NORTECH SYSTEMS INC 10-Q

ITEM 1. FINANCIAL STATEMENTS NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE DATA) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2020 2019 2020 2019 Net Sales $ 26,362 $ 30,058 $ 80,263 $ 85,515 Cost of Goods Sold 24,716 26,423 73,171 76,594 Gross Profit 1,646 3,635 7,092 8,921 Operating Expenses Selling Expenses 594 589 1,945 2,147 General and Administrative Expenses 2,164 2,333 5,819 7,374 Gain on Sale of Property and Equipment (3,821 ) - (3,821 ) - Total Operating Expenses (1,063 ) 2,922 3,943 9,521 Income (Loss) From Operations 2,709 713 3,149 (600 ) Other Expense Interest Expense (126 ) (256 ) (526 ) (780 ) Income (Loss) Before Income Taxes 2,583 457 2,623 (1,380 ) Income Tax Expense 612 44 638 122 Net Income (Loss) $ 1,971 $ 413 $ 1,985 $ (1,502 ) Net Income (Loss) Per Common Share: Basic (in dollars per share) $ 0.74 $ 0.16 $ 0.75 $ (0.56 ) Weighted Average Number of Common Shares Outstanding - Basic (in shares) 2,657,530 2,657,911 2,657,530 2,667,754 Diluted (in dollars per share) $ 0.73 $ 0.16 $ 0.74 $ (0.56 ) Weighted Average Number of Common Shares Outstanding - Diluted (in shares) 2,703,029 2,657,911 2,678,698 2,667,754 Other comprehensive income (loss) Foreign currency translation 96 (56 ) 54 (56 ) Comprehensive income (loss), net of tax $ 2,067 $ 357 $ 2,039 $ (1,558 ) See Accompanying Condensed Notes to Condensed Consolidated Financial Statements 3 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) SEPTEMBER 30, DECEMBER 31, 2020 2019 (1) (Unaudited) ASSETS Current Assets Cash $ 328 $ 351 Restricted Cash 1,366 309 Accounts Receivable, less allowances of $493 and $335 16,019 18,558 Inventories 14,496 14,279 Contract Assets 7,334 7,659 Prepaid Expenses and Other Current Assets 1,274 2,128 Total Current Assets 40,817 43,284 Property and Equipment, Net 6,631 9,581 Operating Lease Assets 8,924 4,827 Goodwill 2,375 2,375 Other Intangible Assets, Net 1,210 1,343 Total Assets $ 59,957 $ 61,410 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Current Maturities of Long-Term Debt $ 444 $ 444 Current Portion of Finance Lease Obligation 652 557 Current Portion of Operating Lease Obligations 614 858 Accounts Payable 11,213 14,014 Accrued Payroll and Commissions 2,912 3,493 Customer Deposits 631 618 Income Tax Payable 398 134 Other Accrued Liabilities 1,382 2,114 Total Current Liabilities 18,246 22,232 Long-Term Liabilities Long Term Line of Credit 2,546 10,088 Long-Term Debt, Net 6,730 3,179 Long Term Finance Lease Obligation, Net 1,320 1,451 Long-Term Operating Lease Obligation, Net 8,832 4,366 Other Long-Term Liabilities 157 118 Total Long-Term Liabilities 19,585 19,202 Total Liabilities 37,831 41,434 Shareholders' Equity Preferred Stock, $1 par value; 1,000,000 Shares Authorized: 250,000 Shares Issued and Outstanding 250 250 Common Stock - $0.01 par value; 9,000,000 Shares Authorized: 2,657,530 Shares Issued and Outstanding 27 27 Additional Paid-In Capital 15,859 15,748 Accumulated Other Comprehensive Loss (203 ) (257 ) Retained Earnings 6,193 4,208 Total Shareholders' Equity 22,126 19,976 Total Liabilities and Shareholders' Equity $ 59,957 $ 61,410 See Accompanying Condensed Notes to Condensed Consolidated Financial Statements (1) The balance sheet at December 31, 2019 has been derived from the audited financial statements at that date 4 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) NINE MONTHS ENDED SEPTEMBER 30, 2020 2019 Cash Flows From Operating Activities Net Income (Loss) $ 1,985 $ (1,502 ) Adjustments to Reconcile Net Income (Loss) to Net Cash Used In Operating Activities Depreciation and Amortization 1,703 1,648 Compensation on Stock-Based & Equity Awards 151 226 Deferred Taxes - 1 Change in Accounts Receivable Allowance 158 101 Change in Inventory Reserves 398 285 Gain on Disposal of Property and Equipment (3,821 ) - Changes in Current Operating Items Accounts Receivable 2,430 (158 ) Inventories (567 ) (237 ) Contract Assets 325 (780 ) Prepaid Expenses and Other Current Assets 858 (641 ) Accounts Payable (2,808 ) 663 Accrued Payroll and Commissions (621 ) (120 ) Other Accrued Liabilities (290 ) 281 Net Cash Used in Operating Activities (99 ) (233 ) Cash Flows from Investing Activities Proceeds from Sale of Property and Equipment 6,019 - Purchase of Intangible Asset (25 ) (37 ) Purchases of Property and Equipment (397 ) (785 ) Net Cash Provided By (Used In) Investing Activities 5,597 (822 ) Cash Flows from Financing Activities Net Change in Line of Credit (7,542 ) 3,165 Proceeds from Long-Term Debt 6,077 - Principal Payments on Long-Term Debt (2,567 ) (728 ) Principal Payments on Finance Leases (432 ) (251 ) Stock option exercises - 7 Share Repurchases - (130 ) Net Cash (Used In) Provided By Financing Activities (4,464 ) 2,063 Effect of Exchange Rate Changes on Cash - (2 ) Net Change in Cash 1,034 1,006 Cash - Beginning of Period 660 948 Cash - Ending of Period $ 1,694 $ 1,954 Reconciliation of cash and restricted cash reported within the condensed consolidated balance sheets Cash $ 328 $ 160 Restricted Cash 1,366 1,794 Total cash and restricted cash reported in the condensed consolidated statements of cash flows $ 1,694 $ 1,954 Supplemental Disclosure of Cash Flow Information: Cash Paid During the Period for Interest $ 526 $ 739 Cash Paid (Refunded) During the Period for Income Taxes 262 (83 ) Supplemental Noncash Investing and Financing Activities: Property and Equipment Purchases in Accounts Payable 6 30 Equipment Acquired under Finance Lease 395 607 See Accompanying Condensed Notes to Condensed Consolidated Financial Statements 5 NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED) (IN THOUSANDS) Accumulated Additional Other Retained Total Preferred Common Paid-In Comprehensive Income Shareholders' Stock Stock Capital Loss Earnings Equity BALANCE JUNE 30, 2019 $ 250 $ 27 $ 15,682 $ (233 ) $ 3,521 $ 19,247 Net Income - - - - 413 413 Cumulative Adjustment - - - - - - Foreign currency translation adjustment - - - (56 ) - (56 ) Compensation on stock-based awards - - 35 - - 35 Share repurchases - - (4 ) - - (4 ) BALANCE SEPTEMBER 30, 2019 $ 250 $ 27 $ 15,713 $ (289 ) $ 3,934 $ 19,635 BALANCE DECEMBER 31, 2018 $ 250 $ 27 $ 15,610 $ (233 ) $ 5,436 $ 21,090 Net Income - - - - (1,502 ) (1,502 ) Cumulative Adjustment - - - - - - Foreign currency translation adjustment - - - (56 ) - (56 ) Stock option exercises - - 7 - - 7 Compensation on stock-based awards - - 226 - - 226 Share repurchases - - (130 ) - - (130 ) BALANCE SEPTEMBER 30, 2019 $ 250 $ 27 $ 15,713 $ (289 ) $ 3,934 $ 19,635 BALANCE JUNE 30, 2020 $ 250 $ 27 $ 15,823 $ (299 ) $ 4,222 $ 20,023 Net Income - - - - 1,971 1,971 Foreign currency translation adjustment - - - 96 - 96 Compensation on stock-based awards - - 36 - - 36 Share repurchases - - - - - - BALANCE SEPTEMBER 30, 2020 $ 250 $ 27 $ 15,859 $ (203 ) $ 6,193 $ 22,126 BALANCE DECEMBER 31, 2019 $ 250 $ 27 $ 15,748 $ (257 ) $ 4,208 $ 19,976 Net Income - - - - 1,985 1,985 Foreign currency translation adjustment - - - 54 - 54 Stock option exercises - - - - - - Compensation on stock-based awards - - 111 - - 111 Share repurchases - - - - - - BALANCE SEPTEMBER 30, 2020 $ 250 $ 27 $ 15,859 $ (203 ) $ 6,193 $ 22,126 See Accompanying Condensed Notes to Condensed Consolidated Financial Statements 6 CONDENSED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying unaudited condensed consolidated financial statements for the interim periods have been prepared in accordance with Generally Accepted Accounting Principles in the United States of America (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the financial information and footnotes required by GAAP for complete financial statements, although we believe the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year or for any other interim period. In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In preparing these condensed consolidated financial statements, we have made our best estimates and judgments of certain amounts included in the condensed consolidated financial statements, giving due consideration to materiality. Changes in the estimates and assumptions used by us could have a significant impact on our financial results, since actual results could differ from those estimates. Principles of Consolidation The condensed consolidated financial statements include the accounts of Nortech Systems Incorporated and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Revenue Recognition Our revenue is comprised of product, engineering services and repair services. All revenue is recognized when the Company satisfies its performance obligation(s) under the contract by transferring the promised product or service to our customer either when (or as) our customer obtains control of the product or service, with the majority of our revenue being recognized over time including goods produced under contract manufacturing agreements and services revenue. A performance obligation is a promise in a contract to transfer a distinct product or service to a customer. A contract’s transaction price is allocated to each distinct performance obligation. The majority of our contracts have a single performance obligation. Revenue is recorded net of returns, allowances and customer discounts. Our net sales for services were less than 10% of our total sales for all periods presented, and accordingly, are included in net sales in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). Sales, value add, and other taxes collected from customers and remitted to governmental authorities are accounted for on a net (excluded from revenues) basis. Shipping and handling costs charged to our customers are included in net sales, while the corresponding shipping expenses are included in cost of goods sold. 7 Stock-Based Awards Following is the status of all stock options as of September 30, 2020: Shares Weighted- Average Exercise Price Per Share Weighted- Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (in thousands) Outstanding - January 1, 2020 372,200 $ 3.85 Granted 11,300 2.95 Exercised - Cancelled (16,667 ) 3.65 Outstanding - September 30, 2020 366,833 $ 3.83 7.88 $ 317 Exercisable - September 30, 2020 181,640 $ 3.72 7.44 $ 176 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 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 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. 8 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 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 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 Credit is extended based upon an evaluation of the customer’s financial condition and, while collateral is not required, the Company periodically receives surety bonds that guarantee payment. 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 $493 at September 30, 2020 and $335 at December 31, 2019. Inventories 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: September 30, December 31, 2020 2019 Raw Materials $ 15,314 $ 15,245 Work in Process 607 479 Finished Goods 459 41 Reserves (1,884 ) (1,486 ) Total $ 14,496 $ 14,279 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. 9 Other Intangible Asse ts Other intangible assets at September 30, 2020 and December 31, 2019 are as follows: September 30, 2020 Gross Carrying Accumulated Net Book Years Amount Amortization Value Customer Relationships 9 $ 1,302 $ 759 $ 543 Intellectual Property 3 100 100 - Trade Names 20 814 214 600 Patents 7 67 - 67 Totals $ 2,283 $ 1,073 $ 1,210 December 31, 2019 Gross Carrying Accumulated Net Book Years Amount Amortization Value Customer Relationships 9 $ 1,302 $ 651 $ 651 Intellectual Property 3 100 95 5 Trade Names 20 814 183 631 Patents 7 56 - 56 Totals $ 2,272 $ 929 $ 1,343 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): Year Amount Remainder of 2020 $ 46 2021 186 2022 185 2023 185 2024 113 Thereafter 428 Total $ 1,143 Impairment of Goodwill and Other Intangible Assets In accordance with ASC 350, Goodwill and Other Intangible Assets , goodwill is not amortized but is required to be reviewed for impairment at least annually or when events or circumstances indicate that carrying value may exceed fair value. We test impairment annually as of October 1 st . 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 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. 10 Impairment Analysis We evaluate long-lived assets, primarily property and equipment and intangible assets, as well as the related depreciation periods, whenever current events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability for assets to be held and used is based on our projection of the undiscounted future operating cash flows of the underlying assets. 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 nine months ended September 30, 2020 and 2019, respectively. Accounting Pronouncements Issued But Not Yet Adopted In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (ASC 326): Measurement of Credit Losses on Financial Instruments,” which amends the guidance on the impairment of financial instruments. The amendments in this update removes the thresholds that entities apply to measure credit losses on financial instruments measured at amortized cost, such as loans, trade receivables, reinsurance recoverables, off-balance-sheet credit exposures, and held-to-maturity securities. Under current U.S. GAAP, entities generally recognize credit losses when it is probable that the loss has been incurred. The guidance removes all current recognition thresholds and introduces the new current expected credit loss (“CECL”) model which will require entities to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that an entity expects to collect over the instrument’s contractual life. The new CECL model is based upon expected losses rather than incurred losses. The amendments in this update are effective for periods beginning after December 15, 2022; early adoption is permitted. We are currently evaluating the impact of this guidance on our financial condition and results of operations. NOTE 2. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and accounts receivable. With regard to cash, we maintain our excess cash balances in checking accounts at primarily two financial institutions, one in the United States and one in China. The account in the United States may at times exceed federally insured limits. 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 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. 11 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. NOTE 3. REVENUE Revenue recognition Our revenue is comprised of product, engineering services and repair services. All revenue is recognized when the Company satisfies its performance obligation(s) under the contract by transferring the promised product or service to our customer either when (or as) our customer obtains control of the product or service, with the majority of our revenue being recognized over time including goods produced under contract manufacturing agreements and services revenue. A performance obligation is a promise in a contract to transfer a distinct product or service to a customer. A contract’s transaction price is allocated to each distinct performance obligation. The majority of our contracts have a single performance obligation, as the promise to transfer products or services is not separately identifiable from other promises in the contract and, therefore, not distinct. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products or providing services. As such, revenue is recorded net of returns, allowances and customer discounts. Sales, value add, and other taxes collected from customers and remitted to governmental authorities are accounted for on a net (excluded from revenues) basis. Shipping and handling costs are included in cost of goods sold. The majority of our revenue is derived from the transfer of goods produced under contract manufacturing agreements which have no alternative use and we have an enforceable right to payment for our performance completed to date. Our performance obligations within our contract manufacturing agreements are generally satisfied over time as the goods are produced based on customer specifications and we have an enforceable right to payment for the goods produced. 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 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. Accounting for contract manufacturing agreements involves the use of various techniques to estimate total revenue and costs. We estimate profit on these agreements as the difference between total estimated revenue and expected costs to complete the performance obligation within the terms of the agreement and recognize the respective profit as the goods are produced. The estimates to determine the profit earned on the performance obligation are based on anticipated selling prices and historical cost of goods sold and represent our best judgement at the time. Changes in judgements on these above estimates could impact the timing and amount of revenue recognized with a resulting impact on the timing and amount of associated profit. On occasion our customers provide materials to be used in the manufacturing process and the fair value of the materials is included in revenue as noncash consideration at the point in time when the manufacturing process commences along with the same corresponding amount recorded as cost of goods sold. The inclusion of noncash consideration has no impact on overall profitability. 12 Contract Assets 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 $ 7,659 Increase (decrease) attributed to: Transferred to receivables from contract assets recognized (6,104 ) Product transferred over time 5,779 Outstanding at September 30, 2020 $ 7,334 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 nine months ended September 30, 2020: Three Months Ended September 30, 2020 Product/ Service Transferred Over Time Product Transferred at Point in Time Noncash Consideration Total Net Sales by Market Medical $ 10,960 $ 1,853 $ 1,405 $ 14,218 Industrial 4,527 791 620 5,938 Aerospace and Defense 5,525 16 665 6,206 Total net sales $ 21,012 $ 2,660 $ 2,690 $ 26,362 Three Months Ended September 30, 2019 Product/ Service Transferred Over Time Product Transferred at Point in Time Noncash Consideration Total Net Sales by Market Medical $ 14,399 $ 1,661 $ 983 $ 17,043 Industrial 7,279 822 522 8,623 Aerospace and Defense 3,978 133 281 4,392 Total net sales $ 25,656 $ 2,616 $ 1,786 $ 30,058 13 Nine Months Ended September 30, 2020 Product/ Service Transferred Over Time Product Transferred at Point in Time Noncash Consideration Total Net Sales by Market Medical $ 35,835 $ 4,454 $ 2,464 $ 42,753 Industrial 17,434 3,354 1,213 22,001 Aerospace and Defense 14,160 396 953 15,509 Total net sales $ 67,429 $ 8,204 $ 4,630 $ 80,263 Nine Months Ended September 30, 2019 Product/ Service Transferred Over Time Product Transferred at Point in Time Noncash Consideration Total Net Sales by Market Medical $ 42,039 $ 1,914 $ 2,053 $ 46,006 Industrial 22,847 2,297 1,146 26,290 Aerospace and Defense 12,236 375 608 13,219 Total net sales $ 77,122 $ 4,586 $ 3,807 $ 85,515 NOTE 4. FINANCING ARRANGEMENTS We have a credit agreement with Bank of America which was entered into on June 15, 2017 and amended effective December 29, 2017 and provides for a line of credit arrangement of $16,000 that expires on June 15, 2022. The credit arrangement also has a $5,000 real estate term note outstanding with a maturity date of June 15, 2022. 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 3.7% 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. The line of credit and real estate term notes with Bank of America contain certain covenants which, among other things, require us to adhere to regular reporting requirements, abide by annual shareholder dividend limitations, maintain certain financial performance, and limit the amount of annual capital expenditures. The availability under our line is subject to borrowing base requirements, and advances are at the discretion of the lender. 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 September 30, 2020. 14 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. Payments are deferred for 10 months after the end of the Promissory Note covered period (which is defined as 24 weeks after the date of the loan) and we can apply for forgiveness of the Promissory Note after 60 days. Forgiveness of the Promissory Note will be determined in accordance with the provisions of the Cares Act and applicable regulations. Any principal and interest amounts outstanding after the determination of amounts forgiven will be repaid on a monthly basis. Long-term debt at September 30, 2020 and December 30, 2019 consisted of following: September 30, December 31, 2020 2019 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. $ 1,188 $ 3,755 Promissory Note 6,077 - 7,265 3,755 Debt issuance Costs (91 ) (132 ) Total long-term debt 7,174 3,623 Current maturities of long-term debt (444 ) (444 ) Long-term debt - net of current maturities $ 6,730 $ 3,179 NOTE 5. LEASES We have operating leases for certain manufacturing sites, office space, and equipment. Most leases include the option to renew, with renewal terms that can extend the lease term from one to five years or more. Right-of-use lease assets and lease liabilities are recognized at the commencement date based on the present value of the remaining lease payments over the lease term which includes renewal periods we are reasonably certain to exercise. Our leases do not contain any material residual value guarantees or material restrictive covenants. At September 30, 2020, we do not have material lease commitments that have not commenced. 15 Supplemental balance sheet information related to leases was as follows: Balance Sheet Location September 30, 2020 Assets Operating lease assets Operating lease assets $ 8,924 Finance lease assets Property, Plant and Equipment 2,493 Total leased assets $ 11,417 Liabilities Current Current operating lease liabilities Current Portion of Operating Lease Obligations $ 614 Current finance lease liabilities Current Portion of Finance Lease Obligations 652 Noncurrent Long-term operating lease liabilities Long Term Operating Lease Liabilities, Net 8,832 Long term finance lease liabilities Long Term Finance Lease Obligations, Net 1,320 Total lease liabilities $ 11,418 Supplemental cash flow information related to leases was as follows: Nine Months Ended September 30, 2020 Operating leases Cash paid for amounts included in the measurement of lease liabilities $ 686 Right-of-use assets obtained in exchange for lease obligations $ 4,685 Maturities of lease liabilities were as follows: Operating Leases Finance Leases Total Remaining 2020 $ 351 $ 207 $ 558 2021 1,264 738 2,002 2022 1,279 575 1,854 2023 1,302 333 1,635 2024 1,374 277 1,651 Thereafter 9,489 20 9,509 Total lease payments $ 15,059 $ 2,150 $ 17,209 Less: Interest (5,613 ) (178 ) (5,791 ) Present value of lease liabilities $ 9,446 $ 1,972 $ 11,418 The lease term and discount rate at September 30, 2020 were as follows: Weighted-average remaining lease term (years) Operating leases 11.1 Finance leases 3.3 Weighted-average discount rate Operating leases 7.4 % Finance leases 5.2 % 16 NOTE 6. INCOME TAXES 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 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. NOTE 7. RELATED PARTY TRANSACTIONS 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 $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. 17