nsys20210930

nsys20210930_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 September 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 November 5, 2021 was 2,672,064.

TABLE OF CONTENTS

			PAGE
PART I - FINANCIAL INFORMATION

	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	22

	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

PART I

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						NINE MONTHS
	ENDED						ENDED
	SEPTEMBER 30,						SEPTEMBER 30,
	2021			2020			2021			2020

Net Sales	$	29,452		$	26,362		$	81,706		$	80,263

Cost of Goods Sold		21,411			24,400			68,519			72,336

Gross Profit		8,041			1,962			13,187			7,927

Operating Expenses
Selling Expenses		449			594			1,741			1,945
General and Administrative Expenses		2,045			2,480			7,247			6,654
Research and Development		141			-			348			-
Restructuring		23			-			319			-
Loss on Abandonment of Intangible Asset		560			-			560			-
Gain on Sale of Assets		(93	)		(3,821	)		(176	)		(3,821	)
Total Operating Expenses		3,125			(747	)		10,039			4,778

Income From Operations		4,916			2,709			3,148			3,149

Other Expense
Interest Expense		(112	)		(126	)		(314	)		(526	)

Income Before Income Taxes		4,804			2,583			2,834			2,623

Income Tax Expense		1,247			612			646			638

Net Income	$	3,557		$	1,971		$	2,188		$	1,985

Net Income Per Common Share - Basic	$	1.33		$	0.74		$	0.82		$	0.75

Weighted Average Number of Common Shares Outstanding - Basic		2,665,682			2,657,530			2,662,066			2,657,530

Net Income Per Common Share - Diluted	$	1.24		$	0.73		$	0.78		$	0.74

Weighted Average Number of Common Shares Outstanding - Diluted		2,880,073			2,703,029			2,806,958			2,670,984

Other Comprehensive Income
Foreign Currency Translation Gain (Loss)		(5	)		96			20			54
Comprehensive Income, Net of Tax	$	3,552		$	2,067		$	2,208		$	2,039

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE DATA)

	SEPTEMBER 30,			DECEMBER 31,
	2021				2020¹
	(Unaudited)
ASSETS
Current Assets
Cash	$	444		$	352
Restricted Cash		999			3,212
Accounts Receivable, less allowances of $361 and $343		13,931			15,625
Employee Retention Credit Receivable		5,209			-
Inventories, Net		20,643			13,917
Contract Assets		8,145			5,899
Income Taxes Receivable		-			547
Prepaid Expenses and Other Current Assets		1,763			1,485
Total Current Assets		51,134			41,037

Property and Equipment, Net		5,803			6,426
Operating Lease Assets		9,052			8,998
Other Intangible Assets, Net		524			1,173
Total Assets	$	66,513		$	57,634

LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current Maturities of Line of Credit	$	6,009		$	-
Current Maturities of Long-Term Debt		3,198			1,204
Current Portion of Finance Lease Obligations		613			660
Current Portion of Operating Lease Obligations		1,023			688
Accounts Payable		14,140			11,239
Accrued Payroll and Commissions		4,407			2,870
Other Accrued Liabilities		3,323			2,875
Income Tax Payable		168			-
Total Current Liabilities		32,881			19,536

Long-Term Liabilities
Long-Term Line of Credit		-			3,328
Long-Term Debt, Net		3,039			5,865
Long Term Finance Lease Obligations, Net		707			1,152
Long-Term Operating Lease Obligations, Net		8,744			8,889
Other Long-Term Liabilities		106			146
Total Long-Term Liabilities		12,596			19,380

Total Liabilities		45,477			38,916

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: 2,672,064 and 2,659,628 Shares Issued and Outstanding, respectively		27			27
Additional Paid-In Capital		15,926			15,816
Accumulated Other Comprehensive Loss		(17	)		(37	)
Retained Earnings		4,850			2,662
Total Shareholders' Equity		21,036			18,718
Total Liabilities and Shareholders' Equity	$	66,513		$	57,634

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

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

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN THOUSANDS)

	NINE MONTHS ENDED
	SEPTEMBER 30,
	2021			2020
Cash Flows From Operating Activities
Net Income	$	2,188		$	1,985
Adjustments to Reconcile Net Income to Net Cash
(Used In) Provided by Operating Activities
Depreciation and Amortization		1,506			1,703
Compensation on Stock-Based & Equity Awards		201			151
Change in Accounts Receivable Allowance		18			158
Change in Inventory Reserves		(959	)		398
Loss on Abandonment of Intangible Asset		560			-
Gain on Disposal of Property and Equipment		(176	)		(3,821	)
Changes in Current Operating Items
Accounts Receivable		1,686			2,430
Employee Retention Credit Receivable		(5,209	)		-
Inventories		(5,755	)		(567	)
Contract Assets		(2,246	)		325
Prepaid Expenses and Other Current Assets		(276	)		858
Income Taxes		708			-
Accounts Payable		2,901			(2,808	)
Accrued Payroll and Commissions		1,537			(621	)
Other Accrued Liabilities		464			(290	)
Net Cash Used In Operating Activities		(2,852	)		(99	)
Cash Flows from Investing Activities
Proceeds from Sale of Property and Equipment		626			6,019
Purchase of Intangible Asset		(49	)		(25	)
Purchases of Property and Equipment		(1,198	)		(397	)
Net Cash (Used In) Provided By Investing Activities		(621	)		5,597
Cash Flows from Financing Activities
Net Change in Line of Credit		2,681			(7,542	)
Proceeds from Long-term Debt		-			6,077
Principal Payments on Long-Term Debt		(873	)		(2,567	)
Principal Payments on Finance Leases		(492	)		(432	)
Stock Option Exercises		36			-
Net Cash Provided By (Used In) Financing Activities		1,352			(4,464	)

Net Change in Cash		(2,121	)		1,034
Cash - Beginning of Period		3,564			660

Cash - Ending of Period	$	1,443		$	1,694

Reconciliation of cash and restricted cash reported within the condensed consolidated balance sheets
Cash	$	444		$	328
Restricted Cash		999			1,366
Total cash and restricted cash reported in the condensed consolidated statements of cash flows	$	1,443		$	1,694

Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Period for Interest	$	220		$	526
Cash Paid (Refunded) During the Period for Income Taxes	$	(114	)	$	262

Supplemental Noncash Investing and Financing Activities:
Property and Equipment Purchases in Accounts Payable	$	-		$	6
Property Acquired under Operating Lease	$	858		$	4,685
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)

	Preferred		Common		Additional Paid-In Capital		Accumulated Other Comprehensive Loss			Retained Earnings		Total Shareholders' Equity
BALANCE JUNE 30, 2020	$	250	$	27	$	15,823	$	(299	)	$	4,222	$	20,023
Net Income		-		-		-		-			1,971		1,971
Foreign currency translation adjustment		-		-		-		96			-		96
Compensation on stock-based awards		-		-		36		-			-		36

BALANCE SEPTEMBER 30, 2020	$	250	$	27	$	15,859	$	(203	)	$	6,193	$	22,126

BALANCE DECEMBER 31, 2019	$	250	$	27	$	15,748	$	(257	)	$	4,208	$	19,976
Net Income		-		-		-		-			1,985		1,985
Foreign currency translation adjustment		-		-		-		54			-		54
Compensation on stock-based awards		-		-		111		-			-		111

BALANCE SEPTEMBER 30, 2020	$	250	$	27	$	15,859	$	(203	)	$	6,193	$	22,126


BALANCE JUNE 30, 2021	$	250	$	27	$	15,862	$	(12	)	$	1,293	$	17,420
Net Income		-		-		-		-			3,557		3,557
Foreign currency translation adjustment		-		-		-		(5	)		-		(5	)
Stock option exercises		-		-		36		-			-		36
Compensation on stock-based awards		-		-		28		-			-		28

BALANCE SEPTEMBER 30, 2021	$	250	$	27	$	15,926	$	(17	)	$	4,850	$	21,036

BALANCE DECEMBER 31, 2020	$	250	$	27	$	15,816	$	(37	)	$	2,662	$	18,718
Net Income		-		-		-		-			2,188		2,188
Foreign currency translation adjustment		-		-		-		20			-		20
Stock option exercises		-		-		36		-			-		36
Compensation on stock-based awards		-		-		74		-			-		74

BALANCE SEPTEMBER 30, 2021	$	250	$	27	$	15,926	$	(17	)	$	4,850	$	21,036

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 September 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		27,000			6.14
Exercised		(13,400	)		3.43
Cancelled		(10,340	)		3.42
Outstanding - September 30, 2021		365,900		$	4.15		7.25	$	2,688
Exercisable - September 30, 2021		180,500		$	3.75		6.56	$	1,398

In May 2017, the shareholders approved the 2017 Stock Incentive Plan which authorized the issuance of 400,000 shares. There were additional shares authorized in March 2020 totaling 50,000 and in May 2021 totaling 75,000. There were 27,000 and 11,300 stock options granted during the nine months ended September 30, 2021 and 2020, respectively.

Total compensation expense related to stock options for the three and nine months ended September 30, 2021 was $28 and $74, respectively. Total compensation expense related to stock options for the three and nine months ended September 30, 2020 was $36 and $111, respectively. As of September 30, 2021, there was $320 of unrecognized compensation which will vest over the next 3.12 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 nine months ended September 30, 2021 and 2020, there were no Units granted. We recognized $13 and $127 of compensation expense in the three and nine months ended September 30, 2021, respectively. Compensation expense was approximately $40 for both the three and nine months ended September 30, 2020. The current liability recorded for the Units at September 30, 2021 is $235.

Net Income per Common Share

For the three and nine months ended September 30, 2021, stock options of 214,391 and 144,892, respectively, were included in the computation of diluted income per common share amount as their impact were dilutive. For the three and nine months ended September 30, 2020, stock options of 45,326 and 21,220, respectively, were included in the computation of diluted income per common share as their impact were dilutive.

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 September 30, 2021 balance included lockbox deposits that are temporarily restricted due to timing at the period end. The lockbox deposits are applied against our line of credit the next business day.

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 customer deposits. Credit terms are consistent with industry standards and practices. The amounts of trade accounts receivable have been reduced by an allowance for doubtful accounts of $361 at September 30, 2021 and $343 at December 31, 2020.

Employee Retention Credit (ERC) and Payroll Tax Deferral

We qualified for Employee Retention Credits on qualified wages paid in the first and second quarters of 2021 and filed for both credits as of the date of this filing. We recognize government grants for which there is a reasonable assurance of compliance with grant conditions and receipt of credits. During the three and nine months ended September 30, 2021, there was $5,209 related to Employee Retention Credits recognized as a reduction of the associated costs within cost of goods sold of $4,670, selling of $125, and general and administrative expenses of $414 on the consolidated statements of operations and within Employee Retention Credits Receivable on the condensed consolidated balance sheets.

The CARES Act allowed for the deferral of the employer portion of social security taxes incurred through the end of calendar 2020. As of September 30, 2021, there was $1,158 of social security tax payments deferred, of which 50% are required to be remitted by December 2021 and the remaining 50% by December 2022. The deferred amounts are recorded within accrued payroll and commissions on the condensed consolidated balance sheets.

Inventories, Net

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:

	September 30,		December 31,
	2021		2020
Raw Materials	$	19,673	$	14,865
Work in Process		1,683		969

SEC Form 10-Q filed by Nortech Systems Incorporated