Intest Corp: Form 10-Q for the period ended Mar 31, 2024

Risk Factors and Forward-Looking Statements

In addition to historical information, this Quarterly Report on Form 10-Q for the period ended March 31, 2024 (this “Report”), including this management’s discussion and analysis (“MD&A”), contains statements that are considered "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. These statements do not convey historical information, but relate to predicted or potential future events, such as statements of our plans, strategies and intentions, or our future performance or goals, projections of revenue, taxable earnings (loss), net earnings (loss), net earnings (loss) per share, capital expenditures and other financial items, that are based on management’s current expectations and estimates. Our forward-looking statements can often be identified by the use of forward-looking terminology such as “believes,” “expects,” “may,” “could,” “will,” “should,” “plans,” “depending,” “forecasts,” “seeking,” “anticipates,” “goal,” “objective,” “target,” “estimates,” “future,” “strategy,” or variations of such words or similar terminology. Investors and prospective investors are cautioned that such forward-looking statements are only projections based on current expectations and estimates. These statements involve risks and uncertainties and are based upon various assumptions. These statements involve risks and uncertainties and are based upon various assumptions. Such risks and uncertainties include, but are not limited to:

• our ability to execute on our 5-Point Strategy;
• our ability to grow our presence in the automotive/electric vehicle (“EV”), life sciences, security, industrial and international markets;
• the possibility of future acquisitions or dispositions and the successful integration of any acquired operations;
• the success of our strategy to diversify our business by entering markets outside the semiconductor automated test equipment (“ATE”) market;
• indications of a change in the market cycles in the semiconductor (“semi”) market, or other markets we serve;
• developments and trends in the semi market, including changes in the demand for semiconductors;
• our ability to convert backlog to sales and to ship product in a timely manner;
• the loss of any one or more of our largest customers, or a reduction in orders by a major customer;
• the availability of materials used to manufacture our products;
• the impact of interruptions in our supply chain caused by external factors;
• the sufficiency of cash balances, lines of credit and net cash from operations;
• stock price fluctuations;
• the ability to borrow funds or raise capital to finance potential acquisitions or for working capital;
• changes in the rate of, and timing of, capital expenditures by our customers;
• effects of exchange rate fluctuations;
• progress of product development programs;
• the anticipated market for our products;
• our failure to effectively remediate the material weakness in our internal control over financial reporting that we have identified or our failure to develop and maintain a proper and effective system of disclosure controls and internal control over financial reporting;
• the availability of and retention of key personnel or our ability to hire personnel at anticipated costs;
• General economic conditions both domestically and globally; and
• other risk factors included in Part II, Item 1A – “Risk Factors” in this Report and in Part I, Item 1A - "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Form 10-K”).

These risks and uncertainties, among others, could cause our actual future results to differ materially from those described in our forward-looking statements or from our prior results. Any forward-looking statement made by us in this Report is based only on information currently available to us and speaks to circumstances only as of the date on which it is made. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Report to conform these statements to actual results or to changes in our expectations, except as required by law.

Overview

This MD&A should be read in conjunction with the accompanying consolidated financial statements. In addition, please refer to the discussion of our business and markets contained in Part 1, Item 1 of our 2023 Form 10-K.

We are a global supplier of innovative test and process technology solutions for use in manufacturing and testing across a wide range of markets including automotive, defense/aerospace, industrial, life sciences, security and semiconductor. We have three reportable segments which are also our reporting units: Electronic Test (which includes our semiconductor test equipment, flying probe and in-circuit testers and the operations of Alfamation S.p.A., (“Alfamation”) which we acquired on March 12, 2024 as discussed further below and in Note 3 to our consolidated financial statements in this Report), Environmental Technologies (which includes our thermal test, process and storage products) and Process Technologies (which includes our induction heating and video imaging products).

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

Markets

As discussed further in Part 1, Item 1 “Markets” of our 2023 Form 10-K, we are focused on specific target markets which include automotive, defense/aerospace, industrial, life sciences, security as well as both the front-end and back-end of the semiconductor manufacturing industry. The semi market, which includes both the broader semiconductor market, as well as the more specialized ATE and wafer production sectors within the broader semiconductor market, has historically been the largest single market in which we operate. The semi market is characterized by rapid technological change, competitive pricing pressures and cyclical market patterns and is subject to periods of significant expansion or contraction in demand. Our intention is to continue diversifying our markets, our product offerings within the markets we serve and our customer base across all of our markets with the goal of reducing our dependence on any one market, product or customer. In particular, we are seeking to reduce the impact of volatility in the semi market on our results of operations.

The portion of our business that is derived from the semi market is substantially dependent upon the demand for ATE by semiconductor manufacturers and companies that specialize in the testing of integrated circuits (“ICs”) and, for our induction heating products, the demand for wafer production equipment. Demand for ATE or wafer production equipment is primarily driven by semiconductor manufacturers that are opening new, or expanding existing, semiconductor fabrication facilities or upgrading equipment, which in turn is dependent upon the current and anticipated market demand for ICs and products incorporating ICs. Such market demand can be the result of market expansion, development of new technologies or redesigned products to incorporate new features, or the replacement of aging equipment.

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

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

As discussed further in Part I, Item 1 “Overview and Strategy” of our 2023 Form 10-K, although the semi market remains our largest market, as part of our strategy to grow our business, we are focused on several other key target markets where we believe our products address test and process requirements and where we believe there is significant potential for growth. These key target markets include the automotive, defense/aerospace, industrial, life sciences and security markets. We believe that these markets are usually less cyclical than the semi market. While market share statistics exist for some of these markets, due to the nature of our highly specialized product offerings in these markets, we do not expect broad market penetration in many of these markets and, therefore, do not anticipate developing meaningful market shares in most of these markets.

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

Acquisition

As discussed further in Note 3 to our consolidated financial statements in this Report, on March 12, 2024 we entered into a stock purchase agreement to acquire all of the outstanding capital shares of Alfamation, a leading global provider of state-of-the-art test and measurement solutions for the automotive, life sciences and specialty consumer electronics markets. Alfamation was founded in 1991 and is headquartered in Milan, Italy. Alfamation also has a small sales and service subsidiary based in Suzhou City, China. Alfamation is included in our Electronic Test operating segment. The aggregate purchase price was approximately EUR 20 million comprised of EUR 18 million in cash, or $19.0 million, and 187,432 shares of our common stock valued at $2.1 million based on the closing price of our stock on the date of acquisition. The cash portion of the purchase price is subject to customary working capital adjustments. We currently expect this to result in an additional payment of EUR 542,000, or $593,000 for assets delivered at closing in excess of agreed upon thresholds. On the closing date, this equated to a total purchase price of approximately $22.4 million. The liabilities assumed in connection with the acquisition included debt of approximately EUR 8.6 million, or $9.4 million. The debt assumed is discussed further in Note 10 to our consolidated financial statements in this Report.

In connection with the acquisition, on March 12, 2024 we entered into a lease agreement (the “Lease Agreement”) with the former owner of Alfamation who will continue to serve as the managing director of Alfamation under our ownership. The Lease Agreement will last for six years and will be automatically renewed for the same period of time unless terminated by either party. Under the terms of the Lease Agreement, Alfamation will lease warehouse and office space totaling about 51,817 square feet. Alfamation will pay a yearly lease payment of EUR 260,000 broken up into two equal payments. At the date of the signing of the Lease Agreement, the yearly lease payment equated to approximately $284,000.

Revenue

The following table sets forth, for the periods indicated, a breakdown of revenue by market (in thousands).

Total consolidated revenue for the three months ended March 31, 2024 was $29.8 million compared to $31.9 million for the same period in 2023 and $27.9 million for the three months ended December 31, 2023. The decrease in revenue for the first quarter of 2024 as compared to the same period in 2023 primarily reflects weak demand from semi, which was partially offset by an increase in revenue from the industrial and auto/EV markets. Revenue from the auto/EV market in the first quarter of 2024 includes $1.4 million from Alfamation which we acquired on March 12, 2024, as previously discussed. As discussed in the Overview, the semi market is highly cyclical resulting in significant swings in demand when period to period comparisons are to different points in a given cycle. As compared to the fourth quarter of 2023, the first quarter of 2024 reflects improved demand from semi, although this was partially offset by weakness from our customers in the industrial market.

Orders and Backlog

We use orders and backlog as key performance metrics to analyze and measure our financial performance and results of operations. We define orders as purchase orders that we have accepted from our customers. Orders are recorded based on the date received and accepted by us. We believe tracking orders is useful in planning for future production needs and staffing levels and we use information about the level of our orders to make decisions about resource allocation, including appropriate levels of inventory purchases and the balance of inventory we carry at any given time. Another important operational measure used is backlog. Backlog is a common measurement used in industries with extended lead times for order fulfillment, like those in which we operate. Backlog at any given date represents the amount of revenue that we expect to realize for unfilled orders received as of that date. We believe backlog is useful and use this information for similar reasons to those detailed above for orders. The majority of our backlog at any given time is expected to be fulfilled within the next twelve months. Depending on the terms of the purchase orders we have accepted, customers may have the ability to cancel an order or accelerate or postpone currently scheduled delivery dates. In some cases, we may have the ability to charge a cancellation fee if a purchase order we have accepted is later cancelled by a customer. Given that both orders and backlog are operational measures and our methodology for calculating orders and backlog do not meet the definition of a non-GAAP measure, as that term is defined by the SEC, a quantitative reconciliation for each is not required or provided.

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

Total consolidated orders for the three months ended March 31, 2024 were $22.8 million compared to $30.8 million for the same period in 2023 and $27.5 million for the three months ended December 31, 2023. The decreases primarily represent the aforementioned decline in demand from semi in the first quarter of 2024 as compared to both the first and fourth quarters of 2023. As previously discussed, the semi market continues to be in a period of reduced demand which we believe primarily reflects the typical cyclicality of this industry. In addition, in the first quarter of 2024, we experienced declines in several of the other markets we serve, which we believe primarily reflects the timing of receipt of orders. Orders are often placed by our customers in large blocks with the associated delivery schedules allocated in smaller amounts over several quarters which can result in significant variation in total order levels from quarter to quarter. Our orders from the auto/EV market for the first quarter of 2024 include $1.8 million from Alfamation.

At March 31, 2024, our backlog of unfilled orders for all products was approximately $55.5 million compared with approximately $45.7 million at March 31, 2023 and $40.1 million at December 31, 2023. Our backlog at March 31, 2024 includes $22.8 million of backlog for Alfamation. Our backlog includes customer orders that we have accepted, substantially all of which we expect to deliver in 2024. While backlog is calculated on the basis of firm purchase orders, a customer may cancel an order or accelerate or postpone currently scheduled delivery dates. Our backlog may be affected by the tendency of customers to rely on short lead times available from suppliers, including us, in periods of depressed demand. In periods of increased demand, there is a tendency towards longer lead times that has the effect of increasing backlog. As a result, our backlog at a particular date is not necessarily indicative of sales for any future period.

Israel-Hamas War, War in Ukraine and Global Supply Chain Constraints

In early October 2023, Hamas attacked Israel and Israel formally declared war in response to the attack. The conflict is ongoing, and it is unclear when it might end. Ambrell has a sole source supplier of capacitors used in certain of our induction heating products that is located in Israel. This supplier is the sole source supplier of capacitors for numerous induction companies, and currently there are no viable alternatives available. We have been in frequent contact with our supplier since the conflict with Hamas began. We maintain a two-to-three month safety stock on these items. Our supplier has indicated that they have large stock available at more than one facility in Israel, so they believe they have redundancies in place that will help ensure that the supply chain to their customers is uninterrupted. We continue to monitor the situation closely and are staying in close contact with our supplier. However, there can be no assurance that the situation will not worsen which could impact our ability to ship certain of our induction heating products which could have a material impact on our future results of operations.

The ongoing war between Russia and Ukraine continues to contribute to global inflationary pressures and the availability of certain raw materials produced in that region, further exacerbating global supply chain challenges that emerged after the onset of the COVID-19 pandemic. Acculogic purchases certain material from a key sole-source supplier in Belarus, which is bordered by Russia to the east and northeast and Ukraine to the south. At present, we are still receiving shipments from this supplier, and we estimate that we have a six-to-nine-month supply of these parts that we are maintaining. We are currently in the process of qualifying an alternate supplier for these parts. We received prototype sample parts from the alternate supplier which we are now evaluating. We expect to complete this evaluation by the third quarter of 2024.

In addition, while the supply chain and logistics challenges that we encountered throughout 2022 have eased and conditions appear to have stabilized, uncertainty in the global trade environment and the possibility of future global health or other crises remain. As a result, we expect that we may continue to experience increased prices, lack of availability and logistics delays from time to time for the foreseeable future. The actions we have taken and are continuing to take to mitigate these risks include qualifying new vendors as alternate sources in our supply chain, increasing our inventory of raw materials and ordering further in advance of when we expect to need materials than has been our practice in the past. We have also increased the prices that we charge our customers, where appropriate, and continue to work with our customers to find alternate options for the shipment of products where they control aspects of the logistics process. However, the environment in which we operate is dynamic and shifts rapidly at times, and the success of our efforts to mitigate and address the impacts on our business may not be successful. As a result, we could see increases in our costs or reduced revenues which would impact the level of our earnings in future periods.

Please refer to Part 1, Item 1A of our 2023 Form 10-K for further discussion of the risks associated with our business operations, including risks associated with foreign operations.

Results of Operations

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

Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023

Revenue. Revenue was $29.8 million for the three months ended March 31, 2024 compared to $31.9 million for the same period in 2023, a decrease of $2.1 million, or 7%. We believe the decrease in our revenue during the first quarter of 2024 reflects the factors previously discussed in the Overview section.

Gross Margin. Our consolidated gross margin was 44% of revenue for the three months ended March 31, 2024 as compared to 47% of revenue for the same period in 2023. The decrease in our gross margin primarily reflects that our fixed operating costs were not as fully absorbed by the lower revenue levels in the first quarter of 2024 as compared to the same period in 2023. To a lesser extent, the absolute dollar value of our fixed operating costs increased $524,000 as compared to the same period in 2023. Alfamation accounted for approximately $288,000 of our fixed operating costs during the first quarter of 2024. The remainder of the increase in our fixed operating costs primarily reflects higher salary and benefits expense.

Selling Expense. Selling expense was $4.6 million for the three months ended March 31, 2024 compared to $4.5 million for the same period in 2023, an increase of $135,000 or 3%. Alfamation accounted for approximately $216,000 of our selling expense during the first quarter of 2024. For the balance of our business, declines in commission expense reflecting the lower revenue levels in 2024 were partially offset by increased salary and benefits expense.

Engineering and Product Development Expense. Engineering and product development expense was $2.0 million for the three months ended March 31, 2024 compared to $1.9 million for the same period in 2023, an increase of $78,000 or 4%. Alfamation had relatively insignificant engineering expense for the period from March 13 to March 31, 2024. In the balance of our business, there were increases in salary and benefits expense and material used in product development projects in the first quarter of 2024 as compared to the same period in 2023.

General and Administrative Expense. General and administrative expense was $6.0 million for the three months ended March 31, 2024 compared to $5.2 million for the same period in 2023 an increase of $837,000, or 16%. Alfamation accounted for approximately $231,000 of our general and administrative expense during the first quarter of 2024. The increase in the balance of our business primarily represents higher costs associated with corporate development activities and compliance with regulatory requirements related to our status as a public company and our transition to an accelerated filer.

Income Tax Expense. For the three months ended March 31, 2024, we recorded income tax expense of $125,000 compared to income tax expense of $577,000 for the same period in 2023. Our effective tax rate was 16% for the three months ended March 31, 2024 compared to 17% for the same period in 2023. On a quarterly basis, we record income tax expense or benefit based on the expected annualized effective tax rate for the various taxing jurisdictions in which we operate our businesses.

Liquidity and Capital Resources

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

Our primary historical source of liquidity and capital resources has been cash flow generated by our operations. In 2021, we also utilized our Credit Facility, which is discussed below, to fund our acquisitions. We manage our businesses to maximize operating cash flows as our primary source of liquidity for our short-term cash requirements, as discussed below. We use cash to fund growth in our operating assets, for new product research and development, for acquisitions and for stock repurchases. We currently anticipate that any additional long-term cash requirements related to our strategy would be funded through a combination of our cash and cash equivalents, our Credit Facility or by issuing equity.

Proceeds from Sale of Common Stock

On May 11, 2023, we entered into an At-the-Market Issuance Sales Agreement (the "Sales Agreement") pursuant to which we issued and sold 921,797 shares of our common stock having an aggregate offering price of $20.0 million between May 11, 2023 and May 31, 2023. We received net proceeds from the sale of these shares of $19.2 million after payment of commissions of 3.0% of the gross proceeds and other fees related to the sale of these shares.

Credit Facility

As discussed in Note 10 to our consolidated financial statements in this Report, on October 15, 2021, we entered into the Loan Agreement with M&T. The Loan Agreement includes a $25 million non-revolving delayed draw term note (the “Term Note”) and a $10 million revolving credit facility (the “Revolving Facility and together with the Term Note, the “Credit Facility”). The Credit Facility had a five-year contract period that began on the Closing Date and expired on October 15, 2026, and draws under the Term Note were permissible for two years.

On September 20, 2022, we further amended the Loan Agreement by entering into a Third Amendment to Amended and Restated Loan and Security Agreement (the Loan Agreement as amended by the Third Amendment, the “Third Amended Loan Agreement”) and the Third Amended and Restated Delayed Draw Term Note 1A. Under the Third Amended Loan Agreement, the maximum loan amount that we may borrow under the Term Note increased from $25 million to $50.5 million, which raises the available funding at March 31, 2024 to $30 million. On May 2, 2024 we further amended our Third Amended Loan Agreement by entering into a Fourth Amendment to the Amended and Restated Loan and Security Agreement (the “Amended Loan Agreement”). Under the Amended Loan Agreement, the period during which we may request advances under the Term Note is extended until May 2, 2026, and the Term Note and revolving credit facility maturity date is extended from September 19, 2027 to May 2, 2031. At March 31, 2024, we had not borrowed any amounts under the $10 million Revolving Facility. Our borrowings under the Term Note are discussed below and occurred prior to entering into the Amended Loan Agreement. The principal balance of the Revolving Facility and the principal balance of any amount drawn under the Term Note accrues interest based on the Secured Overnight Financing Rate or a bank-defined base rate plus an applicable margin, depending on leverage. The Amended Loan Agreement includes customary affirmative, negative and financial covenants, including a maximum ratio of consolidated funded debt to consolidated EBITDA of not more than 3.0 to 1.0 and a fixed charge coverage ratio of not less than 1.25 to 1.0. Our obligations under the Amended Loan Agreement are secured by liens on substantially all of our tangible and intangible assets. At March 31, 2024, we were in compliance with all of the covenants included in the Credit Facility.

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

On December 29, 2021, we drew $8.5 million under the Term Note to finance the acquisition of Acculogic. We did not enter into an interest rate swap agreement with M&T related to this draw. The annual interest rate we expect to pay for this draw under the Term Note is variable. At March 31, 2024, it was approximately 7.4% based on current leverage.

Alfamation Debt

At March 31, 2024, the total debt assumed in connection with the acquisition of Alfamation was valued at $9.4 million. The acquisition is discussed further in Note 3 to our consolidated financial statements in this Report and the debt is discussed further in Note 10 to our consolidated financial statements in this Report. This debt is comprised of both fixed and variable rate bank issued term loans as well as $2.1 million of short-term variable rate financing backed by Alfamation’s accounts receivable. This debt is spread across a number of different institutions with monthly, quarterly or half-yearly repayment schedules. The average interest rate being paid at March 31, 2024 was 1.9% for fixed rate debt and 5.0% for variable rate debt. The average rate for total debt at March 31, 2024 was 4.0%.

Total interest expense from all of our debt for the three months ended March 31, 2024 and 2023 was $140,000 and $182,000, respectively.

Liquidity

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

As of March 31, 2024, $6.9 million, or 25% of our cash and cash equivalents was held by our foreign subsidiaries. We currently expect our cash and cash equivalents, in combination with the borrowing capacity available under our Revolving Facility and the anticipated net cash to be provided by our operations in the next twelve months to be sufficient to support our short-term working capital requirements and other corporate requirements. Our Revolving Facility is discussed in Note 10 to our consolidated financial statements in this Report.

Our material short-term cash requirements include payments due under our various lease agreements, recurring payroll and benefits obligations to our employees, purchase commitments for materials that we use in the products we sell and principal and interest payments on our debt. We anticipate making investments in our business in the next twelve months including hiring of additional staff, updates to our systems and investments related to our geographic and market expansion efforts. We estimate that our minimum short-term working capital requirements currently range between $8.0 million and $10.0 million. We expect our current cash and cash equivalents, in combination with the borrowing capacity available under our Revolving Facility and the anticipated net cash to be provided by our operations to be sufficient to support these additional investments as well as our current short-term cash requirements.

Our current strategy for growth includes pursuing acquisition opportunities for complementary businesses, technologies or products. As previously discussed, we currently anticipate that any additional long-term cash requirements related to our strategy would be funded through a combination of our cash and cash equivalents, the remaining availability under the Term Note or by issuing equity. The borrowing availability under the Term Note was expanded in September 2022 as discussed above and in Note 10 to our consolidated financial statements in this Report.

Cash Flows

Operating Activities. For the three months ended March 31, 2024, we recorded net earnings of $662,000. Net cash provided by operations during this period was $2.1 million. During the three months ended March 31, 2024, we had non-cash charges of $1.3 million for depreciation and amortization which included $403,000 of amortization related to our ROU assets. Our operating lease liabilities declined $447,000 during this same period. During the three months ended March 31, 2024, we recorded $349,000 for amortization of deferred compensation expense related to stock-based awards. During the first quarter of 2024, accounts receivable increased $982,000, inventories increased $396,000 and prepaid expenses and other current assets declined $508,000. During this same period, accrued wages and benefits increased $939,000 while customer deposits and deferred revenue (including deferred revenue, net of current portion) declined $782,000. All of these fluctuations represent normal variations due to varying timing of payments, receipt of cash from customers and normal accruals that are standard in our business operations.

Investing Activities. During the three months ended March 31, 2024, we paid $18.9 million in net cash for the acquisition of Alfamation which is discussed in more detail in Note 3 to our consolidated financial statements in this Report. Purchases of property and equipment were $340,000, during this period, representing capital expenditures in the normal course of business. We have no significant commitments for capital expenditures for the balance of 2024; however, depending upon changes in market demand or manufacturing and sales strategies, we may make such purchases or investments as we deem necessary and appropriate. These additional cash requirements would be funded by our cash and cash equivalents, anticipated net cash to be provided by operations and our revolving credit facility.

Financing Activities. During the three months ended March 31, 2024, we had borrowings under Alfamation’s short-term borrowing arrangements of $273,000 and made principal payments on our long-term debt totaling $1.2 million. There were no other significant amounts used by or received from financing activities during the quarter.

New or Recently Adopted Accounting Standards

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

Critical Accounting Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to inventories, long-lived assets, goodwill, identifiable intangibles, contingent consideration liabilities and deferred income tax valuation allowances. We base our estimates on historical experience and on appropriate and customary assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Some of these accounting estimates and assumptions are particularly sensitive because of their significance to our consolidated financial statements and because of the possibility that future events affecting them may differ markedly from what had been assumed when the financial statements were prepared. As of March 31, 2024, there have been no significant changes to the accounting estimates that we have deemed critical. Our critical accounting estimates are more fully described in our 2023 Form 10-K.

Off -Balance Sheet Arrangements

There were no off-balance sheet arrangements during the three months ended March 31, 2024 that have or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our interests.

Market Risks

We are exposed to certain market risks as part of our ongoing business operations, including concentration of credit risk and risks from foreign currency exchange rate and interest rate fluctuations. These risks could adversely affect our consolidated financial position, results of operations or cash flows. We manage these risks through ongoing operating and monitoring activities.

Concentration of Credit Risk. Financial instruments which potentially subject us to concentrations of credit risk consist principally of cash equivalents and accounts receivable. Our domestic cash equivalents consist primarily of money market funds invested in U.S. Treasuries and government agencies. At March 31, 2024, we also had approximately $6.9 million, or 25% of our cash that was held by our foreign subsidiaries in accounts at local banks. Concentrations of credit risk with respect to accounts receivable are limited due to the large number of geographically dispersed customers. We grant credit to customers and generally require no collateral. Although we do not currently foresee a significant credit risk associated with the outstanding accounts receivable, repayment is dependent upon the financial stability of our customers. To minimize our risk, we perform ongoing credit evaluations of our customers' financial condition. There were no customers who accounted for more than 10% of our accounts receivable balance as of March 31, 2024.

Exchange Rate Risk Management. We have operations in several foreign countries and subsidiaries who report their results in a functional currency other than the U.S. dollar but invoice the majority of their customers in U.S. dollars. For the three months ended March 31, 2024 and 2023, sales transacted in foreign currencies accounted for approximately 22% and 14%, respectively of our consolidated revenue. This exposes us to the risk of incurring both realized and unrealized exchange gains and losses. We do not currently use derivatives to manage this risk. The most significant risk we face is related to accounts receivable that are denominated in U.S. dollars for transactions that are recorded in the local currency of the operation. At March 31, 2024, we had approximately 15% of our accounts receivable denominated in U.S. dollars but recorded in the local currency of the operation. We do maintain bank accounts in most of our foreign locations that can receive and hold U.S. dollars.

Interest Rate Risk Management. We are exposed to potential losses due to changes in interest rates. Our interest rate exposure is primarily related to short-term and long-term debt where the interest rates are variable. At March 31, 2024, we had an aggregate of $20.4 million in short-term and long-term debt, of which approximately 55% had variable rates, including $4.8 million under the Term Note portion of the Credit Facility.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the Exchange Act of 1934, as amended, (the “Exchange Act”). Because there are inherent limitations in all control systems, a control system, no matter how well conceived and operated, can provide only reasonable, as opposed to absolute, assurance that the objectives of the control system are met. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Our management, including the CEO and CFO, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all error and all fraud. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Accordingly, our management has designed the disclosure controls and procedures to provide reasonable assurance that the objectives of the control system were met.

CEO/CFO Conclusions about the Effectiveness of the Disclosure Controls and Procedures

As required by Rule 13a-15(b) of the Exchange Act, inTEST management, including our CEO and CFO, conducted an evaluation as of the end of the period covered by this Report, of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our CEO and CFO concluded that, as of the end of the period covered by this Report, our disclosure controls and procedures were not effective at the reasonable assurance level.

Our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of March 31, 2024 because of the material weakness in our internal control over financial reporting described below. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected in a timely basis. The identified material weakness contributed to the restatements of our financial statements for the three and nine months ended September 30, 2023.

Management has determined that the Company had the following material weakness in its internal control over financial reporting:

• We did not appropriately design and implement controls over 1) the identification of and 2) the application of appropriate U.S. GAAP for transactions related to the procurement and sale of discontinued material/components purchased on behalf of customers where the associated materials/components were still physically located with us and the materials/components are expected to be applied to future product orders for these customers.

This material weakness contributed to material misstatements in our consolidated financial statements for the three and nine months ended September 30, 2023, which have been corrected and restated in our Amendment No. 1 to our Quarterly Report on Form 10-Q for the period ended September 30, 2023. Accordingly, management has concluded that this control deficiency constitutes a material weakness.

Remediation Efforts

Management is developing a remediation plan to address the material weakness discussed above. Remediation will not occur until the plan is implemented and there has been appropriate time for us to conclude through testing that the control operates effectively.

Changes in Internal Control Over Financial Reporting

As described above, we are in the process of implementing changes to our internal control over financial reporting to remediate the material weaknesses described herein. Other that these changes, there has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this Report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Information regarding the primary risks and uncertainties that could materially and adversely affect our future performance or could cause actual results to differ materially from those expressed or implied in our forward-looking statements, appears in Part I, Item 1A - "Risk Factors" of our 2023 Form 10-K filed with the Securities and Exchange Commission on March 27, 2024. There have been no material changes from the risk factors set forth in our 2023 Form 10-K.