of approximately 3.2%, while the Acculogic draw has a variable rate (approx 2.2% at Dec 31, 2021, increasing to 2.4% effective April 1, 2022)[165][166] Liquidity Cash and Working Capital (in thousands) | Metric | March 31, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $17,211 | $21,195 | | Working capital | $27,122 | $27,005 | - The company expects its cash, revolving credit facility, and anticipated operating cash flows to be sufficient for short-term working capital, investments, and other corporate requirements[169] - Future long-term cash requirements for growth strategies, including acquisitions, are anticipated to be funded through a combination of cash, the remaining credit facility, or equity issuance[170] Cash Flows Net Cash Flow Summary (Three Months Ended March 31, in thousands) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(2,795) | $(337) | | Net cash used in investing activities | $(335) | $(388) | | Net cash provided by (used in) financing activities | $(827) | $717 | - Net cash used in operating activities increased significantly to $2.8 million in Q1 2022, primarily due to lower net earnings and changes in working capital, including increases in inventories and accounts receivable, and a decrease in accrued wages and benefits[171][172] - Investing activities used $335k in Q1 2022, mainly for leasehold improvements for the Videology subsidiary's new facility[173] - Financing activities used $827k in Q1 2022, reflecting $883k in Term Note principal repayments, partially offset by $56k from employee stock purchases[174] New or Recently Adopted Accounting Standards - The company refers to the Notes to Consolidated Financial Statements for information on the implementation and impact of new or recently adopted accounting standards[175] Critical Accounting Estimates - The preparation of financial statements requires significant estimates and judgments, particularly for inventories, long-lived assets, goodwill, identifiable intangibles, contingent consideration liabilities, and deferred income tax valuation allowances[176] - As of March 31, 2022, there have been no significant changes to the critical accounting estimates described in the 2021 Form 10-K[176] Off-Balance Sheet Arrangements - There were no material off-balance sheet arrangements during the three months ended March 31, 2022[177] Item 3. Quantitative and Qualitative Disclosures About Market Risk This disclosure is not required as the company is a smaller reporting company - The company is a smaller reporting company and is not required to provide quantitative and qualitative disclosures about market risk[178] Item 4. Controls and Procedures This section details the evaluation of disclosure controls and changes in internal control over financial reporting Evaluation of Disclosure Controls and Procedures - The CEO and CFO concluded that the company's disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2022[180] - Control systems have inherent limitations, and management designs them to provide reasonable, not absolute, assurance[179] Changes in Internal Control Over Financial Reporting - There were no changes in internal control over financial reporting during the period covered by this report that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[181] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is not currently involved in any material legal proceedings - The company is not currently involved in any material legal proceedings, though it may be a party to legal proceedings in the ordinary course of business from time to time[183] Item 1A. Risk Factors There have been no material changes to risk factors previously disclosed in the 2021 Form 10-K - No material changes have occurred to the risk factors set forth in the company's 2021 Form 10-K[184] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reports no unregistered sales of equity securities or use of proceeds - There were no unregistered sales of equity securities or use of proceeds to report[185] Item 3. Defaults Upon Senior Securities The company reports no defaults upon senior securities during the period - There were no defaults upon senior securities to report[186] Item 4. Mine Safety Disclosures This item is not applicable to the company - Mine Safety Disclosures are not applicable to the company[187] Item 5. Other Information The company reports no other information required to be disclosed under this item - There was no other information to report[188] Item 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q - Exhibits include the Amended and Restated Loan and Security Agreement, the 2022 Executive Officer Compensation Plan, CEO/CFO certifications, and Inline XBRL Taxonomy documents[191] SIGNATURES The report is duly signed by the company's CEO and CFO on May 13, 2022 - The report was signed by Richard N. Grant, Jr., President and Chief Executive Officer, and Duncan Gilmour, Chief Financial Officer, Treasurer and Secretary, on May 13, 2022[195]