NORTECH SYSTEMS INC - Quarter Report: 2019 June (Form 10-Q)

 

 

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, 2019

 

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 Exchange 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 ☐

 

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 August 5, 2019 was 2,657,314.

 

 

 

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		THREE MONTHS ENDED								SIX MONTHS ENDED
		JUNE 30,								JUNE 30,
		2019				2018				2019				2018
Net Sales		$	27,292			$	28,538			$	55,457			$	54,985
Cost of Goods Sold			24,967				24,721				50,171				48,140
Gross Profit			2,325				3,817				5,286				6,845
Operating Expenses
Selling Expenses			797				1,037				1,558				2,075
General and Administrative Expenses			2,737				2,046				5,041				4,155
Total Operating Expenses			3,534				3,083				6,599				6,230
(Loss) Income From Operations			(1,209	)			734				(1,313	)			615
Other Expense
Interest Expense			(279	)			(209	)			(524	)			(382	)
(Loss) Income Before Income Taxes			(1,488	)			525				(1,837	)			233
Income Tax Expense			64				135				78				235
(Net Loss) Income		$	(1,552	)		$	390			$	(1,915	)		$	(2	)
(Net Loss) Income Per Common Share - Basic and Diluted		$	(0.58	)		$	0.14			$	(0.72	)		$	(0.00	)
Weighted Average Number of Common Shares Outstanding - Basic and Diluted			2,676,449				2,695,994				2,672,758				2,708,234
Other comprehensive income (loss)
Foreign currency translation			(56	)			(126	)			-				(54	)
Comprehensive (Loss) Income, net of tax		$	(1,608	)		$	264			$	(1,915	)		$	(56	)

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		JUNE 30,				DECEMBER 31,
		2019					2018(1)
ASSETS		(Unaudited)
Current Assets
Cash		$	399			$	480
Restricted Cash			406				467
Accounts Receivable, less allowances of $262 and $222			20,691				20,093
Inventories			16,273				17,004
Contract Assets			7,228				6,431
Prepaid Expenses and Other Current Assets			1,776				1,381
Total Current Assets			46,773				45,856
Property and Equipment, Net			9,512				10,178
Operating Lease Assets			5,202				-
Goodwill			2,375				2,375
Other Intangible Assets, Net			1,439				1,523
Other Non Current Assets			28				28
Total Assets		$	65,329			$	59,960
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current Maturities of Long-Term Debt		$	878			$	780
Current Portion of Finance Lease Obligation			364				337
Current Portion of Operating Lease Obligations			826				-
Accounts Payable			16,845				18,142
Accrued Payroll and Commissions			3,118				2,747
Other Accrued Liabilities			2,793				2,886
Total Current Liabilities			24,824				24,892
Long-Term Liabilities
Long Term Line of Credit			12,297				9,264
Long-Term Debt, Net			3,401				3,624
Long Term Finance Lease Obligation, Net			776				951
Long-Term Operating Lease Obligation, Net			4,666				-
Other Long-Term Liabilities			118				139
Total Long-Term Liabilities			21,258				13,978
Total Liabilities			46,082				38,870
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: 2,658,559 and 2,663,049 Shares Issued and Outstanding, respectively			27				27
Additional Paid-In Capital			15,682				15,610
Accumulated Other Comprehensive Loss			(233	)			(233	)
Retained Earnings			3,521				5,436
Total Shareholders' Equity			19,247				21,090
Total Liabilities and Shareholders' Equity		$	65,329			$	59,960

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		SIX MONTHS ENDED
		JUNE 30,
		2019				2018
Cash Flows From Operating Activities
Net Loss		$	(1,915	)		$	(2	)
Adjustments to Reconcile Net Loss to Net Cash
Provided by (Used in) Operating Activities
Depreciation and Amortization			1,096				1,108
Compensation on Stock-Based Awards			191				45
Change in Accounts Receivable Allowance			40				(5	)
Change in Inventory Reserves			54				73
Changes in Current Operating Items
Accounts Receivable			(646	)			(1,886	)
Inventories			670				(594	)
Contract Assets			(798	)			(88	)
Prepaid Expenses and Other Current Assets			(395	)			(130	)
Accounts Payable			(1,087	)			3,722
Accrued Payroll and Commissions			596				374
Other Accrued Liabilities			(49	)			124
Net Cash (Used in) Provided by Operating Activities			(2,243	)			2,741
Cash Flows from Investing Activities
Purchase of Intangible Asset			(25	)			(4	)
Purchases of Property and Equipment			(545	)			(557	)
Net Cash Used in Investing Activities			(570	)			(561	)
Cash Flows from Financing Activities
Net Change in Line of Credit			3,469				(1,361	)
Principal Payments on Long-Term Debt			(584	)			(545	)
Principal Payments on Finance Leases			(96	)			(150	)
Stock Option Exercises			7				-
Share Repurchases			(126	)			(186	)
Net Cash Provided By (Used in) Financing Activities			2,670				(2,242	)
Effect of Exchange Rate Changes on Cash			-				(46	)
Net Change in Cash			(143	)			(108	)
Cash - Beginning of Period			948				779
Cash - Ending of Period		$	805			$	671
Reconciliation of cash and restricted cash reported within the condensed consolidated balance sheets
Cash		$	399			$	437
Restricted Cash			406				234
Total cash and restricted cash reported in the condensed consolidated statements of cash flows		$	805			$	671
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Period for Interest		$	477			$	317
Cash Paid and Refunded During the Period for Income Taxes			(47	)			167
Supplemental Noncash Investing and Financing Activities:
Property and Equipment Purchases in Accounts Payable			180				284

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														Accumulated
										Additional				Other				Retained				Total
		Preferred				Common				Paid-In				Comprehensive				Earnings				Shareholders'
BALANCE MARCH 31, 2018		$	250			$	27			$	15,654			$	(29	)		$	4,880			$	20,782
Net Income			-				-				-				-				390				390
Cumulative Adjustment			-				-				-				-				(2	)			(2	)
Foreign currency translation adjustment			-				-				-				(126	)			-				(126	)
Compensation on stock-based awards			-				-				25				-				-				25
Share repurchases			-				-				(60	)			-				-				(60	)
BALANCE JUNE 30, 2018		$	250			$	27			$	15,619			$	(155	)		$	5,268			$	21,009
BALANCE DECEMBER 31, 2017		$	250			$	27			$	15,760			$	(101	)		$	3,889			$	19,825
Net Loss			-				-				-				-				(2	)			(2	)
Cumulative Adjustment			-				-				-				-				1,381				1,381
Foreign currency translation adjustment			-				-				-				(54	)			-				(54	)
Compensation on stock-based awards			-				-				45				-				-				45
Share repurchases			-				-				(186	)			-				-				(186	)
BALANCE JUNE 30, 2018		$	250			$	27			$	15,619			$	(155	)		$	5,268			$	21,009
BALANCE MARCH 31, 2019		$	250			$	27			$	15,757			$	(177	)		$	5,073			$	20,930
Net Loss			-				-				-				-				(1,552	)			(1,552	)
Foreign currency translation adjustment			-				-				-				(56	)			-				(56	)
Compensation on stock-based awards			-				-				31				-				-				31
Share repurchases			-				-				(113	)			-				-				(113	)
Stock option exercises			-				-				7				-				-				7
BALANCE JUNE 30, 2019		$	250			$	27			$	15,682			$	(233	)		$	3,521			$	19,247
BALANCE DECEMBER 31, 2018		$	250			$	27			$	15,610			$	(233	)		$	5,436			$	21,090
Net Loss			-				-				-				-				(1,915	)			(1,915	)
Stock option exercises			-				-				7				-				-				7
Compensation on stock-based awards			-				-				191				-				-				191
Share repurchases			-				-				(126	)			-				-				(126	)
BALANCE JUNE 30, 2019		$	250			$	27			$	15,682			$	(233	)		$	3,521			$	19,247

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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. 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-Based Awards

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

 

 

 

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. There were 137,500 and 169,500 stock options granted during the three and six months ended June 30, 2019, respectively.

 

Total compensation expense related to stock options for the three months ended June 30, 2019 and 2018 was $32 and $25, respectively and $75 and $45 for the six months ended June 30, 2019 and 2018, respectively. As of June 30, 2019, there was $444 of unrecognized compensation which will vest over the next 3.26 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 six months ended June 30, 2019, 100,000 Units were granted in the first quarter. During the three and six months ended June 30, 2018, no additional Units were granted.

 

Total compensation expense (income) related to the vested outstanding Units based on the estimated appreciation over their remaining terms was $0 for the three and six months ended June 30, 2019 and 2018.

 

During the six months ended June 30, 2019, there were 25,000 restricted shares awarded that vested immediately that had expense of $116 during the first quarter.

 

 

Net Income (Loss) per Common Share

For both the three months and six months ended June 30, 2019 and 2018, all stock options are deemed to be antidilutive and, therefore, were not included in the computation of loss per common share amount.

 

Share Repurchase Program

As of June 30, 2019, we have a $250 share repurchase program which was authorized by our Board of Directors in August 2017. Under this repurchase program, we repurchased 28,363 and 31,740 shares in the open market transactions totaling $113 and $126 for the three and six months ended June 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.

 

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 June 30, 2019 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 June 30, 2019, we had no outstanding letters of credit.

 

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 six months ended June 30, 2019 have been reduced by an allowance for doubtful accounts of $262 at June 30, 2019 and $222 at December 31, 2018.

 

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 (in thousands):

 

 

 

Other Intangible Assets

Other intangible assets at June 30, 2019 and December 31, 2018 are as follows (in thousands):

 

 

 

 

 

Amortization expense for the three and six months ended June 30, 2019 was $55 and $109, respectively.

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

 

 

 

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 1^st. No events were identified during the six months ended June 30, 2018 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.

 

 

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 six months ended June 30, 2019 and 2018.

 

Recently Issued Accounting Standards

 

On January 1, 2019, we adopted ASU No. 2016-02, Leases (Topic 842). This ASU requires lessees to recognize lease assets and lease liabilities on the balance sheet. Under the new guidance, lessor accounting is largely unchanged. We have elected to adopt 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 recognition 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.

 

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 $399 in cash at June 30, 2019, approximately $333 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 six months ended June 30, 2019 and 2018. One division accounted for approximately 21% and 22% of net sales for the three and six months ended June 30, 2019, respectively, and approximately 21% and 20% for both the three and six months ended June 30, 2018. The other division accounted for approximately 2% of net sales for both the three months and six ended June 30, 2019, and approximately 1% net sales for both the three and six months ended June 30, 2018. Together they accounted for approximately 23% and 24% of net sales for the three and six months ended June 30, 2019, respectively, and approximately 22% and 21% of net sales for the three and six months ended June 30, 2018, respectively. Accounts receivable from the customer at June 30, 2019 and December 31, 2018 represented approximately 22% and 16% of our total accounts receivable, respectively.

 

Export sales represented approximately 17% and 21% of net sales for the three months ended June 30, 2019 and 2018, respectively. Export sales represented 18% and 20% of net sales for the six months ended June 30, 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% of our revenue for both the three and six months ended June 30, 2019. 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 Sheet, consist of unbilled amounts related to revenue recognized over time. Significant changes in the contract assets balance during the three and six months ended June 30, 2019 was as follows (in thousands):

 

 

 

We expect substantially all the remaining performance obligations for the contract assets recorded as of June 30, 2019, 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 six months ended June 30, 2019 (in thousands):

 

 

 

 

 

 

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 5.8% and 4.5% as of June 30, 2019 and 2018, respectively. We had borrowings on our line of credit of $12,297 and $9,264 outstanding as of June 30, 2019 and December 31, 2018, 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 BofA credit agreement as amended provides for, among other things, a fixed 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 quarters ending December 31, 2018. As of June 30, 2019 we did not meet the fixed charge coverage ratio which was waived by BofA in the second amendment to the credit agreement received on August 13, 2019.

 

The availability under the line is subject to borrowing base requirements, and advances are at the discretion of the lender. At June 30, 2019, we had unused availability under our line of credit of $3,703, supported by our borrowing base. The line is secured by substantially all of our assets.

 

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 and $1,300, which was fully paid off during the three months ended June 30, 2019.

 

In the second quarter of 2019, our China operations entered into a line of credit arrangement with China Construction Bank which provides for a line of credit arrangement of 6,000,000 Renminbi (RMB) that expires on April 3, 2021. This line of credit bears an interest rate of 6% and we had borrowings of 3,006,204 RMB ($437) at June 30, 2019.

 

 

Long-term debt at June 30, 2019 and December 30, 2018 consisted of following:

 

 

 

 

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 June 30, 2019, we do not have material lease commitments that have not commenced.

 

 

The components of lease expense were as follows:

 

 

 

Supplemental balance sheet information related to leases was as follows:

 

 

 

Supplemental cash flow information related to leases was as follows:

 

 

Maturities of lease liabilities were as follows:

 

 

The lease term and discount rate at June 30, 2019 were as follows:

 

 

Rent expense for our operating leases the three and six months ended June 30, 2018 as accounted under ASC 840, Leases, was $319 and $654, respectively.

 

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

 

 

 

 

NOTE 6. INCOME TAXES

 

On a quarterly basis, we estimate what our effective tax rate will be for the full calendar year and record a quarterly income tax provision based on the anticipated rate. As the year progresses, we refine our estimate based on the facts and circumstances, including discrete events, by each tax jurisdiction. Our effective tax rate for the three and six months ended June 30, 2019 was (4%) and the rate for the three and six months ended June 30, 2018 was 26% and 101%, respectively.

 

 

 

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