What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2022-08-10 compared with 2022-05-10 · 321 added, 136 removed, 443 unchanged (51% of the section changed)

4 unchanged sentences

THREE MONTHS ENDED

SIX MONTHS ENDED

$ 32,518  

$ 30,182  

$ 63,229  

$ 52,254  

Cost of Goods Sold

27,514  

26,597  

54,181  

47,108  

Operating Expenses

4 unchanged sentences

Gain on Sale of Assets

( 94 )  

( 15 )  

Total Operating Expenses

2 unchanged sentences

Interest Expense

( 117 )  

( 116 )  

( 215 )  

Income (Loss) Before Income Taxes

Income Tax Benefit

Income Tax Expense (Benefit)

Net Income (Loss)

1 unchanged sentence

Basic (in dollars per share)

$ 0.27  

$ 0.07  

$ 0.32  

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

2,683,131  

2,658,926  

2,681,931  

2,659,028  

Diluted (in dollars per share)

$ 0.25  

$ 0.06  

$ 0.30  

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

Other comprehensive income (loss)

2,886,755  

2,767,991  

2,879,216  

2,659,028  

Other comprehensive (loss) income

Foreign currency translation

( 244 )  

( 239 )  

Comprehensive income (loss), net of tax

3 unchanged sentences

(IN THOUSANDS, EXCEPT SHARE DATA)

MARCH 31, 2022

 2021 (1)  

ASSETS  

Current Assets

31 unchanged sentences

Long Term Line of Credit

11,360  

Long Term Finance Lease Obligations, Net

18 unchanged sentences

15,962  

Accumulated Other Comprehensive Loss

Accumulated Other Comprehensive (Income) Loss

( 183 )  

Retained Earnings

10,673  

Total Shareholders' Equity

5 unchanged sentences

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

(1) The balance sheet at December 31, 2021 has been derived from the audited financial statements at that date

(1) The condensed consolidated balance sheet at December 31, 2021 has been derived from the audited financial statements at that date

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

1 unchanged sentence

(IN THOUSANDS)

THREE MONTHS ENDED MARCH 31,

SIX MONTHS ENDED

CASH FLOWS FROM OPERATING ACTIVITIES

4 unchanged sentences

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

( 31 )  

Change in Inventory Reserves

( 103 )  

Gain on Sale of Assets

( 15 )  

Changes in Current Operating Items

Accounts Receivable

( 1,986 )  

( 3,540 )  

Contract Assets

( 372 )  

Prepaid Expenses and other Curent Assets

( 63 )  

Accounts Payable

Accrued Payroll and Commissions

( 84 )  

Other Accrued Liabilities

Net Cash Provided By (Used In) Operating Activities

Net Cash Used In Operating Activities

( 1,940 )  

CASH FLOWS FROM INVESTING ACTIVITIES

1 unchanged sentence

Purchase of Intangible Asset

( 41 )  

Purchases of Property and Equipment

( 1,182 )  

Net Cash Used In Investing Activities

( 1,208 )  

CASH FLOWS FROM FINANCING ACTIVITIES

2 unchanged sentences

Principal Payments on Financing Leases

( 336 )  

Debt Issuance Costs

Stock Option Excercises

Net Cash Provided Used In Financing Activities

Effect of Exchange Rate Changes on Cash

Net Cash Provided By Financing Activities

Net Change in Cash and Cash Equivalents

Cash and Cash Equivalents - Beginning of Year

Cash and Cash Equivalents - End of Year

( 1,050 )  

Cash and Cash Equivalents - Beginning of Period

Cash and Cash Equivalents - End of Period

$ 1,175  

$ 1,253  

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

1 unchanged sentence

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

$ 1,175  

$ 1,253  

Supplemental Disclosure of Cash Flow Information:

9 unchanged sentences

Comprehensive

Shareholders'

Retained  

Shareholders'  

BALANCE MARCH 31, 2021

$ 15,837  

$ ( 71 )  

$ 1,108  

$ 17,151  

Foreign currency translation adjustment

Compensation on stock-based awards

BALANCE JUNE 30, 2021

$ 15,862  

$ ( 13 )  

$ 1,287  

$ 17,413  

BALANCE DECEMBER 31, 2020

$ 15,816  

$ ( 37 )  

$ 2,662  

$ 18,718  

( 1,375 )  

Foreign currency translation adjustment

Compensation on stock-based awards

BALANCE JUNE 30, 2021

$ 15,862  

$ ( 13 )  

$ 1,287  

$ 17,413  

BALANCE MARCH 31, 2022

$ 16,043  

$ 9,954  

$ 26,335  

Foreign currency translation adjustment

( 244 )  

Compensation on stock-based awards

BALANCE JUNE 30, 2022

$ 16,136  

$ ( 183 )  

$ 10,673  

$ 26,903  

BALANCE DECEMBER 31, 2021

$ 15,962  

$ 9,816  

$ 26,111  

Foreign currency translation adjustment

( 239 )  

Stock option exercises

Compensation on stock-based awards

BALANCE MARCH 31, 2022

BALANCE JUNE 30, 2022

$ 16,136  

$ ( 183 )  

$ 10,673  

$ 26,903  

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

27 unchanged sentences

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.

An additional 50,000 and 175,000 shares were authorized by the shareholders in March 2020 and May 2022, respectively.

We granted 0 and 21,000 market condition options to our Chief Executive Officer during the three and six months ended June 30, 2022, respectively.

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:

We granted 13,000 and 66,000 service-based options during the three and six months ended June 30, 2022, respectively.

Total option grants for the three and six months ended June 30, 2022 were 13,000 and 108,000 , respectively.

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

Total compensation expense related to stock options was $ 64 and $ 106 for the three and six months ended June 30, 2022, respectively.

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

As of June 30, 2022, there was $ 851 of unrecognized compensation which will vest over the next 3.90 years.

Following is the status of all stock options as of June 30, 2022:

Exercise Price

Remaining Contractual

Intrinsic Value

6 unchanged sentences

( 4,400 )  

Outstanding - March 31, 2022

Outstanding - June 30, 2022

458,100  

1 unchanged sentence

$ 3,326  

Exercisable - March 31, 2022

Exercisable - June 30, 2022

222,700  

$ 3.93  

$ 2,038  

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.

During the three and six months ended June 30, 2022, we granted 3,000 and 21,000 restricted stock units (“RSUs”), respectively, under our 2017 Stock Incentive Plan to non-employee directors which vest over two years.

There were no RSUs outstanding prior to the six months ended June 30, 2022.

Total compensation expense related to the RSUs were $ 29 and $ 35 for the three and six months ended June 30, 2022, respectively.

There was no compensation expense related to RSUs for the three and six months ended June 30, 2021.

Total unrecognized compensation expense related to the RSUs was $ 218 , which will vest over the next 1.74 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.

The RSUs granted in the six months ended June 30, 2022 had an average grant price of $ 12.00 per share with a weighted average remaining contractual term of 9.73 years.

No RSUs vested during the six months ended June 30, 2022.

Equity Appreciation Rights Plan

1 unchanged sentence

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.

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

There were no units granted during the six months ended June 30, 2022 or June 30, 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.

As of June 30, 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 $ 100 and $ 114 for the three and six months ended June 30, 2021, respectively.

Net Income (Loss) per Common Share

2 unchanged sentences

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.

For the three and six months ended June 30, 2022, stock options of 203,625 and 197,285 , respectively were included in the computation of diluted net income per common share as their impact were dilutive.

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

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 net income per common share amount.

We had outstanding stock options totaling 45,878 and RSUs totaling 19,114 that are not considered in the computation of diluted net income per share as their effect would have been anti-dilutive for the three months ended June 30, 2022.

We had average outstanding stock options totaling 48,895 and RSUs totaling 20,057 that are not considered in the computation of diluted net income per share as their effect would have been anti-dilutive for the six months ended June 30, 2022.

Outstanding stock options totaling 622 are not considered in the computation of diluted net income per share for the three months ended June 30, 2021.

Restricted Cash

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.

As of June 30, 2022 we had outstanding letters of credit for $ 400 .

Restricted cash as of June 30, 2022 was $ 231 .

The June 30, 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.

2 unchanged sentences

Credit terms are consistent with industry standards and practices.

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

Trade accounts receivable have been reduced by an allowance for doubtful accounts of $ 297 at June 30, 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.

11 unchanged sentences

Other Intangible Assets

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

Other intangible assets at June 30, 2022 and December 31, 2021 are as follows:

Customer Relationships

3 unchanged sentences

Balance at December 31, 2021

Balance at March 31, 2022

Balance at June 30, 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.

The weighted-average remaining amortization period of our in-use intangible asset is 2.0 years.

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

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

Amortization expense of finite life intangible assets for the three and six months ended June 30, 2022 was $ 35 and $ 71 , respectively.

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

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

7 unchanged sentences

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.

ASU 2020 - 04 provides optional guidance for a limited period of time to ease potential accounting impact associated with transitioning away from reference rates that are expected to be discontinued, such as LIBOR.

The amendments in this ASU apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued.

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

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 $ 1,617 in cash and restricted cash at March 31, 2022, approximately $ 769 and $ 63 was held at banks located in China and Mexico, respectively.

Of the $ 1,175 in cash and restricted cash at June 30, 2022, approximately $ 691 and $ 54 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.

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.

One customer accounted for 28 % and 26 % of net sales for the three and six months ended June 30, 2022, respectively.

One customer accounted for 25 % and 27 % of net sales for the three and six months ended June 30, 2021, respectively.

At June 30, 2022, two customers represented approximately 37 % of our total accounts receivable.

At December 31, 2021, one customer represented approximately 19 % of our total accounts receivable.

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

Export sales represented approximately 4 % of net sales for both the three and six months ended June 30, 2022.

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

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.

Revenue under contract manufacturing agreements that was recognized over time accounted for approximately 74 % of our revenue for both the three and six months ended June 30, 2022 and 82 % and 79 % of our revenue for the three and six months ended June 30, 2021, respectively.

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

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

6 unchanged sentences

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

Significant changes in the contract assets balance during the three months ended March 31, 2022 was as follows (in thousands):

Three Months Ended March 31, 2022

Outstanding at January 1, 2022

Significant changes in the contract assets balance during the six months ended June 30, 2022 was as follows (in thousands):

Balance outstanding at December 31, 2021

$ 8,698  

Increase (decrease) attributed to:

Transferred to receivables from contract assets recognized

Product transferred over time

Outstanding at March 31, 2022

Transferred to receivables from beginning contract assets

Product transferred over time to ending contract assets

Balance outstanding at June 30, 2022

$ 9,070  

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 expect substantially all the remaining performance obligations for the contract assets recorded as of June 30, 2022 to be transferred to receivables within 90 days, with the majority of 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 ended March 31, 2022 and 2021, respectively:

Three Months Ended March 31, 2022

The following tables summarize our net sales by market:

Three Months Ended June 30, 2022

Product/ Service Transferred

12 unchanged sentences

$ 32,518  

Three Months Ended March 31, 2021

Three Months Ended June 30, 2021

Product/ Service Transferred

6 unchanged sentences

$ 16,070  

10,176  

Aerospace and Defense

3 unchanged sentences

$ 30,182  

Six Months Ended June 30, 2022

Product/ Service Transferred

Transferred at

Point in Time

Consideration

Total Net Sales

$ 22,972  

$ 9,678  

$ 1,154  

$ 33,804  

13,459  

18,121  

Aerospace and Defense

10,046  

11,304  

Total net sales

$ 46,477  

$ 14,426  

$ 2,326  

$ 63,229  

Six Months Ended June 30, 2021

Product/ Service Transferred

Transferred at

Point in Time

Noncash Consideration

Total Net Sales by Market

$ 21,735  

$ 5,942  

$ 28,411  

12,917  

16,395  

Aerospace and Defense

Total net sales

$ 41,454  

$ 9,401  

$ 1,399  

$ 52,254  

FINANCING ARRANGEMENTS

1 unchanged sentence

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.

Our line of credit bears interest at a weighted-average interest rate of 3.9 % and 3.5 % as of June 30, 2022 and December 31, 2021, respectively.

We had borrowings on our line of credit of $ 11,410 and $ 9,016 outstanding as of June 30, 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 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 of credit is shown net of debt issuance costs of $ 50 and $ 58 on the consolidated balance sheet for the periods ended June 30, 2022 and December 31, 2021, respectively.

The line of credit with Bank of America contains 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 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 at each Fiscal Quarter end 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.

As of June 30, 2022 the Company was in compliance with its covenants.

At June 30, 2022, we had unused availability under our line of credit of $ 4,190 supported by our borrowing base.

The line is secured by substantially all of our assets.

4 unchanged sentences

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

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

At June 30, 2022, 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

2 unchanged sentences

Total lease cost

Six Months Ended June 30,

Six Months ended June 30,

Operating lease cost

$ 1,159  

$ 1,120  

Finance lease interest cost

Finance lease amortization expense

Total lease cost

$ 1,560  

$ 1,489  

Supplemental balance sheet information related to leases was as follows:

Balance Sheet Location

March 31, 2022

June 30, 2022

December 31, 2021

1 unchanged sentence

Operating lease assets

$ 8,420  

$ 8,983  

Finance lease assets

1 unchanged sentence

Total leased assets

$ 10,287  

$ 11,035  

Supplemental cash flow information related to leases was as follows:

3 unchanged sentences

Maturities of lease liabilities were as follows:

Operating Leases

Finance Leases

Remaining 2022

$ 1,164  

Total lease payments

$ 13,705  

$ 1,277  

$ 14,982  

( 96 )  

Present value of lease liabilities

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

$ 9,201  

$ 1,181  

$ 10,382  

The lease term and discount rate at June 30, 2022 were as follows:

Weighted-average remaining lease term (years)

6 unchanged sentences

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

Our effective tax rate for the three 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.

Our effective tax rate for the three and six months ended June 30, 2022 was 21 % and 12 %, respectively.

The effective tax rate for the three and six months ended June 30, 2021 was 38 % and 30 %, respectively.

The primary driver of the change in the effective tax rate is attributable to a US loss compared to income from the foreign entities.

RESTRUCTURING CHARGES

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

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.

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.

We had a gain on sale of assets of $ 15 and $ 94 in the six months ended June 30, 2022 and 2021, respectively, related to the sale of machinery and equipment.

There were no restructuring charges or amounts accrued in the six months ended June 30, 2022.

EMPLOYEE RETENTION CREDIT

1 unchanged sentence

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.

At June 30, 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

1 unchanged sentence

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

In the three months ended March 31, 2022 and 2021, Abilitech paid the Company $ 54 and $ 268 , respectively, for delivery of medical products.

In the three and six months ended June 30, 2022, Abilitech paid the Company $ 163 and $ 217 , respectively, for delivery of medical products.

In the three and six months ended June 30, 2021, Abilitech paid the Company $ 472 and $ 740 , respectively for the 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.

4 unchanged sentences

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

The total value of the contribution will not exceed $500;

the Company has contributed $ 182 as of June 30, 2022.

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

2 unchanged sentences

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

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.

During the six months ended June 30, 2022, we recognized revenue of $ 113 .

There was no revenue recognized for the six months ended June 30, 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.

ITEM 2.      

MANAGEMENT ’

10 unchanged sentences

Global Pandemic

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 COVID-19 pandemic continued to impact our business in the first six months of 2022, primarily 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.

4 unchanged sentences

Three Months Ended

Six Months Ended

Cost of Goods Sold

3 unchanged sentences

Gain on Sale of Property and Equipment

(Loss) Income from Operations

Income (Loss) from Operations

Interest Expense

(Loss) Income Before Income Taxes

Income Tax (Benefit) Expense

Income (Loss) Before Income Taxes

Income Tax Expense (Benefit)

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.

Net sales for the three months ended June 30, 2022 and 2021 were $32.5 and $30.2 million, respectively, an increase of $2.3 million or 8%.

Net sales for the six months ended June 30, 2022 and 2021 were $63.2 million and $52.3 million, respectively, an increase of $11.0 million or 21.0%.

The three and six month increases were driven by increased demand 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,

Net sales to medical and defense customers increased compared to prior year for both the three and six month periods ended June 30, 2022.

Sales to industrial customers decreased in the three months ended June 30, 2022 versus the same period in the prior year primarily due to supply chain challenges for electronic components.

Net sales by our major EMS industry markets for the three and six months ended June 30, 2022 and 2021 were as follows (in millions):

Three Months Ended June 30,

Six Months Ended June 30,

Aerospace and Defense

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

Net sales by timing of transfer of goods and services for the three and six months ended June 30, 2022 is as follows (in millions):

Three Months Ended June 30, 2022

Product/ Service Transferred

5 unchanged sentences

Total net sales

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

Six Months Ended June 30, 2022

Product/ Service Transferred

5 unchanged sentences

Total net sales

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 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.

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

Three Months Ended June 30, 2021

Product/ Service Transferred

Transferred at

Point in Time

Consideration

Total Net Sales

Aerospace and Defense

Total net sales

Six Months Ended June 30, 2021

Product/ Service Transferred

Transferred at

Point in Time

Consideration

Total Net Sales

Aerospace and Defense

Total net sales

Our 90-day shipment backlog as of June 30, 2022 was $35.9 million, a 1.2% increase from the beginning of the quarter and a 3.5% increase from June 30, 2021.

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.

Our 90-day shipment backlog by market has remained relatively constant when compared to the prior quarter end and the same period of the prior year.

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

4 unchanged sentences

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

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.

Our total shipment backlog was $106.2 million and $71.5 million as of June 30, 2022 and 2021, respectively.

This backlog contains the contract asset value of $9.1 million which have been recognized as revenue.

Gross profit as a percent of net sales was 15.4% and 11.9% for the three months ended June 30, 2022 and 2021, respectively.

Gross profit as a percent of net sales was 14.3% and 9.9% for the six months ended June 30, 2022 and 2021, respectively.

The gross profit improvement was primarily driven by price increases in response to material and labor cost inflation as well as higher production volume which increased plant utilization.

Selling Expense

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.

Selling expenses for the three months ended June 30, 2022 and 2021 were $1.0 million or 2.9% of sales and $0.6 million or 1.9% of sales, respectively.

Selling expenses for the six months ended June 30, 2022 and 2021 were $1.8 million or 2.8% of sales and $1.3 million or 2.5% of sales, respectively.

The increase in selling expense for the three and six months ended June 30, 2022 compared to the same periods of the prior year relates to an increase in headcount to support the increased sales.

General and Administrative Expense

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.

General and administrative expenses for the three months ended June 30, 2022 and 2021 were $2.7 million or 8.2% of sales and $2.4 million or 8.0% of sales, respectively.

General and administrative expenses for the six months ended June 30, 2022 and 2021 were $5.4 million or 8.5% of sales and $5.2 million or 10.0% of sales, respectively.

General and administrative expenses for the three and six months ended June 30, 2022 were held relatively flat compared to the same periods of the prior year, and are generally fixed in nature.

Restructuring Charges

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.

Restructuring charges for the three and six months ended June 30, 2021 were $0.1 million and $0.3 million, respectively.

There were no restructuring charges for the three and six months ended June 30, 2022.

The restructuring charges relate 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.

Research and development expenses were $0.4 million or 1.1% of net sales for the three months ended June 30, 2022 and $0.7 million or 1.1% of net sales for the six months ended June 30, 2022.

Research and development expenses for both the three and six months ended June 30, 2021 was $0.2 million.

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.

Income from operations for the three months ended June 30, 2022 was $1.0 million compared to $0.4 million for the three months ended June 30, 2021.

Income from operations for the six months ended June 30, 2022 was $1.2 million compared to a loss from operations of $1.8 million for the six months ended June 30, 2021.

The three and six month improvements compared to the same periods of the prior year were 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.

Interest expense was $0.1 million for both the three months ended June 30, 2022 and 2021.

Interest expense was $0.2 million for both the six months ended June 30, 2022 and 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 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.

Our effective tax rate for the three and six months ended June 30, 2022 was 21% and 12%, respectively.

The effective tax rate for the three and six months ended June 30, 2021 was 38% and 30%, respectively.

The primary driver of the change in the effective tax rate is attributable to a US loss compared to income from the foreign entities.

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.

Net income for the three months ended June 30, 2022 was $719 thousand or $0.27 per basic common share and $0.25 per diluted common share.

Net income for the three months ended June 30, 2021 was $179 thousand or $0.07 per basic common share and $0.06 per diluted common share.

Net income for the six months ended June 30, 2022 was $857 thousand or $0.32 per basic common share and $0.30 per diluted common share.

Net loss for the six months ended June 30, 2021 was ($1,375) thousand or ($0.52) per basic and diluted common share.

Liquidity and Capital Resources

1 unchanged sentence

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.

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 $16.0 million 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.

Our line of credit bears interest at a weighted-average interest rate of 3.9% and 3.5% as of June 30, 2022 and December 31, 2021, respectively.

We had borrowings on our line of credit of $11.4 million and $9.0 million outstanding as of June 30, 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 of credit is shown net of debt issuance costs of $50 thousand and $58 thousand on the consolidated balance sheet for the periods ended June 30, 2022 and December 31, 2021, respectively.

As of June 30, 2022 the Company was in compliance with its covenants.

At June 30, 2022, we had unused availability under our line of credit of $4.2 million supported by our borrowing base.

The line is secured by substantially all of our assets.

10 unchanged sentences

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

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

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

Supply chain disruption and unreliability;

20 unchanged sentences

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