UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM10-Q
FORM 10-Q(Mark One)
☒ (Mark One)
xQUARTERLY REPORT PURSUANT TO SECTION13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20172022
OR
☐ oTRANSITION REPORT PURSUANT TO SECTION13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
NORTECH SYSTEMS INCORPORATED
Commission file number 0-13257
State of Incorporation: Minnesota
IRS Employer Identification No. 41-1681094
Executive Offices: 7550 Meridian Circle N., Suite# 150, Maple Grove, MN 55369
Telephone number: (952) 345-2244
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, par value $.01 per share | NSYS | NASDAQ Capital Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x☒ No o☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x☒ No o☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer | Accelerated Filer | |
Non-accelerated Filer | Smaller Reporting Company | |
|
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o☐ No x☒
Number of shares of $.01 par value common stock outstanding at November 3, 2017August 5, 2022 was 2,739,251.
2,683,513.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
PAGE | |||||
Item 1 | - | Financial Statements | |||
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) | 3 | ||||
Condensed Consolidated Balance Sheets | 4 | ||||
Condensed Consolidated Statements of Cash Flows | 5 | ||||
Condensed Consolidated Statements of Shareholders’ Equity | 6 | ||||
Condensed Notes to |
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Management's Discussion and Analysis of Financial Condition And Results of Operations |
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- | Quantitative and Qualitative Disclosures About Market Risk | 26 | |||
Item 4 | Controls and Procedures |
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PART II - OTHER INFORMATION | |||||
Legal Proceedings |
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- | Risk Factors | 27 | |||
Item 2 | Unregistered Sales of Equity Securities, |
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- | Defaults on Senior Securities | 27 | |||
Item 4 | - | Mine Safety Disclosures | 27 | ||
Item 5 | - | Other Information | 27 | ||
Item 6 | - |
| 28 | ||
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PART
|
| THREE MONTHS ENDED SEPTEMBER 30, |
| NINE MONTHS ENDED SEPTEMBER 30, |
| THREE MONTHS ENDED | SIX MONTHS ENDED | ||||||||||||||||||||||
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| JUNE 30, | JUNE 30, | |||||||||||||||||||||||||
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| 2017 |
| 2016 |
| 2017 |
| 2016 |
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||
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Net Sales |
| $ | 28,310,230 |
| $ | 29,718,414 |
| $ | 86,762,131 |
| $ | 87,613,591 |
| $ | 32,518 | $ | 30,182 | $ | 63,229 | $ | 52,254 | ||||||||
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Cost of Goods Sold |
| 24,794,135 |
| 25,932,437 |
| 76,789,388 |
| 77,326,346 |
| 27,514 | 26,597 | 54,181 | 47,108 | ||||||||||||||||
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Gross Profit |
| 3,516,095 |
| 3,785,977 |
| 9,972,743 |
| 10,287,245 |
| 5,004 | 3,585 | 9,048 | 5,146 | ||||||||||||||||
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Operating Expenses |
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Selling Expenses |
| 1,144,193 |
| 1,122,494 |
| 3,676,463 |
| 3,736,319 |
| 960 | 571 | 1,793 | 1,292 | ||||||||||||||||
General and Administrative Expenses |
| 2,087,489 |
| 2,473,719 |
| 6,152,096 |
| 6,250,150 |
| 2,668 | 2,418 | 5,397 | 5,214 | ||||||||||||||||
Gain on Sale of Property and Equipment |
| — |
| — |
| (355,336 | ) | — |
| ||||||||||||||||||||
Research and Development Expenses | 351 | 207 | 679 | 207 | |||||||||||||||||||||||||
Restructuring Charges | 0 | 77 | 0 | 296 | |||||||||||||||||||||||||
Gain on Sale of Assets | 0 | (94 | ) | (15 | ) | (94 | ) | ||||||||||||||||||||||
Total Operating Expenses |
| 3,231,682 |
| 3,596,213 |
| 9,473,223 |
| 9,986,469 |
| 3,979 | 3,179 | 7,854 | 6,915 | ||||||||||||||||
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Income from Operations |
| 284,413 |
| 189,764 |
| 499,520 |
| 300,776 |
| ||||||||||||||||||||
Income (Loss) From Operations | 1,025 | 406 | 1,194 | (1,769 | ) | ||||||||||||||||||||||||
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Other Expense |
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Loss on Extinguishment of Debt |
| — |
| — |
| (174,834 | ) | — |
| ||||||||||||||||||||
Interest Expense |
| (171,699 | ) | (139,458 | ) | (452,695 | ) | (410,727 | ) | (117 | ) | (116 | ) | (215 | ) | (202 | ) | ||||||||||||
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Income (Loss) Before Income Taxes |
| 112,714 |
| 50,306 |
| (128,009 | ) | (109,951 | ) | 908 | 290 | 979 | (1,971 | ) | |||||||||||||||
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Income Tax Expense (Benefit) |
| 69,343 |
| (13,000 | ) | (141,061 | ) | (56,000 | ) | 189 | 111 | 122 | (596 | ) | |||||||||||||||
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Net Income (Loss) |
| $ | 43,371 |
| $ | 63,306 |
| $ | 13,052 |
| $ | (53,951 | ) | $ | 719 | $ | 179 | $ | 857 | $ | (1,375 | ) | |||||||
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Income (Loss) Per Common Share: |
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Net Income (Loss) Per Common Share: | |||||||||||||||||||||||||||||
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Basic (in dollars per share) |
| $ | 0.02 |
| $ | 0.02 |
| $ | 0.00 |
| $ | (0.02 | ) | $ | 0.27 | $ | 0.07 | $ | 0.32 | $ | (0.52 | ) | |||||||
Weighted Average Number of Common Shares Outstanding - Basic (in shares) |
| 2,747,168 |
| 2,747,832 |
| 2,747,608 |
| 2,747,288 |
| 2,683,131 | 2,658,926 | 2,681,931 | 2,659,028 | ||||||||||||||||
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Diluted (in dollars per share) |
| $ | 0.02 |
| $ | 0.02 |
| $ | 0.00 |
| $ | (0.02 | ) | $ | 0.25 | $ | 0.06 | $ | 0.30 | $ | (0.52 | ) | |||||||
Weighted Average Number of Common Shares Outstanding - Diluted (in shares) |
| 2,748,533 |
| 2,749,944 |
| 2,748,973 |
| 2,747,288 |
| 2,886,755 | 2,767,991 | 2,879,216 | 2,659,028 | ||||||||||||||||
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Other Comprehensive Loss |
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Foreign Currency Translation |
| $ | (186 | ) | $ | — |
| $ | (3,248 | ) | $ | — |
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Comprehensive Income (Loss), Net of Tax |
| $ | 43,185 |
| $ | 63,306 |
| $ | 9,804 |
| $ | (53,951 | ) | ||||||||||||||||
Other comprehensive (loss) income | |||||||||||||||||||||||||||||
Foreign currency translation | (244 | ) | 58 | (239 | ) | 24 | |||||||||||||||||||||||
Comprehensive income (loss), net of tax | $ | 475 | $ | 237 | $ | 618 | $ | (1,351 | ) |
See Accompanying Condensed Notes to the Condensed Consolidated Financial Statements
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
|
| SEPTEMBER 30, |
| DECEMBER 31, |
| ||
|
| 2017 |
| 2016(1) |
| ||
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| (Unaudited) |
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ASSETS |
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Current Assets |
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Cash |
| $ | 530,764 |
| $ | 268,204 |
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Restricted Cash |
| 541,795 |
| — |
| ||
Accounts Receivable, less allowances of $163,400 and $883,000 |
| 18,312,667 |
| 17,320,784 |
| ||
Inventories |
| 21,068,366 |
| 20,653,841 |
| ||
Prepaid Expenses |
| 1,044,159 |
| 1,048,373 |
| ||
Income Taxes Receivable |
| 323,198 |
| 198,535 |
| ||
Total Current Assets |
| 41,820,949 |
| 39,489,737 |
| ||
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Property and Equipment, Net |
| 10,104,568 |
| 10,330,834 |
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Other Intangible Assets, Net |
| 1,779,481 |
| 1,861,764 |
| ||
Goodwill |
| 3,283,454 |
| 3,283,454 |
| ||
Deferred Tax Assets |
| 528,000 |
| 543,000 |
| ||
Other Assets |
| 7,726 |
| 7,726 |
| ||
Total Assets |
| $ | 57,524,178 |
| $ | 55,516,515 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Current Liabilities |
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Current Maturities of Long-Term Debt |
| $ | 990,755 |
| $ | 1,565,347 |
|
Current Portion of Capital Lease Obligation |
| 169,131 |
| — |
| ||
Accounts Payable |
| 14,801,233 |
| 13,825,530 |
| ||
Accrued Payroll and Commissions |
| 2,429,767 |
| 3,311,693 |
| ||
Other Accrued Liabilities |
| 2,541,226 |
| 1,603,069 |
| ||
Income Taxes Payable |
| 6,328 |
| — |
| ||
Total Current Liabilities |
| 20,938,440 |
| 20,305,639 |
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Long-Term Liabilities |
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Long-Term Line of Credit |
| 8,481,396 |
| 7,315,262 |
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Long-Term Debt, Net of Current Maturities |
| 4,611,826 |
| 4,891,631 |
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Long-Term Capital Lease Obligation, Net of Current Portion |
| 802,497 |
| — |
| ||
Other Long-Term Liabilities |
| 356,416 |
| 689,195 |
| ||
Total Long-Term Liabilities |
| 14,252,135 |
| 12,896,088 |
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Total Liabilities |
| 35,190,575 |
| 33,201,727 |
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Commitments and Contingencies |
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Shareholders’ Equity |
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Preferred Stock, $1 par value; 1,000,000 Shares Authorized: 250,000 Shares Issued and Outstanding |
| 250,000 |
| 250,000 |
| ||
Common Stock - $0.01 par value; 9,000,000 Shares Authorized: 2,743,008 Shares Issued and Outstanding, respectively |
| 27,430 |
| 27,478 |
| ||
Additional Paid-In Capital |
| 15,755,724 |
| 15,746,665 |
| ||
Accumulated Other Comprehensive Loss |
| (47,693 | ) | (44,445 | ) | ||
Retained Earnings |
| 6,348,142 |
| 6,335,090 |
| ||
Total Shareholders’ Equity |
| 22,333,603 |
| 22,314,788 |
| ||
Total Liabilities and Shareholders’ Equity |
| $ | 57,524,178 |
| $ | 55,516,515 |
|
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES | ||||||
CONDENSED CONSOLIDATED BALANCE SHEETS | ||||||
(IN THOUSANDS, EXCEPT SHARE DATA) |
JUNE 30 | DECEMBER 31, | |||||||
2022 | 2021(1) | |||||||
| (Unaudited) | |||||||
ASSETS | ||||||||
Current Assets | ||||||||
Cash | $ | 944 | $ | 643 | ||||
Restricted Cash | 231 | 1,582 | ||||||
Accounts Receivable, less allowances of $297 and $328 | 16,468 | 14,548 | ||||||
Employee Retention Credit Receivable | 5,209 | 5,209 | ||||||
Inventories, Net | 22,970 | 19,434 | ||||||
Contract Assets | 9,070 | 8,698 | ||||||
Prepaid Expenses and Other Current Assets | 1,563 | 1,660 | ||||||
Total Current Assets | 56,455 | 51,774 | ||||||
Property and Equipment, Net | 6,144 | 5,833 | ||||||
Operating Lease Assets | 8,420 | 8,983 | ||||||
Other Intangible Assets, Net | 471 | 501 | ||||||
Total Assets | $ | 71,490 | $ | 67,091 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
Current Liabilities | ||||||||
Current Portion of Finance Lease Obligations | $ | 447 | $ | 601 | ||||
Current Portion of Operating Lease Obligations | 1,099 | 1,043 | ||||||
Accounts Payable | 14,108 | 12,710 | ||||||
Accrued Payroll and Commissions | 3,961 | 4,045 | ||||||
Other Accrued Liabilities | 4,675 | 3,907 | ||||||
Total Current Liabilities | 24,290 | 22,306 | ||||||
Long-Term Liabilities | ||||||||
Long Term Line of Credit | 11,360 | 8,959 | ||||||
Long Term Finance Lease Obligations, Net | 734 | 916 | ||||||
Long-Term Operating Lease Obligations, Net | 8,103 | 8,695 | ||||||
Other Long-Term Liabilities | 100 | 104 | ||||||
Total Long-Term Liabilities | 20,297 | 18,674 | ||||||
Total Liabilities | 44,587 | 40,980 | ||||||
Commitments and Contingencies | ||||||||
Shareholders' Equity | ||||||||
Preferred Stock, $1 par value; 1,000,000 Shares Authorized: 250,000 Shares Issued and Outstanding | 250 | 250 | ||||||
Common Stock - $0.01 par value; 9,000,000 Shares Authorized: 2,683,513 and 2,672,064 Shares Issued and Outstanding, respectively | 27 | 27 | ||||||
Additional Paid-In Capital | 16,136 | 15,962 | ||||||
Accumulated Other Comprehensive (Income) Loss | (183 | ) | 56 | |||||
Retained Earnings | 10,673 | 9,816 | ||||||
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
(1) The condensed consolidated balance sheet at December 31, 20162021 has been derived from the audited consolidated financial statements at that date
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES | ||||||
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||
(UNAUDITED) | ||||||
(IN THOUSANDS) |
SIX MONTHS ENDED | ||||||||
JUNE 30, | ||||||||
2022 | 2021 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net Income (Loss) | $ | 857 | $ | (1,375 | ) | |||
Adjustments to Reconcile Net Income (Loss) to Net Cash | ||||||||
Provided By (Used In) Operating Activities: | ||||||||
Depreciation and Amortization | 967 | 967 | ||||||
Compensation on Stock-Based Awards | 141 | 160 | ||||||
Change in Accounts Receivable Allowance | (31 | ) | 116 | |||||
Change in Inventory Reserves | (103 | ) | (655 | ) | ||||
Gain on Sale of Assets | (15 | ) | (94 | ) | ||||
Changes in Current Operating Items | ||||||||
Accounts Receivable | (1,986 | ) | (1,153 | ) | ||||
Inventories | (3,540 | ) | (3,719 | ) | ||||
Contract Assets | (372 | ) | (1,019 | ) | ||||
Prepaid Expenses and other Curent Assets | 89 | (286 | ) | |||||
Income Taxes | (63 | ) | (757 | ) | ||||
Accounts Payable | 1,346 | 1,576 | ||||||
Accrued Payroll and Commissions | (84 | ) | 686 | |||||
Other Accrued Liabilities | 854 | 120 | ||||||
Net Cash Used In Operating Activities | (1,940 | ) | (5,433 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Proceeds from Sale of Property and Equipment | 15 | 94 | ||||||
Purchase of Intangible Asset | (41 | ) | (77 | ) | ||||
Purchases of Property and Equipment | (1,182 | ) | (659 | ) | ||||
Net Cash Used In Investing Activities | (1,208 | ) | (642 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Net Change in Line of Credit | 2,394 | 4,339 | ||||||
Principal Payments on Long-Term Debt | 0 | (249 | ) | |||||
Principal Payments on Financing Leases | (336 | ) | (326 | ) | ||||
Debt Issuance Costs | 7 | 0 | ||||||
Stock Option Excercises | 33 | 0 | ||||||
Net Cash Provided By Financing Activities | 2,098 | 3,764 | ||||||
Net Change in Cash and Cash Equivalents | (1,050 | ) | (2,311 | ) | ||||
Cash and Cash Equivalents - Beginning of Period | 2,225 | 3,564 | ||||||
Cash and Cash Equivalents - End of Period | $ | 1,175 | $ | 1,253 | ||||
Reconciliation of cash and restricted cash reported within the consolidated balance sheets | ||||||||
Cash | $ | 944 | $ | 661 | ||||
Restricted Cash | 231 | 592 | ||||||
Total Cash and restricted cash reported in the consolidated statements of cash flows | $ | 1,175 | $ | 1,253 | ||||
Supplemental Disclosure of Cash Flow Information: | ||||||||
Cash Paid During the Period for Interest | $ | 198 | $ | 81 | ||||
Cash Paid During the Period for Income Taxes | 20 | 156 | ||||||
Supplemental Noncash Investing and Financing Activities: | ||||||||
Property and Equipment Purchases in Accounts Payable | 52 | 0 | ||||||
Property Acquired Under Operating Lease | 0 | 858 |
See Accompanying Condensed Notes to the Condensed Consolidated Financial Statements
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
| NINE MONTHS ENDED |
| ||||
|
| SEPTEMBER 30, |
| ||||
|
| 2017 |
| 2016 |
| ||
Cash Flows From Operating Activities |
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Net Income (Loss) |
| $ | 13,052 |
| $ | (53,951 | ) |
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operating Activities |
|
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| ||
Depreciation |
| 1,636,040 |
| 1,565,716 |
| ||
Amortization |
| 236,759 |
| 142,991 |
| ||
Compensation on Stock-Based Awards |
| 25,920 |
| 994 |
| ||
Loss on Extinguishment of Debt |
| 16,756 |
| — |
| ||
Compensation on Equity Appreciation Rights |
| (3,527 | ) | 5,950 |
| ||
Change in Contingent Consideration |
| (299,991 | ) | — |
| ||
Deferred Taxes |
| 15,000 |
| 33,329 |
| ||
Change in Accounts Receivable Allowance |
| (719,919 | ) | 312,421 |
| ||
Change in Inventory Reserves |
| 271,845 |
| (104,341 | ) | ||
(Gain) Loss on Disposal of Property and Equipment |
| (355,336 | ) | 2,473 |
| ||
Changes in Current Operating Items |
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Accounts Receivable |
| (271,964 | ) | 430,647 |
| ||
Inventories |
| (686,370 | ) | (1,452,737 | ) | ||
Prepaid Expenses |
| 4,214 |
| 323,344 |
| ||
Income Taxes Receivable |
| (124,663 | ) | (207,295 | ) | ||
Income Taxes Payable |
| 6,328 |
| (7,382 | ) | ||
Accounts Payable |
| 823,669 |
| 1,857,082 |
| ||
Accrued Payroll and Commissions |
| (881,926 | ) | (595,628 | ) | ||
Other Accrued Liabilities |
| 908,896 |
| (378,606 | ) | ||
Net Cash Provided by Operating Activities |
| 614,783 |
| 1,875,007 |
| ||
Cash Flows from Investing Activities |
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|
|
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Proceeds from Sale of Property and Equipment |
| 668,786 |
| 3,000 |
| ||
Purchase of Intangible Asset |
| (100,000 | ) | — |
| ||
Purchases of Property and Equipment |
| (573,724 | ) | (1,663,821 | ) | ||
Net Cash Used in Investing Activities |
| (4,938 | ) | (1,660,821 | ) | ||
Cash Flows from Financing Activities |
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Net Change in Line of Credit |
| 1,166,134 |
| 522,031 |
| ||
Proceeds from Long-Term Debt |
| 5,123,000 |
| 466,000 |
| ||
Principal Payments on Long-Term Debt |
| (5,623,110 | ) | (1,121,624 | ) | ||
Loss on Extinguishment of Debt |
| (158,078 | ) | — |
| ||
Debt Issuance Costs |
| (267,442 | ) | — |
| ||
Share Repurchases |
| (16,909 | ) | — |
| ||
Excess Tax Benefits from Stock-Based Compensation |
| — |
| (25,209 | ) | ||
Proceeds from Issuance of Common Stock |
| — |
| 4,822 |
| ||
Net Cash Provided by (Used in) Financing Activities |
| 223,595 |
| (153,980 | ) | ||
|
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Effect of Exchange Rate Changes on Cash |
| (29,085 | ) | — |
| ||
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| ||
Net Change in Cash |
| 804,355 |
| 60,206 |
| ||
Cash - Beginning of Period |
| 268,204 |
| 887 |
| ||
Cash - Ending of Period |
| $ | 1,072,559 |
| $ | 61,093 |
|
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Reconciliation of cash and restricted cash reported within the condensed consolidated balance sheets |
|
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| ||
Cash |
| $ | 530,764 |
| $ | 61,093 |
|
Restricted Cash |
| 541,795 |
| — |
| ||
Total Cash and restricted cash reported in the condensed consolidated statements of cash flows |
| $ | 1,072,559 |
| $ | 61,093 |
|
|
|
|
|
|
| ||
Supplemental Disclosure of Cash Flow Information: |
|
|
|
|
| ||
Cash Paid During the Period for Interest |
| $ | 382,578 |
| $ | 394,339 |
|
Cash Refunded During the Period for Income Taxes |
| 22,145 |
| — |
| ||
|
|
|
|
|
| ||
Supplemental Noncash Investing and Financing Activities: |
|
|
|
|
| ||
Property and Equipment Purchases in Accounts Payable |
| 193,004 |
| 31,068 |
| ||
Equipment Acquired under Capital Lease |
| 971,628 |
| — |
|
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES | |||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY | |||||||||||
(UNAUDITED) | |||||||||||
(IN THOUSANDS) |
Accumulated | ||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||
Preferred | Common | Paid-In | Comprehensive | Retained | Shareholders' | |||||||||||||||||||
Stock | Stock | Capital | Loss | Earnings | Equity | |||||||||||||||||||
BALANCE MARCH 31, 2021 | $ | 250 | $ | 27 | $ | 15,837 | $ | (71 | ) | $ | 1,108 | $ | 17,151 | |||||||||||
Net Income | 0 | 0 | 0 | 0 | 179 | 179 | ||||||||||||||||||
Foreign currency translation adjustment | 0 | 0 | 0 | 58 | 0 | 58 | ||||||||||||||||||
Compensation on stock-based awards | 0 | 0 | 25 | 0 | 0 | 25 | ||||||||||||||||||
BALANCE JUNE 30, 2021 | $ | 250 | $ | 27 | $ | 15,862 | $ | (13 | ) | $ | 1,287 | $ | 17,413 | |||||||||||
BALANCE DECEMBER 31, 2020 | $ | 250 | $ | 27 | $ | 15,816 | $ | (37 | ) | $ | 2,662 | $ | 18,718 | |||||||||||
Net Loss | 0 | 0 | 0 | 0 | (1,375 | ) | (1,375 | ) | ||||||||||||||||
Foreign currency translation adjustment | 0 | 0 | 0 | 24 | 0 | 24 | ||||||||||||||||||
Compensation on stock-based awards | 0 | 0 | 46 | 0 | 0 | 46 | ||||||||||||||||||
BALANCE JUNE 30, 2021 | $ | 250 | $ | 27 | $ | 15,862 | $ | (13 | ) | $ | 1,287 | $ | 17,413 | |||||||||||
BALANCE MARCH 31, 2022 | $ | 250 | $ | 27 | $ | 16,043 | $ | 61 | $ | 9,954 | $ | 26,335 | ||||||||||||
Net Income | 0 | 0 | 0 | 0 | 719 | 719 | ||||||||||||||||||
Foreign currency translation adjustment | 0 | 0 | 0 | (244 | ) | 0 | (244 | ) | ||||||||||||||||
Compensation on stock-based awards | 0 | 0 | 93 | 0 | 0 | 93 | ||||||||||||||||||
BALANCE JUNE 30, 2022 | $ | 250 | $ | 27 | $ | 16,136 | $ | (183 | ) | $ | 10,673 | $ | 26,903 | |||||||||||
BALANCE DECEMBER 31, 2021 | $ | 250 | $ | 27 | $ | 15,962 | $ | 56 | $ | 9,816 | $ | 26,111 | ||||||||||||
Net Income | 0 | 0 | 0 | 0 | 857 | 857 | ||||||||||||||||||
Foreign currency translation adjustment | 0 | 0 | 0 | (239 | ) | 0 | (239 | ) | ||||||||||||||||
Stock option exercises | 0 | 0 | 33 | 0 | 0 | 33 | ||||||||||||||||||
Compensation on stock-based awards | 0 | 0 | 141 | 0 | 0 | 141 | ||||||||||||||||||
BALANCE JUNE 30, 2022 | $ | 250 | $ | 27 | $ | 16,136 | $ | (183 | ) | $ | 10,673 | $ | 26,903 |
See Accompanying Condensed Notes to the Condensed Consolidated Financial Statements
CONDENSED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements for the interim periods have been prepared in accordance with Generally Accepted Accounting Principles in the United States of America (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the financial information and footnotes required by GAAP for complete financial statements, although we believe the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K10-K for the year ended December 31, 2016. 2021. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year or for any other interim period. In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In preparing these condensed consolidated financial statements, we have made our best estimates and judgments of certain amounts included in the condensed consolidated financial statements, giving due consideration to materiality. Changes in the estimates and assumptions used by us could have a significant impact on our financial results, since actual results could differ from those estimates.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of Nortech Systems Incorporated and its wholly-owned subsidiaries, Manufacturing Assembly Solutions of Monterrey, Inc., and Nortech Systems Hong Kong Company, Limited and its subsidiary, Nortech Systems Suzhou Company, Limited.wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
ReclassificationsRevenue Recognition
Certain reclassificationsOur revenue is comprised of product, engineering services and repair services. All revenue is recognized when the Company satisfies its performance obligation(s) under the contract by transferring the promised product or service to our customer either when (or as) our customer obtains control of the product or service, with the majority of our revenue being recognized over time including goods produced under contract manufacturing agreements and services revenue. A performance obligation is a promise in a contract to transfer a distinct product or service to a customer. A contract’s transaction price is allocated to each distinct performance obligation. The majority of our contracts have been made to the prior year Condensed Consolidated Statementa single performance obligation. Revenue is recorded net of Cash Flowsreturns, allowances and customer discounts. Our net sales for the nine months ended September 30, 2016 to conform to the current year presentation. In the current year we revisedservices were less than 10% of our presentation of non-cash changestotal sales for all periods presented, and accordingly, are included in the accounts receivable allowance and changesnet sales in inventory reserves on the Condensed Consolidated Statements of Cash Flows to show these amounts separately. Prior year amounts were reclassified to conform with current year presentation, which decreased cash provided by accounts receivable by $312,421 and decreased cash used in inventories by $104,341 for the nine months ended September 30, 2016.
Also in the current year we revised our prior year presentation of borrowings and repayments on our line of credit on the Condensed Consolidated Statements of Cash Flows to show the amounts together as the net change in our line of credit.
There was no change in total net cash provided by operating activities or cash used by financing activities for the nine months ended September 30, 2016. These changes have no impact on the Condensed Consolidated Balance Sheets or the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
Revenue Recognition
We recognize manufacturing revenue when we ship goods or the goods Sales, value add, and other taxes collected from customers and remitted to governmental authorities are received by our customer, when title has passed, all contractual obligations have been satisfied, the price is fixed or determinable and collection of
the resulting receivable is reasonably assured. Generally, there are no formal substantive customer acceptance requirements or further obligations related to manufacturing services. If such requirements or obligations exist, then we recognize the related revenues at the time when such requirements are completed and the obligations are fulfilled. We also provide engineering services separate from the manufacture of a product. Revenueaccounted for engineering services is generally recognized on a time and material basis or upon completion of the engineering process. In addition, we have another separate source of revenue that comesnet (excluded from short-term repair services, which are recognized when the repairs are completed and the repaired products are shipped back to the customer.revenues) basis. 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.
Stock-Based Awards
Stock Options
In May 2017, the shareholders approved the 2017 Stock Incentive Plan which authorized the issuance of 350,000 shares. 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. 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 SeptemberJune 30, 2017:2022:
|
| Shares |
| Weighted- |
| Weighted- |
| Aggregate |
| Shares | Weighted- Average Exercise Price Per Share | Weighted- Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value | ||||||||||||||
Outstanding - January 1, 2017 |
| 37,750 |
| $ | 4.75 |
|
|
|
|
| |||||||||||||||||
Outstanding - January 1, 2022 | 387,500 | $ | 4.57 | ||||||||||||||||||||||||
Granted |
| 150,000 |
| 3.43 |
|
|
|
|
| 87,000 | 11.10 | ||||||||||||||||
Exercised |
| — |
| — |
|
|
|
|
| (12,000 | ) | 3.41 | |||||||||||||||
Cancelled |
| — |
| — |
|
|
|
|
| (4,400 | ) | 3.36 | |||||||||||||||
Outstanding - September 30, 2017 |
| 187,750 |
| $ | 3.70 |
| 8.38 |
| $ | 2,465 |
| ||||||||||||||||
Exercisable - September 30, 2017 |
| 37,750 |
| $ | 4.75 |
| 3.45 |
| $ | 2,465 |
| ||||||||||||||||
Outstanding - June 30, 2022 | 458,100 | $ | 5.82 | 6.97 | $ | 3,326 | |||||||||||||||||||||
Exercisable - June 30, 2022 | 222,700 | $ | 3.93 | 6.12 | $ | 2,038 |
There were no options exercised duringRestricted Stock Units
During the three and ninesix months ended SeptemberJune 30, 2017. For the three2022, we granted 3,000 and nine months ended September 30, 2016, 1,507 options were exercised. These exercised options had a total intrinsic value of $964 and resulted in cash proceeds of $4,822 for the three and nine months ended September 30, 2016.
Under the 2005 Incentive Compensation Plan, there were no21,000 restricted stock options granted during the three and nine months ended September 30, 2016. In May units (“RSUs”), respectively, under our 2017 the shareholders approved the 2017 Stock Incentive Plan to non-employee directors which authorized the issuance of 350,000 shares.vest over two years. There were no stock options granted during RSUs outstanding prior to the threesix months ended SeptemberJune 30, 2017. There were 150,000 options granted during the nine months ended September 30, 2017.
2022. Total compensation expense related to stock optionsthe RSUs were $29 and $35 for the three and six months ended SeptemberJune 30, 2017 and 20162022, respectively. There was $17,280 and $0, respectively. Total0 compensation expense related to stock optionsRSUs for the ninethree and six months ended SeptemberJune 30, 2017 and 20162021. Total unrecognized compensation expense related to the RSUs was $25,920 and $994, respectively. As of September 30, 2017, there was $181,440 of unrecognized compensation$218, which will vest over the next 2.621.74 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. NaN RSUs vested during the six months ended June 30, 2022.
Equity Appreciation Rights Plan
In November 2010, the Board of Directors adopted the Nortech Systems Incorporated Equity Appreciation Rights Plan (“(“2010 Plan”). The total number of Equity Appreciation Right Units (“Units”) that can be issued under the 2010 Plan shall not exceed an aggregate of 1,000,000 Units as amended and restated on March 11, 2015. The 2010 Plan provides that Units issued shall fully vest three years from the base date as defined in the agreement unless terminated earlier. Units give the holder a right to receive a cash payment equal to the appreciation in book value per share of common stock from the base date, as defined, to the redemption date. Unit redemption payments under the 2010 Plan shall be paid in cash within 90 days after we determine the book
value of the Units as of the calendar year immediately preceding the redemption date. The Units are adjusted to each reporting period based on the expected appreciation of the Units as defined in the Plan.
There were no Units units granted during the threesix months ended SeptemberJune 30, 2017. During the nine months ended September2022 or June 30, 2017, a total of 100,000 Units were granted. During the three and nine months ended September 30, 2016, a total of 31,666 Units were granted.2021.
The 100,000 units outstanding at December 31, 2021 were paid on March 29, 2022. As of June 30, 2022, there are 0 units outstanding. Total compensation expense (income) related to the vested outstanding Units based on the estimated appreciation over their remaining terms was ($4,478)$100 and $12,372$114 for the three and six months ended SeptemberJune 30, 2017 and 2016, respectively and ($3,527) and $5,950 for the nine months ended September 30, 2017 and 2016, 2021, respectively. The income for the three and nine months ended September 30, 2017 was the result of a change in the estimate of the appreciation of book value per share of common stock.
As of September 30, 2017 and December 31, 2016, approximately $18,600 and $45,000 is accrued under this plan, respectively. As of September 30, 2017, approximately $8,700 of this balance was included in other accrued liabilities and approximately $9,900 of this balance was included in other long-term liabilities. As of December 31, 2016, approximately $23,000 of this balance was included in other accrued liabilities and the remaining $22,000 balance was included in other long-term liabilities.
EarningsNet Income (Loss) per Common Share
Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding. Dilutive net income (loss) per common share assumes the exercise and issuance of all potential common stock equivalents in computing the weighted-average number of common shares outstanding, unless their effect is antidilutive. All stock options and restricted stock units, while outstanding, are considered common stock equivalents.
For the three and ninesix months ended SeptemberJune 30, 2017, 14,500 2022, stock options of 203,625 and 197,285, respectively were included in the computation of diluted net income per common share amounts as their impact waswere dilutive. For the three and nine months ended SeptemberJune 30, 2017, 2021, stock options of 173,250 were excluded because their inclusion would be antidilutive.
For the three months ended September 30, 2016, 14,500 stock options109,065 were included in the computation of diluted earningsnet income per share amounts as their impact was dilutive, and stock options of 64,250 were excluded because their inclusion would be antidilutive.common share. For the ninesix months ended SeptemberJune 30, 2016, the effect of 2021, all stock options isare deemed to be antidilutive due to the net loss incurred and therefore, were not included in the computation of earnings per-share amounts.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.
Share Repurchase Program
As of September 30, 2017, we have a $250,000 share repurchase program which was authorized by our Board of Directors in August 2017. Under this repurchase program, we repurchased 4,824 shares in open market transactions totaling $16,909 for the three and nine months ended September 30, 2017. As of September 30, 2017, we had a $250,000 share repurchase program with $233,091 remaining under this authorization. The par value of repurchased shares is deducted from common stock and the excess repurchase price over par value is deducted from additional paid-in capital.
Segment Reporting Information
All of our operations fall under the contract manufacturing segment within the electronic manufacturing Services industry. We strategically direct production between our various manufacturing facilities based on a number of considerations to best meet our customers’ requirements. We share resources for sales, marketing, engineering, supply chain, information services, human resources, payroll, and all corporate accounting functions. Consolidated financial information is available that is evaluated regularly by the chief operating decision maker in assessing performance and allocating resources.
Restricted Cash
Cash and cash equivalents classified as restricted cash on our condensed consolidated balance sheets are restricted as to withdrawal or use under the terms of certain contractual agreements. As of June 30, 2022 we had outstanding letters of credit for $400. Restricted cash as of June 30, 2022 was $231. The SeptemberJune 30, 20172022 restricted cash balance included cash collateral required to be held against our corporate employee purchasing card program and lockbox deposits that are temporarily restricted due to timing at the period end. The lockbox deposits are
applied against our line of credit the next business day. As of September 30, 2017, we had no outstanding letters of credit. We held no restricted cash as of December 31, 2016.
Accounts Receivable and Allowance for Doubtful Accounts
We grant credit to customers inCredit is extended based upon an evaluation of the normal course of business. Accountscustomer’s financial condition and, while collateral is not required, the Company periodically receives surety bonds that guarantee payment. Credit terms are consistent with industry standards and practices. Trade accounts receivable are unsecured and are presented net ofhave been reduced by an allowance for doubtful accounts. The allowance for doubtful accounts was approximately $163,400 of $297 at June 30, 2022 and $883,000$328 at September 30, 2017 and December 31, 2016, respectively. We determine our allowance by considering a number of factors, including the length of time accounts receivable are past due, our previous loss history, the customers’ current ability to pay their obligations to us, and the condition of the general economy and the industry as a whole. We write-off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for uncollectible accounts.2021.
Inventories
Inventories are stated at the lower of average cost (first-in, first-out method)(which approximates first-in, first out) or net realizable value. Costs include material, labor, and overhead required in the warehousing and production of our products. Inventory reserves are maintained for the estimated value of the inventories that may have a lower value than stated or quantities in excess of future production needs.
Inventories are as follows:
|
| September 30, |
| December 31, |
| ||
|
| 2017 |
| 2016 |
| ||
Raw Materials |
| $ | 15,709,671 |
| $ | 14,533,690 |
|
Work in Process |
| 3,794,829 |
| 4,104,968 |
| ||
Finished Goods |
| 2,509,124 |
| 2,688,596 |
| ||
Reserves |
| (945,258 | ) | (673,413 | ) | ||
|
|
|
|
|
| ||
Total |
| $ | 21,068,366 |
| $ | 20,653,841 |
|
June 30, | December 31, | |||||||
2022 | 2021 | |||||||
Raw Materials | $ | 21,764 | $ | 18,492 | ||||
Work in Process | 1,793 | 1,678 | ||||||
Finished Goods | 608 | 562 | ||||||
Reserves | (1,195 | ) | (1,298 | ) | ||||
Total | $ | 22,970 | $ | 19,434 |
Other Intangible Assets
Other intangible assets at SeptemberJune 30, 2017 2022 and December 31, 2016 2021 are as follows:
|
| September 30, 2017 |
| |||||||
|
| Gross |
|
|
|
|
| |||
|
| Carrying |
| Accumulated |
| Net Book |
| |||
|
| Amount |
| Amortization |
| Value |
| |||
Customer Relationships |
| $ | 1,302,000 |
| $ | 325,498 |
| $ | 976,502 |
|
Trade Names |
| 814,000 |
| 91,576 |
| 722,424 |
| |||
Intellectual Property |
| 100,000 |
| 19,445 |
| 80,555 |
| |||
Bond Issue Costs |
| 79,373 |
| 79,373 |
| — |
| |||
Totals |
| $ | 2,295,373 |
| $ | 515,892 |
| $ | 1,779,481 |
|
Customer Relationships | Trade Names | Patents | Total | |||||||||||||
Balance at January 1, 2021 | $ | 507 | $ | 589 | $ | 77 | $ | 1,173 | ||||||||
Additions | 0 | 0 | 64 | 64 | ||||||||||||
Amortization | 147 | 29 | 0 | 176 | ||||||||||||
Abandonment Loss | 0 | 560 | 0 | 560 | ||||||||||||
Balance at December 31, 2021 | 360 | 0 | 141 | 501 | ||||||||||||
Additions | 0 | 0 | 41 | 41 | ||||||||||||
Amortization | 71 | 0 | 0 | 71 | ||||||||||||
Balance at June 30, 2022 | $ | 289 | $ | 0 | $ | 182 | $ | 471 |
|
| December 31, 2016 |
| |||||||
|
| Gross |
|
|
|
|
| |||
|
| Carrying |
| Accumulated |
| Net Book |
| |||
|
| Amount |
| Amortization |
| Value |
| |||
Customer Relationships |
| $ | 1,302,000 |
| $ | 216,998 |
| $ | 1,085,002 |
|
Trade Names |
| 814,000 |
| 61,050 |
| 752,950 |
| |||
Bond Issue Costs |
| 79,373 |
| 55,561 |
| 23,812 |
| |||
Totals |
| $ | 2,195,373 |
| $ | 333,609 |
| $ | 1,861,764 |
|
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 2.0 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 and ninesix months ended SeptemberJune 30, 2017 2022 was $75,844$35 and $182,283,$71, respectively. Amortization expense for the three and ninesix months ended SeptemberJune 30, 2016 2021 was $47,663$46 and $142,992,$92, respectively. The increase in
Estimated future annual amortization expense for(not including the three and nine months ended September 30, 2017 was due to the redemption of our industrial revenue bond payable to the City of Blue Earth, which accelerated the recognition of the remaining bond issue costs.
Estimated future amortization expensepatents in process) related to these assets is approximately as follows:
Remainder of 2017 |
| $ | 54,678 |
|
2018 |
| 218,712 |
| |
2019 |
| 218,712 |
| |
2020 |
| 190,925 |
| |
2021 |
| 185,376 |
| |
Thereafter |
| 911,078 |
| |
Total |
| $ | 1,779,481 |
|
Year | Amount | |||
Remainder of 2022 | $ | 72 | ||
2023 | 145 | |||
2024 | 72 | |||
Total | $ | 289 |
Impairment of Goodwill and Other Intangible Assets
In accordance with ASC 350, Goodwill and Other Intangible Assets, goodwill is not amortized but is required to be reviewed for impairment at least annually or when events or circumstances indicate that carrying value may exceed fair value. We test impairment annually as of October 1st.
Impairment AnalysisAccounting Pronouncements Issued But Not Yet Adopted
We evaluate long-lived assets, primarily property and equipment, as well as In June 2016, the related depreciation periods, whenever current events or changes in circumstances indicate that the carrying amountFASB issued ASU 2016-13, Measurement of an asset or asset
group may not be recoverable. RecoverabilityCredit Losses on Financial Instruments. This guidance introduces a new model for assets to be held and used isrecognizing credit losses on financial instruments based on our projectionan estimate of the undiscounted future operating cash flows of the underlying assets. To the extent such projections indicate that future undiscounted cash flows are not sufficient to recover the carrying amounts of related assets, a charge might be required to reduce the carrying amount to equal estimated fair value. No events related to long-lived assets were identified during the three and nine months ended September 30, 2017 that would require us to test for impairment.
In the third quarter of 2017, as a result of changes in the reporting unit’s forecast, goodwill was evaluated for impairment as of September 30, 2017. Based oncurrent expected credit losses. The ASU also provides updated guidance regarding the impairment analysis performed, it was concluded there was no impairment of goodwillavailable-for-sale debt securities and no impairment expense was recorded duringincludes additional disclosure requirements. The new guidance is effective for public business entities that meet the three and nine months ended September 30, 2017 and 2016, respectively.
Recently Issued Accounting Standards
In May 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-09, Compensation — Stock Compensation (Topic 718), to reduce the diversity in practice and the cost and complexity for the accounting for a change in terms or conditionsdefinition of a share-based award. ASU 2017-09 is to be applied on a prospective basis effectiveSmaller Reporting Company as defined by the SEC for interim and annual periods beginning after December 15, 2017, with early2022. Early adoption is permitted. We are currently evaluating the effectimpact of this updatestandard on our consolidated financial statements.statements and related disclosures.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (Topic 350), to simplify the accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test. A goodwill impairment will now be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, limited to the amount of goodwill allocated to that reporting unit. ASU 2017-04 is to be applied on a prospective basis effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted for any impairment tests performed after January 1, 2017. We are currently evaluating the effect of this update on our consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, Restricted Cash in the Statement of Cash Flows (Topic 230), which prescribes that restricted cash should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This standard is effective for fiscal years beginning after December 15, 2017, although early adoption is permitted, including adoption in an interim period. We adopted this guidance in 2017. See Note 1, “Summary of Significant Accounting Policies,” of Condensed Notes to the Consolidated Financial Statements for further description of our restricted cash.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows — Classification of Certain Cash Receipts and Cash Payments (Topic 230). This guidance will be effective for us beginning in the first quarter of 2018, although early adoption is permitted. We are evaluating the impact, if any, that this new guidance will have on our Consolidated Statements of Cash Flows.
In March 2016, FASB issued ASU 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting, which changes how companies account for certain aspects of share-based payments to employees. The new guidance requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled, allows an employer to repurchase more of an employee’s shares than previously allowed for tax withholding purposes without triggering liability accounting, allows a company to make a policy election to account for forfeitures as they occur, and eliminates the requirement that excess tax benefits be realized before companies can recognize them. The new guidance also requires excess tax benefits and tax shortfalls to be presented on the cash flow statement as an operating activity rather than as a financing activity, and clarifies that cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation are to be presented as a financing activity. The standard is effective for our consolidated financial statements issued for fiscal years beginning after December 15, 2016, and interim periods
within those fiscal years. The Company adopted the guidance in the current year. The adoption of ASU 2016-09 required no retrospective adjustments to the consolidated financial statements. In addition, there was no material cumulative-effect adjustment to retained earnings, nor did the adoption impact the tax provision for the current quarter.
During February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 was issued to increase transparency and comparability among organizations by recognizing all lease transactions (with terms in excess of 12 months) on the balance sheet as a lease liability and a right-of-use asset (as defined). ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with earlier application permitted. Upon adoption, the lessee will apply the new standard on a modified retrospective basis to all periods presented. We are currently assessing the effect that ASU 2016-02 will have on our consolidated financial statements.
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. This standard changes the measurement principle for certain inventory methods from the lower of cost or market to the lower of cost and net realizable value. Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This standard does not apply to inventory that is measured using Last-in First-out (“LIFO”) or the retail inventory method. The provisions of ASU 2015-11 are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company adopted this guidance in the current year and there was no impact on the Company’s consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This standard outlines a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that revenue is recognized when a customer obtains control of a good or service. A customer obtains control when it has the ability to direct the use of and obtain the benefits from the good or service. Transfer of control is not the same as transfer of risks and rewards, as it is considered in current guidance. We will also need to apply new guidance to determine whether revenue should be recognized over time or at a point in time. This standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2017, using either of two methods: (a) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09; or (b) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined in ASU 2014-09. We plan to adopt the new guidance beginning January 1, 2018.
We have performed a review of the requirements of the new guidance and have initially identified which of our revenue streams will be within the scope of ASU 2014-09. We are continuing to working through an adoption plan which includes a review of customer contracts, applying the five-step model of the new standard to each revenue stream and comparing the results to our current accounting; an evaluation of the method of adoption; and assessing changes that might be necessary to our processes, internal controls and changes in financial reporting. The Company expects to complete the review of contracts and evaluate the impact of the accounting and disclosure changes on its business processes and controls during the fourth quarter of 2017.
NOTE 2. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and accounts receivable. With regard to cash, we maintain our excess cash balances in checking accounts at primarily two high-credit quality financial institutions. These accounts institutions, one in the United States and one in China. 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. We grant credit to customers in the normal course of business and do not require collateral on our accounts receivable.
Our largest customer has two divisions that together accounted for
We have certain customers whose revenue individually represented 10% or more of our net sales, during the three and nine months ended September 30, 2017 and 2016. or whose accounts receivable balances individually represented 10% or more of total accounts receivable. One division customer accounted for approximately 23.2%28% and 24.3%26% of net sales for the three and ninesix months ended SeptemberJune 30, 2017, respectively,2022, respectively. One customer accounted for 25% and approximately 19.7% and 19.0%27% of net sales for the three and ninesix months ended SeptemberJune 30, 2016. The second division accounted for approximately 1.0% and 1.5% of net sales for the three and nine months ended September2021, respectively.
At June 30, 2017, respectively, and approximately 2.4% and 4.3% of net sales for the three and nine months ended September 30, 2016. Together they accounted for approximately 24.2% and 25.8% of net sales for the three and nine months ended September 30, 2017 and approximately 22.1% and 23.3% of net sales for the three and nine months ended September 30, 2016. Accounts receivable from the customer at September 30, 2017 and December 31, 20162022, two customers represented approximately 19.2% and 13.6%37% of our total accounts receivable, respectively.receivable. At December 31, 2021, one customer represented approximately 19% of our total accounts receivable.
Export sales represented approximately 18.0%4% of net sales for both the three and 13.0%six months ended June 30, 2022. Export sales represented approximately 2% and 3% of net sales for the three and six months ended SeptemberJune 30, 20172021 respectively.
NOTE 3. REVENUE
Revenue recognition
Our revenue is comprised of product, engineering services and 2016, repair services. All revenue is recognized when the Company satisfies its performance obligation(s) under the contract by transferring the promised product or service to our customer either when (or as) our customer obtains control of the product or service, with the majority of our revenue being recognized over time including goods produced under contract manufacturing agreements and services revenue. A performance obligation is a promise in a contract to transfer a distinct product or service to a customer. A contract’s transaction price is allocated to each distinct performance obligation. The majority of our contracts have a single performance obligation, as the promise to transfer products or services is not separately identifiable from other promises in the contract and, therefore, not distinct.
Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products or providing services. As such, revenue is recorded net of returns, allowances and customer discounts. Sales, value add, and other taxes collected from customers and remitted to governmental authorities are accounted for on a net (excluded from revenues) basis. Shipping and handling costs are included in cost of goods sold.
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. 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. Export sales represented 15.8%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 12.2%costs. We estimate profit on these agreements as the difference between total estimated revenue and expected costs to complete the performance obligation within the terms of the agreement and recognize the respective profit as the goods are produced. The estimates to determine the profit earned on the performance obligation are based on anticipated selling prices and historical cost of goods sold and represent our best judgement at the time. Changes in judgements on these above estimates could impact the timing and amount of revenue recognized with a resulting impact on the timing and amount of associated profit.
On occasion our customers provide materials to be used in the manufacturing process and the fair value of the materials is included in revenue as noncash consideration at the point in time when the manufacturing process commences along with the same corresponding amount recorded as cost of goods sold. The inclusion of noncash consideration has no impact on overall profitability.
Contract Assets
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):
Balance outstanding at December 31, 2021 | $ | 8,698 | ||
Increase (decrease) attributed to: | ||||
Transferred to receivables from beginning contract assets | (8,360 | ) | ||
Product transferred over time to ending contract assets | 8,732 | |||
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. We bill our customers upon shipment with payment terms of up to 120 days.
The following tables summarize our net sales for the nine months ended September 30, 2017 and 2016, respectively.by market:
Three Months Ended June 30, 2022 | ||||||||||||||||
Product/ Service Transferred Over Time | Product Transferred at Point in Time | Noncash Consideration | Total Net Sales by Market | |||||||||||||
Medical | $ | 13,165 | $ | 4,763 | $ | 610 | $ | 18,538 | ||||||||
Industrial | 6,930 | 2,196 | 328 | 9,454 | ||||||||||||
Aerospace and Defense | 3,989 | 336 | 201 | 4,526 | ||||||||||||
Total net sales | $ | 24,084 | $ | 7,295 | $ | 1,139 | $ | 32,518 |
Three Months Ended June 30, 2021 | ||||||||||||||||
Product/ Service Transferred Over Time | Product Transferred at Point in Time | Noncash Consideration | Total Net Sales by Market | |||||||||||||
Medical | $ | 12,776 | $ | 3,050 | $ | 244 | $ | 16,070 | ||||||||
Industrial | 8,287 | 1,738 | 151 | 10,176 | ||||||||||||
Aerospace and Defense | 3,738 | 122 | 76 | 3,936 | ||||||||||||
Total net sales | $ | 24,801 | $ | 4,910 | $ | 471 | $ | 30,182 |
Six Months Ended June 30, 2022 | ||||||||||||||||
Product/ Service Transferred Over Time | Product Transferred at Point in Time | Noncash Consideration | Total Net Sales by Market | |||||||||||||
Medical | $ | 22,972 | $ | 9,678 | $ | 1,154 | $ | 33,804 | ||||||||
Industrial | 13,459 | 3,987 | 675 | 18,121 | ||||||||||||
Aerospace and Defense | 10,046 | 761 | 497 | 11,304 | ||||||||||||
Total net sales | $ | 46,477 | $ | 14,426 | $ | 2,326 | $ | 63,229 |
Six Months Ended June 30, 2021 | ||||||||||||||||
Product/ Service Transferred Over Time | Product Transferred at Point in Time | Noncash Consideration | Total Net Sales by Market | |||||||||||||
Medical | $ | 21,735 | $ | 5,942 | $ | 734 | $ | 28,411 | ||||||||
Industrial | 12,917 | 3,075 | 403 | 16,395 | ||||||||||||
Aerospace and Defense | 6,802 | 384 | 262 | 7,448 | ||||||||||||
Total net sales | $ | 41,454 | $ | 9,401 | $ | 1,399 | $ | 52,254 |
NOTE 3.4. FINANCING ARRANGEMENTS
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 $16,000,000$16,000 that expires on June 15, 2022. The credit arrangement also has a $5,000,000 real estate term note outstanding with a maturity date of June 15, 2022. The2026.
Under the amended Bank of America credit agreement replaces our previous credit agreement with Wells Fargo Bank which terminated on June 20, 2017 and resulted in a loss on the extinguishment of debt of $174,834 primarily related to legal and terminations fees.
Under the new credit agreement, both signed December 31, 2021, the line of credit and real estate term notes areis subject to variations in the LIBORBloomberg Short-Term Bank Yield (BSBY) index rate. Our line of credit bears interest at one-month LIBOR + 2.00% (approximately 3.25% at September 30, 2017) while our real estate term notes bear interest at one-month LIBOR + 2.25% (approximately 3.50% at September 30, 2017). The combineda weighted-average interest rate related to our new line of credit agreement3.9% and terminated credit agreement was 3.68% 3.5% as of June 30, 2022 and 3.57% for the three and nine months ended September 30, 2017, December 31, 2021, respectively. We had borrowings on our line of credit of $8,481,396$11,410 and $7,315,262$9,016 outstanding as of SeptemberJune 30, 2017 2022 and December 31, 2016, 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 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 agreementCredit Agreement provides for, among other things, a fixed charge coverage ratioFixed Charge Coverage Ratio of not less than (i) 1.001.0 to 1.001.0 for the trailing four fiscal quarters most recently ended.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 SeptemberJune 30, 2017, we were2022 the Company was in compliance with this covenant.its covenants.
The availability under the line is subject to borrowing base requirements, and advances are at the discretion of the lender. At SeptemberJune 30, 2017, 2022, we had unused availability under our line of credit of $4,462,000$4,190 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.
As part of the July 1, 2015 Devicix acquisition we entered into two unsecured subordinated promissory notes payable to the seller in the principal amounts of $1,000,000 and $1,300,000. The $1,000,000 promissory note has a four-year term, bearing interest at 4.0% per annum, requiring monthly principal and interest payments of $22,579 and is subject to offsets if certain revenue levels are not met. The $1,300,000 promissory note has a four-year term and bears interest at 4.0% per annum, requiring monthly principal and interest payments of $29,353 and is not subject to offset.
Long-term debt at September 30, 2017 and December 31, 2016 consisted of the following:
|
| September 30, |
| December 31, |
| ||
|
| 2017 |
| 2016 |
| ||
Term note payable - Bank of America |
|
|
|
|
| ||
Real estate term note bearing interest at one-month LIBOR + 2.25% maturing June 15, 2022 with monthly payments of approximately $41,000 plus interest secured by substantially all assets. |
| $ | 4,875,527 |
| $ | — |
|
|
|
|
|
|
| ||
Term notes payable - Wells Fargo Bank, N.A. |
|
|
|
|
| ||
Real estate term notes bearing interest at three month LIBOR + 2.75% maturing March 31, 2027, and December 31, 2027 with combined monthly payments of approximately $19,000 plus interest, secured by substantially all assets. |
| — |
| 2,415,428 |
| ||
|
|
|
|
|
| ||
Equipment notes bearing interest at three month LIBOR + 2.75% maturing May 2018 with a combined monthly payments of approximately $46,000 plus interest, secured by substantially all assets. |
| — |
| 2,489,624 |
| ||
|
|
|
|
|
| ||
Industrial revenue bond payable to the City of Blue Earth, Minnesota which bears a variable interest rate had a maturity date on June 1, 2021, with principal of $80,000 payable annually on June 1. Bond redeemed on August 15, 2017. |
| — |
| 200,000 |
| ||
|
|
|
|
|
| ||
Devicix Acquistion Note 1 payable to DeLange Holdings bears interest rate of 4.0% per annum, maturing July 1, 2019. |
| 457,210 |
| 643,585 |
| ||
|
|
|
|
|
| ||
Devicix Acquistion Note 2 payable to DeLange Holdings bears interest rate of 4.0% per annum, maturing July 1, 2019. |
| 594,373 |
| 836,661 |
| ||
|
| 5,927,110 |
| 6,585,298 |
| ||
Discount on Devicix Notes Payable |
| (72,688 | ) | (102,424 | ) | ||
Debt issuance Costs |
| (251,841 | ) | (25,896 | ) | ||
Total long-term debt |
| 5,602,581 |
| 6,456,978 |
| ||
Current maturities of long-term debt |
| (990,755 | ) | (1,565,347 | ) | ||
Long-term debt - net of current maturities |
| $ | 4,611,826 |
| $ | 4,891,631 |
|
Capital LeasesNOTE 5. LEASES
DuringWe have operating leases for certain manufacturing sites, office space, and equipment. Most leases include the third quarter of fiscal year 2017,option to renew, with renewal terms that can extend the Company entered into a five year lease of equipment used interm from one to five years or more. Right-of-use lease assets and lease liabilities are recognized at the normal course of business. The lease qualifies as a capital lease and is accounted for accordingly. As of September 30, 2017,commencement date based on the property held under the capital lease was $971,628 and as of December 31, 2016, the Company held no capital leases. For the three and nine months ended September 30, 2017 and 2016, the Company had no amortization expense related to the leased assets as it was not in operational use as of September 30, 2017. The principal borrowing amountpresent value of the capital lease is $1,095,768.
Approximate future minimumremaining lease payments under non-cancelable capitalover the lease term which includes renewal periods we are reasonably certain to exercise. Our leases subsequent to Septemberdo not contain any material residual value guarantees or material restrictive covenants. At June 30, 2017 are2022, we do not have material lease commitments that have not commenced.
The components of lease expense were as follows:
Years Ending |
|
|
| |
December 31, |
| Amount |
| |
Remainder of 2017 |
| $ | 16,620 |
|
2018 |
| 198,574 |
| |
2019 |
| 208,733 |
| |
2020 |
| 219,412 |
| |
2021 |
| 230,638 |
| |
Thereafter |
| 221,791 |
| |
Total |
| $ | 1,095,768 |
|
Three Months Ended June 30, | Three Months Ended June 30, | |||||||
Lease Cost | 2022 | 2021 | ||||||
Operating lease cost | $ | 578 | $ | 589 | ||||
Finance lease interest cost | 17 | 21 | ||||||
Finance lease amortization expense | 183 | 163 | ||||||
Total lease cost | $ | 778 | $ | 773 |
NOTE 4. INCOME TAXES
Six Months Ended June 30, | Six Months ended June 30, | |||||||
Lease Cost | 2022 | 2021 | ||||||
Operating lease cost | $ | 1,159 | $ | 1,120 | ||||
Finance lease interest cost | 36 | 43 | ||||||
Finance lease amortization expense | 365 | 326 | ||||||
Total lease cost | $ | 1,560 | $ | 1,489 |
Supplemental balance sheet information related to leases was as follows:
Balance Sheet Location | June 30, 2022 | December 31, 2021 | |||||||
Assets | |||||||||
Operating lease assets | Operating lease assets | $ | 8,420 | $ | 8,983 | ||||
Finance lease assets | Property, plant and equipment | 1,867 | 2,052 | ||||||
Total leased assets | $ | 10,287 | $ | 11,035 |
Supplemental cash flow information related to leases was as follows:
June 30, | June 30, | |||||||
2022 | 2021 | |||||||
Operating leases | ||||||||
Cash paid for amounts included in the measurement of lease liabilities | $ | 862 | $ | 821 | ||||
Right-of-use assets obtained in exchange for lease obligations | $ | 0 | $ | 858 |
Maturities of lease liabilities were as follows:
Operating Leases | Finance Leases | Total | ||||||||||
Remaining 2022 | $ | 871 | $ | 293 | $ | 1,164 | ||||||
2023 | 1,789 | 409 | 2,198 | |||||||||
2024 | 1,507 | 357 | 1,864 | |||||||||
2025 | 1,255 | 103 | 1,358 | |||||||||
2026 | 1,217 | 115 | 1,332 | |||||||||
Thereafter | 7,066 | 0 | 7,066 | |||||||||
Total lease payments | $ | 13,705 | $ | 1,277 | $ | 14,982 | ||||||
Less: Interest | (4,504 | ) | (96 | ) | (4,600 | ) | ||||||
Present value of lease liabilities | $ | 9,201 | $ | 1,181 | $ | 10,382 |
The Company estimates thelease term and discount rate at June 30, 2022 were as follows:
Weighted-average remaining lease term (years) | ||||
Operating leases | 9.2 | |||
Finance leases | 2.6 | |||
Weighted-average discount rate | ||||
Operating leases | 7.7 | % | ||
Finance leases | 5.2 | % |
NOTE 6. INCOME TAXES
On a quarterly basis, we estimate what our effective tax rate will be for the full fiscal year and recordsrecord a quarterly income tax provision based on the anticipated rate and refinesrate. As the year progresses, we refine our estimates quarterlyestimate based on the facts and circumstances, including discrete events, by each tax jurisdiction.
Our effective tax rate for the three and ninesix months ended SeptemberJune 30, 2017 2022 was 61.5%21% and 110.2%12%, respectively. OurThe effective tax rate for the three and ninesix months ended SeptemberJune 30, 2016 2021 was (25.8%)38% and 50.9%30%, respectively. The increase in our current year-to-date effective rate versus prior year is due mainly toprimary driver of the higher level of pretax book loss and the related increasechange in the foreigneffective tax rate differential benefit.is attributable to a US loss compared to income from the foreign entities.
The differences between federal income taxes computed at the federal statutory rate and reported income taxes for the three and nine months ended September 30, 2017 and 2016 are as follows:
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| September 30, |
| September 30, |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Statutory federal tax provision (benefit) |
| $ | 38,000 |
| $ | 17,000 |
| $ | (43,000 | ) | $ | (38,000 | ) |
State income tax expense (benefit) |
| 9,500 |
| 8,000 |
| 9,000 |
| 24,000 |
| ||||
Income tax credits |
| (25,000 | ) | (20,000 | ) | (75,000 | ) | (60,000 | ) | ||||
Change in uncertain tax positions |
| 2,500 |
| — |
| 7,500 |
| — |
| ||||
Return to provision true up |
| 74,000 |
| (22,000 | ) | 74,000 |
| (22,000 | ) | ||||
Foreign tax benefit |
| (42,500 | ) | 44,000 |
| (124,500 | ) | 44,000 |
| ||||
Other |
| 12,843 |
| (40,000 | ) | 10,939 |
| (4,000 | ) | ||||
Income tax benefit |
| $ | 69,343 |
| $ | (13,000 | ) | $ | (141,061 | ) | $ | (56,000 | ) |
At September 30, 2017, we had $44,500 of net uncertain tax benefit positions remaining in other long-term liabilities related to research and development credits that would increase our effective income tax rate if recognized. At December 31, 2016, we had $52,000 of net uncertain tax benefit positions recorded in other long-term liabilities that would reduce our effective income tax rate if recognized.
NOTE 5. COMMITMENTS AND CONTINGENCIES7. RESTRUCTURING CHARGES
During the firstsix 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 have various operating leases for productionhad a gain on sale of assets of $15 and office equipment, office space, $94 in the six months ended June 30, 2022 and buildings under non-cancelable lease agreements expiring on various dates through2021, 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.
Rent expense for the three months ended September 30, 2017 and 2016 amounted to approximately $299,000 and $284,000 respectively. Rent expense for the nine months ended September 30, 2017 and 2016 amounted to approximately $948,000 and $877,000 respectively.
Approximate future minimum lease payments under non-cancelable leases subsequent to September 30, 2017 are as follows:
Years Ending |
|
|
| |
December 31, |
| Amount |
| |
Remainder of 2017 |
| $ | 221,000 |
|
2018 |
| 884,000 |
| |
2019 |
| 625,000 |
| |
2020 |
| 379,000 |
| |
2021 |
| 175,000 |
| |
Thereafter |
| 143,000 |
| |
Total |
| $ | 2,427,000 |
|
NOTE 6. PLANT CLOSURE8. EMPLOYEE RETENTION CREDIT
On JanuaryMarch 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law providing numerous tax provisions and other stimulus measures, including an employee retention credit (“ERC”), which is a refundable tax credit against certain employment taxes. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 and the American Rescue Plan Act of 2021 extended and expanded the availability of the ERC.
At June 30, 2022 and December 31, 2017, 2021, the Company closed its manufacturing operations in Augusta, Wisconsin.has ERC benefits of $5,209 within Employee Retention Credits Receivable on the condensed consolidated balance sheet.
NOTE 9. RELATED PARTY TRANSACTIONS
David Kunin, our Chairman, is a minority owner of Abilitech Medical, Inc. Mr. 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. The Company has operatedbelieves that transactions with Abilitech are on terms comparable to those that the Company could reasonably expect in an arm's length transaction with an unrelated third party.
David Kunin, our Chairman, is a facility in Augusta since 1992, serving mainlyminority owner (less than 10%) of Marpe Technologies, LTD an industrial customer base and defense overflow production that aligned with their custom cable capabilities.early-stage medical device company dedicated to the early detection of skin cancer through full body scanners. Mr. Kunin is also a member of the Board of Directors of Marpe Technologies. The Company consolidatedworked with Marpe Technologies to apply for a grant from the Israel-United States Binational Industrial Research and Development Foundation, a legal entity created by Agreement between the Government of the State of Israel and the Government of the United States of America (“BIRD Foundation”). The parties were successful in receiving approval for a $1,000 conditional grant. The Company and Marpe Technologies will each receive $500 from the BIRD Foundation and, among other obligations under the grant, each is required to contribute $500 to match grant funds from the BIRD Foundation. The Company will meet its Augusta operations with its other facilities, continuingobligation by providing certain services at cost or no cost to serve customers without interruption. This consolidation increasedMarpe Technologies. The total value of the Company’s overall asset utilization and cost leveraging. On March 31, 2017,contribution will not exceed $500; the Company closed onhas contributed $182 as of June 30, 2022. The Company will receive a 10-year exclusive right to manufacture the saleproducts of Marpe Technologies. There can be no assurances that Marpe Technologies’ medical device will be commercially successful, that Marpe Technologies will be successful in raising additional funds to finance its operations or, if commercially successful, the Augusta building and building improvements for $715,000. The Augusta building and building improvements had a net bookCompany will recoup the value of $314,000, recognizing a gainservices provided to Marpe for which is not fully paid. The transactions between the Company and Marpe Technologies have been approved by the Audit Committee pursuant to the Company Related-Party Transactions Policy. During the six months ended June 30, 2022, we recognized revenue of $113. There was 0 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 sale, net of related expenses, of $354,000, and applied the net proceeds of $668,000 towards the outstanding real estate term note.Company could reasonably expect in an arm’s length transaction with an unrelated third party.
ITEM 2. MANAGEMENT’SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Overview
We are a Maple Grove, Minnesota, United States based full-service electronicsglobal EMS contract manufacturer in the Medical, Aerospace & Defense and Industrial markets offering a full range of value-added engineering, technical and manufacturing services (“EMS”) contract manufacturer ofand support including project management, design, testing, prototyping, manufacturing, supply chain management and post-market services. Our products are complex electromedical and electromechanical products including medical devices, and systems wire and cable assemblies, printed circuit board assemblies, higher-level assemblies, and higher-levelother box builds for a wide range of industries. We provide value added engineering servicesserve three major markets within the EMS industry: Aerospace and technical support including design, testing, prototypingDefense, Medical, and supply chain management to our customers in the medical, aerospaceIndustrial market which includes industrial capital equipment, transportation, vision, agriculture, oil and defense and industrial equipment markets.gas. We maintain facilities in Minnesota, US;Bemidji, Blue Earth, Mankato, and Milaca, Minnesota; Monterrey, Mexico; and Suzhou, China. All of our facilities are certified to one or more of the ISO/AS standards, including 9001, AS9100 and 13485, with most having additional certifications based on the needs of the customers they serve.
2017 Third Quarter ResultsRecent Developments
Global Pandemic
The third quarter of 2017 revenue was $28.3 million, comparedCOVID-19 pandemic continued to revenue of $29.7 millionimpact our business in the third quarterfirst six months of 2016. Medical market revenue decreased $1.0 million2022, primarily by continued supply chain disruptions and delays. The full extent to which COVID-19 will directly or 7.4% from prior year withindirectly impact our defense revenue down by $0.2 millionbusiness, 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 5.0%treat its impact and industrial revenue down $0.2 million or 1.5%. Heading into the fourth quarter, our backlog at September 30, 2017 is down 7.5% fromeconomic impact on local, regional, national and international markets.
We will continue to assess the startcurrent and potential impacts of the quarterCOVID-19 pandemic on our business, financial condition, and 15.2% comparedresults of operations. We actively manage our cash and working capital to the prior year.preserve adequate liquidity and ensure that our business can continue to operate during these uncertain times.
Our third quarter 2017 gross margin of $3.5 million or 12.4% of sales was down $0.3 million and 30 basis points from the prior year due to reduced sales volume.
Operating profit for the third quarter of 2017 was $0.3 million as compared to $0.2 million for the prior year’s third quarter. The $0.1 million increase was due to the continued focused effort on cost containment and expense reduction.
Net income for the three months ended September 30, 2017 was $43,371 or $0.02 profit per basic and diluted common share compared to net income for the three months ended September 30, 2016 of $0.1 million or $0.02 profit per basic and diluted common share. Net income for the nine months ended September 30, 2017 was $13,052 with no earnings per basic and diluted common share compared to net loss for the nine months ended September 30, 2016 of $0.1 million or $0.02 loss per basic and diluted common share.
Results of Operations
The following table presents statements of operations data as percentages of total net sales for the periods indicated:
|
| Three Months Ended |
| Nine Months Ended |
| Three Months Ended | Six Months Ended | ||||||||||||||||||
|
| September 30, |
| September 30, |
| June 30, | June 30, | ||||||||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| 2022 | 2021 | 2022 | 2021 | ||||||||||||
Net Sales |
| 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | |||||||||
Cost of Goods Sold |
| 87.6 |
| 87.3 |
| 88.5 |
| 88.3 |
| 84.6 | 88.1 | 85.7 | 90.1 | ||||||||||||
Gross Profit |
| 12.4 |
| 12.7 |
| 11.5 |
| 11.7 |
| 15.4 | 11.9 | 14.3 | 9.9 | ||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Selling Expenses |
| 4.0 |
| 3.8 |
| 4.2 |
| 4.3 |
| 2.9 | 1.9 | 2.8 | 2.5 | ||||||||||||
General and Administrative Expenses |
| 7.4 |
| 8.3 |
| 7.1 |
| 7.1 |
| 8.2 | 8.0 | 8.5 | 10.0 | ||||||||||||
R&D Expenses | 1.1 | 0.7 | 1.1 | 0.4 | |||||||||||||||||||||
Restructuring Charges | - | 0.3 | - | 0.6 | |||||||||||||||||||||
Gain on Sale of Property and Equipment |
| 0.0 |
| 0.0 |
| (0.4 | ) | 0.0 |
| 0.0 | (0.3 | ) | 0.0 | (0.2 | ) | ||||||||||
Income from Operations |
| 1.0 |
| 0.6 |
| 0.6 |
| 0.3 |
| ||||||||||||||||
Income (Loss) from Operations | 3.2 | 1.3 | 1.9 | (3.4 | ) | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Other Expenses |
| (0.6 | ) | (0.4 | ) | (0.7 | ) | (0.4 | ) | ||||||||||||||||
Interest Expense | (0.4 | ) | (0.3 | ) | (0.3 | ) | (0.4 | ) | |||||||||||||||||
Income (Loss) Before Income Taxes |
| 0.4 |
| 0.2 |
| (0.1 | ) | (0.1 | ) | 2.8 | 1.0 | 1.6 | (3.8 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Income Tax Expense (Benefit) |
| 0.2 |
| 0.0 |
| (0.2 | ) | 0.0 |
| 0.6 | 0.4 | 0.2 | (1.2 | ) | |||||||||||
Net Income (Loss) |
| 0.2 | % | 0.2 | % | 0.1 | % | (0.1 | )% | ||||||||||||||||
Net (Loss) Income | 2.2 | % | 0.6 | % | 1.4 | % | (2.6 | )% |
Net Sales
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 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 nine month periodssix months ended SeptemberJune 30, 20172022 and 20162021 were as follows:follows (in millions):
|
| Three Months Ended |
| Nine Months Ended |
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||
|
| September 30, |
| September 30, |
| 2022 | 2021 | % Change | 2022 | 2021 | % Change | ||||||||||||||||||||||||||
|
| 2017 |
| 2016 |
| % |
| 2017 |
| 2016 |
| % |
| ||||||||||||||||||||||||
(in thousands) |
| $ |
| $ |
| Change |
| $ |
| $ |
| Change |
| ||||||||||||||||||||||||
Aerospace and Defense |
| 4,027 |
| 4,240 |
| -5.0 | % | 11,264 |
| 12,427 |
| -9.4 | % | ||||||||||||||||||||||||
Medical |
| 12,753 |
| 13,776 |
| -7.4 | % | 41,009 |
| 38,058 |
| 7.8 | % | $ | 18.9 | $ | 16.1 | 17.4 | $ | 33.8 | $ | 28.4 | 19.0 | ||||||||||||||
Industrial |
| 11,530 |
| 11,702 |
| -1.5 | % | 34,489 |
| 37,129 |
| -7.1 | % | 9.4 | 10.2 | (7.8 | ) | 18.1 | 16.4 | 10.4 | |||||||||||||||||
Total Sales |
| 28,310 |
| 29,718 |
| -4.7 | % | 86,762 |
| 87,614 |
| -1.0 | % | ||||||||||||||||||||||||
Aerospace and Defense | 4.2 | 3.9 | 7.7 | 11.3 | 7.5 | 50.7 | |||||||||||||||||||||||||||||||
Total Net Sales | $ | 32.5 | $ | 30.2 | 7.6 | $ | 63.2 | $ | 52.3 | 20.8 |
Net sales were $28.3 million in the third quarter of 2017, as compared to $29.7 million in the third quarter of the prior year, a decrease of $1.4 million or 4.7%. Net sales results were varied by markets. The medical market decreased by $1.0 million or 7.4% primarily due to medical device project delays and lack of funding for certain customers. The industrial market sector was slightly down $0.2 million in the third quarter of 2017 as compared to the same quarter of 2016, primarily from lower demand levels from our transportation equipment customers. Net sales from the aerospace and defense markets decreased by $0.2 million or 5.0% in the third quarter of 2017 as compared to the third quarter of 2016 due to customer mix. Programs frequently fluctuate in demand or come to an end and are replaced by new programs.
Net sales were $86.8 millionby timing of transfer of goods and services for the ninethree and six months ended SeptemberJune 30, 2017,2022 is as compared to $87.6 million infollows (in millions):
Three Months Ended June 30, 2022 | ||||||||||||||||
Product/ Service Transferred Over Time | Product Transferred at Point in Time | Noncash Consideration | Total Net Sales by Market | |||||||||||||
Medical | $ | 13.2 | $ | 4.8 | $ | 0.6 | $ | 18.6 | ||||||||
Industrial | 6.9 | 2.2 | 0.3 | 9.4 | ||||||||||||
Aerospace and Defense | 3.9 | 0.4 | 0.2 | 4.5 | ||||||||||||
Total net sales | 24.0 | 7.4 | 1.1 | 32.5 |
Six Months Ended June 30, 2022 | ||||||||||||||||
Product/ Service Transferred Over Time | Product Transferred at Point in Time | Noncash Consideration | Total Net Sales by Market | |||||||||||||
Medical | $ | 23.0 | $ | 9.7 | $ | 1.1 | $ | 33.8 | ||||||||
Industrial | 13.4 | 4.0 | 0.7 | 18.1 | ||||||||||||
Aerospace and Defense | 10.0 | 0.8 | 0.5 | 11.3 | ||||||||||||
Total net sales | $ | 46.4 | $ | 14.5 | $ | 2.3 | $ | 63.2 |
Net sales by timing of transfer of goods and services for the prior year, a decrease of $0.8 million or 1.0%. For the ninethree and six months ended SeptemberJune 30, 2017, medical sales
increased by $3.0 million or 7.8%, industrial sales were down $2.6 million or 7.1%, primarily from lower demand levels from our transportation equipment customers and sales from the aerospace and defense markets decreased $1.2 million or 9.4% due to lower customer demands.2021 is as follows (in millions):
Three Months Ended June 30, 2021 | ||||||||||||||||
Product/ Service Transferred Over Time | Product Transferred at Point in Time | Noncash Consideration | Total Net Sales by Market | |||||||||||||
Medical | $ | 12.8 | $ | 3.1 | $ | 0.2 | $ | 16.1 | ||||||||
Industrial | 8.3 | 1.7 | 0.2 | 10.2 | ||||||||||||
Aerospace and Defense | 3.7 | 0.1 | 0.1 | 3.9 | ||||||||||||
Total net sales | $ | 24.8 | $ | 4.9 | $ | 0.5 | $ | 30.2 |
Backlog
90-day backlog by our major EMS industry markets are as follows:
Six Months Ended June 30, 2021 | ||||||||||||||||
Product/ Service Transferred Over Time | Product Transferred at Point in Time | Noncash Consideration | Total Net Sales by Market | |||||||||||||
Medical | $ | 21.7 | $ | 6.0 | $ | 0.7 | $ | 28.4 | ||||||||
Industrial | 12.9 | 3.1 | 0.4 | 16.4 | ||||||||||||
Aerospace and Defense | 6.8 | 0.4 | 0.3 | 7.5 | ||||||||||||
Total net sales | $ | 41.4 | $ | 9.5 | $ | 1.4 | $ | 52.3 |
|
| Backlog as of the Quarter Ended |
| |||||||
|
| September 30, |
| June 30, |
| September 30, |
| |||
(in thousands) |
| 2017 |
| 2017 |
| 2016 |
| |||
|
|
|
|
|
|
|
| |||
Aerospace and Defense |
| $ | 4,524 |
| $ | 4,252 |
| $ | 3,565 |
|
Medical |
| 7,897 |
| 10,762 |
| 12,282 |
| |||
Industrial |
| 7,860 |
| 6,900 |
| 8,074 |
| |||
Total Backlog |
| $ | 20,281 |
| $ | 21,914 |
| $ | 23,921 |
|
Backlog
Our 90-day ordershipment backlog as of SeptemberJune 30, 20172022 was $20.3$35.9 million, a 7.5% decrease1.2% increase from the beginning of the quarter and a 15.2% decrease as compared to the prior year. Backlog for our medical customers has decreased 35.7% and 26.6% over the prior year and prior quarter, respectively due to recent demand adjustments by several customers that cited excess inventory levels accumulated over this year. The aerospace and defense backlog increased 6.4% since the beginning of the quarter, and increased 26.9%3.5% increase from the prior year. Our industrial customers’ backlog increased 13.9% since from the beginning of the quarter and decreased 2.6% from the prior year, strengthening our position heading into the fourth quarter.June 30, 2021. Our backlog consists of firm purchase orders and we expect a major portionto 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 currentprior year. 90-day shipment backlog to be realizedby our major industry markets are as revenue during the following quarter.follows (in millions):
Shipment Backlog as of the Period Ended | ||||||||||||
June 30 | March 31 | June 30 | ||||||||||
2022 | 2022 | 2021 | ||||||||||
Medical | $ | 20.9 | $ | 19.7 | $ | 18.9 | ||||||
Industrial | 9.8 | 9.7 | 9.8 | |||||||||
Aerospace and Defense | 5.2 | 6.0 | 6.0 | |||||||||
Total 90-Day Backlog | $ | 35.9 | $ | 35.4 | $ | 34.7 |
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
Gross profit as a percent of net sales was 15.4% and 11.9% for the three months ended SeptemberJune 30, 20172022 and 2016, was 12.4% and 12.7%,2021, respectively. The decrease in gross profit in the third quarter of 2017 as compared to the same period last year was primarily due to customer mix and under utilized plant capacity. Gross profit as a percentagepercent of net sales was 14.3% and 9.9% for the ninesix months ended SeptemberJune 30, 20172022 and 20162021, respectively. The gross profit improvement was 11.5%primarily driven by price increases in response to material and 11.7%, respectively.
Selling Expenselabor cost inflation as well as higher production volume which increased plant utilization.
Selling expenseExpense
Selling expenses for the three months ended SeptemberJune 30, 20172022 and 2016 was $1.12021 were $1.0 million or 4.0%2.9% of sales and $1.1$0.6 million or 3.8%1.9% of sales, respectively. We will continue to fund business development to support activitiesSelling expenses for the six months ended June 30, 2022 and marketing initiatives to maintain existing business2021 were $1.8 million or 2.8% of sales and stimulate$1.3 million or 2.5% of sales, growth. Sellingrespectively. The increase in selling expense for the ninethree and six months ended SeptemberJune 30, 2017 and 2016 was $3.7 million or 4.2%2022 compared to the same periods of sales and $3.7 million or 4.3% of sales, respectively.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 SeptemberJune 30, 20172022 and 2016,2021 were $2.1$2.7 million or 7.4%8.2% of sales and $2.5$2.4 million or 8.3%8.0% of sales, respectively. General and administrative expenses for the ninesix months ended SeptemberJune 30, 20172022 and 20162021 were $6.2$5.4 million or 7.1%8.5% of sales and $6.3$5.2 million or 7.1%10.0% of sales, respectively.
Gain from Sale General and administrative expenses for the three and six months ended June 30, 2022 were held relatively flat compared to the same periods of Propertythe prior year, and Equipmentare generally fixed in nature.
Restructuring Charges
Net gain from sale of property and equipmentRestructuring charges for the ninethree and six months ended SeptemberJune 30, 2017 was2021 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 $0.4 million fromor 1.1% of net sales for the salethree months ended June 30, 2022 and $0.7 million or 1.1% of net sales for the Augusta buildingsix months ended June 30, 2022. Research and building improvements (see Note 6). Theredevelopment expenses for both the three and six months ended June 30, 2021 was no gain from sale of property and equipment recorded in 2016.$0.2 million.
Income from(Loss) From Operations
Third quarter 2017 income from operations was $0.3 million as compared to an income of $0.2 million for the third quarter in 2016. Income from operations for the first ninethree months in 2017ended June 30, 2022 was $0.5$1.0 million as compared to $0.3$0.4 million for the same comparable period in 2016. A portion of the increase in income from operations for the nine-month period was due to bad debt recovery.
Income Taxes
The differences between federal income taxes computed at the federal statutory rate and reported income taxes for the three months ended SeptemberJune 30, 20172021. 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 2016 aresix month improvements compared to the same periods of the prior year were driven by the increase in sales and gross margin as follows:a percent of sales.
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| September 30, |
| September 30, |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Statutory federal tax provision benefit |
| $ | 38,000 |
| $ | 17,000 |
| $ | (43,000 | ) | $ | (38,000 | ) |
State income tax expense (benefit) |
| 9,500 |
| 8,000 |
| 9,000 |
| 24,000 |
| ||||
Income tax credits |
| (25,000 | ) | (20,000 | ) | (75,000 | ) | (60,000 | ) | ||||
Change in uncertain tax positions |
| 2,500 |
| — |
| 7,500 |
| — |
| ||||
Return to provision true up |
| 74,000 |
| (22,000 | ) | 74,000 |
| (22,000 | ) | ||||
Foreign tax benefit |
| (42,500 | ) | 44,000 |
| (124,500 | ) | 44,000 |
| ||||
Other |
| 12,843 |
| (40,000 | ) | 10,939 |
| (4,000 | ) | ||||
Income tax benefit |
| $ | 69,343 |
| $ | (13,000 | ) | $ | (141,061 | ) | $ | (56,000 | ) |
Interest Expense
The Company estimatesInterest 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.
Income Taxes
On a quarterly basis, we estimate what our effective tax rate will be for the full fiscal year and recordsrecord a quarterly income tax provision based on the anticipated rate and refinesrate. As the year progresses, we refine our estimates quarterlyestimate based on the facts and circumstances, including discrete events, by each tax jurisdiction.
Our effective tax rate for the three and ninesix months ended SeptemberJune 30, 20172022 was 61.5%21% and 110.2%12%, respectively. OurThe effective tax rate for the three and ninesix months ended SeptemberJune 30, 20162021 was (25.8%)38% and 50.9%30%, respectively. The increase in our current year-to-date effective rate versus prior year is due mainly toprimary driver of the higher level of pretax book loss and the related increasechange in the foreigneffective tax rate differential benefit.is attributable to a US loss compared to income from the foreign entities.
Net Income (Loss)
Net income for the three months ended SeptemberJune 30, 20172022 was $43,371$719 thousand or $0.02 profit$0.27 per basic and diluted common share compared to net income for the three months ended September 30, 2016 of $0.1 million or $0.02 profitand $0.25 per basic and diluted common share. Net income for the ninethree months ended SeptemberJune 30, 20172021 was $13,052 with no earnings$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 compared to netand $0.30 per diluted common share. Net loss for the ninesix months ended SeptemberJune 30, 2016 of $0.1 million2021 was ($1,375) thousand or $0.02 loss($0.52) per basic and diluted common share.
Liquidity and Capital Resources
We had totalbelieve that our existing financing arrangements, anticipated cash of $1.1 million consisting of unrestrictedflows from operations, funds expected to be received for the ERC and cash of $0.5 millionon hand will be sufficient to satisfy our working capital needs for the next twelve months, capital expenditures and restricted cash of $0.6 million.debt repayments.
Credit Facility
Net cash provided in operating activities decreased by $1.3 million to $0.6 million for the nine months ended September 30, 2017 compared to $1.9 million for the nine months ended September 30, 2016. Increases in our overall accounts receivable and timing of account payable disbursements have negatively impacted cash flows, offset by positive cash flow impacts in inventory and customer deposits which are included in other accrued liabilities on the condensed consolidated balance sheets.
Net cash provided by investing activities was nearly zero for the nine months ended September 30, 2017, which was generated from the proceeds of the sale of the Augusta building (see Note 6), offset by lower property and equipment purchases to support the business.
We have satisfied our liquidity needs over the past several years with cash flows generated from operations and a bank operating line of credit. We have a credit agreement with Bank of America (BofA) 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, 2022. The credit arrangement also has a $5.0 million real estate term note outstanding with a maturity date of June 15, 2022.2026.
BothUnder the amended Bank of America credit agreement signed December 31, 2021, the line of credit and real estate term notes areis subject to fluctuationsvariations in the LIBOR rates.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. 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 real estate term notes$58 thousand on the consolidated balance sheet for the periods ended June 30, 2022 and December 31, 2021, respectively.
The line of credit with BofA containBank 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 subject to borrowing base requirements, and advances are atless than $2,000 until availability is above that amount for 30 days. As of June 30, 2022 the discretion of the lender. TheCompany 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.
On September 30, 2017, In the first quarter of 2022, we had outstanding advances of $8.5 million underamended our credit agreement to include the Employee Retention Credit Receivable as security in our line of credit andwhich improved our unused availability of $4.5 million supported by our borrowing base compared to $5.7 million available on December 31, 2016. We believe our financing arrangements and cash flows to be provided by operations will be sufficient to satisfy our future working capital needs. Our working capital was $20.9 million and $19.2 million as of September 30, 2017 and December 31, 2016, respectively.availability.
The Bank of America credit agreement provides for, among other things, a fixed charge coverage ratio of not less than (i) 1.00 to 1.00 for the trailing four fiscal quarters most recently ended. As of September 30, 2017, we were in compliance with this covenant.
Cash conversion cycle:
|
| Three Months Ended |
| Nine Months Ended |
| ||||
|
| September 30, |
| September 30, |
| ||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
|
Days in trade accounts receivable |
| 55 |
| 55 |
| 53 |
| 53 |
|
Days in inventory |
| 79 |
| 77 |
| 77 |
| 76 |
|
Days in accounts payable |
| (52 | ) | (53 | ) | (52 | ) | (47 | ) |
Cash conversion cycle |
| 82 |
| 79 |
| 78 |
| 82 |
|
We calculate days in accounts receivable as accounts receivable for the respective quarter and year-to-date period divided by annualized sales for the respective quarter and year-to-date period by day. We calculate days in inventory and accounts payable as each balance sheet line item for the respective quarter and year-to-date period divided by annualized cost of sales for the respective quarter and year-to-date period by day. We calculate cash conversion cycle as the sum of days in receivable and inventory less days in accounts payable. Items which may cause the cash conversion cycle in a particular period to differ include, but are not limited to, changes in business mix, changes in payment terms and the timing of revenue recognition and inventory purchases within the period. Days in accounts payable for the three and nine months ended September 30, 2017 decreased by one day and increased five days compared to the three and nine months ended September 30, 2016, as a result of the timing of payments. Days in inventory for the three and nine months ended September 30, 2017 weakened by two days and one day, respectively compared to the three and nine months ended September 30, 2016. The days in accounts receivable remained consistent.
Off-Balance Sheet Arrangements
We have not engaged in any off-balance sheet activities as defined in Item 303(a)(4) of Regulation S-K.
Critical Accounting Policies and Estimates
Our significant accounting policies and estimates are summarized in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2016. There have been no significant changes in these critical accounting policies since December 31, 2016.2021. Some of our accounting policies require us to exercise significant judgment in selecting the appropriate assumptions for calculating financial estimates. Such judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, known trends in our industry, terms of existing contracts and other information from outside sources, as appropriate. Actual results could differ from these estimates.
Forward-Looking Statements
Those statements in the foregoing report that are not historical facts are forward-looking statements made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements generally will be accompanied by words such as “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “intend,” “possible,” “potential,” “predict,” “project,” or other similar words that convey the uncertainty of future events or outcomes. Although we believe these forward-looking statements are reasonable, they are based upon a number of assumptions concerning future conditions, any or all of which may ultimately prove to be inaccurate. Forward-looking statements involve a number of risks and uncertainties. Important factors that could cause actual results to differ materially from the forward-looking statements include, without limitation:
· Volatility in the marketplace which may affect market supply and demand for our products;
· Increased competition;
· Changes in the reliability and efficiency of operating facilities or those of third parties;
· Risks related to availability of labor;
· Increase in certain raw material costs such as copper;
· Commodity and energy cost instability;
· Risk of dependence on a customer that represents a significant portion of our sales;
· Possible customer cancellations of orders, impact of financial difficulty of customers and other factors that could cause losses relating to customer orders;
· General economic, financial and business conditions that could affect our financial condition and results of operations; and
· Availability of raw material components.
♦ | Volatility in the marketplace which may affect market supply, demand of our products, labor rates or currency exchange rates; | |
♦ | Supply chain disruption and unreliability; | |
♦ | Lack of supply of sufficient human resources to produce our products; | |
♦ | Increased competition from within the EMS industry or the decision of OEMs to cease or limit outsourcing; | |
♦ | Changes in the reliability and efficiency of our operating facilities or those of third parties; | |
♦ | Increases in certain raw material costs such as copper and oil; | |
♦ | Commodity and energy cost instability; | |
♦ | Risks related to FDA noncompliance; | |
♦ | The loss of a major customer; | |
♦ | General economic, financial and business conditions that could affect our financial condition and results of operations; | |
♦ | Increased or unanticipated costs related to compliance with securities and environmental regulation; | |
♦ | Disruption of global or local information management systems due to natural disaster or cyber-security incident; | |
♦ | Outbreaks of epidemic, pandemic, or contagious diseases, such as the recent novel coronavirus that affect our operations, our customers' operations or our suppliers' operations. |
The factors identified above are believed to be important factors (but not necessarily all of the important factors) that could cause actual results to differ materially from those expressed in any forward-looking statement made by us. Discussion of these factors is also incorporated in Part I, Item 1A, “Risk Factors,” and should be considered an integral part of Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Unpredictable or unknown factors not discussed herein could also have material adverse effects on forward-looking statements. All forward-looking statements included in this Form 10-Q10-K are expressly qualified in their entirety by the forgoing cautionary statements. We undertake no obligations to update publicly any forward-looking statement (or its associated cautionary language) whether as a result of new information or future events.
Please refer to forward-looking statements and risks as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.2021.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q, our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act). These controls and procedures are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon their evaluation of these disclosure controls and procedures as of the date of the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Qour most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
We are subject to various legal proceedings and claims that arise in the ordinary course of business.
ITEM 1A. RISK FACTORS
We are affected by the risks specific to us as well as factors that affect all businesses operating in a global market. The significant factors known to us that could materially adversely affect our business, financial condition or operating results or could cause our actual results to differ materially from our expectations are described in our annual report on Form 10-K for the fiscal year ended under the heading “Part I – Item 1A.Risk Factors.” There have been no material changes in the risk factors from those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2021.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The table below sets forth information regarding repurchases we made of our common stock during the periods indicated.
Period |
| Total Number |
| Average |
| Total Number of |
| Maximum Dollar |
| ||
July 1 - July 31, 2017 |
| — |
| $ | — |
| — |
| $ | — |
|
August 1 - August 31, 2017 |
| — |
| $ | — |
|
|
| $ | 250,000 |
|
September 1 - September 30, 2017 |
| 4,824 |
| $ | 3.51 |
| 4,824 |
| $ | 233,091 |
|
Total |
| 4,824 |
| $ | 3.51 |
| 4,824 |
| $ | 233,091 |
|
As of SeptemberJune 30, 2017, we had a $250,0002022, our share repurchase program with $233,091 remaining under this program.has expired, and no additional amounts are available for repurchase.
ITEM 3. DEFAULTS ON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
Exhibits
| 31.1* | |
| ||
| 31.2* | |
| 32* | |
| 101* | Financial statements from the quarterly report on Form 10-Q for the quarter ended |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
*Filed herewith
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Nortech Systems Incorporated and Subsidiaries
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Date: | by | /s/ |
| ||
Chief Executive Officer and President | ||
Nortech Systems Incorporated | ||
Date: | by | /s/ |
| ||
Vice President and Chief Financial Officer | ||
Nortech Systems Incorporated |