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

nsys20210331_10q.htm
 
 

 

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.

 

1

 

 

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

 

2

 
 

 

PART

ITEM 1. FINANCIAL STATEMENTS

 

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES  

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE DATA)

 

   

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  

 

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

 

3

 

 

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS 

(IN THOUSANDS, EXCEPT SHARE DATA)

 

   

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  

 

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

(1) The balance sheet at December 31, 2020 has been derived from the audited financial statements at that date

 

4

 

 

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN THOUSANDS)

 

   

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  

 

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

 

5

 
 

 

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(UNAUDITED)

(IN THOUSANDS)

 

                           

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  

 

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

 

6

 

 

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, 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.

 

7

 

 

Stock-Based Awards

Following is the status of all stock options as of March 31, 2021:

 

   

Shares

   

Weighted-

Average

Exercise Price

Per Share

   

Weighted-

Average

Remaining

Contractual

Term

(in years)

   

Aggregate

Intrinsic Value
(in thousands)

 

Outstanding - January 1, 2021

    362,640     $ 3.96                  

Granted

    -       -                  

Exercised

    (1,000 )     3.70                  

Cancelled

    (6,140 )     3.40                  

Outstanding - March 31, 2021

    355,500     $ 3.97       7.52     $ 821  

Exercisable - March 31, 2021

    173,700     $ 3.77       6.99     $ 437  

 

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.

 

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. 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:

 

   

March 31,

   

December 31,

 
   

2021

   

2020

 

Raw Materials

  $ 17,235     $ 14,865  

Work in Process

    1,143       969  

Finished Goods

    465       242  

Reserves

    (1,764 )     (2,159 )
                 

Total

  $ 17,079     $ 13,917  

 

9

 

 

Other Intangible Assets

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

 

           

March 31, 2021

 
           

Gross

                 
           

Carrying

   

Accumulated

   

Net Book

 
   

Years

   

Amount

   

Amortization

   

Value

 

Customer Relationships

    9     $ 1,302     $ 832     $ 470  

Intellectual Property

    3       100       100       -  

Trade Names

    20       814       234       580  

Patents

    7       122       -       122  

Totals

          $ 2,338     $ 1,166     $ 1,172  

 

 

           

December 31, 2020

 
           

Gross

                 
           

Carrying

   

Accumulated

   

Net Book

 
   

Years

   

Amount

   

Amortization

   

Value

 

Customer Relationships

    9     $ 1,302     $ 795     $ 507  

Intellectual Property

    3       100       100       -  

Trade Names

    20       814       225       589  

Patents

    7       77       -       77  

Totals

          $ 2,293     $ 1,120     $ 1,173  

 

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:

 

 

Year

 

Amount

 

Remainder of 2021

  $ 139  

2022

    185  

2023

    185  

2024

    113  

2025

    41  

Thereafter

    387  

Total

  $ 1,050  

 

 

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.

 

10

 

 

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.

 

11

 

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):

 

 

Three Months Ended March 31, 2021

       

Outstanding at January 1, 2021

  $ 5,899  

Increase (decrease) attributed to:

       

Transferred to receivables from contract assets recognized

    (4,331 )

Product transferred over time

    5,109  

Outstanding at March 31, 2021

  $ 6,677  

 

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.

 

12

 

 

The following tables summarize our net sales by market for the three ended March 31, 2021 and 2020, respectively:

 

   

Three Months Ended March 31, 2021

 
   

Product/ Service

Transferred

Over Time

   

Product

Transferred at

Point in Time

   

Noncash

Consideration

   

Total Net Sales

by Market

 

Medical

  $ 8,959     $ 2,893     $ 490     $ 12,342  

Industrial

    4,630       1,336       252       6,218  

Aerospace and Defense

    3,064       262       186       3,512  

Total net sales

  $ 16,653     $ 4,491     $ 928     $ 22,072  

 

 

   

Three Months Ended March 31, 2020

 
   

Product/ Service

Transferred Over

Time

   

Product

Transferred at

Point in Time

   

Noncash

Consideration

   

Total Net Sales by

Market

 

Medical

  $ 13,703     $ 1,061     $ 697     $ 15,461  

Industrial

    6,016       970       323       7,309  

Aerospace and Defense

    4,317       134       219       4,670  

Total net sales

  $ 24,036     $ 2,165     $ 1,239     $ 27,440  

 

 

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.

 

13

 

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:

 

   

March 31,

   

December 31,

 
   

2021

   

2020

 

Real estate term notes bearing interest at one-month LIBOR + 2.00% (2.25% and 4.3% as of March 31, 2021 and December 31, 2020, respectively) maturing June 15, 2022 with monthly payments of approximately $41 plus interest secured by substantially all assets.

  $ 946     $ 1,071  
                 
                 

Promissory Note

    6,077       6,077  
                 
      7,023       7,148  

Debt issuance Costs

    (64 )     (79 )

Total long-term debt

    6,959       7,069  

Current maturities of long-term debt

    (1,964 )     (1,204 )

Long-term debt - net of current maturities

  $ 4,995     $ 5,865  

 

 

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:

 

   

March 31,

   

March 31,

 

Lease Cost

 

2021

   

2020

 

Operating lease cost

  $ 531     $ 357  

Finance lease interest cost

    23       22  

Finance lease amortization expense

    163       152  

Total lease cost

  $ 717     $ 531  

 

14

 

Supplemental balance sheet information related to leases was as follows:

 

 

Balance Sheet Location

 

March 31, 2021

   

December 31, 2020

 

Assets

                 

Operating lease assets

Operating lease assets

  $ 9,594     $ 8,998  

Finance lease assets

Property, Plant and Equipment

    2,167       2,330  

Total leased assets

  $ 11,761     $ 11,328  
                   

Liabilities

                 

Current

                 

Current operating lease liabilities

Current Portion of Operating Lease Obligations

  $ 972     $ 688  

Current finance lease liabilities

Current Portion of Finance Lease Obligations

    671       660  

Noncurrent

                 

Long-term operating lease liabilities

Long Term Operating Lease Liabilities, Net

    9,250       8,889  

Long term finance lease liabilities

Long Term Finance Lease Obligations, Net

    979       1,152  

Total lease liabilities

  $ 11,872     $ 11,389  

 

Supplemental cash flow information related to leases was as follows:

 

   

March 31,

   

March 31,

 
   

2021

   

2020

 

Operating leases

               

Cash paid for amounts included in the measurement of lease liabilities

  $ 357     $ 210  

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

  $ 858     $ -  

 

Maturities of lease liabilities were as follows:

 

   

Operating

Leases

   

Finance Leases

   

Total

 

Remaining 2021

  $ 1,288     $ 554     $ 1,842  

2022

    1,727       587       2,314  

2023

    1,730       333       2,063  

2024

    1,407       280       1,687  

2025

    1,205       29       1,234  

Thereafter

    8,284       -       8,284  

Total lease payments

  $ 15,641     $ 1,783     $ 17,424  

Less: Interest

    (5,419

)

    (133 )     (5,552

)

Present value of lease liabilities

  $ 10,222     $ 1,650     $ 11,872  

 

15

 

The lease term and discount rate at March 31, 2021 were as follows:

 

Weighted-average remaining lease term (years)

       

Operating leases

    9.9  

Finance leases

    3.2  

Weighted-average discount rate

       

Operating leases

    7.7

%

Finance leases

    5.2

%

 

 

NOTE 6. INCOME TAXES

 

On a quarterly basis, we estimate what our effective tax rate will be for the full fiscal year and 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.

 

16

 

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.

 

17

 
 

 

ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Overview

 

We are a Maple Grove, Minnesota based leading provider of design and manufacturing solutions for complex electromechanical systems, assemblies and components. We primarily serve the medical device aerospace and defense, and industrial markets. Our design services span concept development to commercial design, and include software, electrical, mechanical, and biomedical engineering. Our manufacturing and supply chain capabilities are vertically integrated around electromedical systems, wire, cable and interconnect assemblies, printed circuit board assemblies, as well as system-level assembly, integration and final test. We maintain facilities in Bemidji, Blue Earth, 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. The ultimate impact of COVID-19 depends on factors beyond our knowledge or control, including the duration and severity of the outbreak, as well as third-party actions taken to contain its spread and mitigate its public health effects. As a result, we are unable to estimate the extent to which COVID-19 will negatively impact our financial results or liquidity.

 

We will continue to assess the current and potential impacts of the COVID-19 pandemic on our business, financial condition, and results of operations. We actively manage our cash and working capital to preserve adequate liquidity and ensure that our business can continue to operate during these uncertain times.

 

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 was completed in the first quarter of 2021 and impacted approximately 42 employees, who were offered positions at other Nortech facilities in Minnesota. 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. 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. As of March 31, 2021, this closure did qualify for held for sale accounting.

 

18

 

 

Results of Operations

 

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

 

   

Three Months Ended

 
   

March 31,

 
   

2021

   

2020

 

Net Sales

    100.0

%

    100.0

%

Cost of Goods Sold

    92.9       89.0  

Gross Profit

    7.1       11.0  
                 

Selling Expenses

    3.3       2.3  

General and Administrative Expenses

    12.7       7.3  

Restructuring Charges

    1.0       0.0  

(Loss) Income from Operations

    (9.9 )     1.4  
                 

Interest Expense

    (0.3 )     (0.8 )

(Loss) Income Before Income Taxes

    (10.2 )     0.6  
                 

Income Tax (Benefit) Expense

    (3.2 )     0.1  

Net (Loss) Income

    (7.0

)%

    0.5

%

 

Net Sales

 

Net sales were $22.1 million in the first quarter of 2021, as compared to $27.4 million in the first quarter of the prior year, a decrease of $5.3 million or 19.6% that was driven primarily by the COVID-19 pandemic and the related supply chain shortages. Net sales results were varied by markets, the medical market decreased by $3.1 million or 20.2%. The industrial market sector decreased by $1.1 million or 14.9% in the first quarter of 2021 as compared to the same quarter of 2020. Net sales from the aerospace and defense markets decreased by $1.1 million or 24.8% in the first quarter of 2021 as compared to the first quarter of 2020.

 

19

 

 

Net sales by our major industry markets for the three months ended March 31, 2021 and 2020 were as follows (in thousands):

 

   

Three months Ended March 31,

 
   

2021

   

2020

   

%

 
    $     $    

Change

 

Medical

    12,342       15,461       (20.2 )

Industrial

    6,218       7,309       (14.9 )

Aerospace and Defense

    3,512       4,670       (24.8 )

Total Net Sales

    22,072       27,440       (19.6 )

 

 

Net sales by timing of transfer of goods and services for the three ended March 31, 2021 is as follows (in thousands):

 

   

Three Months Ended March 31, 2021

 
   

Product/ Service

Transferred

Over Time

   

Product

Transferred at

Point in Time

   

Noncash

Consideration

   

Total Net Sales

by Market

 

Medical

  $ 8,959     $ 2,893     $ 490     $ 12,342  

Industrial

    4,630       1,336       252       6,218  

Aerospace and Defense

    3,064       262       186       3,512  

Total net sales

  $ 16,653     $ 4,491     $ 928     $ 22,072  

 

 

Net sales by timing of transfer of goods and services for the three ended March 31, 2020 is as follows (in thousands):

 

   

Three Months Ended March 31, 2020

 
   

Product/ Service

Transferred

Over Time

   

Product

Transferred at

Point in Time

   

Noncash

Consideration

   

Total Net Sales

by Market

 

Medical

  $ 13,703     $ 1,061     $ 697     $ 15,461  

Industrial

    6,016       970       323       7,309  

Aerospace and Defense

    4,317       134       219       4,670  

Total net sales

  $ 24,036     $ 2,165     $ 1,239     $ 27,440  

 

20

 

 

Backlog

 

Our 90-day shipment backlog as of March 31, 2021 was $31.1 million, a 28.3% increase from the beginning of the quarter and a 13.0% increase from March 31, 2020. Backlog for our medical customers has increased 27.4% from the beginning of the quarter and 10.7% from the prior year. Our industrial customers’ backlog increased 61.6% from the beginning of the quarter and 59.4% from the prior year. The aerospace and defense backlog decreased 7.6% from the beginning of the quarter and 25.3% 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 industry markets are as follows (in thousands):

 

   

Shipment Backlog as of the Period Ended

 
   

March 31,

   

December 31,

   

March 31,

 
   

2021

   

2020

   

2020

 

Medical

  $ 15,870     $ 12,454     $ 14,330  

Industrial

    10,123       6,263       6,352  

Aerospace and Defense

    5,087       5,508       6,812  

Total 90-Day Backlog

  $ 31,080     $ 24,225     $ 27,494  

 

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 $62.8 million and $53.0 million for periods ended March 31, 2021 and March 31, 2020, respectively.

 

Gross Profit

 

Gross profit as a percent of net sales 7.1% and 11.0% for the three months ended March 31, 2021 and 2020, respectively. The decline in gross profit as a percent of sales was driven by lower sales on a fixed cost base in part due to the impact of COVID-19.

 

Selling Expense

 

Selling expenses for the three months ended March 31, 2021 and 2020 was $0.7 million or 3.3% of sales and $0.6 million or 2.3% of sales, respectively.

 

General and Administrative Expense

 

General and administrative expenses for the three months ended March 31, 2021 and 2020, were $2.8 million or 12.7% of sales and $2.0 million or 7.3% of sales, respectively. This increase is due primarily to higher bad debt expense of $0.4 million and increased training expenses of $0.2 million.

 

Restructuring Charges

 

Restructuring charges for the three months ended March 31, 2021 was $0.2 million or 1.0% of sales. There were no restructuring charges for the three months ended March 31, 2020. The restructuring charges are due to the closure of the Merrifield facility.

 

21

 

 

Income (Loss) before Income Taxes

 

First quarter 2021 loss from operations was $2.3 million compared to income of $0.2 million for the first quarter in 2020.

 

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.

 

Net Income (Loss)

 

Net loss for the three months ended March 31, 2021 was $1.6 million or $0.58 per basic and diluted common share. Net income for the three months ended March 31, 2020 of $0.1 million or $0.05 per basic and diluted common share.

 

Liquidity and Capital Resources

 

Our 2020 and 2021 sales and shipment backlog were impacted by the ongoing COVID-19 pandemic and the related supply chain shortages. 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 which has led to indicators of an inability to continue as a going concern. However, these indicators have been mitigated by our focus on reducing costs, minimizing capital expenditures, and managing working capital. In addition, we believe that cash provided by operations, funds available under the credit agreement with Bank of America, N.A. (BofA), funds received from our sales leaseback transaction and cash on hand will be adequate to meet our liquidity needs, including working capital, capital expenditures, and debt payment obligations.

 

Net cash used by operating activities for the three months ended March 31, 2021 was $0.9 million. The net loss in the three months ended March 31, 2021 negatively impacted operating cash flows.

 

We have a credit agreement with Bank of America (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.

 

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.

 

22

 

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 outstanding advances of $2.2 million and we had unused availability under our line of credit of $7.6 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.

 

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 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 6 months from the date of the Promissory Note 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.

 

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, 2020. 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.

 

23

 

 

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.

 

 

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

 

Supply chain disruption and unreliability due to COVID-19;

 

Lack of supply of sufficient human resources to produce our products;

 

Increased competition from within the EMS industry or the decision of OEMs to cease or limit outsourcing;

 

Changes in the reliability and efficiency of our operating facilities or those of third parties;

 

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

 

Commodity and energy cost instability;

 

Risks related to FDA noncompliance;

 

The loss of a major customer;

 

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

 

Increased or unanticipated costs related to compliance with securities and environmental regulation;

 

Disruption of global or local information management systems due to natural disaster or cyber-security incident;

 

Outbreaks of epidemic, pandemic, or contagious diseases, such as the recent novel coronavirus that affect our operations, our customers' operations or our suppliers' operations.

 

The factors identified above are believed to be important factors (but not necessarily all of the important factors) that could cause actual results to differ materially from those expressed in any forward-looking statement made by us. Discussion of these factors is also incorporated in Part I, Item 1A, “Risk Factors,” and should be considered an integral part of Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Unpredictable or unknown factors not discussed herein could also have material adverse effects on forward-looking statements. All forward-looking statements included in this Form 10-K are expressly qualified in their entirety by the forgoing cautionary statements. We undertake no obligations to update publicly any forward-looking statement (or its associated cautionary language) whether as a result of new information or future events.

 

Please refer to forward-looking statements and risks as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q, our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act). These controls and procedures are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon their evaluation of these disclosure controls and procedures as of the date of the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective.

 

Changes in Internal Control Over Financial Reporting

 

There was no change in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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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.” 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, 2020.

 

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

 

As of March 31, 2021, 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.

 

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ITEM 6. EXHIBITS

 

Exhibits

 

  10.1* Fifth Amendment dated December 1, 2020 to Loan and Security Agreement between the Company and Bank of America, N.A.

 

 

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 March 31, 2021, 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

 

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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

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

 

 

Date: May 14, 2021 

by

/s/ Jay D. Miller

 

     

 

Jay D. Miller

 

 

Chief Executive Officer and President 

 

  Nortech Systems Incorporated  
       
Date: May 14, 2021 by /s/ Christopher D. Jones  
       
  Christopher D. Jones  
  Vice President and Chief Financial Officer  
  Nortech Systems Incorporated  

 

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