What changed in this filing

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Item 1. Financial Statements

2020-11-12 compared with 2020-08-11 · 112 added, 96 removed, 301 unchanged (41% of the section changed)

1 unchanged sentence

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(IN THOUSANDS, EXCEPT SHARE DATA)

THREE MONTHS ENDED

SIX MONTHS ENDED

NINE MONTHS ENDED

SEPTEMBER 30,

Cost of Goods Sold

2 unchanged sentences

General and Administrative Expenses

Gain on Sale of Property and Equipment

Total Operating Expenses

2 unchanged sentences

Interest Expense

(Loss) Income Before Income Taxes

Income Tax (Benefit) Expense

Net (Loss) Income

Net (Loss) Income Per Common Share - Basic

Weighted Average Number of Common Shares Outstanding - Basic

Net (Loss) Income Per Common Share - Diluted

Weighted Average Number of Common Shares Outstanding - Diluted

Other comprehensive loss

Income (Loss) Before Income Taxes

Income Tax Expense

Net Income (Loss)

Net Income (Loss) Per Common Share:

Basic (in dollars per share)

Weighted Average Number of Common Shares Outstanding - Basic (in shares)

Diluted (in dollars per share)

Weighted Average Number of Common Shares Outstanding - Diluted (in shares)

Other comprehensive income (loss)

Foreign currency translation

Comprehensive Loss, net of tax

Comprehensive income (loss), net of tax

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

2 unchanged sentences

(IN THOUSANDS, EXCEPT SHARE DATA)

SEPTEMBER 30,

Current Assets

14 unchanged sentences

Accrued Payroll and Commissions

Customer Deposits

Income Tax Payable

Other Accrued Liabilities

8 unchanged sentences

Total Liabilities

Commitments and Contingencies

Shareholders' Equity

4 unchanged sentences

9,000,000 Shares Authorized:

2,657,530 and 2,657,530 Shares Issued and Outstanding, respectively

2,657,530 Shares Issued and Outstanding

Additional Paid-In Capital

8 unchanged sentences

(IN THOUSANDS)

SIX MONTHS ENDED

NINE MONTHS ENDED

SEPTEMBER 30,

Cash Flows From Operating Activities

1 unchanged sentence

Adjustments to Reconcile Net Income (Loss) to Net Cash

Provided by (Used In) Operating Activities

Used In Operating Activities

Depreciation and Amortization

Compensation on Stock-Based Awards

Compensation on Stock-Based & Equity Awards

Deferred Taxes

Change in Accounts Receivable Allowance

Change in Inventory Reserves

Gain on Disposal of Property and Equipment

Changes in Current Operating Items

5 unchanged sentences

Other Accrued Liabilities

Net Cash Provided by (Used in) Operating Activities

Net Cash Used in Operating Activities

Cash Flows from Investing Activities

Proceeds from Sale of Property and Equipment

Purchase of Intangible Asset

Purchases of Property and Equipment

Net Cash Used in Investing Activities

Net Cash Provided By (Used In) Investing Activities

Cash Flows from Financing Activities

6 unchanged sentences

Net Cash (Used In) Provided By Financing Activities

Effect of Exchange Rate Changes on Cash

Net Change in Cash

6 unchanged sentences

Cash Paid During the Period for Interest

Cash Paid and (Refunded) During the Period for Income Taxes

Cash Paid (Refunded) During the Period for Income Taxes

Supplemental Noncash Investing and Financing Activities:

7 unchanged sentences

Shareholders'

BALANCE MARCH 31, 2019

BALANCE JUNE 30, 2019

Cumulative Adjustment

Foreign currency translation adjustment

1 unchanged sentence

Share repurchases

BALANCE JUNE 30, 2019

BALANCE SEPTEMBER 30, 2019

BALANCE DECEMBER 31, 2018

Cumulative Adjustment

Foreign currency translation adjustment

2 unchanged sentences

Share repurchases

BALANCE SEPTEMBER 30, 2019

BALANCE JUNE 30, 2020

BALANCE MARCH 31, 2020

Foreign currency translation adjustment

Compensation on stock-based awards

BALANCE JUNE 30, 2020

Share repurchases

BALANCE SEPTEMBER 30, 2020

BALANCE DECEMBER 31, 2019

Foreign currency translation adjustment

Stock option exercises

Compensation on stock-based awards

BALANCE JUNE 30, 2020

Share repurchases

BALANCE SEPTEMBER 30, 2020

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

23 unchanged sentences

Stock-Based Awards

Following is the status of all stock options as of June 30, 2020:

Following is the status of all stock options as of September 30, 2020:

Intrinsic Value

1 unchanged sentence

Outstanding - January 1, 2020

Outstanding - June 30, 2020

Exercisable - June 30, 2020

In May 2017, the shareholders approved the 2017 Stock Incentive Plan which authorized the issuance of 400,000 shares, an additional 50,000 shares were authorized in March 2020.

There were 11,300 stock options granted during the six months ended June 30, 2020.

Total compensation expense related to stock options for the three months ended June 30, 2020 and 2019 was $36 and $38, respectively and $75 and $191 for the six months ended June 30, 2020 and 2019, respectively.

As of June 30, 2020, there was $292 of unrecognized compensation which will vest over the next 2.69 years.

Outstanding - September 30, 2020

Exercisable - September 30, 2020

In May 2017, the shareholders approved the 2017 Stock Incentive Plan which has authorized the issuance of 400,000 shares including an additional 50,000 shares authorized in March 2020.

There were 11,300 stock options granted during the nine months ended September 30, 2020.

Total compensation expense was $36 and $35 for the three months ended September 30, 2020 and 2019, respectively, and $111 and $226 for the nine months ended September 30, 2020 and 2019, respectively.

As of September 30, 2020, there was $260 of unrecognized compensation which will vest over the next 2.39 years.

In November 2010, the Board of Directors adopted the Nortech Systems Incorporated Equity Appreciation Rights Plan (“2010 Plan”).

The total number of Equity Appreciation Right Units (“Units”) that can be issued under the 2010 Plan shall not exceed an aggregate of 1,000,000 Units as amended and restated on March 11, 2015.

During the six months ended June 30, 2019, there were 137,500 units granted.

There were no units granted during the six months ended June 30, 2020.

During the nine months ended September 30, 2019, there were 137,500 Units granted.

There were no Units granted during the nine months ended September 30, 2020.

Total compensation expense related to the vested outstanding Units based on the estimated appreciation over their remaining terms was approximately $40 for both the three and nine months ended September 30, 2020 and no expense in the three and nine months ended September 30, 2019.

The total long-term liability recorded for the Units at September 30, 2020 is $40.

Net Income (Loss) per Common Share

For the three months ended June 30, 2020, all stock options are deemed to be antidilutive and therefore, were not included in the computation of incomer per common share amount.

For the six months ended June 30 ,2020, stock options of 9,002 were included in the computation of diluted income per common share amount as their impact were dilutive.

For both the three months and six months ended June 30, 2019, all stock options are deemed to be antidilutive and, therefore, were not included in the computation of loss per common share amount.

For the three and nine months ended September 30 ,2020, stock options of 45,326 and 21,110, respectively, were included in the computation of diluted income per common share amount as their impact were dilutive.

For both the three months and nine months ended September 30, 2019, all stock options were deemed to be antidilutive and, therefore, were not included in the computation of income per common share amount.

Restricted Cash

Cash and cash equivalents classified as restricted cash on our condensed consolidated balance sheets are restricted as to withdrawal or use under the terms of certain contractual agreements.

The June 30, 2020 balance included lockbox deposits that are temporarily restricted due to timing at the period end.

The September 30, 2020 balance included lockbox deposits that are temporarily restricted due to timing at the period end.

The lockbox deposits are applied against our line of credit the next business day.

As of June 30, 2020, we had no outstanding letters of credit.

As of September 30, 2020, we had outstanding letters of credit for $500 in total to Essjay Bemidji Holdings, LLC and Essjay Mankato Holdings, LLC.

Accounts Receivable and Allowance for Doubtful Accounts

1 unchanged sentence

Credit terms are consistent with industry standards and practices.

The amounts of trade accounts receivable have been reduced by an allowance for doubtful accounts of $391 at June 30, 2020 and $335 at December 31, 2019.

Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value.

The amounts of trade accounts receivable have been reduced by an allowance for doubtful accounts of $493 at September 30, 2020 and $335 at December 31, 2019.

Inventories are stated at the lower of cost (average cost method) or net realizable value.

Costs include material, labor, and overhead required in the warehousing and production of our products.

Inventory reserves are maintained for the estimated value of the inventories that may have a lower value than stated or quantities in excess of future production needs.

Inventories are as follows (in thousands):

Inventories are as follows:

September 30,

Raw Materials

1 unchanged sentence

Finished Goods

Other Intangible Assets

Other intangible assets at June 30, 2020 and December 31, 2019 are as follows (in thousands):

June 30, 2020

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation.

Additions, improvements and major renewals are capitalized, while maintenance and minor repairs are expensed as incurred.

When assets are retired or disposed of, the assets and related accumulated depreciation are removed from the accounts and the resulting gain or loss is reflected in operations.

Leasehold improvements are depreciated over the shorter of their estimated useful lives or their remaining lease terms.

All other property and equipment are depreciated by the straight-line method over their estimated useful lives.

In the three months ended September 30, 2020, we closed on a sale and leaseback agreement with Essjay Investment Company, LLC (“Essjay”) relating to the Company’s manufacturing facilities in Bemidji and Mankato, Minnesota.

The Company received net proceeds from the sale, excluding closing costs, of approximately $6,019 and recorded a gain on sale of property of equipment of $3,821.

The Company entered into lease agreements for the Bemidji, Minnesota facility and the Mankato, Minnesota facility for an initial 15-year term, with multiple 5-year renewal options.

See disclosure of leases in Note 5, Leases.

Other Intangible Asse ts

Other intangible assets at September 30, 2020 and December 31, 2019 are as follows:

September 30, 2020

Customer Relationships

3 unchanged sentences

Intellectual Property

Amortization expense for the three and six months ended June 30, 2020 was $47 and $98, respectively.

Amortization expense for the three and nine months ended September 30, 2020 was $47 and $145 respectively.

Estimated future annual amortization expense (not including projects in process) related to these assets is approximately as follows (in thousands):

3 unchanged sentences

We test impairment annually as of October 1 st .

No events were identified during the six months ended June 30, 2020 that would require us to test for impairment.

No events were identified during the nine months ended September 30, 2020 that would require us to test for impairment.

In testing goodwill for impairment, we perform a quantitative impairment test, including computing the fair value of the reporting unit and comparing that value to its carrying value.

If the fair value is less than it carrying value, then the goodwill is determined to be impaired.

If the fair value is less than its carrying value, then the goodwill is determined to be impaired.

In the event that goodwill is impaired, an impairment charge to earnings would become necessary.

3 unchanged sentences

To the extent such projections indicate that future undiscounted cash flows are not sufficient to recover the carrying amounts of related assets, a charge might be required to reduce the carrying amount to equal estimated fair value.

No impairment expense was recorded during the three and six months ended June 30, 2020 and 2019.

No impairment expense was recorded during the three and nine months ended September 30, 2020 and 2019, respectively.

Accounting Pronouncements Issued But Not Yet Adopted

14 unchanged sentences

The account in the United States may at times exceed federally insured limits.

Of the $754 in cash at June 30, 2020, approximately $318 was held at banks located in China.

Of the $1,694 in cash at September 30, 2020, approximately $244 was held at banks located in China.

We grant credit to customers in the normal course of business and do not require collateral on our accounts receivable.

Our largest customer has two divisions that together accounted for 10% or more of our net sales during the three and six months ended June 30, 2020 and 2019.

One division accounted for approximately 20% and 22% of net sales for the three and six months ended June 30, 2020, respectively, and approximately 21% and 22% for both the three and six months ended June 30, 2019, respectively.

The other division accounted for approximately 3% and 2% of net sales for the three months and six ended June 30, 2020, respectively, and approximately 2% net sales for both the three and six months ended June 30, 2019, respectively.

Together they accounted for approximately 23% and 24% of net sales for the three and six months ended June 30, 2020, respectively, and approximately 23% and 24% of net sales for the three and six months ended June 30, 2019, respectively.

Accounts receivable from the customer at June 30, 2020 and December 31, 2019 represented approximately 40% and 36% of our total accounts receivable, respectively.

Export sales represented approximately 9% and 17% of net sales for the three months ended June 30, 2020 and 2019, respectively.

Export sales represented 11% and 18% of net sales for the six months ended June 30, 2020 and 2019, respectively.

Our largest customer has two divisions that together accounted for 10% or more of our net sales during the three and nine months ended September 30, 2020 and 2019.

One division accounted for approximately 20% and 21% of net sales for the three and nine months ended September 30, 2020, respectively, and approximately 19% and 21% for the three and nine months ended September 30, 2019, respectively.

The other division accounted for approximately 3% of net sales for both the three months and nine months ended September 30, 2020, and approximately 3% net sales for the three and nine months ended September 30, 2019.

Together they accounted for approximately 23% and 24% of net sales for the three and nine months ended September 30, 2020, respectively, and approximately 22% and 24% of net sales for both the three and nine months ended September 30, 2019, respectively.

Accounts receivable from the customer at September 30, 2020 and December 31, 2019 represented approximately 37% and 36% of our total accounts receivable, respectively.

Export sales represented approximately 9% of net sales for both the three months ended September 30, 2020 and 2019.

Export sales represented 10% and 15% of net sales for the nine months ended September 30, 2020 and 2019, respectively.

Revenue recognition

11 unchanged sentences

If these requirements are not met, the revenue is recognized at a point in time, generally upon shipment.

Revenue under contract manufacturing agreements that was recognized over time accounted for approximately 84.6% and 86.1% of our revenue for both the three and six months ended June 30, 2020, respectively.

Revenue under contract manufacturing agreements that was recognized over time accounted for approximately 80% and 84% of our revenue for the three and nine months ended September 30, 2020, respectively.

Revenues under these agreements are generally recognized over time using an input measure based upon the proportion of actual costs incurred.

6 unchanged sentences

Contract Assets

Contract assets, recorded as such in the Condensed Consolidated Balance Sheet, consist of unbilled amounts related to revenue recognized over time.

Significant changes in the contract assets balance during the six months ended June 30, 2020 was as follows (in thousands):

Six Months Ended June 30, 2020

Contract assets, recorded as such in the Condensed Consolidated Balance Sheets, consist of unbilled amounts related to revenue recognized over time.

Significant changes in the contract assets balance during the nine months ended September 30, 2020 was as follows:

Nine Months Ended September 30, 2020

Outstanding at January 1, 2020

2 unchanged sentences

Product transferred over time

Outstanding at June 30, 2020

We expect substantially all the remaining performance obligations for the contract assets recorded as of June 30, 2020, to be transferred to receivables within 90 days, with any remaining amounts to be transferred within 180 days.

Outstanding at September 30, 2020

We expect substantially all the remaining performance obligations for the contract assets recorded as of September 30, 2020, to be transferred to receivables within 90 days, with any remaining amounts to be transferred within 180 days.

We bill our customers upon shipment with payment terms of up to 120 days.

The following tables summarize our net sales by market for the three and six months ended June 30 (in thousands):

Three Months Ended June 30, 2020

The following tables summarize our net sales by market for the three and nine months ended September 30, 2020:

Three Months Ended September 30, 2020

Product/ Service

5 unchanged sentences

Total net sales

Three Months Ended June 30, 2019

Three Months Ended September 30, 2019

Product/ Service

5 unchanged sentences

Total net sales

Six Months Ended June 30, 2020

Nine Months Ended September 30, 2020

Product/ Service

5 unchanged sentences

Total net sales

Six Months Ended June 30, 2019

Nine Months Ended September 30, 2019

Product/ Service

9 unchanged sentences

Under the Bank of America credit agreement, both the line of credit and real estate term notes are subject to variations in the LIBOR rate.

Our line of credit bears interest at a weighted-average interest rate of 3.2% and 5.8% as of June 30, 2020 and 2019, respectively.

We had borrowings on our line of credit of $4,392 and $10,088 outstanding as of June 30, 2020 and December 31, 2019, respectively.

Our line of credit bears interest at a weighted-average interest rate of 3.7% and 5.4% as of September 30, 2020 and 2019, respectively.

We had borrowings on our line of credit of $2,546 and $10,088 outstanding as of September 30, 2020 and December 31, 2019, respectively.

There are no subjective acceleration clauses under the credit agreement that would accelerate the maturity of our outstanding borrowings.

2 unchanged sentences

The line of credit is secured by substantially all of our assets.

At September 30, 2020, we had unused availability under our line of credit of $8,640, supported by our borrowing base.

The Bank of America Credit Agreement provides for, among other things, a Fixed Charge Coverage Ratio of not less than (i) 1.0 to 1.0, for the three months ending December 31, 2019, six months ending March 31, 2020, nine months ending June 30, 2020 and twelve months ending September 30, 2020 and each Fiscal Quarter end thereafter.

The Company met the covenants for the period ended June 30, 2020.

The availability under the line is subject to borrowing base requirements, and advances are at the discretion of the lender.

At June 30, 2020, we had unused availability under our line of credit of $8,311, supported by our borrowing base.

The line is secured by substantially all of our assets.

The Company met the covenants for the period ended September 30, 2020.

On April 15, 2020, we entered into a Promissory Note with Bank of America, N.A.

(the “Promissory Note”), which provides for an unsecured loan of $6,077 pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act and applicable regulations (the “CARES Act”) of which;

funds were received on April 22, 2020.

The Promissory Note has a term of 2 years with a 1% per annum interest rate.

2 unchanged sentences

Any principal and interest amounts outstanding after the determination of amounts forgiven will be repaid on a monthly basis.

Long-term debt at June 30, 2020 and December 30, 2019 consisted of following:

Real estate term notes bearing interest at one-month LIBOR + 2.25% (3.0% and 4.1% as of June 30, 2020 and December 31, 2019, respectively) maturing June 15, 2022 with monthly payments of approximately $41 plus interest secured by substantially all assets.

Long-term debt at September 30, 2020 and December 30, 2019 consisted of following:

September 30,

Real estate term notes bearing interest at one-month LIBOR + 2.25% (3.0% and 4.1% as of September 30, 2020 and December 31, 2019, respectively) maturing June 15, 2022 with monthly payments of approximately $41 plus interest secured by substantially all assets.

Promissory Note

7 unchanged sentences

Our leases do not contain any material residual value guarantees or material restrictive covenants.

At June 30, 2020, we do not have material lease commitments that have not commenced.

At September 30, 2020, we do not have material lease commitments that have not commenced.

Supplemental balance sheet information related to leases was as follows:

Balance Sheet Location

June 30, 2020

September 30, 2020

Operating lease assets

13 unchanged sentences

Supplemental cash flow information related to leases was as follows:

Three Months Ended June 30,

Nine Months Ended September 30,

Operating leases

6 unchanged sentences

Present value of lease liabilities

The lease term and discount rate at June 30, 2020 were as follows:

The lease term and discount rate at September 30, 2020 were as follows:

Weighted-average remaining lease term (years)

4 unchanged sentences

Finance leases

On a quarterly basis, we estimate what our effective tax rate will be for the full calendar year and record a quarterly income tax provision based on the anticipated rate.

On a quarterly basis, we estimate what our effective tax rate will be for the full fiscal year and record a quarterly income tax provision based on the anticipated rate.

As the year progresses, we refine our estimate based on the facts and circumstances, including discrete events, by each tax jurisdiction.

Our effective tax rate for the three and six months ended June 30, 2020 was (3.2%) and 65.0%, respectively, and the rate for the three and six months ended June 30, 2019 was (4%).

Our effective tax rate for the three and nine months ended September 30, 2020 was 24% and our effective tax rate for the three and nine months ended September 30, 2019 was 10% and (9%), respectively.

RELATED PARTY TRANSACTIONS

During three and six months ended June 30, 2020, we did business with Printed Circuits, Inc.

During three and nine months ended September 30, 2020, we did business with Printed Circuits, Inc.

which is 90% owned by the Kunin family, of which, owns a majority of our stock.

We had expenses incurred totaling $14 and $0 during the three months ended June 30, 2020 and 2019, and $28 and $51 for the six months ended June 30, 2020 and 2019, respectively to Printed Circuits, Inc.

SUBSEQUENT EVENTS

Sale and Leaseback Agreement

We have entered into sale and leaseback agreements with Essjay Investment Company, LLC (“Essjay”) relating to the Company’s manufacturing facilities in Bemidji and Mankato, Minnesota.

Nortech and Essjay are expected to close during the Company’s fiscal third quarter, subject to final documentation and other customary closing conditions.

The Company expects net proceeds from the sale, excluding expenses and expected taxes, of approximately $5,000.

The Company intends to use net proceeds to pay down debt, provide additional liquidity for initiatives and strengthen the Company’s financial position.

At closing, the Company will enter into a lease agreement for the Bemidji and Mankato, Minnesota facilities for an initial 15-year term, with multiple renewal options.

Facility Consolidation

To further improve operational efficiencies and lower overhead costs, the Company approved on August 7, 2020, the closure of our Merrifield, Minnesota, production facility, shifting wire and cable assembly, system-level assembly and printed circuit board (PCB) manufacturing to Nortech’s other Minnesota locations.

The Merrifield production facility consolidation is expected to be complete on or before December 31, 2020, and will impact approximately 60 employees, who will be offered positions at other Nortech facilities in Minnesota.

We had expenses incurred totaling $0 and $35 during the three months ended September 30, 2020 and 2019, and $28 and $87 for the nine months ended September 30, 2020 and 2019, respectively to Printed Circuits, Inc.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements