What changed in this filing

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Item 1. Financial Statements

2022-05-10 compared with 2021-11-10 · 223 added, 462 removed, 356 unchanged (66% of the section changed)

FINANCIAL STATEMENTS

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(IN THOUSANDS, EXCEPT SHARE DATA)

SEPTEMBER 30,

$ 29,452  

$ 26,362  

$ 81,706  

$ 80,263  

THREE MONTHS ENDED

Cost of Goods Sold

21,411  

24,400  

68,519  

72,336  

13,187  

Operating Expenses

1 unchanged sentence

General and Administrative Expenses

Research and Development

Restructuring

Loss on Abandonment of Intangible Asset 

Research and Development Expenses

Restructuring Charges

Gain on Sale of Assets

( 93 )  

( 3,821 )  

( 176 )  

Total Operating Expenses

( 747 )  

10,039  

Income From Operations

Income (Loss) From Operations

Other Expense

Interest Expense

( 112 )  

( 126 )  

( 314 )  

Income Before Income Taxes

Income Tax Expense

$ 3,557  

$ 1,971  

$ 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

2,665,682  

2,657,530  

2,662,066  

2,657,530  

Net Income Per Common Share - Diluted

$ 1.24  

$ 0.73  

$ 0.78  

$ 0.74  

Weighted Average Number of Common Shares Outstanding - Diluted

2,880,073  

2,703,029  

2,806,958  

2,670,984  

Other Comprehensive Income

Foreign Currency Translation Gain (Loss)

Comprehensive Income, Net of Tax

$ 3,552  

$ 2,067  

$ 2,208  

$ 2,039  

Income (Loss) Before Income Taxes

Income Tax Benefit

Net Income (Loss)

Net Income (Loss) Per Common Share:

Basic (in dollars per share)

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

Diluted (in dollars per share)

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

Other comprehensive income (loss)

Foreign currency translation

Comprehensive income (loss), net of tax

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

2 unchanged sentences

(IN THOUSANDS, EXCEPT SHARE DATA)

SEPTEMBER 30,

2020 1  

MARCH 31, 2022

Current Assets

8 unchanged sentences

Contract Assets

Income Taxes Receivable

Prepaid Expenses and Other Current Assets

9 unchanged sentences

Current Liabilities

Current Maturities of Line of Credit

$ 6,009  

Current Maturities of Long-Term Debt

Current Portion of Finance Lease Obligations

5 unchanged sentences

Other Accrued Liabilities

Income Tax Payable

Total Current Liabilities

3 unchanged sentences

Long Term Line of Credit

Long-Term Debt, Net

Long Term Finance Lease Obligations, Net

7 unchanged sentences

40,980  

Commitments and Contingencies

Shareholders' Equity

9 unchanged sentences

Accumulated Other Comprehensive Loss

( 17 )  

Retained Earnings

10 unchanged sentences

(IN THOUSANDS)

NINE MONTHS ENDED

SEPTEMBER 30,

THREE MONTHS ENDED MARCH 31,

CASH FLOWS FROM OPERATING ACTIVITIES

$ 2,188  

$ 1,985  

Adjustments to Reconcile Net Income to Net Cash

(Used In) Provided by Operating Activities

Net Income (Loss)

Adjustments to Reconcile Net Income (Loss) to Net Cash

Provided By (Used In) Operating Activities:

Depreciation and Amortization

Compensation on Stock-Based & Equity Awards

Compensation on Stock-Based Awards

Compensation on Equity Appreciation Rights

Loss on Held for Sales

(Gain) Loss on Disposal of Property and Equipment

Change in Accounts Receivable Allowance

Change in Inventory Reserves

( 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 )  

Prepaid Expenses and other Curent Assets

Accounts Payable

1 unchanged sentence

Other Accrued Liabilities

Net Cash Used In Operating Activities

( 2,852 )  

Net Cash Provided By (Used In) Operating Activities

CASH FLOWS FROM INVESTING ACTIVITIES

1 unchanged sentence

Purchase of Intangible Asset

( 49 )  

Purchases of Property and Equipment

( 1,198 )  

Net Cash (Used In) Provided By Investing Activities

( 621 )  

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

( 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

Cash - Ending of Period

$ 1,443  

$ 1,694  

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

Principal Payments on Financing Leases

Stock Option Excercises

Net Cash Provided Used In Financing Activities

Effect of Exchange Rate Changes on Cash

Net Change in Cash and Cash Equivalents

Cash and Cash Equivalents - Beginning of Year

Cash and Cash Equivalents - End of Year

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

Restricted Cash

Total cash and restricted cash reported in the condensed consolidated statements of cash flows

$ 1,443  

$ 1,694  

Total Cash and restricted cash reported in the consolidated statements of cash flows

Supplemental Disclosure of Cash Flow Information:

Cash Paid During the Period for Interest

Cash Paid (Refunded) During the Period for Income Taxes

$ ( 114 )  

Cash Paid During the Period for Income Taxes

Supplemental Noncash Investing and Financing Activities:

1 unchanged sentence

Property Acquired Under Operating Lease

$ 4,685  

Equipment Acquired under Finance Lease

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

2 unchanged sentences

(IN THOUSANDS)

Paid-In Capital

Comprehensive

Shareholders'

BALANCE JUNE 30, 2020

Foreign currency translation adjustment

Compensation on stock-based awards

BALANCE SEPTEMBER 30, 2020

BALANCE DECEMBER 31, 2020

1 unchanged sentence

Compensation on stock-based awards

BALANCE SEPTEMBER 30, 2020

BALANCE JUNE 30, 2021

Foreign currency translation adjustment

Stock option exercises

Compensation on stock-based awards

BALANCE SEPTEMBER 30, 2021

BALANCE MARCH 31, 2021

BALANCE DECEMBER 31, 2021

2 unchanged sentences

Compensation on stock-based awards

BALANCE SEPTEMBER 30, 2021

BALANCE MARCH 31, 2022

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

23 unchanged sentences

Stock-Based Awards

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

Stock Options

In May 2017, the shareholders approved the 2017 Stock Incentive Plan which authorized the issuance of 350,000 shares.

There were additional shares authorized by the shareholders in March 2020 totaling 50,000 .

Since the last shareholders’

meeting, the Board of Directors has approved and is seeking shareholder approval of an additional 75,000 shares to be authorized under the plan.

We granted 21,000 service-based options and 21,000 market condition options to Jay Miller per his employment agreement signed February 27, 2022.

The market condition options vest if certain stock prices are exceeded between February 27, 2024 and February 27, 2028.

There were an additional 32,000 employee grants during the three months ended March 31, 2022, for a total of 74,000 options granted during the three months ended March 31, 2022.

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

Total compensation expense related to stock options was $ 43 and $ 21 for the three months ended March 31, 2022 and 2021, respectively.

As of March 31, 2022, there was $ 816 of unrecognized compensation which will vest over the next 3.96 years.

Following is the status of all stock options as of March 31, 2022:

Exercise Price

Intrinsic Value

6 unchanged sentences

( 600 )  

Outstanding - September 30, 2021

365,900  

Outstanding - March 31, 2022

450,900  

$ 5.58  

Exercisable - September 30, 2021

$ 2,063  

Exercisable - March 31, 2022

204,500  

$ 3.92  

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 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.

Restricted Stock Units

During the three months ended March 31, 2022, we granted 21,000 restricted stock units (“RSUs”) under our 2017 Stock Incentive Plan to non-employee directors which vest over two years.

There were no RSUs outstanding prior to the three months ended March 31, 2022.

Total compensation expense related to the RSUs were $ 5 and $ 0 for the three months ended March 31, 2022 and 2021, respectively.

Total unrecognized compensation expense related to the RSUs was $ 243 , which will vest over the next 1.96 years.

The RSUs granted in the three months ended March 31, 2022 had a grant price of $ 11.80 per share with a weighted average remaining contractual term of 9.96 years.

No RSUs vested during the three months ended March 31, 2022.

Equity Appreciation Rights Plan

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, 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.

There were no units granted during the three months ended March 31, 2022 or March 31, 2021.

The 100,000 units outstanding at December 31, 2021 were paid on March 29, 2022.

As of March 31, 2022, there are no units outstanding.

Total compensation expense related to the vested outstanding Units based on the estimated appreciation over their remaining terms was $ 0 and $ 143 for the three months ended March 31, 2022 and 2021, respectively.

Net Income (Loss) per Common Share

Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding.

Dilutive net income (loss) per common share assumes the exercise and issuance of all potential common stock equivalents in computing the weighted-average number of common shares outstanding, unless their effect is antidilutive.

All stock options and restricted stock units, while outstanding, are considered common stock equivalents.

For the three months ended March 31, 2022 there were 191,170 diluted shares with $ 0.02 earnings per diluted share.

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

We had outstanding stock options totaling 51,911 and RSUs totaling 21,000 that are not considered in the computation of diluted net income (loss) per share as their effect would have been anti-dilutive for the three months ended March 31, 2022.

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

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

As of March 31, 2022 we had outstanding letters of credit for $ 400 in total to Essjay Bemidji Holdings, LLC and Essjay Mankato Holdings, LLC.

Restricted cash as of March 31, 2022 was $ 776 .

The March 31, 2022 restricted cash 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 customer deposits.

Credit is extended based upon an evaluation of the customer’s financial condition and, while collateral is not required, the Company periodically receives surety bonds that guarantee payment.

Credit terms are consistent with industry standards and practices.

The amounts of trade accounts receivable have been reduced by an allowance for doubtful accounts of $ 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

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

Trade accounts receivable have been reduced by an allowance for doubtful accounts of $ 366 at March 31, 2022 and $ 328 at December 31, 2021.

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

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

1 unchanged sentence

Inventories are as follows:

September 30,

Raw Materials

5 unchanged sentences

$ 21,187  

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.

$ 19,434  

Other Intangible Assets

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

Relationships

Other intangible assets at March 31, 2022 and December 31, 2021 are as follows:

Customer Relationships

Balance at January 1, 2021

$ 1,173  

( 144 )  

( 41 )  

Balance at December 31, 2020

$ 1,173  

( 109 )  

( 30 )  

Abandonment Loss

( 560 )  

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.

Balance at December 31, 2021

Balance at March 31, 2022

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

The weighted-average remaining amortization period of our intangible assets is 2.5 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):

Amortization expense of finite life intangible assets for the three months ended March 31, 2022 and 2021 was $ 36 and $ 46 , respectively.

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

Remainder of 2022

Reclassification

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.

Comparative figures have been adjusted to conform to the current year’s presentation.

The items were reclassified as follows:

Three Months Ended

Nine Months Ended

September 30, 2020

Reclassification

Cost of Goods Sold

$ 24,717  

$ 24,400  

$ 73,171  

$ 72,336  

General and Administrative Expenses

Accounting Pronouncements Issued But Not Yet Adopted

In June 2016, the FASB issued ASU No.

2016 - 13, “Financial Instruments - Credit Losses (ASC 326 ):

Measurement of Credit Losses on Financial Instruments,”

which amends the guidance on the impairment of financial instruments.

The amendments in this update removes the thresholds that entities apply to measure credit losses on financial instruments measured at amortized cost, such as loans, trade receivables, reinsurance recoverables, off-balance-sheet credit exposures, and held-to-maturity securities.

Under current U.S.

GAAP, entities generally recognize credit losses when it is probable that the loss has been incurred.

The guidance removes all current recognition thresholds and introduces the new current expected credit loss (“CECL”) model which will require entities to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that an entity expects to collect over the instrument’s contractual life.

The new CECL model is based upon expected losses rather than incurred losses.

The amendments in this update are effective for periods beginning after December 15, 2022;

In June 2016, the FASB issued ASU 2016 - 13, Measurement of Credit Losses on Financial Instruments.

This guidance introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses.

The ASU also provides updated guidance regarding the impairment of available-for-sale debt securities and includes additional disclosure requirements.

The new guidance is effective for public business entities that meet the definition of a Smaller Reporting Company as defined by the SEC for interim and annual periods beginning after December 15, 2022.

Early adoption is permitted.

We are currently evaluating the impact of this guidance on our financial condition and results of operations.

We are currently evaluating the impact of this standard on our consolidated financial statements and related disclosures.

In March 2020, the FASB issued ASU 2020 - 04,  Reference Rate Reform.

2 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, we will continue to evaluate our contracts and the effects of this standard on our condensed consolidated financial statements prior to adoption.

Our line of credit agreement with Bank of America was amended on December 31, 2021 to reference the Bloomberg Short-Term Bank Yield Index (BSBY) rather than LIBOR.

We do not anticipate a material impact on our consolidated financial statements related to the change in index.

We do not have additional material agreements that will be impacted by a change in reference rate.

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

Of the $ 1,617 in cash and restricted cash at March 31, 2022, approximately $ 769 and $ 63 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.

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.

One customer accounted for 23 % and 29 % of net sales for the three months ended March 31, 2022 and 2021, respectively.

At March 31, 2022, two customers represented approximately 35 % of our total accounts receivable.

At December 31, 2021, one customer represented approximately 19 % 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.

Export sales represented approximately 5 % and 4 % of net sales for the three months ended March 31, 2022 and 2021, respectively.

Revenue recognition

9 unchanged sentences

The majority of our revenue is derived from the transfer of goods produced under contract manufacturing agreements which have no alternative use and we have an enforceable right to payment for our performance completed to date.

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 % 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.

Our performance obligations within our contract manufacturing agreements are generally satisfied over time as the goods are produced based on customer specifications and we have an enforceable right to payment for the goods produced. Revenue under contract manufacturing agreements that was recognized over time accounted for approximately 73 % and 75 % of our revenue for the three months ended March 31, 2022 and 2021, respectively.

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

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

Accounting for contract manufacturing agreements involves the use of various techniques to estimate total revenue and costs.

5 unchanged sentences

Contract Assets

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

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

Nine Months Ended September 30, 2021

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 three months ended March 31, 2022 was as follows (in thousands):

Three Months Ended March 31, 2022

Outstanding at January 1, 2022

3 unchanged sentences

Product transferred over time

Outstanding at September 30, 2021

Outstanding at March 31, 2022

$ 8,114  

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 expect substantially all the remaining performance obligations for the contract assets recorded as of March 31, 2022, 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, 2021 and 2020 (in thousands):

Three Months Ended September 30, 2021

Transferred at

Point in Time

Consideration

Total Net Sales

$ 13,762  

$ 2,933  

$ 16,977  

Aerospace and Defense

Total Net Sales

$ 24,113  

$ 4,834  

$ 29,452  

Nine Months Ended September 30, 2021

Transferred at

Point in Time

Consideration

Total Net Sales

$ 35,497  

$ 8,876  

$ 1,017  

$ 45,390  

Aerospace and Defense

10,539  

20,385  

25,777  

Total Net Sales

$ 65,567  

$ 14,235  

$ 1,904  

$ 81,706  

Three Months Ended September 30, 2020

The following tables summarize our net sales by market for the three ended March 31, 2022 and 2021, respectively:

Three Months Ended March 31, 2022

Product/ Service Transferred

Transferred at

5 unchanged sentences

$ 15,265  

$ 14,218  

Aerospace and Defense

4 unchanged sentences

$ 30,710  

Nine Months Ended September 30, 2020

Three Months Ended March 31, 2021

Product/ Service Transferred

Transferred at

5 unchanged sentences

$ 12,342  

$ 42,753  

Aerospace and Defense

14,160  

15,509  

17,434  

22,001  

Total net sales

2 unchanged sentences

$ 22,072  

$ 80,263  

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 15, 2022.

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 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 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. 

We have a credit agreement with Bank of America which was entered into on June 15, 2017 and provides for a line of credit arrangement of $ 16,000 that expires on June 15, 2026.

Under the amended Bank of America credit agreement signed December 31, 2021, the line of credit is subject to variations in the Bloomberg Short-Term Bank Yield (BSBY) index rate.

Our line of credit bears interest at a weighted-average interest rate of 3.6 % and 3.5 % as of March 31, 2022 and December 31, 2021, respectively.

We had borrowings on our line of credit of $ 7,579 and $ 9,016 outstanding as of March 31, 2022 and December 31, 2021, respectively.

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

The line of credit is shown net of debt issuance costs of $ 53 and $ 58 on the consolidated balance sheet for the periods ended March 31, 2022 and December 31, 2021, respectively.

The line of credit and real estate term notes with Bank of America contain certain covenants which, among other things, require us to adhere to regular reporting requirements, abide by annual shareholder dividend limitations, maintain certain financial performance, and limit the amount of annual capital expenditures.

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

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

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 September 30, 2021.

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

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

The Company met the covenants for the period ended March 31, 2022.

At March 31, 2022, we had unused availability under our line of credit of $ 8,021 supported by our borrowing base.

The line is secured by substantially all of our assets.

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 (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act and applicable regulations (the “CARES Act”) of which funds were received on April 22, 2020.

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

Payments are deferred for 10 months after the end of the Promissory Note covered period (which is defined as 24 weeks after the date of the loan) and we can apply for forgiveness of the Promissory Note after 60 days.

Forgiveness of the Promissory Note will be determined in accordance with the provisions of the Cares Act and applicable regulations.

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

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.

In the first quarter of 2022, we amended our credit agreement to include the Employee Retention Credit Receivable as security in our line of credit which improved our unused availability.

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

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

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

At March 31, 2022, we do not have material lease commitments that have not commenced.

The components of lease expense were as follows:

Three Months Ended

Nine Months Ended

September 30,

Operating lease cost

$ 1,696  

$ 1,118  

Finance lease interest cost

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Total lease cost

$ 2,246  

$ 1,675  

Supplemental balance sheet information related to leases was as follows:

Balance Sheet Location

March 31, 2022

December 31, 2021

Operating lease assets

$ 9,052  

$ 8,998  

Finance lease assets

Property and Equipment, Net

Property, Plant and Equipment

Total leased assets

$ 10,893  

$ 11,328  

Current Operating Lease Liabilities

Current Portion of Operating Lease Obligations

$ 1,023  

Current Finance Lease Liabilities

Current Portion of Finance Lease Obligations

Long-Term Operating Lease Liabilities

Long-Term Operating Lease Obligations, Net

Long Term Finance Lease Liabilities

Long Term Finance Lease Obligations, Net

Total Lease Liabilities

$ 11,087  

$ 11,389  

Supplemental cash flow information related to leases was as follows:

September 30,

Operating leases

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

$ 4,685  

Maturities of lease liabilities were as follows:

Operating Leases

Finance Leases

1 unchanged sentence

Total lease payments

$ 14,801  

$ 1,411  

$ 16,212  

( 5,034 )  

( 91 )  

Present value of lease liabilities

$ 9,767  

$ 1,320  

$ 11,087  

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

The lease term and discount rate at March 31, 2022 were as follows:

Weighted-average remaining lease term (years)

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Finance leases

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

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

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

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 expense of $646k and $638k for the nine months ended September 30, 2021 and 2020, respectively.

Our effective tax rate for the three months ended March 31, 2022 and 2021 was ( 94 )% and 31 %, respectively.

The primary drivers of the change in the effective tax rate is attributable to the US loss compared to book income on foreign entities and expected US book income for the year.

There are also discrete items related to a release of valuation allowance from use of state attributes and non-qualified options exercised over book value.

RESTRUCTURING CHARGES

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.

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.

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.

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

There were no restructuring charges or amounts accrued in the three months ended March 31, 2022.

EMPLOYEE RETENTION CREDIT

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law providing numerous tax provisions and other stimulus measures, including an employee retention credit (“ERC”), which is a refundable tax credit against certain employment taxes.

The Taxpayer Certainty and Disaster Tax Relief Act of 2020 and the American Rescue Plan Act of 2021 extended and expanded the availability of the ERC.

At March 31, 2022 and December 31, 2021, the Company has ERC benefits of $ 5,209 within Employee Retention Credits Receivable on the condensed consolidated balance sheet.

RELATED PARTY TRANSACTIONS

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 $ 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.

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 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.

In the three months ended March 31, 2022 and 2021, Abilitech paid the Company $ 54 and $ 268 , 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 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 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.

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

During the three months ended March 31, 2022, we incurred expenses of $ 80 and recognized revenue of $ 89 .

There were no expenses incurred or revenue recognized for the three months ended March 31, 2021.

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

MANAGEMENT ’

S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

We are a Maple Grove, Minnesota based full-service electronics manufacturing services (“EMS”) contract manufacturer of wire and cable assemblies, printed circuit board assemblies, higher-level assemblies and box builds for a wide range of industries.

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 are a Minnesota, United States based full-service global EMS contract manufacturer in the Medical, Aerospace & Defense and Industrial markets offering a full range of value-added engineering, technical and manufacturing services and support including project management, design, testing, prototyping, manufacturing, supply chain management and post-market services.

Our products are complex electromedical and electromechanical products including medical devices, wire and cable assemblies, printed circuit board assemblies, higher-level assemblies, and other box builds for a wide range of industries.

We serve three major markets within the EMS industry:

Aerospace and Defense, Medical, and the Industrial market which includes industrial capital equipment, transportation, vision, agriculture, oil and gas.

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

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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.

The COVID-19 pandemic continued to impact our business in the first quarter of 2022 primarily driven by the emergence of the Omicron variant with a resulting increase in COVID cases in early 2022.

During the first quarter of 2022, our performance was also adversely affected by continued supply chain disruptions and delays.

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.

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 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

Nine Months Ended

September 30,

Cost of Goods Sold

Selling Expenses

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Restructuring Charges

Gain on Sale of Fixed Assets

Income from Operations

Other Expenses

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,

Gain on Sale of Property and Equipment

(Loss) Income from Operations

Interest Expense

(Loss) Income Before Income Taxes

Income Tax (Benefit) Expense

Net (Loss) Income

Net sales were $30.7 million in the first quarter of 2022, as compared to $22.1 million in the first quarter of the prior year, an increase of $8.6 million or 38.9% that was driven primarily due to higher production volume as well as price increases to counteract higher material and labor cost.

We have also taken actions to scale the direct labor workforce and strengthen the supply chain for parts.

Net sales by our major industry markets for the three months ended March 31, 2022 and 2021 were as follows (in millions):

Three months Ended March 31,

Aerospace and Defense

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

Total Net Sales

Net sales by timing of transfer of goods and services for the three ended March 31, 2022 is as follows (in millions):

Three Months Ended March 31, 2022

Product/ Service Transferred

Transferred at

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Total net sales

Nine Months Ended September 30, 2021

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

Three Months Ended March 31, 2021

Product/ Service Transferred

Transferred at

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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

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 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 43.3% from the beginning of the quarter and 26.7% from the prior year.

Our 90-day shipment backlog as of March 31, 2022 was $35.4 million, a 4.1% decrease from the beginning of the quarter and a 13.8% increase from March 31, 2021.

Backlog for our medical customers decreased 3.4% from the beginning of the quarter and increased 23.9% from the prior year.

Our industrial customers’

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.

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

backlog increased 9.0% from the beginning of the quarter and decreased 4.0% from the prior year.

The aerospace and defense backlog decreased 21.1% from the beginning of the quarter and increased 17.6% 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 millions):

Shipment Backlog as of the Period Ended

September 30,

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 $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.

Our total shipment backlog was $97.6 million and $62.8 million as of March 31, 2022 and March 31, 2021, respectively.

This backlog contains the contract assets which have been recognized as revenue.

Gross profit as a percent of net sales 13.2% and 7.1% for the three months ended March 31, 2022 and 2021, respectively. 

The gross profit improvement was primarily driven by higher production volume which increased plant utilization.

Additionally, we did implement price increases in response to material and labor cost inflation.

Selling Expense

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.

Selling expenses for the three months ended March 31, 2022 and 2021 was $0.8 million or 2.7% of sales and $0.7 million or 3.3% of sales, respectively.

General and Administrative Expense

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 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.

General and administrative expenses for the three months ended March 31, 2022 and 2021 were held relatively flat, and are generally fixed in nature, at $2.7 million or 8.9% of sales and $2.8 million or 12.7% of sales, respectively.

Restructuring Charges

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.

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

The restructuring charges are due to the closure of the Merrifield facility during 2021.

Research and Development Expense

Research and development expenses were $0.3 million or 1.1% of net sales for the three months ended March 31, 2022.

There were no research and development expenses for the three months ended March 31, 2021.

Income (Loss) From Operations

First quarter 2022 income from operations was $169 thousand compared to a loss from operations of $2.3 million for the first quarter in 2021, driven by the increase in sales and gross margin as a percent of sales.

Interest Expense

Interest expense was $98 thousand and $86 thousand for the three months ended March 31, 2022 and 2021, respectively.

The increase in interest expense relates to increased borrowings on the line of credit in the first quarter of 2022 compared to the first quarter of 2021.

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

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

Our effective tax rate for the three and nine months ended September 30, 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.

Our effective tax rate for the three months ended March 31, 2022 and 2021 was (94)% and 31%, respectively.

The primary drivers of the change in the effective tax rate is attributable to the US loss compared to book income on foreign entities and expected US book income for the year.

There are also discrete items related to a release of valuation allowance from use of state attributes and NQO options exercised over book value.

Net Income (Loss)

Net income for the three months ended March 31, 2022 was $138 thousand or $0.05 per basic and diluted common share.

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

Liquidity and Capital Resources

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 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 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.

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

We expect to extend the agreement past 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 September 30, 2021.

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

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.

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.

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. 

We believe that our existing financing arrangements, anticipated cash flows from operations, funds expected to be received for the ERC and cash on hand will be sufficient to satisfy our working capital needs for the next twelve months, capital expenditures and debt repayments.

Credit Facility

We have a credit agreement with Bank of America which was entered into on June 15, 2017 and provides for a line of credit arrangement of $16,000 that expires on June 15, 2026.

Under the amended Bank of America credit agreement signed December 31, 2021, the line of credit is subject to variations in the Bloomberg Short-Term Bank Yield (BSBY) index rate.

Our line of credit bears interest at a weighted-average interest rate of 3.6% and 3.5% as of March 31, 2022 and December 31, 2021, respectively.

We had borrowings on our line of credit of $7.6 million and $9.0 million outstanding as of March 31, 2022 and December 31, 2021, respectively.

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

The line of credit is shown net of debt issuance costs of $53 thousand and $57 thousand on the consolidated balance sheet for the periods ended March 31, 2022 and December 31, 2021, respectively.

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 $2.0 million until availability is above that amount for 30 days days.

The Company met the covenants for the period ended March 31, 2022.

At March 31, 2022, we had unused availability under our line of credit of $8.0 million supported by our borrowing base.

The line is secured by substantially all of our assets.

In the first quarter of 2022, we amended our credit agreement to include the Employee Retention Credit Receivable as security in our line of credit which improved our unused availability.

Off-Balance Sheet Arrangements

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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;

Supply chain disruption and unreliability;

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

13 unchanged sentences

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-Q are expressly qualified in their entirety by the forgoing cautionary 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.

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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