What changed in this filing

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Item 1. Financial Statements

2021-05-14 compared with 2020-11-12 · 275 added, 144 removed, 269 unchanged (61% of the section changed)

4 unchanged sentences

THREE 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

Restructuring Charges

Total Operating Expenses

3 unchanged sentences

Income (Loss) Before Income Taxes

Income Tax Expense

Income Tax Expense (Benefit)

Net Income (Loss)

11 unchanged sentences

(IN THOUSANDS, EXCEPT SHARE DATA)

SEPTEMBER 30,

Current Assets

1 unchanged sentence

Accounts Receivable, less allowances of $722 and $343

Inventories, net

Contract Assets

Income Taxes Receivable

Prepaid Expenses and Other Current Assets

1 unchanged sentence

Property and Equipment, Net

Assets Held For Sale

Operating Lease Assets

3 unchanged sentences

Current Maturities of Long-Term Debt

Current Portion of Finance Lease Obligation

Current Portion of Finance Lease Obligations

Current Portion of Operating Lease Obligations

1 unchanged sentence

Accrued Payroll and Commissions

Customer Deposits

Income Tax Payable

Other Accrued Liabilities

2 unchanged sentences

Long Term Line of Credit

Long-Term Debt, Net

Long Term Finance Lease Obligation, Net

Long-Term Operating Lease Obligation, Net

Long-Term Debt, Net of Current Maturities

Long Term Finance Lease Obligations, Net

Long-Term Operating Lease Obligations, Net

Other Long-Term Liabilities

1 unchanged sentence

Total Liabilities

Commitments and Contingencies

Shareholders' Equity

4 unchanged sentences

9,000,000 Shares Authorized:

2,657,530 Shares Issued and Outstanding

2,660,330 and 2,659,628 Shares Issued and Outstanding, respectively

Additional Paid-In Capital

8 unchanged sentences

(IN THOUSANDS)

NINE MONTHS ENDED

SEPTEMBER 30,

THREE MONTHS ENDED

Cash Flows From Operating Activities

Net Income (Loss)

Adjustments to Reconcile Net Income (Loss) to Net Cash

Used In Operating Activities

Adjustments to Reconcile Net (Loss) Income to Net Cash

Provided by (Used In) Operating Activities

Depreciation and Amortization

Compensation on Stock-Based & Equity Awards

Deferred Taxes

Compensation on Stock-Based Awards

Compensation on Equity Appreciation Rights

Loss on Held for Sale

Loss on Disposal of Property, Equipment, and Intangibles

Change in Accounts Receivable Allowance

Change in Inventory Reserves

Gain on Disposal of Property and Equipment

Changes in Operating Assets and Liabilities:

Changes in Current Operating Items

5 unchanged sentences

Other Accrued Liabilities

Net Cash Used in Operating Activities

Net Cash (Used in) Provided by Operating Activities

Cash Flows from Investing Activities

Proceeds from Sale of Property and Equipment

Purchase of Intangible Asset

Purchases of Intangible Asset

Purchases of Property and Equipment

Net Cash Provided By (Used In) Investing Activities

Net Cash Used in Investing Activities

Cash Flows from Financing Activities

Net Change in Line of Credit

Proceeds from Long-Term Debt

Principal Payments on Long-Term Debt

Principal Payments on Finance Leases

Stock option exercises

Share Repurchases

Net Cash (Used In) Provided By Financing Activities

Principal Payments on Financing Leases

Net Cash Used in Financing Activities

Effect of Exchange Rate Changes on Cash

7 unchanged sentences

Cash Paid During the Period for Interest

Cash Paid (Refunded) During the Period for Income Taxes

Cash Paid During the Period for Income Taxes

Supplemental Noncash Investing and Financing Activities:

Property and Equipment Purchases in Accounts Payable

Property Acquired under Operating Lease

Equipment Acquired under Finance Lease

3 unchanged sentences

(IN THOUSANDS)

Total Shareholders'

Comprehensive

Shareholders'

BALANCE JUNE 30, 2019

Cumulative Adjustment

Foreign currency translation adjustment

Compensation on stock-based awards

Share repurchases

BALANCE SEPTEMBER 30, 2019

BALANCE DECEMBER 31, 2019

Cumulative Adjustment

Foreign currency translation adjustment

Stock option exercises

Compensation on stock-based awards

Share repurchases

BALANCE SEPTEMBER 30, 2019

BALANCE JUNE 30, 2020

Foreign currency translation adjustment

Compensation on stock-based awards

Share repurchases

BALANCE SEPTEMBER 30, 2020

BALANCE MARCH 31, 2020

BALANCE DECEMBER 31, 2020

Foreign currency translation adjustment

Stock option exercises

Compensation on stock-based awards

Share repurchases

BALANCE SEPTEMBER 30, 2020

BALANCE MARCH 31, 2021

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

25 unchanged sentences

Stock-Based Awards

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

Following is the status of all stock options as of March 31, 2021:

Exercise Price

Intrinsic Value

1 unchanged sentence

Outstanding - January 1, 2021

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.

Outstanding - March 31, 2021

Exercisable - March 31, 2021

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 no stock options granted during the three months ended March 31, 2021.

Total compensation expense was $21 and $39 for the three ended March 31, 2021 and 2020, respectively.

As of March 31, 2021, there was $308 of unrecognized compensation which will vest over the next 2.15 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.

During the three months ended March 31, 2020, there were no units granted.

There were no units granted during the three months ended March 31, 2021.

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.

For the three months ended March 31, 2021, all stock options are deemed to be antidilutive as there was a net loss and, therefore, were not included in the computation of income per common share amount.

For the three months ended March 31, 2020 there were 2,668,590 diluted shares with $0.05 earnings per diluted share.

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 March 31, 2021 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.

As of March 31, 2021, we had no outstanding letters of credit.

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 $493 at September 30, 2020 and $335 at December 31, 2019.

Trade accounts receivable have been reduced by an allowance for doubtful accounts of $722 at March 31, 2021 and $343 at December 31, 2020.

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

2 unchanged sentences

Inventories are as follows:

September 30,

Raw Materials

1 unchanged sentence

Finished Goods

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

Other Intangible Assets

Other intangible assets at March 31, 2021 and December 31, 2020 are as follows:

March 31, 2021

Customer Relationships

3 unchanged sentences

Intellectual Property

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):

Amortization expense for the three months ended March 31, 2021 and 2020 was $46 and $51, respectively.

Estimated future annual amortization expense (not including patents) related to these assets is approximately as follows:

Remainder of 2021

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.

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

14 unchanged sentences

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.

Of the $982 in cash at March 31, 2021, approximately $369 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.

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.

Our largest customer has two divisions that together accounted for 10% or more of our net sales during the three month period ended and March 31, 2021 and 2020.

One division accounted for approximately 25% and 24% of net sales for the three March 31, 2021 and 2020, respectively.

The other division accounted for approximately 4% of net sales for the three month period ended March 31, 2021, and approximately 2% net sales for the three month period ended March 31, 2020.

Together they accounted for approximately 29% and 26% of net sales for the three March 31, 2021 and 2020, respectively.

Accounts receivable from the customer at March 31, 2021 and December 31, 2020 represented approximately 23% and 20% of our total accounts receivable, respectively.

Another customer’s accounts receivable represented 13% and 10% as of March 31, 2021 and December 31, 2020, respectively.

Export sales represented approximately 4% and 3% of net sales for the three months ended March 31, 2021 and 2020, 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 80% and 84% of our revenue for the three and nine months ended September 30, 2020, respectively.

Revenue under contract manufacturing agreements that was recognized over time accounted for approximately 75% and 88% of our revenue for both the three months ended March 31, 2021 and 2020, respectively.

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

7 unchanged sentences

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

Significant changes in the contract assets balance during the three months ended March 31, 2021 was as follows (in thousands):

Three Months Ended March 31, 2021

Outstanding at January 1, 2021

2 unchanged sentences

Product transferred over time

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.

Outstanding at March 31, 2021

We expect substantially all the remaining performance obligations for the contract assets recorded as of March 31, 2021, 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 at

Point in Time

Consideration

Total Net Sales

Aerospace and Defense

Total net sales

Three Months Ended September 30, 2019

Product/ Service

Transferred at

Point in Time

Consideration

Total Net Sales

Aerospace and Defense

Total net sales

Nine Months Ended September 30, 2020

The following tables summarize our net sales by market for the three ended March 31, 2021 and 2020, respectively:

Three Months Ended March 31, 2021

Product/ Service

5 unchanged sentences

Total net sales

Nine Months Ended September 30, 2019

Three Months Ended March 31, 2020

Product/ Service

Transferred Over

Transferred at

1 unchanged sentence

Consideration

Total Net Sales

Total Net Sales by

Aerospace and Defense

1 unchanged sentence

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.

We have a credit agreement with Bank of America which was entered into on June 15, 2017, which was amended five separate occasions on December 29, 2017, August 13, 2019, November 12, 2019, August 27, 2020, and December 1, 2020 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.

Our line of credit bears interest at a weighted-average interest rate of 3.6% and 4.0% as of March 31, 2021 and December 31, 2020, respectively.

We had borrowings on our line of credit of $2,200 and $3,328 outstanding as of March 31, 2021 and December 31, 2020, 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 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 Bank of America Credit Agreement provides for, among other things, a Fixed Charge Coverage Ratio of not less than 1.0 to 1.0, for the twelve months ending December 31, 2020 and each Fiscal Quarter end thereafter subject only during a trigger period commencing when our availability under our line is less than $2,000 until availability is above that amount for 30 days due to amendment to our agreement dated in December of 2020.

The Company met the covenants for the period ended March 31, 2021.

On April 15, 2020, we entered into 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 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.

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

At March 31, 2021, we had unused availability under our line of credit of $7,558, supported by our borrowing base.

The line is secured by substantially all of our assets.

Long-term debt at March 31, 2021 and December 30, 2020 consisted of following:

Real estate term notes bearing interest at one-month LIBOR + 2.00% (2.25% and 4.3% as of March 31, 2021 and December 31, 2020, 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 September 30, 2020, we do not have material lease commitments that have not commenced.

At March 31, 2021, we do not have material lease commitments that have not commenced.

The components of lease expense were as follows:

Operating lease cost

Finance lease interest cost

Finance lease amortization expense

Total lease cost

Supplemental balance sheet information related to leases was as follows:

Balance Sheet Location

September 30, 2020

March 31, 2021

December 31, 2020

Operating lease assets

13 unchanged sentences

Supplemental cash flow information related to leases was as follows:

Nine Months Ended September 30,

Operating leases

6 unchanged sentences

Present value of lease liabilities

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

The lease term and discount rate at March 31, 2021 were as follows:

Weighted-average remaining lease term (years)

6 unchanged sentences

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.

Our effective tax rate for the three months ended March 31, 2021 and 2020 was 31% and 18%, respectively.

On March 11, 2021, the American Rescue Plan Act (“ARPA”) was signed and includes several provisions, such as measures that extend and expand the Employee Retention Credit (“ERC”), previously enacted under the Coronavirus Aid, Relief and Economic Security Act, through December 31, 2021.

Companies who have received PPP are not precluded from this program.

We are still in the process of reviewing but believe we meet the criteria for revenue reduction and the number of monthly average employees, which qualifies us for the credit.

For the three months ended March 31, 2021, we did not record a benefit related to the ERC.

We plan to apply for the credit, however we are still completing the computation.

This is not tax deductible and is thus included in our calculation of the 2021 tax rate.

RESTRUCTURING CHARGES

During the first quarter of 2021, we recorded restructuring charges of $219 related to the consolidation of our production facilities and closure of our Merrifield, Minnesota facility.

With the Merrifiled closure, we are shifting wire and cable assembly, system-level assembly and printed circuit board (PCB) manufacturing to Nortech’s other Minnesota locations.

No amounts were accrued for the period ended March 31, 2021.

We reduced our workforce by approximately 42 employees as a result of this facility closure.

As of March 31, 2021, this closure did qualify for held for sale accounting.

Loss on held for sale assets, relating to write downs to fair value, was $28 during the three months ended March 31, 2021.

RELATED PARTY TRANSACTIONS

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

During three months ended March 31, 2021, 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.

We had payments totaling $20 and $14 during the three months ended March 31, 2021 and 2020, respectively to Printed Circuits, Inc.

The Company believes that these transactions are on terms comparable to those that the Company could reasonably expect in an arm's length transaction with an unrelated third party.

David Kunin, our Chairman, is a minority owner of Abilitech Medical, Inc.

Kunin also was a consultant to Abilitech, which relationship ended on March 1, 2021.

During 2020, Mr.

Kunin earned $16 as a consultant to Abilitech.

In the three months ended March 31, 2021 and 2020, Abilitech paid the Company $268 and $175, respectively, for delivery of medical products.

The Company believes that transactions with Abilitech are on terms comparable to those that the Company could reasonably expect in an arm's length transaction with an unrelated third party.

David Kunin, our Chairman, is a small minority owner (less than 10%) of Marpe Technologies, LTD an early stage medical device company dedicated to the early detection of skin cancer through full body scanners.

Kunin is also a member of the Board of Directors of Marpe Technologies.

The Company worked with Marpe Technologies to apply for a grant from the Israel-United States Binational Industrial Research and Development Foundation, a legal entity created by Agreement between the Government of the State of Israel and the Government of the United States of America (“BIRD Foundation”).

The parties were successful in receiving approval for a $1,000,000 conditional grant.

The Company and Marpe Technologies will each receive $500,000 from the BIRD Foundation and, among other obligations under the grant, each is required to contribute $500,000 to match grant funds from the BIRD Foundation.

The Company will meet its obligation by providing certain services at cost or with respect to administrative services at no cost to Marpe Technologies.

The total value of the contribution will not exceed $500,000.

The Company will receive a 10 year exclusive right to manufacture the products of Marpe Technologies.

There can be no assurances that Marpe Technologies’ medical device will be commercially successful, that Marpe Technologies will be successful in raising additional funds to finance its operations or, if commercially successful, the Company will recoup the value of services provided to Marpe for which is not fully paid.

The transactions between the Company and Marpe Technologies have been approved by the Audit Committee pursuant to the Company Related-Party Transactions Policy.

As of March 31, 2021, no expenses were incurred and the agreement between the Company and Marpe Technologies will become effective upon execution of the agreement among the BIRD Foundation, Marpe Technologies and the Company relating to the the conditional grant from the BIRD Foundation.

SUBSEQUENT EVENT

We entered into an agreement on February 23, 2021 with a third-party agent to sell our facility in Merrifield, MN and some related assets.

A liquidation auction was completed in April of 2021 for the Merrifield facility.

We expect the sale to close in the second quarter of 2021 near the carrying value of the assets, however a sale transaction and the expected sale value is not guaranteed.

MANAGEMENT ’ S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

We are a Maple Grove, Minnesota based leading provider of design and manufacturing solutions for complex electromechanical systems, assemblies and components.

We primarily serve the medical device aerospace and defense, and industrial markets.

Our design services span concept development to commercial design, and include software, electrical, mechanical, and biomedical engineering.

Our manufacturing and supply chain capabilities are vertically integrated around electromedical systems, wire, cable and interconnect assemblies, printed circuit board assemblies, as well as system-level assembly, integration and final test.

We maintain facilities in Bemidji, Blue Earth, Mankato, Merrifield, and Milaca, Minnesota;

Monterrey, Mexico;

and Suzhou, China.

All of our facilities are certified to one or more of the ISO/AS standards, including 9001, AS9100 and 13485, with most having additional certifications based on the needs of the customers they serve.

Recent Developments

Global Pandemic

In March 2020, the World Health Organization recognized the outbreak of a novel coronavirus (“COVID-19”) as a pandemic.

While the COVID-19 pandemic has had an impact on our operations, we have been able to continue to operate our manufacturing facilities and provide essential services to our customers.

Additionally, in an effort to protect the health and safety of our employees and in compliance with state regulations, we have instituted a work-from-home policy for employees who can perform their job functions offsite, implemented social distancing requirements and other measures to allow manufacturing and other personnel essential to production to continue work within our manufacturing facilities, and suspended all non-essential employee travel.

The full extent to which COVID-19 will directly or indirectly impact our business, financial condition, and results of operations will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19, the actions taken to contain it or treat its impact and the economic impact on local, regional, national and international markets.

The ultimate impact of COVID-19 depends on factors beyond our knowledge or control, including the duration and severity of the outbreak, as well as third-party actions taken to contain its spread and mitigate its public health effects.

As a result, we are unable to estimate the extent to which COVID-19 will negatively impact our financial results or liquidity.

We will continue to assess the current and potential impacts of the COVID-19 pandemic on our business, financial condition, and results of operations.

We actively manage our cash and working capital to preserve adequate liquidity and ensure that our business can continue to operate during these uncertain times.

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 was completed in the first quarter of 2021 and impacted approximately 42 employees, who were offered positions at other Nortech facilities in Minnesota.

We entered into an agreement on February 23, 2021 with a third-party agent to sell our facility in Merrifield, MN and some related assets.

We expect the sale to close in the second quarter of 2021 near the carrying value of the assets, however a sale transaction and the expected sale value is not guaranteed.

As of March 31, 2021, this closure did qualify for held for sale accounting.

Results of Operations

The following table presents statements of operations data as percentages of total net sales for the periods indicated:

Three Months Ended

Cost of Goods Sold

Selling Expenses

General and Administrative Expenses

Restructuring Charges

(Loss) Income from Operations

Interest Expense

(Loss) Income Before Income Taxes

Income Tax (Benefit) Expense

Net (Loss) Income

Net sales were $22.1 million in the first quarter of 2021, as compared to $27.4 million in the first quarter of the prior year, a decrease of $5.3 million or 19.6% that was driven primarily by the COVID-19 pandemic and the related supply chain shortages.

Net sales results were varied by markets, the medical market decreased by $3.1 million or 20.2%.

The industrial market sector decreased by $1.1 million or 14.9% in the first quarter of 2021 as compared to the same quarter of 2020.

Net sales from the aerospace and defense markets decreased by $1.1 million or 24.8% in the first quarter of 2021 as compared to the first quarter of 2020.

Net sales by our major industry markets for the three months ended March 31, 2021 and 2020 were as follows (in thousands):

Three months Ended March 31,

Aerospace and Defense

Total Net Sales

Net sales by timing of transfer of goods and services for the three ended March 31, 2021 is as follows (in thousands):

Three Months Ended March 31, 2021

Product/ Service

Transferred at

Point in Time

Consideration

Total Net Sales

Aerospace and Defense

Total net sales

Net sales by timing of transfer of goods and services for the three ended March 31, 2020 is as follows (in thousands):

Three Months Ended March 31, 2020

Product/ Service

Transferred at

Point in Time

Consideration

Total Net Sales

Aerospace and Defense

Total net sales

Our 90-day shipment backlog as of March 31, 2021 was $31.1 million, a 28.3% increase from the beginning of the quarter and a 13.0% increase from March 31, 2020.

Backlog for our medical customers has increased 27.4% from the beginning of the quarter and 10.7% from the prior year.

Our industrial customers’ backlog increased 61.6% from the beginning of the quarter and 59.4% from the prior year.

The aerospace and defense backlog decreased 7.6% from the beginning of the quarter and 25.3% from the prior year.

Our backlog consists of firm purchase orders we expect to ship in the next 90 days, with any remaining amounts to be transferred within 180 days.

90-day shipment backlog by our major industry markets are as follows (in thousands):

Shipment Backlog as of the Period Ended

Aerospace and Defense

Total 90-Day Backlog

Our 90-day backlog varies due to order size, manufacturing delays, contract terms and conditions and timing from customer delivery schedules and releases.

These variables cause inconsistencies in comparing the backlog from one period to the next.

Our total shipment backlog was $62.8 million and $53.0 million for periods ended March 31, 2021 and March 31, 2020, respectively.

Gross profit as a percent of net sales 7.1% and 11.0% for the three months ended March 31, 2021 and 2020, respectively.

The decline in gross profit as a percent of sales was driven by lower sales on a fixed cost base in part due to the impact of COVID-19.

Selling Expense

Selling expenses for the three months ended March 31, 2021 and 2020 was $0.7 million or 3.3% of sales and $0.6 million or 2.3% of sales, respectively.

General and Administrative Expense

General and administrative expenses for the three months ended March 31, 2021 and 2020, were $2.8 million or 12.7% of sales and $2.0 million or 7.3% of sales, respectively.

This increase is due primarily to higher bad debt expense of $0.4 million and increased training expenses of $0.2 million.

Restructuring Charges

Restructuring charges for the three months ended March 31, 2021 was $0.2 million or 1.0% of sales.

There were no restructuring charges for the three months ended March 31, 2020.

The restructuring charges are due to the closure of the Merrifield facility.

Income (Loss) before Income Taxes

First quarter 2021 loss from operations was $2.3 million compared to income of $0.2 million for the first quarter in 2020.

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 months ended March 31, 2021 and 2020 was 31% and 18%, respectively.

Net Income (Loss)

Net loss for the three months ended March 31, 2021 was $1.6 million or $0.58 per basic and diluted common share.

Net income for the three months ended March 31, 2020 of $0.1 million or $0.05 per basic and diluted common share.

Liquidity and Capital Resources

Our 2020 and 2021 sales and shipment backlog were impacted by the ongoing COVID-19 pandemic and the related supply chain shortages.

Due to the inherent uncertainty of this evolving situation, we are unable at this time to predict the likely impact of the COVID-19 pandemic on our future operations which has led to indicators of an inability to continue as a going concern.

However, these indicators have been mitigated by our focus on reducing costs, minimizing capital expenditures, and managing working capital.

In addition, we believe that cash provided by operations, funds available under the credit agreement with Bank of America, N.A.

(BofA), funds received from our sales leaseback transaction and cash on hand will be adequate to meet our liquidity needs, including working capital, capital expenditures, and debt payment obligations.

Net cash used by operating activities for the three months ended March 31, 2021 was $0.9 million.

The net loss in the three months ended March 31, 2021 negatively impacted operating cash flows.

We have a credit agreement with Bank of America (BofA) which was entered into on June 15, 2017 and amended on December 29, 2017 and provides for a line of credit arrangement of $16.0 million that expires on June 15, 2022.

The credit arrangement also has a $5.0 million real estate term note outstanding with a maturity date of June 15, 2022.

Both the line of credit and real estate term notes are subject to fluctuations in the LIBOR rates.

The line of credit and real estate term notes with BofA 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.

The Company met the covenants for the period ended March 31, 2021.

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

At March 31, 2021, we had outstanding advances of $2.2 million and we had unused availability under our line of credit of $7.6 million, supported by our borrowing base.

We believe our financing arrangements and cash flows to be provided by operations will be sufficient to satisfy our future working capital needs.

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 $6.1 million 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 6 months from the date of the Promissory Note 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.

Off-Balance Sheet Arrangements

We have not engaged in any off-balance sheet activities as defined in Item 303(a)(4) of Regulation S-K.

Critical Accounting Policies and Estimates

Our significant accounting policies and estimates are summarized in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2020.

Some of our accounting policies require us to exercise significant judgment in selecting the appropriate assumptions for calculating financial estimates.

Such judgments are subject to an inherent degree of uncertainty.

These judgments are based on our historical experience, known trends in our industry, terms of existing contracts and other information from outside sources, as appropriate.

Actual results could differ from these estimates.

Forward-Looking Statements

Those statements in the foregoing report that are not historical facts are forward-looking statements made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.

Volatility in the marketplace which may affect market supply, demand of our products or currency exchange rates;

Supply chain disruption and unreliability due to COVID-19;

Lack of supply of sufficient human resources to produce our products;

Increased competition from within the EMS industry or the decision of OEMs to cease or limit outsourcing;

Changes in the reliability and efficiency of our operating facilities or those of third parties;

Increases in certain raw material costs such as copper and oil;

Commodity and energy cost instability;

Risks related to FDA noncompliance;

The loss of a major customer;

General economic, financial and business conditions that could affect our financial condition and results of operations;

Increased or unanticipated costs related to compliance with securities and environmental regulation;

Disruption of global or local information management systems due to natural disaster or cyber-security incident;

Outbreaks of epidemic, pandemic, or contagious diseases, such as the recent novel coronavirus that affect our operations, our customers' operations or our suppliers' operations.

The factors identified above are believed to be important factors (but not necessarily all of the important factors) that could cause actual results to differ materially from those expressed in any forward-looking statement made by us.

Discussion of these factors is also incorporated in Part I, Item 1A, “Risk Factors,” and should be considered an integral part of Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Unpredictable or unknown factors not discussed herein could also have material adverse effects on forward-looking statements.

All forward-looking statements included in this Form 10-K are expressly qualified in their entirety by the forgoing cautionary statements.

We undertake no obligations to update publicly any forward-looking statement (or its associated cautionary language) whether as a result of new information or future events.

Please refer to forward-looking statements and risks as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

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