What changed in this filing

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Item 1. Financial Statements

2022-11-09 compared with 2022-08-10 · 203 added, 381 removed, 383 unchanged (60% of the section changed)

1 unchanged sentence

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES   

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(IN THOUSANDS, EXCEPT SHARE DATA)

THREE MONTHS ENDED

SIX MONTHS ENDED

$ 32,518  

$ 30,182  

$ 63,229  

$ 52,254  

NINE MONTHS ENDED

SEPTEMBER 30,

Cost of Goods Sold

27,514  

26,597  

54,181  

47,108  

Operating Expenses

3 unchanged sentences

Restructuring Charges

Loss on Abandonment of Intangible Assets

Gain on Sale of Assets

( 94 )  

( 15 )  

Total Operating Expenses

Income (Loss) From Operations

Income From Operations

Other Expense

Interest Expense

( 117 )  

( 116 )  

( 215 )  

Income (Loss) Before Income Taxes

Income Tax Expense (Benefit)

Net Income (Loss)

Net Income (Loss) Per Common Share:

Income Before Income Taxes

Income Tax Expense

Net Income Per Common Share:

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)

2,886,755  

2,767,991  

2,879,216  

2,659,028  

Other comprehensive (loss) income

Other comprehensive income

Foreign currency translation

( 244 )  

( 239 )  

Comprehensive income (loss), net of tax

Comprehensive income, net of tax

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

2 unchanged sentences

(IN THOUSANDS, EXCEPT SHARE DATA)

 2021 (1)  

ASSETS  

SEPTEMBER 30,

Current Assets

1 unchanged sentence

Accounts Receivable, less allowances of $ 257 and $ 328

16,468  

14,548  

Employee Retention Credit Receivable

Inventories, Net

22,970  

19,434  

Contract Assets

1 unchanged sentence

Total Current Assets

56,455  

51,774  

Property and Equipment, Net

1 unchanged sentence

Other Intangible Assets, Net

$ 71,490  

$ 67,091  

LIABILITIES AND SHAREHOLDERS' EQUITY

3 unchanged sentences

Accounts Payable

14,108  

12,710  

Accrued Payroll and Commissions

Customer Deposits

Other Accrued Liabilities

Total Current Liabilities

24,290  

22,306  

Long-Term Liabilities

Long Term Line of Credit

11,360  

Long Term Finance Lease Obligations, Net

2 unchanged sentences

Total Long-Term Liabilities

20,297  

18,674  

Total Liabilities

44,587  

40,980  

Commitments and Contingencies

7 unchanged sentences

Additional Paid-In Capital

16,136  

15,962  

Accumulated Other Comprehensive (Income) Loss

( 183 )  

Retained Earnings

10,673  

Total Shareholders' Equity

26,903  

26,111  

Total Liabilities and Shareholders' Equity

$ 71,490  

$ 67,091  

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

3 unchanged sentences

(IN THOUSANDS)

SIX MONTHS ENDED

NINE MONTHS ENDED

SEPTEMBER 30,

CASH FLOWS FROM OPERATING ACTIVITIES

Net Income (Loss)

Adjustments to Reconcile Net Income (Loss) to Net Cash

Adjustments to Reconcile Net Income to Net Cash

Provided By (Used In) Operating Activities:

2 unchanged sentences

Change in Accounts Receivable Allowance

( 31 )  

Change in Inventory Reserves

( 103 )  

Gain on Sale of Assets

( 15 )  

Loss on Abandonment of Intangible Asset

Gain on Disposal of Property and Equipment

Changes in Current Operating Items

Accounts Receivable

( 1,986 )  

( 3,540 )  

Employee Retention Credit Receivable

Contract Assets

( 372 )  

Prepaid Expenses and other Curent Assets

( 63 )  

Accounts Payable

Accrued Payroll and Commissions

( 84 )  

Other Accrued Liabilities

Net Cash Used In Operating Activities

( 1,940 )  

Net Cash Provided By (Used In) Operating Activities

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

2 unchanged sentences

Net Change in Cash and Cash Equivalents

( 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  

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

NINE MONTHS ENDED

SEPTEMBER 30,

Supplemental Disclosure of Cash Flow Information:

Cash Paid During the Period for Interest

Cash Paid During the Period for Income Taxes

Cash Paid (Refunded) During the Period for Income Taxes

Supplemental Noncash Investing and Financing Activities:

6 unchanged sentences

Comprehensive

Retained  

Shareholders'  

BALANCE MARCH 31, 2021

$ 15,837  

$ ( 71 )  

$ 1,108  

$ 17,151  

Total Shareholders'

BALANCE JUNE 30, 2021

Foreign currency translation adjustment

Stock option exercises

Compensation on stock-based awards

BALANCE JUNE 30, 2021

$ 15,862  

$ ( 13 )  

$ 1,287  

$ 17,413  

BALANCE SEPTEMBER 30, 2021

BALANCE DECEMBER 31, 2020

$ 15,816  

$ ( 37 )  

$ 2,662  

$ 18,718  

( 1,375 )  

Foreign currency translation adjustment

Stock option exercises

Compensation on stock-based awards

BALANCE SEPTEMBER 30, 2021

BALANCE JUNE 30, 2022

$ 15,862  

$ ( 13 )  

$ 1,287  

$ 17,413  

BALANCE MARCH 31, 2022

$ 16,043  

$ 9,954  

$ 26,335  

Foreign currency translation adjustment

( 244 )  

Stock option exercises

Compensation on stock-based awards

BALANCE JUNE 30, 2022

$ 16,136  

$ ( 183 )  

$ 10,673  

$ 26,903  

BALANCE SEPTEMBER 30, 2022

BALANCE DECEMBER 31, 2021

$ 15,962  

$ 9,816  

$ 26,111  

Foreign currency translation adjustment

( 239 )  

Stock option exercises

Compensation on stock-based awards

BALANCE JUNE 30, 2022

$ 16,136  

$ ( 183 )  

$ 10,673  

$ 26,903  

BALANCE SEPTEMBER 30, 2022

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

24 unchanged sentences

Shipping and handling costs charged to our customers are included in net sales, while the corresponding shipping expenses are included in cost of goods sold.

Customer deposits represent cash received in advance of revenue earned.

Stock-Based Awards

2 unchanged sentences

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.

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

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

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:

We granted 3,000 and 69,000 service-based options during the three and nine months ended September 30, 2022, respectively.

Total option grants for the three and nine months ended September 30, 2022 were 3,000 and 90,000 , respectively.

There were 27,000 stock options granted during the nine months ended September 30, 2021.

Total compensation expense related to stock options was $ 62 and $ 168 for the three and nine months ended September 30, 2022, respectively.

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

As of September 30, 2022, there was $ 810 of unrecognized compensation which will vest over the next 3.86 years.

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

Exercise Price

Remaining Contractual

Intrinsic Value

1 unchanged sentence

Outstanding - January 1, 2022

387,500  

$ 4.57  

87,000  

( 12,000 )  

( 4,400 )  

Outstanding - June 30, 2022

458,100  

$ 5.82  

$ 3,326  

Exercisable - June 30, 2022

222,700  

$ 3.93  

$ 2,038  

Outstanding - September 30, 2022

Exercisable - September 30, 2022

Restricted Stock Units

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.

During the three and nine months ended September 30, 2022, we granted 0 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 nine months ended September 30, 2022.

Total compensation expense related to the RSUs were $ 31 and $ 66 for the three and nine months ended September 30, 2022, respectively.

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

Total unrecognized compensation expense related to the RSUs was $ 186 , which will vest over the next 1.49 years.

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.

The RSUs granted in the nine months ended September 30, 2022 had an average grant price of $ 12.00 per share with a weighted average remaining contractual term of 9.48 years.

No RSUs vested during the nine months ended September 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 six months ended June 30, 2022 or June 30, 2021.

There were no units granted during the nine months ended September 30, 2022 or September 30, 2021.

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

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

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.

There are no units outstanding as of September 30, 2022.

Total compensation expense related to the vested outstanding Units based on the estimated appreciation over their remaining terms was $ 13 and $ 127 for the three and nine months ended September 30, 2021, respectively.

Net Income per Common Share

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

Diluted net income 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 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.

For the three and nine months ended September 30, 2022, stock options of 212,643 and 202,479 , respectively were included in the computation of diluted net income per common share as their impact were dilutive.

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.

We had outstanding stock options totaling 34,211 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 September 30, 2022.

We had average outstanding stock options totaling 44,070 that are not considered in the computation of diluted net income per share as their effect would have been anti-dilutive for the nine months ended September 30, 2022.

Outstanding stock options totaling 0 and 221 are not considered in the computation of diluted net income per share for the three and nine months ended September 30, 2021, respectively.

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 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.

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

Restricted cash as of September 30, 2022 was $ 792 , which includes 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 $ 297 at June 30, 2022 and $ 328 at December 31, 2021.

Trade accounts receivable have been reduced by an allowance for doubtful accounts of $ 257 at September 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.

2 unchanged sentences

Inventories are as follows:

September 30,

Raw Materials

$ 21,764  

$ 18,492  

Work in Process

Finished Goods

( 1,195 )  

$ 22,970  

$ 19,434  

Other Intangible Assets

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

Customer Relationships

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

Relationships

Balance at January 1, 2021

$ 1,173  

Abandonment Loss

Balance at December 31, 2021

Balance at June 30, 2022

Balance at September 30, 2022

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

The weighted-average remaining amortization period of our in-use intangible asset is 2.1 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 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:

In-process patents are not amortized until the patent is received.

At September 30, 2022, patents totaling $ 96 had been received while $ 85 of patents were in-process.

Amortization expense of finite life intangible assets for the three and nine months ended September 30, 2022 was $ 40 and $ 111 , respectively.

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

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

Remainder of 2022

10 unchanged sentences

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

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.

Of the $ 2,092 in cash and restricted cash at September 30, 2022, approximately $ 561 and $ 11 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 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.

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

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

For the nine months ended September 30, 2021, one customer accounted for 26 % of net sales.

At September 30, 2022, two customers represented approximately 43 % of our total accounts receivable.

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

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.

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

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

Revenue recognition

11 unchanged sentences

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

Revenue under contract manufacturing agreements that was recognized over time accounted for approximately 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.

Revenue under contract manufacturing agreements that was recognized over time accounted for approximately 74 % of our revenue for both the three and nine months ended September 30, 2022 and 82 % and 80 % of our revenue for the three and nine months ended September 30, 2021, respectively.

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

7 unchanged sentences

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

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

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

Balance outstanding at December 31, 2021

$ 8,698  

Increase (decrease) attributed to:

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 June 30, 2022 to be transferred to receivables within 90 days, with the majority of any remaining amounts to be transferred within 180 days.

Amounts transferred over time to contract assets

Amounts invoiced during the period

Balance outstanding at September 30, 2022

We expect substantially all the remaining performance obligations for the contract assets recorded as of September 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:

Three Months Ended June 30, 2022

Product/ Service Transferred

The following tables summarize our net sales by timing of transfer of goods and services by market:

Three Months Ended September 30, 2022

Product/ Service

Transferred Over

Transferred at

1 unchanged sentence

Consideration

Total Net Sales

$ 13,165  

$ 4,763  

$ 18,538  

Total Net Sales by

Aerospace and Defense

Total net sales

$ 24,084  

$ 7,295  

$ 1,139  

$ 32,518  

Three Months Ended June 30, 2021

Product/ Service Transferred

Nine Months Ended September 30, 2022

Product/ Service

Transferred Over

Transferred at

1 unchanged sentence

Consideration

Total Net Sales

$ 12,776  

$ 3,050  

$ 16,070  

10,176  

Total Net Sales by

Aerospace and Defense

Total net sales

$ 24,801  

$ 4,910  

$ 30,182  

Six Months Ended June 30, 2022

Product/ Service Transferred

Three Months Ended September 30, 2021

Product/ Service

Transferred Over

Transferred at

1 unchanged sentence

Consideration

Total Net Sales

$ 22,972  

$ 9,678  

$ 1,154  

$ 33,804  

13,459  

18,121  

Total Net Sales by

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

Nine Months Ended September 30, 2021

Product/ Service

Transferred Over

Transferred at

Point in Time

Noncash Consideration

Total Net Sales by Market

$ 21,735  

$ 5,942  

$ 28,411  

12,917  

16,395  

Consideration

Total Net Sales by

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 3.9 % 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.

Our line of credit bears interest at a weighted-average interest rate of 4.1 % and 3.5 % as of September 30, 2022 and December 31, 2021, respectively.

We had borrowings on our line of credit of $ 9,873 and $ 9,016 as of September 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 $ 50 and $ 58 on the consolidated balance sheet for the periods ended June 30, 2022 and December 31, 2021, respectively.

The line of credit is shown net of debt issuance costs of $ 48 and $ 58 on the consolidated balance sheet for the periods ended September 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.

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

At September 30, 2022, we had unused availability under our line of credit of $ 5,827 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.

In the third quarter of 2022, we amended our credit agreement to extend the inclusion of the Employee Retention Credit Receivable through December 31, 2022.

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

2 unchanged sentences

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

At June 30, 2022, we do not have material lease commitments that have not commenced.

At September 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,

Three Months Ended

September 30,

Three Months Ended

September 30,

Operating lease cost

2 unchanged sentences

Total lease cost

Six Months Ended June 30,

Six Months ended June 30,

Nine Months Ended

September 30,

Nine Months ended

September 30,

Operating lease cost

$ 1,159  

$ 1,120  

Finance lease interest cost

1 unchanged sentence

Total lease cost

$ 1,560  

$ 1,489  

Supplemental balance sheet information related to leases was as follows:

Balance Sheet Location

June 30, 2022

September 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:

September 30,

Operating leases

4 unchanged sentences

Remaining 2022

$ 1,164  

Total lease payments

$ 13,705  

$ 1,277  

$ 14,982  

( 96 )  

Present value of lease liabilities

$ 9,201  

$ 1,181  

$ 10,382  

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

The lease term and discount rate at September 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 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.

Our effective tax rate for the three and nine months ended September 30, 2022 was 16 % and 15 %, respectively.

The effective tax rate for the three and nine months ended September 30, 2021 was 26 % and 23 %, respectively.

The primary drivers of the change in effective tax rate are due to a change in the federal valuation allowance, a discrete item of non-qualified options exercised over book value, and the amount due from the IRS exam conclusion.

RESTRUCTURING CHARGES

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

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.

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.

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.

There were no restructuring charges or amounts accrued in the nine months ended September 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 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.

At September 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

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

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.

In the three and nine months ended September 30, 2022, Abilitech paid the Company $ 0 and $ 217 , respectively, for delivery of medical products.

In the three and nine months ended September 30, 2021, Abilitech paid the Company $ 316 and $ 1,056 , 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.

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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.

Under the terms of the BIRD Foundation grant, the Company and Marpe Technologies are to 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 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 has contributed $ 226 as of September 30, 2022.

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.

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.

During the three and nine months ended September 30, 2022, we recognized revenue of $ 66 and $ 182 .

During both the three and nine months ended September 30, 2021, we recognized revenue of $ 78 .

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 ’

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Global Pandemic

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 COVID-19 pandemic continued to impact our business in the first nine 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.

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Cost of Goods Sold

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Gain on Sale of Property and Equipment

Income (Loss) from Operations

Income from Operations

Interest Expense

Income (Loss) Before Income Taxes

Income Tax Expense (Benefit)

Net (Loss) Income

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.

Income Before Income Taxes

Income Tax Expense

Net sales for the three months ended September 30, 2022 and 2021 were $35.3 and $29.5 million, respectively, an increase of $5.8 million or 19.7%.

Net sales for the nine months ended September 30, 2022 and 2021 were $98.5 million and $81.7 million, respectively, an increase of $16.8 million or 20.6%.

The three and nine 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 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 and six months ended June 30, 2022 is as follows (in millions):

Three Months Ended June 30, 2022

Product/ Service Transferred

Transferred at

Point in Time

Consideration

Total Net Sales

Aerospace and Defense

Total net sales

Six Months Ended June 30, 2022

Product/ Service Transferred

Transferred at

Point in Time

Consideration

Total Net Sales

Aerospace and Defense

Total net sales

Net sales by timing of transfer of goods and services for the three 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

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

Three Months Ended September 30,

Nine Months Ended September 30,

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.

Our 90-day order backlog as of September 30, 2022 was $36.9 million, a 2.8% increase from the beginning of the quarter and a 5.1% decrease from September 30, 2021.

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

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.

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

Shipment Backlog as of the Period Ended

90 Day Backlog as of the Period Ended

Aerospace and Defense

Total 90-Day Backlog

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

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

Our total shipment backlog was $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.

Our total order backlog as of September 30, 2022 was $103.3 million, a 2.7% decrease from the beginning of the quarter and a 31.4% increase from September 30, 2021.

Our total backlog remains strong as our biggest customers are placing orders into the future to secure supply of critical components, in particular for those with long lead times.

Total order backlog by our major industry markets are as follows (in millions):

Total Backlog as of the Period Ended

Aerospace and Defense

Total Backlog

The 90-day and total backlog at September 30, 2022 contain the contract asset value of $9.9 million which has been recognized as revenue.

Gross profit as a percent of net sales was 17.9% and 27.3% for the three months ended September 30, 2022 and 2021, respectively.

Gross profit as a percent of net sales was 15.6% and 16.1% for the nine months ended September 30, 2022 and 2021, respectively.

The decrease in gross profit as a percent of net sales for the three and nine months ended September 30, 2022 compared to the same periods in 2021 is primarily due to the $4.7 million reduction in payroll and medical expenses related to the ERC in 2021, partially offset by price increases in response to material and labor cost inflation and higher production volume which increased plant utilization.

Selling Expense

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.

Selling expenses for the three months ended September 30, 2022 and 2021 were $1.0 million or 2.7% of sales and $0.4 million or 1.5% of sales, respectively.

Selling expenses for the nine months ended September 30, 2022 and 2021 were $2.8 million or 2.8% of sales and $1.7 million or 2.1% of sales, respectively.

Selling expense for the three and nine months ended September 30, 2021 includes a $0.1 million reduction in payroll and medical expenses related to the ERC.

The increase in selling expense for the three and nine months ended September 30, 2022 compared to the same periods of the prior year relates to an increase in sales engineering expenses to support the increased sales.

General and Administrative Expense

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.

General and administrative expenses for the three months ended September 30, 2022 and 2021 were $2.9 million or 8.4% of sales and $2.0 million or 6.9% of sales, respectively.

General and administrative expenses for the nine months ended September 30, 2022 and 2021 were $8.3 million or 8.5% of sales and $7.2 million or 8.9% of sales, respectively.

General and administrative expenses for the three and nine months ended September 30, 2021 includes a $0.4 million reduction in payroll and medical expenses related to the ERC.

General and administrative expenses for the three and nine months ended September 30, 2022 were otherwise 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 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.

Restructuring charges for the three and nine months ended September 30, 2021 were $23 thousand and $0.3 million, respectively.

There were no restructuring charges for the three and nine months ended September 30, 2022.

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

Research and Development Expense

Research and development expenses were $0.4 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

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.

Research and development expenses were $0.5 million or 1.3% of net sales for the three months ended September 30, 2022 and $1.2 million or 1.2% of net sales for the nine months ended September 30, 2022.

Research and development expenses for the three and nine months ended September 30, 2021 were $0.1 and $0.3 million, respectively.

Income From Operations

Income from operations for the three months ended September 30, 2022 was $1.9 million compared to $4.9 million for the three months ended September 30, 2021.

Income from operations for both the nine months ended September 30, 2022 and 2021 was $3.1 million.

The decrease in income from operations for the three months ended September 30, 2022 compared to the same period in 2021 is primarily due to the $5.2 million reduction in payroll and medical expenses related to the ERC in 2021, partially offset by the increased gross profit in 2022.

Interest Expense

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.

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

Interest expense was $0.3 million for both the nine months ended September 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 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 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.

Our effective tax rate for the three and nine months ended September 30, 2022 was 16% and 15%, respectively.

The effective tax rate for the three and nine months ended September 30, 2021 was 26% and 23%, respectively.

The primary drivers of the change in effective tax rate are a release in valuation allowance, a discrete item of non-qualified options exercised over book value, and the amount due from the IRS exam conclusion.

Net income for the three months ended September 30, 2022 was $1.5 million or $0.57 per basic common share and $0.53 per diluted common share.

Net income for the three months ended September 30, 2021 was $3.6 million or $1.33 per basic common share and $1.24 per diluted common share.

The decrease in net income for the three months ended September 30, 2022 compared to the same period in 2021 is primarily due to the $5.2 million reduction in payroll and medical expenses related to the ERC in 2021, partially offset by the increased gross profit in 2022.

Net income for the nine months ended September 30, 2022 was $2.4 million or $0.89 per basic common share and $0.83 per diluted common share.

Net income for the nine months ended September 30, 2021 was $2.2 million or $0.82 per basic common share and $0.78 per diluted common share.

Liquidity and Capital Resources

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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 3.9% 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.

Our line of credit bears interest at a weighted-average interest rate of 4.1% and 3.5% as of September 30, 2022 and December 31, 2021, respectively.

We had borrowings on our line of credit of $9.9 million and $9.0 million outstanding as of September 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 $50 thousand and $58 thousand on the consolidated balance sheet for the periods ended June 30, 2022 and December 31, 2021, respectively.

The line of credit is shown net of debt issuance costs of $48 thousand and $58 thousand on the consolidated balance sheet for the periods ended September 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 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 $2.0 million until availability is above that amount for 30 days.

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

At September 30, 2022, we had unused availability under our line of credit of $5.8 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.

In the third quarter of 2022, we amended our credit agreement to extend the inclusion of the Employee Retention Credit Receivable through December 31, 2022.

Off-Balance Sheet Arrangements

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and should be considered an integral part of Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”

of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

Unpredictable or unknown factors not discussed herein could also have material adverse effects on forward-looking statements.

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

All forward-looking statements included or incorporated into this Form 10-Q 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