Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

 

(Mark One)

 

      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, September 30, 20192020

 

OR

 

         TRANSITION REPORT PURSUANT TO SECTION 13 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 ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).  Yes ☒ No ☐

 

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 ☐

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. ☐    

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐  No ☒

 

Number of shares of $.01 par value common stock outstanding at November 8, 2019August 7, 2020 was 2,657,314.2,657,530.

 

1

Table of Contents

 

 

TABLE OF CONTENTS

 

PAGE

PART I - FINANCIAL INFORMATION

Item 1  -  Financial Statements 
   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 Consolidated Financial Statements

7-17

7-18
   
 Item 2-   Management's Discussion and Analysis of Financial Condition And Results of Operations18-2319-26
   
 Item 3-   Quantitative and Qualitative Disclosures About Market Risk2326
   
 Item 4-   Controls and Procedures2426
   

PART II - OTHER INFORMATION

 
   
 

Item 1

-   Legal Proceedings

25

27
   
 

Item 1A.

-   Risk Factors

25

27
   
 

Item 2

-   Unregistered Sales of Equity Securities, Use of Proceeds

25

27
   
 

Item 3

-   Defaults on Senior Securities

25

27
   
 

Item 4

-   Mine Safety Disclosures

25

27
   
 

Item 5

-   Other Information

25

27
   
 

Item 6

-   Exhibits

26

28
   

SIGNATURES

27

29

  

2

Table of Contents

 

PART I

 

ITEM 1. FINANCIAL STATEMENTS

 

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME (LOSS)

(UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE DATA)

 

 

THREE MONTHS ENDED

  

NINE MONTHS ENDED

  

THREE MONTHS ENDED

  

SIX MONTHS ENDED

 
 

SEPTEMEBR 30,

  

SEPTEMBER 30,

  

JUNE 30,

  

JUNE 30,

 
 

2019

  

2018

  

2019

  

2018

  

2020

  

2019

  

2020

  

2019

 
                                

Net Sales

 $30,058  $29,558  $85,515  $84,543  $26,461  $27,292  $53,901  $55,457 
                                

Cost of Goods Sold

  26,423   26,171   76,594   74,311   24,020   24,967   48,455   50,171 
                                

Gross Profit

  3,635   3,387   8,921   10,232   2,441   2,325   5,446   5,286 
                                

Operating Expenses

                                

Selling Expenses

  589   717   2,147   2,792   730   797   1,351   1,558 

General and Administrative Expenses

  2,333   2,021   7,374   6,177   1,662   2,737   3,655   5,041 
                                

Total Operating Expenses

  2,922   2,738   9,521   8,969   2,392   3,534   5,006   6,599 
                                

Income (Loss) From Operations

  713   649   (600)  1,263   49   (1,209)  440   (1,313)
                                

Other Expense

                                

Interest Expense

  (256)  (170)  (780)  (551)  (176)  (279)  (400)  (524)
                                

Income (Loss) Before Income Taxes

  457   479   (1,380)  712 

(Loss) Income Before Income Taxes

  (127)  (1,488)  40   (1,837)
                                

Income Tax Expense

  44   115   122   350 

Income Tax (Benefit) Expense

  (4)  64   26   78 
                                

Net Income (Loss)

 $413  $364  $(1,502) $362 

Net (Loss) Income

 $(123) $(1,552) $14  $(1,915)
                                

Net Income (Loss) Per Common Share:

                

Net (Loss) Income Per Common Share - Basic

 $(0.05) $(0.58) $0.01  $(0.72)
                                

Basic (in dollars per share)

 $0.16  $0.14  $(0.56) $0.13 

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

  2,657,911   2,680,684   2,667,754   2,698,950 

Weighted Average Number of Common Shares Outstanding - Basic

  2,657,530   2,676,449   2,657,530   2,672,758 
                                

Diluted (in dollars per share)

 $0.16  $0.14  $(0.56) $0.13 

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

  2,657,911   2,682,901   2,667,754   2,702,503 

Net (Loss) Income Per Common Share - Diluted

 $(0.05) $(0.58) $0.01  $(0.72)
                                

Other comprehensive income (loss)

                

Weighted Average Number of Common Shares Outstanding - Diluted

  2,657,530   2,676,449   2,666,532   2,672,758 
                

Other comprehensive loss

                

Foreign currency translation

  (56)  (83)  (56)  (137)  19   (56)  (42)   

Comprehensive income (loss), net of tax

 $357  $281  $(1,558) $225 

Comprehensive Loss, net of tax

 $(104) $(1,608) $(28) $(1,915)

 

See Accompanying Accompanying Condensed NotesNotes to Condensed Consolidated Financial StatementsConsolidated Financial Statements

 

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE DATA)

 

 

SEPTEMBER 30,

  

DECEMBER 31,

  

JUNE 30,

  

DECEMBER 31,

 
 

2019

  2018(1)  

2020

  2019(1) 

 

(Unaudited)

      

(Unaudited)

     
ASSETS          

Current Assets

                

Cash

 $160  $480  $345  $351 

Restricted Cash

  1,794   467   409   309 

Accounts Receivable, less allowances of $323 and $222

  20,135   20,093 

Accounts Receivable, less allowances of $391 and $335

  19,219   18,558 

Inventories

  16,941   17,004   15,492   14,279 

Contract Assets

  7,211   6,431   6,399   7,659 

Prepaid Expenses and Other Current Assets

  2,019   1,381   1,785   2,128 

Total Current Assets

  48,260   45,856   43,649   43,284 
                

Property and Equipment, Net

  9,710   10,178   9,371   9,581 

Operating Lease Assets

  5,018   -   4,446   4,827 

Goodwill

  2,375   2,375   2,375   2,375 

Other Intangible Assets, Net

  1,397   1,523   1,237   1,343 

Other Non Current Assets

  19   28 

Total Assets

 $66,779  $59,960  $61,078  $61,410 
                

LIABILITIES AND SHAREHOLDERS' EQUITY

                

Current Liabilities

                

Current Maturities of Long-Term Debt

 $444  $780  $444  $444 

Current Portion of Finance Lease Obligation

  476   337   643   557 

Current Portion of Operating Lease Obligations

  841   -   791   858 

Accounts Payable

  18,384   18,142   13,523   14,014 

Accrued Payroll and Commissions

  2,626   2,747   3,294   3,493 

Other Accrued Liabilities

  2,845   2,886   3,188   2,866 

Total Current Liabilities

  25,616   24,892   21,883   22,232 
                

Long-Term Liabilities

                

Long Term Line of Credit

  12,430   9,264   4,392   10,088 

Long-Term Debt, Net

  3,295   3,624   9,046   3,179 

Long Term Finance Lease Obligation, Net

  1,168   951   1,486   1,451 

Long-Term Operating Lease Obligation, Net

  4,517   -   4,132   4,366 

Other Long-Term Liabilities

  118   139   116   118 

Total Long-Term Liabilities

  21,528   13,978   19,172   19,202 
                

Total Liabilities

  47,144   38,870   41,055   41,434 
                

Commitments and Contingencies

                
                

Shareholders' Equity

                

Preferred Stock, $1 par value; 1,000,000 Shares Authorized: 250,000 Shares Issued and Outstanding

  250   250   250   250 

Common Stock - $0.01 par value; 9,000,000 Shares Authorized: 2,686,328 and 2,739,250 Shares Issued and Outstanding, respectively

  27   27 

Common Stock - $0.01 par value; 9,000,000 Shares Authorized: 2,657,530 and 2,657,530 Shares Issued and Outstanding, respectively

  27   27 

Additional Paid-In Capital

  15,713   15,610   15,823   15,748 

Accumulated Other Comprehensive Loss

  (289)  (233)  (299)  (257)

Retained Earnings

  3,934   5,436   4,222   4,208 

Total Shareholders' Equity

  19,635   21,090   20,023   19,976 

Total Liabilities and Shareholders' Equity

 $66,779  $59,960  $61,078  $61,410 

 

See Accompanying Accompanying Condensed NotesNotes to Condensed Consolidated Financial StatementsConsolidated Financial Statements

(1)The balance sheet at December 31, 20182019 has been derived from the audited financial statements at that date

 

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN THOUSANDS)

 

 

NINE MONTHS ENDED

  

SIX MONTHS ENDED

 
 

SEPTEMBER 30,

  

JUNE 30,

 
 

2019

  

2018

  

2020

  

2019

 

Cash Flows From Operating Activities

                

Net (Loss) Income

 $(1,502) $362 

Adjustments to Reconcile Net (Loss) Income to Net Cash

        

Provided by (Used in) Operating Activities

        

Net Income (Loss)

 $14  $(1,915)

Adjustments to Reconcile Net Income (Loss) to Net Cash

        

Provided by (Used In) Operating Activities

        

Depreciation and Amortization

  1,648   1,655   1,131   1,096 

Compensation on Stock-Based Awards

  226   80   75   191 

Deffered Taxes

  1   1 

Change in Accounts Receivable Allowance

  101   (5)  56   40 

Change in Inventory Reserves

  285   118   (92)  54 

Changes in Operating Assets and Liabilities:

        
Changes in Current Operating Items             

Accounts Receivable

  (158)  (1,619)  (699)  (646)

Inventories

  (237)  (1,959)  (1,105)  670 

Contract Assets

  (780)  (617)  1,260   (798)

Prepaid Expenses and Other Current Assets

  (641)  (278)  357   (395)

Income Taxes

  (117)  - 

Accounts Payable

  663   4,913   (728)  (1,087)

Accrued Payroll and Commissions

  (120)  (374)  (610)  596 

Other Accrued Liabilities

  281   287   930   (49)

Net Cash (Used in) Provided by Operating Activities

  (233)  2,564 

Net Cash Provided by (Used in) Operating Activities

  472   (2,243)

Cash Flows from Investing Activities

                

Proceeds from Sale of Property and Equipment

  -   17 

Purchase of Intangible Asset

  (37)  (3)  (6)  (25)

Purchases of Property and Equipment

  (785)  (999)  (241)  (545)

Net Cash Used in Investing Activities

  (822)  (985)  (247)  (570)

Cash Flows from Financing Activities

                

Net Change in Line of Credit

  3,165   (445)  (5,696)  3,469 

Proceeds from Long-term Debt

  6,077   - 

Principal Payments on Long-Term Debt

  (728)  (819)  (238)  (584)

Principal Payments on Finance Leases

  (251)  (231)  (274)  (96)

Stock option exercises

  7   - 

Stock Option Exercises

  -   7 

Share Repurchases

  (130)  (229)  -   (126)

Net Cash Provided By (Used In) Financing Activities

  2,063   (1,724)
        

Effect of Exchange Rate Changes on Cash

  (2)  (1)

Net Cash (Used in) Provided By Financing Activities

  (131)  2,670 
                

Net Change in Cash

  1,006   (146)  94   (143)

Cash - Beginning of Period

  948   779   660   948 
                

Cash - Ending of Period

 $1,954  $633  $754  $805 
                

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

                

Cash

 $160  $397  $345  $399 

Restricted Cash

  1,794   236   409   406 

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

 $1,954  $633  $754  $805 
                

Supplemental Disclosure of Cash Flow Information:

                

Cash Paid During the Period for Interest

 $739  $507  $394  $477 

Cash Paid (Refunded) During the Period for Income Taxes

  (83)  167 

Cash Paid and (Refunded) During the Period for Income Taxes

  72   (47)
                

Supplemental Noncash Investing and Financing Activities:

                

Property and Equipment Purchases in Accounts Payable

  30   304   237   180 

Equipment Acquired under Finance Lease

  607   100   395   - 

 

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

 

 

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(UNAUDITED)

(IN THOUSANDS)

 

 

Preferred

  

Common

  

Additional

Paid-In

  

Accumulated

Other

Comprehensive

  

Retained

Income

  

Total Shareholders'

Equity

              

Accumulated

         
                                 

Additional

  

Other

  

 

  

Total

 

BALANCE JUNE 30, 2018

  250   27   15,619   (155)  5,268   21,009 

Net Income

  -   -   -   -   364   364 

Cumulative Adjustment

  -   -   -   -   -   - 
 

Preferred

  

Common

  

Paid-In

  

Comprehensive

  Retained  

Shareholders'

 
 Stock  Stock  Capital  Loss  Earnings  Equity 
                        

BALANCE MARCH 31, 2019

 $250  $27  $15,757  $(177) $5,073  $20,930 

Net Loss

  -   -   -   -   (1,552)  (1,552)

Foreign currency translation adjustment

  -   -   -   (83)  -   (83)  -   -   -   (56)  -   (56)

Compensation on stock-based awards

  -   -   35   -   -   35   -   -   38   -   -   38 

Share repurchases

  -   -   (42)  -   -   (42)  -   -   (113)  -   -   (113)
                                                

BALANCE SEPTEMBER 30, 2018

 $250  $27  $15,612  $(238) $5,632  $21,283 
                        

BALANCE DECEMBER 31, 2017

  250   27   15,760   (101)  3,889   19,825 

Net Income

  -   -   -   -   362   362 

Cumulative Adjustment

  -   -   -   -   1,381   1,381 

Foreign currency translation adjustment

  -   -   -   (137)  -   (137)

Compensation on stock-based awards

  -   -   80   -   -   80 

Share repurchases

  -   -   (228)  -   -   (228)
                        

BALANCE SEPTEMBER 30, 2018

 $250  $27  $15,612  $(238) $5,632  $21,283 
                        
                        

BALANCE JUNE 30, 2019

 $250  $27  $15,682  $(233) $3,521  $19,247  $250  $27  $15,682  $(233) $3,521  $19,247 

Net Income

  -   -   -   -   413   413 

Foreign currency translation adjustment

  -   -   -  ��(56)  -   (56)

Compensation on stock-based awards

  -   -   35   -   -   35 

Share repurchases

  -   -   (4)  -   -   (4)
                        

BALANCE SEPTEMBER 30, 2019

 $250  $27  $15,713  $(289) $3,934  $19,635 
                                                

BALANCE DECEMBER 31, 2018

 $250  $27  $15,610  $(233) $5,436  $21,090  $250  $27  $15,610  $(233) $5,436  $21,090 

Net Loss

  -   -   -   -   (1,502)  (1,502)  -   -   -   -   (1,915)  (1,915)

Foreign currency translation adjustment

  -   -   -   (56)  -   (56)  -   -   -   -   -   - 

Stock option exercises

  -   -   7   -   -   7   -   -   7   -   -   7 

Compensation on stock-based awards

  -   -   226   -   -   226   -   -   191   -   -   191 

Share repurchases

  -   -   (130)  -   -   (130)  -   -   (126)  -   -   (126)
                                                

BALANCE SEPTEMBER 30, 2019

 $250  $27  $15,713  $(289) $3,934  $19,635 

BALANCE JUNE 30, 2019

 $250  $27  $15,682  $(233) $3,521  $19,247 
                        
                        

BALANCE MARCH 31, 2020

 $250  $27  $15,787  $(318) $4,345  $20,091 

Net Loss

  -   -   -   -   (123)  (123)

Foreign currency translation adjustment

  -   -   -   19   -   19 

Compensation on stock-based awards

  -   -   36   -   -   36 
                        

BALANCE JUNE 30, 2020

 $250  $27  $15,823  $(299) $4,222  $20,023 
                        

BALANCE DECEMBER 31, 2019

 $250  $27  $15,748  $(257) $4,208  $19,976 

Net Income

  -   -   -   -   14   14 

Foreign currency translation adjustment

  -   -   -   (42)  -   (42)

Compensation on stock-based awards

  -   -   75   -   -   75 
                        

BALANCE JUNE 30, 2020

 $250  $27  $15,823  $(299) $4,222  $20,023 

 

See Accompanying Condensed Notes to 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-K for the year ended December 31, 2018.2019. 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. All significant intercompany accounts and transactions have been eliminated.

 

Revenue Recognition

Our 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 a single performance obligation. Revenue is recorded net of returns, allowances and customer discounts. Our net sales for services were less than 10% of our total sales for all periods presented, and accordingly, are included in net sales in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). 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 charged to our customers are included in net sales, while the corresponding shipping expenses are included in cost of goods sold.

 

 

Stock-BasedStock-Based Awards

Following is the status of all stock options as of SeptemberJune 30, 2019:2020:

 

 

Shares

  

Weighted-

Average

Exercise

Price Per

Share

  

Weighted-

Average

Remaining

Contractual

Term

(in years)

  

Aggregate

Intrinsic Value

(in thousands)

  

Shares

  

Weighted-

Average

Exercise

Price Per

Share

  

Weighted-

Average

Remaining

Contractual

Term

(in years)

  

Aggregate

Intrinsic Value
(in thousands)

 

Outstanding - January 1, 2019

  224,750  $3.44         

Outstanding - January 1, 2020

  372,200  $3.85         

Granted

  186,200   4.31           11,300   2.95         

Exercised

  (2,250)  3.20           -             

Cancelled

  (109,700)  3.50           (4,000)  3.29         

Outstanding - September 30, 2019

  299,000  $3.96   9.13  $- 

Exercisable - September 30, 2019

  26,867  $3.41   8.46  $- 

Outstanding - June 30, 2020

  379,500  $3.83   8.13  $218 

Exercisable - June 30, 2020

  182,240  $3.72   7.70  $119 

 

The 2005 Plan has not been renewed, and therefore no further grants may be made under the 2005 Plan. In May 2017, the shareholders approved the 2017 Stock Incentive Plan which authorized the issuance of 350,000 shares.400,000 shares, an additional 50,000 shares were authorized in March 2020. There were 16,700 and 186,20011,300 stock options granted during the three and ninesix months ended SeptemberJune 30, 2019, respectively.2020.

 

Total compensation expense was $35related to stock options for both the three months ended SeptemberJune 30, 2020 and 2019 was $36 and 2018,$38, respectively and $110$75 and $80$191 for the ninesix months ended SeptemberJune 30, 20192020 and 2018,2019, respectively. As of SeptemberJune 30, 2019,2020, there was $403$292 of unrecognized compensation which will vest over the next 3.132.69 years.

 

In November 2010, the Board of Directors adopted the Nortech Systems Incorporated Equity Appreciation Rights Plan (“2010 Plan”). The total number of Equity Appreciation Right Units (“Units”) that can be issued under the 2010 Plan shall not exceed an aggregate of 1,000,000 Units as amended and restated on March 11, 2015. 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 market value for each reporting period.

During the ninesix months ended September 30, 2019, 100,000 units were granted in the first quarter. During the three and nine months ended September 30, 2018, no units were granted.

Total compensation expense related to vested outstanding Units based on the estimated appreciation over their remaining terms was $0 for both the three and nine months ended September 30, 2019 and 2018.

During the nine months ended SeptemberJune 30, 2019, there were 25,000 shares awarded that vested immediately that had expense of $116137,500 units granted. There were no units granted during the first quarter.six months ended June 30, 2020.

 

Net Income (Loss) per Common Share

For the three months ended SeptemberJune 30, 2019,2020, all stock options are deemed to be antidilutive and therefore, were not included in the computation of incomeincomer per common share amount. For the ninesix months ended SeptemberJune 30 2019,,2020, stock options of 9,002 were included in the Company reported a net losscomputation of diluted income per common share amount as their impact were dilutive. For both the three months and six months ended June 30, 2019, all stock options are deemed to be antidilutive and, therefore, were not included in the computation of loss per common share amount. For both the three months and nine months ended September 30, 2018, 2,217 and 3,553 stock options, respectively, were included in the computation of diluted income per common share amount as their impact were dilutive.

 

Share Repurchase Program

We had a $250 share repurchase program which was authorized by our Board of Directors in August 2017. Under this repurchase program, we repurchased 1,245 and 32,985 shares in the open market transactions totaling $4 and $130 for the three months and nine months ended September 30, 2019, respectively. 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. As of September 30, 2019, our share repurchase program has expired, and no additional amounts are available for repurchase.

Restricted Cash

Cash and cash equivalents classified as restricted cash on our condensed consolidated balance sheets are restricted as to withdrawal or use under the terms of certain contractual agreements. The SeptemberJune 30, 20192020 balance included lockbox deposits that are temporarily restricted due to timing at the period end. The lockbox deposits are applied against our line of credit the next business day. As of SeptemberJune 30, 2019,2020, we had no outstanding letters of credit.

8

 

Accounts Receivable and Allowance for Doubtful Accounts

Credit is extended based upon an evaluation of the customer’s financial condition and, while collateral is not required, the Company periodically receives surety bonds that guarantee payment. Credit terms are consistent with industry standards and practices. The amounts of trade accounts receivable at both the three months ended and nine months ended September 30, 2019 have been reduced by an allowance for doubtful accounts of $323$391 at SeptemberJune 30, 20192020 and $222$335 at December 31, 2018.2019.

 

Inventories

Inventories are stated at the lower of cost (first-in, first-out method) 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:follows (in thousands):

 

 

September 30,

  

December 31,

  

June 30,

  

December 31,

 
 

2019

  

2018

  

2020

  

2019

 

Raw Materials

 $17,036  $16,769  $15,846  $15,245 

Work in Process

  1,105   1,015   628   479 

Finished Goods

  198   332   412   41 

Reserves

  (1,398)  (1,112)  (1,394)  (1,486)
                

Total

 $16,941  $17,004  $15,492  $14,279 

 

 

Other Intangible Assets

Other intangible assets at SeptemberJune 30, 20192020 and December 31, 20182019 are as follows:follows (in thousands):

 

     

September 30, 2019

      

June 30, 2020

 
     

Gross

              

Gross

         
     

Carrying

  

Accumulated

  

Net Book

      

Carrying

  

Accumulated

  

Net Book

 
 

Years

  

Amount

  

Amortization

  

Value

  

Years

  

Amount

  

Amortization

  

Value

 

Customer Relationships

  9  $1,302  $615  $687   9  $1,302  $723  $579 

Trade Names

  3   100   100   - 

Intellectual Property

  3   100   86   14   20   814   203   611 

Trade Names

  20   814   173   641 

Patents

  7   55   -   55   7   47   -   47 

Totals

     $2,271  $874  $1,397      $2,263  $1,026  $1,237 

 

     

December 31, 2018

      

December 31, 2019

 
     

Gross

              

Gross

         
     

Carrying

  

Accumulated

  

Net Book

      

Carrying

  

Accumulated

  

Net Book

 
 

Years

  

Amount

  

Amortization

  

Value

  

Years

  

Amount

  

Amortization

  

Value

 

Customer Relationships

  9  $1,302  $506  $796   9  $1,302  $651  $651 

Intellectual Property

  3   100   61   39   3   100   95   5 

Trade Names

  20   814   143   671   20   814   183   631 

Patents

  7   17   -   17   7   56   -   56 

Totals

     $2,233  $710  $1,523      $2,272  $929  $1,343 

 

Amortization expense for the three and ninesix months ended SeptemberJune 30, 20192020 was $55$47 and $164,$98, respectively.

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

 

Year

 

Amount

 

Remainder of 2019

 $55 

2020

  191 

2021

  185 

2022

  185 

2023

  185 

Thereafter

  541 

Total

 $1,342 

10

Year

 

Amount

 

Remainder of 2020

 $93 

2021

  186 

2022

  185 

2023

  185 

2024

  113 

Thereafter

  428 

Total

 $1,190 

 

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. No events were identified during the ninesix months ended SeptemberJune 30, 20192020 that would require us to test for impairment. In testing goodwill for impairment, we perform a quantitative impairment test, including computing the fair value of the reporting unit and comparing that value to its carrying value. If the fair value is less than it carrying value, then the goodwill is determined to be impaired. In the event that goodwill is impaired, an impairment charge to earnings would become necessary.

10

 

Impairment Analysis

We evaluate long-lived assets, primarily property and equipment and intangible assets, as well as the related depreciation periods, whenever current events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability for assets to be held and used is based on our projection 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 impairment expense was recorded during the three and ninesix months ended SeptemberJune 30, 20192020 and 2018, respectively.2019.

 

Recently AdoptedAccounting StandardsPronouncements Issued But Not Yet Adopted

On January 1, 2019, we adoptedIn June 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This ASU requires lessees2016-13, “Financial Instruments - Credit Losses (ASC 326): Measurement of Credit Losses on Financial Instruments,” which amends the guidance on the impairment of financial instruments. The amendments in this update removes the thresholds that entities apply to measure credit losses on financial instruments measured at amortized cost, such as loans, trade receivables, reinsurance recoverables, off-balance-sheet credit exposures, and held-to-maturity securities. Under current U.S. GAAP, entities generally recognize credit losses when it is probable that the loss has been incurred. The guidance removes all current recognition thresholds and introduces the new current expected credit loss (“CECL”) model which will require entities to recognize lease assetsan allowance for credit losses for the difference between the amortized cost basis of a financial instrument and lease liabilities on the balance sheet. Underamount of amortized cost that an entity expects to collect over the instrument’s contractual life. The new guidance, lessor accountingCECL model is largely unchanged.based upon expected losses rather than incurred losses. The amendments in this update are effective for periods beginning after December 15, 2022; early adoption is permitted. We have elected to adoptare currently evaluating the standard on the modified retrospective basis. We have also elected the package of practical expedients, which permits us not to reassess our prior conclusions about lease identification, lease classification and initial direct costs. In addition, we have elected the short-term lease recognition whereby we will not recognize operating lease related assets or liabilities for leases with a lease term less than one year. We did not elect the hindsight practical expedient to determine the reasonably certain term of existing leases.

The impact of adopting the new lease standard was the recognitionthis guidance on our financial condition and results of $5,731 of lease assets and lease liabilities related to our operating leases. The adoption of the new lease standard had no impact to our Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Cash Flows or Condensed Consolidated Statements of Shareholders’ Equity.

operations.

 

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 financial 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 $160$754 in cash at SeptemberJune 30, 2019,2020, approximately $105$318 was held at banks located in China. We grant credit to customers in the normal course of business and do not require collateral on our accounts receivable.

 

Our largest customer has two divisions that together accounted for 10% or more of our net sales during the three and ninesix months ended SeptemberJune 30, 20192020 and 2018.2019. One division accounted for approximately 19%20% and 21%22% of net sales for the three and ninesix months ended SeptemberJune 30, 2019,2020, respectively, and approximately 20%21% and 22% for both the three and ninesix months ended SeptemberJune 30, 2018.2019, respectively. The other division accounted for approximately 3% and 2% of net sales for the three months and six ended June 30, 2020, respectively, and approximately 2% net sales for both the three months and ninesix months ended SeptemberJune 30, 2019, and approximately 1% net sales for the three and nine months ended September 30, 2018.respectively. Together they accounted for approximately 22%23% and 24% of net sales for the three and ninesix months ended SeptemberJune 30, 2019,2020, respectively, and approximately 21%23% and 24% of net sales for both the three and ninesix months ended SeptemberJune 30, 2018.2019, respectively. Accounts receivable from the customer at SeptemberJune 30, 20192020 and December 31, 20182019 represented approximately 28%40% and 16%36% of our total accounts receivable, respectively.

 

 

Export sales represented approximately 9% and 20%17% of net sales for the three months ended SeptemberJune 30, 20192020 and 2018,2019, respectively. Export sales represented 15%11% and 19%18% of net sales for the ninesix months ended SeptemberJune 30, 2020 and 2019, and 2018, respectively.

 

 

NOTE 3. REVENUE

 

Revenue recognition

Our 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 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 91%84.6% and 86.1% of our revenue for both the three and ninesix months ended SeptemberJune 30, 2019.2020, respectively. Revenues under these agreements are generally recognized over time using an input measure based upon the proportion of actual costs incurred.

 

Accounting for contract manufacturing agreements involves the use of various techniques to estimate total revenue and costs. 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,Sheet, consist of unbilled amounts related to revenue recognized over time. Significant changes in the contract assets balance during the three and ninesix months ended SeptemberJune 30, 20192020 was as follows (in thousands):

 

Nine Months Ended September 30, 2019

    

Outstanding at January 1, 2019

 $6,431 

Six Months Ended June 30, 2020

    

Outstanding at January 1, 2020

 $7,659 

Increase (decrease) attributed to:

        

Transferred to receivables from contract assets recognized

  (4,923)  (6,277)

Product transferred over time

  5,703   5,017 

Outstanding at September 30, 2019

 $7,211 

Outstanding at June 30, 2020

 $6,399 

 

We expect substantially all the remaining performance obligations for the contract assets recorded as of SeptemberJune 30, 2019,2020, to be transferred to receivables within 90 days, with any remaining amounts to be transferred within 180 days. We bill our customers upon shipment with payment terms of up to 120 days.

 

The following tables summarize our net sales by market for the three and ninesix months ended SeptemberJune 30 2019 (in thousands):

 

  

Three Months Ended September 30, 2019

 
  

Product/ Service

Transferred

Over Time

  

Product

Transferred at

Point in Time

  

Noncash

Consideration

  

Total Net Sales

by Market

 

Medical

 $14,399  $1,661  $983  $17,043 

Industrial

  7,279   822   522   8,623 

Aerospace and Defense

  3,978   133   281   4,392 

Total net sales

 $25,656  $2,616  $1,786  $30,058 

  

Nine Months Ended September 30, 2019

 
  

Product/ Service

Transferred

Over Time

  

Product

Transferred at

Point in Time

  

Noncash

Consideration

  

Total Net Sales

by Market

 

Medical

 $42,039  $1,914  $2,053  $46,006 

Industrial

  22,847   2,297   1,146   26,290 

Aerospace and Defense

  12,236   375   608   13,219 

Total net sales

 $77,122  $4,586  $3,807  $85,515 

  

Three Months Ended June 30, 2020

 
  

Product/ Service

Transferred

Over Time

  

Product

Transferred at

Point in Time

  

Noncash

Consideration

  

Total Net Sales

by Market

 

Medical

 $11,464  $1,540  $367  $13,371 

Aerospace and Defense

  4,522   246   138   4,906 

Industrial

  6,395   1,593   196   8,184 

Total net sales

 $22,381  $3,379  $701  $26,461 

 

  

Three Months Ended June 30, 2019

 
  

Product/ Service

Transferred

Over Time

  

Product

Transferred at

Point in Time

  

Noncash

Consideration

  

Total Net Sales

by Market

 

Medical

 $13,145  $218  $661  $14,024 

Aerospace and Defense

  4,155   222   205   4,582 

Industrial

  7,428   878   380   8,686 

Total net sales

 $24,728  $1,318  $1,246  $27,292 

13

  

Six Months Ended June 30, 2020

 
  

Product/ Service

Transferred

Over Time

  

Product

Transferred at

Point in Time

  

Noncash

Consideration

  

Total Net Sales

by Market

 

Medical

 $25,084  $2,601  $1,048  $28,733 

Aerospace and Defense

  8,944   379   367   9,690 

Industrial

  12,390   2,563   525   15,478 

Total net sales

 $46,418  $5,543  $1,940  $53,901 

  

Six Months Ended June 30, 2019

 
  

Product/ Service

Transferred

Over Time

  

Product

Transferred at

Point in Time

  

Noncash

Consideration

  

Total Net Sales

by Market

 

Medical

 $27,640  $253  $1,070  $28,963 

Aerospace and Defense

  8,258   242   327   8,827 

Industrial

  15,568   1,475   624   17,667 

Total net sales

 $51,466  $1,970  $2,021  $55,457 

NOTE 4. FINANCING ARRANGEMENTS

 

We have a credit agreement with Bank of America which was entered into on June 15, 2017 and amended effective December 29, 2017 and provides for a line of credit arrangement of $16,000 that expires on June 15, 2022. The credit arrangement also has a $5,000 real estate term note outstanding with a maturity date of June 15, 2022.

 

Under the Bank of America credit agreement, both the line of credit and real estate term notes are subject to variations in the LIBOR rate. Our line of credit bears interest at a weighted-average interest rate of 5.4%3.2% and 4.3%5.8% as of SeptemberJune 30, 20192020 and 2018,2019, respectively. We had borrowings on our line of credit of $12,430$4,392 and $9,264$10,088 outstanding as of SeptemberJune 30, 20192020 and December 31, 2018,2019, respectively. There are no subjective acceleration clauses under the credit agreement that would accelerate the maturity of our outstanding borrowings.

 

The line of credit and real estate term notes with Bank of America contain certain covenants which, among other things, require us to adhere to regular reporting requirements, abide by annual shareholder dividend limitations, maintain certain financial performance, and limit the amount of annual capital expenditures. The availability under our line is subject to borrowing base requirements, and advances are at the discretion of the lender. The line of credit is secured by substantially all of our assets.

 

The Bank of America credit agreement as amendedCredit Agreement provides for, among other things, a fixed charge coverage ratioFixed Charge Coverage Ratio of not less than (i) 1.0 to 1.0, for each period of four fiscal quarters, commencing with the period of four fiscal quartersthree months ending December 31, 2018. As of2019, six months ending March 31, 2020, nine months ending June 30, 2020 and twelve months ending September 30, 2019, we did not meet2020 and each Fiscal Quarter end thereafter. The Company met the fixed charge coverage ratio which was waived by BofA incovenants for the third amendment to the credit agreement received on November 8, 2019.period ended June 30, 2020.

 

The availability under the line is subject to borrowing base requirements, and advances are at the discretion of the lender. At SeptemberJune 30, 2019,2020, we had unused availability under our line of credit of $3,523,$8,311, supported by our borrowing base. The line is secured by substantially all of our assets.

 

14

As part of the July 1, 2015 Devicix acquisition

On April 15, 2020, we entered into two unsecured subordinated promissory notes payable to the seller in the principal amountsa Promissory Note with Bank of $1,000 and $1,300, which was fully paid off during the first half of 2019.

In the second quarter of 2019, our China operations entered into a line of credit arrangement with China Construction BankAmerica, N.A. (the “Promissory Note”), which provides for a linean unsecured loan of credit arrangement$6,077 pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act and applicable regulations (the “CARES Act”) of 6,000,000 Renminbi (RMB) that expireswhich; funds were received on April 3, 2021. This line22, 2020. The Promissory Note has a term of credit bears an2 years with a 1% per annum interest raterate. Payments are deferred for 10 months after the end of 6%the Promissory Note covered period (which is defined as 24 weeks after the date of the loan) and we had nocan apply for forgiveness of the Promissory Note after 60 days. Forgiveness of the Promissory Note will be determined in accordance with the provisions of the Cares Act and applicable regulations. Any principal and interest amounts outstanding asafter the determination of September 30, 2019.amounts forgiven will be repaid on a monthly basis.

 

Long-term debt at SeptemberJune 30, 20192020 and December 30, 20182019 consisted of following:

 

 

September 30,

  

December 31,

  

June 30,

  

December 31,

 
 

2019

  

2018

  

2020

  

2019

 

Real estate term notes bearing interest at one-month LIBOR + 2.25% (4.4% and 4.8% as of September 30, 2019 and December 31, 2018, respectively) maturing June 15, 2022 with monthly payments of approximately $41 plus interest secured by substantially all assets.

 $3,880  $4,253 

Real estate term notes bearing interest at one-month LIBOR + 2.25% (3.0% and 4.1% as of June 30, 2020 and December 31, 2019, respectively) maturing June 15, 2022 with monthly payments of approximately $41 plus interest secured by substantially all assets.

 $3,518  $3,755 
                

Devicix Acquistion Note 1 payable to DeLange Holdings bears interest rate of 4.0% per annum, maturing July 1, 2019

  -   156 
        

Devicix Acquistion Note 2 payable to DeLange Holdings bears interest rate of 4.0% per annum, maturing July 1, 2019

  -   203 

Promissory Note

  6,077   - 
  3,880   4,612         
          9,595   3,755 

Discount on Devicix Notes Payable

  -   (23)
        

Debt issuance Costs

  (141)  (185)  (105)  (132)
                

Total long-term debt

  3,739   4,404   9,490   3,623 

Current maturities of long-term debt

  (444)  (780)  (444)  (444)

Long-term debt - net of current maturities

 $3,295  $3,624  $9,046  $3,179 

 

15

 

NOTE 5. LEASES

 

We have operating leases for certain manufacturing sites, office space, and equipment. Most leases include the option to renew, with renewal terms that can extend the lease term from one to five years or more. Right-of-use lease assets and lease liabilities are recognized at the commencement date based on the present value of the remaining lease payments over the lease term which includes renewal periods we are reasonably certain to exercise. Our leases do not contain any material residual value guarantees or material restrictive covenants. At SeptemberJune 30, 2019,2020, we do not have material lease commitments that have not commenced.

The components of lease expense were as follows:

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 

Lease Cost

 

2019

  

2019

 

Operating lease cost

 $253  $785 

Finance lease interest cost

  21   54 

Finance lease amortization expense

  65   196 

Total lease cost

 $339  $1,035 

 

Supplemental balance sheet information related to leases was as follows:

 

Balance Sheet Location

 

September 30, 2019

 

Balance Sheet Location

 

June 30, 2020

 

Assets

          

Operating lease assets

Operating lease assets

 $5,018 

Operating lease assets

 $4,446 

Finance lease assets

Property, Plant and Equipment

  1,834 

Property, Plant and Equipment

  2,842 

Total leased assets

Total leased assets

  6,852 

Total leased assets

 $7,288 
          

Liabilities

          

Current

          

Current operating lease liabilities

Current Portion of Operating Lease Obligations

  841 

Current Portion of Operating Lease Obligations

  791 

Current finance lease liabilities

Current Portion of Finance Lease Obligations

  476 

Current Portion of Finance Lease Obligations

  643 

Noncurrent

          

Long-term operating lease liabilities

Long Term Operating Lease Liabilities, Net

  4,517 

Long Term Operating Lease Liabilities, Net

  4,132 

Long term finance lease liabilities

Long Term Finance Lease Obligations, Net

  1,168 

Long Term Finance Lease Obligations, Net

  1,486 

Total lease liabilities

Total lease liabilities

 $7,002 

Total lease liabilities

 $7,052 

16

 

Supplemental cash flow information related to leases was as follows:

 

  

Nine Months Ended September 30,

 
  

2019

 

Operating leases

    

Cash paid for amounts included in the measurement of lease liabilities

 $555 

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

 $ 

16

  

Three Months Ended June 30,

 
  

2020

 

Operating leases

    

Cash paid for amounts included in the measurement of lease liabilities

 $215 

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

 $ 

 

Maturities of lease liabilities were as follows:

 

 

Operating

Leases

  

Finance Leases

  

Total

  

Operating

Leases

  

Finance Leases

  

Total

 

Remaining 2019

 $191  $133  $324 

2020

  858   534   1,392 

Remaining 2020

 $435  $391  $826 

2021

  722   534   1,256   722   738   1,460 

2022

  726   359   1,085   726   575   1,301 

2023

  738   138   876   738   333   1,071 

2024

  798   277   1,075 

Thereafter

  3,381   102   3,483   2,582   20   2,602 

Total lease payments

 $6,616  $1,800  $8,416  $6,001  $2,334  $8,335 

Less: Interest

  (1,258

)

  (156)  (1,414

)

  (1,078

)

  (205)  (1,283

)

Present value of lease liabilities

 $5,358  $1,644  $7,002  $4,923  $2,129  $7,052 

 

The lease term and discount rate at June 30, 20192020 were as follows:

 

Weighted-average remaining lease term (years)

    

Operating leases

  7.67.5 

Finance leases

  3.43.2 

Weighted-average discount rate

    

Operating leases

  4.8

%

Finance leases

  5.44.9

%

 

Rent expense for our operating leases the three and nine months ended September 30, 2018 as accounted under ASC 840, Leases, was $297 and $951, respectively.

The future minimum lease commitments as of December 31, 2018, under ASC 840 are as follows:

  

Operating Leases

 

2019

 $1,024 

2020

  858 

2021

  722 

2022

  726 

2023

  738 

Thereafter

  3,380 

Total minimum obligations

 $7,448 
17

 

 

NOTE 6. INCOME TAXES

 

On a quarterly basis, we estimate what our effective tax rate will be for the full fiscalcalendar year and record a quarterly income tax provision based on the anticipated rate. As the year progresses, we refine our estimate based on the facts and circumstances, including discrete events, by each tax jurisdiction. Our effective tax rate for the three and ninesix months ended SeptemberJune 30, 20192020 was 10%(3.2%) and (9%)65.0%, respectively, and our effective taxthe rate for the three and ninesix months ended SeptemberJune 30, 20182019 was 24% and 49%, respectively.(4%).

 

 

NOTE 7. RELATED PARTY TRANSACTIONS

During three and six months ended June 30, 2020, we did business with Printed Circuits, Inc. which is 90% owned by the Kunin family, of which, owns a majority of our stock. We had expenses incurred totaling $14 and $0 during the three months ended June 30, 2020 and 2019, and $28 and $51 for the six months ended June 30, 2020 and 2019, respectively to Printed Circuits, Inc.

NOTE 8. SUBSEQUENT EVENTS

Sale and Leaseback Agreement

We have entered into sale and leaseback agreements with Essjay Investment Company, LLC (“Essjay”) relating to the Company’s manufacturing facilities in Bemidji and Mankato, Minnesota. Nortech and Essjay are expected to close during the Company’s fiscal third quarter, subject to final documentation and other customary closing conditions. 

The Company expects net proceeds from the sale, excluding expenses and expected taxes, of approximately $5,000. The Company intends to use net proceeds to pay down debt, provide additional liquidity for initiatives and strengthen the Company’s financial position. At closing, the Company will enter into a lease agreement for the Bemidji and Mankato, Minnesota facilities for an initial 15-year term, with multiple renewal options.

Facility Consolidation

To further improve operational efficiencies and lower overhead costs, the Company approved on August 7, 2020, the closure of our Merrifield, Minnesota, production facility, shifting wire and cable assembly, system-level assembly and printed circuit board (PCB) manufacturing to Nortech’s other Minnesota locations. The Merrifield production facility consolidation is expected to be complete on or before December 31, 2020, and will impact approximately 60 employees, who will be offered positions at other Nortech facilities in Minnesota.

18

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Overview

 

We are a Maple Grove, Minnesota based full-service electronics manufacturing services (“EMS”) contract manufacturer of wire and cable assemblies, printed circuit board assemblies, higher-level assemblies and box builds for a wide range of industries. We provide value added engineering services and technical support including design, testing, prototyping and supply chain management to customers mainly in the aerospace and defense, medical, and industrial equipment markets. We maintain facilities in Bemidji, Blue Earth, Eden Prairie, Mankato, Merrifield, 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.

 

Recent Developments

Global Pandemic

In March 2020, the World Health Organization recognized the outbreak of a novel coronavirus (“COVID-19”) as a pandemic. While the COVID-19 pandemic has had an impact on our operations, we have been able to continue to operate our manufacturing facilities and provide essential services to our customers. Additionally, in an effort to protect the health and safety of our employees and in compliance with state regulations, we have instituted a work-from-home policy for employees who can perform their job functions offsite, implemented social distancing requirements and other measures to allow manufacturing and other personnel essential to production to continue work within our manufacturing facilities, and suspended all non-essential employee travel.

The full extent to which COVID-19 will directly or indirectly impact our business, financial condition, and results of operations will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19, the actions taken to contain it or treat its impact and the economic impact on local, regional, national and international markets. We will continue to assess the potential impact of the COVID-19 pandemic on our business, financial condition, and results of operations.

Sale and LeasebackAgreement

We have entered into sale and leaseback agreements with Essjay Investment Company, LLC (“Essjay”) relating to the Company’s manufacturing facilities in Bemidji and Mankato, Minnesota.  Nortech and Essjay are expected to close during the Company’s fiscal third quarter, subject to final documentation and other customary closing conditions. 

The Company expects net proceeds from the sale, excluding expenses and expected taxes, of approximately $5 million.  The Company intends to use net proceeds to pay down debt, provide additional liquidity for initiatives and strengthen the Company’s financial position.  At closing, the Company will enter into a lease agreement for the Bemidji and Mankato, Minnesota facilities for an initial 15-year term, with multiple renewal options.

19

Results of Operations

 

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

 

  

Three Months Ended

  

Nine Months Ended

 
  September 30,  September 30, 
  

2019

  

2018

  

2019

  

2018

 

Net Sales

  100.0

%

  100.0

%

  100.0

%

  100.0

%

Cost of Goods Sold

  87.9   88.5   89.6   87.9 

Gross Profit

  12.1   11.5   10.4   12.1 
                 

Selling Expenses

  2.0   2.4   2.5   3.3 

General and Administrative Expenses

  7.7   6.8   8.6   7.3 

Income from Operations

  2.4   2.3   (0.7)  1.5 
                 

Other Expenses

  (0.9)  (0.7)  (0.9)  (0.7)

Income (Loss) Before Income Taxes

  1.5   1.6   (1.6)  0.8 
                 

Income Tax Expense

  0.1   0.4   0.2   0.4 

Net Income (Loss)

  1.4

%

  1.2

%

  (1.8%)  0.4

%

  

Three Months Ended

  

Six Months Ended

 
  

June 30,

  

June 30,

 
  

2020

  

2019

  

2020

  

2019

 

Net Sales

  100.0

%

  100.0

%

  100.0

%

  100.0

%

Cost of Goods Sold

  90.8   91.5   89.9   90.5 

Gross Profit

  9.2   8.5   10.1   9.5 
                 

Selling Expenses

  2.7   2.9   2.5   2.8 

General and Administrative Expenses

  6.3   10.0   6.8   9.1 

Income from Operations

  0.2   (4.4)  0.8   (2.4)
                 

Other Expenses

  (0.7)  (1.0)  (0.7)  (0.9)

(Loss) Income Before Income Taxes

  (0.5)  (5.4)  0.1   (3.3)
                 

Income Tax Expense (Benefit)

  0.0   0.2   0.1   0.1 

Net (Loss) Income

  (0.5

)%

  (5.6

)%

  0.0

%

  (3.4

)%

 

Net Sales

 

Net sales were $30.1$26.5 million in the thirdsecond quarter of 2019,2020, as compared to $29.6$27.3 million in the thirdsecond quarter of the prior year, an increasea decrease of $0.5$0.8 million or 1.7%3.0%. Net sales results were varied by markets;markets, the medical market increaseddecreased by $2.7$0.7 million or 19.3%4.7% with medical devices accounting for the increase. The industrial market decreased by $2.5 million or 22.3%most of sales in the third quarter of 2019 as compared to the same quarter of 2018.that decrease. Net sales from the aerospace and defense markets increased by $0.2$0.3 million or 5.0%7.1% in the second quarter of 2020 as compared to the second quarter of 2019. The industrial market decreased by $0.5 million or 5.8% of sales in the thirdsecond quarter of 20192020 as compared to the thirdsame quarter of 2018.2019.

 

Net sales were $85.5$53.9 million in the ninesix months ended 2019,2020, as compared to $84.5$55.5 million in the prior year, an increasea decrease of $1.0$1.6 million or 1.1%2.8%. Net sales results were varied by markets;markets, the medical market increaseddecreased by 9.1$0.2 million, or 24.9% with medical device accounting for 84.5% of0.8%. Net sales from the increaseaerospace and medical component products the remaining 15.5%defense markets increased $0.9 million or 9.8%. The industrial market decreased by $8.0$2.2 million of sales or 23.3% for the nine months ended September 30, 2019 as compared to the same period of 2018. Net sales from aerospace and defense markets remained flat in the nine months ended September 30, 2019 as compared to the same period of 2018.12.4%

 

Net sales by our major EMS industry markets for the three and ninesix months ended SeptemberJune 30, 20192020 and 20182019 were as follows (in thousands):

 

  

Three months Ended September 30,

  

Nine Months Ended September 30,

 
  

2019

$

  

2018

$

  

%

Change

  

2019

$

  

2018

$

  

%

Change

 

Medical

  17,043   14,280   19.3   46,006   36,838   24.9 

Industrial

  8,623   11,094   (22.3)  26,290   34,261   (23.3)

Aerospace and Defense

  4,392   4,184   5.0   13,219   13,444   (1.7)

Total Net Sales

  30,058   29,558   1.7   85,515   84,543   1.1 

Net sales by timing of transfer of goods and services for the three and nine months ended September 30, 2019 is as follows (in thousands):

  

Three Months Ended September 30, 2019

 
  

Product/ Service

Transferred

Over Time

  

Product

Transferred at

Point in Time

  

Noncash

Consideration

  

Total Net Sales

by Market

 

Medical

 $14,399  $1,661  $983  $17,043 

Industrial

  7,279   822   522   8,623 

Aerospace and Defense

  3,978   133   281   4,392 

Total net sales

 $25,656  $2,616  $1,786  $30,058 

 

Three Months Ended June 30,

  

Six Months Ended June 30,

 
 

Nine Months Ended September 30, 2019

  

2020

  

2019

  

%

  

2020

  

2019

  

%

 
 

Product/ Service

Transferred

Over Time

  

Product

Transferred at

Point in Time

  

Noncash

Consideration

  

Total Net Sales

by Market

  $  $  

Change

  $  $  

Change

 

Medical

 $42,039  $1,914  $2,053  $46,006   13,371   14,024   (4.7)  28,733   28,963   (0.8)

Aerospace and Defense

  4,906   4,582   7.1   9,690   8,827   9.8 

Industrial

  22,847   2,297   1,146   26,290   8,184   8,686   (5.8)  15,478   17,667   (12.4)

Aerospace and Defense

  12,236   375   608   13,219 

Total net sales

 $77,122  $4,586  $3,807  $85,515 

Total Net Sales

  26,461   27,292   (3.0)  53,901   55,457   (2.8)

 

 

Net sales by timing of transfer of goods and services for the three and ninesix months ended SeptemberJune 30, 20182020 is as follows (in thousands):

 

 Three Months Ended September 30, 2018     

Three Months Ended June 30, 2020

 
 

Product/ Service

Transferred

Over Time

  

Product

Transferred at

Point in Time

  

Noncash

Consideration

  

Total Net Sales

by Market

  

Product/ Service

Transferred

Over Time

  

Product

Transferred at

Point in Time

  

Noncash

Consideration

  

Total Net Sales

by Market

 

Medical

 $13,461  $151  $668  $14,280  $11,464  $1,540  $367  $13,371 

Aerospace and Defense

  4,522   246   138   4,906 

Industrial

  9,486   1,116   492   11,094   6,395   1,593   196   8,184 

Aerospace and Defense

  3,931   50   203   4,184 

Total net sales

 $26,878  $1,317  $1,363  $29,558  $22,381  $3,379  $701  $26,461 

 

 

 

Nine Months Ended September 30, 2018

  

Six Months Ended June 30, 2020

 
 

Product/ Service

Transferred

Over Time

  

Product

Transferred at

Point in Time

  

Noncash

Consideration

  

Total Net Sales

by Market

  

Product/ Service

Transferred

Over Time

  

Product

Transferred at

Point in Time

  

Noncash

Consideration

  

Total Net Sales

by Market

 

Medical

 $34,513  $720  $1,605  $36,838  $25,084  $2,601  $1,048  $28,733 

Aerospace and Defense

  8,944   379   367   9,690 

Industrial

  29,698   3,165   1,398   34,261   12,390   2,563   525   15,478 

Aerospace and Defense

  12,675   170   599   13,444 

Total net sales

 $76,886  $4,055  $3,602  $84,543  $46,418  $5,543  $1,940  $53,901 

 

21

Net sales by timing of transfer of goods and services for the three and six months ended June 30, 2019 is as follows (in thousands):

  

Three Months Ended June 30, 2019

 
  

Product/ Service

Transferred

Over Time

  

Product

Transferred at

Point in Time

  

Noncash

Consideration

  

Total Net Sales

by Market

 

Medical

 $13,145  $218  $661  $14,024 

Aerospace and Defense

  4,155   222   205   4,582 

Industrial

  7,428   878   380   8,686 

Total net sales

 $24,728  $1,318  $1,246  $27,292 

  

Six Months Ended June 30, 2019

 
  

Product/ Service

Transferred

Over Time

  

Product

Transferred at

Point in Time

  

Noncash

Consideration

  

Total Net Sales

by Market

 

Medical

 $27,640  $253  $1,070  $28,963 

Aerospace and Defense

  8,258   242   327   8,827 

Industrial

  15,568   1,475   624   17,667 

Total net sales

 $51,466  $1,970  $2,021  $55,457 

 

Backlog

 

Our 90-day shipment backlog as of SeptemberJune 30, 20192020 was $32$23.3 million, a 2.0% increasedecrease of 15.3% from the beginning of the quarter and a 15.6% increase from25.8% decrease as compared to the prior year. Backlog for our medical customers has increased 6.4% from the beginning of the quarter and increased 37.8% from the prior year. Our industrial customers’ backlog increased 6.0%decreased 16.4% from the beginning of the quarter and decreased 10.2%28.2% from the prior year. The aerospace and defense backlog decreased 13.5%increased 1.3% from the beginning of the quarter and increased 6.9%1.0% from the prior year. Our industrial customers’ backlog decreased 30.7% from the beginning of the quarter and decreased 44.0% from the prior year. Our backlog consists of firm purchase orders we expect to ship in the next 90 days, with any remaining amounts to be transferred within 180 days.

 

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

 

 

Shipment Backlog as of the Period Ended

  

Shipment Backlog as of the Period Ended

 
 

September 30,

  

June 30,

  

September 30,

  

June 30,

  

March 31,

  

June 30,

 
 

2019

  

2019

  

2018

  

2020

  

2020

  

2019

 

Medical

 $17,778  $16,701  $12,902  $11,987  $14,330  $16,701 

Aerospace and Defense

  6,900   6,812   6,833 

Industrial

  8,334   7,863   9,279   4,401   6,352   7,863 

Aerospace and Defense

  5,909   6,833   5,530 

Total 90-Day Backlog

 $32,021  $31,397  $27,711 

Total Backlog

 $23,288  $27,494  $31,397 

 

22

 

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 $58.1$46.6 million at SeptemberJune 30, 20192020 compared to $43.1$58.7 million at the end of SeptemberJune 30, 2018.2019.

 

Gross Profit

 

Gross profit as a percent of net sales for the three months ended SeptemberJune 30, 2020 and 2019 was 9.2% and 2018 was 12.1% and 11.5%8.5%, respectively, driven by favorable product mix.respectively. Gross profit as a percentage of sales for the ninesix months ended SeptemberJune 30, 2020 and 2019 was 10.1% and 2018 was 10.4% and 12.1%9.5%, respectively. The declineincrease in gross profit in the year to date comparisonboth comparisons was driven by product mix and operational inefficiencies due to component shortages.mix.

 

Selling Expense

 

Selling expenses for the three months ended SeptemberJune 30, 2020 and 2019 and 2018 was $0.6$0.7 million or 2.0%2.7% of sales and $0.7$0.8 million or 2.4%2.9% of sales, respectively. Selling expense for the ninesix months ended SeptemberJune 30, 2020 and 2019 and 2018 was $2.1$1.4 million or 2.5% of sales and $2.8$1.6 million or 3.3%2.8% of sales, respectively. The decrease in both the three and ninesix month periods is due to lower sales incentives and timing of events.cost reduction measures taken in prior year.

 

General and Administrative Expense

 

General and administrative expenses for the three months ended SeptemberJune 30, 2020 and 2019 and 2018 were $2.3$1.7 million or 7.7%6.3% of sales and $2.0$2.7 million or 6.8%10.0% of sales, respectively. General and administrative expenses for the ninesix months ended SeptemberJune 30, 2020 and 2019 and 2018 were $7.4$3.7 million or 8.6%6.8% of sales and $6.2$5.0 million or 7.3%9.1% of sales, respectively. The increasedecrease in both comparisons was due to additionalhigher spend in the prior year related to our recently implemented ERP system and one-time expenditures to improve operations.operations in 2019 and the benefits of those cost reduction measures in 2020.

 

Income (Loss)/ Loss from Operations

 

ThirdSecond quarter 2019 income2020 Income from operations was $0.7$0.1 million compared to $0.6loss of $1.2 million for the thirdsecond quarter in 2018. Loss2019. Income from operations for the first ninesix months in 2019 was $0.6$0.4 million as compared to incomeloss of $1.3 million for the same comparable period in 2018.2019.  The decrease to a lossincrease in income from operations for the periodin both comparison periods was due to increased gross margin as a percent of sales and the gross profit decline and higher general anddecreased administrative expenses.expenses due to largely to cost reduction measures taken in the prior year.

 

Income Taxes

 

On a quarterly basis, we estimate what our effective tax rate will be for the full fiscal year and record a quarterly income tax provision based on the anticipated rate. As the year progresses, we refine our estimate based on the facts and circumstances, including discrete events, by each tax jurisdiction. Our effective tax rate for the three and ninesix months ended SeptemberJune 30, 20192020 was 10%(3.2%) and (9%)65.0%, respectively, and the rate for the three and ninesix months ended SeptemberJune 30, 20182019 was 24% and 49%, respectively.(4%).

 

Net Income (Loss)

 

Net loss for the three and net income for the six months ended June 30, 2020 was $0.1 million and $0.0 million, respectively. Net loss for the three months ended September 30, 2019 and September 30, 2018 was $0.4 million. Net loss for the nine months ended SeptemberJune 30, 2019 was $1.5$1.6 million and net income for the nine monthssix month ended SeptemberJune 30, 20182019 was $0.4$1.9 million.

 

 

Liquidity and Capital Resources

Our second quarter sales and shipment backlog were impacted by the COVID-19 pandemic. However, our focus on reducing costs, minimizing capital expenditures, and managing working capital mitigated the impact on liquidity. Due to the inherent uncertainty of this evolving situation, we are unable at this time to predict the likely impact of the COVID-19 pandemic on our future operations. However, we believe that cash provided by operations, funds available under the credit agreement with Bank of America, N.A. (BofA), funds available under a Promissory Note with BofA (“Promissory Note”) pursuant to the Paycheck Protection Program under the Coronavirus Aid and cash on hand will be adequate to meet our liquidity needs, including working capital, capital expenditures, and debt payment obligations.

Net cash provided by operating activities for the six months ended June 30, 2020 was $0.5 million. Earnings adjusted for depreciation and amortization of $1.1 million drove the cash provided offset by an increase in working capital.

 

Net cash used in operating activities for the ninesix months ended SeptemberJune 30, 2019 was $0.2$2.2 million. Net cash provided by operating activities for the nine months ended September 30, 2018 was $2.6 million driven by the net income net of the noncash adjustment of depreciation and amortization, along with an increase in accounts payable, partially offset by anThe increase in accounts receivable and inventories.unbilled revenue and decrease in accounts payable drove this cash outflow, partially offset by a decrease in inventory.

 

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)BofA which was entered into on June 15, 2017 and amended on December 29, 2017 and provides for a line of credit arrangement of $16.0 million that expires on June 15, 2022. The credit arrangement also has a $5.0 million real estate term note outstanding with a maturity date of June 15, 2022.

 

Both the line of credit and real estate term notes are subject to fluctuations in the LIBOR rates. The line of credit and real estate term notes with BofA contain certain covenants which, among other things, require us to adhere to regular reporting requirements, abide by annual shareholder dividend limitations, maintain certain financial performance, and limit the amount of annual capital expenditures. The availability under our line is subject to borrowing base requirements, and advances are at the discretion of the lender. The line of credit is secured by substantially all of our assets.

 

On SeptemberJune 30, 2019,2020, we had outstanding advances of $12.4$4.4 million under the line of credit and unused availability of $3.5$8.3 million supported by our borrowing base. We believe our financing arrangements and cash flows to be provided by operations will be sufficient to satisfy our future working capital needs. Our working capital was $22.7$21.8 million and $20.7$21.1 million as of SeptemberJune 30, 20192020 and December 31, 2018,2019, respectively.

 

The BofA credit agreement as amendedBank of America Credit Agreement provides for, among other things, a fixed charge coverage ratioFixed Charge Coverage Ratio of not less than (i) 1.0 to 1.0 for each period of four fiscal quarters, commencing with the period of four fiscal quartersthree months ending December 31, 2018. As of2019, six months ending March 31, 2020, nine months ending June 30, 2020 and twelve months ending September 30, 2019,2020 and each fiscal quarter end thereafter. The Company met the covenants for the six months ended June 30, 2020.

On April 15, 2020, we did not meet the fixed charge coverage ratioentered into a Promissory Note, which was waived by BofA in the third amendmentprovides for an unsecured loan of $6.1 million pursuant to the credit agreementPaycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act and applicable regulations (the “CARES Act”) of which; funds were received on November 8, 2019.April 22, 2020. The Promissory Note has a term of 2 years with a 1% per annum interest rate. Payments are deferred for 10 months after the end of the Promissory Note covered period (which is defined as 24 weeks after the date of the loan) and we can apply for forgiveness of the Promissory Note after 60 days. Forgiveness of the Promissory Note will be determined in accordance with the provisions of the Cares Act and applicable regulations. Any principal and interest amount outstanding after the determination of amounts forgiven will be repaid on a monthly basis. We expect that all or a significant portion of the Promissory Note will be forgiven.

24

 

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, 2018.2019. 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:

 

General economic, financial and business conditions that could affect our financial condition and results of operations;

 

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

 

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;

 

Risks related to availability of labor;

 

IncreaseIncreases in certain raw material costs such as copper and oil;

 

Commodity and energy cost instability;

 

Risks related to quality, regulatory, securities laws and debt covenantFDA noncompliance;

 

LossThe loss of a major customer or changes to customer orders;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; and

 

Disruption of global or local information management systems due to natural disaster or cyber-security incident.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-Q are expressly qualified in their entirety by the forgoing cautionary statements. We undertake no obligations to update publicly any forward-looking statement (or its associated cautionary language) whether as a result of new information or future events.

 

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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, 2018.2019.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

ITEM 4.4. 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

 

Except for the implementation of certain internal controls related to the adoption of the new lease standard (ASC 842), thereThere was no change in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II

  

ITEM 1. LEGAL PROCEEDINGS

 

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.” Other than as noted below, 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, 2018.2019.

We may be subject to additional regulatory scrutiny in the form of an audit or review as a result of our Paycheck Protection Program Promissory Note which would have an adverse effect on our liquidity

On April 15, 2020, we entered into a Promissory Note with Bank of America, N.A. (the “Promissory Note”), which provides for an unsecured loan of $6.1 million pursuant to the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act and applicable regulations (the “CARES Act”) of which; funds were received on April 22, 2020. On April 23, 2020, the Small Business Administration (“SBA”) issued new guidance that questioned whether a public company with substantial market value and access to capital markets would qualify to participate in the PPP under the CARES Act. Subsequently, on April 28, 2020, the secretary of the Treasury and SBA announced that the government will review all PPP loans of more than $2 million for which a borrower applies for forgiveness. Should we be audited or reviewed by the U.S. Department of Treasury as a result of filing an application for forgiveness or otherwise, such audit or review could result in legal and reputational costs as well as significant use of management time. While the Company believes that it acted in good faith and has complied with all requirements of the PPP, if we are audited and receive an adverse or negative finding in such audit, we could be required to return up to the full amount of the Promissory Note, which would reduce our liquidity by such amount and potentially subject us to fines and penalties.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The table below sets forth information regarding the repurchases we made of our common stock during the periods indicated.

Period

 

Total Number of

Shares Purchased

  

Average Price

Paid Per

Share

  

Total Number of

Shares Purchased as

Part of Publicly

Announced Plan

  

Maximum Dollar Value

of Shares that May

Yet Be Purchased

Under the Plan

 

July 1 - July 31, 2019

  1,029  $3.94   1,029  $33,508 

August 1 - August 30, 2019

  216  $3.90   216  $32,644 

September 1 - September 30, 2019

  -  $-   -  $- 

Total

  1,245  $3.93   1,245  $- 

 

As of SeptemberJune 30, 2019,2020, our share repurchase 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.

 

 

ITEM 6. EXHIBITS

 

Exhibits

 

 10.1*Purchase and Sale Agreement

10.2*Third Amendment to Loan and Security Agreement and Waiver.Second Quarter 2020 Earnings Release
   
 

31.1*

Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.

 

 

31.2*

Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.

 

 

32*

Certification of the Chief Executive Officer and Chief Financial Officer, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

101*

Financial statements from the quarterly report on Form 10-Q for the quarter ended SeptemberJune 30, 2019,2020, formatted in XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations and Comprehensive Loss, (iii) Condensed Consolidated Statements of Cash Flows, and (iv) the Condensed Notes to Condensed Consolidated Financial Statements.

 

*Filed herewith

 

 

Signatures

---------------

-------------

 

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

------------------------------------------------------------

Nortech Systems Incorporated and Subsidiaries
---------------------------------------------------------
Date: November 12, 2019August 11, 2020

by /s/ Jay D. Miller

Jay D. Miller

Chief Executive Officer and President

Nortech Systems Incorporated

  
Date: November 12, 2019August 11, 2020 

by /s/ Constance M. Beck

Constance M. Beck

Vice President and Chief Financial Officer

Nortech Systems Incorporated

 

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