Company Quick10K Filing
Nortech Systems
Price2.98 EPS-1
Shares3 P/E-5
MCap8 P/FCF-34
Net Debt2 EBIT-1
TEV10 TEV/EBIT-17
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-03-31 Filed 2020-05-13
10-K 2019-12-31 Filed 2020-03-19
10-Q 2019-09-30 Filed 2019-11-12
10-Q 2019-06-30 Filed 2019-08-14
10-Q 2019-03-31 Filed 2019-05-15
10-K 2018-12-31 Filed 2019-04-01
10-Q 2018-09-30 Filed 2018-11-14
10-Q 2018-06-30 Filed 2018-08-14
10-Q 2018-03-31 Filed 2018-05-11
10-K 2017-12-31 Filed 2018-03-27
10-Q 2017-09-30 Filed 2017-11-08
10-Q 2017-06-30 Filed 2017-08-09
10-Q 2017-03-31 Filed 2017-05-11
10-K 2016-12-31 Filed 2017-03-08
10-Q 2016-09-30 Filed 2016-11-02
10-Q 2016-06-30 Filed 2016-08-03
10-Q 2016-03-31 Filed 2016-05-04
10-K 2015-12-31 Filed 2016-03-22
10-Q 2015-09-30 Filed 2015-11-05
10-Q 2015-06-30 Filed 2015-08-05
10-Q 2015-03-31 Filed 2015-05-06
10-K 2014-12-31 Filed 2015-03-11
10-Q 2014-09-30 Filed 2014-11-05
10-Q 2014-06-30 Filed 2014-08-06
10-Q 2014-03-31 Filed 2014-05-07
10-K 2013-12-31 Filed 2014-03-07
10-Q 2013-09-30 Filed 2013-11-14
10-Q 2013-06-30 Filed 2013-08-09
10-Q 2013-03-31 Filed 2013-05-10
10-K 2012-12-31 Filed 2013-03-08
10-Q 2012-09-30 Filed 2012-11-14
10-Q 2012-06-30 Filed 2012-08-10
10-Q 2012-03-31 Filed 2012-05-11
10-K 2011-12-31 Filed 2012-03-09
10-Q 2011-09-30 Filed 2011-11-04
10-Q 2011-06-30 Filed 2011-08-12
10-Q 2011-03-31 Filed 2011-05-13
10-K 2010-12-31 Filed 2011-03-11
10-Q 2010-09-30 Filed 2010-11-12
10-Q 2010-06-30 Filed 2010-08-12
10-Q 2010-03-31 Filed 2010-05-14
10-K 2009-12-31 Filed 2010-03-15
8-K 2020-05-13
8-K 2020-04-15
8-K 2020-03-19
8-K 2019-09-17
8-K 2019-09-09
8-K 2019-05-17
8-K 2019-05-10
8-K 2019-04-02
8-K 2019-02-27
8-K 2019-02-19
8-K 2018-12-19
8-K 2018-11-14
8-K 2018-10-05
8-K 2018-08-15
8-K 2018-05-09
8-K 2018-04-16
8-K 2018-03-27
8-K 2018-02-21
8-K 2018-01-08
8-K 2017-12-29

NSYS 10Q Quarterly Report

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
Note 8. Subsequent Events
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 ex_186289.htm
EX-31.2 ex_186290.htm
EX-32 ex_186291.htm

Nortech Systems Earnings 2020-03-31

Balance SheetIncome StatementCash Flow
0.10.10.10.00.00.02012201420172020
Assets, Equity
0.10.10.0-0.0-0.1-0.12012201420172020
Rev, G Profit, Net Income
0.10.10.0-0.0-0.1-0.12012201420172020
Ops, Inv, Fin

10-Q 1 nsys20200331_10q.htm FORM 10-Q nsys20200331_10q.htm
 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

 

(Mark One)

 

 

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

 

For the quarterly period ended March 31, 2020

 

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

 

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 May 11, 2020 was 2,657,530.

 

1

 

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION  
      PAGE
  Item 1 -     Financial Statements  
       
    Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) 3
       
    Condensed Consolidated Balance Sheets 4
       
    Condensed Consolidated Statements of Cash Flows 5
       
    Condensed Consolidated Statements of Shareholders’ Equity 6
       
    Condensed Notes to Consolidated Financial Statements 7-16
       
  Item 2 -     Management's Discussion and Analysis of Financial Condition And Results of Operations 17-22
       
  Item 3 -     Quantitative and Qualitative Disclosures About Market Risk 23
       
  Item 4 -     Controls and Procedures 23
   
PART II - OTHER INFORMATION  
   
  Item 1 -     Legal Proceedings 24
       
  Item 1A. -     Risk Factors 24
       
  Item 2 -     Unregistered Sales of Equity Securities, Use of Proceeds  24
       
  Item 3 -     Defaults on Senior Securities 24
       
  Item 4 -     Mine Safety Disclosures 24
       
  Item 5 -     Other Information 24
       
  Item 6 -     Exhibits  25
       
SIGNATURES 26

 

 

2

 

PART

 

ITEM 1. FINANCIAL STATEMENTS

 

 

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES  

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE DATA)

 

   

THREE MONTHS ENDED

 
   

MARCH 31,

 
   

2020

   

2019

 
                 

Net Sales

  $ 27,440     $ 28,165  
                 

Cost of Goods Sold

    24,435       25,204  
                 

Gross Profit

    3,005       2,961  
                 

Operating Expenses

               

Selling Expenses

    621       761  

General and Administrative Expenses

    1,993       2,304  
                 

Total Operating Expenses

    2,614       3,065  
                 

Income (Loss) From Operations

    391       (104 )
                 

Other Expense

               

Interest Expense

    (224 )     (245 )
                 

Income (Loss) Before Income Taxes

    167       (349 )
                 

Income Tax Expense

    30       14  
                 

Net Income (Loss)

  $ 137     $ (363 )
                 

Net Income (Loss) Per Common Share:

               
                 

Basic (in dollars per share)

  $ 0.05     $ (0.14 )

Weighted Average Number of Common Shares Outstanding - Basic (in shares)

    2,657,530       2,659,859  
                 

Diluted (in dollars per share)

  $ 0.05     $ (0.14 )

Weighted Average Number of Common Shares Outstanding - Diluted (in shares)

    2,668,590       2,659,859  
                 

Other comprehensive income (loss)

               

Foreign currency translation

    (61 )     56  

Comprehensive income (loss), net of tax

  $ 76     $ (307 )

 

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

 

3

 

 

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS 

(IN THOUSANDS, EXCEPT SHARE DATA)

 

   

MARCH 31,

   

DECEMBER 31,

 
   

2020

    2019(1)  

ASSETS

 

(Unaudited)

         

Current Assets

               

Cash

  $ 730     $ 351  

Restricted Cash

    244       309  

Accounts Receivable, less allowances of $325 and $335

    20,226       18,558  

Inventories

    15,363       14,279  

Contract Assets

    6,774       7,659  

Prepaid Expenses and Other Current Assets

    2,119       2,128  

Total Current Assets

    45,456       43,284  
                 

Property and Equipment, Net

    9,338       9,581  

Operating Lease Assets

    4,637       4,827  

Goodwill

    2,375       2,375  

Other Intangible Assets, Net

    1,297       1,343  

Total Assets

  $ 63,103     $ 61,410  
                 

LIABILITIES AND SHAREHOLDERS' EQUITY

               

Current Liabilities

               

Current Maturities of Long-Term Debt

  $ 444     $ 444  

Current Portion of Finance Lease Obligation

    611       557  

Current Portion of Operating Lease Obligations

    825       858  

Accounts Payable

    16,369       14,014  

Accrued Payroll and Commissions

    2,800       3,493  

Other Accrued Liabilities

    2,738       2,866  

Total Current Liabilities

    23,787       22,232  
                 

Long-Term Liabilities

               

Long Term Line of Credit

    10,255       10,088  

Long-Term Debt, Net

    3,069       3,179  

Long Term Finance Lease Obligation, Net

    1,537       1,451  

Long-Term Operating Lease Obligation, Net

    4,252       4,366  

Other Long-Term Liabilities

    112       118  

Total Long-Term Liabilities

    19,225       19,202  

Total Liabilities

    43,012       41,434  
                 

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: 2,657,530 and 2,657,530 Shares Issued and Outstanding, respectively

    27       27  

Additional Paid-In Capital

    15,787       15,748  

Accumulated Other Comprehensive Loss

    (318 )     (257 )

Retained Earnings

    4,345       4,208  

Total Shareholders' Equity

    20,091       19,976  

Total Liabilities and Shareholders' Equity

  $ 63,103     $ 61,410  

 

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

 

(1) The balance sheet at December 31, 2019 has been derived from the audited financial statements at that date

 

4

 

 

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN THOUSANDS)

 

   

THREE MONTHS ENDED

 
   

MARCH 31,

 
   

2020

   

2019

 

Cash Flows From Operating Activities

               

Net Income (Loss)

  $ 137     $ (363 )

Adjustments to Reconcile Net (Loss) Income to Net Cash

               

Provided by (Used In) Operating Activities

               

Depreciation and Amortization

    567       570  

Compensation on Stock-Based Awards

    39       160  

Change in Accounts Receivable Allowance

    (10 )     24  

Change in Inventory Reserves

    93       51  

Changes in Current Operating Items

               

Accounts Receivable

    (1,644 )     (3,001 )

Inventories

    (1,165 )     985  

Contract Assets

    885       (2,154 )

Prepaid Expenses and Other Current Assets

    11       (749 )

Income Taxes

    (88 )     (70 )

Accounts Payable

    2,336       3,209  

Accrued Payroll and Commissions

    (691 )     (611 )

Other Accrued Liabilities

    (4 )     511  

Net Cash Provided by (Used in) Operating Activities

    466       (1,438 )

Cash Flows from Investing Activities

               

Purchase of Intangible Asset

    (6 )     -  

Purchases of Property and Equipment

    (65 )     (396 )

Net Cash Used in Investing Activities

    (71 )     (396 )

Cash Flows from Financing Activities

               

Net Change in Line of Credit

    167       2,030  

Principal Payments on Long-Term Debt

    (124 )     (328 )

Principal Payments on Financing Leases

    (123 )     (65 )

Share Repurchases

    -       (13 )

Net Cash (Used In) Provided By Financing Activities

    (80 )     1,624  
                 

Effect of Exchange Rate Changes on Cash

    (1 )     -  
                 

Net Change in Cash

    314       (210 )

Cash - Beginning of Period

    660       947  

Cash - Ending of Period

  $ 974     $ 737  
                 

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

               

Cash

  $ 730     $ 310  

Restricted Cash

    244       427  

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

  $ 974     $ 737  
                 

Supplemental Disclosure of Cash Flow Information:

               

Cash Paid During the Period for Interest

  $ 222     $ 224  

Cash Paid (Refunded) During the Period for Income Taxes

    40       -  
                 

Supplemental Noncash Investing and Financing Activities:

               

Property and Equipment Purchases in Accounts Payable

    23       78  

Equipment Acquired under Finance Lease

    262       -  

 

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

 

5

 

 

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(UNAUDITED)

(IN THOUSANDS)

 

                           

Accumulated

           

Total

 
                   

Additional

   

Other

   

Retained

    Shareholders'  
   

Preferred

   

Common

   

Paid-In

   

Comprehensive

    Income     Equity  
                                                 

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  
                                                 

BALANCE DECEMBER 31, 2019

    250       27       15,748       (257 )     4,208       19,976  

Net Income

    -       -       -       -       137       137  

Foreign currency translation adjustment

    -       -       -       (61 )     -       (61 )

Compensation on stock-based awards

    -       -       39       -       -       39  
                                                 

BALANCE MARCH 31, 2020

  $ 250     $ 27     $ 15,787     $ (318 )   $ 4,345     $ 20,091  

 

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

 

6

 

CONDENSED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

 

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements for the interim periods have been prepared in accordance with Generally Accepted Accounting Principles in the United States of America (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the financial information and footnotes required by GAAP for complete financial statements, although we believe the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year or for any other interim period. In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

 

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In preparing these condensed consolidated financial statements, we have made our best estimates and judgments of certain amounts included in the condensed consolidated financial statements, giving due consideration to materiality. Changes in the estimates and assumptions used by us could have a significant impact on our financial results, since actual results could differ from those estimates.

 

Principles of Consolidation

The condensed consolidated financial statements include the accounts of Nortech Systems Incorporated and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

 

Revenue Recognition

Our revenue is comprised of product, engineering services and repair services. All revenue is recognized when the Company satisfies its performance obligation(s) under the contract by transferring the promised product or service to our customer either when (or as) our customer obtains control of the product or service, with the majority of our revenue being recognized over time including goods produced under contract manufacturing agreements and services revenue. A performance obligation is a promise in a contract to transfer a distinct product or service to a customer. A contract’s transaction price is allocated to each distinct performance obligation. The majority of our contracts have a single performance obligation. Revenue is recorded net of returns, allowances and customer discounts. Our net sales for services were less than 10% of our total sales for all periods presented, and accordingly, are included in net sales in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). Sales, value add, and other taxes collected from customers and remitted to governmental authorities are accounted for on a net (excluded from revenues) basis. Shipping and handling costs charged to our customers are included in net sales, while the corresponding shipping expenses are included in cost of goods sold.

 

7

 

Stock-Based Awards

Following is the status of all stock options as of March 31, 2020:

 

   

Shares

   

Weighted-Average Exercise Price Per Share

   

Weighted-Average Remaining Contractual Term

(in years)

   

Aggregate Intrinsic Value
(in thousands)

 

Outstanding - January 1, 2020

    372,200     $ 3.85                  

Granted

    11,300       2.95                  

Exercised

                               

Cancelled

    (3,200 )     3.29                  

Outstanding - March 31, 2020

    380,300     $ 3.83       8.37     $ 24,285  

Exercisable - March 31, 2020

    107,557     $ 4.06       7.44     $ 8,095  

 

In May 2017, the shareholders approved the 2017 Stock Incentive Plan which authorized the issuance of 400,000 shares, an additional 50,000 shares were authorized in March 2020. There were 11,300 stock options granted during the three months ended March 31, 2020.

 

Total compensation expense was $39 and $44 for the three ended March 31, 2020 and 2019, respectively. As of March 31, 2020, there was $341 of unrecognized compensation which will vest over the next 2.78 years.

 

In November 2010, the Board of Directors adopted the Nortech Systems Incorporated Equity Appreciation Rights Plan (“2010 Plan”). The total number of Equity Appreciation Right Units (“Units”) that can be issued under the 2010 Plan shall not exceed an aggregate of 1,000,000 Units as amended and restated on March 11, 2015. During the three months ended March 31, 2019, there were 137,500 units granted. There were no units granted during the three months ended March 31, 2020.

 

During the three months ended March 31, 2019, there were 132,500 shares awarded that vested immediately that had expense of $116 during the first quarter.

 

Net Income (Loss) per Common Share

For the three months ended March 31, 2020 there were 2,668,590 diluted shares with $0.05 earnings per diluted share. For the three months ended March 31, 2019, all stock options are deemed to be antidilutive as there was a net loss and, therefore, were not included in the computation of income per common share amount.

 

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, 2020 balance included lockbox deposits that are temporarily restricted due to timing at the period end. The lockbox deposits are applied against our line of credit the next business day. As of March 31, 2020, we had no outstanding letters of credit.

 

8

 

Accounts Receivable and Allowance for Doubtful Accounts

Credit is extended based upon an evaluation of the customer’s financial condition and, while collateral is not required, the Company periodically receives surety bonds that guarantee payment. Credit terms are consistent with industry standards and practices. Trade accounts receivable have been reduced by an allowance for doubtful accounts of $325 at March 31, 2020 and $335 at December 31, 2019.

 

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,

 
   

2020

   

2019

 

Raw Materials

  $ 15,798     $ 15,245  

Work in Process

    588       479  

Finished Goods

    556       41  

Reserves

    (1,579 )     (1,486 )
                 

Total

  $ 15,363     $ 14,279  

 

9

 

Other Intangible Assets

Other intangible assets at March 31, 2020 and December 31, 2019 are as follows:

    

           

March 31, 2020

 
           

Gross

                 
           

Carrying

   

Accumulated

   

Net Book

 
   

Years

   

Amount

   

Amortization

   

Value

 

Customer Relationships

    9     $ 1,302     $ 687     $ 615  

Intellectual Property

    3       100       100       -  

Trade Names

    20       814       193       621  

Patents

    7       61       -       61  

Totals

          $ 2,277     $ 980     $ 1,297  

 

           

December 31, 2019

 
           

Gross

                 
           

Carrying

   

Accumulated

   

Net Book

 
   

Years

   

Amount

   

Amortization

   

Value

 

Customer Relationships

    9     $ 1,302     $ 651     $ 651  

Intellectual Property

    3       100       95       5  

Trade Names

    20       814       183       631  

Patents

    7       56       -       56  

Totals

          $ 2,272     $ 929     $ 1,343  

 

Amortization expense for the three months ended March 31, 2020 and 2019 was $51 and $54, respectively.

 

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

 

Year

 

Amount

 

Remainder of 2020

    139  

2021

    185  

2022

    185  

2023

    185  

Thereafter

    542  

Total

  $ 1,236  

 

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, 2020 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.

 

10

 

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 ended March 31, 2020 and 2019, respectively.

 

Accounting Pronouncements Issued But Not Yet Adopted

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (ASC 326): Measurement of Credit Losses on Financial Instruments,” which amends the guidance on the impairment of financial instruments. The amendments in this update removes the thresholds that entities apply to measure credit losses on financial instruments measured at amortized cost, such as loans, trade receivables, reinsurance recoverables, off-balance-sheet credit exposures, and held-to-maturity securities. Under current U.S. GAAP, entities generally recognize credit losses when it is probable that the loss has been incurred. The guidance removes all current recognition thresholds and introduces the new current expected credit loss (“CECL”) model which will require entities to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that an entity expects to collect over the instrument’s contractual life. The new CECL model is based upon expected losses rather than incurred losses. The amendments in this update are effective for periods beginning after December 15, 2022; early adoption is permitted. We are currently evaluating the impact of this guidance on our financial condition and results of operations.

 

 

NOTE 2. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

 

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and accounts receivable. With regard to cash, we maintain our excess cash balances in checking accounts at primarily two financial institutions, one in the United States and one in China. The account in the United States may at times exceed federally insured limits. Of the $974 in cash at March 31, 2020, approximately $703 was held at banks located in China. We grant credit to customers in the normal course of business and do not require collateral on our accounts receivable.

 

Our largest customer has two divisions that together accounted for 10% or more of our net sales during the three month period ended and March 31, 2020 and 2019. One division accounted for approximately 24% and 23% of net sales for the three March 31, 2020 and 2019, respectively. The other division accounted for approximately 2% of net sales for the three month period ended March 31, 2020 and , and approximately 3% net sales for the three month period ended March 31, 2019. Together they accounted for approximately 26% and 26% of net sales for the three March 31, 2020 and 2019, respectively. Accounts receivable from the customer at March 31, 2020 and December 31, 2019 represented approximately 42% and 36% of our total accounts receivable, respectively.

 

Export sales represented approximately 12% and 19% of net sales for the three months ended March 31, 2020 and 2019, respectively.

 

11

 

 

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 88 % and 95% of our revenue for both the three months ended March 31, 2020 and 2019, respectively. Revenues under these agreements are generally recognized over time using an input measure based upon the proportion of actual costs incurred.

 

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

 

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

 

12

 

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, 2020 was as follows (in thousands):

 

Three Months Ended March 31, 2020

       

Outstanding at January 1, 2020

  $ 7,659  

Increase (decrease) attributed to:

       

Transferred to receivables from contract assets recognized

    (5,712 )

Product transferred over time

    4,827  

Outstanding at March 31, 2020

  $ 6,774  

 

We expect substantially all the remaining performance obligations for the contract assets recorded as of March 31, 2020, to be transferred to receivables within 90 days, with any remaining amounts to be transferred within 180 days. We bill our customers upon shipment with payment terms of up to 120 days.

 

The following tables summarize our net sales by market for the three ended March 31, 2020 (in thousands):

 

   

Three Months Ended March 31, 2020

 
   

Product/ Service Transferred Over Time

   

Product Transferred at Point in Time

   

Noncash Consideration

   

Total Net Sales by Market

 

Medical

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

Industrial

    6,016       970       323       7,309  

Aerospace and Defense

    4,317       134       219       4,670  

Total net sales

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

 

 

   

Three Months Ended March 31, 2019

 
   

Product/ Service Transferred Over Time

   

Product Transferred at Point in Time

   

Noncash Consideration

   

Total Net Sales by Market

 

Medical

  $ 14,495     $ 35     $ 409     $ 14,939  

Industrial

    8,140       597       244       8,981  

Aerospace and Defense

    4,103       20       122       4,245  

Total net sales

  $ 26,738     $ 652     $ 775     $ 28,165  

 

13

 

 

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 4.8% and 5.6% as of March 31, 2020 and 2019, respectively. We had borrowings on our line of credit of $10,255 and $10,088 outstanding as of March 31, 2020 and December 31, 2019, respectively. There are no subjective acceleration clauses under the credit agreement that would accelerate the maturity of our outstanding borrowings.

 

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

 

The Bank of America Credit Agreement provides for, among other things, a Fixed Charge Coverage Ratio of not less than (i) 1.0 to 1.0, for the three months ending December 31, 2019, six months ending March 31, 2020, nine months ending June 30, 2020 and twelve months ending September 30, 2020 and each Fiscal Quarter end thereafter. The Company met the covenants for the three months ended March 31, 2020.

 

The availability under the line is subject to borrowing base requirements, and advances are at the discretion of the lender. At March 31, 2020, we had unused availability under our line of credit of $4,115, supported by our borrowing base. The line is secured by substantially all of our assets.

 

Long-term debt at March 31, 2020 and December 30, 2019 consisted of following:

 

   

March 31,

   

December 31,

 
   

2020

   

2019

 

Real estate term notes bearing interest at one-month LIBOR + 2.25% (3.3% and 4.1% as of March 31, 2020 and December 31, 2019, respectively) maturing June 15, 2022 with monthly payments of approximately $41 plus interest secured by substantially all assets.

  $ 3,631     $ 3,755  
      3,631       3,755  
                 

Debt issuance Costs

    (118 )     (132 )
                 

Total long-term debt

    3,513       3,623  

Current maturities of long-term debt

    (444 )     (444 )

Long-term debt - net of current maturities

  $ 3,069     $ 3,179  

 

14

 

 

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, 2020, we do not have material lease commitments that have not commenced.

 

Supplemental balance sheet information related to leases was as follows:

 

 

Balance Sheet Location

 

March 31, 2020

 

Assets

         

Operating lease assets

Operating lease assets

  $ 4,637  

Finance lease assets

Property, Plant and Equipment

    2,709  

Total leased assets

    7,346  
           

Liabilities

         

Current

         

Current operating lease liabilities

Current Portion of Operating Lease Obligations

    825  

Current finance lease liabilities

Current Portion of Finance Lease Obligations

    611  

Noncurrent

         

Long-term operating lease liabilities

Long Term Operating Lease Liabilities, Net

    4,252  

Long term finance lease liabilities

Long Term Finance Lease Obligations, Net

    1,537  

Total lease liabilities

  $ 7,225  

 

Supplemental cash flow information related to leases was as follows:

 

   

Three Months Ended

March 31,

 
   

2020

 

Operating leases

       

Cash paid for amounts included in the measurement of lease liabilities

  $ 210  

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

  $ 0  

 

15

 

Maturities of lease liabilities were as follows:

 

   

Operating

Leases

   

Finance Leases

   

Total

 

Remaining 2020

  $ 645     $ 531     $ 1,176  

2021

    722       708       1,430  

2022

    726       557       1,283  

2023

    738       302       1,040  

2024

    798       250       1,048  

Thereafter

    2,582       16       2,598  

Total lease payments

  $ 6,211     $ 2,364     $ 8,575  

Less: Interest

    (1,134

)

    (216 )     (1,350

)

Present value of lease liabilities

  $ 5,077     $ 2,148     $ 7,225  

 

The lease term and discount rate at March 31, 2020 were as follows:

 

Weighted-average remaining lease term (years)

       

Operating leases

    7.7  

Finance leases

    3.7  

Weighted-average discount rate

       

Operating leases

    4.8

%

Finance leases

    5.2

%

 

 

NOTE 6. INCOME TAXES

 

On a quarterly basis, we estimate what our effective tax rate will be for the full fiscal year and record a quarterly income tax provision based on the anticipated rate. As the year progresses, we refine our estimate based on the facts and circumstances, including discrete events, by each tax jurisdiction. Our effective tax rate for the three ended March 31, 2020 and 2019 was 18% and (4%), respectively.

 

 

NOTE 7. RELATED PARTY TRANSACTIONS

 

During three months ended March 31, 2020, we did business with Printed Circuits, Inc. which is 90% owned by the Kunin family, of which, owns a majority of our stock. We had expenses incurred totaling $14 and $51 during the three months ended March 31, 2020 and 2019, respectively to Printed Circuits, Inc.

 

 

NOTE 8. SUBSEQUENT EVENTS

 

On April 15, 2020, we entered into a Promissory Note with Bank of America, N.A. (the “Promissory Note”), which provides for an unsecured loan of $6.1 million pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act and applicable regulations (the “CARES Act”) of which; funds were received on April 22, 2020. The Promissory Note has a term of 2 years with a 1% per annum interest rate. Payments are deferred for 6 months from the date of the Promissory Note and we can apply for forgiveness of the Promissory Note after 60 days. Forgiveness of the Promissory Note will be determined in accordance with the provisions of the Cares Act and applicable regulations. Any principal and interest amounts outstanding after the determination of amounts forgiven will be repaid on a monthly basis.

 

16

 

 

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

 

Overview

 

We are a Maple Grove, Minnesota based leading provider of design and manufacturing solutions for complex electromechanical systems, assemblies and components. We primarily serve the medical aerospace and defense, and industrial markets. Our design services span concept development to commercial design, and include software, electrical, mechanical, and biomedical engineering. Our manufacturing and supply chain capabilities are vertically integrated around wire, cable and interconnect assemblies, printed circuit board assemblies, as well as system-level assembly, integration and final test. We maintain facilities in Bemidji, Blue Earth, Mankato, Merrifield, and Milaca, Minnesota; Monterrey, Mexico; and Suzhou, China. All of our facilities are certified to one or more of the ISO/AS standards, including 9001, AS9100 and 13485, with most having additional certifications based on the needs of the customers they serve.

 

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,

 
   

2020

   

2019

 

Net Sales

    100.0

%

    100.0

%

Cost of Goods Sold

    89.0       89.5  

Gross Profit

    11.0       10.5  
                 

Selling Expenses

    2.3       2.7  

General and Administrative Expenses

    7.3       8.1  

Income (Loss) from Operations

    1.4       (0.3 )
                 

Interest Expense

    (0.8 )     (0.9 )

Income (Loss) Before Income Taxes

    0.6       (1.2 )
                 

Income Tax Expense

    0.1       0.1  

Net Income (Loss)

    0.5

%

    (1.3

%)

 

 

 

 

17

  

Net Sales

 

Net sales were $27.4 million in the first quarter of 2020, as compared to $28.2 million in the first quarter of the prior year, a decrease of $0.8 million or 2.6%. Net sales results were varied by markets, the medical market increased by $0.5 million or 3.5% with medical devices accounting for the increase. The industrial market sector was down $1.7 million or 18.6% in the first quarter of 2020 as compared to the same quarter of 2019. Net sales from the aerospace and defense markets increased by $0.4 million or 10.0% in the first quarter of 2020 as compared to the first quarter of 2019.

 

Net sales by our major industry markets for the three months ended March 31, 2020 and 2019 were as follows (in thousands):

 

   

Three months Ended March 31,

 
   

2020

   

2019

   

%

 
    $     $    

Change

 

Medical

    15,461       14,939       3.5  

Industrial

    7,309       8,981       (18.6 )

Aerospace and Defense

    4,670       4,245       10.0  

Total Net Sales

    27,440       28,165       (2.6 )

 

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

 

   

Three Months Ended March 31, 2020

 
   

Product/ Service Transferred Over Time

   

Product Transferred at Point in Time

   

Noncash Consideration

   

Total Net Sales by Market

 

Medical

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

Industrial

    6,016       970       323       7,309  

Aerospace and Defense

    4,317       134       219       4,670  

Total net sales

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

 

18

 

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

 

   

Three Months Ended March 31, 2019

 
   

Product/ Service Transferred Over Time

   

Product Transferred at Point in Time

   

Noncash Consideration

   

Total Net Sales by Market

 

Medical

  $ 14,495     $ 35     $ 409     $ 14,939  

Industrial

    8,140       597       244       8,981  

Aerospace and Defense

    4,103       20       122       4,245  

Total net sales

  $ 26,738     $ 652     $ 775     $ 28,165  

 

Backlog

 

Our 90-day shipment backlog as of March 31, 2020 was $27.5 million, a 0.8% increase from the beginning of the quarter and a 12.5% decrease from the prior year. Backlog for our medical customers has decreased 1.6% from the beginning of the quarter and decreased 17.0% from the prior year. Our industrial customers’ backlog increased 11.1% from the beginning of the quarter and decreased 21.9% from the prior year. The aerospace and defense backlog decreased 2.6% from the beginning of the quarter and increased 13.0% from the prior year. Our backlog consists of firm purchase orders we expect to ship in the next 90 days, with any remaining amounts to be transferred within 180 days.

 

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

 

   

Shipment Backlog as of the Period Ended

 
   

March 31,

   

December 31,

   

March 31,

 
   

2020

   

2019

   

2019

 

Medical

  $ 14,330     $ 14,564     $ 17,256  

Industrial

    6,352       5,716       8,130  

Aerospace and Defense

    6,812       6,994       6,027  

Total 90-Day Backlog

  $ 27,494     $ 27,274     $ 31,413  

 

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 $53.0 million for both periods ended March 31, 2020 and March 31, 2019.

 

Gross Profit

 

Gross profit as a percent of net sales 11.0% and 10.5% for the three months ended March 31, 2020 and 2019, respectively. This increase in gross profit as a percent of net sales is mainly due to product and customer mix.

 

19

  

Selling Expense

 

Selling expenses for the three months ended March 31, 2020 and 2019 was $0.6 million or 2.3% of sales and $0.8 million or 2.7% of sales, respectively. The decrease in selling expenses for 2020 is due to lower headcount and consulting costs.

 

General and Administrative Expense

 

General and administrative expenses for the three months ended March 31, 2020 and 2019, were $2.0 million or 7.3% of sales and $2.3 million or 8.1% of sales, respectively. This decrease is due to lower headcount and consulting costs.

 

Income (Loss) before Income Taxes

 

First quarter 2020 income from operations was $0.2 million compared to a loss of $0.3 million for the first quarter in 2019.

 

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, 2020 and 2019 was 18% and (4%), respectively.

 

Net Income (Loss)

 

Net income for the three months ended March 31, 2020 was $0.1 million or $0.05 per basic and diluted common share and a net loss for the three months ended March 31, 2019 of $0.4 million or $(0.14) per basic and diluted common share.

 

Liquidity and Capital Resources

 

Net cash provided by operating activities for the three months ended March 31, 2020 was $0.5 million. The increase in accounts payable positively impacted cash flows, partially offset by an increase in accounts receivable. Net cash used in investing of $0.1 million for the three months ended March 31, 2020.

 

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.

 

20

 

On March 31, 2020, we had outstanding advances of $10.3 million under the line of credit and unused availability of $4.1 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 $21.7 million and $21.1 million as of March 31, 2020 and December 31, 2019, respectively.

 

The Bank of America Credit Agreement provides for, among other things, a Fixed Charge Coverage Ratio of not less than (i) 1.0 to 1.0 for the three months ending December 31, 2019, six months ending March 31, 2020, nine months ending June 30, 2020 and twelve months ending September 30, 2020 and each fiscal quarter end thereafter. The Company met the covenants for the three months ended March 31.2020.

 

On April 15, 2020, we entered into a Promissory Note with Bank of America, N.A. (the “Promissory Note”), which provides for an unsecured loan of $6.1 million pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act and applicable regulations (the “CARES Act”) of which; funds were received on April 22, 2020. The Promissory Note has a term of 2 years with a 1% per annum interest rate. Payments are deferred for 6 months from the date of the Promissory Note and we can apply for forgiveness of the Promissory Note after 60 days. Forgiveness of the Promissory Note will be determined in accordance with the provisions of the Cares Act and applicable regulations. Any principal and interest amounts outstanding after the determination of amounts forgiven will be repaid on a monthly basis.

 

Off-Balance Sheet Arrangements

 

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

 

Critical Accounting Policies and Estimates

 

Our significant accounting policies and estimates are summarized in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2019. 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.

 

21

 

Forward-Looking Statements

 

Those statements in the foregoing report that are not historical facts are forward-looking statements made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.

 

 

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

  Increased competition from within the EMS industry or the decision of OEMs to cease or limit outsourcing;
  Changes in the reliability and efficiency of our operating facilities or those of third parties;
  Risks related to availability of labor;
  Increases in certain raw material costs such as copper and oil;
  Commodity and energy cost instability;
  Risks related to FDA noncompliance;
  The loss of a major customer;
  General economic, financial and business conditions that could affect our financial condition and results of operations;
  Increased or unanticipated costs related to compliance with securities and environmental regulation;
  Disruption of global or local information management systems due to natural disaster or cyber-security incident;
 

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

 

The factors identified above are believed to be important factors (but not necessarily all of the important factors) that could cause actual results to differ materially from those expressed in any forward-looking statement made by us. Discussion of these factors is also incorporated in Part I, Item 1A, “Risk Factors,” and should be considered an integral part of Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Unpredictable or unknown factors not discussed herein could also have material adverse effects on forward-looking statements. All forward-looking statements included in this Form 10-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, 2019.

 

22

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable. 

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

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

 

Changes in Internal Control Over Financial Reporting

 

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

 

23

 

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, 2019.

 

Paycheck Protection Program Promisorry Note

On April 15, 2020, we entered into a Promissory Note with Bank of America, N.A. (the “Promissory Note”), which provides for an unsecured loan of $6.1 million pursuant to the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act and applicable regulations (the “CARES Act”) of which; funds were received on April 22, 2020. On April 23, 2020, the Small Business Administration (“SBA”) issued new guidance that questioned whether a public company with substantial market value and access to capital markets would qualify to participate in the PPP under the CARES Act. Subsequently, on April 28, 2020, the secretary of the Treasury and SBA announced that the government will review all PPP loans of more than $2 million for which a borrower applies for forgiveness. Should we be audited or reviewed by the U.S. Department of Treasury as a result of filing an application for forgiveness or otherwise, such audit or review could result in legal and reputational costs as well as significant use of management time. In addition, if we are audited and receive an adverse or negative finding in such audit, we could be required to return up to the full amount of the Promissory Note, which would reduce our liquidity by such amount and potentially subject us to fines and penalties.

 

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

 

As of March 31, 2020, our share repurchase program has expired, and no additional amounts are available for repurchase.

  

ITEM 3. DEFAULTS ON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

24

 

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.

 

 

101*

Financial statements from the quarterly report on Form 10-Q for the quarter ended March 31, 2020, 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

 

25

 

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 13, 2020  

by /s/ Jay D. Miller

     
   

Jay D. Miller

Chief Executive Officer and President

Nortech Systems Incorporated

     
Date: May 13, 2020   by /s/ Constance M. Beck
     
   

Constance M. Beck

Vice President and Chief Financial Officer

Nortech Systems Incorporated

 

 

 

26