NORTECH SYSTEMS INC - Quarter Report: 2021 March (Form 10-Q)

 

 

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 March 31, 2021

 

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 and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒ 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 May 7, 2021 was 2,660,330.

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION

 

			PAGE
Item 1	-	Financial Statements
		Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)	3
		Condensed Consolidated Balance Sheets	4
		Condensed Consolidated Statements of Cash Flows	5
		Condensed Consolidated Statements of Shareholders’ Equity	6
		Condensed Notes to Consolidated Financial Statements	7-17
Item 2	-	Management's Discussion and Analysis of Financial Condition And Results of Operations	18-24
Item 3	-	Quantitative and Qualitative Disclosures About Market Risk	25
Item 4	-	Controls and Procedures	25
PART II - OTHER INFORMATION
Item 1	-	Legal Proceedings	26
Item 1A.	-	Risk Factors	26
Item 2	-	Unregistered Sales of Equity Securities, Use of Proceeds	26
Item 3	-	Defaults on Senior Securities	26
Item 4	-	Mine Safety Disclosures	26
Item 5	-	Other Information	26
Item 6	-	Exhibits	27
SIGNATURES			28

 

		THREE MONTHS ENDED
		MARCH 31,
		2021				2020
Net Sales		$	22,072			$	27,440
Cost of Goods Sold			20,511				24,435
Gross Profit			1,561				3,005
Operating Expenses
Selling Expenses			721				621
General and Administrative Expenses			2,796				1,993
Restructuring Charges			219				-
Total Operating Expenses			3,736				2,614
Income (Loss) From Operations			(2,175	)			391
Other Expense
Interest Expense			(86	)			(224	)
Income (Loss) Before Income Taxes			(2,261	)			167
Income Tax Expense (Benefit)			(707	)			30
Net Income (Loss)		$	(1,554	)		$	137
Net Income (Loss) Per Common Share:
Basic (in dollars per share)		$	(0.85	)		$	0.06
Weighted Average Number of Common Shares Outstanding - Basic (in shares)			2,659,132				2,657,530
Diluted (in dollars per share)		$	(0.85	)		$	0.06
Weighted Average Number of Common Shares Outstanding - Diluted (in shares)			2,659,132				2,668,590
Other comprehensive income (loss)
Foreign currency translation			(34	)			(61	)
Comprehensive income (loss), net of tax		$	(1,588	)		$	76

 

		MARCH 31,				DECEMBER 31,
		2021					2020(1)
		(Unaudited)
ASSETS
Current Assets
Cash		$	384			$	352
Restricted Cash			598				3,212
Accounts Receivable, less allowances of $722 and $343			12,507				15,625
Inventories, net			17,079				13,917
Contract Assets			6,677				5,899
Income Taxes Receivable			1,343				547
Prepaid Expenses and Other Current Assets			1,784				1,485
Total Current Assets			40,372				41,037
Property and Equipment, Net			5,920				6,426
Assets Held For Sale			442				-
Operating Lease Assets			9,594				8,998
Other Intangible Assets, Net			1,172				1,173
Total Assets		$	57,500			$	57,634
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current Maturities of Long-Term Debt		$	1,964			$	1,204
Current Portion of Finance Lease Obligations			671				660
Current Portion of Operating Lease Obligations			972				688
Accounts Payable			13,006				11,239
Accrued Payroll and Commissions			3,591				2,870
Other Accrued Liabilities			2,490				2,875
Total Current Liabilities			22,694				19,536
Long-Term Liabilities
Long Term Line of Credit			2,200				3,328
Long-Term Debt, Net of Current Maturities			4,995				5,865
Long Term Finance Lease Obligations, Net			979				1,152
Long-Term Operating Lease Obligations, Net			9,250				8,889
Other Long-Term Liabilities			231				146
Total Long-Term Liabilities			17,655				19,380
Total Liabilities			40,349				38,916
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: 2,660,330 and 2,659,628 Shares Issued and Outstanding, respectively			27				27
Additional Paid-In Capital			15,837				15,816
Accumulated Other Comprehensive Loss			(71	)			(37	)
Retained Earnings			1,108				2,662
Total Shareholders' Equity			17,151				18,718
Total Liabilities and Shareholders' Equity		$	57,500			$	57,634

 

		THREE MONTHS ENDED
		MARCH 31,
		2021				2020
Cash Flows From Operating Activities
Net Income (Loss)		$	(1,554	)		$	137
Adjustments to Reconcile Net (Loss) Income to Net Cash
Provided by (Used In) Operating Activities
Depreciation and Amortization			477				567
Compensation on Stock-Based Awards			21				39
Compensation on Equity Appreciation Rights			13				-
Loss on Held for Sale			28				-
Loss on Disposal of Property, Equipment, and Intangibles			31				-
Change in Accounts Receivable Allowance			379				(10	)
Change in Inventory Reserves			(394	)			93
Changes in Operating Assets and Liabilities: Changes in Current Operating Items
Accounts Receivable			2,732				(1,644	)
Inventories			(2,777	)			(1,165	)
Contract Assets			(778	)			885
Prepaid Expenses and Other Current Assets			(299	)			11
Income Taxes			(796	)			(88	)
Accounts Payable			1,553				2,336
Accrued Payroll and Commissions			721				(691	)
Other Accrued Liabilities			(253	)			(4	)
Net Cash (Used in) Provided by Operating Activities			(896	)			466
Cash Flows from Investing Activities
Purchases of Intangible Asset			(64	)			(6	)
Purchases of Property and Equipment			(208	)			(65	)
Net Cash Used in Investing Activities			(272	)			(71	)
Cash Flows from Financing Activities
Net Change in Line of Credit			(1,128	)			167
Principal Payments on Long-Term Debt			(125	)			(124	)
Principal Payments on Financing Leases			(162	)			(123	)
Net Cash Used in Financing Activities			(1,415	)			(80	)
Effect of Exchange Rate Changes on Cash			1				(1	)
Net Change in Cash			(2,582	)			314
Cash - Beginning of Period			3,564				660
Cash - Ending of Period		$	982			$	974
Reconciliation of cash and restricted cash reported within the condensed consolidated balance sheets
Cash		$	384			$	730
Restricted Cash			598				244
Total cash and restricted cash reported in the condensed consolidated statements of cash flows		$	982			$	974
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Period for Interest		$	59			$	222
Cash Paid During the Period for Income Taxes			97				40
Supplemental Noncash Investing and Financing Activities:
Property and Equipment Purchases in Accounts Payable			214				23
Property Acquired under Operating Lease			858				-
Equipment Acquired under Finance Lease			-				262

 

														Accumulated
										Additional				Other				Retained				Total Shareholders'
		Preferred				Common				Paid-In				Comprehensive				Income				Equity
BALANCE DECEMBER 31, 2019		$	250			$	27			$	15,748			$	(257	)		$	4,208			$	19,976
Net Income			-				-				-				-				137				137
Foreign currency translation adjustment			-				-				-				(61	)			-				(61	)
Compensation on stock-based awards			-				-				39				-				-				39
BALANCE MARCH 31, 2020		$	250			$	27			$	15,787			$	(318	)		$	4,345			$	20,091
BALANCE DECEMBER 31, 2020		$	250			$	27			$	15,816			$	(37	)		$	2,662			$	18,718
Net Loss			-				-				-				-				(1,554	)			(1,554	)
Foreign currency translation adjustment			-				-				-				(34	)			-				(34	)
Compensation on stock-based awards			-				-				21				-				-				21
BALANCE MARCH 31, 2021		$	250			$	27			$	15,837			$	(71	)		$	1,108			$	17,151

 

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, 2020. 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 March 31, 2021:

 

 

In May 2017, the shareholders approved the 2017 Stock Incentive Plan which authorized the issuance of 400,000 shares, an additional 50,000 shares were authorized in March 2020. There were no stock options granted during the three months ended March 31, 2021.

 

Total compensation expense was $21 and $39 for the three ended March 31, 2021 and 2020, respectively. As of March 31, 2021, there was $308 of unrecognized compensation which will vest over the next 2.15 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. During the three months ended March 31, 2020, there were no units granted. There were no units granted during the three months ended March 31, 2021.

 

Net Income (Loss) per Common Share

For the three months ended March 31, 2021, all stock options are deemed to be antidilutive as there was a net loss and, therefore, were not included in the computation of income per common share amount. For the three months ended March 31, 2020 there were 2,668,590 diluted shares with $0.05 earnings per diluted share.

 

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 March 31, 2021 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 March 31, 2021, 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. Trade accounts receivable have been reduced by an allowance for doubtful accounts of $722 at March 31, 2021 and $343 at December 31, 2020.

 

Inventories

Inventories are stated at the lower of cost (average cost 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:

 

 

 

Other Intangible Assets

Other intangible assets at March 31, 2021 and December 31, 2020 are as follows:

 

 

 

 

Amortization expense for the three months ended March 31, 2021 and 2020 was $46 and $51, respectively.

 

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

 

 

 

 

Accounting Pronouncements Issued But Not Yet Adopted

In June 2016, the FASB issued ASU No. 2016-13, “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 an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that an entity expects to collect over the instrument’s contractual life. The new CECL model is 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 are currently evaluating the impact of this guidance on our financial condition and results of 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 $982 in cash at March 31, 2021, approximately $369 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 month period ended and March 31, 2021 and 2020. One division accounted for approximately 25% and 24% of net sales for the three March 31, 2021 and 2020, respectively. The other division accounted for approximately 4% of net sales for the three month period ended March 31, 2021, and approximately 2% net sales for the three month period ended March 31, 2020. Together they accounted for approximately 29% and 26% of net sales for the three March 31, 2021 and 2020, respectively. Accounts receivable from the customer at March 31, 2021 and December 31, 2020 represented approximately 23% and 20% of our total accounts receivable, respectively. Another customer’s accounts receivable represented 13% and 10% as of March 31, 2021 and December 31, 2020, respectively.

 

Export sales represented approximately 4% and 3% of net sales for the three months ended March 31, 2021 and 2020, 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 75% and 88% of our revenue for both the three months ended March 31, 2021 and 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, consist of unbilled amounts related to revenue recognized over time. Significant changes in the contract assets balance during the three months ended March 31, 2021 was as follows (in thousands):

 

 

 

We expect substantially all the remaining performance obligations for the contract assets recorded as of March 31, 2021, 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 ended March 31, 2021 and 2020, respectively:

 

 

 

 

 

NOTE 4. FINANCING ARRANGEMENTS

 

We have a credit agreement with Bank of America which was entered into on June 15, 2017, which was amended five separate occasions on December 29, 2017, August 13, 2019, November 12, 2019, August 27, 2020, and December 1, 2020 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 3.6% and 4.0% as of March 31, 2021 and December 31, 2020, respectively. We had borrowings on our line of credit of $2,200 and $3,328 outstanding as of March 31, 2021 and December 31, 2020, 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 provides for, among other things, a Fixed Charge Coverage Ratio of not less than 1.0 to 1.0, for the twelve months ending December 31, 2020 and each Fiscal Quarter end thereafter subject only during a trigger period commencing when our availability under our line is less than $2,000 until availability is above that amount for 30 days due to amendment to our agreement dated in December of 2020. The Company met the covenants for the period ended March 31, 2021.

 

 

On April 15, 2020, we entered into the Promissory Note, which provides for an unsecured loan of $6,077 pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act and applicable regulations (the “CARES Act”) of which funds were received on 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 amounts outstanding after the determination of amounts forgiven will be repaid on a monthly basis.

 

The availability under the line is subject to borrowing base requirements, and advances are at the discretion of the lender. At March 31, 2021, we had unused availability under our line of credit of $7,558, supported by our borrowing base. The line is secured by substantially all of our assets.

 

Long-term debt at March 31, 2021 and December 30, 2020 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 March 31, 2021, 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 March 31, 2021 were as follows:

 

 

NOTE 6. 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 months ended March 31, 2021 and 2020 was 31% and 18%, respectively.

 

On March 11, 2021, the American Rescue Plan Act (“ARPA”) was signed and includes several provisions, such as measures that extend and expand the Employee Retention Credit (“ERC”), previously enacted under the Coronavirus Aid, Relief and Economic Security Act, through December 31, 2021. Companies who have received PPP are not precluded from this program. We are still in the process of reviewing but believe we meet the criteria for revenue reduction and the number of monthly average employees, which qualifies us for the credit. For the three months ended March 31, 2021, we did not record a benefit related to the ERC. We plan to apply for the credit, however we are still completing the computation. This is not tax deductible and is thus included in our calculation of the 2021 tax rate.

 

NOTE 7. RESTRUCTURING CHARGES

 

During the first quarter of 2021, we recorded restructuring charges of $219 related to the consolidation of our production facilities and closure of our Merrifield, Minnesota facility. With the Merrifiled closure, we are shifting wire and cable assembly, system-level assembly and printed circuit board (PCB) manufacturing to Nortech’s other Minnesota locations. No amounts were accrued for the period ended March 31, 2021. We reduced our workforce by approximately 42 employees as a result of this facility closure. As of March 31, 2021, this closure did qualify for held for sale accounting. Loss on held for sale assets, relating to write downs to fair value, was $28 during the three months ended March 31, 2021.

 

NOTE 8. RELATED PARTY TRANSACTIONS

 

During three months ended March 31, 2021, 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 payments totaling $20 and $14 during the three months ended March 31, 2021 and 2020, respectively to Printed Circuits, Inc. The Company believes that these transactions are on terms comparable to those that the Company could reasonably expect in an arm's length transaction with an unrelated third party.

 

David Kunin, our Chairman, is a minority owner of Abilitech Medical, Inc. Mr. Kunin also was a consultant to Abilitech, which relationship ended on March 1, 2021. During 2020, Mr. Kunin earned $16 as a consultant to Abilitech. In the three months ended March 31, 2021 and 2020, Abilitech paid the Company $268 and $175, respectively, for delivery of medical products. The Company believes that transactions with Abilitech are on terms comparable to those that the Company could reasonably expect in an arm's length transaction with an unrelated third party.

 

 

David Kunin, our Chairman, is a small minority owner (less than 10%) of Marpe Technologies, LTD an early stage medical device company dedicated to the early detection of skin cancer through full body scanners.  Mr. Kunin is also a member of the Board of Directors of Marpe Technologies.  The Company worked with Marpe Technologies to apply for a grant from the Israel-United States Binational Industrial Research and Development Foundation, a legal entity created by Agreement between the Government of the State of Israel and the Government of the United States of America (“BIRD Foundation”).  The parties were successful in receiving approval for a $1,000,000 conditional grant.  The Company and Marpe Technologies will each receive $500,000 from the BIRD Foundation and, among other obligations under the grant, each is required to contribute $500,000 to match grant funds from the BIRD Foundation.  The Company will meet its obligation by providing certain services at cost or with respect to administrative services at no cost to Marpe Technologies. The total value of the contribution will not exceed $500,000.  The Company will receive a 10 year exclusive right to manufacture the products of Marpe Technologies. There can be no assurances that Marpe Technologies’ medical device will be commercially successful, that Marpe Technologies will be successful in raising additional funds to finance its operations or, if commercially successful, the Company will recoup the value of services provided to Marpe for which is not fully paid.  The transactions between the Company and Marpe Technologies have been approved by the Audit Committee pursuant to the Company Related-Party Transactions Policy. As of March 31, 2021, no expenses were incurred and the agreement between the Company and Marpe Technologies will become effective upon execution of the agreement among the BIRD Foundation, Marpe Technologies and the Company relating to the the conditional grant from the BIRD Foundation.

 

NOTE 9. SUBSEQUENT EVENT

 

We entered into an agreement on February 23, 2021 with a third-party agent to sell our facility in Merrifield, MN and some related assets. A liquidation auction was completed in April of 2021 for the Merrifield facility. We expect the sale to close in the second quarter of 2021 near the carrying value of the assets, however a sale transaction and the expected sale value is not guaranteed.