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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, 2024

 

OR

 

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

 

For the transition period from               to             

 

NORTECH SYSTEMS INCORPORATED

 

Commission file number 0-13257

 

State of Incorporation: Minnesota

 

IRS Employer Identification No. 41-1681094

 

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

 

Telephone number: (952) 345-2244

 

Securities registered pursuant to Section 12(b) of the 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 and post 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 as of November 1, 2024 was 2,756,754.

 

 

 

 
 

 

TABLE OF CONTENTS

 

    PAGE
     
PART I – FINANCIAL INFORMATION    
     
Item 1 - Financial Statements  
Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income   3
Condensed Consolidated Balance Sheets   4
Condensed Consolidated Statements of Cash Flows   5-6
Condensed Consolidated Statements of Shareholders’ Equity   7
Condensed Notes to Consolidated Financial Statements   8-16
Item 2 - Management’s Discussion and Analysis of Financial Condition And Results of Operations   17
Item 3 - Quantitative and Qualitative Disclosures About Market Risk   21
Item 4 - Controls and Procedures   21
     
PART II – OTHER INFORMATION    
     
Item 1 - Legal Proceedings   22
Item 1A. - Risk Factors   22
Item 2 - Unregistered Sales of Equity Securities, Use of Proceeds   22
Item 3 - Defaults on Senior Securities   22
Item 4 - Mine Safety Disclosures   22
Item 5 - Other Information   22
Item 6 - Exhibits   22
SIGNATURES   23

 

2
 

 

PART I

 

ITEM 1. FINANCIAL STATEMENTS

 

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME

(UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE DATA)

 

   2024   2023   2024   2023 
   THREE MONTHS ENDED   NINE MONTHS ENDED 
   SEPTEMBER 30,   SEPTEMBER 30, 
   2024   2023   2024   2023 
                 
Net sales  $31,407   $33,369   $99,513   $103,278 
Cost of goods sold   27,572    28,050    85,613    87,001 
Gross profit   3,835    5,319    13,900    16,277 
Operating expenses:                    
Selling   891    923    2,605    2,766 
General and administrative   2,951    2,958    9,103    9,328 
Research and development   284    314    893    907 
Restructuring charges   176    -    267    - 
Total operating expenses   4,302    4,195    12,868    13,001 
(Loss) income from operations   (467)   1,124    1,032    3,276 
Other expense:                    
Interest expense    (216)   (130)   (548)   (365)
(Loss) income before income taxes   (683)   994    484    2,911 
Income tax expense (benefit)   56    (213)   301    389 
Net (loss) income  $(739)  $1,207   $183   $2,522 
                     
Net (loss) income per common share:                    
Basic (in dollars per share)  $(0.27)  $0.44   $0.07   $0.93 
Weighted average number of common shares outstanding - basic (in shares)   2,760,438    2,737,895    2,754,399    2,716,166 
Diluted (in dollars per share)  $(0.27)  $0.42   $0.06   $0.87 
Weighted average number of common shares outstanding - diluted (in shares)   2,760,438    2,888,679    2,931,343    2,887,889 
                     
Other comprehensive (loss) income                    
Foreign currency translation   223    (77)   (135)   (318)
Comprehensive (loss) income, net of tax  $(516)  $1,130   $48   $2,204 

 

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements.

 

3
 

 

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE DATA)

 

   SEPTEMBER 30, 2024   DECEMBER 31, 2023(1) 
ASSETS        
Current assets:          
Cash  $1,239   $960 
Restricted cash   -    715 
Accounts receivable, less allowances of $286 and $358, respectively   16,584    19,279 
Inventories, net   22,332    21,660 
Contract assets   15,058    14,481 
Prepaid assets and other assets   5,065    1,698 
Total current assets   60,278    58,793 
Property and equipment, net   5,834    6,513 
Operating lease assets, net   8,034    6,917 
Deferred tax assets   2,641    2,641 
Other intangible assets, net   179    263 
Total assets  $76,966   $75,127 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
Current liabilities:          
Current portion of finance lease obligations  $175   $356 
Current portion of operating lease obligations   1,174    1,033 
Accounts payable   12,315    15,924 
Accrued payroll and commissions   2,940    4,138 
Customer deposits   5,263    4,068 
Other accrued liabilities   1,451    1,063 
Total current liabilities   23,318    26,582 
Long-term liabilities:          
Long-term line of credit, net of issuance costs   9,508    5,815 
Long-term finance lease obligations, net of current portion   340    209 
Long-term operating lease obligations, net of current portion   7,689    6,763 
Other long-term liabilities   421    414 
Total long-term liabilities   17,958    13,201 
Total liabilities   41,276    39,783 
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; 2,756,367 and 2,740,178 shares issued and outstanding, respectively   28    27 
Additional paid-in capital   17,226    16,929 
Accumulated other comprehensive loss   (667)   (532)
Retained earnings   18,853    18,670 
Total shareholders’ equity   35,690    35,344 
Total liabilities and shareholders’ equity  $76,966   $75,127 

 

(1) The balance sheet as of December 31, 2023 has been derived from the consolidated audited financial statements at that date.

 

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements.

 

4
 

 

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN THOUSANDS)

 

   2024   2023 
  

SEPTEMBER 30,

 
   2024   2023 
CASH FLOWS FROM OPERATING ACTIVITIES          
Net income  $183   $2,522 
Adjustments to reconcile net income to net cash (used in) provided by operating activities:          
Depreciation and amortization   1,400    1,539 
Compensation on stock-based awards   334    299 
Change in inventory reserves   194    (8)
Change in accounts receivable allowances   (72)   (18)
Other, net   9    137 
Changes in current operating assets and liabilities:          
Accounts receivable   2,727    (162)
Employee Retention Credit Receivable   -    2,650 
Inventories   (922)   899 
Contract assets   (577)   (1,780)
Prepaid expenses and other current assets   (2,888)   (976)
Accounts payable   (3,609)   (1,636)
Accrued payroll and commissions   (1,198)   (810)
Customer deposits   1,195    345 
Other accrued liabilities   181    (820)
Net cash (used in) provided by operating activities   (3,043)   2,181 
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Proceeds from sale of property and equipment   9    - 
Purchases of property and equipment   (980)   (1,121)
Net cash used in investing activities   (971)   (1,121)
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Proceeds from line of credit   99,888    95,783 
Payments to line of credit   (96,185)   (98,035)
Proceeds from financing leases   198    - 
Principal payments on financing leases   (304)   (291)
Share repurchases   (67)   - 
Proceeds from stock option exercises   31    155 
Net cash provided by (used in) financing activities   3,561    (2,388)
           
Effect of exchange rate changes on cash   17    (32)
           
Net change in cash and cash equivalents   (436)   (1,360)
Cash - beginning of period   1,675    2,481 
Cash - end of period  $1,239   $1,121 
           
Reconciliation of cash and restricted cash reported within the condensed consolidated balance sheets:          
Cash  $1,239   $699 
Restricted cash   -    422 
Total cash and restricted cash reported in the condensed consolidated statements of cash flows  $1,239   $1,121 

 

5
 

 

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN THOUSANDS)

 

   NINE MONTHS ENDED 
   SEPTEMBER 30, 
   2024   2023 
         
Supplemental disclosure of cash flow information:          
Cash paid for interest  $531   $388 
Cash paid for income taxes  $374   $1,242 
           
Supplemental noncash investing and financing activities:          
Property and equipment purchases in accounts payable  $107   $23 
Operating lease assets acquired under operating leases  $1,923   $- 
Equipment acquired under finance lease  $256   $- 

 

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements.

 

6
 

 

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(UNAUDITED)

(IN THOUSANDS)

 

   Shares   Amount   Shares   Amount   Capital   Loss   Earnings   Equity 
                       Accumulated         
                   Additional   Other       Total 
   Preferred Stock   Common Stock   Paid-In   Comprehensive   Retained   Shareholders’ 
   Shares   Amount   Shares   Amount   Capital   Loss   Earnings   Equity 
Balance as of June 30, 2023   250   $250    2,737   $27   $16,712   $(611)  $13,111   $29,489 
Net income   -    -    -    -    -    -    1,207    1,207 
Foreign currency translation adjustment   -    -    -    -    -    (77)   -    (77)
Stock option exercises   -    -    -    -    9    -    -    9 
Compensation on stock-based awards   -    -    -    -    80    -    -    80 
Balance as of September 30, 2023   250   $250    2,737   $27   $16,801   $(688)  $14,318   $30,708 
                                         
Balance as of June 30, 2024   250   $250    2,762   $28   $17,165   $(890)  $19,592   $36,145 
Net loss   -    -    -    -    -    -    (739)   (739)
Foreign currency translation adjustment   -    -    -    -    -    223    -    223 
Compensation on stock-based awards   -    -    -    -    128    -    -    128 
Stock repurchases   -    -    (6)   -    (67)   -    -    (67)
Balance as of September 30, 2024   250   $250    2,756   $28   $17,226   $(667)  $18,853   $35,690 
                                         
Balance as of December 31, 2022   250   $250    2,691   $27   $16,347   $(370)  $11,826   $28,080 
Net income   -    -    -    -    -    -    2,522    2,522 
Foreign currency translation adjustment   -    -    -    -    -    (318)   -    (318)
Compensation on stock-based awards   -    -    -    -    299    -    -    299 
Stock option exercises   -    -    46    -    155    -    -    155 
Cumulative adjustment related to adoption of ASC 326 (current expected credit loss)   -    -    -    -    -    -    (30)   (30)
Balance as of September 30, 2023   250   $250    2,737   $27   $16,801   $(688)  $14,318   $30,708 
                                         
Balance as of December 31, 2023   250   $250    2,740   $27   $16,929   $(532)  $18,670   $35,344 
Net income   -    -    -    -    -    -    183    183 
Foreign currency translation adjustment   -    -    -    -    -    (135)   -    (135)
Compensation on stock-based awards   -    -    -    -    334    -    -    334 
Stock option exercises   -    -    22    1    30    -    -    31 
Stock repurchases   -    -    (6)   -    (67)   -    -    (67)
Balance as of September 30, 2024   250   $250    2,756   $28   $17,226   $(667)  $18,853   $35,690 

 

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements.

 

7
 

 

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 and Principles of Consolidation

 

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, the Company has omitted footnote disclosures that would substantially duplicate the disclosures contained in the Company’s audited consolidated financial statements. These unaudited condensed consolidated financial statements should be read together with the audited consolidated financial statements for the year ended December 31, 2023, and notes thereto included in our Annual Report on Form 10-K as filed with the SEC.

 

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. All dollar amounts are stated in thousands of U.S. dollars.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of our consolidated financial statements. Estimates also affect the reported amounts of net sales and expenses during each reporting period. Significant items subject to estimates and assumptions include the valuation allowance for inventories, accounts receivable allowances, realizability of deferred tax assets and long-lived asset recovery. Actual results could differ from those estimates.

 

Recently Issued New Accounting Standards

 

In November 2023, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2023-07, Segment Reporting Topic (280): Improvements to Reportable Segment Disclosure. The ASU supplements reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The amendments in this ASU are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024 on a retrospective basis. Early adoption is permitted. The Company is currently evaluating the impact of this ASU on its Consolidated Financial Statements and related disclosures.

 

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The ASU enhances the transparency and decision usefulness of income tax disclosures and is effective for annual periods beginning after December 15, 2024 on a prospective basis. Early adoption is permitted. The Company is currently evaluating the impact of this ASU on its Consolidated Financial Statements and related disclosures.

 

8
 

 

Inventories

 

Inventories are as follows:

 

 

   September 30,   December 31, 
   2024   2023 
Raw materials  $21,596   $20,863 
Work in process   1,108    1,033 
Finished goods   992    934 
Reserves   (1,364)   (1,170)
Inventories, net  $22,332   $21,660 

 

Other Intangible Assets

 

Other intangible assets as of September 30, 2024 and December 31, 2023 are as follows:

 

 

  

Customer

Relationships

   Patents   Total 
Balances as of January 1, 2023  $216   $206   $422 
Amortization   144    15    159 
Balances as of December 31, 2023  $72   $191   $263 
Amortization   72    12    84 
Balances as of September 30, 2024  $-   $179   $179 

 

Intangible assets are amortized on a straight-line basis over their estimated useful lives. The weighted average remaining amortization period of our intangible assets is 5.5 years. Of the patents value as of September 30, 2024, $94 are being amortized and $85 are in process and a patent has not yet been issued.

 

Amortization expense of finite life intangible assets for the three months ended September 30, 2024 and 2023 was $4 and $40, respectively. Amortization expense of finite life intangible assets for the nine months ended September 30, 2024 and 2023 was $84 and $120, respectively.

 

As of September 30, 2024, estimated future annual amortization expense (except projects in process) related to these assets is as follows:

 

 

Year  Amount 
2024  $5 
2025   18 
2026   18 
2027   18 
2028   18 
Thereafter   17 
Total  $94 

 

NOTE 2. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

 

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash, accounts receivable, and contract assets. 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. The Company’s $1,239 cash balance as of September 30, 2024 included approximately $1,035 and $6 that was held at banks located in China and Mexico, respectively. We grant credit to customers in the normal course of business and generally do not require collateral on our accounts receivable.

 

We have certain customers whose revenue individually represented 10% or more of net sales, or whose accounts receivable balances individually represented 10% or more of gross accounts receivable. One customer accounted for 28% and 26% of net sales for the three and nine months ended September 30, 2024, respectively. Two customers accounted for 36% and 38% of net sales for both the three and nine months ended September 30, 2023.

 

9
 

 

As of September 30, 2024, one customer represented approximately 22% of our gross accounts receivable. As of December 31, 2023, two customers represented approximately 35% of our gross accounts receivable.

 

Contract assets for three customers accounted for 44% of gross contract assets as of September 30, 2024. Contract assets for two customers accounted for 34% of gross contract assets as of December 31, 2023.

 

Export sales from the U.S. represented approximately 2% of net sales for both the three and nine months ended September 30, 2024. Export sales represented approximately 3% of net sales for both three and nine month ended September 30, 2023.

 

NOTE 3. REVENUE

 

Revenue Recognition

 

Revenue under contract manufacturing agreements that was recognized over time accounted for approximately 72% and 73% of net sales for the three and nine months ended September 30, 2024, respectively and approximately 74% of net sales for both the three and nine months ended September 30, 2023, respectively.

 

The following tables summarize our net sales by market for the three months ended September 30, 2024 and 2023, respectively:

 

 

                     
   Three Months Ended September 30, 2024 
   Product/ Service Transferred
Over Time		   Product Transferred at Point in Time   Noncash Consideration1   Total Net Sales by Market 
Medical  $12,711   $4,435   $901   $18,047 
Industrial   5,505    2,667    262    8,434 
Aerospace and defense   4,394    494    38    4,926 
Total net sales  $22,610   $7,596   $1,201   $31,407 

 

                     
   Three Months Ended September 30, 2023 
   Product/ Service Transferred
Over Time		   Product Transferred at Point in Time   Noncash Consideration1   Total Net Sales by Market 
Medical  $12,029   $5,185   $621   $17,835 
Industrial   8,195    1,999    241    10,435 
Aerospace and defense   4,609    450    40    5,099 
Total net sales  $24,833   $7,634   $902   $33,369 

 

1 Noncash consideration represents material provided by the customer used in the build of the product.

 

10
 

 

The following tables summarize our net sales by market for the nine months ended September 30, 2024 and 2023, respectively:

 

                     
   Nine Months Ended September 30, 2024 
   Product/ Service Transferred
Over Time		   Product Transferred at Point in Time   Noncash Consideration1   Total Net Sales by Market 
Medical  $37,469   $14,112   $2,410   $53,991 
Industrial   18,847    7,682    1,114    27,643 
Aerospace and defense   16,494    1,231    154    17,879 
Total net sales  $72,810   $23,025   $3,678   $99,513 

 

                     
   Nine Months Ended September 30, 2023 
   Product/ Service Transferred
Over Time		   Product Transferred at Point in Time   Noncash Consideration1   Total Net Sales by Market 
Medical  $42,324   $15,564   $1,926   $59,814 
Industrial   21,378    6,532    1,056    28,966 
Aerospace and defense   12,523    1,674    301    14,498 
Total net sales  $76,225   $23,770   $3,283   $103,278 

 

1 Noncash consideration represents material provided by the customer used in the build of the product.

 

Contract Assets

 

Contract assets, recorded as such in the Condensed Consolidated Balance Sheet, consist of unbilled amounts related to revenue recognized over time. Significant changes in the contract assets balance during the nine months ended September 30, 2024 were as follows:

 

SCHEDULE OF CONTRACT ASSETS

Balances as of January 1, 2024  $14,481 
Increase (decrease) attributed to:     
Amounts transferred over time to contract assets   72,810 
Allowance for current expected credit losses   (15)
Amounts invoiced during the period   (72,218)
Balance outstanding as of September 30, 2024  $15,058 

 

We expect substantially all of the remaining performance obligations for the contract assets recorded as of September 30, 2024 to be transferred to accounts receivable 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.

 

NOTE 4. FINANCING ARRANGEMENTS

 

We had a credit agreement with Bank of America, which was entered into on June 15, 2017 and provides for a line of credit arrangement of $16,000, that was to expire on June 15, 2026.

 

On February 29, 2024, we replaced the asset backed line of credit agreement with a $15,000 Senior Secured Revolving Line of Credit with Bank of America (the “Revolver”). The Revolver allows for borrowings at a defined base rate, or at the one, three or six month Secured Overnight Finance Rate, also known as “SOFR,” plus a defined margin. If the Company prepays SOFR borrowings before their contractual maturity, the Company has agreed to compensate the bank for lost margin, as defined in the Revolver agreement. The Company is required to quarterly pay a 20-basis point fee on the unused portion of the Revolver.

 

The Revolver requires the Company to maintain no more than 2.5 times leverage ratio and at least a 1.25 times minimum fixed charges coverage ratio, both of which are defined in the Revolver agreement. The Company met the covenants for the period ended September 30, 2024. There are no subjective acceleration clauses under the Revolver that would accelerate the maturity of outstanding borrowings. The Revolver contains certain covenants which, among other things, require the Company to adhere to regular reporting requirements, abide by shareholder dividend limitations, maintain certain financial performance, and limit the amount of annual capital expenditures. The Revolver is secured by substantially all the Company’s assets and expires on February 28, 2027. We were in compliance with all the financial covenants related to this agreement as of and for the period ended September 30, 2024, except for the covenant related to operating expense contributions to our Mexican operations in the first and second quarters of 2024 in excess of the amounts allowed under the Revolver. We received a waiver of this event of default from the bank in August 2024.

 

Under the amended Bank of America credit agreement signed February 29, 2024, the line of credit is subject to variations in the SOFR index rate. Under the prior credit agreement with Bank of America, the line of credit borrowing availability was restricted by a defined asset borrowing base, and interest was based on variations in the Bloomberg Short-Term Bank Yield (BSBY) index rate. Our line of credit bears interest at a weighted-average interest rate of 7.9% and 8.3% as of September 30, 2024 and December 31, 2023, respectively. We had borrowings on our line of credit of $9,550 and $5,846 outstanding as of September 30, 2024 and December 31, 2023, respectively. As of September 30, 2024 we had unused availability on the line of credit of $5,450.

 

The Company has an interim funding agreement as of September 30, 2024 with a bank related to $317 of deposits made on equipment purchases that will be funded through a finance lease when the equipment is received and operational. As of September 30, we have $317 outstanding on the interim funding agreement for equipment we expect to receive in the fourth quarter of 2024.

 

The line of credit is shown net of debt issuance costs of $42 and $31 on the condensed consolidated balance sheet as of September 30, 2024 and December 31, 2023, respectively.

 

11
 

 

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. We amended our operating leases for part of our manufacturing facility in China and our corporate office in Maple Grove, Minnesota during the first nine months of 2024 which extended the lease through August of 2033 with monthly lease payments of $14 to $18. As of September 30, 2024, we have a lease commitment of approximately $400 for a finance lease that will commence in the fourth quarter of 2024.

 

The components of lease expense were as follows:

 

SCHEDULE OF COMPONENTS OF LEASE EXPENSE

Lease Cost  2024   2023 
   Three Months Ended September 30, 
Lease Cost  2024   2023 
Operating lease cost  $569   $576 
Finance lease interest cost   6    9 
Finance lease amortization expense   265    182 
Total lease cost  $840   $767 

 

Lease Cost  2024   2023 
   Nine Months Ended September 30, 
Lease Cost  2024   2023 
Operating lease cost  $1,746   $1,735 
Finance lease interest cost   18    32 
Finance lease amortization expense   394    546 
Total lease cost  $2,158   $2,313 

 

Supplemental condensed consolidated balance sheet information related to leases was as follows:

 

   Balance Sheet Location  September 30, 2024   December 31, 2023 
Assets             
Finance lease assets  Property and equipment, net  $485   $636 
Operating lease assets  Operating lease assets, net   8,034    6,917 
Total leased assets     $8,519   $7,553 
              
Liabilities             
Current             
Current finance lease liabilities  Current portion of finance lease obligations  $175   $356 
Current operating lease liabilities  Current portion of operating lease obligations   1,174    1,033 
Noncurrent             
Long-term finance lease liabilities  Long-term finance lease liabilities, net of current portion   340    209 
Long-term operating lease liabilities  Long-term operating lease obligations, net of current portion   7,689    6,763 
Total lease liabilities     $9,378   $8,361 

 

12
 

 

Supplemental condensed consolidated statement of cash flows information for the nine months ended September 30, 2024 related to leases was as follows:

 

SCHEDULE OF SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS INFORMATION

   September 30,   September 30, 
   2024   2023 
Operating Leases          
Cash paid for amounts included in the measurement of lease liabilities  $468   $1,381 
Property acquired under operating lease  $1,923   $- 

 

Future payments of lease liabilities as of September 30, 2024 were as follows:

 

  

Operating

Leases

  

Finance

Leases

   Total 
2024  $469   $70   $539 
2025   1,809    165    1,974 
2026   1,774    168    1,942 
2027   1,472    60    1,532 
2028   1,469    60    1,529 
Thereafter   5,505    44    5,549 
Total lease payments  $12,498   $567   $13,065 
Less: imputed interest   (3,635)   (52)   (3,687)
Present value of lease liabilities  $8,863   $515   $9,378 

 

The lease term and discount rate as of September 30, 2024 were as follows:

 

SCHEDULE OF LEASE TERM AND DISCOUNT RATE

Weighted-average remaining lease term (years)     
Operating leases   7.9 
Finance leases   3.4 
Weighted-average discount rate     
Operating leases   7.8%
Finance leases   5.7%

 

NOTE 6. STOCK BASED AWARDS

 

Stock-based compensation expense was reported as follows in the condensed consolidated statements of operations within general and administrative expenses of $127 and $80 for the three months ended September 30, 2024 and 2023, respectively, and $334 and $299 for the nine months ended September 30, 2024 and 2023, respectively.

 

Stock Options

 

In May 2017, the shareholders approved the 2017 Stock Incentive Plan which authorized the issuance of 350,000 shares. An additional 50,000, 175,000, 100,000 and 100,000 shares were authorized in March 2020, May 2022, May 2023 and May 2024, respectively.

 

We granted 1,000 and 23,000, respectively, service-based stock options during the three and nine months ended September 30, 2024, respectively. The weighted-average grant-date fair value of options granted during the nine months ended September 30, 2024 was $8.20. We granted 25,000 and 54,000, respectively, service-based stock options during the three and nine months ended September 30, 2023. Weighted average stock option fair value assumptions and the weighted average grant date fair value of stock options granted were as follows:

 

   2024   2023 
Stock option fair value assumptions:          
Risk-free interest rate   4.38%   3.45%
Expected life (years)   6.0    6.5 
Dividend yield   0%   0%
Expected volatility   58%   60%
Weighted average grant date fair value of stock options granted  $6.49   $5.67 

 

13
 

 

Total compensation expense related to stock options was $61 and $184 for the three and nine months ended September 30, 2024, respectively. Total compensation expense related to stock options was $42 and $184 for the three and nine months ended September 30, 2023, respectively. As of September 30, 2024, there was $775 of unrecognized compensation related to stock options which will be recognized over a weighted average period of 3.6 years.

 

Following is the status of option activity for the nine months ended and as of September 30, 2024:

 

   Shares  

Weighted-

Average

Exercise Price

Per Share

  

Weighted-

Average

Remaining

Contractual

Term

(in years)

  

Aggregate

Intrinsic

Value

 
Outstanding – December 31, 2023   458,700   $6.63    6.53   $1,432 
Granted   23,000    11.08           
Exercised   (5,500)   5.42           
Forfeited   (12,400)   10.13           
Outstanding – September 30, 2024   463,800   $6.78    5.94   $2,301 
Exercisable on September 30, 2024   284,500   $4.77    4.43   $1,979 

 

Restricted Stock Units

 

During the three and nine months ended September 30, 2024 and 2023, we granted 15,141 and 18,000 restricted stock units (“RSUs”), respectively, at an average grant price per share of $11.06 and $9.37, respectively, under our 2017 Stock Incentive Plan to non-employee directors which vest over two years. Total compensation expense related to the RSUs was $66 and $150 for the three and nine months ended September 30, 2024, respectively. Total compensation expense related to the RSUs was $38 and $113 for the three and nine months ended September 30, 2023, respectively. As of September 30, 2024, total unrecognized compensation expense related to the RSUs was $153, which will vest over a weighted average period of 0.6 years.

 

Following is the status of restricted stock activity for the nine months ended and as of September 30, 2024:

SCHEDULE OF RESTRICTED STOCK ACTIVITY

   Shares  

Weighted-

Average

Remaining

Vesting

Term

(in years)

  

Aggregate

Intrinsic

Value

 
Outstanding – December 31, 2023   27,000    1.0   $254 
Granted   15,141           
Vested   (16,500)          
Forfeited   (1,500)          
Outstanding – September 30, 2024   24,141    0.6   $283 

 

14

 

 

NOTE 7. NET (LOSS) INCOME PER SHARE DATA

 

Basic net (loss) income per common share is calculated by dividing net (loss) income by the weighted average number of common shares outstanding during the period. Diluted net income per common share is computed by dividing net income by the weighted average number of common shares outstanding using the treasury stock method during the period. The Company’s potentially dilutive common shares are those that result from dilutive common stock options and non-vested stock relating to restricted stock units. In a period where the Company incurs a net loss, the Company excludes dilutive securities, and the shares used for the basic and diluted loss per share are the same.

 

The calculation of diluted (loss) income per shared excluded 189,265 and 93,391 in weighted average shares for the three and nine months ended September 30, 2024, respectively, and 64,322 and 52,896 in weighted average shares for the three and nine months ended September 30, 2023, respectively, as their effect was anti-dilutive. Basic and diluted weighted average shares outstanding were as follows:

 

   2024   2023   2024   2023 
  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
   2024   2023   2024   2023 
Basic weighted average shares outstanding   2,760,438    2,737,895    2,754,399    2,716,166 
Dilutive effect of outstanding stock options and non-vested restricted stock units   -    150,783    176,944    171,723 
Diluted weighted average shares outstanding   2,760,438    2,888,679    2,931,343    2,887,889 

 

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NOTE 8. 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.

 

Our effective tax rate for the three and nine months ended September 30, 2024 was 8% and 62%, respectively. Our effective tax rate for the three and nine months ended September 30, 2023 was (21%) and 13%, respectively. The primary drivers of the change in rate relate to changes in pretax book income and the 2023 U.S. federal provision to return adjustments recorded in the third quarter of 2024, partially offset by realization of deferred tax assets in the 2024 periods as the Company removed its valuation allowance in the fourth quarter of 2023.

 

NOTE 9. RESTRUCTURING CHARGES

 

During the first nine months of 2024, we accrued restructuring charges of $267 related to the closure and consolidation of our Blue Earth, Minnesota production facility, which is planned to be completed in the fourth quarter of 2024. There were no restructuring charges or amounts accrued in the nine months ended September 30, 2023.

 

NOTE 10. PAYROLL TAX DEFERRAL

 

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law which allowed for the deferral of the employer portion of social security taxes incurred through the end of calendar 2020. During the year ended December 31, 2023, the Company remitted $1,158 to the Internal Revenue Service (“IRS”) related to the deferral of payroll taxes, of which $785 was recorded as a refund receivable as of December 31, 2023, with a corresponding liability due. These amounts were settled during the first quarter of 2024.

 

NOTE 11. RELATED PARTY TRANSACTIONS

 

David Kunin, our Chairman, is a minority owner of Abilitech Medical, Inc. We have accounts receivable related to Abilitech of $85. Payments of $28 were received during the three months ended March 31, 2024. Abilitech has ceased operations and therefore we do not believe that Abilitech will pay the Company for outstanding accounts receivable, and we have recorded a full allowance against the gross amount. The Company believes that transactions with Abilitech were on terms comparable to those that the Company could reasonably expect in an arm’s length transaction with an unrelated third party.

 

David Kunin, our Chairman, is a minority owner (less than 10%) of Marpe Technologies, LTD an early-stage medical device company dedicated to the early detection of skin cancer through full body scanners. Mr. Kunin is also a member of the Board of Directors of Marpe Technologies. The Company has an agreement with Marpe Technologies to apply for a grant from the Israel-United States Binational Industrial Research and Development Foundation, a legal entity created by Agreement between the Government of the State of Israel and the Government of the United States of America (“BIRD Foundation”). The parties were successful in receiving approval for a $1,000 conditional grant. The Company and Marpe Technologies will each receive $500 from the BIRD Foundation and, among other obligations under the grant, each is required to contribute $500 to match grant funds from the BIRD Foundation. The Company has met its obligation by providing certain services at cost or with respect to administrative services at no cost to Marpe Technologies. The total value of the Company’s contribution will not exceed $500. Marpe is engaged in raising funds for its operations, which funds are necessary to pay for the Company’s services beyond its contribution. The Company will receive a 10-year exclusive right to manufacture the products of Marpe Technologies. There can be no assurances that Marpe Technologies’ medical device operations will be commercially successful, that Marpe Technologies will be successful in raising additional funds to finance its operations or, if commercially successful, the Company will recover the value of services provided to Marpe if not paid when the services are provided. The transactions between the Company and Marpe Technologies have been approved by the Audit Committee pursuant to the Company Related-Party Transactions Policy. During the three months ended September 30, 2024 and 2023, we recognized net sales to Marpe Technologies of $8 and $0, respectively. During the nine months ended September 30, 2024 and 2023, we recognized net sales to Marpe Technologies of $75 and $163, respectively. The Company believes that transactions with Marpe are on terms comparable to those that the Company could reasonably expect in an arm’s length transaction with an unrelated third party.

 

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ITEM 2. Management’s Discussion and Analysis of Financial Conditions and Results of Operations

 

Overview

 

We are a Minnesota, United States based full-service global EMS contract manufacturer in the Medical, Aerospace & Defense and Industrial markets offering a full range of value-added engineering, technical and manufacturing services and support including project management, design, testing, prototyping, manufacturing, supply chain management and post-market services. Our products are complex electromedical and electromechanical products including medical devices, wire and cable assemblies, printed circuit board assemblies, complex higher-level assemblies and other box builds for a wide range of industries. We serve three major markets within the EMS industry: Medical, Aerospace and Defense, and the Industrial market which includes industrial capital equipment, transportation, vision, agriculture, oil and gas. As of September 30, 2024, we have facilities in Minnesota: Bemidji, Blue Earth, Mankato, Milaca and Maple Grove (corporate office). We also have facilities in Monterrey, Mexico and Suzhou, China. In May, 2024, we announced the closure of our Blue Earth facility by the end of 2024 and moving its operations to our Bemidji facility.

 

All dollar amounts are stated in thousands of U.S. dollars.

 

Results of Operations

 

Net Sales. Net sales for the three months ended September 30, 2024 and 2023 were $31,407 and $33,369, respectively, a decrease of $1,962 or 5.9%. Net sales for the nine months ended September 30, 2024 and 2023 were $99,513 and $103,278, respectively, a decrease of $3,765 or 3.6%. The following is a summary of net sales by our major industry markets:

 

  

Three Months Ended

September 30,

     
   2024   2023   Increase (Decrease) 
Medical  $18,047   $17,835   $212    1.2%
Industrial   8,434    10,435    (2,001)   (19.2)%
Aerospace and defense   4,926    5,099    (173)   (3.4)%
Total net sales  $31,407   $33,369   $(1,962)   (5.9)%

 

  

Nine Months Ended

September 30,

     
   2024   2023   Increase (Decrease) 
Medical  $53,991   $59,814   $(5,823)   (9.7)%
Industrial   27,643    28,966    (1,323)   (4.6)%
Aerospace and defense   17,879    14,498    3,381    23.3%
Total net sales  $99,513   $103,278   $(3,765)   (3.6)%

 

  ● Medical: Net sales to our medical customers increased $212, or 1.2%, in the three months ended September 30, 2024 as compared with the same period in 2023, and decreased $5,823, or 9.7%, in the nine months ended September 30, 2024 as compared with the same period in 2023. The decrease in the nine-month comparison was primarily due to inventory re-balancing with existing customers, timing of customer product launches and lower average sales prices in anticipation of moving several programs for one customer to our Monterrey, Mexico facility which will be completed in the fourth quarter of 2024.
     
  ● Industrial: Net sales to our industrial customers decreased $2,001, or 19.2%, in the three months ended September 30, 2024 as compared with the same period in 2023, and $1,323, or 4.6%, in the nine months ended September 30, 2024 as compared with the same period in 2023. The decrease in net sales was primarily due to industrial customer’s efforts to reduce their inventory investments, delayed program launches with several customers as well as sales headwinds in several markets for which we provide products for these customers.
     
  ● Aerospace and defense: Net sales to our aerospace and defense customers decreased $173, or 3.4%, in the three months ended September 30, 2024, as compared with the same period in 2023, and increased $3,381, or 23.3% in the nine months ended September 30, 2024, as compared with the same period in 2023. The increase in net sales in the nine-month comparison relates to increasing demand in the aerospace and defense market, and improved supply chain availability of component materials.

 

Backlog. Our 90-day shipment backlog as of September 30, 2024 was $29,631, down 1.5% from June 30, 2024, and 12.3% from the prior-year comparable quarter end. Our 90-day backlog consists of firm purchase orders we expect to ship in the next 90 days, with any remaining amounts to be shipped within 180 days.

 

Our total order backlog as of September 30, 2024 was $69,770, a 4.8% decrease from the prior quarter end and a 31.8% decrease from the prior-year comparable quarter end. As the supply chain lead times have normalized, customers are returning to their pre-pandemic ordering practices, which has resulted in a decrease in our backlog. We continue to experience reduced visibility to revenues in the next several quarters as customers are rebalancing their inventories and, therefore, deferring the placement of some orders.

 

90-day and total shipment backlog by our major industry markets are as follows:

 

   September 30, 2024   June 30, 2024   September 30, 2023 
   90 Day   Total   90 Day   Total   90 Day   Total 
Medical  $15,684   $35,354   $15,906   $34,450   $16,775   $51,394 
Industrial   7,200    9,445    6,398    11,423    9,656    19,680 
Aerospace and defense   6,747    24,971    7,791    27,423    7,337    31,260 
Total backlog  $29,631   $69,770   $30,095   $73,296   $33,768   $102,334 

 

The 90-day and total backlog as of September 30, 2024 includes orders already recognized in net sales and included in the contract asset value of $15,058.

 

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Operating Costs and Expenses.

 

Net sales, cost of goods sold, gross profit, and operating costs were as follows:

 

   Three Months Ended September 30, 
   2024   2023   Increase/(Decrease) 
Net sales  $31,407   $33,369   $(1,962)   (5.9)%
Cost of goods sold   27,572    28,050    (478)   (1.7)%
Gross profit   3,835    5,319    (1,484)   (27.9)%
Gross margin percentage (1)   12.2%   15.9%   (370)bpc(2)     
Selling   891    923    (32)   (3.5)%
% of Net sales   2.7%   2.8%          
General and administrative   2,950    2,958    (8)   2.6%
% of Net sales   9.4%   8.9%          
Restructuring charges   176    -    176    -%
% of Net sales   0.6%   -%          
Research and development   284    314    (30)   (9.6)%
% of Net sales   0.9%   0.9%          
Operating income   (467)   1,124    (1,591)   (141.5)%
% of Net sales   (1.5)%   3.4%          

 

  (1) Gross margin percentage is defined as gross profit as a percentage of net sales.
  (2) Basis points change in gross margin percentage.

 

   Nine Months Ended September 30, 
   2024   2023   Increase/(Decrease) 
Net sales  $99,513   $103,278   $(3,765)   (3.6)%
Cost of goods sold   85,613    87,001    (1,388)   (1.6)%
Gross profit   13,900    16,277    (2,377)   (14.6)%
Gross margin percentage (1)   14.0%   15.8%   (180)bpc(2)     
Selling   2,605    2,766    (161)   (5.8)%
% of Net sales   2.6%   2.7%          
General and administrative   9,103    9,328    (225)   (2.4)%
% of Net sales   9.1%   9.0%          
Restructuring charges   267    -    267    -%
% of Net sales   0.3%   -%          
Research and development   893    907    (14)   (1.5)%
% of Net sales   0.9%   0.9%          
Operating income   1,032    3,276    (2,244)   (68.5)%
% of Net sales   1.0%   3.2%          

 

  (1) Gross margin percentage is defined as gross profit as a percentage of net sales.
  (2) Basis points change in gross margin percentage.

 

Gross profit and gross margins. Gross profit as a percent of net sales was 12.2% and 15.9% for the three months ended September 30, 2024 and 2023, respectively. Gross profit as a percent of net sales was 14.0% and 15.8% for the nine months ended September 30, 2024 and 2023, respectively. The decrease in gross profit as a percentage of net sales in 2024 as compared with the same prior-year periods was the result of lower net sales, as discussed above, and corresponding lower operating leverage from reduced production at a number of our manufacturing facilities.

 

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Selling expenses. Selling expenses were decreased slightly in the three and nine months ended September 30, 2024 and 2023 as the result of lower incentive compensation accruals in the current-year periods.

 

General and administrative expenses. General and administrative expenses decreased slightly in the 2024 periods as compared with the 2023 periods as the result of lower incentive compensation accruals in the current-year periods.

 

Restructuring charges. Restructuring charges were $176 and $267 in the three and nine months ended September 30, 2024, respectively, for accrued employee retention bonuses for our facility consolidation and closure of our Blue Earth facility. We expect to incur approximately $800 of cash restructuring costs, including employee retention and facility moving cost in 2024, of which substantially all are expected to be incurred and paid by December 2024.

 

Operating income. Operating (loss) income for the three months ended September 30, 2024 and 2023 were $(467) or (1.5)% of net sales, and $1,124 or 3.4% of net sales, respectively. Operating income for the nine months ended September 30, 2024 and 2023 were $1,032 or 1.0% of net sales and $3,276 or 3.2% of net sales, respectively. Decreases in both periods were driven by the decrease in net sales and resulting gross margin.

 

Other expense

 

Interest expense. Interest expense was $216 and $130 for the three months ended September 30, 2024 and 2023, respectively. Interest expense was $548 and $365 for the nine months ended September 30, 2024 and 2023, respectively. This increase was driven by higher borrowings under our line of credit arrangement. Refer to “Liquidity and Capital Resources” for further discussion of financing arrangements.

 

Income taxes. Our effective tax rate for the three and nine months ended September 30, 2024 was 8% and 62%, respectively. Our effective tax rate for the three and nine months ended September 30, 2023 was (21%) and 13%, respectively. The primary drivers of the change in rate relate to changes in pretax book income and the 2023 U.S. federal provision to return adjustments recorded in the third quarter of 2024, partially offset by realization of deferred tax assets in the 2024 periods as the Company removed its valuation allowance in the fourth quarter of 2023.

 

Cash Flow Operating Results

 

The following is a summary of cash flow results:

 

   Nine Months Ended September 30, 
   2024   2023 
Cash provided by (used in):          
Operating activities  $(3,043)  $2,181 
Investing activities   (971)   (1,121)
Financing activities   3,561    (2,388)
Effect of exchange rates on changes in cash and cash equivalents   17    (32)
Net change in cash and cash equivalents  $(436)  $(1,360)

 

Operating Activities. Cash used in operating activities was $3,043 in the first nine months of 2024, compared with cash provided of $2,181 in the same prior-year period. Significant changes in operating assets and liabilities affecting cash flows during these periods included:

 

  ● Cash provided by accounts receivable and contract assets was $2,150 in the nine months ended September 30, 2024 as compared with cash usage of $1,942 in the same prior-year period. The improved cash flow in the current year was due to the timing of customer payments in the fourth quarter of 2023 as compared with the fourth quarter of 2022, both of which impacted cash collections in the subsequent year.
  ● Cash used in inventory was $922 in the nine months ended September 30, 2024 as compared with cash provided of $899 in the prior-year period. The increase in the current-year period cash usage was the result of normal timing variances of inventory purchases and timing of product shipments and increased inventory levels to support the transition of manufacturing from our Blue Earth facility to our Bemidji plant.
  ● Cash used by changes in accounts payable was $3,609 in the current-year period as compared with cash use of $1,636 in the same prior-year period, primarily related to the timing of cash payments.
  ● Cash provided by customer deposits was $1,195 in the nine months ended September 30, 2024 as compared with cash provided of $345 in the same prior-year period which is driven by timing of customer deposits received before the quarter end.

 

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Investing Activities. Cash used in investing activities was $971 in the first nine months of 2024, compared with cash used of $1,121 in the same prior-year period, both primarily for capital expenditures.

 

Financing Activities. Cash provided by financing activities was $3,561in the first nine months of 2024, compared with cash used of $2,388 in the same prior-year period. The increase in cash provided by financing activities resulted from the cash used for working capital in the nine months ended September 30, 2024.

 

Liquidity and Capital Resources

 

We believe that our existing financing arrangements, anticipated cash flows from operations and cash on hand will be sufficient to satisfy our working capital needs for the next twelve months, capital expenditures and debt repayments.

 

Credit Facility. We had a credit agreement with Bank of America, which was entered into on June 15, 2017 and provided for a line of credit arrangement of $16,000, that was to expire on June 15, 2026.

 

On February 29, 2024, we replaced the asset backed line of credit agreement with a $15,000 Senior Secured Revolving Line of Credit with Bank of America (the “Revolver”). The Revolver allows for borrowings at a defined base rate, or at the one, three or six month Secured Overnight Finance Rate, also known as “SOFR,” plus a defined margin. If the Company prepays SOFR borrowings before their contractual maturity, the Company has agreed to compensate the bank for lost margin, as defined in the Revolver agreement. The Company is required to quarterly pay a 20-basis point fee on the unused portion of the Revolver.

 

The Revolver requires the Company to maintain no more than 2.5 times leverage ratio and at least a 1.25 times minimum fixed charges coverage ratio, both of which are defined in the Revolver agreement. The Company met the covenants for the period ended September 30, 2024. There are no subjective acceleration clauses under the Revolver that would accelerate the maturity of outstanding borrowings. The Revolver contains certain covenants which, among other things, require the Company to adhere to regular reporting requirements, abide by shareholder dividend limitations, maintain certain financial performance, and limit the amount of annual capital expenditures. The Revolver is secured by substantially all the Company’s assets and expires on February 28, 2027. We were in compliance with all the financial covenants related to this agreement as of and for the period ended September 30, 2024, except for the covenant related to operating expense contributions to our Mexican operations in the first and second quarters of 2024 in excess of the amounts allowed under the Revolver. We received a waiver of this event of default from the bank in August 2024.

 

Under the amended Bank of America credit agreement signed February 29, 2024, the line of credit is subject to variations in the SOFR index rate. Under the prior credit agreement with Bank of America, the line of credit borrowing availability was restricted by a defined asset borrowing base, and interest was based on variations in the Bloomberg Short-Term Bank Yield (BSBY) index rate. Our line of credit bears interest at a weighted-average interest rate of 7.9% and 8.3% as of September 30, 2024 and December 31, 2023, respectively. We had borrowings on our line of credit of $9,550 and $5,846 outstanding as of September 30, 2024 and December 31, 2023, respectively. As of September 30, 2024 we had unused availability on the line of credit of $5,450.

 

The Company has an interim funding agreement as of September 30, 2024 with a bank related to $317 of deposits made on equipment purchases that will be funded through a finance lease when the equipment is received and operational. As of September 30, we have $317 outstanding on the interim funding agreement for equipment we expect to receive in the fourth quarter of 2024.

 

The line of credit is shown net of debt issuance costs of $42 and $31 on the condensed consolidated balance sheet as of September 30, 2024 and December 31, 2023, respectively.

 

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.

 

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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;
  ♦ Supply chain disruption and unreliability;
  ♦ Lack of supply of sufficient human resources to produce our products;
  ♦ 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;
  ♦ 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-K are expressly qualified in their entirety by the forgoing cautionary statements. We undertake no obligation 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, 2023.

 

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.

 

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PART II

 

ITEM 1. LEGAL PROCEEDINGS

 

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

 

ITEM 1A. RISK FACTORS

 

We are affected by the risks specific to us as well as factors that affect all businesses operating in a global market. The significant factors known to us that could materially adversely affect our business, financial condition or operating results or could cause our actual results to differ materially from our expectations are described in our annual report on Form 10-K for the fiscal year ended under the heading “Part I – Item 1A.Risk Factors.” There have been no material changes in the risk factors from those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2023.

 

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

 

In June 2024, the Company authorized the repurchase of $100,000 of its Common Stock. As of September 30, 2024, 5,810 shares of Common Stock have been repurchased under this program at a weighted average price of $11.95 per share totaling $69,430.

 

ITEM 3. DEFAULTS ON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

Exhibits    
     
31.1*   Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.
     
31.2*   Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.
     
32*   Certification of the Chief Executive Officer and Chief Financial Officer, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101*   Financial statements from the quarterly report on Form 10-Q for the quarter ended September 30, 2024, 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.
     
104   Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

 

*Filed herewith

 

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Signatures

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Nortech Systems Incorporated and Subsidiaries
     
Date: November 7, 2024 by /s/ Jay D. Miller
     
    Jay D. Miller
    Chief Executive Officer and President
    Nortech Systems Incorporated
     
Date: November 7, 2024 by /s/ Andrew D. C. LaFrence
     
    Andrew D. C. LaFrence
    Chief Financial Officer and Senior Vice President of Finance
    Nortech Systems Incorporated

 

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