What changed in this filing

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Item 1. Financial Statements

2021-11-10 compared with 2021-08-12 · 273 added, 261 removed, 545 unchanged (49% of the section changed)

3 unchanged sentences

(IN THOUSANDS, EXCEPT SHARE DATA)

THREE MONTHS ENDED

SIX MONTHS ENDED

SEPTEMBER 30,

$ 29,452  

7 unchanged sentences

72,336  

13,187  

Operating Expenses

3 unchanged sentences

Restructuring

Loss on Abandonment of Intangible Asset 

Gain on Sale of Assets

1 unchanged sentence

( 3,821 )  

( 176 )  

Total Operating Expenses

Income (Loss) From Operations

( 747 )  

10,039  

Income From Operations

Other Expense

Interest Expense

Income (Loss) Before Income Taxes

( 112 )  

Income Tax Expense (Benefit)

( 126 )  

Net Income (Loss)

( 314 )  

Net Income (Loss) Per Common Share - Basic

Income Before Income Taxes

Income Tax Expense

$ 3,557  

1 unchanged sentence

$ 2,188  

$ 1,985  

Net Income Per Common Share - Basic

$ 1.33  

$ 0.74  

$ 0.82  

$ 0.75  

Weighted Average Number of Common Shares Outstanding - Basic

3 unchanged sentences

2,657,530  

Net (Loss) Income Per Common Share - Diluted

Net Income Per Common Share - Diluted

$ 1.24  

$ 0.73  

$ 0.78  

$ 0.74  

Weighted Average Number of Common Shares Outstanding - Diluted

3 unchanged sentences

2,670,984  

Other Comprehensive Income (Loss)

Foreign currency translation

Comprehensive Income (Loss), net of tax

Other Comprehensive Income

Foreign Currency Translation Gain (Loss)

Comprehensive Income, Net of Tax

$ 3,552  

$ 2,067  

$ 2,208  

$ 2,039  

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

2 unchanged sentences

(IN THOUSANDS, EXCEPT SHARE DATA)

SEPTEMBER 30,

2020 1  

ASSETS  

Current Assets

3 unchanged sentences

15,625  

Employee Retention Credit Receivable

Inventories, Net

8 unchanged sentences

Property and Equipment, Net

Assets Held For Sale

Operating Lease Assets

7 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

4 unchanged sentences

Other Accrued Liabilities

Income Tax Payable

Total Current Liabilities

4 unchanged sentences

Long-Term Debt, Net

Long Term Finance Lease Obligation, Net

Long-Term Operating Lease Obligation, Net

Long Term Finance Lease Obligations, Net

Long-Term Operating Lease Obligations, Net

Other Long-Term Liabilities

5 unchanged sentences

38,916  

Commitments and Contingencies

Shareholders' Equity

9 unchanged sentences

Accumulated Other Comprehensive Loss

( 17 )  

Retained Earnings

10 unchanged sentences

(IN THOUSANDS)

SIX MONTHS ENDED

NINE MONTHS ENDED

SEPTEMBER 30,

Cash Flows From Operating Activities

Net (Loss) Income

$ 2,188  

Adjustments to Reconcile Net (Loss) Income to Net Cash

$ 1,985  

Adjustments to Reconcile Net Income to Net Cash

(Used In) Provided by Operating Activities

Depreciation and Amortization

Compensation on Stock-Based Awards

Compensation on Stock-Based & Equity Awards

Change in Accounts Receivable Allowance

Change in Inventory Reserves

Gain on Sale of Assets

( 959 )  

Loss on Abandonment of Intangible Asset

Gain on Disposal of Property and Equipment

( 176 )  

Changes in Current Operating Items

Accounts Receivable

Employee Retention Credit Receivable

( 5,209 )  

( 5,755 )  

Contract Assets

( 2,246 )  

Prepaid Expenses and Other Current Assets

( 276 )  

Accounts Payable

1 unchanged sentence

Other Accrued Liabilities

Net Cash (Used in) Provided by Operating Activities

Net Cash Used In Operating Activities

( 2,852 )  

Cash Flows from Investing Activities

1 unchanged sentence

Purchase of Intangible Asset

( 49 )  

Purchases of Property and Equipment

Net Cash Used in Investing Activities

( 1,198 )  

Net Cash (Used In) Provided By Investing Activities

( 621 )  

Cash Flows from Financing Activities

2 unchanged sentences

Principal Payments on Long-Term Debt

( 873 )  

Principal Payments on Finance Leases

( 492 )  

Stock Option Exercises

Net Cash Provided By (Used In) Financing Activities

Net Change in Cash

( 2,121 )  

Cash - Beginning of Period

1 unchanged sentence

$ 1,443  

$ 1,694  

Reconciliation of cash and restricted cash reported within the condensed consolidated balance sheets

2 unchanged sentences

$ 1,443  

$ 1,694  

Supplemental Disclosure of Cash Flow Information:

Cash Paid During the Period for Interest

Cash Paid During the Period for Income Taxes

Cash Paid (Refunded) During the Period for Income Taxes

$ ( 114 )  

Supplemental Noncash Investing and Financing Activities:

1 unchanged sentence

Property Acquired under Operating Lease

$ 4,685  

Equipment Acquired under Finance Lease

4 unchanged sentences

Paid-In Capital

Comprehensive Income (Loss)

Retained Earnings

Shareholders' Equity

BALANCE MARCH 31, 2020

$ 15,787  

$ 4,345  

$ 20,091  

Comprehensive

Shareholders'

BALANCE JUNE 30, 2020

Foreign currency translation adjustment

Compensation on stock-based awards

BALANCE JUNE 30, 2020

$ 15,823  

$ 4,222  

$ 20,023  

BALANCE SEPTEMBER 30, 2020

BALANCE DECEMBER 31, 2019

$ 15,748  

$ 4,208  

$ 19,976  

Foreign currency translation adjustment

Compensation on stock-based awards

BALANCE SEPTEMBER 30, 2020

BALANCE JUNE 30, 2021

$ 15,823  

$ 4,222  

$ 20,023  

BALANCE MARCH 31, 2021

$ 15,837  

$ 1,108  

$ 17,151  

Foreign currency translation adjustment

Stock option exercises

Compensation on stock-based awards

BALANCE JUNE 30, 2021

$ 15,862  

$ 1,287  

$ 17,413  

BALANCE SEPTEMBER 30, 2021

BALANCE DECEMBER 31, 2020

$ 15,816  

$ 2,662  

$ 18,718  

Foreign currency translation adjustment

Stock option exercises

Compensation on stock-based awards

BALANCE JUNE 30, 2021

$ 15,862  

$ 1,287  

$ 17,413  

BALANCE SEPTEMBER 30, 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 June 30, 2021:

Following is the status of all stock options as of September 30, 2021:

Intrinsic Value

4 unchanged sentences

27,000  

Outstanding - June 30, 2021

( 13,400 )  

( 10,340 )  

Outstanding - September 30, 2021

365,900  

Exercisable - June 30, 2021

$ 4.15  

$ 2,688  

Exercisable - September 30, 2021

180,500  

$ 3.75  

$ 1,398  

In May 2017, the shareholders approved the 2017 Stock Incentive Plan which authorized the issuance of 400,000 shares.

There were additional shares authorized in March 2020 totaling 50,000 and in May 2021 totaling 75,000 .

There were 3,000 stock options granted during the six months ended June 30, 2021.

Total compensation expense related to stock options for the three months ended June 30, 2021 and 2020 was $ 25 and $ 36 , respectively and $ 46 and $ 75 for the six months ended June 30, 2021 and 2020, respectively.

As of June 30, 2021, there was $ 283 of unrecognized compensation which will vest over the next 2.99 years.

There were 27,000 and 11,300 stock options granted during the nine months ended September 30, 2021 and 2020, respectively.

Total compensation expense related to stock options for the three and nine months ended September 30, 2021 was $ 28 and $ 74 , respectively.

Total compensation expense related to stock options for the three and nine months ended September 30, 2020 was $ 36 and $ 111 , respectively.

As of September 30, 2021, there was $ 320 of unrecognized compensation which will vest over the next 3.12 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, 2021 and 2020, there were no units granted.

We recognized $ 100 and $ 114 of compensation expense in the three and six months ended June 30, 2021, respectively.

We had no amounts expensed in the comparable periods in 2020.

Net Income (Loss) per Common Share  

For the three months ended June 30, 2021, stock options of 109,065 were included in the computation of diluted income per common share amount as their impact were dilutive.

For the six months ended June 30, 2021, all stock options are deemed to be antidilutive and therefore, were not included in the computation of incomer per common share amount.

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 income 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 was dilutive. 

During the nine months ended September 30, 2021 and 2020, there were no Units granted.

We recognized $ 13 and $ 127 of compensation expense in the three and nine months ended September 30, 2021, respectively.

Compensation expense was approximately $ 40 for both the three and nine months ended September 30, 2020.

The current liability recorded for the Units at September 30, 2021 is $ 235 .

Net Income per Common Share  

For the three and nine months ended September 30, 2021, stock options of 214,391 and 144,892 , respectively, were included in the computation of diluted income per common share amount as their impact were dilutive.

For the three and nine months ended September 30, 2020, stock options of 45,326 and 21,220 , respectively, were included in the computation of diluted income per common share as their impact were dilutive.

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, 2021 balance included lockbox deposits that are temporarily restricted due to timing at the period end.

The September 30, 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.

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 is extended based upon an evaluation of the customer’s financial condition and, while collateral is not required, the Company periodically receives customer deposits.

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 $ 459 at June 30, 2021 and $ 343 at December 31, 2020.

The amounts of trade accounts receivable have been reduced by an allowance for doubtful accounts of $ 361 at September 30, 2021 and $ 343 at December 31, 2020.

Employee Retention Credit (ERC) and Payroll Tax Deferral

We qualified for Employee Retention Credits on qualified wages paid in the first and second quarters of 2021 and filed for both credits as of the date of this filing.

We recognize government grants for which there is a reasonable assurance of compliance with grant conditions and receipt of credits.

During the three and nine months ended September 30, 2021, there was $ 5,209 related to Employee Retention Credits recognized as a reduction of the associated costs within cost of goods sold of $ 4,670 , selling of $ 125 , and general and administrative expenses of $ 414 on the consolidated statements of operations and within Employee Retention Credits Receivable on the condensed consolidated balance sheets.

The CARES Act allowed for the deferral of the employer portion of social security taxes incurred through the end of calendar 2020.

As of September 30, 2021, there was $ 1,158 of social security tax payments deferred, of which 50% are required to be remitted by December 2021 and the remaining 50% by December 2022.

The deferred amounts are recorded within accrued payroll and commissions on the condensed consolidated balance sheets.

Inventories, Net

3 unchanged sentences

Inventories are as follows:

September 30,

Raw Materials

5 unchanged sentences

$ 13,917  

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.

Other Intangible Assets

Other intangible assets at June 30, 2021 and December 31, 2020 are as follows:

June 30, 2021

Customer Relationships

$ 1,302  

Intellectual Property

Other intangible assets at September 30, 2021 and December 31, 2020 are as follows:

Relationships

Balance at January 1, 2020

$ 1,338  

1 unchanged sentence

( 41 )  

December 31, 2020

Customer Relationships

Balance at December 31, 2020

$ 1,173  

Intellectual Property

( 109 )  

( 30 )  

Abandonment Loss

( 560 )  

Amortization expense for the three and six months ended June 30, 2021 was $ 46 and $ 92 , respectively.

Balance at September 31, 2021

In the three months ended September 30, 2021, we determined the fair value of the Devicix tradename was more likely than not be zero based on management’s best estimate and recognized a $ 560 loss on abandonment of intangible assets.

Intangible assets are amortized on a straight-line bases over their estimated useful lives.

The weighted average remaining amortization period of our intangible assets is 3.0 years.

Patents are not being amortized as they are in process and a patent has not yet been received.

Amortization expense for the three and nine months ended September 30, 2021 was $ 45 and $ 139 , respectively.

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

Remainder of 2021

$ 1,004  

Reclassification

Certain reclassifications have been made to the prior year’s financial statements to enhance comparability with the current year’s financial statements.

Certain reclassifications have been made to the prior year’s consolidated financial statements to enhance comparability with the current year’s financial statements.

As a result, certain line items have been amended in the statement of operations.

1 unchanged sentence

The items were reclassified as follows:

Three Months Ended June 30, 2020

Six Months Ended June 30, 2020

Three Months Ended

Nine Months Ended

September 30, 2020

Reclassification

23 unchanged sentences

The amendments in ASU 2020 - 04 can be adopted as of March 12, 2020 and are effective through December 31, 2022.

We do not currently have any contracts that have been changed to a new reference rate, but we will continue to evaluate our contracts and the effects of this standard on our condensed consolidated financial statements prior to adoption.

We do not currently have any contracts that have been changed to a new reference rate, we will continue to evaluate our contracts and the effects of this standard on our condensed consolidated financial statements prior to adoption.

CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

2 unchanged sentences

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

Of the $ 1,253 in cash at June 30, 2021, approximately $ 274 was held at banks located in China.

Of the $ 1,443 in cash at September 30, 2021, approximately $ 378 and $ 5 was held at banks located in China and Mexico, respectively.

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, 2021 and 2020.

One division accounted for approximately 23 % and 24 % of net sales for the three and six months ended June 30, 2021, respectively, and approximately 20 % and 22 % for the three and six months ended June 30, 2020, respectively.

The other division accounted for approximately 2 % and 3 % of net sales for the three months and six ended June 30, 2021, respectively, and approximately 3 % and 2 % of net sales for the three months and six ended June 30, 2020, respectively.

Together they accounted for approximately 25 % and 27 % of net sales for the three and six months ended June 30, 2021, respectively, and approximately 23 % and 24 % of net sales for the three and six months ended June 30, 2020, respectively.

Accounts receivable from the customer at June 30, 2021 and December 31, 2020 represented approximately 19 % and 20 % of our total accounts receivable, respectively.

Export sales represented approximately 2 % and 3 % of net sales for the three months ended June 30, 2021 and 2020, respectively.

Export sales represented 3 % of net sales for the six months ended June 30, 2021 and 2020.

We have certain customers whose revenue individually represented 10% or more of net sales, or whose accounts receivable balances individually represented 10% or more of total accounts receivable.

For the three months ended September 30, 2021, two customers accounted for 36 % of net sales.

For the three months ended September 30, 2020, one customer accounted for 23 % of net sales.

At September 30, 2021 and 2020, one customer accounted for 26 % and 23 % of net sales, respectively 

At September 30, 2021, two customers represented approximately 36% of our total accounts receivable.

At December 31, 2020, one customer represented approximately 20 % of our total accounts receivable.

Export sales represented approximately 3 % of net sales for the three months ended September 30, 2021 and 2020.

Export sales represented 3 % of net sales for the nine months ended September 30, 2021 and 2020.

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 82.2 % and 79.3 % of our revenue for the three and six months ended June 30, 2021, respectively and for approximately 84.6 % and 86.1 % of our revenue for the three and six months ended June 30, 2020, respectively.

Revenue under contract manufacturing agreements that was recognized over time accounted for approximately 82 % and 80 % of our revenue for the three and nine months ended September 30, 2021, respectively and 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.

7 unchanged sentences

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, 2021 was as follows (in thousands):

Six Months Ended June 30, 2021

Significant changes in the contract assets balance during the nine months ended September 30, 2021 was as follows (in thousands):

Nine Months Ended September 30, 2021

Outstanding at January 1, 2021

3 unchanged sentences

Product transferred over time

Outstanding at June 30, 2021

Outstanding at September 30, 2021

$ 8,145  

We expect substantially all the remaining performance obligations for the contract assets recorded as of June 30, 2021, to be transferred to receivables within 90 days, with any remaining amounts to be transferred within 180 days.

We expect substantially all the remaining performance obligations for the contract assets recorded as of September 30, 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 six months ended June 30 ( in thousands):

Three Months Ended June 30, 2021

The following tables summarize our net sales by market for the three and nine months ended September 30, 2021 and 2020 (in thousands):

Three Months Ended September 30, 2021

Transferred at

1 unchanged sentence

Consideration

Total Net Sales

$ 13,762  

2 unchanged sentences

Aerospace and Defense

10,176  

Total Net Sales

2 unchanged sentences

$ 29,452  

Three Months Ended June 30, 2020

Nine Months Ended September 30, 2021

Transferred at

1 unchanged sentence

Consideration

Total Net Sales

$ 35,497  

1 unchanged sentence

$ 1,017  

$ 45,390  

Aerospace and Defense

10,539  

20,385  

25,777  

Total Net Sales

2 unchanged sentences

$ 1,904  

Six Months Ended June 30, 2021

Product/ Service

$ 81,706  

Three Months Ended September 30, 2020

Transferred at

5 unchanged sentences

$ 1,405  

Aerospace and Defense

$ 14,218  

16,395  

Aerospace and Defense

Total Net Sales

3 unchanged sentences

$ 26,362  

Six Months Ended June 30, 2020

Product/ Service

Nine Months Ended September 30, 2020

Transferred at

9 unchanged sentences

15,509  

17,434  

22,001  

Total Net Sales

4 unchanged sentences

FINANCING ARRANGEMENTS

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 

The credit arrangement also has a $ 5,000 real estate term note outstanding with a maturity date of June 15, 2022.

The line of credit is classified as current on the balance sheet as of June 30, 2021, however we expect to extend the agreement past June 15, 2022.

The line of credit is classified as current on the consolidated balance sheet as of September 30, 2021, however we expect to extend the agreement past 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 3.4 % and 4.0 % as of June 30, 2021 and December 31, 2020, respectively.

We had borrowings on our line of credit of $ 7,667 and $ 3,328 outstanding as of June 30, 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.

Our line of credit bears interest at a weighted-average interest rate of 3.4 % and 4.0 % as of September 30, 2021 and December 31, 2020, respectively.

We had borrowings on our line of credit of $ 6,009 and $ 3,328 outstanding as of September 30, 2021 and December 31, 2020, respectively.

Borrowing on the real estate term note was $ 197 and $ 1,071 as of September 30, 2021 and December 31, 2020, respectively.

Payment on the real estate term note is approximately $ 41 per month.

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.

2 unchanged sentences

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 ended 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 June 30, 2021.

The Company met the covenants for the period ended September 30, 2021.

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

At June 30, 2021, we had unused availability under our line of credit of $ 4,523 , supported by our borrowing base.

At September 30, 2021, we had unused availability under our line of credit of $ 5,762 , supported by our borrowing base.

The line is secured by substantially all of our assets.

3 unchanged sentences

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 June 30, 2021 and December 30, 2020 consisted of following:

Real estate term notes bearing interest at one-month LIBOR + 2.00% ( 2.1% and 4.3% as of June 30, 2021 and December 31, 2020, respectively) maturing June 15, 2022 with monthly payments of approximately $41 plus interest secured by substantially all assets.

$ 1,071  

Promissory Note

$ 6,077  

Debt issuance Costs

Total long-term debt

Current maturities of long-term debt

Long-term debt - net of current maturities

$ 3,798  

$ 5,865  

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

We applied for forgiveness of the Promissory Note in the third quarter of 2021.

We continue to treat this Promissory Note as debt until forgiveness is granted, if forgiven.

We have operating leases for certain manufacturing sites, office space, and equipment.

2 unchanged sentences

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

At June 30, 2021, we do not have material lease commitments that have not commenced.

At September 30, 2021, we do not have material lease commitments that have not commenced.

The components of lease expense were as follows:

Three Months Ended June 30,

Operating lease cost

Finance lease interest cost

Finance lease amortization expense

Total lease cost

Six Months Ended June 30,

Six Months ended June 30,

Three Months Ended

Nine Months Ended

September 30,

Operating Lease Cost

$ 1,696  

$ 1,118  

Finance Lease Interest Cost

5 unchanged sentences

Balance Sheet Location

June 30, 2021

December 31, 2020

Operating Lease Assets

3 unchanged sentences

Finance Lease Assets

Property, Plant and Equipment

Property and Equipment, Net

Total Leased Assets

7 unchanged sentences

Long-Term Operating Lease Liabilities

Long Term Operating Lease Liabilities, Net

Long-Term Operating Lease Obligations, Net

Long Term Finance Lease Liabilities

4 unchanged sentences

Supplemental cash flow information related to leases was as follows:

September 30,

Operating Leases

1 unchanged sentence

Right-of-use assets obtained in exchange for lease obligations

$ 4,685  

Maturities of lease liabilities were as follows:

1 unchanged sentence

Remaining 2021

$ 1,233  

Total Lease Payments

2 unchanged sentences

$ 16,212  

( 5,034 )  

( 91 )  

Present Value of Lease Liabilities

2 unchanged sentences

$ 11,087  

The lease term and discount rate at June 30, 2021 were as follows:

The lease term and discount rate at September 30, 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.

The effective tax rate for the three months ended June 30, 2021, was 38.2 %, compared to a benefit of 3.2 % for the three months ended June 30, 2020.

The effective tax rate for the six months ended June 30, 2021 was 30.2 %, compared to 65.0 % for the six months ended June 30, 2020.

The primary drivers of the change in the Company’s effective tax rate is attributable to the PPP loan forgiveness being non-taxable and a release in valuation allowance on the state NOLs and R&D Credits.

There is also a discrete item related to an IRS exam.

It is more likely than not an amount payable will be due at an estimated $ 44 .

The effective tax rate for the three months ended September 30, 2021 was 26.0 % compared to 23.7 % for the three months ended September 30, 2020.

The effective tax rate for the nine months ended September 30, 2021 was 22.8 % compared to 24.3 % for the nine months ended September 30, 2020.

The primary drivers of the change in the effective tax rate is attributable to the PPP loan forgiveness being non-taxable and additional valuation allowance created from anticipated temporary differences.

There are also discrete items related to an IRS exam and return to provision adjustments from the 2020 tax return.

It is more likely than not an amount payable will be due at an estimated $44k for the IRS exam.

A reserve has been set up for the anticipated adjustment.

We recorded an income tax benefit of $ 596 and expense of $ 26 for the six  months ended June 30, 2021 

and 2020, respectively.

For the three and six months ended June 30, 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.

We recorded an income tax expense of $646k and $638k for the nine months ended September 30, 2021 and 2020, respectively.

RESTRUCTURING CHARGES

During the first six months of 2021, we recorded restructuring charges of $ 296  related to the consolidation of our production facilities and closure of our Merrifield, Minnesota facility.

With the Merrifield 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 June 30, 2021.

During the first nine months of 2021, we recorded restructuring charges of $ 319  related to the consolidation of our production facilities and closure of our Merrifield, Minnesota facility.

With the Merrifield closure, we shifted 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 September 30, 2021.

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

As of June 30, 2021, this closure qualified for held for sale accounting.

We had a gain on sale of assets of $ 94 in the three months ended June 30, 2021 related to the sale of machinery and equipment.

The sale of the Merrifield facility was completed in July 2021.

We recognized a gain on the sale of assets related to the restructure of $ 93 and $ 176 for the three and nine months ended September 30, 2021, respectively.

RELATED PARTY TRANSACTIONS

During six months ended June 30, 2021, we did business with Printed Circuits, Inc.

During the nine months ended September 30, 2021, we did business with Printed Circuits, Inc.

which was 90% owned by the Kunin family until late 2020.

The Kunin family owns a majority of our stock.

We had payments totaling $ 34 and $ 54 during the three and six months ended June 30, 2021, respectively, and $ 14 and $ 28 for the three and six months ended June 30, 2020, respectively, to Printed Circuits, Inc.

We had payments totaling $ 18 and $ 72 during the three and nine months ended September 30, 2021, respectively, and $ 0 and $ 28 for the three and nine months ended September 30, 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.

3 unchanged sentences

Kunin earned $ 16 as a consultant to Abilitech.

In the three months ended June 30, 2021 and 2020, Abilitech paid the Company $ 472 and $ 434 , respectively, and in the six months ended June 30, 2021 and 2020, paid the company $ 740 and $ 609 , respectively, for delivery of medical products.

In the three months ended September 30, 2021 and 2020, Abilitech paid the Company $ 316 and $ 59 , respectively, and in the nine months ended September 30, 2021 and 2020, paid the Company $ 1,056 and $ 668 , 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 conditional grant.

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

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

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 .

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

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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 June 30, 2021, we received a $ 100 deposit but no expenses were incurred.

SUBSEQUENT EVENTS

Facility sale

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 closed on the sale of the facility in July 2021 with a gain less than $ 100 .

PPP and Employee Retention Credit (ERC)

In the third quarter of 2021, we have applied for forgiveness for the $ 6.1 million Promissory Note under the PPP. We will continue to treat this Promissory Note as debt until forgiveness is granted.

In addition, we have applied for the ERC credit for the first and second quarters of 2021.

 If the application is successful, we expect to receive approximately $ 5 million in fiscal 2021.

As of September 30, 2021, we have received a $ 100 deposit, incurred expenses of $ 82 and recognized revenue of $ 78 from Marpe.

MANAGEMENT ’

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We provide value added engineering services and technical support including design, testing, prototyping and supply chain management to customers mainly in the medical, aerospace and defense, and industrial equipment markets.

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

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

Monterrey, Mexico;

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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.

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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.

The sale closed in the third quarter of 2021 with a gain under $100,000.

As of June 30, 2021, this closure did qualify for held for sale accounting but did not qualify for discontinued operations.

The sale closed in the third quarter of 2021. 

Paycheck Protection Program (PPP) and Employee Retention Credit (ERC)

In the third quarter of 2021, we have applied for forgiveness for the $6.1 million Promissory Note under the PPP.

We will continue to treat this Promissory Note as debt until forgiveness is granted.

In addition, we have applied for the ERC credit for the first and second quarters of 2021.

If the application is successful, we expect to receive approximately $5 million in fiscal 2021.

In the third quarter of 2021, we applied for forgiveness for the $6.1 million Promissory Note under the PPP.

We will continue to treat this Promissory Note as debt until forgiveness is granted, any principal and interest amounts outstanding after the determination of amounts forgiven will be repaid on a monthly basis.

In addition, we applied for the ERC for qualified wages paid in the first and second quarters of 2021 and expect to receive approximately $5.2 million in fiscal 2021 or 2022.

The ERC was recorded as a reduction of the associated payroll and benefit costs on the consolidated statements of operations for the three and nine months ended September 30, 2021 and as Employee Retention Credit Receivable on the consolidated balance sheet at September 30, 2021 (see Note 1.)

Results of Operations

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

Three Months Ended

Six Months Ended

Cost of Goods Sold

Nine Months Ended

September 30,

Selling Expenses

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Gain on Sale of Fixed Assets

Income (Loss) from Operations

Income from Operations

Other Expenses

(Loss) Income Before Income Taxes

Income Tax Expense (Benefit)

Net (Loss) Income

Net sales were $30.2 million in the second quarter of 2021, as compared to $26.5 million in the second quarter of the prior year, an increase of $3.7 million or 14.0%.

Net sales results were varied by markets, the medical market increased by $2.7 million or 20.2%.

Net sales from the industrial market increased by $2.0 million or 24.3% in the second quarter of 2021 as compared to the second quarter of 2020.

The aerospace and defense markets decreased by $1.0 million or 19.8% of sales in the second quarter of 2021 as compared to the same quarter of 2020.

Net sales were $52.3 million in the six months ended 2021, as compared to $53.9 million in the prior year, a decrease of $1.6 million or 3.1%.

Net sales results were varied by markets, the medical market decreased by $0.3 million, or 1.1%.

Net sales from the aerospace and defense markets decreased $2.2 million or 23.1%.

The industrial market increased by $0.9 million of sales or 5.9%.

Net sales by our major EMS industry markets for the three and six months ended June 30, 2021 and 2020 were as follows (in thousands):

Three Months Ended June 30,

Six Months Ended June 30,

Income Before Income Taxes

Income Tax Expense

Net sales were $29.5 million in the third quarter of 2021, as compared to $26.4 million in the third quarter of the prior year, an increase of $3.1 million or 11.7%.

The increase was driven primarily by net sales to the industrial market which increased by $3.4 million or 58.0% in the third quarter of 2021 as compared to the third quarter of 2020.

Net sales were $81.7 million in the nine months ended 2021, as compared to $80.3 million in the prior year, an increase of $1.4 million or 1.8%.

Net sales results were varied by markets.

The medical market increased by $2.8 million, or 6.2% and the industrial market increased by $3.8 million of sales or 17.2%, while net sales from the aerospace and defense markets decreased $5.0 million or 32%.

Net sales by our major EMS industry markets for the three and nine months ended September 30, 2021 and 2020 were as follows (in thousands):

Three Months Ended

Nine Months Ended

September 30,

Aerospace and Defense

Total Net Sales

Net sales by timing of transfer of goods and services for the three and six months ended June 30, 2021 is as follows (in thousands):

Three Months Ended June 30, 2021

Product/ Service

Net sales by timing of transfer of goods and services for the three and nine months ended September 30, 2021 is as follows (in thousands):

Three Months Ended September 30, 2021

Transferred at

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Total Net Sales

Six Months Ended June 30, 2021

Product/ Service

Nine Months Ended September 30, 2021

Transferred at

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Total Net Sales

Net sales by timing of transfer of goods and services for the three and six months ended June 30, 2020 is as follows (in thousands):

Three Months Ended June 30, 2020

Product/ Service

Transferred at

Point in Time

Consideration

Total Net Sales

Net sales by timing of transfer of goods and services for the three and nine months ended September 30, 2020 is as follows (in thousands):

Three Months Ended September 30, 2020

Product/ Service Transferred Over Time

Product Transferred at Point in Time

Noncash Consideration

Total Net Sales by Market

Aerospace and Defense

Total Net Sales

Six Months Ended June 30, 2020

Product/ Service

Transferred at

Point in Time

Consideration

Total Net Sales

Nine Months Ended September 30, 2020

Product/ Service Transferred Over Time

Product Transferred at Point in Time

Noncash Consideration

Total Net Sales by Market

Aerospace and Defense

Total Net Sales

Our 90-day shipment backlog as of June 30, 2021 was $34.7 million, an increase of 11.8% from the beginning of the quarter and a 49.1% increase as compared to the prior year.

Our 90-day shipment backlog as of September 30, 2021 was $38.9 million, an increase of 12.0% from the beginning of the quarter and a 68.3% increase as compared to the prior year.

Backlog for our medical customers has increased 4.2% from the beginning of the quarter and increased 71.3% from the prior year.

The aerospace and defense backlog increased 17.6% from the beginning of the quarter and decreased 13.3% from the prior year.

The aerospace and defense backlog increased 43.3% from the beginning of the quarter and 26.7% from the prior year.

Our industrial customers’

backlog decreased 2.5% from the beginning of the quarter and increased 124.4% from the prior year.

backlog increased 7.9% from the beginning of the quarter and increased 119.3% from the prior year.

This backlog consists of firm purchase orders we expect to ship in the next 90 days.

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Shipment Backlog as of the Period Ended

September 30,

Aerospace and Defense

Total 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 $71.5 million at June 30, 2021 compared to $46.6 million at the end of June 30, 2020.

Gross profit as a percent of net sales for the three months ended June 30, 2021 and 2020 was 11.9% and 10.3%, respectively.

Gross profit as a percentage of sales for the six months ended June 30, 2021 and 2020 was 9.9% and 11.1%, respectively.

The increase in gross profit for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 was due mainly to improved utilization as a result of the increase in sales. 

The decrease in gross profit for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 was due mainly by lower sales.

Our total shipment backlog was $78.6 million at September 30, 2021 compared to $45.7 million at September 30, 2020.

Gross profit as a percent of net sales for the three months ended September 30, 2021 and 2020 was 27.3% and 7.4%, respectively.

Gross profit as a percentage of sales for the nine months ended September 30, 2021 and 2020 was 16.1% and 9.9%, respectively.

The gross profit improvement relates primarily to the $4.7 million reduction in payroll and medical expenses related to the ERC and increased utilization as a result of the increase in sales.

Selling Expense

Selling expenses for the three months ended June 30, 2021 and 2020 was $0.6 million or 1.9% of sales and $0.7 million or 2.7% of sales, respectively.

Selling expense for the six months ended June 30, 2021 and 2020 was $1.3 million or 2.5% of sales and $1.4 million or 2.5% of sales, respectively.

Selling expenses for the three months ended September 30, 2021 and 2020 was $0.4 million or 1.5% of sales and $0.6 million or 2.3% of sales, respectively.

Selling expense for the nine months ended September 30, 2021 and 2020 was $1.7 million or 2.1% of sales and $1.9 million or 2.4% of sales, respectively.

The decrease in selling expense for both the three and nine months ended September 30, 2021 compared to the same periods in the prior year relates primarily to the reduction in payroll and medical expenses of $0.1 million due to the ERC.

General and Administrative Expense

General and administrative expenses for the three months ended June 30, 2021 and 2020 were $2.4 million or 8.0% of sales and $1.9 million or 7.4% of sales, respectively.

General and administrative expenses for the six months ended June 30, 2021 and 2020 were $5.2 million or 10.0% of sales and $4.2 million or 7.8% of sales, respectively.

The increase in the quarterly comparison was due primarily to increased training and consulting expenses, while the increase in the year-to-date comparison was primarily due to higher bad debt expense of $0.3 million, increased training and consulting expenses of $0.3, and increased realized loss on foreign currency of $0.3 million.

General and administrative expenses for the three months ended September 30, 2021 and 2020 were $2.0 million or 6.9% of sales and $2.5 million or 9.4% of sales, respectively.

General and administrative expenses for the nine months ended September 30, 2021 and 2020 were $7.2 million or 8.9% of sales and $6.7 million or 8.3% of sales, respectively.

The decrease in general and administrative expenses for the three months ended September 30, 2021 compared to the same period of 2020 relates primarily to the reduction in payroll and medical expenses of $0.4 million related to the ERC.

The increase in general and administrative expenses for the nine months ended September 30, 2021 compared to the same period of 2020 relates primarily to an increase in professional service fees.

Research and Development Expense

Research and development expenses for the three and six months ended June 30, 2021 was $0.2 million or 0.7% of sales.

There were minimal to no research and development expenses for the three and six months ended June 30, 2020.

Research and development expenses for the three months ended September 30, 2021 were $0.1 million or 0.5% of sales.

Research and development expenses for the nine months ended September 30, 2021 were $0.3 million or 0.4% of sales.

There were minimal to no research and development expenses for the three and nine months ended September 30, 2020.

Restructuring Charges

Restructuring charges for the three months ended June 30, 2021 was $0.1 million or 0.3% of sales.

There were no restructuring charges for the three months ended June 30, 2020.

Restructuring charges for the six months ended June 30, 2021 was $0.3 million or 0.6% of sales.

There were no restructuring charges for the six months ended June 30, 2020.

Restructuring charges for the three months ended September 30, 2021 were approximately $23 thousand or 0.1% of sales.

Restructuring charges for the nine months ended September 30, 2021 was $0.3 million or 0.4% of sales.

There were no restructuring charges for the three and nine months ended September 30, 2020.

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

Loss on Abandonment of Intangible Asset

Abandonment charges for the three and nine months ended September 30, 2021 were approximately $0.6 million.

There were no abandonment charges for the three and nine months ended September 30, 2020.

The charges relate to the abandonment of the Devicix tradename.

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, 2021 was 38.2% and (30.2%), respectively, and the rate for the three and six months ended June 30, 2020 was (3.2%) and 65.0%, respectively

Net Income (Loss)

Net income for the three and net loss for the six months ended June 30, 2021 was $0.2 million and $1.4 million, respectively.

Net loss for the three and net income for the six months ended June 30, 2020 was $0.1 million and $0.0 million, respectively. 

Our effective tax rate for the three and nine months ended September 30, 2021 was 26.0% and 22.8%, respectively, and the rate for the three and nine months ended September 30, 2020 was 22.8% and 24.3%, respectively.

Net income for the three months and net loss for the nine months ended September 30, 2021 was $3.6 million and $2.2 million, respectively.

Net income for the three and nine months ended September 30, 2020 was $2.0 million. Net income for the three and nine months ended September 30, 2021 was affected by the reduction in payroll and benefit expense for the ERC, while the three and nine months ended September 30, 2020 included a $3.8 million gain on sale of assets.

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.

Our 2021 sales were impacted by the ongoing COVID-19 pandemic and the related supply chain and workforce 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.

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

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 six months ended June 30, 2021 was $5.4 million.

Increases in working capital due to the higher sales and backlog drove the use of cash by operating activities, primarily in higher accounts receivable and inventory.

Net cash provided by operating activities for the six months ended June 30, 2020 was $0.5 million.

Earnings adjusted for depreciation and amortization of $1.1 million drove the cash provided offset by an increase in working capital.

(BofA), funds expected to be received for the ERC 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 nine months ended September 30, 2021 was $2.9 million.

Increases in working capital due to the higher sales and backlog drove the use of cash by operating activities, primarily in increased inventory of $5.8 million.

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.

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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 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 June 30, 2021.

The Company met the covenants for the period ended September 30, 2021.

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

At June 30, 2021, we had outstanding advances of $7.7 million and we had unused availability under our line of credit of $4.5 million, supported by our borrowing base.

At September 30, 2021, we had outstanding advances of $6.0 million and we had unused availability under our line of credit of $5.8 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.

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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.

We applied for forgiveness in the third quarter of 2021, any principal and interest amounts outstanding after the determination of amounts forgiven will be repaid on a monthly basis. 

Off-Balance Sheet Arrangements

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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