Company Quick10K Filing
Quick10K
Nortech Systems
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$3.45 3 $9
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
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 2019-09-17 Officers, Exhibits
8-K 2019-09-09 Officers, Exhibits
8-K 2019-05-17 Earnings, Exhibits
8-K 2019-05-10 Shareholder Vote
8-K 2019-04-02 Earnings, Exhibits
8-K 2019-02-27 Officers
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
AIMC Altra Industrial Motion 1,573,669,021
TMO Thermo Fisher Scientific 110,419
HRS Harris 17,240
ZBRA Zebra Technologies 10,719
THR Thermon Group Holdings 702
ESIO Electro Scientific Industries 607
DXPE DXP Enterprises 545
ERII Energy Recovery 500
DYSL Dynasil of America 24
IKNX Ikonics 13
NSYS 2019-06-30
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
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-10.1 ex_155127.htm
EX-31.1 ex_154659.htm
EX-31.2 ex_154660.htm
EX-32 ex_154661.htm

Nortech Systems Earnings 2019-06-30

NSYS 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 nsys20190630_10q.htm FORM 10-Q nsys20190630_10q.htm
 

 

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended June 30, 2019

 

OR

 

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

 

For the transition period from            to          

 

NORTECH SYSTEMS INCORPORATED

 

Commission file number 0-13257

 

State of Incorporation: Minnesota

 

IRS Employer Identification No. 41-1681094

 

Executive Offices: 7550 Meridian Circle N., Suite # 150, Maple Grove, MN 55369

 

Telephone number: (952) 345-2244

 

Securities registered pursuant to Section 12(b) of the Exchange Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $.01 per share

NSYS

NASDAQ Capital Market

 

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

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒ No ☐

 

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

 

Large Accelerated Filer ☐

 

Accelerated Filer ☐

Non-accelerated Filer ☒

 

Smaller Reporting Company ☒

Emerging growth company ☐

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐

 

No Number of shares of $.01 par value common stock outstanding at August 5, 2019 was 2,657,314.

 

 

 

 

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

7-18

 

 

 

Item 2  -  Management’s Discussion and Analysis of Financial Condition And Results of Operations

19-24

 

 

 

Item 3  -  Quantitative and Qualitative Disclosures About Market Risk

24

 

 

 

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

 

 

PART 1

 

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

   

SIX MONTHS ENDED

 
   

JUNE 30,

   

JUNE 30,

 
   

2019

   

2018

   

2019

   

2018

 
                                 

Net Sales

  $ 27,292     $ 28,538     $ 55,457     $ 54,985  
                                 

Cost of Goods Sold

    24,967       24,721       50,171       48,140  
                                 

Gross Profit

    2,325       3,817       5,286       6,845  
                                 

Operating Expenses

                               

Selling Expenses

    797       1,037       1,558       2,075  

General and Administrative Expenses

    2,737       2,046       5,041       4,155  
                                 

Total Operating Expenses

    3,534       3,083       6,599       6,230  
                                 

(Loss) Income From Operations

    (1,209 )     734       (1,313 )     615  
                                 

Other Expense

                               

Interest Expense

    (279 )     (209 )     (524 )     (382 )
                                 

(Loss) Income Before Income Taxes

    (1,488 )     525       (1,837 )     233  
                                 

Income Tax Expense

    64       135       78       235  
                                 

(Net Loss) Income

  $ (1,552 )   $ 390     $ (1,915 )   $ (2 )
                                 

(Net Loss) Income Per Common Share - Basic and Diluted

  $ (0.58 )   $ 0.14     $ (0.72 )   $ (0.00 )
                                 

Weighted Average Number of Common Shares Outstanding - Basic and Diluted

    2,676,449       2,695,994       2,672,758       2,708,234  
                                 

Other comprehensive income (loss)

                               

Foreign currency translation

    (56 )     (126 )     -       (54 )

Comprehensive (Loss) Income, net of tax

  $ (1,608 )   $ 264     $ (1,915 )   $ (56 )

 

See Accompanying Condensed Notes to Consolidated Financial Statements

 

 

 

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS 

(IN THOUSANDS, EXCEPT SHARE DATA)

 

   

JUNE 30,

   

DECEMBER 31,

 
   

2019

      2018(1)  

ASSETS

 

(Unaudited)

         

Current Assets

               

Cash

  $ 399     $ 480  

Restricted Cash

    406       467  

Accounts Receivable, less allowances of $262 and $222

    20,691       20,093  

Inventories

    16,273       17,004  

Contract Assets

    7,228       6,431  

Prepaid Expenses and Other Current Assets

    1,776       1,381  

Total Current Assets

    46,773       45,856  
                 

Property and Equipment, Net

    9,512       10,178  

Operating Lease Assets

    5,202       -  

Goodwill

    2,375       2,375  

Other Intangible Assets, Net

    1,439       1,523  

Other Non Current Assets

    28       28  

Total Assets

  $ 65,329     $ 59,960  
                 

LIABILITIES AND SHAREHOLDERS' EQUITY

               

Current Liabilities

               

Current Maturities of Long-Term Debt

  $ 878     $ 780  

Current Portion of Finance Lease Obligation

    364       337  

Current Portion of Operating Lease Obligations

    826       -  

Accounts Payable

    16,845       18,142  

Accrued Payroll and Commissions

    3,118       2,747  

Other Accrued Liabilities

    2,793       2,886  

Total Current Liabilities

    24,824       24,892  
                 

Long-Term Liabilities

               

Long Term Line of Credit

    12,297       9,264  

Long-Term Debt, Net

    3,401       3,624  

Long Term Finance Lease Obligation, Net

    776       951  

Long-Term Operating Lease Obligation, Net

    4,666       -  

Other Long-Term Liabilities

    118       139  

Total Long-Term Liabilities

    21,258       13,978  
                 

Total Liabilities

    46,082       38,870  
                 

Commitments and Contingencies

               
                 

Shareholders' Equity

               

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

    250       250  

Common Stock - $0.01 par value; 9,000,000 Shares Authorized: 2,658,559 and 2,663,049 Shares Issued and Outstanding, respectively

    27       27  

Additional Paid-In Capital

    15,682       15,610  

Accumulated Other Comprehensive Loss

    (233 )     (233 )

Retained Earnings

    3,521       5,436  

Total Shareholders' Equity

    19,247       21,090  

Total Liabilities and Shareholders' Equity

  $ 65,329     $ 59,960  

 

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 

 

 

 

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN THOUSANDS)

 

   

SIX MONTHS ENDED

 
   

JUNE 30,

 
   

2019

   

2018

 

Cash Flows From Operating Activities

               

Net Loss

  $ (1,915 )   $ (2 )

Adjustments to Reconcile Net Loss to Net Cash

               

Provided by (Used in) Operating Activities

               

Depreciation and Amortization

    1,096       1,108  

Compensation on Stock-Based Awards

    191       45  

Change in Accounts Receivable Allowance

    40       (5 )

Change in Inventory Reserves

    54       73  
Changes in Current Operating Items                

Accounts Receivable

    (646 )     (1,886 )

Inventories

    670       (594 )

Contract Assets

    (798 )     (88 )

Prepaid Expenses and Other Current Assets

    (395 )     (130 )

Accounts Payable

    (1,087 )     3,722  

Accrued Payroll and Commissions

    596       374  

Other Accrued Liabilities

    (49 )     124  

Net Cash (Used in) Provided by Operating Activities

    (2,243 )     2,741  

Cash Flows from Investing Activities

               

Purchase of Intangible Asset

    (25 )     (4 )

Purchases of Property and Equipment

    (545 )     (557 )

Net Cash Used in Investing Activities

    (570 )     (561 )

Cash Flows from Financing Activities

               

Net Change in Line of Credit

    3,469       (1,361 )

Principal Payments on Long-Term Debt

    (584 )     (545 )

Principal Payments on Finance Leases

    (96 )     (150 )

Stock Option Exercises

    7       -  

Share Repurchases

    (126 )     (186 )

Net Cash Provided By (Used in) Financing Activities

    2,670       (2,242 )
                 

Effect of Exchange Rate Changes on Cash

    -       (46 )
                 

Net Change in Cash

    (143 )     (108 )

Cash - Beginning of Period

    948       779  
                 

Cash - Ending of Period

  $ 805     $ 671  
                 

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

               

Cash

  $ 399     $ 437  

Restricted Cash

    406       234  

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

  $ 805     $ 671  
                 

Supplemental Disclosure of Cash Flow Information:

               

Cash Paid During the Period for Interest

  $ 477     $ 317  

Cash Paid and Refunded During the Period for Income Taxes

    (47 )     167  
                 

Supplemental Noncash Investing and Financing Activities:

               

Property and Equipment Purchases in Accounts Payable

    180       284  

 

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

 

 

 

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(UNAUDITED)

(IN THOUSANDS)

 

                           

Accumulated

                 
                   

Additional

   

Other

   

Retained

   

Total

 
   

Preferred

   

Common

   

Paid-In

   

Comprehensive

    Earnings    

Shareholders'

 
                                                 

BALANCE MARCH 31, 2018

  $ 250     $ 27     $ 15,654     $ (29 )   $ 4,880     $ 20,782  

Net Income

    -       -       -       -       390       390  

Cumulative Adjustment

    -       -       -       -       (2 )     (2 )

Foreign currency translation adjustment

    -       -       -       (126 )     -       (126 )

Compensation on stock-based awards

    -       -       25       -       -       25  

Share repurchases

    -       -       (60 )     -       -       (60 )
                                                 

BALANCE JUNE 30, 2018

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

BALANCE DECEMBER 31, 2017

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

Net Loss

    -       -       -       -       (2 )     (2 )

Cumulative Adjustment

    -       -       -       -       1,381       1,381  

Foreign currency translation adjustment

    -       -       -       (54 )     -       (54 )

Compensation on stock-based awards

    -       -       45       -       -       45  

Share repurchases

    -       -       (186 )     -       -       (186 )
                                                 

BALANCE JUNE 30, 2018

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

BALANCE MARCH 31, 2019

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

Net Loss

    -       -       -       -       (1,552 )     (1,552 )

Foreign currency translation adjustment

    -       -       -       (56 )     -       (56 )

Compensation on stock-based awards

    -       -       31       -       -       31  

Share repurchases

    -       -       (113 )     -       -       (113 )

Stock option exercises

    -       -       7       -       -       7  
                                                 

BALANCE JUNE 30, 2019

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

BALANCE DECEMBER 31, 2018

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

Net Loss

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

Stock option exercises

    -       -       7       -       -       7  

Compensation on stock-based awards

    -       -       191       -       -       191  

Share repurchases

    -       -       (126 )     -       -       (126 )
                                                 

BALANCE JUNE 30, 2019

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

 

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

 

 

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 Income (Loss). Sales, value add, and other taxes collected from customers and remitted to governmental authorities are accounted for on a net (excluded from revenues) basis. Shipping and handling costs charged to our customers are included in net sales, while the corresponding shipping expenses are included in cost of goods sold.

 

 

Stock-Based Awards

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

 

   

Shares

   

Weighted-

Average

Exercise

Price Per

Share

   

Weighted-

Average

Remaining

Contractual

Term

(in years)

   

Aggregate

Intrinsic Value
(in thousands)

 

Outstanding - January 1, 2019

    224,750     $ 3.44                  

Granted

    169,500       4.44                  

Exercised

    (2,250 )     3.20                  

Cancelled

    (23,250 )     3.85                  

Outstanding - June 30, 2019

    368,750     $ 3.88       9.01     $ 134  

Exercisable - June 30, 2019

    111,817     $ 3.46       7.06     $ 64  

 

 

The 2005 Plan has not been renewed, and therefore no further grants may be made under the 2005 Plan. In May 2017, the shareholders approved the 2017 Stock Incentive Plan which authorized the issuance of 350,000 shares. There were 137,500 and 169,500 stock options granted during the three and six months ended June 30, 2019, respectively.

 

Total compensation expense related to stock options for the three months ended June 30, 2019 and 2018 was $32 and $25, respectively and $75 and $45 for the six months ended June 30, 2019 and 2018, respectively. As of June 30, 2019, there was $444 of unrecognized compensation which will vest over the next 3.26 years.

 

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

 

During the six months ended June 30, 2019, 100,000 Units were granted in the first quarter. During the three and six months ended June 30, 2018, no additional Units were granted.

 

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

 

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

 

 

Net Income (Loss) per Common Share

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

 

Share Repurchase Program

As of June 30, 2019, we have a $250 share repurchase program which was authorized by our Board of Directors in August 2017. Under this repurchase program, we repurchased 28,363 and 31,740 shares in the open market transactions totaling $113 and $126 for the three and six months ended June 30, 2019, respectively. The par value of repurchased shares is deducted from common stock and the excess repurchase price over par value is deducted from additional paid-in capital.

 

Restricted Cash

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

 

Accounts Receivable and Allowance for Doubtful Accounts

Credit is extended based upon an evaluation of the customer’s financial condition and, while collateral is not required, the Company periodically receives surety bonds that guarantee payment. Credit terms are consistent with industry standards and practices. The amounts of trade accounts receivable at both the three months ended and six months ended June 30, 2019 have been reduced by an allowance for doubtful accounts of $262 at June 30, 2019 and $222 at December 31, 2018.

 

Inventories

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

 

 

Inventories are as follows (in thousands):

 

   

June 30,

   

December 31,

 
   

2019

   

2018

 

Raw Materials

  $ 16,447     $ 16,769  

Work in Process

    780       1,015  

Finished Goods

    212       332  

Reserves

    (1,166 )     (1,112 )
                 

Total

  $ 16,273     $ 17,004  

 

 

Other Intangible Assets

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

 

           

June 30, 2019

 
           

Gross

                 
           

Carrying

   

Accumulated

   

Net Book

 
   

Years

   

Amount

   

Amortization

   

Value

 

Customer Relationships

    9     $ 1,302     $ 578     $ 724  

Trade Names

    3       100       78       22  

Intellectual Property

    20       814       163       651  

Patents

    7       42       -       42  

Totals

          $ 2,258     $ 819     $ 1,439  

 

 

           

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 and six months ended June 30, 2019 was $55 and $109, respectively.

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

 

Year

 

Amount

 

Remainder of 2019

  $ 109  

2020

    192  

2021

    185  

2022

    185  

2023

    185  

Thereafter

    541  

Total

  $ 1,397  

 

 

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 six months ended June 30, 2018 that would require us to test for impairment. In testing goodwill for impairment, we perform a quantitative impairment test, including computing the fair value of the reporting unit and comparing that value to its carrying value. If the fair value is less than it carrying value, then the goodwill is determined to be impaired. In the event that goodwill is impaired, an impairment charge to earnings would become necessary.

 

 

Impairment Analysis

We evaluate long-lived assets, primarily property and equipment and intangible assets, as well as the related depreciation periods, whenever current events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability for assets to be held and used is based on our projection of the undiscounted future operating cash flows of the underlying assets. To the extent such projections indicate that future undiscounted cash flows are not sufficient to recover the carrying amounts of related assets, a charge might be required to reduce the carrying amount to equal estimated fair value. No impairment expense was recorded during the three and six months ended June 30, 2019 and 2018.

 

Recently Issued Accounting Standards

 

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

 

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

 

 

NOTE 2. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

 

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and accounts receivable. With regard to cash, we maintain our excess cash balances in checking accounts at primarily two financial institutions, one in the United States and one in China. The account in the United States may at times exceed federally insured limits. Of the $399 in cash at June 30, 2019, approximately $333 was held at banks located in China. We grant credit to customers in the normal course of business and do not require collateral on our accounts receivable.

 

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

 

Export sales represented approximately 17% and 21% of net sales for the three months ended June 30, 2019 and 2018, respectively. Export sales represented 18% and 20% of net sales for the six months ended June 30, 2019 and 2018, respectively.

 

 

 

 

NOTE 3. REVENUE

 

Revenue recognition

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

 

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

 

The majority of our revenue is derived from the transfer of goods produced under contract manufacturing agreements which have no alternative use and we have an enforceable right to payment for our performance completed to date. Our performance obligations within our contract manufacturing agreements are generally satisfied over time as the goods are produced based on customer specifications and we have an enforceable right to payment for the goods produced. If these requirements are not met, the revenue is recognized at a point in time, generally upon shipment. Revenue under contract manufacturing agreements that was recognized over time accounted for approximately 91% of our revenue for both the three and six months ended June 30, 2019. Revenues under these agreements are generally recognized over time using an input measure based upon the proportion of actual costs incurred.

 

Accounting for contract manufacturing agreements involves the use of various techniques to estimate total revenue and costs. We estimate profit on these agreements as the difference between total estimated revenue and expected costs to complete the performance obligation within the terms of the agreement and recognize the respective profit as the goods are produced. The estimates to determine the profit earned on the performance obligation are based on anticipated selling prices and historical cost of goods sold and represent our best judgement at the time. Changes in judgements on these above estimates could impact the timing and amount of revenue recognized with a resulting impact on the timing and amount of associated profit.

 

On occasion our customers provide materials to be used in the manufacturing process and the fair value of the materials is included in revenue as noncash consideration at the point in time when the manufacturing process commences along with the same corresponding amount recorded as cost of goods sold. The inclusion of noncash consideration has no impact on overall profitability.

 

 

Contract Assets

Contract assets, recorded as such in the Condensed Consolidated Balance Sheet, consist of unbilled amounts related to revenue recognized over time. Significant changes in the contract assets balance during the three and six months ended June 30, 2019 was as follows (in thousands):

 

Six Months Ended June 30, 2019

       

Outstanding at January 1, 2019

  $ 6,431  

Increase (decrease) attributed to:

       

Transferred to receivables from contract assets recognized

    (4,985 )

Product transferred over time

    5,782  

Outstanding at June 30, 2019

  $ 7,228  

 

 

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

 

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

 

   

Three Months Ended June 30, 2019

 
   

Product/ Service

Transferred

Over Time

   

Product

Transferred at

Point in Time

   

Noncash

Consideration

   

Total Net Sales

by Market

 

Aerospace and Defense

  $ 4,155     $ 222     $ 205     $ 4,582  

Medical

    13,145       218       661       14,024  

Industrial

    7,428       878       380       8,686  

Total net sales

  $ 24,728     $ 1,318     $ 1,246     $ 27,292  

 

 

   

Six Months Ended June 30, 2019

 
   

Product/ Service

Transferred

Over Time

   

Product

Transferred at

Point in Time

   

Noncash

Consideration

   

Total Net Sales

by Market

 

Aerospace and Defense

  $ 8,258     $ 242     $ 327     $ 8,827  

Medical

    27,640       253       1,070       28,963  

Industrial

    15,568       1,475       624       17,667  

Total net sales

  $ 51,466     $ 1,970     $ 2,021     $ 55,457  

 

 

 

 

NOTE 4. FINANCING ARRANGEMENTS

 

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

 

Under the Bank of America credit agreement, both the line of credit and real estate term notes are subject to variations in the LIBOR rate. Our line of credit bears interest at a weighted-average interest rate of 5.8% and 4.5% as of June 30, 2019 and 2018, respectively. We had borrowings on our line of credit of $12,297 and $9,264 outstanding as of June 30, 2019 and December 31, 2018, respectively. There are no subjective acceleration clauses under the credit agreement that would accelerate the maturity of our outstanding borrowings.

 

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

 

The BofA credit agreement as amended provides for, among other things, a fixed charge coverage ratio of not less than (i) 1.0 to 1.0 for each period of four fiscal quarters, commencing with the period of four fiscal quarters ending December 31, 2018. As of June 30, 2019 we did not meet the fixed charge coverage ratio which was waived by BofA in the second amendment to the credit agreement received on August 13, 2019.

 

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

 

As part of the July 1, 2015 Devicix acquisition we entered into two unsecured subordinated promissory notes payable to the seller in the principal amounts of $1,000 and $1,300, which was fully paid off during the three months ended June 30, 2019.

 

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

 

 

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

 

   

June 30,

   

December 31,

 
   

2019

   

2018

 

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

  $ 4,004     $ 4,253  
                 

China letter of credit arrangement

    437       -  
                 

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

    -       156  
                 

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

    -       203  
      4,441       4,612  
                 

Discount on Devicix Notes Payable

    -       (23 )

Debt issuance Costs

    (162 )     (185 )
                 

Total long-term debt

    4,279       4,404  

Current maturities of long-term debt

    (878 )     (780 )

Long-term debt - net of current maturities

  $ 3,401     $ 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 June 30, 2019, we do not have material lease commitments that have not commenced.

 

 

The components of lease expense were as follows:

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 

Lease Cost

 

2019

   

2019

 

Operating lease cost

  $ 253     $ 532  

Finance lease interest cost

    16       33  

Finance lease amortization expense

    66       131  

Total lease cost

  $ 335     $ 696  

 

 

Supplemental balance sheet information related to leases was as follows:

 

 

Balance Sheet Location

 

June 30, 2019

 

Assets

         

Operating lease assets

Operating lease assets

  $ 5,202  

Finance lease assets

Property, Plant and Equipment

    1,292  

Total leased assets

    6,494  
           

Liabilities

         

Current

         
           

Current operating lease liabilities

Current Portion of Operating Lease Obligations

    826  
           

Current finance lease liabilities

Current Portion of Finance Lease Obligations

    364  

Noncurrent

         

Long-term operating lease liabilities

Long Term Operating Lease Liabilities, Net

    4666  

Long term finance lease liabilities

Long Term Finance Lease Obligations, Net

    776  

Total lease liabilities

  $ 6,632  

 

 

Supplemental cash flow information related to leases was as follows:

 

   

Three Months Ended June 30,

 
   

2019

 

Operating leases

       

Cash paid for amounts included in the measurement of lease liabilities

  $ 200  

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

  $  

 

Maturities of lease liabilities were as follows:

 

   

Operating

Leases

   

Finance Leases

   

Total

 

Remaining 2019

  $ 447     $ 213     $ 660  

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

  $ 6,871     $ 1,234     $ 8,105  

Less: Interest

    (1,379

)

    (94 )     (1,473

)

Present value of lease liabilities

  $ 5,492     $ 1,140     $ 6,632  

 

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

 

Weighted-average remaining lease term (years)

       

Operating leases

    8.1  

Finance leases

    3.5  

Weighted-average discount rate

       

Operating leases

    4.8

%

Finance leases

    5.4

%

 

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

 

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

 

   

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

 

 

 

 

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

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2019

   

2018

   

2019

   

2018

 

Net Sales

    100.0

%

    100.0

%

    100.0

%

    100.0

%

Cost of Goods Sold

    91.5       86.6       90.5       87.6  

Gross Profit

    8.5       13.4       9.5       12.4  
                                 

Selling Expenses

    2.9       3.6       2.8       3.8  

General and Administrative Expenses

    10.0       7.2       9.1       7.6  

Income from Operations

    (4.4 )     2.6       (2.4 )     1.0  
                                 

Other Expenses

    (1.0 )     (0.7 )     (0.9 )     (0.7 )

Income (Loss) Before Income Taxes

    (5.4 )     1.9       (3.3 )     0.3  
                                 

Income Tax Expense (Benefit)

    0.2       0.5       0.1       0.4  

Net Income (Loss)

    (5.6 %)     1.4 %     (3.4 %)     (0.1 %)

 

 

Net Sales

 

Net sales were $27.3 million in the second quarter of 2019, as compared to $28.5 million in the second quarter of the prior year, a decrease of $1.2 million or 4.2%. Net sales results were varied by markets, the medical market increased by $1.5 million or 11.6% with medical devices accounting for most of that increase. The industrial market decreased by $3.1 million or 25.8% of sales in the second quarter of 2019 as compared to the same quarter of 2018. Net sales from the aerospace and defense markets increased by $0.4 million or 7.3% in the second quarter of 2019 as compared to the second quarter of 2018.

 

Net sales were $55.5 million in the six months ended 2019, as compared to $55.0 million in the prior year, an increase of $0.5 million or 0.9%. Net sales results were varied by markets, the medical market increased by 6.2 million, or 27.5% with medical component products accounting for 42% of the increase and medical devices 58%. The industrial market decreased by $5.4 million of sales or 23.3%. Net sales from the aerospace and defense markets decreased $0.4 million or 4.4%.

 

 

Net sales by our major EMS industry markets for the three and six months ended June 30, 2019 and 2018 were as follows (in thousands):

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2019

   

2018

   

%

   

2019

   

2018

   

%

 
    $     $    

Change

    $     $    

Change

 

Aerospace and Defense

    4,582       4,269       7.3       8,827       9,230       (4.4 )

Medical

    14,024       12,565       11.6       28,963       22,715       27.5  

Industrial

    8,686       11,704       (25.8 )     17,667       23,040       (23.3 )

Total Net Sales

    27,292       28,538       (4.4 )     55,457       54,985       0.9  

 

 

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

 

   

Three Months Ended June 30, 2019

 
   

Product/ Service

Transferred

Over Time

   

Product

Transferred at

Point in Time

   

Noncash

Consideration

   

Total Net Sales

by Market

 

Aerospace and Defense

  $ 4,155     $ 222     $ 205     $ 4,582  

Medical

    13,145       218       661       14,024  

Industrial

    7,428       878       380       8,686  

Total net sales

  $ 24,728     $ 1,318     $ 1,246     $ 27,292  

 

 

   

Six Months Ended June 30, 2019

 
   

Product/ Service

Transferred

Over Time

   

Product

Transferred at

Point in Time

   

Noncash

Consideration

   

Total Net Sales

by Market

 

Aerospace and Defense

  $ 8,258     $ 242     $ 327     $ 8,827  

Medical

    27,640       253       1,070       28,963  

Industrial

    15,568       1,475       624       17,667  

Total net sales

  $ 51,466     $ 1,970     $ 2,021     $ 55,457  

 

 

Net sales by timing of transfer of goods and services for the three and six months ended June 30, 2018 is as follows (in thousands):

 

   

Three Months Ended June 30, 2018

 
   

Product/ Service

Transferred

Over Time

   

Product

Transferred at

Point in Time

   

Noncash

Consideration

   

Total Net Sales

by Market

 

Aerospace and Defense

  $ 4,001     $ 72     $ 196     $ 4,269  

Medical

    11,934       87       544       12,565  

Industrial

    10,023       1,206       475       11,704  

Total net sales

  $ 25,958     $ 1,365     $ 1,215     $ 28,538  

 

 

   

Six Months Ended June 30, 2018

 
   

Product/ Service

Transferred

Over Time

   

Product

Transferred at

Point in Time

   

Noncash

Consideration

   

Total Net Sales

by Market

 

Aerospace and Defense

  $ 8,717     $ 120     $ 393     $ 9,230  

Medical

    21,201       569       945       22,715  

Industrial

    20,089       2,049       902       23,040  

Total net sales

  $ 50,007     $ 2,738     $ 2,240     $ 54,985  

 

 

Backlog

 

Our 90-day shipment backlog as of June 30, 2019 was $31 million, flat from the beginning of the quarter and a 31.4% increase as compared to the prior year. Backlog for our medical customers has decreased 3.2% from the beginning of the quarter and increased 55.0% from the prior year. The aerospace and defense backlog increased 13.4% from the beginning of the quarter and increased 22.7% from the prior year. Our industrial customers’ backlog decreased 3.3% from the beginning of the quarter and increased 4.1% from the prior year. Our backlog consists of firm purchase orders we expect to ship in the next 90 days, with any remaining amounts to be transferred within 180 days.

 

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

 

   

Shipment Backlog as of the Period Ended

 
   

June 30,

   

March 31,

   

June 30,

 
   

2019

   

2019

   

2018

 

Aerospace and Defense

  $ 6,833     $ 6,027     $ 5,568  

Medical

    16,701       17,256       10,776  

Industrial

    7,863       8,130       7,552  

Total Backlog

  $ 31,397     $ 31,413     $ 23,896  

 

 

Our 90-day backlog varies due to order size, manufacturing delays, contract terms and conditions and timing from customer delivery schedules and releases. These variables cause inconsistencies in comparing the backlog from one period to the next. Our total shipment backlog was $58.7 million at June 30, 2019 compared to $40.1 million at June 30, 2018.

 

 

Gross Profit

 

Gross profit as a percent of net sales for the three months ended June 30, 2019 and 2018 was 8.5% and 13.4%, respectively. Gross profit as a percentage of sales for the six months ended June 30, 2019 and 2018 was 9.5% and 12.4%, respectively. The decline in gross profit both comparisons was driven by product mix and operational inefficiencies due to component shortages.

 

Selling Expense

 

Selling expenses for the three months ended June 30, 2019 and 2018 was $0.8 million or 2.9% of sales and $1.0 million or 3.6% of sales, respectively. Selling expense for the six months ended June 30, 2019 and 2018 was $1.6 million or 2.8% of sales and $2.1 million or 3.8% of sales, respectively. The decrease in both the three and six month periods is due to lower sales incentives and timing of events.

 

General and Administrative Expense

 

General and administrative expenses for the three months ended June 30, 2019 and 2018 were $2.7 million or 10.0% of sales and $2.0 million or 7.2% of sales, respectively. General and administrative expenses for the six months ended June 30, 2019 and 2018 were $5.0 million or 9.1% of sales and $4.2 million or 7.6% of sales, respectively. The increase in both comparisons was due to additional spend related to our recently implemented ERP system and one-time expenditures to improve operations.

 

Loss from Operations

 

Second quarter 2019 loss from operations was $1.2 million compared to income of $0.7 million for the second quarter in 2018. The increase in loss from operations for the period was due to the gross profit decline and higher general and administrative expenses.

 

Loss from operations for the first six months in 2018 was $1.3 million as compared to income of $0.6 million for the same comparable period in 2018.  The decrease to a loss from operations for the period was due to the gross profit decline and higher general and administrative expenses.

 

Income Taxes

 

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

 

Net Income (Loss)

 

Net loss for the three and six months ended June 30, 2019 was $1.6 million and $1.9 million, respectively. Net income for the three months ended June 30, 2018 was $0.4 million and net loss for six month ended June 30, 2018 was $0.2 million.

 

 

 

Liquidity and Capital Resources

 

Net cash used in operating activities for the six months ended June 30, 2019 was $2.2 million. The increase in accounts receivable and unbilled revenue and decrease in accounts payable drove this cash outflow, partially offset by a decrease inventory.

 

Net cash provided by operating activities for the six months ended June 30, 2018 was $2.7 million. The noncash addback of depreciation and amortization, along with an increase in accounts payable, has positively impacted cash flows, offset by an increase in accounts receivable.

 

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 June 30, 2019, we had outstanding advances of $12.3 million under the line of credit and unused availability of $3.7 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 $21.9 million and $21.0 million as of June 30, 2019 and December 31, 2018, respectively.

 

The BofA credit agreement as amended provides for, among other things, a fixed charge coverage ratio of not less than (i) 1.0 to 1.0 for each period of four fiscal quarters, commencing with the period of four fiscal quarters ending December 31, 2018. As of June 30, 2019 we did not meet the fixed charge cover ratio which was waived by BofA in the second amendment to the credit agreement received on August 13, 2019.

 

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

 

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:

 

 

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.

 

 

PART II

 

 

ITEM 1. LEGAL PROCEEDINGS

 

We are subject to various legal proceedings and claims that arise in the ordinary course of business.

 

ITEM 1A. RISK FACTORS

 

We are affected by the risks specific to us as well as factors that affect all businesses operating in a global market. The significant factors known to us that could materially adversely affect our business, financial condition or operating results or could cause our actual results to differ materially from our expectations are described in our annual report on Form 10-K for the fiscal year ended under the heading “Part I – Item 1A.Risk Factors.” Other than as noted below, there have been no material changes in the risk factors from those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2017.

 

 

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

 

April 1 - April 30, 2019

    -     $ -       -     $ 153,148  

May 1 - May 30, 2019

    11,976     $ 3.99       11,976     $ 104,130  

June 1 - June 30, 2019

    16,387     $ 3.96       16,387     $ 37,661  

Total

    28,363     $ 3.87       28,363     $ 37,661  

 

As of June 30, 2019, we had a $250,000 share repurchase program with $37,661 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

 

 

10.1*

Second Amendment to Loan and Security Agreement and Waiver.

 

 

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 June 30, 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

 

 

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: August 14, 2019

by /s/ Jay D. Miller

 

Jay D. Miller

Chief Executive Officer and President

Nortech Systems Incorporated

 

     
Date: August 14, 2019

by /s/ Constance M. Beck

 

Constance M. Beck

Vice President and Chief Financial Officer

Nortech Systems Incorporated

 

 

 

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