nsys20210630

nsys20210630_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 June 30, 2021

☐

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

For the transition period from to

NORTECH SYSTEMS INCORPORATED

Commission file number 0-13257

State of Incorporation: Minnesota

IRS Employer Identification No. 41-1681094

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

Telephone number: (952) 345-2244

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $.01 per share	NSYS	NASDAQ Capital Market

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

Indicate by check mark whether the registrant has submitted electronically 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 July 31, 2021 was 2,660,330.

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION
			PAGE
	Item 1	- Financial Statements

		Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)	3

		Condensed Consolidated Balance Sheets	4

		Condensed Consolidated Statements of Cash Flows	5

		Condensed Consolidated Statements of Shareholders’ Equity	6

		Condensed Notes to Consolidated Financial Statements	7-17

	Item 2	- Management's Discussion and Analysis of Financial Condition And Results of Operations	18-24

	Item 3	- Quantitative and Qualitative Disclosures About Market Risk	25

	Item 4	- Controls and Procedures	25

PART II - OTHER INFORMATION

	Item 1	- Legal Proceedings	26

	Item 1A.	- Risk Factors	26

	Item 2	- Unregistered Sales of Equity Securities, Use of Proceeds	26

	Item 3	- Defaults on Senior Securities	26

	Item 4	- Mine Safety Disclosures	26

	Item 5	- Other Information	26

	Item 6	- Exhibits	27

SIGNATURES			28

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						SIX MONTHS ENDED
	JUNE 30,						JUNE 30,
	2021			2020			2021			2020

Net Sales	$	30,182		$	26,461		$	52,254		$	53,901

Cost of Goods Sold		26,597			23,736			47,108			47,936

Gross Profit		3,585			2,725			5,146			5,965

Operating Expenses
Selling Expenses		571			730			1,292			1,351
General and Administrative Expenses		2,418			1,946			5,214			4,174
Research and Development		207			-			207			-
Restructuring		77			-			296			-
Gain on Sale of Assets		(94	)		-			(94	)		-
Total Operating Expenses		3,179			2,676			6,914			5,525

Income (Loss) From Operations		406			49			(1,769	)		440

Other Expense
Interest Expense		(116	)		(176	)		(202	)		(400	)

Income (Loss) Before Income Taxes		290			(127	)		(1,971	)		40

Income Tax Expense (Benefit)		111			(4	)		(596	)		26

Net Income (Loss)	$	179		$	(123	)	$	(1,375	)	$	14

Net Income (Loss) Per Common Share - Basic	$	0.07		$	(0.05	)	$	(0.52	)	$	0.01

Weighted Average Number of Common Shares Outstanding - Basic		2,658,926			2,657,530			2,659,028			2,657,530

Net (Loss) Income Per Common Share - Diluted	$	0.06		$	(0.05	)	$	(0.52	)	$	0.01

Weighted Average Number of Common Shares Outstanding - Diluted		2,767,991			2,657,530			2,659,028			2,666,532

Other Comprehensive Income (Loss)
Foreign currency translation		58			19			24			(42	)
Comprehensive Income (Loss), net of tax	$	237		$	(104	)	$	(1,351	)	$	(28	)

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE DATA)

	JUNE 30,			DECEMBER 31,
	2021			2020(1)
	(Unaudited)
ASSETS
Current Assets
Cash	$	661		$	352
Restricted Cash		592			3,212
Accounts Receivable, less allowances of $459 and $343		16,670			15,625
Inventories, Net		18,301			13,917
Contract Assets		6,918			5,899
Income Taxes Receivable		1,257			547
Prepaid Expenses and Other Current Assets		1,773			1,485
Total Current Assets		46,172			41,037

Property and Equipment, Net		5,744			6,426
Assets Held For Sale		430			-
Operating Lease Assets		9,336			8,998
Other Intangible Assets, Net		1,130			1,173
Total Assets	$	62,812		$	57,634

LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current Maturities of Line of Credit	$	7,667		$	-
Current Maturities of Long-Term Debt		3,049			1,204
Current Portion of Finance Lease Obligation		641			660
Current Portion of Operating Lease Obligations		1,013			688
Accounts Payable		12,815			11,239
Accrued Payroll and Commissions		3,556			2,870
Other Accrued Liabilities		2,691			2,875
Total Current Liabilities		31,432			19,536

Long-Term Liabilities
Long-Term Line of Credit		-			3,328
Long-Term Debt, Net		3,798			5,865
Long Term Finance Lease Obligation, Net		845			1,152
Long-Term Operating Lease Obligation, Net		8,995			8,889
Other Long-Term Liabilities		329			146
Total Long-Term Liabilities		13,967			19,380

Total Liabilities		45,399			38,916

Commitments and Contingencies

Shareholders' Equity
Preferred Stock, $1 par value; 1,000,000 Shares Authorized: 250,000 Shares Issued and Outstanding		250			250
Common Stock - $0.01 par value; 9,000,000 Shares Authorized: 2,660,330 and 2,659,628 Shares Issued and Outstanding, respectively		27			27
Additional Paid-In Capital		15,862			15,816
Accumulated Other Comprehensive Loss		(13	)		(37	)
Retained Earnings		1,287			2,662
Total Shareholders' Equity		17,413			18,718
Total Liabilities and Shareholders' Equity	$	62,812		$	57,634

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

The balance sheet at December 31, 2020 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,
	2021			2020
Cash Flows From Operating Activities
Net (Loss) Income	$	(1,375	)	$	14
Adjustments to Reconcile Net (Loss) Income to Net Cash
(Used In) Provided by Operating Activities
Depreciation and Amortization		967			1,131
Compensation on Stock-Based Awards		160			75
Change in Accounts Receivable Allowance		116			56
Change in Inventory Reserves		(655	)		(92	)
Gain on Sale of Assets		(94	)		-
Changes in Current Operating Items
Accounts Receivable		(1,153	)		(699	)
Inventories		(3,719	)		(1,105	)
Contract Assets		(1,019	)		1,260
Prepaid Expenses and Other Current Assets		(286	)		357
Income Taxes		(757	)		(117	)
Accounts Payable		1,576			(728	)
Accrued Payroll and Commissions		686			(610	)
Other Accrued Liabilities		120			930
Net Cash (Used in) Provided by Operating Activities		(5,433	)		472
Cash Flows from Investing Activities
Proceeds from Sale of Property and Equipment		94			-
Purchase of Intangible Asset		(77	)		(6	)
Purchases of Property and Equipment		(659	)		(241	)
Net Cash Used in Investing Activities		(642	)		(247	)
Cash Flows from Financing Activities
Net Change in Line of Credit		4,339			(5,696	)
Proceeds from Long-term Debt		-			6,077
Principal Payments on Long-Term Debt		(249	)		(238	)
Principal Payments on Finance Leases		(326	)		(274	)
Net Cash Provided By (Used in) Financing Activities		3,764			(131	)

Net Change in Cash		(2,311	)		94
Cash - Beginning of Period		3,564			660

Cash - Ending of Period	$	1,253		$	754

Reconciliation of cash and restricted cash reported within the condensed consolidated balance sheets
Cash	$	661		$	345
Restricted Cash		592			409
Total cash and restricted cash reported in the condensed consolidated statements of cash flows	$	1,253		$	754

Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Period for Interest	$	81		$	394
Cash Paid During the Period for Income Taxes		156			72

Supplemental Noncash Investing and Financing Activities:
Property and Equipment Purchases in Accounts Payable		-			237
Property Acquired under Operating Lease		858			-
Equipment Acquired under Finance Lease		-			395

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						Total
	Preferred		Common		Paid-In Capital		Comprehensive Income (Loss)			Retained Earnings			Shareholders' Equity

BALANCE MARCH 31, 2020	$	250	$	27	$	15,787	$	(318	)	$	4,345		$	20,091
Net Loss		-		-		-		-			(123	)		(123	)
Foreign currency translation adjustment		-		-		-		19			-			19
Compensation on stock-based awards		-		-		36		-			-			36

BALANCE JUNE 30, 2020	$	250	$	27	$	15,823	$	(299	)	$	4,222		$	20,023

BALANCE DECEMBER 31, 2019	$	250	$	27	$	15,748	$	(257	)	$	4,208		$	19,976
Net Income		-		-		-		-			14			14
Foreign currency translation adjustment		-		-		-		(42	)		-			(42	)
Compensation on stock-based awards		-		-		75		-			-			75

BALANCE JUNE 30, 2020	$	250	$	27	$	15,823	$	(299	)	$	4,222		$	20,023


BALANCE MARCH 31, 2021	$	250	$	27	$	15,837	$	(71	)	$	1,108		$	17,151
Net Income		-		-		-		-			179			179
Foreign currency translation adjustment		-		-		-		58			-			58
Compensation on stock-based awards		-		-		25		-			-			25

BALANCE JUNE 30, 2021	$	250	$	27	$	15,862	$	(13	)	$	1,287		$	17,413

BALANCE DECEMBER 31, 2020	$	250	$	27	$	15,816	$	(37	)	$	2,662		$	18,718
Net Loss		-		-		-		-			(1,375	)		(1,375	)
Foreign currency translation adjustment		-		-		-		24			-			24
Compensation on stock-based awards		-		-		46		-			-			46

BALANCE JUNE 30, 2021	$	250	$	27	$	15,862	$	(13	)	$	1,287		$	17,413

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, 2020. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year or for any other interim period. In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

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

Principles of Consolidation

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

Revenue Recognition

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

Stock-Based Awards

Following is the status of all stock options as of June 30, 2021:

	Shares			Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding - January 1, 2021		362,640		$	3.96
Granted		3,000			5.76
Exercised		(1,000	)