Company Quick10K Filing
Quick10K
Nortech Systems
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$3.81 3 $10
10-Q 2019-03-31 Quarter: 2019-03-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-05-17 Earnings, Exhibits
8-K 2019-05-10 Shareholder Vote
8-K 2019-04-02 Earnings, Exhibits
8-K 2019-02-19 Officers, Exhibits
8-K 2018-12-19 Officers, Exhibits
8-K 2018-10-05 Officers, Exhibits
8-K 2018-08-15 Earnings, Officers, Exhibits
8-K 2018-05-09 Earnings, Shareholder Vote, Exhibits
8-K 2018-04-16 Officers
8-K 2018-03-27 Earnings, Exhibits
8-K 2018-02-21 Enter Agreement, Exhibits
8-K 2018-01-08 Officers, Exhibits
8-K 2017-12-29 Enter Agreement, Officers, Exhibits
GPS Gap 9,470
NBR Nabors Industries 1,410
NVMI Nova Measuring Instruments 768
ADES Advanced Emissions Solutions 242
ASUR Asure Software 108
COCP Cocrystal Pharma 81
DXF Dunxin Financial Holdings 50
CLCS Cell Source 0
PTIX Protagenic 0
SVR Syniverse 0
NSYS 2019-03-31
Part 1
Item 1. Financial Statements
Note 1. Summary of Significant Accounting Policies
Note 2. Concentration of Credit Risk and Major Customers
Note 3. Revenue
Note 4. Financing Arrangements
Note 5. Leases
Note 6. Income Taxes
Note 7. Related Party Transactions
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults on Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 a19-7733_1ex31d1.htm
EX-31.2 a19-7733_1ex31d2.htm
EX-32 a19-7733_1ex32.htm

Nortech Systems Earnings 2019-03-31

NSYS 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 a19-7733_110q.htm 10-Q

Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended March 31, 2019

 

OR

 

o          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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer,  smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,”  “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer o

 

Accelerated Filer o

Non-accelerated Filer x

 

Smaller Reporting Company x

Emerging growth company o

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 

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

 

Number of shares of $.01 par value common stock outstanding at May 2, 2019 was 2,684,672.

 

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

 

 

 


Table of Contents

 

TABLE OF CONTENTS

 

 

PAGE

 

 

PART I - FINANCIAL INFORMATION

 

 

 

 

Item 1 - Financial Statements

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income

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

18-22

 

 

 

Item 3 - Quantitative and Qualitative Disclosures About Market Risk

22

 

 

 

Item 4 - Controls and Procedures

22

 

 

PART II - OTHER INFORMATION

 

 

 

 

Item 1 - Legal Proceedings

23

 

 

 

 

Item 1A. - Risk Factors

23

 

 

 

 

Item 2 - Unregistered Sales of Equity Securities, Use of Proceeds

23

 

 

 

 

Item 3 - Defaults on Senior Securities

23

 

 

 

 

Item 4 - Mine Safety Disclosures

23

 

 

 

 

Item 5 - Other Information

23

 

 

 

 

Item 6 - Exhibits

23

 

 

SIGNATURES

25

 

2


Table of Contents

 

PART 1

 

ITEM 1.  FINANCIAL STATEMENTS

 

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE DATA)

 

 

 

THREE MONTHS ENDED

 

 

 

MARCH 31,

 

 

 

2019

 

2018

 

 

 

 

 

 

 

Net Sales

 

$

28,165

 

$

26,447

 

 

 

 

 

 

 

Cost of Goods Sold

 

25,204

 

23,419

 

 

 

 

 

 

 

Gross Profit

 

2,961

 

3,028

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

Selling Expenses

 

761

 

1,039

 

General and Administrative Expenses

 

2,304

 

2,109

 

Total Operating Expenses

 

3,065

 

3,148

 

 

 

 

 

 

 

Loss From Operations

 

(104

)

(120

)

 

 

 

 

 

 

Other Expense

 

 

 

 

 

Interest Expense

 

(245

)

(172

)

 

 

 

 

 

 

Loss Before Income Taxes

 

(349

)

(292

)

 

 

 

 

 

 

Income Tax Expense

 

14

 

99

 

 

 

 

 

 

 

Net Loss

 

$

(363

)

$

(391

)

 

 

 

 

 

 

Loss Per Common Share - Basic and Diluted

 

$

(0.14

)

$

(0.14

)

 

 

 

 

 

 

Weighted Average Number of Common Shares Outstanding - Basic and Diluted

 

2,659,859

 

2,720,609

 

 

 

 

 

 

 

Other comprehensive loss

 

 

 

 

 

Foreign currency translation

 

56

 

72

 

Comprehensive loss, net of tax

 

$

(307

)

$

(319

)

 

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

 

3


Table of Contents

 

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE DATA)

 

 

 

MARCH 31,

 

DECEMBER 31,

 

 

 

2019

 

2018 (1)

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash

 

$

310

 

$

480

 

Restricted Cash

 

427

 

467

 

Accounts Receivable, less allowances of $246 and $222

 

23,092

 

20,093

 

Inventories

 

15,984

 

17,004

 

Contract Assets

 

8,584

 

6,431

 

Prepaid Expenses and Other Current Assets

 

2,133

 

1,381

 

Total Current Assets

 

50,530

 

45,856

 

 

 

 

 

 

 

Property and Equipment, Net

 

9,886

 

10,178

 

Operating Lease Assets

 

5,388

 

 

Goodwill

 

2,375

 

2,375

 

Other Intangible Assets, Net

 

1,469

 

1,523

 

Other Non Current Assets

 

28

 

28

 

Total Assets

 

$

69,676

 

$

59,960

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Current Maturities of Long-Term Debt

 

$

586

 

$

780

 

Current Portion of Finance Lease Obligations

 

359

 

337

 

Current Portion of Operating Lease Obligations

 

811

 

 

Accounts Payable

 

21,140

 

18,142

 

Accrued Payroll and Commissions

 

2,136

 

2,747

 

Other Accrued Liabilities

 

3,112

 

2,886

 

Total Current Liabilities

 

28,144

 

24,892

 

 

 

 

 

 

 

Long-Term Liabilities

 

 

 

 

 

Long Term Line of Credit

 

11,294

 

9,264

 

Long-Term Debt, Net

 

3,513

 

3,624

 

Long-Term Finance Lease Obligation, Net

 

864

 

951

 

Long-Term Operating Lease Liabilities, Net

 

4,813

 

 

Other Long-Term Liabilities

 

118

 

139

 

Total Long-Term Liabilities

 

20,602

 

13,978

 

 

 

 

 

 

 

Total Liabilities

 

48,746

 

38,870

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

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

 

250

 

250

 

Common Stock - $0.01 par value; 9,000,000 Shares Authorized: 2,684,672 and 2,663,049 Shares Issued and Outstanding, respectively

 

27

 

27

 

Additional Paid-In Capital

 

15,757

 

15,610

 

Accumulated Other Comprehensive Loss

 

(177

)

(233

)

Retained Earnings

 

5,073

 

5,436

 

Total Shareholders’ Equity

 

20,930

 

21,090

 

Total Liabilities and Shareholders’ Equity

 

$

69,676

 

$

59,960

 

 

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

 


(1)         The balance sheet at December 31, 2018 has been derived from the audited financial statements at that date.

 

4


Table of Contents

 

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN THOUSANDS)

 

 

 

THREE MONTHS ENDED

 

 

 

MARCH 31,

 

 

 

2019

 

2018

 

Cash Flows From Operating Activities

 

 

 

 

 

Net Loss

 

$

(363

)

$

(391

)

Adjustments to Reconcile Net Loss to Net Cash Provided by (Used in) Operating Activities

 

 

 

 

 

Depreciation and Amortization

 

570

 

561

 

Compensation on Stock-Based Awards

 

160

 

20

 

Deferred Taxes

 

 

(1

)

Change in Accounts Receivable Allowance

 

24

 

 

Change in Inventory Reserves

 

51

 

183

 

Changes in Current Operating Items

 

 

 

 

 

Accounts Receivable

 

(3,001

)

(762

)

Inventories

 

985

 

229

 

Contract Assets

 

(2,154

)

308

 

Prepaid Expenses and Other Current Assets

 

(819

)

81

 

Accounts Payable

 

3,209

 

317

 

Accrued Payroll and Commissions

 

(611

)

(579

)

Other Accrued Liabilities

 

511

 

576

 

Net Cash (Used in) Provided by Operating Activities

 

(1,438

)

542

 

Cash Flows from Investing Activities

 

 

 

 

 

Purchase of Intangible Asset

 

 

(4

)

Purchases of Property and Equipment

 

(396

)

(288

)

Net Cash Used in Investing Activities

 

(396

)

(292

)

Cash Flows from Financing Activities

 

 

 

 

 

Net Change in Line of Credit

 

2,030

 

146

 

Principal Payments on Long-Term Debt

 

(328

)

(222

)

Principal Payments on Finance Leases

 

(65

)

(82

)

Share Repurchases

 

(13

)

(126

)

Net Cash Provided by (Used in) Financing Activities

 

1,624

 

(284

)

 

 

 

 

 

 

Effect of Exchange Rate Changes on Cash

 

 

46

 

 

 

 

 

 

 

Net Change in Cash

 

(210

)

12

 

Cash - Beginning of Period

 

947

 

779

 

 

 

 

 

 

 

Cash - Ending of Period

 

$

737

 

$

791

 

 

 

 

 

 

 

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

 

 

 

 

 

Cash

 

$

310

 

$

466

 

Restricted Cash

 

427

 

325

 

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

 

$

737

 

$

791

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

Cash Paid During the Period for Interest

 

$

224

 

$

139

 

 

 

 

 

 

 

Supplemental Noncash Investing and Financing Activities:

 

 

 

 

 

Property and Equipment Purchases in Accounts Payable

 

78

 

68

 

 

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

 

5


Table of Contents

 

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(UNAUDITED)

(IN THOUSANDS)

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Other

 

 

 

Total

 

 

 

Preferred

 

Common

 

Paid-In

 

Comprehensive

 

Retained Income

 

Shareholders’

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE DECEMBER 31, 2017

 

250

 

27

 

15,760

 

(101

)

3,889

 

19,825

 

Net loss

 

 

 

 

 

(391

)

(391

)

Cumulative Adjustment

 

 

 

 

 

1,382

 

1,382

 

Foreign currency translation adjustment

 

 

 

 

72

 

 

72

 

Compensation on stock-based awards

 

 

 

20

 

 

 

20

 

Share repurchases

 

 

 

(126

)

 

 

(126

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE MARCH 31, 2018

 

$

250

 

$

27

 

$

15,654

 

$

(29

)

$

4,880

 

$

20,782

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE DECEMBER 31, 2018

 

$

250

 

$

27

 

$

15,610

 

$

(233

)

$

5,436

 

$

21,090

 

Net loss

 

 

 

 

 

(363

)

(363

)

Foreign currency translation adjustment

 

 

 

 

56

 

 

56

 

Compensation on stock-based awards

 

 

 

160

 

 

 

160

 

Share repurchases

 

 

 

(13

)

 

 

(13

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE MARCH 31, 2019

 

$

250

 

$

27

 

$

15,757

 

$

(177

)

$

5,073

 

$

20,930

 

 

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

 

6


Table of Contents

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)

 

NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements for the interim periods have been prepared in accordance with Generally Accepted Accounting Principles in the United States of America (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the financial information and footnotes required by GAAP for complete financial statements, although we believe the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018. 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 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


Table of Contents

 

Stock-Based Awards

 

Following is the status of all stock options as of March 31, 2019:

 

 

 

Shares

 

Weighted-
Average
Exercise
Price Per

Share

 

Weighted-
Average
Remaining
Contractual
Term
(in years)

 

Aggregate
Intrinsic Value

 

Outstanding - January 1, 2019

 

224,750

 

$

  3.44

 

 

 

 

 

Granted

 

137,500

 

4.53

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

Cancelled

 

(23,250

)

3.85

 

 

 

 

 

Outstanding - March 31, 2019

 

339,000

 

$

  3.85

 

9.12

 

$

298

 

Exercisable - March 31, 2019

 

36,166

 

$

  3.46

 

7.71

 

$

46

 

 

The 2005 Plan has not been renewed, and therefore no further grants may be made under the 2005 Plan. In May 2017, the shareholders approved the 2017 Stock Incentive Plan which authorized the issuance of 350,000 shares. There were 137,500 stock options granted during the three months ended March 31, 2019.

 

Total compensation expense related to stock options for the three months ended March 31, 2019 and 2018 was $43 and $20, respectively. As of March 31, 2019, there was $402 of unrecognized compensation which will vest over the next 3.29 years.

 

In November 2010, the Board of Directors adopted the Nortech Systems Incorporated Equity Appreciation Rights Plan (“2010 Plan”). The total number of Equity Appreciation Right Units (“Units”) that can be issued under the 2010 Plan shall not exceed an aggregate of 1,000,000 Units as amended and restated on March 11, 2015. The 2010 Plan provides that Units issued shall fully vest three years from the base date as defined in the agreement unless terminated earlier. Units give the holder a right to receive a cash payment equal to the appreciation in book value per share of common stock from the base date, as defined, to the redemption date. Unit redemption payments under the 2010 Plan shall be paid in cash within 90 days after we determine the book value of the Units as of the calendar year immediately preceding the redemption date.  The Units are adjusted to market value for each reporting period.

 

During the three months ended March 31, 2019, there were 100,000 Units granted.  Total compensation expense (income) related to the vested outstanding Units based on the estimated appreciation over their remaining terms was $0 for the three months ended March 31, 2019 and 2018, respectively.

 

During the three months ended March 31, 2019, there were 25,000 restricted shares awarded that vested immediately that had expense of $116.

 

Net Loss per Common Share

 

For both the three months ended March 31, 2019 and 2018, the Company reported a net loss and all stock options are deemed to be antidilutive and, therefore, were not included in the computation of loss per common share amount.

 

Share Repurchase Program

 

As of March 31, 2019, we have a $250 share repurchase program which was authorized by our Board of Directors in August 2017. Under this repurchase program, we repurchased 3,377 shares in open market transactions totaling $13 for the three months ended March 31, 2019.  The par value of repurchased shares is deducted from common stock and the excess repurchase price over par value is deducted from additional paid-in capital.

 

8


Table of Contents

 

Segment Reporting Information

 

All of our operations fall under the contract manufacturing segment within the electronic manufacturing Services industry. We strategically direct production between our various manufacturing facilities based on a number of considerations to best meet our customers’ requirements. We share resources for sales, marketing, engineering, supply chain, information services, human resources, payroll, and all corporate accounting functions. Consolidated financial information is available that is evaluated regularly by the chief operating decision maker in assessing performance and allocating resources.

 

Restricted Cash

 

Cash and cash equivalents classified as restricted cash on our condensed consolidated balance sheets are restricted as to withdrawal or use under the terms of certain contractual agreements. The March 31, 2019 balance included cash collateral required to be held against our corporate employee purchasing card program and lockbox deposits that are temporarily restricted due to timing at the period end. The lockbox deposits are applied against our line of credit the next business day. As of March 31, 2019, we had no outstanding letters of credit.

 

Accounts Receivable and Allowance for Doubtful Accounts

 

Credit is extended based upon an evaluation of the customer’s financial condition and, while collateral is not required, the Company periodically receives surety bonds that guarantee payment. Credit terms are consistent with industry standards and practices. The amounts of trade accounts receivable at both March 31, 2019 and December 31, 2018 have been reduced by an allowance for doubtful accounts of $246 and $222, respectively.

 

Inventories

 

Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value. Costs include material, labor, and overhead required in the warehousing and production of our products. Inventory reserves are maintained for the estimated value of the inventories that may have a lower value than stated or quantities in excess of future production needs.

 

Inventories are as follows:

 

 

 

March 31,

 

December 31,

 

 

 

2019

 

2018

 

Raw Materials

 

$

16,197

 

$

16,769

 

Work in Process

 

698

 

1,015

 

Finished Goods

 

252

 

332

 

Reserves

 

(1,163

)

(1,112

)

 

 

 

 

 

 

Total

 

$

15,984

 

$

17,004

 

 

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Other Intangible Assets

 

Other intangible assets at March 31, 2019 and December 31, 2018 are as follows:

 

 

 

 

 

March 31, 2019

 

 

 

 

 

Gross

 

 

 

 

 

 

 

 

 

Carrying

 

Accumulated

 

Net Book

 

 

 

Years

 

Amount

 

Amortization

 

Value

 

Customer Relationships

 

9

 

$

1,302

 

$

542

 

$

760

 

Intellectual Property

 

3

 

100

 

69

 

31

 

Trade Names

 

20

 

814

 

153

 

661

 

Patents

 

7

 

17

 

 

17

 

Totals

 

 

 

$

2,233

 

$

764

 

$

1,469

 

 

 

 

 

 

December 31, 2018

 

 

 

 

 

Gross

 

 

 

 

 

 

 

 

 

Carrying

 

Accumulated

 

Net Book

 

 

 

Years

 

Amount

 

Amortization

 

Value

 

Customer Relationships

 

9

 

$

1,302

 

$

506

 

$

796

 

Intellectual Property

 

3

 

100

 

61

 

39

 

Trade Names

 

20

 

814

 

143

 

671

 

Patents

 

7

 

17

 

 

17

 

Totals

 

 

 

$

2,233

 

$

710

 

$

1,523

 

 

Amortization expense for the three months ended March 31, 2019 and March 31, 2018 was $54 and $55, respectively.

 

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

 

Year

 

Amount

 

Remainder of 2019

 

$

165

 

2020

 

191

 

2021

 

185

 

2022

 

185

 

2023

 

185

 

Thereafter

 

541

 

Total

 

$

1,452

 

 

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Table of Contents

 

Impairment of Goodwill and Other Intangible Assets

 

In accordance with ASC 350, Goodwill and Other Intangible Assets, goodwill is not amortized but is required to be reviewed for impairment at least annually or when events or circumstances indicate that carrying value may exceed fair value. We test impairment annually as of October 1st. No events were identified during the three months ended March 31, 2019 that would require us to test for impairment. In testing goodwill for impairment, we perform a quantitative impairment test, including computing the fair value of the reporting unit and comparing that value to its carrying value. If the fair value is less than its carrying value, then the goodwill is determined to be impaired. In the event that goodwill is impaired, an impairment charge to earnings would become necessary.

 

Impairment Analysis

 

We evaluate long-lived assets, primarily property and equipment and intangible assets, as well as the related depreciation periods, whenever current events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability for assets to be held and used is based on our projection of the undiscounted future operating cash flows of the underlying assets. To the extent such projections indicate that future undiscounted cash flows are not sufficient to recover the carrying amounts of related assets, a charge might be required to reduce the carrying amount to equal estimated fair value. No impairment expense was recorded during the three months ended March 31, 2019 or 2018.

 

Recently Adopted Accounting Standards

 

On January 1, 2019, we adopted ASU No. 2016-02, Leases (Topic 842). This ASU requires lessees to recognize lease assets and lease liabilities on the balance sheet. Under the new guidance, lessor accounting is largely unchanged.  We have elected to adopt the standard on the modified retrospective basis. We have also elected the package of practical expedients, which permits us not to reassess our prior conclusions about lease identification, lease classification and initial direct costs. In addition, we have elected the short-term lease recognition whereby we will not recognize operating lease related assets or liabilities for leases with a lease term less than one year. We did not elect the hindsight practical expedient to determine the reasonably certain term of existing leases.

 

The impact of adopting the new lease standard was the recognition of $5,731 of lease assets and lease liabilities related to our operating leases. The adoption of the new lease standard had no impact to our Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Cash Flows or Condensed Consolidated Statements of Equity.

 

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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 $310 in cash at March 31, 2019, approximately $276 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 months ended March 31, 2019 and 2018. One division accounted for approximately 23% and 19% of net sales for the three months ended March 31, 2019 and 2018, respectively. The other division accounted for approximately 3% and 1% of net sales for the three months ended March 31, 2019 and 2018, respectively.  Together they accounted for approximately 26% and 20% of net sales for the three months ended March 31, 2019 and 2018, respectively.  Accounts receivable from the customer at March 31, 2019 and December 31, 2018 represented approximately 25% and 16% of our total accounts receivable, respectively.

 

Export sales represented approximately 19% of net sales for the three months ended March 31, 2019 and 2018.

 

NOTE 3. REVENUE

 

Revenue recognition

 

Our revenue is comprised of product, engineering services and repair services.  All revenue is recognized when the Company satisfies its performance obligation(s) under the contract by transferring the promised product or service to our customer either when (or as) our customer obtains control of the product or service, with the majority of our revenue being recognized over time including goods produced under contract manufacturing agreements and services revenue. A performance obligation is a promise in a contract to transfer a distinct product or service to a customer. A contract’s transaction price is allocated to each distinct performance obligation. The majority of our contracts have a single performance obligation, as the promise to transfer products or services is not separately identifiable from other promises in the contract and, therefore, not distinct.

 

Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products or providing services. As such, revenue is recorded net of returns, allowances and customer discounts. Sales, value add, and other taxes collected from customers and remitted to governmental authorities are accounted for on a net (excluded from revenues) basis. Shipping and handling costs are included in cost of goods sold.

 

The majority of our revenue is derived from the transfer of goods produced under contract manufacturing agreements which have no alternative use and we have an enforceable right to payment for our performance completed to date. Our performance obligations within our contract manufacturing agreements are generally satisfied over time as the goods are produced based on customer specifications and we have an enforceable right to payment for the goods produced.  If these requirements are not met, the revenue is recognized at a point in time, generally upon shipment. Revenue under contract manufacturing agreements that was recognized over time accounted for approximately 91% of our revenue for the three months ended March 31, 2019 and 2018. 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 judgments 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.

 

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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, 2019 was as follows (in thousands):

 

Outstanding at January 1, 2019

 

$

6,431

 

Increase (decrease) attributed to:

 

 

 

Transferred to receivables from contract assets recognized

 

(4,012

)

Product transferred over time

 

6,165

 

Outstanding at the end of period

 

$

8,584

 

 

We expect substantially all of the remaining performance obligations for the contract assets recorded as of March 31, 2019, to be transferred to receivables within 90 days, with any remaining amounts to be transferred within 180 days. We bill our customers upon shipment with payment terms of up to 120 days.

 

The following table summarizes our net sales by market for the three months ended March 31, 2019:

 

 

 

Product/
Service
Transferred
Over Time

 

Product
Transferred
at Point in
Time

 

Noncash
Consideration

 

Total Net
Sales by
Market

 

Aerospace and Defense

 

$

4,103

 

$

20

 

$

122

 

$

4,245

 

Medical

 

14,495

 

35

 

409

 

$

14,939

 

Industrial

 

8,140

 

597

 

244

 

8,981

 

Total net sales

 

$

26,738

 

$

652

 

$

775

 

$

28,165

 

 

The following table summarizes our net sales by market for the three months ended March 31, 2018:

 

 

 

Product/
Service
Transferred
Over Time

 

Product
Transferred
at Point in
Time

 

Noncash
Consideration

 

Total Net
Sales by
Market

 

Aerospace and Defense

 

$

4,623

 

$

48

 

$

195

 

$

4,866

 

Medical

 

9,434

 

482

 

405

 

10,321

 

Industrial

 

9,992

 

843

 

425

 

11,260

 

Total net sales

 

$

24,049

 

$

1,373

 

$

1,025

 

$

26,447

 

 

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NOTE 4. FINANCING ARRANGEMENTS

 

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

 

Under the Bank of America credit agreement, both the line of credit and real estate term notes are subject to variations in the LIBOR rate. Our line of credit bears interest at a weighted-average interest rate of 5.6% and 3.0% as of March 31, 2019 and 2018, respectively. We had borrowings on our line of credit of $11,294 and $9,264 outstanding as of March 31, 2019 and December 31, 2018. There are no subjective acceleration clauses under the credit agreement that would accelerate the maturity of our outstanding borrowings.

 

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

 

The Bank of America credit agreement as amended provides for, among other things, a fixed charge coverage ratio of not less than (i) 1.0 to 1.0 for each period of four fiscal quarters, commencing with the period of four fiscal quarters ending December 31, 2018.

 

The availability under the line is subject to borrowing base requirements, and advances are at the discretion of the lender. At March 31, 2019, we had unused availability under our line of credit of $4,706, supported by our borrowing base. The line is secured by substantially all of our assets.

 

As part of the July 1, 2015 Devicix acquisition we entered into two unsecured subordinated promissory notes payable to the seller in the principal amounts of $1,000 and $1,300. The $1,000 promissory note has a four-year term, bearing interest at 4% per annum, requiring monthly principal and interest payments of $23 and is subject to offsets if certain revenue levels are not met. The $1,300 promissory note has a four-year term and bears interest at 4% per annum, requiring monthly principal and interest payments of $29 and is not subject to offset.

 

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Table of Contents

 

Long-term debt at March 31, 2019 and December 31, 2018 consisted of the following:

 

 

 

March 31,

 

December 31,

 

 

 

2019

 

2018

 

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

 

$

4,129

 

$

4,253

 

 

 

 

 

 

 

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

 

67

 

156

 

 

 

 

 

 

 

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

 

87

 

203

 

 

 

4,283

 

4,612

 

 

 

 

 

 

 

Discount on Devicix Notes Payable

 

(13

)

(23

)

Debt issuance Costs

 

(172

)

(185

)

 

 

 

 

 

 

Total long-term debt

 

4,098

 

4,404

 

Current maturities of long-term debt

 

(586

)

(780

)

Long-term debt - net of current maturities

 

$

3,512

 

$

3,624

 

 

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

 

The components of lease expense were as follows:

 

 

 

Three Months Ended March 31,

 

Lease Cost

 

2019

 

Operating lease cost

 

$

274

 

Finance lease interest cost

 

17

 

Finance lease amortization expense

 

65

 

Total lease cost

 

$

356

 

 

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Table of Contents

 

Supplemental balance sheet information related to leases was as follows:

 

 

 

Balance Sheet Location

 

March 31, 2019

 

Assets

 

 

 

 

 

Operating lease assets

 

Operating lease assets

 

$

5,387

 

Finance lease assets

 

Property, Plant and Equipment

 

1,358

 

Total leased assets

 

 

 

6,745

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Current

 

 

 

 

 

Current operating lease liabilities

 

Current Portion of Operating Lease Obligations

 

811

 

Current finance lease liabilities

 

Current Portion of Finance Lease Obligations

 

359

 

Noncurrent

 

 

 

 

 

Long-term operating lease liabilities

 

L-T Operating Lease Liabilities, Net

 

4,813

 

Long term finance lease liabilities

 

L-T Finance Lease Obligations, Net

 

864

 

Total lease liabilities

 

 

 

$

6,847

 

 

Supplemental cash flow information related to leases was as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

Operating leases

 

 

 

Cash paid for amounts included in the measurement of lease liabilities

 

$

107

 

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

 

$

 

 

Maturities of lease liabilities were as follows:

 

 

 

Operating Leases

 

Finance Leases

 

Total

 

Remaining 2019

 

$

671

 

$

320

 

$

991

 

2020

 

858

 

398

 

1,256

 

2021

 

722

 

398

 

1,120

 

2022

 

726

 

223

 

949

 

2023

 

738

 

2

 

740

 

Thereafter

 

3,380

 

 

3,380

 

Total lease payments

 

$

7,095

 

$

1,341

 

$

8,436

 

Less: Interest

 

(1,471

)

(118

)

(1,589

)

Present value of lease liabilities

 

$

5,624

 

$

1,223

 

$

6,847

 

 

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Table of Contents

 

The lease term and discount rate at March 31, 2019 were as follows:

 

 

 

March 31,

 

 

 

2019

 

Weighted-average remaining lease term (years)

 

 

 

Operating leases

 

8.3

 

Finance leases

 

3.7

 

Weighted-average discount rate

 

 

 

Operating leases

 

4.8

%

Finance leases

 

5.4

%

 

Rent expense for our operating leases the three months ended March 31, 2018 as accounted under ASC 840, Leases, was $335.

 

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

 

 

 

Operating Leases

 

2019

 

$

1,024

 

2020

 

858

 

2021

 

722

 

2022

 

726

 

2023

 

738

 

Thereafter

 

3,380

 

Total minimum obligations

 

$

7,448

 

 

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, 2019 and 2018 was (4%) and (34%), respectively. Our effective tax rate for the year ended December 31, 2019 is expected to be 19% compared to 64% for the year ended December 31, 2018.  The decrease in rate mainly relates to: (1) a higher ratio of projected annual pre-tax book income compared to permanent differences; (2) the Company’s ability to reduce the impact of global intangible low-taxed income (“GILTI”).

 

NOTE 7.  RELATED PARTY TRANSACTIONS

 

During 2016, the Company entered into a consulting arrangement with a company co-owned by Matt Mahmood, who became the Chief Operating Officer of the Company on May 20, 2017 and who resigned from the Company on October 5, 2018. For the three months ended March 31, 2019 and 2018, expenses were incurred in the amounts of $0, and $12 respectively.

 

On February 22, 2018, the Company entered into a Consulting Agreement with Crosscourt Group, LLC, a limited liability company owned and managed by William Murray, formerly an independent director of the Company.  Mr. Murray resigned from this position in May 2018. The term of the Consulting Agreement was three months and ended in the second quarter of 2018. The Company is paying severance benefits per his employment and separation agreements of $235 over 12 months, to be paid in full during 2019, which was fully expensed in the fourth quarter of 2018.

 

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Table of Contents

 

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

 

Overview

 

We are a Maple Grove, Minnesota based full-service electronics manufacturing services (“EMS”) contract manufacturer of wire and cable assemblies, printed circuit board assemblies, higher-level assemblies and box builds for a wide range of industries. We provide value added engineering services and technical support including design, testing, prototyping and supply chain management to customers mainly in the aerospace and defense, medical, and industrial equipment markets. We maintain facilities in Bemidji, Blue Earth, Eden Prairie, Mankato, Merrifield, and Milaca, Minnesota; Monterrey, Mexico; and Suzhou, China. All of our facilities are certified to one or more of the ISO/AS standards, including 9001, AS9100 and 13485, with most having additional certifications based on the needs of the customers they serve.

 

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,

 

 

 

2019

 

2018

 

Net Sales

 

100.0

%

100.0

%

Cost of Goods Sold

 

89.5

 

88.5

 

Gross Profit

 

10.5

 

11.5

 

 

 

 

 

 

 

Selling Expenses

 

2.7

 

3.9

 

General and Administrative Expenses

 

8.1

 

8.0

 

Loss from Operations

 

(0.3

)

(0.4

)

 

 

 

 

 

 

Other Expenses

 

(0.9

)

(0.7

)

Loss Before Income Taxes

 

(1.2

)

(1.1

)

 

 

 

 

 

 

Income Tax Expense (Benefit)

 

0.1

 

0.4

 

Net Loss

 

(1.3

)%

(1.5

)%

 

Net Sales

 

Net sales were $28.2 million in the first quarter of 2019, as compared to $26.4 million in the first quarter of the prior year, an increase of $1.8 million or 6.5%. Net sales results were varied by markets, the medical market increased by $4.6 million or 44.7% with medical component products accounting for 60% of the increase and medical devices the remaining 40%. The industrial market sector was down $2.3 million or 20.2% in the first quarter of 2019 as compared to the same quarter of 2018. Net sales from the aerospace and defense markets decreased by $0.6 million or 12.8% in the first quarter of 2019 as compared to the first quarter of 2018.

 

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Table of Contents

 

Net sales by our major EMS industry markets for the three months ended March 31, 2019 and 2018 were as follows (in thousands):

 

 

 

March 31,

 

%

 

 

 

2019

 

2018

 

Change

 

Aerospace and Defense

 

$

4,245

 

$

4,866

 

(12.8

)

Medical

 

14,939

 

10,321

 

44.7

 

Industrial

 

8,981

 

11,260

 

(20.2

)

Total Net Sales

 

$

28,165

 

$

26,447

 

6.5

 

 

Net sales by timing of transfer of goods and services for the three months ended March 31, 2019 is as follows (in thousands):

 

 

 

Product/
Service
Transferred
Over Time

 

Product
Transferred
at Point in
Time

 

Noncash
Consideration

 

Total Net
Sales by
Market

 

Aerospace and Defense

 

$

4,103

 

20

 

122

 

$

4,245

 

Medical

 

14,495

 

35

 

409

 

14,939

 

Industrial

 

8,140

 

597

 

244

 

8,981

 

Total Net sales

 

$

26,738

 

$

652

 

$

775

 

$

28,165

 

 

Net sales by timing of transfer of goods and services for the three months ended March 31, 2018 is as follows (in thousands):

 

 

 

Product/
Service
Transferred
Over Time

 

Product
Transferred
at Point in
Time

 

Noncash
Consideration

 

Total Net
Sales by
Market

 

Aerospace and Defense

 

$

4,623

 

$

48

 

$

195

 

$

4,866

 

Medical

 

9,434

 

482

 

405

 

10,321

 

Industrial

 

9,992

 

843

 

425

 

11,260

 

Total Net sales

 

$

24,049

 

$

1,373

 

$

1,025

 

$

26,447

 

 

Backlog

 

Our 90-day shipment backlog as of March 31, 2019 was $31.4 million, a 14.8% increase from the beginning of the quarter and a 43.2% increase as compared to the prior year. Backlog for our medical customers has increased 20.8% from the beginning of the quarter and increased 80.6% compared to the prior year. The aerospace and defense backlog increased 0.6% from the beginning of the quarter and increased 15.5% from the prior year.   Our industrial customers’ backlog increased 14.7% from the beginning of the quarter and increased 13.5% 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.

 

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Table of Contents

 

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

 

 

 

Shipment Backlog as of the Quarter Ended

 

 

 

March 31,

 

December 31,

 

March 31,

 

 

 

2019

 

2018

 

2018

 

Aerospace and Defense

 

$

6,027

 

$

5,993

 

$

5,220

 

Medical

 

17,256

 

14,285

 

9,556

 

Industrial

 

8,130

 

7,088

 

7,166

 

Total Backlog

 

$

31,413

 

$

27,366

 

$

21,942

 

 

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.

 

Gross Profit

 

Gross profit as a percent of net sales 10.5%  and 11.5% for the three months ended March 31, 2019 and 2018, respectively.  This decline in gross profit as a percent of net sales is mainly due to product and customer mix.

 

Selling Expense

 

Selling expenses for the three months ended March 31, 2019 and 2018 was $0.8 million or 2.7% of sales and $1.0 million or 3.9% of sales, respectively. The decrease in selling expenses for 2019 is due to lower sales incentives.

 

General and Administrative Expense

 

General and administrative expenses for the three months ended March 31, 2019 and 2018, were $2.3 million or 8.1% of sales and $2.1 million or 8.0% of sales, respectively.

 

Loss from Operations

 

First quarter 2019 loss from operations was less than $0.1 million compared to a loss of $0.1 million for the first quarter in 2018.

 

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, 2019 and 2018 was (4%) and (34%), respectively. Our effective tax rate for the year ended December 31, 2019 is expected to be 19% compared to 64% for the year ended December 31, 2018.  The decrease in rate mainly relates to: (1) a higher ratio of projected annual pre-tax book income compared to permanent differences; (2) the Company’s ability to reduce the impact of global intangible low-taxed income (“GILTI”).

 

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Table of Contents

 

Net Loss

 

Net loss for the three months ended March 31, 2019 and 2018 was $0.4 million or $0.14 per basic and diluted common share.

 

Liquidity and Capital Resources

 

Net cash used by operating activities for the three months ended March 31, 2019 was $1.4 million. The increase in accounts receivable and contract assets negatively impacted cash flows, partially offset by an increase in accounts payable and decrease in inventory.

 

Net cash used in investing activities of $0.4 million for the three months ended March 31, 2019, was the result of property and equipment purchases to support the business.

 

We have satisfied our liquidity needs over the past several years with cash flows generated from operations and a bank operating line of credit. We have a credit agreement with Bank of America (BofA) which was entered into on June 15, 2017 and amended on December 29, 2017 and provides for a line of credit arrangement of $16.0 million that expires on June 15, 2022. The credit arrangement also has a $5.0 million real estate term note outstanding with a maturity date of June 15, 2022.

 

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

 

On March 31, 2019, we had outstanding advances of $11.3 million under the line of credit and unused availability of $4.7 million supported by our borrowing base. We believe our financing arrangements and cash flows to be provided by operations will be sufficient to satisfy our future working capital needs. Our working capital was $22.4 million and $20.7 million as of March 31, 2019 and December 31, 2018, respectively.

 

The Bank of America credit agreement as amended provides for, among other things, a fixed charge coverage ratio of not less than (i) 1.0 to 1.0 for each period of four fiscal quarters, commencing with the period of four fiscal quarters ending December 31, 2018.

 

Off-Balance Sheet Arrangements

 

We have not engaged in any off-balance sheet activities as defined in Item 303(a)(4) of Regulation S-K.

 

Critical Accounting Policies and Estimates

 

Our significant accounting policies and estimates are summarized in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2018. Some of our accounting policies require us to exercise significant judgment in selecting the appropriate assumptions for calculating financial estimates. Such judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, known trends in our industry, terms of existing contracts and other information from outside sources, as appropriate. Actual results could differ from these estimates.

 

Forward-Looking Statements

 

Those statements in the foregoing report that are not historical facts are forward-looking statements made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements generally will be accompanied by words such as “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “intend,” “possible,” “potential,” “predict,” “project,” or other similar words that convey the uncertainty of future events or outcomes. Although we believe these forward-looking statements are reasonable, they are based upon a number of assumptions concerning future conditions, any or all of which may ultimately prove to be inaccurate. Forward-looking statements involve a number of risks and uncertainties. Important factors that could cause actual results to differ materially from the forward-looking statements include, without limitation:

 

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

 

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

 

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

 

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

 

·                  Risks related to availability of labor;

 

·                  Increase in certain raw material costs such as copper and oil;

 

·                  Commodity and energy cost instability;

 

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

 

·                  Loss of a major customer or changes to customer orders;

 

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

 

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

 

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

 

Please refer to forward-looking statements and risks as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

 

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

 

Except for the implementation of certain internal controls related to the adoption of the new lease standard (ASC 842), 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, 2018.

 

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

 

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

 

Period

 

Total Number
of Shares
Purchased

 

Average
Price Paid
Per Share

 

Total Number of
Shares Purchased as
Part of Publicly
Announced Plan

 

Maximum Dollar
Value of Shares that
May Yet Be
Purchased Under the
Plan

 

January 1 - January 31, 2019

 

3,377

 

$

3.87

 

3,377

 

$

153,148

 

February 1 - February 28, 2019

 

 

$

 

 

$

153,148

 

March 1 - March 31, 2019

 

 

$

 

 

$

153,148

 

Total

 

3,377

 

$

3.87

 

3,377

 

$

153,148

 

 

As of March 31, 2019, we had a $250,000 share repurchase program with $153,148 remaining under this program.

 

ITEM 3.  DEFAULTS ON SENIOR SECURITIES

 

None.

 

ITEM 4.  MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

Exhibits

 

 

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.

 

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101*

 

Financial statements from the quarterly report on Form 10-Q for the quarter ended March 31, 2019, 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 15, 2019

by

/s/ Jay D. Miller

 

 

 

Jay D. Miller

 

Chief Executive Officer and President

 

Nortech Systems Incorporated

 

 

 

Date: May 15, 2019

by

/s/ Constance M. Beck

 

 

 

Constance M. Beck

 

Vice President and Chief Financial Officer

 

Nortech Systems Incorporated

 

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